- Proxy Soliciting Materials (revised) (PRER14A)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. 3)
Filed by the Registrant
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Filed by a Party other than the Registrant
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Check the appropriate box:
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Preliminary Proxy Statement
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Confidential, for Use of the Commission Only (as permitted by Rule 14a-
6(e)(2)
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Definitive Proxy Statement
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Definitive Additional Materials
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Soliciting Material Pursuant to §240.14a-12
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Hiland Holdings GP, LP
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
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No fee required.
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Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
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(1)
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Title of each class of securities to which transaction applies:
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Common units representing limited partner interests
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(2)
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Aggregate number of securities to which transaction applies:
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8,485,948 common units representing limited partner interests (including
16,500 restricted common units held by non-employee directors)
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(3)
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Per unit price or other underlying value of transaction computed pursuant to Exchange Act
Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was
determined):
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$2.40 per common unit (the price per common unit negotiated in the transaction)
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(4)
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Proposed maximum aggregate value of transaction:
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$20,366,276
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(5)
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Total fee paid:
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$1,137, computed in accordance with Exchange Act Rule 0-11(c)(1) and Section
14(g) of the Exchange Act by multiplying the proposed aggregate value
of the transaction by 0.0000558
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Fee paid previously with preliminary materials.
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Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2)
and identify the filing for which the offsetting fee was paid previously. Identify the
previous filing by registration statement number, or the Form or Schedule and the date of its
filing.
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(1)
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Amount Previously Paid:
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(2)
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Form, Schedule or Registration Statement No.:
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(3)
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Filing Party:
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(4)
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Date Filed:
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PRELIMINARY
PROXY STATEMENT, SUBJECT TO COMPLETION, DATED SEPTEMBER 9,
2009
PROPOSED
MERGERS YOUR VOTE IS VERY IMPORTANT
Dear Common Unitholders of Hiland Partners and Hiland Holdings:
As a holder of common units representing limited partner
interests (common units) in Hiland Partners, LP
(Hiland Partners) or Hiland Holdings GP, LP
(Hiland Holdings, and together with Hiland Partners,
the Hiland Companies), respectively, you are
cordially invited to attend a special meeting of the unitholders
of the Hiland Company in which you own common units. The
attached joint proxy statement includes information about the
matters to be acted on at the special meeting of each of the
Hiland Companies, including at any adjournment or postponement
thereof.
At the special meeting of unitholders of Hiland Partners, the
holders of common units of Hiland Partners will be asked to
consider and vote on a proposal to approve (a) the
Agreement and Plan of Merger dated June 1, 2009 (the
Hiland Partners merger agreement) among Hiland
Partners, Hiland Partners GP, LLC (the general partner of Hiland
Partners), HH GP Holding, LLC (an affiliate of Harold Hamm and
Hiland Partners (Parent)), and HLND MergerCo, LLC (a
wholly-owned subsidiary of Parent formed to effect the merger
(HLND Merger Sub)), which agreement provides, among
other things, that HLND Merger Sub will merge with and into
Hiland Partners, with Hiland Partners continuing as the
surviving entity (the Hiland Partners merger), and
(b) the Hiland Partners merger. At the effective time of
the Hiland Partners merger, each common unit of Hiland Partners
(other than common units of Hiland Partners held by Hiland
Holdings and any restricted common units held by officers and
employees of Hiland Partners) will be converted into the right
to receive $7.75 in cash (the Hiland Partners merger
consideration). The Hiland Partners merger consideration
will be paid without interest and reduced by any applicable tax
withholding.
At the special meeting of unitholders of Hiland Holdings, the
holders of common units of Hiland Holdings will be asked to
consider and vote on a proposal to approve (a) the
Agreement and Plan of Merger dated June 1, 2009 (the
Hiland Holdings merger agreement) among Hiland
Holdings, Hiland Partners GP Holdings, LLC (the general partner
of Hiland Holdings), Parent (an affiliate of Harold Hamm and the
sole member of the general partner of Hiland Holdings), and HPGP
MergerCo, LLC (a wholly-owned subsidiary of Parent formed to
effect the merger (HPGP Merger Sub and, together
with HLND Merger Sub, the Merger Subs)), which
agreement provides, among other things, that HPGP Merger Sub
will merge with and into Hiland Holdings, with Hiland Holdings
continuing as the surviving entity (the Hiland Holdings
merger) and (b) the Hiland Holdings merger. At the
effective time of the Hiland Holdings merger, each common unit
of Hiland Holdings (other than common units of Hiland Holdings
held by Harold Hamm, Continental Gas Holdings, Inc., an
affiliate of Mr. Hamm (Continental Gas), the
Harold Hamm DST Trust and the Harold Hamm HJ Trust (the
Hamm family trusts) and any restricted common units
held by officers and employees of Hiland Holdings) will be
converted into the right to receive $2.40 in cash (the
Hiland Holdings merger consideration). The Hiland
Holdings merger consideration will be paid without interest and
reduced by any applicable tax withholding.
As a result and upon completion of the mergers, both Hiland
Companies will be privately owned by Harold Hamm, certain of his
affiliates and the Hamm family trusts. A copy of the Hiland
Partners merger agreement is included as Annex A, and a
copy of the Hiland Holdings merger agreement is included as
Annex D to the attached joint proxy statement.
YOUR VOTE IS IMPORTANT.
Approval of the Hiland
Partners merger agreement and the Hiland Partners merger
requires the affirmative vote of holders of (a) a majority
of the outstanding common units of Hiland Partners, other than
Hiland Partners common units held by the general partner of
Hiland Partners, its affiliates (as defined in the section
entitled The Hiland Partners Merger Agreement
Conditions to Completion of the Hiland Partners Merger in
the attached joint proxy statement, including Hiland Holdings)
and the directors and officers of Hiland Partners general
partner, entitled to vote thereon voting as a class (whom we
refer to as the Hiland Partners public unitholders),
and (b) holders of a majority of the outstanding
subordinated units of Hiland Partners entitled to vote thereon
voting as a class.
Accordingly, the Hiland Partners merger
may not be completed unless a majority of the outstanding common
units held by the Hiland Partners public unitholders approve the
transaction.
Approval of the Hiland Holdings merger
agreement and the Hiland Holdings merger requires the
affirmative vote of (a) holders of a majority of the
outstanding common units of Hiland Holdings entitled to vote
thereon voting as a class, and (b) holders of a majority of
the outstanding common units of Hiland Holdings, other than
Hiland Holdings common units held by Harold Hamm, his affiliates
(as defined in the section entitled The Hiland Holdings
Merger Agreement Conditions to Completion of the
Hiland Holdings Merger in the attached joint proxy
statement, including Continental Gas), the Hamm family trusts
and the directors and officers of the general partner of Hiland
Holdings (whom we refer to as the Hiland Holdings public
unitholders), entitled to vote thereon voting as a class.
Accordingly, the Hiland Holdings merger may not be completed
unless a majority of the outstanding common units held by the
Hiland Holdings public unitholders approve the transaction.
The obligations of Parent and the applicable Merger Sub to
complete a Hiland Company merger are conditioned upon, among
other things, the concurrent completion of the other Hiland
Company merger. Parent and the applicable Merger Sub may waive
the condition requiring the concurrent completion of both Hiland
Company mergers under limited circumstances, but is under no
obligation to do so.
Hiland Partners will hold a special meeting
on , 2009
at , local time,
at . Hiland Holdings will hold a
special meeting on , 2009
at , local time,
at . Whether or not you plan to
attend your meeting, to ensure your common units are represented
at the meeting, please complete and submit the enclosed proxy
card as soon as possible or transmit your voting instructions by
using the telephone or Internet procedures described on your
proxy card. If your common units are held in street
name, please instruct your broker or bank how to vote your
common units.
The Conflicts Committee of the Board of Directors of the general
partner of Hiland Partners (which we refer to as the
Hiland Partners Conflicts Committee), consisting of
two independent directors, has unanimously determined that the
Hiland Partners merger agreement is advisable, fair to, and in
the best interests of, Hiland Partners and the Hiland Partners
public unitholders and approved the Hiland Partners merger
agreement and the Hiland Partners merger. The Hiland Partners
Conflicts Committee recommended to the Board of Directors of the
general partner of Hiland Partners (which we refer to as the
Hiland Partners Board of Directors) that the Hiland
Partners Board of Directors approve the Hiland Partners merger
agreement and the Hiland Partners merger. In determining to make
its recommendation to the Hiland Partners Board of Directors,
the Hiland Partners Conflicts Committee considered, among other
things, the opinion of Jefferies & Company, Inc., the
financial advisor to the Hiland Partners Conflicts Committee, to
the effect that, as of the date of its opinion, the cash merger
consideration of $7.75 per common unit to be received by the
Hiland Partners public unitholders pursuant to the Hiland
Partners merger agreement was fair, from a financial point of
view, to the Hiland Partners public unitholders. The opinion of
Jefferies & Company, Inc. is subject to the
assumptions, limitations and qualifications set forth in that
opinion, which is included as Annex C in the attached joint
proxy statement.
The Hiland Partners Board of Directors, after considering
various factors, including the unanimous determination and
recommendation of the Hiland Partners Conflicts Committee,
determined that the Hiland Partners merger agreement is
advisable, fair to, and in the best interests of, Hiland
Partners and the Hiland Partners public unitholders and approved
the Hiland Partners merger agreement and the Hiland Partners
merger.
Accordingly, the Hiland Partners Board of Directors
and the Hiland Partners Conflicts Committee both recommend that
the Hiland Partners public unitholders vote in favor of the
approval of the Hiland Partners merger agreement and the Hiland
Partners merger.
The Conflicts Committee of the Board of Directors of the general
partner of Hiland Holdings (which we refer to as the
Hiland Holdings Conflicts Committee), consisting of
two independent directors, has unanimously determined that the
Hiland Holdings merger agreement is advisable, fair to, and in
the best interests of, Hiland Holdings and the Hiland Holdings
public unitholders and approved the Hiland Holdings merger
agreement and the Hiland Holdings merger. The Hiland Holdings
Conflicts Committee recommended to the Board of Directors of the
general partner of Hiland Holdings (which we refer to as the
Hiland Holdings Board of Directors) that the Hiland
Holdings Board of Directors approve the Hiland Holdings merger
agreement and the Hiland Holdings merger. In determining to make
its recommendation to the Hiland Holdings Board of Directors,
the Hiland Holdings Conflicts Committee considered, among other
things, the opinion of Barclays Capital Inc., the financial
advisor to the Hiland Holdings Conflicts Committee, to the
effect that, as of the date of its opinion, the cash merger
consideration of $2.40 per common unit offered to the Hiland
Holdings public unitholders pursuant to the Hiland Holdings
merger was fair, from a financial point of view, to the Hiland
Holdings public unitholders. The opinion of Barclays Capital
Inc. is subject to the assumptions, limitations and
qualifications set forth in that opinion, which is included as
Annex F in the attached joint proxy statement.
The Hiland Holdings Board of Directors, after considering
various factors including the unanimous determination and
recommendation of the Hiland Holdings Conflicts Committee,
determined that the Hiland Holdings merger agreement is
advisable, fair to, and in the best interests of, Hiland
Holdings and the Hiland Holdings public unitholders and approved
the Hiland Holdings merger agreement and the Hiland Holdings
merger.
Accordingly, the Hiland Holdings Board of Directors
and the Hiland Holdings Conflicts Committee both recommend that
the Hiland Holdings public unitholders vote in favor of the
approval of the Hiland Holdings merger agreement and the Hiland
Holdings merger.
The attached joint proxy statement provides you with detailed
information about the merger agreements and the mergers. We urge
you to read the entire joint proxy statement carefully,
following which you are asked to return your proxy at your
earliest convenience.
If you have any questions or need assistance voting your units,
please call D.F. King & Co., Inc., which is assisting
each of the Hiland Companies, toll-free at
1-800-967-4612.
Sincerely,
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John T. McNabb, II
Chairman of the Conflicts Committee
of the Board of Directors of
Hiland Partners GP, LLC,
the general partner of Hiland Partners, LP
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Bobby B. Lyle
Chairman of the Conflicts Committee
of the Board of Directors of
Hiland Partners GP Holdings, LLC,
the general partner of Hiland Holdings GP, LP
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Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of this
transaction, or passed upon the fairness or merits of this
transaction or the adequacy or accuracy of the attached joint
proxy statement. Any contrary representation is a criminal
offense.
The attached joint proxy statement is
dated , 2009 and is first being
mailed to unitholders on or about ,
2009.
Hiland
Partners, LP
205 West Maple,
Suite 1100
Enid, Oklahoma 73701
NOTICE OF SPECIAL MEETING OF
UNITHOLDERS
To Be Held On
To the Holders of Common Units of Hiland Partners, LP:
We will hold a special meeting of the holders of common units
representing limited partner interests (common
units) in Hiland Partners, LP (Hiland
Partners) on , 2009
at , local time,
at . The purpose of the special
meeting is:
1. To consider and vote on a proposal to approve
(a) the Agreement and Plan of Merger dated June 1,
2009 (the Hiland Partners merger agreement) among
Hiland Partners, Hiland Partners GP, LLC (the general partner of
Hiland Partners), HH GP Holding, LLC (an affiliate of Harold
Hamm and Hiland Partners (Parent)), and HLND
MergerCo, LLC (a wholly-owned subsidiary of Parent formed to
effect the merger (HLND Merger Sub)), which
agreement provides, among other things, that HLND Merger Sub
will merge with and into Hiland Partners, with Hiland Partners
continuing as the surviving entity (the Hiland Partners
merger) and (b) the Hiland Partners merger.
2. To transact such other business as may properly come
before the special meeting or any adjournment or postponement of
the special meeting.
Only holders of Hiland Partners common units at the close of
business on , 2009, the record date
established for the special meeting, are entitled to notice of,
and to vote at, the special meeting. A complete list of
unitholders entitled to vote at the special meeting will be
available for examination at Hiland Partners headquarters,
205 West Maple, Suite 1100, Enid, Oklahoma 73701,
after , 2009 and at the special
meeting.
The obligations of Parent and HLND Merger Sub to complete the
Hiland Partners merger are conditioned upon, among other things,
the simultaneous merger of HPGP MergerCo, LLC, a subsidiary of
Parent, with and into Hiland Holdings GP, LP (Hiland
Holdings), as contemplated by the Agreement and Plan of
Merger dated June 1, 2009 (the Hiland Holdings merger
agreement) among Hiland Holdings, Hiland Partners GP
Holdings, LLC (the general partner of Hiland Holdings), Parent
and HPGP MergerCo, LLC. We have described both merger agreements
and the associated mergers in the attached joint proxy
statement, which you should read in its entirety before voting.
A copy of the Hiland Partners merger agreement is included as
Annex A and a copy of the Hiland Holdings merger agreement
is included as Annex D to the attached joint proxy
statement.
YOUR VOTE
IS VERY IMPORTANT
The affirmative vote of the holders of a majority of the
outstanding common units of Hiland Partners, other than common
units held by Hiland Partners GP, LLC, its affiliates (as
defined in the Hiland Partners merger agreement, including
Hiland Holdings) and the directors and officers of Hiland
Partners GP, LLC, entitled to vote thereon voting as a class and
the affirmative vote of the holders of a majority of the
outstanding subordinated units of Hiland Partners entitled to
vote thereon voting as a class are required to approve the
Hiland Partners merger agreement and the Hiland Partners merger.
Accordingly, a failure to vote, or an abstention from voting,
will have the same effect as a vote against the
Hiland Partners merger agreement and the Hiland Partners merger.
Whether or not you plan to attend the special meeting, please
complete, sign, date and promptly mail the enclosed proxy card
as soon as possible or vote via telephone or the Internet using
the procedures described on the enclosed proxy card to make sure
your common units are represented at the special meeting. If you
attend the special meeting and wish to vote in person, then you
may revoke your proxy and vote in person. If you have instructed
a broker to vote your common units, then you must follow
directions received from the broker to change or revoke your
proxy.
By Order of the Board of Directors of Hiland Partners GP, LLC,
the general partner of Hiland Partners, LP,
Matthew S. Harrison
Secretary
Enid, Oklahoma
,
2009
Hiland
Holdings GP, LP
205 West Maple,
Suite 1100
Enid, Oklahoma 73701
NOTICE OF SPECIAL MEETING OF
UNITHOLDERS
To Be Held On
To the Holders of Common Units of Hiland Holdings GP, LP:
We will hold a special meeting of the holders of common units
representing limited partner interests (common
units) in Hiland Holdings GP, LP (Hiland
Holdings) on , 2009
at , local time,
at . The purpose of the special
meeting is:
1. To consider and vote on a proposal to approve
(a) the Agreement and Plan of Merger dated June 1,
2009 (the Hiland Holdings merger agreement) among
Hiland Holdings, Hiland Partners GP Holdings, LLC (the general
partner of Hiland Holdings), HH GP Holding, LLC (an affiliate of
Harold Hamm and the sole member of the general partner of Hiland
Holdings (Parent)), and HPGP MergerCo, LLC (a
wholly-owned subsidiary of Parent formed to effect the merger
(HPGP Merger Sub)), which agreement provides, among
other things, that HPGP Merger Sub will merge with and into
Hiland Holdings, with Hiland Holdings continuing as the
surviving entity (the Hiland Holdings merger) and
(b) the Hiland Holdings merger.
2. To transact such other business as may properly come
before the special meeting or any adjournment or postponement of
the special meeting.
Only holders of Hiland Holdings common units at the close of
business on , 2009, the record date
established for the special meeting, are entitled to notice of,
and to vote at, the special meeting. A complete list of
unitholders entitled to vote at the special meeting will be
available for examination at Hiland Holdings headquarters,
205 West Maple, Suite 1100, Enid, Oklahoma 73701,
after , 2009 and at the special
meeting.
The obligations of Parent and HPGP Merger Sub to complete the
Hiland Holdings merger are conditioned upon, among other things,
the simultaneous merger of HLND MergerCo, LLC, a subsidiary of
Parent, with and into Hiland Partners, LP (Hiland
Partners), as contemplated by the Agreement and Plan of
Merger dated June 1, 2009 (the Hiland Partners merger
agreement) among Hiland Partners, Hiland Partners GP, LLC
(the general partner of Hiland Partners), Parent, and HLND
MergerCo, LLC. We have described both merger agreements and the
associated mergers in the attached joint proxy statement, which
you should read in its entirety before voting. A copy of the
Hiland Holdings merger agreement is included as Annex D and
a copy of the Hiland Partners merger agreement is included as
Annex A to the attached joint proxy statement.
YOUR VOTE
IS VERY IMPORTANT
The affirmative vote of the holders of a majority of the
outstanding common units of Hiland Holdings entitled to vote
thereon voting as a class and the affirmative vote of the
holders of a majority of the outstanding common units of Hiland
Holdings, other than common units held by Harold Hamm, his
affiliates (as defined in the Hiland Holdings merger agreement,
including Continental Gas Holdings, Inc. (Continental
Gas)), the Harold Hamm DST Trust, the Harold Hamm HJ Trust
(together with the Harold Hamm DST Trust, the Hamm family
trusts) and the directors and officers of the general
partner of Hiland Holdings, entitled to vote thereon voting as a
class are required to approve the Hiland Holdings merger
agreement and the Hiland Holdings merger. Accordingly, a failure
to vote, or an abstention from voting, will have the same effect
as a vote against the Hiland Holdings merger
agreement and the Hiland Holdings merger.
Whether or not you plan to attend the special meeting, please
complete, sign, date and promptly mail the enclosed proxy card
as soon as possible or vote via telephone or the Internet using
the procedures described on the enclosed proxy card to make sure
your common units are represented at the special meeting. If you
attend the special meeting and wish to vote in person, then you
may revoke your proxy and vote in person. If you have instructed
a broker to vote your common units, then you must follow
directions received from the broker to change or revoke your
proxy.
By Order of the Board of Directors of Hiland Partners GP
Holdings, LLC, the general partner of Hiland Holdings GP, LP,
Matthew S. Harrison
Secretary
Enid, Oklahoma
,
2009
Table
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197
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199
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199
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200
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203
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209
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210
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A-1
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B-1
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C-1
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D-1
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I-1
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J-1
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iii
SUMMARY
TERM SHEET
The following summary, together with Questions and
Answers About the Mergers and the Special Meetings,
highlight selected information contained in this joint proxy
statement and may not contain all of the information that may be
important in your consideration of the proposed mergers. We
encourage you to read carefully this joint proxy statement,
including the annexes, and the documents we refer to before
voting. See Where You Can Find More Information
beginning on page 209. We also encourage you to read the
merger agreements in their entirety as they are the legal
documents that govern the respective mergers. We have included
section references to direct you to a more complete description
of the topics described in this summary.
The
Parties
The
Hiland Companies
Hiland Partners, LP (which we sometimes refer to as Hiland
Partners) is a midstream energy limited partnership
engaged in purchasing, gathering, compressing, dehydrating,
treating, processing and marketing natural gas and
fractionating, or separating, and marketing natural gas liquids,
or NGLs.
Hiland Holdings GP, LP (which we sometimes refer to as
Hiland Holdings) was formed in May 2006 to own the
general partner of Hiland Partners and common units and
subordinated units in Hiland Partners. Currently, Hiland
Holdings owns:
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2,321,471 Hiland Partners common units, representing
approximately 37% of the outstanding common units of Hiland
Partners;
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all 3,060,000 of the subordinated units of Hiland
Partners; and
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through its ownership of the general partner of Hiland Partners,
the 2% general partner interest and all of the incentive
distribution rights in Hiland Partners.
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During the subordination period, the subordinated units are not
entitled to receive any distributions in a quarter until Hiland
Partners has paid the minimum quarterly distribution of $0.45
per unit (MQD), plus any arrearages in the payment
of the MQD from prior quarters, on all of the outstanding Hiland
Partners common units. The incentive distribution rights entitle
Hiland Holdings to receive increasing percentages (up to 48%) of
the cash distributed by Hiland Partners to its unitholders above
the MQD. No distributions may be made in any particular quarter
on the incentive distribution rights until the MQD has been paid
on all outstanding Hiland Partners common units and subordinated
units in respect of such quarter and any arrearages have been
paid in respect of the common units.
As is the case with many publicly traded partnerships, Hiland
Partners and Hiland Holdings (which we collectively refer to as
the Hiland Companies) do not have officers,
directors or employees. The operations and activities of the
Hiland Companies are managed by their respective general
partners. References in this joint proxy statement to Hiland
Partners directors and officers are references to the
directors and officers of Hiland Partners GP, LLC, the general
partner of Hiland Partners, and references in this joint proxy
statement to Hiland Holdings directors and officers are
references to the directors and officers of Hiland Partners GP
Holdings, LLC, the general partner of Hiland Holdings. The
Hiland Companies share a majority of their directors as well as
all of their officers, including the chief executive officer and
chief financial officer, and other key management team members.
See Information Concerning the Hiland Companies
beginning on page 187.
Harold
Hamm, Parent and Merger Subs
Harold Hamm, the chairman of the board of directors of each of
the Hiland Companies, Continental Gas Holdings, Inc., an
affiliate of Mr. Hamm (Continental Gas), and
the Harold Hamm DST Trust and the Harold Hamm HJ Trust (the
Hamm family trusts), beneficially own common units
representing a 60.8% limited partner interest in Hiland
Holdings. Mr. Hamm, the Harold Hamm DST Trust and the
Harold Hamm HJ Trust own 90.7%, 5.6% and 3.7%, respectively, of
Continental Gas.
1
HH GP Holding, LLC (which we sometimes refer to as
Parent) owns 100% of the membership interests in the
general partner of Hiland Holdings. Mr. Hamm owns 100% of
the membership interests in Parent. HLND MergerCo, LLC (which we
sometimes refer to as HLND Merger Sub) and HPGP
MergerCo, LLC (which we sometimes refer to as HPGP Merger
Sub and together with HLND Merger Sub, the Merger
Subs), each currently a wholly-owned subsidiary of Parent,
have been organized by Mr. Hamm and certain of his
affiliates to effect the mergers.
As used in this joint proxy statement, Hamm Continuing
Investors refers (i) with respect to the Hiland
Partners merger, to Harold Hamm, Parent, the general partner of
Hiland Holdings, Hiland Holdings and the Hamm family trusts, who
will collectively own all of the outstanding equity interests in
Hiland Partners (other than restricted common units, phantom
units and unit options issued and outstanding under the Hiland
Partners, LP Long-Term Incentive Plan at the effective time of
the Hiland Partners merger) immediately following the Hiland
Partners merger, and (ii) with respect to the Hiland
Holdings merger, to Harold Hamm, Parent, Continental Gas and the
Hamm family trusts, who will collectively own all of the
outstanding equity interests in Hiland Holdings (other than
restricted common units, phantom units and unit options issued
and outstanding under the Hiland Holdings GP, LP Long-Term
Incentive Plan at the effective time of the Hiland Holdings
merger) immediately following the Hiland Holdings merger.
See Information Concerning Harold Hamm, Parent and Merger
Subs beginning on page 203.
The
Mergers
The Hiland Companies have each separately agreed with Parent to
be acquired by Parent pursuant to the merger agreements
described in this joint proxy statement.
The
Hiland Partners Merger
Under the terms of the Agreement and Plan of Merger dated
June 1, 2009 among Parent, HLND Merger Sub, Hiland Partners
GP, LLC (the general partner of Hiland Partners) and Hiland
Partners (which we sometimes refer to as the Hiland
Partners merger agreement), HLND Merger Sub will be merged
with and into Hiland Partners, with Hiland Partners continuing
its existence as the surviving entity (which we sometimes refer
to as the Hiland Partners merger). The Hiland
Partners merger agreement is attached to this joint proxy
statement as Annex A and is incorporated herein by
reference. We encourage you to read the Hiland Partners merger
agreement in its entirety because it is the legal document that
governs the Hiland Partners merger. See The Hiland
Partners Merger Agreement beginning on page 149.
The
Hiland Holdings Merger
Under the terms of the Agreement and Plan of Merger dated
June 1, 2009 among Parent, HPGP Merger Sub, Hiland Partners
GP Holdings, LLC (the general partner of Hiland Holdings) and
Hiland Holdings (which we sometimes refer to as the Hiland
Holdings merger agreement), HPGP Merger Sub will be merged
with and into Hiland Holdings, with Hiland Holdings continuing
its existence as the surviving entity (which we sometimes refer
to as the Hiland Holdings merger). The Hiland
Holdings merger agreement is attached to this joint proxy
statement as Annex D and is incorporated herein by
reference. We encourage you to read the Hiland Holdings merger
agreement in its entirety because it is the legal document that
governs the Hiland Holdings merger. See The Hiland
Holdings Merger Agreement beginning on page 169.
The
Merger Consideration
The
Hiland Partners Merger Consideration
If the Hiland Partners merger is completed, holders of common
units of Hiland Partners (other than Hiland Holdings and, only
to the extent that they hold restricted common units, officers
and employees of Hiland Partners (collectively, the Hiland
Partners rollover common unitholders)) will receive the
merger consideration of $7.75 in cash for each common unit of
Hiland Partners that they own. We refer to such amount in this
joint proxy statement as the Hiland Partners merger
consideration. See The Hiland Partners
2
Merger Agreement beginning on page 149. If the
Hiland Partners merger is completed, holders of common units of
Hiland Partners will not receive any distribution arrearages
that have accrued on the Hiland Partners common units in
connection with the Hiland Partners merger. See Common
Unit Market Price and Dividend Information
Distribution Information beginning on page 199 for a
discussion of the existing distribution arrearage on the Hiland
Partners common units.
The
Hiland Holdings Merger Consideration
If the Hiland Holdings merger is completed, holders of common
units of Hiland Holdings (other than Harold Hamm, Continental
Gas, the Hamm family trusts and, only to the extent that they
hold restricted common units, officers and employees of Hiland
Holdings (collectively, the Hiland Holdings rollover
common unitholders)) will receive the merger consideration
of $2.40 in cash for each common unit of Hiland Holdings that
they own. We refer to such amount in this joint proxy statement
as the Hiland Holdings merger consideration. See
The Hiland Holdings Merger Agreement beginning on
page 169.
Effects
of the Mergers
Effects
of the Hiland Partners Merger on Outstanding Partnership
Interests in Hiland Partners
If the Hiland Partners merger is completed, holders of Hiland
Partners common units (other than the Hiland Partners rollover
common unitholders) will receive $7.75 per unit in cash for each
Hiland Partners common unit that they own. Restricted common
units issued pursuant to the Hiland Partners, LP Long-Term
Incentive Plan that are held by non-employee members of the
Board of Directors of the general partner of Hiland Partners
(which we sometimes refer to as the Hiland Partners Board
of Directors) will vest immediately prior to the closing
and automatically convert into the right to receive the Hiland
Partners merger consideration. Other restricted common units,
phantom units and unit option awards issued pursuant to the
Hiland Partners, LP Long-Term Incentive Plan that are
outstanding as of the effective time of the Hiland Partners
merger will remain outstanding in accordance with their
respective terms as equity awards in the surviving entity in the
Hiland Partners merger. Additionally, the following partnership
interests will be unaffected and remain outstanding as
partnership interests in the surviving entity of the Hiland
Partners merger, and their holders will not receive any
consideration therefor as part of the Hiland Partners merger:
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2,321,471 Hiland Partners common units owned by Hiland Holdings;
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3,060,000 Hiland Partners subordinated units representing
limited partners interests in Hiland Partners (the
subordinated units) owned by Hiland Holdings;
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the 2% general partner interest in Hiland Partners, represented
by 191,202 general partner units owned by the general
partner of Hiland Partners; and
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the incentive distribution rights in Hiland Partners owned by
the general partner of Hiland Partners.
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See The Hiland Partners Merger Agreement
Effect of the Merger on the Common Units and Certain Other
Securities of Hiland Partners and HLND Merger Sub
beginning on page 150.
Effects
of the Hiland Holdings Merger on Outstanding Partnership
Interests in Hiland Holdings
If the Hiland Holdings merger is completed, holders of Hiland
Holdings common units (other than the Hiland Holdings rollover
common unitholders) will receive $2.40 per unit in cash for each
Hiland Holdings common unit that they own. Restricted common
units issued pursuant to the Hiland Holdings GP, LP Long-Term
Incentive Plan that are held by non-employee members of the
Board of Directors of the general partner of Hiland Holdings
(which we sometimes refer to as the Hiland Holdings Board
of Directors) will vest immediately prior to the closing
and automatically convert into the right to receive the Hiland
Holdings merger consideration. Other restricted common units,
phantom units and unit option awards issued pursuant to the
Hiland Holdings GP, LP Long-Term Incentive Plan that are
outstanding as of the effective time of the Hiland Holdings
merger will remain outstanding in accordance with their
respective terms as equity awards of the surviving entity in the
Hiland Holdings merger. Additionally, the following partnership
interests will be
3
unaffected and remain outstanding as partnership interests in
the surviving entity in the Hiland Holdings merger, and their
holders will not receive any consideration therefor as part of
the Hiland Holdings merger:
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8,481,350 Hiland Holdings common units owned by Continental Gas;
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2,757,390 Hiland Holdings common units owned by the Harold Hamm
DST Trust;
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1,839,712 Hiland Holdings common units owned by the Harold Hamm
HJ Trust;
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59,600 Hiland Holdings common units owned directly by Harold
Hamm; and
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the non-economic general partner interest in Hiland Holdings
owned by the general partner of Hiland Holdings.
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See The Hiland Holdings Merger Agreement
Effect of the Merger on the Common Units and Certain Other
Securities of Hiland Holdings and HPGP Merger Sub
beginning on page 170.
Continued
Investment by Harold Hamm, certain of his Affiliates and the
Hamm family trusts
Upon consummation of the mergers, the Hamm Continuing Investors
will (i) retain their equity interests in the Hiland
Companies, if any; and (ii) directly and indirectly acquire
all other outstanding equity interests in each of the Hiland
Companies (other than restricted common units, phantom units and
unit options of Hiland Partners issued to officers and employees
pursuant to the Hiland Partners, LP Long-Term Incentive Plan and
restricted common units, phantom units and unit options of
Hiland Holdings issued to officers and employees pursuant to the
Hiland Holdings GP, LP Long-Term Incentive Plan, in each case
that remain outstanding as of the effective time of the mergers).
As a result of the mergers, the Hamm Continuing Investors will
own 100% of the outstanding equity interests in each of Hiland
Partners and Hiland Holdings (other than the equity interests of
officers and employees issued and outstanding at the effective
time of the mergers under the equity plans described above). See
Special Factors Structure and Steps of the
Mergers and Special Factors Interests of
Certain Persons in the Mergers beginning on pages 137
and 123, respectively.
Going
Private Transaction
If the mergers are completed, (i) the Hiland Partners
public unitholders will no longer have an equity interest in
Hiland Partners and the Hiland Holdings public unitholders will
no longer have an equity interest in Hiland Holdings,
(ii) the common units of the Hiland Companies will no
longer be listed on the NASDAQ Global Select Market, and
(iii) the registration of the common units of the Hiland
Companies under Section 12 of the Exchange Act will be
terminated. Each of the Hiland Companies will continue to file
periodic reports with the Securities and Exchange Commission
(the SEC) to the extent required by the agreements
governing such Hiland Companys indebtedness or applicable
law. It is expected that the Hamm family trusts will subscribe
for limited liability company units in each Merger Sub
immediately prior to the effective time of the applicable
merger, thereby reducing Mr. Hamms capital commitment
and ultimate ownership of the Merger Subs.
The following charts depict the organization and ownership of
Hiland Holdings and Hiland Partners and its subsidiaries
(i) prior to the mergers and immediately prior to any
subscription by the Hamm family trusts for limited liability
company units in the Merger Subs and (ii) after giving
effect to the mergers.
4
Pre-Mergers
Organizational Chart
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*
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Includes common and subordinated units
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5
Post-Mergers
Organizational Chart
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*
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Includes common and subordinated units
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Assumes consummation of both mergers.
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6
The
Special Meetings
Time,
Date and Place
The Hiland Partners special meeting will be held
on , 2009
at , local time,
at . The Hiland Holdings special
meeting will be held on , 2009
at , local time,
at .
Purpose
Purpose
of the Hiland Partners Unitholder Vote
The unitholders of Hiland Partners are being asked to consider
and vote on a proposal to approve the Hiland Partners merger
agreement and the Hiland Partners merger. The persons named in
the accompanying proxy card will have discretionary authority to
vote on other business, if any, that properly comes before the
Hiland Partners special meeting and any adjournment or
postponement thereof.
Purpose
of the Hiland Holdings Unitholder Vote
The unitholders of Hiland Holdings are being asked to consider
and vote on a proposal to approve the Hiland Holdings merger
agreement and the Hiland Holdings merger. The persons named in
the accompanying proxy card will have discretionary authority to
vote on other business, if any, that properly comes before the
Hiland Holdings special meeting and any adjournment or
postponement thereof.
Unitholders
Entitled to Vote
Holders of Hiland Partners common units as
of , 2009, the record date for the
Hiland Partners special meeting, will be entitled to vote at the
Hiland Partners special meeting. Holders of Hiland Holdings
common units as of , 2009, the
record date for the Hiland Holdings special meeting, will be
entitled to vote at the Hiland Holdings special meeting. Each
unitholder may cast one vote at the applicable special meeting
for each common unit of the applicable Hiland Company that such
unitholder owned at the close of business on the record date. On
the record date, there were Hiland
Partners common units and Hiland
Holdings common units outstanding and entitled to be voted at
their respective special meetings.
Required
Unitholder Votes; Support Agreements
Required
Hiland Partners Vote
Under the terms of the Hiland Partners merger agreement and the
First Amended and Restated Agreement of Limited Partnership of
Hiland Partners, which we refer to in this joint proxy statement
as the Hiland Partners partnership agreement, the
Hiland Partners merger agreement and the Hiland Partners merger
must be approved by the holders of:
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a majority of the outstanding common units of Hiland Partners
owned by Hiland Partners public unitholders (as further
described below) entitled to vote thereon voting as a
class; and
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a majority of the outstanding subordinated units of Hiland
Partners entitled to vote thereon voting as a class.
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Holders of common units of Hiland Partners, other than the
general partner of Hiland Partners, its affiliates (including
Hiland Holdings) and the directors and officers of the general
partner of Hiland Partners, are referred to in this joint proxy
statement as the Hiland Partners public unitholders.
Based on the number of common units of Hiland Partners expected
to be outstanding on the record date,
approximately Hiland Partners
common units owned by Hiland Partners public unitholders must be
voted in favor of the proposal to approve the Hiland Partners
merger agreement and the Hiland Partners merger in order for the
proposal to be approved.
7
Hiland Holdings, which owns 2,321,471 common units (representing
approximately 37% of the outstanding common units of Hiland
Partners) and all of the outstanding subordinated units of
Hiland Partners, has entered into a support agreement with its
general partner, Hiland Partners, the general partner of Hiland
Partners, Parent and HLND Merger Sub (which we refer to as the
Hiland Partners support agreement) in which it has
agreed to (i) maintain the ownership of Hiland Partners
common units and subordinated units held by it, except in
certain circumstances, and (ii) vote its common units and
subordinated units in favor of the approval of the Hiland
Partners merger agreement and the Hiland Partners merger. The
Hiland Partners support agreement assures that the approval of
holders of a majority of the subordinated units will be
obtained, except in certain limited circumstances. While Hiland
Holdings is obligated to vote its common units of Hiland
Partners in favor of the Hiland Partners merger, those votes
will have no effect on whether holders of a majority of the
common units held by Hiland Partners public unitholders have
approved the Hiland Partners merger. See Information about
the Special Meetings and Voting Vote Required at
Hiland Partners Special Meeting; How Units Are Voted
beginning on page 146.
Required
Hiland Holdings Vote
Under the terms of the Hiland Holdings merger agreement and the
Amended and Restated Agreement of Limited Partnership of Hiland
Holdings, which we refer to in this joint proxy statement as the
Hiland Holdings partnership agreement, the Hiland
Holdings merger agreement and the Hiland Holdings merger must be
approved by the holders of:
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a majority of the outstanding common units of Hiland Holdings
entitled to vote thereon voting as a class; and
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a majority of the outstanding common units of Hiland Holdings
owned by Hiland Holdings public unitholders (as further
described below) entitled to vote thereon voting as a class.
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Holders of common units of Hiland Holdings, other than Harold
Hamm, his affiliates (including Continental Gas), the Hamm
family trusts and the directors and officers of the general
partner of Hiland Holdings, are referred to in this joint proxy
statement as the Hiland Holdings public unitholders.
Based on the number of common units of Hiland Holdings expected
to be outstanding on the record date,
approximately
Hiland Holdings common units owned by Hiland Holdings public
unitholders must be voted in favor of the proposal to approve
the Hiland Holdings merger agreement and the Hiland Holdings
merger in order for the proposal to be approved.
Harold Hamm, Continental Gas, and Bert Mackie, as trustee of the
Hamm family trusts which, as of ,
2009, collectively held an aggregate of 13,138,052 Hiland
Holdings common units representing approximately 60.8% of the
total voting power of the Hiland Holdings common units, have
entered into a support agreement with Hiland Holdings and the
general partner of Hiland Holdings (which we refer to as the
Hiland Holdings support agreement) in which they
have agreed to (i) maintain the ownership of their common
units, except in certain circumstances, and (ii) vote their
common units in favor of the approval of the Hiland Holdings
merger agreement and the Hiland Holdings merger. The Hiland
Holdings support agreement assures that the approval of holders
of a majority of the outstanding Hiland Holdings common units
will be obtained, except in certain limited circumstances. See
Information about the Special Meetings and
Voting Vote Required at Hiland Holdings Special
Meeting; How Units are Voted beginning on page 147.
The
Relationship between the Hiland Holdings Merger and the Hiland
Partners Merger
The obligations of Parent and HLND Merger Sub to complete the
Hiland Partners merger are conditioned upon, among other things,
the concurrent completion of the Hiland Holdings merger. In
addition, the obligations of Parent and HPGP Merger Sub to
complete the Hiland Holdings merger are conditioned upon, among
other things, the concurrent completion of the Hiland Partners
merger. Accordingly, the Hiland Partners merger may not be
completed, even if it is approved by the unitholders of Hiland
Partners, if the Hiland Holdings merger is not completed
concurrently. Likewise, the Hiland Holdings merger may not be
completed, even if it is approved by the unitholders of Hiland
Holdings, if the Hiland Partners merger is not completed
concurrently.
8
In certain circumstances, however, Parent and its applicable
Merger Sub will have the option to complete one of the mergers
without completing the other merger.
See The Hiland Partners Merger Agreement
Conditions to Completion of the Hiland Partners Merger
beginning on page 163 and The Hiland Holdings Merger
Agreement Conditions to Completion of the Hiland
Holdings Merger beginning on page 182.
Recommendations
of the Hiland Companies Boards of Directors and Conflicts
Committees
Recommendations
of Hiland Partners Board of Directors and Conflicts
Committee
After considering the various positive and negative factors more
fully described in Special Factors
Recommendations of the Hiland Partners Conflicts Committee and
the Hiland Partners Board of Directors; Reasons for Recommending
Approval of the Merger, the Hiland Partners Conflicts
Committee, which was delegated the authority to review and
evaluate the acquisition proposal made by Harold Hamm, and any
potential alternatives thereto, has unanimously:
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determined that the Hiland Partners merger agreement and the
Hiland Partners merger are advisable, fair to, and in the best
interests of, Hiland Partners and the Hiland Partners public
unitholders;
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approved the Hiland Partners merger agreement and the Hiland
Partners merger; and
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recommended to the Hiland Partners Board of Directors that the
Hiland Partners Board of Directors approve the Hiland Partners
merger agreement and the Hiland Partners merger.
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Accordingly, the Hiland Partners Conflicts Committee
recommends that the Hiland Partners public unitholders vote in
favor of the approval of the Hiland Partners merger agreement
and the Hiland Partners merger.
After considering various factors, including the unanimous
recommendation of the Hiland Partners Conflicts Committee and
the delivery of the opinion of Jefferies & Company,
Inc., the financial advisor to the Hiland Partners Conflicts
Committee (whom we sometimes refer to as Jefferies &
Company), to the Hiland Partners Conflicts Committee, the
Hiland Partners Board of Directors has:
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determined that the Hiland Partners merger agreement and the
Hiland Partners merger are advisable, fair to, and in the best
interests of, Hiland Partners and the Hiland Partners public
unitholders; and
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approved the Hiland Partners merger agreement and the Hiland
Partners merger.
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Accordingly, the Hiland Partners Board of Directors
recommends that the Hiland Partners public unitholders approve
the Hiland Partners merger agreement and the Hiland Partners
merger.
See Special Factors Recommendations of the
Hiland Partners Conflicts Committee and Hiland Partners Board of
Directors; Reasons for Recommending Approval of the Merger
beginning on page 48.
Recommendations
of Hiland Holdings Board of Directors and Conflicts
Committee
After considering the various positive and negative factors more
fully described in Special Factors
Recommendations of the Hiland Holdings Conflicts Committee and
the Hiland Holdings Board of Directors; Reasons for Recommending
Approval of the Merger, the Hiland Holdings Conflicts
Committee, which was delegated the authority to review and
evaluate the acquisition proposal made by Harold Hamm, and any
potential alternatives thereto, has unanimously:
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determined that the Hiland Holdings merger agreement and the
Hiland Holdings merger are advisable, fair to, and in the best
interests of, Hiland Holdings and the Hiland Holdings public
unitholders;
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approved the Hiland Holdings merger agreement and the Hiland
Holdings merger; and
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recommended to the Hiland Holdings Board of Directors that the
Hiland Holdings Board of Directors approve the Hiland Holdings
merger agreement and the Hiland Holdings merger.
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Accordingly, the Hiland Holdings Conflicts Committee
recommends that the Hiland Holdings public unitholders vote in
favor of the approval of the Hiland Holdings merger agreement
and the Hiland Holdings merger.
After considering various factors, including the unanimous
recommendation of the Hiland Holdings Conflicts Committee and
the delivery of the opinion of Barclays Capital Inc., the
financial advisor to the Hiland Holdings Conflicts Committee
(whom we sometimes refer to as Barclays Capital), to
the Hiland Holdings Conflicts Committee, the Hiland Holdings
Board of Directors has:
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determined that the Hiland Holdings merger agreement and the
Hiland Holdings merger are advisable, fair to, and in the best
interests of, Hiland Holdings and the Hiland Holdings public
unitholders; and
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approved the Hiland Holdings merger agreement and the Hiland
Holdings merger.
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Accordingly, the Hiland Holdings Board of Directors
recommends that the Hiland Holdings public unitholders approve
the Hiland Holdings merger agreement and the Hiland Holdings
merger.
See Special Factors Recommendations of the
Hiland Holdings Conflicts Committee and Hiland Holdings Board of
Directors; Reasons for Recommending Approval of the Merger
beginning on page 64.
Opinion
of Financial Advisors
Opinion
of Hiland Partners Conflicts Committee Financial
Advisors
The Hiland Partners Conflicts Committee received an opinion from
Jefferies & Company to the effect that, as of the date
of its opinion, the cash merger consideration of $7.75 per
common unit to be received by the Hiland Partners public
unitholders pursuant to the Hiland Partners merger agreement was
fair, from a financial point of view, to such holders. The
opinion is subject to the assumptions, limitations and
qualifications set forth in the opinion, which is attached as
Annex C to this joint proxy statement. See Special
Factors Opinion of Financial Advisor of Hiland
Partners beginning on page 55.
Opinion
of Hiland Holdings Conflicts Committee Financial
Advisors
The Hiland Holdings Conflicts Committee received an opinion from
Barclays Capital to the effect that, as of the date of its
opinion, the cash merger consideration of $2.40 per common unit
to be offered to the Hiland Holdings public unitholders pursuant
to the Hiland Holdings merger was fair, from a financial point
of view, to such holders. The opinion is subject to the
assumptions, limitations and qualifications set forth in the
opinion, which is attached as Annex F to this joint proxy
statement. See Special Factors Opinion of
Financial Advisor of Hiland Holdings beginning on
page 73.
Interests
of Certain Persons in the Mergers
When considering the mergers, you should be aware that some
unitholders, directors and officers of the Hiland Companies have
interests in the mergers that may be different from, or in
addition to, your interests as a unitholder generally, including:
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the non-employee directors of the general partner of each of the
Hiland Companies hold restricted common units, which will vest
immediately prior to the effective time of the applicable merger
and automatically convert into the right to receive the merger
consideration in the applicable merger;
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certain officers of the Hiland Companies own phantom units in
Hiland Partners that will remain outstanding as equity interests
in the surviving entity following the Hiland Partners merger;
additionally, if any officers or employees of the Hiland
Companies are granted restricted common units, phantom
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units or unit options issued under the Hiland Partners, LP
Long-Term Incentive Plan or the Hiland Holdings GP, LP Long-Term
Incentive Plan in the ordinary course of business prior to the
effective time of the mergers, such equity interests will remain
outstanding following the effective time of the mergers;
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Joseph L. Griffin and Matthew S. Harrison, the Chief
Executive Officer and Chief Financial Officer, respectively, of
each of the Hiland Companies, have agreed to vote their 4,307
and 2,500 respective common units of Hiland Partners in favor of
the Hiland Partners merger agreement and the Hiland Partners
merger, have been offered continued employment with the
surviving entities after the effective times of the mergers and
may enter into or be provided new employment, retention and
compensation arrangements (although no such new arrangements
have been proposed or agreed to);
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the members of the respective Conflicts Committees have received
payments in the amount of $30,000 each for their consideration
and negotiation of the mergers, which payments were not
contingent on any outcome of the consideration or
negotiations; and
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certain indemnification arrangements and insurance policies for
directors and officers of the general partner of each of the
Hiland Companies will be continued for six years by the
surviving entities in the mergers if the mergers are completed.
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These arrangements are more fully described under Special
Factors Interests of Certain Persons in the
Mergers beginning on page 123.
Conditions
to Completion of the Mergers
Conditions
to the Completion of the Hiland Partners Merger
Before the Hiland Partners merger can be completed, a number of
conditions must be satisfied or waived. These include:
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approval of the Hiland Partners merger agreement and the Hiland
Partners merger by holders of (a) a majority of the
outstanding Hiland Partners common units held by Hiland Partners
public unitholders entitled to vote thereon voting as a class
and (b) a majority of the outstanding subordinated units of
Hiland Partners entitled to vote thereon voting as a class;
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the absence of any legal restraint or prohibition enjoining or
otherwise prohibiting the consummation of the Hiland Partners
merger;
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the expiration or early termination of the waiting period
applicable to the consummation of the Hiland Partners merger
under the
Hart-Scott-Rodino
Act, which we refer to in this joint proxy statement as the
HSR Act, which waiting period terminated on
July 10, 2009;
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the accuracy of Parents and HLND Merger Subs
representations and warranties, subject to material adverse
effect qualifications;
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the accuracy of Hiland Partners representations and
warranties, subject to material adverse effect qualifications;
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performance by each of the parties of their respective
obligations and compliance by each of the parties with their
respective covenants, subject to materiality or material adverse
effect qualifications;
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no material adverse effect (as defined in the Hiland Partners
merger agreement) with respect to Hiland Partners having
occurred after the date of the Hiland Partners merger agreement;
and
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the Hiland Holdings merger being effectuated concurrently with
the Hiland Partners merger (which condition can only be waived
by Parent and HLND Merger Sub if the Hiland Holdings merger
agreement and Hiland Holdings merger have been submitted to a
vote of the common unitholders of
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Hiland Holdings and the outcome of such vote fails to satisfy
the requisite approval under the Hiland Holdings merger
agreement).
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Hiland Partners can give no assurance when or if all of the
conditions to the Hiland Partners merger will be either
satisfied or, to the extent possible, waived, or that the Hiland
Partners merger will be consummated. See The Hiland
Partners Merger Agreement Conditions to Completion
of the Hiland Partners Merger beginning on page 163.
Conditions
to the Completion of the Hiland Holdings Merger
Before the Hiland Holdings merger can be completed, a number of
conditions must be satisfied or waived. These include:
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approval of the Hiland Holdings merger agreement and the Hiland
Holdings merger by holders of (a) a majority of the
outstanding Hiland Holdings common units held by Hiland Holdings
public unitholders entitled to vote thereon voting as a class
and (b) a majority of the outstanding common units of
Hiland Holdings entitled to vote thereon voting as a class;
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the absence of any legal restraint or prohibition enjoining or
otherwise prohibiting the consummation of the Hiland Holdings
merger;
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the expiration or early termination of the waiting period
applicable to the consummation of the Hiland Holdings merger
under the HSR Act;
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the accuracy of Parents and HPGP Merger Subs
representations and warranties, subject to material adverse
effect qualifications;
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the accuracy of Hiland Holdings representations and
warranties, subject to material adverse effect qualifications;
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performance by each of the parties of their respective
obligations and compliance by each of the parties with their
respective covenants, subject to materiality or material adverse
effect qualifications;
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no material adverse effect (as defined in the Hiland Holdings
merger agreement) with respect to Hiland Holdings having
occurred after the date of the Hiland Holdings merger agreement;
and
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the Hiland Partners merger being effectuated concurrently with
the Hiland Holdings merger (which condition can only be waived
by Parent and HPGP Merger Sub if the Hiland Partners merger
agreement and Hiland Partners merger have been submitted to a
vote of the common unitholders and subordinated unitholders of
Hiland Partners and the outcome of such vote fails to satisfy
the requisite approval under the Hiland Partners merger
agreement and the Hiland Partners partnership agreement).
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Hiland Holdings can give no assurance when or if all of the
conditions to the Hiland Holdings merger will be either
satisfied or, to the extent possible, waived, or that the Hiland
Holdings merger will be consummated. See The Hiland
Holdings Merger Agreement Conditions to Completion
of the Hiland Holdings Merger beginning on page 182.
12
Termination
of the Merger Agreements
Termination
of the Hiland Partners Merger Agreement
The Hiland Partners merger agreement may be terminated and the
Hiland Partners merger may be abandoned at any time prior to the
effective time of the Hiland Partners merger, whether before or
after Hiland Partners unitholders approve the Hiland
Partners merger agreement and the Hiland Partners merger:
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by the mutual written consent of Hiland Partners and the general
partner of Hiland Partners (which we collectively refer to as
the Hiland Parties) and Parent and HLND Merger Sub
(which we collectively refer to as the HLND Parent
Parties);
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by either the Hiland Parties or the HLND Parent Parties, if:
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the effective time of the Hiland Partners merger does not occur
on or before November 1, 2009 and the party seeking to
terminate the Hiland Partners merger agreement has not breached
its obligations under the Hiland Partners merger agreement in
any manner that proximately caused the failure to consummate the
Hiland Partners merger by such date;
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a legal restraint or order permanently restraining or otherwise
prohibiting the consummation of the Hiland Partners merger has
become final and non-appealable; provided that the party seeking
to terminate the Hiland Partners merger agreement must have
complied in all material respects with its obligations
summarized under The Hiland Partners Merger
Agreement Other Covenants and Agreements
Efforts to Complete the Hiland Partners Merger; or
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the requisite unitholder approval of the Hiland Partners merger
is not obtained; provided that the right to terminate the Hiland
Partners merger agreement will not be available to the Hiland
Parties if any Hiland Party materially breached any of its
obligations summarized under The Hiland Partners Merger
Agreement Other Covenants and Agreements
No Solicitation and The Hiland Partners Merger
Agreement Other Covenants and Agreements
Filings; Other Actions;
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by the Hiland Parties, if any HLND Parent Party has breached or
failed to perform any of its representations, warranties,
covenants or other agreements contained in the Hiland Partners
merger agreement, if the breach or failure to perform:
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would constitute the failure of a condition to the Hiland
Parties obligations to complete the Hiland Partners
merger; and
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is not capable of being satisfied or cured by November 1,
2009 or, if capable of being satisfied or cured, is not
satisfied or cured by thirty days following receipt by Parent of
written notice stating the Hiland Parties intention to
terminate the Hiland Partners merger agreement and the basis for
such termination;
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provided that the right to terminate the Hiland Partners merger
agreement pursuant to the provision summarized above will not be
available to the Hiland Parties if, at such time, a condition to
the HLND Parent Parties obligation to complete the Hiland
Partners merger is not capable of being satisfied; or
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by the HLND Parent Parties, if:
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any Hiland Party has breached or failed to perform any of its
representations, warranties, covenants or other agreements
contained in the Hiland Partners merger agreement, if the breach
or failure to perform: (A) would constitute the failure of
a condition to the HLND Parent Parties obligations to
complete the Hiland Partners merger and (B) is not capable
of being satisfied or cured by November 1, 2009 or, if
capable of being satisfied or cured, is not satisfied or cured
by thirty days following receipt by the Hiland Parties of
written notice stating the HLND Parent Parties intention
to terminate the Hiland Partners merger agreement; provided that
the right to terminate the Hiland
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Partners merger agreement pursuant to the provision summarized
in this bullet point will not be available to the HLND Parent
Parties if, at such time, a condition to the Hiland
Parties obligation to complete the Hiland Partners merger
is not capable of being satisfied;
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a change in the recommendation of the Hiland Partners Board of
Directors or Hiland Partners Conflicts Committee or a failure of
the Hiland Partners Board of Directors or Hiland Partners
Conflicts Committee to recommend the Hiland Partners merger
agreement and Hiland Partners merger to the Hiland Partners
public unitholders occurs or the Hiland Partners Board of
Directors or any committee thereof approves, endorses or
recommends, or resolves to or publicly proposes to approve,
endorse or recommend, any alternative proposal (collectively, a
Hiland Partners change of recommendation); or
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the Hiland Holdings merger and the Hiland Partners merger are
not capable of closing concurrently on or before
November 1, 2009.
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See The Hiland Partners Merger Agreement
Termination beginning on page 165.
Termination
of the Hiland Holdings Merger Agreement
The Hiland Holdings merger agreement may be terminated and the
Hiland Holdings merger may be abandoned at any time prior to the
effective time of the Hiland Holdings merger, whether before or
after Hiland Holdings unitholders approve the Hiland
Holdings merger agreement and the Hiland Holdings merger:
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by the mutual written consent of Hiland Holdings and the general
partner of Hiland Holdings (which we collectively refer to as
the Holdings Parties) and Parent and HPGP Merger Sub
(which we collectively refer to as the HPGP Parent
Parties);
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by either the Holdings Parties or the HPGP Parent Parties, if:
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the effective time of the Hiland Holdings merger does not occur
on or before November 1, 2009 and the party seeking to
terminate the Hiland Holdings merger agreement has not breached
its obligations under the Hiland Holdings merger agreement in
any manner that proximately caused the failure to consummate the
Hiland Holdings merger by such date;
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a legal restraint or order permanently restraining or otherwise
prohibiting the consummation of the Hiland Holdings merger has
become final and non-appealable; provided that the party seeking
to terminate the Hiland Holdings merger agreement must have
complied in all material respects with its obligations
summarized under The Hiland Holdings Merger
Agreement Other Covenants and Agreements
Efforts to Complete the Hiland Holdings Merger; or
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the requisite unitholder approval of the Hiland Holdings merger
is not obtained; provided that the right to terminate the Hiland
Holdings merger agreement will not be available to the Holdings
Parties if any Holdings Party materially breached any of its
obligations summarized under The Hiland Holdings Merger
Agreement Other Covenants and Agreements
No Solicitation and The Hiland Holdings Merger
Agreement Other Covenants and Agreements
Filings; Other Actions or to the HPGP Parent Parties if
any Hamm Continuing Investor materially breached any of its
obligations under the Hiland Holdings support agreement;
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by the Holdings Parties, if any HPGP Parent Party shall have
breached or failed to perform any of its representations,
warranties, covenants or other agreements contained in the
Hiland Holdings merger agreement, if the breach or failure to
perform:
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would constitute the failure of a condition to the Holdings
Parties obligations to complete the Hiland Holdings
merger; and
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is not capable of being satisfied or cured by November 1,
2009 or, if capable of being satisfied or cured, is not
satisfied or cured by thirty days following receipt by Parent of
written notice stating
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the Holdings Parties intention to terminate the Hiland
Holdings merger agreement and the basis for such termination;
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provided that the right to terminate the Hiland Holdings merger
agreement pursuant to the provision summarized above will not be
available to the Holdings Parties if, at such time, a condition
to the HPGP Parent Parties obligation to complete the
Hiland Holdings merger is not capable of being satisfied; or
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by the HPGP Parent Parties, if:
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any Holdings Party has breached or failed to perform any of its
representations, warranties, covenants or other agreements
contained in the Hiland Holdings merger agreement, if the breach
or failure to perform: (A) would constitute the failure of
a condition to the HPGP Parent Parties obligations to
complete the Hiland Holdings merger and (B) is not capable
of being satisfied or cured by November 1, 2009 or, if
capable of being satisfied or cured, is not satisfied or cured
by thirty days following receipt by the Holdings Parties of
written notice stating the HPGP Parent Parties intention
to terminate the Hiland Holdings merger agreement; provided that
the right to terminate the Hiland Holdings merger agreement
pursuant to the provision summarized in this bullet point will
not be available to the HPGP Parent Parties if, at such time, a
condition to the Holdings Parties obligation to complete
the Hiland Holdings merger is not capable of being satisfied;
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a change in the recommendation of the Hiland Holdings Board of
Directors or Hiland Holdings Conflicts Committee or a failure of
the Hiland Holdings Board of Directors or Hiland Holdings
Conflicts Committee to recommend the Hiland Holdings merger
agreement and Hiland Holdings merger to the Hiland Holdings
public unitholders occurs or the Hiland Holdings Board of
Directors or any committee thereof approves, endorses or
recommends, or resolves to or publicly proposes to approve,
endorse or recommend, any alternative proposal (collectively, a
Hiland Holdings change of recommendation); or
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the Hiland Partners merger and the Hiland Holding merger are not
capable of closing concurrently on or before November 1,
2009.
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See The Hiland Holdings Merger Agreement
Termination beginning on page 184.
Fees and
Expenses; Remedies
Hiland
Partners; Reimbursement of Certain Expenses
Generally, each party to the Hiland Partners merger agreement is
responsible for its own expenses, including the fees and
expenses of its advisors, except that in the event that:
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the Hiland Partners merger agreement is terminated by the HLND
Parent Parties due to a Hiland Partners change of
recommendation; or
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the following has occurred:
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an alternative proposal is made known to the Hiland Parties or
is made directly to the Hiland Partners unitholders generally or
any person publicly announces an intention (whether or not
conditional or withdrawn) to make an alternative proposal,
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thereafter, the Hiland Partners merger agreement is terminated
by the Hiland Parties or the HLND Parent Parties (as applicable)
because November 1, 2009 has passed, the unitholders of
Hiland Partners failed to approve the Hiland Partners merger
agreement or the Hiland Partners merger or any Hiland Party
breached or failed to perform any of its representations,
warranties, covenants or other agreements contained in the
Hiland Partners merger agreement, and the breach or failure to
perform: (A) would constitute the failure of a condition to
the HLND Parent Parties obligations to
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complete the merger and (B) is not capable of being
satisfied or cured by November 1, 2009 or, if capable of
being satisfied or cured, is not satisfied or cured by thirty
days following receipt by the Hiland Parties of written notice
stating the HLND Parent Parties intention to terminate the
Hiland Partners merger agreement, and
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a Hiland Party or its subsidiary enters into a definitive
agreement with respect to, or consummates, a transaction
contemplated by any alternative proposal within twelve months of
the date the Hiland Partners merger agreement is terminated,
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then Hiland Partners must pay to Parent all of the expenses of
the HLND Parent Parties, up to $1,100,000; provided that no
expense for which a HLND Parent Party has received reimbursement
pursuant to the Hiland Holdings merger agreement shall be paid
pursuant to this reimbursement obligation. See The Hiland
Partners Merger Agreement Reimbursement of Certain
Expenses, beginning on page 167.
Hiland
Holdings; Reimbursement of Certain Expenses
Generally, each party to the Hiland Holdings merger agreement is
responsible for its own expenses, including the fees and
expenses of its advisors, except that in the event that:
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the Hiland Holdings merger agreement is terminated by the HPGP
Parent Parties due to a Hiland Holdings change of
recommendation; or
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the following has occurred:
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an alternative proposal is made known to the Holdings Parties or
is made directly to the Hiland Holdings unitholders generally or
any person publicly announces an intention (whether or not
conditional or withdrawn) to make an alternative proposal,
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thereafter, the Hiland Holdings merger agreement is terminated
by the Holdings Parties or the HPGP Parent Parties (as
applicable) because November 1, 2009 has passed, the
unitholders of Hiland Holdings failed to approve the Hiland
Holdings merger agreement or the Hiland Holdings merger or any
Holdings Party breached or failed to perform any of its
representations, warranties, covenants or other agreements
contained in the Hiland Holdings merger agreement, and the
breach or failure to perform: (A) would constitute the
failure of a condition to the HPGP Parent Parties
obligations to complete the merger and (B) is not capable
of being satisfied or cured by November 1, 2009 or, if
capable of being satisfied or cured, is not satisfied or cured
by thirty days following receipt by the Holdings Parties of
written notice stating the HPGP Parent Parties intention
to terminate the Hiland Holdings merger agreement, and
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a Holdings Party enters into a definitive agreement with respect
to, or consummates, a transaction contemplated by any
alternative proposal within twelve months of the date the Hiland
Holdings merger agreement is terminated,
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then Hiland Holdings must pay to Parent all of the expenses of
the HPGP Parent Parties, up to $800,000; provided that no
expense for which a HPGP Parent Party has received reimbursement
pursuant to the Hiland Partners merger agreement shall be paid
pursuant to this reimbursement obligation. See The Hiland
Holdings Merger Agreement Reimbursement of Certain
Expenses, beginning on page 186.
Effect
of Termination; Remedies
In the event of termination of either merger agreement as
summarized above under Termination of the
Merger Agreements, the applicable merger agreement will
terminate, except for certain provisions including the provision
relating to reimbursement of expenses summarized above, and
there shall be no liability on the part of the Hiland Parties or
the Holdings Parties, as the case may be, or the HLND Parent
Parties or HPGP Parent Parties, as the case may be, to the other
except as provided in the provision relating to reimbursement of
expenses summarized above. No such termination, however, shall
relieve any party from
16
liability arising out of any willful breach of any of the
representations, warranties or covenants in the applicable
merger agreement (subject to any express limitations set forth
in such merger agreement), in which case the aggrieved party
shall be entitled to all rights and remedies available at law or
in equity.
See The Hiland Partners Merger Agreement
Effect of Termination; Remedies beginning on page 166
and The Hiland Holdings Merger Agreement
Effect of Termination; Remedies beginning on page 185.
Financing
of the Mergers
The mergers will be financed entirely with cash contributed by
Mr. Hamm and the Hamm family trusts to Parent and the
Merger Subs. There is no financing condition to the obligations
of Mr. Hamm and his affiliates to consummate the
transactions.
Mr. Hamm has delivered to Parent a funding commitment
letter related to the Hiland Partners merger, which we refer to
in this joint proxy statement as the Hiland Partners
commitment letter, pursuant to which Mr. Hamm has
committed to contribute approximately $32.0 million to
Parent prior to the closing of the Hiland Partners merger,
representing the aggregate Hiland Partners merger consideration
plus related fees and expenses. Under the Hiland Partners
commitment letter, Mr. Hamms funding commitment is
reduced by the amount of cash, if any, contributed by the Hamm
family trusts to fund the Hiland Partners merger. Pursuant to
its terms, Hiland Partners is a third-party beneficiary of the
Hiland Partners commitment letter.
Mr. Hamm has also delivered to Parent a funding and equity
rollover commitment letter related to the Hiland Holdings
merger, which we refer to in this joint proxy statement as the
Hiland Holdings commitment letter, pursuant to which
Mr. Hamm has committed to contribute approximately
$21.2 million to Parent prior to the closing of the Hiland
Holdings merger, representing the aggregate Hiland Holdings
merger consideration plus related fees and expenses. Under the
Hiland Holdings commitment letter, Mr. Hamms funding
commitment is reduced by the amount of cash, if any, contributed
by the Hamm family trusts to fund the Hiland Holdings merger.
Pursuant to its terms, Hiland Holdings is a third-party
beneficiary of the Hiland Holdings commitment letter. See
Special Factors Financing of the Mergers
beginning on page 139.
No
Solicitation of Competing Proposals
The merger agreements generally restrict the ability of each of
the Hiland Companies and their respective general partners to,
among other things, solicit or engage in discussions or
negotiations with a third party regarding specified transactions
involving the Hiland Companies or their respective subsidiaries
and each of the Hiland Companies Board of Directors
or their respective Conflicts Committees ability to change
or withdraw its recommendation of its respective merger
agreement. Notwithstanding these restrictions, under
circumstances specified in the merger agreements, each Hiland
Company may respond to an unsolicited alternative
proposal as the term is defined in the sections entitled
The Hiland Partners Merger Agreement Other
Covenants and Agreements No Solicitation and
The Hiland Holdings Merger Agreement Other
Covenants and Agreements No Solicitation, so
long as it complies with the terms of the applicable merger
agreement. Each Hiland Company Board of Directors or Conflicts
Committee may also withdraw its recommendation of its respective
merger agreement which it had previously recommended if it
determines in good faith, after consultation with its respective
outside counsel and financial advisors, that doing so would be
in the best interests of the public unitholders of the
respective Hiland Company. See The Hiland Partners Merger
Agreement Other Covenants and Agreements
No Solicitation, beginning on page 157 and The
Hiland Holdings Merger Agreement Other Covenants and
Agreements No Solicitation, beginning on
page 176.
No
Appraisal Rights
Holders of Hiland Partners common units and Hiland Holdings
common units are not entitled to dissenters rights of
appraisal under their respective partnership agreements or
applicable Delaware law.
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Material
United States Federal Income Tax Considerations
The Hiland Partners merger and the Hiland Holdings merger will
each be a taxable transaction for U.S. federal income tax
purposes (and also may be taxed under applicable foreign, state
and local tax laws). For U.S. federal income tax purposes,
a common unitholder receiving merger consideration will
recognize gain or loss in an amount equal to the difference, if
any, between (1) the amount realized by that common
unitholder (equal to the sum of the merger consideration
received and the common unitholders share of the
respective Hiland Companys nonrecourse liabilities) as a
result of the applicable Hiland Company merger and (2) that
common unitholders adjusted tax basis in its common units
of the respective Hiland Company. Moreover, because a portion
(which will likely be substantial) of a common unitholders
gain or loss will be separately computed and taxed as ordinary
income, a common unitholder may recognize both ordinary income
and a capital loss as a result of the mergers. For an
explanation of the amount realized and the character of any gain
recognized by a common unitholder as a result of the mergers and
more information regarding the U.S. federal income tax
consequences of the mergers, see Special
Factors Material United States Federal Income Tax
Considerations beginning on page 131.
The tax consequences of the mergers to you will depend upon your
own personal circumstances. You should consult your tax advisors
for a full understanding of the U.S. federal, state, local
and foreign tax consequences of the mergers to you.
18
QUESTIONS
AND ANSWERS ABOUT THE MERGERS AND THE SPECIAL MEETINGS
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Q:
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Where and when are the special meetings?
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A:
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Hiland Partners and Hiland Holdings will hold separate special
meetings of common unitholders. Hiland Partners will hold a
special meeting of common unitholders
on ,
2009 at , local time,
at . Hiland Holdings will hold a
special meeting of common unitholders
on ,
2009 at , local time,
at .
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Q:
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What am I being asked to vote on?
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A:
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If you are a holder of common units of Hiland Partners, you are
being asked to approve the Hiland Partners merger agreement and
the Hiland Partners merger, pursuant to which an entity created
by the Hamm Continuing Investors will merge with and into Hiland
Partners and each common unit of Hiland Partners not held by the
Hiland Holdings rollover common unitholders will be converted
into the right to receive $7.75 in cash. If you are a holder of
common units of Hiland Holdings, you are being asked to approve
the Hiland Holdings merger agreement and the Hiland Holdings
merger, pursuant to which an entity created by the Hamm
Continuing Investors will merge with and into Hiland Holdings
and each common unit of Hiland Holdings not held by the Hiland
Holdings rollover common unitholders will be converted into the
right to receive $2.40 in cash. After the mergers, Hiland
Partners and Hiland Holdings will be privately-owned companies,
owned by the Hamm Continuing Investors and you will have no
interest in either entity.
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Q:
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If I own common units in each of the Hiland Companies, can I
vote for one merger and against the other merger?
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A:
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Yes. Although this joint proxy statement relates to both going
private transactions, each special meeting is separate and if
you own common units in each of Hiland Partners and Hiland
Holdings, you will receive proxy materials for both transactions
and you may vote in favor of both mergers, against both mergers,
in favor of one merger and against the other merger or abstain
from voting on one or both mergers. Holders of common units of
each of the Hiland Companies will receive a white proxy card
relating to the Hiland Partners special meeting and a blue proxy
card relating to the Hiland Holdings special meeting, to help
ensure they accurately submit their vote on each merger. If only
one merger is approved by the unitholders, provided that the
other merger was voted down by the unitholders, Parent and the
applicable Merger Sub may waive the condition that both mergers
be closed concurrently and choose to close the approved merger.
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Q:
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What are the record dates for the special meetings?
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A:
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The record date for the special meeting of Hiland Partners and
for the special meeting of Hiland Holdings
is ,
2009. Only holders of Hiland Partners common units or Hiland
Holdings common units, as applicable, at the close of business
on the record date are entitled to notice of, and to vote at,
the special meeting of the Hiland Company in which they own
common units or any adjournment or postponement thereof.
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Q:
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What constitutes a quorum for the special meetings?
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A:
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At the special meeting of each Hiland Company, the presence, in
person or by proxy, of holders of (i) a majority of the
outstanding partnership units of the class for which the meeting
is called or (ii) a greater percentage of outstanding
partnership units where such greater percentage is required for
approval of an action to be taken at the meeting, will
constitute a quorum for each of the special meetings.
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Q:
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What do I need to do now?
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A:
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After carefully reading and considering the information
contained in this joint proxy statement (including its annexes
and the documents referenced under Where You Can Find More
Information) please vote by completing, signing and
mailing your proxy card or by voting via telephone or the
Internet as soon as possible so that your units can be
represented at the special meeting of the Hiland Company in
which you own units. Your vote is important. Whether or not you
plan to attend the special meeting, you should sign
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and mail your proxy card or vote via telephone or the Internet
at your first convenience. Remember, if you fail to vote your
units, that will have the same effect as a vote
against the approval of the Hiland Partners merger
agreement and the Hiland Partners merger (if you are a holder of
Hiland Partners common units) or the Hiland Holdings merger
agreement and the Hiland Holdings merger (if you are a holder of
Hiland Holdings common units).
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Q:
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If I hold a unit certificate, should I send in my unit
certificates now?
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A:
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No. After the applicable merger is completed, you will be
sent a letter of transmittal with detailed written instructions
for exchanging your common unit certificates for the cash merger
consideration. If your common units are held in street
name by your broker, bank or other nominee, you will
receive instructions from your broker, bank or other nominee as
to how to effect the surrender of your street name
common units in exchange for the merger consideration.
Please
do not send in your certificates now.
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Q:
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If my common units are held in street name by my
broker, will my broker vote my units for me?
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A:
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Your broker will vote your common units for you only if you
provide your broker with your specific voting instructions. You
should follow the directions provided by your broker to vote
your common units, including instructions for telephone and
Internet voting. Without your instructions your common units in
either Hiland Partners or Hiland Holdings will not be voted,
which will have the same effect as a vote against
the approval of the applicable merger agreement and merger.
Please make certain to return your proxy or voting instruction
card for each separate account you maintain to ensure that all
of your common units in the Hiland Companies are voted.
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Q:
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May I change my vote after I have mailed my signed proxy
card?
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A:
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Yes. You may change your vote by delivering a written notice
stating that you would like to revoke your proxy or by executing
and submitting a new, later dated proxy to the Secretary of the
Hiland Company in which you own common units before the special
meeting of that Hiland Company. You also may revoke your proxy
by attending the special meeting and voting your common units in
person. If your common units are held in street name, you must
contact your broker or bank and follow the directions provided
to change your voting instructions.
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Q:
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May I vote in person?
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A:
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Yes. If you are the record holder of your common units, you may
attend the special meeting for the Hiland Company in which you
own common units and vote your common units in person, rather
than signing and returning your proxy card. If your shares are
held in street name, you must get a proxy from your
broker, bank or nominee in order to attend the special meeting
and vote your common units in person. Even if you plan to attend
the special meeting, we encourage you to sign and deliver a
proxy card, which will not prevent you from attending the
special meeting and voting your common units in person.
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Q:
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What does it mean if I get more than one proxy card or vote
instruction card?
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A:
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If your common units in either of the Hiland Companies are
registered differently or are in more than one account, you will
receive more than one card for that Hiland Company. In addition,
if you own common units in each of the Hiland Companies, you
will receive at least one card for each Hiland Company. For the
convenience of persons who hold common units in each of the
Hiland Companies and will receive proxy materials for both
transactions, we will distinguish the proxy cards by mailing
white proxy cards for the Hiland Partners special meeting and
blue proxy cards for the Hiland Holdings special meeting. Please
complete and return all of the proxy cards or vote instruction
cards you receive (or submit your proxy by telephone or the
Internet, if available to you) to ensure that all of your common
units in either Hiland Company are voted.
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Q:
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Am I entitled to appraisal or dissenters rights?
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A:
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No. Holders of Hiland Partners common units and Hiland
Holdings common units are not entitled to dissenters
rights of appraisal under their respective partnership agreement
or applicable Delaware law.
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Q:
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What will happen if only one of the merger agreements and
related mergers are approved by unitholders?
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A:
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If each Hiland Company merger agreement and Hiland Company
merger is submitted to a vote of the unitholders of the
applicable Hiland Company and only one of the Hiland Company
merger agreements and Hiland Company mergers are approved, then,
if all other conditions are either satisfied or waived, Parent
and the applicable Merger Sub will have the option of completing
only the Hiland Company merger that has been approved.
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For more information, please see The Hiland Partners
Merger Agreement Conditions to Completion of the
Hiland Partners Merger beginning on page 163 and
The Hiland Holdings Merger Agreement
Conditions to Completion of the Hiland Holdings Merger
beginning on page 182.
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Q:
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What if the proposed mergers are not completed?
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A:
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It is possible that the proposed mergers will not be completed.
The mergers will not be completed if all closing conditions are
not satisfied or waived. If the mergers are not completed,
Hiland Partners and Hiland Holdings will each remain an
independent public company, and the common units of Hiland
Partners and Hiland Holdings will continue to be listed and
traded on the NASDAQ Global Select Market. Under specified
circumstances, if the mergers are not completed, Hiland
Partners, Hiland Holdings or each of the Hiland Companies may be
required to reimburse Parent for certain expenses associated
with the mergers, up to an aggregate amount of
$1.9 million. Please see The Hiland Partners Merger
Agreement Reimbursement of Certain Expenses
and The Hiland Holdings Merger Agreement
Reimbursement of Certain Expenses, beginning on
page 167 and 186, respectively.
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Q:
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Why is my vote important?
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A:
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Among other required votes, the Hiland Partners merger agreement
requires the affirmative vote of the holders of a majority of
the Hiland Partners common units held by Hiland Partners public
unitholders and the Hiland Holdings merger agreement requires
the affirmative vote of the holders of a majority of the Hiland
Holdings common units held by Hiland Holdings public
unitholders. Because each of these votes is based upon a
majority of the outstanding common units held by the public
unitholders of the respective Hiland Company, your failure to
vote or your abstention from voting will have the same effect as
a vote against the approval of the Hiland Partners
merger agreement and the Hiland Partners merger or the Hiland
Holdings merger agreement and the Hiland Holdings merger, as
applicable. Additionally, because the merger agreements provide
that the obligation of Parent and the applicable Merger Sub to
complete either of the mergers is conditioned on, among other
things, the concurrent completion of the other merger, it is not
certain that either merger will be completed without, among
other things, the affirmative vote of the holders of a majority
of (i) the outstanding Hiland Partners common units held by
the Hiland Partners public unitholders entitled to vote thereon
voting as a class and (ii) the outstanding Hiland Holdings
common units held by the Hiland Holdings public unitholders
entitled to vote thereon voting as a class.
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Q:
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Who can help answer my questions?
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A:
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If you have any questions about the mergers, need additional
copies of this joint proxy statement or the enclosed proxy card,
or require assistance in voting your common units, you should
contact D.F. King & Co., Inc. (D.F. King),
which is assisting us as the proxy solicitation agent in
connection with the mergers, as follows:
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D.F. King & Co., Inc.
48 Wall Street, 22nd Floor
New York, NY 10005
Toll Free:
1-800-967-4612
21
SPECIAL
FACTORS
Background
of the Mergers
Overview
It is part of the Hiland Companies business strategy to
consistently evaluate strategic alternatives in an effort to
maximize unitholder value as the Hiland Companies, and the
environment in which they operate, evolve.
Like many natural gas gathering and processing companies, Hiland
Partners earnings and cash flows are impacted by changes
in commodity prices. The margins generated under some of Hiland
Partners gathering and processing contracts fluctuate
based on the price of natural gas and NGLs and, in some cases,
the relationship between the price of natural gas and NGLs.
Hiland Partners systems are also dependent on the level of
production from crude oil and natural gas wells that supply
natural gas to its systems. Production from wells naturally
declines over time. Accordingly, in order to maintain or
increase throughput levels on its gathering systems, Hiland
Partners must continually obtain new supplies of natural gas
from newly drilled wells near its gathering systems.
Fluctuations in energy prices, as well as the accessibility of
capital to fund drilling, can greatly affect the level of
drilling activity by producers.
Beginning in the third quarter of 2008, fears of an economic
recession, a significant reduction in the availability of credit
nationwide and significant declines in crude oil, natural gas
and NGLs prices from highs experienced in 2008 led to a sell-off
by investors in master limited partnerships, or
MLPs, particularly ones that face commodity price
exposure in their business, such as gathering and processing
MLPs like Hiland Partners. This sell-off intensified shortly
after the mid-September bankruptcy filing of Lehman Brothers,
Inc., which worsened the global credit crisis.
In the late summer and fall of 2008, commodity prices declined
precipitously. The prompt month New York Mercantile Exchange, or
NYMEX, crude oil price declined from a record high of $145.18
per barrel on July 14, 2008 to $67.81 per barrel on
October 31, 2008. The prompt month NYMEX natural gas price
was halved from $13.51 per MMBtu on July 1, 2008 to $6.75
per MMBtu on October 31, 2008. And the OPIS Conway NGL
simple average price more than halved, from $2.08 per gallon on
July 17, 2008 to a closing price of $0.89 per gallon on
October 31, 2008.
Accordingly, like most gathering and processing MLPs, both
Hiland Partners common unit price and Hiland
Holdings common unit price declined significantly in the
third quarter. For example, Hiland Partners common unit
price declined from $49.26, or at a 7.00% yield to investors
based on the most recent quarterly distribution (on an
annualized basis) (yield), on July 1, 2008, to
$26.06 by October 31, 2008, representing a 13.51% yield.
Likewise, Hiland Holdings common unit price declined from
$26.75, representing a 4.56% yield, as of July 1, 2008, to
$12.40, representing a 10.24% yield, as of October 31, 2008.
As a result of the decline in unit prices and the substantial
reduction in the availability of credit nationwide during this
period, the Hiland Companies cost of raising additional
capital increased significantly at a time when Hiland Partners
was pursuing its growth strategy of expanding organically,
including in the Bakken shale play in northwestern North Dakota
and at its Woodford Shale and Kinta gathering systems in
southeastern Oklahoma. During this time, management believed
that Hiland Partners had adequate capital resources to fund its
announced expansion projects and ongoing system expansions
without having to access the capital markets for debt or equity.
However, given the significant disruption in the capital
markets, the lack of access to debt capital and the uncertainty
regarding the direction of commodity prices, in mid-October,
Joseph L. Griffin, the President and Chief Executive Officer of
each of the Hiland Companies, and Matthew S. Harrison, the Chief
Financial Officer of each of the Hiland Companies, decided to
review a number of potential alternatives to more efficiently
capitalize the companies, to better position the companies to be
able to adapt to further changes in economic conditions, to fund
future unplanned expansion projects and to otherwise maximize
unitholder value. The alternatives considered were:
(i) raising equity capital, (ii) amending the Credit
Agreement dated as of February 15, 2005 (the Hiland
Operating Credit Agreement) among Hiland Operating, LLC (a
subsidiary of Hiland Partners, which we refer to as Hiland
Operating), the lenders party
22
thereto and MidFirst Bank (MidFirst Bank), as
administrative agent, to expand the borrowing capacity
thereunder, (iii) having Hiland Partners acquire Hiland
Holdings in a going private transaction that would result in
Hiland Partners owning its general partner and the cancellation
of the incentive distribution rights held by the general partner
and (iv) having Harold Hamm acquire the Hiland Companies in
going private transactions. In the course of exploring these
alternatives, Mr. Harrison consulted with Douglas
McWilliams, a partner at Vinson & Elkins L.L.P.,
outside counsel to each of the Hiland Companies (Vinson
& Elkins), on or around October 15, 2008 about
the legal issues involved with an acquisition of Hiland Holdings
by Hiland Partners and going private transactions involving
Mr. Hamm. Also on around October 15, 2008,
Mr. Harrison separately contacted Joshua Davidson, a
partner at Baker Botts L.L.P. (Baker Botts), to
inquire about the legal and procedural aspects of a going
private transaction.
During this preliminary exploration of the strategic
alternatives listed above, Messrs. Griffin and Harrison and
Derek Gipson, Director of Business Development and Investor
Relations of each of the Hiland Companies (who, together with
Messrs. Griffin and Harrison we sometimes refer to as the
management team), initiated a meeting with
Mr. Hamm to discuss the possibility of going private
transactions involving Mr. Hamm and the Hiland companies.
During that meeting on or around October 15, 2008,
Mr. Hamm indicated that he would not foreclose the
possibility of such transactions, but that he would prefer to
focus on other alternatives for pursuing growth.
Following their meeting with Mr. Hamm,
Messrs. Griffin, Harrison and Gipson further explored
amending the Hiland operating Credit Facility, under which, as
of September 30, 2008, Hiland Partners had borrowed
$262.1 million against a borrowing base of
$300 million. In this regard, Messrs. Griffin,
Harrison and Gipson had a series of formal discussions with
representatives of MidFirst Bank and the other lenders under the
Hiland Operating Credit Agreement during October and November of
2008 regarding amendments to the Hiland Operating Credit
Agreement, including expanding the borrowing base under the
Hiland Operating Credit Agreement from $300 million to
$350 million. Based on these discussions, management
determined by mid-November that the borrowing base could not be
expanded on terms acceptable to Hiland Partners at that time. In
fact, through such discussions, management learned that many
lenders were looking for opportunities to reduce their credit
commitments to gathering and processing companies.
On November 6, 2008, the Board of Directors of each of the
Hiland Companies held a regularly-scheduled board meeting. At
those meetings, Messrs. Griffin and Harrison discussed,
among other things, recent equity market conditions for the
Hiland Companies and their peers, including increases in yields,
changes in commodity prices and Hiland Partners commodity
price hedge position and the discussions Messrs. Griffin,
Harrison and Gipson had with MidFirst Bank regarding potentially
expanding the borrowing base under the Hiland Operating Credit
Agreement. At those meetings, Messrs. Griffin and Harrison
also summarized managements financial projections and
estimates for the 2009 fiscal year, which included then-current
forward pricing estimates and lower growth capital expenditures
planned for 2009 than in 2008 (the November
Projections). In particular, management advised each Board
of Directors that, based on the November Projections, the Hiland
Companies were expected to generate distribution growth and
remain in compliance with all financial covenants in the Hiland
Operating Credit Agreement through 2009.
On or about November 10, 2008, Messrs. Griffin, Harrison
and Gipson spoke telephonically with Scott Rogan, a Managing
Director of Barclays Capital, and other representatives of
Barclays Capital to informally discuss various potential
capitalization alternatives. The management team discussed
raising equity, expanding the borrowing base under the Hiland
Operating Credit Agreement, having Hiland Partners acquire
Hiland Holdings and going private transactions involving Harold
Hamm.
On November 12, 2008, Messrs. Griffin, Harrison and
Gipson met with Frank Murphy, a Managing Director of Wells Fargo
Securities, LLC, which was then known as Wachovia Capital
Markets, LLC (Wells Fargo Securities), for a capital
markets update. During those discussions, the concept of
potential going private transactions was discussed and Wells
Fargo Securities offered to do some preliminary analytical work
on various alternatives available with respect to the Hiland
Companies.
As a result of their discussions with Barclays Capital and Wells
Fargo Securities, by mid-November Messrs. Griffin, Harrison
and Gipson determined that, based on the then-current yields of
the Hiland
23
Companies common units, the then-current unit price of the
Hiland Companies common units and the highly-dilutive
effect of selling additional common units, a public equity
offering was not an efficient way to capitalize the Hiland
Companies.
On November 14, 2008, Messrs. Griffin, Harrison and Gipson
spoke telephonically with Mr. Rogan and other
representatives of Barclays Capital to further discuss potential
alternatives, with an emphasis on the alternative of having
Hiland Partners acquire Hiland Holdings.
On November 17, 2008, Messrs. Hamm, Griffin, Harrison
and Gipson met with Mr. Rogan and other representatives of
Barclays Capital in Enid, Oklahoma for an informal discussion.
At the meeting, Barclays Capital outlined the following
capitalization strategy alternatives: (i) maintaining the
status quo, (ii) going private transactions involving both
Hiland Companies, (iii) an acquisition of Hiland Holdings
by Hiland Partners, and (iv) a going private transaction
involving only Hiland Holdings. Meeting participants were
provided written discussion materials prepared by Barclays
Capital that provided, as of the date thereof, (a) an
overview of the current financial performance and position of
each of the Hiland Companies, (b) financial analyses based
on assumed premiums paid for the common units of Hiland
Holdings, (c) implications of the alternative transactions,
(d) preliminary timing of the various alternatives and
(e) an analysis of a then-pending MLP going private
transaction. The management team also discussed with Barclays
Capital the outlook for commodity pricing and reviewed with
Barclays Capital the November Projections and guidance to be
announced for the 2009 fiscal year (the Initial 2009
Guidance).
At the close of market on November 18, 2008, Hiland
Partners common unit price was $11.90, representing a
yield of 29.58%, and Hiland Holdings common unit price was
$5.34, representing a yield of 23.78%. Additionally, at the
close of market on November 18, 2008, the prompt month
NYMEX crude oil price was $54.39 per barrel, the prompt month
NYMEX natural gas price was $6.52 per MMBtu, and the OPIS Conway
NGL simple average price was $0.68 per gallon.
On November 18, 2008, the Hiland Companies issued a joint
press release announcing the Initial 2009 Guidance, which was
consistent with the November Projections, but updated to reflect
the most recently available forward commodity strip pricing. In
the release, Hiland Partners projected that 2009 earnings before
interest, taxes, depreciation and amortization
(EBITDA) would range between $68 million and
$80 million based on the following assumptions, each of
which was noted in the press release: (i) $70.00 to $80.00
per barrel NYMEX crude oil pricing, (ii) $6.50 to $7.50 per
MMBtu NYMEX natural gas pricing, (iii) then-current
estimated forward quotes for natural gas pipeline basis
differentials and (iv) trailing
12-month
average NGL pricing correlations to crude oil, with all pricing
subject to Hiland Partners commodity hedging portfolio.
EBITDA is a non-GAAP financial measure. Please read
Non-GAAP Financial Measures of Hiland Partners.
The press release also noted that, despite the recent decline in
commodity prices, as of November 18, 2008, management did
not believe the Hiland Partners unit price reflected
Hiland Partners historical operating results or long-term
prospects for constructing and operating natural gas midstream
facilities. In particular, management mentioned that it
continued to be encouraged by the increased rig count in the
Williston basin, along with increased initial production rates
from wells drilled on its North Dakota Bakken, Montana Bakken
and Woodford Shale dedicated acreage.
On November 18, 2008, Messrs. Hamm and Harrison
contacted Mr. Davidson of Baker Botts, in his capacity as
prospective counsel to Mr. Hamm, and discussed the
possibility of exploring transactions by which Mr. Hamm
would take one or both of the Hiland Companies private.
On November 20, 2008, Messrs. Hamm and Harrison met
with Mr. Davidson and Paul Perea, another partner at Baker
Botts and Mr. Rogan and other representatives of Barclays
Capital to discuss further the possible going private
transactions of one or both of the Hiland Companies led by
Mr. Hamm. At this meeting, potential acquisition structures
for going private transactions and other strategic and legal
matters were discussed, including the potential participation by
the Hamm family trusts in the transactions. Mr. Hamm
informed Mr. Davidson that he wished to engage Baker Botts
to represent him as legal counsel in the potential transactions.
Also available at the meeting were written materials prepared by
Barclays Capital supplementing
24
portions of Barclays Capitals November 17
presentation concerning going private transactions involving
both Hiland Companies. The November 20 materials included
preliminary valuation analyses of the Hiland Companies based on
managements projected financial results as of the date
thereof. However, Barclays Capital did not make a presentation
at the meeting nor were any preliminary valuations discussed.
Mr. Hamm later requested a fee proposal from Barclays
Capital for potential going private transactions, but he did not
pursue further engagement negotiations with Barclays Capital
thereafter and did not engage Barclays Capital as his financial
advisor, nor did Hiland Partners engage Barclays Capital.
From November 18 through December 5, 2008, crude oil,
natural gas and NGL prices continued to fall, with the prompt
month NYMEX crude oil price reaching $40.81 per barrel, a
decrease of $13.58, or 25%, and the prompt month NYMEX natural
gas price reaching $5.75 per MMBtu, a decrease of $0.77, or 11%,
on December 5, 2008. Also, the OPIS Conway NGL simple
average price reached $0.49 per gallon on December 5, 2008,
a decrease of $0.19, or 28%, from November 18, 2008. The
fractionation or frac spread, which represents the
difference in the cost of natural gas to be processed and the
value of the resulting NGL stream, decreased significantly
during that same period due to the comparatively greater
declines in the value of NGLs compared to natural gas. The
combination of the continued decline in commodity prices, the
credit crisis affecting the global economy and the further
sell-off in MLP securities caused the unit prices of the Hiland
Companies to further decline. By December 5, 2008, Hiland
Partners unit price had declined to $8.11 per unit and
Hiland Holdings unit price had declined to $2.78 per unit.
From November 21 through December 7, 2008,
Messrs. Griffin and Harrison had several discussions, with
the participation of Mr. Gipson in some cases, with Messrs.
Davidson and Perea of Baker Botts regarding potential going
private transactions for the Hiland Companies, including
acquisition structures, tax matters, debt covenant matters and
potential transaction terms. During these discussions, Messrs.
Griffin, Harrison and Gipson, in consultation with Baker Botts,
determined that going private transactions with Mr. Hamm
would not trigger any change of control provision under the
Hiland Operating Credit Agreement. During the last week of
November 2008, Mr. Hamm also discussed with Mr. Murphy
of Wells Fargo Securities his potential interest in pursuing
going private transactions. On December 1, 2008,
Mr. Hamm requested a fee proposal from Wells Fargo
Securities to advise him on potential going private transactions.
On December 5, 2008, Mr. Murphy and other Wells Fargo
Securities representatives met with Messrs. Hamm, Griffin,
Harrison and Gipson, with Messrs. Hugh Babowal and Robert
Johnson, each of whom is a Managing Director of Wells Fargo
Securities, participating telephonically. During this meeting
Wells Fargo Securities made a presentation on its qualifications
to serve as financial advisor to Mr. Hamm in connection
with the going private transactions.
The
December 5 Special Meeting and Evaluation of
Alternatives
On December 5, 2008, Mr. Hamm called a special meeting
of the Board of Directors of each of the Hiland Companies to
discuss the continued significant decline in crude oil, natural
gas and NGL prices since the meeting of each Board of Directors
on November 6, 2008 and the effects the decline in prices
were having on the current and projected financial condition of
the Hiland Companies. At the special meetings,
Messrs. Griffin and Harrison presented managements
revised projections for the 2009 fiscal year (the December
Projections), which updated the November Projections to
reflect the most recently-available forward commodity strip
pricing for 2009.
Based upon forward commodity strip pricing for 2009, as of
December 1, 2008, management projected that EBITDA would
approximate $38 million in 2009, a decrease of
approximately $49 million from the November Projections.
The December Projections were based on the following commodity
price assumptions: (i) $57.72 per barrel NYMEX crude oil
pricing as compared to the $70.00 to $80.00 per barrel prices
used in connection with the Initial 2009 Guidance,
(ii) $6.73 per MMBtu NYMEX natural gas pricing as compared
to the $6.50 to $7.50 per MMBtu prices used in connection with
the Initial 2009 Guidance and (iii) $0.64 per gallon NGL
pricing for OPIS Conway compared to the $1.09 to $1.24 per
gallon prices used in connection with the Initial 2009 Guidance,
which were based on trailing
12-month
average NGL pricing correlations to crude oil, with all pricing
subject to Hiland Partners commodity hedging portfolio.
Management also informed
25
the Board of Directors of each of the Hiland Companies that if
management had used current spot prices as opposed to 2009
forward prices, expected EBITDA for 2009 would be approximately
$45 million.
Additionally, management cautioned the Board of Directors of
each of the Hiland Companies that, if commodity prices did not
increase significantly from their stated assumptions, Hiland
Partners would likely violate one or more financial covenants
under the Hiland Operating Credit Agreement as early as
June 30, 2009. In particular, management expressed concerns
about Hiland Partners ability to continue to meet the
Hiland Operating Credit Agreements required ratio of
consolidated funded debt to EBITDA (which we refer to as the
leverage ratio), on a trailing four-quarters basis,
of no greater than 4.0 to 1.0.
To avoid a situation in which Hiland Partners violated any of
its debt covenants under the Hiland Operating Credit Agreement,
the Board of Directors of each of the Hiland Companies charged
management to begin exploring any and all alternatives,
including potential going private transactions.
Following the December 5, 2008 special meetings,
Messrs. Griffin and Harrison continued exploring various
capitalization alternatives and potential transactions, with the
principal consideration being the avoidance of a violation of
the Hiland Operating Credit Agreement. In this regard,
management continued to explore potential asset sales, the
issuance of equity or debt and the renegotiation of the Hiland
Operating Credit Agreement, in addition to the going private
transactions.
Management estimated that, based on the December Projections,
Hiland Partners would have to raise a minimum of approximately
$120 million of equity capital to pay down sufficient debt
to ensure compliance with the leverage ratio covenant through
December 31, 2009. Management estimated that, because of
the rapid decline in unit prices of both Hiland Companies,
raising that much equity capital in the public markets would
result in significant dilution to existing unitholders and
likely trigger change of control provisions under the Hiland
Operating Credit Agreement. Additionally, the disruption in the
MLP markets raised questions as to whether Hiland Partners could
raise that level of equity. Thus, Messrs. Hamm, Griffin,
Harrison and Gipson also began to consider alternatives
involving capital contributions, primarily from Mr. Hamm,
that would not trigger change of control provisions under the
Hiland Operating Credit Agreement.
Also following the December 5, 2008 special meeting,
Messrs. Griffin, Harrison and Gipson contacted
Mr. Murphy to provide an update on the December 5 special
meeting, to convey that Mr. Hamm was interested in further
analysis of going private transactions and to ask Wells Fargo
Securities to use the December Projections that management had
provided in its analysis.
On December 12, 2008, Messrs. Hamm, Griffin and Gipson
had discussions with MidFirst Bank, in which they provided
MidFirst Bank with an update on the Hiland Companies
business and financial position, including potential covenant
compliance issues under the Hiland Operating Credit Agreement
during 2009.
On December 16, 2008 and again on December 18, 2008,
Messrs. Murphy and Babowal and other representatives of
Wells Fargo Securities met telephonically with
Messrs. Griffin, Harrison, Gipson and Hamm (with
Mr. Hamm only participating in the December 18, 2008
meeting) to consider several strategic alternatives for the
Hiland Companies (which alternatives would need to avoid any
covenant defaults under the Hiland Operating Credit Agreement).
The alternatives presented were maintaining the status quo,
renegotiating the Hiland Operating Credit Agreement to achieve
temporary covenant relief, selling existing assets, issuing
convertible securities or issuing new equity to repay bank debt,
merging with a third party to alleviate credit concerns, and
engaging in going private transactions led by Mr. Hamm
coupled with a capital contribution by Mr. Hamm.
From December 19, 2008 to January 9, 2009,
Messrs. Hamm, Griffin, Harrison and Gipson continued to
analyze the strategic alternatives outlined by Wells Fargo
Securities. During this time, Mr. Hamm informed
Messrs. Griffin and Harrison that he personally remained
committed to the business of the Hiland Companies and the
retention of its employees even following going private
transactions.
On December 23, 2008, Hiland Partners common unit
price declined to a closing price of $3.80 and Hiland
Holdings common unit price declined to a closing price of
$1.97. The December 23, 2008 closing price was the
then-lowest closing price in its respective public trading
history.
26
Various combinations of Messrs. Murphy, Babowal and Johnson
of Wells Fargo Securities met telephonically again with
Messrs. Griffin, Harrison and Gipson on four separate
occasions from January 5 to January 9, 2009 and with
Mr. Hamm on January 8, 2009 to further discuss
strategic alternatives. In addition to the previously analyzed
scenarios, which had been updated with more current financial
data, Wells Fargo Securities discussed a possible subordinated
debt issuance funded by Mr. Hamm and his affiliates to
partially repay bank debt. Among the alternatives analyzed,
Mr. Hamm concluded that going private transactions would
enable the public unitholders of Hiland Partners and Hiland
Holdings to receive cash in exchange for their investments in
the Hiland Companies while avoiding the significant dilution
they would experience in connection with an equity infusion that
would ultimately be necessary to stabilize the Hiland Companies.
Later on January 9, 2009, Messrs. Griffin and Harrison
informed Mr. Murphy and Messrs. Davidson and Perea of
Baker Botts that Mr. Hamm wished to proceed with making
proposals to the Boards of Directors of the Hiland Companies for
the acquisition by Mr. Hamm, certain of his affiliates and
the Hamm family trusts of all outstanding common units of the
Hiland Companies held by the public, as he believed that such a
transaction was the best strategic alternative currently
available to the Hiland Companies to maximize unitholder value.
On January 14, 2009, Messrs. Hamm, Griffin, Harrison
and Gipson met with Bert Mackie, the trustee of the Hamm family
trusts, and the beneficiaries of the Hamm DST Trust and informed
them that Mr. Hamm intended to propose going private
transactions involving the Hiland Companies. Mr. Mackie and
the beneficiaries indicated their support for such a proposal.
On January 14, 2009, Mr. Hamm engaged Wells Fargo
Securities as his financial advisor in connection with a
potential acquisition by Mr. Hamm and/or certain of his
affiliates of the assets or the capital stock of the Hiland
Companies.
The
January 15 Proposal
On the evening of January 14, 2009, Mr. Hamm called or
attempted to call each of the members of the Board of Directors
of each Hiland Company to inform them that he intended to
deliver the following day a proposal to acquire each of the
Hiland Companies in going private transactions.
On January 15, 2009, the Hiland Partners Board of Directors
received a letter from Mr. Hamm, on behalf of himself and
certain affiliates, proposing to take Hiland Partners private
for $9.50 per common unit in cash. Concurrently, the Hiland
Holdings Board of Directors received a letter from
Mr. Hamm, on behalf of himself and certain affiliates,
proposing to take Hiland Holdings private for $3.20 per common
unit in cash (collectively, we refer to these proposals as the
January 15 Proposal). In the letters, Mr. Hamm
mentioned that he believed that, if the adverse impact of
commodity prices on gathering and processing fundamentals and
the challenges presented by the global economic crisis persist,
Hiland Partners would experience a meaningful decrease in future
distributable cash flow and would need substantial new equity
capital to remain in continued compliance with its debt
covenants. He also mentioned that obtaining such equity capital
in the current environment on acceptable terms did not appear
feasible and would be significantly dilutive to current
unitholders. Accordingly, Mr. Hamm stated that he was of
the view that going private transactions were the best strategic
alternative currently available to the Hiland Companies to
maximize unitholder value during a time of significant market
and industry turmoil.
In the January 15 Proposal, Mr. Hamm stated that he was
interested only in acquiring common units in the Hiland
Companies and that he was not interested in selling (or causing
his affiliates to sell) interests in the Hiland Companies. The
January 15 Proposal also stated that Mr. Hamm anticipated
that each of the Hiland Companies Board of Directors would
authorize its standing Conflicts Committee of independent
directors to retain its own legal and financial advisors and to
respond to the proposal on behalf of the Hiland Partners and
Hiland Holdings public unitholders.
On January 15, 2009, Hiland Holdings, the general partner
of Hiland Holdings, Parent and Messrs. Hamm, Griffin and
Harrison, having determined that they may be deemed to
constitute a group for Schedule 13D reporting
purposes, filed with the SEC a Schedule 13D with respect to
Hiland Partners, which included as exhibits each of the letters
containing the proposals to the respective Hiland Company Board
of Directors. That same day, Mr. Hamm, Continental Gas, and
Mr. Mackie, as trustee of the Hamm family trusts, as
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members of a group for Schedule 13D reporting
purposes, filed with the SEC a Schedule 13D with respect to
Hiland Holdings, which included as exhibits each of the letters
containing the proposals to the respective Hiland Company Board
of Directors.
Updated
2009 Guidance
On January 26, 2009, the Hiland Companies issued a joint
press release announcing updated guidance for the 2009 fiscal
year. In the release, Hiland Partners projected that EBITDA
would range between $38 million and $50 million (the
Updated 2009 Guidance) based on the following
assumptions, each of which was noted in the press release:
(i) $45.00 to $55.00 per barrel NYMEX crude oil pricing,
(ii) $5.00 to $6.00 per MMBtu NYMEX natural gas pricing,
(iii) then-current estimated forward quotes for natural gas
pipeline basis differentials and (iv) trailing
12-month
average NGL pricing correlations to crude oil, with all pricing
subject to Hiland Partners commodity hedging portfolio.
The Updated 2009 Guidance also contemplated reduced drilling
activity in Hiland Partners service territories and lower
throughput volumes in Hiland Partners gathering systems as
compared to the Initial 2009 Guidance as a result of lower
commodity prices. As a result of the then current pricing
environment, particularly in combination with the constrained
capital and credit markets and overall economic downturn, Hiland
Partners began to experience a decline in drilling activity by
some producers in its areas of operations, resulting in lower
than expected volumes for 2009. In the release, the Hiland
Companies also noted that if commodity prices did not
significantly improve above the expected prices for 2009, Hiland
Partners might be in violation of the leverage ratio in the
Hiland Operating Credit Agreement as early as June 30,
2009, unless the ratio was amended, the debt was restructured or
Hiland Partners received an infusion of equity capital to reduce
indebtedness. Additionally, the Hiland Partners Board of
Directors also announced a cash distribution for the fourth
quarter of 2008 of $0.45 per unit, which represented a $0.43 per
unit decrease from the prior quarter. The Hiland Holdings Board
of Directors announced a cash distribution for the fourth
quarter of 2008 of $0.10 per unit, which represented a $0.2175
per unit decrease from the prior quarter.
Authorization
of Conflicts Committees
On January 21, 2009, by order of Mr. Hamm, as the
Chairman of each of the Hiland Companies Board of
Directors, each of the Hiland Companies Board of Directors
held a special meeting to consider the January 15 Proposal. The
meetings were held consecutively, with the Hiland Partners Board
of Directors meeting in the morning and the Hiland Holdings
Board of Directors meeting in the afternoon. Messrs. Griffin and
Harrison participated in both special meetings. At each of the
special meetings, Mr. McWilliams of Vinson &
Elkins reviewed with the directors their duties and
responsibilities under the respective partnership agreements of
the Hiland Companies and Delaware law, as well as the process to
be expected in connection with addressing the January 15
Proposal. In addition, Messrs. Murphy and Babowal of Wells
Fargo Securities presented an overview of the January 15
Proposal, including a review of the factors that led to the
proposal and the key terms of the January 15 Proposal, to the
Hiland Holdings Board of Directors.
With the assistance of Mr. McWilliams, the Hiland Partners
Board of Directors and the Hiland Holdings Board of Directors
proceeded to consider the independence of each of the members of
their respective Conflicts Committees. At the Hiland
Partners January 21, 2009 special meeting, the Hiland
Partners Board of Directors considered the independence of John
T. McNabb II and David L. Boren, the two members of the
standing Hiland Partners Conflicts Committee. At the outset of
the consideration, Dr. Boren informed the Hiland Partners
Board of Directors that he would prefer to resign from the
Hiland Partners Conflicts Committee out of concerns that
charitable ties between himself, his employer (the University of
Oklahoma) and Mr. Hamm could give the appearance that
Dr. Boren lacked independence. The Hiland Partners Board of
Directors then accepted Dr. Borens resignation from
the Hiland Partners Conflicts Committee. In order to fill the
vacancy on the Hiland Partners Conflicts Committee, the Hiland
Partners Board of Directors reviewed the independence of the
remaining board members before nominating Shelby E. Odell. In
connection with his nomination to the Hiland Partners Conflicts
Committee, Mr. Odell agreed to resign from the Hiland
Holdings Board of Directors. Mr. Odell tendered his
resignation on the afternoon of January 21, 2009 and the
Hiland Holdings Board of Directors accepted his resignation. The
Hiland Partners Board of Directors then determined
28
that there were no relationships that would interfere with the
independence of Mr. McNabb or Mr. Odell, subject to
satisfactory review of Mr. Odells completed director
independence questionnaire.
At the Hiland Holdings special meeting, the Hiland Holdings
Board of Directors considered the independence of Bobby B. Lyle
and Cheryl L. Evans, the two members of the standing Hiland
Holdings Conflicts Committee. In particular, the Hiland
Holdings Board of Directors considered Dr. Lyles and
Dr. Evans relationships with Mr. Hamm. With
respect to Mr. Lyle, the Hiland Holdings Conflicts Committee
considered that: (i) Dr. Lyle and Mr. Hamm were both
passive minority investors in a company that owns a horse racing
track, and Dr. Lyles approximately $1.2 million investment
was believed to constitute an approximate 6% of such company;
and (ii) Dr. Lyle indirectly and passively owned a
one-twelfth equity interest in a partnership that had sold less
than $1.5 million of oilfield tubular pipe (which accounted for
less than 1% of such partnerships 2008 sales) to Hiland
Partners in 2008. With respect to Dr. Evans, the Hiland
Holdings Conflicts Committee considered that Mr. Hamm had
committed to donate approximately $150,000 over six years to
Northwestern Oklahoma State University (NWOSU), of
which Dr. Evans is Dean, to finance the installation of a
bronze statue of a bucking horse and rider on NWOSUs Enid
campus (of which $50,000 had already been paid). After
considering the specific facts and circumstances surrounding the
relationships, the Hiland Holdings Board of Directors determined
that there were no relationships that would interfere with the
independence of Dr. Lyle and Dr. Evans, subject to the
confirmation of quantitative information regarding the business
relationships between Dr. Lyle, the Hiland Companies and
Harold Hamm.
At the conclusion of each of the January 21 meetings, the Hiland
Partners Board of Directors and the Hiland Holdings Board of
Directors each generally authorized their respective Conflicts
Committees to engage legal and financial advisors and begin
evaluating the January 15 Proposal and alternatives thereto,
with final authorization subject to finalization of authorizing
resolutions with their legal counsel and satisfactory
confirmation of the independence of Mr. Odell and
Dr. Lyle.
On February 19, 2009, each of the Hiland Companies Boards
of Directors held a special meeting to
follow-up
on
the outstanding items from the January 21 meetings. Messrs.
Griffin and Harrison attended and participated in the meetings.
After reviewing all additional information and confirming the
independence of their respective Conflicts Committee members,
both the Hiland Partners Board of Directors and the Hiland
Holdings Board of Directors determined to authorize their
respective standing Conflicts Committees to exercise certain
power and authority of the respective full Board of Directors
with respect to the January 15 Proposal or any revised proposal.
More specifically, each Conflicts Committee was delegated the
exclusive power and authority to:
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review, evaluate and negotiate the terms and conditions of the
January 15 Proposal, including any modifications or amendments
thereto and any other similar proposal involving Hiland Partners
or Hiland Holdings, as applicable, and Mr. Hamm, his
affiliates or the Hamm family trusts;
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review, evaluate and negotiate the terms and conditions of any
alternative to the January 15 Proposal;
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determine whether the January 15 Proposal, any revised proposal
or any alternative thereto was advisable, fair to, and in the
best interests of, Hiland Partners or Hiland Holdings, as
applicable, and its public unitholders and to recommend to the
full Board of Directors and the public unitholders of Hiland
Partners or Hiland Holdings, as applicable, what action, if any,
should be taken with respect to the January 15 Proposal, any
revised proposal or any alternative thereto; and
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take any and all actions of Hiland Partners or Hiland Holdings,
as applicable, with respect to the January 15 Proposal,
including reviewing, analyzing, evaluating, authorizing,
monitoring and exercising general oversight of all proceedings
and activities of Hiland Partners or Hiland Holdings related to
the proposal any revised proposal or any alternative thereto.
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Each of the Hiland Partners Board of Directors and the Hiland
Holdings Board of Directors also resolved at its respective
special meeting that it would not recommend, authorize, approve
or endorse the January 15 Proposal or any other merger,
acquisition or similar proposal involving Hiland Partners or
Hiland Holdings, as applicable, and the Hamm Continuing
Investors or any of their affiliates unless such transaction was
recommended to such Board of Directors by its Conflicts
Committee. In addition, both the Hiland Partners Board of
Directors and the Hiland Holdings Board of Directors formalized
the authorization granted to their
29
respective Conflicts Committee during the January 21 meetings to
retain the services of its own legal and financial advisors at
the expense of Hiland Partners or Hiland Holdings, respectively.
The
Hiland Partners Conflicts Committees Process and
Negotiations and Deliberations related to Hiland
Partners
Upon receiving initial authorization to hire legal and financial
advisors and begin considering the January 15 Proposal from the
Hiland Partners Board of Directors on January 21 as described
above, the Hiland Partners Conflicts Committee considered the
retention of legal and financial advisors and interviewed
potential candidates. The Hiland Partners Conflicts Committee
spoke with three law firms and seven financial advisory firms.
After due consideration, the Hiland Partners Conflicts Committee
selected Conner & Winters, LLP
(Conner & Winters) to serve as legal
counsel to the Hiland Partners Conflicts Committee and
Jefferies & Company for the purpose of providing a
fairness opinion to the Hiland Partners Conflicts Committee, in
light of both firms relevant industry experience and prior
representation of special committees and conflicts committees.
On January 29, 2009, the Hiland Partners Conflicts
Committee met formally for the first time following the January
21 Hiland Partners Board of Directors meeting. In addition to
Messrs. McNabb and Odell, Messrs. Robert A. Curry and
Robert J. Melgaard, partners at Conner & Winters,
attended the meeting. Mr. McNabb acted as Chairman and
Mr. Odell acted as Secretary of the meeting (as well as all
subsequent meetings of the Hiland Partners Conflicts Committee).
At such meeting, Mr. McNabb reviewed with the Hiland
Partners Conflicts Committee the delegation of authority and
responsibility to the Hiland Partners Conflicts Committee from
the Hiland Partners Board of Directors and the Hiland Partners
Conflicts Committees mandate. Messrs. Curry and
Melgaard then reviewed with the Hiland Partners Conflicts
Committee the requirements to serve as a member of such
Conflicts Committee and questioned the members of the Hiland
Partners Conflicts Committee regarding matters that might affect
their independence. The Hiland Partners Conflicts Committee and
counsel concluded that the members of the Hiland Partners
Conflicts Committee did not have any relationships that would
interfere with the exercise of their independent judgment in
carrying out their responsibilities as members of the Hiland
Partners Conflicts Committee and further that they met the
independence standards and other requirements to serve as
members of the Hiland Partners Conflicts Committee.
Mr. McNabb recommended that the Hiland Partners Conflicts
Committee confirm the retention of Conner & Winters as
counsel and retain Jefferies & Company. After
concluding that both firms were independent in the context of
the January 15 Proposal, the Hiland Partners Conflicts Committee
unanimously ratified and approved the retention by the Hiland
Partners Conflicts Committee of Conner & Winters and
Jefferies & Company in such capacities. Mr. Curry
then reviewed with the Hiland Partners Conflicts Committee its
duties and responsibilities under the Hiland Partners
partnership agreement with respect to the January 15 Proposal.
Messrs. Curry and Melgaard further briefed the Hiland
Partners Conflicts Committee on the appropriate process
guidelines to be followed by the Hiland Partners Conflicts
Committee. The Hiland Partners Conflicts Committee then
generally discussed alternatives available to Hiland Partners
other than the January 15 Proposal, including renegotiating the
Hiland Operating Credit Agreement, selling assets, issuing debt
or equity capital and merging with a third party. The Hiland
Partners Conflicts Committee reached the preliminary conclusion
that there were no viable alternatives, but agreed to further
examine all such alternatives later in the process. The Hiland
Partners Conflicts Committee then decided that the most
appropriate next step would be a meeting in Enid, Oklahoma, in
which management of the Hiland Companies would brief the Hiland
Partners Conflicts Committee and its counsel and financial
advisor on all pertinent matters relating to the Hiland
Companies.
During the latter part of January through the middle of February
2009, the Hiland Partners Conflicts Committee and Mr. Curry
of Conner & Winters engaged in negotiations with
representatives of Jefferies & Company regarding the
terms of the engagement with Jefferies & Company,
which culminated in the Hiland Partners Conflicts
Committees entering into an engagement letter with
Jefferies & Company on February 13, 2009.
On the evening of February 6, 2009, Baker Botts distributed
initial drafts of the Hiland Partners merger agreement, the
Hiland Holdings merger agreement and related documents to
Conner & Winters, which forwarded them to the Hiland
Partners Conflicts Committee.
The Hiland Partners Conflicts Committee next met on
February 13, 2009, in conjunction with a management
briefing session in Enid, Oklahoma, in which
Messrs. Griffin, Harrison and Gipson provided a
presentation of the current status of the Hiland Companies,
including financial and operating forecasts,
30
managements assessment of the Hiland Companies
credit arrangements and the likelihood that Hiland Partners
would violate the leverage ratio covenant in the Hiland
Operating Credit Agreement as early as June 30, 2009.
Additionally, Messrs. Griffin, Harrison and Gipson reviewed
the alternatives to the January 15 Proposal explored by the
management team, including maintaining the status quo,
renegotiating or replacing the Hiland Operating Credit
Agreement, selling Hiland Partners assets or issuing debt
or equity securities. Also present at the February 13 meeting
were Mr. Rogan and other representatives of Barclays
Capital and Kenneth L. Stewart and Bryn A. Sappington, partners
at Fulbright & Jaworski L.L.P.
(Fulbright), the financial and legal advisors,
respectively, to the Hiland Holdings Conflicts Committee, since
the briefing session also covered matters relevant to Hiland
Holdings.
Following the briefing session, the Hiland Partners Conflicts
Committee discussed with Mr. Curry of Conner &
Winters and Messrs. Straty and Parkinson and other
representatives of Jefferies & Company the next steps
to be taken. It was concluded that Jefferies & Company
would review the information received during the briefing
session, obtain additional information from management as
advisable, conduct a preliminary financial analysis of the
January 15 Proposal and report back to the Hiland Partners
Conflicts Committee. The Hiland Partners Conflicts Committee
also formally approved the engagement letter with
Jefferies & Company. The Hiland Partners Conflicts
Committee further discussed and also clarified the role of the
Hiland Partners Conflicts Committee with respect to the January
15 Proposal and the authority to be delegated to the Hiland
Partners Conflicts Committee by the Hiland Partners Board of
Directors. Although the Hiland Partners Conflicts Committee and
its counsel had done a preliminary review of the proposed Hiland
Partners merger agreement, the Hiland Partners Conflicts
Committee decided to defer any response or negotiations with
respect to the Hiland Partners merger agreement and the January
15 Proposal until Jefferies & Company had an
opportunity to complete its preliminary financial analysis.
Following the Hiland Partners Conflicts Committee meeting held
on February 13, 2009, Jefferies & Company
proceeded with a due diligence review of the Hiland Companies,
and in particular Hiland Partners, for purposes of conducting a
fairness analysis of the January 15 Proposal. In developing this
analysis, Messrs. Straty and Parkinson and other representatives
of Jefferies & Company participated in several
telephone conferences with Messrs. Griffin, Harrison and
Gipson of the Hiland Companies, including with respect to the
management teams financial model and the projections
underlying that financial model.
The depressed commodity price environment that began in the
fourth quarter of 2008 continued into the first quarter of 2009.
During the third week of February, the NYMEX crude oil contract
for March 2009 settled at $38.94 per barrel. In addition, for
the first quarter of 2009, the NYMEX crude oil last day settle
averaged $37.18 per barrel. Natural gas prices continued to
decline with the NYMEX natural gas contract for March 20009
settling at $4.06 per MMBtu during the third week of February,
which was 34% lower than the January 2009 NYMEX natural gas
settle price of $6.14 per MMBtu.
On February 26, 2009, the first of several lawsuits
challenging the January 15 Proposal and related matters was
filed. For more information regarding these lawsuits, please see
Special Factors Certain Legal Matters.
On March 3, 2009, Messrs. Murphy and Babowal of Wells
Fargo Securities met with Mr. Hamm (Mr. Babowals
participation, which was telephonic, being limited to certain
portions only) to review market developments since the January
15 Proposal and present updated analyses. Separately,
Mr. Murphy, with several other representatives of Wells
Fargo Securities, including Mr. Babowal for certain
portions, participating telephonically, met with
Messrs. Griffin, Harrison and Gipson to discuss the Hiland
Companies most recent financial projections and commodity
price information.
In order to assess alternatives to the January 15 Proposal, on
March 5, 2009, Mr. McNabb met with representatives of
MidFirst Bank to determine what arrangements could be reached
with the lending group. Mr. Odell joined in this meeting
via telephone. During that meeting, representatives of MidFirst
Bank indicated that they were willing to discuss the
renegotiation of the Hiland Operating Credit Agreement, but that
they were not encouraging about the possibility of renegotiating
or restructuring the Hiland Operating Credit Agreement on terms
that would present a viable alternative to the January 15
Proposal.
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During a joint meeting of the Hiland Partners Board of Directors
and the Hiland Holdings Board of Directors later that day,
Mr. McNabb informed both Boards of Directors, including
Messrs. Griffin and Harrison, that members of the Hiland
Partners Conflicts Committee had met with representatives of
MidFirst Bank earlier that day and reported his findings.
On March 5, 2009, as disclosed in Hiland Partners
Current Report on
Form 8-K
dated March 11, 2009, the Compensation Committee of the
Hiland Partners Board of Directors increased the annual base
salaries of Messrs. Griffin and Harrison and Kent C.
Christopherson, Vice President Chief Operations
Officer, from $290,000 per year to $340,000 per year, $200,000
per year to $230,000 per year and $205,000 per year to $215,000
per year, respectively, and approved 2009 Incentive Cash Bonuses
for Messrs. Griffin, Harrison and Christopherson of
$175,000, $100,000 and $25,000, respectively. The base salaries
of Messrs. Griffin and Harrison were allocated
approximately 95% and 5% between Hiland Partners and Hiland
Holdings, respectively.
On March 6, 2009, Mr. Murphy and Jim Penilla, a Vice
President of Wells Fargo Securities, met with Messrs. Hamm
and Mackie to discuss alternatives to the going private
transactions. Among the alternatives discussed was a rights
offering in which a right to subscribe for additional Hiland
Partners common units at a discount to the public trading price
would be distributed to each Hiland Partners unitholder. Such
rights would offer current unitholders the opportunity to
participate in an equity infusion in Hiland Partners. In
addition, Messrs. Murphy and Penilla discussed the possible
merger of Hiland Holdings with and into Hiland Partners followed
by a rights offering. During the meeting, Mr. Hamm
requested further information about a rights offering, and he,
Mr. Mackie and Wells Fargo Securities contacted
Mr. Davidson of Baker Botts to request a preliminary
analysis of potential legal implications of a rights offering.
On March 10, 2009, Mr. Hamm and Rayford T. Reid, a
member of the Board of Directors of each of the Hiland
Companies, met with Messrs. Griffin and Harrison and
requested that they continue to pursue alternatives available to
the Hiland Companies with respect to the Hiland Operating Credit
Agreement.
On March 14, 2009, Messrs. Hamm and Reid met
telephonically with Messrs. Murphy and Babowal and other
representatives of Wells Fargo Securities to compare the
proposed going private transactions with both a stand-alone
rights offering by Hiland Partners and a merger of Hiland
Holdings and Hiland Partners followed by a rights offering.
Wells Fargo Securities also presented a case study for a recent
amended credit agreement of a midstream MLP and discussed the
possibility of negotiating with the lenders under the Hiland
Operating Credit Agreement.
Messrs. Hamm and Reid met telephonically with
Messrs. Murphy, Babowal and Penilla and other
representatives of Wells Fargo Securities on March 16, 2009
and with Mr. Penilla on March 17, 2009 to compare the
proposed going private transactions with a subordinated debt
issuance funded by Mr. Hamm and his affiliates. Later on
March 17, 2009, Messrs. Hamm and Harrison met with
representatives of MidFirst Bank to discuss the possibility of
renegotiating the Hiland Operating Credit Agreement in the
context of both of the proposed going private transactions and a
possible subordinated debt issuance.
From March 20 to March 23, 2009, Jefferies &
Company reviewed a new volume forecast from the Hiland Companies
and had several calls and discussions with Messrs. Griffin
and Harrison regarding this information.
The new volume forecasts were based on declines in commodity
prices which were resulting in substantially reduced drilling
activity along Hiland Partners systems. At this time,
Hiland Partners was experiencing the reduction in drilling
activity seen throughout the United States during this time
period. For example, U.S. natural gas drilling rig counts
declined by approximately 29% to 1,018 as of February 20,
2009, compared to 1,430 natural gas drilling rigs in the
comparable period of 2008, and approximately 37% compared to the
peak natural gas drilling rig count of 1,606 in August and
September 2008. Due to the substantial reduction in drilling
activity, Hiland Partners connected 10 new wells during the
first quarter of 2009 as compared to 24 wells during the fourth
quarter of 2008, representing a 58% decline.
On or about March 24, 2009, Mr. Murphy of Wells Fargo Securities
indicated to Mr. Straty of Jefferies & Company that,
while Mr. Hamms offer with respect to the proposed
transaction was still outstanding, Mr. Hamm was not ready to
enter into direct negotiations at that time because he and
management were in
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ongoing discussions with MidFirst Bank regarding the continued
financing of the Hiland Companies following the consummation of
the transactions proposed in the January 15 Proposal and that
Mr. Hamm was considering other alternatives for the Hiland
Companies, including a capital infusion into the Hiland
Companies by him.
From March 25 to April 16, 2009, Jefferies &
Company continued to conduct its financial analyses with respect
to the January 15 Proposal and Mr. Curry of Conner &
Winters continued to evaluate the Hiland Partners merger
agreement and exchanged perspectives with Messrs. Stewart and
Sappington of Fulbright who had been evaluating the Hiland
Holdings merger agreement. During this period, on April 1,
2009, management delivered updated 2009 projections to
Jefferies & Company, which projections reflected
updated 2009 forward strip pricing and lower expected natural
gas volumes for 2009 than contained in managements earlier
projections as a result of a continued reduction in the level of
drilling activity in Hiland Partners areas of operation.
On April 7, 2009, MidFirst Bank formally notified the
lenders under the Hiland Operating Credit Agreement of requested
modifications to such credit agreement to increase the leverage
ratio under the Hiland Operating Credit Agreement to
(i) 5.25 to 1.0 through June 30, 2010, (ii) 5.0
to 1.0 for the period from July 1, 2010 through
December 31, 2010, and (iii) 4.75 to 1.0 for the
period from January 1, 2011 to maturity. The modifications
would require Mr. Hamm to inject $50 million of equity
into Hiland Partners in conjunction with the consummation of the
going private transactions and would prohibit distributions
unless the leverage ratio was less than 4.25 to 1.0. The
modification would also require an amendment fee and increased
interest rates and was subject to formal documentation.
On April 16, 2009, Messrs. Murphy and Babowal and other
representatives of Wells Fargo Securities met telephonically
with Messrs. Hamm, Reid and Mackie to review its financial
analysis of going private transactions in light of developments
in the market and the Hiland Companies financial outlook
since the January 15 Proposal. Messrs. Griffin, Harrison
and Gipson were invited to listen to Wells Fargo
Securities presentation and to provide an update on
managements negotiations with the lenders under the Hiland
Operating Credit Agreement.
On April 17, 2009, MidFirst Bank informed Messrs. Griffin,
Harrison and Gipson that it had received non-binding indications
of interests to the proposed modifications to the Hiland
Operating Credit Agreement contained in the April 7, 2009
notice from the required lenders (more than 50% of commitments).
Subsequently, MidFirst Bank informed management it had received
non-binding indications of interests to the proposed
modifications to the Hiland Operating Credit Agreement from all
lenders.
On April 17, 2009, the Hiland Partners Conflicts Committee,
together with Mr. Curry of Conner & Winters and
Stephen Straty, Managing Director of Jefferies &
Company, Jay C. Parkinson, Senior Vice President of
Jefferies & Company, and other representatives of
Jefferies & Company, met to review the status of the
fairness analysis of Jefferies & Company and review
and discuss the proposed Hiland Partners merger agreement.
Mr. Curry was instructed to complete a
mark-up
of
the Hiland Partners merger agreement and, after review of the
mark-up
by
the Hiland Partners Conflicts Committee, provide it to Baker
Botts.
On April 20, 2009, both members of the Hiland Partners
Conflicts Committee received a telephone call from
Mr. Hamm, during which Mr. Hamm stated that he and his
representatives had engaged in lengthy discussions with MidFirst
Bank regarding the terms on which the Hiland Companies
lenders would agree to amend the Hiland Operating Credit
Agreement in connection with the closing of the acquisition of
the Hiland Companies by Mr. Hamm and his affiliates, as
well as the adverse effect that continued declines in commodity
prices, particularly natural gas prices, and drilling activity
along Hiland Partners systems had on the Hiland
Companies current financial performance and long-term
prospects. In the call, Mr. Hamm stated that he would no
longer continue with the prior proposed offer of $9.50 per
Hiland Partners common unit, based upon the terms under which
the lenders were willing to amend the existing credit
arrangements and the worsening outlook for the Hiland Companies.
Later that same day, the Hiland Partners Conflicts Committee
received a letter from Mr. Hamm amending the January 15
Proposal. Under the revised terms proposed by Mr. Hamm,
holders of Hiland Partners common units (other than the Hiland
Partners rollover common unitholders) would receive $7.75 in
cash per common
33
unit, reduced from $9.50 in cash per common unit under the
January 15 Proposal, and holders of Hiland Holdings common units
(other than the Hiland Holdings rollover common unitholders)
would receive $2.40 in cash per common unit, reduced from $3.20
in cash per common unit under the January 15 Proposal
(collectively, we refer to the revised proposal as the
April 20 Revised Proposal). In his letter reducing
the offered consideration, Mr. Hamm cited the adverse
effect that continued declines in natural gas prices and
drilling activity along Hiland Partners systems had had on
the Hiland Companies current and long-term projected
throughput volumes, midstream segment margins and cash flows
since the January 15 Proposal.
On April 21, 2009, Mr. Hamm, Parent, Hiland Holdings,
the general partner of Hiland Holdings, and Messrs. Griffin
and Harrison filed an amendment to their Schedule 13D with
the SEC, which included as exhibits Mr. Hamms
letters to each of the Conflicts Committees. The amendment also
included disclosures that Messrs. Griffin and Harrison had
agreed to participate in the going private proposals with the
Hamm Continuing Investors by agreeing to vote their Hiland
Partners common units in favor of the proposed Hiland Partners
merger.
On April 24, 2009, the Hiland Holdings Board of Directors
and the Hiland Partners Board of Directors both unanimously
voted to suspend quarterly distributions with respect to each
entitys partnership units beginning with the first quarter
distribution of 2009, based on each of the Hiland Companies
Board of Directors consideration of the impact of lower
commodity prices and drilling activity on Hiland Partners
current and projected throughput volumes, midstream segment
margins and cash flows, as well as future required levels of
capital expenditures and the level of Hiland Partners
outstanding indebtedness under the Hiland Operating Credit
Agreement.
From April 20 through April 30, 2009, Mr. Curry of
Conner & Winters had a number of telephone conferences
with Mr. Sappington of Fulbright, Mr. McWilliams of
Vinson & Elkins and Messrs. Griffin, Harrison and
Gipson regarding the current status of discussions with the
Hiland Companies bank group. On April 30, 2009, Mr.
Curry, Messrs. Stewart and Sappington and Mr. Rogan of
Barclays Capital participated in a call with
Messrs. Griffin and Harrison regarding the status of Hiland
Partners discussions with MidFirst Bank and the potential
violation of the leverage ratio covenant under the Hiland
Operating Credit Agreement. Mr. Harrison reported that
MidFirst Bank was still willing to discuss an amendment or
waiver, but as it had previously informed Mr. Harrison,
such an amendment would involve high up-front fees, a
significant increase in the interest rate and the indefinite
suspension of distributions by Hiland Partners. Additionally,
Mr. Harrison reported that, while MidFirst Bank had
indicated that it might grant a temporary waiver for the
potential leverage ratio covenant violation if the proposed
transaction did not close prior to the default, it would not
agree to do so in advance.
On April 28, 2009, Baker Botts distributed revised drafts
of the Hiland Partners merger agreement, the Hiland Holdings
merger agreement and related documents to the Hiland Partners
Conflicts Committee, Jefferies & Company and
Conner & Winters.
On May 1, 2009, the Hiland Partners Conflicts Committee met
to discuss the current status of negotiations on the Hiland
Partners merger agreement and the proposed price level. Mr.
Curry of Conner & Winters reported on his telephone
conferences with Mr. Stewart of Fulbright, including a phone
call in which Mr. Curry was informed that the Hiland Holdings
Conflicts Committee was considering asking for a higher price.
Mr. Curry also reported on the April 30, 2009 telephone
conference with Messrs. Griffin, Harrison and Gipson regarding
the status of the discussion with MidFirst Bank. The Hiland
Partners Conflicts Committee and its advisors then engaged in a
discussion regarding the negotiation strategy that the Hiland
Partners Conflicts Committee should employ with Mr. Hamm,
including the possible advantages and disadvantages to the
Hiland Partners public unitholders, weighing an attempt to
negotiate for an increase in the purchase price from
Mr. Hamm against the risk that aggressive negotiations
regarding the price might cause Mr. Hamm to decide not to
go forward with the proposed transaction. After discussions with
its advisors, the Hiland Partners Conflicts Committee reached
the preliminary view was that the $7.75 per common unit price
appeared to be fair to Hiland Partners and the public
unitholders. The Hiland Partners Conflicts Committee made a
tentative decision to request an increase in price but agreed to
consider and readdress the price issue at its next meeting. At
this meeting, the Hiland Partners Conflicts Committee and its
advisors also generally discussed the
34
following material open issues with respect to the Hiland
Partners merger agreement: (i) whether the Hiland
Partners commitment letter was sufficient assurance of
Mr. Hamms obligation to fund the merger consideration
as opposed to a guaranty by Mr. Hamm; (ii) whether the
provisions preventing Hiland Partners from approaching other
potential third party buyers were acceptable; (iii) the
need to further limit the representations and warranties of
Hiland Partners, especially with respect to undisclosed
liabilities; (iv) whether the proposed covenants applicable
to Hiland Partners during the period between the signing and
closing of the Hiland Partners merger agreement were acceptable;
(v) whether some of the events constituting a
material adverse effect under the Hiland Partners
merger agreement needed to be eliminated; and (vi) the
circumstances, if any, under which the HLND Parent Parties
should be reimbursed for their expenses incurred in connection
with the termination of the Hiland Partners merger agreement.
On May 3, 2009, the Hiland Partners Conflicts Committee met
to review material outstanding issues regarding the Hiland
Partners merger agreement, which included: (i) if the
Hiland Partners commitment letter was to be used in lieu of a
guaranty by Mr. Hamm, additional protections needed to be
added to such commitment letter; (ii) whether the
provisions preventing Hiland Partners from approaching other
potential third party buyers were acceptable; (iii) whether
a default under the Hiland Operating Credit Agreement would
constitute a material adverse effect under the
Hiland Partners merger agreement; and (iv) the
circumstances, if any, under which the HLND Parent Parties
should be reimbursed for their expenses incurred in connection
with the termination of the Hiland Partners merger agreement,
and finalize its strategy with respect to price. The Hiland
Partners Conflicts Committee discussed these issues and
developed a position on each issue as well as the other material
issues that the Hiland Partners Conflicts Committee had
previously discussed at its meeting on May 1, 2009.
Mr. Curry of Conner & Winters was instructed to
convey the Hiland Partners Conflicts Committees position
on all of the issues to Baker Botts. The Hiland Partners
Conflicts Committee then returned to a discussion of the price.
After discussion, the Hiland Partners Conflicts Committee
decided to request an increase in the price from $7.75 per unit
to $8.00 per unit to test whether the $7.75 per common unit was
the best offer that the Hiland Partners Conflicts Committee
could obtain from Mr. Hamm. Mr. Straty of
Jefferies & Company was instructed to convey that
request to Wells Fargo Securities.
On May 4, 2009, on behalf of the Hiland Holdings Conflicts
Committee, Mr. Stewart of Fulbright contacted
Mr. Curry of Conner & Winters to ascertain the
Hiland Partners Conflicts Committees position regarding
the April 20 Revised Proposal and whether the Hiland Partners
Conflicts Committee intended to approach Mr. Hamm to ask
for a price increase. Mr. Curry replied that the Hiland
Partners Conflicts Committee intended to ask Mr. Hamm to
increase his bid for the Hiland Partners common units by $0.25
per common unit. Mr. Stewart, in turn, confirmed to
Mr. Curry that the Hiland Holdings Conflicts Committee was
considering asking for a price increase without specifying the
amount. On that same day, Mr. Curry submitted updated
proposed drafts of the Hiland Partners merger agreement and
related documentation to Baker Botts.
On May 4, 2009, Mr. Straty of Jefferies &
Company contacted Mr. Murphy of Wells Fargo Securities to
request an increase in the offer price to $8.00 per unit.
Mr. Murphy relayed the request to Mr. Hamm and
subsequently on May 5, 2009 replied to
Jefferies & Company that Mr. Hamm would not agree
to increase the offer price.
On May 5, 2009, Baker Botts distributed revised drafts of
the Hiland Partners merger agreement, the Hiland Holdings merger
agreement and related documents to the Hiland Partners Conflicts
Committee, Jefferies & Company and Conner &
Winters. On May 12, 2009, Mr. Curry of
Conner & Winters and Messrs. Davidson and Perea
and other representatives of Baker Botts had a telephone
conference during which they further negotiated the terms of the
Hiland Partners merger agreement.
At a meeting of the Hiland Partners Conflicts Committee later on
May 12, 2009, Mr. McNabb reported that Mr. Hamm
had rejected the requested increase in price. He also reported
on his conversation with the chairman of the Hiland Holdings
Conflicts Committee and on the differences in strategic
negotiation approaches of the respective Conflicts Committees
with respect to the proposed merger agreements. Mr. Curry
of Conner & Winters then reported on his numerous
discussions with counsel to the Hiland Holdings Conflicts
Committee on the Hiland Holdings Conflicts Committees
approach to the issues in the Hiland Holdings merger agreement
and the response that the Hiland Holdings Conflicts Committee
had received from
35
Mr. Hamm. A discussion was then held regarding the response
by Mr. Hamm to the Hiland Partners Conflicts
Committees proposed changes in the Hiland Partners merger
agreement.
On May 13, 2009, the Hiland Partners Conflicts Committee
met again. Mr. Curry of Conner & Winters
summarized the current state of the negotiations with
Mr. Hamm and the remaining material open issues with
respect to the Hiland Partners merger agreement, specifically:
(i) whether a default under the Hiland Operating Credit
Agreement should constitute a material adverse
effect under the Hiland Partners merger agreement; and
(ii) the circumstances, if any, under which the HLND Parent
Parties should be reimbursed for their expenses incurred in
connection with the Hiland Partners merger agreement in the
event that such merger agreement was terminated. A discussion
ensued in which the Hiland Partners Conflicts Committee
concluded it was very unlikely that the Hiland Companies could
continue without some capital infusion or renegotiation of the
Hiland Operating Credit Agreement since, based on
managements projections, the Hiland Companies would likely
be in violation of certain of the financial covenants in the
Hiland Operating Credit Agreement as early as June 30,
2009. The Hiland Partners Conflicts Committee also concluded
that, based upon the experience of the Hiland Partners Conflicts
Committee and its advisors, as well as information provided by
Hiland Partners management, seeking covenant waivers and
amendments of credit facilities or any renegotiation of the
existing Hiland Operating Credit Agreement would likely require
the Hiland Companies to pay a significant up-front fee, involve
a significant increase in the effective interest rate and
require the reduction of growth capital expenditures and the
indefinite suspension of quarterly distributions to unitholders.
The meeting then turned to the subject of consideration of
alternatives to the proposed merger transaction and, after
discussion of each such alternative with its advisors, the
Hiland Partners Conflicts Committee concluded with respect to
each such alternative considered as follows:
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Marketing the Partnership to Other
Companies.
The Hiland Partners Conflicts
Committee did not believe this to be a viable alternative
because (a) although the Hiland Companies had not been
proactively shopped, the proposed transaction had been known to
the public for several months, and no third party had expressed
an interest in buying either Hiland Partners or the general
partner of Hiland Partners; and (b) it would be
impracticable to sell the general partner of Hiland Partners or
Hiland Partners without Mr. Hamms approval and
Mr. Hamm (who together with Continental Gas and the Hamm
family trusts owns a 60.8% limited partner interest in Hiland
Holdings, which owns a controlling interest in Hiland Partners)
had publicly expressed interest only in acquiring common units
of the Hiland Companies and lack of interest in selling, or
causing his affiliates to sell, interests in the Hiland
Companies. In addition, given the current economic climate, the
Hiland Partners Conflicts Committee noted that there would be
limited access to acquisition capital available to third parties
who might be interested in purchasing the Hiland Companies.
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Raise Capital in the Capital Markets.
The
Hiland Partners Conflicts Committee believed it was very
unlikely that the Hiland Companies would be able to obtain debt
financing from alternative credit sources, such as traditional
bank or mezzanine lenders or high-yield bond markets, to replace
their arrangements under the Hiland Operating Credit Agreement,
or that the Hiland Companies could raise sufficient capital
through a sale of equity to the public or to private investors
to reduce their debt to levels that would allow them to be in
compliance with the leverage ratio covenant under the Hiland
Operating Credit Agreement, especially since distributions to
the holders of Hiland Partners common units had been suspended
indefinitely. The Hiland Partners Conflicts Committee came to
this conclusion because it estimated that the capital required
to prevent a violation of the leverage ratio covenant under the
Hiland Operating Credit Agreement was more than the then-current
market capitalization of Hiland Partners and, based on
discussions with its advisors, the Hiland Partners Conflicts
Committee did not believe that Hiland Partners could raise a
sufficient amount of capital in the current market, especially
in light of the substantial drop in commodity prices,
particularly natural gas, and the number of drilling rigs
operating in Hiland Partners service areas, Hiland
Partners inability to pay distributions or make capital
expenditures, and the perception of the gas gathering and
processing industry among research analysts.
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Status Quo.
Hiland Partners doing nothing and
continuing to do business as currently conducted was not a
practical option. The result of such an approach would most
likely be (a) a violation of the
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36
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leverage ratio covenant under the Hiland Operating Credit
Agreement, (b) problems with the Hiland Companies
bank group, (c) no distributions paid to unitholders of
Hiland Partners, (d) reduced capital expenditures with
respect to the business of the Hiland Companies,
(e) deterioration of the Hiland Companies from an
operational standpoint, and (f) further deterioration of
the unit price of Hiland Partners.
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Chapter 11 Bankruptcy.
The Hiland
Partners Conflicts Committee believed that a Chapter 11
bankruptcy proceeding would be expensive, time consuming and
very unlikely to result in any value for the unitholders of
Hiland Partners, because the debt of the Hiland Companies
likely exceeded the underlying value of the assets of the Hiland
Companies at such time (especially in the context of a
liquidation).
|
After a discussion of the above alternatives and other relevant
considerations, the Hiland Partners Conflicts Committee
concluded that the best (and probably only viable) alternative
available to Hiland Partners was the Hiland Partners merger as
contemplated in the April 20 Revised Proposal. Messrs. Straty
and Parkinson and other representatives of Jefferies &
Company indicated that they expected that they would be able to
render a fairness opinion when requested by the Hiland Partners
Conflicts Committee.
On May 15, 2009, Baker Botts distributed revised drafts of
the Hiland Partners merger agreement, the Hiland Holdings merger
agreement and related documents to the Hiland Partners Conflicts
Committee, Jefferies & Company and Conner &
Winters. Through May 17, 2009, the Hiland Partners
Conflicts Committee and Mr. Curry of Conner & Winters
continued to negotiate the final remaining material open issues
pertaining to the Hiland Partners merger agreement (specifically
whether a default under the Hiland Operating Credit Agreement
should constitute a material adverse effect under
the Hiland Partners merger agreement and whether the restricted
units held by the directors of Hiland Partners would be rolled
over into equity interests of the surviving entity or cashed out
in the Hiland Partners merger) with Mr. Hamm and Messrs.
Davidson and Perea and other representatives of Baker Botts
until such time as the Hiland Partners Conflicts Committee and
Conner & Winters were satisfied on all substantive
issues. From May 17, 2009 through May 26, 2009, the
Hiland Holdings Conflicts Committee and Messrs. Stewart and
Sappington of Fulbright continued to negotiate open issues
pertaining to the Hiland Holdings merger agreement with
Mr. Hamm and Messrs. Davidson and Perea and other
representatives of Baker Botts, which issues consisted of: (i)
the circumstances where Mr. Hamm and his affiliates could
terminate the Hiland Holdings merger agreement or refuse to
close the Hiland Holdings merger following execution of the
Hiland Holdings merger agreement; (ii) whether Hiland
Holdings representations and warranties would be deemed
inaccurate to the extent Mr. Hamm or one of his affiliates
had knowledge of the inaccuracy; (iii) whether Hiland
Holdings operating covenants would be deemed breached if
Hiland Holdings is directed to take action by Mr. Hamm or
his affiliates; (iv) the definition of a material adverse
effect with respect to Hiland Holdings; (v) the amount of
and circumstances under which a
break-up
fee
would be payable; (vi) the no-shop provisions; and (vii) the
nature and extent of Mr. Hamms obligation to
contribute closing funds to HPGP Merger Sub. During such time,
Mr. Perea would periodically update Mr. Curry on the status of
negotiations with the Hiland Holdings Conflicts Committee and
propose further revisions to the Hiland Partners merger
agreement to conform the two merger agreements. All such changes
were approved by the Hiland Partners Conflicts Committee and
Conner & Winters.
On May 28, 2009, management delivered updated 2009
projections to Jefferies & Company, which projections
reflected updated 2009 forward strip pricing and lower expected
natural gas volumes for 2009 than contained in managements
earlier projections as a result of a continued reduction in the
level of drilling activity in Hiland Partners areas of
operation.
On June 1, 2009, the Hiland Partners Conflicts Committee
met again with its advisors. Messrs. Griffin, Harrison and
Gipson were also present at the meeting by invitation.
Messrs. Griffin, Harrison and Gipson updated the Hiland
Partners Conflicts Committee and its advisors on the current
business and financial status of the Hiland Companies and
responded to various questions from the Hiland Partners
Conflicts Committee and its advisors. At that point in the
meeting, Messrs. Griffin, Harrison and Gipson were excused
from the meeting. Mr. Curry of Conner & Winters
advised the Hiland Holdings Conflicts Committee that the terms
of the Hiland Partners merger agreement and related documents
had not changed in a material way since the
37
Hiland Partners Conflicts Committee was last updated on
May 29, 2009. Messrs. Straty and Parkinson, with other
representatives of Jefferies & Company participating
in person and telephonically, made a presentation to the Hiland
Partners Conflicts Committee on its financial analysis regarding
the proposed transaction, a copy of which had been provided to
the Hiland Partners Conflicts Committee prior to the meeting.
Jefferies & Company representatives responded to
numerous questions from the Hiland Partners Conflicts Committee
and counsel. At the conclusion of their presentation,
Jefferies & Company issued its oral opinion that the
transaction was fair, from a financial point of view, to the
Hiland Partners public unitholders. After hearing from its
advisors and following a subsequent discussion, the Hiland
Partners Conflicts Committee resolved unanimously (a) that
the Hiland Partners merger agreement and the Hiland Partners
merger are advisable, fair to, and in the best interests of,
Hiland Partners and the Hiland Partners public unitholders;
(b) to approve and recommend that the Hiland Partners Board
of Directors approve, on behalf of Hiland Partners (i) the
Hiland Partners merger and (ii) the Hiland Partners merger
agreement and related documents; (c) to recommend to the
Hiland Partners Board of Directors that it should recommend that
the Hiland Partners public unitholders should approve the Hiland
Partners merger and the Hiland Partners merger agreement; and
(d) to recommend to the Hiland Partners public unitholders
that such public unitholders should approve the Hiland Partners
merger and the Hiland Partners merger agreement.
The
Hiland Holdings Conflicts Committees Process and
Negotiations and Deliberations related to Hiland
Holdings
On February 4, 2009, after receiving the initial
authorization from the Hiland Holdings Board of Directors to
respond to the January 15 Proposal described above, the Hiland
Holdings Conflicts Committee met to consider the retention of
legal and financial advisors and interviewed potential
candidates to serve as such. After deliberation, the Hiland
Holdings Conflicts Committee selected Fulbright to serve as
legal counsel to the Hiland Holdings Conflicts Committee and
Morris, Nichols, Arsht & Tunnell LLP (Morris
Nichols) to serve as special Delaware counsel to the
Hiland Holdings Conflicts Committee, in light of both
firms experience in the Hiland Companies industry
and in representation of special committees and conflicts
committees. Following the retention of Fulbright and Morris
Nichols, the Hiland Holdings Conflicts Committee interviewed
four potential financial advisors.
On February 6, 2009, the Hiland Holdings Conflicts
Committee held a meeting, at which Messrs. Stewart and
Sappington of Fulbright and Mr. Frederick H. Alexander and Mr.
Louis G. Hering of Morris Nichols were present. At the meeting,
the Hiland Holdings Conflicts Committee continued its
discussions regarding the candidates to serve as financial
advisor to the Hiland Holdings Conflicts Committee and their
qualifications, experience, independence and fee proposals. In
particular, the Hiland Holdings Conflicts Committee discussed
the independence of Barclays Capital, including Barclays
Capitals November 2008 meetings with Mr. Hamm and
Messrs. Griffin, Harrison and Gipson in which Barclays Capital
analyzed potential strategic alternatives available to the
Hiland Companies, including going private transactions led by
Mr. Hamm. Following the discussion, the Hiland Holdings
Conflicts Committee determined to contact representatives of
both Barclays Capital and one of the other three firms for
further information regarding their firms and fees.
On the evening of February 6, 2009, Baker Botts distributed
initial drafts of the Hiland Holdings merger agreement, the
Hiland Partners merger agreement and related documents to
Fulbright, which forwarded them to the members of the Hiland
Holdings Conflicts Committee. While the Hiland Holdings
Conflicts Committee and its legal advisors preliminarily
reviewed and discussed the provisions of the draft Hiland
Holdings merger agreement, the Hiland Holdings Conflicts
Committee decided not to engage in negotiations of the merger
agreement provisions until it had retained a financial advisor
and the Hiland Holdings Conflicts Committees advisors had
a chance to engage in diligence meetings with management of the
Hiland Companies, which meetings were scheduled to take place in
Enid, Oklahoma, on February 13, 2009.
On February 11, 2009, the Hiland Holdings Conflicts
Committee held a meeting, at which Messrs. Stewart and
Sappington of Fulbright and Mr. Hering of Morris Nichols were
present, to further consider the retention of a financial
advisor. After deliberation and determining that Barclays
Capital had no current or prior relationships that compromised
its independence, the Hiland Holdings Conflicts Committee
determined that Barclays Capital should be engaged as the
financial advisor to the Hiland Holdings Conflicts Committee
38
(subject to the negotiation of the terms of an engagement
letter) based on Barclays Capitals expertise and extensive
experience advising companies in the Hiland Companies
industry and in advising special and conflicts committees in
transactions similar to the one proposed by Mr. Hamm. Over the
next several days, Fulbright and the Hiland Holdings Conflicts
Committee engaged in negotiations with Barclays Capital
regarding the terms of Barclays Capitals engagement.
On February 12, 2009, the Hiland Holdings Conflicts
Committee and Messrs. Stewart and Sappington and other
representatives of Fulbright and Messrs. Alexander and Hering of
Morris Nichols met telephonically to discuss the scope of the
duties that had been delegated to the Hiland Holdings Conflicts
Committee by the Hiland Holdings Board of Directors.
On February 13, 2009, Messrs. Griffin, Harrison and
Gipson met with Mr. Rogan and other representatives of
Barclays Capital and Messrs. Stewart and Sappington of
Fulbright, as well as with the Hiland Partners Conflicts
Committee and its legal and financial advisors, in Enid,
Oklahoma, to provide a presentation of the current status of the
Hiland Companies, including financial and operating forecasts,
managements assessment of the Hiland Companies
credit arrangements and managements anticipation that
Hiland Partners would violate the leverage ratio covenant in the
Hiland Operating Credit Agreement as early as June 30,
2009. Additionally, Messrs. Griffin, Harrison and Gipson
reviewed the alternatives to the January 15 Proposal
explored by the management team, specifically: maintaining the
status quo, renegotiating or replacing the Hiland Operating
Credit Agreement, selling Hiland Partners assets or
issuing debt or equity securities. Immediately following that
meeting, the Hiland Holdings Conflicts Committee met
telephonically with Messrs. Stewart and Sappington of Fulbright
to receive a report of the meeting.
On February 17, 2009, the Hiland Holdings Conflicts
Committee and its legal advisors concluded negotiations with
Barclays Capital regarding the terms of Barclays Capitals
engagement, and the general partner of Hiland Holdings and
Barclays Capital executed Barclays Capitals engagement
letter to retain Barclays Capital as the financial advisor to
the Hiland Holdings Conflicts Committee.
On February 18, 2009, at a meeting of the Hiland Holdings
Conflicts Committee, with Messrs. Stewart and Sappington and
other representatives of Fulbright in attendance and
Mr. Rogan and other representatives of Barclays Capital
joining telephonically, Messrs. Griffin and Harrison
reviewed with the Hiland Holdings Conflicts Committee the
management teams assessment of alternatives to the
January 15 Proposal as set forth in the management
teams presentation made on February 13, 2009.
Messrs. Griffin and Harrison also repeated their position,
previously stated in the February 13, 2009 meeting, that
the continued decline in the price of crude oil, natural gas and
NGLs in 2009 had further increased the risk that Hiland Partners
would violate the leverage ratio covenant under the Hiland
Operating Credit Agreement as early as June 30, 2009.
Following the discussion, in response to a query from the
members of the Hiland Holdings Conflicts Committee,
Messrs. Griffin and Harrison indicated that neither Hiland
Holdings nor Hiland Partners had received any offers or
inquiries from any third parties regarding an alternative to the
January 15 Proposal.
Later that day, the Hiland Holdings Conflicts Committee met
telephonically with Messrs. Stewart and Sappington and other
representatives of Fulbright and Mr. Rogan, Jeremy Michael,
a Managing Director of Barclays Capital, and other
representatives of Barclays Capital to discuss Barclays
Capitals proposed timing and process for completing its
diligence review and financial analysis of the Hiland Companies
and the January 15 Proposal. At that meeting, the Hiland
Holdings Conflicts Committee also instructed Barclays Capital
that its analysis should include an exploration of alternatives
to the January 15 Proposal, including the alternatives
discussed by the management team and any other alternatives that
Barclays Capital determined the Hiland Holdings Conflicts
Committee should consider.
Over the next several weeks, Barclays Capital engaged in a
diligence review of the Hiland Companies, including requests for
documents and data and discussions with Messrs. Griffin,
Harrison and Gipson regarding the management teams
financial model and the projections underlying that financial
model. In addition, Messrs. Stewart and Sappington of
Fulbright and members of the Hiland Holdings Conflicts Committee
engaged in a series of telephone calls regarding
Fulbrights initial impressions of the draft merger
agreement proposed by Mr. Hamm. During this period,
Messrs. Stewart and Sappington periodically contacted
Mr. Curry of Conner & Winters to discuss their
respective impressions of the draft merger agreements.
39
The depressed commodity price environment that began in the
fourth quarter of 2008 continued into the first quarter of 2009.
During the third week of February, the NYMEX crude oil contract
for March 2009 settled at $38.94 per barrel. In addition,
for the first quarter of 2009, the NYMEX crude oil last day
settle averaged $37.18 per barrel. Natural gas prices
continued to decline with the NYMEX natural gas contract for
March 20009 settling at $4.06 per MMBtu during the third
week of February, which was 34% lower than the January 2009
NYMEX natural gas settle price of $6.14 per MMBtu.
On February 26, 2009, the first of several lawsuits
challenging the January 15 Proposal and related matters was
filed. For more information regarding these lawsuits, please see
Special Factors Certain Legal Matters.
On March 2, 2009, the Hiland Holdings Conflicts Committee
held a meeting, with Messrs. Stewart and Sappington and other
representatives of Fulbright, Mr. Alexander and
Mr. David J. Teklits, partners at Morris Nichols, and
Messrs. Rogan and Michael and other representatives of
Barclays Capital in attendance, to hear Barclays Capitals
preliminary analyses, from a financial point of view, of the
Hiland Companies and the January 15 Proposal. At this
meeting, Barclays Capital reviewed with the Hiland Holdings
Conflicts Committee preliminary materials relating to its
valuation of the Hiland Companies, including an analysis of the
depressed state of the current and projected crude oil, natural
gas and NGL commodities markets, as well as the recent financial
performance of midstream energy companies. Barclays
Capitals preliminary analyses indicated that the
January 15 Proposal price of $3.20 per Hiland Holdings
common unit exceeded or was within the range of the values of
the Hiland Holdings common units implied by a valuation of
Hiland Holdings on either a discounted cash flow basis, a
valuation derived from publicly available trading or sale values
of comparable companies, or an analysis of the net asset value
of the Hiland Companies. Barclays Capitals preliminary
analyses also included analyses, from a financial point of view,
of potential strategic alternatives to the January 15
Proposal including alternatives involving the issuance of debt
or equity (or both) by the Hiland Companies. Barclays Capital
noted in particular that:
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it was very unlikely that the Hiland Companies could continue as
a going concern without some infusion of capital or
renegotiation of the Hiland Operating Credit Agreement in light
of managements projections;
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it was very unlikely that the Hiland Companies could renegotiate
or replace the Hiland Operating Credit Agreement on terms that
were equal or superior to Hiland Holdings public unitholders
than the January 15 Proposal;
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that it was very unlikely that the Hiland Companies could raise
sufficient equity capital at a reasonable cost to remedy their
credit situation; and
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that a sale of the Hiland Companies or their assets would be
difficult considering the current state of the commodity and
acquisition markets as well as the lack of any indications of
interest from third parties since the January 15 Proposal
and Mr. Hamms statement that he was interested only
in acquiring common units in the Hiland Companies and that he
was not interested in selling (or causing his affiliates to
sell) interests in the Hiland Companies.
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Following Barclays Capitals presentation, the Hiland
Holdings Conflicts Committee asked Barclays Capital to provide
clarification on the alternatives included in Barclays
Capitals presentation, including an analysis of a
potential structured equity investment in the Hiland Companies
by Mr. Hamm or his affiliates. The Hiland Holdings
Conflicts Committee also directed Barclays Capital to perform
further diligence investigations and analysis of the volume
forecasts by the management team.
On March 3, 2009, Messrs. Murphy and Babowal of Wells
Fargo Securities met with Mr. Hamm (Mr. Babowals
participation, which was telephonic, being limited to certain
portions only) to review market developments since the
January 15 Proposal. Separately, Messrs. Griffin,
Harrison and Gipson met with Mr. Murphy, with other
representatives of Wells Fargo Securities, including for certain
portions Mr. Babowal, participating telephonically, to
discuss Wells Fargo Securities analyses which were based
on the Hiland Companies most recent financial projections
and commodity price information.
40
On March 4, 2009, the members of the Hiland Holdings
Conflicts Committee met by telephone, along with
Messrs. Stewart and Sappington and other representatives of
Fulbright and Messrs. Hering and Alexander of Morris
Nichols, to review Barclays Capitals March 2, 2009
presentation and to discuss other specific analyses and
investigations that the Hiland Holdings Conflicts Committee
wanted Barclays Capital to conduct on behalf of the Hiland
Holdings Conflicts Committee. The Hiland Holdings Conflicts
Committee also determined to seek the assistance of the
management team in arranging a direct meeting between
Dr. Lyle, on behalf of the Hiland Holdings Conflicts
Committee, and a member of the lending group under the Hiland
Operating Credit Agreement, to investigate the possibility of
renegotiating the Hiland Operating Credit Agreement and to
confirm the potential terms and conditions that might be
expected in connection with such a renegotiation.
On March 5, 2009, during a joint meeting of the Hiland
Holdings Board of Directors and the Hiland Partners Board of
Directors, Mr. McNabb informed both Boards of Directors,
including Messrs. Griffin and Harrison, that members of the
Hiland Partners Conflicts Committee had met with MidFirst Bank
earlier that day to determine what arrangements could be reached
with the lending group that would be a viable alternative to the
January 15 Proposal. Mr. McNabb informed both Boards
of Directors that MidFirst Bank was willing to discuss the
renegotiation of the Hiland Operating Credit Agreement, but that
it was not encouraging about the possibility of renegotiating or
restructuring the Hiland Operating Credit Agreement on terms
that would present a viable alternative to the January 15
Proposal.
On March 5, 2009, as disclosed in Hiland Holdings
Current Report on
Form 8-K
dated March 11, 2009, the Compensation Committee of the
Hiland Partners Board of Directors increased the annual base
salaries of Messrs. Griffin and Harrison and Kent C.
Christopherson, Vice President Chief Operations
Officer, from $290,000 per year to $340,000 per year, $200,000
per year to $230,000 per year and $205,000 per year to $215,000
per year, respectively, and approved 2009 Incentive Cash Bonuses
for Messrs. Griffin, Harrison and Christopherson of
$175,000, $100,000 and $25,000, respectively. The base salaries
of Messrs. Griffin and Harrison were allocated
approximately 95% and 5% between Hiland Partners and Hiland
Holdings, respectively.
On March 6, 2009, the Hiland Holdings Conflicts Committee
met by telephone with its advisors to discuss its advisors
reaction to the report of Mr. McNabb regarding the Hiland
Partners Conflicts Committees discussions with MidFirst
Bank. The Hiland Holdings Conflicts Committee determined that
Dr. Lyle or Barclays Capital should meet with Wells Fargo,
another prominent member of the lending group under the Hiland
Operating Credit Agreement, to determine if other members of the
lending group might be more receptive than MidFirst Bank to
restructuring the Hiland Operating Credit Agreement on
acceptable terms.
On March 6, 2009, Messrs. Murphy and Penilla of Wells Fargo
Securities met with Messrs. Hamm and Mackie to discuss
further alternatives to going private transactions. Among the
alternatives discussed was a rights offering in which a right to
subscribe for additional Hiland Partners common units at a
discount to the public trading price would be distributed to
each Hiland Partners unitholder. Such rights would offer current
unitholders the opportunity to participate in an equity infusion
in Hiland Partners. In addition, Wells Fargo Securities
discussed the possible merger of Hiland Holdings with and into
Hiland Partners to be followed by a rights offering. During the
meeting, Mr. Hamm requested further information about a
rights offering and he, Mr. Mackie and Wells Fargo
Securities contacted Mr. Davidson of Baker Botts to request
a preliminary analysis of potential legal implications of a
rights offering.
On March 10, 2009, Messrs. Hamm and Reid met with
Messrs. Griffin and Harrison and requested that they
continue to pursue alternatives available to the Hiland
Companies with respect to the Hiland Operating Credit Agreement.
The Hiland Holdings Conflicts Committee met with
Messrs. Stewart and Sappington of Fulbright and
Messrs. Rogan and Michael of Barclays Capital on
March 13, 2009 to receive an update to Barclays
Capitals preliminary analysis based upon any changes in
market conditions since its initial report on March 2, 2009
and to discuss the results of its continued analysis of the
January 15 Proposal and any strategic alternatives to that
proposal. Barclays Capital indicated its preliminary view that,
as of the date thereof, the $3.20 per common unit cash
consideration being offered by Mr. Hamm appeared to be
within or above the range of
41
values of the Hiland Holdings common units implied by a
valuation of Hiland Holdings. The Hiland Holdings Conflicts
Committee also asked Barclays Capital to follow up with Wells
Fargo Securities regarding the possibility of a structured
equity investment by Mr. Hamm as an alternative to the
January 15 Proposal.
On March 14, 2009, Messrs. Hamm and Reid met
telephonically with Messrs. Murphy and Babowal and other
representatives of Wells Fargo Securities to compare the
proposed going private transactions with both a stand-alone
rights offering and a merger of Hiland Holdings and Hiland
Partners in conjunction with a rights offering. Wells Fargo
Securities also presented a case study for a recent amended
credit agreement of a midstream MLP and discussed the
possibility of negotiating with the lenders under the Hiland
Operating Credit Agreement.
Messrs. Hamm and Reid met telephonically with Messrs.
Murphy and Babowal and other representatives of Wells Fargo
Securities on March 16, 2009 and with Mr. Penilla of
Wells Fargo Securities on March 17, 2009 to compare the
proposed going private transactions with a subordinated debt
issuance funded by Mr. Hamm and his affiliates. Later on
March 17, 2009, Messrs. Hamm and Harrison met with
representatives of MidFirst Bank to discuss the possibility of
renegotiating the Hiland Operating Credit Agreement in the
context of both the proposed going private transactions and a
subordinated debt issuance.
On March 17, 2009, Dr. Lyle held a telephonic meeting
with representatives of Wells Fargo in which Wells Fargo
confirmed that it might be willing to discuss a renegotiation of
the Hiland Operating Credit Agreement, but that any such
renegotiation or waiver would require a significant upfront
restructuring fee, a significant increase in the applicable
interest rate and other modifications demanded by the lenders to
the loan agreement, including a significant reduction or
elimination of distributions.
On March 18, 2009, the Hiland Holdings Conflicts Committee
had a telephone call with Messrs. Stewart and Sappington
and other representatives of Fulbright and Mr. Rogan and
other representatives of Barclays Capital during which Barclays
Capital confirmed its preliminary view that as of the date
thereof the January 15 Proposal offered consideration of
$3.20 per common unit of Hiland Holdings was within or
above the range of fairness, from a financial point of view, to
the Hiland Holdings public unitholders. The Hiland Holdings
Conflicts Committee and Barclays Capital also noted that
decreases in distributions by Hiland Partners had a more
significant impact on the market price and value of Hiland
Holdings common units since Hiland Holdings only source of
cash flow was distributions from Hiland Partners.
From March 20, 2009 through March 24, 2009, the Hiland
Holdings Conflicts Committee held several telephone calls with
its advisors, including Messrs. Rogan and Michael and other
representatives of Barclays Capital, Messrs. Stewart and
Sappington and other representatives of Fulbright, and
Messrs. Alexander and Teklits of Morris Nichols, to discuss
possible negotiating strategies with Mr. Hamm regarding the
January 15 Proposal. The Hiland Holdings Conflicts
Committee determined that Barclays Capital should contact
representatives of Wells Fargo Securities and indicate that the
Hiland Holdings Conflicts Committee might be able to support the
currently proposed price of $3.20 per common unit, but that
there were significant issues to discuss with respect to the
terms of the draft Hiland Holdings merger agreement, including:
(i) the extent of the operational representations,
warranties and interim operating covenants of Hiland Holdings;
(ii) whether Mr. Hamm would guarantee the obligations
of his affiliates under the agreement;
(iii) Mr. Hamms and his affiliates request
to have the completion of the transactions be subject to a
financing contingency; (iv) the circumstances where
Mr. Hamm and his affiliates could terminate the Hiland
Holdings merger agreement or refuse to close the Hiland Holdings
merger following execution of the Hiland Holdings merger
agreement; (v) the inclusion of a no-shop provision;
(vi) the parties termination rights and
break-up
fees payable; (vii) whether specific performance would be
provided for in the agreement; and (viii) the definition of
a material adverse effect with respect to Hiland
Holdings. The Hiland Holdings Conflicts Committee then
instructed Fulbright to distribute a revised version of the
draft Hiland Holdings merger agreement to Wells Fargo Securities
and Baker Botts reflecting the comments and proposed changes of
the Hiland Holdings Conflicts Committee and its advisors.
On March 24, 2009, Fulbright transmitted comments to the
draft merger agreement to Baker Botts, and Mr. Rogan of
Barclays Capital contacted Mr. Murphy of Wells Fargo
Securities to inform them of the Hiland Holdings Conflicts
Committees position. Mr. Murphy indicated to
Mr. Rogan that, while Mr. Hamms offer
42
with respect to the proposed transaction was still outstanding,
Mr. Hamm was not ready to enter into direct negotiations at
that time because they were in ongoing discussions with MidFirst
Bank regarding the continued financing of the Hiland Companies
following the consummation of the transactions proposed in the
January 15 Proposal and that they were considering other
alternatives for the Hiland Companies, including a capital
infusion into the Hiland Companies by Mr. Hamm.
The Hiland Holdings Conflicts Committee reconvened by telephone
later that same day with Messrs. Stewart and Sappington of
Fulbright and Mr. Michael and other representatives of
Barclays Capital to receive a report from Barclays Capital
regarding its discussions with Mr. Murphy of Wells Fargo
Securities. Mr. Michael summarized for the Hiland Holdings
Conflicts Committee his call earlier that day with Wells Fargo
Securities and indicated to the Hiland Holdings Conflicts
Committee that Barclays Capital believed the proposed
transaction continued to be a superior option for the Hiland
Holdings public unitholders, when compared with the alternative
of an equity infusion by Mr. Hamm, because such an equity
infusion would likely include significant dilution of Hiland
Holdings interest in Hiland Partners, a significant
reduction or elimination in distributions by Hiland Partners
(and, consequently, a reduction in value of the subordinated
units and incentive distribution rights in Hiland Partners owned
by Hiland Holdings as arrearages built up with regard to minimum
quarterly distributions on the Hiland Partners common units).
From March 24, 2009, until April 20, 2009, there were
no active negotiations between the Hiland Holdings Conflicts
Committee and its representatives and Mr. Hamm and his
representatives related to the January 15 Proposal, though
representatives of Fulbright and Conner & Winters
periodically discussed their respective impressions of the draft
merger agreements.
On April 1, 2009, management delivered updated 2009
projections to Barclays Capital, which projections reflected
updated 2009 forward strip pricing and lower expected natural
gas volumes for 2009 than contained in managements earlier
projections as a result of a continued reduction in the level of
drilling activity in Hiland Partners areas of operation.
At this time, Hiland Partners was experiencing the effects of
the reduction in drilling activity seen throughout the United
States during this time period. For example, U.S. natural
gas drilling rig counts declined by approximately 29% to 1,018
as of February 20, 2009, compared to 1,430 natural gas
drilling rigs in the comparable period of 2008, and
approximately 37% compared to the peak natural gas drilling rig
count of 1,606 in August and September 2008. Due to the
substantial reduction in drilling activity, Hiland Partners
connected 10 new wells during the first quarter of 2009 as
compared to 24 wells during the fourth quarter of 2008,
representing a 58% decline.
On April 7, 2009, MidFirst Bank formally notified the
lenders under Hilands Operating Credit Agreement of
requested modifications to such credit agreement to increase the
leverage ratio under the Hiland Operating Credit Agreement to
(i) 5.25 to 1.0 through June 30, 2010, (ii) 5.0
to 1.0 for the period from July 1, 2010 through
December 31, 2010, and (iii) 4.75 to 1.0 for the
period from January 1, 2011 to maturity. The modifications
would require Mr. Hamm to inject $50 million of equity
into Hiland Partners in conjunction with the consummation of the
going private transactions and would prohibit distributions
unless the leverage ratio was less than 4.25 to 1.0. The
modification would also require an amendment fee and increased
interest rates and was subject to formal documentation.
On April 16, 2009, Messrs. Murphy and Babowal and other
representatives of Wells Fargo Securities met telephonically
with Messrs. Hamm, Reid and Mackie to review its financial
analysis of going private transactions in light of developments
in the market and the Hiland Companies financial outlook
since the January 15 Proposal. Messrs. Griffin, Harrison
and Gipson were invited to listen to the Wells Fargo
Securities presentation and to provide an update on
managements negotiations with the lenders under the Hiland
Operating Credit Agreement.
On April 17, 2009, MidFirst Bank informed the management
team that it had received non-binding indications of interests
to the proposed modifications to the Hiland Operating Credit
Agreement contained in the April 7, 2009 notice from the
required lenders (more than 50% of commitments). Subsequently,
MidFirst Bank informed management it had received non-binding
indications of interests to the proposed modifications to the
Hiland Operating Credit Agreement from all lenders.
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On April 20, 2009, Dr. Lyle received a telephone call
from Mr. Hamm, during which Mr. Hamm stated that he
and his representatives had engaged in lengthy discussions with
MidFirst Bank regarding the terms on which the Hiland
Companies lenders would agree to amend the Hiland
Operating Credit Agreement in connection with the closing of the
acquisition of the Hiland Companies by Mr. Hamm and his
affiliates, as well as the adverse effect that continued
declines in commodity prices, particularly natural gas prices,
and drilling activity along Hiland Partners systems had on
the Hiland Companies current financial performance and
long-term prospects. In the call, Mr. Hamm stated that
Mr. Hamm would no longer continue with the prior proposed
offer of $3.20 per Hiland Holdings common unit, based upon the
terms under which the lenders were willing to amend the existing
credit arrangements and the worsening outlook for the Hiland
Companies. Dr. Lyle then asked Mr. Hamm if
Mr. Hamm, his affiliates or the Hamm family trusts had
considered making a direct equity investment into the Hiland
Companies as an alternative to the proposed transaction.
Mr. Hamm replied that he had considered such an investment
as an alternative, but had concluded that his proposed going
private transactions were a superior alternative, in part
because he believed a direct equity investment would be overly
dilutive to the common unitholders.
Later that same day, the Hiland Holdings Conflicts Committee and
the Hiland Partners Conflicts Committee each received a letter
from Harold Hamm amending the January 15 Proposal and describing
the terms of the April 20 Revised Proposal summarized above in
The Hiland Partners Conflicts Committees
Process, Negotiations and Deliberations. Under the revised
terms proposed by Mr. Hamm, holders of Hiland Holdings
common units would receive $2.40 in cash per common unit,
reduced from $3.20 in cash per common unit under the January 15
Proposal. In his letter reducing the offered consideration,
Mr. Hamm cited the adverse effect that continued declines
in natural gas prices and drilling activity along Hiland
Partners systems had had on the Hiland Companies
current and long-term projected throughput volumes, midstream
segment margins and cash flows since the January 15
Proposal.
On April 24, 2009, the Hiland Holdings Board of Directors
and the Hiland Partners Board of Directors both unanimously
voted to suspend quarterly distributions with respect to each
entitys partnership units beginning with the first quarter
distribution of 2009, based on each of the Hiland Companies
Board of Directors consideration of the impact of lower
commodity prices and drilling activity on Hiland Partners
current and projected throughput volumes, midstream segment
margins and cash flows, as well as future required levels of
capital expenditures and the level of Hiland Partners
outstanding indebtedness under the Hiland Operating Credit
Agreement.
On April 27, 2009, the Hiland Holdings Conflicts Committee
held a telephone call with Messrs. Stewart and Sappington
of Fulbright and Messrs. Rogan and Michael and other
representatives of Barclays Capital to discuss the April 20
call with Mr. Hamm and the April 20 Revised Proposal.
During the call, the Hiland Holdings Conflicts Committee
instructed Barclays Capital to evaluate the April 20
Revised Proposal and report back to the Hiland Holdings
Conflicts Committee as soon as possible.
Later that same evening, Baker Botts transmitted a revised draft
of the Hiland Holdings merger agreement to Fulbright.
On April 28, 2009, Mr. Rogan and other representatives
of Barclays Capital held a telephonic discussion with
Mr. Murphy of Wells Fargo Securities during which the
financial advisors reviewed the status of discussions between
the Hiland Companies and MidFirst Bank regarding the potential
covenant violation under the Hiland Operating Credit Agreement.
On the morning of April 30, 2009, the Hiland Holdings
Conflicts Committee held a telephonic meeting with its advisors,
including Messrs. Stewart and Sappington and other
representatives of Fulbright and Mr. Rogan and other
representatives of Barclays Capital. Mr. Rogan recounted
the call he had with Mr. Murphy of Wells Fargo Securities
regarding the operational update and status regarding MidFirst
Bank and Hiland Partners potential violation of the
leverage ratio covenant under the Hiland Operating Credit
Agreement. Fulbright also briefed the Hiland Holdings Conflicts
Committee on the revised draft of the Hiland Holdings merger
agreement and indicated that while some progress had been made
on the Hiland Holdings merger agreement, there were still issues
to resolve, including the extent of the representations,
warranties and covenants and whether the potential covenant
violation under the Hiland Operating Credit Agreement
44
following signing could be the basis for Mr. Hamm and his
affiliates to refuse to close the Hiland Holdings merger. The
Hiland Holdings Conflicts Committee decided to finalize its
strategy on the Hiland Holdings merger agreement following
Barclays Capitals completion of its updated financial
analysis of the April 20 Revised Proposal.
Later that morning, Messrs. Stewart and Sappington of
Fulbright, Mr. Rogan of Barclays Capital and Mr. Curry
of Conner & Winters participated in a call with
Messrs. Griffin and Harrison and Mr. McWilliams of
Vinson & Elkins regarding the status of Hiland
Partners discussions with MidFirst Bank and the potential
violation of the leverage ratio covenant under the Hiland
Operating Credit Agreement. Mr. Harrison reported that
MidFirst Bank was still willing to discuss an amendment or
waiver, but as it had previously informed Mr. Harrison,
such an amendment would involve high up-front fees, a
significant increase in the interest rate and the indefinite
suspension of distributions by Hiland Partners. Additionally,
Mr. Harrison reported that, while MidFirst Bank had
indicated that it might grant a temporary waiver for the
potential violation of the leverage ratio covenant if the
proposed transaction did not close prior to the default, it
would not agree to do so in advance.
On May 1, 2009, the Hiland Holdings Conflicts Committee
conducted a telephone call with its advisors, including
Messrs. Stewart and Sappington of Fulbright,
Mr. Alexander of Morris Nichols and Messrs. Rogan and
Michael and other representatives of Barclays Capital. During
the call, Barclays Capital provided its preliminary analysis
that as of the date thereof and in light of subsequent
developments, the April 20 Revised Proposal cash
consideration of $2.40 per Hiland Holdings common unit was
within or above the range of values of the Hiland Holdings
common units implied by a valuation of Hiland Holdings, and
therefore appeared to be fair to the Hiland Holdings public
unitholders from a financial point of view. In addition,
Barclays Capital reported that it had received a description of
the terms on which the lenders would amend the Hiland Operating
Credit Agreement following a closing of the proposed Hiland
Holdings merger, and that, as anticipated, Mr. Hamm would
be required to contribute a substantial amount of equity to
Hiland Partners to pay down indebtedness under the Hiland
Operating Credit Agreement. Barclays Capital also preliminarily
reaffirmed its prior view that, based on Barclays Capitals
experience and expertise in the current credit markets, if the
Hiland Companies were to reject the April 20 Revised
Proposal and attempt to refinance or replace the Hiland
Operating Credit Agreement, the terms of that refinancing or
replacement would likely be worse financially for the Hiland
Holdings public unitholders than the April 20 Revised
Proposal, especially considering that any refinancing of the
existing indebtedness would likely involve the continued
suspension of distributions by Hiland Partners for a
considerable period of time.
On May 4, 2009, the Hiland Holdings Conflicts Committee
held a telephone conference with Messrs. Stewart and
Sappington of Fulbright and Mr. Rogan and other
representatives of Barclays Capital, in which Mr. Stewart
reported that he had spoken to Mr. Curry of
Conner & Winters and confirmed that the Hiland
Partners Conflicts Committee intended to seek an increase in the
offer price of $0.25 per common unit. After a brief
discussion, the Hiland Holdings Conflicts Committee determined
that it would seek a price increase from Mr. Hamm to test
whether the April 20 Revised Proposal was the best offer
that the Hiland Holdings Conflicts Committee could obtain from
Mr. Hamm. The Hiland Holdings Conflicts Committee
instructed Barclays Capital to contact Wells Fargo Securities to
pass along the Hiland Holdings Conflicts Committees
request that the price per common unit offered by Mr. Hamm
be increased by a meaningful amount. After
discussions with Messrs. Griffin and Harrison,
Mr. Murphy of Wells Fargo Securities responded later that
day at the direction of Mr. Griffin and requested that the
Hiland Holdings Conflicts Committee propose a specific increase.
On May 5, 2009, the Hiland Holdings Conflicts Committee met
again with Mr. Rogan and other representatives of Barclays
Capital and Messrs. Stewart and Sappington and other
representatives of Fulbright by telephone to discuss the
specific amount of the price increase it should request from
Mr. Hamm. After deliberating and obtaining the preliminary
financial views of Barclays Capital, the Hiland Holdings
Conflicts Committee determined that Barclays Capital should
contact Wells Fargo Securities and request that the offer
proposed by the Hamm Continuing Investors be increased by
$0.40 per common unit. The Hiland Holdings Conflicts
Committee also discussed with Fulbright issues raised by the
Hamm Continuing Investors and Baker Botts in the April 27
draft of the Hiland Holdings merger agreement. Specifically, the
Hiland Holdings
45
Conflicts Committee felt that Fulbright should attempt to limit
operational representations and warranties and interim operating
covenants of Hiland Holdings in the Hiland Holdings merger
agreement, which would limit the ability of Mr. Hamm and
his affiliates to terminate or avoid closing the proposed going
private transaction.
Later that day, Mr. Rogan and other representatives of
Barclays Capital contacted Mr. Murphy of Wells Fargo
Securities to request, on behalf of the Hiland Holdings
Conflicts Committee, that the offer proposed by Mr. Hamm be
increased by $0.40 per Hiland Holdings common unit.
Mr. Murphy relayed the request to Mr. Hamm, and at his
direction contacted Barclays Capital again that afternoon to
report that Mr. Hamm would not agree to increase the offer
price of $2.40 per Hiland Holdings common unit in the
April 20 Revised Proposal.
Mr. Rogan and other representatives of Barclays Capital
relayed Mr. Hamms refusal to the Hiland Holdings
Conflicts Committee in a telephone conference the next morning,
May 6, 2009, at which Messrs. Stewart and Sappington
of Fulbright were present. The Hiland Holdings Conflicts
Committee members then indicated that they thought that they
should personally appeal to Mr. Hamm to increase his offer
price so that they could confirm whether the offer price of
$2.40 per common unit was the best price that they could
obtain from Mr. Hamm.
Later that day, following the Hiland Holdings Board of Directors
meeting in Enid, Oklahoma, both members of the Hiland Holdings
Conflicts Committee met directly with Mr. Hamm to again
request that he increase the offered price of $2.40 per
Hiland Holdings common unit by $0.40 per common unit.
Mr. Hamm agreed to evaluate the Hiland Holdings Conflicts
Committees request, but on May 8, 2009, at the
direction of Mr. Hamm, Mr. Murphy of Wells Fargo
Securities contacted Barclays Capital to report that
Mr. Hamm had again rejected the Hiland Holdings Conflicts
Committees request to increase the offer price.
Mr. Rogan of Barclays Capital reported this to the Hiland
Holdings Conflicts Committee in a telephone conference later
that day at which Messrs. Stewart and Sappington of
Fulbright were also present. The Hiland Holdings Conflicts
Committee determined that it would likely not be productive to
seek further price increases from Mr. Hamm, and that
Barclays Capital should work to confirm that it could opine as
to the fairness to Hiland Holdings public unitholders, from a
financial point of view, of the $2.40 per Hiland Holdings
common unit offered in the April 20 Revised Proposal.
Additionally, the Hiland Holdings Conflicts Committee directed
Fulbright to continue negotiations with Baker Botts regarding
the Hiland Holdings merger agreement and related documents, and
that Fulbright should make efforts to coordinate with
Conner & Winters in its negotiations regarding the
Hiland Partners merger agreement with Baker Botts and
Mr. Hamm.
Between May 8, 2009 and May 26, 2009,
Messrs. Stewart and Sappington of Fulbright, on behalf of
the Hiland Holdings Conflicts Committee, continued to negotiate
the terms of the Hiland Holdings merger agreement with
Messrs. Davidson and Perea and other representatives of
Baker Botts in accordance with the instructions of the Hiland
Holdings Conflicts Committee. Fulbright coordinated directly
with Conner & Winters in its negotiations with Baker
Botts, periodically discussing the Hiland Holdings merger
agreement with Mr. Curry of Conner & Winters and
reviewing and receiving information from Mr. Curry about
the status of the Hiland Partners draft merger agreement.
During this period, Mr. Sappington of Fulbright and
Mr. Perea and other representatives of Baker Botts
participated in several calls and meetings regarding the Hiland
Holdings merger agreement and related documents. In particular,
the Hiland Holdings Conflicts Committee, in consultation with
Messrs. Stewart and Sappington of Fulbright, determined
that Fulbright should continue to seek to limit operational
representations, warranties and interim operating covenants of
Hiland Holdings, as well as to limit the circumstances where
Mr. Hamm and his affiliates could terminate the Hiland
Holdings merger agreement or refuse to close the Hiland Holdings
merger following execution of the Hiland Holdings merger
agreement.
On May 27, 2009, the Hiland Holdings Conflicts Committee
met with Messrs. Rogan and Michael and other
representatives of Barclays Capital and Messrs. Stewart and
Sappington and other representatives of Fulbright to discuss the
status of negotiations on the Hiland Holdings merger agreement
and to receive an updated, preliminary presentation from
Barclays Capital regarding its analysis of the April 20
Revised Proposal, from a financial point of view. At the
meeting, representatives of Fulbright reviewed with the Hiland
Holdings Conflicts Committee its obligations and duties under
the Hiland Holdings partnership agreement and
46
applicable law. Fulbright also provided the Hiland Holdings
Conflicts Committee with a review of the terms of the Hiland
Holdings draft merger agreement and related documents. Following
Fulbrights presentation, a representative of Barclays
Capital presented the Hiland Holdings Conflicts Committee an
update of recent trends in the equity markets and commodity
prices and a review of its financial analysis of the
April 20 Revised Proposal. In particular, Barclays Capital
confirmed its preliminary view that as of the date thereof, the
cash merger consideration of $2.40 per common unit of
Hiland Holdings was fair, from a financial point of view, to the
Hiland Holdings public unitholders. Barclays Capital also stated
in its presentation that, for the same reasons it had indicated
in its March 2, 2009 presentation to the Hiland Holdings
Conflicts Committee, it did not appear likely that there were
alternatives to the April 20 Revised Proposal that were
superior, from a financial point of view, to the Hiland Holdings
public unitholders.
On May 28, 2009, management delivered updated 2009
projections to Barclays Capital, which projections reflected
updated 2009 forward strip pricing and lower expected natural
gas volumes for 2009 than contained in managements earlier
projections as a result of a continued reduction in the level of
drilling activity in Hiland Partners areas of operation.
On June 1, 2009, the Hiland Holdings Conflicts Committee
met again with Messrs. Stewart and Sappington of Fulbright,
Messrs. Rogan and Michael and other representatives of
Barclays Capital and Mr. Alexander of Morris Nichols. At
the meeting, Fulbright confirmed that the terms of the Hiland
Holdings merger agreement and related documents had not
materially changed since the May 27 meeting of the Hiland
Holdings Conflicts Committee. Barclays Capital also briefly
updated its financial analysis from the May 27 meeting of
the Hiland Holdings Conflicts Committee (based on updated market
and company information) and delivered its opinion that the
merger consideration of $2.40 per common unit offered to
the Hiland Holdings public unitholders pursuant to the Hiland
Holdings merger was fair, from a financial point of view, to
such holders. After hearing from its advisors, the Hiland
Holdings Conflicts Committee resolved unanimously (a) that
the Hiland Holdings merger agreement and the Hiland Holdings
merger are advisable, fair to, and in the best interests of,
Hiland Holdings and the Hiland Holdings public unitholders,
(b) to approve and recommend that the Hiland Holdings Board
of Directors approve, on behalf of Hiland Holdings (i) the
Hiland Holdings merger agreement and related documents, and
(ii) the Hiland Holdings merger, (c) to recommend to
the Hiland Holdings Board of Directors that it should recommend
that the Hiland Holdings public unitholders should approve the
Hiland Holdings merger agreement and the Hiland Holdings merger,
and (d) to recommend to the Hiland Holdings public
unitholders that such public unitholders should approve the
Hiland Holdings merger agreement and the Hiland Holdings merger.
Approval
of the Mergers by the Boards of Directors
On June 1, 2009, following the meetings of each Conflicts
Committee during which each Conflicts Committees approved the
applicable merger agreement and merger and recommended that
their respective full Board of Directors approve the applicable
merger agreement and merger, each of the Boards of Directors of
the Hiland Companies convened a special meeting to consider the
recommendation.
At the Hiland Partners Board of Directors meeting, Mr.
McWilliams of Vinson & Elkins again reviewed with the
Hiland Partners Board of Directors its duties under the Hiland
Partners partnership agreement, and Messrs. Griffin and
Harrison provided an update on Hiland Partners business.
Following the update, Mr. Parkinson and other
representatives of Jefferies & Company presented its
financial analysis of the $7.75 per common unit merger
consideration and summarized its opinion, delivered earlier to
the Hiland Partners Conflicts Committee, that the Hiland
Partners merger consideration was fair, from a financial point
of view, to the Hiland Partners public unitholders. Mr. Curry of
Conner & Winters then reviewed the terms of the Hiland
Partners merger agreement and the related agreements. After
hearing from its advisors and the members of the Hiland Partners
Conflicts Committee and their advisors, the Hiland Partners
Board of Directors approved the Hiland Partners merger agreement
and the Hiland Partners merger, recommended approval of the
Hiland Partners merger agreement and the Hiland Partners merger
to the Hiland Partners public unitholders and took other related
actions.
47
Following the conclusion of the special meeting of the Hiland
Partners Board of Directors, the Hiland Holdings Board of
Directors also convened a special meeting. At this meeting,
Mr. McWilliams of Vinson & Elkins again reviewed
with the Hiland Holdings Board of Directors its duties under the
Hiland Holdings partnership agreement, and Messrs. Griffin
and Harrison provided an update on the Hiland Companies
business. Following the update, Barclays Capital presented its
financial analysis of the $2.40 per common unit merger
consideration and summarized its opinion, delivered earlier to
the Hiland Holdings Conflicts Committee, that the Hiland
Holdings merger consideration was fair, from a financial point
of view, to the Hiland Holdings public unitholders. Messrs.
Stewart and Sappington of Fulbright then reviewed the terms of
the Hiland Holdings merger agreement and the related agreements.
After hearing from its advisors and the members of the Hiland
Holdings Conflicts Committee and their advisors, the Hiland
Holdings Board of Directors approved the Hiland Holdings merger
agreement and the Hiland Holdings merger, recommended approval
of the Hiland Holdings merger agreement and the Hiland Holdings
merger to the Hiland Holdings public unitholders and took other
related actions.
On the afternoon of June 1, 2009, Hiland Partners, the
general partner of Hiland Partners, Parent and HLND Merger Sub
executed the Hiland Partners merger agreement and related
documents and Hiland Holdings, the general partner of Hiland
Holdings, Parent and HPGP Merger Sub executed the Hiland
Holdings merger agreement and the related documents. The Hiland
Companies then issued a joint press release announcing the
signing of the merger agreements.
Recommendations
of the Hiland Partners Conflicts Committee and Hiland Partners
Board of Directors; Reasons for Recommending Approval of the
Merger
The
Hiland Partners Conflicts Committee
The Hiland Partners Conflicts Committee consists of two
independent directors: John T. McNabb, II, and Shelby E.
Odell. In resolutions approved by the Hiland Partners Board of
Directors on February 19, 2009, the Hiland Partners
Conflicts Committee was authorized to review, evaluate and make
recommendations to the Hiland Partners Board of Directors with
respect to Mr. Hamms proposed acquisition of the
publicly-held Hiland Partners common units and potential
alternative transactions. The Hiland Partners Conflicts
Committee retained Jefferies & Company as its
independent financial advisor and Conner & Winters as
its independent legal counsel. The Hiland Partners Conflicts
Committee oversaw the performance of financial and legal due
diligence by its advisors, conducted an extensive review and
evaluation of Mr. Hamms proposal and potential
alternative transactions and conducted negotiations with
Mr. Hamm and his representatives with respect to the Hiland
Partners merger agreement and the various other agreements
related to the Hiland Partners merger.
The Hiland Partners Conflicts Committee, by unanimous vote at a
meeting held on June 1, 2009, determined that the Hiland
Partners merger agreement and the transactions contemplated by
the Hiland Partners merger agreement were advisable, fair to,
and in the best interests of, Hiland Partners and the Hiland
Partners public unitholders. In addition, at the June 1,
2009 meeting, the Hiland Partners Conflicts Committee
recommended that (1) the Hiland Partners Board of Directors
approve the Hiland Partners merger agreement and the related
agreements, and the consummation of the transactions
contemplated thereby, including the Hiland Partners merger and
(2) the Hiland Partners public unitholders vote in favor of
approval of the Hiland Partners merger agreement and the Hiland
Partners merger. In reaching its determination, the Hiland
Partners Conflicts Committee consulted with and received the
advice of its independent financial and legal advisors,
considered the potential alternatives of Hiland Partners,
including the uncertainties and risks facing it, and considered
the interests of the Hiland Partners public unitholders.
In determining that the Hiland Partners merger agreement was
advisable, fair to, and in the best interests of, Hiland
Partners and the Hiland Partners public unitholders and
recommending the approval of the Hiland Partners merger
agreement and the related agreements, and the consummation of
the transactions contemplated thereby, including the Hiland
Partners merger, to the Hiland Partners Board of Directors on
June 1, 2009, the Hiland Partners Conflicts Committee
considered a number of factors. The material factors are
summarized below.
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The Hiland Partners Conflicts Committee viewed the following
factors as being generally positive or favorable in coming to
its determination and recommendation:
1. The Hiland Partners merger would provide the Hiland
Partners public unitholders with cash consideration of $7.75 per
common unit, a price the Hiland Partners Conflicts Committee
viewed as fair in light of Hiland Partners recent and
projected financial performance and recent trading prices of the
Hiland Partners common units. In making this determination, the
Hiland Partners Conflicts Committee concluded that the best
alternative was the proposed Hiland Partners merger.
2. The opinion received by the Hiland Partners Conflicts
Committee from its financial advisor, Jefferies &
Company, delivered orally at the Hiland Partners Conflicts
Committee meeting on June 1, 2009, and subsequently
confirmed in writing later that day, to the effect that, as of
the date of the opinion, the $7.75 per common unit merger
consideration to be received by the Hiland Partners public
unitholders pursuant to the Hiland Partners merger, was fair,
from a financial point of view, to those holders.
3. The presentation of Jefferies & Company on
June 1, 2009, in connection with the foregoing opinion,
which is described under Opinion of Financial
Advisor of Hiland Partners.
4. The difficult business environment currently facing
Hiland Partners, including commodity prices, in particular
natural gas prices, and the significant reduction in drilling
activity and the resulting negative effect on the financial
condition and results of operations of Hiland Partners.
5. The Hiland Partners Conflicts Committees belief
that it was unlikely that any other transaction with a third
party involving a sale of the Hiland Companies or a significant
interest in the Hiland Companies could be consummated at this
time in light of the position of Mr. Hamm (contained in his
letter, dated January 15, 2009, to the Hiland Partners
Board of Directors and subsequently confirmed to the Hiland
Partners Conflicts Committee) that he was interested only in
acquiring common units in the Hiland Companies and that he was
not interested in selling (or causing his affiliates to sell)
interests in the Hiland Companies and the lack of any
indications of interest from any third parties since the public
announcement of the January 15 Proposal.
6. The Hiland Partners Conflicts Committees belief
that the $7.75 per common unit cash merger consideration
represented the highest per common unit consideration that could
be negotiated given that the Hiland Partners Conflicts Committee
requested that Mr. Hamm increase the offered price of $7.75
and he declined to negotiate.
7. The likelihood that Hiland Partners would be in
violation of the leverage ratio covenant under the Hiland
Operating Credit Agreement as soon as June 30, 2009, based
upon estimates and projections provided by the management of the
Hiland Companies. In that regard, the Hiland Partners Conflicts
Committee concluded that:
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any solution satisfactory to the existing lenders (or any
lenders willing to refinance the Hiland Operating Credit
Agreement) would likely 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 indefinite suspension of distributions, including
distributions to Hiland Holdings, after discussions with
the existing lenders of the Hiland Companies and based upon the
experience of the members of the Hiland Partners Conflicts
Committee and its advisors; and
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it was unlikely that the Hiland Companies could raise
significant equity capital through a sale of equity to the
public or to private investors (including to Mr. Hamm since
he had rejected such an investment), given the uncertain nature
of the market conditions for equity securities, particularly for
gathering and processing MLPs, and that the amount of money that
would need to be raised to repay debt to be in compliance with
financial covenants would be highly dilutive as such amount was
more than the then current market capitalization of Hiland
Partners.
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8. The terms of the Hiland Partners commitment letter from
Mr. Hamm to Parent to fund the full amount of the HLND
Parent Parties obligation to pay the merger consideration,
including the provision making Hiland Partners a third-party
beneficiary under the Hiland Partners commitment letter.
9. The terms of the Hiland Partners merger agreement,
principally:
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all of the outstanding common units not held by Hiland Holdings
(and restricted common units held by officers and employees of
Hiland Partners) will be converted into the right to receive
cash at $7.75 per common unit;
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the requirement that the Hiland Partners merger agreement and
the Hiland Partners merger be approved by a vote of the holders
of a majority of the common units held by the Hiland Partners
public unitholders entitled to vote thereon voting as a class;
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the provision limiting the ability of the HLND Parent Parties to
close the Hiland Holdings merger without closing the Hiland
Partners merger, unless the Hiland Partners public unitholders
fail to approve the Hiland Partners merger and Hiland Partners
merger agreement;
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the limited nature of the operational representations and
warranties given by Hiland Partners and the fact that the
representations and warranties of Hiland Partners do not survive
the closing;
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the inability of the HLND Parent Parties to refuse to close the
Hiland Partners merger as the result of a failure of Hiland
Operating to be in compliance with certain financial covenants
of the Hiland Operating Credit Agreement;
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the absence of a financing condition to the HLND Parent
Parties obligation to consummate the transaction;
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the provision allowing the Hiland Partners Board of Directors or
the Hiland Partners Conflicts Committee to withdraw or change
its recommendation of the Hiland Partners merger agreement and
the Hiland Partners merger if it makes a good faith
determination that a change or withdrawal would be in the best
interests of the Hiland Partners public unitholders, subject to
providing Parent with advance notice;
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the provisions allowing for Hiland Partners to participate in
negotiations with a third party in response to an unsolicited
alternative proposal, which may, in certain circumstances,
result in a superior proposal; and
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the lack of a
break-up
fee
for termination of the Hiland Partners merger agreement in
accordance with its terms, although Hiland Partners may be
liable to reimburse the expenses of the HLND Parent Parties in
certain limited circumstances if the Hiland Partners merger
agreement is terminated.
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The Hiland Partners Conflicts Committee considered the following
factors to be generally negative or unfavorable in making its
determination and recommendation:
1. The Hiland Partners public unitholders will have no
ongoing equity participation in Hiland Partners following the
Hiland Partners merger, and such unitholders will cease to
participate in Hiland Partners future earnings or growth,
if any, or to benefit from increases, if any, in the value of
Hiland Partners common units and would not participate in
any potential future sale of Hiland Partners to a third party.
However, in considering this unfavorable factor, the Hiland
Partners Conflicts Committee noted that before the Hiland
Partners merger could be consummated, the holders of a majority
of the outstanding Hiland Partners common units held by Hiland
Partners public unitholders would have to approve the Hiland
Partners merger agreement and the Hiland Partners merger.
2. Given that Mr. Hamm (who, together with Continental
Gas and the Hamm family trusts, owns a 60.8% limited partner
interest in Hiland Holdings, which owns a controlling interest
in Hiland Partners) had publicly expressed an interest only in
acquiring common units of the Hiland Companies and lack of
interest in selling, or causing his affiliates to sell,
interests in the Hiland Companies, it would be
50
impracticable to sell the general partner of Hiland Partners or
Hiland Partners without his approval. Therefore, no attempt was
made to contact third parties that might otherwise consider an
acquisition of Hiland Partners. The Hiland Partners Conflicts
Committee recognized that it was possible (although not
considered to be likely) that a sale process open to all
possible bidders might result in a higher sale price than the
cash consideration payable in the Hiland Partners merger.
However, in considering this factor, the Hiland Partners
Conflicts Committee noted that although the Hiland Companies had
not been proactively shopped, the proposed transaction had been
known to the public for several months, and no third party had
expressed an interest in buying either Hiland Partners or the
general partner of Hiland Partners.
3. The Hiland Partners merger agreements limitation
on Hiland Partners ability to solicit third party offers.
However, in considering this factor, the Hiland Partners
Conflicts Committee noted that although the Hiland Companies had
not been proactively shopped, the proposed transaction had been
known to the public for several months, and no third party had
expressed an interest in buying either Hiland Partners or the
general partner of Hiland Partners.
4. The possibility that the Hamm Continuing Investors could
sell some or all of Hiland Partners, as the surviving entity
following the Hiland Partners merger, or its assets to one or
more purchasers at a valuation higher than that available in the
Hiland Partners merger.
The foregoing discussion of the information and factors
considered by the Hiland Partners Conflicts Committee is not
intended to be exhaustive, but includes the material factors
considered by the Hiland Partners Conflicts Committee. In view
of the variety of factors considered in connection with its
evaluation of the Hiland Partners merger, the Hiland Partners
Conflicts Committee did not find it practicable to, and did not,
quantify or otherwise assign specific weights to the factors
considered in reaching its determination and recommendation. In
addition, each of the members of the Hiland Partners Conflicts
Committee may have given differing weights to different factors.
On balance, the Hiland Partners Conflicts Committee believed
that the positive factors discussed above outweighed the
negative factors discussed above. The Hiland Partners Conflicts
Committee expressly adopted the analysis of
Jefferies & Company and considered such analysis and
opinion, among other factors, in reaching its determination as
to the substantive fairness of the going private transactions
contemplated by the Hiland Partners merger agreement to the
Hiland Partners public unitholders.
The Hiland Partners Conflicts Committee believes that sufficient
procedural safeguards were and are present to ensure the
fairness of the Hiland Partners merger and to permit the Hiland
Partners Conflicts Committee to represent effectively the
interests of the Hiland Partners public unitholders, each of
which the Hiland Partners Conflicts Committee believes supports
its decision and provides assurance of the fairness of the
Hiland Partners merger to the Hiland Partners public
unitholders. The Hiland Partners Conflicts Committee determined
that the process it followed in making its determination and
recommendation with respect to the Hiland Partners merger
agreement was procedurally fair to the Hiland Partners public
unitholders because:
1. The Hiland Partners Conflicts Committee consisted solely
of directors who are not officers or controlling unitholders of
Hiland Partners, or affiliated with Mr. Hamm or any of the
Hamm Continuing Investors, and the Hiland Partners Conflicts
Committee was charged with representing the interests of the
Hiland Partners public unitholders.
2. The members of the Hiland Partners Conflicts Committee
were adequately compensated for their services and their
compensation was in no way contingent on their approving the
Hiland Partners merger agreement or the Hiland Partners merger.
3. Other than by the immediate vesting of any restricted
common units issued and outstanding to non-employee directors of
Hiland Partners pursuant to the Hiland Partners, LP Long-Term
Incentive Plan immediately prior to the effective time of the
Hiland Partners merger, the members of the Hiland Partners
Conflicts Committee will not personally benefit from the
completion of the Hiland Partners merger in a manner different
from the Hiland Partners public unitholders.
4. The Hiland Partners Conflicts Committee retained and was
advised by independent legal counsel, Conner &
Winters, and an independent financial advisor,
Jefferies & Company.
51
5. From the date that the January 15 Proposal was announced
to the time of the Hiland Partners Conflicts Committees
determination and recommendations, no third parties indicated
any interest in pursuing a transaction with Hiland Partners or
Hiland Holdings.
6. The Hiland Partners Conflicts Committee and its legal
counsel and financial advisor conducted due diligence regarding
the Hiland Companies and their prospects and considered all
viable alternatives for Hiland Partners in addition to the
proposed Hiland Partners merger agreement.
7. The Hiland Partners Conflicts Committee received the
opinion of Jefferies & Company that, as of
June 1, 2009, and based on and subject to the factors and
assumptions set forth in the opinion, the merger consideration
to be received by the Hiland Partners public unitholders
pursuant to the Hiland Partners merger agreement was fair, from
a financial point of view, to such holders.
8. The Hiland Partners Conflicts Committee had the ultimate
authority to decide whether or not to proceed with the proposed
transaction or any alternatives, and the Hiland Partners Board
of Directors resolved not to recommend, authorize, approve or
endorse the January 15 Proposal or any other merger, acquisition
or similar proposal involving Hiland Partners and the Hamm
Continuing Investors or any of their affiliates unless such
transaction was recommended to the Hiland Partners Board of
Directors by the Hiland Partners Conflicts Committee.
9. The requirement that the Hiland Partners merger
agreement and the Hiland Partners merger be approved by holders
of a majority of the Hiland Partners common units held by Hiland
Partners public unitholders entitled to vote thereon voting as a
class.
10. The Hiland Partners Conflicts Committee, with the
assistance of its legal and financial advisors, negotiated the
terms of the Hiland Partners merger agreement on an
arms-length basis with Mr. Hamm and his legal and
financial advisors.
11. The Hiland Partners Conflicts Committee was aware that
it had no obligation to recommend any transaction, including the
proposal put forth by Mr. Hamm.
The Hiland Partners Conflicts Committee determined that the
merger is procedurally fair to the Hiland Partners public
unitholders despite the fact that the Hiland Partners Conflicts
Committee did not retain an unaffiliated representative to act
solely on behalf of the Hiland Partners public unitholders for
purposes of negotiating the terms of a going-private
transaction. In this regard, the Hiland Partners Conflicts
Committee believes that it was not necessary to retain an
unaffiliated representative to act solely on behalf of the
Hiland Partners public unitholders for purposes of negotiating
the terms of a going-private transaction, because the Hiland
Partners Conflicts Committee was charged with representing the
interests of the Hiland Partners public unitholders, the Hiland
Partners Conflicts Committee consisted solely of directors who
are not officers or controlling unitholders of Hiland Partners,
or affiliated with Mr. Hamm or any of the Hamm Continuing
Investors, it engaged independent financial and legal advisors
to act on its behalf and it was actively involved in
deliberations and negotiations regarding the Hiland Partners
Merger on behalf of the Hiland Partners public unitholders.
The Hiland Partners Conflicts Committee did not consider
liquidation value in determining the fairness of the Hiland
Partners merger to the Hiland Partners public unitholders
because of its belief, after consulting with its financial
advisor, that liquidation value does not present a meaningful
valuation for Hiland Partners and its business as Hiland
Partners value is derived from the cash flows generated
from its continuing operations rather than from the value of
assets that might be realized in a liquidation.
The Hiland Partners Conflicts Committee also did not consider
net book value in determining the fairness of the Hiland
Partners merger to the Hiland Partners public unitholders
because of its belief, after consulting with its financial
advisor, that net book value does not present a meaningful
valuation metric for Hiland Partners and its business as Hiland
Partners value is derived from the cash flows generated
from its continuing operations.
The Hiland Partners Conflicts Committee also did not consider
going concern value in determining the fairness of the Hiland
Partners merger to the Hiland Partners public unitholders
because of its belief, after
52
consulting with its financial advisor, that going concern value
does not present a meaningful valuation metric for Hiland
Partners as Hiland Partners was likely to be in violation of the
leverage ratio covenant under the Hiland Operating Credit
Agreement, the Hiland Companies could not continue operating
without some sort of capital infusion or resolution of this
default, and obtaining such a capital infusion or a waiver or
amendment under the Hiland Operating Credit Agreement were not
viable alternatives.
The
Hiland Partners Board of Directors
The Hiland Partners Board of Directors consists of eight
directors: Harold Hamm, Joseph L. Griffin, Matthew S. Harrison,
Edward D. Doherty, Michael L. Greenwood, John T.
McNabb, II, Shelby E. Odell, and Rayford T. Reid. When the
Hiland Partners Board of Directors received the January 15
Proposal, Dr. David L. Boren was also a member of the
Hiland Partners Board of Directors. Mr. Boren subsequently
resigned on March 13, 2009.
The directors of Hiland Partners have different interests in the
Hiland Partners merger than the Hiland Partners public
unitholders, generally. In particular:
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Affiliates of Mr. Hamm, the Chairman of the Board of
Directors of each of the Hiland Companies, are counterparties to
the Hiland Companies in each of the merger agreements and will
acquire, along with the Hamm family trusts, all of the
outstanding common units of each of the Hiland Companies not
already owned by the Hamm Continuing Investors (other than
certain restricted common units discussed below) pursuant to the
merger agreements.
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six of the eight members of the Hiland Partners Board of
Directors serve as members of the Hiland Holdings Board of
Directors, and therefore have certain duties and obligations to
the unitholders of each Hiland Company as provided in the
respective partnership agreements of the Hiland Companies;
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the non-employee directors of Hiland Partners hold restricted
common units of Hiland Partners, which will vest immediately
prior to the effective time of the Hiland Partners merger and
automatically convert into the right to receive the Hiland
Partners merger consideration in the Hiland Partners merger;
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certain employee directors of Hiland Partners own phantom units
in Hiland Partners that will remain outstanding as equity
interests in the surviving entity following the Hiland Partners
merger. Additionally, if any employee directors of Hiland
Partners are granted restricted common units, phantom units or
unit options under the Hiland Partners, LP Long-Term Incentive
Plan or the Hiland Holdings GP, LP Long-Term Incentive Plan in
the ordinary course of business prior to the effective time of
the Hiland Partners merger or the Hiland Holdings merger, as
applicable, such equity interests will remain outstanding
following the effective time of the Hiland Partners merger or
the Hiland Holdings merger, as applicable;
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certain members of the Hiland Partners Board of Directors hold
Hiland Holdings common units which will convert into the right
to receive the Hiland Holdings merger consideration in the
Hiland Holdings merger;
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certain members of the Hiland Partners Board of Directors who
also serve on the Hiland Holdings Board of Directors, as well as
Mr. Odell, who was formerly a member of the Hiland Holdings
Board of Directors, hold restricted common units in Hiland
Holdings, which will vest immediately prior to the effective
time of the Hiland Holdings merger and automatically convert
into the right to receive the Hiland Holdings merger
consideration in the Hiland Holdings merger;
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the members of the Hiland Partners Conflicts Committees have
received payments in the amount of $30,000 each for their
consideration and negotiation of the mergers, which payments
were not contingent on any outcome of the consideration or
negotiations;
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Joseph L. Griffin and Matthew S. Harrison, who are members of
the Board of Directors and the Chief Executive Officer and Chief
Financial Officer, respectively, of each of the Hiland
Companies, have agreed to vote their common units of Hiland
Partners in favor of the Hiland Partners merger agreement and
the Hiland Partners merger, have been offered continued
employment with the surviving entities
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after the effective times of the mergers, and may enter into or
be provided new employment, retention and compensation
arrangements (although no such arrangements have been proposed
or agreed to); and
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certain indemnification arrangements and insurance policies for
directors and officers of the general partner of Hiland Partners
will be continued for six years by the surviving entity in the
Hiland Partners merger if the Hiland Partners merger is
completed.
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For a complete discussion of these and other interests of the
members of the Hiland Partners Board of Directors in the Hiland
Partners merger, see Special Factors Interests
of Certain Persons in the Mergers.
Because of such actual and potential conflicts, the Hiland
Partners Board of Directors authorized the Hiland Partners
Conflicts Committee to review, evaluate and make recommendations
to the Hiland Partners Board of Directors and the Hiland
Partners public unitholders regarding Mr. Hamms
proposal and any potential alternatives thereto. On June 1,
2009, the Hiland Partners Board of Directors met to consider the
report and recommendation of the Hiland Partners Conflicts
Committee. On the basis of the Hiland Partners Conflicts
Committees recommendation and the other factors described
below, each of the six members of the Hiland Partners Board of
Directors participating in the meeting unanimously
(1) determined that the Hiland Partners merger agreement
and the transactions contemplated by the Hiland Partners merger
agreement, including the Hiland Partners merger, were advisable,
fair to, and in the best interests of, Hiland Partners and
Hiland Partners public unitholders and (2) recommended that
the Hiland Partners public unitholders vote to approve the
Hiland Partners merger agreement and the Hiland Partners merger.
Neither of Messrs. Hamm nor Reid participated in the Hiland
Partners Board of Directors consideration or vote on these
matters. Mr. Hamm did not feel his participation was
appropriate given that the Hiland Partners Board of Directors
was evaluating his offer to acquire Hiland Partners.
Mr. Reid did not feel participation was appropriate given
his professional relationship with Mr. Hamm, through which
he has historically provided Mr. Hamm and the Hamm family
trusts with financial advisory services, including in connection
with evaluating strategic alternatives with respect to the
Hiland Companies.
Because Messrs. Hamm and Reid abstained from voting on the
Hiland Partners merger agreement and the Hiland Partners merger,
only four of the six non-employee members of the Hiland Partners
Board of Directors voted to approve the Hiland Partners merger
agreement and the Hiland Partners merger.
In determining that the Hiland Partners merger agreement is
advisable, fair to, and in the best interests of, Hiland
Partners and the Hiland Partners public unitholders and
approving the Hiland Partners merger agreement and the
transactions contemplated by the Hiland Partners merger
agreement, including the Hiland Partners merger, and
recommending that the Hiland Partners public unitholders vote
for the approval of the Hiland Partners merger agreement and the
Hiland Partners merger, the Hiland Partners Board of Directors
considered a number of factors, including the following material
factors:
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the unanimous determination and recommendation of the Hiland
Partners Conflicts Committee;
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the opinion of Jefferies & Company delivered orally at
the Hiland Partners Conflicts Committee meeting and presented at
the Hiland Partners Board of Directors meeting on June 1,
2009, and subsequently confirmed in writing, that, based upon
and subject to the factors and assumptions set forth in the
opinion, the Hiland Partners merger consideration of $7.75 per
common unit to be received by the holders of common units of
Hiland Partners (other than the Hiland Partners rollover common
unitholders) pursuant to the Hiland Partners merger agreement
was fair, from a financial point of view, to the Hiland Partners
public unitholders, as of the date of such opinion, as described
in the opinion of Jefferies & Company;
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the financial presentation of Jefferies & Company in
connection with the foregoing opinion that was presented to the
Hiland Partners Board of Directors at the request of the Hiland
Partners Conflicts Committee;
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the fact that the Hiland Partners merger consideration and the
other terms of the Hiland Partners merger agreement resulted
from negotiations between the Hiland Partners Conflicts
Committee and Mr. Hamm,
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54
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and the Hiland Partners Board of Directors belief that
$7.75 in cash for each Hiland Partners common unit represented
the highest per common unit consideration that could be
negotiated; and
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the factors considered by the Hiland Partners Conflicts
Committee, including the positive factors and potential benefits
of the Hiland Partners merger agreement, the risks and
potentially negative factors relating to the Hiland Partners
merger agreement, and the factors relating to procedural
safeguards, each as described in The Hiland
Partners Conflicts Committee above.
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In doing so, the Hiland Partners Board of Directors expressly
adopted the analysis of the Hiland Partners Conflicts Committee,
which is discussed above.
The foregoing discussion of the information and factors
considered by the Hiland Partners Board of Directors includes
the material factors considered by the Hiland Partners Board of
Directors. In view of the variety of factors considered in
connection with its evaluation of the Hiland Partners merger,
the Hiland Partners Board of Directors did not find it
practicable to, and did not, quantify or otherwise assign
relative weights to the specific factors considered in reaching
its determination and recommendation. In addition, individual
directors may have given different weights to different factors.
The Hiland Partners Board of Directors approved and recommends
the Hiland Partners merger agreement and the Hiland Partners
merger based upon the totality of the information presented to
and considered by it.
The Hiland Partners Board of Directors did not consider
liquidation value in determining the fairness of the Hiland
Partners merger to the Hiland Partners public unitholders
because of its belief, after considering the factors considered
by the Hiland Partners Conflicts Committee, that liquidation
value does not present a meaningful valuation for Hiland
Partners and its business as Hiland Partners value is
derived from the cash flows generated from its continuing
operations rather than from the value of assets that might be
realized in a liquidation.
The Hiland Partners Board of Directors also did not consider net
book value in determining the fairness of the merger to the
Hiland Partners public unitholders because of its belief, after
considering the factors considered by the Hiland Partners
Conflicts Committee, that net book value does not present a
meaningful valuation metric for Hiland Partners and its business
as Hiland Partners value is derived from the cash flows
generated from its continuing operations.
The Hiland Partners Board of Directors believes that the Hiland
Partners merger is procedurally fair because (1) of the
independence, absence of conflicts of interest and role and
actions of the Hiland Partners Conflicts Committee members
(permitting them to represent effectively the interests of the
Hiland Partners public unitholders), (2) of the approval of
the Hiland Partners merger agreement by a majority of the
directors who are not employees of Hiland Partners and
(3) the terms of the Hiland Partners merger agreement
require the approval of a majority of the publicly-held Hiland
Partners common units. The Hiland Partners Board of Directors
believes that each of these procedural safeguards supports its
decision and provides assurance of the fairness of the Hiland
Partners merger to the Hiland Partners public unitholders.
Opinion
of Financial Advisor of Hiland Partners
Jefferies & Company was engaged by the Hiland Partners
Conflicts Committee to render an opinion to the Hiland Partners
Conflicts Committee as to whether the merger consideration of
$7.75 in cash per common unit to be received by the Hiland
Partners public unitholders pursuant to the Hiland Partners
merger agreement was fair, from a financial point of view, to
such holders. The Hiland Partners Conflicts Committee spoke with
seven financial advisory firms, and after due consideration, the
Hiland Partners Conflicts Committee selected
Jefferies & Company for the purpose of providing a
fairness opinion to the Hiland Partners Conflicts Committee, in
light of Jefferies & Companys relevant industry
experience and prior representation of special committees and
conflicts committees. On June 1, 2009,
Jefferies & Company delivered to the Hiland Partners
Conflicts Committee its oral opinion, subsequently confirmed in
writing, that, as of the date of its opinion, based upon and
subject to the assumptions, limitations, qualifications and
factors contained in its opinion and described below, the merger
consideration to be received by the Hiland Partners public
unitholders pursuant to the Hiland Partners merger agreement was
fair, from a financial point of view, to such holders. The
June 1,
55
2009 opinion of Jefferies & Company is referred to
hereinafter in this Opinion of Jefferies &
Company, Inc. section as the opinion.
The full text of the opinion is attached as Annex C to
this joint proxy statement and incorporated into this joint
proxy statement by reference. We urge you to read the opinion in
its entirety for the assumptions made, procedures followed,
other matters considered and limits of the review undertaken in
arriving at the opinion.
The opinion is for the use and benefit of the general partner of
Hiland Partners and the Hiland Partners Conflicts Committee in
their consideration of the Hiland Partners merger. The opinion
does not address the relative merits of the transactions
contemplated by the Hiland Partners merger agreement as compared
to any alternative transaction or opportunity that might be
available to Hiland Partners, nor does it address the underlying
business decision by Hiland Partners to engage in the Hiland
Partners merger or the terms of the Hiland Partners merger
agreement or the documents referred to therein. The opinion does
not constitute a recommendation as to whether any holder of
common units should vote on the Hiland Partners merger or any
matter related thereto. In addition, the Hiland Partners
Conflicts Committee did not ask Jefferies & Company to
address, and the opinion does not address, the fairness to, or
any other consideration of, the holders of any class of
securities, creditors or other constituencies of Hiland
Partners, other than the holders of common units of Hiland
Partners. Jefferies & Company expresses no opinion as
to the price at which common units will trade at any time.
Furthermore, Jefferies & Company does not express any
view or opinion as to the fairness, financial or otherwise, of
the amount or nature of any compensation payable to or to be
received by, any of Hiland Partners officers, directors or
employees, or any such class of such persons, in connection with
the Hiland Partners merger agreement relative to the merger
consideration to be received by holders of common units. The
opinion has been authorized by a Fairness Committee of
Jefferies & Company.
In arriving at its opinion, Jefferies & Company has,
among other things:
(i) reviewed a draft of the Hiland Partners merger
agreement dated May 28, 2009;
(ii) reviewed certain publicly available financial and
other information about Hiland Partners;
(iii) reviewed certain information furnished by Hiland
Partners management, including financial forecasts and
analyses, relating to the business, operations and prospects of
Hiland Partners;
(iv) held discussions with members of senior management of
Hiland Partners concerning the matters described in
clauses (ii) and (iii) above;
(v) reviewed the trading price history and valuation
multiples for the common units and compared them with those of
certain publicly traded entities that Jefferies &
Company deemed relevant;
(vi) compared the proposed financial terms of the Hiland
Partners merger under the Hiland Partners merger agreement with
the financial terms of certain other transactions that
Jefferies & Company deemed relevant; and
(vii) conducted such other financial studies, analyses and
investigations as Jefferies & Company deemed
appropriate.
In Jefferies & Companys review and analysis and
in rendering its opinion, Jefferies & Company assumed
and relied upon, but did not assume any responsibility to
independently investigate or verify, the accuracy and
completeness of all financial and other information that was
supplied or otherwise made available to Jefferies &
Company or that was publicly available (including, without
limitation, the information described above), or that was
otherwise reviewed by Jefferies & Company. Included in
the financial information provided to Jefferies &
Company were certain financial forecasts, dated May 28,
2009, which are disclosed herein beginning on page 113. In
Jefferies & Companys review,
Jefferies & Company did not obtain any independent
evaluation or appraisal of any of the assets or liabilities, nor
did Jefferies & Company conduct a physical inspection
of any of the properties or facilities, of Hiland Partners, nor
was Jefferies & Company furnished with any such
evaluations or appraisals of such physical inspections, nor does
Jefferies & Company have any responsibility to obtain
any such evaluations or appraisals.
56
With respect to the financial forecasts provided to and examined
by Jefferies & Company, Jefferies & Company
notes that projecting future results of any company is
inherently subject to uncertainty. Hiland Partners informed
Jefferies & Company, however, and
Jefferies & Company assumed, that such financial
forecasts were reasonably prepared on bases reflecting the best
currently available estimates and good faith judgments of the
management of Hiland Partners as to the future financial
performance of Hiland Partners. Jefferies & Company
expresses no opinion as to any such financial forecasts or the
assumptions on which they were made.
Jefferies & Companys opinion was based on
economic, monetary, regulatory, market and other conditions
existing and that could be evaluated as of the date of its
opinion. Jefferies & Company has no obligation to
advise any person of any change in any fact or matter affecting
its opinion of which Jefferies & Company may have
become aware after the date of its opinion.
Jefferies & Company made no independent investigation
of any legal or accounting matters affecting Hiland Partners,
and Jefferies & Company assumed the correctness in all
respects material to its analysis of all legal and accounting
advice given to Hiland Partners and the Hiland Partners Board of
Directors, including, without limitation, advice as to the
legal, accounting and tax consequences of the terms of, and
transactions contemplated by, the Hiland Partners merger
agreement to Hiland Partners and the holders of Hiland Partners
common units. In addition, in preparing its opinion,
Jefferies & Company did not take into account any tax
consequences of the transaction to any holder of Hiland Partners
common units. Jefferies & Company assumed that the
final form of the Hiland Partners merger agreement would be
substantially similar to the draft, dated May 28, 2009,
reviewed by Jefferies & Company. Jefferies &
Company also assumed that, in the course of obtaining the
necessary regulatory or third party approvals, consents and
releases for the Hiland Partners merger, no delay, limitation,
restriction or condition would be imposed that would have an
adverse effect on Hiland Partners, Parent or the contemplated
benefits of the Hiland Partners merger in any way meaningful to
Jefferies & Companys analysis.
Jefferies & Companys opinion was based on and
subject to a number of assumptions, factors, and limitations.
Specifically, Jefferies & Company assumed:
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the accuracy and completeness of all financial and other
information that was supplied or otherwise made available to
Jefferies & Company or that was publicly available;
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that financial forecasts of Hiland Partners were reasonably
prepared on bases reflecting the best currently available
estimates and good faith judgments of the management of Hiland
Partners as to the future financial performance of Hiland
Partners;
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the correctness in all respects material to
Jefferies & Companys analysis of all legal and
accounting advice given to Hiland Partners and the Hiland
Partners Board of Directors, including, without limitation,
advice as to the legal, accounting and tax consequences of the
terms of, and transactions contemplated by, the Hiland Partners
merger agreement to Hiland Partners and the Hiland Partners
public unitholders;
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the final form of the Hiland Partners merger agreement would be
substantially similar to the last draft reviewed by
Jefferies & Company;
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that in the course of obtaining the necessary regulatory or
third party approvals, consents and releases for the Hiland
Partners merger, no delay, limitation, restriction or condition
would be imposed that would have an adverse effect on Hiland
Partners, Parent or the contemplated benefits of the Hiland
Partners merger in any way meaningful to Jefferies &
Companys analysis; and
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that the terms of the Hiland Partners merger agreement are the
most beneficial terms from Hiland Partners perspective
that could under the circumstances be negotiated among the
parties to such transactions.
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The following is a brief summary of the analyses performed by
Jefferies & Company in connection with its opinion.
This summary is not intended to be an exhaustive description of
the analyses performed by Jefferies & Company but
includes all material factors considered by
Jefferies & Company in rendering its
57
opinion. Jefferies & Company drew no specific
conclusions from any individual analysis, but subjectively
factored its observations from all of these analyses into its
qualitative assessment of the merger consideration. Each
analysis performed by Jefferies & Company is a common
methodology utilized in determining valuations. Although other
valuation techniques may exist, Jefferies & Company
believes that the analyses described below, when taken as a
whole, provide the most appropriate analyses for
Jefferies & Company to arrive at its opinion.
Comparable
Public Company Analysis
Jefferies & Company utilized comparable public company
analysis, which values a target company by reference to
publicly-traded companies with similar products, similar
operating and financial characteristics and similar service
markets. Jefferies & Company reviewed and compared
selected financial data for eleven publicly traded companies in
the energy industry. Five of the companies chosen derived more
than 50% of their estimated 2009 cash flow from fee-based
contracts, and six of the companies chosen derived more than 50%
of their estimated 2009 cash flow from non fee-based contracts,
although Copano Energy, L.L.C. was excluded from trimmed mean
calculations due to its significant hedge positions that reduce
sensitivity to commodity prices over the next three years.
Hiland Partners has a high percentage of its contract mix tied
to non-fee based revenue streams, which are sensitive to
commodity prices. The comparable companies chosen by
Jefferies & Company included:
Fee-Based
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Crosstex Energy, L.P.
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DCP Midstream Partners, LP
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Quicksilver Gas Services LP
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Regency Energy Partners LP
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Western Gas Partners, LP
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Non
Fee-Based
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Atlas Pipeline Partners, LP
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Copano Energy, L.L.C.
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Eagle Rock Energy Partners, L.P.
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MarkWest Energy Partners, L.P.
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Targa Resources Partners LP
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Williams Partners L.P.
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For each of the comparable companies, Jefferies &
Company calculated the total enterprise value as a multiple of
(i) that companys revenue for the noted last twelve
month (LTM) periods; (ii) that companys
projected revenue, to the extent available, for the year ending
December 31, 2009, as reflected in certain First Call
estimates; (iii) that companys projected revenue, to
the extent available, for the year ending December 31,
2010, as reflected in certain First Call estimates;
(iv) that companys estimated EBITDA for the noted LTM
periods; (v) that companys EBITDA, to the extent
available, for the year ending December 31, 2009, as
reflected in certain First Call estimates; and (vi) that
companys estimated EBITDA, to the extent available, for
the year ending December 31, 2010, as reflected in certain
First Call estimates. Total enterprise value (TEV)
was calculated as equity market value, plus net debt, all as of
May 28, 2009. Net debt equals total debt plus minority
interest less cash and cash equivalents. Jefferies &
Company then calculated each companys distributable cash
yield using (a) that companys most recent declared
distribution, annualized, divided by that companys unit
price as of May 28, 2009, (b) that companys
estimated distributable cash, to the extent available, for the
year ending December 31, 2009, as reflected in certain
First Call estimates and dividing by that companys unit
price as of May 28, 2009, and (c) that companys
estimated distributable cash,
58
to the extent available, for the year ending December 31,
2010, as reflected in certain first call estimates and dividing
by that companys unit price as of May 28, 2009.
Utilizing the most representative multiple range within the
comparable public company set, Jefferies & Company
then calculated a range of implied values per common unit based
on (i) Hiland Partners LTM EBITDA; (ii) Hiland
Partners projected EBITDA for the year ending
December 31, 2009, based on Hiland Partners
managements estimates, where the estimated downside
projected EBITDA assumed inlet natural gas volumes were risked
at 95%; and (iii) Hiland Partners projected EBITDA
for the year ending December 31, 2010, based on Hiland
Partners managements estimates, where the estimated
downside projected EBITDA assumed inlet natural gas volumes were
risked at 95%. Jefferies & Company then calculated a
range of implied values per common unit by dividing
(i) Hiland Partners current distributable cash;
(ii) Hiland Partners projected distributable cash for
the year ending December 31, 2009, based on Hiland Partners
managements estimates; and (iii) Hiland
Partners projected distributable cash for the year ending
December 31, 2010, based on Hiland Partners
managements estimates, in each case, by the most
representative range of distributable cash yields within the
comparable public company set. For further detail regarding the
results of the calculations described above for each of the
comparable companies, please see page 30 of
Jefferies & Companys presentation to the Hiland
Partners Conflicts Committee filed as Exhibit (c)(17) to the
Transaction Statement on
Schedule 13E-3
(a
Schedule 13E-3)
filed by Hiland Partners on July 1, 2009. The resulting
ranges of implied values per common unit are set forth in the
table below:
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Comparable Public
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Company Multiple
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Hiland
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Hiland Partners
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Implied per Unit
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Range
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Partners
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Metric (Millions)
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Value Range
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TEV/LTM EBITDA
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5.7x - 6.7x
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5.0x
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$
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62.9
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$9.94 - $16.53
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TEV/EBITDA 2009E
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7.2x - 8.2x
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7.0x
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$
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44.8
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$4.73 - $10.98(1)
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TEV/EBITDA 2010E
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6.8x - 7.8x
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6.6x
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$
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48.0
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$3.76 - $11.46(1)
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Current Distributable Cash Yield
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7.1% - 17.1%
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0%
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$
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0.00
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$0.00
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Distributable Cash Yield 2009E
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7.4% - 17.4%
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0%
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$
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0.00
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$0.00
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Distributable Cash Yield 2010E
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7.5% - 17.5%
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0%
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$
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0.00
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$0.00
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(1)
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Downside assumes inlet natural gas volumes risked at 95%.
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Jefferies & Company then compared the ranges of
implied values per common unit against (i) the Hiland
Partners closing unit price of $5.40 per unit on May 28,
2009; and (ii) the merger consideration of $7.75 per unit
to be received by the Hiland Partners public unitholders.
No company utilized in the comparable public company analysis is
identical to Hiland Partners. Jefferies & Company made
judgments and assumptions with regard to industry performance,
general business, economic, market and financial conditions and
other matters, many of which are beyond the control of Hiland
Partners. Mathematical analysis of comparable public companies
in isolation from other analyses is not an effective method of
evaluating transactions.
Premiums
Paid Analysis
Jefferies & Company utilized a premiums paid analysis,
a method of valuing a target business by analyzing the premiums
paid in selected merger and acquisition transactions. Using
publicly available information, Jefferies & Company
conducted a premiums paid analysis using a sample of 19
transactions announced since April 7, 2004. Each of the 19
transactions (i) was a change of control transaction and
(ii) involved companies in the energy industry, which is
the industry in which Hiland Partners operates. Based on these
factors and Jefferies & Companys experience with
transactions in the energy industry, Jefferies &
59
Company determined that these 19 transactions were relevant for
purposes of the premiums paid analysis. The 19 change of control
transactions used by Jefferies & Company in its
premiums paid analysis were:
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Announcement Date
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Buyer
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Seller
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August 25, 2008
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Precision Drilling, Inc.
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Grey Wolf Inc.
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July 29, 2008
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Sempra Energy
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EnergySouth Inc.
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May 5, 2008
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Schlumberger Limited
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Saxon Energy Services Inc.
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November 29, 2007
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VeraSun Energy Corporation
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US BioEnergy Corp.
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September 5, 2007
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MarkWest Energy Partners LP
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Markwest Hydrocarbon, Inc.
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July 17, 2007
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Plains Exploration & Production Company
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Pogo Producing Company
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June 11, 2007
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Helix Energy Solutions Group, Inc.
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Horizon Offshore, Inc.
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March 19, 2007
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Hercules Offshore, Inc.
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TODCO
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November 13, 2006
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Western Refining, Inc.
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Giant Industries, Inc.
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April 21, 2006
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Petrohawk Energy Corporation
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KCS Energy, Inc.
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January 23, 2006
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Helix Energy Solutions Group, Inc.
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Remington Oil & Gas Corp.
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December 12, 2005
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ConocoPhillips
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Burlington Resources Company
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October 13, 2005
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Occidental Petroleum Corporation
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Vintage Petroleum, Inc.
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September 19, 2005
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Norsk Hydro ASA
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Spinnaker Exploration Company
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April 4, 2005
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Petrohawk Energy Corporation
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Mission Resources Corporation
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January 26, 2005
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Cimarex Energy Co.
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Magnum Hunter Resources, Inc.
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December 16, 2004
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Noble Energy, Inc.
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Patina Oil & Gas Corporation
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April 15, 2004
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EnCana Corporation
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Tom Brown, Inc.
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April 7, 2004
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Kerr-McGee Corporation
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Westport Resources Corporation
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For each of the target companies involved in the 19
transactions, Jefferies & Company examined the closing
unit price one trading day prior to announcement of the initial
offer in connection with each transaction in order to calculate
the high and low premiums paid by the acquiror over the target
companys closing unit price at such point in time.
Jefferies & Company then compared those premiums to
(i) the premium implied by the January 15 Proposal of $9.50
per common unit of Hiland Partners over Hiland Partners
common unit price on one trading day prior to the announcement
of the January 15 Proposal ($7.90), and (ii) the $7.75
proposed merger consideration over Hiland Partners common
unit price on one trading day prior to the announcement of the
revised offer of $7.75 per common unit of Hiland Partners
($8.18). Jefferies & Company believed that this method
was less illustrative of value because of the significant
deterioration in Hiland Partners operations since the date
of the January 15 Proposal. A summary of the premiums observed
in the premiums paid analysis is set forth in the table below:
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Premium Percentage
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One Day Prior
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High
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34.4
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%
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Mean
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18.5
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%
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Median
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20.9
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%
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Low
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1.9
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%
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Implied Equity Price Per Unit of the January 15 Proposal
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High
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$
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10.61
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Low
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$
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8.05
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Implied Equity Price Per Unit of the Merger
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High
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$
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10.99
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Low
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$
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8.38
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Implied Merger Premium Per Unit
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January 15 Proposal of $9.50/unit
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20.3
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%
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Merger Consideration of $7.75/unit
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(5.3
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)%
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60
Discounted
Cash Flow Analysis
Jefferies & Company utilized discounted cash flow
analysis, which values a company as the sum of its unlevered
(before financing costs) free cash flows over a forecast period
and the companys terminal or residual value at the end of
the forecast period. Jefferies & Company examined the
value of Hiland Partners based on projected free cash flow
estimates, which were generated utilizing financial projections
from April 1, 2009 through December 31, 2013. Those
internal financial projections, dated May 28, 2009, and
disclosed herein beginning on page 113, were prepared by Hiland
Partners management and were approved for
Jefferies & Companys use by the Hiland Partners
Conflict Committee. As instructed by Hiland Partners,
Jefferies & Company considered the risks and
uncertainties of achieving the Hiland Partners forecasts and the
possibility that the Hiland Partners forecasts will not be
realized. Accordingly, Jefferies & Company performed a
sensitivity analysis to illustrate the effect of different
assumptions for changes in projected annual revenue growth and
projected annual EBITDA margins from the Hiland Partners
management forecasts.
Jefferies & Company ascribed EBITDA exit multiples,
which ranged from 7.5x to 8.5x, to the projected EBITDA for the
LTM ending December 31, 2013, giving effect to
Jefferies & Companys sensitivity analysis.
Jefferies & Company calculated a range of discount
factors of 18.0% 20.0% based on the Capital Asset
Pricing Model using the average levered beta of the comparable
public companies listed in the Comparable Public Company
Analysis section. Based on those ranges of EBITDA exit
multiples and discount rates, Jefferies & Company
calculated the implied equity price per common unit value
ranging from $0.00 to $2.35. Jefferies & Company then
compared the implied equity prices per common unit values
against the $7.75 per common unit in cash to be received in the
Hiland Partners merger.
While discounted cash flow analysis is a widely accepted and
practiced valuation methodology, it relies on a number of
assumptions, including growth rates and discount rates. The
valuation derived from the discounted cash flow analysis is not
necessarily indicative of Hiland Partners present or
future value or results. Discounted cash flow analysis in
isolation from other analyses is not an effective method of
evaluating transactions. For further detail regarding the
calculation of the implied equity price per common unit value
range described above, please see pages 32 and 33 of
Jefferies & Companys presentation to the Hiland
Partners Conflicts Committee filed as Exhibit (c)(17) to the
Schedule 13E-3
filed by Hiland Partners on July 1, 2009.
Conclusion
The preparation of a fairness opinion is a complex process and
is not necessarily susceptible to partial analysis or summary
description. In arriving at its opinion, Jefferies &
Company considered the results of all of its analyses as a whole
and did not attribute any particular weight to any analysis or
factor considered by it. Furthermore, Jefferies &
Company believes that selecting any portion of its analysis,
without considering all analyses, would create an incomplete
view of the process underlying its opinion. In performing its
analyses, Jefferies & Company made numerous
assumptions with respect to industry performance and general
business and economic conditions and other matters, many of
which are beyond the control of Hiland Partners. The analyses
performed by Jefferies & Company are not necessarily
indicative of actual values or actual future results, which may
be significantly more or less favorable than suggested by such
analyses. The merger consideration was determined through
negotiations between the Hiland Partners Conflicts Committee and
Mr. Hamm and was recommended by the Hiland Partners
Conflicts Committee for approval by the Hiland Partners Board of
Directors and approved by the Hiland Partners Board of
Directors. Jefferies & Company did not recommend any
specific merger consideration to Hiland Partners, the Hiland
Partners Conflicts Committee or the Hiland Partners Board of
Directors or that any specific consideration constituted the
only appropriate consideration with respect to the Hiland
Partners merger agreement and the transactions contemplated
thereby, including the Hiland Partners merger. A copy of the
presentation materials presented by Jefferies &
Company to the Hiland Partners Conflicts Committee in connection
with the delivery of its opinion has been filed with the SEC as
an exhibit to the
Schedule 13E-3
filed by Hiland Partners on July 1, 2009.
61
Miscellaneous
Jefferies & Company may seek, in the future, to
provide financial advisory and financing services to Hiland
Partners, the general partner of Hiland Partners or entities
that are affiliated with Hiland Partners or its general partner,
for which Jefferies & Company would expect to receive
compensation. In the past two years, Jefferies &
Company has received no compensation from Hiland Partners or its
affiliates other than for financial advisory services provided
to the Hiland Partners Conflicts Committee in connection with
evaluating the Hiland Partners merger.
Jefferies & Company was engaged by the Hiland Partners
Conflicts Committee in connection with the delivery of the
opinion and is entitled to a fee of $550,000 for its services
from Hiland Partners, a portion of which was payable prior to
the delivery of the opinion and the remainder of which was
payable upon the delivery of the opinion. Jefferies &
Company also will be reimbursed for expenses incurred. Hiland
Partners has agreed to indemnify Jefferies & Company
against liabilities arising out of or in connection with the
services rendered and to be rendered by Jefferies &
Company under such engagement.
In the ordinary course of its business, Jefferies &
Company and its affiliates maintain a market in the securities
of Hiland Partners and may trade or hold securities of Hiland
Partners
and/or
its
affiliates for Jefferies & Company and its
affiliates own accounts and for accounts of their
customers and, accordingly, may, at any time hold long or short
positions in those securities.
Position
of HLND
Schedule 13E-3
Filing Persons as to the Fairness of the Hiland Partners
Merger
Under SEC rules, Parent, HLND Merger Sub, Hiland Holdings, the
general partner of Hiland Holdings, the Harold Hamm DST Trust,
the Harold Hamm HJ Trust and Messrs. Hamm, Griffin,
Harrison and Mackie (collectively the HLND
Schedule 13E-3
Filing Persons) are required to provide certain
information regarding their position as to the substantive and
procedural fairness of the Hiland Partners merger to the Hiland
Partners public unitholders. The HLND
Schedule 13E-3
Filing Persons are making the statements included in this
section solely for purposes of complying with such requirements.
The HLND
Schedule 13E-3
Filing Persons views as to the fairness of the Hiland
Partners merger should not be construed as a recommendation to
any unitholder as to how that unitholder should vote on the
proposals to approve the Hiland Partners merger agreement and
the Hiland Partners merger.
The HLND
Schedule 13E-3
Filing Persons, other than Messrs. Griffin and Harrison,
did not participate in the deliberations of the Hiland Partners
Board of Directors or the Hiland Partners Conflicts Committee
regarding, and did not receive advice from the Hiland Partners
Conflicts Committees legal or financial advisors as to,
the fairness of the Hiland Partners merger. The HLND
Schedule 13E-3
Filing Persons, other than Mr. Hamm, did not perform, or
engage a financial advisor to perform, any financial analysis
for the purposes of assessing the fairness of the Hiland
Partners merger to the Hiland Partners public unitholders.
Mr. Hamm engaged Wells Fargo Securities as his financial
advisor to provide certain financial advisory services with
respect to a potential acquisition by Mr. Hamm
and/or
certain of his affiliates of the assets or capital stock of the
Hiland Companies. Wells Fargo Securities did not provide an
opinion with respect to the fairness of the Hiland Partners
merger or the Hiland Partners merger consideration.
The discussion below of the information and factors considered
by the HLND
Schedule 13E-3
Filing Persons is not intended to be exhaustive, but includes
the material factors considered by the HLND
Schedule 13E-3
Filing Persons. In view of the variety of factors considered in
connection with their evaluation of the fairness of Hiland
Partners merger, the HLND
Schedule 13E-3
Filing Persons did not find it practicable to, and did not,
quantify or otherwise assign specific weights to the factors
considered in reaching their determination. In addition, each of
the HLND
Schedule 13E-3
Filing Persons may have given differing weights to different
factors. On balance, the HLND
Schedule 13E-3
Filing Persons believed that the positive factors discussed
above outweighed the negative factors discussed above and
arrived at the conclusion that the Hiland Partners merger was
fair to the Hiland Partners public unitholders.
62
Harold Hamm and the other HLND
Schedule 13E-3
Filing Persons (with the exception of Messrs. Griffin and
Harrison), believe that the Hiland Partners merger consideration
is substantively fair to the Hiland Partners public unitholders
based on the following factors:
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The HLND
Schedule 13E-3
Filing Persons view that if the adverse impact of
commodity prices on gathering and processing fundamentals and
the challenges presented by the global economic crisis persist,
Hiland Partners will experience a meaningful decrease in future
distributable cash flow and will need substantial new equity
capital to remain in continued compliance with the financial
covenants under the Hiland Operating Credit Agreement. Obtaining
such equity capital in the current environment on acceptable
terms does not appear feasible and would be significantly
dilutive to current unitholders.
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The consideration proposed to be paid to the Hiland Partners
public unitholders represents a 45% premium over the reported
closing sale price $5.36 per common unit of Hiland Partners on
May 29, 2009, the last trading day prior to the execution
of the Hiland Partners merger agreement and a 34% premium over
the average closing sale price of $5.78 per common unit of
Hiland Partners over the
30-day
period ending May 29, 2009.
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The consideration to be paid to the Hiland Partners public
unitholders in the Hiland Partners merger is all cash, thus
eliminating any uncertainty in valuing the consideration to be
received by such unitholders.
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The Hiland Partners merger will provide liquidity for the Hiland
Partners public unitholders without incurring brokerage and
other costs typically associated with market sales.
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The Hiland Partners merger agreement allows the Hiland Partners
Conflicts Committee to withdraw or change its recommendation of
the Hiland Partners merger agreement, and to terminate the
merger agreement in certain circumstances.
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The obligations of Parent and HLND Merger Sub to consummate the
Hiland Partners merger are not subject to any financing
condition. Mr. Hamm has delivered to Parent the Hiland
Partners commitment letter, pursuant to which Mr. Hamm has
committed to contribute an aggregate of approximately
$32.0 million in cash to Parent, representing the Hiland
Partners merger consideration of approximately
$30.9 million and estimated expenses of approximately
$1.1 million, less the amount of cash, if any, contributed
by the Hamm family trusts to Parent or HLND Merger Sub that is
available immediately prior to the closing of the Hiland
Partners merger. Pursuant to its terms, Hiland Partners is a
third-party beneficiary of the Hiland Partners commitment letter.
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The Hiland Partners Conflicts Committee received an opinion from
Jefferies & Company to the effect that, as of the date
of the opinion and based upon and subject to the assumptions and
limitations set forth therein, the cash merger consideration of
$7.75 per common unit to be received by the holders of Hiland
Partners common units (other than the Hiland Partners rollover
common unitholders) pursuant to the Hiland Partners merger
agreement was fair, from a financial point of view, to the
Hiland Partners public unitholders. Jefferies &
Companys opinion is attached to this joint proxy statement
as Annex C.
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Harold Hamm and the other HLND
Schedule 13E-3
Filing Persons (with the exception of Messrs. Griffin and
Harrison), believe that the Hiland Partners merger is
procedurally fair to the Hiland Partners public unitholders
based on the following factors:
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The Hiland Partners Conflicts Committee, which consists of
directors who are not officers, employees or controlling
unitholders of Hiland Partners, or affiliated with the Hamm
Continuing Investors, negotiated with Mr. Hamm the terms of
the Hiland Partners merger. The HLND Schedule 13E-3 Filing
Persons believe that the Hiland Partners Conflicts Committee was
therefore able to represent the interests of the Hiland Partners
public unitholders without the potential conflicts of interest
that the foregoing relationships would otherwise have presented.
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The Hiland Partners Conflicts Committee retained its own
nationally recognized financial advisor, Jefferies &
Company which, in the Hiland Partners Conflicts Committees
view, had no relationships that would compromise its
independence.
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The Hiland Partners Conflicts Committee retained its own legal
advisor, Conner and Winters, which the Hiland Partners Conflicts
Committee determined had no relationship creating a potential
conflict.
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The Hiland Partners Conflicts Committee and its advisors
conducted a due diligence investigation of Hiland Partners
before commencing negotiations, which the HLND Schedule 13E-3
Filing Persons believe provided the Hiland Partners Conflicts
Committee and its advisors with the information necessary to
effectively represent the interests of the Hiland Partners
public unitholders.
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The Hiland Partners Conflicts Committee had the authority to
review alternative proposals and to reject the transaction
proposed by Mr. Hamm.
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The Hiland Partners merger consideration and other terms and
conditions of the Hiland Partners merger agreement were the
result of negotiations between Mr. Hamm and the Hiland
Partners Conflicts Committee and their respective financial and
legal advisors. The Hamm Continuing Investors did not
participate in or have any influence over the conclusions
reached by the Hiland Partners Conflicts Committee or the
negotiating positions of the Hiland Partners Conflicts Committee.
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The Hiland Partners merger agreement and the Hiland Partners
merger were approved unanimously by the Hiland Partners
Conflicts Committee, which determined that the Hiland Partners
merger agreement and the Hiland Partners merger are advisable,
fair to, and in the best interests of, Hiland Partners and the
Hiland Partners public unitholders. The Hiland Partners merger
agreement and the Hiland Partners merger were also recommended
to the Hiland Partners public unitholders unanimously by the
Hiland Partners Conflicts Committee, which further recommended
that the Hiland Partners Board of Directors recommend approval
of the Hiland Partners merger agreement and the Hiland Partners
merger to the Hiland Partners public unitholders.
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The Hiland Partners Board of Directors approved, and recommended
that the Hiland Partners public unitholders vote to approve, the
Hiland Partners merger agreement and the Hiland Partners merger.
The action by the Hiland Partners Board of Directors represented
the unanimous approval of the directors of Hiland Partners,
other than Messrs. Hamm and Reid who recused themselves
from voting.
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The HLND
Schedule 13E-3
Filing Persons did not consider historical prices for Hiland
Partners common units, including prices paid in previous
purchases by them, because such prices were supported by
different market and industry conditions than at present and a
return to such conditions was not likely in the near term. The
HLND
Schedule 13E-3
Filing Persons also did not consider the net book value of
Hiland Partners common units in determining the fairness of the
Hiland Partners merger to the Hiland Partners public unitholders
because they believe that net book value, which is an accounting
concept, does not reflect, or have any meaningful impact on, the
value of Hiland Partners common units, which depend on cash
flows from its continuing operations. Moreover, the HLND
Schedule 13E-3
Filing Persons did not consider going concern value since the
Hiland Companies were likely to be in violation of the leverage
ratio covenant under the Hiland Operating Credit Agreement, thus
materially impairing the Hiland Companies ability to
continue operating.
Messrs. Griffin and Harrison believe that the Hiland
Partners merger is both substantively and procedurally fair to
the Hiland Partners public unitholders based on the factors
described in Recommendation of the Hiland
Partners Conflicts Committee and the Hiland Partners Board of
Directors; Reasons for Recommending Approval of the
Merger The Hiland Partners Board of Directors
beginning on page 48. In doing so, Messrs. Griffin and
Harrison expressly adopted the analysis of the Hiland Partners
Conflicts Committee, which is discussed above.
Recommendations
of the Hiland Holdings Conflicts Committee and Hiland Holdings
Board of Directors; Reasons for Recommending Approval of the
Merger
The
Hiland Holdings Conflicts Committee
The Hiland Holdings Conflicts Committee consists of two
independent directors: Dr. Bobby B. Lyle and
Dr. Cheryl L. Evans. In resolutions approved by the Hiland
Holdings Board of Directors on February 19,
64
2009, the Hiland Holdings Conflicts Committee was authorized to
review, evaluate and make recommendations to the Hiland Holdings
Board of Directors with respect to Mr. Hamms proposed
acquisition of the publicly-held Hiland Holdings common units
and potential alternative transactions. The Hiland Holdings
Conflicts Committee retained Fulbright as its independent legal
counsel and Morris Nichols as its independent special Delaware
legal counsel. In addition, the Hiland Holdings Conflicts
Committee selected and the general partner of Hiland Holdings
retained Barclays Capital as the independent financial advisor
of the Hiland Holdings Conflict Committee. The Hiland Holdings
Conflicts Committee oversaw the performance of financial and
legal due diligence by its advisors, conducted an extensive
review and evaluation of Mr. Hamms proposal and
potential alternative transactions and conducted negotiations
with Mr. Hamm and their representatives with respect to the
Hiland Holdings merger agreement and the various other
agreements related to the Hiland Holdings merger.
The Hiland Holdings Conflicts Committee, by unanimous vote at a
meeting held on June 1, 2009, determined that the Hiland
Holdings merger agreement and the transactions contemplated by
the Hiland Holdings merger agreement were advisable, fair to,
and in the best interests of, Hiland Holdings and the Hiland
Holdings public unitholders. In addition, at the June 1,
2009 meeting, the Hiland Holdings Conflicts Committee
recommended that (1) the Hiland Holdings Board of Directors
approve the Hiland Holdings merger agreement and the related
agreements, and the consummation of the transactions
contemplated thereby, including the Hiland Holdings merger and
(2) the Hiland Holdings public unitholders vote in favor of
approval of the Hiland Holdings merger agreement and the Hiland
Holdings merger. In reaching its determination, the Hiland
Holdings Conflicts Committee consulted with and received the
advice of its independent financial and legal advisors,
considered the potential alternatives of Hiland Holdings,
including the uncertainties and risks facing it, and considered
the interests of the Hiland Holdings public unitholders.
In determining that the Hiland Holdings merger agreement was
advisable, fair to, and in the best interests of, Hiland
Holdings and the Hiland Holdings public unitholders and
recommending the approval of the Hiland Holdings merger
agreement and the related agreements, and the consummation of
the transactions contemplated thereby, including the Hiland
Holdings merger, to the Hiland Holdings Board of Directors on
June 1, 2009, the Hiland Holdings Conflicts Committee
considered a number of factors. The material factors are
summarized below.
The Hiland Holdings Conflicts Committee viewed the following
factors as being generally positive or favorable in coming to
its determination and recommendation:
1. The Hiland Holdings merger would provide the Hiland
Holdings public unitholders with cash consideration of $2.40 per
common unit, a price the Hiland Holdings Conflicts Committee
viewed as fair in light of recent and projected financial
performance of Hiland Holdings and recent trading prices of the
Hiland Holdings common units. In making this determination, the
Hiland Holdings Conflicts Committee also considered that Hiland
Holdings only cash flowing assets are its partnership
interests in Hiland Partners, consisting of 2,321,471 common
units, 3,060,000 subordinated units, the 2% general partner
interest and all the incentive distribution rights, and,
moreover, that on April 27, 2009 Hiland Partners announced
the suspension of quarterly distributions on the common units
and subordinated units beginning with the first quarter of 2009.
The Hiland Holdings Conflicts Committee also considered the
following related facts:
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Since Hiland Partners suspended distributions on the common
units, the amount of common unit arrearages that have been
accumulated through June 1, 2009 is approximately
$2.8 million. Based on the number of common units of Hiland
Partners outstanding as of June 1, 2009, approximately
$2.8 million in common unit arrearages will accumulate each
quarter until Hiland Partners resumes paying the MQD. Therefore,
the likelihood of Hiland Holdings receiving the minimum
quarterly distribution in the future on its subordinated units
in Hiland Partners is significantly less than its likelihood of
receiving the minimum quarterly distribution on its common units.
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Additionally, as a result of the suspension in distributions on
the subordinated units, the likelihood of the subordinated units
meeting the tests for conversion into common units after
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March 31, 2010 has been significantly reduced. In order for
the subordinated units to convert, Hiland Partners must have
earned and paid the minimum quarterly distribution on all
outstanding units for three consecutive four-quarter periods. In
addition to being subordinated to the common units with respect
to distributions, including liquidating distributions, the
subordinated units are not publicly traded and therefore they
are a more illiquid asset than common units, which impairs their
value.
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Furthermore, no distributions may be made on the incentive
distributions rights until the minimum quarterly distribution
has been paid on all outstanding Hiland Partners common units
and subordinated units. Therefore, the likelihood of Hiland
Holdings receiving distributions in the future on its incentive
distribution rights is significantly less than its likelihood of
receiving the minimum quarterly distribution on its subordinated
units. For the third quarter of 2008, the last quarter in which
distributions related to the incentive distribution rights were
paid, approximately 31% of the cash distributions received by
Hiland Holdings from Hiland Partners were the payment of the
minimum quarterly distribution on the common units and the
commensurate general partner interest, approximately 37% were
the payment of the minimum quarterly distribution on the
subordinated units and the commensurate general partner interest
and approximately 31% were the payment of distributions on all
units and the incentive distribution rights above the minimum
quarterly distribution.
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2. The opinion received by the Hiland Holdings Conflicts
Committee from its financial advisor, Barclays Capital,
delivered orally at the Hiland Holdings Conflicts Committee
meeting on June 1, 2009, and subsequently confirmed in
writing later that day, to the effect that as of the date of the
opinion, the $2.40 per common unit cash merger consideration to
be received by the Hiland Holdings public unitholders, pursuant
to the Hiland Holdings merger, was fair, from a financial point
of view, to those holders.
3. The presentation of Barclays Capital on June 1,
2009, in connection with the foregoing opinion, which is
described under Opinion of Financial Advisor
of Hiland Holdings.
4. The difficult business environment currently facing the
Hiland Companies, including commodity prices, in particular
natural gas prices, and the significant reduction in drilling
activity and the resulting negative effect on the financial
condition and results of operations of the Hiland Companies.
5. The Hiland Holdings Conflicts Committees belief
that there were no alternatives to the April 20 Revised Proposal
that would likely be viable or financially superior to the
Hiland Holdings public unitholders. In that regard, the Hiland
Holdings Conflicts Committee noted that:
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maintaining the status quo was not a viable alternative given
the impact of the indefinite suspension of distributions by
Hiland Partners on April 27, 2009 that Hiland
Holdings only cash flowing assets consist of partnership
interests in Hiland Partners, and that it was very likely that
Hiland Partners would be in violation of the leverage ratio
covenant under the Hiland Operating Credit Agreement as soon as
June 30, 2009, and that the Hiland Companies could not
continue operating without some infusion of capital or resolving
this potential default;
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obtaining a waiver or amendment under the Hiland Operating
Credit Agreement was not a viable alternative because in the
absence of a significant equity injection by Mr. Hamm or
some other party, Hiland Partners existing lenders had
indicated that such waiver or amendment would very likely
involve a significant upfront restructuring fee, a significant
increase in the applicable interest rate, and an indefinite
suspension of distributions from Hiland Partners, resulting in
the buildup of arrearages with respect to the common units of
Hiland Partners and a decrease in value of the subordinated
units and incentive distribution rights held directly or
indirectly by Hiland Holdings;
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Barclays Capital had advised the Hiland Holdings Conflicts
Committee that, based upon its experience and knowledge of the
current market environments and given the Hiland Companies
credit ratings and comparable company yields,
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it was very unlikely that the Hiland Companies could refinance
the Hiland Operating Credit Agreement through the issuance of
other debt instruments or replace the Hiland Operating Credit
Agreement with a new credit facility due to the uncertain state
of debt and credit markets, particularly in the energy sector
and for gathering and processing MLPs, which uncertain
conditions resulted in lenders being uncertain about the
valuations of borrowers in those sectors and generally seeking
to reduce their exposure to that market segment,
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even if the Hiland Companies were able to obtain alternative
debt financing, the pricing, terms and conditions of such
financing would likely be as onerous as those involved in
obtaining a waiver or amendment of the existing Hiland Operating
Credit Agreement (high up-front fees, a significant increase in
the interest rate, and indefinite suspension of distributions
from Hiland Partners), and
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it was unlikely that Hiland Partners could convince its existing
lenders to consent to exchange all or a portion of the existing
indebtedness under the Hiland Operating Credit Agreement for
equity securities (which would also dilute existing unitholders);
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it was very unlikely that the Hiland Companies could raise
sufficient equity capital to pay down the indebtedness under the
Hiland Operating Credit Agreement through a public or private
issuance of equity securities, given the uncertain nature of the
market conditions for equity securities, particularly for
gathering and processing MLPs, and that the amount of money that
would need to be raised to repay debt to be in compliance with
financial covenants would be highly dilutive as such amount was
more than the then current market capitalization of Hiland
Partners, and an issuance of structured equity investment
by Mr. Hamm was not viable (particularly as Mr. Hamm
had indicated that he had determined not to pursue such an
investment);
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a sale of strategic assets by Hiland Partners was not an
attractive option as the market for assets of the nature of
Hiland Partners assets is very challenging and the most
likely purchasers are themselves experiencing financial
difficulties and have little access to acquisition
capital; and
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it was unlikely that any other transaction with a third party
involving a sale of the Hiland Companies or a significant
interest in the Hiland Companies could be consummated at this
time in light of the position of Mr. Hamm (contained in his
letter, dated January 15, 2009, to the Hiland Holdings
Board of Directors and subsequently confirmed to the Hiland
Holdings Conflicts Committee), that he was interested only in
acquiring common units in the Hiland Companies and that he was
not interested in selling (or causing his affiliates to sell)
interests in the Hiland Companies, and the lack of any
indications of interest from any third parties since the public
announcement of the January 15 Proposal.
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6. The Hiland Holdings Conflicts Committees belief
that the $2.40 per common unit cash merger consideration
represented the highest per common unit consideration that could
be negotiated with Mr. Hamm, given that the Hiland Holdings
Conflicts Committee twice requested Mr. Hamm to increase
the offered price of $2.40, and he declined each time to raise
the price of his offer.
7. The terms of the Hiland Holdings commitment letter from
Mr. Hamm to Parent to fund the full amount of the HPGP
Parent Parties obligation to pay the merger consideration,
including the provision making the Holdings Parties third-party
beneficiaries under the Hiland Holdings commitment letter.
8. The terms of the Hiland Holdings merger agreement,
principally:
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all of the outstanding common units not held by Harold Hamm,
Continental Gas and the Hamm family trusts (and restricted
common units held by officers and employees of Hiland Holdings)
will be converted into the right to receive cash at $2.40 per
common unit;
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the requirement that the Hiland Holdings merger and Hiland
Holdings merger agreement be approved by a vote of the holders
of a majority of the Hiland Holdings common units held by Hiland
Holdings public unitholders entitled to vote thereon voting as a
class;
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the limited nature of the operational representations and
warranties given by Hiland Holdings and the fact that the
representations and warranties of Hiland Holdings do not survive
the closing of the Hiland Holdings merger;
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the inability of the HPGP Parent Parties to refuse to close the
Hiland Holdings merger as the result of a failure of Hiland
Operating to be in compliance with certain financial covenants
of the Hiland Operating Credit Agreement;
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the provision limiting the ability of the HPGP Parent Parties to
close the Hiland Partners merger without closing the Hiland
Holdings merger, unless the Hiland Holdings public unitholders
fail to approve the Hiland Holdings merger and the Hiland
Holdings merger agreement;
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the absence of a financing condition to the HPGP Parent
Parties obligation to consummate the transaction;
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the provision allowing the Hiland Holdings Board of Directors or
the Hiland Holdings Conflicts Committee to withdraw or change
its recommendation of the Hiland Holdings merger agreement and
the Hiland Holdings merger if it makes a good faith
determination that a change or withdrawal would be in the best
interests of the Hiland Holdings public unitholders, subject to
providing the HPGP Parent Parties with advance notice; and
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the provisions allowing for the Holdings Parties to participate
in negotiations with a third party in response to an unsolicited
alternative proposal which may, in certain circumstances, result
in a superior proposal; and
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the lack of a
break-up
fee
for termination of the Hiland Holdings merger agreement in
accordance with its terms, although Hiland Holdings may be
liable to reimburse the expenses of the HPGP Parent Parties in
certain limited circumstances if the Hiland Holdings merger
agreement is terminated.
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The Hiland Holdings Conflicts Committee considered the following
factors to be generally negative or unfavorable in making its
determination and recommendation:
1. The Hiland Holdings public unitholders will have no
ongoing equity participation in Hiland Holdings following the
Hiland Holdings merger, and such unitholders will cease to
participate in Hiland Holdings future earnings or growth,
if any, or benefit from increases, if any, in the value of
Hiland Holdings common units and would not participate in
any potential future sale of Hiland Holdings to a third party.
2. Given that Mr. Hamm (who together with Continental
Gas and the Hamm family trusts own a 60.8% limited partner
interest in Hiland Holdings) had publicly expressed an interest
only in acquiring common units of the Hiland Companies and no
interest in selling, or causing his affiliates to sell,
interests in the Hiland Companies, it would be impracticable to
sell the general partner of Hiland Partners or Hiland Partners
without his approval. Therefore no attempt was made to contact,
third parties that might otherwise consider an acquisition of
Hiland Holdings. The Hiland Holdings Conflicts Committee
recognized that it was possible (although did not consider it to
be likely) that a sale process open to all possible bidders
might result in a higher sale price than the cash consideration
payable in the Hiland Holdings merger.
3. The Hiland Holdings merger agreements limitation
on Hiland Holdings ability to solicit third party offers.
4. The possibility that the Hamm Continuing Investors could
sell some or all of Hiland Holdings, as the surviving entity
following the Hiland Holdings merger, or its assets to one or
more purchasers at a valuation higher than that available in the
Hiland Holdings merger.
The foregoing discussion of the information and factors
considered by the Hiland Holdings Conflicts Committee is not
intended to be exhaustive, but includes the material factors
considered by the Hiland Holdings Conflicts Committee. In view
of the variety of factors considered in connection with its
evaluation of
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the Hiland Holdings merger, the Hiland Holdings Conflicts
Committee did not find it practicable to, and did not, quantify
or otherwise assign specific weights to the factors considered
in reaching its determination and recommendation. In addition,
each of the members of the Hiland Holdings Conflicts Committee
may have given differing weights to different factors. On
balance, the Hiland Holdings Conflicts Committee believed that
the positive factors discussed above outweighed the negative
factors discussed above. The Hiland Holdings Conflicts Committee
expressly adopted the analyses of Barclays Capital and
considered such analyses and opinion, among other factors
considered, in reaching its determination as to the substantive
fairness of the going private transactions contemplated by the
Hiland Holdings merger agreement to the Hiland Holdings public
unitholders.
The Hiland Holdings Conflicts Committee believes that sufficient
procedural safeguards were and are present to ensure the
fairness of the Hiland Holdings merger and to permit the Hiland
Holdings Conflicts Committee to represent effectively the
interests of the Hiland Holdings public unitholders, each of
which the Hiland Holdings Conflicts Committee believes supports
its decision and provides assurance of the fairness of the
Hiland Holdings merger to the Hiland Holdings public
unitholders. The Hiland Holdings Conflicts Committee determined
that the Hiland Holdings merger was procedurally fair to the
Hiland Holdings public unitholders and believes that the process
it followed in making its determination and recommendation with
respect to the Hiland Holdings merger agreement was fair because:
1. The Hiland Holdings Conflicts Committee consisted solely
of directors who are not officers or controlling unitholders of
Hiland Holdings, or affiliated with Mr. Hamm or any of the
Hamm Continuing Investors, and the Hiland Holdings Conflicts
Committee was charged with representing the interests of the
Hiland Holdings public unitholders.
2. The members of the Hiland Holdings Conflicts Committee
were adequately compensated for their services and their
compensation was in no way contingent on their approving the
Hiland Holdings merger agreement or the Hiland Holdings merger.
3. Other than by the immediate vesting of any restricted
common units issued and outstanding to non-employee directors of
Hiland Holdings pursuant to the Hiland Holdings GP, LP Long-Term
Incentive Plan immediately prior to the effective time of the
Hiland Holdings merger, the members of the Hiland Holdings
Conflicts Committee will not personally benefit from the
completion of the Hiland Holdings merger in a manner different
from the Hiland Holdings public unitholders.
4. The Hiland Holdings Conflicts Committee retained and was
advised by independent legal counsel, Fulbright and Morris
Nichols. In addition, the Hiland Holdings Conflicts Committee
selected and the general partner of Hiland Holdings retained
Barclays Capital as the independent financial advisor of the
Hiland Holdings Conflict Committee. The fact that Barclays
Capital was retained by the general partner of Hiland Holdings
had no impact on Hiland Holdings Conflicts Committees
determination of procedural fairness, as the terms of the
engagement were that Barclays Capital was to provide financial
advisory services to the Hiland Holdings Conflicts Committee,
and all communications and instructions to Barclays Capital
pursuant to the engagement were provided solely by the Hiland
Holdings Conflicts Committee, not the general partner of Hiland
Holdings.
5. Barclays Capitals right to receive its advisory
fee was not contingent upon it delivering a favorable opinion.
6. From the date that the January 15 Proposal was announced
to the time of the Hiland Holdings Conflicts Committees
determination and recommendations, no third parties indicated
any interest in pursuing a transaction with Hiland Holdings or
Hiland Partners.
7. The Hiland Holdings Conflicts Committee and its legal
counsel and financial advisor conducted due diligence regarding
the Hiland Companies and their prospects and considered all
viable alternatives for Hiland Holdings in addition to the
proposed Hiland Holdings merger agreement.
8. The Hiland Holdings Conflicts Committee received the
opinion of Barclays Capital that, as of June 1, 2009, and
based on and subject to the factors and assumptions set forth in
the opinion, the merger
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consideration to be offered to the Hiland Holdings public
unitholders in the Hiland Holdings merger was fair to such
unitholders, from a financial point of view.
9. The requirement that the Hiland Holdings merger
agreement and the Hiland Holdings merger must be approved by
holders of a majority of the Hiland Holdings common units held
by Hiland Holdings public unitholders entitled to vote thereon
voting as a class.
10. The Hiland Holdings Conflicts Committee was involved in
extensive deliberations over a period of approximately three
months regarding both the January 15 Proposal and the April 20
Revised Proposal.
11. The Hiland Holdings Conflicts Committee, with the
assistance of its legal and financial advisors, negotiated the
terms of the Hiland Holdings merger agreement on an
arms-length basis with Mr. Hamm and his legal and
financial advisors.
12. The Hiland Holdings Conflicts Committee had the
ultimate authority to decide whether or not to proceed with the
proposed transaction or any alternatives, and the Hiland
Holdings Board of Directors resolved not to recommend,
authorize, approve or endorse the January 15 Proposal or any
other merger, acquisition or similar proposal involving Hiland
Holdings and the Hamm Continuing Investors or any of their
affiliates unless such transaction was recommended to the Hiland
Holdings Board of Directors by the Hiland Holdings Conflicts
Committee.
13. The Hiland Holdings Conflicts Committee was aware that
it had no obligation to recommend any transaction, including the
proposal put forth by Mr. Hamm.
The Hiland Holdings Conflicts Committee determined that the
Hiland Holdings merger is procedurally fair to the Hiland
Holdings public unitholders despite the fact that the Hiland
Holdings Conflicts Committee did not retain an unaffiliated
representative to act solely on behalf of the Hiland Holdings
public unitholders for purposes of negotiating the terms of a
going-private transaction. In this regard, the Hiland Holdings
Conflicts Committee believes that it was not necessary to retain
an unaffiliated representative to act solely on behalf of the
Hiland Holdings public unitholders for purposes of negotiating
the terms of a going-private transaction, because the Hiland
Holdings Conflicts Committee was charged with representing the
interests of the Hiland Holdings public unitholders, the Hiland
Holdings Conflicts Committee consisted solely of directors who
are not officers or controlling unitholders of Hiland Holdings,
or affiliated with Mr. Hamm or any of the Hamm Continuing
Investors, it engaged financial and legal advisors to act on its
behalf and it was actively involved in deliberations and
negotiations regarding the Hiland Holdings merger on behalf of
the Hiland Holdings public unitholders.
The Hiland Holdings Conflicts Committee did not consider
liquidation value in determining the fairness of the Hiland
Holdings merger to the Hiland Holdings public unitholders
because of its belief, after consulting with its financial
advisor, that liquidation value does not present a meaningful
valuation for Hiland Holdings and its business because Hiland
Holdings value is derived from the cash flows generated
from its continuing operations rather than from the value of
assets that might be realized in a liquidation.
The Hiland Holdings Conflicts Committee also did not consider
net book value in determining the fairness of the merger to the
Hiland Holdings public unitholders because of its belief, after
consulting with its financial advisor, that net book value does
not present a meaningful valuation metric for Hiland Holdings
and its business because Hiland Holdings value is derived
from the cash flows generated from its continuing operations.
The Hiland Holdings Conflicts Committee also did not consider
the going concern value in determining the fairness of the
Hiland Holdings merger to the Hiland Holdings public unitholders
because of its belief, after consulting with its financial
advisor, that the going concern value does not present a
meaningful valuation metric for Hiland Holdings as Hiland
Partners was likely to be in violation of the leverage ratio
covenant under the Hiland Operating Credit Agreement, the Hiland
Companies could not continue operating without some sort of
capital infusion or resolution of this default, and obtaining
such a capital infusion or a waiver or amendment under the
Hiland Operating Credit Agreement were not viable alternatives.
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The
Hiland Holdings Board of Directors
The Hiland Holdings Board of Directors consists of eight
directors: Harold Hamm, Joseph L. Griffin, Matthew S. Harrison,
Edward D. Doherty, Dr. Cheryl L. Evans, Michael L.
Greenwood, Dr. Bobby B. Lyle, and Rayford T. Reid.
The directors of Hiland Holdings have different interests in the
Hiland Holdings merger than the Hiland Holdings public
unitholders generally. In particular:
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Affiliates of Mr. Hamm, the Chairman of the Board of
Directors of each of the Hiland Companies, is a counterparty to
the Hiland Companies in each of the merger agreements and will
acquire, along with the Hamm family trusts, all of the
outstanding common units of each of the Hiland Companies not
already owned by the Hamm Continuing Investors (other than
certain restricted common units discussed below) pursuant to the
merger agreements.
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six of the eight members of the Hiland Holdings Board of
Directors serve as members of the Hiland Partners Board of
Directors, and therefore have certain duties and obligations to
the unitholders of each Hiland Company as provided in the
respective partnership agreements of the Hiland Companies;
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the non-employee directors of Hiland Holdings hold restricted
common units of Hiland Holdings, which will vest immediately
prior to the effective time of the Hiland Holdings merger and
automatically convert into the right to receive the Hiland
Holdings merger consideration in the Hiland Holdings merger;
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if any employee directors of Hiland Holdings are granted
restricted common units, phantom units or unit options under the
Hiland Partners GP, LP Long-Term Incentive Plan or the Hiland
Partners, LP Long-Term Incentive Plan in the ordinary course of
business prior to the effective time of the Hiland Holdings
merger or the Hiland Partners merger, as applicable, such equity
interests will remain outstanding following the effective time
of the Hiland Holdings merger or the Hiland Partners merger, as
applicable;
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certain members of the Hiland Holdings Board of Directors hold
Hiland Partners common units which will convert into the right
to receive the Hiland Partners merger consideration in the
Hiland Partners merger;
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certain members of the Hiland Holdings Board of Directors who
also serve on the Hiland Partners Board of Directors hold
restricted common units in Hiland Partners, which will vest
immediately prior to the effective time of the Hiland Partners
merger and automatically convert into the right to receive the
Hiland Partners merger consideration in the Hiland Partners
merger;
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the members of the Hiland Holdings Conflicts Committees have
received payments in the amount of $30,000 each for their
consideration and negotiation of the mergers, which payments
were not contingent on any outcome of the consideration or
negotiations;
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Joseph L. Griffin and Matthew S. Harrison, who are members of
the Board of Directors and the Chief Executive Officer and Chief
Financial Officer, respectively, of each of the Hiland
Companies, have been offered continued employment with the
surviving entities after the effective times of the mergers, and
may enter into or be provided new employment, retention and
compensation arrangements (although no such arrangements have
been proposed or agreed to); and
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certain indemnification arrangements and insurance policies for
directors and officers of the general partner of Hiland Holdings
will be continued for six years by the surviving entity in the
Hiland Holdings merger if the Hiland Holdings merger is
completed.
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For a complete discussion of these and other interests of the
members of the Hiland Holdings Board of Directors in the Hiland
Holdings merger, see Special Factors Interests
of Certain Persons in the Mergers.
Because of such actual and potential conflicts, the Hiland
Holdings Board of Directors authorized the Hiland Holdings
Conflicts Committee to review, evaluate and make recommendations
to the Hiland Holdings
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Board of Directors and the Hiland Holdings public unitholders
regarding Mr. Hamms proposal and any potential
alternatives thereto. On June 1, 2009, the Hiland Holdings
Board of Directors met to consider the report and recommendation
of the Hiland Holdings Conflicts Committee. On the basis of the
Hiland Holdings Conflicts Committees recommendation and
the other factors described below, each of the six members of
the Hiland Holdings Board of Directors participating in the
meeting unanimously (1) determined that the Hiland Holdings
merger agreement and the transactions contemplated by the Hiland
Holdings merger agreement, including the Hiland Holdings merger,
were advisable, fair to, and in the best interests of, Hiland
Holdings and the Hiland Holdings public unitholders and
(2) recommended that the Hiland Holdings public unitholders
vote to approve the Hiland Holdings merger agreement and the
Hiland Holdings merger.
Neither of Messrs. Hamm nor Reid participated in the Hiland
Holdings Board of Directors consideration or vote on these
matters. Mr. Hamm did not feel his participation was
appropriate given that the Hiland Holdings Board of Directors
was evaluating his offer to acquire Hiland Holdings.
Mr. Reid did not feel participation was appropriate given
his professional relationship with Mr. Hamm, through which
he has historically provided Mr. Hamm and the Hamm family
trusts with financial advisory services, including in connection
with evaluating strategic alternatives with respect to the
Hiland Companies.
Because Messrs. Hamm and Reid abstained from voting on the
Hiland Holdings merger agreement and the Hiland Holdings merger,
only four of the six non-employee members of the Hiland Holdings
Board of Directors voted to approve the Hiland Holdings merger
agreement and the Hiland Holdings merger.
In determining that the Hiland Holdings merger agreement is
advisable, fair to, and in the best interests of, Hiland
Holdings and the Hiland Holdings public unitholders and
approving the Hiland Holdings merger agreement and the
transactions contemplated thereby, including the Hiland Holdings
merger, and recommending that the Hiland Holdings public
unitholders vote for the approval of the Hiland Holdings merger
agreement and the Hiland Holdings merger, the Hiland Holdings
Board of Directors considered a number of factors, including the
following material factors:
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the unanimous determination and recommendation of the Hiland
Holdings Conflicts Committee;
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the opinion of Barclays Capital delivered orally at the Hiland
Holdings Conflicts Committee meeting and presented at the Hiland
Holdings Board of Directors meeting on June 1, 2009, and
subsequently confirmed in writing, that as of the date of the
opinion, based upon and subject to the factors and assumptions
set forth in the opinion, the Hiland Holdings merger
consideration of $2.40 per common unit to be offered to the
holders of common units of Hiland Holdings (other than the
Hiland Holdings rollover common unitholders) pursuant to the
Hiland Holdings merger was fair, from a financial point of view,
to the Hiland Holdings public unitholders, as described in the
opinion of Barclays Capital;
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the financial presentation of Barclays Capital in connection
with the foregoing opinion that was presented to the Hiland
Holdings Board of Directors at the request of the Hiland
Holdings Conflicts Committee;
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the fact that the Hiland Holdings merger consideration and the
other terms of the Hiland Holdings merger agreement resulted
from negotiations between the Hiland Holdings Conflicts
Committee and Mr. Hamm, and the Hiland Holdings Board of
Directors belief that $2.40 in cash for each Hiland
Holdings common unit represented the highest per common unit
consideration that could be negotiated; and
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The factors considered by the Hiland Holdings Conflicts
Committee, including the positive factors and potential benefits
of the Hiland Holdings merger agreement, the risks and
potentially negative factors relating to the Hiland Holdings
merger agreement, and the factors relating to procedural
safeguards, each as described in The Hiland
Holdings Conflicts Committee above.
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In doing so, the Hiland Holdings Board of Directors expressly
adopted the analysis of the Hiland Holdings Conflicts Committee,
which is discussed above.
The foregoing discussion of the information and factors
considered by the Hiland Holdings Board of Directors includes
the material factors considered by the Hiland Holdings Board of
Directors. In view of the
72
variety of factors considered in connection with its evaluation
of the Hiland Holdings merger, the Hiland Holdings Board of
Directors did not find it practicable to, and did not, quantify
or otherwise assign relative weights to the specific factors
considered in reaching its determination and recommendation. In
addition, individual directors may have given different weights
to different factors. The Hiland Holdings Board of Directors
approved and recommends the Hiland Holdings merger agreement and
the Hiland Holdings merger based upon the totality of the
information presented to and considered by it.
The Hiland Holdings Board of Directors did not consider
liquidation value in determining the fairness of the Hiland
Holdings merger to the Hiland Holdings public unitholders
because of its belief, after considering the factors considered
by the Hiland Holdings Conflicts Committee, that liquidation
value does not present a meaningful valuation for Hiland
Holdings and its business as Hiland Holdings value is
derived from the cash flows generated from its continuing
operations rather than from the value of assets that might be
realized in a liquidation.
The Hiland Holdings Board of Directors also did not consider net
book value in determining the fairness of the merger to the
Hiland Holdings public unitholders because of its belief, after
considering the factors considered by the Hiland Holdings
Conflicts Committee, that net book value does not present a
meaningful valuation metric for Hiland Holdings and its business
as Hiland Holdings value is derived from the cash flows
generated from its continuing operations.
The Hiland Holdings Board of Directors believes that the Hiland
Holdings merger is procedurally fair because (1) of the
independence, absence of conflicts of interest and role and
actions of the Hiland Holdings Conflicts Committee members
(permitting them to represent effectively the interests of the
Hiland Holdings public unitholders), (2) of the approval of
the Hiland Holdings merger agreement by a majority of the
directors who are not employees of Hiland Holdings and
(3) the terms of the Hiland Holdings merger agreement
require the approval of a majority of the publicly-held Hiland
Holdings common units. The Hiland Holdings Board of Directors
believes that each of these procedural safeguards supports its
decision and provides assurance of the fairness of the Hiland
Holdings merger to the Hiland Holdings public unitholders.
Opinion
of Financial Advisor of Hiland Holdings
Pursuant to the authority granted by the Hiland Holdings Board
of Directors, the Hiland Holdings Conflicts Committee selected
Barclays Capital to act as financial advisor to the Hiland
Holdings Conflicts Committee with respect to the proposed Hiland
Holdings merger between HPGP Merger Sub and Hiland Holdings. The
Hiland Holdings Conflicts Committee interviewed four potential
financial advisors, including Barclays Capital. After due
consideration, and after determining that Barclays Capital had
no current or prior relationships that compromised its
independence, the Hiland Holdings Conflicts Committee selected
Barclays Capital as its financial advisor based on Barclays
Capitals expertise and extensive experience advising
companies in the Hiland Companies industry and in advising
special and conflicts committees in transactions similar to the
one proposed by Mr. Hamm. On February 17, 2009, the
general partner of Hiland Holdings executed an engagement letter
with Barclays Capital to retain Barclays Capital as the
financial advisor to the Hiland Holdings Conflicts Committee. At
the request of the Hiland Holdings Conflicts Committee, Barclays
Capital prepared and updated several presentations to the Hiland
Holdings Conflicts Committee over the course of its engagement.
On June 1, 2009, Barclays Capital rendered its oral opinion
(which was subsequently confirmed in writing) to the Hiland
Holdings Conflicts Committee that, as of such date and based
upon and subject to the qualifications, limitations and
assumptions stated in its opinion, the consideration to be
offered to the unitholders of Hiland Holdings, other than
Mr. Hamm, Continental Gas and the Hamm family trusts, is
fair, from a financial point of view, to such unitholders.
The full text of Barclays Capitals written opinion,
dated as of June 1, 2009, is attached as Annex F to
this joint proxy statement. Barclays Capitals written
opinion sets forth, among other things, the assumptions made,
procedures followed, factors considered and limitations upon the
review undertaken by Barclays Capital in rendering its opinion.
You are encouraged to read the opinion carefully in its
entirety. The following is a summary of Barclays Capitals
opinion and the methodology that Barclays
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Capital used to render its opinion. This summary is qualified
in its entirety by reference to the full text of the opinion.
Barclays Capitals opinion, the issuance of which was
approved by Barclays Capitals Fairness Opinion Committee,
is addressed to the Hiland Holdings Conflicts Committee,
addresses only the fairness, from a financial point of view, of
the consideration to be received by the unitholders of Hiland
Holdings, other than the Hamm Continuing Investors, and does not
constitute a recommendation to any unitholder of Hiland Holdings
as to how such unitholder should vote with respect to the
proposed transaction or any other matter. The terms of the
proposed transaction were determined through arms-length
negotiations between the general partner of Hiland Holdings and
Parent and were unanimously approved by the Hiland Holdings
Board of Directors, with Messrs. Hamm and Reid abstaining.
The merger consideration was determined through negotiations
between the Hiland Holdings Conflicts Committee and
Mr. Hamm and was recommended by the Hiland Holdings
Conflicts Committee for approval by the Hiland Holdings Board of
Directors and approved by the Hiland Holdings Board of
Directors. Barclays Capital provided advice to the Hiland
Holdings Conflicts Committee during these negotiations. Barclays
Capital did not, however, recommend any specific form or amount
of consideration to the Hiland Holdings Conflicts Committee or
the general partner of Hiland Holdings or that any specific form
or amount of consideration constituted the only appropriate
consideration for the proposed transaction. Barclays Capital was
not requested to address, and its opinion does not in any manner
address, Hiland Holdings underlying business decision
(i) to proceed with or effect the proposed transaction or
(ii) with respect to the timing of entering into or
consummating the proposed transaction. Further, Barclays Capital
was not requested to opine as to, and its opinion does not in
any manner address, the Hiland Partners merger. In addition,
Barclays Capital expressed no opinion on, and its opinion does
not in any manner address, the fairness of the amount or the
nature of any compensation to any officers, directors or
employees of any parties to the proposed transaction, or any
class of such persons, relative to the consideration to be
offered to the unitholders of Hiland Holdings other than the
Hamm Continuing Investors in the proposed transaction. No
limitations were imposed by the Hiland Holdings Conflicts
Committee upon Barclays Capital with respect to the
investigations made or procedures followed by it in rendering
its opinion.
Barclays Capital understands, based on discussions with the
management of Hiland Holdings and Hiland Partners, that Hiland
Holdings derives all of its cash flows from its ownership of
(i) common units and subordinated units in Hiland Partners,
(ii) the general partner interest in Hiland Partners, and
(iii) the associated incentive distribution rights, and as
such, Barclays Capitals analysis involved, in part, a
review of Hiland Partners financial and operating
information provided by the management of Hiland Partners.
In arriving at its opinion, Barclays Capital, among other
things, reviewed and analyzed:
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a draft of the Hiland Holdings merger agreement, dated as of
May 22, 2009, and the specific terms of the Hiland Holdings
merger;
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publicly available information concerning Hiland Holdings and
Hiland Partners that Barclays Capital believed to be relevant to
its analysis, including Hiland Holdings and Hiland
Partners Annual Reports on
Form 10-K
for the fiscal year ended December 31, 2008 and Quarterly
Report on
Form 10-Q
for the fiscal quarter ended March 31, 2009;
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financial and operating information with respect to the
business, operations and prospects of Hiland Partners, furnished
by the management of Hiland Partners, including financial
projections prepared by the management of Hiland Partners (the
Hiland Projections), which May 28, 2009
projections are described in more detail under the heading
Projected Financial Information Projected
Financial Data for Hiland Partners (Provided on May 28,
2009) beginning on page 113;
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financial and operating information with respect to the
business, operations and prospects of Hiland Holdings, furnished
by the management of Hiland Holdings and Hiland Partners,
including financial projections prepared by the management of
Hiland Holdings and Hiland Partners (the Holdings
Projections), which projections were substantially derived
from the Hiland Projections;
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the trading histories of common units of Hiland Holdings and the
common units of Hiland Partners from May 28, 2008 to
May 28, 2009 and a comparison of those trading histories
with those of other companies and publicly traded partnerships
that Barclays Capital deemed relevant;
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a comparison of the historical financial results and present
financial condition of Hiland Holdings and Hiland Partners with
those of other companies and publicly traded partnerships that
Barclays Capital deemed relevant;
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a comparison of the financial terms of the Hiland Holdings
merger with the financial terms of certain other transactions
that Barclays Capital deemed relevant;
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the impact of varying commodity price and volume scenarios on
Hiland Partners operating and financial prospects,
including (i) assumptions used by Hiland Partners
management, with commodity prices as quoted on the NYMEX on
May 28, 2009 and (ii) selected commodity price and
volume sensitivity cases, in both cases analyzing the resultant
impact on Hiland Holdings and Hiland Partners;
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Hiland Partners current liquidity position and its ability
to meet its cash requirements, financial obligations and
covenants contained in the Hiland Operating Credit Agreement;
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the limited business and strategic alternatives available to
Hiland Holdings and Hiland Partners, taking into consideration
the challenging conditions for natural gas gathering and
processing companies;
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the limited financing or re-financing alternatives available to
Hiland Holdings and Hiland Partners, the result of which may
lead to the insolvency of Hiland Holdings
and/or
Hiland Partners;
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the impact of Hiland Partners decision to suspend
indefinitely its quarterly cash distributions, thereby reducing
Hiland Holdings cash inflows to zero and resulting in
arrearages which require Hiland Partners to first pay cumulative
arrearage amounts to its common unitholders (including Hiland
Holdings) before any cash distributions may be paid to Hiland
Holdings with regard to its subordinated units or incentive
distribution rights; and
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the impact of Hiland Holdings decision to suspend
indefinitely its quarterly cash distributions.
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Barclays Capital had discussions with the management of Hiland
Holdings and Hiland Partners concerning their respective
businesses, operations, assets, liabilities, financial condition
and prospects and has undertaken such other studies, analyses
and investigations as deemed appropriate.
In arriving at its opinion, Barclays Capital assumed and relied
upon:
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the accuracy and completeness of the financial and other
information used by Barclays Capital without any independent
verification of such information;
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the assurances of management of Hiland Partners that they were
not aware of any facts or circumstances that would make such
information inaccurate or misleading;
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with respect to the financial projections of Hiland Holdings and
Hiland Partners, the assurance of Hiland Partners that such
projections were reasonably prepared on a basis reflecting the
best currently available estimates and judgments of the
management of Hiland Partners as to Hiland Partners and
Hiland Holdings future financial performance; and
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the expectation that Hiland Partners and Hiland Holdings would
perform substantially in accordance with such projections.
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In addition, Barclays Capital assumed:
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that the executed Hiland Holdings merger agreement would conform
in all materials respects to the last draft of the merger
agreement reviewed by Barclays Capital;
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the accuracy of the representations and warranties contained in
the Hiland Holdings merger agreement and all agreements related
to the merger agreement;
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that all material governmental, regulatory and third party
approvals, consents and releases for the Hiland Holdings merger
would be obtained within the constraints contemplated by the
Hiland Holdings merger agreement; and
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that the Hiland Holdings merger would be consummated in
accordance with the terms of the merger agreement without
waiver, modification or amendment of any material term,
condition or agreement thereof.
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In arriving at its opinion, Barclays Capital assumed no
responsibility for and expressed no view as to any such
projections or estimates or the assumptions on which they were
based. In arriving at its opinion, Barclays Capital did not
conduct a physical inspection of the properties and facilities
of Hiland Partners and did not make or obtain any evaluations or
appraisals of the assets or liabilities of Hiland Holdings and
Hiland Partners. In addition, Barclays Capital was not
authorized by Hiland Holdings to solicit, and did not solicit,
any indications of interest from any third party with respect to
the purchase of all or a part of Hiland Holdings, or Hiland
Partners business. Barclays Capitals opinion was
necessarily based upon market, economic and other conditions as
they existed on, and could be evaluated as of, June 1,
2009. Barclays Capital assumed no responsibility for updating or
revising its opinion based on events or circumstances that may
have occurred after June 1, 2009.
In connection with rendering its opinion, Barclays Capital
performed certain financial, comparative and other analyses as
summarized below. In arriving at its opinion, Barclays Capital
did not ascribe a specific range of values to the Hiland
Holdings units but rather made its determination as to fairness,
from a financial point of view, to Hiland Holdings
unitholders other than the Hamm Continuing Investors of the
consideration to be offered to such unitholders in the proposed
transaction on the basis of various financial and comparative
analyses. The preparation of a fairness opinion is a complex
process and involves various determinations as to the most
appropriate and relevant methods of financial and comparative
analyses and the application of those methods to the particular
circumstances. Therefore, a fairness opinion is not readily
susceptible to summary description.
In arriving at its opinion, Barclays Capital did not attribute
any particular weight to any single analysis or factor
considered by it but rather made qualitative judgments as to the
significance and relevance of each analysis and factor relative
to all other analyses and factors performed and considered by it
and in the context of the circumstances of the particular
transaction. Accordingly, Barclays Capital believes that its
analyses must be considered as a whole, as considering any
portion of such analyses and factors, without considering all
analyses and factors as a whole, could create a misleading or
incomplete view of the process underlying its opinion.
The following is a summary of the material financial analyses
used by Barclays Capital in preparing its opinion to the Hiland
Holdings Conflicts Committee. Certain financial analyses
summarized below include information presented in tabular
format. In order to fully understand the financial analyses used
by Barclays Capital, the tables must be read together with the
text of each summary, as the tables alone do not constitute a
complete description of the financial analyses. In performing
its analyses, Barclays Capital made numerous assumptions with
respect to industry performance, general business and economic
conditions and other matters, many of which are beyond the
control of Hiland Holdings or any other parties to the proposed
transaction. None of Hiland Partners, Hiland Holdings, Barclays
Capital or any other person assumes responsibility if future
results are materially different from those discussed. Any
estimates contained in these analyses are not necessarily
indicative of actual values or predictive of future results or
values, which may be significantly more or less favorable than
as set forth below. In addition, analyses relating to the value
of the businesses do not purport to be appraisals or reflect the
prices at which the businesses may actually be sold.
Strategic
Alternatives Analysis
As of June 1, 2009, according to the management of Hiland
Partners, Hiland Partners was likely to be in breach of the
leverage ratio covenant under the Hiland Operating Credit
Agreement as early as June 30, 2009. Due to these
circumstances, Barclays Capital considered and evaluated various
strategic alternatives with the goal of determining certain
scenarios under which Hiland Partners and Hiland Holdings could
continue to
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operate their respective businesses as going concern entities.
Generally, Barclays Capital looked at strategic alternatives
regarding (i) debt, (ii) equity, and
(iii) mergers and acquisitions. The basis upon which
Barclays Capital selected the various strategic alternatives was
to identify possible alternatives which could potentially assist
Hiland Partners and Hiland Holdings in meeting their present and
future operating and financial objectives. In Barclays
Capitals judgment, the strategic alternatives evaluated as
part of its analysis represented a comprehensive list of
possible alternatives, not all of which were even viable at the
time of its opinion for reasons further explained below. At the
time of its opinion, Barclays Capital was not aware of any
viable strategic alternatives that were not evaluated as part of
its analysis. Below is a more detailed explanation of each
alternative considered.
Debt
Related Alternatives
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Credit Facility Amendment/Waiver
A
credit facility amendment or covenant waiver represented the
only likely actionable and possibly achievable debt-related
alternative. Barclays Capital noted, based on current market
conditions and precedent, that any amendment/waiver for Hiland
Partners would likely require elimination of all distributions
and reduced growth capital expenditures until such time as
Hiland Partners returned to compliance. Barclays Capital also
assumed that any amendment would likely require increased
interest pricing and an upfront fee. Barclays Capital was aware
that Mr. Hamm was in direct negotiations with the Hiland
Partners lenders and had learned through his discussions that an
amendment would require a substantial equity contribution from
Mr. Hamm and increased pricing in exchange for covenant
relief. While Hiland Partners management had not held similar
negotiations with the bank group, Barclays Capital noted that in
conversations with Hiland Partners management, it understood a
similar amendment could be reached, but with far more onerous
terms, particularly due to the absence of any equity injection.
Barclays Capital assumed that executing an amendment to the
existing Hiland Partners credit facility was one alternative
available to Hiland Partners, and accordingly Barclays Capital
developed a set of projections that reflected this alternative
(described in more detail later in this section). While, as of
June 1, 2009, the management of Hiland Partners expected
Hiland Partners to violate its leverage ratio covenant as early
as June 30, 2009, Barclays Capital noted that upon signing
of the merger agreements, Mr. Hamm assumed any default risk
under the Hiland Operating Credit Agreement.
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New Bank Credit Facility
Entering into a new
credit facility would have posed several challenges to Hiland
Partners. First, the market conditions at the time were very
challenging. Attracting a sufficient lender group would likely
not have been possible. Even in the case where Hiland Partners
could have accessed the market, the cost would have been
extremely expensive, both in terms of interest cost and upfront
fees. Given overall credit market conditions and the particulars
around Hiland Partners and the state of its industry, Barclays
Capital believed executing a new credit agreement would not have
been a viable option.
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High Yield Bond Issuance
A high-yield bond
issuance could have potentially represented a way for Hiland
Partners to access capital with less restrictive covenants than
those contained in the Hiland Operating Credit Agreement.
However, because of Hiland Partners financial condition,
Barclays Capital felt that Hiland Partners would not have had
access to this market. Furthermore, the incurrence of additional
debt at Hiland Partners would have required an amendment to the
Hiland Operating Credit Agreement.
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Mezzanine Financing
The mezzanine market,
while similar in many respects to the high-yield market, is
characterized by higher interest costs and restrictions on total
transaction size. The market restrictions around total size
would not have afforded Hiland Partners with enough proceeds to
retire its existing credit facility. Like the high yield bond
issuance, this alternative would have also required an amendment
to the Hiland Operating Credit Agreement. Considering all of
these factors, Barclays Capital believed that mezzanine
financing was not a viable alternative for Hiland Partners.
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Debt-for-Equity
Exchange
A
debt-for-equity
exchange would have represented a de-levering transaction for
Hiland Partners, as lenders would swap out debt for equity in
Hiland Partners. Given the
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77
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required amount of debt relief and current market capitalization
of Hiland Partners, any
debt-for-equity
transaction would have resulted in significant dilution to
current Hiland Partners unitholders. Furthermore, Barclays
Capital believed that given the uncertainty around Hiland
Partners and its industry, the lenders under the Hiland
Operating Credit Agreement would have no interest in owning
Hiland Partners equity. Barclays Capital also believed that this
option was not an appropriate alternative for Hiland Partners.
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Direct Debt Paydown by Harold Hamm
Barclays
Capital also examined a direct equity injection by Mr. Hamm
in order to retire a portion of the borrowings outstanding under
the Hiland Operating Credit Agreement. While this option would
have reduced leverage at no cost to Hiland Partners, the
corresponding returns to Mr. Hamm were negative and
Barclays Capital therefore did not believe that Mr. Hamm
would support this option.
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Equity
Related Alternatives
Barclays Capital also examined certain equity related
alternatives for Hiland Partners. An important factor that
developed during the course of Barclays Capitals analyses
was Hiland Partners and Hiland Holdings
announcement, on April 27, 2009, of the suspension of
distributions, beginning with the first quarter distribution of
2009. As a result, Hiland Partners will accrue arrearages on the
common units, such that no distributions on the subordinated
units or related to the incentive distribution rights are
permitted until such time as the common unit arrearages are
repaid in full.
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Public Equity Issuance
Barclays Capital
examined the potential for Hiland Partners to issue public
equity and use the proceeds to repay bank debt in an amount
sufficient to be in compliance with the covenants in the Hiland
Operating Credit Agreement, given the then-current trading price
of Hiland Partners common units. The estimated amount of equity
required to retire enough debt to achieve compliance represented
nearly twice Hiland Partners market capitalization and a
substantial multiple of the public float. Given the required
offering size, such an issuance would have been extremely
dilutive to existing Hiland Partners unitholders. An equity
issuance of this size would have created a situation whereby
Hiland Partners would not have been able to make its MQD for
some time and therefore Hiland Partners would accrue significant
arrearages on the common units. This alternative was likely not
viable even prior to the suspension of distributions. Following
the suspension of distributions, this option was even less
viable.
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Private Third-Party Investment
Similar to a
public equity issuance, a private equity investment by a third
party could provide proceeds to repay a portion of the debt
outstanding under the Hiland Operating Credit Agreement and
potentially provide covenant relief. However, given Hiland
Partners financial condition and outlook, Barclays Capital
believed that attracting a private equity investment would
likely not be possible given the significant returns required by
private equity investors. Any investment of this nature would
have also limited Hiland Partners ability to pay its MQD
by increasing the outstanding number of common units, and
therefore would not have been a viable alternative.
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Structured Equity Investment by Harold Hamm
An additional alternative that Barclays Capital
analyzed involved a direct equity investment by Mr. Hamm.
Barclays Capital envisioned that this investment would be
structured with the goal of maintaining covenant compliance
while avoiding arrearages on the common units. This equity
security would receive distributions after Hiland Partners paid
the MQD on all common units and subordinated units, and in that
case, this security would receive 100% of the excess cash flow
above the MQD on all common units and subordinated units until
such time as the investment was repaid in full. Given the
contemplated structure, this security would have effectively
limited Hiland Partners and Hiland Holdings
distributions to the MQD level for the foreseeable future.
Barclays Capital believed that this could have been a viable
alternative and accordingly developed a set of projections that
reflected this alternative (described in more detail later in
this section). Barclays Capital understands that Mr. Hamm
considered this alternative, but ultimately chose not to pursue
this alternative.
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78
Mergers
and Acquisitions Alternatives
In addition to the proposed transaction with Mr. Hamm,
Barclays Capital evaluated several additional merger and
acquisition-related alternatives.
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Sale of Entire Entity
Barclays Capital
analyzed a combined sale of both Hiland Partners and Hiland
Holdings to third party acquirors. Barclays Capital analyzed
potential transaction economics to prospective buyers and
concluded that the implied economics did not support a
transaction at or near the levels offered by Mr. Hamm.
Additionally, at the time of his initial offer, Mr. Hamm
stated that he was interested only in acquiring common units in
the Hiland Companies and that he was not interested in selling
(or causing his affiliates to sell) interests in Hiland Holdings
or Hiland Partners, which would have likely deterred any
potential acquirors. Barclays Capital believed that this did not
represent a viable alternative.
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Selected Asset Sales
The market for asset
sales has been and continues to be extremely challenged. Buyers
of gathering and processing assets have limited access to
capital and those with access to capital are offering prices
well below historical averages. According to management, Hiland
Partners historical earnings are expected to be greater
than the projected earnings. Therefore, asset sales would likely
have had a dilutive effect on Hiland Partners credit
statistics as calculated under the Hiland Operating Credit
Agreement. Barclays Capital believed that this did not represent
a viable alternative.
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Sale/Leaseback Transaction
The nature of
Hiland Partners assets are not ideal for a sale/leaseback
structure. Additionally, the number of investors that typically
participate in transactions of this type has decreased
significantly over the past several months. Barclays Capital
believed that this did not represent a viable alternative.
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Purchase of Hiland Holdings by Hiland Partners
A transaction whereby Hiland Partners would
purchase all of the outstanding units of Hiland Holdings may
have been possible, but such transaction would not have resolved
the impending issues related to potential covenant violations
under the Hiland Operating Credit Agreement. Barclays Capital
believed that this did not represent a viable alternative.
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Additionally, in considering these various strategic
alternatives, Barclays Capital took into consideration:
(i) the likelihood of transaction consummation, including
cost and willingness of Hiland Partners and Hiland Holdings to
participate; (ii) the marketplace availability and timing
of each alternative, particularly in certain debt and equity
alternatives; (iii) counterparty availability, willingness,
and timing of each alternative, particularly in the mergers and
acquisitions alternatives; (iv) the financial impact on
Hiland Partners and Hiland Holdings; and (v) whether the
alternatives would be sufficient to resolve Hiland
Partners pending credit facility issues. In its analysis,
Barclays Capital also considered the likelihood of Hiland
Partners embarking on any given alternative; while the Hiland
Holdings Conflicts Committee holds no specific authorization to
pursue any of the alternatives, the Hiland Holdings Conflicts
Committee and Barclays Capital determined that it was important
to evaluate strategic alternatives which could potentially offer
greater value to Hiland Holdings public unitholders. After
the analysis and evaluation, Barclays Capital determined that
the following financial case alternatives were the
only alternatives which were reasonably available to Hiland
Partners (and thus Hiland Holdings).
Financial
Cases
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Status Quo:
This case was a hypothetical case
that assumed that Hiland Partners continued to operate its
business and make distributions without pursuing any strategic
alternatives. In order for this scenario to have been
applicable, industry conditions and Hiland Partners future
financial performance would have needed to improve dramatically
such that Hiland Partners would not have been in violation of
its credit facility covenants in the coming months.
Alternatively, this case would have also been applicable if
Hiland Partners existing bank group would have agreed to
waive covenant compliance for no fee or no increase in interest
cost, which Barclays Capital believed was not possible.
Accordingly, Barclays Capital only considered this case under
the upside operating scenario (as described below).
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79
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Renegotiate Credit Facility:
In this scenario,
Barclays Capital assumed Hiland Partners could renegotiate the
Hiland Operating Credit Agreement with its current bank group.
Barclays Capital assumed a 0.30 percentage point upfront
fee as well as an incremental 2.50 percentage point
increase in interest costs. This case only allowed distributions
to the extent that Hiland Partners was in compliance with its
credit facility covenants.
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Private Investment:
In this case, Barclays
Capital assumed that Mr. Hamm would invest
$125 million into Hiland Partners for the purpose of paying
down the debt outstanding under the Hiland Operating Credit
Agreement to a level that would achieve compliance with the
credit facility covenants. Barclays Capital assumed that this
private investment would be subordinated to both the existing
common units and subordinated units of Hiland Partners and would
only receive distributions in the event that Hiland Partners
paid a cash distribution above the MQD. All distributions above
the MQD would be for the benefit of this private security until
the cumulative distributions to the private security totaled
$125 million.
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Operating
Scenarios
Based on discussions with Hiland Partners and Hiland
Holdings management, Barclays Capital analyzed three
different operational scenarios, as described below:
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Management Case:
Production volumes flat from
fourth quarter 2009 levels; projected NYMEX future pricing for
crude oil, natural gas and NGLs.
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Upside Case:
Production volume growth in 2010
and flat thereafter; NYMEX future pricing through the second
quarter of 2009; afterward, $80.00 per barrel of crude oil,
$8.00 per million British Thermal Units for natural gas and
12-month
historical NGLs to crude oil correlations for NGL prices.
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Downside Case:
Production decline in 2009 and
2010 with a moderate decline thereafter; NYMEX future pricing
for crude oil, natural gas and NGLs.
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Cash distribution assumptions and growth capital expenditure
assumptions vary with each alternative based on the financial
cases described below and Hiland Partners ability to
remain in compliance with its covenants under the Hiland
Operating Credit Agreement.
Barclays
Capitals Summary Valuation Analysis
Hiland Holdings only assets are partnership interests,
including incentive distribution rights, in Hiland Partners.
Accordingly, Barclays Capitals valuation of Hiland
Holdings is highly dependent on the underlying prospects and
performance of Hiland Partners. The economic assets owned by
Hiland Holdings consist of: (i) 2,321,471 common units of
Hiland Partners, (ii) 3,060,000 subordinated units of
Hiland Partners, (iii) the 2% general partner interest in
Hiland Partners, and (iv) the incentive distribution
rights. Given the organizational and ownership structure of
Hiland Holdings and Hiland Partners, any valuation of Hiland
Holdings is highly dependent on the cash distributions received
by Hiland Holdings from Hiland Partners. In any scenario where
Hiland Partners reduces or suspends cash distributions, Hiland
Holdings will receive reduced or no cash distributions. Further
affecting the valuation of Hiland Holdings is Hiland
Holdings ownership of both (i) the subordinated units
of Hiland Partners, which do not receive distributions until the
MQD and all arrearages have been paid to the common unitholders
and (ii) the incentive distribution rights, which do not
receive cash distributions unless the common unitholders are
paid the MQD and all arrearages, the subordinated units have
been paid the MQD and certain target distribution levels above
the MQD are met. When Hiland Partners distributions are lowered
below the MQD level, Hiland Holdings receives reduced cash
distributions on its common units and general partner interest,
and no cash distributions on the subordinated units and the
incentive distribution rights.
80
Following is a summary of per unit values for Hiland Holdings
based on Barclays Capitals different methodologies.
Additional description of the valuation methodologies used by
Barclays Capital can be found on the following pages.
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Valuation Methodology
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Implied Equity Value/HPGP Unit
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Discounted Cash Flow Analysis
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Upside Case: Renegotiate Credit Facility
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$
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2.20
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-
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$
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2.95
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Upside Case: Private Investment
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$
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2.28
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-
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$
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3.15
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Upside Case: Status Quo
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$
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2.99
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-
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$
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3.86
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Management Case: Private Investment
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$
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1.69
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-
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$
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2.20
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Downside Case: Private Investment
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$
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1.65
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-
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$
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2.16
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Comparable Company Analysis
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$
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0.51
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-
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$
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1.04
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Corporate & GP Holdco Transaction Analysis
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$
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2.16
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-
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$
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6.55
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Net Asset Valuations
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Comparable Transactions
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$
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0.89
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-
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$
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3.32
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Discounted Cash Flow
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$
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(1.90
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)
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-
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$
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2.31
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In connection with its analyses, Barclays Capital examined the
current and historical market trading prices of Hiland Holdings
and Hiland Partners. However, Barclays Capital has determined
that historical market prices had limited utility in the
Barclays Capital analyses because market prices existing at the
time of its analyses had been impacted, in part, by
(i) depressed general equity capital market conditions and
more specifically, depressed conditions for gathering and
processing MLPs; (ii) publicly-disclosed concerns about
Hiland Partners and Hiland Holdings ability to pay
future cash distributions; and (iii) the possible impact
the merger proposals had on the market prices for Hiland
Holdings and Hiland Partners units.
Given the overall economic and industry conditions, as well as
the challenges specific to the Hiland Companies, Barclays
Capital concluded that historical trading prices were of limited
utility in its analyses.
Discounted
Cash Flow Analysis
In order to estimate the value of Hiland Holdings, Barclays
Capital performed discounted cash flow analyses on Hiland
Holdings assuming various operating scenarios and financial
cases. A discounted cash flow analysis is a traditional
valuation methodology used to derive a valuation of an asset by
calculating the present value of estimated future
cash flows of the asset. Present value refers to the
current value of future cash flows and is obtained by
discounting those future cash flows or amounts by a discount
rate that takes into account macroeconomic assumptions and
estimates of risk, the opportunity cost of capital, expected
returns and other appropriate factors.
The discounted cash flow analysis was performed on the cash
flows expected to be received by equity holders of Hiland
Holdings and thus is necessarily based upon distributions
received from Hiland Partners. In scenarios where Hiland
Partners is unable to pay distributions, performing a discounted
cash flow analysis on Hiland Holdings is not possible. In the
management and downside operating scenarios under the
Renegotiate Credit Facility case, Barclays Capital
assumed that given the high leverage, the lenders would not
allow Hiland Partners to pay distributions until such time as
Hiland Partners was in compliance with its credit facility
covenants. Without Hiland Partners distributions, there can be
no distributions at Hiland Holdings, rendering an equity
valuation not possible. Therefore, Barclays Capital excluded
these two scenarios from the summary valuation.
The discounted cash flow analyses were performed using a
sum-of-the-parts
approach. Hiland Holdings has four separate possible cash flow
streams: (i) cash distributions on its Hiland Partners
common units; (ii) cash distributions on its subordinated
units; (iii) cash distributions on the general partner
interest and incentive distribution rights; and
(iv) general and administrative (G&A)
expenses at the Hiland Holdings level.
81
Barclays Capital performed a discounted cash flow analysis of
the projected equity cash flow distributions of Hiland Holdings
for the five fiscal years beginning January 1, 2009 and
ending December 31, 2013. These projections, dated
May 28, 2009, and disclosed beginning on page 113,
were prepared by Hiland Partners management. Barclays Capital
used the following discount rates as an estimate of the cost of
equity:
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Common Units: 17.5% - 22.5%
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Subordinated Units: 20.0% - 25.0%
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GP Cash Flows (including both the 2% general partner interest,
the incentive distribution rights and G&A expenses): 25.0%
- 30.0%
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Barclays Capital determined appropriate discount rate ranges
after taking into account a variety of factors, including
distribution yields and estimated long-term debt interest rates.
However, Barclays Capital noted that, due to the suspension of
the distributions at both Hiland Partners and Hiland Holdings,
the equity securities of Hiland Partners and Hiland Holdings did
not provide any distribution yield. Furthermore, the debt
capital markets were not available to Hiland Partners at the
time of the analysis, making any estimate of interest rates
purely hypothetical.
Barclays Capital used the perpetuity growth methodology in
determining the terminal value in the discounted cash flows.
This methodology is based on growing the projected cash flows
using assumed growth rates, as opposed to using multiple ranges
of some financial metric to determine terminal value. In
calculating the terminal values, Barclays Capital used a
perpetuity of projected equity cash flows and assumed growth
rates of: (i) 0.0% - 1.0% for the common units and
subordinated units; (ii) 0.0% - 2.0% for the G&A cash
flows; and (iii) 0.0% - 5.0% for the general partner cash
flows. The growth rates for the projected equity cash flows
beyond 2013 were based on estimated growth rates for Hiland
Partners.
After performing the discounted cash flows analysis related to
the common units, subordinated units and general partner cash
flows (including G&A expenses) of Hiland Partners, Barclays
Capital multiplied the resulting valuation by the appropriate
number of common units or subordinated units, as applicable, to
determine the aggregate value of the common units and
subordinated units of Hiland Partners held by Hiland Holdings.
Barclays Capital then added the value of the general partner
interest and incentive distribution rights and subtracted
G&A expenses value to derive a total equity value for
Hiland Holdings. This amount was then divided by the number of
outstanding Hiland Holdings common units to result in a per
common unit equity value of Hiland Holdings.
The table below shows the resulting valuations based on
discounted cash flow analyses of equity distributions at Hiland
Holdings. Barclays Capital noted that on the basis of the
discounted cash flow analysis, the transaction consideration of
$2.40 per unit was within the implied value ranges per unit. For
further detail regarding the discounted cash flow analysis and
resulting calculation of implied equity value ranges per unit,
please see pages 21 and
23-26
of
Barclays Capitals presentation to the Hiland Holdings
Conflicts Committee filed as Exhibit (c)(20) to the
Schedule 13E-3
filed by Hiland Holdings on July 1, 2009.
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Discounted Cash Flow Analysis
(Equity Value/Hiland Holdings Unit)
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Upside Case:
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Renegotiate Credit Facility
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$
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2.20
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-
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$
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2.95
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Private Investment
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$
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2.28
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-
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$
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3.15
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Status Quo
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$
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2.99
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-
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$
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3.86
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Management Case:
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Private Investment
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$
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1.69
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-
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$
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2.20
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Downside Case:
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Private Investment
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$
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1.65
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-
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$
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2.16
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82
Publicly-Derived
Valuations
In addition to the discounted cash flow analyses, Barclays
Capital also performed valuations based upon observations
regarding (i) comparable publicly traded MLPs and
comparable publicly traded general partner holding companies
(GP Holdcos) and (ii) comparable transactions
involving publicly traded MLPs and publicly traded GP Holdcos.
Selected
Comparable Company Analysis
Barclays Capital reviewed and compared specific financial and
operating data relating to Hiland Holdings with selected
companies that Barclays Capital, based on its experience in the
midstream segment of the energy industry, deemed comparable to
Hiland Holdings. The selected comparable companies (divided into
Selected GP Holdcos and Selected MLPs)
were:
Selected
GP Holdcos
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Alliance Holdings GP, L.P.
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Atlas Pipeline Holdings, L.P.
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Buckeye GP Holdings L.P.
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Crosstex Energy Inc.
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Energy Transfer Equity, L.P.
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Enterprise GP Holdings L.P.
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Inergy Holdings, L.P.
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Magellan Midstream Holdings, L.P.
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NuStar GP Holdings, LLC
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Penn Virginia GP Holdings, L.P.
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Selected
MLPs
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Atlas Pipeline Partners, L.P.
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Copano Energy, L.L.C.
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Crosstex Energy, L.P.
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DCP Midstream Partners, L.P.
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MarkWest Energy Partners, L.P.
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Regency Energy Partners LP
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Targa Resources Partners LP
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Williams Partners L.P.
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The Selected GP Holdcos were selected by Barclays Capital
because they are publicly traded general partners which for the
purposes of analysis may be considered similar to Hiland
Holdings due to organizational structure and broadly, due to the
nature of the business of the underlying MLP. The Selected MLPs
were selected because they are publicly traded partnerships with
operations which for the purposes of analysis may be considered
similar to those of Hiland Partners. However, because of the
inherent differences between the business, operations and
prospects of Hiland Holdings and Hiland Partners and those of
the selected comparable companies
,
Barclays Capital
believed that it was inappropriate to, and therefore did not,
rely solely on the quantitative results of the selected
comparable company analysis. Accordingly, Barclays Capital also
made qualitative judgments concerning differences between the
business, financial and operating
83
characteristics and prospects of Hiland Holdings, Hiland
Partners and the selected comparable companies that could affect
the public trading values of each in order to provide a context
in which to consider the results of the quantitative analysis.
Barclays Capital calculated various multiples for the Selected
GP Holdcos and used the multiples as a reference point to
develop an indicative valuation for the 2% general partner
interest and incentive distribution rights in Hiland Partners
owned by Hiland Holdings. Given the suspension of distributions,
utilizing distributable cash flow estimates results in a more
meaningful result. For the Selected GP Holdcos, Barclays Capital
utilized a range of distributable cash flow multiples (DCF
Multiples), the estimates for which were based on publicly
available Wall Street equity research. In determining
appropriate DCF Multiples for the 2% general partner interest
and incentive distribution rights, Barclays Capital calculated
the implied value of the general partner interest of each
Selected GP Holdco by first calculating the total enterprise
value of each Selected GP Holdco, then subtracting the value of
any limited partner interests owned by the Selected GP Holdco as
well as any other business assets not specifically related to
the general partner interest and incentive distribution rights
of the underlying MLP. Barclays Capital used its judgment in
determining which Selected GP Holdcos were most comparable to
Hiland Holdings in terms of business mix and subsector
participation. Currently, several of the Selected GP Holdcos are
considered to be in financial distress. Barclays Capital
analyzed the Selected GP Holdcos on an after-G&A basis,
then valued Hiland Holdings negative G&A cash flow
stream using the same multiple range. In determining appropriate
DCF Multiples for the limited partner interest owned by Hiland
Holdings, Barclays Capital analyzed the distributable cash flow
yields of the Selected MLPs, again using its judgment in
determining the most comparable companies to Hiland Partners and
using estimates based on publicly available Wall Street equity
research.
The results of this selected comparable company analysis are
summarized below:
|
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|
|
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|
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|
Selected GP Companies
Statistics and Multiples
|
Implied GP Value as Multiple of:
|
|
Median
|
|
Mean
|
|
High
|
|
Low
|
|
Hiland Holdings
|
|
2009E Distributable Cash Flow (After G&A expenses)
|
|
|
10.8
|
x
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|
10.7
|
x
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|
23.4
|
x
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|
3.0x
|
|
|
|
37.6x
|
|
For further detail regarding the multiples of 2009E
distributable cash flow (after G&A expenses) for each
Selected GP Holdco, please see page 29 of Barclays
Capitals presentation to the Hiland Holdings Conflicts
Committee filed as Exhibit (c)(20) to the
Schedule 13E-3
filed by Hiland Holdings on July 1, 2009.
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Selected MLP Companies
Statistics and Multiples
|
Distributable Cash Flow Yield:
|
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Median
|
|
Mean
|
|
High
|
|
Low
|
|
Hiland Partners
|
|
2009E Distributable Cash Flow
|
|
|
16.08
|
%
|
|
|
25.39
|
%
|
|
|
64.69
|
%
|
|
|
12.23
|
%
|
|
|
31.91
|
%
|
For further detail regarding the multiples of 2009E
distributable cash flow for each Selected MLP, please see
page 28 of Barclays Capitals presentation to the
Hiland Holdings Conflicts Committee filed as Exhibit (c)(20) to
the
Schedule 13E-3
filed by Hiland Holdings on July 1, 2009.
For the selected comparable company analysis, Barclays Capital
applied a multiple range of 2.5x 5.0x to Hiland
Holdings estimated 2009 distributable cash flow (before
G&A expenses). This multiple range was selected by Barclays
Capital after deliberation regarding the most comparable GP
Holdco peers for Hiland Holdings. This resulted in a value for
the general partner interest and incentive distribution rights
of Hiland Partners held by Hiland Holdings. Barclays Capital
applied the same multiple range to the G&A expenses. In
determining the value of the common units and subordinated units
of Hiland Partners owned by Hiland Holdings, Barclays Capital
applied a range of yields, specifically 50% 25%, to
Hiland Partners estimated 2009 distributable cash flow per
unit to derive a value per Hiland Partners common unit. Barclays
Capital noted that due to the suspension of Hiland
Partners distributions, any metric based on estimated 2009
distribution yield was not meaningful to the analysis. Barclays
Capital applied a 40% discount to the Hiland Partners
common unit value to estimate the value of a subordinated unit
of Hiland Partners. This discount, while subjective, was based
in part on Barclays Capitals industry and market
experience, investor knowledge and overall judgment. Barclays
Capital multiplied the implied value of a common unit of Hiland
Partners by the number of common units of Hiland Partners owned
by Hiland Holdings and the implied value of a
84
subordinated unit of Hiland Partners by the number of
subordinated units of Hiland Partners owned by Hiland Holdings
to result in the implied value of the Hiland Partners units
owned by Hiland Holdings. Barclays Capital then added the values
of (i) the general partner interest and incentive
distribution rights, (ii) G&A expenses, and
(iii) Hiland Partners interest, and next subtracted the net
debt at Hiland Holdings to result in the implied equity value of
Hiland Holdings. Barclays Capital then divided this value by the
number of Hiland Holdings units outstanding to derive the
implied equity value per Hiland Holdings common unit.
Barclays Capital noted that on the basis of the selected
comparable company analysis, the transaction consideration of
$2.40 per unit was above the range of implied values of $0.51 to
$1.04 per unit.
Selected
Comparable Transaction Analysis
Barclays Capital reviewed and compared the purchase prices and
financial multiples paid in selected other transactions that
Barclays Capital, based on its experience with merger and
acquisition transactions, deemed relevant. These transactions
principally involved publicly traded MLPs and GP Holdcos.
Barclays Capital chose such transactions based on, among other
things, the similarity of the applicable target companies in the
transactions to Hiland Holdings and Hiland Partners primarily
with respect to nature of business and corporate structure.
The reasons for and the circumstances surrounding each of the
selected precedent transactions analyzed were diverse, and there
are inherent differences in the business, operations, financial
conditions and prospects of Hiland Holdings and Hiland Partners
and the companies included in the selected precedent transaction
analysis. Accordingly, Barclays Capital believed that a purely
quantitative selected precedent transaction analysis would not
be particularly meaningful in the context of considering the
proposed transaction. Barclays Capital therefore made
qualitative judgments concerning differences between the
characteristics of the selected precedent transactions and the
proposed transaction which would affect the acquisition values
of the selected target companies and Hiland Holdings. In
particular, Barclays Capital noted that the majority of the
precedent transactions were consummated in different capital
market and industry conditions than at present. Generally
speaking, at the time the selected comparable transactions were
consummated, both debt and equity capital used to fund
acquisitions was more readily available and overall business
prospects were more positive than in the then-current
environment, leading to higher transaction multiples and thus,
business valuations for the selected comparable transactions.
These facts led Barclays Capital to use its judgment in
determining appropriate transaction multiples. Barclays Capital
was of the view, that in general, the differences in market
conditions between those of the selected comparable transactions
and the Hiland Holdings merger made the usefulness of the
selected comparable transactions analysis limited. In deriving
the comparable transaction valuation, Barclays Capital first
valued Hiland Partners as a whole and then calculated the
portion of that value attributable to Hiland Holdings
limited partner interest in Hiland Partners. Barclays Capital
then valued the 2% general partner interest and incentive
distribution rights in Hiland Partners owned by Hiland Holdings,
and added that value to the limited partner interest to derive a
total value for Hiland Holdings.
Barclays Capital examined the following publicly traded MLP
transactions and GP Holdco transactions:
Publicly
Traded MLP Transactions
|
|
|
|
|
Plains All American Pipeline, L.P./Pacific Energy Partners, L.P.
|
|
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|
Valero L.P./Kaneb Pipe Line Partners, L.P.
|
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|
|
Enterprise Products Partners L.P./GulfTerra Energy Partners, L.P.
|
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|
Kinder Morgan Energy Partners, L.P./Santa Fe Pacific
Pipeline Partners, L.P.
|
GP
Holdco Transactions
|
|
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|
Occidental Petroleum Corporation/Plains All American GP LLC
|
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|
|
MarkWest Energy Partners, L.P./MarkWest Hydrocarbon, Inc. &
10.3% Interest in MWE GP
|
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|
GE Energy Financial Services/Regency GP LP
|
85
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|
|
Enterprise GP Holdings L.P./Texas Eastern Products Pipeline
Company, LLC
|
|
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|
ArcLight Capital Partners, Kelso & Company and Lehman
Brothers/Buckeye GP Holdings
|
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|
Suburban Propane Partners, L.P./Suburban Energy Services Group
LLC
|
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|
Plains All American Pipeline, L.P./Pacific Energy Partners, L.P.
|
|
|
|
ONEOK, Inc./TransCanadas GP Interest in Northern Border
Partners, L.P.
|
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|
EPCO, Inc./Texas Eastern Products Pipeline Company, LLC
|
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|
EPCO, Inc./Enterprise Products GP LLC
|
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|
Valero L.P./Kaneb Services LLC
|
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|
LB Pacific, L.P./Pacific Energy Partners, L.P.
|
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|
ONEOK, Inc./Northern Plains
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|
Carlyle/Riverstone/Glenmoor, Ltd.
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|
First Reserve, Corbin Robertson and Mgmt./Arch Coal, Inc.s
G.P. Interest in Natural Resource Partners, L.P.
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|
Enterprise Products Partners L.P./GulfTerra Energy Partners, L.P.
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|
Vulcan Capital/Plains Resources Inc.
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Energy Transfer Company/U.S. Propane L.P.
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Goldman Sachs/GulfTerra Energy Partners, L.P.
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|
Madison Dearborn and Riverstone/Williams Energy Partners L.P.
|
Barclays Capital noted that there were no recent publicly traded
MLP transactions or GP Holdco transactions. Given the depressed
market environment, Barclays Capital believed that the implied
multiples associated with these transactions were not achievable
at the time of its analysis. Accordingly, Barclays Capital
applied a discount intended to reflect the potential of a
distressed sale of Hiland Partners or Hiland Holdings in
todays environment. Barclays Capital estimated this
discount to be 35% - 50%, and applied this to the derived per
unit valuation to establish the low end of the valuation range.
These discounts were derived by examining recent asset sales in
the market and the corresponding percentage decline in those
multiples relative to the multiples received in a more
normalized market environment.
Selected
MLP Transactions
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|
|
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|
Enterprise Value as a Multiple of:
|
|
Median
|
|
Mean
|
|
High
|
|
Low
|
|
2009E EBITDA
|
|
14.4x
|
|
14.7x
|
|
17.3x
|
|
12.7x
|
For further detail regarding the multiples of EBITDA for each
selected publicly traded MLP transaction upon which Barclays
Capital based its analysis, please see page 34 of Barclays
Capitals presentation to the Hiland Holdings Conflicts
Committee filed as Exhibit (c)(20) to the
Schedule 13E-3
filed by Hiland Holdings on July 1, 2009.
Selected
MLP Transactions (35% Discount)
|
|
|
|
|
|
|
|
|
Enterprise Value as a Multiple of:
|
|
Median
|
|
Mean
|
|
High
|
|
Low
|
|
2009E EBITDA
|
|
9.4x
|
|
9.6x
|
|
11.2x
|
|
8.3x
|
Selected
GP Holdco Transactions
|
|
|
|
|
|
|
|
|
Enterprise Value as a Multiple of:
|
|
Median
|
|
Mean
|
|
High
|
|
Low
|
|
2009E Distributable Cash Flow (After G&A)
|
|
12.4x
|
|
24.4x
|
|
145.7x
|
|
6.5x
|
86
For further detail regarding the multiples of distributable cash
flow for each Selected GP Holdco transaction, please see
page 35 of Barclays Capitals presentation to the
Hiland Holdings Conflicts Committee filed as Exhibit (c)(20) to
the
Schedule 13E-3
filed by Hiland Holdings on July 1, 2009.
For the selected comparable transaction analysis, Barclays
Capital applied a multiple range of 9.0x 12.0x to
Hiland Partners estimated 2009 EBITDA. This multiple range
was selected by Barclays Capital based on recent observed
transactions involving the acquisition of an MLP by another MLP.
This calculation resulted in a reference enterprise value range,
from which was subtracted Hiland Partners net debt,
resulting in a preliminary equity value for Hiland Partners.
Based on the relative percentages of distributable cash flow
attributable to the general partner and the limited partners as
a whole, Barclays Capital multiplied the aggregate equity value
by 90% to derive the value attributable to the limited partners.
Barclays Capital then applied a multiple range of
15.0x 20.0x to Hiland Holdings estimated 2009
distributable cash flow, on a pre G&A expense basis, to
derive a preliminary value for the general partner interest in
Hiland Partners owned by Hiland Holdings. Barclays Capital
utilized the same multiple range of 15.0x 20.0x for
the G&A expenses. Then, to derive the aggregate equity
value of Hiland Holdings, Barclays Capital added the value
attributable to the limited partners to the value of the general
partner interest of Hiland Holdings, and subtracted the value of
the G&A expenses and net debt of Hiland Holdings. This
implied equity value of Hiland Holdings was divided by the total
Hiland Holdings common units outstanding to result in an implied
equity value per Hiland Holdings common unit.
Barclays Capital noted that this per unit value of Hiland
Holdings represented a valuation based on transaction multiples
observed in normalized market and industry conditions. As
discussed previously, Barclays Capital was of the opinion that
at the time of its analysis, Hiland Partners and Hiland Holdings
were not operating in a normal environment, and as such, a
discount to the observed multiples was appropriate. In this
regard, Barclays Capital applied a 35% 50% discount
to derive an implied equity value of a Hiland Holdings common
unit when assuming a distressed sale. This discount, while
subjective, was based in part on Barclays Capitals
industry and market experience, investor knowledge and overall
judgment.
Barclays Capital noted that on the basis of the selected
precedent transaction analysis, the transaction consideration of
$2.40 per Hiland Holdings unit was within the range of implied
values of $2.16 to $6.55 per unit.
Net
Asset Valuation
Because of the significant disruption in the capital markets and
the challenging environment for gathering and processing MLPs,
Barclays Capital performed a net asset valuation of Hiland
Partners and Hiland Holdings in order to derive a valuation
based on the underlying business that is not dependent on cash
distributions being paid. The net asset valuation consisted of
two main components: (i) comparable gathering and
processing asset transactions and (ii) a discounted cash
flow analysis on the unlevered cash flows generated by Hiland
Partners assets.
Comparable
Asset Transactions Analysis
Barclays Capital reviewed and compared the purchase prices and
financial multiples paid in selected other asset transactions
that Barclays Capital, based on its experience with merger and
acquisition transactions, deemed relevant. Barclays Capital
chose such transactions based on, among other things, the
similarity of the applicable target assets in the transactions
to Hiland Holdings and Hiland Partners primarily with respect to
nature of business. Below are the asset transactions Barclays
Capital reviewed:
|
|
|
|
|
Spectra Energy Partners, LP/Atlas Pipeline Partners, L.P.
|
|
|
|
Eagle Rock Energy Partners, L.P./Millennium Midstream Partners,
L.P.
|
|
|
|
Regency Energy Partners LP/Nexus Gas Holdings, LLC
|
|
|
|
Targa Resources Partners LP/Targa Resources, Inc.
|
|
|
|
Copano Energy, L.L.C./Cantera Natural Gas, LLC
|
87
|
|
|
|
|
Energy Transfer Partners, L.P./Canyon Gas Resources, LLC
|
|
|
|
Atlas Pipeline Partners, L.P./Anadarko Petroleum Corporation
|
|
|
|
Momentum Energy Group, Inc./DCP Midstream Partners, L.P.
|
|
|
|
Eagle Rock Energy Partners, L.P./Laser Midstream Energy, LP
|
|
|
|
Regency Energy Partners LP/TexStar Field Services, L.P.
|
|
|
|
Enterprise Products Partners L.P./Lewis Energy Group, L.P.
|
|
|
|
Crosstex Energy, L.P./Chief Holdings, LLC
|
|
|
|
Hiland Partners, LP/Enogex Gas Gathering, L.L.C.
|
|
|
|
Southern Union Company/Sid Richardson Energy Services Co.
|
|
|
|
Eagle Rock Energy Partners, L.P./ONEOK Texas Field Services L.P.
|
|
|
|
Crosstex Energy, L.P./El Paso Corporation
|
|
|
|
Targa Resources Partners LP/Dynegy Midstream Services L.P.
|
|
|
|
Copano Energy, L.L.C./ScissorTail Energy, LLC
|
|
|
|
Atlas Pipeline Partners, L.P./Energy Transfer Partners, L.P.
|
|
|
|
Regency Gas Services L.L.C. / El Paso Corporation
|
|
|
|
MarkWest Energy Partners, L.P. / Pinnacle Natural Gas
Company
|
|
|
|
Cantera Resources Inc. / CMS Field Services, Inc.
|
|
|
|
Enbridge Energy Partners, L.P. / Cantera Resources Inc.
|
|
|
|
West Texas Gas Inc. / Sago Energy, LLC
|
|
|
|
Targa Resources Inc. / Conoco Phillips Midstream
|
|
|
|
Atlas Pipeline Partners, L.P. / Spectrum Field
Services Inc.
|
|
|
|
American Central Western Oklahoma Gas Company
L.L.C. / MarkWest Energy Partners, L.P.
|
|
|
|
Hicks, Muse, Tate & Furst Inc. / Regency Gas
Services L.L.C.
|
|
|
|
Enbridge Energy Partners, L.P. / Shell Gas
Transmission, LLC
|
|
|
|
Penn Virginia Resource Partners, L.P. / Cantera
Resources Holdings LLC
|
|
|
|
XTO Energy Inc. / Antero Resources Corporation
|
|
|
|
ONEOK, Inc. / Northern Border Partners, L.P.
|
|
|
|
Martin Midstream Partners L.P. / Woodlawn Pipeline
Company Inc.
|
|
|
|
Williams Partners L.P. / Williams Companies Inc.
|
|
|
|
Anadarko Petroleum Corporation / Western Gas Partners,
LP
|
The reasons for and the circumstances surrounding each of the
selected precedent transactions analyzed were diverse and there
are inherent differences in the business, operations, financial
conditions and prospects of Hiland Holdings and the companies
included in the selected precedent transaction analysis.
Accordingly, Barclays Capital believed that a purely
quantitative selected precedent transaction analysis would not
be particularly meaningful in the context of considering the
proposed transaction. Barclays Capital therefore made
qualitative judgments concerning differences between the
characteristics of the selected precedent transactions and the
proposed transaction which would affect the acquisition values
of the selected target companies and
88
Hiland Holdings. In particular, Barclays Capital noted that the
majority of the precedent transactions were consummated in
different capital market and industry conditions than at present.
For the selected asset transactions analysis, Barclays Capital
applied a multiple range of 7.0x 9.0x to Hiland
Partners estimated 2009 EBITDA. This multiple range was
selected by Barclays Capital based on recently observed
transactions involving the acquisition of assets by various
MLPs, generally in the midstream segment and particularly in the
gathering & processing sub-segment. This resulted in a
reference enterprise value range, from which was subtracted
Hiland Partners net debt, resulting in a preliminary
equity value for Hiland Partners. Based on the relative
percentages of distributable cash flow attributable to the
general partner and the limited partners of Hiland Holdings as a
whole, Barclays Capital multiplied the aggregate equity value by
90% to derive the value attributable to the limited partners and
10% to derive the value attributable to the general partner in
Hiland Partners owned by Hiland Holdings. Based on Hiland
Holdings ownership percentage of Hiland Partners
total common and subordinated units outstanding, Barclays
Capital calculated the value of the Hiland Partners common and
subordinated units held by Hiland Holdings, then added the value
for the general partner interest of Hiland Partners owned by
Hiland Holdings to derive a value attributable to Hiland
Holdings. From this value, Barclays Capital subtracted the value
of the Hiland Holdings G&A expense, based on the same
7.0x 9.0x multiple, as well as the net debt at
Hiland Holdings to derive an implied equity value of Hiland
Holdings. This value was then divided by the number of Hiland
Holdings common units outstanding to derive the equity
value per Hiland Holdings common unit.
After arriving at an equity valuation range for Hiland Partners,
Barclays Capital then calculated the proportion of this value
range attributable to the limited partners and the general
partner based on distributable cash flow attributable to the
limited partners and general partner of Hiland Partners.
Barclays Capital then calculated the implied value of Hiland
Holdings. Barclays Capital then subtracted the value of the
general and administrative expenses and the net debt at Hiland
Holdings to derive an equity valuation range for Hiland Holdings.
Selected
Asset Transactions
|
|
|
|
|
|
|
|
|
Enterprise Value as a Multiple of:
|
|
Median
|
|
Mean
|
|
High
|
|
Low
|
|
2009E EBITDA
|
|
9.0x
|
|
9.8x
|
|
15.4x
|
|
6.5x
|
For further detail regarding the multiples of EBITDA for each
selected asset transaction upon which Barclays Capital based its
analysis, please see
pages 31-33
of Barclays Capitals presentation to the Hiland Holdings
Conflicts Committee filed as Exhibit (c)(20) to the
Schedule 13E-3
filed by Hiland Holdings on July 1, 2009.
Barclays noted that on the basis of the selected comparable
asset transactions analysis, the transaction consideration of
$2.40 per unit was within the range of implied values of $0.89
to $3.32 per unit.
Asset
Discounted Cash Flow Analysis
Barclays Capital also performed an asset-based discounted cash
flow analysis on Hiland Partners using the Management Case
projections. This discounted cash flow analysis was performed on
the unlevered cash flows generated by Hiland Partners
assets for the five fiscal years beginning January 1, 2009
and ending December 31, 2013. Barclays Capital used
discount rates of 12% to 16% as an estimate of the weighted
average cost of capital.
In calculating the terminal values, Barclays Capital used a
perpetuity of projected unlevered free cash flows and assumed
growth rates of 1% to 3%. The growth rates for the projected
unlevered free cash flows beyond 2013 were based on estimated
growth rates for Hiland Partners assets.
After arriving at an equity valuation range for Hiland Partners,
Barclays Capital then calculated the proportion of this value
range attributable to the limited partners and the general
partner based on distributable cash flow attributable to the
limited partners and general partner of Hiland Partners.
Barclays Capital then calculated the implied value of Hiland
Holdings. Barclays Capital then subtracted the value of the
general and administrative expenses and the net debt at Hiland
Holdings to derive an equity valuation range for Hiland
89
Holdings. For further detail regarding the asset discounted cash
flow analysis and resulting calculation of implied equity value
ranges per unit, please see page 37 of Barclays
Capitals presentation to the Hiland Holdings Conflicts
Committee filed as Exhibit (c)(20) to the
Schedule 13E-3
filed by Hiland Holdings on July 1, 2009.
Valuation
Analysis Discounted Cash Flow Sensitivity
|
|
|
|
|
|
|
|
|
|
|
Management Case
|
|
|
Enterprise Value Hiland Partners
|
|
$
|
215.0
|
|
|
$
|
370.0
|
|
Net Debt
|
|
|
265.2
|
|
|
|
265.2
|
|
|
|
|
|
|
|
|
|
|
Equity Value Hiland Partners
|
|
$
|
(50.2
|
)
|
|
$
|
104.8
|
|
|
|
|
|
|
|
|
|
|
Implied Equity Value of Hiland Holdings
|
|
$
|
(41.1
|
)
|
|
|
50.0
|
|
Barclays Capital noted that on the basis of the discounted cash
flow analysis, the transaction consideration of $2.40 per unit
was above the range of implied values of ($1.90) to $2.31 per
unit.
General
Barclays Capital is an internationally recognized investment
banking firm and, as part of its investment banking activities,
is regularly engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions,
investments for passive and control purposes, negotiated
underwritings, competitive bids, secondary distributions of
listed and unlisted securities, private placements and
valuations for estate, corporate and other purposes. The Hiland
Holdings Conflicts Committee selected Barclays Capital because
of its familiarity with Hiland Partners and Hiland Holdings and
its qualifications, reputation and experience in the valuation
of businesses and securities in connection with mergers and
acquisitions generally, as well as substantial experience in
transactions comparable to the proposed transaction.
Barclays Capital is acting as financial advisor to the Hiland
Holdings Conflicts Committee in connection with the proposed
transaction. As compensation for its services in connection with
the proposed transaction, Hiland Holdings paid Barclays Capital
a fee of $250,000 upon execution of Barclays Capitals
engagement letter with the general partner of Hiland Holdings
and $1,000,000 upon the delivery of Barclays Capitals
opinion. At the sole and absolute discretion of the Hiland
Holdings Conflicts Committee, Hiland Holdings may pay Barclays
Capital a limited discretionary fee of $250,000 (in cash) based
on the Hiland Holdings Conflicts Committees evaluation of
the quality and quantity of the work performed. Hiland Holdings
has agreed to reimburse Barclays for certain of its expenses and
to indemnify Barclays Capital for certain liabilities that may
arise out of its engagement. Barclays Capital has performed
various investment banking and financial services for Hiland
Partners, Hiland Holdings, their affiliates and Parent in the
past, and may expect to perform such services in the future, and
has received, and expects to receive, customary fees for such
services. However, in the past two years, Barclays Capital has
performed only limited services for Hiland Partners, Hiland
Holdings and their affiliates, for which Barclays Capital
received no compensation.
Barclays Capital is a full service securities firm engaged in a
wide range of businesses from investment and commercial banking,
lending, asset management and other financial and non-financial
services. In the ordinary course of its business, Barclays
Capital and affiliates may actively trade and effect
transactions in the equity, debt
and/or
other
securities (and any derivatives thereof) and financial
instruments (including loans and other obligations) of Hiland
Partners, Hiland Holdings and their affiliates for its own
account and for the accounts of its customers and, accordingly,
may at any time hold long or short positions and investments in
such securities and financial instruments.
Copies of the presentation materials presented by Barclays
Capital to the Hiland Holdings Conflicts Committee in connection
with the delivery of its opinion have been filed with the SEC as
exhibits to the
Schedule 13E-3
filed by Hiland Holdings.
90
Position
of HPGP
Schedule 13E-3
Filing Persons as to the Fairness of the Hiland Holdings
Merger
Under SEC rules, Parent, HPGP Merger Sub, Continental Gas, the
Harold Hamm DST Trust, the Harold Hamm HJ Trust and
Messrs. Hamm, Griffin, Harrison and Mackie (collectively
the HPGP
Schedule 13E-3
Filing Persons) are required to provide certain
information regarding their position as to the substantive and
procedural fairness of the Hiland Holdings merger to the Hiland
Holdings public unitholders. The HPGP
Schedule 13E-3
Filing Persons are making the statements included in this
section solely for purposes of complying with such requirements.
The HPGP
Schedule 13E-3
Filing Persons views as to the fairness of the Hiland
Holdings merger should not be construed as a recommendation to
any unitholder as to how that unitholder should vote on the
proposals to approve the Hiland Holdings merger agreement and
the Hiland Holdings merger.
The HPGP
Schedule 13E-3
Filing Persons, other than Messrs. Griffin and Harrison,
did not participate in the deliberations of the Hiland Holdings
Board of Directors or the Hiland Holdings Conflicts Committee
regarding, and did not receive advice from the Hiland Holdings
Conflicts Committees legal or financial advisors as to,
the fairness of the Hiland Holdings merger. The HPGP
Schedule 13E-3
Filing Persons, other than Mr. Hamm, did not perform, or
engage a financial advisor to perform, any financial analysis
for the purposes of assessing the fairness of the Hiland
Holdings merger to the Hiland Holdings public unitholders.
Mr. Hamm engaged Wells Fargo Securities as his financial
advisor to provide certain financial advisory services with
respect to a potential acquisition by Mr. Hamm and/or
certain of his affiliates of the assets or the capital stock of
the Hiland Companies. Wells Fargo Securities did not provide an
opinion with respect to the fairness of the Hiland Holdings
merger or the Hiland Holdings merger consideration.
The discussion below of the information and factors considered
by the HPGP
Schedule 13E-3
Filing Persons is not intended to be exhaustive, but includes
the material factors considered by the HPGP
Schedule 13E-3
Filing Persons. In view of the variety of factors considered in
connection with their evaluation of the fairness of Hiland
Holdings merger, the HPGP
Schedule 13E-3
Filing Persons did not find it practicable to, and did not,
quantify or otherwise assign specific weights to the factors
considered in reaching their determination. In addition, each of
the HPGP
Schedule 13E-3
Filing Persons may have given differing weights to different
factors. On balance, the HPGP
Schedule 13E-3
Filing Persons believed that the positive factors discussed
above outweighed the negative factors discussed above and
arrived at the conclusion that the Hiland Holdings merger was
fair to the Hiland Holdings public unitholders.
Harold Hamm and the other HPGP
Schedule 13E-3
Filing Persons (with the exception of Messrs. Griffin and
Harrison), believe that the Hiland Holdings merger consideration
is substantively fair to the Hiland Holdings public unitholders
based on the following factors:
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The HPGP
Schedule 13E-3
Filing Persons view that if the adverse impact of
commodity prices on gathering and processing fundamentals and
the challenges presented by the global economic crisis persist,
Hiland Partners, and consequently Hiland Holdings, will
experience a meaningful decrease in future distributable cash
flow and will need substantial new equity capital to remain in
continued compliance with the financial covenants under the
Hiland Operating Credit Agreement. Obtaining such equity capital
in the current environment on acceptable terms does not appear
feasible and would be significantly dilutive to current
unitholders, including Hiland Holdings.
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The consideration proposed to be paid to the Hiland Holdings
public unitholders represents a 49% premium over the reported
closing sale price of $1.61 per common unit of Hiland Holdings
on May 29, 2009, the last trading day prior to the
execution of the Hiland Holdings merger agreement and a 35%
premium over the average closing sale price of $1.78 per common
unit of Hiland Holdings over the
30-day
period ending May 29, 2009.
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The consideration to be paid to the Hiland Holdings public
unitholders in the Hiland Holdings merger is all cash, thus
eliminating any uncertainty in valuing the consideration to be
received by such unitholders.
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The Hiland Holdings merger will provide liquidity for the Hiland
Holdings public unitholders without incurring brokerage and
other costs typically associated with market sales.
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The Hiland Holdings merger agreement allows the Hiland Holdings
Conflicts Committee to withdraw or change its recommendation of
the Hiland Holdings merger agreement, and to terminate the
merger agreement in certain circumstances.
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The obligations of Parent and HPGP Merger Sub to consummate the
Hiland Holdings merger are not subject to any financing
condition. Mr. Hamm has delivered to Parent the Hiland
Holdings commitment letter, pursuant to which Mr. Hamm has
committed to contribute an aggregate of approximately
$21.2 million in cash to Parent, representing the Hiland
Holdings merger consideration of approximately
$20.4 million and estimated expenses of approximately
$800,000, less the amount of cash, if any, contributed by the
Hamm family trusts to Parent or HPGP Merger Sub that is
available immediately prior to the closing of the Hiland
Holdings merger. Pursuant to its terms, Hiland Holdings is a
third-party beneficiary of the Hiland Holdings commitment letter.
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The Hiland Holdings Conflicts Committee received an opinion from
Barclays Capital to the effect that, as of the date of the
opinion and based upon and subject to the assumptions and
limitations set forth therein, the cash merger consideration of
$2.40 per common unit to be received by the holders of Hiland
Holdings common units (other than the Hiland Holdings rollover
common unitholders) pursuant to the Hiland Holdings merger
agreement was fair, from a financial point of view, to the
Hiland Holdings public unitholders. Barclays Capitals
opinion is attached to this joint proxy statement as
Annex F.
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Harold Hamm and the other HPGP
Schedule 13E-3
Filing Persons (with the exception of Messrs. Griffin and
Harrison) believe that the Hiland Holdings merger is
procedurally fair to the Hiland Holdings public unitholders
based on the following factors:
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The Hiland Holdings Conflicts Committee, which consists of
directors who are not officers, employees or controlling
unitholders of Hiland Holdings, or affiliated with the Hamm
Continuing Investors, negotiated with Mr. Hamm the terms of
the Hiland Holdings merger. The HPGP
Schedule 13E-3
Filing Persons believe that the Hiland Holdings Conflicts
Committee was therefore able to represent the interests of the
Hiland Holdings public unitholders without the potential
conflicts of interest that the foregoing relationships would
otherwise have presented.
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The general partner of Hiland Holdings retained a nationally
recognized financial advisor, Barclays Capital, to act as
financial advisor to the Hiland Holdings Conflicts Committee
which, in the Hiland Holdings Conflicts Committees view,
had no relationships that would compromise its independence.
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The Hiland Holdings Conflicts Committee retained its own legal
advisors, Fulbright and Morris Nichols, which the Hiland
Holdings Conflicts Committee determined had no relationship
creating a potential conflict.
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The Hiland Holdings Conflicts Committee and its advisors
conducted a due diligence investigation of Hiland Holdings
before commencing negotiations, which the HPGP
Schedule 13E-3
Filing Persons believe provided the Hiland Holdings Conflicts
Committee and its advisors with the information necessary to
effectively represent the interests of the Hiland Holdings
public unitholders.
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The Hiland Holdings Conflicts Committee had the authority to
reject the transaction proposed by Mr. Hamm and review and
recommend any alternative thereto.
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The Hiland Holdings merger consideration and other terms and
conditions of the Hiland Holdings merger agreement were the
result of extensive negotiations between Parent and the Hiland
Holdings Conflicts Committee and their respective financial and
legal advisors. The Hamm Continuing Investors did not
participate in or have any influence over the conclusions
reached by the Hiland Holdings Conflicts Committee or the
negotiating positions of the Hiland Holdings Conflicts Committee.
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The Hiland Holdings merger agreement and the Hiland Holdings
merger were approved unanimously by the Hiland Holdings
Conflicts Committee, which determined that the Hiland Holdings
merger agreement and the Hiland Holdings merger are advisable,
fair to, and in the best interests of, the Hiland Holdings
public unitholders. The Hiland Holdings merger agreement and the
Hiland Holdings merger
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were also recommended to the Hiland Holdings public unitholders
unanimously by the Hiland Holdings Conflicts Committee, which
further recommended that the Hiland Holdings Board of Directors
recommend approval of the Hiland Holdings merger agreement and
the Hiland Holdings merger to the Hiland Holdings public
unitholders.
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The Hiland Holdings Board of Directors approved, and recommended
that the Hiland Holdings public unitholders vote to approve, the
Hiland Holdings merger agreement and the Hiland Holdings merger.
The action by the Hiland Holdings Board of Directors represented
the unanimous approval of the directors of Hiland Holdings,
other than Messrs. Hamm and Reid who recused themselves
from voting.
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The HPGP
Schedule 13E-3
Filing Persons did not consider historical prices for Hiland
Holdings common units, including prices paid in previous
purchases by them, because such prices were supported by
different market and industry conditions than at present and a
return to such conditions was not likely in the near term. The
HPGP
Schedule 13E-3
Filing Persons also did not consider the net book value of
Hiland Holdings common units in determining the fairness of the
Hiland Holdings merger to the Hiland Holdings public unitholders
because they believe that net book value, which is an accounting
concept, does not reflect, or have any meaningful impact on, the
value of Hiland Holdings common units, which depend on cash
flows from Hiland Partners continuing operations.
Moreover, the HPGP
Schedule 13E-3
Filing Persons did not consider going concern value since the
Hiland Companies were likely to be in violation of the leverage
ratio covenant under the Hiland Operating Credit Agreement, thus
materially impairing the Hiland Companies ability to
continue operating.
Messrs. Griffin and Harrison believe that the Hiland
Holdings merger is both substantively and procedurally fair to
the Hiland Holdings public unitholders based on the factors
described in Recommendation of the Hiland
Holdings Conflicts Committee and the Hiland Holdings Board of
Directors; Reasons for Approving the Merger The
Hiland Holdings Board of Directors beginning on
page 71. In doing so, Messrs. Griffin and Harrison
expressly adopted the analyses of the Hiland Holdings Conflicts
Committee, which is discussed above.
Reasons
of Combined
Schedule 13E-3
Filing Persons for the Mergers
Under the SEC rules governing going private
transactions, each of the HLND
Schedule 13E-3
Filing Persons and the HPGP
Schedule 13E-3
Filing Persons (collectively, the Combined
Schedule 13E-3
Filing Persons) are deemed to be engaged in a going
private transaction and therefore are required to express
their reasons for the proposed mergers to the unaffiliated
unitholders, as defined in
Rule 13e-3
of the Exchange Act, of Hiland Partners and Hiland Holdings,
respectively. The Combined
Schedule 13E-3
Filing Persons are making the statements included in this
section solely for the purpose of complying with the
requirements of
Rule 13e-3
and related rules under the Exchange Act.
The Combined
Schedule 13E-3
Filing Persons decided to pursue the Hiland Partners merger and
the Hiland Holdings merger because they believe that taking the
Hiland Companies private would eliminate the exposure of the
Hiland Partners and Hiland Holdings public unitholders to
various risks and volatility that began to have serious effects
on the businesses of the Hiland Companies in the third quarter
of 2008. In particular, substantial volatility in NGL prices and
frac spreads and declines in drilling activity along Hiland
Partners systems negatively impacted the Hiland
Companies forecasted throughput volumes, midstream segment
margins and cash flows, resulting in a suspension of quarterly
distributions and a meaningful increase in the risk of a default
under the Hiland Operating Credit Agreement. In addition, the
Hiland Companies experienced significant increases in the cost
of capital and other negative effects of global economic
turmoil. Going private transactions would enable the public
unitholders to receive cash in exchange for their investments in
the Hiland Companies while avoiding the significant dilution
they would experience in connection with an equity infusion
ultimately necessary to stabilize the Hiland Companies. Further,
the Combined
Schedule 13E-3
Filing Persons believe that responding to the developments
experienced by the Hiland Companies will require tolerance for
volatility in the performance of the business of Hiland Partners
and Hiland Holdings and a willingness to make long-term
investment decisions that carry substantial risks. As private
companies, the Hiland Companies would have increased flexibility
to address these developments
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through strategies that might negatively affect short-term
results, that would not be feasible with a public unitholder
base or that may exceed the risk tolerance of public unitholders.
From September 2008 to January 2009, Messrs. Hamm, Griffin
and Harrison began a review of potential alternatives to address
the challenges and risks identified above. During this period,
consideration was given to several approaches including
maintaining the status quo, renegotiating the Hiland Operating
Credit Agreement to achieve temporary covenant relief, selling
certain existing assets to repay debt, issuing convertible
securities to repay bank debt, issuing new equity to maintain
compliance with
debt-to-equity
ratios required under the Hiland Operating Credit Agreement,
merging with a third party to alleviate credit concerns, and
engaging in going private transactions led by Mr. Hamm.
Also considered during the same time frame by Messrs. Hamm,
Griffin and Harrison was a potential subordinated debt issuance
funded by Mr. Hamm to pay down existing debt under the
Hiland Operating Credit Agreement. In subsequent meetings
through April 2009 with Wells Fargo Securities, these directors
and officers also considered a subordinated debt offering, a
rights offering and a merger of Hiland Holdings with and into
Hiland Partners in conjunction with a rights offering. Please
see Special Factors Summary of Analyses of
Wells Fargo Securities Summary of Strategic
Alternatives Analysis for a more detailed description of
each alternative.
Mr. Hamm expressly adopted the strategic alternatives
analysis prepared by Wells Fargo Securities and considered such
analysis, among other factors considered, in concluding that the
going private transactions were the best strategic alternative
then available to the Hiland Companies to maximize unitholder
value. Mr. Hamm and the other the Combined
Schedule 13E-3
Filing Persons further believe that structuring the transactions
as cash mergers is preferable to other transaction structures
because it provides the unitholders of both Hiland Partners and
Hiland Holdings with cash for all of their common units and
allows for a prompt and orderly transfer of ownership of the
common units in a single step for each company, without the
timing complexities and uncertainty associated with
interdependent tender offers.
Summary
of Analyses of Wells Fargo Securities
Mr. Hamm retained Wells Fargo Securities to act as his
financial advisor in connection with a potential acquisition by
Mr. Hamm
and/or
certain of his affiliates of the assets or capital stock of the
Hiland Companies. Over the course of several months, at the
request of Mr. Hamm, Wells Fargo Securities prepared and
updated a number of financial, comparative and other analyses
including an analysis of the various strategic alternatives
involving the Hiland Companies to assist Mr. Hamm in
pursuing such potential acquisition of the Hiland Companies. The
financial, comparative and other analyses conducted by Wells
Fargo Securities, including the analysis of the various
strategic alternatives involving the Hiland Companies, were
prepared solely for Mr. Hamms review and
consideration (other than the presentation dated as of
January 21, 2009 which was presented to the Board of
Directors of Hiland Holdings). None of the analyses conducted by
Wells Fargo Securities was intended to provide advice to any
other person including the management team the Hiland Companies,
their Boards of Directors or any unitholder of the Hiland
Companies. Below is a summary of the material strategic
alternatives analyses contained in Wells Fargo Securities
presentations made on December 18, 2008, January 5,
2009 (dated as of January 5, 2008), January 8, 2009,
March 3, 2009, March 13, 2009 and March 16, 2009,
the final presentation of Wells Fargo Securities made to
Mr. Hamm on April 16, 2009 analyzing certain financial
aspects of a going private transaction, and the material changes
made to the material financial analyses contained in Wells Fargo
Securities final presentation made to Mr. Hamm on
April 16, 2009 from the initial presentation through the
final presentation. The aforementioned summaries are provided in
this joint proxy statement solely for the purpose of complying
with applicable disclosure requirements. The following
summaries, however, do not purport to be a complete description
of the financial, comparative and other analyses performed by
Wells Fargo Securities. The preparation of financial,
comparative and other analyses is a complex analytical process
involving various determinations as to the most appropriate and
relevant methods of analysis and the application of those
methods to the particular circumstances and therefore, is not
readily susceptible to partial analysis or summary description.
Some of the summaries of the financial analyses include
information presented in tabular format. The tables must be read
together with the full text of each summary and are alone not a
complete description of Wells Fargo Securities financial
analyses. The analyses described herein, the order in which they
are presented and the results of the analyses
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do not represent relative importance or weight given to those
analyses by Wells Fargo Securities. Wells Fargo Securities
believes that selecting portions of the analyses and the factors
considered or focusing on information presented in tabular
format, without considering all analyses and factors, the
narrative description and the full text of the analyses, could
create a misleading or incomplete view of the processes
underlying Wells Fargo Securities analyses. The fact that
any specific analysis has been referred to in the summary below
is not meant to indicate that such analysis was viewed as any
more significant or was or should be given any greater weight
than any other analysis in any presentation. The presentations
of Wells Fargo Securities are filed as Exhibits 4 through
16 of the
Schedule 13e-3
filed by Hiland Partners and as Exhibits 4 through 16 of
the
Schedule 13e-3
filed by Hiland Holdings and are incorporated herein by
reference. The descriptions of the analyses below are qualified
by reference to the full text of such analyses. Copies of the
presentations may be obtained from the SEC. See Where You
Can Find More Information beginning on page 209.
Mr. Hamm did not request, and Wells Fargo Securities did
not provide, any opinion as to the fairness of the merger
consideration or any other aspect of the mergers to
Mr. Hamm, the other Hamm Continuing Investors, Hiland
Partners, the unitholders of Hiland Partners, Hiland Holdings,
the unitholders of Hiland Holdings or any other person, or any
other valuation of Hiland Partners or Hiland Holdings for the
purpose of assessing the fairness of the merger consideration or
any other aspect of the mergers to Mr. Hamm, the other Hamm
Continuing Investors, Hiland Partners, the unitholders of Hiland
Partners, Hiland Holdings, the unitholders of Hiland Holdings or
any other person.
Wells Fargo Securities has established procedures for rendering
a fairness opinion, including review of the fairness opinion and
the underlying information, comparisons and analyses by a
fairness committee composed of senior investment bankers with
relevant expertise. Because Wells Fargo Securities was not
requested to and did not render a fairness opinion, it was not
necessary to, and it did not, submit the information,
comparisons and analyses described below to a fairness opinion
committee for review, nor did Wells Fargo Securities follow all
of the procedures that it ordinarily follows in connection with
rendering a fairness opinion. Had Wells Fargo Securities been
requested to provide an opinion or been requested to recommend
or provide support for a fair or appropriate valuation of Hiland
Partners
and/or
Hiland Holdings securities and submitted the information,
comparisons and analyses in its presentations to its full
fairness opinion process, including review by a fairness
committee, the information, comparisons and analyses presented
by Wells Fargo Securities following that process may have been
different from those included in the presentations and described
below.
Wells Fargo Securities delivered its analyses for the
information of Mr. Hamm in connection with his
consideration of the Hiland Partners merger and the Hiland
Holdings merger. Wells Fargo Securities did not make, and its
analyses do not constitute, a recommendation to Mr. Hamm or
any other person or as to how any Hiland Partners or Hiland
Holdings unitholder should vote with respect to the Hiland
Partners merger, the Hiland Holdings merger, or any other matter.
In connection with providing financial advice and preparing its
financial analysis, Wells Fargo Securities made such reviews,
analyses and inquiries as it deemed necessary and appropriate
under the circumstances. Among other things, Wells Fargo
Securities:
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Reviewed and discussed with the management of the Hiland
Companies, certain business, financial and other information,
including financial projections, regarding the Hiland Companies
that were furnished periodically to Wells Fargo Securities by
the management of the Hiland Companies.
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Reviewed certain periodic reports including financial statements
and other publicly available business and financial information
regarding the Hiland Companies.
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Reviewed the unit price and trading history of the Hiland
Companies.
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Discussed the Hiland Companies past and current
operations, financial condition and prospects with Mr. Hamm.
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Considered certain business, financial and other information
regarding the Hiland Companies and compared that information
with corresponding information for certain other publicly traded
partnerships
and/or
transactions that Wells Fargo Securities deemed relevant.
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Performed discounted cash flow analysis based upon financial
forecasts and other estimates gathered from public sources and
provided by management of the Hiland Companies, and other
assumptions discussed with and confirmed as reasonable by the
management of the Hiland Companies.
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Reviewed certain drafts of the Hiland Partners merger agreement.
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Considered other information, such as financial studies,
analyses and investigations, as well as financial, economic and
market criteria that Wells Fargo Securities deemed relevant.
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In connection with its review, Wells Fargo Securities assumed
and relied upon the accuracy and completeness of the financial
and other information reviewed by it, including all information,
analyses and assumptions relating to accounting, legal and tax
matters, and Wells Fargo Securities did not assume any
responsibility for, nor did it independently verify, such
information or physically inspect any of the Hiland
Companies assets. Wells Fargo Securities relied upon the
assurances of the management of the Hiland Companies that they
are not aware of any facts or circumstances that would make such
information about the Hiland Companies inaccurate or misleading,
Wells Fargo Securities relied upon financial forecasts, as well
as estimates, judgments, allocations and assumptions of
management of the Hiland Companies regarding the future
financial performance of the Hiland Companies furnished to it by
the management of the Hiland Companies and was advised by the
management of the Hiland Companies and assumed, at
Mr. Hamms direction, that such financial forecasts,
as well as the estimates, judgments, allocations and assumptions
upon which such financial forecasts are based, have been
reasonably formulated and reflect the best then currently
available estimates, judgments, allocations and assumptions of
the management of the Hiland Companies regarding the future
financial performance of the Hiland Companies. Wells Fargo
Securities assumed no responsibility for, and expressed no view
as to, any such financial forecasts or the estimates, judgments,
allocations or assumptions on which they were based. In
developing its financial analysis, Wells Fargo Securities did
not prepare or obtain any independent evaluations or appraisals
of the assets or liabilities of the Hiland Companies, including
any contingent liabilities, nor was Wells Fargo Securities
provided with any such evaluations or appraisals. Unless
otherwise stated, Wells Fargo Securities also assumed that there
had been no material changes in the condition (financial or
otherwise), results of operations, business or prospects of the
Hiland Companies since the date of the last financial statements
provided to it. In addition, Wells Fargo Securities did not
consider or analyze the price at which the securities of the
Hiland Companies may trade following the announcement of the
mergers. Wells Fargo Securities presentations were
necessarily based on economic, market and other conditions as in
effect on, and information made available to it as of, the date
of such presentations. Hence, although subsequent developments
may affect the information contained in the presentations Wells
Fargo Securities did not assume any obligation to update, revise
or reaffirm the contents of the presentations. At the direction
of Mr. Hamm, other than with respect to the presentations
dated as of March 13, 2009, March 16, 2009 and
March 17, 2009, Wells Fargo Securities assumed the
continuation of all existing contracts with the current
customers of the Hiland Companies.
Except as otherwise set forth in this section of Summary
of Analyses of Wells Fargo Securities, Mr. Hamm
imposed no instructions or limitations on Wells Fargo Securities
with respect to the investigations made or the procedures
followed by Wells Fargo Securities.
Summary
of Strategic Alternatives Analysis
The following is a summary of the material strategic
alternatives analyses contained in Wells Fargo Securities
presentations made on December 18, 2008, January 5,
2009 (dated as of January 5, 2008), January 8, 2009,
March 3, 2009, March 13, 2009 and March 16, 2009.
Status Quo.
According to the management of
Hiland Partners, Hiland Partners was likely to be in violation
of the leverage ratio covenant under the Hiland Operating Credit
Agreement as early as June 30, 2009. Wells Fargo Securities
identified the following as potential impacts in the event that
Hiland Partners
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would not change its operations, organizational structure or
capital structure: (i) Hiland Partners general
recovery and continued compliance with its financial covenants
under the Hiland Operating Credit Agreement would likely be
dependent on a sharp increase in near term commodity prices,
(ii) in the absence of such increase in commodity prices,
distributions on Hiland Partners common units could not be
sustainable and capital expenditures would likely be curtailed,
(iii) the prospects of a capital raise could be low, and
(iv) the potential for a default under the Hiland Operating
Credit Agreement could remain high. Wells Fargo Securities also
analyzed a scenario in which Hiland Partners would discontinue
growth capital expenditures and a scenario in which Hiland
Partners would discontinue growth capital expenditures and
eliminate distributions. Under both of these scenarios,
compliance with Hiland Partners financial covenants would
still be dependent on a sharp increase in near-term commodity
prices.
Renegotiate Hiland Operating Credit
Agreement.
Wells Fargo Securities analyzed a
scenario in which Hiland Partners would renegotiate the terms of
the Hiland Operating Credit Agreement with the lenders
thereunder in an effort to secure relief from certain financial
covenants including the leverage ratio covenant. Wells Fargo
Securities identified the following considerations with respect
to such a scenario: (i) the ability to maintain Hiland
Partners asset base and the ability of all unitholders to
participate in any future upside generated by those assets, and
(ii) the protection of investors from dilution that would
occur through alternative financing alternatives. However, given
the unsuccessful attempt by Hiland Partners in November 2008 to
increase the borrowing base under the Hiland Operating Credit
Agreement on acceptable terms and the global financial crisis
regarding financial institutions, Wells Fargo Securities also
identified the following as potential impacts of such a
scenario: (i) there was a strong likelihood of disapproval
from banks who were members of the lender group to any such
renegotiation of terms, and (ii) given the magnitude of the
covenant violation, the terms on which the lenders would be
willing to renegotiate the Hiland Operating Credit Agreement
were likely to be onerous for Hiland Partners.
Sale of Selected Existing Assets.
Another
option analyzed by Wells Fargo Securities was a sale of selected
assets, the proceeds of which would be used to partially repay
existing debt under the Hiland Operating Credit Agreement. A
sale of selected assets could potentially provide proceeds to
Hiland Partners in the near term. However, given the global
credit crisis and limited ability of companies to secure
acquisition financing and the depressed equity markets, Wells
Fargo Securities identified the following considerations with
respect to a sale of selected assets: (i) the existence of
a limited universe of potential buyers, and (ii) the
anticipation that such buyers would likely seek Hiland
Partners highest quality assets in any such transaction
for a price at the low range of their valuation. This would
result in Hiland Partners becoming an entity that could be too
small to remain public. Wells Fargo Securities also analyzed
that the benefits of an asset sale would likely be mitigated by
the negative impact on the borrowing capacity under Hiland
Operating Credit Agreement.
Issuance of Convertible Security.
A further
strategic alternative analyzed by Wells Fargo Securities was the
potential issuance of a convertible security by Hiland Partners,
the proceeds of which would be used to partially repay existing
debt under the Hiland Operating Credit Agreement. If such a
transaction could be executed, it could strengthen Hiland
Partners balance sheet and allow for Hiland Partners
continued independence compared to a business combination or
strategic transaction with Mr. Hamm or a third party. Wells
Fargo Securities identified the following additional
considerations with respect to any such transaction:
(i) the need for approval of the unitholders of Hiland
Partners, (ii) likely significant dilution of ownership and
cash distributions to existing unitholders, including Hiland
Holdings, upon conversion of the security to common equity,
(iii) given the financial condition of Hiland Partners, the
existence of a potentially limited universe of investors in such
a security, and (iv) significant execution risk as a result
of the foregoing.
Issuance of Subordinated Debt.
Wells Fargo
Securities also analyzed a subordinated debt issuance by Hiland
Partners, the proceeds of which would be used to partially repay
existing debt under the Hiland Operating Credit Agreement. The
subordinated debt issuance would take the form of a subordinated
loan with a blended coupon paid in cash and
in-kind.
Such a transaction could enable Hiland Partners to make
distributions on common and subordinated units through the end
of 2011, and could give unitholders the ability to participate
in future prospects of Hiland Partners which could be positive
in the event of a recovery by Hiland Partners. A subordinated
debt issuance could likely enable Hiland Partners to preserve
its
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independence. Wells Fargo Securities identified the following
additional considerations with respect to any such transaction:
(i) such a transaction would require the consent of
existing lenders under the Hiland Operating Credit Agreement,
including their agreement to modify certain financial covenants,
(ii) even though a subordinated debt issuance was not
anticipated to result in an immediate dilution of unitholders,
it would likely need to be refinanced with new equity, which
would lead to significant dilution of ownership and cash
distributions to unitholders, including Hiland Holdings, and
(iii) given the financial condition of Hiland Partners,
there would likely be a potentially limited universe of
investors in such a security.
Issuance of New Common Equity.
Wells Fargo
Securities also analyzed the possibility of Hiland Partners
issuing new common equity to the public, the proceeds of which
would be used to partially repay existing debt under the Hiland
Operating Credit Agreement. If such a transaction could be
executed, it could strengthen Hiland Partners balance
sheet and allow for Hiland Partners continued
independence. Wells Fargo Securities identified the following as
potential impacts of any such transaction: (i) such a
transaction would result in dilution of ownership and cash
distributions to existing unitholders and would likely require
their approval, (ii) issuance of new common equity to the
public could permanently impair the value of Hiland
Partners subordinated units and incentive distribution
rights (all of which are owned by Hiland Holdings) by increasing
the number of common units that would be entitled to receive
minimum quarterly distribution (and arrearages) prior to any
distributions on the subordinated units and incentive
distribution rights, and (iii) the size of equity
transaction required to achieve financial covenant compliance
could be challenging given the existing equity market
capitalization, float and financial condition of Hiland
Partners. As a result of the foregoing and given the high
volatility of public equity markets, this alternative possessed
significant execution risk.
Merger with Third Party.
Wells Fargo
Securities also analyzed the possibility of merging Hiland
Partners with an unaffiliated third party, which could generate
synergies and potentially alleviate concerns related to the
Hiland Operating Credit Agreement. Such merger transaction could
preserve unitholder participation in the event of a future
recovery, provide business and financial diversification and
mitigate operational and financial risk. Wells Fargo Securities
identified the following as additional considerations with
respect to any such transaction: (i) given the financial
condition of Hiland Partners, there could be a potentially
limited universe of investors, and (ii) any such merger
transaction would likely result in the loss of control of the
surviving entity by Mr. Hamm, who had indicated that he was
interested only in acquiring common units of Hiland Partners and
not selling his interest in Hiland Partners.
Rights Offering.
An additional strategic
alternative analyzed by Wells Fargo Securities was a rights
offering by Hiland Partners, the proceeds of which would be used
to partially repay existing debt under the Hiland Operating
Credit Agreement. Under the contemplated rights offering,
existing unitholders would be issued rights on a pro rata basis
to acquire newly issued common units of Hiland Partners. In
addition, Mr. Hamm would act as the standby purchaser in
the offering. Existing unitholders who had an interest could
maintain their relative percentage ownership of Hiland Partners
by exercising their rights to purchase common units issued by
Hiland Partners at a discount to the public trading price. Such
a transaction could potentially result in a smaller cash outlay
from Mr. Hamm compared to a going private alternative.
Wells Fargo Securities identified the following as additional
potential impacts of any such transaction: (i) it would not
provide liquidity at a premium for investors who were interested
in selling their common units, (ii) it would effectively
force Hiland Holdings to raise equity to participate in the
rights offering in order to avoid dilution of its ownership
interest in Hiland Partners, (iii) it would require
approval by the unitholders; (iv) given the impaired
financial condition of Hiland Partners, the existing
unitholders participation in a rights offering would
likely be limited, (v) any such transaction would increase
the aggregate number of units of Hiland Partners and could
consequently limit the ability of Hiland Partners to pay its
minimum quarterly distribution to its common unitholders,
resulting in the obligation to pay arrearages prior to any
distributions on the subordinated units and incentive
distribution rights could be made and as a result diminishing
the value of each of the Hiland Partners common units,
subordinated units and incentive distribution rights as well as
Hiland Holdings units.
Merger of Hiland Holdings with Hiland
Partners.
Wells Fargo Securities also analyzed a
potential merger of Hiland Holdings with and into Hiland
Partners to be followed by a rights offering. By merging Hiland
Holdings with and into Hiland Partners, the organizational
structure of the Hiland Companies would be simplified and the
public company expenses of Hiland Holdings would be eliminated.
Wells Fargo Securities
98
identified the following considerations with respect to any such
transaction: (i) any such transaction presented complexity
and timing issues, (ii) there could be difficulty valuing
Hiland Holdings as a stand alone entity and determining an
exchange ratio between each Hiland Partners unit and Hiland
Holdings unit, (iii) there would likely be a need to raise
substantial equity in the
follow-up
rights offering which would result in dilution to unitholders of
the combined entity and potentially reduce any future
distributions to the unitholders of such entity, and
(iv) any such transaction would be subject to approval of
the unitholders of each of Hiland Partners and Hiland Holdings.
Going Private Transactions.
Wells Fargo
Securities analyzed a potential going private transaction of
each of Hiland Partners and Hiland Holdings. Such transactions
would potentially provide investors in the Hiland Companies with
greater transaction certainty, liquidity at a premium at a time
when Hiland Partners financial condition was considered to
be impaired and Hiland Partners was expected to violate certain
of its financial covenants, including the leverage ratio
covenant. Wells Fargo Securities identified the following
additional considerations with respect to any such transaction:
(i) it would prevent current public unitholders from
participating in the future prospects and risks of equity
ownership in the Hiland Companies, (ii) the Hiland
Companies could operate without the constraints, including
costs, of being a public company, retain cash flows (instead of
paying quarterly cash distributions) and pursue long-term
projects, and (iii) as notified by MidFirst Bank,
Mr. Hamm would likely be required to contribute substantial
new equity to reduce existing debt of Hiland Partners and
negotiate revisions to the Hiland Operating Credit Agreement.
Summary
of Financial Analyses
The following is a summary of the material financial analyses
contained in Wells Fargo Securities final presentation
made to Mr. Hamm on April 16, 2009. The summary of the
selected comparable transactions analysis is based in part on
information included in Wells Fargo Securities
presentation on January 5, 2009 (dated as of
January 5, 2008), which was referenced in summary format
and updated in Wells Fargo Securities final presentation
made to Mr. Hamm on April 16, 2009. Management of the
Hiland Companies provided Wells Fargo Securities financial
projections to assist Wells Fargo Securities in performing its
financial analysis. These financial projections consisted of
managements estimates with respect to the Hiland
Companies future financial performance for the years 2009
through 2013 based on numerous assumptions made by management of
the Hiland Companies, which are described in more detail under
the heading Projected Financial Information, below.
Selected Comparable Transactions Analysis.
For
reference purposes only, using publicly available information,
including research analysts estimates and public filings,
Wells Fargo Securities reviewed the following six selected
transactions involving midstream MLPs announced during 2008:
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|
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Announcement Date
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Acquiror
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Seller
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December 8, 2008
|
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Duncan Energy Partners, L.P.
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Enterprise Products Partners, L.P.
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November 11, 2008
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Western Gas Partners, LP
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Anadarko Petroleum Corporation
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September 17, 2008
|
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El Paso Pipeline Partners, L.P.
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El Paso Corporation
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September 16, 2008
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Eagle Rock Energy Partners, L.P.
|
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Millennium Midstream Partners, L.P.
|
August 28, 2008
|
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Kinder Morgan Energy Partners, L.P.
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Knight Inc.
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April 30, 2008
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Sunoco Logistics Partners L.P.
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Mobil Pipe Line Company
|
Wells Fargo Securities reviewed, among other things, the
aggregate consideration paid to sellers in the selected
transactions as a multiple of estimated EBITDA which fell in a
range between 6.5x and 9.8x. Wells Fargo Securities then applied
a range of estimated 2009 EBITDA multiples of 7.0x to 9.0x
derived from the estimated EBITDA multiples range for the
selected transactions, to managements March 31, 2009
estimates of Hiland Partners 2009 projected EBITDA of
$41.1 million (please see Special Factors
Projected Financial Information Projected Financial
Data for Hiland Partners (Provided on April 1, 2009),
beginning
99
on page 111). Financial data for the selected transactions
were based on public filings and publicly available financial
information at the time of announcement of the relevant
transaction. Financial data for Hiland Partners consisted of
managements March 31, 2009 estimates (please see
Special Factors Projected Financial
Information Projected Financial Data for Hiland
Partners (Provided on April 1, 2009), beginning on
page 111). This analysis resulted in the following implied
per unit equity reference ranges for Hiland Partners as of
April 16, 2009:
Implied
Hiland Partners Common Unit Equity Reference Range
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Common and Subordinated Units aggregate
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$
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1.71 - $10.34
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Common Units only
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$
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2.52 - $15.21
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|
Based on the number of Hiland Partners common and subordinated
units owned by Hiland Holdings, Wells Fargo Securities derived
the following implied per unit equity reference ranges for
Hiland Holdings, as compared to the $2.49 closing price for
Hiland Holdings common units as of April 14, 2009:
Implied
Hiland Holdings Common Unit Equity Reference Range
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|
|
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Common and Subordinated Units aggregate
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$
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0.44 - $2.67
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Common Units only
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$
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0.29 - $1.77
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|
Comparable Partnership Analysis.
Using
publicly available information, including research
analysts estimates and public filings, Wells Fargo
Securities reviewed and compared specific financial, operating
and equity market data, including the closing price, the implied
market value of equity, implied firm value, distributions per
unit, each partnerships then current general partner tier
for distributions and the distributions received by each
partnerships general partner from its general partner
interest and from any incentive distribution rights shown as a
percentage of each partnerships total distributions
relating to Hiland Partners with that of the following selected
publicly traded gas gathering and processing MLPs that Wells
Fargo Securities deemed comparable to Hiland Partners:
Comparable
Midstream Companies and Partnerships
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Atlas Pipeline Partners, L.P.
|
|
MarkWest Energy Partners, L.P.
|
Copano Energy, L.L.C.
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Quicksilver Gas Services LP
|
Crosstex Energy, L.P.
|
|
Regency Energy Partners LP
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DCP Midstream Partners, LP
|
|
Targa Resources Partners LP
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Eagle Rock Energy Partners,L.P.
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|
Western Gas Partners, LP
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Exterran Partners, L.P.
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Williams Partners L.P.
|
For each of the partnerships listed above, as well as Hiland
Partners, Wells Fargo Securities derived and analyzed current
yield percentages and valuation multiples, including
(i) distributable cash flow (defined as net income plus
depreciation and amortization and other non-cash items less
maintenance capital expenditures) for the calendar years ending
December 31, 2009 and 2010 divided by total current
distributions; (ii) implied firm value (defined as common
and subordinated units multiplied by the market price of common
units) divided by adjusted EBITDA (defined as earnings before
interest, tax, depreciation and amortization less distributions
to the general partner) (based on First Call consensus
estimates) for the calendar years ending December 31, 2009
and 2010; and (iii) net debt divided by EBITDA (based on
First Call consensus estimates) for the calendar year ending
December 31, 2009. The analysis was compiled using publicly
available information, including closing equity market data as
of April 14, 2009 and First Call consensus estimates for
EBITDA for the comparable partnerships and both publicly
available information and managements March 31, 2009
estimates of Hiland Partners projected EBITDA and net debt
(please see Special Factors Projected
Financial Information Projected Financial Data for
Hiland Partners (Provided on April 1, 2009),
beginning
100
on page 111). The following table presents the results of
this analysis with respect to the comparable partnerships
selected by Wells Fargo Securities:
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|
|
|
|
|
|
|
|
|
|
|
|
|
Distributable Cash Flow /
|
|
Implied Firm Value /
|
|
Net Debt /
|
|
|
Current
|
|
Total Distributions
|
|
Adjusted EBITDA
|
|
EBITDA
|
Comparable Partnerships
|
|
Yield
|
|
2009E
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|
2010E
|
|
2009E
|
|
2010E
|
|
2009E
|
|
Mean
|
|
18.5%
|
|
1.1x
|
|
1.5x
|
|
8.2x
|
|
7.0x
|
|
4.4x
|
Median
|
|
15.9%
|
|
1.1x
|
|
1.4x
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|
8.2x
|
|
7.0x
|
|
4.2x
|
The following table presents the results of this analysis with
respect to Hiland Partners:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributable Cash Flow /
|
|
Implied Firm Value /
|
|
Net Debt /
|
|
|
|
|
Total Distributions
|
|
Adjusted EBITDA
|
|
EBITDA
|
Hiland Partners
|
|
Current Yield
|
|
2009E
|
|
2010E
|
|
2009E
|
|
2010E
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|
2009E
|
|
First Call consensus estimates
|
|
23.1%
|
|
1.1x
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|
2.0x
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|
7.2x
|
|
5.6x
|
|
5.5x
|
Management projections
|
|
NA
|
|
NA
|
|
NA
|
|
8.4x
|
|
7.8x
|
|
6.6x
|
Discounted Cash Flow Analysis.
Wells Fargo
Securities performed a discounted cash flow analysis of Hiland
Partners using managements March 31, 2009 estimates
of Hiland Partners 2009 through 2013 projected EBITDA
(please see Special Factors Projected
Financial Information Projected Financial Data for
Hiland Partners (Provided on April 1, 2009),
beginning on page 111). In conducting this analysis, Wells
Fargo Securities arrived at the discounted cash flow by adding
the projected unlevered free cash flows calculated by
subtracting working capital usage, maintenance capital
expenditures, expansion capital expenditures and other long-term
liabilities from projected EBITDA for Hiland Partners and a
terminal value calculated as a 9.0x multiple of 2013 projected
EBITDA. The projections were accepted without any adjustment for
risks or circumstances that might cause actual results to vary
from them. The projected free cash flows and implied terminal
value indications were discounted using a rate of 20% to arrive
at the estimated present enterprise value for Hiland Partners as
of April 16, 2009. From this enterprise value, Wells Fargo
Securities derived an implied per unit value for both Hiland
Partners common and subordinated units aggregated together
and Hiland Partners common units as a separate class. The
following table presents the results of this analysis:
Implied
Equity Value Per Unit Based Upon Discounted Cash Flow
Analysis
(assuming 9.0x exit multiple and 20% discount rate)
|
|
|
|
|
Common and Subordinated Units aggregate
|
|
$
|
3.21
|
|
Common Units only
|
|
$
|
4.73
|
|
Wells Fargo Securities also performed a sensitivity analysis of
the discounted cash flow analysis using discount rates ranging
between 10% and 25% and multiples of 2013 projected EBITDA
ranging between 7.0x and 11.0x. This resulted in implied per
unit values for Hiland Partners common and subordinated
units aggregated together ranging between $22.67 and minus $5.72
and for Hiland Partners common units as a separate class
ranging between $33.37 and minus $8.42.
EBITDA Analysis.
Wells Fargo Securities
compared managements January 16, 2009 (please see
Special Factors Projected Financial
Information Projected Financial Data for Hiland
Partners (Provided on February 13, 2009), beginning
on page 108) and March 31, 2009 (please see
Special Factors Projected Financial
Information Projected Financial Data for Hiland
Partners (Provided on April 1, 2009), beginning on
page 111) estimates of Hiland Partners 2009 to 2013
projected EBITDA. The differences in projected EBITDA and the
decrease in the implied terminal value calculated as a 9.0x
multiple of the difference in 2013 projected EBITDA were
discounted at a rate of 20% which resulted in a present value
total decrease of $14.5 million from the January 16,
2009 projections. This analysis implied a total decrease per
Hiland Partners unit of $1.52, including common units,
subordinated units and general partner interest. Based on the
number
101
of Hiland Partners common units owned by Hiland Holdings, Wells
Fargo Securities derived an implied total decrease per Hiland
Holdings common unit of $0.39.
Liquidation Analysis.
Wells Fargo Securities
utilized March 31, 2009 management estimates of Hiland
Partners EBITDA for the calendar year ending
December 31, 2009 (please see Special
Factors Projected Financial Information
Projected Financial Data for Hiland Partners (Provided on
April 1, 2009), beginning on page 111) to
evaluate an estimated liquidation value per Hiland Partners
common unit, Hiland Partners subordinated unit and Hiland
Holdings common unit. Assuming a range of multiples of total
enterprise value over projected EBITDA from 6.0x to 8.5x, Wells
Fargo Securities arrived at a range of implied liquidation
prices for Hiland Partners of between $246.9 million and
$349.7 million. Wells Fargo Securities then reduced the
implied liquidation prices by management projections of Hiland
Partners net debt of $272.3 million as of June 30,
2009. This analysis resulted in a range of implied Hiland
Partners liquidation value ranging between $11.94 and minus
$3.93 per common unit and $0.00 per subordinated unit.
Based on the number of Hiland Partners common units owned by
Hiland Holdings, Wells Fargo Securities derived a range of
implied Hiland Holdings liquidation value ranging between $1.39
and minus $0.46 per common unit.
Purchase Price Analysis.
Based on publicly
available information and March 31, 2009 management
estimates of Hiland Partners EBITDA (adjusted for
projected savings due to the elimination of certain costs
related to being a public partnership) for the calendar years
ending December 31, 2009 and December 31, 2010 (please
see Special Factors Projected Financial
Information Projected Financial Data for Hiland
Partners (Provided on April 1, 2009), beginning on
page 111), and based on a purchase price of $7.78 per
Hiland Partners common unit (the unit price as of the close of
business on April 14, 2009) and $2.49 per Hiland Holdings
common unit (the unit price as of the close of business on
April 14, 2009), Wells Fargo Securities calculated the
implied enterprise value of Hiland Partners at
$345.8 million and the total implied enterprise value of
Hiland Partners and Hiland Holdings in the aggregate at
$357.0 million. Wells Fargo Securities then divided the
implied enterprise value of Hiland Partners by EBITDA or
projected EBITDA, as applicable, for the calendar years ending
December 31, 2008, December 31, 2009 and
December 31, 2010 and obtained multiples of 5.2x, 8.3x and
7.6x, respectively. Wells Fargo Securities then divided the
total implied enterprise value of Hiland Partners and Hiland
Holdings in the aggregate by EBITDA or projected EBITDA, as
applicable, for the last twelve months and the calendar years
ending December 31, 2008, December 31, 2009 and
December 31, 2010 and obtained multiples of 5.2x, 5.3x,
8.6x and 7.8x, respectively. Wells Fargo Securities then
performed a sensitivity analysis of the total enterprise value
of Hiland Partners and Hiland Holdings in the aggregate over
EBITDA multiples based on unit prices ranging between $5.00 and
$9.50 per Hiland Partners common unit and between $1.50 and
$3.20 per Hiland Holdings common unit. This analysis resulted in
total enterprise value of Hiland Partners and Hiland Holdings in
the aggregate over EBITDA multiples ranging between 7.8x and
9.1x based on estimates of Hiland Partners EBITDA for the
calendar year ending December 31, 2009 and total enterprise
value over EBITDA multiples ranging between 7.1x and 8.3x based
on estimates of Hiland Partners EBITDA for the calendar
year ending December 31, 2010.
Summary
of Preliminary Financial Analyses
Prior to April 16, 2009, Wells Fargo Securities prepared a
number of presentations for Mr. Hamm. The presentations
made by Wells Fargo Securities on December 18, 2008,
January 5, 2009 (dated as of January 5, 2008),
January 8, 2009, January 21, 2009 (presented to the
Board of Directors of Hiland Holdings), March 3, 2009,
March 3, 2009, March 13, 2009 and March 16, 2009
included some of the material financial analyses contained in
Wells Fargo Securities final presentation made to
Mr. Hamm on April 16, 2009, which financial analyses
were based on managements then current projections and
publicly available information as of the respective dates of
each such presentation. The following is a summary of the
material changes made to such financial analyses from
presentation to presentation, starting with the
December 18, 2008 presentation.
The December 18, 2008 presentation included a purchase
price analysis similar to that described above under
Summary of Analyses of Wells Fargo Securities
Summary of Financial Analyses Purchase Price
Analysis. Based on publicly available information and
managements base case and upside case estimates of EBITDA
(adjusted for projected savings due to the elimination of
certain costs related to being a public partnership) of
$41.2 million and $62.0 million, respectively, for the
calendar year ending December 31, 2009,
102
and assuming a purchase price of $7.80 per Hiland Partners
common unit and $2.77 per Hiland Holdings common unit, Wells
Fargo Securities calculated the implied enterprise value of
Hiland Partners at $329.6 million and the total implied
enterprise value of Hiland Holdings and Hiland Partners in the
aggregate at $390.2 million. Wells Fargo Securities then
divided the implied enterprise value of Hiland Partners by
projected EBITDA in the base case and the upside case for the
calendar year ending December 31, 2009 and obtained
multiples of 8.0x and 5.3x, respectively. Wells Fargo Securities
then divided the total implied enterprise value of Hiland
Partners and Hiland Holdings in the aggregate by projected
EBITDA in the base case and the upside case for the calendar
year ending December 31, 2009 and obtained multiples of
9.5x and 6.3x, respectively. Wells Fargo Securities then
performed a sensitivity analysis of these multiples based on
unit prices ranging between $7.80 and $11.05 per Hiland Partners
common unit and $2.77 and $4.16 per Hiland Holdings common unit.
This analysis resulted in total enterprise value of Hiland
Holdings and Hiland Partners in the aggregate over EBITDA
multiples ranging between 9.5x and 10.9x based on
managements estimates of Hiland Partners EBITDA in the
base case, and total enterprise value of Hiland Holdings and
Hiland Partners in the aggregate over EBITDA multiples ranging
between 6.3x and 7.3x based on managements estimates of
Hiland Partners EBITDA in the upside case. In addition, the
December 18, 2008 presentation included a selected
comparable transactions analysis similar to that described above
under Summary of Analyses of Wells Fargo
Securities Summary of Financial Analyses
Selected Comparable Transactions Analysis which focused on
the same six selected transactions described thereunder. On the
basis of such analysis, and relying on publicly available
information and managements base case and upside case
estimates of EBITDA of $40.2 million and
$61.0 million, respectively, for the calendar year ending
December 31, 2009, Wells Fargo Securities obtained implied
per unit equity reference ranges for Hiland Partners of between
$2.58 and $11.18 and between $18.13 and $31.18, respectively.
The January 5, 2009 (dated as of January 5,
2008) presentation updated the purchase price analysis from
the December 18, 2008 presentation to reflect
managements then current base case estimate of EBITDA
(adjusted for projected savings due to the elimination of
certain costs related to being a public partnership) of
$42.4 million for the calendar year ending
December 31, 2009. Assuming a purchase price of $6.16 per
Hiland Partners common unit and $2.37 per Hiland Holdings common
unit, Wells Fargo Securities obtained multiples of enterprise
value of Hiland Partners over projected EBITDA of 7.4x and 5.0x,
respectively, based on managements estimates of EBITDA in
the base case and the upside case for the calendar year ending
December 31, 2009, and multiples of total enterprise value
of Hiland Partners and Hiland Holdings in the aggregate over
projected EBITDA of 8.6x and 5.9x, respectively, based on
managements estimates of EBITDA in the base case and the
upside case for the calendar year ending December 31, 2009.
Wells Fargo Securities then performed a sensitivity analysis of
these multiples based on unit prices ranging between $6.16 and
$8.72 per Hiland Partners common unit and $2.37 and $3.56 per
Hiland Holdings common unit. This analysis resulted in total
enterprise value of Hiland Holdings and Hiland Partners in the
aggregate over EBITDA multiples ranging between 8.6x and 9.7x
based on managements estimates of Hiland Partners EBITDA
for the calendar year ending December 31, 2009 in the base
case and total enterprise value of Hiland Holdings and Hiland
Partners in the aggregate over EBITDA multiples ranging between
5.9x and 6.7x based on managements estimates of Hiland
Partners EBITDA for the calendar year ending December 31,
2009 in the upside case. In addition, the January 5, 2009
presentation updated the selected comparable transactions
analysis from the December 18, 2008 presentation to reflect
managements then current base case estimate of EBITDA for
the calendar year ending December 31, 2009 of
$41.4 million. Based on the same publicly available
information and managements base case and upside case
estimates of EBITDA of $41.4 million and
$61.0 million, respectively, for the calendar year ending
December 31, 2009, Wells Fargo Securities obtained implied
per unit equity reference ranges for Hiland Partners of between
$3.46 and $12.32 based on managements estimates of Hiland
Partners EBITDA for the calendar year ending December 31,
2009 in the base case and between $18.12 and $31.17 based on
managements estimates of Hiland Partners EBITDA for the
calendar year ending December 31, 2009 in the upside case.
The January 8, 2009 presentation updated the purchase price
analysis from the January 5, 2009 (dated as of
January 5, 2008) presentation to reflect assumed
purchase prices of $13.24 per Hiland Partners common unit and
$4.65 per Hiland Holdings common unit. Assuming these purchase
prices, and based on managements then current estimates of
EBITDA (adjusted for projected savings due to the elimination of
103
certain costs related to being a public partnership) of
$42.4 million and $62.0 million in the base case and
the upside case, respectively, for the calendar year ending
December 31, 2009, Wells Fargo Securities obtained
multiples of enterprise value of Hiland Partners over projected
EBITDA of 8.9x and 6.1x, respectively, and multiples of total
enterprise value of Hiland Partners and Hiland Holdings in the
aggregate over projected EBITDA of 11.3x and 7.7x, respectively.
Wells Fargo Securities then performed a sensitivity analysis of
these multiples based on unit prices ranging between $13.24 and
$18.75 per Hiland Partners common unit and $4.65 and $6.98 per
Hiland Holdings common unit. This analysis resulted in total
enterprise value of Hiland Holdings and Hiland Partners in the
aggregate over EBITDA multiples ranging between 11.3x and 13.7x
based on managements estimates of Hiland Partners EBITDA
for the calendar year ending December 31, 2009 in the base
case and total enterprise value Hiland Holdings and Hiland
Partners in the aggregate over EBITDA multiples ranging between
7.7x and 9.4x based on managements estimates of Hiland
Partners EBITDA for the calendar year ending December 31,
2009 in the upside case.
The January 21, 2009 presentation made to the Board of
Directors of Hiland Holdings updated the purchase price analysis
from the January 8, 2009 presentation made to
Mr. Hamm. Based on EBITDA for the last twelve months ended
September 30, 2008 of $68.5 million and
managements estimates of EBITDA of $67.3 million and
$44.4 million, respectively, for the calendar years ending
December 31, 2008 and December 31, 2009 (please see
Special Factors Projected Financial
Information Projected Financial Data for Hiland
Partners (Provided on February 13, 2009), beginning
on page 108) and a purchase price of $9.50 per Hiland
Partners common unit and $3.20 per Hiland Holdings common unit,
Wells Fargo obtained multiples of enterprise value of Hiland
Partners over EBITDA of 5.0x, 5.1x and 7.8, respectively, and
multiples of total enterprise value of Hiland Partners and
Hiland Holdings in the aggregate over EBITDA of 6.0x, 6.1x and
9.3x, respectively.
The March 3, 2009 presentation updated the purchase price
analysis from the January 21, 2009 presentation to reflect
managements February 20, 2009 estimates for EBITDA of
$67.0 million for the calendar year ending
December 31, 2008 and estimated EBITDA of
$40.3 million and $46.0 million, respectively, for the
calendar years ending December 31, 2009 and
December 31, 2010. Assuming a purchase price of $9.50 per
Hiland Partners common unit and $3.20 per Hiland Holdings common
unit, Wells Fargo Securities obtained multiples of enterprise
value of Hiland Partners over EBITDA of 5.2x, 8.6x and 7.5x,
respectively, based on EBITDA for the calendar year ending
December 31, 2008 and estimated EBITDA for the calendar
years ending December 31, 2009 and December 31, 2010,
and multiples of total enterprise value of Hiland Partners and
Hiland Holdings in the aggregate over EBITDA of 5.3x, 5.4x, 9.0x
and 7.9x, respectively, based on the last twelve months EBITDA,
EBITDA for the calendar year ending December 31, 2008, and
estimated EBITDA for the calendar years ending December 31,
2009 and December 31, 2010. Wells Fargo Securities then
performed a sensitivity analysis of these multiples based on
unit prices ranging between $7.00 and $9.50 per Hiland Partners
common unit and between $2.20 and $3.20 per Hiland Holdings
common unit. This analysis resulted in total enterprise value of
Hiland Partners and Hiland Holdings in the aggregate over EBITDA
multiples ranging between 8.2x and 9.0x based on
managements estimates of Hiland Partners EBITDA for
the calendar year ending December 31, 2009 in the base case
and total enterprise value of Hiland Partners and Hiland
Holdings in the aggregate over EBITDA multiples ranging between
7.6x and 8.3x based on managements estimates of Hiland
Partners EBITDA for the calendar year ending
December 31, 2009 in the upside case. The March 3,
2009 presentation also included a variation on this purchase
price analysis utilizing prior management projections and
sensitivities to capital expenditures and correlations to NGL
prices.
The March 3, 2009 presentation on the status of equity
markets included a midstream comparable partnership analysis
similar to that described above under Summary of Analyses
of Wells Fargo Securities Summary of Financial
Analyses Comparable Partnership Analysis which
focused on the same midstream partnerships that it analyzed in
its April 16, 2009 final presentation. Based on the
selected comparable partnerships and their closing prices as of
February 27, 2009, and using the methodology used in the
final presentation, Wells Fargo Securities obtained (i) a
mean value of 21.1% and a median value of 22.7% for current
yield, (ii) mean values of 1.3x and 1.7x and median values
of 1.1x and 1.5x, respectively, for estimated 2009 and 2010
distributable cash flow divided by total distributions,
(iii) mean values of 7.0x and 5.7x and median values of
6.7x and 5.8x, respectively, for estimated 2009 and 2010 implied
firm value divided by
104
adjusted EBITDA (based on First Call consensus estimates), and
(iv) a mean value of 3.8x and a median value of 3.6x for
net debt divided by EBITDA (based on First Call consensus
estimates) for the calendar year ending December 31, 2009.
Wells Fargo Securities also calculated these values for Hiland
Partners as (i) 24.3% for current yield, (ii) 1.1x and
2.0x, respectively, for estimated 2009 and 2010 distributable
cash flow divided by total distributions, (iii) 6.9x and
5.1x, respectively, for estimated 2009 and 2010 implied firm
value divided by adjusted EBITDA (based on First Call consensus
estimates), and (iv) 5.4x for net debt divided by EBITDA
(based on First Call consensus estimates) for the calendar year
ending December 31, 2009.
The March 13, 2009 presentation included a liquidation
analysis similar to that described above under Summary of
Analyses of Wells Fargo Securities Summary of
Financial Analyses Liquidation Analysis. Wells
Fargo Securities utilized February 20, 2009 management
estimates of Hiland Partners EBITDA for the calendar year
ending December 31, 2009 to evaluate an estimated
liquidation value per Hiland Holdings common unit. Assuming a
range of multiples of total enterprise value over projected
EBITDA from 6.0x to 9.0x, Wells Fargo Securities arrived at a
range of implied liquidation prices for Hiland Partners of
between $260.3 million and $390.5 million. Wells Fargo
Securities then reduced the implied liquidation prices by
managements February 20, 2009 projections of Hiland
Partners net debt of $255.3 million. This analysis resulted
in a range of liquidation proceeds to unitholders of Hiland
Partners between $5.0 million and $135.2 million.
Based on the number of Hiland Partners common units owned by
Hiland Holdings, Wells Fargo Securities derived a range of
implied Hiland Holdings liquidation value ranging between $0.11
and $2.93 per Hiland Holdings common unit.
The March 16, 2009 presentation:
|
|
|
|
|
Updated the purchase price analysis from the March 3, 2009
presentation (which was not included in the March 13, 2009
presentation), to reflect managements February 20,
2009 estimates for EBITDA for the calendar year ending
December 31, 2008 and estimated EBITDA for the calendar
years ending December 31, 2009 and December 31, 2010,
respectively, of $67.0 million, $43.4 million and
$41.4 million. Assuming a purchase price of $7.00 per
Hiland Partners common unit and $1.40 per Hiland Holdings common
unit, Wells Fargo Securities obtained multiples of enterprise
value of Hiland Partners over EBITDA of 4.8x, 7.4x and 7.8x,
respectively, based on EBITDA for the calendar year ending
December 31, 2008, and estimated EBITDA for the calendar
years ending December 31, 2009 and December 31, 2010,
and multiples of total enterprise value of Hiland Partners and
Hiland Holdings in the aggregate over EBITDA of 4.6x, 4.7x, 7.3x
and 7.6x, respectively, based on last twelve months EBITDA,
EBITDA for the calendar year ending December 31, 2008 and
estimated EBITDA for the calendar years ending December 31,
2009 and December 31, 2010. Wells Fargo Securities then
performed a sensitivity analysis of these multiples based on
unit prices ranging between $5.00 and $9.50 per Hiland Partners
common unit and between $1.00 and $3.20 per Hiland Holdings
common unit. This analysis resulted in total enterprise value of
Hiland Holdings and Hiland Partners in the aggregate over EBITDA
multiples ranging between 6.9x and 8.4x based on
managements estimates of Hiland Partners EBITDA for
the calendar year ending December 31, 2009 in the base case
and total enterprise value of Hiland Holdings and Hiland
Partners in the aggregate over EBITDA multiples ranging between
6.3x and 7.7x based on estimates of Hiland Partners EBITDA
for the calendar year ending December 31, 2009 in the
upside case. In comparison to the March 3, 2009
presentation, the March 13, 2009 presentation did not
include variations on the purchase price analysis assuming prior
management projections or sensitivities to capital expenditures
or correlations to NGL prices.
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|
Included an updated midstream comparable partnership analysis
similar to that described above under Summary of Analyses
of Wells Fargo Securities Summary of Financial
Analyses Comparable Partnership Analysis which
focused on the same midstream partnerships that it analyzed in
its March 3, 2009 presentation on the status of equity
markets and April 16, 2009 final presentation (excluding
Exterran Partners, L.P.), as well as Martin Midstream Partners
L.P.. Based on the selected comparable partnerships and their
closing prices as of March 13, 2009, and using the
methodology used in its March 3, 2009 presentation on the
status of equity markets and the April 16, 2009 final
presentation, Wells Fargo Securities obtained (i) a mean
value of 21.3% and a median value of 20.0% for current yield,
(ii) mean values of 1.1x and 1.4x and median values of 1.1x
and 1.4x, respectively, for estimated
|
105
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|
2009 and 2010 distributable cash flow divided by total
distributions, (iii) mean values of 7.4x and 6.4x and
median values of 7.6x and 6.8x, respectively, for estimated 2009
and 2010 implied firm value divided by EBITDA (based on First
Call consensus estimates), and (iv) a mean value of 4.3x
and a median value of 4.1x for net debt divided by EBITDA (based
on First Call consensus estimates) for the calendar year ending
December 31, 2009. Wells Fargo Securities also calculated
these values for Hiland Partners as (i) 23.8% for current
yield, (ii) 1.1x and 2.0x, respectively, for estimated 2009
and 2010 distributable cash flow divided by total distributions,
(iii) 6.2x to 5.1x, respectively, for estimated 2009 and
2010 implied firm value divided by EBITDA (based on First Call
consensus estimates), and (iv) 4.8x for net debt to EBITDA
(based on First Call consensus estimates) for the calendar year
ending December 31, 2009.
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|
Updated its liquidation analysis from the March 13, 2009
presentation to reflect updated management estimates of EBITDA
and updated projections for net debt as of June 30, 2009.
Wells Fargo Securities utilized February 20, 2009
management estimates of Hiland Partners EBITDA for the
calendar year ending December 31, 2009 to evaluate an
estimated liquidation value per Hiland Partners common unit,
Hiland Partners subordinated unit and Hiland Holdings common
unit. Assuming a range of multiples of total enterprise value
over projected EBITDA from 6.0x to 7.5x, Wells Fargo Securities
arrived at a range of implied liquidation prices for Hiland
Partners of between $260.3 million and $325.4 million.
Wells Fargo Securities then reduced the implied liquidation
prices by management projections of Hiland Partners net debt of
$260.1 million. This analysis resulted in a Hiland Partners
liquidation value ranging between $0.03 to $8.71 per Hiland
Partners common unit and of $0.00 per subordinated unit. Based
on the number of Hiland Partners common units owned by Hiland
Holdings, Wells Fargo Securities derived a range of implied
Hiland Holdings liquidation value ranging between $0.01 and
$1.42 per Hiland Holdings common unit.
|
Miscellaneous
In performing its analyses Wells Fargo Securities considered
industry performance, general business and economic conditions
and other matters, many of which are beyond the control of the
Hiland Companies or Mr. Hamm. The estimates of the future
performance of the Hiland Companies provided by the management
of the Hiland Companies in or underlying Wells Fargo
Securities analyses are not necessarily indicative of
actual values or future results, which may be significantly more
or less favorable than those suggested by Wells Fargo
Securities analyses. These analyses were prepared solely
as part of the preparation of presentations to Mr. Hamm.
The estimates used in, and the ranges of valuations resulting
from, any particular analysis described above are inherently
subject to substantial uncertainty and should not be taken to be
Wells Fargo Securities view of the actual value of the
Hiland Companies. Therefore neither the Hiland Companies nor
Wells Fargo Securities nor any other person assumes any
responsibility if future results are materially different from
those estimated or indicated.
No partnership, transaction or business utilized in the analyses
conducted by Wells Fargo Securities is identical or directly
comparable to the Hiland Companies or the mergers. Therefore, a
purely quantitative comparable transactions analysis, comparable
partnership analysis or other quantitative analyses would not be
dispositive in the context of the Hiland Partners and Hiland
Holdings mergers, and an appropriate use of such analyses
involves qualitative judgments concerning the differences
between the characteristics of the various partnerships,
transactions or businesses and the Hiland Partners and Hiland
Holdings mergers that would affect the value of the selected
partnerships, transactions, businesses and Hiland Partners and
Hiland Holdings.
The decision to enter into the merger agreements was solely that
of Mr. Hamm and the other parties to each such merger
agreement respectively. The type and the amount of consideration
payable in the mergers were determined through negotiations
between Mr. Hamm and each of the conflicts committees, and
were not determined or recommended by Wells Fargo Securities.
Mr. Hamm selected Wells Fargo Securities as his financial
advisor because it is an internationally recognized investment
banking firm which regularly provides investment banking and
other financial advisory services in connection with mergers and
acquisitions, negotiated underwritings, secondary distributions
of
106
listed and unlisted securities and private placements, its
familiarity with the Hiland Companies and their business, and
after meeting with two other investment banking firms and
considering their respective experience in the field,
preliminary views and fee proposals.
Pursuant to the terms of Wells Fargo Securities engagement
letter, Mr. Hamm has agreed to pay Wells Fargo Securities
(i) a transaction fee of $1,000,000 payable at the closing
of a transaction for the acquisition of the Hiland Companies by
Mr. Hamm
and/or
certain of his affiliates, (ii) a discretionary fee of up
to $500,000 payable at Mr. Hamms sole option based on
Mr. Hamms determination of the quality of the
totality of the services provided, and (iii) in the event
that a transaction is not consummated and Mr. Hamm
and/or
certain of his affiliates receive a
break-up
fee, a topping fee or any other consideration as a result of the
termination of the transaction, a fee of 25% of such
consideration which in no event shall exceed $1,000,000. In
addition, Mr. Hamm has agreed to reimburse Wells Fargo
Securities for reasonable travel and other out-of-pocket
expenses incurred in connection with Wells Fargo
Securities engagement, including certain fees of outside
counsel, and to indemnify Wells Fargo Securities, its affiliates
and certain other related parties for certain liabilities that
may arise out of Wells Fargo Securities engagement by
Mr. Hamm.
Wells Fargo Securities is an affiliate of Wells
Fargo & Company, which through its subsidiaries and
affiliates provides a full range of investment and commercial
banking advice and services, including financial advisory
services; securities underwritings and placements; securities
sales and trading; brokerage advice and services; and commercial
loans. In that regard, Wells Fargo Securities
and/or
its
affiliates have in the past provided, currently are providing
and may in the future provide, investment and commercial banking
advice and financial advisory and financing or other services
to, and otherwise seek to expand or maintain its business and
commercial relationships, with Hiland Partners, the general
partner of Hiland Partners, Hiland Holdings, the general partner
of Hiland Holdings, Mr. Hamm, Parent
and/or
certain of their respective affiliates, for which Wells Fargo
Securities and its affiliates have received and would expect to
receive customary compensation; however, in the past two years,
Wells Fargo Securities has received no compensation from Hiland
Partners, Hiland Holdings, Mr. Hamm, Parent or their
affiliates. In particular, among other services, Wachovia Bank,
National Association and Wells Fargo Bank, N.A., each an
affiliate of Wells Fargo Securities, are participants in Hiland
Partners $300 million senior secured credit facility.
In the ordinary course of business, Wells Fargo Securities or
its affiliates may actively trade or hold securities or other
financial instruments including loans of Mr. Hamm, Hiland
Partners and Hiland Holdings as applicable and certain of their
respective affiliates for their own account or for the account
of their customers, and accordingly they may at any time hold
long or short positions in these securities or financial
instruments.
Wells Fargo Securities is the trade name for certain capital
markets and investment banking services of Wells
Fargo & Company and its subsidiaries, including Wells
Fargo Securities, LLC, which is a member of the Financial
Industry Regulatory Authority, Inc. and the Securities Investor
Protection Corporation.
Projected
Financial Information
As part of their annual financial planning process, the Hiland
Companies prepare a budget for their upcoming fiscal year and a
projection of operating and financial results for the five-year
period beginning with that upcoming fiscal year. While the
Hiland Companies do release annual guidance from time to time,
they do not, as a matter of course, publicly disclose their full
financial projections. Harold Hamm, however, as the controlling
equity holder and chairman of the Board of Directors of each of
the Hiland Companies, generally has access to these projections.
In connection with their consideration of the January 15
Proposal, each of the Conflicts Committees and their respective
financial advisors received certain projected financial
information, which management regularly updated to include the
most recently available information on drilling activity and
then-current forward commodity pricing. In some cases the
projections also included sensitivity analyses illustrating how
certain of the projections would change based on varying
assumptions for (i) future crude oil prices,
(ii) future natural gas prices, and (iii) the future
correlation between crude oil and NGL prices based on three-,
six-, 12- and
24-month
historical correlations.
107
Management first provided projections to the Conflicts
Committees on February 13, 2009, in connection with
managements initial presentation to the Conflicts
Committees and their advisors. All material assumptions and
projections provided by management to the Conflicts Committees
follows. These assumptions and projections were also made
available to Harold Hamm.
Projected
Financial Data for Hiland Partners
(Provided on February 13, 2009)
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2009
|
|
|
2010
|
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2011
|
|
|
2012
|
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|
2013
|
|
|
Financial Data:
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Commodity Pricing Forward Pricing as of 1/16/09
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Assumed NYMEX Gas Price(1)
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$
|
5.38
|
|
|
$
|
6.70
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|
|
$
|
7.12
|
|
|
$
|
7.27
|
|
|
$
|
7.29
|
|
Assumed NYMEX Crude Oil Price
|
|
$
|
51.72
|
|
|
$
|
62.49
|
|
|
$
|
67.10
|
|
|
$
|
70.49
|
|
|
$
|
72.50
|
|
OPIS Conway NGL Simple Average(2)
|
|
$
|
0.7475
|
|
|
$
|
0.8028
|
|
|
$
|
1.0131
|
|
|
$
|
1.0644
|
|
|
$
|
1.0947
|
|
OPIS Conway NGL Simple Average as a % of Assumed NYMEX
Crude Oil
|
|
|
61
|
%
|
|
|
54
|
%
|
|
|
63
|
%
|
|
|
63
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%
|
|
|
63
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%
|
OPIS Mont Belvieu NGL Simple Average(2)
|
|
$
|
0.7853
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|
|
$
|
0.8531
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|
|
$
|
1.0411
|
|
|
$
|
1.0937
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|
|
$
|
1.1248
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|
OPIS Mont Belvieu NGL Simple Average as a % of Assumed NYMEX
Crude Oil
|
|
|
64
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%
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|
57
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%
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|
|
65
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%
|
|
|
65
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%
|
|
|
65
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%
|
Inlet natural gas volumes (Mcf/d)
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291,139
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290,387
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291,617
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291,374
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|
|
|
291,155
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Revenues ($ in millions)
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$
|
268.3
|
|
|
$
|
329.4
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$
|
349.5
|
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$
|
359.7
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|
|
$
|
364.0
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Midstream purchases ($ in millions)
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$
|
184.7
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$
|
239.4
|
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$
|
259.6
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|
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$
|
266.2
|
|
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$
|
268.4
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Total segment margin ($ in millions)(3)
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$
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83.6
|
|
|
$
|
90.1
|
|
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$
|
89.9
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|
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$
|
93.5
|
|
|
$
|
95.6
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EBITDA ($ in millions)(4)
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$
|
44.4
|
|
|
$
|
50.2
|
|
|
$
|
51.6
|
|
|
$
|
54.1
|
|
|
$
|
55.1
|
|
Distributable cash flow ($in millions)(5).
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$
|
25.2
|
|
|
$
|
32.5
|
|
|
$
|
34.2
|
|
|
$
|
37.2
|
|
|
$
|
38.4
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|
Maintenance capital expenditures ($ in millions)
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|
$
|
7.6
|
|
|
$
|
8.5
|
|
|
$
|
8.5
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|
|
$
|
8.5
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|
|
$
|
8.5
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|
Growth capital expenditures ($ in millions)
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|
$
|
18.5
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|
|
$
|
21.5
|
|
|
$
|
21.5
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|
|
$
|
21.5
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|
|
$
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21.5
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(1)
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In determining projected revenues and midstream purchases for
2009 and 2010, management used then-current estimated forward
quotes for natural gas pipeline basis differentials. In
determining projected revenues and midstream purchases for 2011
through 2013, natural gas basis differentials were based on
their historical percentage of the NYMEX price.
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(2)
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NGL prices were based on forward quotes for 2009 and 2010 and
the trailing
12-month
historical correlations to crude oil as of December 31,
2008 for 2011 through 2013.
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(3)
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Total Segment Margin, a Non-GAAP financial measure,
is defined as revenues less midstream purchases. Management
views total segment margin as an important performance measure
of the core profitability of Hiland Partners operations
because it is directly related to Hiland Partners volumes
and commodity price changes. Please see Non-GAAP Financial
Measures of Hiland Partners.
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(4)
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EBITDA, a Non-GAAP financial measure, is defined as
net income (loss) plus interest expense, provisions for income
taxes, and depreciation, amortization and accretion expense.
Please see Non-GAAP Financial Measures of Hiland
Partners.
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(5)
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Distributable Cash Flow, a Non-GAAP financial
measure, is defined as net income (loss) plus interest expense,
provision for income taxes, depreciation, amortization and
accretion expenses less cash interest expense and maintenance
capital expenditures. Please see Non-GAAP Financial
Measures of Hiland Partners.
|
108
Management also included in its projections a calculation of the
leverage ratio under the Hiland Operating Credit Agreement based
upon the projected financial information. Managements
calculations showed that, assuming no distributions were made to
Hiland Partners unitholders, Hiland Partners
leverage ratio would be 4.98x at the end of the second quarter
of 2009, 5.68x at the end of the third quarter of 2009 and 5.81x
at the end of the fourth quarter of 2009, all in excess of the
then maximum permissible leverage ratio of 4.0x under the Hiland
Operating Credit Agreement. The projected leverage ratios were
also in excess of the maximum permissible leverage ratio of
4.75x that would be in effect upon the
step-up
of the leverage ratio that management anticipated electing
pursuant to the provisions of the Hiland Operating Credit
Agreement at the end of the first quarter. The leverage ratio
would be required to be stepped back down to 4.0x at the end of
the fourth quarter of 2009. Based on these projections,
management estimated that at least $80 million of equity
would need to be infused into Hiland Partners by
December 31, 2009 to be in compliance with the leverage
ratio covenant.
At the same meeting, management provided sensitivity analyses
illustrating how certain of the projections, including the
EBITDA projections, would change based on assumptions for
(i) future NYMEX crude oil prices ranging from $40 to $60
per barrel, (ii) future NYMEX natural gas prices ranging
from $4.00 to $7.50 per MMBtu, and (iii) the future
correlation between NYMEX crude oil and NGL prices based on
three-, six-, 12- and
24-month
historical correlations.
A summary of the sensitivity analyses management provided on
February 13, 2009 regarding 2009 EBITDA is shown below.
2009
ESTIMATED EBITDA
(Provided on February 13, 2009)
($ in million)
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Assumed NYMEX
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Assumed NYMEX Gas Price
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Historical NGL/Crude
|
Crude Oil Price
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$4.00
|
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$6.00
|
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|
$7.50
|
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Price Correlation
|
|
|
|
$
|
51.5
|
|
|
$
|
48.1
|
|
|
$
|
46.7
|
|
|
3-month
|
|
|
$
|
53.8
|
|
|
$
|
50.4
|
|
|
$
|
47.8
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|
|
6-month
|
$60.00
|
|
$
|
56.8
|
|
|
$
|
53.3
|
|
|
$
|
50.7
|
|
|
12-month
|
|
|
$
|
61.9
|
|
|
$
|
58.4
|
|
|
$
|
55.9
|
|
|
24-month
|
|
|
|
|
$
|
42.0
|
|
|
$
|
38.5
|
|
|
$
|
38.7
|
|
|
3-month
|
|
|
$
|
43.9
|
|
|
$
|
40.4
|
|
|
$
|
39.7
|
|
|
6-month
|
$50.00
|
|
$
|
46.3
|
|
|
$
|
42.9
|
|
|
$
|
40.7
|
|
|
12-month
|
|
|
$
|
50.6
|
|
|
$
|
47.2
|
|
|
$
|
44.6
|
|
|
24-month
|
|
|
|
|
$
|
32.6
|
|
|
$
|
31.4
|
|
|
$
|
30.7
|
|
|
3-month
|
|
|
$
|
34.0
|
|
|
$
|
31.8
|
|
|
$
|
31.3
|
|
|
6-month
|
$40.00
|
|
$
|
35.9
|
|
|
$
|
32.5
|
|
|
$
|
32.8
|
|
|
12-month
|
|
|
$
|
39.3
|
|
|
$
|
35.9
|
|
|
$
|
35.4
|
|
|
24-month
|
Management provided updates to the projections to each of the
Conflicts Committees and their respective advisors and to
Mr. Hamms advisors on February 23, April 1,
April 28 and May 28. Management did not provide
sensitivities analyses in connection with the updated
projections.
The projections provided to each Conflicts Committee on
February 23, 2009, are detailed below.
109
Projected
Financial Data for Hiland Partners
(Provided on February 23, 2009)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity Pricing Forward Pricing as of 2/20/09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed NYMEX Gas Price(1)
|
|
$
|
4.65
|
|
|
$
|
5.96
|
|
|
$
|
6.63
|
|
|
$
|
6.84
|
|
|
$
|
6.95
|
|
Assumed NYMEX Crude Oil Price
|
|
$
|
44.54
|
|
|
$
|
53.77
|
|
|
$
|
59.34
|
|
|
$
|
62.76
|
|
|
$
|
65.25
|
|
OPIS Conway NGL Simple Average(2)
|
|
$
|
0.7075
|
|
|
$
|
0.7442
|
|
|
$
|
0.8959
|
|
|
$
|
0.9476
|
|
|
$
|
0.9852
|
|
OPIS Conway NGL Simple Average as a % of Assumed NYMEX
Crude Oil
|
|
|
67
|
%
|
|
|
58
|
%
|
|
|
63
|
%
|
|
|
63
|
%
|
|
|
63
|
%
|
OPIS Mont Belvieu NGL Simple Average(2)
|
|
$
|
0.7221
|
|
|
$
|
0.7584
|
|
|
$
|
0.9206
|
|
|
$
|
0.9737
|
|
|
$
|
1.0124
|
|
OPIS Mont Belvieu NGL Simple Average as a % of Assumed NYMEX
Crude Oil
|
|
|
68
|
%
|
|
|
59
|
%
|
|
|
65
|
%
|
|
|
65
|
%
|
|
|
65
|
%
|
Inlet natural gas volumes (Mcf/d)
|
|
|
288,166
|
|
|
|
290,387
|
|
|
|
291,617
|
|
|
|
291,374
|
|
|
|
291,155
|
|
Revenues ($ in millions)
|
|
$
|
238.2
|
|
|
$
|
299.8
|
|
|
$
|
318.1
|
|
|
$
|
330.3
|
|
|
$
|
337.8
|
|
Midstream purchases ($ in millions)
|
|
$
|
158.8
|
|
|
$
|
214.4
|
|
|
$
|
237.5
|
|
|
$
|
246.1
|
|
|
$
|
251.0
|
|
Total segment margin ($ in millions)(3)
|
|
$
|
79.5
|
|
|
$
|
85.3
|
|
|
$
|
80.6
|
|
|
$
|
84.2
|
|
|
$
|
86.8
|
|
EBITDA ($ in millions)(4)
|
|
$
|
40.3
|
|
|
$
|
45.5
|
|
|
$
|
43.2
|
|
|
$
|
49.3
|
|
|
$
|
54.3
|
|
Distributable cash flow ($ in millions)(5)
|
|
$
|
21.0
|
|
|
$
|
27.4
|
|
|
$
|
25.0
|
|
|
$
|
31.0
|
|
|
$
|
34.9
|
|
Maintenance capital expenditures ($ in millions)
|
|
$
|
7.6
|
|
|
$
|
8.6
|
|
|
$
|
9.0
|
|
|
$
|
9.3
|
|
|
$
|
9.7
|
|
Growth capital expenditures ($ in millions)
|
|
$
|
18.5
|
|
|
$
|
21.4
|
|
|
$
|
21.0
|
|
|
$
|
20.7
|
|
|
$
|
20.3
|
|
|
|
|
(1)
|
|
In determining projected revenue and midstream purchases for
2009 and 2010, management used then-current estimated forward
quotes for natural gas pipeline basis differentials. In
determining projected revenue and midstream purchases for 2011
through 2013, natural gas basis differentials were based on
their historical percentage of the NYMEX price.
|
|
(2)
|
|
NGL prices were based on forward quotes for 2009 and 2010 and
the trailing
12-month
historical correlations to crude oil as of December 31,
2008 for 2011 through 2013.
|
|
(3)
|
|
Total Segment Margin, a Non-GAAP financial measure,
is defined as revenues less midstream purchases. Management
views total segment margin as an important performance measure
of the core profitability of Hiland Partners operations
because it is directly related to Hiland Partners volumes
and commodity price changes. Please see Non-GAAP Financial
Measures.
|
|
(4)
|
|
EBITDA, a Non-GAAP financial measure, is defined as
net income (loss) plus interest expense, provisions for income
taxes, and depreciation, amortization and accretion expense.
Please see Non-GAAP Financial Measures of Hiland
Partners.
|
|
(5)
|
|
Distributable Cash Flow, a Non-GAAP financial
measure, is defined as net income (loss) plus interest expense,
provision for income taxes, depreciation, amortization and
accretion expenses less cash interest expense and maintenance
capital expenditures. Please see Non-GAAP Financial
Measures of Hiland Partners.
|
As with the previous projections, management also included in
its projections a calculation of the leverage ratio under the
Hiland Operating Credit Agreement based upon the updated
projected financial information. Managements calculations
showed that, assuming no distributions were made to Hiland
Partners unitholders, Hiland Partners leverage ratio
would be 5.22x at the end of the second quarter of 2009, 6.15x
at the end of the third quarter of 2009 and 6.52x at the end of
the fourth quarter of 2009, all in excess of the then maximum
permissible leverage ratio of 4.0x under the Hiland Operating
Credit Agreement. The projected leverage ratios were also in
excess of the maximum permissible leverage ratio of 4.75x that
would be in effect
110
upon the
step-up
of the leverage ratio that management elected pursuant to the
provisions of the Hiland Operating Credit Agreement at the end
of the first quarter. The leverage ratio would be required to by
stepped back down to 4.0x at the end of the fourth quarter of
2009. Based on these updated projections, management estimated
that at least $103 million of equity would need to be
infused into Hiland Partners by December 31, 2009 to be in
compliance with the leverage ratio covenant.
The projections provided to each Conflicts Committee on
April 1, 2009, are detailed below.
Projected
Financial Data for Hiland Partners
(Provided on April 1, 2009)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity Pricing Forward Pricing as of 3/31/09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed NYMEX Gas Price(1)
|
|
$
|
4.44
|
|
|
$
|
5.92
|
|
|
$
|
6.68
|
|
|
$
|
6.84
|
|
|
$
|
7.00
|
|
Assumed NYMEX Crude Oil Price
|
|
$
|
50.72
|
|
|
$
|
62.69
|
|
|
$
|
67.71
|
|
|
$
|
70.13
|
|
|
$
|
72.17
|
|
OPIS Conway NGL Simple Average(2)
|
|
$
|
0.7301
|
|
|
$
|
0.7691
|
|
|
$
|
1.0224
|
|
|
$
|
1.0589
|
|
|
$
|
1.0897
|
|
OPIS Conway NGL Simple Average as a % of Assumed NYMEX Crude Oil
|
|
|
61
|
%
|
|
|
52
|
%
|
|
|
63
|
%
|
|
|
63
|
%
|
|
|
63
|
%
|
OPIS Mont Belvieu NGL Simple Average(2)
|
|
$
|
0.7730
|
|
|
$
|
0.8206
|
|
|
$
|
1.0505
|
|
|
$
|
1.0881
|
|
|
$
|
1.1197
|
|
OPIS Mont Belvieu NGL Simple Average as a % of Assumed NYMEX
Crude Oil
|
|
|
64
|
%
|
|
|
55
|
%
|
|
|
65
|
%
|
|
|
65
|
%
|
|
|
65
|
%
|
Inlet natural gas volumes (Mcf/d)
|
|
|
280,423
|
|
|
|
279,333
|
|
|
|
278,681
|
|
|
|
278,325
|
|
|
|
277,995
|
|
Revenues ($ in millions)
|
|
$
|
221.3
|
|
|
$
|
285.2
|
|
|
$
|
308.9
|
|
|
$
|
316.1
|
|
|
$
|
323.3
|
|
Midstream purchases ($ in millions)
|
|
$
|
140.8
|
|
|
$
|
201.0
|
|
|
$
|
225.5
|
|
|
$
|
231.2
|
|
|
$
|
236.5
|
|
Total segment margin ($ in millions)(3)
|
|
$
|
80.5
|
|
|
$
|
84.2
|
|
|
$
|
83.4
|
|
|
$
|
85.0
|
|
|
$
|
86.8
|
|
EBITDA ($ in millions)(4)
|
|
$
|
41.1
|
|
|
$
|
44.6
|
|
|
$
|
46.4
|
|
|
$
|
50.4
|
|
|
$
|
54.6
|
|
Distributable cash flow ($ in millions)(5)
|
|
$
|
23.8
|
|
|
$
|
26.6
|
|
|
$
|
27.5
|
|
|
$
|
31.5
|
|
|
$
|
35.7
|
|
Maintenance capital expenditures ($ in millions)
|
|
$
|
6.7
|
|
|
$
|
8.6
|
|
|
$
|
9.0
|
|
|
$
|
9.3
|
|
|
$
|
9.7
|
|
Growth capital expenditures
($ in millions)
|
|
$
|
21.2
|
|
|
$
|
21.4
|
|
|
$
|
21.0
|
|
|
$
|
20.7
|
|
|
$
|
20.3
|
|
|
|
|
(1)
|
|
In determining projected revenues and midstream purchases for
2009 and 2010, management used then-current estimated forward
quotes for natural gas pipeline basis differentials. In
determining projected revenues and midstream purchases for 2011
through 2013, natural gas basis differentials were based on
their historical percentage of the NYMEX price.
|
|
(2)
|
|
NGL prices were based on forward quotes for 2009 and 2010 and
the trailing
12-month
historical correlations to crude oil as of December 31,
2008 for 2011 through 2013.
|
|
(3)
|
|
Total Segment Margin, a Non-GAAP financial measure,
is defined as revenues less midstream purchases. Management
views total segment margin as an important performance measure
of the core profitability of Hiland Partners operations
because it is directly related to Hiland Partners volumes
and commodity price changes. Please see Non-GAAP Financial
Measures of Hiland Partners.
|
|
(4)
|
|
EBITDA, a Non-GAAP financial measure, is defined as
net income (loss) plus interest expense, provisions for income
taxes, and depreciation, amortization and accretion expense.
Please see
Non-GAAP
Financial Measures of Hiland Partners.
|
|
(5)
|
|
Distributable Cash Flow, a Non-GAAP financial
measure, is defined as net income (loss) plus interest expense,
provision for income taxes, depreciation, amortization and
accretion expenses less cash interest expense and maintenance
capital expenditures. Please see Non-GAAP Financial
Measures of Hiland Partners.
|
111
Management also included in its projections a calculation of the
leverage ratio under the Hiland Operating Credit Agreement based
upon the updated projected financial information.
Managements calculations showed that, assuming no
distributions were made to Hiland Partners unitholders,
Hiland Partners leverage ratio would be 5.21x at the end
of the second quarter of 2009, 6.07x at the end of the third
quarter of 2009 and 6.30x at the end of the fourth quarter of
2009, all in excess of the then maximum permissible leverage
ratio of 4.0x under the Hiland Operating Credit Agreement. The
projected leverage ratios were also in excess of the maximum
permissible leverage ratio of 4.75x that would be in effect upon
the
step-up
of the leverage ratio that management elected pursuant to the
provisions of the Hiland Operating Credit Agreement at the end
of the first quarter. The leverage ratio would be required to be
stepped back down to 4.0x at the end of the fourth quarter of
2009. Based on these updated projections, management estimated
that at least $95 million of equity would need to be
infused into Hiland Partners by December 31, 2009 to be in
compliance with the leverage ratio covenant.
The projections provided to each Conflicts Committee on
April 28, 2009, are detailed below.
Projected
Financial Data for Hiland Partners
(Provided on April 28, 2009)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity Pricing Forward Pricing as of 4/28/09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed NYMEX Gas Price(1)
|
|
$
|
4.16
|
|
|
$
|
5.78
|
|
|
$
|
6.69
|
|
|
$
|
7.10
|
|
|
$
|
7.23
|
|
Assumed NYMEX Crude Oil Price
|
|
$
|
49.29
|
|
|
$
|
61.17
|
|
|
$
|
65.71
|
|
|
$
|
68.06
|
|
|
$
|
69.59
|
|
OPIS Conway NGL Simple Average(2)
|
|
$
|
0.7095
|
|
|
$
|
0.7466
|
|
|
$
|
0.9804
|
|
|
$
|
1.0155
|
|
|
$
|
1.0383
|
|
OPIS Conway NGL Simple Average as a % of Assumed NYMEX Crude Oil
|
|
|
61
|
%
|
|
|
51
|
%
|
|
|
63
|
%
|
|
|
63
|
%
|
|
|
63
|
%
|
OPIS Mont Belvieu NGL Simple Average(2)
|
|
$
|
0.7609
|
|
|
$
|
0.8096
|
|
|
$
|
1.0353
|
|
|
$
|
1.0723
|
|
|
$
|
1.0964
|
|
OPIS Mont Belvieu NGL Simple Average as a % of Assumed NYMEX
Crude Oil
|
|
|
65
|
%
|
|
|
56
|
%
|
|
|
66
|
%
|
|
|
66
|
%
|
|
|
66
|
%
|
Inlet natural gas volumes (Mcf/d)
|
|
|
276,829
|
|
|
|
274,782
|
|
|
|
275,154
|
|
|
|
274,805
|
|
|
|
274,482
|
|
Revenues ($ in millions)
|
|
$
|
218.1
|
|
|
$
|
279.0
|
|
|
$
|
300.4
|
|
|
$
|
313.6
|
|
|
$
|
319.0
|
|
Midstream purchases ($ in millions)
|
|
$
|
137.3
|
|
|
$
|
194.9
|
|
|
$
|
219.5
|
|
|
$
|
231.2
|
|
|
$
|
235.2
|
|
Total segment margin ($ in millions)(3)
|
|
$
|
81.0
|
|
|
$
|
84.1
|
|
|
$
|
80.8
|
|
|
$
|
82.4
|
|
|
$
|
83.8
|
|
EBITDA ($ in millions)(4)
|
|
$
|
41.9
|
|
|
$
|
44.6
|
|
|
$
|
43.9
|
|
|
$
|
47.9
|
|
|
$
|
51.6
|
|
Distributable cash flow ($ in millions)(5)
|
|
$
|
24.4
|
|
|
$
|
26.9
|
|
|
$
|
25.0
|
|
|
$
|
28.8
|
|
|
$
|
32.5
|
|
Maintenance capital expenditures ($ in millions)
|
|
$
|
6.8
|
|
|
$
|
8.6
|
|
|
$
|
9.0
|
|
|
$
|
9.3
|
|
|
$
|
9.7
|
|
Growth capital expenditures ($ in millions)
|
|
$
|
20.9
|
|
|
$
|
21.4
|
|
|
$
|
21.0
|
|
|
$
|
20.7
|
|
|
$
|
20.3
|
|
|
|
|
(1)
|
|
In determining projected revenue and midstream purchases for
2009 and 2010, management used then-current estimated forward
quotes for natural gas pipeline basis differentials. In
determining projected revenue and midstream purchases for 2011
through 2013, natural gas basis differentials were based on
their historical percentage of the NYMEX price.
|
|
(2)
|
|
NGL prices were based on forward quotes for 2009 and 2010 and
the trailing
12-month
historical correlations to crude oil as of March 31, 2009
for 2011 through 2013.
|
|
(3)
|
|
Total Segment Margin, a Non-GAAP financial measure,
is defined as revenues less midstream purchases. Management
views total segment margin as an important performance measure
of the core profitability of Hiland Partners operations
because it is directly related to Hiland Partners volumes
and commodity price changes. Please see Non-GAAP Financial
Measures of Hiland Partners.
|
112
|
|
|
(4)
|
|
EBITDA, a Non-GAAP financial measure, is defined as
net income (loss) plus interest expense, provisions for income
taxes, and depreciation, amortization and accretion expense.
Please see Non-GAAP Financial Measures of Hiland
Partners.
|
|
(5)
|
|
Distributable Cash Flow, a Non-GAAP financial
measure, is defined as net income (loss) plus interest expense,
provision for income taxes, depreciation, amortization and
accretion expenses less cash interest expense and maintenance
capital expenditures. Please see Non-GAAP Financial
Measures of Hiland Partners.
|
As with the previous projections, management also included in
its projections a calculation of the leverage ratio under the
Hiland Operating Credit Agreement based upon the updated
projected financial information. Managements calculations
showed that, assuming no distributions were made to Hiland
Partners unitholders, Hiland Partners leverage ratio
would be 5.16x at the end of the second quarter of 2009, 5.98x
at the end of the third quarter of 2009 and 6.24x at the end of
the fourth quarter of 2009, all in excess of the then maximum
permissible leverage ratio of 4.0x under the Hiland Operating
Credit Agreement. The projected leverage ratios were also in
excess of the maximum permissible leverage ratio of 4.75x that
would be in effect upon the
step-up
of the leverage ratio that management elected pursuant to the
provisions of the Hiland Operating Credit Agreement at the end
of the first quarter. The leverage ratio would be required to by
stepped back down to 4.0x at the end of the fourth quarter of
2009. Based on these updated projections, management estimated
that at least $94 million of equity would need to be
infused into Hiland Partners by December 31, 2009 to be in
compliance with the leverage ratio covenant.
The projections provided to each Conflicts Committee on
May 28, 2009, which Jefferies & Company and
Barclays Capital each draw on in their fairness opinions, are
summarized below.
Projected
Financial Data for Hiland Partners
(Provided on May 28, 2009)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity Pricing Forward Pricing as of 5/28/09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed NYMEX Gas Price(1)
|
|
$
|
4.31
|
|
|
$
|
6.20
|
|
|
$
|
7.06
|
|
|
$
|
7.35
|
|
|
$
|
7.44
|
|
Assumed NYMEX Crude Oil Price
|
|
$
|
55.90
|
|
|
$
|
70.00
|
|
|
$
|
72.95
|
|
|
$
|
75.16
|
|
|
$
|
76.43
|
|
OPIS Conway NGL Simple Average(2)
|
|
$
|
0.7646
|
|
|
$
|
0.8419
|
|
|
$
|
1.0824
|
|
|
$
|
1.1151
|
|
|
$
|
1.1340
|
|
OPIS Conway NGL Simple Average as a % of Assumed NYMEX
Crude Oil
|
|
|
57
|
%
|
|
|
51
|
%
|
|
|
62
|
%
|
|
|
62
|
%
|
|
|
62
|
%
|
OPIS Mont Belvieu NGL Simple Average(2)
|
|
$
|
0.8487
|
|
|
$
|
0.9494
|
|
|
$
|
1.1491
|
|
|
$
|
1.1839
|
|
|
$
|
1.2039
|
|
OPIS Mont Belvieu NGL Simple Average as a % of Assumed NYMEX
Crude Oil
|
|
|
64
|
%
|
|
|
57
|
%
|
|
|
66
|
%
|
|
|
66
|
%
|
|
|
66
|
%
|
Inlet natural gas volumes (Mcf/d)
|
|
|
271,076
|
|
|
|
262,296
|
|
|
|
262,353
|
|
|
|
261,915
|
|
|
|
261,506
|
|
Revenues ($ in millions)
|
|
$
|
220.4
|
|
|
$
|
282.4
|
|
|
$
|
294.9
|
|
|
$
|
302.7
|
|
|
$
|
305.9
|
|
Midstream purchases ($ in millions)
|
|
$
|
137.1
|
|
|
$
|
196.4
|
|
|
$
|
211.5
|
|
|
$
|
219.1
|
|
|
$
|
221.4
|
|
Total segment margin ($ in millions)(3)
|
|
$
|
83.6
|
|
|
$
|
86.0
|
|
|
$
|
83.4
|
|
|
$
|
83.6
|
|
|
$
|
84.6
|
|
EBITDA ($ in millions)(4)
|
|
$
|
44.9
|
|
|
$
|
48.0
|
|
|
$
|
47.9
|
|
|
$
|
50.6
|
|
|
$
|
53.9
|
|
Distributable cash flow ($ in millions)(5)
|
|
$
|
27.5
|
|
|
$
|
30.3
|
|
|
$
|
29.2
|
|
|
$
|
31.8
|
|
|
$
|
36.1
|
|
Maintenance capital expenditures ($ in millions)
|
|
$
|
6.8
|
|
|
$
|
8.6
|
|
|
$
|
9.0
|
|
|
$
|
9.3
|
|
|
$
|
9.7
|
|
Growth capital expenditures ($ in millions)
|
|
$
|
20.9
|
|
|
$
|
21.4
|
|
|
$
|
21.0
|
|
|
$
|
20.7
|
|
|
$
|
20.3
|
|
|
|
|
(1)
|
|
In determining projected revenues and midstream purchases for
2009 and 2010, management used then-current estimated forward
quotes for natural gas pipeline basis differentials. In
determining projected
|
113
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|
|
revenues and midstream purchases for 2011 through 2013, natural
gas basis differentials were based on their historical
percentage of the NYMEX price.
|
|
(2)
|
|
NGL prices were based on forward quotes for 2009 and 2010 and
the trailing
12-month
historical correlations to crude oil as of April 30, 2009
for 2011 through 2013.
|
|
(3)
|
|
Total Segment Margin, a Non-GAAP financial measure,
is defined as revenues less midstream purchases. Management
views total segment margin as an important performance measure
of the core profitability of Hiland Partners operations
because it is directly related to Hiland Partners volumes
and commodity price changes. Please see Non-GAAP Financial
Measures of Hiland Partners.
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(4)
|
|
EBITDA, a Non-GAAP financial measure, is defined as
net income (loss) plus interest expense, provisions for income
taxes, and depreciation, amortization and accretion expense.
Please see Non-GAAP Financial Measures of Hiland
Partners.
|
|
(5)
|
|
Distributable Cash Flow, a Non-GAAP financial
measure, is defined as net income (loss) plus interest expense,
provision for income taxes, depreciation, amortization and
accretion expenses less cash interest expense and maintenance
capital expenditures. Please see Non-GAAP Financial
Measures of Hiland Partners.
|
As with the previous projections, management also included in
its projections a calculation of the leverage ratio under the
Hiland Operating Credit Agreement based upon the updated
projected financial information. Managements calculations
showed that, assuming no distributions were made to Hiland
Partners unitholders, Hiland Partners leverage ratio
would be 5.06x at the end of the second quarter of 2009, 5.73x
at the end of the third quarter of 2009 and 5.82x at the end of
the fourth quarter of 2009, all in excess of the then maximum
permissible leverage ratio of 4.0x under the Hiland Operating
Credit Agreement. The projected leverage ratios were also in
excess of the maximum permissible leverage ratio of 4.75x that
would be in effect upon the
step-up
of the leverage ratio that management elected pursuant to the
provisions of the Hiland Operating Credit Agreement at the end
of the first quarter. The leverage ratio would be required to by
stepped back down to 4.0x at the end of the fourth quarter of
2009. Based on these updated projections, management estimated
that at least $82 million of equity would need to be
infused into Hiland Partners by December 31, 2009 to be in
compliance with the leverage ratio covenant.
Projections of this type are based on estimates and assumptions
that are subject to significant uncertainties and contingencies,
all of which are difficult to predict and many of which are
beyond the Hiland Companies control. They are, in general,
prepared solely for internal use in assessing strategic
direction, related capital and resource needs and allocations
and other management decisions.
Since the projections cover multiple years, such information by
its nature becomes less reliable with each successive year.
Consequently, there can be no assurance that the underlying
assumptions will prove to be accurate, that the projected
results will be realized or that actual results will not be
significantly different than projected. These projections were
prepared solely for internal use and not for publication or with
a view of complying with the published guidelines of the SEC
regarding projections or with guidelines established by the
American Institute of Certified Public Accountants for
preparation and presentation of prospective financial
information. The projected financial data set forth above is
included in this joint proxy statement only because such
projected financial information was provided to the Conflicts
Committees and, through Harold Hamm, to the Hamm Continuing
Investors and their financial advisors. The merger agreements
include no representations by either of the Hiland Companies,
their management or the Hamm Continuing Investors as to this
projected financial information. In light of the uncertainties
inherent in projections of this type, neither the Hiland
Companies nor the Hamm Continuing Investors or any other person
has expressed any opinion or assurance on this information or
its achievability. None of the projections reflect any impact of
the mergers.
The Hiland Companies independent registered public
accounting firm has not examined, compiled or otherwise applied
procedures to the financial projections presented herein and,
accordingly, does not express an opinion or any other form of
assurance on them.
114
In addition to the assumptions regarding inlet natural gas
volumes, commodity prices and capital expenditures summarized
above, managements projections are subject to the
following additional important assumptions:
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|
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|
|
That the Hiland Operating Credit Agreement is not amended and
that any breach of the Hiland Operating Credit Agreement by
Hiland Partners is waived by its lenders at no cost;
|
|
|
|
Hiland Partners then current commodity hedge portfolio,
with anticipated hedge income being calculated based on the
assumed commodity pricing;
|
|
|
|
Hiland Partners then current contract portfolio by
gathering system;
|
|
|
|
Operating and general and administrative expenses are escalated
at 2.5% annually;
|
|
|
|
Budgeted growth and maintenance capital expenditures for 2009,
including the construction of the North Dakota Bakken natural
gas gathering system, which was placed in-service in the second
quarter of 2009;
|
|
|
|
Unidentified growth capital expenditures in years 2010 through
2013 with an EBITDA contribution based on a six times multiple.
This EBITDA is realized one year following the incurrence of the
unidentified growth capital expenditure;
|
|
|
|
Increasing maintenance capital expenditures in years 2010
through 2013 to reflect a larger asset base;
|
|
|
|
The loss of the Badlands Gathering System cost recovery fee in
early 2011 due to cumulative throughput volumes on the Badlands
system being greater than 36 Bcf, which is in accordance
with the contract governing the Badlands Gathering System;
|
|
|
|
No non-cash realized gain or loss on derivatives, non-cash unit
based compensation expenses or asset impairment expenses during
the projection periods; and
|
|
|
|
No distributions paid to Hiland Partners unitholders throughout
the forecast period.
|
115
Updated
Projected Financial Data for Hiland Partners
Management of the Hiland Companies provided the following
updated financial projections to each Conflicts Committee on
August 27, 2009. Except as otherwise noted, the following
projections are subject to the assumptions, contingencies,
uncertainties and other qualifications that are described under
Projected Financial Information beginning on
page 107.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity Pricing Forward Pricing as of
8/26/09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed NYMEX Gas Price(1)
|
|
$
|
4.01
|
|
|
$
|
5.74
|
|
|
$
|
6.69
|
|
|
$
|
6.88
|
|
|
$
|
6.96
|
|
Assumed NYMEX Crude Oil Price
|
|
$
|
57.65
|
|
|
$
|
76.41
|
|
|
$
|
79.32
|
|
|
$
|
80.98
|
|
|
$
|
82.75
|
|
OPIS Conway NGL Simple Average(2)
|
|
$
|
0.8379
|
|
|
$
|
0.9888
|
|
|
$
|
1.1440
|
|
|
$
|
1.1680
|
|
|
$
|
1.1934
|
|
OPIS Conway NGL Simple Average as a % of Assumed NYMEX
Crude Oil
|
|
|
61.0
|
%
|
|
|
54.4
|
%
|
|
|
60.6
|
%
|
|
|
60.6
|
%
|
|
|
60.6
|
%
|
OPIS Mont Belvieu NGL Simple Average(2)
|
|
$
|
0.9338
|
|
|
$
|
1.0925
|
|
|
$
|
1.2287
|
|
|
$
|
1.2544
|
|
|
$
|
1.2817
|
|
OPIS Mont Belvieu NGL Simple Average as a % of Assumed NYMEX
Crude Oil
|
|
|
68.0
|
%
|
|
|
60.1
|
%
|
|
|
65.1
|
%
|
|
|
65.1
|
%
|
|
|
65.1
|
%
|
Inlet natural gas volumes (Mcf/d)
|
|
|
266,031
|
|
|
|
247,306
|
|
|
|
242,192
|
|
|
|
242,192
|
|
|
|
242,192
|
|
Revenues ($ in millions)
|
|
$
|
224.4
|
|
|
$
|
275.8
|
|
|
$
|
274.5
|
|
|
$
|
277.0
|
|
|
$
|
281.3
|
|
Midstream purchases ($ in millions)
|
|
$
|
135.8
|
|
|
$
|
190.0
|
|
|
$
|
190.2
|
|
|
$
|
195.4
|
|
|
$
|
198.3
|
|
Total segment margin ($ in millions)(3)
|
|
$
|
88.7
|
|
|
$
|
85.7
|
|
|
$
|
84.4
|
|
|
$
|
81.6
|
|
|
$
|
82.9
|
|
EBITDA ($ in millions)(4)
|
|
$
|
50.9
|
|
|
$
|
47.6
|
|
|
$
|
48.8
|
|
|
$
|
48.6
|
|
|
$
|
52.5
|
|
Distributable cash flow ($ in millions)(5)
|
|
$
|
37.2
|
|
|
$
|
32.6
|
|
|
$
|
32.3
|
|
|
$
|
32.1
|
|
|
$
|
36.7
|
|
Maintenance capital expenditures ($ in millions)
|
|
$
|
6.4
|
|
|
$
|
6.5
|
|
|
$
|
8.0
|
|
|
$
|
8.4
|
|
|
$
|
8.8
|
|
Growth capital expenditures ($ in millions)
|
|
$
|
18.8
|
|
|
$
|
21.3
|
|
|
$
|
22.0
|
|
|
$
|
21.6
|
|
|
$
|
21.2
|
|
|
|
|
(1)
|
|
In determining projected revenue and midstream purchases for
2009 and 2010, management used
then-current
estimated forward quotes for natural gas pipeline basis
differentials. In determining projected revenue and midstream
purchases for 2011 through 2013, natural gas basis differentials
were based on their historical percentage of the NYMEX price.
|
|
(2)
|
|
NGL prices were based on forward quotes for 2009 and 2010 and
the trailing
12-month
historical correlations to crude oil as of July 31, 2009
for 2011 through 2013.
|
|
(3)
|
|
Total Segment Margin, a Non-GAAP financial measure,
is defined as revenues less midstream purchases. Management
views total segment margin as an important performance measure
of the core profitability of Hiland Partners operations
because it is directly related to Hiland Partners volumes
and commodity price changes. Please see Non-GAAP Financial
Measures of Hiland Partners.
|
|
(4)
|
|
EBITDA, a Non-GAAP financial measure, is defined as
net income (loss) plus interest expense, provisions for income
taxes, and depreciation, amortization and accretion expense.
Management noted that if then-current forward quotes for 2011
NGL prices and natural gas pipeline basis differentials were
used to forecast 2011 EBITDA, the resulting 2011 EBITDA would be
$45.6 million. Also, management noted that for years 2012
and 2013, if the natural gas pipeline basis differentials were
based on the then-current 2011 forward quotes for natural gas
pipeline basis differentials as a percentage of the assumed 2011
NYMEX natural gas price and if NGL prices were based on the
correlation between the then-current 2011 forward quotes and the
assumed 2011 NYMEX crude oil price (an approximate 54%
correlation for Conway NGL pricing and an approximate 59%
correlation for Mont Belvieu NGL pricing), EBITDA in those years
would be $45.5 million and $49.2 million,
respectively. Please see Non-GAAP Financial Measures
of Hiland Partners.
|
116
|
|
|
(5)
|
|
Distributable Cash Flow, a Non-GAAP financial
measure, is defined as net income (loss) plus interest expense,
provision for income taxes, depreciation, amortization and
accretion expenses less cash interest expense and maintenance
capital expenditures. Please see Non-GAAP Financial
Measures of Hiland Partners.
|
As with the previous projections, management also included in
its projections a calculation of the leverage ratio under the
Hiland Operating Credit Agreement based upon the updated
projected financial information. Managements calculations
showed that, assuming no distributions were made to Hiland
Partners unitholders, Hiland Partners leverage ratio
would be 4.49x at the end of the fourth quarter of 2009, in
excess of the then maximum permissible leverage ratio of 4.0x
under the Hiland Operating Credit Agreement (as the leverage
ratio would be required to by stepped back down to 4.0x at the
end of the fourth quarter of 2009). Based on these updated
projections, management estimated that at least $27 million
of equity would need to be infused into Hiland Partners by
December 31, 2009 to be in compliance with the leverage
ratio covenant. Also, additional equity infusions of at least
$10 million, $5 million and $6 million would be
required by June 30, 2010, September 30, 2010 and
December 31, 2010, respectively, to be in compliance with
the leverage ratio covenant.
Recent
Developments
Commodity
Price Update
From May 28 through August 27, 2009, crude oil and NGL
prices increased, with the prompt month NYMEX crude oil price
closing at $72.49 per barrel on August 27, 2009, an
increase of $7.41, or 11%, from May 28, 2009 and the OPIS
Conway NGL simple average price reaching $0.87 per gallon
on August 27, 2009, an increase of $0.05, or 6%, from
May 28, 2009. Also, the prompt month NYMEX natural gas
price declined to $2.84 per MMBtu, a decrease of $1.11, or 24%,
from May 28, 2009. Accordingly, the combination of
increasing NGL prices and declining natural gas prices during
this time period caused the fractionation spread to increase.
Hedge
Transactions
On June 26, 2009, Hiland Partners executed a series of
hedging transactions that enhances Hiland Partners 2009
cash flows and current liquidity position. These hedge
transactions involved the unwinding of a portion of net
in-the-money natural gas swaps, and the entering
into new 2010 Colorado Interstate Gas (CIG) natural
gas swaps. Hiland Partners received net proceeds of
approximately $3.2 million from the unwinding of the net
in-the-money positions, which was used to reduce
indebtedness under the Hiland Operating Credit Agreement.
With the execution of these transactions, which resulted in an
increase in Hiland Partners EBITDA for the twelve months
ending June 30, 2009 and a reduction in outstanding debt as
of June 30, 2009, together with the recent improvement in
NGLs prices, Hiland Partners was in compliance with the leverage
ratio contained in the Hiland Operating Credit Agreement as of
June 30, 2009. If commodity prices do not significantly
improve above the current forward prices for the third quarter
of 2009, Hiland Partners could be in violation of the leverage
ratio covenant contained in the Hiland Operating Credit
Agreement as early as September 30, 2009 unless the ratio
is amended, Hiland Partners receives an infusion of equity
capital, Hiland Partners debt is restructured or Hiland
Partners is able to monetize additional in-the-money
hedge positions.
117
The tables below detail the net impact of the hedge transactions
to Hiland Partners hedge portfolio:
Before
June 2009 Hedging Transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
|
Average
|
|
|
|
|
Fixed
|
|
|
Volume
|
|
Price
|
Description and Production Period
|
|
(MMBtus)
|
|
(per MMBtu)
|
|
CIG Natural Gas Sold Fixed for Floating Price Swaps:
|
|
|
|
|
|
|
|
|
July 2009 December 2009
|
|
|
1,068,000
|
|
|
$
|
7.30
|
|
January 2010 December 2010
|
|
|
2,136,000
|
|
|
$
|
8.31
|
|
After
June 2009 Hedging Transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
|
Average
|
|
|
|
|
Fixed
|
|
|
Volume
|
|
Price
|
Description and Production Period
|
|
(MMBtus)
|
|
(per MMBtu)
|
|
CIG Natural Gas Sold Fixed for Floating Price Swaps:
|
|
|
|
|
|
|
|
|
July 2009 December 2009
|
|
|
1,068,000
|
|
|
$
|
7.30
|
|
January 2010 December 2010
|
|
|
2,136,000
|
|
|
$
|
6.73
|
|
Hiland
Operating Credit Facility Covenant Compliance and Renegotiation
Update
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. If commodity prices
do not significantly improve above the current forward prices
for 2009, Hiland Partners could be in violation of the leverage
ratio covenant under the Hiland Operating Credit Agreement 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
of Hiland Partners is continuing extensive discussions with
lenders under the Hiland Operating Credit Agreement 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 the Partnership 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.
Effects
of the Mergers
Private
Ownership
If each of the merger agreements and mergers are approved by the
respective Hiland Company public unitholders and the other
conditions to the closing of each merger are either satisfied or
waived, HLND Merger Sub will be merged with and into Hiland
Partners with Hiland Partners continuing as the surviving entity
and HPGP Merger Sub will be merged with and into Hiland Holdings
with Hiland Holdings continuing as the surviving entity. As a
result of the mergers, Hiland Partners and Hiland Holdings, as
the surviving entities, will be privately owned by the Hamm
Continuing Investors. For a table summarizing the equity
ownership of each surviving entity following the merger, see
Interests of Certain Persons in the
Merger.
As a result of the mergers, Hiland Partners and Hiland Holdings
will be privately-owned companies and there will be no public
market for their common units. Upon the completion of the
mergers, the common units of Hiland Partners and Hiland Holdings
will be delisted from the NASDAQ Global Select Market. In
addition, the registration of the common units of Hiland
Partners and Hiland Holdings under Section 12 of the
118
Exchange Act will be terminated. The Hiland Companies will
continue to file periodic reports with the SEC to the extent
required by the agreements governing the respective
companys indebtedness or applicable law.
Directors
and Management of Each Surviving Entity
It is currently contemplated that the Hiland Partners Board of
Directors and Hiland Holdings Board of Directors will consist of
Harold Hamm, Joseph L. Griffin, Matthew S. Harrison and, likely,
other individuals who have not yet been identified.
It is further contemplated that the officers of Hiland Partners
and Hiland Holdings immediately prior to the effective time of
the Hiland Partners and Hiland Holdings mergers will be the
initial officers of the surviving entities.
The partnership agreement of each of Hiland Partners and Hiland
Holdings will be the partnership agreement of the respective
surviving entity following the merger, in each case, until such
time as the partnership agreement is amended.
Effect
on Interests of HLND
Schedule 13E-3
Filing Persons in Hiland Partners Net Book Value and Net
Earnings
If the Hiland Partners merger is completed, the Hiland Partners
public unitholders will have no interests in Hiland
Partners net book value or net earnings after the Hiland
Partners merger. The table below sets forth the interest of each
of the HLND
Schedule 13E-3
Filing Persons in Hiland Partners net book value and net
earnings prior to and immediately following the Hiland Partners
merger, based on Hiland Partners net book value as of
June 30, 2009, and the net income of Hiland Partners for
the six months ended June 30, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ownership Prior to the Mergers(1)
|
|
|
Ownership After the Mergers(2)
|
|
|
|
Net Book Value
|
|
|
Earnings
|
|
|
Net Book Value
|
|
|
Earnings
|
|
|
|
$ in
|
|
|
|
|
|
$ in
|
|
|
|
|
|
$ in
|
|
|
|
|
|
$ in
|
|
|
|
|
Name of Beneficial Owner
|
|
thousands
|
|
|
%
|
|
|
thousands
|
|
|
%
|
|
|
thousands
|
|
|
%
|
|
|
thousands
|
|
|
%
|
|
|
Hiland Holdings GP, LP(3)
|
|
|
71,578
|
|
|
|
58.3
|
|
|
|
(2,251
|
)
|
|
|
58.3
|
|
|
|
71,578
|
|
|
|
58.3
|
|
|
|
(2,253
|
)
|
|
|
58.3
|
|
Harold Hamm(4)(5)
|
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
*
|
|
|
|
30,149
|
|
|
|
24.6
|
|
|
|
(949
|
)
|
|
|
24.6
|
|
HH GP Holding, LLC(5)
|
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
*
|
|
|
|
30,149
|
|
|
|
24.6
|
|
|
|
(949
|
)
|
|
|
24.6
|
|
Harold Hamm DST Trust
|
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
*
|
|
|
|
12,564
|
|
|
|
10.2
|
|
|
|
(395
|
)
|
|
|
10.2
|
|
Harold Hamm HJ Trust
|
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
*
|
|
|
|
8,382
|
|
|
|
6.8
|
|
|
|
(264
|
)
|
|
|
6.8
|
|
Bert Mackie(6)
|
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
*
|
|
|
|
20,946
|
|
|
|
17.1
|
|
|
|
(659
|
)
|
|
|
17.1
|
|
Joseph L. Griffin
|
|
|
55
|
|
|
|
*
|
|
|
|
(2
|
)
|
|
|
*
|
|
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
*
|
|
Matthew S. Harrison
|
|
|
32
|
|
|
|
*
|
|
|
|
(1
|
)
|
|
|
*
|
|
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
*
|
|
HLND MergerCo, LLC
|
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
*
|
|
Hiland Partners GP, LLC(7)
|
|
|
2,453
|
|
|
|
2.0
|
|
|
|
(77
|
)
|
|
|
2.0
|
|
|
|
2,453
|
|
|
|
2.0
|
|
|
|
(77
|
)
|
|
|
2.0
|
|
Hiland Partners GP Holdings, LLC(5)
|
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
*
|
|
|
|
|
(1)
|
|
Based upon ownership of the common units, subordinated units and
general partner units of Hiland Partners as of August 30,
2009, Hiland Partners net book value as of June 30,
2009, and net income of Hiland Partners for the six months ended
June 30, 2009.
|
|
|
|
(2)
|
|
Based upon the agreed upon equity investments and expected
ownership of common units in the surviving entity after the
Hiland Partners merger and Hiland Partners net book value
as of June 30, 2009, and net income of Hiland Partners for
the six months ended June 30, 2009.
|
|
|
|
(3)
|
|
Includes the 2% economic interest represented by the 191,008
general partner units owned by Hiland Partners GP, LLC, a
wholly-owned subsidiary of Hiland Holdings GP, LP.
|
|
|
|
(4)
|
|
Includes interests attributable to HH GP Holding, LLC, which is
wholly-owned by Mr. Hamm.
|
|
|
|
(5)
|
|
Does not include any interests that may be attributable to such
person through Hiland Holdings GP, LP. Mr. Hamm directly
owns 100% of HH GP Holding, LLC, which directly owns 100% of
Hiland Partners
|
119
|
|
|
|
|
GP Holdings, LLC, the general partner of Hiland Holdings GP,
LP. Accordingly, Mr. Hamm is deemed to be the beneficial
owner of the 2,321,471 common units and 3,060,000 subordinated
units held by Hiland Holdings GP, LP.
|
|
|
|
(6)
|
|
Includes interests held by the Harold Hamm DST Trust and the
Harold Hamm HJ Trust. As trustee of each of the Hamm family
trusts, Mr. Mackie is deemed to have sole voting and
dispositive power of the common units held by the trusts.
|
|
|
|
(7)
|
|
Includes the 2% economic interest represented by the 191,008
general partner units owned by Hiland Partners GP, LLC.
|
Effect
on Interests of HPGP
Schedule 13E-3
Filing Persons in Hiland Holdings Net Book Value and Net
Earnings
If the Hiland Holdings merger is completed, the Hiland Holdings
public unitholders will have no interests in Hiland
Holdings net book value or net earnings after the Hiland
Holdings merger. The table below sets forth the interest of each
of the HPGP
Schedule 13E-3
Filing Persons in Hiland Holdings net book value and net
earnings prior to and immediately following the Hiland Holdings
merger, based on Hiland Holdings net book value as of
June 30, 2009, and net income of Hiland Holdings for the
six months ended June 30, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ownership Prior to the Mergers(1)
|
|
|
Ownership After the Mergers(2)
|
|
|
|
Net Book Value
|
|
|
Earnings
|
|
|
Net Book Value
|
|
|
Earnings
|
|
|
|
$ in
|
|
|
|
|
|
$ in
|
|
|
|
|
|
$ in
|
|
|
|
|
|
$ in
|
|
|
|
|
Name of Beneficial Owner
|
|
thousands
|
|
|
%
|
|
|
thousands
|
|
|
%
|
|
|
thousands
|
|
|
%
|
|
|
thousands
|
|
|
%
|
|
|
Harold Hamm(3)
|
|
|
50,637
|
|
|
|
39.5
|
|
|
|
(2,148
|
)
|
|
|
39.5
|
|
|
|
80,266
|
|
|
|
62.7
|
|
|
|
(3,405
|
)
|
|
|
62.7
|
|
Continental Gas Holdings, Inc.
|
|
|
50,284
|
|
|
|
39.3
|
|
|
|
(2,133
|
)
|
|
|
39.3
|
|
|
|
50,284
|
|
|
|
39.3
|
|
|
|
(2,133
|
)
|
|
|
39.3
|
|
HH GP Holding, LLC
|
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
*
|
|
|
|
29,629
|
|
|
|
23.1
|
|
|
|
(1,257
|
)
|
|
|
23.1
|
|
Harold Hamm DST Trust(4)
|
|
|
16,338
|
|
|
|
12.8
|
|
|
|
(693
|
)
|
|
|
12.8
|
|
|
|
28,685
|
|
|
|
22.4
|
|
|
|
(1,217
|
)
|
|
|
22.4
|
|
Harold Hamm HJ Trust(4)
|
|
|
10,917
|
|
|
|
8.5
|
|
|
|
(463
|
)
|
|
|
8.5
|
|
|
|
19,155
|
|
|
|
15.0
|
|
|
|
(812
|
)
|
|
|
15.0
|
|
Bert Mackie(5)
|
|
|
27,255
|
|
|
|
21.3
|
|
|
|
(1,156
|
)
|
|
|
21.3
|
|
|
|
47,840
|
|
|
|
37.3
|
|
|
|
(2,029
|
)
|
|
|
37.3
|
|
Joseph L. Griffin
|
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
*
|
|
Matthew S. Harrison
|
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
*
|
|
HPGP MergerCo, LLC
|
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
*
|
|
Hiland Partners GP Holdings, LLC
|
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
*
|
|
|
|
|
(1)
|
|
Based upon ownership of common units of Hiland Holdings as of
August 30, 2009 and Hiland Holdings net book value as
of June 30, 2009, and net income of Hiland Holdings for the
six months ended June 30, 2009.
|
|
|
|
(2)
|
|
Based upon the agreed upon equity investments and expected
ownership of common units in the surviving entity after the
Hiland Holdings merger and Hiland Holdings net book value
as of June 30, 2009, and net income of Hiland Holdings for
the six months ended June 30, 2009.
|
|
|
|
(3)
|
|
Includes all interests attributable to HH GP Holding, LLC, which
is wholly-owned by Mr. Hamm, and Continental Gas Holdings,
Inc. Mr. Hamm, the Harold Hamm DST Trust and the Harold
Hamm HJ Trust have a 90.7%, 5.6% and a 3.7% ownership interest,
respectively, in Continental Gas Holdings, Inc.
|
|
|
|
(4)
|
|
Does not include any interest attributable to Continental Gas
Holdings, Inc. Harold Hamm, the Harold Hamm DST Trust and the
Harold Hamm HJ Trust have a 90.7%, 5.6% and a 3.7% ownership
interest, respectively, in Continental Gas Holdings, Inc.
|
|
|
|
(5)
|
|
Includes interests held by the Harold Hamm DST Trust and the
Harold Hamm HJ Trust. As trustee of each of the Hamm family
trusts, Mr. Mackie is deemed to have sole voting and
dispositive power of the common units held by the trusts.
|
120
Primary
Benefits and Detriments of the Mergers
Benefits
and Detriments to Hiland Partners Common
Unitholders
The primary benefits of the mergers to common unitholders of
Hiland Partners that will not have a continuing interest in
Hiland Partners following the Hiland Partners merger include the
following:
|
|
|
|
|
The receipt by such common unitholders of $7.75 per common unit
in cash, representing a 35.0% premium over the closing market
price of Hiland Partners common units on June 1, 2009, the
day of the announcement of the execution of the Hiland Partners
merger agreement.
|
|
|
|
The avoidance of the risk associated with any possible decrease
in the future revenues and free cash flow, growth or value of
Hiland Partners following the Hiland Partners merger.
|
|
|
|
The avoidance of the risk associated with any possible breach of
the financial ratios under the Hiland Operating Credit Agreement.
|
The primary detriments of the Hiland Partners merger to common
unitholders of Hiland Partners that will not have a continuing
interest in Hiland Partners following the Hiland Partners merger
include the following:
|
|
|
|
|
Such common unitholders will cease to have an interest in Hiland
Partners and, therefore, will no longer benefit from possible
increases in the future revenues and free cash flow, growth or
value of Hiland Partners or payment of distributions on Hiland
Partners common units, if any.
|
|
|
|
In general, the receipt of cash pursuant to the Hiland Partners
merger will be a taxable transaction for U.S. federal
income tax purposes and may also be a taxable transaction under
applicable state, local and foreign tax laws. As a result, a
Hiland Partners common unitholder that receives cash in exchange
for such common unitholders common units in the Hiland
Partners merger generally will be required to recognize taxable
income, gain or loss as a result of the Hiland Partners merger
for U.S. federal income tax purposes. Moreover, because a
portion (which will likely be substantial) of a common
unitholders gain or loss will be separately computed and
taxed as ordinary income, a common unitholder may recognize both
ordinary income and a capital loss as a result of the Hiland
Partners merger.
|
Benefits
and Detriments to Hiland Holdings Common
Unitholders
The primary benefits of the mergers to common unitholders of
Hiland Holdings that will not have a continuing interest in
Hiland Holdings following the Hiland Holdings merger include the
following:
|
|
|
|
|
The receipt by such common unitholders of $2.40 per common unit
in cash, representing a 28.3% premium over the closing market
price of Hiland Holdings common units on June 1, 2009, the
day of the announcement of the execution of the Hiland Holdings
merger agreement.
|
|
|
|
The avoidance of the risk associated with any possible decrease
in the future revenues and free cash flow, growth or value of
Hiland Holdings following the Hiland Holdings merger.
|
|
|
|
The avoidance of the risk associated with any possible Hiland
Partners breach of the financial ratios under the Hiland
Operating Credit Agreement.
|
The primary detriments of the Hiland Holdings merger to common
unitholders of Hiland Holdings that will not have a continuing
interest in Hiland Holdings following the Hiland Holdings merger
include the following:
|
|
|
|
|
Such unitholders will cease to have an interest in Hiland
Holdings and, therefore, will no longer benefit from possible
increases in the future revenues and free cash flow, growth or
value of Hiland Holdings or payment of distributions on Hiland
Holdings common units, if any.
|
|
|
|
In general, the receipt of cash pursuant to the Hiland Holdings
merger will be a taxable transaction for U.S. federal
income tax purposes and may also be a taxable transaction under
applicable state, local and foreign tax laws. As a result, a
Hiland Holdings common unitholder that receives cash in exchange
|
121
|
|
|
|
|
for such common unitholders common units in the Hiland
Holdings merger generally will be required to recognize taxable
income, gain or loss as a result of the Hiland Holdings merger
for U.S. federal income tax purposes. Moreover, because a
portion (which will likely be substantial) of a common
unitholders gain or loss will be separately computed and
taxed as ordinary income, a common unitholder may recognize both
ordinary income and a capital loss as a result of the Hiland
Holdings merger.
|
Benefits
and Detriments to the Combined
Schedule 13E-3
Filing Persons
The primary benefits of the mergers to the Combined
Schedule 13E-3
Filing Persons include the following:
|
|
|
|
|
If the Hiland Companies successfully execute their business
strategies, the value of their equity investment could increase
because of possible increases in future revenues and cash flow,
increases in underlying value of the Hiland Companies or the
payment of distributions, if any, that would accrue to the
Combined
Schedule 13E-3
Filing Persons.
|
|
|
|
The Hiland Companies will no longer have continued pressure to
meet quarterly forecasts set by analysts. In contrast, as
publicly-traded companies, the Hiland Companies currently face
public unitholder and investment analyst pressure to make
decisions that may produce better short-term results, but which
may not over the long-term lead to a maximization of their
equity value.
|
|
|
|
The Hiland Companies will have more flexibility to change their
capital spending strategies without public market scrutiny or
analysts quarterly expectations.
|
|
|
|
The directors, officers and beneficial owners of more than 10%
of the common units of the respective Hiland Companies will be
relieved of the reporting requirements and liability for
short-swing profit recovery under Section 16 of the
Exchange Act.
|
|
|
|
The Combined
Schedule 13E-3
Filing Persons, as the owners of the Hiland Companies, will
become the beneficiaries of the savings associated with the
reduced burden of complying with the substantive requirements
that federal securities laws, including the Sarbanes Oxley Act,
impose on public companies. Such savings are expected by the
Hamm Continuing Investors to be approximately $1 million
per year.
|
The primary detriments of the mergers to the Combined
Schedule 13E-3
Filing Persons include the following:
|
|
|
|
|
The mergers are being undertaken during a time of significant
market and industry turmoil, and all of the risk of any possible
decrease in the revenues and cash flow, growth or value of the
Hiland Companies following the mergers will be borne by the
Combined
Schedule 13E-3
Filing Persons.
|
|
|
|
Following the mergers, there will be no trading market for, and
substantial restrictions on the transfer of, the equity
securities of Hiland Partners and Hiland Holdings, as the
surviving entities.
|
|
|
|
In the Hiland Companies ceasing to be publicly traded, the
continuing unitholders would no longer benefit from the rights
and protections that federal securities laws give to such
unitholders with respect to their interests in the Hiland
Companies (including those rights and protections afforded by
the Sarbanes-Oxley Act of 2002, Section 16 of the
Securities Exchange Act of 1934, as amended, and Section 13
of the Securities Act of 1933, as amended).
|
|
|
|
Hiland Partners is highly leveraged and following the mergers,
all risk of default under the Hiland Operating Credit Agreement
will be borne by the Combined Schedule 13E-3 Filing Persons, and
a capital infusion may be required by Mr. Hamm in
connection with renegotiating the Hiland Operating Credit
Agreement, upon which the Hiland Companies will remain
substantially dependent as a source of liquidity.
|
122
Interests
of Certain Persons in the Mergers
In considering the recommendations of the Board of Directors and
Conflicts Committee of either Hiland Company, unitholders of
such Hiland Company should be aware that certain officers and
directors of the Hiland Companies have interests in the mergers
that are different from the interests of the Hiland Partners and
Hiland Holdings public unitholders, which are summarized below.
The members of the Board of Directors and Conflicts Committee of
each Hiland Company were aware of such interests in the proposed
transactions when deciding to approve either the Hiland Partners
merger or the Hiland Holdings merger, as was each Conflicts
Committee when deciding to recommend such approval. For more
information, please see Background of the
Mergers, Recommendations of the Hiland
Partners Conflicts Committee and Hiland Partners Board of
Directors; Reasons for Recommending Approval of the Merger
and Recommendations of the Hiland Holdings
Conflicts Committee and Hiland Holdings Board of Directors;
Reasons for Recommending Approval of the Merger.
Hiland
Partners Merger
Harold
Hamm and the other Hamm Continuing Investors
In connection with the Hiland Partners merger agreement, Harold
Hamm, Hiland Partners Chairman, entered into the Hiland
Partners commitment letter pursuant to which Mr. Hamm
agreed to contribute $32.0 million in cash to Parent to
fund the Hiland Partners merger consideration and estimated
expenses, less the amount of cash, if any, contributed by the
Hamm family trusts to Parent or HLND Merger Sub. The foregoing
summary of the Hiland Partners commitment letter does not
purport to be complete and is qualified in its entirety by
reference to the copy of such commitment letter attached as an
exhibit to the
Schedule 13E-3
filed with the SEC in connection with Hiland Partners merger and
incorporated herein by reference.
Parent, a wholly-owned subsidiary of Mr. Hamm, and HLND
Merger Sub also entered into the Hiland Partners support
agreement with Hiland Holdings, the general partner of Hiland
Holdings, Hiland Partners and the general partner of Hiland
Partners whereby Hiland Holdings and its general partner agreed
to (i) maintain the ownership of its 2,321,471 common units
and 3,060,000 subordinated units of Hiland Partners, which
represent approximately 37.0% and 100.0% of their respective
classes outstanding, (ii) vote its common units and
subordinated units in favor of the approval of the Hiland
Partners merger agreement and the Hiland Partners merger, and
(iii) grant an irrevocable proxy to Parent for the purpose
of voting in favor of the Hiland Partners merger agreement and
the Hiland Partners merger as described above. Based on the cash
purchase price of $7.75 per common unit, the aggregate value of
the continued holding of the Hiland Partners common units by
Hiland Holdings is approximately $18.0 million. The
foregoing summary of the Hiland Partners support agreement does
not purport to be complete and is qualified in its entirety by
reference to the copy of such agreement attached as an exhibit
to the
Schedule 13E-3
filed with the SEC in connection with the Hiland Partners merger
and incorporated herein by reference.
Pursuant to the terms of the Hiland Partners partnership
agreement, any proposed merger, including the Hiland Partners
merger, must first be consented to by the general partner of
Hiland Partners before being submitted to a vote of the limited
partners of Hiland Partners. Because Hiland Holdings owns a
controlling membership interest in the general partner of Hiland
Partners, its consent was required before the Hiland Partners
merger agreement and the Hiland Partners merger could be
submitted to a vote of the unitholders of Hiland Partners.
Hiland Holdings, in a written consent dated June 1, 2009,
has consented to the Hiland Partners merger agreement and the
Hiland Partners merger.
Hiland Partners provides certain services to Continental
Resources, Inc., a publicly traded exploration and production
company controlled by Harold Hamm and certain of his affiliates,
pursuant to contractual arrangements summarized under
Information Concerning the Hiland Companies
Certain Transactions between the Hiland Companies and Affiliates
of Harold Hamm. In addition, Hiland Partners leases office
space under an operating lease from an entity wholly owned by
Harold Hamm. Rents paid under these leases totaled $157,000 and
$143,000 for the years ended December 31, 2008 and 2007,
respectively. Upon consummation of the Hiland Partners merger,
these arrangements may be amended, modified or terminated.
123
Hiland
Partners Board of Directors
Six of the eight members of the Hiland Partners Board of
Directors serve as members of the Hiland Holdings Board of
Directors. Because these persons serve as a director of each of
the Hiland Companies, they have certain duties and obligations
to the unitholders of each Hiland Company as provided in the
respective partnership agreements of the Hiland Companies.
The directors who serve on both boards of directors are: Harold
Hamm, Joseph L. Griffin, Matthew S. Harrison, Edward D. Doherty,
Michael L. Greenwood and Rayford T. Reid. Mr. Griffin also
serves as President and Chief Executive Officer of both Hiland
Companies, and Mr. Harrison serves as Chief Financial
Officer of both Hiland Companies. Shelby E. Odell resigned from
the Hiland Holdings Board of Directors on January 21, 2009.
Accordingly, during the consideration of the Hiland Partners
merger by the Hiland Partners Conflicts Committee, no member of
the Hiland Partners Conflicts Committee also served on the
Hiland Holdings Board of Directors.
Mr. Odell and John T. McNabb, II, who compose the
Hiland Partners Conflicts Committee, each received compensation
of $30,000 in connection with the Hiland Partners Conflicts
Committees consideration of the Hiland Partners merger.
The compensation paid to each of the Hiland Partners Conflicts
Committee members was in addition to the compensation they
receive for serving on the Hiland Partners Board of Directors
and any other committees of the Hiland Partners Board of
Directors. These payments were not predicated on any result of
the deliberations of the Hiland Partners Conflicts Committee.
It is expected that Messrs. Hamm, Griffin and Harrison will
continue as directors of the surviving company after the
effective time of the Hiland Partners merger. In addition, it is
expected that, following the Hiland Holdings merger,
Messrs. Hamm, Griffin and Harrison will continue as
directors of the surviving company after the effective time of
the Hiland Holdings merger.
Rayford T. Reid, a member of the Board of Directors of each of
the Hiland Companies, recused himself from consideration and
voting on the Hiland Partners merger agreement and the Hiland
Partners merger due to his professional relationship with
Mr. Hamm. Mr. Reid has historically provided
Mr. Hamm and the Hamm family trusts with financial advisory
services, including in connection with evaluating strategic
alternatives with respect to the Hiland Companies.
Hiland
Partners Management
Certain members of the Hiland Partners management team,
including Chief Executive Officer Joseph L. Griffin and Chief
Financial Officer Matthew S. Harrison, have been offered
continued employment with the surviving entity after the
effective time of the Hiland Partners merger and may enter into
or be provided new employment, retention and compensation
arrangements (though no such arrangements have been proposed or
agreed to). In addition, Mr. Griffin serves as Chief
Executive Officer of Hiland Holdings, and Mr. Harrison
serves as Chief Financial Officer of Hiland Holdings and as Vice
President and Secretary of Parent and HLND Merger Sub.
While neither Mr. Griffin nor Mr. Harrison have any
ownership interest in Parent or HLND Merger Sub, the 5,000
phantom units in Hiland Partners currently issued and
outstanding to each of Mr. Griffin and Mr. Harrison
under the Hiland Partners, LP Long-Term Incentive Plan will
remain outstanding following consummation of the Hiland Partners
merger, giving Mr. Griffin and Mr. Harrison a
continuing ownership interest in Hiland Partners. For additional
information, please see Treatment of Equity
Awards of Directors and Officers.
The Hiland Partners merger will not trigger any change of
control provision in the employment contract of
Mr. Griffin, Mr. Harrison, or any other officer of
Hiland Partners.
Hiland
Partners Director and Officer Insurance
The Hiland Partners merger agreement provides, with respect to
indemnification of directors and officers, that the partnership
agreement of the surviving entity may not be amended, repealed
or otherwise modified
124
after the effective time of the Hiland Partners merger in any
manner that would adversely affect the rights thereunder of the
persons who at any time prior to the effective time of the
Hiland Partners merger were identified as prospective
indemnitees under the Hiland Partners partnership agreement in
respect of actions or omissions occurring at or prior to the
effective time of the Hiland Partners merger (including the
transactions contemplated by the Hiland Partners merger
agreement).
For a period of six years after the effective time of the Hiland
Partners merger agreement, Parent and the general partner of
Hiland Partners shall, and Parent and the general partner of
Hiland Partners shall cause the surviving entity (and its
successors or assigns) to, maintain officers and
directors liability insurance covering each person who is
immediately prior to the effective time of the Hiland Partners
merger agreement, or has been at any time prior to the effective
time of the Hiland Partners merger, an officer or director of
any of the Hiland Parties or their subsidiaries and each person
who immediately prior to the effective time of the Hiland
Partners merger is serving or prior to the effective time of the
Hiland Partners merger has served at the request of any of the
Hiland Parties or their subsidiaries as a director, officer,
trustee or fiduciary of another corporation, partnership, joint
venture, trust, pension or other employee benefit plan of the
Hiland Parties or their subsidiaries who are or at any time
prior to the effective time were covered by the existing
officers and directors liability insurance
applicable to the Hiland Parties or their subsidiaries on terms
substantially no less advantageous to the indemnified persons
described in this paragraph than such existing insurance with
respect to acts or omissions, or alleged acts or omissions,
prior to the effective time of the Hiland Partners merger
(whether claims, actions or other proceedings relating thereto
are commenced, asserted or claimed before or after the effective
time of the Hiland Partners merger).
Hiland Partners shall cause (and Parent, following the closing
of the Hiland Partners merger, shall continue to cause) coverage
to be extended under the existing officers and
directors liability insurance applicable to the Hiland
Parties or their subsidiaries by obtaining a six-year
tail policy on terms and conditions no less
advantageous than the existing officers and
directors liability insurance, and such tail
policy shall satisfy the requirements summarized in this
section. In no event, however, will Parent be required to spend
more than 250% of the last annual premium paid by the Hiland
Parties and their subsidiaries prior to the signing date of the
Hiland Partners merger agreement per policy year of coverage
under such tail policy. If the cost per policy year
of such insurance exceeds 250% of the last annual premium,
Parent shall purchase as much coverage per policy year as
reasonably obtainable for the amount equal to 250% of the last
annual premium.
The indemnification and insurance provisions of the Hiland
Partners merger agreement are more fully described under
The Hiland Partners Merger Agreement Other
Covenants and Agreements Indemnification and
Insurance.
Treatment
of Equity Awards of Directors and Officers
Upon consummation of the Hiland Partners merger, the outstanding
equity awards under the Hiland Partners, LP Long-Term Incentive
Plan will be subject to the following treatment:
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restricted common units held by non-employee members of the
Hiland Partners Board of Directors will immediately vest and
automatically convert into the right to receive the Hiland
Partners merger consideration;
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all other restricted common units, phantom units and unit option
awards issued pursuant to the Hiland Partners, LP Long-Term
Incentive Plan that remain outstanding as of the effective time
of the Hiland Partners merger will remain outstanding in
accordance with their respective terms as equity awards in the
surviving entity in the merger.
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Following the closing of the Hiland Partners merger, the board
of directors of the surviving entity may amend the terms of
outstanding equity-based awards or other terms of the long-term
incentive plan to align such terms with the privately-held
structure of the surviving entity.
125
Equity
Interests in Hiland Partners, Parent and HLND Merger
Sub
The following table sets forth the current beneficial ownership
of Mr. Hamm, the other Hamm Continuing Investors, their
respective affiliates and the directors and officers of Hiland
Partners in the equity of Hiland Partners as of the date of this
joint proxy statement and their contemplated beneficial
ownership in the surviving entity after the effective time of
the Hiland Partners merger.
Equity
Interests of Hamm Continuing Investors, Directors and Officers
in Hiland Partners (1)
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Common Units
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Restricted Common Units
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Phantom Units
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Unit Options
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Conflicts
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Total Cash
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Cashed
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Cashed
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Cashed
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Cashed
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Committee
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Received
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Name
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Position
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Owned
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Out
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Owned
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Out
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Owned
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Out
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Owned
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Out
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Compensation
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in Merger
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Harold Hamm(2)
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Chairman
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2,321,471
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$
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$
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Joseph L. Griffin
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Director, Chief Executive Officer
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4,307
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4,307
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5,000
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$
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$
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33,379
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Matthew S. Harrison
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Director, Chief Financial Officer
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2,500
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2,500
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5,000
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$
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$
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19,375
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Edward D. Doherty
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Director
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3,500
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3,500
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1,500
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1,500
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$
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$
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38,750
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Michael L. Greenwood
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Director
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11,791
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11,791
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1,500
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1,500
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$
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$
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103,005
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John T. McNabb, II
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Director
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2,250
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2,250
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1,750
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1,750
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$
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30,000
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$
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61,000
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Shelby E. Odell
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Director
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12,250
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12,250
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2,750
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2,750
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$
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30,000
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$
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146,250
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Rayford T. Reid
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Director
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10,318
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10,318
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1,500
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1,500
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$
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$
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92,287
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Dr. David L. Boren(3)
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Director
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1,250
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1,250
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$
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$
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9,687
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Kent C. Christopherson
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Chief Operating Officer
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1,494
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5,625
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$
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$
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11,579
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Robert W. Shain(4)
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Chief Commercial Officer
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3,832
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3,832
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15,000
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$
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$
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29,698
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(1)
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Does not include subordinated units, incentive distribution
rights, or general partner interest, each of which are owned
directly or indirectly by Hiland Holdings and beneficially owned
by Mr. Hamm and will not receive any consideration in the
Hiland Partners merger.
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(2)
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Represents common units held by Hiland Holdings. Mr. Hamm
indirectly owns 100% of Hiland Partners GP Holdings, LLC, the
general partner of Hiland Holdings GP, LP. Accordingly,
Mr. Hamm is deemed to be the beneficial owner of the
2,321,471 Hiland Partners common units and 3,060,000 Hiland
Partners subordinated units held by Hiland Holdings GP, LP.
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(3)
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Dr. Boren resigned from the Hiland Partners Board of
Directors on March 13, 2009.
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(4)
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Mr. Shain resigned from his position as Chief Commercial
Officer of each of the Hiland Companies effective March 31,
2009.
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Pro Forma
Equity Interests in Surviving Entity (1)
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Common Units
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Name
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Position
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Units
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% of Class
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Phantom Units
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Unit Options
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Harold Hamm(2)
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Chairman
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4,668,656
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74
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%
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Bert Mackie, as trustee of the Trusts(3)
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N/A
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1,630,718
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26
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%
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Joseph L. Griffin
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Director, Chief Executive Officer
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5,000
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Matthew S. Harrison
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Director, Chief Financial Officer
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5,000
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Kent C. Christopherson
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Chief Operating Officer
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5,625
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Robert W. Shain(4)
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Chief Commercial Officer
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15,000
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(1)
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Does not include subordinated units, incentive distribution
rights, or general partner interest, each of which are owned
directly or indirectly by Hiland Holdings and beneficially owned
by Mr. Hamm.
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126
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(2)
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Mr. Hamm is the sole member of Parent. Accordingly,
Mr. Hamm is deemed to be the beneficial owner of the
2,347,185 common units of the surviving entity held by Parent.
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(3)
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Mr. Mackie is the trustee of the Harold Hamm DST Trust and
the Harold Hamm HJ Trust. Accordingly, he is deemed to be the
beneficial owner of the 978,167 and 652,551 common units of the
surviving entity, respectively, held by them.
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(4)
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Mr. Shain resigned from his position as Chief Commercial
Officer of each of the Hiland Companies effective March 31,
2009.
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Equity
Interests in Hiland Holdings
In addition to the equity interests of Mr. Hamm, the other
Hamm Continuing Investors, their respective affiliates and the
directors and officers of Hiland Partners in Hiland Partners
summarized in the tables above, certain of those persons also
have equity interests in Hiland Holdings, which are summarized
in the tables included in Interests of Certain Persons in
the Mergers Hiland Holdings Merger
Equity Interests in Hiland Holdings, Parent and HPGP Merger
Sub.
Hiland
Holdings Merger
Harold
Hamm and the other Hamm Continuing Investors
In connection with the Hiland Holdings merger agreement, Harold
Hamm, Hiland Holdings Chairman, entered into the Hiland
Holdings commitment letter pursuant to which Mr. Hamm
agreed to contribute $21.2 million in cash to Parent to
fund the Hiland Holdings merger consideration and estimated
expenses, less the amount of cash, if any, contributed by the
Hamm family trusts to Parent or HPGP Merger Sub. The foregoing
summary of the Hiland Holdings commitment letter does not
purport to be complete and is qualified in its entirety by
reference to the copy of the Hiland Holdings commitment letter
attached as an exhibit to the
Schedule 13E-3
filed with the SEC in connection with the Hiland Holdings merger
and incorporated herein by reference.
Mr. Hamm, Continental Gas, and Bert Mackie, as trustee of
the Hamm family trusts, also entered into the Hiland Holdings
support agreement with Hiland Holdings and the general partner
of Hiland Holdings whereby Mr. Hamm, Continental Gas and
Mr. Mackie each agreed to (i) maintain their
respective ownership of an aggregate 13,138,052 Hiland Holdings
common units, which represent approximately 60.8% of the common
units outstanding, (ii) vote their respective Hiland
Holdings common units in favor of the approval of the Hiland
Holdings merger agreement and the Hiland Holdings merger, and
(iii) grant an irrevocable proxy to Hiland Holdings for the
purpose of voting in favor of the Hiland Holdings merger
agreement and the Hiland Holdings merger as described above.
Based on the cash purchase price of $2.40 per common unit, the
aggregate value of the continued holding of the Hiland Holdings
common units by Mr. Hamm, Continental Gas and the Hamm
family trusts is approximately $31.5 million. The foregoing
summary of the Hiland Holdings support agreement does not
purport to be complete and is qualified in its entirety by
reference to the copy of such agreement attached as an exhibit
to the
Schedule 13E-3
filed with the SEC in connection with the Hiland Holdings merger
and incorporated herein by reference.
Hiland Holdings leases office space under an operating lease
from an entity wholly owned by Harold Hamm. Rents paid under
these leases totaled $157,000 and $143,000 for the years ended
December 31, 2008 and 2007, respectively. Upon consummation of
the Hiland Holdings merger, Mr. Hamm or his affiliates may
amend, modify or terminate this operating lease.
Hiland
Holdings Board of Directors
Six of the eight members of the Hiland Holdings Board of
Directors serve as members of the Hiland Partners Board of
Directors. Because these persons serve as a director of each of
the Hiland Companies, they have certain duties and obligations
to the unitholders of each Hiland Company as provided in the
respective partnership agreements of the Hiland Companies.
127
The directors who serve on both boards of directors are: Harold
Hamm, Joseph L. Griffin, Matthew S. Harrison, Edward D. Doherty,
Michael L. Greenwood and Rayford T. Reid. Mr. Griffin also
serves as President and Chief Executive Officer of both Hiland
Companies, and Mr. Harrison serves as Chief Financial
Officer of both Hiland Companies. No member of the Hiland
Holdings Conflicts Committee also served on the Hiland Partners
Board of Directors.
Dr. Cheryl L. Evans and Dr. Bobby B. Lyle, who compose
the Hiland Holdings Conflicts Committee, each received
compensation of $30,000 in connection with the Hiland Holdings
Conflicts Committees consideration of the Hiland Holdings
merger. The compensation paid to each of the Hiland Holdings
Conflicts Committee members was in addition to the compensation
they receive for serving on the Hiland Holdings Board of
Directors and any other committees of the Hiland Holdings Board
of Directors. These payments were not predicated on any result
of the deliberations of the Hiland Holdings Conflicts Committee.
It is expected that Messrs. Hamm, Griffin and Harrison will
continue as directors of the surviving company after the
effective time of the Hiland Holdings merger. In addition, it is
expected that, following the Hiland Holdings merger,
Messrs. Hamm, Griffin and Harrison will continue as
directors of the surviving company after the effective time of
the Hiland Holdings merger.
Rayford T. Reid, a member of the Board of Directors of each of
the Hiland Companies, recused himself from consideration and
voting on Hiland Holdings merger agreement and Hiland Partners
merger due to his professional relationship with Mr. Hamm.
Mr. Reid has historically provided Mr. Hamm and the
Hamm family trusts with financial advisory services, including
in connection with evaluating strategic alternatives with
respect to the Hiland Companies.
Hiland
Holdings Management
Certain members of the Hiland Holdings management team,
including Chief Executive Officer Joseph L. Griffin and Chief
Financial Officer Matthew S. Harrison, have been offered
continued employment with the surviving entity after the
effective time of the Hiland Holdings merger and may enter into
or be provided new employment, retention and compensation
arrangements (though no such arrangements have been proposed or
agreed to). In addition, Mr. Griffin serves as Chief
Executive Officer of Hiland Holdings, and Mr. Harrison
serves as Chief Financial Officer of Hiland Holdings and as Vice
President and Secretary of Parent, HPGP Merger Sub and
Continental Gas.
Neither Mr. Griffin nor Mr. Harrison have any
ownership interest in Parent or HPGP Merger Sub. The Hiland
Holdings merger will not trigger any change of
control provision in the employment contract of
Mr. Griffin, Mr. Harrison, or any other officer of
Hiland Holdings.
Hiland
Holdings Director and Officer Insurance
The Hiland Holdings merger agreement provides, with respect to
indemnification of directors and officers, that the partnership
agreement of the surviving entity may not be amended, repealed
or otherwise modified after the effective time of the Hiland
Holdings merger in any manner that would adversely affect the
rights thereunder of the persons who at any time prior to the
effective time of the Hiland Holdings merger were identified as
prospective indemnitees under the Hiland Holdings partnership
agreement in respect of actions or omissions occurring at or
prior to the effective time of the Hiland Holdings merger
(including the transactions contemplated by the Hiland Holdings
merger agreement).
For a period of six years after the effective time of the Hiland
Partners merger agreement, Parent and the general partner of
Hiland Holdings shall, and Parent and the general partner of
Hiland Holdings shall cause the surviving entity (and its
successors or assigns) to, maintain officers and
directors liability insurance covering each person who is
immediately prior to the effective time of the Hiland Holdings
merger agreement, or has been at any time prior to the effective
time of the Hiland Holdings merger, an officer or director of
any of the Holdings Parties or their subsidiaries and each
person who immediately prior to the effective time of the Hiland
Holdings merger is serving or prior to the effective time of the
Hiland Holdings merger has served at the request of any of the
Holdings Parties or their subsidiaries as a director, officer,
trustee or fiduciary of
128
another corporation, partnership, joint venture, trust, pension
or other employee benefit plan of the Holdings Parties or their
subsidiaries who are or at any time prior to the effective time
were covered by the existing officers and directors
liability insurance applicable to the Holdings Parties or their
subsidiaries on terms substantially no less advantageous to the
indemnified persons described in this paragraph than such
existing insurance with respect to acts or omissions, or alleged
acts or omissions, prior to the effective time of the Hiland
Holdings merger (whether claims, actions or other proceedings
relating thereto are commenced, asserted or claimed before or
after the effective time of the Hiland Holdings merger).
Hiland Holdings shall cause (and Parent, following the closing
of the Hiland Holdings merger, shall continue to cause) coverage
to be extended under the existing officers and
directors liability insurance applicable to the Holdings
Parties or their subsidiaries by obtaining a six-year
tail policy on terms and conditions no less
advantageous than the existing officers and
directors liability insurance, and such tail
policy shall satisfy the requirements summarized in this
section. In no event, however, will Parent be required to spend
more than 250% of the last annual premium paid by the Holdings
Parties and their subsidiaries prior to the signing date of the
Hiland Holdings merger agreement per policy year of coverage
under such tail policy. If the cost per policy year
of such insurance exceeds 250% of the last annual premium,
Parent shall purchase as much coverage per policy year as
reasonably obtainable for the amount equal to 250% of the last
annual premium.
The indemnification and insurance provisions of the Hiland
Holdings merger agreement are more fully described under
The Hiland Holdings Merger Agreement Other
Covenants and Agreements Indemnification and
Insurance.
Treatment
of Equity Awards of Directors and Officers
Upon consummation of the Hiland Holdings merger, the outstanding
equity awards under the Hiland Holdings, LP Long-Term Incentive
Plan will be subject to the following treatment:
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restricted common units held by non-employee members of the
Hiland Holdings Board of Directors will immediately vest and
automatically convert into the right to receive the Hiland
Holdings merger consideration;
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all other restricted common units, phantom units and unit option
awards issued pursuant to the Hiland Holdings, LP Long-Term
Incentive Plan that remain outstanding as of the effective time
of the Hiland Holdings merger will remain outstanding in
accordance with their respective terms as equity awards in the
surviving entity in the merger.
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Following the closing of the Hiland Holdings merger, the board
of directors of the surviving entity may amend the terms of
outstanding equity-based awards or other terms of the long-term
incentive plan to align such terms with the privately-held
structure of the surviving entity.
129
Equity
Interests in Hiland Holdings, Parent and HPGP Merger
Sub
The following table sets forth the current beneficial ownership
of Mr. Hamm, the other Hamm Continuing Investors, their
respective affiliates and the directors and officers of Hiland
Holdings in the equity of Hiland Holdings as of the date of this
joint proxy statement and their contemplated beneficial
ownership in the surviving entity after the effective time of
the Hiland Holdings merger.
Equity
Interests of Hamm Continuing Investors, Directors and Officers
in Hiland Holdings
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Restricted
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Common Units
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Common Units
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Phantom Units
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Unit Options
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Conflicts
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Total Cash
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Cashed
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Cashed
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Cashed
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Cashed
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Committee
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Received
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Name
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Position
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Owned
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Out
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Owned
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Out
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Owned
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Out
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Owned
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Out
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Compensation
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in Merger
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Harold Hamm(1)
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Chairman
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8,540,950
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$
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$
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Bert Mackie, as trustee of the Trusts
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N/A
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4,597,102
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$
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$
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Joseph L. Griffin
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Director, Chief Executive Officer
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$
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$
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Matthew S. Harrison
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Director, Chief Financial Officer
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$
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$
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Edward D. Doherty
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Director
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1,750
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1,750
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2,750
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2,750
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$
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$
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10,800
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Dr. Cheryl L. Evans
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Director
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1,750
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1,750
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2,750
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2,750
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$
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30,000
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$
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40,800
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Michael L. Greenwood
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Director
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1,250
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1,250
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2,750
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2,750
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$
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$
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9,600
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Dr. Bobby B. Lyle
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Director
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61,154
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61,154
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1,750
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1,750
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$
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30,000
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$
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183,370
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Shelby E. Odell(2)
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Director
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6,250
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6,250
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2,750
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2,750
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$
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$
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21,600
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Rayford T. Reid
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Director
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26,250
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26,250
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2,750
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2,750
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$
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$
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69,600
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Kent C. Christopherson
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Chief Operating Officer
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$
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$
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Robert W. Shain(3)
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Chief Commercial Officer
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$
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$
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(1)
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Mr. Hamm owns approximately 90.7% of Continental Gas.
Accordingly, Mr. Hamm is deemed to be the beneficial owner
of the 8,481,350 Hiland Holdings common units held by
Continental Gas.
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(2)
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Mr. Odell resigned from the Hiland Holdings Board of
Directors effective January 21, 2009.
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(3)
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Mr. Shain resigned from his position as Chief Commercial
Officer of each of the Hiland Companies effective March 31,
2009.
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Pro Forma
Equity Interests in Surviving Entity (1)
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Common Units
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Name
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Current Position
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Units
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% of Class
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Harold Hamm(2)
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Chairman
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13,538,397
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63
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Bert Mackie, as trustee of the Trusts(3)
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N/A
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8,069,103
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37
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%
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Joseph L. Griffin
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Director, Chief
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Executive Officer
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Matthew S. Harrison
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Director, Chief
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Financial Officer
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Kent C. Christopherson
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Chief Operating
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Officer
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Robert W. Shain(4)
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Chief Commercial
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Officer
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(1)
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Does not include the 0% non-economic general partner interest
which is beneficially owned by Mr. Hamm. No restricted
common units, phantom units or unit options are expected to be
outstanding, so they are not reflected in the above table.
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(2)
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Mr. Hamm is the sole member of Parent. Accordingly,
Mr. Hamm is deemed to be the beneficial owner of the
4,997,447 common units of the surviving entity held by Parent.
Mr. Hamm also owns approximately
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90.7% of the common stock of Continental Gas. Accordingly,
Mr. Hamm is deemed to be the beneficial owner of the
8,481,350 common units of the surviving entity held by
Continental Gas.
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(3)
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Mr. Mackie is the trustee of the Harold Hamm DST Trust and
the Harold Hamm HJ Trust. Accordingly, he is deemed to be the
beneficial owner of the 4,838,333 and 3,230,770 common units of
the surviving entity, respectively, held by them.
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(4)
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Mr. Shain resigned from his position as Chief Commercial Officer
of each of the Hiland Companies effective March 31, 2009.
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Equity
Interests in Hiland Partners
In addition to the equity interests of Mr. Hamm, the other
Hamm Continuing Investors, their respective affiliates and the
directors and officers of Hiland Holdings in Hiland Holdings
summarized in the tables above, certain of those persons also
have equity interests in Hiland Partners, which are summarized
in the tables included in Interests of Certain Persons in
the Mergers Hiland Partners Merger
Equity Interests in Hiland Partners, Parent and HLND Merger
Sub.
Material
United States Federal Income Tax Considerations
The following is a discussion of the material U.S. federal
income tax consequences of the Hiland Partners merger and the
Hiland Holdings merger that may be relevant to current Hiland
Partners common unitholders and Hiland Holdings common
unitholders. This discussion is based upon the current
provisions of the Internal Revenue Code of 1986, as amended (the
Internal Revenue Code), existing final Treasury
regulations promulgated under the Internal Revenue Code (the
Treasury Regulations), administrative rulings and
judicial decisions now in effect, all of which are subject to
change, possibly with retroactive effect. Changes in these
authorities may cause the actual tax consequences of the mergers
to vary substantially from the tax consequences described below.
Neither Hiland Partners nor Hiland Holdings has sought a ruling
from the U.S. Internal Revenue Service (the
IRS) with respect to any of the tax matters
discussed below, and the IRS would not be precluded from taking
positions contrary to those described herein. As a result, no
assurance can be given that the IRS will agree with all of the
tax characterizations and the tax consequences described below.
The discussion does not purport to be a complete description of
all U.S. federal income tax consequences of the Hiland
Partners merger or the Hiland Holdings merger to the common
unitholders of Hiland Partners and Hiland Holdings. Moreover,
the discussion focuses on common unitholders of Hiland Partners
and Hiland Holdings who are individual citizens or residents of
the United States and has only limited application to
corporations, estates, trusts, and other common unitholders
subject to specialized tax treatment, such as tax-exempt
institutions, foreign persons, individual retirement accounts
(IRAs), real estate investment trusts (REITs), mutual funds,
dealers in securities or currencies, traders in securities that
have elected to use the
mark-to-market
method of accounting for their securities, or persons that hold
Hiland Partners common units or Hiland Holdings common units as
part of a hedge, straddle or conversion transaction or those who
received their common units of Hiland Partners or Hiland
Holdings as compensation. Also, this discussion assumes that
Hiland Partners common units and Hiland Holdings common units
are held as capital assets at the time of the mergers.
Each holder of Hiland Partners common units or Hiland
Holdings common units should consult its own tax advisor
regarding the tax consequences of the Hiland Partners merger or
the Hiland Holdings merger to such holder in such holders
particular situation, including any tax consequences that may
arise under the laws of any state, local or foreign taxing
jurisdiction and the possible effects of changes in
U.S. federal or other tax laws. Further, it is the
responsibility of each common unitholder to file all state,
local and foreign, as well as U.S. federal, tax returns
that may be required to be filed by such common unitholder.
Tax
Consequences of the Hiland Partners Merger
Tax
Treatment as a Taxable Disposition
If the Hiland Partners merger is completed as contemplated by
the Hiland Partners merger agreement, HLND Merger Sub will be
merged with and into Hiland Partners and holders of common units
of Hiland
131
Partners (other than the Hiland Partners rollover common
unitholders) will receive the merger consideration of $7.75 in
cash for each common unit of Hiland Partners. For
U.S. federal income tax purposes, the Hiland Partners
merger will be treated as a taxable disposition by the holders
of common units of Hiland Partners (other than the Hiland
Partners rollover common unitholders) of their Hiland Partners
common units.
Recognition
of Gain or Loss
In general, for U.S. federal income tax purposes, a holder
of Hiland Partners common units receiving the Hiland Partners
merger consideration will recognize gain or loss in an amount
equal to the difference, if any, between the amount realized by
that Hiland Partners common unitholder and that Hiland Partners
common unitholders adjusted tax basis in its Hiland
Partners common units.
Generally, a Hiland Partners common unitholders initial
tax basis for its common units will have been the amount he paid
for the common units plus its share of Hiland Partners
nonrecourse liabilities. That basis will have been increased by
its share of Hiland Partners income and by any increases
in its share of Hiland Partners nonrecourse liabilities.
That basis will have been decreased, but not below zero, by
distributions from Hiland Partners to the common unitholder, by
the common unitholders share of Hiland Partners
losses, by any decreases in its share of Hiland Partners
nonrecourse liabilities, and by its share of Hiland
Partners expenditures that are not deductible in computing
taxable income and are not required to be capitalized. A Hiland
Partners common unitholder has no share of Hiland Partners
debt that is recourse to Hiland Partners general partner,
but has a share (generally based on its share of Hiland
Partners profits) of Hiland Partners nonrecourse
liabilities.
A common unitholders amount realized will be measured by
the sum of the Hiland Partners merger consideration received by
him plus its share of Hiland Partners nonrecourse
liabilities. Because the amount realized includes a common
unitholders share of Hiland Partners nonrecourse
liabilities, the gain recognized could result in a tax liability
in excess of the cash received as the Hiland Partners merger
consideration. However, because of the prices at which the
holders of Hiland Partners common units have purchased such
common units, it is not anticipated that existing Hiland
Partners common unitholders will recognize additional taxable
gain as a result of their allocation of such nonrecourse
liabilities of Hiland Partners.
Prior distributions from Hiland Partners to a common unitholder
in excess of cumulative net taxable income for a common unit
that decreased the common unitholders tax basis in that
common unit will, in effect, become taxable income if the amount
realized is greater than the common unitholders tax basis
in that common unit, even if the Hiland Partners merger
consideration received is less than its original cost.
Except as noted below, gain or loss recognized by a common
unitholder (other than a dealer in common units) as
a result of the Hiland Partners merger will generally be taxable
as capital gain or loss. Capital gain recognized by an
individual with respect to common units held for more than one
year will generally be taxed at a maximum U.S. federal
income tax rate of 15%. However, a portion (which will likely be
substantial) of a common unitholders gain or loss will be
separately computed and taxed as ordinary income or loss under
Section 751 of the Internal Revenue Code to the extent
attributable to unrealized receivables or to
inventory items owned by Hiland Partners. The term
unrealized receivables includes potential recapture
items, including depreciation recapture. Ordinary income
attributable to unrealized receivables, inventory items and
depreciation recapture may exceed net taxable gain realized upon
the sale of a common unit and may be recognized even if there is
a net taxable loss realized on the sale of a common unit. Thus,
a common unitholder may recognize both ordinary income and a
capital loss upon a sale of common units. Net capital losses may
offset capital gains and up to $3,000 of ordinary income in the
case of individuals, and may only be used to offset capital
gains in the case of corporations.
The IRS has ruled that a partner that acquires interests in a
partnership in separate transactions must combine those
interests and maintain a single adjusted tax basis for all those
interests. Treasury Regulations under Section 1223 of the
Internal Revenue Code allow a selling common unitholder that can
identify common units transferred with an ascertainable holding
period to elect to use the actual holding period of the common
units transferred. A common unitholder with common units
purchased in separate transactions is urged to consult its tax
advisor as to the possible consequences of the IRS ruling and
application of the Treasury Regulations.
132
Limitations
on Deductibility of Losses
A common unitholders ability to deduct its allocable share
of Hiland Partners losses is limited to the tax basis in
its Hiland Partners common units and, in the case of an
individual, estate, trust, or corporate common unitholder (if
more than 50% of the value of the corporate common
unitholders stock is owned directly or indirectly by or
for five or fewer individuals or some tax-exempt organizations)
to the amount for which the common unitholder is considered to
be at risk with respect to Hiland Partners
activities, if that amount is less than its tax basis. A common
unitholder subject to these limitations must recapture losses
deducted in previous years to the extent that distributions
cause its at-risk amount to be less than zero at the end of any
taxable year. Losses disallowed to a common unitholder or
recaptured as a result of these limitations will carry forward
and will be allowable as a deduction to the extent that its
at-risk amount is subsequently increased, provided such losses
do not exceed such common unitholders tax basis in its
common units. Upon the taxable disposition of a common unit, any
gain recognized by a common unitholder can be offset by losses
that were previously suspended by the at-risk limitation but may
not be offset by losses suspended by the basis limitation. Any
loss previously suspended by the at-risk limitation in excess of
that gain would no longer be utilizable.
In general, a common unitholder is at risk to the extent of the
tax basis of its Hiland Partners common units, excluding any
portion of that basis attributable to its share of Hiland
Partners nonrecourse liabilities, reduced by (i) any
portion of that basis representing amounts otherwise protected
against loss because of a guarantee, stop loss agreement or
other similar arrangement and (ii) any amount of money he
borrows to acquire or hold its common units, if the lender of
those borrowed funds owns an interest in Hiland Partners or
Hiland Holdings, is related to the common unitholder, or can
look only to the common units for repayment. A common
unitholders at-risk amount increases or decreases as the
tax basis of the common unitholders common units increases
or decreases, other than as a result of increases or decreases
in its share of Hiland Partners nonrecourse liabilities.
In addition to the basis and at-risk limitations on the
deductibility of losses, the passive loss limitations generally
provide that individuals, estates, trusts, and some closely-held
corporations and personal service corporations can deduct losses
from passive activities (which are generally trade or business
activities in which the taxpayer does not materially
participate) only to the extent of the taxpayers income
from those passive activities. The passive loss limitations are
applied separately with respect to each publicly traded
partnership. Consequently, in some circumstances, a Hiland
Partners common unitholder may have suspended passive activity
losses attributable to its allocations of income and loss from
Hiland Partners. As a result of such common unitholders
disposition of its entire interest in Hiland Partners pursuant
to the Hiland Partners merger and the Hiland Holdings merger,
the common unitholder would generally be entitled to deduct such
losses in full. However, the passive loss limitations are
applied after other applicable limitations on deductions,
including the at-risk rules and the basis limitations which may
otherwise prevent the deduction of such passive activity losses.
Non-U.S.
Holders of Hiland Partners Common Units
A
non-U.S. common
unitholder that receives the Hiland Partners merger
consideration in exchange for its Hiland Partners common unit
will be subject to U.S. federal income tax on any gain
realized from the sale or disposition of that common unit to the
extent such gain is effectively connected with a U.S. trade
or business of the foreign common unitholder. Under a ruling
published by the IRS, interpreting the scope of
effectively connected income, a foreign common
unitholder of Hiland Partners would be considered to be engaged
in a trade or business in the United States by virtue of the
U.S. activities of Hiland Partners, and part or all of that
common unitholders gain would be effectively connected
with that common unitholders indirect U.S. trade or
business. Moreover, under the Foreign Investment in Real
Property Tax Act, a foreign common unitholder generally will be
subject to U.S. federal income tax upon the sale or
disposition of a common unit if (i) he owned (directly or
constructively, applying certain attribution rules) more than 5%
of the Hiland Partners common units at any time during the
five-year period ending on the date of such disposition and
(ii) 50% or more of the fair market value of all of Hiland
Partners assets consisted of U.S. real property
interests at any time during the shorter of the period during
which such common unitholder held the common units or the
5-year
period ending on the date of disposition. Currently, more than
50% of Hiland Partners assets consist of
133
U.S. real property interests. Therefore, foreign common
unitholders may be subject to U.S. federal income tax on
their gain resulting from the Hiland Partners merger.
Constructive
Termination
Hiland Partners will be considered to have terminated for
U.S. federal income tax purposes if, within a twelve-month
period, there are sales or exchanges of interests in Hiland
Partners which, in the aggregate, constitute 50% or more of the
total interests in Hiland Partners capital and profits.
For purposes of measuring whether the 50% threshold is reached,
multiple sales of the same interest are counted only once. While
the sales and exchanges resulting from the Hiland Partners
merger and the Hiland Holdings merger are not anticipated to
cause a constructive termination of the Hiland Partners
partnership, it is possible that, when aggregated with prior and
subsequent transfers of non publicly-held interests in Hiland
Holding or Hiland Partners within a twelve-month period, the
aggregate interests transferred may constitute 50% or more of
the total interests in Hiland Partners capital and
profits, causing a constructive termination of the Hiland
Partners partnership. A constructive termination results in the
closing of Hiland Partners taxable year for all common
unitholders. In the case of a common unitholder reporting on a
taxable year other than a fiscal year ending December 31,
the closing of Hiland Partners taxable year may result in
such common unitholders share of the Hiland Partners
taxable income or loss for more than twelve months being
includable in its taxable income for the year of termination.
Backup
Withholding and Information Reporting
Payment of the cash consideration with respect to the Hiland
Partners merger may be subject to information reporting and
backup withholding at the applicable rate (currently 28%),
unless the holder of Hiland Partners common units properly
certifies its taxpayer identification number or otherwise
establishes an exemption from backup withholding and complies
with all other applicable requirements of the backup withholding
rules. These requirements will be set forth in the letter of
transmittal and should be carefully reviewed by each holder of
Hiland Partners common units. Backup withholding is not an
additional tax. Any amounts so withheld may be allowed as a
refund or a credit against such common unitholders
U.S. federal income tax liability, if any, provided that
the required information is properly and timely furnished to the
IRS.
Tax
Consequences of the Hiland Holdings Merger
Tax
Treatment as a Taxable Disposition
If the Hiland Holdings merger is completed as contemplated by
the Hiland Holdings merger agreement, HPGP Merger Sub will be
merged with and into Hiland Holdings and holders of common units
of Hiland Holdings (other than the Hiland Holdings rollover
common unitholders) will receive the merger consideration of
$2.40 in cash for each common unit of Hiland Holdings. For
U.S. federal income tax purposes, the Hiland Holdings
merger will be treated as a taxable disposition by the holders
of common units of Hiland Holdings (other than the Hiland
Holdings rollover common unitholders) of their Hiland Holdings
common units.
Recognition
of Gain or Loss
In general, for U.S. federal income tax purposes, a holder
of Hiland Holdings common units receiving the Hiland Holdings
merger consideration will recognize gain or loss in an amount
equal to the difference, if any, between the amount realized by
that Hiland Holdings common unitholder and that Hiland Holdings
common unitholders adjusted tax basis in its Hiland
Holdings common units.
Generally, a Hiland Holdings common unitholders initial
tax basis for its common units will have been the amount he paid
for the common units plus its share of Hiland Holdings
nonrecourse liabilities. That basis will have been increased by
its share of Hiland Holdings income and by any increases
in its share of Hiland Holdings nonrecourse liabilities.
That basis will have been decreased, but not below zero, by
distributions from Hiland Holdings to the common unitholder, by
the common unitholders share of Hiland Holdings
losses, by any decreases in its share of Hiland Holdings
nonrecourse liabilities, and by its share of Hiland
Holdings expenditures that are not deductible in computing
taxable income and are not required to be
134
capitalized. A Hiland Holdings common unitholder has no share of
Hiland Holdings debt that is recourse to Hiland
Holdings general partner, but has a share (generally based
on its share of Hiland Holdings profits) of Hiland
Holdings nonrecourse liabilities.
A common unitholders amount realized will be measured by
the sum of the Hiland Holdings merger consideration received by
him plus its share of Hiland Holdings nonrecourse
liabilities. Because the amount realized includes a common
unitholders share of Hiland Holdings nonrecourse
liabilities, the gain recognized could result in a tax liability
in excess of the cash received as the Hiland Holdings merger
consideration. However, because of the prices at which the
holders of Hiland Holdings common units have purchased such
common units, it is not anticipated that existing Hiland
Holdings common unitholders will recognize additional taxable
gain as a result of their allocation of such nonrecourse
liabilities of Hiland Holdings.
Prior distributions from Hiland Holdings to a common unitholder
in excess of cumulative net taxable income for a common unit
that decreased the common unitholders tax basis in that
common unit will, in effect, become taxable income if the amount
realized is greater than the common unitholders tax basis
in that common unit, even if the Hiland Holdings merger
consideration received is less than its original cost.
Except as noted below, gain or loss recognized by a common
unitholder (other than a dealer in common units) as
a result of the Hiland Holdings merger will generally be taxable
as capital gain or loss. Capital gain recognized by an
individual with respect to common units held for more than one
year will generally be taxed at a maximum U.S. federal
income tax rate of 15%. However, a portion (which will likely be
substantial) of a common unitholders gain or loss will be
separately computed and taxed as ordinary income or loss under
Section 751 of the Internal Revenue Code to the extent
attributable to unrealized receivables or to
inventory items owned by Hiland Holdings or Hiland
Partners. The term unrealized receivables includes
potential recapture items, including depreciation recapture.
Ordinary income attributable to unrealized receivables,
inventory items and depreciation recapture may exceed net
taxable gain realized upon the sale of a common unit and may be
recognized even if there is a net taxable loss realized on the
sale of a common unit. Thus, a common unitholder may recognize
both ordinary income and a capital loss upon a sale of common
units. Net capital losses may offset capital gains and up to
$3,000 of ordinary income, in the case of individuals, and may
only be used to offset capital gains in the case of corporations.
In response to recent public offerings of interests in the
management operations of private equity funds and hedge funds,
members of Congress have considered substantive changes to the
Internal Revenue Code that could change the characterization of
certain types of income received from partnerships and upon the
sale of interests in certain types of partnerships. In
particular, one proposal re-characterizes certain income and
gain received with respect to investment service
partnership interests as ordinary income for the
performance of services. As such proposal is currently
interpreted, a significant portion of Hiland Holdings
interest in Hiland Partners may be viewed as an investment
service partnership interest. Therefore, if applied
retroactively to taxable periods that include the closing of
each Hiland Company merger, this proposal could cause
substantially all the gain recognized by common unitholders of
Hiland Holdings to be treated as ordinary income. We are unable
to predict whether this proposed legislation, or any other
proposals will ultimately be enacted.
The IRS has ruled that a partner that acquires interests in a
partnership in separate transactions must combine those
interests and maintain a single adjusted tax basis for all those
interests. Treasury Regulations under Section 1223 of the
Internal Revenue Code allow a selling common unitholder that can
identify common units transferred with an ascertainable holding
period to elect to use the actual holding period of the common
units transferred. A common unitholder with common units
purchased in separate transactions is urged to consult its tax
advisor as to the possible consequences of this ruling and
application of the Treasury Regulations.
Limitations
on Deductibility of Losses
A common unitholders ability to deduct its allocable share
of Hiland Holdings losses is limited to the tax basis in
its Hiland Holdings common units and, in the case of an
individual, estate, trust, or corporate common unitholder (if
more than 50% of the value of the corporate common
unitholders stock is owned directly or indirectly by or
for five or fewer individuals or some tax-exempt organizations)
to the amount for which the common unitholder is considered to
be at risk with respect to Hiland Holdings
activities, if that
135
amount is less than its tax basis. A common unitholder subject
to these limitations must recapture losses deducted in previous
years to the extent that distributions cause its at-risk amount
to be less than zero at the end of any taxable year. Losses
disallowed to a common unitholder or recaptured as a result of
these limitations will carry forward and will be allowable as a
deduction to the extent that its at-risk amount is subsequently
increased, provided such losses do not exceed such common
unitholders tax basis in its common units. Upon the
taxable disposition of a common unit, any gain recognized by a
common unitholder can be offset by losses that were previously
suspended by the at-risk limitation but may not be offset by
losses suspended by the basis limitation. Any loss previously
suspended by the at-risk limitation in excess of that gain would
no longer be utilizable.
In general, a common unitholder is at risk to the extent of the
tax basis of its Hiland Holdings common units, excluding any
portion of that basis attributable to its share of Hiland
Holdings nonrecourse liabilities, reduced by (i) any
portion of that basis representing amounts otherwise protected
against loss because of a guarantee, stop loss agreement or
other similar arrangement and (ii) any amount of money he
borrows to acquire or hold its common units, if the lender of
those borrowed funds owns an interest in Hiland Holdings or
Hiland Partners, is related to the common unitholder, or can
look only to the common units for repayment. A common
unitholders at-risk amount increases or decreases as the
tax basis of the common unitholders common units increases
or decreases, other than as a result of increases or decreases
in its share of Hiland Holdings nonrecourse liabilities.
In addition to the basis and at-risk limitations on the
deductibility of losses, the passive loss limitations generally
provide that individuals, estates, trusts, and some closely-held
corporations and personal service corporations can deduct losses
from passive activities (which are generally trade or business
activities in which the taxpayer does not materially
participate) only to the extent of the taxpayers income
from those passive activities. The passive loss limitations are
applied separately with respect to each publicly traded
partnership. Consequently, in some circumstances, a Hiland
Holdings common unitholder may have suspended passive activity
losses attributable to its allocations of income and loss from
Hiland Holdings. As a result of such common unitholders
disposition of its entire interest in Hiland Partners pursuant
to the Hiland Holdings merger and the Hiland Partners merger,
the common unitholder would generally be entitled to deduct such
losses in full. However, the passive loss limitations are
applied after other applicable limitations on deductions,
including the at-risk rules and the basis limitations which may
otherwise prevent the deduction of such passive activity losses.
Non-U.S.
Holders of Hiland Holdings Common Units
A
non-U.S. common
unitholder that receives the Hiland Holdings merger
consideration in exchange for its Hiland Holdings common unit
will be subject to U.S. federal income tax on any gain
realized from the sale or disposition of that common unit to the
extent such gain is effectively connected with a U.S. trade
or business of the foreign common unitholder. Under a ruling
published by the IRS, interpreting the scope of
effectively connected income, a foreign common
unitholder of Hiland Holdings would be considered to be engaged
in a trade or business in the United States by virtue of the
U.S. activities of Hiland Holdings, and part or all of that
common unitholders gain would be effectively connected
with that common unitholders indirect U.S. trade or
business. Moreover, under the Foreign Investment in Real
Property Tax Act, a foreign common unitholder generally will be
subject to U.S. federal income tax upon the sale or
disposition of a common unit if (i) he owned (directly or
constructively, applying certain attribution rules) more than 5%
of the Hiland Holdings common units at any time during the
five-year period ending on the date of such disposition and
(ii) 50% or more of the fair market value of all of Hiland
Holdings assets consisted of U.S. real property
interests at any time during the shorter of the period during
which such common unitholder held the common units or the
5-year
period ending on the date of disposition. Currently, more than
50% of Hiland Holdings assets consist of U.S. real
property interests. Therefore, foreign common unitholders may be
subject to U.S. federal income tax on their gain resulting
from the Hiland Holdings merger.
Constructive
Termination
Hiland Holdings will be considered to have terminated for
U.S. federal income tax purposes if, within a twelve-month
period, there are sales or exchanges of common units which, in
the aggregate, constitute 50% or
136
more of the total interests in Hiland Holdings capital and
profits. For purposes of measuring whether the 50% threshold is
reached, multiple sales of the same interest are counted only
once. While the sales and exchanges resulting from the Hiland
Partners merger and the Hiland Holdings merger are not
anticipated to cause a constructive termination of the Hiland
Holdings partnership, it is possible that, when aggregated with
prior and subsequent transfers of non publicly-held interests in
Hiland Holding within a twelve-month period, the aggregate
interests transferred may constitute 50% or more of the total
interests in Hiland Holdings capital and profits, causing
a constructive termination of the Hiland Holdings partnership. A
constructive termination results in the closing of Hiland
Holdings taxable year for all common unitholders. In the
case of a common unitholder reporting on a taxable year other
than a fiscal year ending December 31, the closing of
Hiland Holdings taxable year may result in such common
unitholders share of Hiland Holdings taxable income
or loss for more than twelve month being includable in its
taxable income for the year of termination.
Backup
Withholding and Information Reporting
Payment of the cash consideration with respect to the Hiland
Holdings merger may be subject to information reporting and
backup withholding at the applicable rate (currently 28%),
unless the holder of Hiland Holdings common units properly
certifies its taxpayer identification number or otherwise
establishes an exemption from backup withholding and complies
with all other applicable requirements of the backup withholding
rules. These requirements will be set forth in the letter of
transmittal and should be carefully reviewed by each holder of
Hiland Holdings common units. Backup withholding is not an
additional tax. Any amounts so withheld may be allowed as a
refund or a credit against such common unitholders
U.S. federal income tax liability, if any, provided that
the required information is properly and timely furnished to the
IRS.
Structure
and Steps of the Mergers
The transactions necessary to effectuate the mergers will take
place in a number of steps that are governed by the agreements
described below.
The
Hiland Partners Merger
Pursuant to the provisions of the Hiland Partners merger
agreement, HLND Merger Sub will merge with and into Hiland
Partners, with Hiland Partners continuing as the surviving
entity. For a more detailed description of the Hiland Partners
merger agreement, see The Hiland Partners Merger
Agreement beginning on page 149.
Immediately prior to the closing of the Hiland Partners merger,
each common unit of Hiland Partners (other than common units
owned by the Hiland Partners rollover common unitholders will be
cancelled and convert automatically into the right to receive
$7.75 in cash. Restricted common units held by non-employee
members of the Hiland Partners Board of Directors will vest
immediately prior to the effective time of the Hiland Partners
merger and automatically convert into the right to receive the
Hiland Partners merger consideration.
The following partnership interests shall be unaffected and
remain outstanding as partnership interests in the surviving
entity in the Hiland Partners merger, and their holders will not
receive any consideration as part of the Hiland Partners merger:
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2,321,471 Hiland Partners common units owned by Hiland Holdings;
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3,060,000 subordinated units representing limited partners
interests in Hiland Partners owned by Hiland Holdings;
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any restricted common units, phantom units and unit option
awards issued to employees pursuant to the Hiland Partners, LP
Long-Term Incentive Plan that remain outstanding as of the
effective time of the Hiland Partners merger;
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137
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the 2% general partner interest in Hiland Partners, represented
by 191,202 general partner units owned by the general partner of
Hiland Partners; and
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the incentive distribution rights in Hiland Partners owned by
the general partner of Hiland Partners.
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Upon closing of the Hiland Partners merger, each limited
liability company unit of HLND Merger Sub outstanding
immediately prior to the closing will automatically convert into
one common unit of the surviving entity.
The
Hiland Partners Support Agreement
Hiland Holdings and the general partner of Hiland Holdings
entered into the Hiland Partners support agreement with Hiland
Partners, the general partner of Hiland Partners, Parent and
HLND Merger Sub in which Hiland Holdings agreed to
(i) maintain the ownership of its 2,321,471 common and
3,060,000 subordinated units of Hiland Partners, which represent
approximately 37% and 100% of their respective classes
outstanding, (ii) vote its common units and subordinated
units of Hiland Partners in favor of the approval of the Hiland
Partners merger agreement and the Hiland Partners merger, and
(iii) grant an irrevocable proxy to Parent for the purpose
of voting in favor of the Hiland Partners merger agreement and
the Hiland Partners merger as described above.
The Hiland Partners support agreement terminates on the earliest
to occur of (i) the time the Hiland Partners merger becomes
effective pursuant to the terms of the Hiland Partners merger
agreement, (ii) the termination of the Hiland Partners
merger agreement in accordance with its terms, or (iii) the
written agreement of the parties thereto to terminate the Hiland
Partners support agreement.
The Hiland Partners support agreement is attached as
Annex B to this joint proxy statement.
The
Hiland Holdings Merger
Pursuant to the provisions of the Hiland Holdings merger
agreement, HPGP Merger Sub will merge with and into Hiland
Holdings, with Hiland Holdings continuing as the surviving
entity. For a more detailed description of the Hiland Holdings
merger agreement, see The Hiland Holdings Merger
Agreement beginning on page 169. Immediately prior to
the closing of the Hiland Holdings merger, each common unit of
Hiland Holdings (other than common units owned by the Hiland
Holdings rollover common unitholders will be cancelled and
convert automatically into the right to receive $2.40 in cash.
Restricted common units held by non-employee members of the
Hiland Holdings Board of Directors will vest immediately prior
to the effective time of the Hiland Holdings merger and
automatically convert into the right to receive the Hiland
Holdings merger consideration.
The following partnership interests shall be unaffected and
remain outstanding as partnership interests in the surviving
entity in the Hiland Holdings merger, and their holders will not
receive any consideration as part of the Hiland Holdings merger:
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8,481,350 Hiland Holdings common units owned by Continental Gas,
an affiliate of Harold Hamm;
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2,757,390 Hiland Holdings common units owned by the Harold Hamm
DST Trust;
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1,839,712 Hiland Holdings common units owned by the Harold Hamm
HJ Trust;
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59,600 Hiland Holdings common units owned by Harold Hamm;
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any restricted common units, phantom units and unit option
awards issued to employees pursuant to the Hiland Holdings GP,
LP Long-Term Incentive Plan that remain outstanding as of the
effective time of the Hiland Holdings merger; and
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the general partner interest in Hiland Holdings owned by the
general partner of Hiland Holdings.
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Upon closing of the Hiland Holdings merger, each limited
liability company unit of HPGP Merger Sub outstanding
immediately prior to the closing will automatically convert into
one common unit of the surviving entity.
138
The
Hiland Holdings Support Agreement
Mr. Hamm, Continental Gas and the Hamm family trusts, who
beneficially own an aggregate of 13,138,052 common units of
Hiland Holdings, which represent approximately 60.8% of the
common units outstanding, have entered into the Hiland Holdings
support agreement with Hiland Holdings and the general partner
of Hiland Holdings in which they each agreed to
(i) maintain the ownership of their common units of Hiland
Holdings, (ii) vote their common units of Hiland Holdings
in favor of the approval of the Hiland Holdings merger agreement
and the Hiland Holdings merger, and (iii) grant an
irrevocable proxy to the designee of Hiland Holdings for the
purpose of voting in favor of the Hiland Holdings merger
agreement and the Hiland Holdings merger as described above.
The Hiland Holdings support agreement terminates on the earliest
to occur of (i) the time the Hiland Holdings merger becomes
effective pursuant to the terms of the Hiland Holdings merger
agreement, (ii) the termination of the Hiland Partners
merger agreement in accordance with its terms, or (iii) the
written agreement of the parties thereto to terminate the Hiland
Holdings support agreement.
The Hiland Holdings support agreement is attached as
Annex E to this joint proxy statement.
Financing
of the Mergers
The total amount of funds necessary to consummate both the
Hiland Partners merger and the Hiland Holdings merger and the
related transactions is anticipated to be approximately
$51.3 million. This amount will be funded entirely in cash
contributed by Mr. Hamm and the Hamm family trusts to
Parent and the applicable Merger Sub.
Mr. Hamm has delivered to Parent the Hiland Partners
commitment letter, pursuant to which Mr. Hamm has committed
to contribute an aggregate of approximately $32.0 million
in cash to Parent, representing the Hiland Partners merger
consideration of approximately $30.9 million and estimated
expenses of approximately $1.1 million, less the amount of
cash, if any, contributed by the Hamm family trusts to Parent or
HLND Merger Sub that is available immediately prior to the
closing of the Hiland Partners merger.
Mr. Hamm has delivered to Parent the Hiland Holdings
commitment letter, pursuant to which Mr. Hamm has committed
to contribute an aggregate of approximately $21.2 million
in cash to Parent, representing the Hiland Holdings merger
consideration of approximately $20.4 million and estimated
expenses of approximately $800,000, less the amount of cash, if
any, contributed by the Hamm family trusts to Parent or HPGP
Merger Sub that is available immediately prior to the closing of
the Hiland Holdings merger.
There is no financing condition to the obligations of
Mr. Hamm to fund the amounts under either commitment
letter. In addition, Hiland Partners is a third-party
beneficiary under the Hiland Partners commitment letter, and
Hiland Holdings is a third-party beneficiary under the Hiland
Holdings commitment letter. There is no alternative financing
plan.
Estimated
Fees and Expenses
Under the terms of the merger agreements, all expenses will
generally be borne by the party incurring such expenses and
expenses associated with the printing, filing and mailing of
this joint proxy statement and the
Schedule 13E-3
for each of the Hiland Companies and any amendments or
supplements thereto and the solicitation of unitholder approvals
will be borne by the Hiland Companies. Each merger agreement
also provides, however, that in certain circumstances upon
termination of such merger agreement, Hiland Partners or Hiland
Holdings would have to reimburse the Hamm Continuing Investors
for their expenses associated with the mergers, up to an
aggregate of $1.9 million. For more information about the
termination expenses, please see The Hiland Partners
Merger Agreement Reimbursement of Certain
Expenses beginning on page 167 and The Hiland
Holdings Merger Agreement Reimbursement of
Certain Expenses beginning on page 186.
139
Hiland
Partners Fees and Expenses
Jefferies & Company has provided certain financial
advisory services to the Hiland Partners Conflicts Committees in
connection with the Hiland Partners merger. Hiland Partners will
pay Jefferies & Company compensation for its services,
and Hiland Partners has agreed to reimburse
Jefferies & Company for all reasonable out-of-pocket
expenses incurred by them, including the reasonable fees and
expenses of legal counsel, and to indemnify
Jefferies & Company against certain liabilities and
expenses in connection with its engagement, including certain
liabilities under the federal securities laws. See
Opinion of Financial Advisors of Hiland
Partners for more information about Jefferies &
Companys compensation.
The Hiland Companies have retained D. F. King, as a proxy
solicitation and information agent,
and ,
as the paying agent, in connection with the mergers. D. F. King
may contact holders of Hiland Partners common units by mail,
telephone, facsimile,
e-mail
and
personal interview and may request banks, brokers, dealers and
other nominee unitholders to forward materials relating to the
Hiland Partners merger to beneficial owners.
As compensation for acting as a proxy solicitation and
information agent in connection with the mergers, D.F. King
will receive reasonable and customary compensation. Hiland
Partners will pay the paying agent reasonable and customary
compensation for its services in connection with the Hiland
Partners merger, plus reimbursement for out-of-pocket expenses,
and will indemnify the paying agent against certain liabilities
and expenses in connection therewith, including certain
liabilities under federal securities laws. Brokers, dealers,
commercial banks and trust companies will be reimbursed by
Hiland Partners for customary handling and mailing expenses
incurred by them in forwarding material to their customers.
The following is an estimate of fees and expenses to be incurred
by Hiland Partners in connection with the Hiland Partners merger:
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(In thousands)
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Legal
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$
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850
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Financial Advisors
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$
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580
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Accounting
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$
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Printing and Mailing
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$
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250
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SEC Filing Fees
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$
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1
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Paying Agent
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$
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10
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Proxy Solicitation and Information Agent
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$
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25
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Miscellaneous
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$
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100
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Total
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$
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1,816
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Hiland
Holdings Fees and Expenses
Barclays Capital has provided certain financial advisory
services to the Hiland Holdings Conflicts Committees in
connection with the Hiland Holdings merger. Hiland Holdings will
pay Barclays Capital compensation for its services, and Hiland
Holdings has agreed to reimburse Barclays Capital for all
reasonable out-of-pocket expenses incurred by them, including
the reasonable fees and expenses of legal counsel, and to
indemnify Barclays Capital against certain liabilities and
expenses in connection with their engagement, including certain
liabilities under the federal securities laws. See
Opinions of Financial Advisors for more
information about Barclays Capitals compensation.
The Hiland Companies have retained D. F. King, as a proxy
solicitation and information agent,
and ,
as the paying agent, in connection with the mergers. D. F. King
may contact holders of Hiland Holdings common units by mail,
telephone, facsimile,
e-mail
and
personal interview and may request banks, brokers, dealers and
other nominee unitholders to forward materials relating to the
Hiland Holdings merger to beneficial owners.
As compensation for acting as a proxy solicitation and
information agent in connection with the mergers, D.F. King
will receive reasonable and customary compensation. Hiland
Holdings will pay the paying agent
140
reasonable and customary compensation for its services in
connection with the Hiland Holdings merger, plus reimbursement
for out-of-pocket expenses, and will indemnify the paying agent
against certain liabilities and expenses in connection
therewith, including certain liabilities under federal
securities laws. Brokers, dealers, commercial banks and trust
companies will be reimbursed by Hiland Holdings for customary
handling and mailing expenses incurred by them in forwarding
material to their customers.
The following is an estimate of fees and expenses to be incurred
by Hiland Holdings in connection with the Hiland Holdings merger:
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(In thousands)
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Legal
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$
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1,400
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Financial Advisors
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$
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1,280
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Accounting
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$
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8
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Printing and Mailing
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$
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250
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SEC Filing Fees
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$
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1
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Paying Agent
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$
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10
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Proxy Solicitation and Information Agent
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$
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25
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Miscellaneous
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$
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100
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Total
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$
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3,074
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Certain
Legal Matters
General
The mergers are subject to the receipt of certain regulatory and
other approvals. The Hiland Companies are currently seeking such
approvals. There can be no assurance that any such approval, if
required, will be obtained without substantial conditions or at
all or that adverse consequences would not result to the Hiland
Companies business or that certain parts of the Hiland
Companies business would not have to be disposed of in the
event that such approval were not obtained or such other actions
were not taken or in order to obtain any such approval or other
action.
In the merger agreements, the parties have agreed to cooperate
with each other to make all filings with governmental
authorities and to obtain all governmental approvals and
consents necessary to consummate the mergers, subject to certain
exceptions and limitations. It is a condition to the
consummation of each of the mergers that required governmental
consents and approvals shall have been obtained before the
effective date of the mergers.
HSR
Act
Under the HSR Act, Hiland Partners cannot complete the Hiland
Partners merger until Hiland Partners has submitted certain
information to the Antitrust Division of the Department of
Justice and the Federal Trade Commission and satisfied the
statutory waiting period requirements. Early termination of the
waiting period applicable to the consummation of the Hiland
Partners merger was granted by the Federal Trade Commission on
July 10, 2009.
Despite granting early termination of the waiting period
applicable to the consummation of the Hiland Partners Merger
under the HSR Act, nothing prevents the Department of Justice or
the Federal Trade Commission from later challenging either of
the mergers on antitrust grounds.
Certain
Litigation
Since Mr. Hamm, his affiliates and the Hamm family trusts
first proposed to acquire all of the outstanding common units of
each of the Hiland Partners and Hiland Holdings that are not
owned by Mr. Hamm, his affiliates or Hamm family trusts on
January 15, 2009, a number of unitholder class action
lawsuits were filed against Hiland Partners, Hiland Holdings,
the general partner of each of Hiland Partners and Hiland
Holdings, and certain current and former members of the Hiland
Partners Board of Directors and Hiland Holdings Board
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of Directors. 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. CJ-09-211-02.
The lawsuits allege a variety of causes of action challenging
the proposed mergers, including that the named directors have
breached their fiduciary duties in connection with the proposed
mergers. On July 10, 2009, the court in which the Oklahoma
case is pending granted whose 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 Proposed Merger. This Amended
Class Action Complaint alleges, among other things, that
(i) the original consideration and revised consideration
offered by Mr. Hamm is unfair and inadequate, (ii) the
members of the Conflicts Committees of the general partner of
each of the Partnership and Hiland Holdings that were charged
with reviewing the proposals and making a recommendation to each
Committees respective board of directors lacked any
meaningful independence, (iii) the defendants acted in bad
faith in recommending and approving the Proposed Merger, and
(iv) the disclosures in the preliminary proxy statement
filed by the Partnership and Hiland Holdings are materially
misleading.
With respect to the allegations that the members of the
Conflicts Committees lacked meaningful independence, the Amended
Class Action Complaint alleges, among other things, that
(i) each of the members of the Conflicts Committees will
receive material consideration as a result of each of their unit
holdings; (ii) each of the members of the Conflicts
Committees has received compensation for his or her board
service from entities controlled by Mr. Hamm and will
receive compensation in connection with his or her service on
the Conflicts Committee in reviewing the proposals made by
Mr. Hamm that is material to each of them; (iii) each
of the members of the Conflicts Committees is interested because
he or she owes fiduciary duties to both the entity for which he
or she is a director as well as to Mr. Hamm, who controls
both entities; and (iv) Cheryl L. Evans, who is a member of
the Hiland Holdings Conflicts Committee is interested because
she is the dean of the Enid, Oklahoma campus of Northwestern
Oklahoma State University, from which Mr. Hamm received a
Masters degree and an honorary degree, and of which
Mr. Hamm has been a leading benefactor, including, for
example, by working with the Oklahoma legislature to bring the
campus to Enid, and donating money and providing other financing
to the school.
The
Pasternack
plaintiff also seeks to preliminary enjoin
the defendants from proceeding with or consummating the proposed
merger 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.
On June 25, 2009, certain of the individual defendants
moved to dismiss the allegations that were then-pending in
Pasternack
and
Jones
lawsuits, and the Hiland
Companies and certain other defendants subsequently joined in
that motion.
Provisions
for Unaffiliated Security Holders
No provision has been made to grant Hiland Partners or Hiland
Holdings unitholders, other than the Hamm Continuing Investors
or their affiliates, access to the partnership files of Hiland
Partners or Hiland Holdings or any other party to the mergers or
to obtain counsel at the expense of Hiland Partners or Hiland
Holdings or any other such party.
No
Appraisal Rights
Holders of Hiland Partners common units and Hiland Holdings
common units are not entitled to dissenters rights of
appraisal under the partnership agreements or applicable
Delaware law.
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CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This joint proxy statement, including information set forth or
incorporated by reference in this document, contains statements
that constitute forward-looking information, including
disclosures relating to the mergers, projected financial
information, valuation information, possible outcomes from
strategic alternatives other than the mergers, the expected
amounts, timing and availability of financing, availability
under credit facilities, levels of capital expenditures, sources
of funds, and funding requirements, among others. You are
cautioned that such forward-looking statements are not
guarantees of future performance or results and involve risks
and uncertainties and that actual results or developments may
differ materially from the forward-looking statements as a
result of various factors. Factors that may cause such
differences to occur include, but are not limited to:
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with respect to the mergers: (1) the occurrence of any
event, change or other circumstances that could give rise to the
termination of the merger agreements or the failure of required
conditions to close the mergers; (2) the outcome of any
legal proceedings that have been or may be instituted against
Hiland Partners
and/or
Hiland Holdings and others; (3) the inability to obtain
unitholder approval or the failure to satisfy other conditions
to completion of the mergers, including the receipt of certain
regulatory approvals; (4) risks that the proposed
transaction disrupts current plans and operations and the
potential difficulties in employee retention as a result of the
mergers; (5) the performance of Parent, Merger Subs and the
Hamm Continuing Investors and (6) the amount of the costs,
fees, expenses and charges related to the mergers;
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any of the assumptions underlying the Hiland Companies
projected financial information proving to be inaccurate;
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the ability of the Hiland Companies to comply with certain
covenants in their respective credit facilities, including under
the Hiland Operating Credit Agreement;
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the ability of the Hiland Companies to pay distributions to
their respective unitholders;
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Hiland Partners cash flow is affected by the volatility of
natural gas and NGL product prices, which could adversely affect
Hiland Partners ability to make distributions to its
unitholders, including Hiland Holdings;
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Hiland Holdings expected receipt of distributions from
Hiland Partners;
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Hiland Partners continued ability to find and contract for
new sources of natural gas supply;
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the general economic conditions in the United States of America
as well as the general economic conditions and currencies in
foreign countries;
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the amount of natural gas gathered on Hiland Partners
gathering systems;
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the level of throughput in Hiland Partners natural gas
processing and treating facilities;
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the fees Hiland Partners charges and the margins realized for
its services;
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the prices and market demand for, and the relationship between,
the prices of natural gas and NGLs;
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energy prices generally;
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the level of domestic crude oil and natural gas production;
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the availability of imported crude oil and natural gas;
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actions taken by foreign crude oil and natural gas producing
nations;
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the political and economic stability of petroleum producing
nations;
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the weather in Hiland Partners operating areas;
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the extent of governmental regulation and taxation;
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hazards or operating risks incidental to the gathering, treating
and processing of natural gas and NGLs that may not be fully
covered by insurance;
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competition from other midstream companies;
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loss of key personnel;
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the availability and cost of capital and Hiland Partners
ability to access certain capital sources;
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changes in laws and regulations to which Hiland Holdings and
Hiland Partners are subject, including tax, environmental,
transportation and employment regulations;
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the costs and effects of legal and administrative proceedings;
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the ability to successfully identify and consummate strategic
acquisitions at purchase prices that are accretive to the Hiland
Partners financial results; and
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risks associated with the construction of new pipelines and
treating and processing facilities or additions to Hiland
Companies existing pipelines and facilities;
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the completion of significant, unbudgeted expansion projects may
require debt and/or equity financing which may not be available
to Hiland Partners on acceptable terms, or at all;
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increases in interest rates could increase Hiland Partners
borrowing costs, adversely impact its unit price and its ability
to issue additional equity, which could have an adverse effect
on Hiland Partners cash flows and its ability to fund its
growth; and
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the other factors described in each of the Hiland
Companies
Form 10-K
for the fiscal year ended December 31, 2008, including
under the sections entitled Risk Factors and
Managements Discussion and Analysis of Financial
Condition and Results of Operations contained therein.
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The Hiland Companies disclaim any obligation to update or revise
the forward-looking statements contained herein, except as
otherwise required by applicable federal securities laws. A
Schedule 13E-3
filed with the SEC with respect to each of the proposed mergers
will be amended to report any material changes in the
information set forth in the most recent
Schedule 13E-3
filed with the SEC by either Hiland Partners or Hiland Holdings.
INFORMATION
ABOUT THE SPECIAL MEETINGS AND VOTING
Date,
Time and Place
Hiland Partners and Hiland Holdings will hold separate special
meetings of common unitholders. Hiland Partners will hold a
special meeting of common unitholders
on ,
2009
at ,
local time, at . Hiland Holdings
will hold a special meeting of common unitholders
on ,
2009 at , local time,
at .
Purpose
Hiland
Partners
At the special meeting, Hiland Partners common unitholders will
be asked:
1. To consider and vote on a proposal to approve
(a) the Hiland Partners merger agreement, which, among
other things, provides that HLND Merger Sub will merge with and
into Hiland Partners, with Hiland Partners continuing as the
surviving entity and (b) the Hiland Partners merger.
2. To transact such other business as may properly come
before the special meeting or any adjournments or postponements
of the special meeting.
144
Hiland
Holdings
At the special meeting, Hiland Holdings common unitholders will
be asked:
1. To consider and vote on a proposal to approve
(a) the Hiland Holdings merger agreement, which, among
other things, provides that HPGP Merger Sub will merge with and
into Hiland Holdings, with Hiland Holdings continuing as the
surviving entity and (b) the Hiland Holdings merger.
2. To transact such other business as may properly come
before the special meeting or any adjournments or postponements
of the special meeting.
Record
Date and Quorum Requirement
Each of the Hiland Companies has
fixed ,
2009, as the record date. Only holders of record of Hiland
Partners common units or Hiland Holdings common units as of the
close of business on the record date will be entitled to notice
of, and to vote at, the special meeting of Hiland Partners and
Hiland Holdings, respectively. As of the record date, there were
approximately
common units of Hiland Partners issued and outstanding held by
approximately
holders of record. As of the record date, there were
approximately
common units of Hiland Holdings issued and outstanding held by
approximately
holders of record. Votes may be cast at the special meeting in
person or by proxy.
Each holder of record of Hiland Partners common units at the
close of business on the record date is entitled to one vote for
each common unit then held on each matter submitted to a vote of
unitholders at the Hiland Partners special meeting.
Each holder of record of Hiland Holdings common units at the
close of business on the record date is entitled to one vote for
each common unit then held on each matter submitted to a vote of
unitholders at the Hiland Holdings special meeting.
At each of the special meetings, the presence, in person or by
proxy, of holders of (i) a majority of the outstanding
partnership units of the class for which the meeting is called
or (ii) a greater percentage of outstanding partnership
units where such greater percentage is required for approval of
an action to be taken at the meeting, will constitute a quorum
for each of the special meetings. If you are a record holder on
the record date and vote by proxy or in person at the special
meeting, you will be counted for purposes of determining whether
there is a quorum at the special meeting. Hiland Partners common
units and Hiland Holdings common units that are entitled to vote
but are not voted (called abstentions) and broker non-votes will
be counted for the purpose of determining whether there is a
quorum for the transaction of business at the special meeting. A
broker non-vote occurs when a bank, broker or other nominee
holding units for a beneficial owner does not vote on a
particular proposal because the nominee does not have
discretionary voting power for that particular item and has not
received instructions from the beneficial owner.
Voting by
Proxy
Holders of record can ensure that their units are voted at the
special meeting by completing, signing, dating and mailing the
enclosed proxy card in the enclosed postage-prepaid envelope.
Submitting instructions by this method will not affect your
right to attend the special meeting for the Hiland Company in
which you own units and vote. If you hold your units through a
broker, bank or other nominee, you should follow the separate
voting instructions, if any, provided by the broker, bank or
other nominee with this joint proxy statement.
Voting
Via Telephone or the Internet
Voting via the Internet or by telephone is fast, convenient and
your vote is immediately confirmed and tabulated. If you choose
to vote by telephone or the Internet, instructions to do so are
set forth on the enclosed proxy card. The telephone and Internet
voting procedures are designed to authenticate votes cast by use
of a personal identification number, which appears on the proxy
card. These procedures, which comply with Delaware law, allow
unitholders to appoint a proxy to vote their units and to
confirm that their instructions
145
have been properly recorded. If you vote by telephone or the
Internet, you do not have to mail in your proxy card, but your
vote must be received by A.M., New York time,
on ,
2009.
If you own your Hiland Partners common units or Hiland Holdings
common units in your own name, you can vote via the Internet in
accordance with the instructions provided on the enclosed proxy
card. If your units are held by a bank, broker or other nominee,
please follow the instructions provided with your proxy
materials to determine if Internet or telephone voting is
available. If your bank or broker does make Internet or
telephone voting available, please follow the instructions
provided on the voting form supplied by your bank or broker.
Revoking
Your Proxy
You may revoke your proxy at any time before it is voted at the
special meeting by:
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giving written notice of your revocation in person at the
special meeting or in writing bearing a later date than your
proxy, delivered to the Secretary of Hiland Partners prior to
the special meeting, 205 West Maple, Suite 1100, Enid,
Oklahoma 73701 (if you are a Hiland Partners unitholder) or the
Secretary of Hiland Holdings, 205 West Maple,
Suite 1100, Enid, Oklahoma 73701 (if you are a Hiland
Holdings unitholder);
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delivering to the Secretary of Hiland Partners or Hiland
Holdings, as applicable, prior to the special meeting, a duly
executed subsequent proxy (including a proxy delivered by
telephone or the Internet) bearing a later date and indicating a
contrary vote; or
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attending the Hiland Partners or Hiland Holdings special
meeting, as applicable, and voting in person, although
attendance at the special meeting will not by itself constitute
a revocation of a proxy.
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If your units are held through a broker, bank or other nominee,
you should follow the instructions of your broker, bank or
nominee regarding the revocation of proxies. If your broker,
bank or nominee allows you to submit a proxy by telephone or the
Internet, you may be able to change your vote by submitting a
proxy again by telephone or the Internet.
Who to
Call for Assistance
If you need assistance, including help in changing or revoking
your proxy, please contact D.F. King, which is acting as a proxy
solicitation agent and information agent in connection with the
merger as follows:
D.F. King & Co., Inc.
48 Wall Street, 22nd Floor
New York, NY 10005
Toll Free:
1-800-967-4612
Voting at
the Special Meetings
Submitting a proxy now will not limit your right to vote at the
applicable special meeting if you decide to attend in person. If
you plan to attend the special meeting and wish to vote in
person, you will be given a ballot at the special meeting.
Please note, however, that if your units are held in
street name, which means your units are held of
record by a broker, bank or other nominee, and you wish to vote
at the special meeting, you must bring to the special meeting a
proxy from the record holder of the units authorizing you to
vote at the special meeting. Please contact your broker, bank or
nominee for specific instructions.
Vote
Required at Hiland Partners Special Meeting; How Units are
Voted
Under the terms of the Hiland Partners merger agreement and the
Hiland Partners partnership agreement, approval of the Hiland
Partners merger agreement and the Hiland Partners merger
requires the affirmative vote of the holders of (i) a
majority of the outstanding common units of Hiland Partners held
by the Hiland Partners public unitholders entitled to vote
thereon voting as a class and (ii) a majority of the
outstanding subordinated units of Hiland Partners entitled to
vote thereon voting as a class.
146
Hiland Holdings, who, as of June 15, 2009, held units
representing 100% of the total voting power of the Hiland
Partners subordinated units, has entered into the Hiland
Partners support agreement in which it has agreed to
(i) maintain the ownership of its common units and
subordinated units, (ii) vote its common units and
subordinated units in favor of the approval of the Hiland
Partners merger agreement, except in certain circumstances, and
(iii) grant an irrevocable proxy to Parent for the purpose
of voting in favor of the Hiland Partners merger agreement and
the Hiland Partners merger, except in certain circumstances, as
described above. See Special Factors Structure
and Steps of the Mergers beginning on page 137.
Pursuant to the Hiland Partners partnership agreement, the
general partner of Hiland Partners may authorize its designated
chairman of the special meeting to adjourn the special meeting.
Subject to revocation, all units represented by each properly
executed proxy will be voted in accordance with the instructions
indicated on the proxy. If you return a signed proxy card but do
not provide voting instructions (other than in the case of
broker non-votes), the persons named as proxies on the proxy
card will vote FOR the approval of the Hiland
Partners merger agreement and the Hiland Partners merger, and in
such manner as the persons named on the proxy card in their
discretion determine with respect to such other business as may
properly come before the special meeting.
Abstentions and broker non-votes will have the same effect as a
vote AGAINST the Hiland Partners merger agreement
and the Hiland Partners merger. If the special meeting is
adjourned for any reason, at any subsequent reconvening of the
special meeting, all proxies will be voted in the same manner as
such proxies would have been voted at the original convening of
the meeting (except for any proxies that have been revoked or
withdrawn).
The proxy card confers discretionary authority on the persons
named on the proxy card to vote the units represented by the
proxy card on any other matter that is properly presented for
action at the special meeting. As of the date of this joint
proxy statement, Hiland Partners does not know of any other
matter to be raised at the Hiland Partners special meeting.
As
of ,
2009, the record date, the directors and executive officers of
the general partner of Hiland Partners held and were entitled to
vote, in the aggregate, Hiland Partners common units
representing approximately % of the
outstanding Hiland Partners common units. Hiland Partners
believes that the directors and executive officers of the
general partner of Hiland Partners intend to vote all of their
Hiland Partners common units FOR the approval of the Hiland
Holdings merger agreement and the Hiland Holdings merger.
Pursuant to the terms of the Hiland Partners merger agreement
and the Hiland Partners partnership agreement, however, the
votes of directors and officers of the general partner of Hiland
Partners will not be counted in determining if the Hiland
Partner merger agreement and the Hiland Partners merger have
been approved by a majority of the outstanding Hiland Partners
common units owned by the Hiland Partners public unitholders.
Vote
Required at Hiland Holdings Special Meeting; How Units are
Voted
Under the terms of the Hiland Holdings merger agreement and the
Hiland Holdings partnership agreement, the Hiland Holdings
merger agreement and the Hiland Holdings merger requires the
affirmative vote of (i) holders of a majority of the
outstanding common units of Hiland Holdings entitled to vote
thereon voting as a class and (ii) holders of a majority of
the outstanding common units of Hiland Holdings held by the
Hiland Holdings public unitholders entitled to vote thereon
voting as a class.
Harold Hamm, Continental Gas and the Hamm family trusts, who, as
of June 15, 2009, collectively held 13,138,052 common units
of Hiland Holdings representing approximately 60.8% of the total
voting power of the Hiland Holdings common units, have entered
into the Hiland Holdings support agreement in which they have
agreed to (i) maintain the ownership of their common units,
except in certain circumstances, (ii) vote their common
units in favor of the approval of the Hiland Holdings merger
agreement and the Hiland Holdings merger, except in certain
circumstances, and (iii) grant an irrevocable proxy to the
designee of Hiland Holdings for the purpose of voting in favor
of the Hiland Holdings merger agreement and the Hiland Holdings
merger as described above. See Special Factors
Structure and Steps of the Mergers, beginning on
page 137.
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Pursuant to the Hiland Holdings partnership agreement, the
general partner of Hiland Holdings may authorize its designated
chairman of the special meeting to adjourn the special meeting.
Subject to revocation, all units represented by each properly
executed proxy will be voted in accordance with the instructions
indicated on the proxy. If you return a signed proxy card but do
not provide voting instructions (other than in the case of
broker non-votes), the persons named as proxies on the proxy
card will vote FOR the approval of the Hiland
Holdings merger agreement and the Hiland Holdings merger, and in
such manner as the persons named on the proxy card in their
discretion determine with respect to such other business as may
properly come before the special meeting.
Abstentions and broker non-votes will have the same effect as a
vote AGAINST the Hiland Holdings merger agreement
and the Hiland Holdings merger. If the special meeting is
adjourned for any reason, at any subsequent reconvening of the
special meeting, all proxies will be voted in the same manner as
such proxies would have been voted at the original convening of
the meeting (except for any proxies that have been revoked or
withdrawn).
The proxy card confers discretionary authority on the persons
named on the proxy card to vote the units represented by the
proxy card on any other matter that is properly presented for
action at the special meeting. As of the date of this joint
proxy statement, Hiland Holdings does not know of any other
matter to be raised at the Hiland Holdings special meeting.
As
of ,
2009, the record date, the directors and executive officers of
the general partner of Hiland Holdings held and were entitled to
vote, in the aggregate, Hiland Holdings common units
representing approximately % of the
outstanding Hiland Holdings common units. Hiland Holdings
believes that the directors and executive officers of the
general partner of Hiland Holdings intend to vote all of their
Hiland Holdings common units FOR the approval of the Hiland
Holdings merger agreement and the Hiland Holdings merger.
Pursuant to the terms of the Hiland Holdings merger agreement
and the Hiland Holdings partnership agreement, however, the
votes of directors and officers of the general partner of Hiland
Holdings will not be counted in determining if the Hiland
Holdings merger agreement and the Hiland Holdings merger have
been approved by a majority of the outstanding Hiland Holdings
common units owned by the Hiland Holdings public unitholders.
Proxy
Solicitation
This joint proxy statement is being furnished in connection with
the solicitation of proxies by the Hiland Companies. Each of the
Hiland Companies will bear its respective costs of soliciting
proxies. These costs include the preparation, assembly and
mailing of this joint proxy statement, the notice of the special
meeting of unitholders and the enclosed proxy card, as well as
the cost of forwarding these materials to the beneficial owners
of Hiland Partners or Hiland Holdings common units. The
directors, officers and regular employees of the Hiland
Companies may, without compensation other than their regular
compensation, solicit proxies by telephone,
e-mail,
the
Internet, facsimile or personal conversation, as well as by
mail. The Hiland Companies have retained D. F. King, a proxy
solicitation firm, to assist with the solicitation of proxies
for the special meeting for a fee estimated not to exceed
$ plus expenses. The Hiland
Companies may also reimburse brokerage firms, custodians,
nominees, fiduciaries and others for expenses incurred in
forwarding proxy material to the beneficial owners of Hiland
Partners and Hiland Holdings common units. See Special
Factors Estimated Fees and Expenses for more
information about the fees the Hiland Companies expect to pay in
connection with the mergers.
Please do not send any certificates representing Hiland Partners
common units or Hiland Holdings common units with your proxy
card. If the mergers are completed, the procedure for the
exchange of certificates representing common units of Hiland
Partners or Hiland Holdings will be as described in this joint
proxy statement. For a description of procedures for exchanging
certificates representing common units of Hiland Partners or
Hiland Holdings for the merger consideration following
completion of the mergers, see The Hiland Partners Merger
Agreement Payment for Hiland Partners Common Units
in the Merger and The Hiland Holdings Merger
Agreement Payment for Hiland Holdings Common Units
in the Merger.
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ADJOURNMENT
Pursuant to the partnership agreements of Hiland Partners and
Hiland Holdings, the respective general partner of each of
Hiland Partners and Hiland Holdings may authorize its designated
chairman of the special meeting to adjourn the respective
special meeting. The general partner of Hiland Partners or
Hiland Holdings may adjourn its respective special meeting
(including a further adjournment of an adjourned meeting) to a
date within 45 days of the special meeting without further
notice other than by an announcement made at the special meeting
(or such adjourned meeting) and without setting a new record
date. If the requisite unitholder vote to approve the merger
agreements and the mergers has not been received at the time of
the special meeting (or such adjourned meeting) of either Hiland
Company, such Hiland Company may choose to solicit additional
proxies in favor of the applicable merger agreement and merger.
OTHER
MATTERS
Other
Matters for Action at the Special Meetings
As of the date of this joint proxy statement, the Board of
Directors of each of Hiland Partners and Hiland Holdings know of
no matters that will be presented for consideration at their
respective special meetings other than as described in this
joint proxy statement.
Householding
of Special Meeting Materials
Some banks, brokers and other nominees may be participating in
the practice of householding proxy statements and
annual reports. This means that only one copy of this notice and
joint proxy statement may have been sent to multiple unitholders
in your household. If you would prefer to receive separate
copies of a joint proxy statement either now or in the future,
please contact your bank, broker or other nominee. Upon written
or oral request to D.F. King, we will provide a separate
copy of the proxy statements. In addition, unitholders sharing
an address can request delivery of a single copy of proxy
statements if you are receiving multiple copies upon written or
oral request to D.F. King at the address and telephone
number stated above.
THE
HILAND PARTNERS MERGER AGREEMENT
The following is a summary of the material terms of the Hiland
Partners merger agreement, a copy of which is attached as
Annex A to this joint proxy statement. The provisions of
the Hiland Partners merger agreement are extensive and not
easily summarized. You should carefully read the Hiland Partners
merger agreement in its entirety because it, and not this joint
proxy statement, is the legal document that governs the merger.
In addition, you should read Special Factors
Structure and Steps of the Mergers The Hiland
Partners Merger beginning on page 137.
This summary of the Hiland Partners merger agreement is included
to provide you with information regarding the terms of the
Hiland Partners merger agreement and is not intended to provide
any other factual information about Hiland Partners or the other
parties to the Hiland Partners merger agreement.
The Hiland Partners merger agreement contains representations
and warranties by each of the parties to the Hiland Partners
merger agreement. These representations and warranties have been
made for the benefit of the other parties to the Hiland Partners
merger agreement and:
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may be intended not as statements of fact, but rather as a way
of allocating the risk to one of the parties if those statements
prove to be inaccurate;
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have been qualified by disclosures that were made to the other
party in connection with the negotiation of the Hiland Partners
merger agreement, which disclosures are not reflected in the
Hiland Partners merger agreement;
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may apply contractual standards of materiality in a way that is
different from what may be viewed as material to you or other
investors; and
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were made only as of the date of the Hiland Partners merger
agreement or such other date or dates as may be specified in the
Hiland Partners merger agreement and are subject to more recent
developments.
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The representations and warranties in the Hiland Partners merger
agreement and the description of them in this document should be
read in conjunction with the other information contained in the
reports, statements and filings that Hiland Partners publicly
files with the SEC. This description of the representations and
warranties is included to provide Hiland Partners
unitholders with information regarding the terms of the Hiland
Partners merger agreement.
Additional information about Hiland Partners may be found
elsewhere in this joint proxy statement and Hiland
Partners other public filings. Please see Where You
Can Find More Information, beginning on page 209.
Structure
of the Merger
At the closing of the Hiland Partners merger, HLND Merger Sub
will merge with and into Hiland Partners and the separate
existence of HLND Merger Sub will cease. Hiland Partners will be
the surviving entity in the Hiland Partners merger and will
continue to be a Delaware limited partnership after the Hiland
Partners merger. The Hiland Partners partnership agreement, as
in effect immediately prior to the effective time of the Hiland
Partners merger, will be the partnership agreement of the
surviving entity until thereafter changed or amended in
accordance with the provisions of the Hiland Partners
partnership agreement and applicable law.
When the
Merger Becomes Effective
The closing of the Hiland Partners merger will take place on a
date to be specified by the parties, which will be no later than
the third business day after the satisfaction or waiver of the
closing conditions stated in the Hiland Partners merger
agreement (other than those conditions that by their nature are
to be satisfied at the closing, but subject to the satisfaction
or waiver of such conditions), unless another date is agreed to
in writing by the parties. The Hiland Partners merger will
become effective at the time, which we refer to as the
effective time of the Hiland Partners merger, when
Hiland Partners files a certificate of merger with the Secretary
of State of the State of Delaware, or at such later date or time
as Parent and Hiland Partners agree in writing and specify in
the certificate of merger.
Effect of
the Merger on the Common Units and Certain Other Securities of
Hiland Partners and HLND Merger Sub
Each common unit of Hiland Partners (other than common units
owned by Hiland Holdings and restricted common units owned by
certain employees of Hiland Partners as described below) which
we sometimes refer to as the Hiland Partners rollover
common unitholders outstanding immediately prior to the
closing of the Hiland Partners merger, will be cancelled and
convert automatically into the right to receive $7.75 in cash.
Restricted common units held by non-employee members of the
Hiland Partners Board of Directors will vest immediately prior
to the effective time and automatically convert into the right
to receive the Hiland Partners merger consideration.
Other restricted common units, phantom units and unit option
awards issued pursuant to the Hiland Partners, LP Long-Term
Incentive Plan that remain outstanding as of the effective time
of the Hiland Partners merger will remain outstanding in
accordance with their respective terms as equity awards in the
surviving entity in the Hiland Partners merger. Additionally,
the following partnership interests shall be unaffected and
remain outstanding as partnership interests in the surviving
entity in the Hiland Partners merger, and their holders will not
receive any consideration as part of the Hiland Partners merger:
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2,321,471 Hiland Partners common units owned by Hiland Holdings;
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3,060,000 subordinated units representing limited partners
interests in Hiland Partners (the subordinated
units) owned by Hiland Holdings;
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the 2% general partner interest in Hiland Partners, represented
by 191,202 general partner units owned by the general partner of
Hiland Partners; and
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the incentive distribution rights in Hiland Partners owned by
the general partner of Hiland Partners.
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Upon closing of the Hiland Partners merger, each limited
liability company unit of HLND Merger Sub outstanding
immediately prior to the closing will automatically convert into
one common unit of the surviving entity.
Payment
for Hiland Partners Common Units in the Merger
At or prior to the effective time of the Hiland Partners merger,
Parent and HLND Merger Sub will deposit, or cause to be
deposited
with ,
as paying agent, in trust for the benefit of the holders of
Hiland Partners common units (other than those holders who will
not receive the Hiland Partners merger consideration, as
described above), sufficient cash to pay to the Hiland Partners
common unitholders (other than the Hiland Partners rollover
common unitholders) the merger consideration of $7.75 per unit.
As soon as reasonably practicable but in any event not later
than five business days following the effective time of the
Hiland Partners merger, Parent will cause the paying agent to
mail to each record holder of common units of Hiland Partners
that were converted into the right to receive the Hiland
Partners merger consideration a letter of transmittal and
instructions for use in effecting the surrender of certificates
that formerly represented common units of Hiland Partners or
non-certificated common units represented by book-entry in
exchange for the Hiland Partners merger consideration.
Upon surrender of the certificates or book-entry common units
and a duly completed and validly executed letter of transmittal,
together with any other documents required by the letter of
transmittal or customarily required by the paying agent, a
holder of Hiland Partners common units will be entitled to
receive a check for the aggregate Hiland Partners merger
consideration owed to such unitholder. No interest will be paid
or accrue on the Hiland Partners merger consideration. Parent,
the surviving entity in the Hiland Partners merger and the
paying agent will be entitled to deduct and withhold from the
payment of the Hiland Partners merger consideration amounts that
are required to be withheld or deducted under applicable tax
laws.
No transfers of Hiland Partners common units will be made on the
unit transfer register of Hiland Partners from and after the
effective time of the Hiland Partners merger. In the event of a
transfer of ownership of common units that is not registered in
the unit transfer register of Hiland Partners, a check for any
cash to be paid upon surrender of the certificate formerly
representing those shares may be paid to the transferee if the
certificate is presented to the paying agent with all documents
required to evidence and effect the transfer of the shares and
to evidence that any applicable stock transfer or other taxes
have been paid or are not applicable.
Representations
and Warranties
The Hiland Partners merger agreement contains representations
and warranties of Hiland Partners and its general partner (which
we collectively refer to as the Hiland Parties) and
of Parent and HLND Merger Sub (which we refer to as the
HLND Parent Parties) as to, among other things:
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legal organization, existence and good standing, including, as
to the Hiland Parties, with respect to its subsidiaries;
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corporate, partnership or similar power and authority to enter
into the Hiland Partners merger agreement and to consummate the
transaction contemplated by the Hiland Partners merger agreement
and due authorization of the execution, delivery and performance
of the Hiland Partners merger agreement and the consummation of
the Hiland Partners merger;
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the absence of certain violations, defaults or consent
requirements under certain contracts, organizational documents
and law, in each case arising out of the execution and delivery
of, and consummation of, the transactions contemplated by the
Hiland Partners merger agreement;
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the absence of materially misleading statements or omissions in
required filings with the SEC, or information provided in
connection with required filings with the SEC (including this
joint proxy statement) in connection with the Hiland Partners
merger;
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the absence of any fees owed to investment bankers, finders or
brokers in connection with the Hiland Partners merger, other
than those specified in the Hiland Partners merger agreement.
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The Hiland Partners merger agreement contains representations
and warranties of the Hiland Parties as to, among other things:
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the capitalization of the Hiland Parties and the absence of
certain rights to purchase or acquire equity securities of the
Hiland Parties, the absence of any bonds or other obligations
allowing holders the right to vote with unitholders of the
Hiland Parties and the absence of unitholder agreements or
voting trusts to which the Hiland Parties is a party, other than
those specified in the Hiland Partners merger agreement;
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the financial statements of Hiland Partners and its subsidiaries
included or incorporated by reference into Hiland Partners
SEC filings;
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the absence of certain undisclosed indebtedness or liabilities,
other than those incurred or accrued in the ordinary course of
business consistent with past practices since December 31,
2008;
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compliance with laws by the Hiland Parties;
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environmental matters and compliance with environmental laws by
the Hiland Parties;
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the Hiland Parties employee benefit plans and other
agreements with their employees;
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the absence of certain changes since December 31, 2008;
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the absence of certain litigation, orders and judgments and
governmental proceedings and investigations related to the
Hiland Parties, except as otherwise disclosed to the HLND Parent
Parties by the Hiland Parties;
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the payment of taxes, the filing or tax returns and other tax
matters;
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labor matters related to the Hiland Parties;
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property owned and certain rights-of-way sufficient for the
conduct of the Hiland Parties businesses;
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the opinion received by the Hiland Parties from
Jefferies & Company;
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the required approvals of the Hiland Partners merger agreement
and the Hiland Partners merger, including the approval by the
Hiland Partners unitholders at the special meeting;
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material contracts of the Hiland Parties and the performance of
obligations thereunder; and
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the absence of any approval requirements under any state
takeover statutes.
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The Hiland Partners merger agreement also contains
representations and warranties of the HLND Parent Parties as to,
among other things:
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the HLND Parent Parties ability to finance the Hiland
Partners merger and certain related costs;
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the ownership of HLND Merger Sub and the absence of any previous
business activities by HLND Merger Sub other than in connection
with the transactions contemplated by the Hiland Partners merger
agreement;
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the access to information about the Hiland Parties that has been
provided to the HLND Parent Parties; and
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the limitation of the Hiland Parties representations and
warranties to those set forth in the Hiland Partners merger
agreement or in certificates entered into in connection with the
Hiland Partners merger agreement.
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Some of the representations and warranties in the merger
agreement are qualified by materiality qualifications or a
material adverse effect clause.
For purposes of the Hiland Partners merger agreement, a
material adverse effect means, with respect to
Hiland Partners, any fact, circumstance, event, change, effect
or occurrence that, individually or in the aggregate with all
other facts, circumstances, events, changes, effects or
occurrences, has had or would be reasonably likely to have a
material adverse effect on the assets, liabilities, properties,
business, results of operations or condition (financial or
otherwise) of Hiland Partners and its subsidiaries, taken as a
whole, or on the ability of the Hiland Parties to perform their
obligations under the Hiland Partners merger agreement or to
consummate the Hiland Partners merger.
In any case, however, a material adverse effect with
respect to Hiland Partners will not include:
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facts, circumstances, events, changes, effects or occurrences:
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generally affecting the midstream oil and gas or gathering and
processing industries (including commodity prices);
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generally affecting the economy or the financial or securities
markets in the United States or globally (including interest
rates); or
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generally affecting regulatory or political conditions in the
United States or globally,
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except, with respect to the above three bullet-points, for any
fact, circumstance, event, change, effect or occurrence that
affects the assets, liabilities, properties, business, results
of operations or condition (financial or otherwise) of Hiland
Partners and its subsidiaries, taken as a whole, in a
disproportionately adverse manner, compared to other
participants in the midstream oil and gas or gathering and
processing industries;
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facts, circumstances, events, changes, effects or occurrences:
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caused by compliance with the terms of the Hiland Partners
merger agreement (including omissions required by the Hiland
Partners merger agreement);
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caused by the announcement or pendency of the Hiland Partners
merger (including litigation brought by any holder of common or
subordinated units in Hiland Partners (on their own behalf or on
behalf of Hiland Partners) or loss of or adverse changes in
relationships with employees, customers or suppliers of Hiland
Partners); or
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caused by any action taken or omitted to be taken by an officer
of the general partner of Hiland Partners at the direction of
Parent or HLND Merger Sub or Harold Hamm (other than (i) in
his capacity as part of, (ii) in accordance with authority
delegated to him by, or (iii) as otherwise authorized by,
the Hiland Partners Board of Directors or any committee thereof);
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changes in applicable statutes, regulations, statutory rules,
order, judgments, decrees and terms and conditions of any grant
of approval, permission, authority, permit or license of any
court, governmental entity, statutory body or self-regulatory
authority (including the NASDAQ Global Select Market) after the
date hereof;
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changes in generally accepted accounting principles in the
United States, or GAAP, after the date hereof;
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a decrease in the market price of Hiland Partners common units
(except that this exception will not prevent or otherwise affect
a determination that any fact, circumstance, event, change,
effect or occurrence underlying such decrease has resulted in,
or contributed to, a material adverse effect);
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any failure by the Hiland Parties to meet any internal or
publicly disclosed projections, forecasts or estimates of
revenue or earnings (except that this exception will not prevent
or otherwise affect a determination that any fact, circumstance,
event, change, effect or occurrence underlying such failure has
resulted in, or contributed to, a material adverse effect);
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a failure, if any, of Hiland Operating, LLC (a subsidiary of
Hiland Partners) to be in compliance with:
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the Interest Coverage Ratio required by Section 6.17 of the
Hiland Operating Credit Agreement; or
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the Leverage Ratio required by Section 6.18 of the Hiland
Operating Credit Agreement,
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except that failure to be in compliance with the above ratios
will not prevent or otherwise affect a determination that any
fact, circumstance, event, change, effect or occurrence
underlying such default has resulted in, or contributed to, a
material adverse effect; or
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any decrease in distributions in respect of the Hiland Partners
common units (except that this exception will not prevent or
otherwise affect a determination that any fact, circumstance,
event, change, effect or occurrence underlying such decrease has
resulted in, or contributed to, a material adverse effect).
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For purposes of the Hiland Partners merger agreement, a
material adverse effect means, with respect to the
HLND Parent Parties, any fact, circumstance, event, change,
effect or occurrence that, individually or in the aggregate with
all other facts, circumstances, events, changes, effects or
occurrences, prevents or materially delays or materially impairs
or would be reasonably likely to prevent or materially delay or
materially impair the ability of Parent or HLND Merger Sub to
consummate the Hiland Partners merger and the other transactions
contemplated by the Hiland Partners merger agreement.
Agreements
Related to the Conduct of Business
The Hiland Partners merger agreement provides that, subject to
certain exceptions or as consented to in writing by Parent,
during the period from the signing of the Hiland Partners merger
agreement to the effective time of the Hiland Partners merger,
the Hiland Parties, among other things, will, and will cause
their subsidiaries to,
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conduct their business in the ordinary course consistent with
past practices;
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use commercially reasonable efforts to (i) maintain and
preserve intact their business organization and material rights
and franchises, (ii) retain the services of their current
officers and employees and consultants and (iii) maintain
and preserve in all material respects their relationships with
customers, suppliers and others having business dealings with
them; and
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take no action that would materially adversely affect or delay
the ability of any of the parties to the Hiland Partners merger
agreement from obtaining any necessary approvals of any
regulatory agency or other governmental entity required for the
transactions contemplated by the Hiland Partners merger
agreement, performing its covenants and agreements under the
Hiland Partners merger agreement or consummating the
transactions contemplated by the Hiland Partners merger
agreement, or that would otherwise materially delay or prohibit
consummation of the Hiland Partners merger or other transactions
contemplated by the Hiland Partners merger agreement.
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Specifically, the Hiland Parties agreed, subject to certain
exceptions or as consented to in writing by Parent (whose
consent may not be unreasonably withheld, conditioned or
delayed) not to (and cause any of their subsidiaries not to) do,
or agree to do, any of the following:
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make any changes in any of their organizational or governing
documents, other than changes expressly provided for in the
Hiland Partners merger agreement;
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issue, deliver or sell or authorize, or propose the issuance,
delivery or sale of, any interests or equity securities in
Hiland Partners or its subsidiaries or securities convertible
into interests or equity securities in Hiland Partners or its
subsidiaries or subscriptions, rights, warrants or options to
acquire or other agreements or commitments of any character
obligating them to issue any such interests or equity securities
in Hiland Partners or its subsidiaries, other than restricted
common units, phantom units or unit options granted to current
or new employees under the Hiland Partners, LP Long-Term
Incentive Plan in a manner consistent with past practice of up
to 50,000 Hiland Partners common units in the aggregate;
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except for any distributions from Hiland Partners
subsidiaries to Hiland Partners, declare, set aside or pay any
distributions in respect of interests in Hiland Partners or
other ownership interests, or split, combine or reclassify any
of the interest in Hiland Partners or other ownership interests
or issue or authorize the issuance of any other interests in
Hiland Partners or other ownership interests in respect of, in
lieu of or in substitution for any of the interests in Hiland
Partners or other ownership interests, or purchase, redeem or
otherwise acquire, directly or indirectly, any of the interests
in Hiland Partners or other ownership interests other than
repurchases of interests in Hiland Partners in accordance with
the Hiland Partners, LP Long-Term Incentive Plan;
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merge into or with any other entity;
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make any acquisition of, capital contribution to or investment
in assets or stock of any person, whether by way of merger,
consolidation, tender offer, share exchange or other activity
other than as provided for in the Hiland Partners 2009
annual budget, which we refer to in this joint proxy statement
as the Hiland Partners budget, and other than:
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ordinary-course overnight investments consistent with past cash
management practices;
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investments in wholly owned subsidiaries;
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investments in an entity which is not a subsidiary, but in which
Hiland Partners owns less than a 100% interest, as of the date
of the Hiland Partners merger agreement as required under the
governing documents of such partially-owned entities;
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investments by the general partner of Hiland Partners in Hiland
Partners pursuant to the Hiland Partners partnership
agreement; and
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acquisitions, capital contributions or investments in addition
to those contemplated in the four bullet-points above up to an
aggregate amount of $1,000,000; provided that the aggregate
amount of consideration for such acquisitions, capital
contributions or investments contemplated by the four
bullet-points above may not exceed $2,000,000 in the aggregate;
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enter into, amend in any material way or terminate any material
contract or agreement, or waive any material rights under any
material agreement, other than in the ordinary course of
business and consistent with past practice or as otherwise
permitted under the Hiland Partners merger agreement;
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acquire or lease assets or properties, individually or in a
series of transactions, with a cost in excess of $250,000 other
than as provided for in the Hiland Partners budget or other
provision of the Hiland Partners merger agreement;
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incur, assume or guarantee any indebtedness for borrowed money,
issue, assume or guarantee any debt securities, grant any
option, warrant or right to purchase any debt securities, or
issue any securities convertible into or exchangeable for any
debt securities other than in connection with:
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borrowings in the ordinary course of business or provided for in
the Hiland Partners budget, in each case in accordance with any
existing bank credit facilities;
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the refinancing or replacement of existing indebtedness
(provided that such refinancing or replacement is on
substantially comparable terms);
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other than as permitted in the two bullet-points above, the
incurrence by Hiland Partners of up to $1,000,000 in principal
amount of indebtedness; and
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a transaction that is permitted by other provisions of the
Hiland Partners merger agreement;
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subject to certain exceptions, sell, assign, transfer, abandon,
lease or otherwise dispose of assets having a fair market value
in excess of $1,000,000 in the aggregate;
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grant any security interest with respect to, pledge or otherwise
encumber any assets other than permitted encumbrances under the
Hiland Partners merger agreement and security interests granted
after June 1, 2009:
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with respect to assets acquired after June 1, 2009 as
permitted under the Hiland Partners merger agreement; or
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with respect to assets already owned prior to June 1, 2009,
pursuant to the requirements of existing financial arrangements;
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settle any claims, demands, lawsuits or state or federal
regulatory proceedings for damages to the extent such
settlements in the aggregate assess damages in excess of
$1,000,000, other than any claims, demands, lawsuits or
proceedings to the extent insured (net of deductibles), to the
extent reserved against in the financial statements of Hiland
Partners or to the extent covered by an indemnity obligation not
subject to dispute or adjustment from a solvent indemnitor;
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settle any claims, demands, lawsuits or state or federal
regulatory proceedings seeking an injunction or other equitable
relief where such settlements would have a material adverse
affect on the Hiland Parties, as defined in the Hiland Partners
merger agreement;
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except as disclosed to the HLND Parent Parties by Hiland
Partners or as required on an emergency basis or for the safety
of persons or the environment, make any capital expenditure in
excess of $1,000,000 in the aggregate, unless otherwise
permitted by the Hiland Partners merger agreement;
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make any material change in their tax methods, principles or
elections;
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make any material change to their financial reporting and
accounting methods other than as required by a change in GAAP;
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grant any increases in the compensation of any of their
executive officers, except in the ordinary course of business
consistent with past practice or as required by the terms of an
existing employee benefit plan or agreement or by applicable law;
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amend any existing employment or severance or termination
contract with any executive officer;
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become obligated under any new pension plan, welfare plan,
multiemployer plan, employee benefit plan, severance plan,
change of control or other benefit arrangement or similar plan
or arrangement or amend any existing employee benefit plan, if
such amendment would have the effect of materially enhancing any
benefits thereunder; or
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voluntarily dissolve or otherwise adopt or vote to adopt a plan
of complete or partial dissolution or liquidation.
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Provided, however, that any action taken or omitted to be taken
by an officer of a Hiland Party at the direction of any of the
HLND Parent Parties or Mr. Hamm (other than (1) in his
capacity as part of, (2) in accordance with authority
delegated to him by, or (3) as otherwise authorized by, the
Hiland Partners Board of Directors or any committee thereof)
that would otherwise constitute a breach of the Conduct of
Business covenants described in this section, will not
constitute a breach of the Hiland Partners merger agreement
Other
Covenants and Agreements
Investigation
The Hiland Parties must afford to the HLND Parent Parties and
their advisors reasonable access during normal business hours
after reasonable prior notice, during the period prior to the
effective time of the Hiland Partners merger, to the offices,
properties, books and records of the Hiland Parties and their
subsidiaries and provide to the HLND Parent Parties such
financial and other data as they may reasonably request related
to the Hiland Parties and their subsidiaries, including
furnishing to Parent the financial results of Hiland Partners
and its subsidiaries in advance of any filing by Hiland Partners
with the SEC or other public disclosure containing financial
results. The Hiland Parties also agreed to instruct their
employees and advisors to cooperate with Parent in its
investigations described in this paragraph. The Hiland Parties
are not required to furnish information to Parent to the extent
such information is privileged or the furnishing of such
information is prohibited by law or an existing contract or
agreement.
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Parent will hold, and will cause its advisors to hold, any
material or competitively sensitive non-public information
concerning the Hiland Parties or their subsidiaries
confidential. The general partner of Hiland Partners was
obligated to, and has, provided Parent (solely for informational
purposes) the fairness opinion of Jefferies & Company
prepared in connection with the Hiland Partners merger.
No
Solicitation
The Hiland Parties may not, and must cause their officers,
directors, employees, agents and representatives (their
representatives) not to, and must use their
reasonable best efforts to cause each of the subsidiaries of
Hiland Partners and their representatives not to, directly or
indirectly:
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initiate, solicit, knowingly encourage (including by providing
information) or knowingly facilitate any inquiries, proposals or
offers with respect to, or make or complete, an alternative
proposal (as defined below);
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engage or participate in any negotiations concerning, or provide
or cause to be provided any non-public information or data
relating to, the Hiland Parties and their subsidiaries, in
connection with, or have any discussions with any person
relating to, an alternative proposal, or otherwise knowingly
encourage or knowingly facilitate any effort or attempt to make
or implement an alternative proposal;
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approve, endorse or recommend, or propose publicly to approve,
endorse or recommend, any alternative proposal;
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approve, endorse or recommend, or propose to approve, endorse or
recommend, or execute or enter into, any letter of intent,
agreement in principle, merger agreement, acquisition agreement,
option agreement or other similar agreement relating to any
alternative proposal;
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amend, terminate, waive or fail to enforce, or grant any consent
under, any confidentiality, standstill or similar agreement;
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take, encourage or facilitate any of the above actions in
connection with the Hiland Holdings merger and any alternatives
thereto; or
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resolve to propose or agree to do any of the above.
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In addition, upon the signing of the Hiland Partners merger
agreement, the Hiland Parties and their representatives were
obligated, and agreed to use their reasonable best efforts to
cause each of their subsidiaries and their representatives to,
immediately cease any existing solicitations, discussions or
negotiations with any person (other than the HLND Parent
Parties) that had made or indicated an intention to make an
alternative proposal. The Hiland Parties agreed to promptly, and
in any event not later than ten days following the date the
Hiland Partners merger agreement was signed, request that each
person who had executed a confidentiality agreement with a
Hiland Party in connection with that persons consideration
of a transaction involving any Hiland Party or any subsidiary of
a Hiland Party that would constitute an alternative proposal
return or destroy all non-public information furnished to that
person by or on behalf of the Hiland Parties.
Notwithstanding the foregoing, prior to approval of the Hiland
Partners merger agreement and Hiland Partners merger by the
unitholders as required in the Hiland Partners merger agreement,
the Hiland Parties may, in response to an unsolicited
alternative proposal which did not result from or arise in
connection with a breach of the no solicitation covenant
described in the first paragraph under No
Solicitation above and which the Hiland Partners Conflicts
Committee determines, in good faith, after consultation with its
outside counsel and financial advisors, constitutes or could
reasonably be expected to result in a superior proposal (as
defined below):
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furnish information with respect to the Hiland Parties and their
subsidiaries to the person making such alternative proposal and
its representatives pursuant to an executed confidentiality
agreement no less restrictive (including with respect to
standstill provisions) of the other party than the form of
confidentiality agreement attached as an exhibit to the Hiland
Partners merger agreement; and
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participate in discussions or negotiations with such person and
its representatives regarding such alternative proposal.
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In this case, Parent is entitled to receive an executed copy of
such confidentiality agreement prior to or substantially
simultaneously with the Hiland Parties furnishing information to
the person making such alternative proposal or its
representatives. Additionally, the Hiland Parties must
simultaneously provide or make available to Parent any
non-public information concerning the Hiland Parties and their
subsidiaries that is provided to the person making such
alternative proposal or its representatives, which was not
previously provided or made available to Parent.
The Hiland Parties also agreed to promptly (and in any event
within 24 hours) advise Parent orally and in writing of the
receipt by either of them of any alternative proposal or any
request for non-public information relating to the Hiland
Parties and their subsidiaries, other than requests for
information in the ordinary course of business consistent with
past practice and not reasonably expected to be related to an
alternative proposal, including in each case the identity of the
person making any such alternative proposal or request and the
material terms and conditions of any such alternative proposal
or request (including copies of any document or correspondence
evidencing such alternative proposal or request).
The Hiland Parties must keep Parent reasonably informed on a
current basis of the status (including any material change to
the terms thereof) of any such alternative proposal or request.
Neither the Hiland Partners Board of Directors nor any committee
thereof may withdraw, modify or qualify in a manner adverse to
Parent, or resolve to or publicly propose to withdraw, modify or
qualify in a manner adverse to Parent, its recommendation to the
common unitholders to approve the Hiland Partners merger,
unless, prior to the receipt of the requisite approval of the
holders of Hiland Partners common units as required under the
Hiland Partners merger agreement and the Hiland Partners
partnership agreement:
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the Hiland Partners Board of Directors or the Hiland Partners
Conflicts Committee determines in good faith, after consultation
with its respective outside counsel and financial advisors, that
a change in its recommendation would be in the best interests of
the holders of Hiland Partners common units (other than the
general partner of Hiland Partners and its affiliates, including
Hiland Holdings); and
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the Hiland Partners Board of Directors or the Hiland Partners
Conflicts Committee, as applicable, provides Parent with at
least three business days advance written notice of its
intention to change its recommendation and specifying the
material events giving rise thereto, then the Hiland Partners
Board of Directors or the Hiland Partners Conflicts Committee,
as applicable, may change its recommendation.
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The restrictions summarized above are inapplicable to any
discussions or negotiations with the lenders under the Hiland
Operating Credit Agreement regarding debt financing transactions
with such lenders that may involve equity issuances that would
constitute an alternative proposal. In addition, nothing
contained in the Hiland Partners merger agreement prohibits the
Hiland Parties or the Hiland Partners Board of Directors or any
committee thereof from disclosing to the Hiland Partners
unitholders a position in response to any tender offer as
required by the SEC.
As used in the Hiland Partners merger agreement,
alternative proposal means any inquiry, proposal or
offer from any person or group of persons other than the HLND
Parent Parties, relating to, or that could reasonably be
expected to lead to, in one transaction or a series of related
transactions:
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a merger, tender or exchange offer, consolidation,
reorganization, reclassification, recapitalization, liquidation
or dissolution, or other business combination involving any
Hiland Party or any of their subsidiaries;
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the issuance by the Hiland Partners of any general partner
interest or any class of partnership interests constituting more
than 15% of such class of partnership interests; or
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the acquisition in any manner, directly or indirectly, of any
general partner interest, any class of partnership interests
constituting more than 15% of such class of partnership
interests or more than
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15% of the consolidated total assets of the Hiland Parties and
their subsidiaries (including equity interests in any subsidiary
or partially owned entity of Hiland Partners), in each case
other than the Hiland Partners merger and the Hiland Holdings
Merger.
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As used in the Hiland Partners merger agreement, superior
proposal shall mean any written alternative proposal:
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on terms which the Hiland Partners Conflicts Committee
determines in good faith, after consultation with its outside
legal counsel and financial advisors, to be more favorable from
a financial point of view to the holders of Hiland Partners
common units (other than the general partner of Hiland Partners
and its affiliates, including Hiland Holdings); and
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that is reasonably capable of being completed, taking into
account all financial, regulatory, legal and other aspects of
such proposal; provided that for purposes of the definition
Superior Proposal, the references to 15%
in the definition of Alternative Proposal shall be
deemed to be references to 55%.
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In determining if a proposal is more favorable, from a financial
point of view to the holders of Hiland Partners common units
than the Hiland Partners merger, the Hiland Partners Conflicts
Committee may not consider any interests that any holder may
have other than as a unitholder of Hiland Partners entitled to
the Hiland Partners merger consideration and will take into
account all the terms and conditions of such proposal, and the
Hiland Partners merger agreement (including any proposal or
offer by the HLND Parent Parties to amend the terms of the
Hiland Partners merger agreement and the Hiland Partners merger).
Filings
and Other Actions
Upon signing of the Hiland Partners merger agreement, the Hiland
Parties were obligated to prepare and file this joint proxy
statement as soon as reasonably practicable. The Hiland Parties
and Parent were obligated to prepare and file the
Schedule 13E-3
as soon as reasonably practicable and both parties are obligated
to use their commercially reasonable efforts to have this joint
proxy statement and the
Schedule 13E-3
cleared by the SEC as promptly as practicable after such filing.
Additionally, the Hiland Parties agreed to:
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take all action necessary in accordance with applicable laws and
the Hiland Partners partnership agreement to duly call, give
notice of, convene and hold a meeting of the Hiland Partners
unitholders as promptly as reasonably practicable following the
mailing of this joint proxy statement for the purpose of
obtaining the necessary unitholder approvals under the Hiland
Partners merger agreement and the Hiland Partners partnership
agreement of the Hiland Partners merger and the Hiland Partners
merger agreement; and
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unless there is a change in the recommendation of the Hiland
Partners Board of Directors or Hiland Partners Conflicts
Committee, use all commercially reasonable efforts to solicit
from Hiland Partners unitholders proxies in favor of the
adoption and approval of the Hiland Partners merger agreement
and the Hiland Partners merger.
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Unless the Hiland Partners merger agreement is terminated
pursuant to its terms, the Hiland Parties must take all of the
actions described in the first bullet point in the previous
paragraph regardless of whether or not there has been a change
in the recommendation of the Hiland Partners Board of Directors
or the Hiland Partners Conflicts Committee.
Equity
Awards
The Hiland Partners, LP Long-Term Incentive Plan and each award
of restricted units (except awards held by nonemployee members
of the Board of Directors as described in
Effect of the Merger on the Common Units and
Certain Other Securities of Hiland Partners and Merger Sub
above), phantom units and options outstanding under the Hiland
Partners, LP Long-Term Incentive Plan immediately prior to the
effective time of the Hiland Partners merger will remain
outstanding in accordance with its terms as a plan or equity
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compensation award, as applicable, of the surviving entity and
shall be unaffected by the transactions contemplated by the
Hiland Partners merger agreement. Hiland Partners has agreed to
take any action necessary pursuant to the Hiland Partners, LP
Long-Term Incentive Plan to achieve this result.
Efforts
to Complete the Hiland Partners Merger
The HLND Parent Parties and the Hiland Parties shall, and the
Hiland Parties shall cause the subsidiaries of Hiland Partners
and partially owned entities to, use their commercially
reasonable efforts (subject to, and in accordance with,
applicable law) to take promptly, or to cause to be taken, all
actions, and to do promptly, or to cause to be done, and to
assist and to cooperate with the other parties in doing, all
things necessary, proper or advisable to consummate and make
effective the Hiland Partners merger and the other transactions
contemplated by the Hiland Partners merger agreement including:
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the obtaining of all necessary actions or nonactions, waivers,
consents and approvals from governmental entities and the making
of all necessary registrations and filings and the taking of all
steps as may be necessary to obtain an approval or waiver from,
or to avoid an action or proceeding by, any governmental entity;
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the obtaining of all necessary consents, approvals or waivers
from third parties;
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the defending of any lawsuits or other legal proceedings,
whether judicial or administrative, challenging the Hiland
Partners merger agreement or the consummation of the
transactions contemplated hereby; and
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the execution and delivery of any additional instruments
reasonably necessary to consummate the transactions contemplated
hereby.
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In addition, Parent is obligated to use its reasonable best
efforts to obtain the funding for the Hiland Partners merger in
accordance with the funding commitment letters provided by
Mr. Hamm to Parent and described in Special
Factors Financing of the Mergers, beginning on
page 139.
The Hiland Parties and the HLND Parent Parties have agreed to:
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make their respective filings and thereafter make any other
required submissions under the HSR Act;
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use commercially reasonable efforts to cooperate with each other
in determining whether any filings are required to be made with,
or consents, permits, authorizations, waivers or approvals are
required to be obtained from, any third parties or other
governmental entities in connection with the execution and
delivery of the Hiland Partners merger agreement and the
consummation of the transactions contemplated hereby;
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use commercially reasonable efforts to cooperate with each other
in timely making all such filings and timely seeking all such
consents, permits, authorizations or approvals;
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use commercially reasonable efforts to take, or to cause to be
taken, all other actions and to do, or to cause to be done, all
other things necessary, proper or advisable to consummate and
make effective the Hiland Partners merger and the other
transactions contemplated by the Hiland Partners merger
agreement, including taking all such further action as
reasonably may be necessary to resolve such objections, if any,
any federal, state or foreign antitrust enforcement authorities
or competition authorities or other governmental entities may
assert in connection with the HSR Act, or other state or federal
regulatory authorities of any other nation or other jurisdiction
or any other person may assert under regulatory law with respect
to the Hiland Partners merger and the other transactions
contemplated by the Hiland Partners merger agreement, and to
avoid or eliminate each and every impediment under any law that
may be asserted by any governmental entity with respect to the
Hiland Partners merger so as to enable the closing to occur as
soon as reasonably possible; and
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subject to applicable legal limitations and the instructions of
any governmental entity, use commercially reasonable efforts to
keep each other apprised of the status of matters relating to
the completion of the transactions contemplated by the Hiland
Partners merger agreement, including to the extent permitted
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by law promptly furnishing the other with copies of notices or
other communications received by the Hiland Parties or any of
their subsidiaries or the HLND Parent Parties, as the case may
be, from any third party
and/or
any
governmental entity with respect thereto.
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The Hiland Parties and the HLND Parent Parties agreed that, if
any administrative or judicial action or proceeding, including
any proceeding by a private party, is instituted (or threatened
to be instituted) challenging the Hiland Partners merger or any
other transaction contemplated by this Hiland Partners merger
agreement, each of the Hiland Parties or the HLND Parent Parties
shall cooperate in all respects with each other and shall use
their respective commercially reasonable efforts to contest and
resist any such action or proceeding and to have vacated,
lifted, reversed or overturned any decree, judgment, injunction
or other order, whether temporary, preliminary or permanent,
that is in effect and that prohibits, prevents or restricts
consummation of the Hiland Partners merger or any other
transactions contemplated by the Hiland Partners merger
agreement.
The HLND Parent Parties and the Hiland Parties have agreed that
any of the parties to the Hiland Partners merger agreement may,
as each deems advisable and necessary, reasonably designate any
competitively sensitive material provided to the other under the
covenant described in this section as material that may be given
only to the outside regulatory counsel of the recipient and not
disclosed by such outside counsel to employees, officers or
directors of the recipient unless express written permission is
obtained in advance from the source of the materials (the HLND
Parent Parties or the Hiland Parties as the case may be) or its
legal counsel. Materials provided to the other party or its
outside counsel may be redacted to remove references concerning
the valuation of the Hiland Partners common units or the
business of the Hiland Parties and their subsidiaries.
Takeover
Statute
If any fair price, moratorium,
control share acquisition or other form of
anti-takeover statute or regulation shall become applicable to
the Hiland Partners merger or the other transactions
contemplated by the Hiland Partners merger agreement or the
Hiland Partners support agreement or the Hiland Partners
commitment letter, each of the Hiland Parties or the HLND Parent
Parties have agreed to grant such approvals and take such
actions as are reasonably necessary so that the Hiland Partners
merger, the Hiland Partners support agreement or the Hiland
Partners commitment letter, and the other transactions
contemplated by the Hiland Partners merger agreement and thereby
may be consummated as promptly as practicable on the terms
contemplated in the Hiland Partners merger agreement and
otherwise act to eliminate or minimize the effects of such
statute or regulation on the Hiland Partners merger, the Hiland
Partners support agreement or the Hiland Partners commitment
letter, and the other transactions contemplated hereby and
thereby.
Public
Announcements
The Hiland Parties and the HLND Parent Parties have agreed to
consult with and provide each other the opportunity to review
and comment (which shall be considered reasonably and in good
faith by the other parties) upon any press release or other
public statement or comment prior to the issuance of such press
release or other public statement or comment relating to the
Hiland Partners merger agreement or the transactions
contemplated therein and shall not issue any such press release
or other public statement or comment prior to such consultation
and opportunity to review and comment except as may be required
by applicable law or by obligations pursuant to any listing
agreement with any national securities exchange. Any public
statement or disclosure that is consistent with a public
statement or disclosure previously approved by the other party
shall not, however, require the prior approval of such other
party.
Indemnification
and Insurance
The partnership agreement of the surviving entity shall not,
with respect to indemnification of directors and officers, be
amended, repealed or otherwise modified after the effective time
of the Hiland Partners merger in any manner that would adversely
affect the rights thereunder of the persons who at any time
prior to the effective time of the Hiland Partners merger were
identified as prospective indemnitees under the Hiland
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Partners partnership agreement in respect of actions or
omissions occurring at or prior to the effective time of the
Hiland Partners merger (including the transactions contemplated
by the Hiland Partners merger agreement).
For a period of six years after the effective time of the Hiland
Partners merger, Parent and the general partner of Hiland
Partners shall, and Parent and the general partner of Hiland
Partners shall cause the surviving entity (and its successors or
assigns) to, maintain officers and directors
liability insurance covering each person who is immediately
prior to the effective time of the Hiland Partners merger, or
has been at any time prior to the effective time of the Hiland
Partners merger, an officer or director of any of the Hiland
Parties or their subsidiaries and each person who immediately
prior to the effective time of the Hiland Partners merger is
serving or prior to the effective time of the Hiland Partners
merger has served at the request of any of the Hiland Parties or
their subsidiaries as a director, officer, trustee or fiduciary
of another corporation, partnership, joint venture, trust,
pension or other employee benefit plan of the Hiland Parties or
their subsidiaries who are or at any time prior to the effective
time were covered by the existing officers and
directors liability insurance applicable to the Hiland
Parties or their subsidiaries on terms substantially no less
advantageous to the indemnified persons described in this
paragraph than such existing insurance with respect to acts or
omissions, or alleged acts or omissions, prior to the effective
time of the Hiland Partners merger (whether claims, actions or
other proceedings relating thereto are commenced, asserted or
claimed before or after the effective time of the Hiland
Partners merger).
Hiland Partners shall cause (and Parent, following the closing
of the Hiland Partners merger, shall continue to cause) coverage
to be extended under the existing officers and
directors liability insurance applicable to the Hiland
Parties or their subsidiaries by obtaining a six-year
tail policy on terms and conditions no less
advantageous than the existing officers and
directors liability insurance, and such tail
policy shall satisfy the requirements summarized in this
section. In no event, however, will Parent be required to spend
more than 250% of the last annual premium paid by the Hiland
Parties and their subsidiaries prior to the signing date of the
Hiland Partners merger agreement per policy year of coverage
under such tail policy. If the cost per policy year
of such insurance exceeds 250% of the last annual premium,
Parent shall purchase as much coverage per policy year as
reasonably obtainable for the amount equal to 250% of the last
annual premium.
In the event Parent, the general partner of Hiland Partners or
any of their respective successors or assigns:
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consolidates with or merges into any other person and shall not
be the continuing or surviving entity in such consolidation or
merger; or
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transfers all or substantially all of its properties and assets
to any person
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then and in either such case, Parent or the general partner of
Hiland Partners, as the case may be, shall cause proper
provision to be made so that its successors or assigns shall
assume the obligations summarized in this Indemnification
and Insurance section.
Unitholder
Litigation
The Hiland Parties have agreed to give Parent the opportunity to
participate in the defense or settlement of any unitholder
litigation against any of the Hiland Parties or their
subsidiaries
and/or
their
respective directors relating to the Hiland Partners merger or
any other transactions contemplated in the Hiland Partners
merger agreement and not to agree to any settlement shall
without Parents consent (which shall not be unreasonably
withheld, conditioned or delayed).
Notification
of Certain Matters
The Hiland Parties and the HLND Parent Parties have agreed to
give prompt notice to each other of:
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any notice or other communication received by such party from
any governmental entity in connection with the Hiland Partners
merger or the other transactions contemplated in the Hiland
Partners merger agreement or from any person alleging that the
consent of such person is or may be required in
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connection with the Hiland Partners merger or the other
transactions contemplated in the Hiland Partners merger
agreement, if the subject matter of such communication or the
failure of such party to obtain such consent could be material
to Hiland Partners, the surviving entity or Parent,
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any actions, suits, claims, investigations or proceedings
commenced or, to such partys knowledge, threatened
against, relating to or involving or otherwise affecting such
party or any of its subsidiaries which relate to the Hiland
Partners merger or the other transactions contemplated in the
Hiland Partners merger agreement; and
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the discovery of any fact or circumstance that, or the
occurrence or non-occurrence of any event the occurrence or
non-occurrence of which, would, individually or in the
aggregate, cause or result in a material adverse effect to the
Hiland Parties or the HLND Parent Parties.
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The Hiland Parties shall reasonably cooperate with the HLND
Parent Parties in efforts to mitigate any adverse consequences
to the HLND Parent Parties which may arise from any criminal or
regulatory investigation or action involving any of the Hiland
Parties or their subsidiaries (including by coordinating and
providing assistance in meeting with regulators).
Rule 16b-3
Prior to the effective time of the Hiland Partners merger,
Hiland Partners has agreed to take such steps as may be
reasonably requested by any party to the Hiland Partners merger
agreement to cause dispositions of Hiland Partners equity
securities (including derivative securities) pursuant to the
transactions contemplated by the Hiland Partners merger
agreement by each individual who is a director or officer of the
general partner of Hiland Partners to be exempt from short-swing
profits liability under the Exchange Act.
Conditions
to Completion of the Hiland Partners Merger
The obligations of the Hiland Parties and the HLND Parent
Parties to effect the Hiland Partners merger shall be subject to
the fulfillment or waiver by all parties, at or prior to the
effective time of the Hiland Partners merger, of each of the
following mutual conditions:
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the approval of the holders of (i) a majority of the
outstanding common units of Hiland Partners (excluding common
units owned by Hiland Partners general partner, its
affiliates, including Hiland Holdings, and the directors and
officers of Hiland Partners) entitled to vote thereon and
(ii) a majority of the outstanding subordinated units of
Hiland Partners entitled to vote thereon to approve the Hiland
Partners merger agreement must be obtained;
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no restraining order, preliminary or permanent injunction or
other order issued by any court of competent jurisdiction or
other legal restraint or prohibition enacted or promulgated by
any governmental entity restraining, enjoining or otherwise
prohibiting the consummation of the Hiland Partners merger shall
be in effect; and
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any waiting period under the HSR Act applicable to the
consummation of the Hiland Partners merger shall have expired or
been earlier terminated, which waiting period terminated on
July 10, 2009.
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For purposes of the Hiland Partners merger agreement, an
affiliate of the general partner of Hiland Partners
is any person, entity, group (as defined in Section 13 of
the Exchange Act) or organization that directly or indirectly
through one or more intermediaries controls, is controlled by or
is under common control with, the general partner of Hiland
Partners. The term control means the possession,
direct or indirect, of the power to direct or cause the
direction of the management and policies of a person, entity,
group or organization, whether through ownership of voting
securities, by contract or otherwise. As of the date of this
joint proxy statement, affiliates of the general
partner of Hiland Partners included Hiland Partners and its
subsidiaries, the officers and directors of the general partner
of Hiland Partners, Hiland Holdings and its subsidiaries, the
general partner of Hiland Holdings, the officers and directors
of the general partner of Hiland Holdings, Continental Gas,
Parent and the Merger Subs.
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The obligations of the Hiland Parties to effect the Hiland
Partners merger are further subject to the fulfillment at or
prior to the effective time of the Hiland Partners merger of
each of the following conditions, any one or more of which may
be waived in whole or in part by the Hiland Parties:
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(1) the representations and warranties of the HLND Parent
Parties as to qualification, organization, authority, no
violation, and consents and approvals shall be true and correct
in all respects, in each case at and as of the date of the
Hiland Partners merger agreement and at and as of the closing as
though made at and as of the closing date and (2) the
representations and warranties of the HLND Parent Parties set
forth in the Hiland Partners merger agreement (other than those
referenced in clause (1) of this paragraph) shall be true
and correct in all respects (disregarding any materiality or
Parent material adverse effect qualifiers therein) at and as of
the date of the Hiland Partners merger agreement and at and as
of the closing as though made at and as of the closing, except
where any failures of such representations or warranties to be
so true and correct would not have, individually or in the
aggregate, a material adverse effect on Parent; provided,
however, that, with respect to clauses (1) and (2) of
this paragraph, representations and warranties that are made as
of a particular date or period shall be true and correct (in the
manner set forth in clause (1) or (2), as applicable) only
as of such date or period;
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the HLND Parent Parties shall have performed all obligations and
complied with all covenants required by the Hiland Partners
merger agreement to be performed or complied with by them that
are qualified by materiality or a material adverse effect
qualifier and shall have in all material respects performed all
other obligations and complied with all other covenants required
by the Hiland Partners merger agreement to be performed or
complied with by them; and
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Parent shall have delivered to the Hiland Parties a certificate,
dated the effective time of the Hiland Partners merger and
signed by its Chief Executive Officer or another senior
executive officer, certifying to the effect that the conditions
set forth in the first two bullet points above have been
satisfied.
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The obligations of the HLND Parent Parties to effect the Hiland
Partners merger are further subject to the fulfillment at or
prior to the effective time of the Hiland Partners merger of
each of the following conditions, any one or more of which may
be waived in whole or in part by the HLND Parent Parties:
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(1) the representations and warranties of the Hiland
Parties as to qualification, organization, subsidiaries,
capitalization, authority, no violation, consents and approvals,
absence of certain changes or events, required approvals and
material contracts shall be true and correct in all respects,
except, in the case of the representation as to capitalization,
for such inaccuracies as are
de minimis
in the aggregate,
in each case at and as of the date of the Hiland Partners merger
agreement and at and as of the closing date as though made at
and as of the closing date and (2) the representations and
warranties of the Hiland Parties set forth in the Hiland
Partners merger agreement (other than those referenced in
clause (1) of this paragraph) shall be true and correct in
all respects (disregarding any materiality or Hiland material
adverse effect qualifiers therein) as of the date of the Hiland
Partners merger agreement and at and as of the closing date as
though made at and as of the closing date, except where any
failures of such representations or warranties to be so true and
correct would not have, individually or in the aggregate, a
material adverse effect on the Hiland Parties; provided,
however, that, with respect to clauses (1) and (2) of
this paragraph, representations and warranties that are made as
of a particular date or period shall be true and correct (in the
manner set forth in clause (1) or (2), as applicable) only
as of such date or period; provided, further, that the
representations and warranties referenced in clauses (1)
and (2) shall not be deemed to be inaccurate to the extent
that Parent had knowledge on the date of the Hiland Partners
merger agreement of such inaccuracy;
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the Hiland Parties shall have performed all obligations and
complied with all covenants required by the Hiland Partners
merger agreement to be performed or complied with by them that
are qualified by materiality or a Hiland material adverse effect
qualifier and shall have in all material respects performed all
other obligations and complied with all other covenants required
by the Hiland Partners merger agreement to be performed or
complied with by them;
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since the date of the Hiland Partners merger agreement there
shall not have been any material adverse effect on the Hiland
Parties;
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the Hiland Holdings merger shall be effectuated concurrently
with the Hiland Partners merger; provided that the HLND Parent
Parties may not waive this condition unless the Hiland Holdings
merger agreement and the Hiland Holdings merger shall have been
submitted to a vote of unitholders and the outcome of such vote
shall not have constituted the unitholder approval required
under the Hiland Holdings partnership agreement and the Hiland
Holdings merger agreement, described in The Hiland
Holdings Merger Agreement Conditions to Completion
of the Hiland Holdings Merger, beginning on
page 182; and
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the Hiland Parties shall have delivered to the HLND Parent
Parties a certificate, dated the effective time of the Hiland
Partners merger and signed by an executive officer of Hiland
Partners, certifying to the effect that the conditions set forth
in the first three bullet points of this paragraph have been
satisfied.
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No party to the Hiland Partners merger agreement may rely on the
failure of any condition summarized in this section to be
satisfied if such failure was caused by such partys breach
in any material respect of any provision of the Hiland Partners
merger agreement or failure to use commercially reasonable
efforts to consummate the Hiland Partners merger and the other
transactions contemplated by the Hiland Partners merger
agreement.
The Hiland Partners merger agreement provides that any or all of
the conditions described above may be waived, in whole or in
part, by Hiland Partners or the HLND Parent Parties, as the case
may be, to the extent permitted by applicable law. None of
Hiland Partners or the HLND Parent Parties currently expect to
waive any material condition to the completion of the Hiland
Partners merger. If either Hiland Partners, on one hand, or the
HLND Parent Parties on the other hand, determines to waive any
condition to the Hiland Partners merger that would result in a
material and adverse change in the terms of the merger to Hiland
Partners or its unitholders, proxies would be re-solicited from
Hiland Partners public unitholders in connection with the
waiver. Notwithstanding the foregoing, following the failure to
receive the Hiland Holdings unitholder approval required under
the Hiland Holdings partnership agreement and the Hiland
Holdings merger agreement, if the HLND Parent Parties waive, in
accordance with the Hiland Partners merger agreement, the
condition that the Hiland Holdings merger be effected
concurrently with the Hiland Partners merger, Hiland Partners
will not re-solicit proxies from the Hiland Partners unitholders.
Additionally, because the parties to the Hiland Partners merger
agreement have agreed to use commercially reasonable efforts to
take all actions and to do all things necessary, proper or
advisable under applicable laws to complete the Hiland Partners
merger, Hiland Partners believes that there is no material
uncertainty as to the satisfaction of any of the conditions to
the consummation of the Hiland Partners merger, subject to
(i) the Hiland Partners public unitholders vote to approve
the Hiland Partners merger agreement and the Hiland Partners
merger and (ii) the Hiland Holdings public unitholders vote
to approve the Hiland Holdings merger agreement and the Hiland
Holdings merger.
Termination
The Hiland Partners merger agreement may be terminated and
abandoned at any time prior to the effective time of the Hiland
Partners merger, whether before or after any approval of the
matters presented in connection with the Hiland Partners merger
by the unitholders of Hiland Partners:
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by the mutual written consent of the Hiland Parties and the HLND
Parent Parties;
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by either the Hiland Parties or the HLND Parent Parties, if:
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the Hiland Partners merger shall not have become effective on or
before November 1, 2009 and the party seeking to terminate
the Hiland Partners merger agreement shall not have breached its
obligations under the Hiland Partners merger agreement in any
manner that shall have proximately caused the failure to
consummate the Hiland Partners merger on or before
November 1, 2009;
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an injunction, other legal restraint or order of any
governmental entity shall have been entered permanently
restraining, enjoining or otherwise prohibiting the consummation
of the Hiland Partners merger and such injunction, other legal
restraint or order shall have become final and nonappealable;
provided that the party seeking to terminate this Agreement
shall have complied in all material respects with its
obligations summarized under Efforts to
Complete the Hiland Partners Merger above; or
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the special meeting of the unitholders of Hiland Partners shall
have concluded and, upon a vote taken at such meeting, the
requisite unitholder approval of the Hiland Partners merger
agreement or the Hiland Partners merger shall not have been
obtained; provided that the right to terminate the Hiland
Partners merger agreement shall not be available to the Hiland
Parties if any Hiland Party materially breached any obligations
summarized under No Solicitation and
Filings and Other Actions above;
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by the Hiland Parties, if any HLND Parent Party shall have
breached or failed to perform any of its representations,
warranties, covenants or other agreements contained in the
Hiland Partners merger agreement, which breach or failure to
perform:
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would constitute the failure of a condition to the Hiland
Parties obligations to complete the Hiland Partners
merger; and
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is not capable of being satisfied or cured by November 1,
2009 or, if capable of being satisfied or cured, is not
satisfied or cured by thirty days following receipt by Parent of
written notice stating the Hiland Parties intention to
terminate the Hiland Partners merger agreement and the basis for
such termination;
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provided that the right to terminate the Hiland Partners merger
agreement pursuant to the provision summarized in this paragraph
shall not be available to the Hiland Parties if, at such time, a
condition to the HLND Parent Parties obligation to
complete the merger is not capable of being satisfied; or
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by the HLND Parent Parties, if:
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any Hiland Party shall have breached or failed to perform any of
its representations, warranties, covenants or other agreements
contained in the Hiland Partners merger agreement, which breach
or failure to perform: (A) would constitute the failure of
a condition to the HLND Parent Parties obligations to
complete the merger and (B) is not capable of being
satisfied or cured by November 1, 2009 or, if capable of
being satisfied or cured, is not satisfied or cured by thirty
days following receipt by the Hiland Parties of written notice
stating the HLND Parent Parties intention to terminate the
Hiland Partners merger agreement and the basis for such
termination; provided that the right to terminate the Hiland
Partners merger agreement pursuant to the provision summarized
in this paragraph shall not be available to the HLND Parent
Parties if, at such time, a condition to the Hiland
Parties obligation to complete the merger is not capable
of being satisfied;
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a change in the recommendation of the Hiland Partners Board of
Directors or Hiland Partners Conflicts Committee or a failure of
the Hiland Partners Board of Directors to recommend the Hiland
Partners merger agreement and Hiland Partners merger to its
unitholders occurs or the Hiland Partners Board of Directors of
Directors or any committee thereof approves, endorses or
recommends, or resolves to or publicly proposes to approve,
endorse or recommend, any alternative proposal; or
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the Hiland Holdings merger is not capable of closing by
November 1, 2009.
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Effect of
Termination; Remedies
In the event of termination of the Hiland Partners merger
agreement as summarized above under
Termination, the Hiland Partners merger
agreement shall terminate, except for certain provisions
including the provision relating to reimbursement of expenses
summarized in Reimbursement of Certain
Expenses below, and there shall be no liability on the
part of the Hiland Parties or the HLND Parent Parties
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to the other except as provided in the provision relating to
reimbursement of expenses summarized in
Reimbursement of Certain Expenses below.
No such termination, however, shall relieve any party from
liability arising out of any willful breach of any of the
representations, warranties or covenants in the Hiland Partners
merger agreement (subject to any express limitations set forth
in the Hiland Partners merger agreement), in which case the
aggrieved party shall be entitled to all rights and remedies
available at law or in equity.
Reimbursement
of Certain Expenses
In the event that the Hiland Partners merger agreement is
terminated by the HLND Parent Parties due to a change in the
recommendation of the Hiland Partners Board of Directors or the
Hiland Partners Conflicts Committee or:
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an alternative proposal shall have been made known to the Hiland
Parties or shall have been made directly to the Hiland Partners
unitholders generally or any person shall have publicly
announced an intention (whether or not conditional or withdrawn)
to make an alternative proposal and thereafter;
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the Hiland Partners merger agreement is terminated by the Hiland
Parties or the HLND Parent Parties (as applicable) because
November 1, 2009 has passed, the unitholders of Hiland
Partners failed to approve the Hiland Partners merger agreement
or the Hiland Partners merger or any Hiland Party breached or
failed to perform any of its representations, warranties,
covenants or other agreements contained in the Hiland Partners
merger agreement, which breach or failure to perform:
(A) would constitute the failure of a condition to the HLND
Parent Parties obligations to complete the merger and
(B) is not capable of being satisfied or cured by
November 1, 2009 or, if capable of being satisfied or
cured, is not satisfied or cured by thirty days following
receipt by the Hiland Parties of written notice stating the HLND
Parent Parties intention to terminate the Hiland Partners
merger agreement; and
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a Hiland Party or its subsidiary enters into a definitive
agreement with respect to, or consummates, a transaction
contemplated by any alternative proposal within twelve months of
the date the Hiland Partners merger agreement is terminated,
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then Hiland Partners shall pay to Parent all of the expenses of
the HLND Parent Parties, up to $1,100,000; provided that, no
expense for which a Parent Party has received reimbursement
pursuant to the Hiland Holdings merger agreement shall be paid.
See The Hiland Holdings Merger Agreement
Reimbursement of Certain Expenses, beginning on
page 186.
Any payment required to be made pursuant to the provision
summarized in the prior paragraph shall be made to Parent not
later than two business days after delivery to Hiland Partners
of an itemization setting forth in reasonable detail all
expenses of the HLND Parent Parties for which reimbursement is
sought (which itemization may be supplemented and updated from
time to time by Parent until the sixtieth day after delivery of
such notice of demand for payment). All such payments shall be
made by wire transfer of immediately available funds to an
account to be designated by Parent.
Specific
Performance
The parties to the Hiland Partners merger agreement have agreed
that irreparable damage would occur in the event that any
provisions of the Hiland Partners merger agreement were not
performed in accordance with their specific terms or were
otherwise breached. Accordingly, prior to termination of the
Hiland Partners merger agreement in accordance with its terms,
the parties will be entitled to an injunction or injunctions to
prevent breaches of the Hiland Partners merger agreement and to
enforce specifically the terms and provisions of the Hiland
Partners merger agreement in addition to any other remedy to
which the parties are entitled at law or in equity. In
connection with any request for specific performance or
equitable relief by any party, each of the other parties agreed
to waive any requirement for the security or posting of any bond
in connection with the remedy of specific performance or
equitable relief. Any actions for specific performance or
equitable relief must be brought in the Delaware Chancery Court
or the federal courts within the State of Delaware.
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Amendments
and Waivers
At any time prior to the effective time of the Hiland Partners
merger, any provision of the Hiland Partners merger agreement
may be amended or waived if, and only if, such amendment or
waiver is in writing and signed, in the case of an amendment, by
the Hiland Parties and the HLND Parent Parties, or in the case
of a waiver, by the party against whom the waiver is to be
effective; provided, however, that after receipt of the
unitholder approval required under the Hiland Partners merger
agreement and the Hiland Partners merger, if any such amendment
or waiver shall by applicable law or in accordance with the
rules and regulations of the NASDAQ Global Select Market require
further approval of the unitholders of Hiland Partners, the
effectiveness of such amendment or waiver shall be subject to
the approval of the unitholders of Hiland Partners.
Notwithstanding the foregoing, no failure or delay by the Hiland
Parties or the HLND Parent Parties in exercising any right under
the Hiland Partners merger agreement shall operate as a waiver
thereof nor shall any single or partial exercise thereof
preclude any other or further exercise of any other right under
the Hiland Partners merger agreement.
Recommendation
The Hiland Partners Conflicts Committee has unanimously
determined that the Hiland Partners merger agreement and the
Hiland Partners merger are advisable, fair to, and in the best
interests of, Hiland Partners and the Hiland Partners public
unitholders and (i) has unanimously recommended to the
Hiland Partners Board of Directors that the Hiland Partners
Board of Directors approve the Hiland Partners merger agreement
and the Hiland Partners merger and (ii) unanimously
recommends that the Hiland Partners public unitholders approve
the Hiland Partners merger agreement and the Hiland Partners
merger. The Hiland Partners Board of Directors, after
considering factors, including the unanimous recommendation of
the Hiland Partners Conflicts Committee, determined that the
Hiland Partners merger agreement is advisable, fair to, and in
the best interests of, Hiland Partners and the Hiland Partners
public unitholders, approved the Hiland Partners merger
agreement and the Hiland Partners merger and recommends that the
Hiland Partners public unitholders vote in favor of the approval
of the Hiland Partners merger agreement and the Hiland Partners
merger. See Special Factors Recommendation of
the Hiland Partners Conflicts Committee and the Hiland Partners
Board of Directors; Reasons For Recommending Approval of the
Merger.
168
THE
HILAND HOLDINGS MERGER AGREEMENT
The following is a summary of the material terms of the Hiland
Holdings merger agreement, a copy of which is attached as
Annex D to this joint proxy statement. The provisions of
the Hiland Holdings merger agreement are extensive and not
easily summarized. You should carefully read the Hiland Holdings
merger agreement in its entirety because it, and not this joint
proxy statement, is the legal document that governs the merger.
In addition, you should read Special Factors
Structure and Steps of the Mergers, beginning on
page 137.
This summary of the Hiland Holdings merger agreement is included
to provide you with information regarding the terms of the
Hiland Holdings merger agreement and is not intended to provide
any other factual information about Hiland Holdings or the other
parties to the Hiland Holdings merger agreement.
The Hiland Holdings merger agreement contains representations
and warranties by each of the parties to the Hiland Holdings
merger agreement. These representations and warranties have been
made for the benefit of the other parties to the Hiland Holdings
merger agreement and:
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may be intended not as statements of fact, but rather as a way
of allocating the risk to one of the parties if those statements
prove to be inaccurate,
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have been qualified by disclosures that were made to the other
party in connection with the negotiation of the Hiland Holdings
merger agreement, which disclosures are not reflected in the
Hiland Holdings merger agreement,
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may apply contractual standards of materiality in a way that is
different from what may be viewed as material to you or other
investors, and
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were made only as of the date of the Hiland Holdings merger
agreement or such other date or dates as may be specified in the
Hiland Holdings merger agreement and are subject to more recent
developments.
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The representations and warranties in the Hiland Holdings merger
agreement and the description of them in this document should be
read in conjunction with the other information contained in the
reports, statements and filings that Hiland Holdings publicly
files with the SEC. This description of the representations and
warranties is included to provide Hiland Holdings
unitholders with information regarding the terms of the Hiland
Partners merger agreement.
Additional information about Hiland Holdings may be found
elsewhere in this joint proxy statement and Hiland
Holdings other public filings. Please see Where You
Can Find More Information, beginning on page 209.
Structure
of the Merger
At the closing of the Hiland Holdings merger, HPGP Merger Sub
will merge with and into Hiland Holdings and the separate
existence of HPGP Merger Sub will cease. Hiland Holdings will be
the surviving entity in the Hiland Holdings merger and will
continue to be a Delaware limited partnership after the Hiland
Holdings merger. The Hiland Holdings partnership agreement, as
in effect immediately prior to the effective time of the Hiland
Holdings merger, will be the partnership agreement of the
surviving entity until thereafter changed or amended in
accordance with the provisions of the Hiland Holdings
partnership agreement and applicable law.
When the
Merger Becomes Effective
The closing of the Hiland Holdings merger will take place on a
date to be specified by the parties, which will be no later than
the later of the third business day after the satisfaction or
waiver of the closing conditions stated in the Hiland Holdings
merger agreement (other than those conditions that by their
nature are to be satisfied at the closing, but subject to the
satisfaction or waiver of such conditions), unless another date
is agreed to in writing by the parties. The Hiland Holdings
merger will become effective at the time, which we
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refer to as the effective time of the Hiland Holdings merger,
when Hiland Holdings files a certificate of merger with the
Secretary of State of the State of Delaware, or at such later
date or time as Parent and Hiland Holdings agree in writing and
specify in the certificate of merger.
Effect of
the Merger on the Common Units and Certain Other Securities of
Hiland Holdings and HPGP Merger Sub
Each common unit of Hiland Holdings (other than common units
owned by the Hamm Continuing Investors and restricted common
units owned by certain employees of Hiland Holdings as described
below which we sometimes refer to as the Hiland Holdings
rollover common unitholders) outstanding immediately prior
to the closing of the Hiland Holdings merger, will be cancelled
and convert automatically into the right to receive $2.40 in
cash. Restricted common units held by non-employee members of
the Hiland Holdings Board of Directors will vest immediately
prior to the effective time and automatically convert into the
right to receive the Hiland Holdings merger consideration.
Other restricted common units, phantom units and unit option
awards issued pursuant to the Hiland Holdings GP, LP Long-Term
Incentive Plan that remain outstanding as of the effective time
of the Hiland Holdings merger will remain outstanding in
accordance with their respective terms as equity awards in the
surviving entity in the Hiland Holdings merger.
The following partnership interests shall be unaffected and
remain outstanding as partnership interests in the surviving
entity in the Hiland Holdings merger, and their holders will not
receive any consideration as part of the Hiland Holdings merger:
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8,481,350 Hiland Holdings common units owned by Continental Gas
Holdings, Inc. (Continental Gas), an affiliate of
Harold Hamm;
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2,757,390 Hiland Holdings common units owned by the Harold Hamm
DST Trust (or Bert Harold Mackie, as trustee thereof);
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1,839,712 Hiland Holdings common units owned by the Harold Hamm
HJ Trust (or Bert Harold Mackie, as trustee thereof);
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59,600 Hiland Holdings common units owned by Harold
Hamm; and
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the general partner interest in Hiland Holdings owned by the
general partner of Hiland Holdings.
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Upon closing of the Hiland Holdings merger, each limited
liability company unit of HPGP Merger Sub outstanding
immediately prior to the closing will automatically convert into
one common unit of the surviving entity.
Payment
for Hiland Holdings Common Units in the Merger
At or prior to the effective time of the Hiland Holdings merger,
Parent and HPGP Merger Sub will deposit, or cause to be
deposited
with ,
as paying agent, in trust for the benefit of the holders of
Hiland Holdings common units (other than those holders who will
not receive the Hiland Holdings merger consideration, as
described above), sufficient cash to pay to the Hiland Holdings
common unitholders (other than the Hiland Holdings rollover
common unitholders) the merger consideration of $2.40 per unit.
As soon as reasonably practicable but in any event not later
than five business days following the effective time of the
Hiland Holdings merger, Parent will cause the paying agent to
mail to each record holder of common units of Hiland Holdings
that were converted into the right to receive the Hiland
Holdings merger consideration a letter of transmittal and
instructions for use in effecting the surrender of certificates
that formerly represented common units of Hiland Holdings or
non-certificated common units represented by book-entry in
exchange for the Hiland Holdings merger consideration.
Upon surrender of the certificates or book-entry common units
and a duly completed and validly executed letter of transmittal,
together with any other documents required by the letter of
transmittal or customarily required by the paying agent, a
holder of Hiland Holdings common units will be entitled to
receive a check
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for the aggregate Hiland Holdings merger consideration owed to
such unitholder. No interest will be paid or accrue on the
Hiland Holdings merger consideration. Parent, the surviving
entity in the Hiland Holdings merger and the paying agent will
be entitled to deduct and withhold from the payment of the
Hiland Holdings merger consideration amounts that are required
to be withheld or deducted under applicable tax laws.
No transfers of Hiland Holdings common units will be made on the
unit transfer register of Hiland Holdings from and after the
effective time of the Hiland Holdings merger. In the event of a
transfer of ownership of common units that is not registered in
the unit transfer register of Hiland Holdings a check for any
cash to be paid upon surrender of the certificate formerly
representing those shares may be paid to the transferee if the
certificate is presented to the paying agent with all documents
required to evidence and effect the transfer of the shares and
to evidence that any applicable stock transfer or other taxes
have been paid or are not applicable.
Representations
and Warranties
The Hiland Holdings merger agreement contains representations
and warranties of Hiland Holdings and its general partner (which
we collectively refer to as the Holdings Parties)
and of Parent and HPGP Merger Sub (which we refer to as the
HPGP Parent Parties) as to, among other things:
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legal organization, existence and good standing, including, as
to the Holdings Parties, with respect to its subsidiaries;
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corporate, partnership or similar power and authority to enter
into the Hiland Holdings merger agreement and to consummate the
transaction contemplated by the Hiland Holdings merger agreement
and due authorization of the execution, delivery and performance
of the Hiland Holdings merger agreement and the consummation of
the Hiland Holdings merger;
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the absence of certain violations, defaults or consent
requirements under certain contracts, organizational documents
and law, in each case arising out of the execution and delivery
of, and consummation of, the transactions contemplated by the
Hiland Holdings merger agreement;
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the absence of materially misleading statements or omissions in
required filings with the SEC, or information provided in
connection with required filings with the SEC (including this
joint proxy statement) in connection with the Hiland Holdings
merger;
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the absence of any fees owed to investment bankers, finders or
brokers in connection with the Hiland Holdings merger, other
than those specified in the Hiland Holdings merger agreement.
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The Hiland Holdings merger agreement contains representations
and warranties of the Holdings Parties as to, among other things:
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the capitalization of the Holdings Parties and the absence of
certain rights to purchase or acquire equity securities of the
Holdings Parties, the absence of any bonds or other obligations
allowing holders the right to vote with unitholders of the
Holdings Parties and the absence of unitholder agreements or
voting trusts to which the Holdings Parties is a party, other
than those specified in the Hiland Holdings merger agreement;
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the financial statements of Hiland Holdings and its subsidiaries
included or incorporated by reference into Hiland Holdings
SEC filings;
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the absence of certain undisclosed indebtedness liabilities,
other than those incurred or accrued in the ordinary course of
business consistent with past practices since December 31,
2008;
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compliance with laws by the Holdings Parties;
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the Holdings Parties employee benefit plans and other
agreements with their employees;
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the absence of certain changes since December 31, 2008;
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the absence of certain litigation, orders and judgments and
governmental proceedings and investigations related to the
Holdings Parties except as otherwise disclosed to the HPGP
Parent Parties by the Holdings Parties;
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the payment of taxes, the filing or tax returns and other tax
matters;
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labor matters related to the Holdings Parties;
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the assets of the Holdings Parties;
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the opinion received by the Holdings Parties from Barclays
Capital;
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the required approvals of the Hiland Holdings merger agreement
and the Hiland Holdings merger, including approval by the Hiland
Holdings unitholders at the special meeting;
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material contracts of the Holdings Parties and the performance
of obligations thereunder; and
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the absence of any approval requirements under any state
takeover statutes.
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The Hiland Holdings merger agreement also contains
representations and warranties of the HPGP Parent Parties as to,
among other things:
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the HPGP Parent Parties ability to finance the Hiland
Holdings merger and certain related costs;
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the ownership of HPGP Merger Sub and the absence of any previous
business activities by HPGP Merger Sub other than in connection
with the transactions contemplated by the Hiland Holdings merger
agreement;
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the access to information about the Holdings Parties that has
been provided to the HPGP Parent Parties; and
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the limitation of the Holdings Parties representations and
warranties to those set forth in the Hiland Holdings merger
agreement or in certificates entered into in connection with the
Hiland Holdings merger agreement.
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Some of the representations and warranties in the merger
agreement are qualified by materiality qualifications or a
material adverse effect clause.
For purposes of the Hiland Holdings merger agreement, a
material adverse effect means, with respect to
Hiland Holdings, any fact, circumstance, event, change, effect
or occurrence that, individually or in the aggregate with all
other facts, circumstances, events, changes, effects or
occurrences, has had or would be reasonably likely to have a
material adverse effect on the assets, liabilities, properties,
business, results of operations or condition (financial or
otherwise) of the Holdings Parties, taken as a whole, or on the
ability of the Holdings Parties to perform their obligations
under the Hiland Holdings merger agreement or to consummate the
Hiland Holdings merger.
In any case, however, a material adverse effect with
respect to Hiland Holdings will not include:
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facts, circumstances, events, changes, effects or occurrences:
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generally affecting the midstream oil and gas or gathering and
processing industries (including commodity prices);
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generally affecting the economy or the financial or securities
markets in the United States or globally (including interest
rates); or
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generally affecting regulatory or political conditions in the
United States or globally,
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except, with respect to the above three bullet-points, for any
fact, circumstance, event, change, effect or occurrence that
affects the assets, liabilities, properties, business, results
of operations or condition (financial or otherwise) of Hiland
Holdings and its subsidiaries, taken as a whole, in a
disproportionately adverse manner, compared to other
participants in the midstream oil and gas or gathering and
processing industries;
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facts, circumstances, events, changes, effects or occurrences:
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caused by compliance with the terms of the Hiland Holdings
merger agreement (including omissions required by the Hiland
Holdings merger agreement);
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caused by the announcement or pendency of the Hiland Holdings
merger (including litigation brought by any holder of common
units in Hiland Holdings (on their own behalf or on behalf of
Hiland Holdings) or loss of or adverse changes in relationships
with employees, customers or suppliers of Hiland
Holdings); or
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caused by any action taken or omitted to be taken by an officer
of the general partner of Hiland Partners at the direction of
Parent or HPGP Merger Sub or Harold Hamm (other than (i) in
his capacity as part of, (ii) in accordance with authority
delegated to him by, or (iii) as otherwise authorized by,
the Hiland Holdings Board of Directors or any committee thereof);
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changes in applicable statutes, regulations, statutory rules,
order, judgments, decrees and terms and conditions of any grant
of approval, permission, authority, permit or license of any
court, governmental entity, statutory body or self-regulatory
authority (including the NASDAQ Global Select Market) after the
date hereof;
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changes in generally accepted accounting principles in the
United States, or GAAP, after the date hereof;
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a decrease in the market price of Hiland Holdings common units
(except that this exception will not prevent or otherwise affect
a determination that any fact, circumstance, event, change,
effect or occurrence underlying such decrease has resulted in,
or contributed to, a material adverse effect);
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any failure by the Holdings Parties to meet any internal or
publicly disclosed projections, forecasts or estimates of
revenue or earnings (except that this exception will not prevent
or otherwise affect a determination that any fact, circumstance,
event, change, effect or occurrence underlying such failure has
resulted in, or contributed to, a material adverse effect);
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a failure, if any, of Hiland Operating, LLC (a subsidiary of
Hiland Holdings) to be in compliance with:
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the Interest Coverage Ratio required by Section 6.17 of the
Hiland Operating Credit Agreement; or
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the Leverage Ratio required by Section 6.18 of the Hiland
Operating Credit Agreement,
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(except that failure to be in compliance with the above ratios
will not prevent or otherwise affect a determination that any
fact, circumstance, event, change, effect or occurrence
underlying such default has resulted in, or contributed to, a
material adverse effect); or
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any decrease in distributions in respect of the Hiland Holdings
common units (except that this exception will not prevent or
otherwise affect a determination that any fact, circumstance,
event, change, effect or occurrence underlying such decrease has
resulted in, or contributed to, a material adverse
effect); and
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any decrease in distributions in respect of the common or
subordinated units of Hiland Partners occurring prior to the
execution date of the Hiland Holdings merger agreement (except
that this exception will not prevent or otherwise affect a
determination that any fact, circumstance, event, change, effect
or occurrence underlying such decrease has resulted in, or
contributed to, a material adverse effect).
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For purposes of the Hiland Holdings merger agreement, a
material adverse effect means, with respect to the
HPGP Parent Parties, any fact, circumstance, event, change,
effect or occurrence that, individually or in the aggregate with
all other facts, circumstances, events, changes, effects or
occurrences, prevents or materially delays or materially impairs
or would be reasonably likely to prevent or materially delay or
materially impair the ability of Parent or HPGP Merger Sub to
consummate the Hiland Holdings merger and the other transactions
contemplated by the Hiland Holdings merger agreement.
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Agreements
Related to the Conduct of Business
The Hiland Holdings merger agreement provides that, subject to
certain exceptions or as consented to in writing by Parent,
during the period from the signing of the Hiland Holdings merger
agreement to the effective time of the Hiland Holdings merger,
the Holdings Parties, among other things, will:
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conduct their business in the ordinary course consistent with
past practice;
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use commercially reasonable efforts to (i) maintain and
preserve intact their business organization and material rights
and franchises, (ii) retain the services of their current
officers and employees and consultants and (iii) maintain
and preserve in all material respects the relationships with
customers, suppliers, and others having business dealings with
them; and
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take no action that would materially adversely affect or
materially delay the ability of any of the parties to the Hiland
Holdings merger agreement from obtaining any necessary approvals
of any regulatory agency or other governmental entity required
for the transactions contemplated by the Hiland Partners merger
agreement, performing its covenants and agreements under the
Hiland Holdings merger agreement or consummating the
transactions contemplated by the Hiland Holdings merger
agreement, or otherwise materially delay or prohibit
consummation of the Hiland Partners merger or other transactions
contemplated by the Hiland Holdings merger agreement.
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Specifically, the Holdings Parties agreed, subject to certain
exceptions or as consented to in writing by Parent (whose
consent may not be unreasonably withheld, conditioned or
delayed), not to do, or agree to do, any of the following:
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make any changes in any of their organizational or governing
documents, other than changes expressly provided for in the
Hiland Holdings merger agreement;
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issue, deliver or sell or authorize, or propose the issuance,
delivery or sale of, any interests or equity securities in
Hiland Holdings or its subsidiaries or securities convertible
into interests or equity securities in Hiland Holdings or its
subsidiaries or subscriptions, rights, warrants or options to
acquire or other agreements or commitments of any character
obligating them to issue any such partnership interests or
equity securities in Hiland Holdings, other than restricted
common units, phantom units or unit options granted to current
or new employees under the Hiland Holdings GP, LP Long-Term
Incentive Plan in a manner consistent with past practice of up
to 50,000 Hiland Holdings common units in the aggregate;
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except for any distributions from Hiland Holdings
subsidiaries to Hiland Holdings, declare, set aside or pay any
distributions in respect of the interests in Hiland Holdings or
other ownership interests, or split, combine or reclassify any
of the interests in Hiland Holdings or other ownership interests
or issue or authorize the issuance of any other interests in
Hiland Holdings or other ownership interests in respect of, in
lieu of or in substitution for any of the interests in Hiland
Holdings or other ownership interests, or purchase, redeem or
otherwise acquire, directly or indirectly, any of the interests
in Hiland Holdings or other ownership interests other than
repurchase of interests in Hiland Holdings in accordance with
the Hiland Holdings GP, LP Long-Term Incentive Plan;
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merge into or with any other entity, other than the Hiland
Partners merger;
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incur, assume or guarantee any indebtedness for borrowed money,
issue, assume or guarantee any debt securities, grant any
option, warrant or right to purchase any debt securities, or
issue any securities convertible into or exchangeable for any
debt securities other than in connection with:
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borrowings in the ordinary course of business or provided for in
the Hiland Holdings 2009 annual budget (which we sometimes
refer to in this joint proxy statement as the Hiland
Holdings budget), in each case in accordance with any
existing bank credit facilities;
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the refinancing or replacement of existing indebtedness;
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other than as permitted in the two bullet-points above, the
incurrence by Hiland Holdings of up to $1,000,000 in principal
amount of indebtedness; and
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a transaction that is permitted by other provisions of the
Hiland Holdings merger agreement;
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sell, assign, transfer, abandon, lease or otherwise dispose of
or grant any security interest with respect to, pledge or
otherwise encumber (other than permitted encumbrances under the
Hiland Holdings merger agreement) any limited liability company,
partnership or other equity interests of any subsidiary or
partially owned entity of the Holdings Parties (excluding
subsidiaries and partially owned entities of Hiland Partners);
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settle any claims, demands, lawsuits or state or federal
regulatory proceedings for damages to the extent such
settlements in the aggregate assess damages in excess of
$1,000,000, other than any claims, demands, lawsuits or
proceedings to the extent insured (net of deductibles), to the
extent reserved against in the financial statements of Hiland
Holdings or to the extent covered by an indemnity obligation not
subject to dispute or adjustment from a solvent indemnitor;
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settle any claims, demands, lawsuits or state or federal
regulatory proceedings seeking an injunction or other equitable
relief where such settlements would have a material adverse
affect on the Hiland Holdings, as defined in the Hiland Holdings
merger agreement;
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make any material change in their tax methods, principles or
elections;
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make any material change to their financial reporting and
accounting methods other than as required by a change in GAAP;
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grant any increases in the compensation of any of their
executive officers, except in the ordinary course of business
consistent with past practice or as required by the terms of an
existing employee benefit plan or agreement or by applicable law;
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amend any existing employment or severance or termination
contract with any executive officer;
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become obligated under any new pension plan, welfare plan,
multiemployer plan, employee benefit plan, severance plan,
change of control or other benefit arrangement or similar plan
or arrangement or amend any existing employee benefit plan, if
such amendment would have the effect of materially enhancing any
benefits thereunder; or
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voluntarily dissolve or otherwise adopt or vote to adopt a plan
of complete or partial dissolution or liquidation.
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Provided, however, that any action taken or omitted to be taken
by an officer of a Holdings Party at the direction of any of the
HPGP Parent Parties or Mr. Hamm (other than (1) in his
capacity as part of, (2) in accordance with authority
delegated to him by, or (3) as otherwise authorized by, the
Hiland Holdings Board of Directors or any committee thereof)
that would otherwise constitute a breach of the Conduct of
Business covenants described in this section, will not
constitute a breach of the Hiland Holdings merger agreement.
Other
Covenants and Agreements
Investigation
The Holdings Parties must afford to the HPGP Parent Parties and
their advisors reasonable access during normal business hours
after reasonable prior notice, during the period prior to the
effective time of the Hiland Holdings merger, to the offices,
properties, books and records of the Holdings Parties and
provide to the HPGP Parent Parties such financial and other data
as they may reasonably request related to the Holdings Parties,
including furnishing to Parent the financial results of Hiland
Holdings and its subsidiaries in advance of any filing by Hiland
Holdings with the SEC or other public disclosure containing
financial results. The Holdings Parties also agreed to instruct
their employees and advisors to cooperate with Parent in its
investigations described in this paragraph. The Holdings Parties
are not required to furnish information to Parent to the
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extent such information is privileged or the furnishing of such
information is prohibited by law or an existing contract or
agreement.
Parent will hold, and will cause its advisors to hold, any
material or competitively sensitive non-public information
concerning the Holdings Parties or their subsidiaries
confidential. The general partner of Hiland Holdings was
obligated to provide, and has provided, Parent (solely for
informational purposes) the fairness opinion of Barclays Capital
prepared in connection with the Hiland Holdings merger.
No
Solicitation
The Holdings Parties may not, and must cause their officers,
directors, employees, agents and representatives (their
representatives) not to, directly or indirectly:
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initiate, solicit, knowingly encourage (including by providing
information) or knowingly facilitate any inquiries, proposals or
offers with respect to, or the making or completing, an
alternative proposal (as defined below);
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engage or participate in any negotiations concerning, or provide
or cause to be provided any non-public information or data
relating to, the Holdings Parties and their subsidiaries, in
connection with, or have any discussions with any person
relating to, an alternative proposal, or otherwise knowingly
encourage or knowingly facilitate any effort or attempt to make
or implement an alternative proposal;
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approve, endorse or recommend, or propose publicly to approve,
endorse or recommend, any alternative proposal;
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approve, endorse or recommend, or propose to approve, endorse or
recommend, or execute or enter into, any letter of intent,
agreement in principle, merger agreement, acquisition agreement,
option agreement or other similar agreement relating to any
alternative proposal;
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amend, terminate, waive or fail to enforce, or grant any consent
under, any confidentiality, standstill or similar
agreement; or
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resolve to propose or agree to do any of the above.
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In addition, upon the signing of the Hiland Holdings merger
agreement, the Holdings Parties and their representatives were
obligated to immediately cease any existing solicitations,
discussions or negotiations with any person (other than the HPGP
Parent Parties) that had made or indicated an intention to make
an alternative proposal. The Holdings Parties agreed to
promptly, and in any event not later than ten days following the
date the Hiland Holdings merger agreement was signed, request
that each person who had executed a confidentiality agreement
with a Holdings Party in connection with that persons
consideration of a transaction involving any Holdings Party that
would constitute an alternative proposal return or destroy all
non-public information furnished to that person by or on behalf
of the Holdings Parties.
Notwithstanding the foregoing, prior to approval of the Hiland
Holdings merger agreement and Hiland Holdings merger by the
unitholders as required in the Hiland Holdings merger agreement,
the Holdings Parties may, in response to an unsolicited
alternative proposal which did not result from or arise in
connection with a breach of the no solicitation covenant
described in the first paragraph under No
Solicitation above and which the Hiland Holdings Conflicts
Committee determines, in good faith, after consultation with its
outside counsel and financial advisors, constitutes or could
reasonably be expected to result in a superior proposal (as
defined below):
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furnish information with respect to the Holdings Parties and
their subsidiaries to the person making such alternative
proposal and its representatives pursuant to an executed
confidentiality agreement no less restrictive (including with
respect to standstill provisions) of the other party than the
form of confidentiality agreement attached as an exhibit to the
Hiland Holdings merger agreement; and
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participate in discussions or negotiations with such person and
its representatives regarding such alternative proposal.
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In this case, Parent is entitled to receive an executed copy of
such confidentiality agreement prior to or substantially
simultaneously with the Holdings Parties furnishing information
to the person making such alternative proposal or its
representatives. Additionally, the Holdings Parties must
simultaneously provide or make available to Parent any
non-public information concerning the Holdings Parties and their
subsidiaries that is provided to the person making such
alternative proposal or its representatives which was not
previously provided or made available to Parent.
The Holdings Parties also agreed to promptly (and in any event
within 24 hours) advise Parent orally and in writing of the
receipt by either of them of any alternative proposal or any
request for non-public information relating to the Holdings
Parties and their subsidiaries, other than requests for
information in the ordinary course of business consistent with
past practice and not reasonably expected to be related to an
alternative proposal, including in each case the identity of the
person making any such alternative proposal or request and the
material terms and conditions of any such alternative proposal
or request (including copies of any document or correspondence
evidencing such alternative proposal or request).
The Holdings Parties must keep Parent reasonably informed on a
current basis of the status (including any material change to
the terms thereof) of any such alternative proposal or request.
Neither the Hiland Holdings Board of Directors nor any committee
thereof may withdraw, modify or qualify in a manner adverse to
Parent, or resolve to or publicly propose to withdraw, modify or
qualify in a manner adverse to Parent, its recommendation to the
common unitholders to approve the Hiland Holdings merger,
unless, prior to the receipt of the requisite approval of the
holders of Hiland Holdings common units as required under the
Hiland Holdings merger agreement and the Hiland Holdings
partnership agreement:
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the Hiland Holdings Board of Directors or the Hiland Holdings
Conflicts Committee determines in good faith, after consultation
with its respective outside counsel and financial advisors, that
a change in its recommendation would be in the best interests of
the holders of Hiland Holdings common units (other than the Hamm
Continuing Investors); and
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the Hiland Holdings Board of Directors or the Hiland Holdings
Conflicts Committee, as applicable, provides Parent with at
least three business days advance written notice of its
intention to change its recommendation and specifying the
material events giving rise thereto, then the Hiland Holdings
Board of Directors or the Hiland Holdings Conflicts Committee,
as applicable, may change its recommendation.
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The restrictions summarized above are inapplicable to any
discussions or negotiations with the lenders under the Credit
Agreement, dated as of May 1, 2006, between Hiland Holdings
GP, LLC and MidFirst Bank (which, together with any related
guarantees, in each case as amended, restated, supplemented or
otherwise modified from time, we refer to in this joint proxy
statement as the HPGP Credit Agreement) or the
Hiland Operating Credit Agreement regarding debt financing
transactions with such lenders that may involve equity issuances
that would constitute an alternative proposal. In addition,
nothing contained in the Hiland Holdings merger agreement
prohibits the Holdings Parties or the Hiland Holdings Board of
Directors or any committee thereof from disclosing to the Hiland
Holdings unitholders a position in response to any tender offer
as required by the SEC.
As used in the Hiland Holdings merger agreement,
alternative proposal means any inquiry, proposal or
offer from any person or group of persons other than the HPGP
Parent Parties, relating to, or that could reasonably be
expected to lead to, in one transaction or a series of related
transactions:
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a merger, tender or exchange offer, consolidation,
reorganization, reclassification, recapitalization, liquidation
or dissolution, or other business combination involving any
Holdings Party or any of their subsidiaries;
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the issuance by Hiland Holdings or Hiland Partners of any
general partner interest or any class of partnership interests
constituting more than 15% of such class of partnership
interests; or
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the acquisition in any manner, directly or indirectly, of any
general partner interest, any class of partnership interests
constituting more than 15% of such class of partnership
interests or more than
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15% of the consolidated total assets of the Holdings Parties and
their subsidiaries (including equity interests in any subsidiary
or partially owned entity of Hiland Holdings), in each case
other than the Hiland Partners merger and the Hiland Holdings
merger.
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As used in the Hiland Holdings merger agreement, superior
proposal shall mean any written alternative proposal:
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on terms which the Hiland Holdings Conflicts Committee
determines in good faith, after consultation with its outside
legal counsel and financial advisors, to be more favorable from
a financial point of view to the holders of Hiland Holdings
common units (other than the Hamm Continuing Investors); and
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that is reasonably capable of being completed, taking into
account all financial, regulatory, legal and other aspects of
such proposal; provided that for purposes of the definition
Superior Proposal, the references to 15%
in the definition of Alternative Proposal shall be
deemed to be references to 35% with respect to the
Holdings Parties and 55% with respect to the Hiland
Parties and the subsidiaries and partially owned entities of
Hiland.
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In determining if a proposal is more favorable, from a financial
point of view to the holders of Hiland Holdings common units
than the Hiland Holdings merger, the Hiland Holdings Conflicts
Committee may not consider any interests that any holder may
have other than as a unitholder of Hiland Holdings entitled to
the Hiland Holdings merger consideration and will take into
account all the terms and conditions of such proposal, and the
Hiland Holdings merger agreement (including any proposal or
offer by the HPGP Parent Parties to amend the terms of the
Hiland Holdings merger agreement and the Hiland Holdings merger).
Filings
and Other Actions
Upon signing of the Hiland Holdings merger agreement, the
Holdings Parties were obligated to prepare and file this joint
proxy statement as soon as reasonably practicable. The Holdings
Parties and Parent were obligated to prepare and file the
Schedule 13E-3
as soon as reasonably practicable and both parties are obligated
to use their commercially reasonable efforts to have this joint
proxy statement and the
Schedule 13E-3,
cleared by the SEC as promptly as practicable after such filing.
Additionally, the Holdings Parties agreed to:
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take all action necessary in accordance with applicable laws and
the Hiland Holdings partnership agreement to duly call, give
notice of, convene and hold a meeting of the Hiland Holdings
unitholders as promptly as reasonably practicable following the
mailing of this joint proxy statement for the purpose of
obtaining the necessary unitholder approvals under the Hiland
Holdings merger agreement and the Hiland Holdings partnership
agreement of the Hiland Holdings merger and the Hiland Holdings
merger agreement; and
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unless there is a change in the recommendation of the Hiland
Holdings Board of Directors or Hiland Holdings Conflicts
Committee, use all commercially reasonable efforts to solicit
from Hiland Holdings unitholders proxies in favor of the
adoption and approval of the Hiland Holdings merger agreement
and the Hiland Holdings merger.
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Unless the Hiland Holdings merger agreement is terminated
pursuant to its terms, the Holdings Parties must take all of the
actions described in the first bullet point in the previous
paragraph regardless of whether or not there has been a change
in the recommendation of the Hiland Holdings Board of Directors
or the Hiland Holdings Conflicts Committee.
Equity
Awards
The Hiland Holdings GP, LP Long-Term Incentive Plan and each
award of restricted common units (except awards held by
nonemployee members of the Board of Directors of Directors as
described in Effect of the Merger on the
Common Units and Certain Other Securities of Hiland Holdings and
Merger Sub above), phantom units and options outstanding
under the Hiland Holdings GP, LP Long-Term Incentive Plan
immediately prior to the effective time of the Hiland Holdings
merger will remain outstanding in
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accordance with its terms as a plan or equity compensation
award, as applicable, of the surviving entity and shall be
unaffected by the transactions contemplated by the Hiland
Holdings merger agreement. Hiland Holdings has agreed to take
any action necessary pursuant to the Hiland Holdings GP, LP
Long-Term Incentive Plan to achieve this result.
Efforts
to Complete the Hiland Holdings Merger
The HPGP Parent Parties and the Holdings Parties shall use their
commercially reasonable efforts (subject to, and in accordance
with, applicable law) to take promptly, or to cause to be taken,
all actions, and to do promptly, or to cause to be done, and to
assist and to cooperate with the other parties in doing, all
things necessary, proper or advisable to consummate and make
effective the Hiland Holdings merger and the other transactions
contemplated by the Hiland Holdings merger agreement including:
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the obtaining of all necessary actions or nonactions, waivers,
consents and approvals from governmental entities and the making
of all necessary registrations and filings and the taking of all
steps as may be necessary to obtain an approval or waiver from,
or to avoid an action or proceeding by, any governmental entity,
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the obtaining of all necessary consents, approvals or waivers
from third parties,
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the defending of any lawsuits or other legal proceedings,
whether judicial or administrative, challenging the Hiland
Holdings merger agreement or the consummation of the
transactions contemplated hereby and
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the execution and delivery of any additional instruments
reasonably necessary to consummate the transactions contemplated
hereby.
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In addition, Parent is obligated to use its reasonable best
efforts to obtain the funding for the Hiland Holdings merger in
accordance with the funding commitment letters provided by
Mr. Hamm to Parent and described in Special
Factors Financing of the Mergers, beginning on
page 139.
The Holdings Parties and the HPGP Parent Parties have
agreed to:
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make their respective filings, if applicable, and thereafter
make any other required submissions under the HSR Act;
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use commercially reasonable efforts to cooperate with each other
in determining whether any filings are required to be made with,
or consents, permits, authorizations, waivers or approvals are
required to be obtained from, any third parties or other
governmental entities in connection with the execution and
delivery of the Hiland Holdings merger agreement and the
consummation of the transactions contemplated hereby;
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use commercially reasonable efforts to cooperate with each other
in timely making all such filings and timely seeking all such
consents, permits, authorizations or approvals;
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use commercially reasonable efforts to take, or to cause to be
taken, all other actions and to do, or to cause to be done, all
other things necessary, proper or advisable to consummate and
make effective the Hiland Holdings merger and the other
transactions contemplated by the Hiland Holdings merger
agreement, including taking all such further action as
reasonably may be necessary to resolve such objections, if any,
any federal, state or foreign antitrust enforcement authorities
or competition authorities or other governmental entities may
assert in connection with the HSR Act, or other state or federal
regulatory authorities of any other nation or other jurisdiction
or any other person may assert under regulatory law with respect
to the Hiland Holdings merger and the other transactions
contemplated by the Hiland Holdings merger agreement, and to
avoid or eliminate each and every impediment under any law that
may be asserted by any governmental entity with respect to the
Hiland Holdings merger so as to enable the closing to occur as
soon as reasonably possible; and
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subject to applicable legal limitations and the instructions of
any governmental entity, use commercially reasonable efforts to
keep each other apprised of the status of matters relating to
the completion of the
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transactions contemplated by the Hiland Holdings merger
agreement, including to the extent permitted by law promptly
furnishing the other with copies of notices or other
communications received by the Holdings Parties or any of their
subsidiaries or the HPGP Parent Parties, as the case may be,
from any third party
and/or
any
governmental entity with respect thereto.
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The Holdings Parties and the HPGP Parent Parties agreed that, if
any administrative or judicial action or proceeding, including
any proceeding by a private party, is instituted (or threatened
to be instituted) challenging the Hiland Holdings merger or any
other transaction contemplated by this Hiland Holdings merger
agreement, each of the Holdings Parties or the HPGP Parent
Parties shall cooperate in all respects with each other and
shall use their respective commercially reasonable efforts to
contest and resist any such action or proceeding and to have
vacated, lifted, reversed or overturned any decree, judgment,
injunction or other order, whether temporary, preliminary or
permanent, that is in effect and that prohibits, prevents or
restricts consummation of the Hiland Holdings merger or any
other transactions contemplated by the Hiland Holdings merger
agreement.
The HPGP Parent Parties and the Holdings Parties have agreed
that any of the parties to the Hiland Holdings merger agreement
may, as each deems advisable and necessary, reasonably designate
any competitively sensitive material provided to the other under
the covenant described in this section as material that may be
given only to the outside regulatory counsel of the recipient
and not disclosed by such outside counsel to employees, officers
or directors of the recipient unless express written permission
is obtained in advance from the source of the materials (the
HPGP Parent Parties or the Holdings Parties as the case may be)
or its legal counsel. Materials provided to the other party or
its outside counsel may be redacted to remove references
concerning the valuation of the Hiland Holdings common units or
the business of the Holdings Parties and their subsidiaries.
Takeover
Statute
If any fair price, moratorium,
control share acquisition or other form of
anti-takeover statute or regulation shall become applicable to
the Hiland Holdings merger or the other transactions
contemplated by the Hiland Holdings merger agreement or the
Hiland Holdings support agreement, each of the Holdings Parties
or the HPGP Parent Parties have agreed to grant such approvals
and take such actions as are reasonably necessary so that the
Hiland Holdings merger, the Hiland Holdings support agreement,
and the other transactions contemplated by the Hiland Holdings
merger agreement and thereby may be consummated as promptly as
practicable on the terms contemplated in the Hiland Holdings
merger agreement and otherwise act to eliminate or minimize the
effects of such statute or regulation on the Hiland Holdings
merger, the Hiland Holdings support agreement, and the other
transactions contemplated hereby and thereby.
Public
Announcements
The Holdings Parties and the HPGP Parent Parties have agreed to
consult with and provide each other the opportunity to review
and comment (which shall be considered reasonably and in good
faith by the other parties) upon any press release or other
public statement or comment prior to the issuance of such press
release or other public statement or comment relating to the
Hiland Holdings merger agreement or the transactions
contemplated therein and shall not issue any such press release
or other public statement or comment prior to such consultation
and opportunity to review and comment except as may be required
by applicable law or by obligations pursuant to any listing
agreement with any national securities exchange. Any public
statement or disclosure that is consistent with a public
statement or disclosure previously approved by the other party
shall not, however, require the prior approval of such other
party.
Indemnification
and Insurance
The partnership agreement of the surviving entity shall not,
with respect to indemnification of directors and officers, be
amended, repealed or otherwise modified after the effective time
of the Hiland Holdings merger in any manner that would adversely
affect the rights thereunder of the persons who at any time
prior to the effective time of the Hiland Holdings merger were
identified as prospective indemnitees under the Hiland
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Holdings partnership agreement in respect of actions or
omissions occurring at or prior to the effective time of the
Hiland Holdings merger (including the transactions contemplated
by the Hiland Holdings merger agreement).
For a period of six years after the effective time of the Hiland
Holdings merger, Parent and the general partner of Hiland
Holdings shall, and Parent and the general partner of Hiland
Holdings shall cause the surviving entity (and its successors or
assigns) to, maintain officers and directors
liability insurance covering each person who is immediately
prior to the effective time of the Hiland Holdings merger, or
has been at any time prior to the effective time of the Hiland
Holdings merger, an officer or director of any of the Holdings
Parties or their subsidiaries and each person who immediately
prior to the effective time of the Hiland Holdings merger is
serving or prior to the effective time of the Hiland Holdings
merger has served at the request of any of the Holdings Parties
or their subsidiaries as a director, officer, trustee or
fiduciary of another corporation, partnership, joint venture,
trust, pension or other employee benefit plan of the Holdings
Parties or their subsidiaries who are or at any time prior to
the effective time were covered by the existing officers
and directors liability insurance applicable to the
Holdings Parties or their subsidiaries on terms substantially no
less advantageous to the indemnified persons described in this
paragraph than such existing insurance with respect to acts or
omissions, or alleged acts or omissions, prior to the effective
time of the Hiland Holdings merger (whether claims, actions or
other proceedings relating thereto are commenced, asserted or
claimed before or after the effective time of the Hiland
Holdings merger).
Hiland Holdings shall cause (and Parent, following the closing
of the Hiland Partners merger, shall continue to cause) coverage
to be extended under the existing officers and
directors liability insurance applicable to the Holdings
Parties or their subsidiaries by obtaining a six-year
tail policy on terms and conditions no less
advantageous than the existing officers and
directors liability insurance, and such tail
policy shall satisfy the requirements summarized in this
section. In no event, however, will Parent be required to spend
more than 250% of the last annual premium paid by the Holdings
Parties and their subsidiaries prior to the signing date of the
Hiland Holdings merger agreement per policy year of coverage
under such tail policy. If the cost per policy year
of such insurance exceeds 250% of the last annual premium,
Parent shall purchase as much coverage per policy year as
reasonably obtainable for the amount equal to 250% of the last
annual premium.
In the event Parent, the general partner of Hiland Holdings or
any of their respective successors or assigns:
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consolidates with or merges into any other person and shall not
be the continuing or surviving entity in such consolidation or
merger; or
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transfers all or substantially all of its properties and assets
to any person
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then and in either such case, Parent or the general partner of
Hiland Holdings, as the case may be, shall cause proper
provision to be made so that its successors or assigns shall
assume the obligations summarized in this
Indemnification and Insurance section.
Unitholder
Litigation
The Holdings Parties have agreed to give Parent the opportunity
to participate in the defense or settlement of any unitholder
litigation against any of the Holdings Parties or their
subsidiaries
and/or
their
respective directors relating to the Hiland Holdings merger or
any other transactions contemplated in the Hiland Holdings
merger agreement and not to agree to any settlement shall
without Parents consent (which shall not be unreasonably
withheld, conditioned or delayed).
Notification
of Certain Matters
The Holdings Parties and the HPGP Parent Parties have agreed to
give prompt notice to each other of:
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any notice or other communication received by such party from
any governmental entity in connection with the Hiland Holdings
merger or the other transactions contemplated in the Hiland
Holdings merger
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agreement or from any person alleging that the consent of such
person is or may be required in connection with the Hiland
Holdings merger or the other transactions contemplated in the
Hiland Holdings merger agreement, if the subject matter of such
communication or the failure of such party to obtain such
consent could be material to Hiland Holdings, the surviving
entity or Parent,
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any actions, suits, claims, investigations or proceedings
commenced or, to such partys knowledge, threatened
against, relating to or involving or otherwise affecting such
party or any of its subsidiaries which relate to the Hiland
Holdings merger or the other transactions contemplated in the
Hiland Holdings merger agreement; and
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the discovery of any fact or circumstance that, or the
occurrence or non-occurrence of any event the occurrence or
non-occurrence of which, would, individually or in the
aggregate, cause or result in a material adverse effect to the
Holdings Parties or the HPGP Parent Parties.
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The Holdings Parties shall reasonably cooperate with the HPGP
Parent Parties in efforts to mitigate any adverse consequences
to the HPGP Parent Parties which may arise from any criminal or
regulatory investigation or action involving any of the Hiland
Parties or their subsidiaries or partially-owned entities
(including by coordinating and providing assistance in meeting
with regulators).
Rule 16b-3
Prior to the effective time of the Hiland Holdings merger,
Hiland Holdings has agreed to take such steps as may be
reasonably requested by any party to the Hiland Holdings merger
agreement to cause dispositions of Hiland Holdings equity
securities (including derivative securities) pursuant to the
transactions contemplated by the Hiland Holdings merger
agreement by each individual who is a director or officer of the
general partner of Hiland Holdings to be exempt from short-swing
profits liability under the Exchange Act.
Conditions
to Completion of the Hiland Holdings Merger
The obligations of the Holdings Parties and the HPGP Parent
Parties to effect the Hiland Holdings merger shall be subject to
the fulfillment or waiver by all parties, at or prior to the
effective time of the Hiland Holdings merger, of each of the
following, mutual conditions:
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the approval of the holders of (i) a majority of the
outstanding common units of Hiland Holdings (excluding common
units owned by Mr. Hamm, his affiliates (including
Continental Gas), the Hamm family trusts and the directors and
officers of Hiland Holdings) entitled to vote thereon voting as
a class and (ii) a majority of the outstanding common units
of Hiland Holdings entitled to vote thereon voting as a class to
approve the Hiland Holdings merger agreement must be obtained;
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no restraining order, preliminary or permanent injunction or
other order issued by any court of competent jurisdiction or
other legal restraint or prohibition enacted or promulgated by
any governmental entity restraining, enjoining or otherwise
prohibiting the consummation of the Hiland Holdings merger shall
be in effect; and
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any waiting period under the HSR Act applicable to the
consummation of the Hiland Holdings merger shall have expired or
been earlier terminated.
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For purposes of the Hiland Holdings merger agreement, an
affiliate of Mr. Hamm is any person, entity,
group (as defined in Section 13 of the Exchange Act) or
organization that directly or indirectly through one or more
intermediaries controls, is controlled by or is under common
control with, Mr. Hamm. The term control means
the possession, direct or indirect, of the power to direct or
cause the direction of the management and policies of a person,
entity, group or organization, whether through ownership of
voting securities, by contract or otherwise. As of the date of
this joint proxy statement, affiliates of
Mr. Hamm included Hiland Partners and its subsidiaries, the
general partner of Hiland Partners, Hiland Holdings and its
subsidiaries, the general partner of Hiland Holdings, the
officers and directors of the general partner of Hiland
Holdings, Continental Gas, Parent and the Merger Subs.
182
The obligations of the Holdings Parties to effect the Hiland
Holdings merger are further subject to the fulfillment at or
prior to the effective time of the Hiland Holdings merger of
each of the following conditions, any one or more of which may
be waived in whole or in part by the Holdings Parties:
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(1) the representations and warranties of the HPGP Parent
Parties as to qualification, organization, authority, no
violation, and consents and approvals shall be true and correct
in all respects, in each case at and as of the date of the
Hiland Holdings merger agreement and at and as of the closing
date as though made at and as of the closing date of the Hiland
Holdings merger and (2) the representations and warranties
of the HPGP Parent Parties set forth in the Hiland Holdings
merger agreement (other than those referenced in clause (1)
of this paragraph) shall be true and correct in all respects
(disregarding any materiality or Parent material adverse effect
qualifiers therein) at and as of the date of the Hiland Holdings
merger agreement and at and as of the closing date as though
made at and as of the closing date, except where any failures of
such representations or warranties to be so true and correct
would not have, individually or in the aggregate, a material
adverse effect on Parent; provided, however, that, with respect
to clauses (1) and (2) of this paragraph,
representations and warranties that are made as of a particular
date or period shall be true and correct (in the manner set
forth in clause (1) or (2), as applicable) only as of such
date or period;
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the HPGP Parent Parties shall have performed all obligations and
complied with all covenants required by the Hiland Holdings
merger agreement to be performed or complied with by them that
are qualified by materiality or a material adverse effect
qualifier and shall have in all material respects performed all
other obligations and complied with all other covenants required
by the Hiland Holdings merger agreement to be performed or
complied with by them; and
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Parent shall have delivered to the Holdings Parties a
certificate, dated the effective time of the Hiland Holdings
merger and signed by its Chief Executive Officer or another
senior executive officer, certifying to the effect that the
conditions set forth in the first two bullet points above have
been satisfied.
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The obligations of the HPGP Parent Parties to effect the Hiland
Holdings merger are further subject to the fulfillment at or
prior to the effective time of the Hiland Holdings merger of
each of the following conditions, any one or more of which may
be waived in whole or in part by the HPGP Parent Parties:
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(1) the representations and warranties of the Holdings
Parties as to qualification, organization, subsidiaries,
capitalization, authority, no violation, consents and approvals,
absence of certain changes or events and required approvals
shall be true and correct in all respects, except, in the case
of the representation as to capitalization, for such
inaccuracies as are
de minimis
in the aggregate, in each
case at and as of the date of the Hiland Holdings merger
agreement and at and as of the closing as though made at and as
of the closing and (2) the representations and warranties
of the Holdings Parties set forth in the Hiland Holdings merger
agreement (other than those referenced in clause (1) of
this paragraph) shall be true and correct in all respects
(disregarding any materiality or Holdings material adverse
effect qualifiers therein) as of the date of the Hiland Holdings
merger agreement and at and as of the closing as though made at
and as of the closing, except where any failures of such
representations or warranties to be so true and correct would
not have, individually or in the aggregate, a material adverse
effect on the Holdings Parties; provided, however, that, with
respect to clauses (1) and (2) of this paragraph,
representations and warranties that are made as of a particular
date or period shall be true and correct (in the manner set
forth in clause (1) or (2), as applicable) only as of such
date or period; provided, further, that the representations and
warranties referenced in clauses (1) and (2) shall not
be deemed to be inaccurate to the extent that Parent had
knowledge on the date of the Hiland Holdings merger agreement of
such inaccuracy;
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the Holdings Parties shall have performed all obligations and
complied with all covenants required by the Hiland Holdings
merger agreement to be performed or complied with by them that
are qualified by materiality or a Holdings material adverse
effect qualifier and shall have in all material respects
performed all other obligations and complied with all other
covenants required by the Hiland Holdings merger agreement to be
performed or complied with by them;
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since the date of the Hiland Holdings merger agreement there
shall not have been any material adverse effect on the Holdings
Parties;
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the Hiland Partners merger shall be effectuated concurrently
with the Hiland Holdings merger; provided that the HPGP Parent
Parties may not waive this condition unless the Hiland Partners
merger agreement and the Hiland Partners merger shall have been
submitted to a vote of unitholders and the outcome of such vote
shall not have constituted the unitholder approval required
under the Hiland Partners partnership agreement and the Hiland
Partners merger agreement, described in The Hiland
Partners Merger Agreement Conditions to Completion
of the Hiland Partners Merger, beginning on
page 163; and
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the Holdings Parties shall have delivered to the HPGP Parent
Parties a certificate, dated the effective time of the Hiland
Holdings merger and signed by an executive officer of Hiland
Holdings, certifying to the effect that the conditions set forth
in the first three bullet points of this paragraph have been
satisfied.
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No party to the Hiland Holdings merger agreement may rely on the
failure of any condition summarized in this section to be
satisfied if such failure was caused by such partys breach
in any material respect of any provision of the Hiland Holdings
merger agreement or failure to use commercially reasonable
efforts to consummate the Hiland Holdings merger and the other
transactions contemplated by the Hiland Holdings merger
agreement.
The Hiland Holdings merger agreement provides that any or all of
the conditions described above may be waived, in whole or in
part, by Hiland Holdings or the HPGP Parent Parties, as the case
may be, to the extent permitted by applicable law. None of
Hiland Holdings or the HPGP Parent Parties currently expect to
waive any material condition to the completion of the Hiland
Partners merger. If either Hiland Holdings, on one hand, or the
HPGP Parent Parties on the other hand, determines to waive any
condition to the Hiland Holdings merger that would result in a
material and adverse change in the terms of the merger to Hiland
Holdings or its unitholders, proxies would be re-solicited from
Hiland Holdings public unitholders in connection with the
waiver. Notwithstanding the foregoing, following the failure to
receive the Hiland Partners unitholder approval required under
the Hiland Partners partnership agreement and the Hiland
Partners merger agreement, if the HPGP Parent Parties waive, in
accordance with the Hiland Holdings merger agreement, the
condition that the Hiland Partners merger be effected
concurrently with the Hiland Holdings merger, Hiland Holdings
will not re-solicit proxies from the Hiland Holdings unitholders.
Additionally, because the parties to the Hiland Holdings merger
agreement have agreed to use commercially reasonable efforts to
take all actions and to do all things necessary, proper or
advisable under applicable laws to complete the Hiland Holdings
merger, Hiland Holdings believes that there is no material
uncertainty as to the satisfaction of any of the conditions to
the consummation of the Hiland Holdings merger, subject to
(i) the Hiland Holdings public unitholders vote to approve
the Hiland Holdings merger agreement and the Hiland Holdings
merger and (ii) the Hiland Partners public unitholders vote
to approve the Hiland Partners merger agreement and the Hiland
Partners merger.
Termination
The Hiland Holdings merger agreement may be terminated and
abandoned at any time prior to the effective time of the Hiland
Holdings merger, whether before or after any approval of the
matters presented in connection with the Hiland Holdings merger
by the unitholders of Hiland Holdings:
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by the mutual written consent of the Holdings Parties and the
HPGP Parent Parties;
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by either the Holdings Parties or the HPGP Parent
Parties, if:
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the Hiland Holdings merger shall not have become effective on or
before November 1, 2009 and the party seeking to terminate
the Hiland Holdings merger agreement shall not have breached its
obligations under the Hiland Holdings merger agreement in any
manner that shall have proximately caused the failure to
consummate the Hiland Holdings merger on or before
November 1, 2009;
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an injunction, other legal restraint or order of any
governmental entity shall have been entered permanently
restraining, enjoining or otherwise prohibiting the consummation
of the Hiland Holdings merger and such injunction, other legal
restraint or order shall have become final and nonappealable;
provided that the party seeking to terminate this Agreement
shall have complied in all material respects with its
obligations summarized under Efforts to
Complete the Hiland Holdings Merger above; or
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the special meeting of the unitholders of Hiland Holdings shall
have concluded and, upon a vote taken at such meeting, the
requisite unitholder approval of the Hiland Holdings merger
agreement or the Hiland Holdings merger shall not have been
obtained; provided that the right to terminate the Hiland
Holdings merger agreement shall not be available to the Holdings
Parties if any Holdings Party materially breached any
obligations summarized under No
Solicitation and Filings and Other
Actions above or to the HPGP Parent Parties if any Hamm
Continuing Investor materially breached any of their obligations
under the Hiland Holdings support agreement;
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by the Holdings Parties, if any HPGP Parent Party shall have
breached or failed to perform any of its representations,
warranties, covenants or other agreements contained in the
Hiland Holdings merger agreement, which breach or failure to
perform:
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would constitute the failure of a condition to the Holdings
Parties obligations to complete the Hiland Holdings
merger; and
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is not capable of being satisfied or cured by November 1,
2009 or, if capable of being satisfied or cured, is not
satisfied or cured by thirty days following receipt by Parent of
written notice stating the Holdings Parties intention to
terminate the Hiland Holdings merger agreement and the basis for
such termination;
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provided that the right to terminate the Hiland Holdings merger
agreement pursuant to the provision summarized in this paragraph
shall not be available to the Holdings Parties if, at such time,
a condition to the HPGP Parent Parties obligation to
complete the merger is not capable of being satisfied; or
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by the HPGP Parent Parties, if:
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any Holdings Party shall have breached or failed to perform any
of its representations, warranties, covenants or other
agreements contained in the Hiland Holdings merger agreement,
which breach or failure to perform: (A) would constitute
the failure of a condition to the HPGP Parent Parties
obligations to complete the merger and (B) is not capable
of being satisfied or cured by November 1, 2009 or, if
capable of being satisfied or cured, is not satisfied or cured
by thirty days following receipt by the Holdings Parties of
written notice stating the HPGP Parent Parties intention
to terminate the Hiland Holdings merger agreement and the basis
for such termination; provided that the right to terminate the
Hiland Holdings merger agreement pursuant to the provision
summarized in this paragraph shall not be available to the HPGP
Parent Parties if, at such time, a condition to the Holdings
Parties obligation to complete the merger is not capable
of being satisfied;
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a change in the recommendation of the Hiland Holdings Board of
Directors or Hiland Holdings Conflicts Committee or a failure of
the Hiland Holdings Board of Directors to recommend the Hiland
Holdings merger agreement and Hiland Holdings merger to its
unitholders occurs or the Hiland Holdings Board of Directors or
any committee thereof approves, endorses or recommends, or
resolves to or publicly proposes to approve, endorse or
recommend, any alternative proposal; or
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the Hiland Holdings merger is not capable of closing by
November 1, 2009.
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Effect of
Termination; Remedies
In the event of termination of the Hiland Holdings merger
agreement as summarized above under
Termination, the Hiland Holdings merger
agreement shall terminate, except for certain provisions
including the provision relating to reimbursement of expenses
summarized in Reimbursement of Certain
Expenses below, and there shall be no liability on the
part of the Holdings Parties or the HPGP Parent Parties
185
to the other except as provided in the provision relating to
reimbursement of expenses summarized in
Reimbursement of Certain Expenses below.
No such termination, however, shall relieve any party from
liability arising out of any willful breach of any of the
representations, warranties or covenants in the Hiland Holdings
merger agreement (subject to any express limitations set forth
in the Hiland Holdings merger agreement), in which case the
aggrieved party shall be entitled to all rights and remedies
available at law or in equity.
Reimbursement
of Certain Expenses
In the event that the Hiland Holdings merger agreement is
terminated by the HPGP Parent Parties due to a change in the
recommendation of the Hiland Holdings Board of Directors or the
Hiland Holdings Conflicts Committee or:
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an alternative proposal shall have been made known to the
Holdings Parties or shall have been made directly to the Hiland
Holdings unitholders generally or any person shall have publicly
announced an intention (whether or not conditional or withdrawn)
to make an alternative proposal and thereafter;
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the Hiland Holdings merger agreement is terminated by the
Holdings Parties or the HPGP Parent Parties (as applicable)
because November 1, 2009 has passed, the unitholders of
Hiland Holdings failed to approve the Hiland Holdings merger
agreement or the Hiland Holdings merger or any Holdings Party
breached or failed to perform any of its representations,
warranties, covenants or other agreements contained in the
Hiland Holdings merger agreement, which breach or failure to
perform: (A) would constitute the failure of a condition to
the HPGP Parent Parties obligations to complete the merger
and (B) is not capable of being satisfied or cured by
November 1, 2009 or, if capable of being satisfied or
cured, is not satisfied or cured by thirty days following
receipt by the Holdings Parties of written notice stating the
HPGP Parent Parties intention to terminate the Hiland
Holdings merger agreement; and
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a Holdings Party enters into a definitive agreement with respect
to, or consummates, a transaction contemplated by any
alternative proposal within twelve months of the date the Hiland
Holdings merger agreement is terminated,
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then Hiland Holdings shall pay to Parent all of the expenses of
the HPGP Parent Parties, up to $800,000; provided that, no
expense for which a Parent Party has received reimbursement
pursuant to the Hiland Partners merger agreement shall be paid.
See The Hiland Partners Merger Agreement
Reimbursement of Certain Expenses, beginning on
page 167.
Any payment required to be made pursuant to the provision
summarized in the prior paragraph shall be made to Parent not
later than two business days after delivery to Hiland Holdings
of an itemization setting forth in reasonable detail all
expenses of the HPGP Parent Parties for which reimbursement is
sought (which itemization may be supplemented and updated from
time to time by Parent until the sixtieth day after delivery of
such notice of demand for payment). All such payments shall be
made by wire transfer of immediately available funds to an
account to be designated by Parent.
Specific
Performance
The parties to the Hiland Holdings merger agreement have agreed
that irreparable damage would occur in the event that any
provisions of the Hiland Holdings merger agreement were not
performed in accordance with their specific terms or were
otherwise breached. Accordingly, prior to termination of the
Hiland Holdings merger agreement in accordance with its terms,
the parties will be entitled to an injunction or injunctions to
prevent breaches of the Hiland Holdings merger agreement and to
enforce specifically the terms and provisions of the Hiland
Holdings merger agreement in addition to any other remedy to
which the parties are entitled at law or in equity. In
connection with any request for specific performance or
equitable relief by any party, each of the other parties agreed
to waive any requirement for the security or posting of any bond
in connection with the remedy of specific performance or
equitable relief. Any actions for specific performance or
equitable relief must be brought in the Delaware Chancery Court
or the federal courts within the State of Delaware.
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Amendments
and Waivers
At any time prior to the effective time of the Hiland Holdings
merger, any provision of the Hiland Holdings merger agreement
may be amended or waived if, and only if, such amendment or
waiver is in writing and signed, in the case of an amendment, by
the Holdings Parties and the HPGP Parent Parties, or in the case
of a waiver, by the party against whom the waiver is to be
effective; provided, however, that after receipt of the
unitholder approval required under the Hiland Holdings merger
agreement and the Hiland Holdings merger, if any such amendment
or waiver shall by applicable law or in accordance with the
rules and regulations of the NASDAQ Global Select Market require
further approval of the unitholders of Hiland Holdings, the
effectiveness of such amendment or waiver shall be subject to
the approval of the unitholders of Hiland Holdings.
Notwithstanding the foregoing, no failure or delay by the
Holdings Parties or the HPGP Parent Parties in exercising any
right under the Hiland Holdings merger agreement shall operate
as a waiver thereof nor shall any single or partial exercise
thereof preclude any other or further exercise of any other
right under the Hiland Holdings merger agreement.
Recommendation
The Hiland Holdings Conflicts Committee has unanimously
determined that the Hiland Holdings merger agreement is
advisable, fair to, and in the best interests of, Hiland
Holdings and the Hiland Holdings public unitholders and
(i) has unanimously recommended to the Hiland Holdings
Board of Directors that the Hiland Holdings Board of Directors
approve the Hiland Holdings merger agreement and the Hiland
Holdings merger and (ii) unanimously recommends that the
Hiland Holdings public unitholders approve the Hiland Holdings
merger agreement and the Hiland Holdings merger. The Hiland
Holdings Board of Directors, after considering factors including
the unanimous recommendation of the Hiland Holdings Conflicts
Committee, determined that the Hiland Holdings merger agreement
is advisable, fair to, and in the best interests of, Hiland
Holdings and the Hiland Holdings public unitholders, approved
the Hiland Holdings merger agreement and the Hiland Holdings
merger and recommends that the Hiland Holdings public
unitholders vote in favor of the approval of the Hiland Holdings
merger agreement and the Hiland Holdings merger. See
Special Factors Recommendation of the Hiland
Holdings Conflicts Committee and the Hiland Holdings Board of
Directors; Reasons For Recommending Approval of the Merger.
INFORMATION
CONCERNING THE HILAND COMPANIES
About
Hiland Partners
Hiland Partners, a Delaware limited partnership formed in
October 2004, is a midstream energy limited partnership engaged
in purchasing, gathering, compressing, dehydrating, treating,
processing and marketing of natural gas and the fractionating,
or separating, and marketing of NGLs. Hiland Partners
operations are primarily located in the Mid-Continent and Rocky
Mountain regions of the United States.
Through its midstream segment, Hiland Partners connects the
wells of natural gas and crude oil producers in its operating
areas to its gathering systems, treats natural gas to remove
impurities, processes natural gas for the removal of NGLs,
fractionates NGLs into NGL products and provides an aggregate
supply of natural gas and NGL products to a variety of
transmission pipelines and markets. Through its compression
segment, Hiland Partners provides compressed air and water to
Continental Resources. Continental Resources uses the compressed
air and water in its oil and gas secondary recovery operations
in North Dakota by injecting them into its oil and gas
reservoirs to increase oil and gas production from those
reservoirs. This increased production of natural gas flows
through Hiland Partners Badlands gathering system.
Hiland Partners midstream assets consist of 15 natural gas
gathering systems with approximately 2,138 miles of gas
gathering pipelines, six natural gas processing plants, seven
natural gas treating facilities and three NGL fractionation
facilities. Hiland Partners compression assets consist of
two air compression facilities and a water injection plant.
187
Hiland Partners common units trade on the NASDAQ Global
Select Market under the symbol HLND. Hiland
Partners and its general partners mailing address is
205 West Maple, Suite 1100, Enid, Oklahoma 73701 and
their telephone number is
(580) 242-6040.
A detailed description of Hiland Partners business is
contained in Hiland Partners Annual Report on
Form 10-K
for the year ended December 31, 2008 attached as Annex G to
this joint proxy statement and the Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2009 attached as Annex H to
this joint proxy statement. See Where You Can Find More
Information.
During the past five years, neither Hiland Partners nor the
general partner of Hiland Partners has been (i) convicted
in a criminal proceeding or (ii) party to any judicial or
administrative proceeding (except for matters that were
dismissed without sanction or settlement) that resulted in a
judgment, decree or final order enjoining the entity from future
violations of, or prohibiting activities subject to, federal or
state securities laws, or a finding of any violation of federal
or state securities laws.
About
Hiland Holdings
Hiland Holdings, a Delaware limited partnership was formed in
May 2006 to own Hiland Partners GP, LLC, the general partner of
Hiland Partners and certain other common units and subordinated
units in Hiland Partners. Hiland Holdings cash generating
assets consist solely of its ownership interests in Hiland
Partners, in particular (i) the 2% general partner interest
in Hiland Partners, (ii) all of the incentive distribution
rights in Hiland Partners, and (iii) 2,321,471 common units
and 3,060,000 subordinated units of Hiland Partners,
representing an aggregate 57.3% limited partner interest in
Hiland Partners.
Hiland Holdings common units trade on the NASDAQ Global
Select Market under the symbol HPGP. Hiland
Holdings and its general partners mailing address is
205 West Maple, Suite 1100, Enid, Oklahoma 73701 and
their telephone number is
(580) 242-6040.
A detailed description of Hiland Holdings business is
contained in Hiland Holdings Annual Report on
Form 10-K
for the year ended December 31, 2008 attached as
Annex I to this joint proxy statement and the Quarterly
Report on
Form 10-Q
for the quarter ended June 30, 2009 attached as
Annex J to this joint proxy statement. See Where You
Can Find More Information.
During the past five years, neither Hiland Holdings nor the
general partner of Hiland Holdings has been (i) convicted
in a criminal proceeding or (ii) party to any judicial or
administrative proceeding (except for matters that were
dismissed without sanction or settlement) that resulted in a
judgment, decree or final order enjoining the entity from future
violations of, or prohibiting activities subject to, federal or
state securities laws, or a finding of any violation of federal
or state securities laws.
Certain
Transactions between the Hiland Companies and Affiliates of
Harold Hamm
As more fully described in each Hiland Companys Annual
Report on
Form 10-K
for the year ended December 31, 2008, which are attached as
Annex G and Annex I to this joint proxy statement, the
Hiland Companies regularly transact business with Continental
Resources pursuant to the contracts summarized below. As of
April 10, 2009, Mr. Hamm owned 72.8% of the equity
interests in Continental Resources.
The Hiland Companies believe that the terms of the transactions
described below would have been similar to the terms of
transactions that could have been entered into with unaffiliated
third parties.
Compression
Services Agreement
In connection with Hiland Partners initial public
offering, Hiland Partners entered into a four-year compression
services agreement with Continental Resources. The initial term
expired on January 28, 2009, but the contract has
automatically renewed each month since the expiration for an
additional one-month term. For each of the years ended
December 31, 2008 and 2007, Hiland Partners received
revenues of $4.8 million from Continental Resources under
this arrangement.
Gas
Purchase Contracts
Hiland Partners purchases natural gas and NGLs from Continental
Resources and its affiliates. Hiland Partners purchased natural
gas and NGLs from Continental Resources and its affiliates in
the amount of
188
approximately $116.7 million and $60.1 million for the
years ended December 31, 2008 and 2007, respectively.
Badlands
Purchase Contract
On November 8, 2005, Hiland Partners entered into a new
15-year
definitive gas purchase agreement with Continental Resources
under which Hiland Partners gathers, treats and processes
additional natural gas, which is produced as a by-product of
Continental Resources secondary oil recovery operations,
in the areas specified by the contract. In return, Hiland
Partners receives 50% of the proceeds attributable to residue
gas and NGLs sales as well as certain fixed fees associated with
gathering and treating the natural gas, including a $0.60 per
Mcf fee for the first 36 Bcf of natural gas gathered.
Other
Agreements
Each of the Hiland Companies leases office space under operating
leases from an entity wholly owned by Harold Hamm. Rents paid
under these leases totaled approximately $157,000 and $143,000
for each of the Hiland Companies for the years ended
December 31, 2008 and 2007, respectively. These rates are
consistent with the rates charged to other non-affiliated
tenants in the building in which the Hiland Companies have their
offices.
DIRECTORS
AND EXECUTIVE OFFICERS OF THE HILAND COMPANIES
As is the case with many publicly traded partnerships, the
Hiland Companies do not have officers, directors or employees.
The operations and activities of the Hiland Companies are
managed by their respective general partners. References to
Hiland Partners directors and officers are references to
the directors and officers of Hiland Partners GP, LLC, and
references to Hiland Holdings directors and officers are
references to the directors and officers of Hiland Partners GP
Holdings, LLC. Neither Hiland Partners unitholders nor Hiland
Holdings unitholders participate, directly or indirectly, in the
management or operation of the Hiland Companies. The general
partner of each of the Hiland Companies owes a fiduciary duty to
the unitholders of that Hiland Company, as limited by such
Hiland Companys partnership agreement.
During the past five years, none of the directors or executive
officers of Hiland Partners or Hiland Holdings described below
has been (i) convicted in a criminal proceeding (excluding
traffic violations or similar misdemeanors) or (ii) party
to any judicial or administrative proceeding (except for matters
that were dismissed without sanction or settlement) that
resulted in a judgment, decree or final order enjoining the
person from future violations of, or prohibiting activities
subject to, federal or state securities laws or a finding of any
violation of federal or state securities laws. Each person
identified below is a United States citizen. Other than Harold
Hamm, the business address of each of the persons identified
below is 205 West Maple, Suite 1100, Enid, Oklahoma
73701. Mr. Hamms business address is 302 North
Independence, Enid, Oklahoma 73701.
Hiland
Partners
Directors are elected for one-year terms. The following table
shows information regarding the current directors and executive
officers of Hiland Partners GP, LLC, as of the date of this
joint proxy statement.
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position with Hiland Partners GP, LLC
|
|
Harold Hamm
|
|
|
63
|
|
|
Chairman of the Board of Directors
|
Joseph L. Griffin
|
|
|
48
|
|
|
Chief Executive Officer, President and Director
|
Matthew S. Harrison
|
|
|
39
|
|
|
Chief Financial Officer, Vice President-Finance, Secretary and
Director
|
Kent C. Christopherson
|
|
|
51
|
|
|
Chief Operations Officer, Vice President
|
Michael L. Greenwood
|
|
|
54
|
|
|
Director
|
Edward D. Doherty
|
|
|
73
|
|
|
Director
|
Rayford T. Reid
|
|
|
61
|
|
|
Director
|
Shelby E. Odell
|
|
|
70
|
|
|
Director
|
John T. McNabb, II
|
|
|
64
|
|
|
Director
|
189
Harold Hamm
was elected Chairman of the Hiland Partners
Board of Directors in October 2004 and serves as Chairman of the
Compensation Committee of the Hiland Partners Board of
Directors. Mr. Hamm has served as Chairman of the Hiland
Holdings Board of Directors since September 2006 and also serves
as Chairman of the Compensation Committee of the Hiland Holdings
Board of Directors. In December 1994, Mr. Hamm began
serving as President and Chief Executive Officer and as a
director of Continental Gas, Inc., and he subsequently served as
chief executive officer and director of Continental Gas, Inc.
until 2004. Since its inception in 1967 until October 2005,
Mr. Hamm served as President and Chief Executive Officer
and a director of Continental Resources, Inc. and currently
serves as its Chief Executive Officer and Chairman of its board
of directors. Mr. Hamm is also immediate past President of
the National Stripper Well Association, a member of the
executive board of the Oklahoma Independent Petroleum
Association and a member of the executive board of the Oklahoma
Energy Explorers. In addition, Mr. Hamm is a director of
Complete Production Services, Inc., a publicly traded oilfield
service company.
Joseph L. Griffin
was appointed Chief Executive Officer,
President and was elected as a director of the general partner
of Hiland Partners in June 2007. Mr. Griffin has also
served as Chief Executive Officer, President and a director of
the general partner of Hiland Holdings since June 2007.
Mr. Griffin has more than 20 years of experience in
the midstream natural gas industry. From June 2004 to June 2007,
Mr. Griffin served as executive vice president over
multiple facets of the business of Lumen Midstream Partnership,
a subsidiary of the Southern Ute Indian Tribe, in Tulsa, OK. In
1989, Mr. Griffin co-founded Lumen Midstream, held various
senior level management positions and served as a director until
Lumen was sold in 2004 to the Southern Ute Indian Tribe.
Mr. Griffin holds a Bachelor of Science degree in Business
Administration from Oklahoma State University and is also a
certified public accountant.
Matthew S. Harrison
was appointed Chief Financial
Officer, Vice President-Finance, Secretary and was elected as a
director of the general partner of Hiland Partners in April
2008. Mr. Harrison has served as Chief Financial Officer,
Vice President-Finance, Secretary and a director of the general
partner of Hiland Holdings since April 2008. Mr. Harrison
joined the Hiland Companies as Vice President of Business
Development in February 2008 from Wachovia Securities where he
most recently was a director for its Energy & Power
Mergers & Acquisitions Group. Prior to joining
Wachovia Securities in 2007, Mr. Harrison spent eight years
as an investment banker with A.G. Edwards Capital Markets
Mergers & Acquisitions Group. Prior to joining A.G.
Edwards, Mr. Harrison spent five years with Price
Waterhouse, LLP, the predecessor of PricewaterhouseCoopers, LLP,
as a senior accountant. He holds a B.S. degree in Accounting
from the University of Tennessee, a Masters of Business
Administration degree from the Kellogg Graduate School of
Management at Northwestern University and is a certified public
accountant.
Kent C. Christopherson
was appointed Vice President-Chief
Operations Officer of the general partner of Hiland Partners in
August 2008. Mr. Christopherson has also served as Vice
President-Chief Operations Officer of the general partner of
Hiland Holdings since August 2008. Mr. Christopherson
joined the Hiland Companies from DCP Midstream Partners, L.P.
where he served as Senior Director of Operating Excellence and
Reliability Services from 2002 until 2008. Prior to joining DCP,
Mr. Christopherson was employed by Western Gas Resources
and Flopetrol-Johnson Schlumberger. Mr. Christopherson
earned a B.S. degree in Mining Engineering & Geology
from the South Dakota School of Mines and Technology, a Masters
of Business Administration degree from Nova Southeastern
University and is a certified maintenance &
reliability professional by the Society of
Maintenance & Reliability Professionals and a
certified lubrication specialist by the Society of
Tribologists & Lubrication Engineers.
Michael L. Greenwood
was elected as a director of the
general partner of Hiland Partners in February 2005, and serves
as Chairman of the Audit Committee of the Hiland Partners Board
of Directors. Mr. Greenwood has served as a director of the
general partner of Hiland Holdings since September 2006, and
serves as chairman of the audit committee of the Hiland Holdings
Board of Directors. Mr. Greenwood is founder and managing
director of Carnegie Capital LLC, a financial advisory services
firm providing investment banking assistance to the energy
industry. Mr. Greenwood previously served as Vice
President Finance and Treasurer of Energy Transfer
Partners, L.P. until August 2004. From July 2002 until its
merger with Energy Transfer in 2003, Mr. Greenwood served
as Vice President and Chief Financial Officer &
Treasurer of Heritage Propane Partners, L.P. Prior to joining
Heritage Propane, Mr. Greenwood was Senior Vice President,
Chief Financial
190
Officer and Treasurer for Alliance Resource Partners, L.P. from
1994 to 2002. Mr. Greenwood has over 25 years of
diverse financial and management experience in the energy
industry during his career with several major public energy
companies, including MAPCO Inc., Penn Central Corporation and
The Williams Companies. Mr. Greenwood holds a Bachelor of
Science in Business Administration degree from Oklahoma State
University and a Master of Business Administration degree from
the University of Tulsa.
Edward D. Doherty
was elected as a director of the
general partner of Hiland Partners in February 2005, and serves
as a member of the Audit Committee of the Hiland Partners Board
of Directors. Mr. Doherty has served as a director of the
general partner of Hiland Holdings since September 2006, and
serves as a member of the Audit Committee of the Hiland Holdings
Board of Directors. Since March 2006, Mr. Doherty has been
a partial owner and CEO of ANZ Terminals Pty. Ltd., an
Australian company that owns and operates eight liquid storage
terminals in Australia and New Zealand. Mr. Doherty also
provides consulting services on terminal acquisitions.
Mr. Doherty served as the Chairman and Chief Executive
Officer of Kaneb Pipe Line Company LLC, the general partner of
Kaneb Pipe Line Partners L.P. from its inception in September
1989 until July 2005. Prior to joining Kaneb, Mr. Doherty
was President and Chief Executive Officer of two private
companies, which provided restructuring services to troubled
companies and was President and Chief Executive Officer of
Commonwealth Oil Refining Company, Inc., a public refining and
petrochemical company. Mr. Doherty holds a Bachelor of Arts
degree from Lafayette College and a Doctor of Jurisprudence from
Columbia University School of Law.
Rayford T. Reid
was elected as a director of the general
partner of Hiland Partners in May 2005, and serves as a member
of the Compensation Committee of the Hiland Partners Board of
Directors. Mr. Reid has served as a director of the general
partner of Hiland Holdings since September 2006, and serves as a
member of the Compensation Committee of the Hiland Holdings
Board of Directors. Mr. Reid has more than 35 years of
investment banking, financial advisory and commercial banking
experience, including 30 years focused on the oil and gas
industry. Mr. Reid is President of Kentucky Downs Partners,
LLC (KDP). KDPs principal business is the
ownership of a controlling interest in a thoroughbred horse
racing track in Franklin, Kentucky. Prior to forming KDP in
2007, Mr. Reid served as President of R. Reid Investments
Inc., a private investment banking firm, which exclusively
served companies engaged in the energy industry. Mr. Reid
holds a Bachelor of Arts degree from Oklahoma State University
and a Master of Business Administration degree from the Wharton
School of the University of Pennsylvania.
Shelby E. Odell
was elected as a director of the general
partner of Hiland Partners in September 2005. Mr. Odell
serves as a member of the Audit Committee of the Hiland Partners
Board of Directors, and, since January 21, 2009, has served
as a member of the Hiland Partners Conflicts Committee.
Mr. Odell served as a director of the general partner of
Hiland Holdings from September 2006 to January 2009.
Mr. Odell has 40 years of experience in the petroleum
business, including marketing, distribution, acquisitions,
innovation of new asset opportunities, and management. From 1974
to 2000, Mr. Odell held several positions with Koch
Industries. He retired in 2000 as President of Koch Hydrocarbon
Company and Sr. Vice President of Koch Industries. Prior to
joining Koch, Mr. Odell advanced through several positions
with Phillips Petroleum Company. Mr. Odell is a member of
the Board of Directors of ONEOK Partners, L.P. and is a past
member of the Board of Directors of the Gas Processors
Association. Mr. Odell holds an Associate Degree in
Accounting from Enid Business College.
John T. McNabb, II
was elected as a director of the
general partner of Hiland Partners in August 2006, and he serves
as chairman of the Hiland Partners Conflicts Committee and as a
member of the Compensation Committee of the Hiland Partners
Board of Directors. Mr. McNabb is the founder of Growth
Capital Partners, LP, a merchant banking firm that provides
financial advisory services to middle market companies
throughout the United States, and he has served as the Chairman
of its board of directors since 1992. Mr. McNabb was a
Managing Director of Bankers Trust Company, managing
commercial banking, investment banking and financial advisory
activities in the Southwest for Bankers Trust Company, and
a director of BT Southwest, Inc., an affiliate of Bankers
Trust New York Corporation. He currently serves as Chairman
of the board of directors of Willbros Group, Inc., a publicly
traded oil and gas contractor. He started his career, after
serving in the U.S. Air Force during the Vietnam conflict,
with Mobil Oil in its exploration and production division.
191
Mr. McNabb holds a Bachelor of Arts in History and a
Masters of Business Administration from Duke University.
For information about the directors and officers of Hiland
Partners after the completion of the merger, see Special
Factors Effects of the Mergers Directors
and Management of Each Surviving Entity.
Hiland
Holdings
Directors are elected for one-year terms. The following table
shows information regarding the directors and executive officers
of Hiland Partners GP Holdings, LLC, as of the date of this
joint proxy statement.
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position with Our General Partner
|
|
Harold Hamm
|
|
|
63
|
|
|
Chairman of the Board of Directors
|
Joseph L. Griffin
|
|
|
48
|
|
|
Chief Executive Officer, President and Director
|
Matthew S. Harrison
|
|
|
39
|
|
|
Chief Financial Officer, Vice
President Finance, Secretary and Director
|
Kent C. Christopherson
|
|
|
51
|
|
|
Chief Operations Officer, Vice President
|
Michael L. Greenwood
|
|
|
54
|
|
|
Director
|
Edward D. Doherty
|
|
|
73
|
|
|
Director
|
Rayford T. Reid
|
|
|
61
|
|
|
Director
|
Dr. Cheryl L. Evans
|
|
|
46
|
|
|
Director
|
Dr. Bobby B. Lyle
|
|
|
68
|
|
|
Director
|
For biographical information about Harold Hamm, Joseph L.
Griffin, Matthew S. Harrison, Kent C. Christopherson,
Edward D. Doherty, Michael L. Greenwood and Rayford T. Reid, see
Directors and Executive Officers of the Hiland
Companies Hiland Partners.
Dr. Cheryl L. Evans
was elected as director of the
general partner of Hiland Holdings in September 2006, and serves
as a member of the Hiland Holdings Conflicts Committee.
Dr. Evans is in her 15th year of service at
Northwestern Oklahoma State University and has been a faculty
member since 1994. In 2004, Dr. Evans was appointed Dean of
the institutions Enid campus. From 2002 to 2004,
Dr. Evans chaired the communication department on the Alva
campus, and from 1996 to 2002 she chaired the mass communication
department. She earned her doctorate at Oklahoma State
University in higher education, her Master of Arts in
communication degree at Wichita State University and her
Bachelor of Arts degree in mass communications/public relations
at Northwestern Oklahoma State University. Dr. Evans is a
2004 graduate of Harvards Management Development Program
for academic leaders. In addition to her administrative duties
for Northwestern Oklahoma State University, she presently
teaches in the Northwestern Oklahoma State University graduate
program. Dr. Evans is an active community volunteer and
currently serves on numerous civic and charitable boards.
Dr. Bobby B. Lyle
was elected as director of the
general partner of Hiland Holdings in September 2006, and he
serves as chairman of the Hiland Holdings Conflicts Committee
and as a member of the Compensation Committee of the Hiland
Holdings Board of Directors. Dr. Lyle has over
29 years of experience in oil and gas exploration and
development. From 1977 to 1981, he was President of Cornell Oil
Company. In 1981, he formed Lyco Energy Corporation, and served
as its Chairman, President and CEO until the company was sold to
Enerplus Resources (USA) Corporation in August 2005. After
assisting with the transition of ownership to Enerplus, he
formed Lyco Holdings Incorporated in March 2006 and currently
serves as its Chairman, President and CEO. Lyco Holdings
Incorporated is a private company engaged in private equity
investments and ranching. From 1968 to 1975, Dr. Lyle was a
member of the faculty of the Southern Methodist University
School of Business and served as Dean
ad interim
from
1970 to 1973 and Executive Dean from 1973 to 1975. Subsequently,
he served as Trustee of the University from 1982 to 2000 and
from 2006 to the present. Prior to joining SMU, he worked as a
professional engineer with General Dynamics and Geotech, a
Teledyne Industries company. He has helped organize and served
as director of a number of private companies covering a broad
range of industries, including banking, energy software, real
estate, retail, and home and industrial insulation.
Dr. Lyle has been an active member of numerous industry
organizations, including the Independent
192
Petroleum Association of America, where he served as regional
Vice President and a member of the Executive Committee, Texas
Independent Producers and Royalty Owners Association and the
Texas Alliance for Energy. Dr. Lyle holds a Bachelor of
Science degree in Mechanical Engineering from Louisiana Tech
University; a Masters in Engineering Administration degree from
Southern Methodist University; and a Doctorate in Education,
with emphasis on Strategic Planning and Leadership in Higher
Education, from the University of Massachusetts.
For information about the directors and officers of Hiland
Partners after the completion of the merger, see Special
Factors Effects of the Mergers Directors
and Management of Each Surviving Entity.
SELECTED
HISTORICAL CONSOLIDATED FINANCIAL DATA
Hiland
Partners
Set forth below is certain selected historical consolidated
financial data relating to Hiland Partners. The selected
historical consolidated financial data has been derived from the
audited financial statements and selected financial data
contained in Hiland Partners Annual Report on
Form 10-K
for the fiscal year ended December 31, 2008 (the
Form 10-K),
and the unaudited financial statements contained in Hiland
Partners Quarterly Report on
Form 10-Q
(the
Form 10-Q)
for the quarterly period ended June 30, 2009. This data
should be read in conjunction with the audited consolidated
financial statements and other financial information contained
in the Hiland Partners
Form 10-K
and
Form 10-Q,
including the notes thereto. More comprehensive financial
information is included in such reports (including
managements discussion and analysis of financial condition
and results of operations) and the following summary is
qualified in its entirety by reference to such reports and all
of the financial information and notes contained therein. See
Annexes G and H.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hiland Partners, LP
|
|
|
Predecessor
|
|
|
|
Three Months
|
|
|
Six Months
|
|
|
|
|
|
Continental
|
|
|
|
Ended June 30,
|
|
|
Ended June 30,
|
|
|
Year Ended December 31,
|
|
|
Gas, Inc.
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except per unit and operating data)
|
|
|
Summary of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
50,079
|
|
|
$
|
115,441
|
|
|
$
|
102,427
|
|
|
$
|
206,920
|
|
|
$
|
387,999
|
|
|
$
|
278,043
|
|
|
$
|
219,686
|
|
|
$
|
166,601
|
|
|
$
|
98,296
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Midstream purchases (exclusive of items shown separately below)
|
|
|
26,999
|
|
|
|
88,073
|
|
|
|
58,215
|
|
|
|
156,691
|
|
|
|
276,600
|
|
|
|
195,212
|
|
|
|
156,193
|
|
|
|
133,089
|
|
|
|
82,532
|
|
Operations and maintenance
|
|
|
7,785
|
|
|
|
7,551
|
|
|
|
15,480
|
|
|
|
14,320
|
|
|
|
30,526
|
|
|
|
23,279
|
|
|
|
16,071
|
|
|
|
7,359
|
|
|
|
4,933
|
|
Depreciation, amortization and accretion
|
|
|
10,538
|
|
|
|
9,169
|
|
|
|
20,509
|
|
|
|
18,098
|
|
|
|
37,502
|
|
|
|
29,855
|
|
|
|
22,130
|
|
|
|
11,112
|
|
|
|
4,127
|
|
Property impairments
|
|
|
|
|
|
|
|
|
|
|
950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bad debt
|
|
|
|
|
|
|
8,103
|
|
|
|
|
|
|
|
8,103
|
|
|
|
304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on asset sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19
|
)
|
General and administrative
|
|
|
2,939
|
|
|
|
1,863
|
|
|
|
5,879
|
|
|
|
4,164
|
|
|
|
8,753
|
|
|
|
7,587
|
|
|
|
4,994
|
|
|
|
2,470
|
|
|
|
1,082
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
48,261
|
|
|
|
114,759
|
|
|
|
101,033
|
|
|
|
201,376
|
|
|
|
353,685
|
|
|
|
255,933
|
|
|
|
199,388
|
|
|
|
154,030
|
|
|
|
92,655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
1,818
|
|
|
|
682
|
|
|
|
1,394
|
|
|
|
5,544
|
|
|
|
34,314
|
|
|
|
22,110
|
|
|
|
20,298
|
|
|
|
12,571
|
|
|
|
5,641
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(2,684
|
)
|
|
|
(3,116
|
)
|
|
|
(5,037
|
)
|
|
|
(6,617
|
)
|
|
|
(13,639
|
)
|
|
|
(11,346
|
)
|
|
|
(5,532
|
)
|
|
|
(1,942
|
)
|
|
|
(702
|
)
|
Amortization of deferred loan costs
|
|
|
(150
|
)
|
|
|
(145
|
)
|
|
|
(299
|
)
|
|
|
(279
|
)
|
|
|
(574
|
)
|
|
|
(410
|
)
|
|
|
(407
|
)
|
|
|
(484
|
)
|
|
|
(102
|
)
|
Interest income and other
|
|
|
68
|
|
|
|
71
|
|
|
|
81
|
|
|
|
171
|
|
|
|
346
|
|
|
|
430
|
|
|
|
323
|
|
|
|
192
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(2,766
|
)
|
|
|
(3,190
|
)
|
|
|
(5,255
|
)
|
|
|
(6,725
|
)
|
|
|
(13,867
|
)
|
|
|
(11,326
|
)
|
|
|
(5,616
|
)
|
|
|
(2,234
|
)
|
|
|
(764
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
(948
|
)
|
|
|
(2,508
|
)
|
|
|
(3,861
|
)
|
|
|
(1,181
|
)
|
|
|
20,447
|
|
|
|
10,784
|
|
|
|
14,682
|
|
|
|
10,337
|
|
|
|
4,877
|
|
Discontinued operations, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(948
|
)
|
|
|
(2,508
|
)
|
|
|
(3,861
|
)
|
|
|
(1,181
|
)
|
|
|
20,447
|
|
|
|
10,784
|
|
|
|
14,682
|
|
|
|
10,337
|
|
|
$
|
4,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less income (loss) attributable to predecessor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
493
|
|
|
|
|
|
193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hiland Partners, LP
|
|
|
Predecessor
|
|
|
|
Three Months
|
|
|
Six Months
|
|
|
|
|
|
Continental
|
|
|
|
Ended June 30,
|
|
|
Ended June 30,
|
|
|
Year Ended December 31,
|
|
|
Gas, Inc.
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except per unit and operating data)
|
|
|
Less general partner interest in net income (loss)
|
|
|
(19
|
)
|
|
|
2,057
|
|
|
|
(77
|
)
|
|
|
3,872
|
|
|
|
6,572
|
|
|
|
4,526
|
|
|
|
2,409
|
|
|
|
464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Limited partners interest in net income (loss)
|
|
$
|
(929
|
)
|
|
$
|
(4,565
|
)
|
|
$
|
(3,784
|
)
|
|
$
|
(5,053
|
)
|
|
$
|
13,875
|
|
|
$
|
6,258
|
|
|
$
|
12,273
|
|
|
$
|
9,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per limited partner unit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
basic(1)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.49
|
)
|
|
$
|
(0.40
|
)
|
|
$
|
(0.54
|
)
|
|
$
|
1.49
|
|
|
$
|
0.67
|
|
|
$
|
1.37
|
|
|
$
|
1.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
diluted(1)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.49
|
)
|
|
$
|
(0.40
|
)
|
|
$
|
(0.54
|
)
|
|
$
|
1.48
|
|
|
$
|
0.67
|
|
|
$
|
1.36
|
|
|
$
|
1.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash distributions per limited partner unit(2)
|
|
$
|
0.00
|
|
|
$
|
0.86
|
|
|
$
|
0.00
|
|
|
$
|
1.69
|
|
|
$
|
3.02
|
|
|
$
|
3.00
|
|
|
$
|
2.74
|
|
|
$
|
1.83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data (at end of period):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, at cost, net
|
|
|
|
|
|
|
|
|
|
$
|
346,393
|
|
|
$
|
322,477
|
|
|
$
|
345,855
|
|
|
$
|
319,320
|
|
|
$
|
252,801
|
|
|
$
|
120,715
|
|
|
$
|
37,075
|
|
Total assets
|
|
|
|
|
|
|
|
|
|
|
414,475
|
|
|
|
428,923
|
|
|
|
426,139
|
|
|
|
410,473
|
|
|
|
343,816
|
|
|
|
193,969
|
|
|
|
49,175
|
|
Accounts payable affiliates
|
|
|
|
|
|
|
|
|
|
|
5,095
|
|
|
|
15,281
|
|
|
|
7,662
|
|
|
|
7,880
|
|
|
|
4,412
|
|
|
|
6,122
|
|
|
|
2,998
|
|
Long-term debt, net of current maturities
|
|
|
|
|
|
|
|
|
|
|
265,117
|
|
|
|
244,795
|
|
|
|
256,466
|
|
|
|
226,104
|
|
|
|
147,064
|
|
|
|
33,784
|
|
|
|
12,643
|
|
Net equity
|
|
|
|
|
|
|
|
|
|
|
122,674
|
|
|
|
115,789
|
|
|
|
133,156
|
|
|
|
139,167
|
|
|
|
167,746
|
|
|
|
138,589
|
|
|
|
24,510
|
|
Cash Flow Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flow provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
$
|
25,782
|
|
|
$
|
22,781
|
|
|
$
|
53,886
|
|
|
$
|
40,702
|
|
|
$
|
39,580
|
|
|
$
|
8,122
|
|
|
$
|
7,957
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
(27,213
|
)
|
|
|
(20,270
|
)
|
|
|
(54,342
|
)
|
|
|
(83,408
|
)
|
|
|
(158,426
|
)
|
|
|
(74,888
|
)
|
|
|
(5,290
|
)
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
4,347
|
|
|
|
629
|
|
|
|
(8,868
|
)
|
|
|
42,817
|
|
|
|
123,045
|
|
|
|
72,736
|
|
|
|
(2,946
|
)
|
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Midstream segment margin
|
|
$
|
21,875
|
|
|
$
|
26,163
|
|
|
$
|
41,802
|
|
|
$
|
47,819
|
|
|
$
|
106,580
|
|
|
$
|
78,012
|
|
|
$
|
58,674
|
|
|
$
|
29,295
|
|
|
$
|
15,764
|
|
Compression segment margin
|
|
|
1,205
|
|
|
|
2,410
|
|
|
|
2,410
|
|
|
|
2,410
|
|
|
|
4,819
|
|
|
|
4,819
|
|
|
|
4,819
|
|
|
|
4,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment margin
|
|
$
|
23,080
|
|
|
$
|
28,573
|
|
|
$
|
44,212
|
|
|
$
|
50,229
|
|
|
$
|
111,399
|
|
|
$
|
82,831
|
|
|
$
|
63,493
|
|
|
$
|
33,512
|
|
|
$
|
15,764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
12,424
|
|
|
$
|
9,922
|
|
|
$
|
21,984
|
|
|
$
|
23,813
|
|
|
$
|
72,162
|
|
|
$
|
52,395
|
|
|
$
|
42,751
|
|
|
$
|
23,875
|
|
|
$
|
9,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non cash unrealized (gain) loss on derivatives
|
|
$
|
150
|
|
|
$
|
1,534
|
|
|
$
|
(120
|
)
|
|
$
|
1,935
|
|
|
$
|
(6,981
|
)
|
|
$
|
(373
|
)
|
|
$
|
(113
|
)
|
|
$
|
|
|
|
$
|
|
|
Non cash unit based compensation expense
|
|
$
|
281
|
|
|
$
|
392
|
|
|
$
|
601
|
|
|
$
|
763
|
|
|
$
|
1,538
|
|
|
$
|
951
|
|
|
$
|
473
|
|
|
$
|
|
|
|
$
|
|
|
Maintenance capital expenditures
|
|
$
|
1,472
|
|
|
$
|
2,416
|
|
|
$
|
2,858
|
|
|
$
|
2,944
|
|
|
$
|
5,994
|
|
|
$
|
3,423
|
|
|
$
|
3,434
|
|
|
$
|
2,225
|
|
|
$
|
1,693
|
|
Expansion capital expenditures
|
|
|
5,702
|
|
|
|
7,822
|
|
|
|
16,331
|
|
|
|
15,424
|
|
|
|
52,275
|
|
|
|
87,530
|
|
|
|
155,103
|
|
|
|
72,723
|
|
|
|
3,474
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital expenditures
|
|
$
|
7,174
|
|
|
$
|
10,238
|
|
|
$
|
19,189
|
|
|
$
|
18,368
|
|
|
$
|
58,269
|
|
|
$
|
90,953
|
|
|
$
|
158,537
|
|
|
$
|
74,948
|
|
|
$
|
5,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of earnings to fixed charges
|
|
$
|
0.67
|
|
|
$
|
0.21
|
|
|
$
|
0.28
|
|
|
$
|
0.82
|
|
|
$
|
2.46
|
|
|
$
|
1.93
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
(1)
|
|
Net income per unit is not applicable for periods prior to
Hiland Partners initial public offering.
|
|
(2)
|
|
Includes Hiland Partners cash distributions of $0.8275 per
unit paid on May 14, 2008 for the three months ended
March 31, 2008, $0.45 per unit paid on February 13,
2009 for 2008, $0.795 per unit paid on February 14, 2008
for 2007, $0.7125 per unit paid on February 14, 2007 for
2006 and $0.625 per unit paid on February 14, 2006 for 2005.
|
Hiland
Holdings
Set forth below is certain selected historical consolidated
financial data relating to Hiland Holdings. The selected
historical consolidated financial data has been derived from the
financial statements and selected financial data contained in
Hiland Holdings Annual Report on
Form 10-K
for the fiscal year ended December 31, 2008 (the
Form 10-K)
and the unaudited financial statements contained in Hiland
Holdings
194
Quarterly Report on
Form 10-Q
for the quarterly period ended June 30, 2009 (the
Form 10-Q).
This data should be read in conjunction with the audited
consolidated financial statements and other financial
information contained in the
Form 10-K
and
Form 10-Q,
including the notes thereto. More comprehensive financial
information is included in such report (including
managements discussion and analysis of financial condition
and results of operations) and the following summary is
qualified in its entirety by reference to such report and all of
the financial information and notes contained therein. See
Annexes I and J.
Because Hiland Holdings consolidated financial statements
include the results of Hiland Partners, Hiland Holdings
financial statements are substantially similar to the financial
statements of Hiland Partners and its predecessor, CGI. However,
Hiland Holdings consolidated balance sheet includes a
minority interest amount that reflects the proportion of Hiland
Partners owned by its unitholders other than Hiland Holdings.
Similarly, the ownership interests in Hiland Partners held by
its unitholders other than Hiland Holdings are reflected in
Hiland Holdings consolidated income statement as minority
interest. The minority interest amounts are not reflected on
Hiland Partners financial statements.
Certain adjustments have been made to prior period information
to conform to current period presentation related to Hiland
Holdings adoption of Statement of Financial Accounting
Standards No. 160, Noncontrolling Interests in
Consolidated Financial Statements an Amendment of
ARB No. 51 (SFAS 160) which
established 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 is now 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 Hiland
Holdings financial position, results of operations or cash
flows. However, it did result in certain changes to Hiland
Holdings 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,
Hiland Holdings reclassified $125,851, $126,409 and $137,302
from minority interests liabilities to noncontrolling
partners interest in Hiland Partners, of which $123,729,
$128,713 and $135,513 are separate components of equity and
$2,122, $(2,304) and $1,789 are increases (decreases) to
accumulated other comprehensive income, also components of
equity, in our consolidated balance sheets as of
December 31, 2008, 2007 and 2006, respectively.
Additionally, Hiland Holdings reclassified $209 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 months ended March 31, 2008 and reclassified $5,902,
$2,635 and $10,164 of minority interest in income of Hiland
Partners to net income attributable to noncontrolling
partners interest in income of Hiland Partners in our
consolidated statement of operations for the years ended
December 31, 2008, 2007 and 2006, respectively. For the
year ended December 31, 2005, Hiland Holdings reclassified
$9,380 of minority interest in income of Hiland Partners to net
income attributable to noncontrolling partners interest in
income of Hiland Partners. Net income per limited partner unit
has not been affected as a result of the adoption of
SFAS 160.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hiland
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partners
|
|
|
Continental
|
|
|
|
Hiland Holdings GP, LP
|
|
|
GP, LLC
|
|
|
Gas, Inc.
|
|
|
|
Three Months
|
|
|
Six Months
|
|
|
|
|
|
|
Ended June 30,
|
|
|
Ended June 30,
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except per unit and operating data)
|
|
|
|
|
|
|
|
|
Summary of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
50,079
|
|
|
$
|
115,441
|
|
|
$
|
102,427
|
|
|
$
|
206,920
|
|
|
$
|
387,999
|
|
|
$
|
278,043
|
|
|
$
|
219,686
|
|
|
$
|
166,601
|
|
|
$
|
98,296
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Midstream purchases (exclusive of items shown separately below)
|
|
|
26,999
|
|
|
|
88,073
|
|
|
|
58,215
|
|
|
|
156,691
|
|
|
|
276,600
|
|
|
|
195,212
|
|
|
|
156,193
|
|
|
|
133,089
|
|
|
|
82,532
|
|
195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hiland
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partners
|
|
|
Continental
|
|
|
|
Hiland Holdings GP, LP
|
|
|
GP, LLC
|
|
|
Gas, Inc.
|
|
|
|
Three Months
|
|
|
Six Months
|
|
|
|
|
|
|
Ended June 30,
|
|
|
Ended June 30,
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except per unit and operating data)
|
|
|
|
|
|
|
|
|
Operations and maintenance
|
|
|
7,785
|
|
|
|
7,551
|
|
|
|
15,480
|
|
|
|
14,320
|
|
|
|
30,526
|
|
|
|
23,279
|
|
|
|
16,071
|
|
|
|
7,359
|
|
|
|
4,933
|
|
Depreciation, amortization and accretion
|
|
|
10,824
|
|
|
|
9,456
|
|
|
|
21,082
|
|
|
|
18,671
|
|
|
|
38,650
|
|
|
|
31,002
|
|
|
|
22,863
|
|
|
|
11,112
|
|
|
|
4,127
|
|
Property impairments
|
|
|
|
|
|
|
|
|
|
|
950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bad Debt
|
|
|
|
|
|
|
8,103
|
|
|
|
|
|
|
|
8,103
|
|
|
|
304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on asset sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19
|
)
|
General and administrative
|
|
|
4,606
|
|
|
|
2,333
|
|
|
|
8,433
|
|
|
|
5,018
|
|
|
|
10,337
|
|
|
|
9,321
|
|
|
|
5,299
|
|
|
|
2,542
|
|
|
|
1,082
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
50,214
|
|
|
|
115,516
|
|
|
|
104,160
|
|
|
|
202,803
|
|
|
|
356,417
|
|
|
|
258,814
|
|
|
|
200,426
|
|
|
|
154,102
|
|
|
|
92,655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(135
|
)
|
|
|
(75
|
)
|
|
|
(1,733
|
)
|
|
|
4,117
|
|
|
|
31,582
|
|
|
|
19,229
|
|
|
|
19,260
|
|
|
|
12,499
|
|
|
|
5,641
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(2,691
|
)
|
|
|
(3,130
|
)
|
|
|
(5,049
|
)
|
|
|
(6,636
|
)
|
|
|
(13,674
|
)
|
|
|
(11,371
|
)
|
|
|
(6,543
|
)
|
|
|
(1,942
|
)
|
|
|
(702
|
)
|
Amortization of deferred loan costs
|
|
|
(172
|
)
|
|
|
(168
|
)
|
|
|
(343
|
)
|
|
|
(324
|
)
|
|
|
(663
|
)
|
|
|
(499
|
)
|
|
|
(513
|
)
|
|
|
(484
|
)
|
|
|
(102
|
)
|
Interest income and other
|
|
|
68
|
|
|
|
73
|
|
|
|
81
|
|
|
|
177
|
|
|
|
357
|
|
|
|
445
|
|
|
|
323
|
|
|
|
192
|
|
|
|
40
|
|
Total other income (expense), net:
|
|
|
(2,795
|
)
|
|
|
(3,225
|
)
|
|
|
(5,311
|
)
|
|
|
(6,783
|
)
|
|
|
(13,980
|
)
|
|
|
(11,425
|
)
|
|
|
(6,733
|
)
|
|
|
(2,234
|
)
|
|
|
(764
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
(2,930
|
)
|
|
|
(3,300
|
)
|
|
|
(7,044
|
)
|
|
|
(2,666
|
)
|
|
|
17,602
|
|
|
|
7,804
|
|
|
|
12,527
|
|
|
|
10,265
|
|
|
|
4,877
|
|
Discontinued operations, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(2,930
|
)
|
|
|
(3,300
|
)
|
|
|
(7,044
|
)
|
|
|
(2,666
|
)
|
|
|
17,602
|
|
|
|
7,804
|
|
|
|
12,527
|
|
|
|
10,265
|
|
|
|
4,912
|
|
Loss attributable to predecessor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(407
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partners interest in net income (loss)
|
|
|
(2,930
|
)
|
|
|
(3,300
|
)
|
|
|
(7,044
|
)
|
|
|
(2,666
|
)
|
|
|
17,602
|
|
|
|
7,804
|
|
|
|
12,120
|
|
|
|
10,265
|
|
|
|
4,912
|
|
Less: noncontrolling partners interest in income (loss) of
Hiland Partners:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,494
|
|
|
|
5,993
|
|
|
|
|
|
Non-affiliate
|
|
|
(395
|
)
|
|
|
(2,192
|
)
|
|
|
(1,610
|
)
|
|
|
(2,398
|
)
|
|
|
5,902
|
|
|
|
2,638
|
|
|
|
3,670
|
|
|
|
3,387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Limited partners interest in net income (loss)
|
|
$
|
(2,535
|
)
|
|
$
|
(1,108
|
)
|
|
$
|
(5,434
|
)
|
|
$
|
(268
|
)
|
|
$
|
11,700
|
|
|
$
|
5,166
|
|
|
$
|
1,956
|
|
|
$
|
885
|
|
|
$
|
4,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per limited partner unit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
basic(1)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.25
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
0.54
|
|
|
$
|
0.24
|
|
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
diluted(1)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.25
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
0.54
|
|
|
$
|
0.24
|
|
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash distributions per limited partner unit(2)
|
|
$
|
0.00
|
|
|
$
|
0.31
|
|
|
$
|
0.00
|
|
|
$
|
0.59
|
|
|
$
|
1.00
|
|
|
$
|
0.91
|
|
|
$
|
0.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data (at end of period):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, at cost, net
|
|
|
|
|
|
|
|
|
|
$
|
349,473
|
|
|
$
|
326,005
|
|
|
$
|
349,159
|
|
|
$
|
323,073
|
|
|
$
|
257,003
|
|
|
$
|
120,715
|
|
|
$
|
37,075
|
|
Total assets
|
|
|
|
|
|
|
|
|
|
|
422,585
|
|
|
|
438,456
|
|
|
|
435,560
|
|
|
|
420,286
|
|
|
|
355,198
|
|
|
|
194,085
|
|
|
|
49,175
|
|
Accounts payable affiliates
|
|
|
|
|
|
|
|
|
|
|
5,236
|
|
|
|
15,411
|
|
|
|
7,823
|
|
|
|
7,957
|
|
|
|
4,412
|
|
|
|
5,819
|
|
|
|
2,998
|
|
Long-term debt, net of current maturities
|
|
|
|
|
|
|
|
|
|
|
265,117
|
|
|
|
245,150
|
|
|
|
256,466
|
|
|
|
226,459
|
|
|
|
147,318
|
|
|
|
33,784
|
|
|
|
12,643
|
|
Limited partners equity
|
|
|
|
|
|
|
|
|
|
|
6,232
|
|
|
|
7,316
|
|
|
|
15,497
|
|
|
|
22,135
|
|
|
|
41,157
|
|
|
|
2,791
|
|
|
|
24,510
|
|
196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hiland
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partners
|
|
|
Continental
|
|
|
|
Hiland Holdings GP, LP
|
|
|
GP, LLC
|
|
|
Gas, Inc.
|
|
|
|
Three Months
|
|
|
Six Months
|
|
|
|
|
|
|
Ended June 30,
|
|
|
Ended June 30,
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except per unit and operating data)
|
|
|
|
|
|
|
|
|
Noncontrolling partners interest in Hiland Partners
|
|
|
|
|
|
|
|
|
|
|
121,874
|
|
|
|
117,241
|
|
|
|
125,851
|
|
|
|
126,409
|
|
|
|
137,302
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
|
|
|
|
|
|
|
|
128,106
|
|
|
|
124,557
|
|
|
|
141,348
|
|
|
|
148,544
|
|
|
|
178,459
|
|
|
|
2,791
|
|
|
|
24,510
|
|
Cash Flow Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flow provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
$
|
24,531
|
|
|
$
|
22,033
|
|
|
$
|
52,484
|
|
|
$
|
39,379
|
|
|
$
|
38,476
|
|
|
$
|
8,159
|
|
|
$
|
7,957
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
(27,213
|
)
|
|
|
(20,270
|
)
|
|
|
(54,342
|
)
|
|
|
(83,408
|
)
|
|
|
(158,426
|
)
|
|
|
(74,888
|
)
|
|
|
(5,290
|
)
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
5,197
|
|
|
|
1,428
|
|
|
|
(7,011
|
)
|
|
|
44,062
|
|
|
|
124,201
|
|
|
|
72,830
|
|
|
|
(2,946
|
)
|
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Midstream segment margin
|
|
$
|
21,875
|
|
|
$
|
26,163
|
|
|
$
|
41,802
|
|
|
$
|
47,819
|
|
|
$
|
106,580
|
|
|
$
|
78,012
|
|
|
$
|
58,674
|
|
|
$
|
29,295
|
|
|
$
|
15,764
|
|
Compression segment margin
|
|
|
1,205
|
|
|
|
2,410
|
|
|
|
2,410
|
|
|
|
2,410
|
|
|
|
4,819
|
|
|
|
4,819
|
|
|
|
4,819
|
|
|
|
4,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment margin
|
|
$
|
23,080
|
|
|
$
|
28,573
|
|
|
$
|
44,212
|
|
|
$
|
50,229
|
|
|
$
|
111,399
|
|
|
$
|
82,831
|
|
|
$
|
63,493
|
|
|
$
|
33,512
|
|
|
$
|
15,764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maintenance capital expenditures
|
|
$
|
1,472
|
|
|
$
|
2,416
|
|
|
$
|
2,858
|
|
|
$
|
2,944
|
|
|
$
|
5,994
|
|
|
$
|
3,423
|
|
|
$
|
3,434
|
|
|
$
|
2,225
|
|
|
$
|
1,693
|
|
Expansion capital expenditures
|
|
|
5,702
|
|
|
|
7,822
|
|
|
|
16,331
|
|
|
|
15,424
|
|
|
|
52,275
|
|
|
|
87,530
|
|
|
|
155,103
|
|
|
|
72,723
|
|
|
|
3,474
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital expenditures
|
|
$
|
7,174
|
|
|
$
|
10,238
|
|
|
$
|
19,189
|
|
|
$
|
18,368
|
|
|
$
|
58,269
|
|
|
$
|
90,953
|
|
|
$
|
158,537
|
|
|
$
|
74,948
|
|
|
$
|
5,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of earnings to fixed charges
|
|
$
|
0.12
|
|
|
$
|
0.65
|
|
|
$
|
(0.02
|
)
|
|
$
|
0.96
|
|
|
$
|
2.26
|
|
|
$
|
1.67
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
(1)
|
|
Net income per unit is not applicable for periods prior to our
initial public offering.
|
|
(2)
|
|
Includes our cash distribution of $0.10 per unit paid on
February 18, 2009 for 2008, $0.255 per unit paid on
February 19, 2008 for 2007 and $0.2075 per unit paid on
February 19, 2007 for 2006.
|
Non-GAAP Financial
Measures of Hiland Partners
This joint proxy statement includes the non-GAAP financial
measures of (1) EBITDA, (2) total segment margin,
which consists of midstream segment margin and compression
segment margin, and (3) distributable cash flow to net
income (loss).
Hiland Partners defines EBITDA, a non-GAAP financial measure, as
net income (loss) plus interest expense, provision for income
taxes and depreciation, amortization and accretion expense.
EBITDA is used as a supplemental financial measure by management
and by external users of its financial statements such as
investors, commercial banks, research analysts and others to
assess: (1) the financial performance of Hiland
Partners assets without regard to financing methods,
capital structure or historical cost basis; (2) the ability
of Hiland Partners assets to generate cash sufficient to
pay interest costs and support our indebtedness; (3) Hiland
Partners operating performance and return on capital as
compared to those of other companies in the midstream energy
sector, without regard to financing or structure; and
(4) the viability of acquisitions and capital expenditure
projects and the overall rates of return on alternative
investment opportunities. EBITDA is also a financial measurement
that, with certain negotiated adjustments, is reported to Hiland
Partners banks and is used as a gauge for compliance with
financial covenants under the Hiland Operating Credit Agreement.
EBITDA should not be considered an alternative to net income
(loss), operating income, cash flows from operating activities
or any other measure of financial performance presented in
accordance with GAAP. Hiland Partners EBITDA may not be
comparable to EBITDA of similarly titled measures of other
entities, as other entities may not calculate EBITDA in the same
manner as Hiland Partners does.
197
Hiland Partners views total segment margin, a non-GAAP financial
measure, as an important performance measure of the core
profitability of its operations because it is directly related
to Hiland Partners volumes and commodity price changes.
Hiland Partners reviews total segment margin monthly for
consistency and trend analysis. Hiland Partners defines
midstream segment margin as midstream revenue less midstream
purchases. Midstream revenue includes revenue from the sale of
natural gas, NGLs and NGL products resulting from Hiland
Partners gathering, treating, processing and fractionation
activities and fixed fees associated with the gathering of
natural gas and the transportation and disposal of saltwater.
Midstream purchases include the following costs and expenses:
cost of natural gas and NGLs purchased by us from third parties,
cost of natural gas and NGLs purchased by Hiland Partners from
affiliates, and costs of crude oil purchased by Hiland Partners
from third parties. Hiland Partners defines compression segment
margin as the payments received under its compression services
agreement with Continental Resources, Inc.
Hiland Partners views distributable cash flow, a non-GAAP
financial measure, as an important performance measure used by
senior management to determine whether or not Hiland Partners is
generating cash flow at a level that can sustain or support
quarterly distributions to unitholders and, if so, at what
distribution level. The GAAP financial measure most directly
comparable to distributable cash flow is net income (loss). Our
distributable cash flow may not be comparable to similarly
titled measures of other entities, as other entities may not
calculate distributable cash flow in the same manner Hiland
Partners does.
The following table presents a reconciliation of the non-GAAP
financial measures of (1) EBITDA to the GAAP financial
measure of net income and (2) total segment margin (which
consists of the sum of midstream segment margin and compression
segment margin) to operating income, in each case, on a
historical basis for each of the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hiland Partners, LP
|
|
|
Predecessor
|
|
|
|
Three Months
|
|
|
Six Months
|
|
|
|
|
|
Continental
|
|
|
|
Ended June 30,
|
|
|
Ended June 30,
|
|
|
Year Ended December 31,
|
|
|
Gas, Inc.
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of EBITDA to Net income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(948
|
)
|
|
$
|
(2,508
|
)
|
|
$
|
(3,861
|
)
|
|
$
|
(1,181
|
)
|
|
$
|
20,447
|
|
|
$
|
10,784
|
|
|
$
|
14,682
|
|
|
$
|
10,337
|
|
|
$
|
4,912
|
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, amortization and accretion
|
|
|
10,538
|
|
|
|
9,169
|
|
|
|
20,509
|
|
|
|
18,098
|
|
|
|
37,502
|
|
|
|
29,855
|
|
|
|
22,130
|
|
|
|
11,112
|
|
|
|
4,127
|
|
Amortization of deferred loan costs
|
|
|
150
|
|
|
|
145
|
|
|
|
299
|
|
|
|
279
|
|
|
|
574
|
|
|
|
410
|
|
|
|
407
|
|
|
|
484
|
|
|
|
102
|
|
Interest expense
|
|
|
2,684
|
|
|
|
3,116
|
|
|
|
5,037
|
|
|
|
6,617
|
|
|
|
13,639
|
|
|
|
11,346
|
|
|
|
5,532
|
|
|
|
1,942
|
|
|
|
702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
12,424
|
|
|
$
|
9,922
|
|
|
$
|
21,984
|
|
|
$
|
23,813
|
|
|
$
|
72,162
|
|
|
$
|
52,395
|
|
|
$
|
42,751
|
|
|
$
|
23,875
|
|
|
$
|
9,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of Total Segment Margin to Operating Income
(Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$
|
1,818
|
|
|
$
|
682
|
|
|
$
|
1,394
|
|
|
$
|
5,544
|
|
|
$
|
34,314
|
|
|
$
|
22,110
|
|
|
$
|
20,298
|
|
|
$
|
12,571
|
|
|
$
|
5,641
|
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations and maintenance expenses
|
|
|
7,785
|
|
|
|
7,551
|
|
|
|
15,480
|
|
|
|
14,320
|
|
|
|
30,526
|
|
|
|
23,279
|
|
|
|
16,071
|
|
|
|
7,359
|
|
|
|
4,933
|
|
Depreciation, amortization and accretion
|
|
|
10,538
|
|
|
|
9,169
|
|
|
|
20,509
|
|
|
|
18,098
|
|
|
|
37,502
|
|
|
|
29,855
|
|
|
|
22,130
|
|
|
|
11,112
|
|
|
|
4,127
|
|
Property impairments
|
|
|
|
|
|
|
|
|
|
|
950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bad debt
|
|
|
|
|
|
|
8,103
|
|
|
|
|
|
|
|
8,103
|
|
|
|
304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on asset sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19
|
)
|
General and administrative expenses
|
|
|
2,939
|
|
|
|
1,863
|
|
|
|
5,879
|
|
|
|
4,164
|
|
|
|
8,753
|
|
|
|
7,587
|
|
|
|
4,994
|
|
|
|
2,470
|
|
|
|
1,082
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment margin
|
|
$
|
23,080
|
|
|
$
|
27,368
|
|
|
$
|
44,212
|
|
|
$
|
50,229
|
|
|
$
|
111,399
|
|
|
$
|
82,831
|
|
|
$
|
63,493
|
|
|
$
|
33,512
|
|
|
$
|
15,764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
198
COMMON
UNIT MARKET PRICE AND DIVIDEND INFORMATION
Common
Unit Price Information
Hiland
Partners
Hiland Partners common units trade on the NASDAQ Global Select
Market under the symbol HLND. On June 1, 2009,
the last trading day prior to the public announcement of the
execution of the merger agreements, the high and low reported
sales price for the Hiland Partners common units was $5.77 per
unit and $5.34 per unit, respectively.
On ,
2009, the most recent practicable date before the printing of
this joint proxy statement, high and low reported sales prices
of Hiland Partners common units were
$ and
$ , respectively and there were
approximately
common unitholders, including beneficial owners of common units
held in street name, and one record holder of our subordinated
units. There is no established public trading market for Hiland
Partners subordinated units.
The following table shows the high and low sales prices per
common unit, as reported by the NASDAQ National Market, for the
periods indicated.
|
|
|
|
|
|
|
|
|
|
|
Common Unit
|
|
|
|
Price Ranges
|
|
|
|
High
|
|
|
Low
|
|
|
Period from July 1, 2009 to August 27, 2009
|
|
$
|
7.60
|
|
|
$
|
7.23
|
|
Quarter Ended June 30, 2009
|
|
$
|
8.25
|
|
|
$
|
5.26
|
|
Quarter Ended March 31, 2009
|
|
$
|
11.98
|
|
|
$
|
5.25
|
|
Year Ended December 31, 2008
|
|
|
|
|
|
|
|
|
Quarter Ended December 31
|
|
$
|
36.49
|
|
|
$
|
3.64
|
|
Quarter Ended September 30
|
|
$
|
50.44
|
|
|
$
|
33.95
|
|
Quarter Ended June 30
|
|
$
|
52.00
|
|
|
$
|
43.11
|
|
Quarter Ended March 31
|
|
$
|
51.23
|
|
|
$
|
41.83
|
|
Year Ended December 31, 2007
|
|
|
|
|
|
|
|
|
Quarter Ended December 31
|
|
$
|
53.00
|
|
|
$
|
41.60
|
|
Quarter Ended September 30
|
|
$
|
60.50
|
|
|
$
|
46.02
|
|
Quarter Ended June 30
|
|
$
|
61.75
|
|
|
$
|
52.05
|
|
Quarter Ended March 31
|
|
$
|
58.49
|
|
|
$
|
52.54
|
|
Hiland
Holdings
Hiland Holdings common units trade on the NASDAQ Global Select
Market under the symbol HPGP. On June 1, 2009,
the last trading day prior to the public announcement of the
execution of the merger agreements, the high and low reported
sales price for the Hiland Holdings common units were $1.87 per
unit and $1.63 per unit, respectively.
On ,
2009, the most recent practicable date before the printing of
this joint proxy statement, high and low reported sales prices
of Hiland Holdings common units were
$ and
$ , respectively and there were
approximately
common unitholders, including beneficial owners of common units
held in street name.
199
The following table shows the high and low prices per common
unit, as reported by the NASDAQ Global Select Market, for the
periods indicated.
|
|
|
|
|
|
|
|
|
|
|
Common Unit
|
|
|
|
Price Ranges
|
|
|
|
High
|
|
|
Low
|
|
|
Period from July 1, 2009 to August 27, 2009
|
|
$
|
2.38
|
|
|
$
|
2.21
|
|
Quarter Ended June 30, 2009
|
|
$
|
2.54
|
|
|
$
|
1.55
|
|
Quarter Ended March 31, 2009
|
|
$
|
5.07
|
|
|
$
|
2.10
|
|
Year Ended December 31, 2008
|
|
|
|
|
|
|
|
|
Quarter Ended December 31
|
|
$
|
21.87
|
|
|
$
|
1.90
|
|
Quarter Ended September 30
|
|
$
|
27.22
|
|
|
$
|
18.51
|
|
Quarter Ended June 30
|
|
$
|
28.08
|
|
|
$
|
22.12
|
|
Quarter Ended March 31
|
|
$
|
28.90
|
|
|
$
|
21.08
|
|
Year Ended December 31, 2007
|
|
|
|
|
|
|
|
|
Quarter Ended December 31
|
|
$
|
31.50
|
|
|
$
|
22.49
|
|
Quarter Ended September 30
|
|
$
|
42.22
|
|
|
$
|
25.81
|
|
Quarter Ended June 30
|
|
$
|
35.95
|
|
|
$
|
27.35
|
|
Quarter Ended March 31
|
|
$
|
31.50
|
|
|
$
|
26.65
|
|
Distribution
Information
Hiland
Partners
Hiland Partners considers cash distributions to unitholders on a
quarterly basis, although there is no assurance as to the future
cash distributions since they are dependent upon future
earnings, cash flows, capital requirements, financial condition
and other factors. Hiland Partners ability to distribute
available cash is contractually restricted by the terms of the
Hiland Operating Credit Agreement. The Hiland Operating Credit
Agreement contains covenants requiring Hiland Partners to
maintain certain financial ratios, which are tested quarterly.
Hiland Partners ability to remain in compliance with these
restrictions and covenants in the future is uncertain and will
be affected by the levels of cash flow from its operations and
events or circumstances beyond Hiland Partners control.
Hiland Partners is prohibited from making any distributions to
unitholders if the distribution would cause an event of default,
or an event of default exists, under the Hiland Operating Credit
Agreement.
On April 24, 2009, the Hiland Partners Board of Directors
voted to suspend quarterly distributions with respect to Hiland
Partners common units and subordinated units beginning with the
first quarter distribution of 2009, based on the Hiland Partners
Board of Directors consideration of the impact of lower
commodity prices and drilling activity on Hiland Partners
current and projected throughput volumes, midstream segment
margins and cash flows, as well as future required levels of
capital expenditures and the level of Hiland Partners
outstanding indebtedness under the Hiland Operating Credit
Agreement. Under the Hiland Partners partnership
agreement, the common units will carry a cumulative arrearage
equal to the amount by which for any quarter the quarterly
distribution paid on the common units is less than $0.45.
Accordingly, since no distribution was paid on the common units
in the first and second quarters of 2009, the common units have
accrued a cumulative arrearage of $0.90 in respect of the first
and second quarters of 2009. Under the terms of the partnership
agreement, any cumulative arrearages on the common units must be
paid in full before any quarterly distributions may be made on
the subordinated units.
Under the terms of the Hiland Partners merger agreement, Hiland
Partners is prohibited from paying distributions to its
unitholders without the prior written consent of Parent.
200
The following table shows the cash distributions paid per common
unit and subordinated unit during the first quarter of 2009 and
each quarter of the years ended December 31, 2008 and 2007.
Cash distributions shown below were paid within 45 days
after the end of each applicable quarter.
|
|
|
|
|
|
|
Cash Distribution
|
|
|
Paid Per Unit
|
|
Quarter Ended June 30, 2009
|
|
$
|
0.0000
|
|
Quarter Ended March 31, 2009
|
|
$
|
0.0000
|
|
Year Ended December 31, 2008
|
|
|
|
|
Quarter Ended December 31
|
|
$
|
0.4500
|
|
Quarter Ended September 30
|
|
$
|
0.8800
|
|
Quarter Ended June 30
|
|
$
|
0.8625
|
|
Quarter Ended March 31
|
|
$
|
0.8275
|
|
Year Ended December 31, 2007
|
|
|
|
|
Quarter Ended December 31
|
|
$
|
0.7950
|
|
Quarter Ended September 30
|
|
$
|
0.7550
|
|
Quarter Ended June 30
|
|
$
|
0.7325
|
|
Quarter Ended March 31
|
|
$
|
0.7125
|
|
Hiland
Holdings
Hiland Holdings considers cash distributions to unitholders on a
quarterly basis, although there is no assurance as to the future
cash distributions since they are dependent upon future
earnings, cash flows, capital requirements, financial condition
and other factors. In particular, Hiland Holdings ability
to distribute available cash to its common unitholders is
dependent on its receipt of distributions from Hiland Partners.
Hiland Holdings ability to distribute available cash is
contractually restricted by the terms of Hiland Holdings
credit facility. Hiland Holdings credit facility contains
covenants requiring Hiland Holdings to maintain certain
financial ratios. Hiland Holdings is prohibited from making any
distributions to unitholders if the distribution would cause an
event of default, or an event of default exists, under its
credit facility.
On April 24, 2009, the Hiland Holdings Board of Directors
voted to suspend quarterly distributions with respect to Hiland
Holdings partnership units beginning with the first quarter
distribution of 2009, based on the Hiland Holdings Board of
Directors consideration of the impact of lower commodity
prices and drilling activity on Hiland Partners current
and projected throughput volumes, midstream segment margins and
cash flows, as well as future required levels of capital
expenditures and the level of Hiland Partners outstanding
indebtedness under the Hiland Operating Credit Agreement. Since
Hiland Holdings does not have outstanding subordinated units,
arrearages do not accrue on the common units of Hiland Holdings.
Under the terms of the Hiland Holdings merger agreement, Hiland
Holdings is prohibited from paying distributions to its
unitholders without the prior written consent of Parent.
201
The following table shows the cash distributions paid during the
first quarter of 2009 and each quarter of the years ended
December 31, 2008 and 2007. Cash distributions shown below
were paid within 50 days after the end of each applicable
quarter.
|
|
|
|
|
|
|
Cash Distribution
|
|
|
Paid Per Unit
|
|
Quarter Ended June 30, 2009
|
|
$
|
0.0000
|
|
Quarter Ended March 31, 2009
|
|
$
|
0.0000
|
|
Year Ended December 31, 2008
|
|
|
|
|
Quarter Ended December 31
|
|
$
|
0.1000
|
|
Quarter Ended September 30
|
|
$
|
0.3175
|
|
Quarter Ended June 30
|
|
$
|
0.3050
|
|
Quarter Ended March 31
|
|
$
|
0.2800
|
|
Year Ended December 31, 2007
|
|
|
|
|
Quarter Ended December 31
|
|
$
|
0.2550
|
|
Quarter Ended September 30
|
|
$
|
0.2300
|
|
Quarter Ended June 30
|
|
$
|
0.2200
|
|
Quarter Ended March 31
|
|
$
|
0.2075
|
|
202
INFORMATION
CONCERNING HAROLD HAMM, PARENT AND MERGER SUBS
Parent was formed on February 3, 2005 as an Oklahoma
limited liability company. Mr. Hamm is the sole member of
Parent, and Parent is the sole member of both HLND Merger Sub
and HPGP Merger Sub. Each of HLND Merger Sub and HPGP Merger Sub
was formed on May 8, 2009 by its sole member. Each of HLND
Merger Sub and HPGP Merger Sub was formed solely for the purpose
of effecting the Hiland Partners merger and the Hiland Holdings
merger, respectively. Neither HLND Merger Sub, nor HPGP Merger
Sub has conducted any activities other than those incident to
its formation and the matters contemplated by the Hiland
Partners merger agreement and the Hiland Holdings merger
agreement, respectively, including the preparation of applicable
filings under the securities laws. It is expected that the Hamm
family trusts will subscribe for limited liability company units
in HLND Merger Sub immediately prior to the effective time of
the Hiland Partners merger, thereby reducing
Mr. Hamms capital commitment and ultimate ownership
of HLND Merger Sub. Upon completion of the Hiland Partners
merger, HLND Merger Sub will merge with and into Hiland Partners
with Hiland Partners being the surviving entity in the Hiland
Partners merger as a subsidiary of Parent, Hiland Holdings and
the Hamm family trusts whose limited liability company units
shall be converted into common units of the surviving entity on
a one-for-one basis. It is expected that the Hamm family trusts
will subscribe for limited liability company units in HPGP
Merger Sub immediately prior to the effective time of the Hiland
Holdings merger, thereby reducing Mr. Hamms capital
commitment and ultimate ownership of HPGP Merger Sub. Likewise,
upon completion of the Hiland Holdings merger, HPGP Merger Sub
will merge with and into Hiland Holdings with Hiland Holdings
being the surviving entity of the Hiland Partners merger as a
subsidiary of Parent, Continental Gas, Harold Hamm and the Hamm
family trusts.
Parent owns 100% of the membership interest in the general
partner of Hiland Holdings and is principally engaged in the
business of serving as the sole member of the general partner of
Hiland Holdings. Parent has not conducted activities other than
those incident to serving as the sole member of the general
partner of Hiland Holdings and the matters contemplated by the
both the Hiland Partners merger agreement and Hiland Holdings
merger agreement, including the preparation of applicable
filings under the securities laws.
The business address and telephone number of each of Parent,
HLND Merger Sub and HPGP Merger Sub is
c/o HH
GP Holding, LLC, 302 North Independence, Enid, Oklahoma 73701,
(580) 233-8955,
Attention: Harold Hamm.
Mr. Mackie is the trustee of both the Harold Hamm DST Trust
and the Harold Hamm HJ Trust, and his business address and
telephone number is 302 N. Independence, Enid,
Oklahoma 73701,
(580) 548-5200.
At the closing of the Hiland Partners merger and the Hiland
Holdings merger, Parents sole member will be Mr. Hamm.
During the past five years, none of the persons or entities
described above has been (i) convicted in a criminal
proceeding or (ii) party to any judicial or administrative
proceeding (except for matters that were dismissed without
sanction or settlement) that resulted in a judgment, decree or
final order enjoining the entity from future violations of, or
prohibiting activities subject to, federal or state securities
laws, or a finding of any violation of federal or state
securities laws.
203
DIRECTORS
AND EXECUTIVE OFFICERS OF PARENT AND MERGER SUBS
Set forth below are the names, the present principal occupations
or employment and the name, principal business address of any
corporation or other organization in which such occupation or
employment is conducted, and the five-year employment history of
each of the current sole member and executive officers of Parent
and the current sole director and executive officers of each of
HLND Merger Sub and HPGP Merger Sub, respectively.
Harold Hamm, 63, Sole Member and President of HH GP Holding, LLC
since February 3, 2005. Mr. Hamm has served as
Chairman of the Board of Directors of (i) the general
partner of Hiland Partners since October 2004, and (ii) the
general partner of Hiland Holdings since May 2006. In December
1994, Mr. Hamm began serving as President and Chief
Executive Officer and as a director of Continental Gas, Inc.,
and he subsequently served as Chief Executive Officer and
director of Continental Gas, Inc. until 2004. Since its
inception in 1967 until October 2005, Mr. Hamm served as
President and Chief Executive Officer and a director of
Continental Resources, Inc. and currently serves as its Chief
Executive Officer and Chairman of its board of directors.
Mr. Hamm is also immediate past President of the National
Stripper Well Association, a member of the executive board of
the Oklahoma Independent Petroleum Association and a member of
the executive board of the Oklahoma Energy Explorers. In
addition, Mr. Hamm is a director of Complete Production
Services, Inc., a publicly traded oilfield service company.
Matthew Harrison, 39, Vice President and Secretary of HH GP
Holding, LLC since June 1, 2009. Mr. Harrison has
served as Chief Financial Officer, Vice President
Finance, Secretary and a director of the general partners of
each of Hiland Partners and Hiland Holdings since April 2008.
Mr. Harrison joined the Hiland Companies as Vice President
of Business Development in February 2008 from Wachovia
Securities, where he most recently was a director for its
Energy & Power Mergers & Acquisitions Group.
Prior to joining Wachovia Securities in 2007, Mr. Harrison
spent eight years with A.G. Edwards Capital Markets
Mergers & Acquisitions Group, most recently leading
its energy mergers & acquisitions effort. Prior to
joining A.G. Edwards, Mr. Harrison spent five years with
Price Waterhouse, LLP, the predecessor of
PricewaterhouseCoopers, LLP as a senior accountant. He holds a
B.S. degree in Accounting from the University of Tennessee, a
Masters of Business Administration degree from Kellogg Graduate
School of Management at Northwestern University and is a
certified public accountant.
During the past five years, none of the persons described above
has been (i) convicted in a criminal proceeding (excluding
traffic violations or similar misdemeanors) or (ii) party
to any judicial or administrative proceeding (except for matters
that were dismissed without sanction or settlement) that
resulted in a judgment, decree or final order enjoining the
person from future violations of, or prohibiting activities
subject to, federal or state securities laws or a finding of any
violation of federal or state securities laws. Each person
identified above is a United States citizen.
204
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Beneficial
Ownership of Hiland Partners
The following table sets forth the beneficial ownership of
Hiland Partners units as of August 7, 2009 held by each
person who beneficially owned more than 5% or more of the then
outstanding units and all of the directors, named executive
officers, and directors and executive officers as a group of the
general partner of Hiland Partners.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of
|
|
|
|
|
|
|
|
|
|
Percentage of
|
|
|
Subordinated
|
|
|
Subordinated
|
|
|
Percentage of
|
|
|
|
Common Units
|
|
|
Common Units
|
|
|
Units
|
|
|
Units
|
|
|
Total Units
|
|
|
|
Beneficially
|
|
|
Beneficially
|
|
|
Beneficially
|
|
|
Beneficially
|
|
|
Beneficially
|
|
Name of Beneficial Owner
|
|
Owned
|
|
|
Owned
|
|
|
Owned
|
|
|
Owned
|
|
|
Owned
|
|
|
Harold Hamm(1)(2)(3)
|
|
|
2,321,471
|
|
|
|
36.9
|
%
|
|
|
3,060,000
|
|
|
|
100.0
|
%
|
|
|
57.5
|
%
|
Hiland Holdings GP, LP(1)(3)
|
|
|
2,321,471
|
|
|
|
36.9
|
%
|
|
|
3,060,000
|
|
|
|
100.0
|
%
|
|
|
57.5
|
%
|
Joseph L. Griffin(1)
|
|
|
4,307
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Matthew S. Harrison(1)
|
|
|
2,500
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Kent C. Christopherson(1)
|
|
|
1,494
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Michael L. Greenwood(1)(2)(4)
|
|
|
13,291
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Edward D. Doherty(1)(2)(4)
|
|
|
5,000
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Rayford T. Reid(1)(2)(4)
|
|
|
11,818
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Shelby E. Odell(1)(2)(5)
|
|
|
15,000
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
John T. McNabb, II(1)(6)
|
|
|
4,000
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Kayne Anderson Capital Advisors, L.P.(7)
|
|
|
330,600
|
|
|
|
5.2
|
%
|
|
|
|
|
|
|
|
|
|
|
3.5
|
%
|
All directors and executive officers as a group
|
|
|
2,378,881
|
|
|
|
37.7
|
%
|
|
|
3,060,000
|
|
|
|
100.0
|
%
|
|
|
58.1
|
%
|
|
|
|
*
|
|
Less than 1%.
|
|
(1)
|
|
The address of this person is 205 West Maple,
Suite 1100, Enid, Oklahoma 73701.
|
|
(2)
|
|
These individuals each hold an ownership interest in Hiland
Holdings GP, LP as indicated in the following table.
|
|
(3)
|
|
Mr. Hamm indirectly owns 100% of Hiland Partners GP
Holdings, LLC, the general partner of Hiland Holdings GP, LP.
Accordingly, Mr. Hamm is deemed to be the beneficial owner
of the 2,321,471 common units and 3,060,000 subordinated units
held by Hiland Holdings GP, LP.
|
|
(4)
|
|
250, 500 and 750 of the indicated common units are restricted
common units that vest on the anniversary of each grant date
over periods of one, two and three years, respectively.
|
|
(5)
|
|
500, 500, 750 and 1,000 of the indicated common units are
restricted common units that vest on the anniversary of each
grant over periods of one, two, three and four years,
respectively.
|
|
(6)
|
|
500, 500 and 750 of the indicated common units are restricted
common units that vest on the anniversary of each grant date
over periods of one, two and three years, respectively.
|
|
(7)
|
|
Represents holdings as of June 30, 2009 as reported on
Schedule 13G filed on July 1, 2009. The address of
this person is 1800 Avenue of the Stars, Second Floor, Los
Angeles, CA 90067. Richard A. Kayne is deemed to have shared
voting and dispositive power over the common units held by Kayne
Anderson Capital Advisors, L.P.
|
Beneficial
Ownership of Interests in Hiland Partners by Hiland
Holdings
Hiland Holdings GP, LP owns all of Hiland Partners 2% general
partner interest, all of the incentive distributions rights in
Hiland Partners, 2,321,471 of Hiland Partners common units and
3,060,000 of Hiland Partners subordinated units.
205
Beneficial
Ownership of Hiland Holdings
The following table sets forth the beneficial ownership of units
of Hiland Holdings GP, LP as of August 7, 2009 held by each
person who beneficially owned more than 5% or more of the then
outstanding units and all of the directors, named executive
officers, and directors and executive officers as a group of
Hiland Holdings GP, LP.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of
|
|
|
|
Common Units
|
|
|
Common Units
|
|
|
|
Beneficially
|
|
|
Beneficially
|
|
Name of Beneficial Owner(1)
|
|
Owned
|
|
|
Owned
|
|
|
Harold Hamm(2)
|
|
|
8,540,950
|
|
|
|
39.5
|
%
|
Continental Gas Holdings, Inc.(2)(3)
|
|
|
8,481,350
|
|
|
|
39.3
|
%
|
Harold Hamm DST Trust(2)(4)
|
|
|
2,755,694
|
|
|
|
12.8
|
%
|
Harold Hamm HJ Trust(2)(4)
|
|
|
1,841,408
|
|
|
|
8.5
|
%
|
Joseph L. Griffin
|
|
|
|
|
|
|
*
|
|
Matthew S. Harrison
|
|
|
|
|
|
|
*
|
|
Kent C. Christopherson
|
|
|
|
|
|
|
*
|
|
Michael L. Greenwood(5)
|
|
|
4,000
|
|
|
|
*
|
|
Edward D. Doherty(5)
|
|
|
4,500
|
|
|
|
*
|
|
Rayford T. Reid(5)
|
|
|
29,000
|
|
|
|
*
|
|
Dr. Cheryl L. Evans(5)
|
|
|
4,500
|
|
|
|
*
|
|
Dr. Bobby B. Lyle(5)
|
|
|
63,904
|
|
|
|
*
|
|
Swank Capital, LLC(6)
|
|
|
1,673,577
|
|
|
|
7.7
|
%
|
All directors and executive officers as a group
|
|
|
8,646,854
|
|
|
|
40.0
|
%
|
|
|
|
*
|
|
Less than 1%.
|
|
(1)
|
|
The address of each person listed above is 205 West Maple,
Suite 1100, Enid, Oklahoma 73701, except for (a) the
Harold Hamm DST Trust and the Harold Hamm HJ Trust, which
Mr. Bert H. Mackie is the trustee for both trusts and his
address is 302 N. Independence, Enid, Oklahoma 73701
and (b) Swank Capital, whose address is 3300 Oak Lawn
Avenue, Suite 650, Dallas, TX 75219.
|
|
(2)
|
|
Harold Hamm, the Harold Hamm DST Trust and the Harold Hamm HJ
Trust have a 90.7%, 5.6% and a 3.7% ownership interest,
respectively, in Continental Gas Holdings, Inc., which
beneficially owns 8,481,350 common units. Thus, if the
beneficial ownership of Harold Hamm, the Harold Hamm DST Trust
and the Harold Hamm HJ Trust in the common units were shown in
proportion to their respective ownership interest in Continental
Gas Holdings, Inc., the common units beneficially owned in the
above table would be 7,752,184 for Harold Hamm, 3,232,346 for
the Harold Hamm DST Trust and 2,153,522 for the Harold Hamm HJ
Trust, respectively.
|
|
(3)
|
|
As the controlling equity holder in Continental Gas Holdings,
Inc., Harold Hamm is deemed to have sole voting and dispositive
power of the 8,481,350 common units held by Continental Gas
Holdings, Inc.
|
|
(4)
|
|
As the trustee of both the Harold Hamm DST Trust and the Harold
Hamm HJ Trust, Bert H. Mackie is deemed to have sole voting and
dispositive power of the common units held by each trust.
|
|
(5)
|
|
1,000, 750 and 1,000 of the indicated common units are
restricted common units that vest on the anniversary of each
grant date over periods of two, three and four years,
respectively.
|
|
(6)
|
|
Represents holdings as of March 31, 2009 as reported on
Form 13F filed on May 15, 2009. As the principal of
Swank Capital, LLC and Swank Energy Income Advisors, LP,
Mr. Jerry V. Swank may direct the voting or disposition of
the common units held by Swank Capital, LLC.
|
206
CERTAIN
PURCHASES AND SALES OF HILAND COMPANIES COMMON UNITS
Hiland
Partners
Except as set forth below, there have been no transactions in
Hiland Partners common units during the past 60 days by
Hiland Partners, Hiland Holdings or the Hamm Continuing
Investors, HLND Merger Sub or HPGP Merger Sub or their
directors, executive officers or controlling persons or by any
pension, profit-sharing or similar plan of Hiland Partners or
Hiland Holdings or the Hamm Continuing Investors.
|
|
|
|
|
|
|
|
|
|
|
|
|
Reporting Person
|
|
Transaction Type
|
|
Date
|
|
Number of Units
|
|
Price per Unit
|
|
Kent C. Christopherson
|
|
Conversion of phantom units
|
|
8/7/2009
|
|
|
1,494
|
|
|
|
$7.40
|
|
Joseph L. Griffin
|
|
Conversion of phantom units
|
|
6/19/2009
|
|
|
2,500
|
|
|
|
$7.33
|
|
There have been no purchases of Hiland Partners common units
during the past two years effected by any of Hiland Partners,
Hiland Holdings or the Hamm Continuing Investors, HLND Merger
Sub or HPGP Merger Sub.
Hiland
Holdings
Except as set forth below, there have been no transactions in
Hiland Holdings common units during the past 60 days by
Hiland Holdings, Hiland Partners or the Hamm Continuing
Investors, HLND Merger Sub or HPGP Merger Sub, or their
directors, executive officers or controlling persons or by any
pension, profit-sharing or similar plan of Hiland Holdings or
Hiland Partners or the Hamm Continuing Investors.
|
|
|
|
|
|
|
|
|
Reporting Person
|
|
Transaction Type
|
|
Date
|
|
Number of Units
|
|
Price per Units
|
|
The following table shows purchases of Hiland Holdings common
units during the past two years effected by any of Hiland
Holdings, Hiland Partners or the Hamm Continuing Investors, HLND
Merger Sub or HPGP Merger Sub, showing the number of units of
Hiland Holdings common units purchased by each, the range of
prices paid for those units and the average price paid per
quarter.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended 6/30/2007
|
Name of Filer
|
|
Amount of Units Purchased
|
|
Range of Prices Paid
|
|
Average Purchase Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended 9/30/2007
|
Name of Filer
|
|
Amount of Units Purchased
|
|
Range of Prices Paid
|
|
Average Purchase Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended 12/31/2007
|
Name of Filer
|
|
Amount of Units Purchased
|
|
Range of Prices Paid
|
|
Average Purchase Price
|
|
Harold Hamm
|
|
|
40,300
|
|
|
|
$23.60 - $24.41
|
|
|
|
$24.18
|
|
Harold Hamm DST Trust
|
|
|
6,000
|
|
|
|
$24.23 - $24.29
|
|
|
|
$24.27
|
|
Harold Hamm HJ Trust
|
|
|
4,000
|
|
|
|
$24.23 - $24.29
|
|
|
|
$24.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended 3/31/2008
|
Name of Filer
|
|
Amount of Units Purchased
|
|
Range of Prices Paid
|
|
Average Purchase Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended 6/30/2008
|
Name of Filer
|
|
Amount of Units Purchased
|
|
Range of Prices Paid
|
|
Average Purchase Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
207
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended 9/30/2008
|
Name of Filer
|
|
Amount of Units Purchased
|
|
Range of Prices Paid
|
|
Average Purchase Price
|
|
Harold Hamm
|
|
|
19,300
|
|
|
|
$21.95 - $22.50
|
|
|
|
$22.08
|
|
Harold Hamm DST Trust
|
|
|
5,000
|
|
|
|
$22.07 - $22.15
|
|
|
|
$22.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended 12/31/2008
|
Name of Filer
|
|
Amount of Units Purchased
|
|
Range of Prices Paid
|
|
Average Purchase Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended 3/31/2009
|
Name of Filer
|
|
Amount of Units Purchased
|
|
Range of Prices Paid
|
|
Average Purchase Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended 6/30/2009
|
Name of Filer
|
|
Amount of Units Purchased
|
|
Range of Prices Paid
|
|
Average Purchase Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended 6/30/2009 to 8/7/09
|
Name of Filer
|
|
Amount of Units Purchased
|
|
Range of Prices Paid
|
|
Average Purchase Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
208
WHERE YOU
CAN FIND MORE INFORMATION
Hiland Partners and Hiland Holdings file annual, quarterly and
special reports, proxy statements and other information with the
SEC. Copies of the annual report on Form 10-K of each
Hiland Company for the year ended December 31, 2008 and the
quarterly report on Form 10-K of each Hiland Company for
the quarter ended June 30, 2009 are attached as annexes G
through J to this joint proxy statement. These reports, proxy
statements and other information contain additional information
about the Hiland Companies. Each of the Hiland Companies will
make these materials available for inspection and copying by any
of its unitholders, or a representative of any unitholder who is
so designated in writing, at its executive offices during
regular business hours.
Because the mergers are each a going private
transaction, the HLND
Schedule 13E-3
Filing Persons have filed with the SEC a Transaction Statement
on
Schedule 13E-3
with respect to the proposed Hiland Partners merger and the HPGP
Schedule 13E-3
Filing Persons have filed with the SEC a Transaction Statement
on
Schedule 13E-3
with respect to the proposed Hiland Holdings merger. Each
Schedule 13E-3,
including any amendments and exhibits filed or incorporated by
reference as a part of it, is available for inspection as set
forth above. Each
Schedule 13E-3
will be amended to report promptly any material changes in the
information set forth in the most recent
Schedule 13E-3
filed with the SEC with respect to each merger and any such
information contained in a document filed with the SEC after the
date of this joint proxy statement will not automatically be
incorporated into either schedule 13E-3.
The Hiland Companies also makes available on their joint website
(
www.hilandpartners.com
) under Investor
Relations the annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and amendments to those reports filed by each of the Hiland
Companies.
The opinion of Barclays Capital and the presentations Barclays
Capital made to the Hiland Holdings Conflicts Committee will be
made available for inspection and copying at the principal
executive offices of Hiland Holdings during regular business
hours by any interested unitholder of Hiland Holdings or such
unitholders representative who has been so designated in
writing. The opinion of Jefferies & Company and the
presentation Jefferies & Company made to the Hiland
Partners Conflicts Committee will be made available for
inspection and copying at the principal executive offices of
Hiland Partners during regular business hours by any interested
unitholder of Hiland Partners or such unitholders
representative who has been so designated in writing. The
presentations of Wells Fargo Securities will be made available
for inspection and copying at the principal executive offices of
Hiland Partners and Hiland Holdings during regular business
hours by any interested unitholder of Hiland Partners or Hiland
Holdings, respectively, or such unitholders representative
who has been so designated in writing.
This joint proxy statement does not constitute an offer to sell,
or a solicitation of an offer to buy, any securities, or the
solicitation of a proxy, in any jurisdiction to or from any
person to whom it is not lawful to make any offer or
solicitation in that jurisdiction. The delivery of this joint
proxy statement should not create an implication that there has
been no change in the affairs of Hiland Partners or Hiland
Holdings since the date of this joint proxy statement or that
the information herein is correct as of any later date
regardless of the time of delivery of this joint proxy statement.
The provisions of the merger agreements are extensive and not
easily summarized. You should carefully read the Hiland Partners
merger agreement or the Hiland Holdings merger agreement in its
entirety because it, and not this joint proxy statement, is the
legal document that governs the merger of the Hiland Company in
which you own units. In addition, you should read Special
Factors Structure and Steps of the Mergers,
beginning on page 137.
The merger agreements contain representations and warranties by
each of the parties to such merger agreement. These
representations and warranties have been made solely for the
benefit of the other parties to such merger agreement and:
|
|
|
|
|
may be intended not as statements of fact, but rather as a way
of allocating the risk to one of the parties if those statements
prove to be inaccurate;
|
209
|
|
|
|
|
have been qualified by disclosures that were made to the other
party in connection with the negotiation of the merger, which
disclosures are not reflected in the associated merger agreement;
|
|
|
|
may apply standards of materiality in a way that is different
from what may be viewed as material to you or other
investors; and
|
|
|
|
were made only as of the date of the merger agreements or such
other date or dates as may be specified in the merger agreements
and are subject to more recent developments.
|
Accordingly, these representations and warranties may not
describe the actual state of affairs as of the date they were
made or at any other time.
You should rely only on the information contained in this
joint proxy statement to vote your common units at the
applicable special meeting. Neither Hiland Company has
authorized anyone to provide you with information that is
different from what is contained in this joint proxy statement.
This joint proxy statement is
dated ,
2009. You should not assume that the information contained in
this joint proxy statement is accurate as of any date other than
that date, or that the information contained in the Form 10-Ks
and Form 10-Qs attached as annexes to this joint proxy statement
is accurate as of any date other than the date of the document
attached hereto. Neither the mailing of the joint proxy
statement to unitholders nor the issuance of the applicable
merger consideration pursuant to the merger shall create any
implication to the contrary.
INDEPENDENT
REGISTERED PUBLIC ACCOUNTANTS
The consolidated financial statements and effectiveness of
internal control over financial reporting of Hiland Partners
included in its Annual Report on
Form 10-K
for the year ended December 31, 2008 attached as Annex G to
this joint proxy statement, have been audited by Grant Thornton,
LLP, independent registered public accountants, as stated in
their reports with respect thereto.
The consolidated financial statements and effectiveness of
internal control over financial reporting of Hiland Holdings
included in its Annual Report on
Form 10-K
for the year ended December 31, 2008 attached as Annex I to
this joint proxy statement, have been audited by Grant Thornton,
LLP, independent registered public accountants, as stated in
their reports with respect thereto.
210
Annex A
AGREEMENT
AND PLAN OF MERGER
among
HH GP HOLDING, LLC,
HLND MERGERCO, LLC,
HILAND PARTNERS GP, LLC
and
HILAND PARTNERS, LP
Executed June 1, 2009
TABLE OF
CONTENTS
|
|
|
|
|
|
|
|
|
|
|
Page
|
|
ARTICLE I THE MERGER
|
|
|
A-2
|
|
Section 1.1
|
|
The Merger
|
|
|
A-2
|
|
Section 1.2
|
|
Closing
|
|
|
A-2
|
|
Section 1.3
|
|
Effective Time
|
|
|
A-2
|
|
Section 1.4
|
|
Effects of the Merger
|
|
|
A-2
|
|
Section 1.5
|
|
Partnership Agreement of the Surviving Entity
|
|
|
A-2
|
|
Section 1.6
|
|
Admission of Additional Limited Partners
|
|
|
A-2
|
|
ARTICLE II CONVERSION OF PARTNERSHIP INTERESTS; EXCHANGE OF
CERTIFICATES
|
|
|
A-2
|
|
Section 2.1
|
|
Effect on Partnership Interests
|
|
|
A-2
|
|
Section 2.2
|
|
Exchange of Certificates
|
|
|
A-4
|
|
Section 2.3
|
|
Timing for Rollover Interests
|
|
|
A-5
|
|
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE HILAND
PARTIES
|
|
|
A-5
|
|
Section 3.1
|
|
Qualification, Organization, Subsidiaries, Etc.
|
|
|
A-5
|
|
Section 3.2
|
|
Capitalization
|
|
|
A-6
|
|
Section 3.3
|
|
Authority; No Violation; Consents and Approvals
|
|
|
A-7
|
|
Section 3.4
|
|
SEC Reports and Compliance
|
|
|
A-8
|
|
Section 3.5
|
|
No Undisclosed Liabilities
|
|
|
A-9
|
|
Section 3.6
|
|
Compliance with Law
|
|
|
A-9
|
|
Section 3.7
|
|
Environmental Laws and Regulations
|
|
|
A-9
|
|
Section 3.8
|
|
Employee Benefits
|
|
|
A-9
|
|
Section 3.9
|
|
Absence of Certain Changes or Events
|
|
|
A-9
|
|
Section 3.10
|
|
Investigations; Litigation
|
|
|
A-10
|
|
Section 3.11
|
|
Proxy Statement; Other Information
|
|
|
A-10
|
|
Section 3.12
|
|
Tax Matters
|
|
|
A-10
|
|
Section 3.13
|
|
Labor Matters
|
|
|
A-10
|
|
Section 3.14
|
|
Title to Properties and Rights-of-Way
|
|
|
A-11
|
|
Section 3.15
|
|
Opinion of Financial Advisor
|
|
|
A-11
|
|
Section 3.16
|
|
Required Approvals
|
|
|
A-11
|
|
Section 3.17
|
|
Material Contracts
|
|
|
A-11
|
|
Section 3.18
|
|
State Takeover Laws
|
|
|
A-12
|
|
Section 3.19
|
|
Finders or Brokers
|
|
|
A-12
|
|
Section 3.20
|
|
No Other Representations or Warranties
|
|
|
A-12
|
|
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE PARENT
PARTIES
|
|
|
A-12
|
|
Section 4.1
|
|
Qualification; Organization
|
|
|
A-12
|
|
Section 4.2
|
|
Authority; No Violation; Consents and Approvals
|
|
|
A-13
|
|
Section 4.3
|
|
Proxy Statement; Other Information
|
|
|
A-13
|
|
Section 4.4
|
|
Funding
|
|
|
A-14
|
|
Section 4.5
|
|
Ownership and Operations of Merger Sub
|
|
|
A-14
|
|
Section 4.6
|
|
Finders or Brokers
|
|
|
A-14
|
|
Section 4.7
|
|
Access to Information; No Other Representations or
Warranties; Disclaimer
|
|
|
A-14
|
|
A-i
|
|
|
|
|
|
|
|
|
|
|
Page
|
|
ARTICLE V COVENANTS AND AGREEMENTS
|
|
|
A-15
|
|
Section 5.1
|
|
Conduct of Business by the Partnership and Parent
|
|
|
A-15
|
|
Section 5.2
|
|
Investigation
|
|
|
A-17
|
|
Section 5.3
|
|
No Solicitation
|
|
|
A-17
|
|
Section 5.4
|
|
Filings; Other Actions
|
|
|
A-19
|
|
Section 5.5
|
|
Equity Awards
|
|
|
A-20
|
|
Section 5.6
|
|
Efforts
|
|
|
A-20
|
|
Section 5.7
|
|
Takeover Statute
|
|
|
A-21
|
|
Section 5.8
|
|
Public Announcements
|
|
|
A-21
|
|
Section 5.9
|
|
Indemnification and Insurance
|
|
|
A-22
|
|
Section 5.10
|
|
Unitholder Litigation
|
|
|
A-22
|
|
Section 5.11
|
|
Notification of Certain Matters
|
|
|
A-22
|
|
Section 5.12
|
|
Rule 16b-3
|
|
|
A-23
|
|
ARTICLE VI CONDITIONS TO THE MERGER
|
|
|
A-23
|
|
Section 6.1
|
|
Conditions to Each Partys Obligation to Effect the
Merger
|
|
|
A-23
|
|
Section 6.2
|
|
Conditions to Obligation of the Hiland Parties to Effect
the Merger
|
|
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A-23
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Section 6.3
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Conditions to Obligation of the Parent Parties to Effect
the Merger
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A-24
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Section 6.4
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Frustration of Conditions
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A-24
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ARTICLE VII TERMINATION
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A-25
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Section 7.1
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Termination or Abandonment
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A-25
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Section 7.2
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Reimbursement of Certain Expenses
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A-26
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ARTICLE VIII MISCELLANEOUS
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A-26
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Section 8.1
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No Survival of Representations and Warranties
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A-26
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Section 8.2
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Holdings Merger
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A-26
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Section 8.3
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Expenses
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A-26
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Section 8.4
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Counterparts; Effectiveness
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A-27
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Section 8.5
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Governing Law
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A-27
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Section 8.6
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Specific Performance; Jurisdiction; Enforcement
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A-27
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Section 8.7
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WAIVER OF JURY TRIAL
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A-27
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Section 8.8
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Notices
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A-27
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Section 8.9
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Assignment; Binding Effect
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A-28
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Section 8.10
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Severability
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A-29
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Section 8.11
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Entire Agreement; No Third-Party Beneficiaries
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A-29
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Section 8.12
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Amendments; Waivers
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A-29
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Section 8.13
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Headings; Interpretation
|
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A-29
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Section 8.14
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No Recourse
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A-30
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Section 8.15
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Certain Definitions
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A-30
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Exhibit A Form of Confidentiality Agreement
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A-ii
AGREEMENT
AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER, executed this 1st day of
June, 2009 (this
Agreement
), is entered into
among HH GP Holding, LLC, an Oklahoma limited liability company
(
Parent
), HLND MergerCo, LLC, a Delaware
limited liability company and a subsidiary of Parent
(
Merger Sub
and, together with Parent, the
Parent Parties
), Hiland Partners GP, LLC, a
Delaware limited liability company and the general partner of
the Partnership (
Partnership GP
), and Hiland
Partners, LP, a Delaware limited partnership (the
Partnership
and, together with Partnership
GP, the
Hiland Parties
).
W I T N E
S S E T
H
:
WHEREAS, the parties intend that Merger Sub be merged with and
into the Partnership, with the Partnership surviving that merger
on the terms and subject to the conditions set forth in this
Agreement (the
Merger
);
WHEREAS, it is contemplated that, on the Closing Date (as
defined herein), HPGP MergerCo, LLC, a Delaware limited
liability company and a subsidiary of Parent (
HPGP
Merger Sub
), be merged with and into Hiland Holdings
GP, LP, a Delaware limited partnership
(
Holdings
), with Holdings surviving that
merger (the
Holdings Merger
) on the terms and
subject to the conditions set forth in the Agreement and Plan of
Merger, dated as of the date hereof (the
Holdings
Agreement
), among Parent, HPGP Merger Sub, Hiland
Partners GP Holdings, LLC, a Delaware limited liability company
and the general partner of Holdings (
Holdings
GP
), and Holdings;
WHEREAS, the board of directors of Partnership GP (the
Board of Directors
), acting upon the
unanimous recommendation of its Conflicts Committee, has
(i) determined that this Agreement and the transactions
contemplated hereby are advisable, fair to and in the best
interests of the Partnership and the holders of Common Units
(other than Partnership GP and its Affiliates (including
Holdings)), (ii) approved the execution, delivery and
performance of this Agreement by the Hiland Parties and the
consummation of the transactions contemplated hereby, including
the Merger, and (iii) resolved to recommend approval of
this Agreement and the Merger by the holders of Common Units
(excluding Common Units owned by Partnership GP and its
Affiliates (including Holdings)) of the Partnership;
WHEREAS, Holdings GP and Holdings are parties to a Support
Agreement, dated the date hereof (the
Support
Agreement
), with Parent and the Hiland Parties
pursuant to which Holdings GP and Holdings have, among other
things: (i) agreed that the Partnership Interests of which
Holdings is the record and beneficial owner will not be
converted into the right to receive the Merger Consideration and
will remain outstanding as Partnership Interests of the
Surviving Entity (as defined herein) in the Merger, and
(ii) agreed to vote the Common Units and Subordinated Units
of which Holdings is the record and beneficial owner in favor of
the approval of this Agreement and the Merger;
WHEREAS, the board of directors of each of Parent and Merger Sub
and the sole member of Merger Sub have unanimously approved this
Agreement and declared it advisable for Parent and Merger Sub,
respectively, to enter into this Agreement; and
WHEREAS, the parties desire to make certain representations,
warranties, covenants and agreements in connection with the
Merger and the transactions contemplated by this Agreement and
also to prescribe certain conditions to the Merger as specified
herein.
A-1
NOW, THEREFORE, in consideration of the foregoing and the
representations, warranties, covenants and agreements contained
herein, and intending to be legally bound hereby, Parent, Merger
Sub, Partnership GP and the Partnership hereby agree as follows:
ARTICLE I
The Merger
Section 1.1
The
Merger
.
At the Effective Time, upon the terms
and subject to the conditions set forth in this Agreement and in
accordance with the applicable provisions of the Delaware
Revised Uniform Limited Partnership Act
(
DRULPA
) and the Delaware Limited Liability
Company Act (
DLLCA
), Merger Sub shall be
merged with and into the Partnership, whereupon the separate
existence of Merger Sub shall cease, and the Partnership shall
continue as the surviving entity in the Merger (the
Surviving Entity
).
Section 1.2
Closing
.
The
closing of the Merger (the
Closing
) shall
take place at the offices of Baker Botts L.L.P. at 910 Louisiana
Street, Houston, Texas at 10:00 a.m., local time, on a date
to be specified by the parties (the
Closing
Date
) which shall be no later than the third Business
Day after the satisfaction or waiver (to the extent permitted by
applicable Law) of the conditions set forth in Article VI
(other than those conditions that by their nature are to be
satisfied at the Closing, but subject to the satisfaction or
waiver of such conditions), or at such other place, date and
time as the Partnership and Parent may agree in writing.
Section 1.3
Effective
Time
.
At the Closing, the Partnership shall
cause the Merger to be consummated by executing and filing a
certificate of merger (the
Certificate of
Merger
) with the Secretary of State of the State of
Delaware in accordance with
Section 17-211
of the DRULPA and
Section 18-209
of the DLLCA. The Merger shall become effective at such time as
the Certificate of Merger is duly filed with the Secretary of
State of the State of Delaware, or at such later date or time as
may be agreed by Parent and the Partnership in writing and
specified in the Certificate of Merger in accordance with the
DRULPA and the DLLCA (such time as the Merger becomes effective
is referred to herein as the
Effective Time
).
Section 1.4
Effects
of the Merger
.
The Merger shall have the
effects set forth in this Agreement, the Partnership Agreement
and the applicable provisions of the DRULPA and DLLCA.
Section 1.5
Partnership
Agreement of the Surviving Entity
.
The
Partnership Agreement, as in effect immediately prior to the
Effective Time, shall remain the partnership agreement of the
Surviving Entity and shall continue in effect until thereafter
changed or amended in accordance with the provisions thereof and
applicable Law.
Section 1.6
Admission
of Additional Limited Partners
.
Upon the
conversion of the limited liability company interests in Merger
Sub (
Merger Sub LLC Interests
), which are
denominated in units (
Merger Sub LLC Units
),
into Common Units pursuant to Section 2.1(c) and the
recording of the name of the holder thereof as a limited partner
of the Partnership on the books and records of the Partnership,
such Person shall automatically and effective as of the
Effective Time be admitted to the Partnership as an additional
Limited Partner and be bound by the Partnership Agreement as
such.
ARTICLE II
Conversion
of Partnership Interests; Exchange of Certificates
Section 2.1
Effect
on Partnership Interests
.
At the Effective
Time, by virtue of the Merger and without any action on the part
of the Partnership, Merger Sub or the holders of any securities
of the Partnership or Merger Sub:
(a)
Conversion of Common
Units
.
Subject to Sections 2.1(b) and
2.1(d), each Common Unit issued and outstanding immediately
prior to the Effective Time, other than any Common Units
included among the Rollover Interests, shall thereupon be
converted automatically into and shall thereafter represent the
right to receive $7.75 in cash without any interest thereon (the
Merger Consideration
). Immediately prior to
the Effective Time, each award of Restricted Units (as defined
in the Hiland Partners, LP Long-
A-2
Term Incentive Plan (the
Hiland LTIP
)) issued
and outstanding to any nonemployee member of the Board of
Directors shall become fully vested as Common Units and shall
thereupon be converted automatically into and shall thereafter
represent the right to receive the Merger Consideration. All
Common Units that have been converted into the right to receive
the Merger Consideration as provided in this Section 2.1
shall be automatically cancelled and shall cease to exist, and
the holders of such Common Units immediately prior to the
Effective Time (whether certificated or non-certificated and
represented in book-entry form) shall cease to have any rights
with respect to such Common Units other than the right to
receive the Merger Consideration.
(b)
Rollover of Certain Partnership
Interests
.
The following Partnership
Interests shall be treated in the Merger as follows:
(i) each of the 2,321,471 Common Units owned by Holdings
shall be unchanged and remain outstanding as Common Units of the
Surviving Entity, and no consideration shall be delivered in
respect thereof;
(ii) each of the 3,060,000 Subordinated Units owned by
Holdings shall be unchanged and remain outstanding as
Subordinated Units of the Surviving Entity, and no consideration
shall be delivered in respect thereof;
(iii) the General Partner Interest, which is represented by
190,814 General Partner Units and is owned by Partnership GP,
shall be unchanged and remain outstanding as the General Partner
Interest of the Surviving Entity, and no consideration shall be
delivered in respect thereof; and
(iv) the Incentive Distribution Rights, which are owned by
Partnership GP, shall be unchanged and remain outstanding as
Incentive Distribution Rights of the Surviving Entity, and no
consideration shall be delivered in respect thereof.
The Partnership Interests described in this Section 2.1(b)
are referred to in this Agreement as
Rollover
Interests
, and the record and beneficial owners of
such Rollover Interests are referred to in this Agreement as the
Rollover Parties
.
(c)
Conversion of Merger Sub Limited Liability
Company Interests
.
At the Effective Time, by
virtue of the Merger and without any action on the part of the
holder thereof, each Merger Sub LLC Unit issued and outstanding
immediately prior to the Effective Time shall be converted into
and become one Common Unit of the Surviving Entity, which Common
Units shall be duly authorized and validly issued in accordance
with applicable Laws and the Partnership Agreement and shall be
fully paid (to the extent required by the Partnership Agreement)
and nonassessable (except to the extent such nonassessability
may be affected by
Sections 17-607
and
17-804
of DRULPA). Immediately after the Effective Time, such Common
Units and the Rollover Interests will constitute the only
outstanding Partnership Interests of the Surviving Entity. From
and after the Effective Time, any certificates or other evidence
representing the Merger Sub LLC Units shall be deemed for all
purposes to represent the number of Common Units of the
Surviving Entity into which such Merger Sub LLC Units were
converted in accordance with this Section 2.1(c).
Partnership GP hereby agrees and acknowledges that conversion of
the Merger Sub LLC Units to Common Units of the Surviving Entity
as provided herein shall constitute a duly authorized, accepted,
executed and countersigned delivery of such Common Units,
without any further action by Partnership GP or any other person.
(d)
Adjustments
.
If between the
date of this Agreement and the Effective Time, the outstanding
Common Units, including securities convertible or exchangeable
into or exercisable for Common Units, shall be changed into a
different number of units or other securities by reason of any
split, combination, merger, consolidation, reorganization,
reclassification, recapitalization or other similar transaction,
or any distribution payable in Partnership Interests shall be
declared thereon with a record date within such period, the
Merger Consideration shall be appropriately adjusted to provide
the holders of Common Units the same economic effect as
contemplated by this Agreement prior to such event;
provided
that nothing herein shall be construed to permit
the Partnership to take any action with respect to its
securities that is expressly prohibited by the terms of this
Agreement.
A-3
Section 2.2
Exchange
of Certificates
.
(a)
Paying Agent
.
Prior to the
mailing of the Proxy Statement (as defined herein), Parent shall
appoint a U.S. bank or trust company agreeable to the
Conflicts Committee to act as paying agent (the
Paying
Agent
) for the holders of Common Units (other than the
Rollover Parties) in connection with the Merger and to receive
and pay out the Merger Consideration to which such holders shall
become entitled pursuant to Section 2.1. At or prior to the
Effective Time, the Parent Parties shall deposit, or shall cause
to be deposited, in trust with the Paying Agent, for the benefit
of holders of Common Units (other than the Rollover Parties),
cash in an amount sufficient to pay the aggregate Merger
Consideration in exchange for all Common Units outstanding
immediately prior to the Effective Time (other than Common Units
included among the Rollover Interests), payable upon due
surrender of the certificates that immediately prior to the
Effective Time represented Common Units
(
Certificates
) (or effective affidavits of
loss in lieu thereof) or non-certificated Common Units
represented in book-entry form (
Book-Entry Common
Units
) pursuant to the provisions of this
Article II (such cash hereinafter referred to as the
Exchange Fund
).
(b)
Payment Procedures
.
(i) As soon as reasonably practicable after the Effective
Time and in any event not later than the fifth Business Day
following the Effective Time, Parent shall cause the Paying
Agent to mail to each holder of record of Common Units whose
Common Units were converted into the Merger Consideration
pursuant to Section 2.1(a), (A) a letter of
transmittal (the
Letter of Transmittal
)
(which shall specify that delivery shall be effected, and risk
of loss and title to the Certificates shall pass, only upon
proper delivery of the Certificates (or effective affidavits of
loss in lieu thereof) to the Paying Agent or, in the case of
Book-Entry Common Units, upon adherence to the procedures set
forth in the Letter of Transmittal, and shall be in such
customary form and have such other provisions as Parent and the
Hiland Parties shall reasonably determine) and
(B) instructions for use of the Letter of Transmittal in
effecting the surrender of the Certificates (or effective
affidavits of loss in lieu thereof) or Book-Entry Common Units
in exchange for the Merger Consideration.
(ii) Upon surrender of a Certificate (or an effective
affidavit of loss in lieu thereof) or Book-Entry Common Units to
the Paying Agent together with such Letter of Transmittal, duly
completed and validly executed in accordance with the
instructions thereto, and such other documents as may
customarily be required by the Paying Agent, the holder of such
Certificate or Book-Entry Common Units shall be entitled to
receive in exchange therefor a check in an amount equal to the
product of (x) the number of Common Units represented by
such holders properly surrendered Certificates (or
effective affidavits of loss in lieu thereof) or Book-Entry
Common Units multiplied by (y) the Merger Consideration. No
interest shall be paid or accrued for the benefit of holders of
the Certificates or Book-Entry Common Units on the Merger
Consideration payable in respect of the Certificates or
Book-Entry Common Units. In the event of a transfer of ownership
of Common Units that is not registered in the unit transfer
register of the Partnership, a check for any cash to be paid
upon due surrender of the Certificate may be paid to such a
transferee if the Certificate formerly representing such Common
Units is presented to the Paying Agent, accompanied by all
documents required to evidence and effect such transfer and to
evidence that any applicable unit transfer or other Taxes have
been paid or are not applicable.
(iii) Parent, the Surviving Entity and the Paying Agent
shall be entitled to deduct and withhold from the consideration
otherwise payable under this Agreement to any holder of Common
Units such amounts as are required to be withheld or deducted
under the Internal Revenue Code of 1986, as amended (the
Code
), or any provision of federal, state,
local or foreign Tax Law with respect to the making of such
payment. To the extent that amounts are so withheld or deducted
and paid over to the applicable Governmental Entity, such
withheld or deducted amounts shall be treated for all purposes
of this Agreement as having been paid to the holder of Common
Units in respect of which such deduction and withholding were
made.
(c)
Closing of Transfer
Register
.
At the Effective Time, the unit
transfer register of the Partnership shall be closed, and there
shall be no further registration of transfers on the unit
transfer register of the Surviving Entity of Common Units (other
than the Rollover Interests) that were outstanding immediately
prior to the
A-4
Effective Time. If, after the Effective Time, Certificates or
Book-Entry Common Units provided for in Section 2.1(a) are
presented to the Surviving Entity or Parent for transfer, they
shall be cancelled and exchanged for a check in the proper
amount pursuant to and subject to the requirements of this
Article II.
(d)
Termination of Exchange
Fund
.
Any portion of the Exchange Fund
(including the proceeds of any investments thereof) that remains
undistributed to the former holders of Common Units for twelve
months after the Effective Time shall be delivered to the
Surviving Entity upon demand, and any former holders of Common
Units who have not surrendered their Certificates or Book-Entry
Common Units provided for in Section 2.1(a) in accordance
with this Section 2.2 shall thereafter look only to the
Surviving Entity for payment of their claim for the Merger
Consideration, without any interest thereon, upon due surrender
of their Certificates or Book-Entry Common Units.
(e)
No Liability
.
Notwithstanding
anything herein to the contrary, none of Parent, Merger Sub, the
Partnership, Partnership GP, the Surviving Entity, the Paying
Agent or any other person shall be liable to any former holder
of Common Units for any amount properly delivered to a public
official pursuant to any applicable abandoned property, escheat
or similar Law.
(f)
Investment of Exchange
Fund
.
The Paying Agent shall invest the
Exchange Fund as reasonably directed by Parent;
provided
,
however
, that any investment of such Exchange Fund shall
be limited to direct short-term obligations of, or short-term
obligations fully guaranteed as to principal and interest by,
the U.S. government and that no such investment or loss
thereon shall affect the amounts payable to holders of Common
Units that converted into the right to receive the Merger
Consideration pursuant to Section 2.1. Any interest and
other income resulting from such investments shall be paid to
the Surviving Entity pursuant to Section 2.2(d).
(g)
Lost Certificates
.
In the
event that any Certificate representing Common Units provided
for in Section 2.1(a) shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the
person claiming such Certificate to be lost, stolen or destroyed
and, if required by Parent or the Paying Agent, the posting by
such person of a bond in customary amount as indemnity against
any claim that may be made against it with respect to such
Certificate, the Paying Agent will issue in exchange for such
lost, stolen or destroyed Certificate a check in the amount of
the number of Common Units represented by such lost, stolen or
destroyed Certificate multiplied by the Merger Consideration.
Section 2.3
Timing
for Rollover Interests
.
For the avoidance of
doubt, the parties acknowledge and agree that the Rollover
Commitments shall be deemed to become effective and irrevocable
immediately prior to the Effective Time and prior to any other
event described above in this Article II.
ARTICLE III
Representations
and Warranties of the Hiland Parties
Except as disclosed (a) in (i) the Hiland SEC
Documents (as defined herein) or (ii) the Holdings SEC
Documents (as defined in the Holdings Agreement), in each case
filed on or after December 31, 2008 and prior to the date
of this Agreement (excluding any disclosures included in any
risk factor section of such documents and any other disclosures
in such documents to the extent that they are cautionary,
predictive or forward-looking in nature) or (b) in a
section of the disclosure schedule delivered concurrently
herewith by the Hiland Parties to Parent (the
Hiland
Disclosure Schedule
) corresponding to the applicable
sections of this Article III to which such disclosure
applies (
provided
,
however
, that any information
set forth in one section of such Hiland Disclosure Schedule also
shall be deemed to apply to each other section of this Agreement
to which its relevance is reasonably apparent), the Hiland
Parties hereby represent and warrant, jointly and severally, to
the Parent Parties as follows:
Section 3.1
Qualification,
Organization, Subsidiaries, Etc.
(a) Section 3.1(a) of the Hiland Disclosure Schedule
sets forth, as of the date hereof, a true and complete list of
the Hiland Parties and each direct or indirect Subsidiary and
Partially Owned Entity of the Partnership (collectively, the
Hiland Group Entities
), together with
(i) the nature of the legal organization of such
A-5
person, (ii) the jurisdiction of organization or formation
of such person, (iii) the name of each Hiland Group Entity
that owns beneficially or of record any equity or similar
interest in such person, and (iv) the percentage interest
owned by each such Hiland Group Entity in such other persons.
(b) Each Hiland Group Entity is a legal entity validly
existing and in good standing under the Laws of its respective
jurisdiction of formation. Each Hiland Group Entity has all
requisite limited partnership, limited liability company or
corporate, as the case may be, power and authority to own, lease
and operate its properties and assets and to carry on its
business as presently conducted in all material respects.
(c) Each Hiland Group Entity is duly registered or
qualified to do business and is in good standing as a foreign
limited partnership, limited liability company or corporation,
as the case may be, in each jurisdiction where the ownership,
leasing or operation of its assets or properties or the conduct
of its business requires such registration or qualification,
except where the failure to be so registered, qualified or in
good standing would not, individually or in the aggregate, have
a Hiland Material Adverse Effect. The organizational or
governing documents of the Hiland Group Entities, as previously
made available to Parent, are in full force and effect. None of
the Hiland Group Entities is in violation of its organizational
or governing documents.
Section 3.2
Capitalization
.
(a) Partnership GP is the sole general partner of the
Partnership. Partnership GP is the record and beneficial owner
of the 2% General Partner Interest and all of the Incentive
Distribution Rights in the Partnership, and such General Partner
Interest and Incentive Distribution Rights have been duly
authorized and validly issued in accordance with applicable Laws
and the Partnership Agreement and such Incentive Distribution
Rights are fully paid (to the extent required by the Partnership
Agreement) and nonassessable (to the extent such
nonassessability may be affected by
Sections 17-607
and
17-804
of DRULPA). Partnership GP owns all of the General Partner
Interest and all of the Incentive Distribution Rights free and
clear of any Encumbrances except pursuant to the organizational
or governing documents of any of the Hiland Group Entities.
Holdings is the record owner of 99.999% of the limited liability
company interests in Partnership GP. Hiland Partners GP, Inc. is
the record owner of 0.001% of the limited liability company
interests of Partnership GP. Such limited liability company
interests in Partnership GP have been duly authorized and
validly issued in accordance with applicable Laws and the
limited liability company agreement of Partnership GP and are
fully paid (to the extent required by the limited liability
company agreement of Partnership GP) and nonassessable (except
to the extent such nonassessability may be affected by
Sections 18-607
and
18-804
of DLLCA).
(b) As of the date of this Agreement (the
Execution Date
), the Partnership has no
Partnership Interests issued and outstanding other than the
following:
(i) 6,289,880 Common Units, of which 2,321,471 are owned of
record by Holdings;
(ii) 3,060,000 Subordinated Units, all of which are owned
of record by Holdings;
(iii) 190,814 General Partner Units, comprising all of the
General Partner Interest, all of which are owned beneficially
and of record by Partnership GP; and
(iv) the Incentive Distribution Rights, all of which are
owned beneficially and of record by Partnership GP.
Each of such limited partner interests described in clauses (i),
(ii) and (iv) above has been duly authorized and
validly issued in accordance with applicable Laws and the
Partnership Agreement, and is fully paid (to the extent required
under the Partnership Agreement) and non-assessable (except to
the extent such nonassessability may be affected by
Sections 17-607
and
17-804
of DRULPA). Such limited partner interests were not issued in
violation of any preemptive or similar rights or any other
agreement or understanding binding on the Partnership. As of the
date of this Agreement, except for outstanding awards for the
issuance of 15,750 Restricted Units pursuant to the Hiland LTIP,
47,169 phantom units that may be settled in Common Units, and
33,336 options for the purchase of Common Units and except
pursuant to the organizational or governing documents of any of
the Hiland Group Entities, (A) there are no outstanding
options, warrants, subscriptions, puts, calls or other rights,
agreements, arrangements or commitments (preemptive, contingent
or otherwise) obligating any of the Hiland Group Entities to
offer, issue, sell, redeem, repurchase, otherwise acquire or
A-6
transfer, pledge or encumber any equity interest in any of the
Hiland Group Entities; (B) there are no outstanding
securities or obligations of any kind of any of the Hiland Group
Entities that are convertible into or exercisable or
exchangeable for any equity interest in any of the Hiland Group
Entities or any other person, and none of the Hiland Group
Entities has any obligation of any kind to issue any additional
securities or to pay for or repurchase any securities;
(C) there are not outstanding any equity appreciation
rights, phantom equity or similar rights, agreements,
arrangements or commitments based on the value of the equity,
book value, income or any other attribute of any of the Hiland
Group Entities; (D) there are no outstanding bonds,
debentures or other evidences of indebtedness of any of the
Hiland Group Entities having the right to vote (or that are
exchangeable for or convertible or exercisable into securities
having the right to vote) with the holders of Common Units on
any matter; and (E) except as described in the
organizational or governing documents of the Hiland Parties or
the Support Agreement, there are no Unitholder agreements,
proxies, voting trusts, rights to require registration under
securities Laws or other arrangements or commitments to which
any of the Hiland Group Entities is a party or to the knowledge
of the Hiland Group Entities by which any of their securities
are bound with respect to the voting, disposition or
registration of any outstanding securities of any of the Hiland
Group Entities.
(c) All of the outstanding limited liability company,
partnership or other equity interests of each Subsidiary of the
Partnership (i) have been duly authorized and validly
issued in accordance with applicable Laws and its governing
documents and are fully paid (to the extent required by its
governing documents) and nonassessable (except to the extent
such nonassessability may be affected by applicable Laws,
including
Sections 17-607
and
17-804
of DRULPA) and (ii) are owned 100% directly or indirectly
by the Partnership, free and clear of any Encumbrance except
pursuant to the organizational or governing documents of any of
the Hiland Group Entities and other than Encumbrances securing
the obligations of Hiland Operating, LLC under the Hiland
Operating Credit Agreement.
(d) All of the outstanding equity interests of each
Partially Owned Entity of the Partnership (i) have been
duly authorized and validly issued in accordance with applicable
Laws and its governing documents and are fully paid (to the
extent required by its organizational or governing documents)
and nonassessable (except to the extent such nonassessability
may be affected by applicable Laws), and (ii) are owned
directly or indirectly by the Partnership in the respective
amounts shown on Section 3.1(a) of the Hiland Disclosure
Schedule, free and clear of any Encumbrance except pursuant to
the organizational or governing documents of any of the Hiland
Group Entities.
(e) Except with respect to the ownership of any equity or
long-term debt securities between or among the Hiland Group
Entities, none of the Hiland Group Entities owns or will own at
the Closing Date, directly or indirectly, any equity or
long-term debt securities of any corporation, partnership,
limited liability company, joint venture, association or other
entity.
(f) Except as provided in the Partnership Agreement, no
holder of Partnership Interests in any of the Hiland Parties has
any right to have such Partnership Interests registered under
the Securities Act of 1933, as amended (the
Securities
Act
), by the Partnership.
Section 3.3
Authority;
No Violation; Consents and Approvals
.
(a) Each of the Hiland Parties has all requisite limited
liability company or limited partnership power and authority to
enter into this Agreement, to carry out its obligations
hereunder and to consummate the transactions contemplated
hereby. The execution, delivery and performance by each Hiland
Party of this Agreement and the consummation of the transactions
contemplated hereby have been duly authorized by all requisite
limited liability company or limited partnership action on the
part of such Hiland Party, except for (i) Unitholder
Approval of this Agreement and the Merger and (ii) the
filing of the Certificate of Merger with the Secretary of State
of the State of Delaware; and no other vote or approval by any
holders of Partnership Interests or limited liability company
interests in Partnership GP or other corporate, limited
liability company, partnership or other organizational votes,
approvals or proceedings in respect of the Hiland Parties are
necessary to consummate the transactions contemplated by this
Agreement.
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(b) This Agreement has been duly executed and delivered by
each Hiland Party and, assuming the due authorization, execution
and delivery hereof by the Parent Parties, constitutes a legal,
valid and binding agreement of such Hiland Party, enforceable
against such Hiland Party in accordance with its terms (except
insofar as such enforceability may be limited by bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium and
similar laws relating to or affecting creditors rights
generally and by general principles of equity (regardless of
whether such enforceability is considered in a proceeding in
equity or at law)).
(c) Except for matters expressly contemplated by this
Agreement and matters described in clauses (ii), (iii) or
(iv) below that would not, individually or in the
aggregate, have a Hiland Material Adverse Effect, neither the
execution and delivery by the Hiland Parties of this Agreement,
nor the consummation by the Hiland Parties of the transactions
contemplated hereby and the performance by the Hiland Parties of
this Agreement will (i) violate or conflict with any
provision of the organizational or governing documents of the
Hiland Group Entities; (ii) require any consent, approval,
authorization or permit of, registration, declaration or filing
with, or notification to, any Governmental Entity or any other
person; (iii) result in any breach of or constitute a
default (or an event that, with notice or lapse of time or both,
would become a default) under, or give to others any right of
termination, cancellation, amendment or acceleration of any
obligation or the loss of any benefit under any agreement or
instrument to which any of the Hiland Group Entities is a party
or by or to which any of their properties are bound;
(iv) result in the creation of an Encumbrance upon any of
the assets of any of the Hiland Group Entities; or
(v) violate or conflict in any material respect with any
material Law applicable to the Hiland Group Entities.
(d) Section 3.3(d) of the Hiland Disclosure Schedule
identifies all consents, approvals and authorizations of any
Governmental Entity or third party that are required to be
obtained by any Hiland Group Entity in connection with
(1) the execution and delivery by the Hiland Parties of
this Agreement or (2) the consummation by the Hiland
Parties of the transactions contemplated by this Agreement, in
each case except for such consents, approvals and authorizations
that, if not obtained, would not, individually or in the
aggregate, have a Hiland Material Adverse Effect.
Section 3.4
SEC
Reports and Compliance
.
(a) The Partnership and its Subsidiaries have filed or
furnished all forms, documents, statements and reports required
to be filed or furnished prior to the date hereof by them with
the Securities and Exchange Commission (the
SEC
) since January 1, 2006 (the forms,
documents, statements and reports filed with or furnished to the
SEC since January 1, 2006 and those filed or furnished with
the SEC subsequent to the date of this Agreement, if any,
including any amendments thereto, the
Hiland SEC
Documents
). As of their respective dates, or, if
amended, as of the date of the last such amendment prior to the
date hereof, the Hiland SEC Documents complied, and each of the
Hiland SEC Documents filed or furnished subsequent to the date
of this Agreement will comply, in all material respects with the
requirements of the Securities Act and the Securities Exchange
Act of 1934, as amended (the
Exchange Act
),
as the case may be, and the applicable rules and regulations
promulgated thereunder, and complied or will comply, as
applicable, in all material respects with the then-applicable
accounting standards and the rules and regulations of the SEC
with respect thereto. None of the Hiland SEC Documents so filed
or furnished or that will be filed or furnished subsequent to
the date of this Agreement contained or will contain, as the
case may be, any untrue statement of a material fact or omitted
or will omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading.
(b) As of the date hereof, there are no outstanding
comments from, or unresolved issues raised by, the SEC with
respect to the Hiland SEC Documents.
(c) The financial statements (including all related notes
and schedules) of the Partnership and its Subsidiaries included
in or incorporated by reference into the Hiland SEC Documents
(the
Hiland Financial Statements
) fairly
present, in all material respects, the financial position of the
Partnership and its Subsidiaries, taken as a whole, as at the
respective dates thereof, and the results of their operations
and their cash flows for the respective periods then ended
(subject, in the case of the unaudited statements, to normal
year-end audit adjustments and to any other adjustments
described therein, including the notes thereto) in conformity
with United States generally accepted accounting principles
(
GAAP
) (except, in the case of the
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unaudited statements, as permitted by the SEC) applied on a
consistent basis during the periods involved (except as may be
specified therein or in the notes thereto).
Section 3.5
No
Undisclosed Liabilities
.
Neither the
Partnership nor any of the Partnerships Subsidiaries has
any indebtedness or liability (whether absolute, accrued,
contingent or otherwise) of any nature that is not accrued or
reserved against in the Hiland Financial Statements filed prior
to the execution of this Agreement or reflected in the notes
thereto, other than (a) liabilities incurred or accrued in
the ordinary course of business consistent with past practice
since December 31, 2008 or (b) liabilities of the
Partnership or any of the Partnerships Subsidiaries that
would not, individually or in the aggregate, have a Hiland
Material Adverse Effect.
Section 3.6
Compliance
with Law
.
Each of the Hiland Group Entities
is in compliance with all applicable Laws, other than any
noncompliance which would not, individually or in the aggregate,
have a Hiland Material Adverse Effect.
Section 3.7
Environmental
Laws and Regulations
.
Except as reflected in
the Hiland Financial Statements, and except for any such matter
that individually would not have a Hiland Material Adverse
Effect:
(a) None of the Hiland Group Entities is the subject of any
outstanding written agreements (including consent orders and
settlement agreements) with any Governmental Entity or other
Person imposing liability with respect to any environmental
matter;
(b) None of the Hiland Group Entities has received any
written communication from any Governmental Entity or other
Person alleging, with respect to any such party, the violation
of or liability under any Environmental Law or requesting, with
respect to any such party, information with respect to an
investigation pursuant to any Environmental Law; and
(c) There has been no Release of any Hazardous Material
from or in connection with the properties or operations of the
Hiland Group Entities that has not been adequately reserved for
in the Hiland Financial Statements and that has resulted or
could reasonably be expected to result in liability under
Environmental Laws or a claim for damages or compensation by any
Person or Remedial Work.
Section 3.8
Employee
Benefits
.
(a) Except as would not have, individually or in the
aggregate, a Hiland Material Adverse Effect, no Hiland Group
Entity and no company or other entity that is required to be
treated as a single employer together with a Hiland Group Entity
under Section 414 of the Code (each, an
ERISA
Affiliate
) maintains or has ever maintained or been
obligated to contribute to or has any liability (secondary or
otherwise) to an Employee Benefit Plan that is (1) subject
to Title IV of the Employee Retirement Income Security Act
of 1974, as amended (
ERISA
), or the minimum
funding requirements of Section 412 of the Code or
Section 302 of ERISA, (2) a plan of the type described
in Section 4063 of ERISA or Section 413(c) of the
Code, (3) a multiemployer plan (as defined in
Section 3(37) of ERISA) or (4) a multiple employer
welfare arrangement (as defined in Section 3(40) of ERISA).
(b) Except as would not have, individually or in the
aggregate, a Hiland Material Adverse Effect, the Employee
Benefit Plans of the Hiland Group Entities and their affiliates
(A) have been maintained (in form and in operation) in all
respects in accordance with their terms and with ERISA, the Code
and all other applicable Laws, (B) if intended to be
qualified under Section 401(a) of the Code, have been
maintained, and are currently, in compliance with the
Codes qualification requirements in form and operation,
and (C) do not provide, and have not provided, any
post-retirement welfare benefits or coverage, except as required
under Part 6 of Subtitle B of Title I of ERISA and
Section 4980B of the Code (or similar state or local law).
Section 3.9
Absence
of Certain Changes or Events
.
Since
December 31, 2008, (a) except as otherwise required or
expressly provided for in this Agreement, (i) the
businesses of the Hiland Group Entities have been conducted, in
all material respects, in the ordinary course of business
consistent with past practice and (ii) none of the Hiland
Group Entities has taken or permitted to occur any action that,
were it to be taken from and after the date hereof, would
require approval of Parent pursuant to Section 5.1(b) and
(b) there has not been a Hiland Material Adverse Effect.
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Section 3.10
Investigations;
Litigation
.
Except as disclosed in
Section 3.10 of the Hiland Disclosure Schedule, there are
no (a) investigations or proceedings pending (or, to the
Knowledge of the Hiland Parties, threatened) by any Governmental
Entity with respect to the Partnership or any of its
Subsidiaries or (b) actions, suits, inquiries,
investigations or proceedings pending (or, to the Knowledge of
the Hiland Parties, threatened) against or affecting any Hiland
Group Entity, or any of their respective properties at law or in
equity before, and there are no orders, judgments or decrees of,
or before, any Governmental Entity, in each case of
clause (a) or (b), which would have (if adversely
determined), individually or in the aggregate, a Hiland Material
Adverse Effect.
Section 3.11
Proxy
Statement; Other Information
.
None of the
information contained in the Proxy Statement will at the time of
the mailing of the Proxy Statement to the Unitholders of the
Partnership, at the time of the Partnership Meeting (as defined
herein) (as such Proxy Statement shall have been amended or
supplemented prior to the date of the Partnership Meeting), and
at the time of any amendments thereof or supplements thereto,
and none of the information supplied or to be supplied by the
Partnership for inclusion or incorporation by reference in the
Schedule 13E-3
(as defined herein) to be filed with the SEC concurrently with
the filing of the Proxy Statement, will, at the time of its
filing with the SEC, and at the time of any amendments thereof
or supplements thereto, contain any untrue statement of a
material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were
made, not misleading;
provided
that no representation is
made by the Partnership with respect to information supplied by
a Parent Party or its controlling Affiliates or a Holdings Party
for inclusion therein. The Proxy Statement will comply as to
form in all material respects with the Exchange Act, except that
no representation is made by the Partnership with respect to
information supplied by a Parent Party or its controlling
Affiliates or a Holdings Party for inclusion therein. The letter
to Unitholders, notice of meeting, proxy statement and forms of
proxy to be distributed to Unitholders in connection with the
Merger to be filed with the SEC in connection with seeking the
adoption and approval of this Agreement and the Merger are
collectively referred to herein as the
Proxy
Statement.
The
Rule 13E-3
Transaction Statement on
Schedule 13E-3
to be filed with the SEC in connection with seeking the adoption
and approval of this Agreement and the Merger is referred to
herein as the
Schedule 13E-3
.
Section 3.12
Tax
Matters
.
(a) (i) There is no action, suit, proceeding,
investigation, audit or claim now pending against, or with
respect to, any of the Hiland Group Entities in respect of any
material Tax or material Tax assessment, nor has any claim for
additional material Tax or material Tax assessment been asserted
in writing or been proposed by any Tax authority;
(ii) no written claim has been made by any Tax authority in
a jurisdiction where any of the Hiland Group Entities does not
currently file a Tax Return that it is or may be subject to any
material Tax in such jurisdiction, nor has any such assertion
been threatened or proposed in writing;
(iii) none of the Hiland Group Entities has been a member
of an affiliated group filing a consolidated federal income Tax
Return or has any liability for the Taxes of any Person (other
than a Hiland Group Entity) under Treasury
Regulation Section 1.1502-6
(or any similar provision of state, local, or foreign Law), as a
transferee or successor, by contract, or otherwise.
(b) In each tax year since the formation of the Partnership
up to and including the current tax year, at least 90% of the
gross income of the Partnership has been income which is
qualifying income within the meaning of
Section 7704(d) of the Code.
Section 3.13
Labor
Matters.
Except as disclosed in
Section 3.13 of the Hiland Disclosure Schedule, no Hiland
Group Entity, other than Partnership GP, has or has ever had
employees. Except for such matters which would not have,
individually or in the aggregate, a Hiland Material Adverse
Effect, no Hiland Group Entity has received written notice
during the past two years of the intent of any Governmental
Entity responsible for the enforcement of labor, employment,
occupational health and safety or workplace safety and
insurance/workers compensation laws to conduct an investigation
of the Hiland Group Entities and, to the Knowledge of the Hiland
Parties, no such investigation is in progress. Except for such
matters which would
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not have, individually or in the aggregate, a Hiland Material
Adverse Effect, (i) there are no (and have not been during
the two-year period preceding the date hereof) strikes or
lockouts with respect to any employees of, or providing services
to, the Hiland Group Entities (
Employees
),
(ii) to the Knowledge of the Hiland Parties, there is no
(and has not been during the two-year period preceding the date
hereof) union organizing effort pending or threatened against
the Hiland Group Entities, (iii) there is no (and has not
been during the two-year period preceding the date hereof)
unfair labor practice, labor dispute or labor arbitration
proceeding pending or, to the Knowledge of the Hiland Parties,
threatened against the Hiland Group Entities, and
(iv) there is no (and has not been during the two-year
period preceding the date hereof) slowdown or work stoppage in
effect or, to the Knowledge of the Hiland Parties, threatened
with respect to Employees. No Hiland Group Entity has any
liabilities under the Worker Adjustment and Retraining Act and
the regulations promulgated thereunder or any similar state or
local law as a result of any action taken by a Hiland Group
Entity that would have, individually or in the aggregate, a
Hiland Material Adverse Effect. No Hiland Group Entity is a
party to any collective bargaining agreements.
Section 3.14
Title
to Properties and Rights-of-Way
.
(a) Except as would not have, individually or in the
aggregate, a Hiland Material Adverse Effect, each of the Hiland
Group Entities has defensible title to all material real
property and good title to all material tangible personal
property owned by the Hiland Group Entities and which is
sufficient for the operation of their respective businesses as
presently conducted, free and clear of all Encumbrances except
Permitted Encumbrances.
(b) Each of the Hiland Group Entities has such consents,
easements, rights-of-way, permits or licenses from each Person
(collectively,
rights-of-way
) as are
sufficient to conduct its business in the manner described, and
subject to the limitations contained, in the Partnerships
annual report on
Form 10-K
for the year ended December 31, 2008, except for such
rights-of-way the absence of which would not, individually or in
the aggregate, result in a Hiland Material Adverse Effect. Each
of the Hiland Group Entities has fulfilled and performed all its
material obligations with respect to such rights-of-way and no
event has occurred that allows, or after notice or lapse of time
would allow, revocation or termination thereof or would result
in any impairment of the rights of the holder of any such
rights-of-way, except for such revocations, terminations and
impairments that would not, individually or in the aggregate,
result in a Hiland Material Adverse Effect.
Section 3.15
Opinion
of Financial Advisor
.
The Conflicts Committee
has received the written opinion of Jefferies &
Company, Inc., dated as of the date of this Agreement, to the
effect that, as of the date hereof, the Merger Consideration is
fair to the holders of Common Units (excluding Common Units
owned by Partnership GP and its Affiliates (including Holdings))
from a financial point of view.
Section 3.16
Required
Approvals
.
Partnership GP has approved this
Agreement and the transactions contemplated by this Agreement
and directed that this Agreement and the Merger be submitted to
a vote of Unitholders as required under
Section 17-211
of the DRULPA and under Articles XIII and XIV of the
Partnership Agreement. The Board of Directors, upon the
unanimous recommendation of its Conflicts Committee, at a
meeting duly called and held, has, (i) determined that this
Agreement and the transactions contemplated hereby are
advisable, fair to and in the best interests of the Partnership
and the holders of Common Units (excluding Common Units owned by
Partnership GP and its Affiliates (including Holdings)),
(ii) approved the Merger and this Agreement and
(iii) recommended that this Agreement and the Merger be
approved by holders of Common Units (excluding Common Units
owned by Partnership GP and its Affiliates (including Holdings))
(including the Conflicts Committees recommendation, the
Recommendation
). The members of Partnership
GP have approved this Agreement and the Merger.
Section 3.17
Material
Contracts
.
(a) Except for this Agreement or as designated as an
exhibit to the Partnerships annual report on
Form 10-K
for the year ended December 31, 2008 or to a Hiland SEC
Document filed thereafter and prior to the date of this
Agreement, neither the Partnership nor any of its Subsidiaries
is a party to or bound by, as of the date hereof, any Contract
(whether written or oral) which is a material
contract (as such term is defined
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in Item 601(b)(10) of
Regulation S-K
of the SEC) (all contracts of the type described in this
Section 3.17(a) being referred to herein as
Material Contracts
).
(b) (i) Each Material Contract (other than the Hiland
Operating Credit Agreement) is valid and binding on the
Partnership and any of its Subsidiaries that is a party thereto,
as applicable, and in full force and effect, except where the
failure to be valid, binding and in full force and effect,
either individually or in the aggregate, would not have a Hiland
Material Adverse Effect, (ii) the Partnership and each of
its Subsidiaries has in all material respects performed all
obligations required to be performed by it under each Material
Contract (other than the Hiland Operating Credit Agreement),
except where such noncompliance, either individually or in the
aggregate, would not have a Hiland Material Adverse Effect, and
(iii) neither the Partnership nor any of its Subsidiaries
knows of, or has received notice of, the existence of any event
or condition which constitutes, or, after notice or lapse of
time or both, will constitute, a material default on the part of
the Partnership or any of its Subsidiaries under any such
Material Contract (other than the Hiland Operating Credit
Agreement), except where such default, either individually or in
the aggregate, would not have a Hiland Material Adverse Effect.
(c) The Hiland Operating Credit Agreement is valid and
binding on Hiland Operating, LLC and in full force and effect.
Except for a Ratio Default, (i) each Hiland Group Entity
has performed all obligations required to be performed by it
under the Hiland Operating Credit Agreement, and (ii) no
Hiland Group Entity is in breach, default (or after notice or
lapse of time or both, would be in default) or violation in the
performance of any obligation, agreement or condition contained
in the Hiland Operating Credit Agreement.
Section 3.18
State
Takeover Laws
.
No approvals are required
under state takeover or similar laws in connection with the
performance by the Hiland Parties or their Affiliates of their
obligations under this Agreement, the Support Agreement, the
Rollover Commitments or the transactions contemplated hereby or
thereby.
Section 3.19
Finders
or Brokers
.
Except for Jefferies &
Company, Inc., none of the Hiland Parties (including through its
respective board of directors (or similar governing body) or any
committee thereof) has engaged any investment banker, broker or
finder in connection with the transactions contemplated by this
Agreement who would be entitled to any fee or any commission in
connection with or upon consummation of the Merger or the other
transactions contemplated hereby.
Section 3.20
No
Other Representations or Warranties
.
Except
for the representations and warranties contained in this
Article III and except as otherwise expressly set forth in
this Agreement or in the agreements or certificates entered into
in connection herewith or contemplated hereby, none of the
Hiland Parties nor any other Person on behalf of the Hiland
Parties makes any other representation or warranty of any kind
or nature, express or implied, in connection with this Agreement
or the transactions contemplated by this Agreement.
ARTICLE IV
Representations
and Warranties of the Parent Parties
Except as disclosed in a section of the disclosure schedule
delivered concurrently herewith by Parent to the Hiland Parties
immediately prior to the execution of this Agreement (the
Parent Disclosure Schedule
) corresponding to
the applicable sections of this Article IV to which such
disclosure applies (
provided
,
however
, that any
information set forth in one section of such Parent Disclosure
Schedule also shall be deemed to apply to each other section of
this Agreement to which its relevance is reasonably apparent),
the Parent Parties hereby represent and warrant, jointly and
severally, to the Hiland Parties as follows:
Section 4.1
Qualification;
Organization
.
(a) Each of the Parent Parties is a legal entity validly
existing and in good standing under the Laws of its respective
jurisdiction of formation. Each of the Parent Parties has all
requisite limited liability company power and authority to own,
lease and operate its properties and assets and to carry on its
business as presently conducted in all material respects.
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(b) Each of the Parent Parties is duly registered or
qualified to do business and is in good standing as a foreign
limited liability company in each jurisdiction where the
ownership, leasing or operation of its assets or properties or
the conduct of its business requires such registration or
qualification, except where the failure to be so registered,
qualified or in good standing would not, individually or in the
aggregate, have a Parent Material Adverse Effect. The
organizational or governing documents of the Parent Parties, as
previously made available to the Hiland Parties, are in full
force and effect. None of the Parent Parties is in violation of
its organizational or governing documents.
Section 4.2
Authority;
No Violation; Consents and Approvals
.
(a) Each of the Parent Parties has all requisite limited
liability company power and authority to enter into this
Agreement and to carry out its obligations hereunder and to
consummate the transactions contemplated hereby. The execution,
delivery and performance by each Parent Party of this Agreement
and the consummation of the transactions contemplated hereby
have been duly authorized by all requisite limited liability
company action on the part of such Parent Party, and no other
limited liability company proceedings on the part of a Parent
Party are necessary to consummate the transactions contemplated
by this Agreement.
(b) This Agreement has been duly executed and delivered by
each Parent Party and, assuming the due authorization, execution
and delivery hereof by the Hiland Parties, constitutes a legal,
valid and binding agreement of such Parent Party, enforceable
against such Parent Party in accordance with its terms (except
insofar as such enforceability may be limited by bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium and
similar laws relating to or affecting creditors rights
generally and by general principles of equity (regardless of
whether such enforceability is considered in a proceeding in
equity or at law)).
(c) Except for matters expressly contemplated by this
Agreement and matters described in clauses (ii), (iii) or
(iv) below that would not, individually or in the
aggregate, have a Parent Material Adverse Effect, neither the
execution and delivery by the Parent Parties of this Agreement,
nor the consummation by the Parent Parties of the transactions
contemplated hereby and the performance by the Parent Parties of
this Agreement will (i) violate or conflict with any
provision of the governing documents of the Parent Parties;
(ii) require any consent, approval, authorization or permit
of, registration, declaration or filing with, or notification
to, any Governmental Entity or any other person;
(iii) result in any breach of or constitute a default (or
an event that, with notice or lapse of time or both, would
become a default) under, or give to others any right of
termination, cancellation, amendment or acceleration of any
obligation or the loss of any benefit under any agreement or
instrument to which any of the Parent Parties is a party or by
or to which any of their properties are bound; (iv) result
in the creation of an Encumbrance upon any of the assets of any
of the Parent Parties; or (v) violate or conflict in any
material respect with any material Law applicable to the Parent
Parties.
(d) Section 4.2(d) of the Parent Disclosure Schedule
identifies all material consents, approvals and authorizations
of any Governmental Entity or third party that are required to
be obtained by any Parent Parties in connection with
(1) the execution and delivery by the Parent Parties of
this Agreement or (2) the consummation by the Parent
Parties of the transactions contemplated by this Agreement,
except for such consents, approvals and authorizations that, if
not obtained, would not, individually or in the aggregate, have
a Parent Material Adverse Effect.
Section 4.3
Proxy
Statement; Other Information
.
None of the
information supplied or to be supplied by the Parent Parties,
their controlling Affiliates, Continental Gas Holdings, Inc., a
Delaware corporation (
Continental Gas
), the
Harold Hamm DST Trust or the Harold Hamm HJ Trust (together with
the Harold Hamm DST Trust, the
Trusts
) in
writing for inclusion in the Proxy Statement will at the time of
the mailing of the Proxy Statement to the Unitholders of the
Partnership, at the time of the Partnership Meeting (as such
Proxy Statement shall have been amended or supplemented prior to
the date of the Partnership Meeting), and at the time of any
amendments thereof or supplements thereto, and none of the
information supplied or to be supplied by the Parent Parties,
their controlling Affiliates, Continental Gas or the Trusts in
writing for inclusion in the
Schedule 13E-3
to be filed with the SEC concurrently with the filing of the
Proxy Statement, will, at the time of its filing with the SEC,
and at the time of any amendments thereof or supplements
thereto, contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein
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or necessary in order to make the statements therein, in light
of the circumstances under which they were made, not misleading.
Section 4.4
Funding
.
On
the Closing Date, the Parent Parties will have sufficient cash
to enable them to make payment of the aggregate Merger
Consideration and the Parent Parties related fees and
expenses (the
Funding
). For the avoidance of
doubt, it shall not be a condition to the obligations of the
Parent Parties to effect the Merger for the Parent Parties to
obtain the Funding or any other financing of the Merger
Consideration and the Parent Parties related fees and
expenses. Section 4.4 of the Parent Disclosure Schedule
sets forth true, accurate and complete copies of
(i) executed equity commitment letters (the
Funding Commitments
) to provide the Funding
to Parent or Merger Sub and (ii) the Rollover Commitments.
As of the date hereof, the Funding Commitments are in full force
and effect and have not been withdrawn or terminated or
otherwise amended or modified in any respect and none of the
Parent Parties is in breach of any of the terms or conditions
set forth therein and no event has occurred which, with or
without notice, lapse of time or both, could reasonably be
expected to constitute a material breach or failure to satisfy a
condition precedent set forth therein.
Section 4.5
Ownership
and Operations of Merger Sub
.
As of the date
of this Agreement, all of the issued and outstanding Merger Sub
LLC Interests are, and at the Effective Time will be, owned by
Parent, the Harold Hamm DST Trust and the Harold Hamm HJ Trust,
and such Merger Sub LLC Interests have been duly authorized and
validly issued in accordance with applicable Laws and the
limited liability company agreement of Merger Sub and are fully
paid (to the extent required by the limited liability company
agreement of Merger Sub) and nonassessable (except to the extent
such nonassessability may be affected by
Sections 18-607
and
18-804
of DLLCA). Merger Sub has not conducted any business other than
incident to its formation and pursuant to this Agreement, the
Merger and the other transactions contemplated hereby and the
financing of such transactions.
Section 4.6
Finders
or Brokers
.
Except for Wachovia Capital
Markets, LLC, none of the Parent Parties has engaged any
investment banker, broker or finder in connection with the
transactions contemplated by this Agreement who might be
entitled to any fee or any commission in connection with or upon
consummation of the Merger or the other transactions
contemplated hereby.
Section 4.7
Access
to Information; No Other Representations or Warranties;
Disclaimer
.
(a) Each of Parent and Merger Sub has conducted its own
investigations of the Hiland Group Entities and acknowledges
that it has been provided adequate access to the personnel,
properties, premises and records of the Hiland Group Entities
for such purpose.
(b) Except for the representations and warranties contained
in this Article IV and except as otherwise expressly set
forth in this Agreement or in the agreements or certificates
entered into in connection herewith or contemplated hereby, none
of the Parent Parties nor any other Person on behalf of the
Parent Parties makes any other representation or warranty of any
kind or nature, express or implied, in connection with the
transactions contemplated by this Agreement.
(c) Except for the representations and warranties expressly
set forth in this Agreement or in the agreements or certificates
entered into in connection herewith or contemplated hereby,
neither Parent nor Merger Sub has relied on any representation
or warranty, express or implied, with respect to the Hiland
Group Entities or with respect to any other information provided
or made available to Parent or Merger Sub in connection with the
transactions contemplated by this Agreement. None of the Hiland
Group Entities nor any other Person will have or be subject to
any liability or indemnification obligation to Parent, Merger
Sub or any other Person resulting from the distribution to
Parent or Merger Sub, or use by Parent or Merger Sub of any such
information, including any information, documents, projections,
forecasts or other material made available to Parent or Merger
Sub or management presentations in expectation of the
transactions contemplated by this Agreement.
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ARTICLE V
Covenants
and Agreements
Section 5.1
Conduct
of Business by the Partnership and Parent
.
(a) From and after the date hereof and prior to the
Effective Time or the date, if any, on which this Agreement is
earlier terminated pursuant to Article VII, and except
(i) as required by applicable Law, (ii) with the prior
written consent of Parent (which shall not be unreasonably
withheld, conditioned or delayed), (iii) as expressly
provided for and permitted by this Agreement or (iv) as
disclosed in Section 5.1(a) of the Hiland Disclosure
Schedule, the Hiland Parties shall, and shall cause the other
Hiland Group Entities to, (A) conduct the business of such
Hiland Group Entities in the ordinary course consistent with
past practice, (B) use their commercially reasonable
efforts to maintain and preserve intact the present business
organizations and material rights and franchises of such Hiland
Group Entities, to keep available the services of the current
Employees and the current officers and consultants of, or
providing services to, the Hiland Group Entities, and to
maintain and preserve in all material respects the relationships
of such Hiland Group Entities with customers, suppliers and
others having business dealings with them, and (C) take no
action that would materially adversely affect or delay the
ability of any of the parties hereto from obtaining any
necessary approvals of any Governmental Entity required for the
transactions contemplated hereby, performing its covenants and
agreements under this Agreement or consummating the transactions
contemplated hereby or that would otherwise materially delay or
prohibit consummation of the Merger or other transactions
contemplated hereby;
provided
,
however
, that any
action taken or omitted to be taken by an officer of a Hiland
Party at the direction of any of the Parent Parties or
Mr. Hamm (other than (1) in his capacity as part of,
(2) in accordance with authority delegated to him by, or
(3) as otherwise authorized by, the Board of Directors or
any committee thereof) that would otherwise constitute a breach
of this Section 5.1 shall not constitute such a breach.
(b) Without limiting the generality of Section 5.1(a),
the Hiland Parties agree that, except (i) as required by
applicable Law, (ii) with the prior written consent of
Parent (which shall not be unreasonably withheld, conditioned or
delayed), (iii) as expressly provided for and permitted by
this Agreement or (iv) as disclosed in Section 5.1(b)
of the Hiland Disclosure Schedule, the Hiland Parties will not,
and agree that they will cause the other Hiland Group Entities
not to:
(i) make any change in any of their organizational or
governing documents, other than changes expressly provided for
in this Agreement;
(ii) issue, deliver or sell or authorize or propose the
issuance, delivery or sale of, any of their Partnership
Interests or equity securities or securities convertible into
their Partnership Interests or equity securities, or
subscriptions, rights, warrants or options to acquire or other
agreements or commitments of any character obligating any of
them to issue any such Partnership Interests or equity
securities (other than restricted units, phantom units or unit
options to current or newly-hired employees consistent with past
practice of up to 50,000 Common Units in the aggregate in
accordance with the Hiland LTIP);
(iii) except for any distributions from the
Partnerships Subsidiaries to the Partnership, declare, set
aside or pay any distributions in respect of the Partnership
Interests or other ownership interests, or split, combine or
reclassify any of the Partnership Interests or other ownership
interests or issue or authorize the issuance of any other
Partnership Interests or other ownership interests in respect
of, in lieu of or in substitution for any of the Partnership
Interests or other ownership interests, or purchase, redeem or
otherwise acquire, directly or indirectly, any of the
Partnership Interests or other ownership interests other than
repurchases of Partnership Interests in accordance with the
Hiland LTIP;
(iv) merge into or with any other Person;
(v) make any acquisition of, capital contribution to or
investment in assets or stock of any person, whether by way of
merger, consolidation, tender offer, share exchange or other
activity other than (A) as provided for in the Budget,
(B) ordinary-course overnight investments consistent with
past cash management practices, (C) investments in wholly
owned subsidiaries, (D) investments in Partially Owned
Entities owned as of the Execution Date as required under the
governing documents of such Partially Owned
A-15
Entities, (E) investments by Partnership GP in the
Partnership pursuant to the Partnership Agreement, and
(F) acquisitions, capital contributions or investments in
addition to those contemplated by (B) through
(E) above up to an aggregate amount of $1,000,000; provided
that the aggregate amount of consideration for such
acquisitions, capital contributions or investments contemplated
by (B) through (F) above shall not exceed $2,000,000
in the aggregate;
(vi) except as permitted by exclusions under other clauses
of this Section 5.1(b), other than in the ordinary course
of business consistent with past practice, enter into any
material contract or agreement or terminate or amend in any
material respect any material contract or agreement to which it
is a party or waive any material rights under any material
contract or agreement to which it is a party;
(vii) acquire or lease assets or properties, individually
or in a series of transactions, with a cost in excess of
$250,000 other than as provided for in the Budget or pursuant to
clause (xi);
(viii) incur, assume or guarantee any indebtedness for
borrowed money, issue, assume or guarantee any debt securities,
grant any option, warrant or right to purchase any debt
securities, or issue any securities convertible into or
exchangeable for any debt securities (other than in connection
with (A) borrowings in the ordinary course of business or
provided for in the Budget, in each case in accordance with any
existing bank credit facilities, (B) the refinancing or
replacement of existing indebtedness (provided that such
refinancing or replacement is on substantially comparable
terms), (C) other than as permitted by (A) and
(B) above, the incurrence by the Partnership of up to
$1,000,000 in principal amount of indebtedness and (D) a
transaction that is permitted by clauses (v) and (xi);
(ix) (A) sell, assign, transfer, abandon, lease or
otherwise dispose of assets having a fair market value in excess
of $1,000,000 in the aggregate, except for (1) assets
listed on Section 5.1(b)(ix) of the Hiland Disclosure
Schedule, (2) idled assets and (3) dispositions of
inventory or worn-out or obsolete equipment for fair value in
the ordinary course of business consistent with past practice;
or (B) grant any security interest with respect to, pledge
or otherwise encumber any assets other than Permitted
Encumbrances and security interests granted after the Execution
Date (i) with respect to assets acquired after the
Execution Date (which acquisition is otherwise permitted by this
Agreement) pursuant to related financing arrangements or
(ii) with respect to assets already owned prior to the
Execution Date, pursuant to the requirements of existing
financial arrangements;
(x) (A) settle any claims, demands, lawsuits or state
or federal regulatory proceedings for damages to the extent such
settlements in the aggregate assess damages in excess of
$1,000,000 (other than any claims, demands, lawsuits or
proceedings to the extent insured (net of deductibles), to the
extent reserved against in the Hiland Financial Statements or to
the extent covered by an indemnity obligation not subject to
dispute or adjustment from a solvent indemnitor) or
(B) settle any claims, demands, lawsuits or state or
federal regulatory proceedings seeking an injunction or other
equitable relief where such settlements would have a Hiland
Material Adverse Effect;
(xi) except as set forth in Section 5.1(b)(xi) of the
Hiland Disclosure Schedule or as required on an emergency basis
or for the safety of persons or the environment, make any
capital expenditure in excess of $1,000,000 in the aggregate
(other than as permitted by clause (v));
(xii) make any material change in their tax methods,
principles or elections;
(xiii) make any material change to their financial
reporting and accounting methods other than as required by a
change in GAAP;
(xiv) (A) grant any increases in the compensation of
any of their executive officers, except in the ordinary course
of business consistent with past practice or as required by the
terms of an existing Employee Benefit Plan or agreement or by
applicable Law, (B) amend any existing employment or
severance or termination contract with any executive officer,
(C) become obligated under any new pension plan, welfare
plan, multiemployer plan, Employee Benefit Plan, severance plan,
change of control or other benefit arrangement or similar plan
or arrangement, or (D) amend any Employee Benefit Plan, if
such amendment would have the effect of materially enhancing any
benefits thereunder;
A-16
(xv) voluntarily dissolve or otherwise adopt or vote to
adopt a plan of complete or partial dissolution or
liquidation; or
(xvi) agree or commit to do any of the foregoing.
Section 5.2
Investigation
.
From
the date hereof until the Effective Time and subject to the
requirements of applicable Laws, the Hiland Parties shall
(a) provide to the Parent Parties and their respective
counsel, financial advisors, auditors and other authorized
representatives reasonable access during normal business hours
after reasonable prior notice to the offices, properties, books
and records of the Hiland Group Entities, (b) furnish to
the Parent Parties and their respective counsel, financial
advisors, auditors and other authorized representatives such
financial and operating data and other information as such
persons may reasonably request (including furnishing to Parent
the financial results of the Partnership and its Subsidiaries in
advance of any filing by the Partnership with the SEC or other
public disclosure containing such financial results), and
(c) instruct the employees, counsel, financial advisors,
auditors and other authorized representatives of the Hiland
Group Entities to cooperate with Parent in its investigation of
the Hiland Group Entities, as the case may be. Notwithstanding
the foregoing provisions of this Section 5.2, the Hiland
Parties shall not be required to, or to cause any of their
Subsidiaries to, grant access or furnish information to Parent
or any of its representatives to the extent that such
information is subject to an attorney/client or attorney work
product privilege or that such access or the furnishing of such
information is prohibited by Law or an existing contract or
agreement. Parent shall hold, and shall cause its counsel,
financial advisors, auditors and representatives to hold, any
material or competitively sensitive non-public information
concerning a Hiland Group Entity received from the Hiland Group
Entities confidential. Partnership GP will provide Parent
(solely for informational purposes) a true and complete copy of
the opinion referenced in Section 3.15 promptly after
delivery thereof. Any investigation pursuant to this
Section 5.2 shall be conducted in such manner as not to
interfere unreasonably with the conduct of the business of the
Hiland Group Entities. No information or knowledge obtained by
Parent in any investigation pursuant to this Section 5.2
shall affect or be deemed to modify any representation or
warranty made by the Hiland Parties in Article III or any
condition set forth in Article VI.
Section 5.3
No
Solicitation
.
(a) Subject to
Sections 5.3(b)-(h),
the Hiland Parties shall not and shall cause their officers,
directors, employees, agents and representatives
(
Representatives
) not to, and shall use their
reasonable best efforts to cause each of the other Hiland Group
Entities and their Representatives not to, directly or
indirectly, (i) initiate, solicit, knowingly encourage
(including by providing information) or knowingly facilitate any
inquiries, proposals or offers with respect to, or the making or
completion of, an Alternative Proposal (as defined herein),
(ii) engage or participate in any negotiations concerning,
or provide or cause to be provided any non-public information or
data relating to, the Hiland Group Entities, in connection with,
or have any discussions with any person relating to, an
Alternative Proposal, or otherwise knowingly encourage or
knowingly facilitate any effort or attempt to make or implement
an Alternative Proposal, (iii) approve, endorse or
recommend, or propose publicly to approve, endorse or recommend,
any Alternative Proposal, (iv) approve, endorse or
recommend, or propose to approve, endorse or recommend, or
execute or enter into, any letter of intent, agreement in
principle, merger agreement, acquisition agreement, option
agreement or other similar agreement relating to any Alternative
Proposal, (v) amend, terminate, waive or fail to enforce,
or grant any consent under, any confidentiality, standstill or
similar agreement, (vi) take, encourage or facilitate any
action that Section 5.3(a) of the Holdings Agreement would
prohibit if the Hiland Parties were the Holdings
Parties, as such term is defined and used therein, or
(vii) resolve to propose or agree to do any of the
foregoing.
(b) The Hiland Parties shall and shall cause their
Representatives to, and shall use their reasonable best efforts
to cause each of the other Hiland Group Entities and their
Representatives to, immediately cease any existing
solicitations, discussions or negotiations with any Person
(other than the parties hereto) that has made or indicated an
intention to make an Alternative Proposal. The Hiland Parties
shall promptly, and in any event not later than ten
(10) days following the date hereof, request that each
Person who has executed a confidentiality agreement with a
Hiland Party in connection with that Persons consideration
of a transaction
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involving any Hiland Group Entity that would constitute an
Alternative Proposal return or destroy all non-public
information furnished to that Person by or on behalf of the
Hiland Group Entities.
(c) Notwithstanding anything to the contrary in
Section 5.3(a), prior to the receipt of Unitholder
Approval, the Hiland Parties may, in response to an unsolicited
Alternative Proposal which did not result from or arise in
connection with a breach of this Section 5.3 and which the
Conflicts Committee determines, in good faith, after
consultation with its outside counsel and financial advisors,
constitutes or could reasonably be expected to result in a
Superior Proposal (as defined herein), (i) furnish
information with respect to the Hiland Group Entities to the
person making such Alternative Proposal and its Representatives
pursuant to an executed confidentiality agreement no less
restrictive (including with respect to standstill provisions) of
the other party than the Confidentiality Agreement and
(ii) participate in discussions or negotiations with such
person and its Representatives regarding such Alternative
Proposal;
provided
,
however
, (A) that Parent
shall be entitled to receive an executed copy of such
confidentiality agreement prior to or substantially
simultaneously with the Hiland Parties furnishing information to
the person making such Alternative Proposal or its
Representatives and (B) that the Hiland Parties shall
simultaneously provide or make available to Parent any
non-public information concerning the Hiland Group Entities that
is provided to the person making such Alternative Proposal or
its Representatives which was not previously provided or made
available to Parent. Notwithstanding anything to the contrary in
Section 5.3(a), prior to the receipt of Unitholder
Approval, the Hiland Parties may participate in discussions or
negotiations with the lenders under the Hiland Operating Credit
Agreement regarding debt financing transactions with such
lenders that may involve equity issuances that would constitute
an Alternative Proposal and, in connection therewith, furnish
information with respect to the Hiland Group Entities to such
lenders pursuant to confidentiality obligations substantially
consistent with past practice.
(d) Neither the Board of Directors nor any committee
thereof shall withdraw, modify or qualify in a manner adverse to
Parent, or resolve to or publicly propose to withdraw, modify or
qualify in a manner adverse to Parent, the Recommendation (any
of the foregoing actions, whether taken by the Board of
Directors or any committee thereof, a
Change in Board
Recommendation
). Notwithstanding the immediately
preceding sentence, if, prior to receipt of the Unitholder
Approval, (i) the Board of Directors or the Conflicts
Committee determines in good faith, after consultation with its
respective outside counsel and financial advisors, that a Change
in Board Recommendation would be in the best interests of the
holders of Common Units (other than Partnership GP and its
Affiliates (including Holdings)) and (ii) the Board of
Directors or the Conflicts Committee, as applicable, provides
Parent with at least three (3) Business Days advance
written notice of its intention to make a Change in Board
Recommendation and specifying the material events giving rise
thereto, then the Board of Directors or the Conflicts Committee,
as applicable, may make a Change in Board Recommendation.
(e) The Hiland Parties promptly (and in any event within
24 hours) shall advise Parent orally and in writing of the
receipt by either of them of (i) any Alternative Proposal
or (ii) any request for non-public information relating to
the Hiland Group Entities, other than requests for information
in the ordinary course of business consistent with past practice
and not reasonably expected to be related to an Alternative
Proposal, including in each case the identity of the person
making any such Alternative Proposal or request and the material
terms and conditions of any such Alternative Proposal or request
(including copies of any document or correspondence evidencing
such Alternative Proposal or request). The Hiland Parties shall
keep Parent reasonably informed on a current basis of the status
(including any material change to the terms thereof) of any such
Alternative Proposal or request.
(f) Nothing contained in this Agreement shall prohibit the
Hiland Parties or the Board of Directors or any committee
thereof from disclosing to the Partnerships Unitholders a
position contemplated by
Rules 14d-9
and
14e-2(a)
promulgated under the Exchange Act;
provided
,
however
, that none of the Hiland Parties or the Board of
Directors or any committee thereof shall in any event be
entitled to disclose a position under
Rules 14d-9
or
14e-2(a)
promulgated under the Exchange Act other than the
Recommendation, except in accordance with Section 5.3(d).
(g) As used in this Agreement,
Alternative
Proposal
shall mean any inquiry, proposal or offer
from any Person or group of Persons other than the Parent
Parties, relating to, or that could reasonably be expected to
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lead to, in one transaction or a series of related transactions,
(i) a merger, tender or exchange offer, consolidation,
reorganization, reclassification, recapitalization, liquidation
or dissolution, or other business combination involving any
Hiland Group Entity, (ii) the issuance by the Partnership
of (A) any General Partner Interest or (B) any class
of Partnership Interests constituting more than 15% of such
class of Partnership Interests or (iii) the acquisition in
any manner, directly or indirectly, of (A) any General
Partner Interest, (B) any class of Partnership Interests
constituting more than 15% of such class of Partnership
Interests or (C) more than 15% of the consolidated total
assets of the Hiland Group Entities (including equity interests
in any Subsidiary or Partially Owned Entity of the Partnership),
in each case other than the Merger and the Holdings Merger.
(h) As used in this Agreement,
Superior
Proposal
shall mean any written Alternative Proposal
(i) on terms which the Conflicts Committee determines in
good faith, after consultation with its outside legal counsel
and financial advisors, to be more favorable from a financial
point of view to the holders of Common Units (other than
Partnership GP and its Affiliates (including Holdings))
(excluding consideration of any interests that any holder may
have other than as a Unitholder of the Partnership entitled to
the Merger Consideration) than the Merger, taking into account
all the terms and conditions of such proposal, and this
Agreement (including any proposal or offer by the Parent Parties
to amend the terms of this Agreement and the Merger) and
(ii) that is reasonably capable of being completed, taking
into account all financial, regulatory, legal and other aspects
of such proposal;
provided
that for purposes of the
definition Superior Proposal, the references to
15% in the definition of Alternative
Proposal shall be deemed to be references to
55%.
Section 5.4
Filings;
Other Actions.
(a) As promptly as reasonably practicable following the
date of this Agreement, the Hiland Parties shall prepare the
Proxy Statement, which shall, subject to Section 5.3(d),
include the Recommendation, and the Hiland Parties and Parent
shall prepare the
Schedule 13E-3.
Parent and the Hiland Parties shall cooperate with each other in
connection with the preparation of the foregoing documents. The
Hiland Parties will use their commercially reasonable efforts to
have the Proxy Statement, and Parent and the Hiland Parties will
use their commercially reasonable efforts to have the
Schedule 13E-3,
cleared by the SEC as promptly as practicable after such filing.
The Hiland Parties will use their commercially reasonable
efforts to cause the Proxy Statement to be mailed to the
Partnerships Unitholders as promptly as practicable after
the Proxy Statement is cleared by the SEC. The Hiland Parties
shall as promptly as practicable notify Parent of the receipt of
any oral or written comments from the SEC relating to the Proxy
Statement or
Schedule 13E-3.
The Hiland Parties shall cooperate and provide Parent with a
reasonable opportunity to review and comment on the draft of the
Proxy Statement (including each amendment or supplement
thereto), which comments shall be considered reasonably and in
good faith by the Hiland Parties, and Parent and the Hiland
Parties shall cooperate and provide each other with a reasonable
opportunity to review and comment on the draft
Schedule 13E-3
(including each amendment or supplement thereto), which comments
shall be considered reasonably and in good faith by the other
party, and all responses to requests for additional information
by and replies to comments of the SEC, prior to filing such with
or sending such to the SEC, and Parent and the Hiland Parties
will provide each other with copies of all such filings made and
correspondence with the SEC with respect thereto. If at any time
prior to the Effective Time, any information should be
discovered by any party hereto which should be set forth in an
amendment or supplement to the Proxy Statement or the
Schedule 13E-3
so that the Proxy Statement or the
Schedule 13E-3
would not include any misstatement of a material fact or omit to
state any material fact required to be stated therein or
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, the
party which discovers such information shall promptly notify the
other parties hereto and, to the extent required by applicable
Law, an appropriate amendment or supplement describing such
information shall be promptly filed by the Hiland Parties with
the SEC and disseminated by the Hiland Parties to the
Unitholders of the Partnership.
(b) The Hiland Parties shall (i) take all action
necessary in accordance with applicable Laws and the Partnership
Agreement to duly call, give notice of, convene and hold a
meeting of the Partnerships Unitholders as promptly as
reasonably practicable following the mailing of the Proxy
Statement for the purpose of obtaining the Unitholder Approval
of the Merger and this Agreement (such meeting or any
adjournment or postponement thereof, the
Partnership
Meeting
), and (ii) subject to a Change in Board
A-19
Recommendation in accordance with Section 5.3(d), use all
commercially reasonable efforts to solicit from its Unitholders
proxies in favor of the adoption and approval of this Agreement
and the Merger. Notwithstanding anything in this Agreement to
the contrary, unless this Agreement is terminated in accordance
with Article VII, the Hiland Parties will take all of the
actions contemplated by this Section 5.4 regardless of
whether there has been a Change in Board Recommendation, and
shall direct that this Agreement be submitted to a vote of
Unitholders in accordance with the requirements of
Articles XIII and XIV of the Partnership Agreement.
Section 5.5
Equity
Awards.
The Hiland LTIP and each award of
Restricted Units (except as expressly provided otherwise in
Section 2.1(a) with respect to awards held by nonemployee
members of the Board of Directors), Phantom Units (as defined in
the Hiland LTIP) and Options (as defined in the Hiland LTIP)
outstanding under the Hiland LTIP immediately prior to the
Effective Time will remain outstanding in accordance with its
terms as a plan or equity compensation award, as applicable, of
the Surviving Entity and shall be unaffected by the transactions
contemplated by this Agreement. Prior to the Effective Time, the
Partnership shall take any action necessary pursuant to the
Hiland LTIP to achieve this result.
Section 5.6
Efforts.
(a) Subject to the terms and conditions set forth in this
Agreement, each of the parties hereto shall, and the Hiland
Parties shall cause the other Hiland Group Entities to, use
their commercially reasonable efforts (subject to, and in
accordance with, applicable Law) to take promptly, or to cause
to be taken, all actions, and to do promptly, or to cause to be
done, and to assist and to cooperate with the other parties in
doing, all things necessary, proper or advisable to consummate
and make effective the Merger and the other transactions
contemplated hereby, including (i) the obtaining of all
necessary actions or nonactions, waivers, consents and approvals
from Governmental Entities and the making of all necessary
registrations and filings and the taking of all steps as may be
necessary to obtain an approval or waiver from, or to avoid an
action or proceeding by, any Governmental Entity, (ii) the
obtaining of all necessary consents, approvals or waivers from
third parties, (iii) the defending of any lawsuits or other
legal proceedings, whether judicial or administrative,
challenging this Agreement or the consummation of the
transactions contemplated hereby and (iv) the execution and
delivery of any additional instruments reasonably necessary to
consummate the transactions contemplated hereby. In addition,
Parent shall use its reasonable best efforts to obtain the
Funding in accordance with the Funding Commitments.
(b) Subject to the terms and conditions herein provided and
without limiting the foregoing, the Hiland Parties and the
Parent Parties shall (i) if required, as promptly as
practicable after the date hereof, make their respective filings
and thereafter make any other required submissions under the
Hart-Scott-Rodino
Antitrust Improvements Act of 1976, 15 U.S.C.
§ 18a, as amended (the
HSR Act
),
(ii) use commercially reasonable efforts to cooperate with
each other in (x) determining whether any filings are
required to be made with, or consents, permits, authorizations,
waivers or approvals are required to be obtained from, any third
parties or other Governmental Entities in connection with the
execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby and (y) timely making
all such filings and timely seeking all such consents, permits,
authorizations or approvals, (iii) use commercially
reasonable efforts to take, or to cause to be taken, all other
actions and to do, or to cause to be done, all other things
necessary, proper or advisable to consummate and make effective
the Merger and the other transactions contemplated hereby,
including taking all such further action as reasonably may be
necessary to resolve such objections, if any, as the United
States Federal Trade Commission, the Antitrust Division of the
United States Department of Justice, state or foreign antitrust
enforcement authorities or competition authorities, other
Governmental Entities in connection with the HSR Act, or other
state or federal regulatory authorities of any other nation or
other jurisdiction or any other person may assert under
Regulatory Law (as defined herein) with respect to the Merger
and the other transactions contemplated hereby, and to avoid or
eliminate each and every impediment under any Law that may be
asserted by any Governmental Entity with respect to the Merger
so as to enable the Closing to occur as soon as reasonably
possible (and in any event no later than the End Date), and
(iv) subject to applicable legal limitations and the
instructions of any Governmental Entity, use commercially
reasonable efforts to keep each other apprised of the status of
matters relating to the completion of the transactions
contemplated by this Agreement, including to the extent
permitted by Law promptly furnishing the other with copies of
notices or other communications received by the Hiland Parties
or any of their
A-20
Subsidiaries or the Parent Parties, as the case may be, from any
third party
and/or
any
Governmental Entity with respect thereto.
(c) Subject to the rights of the Parent Parties in
Section 5.11, and in furtherance and not in limitation of
the covenants of the parties contained in this Section 5.6,
if any administrative or judicial action or proceeding,
including any proceeding by a private party, is instituted (or
threatened to be instituted) challenging the Merger or any other
transaction contemplated by this Agreement, each of the Hiland
Parties or the Parent Parties shall cooperate in all respects
with each other and shall use their respective commercially
reasonable efforts to contest and resist any such action or
proceeding and to have vacated, lifted, reversed or overturned
any decree, judgment, injunction or other order, whether
temporary, preliminary or permanent, that is in effect and that
prohibits, prevents or restricts consummation of the Merger or
any other transactions contemplated hereby. Notwithstanding the
foregoing or any other provision of this Agreement, nothing in
this Section 5.6 shall limit a partys right to
terminate this Agreement pursuant to Section 7.1(b)(i) or
(ii) so long as such party has, prior to such termination,
complied with its obligations under this Section 5.6.
(d) The Parent Parties and the Hiland Parties may, as each
deems advisable and necessary, reasonably designate any
competitively sensitive material provided to the other under
this Section 5.6 as
Regulatory Counsel Only
Material.
Such materials and the information contained
therein shall be given only to the outside regulatory counsel of
the recipient and will not be disclosed by such outside counsel
to employees, officers or directors of the recipient unless
express written permission is obtained in advance from the
source of the materials (the Parent Parties or the Hiland
Parties as the case may be) or its legal counsel.
Notwithstanding anything to the contrary in this
Section 5.6, materials provided to the other party or its
outside counsel may be redacted to remove references concerning
the valuation of the Common Units or the business of the Hiland
Group Entities. For purposes of this Agreement,
Regulatory Law
means any and all state,
federal and foreign statutes, rules, regulations, orders,
decrees, administrative and judicial doctrines and other Laws
requiring notice to, filings with, or the consent or approval
of, any Governmental Entity, or that otherwise may cause any
restriction, in connection with the Merger and the transactions
contemplated thereby, including (i) the Sherman Act of
1890, the Clayton Antitrust Act of 1914, the HSR Act, the
Federal Trade Commission Act of 1914 and all other Laws that are
designed or intended to prohibit, restrict or regulate actions
having the purpose or effect of monopolization or restraint of
trade or lessening competition through merger or acquisition,
(ii) any Law governing any of the material operations or
assets of the Partnership and its Subsidiaries or (iii) any
Law with the purpose of protecting the national security or the
national economy of any nation.
Section 5.7
Takeover
Statute.
Subject to Section 5.3(d), if
any fair price, moratorium,
control share acquisition or other form of
anti-takeover statute or regulation shall become applicable to
the Merger or the other transactions contemplated by this
Agreement, the Support Agreement or the Rollover Commitments,
each of the Hiland Parties or the Parent Parties shall grant
such approvals and take such actions as are reasonably necessary
so that the Merger, the Support Agreement, the Rollover
Commitments and the other transactions contemplated hereby and
thereby may be consummated as promptly as practicable on the
terms contemplated herein and otherwise act to eliminate or
minimize the effects of such statute or regulation on the
Merger, the Support Agreement, the Rollover Commitments and the
other transactions contemplated hereby and thereby.
Section 5.8
Public
Announcements.
Subject to
Section 5.3(d), the Hiland Parties and the Parent Parties
will consult with and provide each other the opportunity to
review and comment (which shall be considered reasonably and in
good faith by the other parties) upon any press release or other
public statement or comment prior to the issuance of such press
release or other public statement or comment relating to this
Agreement or the transactions contemplated herein and shall not
issue any such press release or other public statement or
comment prior to such consultation and opportunity to review and
comment except as may be required by applicable Law or by
obligations pursuant to any listing agreement with any national
securities exchange;
provided
,
however
, that any
public statement or disclosure that is consistent with a public
statement or disclosure previously approved by the other party
shall not require the prior approval of such other party. The
Hiland Parties and the Parent Parties agree to issue a joint
press release announcing the execution and delivery of this
Agreement.
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Section 5.9
Indemnification
and Insurance.
(a) The partnership agreement of the Surviving Entity
shall, with respect to indemnification of directors and
officers, not be amended, repealed or otherwise modified after
the Effective Time in any manner that would adversely affect the
rights thereunder of the Persons who at any time prior to the
Effective Time were identified as prospective indemnitees under
the Partnership Agreement in respect of actions or omissions
occurring at or prior to the Effective Time (including the
transactions contemplated by this Agreement).
(b) For a period of six years after the Effective Time,
Parent and Partnership GP shall, and Parent and Partnership GP
shall cause the Surviving Entity (and its successors or assigns)
to, maintain officers and directors liability
insurance covering each person who is immediately prior to the
Effective Time, or has been at any time prior to the Effective
Time, an officer or director of any of the Hiland Group Entities
and each person who immediately prior to the Effective Time is
serving or prior to the Effective Time has served at the request
of any of the Hiland Group Entities as a director, officer,
trustee or fiduciary of another corporation, partnership, joint
venture, trust, pension or other Employee Benefit Plan of the
Hiland Group Entities (collectively, the
Hiland
D&O Indemnified Parties
) who are or at any time
prior to the Effective Time were covered by the existing
officers and directors liability insurance
applicable to the Hiland Group Entities (
D&O
Insurance
) on terms substantially no less advantageous
to the Hiland D&O Indemnified Parties than such existing
insurance with respect to acts or omissions, or alleged acts or
omissions, prior to the Effective Time (whether claims, actions
or other proceedings relating thereto are commenced, asserted or
claimed before or after the Effective Time).
(c) The Partnership shall cause (and Parent, following the
Closing, shall continue to cause) coverage to be extended under
the D&O Insurance by obtaining a six-year tail
policy on terms and conditions no less advantageous than the
existing D&O Insurance, and such tail policy
shall satisfy the provisions of this Section 5.9;
provided
that in no event shall Parent be required to
spend more than 250% (the
Cap Amount
) of the
last annual premium paid by the Hiland Group Entities prior to
the date hereof (the amount of such premium being set forth in
Section 5.9(c) of the Hiland Disclosure Schedule) per
policy year of coverage under such tail policy;
provided
,
further
, that if the cost per policy
year of such insurance exceeds the Cap Amount, Parent shall
purchase as much coverage per policy year as reasonably
obtainable for the Cap Amount.
(d) The rights of each Hiland D&O Indemnified Party
hereunder shall be in addition to any other rights such Hiland
D&O Indemnified Party may have under the governing
documents of any Hiland Group Entity under applicable Delaware
Law or otherwise. The provisions of this Section 5.9 shall
survive the consummation of the Merger and expressly are
intended to benefit each of the Hiland D&O Indemnified
Parties.
(e) In the event Parent, Partnership GP or any of their
respective successors or assigns (i) consolidates with or
merges into any other person and shall not be the continuing or
surviving entity in such consolidation or merger or
(ii) transfers all or substantially all of its properties
and assets to any person, then and in either such case, Parent
or Partnership GP, as the case may be, shall cause proper
provision to be made so that its successors or assigns shall
assume the obligations set forth in this Section 5.9.
Section 5.10
Unitholder
Litigation.
The Hiland Parties shall give
Parent the opportunity to participate in the defense or
settlement of any Unitholder litigation against any of the
Hiland Group Entities
and/or
their
respective directors relating to the Merger or any other
transactions contemplated hereby and no such settlement shall in
any event be agreed to without Parents consent (which
shall not be unreasonably withheld, conditioned or delayed).
Section 5.11
Notification
of Certain Matters.
The Hiland Parties shall
give prompt notice to the Parent Parties, and the Parent Parties
shall give prompt notice to the Hiland Parties, of (i) any
notice or other communication received by such party from any
Governmental Entity in connection with the Merger or the other
transactions contemplated hereby or from any person alleging
that the consent of such person is or may be required in
connection with the Merger or the other transactions
contemplated hereby, if the subject matter of such communication
or the failure of such party to obtain such consent could be
material to the Partnership, the Surviving Entity or Parent,
(ii) any actions, suits, claims, investigations or
proceedings commenced or, to
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such partys Knowledge, threatened against, relating to or
involving or otherwise affecting such party or any of its
Subsidiaries which relate to the Merger or the other
transactions contemplated hereby, (iii) the discovery of
any fact or circumstance that, or the occurrence or
non-occurrence of any event the occurrence or non-occurrence of
which, would, individually or in the aggregate, cause or result
in a Hiland Material Adverse Effect or a Parent Material Adverse
Effect, respectively;
provided
,
however
, that the
delivery of any notice pursuant to this Section 5.11 shall
not (x) cure any breach of, or non-compliance with, any
other provision of this Agreement or (y) limit the remedies
available to the party receiving such notice. The Hiland Parties
shall reasonably cooperate with the Parent Parties in efforts to
mitigate any adverse consequences to the Parent Parties which
may arise from any criminal or regulatory investigation or
action involving any of the Hiland Group Entities (including by
coordinating and providing assistance in meeting with
regulators).
Section 5.12
Rule 16b-3.
Prior
to the Effective Time, the Partnership shall take such steps as
may be reasonably requested by any party hereto to cause
dispositions of Partnership equity securities (including
derivative securities) pursuant to the transactions contemplated
by this Agreement by each individual who is a director or
officer of the Partnership to be exempt under
Rule 16b-3
promulgated under the Exchange Act in accordance with that
certain No-Action Letter dated January 12, 1999 issued by
the SEC regarding such matters.
ARTICLE VI
Conditions to the Merger
Section
6.1
Conditions
to Each Partys Obligation to Effect the
Merger.
The respective obligations of each
party to effect the Merger shall be subject to the fulfillment
(or waiver by all parties) at or prior to the Effective Time of
each of the following conditions:
(a) the Unitholder Approval of this Agreement and the
Merger shall have been obtained;
(b) no restraining order, preliminary or permanent
injunction or other order issued by any court of competent
jurisdiction or other legal restraint or prohibition enacted or
promulgated by any Governmental Entity restraining, enjoining or
otherwise prohibiting the consummation of the Merger shall be in
effect; and
(c) any waiting period under the HSR Act applicable to the
consummation of the Merger shall have expired or been earlier
terminated.
Section
6.2
Conditions
to Obligation of the Hiland Parties to Effect the
Merger.
The obligations of the Hiland Parties
to effect the Merger are further subject to the fulfillment at
or prior to the Effective Time of each of the following
conditions, any one or more of which may be waived in whole or
in part by the Hiland Parties:
(a) (i) the representations and warranties of the
Parent Parties contained in Section 4.1(a) (Qualification;
Organization) and Section 4.2 (Authority; No Violation;
Consents and Approvals) shall be true and correct in all
respects, in each case at and as of the date of this Agreement
and at and as of the Closing Date as though made at and as of
the Closing Date and (ii) the representations and
warranties of the Parent Parties set forth in this Agreement
(other than those referenced in clause (i) of this
paragraph) shall be true and correct in all respects
(disregarding any materiality or Parent Material Adverse Effect
qualifiers therein) at and as of the date of this Agreement and
at and as of the Closing Date as though made at and as of the
Closing Date, except where any failures of such representations
or warranties to be so true and correct would not have,
individually or in the aggregate, a Parent Material Adverse
Effect;
provided
,
however
, that, with respect to
clauses (i) and (ii) of this paragraph,
representations and warranties that are made as of a particular
date or period shall be true and correct (in the manner set
forth in clause (i) or (ii), as applicable) only as of such
date or period;
(b) the Parent Parties shall have performed all obligations
and complied with all covenants required by this Agreement to be
performed or complied with by them that are qualified by
materiality or Parent Material Adverse Effect and shall have in
all material respects performed all other obligations and
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complied with all other covenants required by this Agreement to
be performed or complied with by them; and
(c) Parent shall have delivered to the Hiland Parties a
certificate, dated the Effective Time and signed by its Chief
Executive Officer or another senior executive officer,
certifying to the effect that the conditions set forth in
Sections 6.2(a) and 6.2(b) have been satisfied.
Section
6.3
Conditions
to Obligation of the Parent Parties to Effect the
Merger.
The obligations of the Parent Parties
to effect the Merger are further subject to the fulfillment at
or prior to the Effective Time of each of the following
conditions, any one or more of which may be waived in whole or
in part by the Parent Parties:
(a) (i) the representations and warranties of the
Hiland Parties contained in Section 3.1(b) (Qualification,
Organization, Subsidiaries, Etc.), Section 3.2
(Capitalization), Section 3.3 (Authority; No Violation;
Consents and Approvals), Section 3.9(b) (Absence of Certain
Changes or Events), Section 3.16 (Required Approvals) and
Section 3.17(c) (Material Contracts) shall be true and
correct in all respects, except, in the case of
Section 3.2, for such inaccuracies as are
de minimis
in the aggregate, in each case at and as of the date of this
Agreement and at and as of the Closing Date as though made at
and as of the Closing Date and (ii) the representations and
warranties of the Hiland Parties set forth in this Agreement
(other than those referenced in clause (i) of this
paragraph) shall be true and correct in all respects
(disregarding any materiality or Hiland Material Adverse Effect
qualifiers therein) as of the date of this Agreement and at and
as of the Closing Date as though made at and as of the Closing
Date, except where any failures of such representations or
warranties to be so true and correct would not have,
individually or in the aggregate, a Hiland Material Adverse
Effect;
provided
,
however
, that, with respect to
clauses (i) and (ii) of this paragraph,
representations and warranties that are made as of a particular
date or period shall be true and correct (in the manner set
forth in clause (i) or (ii), as applicable) only as of such
date or period;
provided
,
further
, that the
representations and warranties referenced in clauses (i)
and (ii) shall not be deemed to be inaccurate to the extent
that Parent had knowledge at the Execution Date of such
inaccuracy;
(b) the Hiland Parties shall have performed all obligations
and complied with all covenants required by this Agreement to be
performed or complied with by them that are qualified by
materiality or Hiland Material Adverse Effect and shall have in
all material respects performed all other obligations and
complied with all other covenants required by this Agreement to
be performed or complied with by them;
(c) since the date of this Agreement there shall not have
been any Hiland Material Adverse Effect;
(d) the Holdings Merger shall be effectuated concurrently
with the Merger;
provided
that the Parent Parties may not
waive this condition unless the Holdings Agreement and the
Holdings Merger shall have been submitted to a vote of
Unitholders and the outcome of such vote shall not have
constituted a Unitholder Approval;
provided
,
further
, that for purposes of this clause 6.3(d),
the terms Unitholders and Unitholder
Approval shall have the meanings assigned to them in the
Holdings Agreement; and
(e) the Hiland Parties shall have delivered to the Parent
Parties a certificate, dated the Effective Time and signed by an
executive officer of the Partnership, certifying to the effect
that the conditions set forth in Sections 6.3(a), 6.3(b)
and 6.3(c) have been satisfied.
Section 6.4
Frustration
of Conditions.
No party may rely on the
failure of any condition set forth in Section 6.1, 6.2 or
6.3, as the case may be, to be satisfied if such failure was
caused by such partys breach in any material respect of
any provision of this Agreement or failure to use commercially
reasonable efforts to consummate the Merger and the other
transactions contemplated hereby, as required by and subject to
Section 5.6.
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ARTICLE VII
Termination
Section 7.1
Termination
or Abandonment.
Notwithstanding anything
contained in this Agreement to the contrary, this Agreement may
be terminated and abandoned at any time prior to the Effective
Time, whether before or after any approval of the matters
presented in connection with the Merger by the Unitholders of
the Partnership:
(a) by the mutual written consent of the Hiland Parties and
the Parent Parties;
(b) by either the Hiland Parties or the Parent Parties, if:
(i) the Effective Time shall not have occurred on or before
November 1, 2009 (the
End Date
) and the
party seeking to terminate this Agreement pursuant to this
Section 7.1(b)(i) shall not have breached its obligations
under this Agreement in any manner that shall have proximately
caused the failure to consummate the Merger on or before the End
Date;
(ii) an injunction, other legal restraint or order of any
Governmental Entity shall have been entered permanently
restraining, enjoining or otherwise prohibiting the consummation
of the Merger and such injunction, other legal restraint or
order shall have become final and nonappealable;
provided
that the party seeking to terminate this Agreement pursuant to
this Section 7.1(b)(ii) shall have complied in all material
respects with its obligations in Section 5.6; or
(iii) the Partnership Meeting shall have concluded and,
upon a vote taken at such meeting, the Unitholder Approval of
this Agreement or the Merger shall not have been obtained;
provided
that the right to terminate this Agreement
pursuant to this Section 7.1(b)(iii) shall not be available
to the Hiland Parties if any Hiland Party materially breached
any obligations under Section 5.3 or 5.4;
(c) by the Hiland Parties, if any Parent Party shall have
breached or failed to perform any of its representations,
warranties, covenants or other agreements contained in this
Agreement, which breach or failure to perform: (A) would
constitute the failure of a condition set forth in
Section 6.2(a) or 6.2(b) and (B)(I) is not capable of being
satisfied or cured by the End Date or (II) if capable of
being satisfied or cured, is not satisfied or cured by thirty
(30) days following receipt by Parent of written notice
stating the Hiland Parties intention to terminate this
Agreement pursuant to this Section 7.1(c) and the basis for
such termination;
provided
that the right to terminate
this Agreement pursuant to this paragraph shall not be available
to the Hiland Parties if, at such time, a condition set forth in
Section 6.3(a), 6.3(b) or 6.3(c) is not capable of being
satisfied; or
(d) by the Parent Parties, if:
(i) any Hiland Party shall have breached or failed to
perform any of its representations, warranties, covenants or
other agreements contained in this Agreement, which breach or
failure to perform: (A) would constitute the failure of a
condition set forth in Section 6.3(a), 6.3(b) or 6.3(c) and
(B)(I) is not capable of being satisfied or cured by the End
Date or (II) if capable of being satisfied or cured, is not
satisfied or cured by thirty (30) days following receipt by
the Hiland Parties of written notice stating the Parent
Parties intention to terminate this Agreement pursuant to
this Section 7.1(d)(i) and the basis for such termination;
provided
that the right to terminate this Agreement
pursuant to this paragraph shall not be available to the Parent
Parties if, at such time, a condition set forth in
Section 6.2(a) or 6.2(b) is not capable of being satisfied;
(ii) a Change in Board Recommendation or a failure to make
the Recommendation occurs or the Board of Directors or any
committee thereof approves, endorses or recommends, or resolves
to or publicly proposes to approve, endorse or recommend, any
Alternative Proposal, including in any disclosure made pursuant
to
Rule 14d-9
or
14e-2(a)
promulgated under the Exchange Act; or
(iii) the condition set forth in Section 6.3(d) is not
capable of being satisfied by the End Date.
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In the event of termination of this Agreement pursuant to this
Section 7.1, this Agreement shall terminate (except for the
provisions of Section 7.2 and Article VIII), and there
shall be no liability on the part of the Hiland Parties or the
Parent Parties to the other except as provided in
Section 7.2 and Article VIII and except that no such
termination shall relieve any party from liability arising out
of any willful breach of any of the representations, warranties
or covenants in this Agreement (subject to any express
limitations set forth in this Agreement), in which case the
aggrieved party shall be entitled to all rights and remedies
available at law or in equity.
Section 7.2
Reimbursement
of Certain Expenses.
(a) In the event that:
(i) (A) an Alternative Proposal shall have been made
known to the Hiland Parties or shall have been made directly to
the Unitholders generally or any person shall have publicly
announced an intention (whether or not conditional or withdrawn)
to make an Alternative Proposal and thereafter, (B) this
Agreement is terminated by the Hiland Parties or the Parent
Parties (as applicable) pursuant to Section 7.1(b)(i),
7.1(b)(iii) or 7.1(d)(i), and (C) a Hiland Group Entity
enters into a definitive agreement with respect to, or
consummates, a transaction contemplated by any Alternative
Proposal within twelve (12) months of the date this
Agreement is terminated; or
(ii) this Agreement is terminated by the Parent Parties
pursuant to Section 7.1(d)(ii);
then in any such event under clause (i) or (ii) of
this Section 7.2(a), the Partnership shall pay to Parent
all of the Expenses of the Parent Parties,
provided
that
in no event shall the Partnership be required to pay for
Expenses in any amount in excess of $1,100,000;
provided
further
, that no expense for which a Parent Party has
received reimbursement pursuant to the Holdings Agreement shall
be paid hereunder. As used herein,
Expenses
shall mean all out-of-pocket fees and expenses (including all
fees and expenses of counsel, accountants, consultants,
financial advisors and investment bankers of Parent and its
Affiliates (other than the Hiland Group Entities)) incurred by
Parent and its Affiliates (other than the Hiland Group Entities)
or on their behalf in connection with or related to the
authorization, preparation, negotiation, execution and
performance of this Agreement and the Funding and all other
matters related to the Merger.
(b) Any payment required to be made pursuant to
Section 7.2(a) shall be made to Parent not later than two
(2) Business Days after delivery to the Partnership of an
itemization setting forth in reasonable detail all Expenses of
the Parent Parties for which payment pursuant to
Section 7.2(a) is sought (which itemization may be
supplemented and updated from time to time by Parent until the
sixtieth (60th) day after delivery of such notice of demand for
payment). All such payments shall be made by wire transfer of
immediately available funds to an account to be designated by
Parent.
(c) The Partnership acknowledges that the Expense
reimbursement and the other provisions of this Section 7.2
are an integral part of the Merger and that, without these
agreements, Parent would not enter into this Agreement.
ARTICLE VIII
Miscellaneous
Section 8.1
No
Survival of Representations and
Warranties.
None of the representations and
warranties in this Agreement or in any instrument delivered
pursuant to this Agreement shall survive the Merger.
Section 8.2
Holdings
Merger.
Parent hereby covenants and agrees
that it shall not close the Holdings Merger unless the Merger
has closed prior to or is closing concurrently with the Holdings
Merger;
provided
,
however
, that such restriction
shall not apply if this Agreement and the Merger shall have been
submitted to a vote of Unitholders and the outcome of such vote
shall not have constituted a Unitholder Approval.
Section 8.3
Expenses.
Except
as set forth in Section 7.2, whether or not the Merger is
consummated, all costs and expenses incurred in connection with
the Merger, this Agreement and the transactions contemplated
hereby shall be paid by the party incurring or required to incur
such expenses.
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Section 8.4
Counterparts;
Effectiveness.
This Agreement may be executed
in two or more counterparts (including by facsimile), each of
which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument, and
shall become effective when one or more counterparts have been
signed by each of the parties and delivered (by telecopy or
otherwise) to the other parties.
Section 8.5
Governing
Law.
This Agreement, and all claims or causes
of action (whether at law, in contract or in tort) that may be
based upon, arise out of or relate to this Agreement or the
negotiation, execution or performance hereof, shall be governed
by and construed in accordance with the laws of the State of
Delaware, without giving effect to any choice or conflict of law
provision or rule (whether of the State of Delaware or any other
jurisdiction) that would cause the application of the laws of
any jurisdiction other than the State of Delaware.
Section 8.6
Specific
Performance; Jurisdiction; Enforcement.
The
parties agree that irreparable damage would occur in the event
that any of the provisions of this Agreement were not performed
in accordance with their specific terms or were otherwise
breached. It is accordingly agreed that prior to the termination
of this Agreement in accordance with Article VII the
parties shall be entitled to an injunction or injunctions to
prevent breaches of this Agreement and to enforce specifically
the terms and provisions of this Agreement exclusively in the
Delaware Court of Chancery (or a proper Delaware state court if
the Court of Chancery does not have subject matter jurisdiction)
or the federal courts sitting in the State of Delaware, this
being in addition to any other remedy to which they are entitled
at law or in equity. In connection with any request for specific
performance or equitable relief by any party hereto, each of the
other parties waive any requirement for the security or posting
of any bond in connection with such remedy. In addition, each of
the parties hereto irrevocably agrees that any legal action or
proceeding with respect to this Agreement and the rights and
obligations arising hereunder, or for recognition and
enforcement of any judgment in respect of this Agreement and the
rights and obligations arising hereunder brought by the other
party hereto or its successors or assigns, shall be brought and
determined exclusively in the Delaware Court of Chancery (or a
proper Delaware state court if the Court of Chancery does not
have subject matter jurisdiction) or the federal courts sitting
in the State of Delaware. Each of the parties hereto consents to
the service of process or other papers in connection with such
action or proceeding in the manner provided in Section 8.8
or in such other manner as permitted by Law. Each of the parties
hereto hereby irrevocably submits with regard to any such action
or proceeding for itself and in respect of its property,
generally and unconditionally, to the personal jurisdiction of
the aforesaid courts and agrees that it will not bring any
action relating to this Agreement or any of the transactions
contemplated hereby in any court other than the aforesaid
courts. Each of the parties hereto hereby irrevocably waives, to
the fullest extent permitted by applicable law, and agrees not
to assert, by way of motion, as a defense, counterclaim or
otherwise, in any action or proceeding with respect to this
Agreement, (a) any claim that it is not personally subject
to the jurisdiction of the above named courts for any reason
other than the failure to serve in accordance with this
Section 8.6, (b) any claim that it or its property is
exempt or immune from jurisdiction of any such court or from any
legal process commenced in such courts (whether through service
of notice, attachment prior to judgment, attachment in aid of
execution of judgment, execution of judgment or otherwise) and
(c) any claim that (i) the suit, action or proceeding
in such court is brought in an inconvenient forum, (ii) the
venue of such suit, action or proceeding is improper or
(iii) this Agreement, or the subject matter hereof, may not
be enforced in or by such courts.
Section 8.7
WAIVER
OF JURY TRIAL.
EACH OF THE PARTIES HERETO
IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY
LEGAL PROCEEDING BETWEEN THE PARTIES HERETO ARISING OUT OF OR
RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED
HEREBY.
Section 8.8
Notices.
Any
notice required to be given hereunder shall be sufficient if in
writing, and sent by facsimile transmission (provided that any
notice received by facsimile transmission or otherwise at the
addressees location on any Business Day after
5:00 p.m. (addressees local time) shall be deemed to
have been received at 9:00 a.m. (addressees local
time) on the next Business Day), by reliable overnight delivery
service (with proof of service), hand delivery or certified or
registered mail (return receipt requested and first-
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class postage prepaid), addressed as follows:
To Parent or Merger Sub:
HH GP Holding, LLC
302 North Independence
Enid, OK 73701
Facsimile:
(580) 242-4703
Attention: Harold Hamm
with copies to:
Baker Botts L.L.P.
910 Louisiana
Houston, TX 77002
Facsimile:
(713) 229-1522
|
|
|
|
Attention:
|
Joshua Davidson
|
Paul Perea
To Partnership GP or the Partnership:
Hiland Partners, LP
205 West Maple
Suite 1100
Enid, OK 73701
Facsimile:
(580) 616-2080
Attention: Joseph L. Griffin
with copies to:
John T. McNabb, II
363 North Sam Houston Parkway East
Suite 550
Houston, TX 77060
Facsimile:
(281) 445-4298
and
Conner & Winters, LLP
4000 One Williams Center
Tulsa, OK 74172
Facsimile:
(918) 586-8625
Attention: Robert A. Curry
or to such other address as any party shall specify by written
notice so given, and such notice shall be deemed to have been
delivered as of the date so telecommunicated, personally
delivered or mailed. Any party to this Agreement may notify any
other party of any changes to the address or any of the other
details specified in this Section 8.8;
provided
,
however
, that such notification shall only be effective
on the date specified in such notice or five (5) Business
Days after the notice is given, whichever is later. Rejection or
other refusal to accept or the inability to deliver because of
changed address of which no notice was given shall be deemed to
be receipt of the notice as of the date of such rejection,
refusal or inability to deliver.
Section 8.9
Assignment;
Binding Effect.
Neither this Agreement nor
any of the rights, interests or obligations hereunder shall be
assigned by any of the parties hereto (whether by operation of
law or otherwise) without the prior written consent of the other
parties, except that, without written consent of any party
hereto, (i) Merger Sub may assign, in its sole discretion,
any of or all of its rights, interest and obligations under this
Agreement to Parent or to any direct or indirect wholly-owned
subsidiary of Parent, (ii) Parent may assign any right to
receive a payment by the Partnership of Expenses to any
Affiliate of Parent, and (iii) Merger Sub
and/or
Parent may assign its rights hereunder as collateral security to
any lender to Merger Sub
and/or
Parent
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or an Affiliate of Merger Sub
and/or
Parent, as the case may be, but, in each case, no such
assignment shall relieve Merger Sub
and/or
Parent, as applicable, of its obligations hereunder. Subject to
the preceding sentence, this Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their
respective successors and assigns.
Section 8.10
Severability.
Any
term or provision of this Agreement which is invalid or
unenforceable in any jurisdiction shall, as to that
jurisdiction, be ineffective only to the extent of such
invalidity or unenforceability without rendering invalid or
unenforceable such term or provision as to any other
jurisdiction or any of the remaining terms and provisions of
this Agreement in that or any other jurisdiction. If any
provision of this Agreement is so broad as to be unenforceable,
such provision shall be interpreted to be only so broad as is
enforceable.
Section 8.11
Entire
Agreement; No Third-Party Beneficiaries.
This
Agreement (including the exhibits and schedules hereto)
constitutes the entire agreement, and supersedes all other prior
agreements and understandings, both written and oral, between
the parties, or any of them, with respect to the subject matter
hereof and thereof and, except as set forth in Section 5.9
and except for the rights of Unitholders whose Common Units
converted into the right to receive the Merger Consideration
pursuant to Section 2.1 to receive such Merger
Consideration after the Effective Time, is not intended to and
shall not confer upon any person other than the parties hereto
any rights or remedies hereunder.
Section 8.12
Amendments;
Waivers.
At any time prior to the Effective
Time, any provision of this Agreement may be amended or waived
if, and only if, such amendment or waiver is in writing and
signed, in the case of an amendment, by the Hiland Parties and
the Parent Parties, or in the case of a waiver, by the party
against whom the waiver is to be effective;
provided
,
however
, that after receipt of Unitholder Approval, if
any such amendment or waiver shall by applicable Law or in
accordance with the rules and regulations of the NASDAQ Global
Select Market require further approval of the Unitholders of the
Partnership, the effectiveness of such amendment or waiver shall
be subject to the approval of the Unitholders of the
Partnership. Notwithstanding the foregoing, no failure or delay
by the Hiland Parties or the Parent Parties in exercising any
right hereunder shall operate as a waiver thereof nor shall any
single or partial exercise thereof preclude any other or further
exercise of any other right hereunder.
Section 8.13
Headings;
Interpretation.
(a) Headings of the Articles and Sections of this Agreement
are for convenience of the parties only and shall be given no
substantive or interpretive effect whatsoever. The table of
contents to this Agreement is for reference purposes only and
shall not affect in any way the meaning or interpretation of
this Agreement.
(b) When a reference is made in this Agreement to an
Article or Section, such reference shall be to an Article or
Section of this Agreement unless otherwise indicated. Whenever
the words include, includes or
including are used in this Agreement, they shall be
deemed to be followed by the words without
limitation. The words hereof,
herein and hereunder and words of
similar import when used in this Agreement shall refer to this
Agreement as a whole and not to any particular provision of this
Agreement. The word or shall be deemed to mean
and/or. All terms defined in this Agreement shall
have the defined meanings when used in any certificate or other
document made or delivered pursuant thereto unless otherwise
defined therein. The definitions contained in this Agreement are
applicable to the singular as well as the plural forms of such
terms and to the masculine as well as to the feminine and neuter
genders of such term. Any agreement, instrument or statute
defined or referred to herein or in any agreement or instrument
that is referred to herein means such agreement, instrument or
statute as from time to time amended, modified or supplemented,
including (in the case of agreements or instruments) by waiver
or consent and (in the case of statutes) by succession of
comparable successor statutes and references to all attachments
thereto and instruments incorporated therein. Each of the
parties has participated in the drafting and negotiation of this
Agreement. If an ambiguity or question of intent or
interpretation arises, this Agreement must be construed as if it
is drafted by all the parties, and no presumption or burden of
proof shall arise favoring or disfavoring any party by virtue of
authorship of any of the provisions of this Agreement.
References in this Agreement to specific laws or to specific
provisions of laws shall include all rules and regulations
promulgated thereunder. Each party to this Agreement has or may
have set forth information in its respective disclosure schedule
in a
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section of such disclosure corresponding to the applicable
sections of this Agreement to which such disclosure applies. The
fact that any item of information is disclosed in a disclosure
schedule to this Agreement shall not constitute an admission by
such party that such item is material, that such item has had or
would have a Hiland Material Adverse Effect or Parent Material
Adverse Effect, as applicable, or that the disclosure of such be
construed to mean that such information is required to be
disclosed by this Agreement.
Section 8.14
No
Recourse.
This Agreement may only be enforced
against, and any claims or causes of action that may be based
upon, arise out of or relate to this Agreement, or the
negotiation, execution or performance of this Agreement may only
be made against the entities that are expressly identified as
parties hereto and no past, present or future Affiliate,
director, officer, employee, incorporator, member, manager,
partner, stockholder, agent, attorney or representative of any
party hereto shall have any liability for any obligations or
liabilities of the parties to this Agreement or for any claim
based on, in respect of, or by reason of, the transactions
contemplated hereby.
Section 8.15
Certain
Definitions.
For purposes of this Agreement,
the following terms will have the following meanings when used
herein:
(a)
Affiliates
means, with respect to
any Person, any other Person that directly or indirectly through
one or more intermediaries controls, is controlled by or is
under common control with, the Person in question. As used
herein, the term control means the possession,
direct or indirect, of the power to direct or cause the
direction of the management and policies of a Person, whether
through ownership of voting securities, by contract or otherwise.
(b)
Budget
means the annual budget of
the Partnership for fiscal year 2009 and included in
Section 8.15(b) of the Hiland Disclosure Schedule.
(c)
Business Day
means any day other
than a Saturday, Sunday or a day on which the banks in New York
are authorized by law or executive order to be closed.
(d)
Common Unit
has the meaning set
forth in the Partnership Agreement.
(e)
Confidentiality Agreement
means the
form of confidentiality agreement in
Exhibit A
to
this Agreement.
(f)
Conflicts Committee
means a
committee of the Board of Directors composed entirely of two or
more directors who are not (a) security holders, officers
or employees of Partnership GP, (b) officers, directors or
employees of any Affiliate of Partnership GP or (c) holders
of any ownership interest in the Hiland Group Entities other
than Common Units and who also meet the independence standards
required of directors who serve on an audit committee of a board
of directors established by the Exchange Act and the rules and
regulations of the SEC thereunder and by the national securities
exchange on which the Common Units are listed.
(g)
Contracts
means any contracts,
agreements, licenses, notes, bonds, mortgages, indentures,
commitments, leases or other instruments or obligations, whether
written or oral.
(h)
Employee Benefit Plan
means all
compensation or employee benefit plans, programs, policies,
agreements or other arrangements, whether or not employee
benefit plans (within the meaning of Section 3(3) of
ERISA, whether or not subject to ERISA), whether written or
oral, including but not limited to, those that provide cash or
equity-based incentives, health, medical, dental, disability,
accident or life insurance benefits or vacation, severance,
retirement, pension or savings benefits, that are sponsored,
maintained or contributed to by the Hiland Group Entities, or
that the Hiland Group Entities have any obligation to sponsor,
maintain or contribute to, for the benefit of current or former
employees, directors, independent contractors or consultants of
the Hiland Group Entities and all employee, consultant and
independent contractor agreements providing compensation,
vacation, severance or other benefits to any current or former
officer, employee, independent contractor or consultant of the
Hiland Group Entities, including Employment Agreements.
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(i)
Employment Agreement
means all
agreements to which a Hiland Group Entity is a party that relate
to the employment or engagement, or arise from the past
employment or engagement, of any natural person by a Hiland
Group Entity, whether as an employee, nonemployee officer or
director, consultant or other independent contractor, sales
representative or distributor of any kind, including any
employee leasing or service agreement and any noncompetition
agreement.
(j)
Encumbrances
means pledges,
restrictions on transfer, proxies and voting or other
agreements, liens, claims, charges, mortgages, security
interests or other legal or equitable encumbrances, limitations
or restrictions of any nature whatsoever.
(k)
Environmental Laws
means any
applicable law (including common law) regulating or prohibiting
Releases of Hazardous Materials into any part of the workplace
or the environment, or pertaining to the protection of natural
resources, wildlife, the environment, or public or employee
health and safety including, without limitation, the
Comprehensive Environmental Response, Compensation, and
Liability Act (42 U.S.C. Section 9601 et seq.), the
Hazardous Materials Transportation Act (49 U.S.C.
Section 5101 et seq.), the Resource Conservation and
Recovery Act (42 U.S.C. Section 6901 et seq.), the
Clean Water Act (33 U.S.C. Section 1251 et seq.), the
Clean Air Act (42 U.S.C. Section 7401 et seq.), the
Toxic Substances Control Act (15 U.S.C. Section 2601
et seq.), the Oil Pollution Act of 1990 (33 U.S.C.
Section 2701 et seq.), the Atomic Energy Act of 1954
(42 U.S.C. Section 2014 et seq.), the Federal
Insecticide, Fungicide, and Rodenticide Act (7 U.S.C.
Section 136 et seq.), and the Occupational Safety and
Health Act (29 U.S.C. Section 651 et seq.) and the
regulations promulgated pursuant thereto, and any analogous
international treaties, national, provincial, state or local
statutes, and the regulations promulgated pursuant thereto, as
such laws have been amended as of the Closing Date.
(l)
General Partner Interest
has the
meaning set forth in the Partnership Agreement.
(m)
General Partner Unit
has the meaning
set forth in the Partnership Agreement.
(n)
Governmental Entity
means any
(a) multinational, federal, national, provincial,
territorial, state, regional, municipal, local or other
government, governmental or public department, central bank,
court, tribunal, arbitral body, commission, administrative
agency, board, bureau or agency, domestic or foreign,
(b) subdivision, agent, commission, board, or authority of
any of the foregoing, or (c) quasi-governmental or private
body exercising any regulatory, expropriation or taxing
authority under, or for the account of, any of the foregoing, in
each case, which has jurisdiction or authority with respect to
the applicable party.
(o)
Hazardous Material
means and
includes each substance defined, designated or classified as a
hazardous waste, hazardous substance, hazardous material,
pollutant, contaminant or toxic substance under any
Environmental Law, including petroleum, petroleum products,
propane by products, lead, mercury, asbestos or polychlorinated
byphenyls that have been Released into the environment.
(p)
Hiland Material Adverse Effect
means
any fact, circumstance, event, change, effect or occurrence
that, individually or in the aggregate with all other facts,
circumstances, events, changes, effects or occurrences, has had
or would be reasonably likely to have a material adverse effect
on the assets, liabilities, properties, business, results of
operations or condition (financial or otherwise) of the
Partnership and its Subsidiaries, taken as a whole, or on the
ability of the Hiland Parties to perform their obligations
hereunder or to consummate the Merger, but shall not include:
(a) facts, circumstances, events, changes, effects or
occurrences (i) generally affecting the midstream oil and
gas or gathering and processing industries (including commodity
prices), (ii) generally affecting the economy or the
financial or securities markets in the United States or globally
(including interest rates), (iii) generally affecting
regulatory or political conditions in the United States or
globally, (iv) caused by compliance with the terms of this
Agreement (including omissions required by this Agreement),
(v) caused by the announcement or pendency of the Merger
(including litigation brought by any Unitholders of the
Partnership (on their own behalf or on behalf of the
Partnership) or loss of or adverse changes in relationships with
employees, customers or suppliers of the Partnership) or
(vi) caused by any action taken or omitted to be taken by
an officer of a Hiland Party at the direction of any of the
Parent Parties or Mr. Hamm (other than (A) in his
capacity as part of, (B) in accordance with authority
delegated to him by, or (C) as
A-31
otherwise authorized by, the Board of Directors or any committee
thereof); (b) changes in applicable Laws or GAAP after the
date hereof; (c) a decrease in the market price of the
Common Units; (d) any failure by the Hiland Parties to meet
any internal or publicly disclosed projections, forecasts or
estimates of revenue or earnings; (e) a Ratio Default; or
(f) any decrease in distributions in respect of the Common
Units; except, in the case of clauses (a)(i), (a)(ii) or
(a)(iii) of this definition, for any fact, circumstance, event,
change, effect or occurrence that affects the assets,
liabilities, properties, business, results of operations or
condition (financial or otherwise) of the Partnership and its
Subsidiaries, taken as a whole, in a disproportionately adverse
manner, compared to other participants in the midstream oil and
gas or gathering and processing industries, and except that
clauses (c), (d), (e) and (f) of this definition shall
not prevent or otherwise affect a determination that any fact,
circumstance, event, change, effect or occurrence underlying
such decrease, failure or default has resulted in, or
contributed to, a Hiland Material Adverse Effect.
(q)
Hiland Operating Credit Agreement
means the Credit Agreement, dated as of February 15, 2005,
among Hiland Operating, LLC, the lenders party thereto and
MidFirst Bank, as administrative agent, together with any
related guarantees, in each case as amended, restated,
supplemented or otherwise modified from time to time.
(r)
Holdings Credit Agreement
means the
Credit Agreement, dated as of September 26, 2006, among
Holdings, the lenders party thereto and MidFirst Bank, as
administrative agent, together with any related guarantees, in
each case as amended, restated, supplemented or otherwise
modified from time to time.
(s)
Incentive Distribution Right
has the
meaning set forth in the Partnership Agreement.
(t)
Knowledge
or
knowledge
means (i) with respect to
Parent, the knowledge of the individuals listed on
Section 8.15(t)(i) of the Parent Disclosure Schedule and
(ii) with respect to the Hiland Parties, the knowledge of
the individuals listed on Section 8.15(t)(ii) of the Hiland
Disclosure Schedule.
(u)
Law
or
Laws
means
all statutes, regulations, statutory rules, orders, judgments,
decrees and terms and conditions of any grant of approval,
permission, authority, permit or license of any court,
Governmental Entity, statutory body or self-regulatory authority
(including the NASDAQ Global Select Market).
(v)
Limited Partner
has the meaning set
forth in the Partnership Agreement.
(w)
Orders
or
orders
means any orders, judgments, injunctions, awards, decrees or
writs handed down, adopted or imposed by, including any consent
decree, settlement agreement or similar written agreement with,
any Governmental Entity.
(x)
organizational or governing
documents
means, for a corporation, the certificate of
incorporation (or similarly-titled document of equivalent
effect) and bylaws; for a partnership, the certificate of
limited partnership (or similarly-titled document of equivalent
effect) and partnership agreement; for a limited liability
company, the certificate of formation (or similarly-titled
document of equivalent effect) and limited liability company
agreement; and for other business entities, certificates and
documents of equivalent effect.
(y)
Outstanding
has the meaning set
forth in the Partnership Agreement.
(z)
Parent Material Adverse Effect
means
any fact, circumstance, event, change, effect or occurrence
that, individually or in the aggregate with all other facts,
circumstances, events, changes, effects or occurrences, prevents
or materially delays or materially impairs or would be
reasonably likely to prevent or materially delay or materially
impair the ability of Parent or Merger Sub to consummate the
Merger and the other transactions contemplated hereby.
(aa)
Partially Owned Entity
means, with
respect to a specified person, any other person that is not a
Subsidiary of such specified person but in which such specified
person, directly or indirectly, owns less
A-32
than 100% of the equity interests thereof (whether voting or
non-voting and including beneficial interests).
(bb)
Partnership Agreement
means the
First Amended and Restated Limited Partnership Agreement of the
Partnership, dated as of February 15, 2005, as amended by
Amendment No. 1, dated April 15, 2008, as it may be
further amended from time to time.
(cc)
Partnership Interest
has the
meaning set forth in the Partnership Agreement.
(dd)
Permitted Encumbrances
means
(i) carriers, warehousemens, mechanics,
materialmens, repairmens or other like liens imposed
by law arising in the ordinary course of business which are not
overdue for a period of more than 60 days or which are
being contested in good faith by appropriate proceeding,
(ii) pledges or deposits in connection with workers
compensation, unemployment insurance and other social security
legislation and deposits securing liability to insurance
carriers under insurance or self-insurance arrangements,
(iii) liens, security interests, charges or other
encumbrances imposed by law for Taxes not yet due or which are
being contested in good faith by appropriate proceedings
(provided that adequate reserves with respect thereto are
maintained on the books of such person or its subsidiaries, as
the case may be, in conformity with GAAP), (iv) deposits to
secure the performance of bids, trade contracts (other than for
borrowed money), leases, statutory obligations, surety and
appeal bonds, performance bonds and other obligations of a like
nature incurred in the ordinary course of business,
(v) easements, rights-of-way, restrictions and other
similar encumbrances incurred in the ordinary course of business
which, in the aggregate, do not materially interfere with the
ordinary conduct of the business by the relevant person and its
subsidiaries, (vi) liens, title defects, preferential
rights or other encumbrances created pursuant to construction,
operating and maintenance agreements, space lease agreements and
other similar agreements, in each case having ordinary and
customary terms and entered into in the ordinary course of
business by the relevant person and its subsidiaries,
(vii) liens on the assets of Hiland Operating, LLC and its
Subsidiaries securing the obligations of Hiland Operating, LLC
under the Hiland Operating Credit Agreement, (viii) liens
on the assets of Holdings and its Subsidiaries securing the
obligations of Holdings under the Holdings Credit Agreement and
(ix) Encumbrances set forth in the organizational or
governing documents of any of the Hiland Group Entities.
(ee)
person
or
Person
means an individual, a corporation, a partnership, a limited
liability company, an association, a trust or any other entity,
group (as such term is used in Section 13 of the Exchange
Act) or organization, including a Governmental Entity, and any
permitted successors and assigns of such person.
(ff)
Ratio Default
means the failure, if
any, of Hiland Operating, LLC to be in compliance with
(i) the Interest Coverage Ratio required by
Section 6.17 of the Hiland Operating Credit Agreement or
(ii) the Leverage Ratio required by Section 6.18 of
the Hiland Operating Credit Agreement. For purposes of this
definition, Interest Coverage Ratio and
Leverage Ratio have the meanings assigned to them in
the Hiland Operating Credit Agreement.
(gg)
Release
means any depositing,
spilling, leaking, pumping, pouring, placing, burying, emitting,
discarding, abandoning, emptying, discharging, migrating,
injecting, escaping, leaching, dumping or disposing.
(hh)
Remedial Work
means any action
(including investigative, site monitoring, restoration,
abatement, detoxification, containment, handling, treatment,
removal, storage, decontamination,
clean-up,
transport, disposal or other ameliorative work, corrective
action or response action) necessary to remediate or respond to
a Release or the presence of any Hazardous Material.
(ii)
Rollover Commitment
means the
acknowledgement or commitment made by a Person listed on
Section 8.15(ii) of the Parent Disclosure Schedule in a
commitment letter or other support agreement executed as of the
date hereof in connection herewith.
(jj)
Subordinated Unit
has the meaning
set forth in the Partnership Agreement.
A-33
(kk)
Subsidiaries
of any person means
any corporation, partnership, association, trust or other form
of legal entity of which (i) more than 50% of the
outstanding voting securities are directly or indirectly owned
by such person, or (ii) such person or any Subsidiary of
such person is a general partner.
(ll)
Tax
or
Taxes
means any taxes, assessments, fees and other governmental
charges imposed by any Governmental Entity, including income,
profits, gross receipts, net proceeds, alternative or add-on
minimum, ad valorem, value added, goods and services, turnover,
sales, use, property, personal property (tangible and
intangible), environmental, stamp, leasing, lease, user, excise,
duty, franchise, capital stock, transfer, registration, license,
withholding, social security (or similar), unemployment,
disability, payroll, employment, fuel, excess profits,
occupational, premium, windfall profit, severance, estimated, or
other charge of any kind whatsoever, including any interest,
penalty, or addition thereto, whether disputed or not.
(mm)
Tax Return
means any return,
declaration, report, election, designation, notice, claim for
refund, or information return or statement relating to Taxes,
including any schedule or attachment thereto, and including any
amendment thereof.
(nn)
Unit
means any class or series of
equity interest in the Partnership (but excluding any options,
rights, warrants and appreciation rights relating to an equity
interest in the Partnership) designated as a Unit,
which shall include Common Units and Subordinated Units but does
not include (i) General Partner Units (or the General
Partner Interest represented thereby) or (ii) Incentive
Distribution Rights.
(oo)
Unitholder
means the holder of a
Unit.
(pp)
Unitholder Approval
means approval
of at least a majority of the Outstanding Common Units
(excluding Common Units owned by Partnership GP and its
Affiliates (including Holdings)) voting as a class and at least
a majority of the Outstanding Subordinated Units voting as a
class.
(qq) Each of the following terms is defined in the Section
set forth opposite such term:
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|
Agreement
|
|
Preamble
|
Alternative Proposal
|
|
Section 5.3(g)
|
Board of Directors
|
|
Recitals
|
Book-Entry Common Units
|
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Section 2.2(a)
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Cap Amount
|
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Section 5.9(c)
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Certificate of Merger
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Section 1.3
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Certificates
|
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Section 2.2(a)
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Change in Board Recommendation
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Section 5.3(d)
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Closing
|
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Section 1.2
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Closing Date
|
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Section 1.2
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Code
|
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Section 2.2(b)(iii)
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Continental Gas
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Section 4.3
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D&O Insurance
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Section 5.9(b)
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DLLCA
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Section 1.1
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DRULPA
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Section 1.1
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Effective Time
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Section 1.3
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Employees
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Section 3.13
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End Date
|
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Section 7.1(b)(i)
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ERISA
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Section 3.8(a)
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ERISA Affiliate
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Section 3.8(a)
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Exchange Act
|
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Section 3.4(a)
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Exchange Fund
|
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Section 2.2(a)
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Execution Date
|
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Section 3.2(b)
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Expenses
|
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Section 7.2(a)
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A-34
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Funding
|
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Section 4.4
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Funding Commitments
|
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Section 4.4
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GAAP
|
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Section 3.4(c)
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Hiland D&O Indemnified Parties
|
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Section 5.9(a)
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Hiland Disclosure Schedule
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Article III
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Hiland Financial Statements
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Section 3.4(c)
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Hiland Group Entities
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Section 3.1(a)
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Hiland LTIP
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Section 2.1(a)
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Hiland Parties
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Preamble
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Hiland SEC Documents
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Section 3.4(a)
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Holdings
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Recitals
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Holdings Agreement
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Recitals
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Holdings GP
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Recitals
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Holdings Merger
|
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Recitals
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HPGP Merger Sub
|
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Recitals
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HSR Act
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Section 5.6(b)
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Letter of Transmittal
|
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Section 2.2(b)(i)
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Material Contracts
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Section 3.17(a)
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Merger
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Recitals
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Merger Consideration
|
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Section 2.1(a)
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Merger Sub
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Preamble
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Merger Sub LLC Interests
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Section 1.6
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Merger Sub LLC Units
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Section 1.6
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Parent
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Preamble
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Parent Disclosure Schedule
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Article IV
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Parent Parties
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Preamble
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Partnership
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Preamble
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Partnership GP
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Preamble
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Partnership Meeting
|
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Section 5.4(b)
|
Paying Agent
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Section 2.2(a)
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Proxy Statement
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Section 3.11
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Recommendation
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Section 3.16
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Regulatory Law
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Section 5.6(d)
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Representatives
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Section 5.3(a)
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rights-of-way
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Section 3.14(b)
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Rollover Interests
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Section 2.1(b)
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Rollover Parties
|
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Section 2.1(b)
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Schedule 13E-3
|
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Section 3.11
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SEC
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Section 3.4(a)
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Securities Act
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Section 3.2(f)
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Superior Proposal
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Section 5.3(h)
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Support Agreement
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Recitals
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Surviving Entity
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Section 1.1
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Trusts
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Section 4.3
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A-35
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed and delivered on the date first
above written.
HH GP HOLDING, LLC
Harold Hamm
President
HLND MERGERCO, LLC
Harold Hamm
President
HILAND PARTNERS GP, LLC
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By:
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/s/ Joseph
L. Griffin
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Joseph L. Griffin
Chief Executive Officer and President
HILAND PARTNERS, LP
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By:
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Hiland Partners GP, LLC,
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its General Partner
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By:
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/s/ Joseph
L. Griffin
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Joseph L. Griffin
Chief Executive Officer and President
Signature
Page to Agreement and Plan of Merger
A-36
Annex B
SUPPORT
AGREEMENT
(HLND Units)
This SUPPORT AGREEMENT, dated as of June 1, 2009 (this
Agreement
), is entered into among HH GP
Holding, LLC, an Oklahoma limited liability company
(
Parent
), HLND MergerCo, LLC, a Delaware
limited liability company and a subsidiary of Parent
(
Merger Sub
and, together with Parent, the
Parent Parties
), Hiland Partners GP, LLC, a
Delaware limited liability company and the general partner of
the Partnership (
Partnership GP
), Hiland
Partners, LP, a Delaware limited partnership (the
Partnership
and, together with Partnership
GP, the
Hiland Parties
), Hiland Partners GP
Holdings, LLC, a Delaware limited liability company and the
general partner of Holdings (
Holdings GP
),
and Hiland Holdings GP, LP, a Delaware limited partnership
(
Holdings
and, together with Holdings GP, the
Holdings Parties
). Each of the Parent
Parties, the Hiland Parties and the Holdings Parties are
referred to herein individually as a Party, and they
are referred to herein collectively as the Parties.
RECITALS
WHEREAS, simultaneously with the execution of this Agreement,
the Parent Parties and the Hiland Parties have entered into an
Agreement and Plan of Merger, as it may be amended, supplemented
or otherwise modified from time to time (the
Merger
Agreement
), which provides, among other things, for
the merger of Merger Sub with and into the Partnership, upon the
terms and subject to the conditions set forth therein;
WHEREAS, Holdings is the record and Beneficial Owner of, and has
the right to vote and dispose of, that number of Units set forth
next to Holdings name on
Schedule A
hereto; and
WHEREAS, as an inducement to the Parent Parties and the Hiland
Parties entering into the Merger Agreement and incurring the
obligations therein, the Parent Parties and the Hiland Parties
have required that the Holdings Parties enter into this
Agreement.
NOW, THEREFORE, the parties hereto, intending to be legally
bound, agree as follows:
ARTICLE I
Certain
Definitions
Section
1.1
Defined
Terms
.
Terms used in this Agreement and not
defined herein have the meanings ascribed to such terms in the
Merger Agreement.
Section
1.2
Other
Definitions
.
For the purposes of this
Agreement:
(a)
Beneficially Own
or
Beneficial Ownership
with respect to any
securities means having beneficial ownership of such
securities (as determined pursuant to
Rule 13d-3
under the Exchange Act), including pursuant to any agreement,
arrangement or understanding, whether or not in writing. Without
duplicative counting of the same securities by the same holder,
securities Beneficially Owned by a Person include securities
Beneficially Owned by all Affiliates of such Person and all
other Persons with whom such Person would constitute a
group within the meaning of Section 13(d) of
the Exchange Act and the rules promulgated thereunder.
(b)
Expiration Time
has the meaning set
forth in Section 2.1.
(c)
Holdings Conflicts Committee
means
the conflicts committee of the board of directors of Holdings GP.
(d)
Owned Units
has the meaning set
forth in Section 2.1 as supplemented by Section 2.2.
(e)
Partnership Conflicts Committee
means the conflicts committee of the board of directors of
Partnership GP.
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(f)
Transfer
means, with respect to a
security, the sale, grant, assignment, transfer, pledge,
encumbrance, hypothecation or other disposition of such security
or the Beneficial Ownership thereof (including by operation of
Law), or the entry into any Contract to effect any of the
foregoing, including, for purposes of this Agreement, the
transfer or sharing of any voting power of such security or
other rights in or of such security, the granting of any proxy
with respect to such security, depositing such security into a
voting trust or entering into a voting agreement with respect to
such security. As a verb, Transfer shall have a
correlative meaning.
(g)
Units
has the meaning ascribed
thereto in the Merger Agreement, and will also include for
purposes of this Agreement all Partnership Interests into which
Units may be split, combined, merged, consolidated, reorganized,
reclassified, recapitalized or otherwise converted and any
rights and benefits arising therefrom, including any dividends
or distributions of Partnership Interests or other equity
securities which may be declared in respect of the Units and
entitled to vote in respect of the matters contemplated by
Article II.
ARTICLE II
Agreement to
Vote
Section 2.1
Agreement
to Vote
.
Subject to the terms and conditions
hereof, Holdings irrevocably and unconditionally agrees that
from and after the date hereof and until the earliest to occur
of (i) the Effective Time; (ii) the termination of the
Merger Agreement in accordance with its terms; (iii) the
written agreement of the Parent Parties, the Hiland Parties
(with respect to Partnership GP, acting through the Partnership
Conflicts Committee) and the Holdings Parties (with respect to
Holdings GP, acting through the Holdings Conflicts Committee) to
terminate this Agreement; and (iv) the termination of the
merger agreement, dated as of June 1, 2009, by and among
Parent, HPGP MergerCo, LLC, Holdings GP and Holdings (the
HPGP Merger Agreement), in accordance with its
terms, (such earliest occurrence being the
Expiration
Time
);
provided
,
however
, that if the
HPGP Merger Agreement and the Merger (as defined in the HPGP
Merger Agreement) shall have been submitted to a vote of
Holdings Unitholders and the outcome of such vote shall
not have constituted a Unitholder Approval (as defined in the
HPGP Merger Agreement), the termination of the HPGP Merger
Agreement shall not result in the occurrence of the Expiration
Time, at any meeting (including each adjourned or postponed
meeting) of the Partnerships Unitholders, however called,
or in any other circumstances (including any sought action by
written consent) upon which a vote or other consent or approval
is sought (any such meeting or other circumstance, a
Unitholders Meeting
), Holdings will
(A) appear at such Unitholders Meeting or otherwise
cause the Units Beneficially Owned by Holdings as of the
relevant time (
Owned Units
) to be counted as
present thereat for purposes of calculating a quorum and respond
to any other request by the Hiland Parties for written consent,
if any, and, (B) vote, or cause to be voted, all of its
Owned Units (1) in favor of the adoption and approval of
the Merger Agreement (whether or not recommended by Partnership
GPs Board of Directors or any committee thereof) and the
transactions contemplated thereby, including the Merger,
(2) in favor of the approval of any other matter to be
approved by the Unitholders of the Partnership (including,
without limitation, an adjournment of the Unitholders
Meeting) to facilitate the transactions contemplated by the
Merger Agreement, including the Merger, (3) against any
Alternative Proposal or any transaction contemplated by such
Alternative Proposal, (4) against any proposal made in
opposition to, or in competition or inconsistent with, the
Merger Agreement or the Merger, including the adoption thereof
or the consummation thereof, (5) against any extraordinary
dividend, distribution or recapitalization by the Partnership or
change in the capital structure of the Partnership (other than
pursuant to or as explicitly permitted by the Merger Agreement),
and (6) against any action or agreement that would
reasonably be expected to (a) result in a breach of any
representation, warranty or covenant of the Hiland Parties under
the Merger Agreement or (b) interfere with, delay or
attempt to discourage the Merger or the transactions
contemplated by the Merger Agreement.
Section 2.2
Additional
Units
.
The Holdings Parties hereby agree,
while this Agreement is in effect, promptly to notify the Parent
Parties and the Hiland Parties of the number of any new Units or
any new restricted units, phantom units or unit options of the
Partnership (collectively,
Derivative Units
)
with respect to which Beneficial Ownership is acquired by
Holdings, if any, after the date hereof and before the
Expiration
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Time. Any such Partnership Interests shall automatically become
subject to the terms of this Agreement as Owned Units as though
Beneficially Owned by Holdings as of the date hereof.
Section 2.3
Restrictions
on Transfer, Etc
.
Except as provided for
herein, the Holdings Parties agree, from the date hereof until
the Expiration Time, not to (i) directly or indirectly
Transfer or offer to Transfer any Owned Units; (ii) tender
any Owned Units into any tender or exchange offer or otherwise;
or (iii) otherwise restrict the ability of the Holdings
Parties freely to exercise all voting rights with respect to the
Owned Units. Any action attempted to be taken in violation of
the preceding sentence will be null and void. The Holdings
Parties further agree to authorize and hereby authorize the
Parent Parties and the Partnership to notify the
Partnerships transfer agent that there is a stop transfer
order with respect to all of the Owned Units and that this
Agreement places limits on the voting of the Owned Units.
Section 2.4
Proxy
.
The
Holdings Parties hereby revoke any and all previous proxies
granted with respect to the Owned Units. By entering into this
Agreement, the Holdings Parties hereby grant a proxy appointing
Parent, with full power of substitution, as the Holdings
Parties attorney-in-fact and proxy, for and in the
Holdings Parties names, to be counted as present and to
vote or otherwise to act on behalf of Holdings with respect to
the Owned Units solely with respect to the matters set forth in,
and in accordance with Section 2.1. The proxy granted by
the Holdings Parties pursuant to this Section 2.4 is,
subject to the penultimate sentence of this Section 2.4,
irrevocable and is coupled with an interest and is granted in
order to secure the Holdings Parties performance under
this Agreement and also in consideration of Parent and Merger
Sub entering into this Agreement and the Merger Agreement. The
proxy granted by the Holdings Parties shall be automatically
revoked upon termination of this Agreement in accordance with
its terms. The Holdings Parties agree, from the date hereof
until the Expiration Time, not to attempt to revoke, frustrate
the exercise of, or challenge the validity of, the irrevocable
proxy granted pursuant to this Section 2.4.
ARTICLE III
Representations
and Warranties
Section 3.1
Representations
and Warranties of Holdings Parties
.
The
Holdings Parties, jointly and severally, represent and warrant
to both the Parent Parties and the Hiland Parties as of the date
of this Agreement and at all times during the term of this
Agreement, as follows:
(a) Each of the Holdings Parties has all requisite limited
liability company or partnership power and authority to enter
into this Agreement, to carry out its obligations hereunder and
to consummate the transactions contemplated hereby. The
execution, delivery and performance by each Holdings Party of
this Agreement and the consummation of the transactions
contemplated hereby have been duly authorized by all requisite
limited liability company or partnership action on the part of
such Holdings Party. No representation or warranty is made
concerning whether the consent of Holdings GP, to the extent
reserved to Parent pursuant to Section 7.1(d) of the
Amended and Restated Limited Liability Company Agreement of
Holdings GP, was validly adopted by Parent. This Agreement has
been duly executed and delivered by each Holdings Party and,
assuming the due authorization, execution and delivery hereof by
both the Parent Parties and the Hiland Parties, constitutes a
legal, valid and binding agreement of such Holdings Party,
enforceable against such Holdings Party in accordance with its
terms (except insofar as such enforceability may be limited by
bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and similar laws relating to or affecting
creditors rights generally and by general principles of
equity (regardless of whether such enforceability is considered
in a proceeding in equity or at law)).
(b) Except for matters expressly contemplated by this
Agreement, neither the execution and delivery by the Holdings
Parties of this Agreement, nor the consummation by the Holdings
Parties of the transactions contemplated hereby and the
performance by the Holdings Parties of this Agreement will
(i) violate or conflict with any provision of the
organizational or governing documents of the Holdings Parties;
(ii) other than pursuant to Sections 13(d) and 16 of
the Exchange Act, require any consent, approval, authorization
or permit of, registration, declaration or filing with, or
notification to, any Governmental Entity or any other person;
(iii) result in any breach of or constitute a default (or
an event that, with notice or lapse of time or both, would
become a default) under, or give to others any right of
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termination, cancellation, amendment or acceleration of any
obligation or the loss of any benefit under any agreement or
instrument to which any of the Holdings Parties is a party or by
or to which any of their properties are bound; (iv) result
in the creation of an Encumbrance upon any of the assets of any
of the Holdings Parties; or (v) violate or conflict with
any Law applicable to the Holdings Parties.
(c) Holdings GP is the sole general partner of Holdings.
Holdings GP is the record and Beneficial Owner of the 0%
non-economic general partner interest in Holdings and such
general partner interest has been duly authorized and validly
issued in accordance with applicable Laws and the Amended and
Restated Agreement of Limited Partnership of Holdings. Holdings
GP owns all of the general partner interest in Holdings free and
clear of any Encumbrances, except pursuant to the organizational
or governing documents of any of the Holdings Parties or the
Hiland Parties.
(d) Holdings is the record and Beneficial Owner of the
number of Common Units and Subordinated Units of the Partnership
constituting Owned Units as of the date hereof as set forth next
to Holdings name on
Schedule A
of this
Agreement. Holdings owns the Owned Units free and clear of any
Encumbrances, except pursuant to the organizational or governing
documents of any of the Holding Parties or the Hiland Parties,
and has the full legal right, power and authority to vote all of
the Owned Units without the consent or approval of, or any other
action on the part of any other Person (other than Holdings GP),
and has not granted any proxy inconsistent with this Agreement
that is still effective or entered into any voting or similar
agreement with respect to, the Owned Units, in each case, except
as provided in this Agreement.
(e) The Owned Units set forth next to Holdings name
on
Schedule A
hereto constitute all of the
Partnership Interests of the Partnership that are Beneficially
Owned by Holdings as of the date hereof, and, except for the
Owned Units and except pursuant to the organizational or
governing documents of any of the Holding Parties or the Hiland
Parties, Holdings does not Beneficially Own or have any right to
acquire (whether currently, upon lapse of time, following the
satisfaction of any conditions, upon the occurrence of any event
or any combination of the foregoing) any Units or any Derivative
Units.
(f) Except for the representations and warranties contained
in this Section 3.1 and except as otherwise expressly set
forth in this Agreement or in the agreements or certificates
entered into in connection herewith or contemplated hereby
(including, without limitation, the HPGP Merger Agreement), none
of the Holdings Parties nor any other Person on behalf of the
Holdings Parties makes any other representation or warranty of
any kind or nature, express or implied, in connection with this
Agreement or the transactions contemplated by this Agreement.
Section 3.2
Representations
and Warranties of Parent Parties
.
The Parent
Parties, jointly and severally, represent and warrant to both
the Holdings Parties and the Hiland Parties as of the date of
this Agreement and at all times during the term of this
Agreement, as follows:
(a) Each of the Parent Parties has all requisite limited
liability company power and authority to enter into this
Agreement, to carry out its obligations hereunder and to
consummate the transactions contemplated hereby. The execution,
delivery and performance by each Parent Party of this Agreement
and the consummation of the transactions contemplated hereby
have been duly authorized by all requisite limited liability
company action on the part of such Parent Party. This Agreement
has been duly executed and delivered by each Parent Party and,
assuming the due authorization, execution and delivery hereof by
both the Holdings Parties and the Hiland Parties, constitutes a
legal, valid and binding agreement of such Parent Party,
enforceable against such Parent Party in accordance with its
terms (except insofar as such enforceability may be limited by
bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and similar laws relating to or affecting
creditors rights generally and by general principles of
equity (regardless of whether such enforceability is considered
in a proceeding in equity or at law)).
(b) Except for matters expressly contemplated by this
Agreement, neither the execution and delivery by the Parent
Parties of this Agreement, nor the consummation by the Parent
Parties of the transactions contemplated hereby and the
performance by the Parent Parties of this Agreement will
(i) violate or conflict with any provision of the
organizational or governing documents of the Parent Parties;
(ii) other
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than pursuant to Sections 13(d) and 16 of the Exchange Act,
require any consent, approval, authorization or permit of,
registration, declaration or filing with, or notification to,
any Governmental Entity or any other person; (iii) result
in any breach of or constitute a default (or an event that, with
notice or lapse of time or both, would become a default) under,
or give to others any right of termination, cancellation,
amendment or acceleration of any obligation or the loss of any
benefit under any agreement or instrument to which any of the
Parent Parties is a party or by or to which any of their
properties are bound; (iv) result in the creation of an
Encumbrance upon any of the assets of any of the Parent Parties;
or (v) violate or conflict with any Law applicable to the
Parent Parties.
(c) Except for the representations and warranties contained
in this Section 3.2 and except as otherwise expressly set
forth in this Agreement or in the agreements or certificates
entered into in connection herewith or contemplated hereby
(including, without limitation, the Merger Agreement), none of
the Parent Parties nor any other Person on behalf of the Parent
Parties makes any other representation or warranty of any kind
or nature, express or implied, in connection with this Agreement
or the transactions contemplated by this Agreement.
Section 3.3
Representations
and Warranties of Hiland Parties
.
The Hiland
Parties, jointly and severally, represent and warrant to both
the Holdings Parties and the Parent Parties as of the date of
this Agreement and at all times during the term of this
Agreement, as follows:
(a) Each of the Hiland Parties has all requisite limited
liability company or partnership power and authority to enter
into this Agreement, to carry out its obligations hereunder and
to consummate the transactions contemplated hereby. The
execution, delivery and performance by each Hiland Party of this
Agreement and the consummation of the transactions contemplated
hereby have been duly authorized by all requisite limited
liability company or partnership action on the part of such
Hiland Party. This Agreement has been duly executed and
delivered by each Hiland Party and, assuming the due
authorization, execution and delivery hereof by both the
Holdings Parties and the Parent Parties, constitutes a legal,
valid and binding agreement of such Hiland Party, enforceable
against such Hiland Party in accordance with its terms (except
insofar as such enforceability may be limited by bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium and
similar laws relating to or affecting creditors rights
generally and by general principles of equity (regardless of
whether such enforceability is considered in a proceeding in
equity or at law)).
(b) Except for matters expressly contemplated by this
Agreement, neither the execution and delivery by the Hiland
Parties of this Agreement, nor the consummation by the Hiland
Parties of the transactions contemplated hereby and the
performance by the Hiland Parties of this Agreement will
(i) violate or conflict with any provision of the
organizational or governing documents of the Hiland Parties;
(ii) require any consent, approval, authorization or permit
of, registration, declaration or filing with, or notification
to, any Governmental Entity or any other person;
(iii) result in any breach of or constitute a default (or
an event that, with notice or lapse of time or both, would
become a default) under, or give to others any right of
termination, cancellation, amendment or acceleration of any
obligation or the loss of any benefit under any agreement or
instrument to which any of the Hiland Parties is a party or by
or to which any of their properties are bound; (iv) result
in the creation of an Encumbrance upon any of the assets of any
of the Hiland Parties; or (v) violate or conflict with any
Law applicable to the Hiland Parties.
(c) Except for the representations and warranties contained
in this Section 3.3 and except as otherwise expressly set
forth in this Agreement or in the agreements or certificates
entered into in connection herewith or contemplated hereby
(including, without limitation, the Merger Agreement), none of
the Hiland Parties nor any other Person on behalf of the Hiland
Parties makes any other representation or warranty of any kind
or nature, express or implied, in connection with this Agreement
or the transactions contemplated by this Agreement.
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ARTICLE IV
Additional
Covenants of Holdings
Section 4.1
Rollover
of Partnership Interests
.
The Holdings
Parties agree and acknowledge that in the Merger, (a) the
Common Units of which Holdings is the record and Beneficial
Owner will remain outstanding as Common Units of the Surviving
Entity and will not be converted into the right to receive the
Merger Consideration or entitled to any other form of
consideration, and (b) the Subordinated Units of which
Holdings is the record and Beneficial Owner will remain
outstanding as Subordinated Units of the Surviving Entity.
Section 4.2
Non-Interference;
Further Assurances
.
The Holdings Parties
agree that, prior to the termination of this Agreement, no
Holdings Party shall take any action that would make any
representation or warranty of such Holdings Party contained
herein untrue or incorrect or have the effect of preventing,
impeding, interfering with or adversely affecting the
performance by such Holdings Party of its obligations under this
Agreement;
provided
,
however
, that this
restriction shall not in any way restrict or limit the Holdings
Parties right to terminate the HPGP Merger Agreement in
accordance with its terms or obligate the Holdings Parties to
waive any conditions set forth in the HPGP Merger Agreement. The
Holdings Parties agree, without further consideration, to
execute and deliver such additional documents and to take such
further actions as are necessary or reasonably requested by the
Parent Parties or the Hiland Parties to confirm and assure the
rights and obligations set forth in this Agreement or to
consummate the transactions contemplated by this Agreement.
ARTICLE V
Termination
Section 5.1
Termination
.
This
Agreement shall terminate without further action at the
Expiration Time.
Section 5.2
Effect
of Termination
.
Upon termination of this
Agreement, the rights and obligations of all the parties will
terminate and become void without further action by any party
except for the provisions of Section 5.1, this
Section 5.2 and Article VI, which will survive such
termination. For the avoidance of doubt, the termination of this
Agreement shall not relieve any party of liability for any
willful breach of this Agreement prior to the time of
termination, in which case the aggrieved party shall be entitled
to all rights and remedies available at law or in equity.
ARTICLE VI
General
Section 6.1
Survival
of Representations and Warranties
.
None of
the representations and warranties in this Agreement shall
survive the Expiration Time.
Section 6.2
Expenses
.
All
costs and expenses incurred in connection with this Agreement
and the transactions contemplated hereby shall be paid by the
party incurring or required to incur such expenses.
Section 6.3
Counterparts;
Effectiveness
.
This Agreement may be executed
in two or more counterparts (including by facsimile), each of
which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument, and
shall become effective when one or more counterparts have been
signed by each of the parties and delivered (by telecopy or
otherwise) to the other parties.
Section 6.4
Governing
Law
.
This Agreement, and all claims or causes
of action (whether at law or in equity, in contract or in tort)
that may be based upon, arise out of or relate to this Agreement
or the negotiation, execution or performance hereof, shall be
governed by and construed in accordance with the laws of the
State of Delaware, without giving effect to any choice or
conflict of law provision or rule (whether of the State of
Delaware or any other jurisdiction) that would cause the
application of the laws of any jurisdiction other than the State
of Delaware. Each of the parties hereto agrees (a) that
this Agreement involves at least
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$100,000.00, and (b) that this Agreement has been entered
into by the parties hereto in express reliance upon 6
Del.
C
. § 2708.
Section 6.5
Specific
Performance; Jurisdiction; Enforcement
.
The
parties agree that irreparable damage would occur in the event
that any of the provisions of this Agreement were not performed
in accordance with their specific terms or were otherwise
breached. It is accordingly agreed that prior to the termination
of this Agreement in accordance with Article V the parties
shall be entitled to an injunction or injunctions to prevent
breaches of this Agreement and to enforce specifically the terms
and provisions of this Agreement exclusively in the Delaware
Court of Chancery (or a proper Delaware state court if the Court
of Chancery does not have subject matter jurisdiction) or the
federal courts sitting in the State of Delaware, this being in
addition to any other remedy to which they are entitled at law
or in equity. In connection with any request for specific
performance or equitable relief by any party hereto, each of the
other parties waive any requirement for the security or posting
of any bond in connection with such remedy. In addition, each of
the parties hereto irrevocably agrees that any Legal Action or
proceeding with respect to this Agreement and the rights and
obligations arising hereunder, or for recognition and
enforcement of any judgment in respect of this Agreement and the
rights and obligations arising hereunder brought by the other
party hereto or its successors or assigns, shall be brought and
determined exclusively in the Delaware Court of Chancery (or a
proper Delaware state court if the Court of Chancery does not
have subject matter jurisdiction) or the federal courts sitting
in the State of Delaware. Each of the parties hereto consents to
the service of process or other papers in connection with such
action or proceeding in the manner provided in Section 6.7
or in such other manner as permitted by Law and, to the extent
such party is not otherwise subject to service of process in the
State of Delaware, to appoint and maintain an agent in the State
of Delaware as such partys agent for acceptance of legal
process and notify the other party or parties hereto of the name
and address of such agent, and that service of process may, to
the fullest extent permitted by law, also be made on such party
by prepaid certified mail with a proof of mailing receipt
validated by the United States Postal Service constituting
evidence of valid service, and that service made pursuant to the
above shall, to the fullest extent permitted by law, have the
same legal force and effect as if served upon such party
personally within the State of Delaware. Each of the parties
hereto hereby irrevocably submits with regard to any such action
or proceeding for itself and in respect of its property,
generally and unconditionally, to the personal jurisdiction of
the aforesaid courts and agrees that it will not bring any
action relating to this Agreement or any of the transactions
contemplated hereby in any court other than the aforesaid
courts. Each of the parties hereto hereby irrevocably waives, to
the fullest extent permitted by applicable law, and agrees not
to assert, by way of motion, as a defense, counterclaim or
otherwise, in any action or proceeding with respect to this
Agreement, (a) any claim that it is not personally subject
to the jurisdiction of the above named courts for any reason
other than the failure to serve in accordance with this
Section 6.5, (b) any claim that it or its property is
exempt or immune from jurisdiction of any such court or from any
legal process commenced in such courts (whether through service
of notice, attachment prior to judgment, attachment in aid of
execution of judgment, execution of judgment or otherwise) and
(c) any claim that (i) the suit, action or proceeding
in such court is brought in an inconvenient forum, (ii) the
venue of such suit, action or proceeding is improper or
(iii) this Agreement, or the subject matter hereof, may not
be enforced in or by such courts. For purposes of implementing
the parties agreement to appoint and maintain an agent for
service of process in the State of Delaware, each such party
that has not as of the date hereof already duly appointed such
an agent does hereby appoint The Corporation Trust Company,
Corporation Trust Center, 1209 Orange Street, Wilmington,
Delaware 19801, as such agent.
Section 6.6
WAIVER
OF JURY TRIAL
.
EACH OF THE PARTIES HERETO
IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY
LEGAL PROCEEDING BETWEEN THE PARTIES HERETO ARISING OUT OF OR
RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED
HEREBY.
Section 6.7
Notices
.
Any
notice required to be given hereunder shall be sufficient if in
writing, and sent by facsimile transmission (provided that any
notice received by facsimile transmission or otherwise at the
addressees location on any Business Day after
5:00 p.m. (addressees local time) shall be deemed to
have been received at 9:00 a.m. (addressees local
time) on the next Business Day), by reliable overnight delivery
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service (with proof of service), hand delivery or certified or
registered mail (return receipt requested and first-class
postage prepaid), addressed as follows:
To the Parent Parties:
HH GP Holding, LLC
302 North Independence
Enid, OK 73701
Facsimile:
(580) 242-4703
Attention: Harold Hamm
with copies to:
Baker Botts L.L.P.
910 Louisiana
Houston, TX 77002
Facsimile:
(713) 229-1522
|
|
|
|
Attention:
|
Joshua Davidson
|
Paul Perea
To the Hiland Parties:
Hiland Partners, GP
205 West Maple
Suite 1100
Enid, OK 73701
Facsimile:
(580) 616-2080
Attention: Joseph L. Griffin
with copies to:
John T. McNabb, II
363 North Sam Houston Parkway East
Suite 550
Houston, TX 77060
Facsimile:
(281) 445-4298
and
Conner & Winters, LLP
4000 One Williams Center
Tulsa, OK 74172
Facsimile:
(918) 586-8625
Attention: Robert A. Curry
B-8
To the Holdings Parties:
Hiland Holdings GP, LP
205 West Maple
Suite 1100
Enid, OK 73701
Facsimile:
(580) 616-2080
Attention: Joseph L. Griffin
with copies to:
Fulbright & Jaworski L.L.P.
2200 Ross Avenue
Suite 2800
Dallas, TX 75201
Facsimile:
(214) 855-8000
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|
|
|
Attention:
|
Kenneth L. Stewart
|
Bryn A. Sappington
or to such other address as any Party shall specify by written
notice so given, and such notice shall be deemed to have been
delivered as of the date so telecommunicated, personally
delivered or mailed. Any party to this Agreement may notify any
other party of any changes to the address or any of the other
details specified in this paragraph;
provided
,
however
, that such notification shall only be effective
on the date specified in such notice or five (5) Business
Days after the notice is given, whichever is later. Rejection or
other refusal to accept or the inability to deliver because of
changed address of which no notice was given shall be deemed to
be receipt of the notice as of the date of such rejection,
refusal or inability to deliver.
Section 6.8
Assignment
.
Neither
this Agreement nor any of the rights, interests or obligations
hereunder shall be assigned by any of the parties hereto
(whether by operation of law or otherwise) without the prior
written consent of the other parties. Subject to the preceding
sentence, this Agreement shall be binding upon and shall inure
to the benefit of the parties hereto and their respective
successors and assigns.
Section 6.9
Severability
.
Any
term or provision of this Agreement which is invalid or
unenforceable in any jurisdiction shall, as to that
jurisdiction, be ineffective to the extent of such invalidity or
unenforceability without rendering invalid or unenforceable the
remaining terms and provisions of this Agreement in any other
jurisdiction. If any provision of this Agreement is so broad as
to be unenforceable, such provision shall be interpreted to be
only so broad as is enforceable.
Section 6.10
Entire
Agreement; No Third Party Beneficiaries
.
This
Agreement (including the exhibits and schedules hereto)
constitutes the entire agreement, and supersedes all other prior
agreements and understandings, both written and oral, between
the parties, or any of them, with respect to the subject matter
hereof and is not intended to and shall not confer upon any
person other than the parties hereto any rights or remedies
hereunder.
Section 6.11
Amendments
.
This
Agreement may not be amended, supplemented or otherwise modified
except by the express written agreement signed by all of the
parties (with respect to Holdings GP, acting through the
Holdings Conflicts Committee and with respect to Partnership GP,
acting through the Partnership Conflicts Committee) to this
Agreement.
Section 6.12
Extension;
Waiver
.
At any time prior to the Expiration
Time, by mutual agreement of any two of the Parent Parties, the
Hiland Parties (with respect to Partnership GP, acting through
the Partnership Conflicts Committee) and the Holdings Parties
(with respect to Holdings GP, acting through the Holdings
Conflicts Committee), such Parties may (i) extend the time
for the performance of any of the obligations of the third
Party, (ii) waive any inaccuracies in the representations
and warranties of the third Party contained in this Agreement or
in any document delivered under this Agreement or
(iii) waive compliance with any of the covenants or
conditions of the third Party contained in this Agreement. Any
agreement on the part of such Parties to any extension or waiver
will be valid only if set forth in an instrument in writing
signed by such
B-9
Parties. The failure of any Party to assert any of its rights
under this Agreement or otherwise will not constitute a waiver
of such rights.
Section 6.13
Headings
.
Headings
of the Articles and Sections of this Agreement are for
convenience of the parties only and shall be given no
substantive or interpretive effect whatsoever. The table of
contents to this Agreement is for reference purposes only and
shall not affect in any way the meaning or interpretation of
this Agreement.
Section 6.14
Interpretation
.
When
a reference is made in this Agreement to an Article or Section,
such reference shall be to an Article or Section of this
Agreement unless otherwise indicated. Whenever the words
include, includes or
including are used in this Agreement, they shall be
deemed to be followed by the words without
limitation. The words hereof,
herein and hereunder and words of
similar import when used in this Agreement shall refer to this
Agreement as a whole and not to any particular provision of this
Agreement. The word or shall be deemed to mean
and/or. All terms defined in this Agreement shall
have the defined meanings when used in any certificate or other
document made or delivered pursuant thereto unless otherwise
defined therein. The definitions contained in this Agreement are
applicable to the singular as well as the plural forms of such
terms and to the masculine as well as to the feminine and neuter
genders of such term. Any agreement, instrument or statute
defined or referred to herein or in any agreement or instrument
that is referred to herein means such agreement, instrument or
statute as from time to time amended, modified or supplemented,
including (in the case of agreements or instruments) by waiver
or consent and (in the case of statutes) by succession of
comparable successor statutes and references to all attachments
thereto and instruments incorporated therein. Each of the
parties has participated in the drafting and negotiation of this
Agreement. If an ambiguity or question of intent or
interpretation arises, this Agreement must be construed as if it
is drafted by all the parties, and no presumption or burden of
proof shall arise favoring or disfavoring any party by virtue of
authorship of any of the provisions of this Agreement. Any
statute defined or referred to herein or in any agreement or
instrument referred to herein shall mean such statute as from
time to time amended, modified or supplemented, including by
succession of comparable successor statutes.
Section 6.15
No
Recourse
.
This Agreement may only be enforced
against, and any claims or causes of action that may be based
upon, arise out of or relate to this Agreement, or the
negotiation, execution or performance of this Agreement may only
be made against the entities that are expressly identified as
parties hereto and no past, present or future Affiliate,
director, officer, employee, incorporator, member, manager,
partner, stockholder, agent, attorney or representative of any
party hereto shall have any liability for any obligations or
liabilities of the parties to this Agreement or for any claim
based on, in respect of, or by reason of, the transactions
contemplated hereby.
Section 6.16
Action
in Unitholder Capacity Only
.
The parties
acknowledge that this Agreement is entered into by Holdings and
Holdings GP solely in their capacity as the Beneficial Owner of
the Owned Units and the general partner of such Beneficial
Owner, respectively.
B-10
IN WITNESS WHEREOF, each party hereto has caused this Agreement
to be signed as of the date first above written.
HH GP HOLDING, LLC
Harold Hamm
President
HLND MERGERCO, LLC
Harold Hamm
President
HILAND PARTNERS GP, LLC
|
|
|
|
By:
|
/s/ Joseph
L. Griffin
|
Joseph L. Griffin
Chief Executive Officer and President
HILAND PARTNERS, LP
|
|
|
|
By:
|
Hiland Partners GP, LLC,
its General Partner
|
|
|
By:
|
/s/ Joseph
L. Griffin
|
Joseph L. Griffin
Chief Executive Officer and President
Signature
Page to Support Agreement (HLND Units)
HILAND PARTNERS GP HOLDINGS, LLC
|
|
|
|
By:
|
/s/ Joseph
L. Griffin
|
Joseph L. Griffin
Chief Executive Officer and President
HILAND HOLDINGS GP, LP
|
|
|
|
By:
|
Hiland Partners GP Holdings, LLC,
its General Partner
|
|
|
By:
|
/s/ Joseph
L. Griffin
|
Joseph L. Griffin
Chief Executive Officer and President
Signature Page to Support
Agreement (HLND Units)
Schedule
A
BENEFICIAL
OWNERSHIP OF UNITS
|
|
|
|
|
Hiland Holdings GP, LP
|
|
|
|
|
Common Units
|
|
|
2,321,471
|
|
Subordinated Units
|
|
|
3,060,000
|
|
Annex C
PRIVILEGED
AND CONFIDENTIAL
June 1, 2009
Conflicts Committee of the Board of Directors
Hiland Partners GP, LLC
205 West Maple, Suite 1100
Enid, Oklahoma 73701
Members of the Conflicts Committee:
We understand that HH GP Holding, LLC, an Oklahoma limited
liability company (Parent), HLND MergerCo, LLC, a
Delaware limited liability company and subsidiary of Parent
(Merger Sub), Hiland Partners GP, LLC, a Delaware
limited liability company and the general partner of the
Partnership (Partnership GP), and Hiland Partners,
LP, a Delaware limited partnership (the
Partnership), propose to enter into an Agreement and
Plan of Merger (the Merger Agreement), pursuant to
which Merger Sub will merge with and into the Partnership (the
Merger) in a transaction in which each outstanding
Common Unit, as defined in the First Amended and Restated
Agreement of Limited Partnership of the Partnership, other than
any Common Units included among the Rollover Interests (as
defined in the Merger Agreement), all of which Common Units will
be canceled, will be converted into the right to receive $7.75
in cash (the Consideration). The terms and
conditions of the Merger are more fully set forth in the Merger
Agreement.
You have asked for our opinion as to whether the Consideration
to be received by the holders of Common Units pursuant to the
Merger Agreement is fair, from a financial point of view, to
such holders (other than the Partnership GP and its Affiliates,
including Hiland Holdings GP, LP). Capitalized terms not defined
herein are defined in the Merger Agreement.
In arriving at our opinion, we have, among other things:
(i) reviewed a draft dated May 28, 2009 of the Merger
Agreement;
(ii) reviewed certain publicly available financial and
other information about the Partnership;
(iii) reviewed certain information furnished to us by the
Partnerships management, including financial forecasts and
analyses, relating to the business, operations and prospects of
the Partnership;
(iv) held discussions with members of senior management of
the Partnership concerning the matters described in
clauses (ii) and (iii) above;
(v) reviewed the trading price history and valuation
multiples for the Common Units and compared them with those of
certain publicly traded entities that we deemed relevant;
(vi) compared the proposed financial terms of the Merger
with the financial terms of certain other transactions that we
deemed relevant; and
(vii) conducted such other financial studies, analyses and
investigations as we deemed appropriate.
In our review and analysis and in rendering this opinion, we
have assumed and relied upon, but have not assumed any
responsibility to independently investigate or verify, the
accuracy and completeness of all
C-1
financial and other information that was supplied or otherwise
made available to us or that was publicly available (including,
without limitation, the information described above), or that
was otherwise reviewed by us. We have relied on the assurances
of the management of the Partnership that they are not aware of
any facts or circumstances that would make such information
inaccurate or misleading. In our review, we did not obtain any
independent evaluation or appraisal of any of the assets or
liabilities, nor did we conduct a physical inspection of any of
the properties or facilities, of the Partnership, nor have we
been furnished with any such evaluations or appraisals or any
such physical inspections, nor do we assume any responsibility
to obtain any such evaluations or appraisals.
With respect to the financial forecasts provided to and examined
by us, we note that projecting future results of any company is
inherently subject to uncertainty. The Partnership has informed
us, however, and we have assumed, that such financial forecasts
were reasonably prepared on bases reflecting the best currently
available estimates and good faith judgments of the management
of the Partnership as to the future financial performance of the
Partnership. We express no opinion as to any such financial
forecasts or the assumptions on which they were made.
Our opinion is based on economic, monetary, regulatory, market
and other conditions existing and which can be evaluated as of
the date hereof. We expressly disclaim any undertaking or
obligation to advise any person of any change in any fact or
matter affecting our opinion of which we become aware after the
date hereof.
We have made no independent investigation of any legal or
accounting matters affecting the Partnership, and we have
assumed the correctness in all respects material to our analysis
of all legal and accounting advice given to the Partnership and
the Board of Directors of Partnership GP, including, without
limitation, advice as to the legal, accounting and tax
consequences of the terms of, and transactions contemplated by,
the Merger Agreement to the Partnership and the holders of
Common Units. In addition, in preparing this opinion, we have
not taken into account any tax consequences of the transaction
to any holder of Common Units. We have assumed that the final
form of the Merger Agreement will be substantially similar to
the last draft reviewed by us. We have also assumed that, in the
course of obtaining the necessary regulatory or third party
approvals, consents and releases for the Merger, no delay,
limitation, restriction or condition will be imposed that would
have an adverse effect on the Partnership, Parent or the
contemplated benefits of the Merger in any way meaningful to our
analysis.
In addition, we were not requested to and did not provide advice
concerning the structure, the specific amount of the
Consideration, or any other aspects of the Merger, or to provide
services other than the delivery of this opinion. We were not
authorized to and did not solicit any expressions of interest
from any other parties with respect to the sale of all or any
part of the Partnership or any other alternative transaction. We
did not participate in negotiations with respect to the terms of
the Merger and related transactions. Consequently, we have
assumed that such terms are the most beneficial terms from the
Partnerships perspective that could under the
circumstances be negotiated among the parties to such
transactions, and no opinion is expressed as to whether any
alternative transaction might result in consideration more
favorable to the Partnerships common unitholders than that
contemplated by the Merger Agreement.
It is understood that our opinion is for the use and benefit of
the Partnership GP and the Conflicts Committee of the Board of
Directors of the Partnership GP in its consideration of the
Merger, and our opinion does not address the relative merits of
the transactions contemplated by the Merger Agreement as
compared to any alternative transaction or opportunity that
might be available to the Partnership, nor does it address the
underlying business decision by the Partnership to engage in the
Merger or the terms of the Merger Agreement or the documents
referred to therein. Our opinion does not constitute a
recommendation as to how any holder of Common Units should vote
on the Merger or any matter related thereto. In addition, you
have not asked us to address, and this opinion does not address,
the fairness to, or any other consideration of, the holders of
any class of securities, creditors or other constituencies of
the Partnership, other than the holders of Common Units. We
express no opinion as to the price at which Common Units will
trade at any time. Furthermore, we do not express any view or
opinion as to the fairness, financial or otherwise, of the
amount or nature of any compensation to be received by any of
the Partnerships officers, directors or employees, or any
class of such
C-2
persons, in connection with the Merger relative to the
Consideration to be received by holders of Common Units. Our
opinion has been authorized by the Fairness Committee of
Jefferies & Company, Inc.
We have been engaged by you to render this opinion and will
receive a fee from the Partnership for our services, a portion
of which was payable prior to the date hereof and the remainder
of which is payable upon delivery of this opinion. We also will
be reimbursed for expenses incurred. The Partnership has agreed
to indemnify us against liabilities arising out of or in
connection with the services rendered and to be rendered by us
under such engagement. We have, in the past, provided financial
advisory and financing services to the Partnership and
affiliates of the Partnership and may continue to do so and have
received, and may receive, fees for the rendering of such
services. We maintain a market in the securities of the
Partnership, and, in the ordinary course of our business, we and
our affiliates may trade or hold securities of the Partnership
and/or
its
respective affiliates for our own account and for the accounts
of our customers and, accordingly, may at any time hold long or
short positions in those securities. In addition, we may seek
to, in the future, provide financial advisory and financing
services to the Partnership, Parent or entities that are
affiliated with the Partnership or Parent, for which we would
expect to receive compensation. Except as otherwise expressly
provided in our engagement letter with the Partnership, our
opinion may not be used or referred to by the Partnership, or
quoted or disclosed to any person in any matter, without our
prior written consent.
Based upon and subject to the foregoing, we are of the opinion
that, as of the date hereof, the Consideration to be received by
the holders of Common Units pursuant to the Merger Agreement is
fair, from a financial point of view, to such holders (other
than Rollover Parties).
Very truly yours,
JEFFERIES & COMPANY, INC.
C-3
Annex D
AGREEMENT AND PLAN OF MERGER
among
HH GP HOLDING, LLC,
HPGP MERGERCO, LLC,
HILAND PARTNERS GP HOLDINGS, LLC
and
HILAND HOLDINGS GP, LP
Executed June 1, 2009
TABLE OF
CONTENTS
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Page
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ARTICLE I THE MERGER
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D-2
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Section 1.1
|
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The Merger
|
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D-2
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Section 1.2
|
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Closing
|
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D-2
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Section 1.3
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Effective Time
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D-2
|
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Section 1.4
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Effects of the Merger
|
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D-2
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Section 1.5
|
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Partnership Agreement of the Surviving Entity
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D-2
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Section 1.6
|
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Admission of Additional Limited Partners
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D-2
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ARTICLE II CONVERSION OF PARTNERSHIP INTERESTS; EXCHANGE OF
CERTIFICATES
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D-2
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Section 2.1
|
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Effect on Partnership Interests
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D-2
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Section 2.2
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Exchange of Certificates
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D-4
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Section 2.3
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Timing for Rollover Interests
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D-5
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ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE HOLDINGS
PARTIES
|
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D-5
|
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Section 3.1
|
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Qualification, Organization, Subsidiaries, Etc.
|
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D-6
|
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Section 3.2
|
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Capitalization
|
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D-6
|
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Section 3.3
|
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Authority; No Violation; Consents and Approvals
|
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D-7
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Section 3.4
|
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SEC Reports and Compliance
|
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D-8
|
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Section 3.5
|
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No Undisclosed Liabilities
|
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D-9
|
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Section 3.6
|
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Compliance with Law
|
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D-9
|
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Section 3.7
|
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Employee Benefits
|
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D-9
|
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Section 3.8
|
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Absence of Certain Changes or Events
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D-9
|
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Section 3.9
|
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Investigations; Litigation
|
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|
D-9
|
|
Section 3.10
|
|
Proxy Statement; Other Information
|
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D-9
|
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Section 3.11
|
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Tax Matters
|
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D-10
|
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Section 3.12
|
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Labor Matters
|
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D-10
|
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Section 3.13
|
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Assets of the Holdings Parties
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D-11
|
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Section 3.14
|
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Opinion of Financial Advisor
|
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D-11
|
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Section 3.15
|
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Required Approvals
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D-11
|
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Section 3.16
|
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Material Contracts
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D-11
|
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Section 3.17
|
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State Takeover Laws
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D-11
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Section 3.18
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Finders or Brokers
|
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|
D-11
|
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Section 3.19
|
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No Other Representations or Warranties
|
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D-11
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ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE PARENT
PARTIES
|
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D-12
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Section 4.1
|
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Qualification; Organization
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D-12
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Section 4.2
|
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Authority; No Violation; Consents and Approvals
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D-12
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Section 4.3
|
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Proxy Statement; Other Information
|
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D-13
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Section 4.4
|
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Funding
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D-13
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Section 4.5
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Ownership and Operations of Merger Sub
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D-13
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Section 4.6
|
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Finders or Brokers
|
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D-13
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Section 4.7
|
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Access to Information; No Other Representations or Warranties;
Disclaimer
|
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D-14
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D-i
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Page
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ARTICLE V COVENANTS AND AGREEMENTS
|
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D-14
|
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Section 5.1
|
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Conduct of Business by Holdings and Parent
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D-14
|
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Section 5.2
|
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Investigation
|
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D-15
|
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Section 5.3
|
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No Solicitation
|
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D-16
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Section 5.4
|
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Filings; Other Actions
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D-18
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Section 5.5
|
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Equity Awards
|
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D-19
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Section 5.6
|
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Efforts
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D-19
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Section 5.7
|
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Takeover Statute
|
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D-20
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Section 5.8
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Public Announcements
|
|
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D-20
|
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Section 5.9
|
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Indemnification and Insurance
|
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D-20
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Section 5.10
|
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Unitholder Litigation
|
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|
D-21
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Section 5.11
|
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Notification of Certain Matters
|
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D-21
|
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Section 5.12
|
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Rule 16b-3
|
|
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D-22
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|
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ARTICLE VI CONDITIONS TO THE MERGER
|
|
|
D-22
|
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Section 6.1
|
|
Conditions to Each Partys Obligation to Effect the Merger
|
|
|
D-22
|
|
Section 6.2
|
|
Conditions to Obligation of the Holdings Parties to Effect the
Merger
|
|
|
D-22
|
|
Section 6.3
|
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Conditions to Obligation of the Parent Parties to Effect the
Merger
|
|
|
D-23
|
|
Section 6.4
|
|
Frustration of Conditions
|
|
|
D-23
|
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|
|
|
|
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ARTICLE VII TERMINATION
|
|
|
D-24
|
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Section 7.1
|
|
Termination or Abandonment
|
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|
D-24
|
|
Section 7.2
|
|
Reimbursement of Certain Expenses
|
|
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D-25
|
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ARTICLE VIII MISCELLANEOUS
|
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D-25
|
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Section 8.1
|
|
No Survival of Representations and Warranties
|
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|
D-25
|
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Section 8.2
|
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Hiland Merger
|
|
|
D-25
|
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Section 8.3
|
|
Expenses
|
|
|
D-26
|
|
Section 8.4
|
|
Counterparts; Effectiveness
|
|
|
D-26
|
|
Section 8.5
|
|
Governing Law
|
|
|
D-26
|
|
Section 8.6
|
|
Specific Performance; Jurisdiction; Enforcement
|
|
|
D-26
|
|
Section 8.7
|
|
WAIVER OF JURY TRIAL
|
|
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D-26
|
|
Section 8.8
|
|
Notices
|
|
|
D-26
|
|
Section 8.9
|
|
Assignment; Binding Effect
|
|
|
D-27
|
|
Section 8.10
|
|
Severability
|
|
|
D-28
|
|
Section 8.11
|
|
Entire Agreement; No Third-Party Beneficiaries
|
|
|
D-28
|
|
Section 8.12
|
|
Amendments; Waivers
|
|
|
D-28
|
|
Section 8.13
|
|
Headings; Interpretation.
|
|
|
D-28
|
|
Section 8.14
|
|
No Recourse
|
|
|
D-29
|
|
Section 8.15
|
|
Certain Definitions
|
|
|
D-29
|
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Exhibit A
Form of Confidentiality Agreement
|
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D-ii
AGREEMENT
AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER, executed this 1st day of
June, 2009 (this
Agreement
), is entered into
among HH GP Holding, LLC, an Oklahoma limited liability company
(
Parent
), HPGP MergerCo, LLC, a Delaware
limited liability company and a subsidiary of Parent
(
Merger Sub
and, together with Parent, the
Parent Parties
), Hiland Partners GP Holdings,
LLC, a Delaware limited liability company and the general
partner of Holdings (
Holdings GP
), and Hiland
Holdings GP, LP, a Delaware limited partnership
(
Holdings
and, together with Holdings GP, the
Holdings Parties
).
W I T N E
S S E T H
:
WHEREAS, the parties intend that Merger Sub be merged with and
into Holdings, with Holdings surviving that merger on the terms
and subject to the conditions set forth in this Agreement (the
Merger
);
WHEREAS, it is contemplated that, on the Closing Date (as
defined herein), HLND MergerCo, LLC, a Delaware limited
liability company and a subsidiary of Parent (
HLND
Merger Sub
), be merged with and into Hiland Partners,
LP, a Delaware limited partnership (
Hiland
),
with Hiland surviving that merger (the
Hiland
Merger
) on the terms and subject to the conditions set
forth in the Agreement and Plan of Merger, dated as of the date
hereof (the
Hiland Agreement
), among Parent,
HLND Merger Sub, Hiland Partners GP, LLC, a Delaware limited
liability company and the general partner of Hiland
(
Hiland GP
and, together with Hiland, the
Hiland Parties
), and Hiland;
WHEREAS, the board of directors of Holdings GP (the
Board of Directors
), acting upon the
unanimous recommendation of its Conflicts Committee, has
(i) determined that this Agreement and the transactions
contemplated hereby are advisable, fair to and in the best
interests of Holdings and the holders of Common Units (other
than Harold Hamm, his Affiliates (including Continental Gas
Holdings, Inc., a Delaware corporation (
Continental
Gas
)) and the Trusts), (ii) approved the
execution, delivery and performance of this Agreement by the
Holdings Parties and the consummation of the transactions
contemplated hereby, including the Merger, and
(iii) resolved to recommend approval of this Agreement and
the Merger by the holders of Common Units (excluding Common
Units owned by Mr. Hamm, his Affiliates (including
Continental Gas) and the Trusts);
WHEREAS, the Trusts and certain Affiliates of Parent are parties
to a Support Agreement, dated the date hereof (the
Support Agreement
), with Holdings and
Holdings GP pursuant to which the Trusts and such Affiliates
have, among other things: (i) agreed that the Partnership
Interests of which they are the record and beneficial owners
will not be converted into the right to receive the Merger
Consideration and will remain outstanding as Partnership
Interests of the Surviving Entity (as defined herein) in the
Merger, and (ii) agreed to vote the Common Units of which
they are the record and beneficial owners in favor of the
approval of this Agreement and the Merger;
WHEREAS, the board of directors of each of Parent and Merger Sub
and the sole member of Merger Sub have unanimously approved this
Agreement and declared it advisable for Parent and Merger Sub,
respectively, to enter into this Agreement; and
WHEREAS, the parties desire to make certain representations,
warranties, covenants and agreements in connection with the
Merger and the transactions contemplated by this Agreement and
also to prescribe certain conditions to the Merger as specified
herein.
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NOW, THEREFORE, in consideration of the foregoing and the
representations, warranties, covenants and agreements contained
herein, and intending to be legally bound hereby, Parent, Merger
Sub, Holdings GP and Holdings hereby agree as follows:
ARTICLE I
The Merger
Section 1.1
The
Merger
.
At the Effective Time, upon the terms
and subject to the conditions set forth in this Agreement and in
accordance with the applicable provisions of the Delaware
Revised Uniform Limited Partnership Act
(
DRULPA
) and the Delaware Limited Liability
Company Act (
DLLCA
), Merger Sub shall be
merged with and into Holdings, whereupon the separate existence
of Merger Sub shall cease, and Holdings shall continue as the
surviving entity in the Merger (the
Surviving
Entity
).
Section 1.2
Closing
.
The
closing of the Merger (the
Closing
) shall
take place at the offices of Baker Botts L.L.P. at 910 Louisiana
Street, Houston, Texas at 10:00 a.m., local time, on a date
to be specified by the parties (the
Closing
Date
) which shall be no later than the third Business
Day after the satisfaction or waiver (to the extent permitted by
applicable Law) of the conditions set forth in Article VI
(other than those conditions that by their nature are to be
satisfied at the Closing, but subject to the satisfaction or
waiver of such conditions), or at such other place, date and
time as Holdings and Parent may agree in writing.
Section 1.3
Effective
Time
.
At the Closing, Holdings shall cause
the Merger to be consummated by executing and filing a
certificate of merger (the
Certificate of
Merger
) with the Secretary of State of the State of
Delaware in accordance with
Section 17-211
of the DRULPA and
Section 18-209
of the DLLCA. The Merger shall become effective at such time as
the Certificate of Merger is duly filed with the Secretary of
State of the State of Delaware, or at such later date or time as
may be agreed by Parent and Holdings in writing and specified in
the Certificate of Merger in accordance with the DRULPA and the
DLLCA (such time as the Merger becomes effective is referred to
herein as the
Effective Time
).
Section 1.4
Effects
of the Merger
.
The Merger shall have the
effects set forth in this Agreement, the Partnership Agreement
and the applicable provisions of the DRULPA and DLLCA.
Section 1.5
Partnership
Agreement of the Surviving Entity
.
The
Partnership Agreement, as in effect immediately prior to the
Effective Time, shall remain the partnership agreement of the
Surviving Entity and shall continue in effect until thereafter
changed or amended in accordance with the provisions thereof and
applicable Law.
Section 1.6
Admission
of Additional Limited Partners
.
Upon the
conversion of the limited liability company interests in Merger
Sub (
Merger Sub LLC Interests
), which are
denominated in units (
Merger Sub LLC Units
),
into Common Units pursuant to Section 2.1(c) and the
recording of the name of the holder thereof as a limited partner
of Holdings on the books and records of Holdings, such Person
shall automatically and effective as of the Effective Time be
admitted to Holdings as an additional Limited Partner and be
bound by the Partnership Agreement as such.
ARTICLE II
Conversion
of Partnership Interests; Exchange of Certificates
Section 2.1
Effect
on Partnership Interests
.
At the Effective
Time, by virtue of the Merger and without any action on the part
of Holdings, Merger Sub or the holders of any securities of
Holdings or Merger Sub:
(a)
Conversion of Common Units
. Subject
to Sections 2.1(b) and 2.1(d), each Common Unit issued and
outstanding immediately prior to the Effective Time, other than
any Common Units included among the Rollover Interests, shall
thereupon be converted automatically into and shall thereafter
represent the right to receive $2.40 in cash without any
interest thereon (the
Merger Consideration
).
Immediately prior to the Effective Time, each award of
Restricted Units (as defined in the Hiland Holdings GP, LP
Long-Term Incentive Plan (the
Holdings LTIP
))
issued and outstanding to any nonemployee member of the Board of
Directors shall become fully vested as Common Units and shall
thereupon be converted
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automatically into and shall thereafter represent the right to
receive the Merger Consideration. All Common Units that have
been converted into the right to receive the Merger
Consideration as provided in this Section 2.1 shall be
automatically cancelled and shall cease to exist, and the
holders of such Common Units immediately prior to the Effective
Time (whether certificated or non-certificated and represented
in book-entry form) shall cease to have any rights with respect
to such Common Units other than the right to receive the Merger
Consideration.
(b)
Rollover of Certain Partnership
Interests
. The following Partnership Interests
shall be treated in the Merger as follows:
(i) each of the 8,481,350 Common Units owned by Continental
Gas Holdings, Inc., a Delaware corporation (
Continental
Gas
), shall be unchanged and remain outstanding as
Common Units of the Surviving Entity, and no consideration shall
be delivered in respect thereof;
(ii) each of the 2,757,390 Common Units owned by the Harold
Hamm DST Trust (or Bert Harold Mackie, as trustee thereof) shall
be unchanged and remain outstanding as Common Units of the
Surviving Entity, and no consideration shall be delivered in
respect thereof;
(iii) each of the 1,839,712 Common Units owned by the
Harold Hamm HJ Trust (or Bert Harold Mackie, as trustee thereof)
shall be unchanged and remain outstanding as Common Units of the
Surviving Entity, and no consideration shall be delivered in
respect thereof;
(iv) each of the 59,600 Common Units owned by Harold Hamm
shall be unchanged and remain outstanding as Common Units of the
Surviving Entity, and no consideration shall be delivered in
respect thereof; and
(v) the General Partner Interest, which is owned by
Holdings GP, shall be unchanged and remain outstanding as the
General Partner Interest of the Surviving Entity, and no
consideration shall be delivered in respect thereof.
The Partnership Interests described in this Section 2.1(b)
are referred to in this Agreement as
Rollover
Interests
, and the record and beneficial owners of
such Rollover Interests are referred to in this Agreement as the
Rollover Parties
.
(c)
Conversion of Merger Sub Limited Liability Company
Interests
. At the Effective Time, by virtue of
the Merger and without any action on the part of the holder
thereof, each Merger Sub LLC Unit issued and outstanding
immediately prior to the Effective Time shall be converted into
and become one Common Unit of the Surviving Entity, which Common
Units shall be duly authorized and validly issued in accordance
with applicable Laws and the Partnership Agreement and shall be
fully paid (to the extent required by the Partnership Agreement)
and nonassessable (except to the extent such nonassessability
may be affected by
Sections 17-607
and
17-804
of DRULPA). Immediately after the Effective Time, such Common
Units and the Rollover Interests will constitute the only
outstanding Partnership Interests of the Surviving Entity. From
and after the Effective Time, any certificates or other evidence
representing the Merger Sub LLC Units shall be deemed for all
purposes to represent the number of Common Units of the
Surviving Entity into which such Merger Sub LLC Units were
converted in accordance with this Section 2.1(c). Holdings
GP hereby agrees and acknowledges that conversion of the Merger
Sub LLC Units to Common Units of the Surviving Entity as
provided herein shall constitute a duly authorized, accepted,
executed and countersigned delivery of such Common Units,
without any further action by Holdings GP or any other person.
(d)
Adjustments
. If between the date of
this Agreement and the Effective Time, the outstanding Common
Units, including securities convertible or exchangeable into or
exercisable for Common Units, shall be changed into a different
number of units or other securities by reason of any split,
combination, merger, consolidation, reorganization,
reclassification, recapitalization or other similar transaction,
or any distribution payable in Partnership Interests shall be
declared thereon with a record date within such period, the
Merger Consideration shall be appropriately adjusted to provide
the holders of Common Units the same economic effect as
contemplated by this Agreement prior to such event;
provided
that nothing
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herein shall be construed to permit Holdings to take any action
with respect to its securities that is expressly prohibited by
the terms of this Agreement.
Section 2.2
Exchange
of Certificates
.
(a)
Paying Agent
. Prior to the mailing of
the Proxy Statement (as defined herein), Parent shall appoint a
U.S. bank or trust company agreeable to the Conflicts
Committee to act as paying agent (the
Paying
Agent
) for the holders of Common Units (other than the
Rollover Parties) in connection with the Merger and to receive
and pay out the Merger Consideration to which such holders shall
become entitled pursuant to Section 2.1. At or prior to the
Effective Time, the Parent Parties shall deposit, or shall cause
to be deposited, in trust with the Paying Agent, for the benefit
of holders of Common Units (other than the Rollover Parties),
cash in an amount sufficient to pay the aggregate Merger
Consideration in exchange for all Common Units outstanding
immediately prior to the Effective Time (other than Common Units
included among the Rollover Interests), payable upon due
surrender of the certificates that immediately prior to the
Effective Time represented Common Units
(
Certificates
) (or effective affidavits of
loss in lieu thereof) or non-certificated Common Units
represented in book-entry form (
Book-Entry Common
Units
) pursuant to the provisions of this
Article II (such cash hereinafter referred to as the
Exchange Fund
).
(b)
Payment Procedures
.
(i) As soon as reasonably practicable after the Effective
Time and in any event not later than the fifth Business Day
following the Effective Time, Parent shall cause the Paying
Agent to mail to each holder of record of Common Units whose
Common Units were converted into the Merger Consideration
pursuant to Section 2.1(a), (A) a letter of
transmittal (the
Letter of Transmittal
)
(which shall specify that delivery shall be effected, and risk
of loss and title to the Certificates shall pass, only upon
proper delivery of the Certificates (or effective affidavits of
loss in lieu thereof) to the Paying Agent or, in the case of
Book-Entry Common Units, upon adherence to the procedures set
forth in the Letter of Transmittal, and shall be in such
customary form and have such other provisions as Parent and the
Holdings Parties shall reasonably determine) and
(B) instructions for use of the Letter of Transmittal in
effecting the surrender of the Certificates (or effective
affidavits of loss in lieu thereof) or Book-Entry Common Units
in exchange for the Merger Consideration.
(ii) Upon surrender of a Certificate (or an effective
affidavit of loss in lieu thereof) or Book-Entry Common Units to
the Paying Agent together with such Letter of Transmittal, duly
completed and validly executed in accordance with the
instructions thereto, and such other documents as may
customarily be required by the Paying Agent, the holder of such
Certificate or Book-Entry Common Units shall be entitled to
receive in exchange therefor a check in an amount equal to the
product of (x) the number of Common Units represented by
such holders properly surrendered Certificates (or
effective affidavits of loss in lieu thereof) or Book-Entry
Common Units multiplied by (y) the Merger Consideration. No
interest shall be paid or accrued for the benefit of holders of
the Certificates or Book-Entry Common Units on the Merger
Consideration payable in respect of the Certificates or
Book-Entry Common Units. In the event of a transfer of ownership
of Common Units that is not registered in the unit transfer
register of Holdings, a check for any cash to be paid upon due
surrender of the Certificate may be paid to such a transferee if
the Certificate formerly representing such Common Units is
presented to the Paying Agent, accompanied by all documents
required to evidence and effect such transfer and to evidence
that any applicable unit transfer or other Taxes have been paid
or are not applicable.
(iii) Parent, the Surviving Entity and the Paying Agent
shall be entitled to deduct and withhold from the consideration
otherwise payable under this Agreement to any holder of Common
Units such amounts as are required to be withheld or deducted
under the Internal Revenue Code of 1986, as amended (the
Code
), or any provision of federal, state,
local or foreign Tax Law with respect to the making of such
payment. To the extent that amounts are so withheld or deducted
and paid over to the applicable Governmental Entity, such
withheld or deducted amounts shall be treated for all purposes
of this Agreement as having been paid to the holder of Common
Units in respect of which such deduction and withholding were
made.
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(c)
Closing of Transfer Register
. At the
Effective Time, the unit transfer register of Holdings shall be
closed, and there shall be no further registration of transfers
on the unit transfer register of the Surviving Entity of Common
Units (other than the Rollover Interests) that were outstanding
immediately prior to the Effective Time. If, after the Effective
Time, Certificates or Book-Entry Common Units provided for in
Section 2.1(a) are presented to the Surviving Entity or
Parent for transfer, they shall be cancelled and exchanged for a
check in the proper amount pursuant to and subject to the
requirements of this Article II.
(d)
Termination of Exchange Fund
. Any
portion of the Exchange Fund (including the proceeds of any
investments thereof) that remains undistributed to the former
holders of Common Units for twelve months after the Effective
Time shall be delivered to the Surviving Entity upon demand, and
any former holders of Common Units who have not surrendered
their Certificates or Book-Entry Common Units provided for in
Section 2.1(a) in accordance with this Section 2.2
shall thereafter look only to the Surviving Entity for payment
of their claim for the Merger Consideration, without any
interest thereon, upon due surrender of their Certificates or
Book-Entry Common Units.
(e)
No Liability
. Notwithstanding
anything herein to the contrary, none of Parent, Merger Sub,
Holdings, Holdings GP, the Surviving Entity, the Paying Agent or
any other person shall be liable to any former holder of Common
Units for any amount properly delivered to a public official
pursuant to any applicable abandoned property, escheat or
similar Law.
(f)
Investment of Exchange Fund
. The
Paying Agent shall invest the Exchange Fund as reasonably
directed by Parent;
provided
,
however
, that any
investment of such Exchange Fund shall be limited to direct
short-term obligations of, or short-term obligations fully
guaranteed as to principal and interest by, the
U.S. government and that no such investment or loss thereon
shall affect the amounts payable to holders of Common Units that
converted into the right to receive the Merger Consideration
pursuant to Section 2.1. Any interest and other income
resulting from such investments shall be paid to the Surviving
Entity pursuant to Section 2.2(d).
(g)
Lost Certificates
. In the event that
any Certificate representing Common Units provided for in
Section 2.1(a) shall have been lost, stolen or destroyed,
upon the making of an affidavit of that fact by the person
claiming such Certificate to be lost, stolen or destroyed and,
if required by Parent or the Paying Agent, the posting by such
person of a bond in customary amount as indemnity against any
claim that may be made against it with respect to such
Certificate, the Paying Agent will issue in exchange for such
lost, stolen or destroyed Certificate a check in the amount of
the number of Common Units represented by such lost, stolen or
destroyed Certificate multiplied by the Merger Consideration.
Section 2.3
Timing
for Rollover Interests
.
For the avoidance of
doubt, the parties acknowledge and agree that the Rollover
Commitments shall be deemed to become effective and irrevocable
immediately prior to the Effective Time and prior to any other
event described above in this Article II.
ARTICLE III
Representations
and Warranties of the Holdings Parties
Except as disclosed (a) in (i) the Holdings SEC
Documents (as defined herein) or (ii) the Hiland SEC
Documents (as defined in the Hiland Agreement), in each case
filed on or after December 31, 2008 and prior to the date
of this Agreement (excluding any disclosures included in any
risk factor section of such documents and any other disclosures
in such documents to the extent that they are cautionary,
predictive or forward-looking in nature) or (b) in a
section of the disclosure schedule delivered concurrently
herewith by the Holdings Parties to Parent (the
Holdings Disclosure Schedule
) corresponding
to the applicable sections of this Article III to which
such disclosure applies (
provided
,
however
, that
any information set forth in one section of such Holdings
Disclosure Schedule also shall be deemed to apply to each other
section of this
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Agreement to which its relevance is reasonably apparent), the
Holdings Parties hereby represent and warrant, jointly and
severally, to the Parent Parties as follows:
Section 3.1
Qualification,
Organization, Subsidiaries, Etc.
(a) Section 3.1(a) of the Holdings Disclosure Schedule
sets forth, as of the date hereof, a true and complete list of
the Holdings Parties and each direct or indirect Subsidiary and
Partially Owned Entity of Holdings (collectively, the
Holdings Group Entities
), together with
(i) the nature of the legal organization of such person,
(ii) the jurisdiction of organization or formation of such
person, (iii) the name of each Holdings Group Entity that
owns beneficially or of record any equity or similar interest in
such person, and (iv) the capital stock or other ownership
interest owned by each such Holdings Group Entity in such other
persons.
(b) Each Holdings Party is a legal entity validly existing
and in good standing under the Laws of its respective
jurisdiction of formation. Each Holdings Party has all requisite
limited partnership, limited liability company or corporate, as
the case may be, power and authority to own, lease and operate
its properties and assets and to carry on its business as
presently conducted in all material respects.
(c) Each Holdings Party is duly registered or qualified to
do business and is in good standing as a foreign limited
partnership, limited liability company or corporation, as the
case may be, in each jurisdiction where the ownership, leasing
or operation of its assets or properties or the conduct of its
business requires such registration or qualification, except
where the failure to be so registered, qualified or in good
standing would not, individually or in the aggregate, have a
Holdings Material Adverse Effect. The organizational or
governing documents of the Holdings Parties, as previously made
available to Parent, are in full force and effect. None of the
Holdings Parties is in violation of its organizational or
governing documents.
Section 3.2
Capitalization.
(a) Holdings GP is the sole general partner of Holdings.
Holdings GP is the record and beneficial owner of the 0%
non-economic General Partner Interest in Holdings, and such
General Partner Interest has been duly authorized and validly
issued in accordance with applicable Laws and the Partnership
Agreement. Holdings GP owns all of the General Partner Interest
free and clear of any Encumbrances except pursuant to the
organizational or governing documents of any of the Holdings
Parties. Parent is the record owner of all of the limited
liability company interests in Holdings GP. Such limited
liability company interests in Holdings GP have been duly
authorized and validly issued in accordance with applicable Laws
and the limited liability company agreement of Holdings GP and
are fully paid (to the extent required by the limited liability
company agreement of Partnership GP) and nonassessable (except
to the extent such nonassessability may be affected by
Sections 18-607
and
18-804
of DLLCA).
(b) As of the date of this Agreement (the
Execution Date
), Holdings has no Partnership
Interests issued and outstanding other than the following:
(i) 21,607,500 Common Units; and
(ii) the General Partner Interest.
Each of such limited partner interests described in
clause (i) above has been duly authorized and validly
issued in accordance with applicable Laws and the Partnership
Agreement, and is fully paid (to the extent required under the
Partnership Agreement) and non-assessable (except to the extent
such nonassessability may be affected by
Sections 17-607
and
17-804
of DRULPA). Such limited partner interests were not issued in
violation of any preemptive or similar rights or any other
agreement or understanding binding on Holdings. As of the date
of this Agreement, except for outstanding awards for the
issuance of 16,500 Restricted Units pursuant to the Holdings
LTIP and except pursuant to the organizational or governing
documents of any of the Holdings Parties, (A) there are no
outstanding options, warrants, subscriptions, puts, calls or
other rights, agreements, arrangements or commitments
(preemptive, contingent or otherwise) obligating any of the
Holdings Parties to offer, issue, sell, redeem, repurchase,
otherwise acquire or transfer, pledge or encumber any equity
interest in any of the Holdings Parties; (B) there are no
outstanding securities or obligations of any kind of any of the
Holdings Parties that are convertible into or exercisable or
exchangeable for any equity interest in any of the Holdings
Parties or any other person, and none of the Holdings Parties
has any obligation
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of any kind to issue any additional securities or to pay for or
repurchase any securities; (C) there are not outstanding
any equity appreciation rights, phantom equity or similar
rights, agreements, arrangements or commitments based on the
value of the equity, book value, income or any other attribute
of any of the Holdings Parties; (D) there are no
outstanding bonds, debentures or other evidences of indebtedness
of any of the Holdings Parties having the right to vote (or that
are exchangeable for or convertible or exercisable into
securities having the right to vote) with the holders of Common
Units on any matter; and (E) except as described in the
organizational or governing documents of the Holdings Parties or
the Support Agreement, there are no Unitholder agreements,
proxies, voting trusts, rights to require registration under
securities Laws or other arrangements or commitments to which
any of the Holdings Parties is a party or to the knowledge of
the Holdings Parties by which any of their securities are bound
with respect to the voting, disposition or registration of any
outstanding securities of any of the Holdings Parties.
(c) All of the outstanding limited liability company,
partnership or other equity interests of each Subsidiary of
Holdings (but, for purposes of this Section 3.2(c), not
including Subsidiaries of Hiland) (i) have been duly
authorized and validly issued in accordance with applicable Laws
and its governing documents and are fully paid (to the extent
required by its governing documents) and nonassessable (except
to the extent such nonassessability may be affected by
applicable Laws, including
Sections 17-607
and
17-804
of DRULPA) and (ii) are owned directly or indirectly by
Holdings in the amounts set forth in Section 3.1(a) of the
Holdings Disclosure Schedule, free and clear of any Encumbrance
except pursuant to the organizational or governing documents of
any of the Holdings Group Entities (not including Subsidiaries
and Partially Owned Entities of Hiland) and other than
Encumbrances securing the obligations of Holdings under the
Holdings Credit Agreement and Hiland Operating, LLC under the
Hiland Operating Credit Agreement.
(d) All of the outstanding equity interests of each
Partially Owned Entity of Holdings (but, for purposes of this
Section 3.2(d), not including Partially Owned Entities of
Hiland) (i) have been duly authorized and validly issued in
accordance with applicable Laws and its governing documents and
are fully paid (to the extent required by its organizational or
governing documents) and nonassessable (except to the extent
such nonassessability may be affected by applicable Laws), and
(ii) are owned directly or indirectly by Holdings in the
respective amounts shown on Section 3.1(a) of the Holdings
Disclosure Schedule, free and clear of any Encumbrance except
pursuant to the organizational or governing documents of any of
the Holdings Group Entities (not including Subsidiaries and
Partially Owned Entities of Hiland).
(e) Except with respect to the ownership of any equity or
long-term debt securities between or among the Holdings Group
Entities, none of the Holdings Parties owns or will own at the
Closing Date, directly or indirectly, any equity or long-term
debt securities of any corporation, partnership, limited
liability company, joint venture, association or other entity.
(f) Except as provided in the Partnership Agreement, no
holder of Partnership Interests in any of the Holdings Parties
has any right to have such Partnership Interests registered
under the Securities Act of 1933, as amended (the
Securities Act
), by Holdings.
Section 3.3
Authority;
No Violation; Consents and Approvals.
(a) Each of the Holdings Parties has all requisite limited
liability company or limited partnership power and authority to
enter into this Agreement, to carry out its obligations
hereunder and to consummate the transactions contemplated
hereby. The execution, delivery and performance by each Holdings
Party of this Agreement and the consummation of the transactions
contemplated hereby have been duly authorized by all requisite
limited liability company or limited partnership action on the
part of such Holdings Party, except for (i) Unitholder
Approval of this Agreement and the Merger and (ii) the
filing of the Certificate of Merger with the Secretary of State
of the State of Delaware; and no other vote or approval by any
holders of Partnership Interests or limited liability company
interests in Holdings GP or other corporate, limited liability
company, partnership or other organizational votes, approvals or
proceedings in respect of the Holdings Parties are necessary to
consummate the transactions contemplated by this Agreement.
Notwithstanding the foregoing, no representation or warranty is
made concerning whether the consent of Holdings GP, to the
extent reserved to Parent pursuant to Section 7.1(d) of the
Amended and Restated Limited Liability Company Agreement of
Holdings GP (the
Holdings GP LLC Agreement
),
was validly adopted by Parent.
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(b) This Agreement has been duly executed and delivered by
each Holdings Party and, assuming the due authorization,
execution and delivery hereof by the Parent Parties, constitutes
a legal, valid and binding agreement of such Holdings Party,
enforceable against such Holdings Party in accordance with its
terms (except insofar as such enforceability may be limited by
bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and similar laws relating to or affecting
creditors rights generally and by general principles of
equity (regardless of whether such enforceability is considered
in a proceeding in equity or at law)).
(c) Except for matters expressly contemplated by this
Agreement and matters described in clauses (ii), (iii) or
(iv) below that would not, individually or in the
aggregate, have a Holdings Material Adverse Effect, neither the
execution and delivery by the Holdings Parties of this
Agreement, nor the consummation by the Holdings Parties of the
transactions contemplated hereby and the performance by the
Holdings Parties of this Agreement will (i) violate or
conflict with any provision of the organizational or governing
documents of the Holdings Group Entities; (ii) require any
consent, approval, authorization or permit of, registration,
declaration or filing with, or notification to, any Governmental
Entity or any other person; (iii) result in any breach of
or constitute a default (or an event that, with notice or lapse
of time or both, would become a default) under, or give to
others any right of termination, cancellation, amendment or
acceleration of any obligation or the loss of any benefit under
any agreement or instrument to which any of the Holdings Group
Entities is a party or by or to which any of their properties
are bound; (iv) result in the creation of an Encumbrance
upon any of the assets of any of the Holdings Group Entities; or
(v) violate or conflict in any material respect with any
material Law applicable to the Holdings Group Entities.
Notwithstanding the foregoing, no representation or warranty is
made concerning whether the consent of Holdings GP, to the
extent reserved to Parent pursuant to Section 7.1(d) of the
Holdings GP LLC Agreement was validly adopted by Parent.
(d) Section 3.3(d) of the Holdings Disclosure Schedule
identifies all consents, approvals and authorizations of any
Governmental Entity or third party that are required to be
obtained by any Holdings Group Entity in connection with
(1) the execution and delivery by the Holdings Parties of
this Agreement or (2) the consummation by the Holdings
Parties of the transactions contemplated by this Agreement, in
each case except for such consents, approvals and authorizations
that, if not obtained, would not, individually or in the
aggregate, have a Holdings Material Adverse Effect.
Section 3.4
SEC
Reports and Compliance.
(a) The Holdings Parties have filed or furnished all forms,
documents, statements and reports required to be filed or
furnished prior to the date hereof by them with the Securities
and Exchange Commission (the
SEC
) since
January 1, 2007 (the forms, documents, statements and
reports filed with or furnished to the SEC since January 1,
2007 and those filed or furnished with the SEC subsequent to the
date of this Agreement, if any, including any amendments
thereto, the
Holdings SEC Documents
). As of
their respective dates, or, if amended, as of the date of the
last such amendment prior to the date hereof, the Holdings SEC
Documents complied, and each of the Holdings SEC Documents filed
or furnished subsequent to the date of this Agreement will
comply, in all material respects with the requirements of the
Securities Act and the Securities Exchange Act of 1934, as
amended (the
Exchange Act
), as the case may
be, and the applicable rules and regulations promulgated
thereunder, and complied or will comply, as applicable, in all
material respects with the then-applicable accounting standards
and the rules and regulations of the SEC with respect thereto.
None of the Holdings SEC Documents so filed or furnished or that
will be filed or furnished subsequent to the date of this
Agreement contained or will contain, as the case may be, any
untrue statement of a material fact or omitted or will omit to
state any material fact required to be stated therein or
necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(b) As of the date hereof, there are no outstanding
comments from, or unresolved issues raised by, the SEC with
respect to the Holdings SEC Documents.
(c) The financial statements (including all related notes
and schedules) of Holdings and its Subsidiaries included in or
incorporated by reference into the Holdings SEC Documents (the
Holdings Financial Statements
) fairly
present, in all material respects, the financial position of
Holdings and its Subsidiaries, taken as a whole, as at the
respective dates thereof, and the results of their operations
and their cash flows for
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the respective periods then ended (subject, in the case of the
unaudited statements, to normal year-end audit adjustments and
to any other adjustments described therein, including the notes
thereto) in conformity with United States generally accepted
accounting principles (
GAAP
) (except, in the
case of the unaudited statements, as permitted by the SEC)
applied on a consistent basis during the periods involved
(except as may be specified therein or in the notes thereto).
Section 3.5
No
Undisclosed Liabilities
.
Neither Holdings nor
any of Holdings Subsidiaries has any indebtedness or
liability (whether absolute, accrued, contingent or otherwise)
of any nature that is not accrued or reserved against in the
Holdings Financial Statements filed prior to the execution of
this Agreement or reflected in the notes thereto, other than
(a) liabilities incurred or accrued in the ordinary course
of business consistent with past practice since
December 31, 2008 or (b) liabilities of Holdings or
any of Holdings Subsidiaries that would not, individually
or in the aggregate, have a Holdings Material Adverse Effect.
Section 3.6
Compliance
with Law
.
Each of the Holdings Parties is in
compliance with all applicable Laws, other than any
noncompliance which would not, individually or in the aggregate,
have a Holdings Material Adverse Effect.
Section 3.7
Employee
Benefits.
(a) Except as would not have, individually or in the
aggregate, a Holdings Material Adverse Effect, no Holdings Party
and no company or other entity that is required to be treated as
a single employer together with a Holdings Party under
Section 414 of the Code (each, an
ERISA
Affiliate
) maintains or has ever maintained or been
obligated to contribute to or has any liability (secondary or
otherwise) to an Employee Benefit Plan that is (1) subject
to Title IV of the Employee Retirement Income Security Act
of 1974, as amended (
ERISA
), or the minimum
funding requirements of Section 412 of the Code or
Section 302 of ERISA, (2) a plan of the type described
in Section 4063 of ERISA or Section 413(c) of the
Code, (3) a multiemployer plan (as defined in
Section 3(37) of ERISA) or (4) a multiple employer
welfare arrangement (as defined in Section 3(40) of ERISA).
(b) Except as would not have, individually or in the
aggregate, a Holdings Material Adverse Effect, the Employee
Benefit Plans of the Holdings Parties and their affiliates
(A) have been maintained (in form and in operation) in all
respects in accordance with their terms and with ERISA, the Code
and all other applicable Laws, (B) if intended to be
qualified under Section 401(a) of the Code, have been
maintained, and are currently, in compliance with the
Codes qualification requirements in form and operation,
and (C) do not provide, and have not provided, any
post-retirement welfare benefits or coverage, except as required
under Part 6 of Subtitle B of Title I of ERISA and
Section 4980B of the Code (or similar state or local law).
Section 3.8
Absence
of Certain Changes or Events
.
Since
December 31, 2008, (a) except as otherwise required or
expressly provided for in this Agreement, (i) the
businesses of the Holdings Parties have been conducted, in all
material respects, in the ordinary course of business consistent
with past practice and (ii) none of the Holdings Parties
has taken or permitted to occur any action that, were it to be
taken from and after the date hereof, would require approval of
Parent pursuant to Section 5.1(b) and (b) there has
not been a Holdings Material Adverse Effect.
Section 3.9
Investigations;
Litigation
.
Except as disclosed in
Section 3.9 of the Holdings Disclosure Schedule, there are
no (a) investigations or proceedings pending (or, to the
Knowledge of the Holdings Parties, threatened) by any
Governmental Entity with respect to the Holdings Parties or
(b) actions, suits, inquiries, investigations or
proceedings pending (or, to the Knowledge of the Holdings
Parties, threatened) against or affecting any Holdings Party, or
any of their respective properties at law or in equity before,
and there are no orders, judgments or decrees of, or before, any
Governmental Entity, in each case of clause (a) or (b),
which would have (if adversely determined), individually or in
the aggregate, a Holdings Material Adverse Effect.
Section 3.10
Proxy
Statement; Other Information
.
None of the
information contained in the Proxy Statement will at the time of
the mailing of the Proxy Statement to the Unitholders of
Holdings, at the time of the Partnership Meeting (as defined
herein) (as such Proxy Statement shall have been amended or
supplemented prior to the date of the Partnership Meeting), and
at the time of any amendments thereof or supplements thereto,
and none of the information supplied or to be supplied by
Holdings for inclusion or
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incorporation by reference in the
Schedule 13E-3
(as defined herein) to be filed with the SEC concurrently with
the filing of the Proxy Statement, will, at the time of its
filing with the SEC, and at the time of any amendments thereof
or supplements thereto, contain any untrue statement of a
material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were
made, not misleading;
provided
that no representation is
made by Holdings with respect to information supplied by a
Parent Party, its controlling Affiliates, Continental Gas, the
Trusts or a Hiland Party for inclusion therein. The Proxy
Statement will comply as to form in all material respects with
the Exchange Act, except that no representation is made by
Holdings with respect to information supplied by a Parent Party,
its controlling Affiliates, Continental Gas, the Trusts or a
Hiland Party for inclusion therein. The letter to Unitholders,
notice of meeting, proxy statement and forms of proxy to be
distributed to Unitholders in connection with the Merger to be
filed with the SEC in connection with seeking the adoption and
approval of this Agreement and the Merger are collectively
referred to herein as the
Proxy Statement.
The
Rule 13E-3
Transaction Statement on
Schedule 13E-3
to be filed with the SEC in connection with seeking the adoption
and approval of this Agreement and the Merger is referred to
herein as the
Schedule 13E-3.
Section 3.11
Tax
Matters.
(a) (i) There is no action, suit, proceeding,
investigation, audit or claim now pending against, or with
respect to, any of the Holdings Parties in respect of any
material Tax or material Tax assessment, nor has any claim for
additional material Tax or material Tax assessment been asserted
in writing or been proposed by any Tax authority;
(ii) no written claim has been made by any Tax authority in
a jurisdiction where any of the Holdings Parties does not
currently file a Tax Return that it is or may be subject to any
material Tax in such jurisdiction, nor has any such assertion
been threatened or proposed in writing;
(iii) none of the Holdings Parties has been a member of an
affiliated group filing a consolidated federal income Tax Return
or has any liability for the Taxes of any Person (other than a
Holdings Party) under Treasury
Regulation Section 1.1502-6
(or any similar provision of state, local, or foreign Law), as a
transferee or successor, by contract, or otherwise.
(b) In each tax year since the formation of Holdings up to
and including the current tax year, at least 90% of the gross
income of Holdings has been income which is qualifying
income within the meaning of Section 7704(d) of the
Code.
Section 3.12
Labor
Matters
.
Except as disclosed in
Section 3.12 of the Holdings Disclosure Schedule, no
Holdings Party, other than Holdings GP, has or has ever had
employees. Except for such matters which would not have,
individually or in the aggregate, a Holdings Material Adverse
Effect, no Holdings Party has received written notice during the
past two years of the intent of any Governmental Entity
responsible for the enforcement of labor, employment,
occupational health and safety or workplace safety and
insurance/workers compensation laws to conduct an investigation
of the Holdings Parties and, to the Knowledge of the Holdings
Parties, no such investigation is in progress. Except for such
matters which would not have, individually or in the aggregate,
a Holdings Material Adverse Effect, (i) there are no (and
have not been during the two-year period preceding the date
hereof) strikes or lockouts with respect to any employees of, or
providing services to, the Holdings Parties
(
Employees
), (ii) to the Knowledge of
the Holdings Parties, there is no (and has not been during the
two-year period preceding the date hereof) union organizing
effort pending or threatened against the Holdings Parties,
(iii) there is no (and has not been during the two-year
period preceding the date hereof) unfair labor practice, labor
dispute or labor arbitration proceeding pending or, to the
Knowledge of the Holdings Parties, threatened against the
Holdings Parties, and (iv) there is no (and has not been
during the two-year period preceding the date hereof) slowdown
or work stoppage in effect or, to the Knowledge of the Holdings
Parties, threatened with respect to Employees. No Holdings Party
has any liabilities under the Worker Adjustment and Retraining
Act and the regulations promulgated thereunder or any similar
state or local law as a result of any action taken by a Holdings
Party that would have, individually or in the aggregate, a
Holdings Material Adverse Effect. No Holdings Party is a party
to any collective bargaining agreements.
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Section 3.13
Assets
of the Holdings Parties
.
Other than assets
and properties that are both individually and in the aggregate
not material to the business of the Holdings Parties, the only
assets and properties owned by the Holdings Parties are the
ownership interests in Hiland and Hiland GP set forth in
Section 3.1(a) of the Holdings Disclosure Schedule.
Section 3.14
Opinion
of Financial Advisor
.
The Conflicts Committee
has received the written opinion of Barclays Capital, Inc.,
dated as of the date of this Agreement, to the effect that, as
of the date hereof, the Merger Consideration is fair to the
holders of Common Units (excluding Common Units owned by
Mr. Hamm, his Affiliates (including Continental Gas) and
the Trusts) from a financial point of view.
Section 3.15
Required
Approvals
.
Holdings GP has approved this
Agreement and the transactions contemplated by this Agreement
and directed that this Agreement and the Merger be submitted to
a vote of Unitholders as required under
Section 17-211
of the DRULPA and under Articles XIII and XIV of the
Partnership Agreement;
provided
,
however
, that no
representation or warranty is made concerning whether the
consent of Holdings GP, to the extent reserved to Parent
pursuant to Section 7.1(d) of the Holdings GP LLC
Agreement, was validly adopted by Parent. The Board of
Directors, upon the unanimous recommendation of its Conflicts
Committee, at a meeting duly called and held, has,
(i) determined that this Agreement and the transactions
contemplated hereby are advisable, fair to and in the best
interests of Holdings and the holders of Common Units (excluding
Common Units owned by Mr. Hamm, his Affiliates (including
Continental Gas) and the Trusts), (ii) approved the Merger
and this Agreement and (iii) recommended that this
Agreement and the Merger be approved by holders of Common Units
(excluding Common Units owned by Mr. Hamm, his Affiliates
(including Continental Gas) and the Trusts)(including the
Conflicts Committees recommendation, the
Recommendation
).
Section 3.16
Material
Contracts.
(a) Except for this Agreement or as designated as an
exhibit to Holdings annual report on
Form 10-K
for the year ended December 31, 2008 or to a Holdings SEC
Document filed thereafter and prior to the date of this
Agreement, neither Holdings nor any of its Subsidiaries is a
party to or bound by, as of the date hereof, any Contract
(whether written or oral) which is a material
contract (as such term is defined in Item 601(b)(10)
of
Regulation S-K
of the SEC) (all contracts of the type described in this
Section 3.16(a) being referred to herein as
Material Contracts
).
(b) (i) Each Material Contract to which a Holdings
Party is a party is valid and binding on such Holdings Party and
in full force and effect, except where the failure to be valid,
binding and in full force and effect, either individually or in
the aggregate, would not have a Holdings Material Adverse
Effect, (ii) each Holdings Party has in all material
respects performed all obligations required to be performed by
it under each Material Contract to which it is a party, except
where such noncompliance, either individually or in the
aggregate, would not have a Holdings Material Adverse Effect,
and (iii) no Holdings Party knows of, or has received
notice of, the existence of any event or condition which
constitutes, or, after notice or lapse of time or both, will
constitute, a material default on the part of any Holdings Party
under any such Material Contract, except where such default,
either individually or in the aggregate, would not have a
Holdings Material Adverse Effect.
Section 3.17
State
Takeover Laws
.
No approvals are required
under state takeover or similar laws in connection with the
performance by the Holdings Parties or their Affiliates of their
obligations under this Agreement, the Support Agreement, the
Rollover Commitments or the transactions contemplated hereby or
thereby.
Section 3.18
Finders
or Brokers
.
Except for Barclays Capital,
Inc., none of the Holdings Parties (including through its
respective board of directors (or similar governing body) or any
committee thereof) has engaged any investment banker, broker or
finder in connection with the transactions contemplated by this
Agreement who would be entitled to any fee or any commission in
connection with or upon consummation of the Merger or the other
transactions contemplated hereby.
Section 3.19
No
Other Representations or Warranties
.
Except
for the representations and warranties contained in this
Article III and except as otherwise expressly set forth in
this Agreement or in the agreements
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or certificates entered into in connection herewith or
contemplated hereby, none of the Holdings Parties nor any other
Person on behalf of the Holdings Parties makes any other
representation or warranty of any kind or nature, express or
implied, in connection with this Agreement or the transactions
contemplated by this Agreement.
ARTICLE IV
Representations
and Warranties of the Parent Parties
Except as disclosed in a section of the disclosure schedule
delivered concurrently herewith by Parent to the Holdings
Parties immediately prior to the execution of this Agreement
(the
Parent Disclosure Schedule
)
corresponding to the applicable sections of this Article IV
to which such disclosure applies (
provided
,
however
, that any information set forth in one section of
such Parent Disclosure Schedule also shall be deemed to apply to
each other section of this Agreement to which its relevance is
reasonably apparent), the Parent Parties hereby represent and
warrant, jointly and severally, to the Holdings Parties as
follows:
Section 4.1
Qualification;
Organization.
(a) Each of the Parent Parties is a legal entity validly
existing and in good standing under the Laws of its respective
jurisdiction of formation. Each of the Parent Parties has all
requisite limited liability company power and authority to own,
lease and operate its properties and assets and to carry on its
business as presently conducted in all material respects.
(b) Each of the Parent Parties is duly registered or
qualified to do business and is in good standing as a foreign
limited liability company in each jurisdiction where the
ownership, leasing or operation of its assets or properties or
the conduct of its business requires such registration or
qualification, except where the failure to be so registered,
qualified or in good standing would not, individually or in the
aggregate, have a Parent Material Adverse Effect. The
organizational or governing documents of the Parent Parties, as
previously made available to the Holdings Parties, are in full
force and effect. None of the Parent Parties is in violation of
its organizational or governing documents.
Section 4.2
Authority;
No Violation; Consents and Approvals.
(a) Each of the Parent Parties has all requisite limited
liability company power and authority to enter into this
Agreement and to carry out its obligations hereunder and to
consummate the transactions contemplated hereby. The execution,
delivery and performance by each Parent Party of this Agreement
and the consummation of the transactions contemplated hereby
have been duly authorized by all requisite limited liability
company action on the part of such Parent Party, and no other
limited liability company proceedings on the part of a Parent
Party are necessary to consummate the transactions contemplated
by this Agreement. Parent has, in its capacity as the sole
member of Holdings GP, duly authorized by all requisite limited
liability company action on the part of Parent, the execution,
delivery and performance by Holdings GP of this Agreement and
the consummation of the transactions contemplated hereby.
(b) This Agreement has been duly executed and delivered by
each Parent Party and, assuming the due authorization, execution
and delivery hereof by the Holdings Parties, constitutes a
legal, valid and binding agreement of such Parent Party,
enforceable against such Parent Party in accordance with its
terms (except insofar as such enforceability may be limited by
bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and similar laws relating to or affecting
creditors rights generally and by general principles of
equity (regardless of whether such enforceability is considered
in a proceeding in equity or at law)).
(c) Except for matters expressly contemplated by this
Agreement and matters described in clauses (ii), (iii) or
(iv) below that would not, individually or in the
aggregate, have a Parent Material Adverse Effect, neither the
execution and delivery by the Parent Parties of this Agreement,
nor the consummation by the Parent Parties of the transactions
contemplated hereby and the performance by the Parent Parties of
this Agreement will (i) violate or conflict with any
provision of the governing documents of the Parent Parties;
(ii) require any consent, approval, authorization or permit
of, registration, declaration or filing with, or notification
to, any Governmental Entity or any other person;
(iii) result in any breach of or constitute a
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default (or an event that, with notice or lapse of time or both,
would become a default) under, or give to others any right of
termination, cancellation, amendment or acceleration of any
obligation or the loss of any benefit under any agreement or
instrument to which any of the Parent Parties is a party or by
or to which any of their properties are bound; (iv) result
in the creation of an Encumbrance upon any of the assets of any
of the Parent Parties; or (v) violate or conflict in any
material respect with any material Law applicable to the Parent
Parties.
(d) Section 4.2(d) of the Parent Disclosure Schedule
identifies all material consents, approvals and authorizations
of any Governmental Entity or third party that are required to
be obtained by any Parent Parties in connection with
(1) the execution and delivery by the Parent Parties of
this Agreement or (2) the consummation by the Parent
Parties of the transactions contemplated by this Agreement,
except for such consents, approvals and authorizations that, if
not obtained, would not, individually or in the aggregate, have
a Parent Material Adverse Effect.
Section 4.3
Proxy
Statement; Other Information
.
None of the
information supplied or to be supplied by the Parent Parties,
their controlling Affiliates, Continental Gas or the Trusts in
writing for inclusion in the Proxy Statement will at the time of
the mailing of the Proxy Statement to the Unitholders of
Holdings, at the time of the Partnership Meeting (as such Proxy
Statement shall have been amended or supplemented prior to the
date of the Partnership Meeting), and at the time of any
amendments thereof or supplements thereto, and none of the
information supplied or to be supplied by the Parent Parties,
their controlling Affiliates, Continental Gas or the Trusts in
writing for inclusion in the
Schedule 13E-3
to be filed with the SEC concurrently with the filing of the
Proxy Statement, will, at the time of its filing with the SEC,
and at the time of any amendments thereof or supplements
thereto, contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading.
Section 4.4
Funding
.
On
the Closing Date, the Parent Parties will have sufficient cash
to enable them to make payment of the aggregate Merger
Consideration and the Parent Parties related fees and
expenses (the
Funding
). For the avoidance of
doubt, it shall not be a condition to the obligations of the
Parent Parties to effect the Merger for the Parent Parties to
obtain the Funding or any other financing of the Merger
Consideration and the Parent Parties related fees and
expenses. Section 4.4 of the Parent Disclosure Schedule
sets forth true, accurate and complete copies of
(i) executed equity commitment letters (the
Funding Commitments
) to provide the Funding
to Parent or Merger Sub and (ii) the Rollover Commitments.
As of the date hereof, the Funding Commitments are in full force
and effect and have not been withdrawn or terminated or
otherwise amended or modified in any respect and none of the
Parent Parties is in breach of any of the terms or conditions
set forth therein and no event has occurred which, with or
without notice, lapse of time or both, could reasonably be
expected to constitute a material breach or failure to satisfy a
condition precedent set forth therein.
Section 4.5
Ownership
and Operations of Merger Sub
.
As of the date
of this Agreement, all of the issued and outstanding Merger Sub
LLC Interests are, and at the Effective Time will be, owned by
Parent, the Harold Hamm DST Trust and the Harold Hamm HJ Trust,
and such Merger Sub LLC Interests have been duly authorized and
validly issued in accordance with applicable Laws and the
limited liability company agreement of Merger Sub and are fully
paid (to the extent required by the limited liability company
agreement of Merger Sub) and nonassessable (except to the extent
such nonassessability may be affected by
Sections 18-607
and
18-804
of DLLCA). Merger Sub has not conducted any business other than
incident to its formation and pursuant to this Agreement, the
Merger and the other transactions contemplated hereby and the
financing of such transactions.
Section 4.6
Finders
or Brokers
.
Except for Wachovia Capital
Markets, LLC, none of the Parent Parties has engaged any
investment banker, broker or finder in connection with the
transactions contemplated by this Agreement who might be
entitled to any fee or any commission in connection with or upon
consummation of the Merger or the other transactions
contemplated hereby.
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Section
4.7
Access
to Information; No Other Representations or Warranties;
Disclaimer.
(a) Each of Parent and Merger Sub has conducted its own
investigations of the Holdings Group Entities and acknowledges
that it has been provided adequate access to the personnel,
properties, premises and records of the Holdings Group Entities
for such purpose.
(b) Except for the representations and warranties contained
in this Article IV and except as otherwise expressly set
forth in this Agreement or in the agreements or certificates
entered into in connection herewith or contemplated hereby, none
of the Parent Parties nor any other Person on behalf of the
Parent Parties makes any other representation or warranty of any
kind or nature, express or implied, in connection with the
transactions contemplated by this Agreement.
(c) Except for the representations and warranties expressly
set forth in this Agreement or in the agreements or certificates
entered into in connection herewith or contemplated hereby,
neither Parent nor Merger Sub has relied on any representation
or warranty, express or implied, with respect to the Holdings
Group Entities or with respect to any other information provided
or made available to Parent or Merger Sub in connection with the
transactions contemplated by this Agreement. None of the
Holdings Group Entities nor any other Person will have or be
subject to any liability or indemnification obligation to
Parent, Merger Sub or any other Person resulting from the
distribution to Parent or Merger Sub, or use by Parent or Merger
Sub of any such information, including any information,
documents, projections, forecasts or other material made
available to Parent or Merger Sub or management presentations in
expectation of the transactions contemplated by this Agreement.
ARTICLE V
Covenants
and Agreements
Section 5.1
Conduct
of Business by Holdings and Parent.
(a) From and after the date hereof and prior to the
Effective Time or the date, if any, on which this Agreement is
earlier terminated pursuant to Article VII, and except
(i) as required by applicable Law, (ii) with the prior
written consent of Parent (which shall not be unreasonably
withheld, conditioned or delayed), (iii) as expressly
provided for and permitted by this Agreement or (iv) as
disclosed in Section 5.1(a) of the Holdings Disclosure
Schedule, the Holdings Parties shall (A) conduct the
business of such Holdings Parties in the ordinary course
consistent with past practice, (B) use their commercially
reasonable efforts to maintain and preserve intact the present
business organizations and material rights and franchises of
such Holdings Group Entities, to keep available the services of
the current Employees and the current officers and consultants
of, or providing services to, the Holdings Group Entities, and
to maintain and preserve in all material respects the
relationships of such Holdings Group Entities with customers,
suppliers and others having business dealings with them, and
(C) take no action that would materially adversely affect
or delay the ability of any of the parties hereto from obtaining
any necessary approvals of any Governmental Entity required for
the transactions contemplated hereby, performing its covenants
and agreements under this Agreement or consummating the
transactions contemplated hereby or that would otherwise
materially delay or prohibit consummation of the Merger or other
transactions contemplated hereby;
provided
,
however
, that any action taken or omitted to be taken by
an officer of a Holdings Party at the direction of any of the
Parent Parties or Mr. Hamm (other than (1) in his
capacity as part of, (2) in accordance with authority
delegated to him by, or (3) as otherwise authorized by, the
Board of Directors or any committee thereof) that would
otherwise constitute a breach of this Section 5.1 shall not
constitute such a breach.
(b) Without limiting the generality of Section 5.1(a),
the Holdings Parties agree that, except (i) as required by
applicable Law, (ii) with the prior written consent of
Parent (which shall not be unreasonably withheld, conditioned or
delayed), (iii) as expressly provided for and permitted by
this Agreement or (iv) as disclosed in Section 5.1(b)
of the Holdings Disclosure Schedule, the Holdings Parties will
not:
(i) make any change in any of their organizational or
governing documents, other than changes expressly provided for
in this Agreement;
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(ii) issue, deliver or sell or authorize or propose the
issuance, delivery or sale of, any of their Partnership
Interests or equity securities or securities convertible into
their Partnership Interests or equity securities, or
subscriptions, rights, warrants or options to acquire or other
agreements or commitments of any character obligating any of
them to issue any such Partnership Interests or equity
securities (other than restricted units, phantom units or unit
options to current or newly-hired employees consistent with past
practice of up to 50,000 Common Units in the aggregate in
accordance with the Holdings LTIP);
(iii) except for any distributions from Holdings
Subsidiaries to Holdings, declare, set aside or pay any
distributions in respect of the Partnership Interests or other
ownership interests, or split, combine or reclassify any of the
Partnership Interests or other ownership interests or issue or
authorize the issuance of any other Partnership Interests or
other ownership interests in respect of, in lieu of or in
substitution for any of the Partnership Interests or other
ownership interests, or purchase, redeem or otherwise acquire,
directly or indirectly, any of the Partnership Interests or
other ownership interests other than repurchases of Partnership
Interests in accordance with the Holdings LTIP;
(iv) other than the Hiland Merger, merge into or with any
other Person;
(v) incur, assume or guarantee any indebtedness for
borrowed money, issue, assume or guarantee any debt securities,
grant any option, warrant or right to purchase any debt
securities, or issue any securities convertible into or
exchangeable for any debt securities other than in connection
with (A) borrowings in the ordinary course of business or
provided for in the Budget, in each case in accordance with any
existing bank credit facilities, (B) the refinancing or
replacement of existing indebtedness, (C) other than as
permitted by (A) and (B) above, the incurrence by
Holdings of up to $1,000,000 in principal amount of indebtedness
and (D) a transaction that is permitted by clause (vi);
(vi) (A) sell, assign, transfer, abandon, lease or
otherwise dispose of or (B) grant any security interest
with respect to, pledge or otherwise encumber (other than
Permitted Encumbrances) any limited liability company,
partnership or other equity interests of any Subsidiary or
Partially Owned Entity of the Holdings Parties (not including
Subsidiaries and Partially Owned Entities of Hiland);
(vii) (A) settle any claims, demands, lawsuits or
state or federal regulatory proceedings for damages to the
extent such settlements in the aggregate assess damages in
excess of $1,000,000 (other than any claims, demands, lawsuits
or proceedings to the extent insured (net of deductibles), to
the extent reserved against in the Holdings Financial Statements
or to the extent covered by an indemnity obligation not subject
to dispute or adjustment from a solvent indemnitor) or
(B) settle any claims, demands, lawsuits or state or
federal regulatory proceedings seeking an injunction or other
equitable relief where such settlements would have a Holdings
Material Adverse Effect;
(viii) make any material change in their tax methods,
principles or elections;
(ix) make any material change to their financial reporting
and accounting methods other than as required by a change in
GAAP;
(x) (A) grant any increases in the compensation of any
of their executive officers, except in the ordinary course of
business consistent with past practice or as required by the
terms of an existing Employee Benefit Plan or agreement or by
applicable Law, (B) amend any existing employment or
severance or termination contract with any executive officer,
(C) become obligated under any new pension plan, welfare
plan, multiemployer plan, Employee Benefit Plan, severance plan,
change of control or other benefit arrangement or similar plan
or arrangement, or (D) amend any Employee Benefit Plan, if
such amendment would have the effect of materially enhancing any
benefits thereunder;
(xi) voluntarily dissolve or otherwise adopt or vote to
adopt a plan of complete or partial dissolution or
liquidation; or
(xii) agree or commit to do any of the foregoing.
Section 5.2
Investigation
.
From
the date hereof until the Effective Time and subject to the
requirements of applicable Laws, the Holdings Parties shall
(a) provide to the Parent Parties and their respective
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counsel, financial advisors, auditors and other authorized
representatives reasonable access during normal business hours
after reasonable prior notice to the offices, properties, books
and records of the Holdings Group Entities, (b) furnish to
the Parent Parties and their respective counsel, financial
advisors, auditors and other authorized representatives such
financial and operating data and other information as such
persons may reasonably request (including furnishing to Parent
the financial results of Holdings and its Subsidiaries in
advance of any filing by Holdings with the SEC or other public
disclosure containing such financial results), and
(c) instruct the employees, counsel, financial advisors,
auditors and other authorized representatives of the Holdings
Group Entities to cooperate with Parent in its investigation of
the Holdings Group Entities, as the case may be. Notwithstanding
the foregoing provisions of this Section 5.2, the Holdings
Parties shall not be required to, or to cause any of their
Subsidiaries to, grant access or furnish information to Parent
or any of its representatives to the extent that such
information is subject to an attorney/client or attorney work
product privilege or that such access or the furnishing of such
information is prohibited by Law or an existing contract or
agreement. Parent shall hold, and shall cause its counsel,
financial advisors, auditors and representatives to hold, any
material or competitively sensitive non-public information
concerning a Holdings Party received from a Holdings Party
confidential. Holdings GP will provide Parent (solely for
informational purposes) a true and complete copy of the opinion
referenced in Section 3.14 promptly after delivery thereof.
Any investigation pursuant to this Section 5.2 shall be
conducted in such manner as not to interfere unreasonably with
the conduct of the business of the Holdings Group Entities. No
information or knowledge obtained by Parent in any investigation
pursuant to this Section 5.2 shall affect or be deemed to
modify any representation or warranty made by the Holdings
Parties in Article III or any condition set forth in
Article VI.
Section 5.3
No
Solicitation.
(a) Subject to
Sections 5.3(b)-(h),
the Holdings Parties shall not, and shall cause their officers,
directors, employees, agents and representatives
(
Representatives
) not to, directly or
indirectly, (i) initiate, solicit, knowingly encourage
(including by providing information) or knowingly facilitate any
inquiries, proposals or offers with respect to, or the making or
completion of, an Alternative Proposal (as defined herein),
(ii) engage or participate in any negotiations concerning,
or provide or cause to be provided any non-public information or
data relating to, the Holdings Group Entities, in connection
with, or have any discussions with any person relating to, an
Alternative Proposal, or otherwise knowingly encourage or
knowingly facilitate any effort or attempt to make or implement
an Alternative Proposal, (iii) approve, endorse or
recommend, or propose publicly to approve, endorse or recommend,
any Alternative Proposal, (iv) approve, endorse or
recommend, or propose to approve, endorse or recommend, or
execute or enter into, any letter of intent, agreement in
principle, merger agreement, acquisition agreement, option
agreement or other similar agreement relating to any Alternative
Proposal, (v) amend, terminate, waive or fail to enforce,
or grant any consent under, any confidentiality, standstill or
similar agreement or (vi) resolve to propose or agree to do
any of the foregoing.
(b) The Holdings Parties shall, and shall cause their
Representatives to, immediately cease any existing
solicitations, discussions or negotiations with any Person
(other than the parties hereto) that has made or indicated an
intention to make an Alternative Proposal. The Holdings Parties
shall promptly, and in any event not later than ten
(10) days following the date hereof, request that each
Person who has executed a confidentiality agreement with a
Holdings Party in connection with that Persons
consideration of a transaction involving any Holdings Group
Entity that would constitute an Alternative Proposal return or
destroy all non-public information furnished to that Person by
or on behalf of the Holdings Group Entities.
(c) Notwithstanding anything to the contrary in
Section 5.3(a), prior to the receipt of Unitholder
Approval, the Holdings Parties may, in response to an
unsolicited Alternative Proposal which did not result from or
arise in connection with a breach of this Section 5.3 and
which the Conflicts Committee determines, in good faith, after
consultation with its outside counsel and financial advisors,
constitutes or could reasonably be expected to result in a
Superior Proposal (as defined herein), (i) furnish
information with respect to the Holdings Group Entities to the
person making such Alternative Proposal and its Representatives
pursuant to an executed confidentiality agreement no less
restrictive (including with respect to standstill provisions) of
the other party than the Confidentiality Agreement and
(ii) participate in discussions or negotiations with such
person and its Representatives regarding such Alternative
Proposal;
provided
,
however
, (A) that Parent
shall be entitled to receive an executed copy of such
confidentiality agreement prior to or substantially
simultaneously
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with the Holdings Parties furnishing information to the person
making such Alternative Proposal or its Representatives and
(B) that the Holdings Parties shall simultaneously provide
or make available to Parent any non-public information
concerning the Holdings Group Entities that is provided to the
person making such Alternative Proposal or its Representatives
which was not previously provided or made available to Parent.
Notwithstanding anything to the contrary in Section 5.3(a),
prior to the receipt of Unitholder Approval, the Holdings
Parties may participate in discussions or negotiations with the
lenders under the Holdings Credit Agreement or the Hiland
Operating Credit Agreement regarding debt financing transactions
with such lenders that may involve equity issuances that would
constitute an Alternative Proposal and, in connection therewith,
furnish information with respect to the Holdings Group Entities
to such lenders pursuant to confidentiality obligations
substantially consistent with past practice.
(d) Neither the Board of Directors nor any committee
thereof shall withdraw, modify or qualify in a manner adverse to
Parent, or resolve to or publicly propose to withdraw, modify or
qualify in a manner adverse to Parent, the Recommendation (any
of the foregoing actions, whether taken by the Board of
Directors or any committee thereof, a
Change in Board
Recommendation
). Notwithstanding the immediately
preceding sentence, if, prior to receipt of the Unitholder
Approval, (i) the Board of Directors or the Conflicts
Committee determines in good faith, after consultation with its
respective outside counsel and financial advisors, that a Change
in Board Recommendation would be in the best interests of the
holders of Common Units (other than Mr. Hamm, his
Affiliates (including Continental Gas) and the Trusts) and
(ii) the Board of Directors or the Conflicts Committee, as
applicable, provides Parent with at least three
(3) Business Days advance written notice of its
intention to make a Change in Board Recommendation and
specifying the material events giving rise thereto, then the
Board of Directors or the Conflicts Committee, as applicable,
may make a Change in Board Recommendation.
(e) The Holdings Parties promptly (and in any event within
24 hours) shall advise Parent orally and in writing of the
receipt by either of them of (i) any Alternative Proposal
or (ii) any request for non-public information relating to
the Holdings Group Entities, other than requests for information
in the ordinary course of business consistent with past practice
and not reasonably expected to be related to an Alternative
Proposal, including in each case the identity of the person
making any such Alternative Proposal or request and the material
terms and conditions of any such Alternative Proposal or request
(including copies of any document or correspondence evidencing
such Alternative Proposal or request). The Holdings Parties
shall keep Parent reasonably informed on a current basis of the
status (including any material change to the terms thereof) of
any such Alternative Proposal or request.
(f) Nothing contained in this Agreement shall prohibit the
Holdings Parties or the Board of Directors or any committee
thereof from disclosing to Holdings Unitholders a position
contemplated by
Rules 14d-9
and
14e-2(a)
promulgated under the Exchange Act;
provided
,
however
, that none of the Holdings Parties or the Board
of Directors or any committee thereof shall in any event be
entitled to disclose a position under
Rules 14d-9
or
14e-2(a)
promulgated under the Exchange Act other than the
Recommendation, except in accordance with Section 5.3(d).
(g) As used in this Agreement,
Alternative
Proposal
shall mean any inquiry, proposal or offer
from any Person or group of Persons other than the Parent
Parties relating to, or that could reasonably be expected to
lead to, in one transaction or a series of related transactions,
(i) a merger, tender or exchange offer, consolidation,
reorganization, reclassification, recapitalization, liquidation
or dissolution, or other business combination involving any
Holdings Group Entity, (ii) the issuance by Holdings or
Hiland of (A) any General Partner Interest or (B) any
class of Partnership Interests constituting more than 15% of
such class of Partnership Interests or (iii) the
acquisition in any manner, directly or indirectly, of
(A) any General Partner Interest of Holdings or Hiland,
(B) any class of Partnership Interests of Holdings or
Hiland constituting more than 15% of such class of Partnership
Interests or (C) more than 15% of the consolidated total
assets of the Holdings Group Entities (including equity
interests in any Subsidiary or Partially Owned Entity of
Holdings), in each case other than the Merger and the Hiland
Merger. References in this paragraph to General Partner Interest
or Partnership Interests with respect to Hiland shall be to such
interests as defined in the agreement of limited partnership of
Hiland.
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(h) As used in this Agreement,
Superior
Proposal
shall mean any written Alternative Proposal
(i) on terms which the Conflicts Committee determines in
good faith, after consultation with its outside legal counsel
and financial advisors, to be more favorable from a financial
point of view to the holders of Common Units (other than
Mr. Hamm, his Affiliates (including Continental Gas) and
the Trusts) (excluding consideration of any interests that any
holder may have other than as a Unitholder of Holdings entitled
to the Merger Consideration) than the Merger, taking into
account all the terms and conditions of such proposal, and this
Agreement (including any proposal or offer by the Parent Parties
to amend the terms of this Agreement and the Merger) and
(ii) that is reasonably capable of being completed, taking
into account all financial, regulatory, legal and other aspects
of such proposal;
provided
that for purposes of the
definition Superior Proposal, the references to
15% in the definition of Alternative
Proposal shall be deemed to be references to
35% with respect to the Holdings Parties and,
consistent with the provisions of Section 5.3(h) of the
Hiland Agreement, 55% with respect to the Hiland
Parties and the Subsidiaries and Partially Owned Entities of
Hiland.
Section 5.4
Filings;
Other Actions.
(a) As promptly as reasonably practicable following the
date of this Agreement, the Holdings Parties shall prepare the
Proxy Statement, which shall, subject to Section 5.3(d),
include the Recommendation, and the Holdings Parties and Parent
shall prepare the
Schedule 13E-3.
Parent and the Holdings Parties shall cooperate with each other
in connection with the preparation of the foregoing documents.
The Holdings Parties will use their commercially reasonable
efforts to have the Proxy Statement, and Parent and the Holdings
Parties will use their commercially reasonable efforts to have
the
Schedule 13E-3,
cleared by the SEC as promptly as practicable after such filing.
The Holdings Parties will use their commercially reasonable
efforts to cause the Proxy Statement to be mailed to
Holdings Unitholders as promptly as practicable after the
Proxy Statement is cleared by the SEC. The Holdings Parties
shall as promptly as practicable notify Parent of the receipt of
any oral or written comments from the SEC relating to the Proxy
Statement or
Schedule 13E-3.
The Holdings Parties shall cooperate and provide Parent with a
reasonable opportunity to review and comment on the draft of the
Proxy Statement (including each amendment or supplement
thereto), which comments shall be considered reasonably and in
good faith by the Holdings Parties, and Parent and the Holdings
Parties shall cooperate and provide each other with a reasonable
opportunity to review and comment on the draft
Schedule 13E-3
(including each amendment or supplement thereto), which comments
shall be considered reasonably and in good faith by the other
party, and all responses to requests for additional information
by and replies to comments of the SEC, prior to filing such with
or sending such to the SEC, and Parent and the Holdings Parties
will provide each other with copies of all such filings made and
correspondence with the SEC with respect thereto. If at any time
prior to the Effective Time, any information should be
discovered by any party hereto which should be set forth in an
amendment or supplement to the Proxy Statement or the
Schedule 13E-3
so that the Proxy Statement or the
Schedule 13E-3
would not include any misstatement of a material fact or omit to
state any material fact required to be stated therein or
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, the
party which discovers such information shall promptly notify the
other parties hereto and, to the extent required by applicable
Law, an appropriate amendment or supplement describing such
information shall be promptly filed by the Holdings Parties with
the SEC and disseminated by the Holdings Parties to the
Unitholders of Holdings.
(b) The Holdings Parties shall (i) take all action
necessary in accordance with applicable Laws and the Partnership
Agreement to duly call, give notice of, convene and hold a
meeting of Holdings Unitholders as promptly as reasonably
practicable following the mailing of the Proxy Statement for the
purpose of obtaining the Unitholder Approval of the Merger and
this Agreement (such meeting or any adjournment or postponement
thereof, the
Partnership Meeting
), and
(ii) subject to a Change in Board Recommendation in
accordance with Section 5.3(d), use all commercially
reasonable efforts to solicit from its Unitholders proxies in
favor of the adoption and approval of this Agreement and the
Merger. Notwithstanding anything in this Agreement to the
contrary, unless this Agreement is terminated in accordance with
Article VII, the Holdings Parties will take all of the
actions contemplated by this Section 5.4 regardless of
whether there has been a Change in
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Board Recommendation, and shall direct that this Agreement be
submitted to a vote of Unitholders in accordance with the
requirements of Articles XIII and XIV of the Partnership
Agreement.
Section 5.5
Equity
Awards
.
The Holdings LTIP and each award of
Restricted Units (except as expressly provided otherwise in
Section 2.1(a) with respect to awards held by nonemployee
members of the Board of Directors), Phantom Units (as defined in
the Holdings LTIP) and Options (as defined in the Holdings LTIP)
outstanding under the Holdings LTIP immediately prior to the
Effective Time will remain outstanding in accordance with its
terms as a plan or equity compensation award, as applicable, of
the Surviving Entity and shall be unaffected by the transactions
contemplated by this Agreement. Prior to the Effective Time,
Holdings shall take any action necessary pursuant to the
Holdings LTIP to achieve this result.
Section 5.6
Efforts.
(a) Subject to the terms and conditions set forth in this
Agreement, each of the parties hereto shall use their
commercially reasonable efforts (subject to, and in accordance
with, applicable Law) to take promptly, or to cause to be taken,
all actions, and to do promptly, or to cause to be done, and to
assist and to cooperate with the other parties in doing, all
things necessary, proper or advisable to consummate and make
effective the Merger and the other transactions contemplated
hereby, including (i) the obtaining of all necessary
actions or nonactions, waivers, consents and approvals from
Governmental Entities and the making of all necessary
registrations and filings and the taking of all steps as may be
necessary to obtain an approval or waiver from, or to avoid an
action or proceeding by, any Governmental Entity, (ii) the
obtaining of all necessary consents, approvals or waivers from
third parties, (iii) the defending of any lawsuits or other
legal proceedings, whether judicial or administrative,
challenging this Agreement or the consummation of the
transactions contemplated hereby and (iv) the execution and
delivery of any additional instruments reasonably necessary to
consummate the transactions contemplated hereby. In addition,
Parent shall use its reasonable best efforts to obtain the
Funding in accordance with the Funding Commitments.
(b) Subject to the terms and conditions herein provided and
without limiting the foregoing, the Holdings Parties and the
Parent Parties shall (i) if required, as promptly as
practicable after the date hereof, make their respective filings
and thereafter make any other required submissions under the
Hart-Scott-Rodino
Antitrust Improvements Act of 1976, 15 U.S.C.
§ 18a, as amended (the
HSR Act
),
(ii) use commercially reasonable efforts to cooperate with
each other in (x) determining whether any filings are
required to be made with, or consents, permits, authorizations,
waivers or approvals are required to be obtained from, any third
parties or other Governmental Entities in connection with the
execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby and (y) timely making
all such filings and timely seeking all such consents, permits,
authorizations or approvals, (iii) use commercially
reasonable efforts to take, or to cause to be taken, all other
actions and to do, or to cause to be done, all other things
necessary, proper or advisable to consummate and make effective
the Merger and the other transactions contemplated hereby,
including taking all such further action as reasonably may be
necessary to resolve such objections, if any, as the United
States Federal Trade Commission, the Antitrust Division of the
United States Department of Justice, state or foreign antitrust
enforcement authorities or competition authorities, other
Governmental Entities in connection with the HSR Act, or other
state or federal regulatory authorities of any other nation or
other jurisdiction or any other person may assert under
Regulatory Law (as defined herein) with respect to the Merger
and the other transactions contemplated hereby, and to avoid or
eliminate each and every impediment under any Law that may be
asserted by any Governmental Entity with respect to the Merger
so as to enable the Closing to occur as soon as reasonably
possible (and in any event no later than the End Date), and
(iv) subject to applicable legal limitations and the
instructions of any Governmental Entity, use commercially
reasonable efforts to keep each other apprised of the status of
matters relating to the completion of the transactions
contemplated by this Agreement, including to the extent
permitted by Law promptly furnishing the other with copies of
notices or other communications received by the Holdings Parties
or any of their Subsidiaries or the Parent Parties, as the case
may be, from any third party
and/or
any
Governmental Entity with respect thereto.
(c) Subject to the rights of the Parent Parties in
Section 5.11, and in furtherance and not in limitation of
the covenants of the parties contained in this Section 5.6,
if any administrative or judicial action or proceeding,
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including any proceeding by a private party, is instituted (or
threatened to be instituted) challenging the Merger or any other
transaction contemplated by this Agreement, each of the Holdings
Parties or the Parent Parties shall cooperate in all respects
with each other and shall use their respective commercially
reasonable efforts to contest and resist any such action or
proceeding and to have vacated, lifted, reversed or overturned
any decree, judgment, injunction or other order, whether
temporary, preliminary or permanent, that is in effect and that
prohibits, prevents or restricts consummation of the Merger or
any other transactions contemplated hereby. Notwithstanding the
foregoing or any other provision of this Agreement, nothing in
this Section 5.6 shall limit a partys right to
terminate this Agreement pursuant to Section 7.1(b)(i) or
(ii) so long as such party has, prior to such termination,
complied with its obligations under this Section 5.6.
(d) The Parent Parties and the Holdings Parties may, as
each deems advisable and necessary, reasonably designate any
competitively sensitive material provided to the other under
this Section 5.6 as Regulatory Counsel Only
Material. Such materials and the information contained
therein shall be given only to the outside regulatory counsel of
the recipient and will not be disclosed by such outside counsel
to employees, officers or directors of the recipient unless
express written permission is obtained in advance from the
source of the materials (the Parent Parties or the Holdings
Parties as the case may be) or its legal counsel.
Notwithstanding anything to the contrary in this
Section 5.6, materials provided to the other party or its
outside counsel may be redacted to remove references concerning
the valuation of the Common Units or the business of the
Holdings Group Entities. For purposes of this Agreement,
Regulatory Law
means any and all state,
federal and foreign statutes, rules, regulations, orders,
decrees, administrative and judicial doctrines and other Laws
requiring notice to, filings with, or the consent or approval
of, any Governmental Entity, or that otherwise may cause any
restriction, in connection with the Merger and the transactions
contemplated thereby, including (i) the Sherman Act of
1890, the Clayton Antitrust Act of 1914, the HSR Act, the
Federal Trade Commission Act of 1914 and all other Laws that are
designed or intended to prohibit, restrict or regulate actions
having the purpose or effect of monopolization or restraint of
trade or lessening competition through merger or acquisition,
(ii) any Law governing any of the material operations or
assets of Holdings and its Subsidiaries or (iii) any Law
with the purpose of protecting the national security or the
national economy of any nation.
Section 5.7
Takeover
Statute
.
Subject to Section 5.3(d), if
any fair price, moratorium,
control share acquisition or other form of
anti-takeover statute or regulation shall become applicable to
the Merger or the other transactions contemplated by this
Agreement, the Support Agreement or the Rollover Commitments,
each of the Holdings Parties or the Parent Parties shall grant
such approvals and take such actions as are reasonably necessary
so that the Merger, the Support Agreement, the Rollover
Commitments and the other transactions contemplated hereby and
thereby may be consummated as promptly as practicable on the
terms contemplated herein and otherwise act to eliminate or
minimize the effects of such statute or regulation on the
Merger, the Support Agreement, the Rollover Commitments and the
other transactions contemplated hereby and thereby.
Section 5.8
Public
Announcements
.
Subject to
Section 5.3(d), the Holdings Parties and the Parent Parties
will consult with and provide each other the opportunity to
review and comment (which shall be considered reasonably and in
good faith by the other parties) upon any press release or other
public statement or comment prior to the issuance of such press
release or other public statement or comment relating to this
Agreement or the transactions contemplated herein and shall not
issue any such press release or other public statement or
comment prior to such consultation and opportunity to review and
comment except as may be required by applicable Law or by
obligations pursuant to any listing agreement with any national
securities exchange;
provided
,
however
, that any
public statement or disclosure that is consistent with a public
statement or disclosure previously approved by the other party
shall not require the prior approval of such other party. The
Holdings Parties and the Parent Parties agree to issue a joint
press release announcing the execution and delivery of this
Agreement.
Section 5.9
Indemnification
and Insurance.
(a) The partnership agreement of the Surviving Entity
shall, with respect to indemnification of directors and
officers, not be amended, repealed or otherwise modified after
the Effective Time in any manner that
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would adversely affect the rights thereunder of the Persons who
at any time prior to the Effective Time were identified as
prospective indemnitees under the Partnership Agreement in
respect of actions or omissions occurring at or prior to the
Effective Time (including the transactions contemplated by this
Agreement).
(b) For a period of six years after the Effective Time,
Parent and Holdings GP shall, and Parent and Holdings GP shall
cause the Surviving Entity (and its successors or assigns) to,
maintain officers and directors liability insurance
covering each person who is immediately prior to the Effective
Time, or has been at any time prior to the Effective Time, an
officer or director of any of the Holdings Group Entities and
each person who immediately prior to the Effective Time is
serving or prior to the Effective Time has served at the request
of any of the Holdings Group Entities as a director, officer,
trustee or fiduciary of another corporation, partnership, joint
venture, trust, pension or other Employee Benefit Plan of the
Holdings Group Entities (collectively, the
Holdings
D&O Indemnified Parties
) who are or at any time
prior to the Effective Time were covered by the existing
officers and directors liability insurance
applicable to the Holdings Group Entities (
D&O
Insurance
) on terms substantially no less advantageous
to the Holdings D&O Indemnified Parties than such existing
insurance with respect to acts or omissions, or alleged acts or
omissions, prior to the Effective Time (whether claims, actions
or other proceedings relating thereto are commenced, asserted or
claimed before or after the Effective Time).
(c) Holdings shall cause (and Parent, following the
Closing, shall continue to cause) coverage to be extended under
the D&O Insurance by obtaining a six-year tail
policy on terms and conditions no less advantageous than the
existing D&O Insurance, and such tail policy
shall satisfy the provisions of this Section 5.9;
provided
that in no event shall Parent be required to
spend more than 250% (the
Cap Amount
) of the
last annual premium paid by the Holdings Group Entities prior to
the date hereof (the amount of such premium being set forth in
Section 5.9(c) of the Holdings Disclosure Schedule) per
policy year of coverage under such tail policy;
provided
,
further
, that if the cost per policy
year of such insurance exceeds the Cap Amount, Parent shall
purchase as much coverage per policy year as reasonably
obtainable for the Cap Amount.
(d) The rights of each Holdings D&O Indemnified Party
hereunder shall be in addition to any other rights such Holdings
D&O Indemnified Party may have under the governing
documents of any Holdings Group Entity under applicable Delaware
Law or otherwise. The provisions of this Section 5.9 shall
survive the consummation of the Merger and expressly are
intended to benefit each of the Holdings D&O Indemnified
Parties.
(e) In the event Parent, Holdings GP or any of their
respective successors or assigns (i) consolidates with or
merges into any other person and shall not be the continuing or
surviving entity in such consolidation or merger or
(ii) transfers all or substantially all of its properties
and assets to any person, then and in either such case, Parent
or Holdings GP, as the case may be, shall cause proper provision
to be made so that its successors or assigns shall assume the
obligations set forth in this Section 5.9.
Section 5.10
Unitholder
Litigation
.
The Holdings Parties shall give
Parent the opportunity to participate in the defense or
settlement of any Unitholder litigation against any of the
Holdings Group Entities
and/or
their
respective directors relating to the Merger or any other
transactions contemplated hereby and no such settlement shall in
any event be agreed to without Parents consent (which
shall not be unreasonably withheld, conditioned or delayed).
Section 5.11
Notification
of Certain Matters
.
The Holdings Parties
shall give prompt notice to the Parent Parties, and the Parent
Parties shall give prompt notice to the Holdings Parties, of
(i) any notice or other communication received by such
party from any Governmental Entity in connection with the Merger
or the other transactions contemplated hereby or from any person
alleging that the consent of such person is or may be required
in connection with the Merger or the other transactions
contemplated hereby, if the subject matter of such communication
or the failure of such party to obtain such consent could be
material to Holdings, the Surviving Entity or Parent,
(ii) any actions, suits, claims, investigations or
proceedings commenced or, to such partys Knowledge,
threatened against, relating to or involving or otherwise
affecting such party or any of its Subsidiaries which relate to
the Merger or the other transactions contemplated hereby,
(iii) the discovery of any fact or circumstance that, or
the occurrence or non-occurrence of any event the
D-21
occurrence or non-occurrence of which, would, individually or in
the aggregate, cause or result in a Holdings Material Adverse
Effect or a Parent Material Adverse Effect, respectively;
provided
,
however
, that the delivery of any notice
pursuant to this Section 5.11 shall not (x) cure any
breach of, or non-compliance with, any other provision of this
Agreement or (y) limit the remedies available to the party
receiving such notice. The Holdings Parties shall reasonably
cooperate with the Parent Parties in efforts to mitigate any
adverse consequences to the Parent Parties which may arise from
any criminal or regulatory investigation or action involving any
of the Holdings Group Entities (including by coordinating and
providing assistance in meeting with regulators).
Section 5.12
Rule 16b-3
.
Prior
to the Effective Time, Holdings shall take such steps as may be
reasonably requested by any party hereto to cause dispositions
of Partnership equity securities (including derivative
securities) pursuant to the transactions contemplated by this
Agreement by each individual who is a director or officer of
Holdings to be exempt under
Rule 16b-3
promulgated under the Exchange Act in accordance with that
certain No-Action Letter dated January 12, 1999 issued by
the SEC regarding such matters.
ARTICLE VI
Conditions
to the Merger
Section
6.1
Conditions
to Each Partys Obligation to Effect the
Merger.
The respective obligations of each
party to effect the Merger shall be subject to the fulfillment
(or waiver by all parties) at or prior to the Effective Time of
each of the following conditions:
(a) the Unitholder Approval of this Agreement and the
Merger shall have been obtained;
(b) no restraining order, preliminary or permanent
injunction or other order issued by any court of competent
jurisdiction or other legal restraint or prohibition enacted or
promulgated by any Governmental Entity restraining, enjoining or
otherwise prohibiting the consummation of the Merger shall be in
effect; and
(c) any waiting period under the HSR Act applicable to the
consummation of the Merger shall have expired or been earlier
terminated.
Section
6.2
Conditions
to Obligation of the Holdings Parties to Effect the
Merger.
The obligations of the Holdings
Parties to effect the Merger are further subject to the
fulfillment at or prior to the Effective Time of each of the
following conditions, any one or more of which may be waived in
whole or in part by the Holdings Parties:
(a) (i) the representations and warranties of the
Parent Parties contained in Section 4.1(a) (Qualification;
Organization) and Section 4.2 (Authority; No Violation;
Consents and Approvals) shall be true and correct in all
respects, in each case at and as of the date of this Agreement
and at and as of the Closing Date as though made at and as of
the Closing Date and (ii) the representations and
warranties of the Parent Parties set forth in this Agreement
(other than those referenced in clause (i) of this
paragraph) shall be true and correct in all respects
(disregarding any materiality or Parent Material Adverse Effect
qualifiers therein) at and as of the date of this Agreement and
at and as of the Closing Date as though made at and as of the
Closing Date, except where any failures of such representations
or warranties to be so true and correct would not have,
individually or in the aggregate, a Parent Material Adverse
Effect;
provided
,
however
, that, with respect to
clauses (i) and (ii) of this paragraph,
representations and warranties that are made as of a particular
date or period shall be true and correct (in the manner set
forth in clause (i) or (ii), as applicable) only as of such
date or period;
(b) the Parent Parties shall have performed all obligations
and complied with all covenants required by this Agreement to be
performed or complied with by them that are qualified by
materiality or Parent Material Adverse Effect and shall have in
all material respects performed all other obligations and
complied with all other covenants required by this Agreement to
be performed or complied with by them; and
D-22
(c) Parent shall have delivered to the Holdings Parties a
certificate, dated the Effective Time and signed by its Chief
Executive Officer or another senior executive officer,
certifying to the effect that the conditions set forth in
Sections 6.2(a) and 6.2(b) have been satisfied.
Section
6.3
Conditions
to Obligation of the Parent Parties to Effect the
Merger.
The obligations of the Parent Parties
to effect the Merger are further subject to the fulfillment at
or prior to the Effective Time of each of the following
conditions, any one or more of which may be waived in whole or
in part by the Parent Parties:
(a) (i) the representations and warranties of the
Holdings Parties contained in Section 3.1(b)
(Qualification, Organization, Subsidiaries, Etc.),
Section 3.2 (Capitalization), Section 3.3 (Authority;
No Violation; Consents and Approvals), Section 3.8(b)
(Absence of Certain Changes or Events) and Section 3.15
(Required Approvals) shall be true and correct in all respects,
except, in the case of Section 3.2, for such inaccuracies
as are
de minimis
in the aggregate, in each case at and
as of the date of this Agreement and at and as of the Closing
Date as though made at and as of the Closing Date and
(ii) the representations and warranties of the Holdings
Parties set forth in this Agreement (other than those referenced
in clause (i) of this paragraph) shall be true and correct
in all respects (disregarding any materiality or Holdings
Material Adverse Effect qualifiers therein) as of the date of
this Agreement and at and as of the Closing Date as though made
at and as of the Closing Date, except where any failures of such
representations or warranties to be so true and correct would
not have, individually or in the aggregate, a Holdings Material
Adverse Effect;
provided
,
however
, that, with
respect to clauses (i) and (ii) of this paragraph,
representations and warranties that are made as of a particular
date or period shall be true and correct (in the manner set
forth in clause (i) or (ii), as applicable) only as of such
date or period;
provided
,
further
, that the
representations and warranties referenced in clauses (i)
and (ii) shall not be deemed to be inaccurate to the extent
that Parent had knowledge at the Execution Date of such
inaccuracy;
(b) the Holdings Parties shall have performed all
obligations and complied with all covenants required by this
Agreement to be performed or complied with by them that are
qualified by materiality or Holdings Material Adverse Effect and
shall have in all material respects performed all other
obligations and complied with all other covenants required by
this Agreement to be performed or complied with by them;
(c) since the date of this Agreement there shall not have
been any Holdings Material Adverse Effect;
(d) the Hiland Merger shall be effectuated concurrently
with the Merger;
provided
that the Parent Parties may not
waive this condition unless the Hiland Agreement and the Hiland
Merger shall have been submitted to a vote of Unitholders and
the outcome of such vote shall not have constituted a Unitholder
Approval;
provided
,
further
, that for purposes of
this clause 6.3(d), the terms Unitholders and
Unitholder Approval shall have the meanings assigned
to them in the Hiland Agreement; and
(e) the Holdings Parties shall have delivered to the Parent
Parties a certificate, dated the Effective Time and signed by an
executive officer of Holdings, certifying to the effect that the
conditions set forth in Sections 6.3(a), 6.3(b) and 6.3(c)
have been satisfied.
Section 6.4
Frustration of
Conditions
.
No party may rely on the failure
of any condition set forth in Section 6.1, 6.2 or 6.3, as
the case may be, to be satisfied if such failure was caused by
such partys breach in any material respect of any
provision of this Agreement or failure to use commercially
reasonable efforts to consummate the Merger and the other
transactions contemplated hereby, as required by and subject to
Section 5.6.
D-23
ARTICLE VII
Termination
Section 7.1
Termination or
Abandonment
.
Notwithstanding anything
contained in this Agreement to the contrary, this Agreement may
be terminated and abandoned at any time prior to the Effective
Time, whether before or after any approval of the matters
presented in connection with the Merger by the Unitholders of
Holdings:
(a) by the mutual written consent of the Holdings Parties
and the Parent Parties;
(b) by either the Holdings Parties or the Parent Parties,
if:
(i) the Effective Time shall not have occurred on or before
November 1, 2009 (the
End Date
) and the
party seeking to terminate this Agreement pursuant to this
Section 7.1(b)(i) shall not have breached its obligations
under this Agreement in any manner that shall have proximately
caused the failure to consummate the Merger on or before the End
Date;
(ii) an injunction, other legal restraint or order of any
Governmental Entity shall have been entered permanently
restraining, enjoining or otherwise prohibiting the consummation
of the Merger and such injunction, other legal restraint or
order shall have become final and nonappealable;
provided
that the party seeking to terminate this Agreement pursuant to
this Section 7.1(b)(ii) shall have complied in all material
respects with its obligations in Section 5.6; or
(iii) the Partnership Meeting shall have concluded and,
upon a vote taken at such meeting, the Unitholder Approval of
this Agreement or the Merger shall not have been obtained;
provided
that the right to terminate this Agreement
pursuant to this Section 7.1(b)(iii) shall not be available
(A) to the Holdings Parties if any Holdings Party
materially breached any obligations under Section 5.3 or
5.4 or (B) to the Parent Parties if Mr. Hamm,
Continental Gas or the Trusts materially breached any of their
obligations under Article II of the Support Agreement;
(c) by the Holdings Parties, if any Parent Party shall have
breached or failed to perform any of its representations,
warranties, covenants or other agreements contained in this
Agreement, which breach or failure to perform: (A) would
constitute the failure of a condition set forth in
Section 6.2(a) or 6.2(b) and (B)(I) is not capable of being
satisfied or cured by the End Date or (II) if capable of
being satisfied or cured, is not satisfied or cured by thirty
(30) days following receipt by Parent of written notice
stating the Holdings Parties intention to terminate this
Agreement pursuant to this Section 7.1(c) and the basis for
such termination;
provided
that the right to terminate
this Agreement pursuant to this paragraph shall not be available
to the Holdings Parties if, at such time, a condition set forth
in Section 6.3(a), 6.3(b) or 6.3(c) is not capable of being
satisfied; or
(d) by the Parent Parties, if:
(i) any Holdings Party shall have breached or failed to
perform any of its representations, warranties, covenants or
other agreements contained in this Agreement, which breach or
failure to perform: (A) would constitute the failure of a
condition set forth in Section 6.3(a), 6.3(b) or 6.3(c) and
(B)(I) is not capable of being satisfied or cured by the End
Date or (II) if capable of being satisfied or cured, is not
satisfied or cured by thirty (30) days following receipt by
the Holdings Parties of written notice stating the Parent
Parties intention to terminate this Agreement pursuant to
this Section 7.1(d)(i) and the basis for such termination;
provided
that the right to terminate this Agreement
pursuant to this paragraph shall not be available to the Parent
Parties if, at such time, a condition set forth in
Section 6.2(a) or 6.2(b) is not capable of being satisfied;
(ii) a Change in Board Recommendation or a failure to make
the Recommendation occurs or the Board of Directors or any
committee thereof approves, endorses or recommends, or resolves
to or publicly proposes to approve, endorse or recommend, any
Alternative Proposal, including in any disclosure made pursuant
to
Rule 14d-9
or
14e-2(a)
promulgated under the Exchange Act; or
(iii) the condition set forth in Section 6.3(d) is not
capable of being satisfied by the End Date.
D-24
In the event of termination of this Agreement pursuant to this
Section 7.1, this Agreement shall terminate (except for the
provisions of Section 7.2 and Article VIII), and there
shall be no liability on the part of the Holdings Parties or the
Parent Parties to the other except as provided in
Section 7.2 and Article VIII and except that no such
termination shall relieve any party from liability arising out
of any willful breach of any of the representations, warranties
or covenants in this Agreement (subject to any express
limitations set forth in this Agreement), in which case the
aggrieved party shall be entitled to all rights and remedies
available at law or in equity.
Section 7.2
Reimbursement
of Certain Expenses.
(a) In the event that:
(i) (A) an Alternative Proposal shall have been made
known to the Holdings Parties or shall have been made directly
to the Unitholders generally or any person shall have publicly
announced an intention (whether or not conditional or withdrawn)
to make an Alternative Proposal and thereafter, (B) this
Agreement is terminated by the Holdings Parties or the Parent
Parties (as applicable) pursuant to Section 7.1(b)(i),
7.1(b)(iii) or 7.1(d)(i), and (C) a Holdings Party enters
into a definitive agreement with respect to, or consummates, a
transaction contemplated by any Alternative Proposal within
twelve (12) months of the date this Agreement is
terminated; or
(ii) this Agreement is terminated by the Parent Parties
pursuant to Section 7.1(d)(ii);
then in any such event under clause (i) or (ii) of
this Section 7.2(a), Holdings shall pay to Parent all of
the Expenses of the Parent Parties,
provided
that in no
event shall Holdings be required to pay for Expenses in any
amount in excess of $800,000;
provided further
, that no
expense for which a Parent Party has received reimbursement
pursuant to the Hiland Agreement shall be paid hereunder. As
used herein,
Expenses
shall mean all
out-of-pocket fees and expenses (including all fees and expenses
of counsel, accountants, consultants, financial advisors and
investment bankers of Parent and its Affiliates (other than the
Holdings Group Entities)) incurred by Parent and its Affiliates
(other than the Holdings Group Entities) or on their behalf in
connection with or related to the authorization, preparation,
negotiation, execution and performance of this Agreement and the
Funding and all other matters related to the Merger.
(b) Any payment required to be made pursuant to
Section 7.2(a) shall be made to Parent not later than two
(2) Business Days after delivery to Holdings of an
itemization setting forth in reasonable detail all Expenses of
the Parent Parties for which payment pursuant to
Section 7.2(a) is sought (which itemization may be
supplemented and updated from time to time by Parent until the
sixtieth (60th) day after delivery of such notice of demand for
payment). All such payments shall be made by wire transfer of
immediately available funds to an account to be designated by
Parent.
(c) Holdings acknowledges that the Expense reimbursement
and the other provisions of this Section 7.2 are an
integral part of the Merger and that, without these agreements,
Parent would not enter into this Agreement.
ARTICLE VIII
Miscellaneous
Section 8.1
No
Survival of Representations and
Warranties
.
None of the representations and
warranties in this Agreement or in any instrument delivered
pursuant to this Agreement shall survive the Merger.
Section 8.2
Hiland
Merger
.
Parent hereby covenants and agrees
that it shall not close the Hiland Merger unless the Merger has
closed prior to or is closing concurrently with the Hiland
Merger;
provided
,
however
, that such restriction
shall not apply if this Agreement and the Merger shall have been
submitted to a vote of Unitholders and the outcome of such vote
shall not have constituted a Unitholder Approval.
D-25
Section 8.3
Expenses
.
Except
as set forth in Section 7.2, whether or not the Merger is
consummated, all costs and expenses incurred in connection with
the Merger, this Agreement and the transactions contemplated
hereby shall be paid by the party incurring or required to incur
such expenses.
Section 8.4
Counterparts;
Effectiveness
.
This Agreement may be executed
in two or more counterparts (including by facsimile), each of
which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument, and
shall become effective when one or more counterparts have been
signed by each of the parties and delivered (by telecopy or
otherwise) to the other parties.
Section 8.5
Governing
Law
.
This Agreement, and all claims or causes
of action (whether at law, in contract or in tort) that may be
based upon, arise out of or relate to this Agreement or the
negotiation, execution or performance hereof, shall be governed
by and construed in accordance with the laws of the State of
Delaware, without giving effect to any choice or conflict of law
provision or rule (whether of the State of Delaware or any other
jurisdiction) that would cause the application of the laws of
any jurisdiction other than the State of Delaware.
Section 8.6
Specific
Performance; Jurisdiction; Enforcement
.
The
parties agree that irreparable damage would occur in the event
that any of the provisions of this Agreement were not performed
in accordance with their specific terms or were otherwise
breached. It is accordingly agreed that prior to the termination
of this Agreement in accordance with Article VII the
parties shall be entitled to an injunction or injunctions to
prevent breaches of this Agreement and to enforce specifically
the terms and provisions of this Agreement exclusively in the
Delaware Court of Chancery (or a proper Delaware state court if
the Court of Chancery does not have subject matter jurisdiction)
or the federal courts sitting in the State of Delaware, this
being in addition to any other remedy to which they are entitled
at law or in equity. In connection with any request for specific
performance or equitable relief by any party hereto, each of the
other parties waive any requirement for the security or posting
of any bond in connection with such remedy. In addition, each of
the parties hereto irrevocably agrees that any legal action or
proceeding with respect to this Agreement and the rights and
obligations arising hereunder, or for recognition and
enforcement of any judgment in respect of this Agreement and the
rights and obligations arising hereunder brought by the other
party hereto or its successors or assigns, shall be brought and
determined exclusively in the Delaware Court of Chancery (or a
proper Delaware state court if the Court of Chancery does not
have subject matter jurisdiction) or the federal courts sitting
in the State of Delaware. Each of the parties hereto consents to
the service of process or other papers in connection with such
action or proceeding in the manner provided in Section 8.8
or in such other manner as permitted by Law. Each of the parties
hereto hereby irrevocably submits with regard to any such action
or proceeding for itself and in respect of its property,
generally and unconditionally, to the personal jurisdiction of
the aforesaid courts and agrees that it will not bring any
action relating to this Agreement or any of the transactions
contemplated hereby in any court other than the aforesaid
courts. Each of the parties hereto hereby irrevocably waives, to
the fullest extent permitted by applicable law, and agrees not
to assert, by way of motion, as a defense, counterclaim or
otherwise, in any action or proceeding with respect to this
Agreement, (a) any claim that it is not personally subject
to the jurisdiction of the above named courts for any reason
other than the failure to serve in accordance with this
Section 8.6, (b) any claim that it or its property is
exempt or immune from jurisdiction of any such court or from any
legal process commenced in such courts (whether through service
of notice, attachment prior to judgment, attachment in aid of
execution of judgment, execution of judgment or otherwise) and
(c) any claim that (i) the suit, action or proceeding
in such court is brought in an inconvenient forum, (ii) the
venue of such suit, action or proceeding is improper or
(iii) this Agreement, or the subject matter hereof, may not
be enforced in or by such courts.
Section 8.7
WAIVER
OF JURY TRIAL
.
EACH OF THE PARTIES HERETO
IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY
LEGAL PROCEEDING BETWEEN THE PARTIES HERETO ARISING OUT OF OR
RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED
HEREBY.
Section 8.8
Notices
.
Any
notice required to be given hereunder shall be sufficient if in
writing, and sent by facsimile transmission (
provided
that any notice received by facsimile transmission or otherwise
at the addressees location on any Business Day after
5:00 p.m. (addressees local time) shall be deemed to
have
D-26
been received at 9:00 a.m. (addressees local time) on
the next Business Day), by reliable overnight delivery service
(with proof of service), hand delivery or certified or
registered mail (return receipt requested and first-class
postage prepaid), addressed as follows:
To Parent or Merger Sub:
HH GP Holding, LLC
302 North Independence
Enid, OK 73701
Facsimile:
(580) 242-4703
Attention: Harold Hamm
with copies to:
Baker Botts L.L.P.
910 Louisiana
Houston, TX 77002
Facsimile:
(713) 229-1522
|
|
|
|
Attention:
|
Joshua Davidson
|
Paul Perea
To Holdings GP or Holdings:
Hiland Holdings GP, LP
205 West Maple
Suite 1100
Enid, OK 73701
Facsimile:
(580) 616-2080
Attention: Joseph L. Griffin
with copies to:
Fulbright & Jaworski L.L.P.
2200 Ross Avenue
Suite 2800
Dallas, TX 75201
Facsimile:
(214) 855-8000
|
|
|
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Attention:
|
Kenneth L. Stewart
|
Bryn A. Sappington
or to such other address as any party shall specify by written
notice so given, and such notice shall be deemed to have been
delivered as of the date so telecommunicated, personally
delivered or mailed. Any party to this Agreement may notify any
other party of any changes to the address or any of the other
details specified in this Section 8.8;
provided
,
however
, that such notification shall only be effective
on the date specified in such notice or five (5) Business
Days after the notice is given, whichever is later. Rejection or
other refusal to accept or the inability to deliver because of
changed address of which no notice was given shall be deemed to
be receipt of the notice as of the date of such rejection,
refusal or inability to deliver.
Section 8.9
Assignment;
Binding Effect
.
Neither this Agreement nor
any of the rights, interests or obligations hereunder shall be
assigned by any of the parties hereto (whether by operation of
law or otherwise) without the prior written consent of the other
parties, except that, without written consent of any party
hereto, (i) Merger Sub may assign, in its sole discretion,
any of or all of its rights, interest and obligations under this
Agreement to Parent or to any direct or indirect wholly-owned
subsidiary of Parent, (ii) Parent may assign any right to
receive a payment by Holdings of Expenses to any Affiliate of
Parent, and (iii) Merger Sub
and/or
Parent may assign its rights hereunder as collateral security to
any lender to Merger Sub
and/or
Parent or an Affiliate of Merger Sub
and/or
Parent, as the case may be, but, in each case, no such
assignment shall relieve Merger Sub
and/or
Parent, as applicable, of its obligations hereunder. Subject to
the preceding sentence, this
D-27
Agreement shall be binding upon and shall inure to the benefit
of the parties hereto and their respective successors and
assigns.
Section 8.10
Severability
.
Any
term or provision of this Agreement which is invalid or
unenforceable in any jurisdiction shall, as to that
jurisdiction, be ineffective only to the extent of such
invalidity or unenforceability without rendering invalid or
unenforceable such term or provision as to any other
jurisdiction or any of the remaining terms and provisions of
this Agreement in that or any other jurisdiction. If any
provision of this Agreement is so broad as to be unenforceable,
such provision shall be interpreted to be only so broad as is
enforceable.
Section 8.11
Entire
Agreement; No Third-Party Beneficiaries
.
This
Agreement (including the exhibits and schedules hereto)
constitutes the entire agreement, and supersedes all other prior
agreements and understandings, both written and oral, between
the parties, or any of them, with respect to the subject matter
hereof and thereof and, except as set forth in Section 5.9
and except for the rights of Unitholders whose Common Units
converted into the right to receive the Merger Consideration
pursuant to Section 2.1 to receive such Merger
Consideration after the Effective Time, is not intended to and
shall not confer upon any person other than the parties hereto
any rights or remedies hereunder.
Section 8.12
Amendments;
Waivers
.
At any time prior to the Effective
Time, any provision of this Agreement may be amended or waived
if, and only if, such amendment or waiver is in writing and
signed, in the case of an amendment, by the Holdings Parties and
the Parent Parties, or in the case of a waiver, by the party
against whom the waiver is to be effective;
provided
,
however
, that after receipt of Unitholder Approval, if
any such amendment or waiver shall by applicable Law or in
accordance with the rules and regulations of the NASDAQ Global
Select Market require further approval of the Unitholders of
Holdings, the effectiveness of such amendment or waiver shall be
subject to the approval of the Unitholders of Holdings.
Notwithstanding the foregoing, no failure or delay by the
Holdings Parties or the Parent Parties in exercising any right
hereunder shall operate as a waiver thereof nor shall any single
or partial exercise thereof preclude any other or further
exercise of any other right hereunder.
Section
8.13
Headings;
Interpretation
.
(a) Headings of the Articles and Sections of this Agreement
are for convenience of the parties only and shall be given no
substantive or interpretive effect whatsoever. The table of
contents to this Agreement is for reference purposes only and
shall not affect in any way the meaning or interpretation of
this Agreement.
(b) When a reference is made in this Agreement to an
Article or Section, such reference shall be to an Article or
Section of this Agreement unless otherwise indicated. Whenever
the words include, includes or
including are used in this Agreement, they shall be
deemed to be followed by the words without
limitation. The words hereof,
herein and hereunder and words of
similar import when used in this Agreement shall refer to this
Agreement as a whole and not to any particular provision of this
Agreement. The word or shall be deemed to mean
and/or. All terms defined in this Agreement shall
have the defined meanings when used in any certificate or other
document made or delivered pursuant thereto unless otherwise
defined therein. The definitions contained in this Agreement are
applicable to the singular as well as the plural forms of such
terms and to the masculine as well as to the feminine and neuter
genders of such term. Any agreement, instrument or statute
defined or referred to herein or in any agreement or instrument
that is referred to herein means such agreement, instrument or
statute as from time to time amended, modified or supplemented,
including (in the case of agreements or instruments) by waiver
or consent and (in the case of statutes) by succession of
comparable successor statutes and references to all attachments
thereto and instruments incorporated therein. Each of the
parties has participated in the drafting and negotiation of this
Agreement. If an ambiguity or question of intent or
interpretation arises, this Agreement must be construed as if it
is drafted by all the parties, and no presumption or burden of
proof shall arise favoring or disfavoring any party by virtue of
authorship of any of the provisions of this Agreement.
References in this Agreement to specific laws or to specific
provisions of laws shall include all rules and regulations
promulgated thereunder. Each party to this Agreement has or may
have set forth information in its respective disclosure schedule
in a section of such disclosure corresponding to the applicable
sections of this Agreement to which such disclosure applies. The
fact that any item of information is disclosed in a disclosure
schedule to this Agreement shall not
D-28
constitute an admission by such party that such item is
material, that such item has had or would have a Holdings
Material Adverse Effect or Parent Material Adverse Effect, as
applicable, or that the disclosure of such be construed to mean
that such information is required to be disclosed by this
Agreement. For the avoidance of doubt, no provision of this
Agreement, including Sections 5.1, 5.4 or 5.6, shall
require the Holdings Parties to cause the board of directors of
Hiland GP (or any committee thereof) to recommend approval of
the Hiland Merger or the Hiland Agreement following a Hiland
Change in Board Recommendation or to prevent the board of
directors of Hiland GP (or any committee thereof) from
terminating the Hiland Agreement in accordance with its terms.
Section 8.14
No
Recourse
.
This Agreement may only be enforced
against, and any claims or causes of action that may be based
upon, arise out of or relate to this Agreement, or the
negotiation, execution or performance of this Agreement may only
be made against the entities that are expressly identified as
parties hereto and no past, present or future Affiliate,
director, officer, employee, incorporator, member, manager,
partner, stockholder, agent, attorney or representative of any
party hereto shall have any liability for any obligations or
liabilities of the parties to this Agreement or for any claim
based on, in respect of, or by reason of, the transactions
contemplated hereby.
Section 8.15
Certain
Definitions
.
For purposes of this Agreement,
the following terms will have the following meanings when used
herein:
(a)
Affiliates
means, with respect to
any Person, any other Person that directly or indirectly through
one or more intermediaries controls, is controlled by or is
under common control with, the Person in question. As used
herein, the term control means the possession,
direct or indirect, of the power to direct or cause the
direction of the management and policies of a Person, whether
through ownership of voting securities, by contract or otherwise.
(b)
Budget
means the annual budget of
each of Holdings and Hiland for fiscal year 2009 and included in
Section 8.15(b) of the Holdings Disclosure Schedule.
(c)
Business Day
means any day other
than a Saturday, Sunday or a day on which the banks in New York
are authorized by law or executive order to be closed.
(d)
Common Unit
has the meaning set
forth in the Partnership Agreement.
(e)
Confidentiality Agreement
means the
form of confidentiality agreement in
Exhibit A
to
this Agreement.
(f)
Conflicts Committee
means a
committee of the Board of Directors composed entirely of two or
more directors who are not (a) security holders, officers
or employees of Holdings GP, (b) officers, directors or
employees of any Affiliate of Holdings GP or (c) holders of
any ownership interest in the Holdings Group Entities other than
Common Units and who also meet the independence standards
required of directors who serve on an audit committee of a board
of directors established by the Exchange Act and the rules and
regulations of the SEC thereunder and by the national securities
exchange on which the Common Units are listed.
(g)
Contracts
means any contracts,
agreements, licenses, notes, bonds, mortgages, indentures,
commitments, leases or other instruments or obligations, whether
written or oral.
(h)
Employee Benefit Plan
means all
compensation or employee benefit plans, programs, policies,
agreements or other arrangements, whether or not employee
benefit plans (within the meaning of Section 3(3) of
ERISA, whether or not subject to ERISA), whether written or
oral, including but not limited to, those that provide cash or
equity-based incentives, health, medical, dental, disability,
accident or life insurance benefits or vacation, severance,
retirement, pension or savings benefits, that are sponsored,
maintained or contributed to by the Holdings Group Entities, or
that the Holdings Group Entities have any obligation to sponsor,
maintain or contribute to, for the benefit of current or former
employees, directors, independent contractors or consultants of
the Holdings Group Entities and all employee, consultant and
independent contractor agreements providing compensation,
vacation, severance
D-29
or other benefits to any current or former officer, employee,
independent contractor or consultant of the Holdings Group
Entities, including Employment Agreements.
(i)
Employment Agreement
means all
agreements to which a Holdings Group Entity is a party that
relate to the employment or engagement, or arise from the past
employment or engagement, of any natural person by a Holdings
Group Entity, whether as an employee, nonemployee officer or
director, consultant or other independent contractor, sales
representative or distributor of any kind, including any
employee leasing or service agreement and any noncompetition
agreement.
(j)
Encumbrances
means pledges,
restrictions on transfer, proxies and voting or other
agreements, liens, claims, charges, mortgages, security
interests or other legal or equitable encumbrances, limitations
or restrictions of any nature whatsoever.
(k)
General Partner Interest
has the
meaning set forth in the Partnership Agreement.
(l)
Governmental Entity
means any
(a) multinational, federal, national, provincial,
territorial, state, regional, municipal, local or other
government, governmental or public department, central bank,
court, tribunal, arbitral body, commission, administrative
agency, board, bureau or agency, domestic or foreign,
(b) subdivision, agent, commission, board, or authority of
any of the foregoing, or (c) quasi-governmental or private
body exercising any regulatory, expropriation or taxing
authority under, or for the account of, any of the foregoing, in
each case, which has jurisdiction or authority with respect to
the applicable party.
(m)
Hamm Parties
means Harold Hamm,
Continental Gas Holdings, Inc. and Bert Mackie, as trustee of
the Harold Hamm DST Trust and the Harold Hamm HJ Trust.
(n)
Hiland Change in Board
Recommendation
means a Change in Board Recommendation
as defined in the Hiland Agreement.
(o)
Hiland Operating Credit Agreement
means the Credit Agreement, dated as of February 15, 2005,
among Hiland Operating, LLC, the lenders party thereto and
MidFirst Bank, as administrative agent, together with any
related guarantees, in each case as amended, restated,
supplemented or otherwise modified from time to time.
(p)
Holdings Credit Agreement
means the
Credit Agreement, dated as of September 26, 2006, among
Holdings, the lenders party thereto and MidFirst Bank, as
administrative agent, together with any related guarantees, in
each case as amended, restated, supplemented or otherwise
modified from time to time.
(q)
Holdings Material Adverse Effect
means any fact, circumstance, event, change, effect or
occurrence that, individually or in the aggregate with all other
facts, circumstances, events, changes, effects or occurrences,
has had or would be reasonably likely to have a material adverse
effect on the assets, liabilities, properties, business, results
of operations or condition (financial or otherwise) of the
Holdings Parties, taken as a whole, or on the ability of the
Holdings Parties to perform their obligations hereunder or to
consummate the Merger, but shall not include: (a) facts,
circumstances, events, changes, effects or occurrences
(i) generally affecting the midstream oil and gas or
gathering and processing industries (including commodity
prices), (ii) generally affecting the economy or the
financial or securities markets in the United States or globally
(including interest rates), (iii) generally affecting
regulatory or political conditions in the United States or
globally, (iv) caused by compliance with the terms of this
Agreement (including omissions required by this Agreement),
(v) caused by the announcement or pendency of the Merger
(including litigation brought by any Unitholders of Holdings (on
their own behalf or on behalf of Holdings) or loss of or adverse
changes in relationships with employees, customers or suppliers
of Holdings) or (vi) caused by any action taken or omitted
to be taken by an officer of a Holdings Party at the direction
of any of the Parent Parties or Mr. Hamm (other than
(A) in his capacity as part of, (B) in accordance with
authority delegated to him by, or (C) as otherwise
authorized by, the Board of Directors or any committee thereof);
(b) changes in applicable Laws or GAAP after the date
hereof; (c) a decrease in the market price of the Common
Units; (d) any failure by the Holdings Parties to meet any
internal or publicly disclosed projections, forecasts or
estimates of revenue or earnings; (e) a
D-30
Ratio Default; (f) any decrease in distributions in respect
of the Common Units; or (g) any decrease in distributions
in respect of the Common or Subordinated Units of Hiland
occurring prior to the Execution Date; except, in the case of
clauses (a)(i), (a)(ii) or (a)(iii) of this definition, for any
fact, circumstance, event, change, effect or occurrence that
affects the assets, liabilities, properties, business, results
of operations or condition (financial or otherwise) of the
Holdings Parties, taken as a whole, in a disproportionately
adverse manner, compared to other participants in the midstream
oil and gas or gathering and processing industries, and except
that clauses (c), (d), (e), (f) and (g) of this
definition shall not prevent or otherwise affect a determination
that any fact, circumstance, event, change, effect or occurrence
underlying such decrease, failure or default has resulted in, or
contributed to, a Holdings Material Adverse Effect.
(r)
Knowledge
or
knowledge
means (i) with respect to
Parent, the knowledge of the individuals listed on
Section 8.15(r)(i) of the Parent Disclosure Schedule and
(ii) with respect to the Holdings Parties, the knowledge of
the individuals listed on Section 8.15(r)(ii) of the
Holdings Disclosure Schedule.
(s)
Law
or
Laws
means
all statutes, regulations, statutory rules, orders, judgments,
decrees and terms and conditions of any grant of approval,
permission, authority, permit or license of any court,
Governmental Entity, statutory body or self-regulatory authority
(including the NASDAQ Global Select Market).
(t)
Limited Partner
has the meaning set
forth in the Partnership Agreement.
(u)
Orders
or
orders
means any orders, judgments, injunctions, awards, decrees or
writs handed down, adopted or imposed by, including any consent
decree, settlement agreement or similar written agreement with,
any Governmental Entity.
(v)
organizational or governing
documents
means, for a corporation, the certificate of
incorporation (or similarly-titled document of equivalent
effect) and bylaws; for a partnership, the certificate of
limited partnership (or similarly-titled document of equivalent
effect) and partnership agreement; for a limited liability
company, the certificate of formation (or similarly-titled
document of equivalent effect) and limited liability company
agreement; and for other business entities, certificates and
documents of equivalent effect.
(w)
Outstanding
has the meaning set
forth in the Partnership Agreement.
(x)
Parent Material Adverse Effect
means
any fact, circumstance, event, change, effect or occurrence
that, individually or in the aggregate with all other facts,
circumstances, events, changes, effects or occurrences, prevents
or materially delays or materially impairs or would be
reasonably likely to prevent or materially delay or materially
impair the ability of Parent or Merger Sub to consummate the
Merger and the other transactions contemplated hereby.
(y)
Partially Owned Entity
means, with
respect to a specified person, any other person that is not a
Subsidiary of such specified person but in which such specified
person, directly or indirectly, owns less than 100% of the
equity interests thereof (whether voting or non-voting and
including beneficial interests).
(z)
Partnership Agreement
means the
Amended and Restated Limited Partnership Agreement of Holdings,
dated as of September 25, 2006, as amended from time to
time.
(aa)
Partnership Interest
has the
meaning set forth in the Partnership Agreement.
(bb)
Permitted Encumbrances
means
(i) carriers, warehousemens, mechanics,
materialmens, repairmens or other like liens imposed
by law arising in the ordinary course of business which are not
overdue for a period of more than 60 days or which are
being contested in good faith by appropriate proceeding,
(ii) pledges or deposits in connection with workers
compensation, unemployment insurance and other social security
legislation and deposits securing liability to insurance
carriers under insurance or self-insurance arrangements,
(iii) liens, security interests, charges or other
encumbrances imposed by law for Taxes not yet due or which are
being contested in good faith by appropriate proceedings
(
provided
D-31
that adequate reserves with respect thereto are maintained on
the books of such person or its subsidiaries, as the case may
be, in conformity with GAAP), (iv) deposits to secure the
performance of bids, trade contracts (other than for borrowed
money), leases, statutory obligations, surety and appeal bonds,
performance bonds and other obligations of a like nature
incurred in the ordinary course of business, (v) easements,
rights-of-way, restrictions and other similar encumbrances
incurred in the ordinary course of business which, in the
aggregate, do not materially interfere with the ordinary conduct
of the business by the relevant person and its subsidiaries,
(vi) liens, title defects, preferential rights or other
encumbrances created pursuant to construction, operating and
maintenance agreements, space lease agreements and other similar
agreements, in each case having ordinary and customary terms and
entered into in the ordinary course of business by the relevant
person and its subsidiaries, (vii) liens on the assets of
Hiland Operating, LLC and its Subsidiaries securing the
obligations of Hiland Operating, LLC under the Hiland Operating
Credit Agreement, (viii) liens on the assets of Holdings
and its Subsidiaries securing the obligations of Holdings under
the Holdings Credit Agreement and (ix) Encumbrances set
forth in the organizational or governing documents of any of the
Holdings Group Entities.
(cc)
person
or
Person
means an individual, a corporation, a partnership, a limited
liability company, an association, a trust or any other entity,
group (as such term is used in Section 13 of the Exchange
Act) or organization, including a Governmental Entity, and any
permitted successors and assigns of such person.
(dd)
Ratio Default
means the failure, if
any, of Hiland Operating, LLC to be in compliance with
(i) the Interest Coverage Ratio required by
Section 6.17 of the Hiland Operating Credit Agreement or
(ii) the Leverage Ratio required by Section 6.18 of
the Hiland Operating Credit Agreement. For purposes of this
definition, Interest Coverage Ratio and
Leverage Ratio have the meanings assigned to them in
the Hiland Operating Credit Agreement.
(ee)
Release
means any depositing,
spilling, leaking, pumping, pouring, placing, burying, emitting,
discarding, abandoning, emptying, discharging, migrating,
injecting, escaping, leaching, dumping or disposing.
(ff)
Rollover Commitment
means the
acknowledgement or commitment made by a Person listed on
Section 8.15(ff) of the Parent Disclosure Schedule in a
commitment letter or other support agreement executed as of the
date hereof in connection herewith.
(gg)
Subsidiaries
of any person means
any corporation, partnership, association, trust or other form
of legal entity of which (i) more than 50% of the
outstanding voting securities are directly or indirectly owned
by such person, or (ii) such person or any Subsidiary of
such person is a general partner.
(hh)
Tax
or
Taxes
means any taxes, assessments, fees and other governmental
charges imposed by any Governmental Entity, including income,
profits, gross receipts, net proceeds, alternative or add-on
minimum, ad valorem, value added, goods and services, turnover,
sales, use, property, personal property (tangible and
intangible), environmental, stamp, leasing, lease, user, excise,
duty, franchise, capital stock, transfer, registration, license,
withholding, social security (or similar), unemployment,
disability, payroll, employment, fuel, excess profits,
occupational, premium, windfall profit, severance, estimated, or
other charge of any kind whatsoever, including any interest,
penalty, or addition thereto, whether disputed or not.
(ii)
Tax Return
means any return,
declaration, report, election, designation, notice, claim for
refund, or information return or statement relating to Taxes,
including any schedule or attachment thereto, and including any
amendment thereof.
(jj)
Trusts
means the Harold Hamm DST
Trust and the Harold Hamm HJ Trust. Bert Harold Mackie is the
trustee of each Trust.
(kk)
Unit
means any class or series of
equity interest in Holdings (but excluding any options, rights,
warrants and appreciation rights relating to an equity interest
in Holdings) designated as a Unit, which shall
include Common Units.
D-32
(ll)
Unitholder
means the holder of a
Unit.
(mm)
Unitholder Approval
means
(i) approval of at least a majority of the Outstanding
Common Units voting together as a class and (ii) approval
of at least a majority of the Outstanding Common Units
(excluding Common Units owned by Mr. Hamm, his Affiliates
(including Continental Gas) and the Trusts) voting as a class.
(nn) Each of the following terms is defined in the Section
set forth opposite such term:
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Agreement
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Preamble
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Alternative Proposal
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Section 5.3(g)
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Board of Directors
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Recitals
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Book-Entry Common Units
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Section 2.2(a)
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Cap Amount
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Section 5.9(c)
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Certificate of Merger
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Section 1.3
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Certificates
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Section 2.2(a)
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Change in Board Recommendation
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Section 5.3(d)
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Closing
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Section 1.2
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Closing Date
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Section 1.2
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Code
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Section 2.2(b)(iii)
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Continental Gas
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Recitals
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D&O Insurance
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Section 5.9(b)
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DLLCA
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Section 1.1
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DRULPA
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Section 1.1
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Effective Time
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Section 1.3
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Employees
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Section 3.12
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End Date
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Section 7.1(b)(i)
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ERISA
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Section 3.7(a)
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ERISA Affiliate
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Section 3.7(a)
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Exchange Act
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Section 3.4(a)
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Exchange Fund
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Section 2.2(a)
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Execution Date
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Section 3.2(b)
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Expenses
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Section 7.2(a)
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Funding
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Section 4.4
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Funding Commitments
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Section 4.4
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GAAP
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Section 3.4(c)
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Hiland
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Recitals
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Hiland Agreement
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Recitals
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Hiland GP
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Recitals
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Hiland Merger
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Recitals
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Hiland Parties
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Recitals
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HLND Merger Sub
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Recitals
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Holdings
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Preamble
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Holdings GP
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Preamble
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Holdings D&O Indemnified Parties
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Section 5.9(b)
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Holdings Disclosure Schedule
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Article III
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Holdings Financial Statements
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Section 3.4(c)
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Holdings GP LLC Agreement
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Section 3.3(a)
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Holdings Group Entities
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Section 3.1(a)
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Holdings LTIP
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Section 2.1(b)(vi)
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Holdings Parties
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Preamble
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Holdings SEC Documents
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Section 3.4(a)
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HSR Act
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Section 5.6(b)
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Letter of Transmittal
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Section 2.2(b)(i)
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Material Contracts
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Section 3.16(a)
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Merger
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Recitals
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Merger Consideration
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Section 2.1(a)
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Merger Sub
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Preamble
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Merger Sub LLC Interests
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Section 1.6
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Merger Sub LLC Units
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Section 1.6
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Parent
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Preamble
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Parent Disclosure Schedule
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Article IV
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Parent Parties
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Preamble
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Partnership Meeting
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Section 5.4(b)
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Paying Agent
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Section 2.2(a)
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Proxy Statement
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Section 3.10
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Recommendation
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Section 3.15
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Regulatory Law
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Section 5.6(d)
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Representatives
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Section 5.3(a)
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Rollover Interests
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Section 2.1(b)
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Rollover Parties
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Section 2.1(b)
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Schedule 13E-3
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Section 3.10
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SEC
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Section 3.4(a)
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Securities Act
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Section 3.2(f)
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Superior Proposal
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Section 5.3(h)
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Support Agreement
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Recitals
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Surviving Entity
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Section 1.1
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D-34
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed and delivered on the date first
above written.
HH GP HOLDING, LLC
Harold Hamm
President
HPGP MERGERCO, LLC
Harold Hamm
President
HILAND PARTNERS GP HOLDINGS, LLC
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By:
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/s/ Joseph
L. Griffin
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Joseph L. Griffin
Chief Executive Officer and President
HILAND HOLDINGS GP, LP
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By:
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Hiland Partners GP Holdings, LLC,
its General Partner
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By:
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/s/ Joseph
L. Griffin
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Joseph L. Griffin
Chief Executive Officer and President
Signature
Page to Agreement and Plan of Merger
Annex E
SUPPORT
AGREEMENT
(HPGP Units)
This SUPPORT AGREEMENT, dated as of June 1, 2009 (this
Agreement
), is entered into among Harold
Hamm, an individual residing in Oklahoma, Continental Gas
Holdings, Inc., a Delaware corporation (
Continental
Gas
), Bert Mackie, as trustee of the Harold Hamm DST
Trust and the Harold Hamm HJ Trust (each a
Trust
and together the
Trusts
), Hiland Partners GP Holdings, LLC, a
Delaware limited liability company and the general partner of
Holdings (
Holdings GP
), and Hiland Holdings
GP, LP, a Delaware limited partnership
(
Holdings
and, together with Holdings GP, the
Holdings Parties
).
RECITALS
WHEREAS, simultaneously with the execution of this Agreement, HH
GP Holding, LLC, an Oklahoma limited liability company
(
Parent
), HPGP MergerCo, LLC, a Delaware
limited liability company and a subsidiary of Parent
(
Merger Sub
and, together with Parent, the
Parent Parties
), and the Holdings Parties
have entered into an Agreement and Plan of Merger, as it may be
amended, supplemented or otherwise modified from time to time
(the
Merger Agreement
), which provides, among
other things, for the merger of Merger Sub with and into
Holdings, upon the terms and subject to the conditions set forth
therein;
WHEREAS, Mr. Hamm and Continental Gas are the record and
Beneficial Owners of, and have the right to vote and dispose of,
that number of Units set forth next to their respective names on
Schedule A
hereto;
WHEREAS, the Trusts are the record owners of that number of
Units set forth next to their respective names on
Schedule A
, and Mr. Mackie in his capacity as
trustee of the Trusts is the Beneficial Owner of, and has the
right to vote and dispose of, such Units; and
WHEREAS, as an inducement to the Holdings Parties entering into
the Merger Agreement and incurring the obligations therein, the
Holdings Parties have required that Mr. Hamm, Continental
Gas and Mr. Mackie (collectively, the
Hamm
Parties
) enter into this Agreement.
NOW, THEREFORE, the parties hereto, intending to be legally
bound, agree as follows:
ARTICLE I
Certain
Definitions
Section
1.1
Defined
Terms.
Terms used in this Agreement and not
defined herein have the meanings ascribed to such terms in the
Merger Agreement.
Section
1.2
Other
Definitions.
For the purposes of this
Agreement:
(a)
Affiliates
means, with respect
to any Person, any other Person that directly or indirectly
through one or more intermediaries controls, is controlled by or
is under common control with, the Person in question. As used
herein, the term control means the possession,
direct or indirect, of the power to direct or cause the
direction of the management and policies of a Person, whether
through ownership of voting securities, by contract or
otherwise. Notwithstanding the foregoing, none of the Hamm
Parties, on the one hand, and the Holdings Parties, the Hiland
Parties and their respective Subsidiaries, on the other hand,
shall be considered Affiliates for purposes of this Agreement.
(b)
Beneficially Own
or
Beneficial Ownership
with respect to any
securities means having beneficial ownership of such
securities (as determined pursuant to
Rule 13d-3
under the Exchange Act), including pursuant to any agreement,
arrangement or understanding, whether or not in writing. Without
duplicative counting of the same securities by the same holder,
securities Beneficially Owned by a Person include securities
Beneficially Owned by all Affiliates of such Person and all
other Persons with whom
E-1
such Person would constitute a group within the
meaning of Section 13(d) of the Exchange Act and the rules
promulgated thereunder.
(c)
Conflicts Committee
means the
conflicts committee of the board of directors of Holdings GP.
(d)
Expiration Time
has the
meaning set forth in Section 2.1.
(e)
Owned Units
has the meaning
set forth in Section 2.1.
(f)
Units
has the meaning ascribed
thereto in the Merger Agreement, and will also include for
purposes of this Agreement all Partnership Interests into which
Units may be split, combined, merged, consolidated, reorganized,
reclassified, recapitalized or otherwise converted and any
rights and benefits arising therefrom, including any dividends
or distributions of Partnership Interests or other equity
securities which may be declared in respect of the Units and
entitled to vote in respect of the matters contemplated by
Article II.
ARTICLE II
Agreement to
Vote
Section
2.1
Agreement
to Vote.
Subject to the terms and conditions
hereof, each of the Hamm Parties irrevocably and unconditionally
agrees that from and after the date hereof and until the
earliest to occur of (i) the Effective Time; (ii) the
termination of the Merger Agreement in accordance with its
terms; and (iii) the written agreement of the parties (with
respect to Holdings GP, acting through the Conflicts Committee)
to terminate this Agreement (such earliest occurrence being the
Expiration Time
), at any meeting (including
each adjourned or postponed meeting) of Holdings
Unitholders, however called, or in any other circumstances
(including any sought action by written consent) upon which a
vote or other consent or approval is sought (any such meeting or
other circumstance, a
Unitholders
Meeting
), such Hamm Party will (A) appear at such
Unitholders Meeting or otherwise cause the Units
Beneficially Owned by such Hamm Party as of the relevant time
(
Owned Units
) to be counted as present
thereat for purposes of calculating a quorum and respond to any
other request by the Holdings Parties for written consent, if
any, and, (B) vote, or cause to be voted, all of its Owned
Units (1) in favor of the adoption and approval of the
Merger Agreement (whether or not recommended by Holdings
GPs Board of Directors or any committee thereof) and the
transactions contemplated thereby, including the Merger,
(2) in favor of the approval of any other matter to be
approved by the Unitholders of Holdings (including, without
limitation, the adjournment of a Unitholders Meeting) to
facilitate the transactions contemplated by the Merger
Agreement, including the Merger, (3) against any
Alternative Proposal or any transaction contemplated by such
Alternative Proposal, (4) against any proposal made in
opposition to, or in competition or inconsistent with, the
Merger Agreement or the Merger, including the adoption thereof
or the consummation thereof, (5) against any extraordinary
dividend, distribution or recapitalization by Holdings or change
in the capital structure of Holdings (other than pursuant to or
as explicitly permitted by the Merger Agreement), and
(6) against any action or agreement that would reasonably
be expected to (a) result in a breach of any
representation, warranty or covenant of the Holdings Parties
under the Merger Agreement or (b) interfere with, delay or
attempt to discourage the Merger or the transactions
contemplated by the Merger Agreement.
Section
2.2
Restrictions
on Unit Acquisitions.
Until the Expiration
Time, each of the Hamm Parties agrees not to, and to cause their
respective Affiliates not to, (i) purchase any Common Units
or any other security of Holdings that is convertible into
Common Units in the open market or in privately negotiated
transactions with third parties; (ii) form, join or in any
way participate in a group (within the meaning of
Section 13(d) of the Exchange Act and the rules promulgated
thereunder) in connection with any of the foregoing; or
(iii) commence a tender or exchange offer for Common Units
at a price below $2.40 per Common Unit;
provided
that
nothing herein shall restrict or be deemed to restrict any
actions by any of the Hamm Parties (whether as part of a group
or otherwise) that are consistent with or in furtherance of the
transactions contemplated by the Merger Agreement, including
changes to the membership of any such group in which
Mr. Hamm participates or the receipt by any of them of
Common Units in accordance with benefit plans in place prior to
the date hereof. For the avoidance of doubt, nothing contained
in this Section 2.2
E-2
shall be deemed to restrict in any manner the purchase by any
Hamm Party of Common Units or any other security of Holdings
that is convertible into Common Units in a privately negotiated
transaction with Holdings, which transaction would be subject to
the applicable provisions of the Partnership Agreement and
DRULPA.
Section
2.3
Proxy.
The
Hamm Parties hereby revoke any and all previous proxies granted
with respect to the Owned Units. By entering into this
Agreement, the Hamm Parties hereby grant a proxy appointing the
proxyholders named in Holdings proxy card, with full power
of substitution (the Proxyholders), as the Hamm
Parties attorney-in-fact and proxy, for and in the Hamm
Parties names, to be counted as present and to vote or
otherwise to act on behalf of each Hamm Party with respect to
the Owned Units solely with respect to the matters set forth in,
and in accordance with Section 2.1. The proxy granted by
the Hamm Parties pursuant to this Section 2.3 is, subject
to the penultimate sentence of this Section 2.3,
irrevocable and is coupled with an interest and is granted in
order to secure the Hamm Parties performance under this
Agreement and also in consideration of Holdings and Holdings GP
entering into this Agreement and the Merger Agreement. The proxy
granted by the Hamm Parties shall be automatically revoked upon
termination of this Agreement in accordance with its terms. The
Hamm Parties agree, from the date hereof until the Expiration
Time, not to attempt to revoke, frustrate the exercise of, or
challenge the validity of, the irrevocable proxy granted
pursuant to this Section 2.3.
ARTICLE III
Representations
and Warranties
Section
3.1
Representations
and Warranties of Hamm Parties.
The Hamm
Parties severally represent and warrant to the Holdings Parties
as of the date of this Agreement and at all times during the
term of this Agreement, as follows:
(a) Such Hamm Party has all requisite corporate, limited
liability or other requisite power and authority to enter into
this Agreement, to carry out its obligations hereunder and to
consummate the transactions contemplated hereby. The execution,
delivery and performance by such Hamm Party of this Agreement
and the consummation of the transactions contemplated hereby
have been duly authorized by all requisite corporate, limited
liability company or other requisite action on the part of such
Hamm Party. This Agreement has been duly executed and delivered
by such Hamm Party and, assuming the due authorization,
execution and delivery hereof by the other parties hereto,
constitutes a legal, valid and binding agreement of such Hamm
Party, enforceable against such Hamm Party in accordance with
its terms (except insofar as such enforceability may be limited
by bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and similar laws relating to or affecting
creditors rights generally and by general principles of
equity (regardless of whether such enforceability is considered
in a proceeding in equity or at law)).
(b) Except for matters expressly contemplated by this
Agreement, neither the execution and delivery by such Hamm Party
of this Agreement, nor the consummation by such Hamm Party of
the transactions contemplated hereby and the performance by such
Hamm Party of this Agreement will (i) violate or conflict
with any provision of the organizational or governing documents
of such Hamm Party, if any; (ii) other than pursuant to
Sections 13(d) and 16 of the Exchange Act, require any
consent, approval, authorization or permit of, registration,
declaration or filing with, or notification to, any Governmental
Entity or any other person; (iii) result in any breach of
or constitute a default (or an event that, with notice or lapse
of time or both, would become a default) under, or give to
others any right of termination, cancellation, amendment or
acceleration of any obligation or the loss of any benefit under
any agreement or instrument to which such Hamm Party is a party
or by or to which any of their properties are bound;
(iv) result in the creation of an Encumbrance upon any of
the assets of such Hamm Party; or (v) violate or conflict
with any Law applicable to such Hamm Party.
(c) Such Hamm Party is the record and Beneficial Owner of
the number of Common Units of Holdings constituting Owned Units
as of the date hereof as set forth next to its respective name
on
Schedule A
of this Agreement. Such Hamm Party
owns its respective Owned Units free and clear of any
Encumbrances, except pursuant to the organizational or governing
documents of such Hamm Party, if any,
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or the Holdings Parties and has the full legal right, power and
authority to vote all of the Owned Units without the consent or
approval of, or any other action on the part of any other
Person, and has not granted any proxy inconsistent with this
Agreement that is still effective or entered into any voting or
similar agreement with respect to, the Owned Units, in each
case, except as provided in this Agreement.
(d) The Owned Units set forth next to such Hamm
Partys name on
Schedule A
hereto constitute
all of the Partnership Interests of Holdings that are
Beneficially Owned by such Hamm Party as of the date hereof,
and, except for such Owned Units and except pursuant to the
organizational or governing documents of such Hamm Party, if
any, or the Holdings Parties such Hamm Party does not
Beneficially Own or have any right to acquire (whether
currently, upon lapse of time, following the satisfaction of any
conditions, upon the occurrence of any event or any combination
of the foregoing) any Units.
(e) Except for the representations and warranties contained
in this Section 3.1 and except as otherwise expressly set
forth in this Agreement or in the agreements or certificates
entered into in connection herewith or contemplated hereby
(including, without limitation, the Merger Agreement), none of
the Hamm Parties nor any other Person on behalf of the Hamm
Parties makes any other representation or warranty of any kind
or nature, express or implied, in connection with this Agreement
or the transactions contemplated by this Agreement.
Section
3.2
Representations
and Warranties of the Holdings Parties.
The
Holdings Parties, jointly and severally, represent and warrant
to each of the Hamm Parties as of the date of this Agreement and
at all times during the term of this Agreement, as follows:
(a) Each of the Holdings Parties has all requisite limited
liability company power and authority to enter into this
Agreement, to carry out its obligations hereunder and to
consummate the transactions contemplated hereby. The execution,
delivery and performance by each Holdings Party of this
Agreement and the consummation of the transactions contemplated
hereby have been duly authorized by all requisite limited
liability company action on the part of such Holdings Party.
This Agreement has been duly executed and delivered by each
Holdings Party and, assuming the due authorization, execution
and delivery hereof by the other parties hereto, constitutes a
legal, valid and binding agreement of such Holdings Party,
enforceable against such Holdings Party in accordance with its
terms (except insofar as such enforceability may be limited by
bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and similar laws relating to or affecting
creditors rights generally and by general principles of
equity (regardless of whether such enforceability is considered
in a proceeding in equity or at law)).
(b) Except for matters expressly contemplated by this
Agreement, neither the execution and delivery by the Holdings
Parties of this Agreement, nor the consummation by the Holdings
Parties of the transactions contemplated hereby and the
performance by the Holdings Parties of this Agreement will
(i) violate or conflict with any provision of the
organizational or governing documents of the Holdings Parties;
(ii) require any consent, approval, authorization or permit
of, registration, declaration or filing with, or notification
to, any Governmental Entity or any other person;
(iii) result in any breach of or constitute a default (or
an event that, with notice or lapse of time or both, would
become a default) under, or give to others any right of
termination, cancellation, amendment or acceleration of any
obligation or the loss of any benefit under any agreement or
instrument to which any of the Holdings Parties is a party or by
or to which any of their properties are bound; (iv) result
in the creation of an Encumbrance upon any of the assets of any
of the Holdings Parties; or (v) violate or conflict with
any Law applicable to the Holdings Parties.
(c) Except for the representations and warranties contained
in this Section 3.2 and except as otherwise expressly set
forth in this Agreement or in the agreements or certificates
entered into in connection herewith or contemplated hereby
(including, without limitation, the Merger Agreement), none of
the Holdings Parties nor any other Person on behalf of the
Holdings Parties makes any other representation or warranty of
any kind or nature, express or implied, in connection with this
Agreement or the transactions contemplated by this Agreement.
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ARTICLE IV
Additional
Covenants of Hamm Parties
Section
4.1
Rollover
of Partnership Interests.
Each of the Hamm
Parties agrees and acknowledges that in the Merger, the Common
Units of which such Hamm Party is the record owner (in the case
of the Trusts), is the Beneficial Owner (in the case of
Mr. Mackie) or is the record and Beneficial Owner (in the
case of Mr. Hamm and Continental Gas) will remain
outstanding as Common Units of the Surviving Entity and will not
be converted into the right to receive the Merger Consideration
or entitled to any other form of consideration.
Section
4.2
Non-Interference;
Further Assurances.
Each of the Hamm Parties
agrees that, prior to the termination of this Agreement, such
Hamm Party shall not take any action that would make any
representation or warranty of such Hamm Party contained herein
untrue or incorrect or have the effect of preventing, impeding,
interfering with or adversely affecting the performance by such
Hamm Party of its obligations under this Agreement;
provided
,
however
, that this restriction shall not
in any way restrict or limit the Parent Parties right to
terminate the Merger Agreement in accordance with its terms or
obligate the Parent Parties to waive any conditions set forth in
the Merger Agreement. Each of the Hamm Parties agrees, without
further consideration, to execute and deliver such additional
documents and to take such further actions as are necessary or
reasonably requested by the Holdings Parties to confirm and
assure the rights and obligations set forth in this Agreement or
to consummate the transactions contemplated by this Agreement.
ARTICLE V
Termination
Section
5.1
Termination.
This
Agreement shall terminate without further action at the
Expiration Time.
Section
5.2
Effect
of Termination.
Upon termination of this
Agreement, the rights and obligations of all the parties will
terminate and become void without further action by any party
except for the provisions of Section 5.1, this
Section 5.2 and Article VI, which will survive such
termination. For the avoidance of doubt, the termination of this
Agreement shall not relieve any party of liability for any
willful breach of this Agreement prior to the time of
termination, in which case the aggrieved party shall be entitled
to all rights and remedies available at law or in equity.
ARTICLE VI
General
Section
6.1
Survival
of Representations and Warranties.
None of
the representations and warranties in this Agreement shall
survive the Expiration Time.
Section
6.2
Expenses.
All
costs and expenses incurred in connection with this Agreement
and the transactions contemplated hereby shall be paid by the
party incurring or required to incur such expenses.
Section
6.3
Counterparts;
Effectiveness.
This Agreement may be executed
in two or more counterparts (including by facsimile), each of
which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument, and
shall become effective when one or more counterparts have been
signed by each of the parties and delivered (by telecopy or
otherwise) to the other parties.
Section
6.4
Governing
Law.
This Agreement, and all claims or causes
of action (whether at law or in equity, in contract or in tort)
that may be based upon, arise out of or relate to this Agreement
or the negotiation, execution or performance hereof, shall be
governed by and construed in accordance with the laws of the
State of Delaware, without giving effect to any choice or
conflict of law provision or rule (whether of the State of
Delaware or any other jurisdiction) that would cause the
application of the laws of any jurisdiction other than the State
of Delaware. Each of the parties hereto agrees (a) that
this Agreement involves at least
E-5
$100,000.00, and (b) that this Agreement has been entered
into by the parties hereto in express reliance upon 6
Del.
C.
§ 2708.
Section
6.5
Specific
Performance; Jurisdiction; Enforcement.
The
parties agree that irreparable damage would occur in the event
that any of the provisions of this Agreement were not performed
in accordance with their specific terms or were otherwise
breached. It is accordingly agreed that prior to the termination
of this Agreement in accordance with Article V the parties
shall be entitled to an injunction or injunctions to prevent
breaches of this Agreement and to enforce specifically the terms
and provisions of this Agreement exclusively in the Delaware
Court of Chancery (or a proper Delaware state court if the Court
of Chancery does not have subject matter jurisdiction) or the
federal courts sitting in the State of Delaware, this being in
addition to any other remedy to which they are entitled at law
or in equity. In connection with any request for specific
performance or equitable relief by any party hereto, each of the
other parties waive any requirement for the security or posting
of any bond in connection with such remedy. In addition, each of
the parties hereto irrevocably agrees that any Legal Action or
proceeding with respect to this Agreement and the rights and
obligations arising hereunder, or for recognition and
enforcement of any judgment in respect of this Agreement and the
rights and obligations arising hereunder brought by the other
party hereto or its successors or assigns, shall be brought and
determined exclusively in the Delaware Court of Chancery (or a
proper Delaware state court if the Court of Chancery does not
have subject matter jurisdiction) or the federal courts sitting
in the State of Delaware. Each of the parties hereto consents to
the service of process or other papers in connection with such
action or proceeding in the manner provided in Section 6.7
or in such other manner as permitted by Law and, to the extent
such party is not otherwise subject to service of process in the
State of Delaware, to appoint and maintain an agent in the State
of Delaware as such partys agent for acceptance of legal
process and notify the other party or parties hereto of the name
and address of such agent, and that service of process may, to
the fullest extent permitted by law, also be made on such party
by prepaid certified mail with a proof of mailing receipt
validated by the United States Postal Service constituting
evidence of valid service, and that service made pursuant to the
above shall, to the fullest extent permitted by law, have the
same legal force and effect as if served upon such party
personally within the State of Delaware. Each of the parties
hereto hereby irrevocably submits with regard to any such action
or proceeding for itself and in respect of its property,
generally and unconditionally, to the personal jurisdiction of
the aforesaid courts and agrees that it will not bring any
action relating to this Agreement or any of the transactions
contemplated hereby in any court other than the aforesaid
courts. Each of the parties hereto hereby irrevocably waives, to
the fullest extent permitted by applicable law, and agrees not
to assert, by way of motion, as a defense, counterclaim or
otherwise, in any action or proceeding with respect to this
Agreement, (a) any claim that it is not personally subject
to the jurisdiction of the above named courts for any reason
other than the failure to serve in accordance with this
Section 6.5, (b) any claim that it or its property is
exempt or immune from jurisdiction of any such court or from any
legal process commenced in such courts (whether through service
of notice, attachment prior to judgment, attachment in aid of
execution of judgment, execution of judgment or otherwise) and
(c) any claim that (i) the suit, action or proceeding
in such court is brought in an inconvenient forum, (ii) the
venue of such suit, action or proceeding is improper or
(iii) this Agreement, or the subject matter hereof, may not
be enforced in or by such courts. For purposes of implementing
the parties agreement to appoint and maintain an agent for
service of process in the State of Delaware, each such party
that has not as of the date hereof already duly appointed such
an agent does hereby appoint The Corporation Trust Company,
Corporation Trust Center, 1209 Orange Street, Wilmington,
Delaware 19801, as such agent.
Section
6.6
WAIVER
OF JURY TRIAL.
EACH OF THE PARTIES HERETO
IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY
LEGAL PROCEEDING BETWEEN THE PARTIES HERETO ARISING OUT OF OR
RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED
HEREBY.
Section
6.7
Notices.
Any
notice required to be given hereunder shall be sufficient if in
writing, and sent by facsimile transmission (provided that any
notice received by facsimile transmission or otherwise at the
addressees location on any Business Day after
5:00 p.m. (addressees local time) shall be deemed to
have been received at 9:00 a.m. (addressees local
time) on the next Business Day), by reliable overnight delivery
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service (with proof of service), hand delivery or certified or
registered mail (return receipt requested and first-class
postage prepaid), addressed as follows:
To Harold Hamm and Continental Gas:
Harold Hamm
302 North Independence
Enid, OK 73701
Facsimile:
(580) 242-4703
Continental Gas Holdings, Inc.
302 North Independence
Enid, OK 73701
Facsimile:
(580) 242-4703
Attention: Harold Hamm
with copies to:
Baker Botts L.L.P.
910 Louisiana
Houston, TX 77002
Facsimile:
(713) 229-1522
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Attention:
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Joshua Davidson
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Paul Perea
To Bert Mackie,
as Trustee of the Harold Hamm DST Trust and the Harold Hamm HJ
Trust:
Bert Mackie
201 West Broadway
Enid, OK 73701
Facsimile:
(580) 242-4703
To the Holdings Parties:
Hiland Holdings GP, LP
205 West Maple
Suite 1100
Enid, OK 73701
Facsimile:
(580) 616-2080
Attention: Joseph L. Griffin
with copies to:
Fulbright & Jaworski L.L.P.
2200 Ross Avenue
Suite 2800
Dallas, TX 75201
Facsimile:
(214) 855-8000
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Attention:
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Kenneth L. Stewart
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Bryn A. Sappington
or to such other address as any party shall specify by written
notice so given, and such notice shall be deemed to have been
delivered as of the date so telecommunicated, personally
delivered or mailed. Any party to this Agreement may notify any
other party of any changes to the address or any of the other
details specified in this paragraph;
provided
,
however
, that such notification shall only be effective
on the date specified in such notice or five (5) Business
Days after the notice is given, whichever is later. Rejection or
other refusal to accept or the inability to deliver because of
changed address of which no notice was given shall be deemed to
be receipt of the notice as of the date of such rejection,
refusal or inability to deliver.
E-7
Section
6.8
Assignment.
Neither
this Agreement nor any of the rights, interests or obligations
hereunder shall be assigned by any of the parties hereto
(whether by operation of law or otherwise) without the prior
written consent of the other parties. Subject to the preceding
sentence, this Agreement shall be binding upon and shall inure
to the benefit of the parties hereto and their respective
successors and assigns.
Section
6.9
Severability.
Any
term or provision of this Agreement which is invalid or
unenforceable in any jurisdiction shall, as to that
jurisdiction, be ineffective to the extent of such invalidity or
unenforceability without rendering invalid or unenforceable the
remaining terms and provisions of this Agreement in any other
jurisdiction. If any provision of this Agreement is so broad as
to be unenforceable, such provision shall be interpreted to be
only so broad as is enforceable.
Section
6.10
Entire
Agreement; No Third Party Beneficiaries.
This
Agreement (including the exhibits and schedules hereto)
constitutes the entire agreement, and supersedes all other prior
agreements and understandings, both written and oral, between
the parties, or any of them, with respect to the subject matter
hereof and is not intended to and shall not confer upon any
person other than the parties hereto any rights or remedies
hereunder.
Section
6.11
Amendments.
This
Agreement may not be amended, supplemented or otherwise modified
except by the express written agreement signed by all of the
parties (with respect to Holdings GP, acting through the
Conflicts Committee) to this Agreement.
Section
6.12
Extension;
Waiver.
At any time prior to the Expiration
Time, the Holdings Parties (with respect to Holdings GP, acting
through the Conflicts Committee), on the one hand, and the Hamm
Parties, on the other hand, may (i) extend the time for the
performance of any of the obligations of the other party,
(ii) waive any inaccuracies in the representations and
warranties of the other party contained in this Agreement or in
any document delivered under this Agreement or (iii) waive
compliance with any of the covenants or conditions of the other
party contained in this Agreement. Any agreement on the part of
a party to any extension or waiver will be valid only if set
forth in an instrument in writing signed by such party. The
failure of any party to assert any of its rights under this
Agreement or otherwise will not constitute a waiver of such
rights.
Section
6.13
Headings.
Headings
of the Articles and Sections of this Agreement are for
convenience of the parties only and shall be given no
substantive or interpretive effect whatsoever. The table of
contents to this Agreement is for reference purposes only and
shall not affect in any way the meaning or interpretation of
this Agreement.
Section
6.14
Interpretation.
When
a reference is made in this Agreement to an Article or Section,
such reference shall be to an Article or Section of this
Agreement unless otherwise indicated. Whenever the words
include, includes or
including are used in this Agreement, they shall be
deemed to be followed by the words without
limitation. The words hereof,
herein and hereunder and words of
similar import when used in this Agreement shall refer to this
Agreement as a whole and not to any particular provision of this
Agreement. The word or shall be deemed to mean
and/or. All terms defined in this Agreement shall
have the defined meanings when used in any certificate or other
document made or delivered pursuant thereto unless otherwise
defined therein. The definitions contained in this Agreement are
applicable to the singular as well as the plural forms of such
terms and to the masculine as well as to the feminine and neuter
genders of such term. Any agreement, instrument or statute
defined or referred to herein or in any agreement or instrument
that is referred to herein means such agreement, instrument or
statute as from time to time amended, modified or supplemented,
including (in the case of agreements or instruments) by waiver
or consent and (in the case of statutes) by succession of
comparable successor statutes and references to all attachments
thereto and instruments incorporated therein. Each of the
parties has participated in the drafting and negotiation of this
Agreement. If an ambiguity or question of intent or
interpretation arises, this Agreement must be construed as if it
is drafted by all the parties, and no presumption or burden of
proof shall arise favoring or disfavoring any party by virtue of
authorship of any of the provisions of this Agreement. Any
statute defined or referred to herein or in any agreement or
instrument referred to herein shall mean such statute as from
time to time amended, modified or supplemented, including by
succession of comparable successor statutes.
E-8
Section
6.15
No
Recourse.
This Agreement may only be enforced
against, and any claims or causes of action that may be based
upon, arise out of or relate to this Agreement, or the
negotiation, execution or performance of this Agreement may only
be made against the entities that are expressly identified as
parties hereto and no past, present or future Affiliate,
director, officer, employee, incorporator, member, manager,
partner, stockholder, agent, attorney or representative of any
party hereto shall have any liability for any obligations or
liabilities of the parties to this Agreement or for any claim
based on, in respect of, or by reason of, the transactions
contemplated hereby.
Section
6.16
Action
in Unitholder Capacity Only.
The parties
acknowledge that this Agreement is entered into by each of the
Hamm Parties solely in their respective capacities as the record
or Beneficial Owners of the Owned Units.
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IN WITNESS WHEREOF, each party hereto has caused this Agreement
to be signed as of the date first above written.
HILAND PARTNERS GP HOLDINGS, LLC
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By:
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/s/ Joseph
L. Griffin
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Joseph L. Griffin
Chief Executive Officer and President
HILAND HOLDINGS GP, LP
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By:
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Hiland Partners GP Holdings, LLC,
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its General Partner
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By:
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/s/ Joseph
L. Griffin
|
Joseph L. Griffin
Chief Executive Officer and President
HAROLD HAMM
CONTINENTAL GAS HOLDINGS, INC.
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By:
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/s/ Matthew
S. Harrison
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Matthew S. Harrison
Vice President - Finance,
Chief Financial Officer and Secretary
BERT MACKIE
,
as Trustee of the Harold Hamm DST Trust
BERT MACKIE
,
as Trustee of the Harold Hamm HJ Trust
Signature Page to Support
Agreement (HPGP Units)
Schedule A
BENEFICIAL
OWNERSHIP OF HOLDINGS COMMON UNITS
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Harold Hamm
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Sole Voting and Dispositive Power
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59,600
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Shared Voting and Dispositive Power
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8,481,350
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Continental Gas Holdings, Inc.
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Shared Voting and Dispositive Power
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8,481,350
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Bert Mackie
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Sole Voting and Dispositive Power
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4,597,102
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(1)
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(1)
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Consisting of 2,757,390 Common Units and 1,839,712 Common Units
held of record by the Harold Hamm DST Trust and the Harold Hamm
HJ Trust, respectively.
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Annex F
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745 Seventh Avenue
New York, NY 10019
United States
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June 1,
2009
Conflicts Committee of the Board of Directors
Hiland Partners GP Holdings, LLC
205 West Maple, Suite 1100
Enid, Oklahoma 73701
Conflicts
Committee of the Board of Directors:
We understand that Hiland Holdings GP, LP, a Delaware limited
partnership (
Holdings
), and Hiland Partners
GP Holdings, LLC, a Delaware limited liability company and the
general partner of Holdings (
Holdings GP,
and
together with Holdings, the
Holdings
Parties
), intend to enter into a transaction (the
Proposed Transaction
) with HH GP Holding,
LLC, an Oklahoma limited liability company
(
Parent
), and HPGP MergerCo, LLC, a Delaware
limited liability company and a wholly owned subsidiary of the
Parent (
HPGP Merger Sub,
and together with
Parent, the
Parent Parties
), pursuant to
which (i) HPGP Merger Sub will be merged with and into
Holdings, with Holdings continuing as the surviving entity (the
Merger
), and (ii) upon effectiveness of
the Merger, each issued and outstanding common unit of Holdings
(the
Holdings Common Units
), other than the
interests owned by the Hamm Parties (as defined below), as set
forth in the Agreement, will be converted into the right to
receive $2.40 per Holdings Common Unit in cash. The terms and
conditions of the Proposed Transaction are set forth in more
detail in the Agreement and Plan of Merger among the Parent,
HPGP Merger Sub, Holdings GP and Holdings (the
Agreement
). We also understand that certain
unitholders of Holdings, including Harold Hamm, Continental Gas
Holdings, Inc. (
Continental Holdings
), and
Bert Mackie, as trustee of the Harold Hamm DST Trust and the
Harold Hamm HJ Trust (collectively, the parties to the Support
Agreement (as defined below), the
Hamm
Parties
), have agreed to vote all Holdings Common
Units beneficially owned or controlled by the Hamm Parties and
their affiliates in favor of the Proposed Transaction, as
reflected in the Support Agreement (the
Support
Agreement
). In addition, we understand that in
connection with the Proposed Transaction, HLND Merger Co, LLC, a
Delaware limited liability company and a wholly owned subsidiary
of the Parent (the
HLND Merger Sub
), will be
merged with and into Hiland Partners, LP, a Delaware limited
partnership (
Hiland
), on the terms and
subject to the conditions set forth in the Agreement and Plan of
Merger (the
Hiland Agreement
) among the
Parent, HLND Merger Sub, Hiland Partners GP, LLC, a Delaware
limited liability company and the general partner of Hiland
(
Hiland GP
), and Hiland (such proposed
merger, the
Hiland Merger
), and that upon the
effectiveness of the Hiland Merger, each common unit of Hiland,
other than those owned by Holdings, will be converted into the
right to receive an amount of cash, as provided in Hiland
Agreement. In addition, we further understand that the Parent
Parties and the Holdings Parties respective
obligations to consummate the Proposed Transaction are
contingent (except in limited circumstances) upon the concurrent
consummation of the Hiland Merger on the terms set forth in the
Hiland Agreement.
We have been requested by the Conflicts Committee (the
Conflicts Committee
) of the Board of
Directors of Holdings GP (the
Board
) to
render our opinion with respect to the fairness, from a
financial point of view, to Holdings unitholders (other
than the Hamm Parties) of the consideration to be offered to
such unitholders in the Proposed Transaction. We have not been
requested to opine as to, and our opinion does not in any manner
address, Holdings GPs or Holdings underlying
business decision (i) to proceed with or effect the
Proposed Transaction or (ii) with respect to the timing of
entering into or consummating the Proposed Transaction. Further,
we have not been requested to opine as to, and our opinion does
not in any manner address, the proposed Hiland Merger among the
Parent, HLND Merger Sub, Hiland GP and Hiland, nor are we
representing any of those entities or the Hamm Parties. In
addition, we express no opinion on, and
F-1
our opinion does not in any manner address, the fairness of the
amount or the nature of any compensation to any officers,
directors or employees of any parties to the Proposed
Transaction, or any class of such persons, relative to the
consideration to be offered to the unitholders of Holdings in
the Proposed Transaction.
We understand, based on discussions with the management of
Holdings and Hiland, that Holdings derives all of its cash flows
from its ownership of (i) limited partner units in Hiland
(both common and subordinated), (ii) the general partner
interest in Hiland, and (iii) the associated incentive
distribution rights, and as such, our analysis involved, in
part, a review of Hilands financial and operating
information provided by the management of Hiland. In arriving at
our opinion, we reviewed and analyzed: (1) a draft of the
Agreement, dated as of May 22, 2009, and the specific terms
of the Proposed Transaction, (2) publicly available
information concerning Holdings and Hiland that we believe to be
relevant to our analysis, including Holdings and
Hilands Annual Reports on
Form 10-K
for the fiscal year ended December 31, 2008 and Quarterly
Reports on
Form 10-Q
for the fiscal quarter ended March 31, 2009,
(3) financial and operating information with respect to the
business, operations and prospects of Hiland, furnished to us by
Hiland management, including financial projections prepared by
Hiland management (the
Hiland Projections
),
(4) financial and operating information with respect to the
business, operations and prospects of Holdings, furnished to us
by the management of Holdings and Hiland, including financial
projections prepared by the management of Holdings and Hiland
(the
Holdings Projections
), (5) the
trading histories of Holdings Common Units and the common units
of Hiland from May 28, 2008 to May 28, 2009 and a
comparison of those trading histories with those of other
companies and publicly traded partnerships that we deemed
relevant, (6) a comparison of the historical financial
results and present financial condition of Holdings and Hiland
with those of other companies and publicly traded partnerships
that we deemed relevant, (7) a comparison of the financial
terms of the Proposed Transaction with the financial terms of
certain other transactions that we deemed relevant, (8) the
impact of varying commodity price and volume scenarios on
Hilands operating and financial prospects, including
(i) assumptions used by Hilands management, with
commodity prices as quoted on the NYMEX on May 28, 2009 and
(ii) selected commodity price and volume sensitivity cases,
in both cases analyzing the resultant impact on Holdings and
Hiland, (9) Hilands current liquidity position and
its ability to meet its cash requirements, financial obligations
and covenants contained in its revolving credit facility,
(10) the limited business and strategic alternatives
available to Holdings and Hiland, taking into consideration the
challenging conditions for natural gas gathering and processing
companies, (11) the limited financing or re-financing
alternatives available to Holdings and Hiland, the result of
which may lead to the insolvency of Holdings
and/or
Hiland, (12) the impact of Hilands recent decision to
suspend indefinitely its quarterly cash distributions, thereby
reducing Holdings cash inflows to zero and resulting in
arrearages which require Hiland to first pay cumulative
arrearage amounts to its common unit holders (including
Holdings) before any cash distributions may be paid to Holdings
with regard to its subordinated units, and (13) the impact
of Holdings recent decision to suspend indefinitely its
quarterly cash distributions. We have had discussions with the
management of Holdings and Hiland concerning their respective
business, operations, assets, liabilities, financial condition
and prospects and have undertaken such other studies, analyses
and investigations as we deemed appropriate.
In arriving at our opinion, we have assumed and relied upon the
accuracy and completeness of the financial and other information
used by us without any independent verification of such
information and have further relied upon the assurances of the
management of Holdings and Hiland that they are not aware of any
facts or circumstances that would make such information
inaccurate or misleading. With respect to the Hiland
Projections, upon the advice of Hiland, we have assumed that
such projections have been reasonably prepared on a basis
reflecting the best currently available estimates and judgments
of the management of Hiland as to the future financial
performance of Hiland and that Hiland will perform substantially
in accordance with such projections. With respect to the
Holdings Projections, upon advice of the management of Hiland
and Holdings we have assumed that such projections have been
reasonably prepared on a basis reflecting the best currently
available estimates and judgments of the management of Hiland
and Holdings as to the future financial performance of Holdings
and that Holdings will perform substantially in accordance with
such projections. We assume no responsibility for and we express
no view as to the accuracy of any such projections or estimates
or the assumptions on which they are based. In arriving at our
opinion, we have not conducted a physical inspection of the
properties and facilities of either Hiland or Holdings and have
not made or obtained any
F-2
evaluations or appraisals of the assets or liabilities of
Hiland, Holdings or any of their subsidiaries. In addition, you
have not authorized us to solicit, and we have not solicited,
any indications of interest from any third party with respect to
the purchase of all or a part of Hilands business or
Holdings equity interests in Hiland. Our opinion
necessarily is based upon market, economic and other conditions
as they exist on, and can be evaluated as of, the date of this
letter. We assume no responsibility for updating or revising our
opinion based on events or circumstances that may occur after
the date of this letter.
We have assumed that the executed Agreement will conform in all
material respects to the last draft reviewed by us. In addition,
we have assumed the accuracy of the representations and
warranties contained in the Agreement and all agreements related
thereto. We have also assumed, upon the advice of Holdings, that
all material governmental, regulatory and third party approvals,
consents and releases for the Proposed Transaction will be
obtained within the constraints contemplated by the Agreement
and that the Proposed Transaction will be consummated in
accordance with the terms of the Agreement without waiver,
modification or amendment of any material term, condition or
agreement thereof. We do not express any opinion as to any tax
or other consequences that might result from the Proposed
Transaction, nor does our opinion address any legal, tax,
regulatory or accounting matters, as to which we understand that
Holdings has obtained such advice as it deemed necessary from
qualified professionals.
Based upon and subject to the foregoing, we are of the opinion
as of the date hereof that, from a financial point of view, the
cash consideration to be offered to the unitholders of Holdings
(other than the Hamm Parties) in the Proposed Transaction is
fair to such unitholders.
We have acted as financial advisor to the Conflicts Committee of
the Board in connection with the Proposed Transaction. We have
received a retainer fee for our services and will receive an
additional fee for our services which is payable upon rendering
this opinion. In addition, in the sole and absolute discretion
of the Conflicts Committee of the Board, we may be paid a
limited discretionary fee based on the Conflict Committees
evaluation of the quality and quantity of work we have
performed. Holdings has also agreed to reimburse certain of our
expenses and indemnify us for certain liabilities that may arise
out of our engagement. We have performed various investment
banking and financial services for Hiland, Holdings, their
affiliates and the Parent in the past, and may expect to perform
such services in the future, and have received, and expect to
receive, customary fees for such services. However, in the past
two years, we have performed only limited services for Hiland,
Holdings and their affiliates, for which we received no
compensation. Barclays Capital Inc. is a full service securities
firm engaged in a wide range of businesses from investment and
commercial banking, lending, asset management and other
financial and non-financial services. In the ordinary course of
our business, we and our affiliates may actively trade and
effect transactions in the equity, debt
and/or
other
securities (and any derivatives thereof) and financial
instruments (including loans and other obligations) of Hiland,
Holdings, and their affiliates for our own account and for the
accounts of our customers and, accordingly, may at any time hold
long or short positions and investments in such securities and
financial instruments.
This opinion, the issuance of which has been approved by our
Fairness Opinion Committee, is for the use and benefit of the
Conflicts Committee of the Board and is rendered to the
Conflicts Committee of the Board in connection with its
consideration of the Proposed Transaction. In connection with
the Conflicts Committees recommendation to the Board
regarding the Proposed Transaction, we hereby authorize the
Conflicts Committee to provide a copy of this opinion to the
members of the Board for the use and benefit of the Board in
connection with the Boards consideration of the Proposed
Transaction in light of their fiduciary duties to the
unitholders of Holdings. This opinion is not intended to be and
does not constitute a recommendation to any unitholder of
Holdings as to how such unitholder should vote with respect to
the Proposed Transaction or whether to accept the consideration
to be offered to the unitholders (other than the Hamm Parties)
in connection with the Proposed Transaction.
Very truly yours,
BARCLAYS CAPITAL INC.
F-3
Annex
G
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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þ
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31,
2008
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Commission file number:
000-51120
Hiland Partners, LP
(Exact name of Registrant as
specified in its charter)
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DELAWARE
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71-0972724
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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205 West Maple, Suite 1100
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73701
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Enid, Oklahoma
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(Zip code)
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(Address of principal executive
offices)
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Registrants telephone number including area code
(580) 242-6040
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Limited Partner Units
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The NASDAQ Stock Market, LLC
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Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of Securities
Act. Yes
o
No
þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or 15(d) of
Act. Yes
o
No
þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes
þ
No
o
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 during the
preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). Yes
o
No
o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K.
þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large
accelerated
filer
o
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Accelerated
filer
þ
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Non-accelerated
filer
o
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Smaller
reporting
company
o
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(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes
o
No
þ
The aggregate market value of common limited partner units held
by non-affiliates of the registrant was approximately
$197.8 million on June 30, 2008 based on the closing
price of $49.77 on the NASDAQ National Market.
The number of the registrants outstanding equity units as
of March 7, 2009 was 6,289,880 common units, 3,060,000
subordinated units and a 2% general partnership interest.
DOCUMENTS
INCORPORATED BY REFERENCE:
None
PART I
Items 1.
and 2.
Business and Properties
References in this annual report on
Form 10-K
to Hiland Partners, we, our,
us or similar terms refer to Hiland Partners, LP and
its operating subsidiaries after giving effect to the formation
transactions described in Item 7. Managements
Discussion and Analysis of Financial Condition and Results of
Operations Overview. References to
Hiland Holdings refer to Hiland Holdings GP, LP, a
public partnership that owns our general partner and 2,321,471
common units and 3,060,000 subordinated units in us. References
to our general partner refer to Hiland Partners GP,
LLC.
Overview
We are a midstream energy partnership engaged in purchasing,
gathering, compressing, dehydrating, treating, processing and
marketing of natural gas and the fractionating, or separating,
and marketing of natural gas liquids, or NGLs. We also provide
air compression and water injection services to Continental
Resources, Inc. (CLR), a publicly traded exploration
and production company controlled by affiliates of our general
partner for use in its oil and gas secondary recovery
operations. Our operations are primarily located in the
Mid-Continent and Rocky Mountain regions of the United States.
In our midstream segment, we connect the wells of natural gas
and crude oil producers in our operating areas to our gathering
systems, treat natural gas to remove impurities, process natural
gas for the removal of NGLs, fractionate NGLs into NGL products
and provide an aggregate supply of natural gas and NGL products
to a variety of transmission pipelines and markets. In our
compression segment, we provide compressed air and water to CLR.
CLR uses the compressed air and water in its oil and gas
secondary recovery operations in North Dakota by injecting them
into its oil and gas reservoirs to increase oil and gas
production from those reservoirs. This increased production of
natural gas flows through our Badlands gathering system.
Our midstream assets consist of 14 natural gas gathering systems
with approximately 2,111 miles of gas gathering pipelines,
five natural gas processing plants, seven natural gas treating
facilities and three NGL fractionation facilities. Our
compression assets consist of two air compression facilities and
a water injection plant.
Recent
Developments
Going Private Proposals.
On January 15,
2009, the board of directors of the general partner of each of
Hiland Partners and Hiland Holdings received a proposal from
Harold Hamm to acquire all of the outstanding common units of
each of Hiland Partners and Hiland Holdings that are not owned
by Mr. Hamm, his affiliates or the Hamm family trusts.
Consummation of each transaction is conditioned upon the
consummation of the other. The proposals contemplate a merger of
each of Hiland Partners and Hiland Holdings with a separate new
acquisition vehicle to be formed by Mr. Hamm and the Hamm
family trusts. Under the terms proposed by Mr. Hamm, Hiland
Partners unitholders would receive $9.50 in cash per common unit
and Hiland Holdings unitholders would receive $3.20 in cash per
common unit. Mr. Hamm is the Chairman of the board of
directors of the general partner of each of Hiland Partners and
Hiland Holdings. Mr. Hamm, either individually or together
with his affiliates or the Hamm family trusts, beneficially owns
100% of Hiland Partners GP Holdings, LLC, the general partner of
Hiland Holdings, and approximately 61% of the outstanding common
units of Hiland Holdings. Hiland Holdings owns 100% of our
general partner and approximately 37% of our outstanding common
units.
It is anticipated that the conflicts committee of the board of
directors of the general partner of each of Hiland Partners and
Hiland Holdings will consider the proposals. In reviewing the
proposals, each conflicts committee has retained its own
financial advisers and legal counsel to assist in its work. The
board of directors of the general partner of each of Hiland
Partners and Hiland Holdings caution our unitholders and the
unitholders of Hiland Holdings respectively, and others
considering trading in the securities of Hiland Partners and
Hiland Holdings, that each conflicts committee of the board of
directors is reviewing its respective proposal and no decisions
have been made by either conflicts committee of either board of
directors with
3
respect to the response of either us or Hiland Holdings to the
proposals. There can be no assurance that any agreement will be
executed or that any transaction will be approved or consummated.
On February 26, 2009, a unitholder of Hiland Partners and
Hiland Holdings filed a complaint alleging claims relating to
Mr. Hamms proposal on behalf of a purported class of
common unitholders of Hiland Partners and Hiland Holdings
against Hiland Partners, Hiland Holdings, the general partner of
each of Hiland Partners and Hiland Holdings, and certain members
of the board of directors of each of Hiland Partners and Hiland
Holdings in the Court of Chancery of the State of Delaware. For
additional information, please see Item 3. Legal
Proceedings.
Midstream
Segment
Our midstream operations consist of the following:
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gathering and compressing natural gas to facilitate its
transportation to our processing plants, third party pipelines,
utilities and other consumers;
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dehydrating natural gas to remove water from the natural gas
stream to meet pipeline quality specifications;
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treating natural gas to remove or reduce impurities such as
carbon dioxide, nitrogen, hydrogen sulfide and other
contaminants to ensure that the natural gas meets pipeline
quality specifications;
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processing natural gas to extract NGLs and selling the resulting
residue natural gas and, in most cases, the NGLs; and
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fractionating a portion of our NGLs into a mix of NGL products,
including propane, butanes and natural gasoline or various
combinations of these NGLs, and selling these NGL products to
third parties.
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Our midstream assets include the following:
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Bakken Gathering System.
The Bakken gathering
system is a
374-mile
gas
gathering system located in eastern Montana that gathers
compresses, dehydrates and processes natural gas, and
fractionates NGLs. This system includes the Bakken processing
plant, three compressor stations and one fractionation facility,
and has approximately 11,050 horsepower installed. We acquired
the Bakken gathering system and the Bakken processing plant in
September 2005. Our Bakken gathering system has capacity of
25,000 Mcf/d and average throughput was 22,687 Mcf/d
of natural gas which produced approximately 2,264 Bbls/d of
NGLs for the year ended December 31, 2008. The system
represented approximately 33.5% of our total segment margin for
the year ended December 31, 2008.
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Badlands Gathering System.
The Badlands
gathering system is a
221-mile
gas
gathering system primarily located in southwest North Dakota
that gathers, compresses, dehydrates, treats and processes
natural gas, and fractionates NGLs. The system includes the
Badlands processing plant, seven compressor stations, one
treating facility and one fractionation facility, and has
approximately 18,550 horsepower installed. We constructed
the original Badlands gathering system and processing plant in
1997. Our Badlands gathering system has capacity of
46,000 Mcf/d and average throughput was 22,930 Mcf/d
of natural gas which produced approximately 962 Bbls/d of
NGLs for the year ended December 31, 2008. The system
represented approximately 17.5% of our total segment margin for
the year ended December 31, 2008.
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Eagle Chief Gathering System.
The Eagle Chief
gathering system is a
609-mile
gas
gathering system located in northwest Oklahoma that gathers,
compresses, dehydrates and processes natural gas. The system
includes the Eagle Chief processing plant and eight compressor
stations and has approximately 17,500 horsepower installed. We
constructed the Eagle Chief gathering system in 1990 and
constructed the Eagle Chief processing plant in 1995. We
acquired the Carmen gathering system in August 2003, which
consists solely of gathering lines to expand the Eagle Chief
gathering system. Our Eagle Chief gathering system has a
capacity of 35,500 Mcf/d and average throughput was
25,259 Mcf/d of natural
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gas which produced approximately 980 Bbls/d of NGLs for the
year ended December 31, 2008. The system represented
approximately 12.6% of our total segment margin for the year
ended December 31, 2008.
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Kinta Area Gathering Systems.
The Kinta Area
gathering system was acquired on May 1, 2006 and is a
601-mile
gathering system located in southeastern Oklahoma that includes
five separate low pressure natural gas gathering systems. The
systems are comprised of four 10,000 Mcf/d capacity amine
treating facilities and thirteen compressor stations with an
aggregate of approximately 43,750 horsepower. Our Kinta Area
gathering systems have an aggregate capacity of
200,000 Mcf/d and average throughput was 133,755 Mcf/d
for the year ended December 31, 2008. The systems
represented approximately 12.5% of our total segment margin for
the year ended December 31, 2008.
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Woodford Shale Gathering System.
The Woodford
Shale gathering system is a
55-mile
gathering system located in southeastern Oklahoma and is
designed to provide low-pressure gathering, compression and
dehydrating services. The system includes four compressor
stations and has approximately 17,400 horsepower installed.
Natural gas gathered on the Woodford Shale gathering system is
processed at third party processing facilities. Our Woodford
Shale gathering system has a capacity of 65,000 Mcf/d and
average throughput was 27,447 Mcf/d of natural gas which
produced approximately 1,214 Bbls/d of NGLs for the year
ended December 31, 2008. The system represented
approximately 9.2% of our total segment margin for the year
ended December 31, 2008.
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Matli Gathering System.
The Matli gathering
system is a
58-mile
gas
gathering system located in northcentral Oklahoma that gathers,
compresses, dehydrates, treats and processes natural gas. The
system includes the Matli processing plant, three compressor
stations and one treating facility which combined have
approximately 9,450 horsepower. We constructed the Matli
gathering system in 1999, and in December 2006 we completed the
construction of a new processing plant. Our Matli gathering
system has a capacity of 25,000 Mcf/d and average
throughput was 15,627 Mcf/d of natural gas which produced
approximately 343 Bbls/d of NGLs for the year ended
December 31, 2008. The system represented approximately
5.7% of our total segment margin for the year ended
December 31, 2008.
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Worland Gathering System.
The Worland
gathering system is a
153-mile
gas
gathering system located in central Wyoming that gathers,
compresses, dehydrates, treats and processes natural gas, and
fractionates NGLs. The system includes the Worland processing
plant, seven compressor stations, one treating facility and one
fractionation facility, and has approximately 5,700 horsepower
installed. The Worland gathering system and the Worland
processing plant were contributed to us on February 15,
2005 in connection with our formation and our initial public
offering. Our Worland gathering system has a capacity of
8,000 Mcf/d and average throughput was 2,603 Mcf/d of
natural gas which produced approximately 157 Bbls/d of NGLs
for the year ended December 31, 2008. The system
represented approximately 4.3% of our total segment margin for
the year ended December 31, 2008.
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Other Systems.
We also own three other natural
gas gathering systems located in Texas, Mississippi and
Oklahoma. These systems represented approximately 0.4% of our
total segment margin for the year ended December 31, 2008.
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North Dakota Bakken Gathering System.
The
North Dakota Bakken gathering system presently consists of a
23-mile
gathering system located in northwestern North Dakota that will
gather natural gas associated with crude oil produced from the
Bakken shale and Three Forks / Sanish formations. The
gathering system, associated compression and treating facilities
and a processing plant are currently under construction with an
expected start up in the second quarter of 2009.
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Our midstream revenues represented 98.8%, 98.3% and 97.8% of our
total revenues for the years ended December 31, 2008, 2007
and 2006, respectively.
5
The following table contains certain information regarding our
gathering systems as of or for the year ended December 31,
2008:
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Percent
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of Total
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Length
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Receipt
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Throughput
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Throughput
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Capacity
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Segment
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Asset
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Type
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(Miles)
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Points
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Capacity(1)
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Average(1)
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Utilization
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Margin
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Bakken gathering system
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Gathering pipelines
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374
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292
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25,000
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22,687
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90.8
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%
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Refrigeration Plant Constructed in 2004
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25,000
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22,687
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90.8
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%
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Fractionation facility (Bbls/d)
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6,500
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3,354
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51.6
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%
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33.5
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%
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Badlands gathering system
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Gathering pipelines
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221
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44
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46,000
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22,930
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49.9
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%
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Cryogenic and Refrigeration Plant Constructed in 2007
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40,000
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22,930
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57.3
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%
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Treating facility
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40,000
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22,930
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57.3
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%
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Fractionation facility (Bbls/d)
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4,000
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836
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20.9
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%
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17.5
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%
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Eagle Chief gathering system
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Gathering pipelines
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609
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447
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35,500
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25,259
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71.2
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%
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Mix Refrigeration/JT Plant Constructed in 1995
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35,000
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25,259
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72.2
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%
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12.6
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%
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Kinta Area gathering systems(2)
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Gathering pipelines
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601
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710
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200,000
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133,755
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66.9
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%
|
|
|
|
|
|
|
Treating facilities
|
|
|
|
|
|
|
|
|
|
|
40,000
|
|
|
|
21,116
|
|
|
|
52.9
|
%
|
|
|
12.5
|
%
|
Woodford Shale gathering system
|
|
Gathering pipelines
|
|
|
55
|
|
|
|
53
|
|
|
|
65,000
|
|
|
|
27,447
|
|
|
|
42.2
|
%
|
|
|
9.2
|
%
|
Matli gathering system
|
|
Gathering pipelines
|
|
|
58
|
|
|
|
57
|
|
|
|
25,000
|
|
|
|
15,627
|
|
|
|
62.5
|
%
|
|
|
|
|
|
|
Mix Refrigeration Plant Constructed in 2006
|
|
|
|
|
|
|
|
|
|
|
25,000
|
|
|
|
15,627
|
|
|
|
62.5
|
%
|
|
|
|
|
|
|
Treating facility
|
|
|
|
|
|
|
|
|
|
|
20,000
|
|
|
|
11,336
|
|
|
|
56.7
|
%
|
|
|
5.7
|
%
|
Worland gathering system
|
|
Gathering pipelines
|
|
|
153
|
|
|
|
24
|
|
|
|
8,000
|
|
|
|
2,603
|
|
|
|
32.5
|
%
|
|
|
|
|
|
|
Refrigeration Plant Constructed in mid 1980s
|
|
|
|
|
|
|
|
|
|
|
8,000
|
|
|
|
2,603
|
|
|
|
32.5
|
%
|
|
|
|
|
|
|
Treating facility
|
|
|
|
|
|
|
|
|
|
|
8,000
|
|
|
|
2,603
|
|
|
|
32.5
|
%
|
|
|
|
|
|
|
Fractionation facility (Bbls/d)
|
|
|
|
|
|
|
|
|
|
|
650
|
|
|
|
260
|
|
|
|
40.0
|
%
|
|
|
4.3
|
%
|
Other systems(3)
|
|
Gathering pipelines
|
|
|
17
|
|
|
|
21
|
|
|
|
7,000
|
|
|
|
2,362
|
|
|
|
33.7
|
%
|
|
|
0.4
|
%
|
North Dakota Bakken gathering System(4)
|
|
Gathering pipelines
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,111
|
|
|
|
1,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Throughput capacity and average throughput are measured in Mcf/d
for the gathering pipelines, processing plants and treating
facilities and in Bbls/d for the fractionation facilities shown
on this chart.
|
|
(2)
|
|
The Kinta Area gathering systems includes five separate natural
gas gathering systems.
|
|
(3)
|
|
Other systems include three natural gas gathering systems
located in Texas, Mississippi and Oklahoma.
|
|
(4)
|
|
The North Dakota Bakken natural gas gathering system is
currently under construction.
|
6
Compression
Segment
We provide air and water compression services to CLR for use in
its oil and gas secondary recovery operations under a four-year,
monthly fixed-fee contract (which we entered into in connection
with our initial public offering) that expired on
January 28, 2009 and now automatically renews for
additional one-month terms at our Cedar Hills compression
facility, our Horse Creek compression facility and our water
injection plant located next to our Cedar Hills compression
facility. These assets are located in North Dakota in close
proximity to our Badlands gathering system. At the compression
facilities, we compress air to pressures in excess of 4,000
pounds per square inch, and at the water injection plant, we
pump water to pressures in excess of 2,000 pounds per square
inch. The air and water are delivered at the tailgate of our
facilities into pipelines operated by CLR and are ultimately
utilized by CLR in its oil and gas secondary recovery
operations. The natural gas produced by CLR flows through our
Badlands gathering system. Our compression segment represented
approximately 4.3% of our total segment margin for the year
ended December 31, 2008. Our compression revenues
represented 1.2%, 1.7% and 2.2% of our total revenues for the
years ended December 31, 2008, 2007 and 2006, respectively.
Financial
Information About Segments
See Part II, Item 8. Financial Statements
and Supplementary Data.
Business
Strategies
Multiple events during 2008 and early 2009 involving numerous
financial institutions have effectively restricted current
liquidity with the capital markets throughout the United States
and around the world. Despite efforts by treasury and banking
regulators in the United States, Europe and other nations around
the world to provide liquidity to the financial sector, capital
markets currently remain constrained. Additionally, our cash
flows are impacted by the price of natural gas, crude oil and
natural gas liquids. During 2008, we experienced extreme swings
in our average realized natural gas and NGL sales prices. Our
average realized natural gas sales price increased from
$6.44/MMBtu in January 2008 to a high sales price of
$10.05/MMBtu in July 2008, then decreased to a low sales price
of $3.38/MMBtu in November 2008. Our average realized NGL sales
price increased from $1.42 per gallon in January 2008 to a high
sales price of $1.74 per gallon in June 2008, then decreased to
a low sales price of $0.61 per gallon in December 2008. The
current pricing environment, particularly in combination with
the constrained capital and credit markets and overall economic
downturn, resulted in a decline in drilling activity by some
producers. Sustained declines in drilling activity could have a
negative impact on the natural gas volumes we gather and
process. In the near term, our management team is committed to
managing costs and expenditures during this difficult commodity
price and capital markets cycle. For the longer term, and
assuming the financial and energy markets stabilize, our
management team continues to be committed to increasing the
amount of cash available for distribution per unit by executing
the following strategies:
|
|
|
|
|
Engaging in construction and expansion
opportunities.
We intend to leverage our existing
infrastructure and customer relationships by constructing and
expanding systems to meet any new or increased demand for our
midstream services. These projects may include expansion of
existing systems and construction of new facilities.
|
|
|
|
Pursuing complementary acquisitions.
We intend
to evaluate making complementary acquisitions of midstream
assets in our operating areas that provide opportunities to
expand or increase the utilization of our existing assets. We
would consider acquisitions that we believe will allow us to
capitalize on our existing infrastructure, personnel, and
producer and customer relationships to provide an integrated
package of natural gas midstream services. In addition, we would
consider selected acquisitions in new geographic areas to the
extent they present growth opportunities similar to those we are
pursuing in our existing areas of operations.
|
|
|
|
Increasing volumes on our existing assets.
Our
gathering systems have excess capacity, which provides us with
opportunities to increase throughput volume with minimal
incremental operating costs
|
7
|
|
|
|
|
and thereby increase cash flow. We intend to aggressively market
our services to producers in order to connect new supplies of
natural gas, increase volumes and more fully utilize our
capacity.
|
|
|
|
|
|
Taking measures that reduce our exposure to commodity price
risk.
Because of the significant volatility of
natural gas, crude oil and NGL prices, we attempt to operate our
business in a manner that allows us to mitigate the impact of
fluctuations in commodity prices. In order to reduce our
exposure to commodity price risk, we intend to pursue fee-based
arrangements, where market conditions permit, and to enter into
forward sales contracts or hedging arrangements to cover a
portion of our operations that are not conducted under fee-based
arrangements. In addition, when processing margins (or the
difference between NGL sales prices and the cost of natural gas)
are unfavorable, we can elect not to process natural gas at our
Eagle Chief processing plant and third parties processors
providing processing services on our behalf downstream of the
Woodford Shale system can reject ethane or elect not to process
natural gas.
|
Midstream
Assets
Our natural gas gathering systems include approximately
2,111 miles of pipeline. A substantial majority of our
revenues are derived from purchasing, gathering, compressing,
dehydrating, treating, processing and marketing of natural gas
that flows through our gathering pipelines and from
fractionating and marketing of NGLs resulting from the
processing of natural gas into NGL products. We describe our
principal systems below.
Bakken
Gathering System
General.
The Bakken gathering system is
located in eastern Montana and consists of approximately
374 miles of natural gas gathering pipelines, ranging from
three inches to twelve inches in diameter, and the Bakken
processing plant, which includes seven compressors and a
fractionation facility. The gathering system has a capacity of
approximately 25,000 Mcf/d, and average throughput was
approximately 22,687 Mcf/d for the year ended
December 31, 2008. There are three compressor stations
located within the gathering system. The compressor stations and
plant combined have approximately 11,050 horsepower.
The Bakken processing plant processes natural gas that flows
through the Bakken gathering system to produce residue gas and
NGLs. The plant has processing capacity of approximately
25,000 Mcf/d. For the year ended December 31, 2008,
the facility processed approximately 22,687 Mcf/d of
natural gas and produced approximately 2,264 Bbls/d of NGLs.
The Bakken gathering system also includes a fractionation
facility that separates NGLs into propane, butane and natural
gasoline. The fractionation facility has a current capacity to
fractionate approximately 6,500 Bbls/d of NGLs. For the
year ended December 31, 2008, the facility fractionated an
average of approximately 3,354 Bbls/d which included
volumes from our Badlands processing plant. In the third quarter
of 2007, we completed the expansion of our NGL fractionation
facilities at our Bakken processing plant to fractionate NGL
volumes from both the Bakken processing plant and the Badlands
processing plant.
Natural Gas Supply.
As of December 31,
2008, 292 receipt points were connected to our Bakken gathering
system. The wells behind these receipt points, which are located
in the Williston Basin of Montana, primarily produce crude oil
from the Bakken formation. The associated natural gas produced
from these wells flows through our Bakken gathering system. The
primary suppliers of natural gas to the Bakken gathering system
are Enerplus Resources (USA) Corporation, CLR and ConocoPhillips
Company, which represented approximately 55%, 34% and 10%,
respectively, of the Bakken gathering systems natural gas
supply for the year ended December 31, 2008.
Substantially all of the natural gas supplied to the Bakken
gathering system is dedicated to us under three individually
negotiated
percentage-of-proceeds
contracts. Two of these contracts have an initial term of
ten years, expiring in 2014, and one is for the life of the
lease. Under these contracts, natural gas is purchased at the
wellhead from the producers. For a more complete discussion of
natural gas purchase and gathering
8
contracts, please read Item 7. Managements
Discussion and Analysis of Financial Condition and Results of
Operations Our Natural Gas Purchase and Gathering
Contracts.
Markets for Sale of Natural Gas and
NGLs.
Residue gas derived from our processing
operations is sold at the tailgate of the Bakken processing
plant on the Williston Basin Interstate Pipeline to third
parties. Depending on prevailing market prices at each delivery
point, we either sell our NGLs produced by our fractionation
facility to SemStream, L.P. at the tailgate of the plant or
transport the same NGLs through a pipeline to a rail terminal
and then sell to SemStream, L.P. From July 18, 2008 through
September 30, 2008, we sold NGLs to other third parties,
including CLR. Prior to July 18, 2008 and since October
2008, we have sold NGLs to SemStream, L.P., who is fully
performing under these contracts.
Our primary purchasers of residue gas and NGLs on the Bakken
gathering system were SemStream, L.P., Montana-Dakota Utilities
Co. and Rainbow Gas Company, which represented approximately
37%, 29% and 19% respectively, of the revenues from such sales
for the year ended December 31, 2008.
Badlands
Gathering System and Air Compression and Water Injection
Facilities
General.
The Badlands gathering system is
located primarily in southwestern North Dakota and consists of
approximately 221 miles of natural gas gathering pipelines,
ranging from two inches to twelve inches in diameter, the
Badlands processing plant, natural gas treating facilities, a
fractionation facility and seven compressor stations. The total
horsepower for the system was approximately 18,550 at
December 31, 2008. The gathering system has a capacity of
approximately 46,000 Mcf/d and average throughput was
approximately 22,930 Mcf/d for the year ended
December 31, 2008.
In order to fulfill our obligations under an agreement with CLR
to gather, treat and process additional natural gas, produced as
a by-product of CLRs secondary oil recovery operations, in
the areas specified by the contract, we expanded our Badlands
gas gathering system and processing plant located in Bowman
County, North Dakota. We completed the expansion of our Badlands
gathering system, the associated field gathering infrastructure,
processing plant and treating facilities, which included the
completion of our 40,000 Mcf/d nitrogen rejection plant,
and amine and hydrogen sulfide treating facilities during the
third quarter of 2007. As a result, gathering pipelines,
processing plant, treating facility and fractionation facility
throughput capacities increased significantly.
We completed construction and commenced operation of the
Badlands gathering system, including the original Badlands
processing plant, in 1997. The Badlands processing plant
processes natural gas that flows through the Badlands gathering
system to produce residue gas and NGLs. The natural gas gathered
in this system must be processed and treated for high levels of
contaminates, including carbon dioxide, hydrogen sulfide and
nitrogen, in order to meet pipelines quality specifications. The
plant has processing capacity of approximately
40,000 Mcf/d. During the year ended December 31, 2008,
the facility processed approximately 22,930 Mcf/d of
natural gas and produced approximately 962 Bbls/d of NGLs.
The Badlands gathering system also includes a fractionation
facility that separates NGLs into propane and a mixture of
butane and natural gasoline. At December 31, 2008, the
fractionation facility had a capacity to fractionate
approximately 4,000 Bbls/d of NGLs. For the year ended
December 31, 2008, the facility fractionated an average of
approximately 836 Bbls/d.
Natural Gas Supply.
As of December 31,
2008, 44 receipt points were connected to our Badlands gathering
system. The wells behind these receipt points are located in the
Williston Basin of southwestern North Dakota and northwestern
South Dakota and primarily produce crude oil from the Red River
formation. The associated natural gas produced from these wells
flows through our Badlands gathering system. The primary
supplier of natural gas to the Badlands gathering system is CLR,
which represented approximately 97% of the Badlands gathering
systems natural gas supply for the year ended
December 31, 2008.
The natural gas supplied to the Badlands gathering system is
generally dedicated to us under individually negotiated
long-term contracts. Our agreement with CLR has an initial term
of 15 years, expiring in August 2022. Under this agreement,
we receive 50% of the proceeds attributable to residue gas and
natural gas liquids sales as well as certain fixed fees
associated with gathering and treating the natural gas,
including a $0.60 per
9
Mcf fee for the first 36.0 Bcf of natural gas gathered. As
of December 31, 2008, we have gathered approximately
9.8 Bcf of natural gas since inception of the agreement.
This agreement replaced our prior agreement with CLR in the area
as the new plant and treating facilities became operational in
August 2007. Following the initial term of the contracts, they
generally continue on a year to year basis, unless terminated by
one of the parties. For the other agreements, natural gas is
purchased at the wellhead from the producers under
percentage-of-proceeds
arrangements. For a more complete discussion of natural gas
purchase and gathering contracts, please read Item 7.
Managements Discussion and Analysis of Financial
Condition and Results of Operations Our Natural Gas
Purchase and Gathering Contracts.
Air Compression and Water Injection
Facilities.
In order to enhance the production of
natural gas that flows through our Badlands gathering system, we
currently provide air compression and water injection services
to CLR at our Cedar Hills compression facility, our Horse Creek
compression facility and our water injection plant, all of which
are located in North Dakota in close proximity to our Badlands
gathering system.
Markets for Sale of Natural Gas and
NGLs.
Residue gas derived from our processing
operations is sold at the tailgate of the Badlands processing
plant primarily to CLR for their secondary recovery operations
or on the Williston Basin Interstate Pipeline to third parties.
We sell the propane produced by our fractionation facility at
the tailgate of the plant to SemStream, L.P. The remaining NGL
products are either sold to SemStream, L.P. at the tailgate of
the plant, or trucked to the Bakken fractionation facility for
further fractionation, and then sold to SemStream, L.P. From
July 18, 2008 through September 30, 2008, we sold NGLs
to other third parties, including CLR. Prior to July 18,
2008 and since October 2008, we have sold NGLs to SemStream,
L.P., who is fully performing under these contracts.
Our primary purchasers of the residue gas and NGLs from the
Badlands gathering system were SemStream, L.P. and CLR, which
represented approximately 73% and 10%, respectively, of the
revenues from such sales for the year ended December 31,
2008.
Eagle
Chief Gathering System
General.
The Eagle Chief gathering system is
located in northwest Oklahoma and consists of approximately
609 miles of natural gas gathering pipelines, ranging from
two inches to sixteen inches in diameter, and the Eagle Chief
processing plant. The gathering system has a capacity of
approximately 35,500 Mcf/d, and average throughput was
approximately 25,259 Mcf/d for the year ended
December 31, 2008. There are eight gas compressor stations
located within the gathering system, comprised of fifteen units.
The plant and compressor stations combined have an aggregate of
approximately 17,500 horsepower.
We completed construction and commenced operation of the Eagle
Chief gathering system in 1990 and constructed the Eagle Chief
processing plant in 1995. Since its construction, we have
expanded the size of the Eagle Chief gathering system through
the acquisition of approximately 377 miles of gathering
pipelines in five separate acquisitions, including our
acquisition of the Carmen gathering system, and the construction
of approximately 232 miles of gathering pipelines. In the
first quarter of 2007, we completed the installation of
additional pipelines and compression facilities at our Eagle
Chief gathering system and increased our system capacity from
30,000 Mcf/d to 35,500 Mcf/d.
The Eagle Chief processing plant processes natural gas that
flows through the Eagle Chief gathering system to produce
residue gas and NGLs. The natural gas gathered in this system,
depending on delivery points, may not be required to be
processed to meet pipeline quality specifications when we sell
into interstate markets. The plant has processing capacity of
approximately 35,000 Mcf/d. During the year ended
December 31, 2008, the facility processed approximately
25,259 Mcf/d of natural gas and produced approximately
980 Bbls/d of NGLs.
Natural Gas Supply.
As of December 31,
2008, 447 receipt points were connected to our Eagle Chief
gathering system. The wells behind these receipt points are
located in the Anadarko Basin of northwestern Oklahoma and
primarily produce natural gas from the Chester, Mississippi,
Hunton and Manning formations. The primary suppliers of natural
gas to the Eagle Chief gathering system are various subsidiaries
of
10
Chesapeake Energy Corporation and CLR, which represented
approximately 64% and 10%, respectively, of the Eagle Chief
gathering systems natural gas supply for the year ended
December 31, 2008.
The natural gas supplied to the Eagle Chief gathering system is
generally dedicated to us under individually negotiated
long-term contracts. Some of our contracts have an initial term
of five years. Following the initial term, these contracts
generally continue on a
year-to-year
basis unless terminated by one of the parties. In addition, some
of our contracts are for the life of the lease. Natural gas is
purchased at the wellhead from the producers under
percentage-of-proceeds
contracts,
percentage-of-index
contracts or index-minus-fees contracts. For the year ended
December 31, 2008, approximately 67%, 30% and 3% of our
total wellhead volumes at the Eagle Chief gathering system was
derived from
percentage-of-proceeds,
percentage-of-index
and index-minus-fees contracts, respectively. For a more
complete discussion of natural gas purchase and gathering
contracts, please read Item 7. Managements
Discussion and Analysis of Financial Condition and Results of
Operations Our Natural Gas Purchase and Gathering
Contracts.
Markets for Sale of Natural Gas and NGLs.
The
residue gas can be either delivered at the tailgate of the Eagle
Chief processing plant on the ONEOK Gas Transportation, L.L.C.
pipeline to intrastate markets or on the Panhandle Eastern
Pipeline Company, L.P. pipeline to interstate markets. We are
able to bypass our Eagle Chief processing plant by selling into
the interstate markets when processing margins are unfavorable.
The NGLs extracted from the gas at the Eagle Chief processing
are sold to ONEOK Hydrocarbon, L.P. at the tailgate of our plant.
Our primary purchasers of residue gas and NGLs on the Eagle
Chief gathering system were BP Energy Company, ONEOK
Hydrocarbon, L.P. and OGE Energy Resources, Inc., which
represented approximately 40%, 26% and 17%, respectively, of the
revenues from such sales for the year ended December 31,
2008.
Kinta
Area Gathering Systems
General.
The Kinta Area gathering systems,
which we acquired from Enogex Gas Gathering, L.L.C. on
May 1, 2006, are located in southeastern Oklahoma and
consist of five separate natural gas gathering systems with
601 miles of natural gas gathering pipelines ranging from
four inches to twelve inches in diameter and 13 compressor
stations with an aggregate of approximately 43,750 horsepower.
Some of the natural gas supplied to the Kinta Area gathering
systems has high carbon dioxide content; consequently, during
the first quarter of 2007, we installed four 10,000 Mcf/d
capacity amine-treating facilities on two of the five
sub-systems
to remove excess carbon dioxide levels from the gas gathered by
these gathering systems. The gathering systems have a combined
capacity of approximately 200,000 Mcf/d, and average
throughput was 133,755 Mcf/d for the year ended
December 31, 2008. Our operations include gathering,
dehydration, compression and treating of the natural gas
supplied to the Kinta Area gathering systems and the redelivery
of such natural gas primarily for a fixed fee. In the third
quarter of 2008, we completed the installation of additional
compression facilities on these gathering systems to increase
the capacity by approximately 20,000 Mcf/d from
180,000 Mcf/d. During 2008, we treated 21,166 Mcf/d of
natural gas.
Natural Gas Supply.
As of December 31,
2008, approximately 710 receipt points were connected to our
Kinta Area gathering systems. The wells behind these receipt
points, which are located in the Arkoma Basin of southeastern
Oklahoma, primarily produce natural gas from the Atoka,
Cromwell, Booch, Hartshorne, Spiro, Fanshaw and Red Oak
formations. The primary suppliers of natural gas to these
gathering systems are BP America Production Company, various
subsidiaries of Chesapeake Energy Corporation and Chevron North
America Exploration and Production Co., which represented
approximately 52%, 13% and 6%, respectively, of the Kinta Area
gathering systems natural gas supply for the year ended
December 31, 2008.
We do not take title on the majority of the natural gas gathered
on the systems and we generally receive fixed-fees for our
services under fixed fee gathering arrangements. A small amount
of the natural gas gathered on the systems is purchased at the
wellhead under percentage of index contract arrangements. The
initial term of the Kinta agreements generally range from
monthly to ten years. Following the initial term, these
contracts generally continue on a
month-to-month
basis unless terminated by one of the parties. For the year
ended December 31, 2008, approximately 93% and 7% of our
total inlet wellhead volumes at the Kinta gathering system was
derived from fixed fee gathering contract arrangements and
index-minus-fees contract
11
arrangements, respectively. For a more complete discussion of
natural gas purchase and gathering contracts, please read
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations Our
Natural Gas Purchase and Gathering Contracts.
Woodford
Shale Gathering System
General.
The Woodford Shale gathering system
is located in southeastern Oklahoma, just to the west of our
Kinta Area gathering systems. As of December 31, 2008 we
had installed 55 miles of gathering pipelines and the
gathering system had a capacity of approximately
65,000 Mcf/d. Average throughput for the year ended
December 31, 2008 was approximately 27,447 Mcf/d of
natural gas, which produced approximately 1,214 Bbls/d of
NGLs. Our current operations provide only gathering and
compression services. The gathering infrastructure consists of
field gathering, four compressor stations and associated
equipment, which includes approximately 17,400 horsepower of
compression. Initial production from this gathering system
commenced in April 2007.
Natural Gas Supply.
As of December 31,
2008, 53 receipt points were connected to our Woodford Shale
gathering system, which primarily produce natural gas from the
Woodford shale formation. Presently, the suppliers of natural
gas to this gathering system are CLR and Antero Resources
Midstream Corporation, which provided all of the Woodford Shale
gathering systems natural gas supply for the year ended
December 31, 2008.
Natural gas is purchased at the wellhead from CLR under
index-minus-fees contract arrangements. We receive a fixed
gathering fee for natural gas supplied by Antero Resources
Midstream Corporation under a fixed fee gathering contract
arrangement. The initial term of the Woodford Shale agreements
is ten years. Following the initial term, these contracts
generally continue on a
year-to-year
basis unless terminated by one of the parties. For the year
ended December 31, 2008, approximately 77% and 23% of our
total inlet wellhead volumes at the Woodford Shale gathering
system was derived from index-minus-fees contract arrangements
and fixed fee gathering contract arrangements, respectively. For
a more complete discussion of natural gas purchase and gathering
contracts, please read Item 7. Managements
Discussion and Analysis of Financial Condition and Results of
Operations Our Natural Gas Purchase and Gathering
Contracts.
Markets for Sale of Natural Gas and NGLs.
The
Woodford Shale gathering system has numerous market outlets for
the residue natural gas and NGLs that we produce on the system.
The residue gas can be sold at the tailgate of three different
processing plants and can be delivered to Enogex, Inc. or
CenterPoint Energy Gas Transmission Company. The third parties
processors providing processing services on behalf of the
Partnership downstream of the Woodford Shale system can reject
ethane or elect not to process natural gas.
Our primary purchasers of residue gas and NGLs on the Woodford
Shale gathering system were OGE Energy Corp (and affiliates),
Tenaska Marketing Ventures, Devon Gas Services, L.P. and
ConocoPhillips Company, which represented approximately 24%,
20%, 14% and 10%, respectively, of the revenues from such sales
for the year ended December 31, 2008.
Matli
Gathering System
General.
The Matli Gathering System is located
in central Oklahoma and consists of approximately 58 miles
of natural gas gathering pipelines, ranging from three inches to
twelve inches in diameter, the Matli processing plant, a natural
gas treating facility and three compressor stations, all
totaling approximately 9,450 horsepower. The gathering system
has a capacity of approximately 25,000 Mcf/d, and average
throughput was approximately 15,627 Mcf/d for the year
ended December 31, 2008.
We commenced operation of the Matli gathering system in 1999.
During the fourth quarter of 2006, we completed the construction
of a 25,000 Mcf/d natural gas processing facility along our
existing gas gathering system, which replaced our
10,000 Mcf/d processing facility we had constructed in
2003. The Matli processing plant processes natural gas on the
Matli gathering system to produce residue gas and NGLs. The
natural gas gathered in this system must be processed in order
to meet pipeline quality specifications. The current plant has
processing capacity of approximately 25,000 Mcf/d. During
the year ended December 31, 2008, the
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facilities processed approximately 15,627 Mcf/d of natural
gas and produced approximately 343 Bbls/d of NGLs. The
10,000 Mcf/d natural gas processing facility constructed in
2003 is currently idle.
The Matli gathering system includes a natural gas treating
facility that uses a liquid chemical to remove hydrogen sulfide
from natural gas that is gathered into our system before the
natural gas is introduced to transportation pipelines to ensure
it meets pipeline quality specifications. The throughput
capacity on our Matli treating facility is approximately
20,000 Mcf/d. During the year ended December 31, 2008,
the facility treated approximately 11,336 Mcf/d of natural
gas.
Natural Gas Supply.
As of December 31,
2008, 57 receipt points were connected to our Matli gathering
system. The wells behind these receipt points are located in the
Anadarko Basin of northcentral Oklahoma and produce natural gas
from the Morrow and Springer formations. The primary suppliers
of natural gas to the Matli gathering system are CLR and Range
Resources Corporation, which represented approximately 62% and
23%, respectively, of the Matli gathering systems natural
gas supply for the year ended December 31, 2008.
The natural gas supplied to the Matli gathering system is
generally dedicated to us under individually negotiated
long-term contracts. The initial term of such agreements is
generally from life of lease to five years. Following the
initial term, these contracts usually continue on a
year-to-year
basis, unless terminated by one of the parties. Natural gas is
purchased at the wellhead from the producers under
index-minus-fees contract arrangements. For a more complete
discussion of natural gas purchase and gathering contracts,
please read Item 7. Managements Discussion and
Analysis of Financial Condition and Results of
Operations Our Natural Gas Purchase and Gathering
Contracts.
Markets for Sale of Natural Gas and
NGLs.
Residue gas resulting from our processing
operations is sold at the tailgate of the plant on the ONEOK Gas
Transportation, L.L.C. intrastate pipeline. As part of our
expansion project completed in late 2006, we converted an
existing natural gas pipeline into a NGL pipeline and now
transport NGLs to a ONEOK Hydrocarbon, L.P. pipeline.
Our primary purchasers of residue gas and NGLs on the Matli
gathering system were ONEOK Hydrocarbon, L.P., OGE Energy
Resources, ConocoPhillips Company and BP Energy Company, which
represented approximately 25%, 25%, 17% and 14%, respectively,
of the revenues from such sales for the year ended
December 31, 2008.
Worland
Gathering System
General.
The Worland gathering system is
located in central Wyoming and consists of approximately
153 miles of natural gas gathering pipelines, ranging from
two inches to eight inches in diameter, the Worland processing
plant, a natural gas treating facility and a fractionation
facility. The gathering system has a capacity of approximately
8,000 Mcf/d, and average throughput was approximately
2,603 Mcf/d for the year ended December 31, 2008.
There are seven compressor stations located within the gathering
system. The plant and compressor stations have approximately
5,700 horsepower installed.
The Worland gathering system and the Worland processing plant
were contributed to us on February 15, 2005 in connection
with our formation and our initial public offering. This
gathering system, including the Worland processing plant, was
originally built in the mid 1980s. A substantial portion of the
equipment on the Worland gathering system, including portions of
the Worland processing plant and the fractionation facility, was
replaced in 1997.
The Worland processing plant processes natural gas that flows
through the Worland gathering system to produce residue gas and
NGLs. The natural gas gathered in this system is rich gas that
must be processed in order to meet pipeline quality
specifications. The plant has processing capacity of
approximately 8,000 Mcf/d. During the year ended
December 31, 2008, the facility processed approximately
2,603 Mcf/d of natural gas and produced approximately
157 Bbls/d of NGLs.
The Worland gathering system includes a natural gas amine
treating facility that removes carbon dioxide and hydrogen
sulfide from natural gas that is gathered into our system before
the natural gas is introduced to transportation pipelines to
ensure that it meets pipeline quality specifications. Generally,
the natural gas
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gathered in this system contains a high concentration of
hydrogen sulfide, a highly toxic and corrosive chemical that
must be removed prior to transporting the gas via pipeline.
The Worland gathering system also includes a fractionation
facility that separates NGLs into propane and a mixture of
butane and natural gasoline. The fractionation facility has a
capacity to fractionate approximately 650 Bbls/d of NGLs.
For the year ended December 31, 2008, the facility
fractionated an average of 260 Bbls/d.
Natural Gas Supply.
As of December 31,
2008, 24 receipt points were connected to our Worland gathering
system. The wells behind these receipt points are located in the
Bighorn Basin of central Wyoming and produce crude oil primarily
from the Frontier formation. The associated natural gas produced
from these wells flows through our Worland gathering system. The
primary suppliers of natural gas to the Worland gathering system
are CLR and Saga Petroleum Corp., which represented
approximately 50% and 43%, respectively, of the Worland
gathering systems natural gas supply for the year ended
December 31, 2008.
The natural gas supplied to the Worland gathering system is
generally dedicated to us under individually negotiated
long-term contracts. Following the initial term of the
contracts, they generally continue on a year to year basis,
unless terminated by one of the producers. Natural gas is
purchased at the wellhead from the producers under
percentage-of-index
contracts,
percentage-of-proceeds
contracts and index-minus-fees contracts. For the year ended
December 31, 2008, approximately 67%, 29% and 4% of our
total system inlet wellhead volumes at the Worland gathering
system was derived from
percentage-of-index
contracts,
percentage-of-proceeds
contracts and index-minus-fees contracts, respectively. For a
more complete discussion of natural gas purchase and gathering
contracts, please read Item 7. Managements
Discussion and Analysis of Financial Condition and Results of
Operations Our Natural Gas Purchase and Gathering
Contracts.
Markets for Sale of Natural Gas and
NGLs.
Residue gas derived from our processing
operations is sold at the tailgate of the Worland processing
plant on the Williston Basin Interstate Pipeline to third
parties. We sell the NGLs to KM Upstream LLC and Kinder Morgan
Operating, L.P. A, subsidiaries of Kinder Morgan
Energy Partners, LP, at the tailgate of the plant.
Our primary purchasers of residue gas and NGLs on the Worland
gathering system were Rainbow Gas Company, KM Upstream LLC and
Kinder Morgan Operating, L.P. A, subsidiaries of
Kinder Morgan Energy Partners, LP, and CLR, which represented
approximately 43%, 41% and 16%, respectively, of revenues from
such sales on the Worland gathering system for the year ended
December 31, 2008.
Other
Systems
In addition to the midstream assets described above, we own two
gathering systems located in Texas and Mississippi and a
gathering pipeline system in Oklahoma. These assets do not
provide us with material cash flows and consist of the following:
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Driscoll Gathering System.
Our Driscoll
gathering system is located in south Texas and consists of
approximately 4 miles of natural gas gathering pipeline and
a compressor station.
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Stovall Gathering System.
Our Stovall
gathering system is located in northern Mississippi and consists
of approximately 8 miles of natural gas gathering pipeline
and a compressor station.
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Enid Gathering Pipeline System.
Our Enid
gathering pipeline system is located in northern Oklahoma and
consists of approximately 5 miles of pipeline.
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North
Dakota Bakken Gathering System
Our North Dakota Bakken gathering system presently consists of a
23-mile
gathering system located in northwestern North Dakota that will
gather natural gas associated with crude oil produced from the
Bakken shale and Three Forks / Sanish formations. The
gathering system, associated compression and treating facilities
and a processing plant are currently under construction with an
expected start up in the second quarter of 2009. Construction of
the processing plant and gathering system commenced in October
2008. As of December 31, 2008, we have invested
approximately $9.2 million in the project.
14
Compression
Assets
We provide air and water compression services to CLR for use in
its oil and gas secondary recovery operations under a four-year,
monthly fixed-fee contract (which we entered into in connection
with our initial public offering) that expired on
January 28, 2009 and now automatically renews for
additional one-month terms at our Cedar Hills compression
facility, our Horse Creek compression facility and our water
injection plant located next to our Cedar Hills compression
facility. We completed construction of our Cedar Hills
compression facility and acquired the Horse Creek compression
facility in 2002. The Horse Creek compression facility is
comprised of two units with an aggregate of approximately 5,300
horsepower. The Cedar Hills compression facility is comprised of
ten units with an aggregate of approximately 40,000 horsepower.
Our water injection plant has six pumps with a total of 1,800
horsepower.
At the compression facilities, we compress air to pressures in
excess of 4,000 pounds per square inch. At our water injection
plant, water is produced from source wells located near the
water plant site. Produced water is run through a filter system
to remove impurities and is then cooled prior to being pumped to
pressures in excess of 2,000 pounds per square inch. The air and
water are delivered at the tailgate of our facilities into
pipelines owned by CLR and are ultimately utilized by CLR in its
oil and gas secondary recovery operations. For a description of
the services agreement we entered into with CLR in connection
with our initial public offering, please read
Managements Discussion and Analysis of Financial
Condition and Results of Operations Our
Contracts Compression Services Agreement.
Credit
Risks
Counterparties pursuant to the terms of their contractual
obligations expose us to potential losses as a result of
nonperformance. SemStream, L.P., BP Energy Company, OGE Energy
Resources, Inc. and ONEOK Energy Services Company, LP were our
largest customers for the year ended December 31, 2008,
accounting for approximately 16%, 14%, 11% and 10%,
respectively, of our revenues. Consequently, changes within one
or more of these companies operations have the potential
to impact, both positively and negatively, our credit exposure
and make us subject to risks of loss resulting from nonpayment
or nonperformance by these or any of our other customers. Any
material nonpayment or nonperformance by our key customers could
materially and adversely affect our business, financial
condition or results of operations and reduce our ability to
make distributions to our unitholders. Additionally, we derive
our revenues primarily from customers in the energy industry.
This industry concentration has the potential to impact our
overall exposure to credit risk, either positively or
negatively, in that our customers could be affected by similar
changes in economic, industry or other conditions, including
changing commodities prices. Furthermore, some of our customers
may be highly leveraged and subject to their own operating and
regulatory risks, which increases the risk that they may default
on their obligations to us. Our counterparties to our commodity
based derivative instruments as of December 31, 2008 were
BP Energy Company and Bank of Oklahoma, N.A. Our counterparty to
our interest rate swap is Wells Fargo Bank, N.A.
Competition
The natural gas gathering, treating, processing and marketing
industries are highly competitive. We face strong competition in
acquiring new natural gas supplies. Our competitors include
other natural gas gatherers that gather, compress, treat,
process and market natural gas. Competition for natural gas
supplies is primarily based on the reputation, efficiency,
flexibility and reliability of the gatherer, the pricing
arrangements offered by the gatherer and the location of the
gatherers pipeline facilities. We provide flexible
services to natural gas producers, including natural gas
gathering, compression, dehydrating, treating and processing. We
believe our ability to furnish these services gives us an
advantage in competing for new supplies of natural gas because
we can provide the services that producers, marketers and others
require to connect their natural gas quickly and efficiently. In
addition, using centralized treating and processing facilities,
we can in most cases attract producers that require these
services and at a lower initial capital cost. For natural gas
that exceeds the maximum contaminant levels and NGL
specifications for interconnecting natural gas pipelines and
downstream markets, we believe that we offer treating and other
processing services on competitive terms. In addition,
15
with respect to natural gas suppliers attached to our pipeline
systems, we provide such natural gas supplies on a flexible
basis.
We believe that our producers prefer a midstream energy company
with the flexibility to accept natural gas not meeting typical
industry standard gas quality requirements. The primary
difference between us and our competitors is that we provide an
integrated and responsive package of midstream services, while
most of our competitors typically offer only a few select
services. We believe that offering an integrated package of
services, while remaining flexible in the types of contractual
arrangements that we offer producers, allows us to compete more
effectively for new natural gas supplies.
Many of our competitors have capital resources and control
supplies of natural gas greater than ours. Our primary
competitors on the Eagle Chief gathering system are Atlas
Pipeline Partners, Mustang Fuel Corporation, Duke Energy Field
Services and SemGas, L.P. Our primary competitor on the Bakken
gathering system and the Badlands gathering system is Bear Paw
Energy, and on the Matli gathering system, our competitor is
Enogex, Inc. Our primary competitors on the Kinta Area gathering
systems are CenterPoint Energy Field Services and Superior
Pipeline Company. Our primary competitors on the Woodford Shale
gathering system are MarkWest Energy Partners, Enogex, Inc.,
Antero Resources Midstream Corporation and Copano Energy, L.L.C.
We do not have a major competitor on the Worland gathering
system.
Regulation
Regulation by the FERC of Interstate Natural Gas
Pipelines.
We do not own any interstate natural
gas pipelines, so the Federal Energy Regulatory Commission, or
the FERC, does not directly regulate any of our operations.
However, the FERCs regulation influences certain aspects
of our business and the market for our products and services. In
general, the FERC has authority over natural gas companies that
provide natural gas pipeline transportation services in
interstate commerce, and its authority to regulate those
services includes:
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the certification and construction of new facilities;
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the extension or abandonment of services and facilities;
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the maintenance of accounts and records;
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the acquisition and disposition of facilities;
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the initiation and discontinuation of services; and
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various other matters.
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In recent years, the FERC has pursued pro-competitive policies
in its regulation of interstate natural gas pipelines. However,
we can provide no assurance that the FERC will continue this
approach as it considers matters such as pipeline rates and
rules and policies that may affect rights of access to natural
gas transportation capacity.
Regulation of Intrastate Natural Gas Transportation
Pipelines.
We do not own any pipelines that
provide intrastate natural gas transportation, so state
regulation of non-gathering pipeline transportation does not
directly affect our operations. As with FERC regulation
described above, however, state regulation of pipeline
transportation may influence certain aspects of our business and
the market for our products.
Gathering Pipeline
Regulation.
Section 1(b) of the Natural Gas
Act, or NGA, exempts natural gas gathering facilities from the
jurisdiction of the FERC. We own a number of natural gas
pipelines that we believe would meet the traditional tests the
FERC has used to establish a pipelines status as a
gatherer not subject to the FERC jurisdiction. However, there is
no bright-line distinction between FERC-regulated natural gas
transportation services and federally unregulated gathering
services. Moreover, this distinction is the subject of regular
litigation. Thus, the classification and regulation of some of
our gathering facilities may be subject to change based on
future determinations by the FERC and the courts.
In the states in which we operate, regulation of gathering
facilities generally includes various safety, environmental and,
in some circumstances, nondiscriminatory take requirement and
complaint based rate
16
regulation. For example, we are subject to state ratable take
and common purchaser statutes. Ratable take statutes generally
require gatherers to take, without undue discrimination, natural
gas production that may be tendered to the gatherer for
handling. In certain circumstances, such laws will apply even to
gatherers like us that do not provide third party, fee-based
gathering service and may require us to provide such third party
service at a regulated rate. Similarly, common purchaser
statutes generally require gatherers to purchase without undue
discrimination as to source of supply or producer. These
statutes are designed to prohibit discrimination in favor of one
producer over another producer or one source of supply over
another source of supply. These statutes have the effect of
restricting our right as an owner of gathering facilities to
decide with whom we contract to purchase or gather natural gas.
Natural gas gathering may receive greater regulatory scrutiny at
both the state and federal levels now that the FERC has taken a
less stringent approach to regulation of the gathering
activities of interstate pipeline transmission companies and a
number of such companies have transferred gathering facilities
to unregulated affiliates.
Our gathering operations could be adversely affected should they
be subject in the future to the application of state or federal
regulation of rates and services. Our gathering operations also
may be or become subject to safety and operational regulations
relating to the design, installation, testing, construction,
operation, replacement and management of gathering facilities.
Additional rules and legislation pertaining to these matters are
considered or adopted from time to time. We cannot predict what
effect, if any, such changes might have on our operations, but
the industry could be required to incur additional capital
expenditures and increased costs depending on future legislative
and regulatory changes.
Sales of Natural Gas, NGLs and Other
Products.
The price at which we buy and sell
natural gas currently is not subject to federal regulation and,
for the most part, is not subject to state regulation. The price
at which we buy and sell NGLs and other products is not subject
to regulation. Our sales of natural gas, NGLs and other products
are affected by the availability, terms and cost of pipeline
transportation. Pipeline rates, terms of access and terms and
conditions of service are subject to extensive federal and state
regulation. The FERC is continually proposing and implementing
new rules and regulations affecting those segments of the
natural gas industry, most notably interstate natural gas
transmission companies that remain subject to the FERCs
jurisdiction. These initiatives also may affect the intrastate
transportation of natural gas under certain circumstances. The
stated purpose of many of these regulatory changes is to promote
competition among the various sectors of the natural gas
industry, and these initiatives generally reflect more light
handed regulation. We cannot predict the ultimate impact of
these regulatory changes to our natural gas marketing
operations. We do not believe that we will be affected by any
such FERC action materially differently than other natural gas
marketers with whom we compete.
Under the Energy Policy Act of 2005, FERC possesses regulatory
oversight over natural gas markets, including the purchase, sale
and transportation activities of non-interstate pipelines and
other natural gas market participants. The Commodity Futures
Trading Commission, or the CFTC, also holds authority to monitor
certain segments of the physical and futures energy commodities
market pursuant to the Commodity Exchange Act. With regard to
physical purchases and sales of natural gas, NGLs and other
products, our gathering services related to these energy
commodities, and any related hedging activities that we
undertake, we are required to observe these anti-market
manipulation laws and related regulations enforced by FERC
and/or
the
CFTC. These agencies hold substantial enforcement authority,
including the ability to assess civil penalties of up to
$1 million per day per violation, to order disgorgement of
profits and to recommend criminal penalties. FERC has continued
to impose additional regulations intended to prevent market
manipulation and to promote price transparency. For example, new
FERC rules require wholesale purchasers and sellers of natural
gas to report to FERC certain aggregated volume and other
purchase and sales data for the previous calendar year. Should
we violate the anti-market manipulation laws and regulations, we
could also be subject to related third party damage claims by,
among others, sellers, royalty owners and taxing authorities.
17
Environmental
Matters
The operation of pipelines, plants and other facilities for
gathering, compressing, dehydrating, treating, and processing of
natural gas and fractionating NGLs and other products is subject
to stringent and complex laws and regulations pertaining to
health, safety and the environment. As an owner or operator of
these facilities, we must comply with these laws and regulations
at the federal, regional, state and local levels. These laws and
regulations can restrict or impact our business activities in
many ways, such as:
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requiring the acquisition of permits or other approvals to
conduct regulated activities;
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restricting the way we can handle or dispose of our wastes;
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limiting or prohibiting construction activities in sensitive
areas such as wetlands, coastal regions, or areas inhabited by
endangered species;
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requiring remedial action to mitigate pollution conditions
caused by our operations, or attributable to former
operations; and
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enjoining the operations of facilities deemed in non-compliance
with permits issued pursuant to such environmental laws and
regulations.
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Failure to comply with these laws and regulations may trigger a
variety of administrative, civil and criminal enforcement
measures, including the assessment of monetary penalties, the
imposition of remedial requirements, and the issuance of orders
enjoining future operations. Certain environmental statutes
impose strict and, under certain circumstances, joint and
several liability for costs required to clean up and restore
sites where hazardous substances have been disposed or otherwise
released. Moreover, it is not uncommon for neighboring
landowners and other third parties to file claims for personal
injury and property damage allegedly caused by the release of
substances or waste products into the environment.
The trend in environmental regulation is to place more
restrictions and limitations on activities that may affect the
environment, and thus there can be no assurance as to the amount
or timing of future expenditures for environmental compliance or
remediation. Actual future expenditures may be different from
the amounts we currently anticipate. We try to anticipate future
regulatory requirements that might be imposed and plan
accordingly to remain in compliance with changing environmental
laws and regulations and to minimize the costs of such
compliance. While we believe that we are in substantial
compliance with current applicable federal and state
environmental laws and regulations and that continued compliance
with existing requirements will not have a material adverse
impact on our results of operations or financial condition,
there is no assurance that this trend of compliance will
continue in the future. Moreover, while we believe that the
various environmental activities in which we are presently
engaged will not affect our operational ability to gather,
compress, treat and process natural gas or fractionate NGLs, we
cannot assure you that future events, such as changes in
existing laws, the promulgation of new laws, or the development
or discovery of new facts or conditions will not cause us to
incur significant costs.
The following is a summary of the more significant existing
environmental laws to which our business operations are subject
and with which compliance may have a material adverse effect on
our capital expenditures, earnings or competitive position.
Air Emissions.
Our operations are subject to
the federal Clean Air Act, as amended and comparable state laws.
These laws regulate emissions of air pollutants from various
industrial sources, including processing and treatment plants,
fractionation facilities and compressor stations, and also
impose various monitoring and reporting requirements. Such laws
may require that we obtain pre-approval for the construction or
modification of certain projects or facilities expected to
produce air emissions or result in the increase of existing air
emissions, obtain and comply with air permits containing various
emissions and operational limitations, or utilize specific
emission control technologies to limit emissions. Our failure to
comply with these requirements could subject us to monetary
penalties, injunctions, conditions or restrictions on
operations, and potentially criminal enforcement actions. We
will be required to incur certain capital expenditures in the
future for air pollution control equipment in connection with
obtaining and maintaining operating permits and approvals for
air emissions. We believe, however, that our operations will not
be materially adversely affected by such
18
requirements, and the requirements are not expected to be any
more burdensome to us than to other similarly situated companies.
Hazardous Waste.
Our operations generate
wastes, including hazardous wastes that are subject to the
federal Resource Conservation and Recovery Act, as amended, or
RCRA, and comparable state laws, which impose detailed
requirements for the handling, storage, treatment and disposal
of hazardous and solid waste. While RCRA currently excludes from
the definition of hazardous waste produced waters and other
wastes associated with the exploration, development, or
production of crude oil and natural gas, these oil and gas
exploration and production wastes may still be regulated under
state law or the less stringent solid waste requirements of
RCRA. Moreover, ordinary industrial wastes such as paint wastes,
waste solvents, laboratory wastes, and waste compressor oils may
be regulated as hazardous waste. The transportation of natural
gas in pipelines may also generate wastes that are subject to
RCRA or comparable state law requirements.
Site Remediation.
The Comprehensive
Environmental Response, Compensation and Liability Act, as
amended, or CERCLA, also known as Superfund, and
comparable state laws impose liability, without regard to fault
or the legality of the original conduct, on certain classes of
persons responsible for the release of hazardous substances into
the environment. Such classes of persons include the current and
past owners or operators of sites where a hazardous substance
was released, and companies that disposed or arranged for
disposal of hazardous substances at offsite locations such as
landfills. Although petroleum as well as natural gas is excluded
from CERCLAs definition of hazardous
substance, in the course of our ordinary operations we
will generate wastes that may fall within the definition of a
hazardous substance. CERCLA authorizes the EPA and,
in some cases, third parties to take actions in response to
threats to the public health or the environment and to seek to
recover from the responsible classes of persons the costs they
incur. Under CERCLA, we could be subject to joint and several
liability for the costs of cleaning up and restoring sites where
hazardous substances have been released, for damages to natural
resources, and for the costs of certain health studies.
We currently own or lease, and in the past have owned or leased,
properties that have been used for natural gas and NGL
gathering, treating, processing, and fractionating activities
for many years. Although we believe that we have utilized
operating and waste disposal practices that were standard in the
industry at the time, hazardous substances, wastes, or
hydrocarbons may have been released on or under the properties
owned or leased by us, or on or under other locations where such
substances have been taken for recycling or disposal. In
addition, some of our properties have been operated by third
parties whose treatment and disposal of hazardous substances,
wastes, or hydrocarbons was not under our control. These
properties and the substances disposed or released on them may
be subject to CERCLA, RCRA, and analogous state laws. Under such
laws, we could be required to remove previously disposed
substances, hazardous wastes and hydrocarbons or remediate
contaminated property.
Water Discharges.
Our operations are subject
to the Federal Water Pollution Control Act, as amended, also
known as the Clean Water Act, and analogous state laws. These
laws impose detailed requirements and strict controls regarding
the discharge of pollutants into state waters and waters of the
United States. The unpermitted discharge of pollutants,
including discharges resulting from a spill or leak incident, is
prohibited by the U.S. Environmental Protection Agency, or
EPA, or analogous state agencies. The Clean Water Act and
regulations implemented thereunder also prohibit discharges of
dredged and fill material into wetlands and other waters of the
United States unless authorized by an appropriately issued
permit. Any unpermitted release of pollutants from our pipelines
or facilities could result in administrative civil and criminal
penalties as well as significant remedial obligations.
Global Warming and Climate Change.
In response
to public concerns suggesting that emissions of certain gases,
referred to as greenhouse gases and including carbon
dioxide and methane, may be contributing to warming of the
Earths atmosphere, President Obama has expressed support
for, and it is anticipated that the current session of the
U.S. Congress will consider climate change-related
legislation to reduce greenhouse gas emissions. In addition, at
least one-third of the states, either individually or through
multi-state regional initiatives, already have taken legal
measures to reduce emissions of greenhouse gases, primarily
through the planned development of greenhouse gas emission
inventories
and/or
greenhouse gas cap
19
and trade programs. As an alternative to reducing emissions of
greenhouse gases under cap and trade programs, the Congress may
consider the implementation of a program to tax the emission of
carbon dioxide and other greenhouse gases. The cap and trade
programs could require major sources of emissions, such as
electric power plants, or major producers of fuels, such as
refineries or gas processing plants, to acquire and surrender
emission allowances. Depending on the particular cap and trade
program, we could be required to purchase and surrender
allowances, either for greenhouse gas emissions resulting from
our operations (e.g., compressor stations) or from combustion of
fuels (
e.g.
, natural gas or NGLs) we process. Similarly,
depending on the design and implementation of a program to tax
emissions or greenhouse gases, our operations could face
additional taxes and higher cost of doing business. Although we
would not be impacted to a greater degree than other similarly
situated gatherers and processors of natural gas or NGLs, a
stringent greenhouse gas control or taxing program could have an
adverse effect on our cost of doing business and could reduce
demand for the natural gas and NGLs we gather and process.
Also, as a result of the U.S. Supreme Courts decision
in 2007 in
Massachusetts, et al. v. EPA
, the EPA may
regulate carbon dioxide and other greenhouse gas emissions from
mobile sources such as cars and trucks, even if Congress does
not adopt new legislation specifically addressing emissions of
greenhouse gases. The Courts holding in
Massachusetts
that greenhouse gases including carbon dioxide fall under
the federal Clean Air Acts definition of air
pollutant may also result in future regulation of carbon
dioxide and other greenhouse gas emissions from stationary
sources under certain Clean Air Act programs. In July 2008, the
EPA released an Advance Notice of Proposed
Rulemaking regarding possible future regulation of
greenhouse gas emissions under the Clean Air Act, in response to
the Supreme Courts decision in
Massachusetts.
In
the notice, the EPA evaluated the potential regulation of
greenhouse gases under the Clean Air Act and other potential
methods of regulating greenhouse gases. Although the notice did
not propose any specific, new regulatory requirements for
greenhouse gases, it indicates that federal regulation of
greenhouse gas emissions could occur in the near future even if
Congress does not adopt new legislation specifically addressing
emissions of greenhouse gases. Although it is not possible at
this time to predict how legislation or new regulations that may
be adopted to address greenhouse gas emissions would impact our
business, any such new federal, regional or state restrictions
on or taxing of emissions of carbon dioxide in areas of the
United States in which we conduct business could adversely
affect our cost of doing business and demand for the natural gas
and NGLs we gather and process.
Pipeline Safety.
Some of our pipelines are
subject to regulation by the U.S. Department of
Transportation, or the DOT, under the Natural Gas Pipeline
Safety Act of 1968, as amended, or the NGPSA, pursuant to which
the DOT has established requirements relating to the design,
installation, testing, construction, operation, replacement and
management of pipeline facilities. The NGPSA covers the pipeline
transportation of natural gas and other gases, and the
transportation and storage of liquefied natural gas and requires
any entity that owns or operates pipeline facilities to comply
with the regulations under the NGPSA, to permit access to and
allow copying of records and to make certain reports and provide
information as required by the Secretary of Transportation. We
believe that our natural gas pipeline operations are in
substantial compliance with applicable NGPSA requirements;
however, due to the possibility of new or amended laws and
regulations or reinterpretation of existing laws and
regulations, future compliance with the NGPSA could result in
increased costs that, at this time, cannot reasonably be
quantified.
The DOT, through the Pipeline and Hazardous Materials Safety
Administration, adopted regulations to implement the Pipeline
Safety Improvement Act of 2002, as amended by the Pipeline
Inspection, Protection, Enforcement and Safety Act of 2006,
which requires pipeline operators to, among other things,
develop integrity management programs for gas transmission
pipelines that, in the event of a failure, could affect
high consequence areas. High consequence
areas are defined as areas with specified population
densities, buildings containing populations of limited mobility,
and areas where people gather that are located along the route
of a pipeline. States in which we operate have adopted similar
regulations applicable to intrastate gathering and transmission
lines. Our pipeline systems are largely excluded from these
regulations and are not generally situated within areas that
would be designated high consequence.Therefore,
compliance with these regulations has not had a significant
impact on our operations.
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Employee Health and Safety.
We are subject to
the requirements of the Occupational Safety and Health Act, or
OSHA, and comparable state laws that regulate the protection of
the health and safety of workers. In addition, the OSHA hazard
communication standard requires that information be maintained
about hazardous materials used or produced in our operations and
that this information be provided to employees, state and local
government authorities and citizens.
Hydrogen Sulfide.
Exposure to gas containing
high levels of hydrogen sulfide, referred to as sour gas, is
harmful to humans, and exposure can result in death. The gas
handled at our Worland gathering system contains high levels of
hydrogen sulfide, and we employ numerous safety precautions at
the system to ensure the safety of our employees. There are
various federal and state environmental and safety requirements
for handling sour gas, and we are in substantial compliance with
all such requirements.
Anti-Terrorism Measures.
The federal
Department of Homeland Security Appropriations Act of 2007
required the Department of Homeland Security, or DHS, to issue
regulations establishing risk-based performance standards for
the security of chemical and industrial facilities, including
oil and gas facilities that are deemed to present high
levels of security risk. The DHS issued an interim final
rule in April 2007 regarding risk-based performance standards to
be attained pursuant to the act and, on November 20, 2007,
further issued an Appendix A to the interim rule that
established chemicals of interest and their respective threshold
quantities that will trigger compliance with the interim rule.
Facilities possessing greater than threshold levels of these
chemicals of interest were required to prepare and submit to the
DHS in January 2008 initial screening surveys that the agency
would use to determine whether the facilities presented a high
level of security risk. Covered facilities that are determined
by DHS to pose a high level of security risk will be notified by
DHS and will be required to prepare and submit Security
Vulnerability Assessments and Site Security Plans as well as
comply with other regulatory requirements, including those
regarding inspections, audits, recordkeeping, and protection of
chemical-terrorism vulnerability information. In January 2008,
we prepared and submitted to the DHS initial screening surveys
for five facilities operated by us that possess regulated
chemicals of interest in excess of the Appendix A threshold
levels. In June 2008, the DHS advised us that theses five
facilities were determined by the agency not to present high
levels of security risk and thus did not require further
assessment under the interim rules.
Title to
Properties
Substantially all of our pipelines are constructed on
rights-of-way
granted by the apparent record owners of the property. Lands
over which pipeline
rights-of-way
have been obtained may be subject to prior liens that have not
been subordinated to the
right-of-way
grants. We have obtained, where necessary, license or permit
agreements from public authorities and railroad companies to
cross over or under, or to lay facilities in or along,
waterways, county roads, municipal streets, railroad properties
and state highways, as applicable. In some cases, property on
which our pipelines were built was purchased in fee.
Some of our leases, easements,
rights-of-way,
permits, licenses and franchise ordinances require the consent
of the current landowner to transfer these rights, which in some
instances is a governmental entity. We believe that we have
obtained or will obtain sufficient third party consents, permits
and authorizations for the transfer of the assets necessary for
us to operate our business in all material respects. With
respect to any consents, permits or authorizations that have not
been obtained, we believe that these consents, permits or
authorizations will be obtained reasonably soon, or that the
failure to obtain these consents, permits or authorizations will
have no material adverse effect on the operation of our business.
We lease the majority of the surface land on which our gathering
systems operate. With respect to our Bakken gathering system, we
own the land on which the processing plant is located and the
land on which the three compressor stations are located. With
respect to our Badlands gathering system, we own the land on
which the Badlands processing plant is located and we lease the
land on which the seven compressor sites are located. With
respect to our Eagle Chief gathering system, we lease the
surface land on which the Eagle Chief processing plant, seven of
the eight compressor stations, a produced water dumping station
and the three pumping stations are located. We lease the surface
lands on which twelve of the thirteen Kinta Area compressors are
located. At our Woodford Shale gathering system, we own the land
on which one compressor
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station is located and lease the surface land on three
compressor station locations. We lease the surface lands on
which our Matli processing plant and three compressor stations
are located and in our Worland gathering system, we lease the
surface land on which the Worland processing plant and the seven
compressor stations are located. We own the land on which the
North Dakota Bakken processing plant is being constructed.
We believe that we have satisfactory title to all of our assets.
Record title to some of our assets may continue to be held by
our affiliates until we have made the appropriate filings in the
jurisdictions in which such assets are located and obtained any
consents and approvals that are not obtained prior to transfer.
Title to property may be subject to encumbrances. We believe
that none of these encumbrances will materially detract from the
value of our properties or from our interest in these
properties, nor will they materially interfere with their use of
these properties in the operation of our business.
We believe that we either own in fee or have leases, easements,
rights-of-way
or licenses and have obtained the necessary consents, permits
and franchise ordinances to conduct our operations in all
material respects.
Office
Facilities
We occupy approximately 12,358 square feet of space at our
executive offices in Enid, Oklahoma, under leases expiring
April 30, 2011. While we may require additional office
space as our business expands, we believe that our existing
facilities are adequate to meet our needs for the immediate
future and that additional facilities will be available on
commercially reasonable terms as needed.
Employees
We have no employees. Prior to September 25, 2006,
employees of our general partner, Hiland Partners GP, LLC,
provided services to us. In connection with the initial public
offering of Hiland Holdings, LP, all of the employees of our
general partner became employees of the general partner of
Hiland Holdings, LP, Hiland Partners GP Holdings, LLC. As of
December 31, 2008, Hiland Partners GP Holdings, LLC had
121 full-time employees who provide services to us. We are
not a party to any collective bargaining agreements, and we have
not had any significant labor disputes in the past. We believe
we have good relations with the employees of Hiland Partners GP
Holdings, LLC.
Address,
Internet Web site and Availability of Public Filings
We maintain our principal corporate offices at 205 West
Maple, Suite 1100, Enid, Oklahoma 73701. Our telephone
number is
(580) 242-6040.
Our Internet address is
www.hilandpartners.com
. We make
the following information available free of charge on our
Internet Web site:
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Annual Report on
Form 10-K;
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Quarterly Reports on
Form 10-Q;
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Current Reports on
Form 8-K;
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Amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of
1934;
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Charters for our Audit, Conflicts, and Compensation Committees;
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Code of Business Conduct and Ethics;
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Code of Ethics for Chief Executive Officer and Senior Financial
Officers; and
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Environmental, Health and Safety Policy Statements
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We make our SEC filings available on our Web site as soon as
reasonably practicable after we electronically file such
material with, or furnish such material to, the SEC. The above
information is available in print to anyone who requests it.
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Limited partner interests are inherently different from
capital stock of a corporation, although many of the business
risks to which we are subject are similar to those that would be
faced by a corporation engaged in a similar business. The
following risks could materially and adversely affect our
business, financial condition or results of operations. In that
case, the amount of the distributions on our common units could
be materially and adversely affected and the trading price of
our common units could decline.
Risks
Related to Our Business
If
commodity prices do not significantly improve above the expected
prices for 2009, we may be in violation of the maximum
consolidated funded debt to EBITDA ratio as early as
June 30, 2009, unless the ratio is amended, the senior
secured revolving credit facility is restructured or we receive
an infusion of equity capital. Failure to comply with the
covenants could cause an event of default under our credit
facility.
Our credit facility contains covenants requiring us to maintain
certain financial ratios and comply with certain financial
tests, which, among other things, require us and our subsidiary
guarantors, on a consolidated basis, to maintain specified
ratios or conditions as follows:
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EBITDA to interest expense of not less than 3.0 to 1.0; and
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consolidated funded debt to EBITDA of not more than 4.0 to 1.0
with the option to increase the consolidated funded debt to
EBITDA ratio to not more than 4.75 to 1.0 for a period of up to
nine months following an acquisition or a series of acquisitions
totaling $40 million in a
12-month
period (subject to an increased applicable interest rate margin
and commitment fee rate).
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As of December 31, 2008, we were in compliance with each of
these ratios, which are tested quarterly. Our EBITDA to interest
expense ratio was 5.0 to 1.0 and our consolidated funded debt to
EBITDA ratio was 3.7 to 1.0. We intend to elect to increase the
ratio to 4.75:1.0 on March 31, 2009. Our ability to remain
in compliance with these restrictions and covenants in the
future is uncertain and will be affected by the levels of cash
flow from our operations and events or circumstances beyond our
control. If commodity prices do not significantly improve above
the expected prices for 2009, we may be in violation of the
maximum consolidated funded debt to EBITDA ratio as early as
June 30, 2009, unless the ratio is amended, the senior
secured revolving credit facility is restructured or we receive
an infusion of equity capital.
Our failure to comply with any of the restrictions and covenants
under our revolving credit facility could lead to an event of
default and the acceleration of our obligations under those
agreements. We may not have sufficient funds to make such
payments. If we are unable to satisfy our obligations with cash
on hand, we could attempt to refinance such debt, sell assets or
repay such debt with the proceeds from an equity offering. We
cannot assure that we will be able to generate sufficient cash
flow to pay the interest on our debt or that future borrowings,
equity financings or proceeds from the sale of assets will be
available to pay or refinance such debt. The terms of our
financing agreements may also prohibit us from taking such
actions. Factors that will affect our ability to raise cash
through an offering of our common units or other equity, a
refinancing of our debt or a sale of assets include financial
market conditions and our market value and operating performance
at the time of such offering or other financing. We cannot
assure that any such proposed offering, refinancing or sale of
assets can be successfully completed or, if completed, that the
terms will be favorable to us.
For additional information about the restrictions under our
credit facility, please see Item 7. Managements
Discussion and Analysis of Financial Condition and Results of
Operations Liquidity and Capital
Resources Credit Facility.
We may
not have sufficient cash after the establishment of cash
reserves and payment of our general partners fees and
expenses to enable us to pay distributions at the current level,
or at all.
We may not have sufficient available cash each quarter to pay
distributions at the current level, or at all. Under the terms
of our partnership agreement, we must pay our general
partners fees and expenses and set aside any cash reserve
amounts before making a distribution to our unitholders. The
amount of cash we can
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distribute on our units principally depends upon the amount of
cash we generate from our operations, which will fluctuate from
quarter to quarter based on several factors, some of which are
beyond our control, including:
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the amount of natural gas gathered on our pipelines;
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the throughput volumes at our processing, treating and
fractionation plants;
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the price of natural gas and crude oil;
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the price of NGLs;
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the relationship between natural gas and NGL prices;
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the level of our operating costs;
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the weather in our operating areas;
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the level of competition from other midstream energy
companies; and
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the fees we charge and the margins we realize for our services.
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In addition, the actual amount of cash we will have available
for distribution will depend on other factors, some of which are
beyond our control, including:
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the level of capital expenditures we make;
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the availability, if any, and cost of acquisitions;
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our debt service requirements;
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our ability to access capital markets and borrow money;
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fluctuations in our working capital needs;
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restrictions on distributions contained in our credit facility;
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restrictions on our ability to make working capital borrowings
under our credit facility to pay distributions;
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prevailing economic conditions; and
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the amount, if any, of cash reserves established by our general
partners board of directors in its sole discretion for the
proper conduct of our business.
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Our
cash flow is affected by the volatility of natural gas and NGL
product prices, which could adversely affect our ability to make
distributions to unitholders or to service our
debt.
We are subject to significant risks due to frequent and often
substantial fluctuations in commodity prices. In the past, the
prices of natural gas and NGLs have been extremely volatile, and
we expect this volatility to continue. For the year ended
December 31, 2008, our average realized natural gas sales
price increased from $6.44/MMBtu in January to a high sales
price of $10.05/MMBtu in July, then decreased to a low sales
price of $3.38/MMBtu in November. Our average realized NGL sales
price increased from $1.42 per gallon in January 2008 to a high
sales price of $1.74 per gallon in June 2008, then decreased to
a low sales price of $0.61 per gallon in December 2008. The
markets and prices for natural gas and NGLs depend upon factors
beyond our control. These factors include demand for oil,
natural gas and NGLs, which fluctuate with changes in market and
economic conditions and other factors, including:
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the impact of weather on the demand for oil and natural gas;
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the level of domestic oil and natural gas production;
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the availability of imported oil and natural gas;
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actions taken by foreign oil and gas producing nations;
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the availability of local, intrastate and interstate
transportation systems;
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the availability and marketing of competitive fuels;
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the impact of energy conservation efforts; and
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the extent of governmental regulation and taxation.
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We operate under three types of contractual arrangements under
which our total segment margin is exposed to increases and
decreases in the price of natural gas, NGLs and the relationship
between natural gas and NGL prices:
percentage-of-proceeds,
percentage-of-index
and index-minus-fees arrangements. Under
percentage-of-proceeds
arrangements, we generally purchase natural gas from producers
for an agreed percentage of proceeds or upon an index related
price, and then sell the resulting residue gas and NGLs or NGL
products at index related prices. Under
percentage-of-index
arrangements, we purchase natural gas from producers at a fixed
percentage of the index price for the natural gas they produce
and subsequently sell the residue gas and NGLs or NGL products
at market prices. Under index-minus-fees arrangements, we
purchase natural gas from producers at an expected index related
price less fees to gather, dehydrate, compress, treat
and/or
process the natural gas. Under these types of contracts our
revenues and total segment margin increase or decrease,
whichever is applicable, as the price of natural gas and NGLs
fluctuates.
Because
of the natural decline in production from existing wells, our
success depends on our ability to obtain new supplies of natural
gas, which involves factors beyond our control. Any decrease in
supplies of natural gas in our areas of operation could
adversely affect our business and operating results and reduce
our ability to make distributions to our unitholders or to
service our debt.
Our gathering systems and processing plants are dependent on the
level of production from oil and natural gas wells that supply
our systems with natural gas and from which production will
naturally decline over time. As a result, our cash flows
associated with these wells will also decline over time. In
order to maintain or increase throughput volume levels on our
gathering systems and the asset utilization rates at our natural
gas processing plants, we must continually obtain new supplies
of natural gas. The primary factors affecting our ability to
obtain new supplies of natural gas and attract new customers to
our assets are the level of successful drilling activity near
our gathering systems and our ability to compete with other
gathering and processing companies for volumes from successful
new wells.
The level of drilling activity is dependent on economic and
business factors beyond our control. Fluctuations in energy
prices can greatly affect production rates and investments by
third parties in the development of new oil and natural gas
reserves. Drilling activity generally decreases as oil and
natural gas prices decrease. Natural gas, crude oil and NGL
prices have been high in recent years compared to historical
periods, but have decreased significantly during the fourth
quarter of 2008 and thus far in 2009. This decline in natural
gas prices coupled with the effect of illiquid capital markets
has led to a decrease in drilling activity in our areas of
operation.
In addition, producers may decrease their drilling activity
levels due to the current deterioration in the credit markets.
Many of our customers finance their drilling activities though
cash flow from operations, the incurrence of debt or the
issuance of equity. Recently, there has been a significant
decline in the credit markets and the availability of credit.
Additionally, many of our customers equity values have
substantially declined. The combination of a reduction of cash
flow resulting from declines in commodity prices, a reduction in
borrowing bases under reserve-based credit facilities and the
lack of availability of debt or equity financing may result in a
significant reduction in our customers spending. For
example, a number of our customers have announced reduced
capital expenditure budgets for 2009.
Other factors that impact production decisions include
producers capital budget limitations, the ability of
producers to obtain necessary drilling and other governmental
permits and regulatory changes. Because of these factors, even
if additional crude oil or natural gas reserves were discovered
in areas served by our assets, producers may choose not to
develop those reserves. If we were not able to obtain new
supplies of natural gas to replace the natural decline in
volumes from existing wells due to reductions in drilling
activity or competition, throughput volumes on our pipelines and
the utilization rates of our processing facilities would
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decline, which could have a material adverse effect on our
business, results of operations and financial condition.
If we
fail to obtain new sources of natural gas supply, our revenues
and cash flow may be adversely affected and our ability to make
distributions to our unitholders or service our
debt.
We face competition in acquiring new natural gas supplies.
Competition for natural gas supplies is primarily based on the
location of pipeline facilities, pricing arrangements,
reputation, efficiency, flexibility and reliability. Our major
competitors for natural gas supplies and markets include
(1) Atlas Pipeline Partners, Mustang Fuel Corporation, Duke
Energy Field Services, LLC and SemGas, L.P. at our Eagle Chief
gathering system, (2) Enogex, Inc. at our Matli gathering
system, (3) Bear Paw Energy, a subsidiary of ONEOK
Partners, L.P., at our Badlands and Bakken gathering systems,
(4) CenterPoint Energy Field Services and Superior Pipeline
Company, L.L.C., a subsidiary of Unit Corporation, at the Kinta
Area gathering system and (5) MarkWest Energy Partners,
Enogex, Inc., Antero Resources Midstream Corporation and Copano
Energy, L.L.C. at the Woodford Shale gathering system. Many of
our competitors have greater financial resources than we do,
which may better enable them to pursue additional gathering and
processing opportunities than us.
We
depend on certain key producers for a significant portion of our
supply of natural gas, and the loss of any of these key
producers could reduce our supply of natural gas and adversely
affect our financial results.
For the year ended December 31, 2008, CLR, Chesapeake
Energy Corporation and Enerplus Resources (USA) Corporation
supplied us with approximately 49%, 13% and 10%, respectively,
of our total natural gas volumes purchased. BP America
Production Company and Chesapeake Energy Corporation supplied us
with approximately 52% and 13%, respectively, of our natural gas
volumes gathered. Certain of our natural gas gathering systems
is dependent on one or more of these producers. To the extent
that these producers reduce the volumes of natural gas that they
supply us as a result of competition or otherwise, we would be
adversely affected unless we were able to acquire comparable
supplies of natural gas on comparable terms from other
producers, which may not be possible in areas where the producer
that reduces its volumes is the primary producer in the area.
Our
ability to grow depends in part on our ability to make
acquisitions that result in an increase in the cash generated
from operations per unit. If we do not make acquisitions on
economically acceptable terms, our future growth may be
limited.
Our ability to grow depends in part on our ability to make
acquisitions that result in an increase in the cash generated
from operations per unit. If we are unable to make these
accretive acquisitions because we are: (1) unable to
identify attractive acquisition candidates or negotiate
acceptable purchase contracts with them, (2) unable to
obtain financing for these acquisitions on economically
acceptable terms, or (3) outbid by competitors, then our
future growth and ability to increase distributions may be
limited. Furthermore, even if we do make acquisitions that we
believe will be accretive, these acquisitions may nevertheless
result in a decrease in the cash generated from operations per
unit. Any acquisition involves potential risks, including, among
other things:
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mistaken assumptions about revenues and costs, including
synergies;
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an inability to integrate successfully the businesses we acquire;
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the assumption of unknown liabilities;
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limitations on rights to indemnity from the seller;
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the diversion of managements attention from other business
concerns;
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unforeseen difficulties operating in new product areas or new
geographic areas; and
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customer or key employee losses at the acquired businesses.
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If we consummate any future acquisitions, our capitalization and
results of operations may change significantly, and you will not
have the opportunity to evaluate the economic, financial and
other relevant information that we will consider in determining
the application of these funds and other resources.
Our acquisition approach is based, in part, on ongoing
divestitures of midstream assets by large industry participants.
A material decrease in such divestitures would limit our
opportunities for future acquisitions and could adversely affect
our operations and cash flows available for distribution to our
unitholders.
Our
ability to engage in construction projects and to make
acquisitions will require access to a substantial amount of
capital. Our inability to obtain adequate sources of financing
on economically acceptable terms may limit our growth
opportunities, which could have a negative impact on our cash
available to pay distributions.
Our ability to engage in construction projects or to make
acquisitions is dependent on obtaining adequate sources of
outside financing, including commercial borrowings and other
debt and equity issuances. While the initial funding of our
acquisitions may consist of debt financing, our financial
strategy is to finance acquisitions approximately equally with
equity and debt, and we would expect to repay such debt with
proceeds of equity issuances to achieve this relatively balanced
financing ratio.
Global market and economic conditions have been, and continue to
be, disruptive and volatile. The debt and equity capital markets
have been adversely affected by significant write-offs in the
financial services sector relating to subprime mortgages, and
the re-pricing of credit risk in the broadly syndicated market,
among other things. These events have led to worsening general
economic conditions. In particular, the cost of capital in the
debt and equity capital markets has increased substantially,
while the availability of funds from those markets has
diminished significantly. Also, concerns about the stability of
financial markets generally and the solvency of counterparties
specifically have led to increases in the cost of obtaining
money from the credit markets as many lenders and institutional
investors have increased interest rates, enacted tighter lending
standards and reduced funding and, in some cases, ceased to
provide funding to borrowers.
If we are unable to finance our growth through external sources
or are unable to achieve our targeted debt/equity ratios, or if
the cost of such financing is higher than expected, we may be
required to forgo certain construction projects or acquisition
opportunities or such construction projects or acquisition
opportunities may not result in expected increases in
distributable cash flow. Accordingly, our inability to obtain
adequate sources of financing on economically acceptable terms
may limit our growth opportunities, which could have a negative
impact on our cash available to pay distributions.
For additional information on our access to capital markets, see
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations
Liquidity and Capital Resources.
We
generally do not obtain independent evaluations of natural gas
reserves dedicated to our gathering systems; therefore, volumes
of natural gas gathered on our gathering systems in the future
could be less than we anticipate. A decline in the volumes of
natural gas gathered on our gathering systems would have an
adverse effect on our results of operations and financial
condition.
We generally do not obtain independent evaluations of natural
gas reserves connected to our gathering systems due to the
unwillingness of producers to provide reserve information as
well as the cost of such evaluations. Accordingly, we do not
have estimates of total reserves dedicated to our systems or the
anticipated life of such reserves. If the total reserves or
estimated life of the reserves connected to our gathering
systems is less than we anticipate and we are unable to secure
additional sources of natural gas, then the volumes of natural
gas gathered on our gathering systems in the future could be
less than we anticipate. A decline in the volumes of natural gas
gathered on our gathering systems would have an adverse effect
on our results of operations and financial condition.
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We are
exposed to the credit risks of our key customers, and any
material nonpayment or nonperformance by our key customers could
reduce our ability to make distributions to our unitholders or
to service our debt.
We are subject to risks of loss resulting from nonpayment or
nonperformance by our customers. Any material nonpayment or
nonperformance by our key customers could reduce our ability to
make distributions to our unitholders. Furthermore, some of our
customers may be highly leveraged and subject to their own
operating and regulatory risks, which increases the risk that
they may default on their obligations to us.
Additionally, we derive our revenues primarily from customers in
the energy industry. This industry concentration has the
potential to impact our overall exposure to credit risk, either
positively or negatively, in that our customers could be
affected by similar changes in economic, industry or other
conditions, including changing commodities prices.
We may
not successfully balance our purchases of natural gas and our
sales of residue gas and NGLs, which increases our exposure to
commodity price risks.
We may not be successful in balancing our purchases and sales.
In addition, a producer could fail to deliver expected volumes
or deliver in excess of contracted volumes, or a purchaser could
purchase less than contracted volumes. Any of these actions
could cause our purchases and sales not to be balanced. If our
purchases and sales are not balanced, we will face increased
exposure to commodity price risks and could have increased
volatility in our operating income.
Our
construction of new assets or the expansion of existing assets
may not result in revenue increases and is subject to
regulatory, environmental, political, legal and economic risks,
which could adversely affect our results of operations and
financial condition.
One of the ways we may grow our business is through the
construction of new midstream assets or the expansion of
existing systems. The construction of additions or modifications
to our existing systems, and the construction of new midstream
assets involve numerous regulatory, environmental, political and
legal uncertainties beyond our control and require the
expenditure of significant amounts of capital. If we undertake
these projects, they may not be completed on schedule at the
budgeted cost, or at all. Moreover, our revenues may not
increase immediately upon the expenditure of funds on a
particular project. For instance, if we expand a new pipeline,
the construction may occur over an extended period of time, and
we will not receive any material increases in revenues until the
project is completed. Moreover, we may construct facilities to
capture anticipated future growth in production in a region in
which such growth does not materialize. Since we are not engaged
in the exploration for and development of oil and natural gas
reserves, we often do not have access to estimates of potential
reserves in an area prior to constructing facilities in such
area. To the extent we rely on estimates of future production in
our decision to construct additions to our systems, such
estimates may prove to be inaccurate because there are numerous
uncertainties inherent in estimating quantities of future
production. As a result, new facilities may not be able to
attract enough throughput to achieve our expected investment
return, which could adversely affect our results of operations
and financial condition.
A
change in the characterization of some of our assets by federal,
state or local regulatory agencies or a change in policy by
those agencies may result in increased regulation of our assets,
which may cause our revenues to decline and operating expenses
to increase.
Our gathering facilities are exempt from FERC regulation under
the Natural Gas Act of 1938, or NGA, but FERC jurisdiction still
affects our business and the market for our products.
FERCs policies and practices affect a wide range of
activities bearing directly or indirectly on our business and
operations, including, for example, FERCs regulations and
policies related to open access transportation, ratemaking,
capacity release, market center promotion, intrastate
transportation, and market transparency. In recent years, FERC
has pursued pro-competitive policies in its regulation of
interstate natural gas pipelines. However, we cannot assure you
that FERC will continue this approach as it considers matters
such as pipeline rates and rules and policies that may affect
rights of access to natural gas transportation capacity. In
addition, there is no bright-line distinction between
FERC-regulated transmission service and federally unregulated
gathering services. Moreover, this
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distinction is the subject of regular litigation. Consequently,
the classification and regulation of some of our gathering
facilities may be subject to change based on future
determinations by the FERC and the courts. A change in
jurisdictional characterization may cause the affected
facilitys revenues to decline and its operating expenses
to increase.
Other state and local regulations also affect our business. Our
gathering lines are subject to ratable take and common purchaser
statutes in states in which we operate. Ratable take statutes
generally require gatherers to take, without undue
discrimination, natural gas production that may be tendered to
the gatherer for handling. Similarly, common purchaser statutes
generally require gatherers to purchase without undue
discrimination as to source of supply or producer. These
statutes restrict our right as an owner of gathering facilities
to decide with whom we contract to purchase or transport natural
gas. Federal law leaves any economic regulation of natural gas
gathering to the states. States in which we operate have adopted
complaint based regulation of natural gas gathering activities,
which allows natural gas producers and shippers to file
complaints with state regulators in an effort to resolve
grievances relating to natural gas gathering access and rate
discrimination. While our proprietary gathering lines currently
are subject to limited state regulation, there is a risk that
state laws will be changed, which may give producers a stronger
basis to challenge proprietary status of a line, or the rates,
terms and conditions of a gathering line providing
transportation service.
We may
incur significant costs and liabilities in the future resulting
from a failure to comply with new or existing environmental laws
and regulations or an accidental release of hazardous
substances, wastes or hydrocarbons into the environment. These
costs could have an adverse effect on our ability to make
distributions to unitholders.
Our operations are subject to stringent and complex federal,
regional, state and local environmental laws and regulations
governing the discharge of substances into the environment and
environmental protection. These laws and regulations require us
to acquire permits to conduct regulated activities, to incur
capital expenditures to limit or prevent releases of substances
from our facilities, and to respond to liabilities for pollution
resulting from our operations. Governmental authorities enforce
compliance with these laws and regulations and the permits
issued under them, oftentimes requiring difficult and costly
actions. Failure to comply with these laws and regulations or
newly adopted laws or regulations may trigger a variety of
administrative, civil and criminal enforcement measures,
including the assessment of monetary penalties, the imposition
of remedial requirements, and the issuance of orders enjoining
future operations. Certain environmental statutes impose strict
and, under certain circumstances, joint and several liability
for costs required to clean up and restore sites where hazardous
substances have been disposed or otherwise released. Moreover,
it is not uncommon for neighboring landowners and other third
parties to file claims for personal injury and property damage
allegedly caused by the release of hazardous substances, wastes
or hydrocarbons into the environment.
There is inherent risk of incurring significant environmental
costs and liabilities in our business due to our handling of
natural gas, condensate, oil, NGLs and wastes, the release of
water discharges or air emissions related to our operations, and
historical industry operations and waste disposal practices
conducted by us or predecessors operators. For example, an
accidental release from one of our pipelines or processing
facilities could subject us to substantial liabilities arising
from environmental cleanup and restoration costs, claims made by
neighboring landowners and other third parties for personal
injury and property or natural resource damage, and fines or
penalties for related violations of environmental laws or
regulations. Moreover, the possibility exists that stricter
laws, regulations or enforcement policies could significantly
increase our compliance costs and the cost of any remediation
that may become necessary. We may not be able to recover some or
any of these costs from insurance.
If we
are unable to obtain new
rights-of-way
or the cost of renewing existing
rights-of-way
increases, then we may be unable to fully execute our growth
strategy and our cash flows could be adversely
affected.
The construction of additions to our existing gathering assets
may require us to obtain new
rights-of-way
prior to constructing new pipelines. We may be unable to obtain
such
rights-of-way
to connect new natural gas
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supplies to our existing gathering lines or capitalize on other
attractive expansion opportunities. Additionally, it may become
more expensive for us to obtain new
rights-of-way
or to renew existing
rights-of-way.
If the cost of obtaining new
rights-of-way,
or renewing existing
rights-of-way
increases, our cash flows could be adversely affected.
If we
fail to renew any of our significant contracts as they expire
under the terms of the particular agreement, our revenues and
cash flow may be adversely affected and our ability to make
distributions to our unitholders or service our debt may be
reduced.
If we fail to renew any of our significant natural gas sales
contracts, NGL sales arrangements, hedging contracts, natural
gas purchase and gathering contracts or our compression services
agreement as they expire under the terms of the particular
agreement, we would be adversely affected unless we were able to
replace such contract with a contract containing similar terms.
For example, our compression services agreement with CLR had an
initial term that ended on January 28, 2009 and now
automatically renews for additional one-month terms unless
terminated by either party by giving notice at least
15 days prior to the end of the then current term. If CLR
elects to terminate the monthly agreement and we fail to renew
the monthly agreement with CLR, we would be adversely affected
unless we were able to provide air and water compression
services to other parties in the area where our air and
compression facilities are located.
Our
business involves many hazards and operational risks, some of
which may not be fully covered by insurance. If a significant
accident or event occurs that is not fully insured, our
operations and financial results could be adversely
affected.
Our operations are subject to the many hazards inherent in the
gathering, treating, processing and fractionation of natural gas
and NGLs, including:
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damage to pipelines, related equipment and surrounding
properties caused by tornadoes, floods, fires and other natural
disasters and acts of terrorism;
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inadvertent damage from construction and farm equipment;
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leaks of natural gas, NGLs and other hydrocarbons or losses of
natural gas or NGLs as a result of the malfunction of
measurement equipment or facilities at receipt or delivery
points;
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fires and explosions; and
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other hazards, including those associated with high-sulfur
content, or sour gas, that could also result in personal injury
and loss of life, pollution and suspension of operations.
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These risks could result in substantial losses due to personal
injury
and/or
loss
of life, severe damage to and destruction of property and
equipment and pollution or other environmental damage and may
result in curtailment or suspension of our related operations. A
natural disaster or other hazard affecting the areas in which we
operate could have a material adverse effect on our operations.
We are not fully insured against all risks incident to our
business. In accordance with typical industry practice, we do
not have any property insurance on any of our underground
pipeline systems that would cover damage to the pipelines. We
are not insured against all environmental accidents that might
occur, other than those considered to be sudden and accidental.
In addition, we do not have business interruption insurance. If
a significant accident or event occurs that is not fully
insured, it could adversely affect our operations and financial
condition.
Restrictions
in our credit facility limit our ability to make distributions
to you and may limit our ability to capitalize on acquisitions
and other business opportunities.
Our credit facility contains various covenants limiting our
ability to incur indebtedness, grant liens, engage in
transactions with affiliates, make distributions to our
unitholders and capitalize on acquisition or other business
opportunities. It also contains covenants requiring us to
maintain certain financial ratios and tests. We are prohibited
from making any distribution to unitholders if such distribution
would cause a default or an event of default under our credit
facility. Any subsequent refinancing of our current indebtedness
or any
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new indebtedness could have similar or greater restrictions. At
December 31, 2008, our outstanding long-term indebtedness
was approximately $252.1 million under our senior secured
revolving credit facility. Payments of principal and interest on
the indebtedness will reduce the cash available for distribution
on our units.
For additional information about the restrictions under our
credit facility, please see Item 7. Managements
Discussion and Analysis of Financial Condition and Results of
Operations Liquidity and Capital
Resources Credit Facility.
Due to
our lack of asset diversification, adverse developments in our
midstream operations would reduce our ability to make
distributions to our unitholders or to service our
debt.
We rely exclusively on the revenues generated from our
gathering, dehydration, treating, processing, fractionation and
compression services businesses, and as a result, our financial
condition depends upon prices of, and continued demand for,
natural gas, crude oil and NGLs. Due to our lack of
diversification in asset type, an adverse development in one of
these businesses would have a significantly greater impact on
our financial condition and results of operations than if we
maintained more diverse assets.
Our
hedging activities may not be as effective as we intend in
reducing the volatility of our cash flows, and in certain
circumstances may actually increase the volatility of our cash
flows.
We utilize derivative financial instruments related to the
future price of natural gas and to the future price of NGLs with
the intent of reducing volatility in our cash flows due to
fluctuations in commodity prices. While our hedging activities
are designed to reduce commodity price risk, we remain exposed
to fluctuations in commodity prices.
The extent of our commodity price exposure is related largely to
the effectiveness and scope of our hedging activities. For
example, the derivative instruments we utilize are based on
posted market prices, which may differ significantly from the
actual natural gas prices or NGLs prices that we realize in our
operations. Furthermore, our hedges relate to only a portion of
the volume of our expected sales and, as a result, we will
continue to have direct commodity price exposure to the unhedged
portion. Our actual future sales may be significantly higher or
lower than we estimate at the time we enter into derivative
transactions for such period. If the actual amount is higher
than we estimate, we will have greater commodity price exposure
than we intended. If the actual amount is lower than the amount
that is subject to our derivative financial instruments, we
might be forced to satisfy all or a portion of our derivative
transactions without the benefit of the cash flow from our sale
or purchase of the underlying physical commodity, resulting in a
substantial diminution of our liquidity.
As a result of these factors, our hedging activities may not be
as effective as we intend in reducing the volatility of our cash
flows, and in certain circumstances may actually increase the
volatility of our cash flows. In addition, our hedging
activities are subject to the risks that a counterparty may not
perform its obligation under the applicable derivative
instrument, the terms of the derivative instruments are
imperfect, and our hedging procedures may not be properly
followed. We cannot assure you that the steps we take to monitor
our derivative financial instruments will detect and prevent
violations of our risk management policies and procedures,
particularly if deception or other intentional misconduct is
involved.
Completion
of significant, unbudgeted expansion projects may require debt
and/or equity financing which may not be available to us on
acceptable terms, or at all.
We plan to fund our expansion capital expenditures, including
any future expansions we may undertake, with proceeds from sales
of our debt and equity securities and borrowings under our
revolving credit facility; however, we cannot be certain that we
will be able to issue our debt and equity securities on terms or
in the proportions that we expect, or at all, and we may be
unable to refinance our revolving credit facility when it
expires. In addition, we may be unable to obtain adequate
funding under our current revolving credit facility because our
lending counterparties may be unwilling or unable to meet their
funding obligations.
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Global financial markets and economic conditions have been, and
continue to be, disrupted and volatile. The debt and equity
capital markets have been exceedingly distressed. These issues,
along with significant write-offs in the financial services
sector, the re-pricing of credit risk and the current weak
economic conditions have made, and will likely continue to make,
it difficult to obtain funding.
The cost of raising money in the debt and equity capital markets
has increased substantially while the availability of funds from
those markets generally has diminished significantly. Also, as a
result of concerns about the stability of financial markets
generally and the solvency of counterparties specifically, the
cost of obtaining money from the credit markets generally has
increased as many lenders and institutional investors have
increased interest rates, enacted tighter lending standards,
refused to refinance existing debt at maturity at all or on
terms similar to our current debt and reduced and, in some
cases, ceased to provide funding to borrowers.
A significant increase in our indebtedness, or an increase in
our indebtedness that is proportionately greater than our
issuances of equity, as well as the credit market and debt and
equity capital market conditions discussed above could
negatively impact our ability to remain in compliance with the
financial covenants under our revolving credit agreement which
could have a material adverse effect on our financial condition,
results of operations and cash flows. If we are unable to
finance our expansion projects as expected, we could be required
to seek alternative financing, the terms of which may not be
attractive to us, or to revise or cancel our expansion plans. If
we are unable to finance our expansion projects as expected,
this could have a material adverse effect on our operations,
which could reduce our ability to make distributions to our
unitholders.
Increases
in interest rates could increase our borrowing costs, adversely
impact our unit price and our ability to issue additional
equity, which could have an adverse effect on our cash flows and
our ability to fund our growth.
Due to the recent volatility and decline in the credit markets,
the interest rate on our credit facility could increase, which
would reduce our cash flows. In addition, interest rates on
future credit facilities and debt offerings could be higher than
current levels, causing our financing costs to increase
accordingly. As with other yield-oriented securities, the market
price for our units will be affected by the level of our cash
distributions and implied distribution yield. The distribution
yield is often used by investors to compare and rank
yield-oriented securities for investment decision-making
purposes. Therefore, changes in interest rates, either positive
or negative, may affect the yield requirements of investors who
invest in our units, and a rising interest rate environment
could have an adverse effect on our unit price and our ability
to issue additional equity in order to make acquisitions, to
reduce debt or for other purposes.
Risks
Inherent in an Investment in Us
Harold
Hamm and his affiliates control our general partner, which has
sole responsibility for conducting our business and managing our
operations. Affiliates of Harold Hamm and our general partner
have conflicts of interest and limited fiduciary duties, which
may permit them to favor their own interests to your
detriment.
Harold Hamm and his affiliates control Hiland Partners GP
Holdings, LLC, the general partner of Hiland Holdings, a
publicly traded Delaware limited partnership that directly or
indirectly owns 100% of our general partner. As a result, Harold
Hamm and his affiliates control our general partner, which has
sole responsibility for conducting our business and managing our
operations. Conflicts of interest may arise between Harold Hamm
and his affiliates, including our general partner, on the one
hand, and us and our unitholders, on the other hand. As a result
of these conflicts, the general partner may favor its own
interests and the interests of its affiliates over the interests
of our unitholders. These conflicts include, among others, the
following situations:
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Harold Hamm and his affiliates control CLR; neither our
partnership agreement nor any other agreement requires CLR to
pursue a business strategy that favors us;
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our general partner is allowed to take into account the
interests of parties other than us, in resolving conflicts of
interest;
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our general partner has limited its liability and reduced its
fiduciary duties, and has also restricted the remedies available
to our unitholders for actions that, without the limitations,
might constitute breaches of fiduciary duty;
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our general partner determines the amount and timing of asset
purchases and sales, capital expenditures, borrowings, issuance
of additional limited partner securities, and reserves, each of
which can affect the amount of cash that is distributed to
unitholders;
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our partnership agreement does not restrict our general partner
from causing us to pay it or its affiliates for any services
rendered to us or entering into additional contractual
arrangements with any of these entities on our behalf;
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our general partner controls the enforcement of obligations owed
to us by our general partner and its affiliates; and
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our general partner decides whether to retain separate counsel,
accountants, or others to perform services for us.
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Unitholders
have limited voting rights and limited ability to influence our
operations and activities.
Unitholders have only limited voting rights on matters affecting
our operations and activities and, therefore, limited ability to
influence managements decisions regarding our business.
Unitholders did not select our general partner or elect the
board of directors of our general partner and effectively have
no right to select our general partner or elect its board of
directors in the future.
Unitholders voting rights are further restricted by the
partnership agreement provision providing 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, the partnership
agreement contains provisions limiting the ability of
unitholders to call meetings or to acquire information about our
operations, as well as other provisions limiting the
unitholders ability to influence the manner or direction
of management.
Our
general partner determines the cost reimbursement and fees
payable to it from us; such payments may be substantial and
could reduce our cash available for distribution to
you.
Prior to making any distributions on our common units, we will
reimburse our general partner for expenses it incurs on our
behalf. Payments to our general partner may be substantial and
will reduce the amount of available cash for distribution to
unitholders. We will reimburse our general partner for the
provision by it and its affiliates of various general and
administrative services for our benefit, including the salaries
and costs of employee benefits for employees of the general
partner and its affiliates that provide services to us. Our
general partner determines the amount of expenses allocable to
us. There is no cap on the amount that may be paid or reimbursed
to our general partner for compensation or expenses incurred on
our behalf. Our general partner and its affiliates also may
provide us other services for which we will be charged fees as
determined by our general partner.
Our
partnership agreement limits our general partners
fiduciary duties to our unitholders and restricts the remedies
available to unitholders for actions taken by our general
partner that might otherwise constitute breaches of fiduciary
duty.
Our partnership agreement contains provisions that reduce the
standards to which our general partner would otherwise be held
by state fiduciary duty law. For example, our partnership
agreement:
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permits our general partner to make a number of decisions in its
individual capacity, as opposed to in its capacity as our
general partner. This entitles our general partner to consider
only the interests and
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factors that it desires, and it has no duty or obligation to
give any consideration to any interest of, or factors affecting,
us, our affiliates or any limited partner. Examples include the
exercise of our general partners limited call right, its
rights to vote or transfer the units it owns, its registration
rights and its determination whether or not to consent to any
merger or consolidation of our partnership or amendment to our
partnership agreement;
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provides that our general partner is entitled to make other
decisions in good faith if it reasonably believes
that the decision is in our best interests;
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generally provides that affiliated transactions and resolutions
of conflicts of interest not approved by the conflicts committee
of the board of directors of our general partner and not
involving a vote of unitholders must be on terms no less
favorable to us than those generally being provided to or
available from unrelated third parties or be fair and
reasonable to us and that, in determining whether a
transaction or resolution is fair and reasonable,
our general partner may consider the totality of the
relationships between the parties involved, including other
transactions that may be particularly advantageous or beneficial
to us; and
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provides that our general partner and its officers and directors
will not be liable for monetary damages to us, our limited
partners or assignees for any acts or omissions unless there has
been a final and non-appealable judgment entered by a court of
competent jurisdiction determining that the general partner or
those other persons acted in bad faith or engaged in fraud or
willful misconduct or, in the case of a criminal matter, acted
with knowledge that such persons conduct was criminal.
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In order to become a limited partner of our partnership, a
common unitholder is required to agree to be bound by the
provisions in the partnership agreement, including the
provisions discussed above.
Harold
Hamm and CLR may engage in limited competition with
us.
Harold Hamm and CLR and their affiliates may engage in limited
competition with us. Pursuant to the omnibus agreement entered
into in connection with our initial public offering, Harold Hamm
has agreed that neither he nor any of his affiliates (including
CLR) will engage in, whether by acquisition, construction,
investment in debt or equity interests of any person or
otherwise, the business of gathering, treating, processing and
transportation of natural gas in North America, the
transportation and fractionation of NGLs in North America,
and constructing, buying or selling any assets related to the
foregoing businesses. This restriction does not apply to:
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any business that is primarily related to the exploration for
and production of oil or natural gas, including the sale and
marketing of oil and natural gas derived from such exploration
and production activities;
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any business conducted by Harold Hamm or his affiliates as of
the date of the omnibus agreement;
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the purchase and ownership of not more than five percent of any
class of securities of any entity engaged in any restricted
business (but without otherwise participating in the activities
of such entity);
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any business that Harold Hamm or his affiliates acquires or
constructs that has a fair market value or construction cost, as
applicable, of less than $5.0 million;
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any business that Harold Hamm or his affiliates acquires or
constructs that has a fair market value or construction cost, as
applicable, of $5.0 million or more if we have been offered
the opportunity to purchase the business for the fair market
value or construction cost, as applicable, and we decline to do
so with the concurrence of the conflicts committee of our
general partner; and
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any business conducted by Harold Hamm or his affiliates with the
approval of the conflicts committee.
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These non-competition obligations will terminate on the first to
occur of the following events:
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the first day on which Harold Hamm and his affiliates no longer
control us;
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the death of Harold Hamm; and
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February 15, 2010.
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In addition, in connection with the initial public offering of
Hiland Holdings, Hiland Holdings and its general partner entered
into a non-competition agreement with us pursuant to which
Hiland Holdings and its general partner have agreed that they
will not, and they will cause any person or entity controlled by
Hiland Holdings or its general partner (other than our general
partner, our subsidiaries and us) not to, engage in, whether by
acquisition, construction, investment in debt or equity
interests of any person or otherwise, the business of gathering,
treating, processing and transportation of natural gas in North
America, the transportation and fractionation of NGLs in North
America, and constructing, buying or selling any assets related
to the foregoing businesses. The non-competition agreement has
the same permitted exceptions as the omnibus agreement and will
terminate on the first day on which neither Hiland Holdings nor
its general partner control us.
Even
if unitholders are dissatisfied, they cannot remove our general
partner without its consent.
Unlike the holders of common stock in a corporation, unitholders
have only limited voting rights on matters affecting our
business and, therefore, limited ability to influence
managements decisions regarding our business. Unitholders
did not elect our general partner or the board of directors of
our general partner and will have no right to elect our general
partner or the board of directors of our general partner on an
annual or other continuing basis. The board of directors of our
general partner is chosen by the members of our general partner.
Furthermore, if the unitholders were dissatisfied with the
performance of our general partner, they would have little
ability to remove our general partner. As a result of these
limitations, the price at which the common units will trade
could be diminished because of the absence or reduction of a
takeover premium in the trading price.
The unitholders are unable initially to remove the general
partner without its consent because the general partner and its
affiliates own sufficient units to be able to prevent removal.
The vote of the holders of at least
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2
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3
%
of all outstanding units voting together as a single class is
required to remove the general partner. As of March 5,
2009, affiliates of the general partner owned 57.4% of the
limited partner units outstanding. Also, if the general partner
is removed without cause during the subordination period and
units held by the general partner and its affiliates are not
voted in favor of that removal, all remaining subordinated units
will automatically convert into common units and any existing
arrearages on the common units will be extinguished. A removal
of the general partner under these circumstances would adversely
affect the common units by prematurely eliminating their
distribution and liquidation preference over the subordinated
units, which would otherwise have continued until we had met
certain distribution and performance tests. Cause is narrowly
defined to mean that a court of competent jurisdiction has
entered a final, non-appealable judgment finding the general
partner liable for actual fraud, gross negligence, or willful or
wanton misconduct in its capacity as our general partner. Cause
does not include most cases of charges of poor management of the
business, so the removal of the general partner because of the
unitholders dissatisfaction with the general
partners performance in managing our partnership would
most likely result in the termination of the subordination
period.
Furthermore, unitholders voting rights are further
restricted by the partnership agreement provision providing 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 the
general partners general partner, cannot vote on any
matter. Our partnership agreement also contains provisions
limiting the ability of unitholders to call meetings or to
acquire information about our operations, as well as other
provisions limiting the unitholders ability to influence
the manner or direction of management.
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The
control of our general partner may be transferred to a third
party without unitholder consent.
Our general partner may transfer its general partner interest to
a third party in a merger or in a sale of all or substantially
all of its assets without the consent of the unitholders.
Furthermore, our partnership agreement does not restrict the
ability of the members of our general partner from transferring
their respective membership interests in our general partner to
a third party. The new members of our general partner would then
be in a position to replace the board of directors of our
general partner with their own choices and to control the
decisions taken by the board of directors.
We do
not have our own officers and employees and rely solely on the
officers and employees of our general partner and its affiliates
to manage our business and affairs.
We do not have our own officers and employees and rely solely on
the officers and employees of our general partner and its
affiliates to manage our business and affairs. We can provide no
assurance that the general partner will continue to provide us
the officers and employees that are necessary for the conduct of
our business nor that such provision will be on terms that are
acceptable to us. Other than option agreements, neither we nor
our general partner have entered into any employment agreements
with any officers of our general partner. If the general partner
fails to provide us with adequate personnel, our operations
could be adversely impacted. In addition, certain of the
officers of our general partner, including the chief executive
officer and chief financial officer, may also serve as officers
and directors of affiliates of the general partner.
We may
issue additional common units without your approval, which would
dilute your existing ownership interests.
During the subordination period, our general partner, without
the approval of our unitholders, may cause us to issue up to
1,360,000 additional common units. Our general partner may also
cause us to issue an unlimited number of additional common units
or other equity securities of equal rank with the common units,
without unitholder approval, in a number of circumstances such
as:
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the issuance of common units upon the exercise of the
underwriters over-allotment option;
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the issuance of common units in connection with acquisitions or
capital improvements that increase cash flow from operations per
unit on an estimated pro forma basis;
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issuances of common units to repay indebtedness, if the cost to
service the indebtedness is greater than the distribution
obligations associated with the units issued in connection with
the repayment of the indebtedness;
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the conversion of subordinated units into common units;
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the conversion of units of equal rank with the common units into
common units under some circumstances;
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in the event of a combination or subdivision of common units;
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issuances of common units under our employee benefit
plans; or
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the conversion of the general partner interest and the incentive
distribution rights into common units as a result of the
withdrawal or removal of our general partner.
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In addition, our partnership agreement does not prohibit the
issuance by our subsidiaries of equity securities, which may
effectively rank senior to the common units.
The issuance of additional common units or other equity
securities of equal or senior rank will have the following
effects:
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our unitholders proportionate ownership interest in us may
decrease;
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the amount of cash available for distribution on each unit may
decrease;
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36
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because a lower percentage of total outstanding units will be
subordinated units, the risk that a shortfall in the payment of
the minimum quarterly distribution will be borne by our common
unitholders will increase;
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the relative voting strength of each previously outstanding unit
may be diminished;
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the market price of the common units may decline; and
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the ratio of taxable income to distributions may increase.
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After the end of the subordination period, we may issue an
unlimited number of limited partner interests of any type
without the approval of our unitholders. Our partnership
agreement does not give our unitholders the right to approve our
issuance of equity securities ranking junior to the common units
at any time.
Our
general partners discretion in determining the level of
cash reserves may reduce the amount of available cash for
distribution to you.
Our partnership agreement requires our general partner to deduct
from operating surplus cash reserves that it determines are
necessary to fund our future operating expenditures. In
addition, our partnership agreement also permits our general
partner to reduce available cash by establishing cash reserves
for the proper conduct of our business, to comply with
applicable law or agreements to which we are a party, or to
provide funds for future distributions to partners. These
reserves will affect the amount of cash available for
distribution to you.
Our
general partner may cause us to borrow funds in order to make
cash distributions, even where the purpose or effect of the
borrowing benefits our general partner or its
affiliates.
In some instances, our general partner may cause us to borrow
funds in order to permit the payment of cash distributions.
These borrowings are permitted even if the purpose and effect of
the borrowing is to enable us to make a distribution on the
subordinated units, to make incentive distributions, or to
hasten the expiration of the subordination period.
All of
the membership interests in our general partner and all of the
common and subordinated units in us that are owned by Hiland
Holdings are pledged as security under Hiland Holdings
credit facility. Upon an event of default under Hiland
Holdings credit facility, a change in ownership or control
of us could ultimately result.
The 100% membership interest in our general partner and the
2,321,471 common units and 3,060,000 subordinated units in us
that are owned by Hiland Holdings are pledged under Hiland
Holdings credit facility. Hiland Holdings credit
facility contains customary and other events of default. Upon an
event of default, the lenders under Hiland Holdings credit
facility could foreclose on Hiland Holdings assets, which
could ultimately result in a change in control of our general
partner and a change in the ownership of our units held by
Hiland Holdings.
Our
general partner has a limited call right that may require you to
sell your units at an undesirable time or price.
If at any time our general partner and its affiliates own more
than 80% of the common units, our general partner will have the
right, but not the obligation, which it may assign to any of its
affiliates or to us, to acquire all, but not less than all, of
the common units held by unaffiliated persons at a price not
less than their then-current market price. As a result, you may
be required to sell your common units at an undesirable time or
price and may not receive any return on your investment. You may
also incur a tax liability upon a sale of your units. As of
March 5, 2009, affiliates of our general partner owned
approximately 36.8% of our common units and, at the end of the
subordination period, assuming no additional issuances of common
units, affiliates of our general partner will own approximately
57.4% of our common units.
37
You
could be liable for any and all of our obligations if a court
finds that unitholder action constitutes control of our
business.
A general partner of a partnership generally has unlimited
liability for the obligations of the partnership, except for
those contractual obligations of the partnership that are
expressly made without recourse to the general partner. Our
partnership is organized under Delaware law and we conduct
business in a number of other states. The limitations on the
liability of holders of limited partner interests for the
obligations of a limited partnership have not been clearly
established in some of the other states in which we do business.
You could be liable for any and all of our obligations as if you
were a general partner if:
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a court or government agency determined that we were conducting
business in a state but had not complied with that particular
states partnership statute; or
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your right to act with other unitholders to remove or replace
the general partner, to approve some amendments to our
partnership agreement or to take other actions under our
partnership agreement constitute control of our
business.
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Unitholders
may have liability to repay distributions that were wrongfully
distributed to them.
Under certain circumstances, unitholders may have to repay
amounts wrongfully returned or distributed to them. Under
Section 17-607
of the Delaware Revised Uniform Limited Partnership Act, we may
not make a distribution to you if the distribution would cause
our liabilities to exceed the fair value of our assets. Delaware
law provides that for a period of three years from the date of
the impermissible distribution, limited partners who received
the distribution and who knew at the time of the distribution
that it violated Delaware law will be liable to the limited
partnership for the distribution amount. Substituted limited
partners are liable for the obligations of the assignor to make
contributions to the partnership that are known to the
substituted limited partner at the time it became a limited
partner and for unknown obligations if the liabilities could be
determined from the partnership agreement. Liabilities to
partners on account of their partnership interest and
liabilities that are non-recourse to the partnership are not
counted for purposes of determining whether a distribution is
permitted.
Tax Risks
to Common Unitholders
Our
tax treatment depends on our status as a partnership for federal
income tax purposes, as well as our not being subject to
entity-level taxation by individual states. If we were to be
treated as a corporation for federal income tax purposes or we
were to become subject to additional amounts of entity-level
taxation for state tax purposes, taxes paid, if any, would
reduce the amount of cash available for distribution to
you.
The anticipated after-tax economic benefit of an investment in
our common units depends largely on our being treated as a
partnership for federal income tax purposes. We have not
requested, and do not plan to request, a ruling from the IRS on
this or any other tax matter affecting us.
Despite the fact that we are a limited partnership under
Delaware law, it is possible in certain circumstances for a
partnership such as ours to be treated as a corporation for
federal income tax purposes. Although we do not believe based
upon our current operations that we are so treated, a change in
our business (or a change in current law) could cause us to be
treated as a corporation for federal income tax purposes or
otherwise subject us to taxation as an entity.
If we were treated as a corporation for federal income tax
purposes, we would pay federal income tax on our taxable income
at the corporate tax rate, which is currently a maximum of 35%,
and would likely pay state income tax at varying rates.
Distributions to you would generally be taxed again as corporate
distributions, and no income, gains, losses or deductions would
flow through to you. Because a tax would be imposed upon us as a
corporation, our cash available for distribution to you would be
substantially reduced. Therefore, treatment of us as a
corporation would result in a material reduction in the
anticipated cash flow and after-tax return to the unitholders,
likely causing a substantial reduction in the value of our
common units.
38
Current law may change so as to cause us to be treated as a
corporation for federal income tax purposes or otherwise subject
us to entity-level taxation. In addition, because of widespread
state budget deficits and other reasons, several states are
evaluating ways to subject partnerships to entity-level taxation
through the imposition of state income, franchise and other
forms of taxation. For example, we are required to pay Texas
margin tax at a maximum effective rate of 0.7% of our gross
income apportioned to Texas in the prior year. Imposition of
this tax on us by Texas, or similar taxes by any other state in
which we operate, will reduce the cash available for
distribution to you.
Our partnership agreement provides that if a law is enacted or
existing law is modified or interpreted in a manner that
subjects us to taxation as a corporation or otherwise subjects
us to entity-level taxation for federal, state or local income
tax purposes, the minimum quarterly distribution amount and the
target distribution amounts will be adjusted to reflect the
impact of that law on us.
The
tax treatment of publicly traded partnerships or an investment
in our common units could be subject to potential legislative,
judicial or administrative changes and differing
interpretations, possibly on a retroactive basis.
The present U.S. federal income tax treatment of publicly
traded partnerships, including us, or an investment in our
common units may be modified by administrative, legislative or
judicial interpretation at any time. For example, members of
Congress recently considered substantive changes to the existing
U.S. federal income tax laws that affect publicly traded
partnerships, including us. Any modification to the
U.S. federal income tax laws and interpretations thereof
may or may not be applied retroactively. Although the considered
legislation would not have appeared to have affected our tax
treatment as a partnership, we are unable to predict whether any
of these changes, or other proposals, will be introduced or will
ultimately be enacted. Any such changes could negatively impact
the value of an investment in our common units.
If the
IRS contests the federal income tax positions we take, the
market for our common units may be adversely impacted and the
cost of any IRS contest will reduce our cash available for
distribution to you.
We have not requested a ruling from the IRS with respect to our
treatment as a partnership for federal income tax purposes or
any other matter affecting us. The IRS may adopt positions that
differ from the positions we take. It may be necessary to resort
to administrative or court proceedings to sustain some or all of
the positions we take. A court may not agree with some or all of
the positions we take. Any contest with the IRS may materially
and adversely impact the market for our common units and the
price at which they trade. In addition, our costs of any contest
with the IRS will be borne indirectly by our unitholders and our
general partner because the costs will reduce our cash available
for distribution.
You
may be required to pay taxes on your share of our income even if
you do not receive any cash distributions from us.
Because our unitholders will be treated as partners to whom we
will allocate taxable income which could be different in amount
than the cash we distribute, you will be required to pay any
federal income taxes and, in some cases, state and local income
taxes on your share of our taxable income even if you receive no
cash distributions from us. You may not receive cash
distributions from us equal to your share of our taxable income
or even equal to the actual tax liability that results from that
income.
Tax
gain or loss on the disposition of our common units could be
more or less than expected.
If you sell your common units, you will recognize a gain or loss
equal to the difference between the amount realized and your tax
basis in those common units. Because distributions in excess of
your allocable share of our net taxable income decrease your tax
basis in your common units, the amount, if any, of such prior
excess distributions with respect to the units you sell will, in
effect, become taxable income to you if you sell such units at a
price greater than your tax basis in those units, even if the
price you receive is less than your original cost. Furthermore,
a substantial portion of the amount realized, whether or not
representing gain, may be taxed as ordinary income due to
potential recapture items, including depreciation recapture. In
39
addition, because the amount realized includes a
unitholders share of nonrecourse liabilities if you sell
your units, you may incur a tax liability in excess of the
amount of cash you receive from the sale.
Tax-exempt
entities and
non-U.S.
persons face unique tax issues from owning our common units that
may result in adverse tax consequences to them.
Investment in units by tax-exempt entities, including employee
benefit plans and individual retirement accounts (known as
IRAs), and
non-U.S. persons
raises issues unique to them. For example, virtually all of our
income allocated to organizations exempt from federal income
tax, including IRAs and other retirement plans, will be
unrelated business taxable income and will be taxable to such a
unitholder. Distributions to
non-U.S. persons
will be reduced by withholding taxes imposed at the highest
effective applicable tax rate, and such
non-U.S. persons
will be required to file United States federal income tax
returns and pay tax on their share of our taxable income. If you
are a tax exempt entity or a
non-U.S. person,
you should consult your tax advisor before investing in our
common units.
We
treat each purchaser of common units as having the same tax
benefits without regard to the actual common units purchased.
The IRS may challenge this treatment, which could adversely
affect the value of the common units.
Because we cannot match transferors and transferees of common
units and because of other reasons, we have adopted depreciation
and amortization positions that may not conform to all aspects
of existing Treasury Regulations. A successful IRS challenge to
those positions could adversely affect the amount of tax
benefits available to you. It also could affect the timing of
these tax benefits or the amount of gain from your sale of
common units and could have a negative impact on the value of
our common units or result in audit adjustments to your tax
returns.
We
prorate our items of income, gain, loss and deduction between
transferors and transferees of our common units each month based
upon the ownership of our common units on the first day of each
month, instead of on the basis of the date a particular common
unit is transferred. The IRS may challenge this treatment, and,
if successful, we would be required to change the allocation of
items of income, gain, loss and deduction among our
unitholders.
We prorate our items of income, gain, loss and deduction between
transferors and transferees of our common units each month based
upon the ownership of our common units on the first day of each
month, instead of on the basis of the date a particular common
unit is transferred. The use of this proration method may not be
permitted under existing Treasury Regulations. If the IRS were
to successfully challenge this method or new Treasury
Regulations were issued, we could be required to change the
allocation of items of income, gain, loss and deduction among
our unitholders.
A
unitholder whose units are loaned to a short seller
to cover a short sale of units may be considered as having
disposed of those units. If so, he would no longer be treated
for tax purposes as a partner with respect to those units during
the period of the loan and may recognize gain or loss from the
disposition.
Because a unitholder whose units are loaned to a short
seller to cover a short sale of units may be considered as
having disposed of the loaned units, he may no longer be treated
for tax purposes as a partner with respect to those units during
the period of the loan to the short seller and the unitholder
may recognize gain or loss from such disposition. Moreover,
during the period of the loan to the short seller, any of our
income, gain, loss or deduction with respect to those units may
not be reportable by the unitholder and any cash distributions
received by the unitholder as to those units could be fully
taxable as ordinary income. Unitholders desiring to assure their
status as partners and avoid the risk of gain recognition from a
loan to a short seller are urged to modify any applicable
brokerage account agreements to prohibit their brokers from
borrowing their units.
40
We
have adopted certain valuation methodologies that could result
in a shift of income, gain, loss and deduction between the
general partner and the unitholders. The IRS may successfully
challenge this treatment, which could adversely affect the value
of the common units.
When we issue additional units or engage in certain other
transactions, we will determine the fair market value of our
assets and allocate any unrealized gain or loss attributable to
our assets to the capital accounts of our unitholders and our
general partner. Our methodology may be viewed as understating
the value of our assets. In that case, there may be a shift of
income, gain, loss and deduction between certain unitholders and
the general partner, which may be unfavorable to such
unitholders. Moreover, under our valuation methods, subsequent
purchasers of common units may have a greater portion of their
Internal Revenue Code Section 743(b) adjustment allocated
to our tangible assets and a lesser portion allocated to our
intangible assets. The IRS may challenge our valuation methods,
or our allocation of the Section 743(b) adjustment
attributable to our tangible and intangible assets, and
allocations of income, gain, loss and deduction between the
general partner and certain of our unitholders.
A successful IRS challenge to these methods or allocations could
adversely affect the amount of taxable income or loss being
allocated to our unitholders. It also could affect the amount of
gain from our unitholders sale of common units and could
have a negative impact on the value of the common units or
result in audit adjustments to our unitholders tax returns
without the benefit of additional deductions.
The
sale or exchange of 50% or more of our capital and profits
interests during any twelve-month period will result in the
termination of our partnership for federal income tax
purposes.
We will be considered to have terminated for federal income tax
purposes if there is a sale or exchange of 50% or more of the
total interests in our capital and profits within a twelve-month
period. For purposes of determining whether the 50% threshold
has been met, multiple sales of the same interest will be
counted only once. Our termination would, among other things,
result in the closing of our taxable year for all unitholders,
which would result in us filing two tax returns (and our
unitholders could receive two Schedules K-1) for one fiscal year
and could result in a significant deferral of depreciation
deductions allowable in computing our taxable income. In the
case of a unitholder reporting on a taxable year other than a
fiscal year ending December 31, the closing of our taxable
year may also result in more than twelve months of our taxable
income or loss being includable in his taxable income for the
year of termination. Our termination currently would not affect
our classification as a partnership for federal income tax
purposes, but instead, we would be treated as a new partnership
for tax purposes. If treated as a new partnership, we must make
new tax elections and could be subject to penalties if we are
unable to determine that a termination occurred.
You
will likely be subject to state and local taxes and return
filing requirements in states where you do not live as a result
of investing in our common units.
In addition to federal income taxes, you will likely be subject
to other taxes, including foreign, state and local taxes,
unincorporated business taxes and estate, inheritance or
intangible taxes that are imposed by the various jurisdictions
in which we do business or own property, even if you do not live
in any of those jurisdictions. You will likely be required to
file foreign, state and local income tax returns and pay state
and local income taxes in some or all of these various
jurisdictions. Further, you may be subject to penalties for
failure to comply with those requirements. We currently do
business or own property in various states, most of which impose
a tax on individuals, corporations and other entities. As we
make acquisitions or expand our business, we may own assets or
conduct business in additional states that impose similar income
taxes. It is your responsibility to file all United States
federal, foreign, state and local tax returns.
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Item 1B.
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Unresolved
Staff Comments
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None.
41
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Item 3.
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Legal
Proceedings
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On February 26, 2009, a unitholder of Hiland Partners and
Hiland Holdings filed a complaint alleging claims on behalf of a
purported class of common unitholders of Hiland Partners and
Hiland Holdings against Hiland Partners, Hiland Holdings, the
general partner of each of Hiland Partners and Hiland Holdings,
and certain members of the board of directors of each of Hiland
Partners and Hiland Holdings in the Court of Chancery of the
State of Delaware. The complaint challenges a proposal made by
Harold Hamm to acquire all of the outstanding common units of
each of Hiland Partners and Hiland Holdings that are not owned
by Mr. Hamm, his affiliates or Hamm family trusts. The
complaint alleges, among other things, that the consideration
offered is unfair and grossly inadequate, that the conflicts
committee of the board of directors of the general partner of
each of Hiland Partners and Hiland Holdings cannot be expected
to act independently, and that the management of Hiland Partners
and Hiland Holdings has manipulated its public statements to
depress the price of the common units of Hiland Partners and
Hiland Holdings. The plaintiffs seek to enjoin Hiland Partners,
Hiland Holdings, and their respective board members from
proceeding with any transaction that may arise from
Mr. Hamms going private proposal, along with
compensatory damages. For more information on the going private
proposal, please see Items 1. and 2. Business and
Properties Recent Developments Going
Private Proposal. We cannot predict the outcome of this
lawsuit, or others, nor can we predict the amount of time and
expense that will be required to resolve the lawsuit.
We are not aware of any legal or governmental proceedings
against us, or contemplated to be brought against us, under the
various environmental protection statutes to which we are
subject. We maintain insurance policies with insurers in amounts
and with coverage and deductibles as our general partner
believes are reasonable and prudent. However, we cannot assure
you that this insurance will be adequate to protect us from all
material expenses related to potential future claims for
personal and property damage or that these levels of insurance
will be available in the future at economical prices.
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Item 4.
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Submission
of Matters to a Vote of Security Holders
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None.
PART II
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Item 5.
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Market
for Registrants Common Units and Related Unitholder
Matters and Issuer Purchases of Equity Securities
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Our limited partner common units began trading on the NASDAQ
National Market under the symbol HLND commencing
with our initial public offering on February 10, 2005 at an
initial public offering price of $22.50 per common unit. As of
March 5, 2009, the market price for the common units was
$7.40 per unit and there were approximately 3,700 common
unitholders, including beneficial owners of common units held in
street name, and one record holder of our subordinated units.
There is no established public trading market for our
subordinated units. We consider cash distributions to
unitholders on a quarterly basis, although there is no assurance
as to the future cash distributions since they are dependent
upon future earnings, cash flows, capital requirements,
financial condition and other factors. Our ability to distribute
available cash is contractually restricted by the terms of our
credit facility. Our credit facility contains covenants
requiring us to maintain certain financial ratios, which are
tested quarterly, and, as of December 31, 2008, we were in
compliance with each of those covenants. Our ability to remain
in compliance with these restrictions and covenants in the
future is uncertain and will be affected by the levels of cash
flow from our operations and events or circumstances beyond our
control. If commodity prices do not significantly improve above
the expected prices for 2009, we may be in violation of the
maximum consolidated funded debt to EBITDA ratio as early as
June 30, 2009, unless the ratio is amended, the senior
secured revolving credit facility is restructured or we receive
an infusion of equity capital. We are prohibited from making any
distributions to unitholders if the distribution would cause an
event of default, or an event of default exists, under our
credit facility. Please read Item 7.
Managements Discussion and Analysis of Financial Condition
and Results of Operations Liquidity and Capital
Resources Description of Indebtedness
Credit Facility.
42
The following table shows the high and low prices per common
unit, as reported by the NASDAQ National Market, for the periods
indicated. Cash distributions shown were paid within
45 days after the end of each quarter.
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Cash
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Common Unit
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Distribution
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Price Ranges
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Paid per
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High
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Low
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Unit(a)
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Year Ended December 31, 2008
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Quarter Ended December 31
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$
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36.49
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$
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3.64
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$
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0.4500
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Quarter Ended September 30
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$
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50.44
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$
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33.95
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$
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0.8800
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Quarter Ended June 30
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$
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52.00
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$
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43.11
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$
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0.8625
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Quarter Ended March 31
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$
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51.23
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$
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41.83
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$
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0.8275
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Year Ended December 31, 2007
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Quarter Ended December 31
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$
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53.00
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$
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41.60
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$
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0.7950
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Quarter Ended September 30
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$
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60.50
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$
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46.02
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$
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0.7550
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Quarter Ended June 30
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$
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61.75
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$
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52.05
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$
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0.7325
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Quarter Ended March 31
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$
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58.49
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$
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52.54
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$
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0.7125
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(a)
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For each quarter, an identical per unit cash distribution was
paid on all outstanding subordinated units.
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Cash
Distribution Policy
Within 45 days after the end of each quarter, we will
distribute all of our available cash (as defined in our
partnership agreement) to unitholders of record on the
applicable record date. The amount of available cash generally
is all cash on hand at the end of the quarter less the amount of
cash reserves established by our general partner to provide for
the proper conduct of our business, to comply with applicable
law, any of our debt instruments, or other agreements, or to
provide funds for distributions to our unitholders and to our
general partner for any one or more of the next four quarters.
Working capital borrowings are generally borrowings that are
made under the working capital portion of our credit facility
and in all cases are used solely for working capital purposes or
to pay distributions to partners.
Upon the closing of our initial public offering, affiliates of
Harold Hamm, the Hamm Trusts and an affiliate of Randy Moeder,
our past Chief Executive Officer, received an aggregate of
4,080,000 subordinated units. The subordinated units were
contributed to Hiland Holdings GP, LP, a publicly owned limited
partnership on the date of its initial public offering,
September 25, 2006. During the subordination period, the
common units will have the right to receive distributions of
available cash from operating surplus in an amount equal to the
minimum quarterly distribution of $0.45 per quarter, plus any
arrearages in the payment of the minimum quarterly distribution
on the common units from prior quarters, before any
distributions of available cash from operating surplus may be
made on the subordinated units. The purpose of the subordinated
units is to increase the likelihood that during the
subordination period there will be available cash to be
distributed on the common units. The subordination period will
extend until the first day of any quarter beginning after
March 31, 2010 that each of the following tests are met:
distributions of available cash from operating surplus on each
of the outstanding common units and subordinated units equaled
or exceeded the minimum quarterly distribution for each of the
three consecutive, non-overlapping four-quarter periods
immediately preceding that date; the adjusted operating
surplus (as defined in its partnership agreement)
generated during each of the three consecutive, non-overlapping
four-quarter periods immediately preceding that date equaled or
exceeded the sum of the minimum quarterly distributions on all
of the outstanding common units and subordinated units during
those periods on a fully diluted basis and the related
distribution on the 2% general partner interest during those
periods; and there are no arrearages in payment of the minimum
quarterly distribution on the common units. If the unitholders
remove the general partner without cause, the subordination
period may end before March 31, 2010.
In addition, if the tests for ending the subordination period
are satisfied for any three consecutive
four-quarter
periods ending on or after March 31, 2008, 25% of the
subordinated units will convert into an equal number of common
units. On May 16, 2008 these tests were met and
accordingly, 1,020,000, or 25%, of the subordinated units
43
converted into an equal number of common units. Similarly, if
the tests are also satisfied for any three consecutive
four-quarter periods ending on or after March 31, 2009, an
additional 25% of the subordinated units will convert into an
equal number of common units. The second early conversion of
subordinated units may not occur, however, until at least one
year following the end of the period for the first early
conversion of subordinated units.
We will make distributions of available cash from operating
surplus for any quarter during any subordination period in the
following manner: first, 98% to the common unitholders, pro
rata, and 2% to the general partner, until we distribute for
each outstanding common unit an amount equal to the minimum
quarterly distribution for that quarter; second, 98% to the
common unitholders, pro rata, and 2% to the general partner,
until we distribute for each outstanding common unit an amount
equal to any arrearages in payment of the minimum quarterly
distribution on the common units for any prior quarters during
the subordination period; third, 98% to the subordinated
unitholders, pro rata, and 2% to the general partner, until we
distribute for each subordinated unit an amount equal to the
minimum quarterly distribution for that quarter; and thereafter,
cash in excess of the minimum quarterly distributions is
distributed to the unitholders and the general partner based on
the percentages below.
Our general partner, Hiland Partners GP, LLC, is entitled to
incentive distributions if the amount we distribute with respect
to any quarter exceeds the specified target levels shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marginal Percentage
|
|
|
|
|
|
Interest in Distributions
|
|
|
|
Total Quarterly Distribution
|
|
|
|
|
General
|
|
|
|
Target Amount
|
|
Unitholders
|
|
|
Partner
|
|
|
Minimum Quarterly Distribution
|
|
$0.45
|
|
|
98
|
%
|
|
|
2
|
%
|
First Target Distribution
|
|
Up to $0.495
|
|
|
98
|
%
|
|
|
2
|
%
|
Second Target Distribution
|
|
Above $0.495 up to $0.5625
|
|
|
85
|
%
|
|
|
15
|
%
|
Third Target Distribution
|
|
Above $0.5625 up to $0.675
|
|
|
75
|
%
|
|
|
25
|
%
|
Thereafter
|
|
Above $0.675
|
|
|
50
|
%
|
|
|
50
|
%
|
Equity
Compensation Plan Information
The following table presents information about the unit options
contained in our long-term incentive plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
|
|
|
|
|
|
|
of Units
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
Number of
|
|
|
|
|
|
Available for
|
|
|
|
Units to be
|
|
|
|
|
|
Future Issuance
|
|
|
|
Issued
|
|
|
Weighted-
|
|
|
Under Equity
|
|
|
|
Upon
|
|
|
Average
|
|
|
Compensation
|
|
|
|
Exercise of
|
|
|
Price of
|
|
|
Plan
|
|
|
|
Outstanding
|
|
|
Outstanding
|
|
|
(Excluding Units
|
|
|
|
Options and
|
|
|
Options and
|
|
|
Reflected in
|
|
Plan Category
|
|
Rights
|
|
|
Rights
|
|
|
Column (a))
|
|
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
Equity Compensation Plans Approved By Security Holders
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Equity Compensation Plans Not Approved By Security Holders
|
|
|
33,336
|
(1)
|
|
$
|
37.92
|
(2)
|
|
|
386,375
|
|
|
|
|
(1)
|
|
Our general partner has adopted and maintains a long term
incentive plan for employees and directors of our general
partner and employees of its affiliates. The plan currently
provides for issuance of a total of 680,000 common units to be
issued with respect to unit options, restricted units and
phantom units granted under the plan. For a more complete
description of our long-term incentive plan, please read
Note 8 of the accompanying Notes to Financial Statements.
|
|
(2)
|
|
The exercise prices for outstanding options under the plan as of
December 31, 2008 range from $22.50 to $40.70 per unit.
|
Issuer
Purchases of Equity Securities
We did not repurchase any of our common units during the fourth
quarter of fiscal 2008.
44
|
|
Item 6.
|
Selected
Historical Financial and Operating Data
|
The following table sets forth selected historical financial and
operating data of Hiland Partners, LP and our predecessor,
Continental Gas, Inc. (CGI) as of and for the
periods indicated. The selected historical financial data as of,
and for the years ended December 31, 2008, 2007, 2006 and
2005 are derived from the audited financial statements of Hiland
Partners, LP. The selected historical financial data for the
year ended December 31, 2004 is derived from the audited
financial statements of CGI.
The following table includes the non-GAAP financial measures of
(1) EBITDA and (2) total segment margin, which
consists of midstream segment margin and compression segment
margin. We define EBITDA, a non-GAAP financial measure, as net
income (loss) plus interest expense, provision for income taxes
and depreciation, amortization and accretion expense. EBITDA is
used as a supplemental financial measure by our management and
by external users of our financial statements such as investors,
commercial banks, research analysts and others to assess:
(1) the financial performance of our assets without regard
to financing methods, capital structure or historical cost
basis; (2) the ability of our assets to generate cash
sufficient to pay interest costs and support our indebtedness;
(3) our operating performance and return on capital as
compared to those of other companies in the midstream energy
sector, without regard to financing or structure; and
(4) the viability of acquisitions and capital expenditure
projects and the overall rates of return on alternative
investment opportunities. EBITDA is also a financial measurement
that, with certain negotiated adjustments, is reported to our
banks and is used as a gauge for compliance with our financial
covenants under our credit facility. EBITDA should not be
considered an alternative to net income (loss), operating
income, cash flows from operating activities or any other
measure of financial performance presented in accordance with
GAAP. Our EBITDA may not be comparable to EBITDA of similarly
titled measures of other entities, as other entities may not
calculate EBITDA in the same manner as we do. We view total
segment margin, a non-GAAP financial measure, as an important
performance measure of the core profitability of our operations
because it is directly related to our volumes and commodity
price changes. We review total segment margin monthly for
consistency and trend analysis. We define midstream segment
margin as midstream revenue less midstream purchases. Midstream
revenue includes revenue from the sale of natural gas, NGLs and
NGL products resulting from our gathering, treating, processing
and fractionation activities and fixed fees associated with the
gathering of natural gas and the transportation and disposal of
saltwater. Midstream purchases include the following costs and
expenses: cost of natural gas and NGLs purchased by us from
third parties, cost of natural gas and NGLs purchased by us from
affiliates, and costs of crude oil purchased by us from third
parties. We define compression segment margin as the payments
received under our compression services agreement with CLR which
was restructured as described in Item 7.
Managements Discussion and Analysis of Financial Condition
and Results of Operations Items Impacting
Comparability of Our Financial Results Restructuring
of Compression Facilities Lease. For a reconciliation of
these non-GAAP financial measures to their most directly
comparable financial measures calculated and presented in
accordance with GAAP, please refer to the reconciliation
following the table below.
Maintenance capital expenditures represent capital expenditures
made to replace partially or fully depreciated assets to
maintain the existing operating capacity of our assets and to
extend their useful lives, or other capital expenditures that
are incurred in maintaining existing system volumes and related
cash flows. Expansion capital expenditures represent capital
expenditures made to expand or increase the efficiency of the
existing operating capacity of our assets. Expansion capital
expenditures include expenditures that facilitate an increase in
volumes within our operations, whether through construction or
acquisition. Expenditures that reduce our operating costs will
be considered expansion capital expenditures only if the
reduction in operating expenses exceeds cost reductions
typically resulting from routine maintenance. We treat costs for
repairs and minor renewals to maintain facilities in operating
condition and that do not extend the useful life of existing
assets as operations and maintenance expenses as we incur them.
45
The following table sets forth our selected historical financial
data, which has been derived from our audited historical
financial statements. The table should be read together with
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
|
|
|
Continental
|
|
|
|
Hiland Partners, LP
|
|
|
Gas, Inc.
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except per unit and operating data)
|
|
|
Summary of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
387,999
|
|
|
$
|
278,043
|
|
|
$
|
219,686
|
|
|
$
|
166,601
|
|
|
$
|
98,296
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Midstream purchases (exclusive of items shown separately below)
|
|
|
276,600
|
|
|
|
195,212
|
|
|
|
156,193
|
|
|
|
133,089
|
|
|
|
82,532
|
|
Operations and maintenance
|
|
|
30,526
|
|
|
|
23,279
|
|
|
|
16,071
|
|
|
|
7,359
|
|
|
|
4,933
|
|
Depreciation, amortization and accretion
|
|
|
37,502
|
|
|
|
29,855
|
|
|
|
22,130
|
|
|
|
11,112
|
|
|
|
4,127
|
|
Bad debt
|
|
|
304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on asset sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19
|
)
|
General and administrative
|
|
|
8,753
|
|
|
|
7,587
|
|
|
|
4,994
|
|
|
|
2,470
|
|
|
|
1,082
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
353,685
|
|
|
|
255,933
|
|
|
|
199,388
|
|
|
|
154,030
|
|
|
|
92,655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
34,314
|
|
|
|
22,110
|
|
|
|
20,298
|
|
|
|
12,571
|
|
|
|
5,641
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(13,639
|
)
|
|
|
(11,346
|
)
|
|
|
(5,532
|
)
|
|
|
(1,942
|
)
|
|
|
(702
|
)
|
Amortization of deferred loan costs
|
|
|
(574
|
)
|
|
|
(410
|
)
|
|
|
(407
|
)
|
|
|
(484
|
)
|
|
|
(102
|
)
|
Interest income and other
|
|
|
346
|
|
|
|
430
|
|
|
|
323
|
|
|
|
192
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(13,867
|
)
|
|
|
(11,326
|
)
|
|
|
(5,616
|
)
|
|
|
(2,234
|
)
|
|
|
(764
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
20,447
|
|
|
|
10,784
|
|
|
|
14,682
|
|
|
|
10,337
|
|
|
|
4,877
|
|
Discontinued operations, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
20,447
|
|
|
$
|
10,784
|
|
|
$
|
14,682
|
|
|
$
|
10,337
|
|
|
$
|
4,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less income attributable to predecessor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
493
|
|
|
|
|
|
Less general partner interest in net income
|
|
|
6,572
|
|
|
|
4,526
|
|
|
|
2,409
|
|
|
|
464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Limited partners interest in net income
|
|
$
|
13,875
|
|
|
$
|
6,258
|
|
|
$
|
12,273
|
|
|
$
|
9,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per limited partner unit basic(1)
|
|
$
|
1.49
|
|
|
$
|
0.67
|
|
|
$
|
1.37
|
|
|
$
|
1.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per limited partner unit diluted(1)
|
|
$
|
1.48
|
|
|
$
|
0.67
|
|
|
$
|
1.36
|
|
|
$
|
1.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash distributions per limited partner unit(2)
|
|
$
|
3.02
|
|
|
$
|
3.00
|
|
|
$
|
2.74
|
|
|
$
|
1.83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data (at end of period):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, at cost, net
|
|
$
|
345,855
|
|
|
$
|
319,320
|
|
|
$
|
252,801
|
|
|
$
|
120,715
|
|
|
$
|
37,075
|
|
Total assets
|
|
|
426,139
|
|
|
|
410,473
|
|
|
|
343,816
|
|
|
|
193,969
|
|
|
|
49,175
|
|
Accounts payable affiliates
|
|
|
7,662
|
|
|
|
7,880
|
|
|
|
4,412
|
|
|
|
6,122
|
|
|
|
2,998
|
|
Long-term debt, net of current maturities
|
|
|
256,466
|
|
|
|
226,104
|
|
|
|
147,064
|
|
|
|
33,784
|
|
|
|
12,643
|
|
Net equity
|
|
|
133,156
|
|
|
|
139,167
|
|
|
|
167,746
|
|
|
|
138,589
|
|
|
|
24,510
|
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
|
|
|
Continental
|
|
|
|
Hiland Partners, LP
|
|
|
Gas, Inc.
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except per unit and operating data)
|
|
|
Cash Flow Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flow provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
|
53,886
|
|
|
$
|
40,702
|
|
|
$
|
39,580
|
|
|
$
|
8,122
|
|
|
$
|
7,957
|
|
Investing activities
|
|
|
(54,342
|
)
|
|
|
(83,408
|
)
|
|
|
(158,426
|
)
|
|
|
(74,888
|
)
|
|
|
(5,290
|
)
|
Financing activities
|
|
|
(8,868
|
)
|
|
|
42,817
|
|
|
|
123,045
|
|
|
|
72,736
|
|
|
|
(2,946
|
)
|
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Midstream segment margin
|
|
$
|
106,580
|
|
|
$
|
78,012
|
|
|
$
|
58,674
|
|
|
$
|
29,295
|
|
|
$
|
15,764
|
|
Compression segment margin
|
|
|
4,819
|
|
|
|
4,819
|
|
|
|
4,819
|
|
|
|
4,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment margin
|
|
$
|
111,399
|
|
|
$
|
82,831
|
|
|
$
|
63,493
|
|
|
$
|
33,512
|
|
|
$
|
15,764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
72,162
|
|
|
$
|
52,395
|
|
|
$
|
42,751
|
|
|
$
|
23,875
|
|
|
$
|
9,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash unrealized gain on derivatives
|
|
$
|
(6,981
|
)
|
|
$
|
(373
|
)
|
|
$
|
(113
|
)
|
|
|
|
|
|
|
|
|
Non-cash unit based compensation expense
|
|
$
|
1,538
|
|
|
$
|
951
|
|
|
$
|
473
|
|
|
|
|
|
|
|
|
|
Maintenance capital expenditures
|
|
$
|
5,994
|
|
|
$
|
3,423
|
|
|
$
|
3,434
|
|
|
$
|
2,225
|
|
|
$
|
1,693
|
|
Expansion capital expenditures
|
|
|
52,275
|
|
|
|
87,530
|
|
|
|
155,103
|
|
|
|
72,723
|
|
|
|
3,474
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital expenditures
|
|
$
|
58,269
|
|
|
$
|
90,953
|
|
|
$
|
158,537
|
|
|
$
|
74,948
|
|
|
$
|
5,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inlet natural gas (Mcf/d)
|
|
|
252,670
|
|
|
|
215,551
|
|
|
|
157,556
|
|
|
|
57,545
|
|
|
|
50,283
|
|
Natural gas sales (MMBtu/d)
|
|
|
90,910
|
|
|
|
80,731
|
|
|
|
66,947
|
|
|
|
47,096
|
|
|
|
40,560
|
|
NGL sales (Bbls/d)
|
|
|
5,920
|
|
|
|
4,696
|
|
|
|
3,347
|
|
|
|
1,965
|
|
|
|
1,133
|
|
|
|
|
(1)
|
|
Net income per unit is not applicable for periods prior to our
initial public offering.
|
|
(2)
|
|
Includes our cash distributions of $0.45 per unit paid on
February 13, 2009 for 2008, $0.795 per unit paid on
February 14, 2008 for 2007, $0.7125 per unit paid on
February 14, 2007 for 2006 and $0.625 per unit paid on
February 14, 2006 for 2005.
|
47
Reconciliation
of Non-GAAP Financial Measures
The following table presents a reconciliation of the non-GAAP
financial measures of (1) EBITDA to the GAAP financial
measure of net income and (2) total segment margin (which
consists of the sum of midstream segment margin and compression
segment margin) to operating income, in each case, on a
historical basis for each of the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
|
|
|
Continental
|
|
|
|
Hiland Partners, LP
|
|
|
Gas, Inc.
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Reconciliation of EBITDA to Net Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
20,447
|
|
|
$
|
10,784
|
|
|
$
|
14,682
|
|
|
$
|
10,337
|
|
|
$
|
4,912
|
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, amortization and accretion
|
|
|
37,502
|
|
|
|
29,855
|
|
|
|
22,130
|
|
|
|
11,112
|
|
|
|
4,127
|
|
Amortization of deferred loan costs
|
|
|
574
|
|
|
|
410
|
|
|
|
407
|
|
|
|
484
|
|
|
|
102
|
|
Interest expense
|
|
|
13,639
|
|
|
|
11,346
|
|
|
|
5,532
|
|
|
|
1,942
|
|
|
|
702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
72,162
|
|
|
$
|
52,395
|
|
|
$
|
42,751
|
|
|
$
|
23,875
|
|
|
$
|
9,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of Total Segment Margin to Operating Income
(Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$
|
34,314
|
|
|
$
|
22,110
|
|
|
$
|
20,298
|
|
|
$
|
12,571
|
|
|
$
|
5,641
|
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations and maintenance expenses
|
|
|
30,526
|
|
|
|
23,279
|
|
|
|
16,071
|
|
|
|
7,359
|
|
|
|
4,933
|
|
Depreciation, amortization and accretion
|
|
|
37,502
|
|
|
|
29,855
|
|
|
|
22,130
|
|
|
|
11,112
|
|
|
|
4,127
|
|
Bad debt
|
|
|
304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on asset sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19
|
)
|
General and administrative expenses
|
|
|
8,753
|
|
|
|
7,587
|
|
|
|
4,994
|
|
|
|
2,470
|
|
|
|
1,082
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment margin
|
|
$
|
111,399
|
|
|
$
|
82,831
|
|
|
$
|
63,493
|
|
|
$
|
33,512
|
|
|
$
|
15,764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
You should read the following discussion in conjunction with our
Consolidated Financial Statements and notes thereto included
elsewhere in this report.
Overview
We are a Delaware limited partnership formed in October 2004 to
own and operate the assets that had historically been owned and
operated by CGI and Hiland Partners, LLC.
CGI historically owned all of our natural gas gathering,
processing, treating and fractionation assets other than our
Worland and Bakken gathering systems, the Kinta Area gathering
systems we acquired on May 1, 2006 and our internally
constructed Woodford Shale gathering system, which commenced
operations in April 2007. Hiland Partners, LLC historically
owned our Worland gathering system, our compression services
assets and the Bakken gathering system. CGI is our predecessor
for accounting purposes. As a result, our historical financial
statements for periods prior to February 15, 2005, the date
of our initial public offering, are the financial statements of
CGI.
In connection with our initial public offering, the former
owners of CGI and Hiland Partners, LLC and certain of our
affiliates, including our general partner, contributed to us all
of the assets and operations of CGI, other than a portion of its
working capital assets, and substantially all of the assets and
operations of Hiland Partners, LLC, other than a portion of its
working capital assets and the assets related to the Bakken
48
gathering system, in exchange for an aggregate of 720,000 common
units and 4,080,000 subordinated units, a 2% general partner
interest in us and all of our incentive distribution rights,
which entitle the general partner to increasing percentages of
the cash we distribute in excess of $0.495 per unit per quarter.
We completed our initial public offering of 2,300,000 common
units on February 15, 2005, receiving net proceeds of
$48.1 million. The proceeds from the public offering were
used to (1) pay remaining offering costs of
$2.2 million and deferred debt issuance costs of
$0.6 million, (2) pay outstanding indebtedness of
$22.9 million, (3) redeem $6.3 million of common
units from an affiliate of Harold Hamm and the Hamm Trusts, and
(4) make a $3.9 million distribution to the previous
owners of Hiland Partners, LLC. We retained $12.2 million
of the net proceeds to replenish working capital.
Effective September 1, 2005, we consummated the Bakken
acquisition pursuant to which we acquired the outstanding
membership interests in Hiland Partners, LLC, an Oklahoma
limited liability company, for approximately $92.7 million
in cash, $35.0 million of which was used to retire
outstanding Hiland Partners, LLC indebtedness. Hiland Partners,
LLCs principal asset is the Bakken gathering system
located in eastern Montana.
We completed a follow-on offering of 1,630,000 common units on
November 21, 2005, receiving net proceeds of
$66.1 million, including our general partners
contribution of $1.4 million. We used $65.2 million of
the proceeds from the public offering to repay a portion of our
credit facility borrowings that we had previously used to fund
the Bakken acquisition.
On May 1, 2006, we 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. We
financed this acquisition with $61.2 million of borrowings
from our credit facility and $35.0 million of proceeds from
the issuance of 761,714 common units at $45.03 per unit to
Hiland Partners GP, LLC, our general partner, and from its 2%
general partner contribution.
On September 25, 2006, certain affiliated unitholders
contributed (i) all of the membership interests in our
general partner, which owns the 2% general partner interest and
all of the incentive distribution rights in us and
(ii) 1,301,471 common units (including 761,714 common units
held by our general partner) and 4,080,000 subordinated units in
us to Hiland Holdings GP, LP, a publicly owned limited
partnership (NASDAQ: HPGP), in exchange for 13,550,000 limited
partner units of Hiland Holdings GP, LP, representing a 62.7%
ownership in Hiland Holdings GP, LP. Hiland Partners GP
Holdings, LLC, a Delaware limited liability company formed on
May 10, 2006, is the general partner of Hiland Holdings GP,
LP.
We are engaged in purchasing, gathering, compressing,
dehydrating, treating, processing and marketing of natural gas
and fractionating and marketing of NGLs and providing air
compression and water injection services for oil and gas
secondary recovery operations. Our operations are primarily
located in the Mid-Continent and Rocky Mountain regions of the
United States.
We manage our business and analyze and report our results of
operations on a segment basis. Our operations are divided into
two business segments:
|
|
|
|
|
Midstream Segment
, which is engaged in purchasing,
gathering, compressing, dehydrating, treating, processing and
marketing of natural gas and the fractionation and marketing of
NGLs. Our operations are primarily located in the Mid-Continent
and Rocky Mountain regions of the United States. The midstream
segment generated 95.7%, 94.2% and 92.4% of our total segment
margin for the years ended December 31, 2008, 2007 and
2006, respectively.
|
|
|
|
Compression Segment
, which is engaged in providing air
compression and water injection services for oil and gas
secondary recovery operations that are ongoing in North Dakota.
The compression segment generated 4.3%, 5.8% and 7.6% of our
total segment margin for the years ended December 31, 2008,
2007 and 2006, respectively.
|
Our midstream assets consist of 14 natural gas gathering systems
with approximately 2,111 miles of gas gathering pipelines,
five natural gas processing plants, seven natural gas treating
facilities and three NGL
49
fractionation facilities. Our compression assets consist of two
air compression facilities and a water injection plant.
Our results of operations are determined primarily by five
interrelated variables: (1) the volume of natural gas
gathered through our pipelines; (2) the volume of natural
gas processed; (3) the volume of NGLs fractionated;
(4) the level and relationship of natural gas and NGL
prices; and (5) our current contract portfolio. Because our
profitability is a function of the difference between the
revenues we receive from our operations, including revenues from
the products we sell, and the costs associated with conducting
our operations, including the costs of products we purchase,
increases or decreases in our revenues alone are not necessarily
indicative of increases or decreases in our profitability. To a
large extent, our contract portfolio and the pricing environment
for natural gas and NGLs will dictate increases or decreases in
our profitability. Our profitability is also dependent upon
prices and market demand for natural gas and NGLs, which
fluctuate with changes in market and economic condition and
other factors.
How We
Evaluate Our Operations
Our management uses a variety of financial and operational
measurements to analyze our segment performance. These
measurements include the following: (1) natural gas and NGL
sales volumes, throughput volumes and fuel consumption by our
facilities; (2) total segment margin; (3) operations
and maintenance expenses; (4) general and administrative
expenses; and (5) EBITDA.
Volumes and Fuel Consumption.
Natural gas and
NGL sales volumes, throughput volumes and fuel consumption
associated with our business are an important part of our
operational analysis. We continually monitor volumes on our
pipelines to ensure that we have adequate throughput to meet our
financial objectives. It is important that we continually add
new volumes to our gathering systems to offset or exceed the
normal decline of existing volumes that are connected to those
systems. The performance at our compressing, processing,
fractionation and treating facilities is significantly
influenced by the volumes of natural gas that flow through our
systems. In addition, we monitor fuel consumption because it has
an impact on the total segment margin realized from our
midstream operations and our compression services operations.
Total Segment Margin.
We view total segment
margin as an important performance measure of the core
profitability of our operations because it is directly related
to our volumes and commodity price changes. We review total
segment margin monthly for consistency and trend analysis.
With respect to our midstream segment, we define midstream
segment margin as our midstream revenue minus midstream
purchases. Midstream revenue includes revenue from the sale of
natural gas, NGLs and NGL products resulting from our gathering,
treating, processing and fractionation activities and fixed fees
associated with the gathering of natural gas and the
transportation and disposal of saltwater. Midstream purchases
include the cost of natural gas, condensate and NGLs purchased
by us from third parties, the cost of natural gas, condensate
and NGLs purchased by us from affiliates, and the costs of crude
oil purchased by us from third parties. Our midstream segment
margin is impacted by our midstream contract portfolio, which is
described in more detail below.
With respect to our compression segment, following the
restructuring of our lease arrangement to become a service
arrangement in connection with our initial public offering as
described in Items Impacting
Comparability of Our Financial Results, our compression
segment margin equals the fee we earn under our Compression
Services Agreement with CLR for providing air compression and
water injection services. The fee that we earn under this
agreement is fixed so long as our facilities meet specified
availability requirements, regardless of CLRs utilization.
As a result, our compression segment margin is dependent on our
ability to meet their utilization levels. For a discussion of
this agreement, please read Our
Contracts Compression Services Agreement.
Total segment margin is a Non-GAAP performance measure. For a
reconciliation of Total Segment Margin to the most comparable
GAAP financial measure, please see Item 6. Selected
Historical Financial and Operating Data.
50
Operations and Maintenance
Expenses.
Operations and maintenance expenses are
costs associated with the operation of a specific asset. Direct
labor, insurance, ad valorem taxes, repair and maintenance,
utilities and contract services comprise the most significant
portion of our operations and maintenance expenses. These
expenses remain relatively stable independent of the volumes
through our systems but fluctuate slightly depending on the
activities performed during a specific period.
General and Administrative Expenses.
Our
general and administrative expenses include the cost of employee
and officer compensation and related benefits, office lease and
expenses, professional fees, information technology expenses, as
well as other expenses not directly associated with our field
operations.
EBITDA.
We define EBITDA, a non-GAAP financial
measure, as net income (loss) plus interest expense, provision
for income taxes and depreciation, amortization and accretion
expense. EBITDA is used as a supplemental financial measure by
our management and by external users of our financial statements
such as investors, commercial banks, research analysts and
others, to assess:
|
|
|
|
|
the financial performance of our assets without regard to
financing methods, capital structure or historical cost basis;
|
|
|
|
the ability of our assets to generate cash sufficient to pay
interest costs and support our indebtedness;
|
|
|
|
our operating performance and return on capital as compared to
those of other companies in the midstream energy sector, without
regard to financing or capital structure; and
|
|
|
|
the viability of acquisitions and capital expenditure projects
and the overall rates of return on alternative investment
opportunities.
|
EBITDA is also a financial measurement that, with certain
negotiated adjustments, is reported to our lenders and is used
as a gauge for compliance with some of our financial covenants
under our credit facility. EBITDA should not be considered an
alternative to net income, operating income, cash flows from
operating activities or any other measure of financial
performance presented in accordance with GAAP. Our EBITDA may
not be comparable to EBITDA of similarly titled measures of
other entities as other entities may not calculate EBITDA in the
same manner as we do. For a reconciliation of EBITDA to the most
comparable GAAP financial measure, please see Item 6.
Selected Historical Financial and Operating Data.
How We
Manage Our Operations
Our management team uses a variety of tools to manage our
business. These tools include: (1) flow and transaction
monitoring systems; (2) producer activity evaluation and
reporting; and (3) imbalance monitoring and control.
Flow and transaction monitoring systems.
We
utilize a customized system that tracks commercial activity on a
daily basis at each of our gathering systems, processing plants
and treating and fractionation facilities. We track and monitor
inlet volumes to our facilities, fuel consumption, NGLs and NGL
products extracted, condensate volumes and residue sales
volumes. We also monitor daily operational throughput at our air
compression and water injection facilities.
Producer activity evaluation and
reporting.
The continued connection of natural
gas production to our gathering systems is critical to our
business and directly impacts our financial performance. We
monitor the producer drilling and completion activity in our
primary areas of operation to identify anticipated changes in
production and potential new well attachment opportunities. We
receive daily summaries of new drilling permits and completion
reports filed with the state regulatory agencies that govern
these activities on all of our gathering systems. Producers that
have dedicated acreage to our Bakken gathering system provide us
with their projected annual drilling schedules, which are
updated periodically. Additionally, our field personnel report
the locations of new wells in their respective areas and
anticipated changes in production volumes to supply
representatives and operating personnel at our corporate
offices. These processes enhance our awareness of new well
activity in our operating areas and allow us to be responsive to
producers in connecting new volumes of natural gas to our
pipelines.
51
Imbalance monitoring and control.
We
continually monitor volumes we deliver to pipelines and volumes
nominated for sale on pipelines to ensure we remain within
acceptable imbalance limits during a calendar month. We seek to
reduce imbalances because of the inherent commodity risk that
results when deliveries and sales of natural gas are not
balanced concurrently.
Our
Contracts
Because of the significant volatility of natural gas and NGL
prices, our contract mix can have a significant impact on our
profitability. In order to reduce our exposure to commodity
price risk and where market conditions permit, we pursue
arrangements under which we purchase natural gas from the
producers at the wellhead at an index-based price less a fixed
fee to gather, dehydrate, compress, treat
and/or
process their natural gas, referred to as fee-based arrangements
or contracts. Actual contract terms are based upon a variety of
factors, including natural gas quality, geographical location,
the competitive environment at the time the contract is executed
and customer requirements. Our contract mix and, accordingly,
our exposure to natural gas and NGL prices, may change as a
result of producer preferences, our expansion in regions where
some types of contracts are more common and other market factors.
Our
Natural Gas Sales Contracts
We sell natural gas on intrastate and interstate pipelines to
marketing affiliates of natural gas pipelines, marketing
affiliates of integrated oil companies and utilities. We
typically sell natural gas on a monthly basis under index
related pricing terms.
We also use cash flow hedges to limit our exposure to changing
natural gas prices. Under these hedges, we settle monthly on the
difference between the sales or purchases of future production
to or from our counterparty at fixed prices and the price that
will be established on the date of hedge settlement by reference
to a specified index price. These hedge contracts currently
cover periods of up to twenty-four months from the date of the
hedge.
Our
NGL Sales Arrangements
We sell NGLs and NGL products at the tailgate of our facilities
to ONEOK Hydrocarbon, LP, SemStream, L.P., and KM Upstream LLC
and Kinder Morgan Operating, L.P. A, subsidiaries of
Kinder Morgan Energy Partners, LP. We typically sell NGLs and
NGL products on a monthly basis under index related pricing
terms in our Mid-Continent region and at market prices in our
Rocky Mountain region. We also use cash flow hedges to limit our
exposure to changing NGL prices. Under these hedges we settle
monthly on the difference between the sales of future production
to our counterparty at a fixed price and the price that will be
established on the date of hedge settlement by reference to a
specified index price. In the past, these hedges have covered
periods of up to twelve months from the date of the hedge. As of
January 1, 2009, we had no NGL hedging contracts
outstanding.
Hedging
Contracts
To insure that our hedging financial instruments will be used
solely for hedging commodity price risks and not for speculative
purposes, we continually review our hedges for compliance with
our hedging policies and procedures. We recognize gains and
losses from the settlement of our hedges in revenue when we
either sell or buy the associated physical residue natural gas
or sell the associated physical natural gas liquid. Any gain or
loss realized as a result of hedging is substantially offset in
the market when we either sell or buy the physical residue
natural gas or sell the physical natural gas liquid. Our hedges
that qualify for hedge accounting are characterized as cash flow
hedges as defined in Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and
Hedging Activities, as amended. We determine gains or
losses on open and closed hedging transactions based upon the
difference between the hedge price and the physical price. For a
more detailed discussion on our hedging activity, please read
commodity price risks included in Item 7A.
Quantitative and Qualitative Disclosures about Market
Risk.
52
Our
Natural Gas Purchase and Gathering Contracts
With respect to our natural gas gathering, compression,
dehydrating, treating, processing and marketing activities and
our NGL fractionation activities, we contract under four types
of arrangements. Under all contracts except the fixed-fee
gathering arrangement, we are required to purchase the supplied
gas, subject to the demands of our resale purchasers and the
operating conditions and capacity of our facilities. We do not
guarantee the purchase of any particular quantity of the gas
which is available for sale. The supplier delivers the gas to us
at the inlet of our gathering systems and we obtain title to the
gas at the delivery point. The gas delivered to us is required
to meet certain specified quality requirements. Under the
fixed-fee gathering arrangement, we take custody of, but do not
purchase or take title to, the gas supplied to us.
The following is a summary of the four types of natural gas
purchase or gathering contract arrangements that accounted for
the largest percentage of volumes purchased for the years ended
December 31, 2008, 2007, and 2006.
|
|
|
|
|
Percentage-of-proceeds
arrangements.
Under
percentage-of-proceeds
contracts, we generally purchase natural gas from producers at
the wellhead, gather, treat, and process the natural gas, in
some cases fractionate the NGLs into NGL products, and then sell
the resulting residue gas and NGLs or NGL products at index
related prices. We remit to the producers an agreed upon
percentage of the proceeds for the natural gas and the NGLs.
Under these types of contracts, our revenues and total segment
margin correlate directly with the price of natural gas and
NGLs. For the years ended December 31, 2008, 2007, and 2006
we purchased 51%, 56% and 52% of our total purchased volumes
under these types of fee contracts, respectively.
|
|
|
|
Percentage-of-index
arrangements.
Under
percentage-of-index
contracts, we purchase natural gas from the producers at the
wellhead at a price that is at a fixed percentage of the
expected index-related price for the resale of the natural gas
they produce. We then gather, treat and process the natural gas,
in some cases fractionate the NGLs into NGL products and then
sell the residue gas and NGLs or NGL products pursuant to
natural gas or NGL contracts described above. Because under
these types of contracts our costs to purchase the natural gas
from the producer is based on the price of natural gas, our
total segment margin under these contracts increases as the
realized price of NGLs increases relative to the expected
index-related price of natural gas, and our total segment margin
under these contracts decreases as the expected index-related
price of natural gas increases relative to the realized price of
NGLs (keep-whole exposure). For the years ended
December 31, 2008, 2007 and 2006 we purchased 8%, 12% and
17% of our total purchased volumes under these types of fee
contracts, respectively.
|
|
|
|
Index-minus-fees arrangements.
Under
index-minus-fees contracts, we purchase natural gas from the
producers at the wellhead at an expected index related price
less fees to gather, dehydrate, compress, treat
and/or
process their natural gas. These types of contracts typically
require us to pay the producer for the value of the wellhead gas
less the applicable fees. Because under these types of contracts
our costs to purchase the natural gas from the producer is based
on the expected index-related price of natural gas, our total
segment margin under these contracts increases as the realized
price of NGLs increases relative to the expected index-related
price of natural gas, and our total segment margin under these
contracts decreases as the expected index-related price of
natural gas increases relative to the realized price of NGLs
(keep-whole exposure). For the years ended December 31,
2008, 2007, and 2006, we purchased 41%, 32% and 31% of our total
purchased volumes under these types of fee contracts,
respectively.
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|
|
|
Fixed-fee gathering arrangements.
Under
fixed-fee gathering contracts, we gather, dehydrate, compress
and treat natural gas supplied to our gathering systems and
redeliver the compressed natural gas for a fixed fee. Under
these contracts, we take custody of, but do not take title to,
the natural gas. We gathered an average of 133,755 MMBtu/d
for 2008, 123,008 MMBtu/d for 2007 and from the period
May 1, 2006, the date we acquired the Kinta Area gas
gathering assets, through December 31, 2006, we gathered an
average of 134,140 MMBtu/d.
|
53
Compression
Services Agreement
Under the compression services agreement that we entered into
with CLR in connection with our initial public offering and
effective as of January 28, 2005, CLR pays us a fixed
monthly fee to provide compressed air and water at pressures
sufficient to allow for the injection of either air or water
into underground reservoirs for oil and gas secondary recovery
operations. Under the compression services agreement, CLR is
responsible for the provision to us of power and water to be
utilized in the compression process. If our facilities do not
meet the monthly volume requirements for compressed air and
water, and the failure is not attributable to CLRs failure
to supply power or water or a force majeure, the fixed monthly
payment will be reduced in proportion to the volumes of air or
water we were unable to deliver during such month. CLR may
terminate the compression services agreement if we are unable to
deliver any compressed air and water for a period of more than
20 consecutive days and the failure is not attributable to
CLRs failure to supply power or water or a force majeure.
The agreements initial term ended on January 28, 2009
and the agreement now automatically renews on a
month-to-month
basis unless terminated by either party by giving notice at
least 15 days prior to the end of the then current month.
Items Impacting
Comparability of Our Financial Results
Our historical results of operations for the periods presented
may not be comparable, either from period to period or going
forward, for the reasons described below.
Our
Formation
We were formed in October 2004 to own and operate the assets
that have historically been owned and operated by CGI and Hiland
Partners, LLC. As part of our formation, immediately prior to
consummation of our initial public offering, the former owners
of CGI and Hiland Partners, LLC contributed to us all of the
assets and operations of CGI other than a portion of its working
capital assets and all of the assets and operations of Hiland
Partners, LLC, other than a portion of its working capital
assets and the assets related to the Bakken gathering system.
Effective September 1, 2005, we acquired Hiland Partners,
LLC, which owns the Bakken gathering system.
CGI is our predecessor for accounting purposes and historically
owned all of our natural gas gathering, processing and
fractionation assets other than the Worland and Bakken gathering
systems, the Kinta Area gathering systems we acquired on
May 1, 2006 and our internally constructed Woodford Shale
gathering system, which commenced operations in April 2007. As a
result, our historical financial statements for the periods
prior to February 15, 2005 are the financial statements of
CGI.
Hiland Partners, LLC historically owned our Worland gathering
system, our Horse Creek compression facility, our Cedar Hills
water injection plant located next to our Cedar Hills
compression facility and the Bakken gathering system.
Restructuring
of Compression Facilities Lease
Prior to our initial public offering, Hiland Partners, LLC owned
our Horse Creek air compression facility and our Cedar Hills
water injection facility. In 2002, Hiland Partners, LLC entered
into a five year lease agreement with CLR, pursuant to which
Hiland Partners, LLC leased the facilities to CLR. CLR used its
own personnel to operate the facilities, and Hiland Partners,
LLC made no operational decisions. In connection with our
formation and our initial public offering, we entered into a
four-year services agreement with CLR, effective as of
January 28, 2005, that replaced the existing lease. The
four year services agreement terminated on January 28,
2009. We are currently operating on a
month-to-month
basis and the agreement can be terminated by either party by
giving notice at least 15 days prior to the end of the then
current month. Under the services agreement, we own and operate
the facilities and provide air compression and water injection
services to CLR for a fee. As part of the restructuring in
January 2005, the personnel at CLR that operated the facilities
were transferred to us. Under the current services agreement, we
receive a fixed payment of approximately $4.8 million per
year as compared to $3.8 million per year under the prior
lease agreement. In connection with this services arrangement,
we incur approximately $1.0 million per year in additional
operating costs. For a description of the restructured
agreement, please read Our
Contracts Compression Services Agreement.
54
Construction
and Acquisition Activities
Since our inception, we have grown through a combination of
building gas gathering and processing assets and acquisitions.
For example, we commenced operation of the Matli gathering
system in 1999, constructed the original Matli processing plant
in 2003 and completed the construction of a new processing plant
in 2006. Additionally, we acquired the Worland gathering system
in 2000. We acquired the Carmen gathering system in 2003 as an
expansion of our Eagle Chief gathering system. Prior to our
acquisition of the Carmen gathering system, we purchased the gas
from the previous owner, processed it and returned it to the
previous owner pursuant to a keep-whole arrangement. After we
acquired the Carmen gathering system, we terminated this
keep-whole arrangement and now sell the gas at the tailgate of
the Eagle Chief processing plant. In addition, we completed the
Bakken acquisition in September 2005 and the acquisition of the
Kinta Area gathering assets in May 2006. These historical
acquisitions were completed at different dates and with numerous
sellers and were accounted for using the purchase method of
accounting. Under the purchase method of accounting, results
from such acquisitions are recorded in the financial statements
only from the date of acquisition.
We acquired the Kinta Area gathering assets in May 2006 and
operate the gathering assets substantially differently than were
operated by the previous owner. Since there was no sufficient
continuity of the Kinta Area gathering assets operations
prior to and after our acquisition, disclosure of prior
financial information would not be material to an understanding
of future operations. Therefore, the acquisition has been
recorded as a purchase of assets and not of a business.
We expanded our processing plant and our existing
field-gathering infrastructure and constructed a
40,000 Mcf/d nitrogen rejection plant at our Badlands gas
gathering system located in Bowman County, North Dakota. We also
entered into a five-year definitive purchase agreement with a
producer and have constructed additional compression facilities
and expanded our existing Badlands gas gathering system into
South Dakota.
We installed additional gathering and compression infrastructure
at our Bakken gathering system in 2006 to increase the
systems capacity from approximately 20,000 Mcf/d to
25,000 Mcf/d and in 2007, we expanded the existing NGL
fractionation facilities at the processing plant to fractionate
increased NGL volumes from both the Bakken processing plant and
the Badlands processing plant.
In 2006, we completed the installation of additional pipelines
and compression facilities and increased our system capacity at
our Eagle Chief gathering system from approximately
30,000 Mcf/d to approximately 35,500 Mcf/d due to
increased volumes on this system and completed the construction
of a 25,000 Mcf/d natural gas processing facility along our
existing Matli gas gathering system which now provides
additional plant processing capacity for increased system
volumes.
In 2007, we installed four 10,000 Mcf/d capacity
amine-treating facilities at several of our Kinta Area gathering
system locations to remove excess carbon dioxide levels from the
natural gas. In the third quarter of 2008, we completed the
installation of additional compression facilities on the Kinta
Area gathering system to increase the capacity by approximately
20,000 Mcf/d to 200,000 Mcf/d.
In December 2006, we entered into an agreement to construct and
operate gathering pipelines and related facilities associated
with the development of a portion of the acreage owned by CLR in
the Woodford shale play in the Arkoma Basin of southeastern
Oklahoma. We have installed field gathering, compression and
associated equipment designed to provide low-pressure gathering,
compression and dehydration services. The gathering
infrastructure currently includes more than 17,400 horsepower of
compression to provide takeaway capacity of approximately
65,000 Mcf/d.
Construction of a processing plant and gathering pipeline at our
North Dakota Bakken system located in the Bakken Shale play in
northwestern North Dakota commenced in October 2008. As of
December 31, 2008, the gathering system consisted of
23 miles of natural gas gathering pipelines.
55
Our
Results of Operations
The following table presents a reconciliation of the non-GAAP
financial measure of total segment margin (which consists of the
sum of midstream segment margin and compression segment margin)
to operating income on a historical basis for each of the
periods indicated. We view total segment margin, a non-GAAP
financial measure, as an important performance measure of the
core profitability of our operations because it is directly
related to our volumes and commodity price changes. We review
total segment margin monthly for consistency and trend analysis.
We define midstream segment margin as midstream revenue less
midstream purchases. Midstream revenue includes revenue from the
sale of natural gas, NGLs and NGL products resulting from our
gathering, treating, processing and fractionation activities and
fixed fees associated with the gathering of natural gas and the
transportation and disposal of saltwater. Midstream purchases
include the following costs and expenses: cost of natural gas,
condensate and NGLs purchased by us from third parties, cost of
natural gas, condensate and NGLs purchased by us from
affiliates, and cost of crude oil purchased by us from third
parties. We define compression segment margin as the revenue
derived from our compression segment. Our total segment margin
may not be comparable to similarly titled measures of other
companies as other companies may not calculate total segment
margin in the same manner.
Set forth in the tables below are financial and operating data
for the periods indicated. Operations from our acquisition of
the Kinta Area gathering assets are reflected only from
May 1, 2006.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Total Segment Margin Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Midstream revenues
|
|
$
|
383,180
|
|
|
$
|
273,224
|
|
|
$
|
214,867
|
|
Midstream purchases
|
|
|
276,600
|
|
|
|
195,212
|
|
|
|
156,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Midstream segment margin
|
|
|
106,580
|
|
|
|
78,012
|
|
|
|
58,674
|
|
Compression revenues(1)
|
|
|
4,819
|
|
|
|
4,819
|
|
|
|
4,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment margin(2)
|
|
$
|
111,399
|
|
|
$
|
82,831
|
|
|
$
|
63,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Summary of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Midstream revenues
|
|
$
|
383,180
|
|
|
$
|
273,224
|
|
|
$
|
214,867
|
|
Compression revenues
|
|
|
4,819
|
|
|
|
4,819
|
|
|
|
4,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
387,999
|
|
|
|
278,043
|
|
|
|
219,686
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Midstream purchases (exclusive of items shown separately below)
|
|
|
276,600
|
|
|
|
195,212
|
|
|
|
156,193
|
|
Operations and maintenance
|
|
|
30,526
|
|
|
|
23,279
|
|
|
|
16,071
|
|
Depreciation, amortization and accretion
|
|
|
37,502
|
|
|
|
29,855
|
|
|
|
22,130
|
|
Bad debt
|
|
|
304
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
8,753
|
|
|
|
7,587
|
|
|
|
4,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
353,685
|
|
|
|
255,933
|
|
|
|
199,388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
34,314
|
|
|
|
22,110
|
|
|
|
20,298
|
|
Other income (expense)
|
|
|
(13,867
|
)
|
|
|
(11,326
|
)
|
|
|
(5,616
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
20,447
|
|
|
$
|
10,784
|
|
|
$
|
14,682
|
|
Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Inlet natural gas (Mcf/d)
|
|
|
252,670
|
|
|
|
215,551
|
|
|
|
157,556
|
|
Natural gas sales (MMBtu/d)
|
|
|
90,910
|
|
|
|
80,731
|
|
|
|
66,947
|
|
NGL sales (Bbls/d)
|
|
|
5,920
|
|
|
|
4,696
|
|
|
|
3,347
|
|
|
|
|
(1)
|
|
Compression revenues and compression segment margin are the
same. There are no compression purchases associated with the
compression segment.
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56
|
|
|
(2)
|
|
Reconciliation of total segment margin to operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Reconciliation of Total Segment Margin to Operating Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
34,314
|
|
|
$
|
22,110
|
|
|
$
|
20,298
|
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations and maintenance expenses
|
|
|
30,526
|
|
|
|
23,279
|
|
|
|
16,071
|
|
Depreciation, amortization and accretion
|
|
|
37,502
|
|
|
|
29,855
|
|
|
|
22,130
|
|
Bad debt
|
|
|
304
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
8,753
|
|
|
|
7,587
|
|
|
|
4,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment margin
|
|
$
|
111,399
|
|
|
$
|
82,831
|
|
|
$
|
63,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31, 2008 Compared with Year Ended
December 31, 2007
Revenues.
Total revenues (midstream and
compression) were $388.0 million for the year ended
December 31, 2008 compared to $278.0 million for the
year ended December 31, 2007, an increase of
$110.0 million, or 39.6%. This $110.0 million increase
was primarily due to: (i) increased natural gas sales
volumes of 13,852 MMBtu/day (MMBtu per day) and increased
NGL sales volumes of 771 Bbls/day (Bbls per day) related to
the Woodford Shale gathering system which commenced operation in
April 2007, (ii) increased NGL sales volumes of
502 Bbls/day attributable to the expanded Badlands
gathering system, including the processing and nitrogen
rejection plants and other treating facilities, which commenced
operation in August 2007 and (iii) significantly higher
average realized natural gas and NGL sales prices for the year
ended December 31, 2008 as compared to the year ended
December 31, 2007, resulting in increased revenue at all of
our gathering systems. Revenues from compression assets were the
same for both periods.
Midstream revenues were $383.2 million for the year ended
December 31, 2008 compared to $273.2 million for the
year ended December 31, 2007, an increase of
$110.0 million, or 40.2%. Of this $110.0 million
increase in midstream revenues, approximately $48.5 million
was attributable to revenues from increased natural gas and NGL
sales volumes at the Woodford Shale, Badlands, Bakken and Matli
gathering systems and approximately $61.5 million was
attributable to significantly higher average realized natural
gas and NGL sales prices for the year ended December 31,
2008 as compared to the same period in 2007, resulting in
increased revenues for all of our gathering systems.
Inlet natural gas was 252,670 Mcf/d (Mcf per day) for the
year ended December 31, 2008 compared to 215,551 Mcf/d
for the year ended December 31, 2007, an increase of
37,119 Mcf/d, or 17.2%. This increase is primarily
attributable to volume growth at our Woodford Shale and Badlands
gathering systems, offset by volume declines at our Eagle Chief
gathering system.
Natural gas sales volumes were 90,910 MMBtu/d for the year
ended December 31, 2008 compared to 80,731 MMBtu/d for
the year ended December 31, 2007, an increase of
10,179 MMBtu/d, or 12.6%. This 10,179 MMBtu/d net
increase in natural gas sales volumes was attributable to
increased natural gas sales volumes at our Woodford Shale, Matli
and Bakken gathering systems, offset by reduced natural gas
sales volumes at our Eagle Chief and Kinta gathering systems.
NGL sales volumes were 5,920 Bbls/d for the year ended
December 31, 2008 compared to 4,696 Bbls/d for the
year ended December 31, 2007, a net increase of
1,224 Bbls/d, or 26.1%. This net increase is primarily
attributable to volume growth at our Woodford Shale and Badlands
gathering systems, offset by reduced NGL sales volumes at our
Bakken and Eagle Chief gathering systems.
During 2008, we experienced extreme swings in our average
realized natural gas and NGL sales prices. Our average realized
natural gas sales price steadily increased from $6.44/MMBtu in
January 2008 to a high sales price of $10.05/MMBtu in July 2008,
then sharply decreased to a low sales price of $3.38/MMBtu in
November 2008. Our average realized NGL sales price steadily
increased from $1.42 per gallon in January
57
2008 to a high sales price of $1.74 per gallon in June 2008,
then sharply decreased to a low sales price of $0.61 per gallon
in December 2008. Consequently, for the year ended
December 31, 2008, average realized natural gas sales
prices were $7.00 per MMBtu compared to $5.75 per MMBtu for the
year ended December 31, 2007, an increase of $1.25 per
MMBtu, or 21.7%. Average realized NGL sales prices for the year
ended December 31, 2008 were $1.33 per gallon compared to
$1.18 per gallon for the year ended December 31, 2007, an
increase of $0.15 per gallon or 12.7%. The overall increase in
our average realized natural gas and NGL sales prices was a
result of higher index prices for natural gas and posted prices
for NGLs during the year ended December 31, 2008 compared
to the year ended December 31, 2007.
Cash received from our counterparty on cash flow swap contracts
for natural gas derivative transactions that closed during the
year ended December 31, 2008 totaled $2.8 million
compared to $4.8 million for the year ended
December 31, 2007. The $2.8 million gain for the year
ended December 31, 2008 increased averaged realized natural
gas prices to $7.00 per MMBtu from $6.91 per MMBtu, an increase
of $0.09 per MMBtu. The $4.8 million gain for the year
ended December 31, 2007 increased averaged realized natural
gas prices to $5.75 per MMBtu from $5.59 per MMBtu, an increase
of $0.16 per MMBtu. Cash paid to our counterparty on cash flow
swap contracts for NGL derivative transactions that closed
during the year ended December 31, 2008 totaled
$5.9 million compared to $3.0 million for the year
ended December 31, 2007. The $5.9 million loss for the
year ended December 31, 2008 reduced averaged realized NGL
prices to $1.33 per gallon from $1.39 per gallon, a decrease of
$0.06 per gallon. The $3.0 million loss for the year ended
December 31, 2007 reduced averaged realized NGL prices to
$1.18 per gallon from $1.22 per gallon, a decrease of $0.04 per
gallon.
Our compression revenues were $4.8 million for each of the
years ended December 31, 2008 and 2007.
Midstream Purchases.
Midstream purchases were
$276.6 million for the year ended December 31, 2008
compared to $195.2 million for the year ended
December 31, 2007, an increase of $81.4 million, or
41.7%. The $81.4 million increase is primarily due to
volume growth at the Woodford Shale gathering system which
commenced operation in April 2007, the expanded Badlands
gathering system, including the processing and nitrogen
rejection plants and the other treating facilities, which
commenced operation in August 2007, increased volume growth at
our Matli gathering system and higher natural gas and NGL
purchase prices, resulting in increased midstream purchases for
all of our gathering systems.
Midstream Segment Margin.
Midstream segment
margin was $106.6 million for the year ended
December 31, 2008 compared to $78.0 million for the
year ended December 31, 2007, an increase of
$28.6 million, or 36.6%. The increase is primarily due to
favorable average gross processing spreads, higher average
realized natural gas and NGL prices, volume growth at the
expanded Badlands gathering system, including the processing and
nitrogen rejection plants and the other treating facilities,
which commenced operations in August 2007, volume growth at the
Woodford Shale gathering system which commenced operation in
April 2007, and volume growth at our Matli gathering system. As
a percent of midstream revenues, midstream segment margin was
27.8% and 28.6% for the year ended December 31, 2008 and
2007, respectively, a reduction of 0.8%. This reduction is
attributable to net losses on closed/settled derivative
transactions and unrealized non-cash losses on derivative
transactions for the year ended December 31, 2008 totaling
$3.0 million, offset by an unrealized non-cash gain of
$6.7 million related to a non-qualifying
mark-to-market
cash flow derivative for forecasted natural gas sales in 2010,
compared to net gains totaling $1.8 million on
closed/settled derivative transactions and $0.4 million
unrealized non-cash gains on derivative transactions for the
year ended December 31, 2007. The increase in midstream
segment margin was offset by approximately $2.3 million of
forgone margin as a result of the Badlands nitrogen rejection
plant being temporarily taken out of service due to equipment
failure during the first quarter in 2008.
Operations and Maintenance.
Operations and
maintenance expense totaled $30.5 million for the year
ended December 31, 2008 compared with $23.3 million
for the year ended December 31, 2007, an increase of
$7.2 million, or 31.1%. Of this increase, $4.0 million
was attributable to increased operations and maintenance at the
expanded Badlands gathering system and $2.0 million was
attributable to increased operations and maintenance at the
Woodford Shale gathering system.
58
Depreciation, Amortization and
Accretion.
Depreciation, amortization and
accretion expense totaled $37.5 million for the year ended
December 31, 2008 compared with $29.9 million for the
year ended December 31, 2007, an increase of
$7.6 million, or 25.6%. Of this increase, $2.3 million
was attributable to increased depreciation on the expanded
Badlands gathering system, $2.3 million was attributable to
increased depreciation on the Woodford Shale gathering system,
$1.3 million was attributable to increased depreciation on
the Bakken gathering system and $1.0 million was
attributable to increased depreciation on the Kinta Area
gathering systems.
General and Administrative.
General and
administrative expense totaled $8.8 million for the year
ended December 31, 2008 compared with $7.6 million for
the year ended December 31, 2007, an increase of
$1.2 million, or 15.4%. Salaries increased
$1.8 million in the year ended December 31, 2008 as
compared to the year ended December 31, 2007 due to
increased non-cash unit based compensation and increased
staffing during the year ended December 31, 2008 as
compared to the year ended December 31, 2007. General and
administrative expenses included $1.1 million of
unsuccessful acquisition costs incurred in the year ended
December 31, 2007 compared to only $0.1 million in the
year ended December 31, 2008.
Other Income (Expense).
Other income (expense)
totaled $(13.9) million for the year ended
December 31, 2008 compared with $(11.3) million for
the year ended December 31, 2007, an increase in expense of
$2.5 million. The increase is primarily attributable to
additional interest expense from borrowings on our credit
facility to fund expansions at the Badlands and Kinta Area
gathering systems and to fund internal growth projects at the
Woodford Shale and the North Dakota Bakken gathering systems,
after being offset by lower interest rates incurred during the
year ended December 31, 2008 compared to interest rates
incurred during the year ended December 31, 2007.
Year
Ended December 31, 2007 Compared with Year Ended
December 31, 2006
Revenues.
Total revenues (midstream and
compression) were $278.0 million for the year ended
December 31, 2007 compared to $219.7 million for the
year ended December 31, 2006, an increase of
$58.4 million, or 26.6%. This $58.4 million increase
was largely due to (i) revenues associated with natural gas
sales volumes related to our Woodford Shale gathering system
which commenced production on April 27, 2007, (ii) a
full year of natural gas sales volumes in 2007 related to our
acquisition of the Kinta Area gathering assets effective
May 1, 2006, (iii) increased natural gas sales volumes
at our Eagle Chief and Bakken gathering systems,
(iv) revenues related to increased NGL sales volumes at our
Woodford Shale, Bakken, Badlands and Eagle Chief gathering
systems and (v) increased average realized NGL sales prices
partially offset by lower average realized natural gas sales
prices in 2007 as compared to the same period in 2006. Revenues
from compression assets were the same for both periods.
Our midstream revenues were $273.2 million for the year
ended December 31, 2007 compared to $214.9 million for
the year ended December 31, 2006, a net increase of
$58.4 million, or 27.2%. Of this increase in midstream
revenues, approximately $57.4 million was attributable to
natural gas sales volumes related to our Woodford Shale
gathering system, a full year of natural gas sales volumes and
gathering fee volumes in 2007 associated with the Kinta Area
gathering assets acquisition effective May 1, 2006 and
increased natural gas and NGL sales volumes at our Bakken,
Badlands and Eagle Chief gathering systems. Midstream revenues
increased by approximately $12.7 million due to increased
NGL sales prices offset by $11.7 million as a result of
lower natural gas sales prices compared to 2006. Our Woodford
Shale gathering system, which began production in late April,
2007 accounted for 28.8% of the $58.4 million increase
contributing $16.8 million to midstream revenues.
Inlet natural gas volumes were 215,551 Mcf/d for the year
ended December 31, 2007 compared to 157,556 Mcf/d for
the year ended December 31, 2006, an increase of
57,995 Mcf/d, or 36.8%. Of the 57,995 Mcf/d increase,
41,915 Mcf/d, or 72.3% was attributable to inlet Mcf/d at
our Kinta Area gathering system for a full year in 2007 which we
acquired effective May 1, 2006, and the remaining
16,080 Mcf/d increase was primarily attributable to inlet
Mcf/d at our Woodford Shale gathering system and increased inlet
Mcf/d at our Eagle Chief, Bakken and Badlands gathering systems.
Natural gas sales volumes were 80,731 MMBtu/d for the year
ended December 31, 2007 compared to 66,947 MMBtu/d for
the year ended December 31, 2006, an increase of
13,784 MMBtu/d, or 20.6%. The increase of
13,784 MMBtu/d was
59
primarily attributable to the increased natural gas volumes as a
result of a full year of operations in 2007 at our Kinta Area
gathering system which we acquired effective May 1, 2006
and to increased volumes at both our Bakken and Eagle Chief
gathering systems and our new Woodford Shale gathering system,
which contributed 4,649 MMBtu/d to the increase in natural
gas sales volumes. Our NGL sales volumes were 4,696 Bbls/d
for the year ended December 31, 2007 compared to
3,347 Bbls/d for the year ended December 31, 2006, an
increase of 1,349 Bbls/d, or 40.3%. Of the
1,349 Bbls/d increase, 443 Bbls/d, or 32.8% was
attributable to NGL sales volumes at our Woodford Shale
gathering system and 834 Bbls/d, or 61.8% was attributable
to increased NGL sales volumes at our Bakken, Eagle Chief and
Badlands gathering systems.
Our average realized natural gas sales prices were $5.75 per
MMBtu for the year ended December 31, 2007 compared to
$6.11 per MMBtu for the year ended December 31, 2006, a
decrease of $0.36 per MMBtu, or 5.9%. Our average realized NGL
sales prices were $1.18 per gallon for the year ended
December 31, 2007 compared to $1.02 per gallon for the year
ended December 31, 2006, an increase of $0.16 per gallon or
15.7%. The change in our average realized natural gas sales
prices was primarily a result of lower index prices due to a
softening of supply and demand fundamentals for energy, which
caused natural gas prices to fall during the year ended
December 31, 2007 compared to the year ended
December 31, 2006. The change in our average realized NGL
sales prices was primarily a result of higher index prices due
to a tightening of supply and demand fundamentals for energy,
which caused NGL prices to rise during the year ended
December 31, 2007 compared to the year ended
December 31, 2006.
Net cash received from our counterparty on cash flow swap
contracts that began on May 1, 2006 for natural gas
derivative transactions that closed during the year ended
December 31, 2007 was $4.8 million compared to
$3.6 million for the year ended December 31, 2006.
These receipts increased average realized natural gas sales
prices by $0.16 per MMBtu in 2007 and by $0.14 per MMBtu in
2006. Cash paid to our counterparty on cash flow swap contracts
that began on September 1, 2006 for NGL derivative
transactions that closed during the year ended December 31,
2007 was $3.0 million. These payments decreased average
realized natural gas sales prices by $0.04 per gallon in 2007.
Closed NGL derivative transactions during the year ended
December 31, 2006 were insignificant.
Fees earned from 123,008 MMBtu/d of natural gas gathered,
in which we do not take title to the gas, related to our Kinta
Area gathering assets we acquired on May 1, 2006 were
$11.1 million for the year ended December 31, 2007.
Similar fees earned from May 1, 2006 through
December 31, 2006 averaging 127,437 MMBtu/d of natural
gas gathered was $7.2 million. The increase of
$3.9 million in fees earned was primarily due to a full
year of operations in 2007 as compared to eight months of
operations in 2006, and partially attributable to treating fees
earned related to the four amine treating facilities installed
in early 2007. Gathering fees earned during the year ended
December 2007 as compared to the eight month period in 2006 were
somewhat offset by a 4,429 MMBtu/d reduction in volumes
gathered.
Our compression revenues were $4.8 million for the each of
the years ended December 31, 2007 and 2006.
Midstream Purchases.
Our midstream purchases
were $195.2 million for the year ended December 31,
2007 compared to $156.2 million for the year ended
December 31, 2006, an increase of $39.0 million, or
25.0%. The $39.0 million increase primarily consists of
$12.8 million, or 32.8% attributable to purchased natural
gas from our Woodford Shale gathering system and
$10.8 million, or 27.6%, attributable to purchased natural
gas from our Kinta Area gathering assets for a full year of
operations in 1007. The remaining increase in midstream
purchases was attributable to increased purchased residue gas
volumes at our Bakken, Eagle Chief and Badlands gathering
systems. The increase in volumes was offset by reduced payments
to producers due primarily to lower natural gas purchase prices,
which generally are closely related to fluctuations in natural
gas sales prices.
Midstream Segment Margin.
Midstream segment
margin was $78.0 million for the year ended
December 31, 2007 compared to $58.7 million for the
year ended December 31, 2006, an increase of
$19.3 million, or 33.0%. The increase is primarily due to
favorable gross processing spreads for the year, higher average
realized natural gas and NGL prices for the year, volume growth
at the expanded Badlands gathering system, including the
processing and nitrogen rejection plants and the other treating
facilities, which commenced operations in August 2007, volume
growth at the Woodford Shale gathering system which
60
commenced operation in April 2007, volume growth at the Kinta
Area gathering system which we acquire in May 2006 and volume
growth at the Bakken and Eagle Chief gathering systems. As a
percent of midstream revenues, midstream segment margin was
28.6% and 27.3% for the year ended December 31, 2007 and
2006, respectively, an increase of 1.3%. This increase is
primarily attributable to increased volumes on gathering systems
with more accretive segment margins for the year ended
December 31, 2007 as compared to the year ended
December 31, 2006. These increases were offset by a
decrease of $1.8 million on closed/settled derivative
transactions of $1.8 million during the year ended
December 31, 2007 compared to $3.6 million on
closed/settled derivative transactions during the year ended
December 31, 2006.
Operations and Maintenance.
Our operations and
maintenance expense totaled $23.3 million for the year
ended December 31, 2007 compared with $16.1 million
for the year ended December 31, 2006, an increase of
$7.2 million, or 44.9%. Of this increase,
$2.9 million, or 40.0% was attributable to a full year of
operations and maintenance expense at our Kinta Area gathering
system. Operations and maintenance expense also increased by
$2.5 million, or 35.2% at our Badlands gathering facility
largely due to compressor rentals and other related costs
associated with our expansion project. Our new Woodford Shale
gathering system contributed $0.9 million to the increase
in operations and maintenance expense and our Bakken and Eagle
Chief gathering systems, as a result of increased volumes,
contributed $0.8 million to the increase in operations and
maintenance expense.
Depreciation, Amortization and Accretion.
Our
depreciation, amortization and accretion expense totaled
$29.9 million for the year ended December 31, 2007
compared with $22.1 million for the year ended
December 31, 2006, an increase of $7.7 million, or
34.9%. Of this increase, $3.1 million, or 40.1% was
attributable to depreciation and amortization on our Kinta Area
gathering system for a full year of operations in 2007. The
increase is also attributable to additional depreciation related
to our internal organic growth projects completed in 2007 of
$1.8 million, or 23.2% at our Bakken gathering system and
$1.4 million, or 17.8% at our Badlands gathering system,
General and Administrative.
Our general and
administrative expense totaled $7.6 million for the year
ended December 31, 2007 compared with $5.0 million for
the year ended December 31, 2006, an increase of
$2.6 million, or 51.9%. The increase is primarily
attributable to $1.1 million of acquisition evaluation
expenses, $0.5 million of non-cash compensation expense
related to unit option awards and restricted and phantom unit
awards and $0.5 million due to increased salaries and
salary related expenses as a result of additional staffing,
including costs of recruitment.
Other Income (Expense).
Our other income
(expense) totaled ($11.3) million for the year ended
December 31, 2007 compared with ($5.6) million for the
year ended December 31, 2006, an increase in expense of
$5.7 million. The increase is primarily attributable to
additional interest expense from a full year of borrowings on
our credit facility for the acquisition of the Kinta Area
gathering assets effective May 1, 2006 and to interest
expense for our internal plant and pipeline expansion projects
at our Badlands, Woodford Shale and Bakken gathering systems in
2007.
General
Trends and Outlook
We expect our business to continue to be affected by the
following key trends. Our expectations are based on assumptions
made by us, and information currently available to us. To the
extent our underlying assumptions about or interpretations of
available information prove to be incorrect, our expectations
may vary materially from actual results. Please see
Forward Looking Statements.
U.S. Natural Gas Supply and
Outlook.
Natural gas prices declined dramatically
since the peak New York Mercantile Exchange
(NYMEX) Henry Hub last day settle price of
$13.11/MMBtu in July 2008 to the low NYMEX Henry Hub last day
settle price of $4.48 in February 2009. U.S. natural gas
drilling rig counts have declined by approximately 29% to 1,018
as of February 20, 2009, compared to 1,430 natural gas
drilling rigs in the comparable period of 2008, and
approximately 37% compared to the peak natural gas drilling rig
count of 1,606 in August and September 2008. We believe that
current natural gas prices will continue to result in reduced
natural gas-related drilling activity as producers seek to
decrease their level of natural gas production. We also believe
that current reduced natural gas drilling activity will persist
until the economic environment in the United States improves and
increases the demand for natural gas.
61
U.S. Crude Oil Supply and Outlook.
The
domestic and global recession and resulting drop in demand for
crude oil products has significantly impacted the price for
crude oil. West Texas Intermediate (WTI) crude oil pricing has
declined from a peak of $134.62/bbl in July 2008 to a low of
$33.87/Bbl in January 2009, a 74.8% decline. U.S. crude oil
drilling rig counts have declined by approximately 19% to 269 as
of February 20, 2009, compared to 333 crude oil drilling
rigs in the comparable period of 2008, and approximately 39%
compared to the peak crude oil drilling rig count of 442 in
November 2008. The forward curve for WTI crude oil pricing
reflects continued reductions in demand for crude oil. We also
believe that current reduced crude oil drilling activity will
persist until the economic environment in the United States
improves and increases the demand for crude oil.
U.S. NGL Supply and Outlook.
The domestic
and global recession and resulting drop in demand for NGL
products has significantly impacted the price for NGLs. NGL
prices have dropped dramatically since the peak NGL basket
pricing of $2.21/gallon in June 2008 to a January 2009 NGL
basket pricing of $0.68/gallon, a 69.2% decline. NGL basket
pricing correlates to WTI crude oil pricing. WTI crude oil
pricing has declined from a peak of $134.62/Bbl in July 2008 to
a low of $33.87/Bbl in January 2009, a 74.8% decline. The
forward curve for NGL basket pricing and WTI crude oil pricing
reflects continued reductions in demand for NGL products. We
also believe that the current reduced NGL products pricing will
persist until the economic environment in the United States
improves and increases the demand for NGL products.
A number of the areas in which we operate are experiencing a
significant decline in drilling activity as a result of the
recent dramatic decline in natural gas and crude oil prices.
While we anticipate continued exploration and production
activities in the areas in which we operate, albeit at depressed
levels, fluctuations in energy prices can greatly affect
production rates and investments by third parties in the
development of natural gas and oil reserves. Drilling activity
generally decreases as natural gas and oil prices decrease. We
have no control over the level of drilling activity in the areas
of our operations.
Midstream Segment Margins.
During 2008, our
midstream segment margins were positively impacted by increased
natural gas and NGL volumes, increased natural gas and NGL sales
prices and increased gross processing spreads resulting in an
increase in our midstream segment margins from 2007. During
2007, our midstream segment margins were positively impacted due
to increased volumes and NGL prices but were negatively impacted
due to reduced natural gas prices resulting in a net increase in
our midstream segment margins from 2006. During 2006, our
midstream segment margins were positively impacted due to
increased volumes but were negatively impacted due to reduced
natural gas prices and NGL prices, resulting in a net increase
in margins from 2005. Our profitability is dependent upon
pricing and market demand for natural gas and NGLs, which are
beyond our control and have experienced substantial volatility
in 2008.
Interest Rate Environment.
Interest rates on
future credit facility borrowings and debt offerings could be
higher than current levels, causing our financing costs to
increase accordingly. Although this could limit our ability to
raise funds in the debt capital markets, we expect to remain
competitive with respect to acquisitions and capital projects,
as our competitors would face similar circumstances. As with
other yield-oriented securities, our unit price is impacted by
the level of our cash distributions and an associated implied
distribution yield. The distribution yield is often used by
investors to compare and rank related yield-oriented securities
for investment decision making purposes. Therefore, changes in
interest rates, either positive or negative, may affect the
yield requirements of investors who invest in our units, and a
rising interest rate environment could have an adverse impact on
our unit price and our ability to issue additional equity to
make acquisitions, reduce debt or for other purposes.
Impact of
Inflation
Inflation in the United States has been relatively low in recent
years and did not have a material impact on our results of
operations for the periods presented.
Liquidity
and Capital Resources
Overview
Due to the recent decline in natural gas and NGL prices, we
believe that our cash generated from operations will decrease in
2009 relative to comparable periods in 2008. Our senior secured
revolving credit
62
facility requires us to meet certain financial tests, including
a maximum consolidated funded debt to EBITDA ratio of 4.0:1.0 as
of the last day of any fiscal quarter; provided that in the
event that we make certain permitted acquisitions or capital
expenditures, this ratio may be increased to 4.75:1.0 for the
three fiscal quarters following the quarter in which such
acquisition or capital expenditure occurs. We intend to elect to
increase the ratio to 4.75:1.0 on March 31, 2009. During
this
step-up
period, the applicable margin with respect to loans under the
credit facility will be increased by 35 basis points per
annum and the unused commitment fee will be increased by
12.5 basis points per annum. Additionally, if commodity
prices do not significantly improve above the expected prices
for 2009, we may be in violation of the maximum consolidated
funded debt to EBITDA ratio as early as June 30, 2009,
unless the ratio is amended, the senior secured revolving credit
facility is restructured or we receive an infusion of equity
capital.
Cash
Flows
Year
ended December 31, 2008 Compared to Year ended
December 31, 2007
Cash Flows from Operating Activities.
Our cash
flows from operating activities increased by $13.2 million
to $53.9 million for the year ended December 31, 2008,
from $40.7 million for the year ended December 31,
2007. During the year ended December 31, 2008 we received
cash flows from customers of approximately $387.9 million,
had cash payments to our suppliers and employees of
approximately $320.3 million and payment of interest
expense of $13.7 million, net of amounts capitalized,
resulting in cash received from operating activities of
$53.9 million. During the year ended December 31,
2007, we received cash flows from customers of approximately
$195.8 million, had cash payments to our suppliers and
employees of approximately $159.3 million and payment of
interest expense of $7.4 million, net of amounts
capitalized, resulting in cash received from our operating
activities of $29.1 million. The increase in cash flows for
the year ended December 31, 2008, as compared to the year
ended December 31, 2007, was attributable to increased
natural gas and NGLs volumes and higher average realized natural
gas and NGL sales prices.
Changes in cash receipts and payments are primarily due to the
timing of collections at the end of our reporting periods. We
collect and pay large receivables and payables at the end of
each calendar month. The timing of these payments and receipts
may vary by a day or two between month-end periods and cause
fluctuations in cash received or paid. Working capital items,
exclusive of cash, provided $0.3 million to cash flows from
operating activities during the year ended December 31,
2008 and used $0.9 million of cash flows from operating
activities during the year ended December 31, 2007.
Net income for the year ended December 31, 2008 was
$20.4 million, an increase of $9.7 million from a net
income of $10.8 million for the year ended
December 31, 2007. Depreciation, amortization and accretion
increased by $7.7 million to $37.5 million for the
year ended December 31, 2008 from $29.9 million for
the year ended December 31, 2007. Bad debt expense was
$0.3 million for the year ended December 31, 2008
compared to zero for the year ended December 31, 2007.
Cash Flows Used for Investing Activities.
Our
cash flows used for investing activities, which represent
investments in property and equipment, decreased by
$29.1 million to $54.3 million for the year ended
December 31, 2008 from $83.4 million for the year
ended December 31, 2007, primarily due to reduced capital
investing in the year ended December 31, 2008 related to
the Badlands nitrogen rejection plant, which was under
construction during the first eight months of 2007.
Cash Flows from Financing Activities.
Our cash
flows from financing activities decreased to $(8.9) million
for the year ended December 31, 2008 from
$42.8 million for the year ended December 31, 2007, a
decrease of $51.7 million. During the year ended
December 31, 2008, we borrowed $41.0 million under our
credit facility to fund internal expansion and organic growth
projects, made payments of $10.0 million to our credit
facility, received capital contributions of $1.1 million as
a result of issuing common units in connection with the exercise
of 40,705 vested unit options, incurred debt issuance costs of
$0.4 million associated with the fourth amendment to our
credit facility in February 2008, made $0.5 million
payments on capital lease obligations and distributed
$40.0 million to our unitholders.
63
During the year ended December 31, 2007, we borrowed
$74.0 million under our credit facility to fund internal
expansion projects, received capital contributions of
$1.1 million as a result of issuing common units in
connection with the exercise of 42,660 vested unit options,
distributed $31.3 million to unitholders, incurred offering
costs of $0.2 million associated with the preparation and
filing of a registration statement filed with the SEC on
January 23, 2007 and paid debt issuance costs of
$0.5 million associated with our third amendment to our
credit facility in July 2007.
Year
ended December 31, 2007 Compared to Year ended
December 31, 2006
Cash Flows from Operating Activities.
Our cash
flows from operating activities increased by $1.1 million
to $40.7 million for the year ended December 31, 2007
from $39.6 million for the year ended December 31,
2006. During the year ended December 31, 2007, we received
cash flows from customers of approximately $269.3 million,
had cash payments to our suppliers and employees of
approximately $217.3 million and payment of interest
expense of $11.3 million, net of amounts capitalized,
resulting in cash received from our operating activities of
$40.7 million. During the year ended December 31,
2006, we received cash flows from customers of approximately
$218.0 million, had cash payments to our suppliers and
employees of approximately $173.0 million and payment of
interest expense of $5.4 million, net of amounts
capitalized, resulting in cash received from our operating
activities of $39.6 million. Changes in cash receipts and
payments are primarily due to the timing of collections at the
end of our reporting periods. We collect and pay large
receivables and payables at the end of each calendar month. The
timing of these payments and receipts may vary by a day or two
between month-end periods and cause fluctuations in cash
received or paid. Natural gas and NGL volumes from our new
Woodford Shale gathering system and increased natural gas and
NGL volumes from our Bakken, Badlands and Eagle Chief gathering
systems combined with increased NGL sales prices, but offset by
lower natural gas sales prices contributed to increases in
accounts receivable, accrued midstream revenues, accounts
payable and accrued midstream purchases during the year ended
December 31, 2007. Working capital items, exclusive of
cash, used $0.9 million in cash flows from operating
activities and contributed $2.1 million to cash flows from
operating activities during the year ended December 31,
2007 and 2006, respectively. Net income for the year ended
December 31, 2007 was $10.8 million, a decrease of
$3.9 million from a net income of $14.7 million for
the year ended December 31, 2006. Depreciation,
amortization and accretion increased by $7.7 million or
20.9%, to $29.7 million for the year ended
December 31, 2007 from $22.1 million for the year
ended December 31, 2006.
Cash Flows Used for Investing Activities.
Our
cash flows used for investing activities representing our
internal organic growth investments in property and equipment,
increased by $21.3 million to $83.4 million for the
year ended December 31, 2007 from $62.1 million for
the year ended December 31, 2006. This $21.3 million
increase is largely attributable to cash invested at our new
Woodford Shale gathering system, our Badlands expansion project
and continued growth at our Bakken gathering system. We had no
asset acquisitions in 2007. In May 2006, $96.4 million of
cash flows was used for our Kinta Area gathering assets
acquisition.
Cash Flows from Financing Activities.
Our cash
flows from financing activities decreased by $80.2 million
to $42.8 million for the year ended December 31, 2007
from $123.0 million for the year ended December 31,
2006. During the year ended December 31, 2007, we borrowed
$74.0 million under our credit facility to fund our
internal expansion projects, received capital contributions of
$1.1 million as a result of issuing common units due to the
exercise of 42,660 vested unit options, made capital lease
obligation payments of $0.3 million, distributed
$31.3 million to our unitholders, incurred offering costs
of $0.2 million associated with our
S-3/A
registration statement filed with the SEC on January 23,
2007 and paid debt issuance costs of $0.5 million
associated with our third amended credit facility. During the
year ended December 31, 2006, we borrowed
$113.3 million under our credit facility to partially fund
the Kinta Area gathering assets acquisition on May 1, 2006
and to fund our internal expansion projects at both our Badlands
and Bakken gathering systems. Also during the year ended
December 31, 2006, we received capital contributions of
$35.0 million from our general partner in exchange for the
issuance of 761,714 common units and general partner equivalent
units, received $1.3 million as a result of issuing common
units due to the exercise of 52,699 vested unit options, paid
debt issuance costs of $0.9 million and distributed
$25.6 million to our unitholders.
64
Capital
Requirements
The midstream energy business is capital intensive, requiring
significant investment to maintain and upgrade existing
operations. Our capital requirements have consisted primarily
of, and we anticipate will continue to be:
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maintenance capital expenditures, which are capital expenditures
made to replace partially or fully depreciated assets to
maintain the existing operating capacity of our assets and to
extend their useful lives, or other capital expenditures that
are incurred in maintaining existing system volumes and related
cash flows; and
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expansion capital expenditures such as those to acquire
additional assets to grow our business, to expand and upgrade
gathering systems, processing plants, treating facilities and
fractionation facilities and to construct or acquire similar
systems or facilities.
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Total Contractual Cash Obligations.
A summary
of our total contractual cash obligations as of
December 31, 2008 including leases renewed and entered into
subsequent to year end is presented below:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Due by Period
|
|
|
|
Total
|
|
|
Due in
|
|
|
Due in
|
|
|
Due in
|
|
|
Due in
|
|
|
Due in
|
|
|
|
|
Type of Obligation
|
|
Obligation
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
Thereafter
|
|
|
|
(In thousands)
|
|
|
Senior secured revolving credit facility
|
|
$
|
252,064
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
252,064
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Estimated interest expense on credit facility(1)
|
|
|
19,634
|
|
|
|
8,267
|
|
|
|
8,267
|
|
|
|
3,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligations(2)
|
|
|
7,378
|
|
|
|
1,256
|
|
|
|
1,256
|
|
|
|
1,256
|
|
|
|
1,107
|
|
|
|
1,001
|
|
|
|
1,502
|
|
Operating leases, service agreements and other
|
|
|
3,959
|
|
|
|
1,700
|
|
|
|
858
|
|
|
|
465
|
|
|
|
299
|
|
|
|
211
|
|
|
|
426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations
|
|
$
|
283,035
|
|
|
$
|
11,223
|
|
|
$
|
10,381
|
|
|
$
|
256,885
|
|
|
$
|
1,406
|
|
|
$
|
1,212
|
|
|
$
|
1,928
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Interest rates on the senior secured revolving credit facility
are variable. Estimated interest payments are based on the
interest rate and the amount outstanding as of December 31,
2008. For a discussion of our senior secured revolving credit
facility, please read Credit Facility
below.
|
|
(2)
|
|
Contractual cash commitments on our capital lease obligations
include $2,335 of interest expense.
|
Financial Derivatives and Commodity Hedges.
We
have entered into certain financial derivative instruments that
are classified as cash flow hedges in accordance with Statement
of Financial Accounting Standards (SFAS)
No. 133, Accounting for Derivative Instruments and
Hedging Activities, as amended, and relate to forecasted
sales and purchases in 2008, 2009 and
mark-to-market
cash flow derivative which relates to forecasted sales in 2010.
We entered into these financial swap instruments to hedge the
forecasted natural gas sales or purchases and NGL sales against
the variability in expected future cash flows attributable to
changes in commodity prices. Under these swap agreements, we
receive a fixed price and pay a floating price or we pay a fixed
price and receive a floating price based on certain indices for
the relevant contract period as the underlying natural gas is
sold or purchased or NGL is sold. The following table provides
information about our commodity based derivative instruments at
December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Fair Value
|
|
|
|
|
|
|
Fixed/Open
|
|
|
Asset
|
|
Description and Production Period
|
|
Volume
|
|
|
Price
|
|
|
(Liability)
|
|
|
|
(MMBtu)
|
|
|
(Per MMBtu)
|
|
|
|
|
|
Natural Gas Sold Fixed for Floating Price Swaps
|
|
|
|
|
|
|
|
|
|
|
|
|
January 2009 December 2009
|
|
|
2,136,000
|
|
|
$
|
7.30
|
|
|
$
|
6,851
|
|
January 2010 December 2010
|
|
|
2,136,000
|
|
|
$
|
10.50
|
|
|
|
7,141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
13,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65
The following table provides information about our interest rate
swap at December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
Notional
|
|
Interest
|
|
Asset
|
Description and Period
|
|
Amount
|
|
Rate
|
|
(Liability)
|
|
Interest Rate Swap
|
|
|
|
|
|
|
|
|
|
|
|
|
January 2009 December 2009
|
|
$
|
100,000,000
|
|
|
|
2.245
|
%
|
|
$
|
(1,439
|
)
|
Off-Balance Sheet Arrangements.
We had no
significant off-balance sheet arrangements as of
December 31, 2008 or December 31, 2007.
Credit
Facility
On February 6, 2008, we entered into a fourth amendment to
our credit facility dated February 15, 2005. Pursuant to
the fourth amendment, we have, among other things, increased our
borrowing base from $250 million to $300 million and
decreased the accordion feature in the facility from
$100 million to $50 million. Our original credit
facility dated February 15, 2005 was first amended in
September 2005, amended a second time in June 2006 and amended a
third time in July 2007.
The fourth amendment increases our borrowing capacity under our
senior secured revolving credit facility to $300 million
such that the facility now consists of a $291 million
senior secured revolving credit facility to be used for funding
acquisitions and other capital expenditures, issuance of letters
of credit and general corporate purposes (the Acquisition
Facility) and a $9.0 million senior secured revolving
credit facility to be used for working capital and to fund
distributions (the Working Capital Facility).
In addition, the fourth amendment provides for an accordion
feature, which permits us, if certain conditions are met, to
increase the size of the Acquisition Facility by up to
$50 million and allows for the issuance of letters of
credit of up to $15 million in the aggregate. The senior
secured revolving credit facility also requires us to meet
certain financial tests, including a maximum consolidated funded
debt to EBITDA ratio of 4.0:1.0 as of the last day of any fiscal
quarter; provided that in the event that the Partnership makes
certain permitted acquisitions or capital expenditures, this
ratio may be increased to 4.75:1.0 for the three fiscal quarters
following the quarter in which such acquisition or capital
expenditure occurs; and a minimum interest coverage ratio of
3.0:1.0. The credit facility will mature in May 2011. At that
time, the agreement will terminate and all outstanding amounts
thereunder will be due and payable.
Due to the recent decline in natural gas and NGL prices, we
believe our cash flow from operating activities will decrease
relative to the level experienced in 2008. Consequently, we
anticipate electing to step up our debt covenants on
our credit facility to 4:75:1.0 debt to EBITDA at the end of the
first quarter 2009. Additionally, given the current natural gas
and NGL forward price strips, we may require additional equity
as soon as June 30, 2009 to remain in compliance with our
existing debt covenants contained in our credit facility.
Our obligations under the credit facility are secured by
substantially all of our assets and guaranteed by us, and all of
our subsidiaries, other than our operating company, which is the
borrower under the credit facility.
Indebtedness under the credit facility will bear interest, at
our option, at either: (i) an Alternate Base Rate plus an
applicable margin ranging from 50 to 125 basis points per
annum or (ii) LIBOR plus an applicable margin ranging from
150 to 225 basis points per annum based on our ratio of
consolidated funded debt to EBITDA. The Alternate Base Rate is a
rate per annum equal to the greatest of: (a) the Prime Rate
in effect on such day, (b) the base CD rate in effect on
such day plus 1.50% and (c) the Federal Funds effective
rate in effect on such day plus
1
/2 of
1%. We have elected for the indebtedness to bear interest at
LIBOR plus the applicable margin. A letter of credit fee will be
payable for the aggregate amount of letters of credit issued
under the credit facility at a percentage per annum equal to
1.0%. An unused commitment fee ranging from 25 to 50 basis
points per annum based on our ratio of consolidated funded debt
to EBITDA will be payable on the unused portion of the credit
facility. During any
step-up
period, the applicable margin with respect to loans under the
credit facility will be increased by 35 basis points per
annum and the unused commitment fee will be increased by
12.5 basis points per annum. At December 31, 2008, the
interest rate on outstanding borrowings from our credit facility
was 3.28%
66
The credit facility prohibits us from making distributions to
unitholders if any default or event of default, as defined in
the credit facility, has occurred and is continuing or would
result from the distribution. In addition, the credit facility
contains various covenants that limit, among other things,
subject to certain exceptions and negotiated
baskets, our ability to incur indebtedness, grant
liens, make certain loans, acquisitions and investments, make
any material changes to the nature of its business, amend its
material agreements, including the Omnibus Agreement or enter
into a merger, consolidation or sale of assets.
The credit facility defines EBITDA as our consolidated net
income, plus income tax expense, interest expense, depreciation,
amortization and accretion expense, amortization of intangibles
and organizational costs, non-cash unit based compensation
expense, and adjustments for non-cash gains and losses on
specified derivative transactions and for other extraordinary or
non-recurring items.
Upon the occurrence of an event of default as defined in the
credit facility, the lenders may, among other things, be able to
accelerate the maturity of the credit facility and exercise
other rights and remedies as set forth in the credit facility.
The credit facility limits distributions to our unitholders to
available cash, as defined by the agreement, and borrowings to
fund such distributions are only permitted under the revolving
working capital facility. The revolving working capital facility
is subject to an annual clean-down period of 15
consecutive days in which the amount outstanding under the
revolving working capital facility is reduced to zero.
As of December 31, 2008, we had $252.1 million
outstanding under the credit facility and were in compliance
with its financial covenants.
Recent
Accounting Pronouncements
On April 25, 2008, the Financial Accounting Standards Board
(FASB) FASB issued Staff Position
No. FAS 142-3,
Determination of the Useful Life of Intangible
Assets
(FSP 142-3).
FSP 142-3
amends the factors that an entity should consider in developing
renewal or extension assumptions used in determining the useful
life of recognized intangible assets under FASB Statement
No. 142, Goodwill and Other Intangible Assets
(SFAS 142). In determining the useful life of
an acquired intangible asset,
FSP 142-3
removes the requirement from SFAS 142 for an entity to
consider whether renewal of the intangible asset requires
significant costs or material modifications to the related
arrangement.
FSP 142-3
also replaces the previous useful life assessment criteria with
a requirement that an entity considers its own experience in
renewing similar arrangements. If the entity has no relevant
experience, it would consider market participant assumptions
regarding renewal.
FSP 142-3
will be effective as of January 1, 2009 and will apply only
to intangible assets acquired after that date. Retroactive
application to previously acquired intangible assets is
prohibited. The adoption of
FSP 142-3
is not expected to have a material impact on our financial
position, results of operations or cash flows.
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 entitys derivative instruments
and hedging activities and their effects on the entitys
financial position, financial performance, and cash flows.
SFAS 161 is effective prospectively for financial
statements issued for fiscal years and interim periods beginning
after November 15, 2008, with early application encouraged.
SFAS 161 encourages, but does not require, comparative
disclosures for periods prior to its initial adoption.
SFAS 161 amends the current qualitative and quantitative
disclosure requirements for derivative instruments and hedging
activities set forth in SFAS 133 and generally increases
the level of aggregation/disaggregation that will be required in
an entitys financial statements. We are currently
reviewing SFAS 161 to determine the effect it will have on
our financial statements and disclosures therein.
On March 12, 2008, the Emerging Issues Task Force
(EITF) reached consensus opinion on EITF Issue
07-4,
Application of the two-class method under FASB Statement
No. 128, Earnings per Share, to Master Limited
Partnerships
(EITF 07-4),
which the FASB ratified at its March 26, 2008 meeting.
EITF 07-4
requires the calculation of a Master Limited Partnerships
(MLPs) net earnings per limited partner unit for
67
each period presented according to distributions declared and
participation rights in undistributed earnings as if all of the
earnings for that period had been distributed. In periods with
undistributed earnings above specified levels, the calculation
per the two-class method results in an increased allocation of
such undistributed earnings to the general partner and a
dilution of earnings to the limited partners.
EITF 07-4
is effective for fiscal years beginning after December 15,
2008, and is to be applied retrospectively to all periods
presented. Early application is not permitted. We will apply the
requirements of
EITF 07-4
as it pertains to MLPs upon its adoption during the quarter
ended March 31, 2009 and do not expect a significant impact
when adopted.
In December 2007, the FASB issued SFAS No. 141(R),
Business Combinations
(SFAS 141(R)). SFAS 141(R) amends and
replaces SFAS 141, but retains the fundamental requirements
in SFAS 141 that the purchase method of accounting be used
for all business combinations and an acquirer be identified for
each business combination. SFAS 141(R) provides for how the
acquirer recognizes and measures the identifiable assets
acquired, liabilities assumed and any non-controlling interest
in the acquiree. SFAS 141(R) provides for how the acquirer
recognizes and measures the goodwill acquired in the business
combination or a gain from a bargain purchase. SFAS 141(R)
also determines what information to disclose to enable users to
be able to evaluate the nature and financial effects of the
business combination. The provisions of SFAS 141(R) apply
prospectively to business combinations for which the acquisition
date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008 and do not
allow early adoption. We are evaluating the new requirements of
SFAS 141(R) and the impact it will have on business
combinations completed in 2009 and thereafter.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements an amendment of ARB No. 51
(SFAS 160). SFAS 160 establishes
accounting and reporting standards that require the ownership
interests in subsidiaries held by parties other than the parent
(minority interest) be clearly identified, labeled and presented
in the consolidated balance sheet within equity, but separate
from the parents 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 parents ownership interest while the
parent retains its controlling financial interest in its
subsidiary be accounted for consistently and similarly as equity
transactions. Consolidated net income and comprehensive income
will be determined without deducting minority interest; however,
earnings-per-share
information will continue to be calculated on the basis of the
net income attributable to the parents shareholders.
Additionally, SFAS 160 establishes a single method for
accounting for changes in a parents ownership interest in
a subsidiary that does not result in deconsolidation and that
the parent recognize a gain or loss in net income when a
subsidiary is deconsolidated. SFAS 160 is effective for
fiscal years beginning on or after December 15, 2008. Early
adoption is not permitted. We do not expect SFAS 160 will
have a material impact on our financial position, results of
operations or cash flows.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities (SFAS 159). SFAS 159
expands opportunities to use fair value measurement in financial
reporting and permits entities to choose to measure many
financial instruments and certain other items at fair value.
SFAS 159 is effective for fiscal years beginning after
November 15, 2007. SFAS 159 was adopted by us
effective January 1, 2008, at which time no financial
assets or liabilities, not previously required to be recorded at
fair value by other authoritative literature, were designated to
be recorded at fair value. As such, the adoption of
SFAS 159 did not have any impact on our financial position,
results of operations or cash flows.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements (SFAS 157).
SFAS 157 defines fair value as the price that would be
received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the
measurement date, establishes a framework for measuring fair
value in generally accepted accounting principles
(GAAP) such as fair value hierarchy used to classify
the source of information used in fair value measurements (i.e.,
market based or non-market based) and expands disclosure about
fair value measurements based on their level in the hierarchy.
SFAS 157 applies to derivatives and other financial
instruments, which SFAS 133 requires be measured at fair
value at initial recognition and for all subsequent periods.
SFAS 157 establishes a fair value hierarchy which requires
an entity to maximize the use of observable inputs and minimize
the use of unobservable inputs when measuring fair value.
68
SFAS 157s hierarchy defines three levels of inputs
that may be used to measure fair value. Level 1 refers to
assets that have observable market prices, level 2 assets
do not have an observable price but do have inputs
that are based on such prices in which components have
observable data points and level 3 refers to assets in
which one or more of the inputs do not have observable prices
and calibrated model parameters, valuation techniques or
managements assumptions are used to derive the fair value.
SFAS 157 is effective for financial statements issued for
fiscal years beginning after November 15, 2007 and interim
periods within those fiscal years. We elected to implement
SFAS 157 prospectively in the first quarter of 2008 with
the one-year deferral permitted by FASB Staff Position (FSP)
157-2
for
nonfinancial assets and nonfinancial liabilities measured at
fair value, except those that are recognized or disclosed on a
recurring basis (at least annually). The deferral applies to
nonfinancial assets and liabilities measured at fair value in a
business combination; impaired properties, plants and equipment;
intangible assets and goodwill; and initial recognition of asset
retirement obligations and restructuring costs for which we use
fair value. We do not expect any significant impact to our
consolidated financial statements when we implement SFAS 157 for
these assets and liabilities.
Significant
Accounting Policies and Estimates
The selection and application of accounting policies is an
important process that has developed as our business activities
have evolved and as the accounting rules have developed.
Accounting rules generally do not involve a selection among
alternatives, but involve the implementation and interpretation
of existing rules, and the use of judgment applied to the
specific set of circumstances existing in our business. We make
every effort to properly comply with all applicable rules on or
before their adoption, and we believe the proper implementation
and consistent application of the accounting rules are critical.
For further details on our accounting policies, you should read
Note 1 of the accompanying Notes to Consolidated Financial
Statements.
Revenue Recognition.
Revenues for sales and
gathering of natural gas and NGLs product sales are recognized
at the time the product is delivered and title is transferred.
Revenues for compression services are recognized when the
services under the agreement are performed.
Depreciation and Amortization.
Depreciation of
all equipment is determined under the straight-line method using
various rates based on useful lives, 10 to 22 years for
pipeline and processing plants, and 3 to 10 years for
corporate and other assets. The cost of assets and related
accumulated depreciation is removed from the accounts when such
assets are disposed of, and any related gains or losses are
reflected in current earnings. Maintenance, repairs and minor
replacements are expensed as incurred. Costs of replacements
constituting improvement are capitalized. Intangible assets
consist of the acquired value of existing contracts to sell
natural gas and other NGLs, compression contracts and
identifiable customer relationships, which do not have
significant residual value. The contracts are being amortized
over their estimated lives of ten years.
Derivatives.
We utilize derivative financial
instruments to reduce commodity price risks. We do not hold or
issue derivative financial instruments for trading purposes.
Statement of Financial Accounting Standards (SFAS)
No. 133, Accounting for Derivative Instruments and
Hedging Activities, which was amended in June 2000 by
SFAS 138 and in May 2003 by SFAS 149, establishes
accounting and reporting standards for derivative instruments
and hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of
financial condition and measure those instruments at fair value.
Derivatives that are not designated as hedges are adjusted to
fair value through income. If the derivative is designated as a
hedge, depending upon the nature of the hedge, changes in the
fair value of the derivatives are either offset against the fair
value of assets, liabilities or firm commitments through income,
or recognized in other comprehensive income until the hedged
item is recognized in income. The ineffective portion of a
derivatives change in fair value is immediately recognized
into income. If a derivative no longer qualifies for hedge
accounting the amounts in accumulated other comprehensive income
will be immediately charged to operations.
Asset Retirement
Obligations.
SFAS No. 143,
Accounting for Asset Retirement Obligations
(SFAS 143), requires entities to record the
fair value of a liability for an asset retirement obligation in
the period in which it is incurred and a corresponding increase
in the carrying amount of the related long-lived asset.
Subsequently, the asset retirement cost is allocated to expense
using a systematic and rational method and the liability is
accreted to measure the change in liability due to the passage
of time. The primary impact
69
of SFAS 143 relates to our estimated costs for primarily
dismantling and site restoration of leased compression facility
locations. Estimating future asset retirement obligations
requires us to make estimates and judgments regarding timing,
existence of a liability, as well as what constitutes adequate
restoration. We use the present value of estimated cash flows
related to our asset retirement obligation to determine the fair
value, generally as estimated by third party consultants. The
present value calculation requires us to make numerous
assumptions and judgments, including the ultimate costs of
dismantling and site restoration, inflation factors, credit
adjusted discount rates, timing of settlement and changes in the
legal, regulatory, environmental and political environments. To
the extent future revisions to these assumptions impact the
present value of the existing asset retirement obligation
liability, a corresponding adjustment will be required to the
related asset. We believe the estimates and judgments reflected
in our financial statements are reasonable but are necessarily
subject to the uncertainties we have just described.
Accordingly, any significant variance in any of the above
assumptions or factors could materially affect our cash flows.
Impairment of Long-Lived Assets.
In accordance
with SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, we evaluate our
long-lived assets, including intangible assets, of identifiable
business activities for impairment when events or changes in
circumstances indicate, in managements judgment, that the
carrying value of such assets may not be recoverable. The
determination of whether impairment has occurred is based on
managements estimate of undiscounted future cash flows
attributable to the assets as compared to the carrying value of
the assets. If impairment has occurred, the amount of the
impairment recognized is determined by estimating the fair value
for the assets and recording a provision for loss if the
carrying value is greater than fair value. For assets identified
to be disposed of in the future, the carrying value of these
assets is compared to the estimated fair value less the cost to
sell to determine if impairment is required. Until the assets
are disposed of, an estimate of the fair value is re-determined
when related events or circumstances change.
When determining whether impairment of one of our long-lived
assets has occurred, we must estimate the undiscounted cash
flows attributable to the asset or asset group. Our estimate of
cash flows is based on assumptions regarding the volume of
reserves providing asset cash flow and future NGL product and
natural gas prices. The amount of reserves and drilling activity
are dependent in part on natural gas prices. Projections of
reserves and future commodity prices are inherently subjective
and contingent upon a number of variable factors, including, but
not limited to:
|
|
|
|
|
changes in general economic conditions in regions in which the
Partnerships products are located;
|
|
|
|
the availability and prices of NGL products and competing
commodities;
|
|
|
|
the availability and prices of raw natural gas supply;
|
|
|
|
our ability to negotiate favorable marketing agreements;
|
|
|
|
the risks that third party oil and gas exploration and
production activities will not occur or be successful;
|
|
|
|
our 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.
Share Based Compensation.
In October 1995 the
FASB issued SFAS No. 123, Share-Based
Payment, which was revised in December 2004
(SFAS 123R). SFAS 123R requires that the
compensation cost relating to share-based payment transactions
be recognized in the financial statements and that cost be
measured based on the fair value of the equity or liability
instruments issued. We adopted SFAS 123R as of
January 1, 2006 and applied SFAS 123R using the
permitted modified prospective method beginning as of the same
date and our unearned deferred compensation of $289 as of
January 1, 2006 has been eliminated against common unit
equity. Prior to January 1, 2006 we recorded any
unamortized compensation related to restricted unit awards as
unearned compensation in equity.
70
We estimate the fair value of each option granted on the date of
grant using the American Binomial option-pricing model. In
estimating the fair value of each option, we use our peer group
volatility averages as determined on the option grant dates. We
calculate expected lives of the options under the simplified
method as prescribed by the SEC Staff Accounting
Bulletin 107 and have used a risk free interest rate based
on the applicable U.S. Treasury yield in effect at the time
of grant. We estimate the fair value of each restricted unit and
phantom unit granted on the date of grant based on the unit
closing price on that same date. Our compensation expense for
these awards is recognized on the graded vesting attribution
method. Units to be issued under our unit incentive plan may be
from newly issued units. Prior to our adoption of SFAS 123R
on January 1, 2006, we applied Accounting Principles Board
Opinion No. 25 and related interpretations in accounting
for our unit-based compensation awards.
Disclosure
Regarding Forward-Looking Statements
This annual report on
Form 10-K
includes certain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933
and Section 21E of the Securities Exchange Act of 1934.
These statements include statements regarding our plans, goals,
beliefs or current expectations. Statements using words such as
anticipate, believe, intend,
project, plan, continue,
estimate, forecast, may,
will, or similar expressions help identify
forward-looking statements. Although we believe such
forward-looking statements are based on reasonable assumptions
and current expectations and projections about future events, no
assurance can be given that every objective will be reached.
Actual results may differ materially from any results projected,
forecasted, estimated or expressed in forward-looking statements
since many of the factors that determine these results are
subject to uncertainties and risks, difficult to predict, and
beyond managements control. Such factors include:
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the ability to comply with certain covenants in our credit
facility;
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the ability to pay distributions to our unitholders;
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our cash flow is affected by the volatility of natural gas and
NGL product prices, which could adversely affect our ability to
make distributions to unitholders.
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the continued ability to find and contract for new sources of
natural gas supply;
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the general economic conditions in the United States of America
as well as the general economic conditions and currencies in
foreign countries;
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the amount of natural gas transported on our gathering systems;
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the level of throughput in our natural gas processing and
treating facilities;
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the fees we charge and the margins realized for our services;
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the prices and market demand for, and the relationship between,
natural gas and NGLs;
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energy prices generally;
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the level of domestic oil and natural gas production;
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the availability of imported oil and natural gas;
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actions taken by foreign oil and gas producing nations;
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the political and economic stability of petroleum producing
nations;
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the weather in our operating areas;
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the extent of governmental regulation and taxation;
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hazards or operating risks incidental to the transporting,
treating and processing of natural gas and NGLs that may not be
fully covered by insurance;
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competition from other midstream companies;
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71
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loss of key personnel;
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the availability and cost of capital and our ability to access
certain capital sources;
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changes in laws and regulations to which we are subject,
including tax, environmental, transportation and employment
regulations;
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the costs and effects of legal and administrative proceedings;
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the ability to successfully identify and consummate strategic
acquisitions at purchase prices that are accretive to the our
financial results; and
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risks associated with the construction of new pipelines and
treating and processing facilities or additions to our existing
pipelines and facilities;
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the completion of significant, unbudgeted expansion projects may
require debt
and/or
equity financing which may not be available to us on acceptable
terms, or at all; and;
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increases in interest rates could increase our borrowing costs,
adversely impact our unit price and our ability to issue
additional equity, which could have an adverse effect on our
cash flows and our ability to fund our growth.
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These factors are not necessarily all of the important factors
that could cause actual results to differ materially from those
expressed in any of our forward-looking statements. Our future
results will depend upon various other risks and uncertainties,
including, but not limited to those described under
Item 1A. Risk Factors. Other unknown or
unpredictable factors also could have material adverse effects
on our future results. You should not put undue reliance on any
forward-looking statements.
All forward-looking statements attributable to us are qualified
in their entirety by this cautionary statement. We undertake no
duty to update our forward-looking statements to reflect the
impact of events or circumstances after the date of the
forward-looking statements.
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Item 7A.
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Quantitative
and Qualitative Disclosures about Market Risk
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Market risk is the risk of loss arising from adverse changes in
market rates and prices. The principal market risk to which we
are exposed is commodity price risk for natural gas and NGLs. We
also incur, to a lesser extent, risks related to interest rate
fluctuations. We do not engage in commodity energy trading
activities.
Commodity Price Risks.
Our profitability is
affected by volatility in prevailing NGL and natural gas prices.
Historically, changes in the prices of most NGL products have
generally correlated with changes in the price of crude oil. NGL
and natural gas prices are volatile and are impacted by changes
in the supply and demand for NGLs and natural gas, as well as
market uncertainty. For a discussion of the volatility of
natural gas and NGL prices, please read Item 1A. Risk
Factors Risk Factors Related to our Business.
Our cash flow is affected by the volatility of natural gas and
NGL product prices, which could adversely affect our ability to
make distributions to unitholders. To illustrate the impact of
changes in prices for natural gas and NGLs on our operating
results, we have provided the table below, which reflects, for
the years ended December 31, 2008 and 2007, the impact on
our total segment margin of a $0.01 per gallon change (increase
or decrease) in NGL prices coupled with a $0.10 per MMBtu change
(increase or decrease) in the price of natural gas.
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Natural Gas Price Change ($/MMBtu)
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2008
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2007
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$0.10
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$(0.10)
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$0.10
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$(0.10)
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NGL Price Change ($/gal)
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$
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0.01
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$
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615,000
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$
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548,000
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$
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642,000
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$
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194,000
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$
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(0.01
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)
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$
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(472,000
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)
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$
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(649,000
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)
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$
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(207,000
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)
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$
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(645,000
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)
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The increase in commodity exposure is the result of increased
natural gas and NGL product volumes in the year ended
December 31, 2008 compared to the year ended
December 31, 2007. The magnitude of the
72
impact on total segment margin of changes in natural gas and NGL
prices presented may not be representative of the magnitude of
the impact on total segment margin for different commodity
prices or contract portfolios. Natural gas prices can also
affect our profitability indirectly by influencing the level of
drilling activity and related opportunities for our services.
We manage this commodity price exposure through an integrated
strategy that includes management of our contract portfolio,
optimization of our assets and the use of derivative contracts.
As a result of these derivative swap contracts, we have hedged a
portion of our expected exposure to natural gas prices and
natural gas liquids prices in 2009 and 2010. We continually
monitor our hedging and contract portfolio and expect to
continue to adjust our hedge position as conditions warrant. The
following table provides information about our commodity based
derivative instruments at December 31, 2008 for the periods
indicated:
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Average
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Fixed
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Price
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Fair Value
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per
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Asset
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Description and Production Period
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(MMBtu)
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MMBtu
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(Liability)
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Natural Gas Sold Fixed for Floating Price Swaps
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January 2009 December 2009
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2,136,000
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$
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7.30
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$
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6,851
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January 2010 December 2010
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2,136,000
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$
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10.50
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7,141
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$
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13,992
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Interest Rate Risk.
We have elected for the
indebtedness under our credit facility to bear interest at LIBOR
plus the applicable margin. We are exposed to changes in the
LIBOR rate as a result of our credit facility, which is
partially subject to floating interest rates. On October 7,
2008, we entered into a
floating-to-fixed
interest rate swap agreement with an investment grade
counterparty whereby we pay a monthly fixed interest rate of
2.245% and receive a monthly variable rate based on the one
month posted LIBOR interest rate on a notional amount of
$100.0 million. This swap agreement is effective on
January 2, 2009 and terminates on January 1, 2010. As
of December 31, 2008, we had approximately
$252.1 million of indebtedness outstanding under our credit
facility, of which $152.1 million is exposed to changes in
the LIBOR rate. The impact of a 100 basis point increase in
interest rates on the amount of current debt exposed to variable
interest rates would result in an increase in annualized
interest expense and a corresponding decrease in annualized net
income of approximately $1.5 million. The following table
provides information about our interest rate swap at
December 31, 2008 for the periods indicated:
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Fair Value Asset
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Description and Period
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Notional Amount
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Interest Rate
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(Liability)
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Interest Rate Swap
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January 2009 December 2009
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$
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100,000,000
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2.245
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%
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$
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(1,439
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)
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Credit Risk.
Counterparties pursuant to the
terms of their contractual obligations expose us to potential
losses as a result of nonperformance. SemStream, L.P., BP Energy
Company, OGE Energy Resources, Inc., ONEOK Energy Services
Company, LP and ConocoPhillips, Inc. were our largest customers
for the year ended December 31, 2008, accounting for
approximately 16%, 14%, 11%, 10% and 9%, respectively, of our
revenues. Consequently, changes within one or more of these
companies operations have the potential to impact, both
positively and negatively, our credit exposure and make us
subject to risks of loss resulting from nonpayment or
nonperformance by these or any of our other customers. Any
material nonpayment or nonperformance by our key customers could
materially and adversely affect our business, financial
condition or results of operations and reduce our ability to
make distributions to our unitholders. Furthermore, some of our
customers may be highly leveraged and subject to their own
operating and regulatory risks, which increases the risk that
they may default on their obligations to us. Our counterparties
to our commodity based derivative instruments as of
December 31, 2008 are BP Energy Company and Bank of
Oklahoma, N.A. Our counterparty to our interest rate swap as of
December 31, 2008 is Wells Fargo Bank, N.A.
73
On July 22, 2008, SemGroup, L.P. and certain subsidiaries
filed voluntary petitions for reorganization under
Chapter 11 of the U.S. Bankruptcy Code. Affiliates of
SemGroup, L.P. purchase our NGLs and condensate, primarily at
our Bakken and Badlands plants and gathering systems. During the
second quarter 2008, we increased our allowance for doubtful
accounts and bad debt expense by $8.1 million for related
product sales through June 30, 2008. On October 20,
2008, the United States Bankruptcy Court for the District of
Delaware entered an order approving the assumption of a Natural
Gas Liquids Marketing Agreement (the SemStream
Agreement) between SemStream, L.P., an affiliate of
SemGroup, L.P., and us relating to the sale of NGLs and
condensate at our Bakken and Badlands plants and gathering
systems. As a result of the assumption, and in accordance with
the order, on October 21, 2008, SemStream paid
$12.1 million to us, representing amounts owed to us from
SemStream for June and July 2008 product sales under the
SemStream Agreement. The assumption of the SemStream Agreement
restores us and SemStream, L.P. to our pre-bankruptcy
contractual relationship.
Our third quarter 2008 results of operations reflected a
reversal of $7.8 million of the $8.1 million allowance
for doubtful accounts and bad debt expense previously recorded
on our income statement in the second quarter of 2008. After
receipt of the October 21 payment, our total pre-petition credit
exposure to SemGroup, related to condensate sales to SemCrude,
LLC, and outside of the SemStream Agreement, is approximately
$0.3 million, which we have reserved as of
December 31, 2008.
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Item 8.
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Financial
Statements and Supplementary Data
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The See our Financial Statements beginning on
page F-1
for the information required by this Item.
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Item 9.
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Changes
in and Disagreements on Accounting and Financial
Disclosure
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None.
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Item 9A.
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Controls
and Procedures
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Evaluation
of Disclosure Controls and Procedures
(a) Evaluation
of disclosure controls and procedures.
As required by
Rule 13a-15(b)
under the Securities Exchange Act of 1934, as amended, we have
evaluated, under the supervision and with the participation of
our management, including our principal executive officer and
principal financial officer, the effectiveness of the design and
operation of our disclosure controls and procedures (as defined
in
Rules 13a-15(e)
and
15d-15(e)
under the Exchange Act) as of the end of the period covered by
this Annual Report on
Form 10-K.
Based upon that evaluation, our principal executive officer and
principal financial officer concluded that our disclosure
controls and procedures were effective as of December 31,
2008, to ensure that information is accumulated and communicated
to our management, including our principal executive officer and
principal financial officer, as appropriate, to allow timely
decisions regarding required disclosure and is recorded,
processed, summarized and reported within the time periods
specified in the rules and forms of the SEC.
(b) Changes
in internal control over financial reporting.
During the three months ended December 31, 2008, there were
no changes in our system of internal control over financial
reporting (as defined in
Rules 13a-15(f)
and
15d-15(f)
under the Exchange Act) that has materially affected, or is
reasonably likely to materially affect, our internal control
over financial reporting.
Internal
Control Over Financial Reporting
See Managements Report on Internal Control over
Financial Reporting on
page F-2.
74
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Item 9B.
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Other
Information
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There have been no events that occurred in the fourth quarter of
2008 that would need to be reported on
Form 8-K
that have not been previously reported.
PART III
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Item 10.
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Directors
and Executive Officers of the Registrant
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As is the case with many publicly traded partnerships, we do not
have officers, directors or employees. Our operations and
activities are managed by our general partner, Hiland Partners
GP, LLC. References to our directors and officers are references
to the directors and officers of Hiland Partners GP, LLC.
Unitholders do not directly or indirectly participate in our
management or operation. Our general partner owes a fiduciary
duty to our unitholders, as limited by our partnership agreement.
Directors are elected for one-year terms. The following table
shows information regarding the current directors and executive
officers of Hiland Partners GP, LLC.
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Name
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Age
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Position with Hiland Partners GP, LLC
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Harold Hamm
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63
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Chairman of the Board of Directors
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Joseph L. Griffin
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48
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Chief Executive Officer, President and Director
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Matthew S. Harrison
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38
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Chief Financial Officer, Vice President Finance,
Secretary and Director
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Robert W. Shain
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58
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Chief Commercial Officer, Vice President
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Kent C. Christopherson
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51
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Chief Operations Officer, Vice President
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Michael L. Greenwood
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53
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Director
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Edward D. Doherty
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73
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Director
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Rayford T. Reid
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60
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Director
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Shelby E. Odell
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69
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Director
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John T. McNabb, II
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|
64
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|
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Director
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Dr. David L. Boren
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67
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Director
|
Harold Hamm
was elected Chairman of the Board of
Directors of our general partner in October 2004 and serves as
chairman of the compensation committee of the board of directors
of our general partner. Mr. Hamm has served as chairman of
the board of directors of the general partner of Hiland Holdings
GP, LP since September 2006 and also serves as chairman of the
compensation committee of the board of directors of Hiland
Holdings GP, LPs general partner. Mr. Hamm served as
President and Chief Executive Officer and as a director of
Continental Gas, Inc. since December 1994 and then served as
Chief Executive Officer and a director to 2004. Since its
inception in 1967 until October 2005, Mr. Hamm served as
President and Chief Executive Officer and a director of
Continental Resources, Inc. and currently serves as its Chief
Executive Officer and Chairman of its board of directors.
Mr. Hamm is also immediate past President of the National
Stripper Well Association, a member of the executive board of
the Oklahoma Independent Petroleum Association and a member of
the executive board of the Oklahoma Energy Explorers. In
addition, Mr. Hamm is a director of Complete Production
Services, Inc., a publicly traded oilfield service company.
Joseph L. Griffin
was appointed Chief Executive Officer,
President and a director of our general partner in June 2007.
Mr. Griffin has also served as Chief Executive Officer,
President and a director of the general partner of Hiland
Holdings since June 2007. Mr. Griffin has more than
20 years of experience in the midstream natural gas
industry. From 2004 to June 2007, Mr. Griffin served as
executive vice president over multiple facets of the business of
Lumen Midstream Partnership, a subsidiary of the Southern Ute
Indian Tribe, in Tulsa, OK. In 1989, Mr. Griffin co-founded
Lumen Midstream, held various senior level management positions
and served as a director until Lumen was sold in 2004 to the
Southern Ute Indian Tribe. Mr. Griffin holds a Bachelor of
Science degree in Business Administration from Oklahoma State
University and is also a Certified Public Accountant.
75
Matthew S. Harrison
was appointed Chief Financial
Officer, Vice President Finance, Secretary and a
director of our general partner in April 2008. Mr. Harrison
has served as Chief Financial Officer, Vice
President Finance, Secretary and a director of the
general partner of Hiland Holdings since April 2008.
Mr. Harrison joined Hiland as Vice President of Business
Development in February 2008 from Wachovia Securities where he
most recently was a director for its Energy & Power
Mergers & Acquisitions Group. Prior to joining
Wachovia in 2007, Mr. Harrison spent eight years with A.G.
Edwards Capital Markets Mergers & Acquisitions
Group, most recently leading its energy mergers &
acquisitions effort. Prior to joining A.G. Edwards,
Mr. Harrison spent five years with Price Waterhouse as a
senior accountant. He holds a B.S. degree in Accounting from the
University of Tennessee, a Masters of Business Administration
degree from the Kellogg Graduate School of Management at
Northwestern University and is a Certified Public Accountant.
Robert W. Shain
was elected as our Vice President
Northern Region Operations & Engineering in March
2006, was appointed Vice President Operations and
Engineering in June 2006 and most recently was appointed Vice
President Chief Commercial Officer in August 2008.
Mr. Shain has also served as Vice President
Chief Commercial Officer of the general partner of Hiland
Holdings since August 2008. Mr. Shain has over
30 years of experience in the oil and gas industry. The
majority of his experience has been in the engineering and
operations of midstream natural gas gathering, compression,
processing and treating, along with business development, gas
supply and marketing. From July 2003 until March 2006,
Mr. Shain served as Vice President of Operations and
Engineering for Seminole Gas Company, LLC (successor to Impact
Energy, LTD) in Tulsa, Oklahoma. From May 1995 until July 2003
Mr. Shain served in a variety of commercial roles, most
recently of which was Vice President of Commercial Services, for
CMS Field Services, LLC (successor to Heritage Gas Services,
LLC) also in Tulsa, Oklahoma, in which he was responsible
for the development and management of operating and capital
budgets. Mr. Shain holds a B.S degree in Mechanical
Engineering from Texas A & M University.
Kent C. Christopherson
was appointed Vice
President Chief Operations Officer in August 2008.
Mr. Christopherson has also served as Vice
President Chief Operations Officer of the general
partner of Hiland Holdings since August 2008.
Mr. Christopherson joined Hiland from DCP Midstream
Partners, L.P. where he served as Senior Director of Operating
Excellence and Reliability Services since 2002. Prior to joining
DCP, Mr. Christopherson was employed by Western Gas
Resources and Flopetrol-Johnson Schlumberger.
Mr. Christopherson earned a B.S. degree in Mining
Engineering & Geology from the South Dakota School of
Mines and Technology, a Masters of Business Administration
degree from Nova Southeastern University and is a Certified
Maintenance & Reliability Professional by the Society
of Maintenance & Reliability Professionals and a
Certified Lubrication Specialist by the Society of
Tribologists & Lubrication Engineers.
Michael L. Greenwood
was elected as a director of our
general partner in February 2005, and serves as chairman of the
audit committee of our general partner. Mr. Greenwood has
served as a director of the general partner of Hiland Holdings
GP, LP since September 2006, and serves as chairman of the audit
committee of the board of directors of Hiland Holdings GP,
LPs general partner. Mr. Greenwood is founder and
managing director of Carnegie Capital LLC, a financial advisory
services firm providing investment banking assistance to the
energy industry. Mr. Greenwood previously served as Vice
President Finance and Treasurer of Energy Transfer
Partners, L.P. until August 2004. Prior to its merger with
Energy Transfer, Mr. Greenwood served as Vice President and
Chief Financial Officer & Treasurer of Heritage
Propane Partners, L.P. from 2002 to 2003. Prior to joining
Heritage Propane, Mr. Greenwood was Senior Vice President,
Chief Financial Officer and Treasurer for Alliance Resource
Partners, L.P. from 1994 to 2002. Mr. Greenwood has over
25 years of diverse financial and management experience in
the energy industry during his career with several major public
energy companies including MAPCO Inc., Penn Central Corporation,
and The Williams Companies. Mr. Greenwood holds a Bachelor
of Science in Business Administration degree from Oklahoma State
University and a Master of Business Administration degree from
the University of Tulsa.
Edward D. Doherty
was elected as a director of our
general partner in February 2005, and serves as a member of the
audit committee of the board of directors of our general
partner. Mr. Doherty has served as a director of the
general partner of Hiland Holdings GP, LP since September 2006,
and serves as a member of the audit committee of the board of
directors of Hiland Holdings GP, LPs general partner.
Since March 2006,
76
Mr. Doherty has been a partial owner and CEO of ANZ
Terminals Pty. Ltd., an Australian company which owns and
operates eight liquid storage terminals in Australia and New
Zealand. Mr. Doherty also provides consulting services on
terminal acquisitions. Mr. Doherty served as the Chairman
and Chief Executive Officer of Kaneb Pipe Line Company LLC, the
general partner of Kaneb Pipe Line Partners L.P. since its
inception in September 1989 until July 2005. Prior to joining
Kaneb, Mr. Doherty was President and Chief Executive
Officer of two private companies, which provided restructuring
services to troubled companies and was President and Chief
Executive Officer of Commonwealth Oil Refining Company, Inc., a
public refining and petrochemical company. Mr. Doherty
holds a Bachelor of Arts degree from Lafayette College and a
Doctor of Jurisprudence from Columbia University School of Law.
Rayford T. Reid
was elected as a director of our general
partner in May 2005, and serves as a member of the compensation
committee of the board of directors of our general partner.
Mr. Reid has served as a director of the general partner of
Hiland Holdings GP, LP since September 2006, and serves as a
member of the compensation committee of the board of directors
of Hiland Holdings GP, LPs general partner. Mr. Reid has
more than 35 years of investment banking, financial
advisory and commercial banking experience, including
30 years focused on the oil and gas industry. Mr. Reid
is President of Kentucky Downs Partners, LLC (KDP).
KDPs principal business is the ownership of a controlling
interest in a thoroughbred horse racing track in Franklin,
Kentucky. Prior to forming KDP in 2007, Mr. Reid served as
President of R. Reid Investments Inc., a private investment
banking firm which exclusively served companies engaged in the
energy industry. Mr. Reid holds a Bachelor of Arts degree
from Oklahoma State University and a Master of Business
Administration degree from the Wharton School of the University
of Pennsylvania.
Shelby E. Odell
was elected as a director of our general
partner in September 2005. Mr. Odell serves as a member of
our audit committee of the board of directors of our general
partner and, as of January 21, 2009, as a member of our
conflicts committee of the board of directors of our general
partner. Mr. Odell served as a director of the general
partner of Hiland Holdings GP, LP from September 2006 to January
2009. Mr. Odell has 40 years of experience in the
petroleum business, including marketing, distribution,
acquisitions, innovation of new asset opportunities, and
management. From 1974 to 2000, Mr. Odell held several
positions with Koch Industries. He retired in 2000 as President
of Koch Hydrocarbon Company and Sr. Vice President of Koch
Industries. Prior to joining Koch, Mr. Odell advanced
through several positions with Phillips Petroleum Company. He is
a past member of the Board of Directors of the Gas Processors
Association and holds an Associate Degree in Accounting from
Enid Business College.
John T. McNabb, II
was elected as a director of our
general partner in August 2006, and he serves as chairman of the
conflicts committee and as a member of the compensation
committee of the board of directors of our general partner.
Mr. McNabb is the founder of Growth Capital Partners, LP, a
merchant banking firm that provides financial advisory services
to middle market companies throughout the United States, and he
has served as the chairman of its board of directors since 1992.
Mr. McNabb was a Managing Director of Bankers
Trust Company, managing commercial banking, investment
banking and financial advisory activities in the Southwest for
Bankers Trust Company, and a director of BT Southwest,
Inc., an affiliate of Bankers Trust New York
Corporation. Mr. McNabb has served on six public boards. He
currently serves as Chairman of the board of directors of
Willbros Group, Inc. He started his career, after serving in the
U.S. Air Force during the Vietnam conflict, with Mobil Oil
in its exploration and production division. Mr. McNabb
holds a Bachelor of Arts in History and a Masters of Business
Administration from Duke University.
Dr. David L. Boren
was elected as a director of our
general partner in August 2006. Dr. Boren served as a
member of the conflicts committee of the board of directors of
our general partner from August 2006 until January 21,
2009. Dr. Boren serves as President of the University of
Oklahoma, a position he has held since November of 1994. Prior
to becoming President of the university, he served in the United
States Senate representing Oklahoma from 1979 to 1994. During
his service in the Senate he was the longest serving Chairman of
the U.S. Select Committee on Intelligence. From 1975 to
1979, Dr. Boren was Governor of Oklahoma. Before being
elected Governor, he served 8 years in the Oklahoma House
of Representatives. He engaged in the private practice of law
from 1969 to 1974. He also served as a professor of Political
Sciences at Oklahoma Baptist University from 1970 to 1974. In
1986 Dr. Boren founded the Oklahoma Foundation for
Excellence, a private foundation which rewards and encourages
excellence in public education. He continues
77
to serve as its Chairman. Dr. Boren received his BA degree
from Yale University in 1963, his Masters Degree in
Economics from Oxford University in 1965 as a Rhodes Scholar and
his Juris Doctorate Degree from the University of Oklahoma in
1968. He previously served as a director of ConocoPhillips Inc.
and currently serves as a director of Texas Instruments, AMR
Corporation and Torchmark Corporation.
Board
Committees
The board appoints committees to help carry out its duties. In
particular, the board committees work on key issues in greater
detail than would be possible at full board meetings. Only
non-employee directors may serve on the audit, compensation and
conflicts committees. Each committee has a written charter. The
charters are posted on our Web site and are available free of
charge on request to our Secretary at the address given under
Contact Us.
The table below shows the current membership of each board
committee.
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Name
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Audit
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Conflicts
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Compensation
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Mr. Hamm
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C
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Mr. Greenwood
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C
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Mr. Doherty
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*
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Mr. Reid
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*
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Mr. Odell
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*
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*
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Mr. McNabb, II
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C
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*
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Dr. Boren
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C = Chairman
* = Member
Audit
Committee
The audit committee of our general partners board of
directors is comprised of three non-employee members of the
board. The committee is appointed by the board of directors to
assist the board in fulfilling its oversight responsibilities.
Its primary responsibility is to monitor the quality, integrity
and reliability of the financial reporting process, review the
adequacy of our systems of internal controls for financial
reporting, legal compliance and ethics established by management
and the board and review procedures for internal auditing.
Responsibilities also include the appointment, compensation,
retention and oversight of the work of the independent
registered public accounting firm engaged to prepare the audit
report or perform other audit, review or attestation services.
The committee reviews proposed audit plans for the year and the
coordination of these plans with the independent registered
public accounting firm. The committee also reviews, in
conjunction with management and the independent registered
public accounting firm, the financial statements and other
information contained in our quarterly and annual reports filed
with the SEC to determine that the independent registered public
accounting firm is satisfied with the disclosure and content of
such financial statements and other information included in the
reports. The committee shall have authority to obtain advice and
assistance from internal or external legal, financial and other
advisors.
The board has determined that all members of the committee are
independent within the meaning of both the SEC rules and NASDAQ
listing standards. The board has further determined that all
members are financially literate within the meaning of the
NASDAQ standards and that Mr. Greenwood is an audit
committee financial expert as defined in the SEC rules. In
making these determinations, the board reviewed information from
each of these non-employee directors concerning all of their
respective relationships with us and analyzed the materiality of
those relationships.
Conflicts
Committee
The conflicts committee of our general partners board of
directors is comprised of two non-employee members of the board.
The committee is appointed by the board of directors of our
general partner to carry
78
out the duties delegated by the board that relate to specific
matters that the board believes may involve conflicts of
interests between us and our affiliates, on the one hand and us
and any other group member, any partner or any assignee, on the
other hand. The committee is composed solely of two independent
directors who are not unitholders, officers or employees of us
or our general partner, officers, directors or employees of any
affiliate or holders of any ownership interest in us other than
our common units and who also meet the independence and
experience standards established by NASDAQ and any applicable
laws and regulations.
The committee shall advise the board on actions to be taken by
us or matters related to us upon request of the board. The
committee determines if the resolution of such conflicts of
interest is fair and reasonable to us. Any matters approved by
the conflicts committee will be conclusively deemed to be fair
and reasonable to us, approved by all of our partners, and not a
breach by our general partner of any duties it may owe to us or
to our unitholders. In connection with the committees
resolution of any conflict of interest, the committee is
authorized to consider the relative interests of any party to
such conflict, agreement, transaction or situation and the
benefits and burdens relating to such interest, any customary or
accepted industry practices and any customary or historical
dealings with a particular person. The committee is also
authorized to consider any applicable generally accepted
accounting practices or principles and such additional factors
as the committee determines in its sole discretion to be
relevant, reasonable or appropriate under the circumstances.
With respect to any contribution of assets to the Partnership in
exchange for Partnership securities, the committee, in
determining whether the appropriate number of Partnership
securities are being issued, may take into account, among other
things, the fair market value of the assets, the liquidated and
contingent liabilities assumed, the tax basis in the assets, the
extent to which tax-only allocations to the transferor will
protect the existing partners of the Partnership against a low
tax basis, and such other factors as the committee deems
relevant under the circumstances. The committee shall have
authority to obtain advice and assistance from internal or
external legal, financial and other advisors.
Compensation
Committee
The compensation committee of our general partners board
of directors is comprised of three non-employee members of the
board. The committee has overall responsibility for approving
and evaluating the general partners director and officer
compensation plans, policies and programs.
The committee oversees the compensation for our senior
executives, including their salary, bonus, and incentive and
equity awards. The committee is responsible primarily for
reviewing, approving and reporting to the board on major
compensation and benefits plans, policies and programs of the
company; reviewing and evaluating the performance and approving
the compensation of senior executive officers; and overseeing
management development programs, performance assessment of
senior executives and succession planning. Other specific duties
and responsibilities include: annually reviewing and approving
corporate goals and objectives relevant to the chief executive
officer (CEO) base compensation,
incentive-compensation plans and equity-based plans; evaluating
the CEOs performance in light of those goals and
objectives, and recommending to the board either as a committee
or together with the other independent directors, the CEOs
compensation levels based on this evaluation; and producing the
required annual report on executive compensation.
The compensation committee has the sole authority to retain,
amend the engagement with, and terminate any compensation
consultant to be used to assist it in the evaluation of
director, CEO or officer compensation. The committee has sole
authority to approve the consultants fees and other
retention terms and shall have authority to cause us to pay the
fees and expenses of such consultants. The committee shall also
have authority to obtain advice and assistance from internal or
external legal, accounting or other advisors, to approve the
fees and expenses of such outside advisors, and to cause us to
pay the fees and expenses of such outside advisors.
79
Report of
the Audit Committee for the Year Ended December 31,
2008
Our management is responsible for our internal controls and our
financial reporting process. Grant Thornton LLP, our Independent
Registered Public Accounting Firm for the year ended
December 31, 2008, is responsible for performing an
integrated audit of the effectiveness of internal control over
financial reporting and an independent audit of our consolidated
financial statements in accordance with standards of the Public
Company Accounting Oversight Board and to issue a report
thereon. Our audit committee monitors and oversees these
processes. Our audit committee, made up of members of our
general partners Board of Directors, selects our
independent registered public accounting firm.
Our audit committee has reviewed and discussed our audited
consolidated financial statements with our management and the
independent registered public accounting firm. Our audit
committee has discussed with Grant Thornton LLP the matters
required to be discussed by Statement on Auditing Standards
No. 61, as amended, Communications with Audit
Committees, including that firms independence.
Members of the Audit Committee:
Michael L. Greenwood
Edward D. Doherty
Shelby E. Odell
Code of
Ethics
Our general partner has adopted a Financial Officers Code of
Ethics applicable to the Chief Executive Officer and the Chief
Financial Officer, Controller and all other senior financial and
accounting officers (the Senior Financial Officers)
with regard to Partnership-related activities. This Code of
Ethics contains the policies that relate to the legal and
ethical standards of conduct that the Senior Financial Officers
of our general partner are expected to comply with while
carrying out their duties and responsibilities on behalf of the
Company. The Code of Ethics also incorporates expectations of
Senior Financial Officers that enable us to provide accurate and
timely disclosure in our filings with the SEC and other public
communications. The Code of Ethics is publicly available on our
website under the Governance section (at
www.hilandpartners.com
) and is also available free of
charge on request to the Secretary at the address given under
Contact Us.
Section 16(a)
Beneficial Ownership Reporting Compliance
Based upon our records, we believe that during 2008 all
reporting persons complied with the Section 16(a) filing
requirements applicable to them.
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Item 11.
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Executive
Compensation
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COMPENSATION
DISCUSSION AND ANALYSIS
Compensation
Objectives and Philosophy
The executive compensation program of our general partner is
designed to enable our general partner to execute our business
objectives by attracting, retaining, and motivating the highest
quality of executive talent and by rewarding superior
performance. Performance management focuses on building
competencies required for our business and achieving the highest
level of contribution from each employee. Our compensation and
benefits policies and practices are designed to motivate and
reward officers and employees to achieve goals and objectives
that are expected to lead to
long-term
enhancement of unitholder value, provide total compensation that
is competitive within the market place and align individual
compensation with competency and contribution so that
performance, tied to measurable objectives and results, will be
rewarded appropriately. We identify our marketplace as the
following publicly traded midstream and pipeline master limited
partnerships within our peer group:
Atlas Pipeline Partners, L.P., Copano Energy, L.L.C., Crosstex
Energy, L.P., DCP Midstream Partners, LP, Eagle Rock Energy
Partners, L.P., MarkWest Energy Partners, L.P., Quicksilver Gas
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Services, LP, Regency Energy Partners LP, Targa Resources
Partners LP, Western Gas Partners, LP and Williams Partners,
L.P. The compensation committee, established in May 2005,
believes this definition of our marketplace along with
third-party industry compensation surveys provides a good
benchmark for analyzing the competitiveness of our executive
compensation program.
In addition to base salary, executive officers are compensated
on a
performance-oriented
basis through the use of incentive compensation linking both
annual and
longer-term
results. The annual incentive cash bonus permits team and
individual performance to be recognized and is based, in part,
on an evaluation of the contribution made by the officer to our
performance. Equity compensation awards are included in the
compensation program to reward executive officers for
long-term
strategic actions that increase our value and thus unitholder
value and to link a significant amount of an executives
current and potential future net worth to our success. This use
of equity compensation directly relates a portion of each
executive officers
long-term
remuneration to our unit price, and therefore aligns the
executives compensation with the interests of our
unitholders. The discretionary granting of unit options, as well
as the use of restricted and phantom units, is used to
(1) recognize promotions of executives into positions of
significant responsibilities; (2) recognize significant
accomplishments of executives, particularly as the
accomplishments impact growth, profits
and/or
competitive positioning; and (3) attract and retain high
level executive talent.
Oversight
of Executive Compensation Program
The compensation committee of our general partner administers
our executive officer compensation program. The compensation
committee is primarily responsible for reviewing, approving and
reporting to the board on major compensation and benefits plans,
policies and programs of the Partnership; reviewing and
evaluating the performance and approving the compensation of
senior executive officers; and overseeing management development
programs, performance assessment of senior executives and
succession planning. Other specific duties and responsibilities
include: annually reviewing and approving corporate goals and
objectives relevant to the chief executive officer
(CEO) base compensation, incentive-compensation
plans and equity-based plans; evaluating the CEOs
performance in light of those goals and objectives, and
recommending to the board, either as a committee or together
with the other independent directors, the CEOs
compensation levels based on this evaluation; and producing the
required annual report on executive compensation. The
compensation committee annually evaluates the effectiveness of
the executive compensation program in meeting its objectives.
The CEO serves in an advisory role to the compensation committee
with respect to executive compensation for the executive
officers other than himself. In addition, the compensation
committee may request the CEO to provide management feedback and
recommendations on changes in the design of the executive
compensation programs and executive compensation policies. The
CEO does not participate in determining or recommending the form
or amount of compensation for himself or for the outside
directors. The CEOs recommendations are given significant
weight by the compensation committee, but the compensation
committee remains responsible for all final decisions regarding
compensation levels for the executive officers, the executive
compensation policies and executive compensation programs. The
CEO is not present during the compensation committees
discussions regarding his own compensation. In the CEOs
advisory role to the compensation committee, he does not have
the authority to call a meeting of the compensation committee.
Only the chairperson of the committee, two or more members of
the committee or the Chairman of the Board of Directors may call
a committee meeting pursuant to the compensation
committees charter. However, the CEO is involved in
setting the agenda for compensation committee meetings and
generally attends such meetings (other than the portions of the
meetings during which his compensation and performance are
discussed).
The CEO submits annual base compensation, incentive-compensation
and equity-based compensation recommendations of senior
executive officers below the CEO to the compensation committee
based on each executives contribution to our performance
and each executives responsibilities and management
abilities. The compensation committee evaluates compensation
with reference to our financial and operating performance,
distribution performance, relative unitholder total return for
the prior fiscal year, competitive compensation data of
executives in our marketplace and each executives
individual performance evaluation, length of
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service with the company and previous work experience. The
compensation committee annually advises the board on the
compensation to be paid to the executive officers and approves
the compensation for executive officers.
The compensation committee has the sole authority to retain,
amend the engagement with, and terminate any compensation
consultant to be used to assist it in the evaluation of
director, CEO and executive officer compensation, as
appropriate. The committee has sole authority to approve the
consultants fees and other retention terms and shall have
authority to cause us to pay the fees and expenses of such
consultants. The committee shall also have authority to obtain
advice and assistance from internal or external legal,
accounting or other advisors, to approve the fees and expenses
of such outside advisors, and to cause us to pay the fees and
expenses of such outside advisors.
Elements
of Compensation
Our general partners executive compensation program
currently consists of the following elements:
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base salaries;
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annual incentive cash bonuses; and
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long-term
incentive compensation.
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Base
Salaries
Base salary for each executive officer is determined annually by
an assessment of our overall financial and operating
performance, each executive officers performance
evaluation, changes in executive officer responsibilities and
relevant marketplace data. While many aspects of performance can
be measured in financial terms, the compensation committee also
evaluates senior management in areas of performance that are
more subjective. These areas include the development and
execution of strategic plans, the exercise of leadership in the
development of management and other employees, innovation and
improvement in our business activities, as well as the
executives involvement in industry groups and in the
communities that we serve. Our general partner seeks to
compensate executives for their performance throughout the year
with annual base salaries that are fair and competitive within
our marketplace. Our general partner believes that executive
base salaries should be targeted near the median of the range of
salaries for executives in similar positions and with similar
responsibilities in our marketplace and adjusted for financial
and operating performance and each executives performance
evaluation, length of service with the company and previous work
experience. Individual salaries are generally established in
alignment with these considerations to ensure the attraction,
development and retention of superior talent, as well as in
relation to individual executive performance. Base salaries are
reviewed annually to ensure continuing consistency with market
levels and our level of financial performance during the
previous fiscal year. Future adjustments to base salaries and
salary ranges will reflect average movement in the competitive
market as well as individual performance. The compensation
committee approves annual base salary adjustments, if any, for
the CEO, and for each officer below the CEO level based on the
CEOs recommendations.
Base salaries in 2008 for the past Chief Financial Officer
(past CFO) and the Vice President of Operations and
Engineering were set based on (1) the latest available
financial results of operations; (2) each executives
performance evaluation; and (3) the comparable base
salaries of executives within our marketplace and our most
recent third-party industry compensation survey. The past
CFOs annual base salary was $250,000 for the period of
November 2007 through April 2008, upon his resignation. The past
CFOs annual base salary, established by the compensation
committee in November 2007, approximated the median annual base
salaries within our marketplace for 2006 and our most recent
third-party industry compensation survey for his position. The
Vice President of Operations and Engineerings annual base
salary was $190,000 for the period of March 2007 to March 2008.
On August 7, 2008, the Vice President of Operations and
Engineering was appointed to Vice President Chief
Commercial Officer. The Vice President Chief
Commercial Officers current annual base salary,
established at the compensation committees meeting in
March 2008, is $210,000 and approximated 83% of the median
annual base salary within our most recent third-party industry
82
compensation survey for his position. The CEOs annual base
salary for the period from November 2007 to present was $290,000
and approximated 83% of the median annual base salary within our
marketplace for 2006 for his position. The CEOs current
annual base salary was set based on his initial performance
evaluation. The Vice President of Business Developments
annual base salary, established upon his February 4, 2008
hire date, was $200,000 for the period February 2008 to present.
The Vice President of Business Developments annual base
salary was primarily determined by the comparable base salaries
of similar executives within our marketplace and previous work
experience. On April 16, 2008, the Vice President of
Business Development was appointed to Chief Financial Officer
upon resignation of our past CFO. The Vice President and Chief
Operations Officers annual base salary, established upon
his August 4, 2008 hire date, was $205,000 for the period
August 2008 to present. The Vice President and Chief Operations
Officers annual base salary was primarily determined by
the comparable base salaries of similar executives within our
marketplace and previous work experience. Base salaries for our
four named executive officers are to be addressed at the
compensation committee meeting to be held in March 2009.
Annual
Incentive Cash Bonus
As one way of accomplishing its compensation objectives, the
compensation committee of the general partner rewards executive
officers for their contribution to our financial and operational
success through the award of discretionary annual incentive cash
bonuses intended to encourage the attainment of strategic,
operational and financial goals and for individual performance
measures. The compensation committee approves the annual
incentive award, if any, for the CEO, and for each officer below
the CEO level based on the CEOs recommendations.
While target bonuses are initially set at 50% of base salaries,
the compensation committee has broad discretion to retain,
reduce or increase the award amounts when making its final bonus
determinations in March. The awards are also contingent on the
executive officers continued employment with the
Partnership at the time of the award in March. Further, bonuses
(similar to other elements of the compensation provided to the
executive officers) are not based on a prescribed formula or
pre-determined goals or performance targets but rather have been
determined on a subjective basis and generally have been based
on a subjective evaluation of individual, company and industry
performance. The compensation committee believes that this
approach to assessing performance results in more comprehensive
evaluation and fairer compensation decisions.
From an enterprise-wide perspective and industry perspective,
the compensation committee recognized the following factors
during its March 2008 meeting (without assigning any
particular weighting to any factor):
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financial performance for the prior fiscal year, including
EBITDA and distributions, in comparison to guidance provided to
the marketplace during the prior fiscal year;
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operating performance for the prior fiscal year, including inlet
natural gas volumes, natural gas sales volumes and NGL sales
volumes, in comparison to the prior fiscal years actual
results;
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distribution performance for the prior fiscal year compared to
the peer group;
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unitholder total return for the prior fiscal year compared to
the peer group; and
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competitive compensation data of executive officers in the peer
group.
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These factors were selected as the most appropriate measures
upon which to base the annual incentive cash bonus decisions
because they will most directly result in long-term value to our
unitholders.
The personal performance criteria considered by the compensation
committee during its March 2008 meeting related to factors
unique to the individual executive officer, including, for
example:
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each executive officers performance evaluation based upon
responsibilities unique to each executive officer and
leadership/management competencies applicable to all executive
officers;
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length of service with the Partnership; and
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the scope, level of expertise and experience required for the
executive officers position.
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These factors were selected as the most appropriate measures
upon which to base the annual incentive cash bonus decisions
because they help to align individual compensation with
competency and contribution.
EBITDA, distributions per unit, inlet natural gas volumes,
natural gas sales, and NGL sales increased approximately 23%,
10%, 37%, 21% and 40%, respectively in 2007 as compared to 2006.
Our unitholder total return for 2007 was approximately -2%
compared to the median for our marketplace of approximately 15%.
Discretionary cash bonuses were awarded in March 2008 to
our CEO, past CFO, and the Vice President of Operations and
Engineering (now our Vice President Chief Commercial
Officer) in the amounts of $150,000, $125,000 and $95,000,
respectively, representing approximately 58%, 102% and 72% of
the median incentive cash bonuses for such positions within our
marketplace for 2006. The past Vice President of Business
Development received a discretionary cash bonus of $42,000 in
March 2008. Discretionary cash bonuses for our four named
executive officers are to be addressed at the compensation
committee meeting to be held in March 2009.
Long-Term
Incentive Compensation
Our general partner, Hiland Partners GP, LLC adopted the Hiland
Partners, LP
Long-Term
Incentive Plan for its employees and directors of our general
partner and employees of its affiliates. The compensation plan
is administered by the compensation committee of our general
partners board of directors and will continue in effect
until the earliest of (i) the date determined by the board
of directors of our general partner; (ii) the date that
common units are no longer available for payment of awards under
the plan; or (iii) the tenth anniversary of the plan.
The long-term incentive compensation plan is designed to reward
executives and other key employees for the attainment of
financial goals and other performance objectives approved
annually by the compensation committee and to encourage
responsible and profitable growth while taking into account
non-routine factors that may be integral to our success.
Long-term incentive compensation in the form of equity grants of
our common units, such as incentive unit option grants and
grants of restricted units and phantom units, are used to incent
performance that leads to enhanced unitholder value, encourage
retention and closely align the executives interests with
unitholders long-term interests. Equity grants provide a
vital link between the long-term results achieved for our
unitholders and the rewards provided to executives and other key
employees. The equity grants we adopted upon the formation of
our long-term incentive compensation plan were designed to be
comparable with long-term incentive plans of other midstream and
pipeline master limited partnerships.
Under the unit option grant agreement, granted options of common
units vest and become exercisable in one-third increments on the
anniversary of the grant date over three years. Vested unit
options are exercisable within the options contractual
life of ten years after the grant date. Restricted units vest in
quarterly increments over a four-year period from the date of
issuance. Phantom units vest in increments and over a period of
time as determined by the compensation committee. Unvested unit
options, restricted units and phantom units generally become
fully vested upon the disability, death or termination other
than for cause of the holder or a change of control of our
general partner. If the holder ceases to be an officer or
employee of our general partner for any other reason, his or her
unvested unit options, restricted units or phantom units are
forfeited. Unit option awards are less attractive than
restricted units or phantom units to the recipient because the
fair value of the unit option at the grant date is generally
less than the fair value of the restricted unit or phantom unit
at the grant date, which bears no cost to the recipient.
The size of the unit option, restricted unit and phantom unit
grants is determined relative to our size and our market,
employee qualifications and position, as well as master limited
partnership peer group data. All grants to executive officers
require board approval. Neither our general partner nor the
compensation committee has a program, plan or practice to time
options or grants to its executives in coordination with the
release of material nonpublic information. Any unit options,
restricted units or phantom units grants made to non-executive
employees typically will occur concurrently with grants to named
executive officers. All unit
84
options are granted at the fair market value of our units on the
date of grant. The compensation committee determines the
aggregate amounts, terms and timing of unit option, restricted
unit and phantom unit awards. The number of units covered by
each award reflects the executives level of responsibility
along with past and anticipated future contributions to us.
Initially, based on comparable options granted to executives of
similar midstream and pipeline master limited partnerships at
their respective initial public offerings, the past CEO
recommended to the chairman of the board the number of options
to be granted to executive officers and key employees at our
initial public offering in February 2005. In November 2005, the
compensation committee approved 15,000 and 13,000 unit
options to be granted to our Vice President of Operations and
Engineering (now our Vice President Chief Commercial
Officer) and our past Vice President of Business Development,
respectively, on their hire dates in early 2006. In November
2006, the compensation committee approved 3,000 restricted units
to be granted to the Vice President of Operations and
Engineering (now our Vice President Chief Commercial
Officer) and 2,000 restricted units to be granted to key
employees.
In June 2007, the compensation committee approved 10,000 phantom
units to be granted to our current CEO. In November 2007,
the compensation committee approved 5,000 phantom units to be
granted to the past CFO, 5,000 phantom units to be granted to
the Vice President of Operations and Engineering (now our Vice
President Chief Commercial Officer) and 21,825
phantom units to be granted to key employees. In December 2007,
our CEO awarded 1,000 phantom units to a key employee. The
compensation committee approved 7,500 phantom units to be
granted to our Vice President of Business Development (now our
Chief Financial Officer) in February 2008 and approved 7,500
phantom units to be granted to our Vice President
Chief Operations Officer in July 2008. Additionally in 2008, our
CEO approved a total of 7,300 phantom units to be granted to
four key employees.
Employment,
Change in Control and Salary Continuation Agreements
No employment agreements exist with any employee of our general
partner.
Change in control agreements exist only with respect to all
unexercised unit options, restricted units and phantom units
held by employees and directors of our general partner which in
the event of any of the following change of control events
become fully vested and exercisable. A change of control
generally shall be deemed to occur upon the occurrence of one or
more of the following events: (i) any sale, lease, exchange
or other transfer or disposition of all or substantially all of
the assets of the Partnership to any party not affiliated with
the Partnership
and/or
any
of our affiliates; (ii) the consolidation, reorganization,
merger or other transaction pursuant to which more than 50% of
the combined voting power of the outstanding equity interests in
the Partnership cease to be directly or indirectly owned by our
current majority owner group or their affiliate; or
(iii) our general partner ceases to be the general partner
of the Partnership. If a qualifying change in control event had
occurred as of December 31, 2008, the estimated value of
payments and benefits that would inure to the benefit of the
executive officers and directors as a group would have been
approximately $0.2 million.
Our general partner currently has no salary continuation
agreement, or agreement having similar effect, in place with any
employee of our general partner other than the change in control
agreements described above.
Hiland
Holdings GP, LP Class B Common Units
In connection with our initial public offering on
February 15, 2005, our general partner issued Class B
member interests in our general partner to our past CEO and past
CFO as compensation for services to be rendered exclusively for
the benefit of our general partner. In addition, in connection
with the initial public offering of Hiland Holdings GP, LP on
September 25, 2006, Class B common units in Hiland
Holdings, GP, LP, who, at that time, became a majority common
unitholder of Hiland Partners, LP, were issued to our past CEO
and past CFO as consideration for their unvested Class B
member interests in our general partner. The Hiland Holdings GP,
LP Class B common units have substantially identical rights
as Hiland Holdings GP, LP common units and, upon vesting, become
convertible at the election of the holder into common units.
Prior to conversion, the Class B common units are
non-transferable. The Class B common units vested in equal
85
increments on February 15, 2007 and February 15, 2008.
In February and April 2007, our past CEO elected to convert his
vested Class B common units to common units. In April 2007,
our past CEO resigned and his unvested Class B common units
in Hiland Holdings, GP, LP, were forfeited and transferred to
the Hiland Holdings GP, LPs contributing parties on a pro
rata basis based on their vested ownership of Hiland Partners
GP, LLC immediately prior to the contribution of those interests
in connection with their formation. In February 2008, our past
CFO elected to convert his Class B common units to common
units.
Summary
Compensation Table
The following table sets forth information regarding
compensation earned by our CEO, our CFO and three other most
highly compensated executive officers employed in 2008, 2007 and
2006:
SUMMARY
COMPENSATION TABLE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual
|
|
Long-Term Compensation
|
|
|
|
|
|
|
Compensation
|
|
Unit
|
|
Option
|
|
All Other
|
|
|
|
|
|
|
Salary
|
|
Bonus
|
|
Awards
|
|
Awards
|
|
Compensation
|
|
Total
|
Name and Principal Position
|
|
Year
|
|
($)(1)
|
|
($)(2)
|
|
($)(3)
|
|
($)(4)
|
|
($)
|
|
($)
|
|
Joseph Griffin
|
|
|
2008
|
|
|
$
|
275,500
|
|
|
$
|
150,000
|
|
|
$
|
208,690
|
|
|
$
|
|
|
|
$
|
12,000
|
|
|
$
|
646,190
|
|
President and Chief Executive Officer
|
|
|
2007
|
|
|
$
|
137,494
|
|
|
$
|
40,000
|
|
|
$
|
154,426
|
|
|
$
|
|
|
|
$
|
31,667
|
|
|
$
|
363,587
|
|
Matthew Harrison
|
|
|
2008
|
|
|
$
|
172,709
|
|
|
$
|
5,000
|
|
|
$
|
182,976
|
|
|
$
|
|
|
|
$
|
88,847
|
|
|
$
|
449,532
|
|
Vice President Finance, Secretary and Chief
Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert Shain
|
|
|
2008
|
|
|
$
|
205,385
|
|
|
$
|
95,000
|
|
|
$
|
150,629
|
|
|
$
|
|
|
|
$
|
11,019
|
|
|
$
|
462,033
|
|
Vice President Chief Commercial Officer
|
|
|
2007
|
|
|
$
|
184,961
|
|
|
$
|
88,000
|
|
|
$
|
95,217
|
|
|
$
|
20,559
|
|
|
$
|
9,154
|
|
|
$
|
397,891
|
|
|
|
|
2006
|
|
|
$
|
126,151
|
|
|
$
|
40,000
|
|
|
$
|
4,071
|
|
|
$
|
27,858
|
|
|
$
|
69,950
|
|
|
$
|
268,030
|
|
Kent Christopherson
|
|
|
2008
|
|
|
$
|
75,692
|
|
|
$
|
40,000
|
|
|
$
|
61,425
|
|
|
$
|
|
|
|
$
|
76,246
|
|
|
$
|
253,363
|
|
Vice President Chief Operations Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ken Maples
|
|
|
2008
|
|
|
$
|
84,505
|
|
|
$
|
125,000
|
|
|
$
|
|
|
|
$
|
895
|
|
|
$
|
4,995
|
|
|
$
|
215,395
|
|
Past Vice President Finance, Secretary
|
|
|
2007
|
|
|
$
|
218,318
|
|
|
$
|
113,750
|
|
|
$
|
17,306
|
|
|
$
|
11,838
|
|
|
$
|
10,687
|
|
|
$
|
371,899
|
|
and Chief Financial Officer
|
|
|
2006
|
|
|
$
|
192,490
|
|
|
$
|
55,000
|
|
|
$
|
|
|
|
$
|
32,834
|
|
|
$
|
9,560
|
|
|
$
|
289,884
|
|
Ron Hill
|
|
|
2007
|
|
|
$
|
166,211
|
|
|
$
|
51,000
|
|
|
$
|
2,855
|
|
|
$
|
17,792
|
|
|
$
|
8,250
|
|
|
$
|
246,108
|
|
Past Vice President of Business Development
|
|
|
2006
|
|
|
$
|
147,692
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
37,624
|
|
|
$
|
3,173
|
|
|
$
|
188,489
|
|
Randy Moeder
|
|
|
2007
|
|
|
$
|
101,021
|
|
|
$
|
130,000
|
|
|
$
|
|
|
|
$
|
29,342
|
|
|
$
|
5,577
|
|
|
$
|
265,940
|
|
Past President and Chief Executive Officer
|
|
|
2006
|
|
|
$
|
231,058
|
|
|
$
|
85,000
|
|
|
$
|
|
|
|
$
|
52,534
|
|
|
$
|
10,855
|
|
|
$
|
379,447
|
|
Clint Duty
|
|
|
2006
|
|
|
$
|
46,577
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
12,325
|
|
|
$
|
2,598
|
|
|
$
|
61,500
|
|
Past Vice President of Operations and Engineering
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Salary includes base salary and payment in respect of accrued
vacation, holidays and sick days. Mr. Christopherson was
appointed Vice President Chief Operations Officer on
August 7, 2008. Mr. Harrison was appointed Vice
President of Business Development on February 4, 2008 and
was later appointed Vice President Finance,
Secretary, Chief Financial Officer and director on April 5,
2008. Mr. Griffin was appointed President, Chief Executive
Officer and director on June 19, 2007. Mr. Hill was
reassigned in January 2008. Mr. Moeder left our employment
in April 2007 and Mr. Duty left our employment in April
2006. Salaries for our CEO and CFO are allocated between us and
Hiland Holdings for each of the years presented. Generally,
salaries allocated to us represent 95% of total salaries and the
remaining 5% is allocated to Hiland Holdings. The awards shown
above only reflect the 95% allocated to us.
|
|
(2)
|
|
Bonuses paid in 2008 to Messrs. Griffin, Maples and Shain
were awarded in March 2008. Bonuses paid in 2007 were awarded in
March 2007. Bonuses paid in 2006 to Mr. Moeder and
Mr. Maples were awarded in March 2006.
Mr. Christopherson and Mr. Harrison were awarded sign
on bonuses of $40,000 and $5,000, respectively, on their
respective dates of hire in 2008 and Mr. Griffin and
Mr. Shain were each awarded a sign on bonus of $40,000 on
their respective dates of hire in 2007 and 2006.
|
86
|
|
|
(3)
|
|
Mr. Christopherson was awarded 7,500 phantom units on
August 7, 2008, which vest equally on the anniversary of
the grant date over a four year period. Mr. Harrison was
awarded 7,500 phantom units on February 4, 2008, which vest
equally on the anniversary of the grant date over a three year
period. Mr. Griffin was awarded 10,000 phantom units on
June 19, 2007, which vest equally on the anniversary of the
grant date over a four year period. Periodic distributions on
Messrs. Christopherson, Harrison and Griffins phantom
units are held in trust by our general partner until the units
vest. On November 6, 2007 Messrs. Maples, Shain and
Hill were awarded phantom units that also vest equally on the
anniversary of the grant date over a four year period, but do
not accumulate distributions. Mr. Maples forfeited 5,000
phantom units when he resigned on April 4, 2008.
Mr. Shain was awarded 3,000 restricted units on
November 10, 2006. Mr. Shains restricted units
vest in quarterly increments on the anniversary of the grant
date over a period of four years and periodic distributions are
held in trust by our general partner until the units vest.
|
|
(4)
|
|
Mr. Moeder, Mr. Maples and Mr. Duty were granted
32,000, 20,000 and 20,000 unit options, respectively, at an
exercise price of $22.50 per unit on February 10, 2005. The
grant date fair value of $5.11 per unit was determined in
accordance with FAS 123R using the American Binomial
option-pricing model. Mr. Duty forfeited his remaining
unvested 13,333 unit options when he left our employment.
Mr. Hill was hired on January 5, 2006 and was awarded
13,000 unit options at a per unit exercise price of $38.72
with a grant date fair value of $4.82 per unit. Mr. Shain
was hired on March 20, 2006 and was awarded
15,000 unit options at a per unit exercise price of $40.70
with a grant date fair value of $3.91 per unit. The exercise
price of the options granted equaled the market price of the
units on the grant date. The fair value of each option granted,
as determined in accordance with SFAS 123R, was estimated
on the date of grant using the American Binomial option-pricing
model. All unit options vest over a three-year period beginning
on their respective date of grant.
|
|
(5)
|
|
All other compensation includes our discretionary contributions
to our defined contribution retirement plan under which we make
contributions to the plan based on a percentage of eligible
employees compensation. Additionally, in 2008, we paid
relocation expenses of $75,965 for Mr. Christopherson and
$85,113 for Mr. Harrison. In 2007, we paid relocation
expenses of $31,667 for Mr. Griffin and in 2006, $68,104
for Mr. Shain.
|
Grants of
Plan Based Awards
The following table provides information regarding unit options
and restricted and phantom units awarded to our executive
officers in 2008:
GRANTS OF
PLAN BASED AWARDS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other
|
|
|
|
|
|
Awards:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unit
|
|
|
|
|
|
Number of
|
|
|
Exercise or
|
|
|
Grant Date
|
|
|
|
|
|
|
Awards:
|
|
|
Base Price
|
|
|
Securities
|
|
|
Base Price
|
|
|
Fair Value
|
|
|
|
|
|
|
Number of
|
|
|
of Unit
|
|
|
Underlying
|
|
|
of Option
|
|
|
of Option
|
|
|
|
|
|
|
Units
|
|
|
Awards
|
|
|
Options
|
|
|
Awards
|
|
|
Awards
|
|
Name
|
|
Grant Date
|
|
|
(#)
|
|
|
($/Unit)
|
|
|
(#)
|
|
|
($/Unit)
|
|
|
($/Unit)
|
|
|
Mr. Harrison
|
|
|
2/4/2008
|
|
|
|
7,500
|
|
|
$
|
49.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mr. Christopherson
|
|
|
8/7/2008
|
|
|
|
7,500
|
|
|
$
|
43.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mr. Christopherson was awarded 7,500 phantom units on
August 7, 2008, which vest in equal annual installments on
the anniversary of the grant date over a four year period.
Mr. Harrison was awarded 7,500 phantom units on
February 4, 2008, which vest in equal annual installments
on the anniversary of the grant date over a three year period.
Quarterly distributions on the phantom units awarded to
Mr. Harrison and Mr. Christopherson are held in trust
by our general partner until the units vest, at which time they
are distributed to the award recipient.
87
Outstanding
Equity Awards at Fiscal Year-End Table
The following table provides information regarding outstanding
awards that have been granted to our executive officers, but the
ultimate outcomes of which have not been realized:
OUTSTANDING
EQUITY AWARDS AS FISCAL YEAR-END
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Market
|
|
|
|
Number of
|
|
|
Number of
|
|
|
|
|
|
|
|
|
Restricted
|
|
|
Value of
|
|
|
|
Securities
|
|
|
Securities
|
|
|
|
|
|
|
|
|
and Phantom
|
|
|
Units and
|
|
|
|
Underlying
|
|
|
Underlying
|
|
|
Option
|
|
|
|
|
|
Units that
|
|
|
Options that
|
|
|
|
Unexercised
|
|
|
Unexercised
|
|
|
Exercise
|
|
|
Option
|
|
|
Have Not
|
|
|
Have Not
|
|
|
|
Options (#)
|
|
|
Options (#)
|
|
|
Price
|
|
|
Expiration
|
|
|
Vested
|
|
|
Vested
|
|
Name
|
|
Exercisable
|
|
|
Unexercisable
|
|
|
($)
|
|
|
Date
|
|
|
(#)
|
|
|
($)
|
|
|
Mr. Griffin(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,500
|
|
|
$
|
38,475
|
|
Mr. Harrison(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,500
|
|
|
$
|
38,475
|
|
Mr. Shain(3)
|
|
|
10,000
|
|
|
|
5,000
|
|
|
$
|
40.70
|
|
|
|
03/20/16
|
|
|
|
5,250
|
|
|
$
|
26,933
|
|
Mr. Christopherson(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,500
|
|
|
$
|
38,475
|
|
|
|
|
(1)
|
|
Mr. Griffins phantom units vest in equal annual
increments over three years from his first anniversary date of
June 19, 2008.
|
|
(2)
|
|
Mr. Harrisons phantom units vest in equal annual
increments over three years from his February 4, 2008 grant
date.
|
|
(3)
|
|
Mr. Shains 15,000 unit options awarded on
March 20, 2006 vest in one-third annual increments.
Mr. Shains 3,750 phantom units vest in equal annual
increments over three years from his first anniversary date of
November 6, 2008 and 1,500 of his 3,000 restricted units
granted on November 10, 2006 vest in equal annual
increments over a two year remaining period beginning on
November 10, 2008.
|
|
(4)
|
|
Mr. Christophersons phantom units vest in equal
annual increments over four years from his August 7, 2008
grant date.
|
Option
Exercises and Units Vested Table
The table presented below provides information of the values
realized upon the exercise of options and the vesting of
restricted and phantom units of our executive officers during
2008 based on the difference between the market price of the
underlying units at exercise and the exercise or base price of
the unit options:
OPTION
EXERCISES AND UNITS VESTED
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
|
Unit Awards
|
|
|
|
Number
|
|
|
Value
|
|
|
Number
|
|
|
Value
|
|
|
|
of Units
|
|
|
Realized
|
|
|
of Units
|
|
|
Realized
|
|
|
|
Acquired on
|
|
|
Upon
|
|
|
Acquired on
|
|
|
Upon
|
|
|
|
Exercise
|
|
|
Exercise
|
|
|
Vesting
|
|
|
Vesting
|
|
Name
|
|
(#)
|
|
|
($)
|
|
|
(#)
|
|
|
($)
|
|
|
Mr. Griffin
|
|
|
|
|
|
|
|
|
|
|
1,807
|
|
|
$
|
132,775
|
|
Mr. Shain
|
|
|
|
|
|
|
|
|
|
|
1,582
|
|
|
$
|
50,883
|
|
On June 19, 2008, 2,500 of the 10,000 phantom units awarded
to Mr. Griffin on June 19, 2007 vested. Upon vesting,
Mr. Griffin elected to redeem 693 units in cash. On
November 6, 2008, 1,250 of the 5,000 phantom units awarded
to Mr. Shain on November 6, 2007 vested. Upon vesting,
Mr. Shain elected to redeem 418 units in cash. On
November 10, 2008, 750 of the restricted units awarded to
Mr. Shain on November 10, 2006 vested.
Director
Compensation
Mr. Harold Hamm, the chairman of the board of directors of
our general partner and a non-employee director, received no
form of director compensation. Mr. Griffin, our CEO and
Mr. Harrison our CFO, who are
88
employees of our general partner, are also non-compensated
members of the board of directors of our general partner.
Mr. Maples, our past CFO was also a non-compensated member
of the board of directors of our general partner. The table
below shows the total compensation paid in 2008 to each of our
current non-employee directors:
DIRECTOR
COMPENSATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
|
|
|
Restricted
|
|
|
|
|
|
|
Annual
|
|
|
Committee
|
|
|
Unit
|
|
|
Unit
|
|
|
|
|
|
|
Base Fee(1)
|
|
|
Fees
|
|
|
Awards(2)
|
|
|
Distributions(3)
|
|
|
Total
|
|
Name
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
Michael L. Greenwood
|
|
$
|
31,000
|
|
|
$
|
10,500
|
|
|
$
|
44,790
|
|
|
$
|
6,614
|
|
|
$
|
92,904
|
|
Edward D. Doherty
|
|
$
|
31,000
|
|
|
$
|
5,500
|
|
|
$
|
44,790
|
|
|
$
|
6,614
|
|
|
$
|
87,904
|
|
Rayford T. Reid
|
|
$
|
31,000
|
|
|
$
|
6,500
|
|
|
$
|
44,790
|
|
|
$
|
6,614
|
|
|
$
|
88,904
|
|
Shelby E. Odell
|
|
$
|
31,000
|
|
|
$
|
5,500
|
|
|
$
|
36,300
|
|
|
$
|
6,614
|
|
|
$
|
79,414
|
|
John T. McNabb, II
|
|
$
|
31,000
|
|
|
$
|
12,000
|
|
|
$
|
33,592
|
|
|
$
|
3,859
|
|
|
$
|
80,451
|
|
Dr. David L. Boren
|
|
$
|
31,000
|
|
|
$
|
3,750
|
|
|
$
|
33,592
|
|
|
$
|
3,859
|
|
|
$
|
72,201
|
|
|
|
|
(1)
|
|
Includes an annual base fee of $25,000 per director plus $1,500
per director for each quarterly board of directors meeting
attended.
|
|
(2)
|
|
The value shown is the number of restricted units granted in
2008 times the closing price of our units on the day of grant.
The value given does not reflect a reduction for the fact that
the shares are subject to potential forfeiture in the event the
director leaves the board before the four-year vesting period.
In 2008, all non-employee directors, other than Mr. Hamm,
each received 1,000 restricted units on their anniversary date.
|
|
(3)
|
|
Represents the aggregate cash distributions paid at the time the
units vested on all restricted units held by the director.
|
No additional remuneration is paid to officers of our general
partner who also serve as directors. In 2006 through November
2008, our non-employee directors, other than Mr. Hamm,
received (a) a $25,000 annual cash retainer fee,
(b) $1,500 for each regularly scheduled meeting attended,
(c) $750 for each special meeting attended and
(d) 2,000 restricted units upon becoming a director and
1,000 restricted units on each anniversary date of becoming a
director. The restricted units vest in quarterly increments on
the anniversary of the grant date over a period of four years.
In addition to the foregoing, each director who serves on a
committee receives $1,000 for each committee meeting attended,
the chairman of our audit committee receives an annual retainer
of $5,000 and the chairmen of our other committees, excluding
the compensation committee, receive an annual retainer of
$2,500. In November 2008, the compensation committee of our
general partner approved the following remuneration changes
(a) an increase in the annual cash retainer fee from
$25,000 to $30,000, (b) an increase in the annual retainer
fee of the chairman of the audit committee from $5,000 to
$7,500, (c) an increase in the annual retainer fee of the
chairman of the compensation committee from $0 to $2,500, and
(d) the remuneration of Mr. Hamm consistent with other
non-employee directors. In addition, each independent director
is reimbursed for his
out-of-pocket
expenses in connection with attending meetings of the board of
directors or committees. Each director is fully indemnified for
his actions associated with being a director to the fullest
extent permitted under Delaware law.
Reimbursement
of Expenses of Our General Partner
Our general partner will not receive any management fee or other
compensation for its management of our partnership. Our general
partner and its affiliates will be reimbursed for all expenses
incurred on our behalf. These expenses include the cost of
employee, officer and director compensation benefits properly
allocable to our partnership and all other expenses necessary or
appropriate to the conduct of our business and allocable to us.
The partnership agreement provides that our general partner will
determine the expenses that are allocable to us in any
reasonable manner determined by our general partner in its
discretion. There is no cap on the amount that may be paid or
reimbursed to our general partner for compensation or expenses
89
incurred on our behalf. CLR currently provides us with certain
general and administration services. For a description of these
services, please read Certain Relationships and Related
Party Transactions Agreements with Harold Hamm and
His Affiliates Omnibus Agreement
Services. In the omnibus agreement, CLR agreed to continue
to provide these services to us for two years after our initial
public offering, at the lower of CLRs cost to provide the
services or $50,000 per year. During the third quarter of 2006,
we hired a director of information technology and a director of
human resources and transitioned these services away from CLR.
The remainder of general and administration services provided by
CLR under this agreement expired on February 15, 2007.
Long-Term
Incentive Plan
Our general partner, Hiland Partners GP, LLC adopted the Hiland
Partners, LP Long-Term Incentive Plan for its employees and
directors of our general partner and employees of its
affiliates. The plan is intended to promote our interests and
the interests of our general partner by providing to employees
and directors of our general partner and its affiliates
incentive compensation awards for superior performance that are
based on units. The plan is also contemplated to enhance the
ability of our general partner, its affiliates or us to attract
and retain the services of individuals who are essential for our
growth and profitability and to encourage them to devote their
best efforts to advancing our business. The long-term incentive
plan currently permits an aggregate of 680,000 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 our general partners board of
directors. The plan will continue in effect until the earliest
of (i) the date determined by the board of directors of our
general partner; (ii) the date common units are no longer
available for payment of awards under the plan; or
(iii) the tenth anniversary of the plan.
Our general partners 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.
Our general partners 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.
Restricted Units and Phantom Units.
A
restricted unit is a common unit that is subject to forfeiture.
Upon vesting, the grantee receives a common unit that is not
subject to forfeiture. 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. A phantom unit is a notional 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 the our general partners board of directors, and
(ii) the distributions held in trust, if applicable,
related to the vested units. The compensation committee may make
grants of restricted units and phantom units under the plan to
employees and directors containing such terms as the
compensation committee shall determine under the plan, including
the period over which restricted units and phantom units granted
will vest. The compensation committee may, in its discretion,
base its determination on the grantees period of service
or upon the achievement of specified financial objectives. In
addition, the restricted and phantom units will vest upon a
change of control of us or our general partner, subject to
additional or contrary provisions in the award agreement.
If a grantees employment or membership on the board of
directors terminates for any reason, the grantees
restricted units and phantom units will be automatically
forfeited unless, and to the extent, the compensation committee
provides otherwise or unless otherwise provided in a written
employment agreement between the grantee and our general partner
or its affiliates. Common units to be delivered with respect to
these awards may be common units acquired by our general partner
in the open market, common units already owned by our general
partner, common units acquired by our general partner directly
from us or any other person or any combination of the foregoing.
Our general partner will be entitled to reimbursement by us for
90
the cost incurred in acquiring common units. If we issue new
common units with respect to these awards, the total number of
common units outstanding will increase.
Distributions on restricted units may be subject to the same
vesting requirements as the restricted units, in the
compensation committees discretion. The compensation
committee, in its discretion, may also grant tandem distribution
equivalent rights with respect to phantom units. These are
rights that entitle the grantee to receive cash equal to the
cash distributions made on the common units.
We intend for the restricted units and phantom units under the
plan to serve as a means of incentive compensation for
performance and not primarily as an opportunity to participate
in the equity appreciation of the common units. Therefore, plan
participants will not pay any consideration for the common units
they receive, and we will receive no remuneration for the units.
Unit Options.
The long-term incentive plan
permits the grant of options covering common units. The
compensation committee may make grants under the plan to
employees and directors containing such terms as the committee
shall determine. Except in the case of substitute options
granted to new employees or directors in connection with a
merger, consolidation or acquisition, unit options may not have
an exercise price that is less than the fair market value of the
units on the date of grant. In addition, unit options granted
will generally become exercisable over a period determined by
the compensation committee and, in the compensation
committees discretion, may provide for accelerated vesting
upon the achievement of specified performance objectives. The
unit options will become exercisable upon a change in control of
us or of our operating company. Unless otherwise provided in an
award agreement, unit options may be exercised only by the
participant during his lifetime or by the person to whom the
participants right will pass by will or the laws of
descent and distribution. If a grantees employment or
membership on the board of directors terminates for any reason,
the grantees unvested options will be automatically
forfeited unless, and to the extent, the compensation committee
provides otherwise or unless otherwise provided in a written
employment agreement or the option agreement between the grantee
and our general partner or its affiliates. If the exercise of an
option is to be settled in common units rather than cash, the
general partner will acquire common units in the open market or
directly from us or any other person or use common units already
owned by our general partner or any combination of the
foregoing. The general partner will be entitled to reimbursement
by us for the difference between the cost incurred by it in
acquiring these common units and the proceeds it receives from a
grantee at the time of exercise. Thus, the cost of the unit
options above the proceeds from grantees will be borne by us. If
we issue new common units upon exercise of the unit options, the
total number of common units outstanding will increase, and our
general partner will pay us the proceeds it received from the
grantee upon exercise of the unit option. The plan has been
designed to furnish additional compensation to employees and
directors and to align their economic interests with those of
common unitholders.
Unit Option Grant Agreement.
As of
January 1, 2009, we have outstanding unit options to
officers, directors and employees of our general partner to
purchase an aggregate of 33,336 common units with a weighted
average exercise price of $37.92. No unit options were granted
in 2008 or 2007. Under the unit option grant agreements, the
options vest and may be exercised in one third increments on the
anniversary of the grant date over a period of three years. In
addition, the unit options will vest and become exercisable,
subject to certain conditions, upon the occurrence of any of the
following:
|
|
|
|
|
the grantee becomes disabled;
|
|
|
|
the grantee dies;
|
|
|
|
the grantees employment is terminated other than for
cause; and
|
|
|
|
upon a change of control of the Partnership.
|
Of the 75,041 outstanding unit options at January 1, 2008,
40,705 were exercised in 2008, resulting in cash contributions
to us of $1.1 million and 1,000 unit options were
forfeited. Of the remaining 33,336 outstanding unit options at
December 31, 2008, 24,002 were exercisable. On
January 5, 2009, the 4,334 unit options granted on
January 5, 2006 vested, and on March 20, 2009, the
final 5,000 unit options will vest.
91
Compensation
Committee Interlocks and Insider Participation
Harold Hamm serves as the chairman of our Compensation
Committee. Mr. Hamm controls CLR, and the required
disclosure concerning related party transactions involving
Mr. Hamm, CLR and us are set forth below. Other members of
the compensation committee include Mr. John T.
McNabb, II and Mr. Rayford T. Reid.
Report of
the Compensation Committee
The compensation committee of the Board of Directors of Hiland
Partners GP, LLC administers the executive compensation program
of Hiland Partners, LP. The compensation committee is primarily
responsible for reviewing, approving and reporting to the Board
of Directors of Hiland Partners GP, LLC on major compensation
and benefits plans, policies and programs of Hiland Partners,
LP; reviewing and evaluating the performance and approving the
compensation of senior executive officers; and overseeing
management development programs, performance assessment of
senior executives and succession planning. Other specific duties
and responsibilities include: annually reviewing and approving
corporate goals and objectives relevant to the CEO base
compensation, incentive-compensation plans and equity-based
plans; evaluating the CEOs performance in light of those
goals and objectives, and recommending to the Board of
Directors, either as a committee or together with the other
independent directors, the CEOs compensation levels based
on this evaluation; and producing the required annual report on
executive compensation. The compensation committee annually
evaluates the effectiveness of the executive compensation
program in meeting its objectives.
As required by applicable regulations of the Securities and
Exchange Commission, the compensation committee reviewed and
discussed with management the compensation discussion and
analysis contained in this Annual Report on
Form 10-K.
Based on the reviews and discussions referred to above, the
compensation committee recommended to the Board of Directors of
Hiland Partners GP, LLC that the compensation discussion and
analysis be included in the Annual Report on
Form 10-K
for the year ended December 31, 2008 for filing with the
SEC.
Respectively submitted on March 5, 2009 by the members of
the compensation committee of the Board of Directors of Hiland
Partners GP, LLC:
Harold Hamm, Chairman
John T. McNabb, II
Rayford T. Reid
92
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Unitholder Matters
|
Beneficial Ownership of Hiland Partners,
LP.
The following table sets forth the beneficial
ownership of our units as of March 5, 2009 held by each
person who beneficially owned more than 5% or more of the then
outstanding units and all of the directors, named executive
officers, and directors and executive officers as a group of our
general partner.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of
|
|
|
|
|
|
Percentage of
|
|
|
|
|
|
|
Common
|
|
|
Common
|
|
|
Subordinate
|
|
|
Subordinated
|
|
|
Percentage of
|
|
|
|
Units
|
|
|
Units
|
|
|
Units
|
|
|
Units
|
|
|
Total Units
|
|
|
|
Beneficially
|
|
|
Beneficially
|
|
|
Beneficially
|
|
|
Beneficially
|
|
|
Beneficially
|
|
Name of Beneficial Owner
|
|
Owned
|
|
|
Owned
|
|
|
Owned
|
|
|
Owned
|
|
|
Owned
|
|
|
Harold Hamm(1)(2)(3)
|
|
|
2,321,471
|
|
|
|
36.8
|
%
|
|
|
3,060,000
|
|
|
|
100.0
|
%
|
|
|
57.4
|
%
|
Hiland Holdings GP, LP(1)(3)
|
|
|
2,321,471
|
|
|
|
36.8
|
%
|
|
|
3,060,000
|
|
|
|
100.0
|
%
|
|
|
57.4
|
%
|
Joseph L. Griffin(1)
|
|
|
1,807
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Matthew S. Harrison(1)
|
|
|
2,500
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Robert W. Shain(1)(4)
|
|
|
18,832
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Kent C. Christopherson(1)
|
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Michael L. Greenwood(1)(2)(5)
|
|
|
13,291
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Edward D. Doherty(1)(2)(5)
|
|
|
5,000
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Rayford T. Reid(1)(2)(5)
|
|
|
11,818
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Shelby E. Odell(1)(2)(5)
|
|
|
15,000
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
John T. McNabb, II(1)(6)
|
|
|
4,000
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Dr. David L. Boren(1)(6)
|
|
|
4,000
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Kayne Anderson Capital Advisors, L.P.(7)
|
|
|
686,439
|
|
|
|
10.9
|
%
|
|
|
|
|
|
|
|
|
|
|
7.3
|
%
|
All directors and executive officers as a group
|
|
|
2,397,719
|
|
|
|
38.0
|
%
|
|
|
3,060,000
|
|
|
|
100.0
|
%
|
|
|
58.3
|
%
|
|
|
|
*
|
|
Less than 1%.
|
|
(1)
|
|
The address of this person is 205 West Maple,
Suite 1100, Enid, Oklahoma 73701.
|
|
(2)
|
|
These individuals each hold an ownership interest in Hiland
Holdings GP, LP as indicated in the following table.
|
|
(3)
|
|
Mr. Hamm indirectly owns 100% of Hiland Partners GP
Holdings, LLC, the general partner of Hiland Holdings GP, LP.
Accordingly, Mr. Hamm is deemed to be the beneficial owner
of the 2,321,471 common units and 3,060,000 subordinated units
held by Hiland Holdings GP, LP.
|
|
(4)
|
|
1,500 of the indicated common units are restricted units that
vest on the anniversary of the grant date over a period of three
years and 15,000 of these units underly unit options and are
deemed to be outstanding pursuant to
Rule 13d-3.
|
|
(5)
|
|
500, 500, 750 and 1,000 of the indicated common units are
restricted units that vest on the anniversary of each grant date
over periods of one, two, three and four years, respectively.
|
|
(6)
|
|
1,000, 750 and 1,000 of the indicated common units are
restricted units that vest on the anniversary of each grant date
over periods of two, three and four years, respectively.
|
|
(7)
|
|
Represents holdings as of December 31, 2008 as reported on
Schedule 13G filed on February 11, 2009. The address
of this person is 1800 Avenue of the Stars, Second Floor, Los
Angeles, CA 90067.
|
93
Beneficial Ownership of Hiland Holdings GP,
LP.
The following table sets forth the beneficial
ownership of units of Hiland Holdings GP, LP as of March 5,
2009 held by each person who beneficially owned more than 5% or
more of the then outstanding units and all of the directors,
named executive officers, and directors and executive officers
as a group of Hiland Holdings GP, LP.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of
|
|
|
|
Common Units
|
|
|
Common Units
|
|
|
|
Beneficially
|
|
|
Beneficially
|
|
Name of Beneficial Owner(1)
|
|
Owned
|
|
|
Owned
|
|
|
Harold Hamm(2)
|
|
|
7,752,184
|
|
|
|
35.9
|
%
|
Harold Hamm DST Trust(2)
|
|
|
3,232,346
|
|
|
|
15.0
|
%
|
Harold Hamm HJ Trust(2)
|
|
|
2,153,522
|
|
|
|
10.0
|
%
|
Joseph L. Griffin(1)
|
|
|
|
|
|
|
*
|
|
Matthew S. Harrison(1)
|
|
|
|
|
|
|
*
|
|
Robert W. Shain(1)
|
|
|
|
|
|
|
*
|
|
Kent C. Christopherson(1)
|
|
|
|
|
|
|
*
|
|
Michael L. Greenwood(3)
|
|
|
4,000
|
|
|
|
*
|
|
Edward D. Doherty(3)
|
|
|
4,500
|
|
|
|
*
|
|
Rayford T. Reid(3)
|
|
|
29,000
|
|
|
|
*
|
|
Shelby E. Odell(3)
|
|
|
9,000
|
|
|
|
*
|
|
Dr. Cheryl L. Evans(3)
|
|
|
4,500
|
|
|
|
*
|
|
Dr. Bobby B. Lyle(3)
|
|
|
63,904
|
|
|
|
*
|
|
Swank Capital, LLC(4)
|
|
|
1,962,285
|
|
|
|
9.1
|
%
|
Kayne Anderson Capital Advisors, L.P.(5)
|
|
|
1,166,036
|
|
|
|
5.4
|
%
|
All directors and executive officers as a group
|
|
|
7,867,088
|
|
|
|
36.4
|
%
|
|
|
|
*
|
|
Less than 1%.
|
|
(1)
|
|
The address of each person listed above is 205 West Maple,
Suite 1100, Enid, Oklahoma 73701, except for the Harold Hamm DST
Trust and the Harold Hamm HJ Trust, which Mr. Bert Mackie
is the trustee for both trusts and his address is
302 N. Independence, Enid, Oklahoma 73701.
|
|
(2)
|
|
Harold Hamm, the Harold Hamm DST Trust and the Harold Hamm HJ
Trust have a 90.7%, 5.6% and a 3.7% ownership interest,
respectively, in Continental Gas Holdings, Inc., which
beneficially owns 8,481,350 common units. The units held by
Continental Gas Holdings, Inc. are reported in this table as
beneficially owned by Mr. Hamm, the Harold Hamm DST Trust
and the Harold Hamm HJ Trust in proportion to their respective
ownership interest in Continental Gas Holdings, Inc. The address
of Continental Gas Holdings, Inc. is 205 West Maple,
Suite 1100, Enid, Oklahoma 73701.
|
|
(3)
|
|
1,000, 750 and 1,000 of the indicated common units are
restricted units that vest on the anniversary of each grant date
over periods of two, three and four years, respectively.
|
|
(4)
|
|
Represents holdings as of December 31, 2008 as reported on
Schedule 13G filed on February 17, 2009. The address of
this person is 3300 Oak Lawn Avenue, Suite 650, Dallas, TX
75219.
|
|
(5)
|
|
Represents holdings as of December 31, 2008 as reported on
Schedule 13G filed on February 9, 2009. The address of
this person is 1800 Avenue of the Stars, Second Floor, Los
Angeles, CA 90067.
|
Beneficial Ownership of Our General Partner
Interest.
Hiland Holdings GP, LP owns all of our
2% general partner interest, all of our incentive distributions
rights, 2,321,471 of our common units and 3,060,000 of our
subordinated units.
For information on our equity compensation plans, see
Item 5. Equity Compensation Plan Information.
94
|
|
Item 13.
|
Certain
Relationships and Related Transactions and Director
Independence
|
For a discussion of director independence, see Item 10.
Directors and Executive Officers of the Registrant.
Harold Hamm, the Harold Hamm DST Trust and the Harold Hamm HJ
Trust own 60.8% of Hiland Holdings GP, LP, who owns all of our
2% general partner interest, all of our incentive distributions
rights, 2,321,471 of our common units and 3,060,000 of our
subordinated units. Mr. Harold Hamm owns 72.8% of the
ownership interest of Continental Resources, Inc. Since its
inception in 1967, Mr. Hamm has served as Chief Executive
Officer and a director of Continental Resources, Inc. and
currently serves as Chairman of the Board of Directors and Chief
Executive Officer.
Distributions
and Payments to Our General Partner and its Affiliates
Our general partner and its affiliates do not receive any
management fee or other compensation for the management of our
business and affairs, but they are reimbursed for all expenses
that they incur on our behalf, including general and
administrative expenses, salaries and benefits for all of our
employees and other corporate overhead. Our general partner
determines the amount of these expenses. In the omnibus
agreement, CLR agreed to continue to provide certain general and
administrative services to us for two years after our initial
public offering, at the lower of CLRs cost to provide the
services or $50,000 per year. During the third quarter of 2006,
we hired a director of information technology and a director of
human resources and transitioned these services away from CLR.
The remainder of general and administration services provided by
CLR under this agreement expired on February 15, 2007.
Please read Omnibus Agreement
Services below. In addition, our general partner owns the
2% general partner interest and all of the incentive
distribution rights. Our general partner is entitled to receive
incentive distributions if the amount we distribute with respect
to any quarter exceeds levels specified in our partnership
agreement.
Omnibus
Agreement
Upon the closing of our initial public offering, we entered into
an omnibus agreement with CLR, Hiland Partners, LLC, Harold
Hamm, Continental Gas Holdings, Inc. and our general partner
that addressed the following matters:
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Harold Hamms agreement not to compete and to cause his
affiliates (including CLR) not to compete with us under certain
circumstances;
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an indemnity by CLR, Hiland Partners, LLC and Continental Gas
Holdings, Inc. for prior tax liabilities resulting from the
assets contributed to the partnership;
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an indemnity by CLR for liabilities associated with oil and gas
properties conveyed by CGI to CLR by dividend;
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|
our two-year exclusive option to purchase the Bakken gathering
system owned by Hiland Partners, LLC; and
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for a two-year period, CLR will provide certain general and
administrative services.
|
Non-Competition
Harold Hamm will not, and will cause his affiliates not to
engage in, whether by acquisition, construction, investment in
debt or equity interests of any person or otherwise, the
business of gathering, treating, processing and transportation
of natural gas in North America, the transportation and
fractionation of NGLs in North America, and constructing, buying
or selling any assets related to the foregoing businesses. This
restriction does not apply to:
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any business that is primarily related to the exploration for
and production of oil or natural gas, including the sale and
marketing of oil and natural gas derived from such exploration
and production activities;
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|
the purchase and ownership of not more than five percent of any
class of securities of any entity engaged in the business
described above;
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95
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any business conducted by Harold Hamm or his affiliates as of
the date of the omnibus agreement;
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|
any business that Harold Hamm or his affiliates acquires or
constructs that has a fair market value or construction cost, as
applicable, of less than $5.0 million;
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|
any business that Harold Hamm or his affiliates acquires or
constructs that has a fair market value or construction cost, as
applicable, of $5.0 million or more if we have been offered
the opportunity to purchase the business for the fair market
value or construction cost, as applicable, and we decline to do
so with the concurrence of the conflicts committee of our
general partner; and
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any business conducted by Harold Hamm or his affiliates, with
the approval of the conflicts committee.
|
These non-competition obligations will terminate on the first to
occur of the following events:
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|
the first day on which the Hamm Parties no longer control us;
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the death of Harold Hamm; and
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February 15, 2010.
|
Indemnification
CLR, Hiland Partners, LLC and Continental Gas Holdings, Inc.
agreed to indemnify us for all federal, state and local income
tax liabilities attributable to the operation of the assets
contributed by such entities to us prior to the closing of our
initial public offering. In addition, CLR agreed to indemnify us
for a period of five years from the closing date of our initial
public offering for liabilities associated with oil and gas
properties conveyed by CGI to CLR by dividend.
Contracts
with CLR
Compression
Services Agreement
In connection with our initial public offering, we entered into
a four-year compression services agreement with CLR as described
under Managements Discussion and Analysis of
Financial Condition and Results of Operations Our
Contracts Compression Services Agreement. For
the year ended December 31, 2008 we received revenues of
$4.8 million from CLR under this arrangement.
Gas
Purchase Contracts
We purchase natural gas and NGLs from CLR and its affiliates. We
purchased natural gas and NGLs from CLR and its affiliates in
the amount of approximately $116.7 million for the year
ended December 31, 2008.
Badlands
Purchase Contract
On November 8, 2005, we entered into a new
15-year
definitive gas purchase agreement with CLR under which we will
gather, treat and process additional natural gas, which is
produced as a by-product of CLRs secondary oil recovery
operations, in the areas specified by the contract. In return,
we will receive 50% of the proceeds attributable to residue gas
and natural gas liquids sales as well as certain fixed fees
associated with gathering and treating the natural gas,
including a $0.60 per Mcf fee for the first 36 Bcf of
natural gas gathered. The board of directors, as well as the
conflicts committee of the board of directors, of our general
partner have approved the agreement.
In order to fulfill our obligations under the agreement, we
expanded our Badlands gas gathering system and processing plant
located in Bowman County, North Dakota. This expansion project
included the construction of a 40,000 Mcf/d nitrogen
rejection plant, which became operational in the third quarter
of 2007, and the expansion of our existing Badlands
field-gathering infrastructure.
96
Other
Agreements
Historically, our predecessor and Hiland Partners, LLC have
contracted for down hole well services, fluid supply and oil
field services from businesses in which Harold Hamm and members
of his family have historically owned equity interests.
Mr. Hamm and members of his family sold these businesses to
Complete Production Services, Inc. in October 2004.
Mr. Hamm is currently a director and stockholder of
Complete Production Services. Payments made for these services
were $463,000 during the year ended December 31, 2008. We
have continued to obtain services from these companies following
the completion of our initial public offering. Based on various
bids received by our general partner from unaffiliated third
parties, our general partner believes that amounts paid for
these services are comparable to amounts which would be charged
by an unaffiliated third party.
We lease office space under operating leases from an entity
wholly owned by Harold Hamm. Rents paid under these leases
totaled approximately $157,000 for the year ended
December 31, 2008. These rates are consistent with the
rates charged to other non-affiliated tenants in the building
which we office.
In connection with the completion of our initial public
offering, we adopted an ethics policy that requires related
party transactions be reviewed to ensure that they are fair and
reasonable to us. This requirement is also contained in our
partnership agreement.
While we do not have formal, specified policies or procedures
for the review, approval or ratification of transactions
required to be reported under paragraph (a) of
Regulation S-K
Item 404, as related person transactions may result in
potential conflicts of interest among management and board-level
decision makers, our partnership agreement does set forth
procedures that our board of directors may utilize in connection
with resolutions of potential conflicts of interest, including
referral of such matters to an independent conflicts committee
for its review and approval or disapproval of such matters. For
a discussion of our conflicts committee, see Item 10.
Directors and Executive Officers of the Registrant.
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|
Item 14.
|
Principal
Accountant Fees and Services
|
Our audit committee has adopted an audit committee charter,
which is available on our Web site at
www.hilandpartners.com
. The charter requires our audit
committee to approve in advance all audit and non-audit services
to be provided by our independent registered public accounting
firm. Our audit committee ratified Grant Thornton LLP,
Independent Registered Public Accounting Firm, to audit the
books, records and accounts of Hiland Partners, LP for the year
ended December 31, 2008. Audit fees paid to Grant Thornton
LLP in 2008 include fees for our annual integrated audit, review
of documents filed with the Securities and Exchange Commission
and review of our quarterly reports on
Form 10-Q.
Tax fees include tax compliance matters. Fees paid in 2007 to
Grant Thornton LLP for audit services included fees for our
annual integrated audit, review of documents filed with the
Securities and Exchange Commission and reviews of our quarterly
reports on
Form 10-Q.
Fees for audit related services relate to consultation regarding
various business transactions. Tax fees include tax compliance
and acquisition matters. Fees paid to Grant Thornton LLP for the
periods indicated are as follows:
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2008
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2007
|
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Audit Fees
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$
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355,000
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$
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338,000
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Audit Related Fees
|
|
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11,000
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Tax Fees
|
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88,000
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121,000
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All Other Fees
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Total
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$
|
443,000
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|
$
|
470,000
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97
PART IV
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Item 15.
|
Exhibits
and Financial Statement Schedules
|
(a)
Financial Statements
The financial statements listed in the accompanying Index to
Consolidated Financial Statements are filed as part of this
Annual Report on
Form 10-K.
(b)
Other Information
None.
EXHIBITS
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Exhibit
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Number
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Description
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2
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.1
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Acquisition Agreement by and among Hiland Operating, LLC and
Hiland Partners, LLC dated as of September 1, 2005 (incorporated
by referenced to Exhibit 2.1 of Registrants Form 8-K filed
September 29, 2005)
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3
|
.1
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Certificate of Limited Partnership of Hiland Partners, LP.
(incorporated by reference to Exhibit 3.1 of Registrants
Registration Statement on Form S-1 (File No. 333-119908))
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3
|
.2
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First Amended and Restated Limited Partnership Agreement of
Hiland Partners, LP (incorporated by reference to exhibit 3.2 of
Registrants annual report on Form 10-K filed on March 30,
2005)
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3
|
.3
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Certificate of Formation of Hiland Partners GP, LLC
(incorporated by reference to Exhibit 3.3 of Registrants
Registration Statement on Form S-1 (File No. 333-119908))
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3
|
.4
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Second Amended and Restated Limited Liability Company Agreement
of Hiland Partners GP, LLC (incorporated by reference to Exhibit
10.2 of Registrants Form 8-K filed on September 29, 2006)
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4
|
.1
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|
Certificate of Limited Partnership of Hiland Partners, LP.
(incorporated by reference to Exhibit 3.1 of Registrants
Registration Statement on Form S-1 (File No. 333-119908)).
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4
|
.2
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First Amended and Restated Limited Partnership Agreement of
Hiland Partners, LP (incorporated by reference to Exhibit 3.2 of
Registrants annual report on Form 10-K filed on March 30,
2005).
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4
|
.3
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|
Certificate of Formation of Hiland Partners GP, LLC
(incorporated by reference to Exhibit 3.3 of Registrants
Registration Statement on Form S-1 (File No. 333-119908)).
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4
|
.4
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Second Amended and Restated Limited Liability Company Agreement
of Hiland Partners GP, LLC (incorporated by reference to Exhibit
10.2 of Registrants Form 8-K filed on September 29, 2006).
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10
|
.1
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Credit Agreement dated as of February 15, 2005 among Hiland
Operating, LLC and MidFirst Bank (incorporated by reference to
Exhibit 10.1 of Registrants annual report on Form 10-K
filed on March 30, 2005)
|
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10
|
.2*
|
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Hiland Partners, LP Long-Term Incentive Plan (incorporated by
reference to Exhibit 10.2 of Registrants Registration
Statement on Form S-1 (File No. 333-119908))
|
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10
|
.3
|
|
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Compression Services Agreement, effective as of January 28,
2005, by and among Hiland Partners, LP and Continental
Resources, Inc. (incorporated by reference to Exhibit 10.3 of
Registrants annual report on Form 10-K filed on March 30,
2005)
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10
|
.4
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Gas Purchase Contract between Continental Resources, Inc. and
Continental Gas, Inc. (incorporated by reference to Exhibit 10.4
of Registrants Registration Statement on Form S-1 (File
No. 333-119908))
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10
|
.5
|
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Gas Purchase Contract Chesapeake Energy Marketing, Inc. and
Continental Gas, Inc. (incorporated by reference to Exhibit 10.5
of Registrants Registration Statement on Form S-1 (File
No. 333-119908))
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10
|
.6
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Gas Purchase Contract between Magic Circle Energy Corporation
and Magic Circle Gas (incorporated by reference to Exhibit 10.6
of Registrants Registration Statement on Form S-1 (File
No. 333-119908))
|
98
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Exhibit
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Number
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|
Description
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10
|
.7
|
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Gas Purchase Contract between Range Resources Corporation and
Continental Gas, Inc. (incorporated by reference to Exhibit 10.7
of Registrants Registration Statement on Form S-1 (File
No. 333-119908))
|
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10
|
.8
|
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|
Contribution, Conveyance and Assumption Agreement among Hiland
Partners, LP, Hiland Operating, LLC, Hiland GP, LLC, Hiland LP,
LLC, Continental Gas, Inc., Hiland Partners GP, LLC, Hiland
Partners, LLC, Continental Gas Holdings, Inc., Hiland Energy
Partners, LLC, Harold Hamm, Harold Hamm HJ Trust, Harold Hamm
DST Trust, Equity Financial Services, Inc., Randy Moeder, and
Ken Maples effective as of February 15, 2005 (incorporated by
reference to Exhibit 10.8 of Registrants annual
report on Form 10-K filed on March 30, 2005)
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10
|
.9*
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Form of Unit Option Grant (incorporated by reference to Exhibit
10.9 of Registrants Registration Statement on Form S-1
(File No. 333-119908))
|
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10
|
.10
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Omnibus Agreement among Continental Resources, Inc., Hiland
Partners, LLC, Harold Hamm, Hiland Partners GP, LLC, Continental
Gas Holdings, Inc., and Hiland Partners, LP effective as of
February 15, 2005 (incorporated by reference to exhibit 10.10 of
Registrants annual report on Form 10-K filed on March 30,
2005)
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10
|
.11*
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Directors Compensation Summary (incorporated by reference
to exhibit 10.11 of Registrants annual report on Form 10-K
filed on March 30, 2005)
|
|
10
|
.12*
|
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Form of Restricted Unit Grant Agreement (incorporated by
reference to exhibit 10.1 of Registrants Form 8-K filed on
November 14, 2005)
|
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10
|
.13
|
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First Amendment, dated as of September 26, 2005 to Credit
Agreement dated as of February 15, 2005 among Hiland Operating,
LLC and the lenders thereto (incorporated by reference to
Exhibit 10.1 of Registrants Form 8-K filed on
September 29, 2005)
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10
|
.14
|
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Gas Purchase Agreement among Hiland Partners, LP and Continental
Resources, Inc. dated November 8, 2005 (incorporated by
reference to Exhibit 10.1 of Registrants Form 8-K filed on
November 10, 2005)
|
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10
|
.15
|
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|
Unit Purchase Agreement dated May 1, 2006 by and between Hiland
Partners, LP and Hiland Partners GP, LLC (incorporated by
reference to Exhibit 10.1 of Registrants Form 8-K filed on
May 3, 2006)
|
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10
|
.16
|
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|
Asset Purchase Agreement dated March 30, 2006 by and between
Hiland Operating, LLC and Enogex Gas Gathering, L.L.C.
(incorporated by reference to Exhibit 10.2 of Registrants
Form 8-K
filed on May 3, 2006)
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10
|
.17
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|
Second Amendment, dated as of June 8, 2006, to Credit Agreement
dated as of February 15, 2005 among Hiland Operating, LLC and
the lenders thereto (incorporated by reference to Exhibit 10.1
of Registrants Form 8-K filed on June 13, 2006)
|
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10
|
.18
|
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|
Non-Competition Agreement dated September 25, 2006 (2006 by and
among Hiland Partners, LP, Hiland Holdings GP, LP and Hiland
Partners GP Holdings, LLC (incorporated by reference to Exhibit
10.1 of Registrants Form 8-K filed on September 29, 2006)
|
|
10
|
.19
|
|
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|
Retention Agreement, dated as of March 14, 2007, by and among
Randy Moeder, Hiland Partners GP, LLC, Hiland Partners GP
Holdings, LLC and the other parties listed on the signature page
thereto. (incorporated by reference to Exhibit 10.1 of
Registrants Form 8-K filed on March 15, 2007)
|
|
10
|
.20
|
|
|
|
Third Amendment, dated as of July 13, 2007, to Credit Agreement
dated as of February 15, 2005 among Hiland Operating, LLC and
the lenders thereto (incorporated by reference to Exhibit 10.1
of Registrants Form 8-K filed on July 18, 2007)
|
|
10
|
.21*
|
|
|
|
Form of Phantom Unit Grant Agreement (incorporated by reference
to Exhibit 10.1 of Registrants Form 8-K filed on November
13, 2007)
|
|
10
|
.22
|
|
|
|
Fourth Amendment, dated as of February 6, 2008, to Credit
Agreement dated as of February 15, 2005 among Hiland Operating,
LLC and the lenders thereto (incorporated by reference to
exhibit 10.1 of Registrants Form 8-K filed on
February 12, 2008)
|
|
10
|
.23
|
|
|
|
Compensation of Conflicts Committee Members
|
99
|
|
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|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
Description
|
|
|
19
|
.1
|
|
|
|
Code of Ethics for Chief Executive Officer and Senior Finance
Officers (incorporated by reference to Exhibit 19.1 of
Registrants annual report on Form 10-K filed on March 30,
2005)
|
|
21
|
.1
|
|
|
|
List of Subsidiaries of Hiland Partners, LP (incorporated by
reference to Exhibit 21.1 of Registrants annual report on
Form 10-K filed on March 30, 2005)
|
|
23
|
.1
|
|
|
|
Consent of Grant Thornton LLP
|
|
31
|
.1
|
|
|
|
Certification of Chief Executive Officer under Section 302 of
the Sarbanes-Oxley Act of 2002
|
|
31
|
.2
|
|
|
|
Certification of Chief Financial Officer under Section 302 of
the Sarbanes-Oxley Act of 2002
|
|
32
|
.1
|
|
|
|
Certification of Chief Executive Officer under Section 906 of
the Sarbanes-Oxley Act of 2002
|
|
32
|
.2
|
|
|
|
Certification of Chief Financial Officer under Section 906 of
the Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
Portions of this exhibit have been omitted pursuant to a request
for confidential treatment.
|
|
*
|
|
Constitutes management contracts or compensatory plans or
arrangements.
|
100
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized in the city of Enid, Oklahoma, on the
9th day of March, 2009.
HILAND PARTNERS, LP
By: Hiland Partners GP, LLC, its general partner
|
|
|
|
By:
|
/s/ JOSEPH
L. GRIFFIN
|
Joseph L. Griffin
Chief Executive Officer, President and Director
(principal executive officer)
|
|
|
|
By:
|
/s/ MATTHEW
S. HARRISON
|
Matthew S. Harrison
Chief Financial Officer, Vice President
Finance,
Secretary and Director
(principal financial and accounting officer)
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant in the capacities indicated on the
9th day of March, 2009.
|
|
|
|
|
Signature
|
|
Title
|
|
|
|
|
/s/
HAROLD
HAMM
Harold
Hamm
|
|
Chairman of the Board
|
|
|
|
/s/
JOSEPH
L. GRIFFIN
Joseph
L. Griffin
|
|
Chief Executive Officer, President and Director
|
|
|
|
/s/
MATTHEW
S. HARRISON
Matthew
S. Harrison
|
|
Chief Financial Officer,
Vice President Finance, Secretary and Director
|
|
|
|
/s/
MICHAEL
L. GREENWOOD
Michael
L. Greenwood
|
|
Director
|
|
|
|
/s/
EDWARD
D. DOHERTY
Edward
D. Doherty
|
|
Director
|
|
|
|
/s/
RAYFORD
T. REID
Rayford
T. Reid
|
|
Director
|
|
|
|
/s/
SHELBY
E. ODELL
Shelby
E. Odell
|
|
Director
|
|
|
|
/s/
JOHN
T. MCNABB, II
John
T. McNabb, II
|
|
Director
|
|
|
|
/s/
DR. DAVID
L. BOREN
Dr. David
L. Boren
|
|
Director
|
101
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
Hiland Partners, LP Consolidated Financial Statements:
|
|
|
|
|
|
|
|
F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
|
|
|
F-9
|
|
|
|
|
F-10
|
|
F-1
Managements
Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting (as defined
in Rules 13a 15(f) and 15d 15(f)
under the Securities and Exchange Act of 1934). Our internal
control over financial reporting is a process designed by
management, under the supervision of the Chief Executive Officer
and Chief Financial Officer, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with accounting principles generally accepted in the
United States of America, and includes those policies and
procedures that:
(i) pertain to the maintenance of records that in
reasonable detail accurately and fairly reflect the transactions
and dispositions of our assets;
(ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial
statements in accordance with accounting principles generally
accepted in the United States, and that our receipts and
expenditures are being made only in accordance with
authorizations of management and our directors; and
(iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition
of our assets that could have a material effect on our
consolidated financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies and procedures may deteriorate.
Accordingly, even effective internal control over financial
reporting can only provide reasonable assurance of achieving
their control objectives.
Our management, under the supervision and with the participation
of our Chief Executive Officer and Chief Financial Officer,
assessed the effectiveness of the Companys internal
control over financial reporting as of December 31, 2008.
In making this assessment, management used the criteria set
forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in
Internal Control-Integrated
Framework
.
Based on our evaluation under the framework in Internal
Control-Integrated Framework, our management concluded that, as
of December 31, 2008, our internal control over financial
reporting was effective.
Grant Thornton LLP, the independent registered accounting firm
who audited the consolidated financial statements included in
this Annual Report, has issued a report on our internal control
over financial reporting. This report, dated March 9, 2009,
appears on
page F-3.
Joseph L. Griffin
Chief Executive Officer
March 9, 2009
Matthew S. Harrison
Chief Financial Officer
March 9, 2009
F-2
Report of
Independent Registered Public Accounting Firm
Board of Directors
Hiland Partners GP, LLC
We have audited internal control over financial reporting of
Hiland Partners, LP and subsidiaries (the Partnership) as of
December 31, 2008, based on criteria established in
Internal Control Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Partnerships management is
responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness
of internal control over financial reporting, included in the
accompanying Managements Report on Internal Control
Over Financial Reporting. Our responsibility is to express
an opinion on the Partnerships internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, the Partnership maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2008, based on
Internal
Control Integrated Framework
issued by COSO.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of the Partnership as of
December 31, 2008 and 2007, and the related consolidated
statements of operations, cash flows, and changes in
partners equity and comprehensive income for each of the
three years in the period ended December 31, 2008 and our
report dated March 9, 2009 expressed an unqualified opinion.
/s/ GRANT THORNTON LLP
Oklahoma City, Oklahoma
March 9, 2009
F-3
Report of
Independent Registered Public Accounting Firm
Board of Directors
Hiland Partners GP, LLC
We have audited the accompanying consolidated balance sheets of
Hiland Partners, LP and subsidiaries (the Partnership) as of
December 31, 2008 and 2007 and the related consolidated
statements of operations, cash flows, and changes in
partners equity and comprehensive income for each of the
three years in the period ended December 31, 2008. These
financial statements are the responsibility of the
Partnerships management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Hiland Partners, LP and subsidiaries as of
December 31, 2008 and 2007, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2008 in conformity with
accounting principles generally accepted in the United States of
America.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
Partnerships internal control over financial reporting as
of December 31, 2008, based on criteria established in
Internal Control Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) and our report dated March 9, 2009
expressed an unqualified opinion.
/s/ GRANT THORNTON LLP
Oklahoma City, Oklahoma
March 9, 2009
F-4
HILAND
PARTNERS, LP
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except unit amounts)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,173
|
|
|
$
|
10,497
|
|
Accounts receivable:
|
|
|
|
|
|
|
|
|
Trade net of allowance for doubtful accounts of $304
in 2008
|
|
|
23,863
|
|
|
|
31,841
|
|
Affiliates
|
|
|
2,346
|
|
|
|
1,479
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,209
|
|
|
|
33,320
|
|
Fair value of derivative assets
|
|
|
6,851
|
|
|
|
2,718
|
|
Other current assets
|
|
|
1,584
|
|
|
|
1,155
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
35,817
|
|
|
|
47,690
|
|
Property and equipment, net
|
|
|
345,855
|
|
|
|
319,320
|
|
Intangibles, net
|
|
|
35,642
|
|
|
|
41,102
|
|
Fair value of derivative assets
|
|
|
7,141
|
|
|
|
418
|
|
Other assets, net
|
|
|
1,684
|
|
|
|
1,943
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
426,139
|
|
|
$
|
410,473
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND PARTNERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
22,470
|
|
|
$
|
24,709
|
|
Accounts payable-affiliates
|
|
|
7,662
|
|
|
|
7,880
|
|
Fair value of derivative liabilities
|
|
|
1,439
|
|
|
|
8,238
|
|
Accrued liabilities and other
|
|
|
2,463
|
|
|
|
2,075
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
34,034
|
|
|
|
42,902
|
|
Commitments and contingencies (Note 9)
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
256,466
|
|
|
|
226,104
|
|
Fair value of derivative liabilities
|
|
|
|
|
|
|
141
|
|
Asset retirement obligations
|
|
|
2,483
|
|
|
|
2,159
|
|
Partners equity
|
|
|
|
|
|
|
|
|
Limited partners interest:
|
|
|
|
|
|
|
|
|
Common unitholders (6,286,755 and 5,214,323 units issued
and outstanding at December 31, 2008 and December 31,
2007, respectively)
|
|
|
122,666
|
|
|
|
130,066
|
|
Subordinated unitholders (3,060,000 and 4,080,000 units
issued and outstanding at December 31, 2008 and
December 31, 2007, respectively)
|
|
|
3,055
|
|
|
|
10,774
|
|
General partners interest
|
|
|
2,202
|
|
|
|
4,056
|
|
Accumulated other comprehensive income (loss)
|
|
|
5,233
|
|
|
|
(5,729
|
)
|
|
|
|
|
|
|
|
|
|
Total partners equity
|
|
|
133,156
|
|
|
|
139,167
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and partners equity
|
|
$
|
426,139
|
|
|
$
|
410,473
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
HILAND
PARTNERS, LP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except per unit amounts)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Midstream operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Third parties
|
|
$
|
371,686
|
|
|
$
|
269,769
|
|
|
$
|
210,732
|
|
Affiliates
|
|
|
11,494
|
|
|
|
3,455
|
|
|
|
4,135
|
|
Compression services, affiliate
|
|
|
4,819
|
|
|
|
4,819
|
|
|
|
4,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
387,999
|
|
|
|
278,043
|
|
|
|
219,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Midstream purchases (exclusive of items shown separately below)
|
|
|
159,906
|
|
|
|
135,134
|
|
|
|
105,884
|
|
Midstream purchases affiliate (exclusive of items
shown separately below)
|
|
|
116,694
|
|
|
|
60,078
|
|
|
|
50,309
|
|
Operations and maintenance
|
|
|
30,526
|
|
|
|
23,279
|
|
|
|
16,071
|
|
Depreciation, amortization and accretion
|
|
|
37,502
|
|
|
|
29,855
|
|
|
|
22,130
|
|
Bad debt
|
|
|
304
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
8,753
|
|
|
|
7,587
|
|
|
|
4,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
353,685
|
|
|
|
255,933
|
|
|
|
199,388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
34,314
|
|
|
|
22,110
|
|
|
|
20,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other income
|
|
|
346
|
|
|
|
430
|
|
|
|
323
|
|
Amortization of deferred loan costs
|
|
|
(574
|
)
|
|
|
(410
|
)
|
|
|
(407
|
)
|
Interest expense
|
|
|
(13,639
|
)
|
|
|
(11,346
|
)
|
|
|
(5,532
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net
|
|
|
(13,867
|
)
|
|
|
(11,326
|
)
|
|
|
(5,616
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
20,447
|
|
|
|
10,784
|
|
|
|
14,682
|
|
Less general partners interest in net income
|
|
|
6,572
|
|
|
|
4,526
|
|
|
|
2,409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Limited partners interest in net income
|
|
$
|
13,875
|
|
|
$
|
6,258
|
|
|
$
|
12,273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per limited partners unit
basic
|
|
$
|
1.49
|
|
|
$
|
0.67
|
|
|
$
|
1.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per limited partners unit
diluted
|
|
$
|
1.48
|
|
|
$
|
0.67
|
|
|
$
|
1.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average limited partners units
outstanding basic
|
|
|
9,328
|
|
|
|
9,284
|
|
|
|
8,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average limited partners units
outstanding diluted
|
|
|
9,354
|
|
|
|
9,334
|
|
|
|
9,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
HILAND
PARTNERS, LP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
20,447
|
|
|
$
|
10,784
|
|
|
$
|
14,682
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
37,364
|
|
|
|
29,739
|
|
|
|
22,064
|
|
Accretion of asset retirement obligation
|
|
|
138
|
|
|
|
116
|
|
|
|
66
|
|
Amortization of deferred loan cost
|
|
|
574
|
|
|
|
410
|
|
|
|
407
|
|
Gain on derivative transactions
|
|
|
(6,834
|
)
|
|
|
(373
|
)
|
|
|
(113
|
)
|
Unit based compensation
|
|
|
1,538
|
|
|
|
951
|
|
|
|
473
|
|
Bad debt
|
|
|
304
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in other assets
|
|
|
60
|
|
|
|
|
|
|
|
(144
|
)
|
(Increase) decrease in current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable trade
|
|
|
7,674
|
|
|
|
(8,139
|
)
|
|
|
(1,809
|
)
|
Accounts receivable affiliates
|
|
|
(867
|
)
|
|
|
(195
|
)
|
|
|
239
|
|
Other current assets
|
|
|
(429
|
)
|
|
|
(430
|
)
|
|
|
(330
|
)
|
Increase (decrease) in current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
(6,149
|
)
|
|
|
4,013
|
|
|
|
5,708
|
|
Accounts payable affiliates
|
|
|
(218
|
)
|
|
|
3,468
|
|
|
|
(1,710
|
)
|
Accrued liabilities
|
|
|
284
|
|
|
|
358
|
|
|
|
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
53,886
|
|
|
|
40,702
|
|
|
|
39,580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(54,367
|
)
|
|
|
(83,408
|
)
|
|
|
(62,137
|
)
|
Payment for Kinta Area gathering assets acquired
|
|
|
|
|
|
|
|
|
|
|
(96,400
|
)
|
Proceeds from disposals of property and equipment
|
|
|
25
|
|
|
|
|
|
|
|
111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(54,342
|
)
|
|
|
(83,408
|
)
|
|
|
(158,426
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from long-term borrowings
|
|
|
41,000
|
|
|
|
74,000
|
|
|
|
113,280
|
|
Payments on long-term borrowings
|
|
|
(10,000
|
)
|
|
|
|
|
|
|
|
|
Increase in deferred offering cost
|
|
|
(7
|
)
|
|
|
(157
|
)
|
|
|
|
|
Debt issuance costs
|
|
|
(368
|
)
|
|
|
(501
|
)
|
|
|
(930
|
)
|
Common units issued to our general partner
|
|
|
|
|
|
|
|
|
|
|
35,000
|
|
Proceeds from unit options exercise
|
|
|
1,052
|
|
|
|
1,055
|
|
|
|
1,312
|
|
General partner contribution for issuance of restricted common
units and from conversion of vested phantom units
|
|
|
8
|
|
|
|
6
|
|
|
|
12
|
|
Redemption of vested phantom units
|
|
|
(60
|
)
|
|
|
|
|
|
|
|
|
Payments on capital lease obligations
|
|
|
(534
|
)
|
|
|
(296
|
)
|
|
|
|
|
Cash distributions to unitholders
|
|
|
(39,959
|
)
|
|
|
(31,290
|
)
|
|
|
(25,629
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(8,868
|
)
|
|
|
42,817
|
|
|
|
123,045
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase for the period
|
|
|
(9,324
|
)
|
|
|
111
|
|
|
|
4,199
|
|
Beginning of period
|
|
|
10,497
|
|
|
|
10,386
|
|
|
|
6,187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period
|
|
$
|
1,173
|
|
|
$
|
10,497
|
|
|
$
|
10,386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplementary information
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest, net of amounts capitalized
|
|
$
|
13,430
|
|
|
$
|
11,332
|
|
|
$
|
4,514
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
HILAND
PARTNERS, LP
Consolidated
Statements of Cash Flows (Continued)
|
|
|
|
|
|
|
(In thousands)
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
Property and equipment financed under capital lease obligations
in the third quarter of 2007
|
|
$
|
5,881
|
|
|
|
|
|
|
Assumed asset retirement obligations on May 1, 2006 in
connection with acquisition of Kinta Area gathering assets
|
|
$
|
1,106
|
|
|
|
|
|
|
F-8
HILAND
PARTNERS, LP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
Subordinated
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Limited
|
|
|
Limited
|
|
|
General
|
|
|
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
Partner
|
|
|
Partner
|
|
|
Partner
|
|
|
Unearned
|
|
|
Comprehensive
|
|
|
|
|
|
Comprehensive
|
|
|
|
Interest
|
|
|
Interest
|
|
|
Interest
|
|
|
Compensation
|
|
|
Income (Loss)
|
|
|
Total
|
|
|
Income
|
|
|
|
(In thousands, except unit amounts)
|
|
|
Balance, January 1, 2006
|
|
$
|
110,027
|
|
|
$
|
25,126
|
|
|
$
|
2,676
|
|
|
$
|
(289
|
)
|
|
$
|
1,049
|
|
|
$
|
138,589
|
|
|
|
|
|
Elimination of unearned compensation upon adoption of
SFAS 123R
|
|
|
(289
|
)
|
|
|
|
|
|
|
|
|
|
|
289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of 761,714 common units to our general partner
|
|
|
34,300
|
|
|
|
|
|
|
|
700
|
|
|
|
|
|
|
|
|
|
|
|
35,000
|
|
|
|
|
|
Proceeds from 52,699 unit options exercise
|
|
|
1,286
|
|
|
|
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
1,312
|
|
|
|
|
|
Issuance of 13,000 restricted common units
|
|
|
|
|
|
|
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
12
|
|
|
|
|
|
Periodic cash distributions
|
|
|
(12,690
|
)
|
|
|
(10,812
|
)
|
|
|
(2,127
|
)
|
|
|
|
|
|
|
|
|
|
|
(25,629
|
)
|
|
|
|
|
Unit based compensation
|
|
|
473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
473
|
|
|
|
|
|
Other comprehensive losses reclassified to income on closed
derivative transactions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,582
|
)
|
|
|
(3,582
|
)
|
|
$
|
(3,582
|
)
|
Change in fair value of derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,889
|
|
|
|
6,889
|
|
|
|
6,889
|
|
Net income
|
|
|
6,674
|
|
|
|
5,599
|
|
|
|
2,409
|
|
|
|
|
|
|
|
|
|
|
|
14,682
|
|
|
|
14,682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,989
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
$
|
139,781
|
|
|
$
|
19,913
|
|
|
$
|
3,696
|
|
|
$
|
|
|
|
$
|
4,356
|
|
|
$
|
167,746
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from 42,660 unit options exercise
|
|
|
1,034
|
|
|
|
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
1,055
|
|
|
|
|
|
Issuance of 6,000 restricted common units
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
Periodic cash distributions
|
|
|
(15,214
|
)
|
|
|
(11,883
|
)
|
|
|
(4,193
|
)
|
|
|
|
|
|
|
|
|
|
|
(31,290
|
)
|
|
|
|
|
Unit based compensation
|
|
|
951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
951
|
|
|
|
|
|
Other comprehensive losses reclassified to income on closed
derivative transactions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,783
|
)
|
|
|
(1,783
|
)
|
|
$
|
(1,783
|
)
|
Change in fair value of derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,302
|
)
|
|
|
(8,302
|
)
|
|
|
(8,302
|
)
|
Net income
|
|
|
3,514
|
|
|
|
2,744
|
|
|
|
4,526
|
|
|
|
|
|
|
|
|
|
|
|
10,784
|
|
|
|
10,784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
$
|
130,066
|
|
|
$
|
10,774
|
|
|
$
|
4,056
|
|
|
$
|
|
|
|
$
|
(5,729
|
)
|
|
$
|
139,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from 40,705 unit options exercise
|
|
|
1,031
|
|
|
|
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
1,052
|
|
|
|
|
|
Conversion of 1,020,000 subordinated units to common units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of 5,227 common units from 5,227 vested phantom units
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
Redemption of 1,804 vested phantom units
|
|
|
(60
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(60
|
)
|
|
|
|
|
Issuance of 6,000 restricted common units
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
Forfeiture of 375 restricted common units
|
|
|
2
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
Periodic cash distributions
|
|
|
(19,553
|
)
|
|
|
(11,952
|
)
|
|
|
(8,454
|
)
|
|
|
|
|
|
|
|
|
|
|
(39,959
|
)
|
|
|
|
|
Unit based compensation
|
|
|
1,538
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,538
|
|
|
|
|
|
Other comprehensive income reclassified to income on closed
derivative transactions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,996
|
|
|
|
2,996
|
|
|
$
|
2,996
|
|
Change in fair value of derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,966
|
|
|
|
7,966
|
|
|
|
7,966
|
|
Net income
|
|
|
9,642
|
|
|
|
4,233
|
|
|
|
6,572
|
|
|
|
|
|
|
|
|
|
|
|
20,447
|
|
|
|
20,447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
$
|
122,666
|
|
|
$
|
3,055
|
|
|
$
|
2,202
|
|
|
$
|
|
|
|
$
|
5,233
|
|
|
$
|
133,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of this consolidated
financial statement.
F-9
|
|
Note 1:
|
Description
of Business and Summary of Significant Accounting
Policies
|
Description
of Business
Hiland Partners, LP, a Delaware limited partnership
(we, us, our, or the
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.
(Predecessor or CGI) and Hiland
Partners, LLC. We commenced operations on February 15,
2005, and concurrently with the completion of our initial public
offering, CGI contributed a substantial portion of its net
assets to us. The transfer of ownership of net assets from CGI
to us 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, and
processing of natural gas and fractionating and marketing of
natural gas liquids, or NGLs. CGI historically has owned all of
our natural gas gathering, processing, treating and
fractionation assets other than our Worland gathering system and
our Bakken gathering system. Hiland Partners, LLC historically
owned our Worland gathering system and our compression services
assets, which we acquired on February 15, 2005, and our
Bakken gathering system. Since our initial public offering on
February 15, 2005, we have operated in midstream and
compression services segments. On September 26, 2005, we
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, we
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. We financed this
acquisition with $61.2 million of borrowings from our
credit facility and $35.0 million of proceeds from the
issuance to Hiland Partners GP, LLC, our general partner, of
761,714 common units and 15,545 general partner equivalent
units, both at $45.03 per unit.
Principles
of Consolidation
The consolidated financial statements include our accounts and
those of our subsidiaries. All significant intercompany
transactions and balances have been eliminated. The consolidated
financial statements include the net assets and operations of
assets owned by CGI and Hiland Partners, LLC that were
contributed to us concurrently with the completion of our
initial public offering and also include the net assets and
operations of Hiland Partners, LLC acquired effective
September 1, 2005. Operations from the acquisition of the
Kinta Area gathering assets are reflected only from May 1,
2006.
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.
Cash
and Cash Equivalents
For financial reporting, we consider all highly liquid
investments with maturity of three months or less at date of
purchase to be cash equivalents.
F-10
HILAND
PARTNERS, LP
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Accounts
Receivable
The majority of our accounts receivable are due from companies
in the oil and gas industry as well as the utility industry.
Credit is extended based on evaluation of the customers
financial condition. In certain circumstances, collateral, such
as letters of credit or guarantees, is required. Accounts
receivable are due within 30 days and are stated at amounts
due from customers. We have established various procedures to
manage our credit exposure, including initial credit approvals,
credit limits and rights of offset. Credit losses are charged to
income when accounts are deemed uncollectible, determined on a
case-by-case
basis when we believe the required payment of specific amounts
owed is unlikely to occur. Prior to 2008, losses were minimal.
In 2008, an allowance for uncollectible accounts was established.
Concentration
and Credit Risk
Financial instruments that potentially subject us to
concentrations of credit risk consist principally of cash and
cash equivalents and receivables. We place our cash and cash
equivalents with high-quality institutions and in money market
funds. We derive our revenue from customers primarily in the oil
and gas and utility industries. These industry concentrations
have the potential to impact our overall exposure to credit
risk, either positively or negatively, in that our 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 our customer base. Our portfolio of accounts receivable is
comprised primarily of mid-size to large domestic corporate
entities. Our counterparties to our commodity based derivative
instruments as of December 31, 2008 were BP Energy Company
and Bank of Oklahoma, N.A. Our counterparty to our interest rate
swap 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
We are exposed to interest rate risk on our variable rate bank
credit facility and have entered into an interest rate swap to
reduce this risk. We manage a portion of our interest rate
exposure on our variable rate debt 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. We have 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.
F-11
HILAND
PARTNERS, LP
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Commodity
Risk Management
We engage in price risk management activities in order to
minimize the risk from market fluctuation in the prices of
natural gas and NGLs. To qualify as an accounting hedge, the
price movements in the commodity derivatives must be highly
correlated with the underlying hedged commodity. Gains and
losses related to commodity derivatives that qualify as
accounting hedges are recognized in income when the underlying
hedged physical transaction closes and are included in the
consolidated statements of operations as revenues from midstream
operations. Gains and losses related to commodity derivatives
that are not designated as accounting hedges or do not qualify
as accounting hedges are recognized in income immediately and
are included in revenues from midstream operations in the
consolidated statement of operations.
SFAS 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities.
SFAS 133 requires that an entity recognize all derivatives
as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. However,
if a derivative does qualify for hedge accounting, depending on
the nature of the hedge, changes in fair value can be offset
against the change in fair value of the hedged item through
earnings or recognized in other comprehensive income 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 a derivative instrument
that will be delivered in quantities expected to be used or sold
by the reporting entity over a reasonable period in the normal
course of business. Our fixed price physical forward natural gas
sales contract in which we contracted to sell natural gas
quantities at a fixed price was designated as a normal sale.
This forward sales contract expired on December 31, 2008.
Currently, our derivative financial instruments that qualify for
hedge accounting are designated as cash flow hedges. The cash
flow hedge instruments hedge the exposure of variability in
expected future cash flows that is attributable to a particular
risk. The effective portion of the gain or loss on these
derivative instruments is recorded in accumulated other
comprehensive income (loss) in partners equity and
reclassified into earnings in the same period in which the
hedged transaction closes. The asset or liability related to the
derivative instruments is recorded on the balance sheet as fair
value of derivative assets or liabilities. Any ineffective
portion of the gain or loss is recognized in earnings
immediately.
Property
and Equipment, Intangible Assets, Depreciation and
Amortization
Our property and equipment are carried at cost. Depreciation and
amortization of all equipment is determined under the
straight-line method using various rates based on useful lives,
10 to 22 years for pipeline and processing plants, and 3 to
10 years for corporate and other assets. The cost of assets
and related accumulated depreciation is removed from the
accounts when such assets are disposed of, and any related gains
or losses are reflected in current earnings. Maintenance,
repairs and minor replacements are expensed as incurred. Costs
of replacements constituting improvement are capitalized.
Intangible assets consist of the acquired value of existing
contracts to sell natural gas and other NGLs, compression
contracts and identifiable customer relationships, which do not
have significant residual value. The contracts are being
amortized over their estimated lives of ten years. 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.
F-12
HILAND
PARTNERS, LP
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Long
Lived Assets
In accordance with SFAS No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets, we
evaluate our long-lived assets of identifiable business
activities for impairment when events or changes in
circumstances indicate, in our managements judgment, that
the carrying value of such assets may not be recoverable. The
determination of whether impairment has occurred is based on our
managements estimate of undiscounted future cash flows
attributable to the assets as compared to the carrying value of
the assets. If impairment has occurred, the amount of the
impairment recognized is determined by estimating the fair value
of the assets and recording a provision for loss if the carrying
value is greater than the fair value. For assets identified to
be disposed of in the future, the carrying value of these assets
is compared to the estimated fair value less the cost to sell to
determine if impairment is required. Until the assets are
disposed of, an estimate of the fair value is re-determined when
related events or circumstances change.
When determining whether impairment of one of our long-lived
assets has occurred, we must estimate the undiscounted future
cash flows attributable to the asset or asset group. Our
estimate of cash flows is based on assumptions regarding the
volume of reserves providing asset cash flow and future NGL
product and natural gas prices. The amount of reserves and
drilling activities are dependent in part on natural gas prices.
Projections of reserves and future commodity prices are
inherently subjective and contingent upon a number of variable
factors, including, but not limited to:
|
|
|
|
|
changes in general economic conditions in regions in which the
Partnerships assets are located;
|
|
|
|
the availability and prices of NGL products and competing
commodities;
|
|
|
|
the availability and prices of raw natural gas supply;
|
|
|
|
our ability to negotiate favorable marketing agreements;
|
|
|
|
the risks that third party oil and gas exploration and
production activities will not occur or be successful;
|
|
|
|
our 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.
No impairment charges were recognized during the years ended
December 31, 2008, 2007 and 2006.
Other
Assets
Unamortized deferred loan costs related to the long-term debt on
our bank credit facility totaling $1,435 and $1,641 as of
December 31, 2008 and 2007, respectively, are included in
other noncurrent assets. The deferred loan costs are amortized
using the straight-line method over the term of the debt for the
bank credit facility.
Revenue
Recognition
Revenues for sales and gathering of natural gas and NGLs are
recognized at the time all gathering and processing activities
are completed, the product is delivered and title, if
applicable, is transferred. Revenues related to our compression
segment are recognized as monthly services are rendered under a
four-year fixed-fee contract that we entered into concurrently
with our initial public offering.
F-13
HILAND
PARTNERS, LP
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Comprehensive
Income
Comprehensive income includes net income and other comprehensive
income, which includes, but is not limited to, changes in the
fair value of derivative financial instruments. Pursuant to
SFAS 133, for derivatives qualifying as hedges, the
effective portion of changes in fair value are recognized in
partners equity as accumulated other comprehensive income
and reclassified to earnings when the underlying hedged physical
transaction closes. Comprehensive income consisted of the
following for the indicated periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Net income
|
|
$
|
20,447
|
|
|
$
|
10,784
|
|
|
$
|
14,682
|
|
Closed derivative transactions reclassified to income
|
|
|
2,996
|
|
|
|
(1,783
|
)
|
|
|
(3,582
|
)
|
Change in fair value of derivatives
|
|
|
7,966
|
|
|
|
(8,302
|
)
|
|
|
6,889
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
31,409
|
|
|
$
|
699
|
|
|
$
|
17,989
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income per Limited Partners Unit
Net income per limited partners unit is computed based on
the weighted-average number of common and subordinated units
outstanding during the period. The computation of diluted net
income per limited partner unit further assumes the dilutive
effect of unit options and restricted and phantom units. Net
income per limited partners unit is computed by dividing
net income applicable to limited partners, after deducting the
general partners 2% interest and incentive distributions,
by both the basic and diluted weighted-average number of limited
partnership units outstanding.
Environmental
Costs
Environmental costs are expensed if they relate to an existing
condition caused by past operations and do not contribute to
current or future revenue generation. Liabilities are recorded
when site restoration and environmental remediation and cleanup
obligations are either known or considered probable and can be
reasonably estimated. Recoveries of environmental costs through
insurance, indemnification arrangements or other sources are
included in other assets to the extent such recoveries are
considered probable.
Income
Taxes
As a partnership, we are not subject to income taxes. Therefore,
there is no provision for income taxes included in our
consolidated financial statements. Taxable income, gain, loss
and deductions are allocated to the unitholders who are
responsible for payment of any income taxes thereon.
Net income for financial statement purposes may differ
significantly from taxable income reportable to unitholders as a
result of differences between the tax basis and financial
reporting basis of assets and liabilities and the taxable income
allocation requirements under the partnership agreement.
Individual unitholders have different investment bases depending
upon the timing and price of acquisition of their partnership
units. Furthermore, each unitholders tax accounting, which
is partially dependent upon the unitholders tax position,
differs from the accounting followed in the consolidated
financial statements. Accordingly, the aggregate difference in
the basis of our net assets for financial and tax reporting
purposes cannot be readily determined because information
regarding each unitholders tax attributes in our
partnership is not available to us.
Transportation
and Exchange Imbalances
In the course of gathering natural gas and NGLs for others, we
may receive for redelivery different quantities of natural gas
or NGLs than the quantities actually redelivered. These
transactions result in transportation and exchange imbalance
receivables or payables that are recovered or repaid through the
receipt
F-14
HILAND
PARTNERS, LP
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
or delivery of natural gas or NGLs in future periods, if not
subject to cashout provisions. Imbalance receivables are
included in accounts receivable and imbalance payables are
included in accounts payable on the balance sheets and
marked-to-market
using current market prices in effect for the reporting period
of the outstanding imbalances. Changes in market value and the
settlement of any such imbalance at a price greater than or less
than the recorded imbalance results in either an upward or
downward adjustment, as appropriate, to the cost of natural gas
sold. As of December 31, 2008 and 2007, we had imbalance
receivables of $1,221 and $454, respectively. Imbalance payables
were $560 at December 31, 2008. We had no significant
imbalance payables at December 31, 2007.
Recent
Accounting Pronouncements
On April 25, 2008, the Financial Accounting Standards Board
(FASB) FASB issued Staff Position
No. FAS 142-3,
Determination of the Useful Life of Intangible
Assets
(FSP 142-3).
FSP 142-3
amends the factors that an entity should consider in developing
renewal or extension assumptions used in determining the useful
life of recognized intangible assets under FASB Statement
No. 142 (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
will be effective as of January 1, 2009 and will apply only
to intangible assets acquired after that date. Retroactive
application to previously acquired intangible assets is
prohibited. The adoption of
FSP 142-3
is not expected to have a material impact on our financial
position, results of operations or cash flows.
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 entitys derivative instruments
and hedging activities and their effects on the entitys
financial position, financial performance, and cash flows.
SFAS 161 is effective prospectively for financial
statements issued for fiscal years and interim periods beginning
after November 15, 2008, with early application encouraged.
SFAS 161 encourages, but does not require, comparative
disclosures for periods prior to its initial adoption.
SFAS 161 amends the current qualitative and quantitative
disclosure requirements for derivative instruments and hedging
activities set forth in SFAS 133 and generally increases
the level of aggregation/disaggregation that will be required in
an entitys financial statements. We are currently
reviewing SFAS 161 to determine the effect it will have on
our financial statements and disclosures therein.
On March 12, 2008, the Emerging Issues Task Force
(EITF) reached consensus opinion on EITF Issue
07-4,
Application of the two-class method under FASB Statement
No. 128, Earnings per Share, to Master Limited
Partnerships
(EITF 07-4),
which the FASB ratified at its March 26, 2008 meeting.
EITF 07-4
requires the calculation of a Master Limited Partnerships
(MLPs) net earnings per limited partner unit for
each period presented according to distributions declared and
participation rights in undistributed earnings as if all of the
earnings for that period had been distributed. In periods with
undistributed earnings above specified levels, the calculation
per the two-class method results in an increased allocation of
such undistributed earnings to the general partner and a
dilution of earnings to the limited partners.
EITF 07-4
is effective for fiscal years beginning after December 15,
2008, and is to be applied retrospectively to all periods
presented. Early application is not permitted. We will apply the
requirements of
EITF 07-4
as it pertains to MLPs upon its adoption during the quarter
ended March 31, 2009 and do not expect a significant impact
when adopted.
In December 2007, the FASB issued SFAS No. 141(R),
Business Combinations
(SFAS 141(R)). SFAS 141(R) amends and
replaces SFAS 141, but retains the fundamental requirements
in SFAS 141 that the
F-15
HILAND
PARTNERS, LP
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
purchase method of accounting be used for all business
combinations and an acquirer be identified for each business
combination. SFAS 141(R) provides for how the acquirer
recognizes and measures the identifiable assets acquired,
liabilities assumed and any non-controlling interest in the
acquiree. SFAS 141(R) provides for how the acquirer
recognizes and measures the goodwill acquired in the business
combination or a gain from a bargain purchase. SFAS 141(R)
also determines what information to disclose to enable users to
be able to evaluate the nature and financial effects of the
business combination. The provisions of SFAS 141(R) apply
prospectively to business combinations for which the acquisition
date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008 and do not
allow early adoption. We are evaluating the new requirements of
SFAS 141(R) and the impact it will have on business
combinations completed in 2009 and thereafter.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements an amendment of ARB No. 51
(SFAS 160). SFAS 160 establishes
accounting and reporting standards that require the ownership
interests in subsidiaries held by parties other than the parent
(minority interest) be clearly identified, labeled and presented
in the consolidated balance sheet within equity, but separate
from the parents 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 parents ownership interest while the
parent retains its controlling financial interest in its
subsidiary be accounted for consistently and similarly as equity
transactions. Consolidated net income and comprehensive income
will be determined without deducting minority interest; however,
earnings-per-share
information will continue to be calculated on the basis of the
net income attributable to the parents shareholders.
Additionally, SFAS 160 establishes a single method for
accounting for changes in a parents ownership interest in
a subsidiary that does not result in deconsolidation and that
the parent recognize a gain or loss in net income when a
subsidiary is deconsolidated. SFAS 160 is effective for
fiscal years beginning on or after December 15, 2008. Early
adoption is not permitted. We do not expect SFAS 160 will
have a material impact on our financial position, results of
operations or cash flows.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities (SFAS 159). SFAS 159
expands opportunities to use fair value measurement in financial
reporting and permits entities to choose to measure many
financial instruments and certain other items at fair value.
SFAS 159 is effective for fiscal years beginning after
November 15, 2007. SFAS 159 was adopted by us
effective January 1, 2008, at which time no financial
assets or liabilities, not previously required to be recorded at
fair value by other authoritative literature, were designated to
be recorded at fair value. As such, the adoption of
SFAS 159 did not have any impact on our financial position,
results of operations or cash flows.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements (SFAS 157).
SFAS 157 defines fair value as the price that would be
received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the
measurement date, establishes a framework for measuring fair
value in generally accepted accounting principles
(GAAP) such as fair value hierarchy used to classify
the source of information used in fair value measurements (i.e.,
market based or non-market based) and expands disclosure about
fair value measurements based on their level in the hierarchy.
SFAS 157 applies to derivatives and other financial
instruments, which SFAS 133 requires be measured at fair
value at initial recognition and for all subsequent periods.
SFAS 157 establishes a fair value hierarchy which requires
an entity to maximize the use of observable inputs and minimize
the use of unobservable inputs when measuring fair value.
SFAS 157s hierarchy defines three levels of inputs
that may be used to measure fair value. Level 1 refers to
assets that have observable market prices, level 2 assets
do not have an observable price but do have inputs
that are based on such prices in which components have
observable data points and level 3 refers to assets in
which one or more of the inputs do not have observable prices
and calibrated model parameters, valuation techniques or
managements assumptions are used to derive the fair value.
SFAS 157 is effective for financial statements issued for
fiscal years beginning after November 15, 2007 and interim
periods within those fiscal
F-16
HILAND
PARTNERS, LP
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
years. We elected to implement SFAS 157 prospectively in
the first quarter of 2008 with the one-year deferral permitted
by FASB Staff Position (FSP)
157-2
for
nonfinancial assets and nonfinancial liabilities measured at
fair value, except those that are recognized or disclosed on a
recurring basis (at least annually). The deferral applies to
nonfinancial assets and liabilities measured at fair value in a
business combination; impaired properties, plants and equipment;
intangible assets and goodwill; and initial recognition of asset
retirement obligations and restructuring costs for which we use
fair value. We do not expect any significant impact to our
consolidated financial statements when we implement
SFAS 157 for these assets and liabilities. See Note 6
Fair Value Measurements of Financial Instruments.
On May 1, 2006, we acquired certain gas gathering assets
from Enogex Gas Gathering, L.L.C. for $96.4 million cash,
including certain closing costs, financed with the issuance of
761,714 common units and 15,545 general partner equivalent units
to our general partner for proceeds of $35.0 million and
borrowings of $61.2 million under our credit facility. We
refer to these assets as the Kinta Area gathering assets. A
determination was made by our management of the fair value of
these assets and liabilities as required by SFAS 141,
Business Combinations, primarily using current
replacement cost for the acquired gas gathering assets and
related equipment less estimated accumulated depreciation on
such replacement costs; and estimated discounted cash flows
arising from future renegotiated customer contracts. The
acquired assets at the time of the acquisition, which are
located in the eastern Oklahoma Arkoma Basin, had approximately
672 wellhead receipt points and included five separate low
pressure natural gas gathering systems, which consisted of over
569 miles of natural gas gathering pipelines and 23
compressors with an aggregate of approximately 40,000
horsepower. The natural gas gathering systems operate under
contracts with producers that provide for services under
fixed-fee arrangements. We operate the Kinta Area gathering
assets substantially differently than were operated by the
previous owner. Since there was no sufficient continuity of the
Kinta Area gathering assets operations prior to and after
our acquisition, disclosure of prior financial information would
not be material to an understanding of future operations.
Therefore, the acquisition has been recorded as a purchase of
assets and not of a business and no pro forma financial
information is required to be presented.
The following table presents the resulting allocation to the net
assets acquired and liabilities assumed on May 1, 2006:
|
|
|
|
|
Pipelines, including right of ways
|
|
$
|
56,175
|
|
Compressors
|
|
|
22,221
|
|
Land, buildings and other equipment
|
|
|
8,618
|
|
Customer relationships
|
|
|
10,492
|
|
|
|
|
|
|
|
|
|
97,506
|
|
Asset retirement obligations assumed
|
|
|
1,106
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
96,400
|
|
|
|
|
|
|
The Kinta Area gathering assets and operations are included in
the consolidated financial statements from May 1, 2006
forward.
F-17
HILAND
PARTNERS, LP
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 3:
|
Property
and Equipment and Asset Retirement Obligations
|
Property and equipment consisted of the following for the
periods indicated:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Land
|
|
$
|
295
|
|
|
$
|
295
|
|
Construction in progress
|
|
|
19,523
|
|
|
|
12,030
|
|
Midstream pipeline, plants and compressors
|
|
|
401,902
|
|
|
|
352,003
|
|
Compression and water injection equipment
|
|
|
19,391
|
|
|
|
19,258
|
|
Other
|
|
|
4,621
|
|
|
|
3,958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
445,732
|
|
|
|
387,544
|
|
Less: accumulated depreciation and amortization
|
|
|
99,877
|
|
|
|
68,224
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
345,855
|
|
|
$
|
319,320
|
|
|
|
|
|
|
|
|
|
|
During the third quarter 2007, we purchased two separate capital
assets under capital lease obligations for a total cost of
$5,881. Accumulated depreciation related to the assets purchased
under capital lease obligations was $541 as of December 31,
2008 and $175 as of December 31, 2007.
We capitalized interest of $176, $2,580 and $1,467 during the
years ended December 31, 2008, 2007 and 2006, respectively.
Depreciation charged to expense totaled $31,906, $24,280 and
$16,954 for the years ended December 31, 2008, 2007 and
2006, respectively.
No impairment charges were recognized during each of the years
ended December 31, 2008, 2007 and 2006.
In accordance with SFAS No. 143, Accounting for
Asset Retirement Obligations (SFAS 143),
we have recorded the fair value of liabilities for asset
retirement obligations in the periods in which they are incurred
and corresponding increases in the carrying amounts of the
related long-lived assets. The asset retirement costs are
subsequently allocated to expense using a systematic and
rational method and the liabilities are accreted to measure the
change in liability due to the passage of time. The provisions
of SFAS 143 primarily apply to dismantlement and site
restoration of certain of our plants and pipelines. We have
evaluated our asset retirement obligations as of
December 31, 2008 and have determined that revisions in the
carrying values are not necessary at this time.
The following table summarizes our activity related to asset
retirement obligations for the indicated periods:
|
|
|
|
|
Asset retirement obligations, January 1, 2007
|
|
$
|
2,196
|
|
Add: additions on various leased locations
|
|
|
505
|
|
Revisions of prior estimates
|
|
|
(658
|
)
|
Add: accretion expense
|
|
|
116
|
|
|
|
|
|
|
|
|
|
|
|
Asset retirement obligations, December 31, 2007
|
|
|
2,159
|
|
Add: additions on various leased locations
|
|
|
186
|
|
Add: accretion expense
|
|
|
138
|
|
|
|
|
|
|
|
|
|
|
|
Asset retirement obligations, December 31, 2008
|
|
$
|
2,483
|
|
|
|
|
|
|
|
|
|
|
|
F-18
HILAND
PARTNERS, LP
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 4:
|
Intangible
Assets
|
Intangible assets consist of the acquired value of customer
relationships and existing contracts to sell natural gas and
other NGLs and compression contracts, which do not have
significant residual value. The customer relationships and the
contracts are being amortized over their estimated lives of ten
years. We review intangible assets for impairment whenever
events or circumstances indicate that the carrying amounts may
not be recoverable. If such a review should indicate that the
carrying amount of intangible assets is not recoverable, we
reduce the carrying amount of such assets to fair value based on
the discounted probable cash flows of the intangible assets. No
impairments of intangible assets were recorded during the years
ended December 30, 2008, 2007 and 2006, respectively.
Intangible assets consisted of the following for the periods
indicated:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Gas sales contracts
|
|
$
|
25,585
|
|
|
$
|
25,585
|
|
Compression contracts
|
|
|
18,515
|
|
|
|
18,515
|
|
Customer relationships
|
|
|
10,492
|
|
|
|
10,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54,592
|
|
|
|
54,592
|
|
Less accumulated amortization
|
|
|
18,950
|
|
|
|
13,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
$
|
35,642
|
|
|
$
|
41,102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the years ended December 31, 2008 and 2007, we
recorded amortization expense of $5,460 and $5,459,
respectively. Estimated aggregate amortization expense for each
of the five succeeding fiscal years is $5,459 from 2009 through
2013 and a total of $8,347 for all years thereafter.
Interest
Rate Swap
We are subject to interest rate risk on our credit facility and
have entered into an interest rate swap to reduce this risk. We
entered into a one year interest rate swap agreement with our
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.
Commodity
Swaps
We have 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 a
mark-to-market
cash flow derivative which relates to forecasted natural gas
sales in 2010. The 2010 derivative does not qualify for cash
flow hedge accounting. We 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 contractual swap
agreements with our counterparties, we receive a fixed price and
pay a floating price based on certain indices for the relevant
contract period as the underlying natural gas is sold.
We formally document all relationships between hedging
instruments and the items being hedged, including our risk
management objective and strategy for undertaking the hedging
transactions. This includes matching the natural gas futures,
sold fixed for floating price or buy fixed for
floating price contracts, to the forecasted transactions.
We assess, 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
F-19
HILAND
PARTNERS, LP
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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, we will discontinue hedge accounting
for the derivative and subsequent changes in fair value for the
derivative will be recognized immediately into earnings. We
assess 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 or from earnings
when the underlying hedged physical transaction closes. Changes
in fair value of non-qualifying derivatives and the ineffective
portion of qualifying derivatives are recognized in earnings as
they occur. Actual amounts that will be reclassified will vary
as a result of future changes in prices. Hedge ineffectiveness
is recorded in income while the hedge contract is open and may
increase or decrease until settlement of the contract. Realized
cash gains and losses on closed/settled instruments and hedge
ineffectiveness are reflected in the contract month being hedged
as an adjustment to our midstream revenue.
On May 27, 2008, we entered into a financial swap
instrument related to forecasted natural gas sales in 2010
whereby we receive a fixed price and pay a floating price based
on NYMEX Henry Hub pricing for the relevant contract period as
the underlying natural gas is sold. At December 31, 2008,
this financial swap instrument did not qualify for hedge
accounting as there was inadequate correlation between NYMEX
Henry Hub natural gas prices and actual prices received for the
natural gas sold.
The following table summarizes our activity related to
derivative transactions for the indicated periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Net (losses) gains on closed/settled transactions reclassified
(to) from accumulated other comprehensive income
|
|
$
|
(2,996
|
)
|
|
$
|
1,783
|
|
|
$
|
3,582
|
|
Increases (decreases) in fair values of open derivatives
recorded to (from) accumulated other comprehensive income
|
|
$
|
7,966
|
|
|
$
|
(8,302
|
)
|
|
$
|
6,889
|
|
Unrealized non-cash gains (losses) on ineffective portions of
qualifying derivative transactions
|
|
$
|
112
|
|
|
$
|
(45
|
)
|
|
$
|
113
|
|
Unrealized non-cash gains on non-qualifying derivatives
|
|
$
|
6,722
|
|
|
$
|
418
|
|
|
$
|
|
|
At December 31, 2008, our accumulated other comprehensive
income related to derivatives was $5,233, which we anticipate
will be reclassified to earnings during the next twelve months.
The fair value of derivative assets and liabilities related to
the interest rate swap and the commodity swaps are as follows
for the indicated periods:
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Fair value of derivative assets current
|
|
$
|
6,851
|
|
|
$
|
2,718
|
|
Fair value of derivative assets long term
|
|
|
7,141
|
|
|
|
418
|
|
Fair value of derivative liabilities current
|
|
|
(1,439
|
)
|
|
|
(8,238
|
)
|
Fair value of derivative liabilities long term
|
|
|
|
|
|
|
(141
|
)
|
|
|
|
|
|
|
|
|
|
Net fair value of derivatives
|
|
$
|
12,553
|
|
|
$
|
(5,243
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-20
HILAND
PARTNERS, LP
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The terms of our derivative contracts currently extend as far as
December 2010. The counterparties to our commodity based
derivative instruments are BP Energy Company and Bank of
Oklahoma, N.A. Our counterparty to our interest rate swap is
Wells Fargo Bank, N.A.
The following table provides information about our commodity
derivative instruments at December 31, 2008 for the periods
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Fair Value
|
|
|
|
|
|
|
Fixed Price
|
|
|
Asset
|
|
Description and Production Period
|
|
(MMBtu)
|
|
|
per MMBtu
|
|
|
(Liability)
|
|
|
Natural Gas Sold Fixed for Floating Price Swaps
|
|
|
|
|
|
|
|
|
|
|
|
|
January 2009 December 2009
|
|
|
2,136,000
|
|
|
$
|
7.30
|
|
|
$
|
6,851
|
|
January 2010 December 2010
|
|
|
2,136,000
|
|
|
$
|
10.50
|
|
|
|
7,141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
13,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table provides information about our interest rate
swap at December 31, 2008 for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
Notional
|
|
|
Interest
|
|
|
Asset
|
|
Description and Period
|
|
Amount
|
|
|
Rate
|
|
|
(Liability)
|
|
|
Interest Rate Swap
|
|
|
|
|
|
|
|
|
|
|
|
|
January 2009 December 2009
|
|
$
|
100,000,000
|
|
|
|
2.245
|
%
|
|
$
|
(1,439
|
)
|
|
|
Note 6:
|
Fair
Value Measurements of Financial Instruments
|
We adopted SFAS No. 157, Fair Value
Measurements (SFAS 157) beginning in the
first quarter of 2008. SFAS 157 defines fair value as the
price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market
participants at the measurement date, establishes a framework
for measuring fair value in GAAP such as fair value hierarchy
used to classify the source of information used in fair value
measurements (i.e., market based or non-market 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 157s hierarchy
defines three levels of inputs that may be used to measure fair
value. Level 1 refers to assets that have observable market
prices, level 2 assets do not have an observable
price but do have inputs that are based on such prices in
which components have observable data points and level 3
refers to assets in which one or more of the inputs do not have
observable prices and calibrated model parameters, valuation
techniques or managements assumptions are used to derive
the fair value.
We use the fair value methodology outlined in SFAS 157 to
value assets and liabilities for our outstanding fixed price
cash flow swap derivative contracts. Valuations of our natural
gas and propane derivative contracts are based on published
forward price curves for natural gas and propane and, as such,
are defined as Level 2 fair value hierarchy assets and
liabilities. There are no published forward price curves for
butanes or natural gasoline, and therefore, our butanes and
natural gasoline derivative contracts are defined as
Level 3 fair value hierarchy assets and liabilities. We
value our butanes and natural gasoline derivative contracts
based on calibrated model parameters relative to forward
published price curves for crude oil and comparative
mark-to-market
values received from our counterparty. We value our interest
rate-based derivative on a
F-21
HILAND
PARTNERS, LP
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
comparative
mark-to-market
value received from our counterparty. The following table
represents the fair value hierarchy for our assets and
liabilities at December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Commodity-based derivative assets
|
|
$
|
|
|
|
$
|
13,992
|
|
|
$
|
|
|
|
$
|
13,992
|
|
Interest rate-based derivative liabilities
|
|
|
|
|
|
|
|
|
|
|
(1,439
|
)
|
|
|
(1,439
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
13,992
|
|
|
$
|
(1,439
|
)
|
|
$
|
12,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table provides a summary of changes in the fair
value of our Level 3 commodity-based derivatives for the
year ended December 31, 2008:
|
|
|
|
|
Balance, January 1, 2008
|
|
$
|
(4,489
|
)
|
Cash settlements from other comprehensive income
|
|
|
3,484
|
|
Net change in other comprehensive income
|
|
|
1,005
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
$
|
|
|
|
|
|
|
|
The following table provides a summary of changes in the fair
value of our Level 3 interest rate-based derivatives for
the year ended December 31, 2008:
|
|
|
|
|
Balance, January 1, 2008
|
|
$
|
|
|
Cash settlements from other comprehensive income
|
|
|
|
|
Net change in other comprehensive income
|
|
|
(1,439
|
)
|
|
|
|
|
|
Balance, December 31, 2008
|
|
$
|
(1,439
|
)
|
|
|
|
|
|
Long-term debt consisted of the following for the indicated
periods:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Revolving credit facility
|
|
$
|
252,064
|
|
|
$
|
221,064
|
|
Capital lease obligations
|
|
|
5,051
|
|
|
|
5,585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
257,115
|
|
|
|
226,649
|
|
Less: current portion of capital lease obligations
|
|
|
649
|
|
|
|
545
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
256,466
|
|
|
$
|
226,104
|
|
|
|
|
|
|
|
|
|
|
Credit Facility.
On February 6, 2008, we
entered into a fourth amendment to our credit facility dated as
of February 15, 2005. Pursuant to the fourth amendment, we
have, among other things, increased our borrowing base from
$250 million to $300 million and decreased the
accordion feature in the facility from $100 million to
$50 million. Our original credit facility dated
February 15, 2005 was first amended in September 2005,
amended a second time in June 2006 and amended a third time in
July 2007.
The fourth amendment increases our borrowing capacity under our
senior secured revolving credit facility to $300 million
such that the facility now consists of a $291 million
senior secured revolving credit facility to be used for funding
acquisitions and other capital expenditures, issuance of letters
of credit and general corporate purposes (the Acquisition
Facility) and a $9.0 million senior secured revolving
credit facility to be used for working capital and to fund
distribution (the Working Capital Facility).
F-22
HILAND
PARTNERS, LP
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In addition, the fourth amendment provides for an accordion
feature, which permits us, if certain conditions are met, to
increase the size of the Acquisition Facility by up to
$50 million and allows for the issuance of letters of
credit of up to $15 million in the aggregate. The senior
secured revolving credit facility also requires us to meet
certain financial tests, including a maximum consolidated funded
debt to EBITDA ratio of 4.0:1.0 as of the last day of any fiscal
quarter; provided that in the event that the Partnership makes
certain permitted acquisitions or capital expenditures, this
ratio may be increased to 4.75:1.0 for the three fiscal quarters
following the quarter in which such acquisition or capital
expenditure occurs; and a minimum interest coverage ratio of
3.0:1.0. The credit facility will mature in May 2011. At that
time, the agreement will terminate and all outstanding amounts
thereunder will be due and payable.
Due to the recent decline in natural gas and NGL prices, we
believe that our cash generated from operations will decrease in
2009 relative to comparable periods in 2008. Our senior secured
revolving credit facility requires us to meet certain financial
tests, including a maximum consolidated funded debt to EBITDA
ratio of 4.0:1.0 as of the last day of any fiscal quarter;
provided that in the event that we make certain permitted
acquisitions or capital expenditures, this ratio may be
increased to 4.75:1.0 for the three fiscal quarters following
the quarter in which such acquisition or capital expenditure
occurs. We intend to elect to increase the ratio to 4.75:1.0 on
March 31, 2009. During this
step-up
period, the applicable margin with respect to loans under the
credit facility will be increased by 35 basis points per
annum and the unused commitment fee will be increased by
12.5 basis points per annum. Additionally, if commodity
prices do not significantly improve above the expected prices
for 2009, we may be in violation of the maximum consolidated
funded debt to EBITDA ratio as early as June 30, 2009,
unless the ratio is amended, the senior secured revolving credit
facility is restructured or we receive an infusion of equity
capital.
We are subject to interest rate risk on our credit facility and
have entered into an interest rate swap to reduce this risk. See
Note 5 Derivatives for a discussion of our
interest rate swap.
Our obligations under the credit facility are secured by
substantially all of our assets and guaranteed by us, and all of
our subsidiaries, other than our operating company, which is the
borrower under the credit facility.
Indebtedness under the credit facility will bear interest, at
our option, at either (i) an Alternate Base Rate plus an
applicable margin ranging from 50 to 125 basis points per
annum or (ii) LIBOR plus an applicable margin ranging from
150 to 225 basis points per annum based on our ratio of
consolidated funded debt to EBITDA. The Alternate Base Rate is a
rate per annum equal to the greatest of (a) the Prime Rate
in effect on such day, (b) the base CD rate in effect on
such day plus 1.50% and (c) the Federal Funds effective
rate in effect on such day plus 1/2 of 1%. We have elected
for the indebtedness to bear interest at LIBOR plus the
applicable margin. A letter of credit fee will be payable for
the aggregate amount of letters of credit issued under the
credit facility at a percentage per annum equal to 1.0%. An
unused commitment fee ranging from 25 to 50 basis points
per annum based on our ratio of consolidated funded debt to
EBITDA will be payable on the unused portion of the credit
facility. During any
step-up
period, the applicable margin with respect to loans under the
credit facility will be increased by 35 basis points per
annum and the unused commitment fee will be increased by
12.5 basis points per annum. At December 31, 2008, the
interest rate on outstanding borrowings from our credit facility
was 3.28%.
The credit facility prohibits us from making distributions to
unitholders if any default or event of default, as defined in
the credit facility, has occurred and is continuing or would
result from the distribution. In addition, the credit facility
contains various covenants that limit, among other things,
subject to certain exceptions and negotiated
baskets, our ability to incur indebtedness, grant
liens, make certain loans, acquisitions and investments, make
any material changes to the nature of its business, amend its
material agreements, including the Omnibus Agreement or enter
into a merger, consolidation or sale of assets.
F-23
HILAND
PARTNERS, LP
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The credit facility defines EBITDA as our consolidated net
income (loss), plus income tax expense, interest expense,
depreciation, amortization and accretion expense, amortization
of intangibles and organizational costs, non-cash unit based
compensation expense, and adjustments for non-cash gains and
losses on specified derivative transactions and for other
extraordinary or non-recurring items.
Upon the occurrence of an event of default as defined in the
credit facility, the lenders may, among other things, be able to
accelerate the maturity of the credit facility and exercise
other rights and remedies as set forth in the credit facility.
The credit facility limits distributions to our unitholders to
available cash, as defined by the agreement, and borrowings to
fund such distributions are only permitted under the revolving
working capital facility. The revolving working capital facility
is subject to an annual clean-down period of 15
consecutive days in which the amount outstanding under the
revolving working capital facility is reduced to zero.
As of December 31, 2008, we had $252.1 million
outstanding under the credit facility and were in compliance
with its financial covenants.
Capital Lease Obligations.
During the third
quarter 2007, we incurred two separate capital lease obligations
at our Bakken and Badlands gathering systems. Under the terms of
a capital lease agreement for a rail loading facility and an
associated products pipeline at our Bakken gathering system, we
have agreed to repay a counterparty a predetermined amount over
a period of eight years. Once fully paid, title to the leased
assets will transfer to us no later than the end of the
eight-year period commencing from the inception date of the
lease. We also incurred a capital lease obligation to a
counterparty for the aid to construct several electric
substations at our Badlands gathering system which, by
agreement, will be repaid in equal monthly installments over a
period of five years.
During the years ended December 31, 2008 and 2007, we made
principal payments of $534 and $296, respectively, on the above
described capital lease obligations. The current portion of the
capital lease obligations presented in the table above is
included accrued liabilities and other in the balance sheet.
|
|
Note 8:
|
Share-Based
Compensation
|
Our general partner, Hiland Partners GP, LLC adopted the Hiland
Partners, LP Long-Term Incentive Plan for its employees and
directors of our general partner and employees of its
affiliates. The long-term incentive plan currently permits an
aggregate of 680,000 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 our
general partners board of directors. The plan will
continue in effect until the earliest of (i) the date
determined by the board of directors of our general partner;
(ii) the date common units are no longer available for
payment of awards under the plan; or (iii) the tenth
anniversary of the plan.
Our general partners 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.
Our general partners board of directors or its
compensation committee also has the right to alter or amend the
long-term incentive plan or any part of the plan from time to
time, including increasing the number of units that may be
granted, subject to unitholder approval if required by the
exchange upon which the common units are listed at that time. No
change in any outstanding grant may be made, however, that would
materially impair the rights of the participant without the
consent of the participant. Under the unit option grant
agreement, granted options of common units vest and become
exercisable in one-third increments on the anniversary of the
grant date over three years. Vested options are exercisable
within the options contractual life of ten years after the
grant date. Restricted common units granted vest and become
exercisable in one-fourth increments on the anniversary of the
grant date over four years. A restricted unit is a common unit
that is subject to forfeiture, and upon vesting, the grantee
receives a common unit that is not subject to
F-24
HILAND
PARTNERS, LP
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
Granted phantom common units are generally more flexible than
restricted units and vesting periods and distribution rights may
vary with each grant. A phantom unit is a common unit that is
subject to forfeiture and is not considered issued until it
vests. Upon vesting, holders of phantom units will receive
(i) a common unit that is not subject to forfeiture, cash
in lieu of the delivery of such unit equal to the fair market
value of the unit on the vesting date, or a combination thereof,
at the discretion of our general partners board of
directors and (ii) the distributions held in trust, if
applicable, related to the vested units.
Phantom
Units
On February 4, 2008, we granted 7,500 phantom units under
the plan to our Vice President Business Development,
Matthew S. Harrison, who on April 16, 2008, was appointed
Chief Financial Officer. Mr. Harrisons phantom units
vest over a three-year period from the date of issuance and
distributions on the phantom units will be held in trust by our
general partner until the units vest. On February 4, 2009,
2,500 phantom units vested and Mr. Harrison settled 2,500
of the phantom units for 2,500 common units.
On August 7, 2008, we granted 7,500 phantom units under the
plan to Mr. Kent C. Christopherson, our Chief Operations
Officer, appointed on August 4, 2008.
Mr. Christophersons phantom units vest over a
four-year period from the date of issuance and distributions on
the phantom units will be held in trust by our general partner
until such units vest. Additionally, in 2008, we granted 7,300
phantom units to key employees.
A total of 7,031 phantom units awarded in 2007 vested during the
year ended December 31, 2008, of which 5,227 phantom units
were converted to common units resulting in contributions of $3
from our general partner to maintain its 2% ownership interest
and 1,804 phantom units were redeemed.
The following table summarizes information about phantom units
for the year ended December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
|
Fair Value
|
|
|
Fair Value at
|
|
|
|
|
|
|
at Grant
|
|
|
Redemption
|
|
|
|
Units
|
|
|
Date ($)
|
|
|
Date ($)
|
|
|
Unvested January 1, 2008
|
|
|
42,825
|
|
|
$
|
50.12
|
|
|
|
|
|
Granted
|
|
|
22,300
|
|
|
$
|
44.49
|
|
|
|
|
|
Vested and converted
|
|
|
(5,227
|
)
|
|
$
|
50.76
|
|
|
|
|
|
Vested and redeemed
|
|
|
(1,804
|
)
|
|
$
|
50.96
|
|
|
$
|
33.46
|
|
Forfeited
|
|
|
(7,300
|
)
|
|
$
|
48.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested December 31, 2008
|
|
|
50,794
|
|
|
$
|
47.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the years ended December 31, 2008 and 2007, we
incurred non-cash unit based compensation expense of $1,149 and
$249, respectively, related to the phantom units. As of
December 31, 2008, there was $1,455 of total unrecognized
cost related to the unvested phantom units which is to be is to
be recognized over a weighted average period of 2.9 years.
At December 31, 2007, there was $1,721 of total
unrecognized cost related to the unvested phantom units.
Restricted
Units
During 2008, we issued 1,000 restricted units each to six
non-employee board members of our general partner on their
one-year anniversary dates, and accordingly, our general partner
contributed $5 to us to maintain its 2% ownership interest. On
the same anniversary dates of the six non-employee board
members, 5,500 previously granted restricted units vested and
were converted to common units. Additionally, 1,000 restricted
units granted to key employees in 2006 vested and were converted
to common units. On August 1,
F-25
HILAND
PARTNERS, LP
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
2008, 375 restricted units granted in November 2006 were
forfeited and cancelled and the associated accumulated
distributions held in trust by our general partner were returned
to us.
The following table summarizes information about restricted
units for the year ended December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Fair Value
|
|
|
|
|
|
|
at Grant
|
|
Restricted Units
|
|
Units
|
|
|
Date ($)
|
|
|
Non-vested at January 1, 2008
|
|
|
19,375
|
|
|
$
|
46.57
|
|
Granted
|
|
|
6,000
|
|
|
$
|
43.97
|
|
Vested
|
|
|
(6,500
|
)
|
|
$
|
37.89
|
|
Forfeited or expired
|
|
|
(375
|
)
|
|
$
|
48.85
|
|
|
|
|
|
|
|
|
|
|
Non-vested at December 31, 2008
|
|
|
18,500
|
|
|
$
|
48.73
|
|
|
|
|
|
|
|
|
|
|
Non-cash unit based compensation expense related to the
restricted units was $356 and $537 for the years ended
December 31, 2008 and 2007, respectively. As of
December 31, 2008, there was $429 of total unrecognized
cost related to the unvested restricted units. This cost is to
be recognized over a weighted average period of 2.4 years.
At December 31, 2007, there was $533 of total unrecognized
cost related to the unvested restricted units.
Unit
Options
The following table summarizes information about outstanding
options for the year ended December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
Options
|
|
Units
|
|
|
Price ($)
|
|
|
Term (Years)
|
|
|
Value ($)
|
|
|
Outstanding at January 1, 2008
|
|
|
75,041
|
|
|
$
|
31.11
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(40,705
|
)
|
|
$
|
25.32
|
|
|
|
|
|
|
$
|
975
|
|
Forfeited or expired
|
|
|
(1,000
|
)
|
|
$
|
40.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2008
|
|
|
33,336
|
|
|
$
|
37.92
|
|
|
|
7.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2008
|
|
|
24,002
|
|
|
$
|
37.01
|
|
|
|
6.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There have been no unit options granted since March 2006. The
weighted average grant date fair value of the 28,000 unit
options granted during the year ended December 31, 2006 was
$4.33 per unit. The weighted average grant date fair value of
167,500 unit options granted during the year ended
December 31, 2005 was $5.30 per unit. The weighted average
grant date fair value of 47,400 unit options vested during
the year ended December 31, 2008 was $5.25 per unit.
The aggregate intrinsic value of options exercised were $975 and
$1,315 for the years ended December 31, 2008 and 2007,
respectively.
On March 14, 2007, Randy Moeder, our past President, Chief
Executive Officer and a director of our general partner
announced his intention to resign. In connection with
Mr. Moeders resignation, we and our general partner
entered into a retention agreement with Mr. Moeder that
allowed Mr. Moeder to continue his employment for a
mutually agreeable period of time, but no longer than six
months. Under the agreement, as long as Mr. Moeder
continued his employment, a pro rata portion of his 10,666
unvested options to purchase
F-26
HILAND
PARTNERS, LP
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
our common units, issued to him on February 10, 2005, would
vest. Accordingly, as required by SFAS 123R
Share-Based Payment, as amended, on March 14,
2007 we recalculated the fair value of the remaining unvested
options to purchase our common units as a modification of the
options awarded to Mr. Moeder on February 10, 2005.
The recalculated fair value of the options of $33.65 per unit
was determined by using the American Binomial option pricing
model.
On April 16, 2007, Mr. Moeder resigned and 1,899 of
his 10,666 unvested options to purchase our common units vested.
As a result of the recalculated fair value of $33.65 per unit,
we recorded an additional $24 of expense for the period from
March 15, 2007 through April 16, 2007. On the same
day, Mr. Moeder forfeited his remaining 8,767 unvested unit
options. The forfeiture of Mr. Moeders 8,767 unvested
unit options reduced compensation expense for the period from
April 1, 2007 through April 16, 2007 by $16. On
April 19, 2007, Mr. Moeder exercised his 1,899 vested
options to purchase our common units.
On April 14, 2006, 13,333 of the unit options issued on
February 10, 2005, were forfeited. Compensation expense for
the year ended December 31, 2006 has been reduced by $21 as
a result of the forfeiture.
As a result of adopting SFAS 123R on the modified
prospective basis beginning on January 1, 2006, we expensed
$32, $165 and $354 in 2008, 2007 and 2006, respectively, related
to unit options awarded in 2006 and 2005. Basic and diluted
earnings per unit were each reduced by $0.04 for the year ended
December 31, 2006 as a result of the additional
compensation recognized under SFAS 123R.
|
|
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 expenses for the
three years ended December 31, 2008, 2007 and 2006 of $320,
$262 and $201, respectively.
Prior to January 1, 2007, we jointly participated with
other affiliated companies in a self-insurance pool (the
Pool) covering health and workers compensation
claims made by employees up to the first $150 and $500,
respectively, per claim. Any amounts paid above these were
reinsured through third party providers. Premiums charged to us
were based on estimated costs per employee of the Pool.
Effective January 1, 2007, we obtained our own health and
workers compensation insurance through third-party
providers. Property and general liability insurance is also
maintained through third-party providers with a $100 deductible
on each policy.
The operation of pipelines, plants and other facilities for
gathering, compressing, treating, or processing natural gas,
NGLs and other products is subject to stringent and complex laws
and regulations pertaining to health, safety and the
environment. 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 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.
We lease office space from a related entity (Note 11). We
also lease certain facilities, vehicles and equipment under
operating leases, most of which contain annual renewal options.
For the years ended December 31, 2008, 2007 and 2006, rent
expense was $2,834, $2,285 and $779, respectively, under these
leases.
F-27
HILAND
PARTNERS, LP
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of our contractual cash obligations as of
December 31, 2008, including minimum future rental
commitments under operating leases having non-cancelable lease
terms in excess of one year, and leases renewed and entered into
subsequent to year end but prior to financial statement
issuance, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Due by Period
|
|
|
|
Total
|
|
|
Due in
|
|
|
Due in
|
|
|
Due in
|
|
|
Due in
|
|
|
Due in
|
|
|
|
|
Type of Obligation
|
|
Obligation
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
Thereafter
|
|
|
|
(In thousands)
|
|
|
Senior secured revolving credit facility
|
|
$
|
252,064
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
252,064
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Estimated interest expense on credit facility(1)
|
|
|
19,634
|
|
|
|
8,267
|
|
|
|
8,267
|
|
|
|
3,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligations(2)
|
|
|
7,378
|
|
|
|
1,256
|
|
|
|
1,256
|
|
|
|
1,256
|
|
|
|
1,107
|
|
|
|
1,001
|
|
|
|
1,502
|
|
Operating leases, service agreements and other
|
|
|
3,959
|
|
|
|
1,700
|
|
|
|
858
|
|
|
|
465
|
|
|
|
299
|
|
|
|
211
|
|
|
|
426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations
|
|
$
|
283,035
|
|
|
$
|
11,223
|
|
|
$
|
10,381
|
|
|
$
|
256,885
|
|
|
$
|
1,406
|
|
|
$
|
1,212
|
|
|
$
|
1,928
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Interest rates on the senior secured revolving credit facility
are variable. Estimated interest payments are based on the
interest rate and the amount outstanding as of December 31,
2008. See Note (7) for a discussion of our senior secured
revolving credit facility.
|
|
(2)
|
|
Contractual cash commitments on our capital lease obligations
include $2,335 of interest expense.
|
|
|
Note 10:
|
Significant
Customers and Suppliers
|
All of our revenues are domestic revenues. The following table
presents our top midstream customers as a percent of total
revenue for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Customer 1
|
|
|
16
|
%
|
|
|
19
|
%
|
|
|
14
|
%
|
Customer 2
|
|
|
14
|
%
|
|
|
6
|
%
|
|
|
13
|
%
|
Customer 3
|
|
|
11
|
%
|
|
|
19
|
%
|
|
|
20
|
%
|
Customer 4
|
|
|
10
|
%
|
|
|
9
|
%
|
|
|
8
|
%
|
Customer 5
|
|
|
9
|
%
|
|
|
12
|
%
|
|
|
4
|
%
|
All of our purchases are from domestic sources. The following
table presents our top midstream suppliers as a percent of total
midstream purchases for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Supplier 1 (affiliated company)
|
|
|
42
|
%
|
|
|
31
|
%
|
|
|
32
|
%
|
Supplier 2
|
|
|
18
|
%
|
|
|
25
|
%
|
|
|
24
|
%
|
Supplier 3
|
|
|
15
|
%
|
|
|
14
|
%
|
|
|
13
|
%
|
|
|
Note 11:
|
Related
Party Transactions
|
We purchase natural gas and NGLs from affiliated companies.
Purchases of product from affiliates totaled
$116.7 million, $60.1 million, and $50.3 million
for the years ended December 31, 2008, 2007 and 2006,
respectively. We sell natural gas and NGLs to affiliated
companies. Sales of product to affiliates totaled
F-28
HILAND
PARTNERS, LP
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
$11.5 million, $3.5 million, and $4.1 million for
the years ended December 31, 2008, 2007 and 2006,
respectively. Compression revenues from affiliates were
$4.8 million each for 2008, 2007 and 2006.
Accounts receivable-affiliates of $2,346 and $1,479 at
December 31, 2008 and 2007, respectively, includes $2,083
and $1,090 from one affiliate for midstream sales.
Accounts payable-affiliates of $7,662 and $7,880 at
December 31, 2008 and 2007, respectively, includes $6,682
and $7,094 due to one affiliate for midstream purchases.
We utilize affiliated companies to provide services to our
plants and pipelines and certain administrative costs. The total
amount paid to these companies was $555, $525, and $353 during
the years ended December 31, 2008, 2007 and 2006,
respectively.
We lease office space under operating leases directly or
indirectly from an affiliate. Rents paid associated with these
leases totaled $157, $143, and $118 for the years ended
December 31, 2008, 2007 and 2006, respectively.
|
|
Note 12:
|
Reportable
Segments
|
We have distinct operating segments for which additional
financial information must be reported. Our 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 we manage our
operations. Our 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 $401,799, $382,626 and $312,431 at
December 31, 2008, 2007 and 2006, respectively. On the same
dates, assets attributable to compression operations totaled
$24,340, $27,847 and $31,385, respectively. All but $80 of the
$58,455 total additions to property and equipment for the year
ended December 31, 2008 was attributable to midstream
operations. All but $48 of the $90,953 total additions to
property and equipment for the year ended December 31, 2007
was attributable to midstream operations. All but $72 of the
total additions to property and equipment of $62,137 and Kinta
Area gathering assets acquired of $96,400 for the year ended
December 31, 2006 was attributable to midstream operations.
F-29
HILAND
PARTNERS, LP
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The table below presents information about operating income for
the reportable segments for the years ended December 31,
2008, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Midstream
|
|
|
Compression
|
|
|
|
|
|
|
Segment
|
|
|
Segment
|
|
|
Total
|
|
|
For the Year Ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
383,180
|
|
|
|
4,819
|
|
|
$
|
387,999
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Midstream purchases (exclusive of items shown separately below)
|
|
|
276,600
|
|
|
|
|
|
|
|
276,600
|
|
Operations and maintenance
|
|
|
29,476
|
|
|
|
1,050
|
|
|
|
30,526
|
|
Depreciation and amortization
|
|
|
33,919
|
|
|
|
3,583
|
|
|
|
37,502
|
|
Bad debt
|
|
|
304
|
|
|
|
|
|
|
|
304
|
|
General and administrative
|
|
|
8,634
|
|
|
|
119
|
|
|
|
8,753
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
348,933
|
|
|
|
4,752
|
|
|
|
353,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
34,247
|
|
|
|
67
|
|
|
|
34,314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other income
|
|
|
|
|
|
|
|
|
|
|
346
|
|
Amortization of deferred loan costs
|
|
|
|
|
|
|
|
|
|
|
(574
|
)
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
(13,639
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
|
|
|
|
|
|
|
|
(13,867
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
$
|
20,447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
273,224
|
|
|
$
|
4,819
|
|
|
$
|
278,043
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Midstream purchases (exclusive of items shown separately below)
|
|
|
195,212
|
|
|
|
|
|
|
|
195,212
|
|
Operations and maintenance
|
|
|
22,472
|
|
|
|
807
|
|
|
|
23,279
|
|
Depreciation and amortization
|
|
|
26,277
|
|
|
|
3,578
|
|
|
|
29,855
|
|
General and administrative
|
|
|
7,456
|
|
|
|
131
|
|
|
|
7,587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
251,417
|
|
|
|
4,516
|
|
|
|
255,933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
21,807
|
|
|
|
303
|
|
|
|
22,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other income
|
|
|
|
|
|
|
|
|
|
|
430
|
|
Amortization of deferred loan costs
|
|
|
|
|
|
|
|
|
|
|
(410
|
)
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
(11,346
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
|
|
|
|
|
|
|
|
(11,326
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
$
|
10,784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-30
HILAND
PARTNERS, LP
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Midstream
|
|
|
Compression
|
|
|
|
|
|
|
Segment
|
|
|
Segment
|
|
|
Total
|
|
|
For the Year Ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
214,867
|
|
|
$
|
4,819
|
|
|
$
|
219,686
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Midstream purchases (exclusive of items shown separately below)
|
|
|
156,193
|
|
|
|
|
|
|
|
156,193
|
|
Operations and maintenance
|
|
|
15,228
|
|
|
|
843
|
|
|
|
16,071
|
|
Depreciation and amortization
|
|
|
18,559
|
|
|
|
3,571
|
|
|
|
22,130
|
|
General and administrative
|
|
|
4,884
|
|
|
|
110
|
|
|
|
4,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
194,864
|
|
|
|
4,524
|
|
|
|
199,388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
20,003
|
|
|
|
295
|
|
|
|
20,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other income
|
|
|
|
|
|
|
|
|
|
|
323
|
|
Amortization of deferred loan costs
|
|
|
|
|
|
|
|
|
|
|
(407
|
)
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
(5,532
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
|
|
|
|
|
|
|
|
(5,616
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
$
|
14,682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 13:
|
Selected
Quarterly Financial Data Unaudited
|
The following is a summary of selected quarterly financial data
for the years ended December 31, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 Quarter
|
|
|
|
1st
|
|
|
2nd
|
|
|
3rd
|
|
|
4th
|
|
|
Revenues
|
|
$
|
91,479
|
|
|
$
|
115,441
|
|
|
$
|
115,753
|
|
|
$
|
65,326
|
|
Operating income
|
|
|
4,862
|
|
|
|
682
|
|
|
|
21,963
|
|
|
|
6,807
|
|
Net income (loss)
|
|
|
1,327
|
|
|
|
(2,508
|
)*
|
|
|
18,641
|
*
|
|
|
2,987
|
|
General partner interest in net income
|
|
|
1,815
|
|
|
|
2,057
|
*
|
|
|
2,641
|
*
|
|
|
59
|
|
Limited partners interest in net income (loss)
|
|
$
|
(488
|
)
|
|
$
|
(4,565
|
)*
|
|
$
|
16,000
|
*
|
|
$
|
2,928
|
|
Net income (loss) per limited partner unit basic
|
|
$
|
(0.05
|
)
|
|
$
|
(0.49
|
)*
|
|
$
|
1.71
|
*
|
|
$
|
0.32
|
|
Net income (loss) per limited partner unit diluted
|
|
$
|
(0.05
|
)
|
|
$
|
(0.49
|
)*
|
|
$
|
1.71
|
*
|
|
$
|
0.31
|
|
|
|
|
*
|
|
The second quarter includes a bad debt expense of $8,103 related
to SemGroup, L.P. which was subsequently reduced to $304 by a
$7,799 recovery in the third quarter. For a more detailed
discussion on SemGroup, L.P., please read Item 7A.
Quantitative and Qualitative Disclosures about Market
Risk Credit Risk.
|
F-31
HILAND
PARTNERS, LP
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 Quarter
|
|
|
|
1st
|
|
|
2nd
|
|
|
3rd
|
|
|
4th
|
|
|
Revenues
|
|
$
|
61,054
|
|
|
$
|
66,616
|
|
|
$
|
67,636
|
|
|
$
|
82,737
|
|
Operating income
|
|
|
4,213
|
|
|
|
4,802
|
|
|
|
6,392
|
|
|
|
6,703
|
|
Net income
|
|
|
2,162
|
|
|
|
2,496
|
|
|
|
3,254
|
|
|
|
2,872
|
|
General partner interest in net income
|
|
|
795
|
|
|
|
982
|
|
|
|
1,199
|
|
|
|
1,550
|
|
Limited partners interest in net income
|
|
$
|
1,367
|
|
|
$
|
1,514
|
|
|
$
|
2,055
|
|
|
$
|
1,322
|
|
Net income per limited partner unit basic
|
|
$
|
0.15
|
|
|
$
|
0.16
|
|
|
$
|
0.22
|
|
|
$
|
0.14
|
|
Net income per limited partner unit diluted
|
|
$
|
0.15
|
|
|
$
|
0.16
|
|
|
$
|
0.22
|
|
|
$
|
0.14
|
|
|
|
Note 14:
|
Net
Income per Limited Partners Unit
|
The computation of net income per limited partners unit is
based on the weighted-average number of common and subordinated
units outstanding during the period. The computation of diluted
net income per limited partner unit further assumes the dilutive
effect of unit options and restricted and phantom units. Net
income per unit applicable to limited partners is computed by
dividing net income applicable to limited partners, after
deducting the general partners 2% interest and incentive
distributions by the weighted-average number of limited
partnership units outstanding. The following is a reconciliation
of the limited partner units used in the calculations of income
per limited partner unit basic and income per
limited partner unit diluted assuming dilution for
the years ended December 31, 2008, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
|
|
|
|
|
|
|
|
|
|
Available to
|
|
|
|
|
|
|
|
|
|
Limited
|
|
|
Limited
|
|
|
|
|
|
|
Partners
|
|
|
Partner Units
|
|
|
Per Unit
|
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
|
For the Year Ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per limited partner unit basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to limited unitholders
|
|
$
|
13,875
|
|
|
|
|
|
|
$
|
1.49
|
|
Weighted average limited partner units outstanding
|
|
|
|
|
|
|
9,328,000
|
|
|
|
|
|
Income per limited partner unit diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unit Options, restricted and phantom units
|
|
|
|
|
|
|
26,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common unitholders plus assumed conversions
|
|
$
|
13,875
|
|
|
|
9,354,000
|
|
|
$
|
1.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per limited partner unit basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to limited unitholders
|
|
$
|
6,258
|
|
|
|
|
|
|
$
|
0.67
|
|
Weighted average limited partner units outstanding
|
|
|
|
|
|
|
9,284,000
|
|
|
|
|
|
Income per limited partner unit diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unit Options, restricted and phantom units
|
|
|
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common unitholders plus assumed conversions
|
|
$
|
6,258
|
|
|
|
9,334,000
|
|
|
$
|
0.67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per limited partner unit basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to limited unitholders
|
|
$
|
12,273
|
|
|
|
|
|
|
$
|
1.37
|
|
Weighted average limited partner units outstanding
|
|
|
|
|
|
|
8,961,000
|
|
|
|
|
|
Income per limited partner unit diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unit Options, restricted and phantom units
|
|
|
|
|
|
|
49,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common unitholders plus assumed conversions
|
|
$
|
12,273
|
|
|
|
9,010,000
|
|
|
$
|
1.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-32
HILAND
PARTNERS, LP
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 15:
|
Partners
Capital and Cash Distributions
|
Our unitholders (limited partners) have only limited voting
rights on matters affecting our operations and activities and,
therefore, limited ability to influence our managements
decisions regarding our business. Unitholders did not select our
general partner or elect the board of directors of our general
partner and effectively have no right to select our general
partner or elect its board of directors in the future.
Unitholders voting rights are further restricted by our
partnership agreement provision providing that any units held by
a person that owns 20% or more of any class of units then
outstanding, other than the general partner, its affiliates,
their transferees and persons who acquired such units with the
prior approval of the board of directors of our general partner,
cannot be voted on any matter. In addition, our partnership
agreement contains provisions limiting the ability of our
unitholders to call meetings or to acquire information about our
operations, as well as other provisions limiting a
unitholders ability to influence the manner or direction
of our management.
Our partnership agreement requires that we distribute all of our
cash on hand at the end of each quarter, less reserves
established at our general partners discretion. We refer
to this as available cash. The amount of available
cash may be greater than or less than the minimum quarterly
distributions. In general, we will pay any cash distribution
made each quarter in the following manner:
|
|
|
|
|
first, 98% to the common units and 2% to our general partner,
until each common unit has received a minimum quarterly
distribution of $0.45 plus any arrearages from prior quarters;
|
|
|
|
second, 98% to the subordinated units and 2% to our general
partner, until each subordinated unit has received a minimum
quarterly distribution of $0.45; and
|
|
|
|
third, 98% to all units pro rata, and 2% to our general partner,
until each unit has received a distribution of $0.495.
|
If cash distributions per unit exceed $0.495 in any quarter, our
general partner will receive increasing percentages, up to a
maximum of 50% of the cash we distribute in excess of that
amount. We refer to these distributions as incentive
distributions.
The distributions on the subordinated units may be reduced or
eliminated if necessary to ensure the common units receive their
minimum quarterly distribution. Subordinated units do not accrue
arrearages. The subordination period will end with respect to
certain portions of the subordinated units once we meet certain
financial tests, but will not end with respect to all
subordinated units before March 31, 2010. These financial
tests require us to have earned and paid the minimum quarterly
distribution on all of our outstanding units for three
consecutive four-quarter periods. When the subordination period
ends, all remaining subordinated units will convert into common
units on a
one-for-one
basis and the common units will no longer be entitled to
arrearages. Following our distribution on May 14, 2008,
these financial tests were met for the immediate preceding three
consecutive four-quarter periods, and accordingly, 25%, or
1,020,000, of the subordinated units were converted to common
units on May 19, 2008.
F-33
HILAND
PARTNERS, LP
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Presented below are cash distributions to common and
subordinated unitholders, including amounts to affiliate owners
and regular and incentive distributions to our general partner
paid by us from January 1, 2007 forward (in thousands,
except per unit amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Unit Cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution
|
|
|
Common
|
|
|
Subordinated
|
|
|
General Partner
|
|
|
Total Cash
|
|
Date Cash Distribution Paid
|
|
Amount
|
|
|
Units
|
|
|
Units
|
|
|
Regular
|
|
|
Incentive
|
|
|
Distribution
|
|
|
02/14/07
|
|
$
|
0.7125
|
|
|
$
|
3,694
|
|
|
$
|
2,907
|
|
|
$
|
150
|
|
|
$
|
749
|
|
|
$
|
7,500
|
|
05/15/07
|
|
|
0.7125
|
|
|
|
3,724
|
|
|
|
2,907
|
|
|
|
151
|
|
|
|
752
|
|
|
|
7,534
|
|
08/14/07
|
|
|
0.7325
|
|
|
|
3,837
|
|
|
|
2,989
|
|
|
|
158
|
|
|
|
932
|
|
|
|
7,916
|
|
11/14/07
|
|
|
0.7550
|
|
|
|
3,959
|
|
|
|
3,080
|
|
|
|
167
|
|
|
|
1,134
|
|
|
|
8,340
|
|
02/14/08
|
|
|
0.7950
|
|
|
|
4,169
|
|
|
|
3,243
|
|
|
|
182
|
|
|
|
1,492
|
|
|
|
9,086
|
|
05/14/08
|
|
|
0.8275
|
|
|
|
4,364
|
|
|
|
3,376
|
|
|
|
194
|
|
|
|
1,789
|
|
|
|
9,723
|
|
08/14/08
|
|
|
0.8625
|
|
|
|
5,446
|
|
|
|
2,639
|
|
|
|
208
|
|
|
|
2,107
|
|
|
|
10,400
|
|
11/14/08
|
|
|
0.8800
|
|
|
|
5,574
|
|
|
|
2,694
|
|
|
|
214
|
|
|
|
2,268
|
|
|
|
10,750
|
|
02/13/09(a)
|
|
|
0.4500
|
|
|
|
2,849
|
|
|
|
1,377
|
|
|
|
86
|
|
|
|
|
|
|
|
4,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6.7275
|
|
|
$
|
37,616
|
|
|
$
|
25,212
|
|
|
$
|
1,510
|
|
|
$
|
11,223
|
|
|
$
|
75,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
This cash distribution was announced on January 26, 2009
and was paid on February 13, 2009 to all unitholders of
record as of February 5, 2009.
|
|
|
Note 16:
|
Subsequent
Events (unaudited)
|
On January 15, 2009, the board of directors of the general
partner of each of Hiland Partners and Hiland Holdings received
a proposal from Harold Hamm to acquire all of the outstanding
common units of each of Hiland Partners and Hiland Holdings that
are not owned by Mr. Hamm, his affiliates or Hamm family
trusts. Consummation of each transaction is conditioned upon the
consummation of the other. The proposals contemplate a merger of
each of Hiland Partners and Hiland Holdings with a separate new
acquisition vehicle to be formed by Mr. Hamm and the Hamm
family trusts. Under the terms proposed by Mr. Hamm, Hiland
Partners unitholders would receive $9.50 in cash per common unit
and Hiland Holdings unitholders would receive $3.20 in cash per
common unit. Mr. Hamm is the Chairman of the board of
directors of the general partner of each of Hiland Partners and
Hiland Holdings. Mr. Hamm, either individually or together
with his affiliates or the Hamm family trusts, beneficially owns
100% of Hiland Partners GP Holdings, LLC, the general partner of
Hiland Holdings, and approximately 61% of the outstanding common
units of Hiland Holdings. Hiland Holdings owns 100% of our
general partner and approximately 37% of our outstanding common
units.
It is anticipated that the conflicts committee of the board of
directors of the general partner of each of Hiland Partners and
Hiland Holdings will consider the proposals. In reviewing the
proposals, each conflicts committee has retained its own
financial advisers and legal counsel to assist in its work. The
boards of directors of the general partners of each of Hiland
Partners and Hiland Holdings caution our unitholders and
unitholders of Hiland Holdings respectively, and others
considering trading in the securities of Hiland Partners and
Hiland Holdings, that each conflicts committee of the board of
directors is reviewing its respective proposal and no decisions
have been made by either conflicts committee of either board of
directors with respect to the response of either us or Hiland
Holdings to the proposals. There can be no assurance that any
agreement will be executed or that any transaction will be
approved or consummated.
On February 26, 2009, a unitholder of Hiland Partners and
Hiland Holdings filed a complaint alleging claims on behalf of a
purported class of common unitholders of Hiland Partners and
Hiland Holdings against Hiland Partners, Hiland Holdings, the
general partner of each of Hiland Partners and Hiland Holdings,
and
F-34
HILAND
PARTNERS, LP
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
certain members of the board of directors of each of Hiland
Partners and Hiland Holdings in the Court of Chancery of the
State of Delaware. The complaint challenges a proposal made by
Harold Hamm to acquire all of the outstanding common units of
each of Hiland Partners and Hiland Holdings that are not owned
by Mr. Hamm, his affiliates or Hamm family trusts. The
complaint alleges, among other things, that the consideration
offered is unfair and grossly inadequate, that the conflicts
committee of the board of directors of the general partner of
each of Hiland Partners and Hiland Holdings cannot be expected
to act independently, and that the management of Hiland Partners
and Hiland Holdings has manipulated its public statements to
depress the price of the common units of Hiland Partners and
Hiland Holdings. The plaintiffs seek to enjoin Hiland Partners,
Hiland Holdings, and their respective board members from
proceeding with any transaction that may arise from
Mr. Hamms going private proposal, along with
compensatory damages. For more information on the going private
proposal, please see Items 1. and 2. Business and
Properties Recent Developments Going
Private Proposal. We cannot predict the outcome of this
lawsuit, or others, nor can we predict the amount of time and
expense that will be required to resolve the lawsuit.
On January 13, 2009 and January 15, 2009, we entered
into financial swap instruments related to forecasted natural
gas sales in 2010 whereby we receive a fixed price and pay a
floating price based on Colorado Interstate Gas
(CIG) basis differential to the contract NYMEX Henry
Hub price for the relevant contract period as the underlying gas
is sold. These series of derivative contracts related to
forecasted natural gas sales in 2010 will be classified as cash
flow hedges in accordance with SFAS 133 for the remainder
of their respective contract periods.
F-35
Annex H
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
|
|
|
þ
|
|
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:
000-51120
Hiland Partners, LP
(Exact name of Registrant as
specified in its charter)
|
|
|
DELAWARE
|
|
71-0972724
|
(State or other jurisdiction
of
incorporation or organization)
|
|
(I.R.S. Employer
Identification No.)
|
|
|
|
205 West Maple, Suite 1100
Enid, Oklahoma
(Address of principal
executive offices)
|
|
73701
(Zip Code)
|
(580) 242-6040
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes
þ
No
o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes
o
No
o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2
of the
Exchange Act. (Check one):
|
|
|
|
Large
accelerated
filer
o
|
Accelerated
filer
þ
|
Non-accelerated
filer
o
|
Smaller
reporting
company
o
|
(Do not check if a smaller reporting company)
Indicate by a check mark whether the registrant is a shell
company (as defined in
rule 12b-2
of the Exchange
Act). Yes
o
No
þ
The number of the registrants outstanding equity units as
of August 7, 2009 was 6,294,624 common units, 3,060,000
subordinated units and a 2% general partnership interest.
HILAND
PARTNERS, LP
INDEX
2
HILAND
PARTNERS, LP
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
(In thousands, except unit amounts)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
4,089
|
|
|
$
|
1,173
|
|
Accounts receivable:
|
|
|
|
|
|
|
|
|
Trade net of allowance for doubtful
|
|
|
|
|
|
|
|
|
accounts of $304
|
|
|
17,820
|
|
|
|
23,863
|
|
Affiliates
|
|
|
2,949
|
|
|
|
2,346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,769
|
|
|
|
26,209
|
|
Fair value of derivative assets
|
|
|
6,188
|
|
|
|
6,851
|
|
Other current assets
|
|
|
1,082
|
|
|
|
1,584
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
32,128
|
|
|
|
35,817
|
|
Property and equipment, net
|
|
|
346,393
|
|
|
|
345,855
|
|
Intangibles, net
|
|
|
32,913
|
|
|
|
35,642
|
|
Fair value of derivative assets
|
|
|
1,597
|
|
|
|
7,141
|
|
Other assets, net
|
|
|
1,444
|
|
|
|
1,684
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
414,475
|
|
|
$
|
426,139
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND PARTNERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
12,802
|
|
|
$
|
22,470
|
|
Accounts payable affiliates
|
|
|
5,095
|
|
|
|
7,662
|
|
Fair value of derivative liabilities
|
|
|
921
|
|
|
|
1,439
|
|
Accrued liabilities and other
|
|
|
5,159
|
|
|
|
2,463
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
23,977
|
|
|
|
34,034
|
|
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
|
|
|
|
|
|
|
|
|
Limited partners interest:
|
|
|
|
|
|
|
|
|
Common unitholders (6,292,380 and 6,286,755 units issued
and outstanding at June 30, 2009 and December 31,
2008, respectively)
|
|
|
117,892
|
|
|
|
122,666
|
|
Subordinated unitholders (3,060,000 units issued and
outstanding)
|
|
|
442
|
|
|
|
3,055
|
|
General partner interest
|
|
|
2,036
|
|
|
|
2,202
|
|
Accumulated other comprehensive income
|
|
|
2,304
|
|
|
|
5,233
|
|
|
|
|
|
|
|
|
|
|
Total partners equity
|
|
|
122,674
|
|
|
|
133,156
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and partners equity
|
|
$
|
414,475
|
|
|
$
|
426,139
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands, except per unit amounts)
|
|
|
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
|
|
|
10,538
|
|
|
|
9,169
|
|
|
|
20,509
|
|
|
|
18,098
|
|
Property impairments
|
|
|
|
|
|
|
|
|
|
|
950
|
|
|
|
|
|
Bad debt
|
|
|
|
|
|
|
8,103
|
|
|
|
|
|
|
|
8,103
|
|
General and administrative
|
|
|
2,939
|
|
|
|
1,863
|
|
|
|
5,879
|
|
|
|
4,164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
48,261
|
|
|
|
114,759
|
|
|
|
101,033
|
|
|
|
201,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
1,818
|
|
|
|
682
|
|
|
|
1,394
|
|
|
|
5,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other income
|
|
|
68
|
|
|
|
71
|
|
|
|
81
|
|
|
|
171
|
|
Amortization of deferred loan costs
|
|
|
(150
|
)
|
|
|
(145
|
)
|
|
|
(299
|
)
|
|
|
(279
|
)
|
Interest expense
|
|
|
(2,684
|
)
|
|
|
(3,116
|
)
|
|
|
(5,037
|
)
|
|
|
(6,617
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net
|
|
|
(2,766
|
)
|
|
|
(3,190
|
)
|
|
|
(5,255
|
)
|
|
|
(6,725
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(948
|
)
|
|
|
(2,508
|
)
|
|
|
(3,861
|
)
|
|
|
(1,181
|
)
|
Less general partners interest in net (loss) income
|
|
|
(19
|
)
|
|
|
2,057
|
|
|
|
(77
|
)
|
|
|
3,872
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Limited partners interest in net loss
|
|
$
|
(929
|
)
|
|
$
|
(4,565
|
)
|
|
$
|
(3,784
|
)
|
|
$
|
(5,053
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) per limited partners unit
basic
|
|
$
|
(0.10
|
)
|
|
$
|
(0.49
|
)
|
|
$
|
(0.40
|
)
|
|
$
|
(0.54
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) per limited partners unit
diluted
|
|
$
|
(0.10
|
)
|
|
$
|
(0.49
|
)
|
|
$
|
(0.40
|
)
|
|
$
|
(0.54
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average limited partners units
outstanding basic
|
|
|
9,350
|
|
|
|
9,326
|
|
|
|
9,349
|
|
|
|
9,314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average limited partners units
outstanding diluted
|
|
|
9,350
|
|
|
|
9,326
|
|
|
|
9,349
|
|
|
|
9,314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
4
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited,
|
|
|
|
in thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,861
|
)
|
|
$
|
(1,181
|
)
|
Adjustments to reconcile net loss to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
20,431
|
|
|
|
18,032
|
|
Accretion of asset retirement obligation
|
|
|
78
|
|
|
|
66
|
|
Property impairments
|
|
|
950
|
|
|
|
|
|
Amortization of deferred loan cost
|
|
|
299
|
|
|
|
279
|
|
(Gain) loss on derivative transactions
|
|
|
(247
|
)
|
|
|
1,935
|
|
Net proceeds from settlement of derivative contracts
|
|
|
3,155
|
|
|
|
|
|
Unit based compensation
|
|
|
601
|
|
|
|
763
|
|
Bad debt
|
|
|
|
|
|
|
8,103
|
|
Gain on sale of assets
|
|
|
(3
|
)
|
|
|
|
|
Increase in other assets
|
|
|
(48
|
)
|
|
|
(146
|
)
|
(Increase) decrease in current assets:
|
|
|
|
|
|
|
|
|
Accounts receivable trade
|
|
|
6,043
|
|
|
|
(21,990
|
)
|
Accounts receivable affiliates
|
|
|
(603
|
)
|
|
|
(1,526
|
)
|
Other current assets
|
|
|
502
|
|
|
|
(910
|
)
|
Increase (decrease) in current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
(1,644
|
)
|
|
|
10,943
|
|
Accounts payable affiliates
|
|
|
(2,567
|
)
|
|
|
7,401
|
|
Accrued liabilities and other
|
|
|
2,696
|
|
|
|
1,012
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
25,782
|
|
|
|
22,781
|
|
|
|
|
|
|
|
|
|
|
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 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 unit options exercise
|
|
|
|
|
|
|
1,052
|
|
General partner contribution for issuance of restricted common
units and from conversion of vested phantom units
|
|
|
1
|
|
|
|
2
|
|
Redemption of vested phantom units
|
|
|
|
|
|
|
(35
|
)
|
Forfeiture of unvested restricted common units
|
|
|
18
|
|
|
|
|
|
Payments on capital lease obligations
|
|
|
(350
|
)
|
|
|
(235
|
)
|
Cash distributions to unitholders
|
|
|
(4,312
|
)
|
|
|
(18,809
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
4,347
|
|
|
|
629
|
|
|
|
|
|
|
|
|
|
|
Increase for the period
|
|
|
2,916
|
|
|
|
3,140
|
|
Beginning of period
|
|
|
1,173
|
|
|
|
10,497
|
|
|
|
|
|
|
|
|
|
|
End of period
|
|
$
|
4,089
|
|
|
$
|
13,637
|
|
|
|
|
|
|
|
|
|
|
Supplementary information
|
|
|
|
|
|
|
|
|
Cash paid for interest, net of amounts capitalized
|
|
$
|
5,179
|
|
|
$
|
6,416
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
5
HILAND
PARTNERS, LP
For the Six Months Ended June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
Subordinated
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Limited
|
|
|
Limited
|
|
|
General
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
Partner
|
|
|
Partner
|
|
|
Partner
|
|
|
Comprehensive
|
|
|
|
|
|
Comprehensive
|
|
|
|
Interest
|
|
|
Interest
|
|
|
Interest
|
|
|
Income
|
|
|
Total
|
|
|
Income (Loss)
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands, except unit amounts)
|
|
|
Balance, January 1, 2009
|
|
$
|
122,666
|
|
|
$
|
3,055
|
|
|
$
|
2,202
|
|
|
$
|
5,233
|
|
|
$
|
133,156
|
|
|
|
|
|
Issuance of 5,625 common units from 5,625 vested phantom units
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
Forfeiture of 4,250 unvested restricted common units
|
|
|
22
|
|
|
|
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
18
|
|
|
|
|
|
Periodic cash distributions
|
|
|
(2,849
|
)
|
|
|
(1,377
|
)
|
|
|
(86
|
)
|
|
|
|
|
|
|
(4,312
|
)
|
|
|
|
|
Unit based compensation
|
|
|
601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
601
|
|
|
|
|
|
Other comprehensive income reclassified to income on closed
derivative transactions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,879
|
)
|
|
|
(3,879
|
)
|
|
$
|
(3,879
|
)
|
Change in fair value of derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
950
|
|
|
|
950
|
|
|
|
950
|
|
Net loss
|
|
|
(2,548
|
)
|
|
|
(1,236
|
)
|
|
|
(77
|
)
|
|
|
|
|
|
|
(3,861
|
)
|
|
|
(3,861
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(6,790
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2009
|
|
$
|
117,892
|
|
|
$
|
442
|
|
|
$
|
2,036
|
|
|
$
|
2,304
|
|
|
$
|
122,674
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of this consolidated
financial statement.
6
HILAND
PARTNERS, 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
|
Hiland Partners, LP, a Delaware limited partnership
(we, us, our or the
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.
(Predecessor or CGI) and Hiland
Partners, LLC. We commenced operations on February 15,
2005, and concurrently with the completion of our initial public
offering, CGI contributed a substantial portion of its net
assets to us. The transfer of ownership of net assets from CGI
to us 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 our natural gas gathering, processing, treating and
fractionation assets other than our Worland, Bakken, Kinta Area,
Woodford Shale and North Dakota Bakken gathering systems. Hiland
Partners, LLC historically owned our Worland gathering system
and our compression services assets, which we acquired on
February 15, 2005, and our Bakken gathering system. Since
our initial public offering, we have operated in midstream and
compression services segments. On September 26, 2005, we
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, we
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. We financed this
acquisition with $61.2 million of borrowings from our
credit facility and $35.0 million of proceeds from the
issuance to Hiland Partners GP, LLC, our general partner, of
761,714 common units and 15,545 general partner equivalent
units, both at $45.03 per unit. We 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, we have 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.
Principles
of Consolidation
The consolidated financial statements include our accounts and
those of our subsidiaries. All significant intercompany
transactions and balances have been eliminated.
7
HILAND
PARTNERS, LP
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
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. We place our cash and cash
equivalents with high-quality institutions and in money market
funds. We derive our revenue from customers primarily in the oil
and gas and utility industries. These industry concentrations
have the potential to impact our overall exposure to credit
risk, either positively or negatively, in that our 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 our customer base. Our portfolio of accounts receivable is
comprised primarily of mid-size to large domestic corporate
entities. The counterparties to our commodity based derivative
instruments as of June 30, 2009 are BP Energy Company and
Bank of Oklahoma, N.A. Our counterparty to our interest rate
swap 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
We are exposed to interest rate risk on our variable rate bank
credit facility. We manage a portion of our 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. We have 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
We engage in price risk management activities in order to
minimize the risk from market fluctuation in the prices of
natural gas and NGLs. To qualify as an accounting hedge, the
price movements in the commodity derivatives must be highly
correlated with the underlying hedged commodity. Gains and
losses related to commodity derivatives that qualify as
accounting hedges are recognized in income when the underlying
hedged physical transaction closes and are included in the
consolidated statement of operations as revenues
8
HILAND
PARTNERS, LP
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
from midstream operations. Gains and losses related to commodity
derivatives that are not designated as accounting hedges or do
not qualify as accounting hedges are recognized in income
immediately and are included in revenues from midstream
operations in the consolidated statement of operations.
SFAS 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities.
SFAS 133 requires that an entity recognize all derivatives
as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. However,
if a derivative does qualify for hedge accounting, depending on
the nature of the hedge, changes in fair value can be offset
against the change in fair value of the hedged item through
earnings or recognized in other comprehensive income 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 a derivative instrument
that will be delivered in quantities expected to be used or sold
by the reporting entity over a reasonable period in the normal
course of business.
Our 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, we
evaluate our long-lived assets of identifiable business
activities for impairment when events or changes in
circumstances indicate, in our managements judgment, that
the carrying value of such assets may not be recoverable. The
determination of whether impairment has occurred is based on our
managements estimate of undiscounted future cash flows
attributable to the assets as compared to the carrying value of
the assets. If impairment has occurred, the amount of the
impairment recognized is determined by estimating the fair value
of the assets and recording a provision for loss if the carrying
value is greater than the fair value. For assets identified to
be disposed of in the future, the carrying value of these assets
is compared to the 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 our long-lived
assets has occurred, we must estimate the undiscounted future
cash flows attributable to the asset or asset group. Our
estimate of cash flows is based on assumptions regarding the
volume of reserves providing asset cash flow and future NGL
product and natural gas prices. The amount of reserves and
drilling 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 the
Partnerships assets are located;
|
|
|
|
the availability and prices of NGLs and NGL products and
competing commodities;
|
|
|
|
the availability and prices of raw natural gas supply;
|
|
|
|
our ability to negotiate favorable marketing agreements;
|
9
HILAND
PARTNERS, LP
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
|
|
|
|
|
the risks that third party oil and gas exploration and
production activities will not occur or be successful;
|
|
|
|
our 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 our natural gas gathering
systems located in Texas and Mississippi, combined with
significantly reduced natural gas prices, we recognized
impairment charges of $950 in March 2009. No impairment charges
were recognized during the three and six months ended
June 30, 2008.
Comprehensive
Income (Loss)
Comprehensive income (loss) includes net income (loss) and other
comprehensive income, which includes, but is not limited to,
changes in the fair value of derivative financial instruments.
Pursuant to SFAS 133, for derivatives qualifying as
accounting hedges, the effective portion of changes in fair
value is recognized in partners equity as accumulated
other comprehensive income and reclassified to earnings when the
underlying hedged physical transaction closes. Our comprehensive
income (loss) for the three and six months ended June 30,
2009 and 2008 is presented in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Net loss
|
|
$
|
(948
|
)
|
|
$
|
(2,508
|
)
|
|
$
|
(3,861
|
)
|
|
$
|
(1,181
|
)
|
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
|
|
$
|
(4,451
|
)
|
|
$
|
(7,217
|
)
|
|
$
|
(6,790
|
)
|
|
$
|
(6,351
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income (Loss) per Limited Partners Unit
Net income (loss) per limited partners unit is computed
based on the weighted-average number of common and subordinated
units outstanding during the period. The computation of diluted
net income (loss) per limited partner unit further assumes the
dilutive effect of unit options and restricted and phantom
units. Net income (loss) per limited partners unit is
computed by dividing net income (loss) applicable to limited
partners, after deducting the general partners 2% interest
and incentive distributions, by both the basic and diluted
weighted-average number of limited partnership units outstanding.
Recent
Accounting Pronouncements
On June 30, 2009, the Financial Accounting Standards Board
(FASB) issued FASB Statement No. 168, The
FASB Accounting Standards
Codification
tm
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
10
HILAND
PARTNERS, LP
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
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
(FAS 107-1).
FAS 107-1
increases the frequency of fair value disclosures to a quarterly
basis instead of annual basis.
FAS 107-1
specifically relates to fair value disclosures for any financial
instruments that are not currently reflected on the balance
sheet at fair value.
FAS 107-1
is effective for interim and annual periods ending after
June 15, 2009.
FAS 107-1
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 dont 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 entitys derivative instruments
and hedging activities and their effects on the entitys
financial position, financial performance, and cash flows.
SFAS 161 is effective prospectively for financial
statements issued for fiscal years and interim periods beginning
after November 15, 2008, with early application encouraged.
SFAS 161 encourages, but does not require, comparative
disclosures for periods prior to its initial adoption.
SFAS 161 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
entitys 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
11
HILAND
PARTNERS, LP
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
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 Partnerships
(MLPs) net earnings per limited partner unit for
each period presented according to distributions declared and
participation rights in undistributed earnings as if all of the
earnings for that period had been distributed. In periods with
undistributed earnings above specified levels, the calculation
per the two-class method results in an increased allocation of
such undistributed earnings to the general partner and a
dilution of earnings to the limited partners.
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 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 parents 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 parents ownership interest while the
parent retains its controlling financial interest in its
subsidiary be accounted for consistently and similarly as equity
transactions. Consolidated net income and comprehensive income
are now determined without deducting minority interest; however,
earnings-per-share
information continues to be calculated on the basis of the net
income attributable to the parents shareholders.
Additionally, SFAS 160 establishes a single method for
accounting for changes in a parents ownership interest in
a subsidiary that does not result in deconsolidation and that
the parent recognize a gain or loss in net income when a
subsidiary is deconsolidated. 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.
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
12
HILAND
PARTNERS, LP
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
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 157s hierarchy defines three levels of inputs
that may be used to measure fair value. Level 1 refers to
assets that have observable market prices, level 2 assets
do not have an observable price but do have inputs
that are based on such prices in which components have
observable data points and level 3 refers to assets in
which one or more of the inputs do not have observable prices
and calibrated model parameters, valuation techniques or
managements assumptions are used to derive the fair value.
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.
On June 1, 2009, the Partnership and Hiland Holdings GP, LP
(Hiland Holdings and, 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 the
Partnership (other than certain restricted common units owned by
officers and employees) not owned by Hiland Holdings (the
Hiland Partners Merger); and (ii) all of the
outstanding common units of Hiland Holdings (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
Partnerships unitholders will receive $7.75 in cash for
each common unit they hold and Hiland Holdings unitholders
will receive $2.40 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 Holdings 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 recommendation 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 Holdings has approved the
applicable merger agreement and has recommended, along with its
respective conflicts committee, that the public unitholders of
the Partnership and Hiland Holdings, 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
Hiland Holdings or any other affiliate of our general partner,
including the members of our board of directors, the expiration
or termination of applicable waiting periods under the
Hart-Scott-Rodino
Act, the absence of any restraining order or injunction, and
other customary closing conditions. Additionally, the
obligations of Mr. Hamm and his affiliates to complete the
Hiland Partners Merger is contingent upon the concurrent
completion of the Hiland Holdings Merger, and the Hiland
Holdings Merger is subject to closing conditions similar to
those described above. There can be no assurance that the Hiland
Partners Merger or any other transaction will be approved or
consummated.
On July 1, 2009, the Partnership, its general partner,
Hiland Partners GP, LLC, Hiland Holdings, Hiland Partners GP
Holdings, LLC, the general partner of Hiland Holdings, HH GP
Holding, LLC, an affiliate of
13
HILAND
PARTNERS, LP
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
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 the
Partnership, Hiland Partners GP, LLC, HH GP Holding, LLC, and
HLND MergerCo, LLC, filed a Transaction Statement on
Schedule 13E-3
with the SEC. Concurrently with the filing of this
Schedule 13E-3,
the Partnership and Hiland Holdings 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 Partnership and Hiland Holdings will be
soliciting proxies from unitholders of the Partnership and
Hiland Holdings 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, we 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. We 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 our 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 Holdings, and the members of the board of directors of
each of the Partnership and Hiland Holdings. 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 Holdings.
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
Holdings that were charged with reviewing the proposals and
making a recommendation to each committees respective
board of directors lacked any meaningful independence,
(iii) the defendants acted in bad faith in recommending and
approving the Hiland Partners Merger or the Hiland Holdings
Merger, and (iv) the disclosures in the Preliminary Proxy
Statement filed by the Partnership and Hiland Holdings 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 Holdings and, when filed, in the definitive joint proxy
statement.
14
HILAND
PARTNERS, LP
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
We 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 our current and projected throughput
volumes, midstream segment margins and cash flows combined with
future required levels of capital expenditures and the
outstanding indebtedness under our senior secured revolving
credit facility. Under the terms of the partnership agreement,
the common units will carry an arrearage of $0.90 per unit,
representing the minimum quarterly distribution to common units
for the first and second quarters of 2009 that must be paid
before the Partnership can make distributions to the
subordinated units.
|
|
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
|
|
|
438,192
|
|
|
|
405,842
|
|
Compression and water injection equipment
|
|
|
19,417
|
|
|
|
19,391
|
|
Other
|
|
|
4,935
|
|
|
|
4,621
|
|
|
|
|
|
|
|
|
|
|
|
|
|
464,907
|
|
|
|
445,732
|
|
Less: accumulated depreciation and amortization
|
|
|
118,514
|
|
|
|
99,877
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
346,393
|
|
|
$
|
345,855
|
|
|
|
|
|
|
|
|
|
|
During the three and six months ended June 30, 2009, we
capitalized interest of $42 and $104, respectively. We
capitalized $24 and $155 interest during the three and six
months ended June 30, 2008, respectively. We recognized
$950 of property impairment charges related to natural gas
gathering systems in Texas and Mississippi during the six months
ended June 30, 2009. We 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 our plants and pipelines. We have
evaluated our 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
|
|
|
|
|
|
|
15
HILAND
PARTNERS, LP
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
|
|
Note 4:
|
Intangible
Assets
|
Intangible assets consist of the acquired value of customer
relationships and existing contracts to purchase, gather and
sell natural gas and other NGLs and compression contracts, which
do not have significant residual value. The customer
relationships and the contracts are being amortized over their
estimated lives of ten years. We review intangible assets for
impairment whenever events or circumstances indicate that the
carrying amounts may not be recoverable. If such a review should
indicate that the carrying amount of intangible assets is not
recoverable, we reduce the carrying amount of such assets to
fair value based on the discounted probable cash flows of the
intangible assets. 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
|
|
$
|
25,585
|
|
|
$
|
25,585
|
|
Compression contracts
|
|
|
18,515
|
|
|
|
18,515
|
|
Customer relationships
|
|
|
10,492
|
|
|
|
10,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54,592
|
|
|
|
54,592
|
|
Less accumulated amortization
|
|
|
21,679
|
|
|
|
18,950
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
$
|
32,913
|
|
|
$
|
35,642
|
|
|
|
|
|
|
|
|
|
|
During each of the three months ended June 30, 2009 and
2008, we recorded $1,365 of amortization expense. During each of
the six months ended June 30, 2009 and 2008, we recorded
$2,729 of amortization expense. Estimated aggregate amortization
expense for the remainder of 2009 is $2,730 and $5,459 for each
of the four succeeding fiscal years from 2010 through 2013 and a
total of $8,347 for all years thereafter.
Interest
Rate Swap
We are subject to interest rate risk on our credit facility and
have entered into an interest rate swap to reduce this risk. We
entered into a one year interest rate swap agreement with our
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%.
Consequently, for the three and six months ended June 30,
2009, we incurred additional interest expense of $462 and $905,
respectively, upon monthly settlements of the interest rate swap
agreement.
The following table provides information about our interest rate
swap at June 30, 2009 for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional
|
|
|
Interest
|
|
|
Fair Value
|
|
Description and Period
|
|
Amount
|
|
|
Rate
|
|
|
(Liability)
|
|
|
Interest Rate Swap
|
|
|
|
|
|
|
|
|
|
|
|
|
July 2009 December 2009
|
|
$
|
100,000
|
|
|
|
2.245
|
%
|
|
$
|
(921
|
)
|
Commodity
Swaps
We have 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.
We entered into these financial
16
HILAND
PARTNERS, LP
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
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
our counterparties, we receive a fixed price and pay a floating
price based on certain indices for the relevant contract period
as the underlying natural gas is sold.
We formally document all relationships between hedging
instruments and the items being hedged, including our 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. We assess, 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, we
will discontinue hedge accounting for the derivative and
subsequent changes in fair value for the derivative will be
recognized immediately into earnings. We assess effectiveness
using regression analysis and measure ineffectiveness using the
dollar offset method.
Derivatives are recorded on our consolidated balance sheet as
assets or liabilities at fair value. For derivatives qualifying
as hedges, the effective portion of changes in fair value are
recognized in partners equity as accumulated other
comprehensive income (loss) and reclassified to earnings when
the underlying hedged 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, we 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 we 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, we receive a
fixed price of $5.08 and pay a floating CIG index price for the
same relevant volumes and contract period as the underlying
natural gas is sold.
17
HILAND
PARTNERS, LP
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
Presented in the table below is information related to our
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
|
)
|
At June 30, 2009, our accumulated other comprehensive
income was $2,304. Of this amount, we anticipate $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 our derivative contracts currently extend as far as
December 2010. The counterparties to our commodity-based
derivative contracts are BP Energy Company and Bank of Oklahoma,
N.A. Our counterparty to our interest rate swap is Wells Fargo
Bank, N.A.
The following table provides information about our 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
18
HILAND
PARTNERS, LP
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
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 157s hierarchy defines three levels of inputs
that may be used to measure fair value. Level 1 refers to
assets that have observable market prices, level 2 assets
do not have an observable price but do have inputs
that are based on such prices in which components have
observable data points and level 3 refers to assets in
which one or more of the inputs do not have observable prices
and calibrated model parameters, valuation techniques or
managements assumptions are used to derive the fair value.
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 valued our interest rate-based derivative on a
comparative
mark-to-market
value received from our counterparty and, as such, is defined as
Level 3. The following table represents the fair value
hierarchy for our 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 our Level 3 interest rate-based derivative 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, we review
properties for impairment when events and circumstances indicate
a possible decline in the recoverability of the carrying value
of such property. We compare each propertys estimated
expected future cash flows to the carrying amount of the
property to determine if the carrying amount is recoverable. If
the carrying amount of the property exceeds its estimated
undiscounted future cash flows, the carrying amount of the
property is reduced to its estimated fair value. Fair value may
be estimated using comparable market data, a discounted cash
flow method, or a combination of the two. In the discounted cash
flow method, estimated future cash flows are based on
managements expectations for the future and include
estimates of future oil and gas reserves, commodity prices based
on commodity futures price strips as of the date of the
estimate, operating and development costs, and a risk-adjusted
discount rate.
As a result of volumes declines combined with significantly
reduced natural gas prices, we determined that carrying amounts
totaling approximately $950 related to natural gas gathering
systems located in Texas
19
HILAND
PARTNERS, LP
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
and Mississippi were not recoverable from future cash flows and,
therefore, were impaired at March 31, 2009. We reduced the
carrying amounts of these nonrecurring level 3 hierarchy
assets to their estimated fair values of approximately $249 by
using the discounted cash flow method described above, as
comparable market data was not available.
Long-term debt consisted of the following for the indicated
periods:
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Credit facility
|
|
$
|
261,064
|
|
|
$
|
252,064
|
|
Capital lease obligations
|
|
|
4,701
|
|
|
|
5,051
|
|
|
|
|
|
|
|
|
|
|
|
|
|
265,765
|
|
|
|
257,115
|
|
Less: current portion of capital lease obligations
|
|
|
648
|
|
|
|
649
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
265,117
|
|
|
$
|
256,466
|
|
|
|
|
|
|
|
|
|
|
Credit Facility.
Our borrowing capacity under
our 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, the senior secured revolving credit facility
provides for an accordion feature, which permits us, if certain
conditions are met, to increase the size of the Acquisition
Facility by up to $50.0 million and allows for the issuance
of letters of credit of up to $15.0 million in the
aggregate. The credit facility will mature in May 2011. At that
time, the agreement will terminate and all outstanding amounts
thereunder will be due and payable.
Due to lower natural gas and NGL prices and the impact of
reduced drilling activity on our current and projected
throughput volumes, we believe that cash generated from
operations will decrease for the remainder of 2009 relative to
comparable periods in 2008. Our senior secured revolving credit
facility requires us 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 we make 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. We 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, the
Partnership receives an infusion of equity capital, the
Partnerships debt is restructured or the Partnership 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, the Partnership 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 the Partnership 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
20
HILAND
PARTNERS, LP
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
or debt financing will be available to the Partnership, or that
the Partnerships 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.
Our obligations under the credit facility are secured by
substantially all of our assets and guaranteed by us, and all of
our subsidiaries, other than our operating company, which is the
borrower under the credit facility.
Indebtedness under the credit facility will bear interest, at
our option, at either (i) an Alternate Base Rate plus an
applicable margin ranging from 50 to 125 basis points per
annum or (ii) LIBOR plus an applicable margin ranging from
150 to 225 basis points per annum based on our ratio of
consolidated funded debt to EBITDA. The Alternate Base Rate is a
rate per annum equal to the greatest of (a) the Prime Rate
in effect on such day, (b) the base CD rate in effect on
such day plus 1.50% and (c) the Federal Funds effective
rate in effect on such day plus 1/2 of 1%. We have elected for
the indebtedness to bear interest at LIBOR plus the applicable
margin. A letter of credit fee will be payable for the aggregate
amount of letters of credit issued under the credit facility at
a percentage per annum equal to 1.0%. An unused commitment fee
ranging from 25 to 50 basis points per annum based on our
ratio of consolidated funded debt to EBITDA will be payable on
the unused portion of the credit 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 our credit facility
was 2.92%.
We are subject to interest rate risk on our credit facility and
have entered into an interest rate swap to reduce this risk. See
Note 5 Derivatives for a discussion of our
interest rate swap.
The credit facility prohibits us from making distributions to
unitholders if any default or event of default, as defined in
the credit facility, has occurred and is continuing or would
result from such distributions. In addition, the credit facility
contains various covenants that limit, among other things,
subject to certain exceptions and negotiated
baskets, our ability to incur indebtedness, grant
liens, make certain loans, acquisitions and investments, make
any material changes to the nature of its business, amend its
material agreements, including the Omnibus Agreement, which
contains non-compete and indemnity provisions, or enter into a
merger, consolidation or sale of assets.
The credit facility defines EBITDA as our 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 our unitholders to
available cash, as defined by the agreement, and borrowings to
fund such distributions are only permitted under the revolving
working capital facility. The revolving working capital facility
is subject to an annual clean-down period of 15
consecutive days in which the amount outstanding under the
revolving working capital facility is reduced to zero.
As of June 30, 2009, we had $261.1 million outstanding
under the credit facility and were in compliance with its
financial covenants. Our EBITDA to interest expense ratio was
4.95 to 1.0 and our consolidated funded debt to EBITDA ratio was
4.40 to 1.0.
Capital Lease Obligations.
We are obligated
under two separate capital lease agreements entered into with
respect to our 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 our Bakken gathering system, we are repaying a
counterparty a predetermined amount over a period of eight
years. Once fully paid,
21
HILAND
PARTNERS, LP
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
title to the leased assets will transfer to us no later than the
end of the eight-year period commencing from the inception date
of the lease. We also incurred a capital lease obligation to a
counterparty for the aid to construct several electric
substations at our 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, we
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
|
Our general partner, Hiland Partners GP, LLC adopted the Hiland
Partners, LP Long-Term Incentive Plan for its employees and
directors of our general partner and employees of its
affiliates. The long-term incentive plan currently permits an
aggregate of 680,000 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 our
general partners board of directors. The plan will
continue in effect until the earliest of (i) a date
determined by the board of directors of our general partner;
(ii) the date common units are no longer available for
payment of awards under the plan; or (iii) the tenth
anniversary of the plan.
Our general partners 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.
Our general partners board of directors or its
compensation committee also has the right to alter or amend the
long-term incentive plan or any part of the plan from time to
time, including increasing the number of units that may be
granted, subject to unitholder approval if required by the
exchange upon which the common units are listed at that time. No
change in any outstanding grant may be made, however, that would
materially impair the rights of the participant without the
consent of the participant. Under the unit option grant
agreement, granted options of common units vest and become
exercisable in one-third increments on the anniversary of the
grant date over three years. Vested options are exercisable
within the options contractual life of ten years after the
grant date. Restricted common units granted vest and become
exercisable in one-fourth increments on the anniversary of the
grant date over four years. A restricted unit is a common unit
that is subject to forfeiture, and upon vesting, the grantee
receives a common unit that is not subject to forfeiture.
Distributions on unvested restricted common units are held in
trust by our general partner until the units vest, at which time
the distributions are distributed to the grantee. Granted
phantom common units are generally more flexible than restricted
units and vesting periods and distribution rights may vary with
each grant. A phantom unit is a common unit that is subject to
forfeiture and is not considered issued until it vests. Upon
vesting, holders of phantom units will receive (i) a common
unit that is not subject to forfeiture, cash in lieu of the
delivery of such unit equal to the fair market value of the unit
on the vesting date, or a combination thereof, at the discretion
of our general partners 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.
22
HILAND
PARTNERS, LP
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
The following table summarizes information about our 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, we
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, we incurred non-cash
unit based compensation expense of $301 and $580, respectively,
related to phantom units. We will recognize additional expense
of $992 over the next four years, and the additional expense is
to be recognized over a weighted average period of
2.5 years.
Restricted Units.
We issued no restricted
units during the three and six months ended June 30, 2009.
On April 1, 2009, our former Chief Commercial Officer
retired and forfeited 1,500 restricted units. The following
table summarizes information about our restricted units for the
six months ended June 30, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Fair Value
|
|
|
|
|
|
|
per Unit
|
|
|
|
|
|
|
at Grant
|
|
Restricted Units
|
|
Units
|
|
|
Date ($)
|
|
|
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 the
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 the 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 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 unit options 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.
|
|
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,
23
HILAND
PARTNERS, LP
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
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 and 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.
We lease certain equipment, vehicles and facilities under
operating leases, most of which contain annual renewal options.
We 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 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
Holdings, the general partner of each of the Partnership and
Hiland Holdings, and the members of the board of directors of
each of the Partnership and Hiland Holdings. 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 Holdings.
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
Holdings that were charged with reviewing the proposals and
making a recommendation to each committees respective
board of directors lacked any meaningful independence,
(iii) the defendants acted in bad faith in recommending and
approving the Hiland Partners Merger or the Hiland Holdings
Merger, and (iv) the disclosures in the Preliminary Proxy
Statement filed by the Partnership and Hiland Holdings 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.
24
HILAND
PARTNERS, LP
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
Additional information concerning these lawsuits may be found in
the Preliminary Proxy Statement filed by the Partnership and
Hiland Holdings and, when filed, in the definitive joint proxy
statement.
|
|
Note 10:
|
Significant
Customers and Suppliers
|
All of our revenues are domestic revenues. The following table
presents our top midstream customers as a percent of total
revenue for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
For the Six Months Ended
|
|
|
|
Ended June 30,
|
|
|
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
|
%
|
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, we 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 our purchases are from domestic sources. The following
table presents our top midstream suppliers as a percent of total
midstream purchases for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
For the Six Months Ended
|
|
|
|
Ended June 30,
|
|
|
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
|
We purchase 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. We also sell
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 $2,949 at
June 30, 2009 include $2,649 from one affiliate for
midstream sales. Accounts receivable affiliates of
$2,346 at December 31, 2008 include $2,083 from one
affiliate for midstream sales.
25
HILAND
PARTNERS, LP
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
Accounts payable affiliates of $5,095 at
June 30, 2009 include $4,018 due to one affiliate for
midstream purchases. Accounts payable affiliates of
$7,662 at December 31, 2008 include $6,682 payable to the
same affiliate for midstream purchases.
We utilize affiliated companies to provide services to our
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 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
|
We have distinct operating segments for which additional
financial information must be reported. Our 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 we manage our
operations. Our 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 $390,702 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.
26
HILAND
PARTNERS, LP
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
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
|
|
|
9,640
|
|
|
|
898
|
|
|
|
10,538
|
|
|
|
8,274
|
|
|
|
895
|
|
|
|
9,169
|
|
Bad debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,103
|
|
|
|
|
|
|
|
8,103
|
|
General and administrative
|
|
|
2,868
|
|
|
|
71
|
|
|
|
2,939
|
|
|
|
1,844
|
|
|
|
19
|
|
|
|
1,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
47,082
|
|
|
|
1,179
|
|
|
|
48,261
|
|
|
|
113,565
|
|
|
|
1,194
|
|
|
|
114,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
1,792
|
|
|
$
|
26
|
|
|
|
1,818
|
|
|
$
|
671
|
|
|
$
|
11
|
|
|
|
682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other income
|
|
|
|
|
|
|
|
|
|
|
68
|
|
|
|
|
|
|
|
|
|
|
|
71
|
|
Amortization of deferred loan costs
|
|
|
|
|
|
|
|
|
|
|
(150
|
)
|
|
|
|
|
|
|
|
|
|
|
(145
|
)
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
(2,684
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,116
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
|
|
|
|
|
|
|
|
(2,766
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,190
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
$
|
(948
|
)
|
|
|
|
|
|
|
|
|
|
$
|
(2,508
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the 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
|
|
|
18,714
|
|
|
|
1,795
|
|
|
|
20,509
|
|
|
|
16,308
|
|
|
|
1,790
|
|
|
|
18,098
|
|
Property impairments
|
|
|
950
|
|
|
|
|
|
|
|
950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bad debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,103
|
|
|
|
|
|
|
|
8,103
|
|
General and administrative
|
|
|
5,740
|
|
|
|
139
|
|
|
|
5,879
|
|
|
|
4,115
|
|
|
|
49
|
|
|
|
4,164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
98,672
|
|
|
|
2,361
|
|
|
|
101,033
|
|
|
|
199,028
|
|
|
|
2,348
|
|
|
|
201,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
1,345
|
|
|
$
|
49
|
|
|
|
1,394
|
|
|
$
|
5,482
|
|
|
$
|
62
|
|
|
|
5,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other income
|
|
|
|
|
|
|
|
|
|
|
81
|
|
|
|
|
|
|
|
|
|
|
|
171
|
|
Amortization of deferred loan costs
|
|
|
|
|
|
|
|
|
|
|
(299
|
)
|
|
|
|
|
|
|
|
|
|
|
(279
|
)
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
(5,037
|
)
|
|
|
|
|
|
|
|
|
|
|
(6,617
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
|
|
|
|
|
|
|
|
(5,255
|
)
|
|
|
|
|
|
|
|
|
|
|
(6,725
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
$
|
(3,861
|
)
|
|
|
|
|
|
|
|
|
|
$
|
(1,181
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
HILAND
PARTNERS, LP
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
|
|
Note 13:
|
Net
Income (Loss) per Limited Partners Unit
|
The computation of net income (loss) per limited partners
unit is based on the weighted-average number of common and
subordinated units outstanding during the period. The
computation of diluted net income (loss) per limited partner
unit further assumes the dilutive effect of unit options and
restricted and phantom units. Net income (loss) per unit
applicable to limited partners is computed by dividing net
income (loss) applicable to limited partners, after deducting
the general partners 2% interest and incentive
distributions, 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 (loss)
per limited partner unit basic and (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)
|
|
|
|
|
|
|
|
|
(Loss)
|
|
|
|
|
|
|
|
|
|
Attributable
|
|
|
|
|
|
|
|
|
Attributable
|
|
|
|
|
|
|
|
|
|
to Limited
|
|
|
Limited
|
|
|
Per
|
|
|
to Limited
|
|
|
Limited
|
|
|
Per
|
|
|
|
Partners
|
|
|
Partner Units
|
|
|
Unit
|
|
|
Partners
|
|
|
Partner Units
|
|
|
Unit
|
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
|
(Loss) per limited partner unit basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) attributable to limited partners
|
|
$
|
(929
|
)
|
|
|
|
|
|
$
|
(0.10
|
)
|
|
$
|
(4,565
|
)
|
|
|
|
|
|
$
|
(0.49
|
)
|
Weighted average limited partner units outstanding
|
|
|
|
|
|
|
9,350,000
|
|
|
|
|
|
|
|
|
|
|
|
9,326,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) attributable to limited partners plus assumed conversions
|
|
$
|
(929
|
)
|
|
|
9,350,000
|
|
|
$
|
(0.10
|
)
|
|
$
|
(4,565
|
)
|
|
|
9,326,000
|
|
|
$
|
(0.49
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Loss)
|
|
|
|
|
|
|
|
|
(Loss)
|
|
|
|
|
|
|
|
|
|
Attributable
|
|
|
|
|
|
|
|
|
Attributable
|
|
|
|
|
|
|
|
|
|
to Limited
|
|
|
Limited
|
|
|
Per
|
|
|
to Limited
|
|
|
Limited
|
|
|
Per
|
|
|
|
Partners
|
|
|
Partner Units
|
|
|
Unit
|
|
|
Partners
|
|
|
Partner Units
|
|
|
Unit
|
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
|
(Loss) per limited partner unit basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) attributable to limited partners
|
|
$
|
(3,784
|
)
|
|
|
|
|
|
$
|
(0.40
|
)
|
|
$
|
(5,053
|
)
|
|
|
|
|
|
$
|
(0.54
|
)
|
Weighted average limited partner units outstanding
|
|
|
|
|
|
|
9,349,000
|
|
|
|
|
|
|
|
|
|
|
|
9,314,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) attributable to limited partners plus assumed conversions
|
|
$
|
(3,784
|
)
|
|
|
9,349,000
|
|
|
$
|
(0.40
|
)
|
|
$
|
(5,053
|
)
|
|
|
9,314,000
|
|
|
$
|
(0.54
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three and six months ended June 30, 2009 and 2008,
approximately 88,000 and 98,000 unit options and restricted
and phantom units, respectively, were excluded from the
computation of diluted earnings attributable to limited partner
units because the inclusion of such units would have been
anti-dilutive.
28
HILAND
PARTNERS, LP
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
|
|
Note 14:
|
Partners
Capital and Cash Distributions
|
Our unitholders (limited partners) have only limited voting
rights on matters affecting our operations and activities and,
therefore, limited ability to influence our managements
decisions regarding our business. Unitholders did not select our
general partner or elect the board of directors of our general
partner and effectively have no right to select our general
partner or elect its board of directors in the future.
Unitholders voting rights are further restricted by our
partnership agreement provision providing 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 the
unitholders ability to influence the manner or direction
of our management.
Our partnership agreement requires that we distribute all of our
cash on hand at the end of each quarter, less reserves
established at our general partners discretion. We refer
to this as available cash. The amount of available
cash may be greater than or less than the minimum quarterly
distributions. In general, we will pay any cash distribution
made each quarter in the following manner:
|
|
|
|
|
first, 98% to the common units and 2% to our general partner,
until each common unit has received a minimum quarterly
distribution of $0.45 plus any arrearages from prior quarters;
|
|
|
|
second, 98% to the subordinated units and 2% to our general
partner, until each subordinated unit has received a minimum
quarterly distribution of $0.45; and
|
|
|
|
third, 98% to all units pro rata, and 2% to our general partner,
until each unit has received a distribution of $0.495.
|
If cash distributions per unit exceed $0.495 in any quarter, our
general partner will receive increasing percentages, up to a
maximum of 50% of the cash we distribute in excess of that
amount. We refer to these distributions as incentive
distributions.
The distributions on the subordinated units may be reduced or
eliminated if necessary to ensure the common units receive their
minimum quarterly distribution. Subordinated units do not accrue
arrearages. The subordination period will extend until the first
day of any quarter beginning after March 31, 2010 that each
of the following tests are met: distributions of available cash
from operating surplus on each of the outstanding common units
and subordinated units equaled or exceeded the minimum quarterly
distribution for each of the three consecutive, non-overlapping
four-quarter periods immediately preceding that date; the
adjusted operating surplus (as defined in the
partnership agreement) generated during each of the three
consecutive, non-overlapping four-quarter periods immediately
preceding that date equaled or exceeded the sum of the minimum
quarterly distributions on all of the outstanding common units
and subordinated units during those periods on a fully diluted
basis and the related distribution on the 2% general partner
interest during those periods; and there are no arrearages in
payment of the minimum quarterly distribution on the common
units. In addition, if the tests for ending the subordination
period are satisfied for any three consecutive four quarter
periods ending on or after March 31, 2008, 25% of the
subordinated units will convert into an equal number of common
units. On May 14, 2008 these tests were met and
accordingly, 1,020,000, or 25%, of the subordinated units
converted into an equal number of common units.
We 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 our current and projected throughput
volumes, midstream segment margins and cash flows combined with
future required levels of capital expenditures and the
outstanding indebtedness under our senior secured revolving
credit facility. Under the terms of the partnership agreement,
the common units carry an arrearage of
29
HILAND
PARTNERS, LP
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
$0.90 per unit, representing the minimum quarterly distribution
to common units for the first two quarters of 2009 that must be
paid before the Partnership can make distributions to the
subordinated units. Presented below are cash distributions to
common and subordinated unitholders, including amounts to
affiliate owners and regular and incentive distributions to our
general partner paid by us from January 1, 2008 forward (in
thousands, except per unit amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Unit Cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution
|
|
|
Common
|
|
|
Subordinated
|
|
|
General Partner
|
|
|
Total Cash
|
|
Date Cash Distribution Paid
|
|
Amount
|
|
|
Units
|
|
|
Units
|
|
|
Regular
|
|
|
Incentive
|
|
|
Distribution
|
|
|
02/14/08
|
|
$
|
0.7950
|
|
|
$
|
4,169
|
|
|
$
|
3,243
|
|
|
$
|
182
|
|
|
$
|
1,492
|
|
|
$
|
9,086
|
|
05/14/08
|
|
|
0.8275
|
|
|
|
4,364
|
|
|
|
3,376
|
|
|
|
194
|
|
|
|
1,789
|
|
|
|
9,723
|
|
08/14/08
|
|
|
0.8625
|
|
|
|
5,446
|
|
|
|
2,639
|
|
|
|
208
|
|
|
|
2,107
|
|
|
|
10,400
|
|
11/14/08
|
|
|
0.8800
|
|
|
|
5,574
|
|
|
|
2,694
|
|
|
|
214
|
|
|
|
2,268
|
|
|
|
10,750
|
|
02/13/09
|
|
|
0.4500
|
|
|
|
2,849
|
|
|
|
1,377
|
|
|
|
86
|
|
|
|
|
|
|
|
4,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3.8150
|
|
|
$
|
22,402
|
|
|
$
|
13,329
|
|
|
$
|
884
|
|
|
$
|
7,656
|
|
|
$
|
44,271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 15:
|
Subsequent
Events (evaluated through August 10, 2009)
|
On July 1, 2009, the Partnership, its general partner,
Hiland Partners GP, LLC, Hiland Holdings, Hiland Partners GP
Holdings, LLC, the general partner of Hiland Holdings, 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 the Partnership, Hiland Partners
GP, LLC, HH GP Holding, LLC, and HLND MergerCo, LLC, filed a
Transaction Statement on
Schedule 13E-3
with the SEC. Concurrently with the filing of this
Schedule 13E-3,
the Partnership and Hiland Holdings 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 Partnership and Hiland Holdings will be
soliciting proxies from unitholders of the Partnership and
Hiland Holdings in connection with the mergers of both Hiland
Companies. On July 10, the Partnerships were granted early
termination of the waiting period under the
Hart-Scott-Rodino
Act for the Hiland Companies merger.
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.
30
Cautionary
Statement About Forward-Looking Statements
This report on
Form 10-Q
includes certain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933
and Section 21E of the Securities Exchange Act of 1934.
These statements include statements regarding our plans, goals,
beliefs or current expectations. Statements using words such as
anticipate, believe, intend,
project, plan, continue,
estimate, forecast, may,
will or similar expressions help identify
forward-looking statements. Although we believe such
forward-looking statements are based on reasonable assumptions
and current expectations and projections about future events, no
assurance can be given that every objective will be reached.
Our actual results may differ materially from any results
projected, forecasted, estimated or expressed in forward-looking
statements since many of the factors that determine these
results are subject to uncertainties and risks, difficult to
predict, and beyond managements control. Such factors
include:
|
|
|
|
|
with respect to the mergers: (1) the occurrence of any
event, change or other circumstances that could give rise to the
termination of the merger agreements or the failure of required
conditions to close the mergers; (2) the outcome of any
legal proceedings that have been or may be instituted against
the Partnership
and/or
Hiland Holdings and others; (3) the inability to obtain
unitholder approval or the failure to satisfy other conditions
to completion of the mergers, including the receipt of certain
regulatory approvals; (4) risks that the proposed
transaction disrupts current plans and operations and the
potential difficulties in employee retention as a result of the
mergers; (5) the performance of Mr. Hamm, his
affiliates and the Hamm family trusts and (6) the amount of
the costs, fees, expenses and related charges;
|
|
|
|
the ability to comply with certain covenants in our credit
facility and the ability to reach agreement with our lenders in
the event of a breach of such covenants;
|
|
|
|
the ability to pay distributions to our unitholders;
|
|
|
|
our cash flow is affected by the volatility of natural gas and
NGL product prices, which could adversely affect our ability to
make distributions to unitholders.
|
|
|
|
the continued ability to find and contract for new sources of
natural gas supply;
|
|
|
|
the general economic conditions in the United States of America
as well as the general economic conditions and currencies in
foreign countries;
|
|
|
|
the amount of natural gas gathered on our gathering systems;
|
|
|
|
the level of throughput in our natural gas processing and
treating facilities given the recent reduction in drilling
activity in our areas of operations;
|
|
|
|
the fees we charge and the margins realized for our services;
|
|
|
|
the prices and market demand for, and the relationship between,
natural gas and NGLs;
|
|
|
|
energy prices generally;
|
|
|
|
the level of domestic crude oil and natural gas production;
|
|
|
|
the availability of imported crude oil and natural gas;
|
|
|
|
actions taken by foreign crude oil and natural gas producing
nations;
|
|
|
|
the political and economic stability of petroleum producing
nations;
|
|
|
|
the weather in our operating areas;
|
|
|
|
the extent of governmental regulation and taxation;
|
|
|
|
hazards or operating risks incidental to the gathering, treating
and processing of natural gas and NGLs that may not be fully
covered by insurance;
|
31
|
|
|
|
|
competition from other midstream companies;
|
|
|
|
loss of key personnel;
|
|
|
|
the availability and cost of capital and our ability to access
certain capital sources;
|
|
|
|
changes in laws and regulations to which we are subject,
including tax, environmental, transportation and employment
regulations;
|
|
|
|
the costs and effects of legal and administrative proceedings;
|
|
|
|
the ability to successfully identify and consummate strategic
acquisitions at purchase prices that are accretive to our
financial results;
|
|
|
|
risks associated with the construction of new pipelines and
treating and processing facilities or additions to our existing
pipelines and facilities;
|
|
|
|
the completion of significant, unbudgeted expansion projects may
require debt
and/or
equity financing which may not be available to us on acceptable
terms, or at all; and;
|
|
|
|
increases in interest rates could increase our borrowing costs,
adversely impact our unit price and our ability to issue
additional equity, which could have an adverse effect on our
cash flows and our ability to fund our growth.
|
These factors are not necessarily all of the important factors
that could cause our actual results to differ materially from
those expressed in any of our forward-looking statements. Our
future results will depend upon various other risks and
uncertainties, including, but not limited to those described
above. Other unknown or unpredictable factors also could have
material adverse effects on our future results. You should not
place undue reliance on any forward-looking statements.
All forward-looking statements attributable to us are qualified
in their entirety by this cautionary statement. We undertake no
duty to update our forward-looking statements to reflect the
impact of events or circumstances after the date of the
forward-looking statements.
32
|
|
Item 2.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
General
Trends and Outlook
We expect our business to continue to be affected by the key
trends described below. Our expectations are based on
assumptions made by us, and information currently available to
us. To the extent our underlying assumptions about or
interpretations of available information prove to be incorrect,
our expectations may vary materially from actual results. Please
see Forward Looking Statements.
U.S. Natural Gas Supply and
Outlook.
Natural gas prices have declined
significantly since the peak New York Mercantile Exchange
(NYMEX) Henry Hub last day settle price of
$13.11/MMBtu in July 2008 to the NYMEX Henry Hub last day settle
price of $3.95 in July 2009, a 70% decline. According to data
published by Baker Hughes Incorporated (Baker
Hughes), U.S. natural gas drilling rig counts have
declined by approximately 57% to 675 as of July 24, 2009,
compared to 1,555 natural gas drilling rigs as of July 25,
2008, and have declined approximately 58% compared to the peak
natural gas drilling rig count of 1,606 in September 2008. We
believe that current natural gas prices will continue to result
in reduced natural gas-related drilling activity as producers
seek to decrease their level of natural gas production. We also
believe that current reduced natural gas drilling activity will
persist until the economic environment in the United States
improves and increases the demand for natural gas.
U.S. Crude Oil Supply and Outlook.
The
domestic and global recession and resulting drop in demand for
crude oil products continues to significantly impact the price
for crude oil. West Texas Intermediate (WTI) crude oil pricing
has declined from a peak of $134.62/bbl in July 2008 to a low of
$33.87/Bbl in January 2009, a 75% decline, increasing to
$66.93/Bbl in July 2009, a 50% decline from July 2008. According
to data published by Baker Hughes, U.S. crude oil drilling
rig counts have declined by approximately 35% to 257 as of
July 24, 2009, compared to 393 crude oil drilling rigs as
of July 25, 2008, and have declined approximately 42%
compared to the peak crude oil drilling rig count of 442 in
November 2008. Baker Hughes also published that U.S. crude
oil drilling rig counts have recently increased from a low of
179 as of June 5, 2009 to 257 as of July 24, 2009, an
increase of 44%. Even though crude oil prices have steadily
increased from $33.87/Bbl in January 2009 to $66.93/Bbl in July
2009, the forward curve for WTI crude oil pricing continues to
reflect reductions in demand for crude oil. We also believe that
current reduced crude oil drilling activity will persist until
the economic environment in the United States improves and
increases the demand for crude oil.
U.S. NGL Supply and Outlook.
The domestic
and global recession and resulting drop in demand for NGL
products has significantly impacted the price for NGLs. NGL
prices have dropped dramatically since the peak NGL basket
pricing of $2.21/gallon in June 2008 to a low of $0.70/gallon in
January 2009, a 68% decline, increasing to $0.95/gallon in July
2009, a 57% decline from June 2008. NGL basket pricing
historically correlated to WTI crude oil pricing. WTI crude oil
pricing has declined from a peak of $134.62/bbl in July 2008 to
a low of $33.87/Bbl in January 2009, a 75% decline, increasing
to $66.93/Bbl in July 2009, a 50% decline from July 2008. The
forward curve for NGL basket pricing and WTI crude oil pricing
reflects continued reductions in demand for NGL products. We
also believe that the current reduced NGL products pricing will
persist until the economic environment in the United States
improves and increases the demand for NGL products.
A number of the areas in which we operate have experienced a
significant decline in drilling activity as a result of the
recent decline in natural gas and crude oil prices. Along our
systems, excluding our North Dakota Bakken gathering system,
which commenced operations in late April 2009, we connected
23 wells during the first six months of 2009 as compared to
55 wells connected during the same period in 2008.
Currently, there is one rig drilling along our dedicated acreage
company wide. While we anticipate continued exploration and
production activities in the areas in which we operate, albeit
at depressed levels, fluctuations in energy prices can greatly
affect production rates and investments by third parties in the
development of natural gas and oil reserves. Drilling activity
generally decreases as natural gas and oil prices decrease. We
have no control over the level of drilling activity in the areas
of our operations.
33
Disruption
to functioning of capital markets
Multiple events during 2008 and 2009 involving numerous
financial institutions have effectively restricted current
liquidity within the capital markets throughout the United
States and around the world. Despite efforts by treasury and
banking regulators in the United States, Europe and other
nations around the world to provide liquidity to the financial
sector, capital markets currently remain constrained. We expect
that our ability to raise debt and equity at prices that are
similar to offerings in recent years to be limited over the next
three to six months and possibly longer should capital markets
remain constrained.
Overview
We are engaged in purchasing, gathering, compressing,
dehydrating, treating, processing and marketing of natural gas,
fractionating and marketing of NGLs, and providing air
compression and water injection services for oil and gas
secondary recovery operations. Our operations are primarily
located in the Mid-Continent and Rocky Mountain regions of the
United States.
We manage our business and analyze and report our results of
operations on a segment basis. Our operations are divided into
two business segments:
|
|
|
|
|
Midstream Segment
, which is engaged in purchasing,
gathering, compressing, dehydrating, treating, processing and
marketing of natural gas and the fractionating and marketing of
NGLs. The midstream segment generated 94.9% and 95.6% of our
total segment margin for the three months ended June 30,
2009 and 2008, respectively and 94.6% and 95.2% of our total
segment margin for the six months ended June 30, 2009 and
2008, respectively.
|
|
|
|
Compression Segment
, which is engaged in providing air
compression and water injection services for oil and gas
secondary recovery operations that are ongoing in North Dakota.
The compression segment generated 5.1% and 4.4% of our total
segment margin for the three months ended June 30, 2009 and
2008, respectively and 5.4% and 4.8% of our total segment margin
for the six months ended June 30, 2009 and 2008,
respectively.
|
Our midstream assets currently consist of 15 natural gas
gathering systems with approximately 2,147 miles of gas
gathering pipelines, six natural gas processing plants, seven
natural gas treating facilities and three NGL fractionation
facilities. Our compression assets consist of two air
compression facilities and a water injection plant.
Our results of operations are determined primarily by five
interrelated variables: (1) the volume of natural gas
gathered through our pipelines; (2) the volume of natural
gas processed; (3) the volume of NGLs fractionated;
(4) the level and relationship of natural gas and NGL
prices; and (5) our current contract portfolio. Because our
profitability is a function of the difference between the
revenues we receive from our operations, including revenues from
the products we sell, and the costs associated with conducting
our operations, including the costs of products we purchase,
increases or decreases in our revenues alone are not necessarily
indicative of increases or decreases in our profitability. To a
large extent, our contract portfolio, the pricing environment
for natural gas and NGLs and the price of NGLs relative to
natural gas prices will dictate increases or decreases in our
profitability. Our profitability is also dependent upon prices
and market demand for natural gas and NGLs, which fluctuate with
changes in market and economic conditions and other factors.
Recent
Events
Merger Agreements.
On June 1, 2009, the
Partnership and Hiland Holdings 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 the
Partnership (other than certain restricted common units owned by
officers and employees) not owned by Hiland Holdings; and
(ii) all of the outstanding common units of Hiland Holdings
(other than certain restricted common units owned by officers
and employees) not owned by Mr. Hamm, his affiliates or the
Hamm family trusts. 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 Partnerships
unitholders will receive $7.75 in cash for each common unit they
hold and
34
Hiland Holdings unitholders will receive $2.40 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 Holdings
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
recommendation 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 Holdings has approved the applicable merger agreement and
has recommended, along with its respective conflicts committee,
that the public unitholders of the Partnership and Hiland
Holdings, 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 Hiland Holdings or any
other affiliate of our general partner, including the members of
our board of directors, the expiration or termination of
applicable waiting periods under the
Hart-Scott-Rodino
Act, 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
Partners Merger is contingent upon the concurrent completion of
the Hiland Holdings Merger, and the Hiland Holdings Merger is
subject to closing conditions similar to those described above.
There can be no assurance that the Hiland Partners Merger or any
other transaction will be approved or consummated.
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.
SEC Filings.
On July 1, 2009, the
Partnership, its general partner, Hiland Partners GP, LLC,
Hiland Holdings, Hiland Partners GP Holdings, LLC, the general
partner of Hiland Holdings, 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 and Vice President Finance and Secretary of
the Hiland Companies, in connection with the Agreement and Plan
of Merger, dated June 1, 2009 (the Merger
Agreement), among the Partnership, Hiland Partners GP,
LLC, HH GP Holding, LLC, and HLND MergerCo, LLC filed a
Transaction Statement on
Schedule 13E-3
with the SEC. Concurrently with the filing of this
Schedule 13E-3,
the Partnership and Hiland Holdings 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 Partnership and Hiland Holdings will be
soliciting proxies from unitholders of the Partnership and
Hiland Holdings in connection with the mergers of both Hiland
Companies.
Hedging Transactions.
On June 26, 2009,
we 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. We 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 our senior secured revolving credit facility.
Class Action Lawsuits.
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
Holdings, the general partner of each of the Partnership and
Hiland Holdings, and the members of the board of directors of
each of the Partnership and Hiland Holdings. 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 Holdings.
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
35
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
Holdings that were charged with reviewing the proposals and
making a recommendation to each committees respective
board of directors lacked any meaningful independence,
(iii) the defendants acted in bad faith in recommending and
approving the Hiland Partners Merger or the Hiland Holdings
Merger, and (iv) the disclosures in the Preliminary Proxy
Statement filed by the Partnership and Hiland Holdings 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 Holdings and, when filed, in the definitive joint proxy
statement.
Distributions.
We 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 our
current and projected throughput volumes, midstream segment
margins and cash flows combined with future required levels of
capital expenditures and the outstanding indebtedness under our
senior secured revolving credit facility. Under the terms of the
partnership agreement, the common units will carry an arrearage
of $0.90 per unit, representing the minimum quarterly
distribution to common units for the first and second quarters
of 2009 that must be paid before the Partnership can make
distributions to the subordinated units.
Historical
Results of Operations
Our historical results of operations for the periods presented
may not be comparable, either from period to period or going
forward primarily due to decreased natural gas and natural gas
liquid prices and significantly increased volumes and operating
expenses at our Woodford Shale and Badlands gathering systems.
36
Our
Results of Operations
The following table presents a reconciliation of the non-GAAP
financial measure of total segment margin (which consists of the
sum of midstream segment margin and compression segment margin)
to operating income on a historical basis for each of the
periods indicated. We view total segment margin, a non-GAAP
financial measure, as an important performance measure of the
core profitability of our operations because it is directly
related to our volumes and commodity price changes. We review
total segment margin monthly for consistency and trend analysis.
We define midstream segment margin as midstream revenue less
midstream purchases. Midstream revenue includes revenue from the
sale of natural gas, NGLs and NGL products resulting from our
gathering, treating, processing and fractionation activities and
fixed fees associated with the gathering of natural gas and the
transportation and disposal of saltwater. Midstream purchases
include the cost of natural gas, condensate and NGLs purchased
by us from third parties, the cost of natural gas, condensate
and NGLs purchased by us from affiliates, and the cost of crude
oil purchased by us from third parties. We define compression
segment margin as the revenue derived from our compression
segment. Our total segment margin may not be comparable to
similarly titled measures of other companies as other companies
may not calculate total segment margin in the same manner.
Set forth in the tables below are certain financial and
operating data for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Total Segment Margin Data:
|
|
|
|
|
|
|
|
|
Midstream revenues
|
|
$
|
48,874
|
|
|
$
|
114,236
|
|
Midstream purchases
|
|
|
26,999
|
|
|
|
88,073
|
|
|
|
|
|
|
|
|
|
|
Midstream segment margin
|
|
|
21,875
|
|
|
|
26,163
|
|
Compression revenues(1)
|
|
|
1,205
|
|
|
|
1,205
|
|
|
|
|
|
|
|
|
|
|
Total segment margin(2)
|
|
$
|
23,080
|
|
|
$
|
27,368
|
|
|
|
|
|
|
|
|
|
|
Summary of Operations Data:
|
|
|
|
|
|
|
|
|
Midstream revenues
|
|
$
|
48,874
|
|
|
$
|
114,236
|
|
Compression revenues
|
|
|
1,205
|
|
|
|
1,205
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
50,079
|
|
|
|
115,441
|
|
Midstream purchases (exclusive of items shown separately below)
|
|
|
26,999
|
|
|
|
88,073
|
|
Operations and maintenance
|
|
|
7,785
|
|
|
|
7,551
|
|
Depreciation, amortization and accretion
|
|
|
10,538
|
|
|
|
9,169
|
|
Bad debt
|
|
|
|
|
|
|
8,103
|
|
General and administrative
|
|
|
2,939
|
|
|
|
1,863
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
48,261
|
|
|
|
114,759
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
1,818
|
|
|
|
682
|
|
Other income (expense)
|
|
|
(2,766
|
)
|
|
|
(3,190
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(948
|
)
|
|
|
(2,508
|
)
|
Add:
|
|
|
|
|
|
|
|
|
Depreciation, amortization and accretion
|
|
|
10,538
|
|
|
|
9,169
|
|
Amortization of deferred loan costs
|
|
|
150
|
|
|
|
145
|
|
Interest expense
|
|
|
2,684
|
|
|
|
3,116
|
|
|
|
|
|
|
|
|
|
|
EBITDA
(3)
|
|
$
|
12,424
|
|
|
$
|
9,922
|
|
|
|
|
|
|
|
|
|
|
Operating Data:
|
|
|
|
|
|
|
|
|
Inlet natural gas (Mcf/d)
|
|
|
272,666
|
|
|
|
246,339
|
|
Natural gas sales (MMBtu/d)
|
|
|
87,273
|
|
|
|
86,203
|
|
NGL sales (Bbls/d)
|
|
|
7,260
|
|
|
|
5,979
|
|
37
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Total Segment Margin Data:
|
|
|
|
|
|
|
|
|
Midstream revenues
|
|
$
|
100,017
|
|
|
$
|
204,510
|
|
Midstream purchases
|
|
|
58,215
|
|
|
|
156,691
|
|
|
|
|
|
|
|
|
|
|
Midstream segment margin
|
|
|
41,802
|
|
|
|
47,819
|
|
Compression revenues(1)
|
|
|
2,410
|
|
|
|
2,410
|
|
|
|
|
|
|
|
|
|
|
Total segment margin(2)
|
|
$
|
44,212
|
|
|
$
|
50,229
|
|
|
|
|
|
|
|
|
|
|
Summary of Operations Data:
|
|
|
|
|
|
|
|
|
Midstream revenues
|
|
$
|
100,017
|
|
|
$
|
204,510
|
|
Compression revenues
|
|
|
2,410
|
|
|
|
2,410
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
102,427
|
|
|
|
206,920
|
|
Midstream purchases (exclusive of items shown separately below)
|
|
|
58,215
|
|
|
|
156,691
|
|
Operations and maintenance
|
|
|
15,480
|
|
|
|
14,320
|
|
Depreciation, amortization and accretion
|
|
|
20,509
|
|
|
|
18,098
|
|
Property impairments
|
|
|
950
|
|
|
|
|
|
Bad debt
|
|
|
|
|
|
|
8,103
|
|
General and administrative
|
|
|
5,879
|
|
|
|
4,164
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
101,033
|
|
|
|
201,376
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
1,394
|
|
|
|
5,544
|
|
Other income (expense)
|
|
|
(5,255
|
)
|
|
|
(6,725
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(3,861
|
)
|
|
|
(1,181
|
)
|
Add:
|
|
|
|
|
|
|
|
|
Depreciation, amortization and accretion
|
|
|
20,509
|
|
|
|
18,098
|
|
Amortization of deferred loan costs
|
|
|
299
|
|
|
|
279
|
|
Interest expense
|
|
|
5,037
|
|
|
|
6,617
|
|
|
|
|
|
|
|
|
|
|
EBITDA
(3)
|
|
$
|
21,984
|
|
|
$
|
23,813
|
|
|
|
|
|
|
|
|
|
|
Operating Data:
|
|
|
|
|
|
|
|
|
Inlet natural gas (Mcf/d)
|
|
|
274,521
|
|
|
|
236,885
|
|
Natural gas sales (MMBtu/d)
|
|
|
89,579
|
|
|
|
86,174
|
|
NGL sales (Bbls/d)
|
|
|
7,155
|
|
|
|
5,626
|
|
|
|
|
(1)
|
|
Compression revenues and compression segment margin are the
same. There are no compression purchases associated with the
compression segment.
|
|
(2)
|
|
Reconciliation of total segment margin to operating income:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Reconciliation of Total Segment Margin to Operating Income
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
1,818
|
|
|
$
|
682
|
|
Add:
|
|
|
|
|
|
|
|
|
Operations and maintenance expenses
|
|
|
7,785
|
|
|
|
7,551
|
|
Depreciation, amortization and accretion
|
|
|
10,538
|
|
|
|
9,169
|
|
Bad debt
|
|
|
|
|
|
|
8,103
|
|
General and administrative
|
|
|
2,939
|
|
|
|
1,863
|
|
|
|
|
|
|
|
|
|
|
Total segment margin
|
|
$
|
23,080
|
|
|
$
|
27,368
|
|
|
|
|
|
|
|
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Reconciliation of Total Segment Margin to Operating Income
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
1,394
|
|
|
$
|
5,544
|
|
Add:
|
|
|
|
|
|
|
|
|
Operations and maintenance expenses
|
|
|
15,480
|
|
|
|
14,320
|
|
Depreciation, amortization and accretion
|
|
|
20,509
|
|
|
|
18,098
|
|
Property impairments
|
|
|
950
|
|
|
|
|
|
Bad debt
|
|
|
|
|
|
|
8,103
|
|
General and administrative expenses
|
|
|
5,879
|
|
|
|
4,164
|
|
|
|
|
|
|
|
|
|
|
Total segment margin
|
|
$
|
44,212
|
|
|
$
|
50,229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3)
|
|
We define EBITDA, a non-GAAP financial measure, as net income
(loss) plus interest expense, provisions for income taxes and
depreciation, amortization and accretion expense. EBITDA is used
as a supplemental financial measure by our management and by
external users of our financial statements such as investors,
commercial banks, research analysts and others to assess:
(1) the financial performance of our assets without regard
to financial methods, capital structure or historical cost
basis; (2) the ability of our assets to generate cash
sufficient to pay interest costs and support our indebtedness;
(3) our operating performance and return on capital as
compared to those of other companies in the midstream energy
sector, without regard to financing or structure; and
(4) the viability of acquisitions and capital expenditure
projects and the overall rates of return on alternative
investment opportunities. EBITDA is also a financial measurement
that, with certain negotiated adjustments, is reported to our
lenders and is used as a gauge for compliance with our financial
covenants under our credit facility. EBITDA should not be
considered an alternative to net income (loss), operating
income, cash flows from operating activities or any other
measure of financial performance presented in accordance with
GAAP. Our EBITDA may not be comparable to EBITDA of similarly
titled measures of other entities, as other entities may not
calculate EBITDA in the same manner as we do.
|
Three
Months Ended June 30, 2009 Compared with Three Months Ended
June 30, 2008
Revenues.
Total revenues (midstream and
compression) were $50.1 million for the three months ended
June 30, 2009 compared to $115.4 million for the three
months ended June 30, 2008, a decrease of
$65.4 million, or (56.7%). This $65.4 million decrease
was primarily due to significantly lower average realized
natural gas and NGL sales prices for all of our gathering
systems. Natural gas sales volumes increased by
7,297 MMBtu/d (MMBtu per day) at the Woodford Shale and
Kinta Area gathering systems and NGL sales volumes increased by
1,299 Bbls/d (Bbls per day) at the Woodford Shale, Badlands
and Matli gathering systems for the three months ended
June 30, 2009 compared to the same period in 2008. The
North Dakota Bakken gathering system, which commenced operations
in late April 2009, contributed natural gas sales volumes of
1,323 MMBtu/d and NGL sales volumes of 919 Bbls/d
during the three months ended June 30, 2009. Natural gas
sales volumes decreased by 7,225 MMBtu/d at the Eagle
Chief, Matli and Badlands gathering systems and NGL sales
volumes decreased by 223 Bbls/d at the Bakken and Eagle
Chief gathering systems compared to the same period in 2008.
Revenues from compression assets were the same for both periods.
Midstream revenues were $48.9 million for the three months
ended June 30, 2009 compared to $114.2 million for the
three months ended June 30, 2008, a decrease of
$65.4 million, or (57.2%). Of this $65.4 million
decrease in midstream revenues, approximately $73.9 million
was attributable to significantly lower average realized natural
gas and NGL sales prices for all of our gathering systems,
partially offset by approximately $8.5 million attributable
to revenues from overall increases in natural gas and NGL sales
volumes for the three months ended June 30, 2009 as
compared to the same period in 2008.
39
Inlet natural gas was 272,666 Mcf/d (Mcf per day) for the
three months ended June 30, 2009 compared to
246,339 Mcf/d for the three months ended June 30,
2008, an increase of 26,327 Mcf/d, or 10.7%. This increase
is primarily attributable to volume growth totaling
31,111 Mcf/d at the Kinta Area, Woodford Shale and Badlands
gathering systems and volumes of 2,171 Mcf/d at the North
Dakota Bakken gathering system, which commenced operations in
late April 2009, offset by volume declines totaling
6,616 Mcf/d at the Eagle Chief and Matli gathering systems.
Natural gas sales volumes were 87,273 MMBtu/d for the three
months ended June 30, 2009 compared to 86,203 MMBtu/d
for the three months ended June 30, 2008, an increase of
1,070 MMBtu/d, or 1.2%. This 1,070 MMBtu/d net
increase in natural gas sales volumes was attributable to
increased natural gas sales volumes of 7,297 MMBtu/d at the
Woodford Shale and Kinta Area gathering systems and natural gas
sales volumes of 1,323 MMBtu/d at the North Dakota Bakken
gathering system, which commenced operations in late April 2009,
offset by reduced natural gas sales volumes totaling
7,225 MMBtu/d at our Eagle Chief, Matli and Badlands
gathering systems.
NGL sales volumes were 7,260 Bbls/d for the three months
ended June 30, 2009 compared to 5,979 Bbls/d for the
three months ended June 30, 2008, a net increase of
1,281 Bbls/d, or 21.4%. This 1,281 Bbls/d net increase
in NGL sales volumes is primarily attributable to increased NGL
sales volumes totaling 1,299 Bbls/d at the Woodford Shale,
Badlands and Matli gathering systems and NGL sales volumes of
206 Bbls/d at the North Dakota Bakken gathering system,
which commenced operations in late April 2009, offset by reduced
NGL sales volumes totaling 223 Bbls/d at our Bakken and
Eagle Chief gathering systems.
Average realized natural gas sales prices were $3.02 per MMBtu
for the three months ended June 30, 2009 compared to $9.29
per MMBtu for the three months ended June 30, 2008, a
decrease of $6.27 per MMBtu, or (67.5%). Average realized NGL
sales prices were $0.66 per gallon for the three months ended
June 30, 2009 compared to $1.64 per gallon for the three
months ended June 30, 2008, a decrease of $0.98 per gallon
or (59.8%). The decrease in our average realized natural gas and
NGL sales prices was primarily a result of significantly lower
index prices for natural gas and posted prices for NGLs during
the three months ended June 30, 2009 compared to the three
months ended June 30, 2008.
Net cash received from our counterparty on cash flow swap
contracts for natural gas sales and natural gas purchase
derivative transactions that closed during the three months
ended June 30, 2009 totaled $2.6 million compared to
$0.1 million for the three months ended June 30, 2008.
The $2.6 million gain for the three months ended
June 30, 2009 increased averaged realized natural gas
prices to $3.02 per MMBtu from $2.69 per MMBtu, an increase of
$0.33 per MMBtu. The $0.1 million net gain was immaterial
to average realized natural gas sales prices for the three
months ended June 30, 2008. We had no cash flow swap
contracts for NGLs during the three months ended June 30,
2009. Cash paid to our counterparty on cash flow swap contracts
for NGL derivative transactions that closed during the three
months ended June 30, 2008 totaled $3.1 million. The
$3.1 million loss for the three months ended June 30,
2008 reduced averaged realized NGL prices to $1.64 per gallon
from $1.76 per gallon, a decrease of $0.12 per gallon.
Compression revenues were $1.2 million for the each of the
three months ended June 30, 2009 and 2008.
Midstream Purchases.
Midstream purchases were
$27.0 million for the three months ended June 30, 2009
compared to $88.1 million for the three months ended
June 30, 2008, a decrease of $61.1 million, or
(69.3%). This $61.1 million decrease is due to
significantly reduced natural gas and NGL purchase prices,
resulting in decreased midstream purchases for all of our
gathering systems compared to the same period in 2008, with the
exception of $0.6 million of midstream purchases at the
North Dakota Bakken gathering system, which commenced operations
in late April 2009.
Midstream Segment Margin.
Midstream segment
margin was $21.9 million for the three months ended
June 30, 2009 compared to $26.2 million for the three
months ended June 30, 2008, a decrease of
$4.3 million, or (16.4%). The decrease is primarily due to
unfavorable gross processing spreads and significantly lower
average realized natural gas and NGL prices despite the overall
increase in volumes. As a percent of midstream revenues,
midstream segment margin was 44.8% for the three months ended
June 30, 2009 compared to 22.9% for the three months ended
June 30, 2008, an increase of 21.9%. This increase is
40
attributable to (i) the positive impact of fixed fee
arrangement contracts which are not affected by realized natural
gas and NGL selling prices, (ii) improvements in third
party processing arrangements at the Woodford Shale gathering
system, (iii) increased volumes under favorable
percentage-of-proceeds
contracts at the North Dakota Bakken and Badlands gathering
systems and (iv) gains on closed/settled derivative
transactions and unrealized non-cash gains on open derivative
transactions for the three months ended June 30, 2009
totaling $2.8 million compared to net losses of
$3.1 million on closed/settled derivative transactions and
unrealized non-cash losses on open derivative transactions for
the three months ended June 30, 2008, including an
unrealized non-cash loss of $1.5 million related to a
non-qualifying
mark-to-market
cash flow hedge for forecasted sales in 2010.
Operations and Maintenance.
Operations and
maintenance expense totaled $7.8 million for the three
months ended June 30, 2009 compared with $7.6 million
for the three months ended June 30, 2008, a net increase of
only $0.2 million, or 3.1%. The net increase in operations
and maintenance of $0.2 million compared to the same period
in 2008 includes (i) an increase of $0.2 million at
the Badlands gathering system, (ii) $0.4 million
attributable to the North Dakota Bakken gathering system, which
commenced operations in late April 2009, (iii) decreases
totaling $0.4 million at the Kinta Area, Worland, Eagle
Chief and Matli gathering systems and (iv) a decrease of
$0.1 million related to compression operations.
Depreciation, Amortization and
Accretion.
Depreciation, amortization and
accretion expense totaled $10.5 million for the three
months ended June 30, 2009 compared with $9.2 million
for the three months ended June 30, 2008, an increase of
$1.4 million, or 14.9%. This $1.4 million increase was
primarily attributable to increased depreciation of
$0.5 million on the Kinta Area gathering system,
$0.3 million each on the Woodford Shale and Badlands
gathering systems and $0.2 million attributable to the
North Dakota Bakken gathering system, which commenced operations
in late April 2009.
Bad Debt.
We had no bad debts for the three
months ended June 30, 2009. For the three months ended
June 30, 2008 we had determined that collection of a trade
accounts receivable from a significant customer totaling
$8.1 million was doubtful. Accordingly, we increased our
reserve for doubtful accounts and recorded a bad debt expense of
$8.1 million.
General and Administrative.
General and
administrative expense totaled $2.9 million for the three
months ended June 30, 2009 compared with $1.9 million
for the three months ended June 30, 2008, an increase of
$1.1 million, or 57.8%. Other than $1.1 million of
expenses attributable to the going private proposals,
differences in general and administrative expenses for the three
months ended June 30, 2009 compared to the same period in
2008 were insignificant.
Other Income (Expense).
Other income (expense)
totaled $(2.8) million for the three months ended
June 30, 2009 compared with $(3.2) million for the
three months ended June 30, 2008, a decrease in expense of
$0.4 million. The decrease is primarily attributable lower
interest rates incurred during the three months ended
June 30, 2009 compared to interest rates incurred during
the three months ended June 30, 2008, offset by interest
expense of $0.5 million related to an interest rate swap
during the three months ended June 30, 2009 which did not
exist in 2008 and increased interest expense on additional
borrowings for the three months ended June 30, 2009
compared to the three months ended June 30, 2008.
Six
Months Ended June 30, 2009 Compared with Six Months Ended
June 30, 2008
Revenues.
Total revenues (midstream and
compression) were $102.4 million for the six months ended
June 30, 2009 compared to $206.9 million for the six
months ended June 30, 2008, a decrease of
$104.5 million, or (51.0%). This $104.5 million
decrease was primarily due to significantly lower average
realized natural gas and NGL sales prices for all of our
gathering systems. Natural gas sales volumes increased by
7,838 MMBtu/d at the Woodford Shale, Kinta Area, Badlands
and Bakken gathering systems and NGL sales volumes increased by
1,637 Bbls/d at the Woodford Shale, Badlands and Matli
gathering systems for the six months ended June 30, 2009,
compared to the same period in 2008. The North Dakota Bakken
gathering system, which commenced operations in late April 2009
contributed natural gas sales volumes of 1,323 MMBtu/d and
NGL sales volumes of 919 Bbls/d during the six months ended
June 30, 2009. Natural gas sales volumes decreased by
4,700 MMBtu/d at the Eagle Chief and Matli gathering
systems and NGL
41
sales volumes decreased by 200 Bbls/d at the Eagle Chief
and Bakken gathering systems compared to the same period in
2008. Revenues from compression assets were the same for both
periods.
Midstream revenues were $100.0 million for the six months
ended June 30, 2009 compared to $204.5 million for the
six months ended June 30, 2008, a decrease of
$104.5 million, or (51.1%). Of this $104.5 million
decrease in midstream revenues, approximately
$126.9 million was attributable to significantly lower
average realized natural gas and NGL sales prices for all of our
gathering systems, partially offset by approximately
$22.4 million attributable to revenues from overall
increases in natural gas and NGL sales volumes for the six
months ended June 30, 2009 as compared to the same period
in 2008.
Inlet natural gas was 274,521 Mcf/d (Mcf per day) for the
six months ended June 30, 2009 compared to
236,885 Mcf/d for the six months ended June 30, 2008,
an increase of 37,636 Mcf/d, or 15.9%. This increase is
primarily attributable to volume growth totaling
42,260 Mcf/d at the Woodford Shale, Kinta Area and Badlands
gathering systems, volumes of 1,091 Mcf/d at the North
Dakota Bakken gathering system, which commenced operations in
late April 2009, offset by volume declines totaling
5,316 Mcf/d at the Eagle Chief and Matli gathering systems.
Natural gas sales volumes were 89,579 MMBtu/d for the six
months ended June 30, 2009 compared to 86,174 MMBtu/d
for the six months ended June 30, 2008, an increase of
3,405 MMBtu/d, or 4.0%. This 3,405 MMBtu/d net
increase in natural gas sales volumes was attributable to
increased natural gas sales volumes of 7,640 MMBtu/d at the
Woodford Shale and Kinta Area gathering systems, natural gas
sales volumes of 665 MMBtu/d at the North Dakota Bakken
gathering system, which commenced operations in late April 2009,
offset by reduced natural gas sales volumes totaling
4,700 MMBtu/d at our Eagle Chief and Matli gathering
systems.
NGL sales volumes were 7,155 Bbls/d for the six months
ended June 30, 2009 compared to 5,626 Bbls/d for the
six months ended June 30, 2008, a net increase of
1,529 Bbls/d, or 27.2%. This 1,529 Bbls/d net increase
in NGL sales volumes is primarily attributable to increased NGL
sales volumes totaling 1,637 Bbls/d at our Woodford Shale,
Badlands and Matli gathering systems, NGL sales volumes of
104 Bbls/d at the North Dakota Bakken gathering
system, which commenced operations in late April 2009, offset by
reduced NGL sales volumes totaling 200 Bbls/d at our Eagle
Chief and Bakken gathering systems.
Average realized natural gas sales prices were $3.36 per MMBtu
for the six months ended June 30, 2009 compared to $8.29
per MMBtu for the six months ended June 30, 2008, a
decrease of $4.93 per MMBtu, or (59.5%). Average realized NGL
sales prices were $0.62 per gallon for the six months ended
June 30, 2009 compared to $1.53 per gallon for the six
months ended June 30, 2008, a decrease of $0.91 per gallon
or (59.5%). The decrease in our average realized natural gas and
NGL sales prices was primarily a result of significantly lower
index prices for natural gas and posted prices for NGLs during
the six months ended June 30, 2009 compared to the six
months ended June 30, 2008.
Net cash received from our counterparty on cash flow swap
contracts for natural gas sales and natural gas purchase
derivative transactions that closed during the six months ended
June 30, 2009 totaled $4.8 million compared to
$0.2 million for the six months ended June 30, 2008.
The $4.8 million gain for the six months ended
June 30, 2009 increased averaged realized natural gas
prices to $3.36 per MMBtu from $3.06 per MMBtu, an increase of
$0.3 per MMBtu. The $0.2 million net gain for the six
months ended June 30, 2008 increased averaged realized
natural gas prices to $8.29 per MMBtu from $8.28 per MMBtu, an
increase of $0.01 per MMBtu. We had no cash flow swap contracts
for NGLs during the six months ended June 30, 2009. Cash
paid to our counterparty on cash flow swap contracts for NGL
derivative transactions that closed during the six months ended
June 30, 2008 totaled $5.3 million. The
$5.3 million loss for the six months ended June 30,
2008 reduced averaged realized NGL prices to $1.53 per gallon
from $1.64 per MMBtu, a decrease of $0.11 per gallon.
Compression revenues were $2.4 million for the each of the
six months ended June 30, 2009 and 2008.
Midstream Purchases.
Midstream purchases were
$58.2 million for the six months ended June 30, 2009
compared to $156.7 million for the six months ended
June 30, 2008, a decrease of $98.5 million, or
(62.9%). This $98.5 million decrease is due to
significantly reduced natural gas and NGL purchase prices,
resulting in
42
decreased midstream purchases for all of our gathering systems
compared to the same period in 2008, with the exception of
$0.6 million of midstream purchases at the North Dakota
Bakken gathering system, which commenced operations in late
April 2009.
Midstream Segment Margin.
Midstream segment
margin was $41.8 million for the six months ended
June 30, 2009 compared to $47.8 million for the six
months ended June 30, 2008, a decrease of
$6.0 million, or (12.6%). The decrease is primarily due to
unfavorable gross processing spreads and significantly lower
average realized natural gas and NGL prices despite the overall
increase in volumes and approximately $2.3 million of
foregone margin as a result of the nitrogen rejection plant at
the Badlands gathering system being taken out of service due to
equipment failure during the three months ended March 31,
2008. As a percent of midstream revenues, midstream segment
margin was 42.2% for the six months ended June 30, 2009
compared to 23.4% for the six months ended June 30, 2008,
an increase of 18.8%. This increase is attributable to
(i) the positive impact of fixed fee arrangement contracts
which are not affected by realized natural gas and NGL selling
prices, (ii) improvements in third party processing
arrangements at the Woodford Shale gathering system,
(iii) increased volumes under favorable
percentage-of-proceeds
contracts at the North Dakota Bakken and Badlands gathering
systems and (iv) gains on closed/settled derivative
transactions and unrealized non-cash gains on open derivative
transactions for the six months ended June 30, 2009
totaling $4.9 million compared to net losses of
$5.5 million on closed/settled derivative transactions and
unrealized non-cash losses on open derivative transactions for
the six months ended June 30, 2008, including an unrealized
non-cash loss of $1.5 million related to a non-qualifying
mark-to-market
cash flow hedge for forecasted sales in 2010.
Operations and Maintenance.
Operations and
maintenance expense totaled $15.5 million for the six
months ended June 30, 2009 compared with $14.3 million
for the six months ended June 30, 2008, an increase of
$1.2 million, or 8.1%. The net increase in operations and
maintenance of $1.2 million compared to the same period in
2008 includes (i) increases of $0.9 million and
$0.1 million at the Badlands and Woodford Shale gathering
systems, respectively, (ii) $0.5 million attributable
to the North Dakota Bakken gathering system, which commenced
operations in late April 2009, (iii) decreases totaling
$0.3 million at the Worland, Kinta Area, Bakken, Eagle
Chief and Matli gathering systems and (iv) a decrease of
$0.1 million related to compression operations.
Depreciation, Amortization and
Accretion.
Depreciation, amortization and
accretion expense totaled $20.5 million for the six months
ended June 30, 2009 compared with $18.1 million for
the six months ended June 30, 2008, an increase of
$2.4 million, or 13.3%. This $2.4 million increase was
primarily attributable to increased depreciation of
$0.8 million on the Woodford Shale gathering system
$0.7 million on the Kinta Area gathering system,
$0.5 million on the Badlands gathering system and
$0.2 million attributable to the North Dakota Bakken
gathering system, which commenced operations in late April 2009.
Property Impairments.
Property impairment
expense related to natural gas gathering systems in Texas and
Mississippi totaled $1.0 million for the six months ended
June 30, 2009. We had no property impairments during the
six months ended June 30, 2008.
Bad Debt.
We had no bad debts for the six
months ended June 30, 2009. For the six months ended
June 30, 2008 we determined that collection of a trade
accounts receivable from a significant customer totaling
$8.1 million was doubtful. Accordingly, we increased our
reserve for doubtful accounts and recorded a bad debt expense of
$8.1 million.
General and Administrative.
General and
administrative expense totaled $5.9 million for the six
months ended June 30, 2009 compared with $4.2 million
for the six months ended June 30, 2008, an increase of
$1.7 million, or 41.2%. Salaries expense increased by
$0.3 million as a result of increased staffing during the
six months ended June 30, 2009 as compared to the six
months ended June 30, 2008. Expenses related to the going
private proposals were $1.4 million for the six months
ended June 30, 2009.
Other Income (Expense).
Other income (expense)
totaled $(5.3) million for the six months ended
June 30, 2009 compared with $(6.7) million for the six
months ended June 30, 2008, a decrease in expense of
$1.5 million. The decrease is primarily attributable lower
interest rates incurred during the six months ended
June 30, 2009 compared to interest rates incurred during
the six months ended June 30, 2008, offset by
43
interest expense of $0.9 million related to an interest
rate swap during the six months ended June 30, 2009 which
did not exist in 2008 and increased interest expense on
additional borrowings for the six months ended June 30,
2009 compared to the six months ended June 30, 2008.
LIQUIDITY
AND CAPITAL RESOURCES
U.S.
Natural Gas, Crude Oil and NGL Supplies and
Outlook
The drop in demand for natural gas, crude oil and NGL products
since the third quarter of 2008 continues to impact the price
for natural gas, crude oil and NGLs. Natural gas prices have
declined significantly since the peak NYMEX Henry Hub last day
settle price of $13.11/MMBtu in July 2008 to the NYMEX Henry Hub
last day settle price of $3.95 in July 2009, a 70% decline. WTI
crude oil pricing has declined from a peak of $134.62/bbl in
July 2008 to a low of $33.87/Bbl in January 2009, a 75% decline,
increasing to $66.93/Bbl in July 2009, a 50% decline from July
2008. NGL basket pricing, which historically has correlated to
WTI crude oil pricing, has dropped since the peak NGL basket
pricing of $2.21/gallon in June 2008 to a low of
$0.70/gallon
in January 2009, a 68% decline, increasing to $0.95/gallon in
July 2009, a 57% decline from June 2008. Forward curves for
natural gas, crude oil and NGL basket pricing reflect continued
reductions in demand for natural gas, crude oil and NGL
products. A number of the areas in which we operate are
experiencing a significant decline in drilling activity as a
result of the recent decline in natural gas and crude oil
prices. While we anticipate continued exploration and production
activities in the areas in which we operate, albeit at depressed
levels, fluctuations in energy prices can greatly affect
production rates and investments by third parties in the
development of natural gas and crude oil reserves. Drilling
activity generally decreases as natural gas and crude oil prices
decrease. We have no control over the level of drilling activity
in the areas of our operations.
Disruption
to Functioning of Capital Markets
Multiple events during 2008 and 2009 involving numerous
financial institutions have effectively restricted current
liquidity within the capital markets throughout the United
States and around the world. Despite efforts by treasury and
banking regulators in the United States, Europe and other
nations around the world to provide liquidity to the financial
sector, capital markets currently remain constrained. We expect
that our ability to issue debt and equity at prices that are
similar to offerings in recent years will be limited over the
next three to six months and possibly longer should capital
markets remain constrained. Although we intend to move forward
with our planned capital expenditures attributable to our
existing facilities, we may revise the timing and scope of these
projects as necessary to adapt to existing economic conditions
and the benefits expected to accrue to our unitholders from our
capital expenditures may be muted by substantial cost of capital
increases during this period.
Overview
Due to lower natural gas and NGL prices and the impact of
reduced drilling activity on our current and projected
throughput volumes, we believe that cash generated from
operations will decrease for the remainder of 2009 relative to
comparable periods in 2008. Our senior secured revolving credit
facility requires us 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 we make 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. We 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, the
Partnership receives an infusion of equity capital, the
Partnerships debt is restructured or the
44
Partnership 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, the Partnership 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 the Partnership 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 the Partnership, or that the
Partnerships hedge positions will be
in-the-money.
Cash
Flows from Operating Activities
Our cash flows from operating activities increased by
$3.0 million to $25.8 million for the six months ended
June 30, 2009 from $22.8 million for the six months
ended June 30, 2008. During the six months ended
June 30, 2009 we received cash flows from customers of
approximately $108.2 million attributable to significantly
lower average realized natural gas and NGL sales prices,
partially offset by increased natural gas and NGLs volumes,
received $3.2 million from early settlements of derivative
contracts, made cash payments to our suppliers and employees of
approximately $80.4 million and made payments of interest
expense of $5.2 million, net of amounts capitalized,
resulting in cash received from operating activities of
$25.8 million. During the same six month period in 2008, we
received cash flows from customers of approximately
$184.6 million attributable to increased natural gas and
NGL volumes and significantly higher average realized natural
gas and NGL sales prices, made cash payments to our suppliers
and employees of approximately $155.4 million and made
payments of interest expense of $6.4 million, net of
amounts capitalized, resulting in cash received from operating
activities of $22.8 million.
Changes in cash receipts and payments are primarily due to the
timing of collections at the end of our reporting periods. We
collect and pay large receivables and payables at the end of
each calendar month. The timing of these payments and receipts
may vary by a day or two between month-end periods and cause
fluctuations in cash received or paid. Working capital items,
exclusive of cash, provided $3.8 million of cash flows from
operating activities during the six months ended June 30,
2009 and used $5.1 million of cash flows from operating
activities during the six months ended June 30, 2008.
Net loss for the six months ended June 30, 2009 was
$(3.9) million, an increase in net loss of
$2.7 million from a net loss of $(1.2) million for the
six months ended June 30, 2008. Depreciation, amortization,
accretion and property impairments increased by
$3.4 million to $21.5 million for the six months ended
June 30, 2009 from $18.1 million for the six months
ended June 30, 2008.
Cash
Flows Used for Investing Activities
Our cash flows used for investing activities, which represent
investments in property and equipment, increased by
$6.9 million to $27.2 million for the six months ended
June 30, 2009 from $20.3 million for the six months
ended June 30, 2008 primarily due to cash flows invested
related to the construction of the North Dakota Bakken gathering
system.
Cash
Flows from Financing Activities
Our cash flows from financing activities increased to
$4.3 million for the six months ended June 30, 2009
from $0.6 million for the six months ended June 30,
2008, an increase of $3.7 million. During the six months
ended June 30, 2009, we borrowed $12.0 million under
our credit facility to fund internal expansion projects, repaid
$3.0 million on our credit facility upon net receipt of
$3.2 million early hedge settlements, distributed
$4.3 million to our unitholders, and made $0.4 million
payments on capital lease obligations.
During the six months ended June 30, 2008, we borrowed
$19.0 million under our credit facility to fund internal
expansion projects, we received capital contributions of
$1.1 million as a result of issuing common units due to the
exercise of 40,705 vested unit options, we distributed
$18.8 million to our unitholders, incurred debt issuance
costs of $0.3 million associated with the fourth amendment
to our credit facility amended in February 2008 and made
$0.2 million payments on capital lease obligations.
45
Capital
Requirements
The midstream energy business is capital intensive, requiring
significant investment to maintain and upgrade existing
operations. Our capital requirements have consisted primarily
of, and we anticipate will continue to be:
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maintenance capital expenditures, which are capital expenditures
made to replace partially or fully depreciated assets to
maintain the existing operating capacity of our assets and to
extend their useful lives, or other capital expenditures that
are incurred in maintaining existing system volumes and related
cash flows; and
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expansion capital expenditures such as those to acquire
additional assets to grow our business, to expand and upgrade
gathering systems, processing plants, treating facilities and
fractionation facilities and to construct or acquire similar
systems or facilities.
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We believe that cash generated from the operations of our
business will be sufficient to meet anticipated maintenance
capital expenditures for the next twelve months. We anticipate
that any future expansion capital expenditures may be funded
through operating cash flow, long-term borrowings or other debt
financings
and/or
equity offerings. See Credit Facility below for
information related to our credit agreement.
North
Dakota Bakken
Our North Dakota Bakken gathering system presently consists of a
55-mile
gathering system located in northwestern North Dakota that will
gather natural gas associated with crude oil produced from the
Bakken shale and Three Forks/Sanish formations. Construction of
the gathering system, associated compression and treating
facilities and a processing plant commenced in October 2008 and
became fully operational in May 2009. As of June 30,
2009, we have invested approximately $22.9 million in the
project.
Financial
Derivatives and Commodity Hedges
We have entered into certain financial derivative instruments
that are classified as cash flow hedges in accordance with
SFAS 133 and relate to forecasted natural gas sales in 2009
and 2010. We entered into these financial swap instruments to
hedge the forecasted natural gas sales against the variability
in expected future cash flows attributable to changes in
commodity prices. Under these swap agreements, we receive a
fixed price and pay a floating price based on certain indices
for the relevant contract period as the underlying natural gas
is sold.
The following table provides information about our commodity
based derivative instruments at June 30, 2009:
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Average
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Fixed
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Fair Value
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Description and Production Period
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Volume
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Price
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Asset
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(MMBtu)
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(Per MMBtu)
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Natural Gas Sold Fixed for Floating Price Swaps
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July 2009 June 2010
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2,136,000
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$
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7.01
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$
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6,188
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July 2010 December 2010
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1,068,000
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$
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6.73
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1,450
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$
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7,638
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We have entered into a financial derivative instrument that is
classified as a cash flow hedge in accordance with SFAS 133
and relates to forecasted interest payments under our credit
facility in 2009. We entered into this financial swap instrument
to hedge forecasted interest payments against the variable
interest payments under our credit facility. Under this swap
agreement, we pay a fixed interest rate and receive a
46
floating rate based on one month LIBOR on the notional amount
for the contract period. The following table provides
information about our 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
|
)
|
Off-Balance
Sheet Arrangements
We had no significant off-balance sheet arrangements as of
June 30, 2009.
Available
Credit
Credit markets in the United States and around the world remain
constrained due to a lack of liquidity and confidence in a
number of financial institutions. Investors continue to seek
perceived safe investments in securities of the United States
government rather than corporate issues. We may at times
experience difficulty accessing the long-term credit markets due
to prevailing market conditions. Additionally, existing
constraints in the credit markets may increase the rates we are
charged for utilizing these markets.
Credit
Facility
Our borrowing capacity under our 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, the senior secured revolving credit facility
provides for an accordion feature, which permits us, if certain
conditions are met, to increase the size of the Acquisition
Facility by up to $50 million and allows for the issuance
of letters of credit of up to $15 million in the aggregate.
The 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 our current and projected
throughput volumes, we believe that cash generated from
operations will decrease for the remainder of 2009 relative to
comparable periods in 2008. Our senior secured revolving credit
facility requires us 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 we make 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. We 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, the
Partnership receives an infusion of equity capital, the
Partnerships debt is restructured or the Partnership 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, the Partnership 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 the Partnership 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
47
or debt financing will be available to the Partnership, or that
the Partnerships 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.
Our obligations under the credit facility are secured by
substantially all of our assets and guaranteed by us, and all of
our subsidiaries, other than our operating company, which is the
borrower under the credit facility.
Indebtedness under the credit facility will bear interest, at
our option, at either: (i) an Alternate Base Rate plus an
applicable margin ranging from 50 to 125 basis points per
annum or (ii) LIBOR plus an applicable margin ranging from
150 to 225 basis points per annum based on our ratio of
consolidated funded debt to EBITDA. The Alternate Base Rate is a
rate per annum equal to the greatest of: (a) the Prime Rate
in effect on such day, (b) the base CD rate in effect on
such day plus 1.50% and (c) the Federal Funds effective
rate in effect on such day plus 1/2 of 1%. We have elected for
the indebtedness to bear interest at LIBOR plus the applicable
margin. A letter of credit fee will be payable for the aggregate
amount of letters of credit issued under the credit facility at
a percentage per annum equal to 1.0%. An unused commitment fee
ranging from 25 to 50 basis points per annum based on our
ratio of consolidated funded debt to EBITDA will be payable on
the unused portion of the credit 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 our credit facility
was 2.92%.
We are subject to interest rate risk on our credit facility and
have entered into an interest rate swap to reduce this risk. See
Note 5 Derivatives for a discussion of our
interest rate swap.
The credit facility prohibits us from making distributions to
unitholders if any default or event of default, as defined in
the credit facility, has occurred and is continuing or would
result from such distributions. In addition, the credit facility
contains various covenants that limit, among other things,
subject to certain exceptions and negotiated
baskets, our ability to incur indebtedness, grant
liens, make certain loans, acquisitions and investments, make
any material changes to the nature of its business, amend its
material agreements, including the Omnibus Agreement or enter
into a merger, consolidation or sale of assets.
The credit facility defines EBITDA as our 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 our unitholders to
available cash, as defined by the agreement, and borrowings to
fund such distributions are only permitted under the revolving
working capital facility. The revolving working capital facility
is subject to an annual clean-down period of 15
consecutive days in which the amount outstanding under the
revolving working capital facility is reduced to zero.
As of June 30, 2009, we had $261.1 million outstanding
under the credit facility and were in compliance with its
financial covenants. Our EBITDA to interest expense ratio was
4.95 to 1.0 and our consolidated funded debt to EBITDA ratio was
4.40 to 1.0.
Impact
of Inflation
Inflation in the United States has been relatively low in recent
years and did not have a material impact on our results of
operations for the periods presented.
Recent
Accounting Pronouncements
On June 30, 2009, the Financial Accounting Standards Board
(FASB) issued FASB Statement No. 168, The
FASB Accounting Standards
Codification
tm
and The Hierarchy of Generally Accepted Accounting
48
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
(FAS 107-1).
FAS 107-1
increases the frequency of fair value disclosures to a quarterly
basis instead of annual basis.
FAS 107-1
specifically relates to fair value disclosures for any financial
instruments that are not currently reflected on the balance
sheet at fair value.
FAS 107-1
is effective for interim and annual periods ending after
June 15, 2009.
FAS 107-1
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 dont 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 entitys derivative instruments
and hedging activities and their effects on the entitys
financial position, financial performance, and cash flows.
SFAS 161 is effective prospectively for financial
statements issued for fiscal years and interim periods beginning
after November 15, 2008, with early application encouraged.
SFAS 161 encourages, but does not require, comparative
disclosures for periods prior to its initial adoption.
SFAS 161 amended the qualitative and quantitative
disclosure requirements for derivative instruments and hedging
activities set forth in SFAS 133
49
and generally increased the level of aggregation/disaggregation
required in an entitys 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 Partnerships
(MLPs) net earnings per limited partner unit for
each period presented according to distributions declared and
participation rights in undistributed earnings as if all of the
earnings for that period had been distributed. In periods with
undistributed earnings above specified levels, the calculation
per the two-class method results in an increased allocation of
such undistributed earnings to the general partner and a
dilution of earnings to the limited partners.
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 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 parents 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 parents ownership interest while the
parent retains its controlling financial interest in its
subsidiary be accounted for consistently and similarly as equity
transactions. Consolidated net income and comprehensive income
are now determined without deducting minority interest; however,
earnings-per-share
information continues to be calculated on the basis of the net
income attributable to the parents shareholders.
Additionally, SFAS 160 establishes a single method for
accounting for changes in a parents ownership interest in
a subsidiary that does not result in deconsolidation and that
the parent recognize a gain or loss in net income when a
subsidiary is deconsolidated. 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.
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
50
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 157s hierarchy
defines three levels of inputs that may be used to measure fair
value. Level 1 refers to assets that have observable market
prices, level 2 assets do not have an observable
price but do have inputs that are based on such prices in
which components have observable data points and level 3
refers to assets in which one or more of the inputs do not have
observable prices and calibrated model parameters, valuation
techniques or managements assumptions are used to derive
the fair value. 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.
Significant
Accounting Policies and Estimates
The selection and application of accounting policies is an
important process that has developed as our business activities
have evolved and as the accounting rules have developed.
Accounting rules generally do not involve a selection among
alternatives, but involve the implementation and interpretation
of existing rules, and the use of judgment applied to the
specific set of circumstances existing in our business. We make
every effort to properly comply with all applicable rules on or
before their adoption, and we believe the proper implementation
and consistent application of the accounting rules are critical.
There have been no material changes in our significant
accounting policies and estimates during the three and six
months ended June 30, 2009. See our disclosure of
significant accounting policies and estimates in Item 7.
Managements Discussion and Analysis of Financial
Condition and Results of Operations on our Annual Report
on
Form 10-K
for the year ended December 31, 2008, filed with the SEC on
March 9, 2009.
|
|
Item 3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
Market risk is the risk of loss arising from adverse changes in
market rates and prices. The principal market risk to which we
are exposed is commodity price risk for natural gas and NGLs. We
also incur, to a lesser extent, risks related to interest rate
fluctuations. We do not engage in commodity energy trading
activities.
51
Commodity Price Risks.
Our profitability is
affected by volatility in prevailing NGL and natural gas prices.
Historically, changes in the prices of most NGL products have
generally correlated with changes in the price of crude oil. NGL
and natural gas prices are volatile and are impacted by changes
in the supply and demand for NGLs and natural gas, as well as
market uncertainty. Our cash flow is affected by the volatility
of natural gas and NGL product prices, which could adversely
affect our ability to make distributions to unitholders. To
illustrate the impact of changes in prices for natural gas and
NGLs on our operating results, we have provided the table below,
which reflects, for the three months ended June 30, 2009
and 2008, respectively, the impact on our midstream segment
margin of a $0.01 per gallon change (increase or decrease) in
NGL prices coupled with a $0.10 per MMBtu change (increase or
decrease) in the price of natural gas.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural Gas Price Change
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
($/MMBtu)
|
|
|
|
|
|
|
|
|
$
|
0.10
|
|
|
$
|
(0.10
|
)
|
|
$
|
0.10
|
|
|
$
|
(0.10
|
)
|
NGL Price Change ($/gal)
|
|
$
|
0.01
|
|
|
$
|
163,000
|
|
|
$
|
181,000
|
|
|
$
|
151,000
|
|
|
$
|
142,000
|
|
|
|
$
|
(0.01
|
)
|
|
$
|
(213,000
|
)
|
|
$
|
(216,000
|
)
|
|
$
|
(127,000
|
)
|
|
$
|
(189,000
|
)
|
The increase in commodity exposure is the result of increased
natural gas and NGL product volumes during the three months
ended June 30, 2009 compared to the three months ended
June 30, 2008 and the increased exposure to NGL product
prices in 2009 as the result of no NGL hedging contracts in
2009. The magnitude of the impact on total segment margin of
changes in natural gas and NGL prices presented may not be
representative of the magnitude of the impact on total segment
margin for different commodity prices or contract portfolios.
Natural gas and crude oil prices can also affect our
profitability indirectly by influencing the level of drilling
activity and related opportunities for our services.
We manage this commodity price exposure through an integrated
strategy that includes management of our contract portfolio,
optimization of our assets and the use of derivative contracts.
As a result of these derivative swap contracts, we have hedged a
portion of our expected exposure to natural gas prices in 2009
and 2010. We continually monitor our hedging and contract
portfolio and expect to continue to adjust our hedge position as
conditions warrant. The following table provides information
about our commodity-based derivative instruments at
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Risk.
We have elected for the
indebtedness under our credit facility to bear interest at LIBOR
plus the applicable margin. We are exposed to changes in the
LIBOR rate as a result of our credit facility, which is subject
to floating interest rates. On October 7, 2008, we entered
into a
floating-to-fixed
interest rate swap agreement with an investment grade
counterparty whereby we pay a monthly fixed interest rate of
2.245% and receive a monthly variable rate based on the one
month posted LIBOR interest rate on a notional amount of
$100.0 million. This swap agreement was effective on
January 2, 2009 and terminates on January 1, 2010. As
of June 30, 2009, we had approximately $261.1 million
of indebtedness outstanding under our credit facility, of which
$161.1 million is exposed to changes in the LIBOR rate. The
impact of a 100 basis point increase in interest rates on
the amount of current debt exposed to variable interest rates
would for the remainder of 2009, result in an increase in
annualized interest expense and a corresponding decrease in
52
annualized net income of approximately $1.6 million. The
following table provides information about our interest rate
swap at June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
Notional
|
|
|
Interest
|
|
|
Asset
|
|
Description and Period
|
|
Amount
|
|
|
Rate
|
|
|
(Liability)
|
|
|
Interest Rate Swap
|
|
|
|
|
|
|
|
|
|
|
|
|
July 2009 December 2009
|
|
$
|
100,000
|
|
|
|
2.245
|
%
|
|
$
|
(921
|
)
|
Credit Risk.
Counterparties pursuant to the
terms of their contractual obligations expose us to potential
losses as a result of nonperformance. Our four largest customers
for the six months ended June 30, 2009, accounted for
approximately 20%, 15%, 11% and 10%, respectively, of our
revenues. Consequently, changes within one or more of these
companies operations have the potential to impact, both
positively and negatively, our credit exposure and make us
subject to risks of loss resulting from nonpayment or
nonperformance by these or any of our other customers. Any
material nonpayment or nonperformance by our key customers could
materially and adversely affect our business, financial
condition or results of operations and reduce our ability to
make distributions to our unitholders. Furthermore, some of our
customers may be highly leveraged and subject to their own
operating and regulatory risks, which increases the risk that
they may default on their obligations to us. Our counterparties
for our commodity based derivative instruments as of
June 30, 2009 are BP Energy Company and Bank of Oklahoma,
N.A. Our counterparty to our interest rate swap as of
June 30, 2009 is Wells Fargo Bank, N.A.
On July 22, 2008, SemGroup, L.P. and certain subsidiaries
filed voluntary petitions for reorganization under
Chapter 11 of the U.S. Bankruptcy Code. In October
2008, the United States Bankruptcy Court for the District of
Delaware entered an order approving the assumption of a Natural
Gas Liquids Marketing Agreement (the SemStream
Agreement) between SemStream, L.P., an affiliate of
SemGroup, L.P., and us relating to sales of natural gas liquids
and condensate at our Bakken and Badlands plants and gathering
systems, restoring us and SemStream, L.P. to our pre-bankruptcy
contractual relationship. Our pre-petition credit exposure to
SemGroup, L.P. relating to condensate sales to SemCrude, LLC in
our mid-continent region is approximately $0.3 million,
which continues to be reserved as of June 30, 2009.
|
|
Item 4.
|
Controls
and Procedures
|
Evaluation
of Disclosure Controls and Procedures
|
|
(a)
|
Evaluation
of disclosure controls and procedures.
|
As required by
Rule 13a-15(b)
under the Securities Exchange Act of 1934, as amended, we have
evaluated, under the supervision and with the participation of
our management, including our principal executive officer and
principal financial officer, the effectiveness of the design and
operation of our disclosure controls and procedures (as defined
in
Rules 13a-15(e)
and
15d-15(e)
under the Exchange Act) as of the end of the period covered by
this Quarterly Report on
Form 10-Q.
Based upon that evaluation, our principal executive officer and
principal financial officer concluded that our disclosure
controls and procedures were effective as of June 30, 2009,
to ensure that information is accumulated and communicated to
our management, including our principal executive officer and
principal financial officer, as appropriate, to allow timely
decisions regarding required disclosure and is recorded,
processed, summarized and reported within the time periods
specified in the rules and forms of the SEC.
|
|
(b)
|
Changes
in internal control over financial reporting.
|
During the three months ended June 30, 2009, there were no
changes in our system of internal control over financial
reporting (as defined in
Rules 13a-15(f)
and
15d-15(f)
under the Exchange Act) that has materially affected, or is
reasonably likely to materially affect, our internal control
over financial reporting.
53
PART II.
OTHER INFORMATION
|
|
Item 1.
|
Legal
Proceedings
|
Three putative unitholder class action lawsuits have been filed
relating to the Hiland Partners Merger and the Hiland Holdings
Merger. These lawsuits are as follows: (i)
Robert
Pasternack v. Hiland Partners, LP et al.
, In the Court
of Chancery of the State of Delaware, Civil Action
No. 4397-VCS;
(ii)
Andrew Jones v. Hiland Partners, LP et
al.
, In the Court of Chancery of the State of Delaware,
Civil Action
No. 4558-VCS;
and (iii)
Arthur G. Rosenberg v. Hiland Partners,
LP et al.
, In the District Court of Garfield County, State
of Oklahoma, Case
No. C3-09-211-02.
The lawsuits name as defendants the Partnership, Hiland
Holdings, the general partner of each of the Partnership and
Hiland Holdings, and the members of the board of directors of
each of the Partnership and Hiland Holdings. 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 Holdings.
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
Holdings that were charged with reviewing the proposals and
making a recommendation to each committees respective
board of directors lacked any meaningful independence,
(iii) the defendants acted in bad faith in recommending and
approving the Hiland Partners Merger or the Hiland Holdings
Merger, and (iv) the disclosures in the Preliminary Proxy
Statement filed by the Partnership and Hiland Holdings 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 Holdings and, when filed, in the definitive joint proxy
statement.
We are not aware of any legal or governmental proceedings
against us, or contemplated to be brought against us, under the
various environmental protection statutes to which we are
subject. We maintain insurance policies with insurers in amounts
and with coverage and deductibles as our general partner
believes are reasonable and prudent. However, we cannot assure
you that this insurance will be adequate to protect us from all
material expenses related to potential future claims for
personal and property damage or that these levels of insurance
will be available in the future at economical prices.
The
failure to complete the Hiland Partners Merger could adversely
affect the price of our common units and otherwise have an
adverse effect on us.
There can be no assurance that the conditions to the completion
of the Hiland Partners Merger, many of which are out of our
control, will be satisfied by the November 1, 2009 deadline
set forth in the merger agreement. Among other things, we cannot
be certain that (i) holders of a majority of our common
units (other than Hiland Holdings) will vote in favor of the
Hiland Partners Merger and the merger agreement; (ii) no
injunction will be granted in any of the three pending
unitholder lawsuits challenging the Hiland Partners Merger (as
described elsewhere in this
Form 10-Q);
or (iii) that the Hiland Holdings Merger will be completed
concurrently with the Hiland Partners Merger (the completion of
which is a condition to Mr. Hamms obligation to
complete the Hiland Partners Merger).
54
If the Hiland Partners Merger is not completed, the price of our
common units will likely fall to the extent that the current
market price of our common units reflects an assumption that a
transaction will be completed. Further, a failed transaction may
result in negative publicity
and/or
a
negative impression of us in the investment community and may
affect our relationship with employees, vendors, creditors and
other business partners.
Additionally, we are subject to the following risks related to
the Hiland Partners Merger:
|
|
|
|
|
Certain costs relating to the Hiland Partners Merger, including
legal, accounting and financial advisory fees, are payable by us
whether or not the Hiland Partners Merger is completed.
|
|
|
|
Under circumstances set out in the merger agreement, if the
Hiland Partners Merger is not completed we may be required to
reimburse up to $1.1 million of Mr. Hamm and his
affiliates expenses associated with the Hiland Partners
Merger.
|
|
|
|
Our managements and our employees attention will
have been diverted from our
day-to-day
operations, we may experience unusually high employee attrition
and our business and customer relationships may be disrupted.
|
We are
subject to litigation related to the Hiland Partners
Merger.
We are actively defending three putative unitholder class action
lawsuits which have been filed relating to the Hiland Partners
Merger and the Hiland Holdings Merger. These lawsuits are as
follows: (i)
Robert Pasternack v. Hiland Partners,
LP et al.
, In the Court of Chancery of the State of
Delaware, Civil Action
No. 4397-VCS;
(ii)
Andrew Jones v. Hiland Partners, LP et
al.
, In the Court of Chancery of the State of Delaware,
Civil Action
No. 4558-VCS;
and (iii)
Arthur G. Rosenberg v. Hiland Partners,
LP et al.
, In the District Court of Garfield County, State
of Oklahoma, Case
No. C3-09-211-02.
The lawsuits name as defendants the Partnership, Hiland
Holdings, the general partner of each of the Partnership and
Hiland Holdings, and the members of the board of directors of
each of the Partnership and Hiland Holdings. 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 Holdings.
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
Holdings that were charged with reviewing the proposals and
making a recommendation to each committees respective
board of directors lacked any meaningful independence,
(iii) the defendants acted in bad faith in recommending and
approving the Hiland Partners Merger or the Hiland Holdings
Merger, and (iv) the disclosures in the Preliminary Proxy
Statement filed by the Partnership and Hiland Holdings 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. It is possible that additional claims beyond those
that have already been filed will be brought by the current
plaintiffs or by others in an effort to enjoin the Hiland
Partners Merger or seek monetary relief from us.
While the Hiland Companies do not believe these lawsuits have
merit and intend to defend themselves vigorously, we cannot
predict the outcome of these lawsuits, or others, nor can we
predict the amount of time and expense that will be required to
resolve the lawsuits. An unfavorable resolution of any such
litigation surrounding the Hiland Partners Merger could delay or
prevent the consummation of the Hiland Partners Merger. In
addition, the cost to us of defending the litigation, even if
resolved in our favor, could be substantial. Such litigation
could also divert the attention of our management and our
resources in general from
day-to-day
operations.
55
If
commodity prices do not significantly improve above the expected
prices for 2009, we may be in violation of the maximum
consolidated funded debt to EBITDA covenant ratio as early as
September 30, 2009, unless the ratio is amended, the senior
secured revolving credit facility is restructured, we receive an
infusion of equity capital or the Partnership is able to
monetize
in-the-money
hedge positions. Failure to comply with the covenants could
cause an event of default under our credit
facility.
Our credit facility contains covenants requiring us to maintain
certain financial ratios and comply with certain financial
tests, which, among other things, require us and our subsidiary
guarantors, on a consolidated basis, to maintain specified
ratios or conditions as follows:
|
|
|
|
|
EBITDA to interest expense of not less than 3.0 to 1.0; and
|
|
|
|
consolidated funded debt to EBITDA of not more than 4.0 to 1.0
with the option to increase the consolidated funded debt to
EBITDA ratio to not more than 4.75 to 1.0 for a period of up to
nine months following an acquisition or a series of acquisitions
totaling $40 million in a
12-month
period (subject to an increased applicable interest rate margin
and commitment fee rate).
|
As of June 30, 2009, we were in compliance with each of
these ratios, which are tested quarterly. Our EBITDA to interest
expense ratio was 4.95 to 1.0 and our consolidated funded debt
to EBITDA ratio was 4.40 to 1.0. We temporarily increased the
ratio to 4.75:1.0 on March 31, 2009, but such ratio will be
reduced to 4.0:1.0 on December 31, 2009. Our ability to
remain in compliance with these restrictions and covenants in
the future is uncertain and will be affected by the levels of
cash flow from our operations and events or circumstances beyond
our control. If commodity prices do not significantly improve
above the expected prices for 2009, we may be in violation of
the maximum consolidated funded debt to EBITDA ratio as early as
September 30, 2009, unless the ratio is amended, the senior
secured revolving credit facility is restructured, we receive an
infusion of equity capital or the Partnership is able to
monetize
in-the-money
hedge positions. Our failure to comply with any of the
restrictions and covenants under our revolving credit facility
could lead to an event of default and the acceleration of our
obligations under those agreements. We may not have sufficient
funds to make such payments. If we are unable to satisfy our
obligations with cash on hand, we could attempt to refinance
such debt, sell assets or repay such debt with the proceeds from
an equity offering. We cannot assure that we will be able to
generate sufficient cash flow to pay the interest on our debt or
that future borrowings, equity financings or proceeds from the
sale of assets will be available to pay or refinance such debt.
The terms of our financing agreements may also prohibit us from
taking such actions. Factors that will affect our ability to
raise cash through an offering of our common units or other
equity, a refinancing of our debt or a sale of assets include
financial market conditions and our market value and operating
performance at the time of such offering or other financing. We
cannot assure that any such proposed offering, refinancing or
sale of assets can be successfully completed or, if completed,
that the terms will be favorable to us.
In addition to the other information set forth in this report,
you should carefully consider the factors discussed in
Part I, Item 1A. Risk Factors in our
Annual Report on
Form 10-K
for the year ended December 31, 2008, which could
materially affect our business, financial condition or future
results. The risks described in our Annual Report on
Form 10-K
are not the only risks facing the Partnership. Additional risks
and uncertainties not currently known to us or that we currently
deem to be immaterial also may materially adversely affect our
business, financial condition and/ or operating results.
|
|
Item 2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
None.
|
|
Item 3.
|
Defaults
Upon Senior Securities
|
None.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
None.
|
|
Item 5.
|
Other
Information
|
None.
56
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
Description
|
|
|
2
|
.1
|
|
|
|
Acquisition Agreement by and among Hiland Operating, LLC and
Hiland Partners, LLC dated as of September 1, 2005
(incorporated by referenced to Exhibit 2.1 of
Registrants
Form 8-K
filed September 29, 2005).
|
|
2
|
.2
|
|
|
|
Agreement and Plan of Merger, dated as of June 1, 2009, by
and between Hiland Partners, LP, Hiland Partners GP, LLC, HH GP
Holding, LLC and HLND MergerCo, LLC (incorporated by reference
to Exhibit 2.1 of Registrants
Form 8-K
filed on June 1, 2009). Schedules and Exhibits are omitted
pursuant to Section 601(b)(2) of
Regulation S-K.
|
|
2
|
.3
|
|
|
|
Equity Commitment Letter Agreement, dated as of June 1,
2009, by and between Harold Hamm and HH GP Holding, LLC
(incorporated by reference to Exhibit 2.2 of
Registrants
Form 8-K
filed on June 1, 2009).
|
|
2
|
.4
|
|
|
|
Support Agreement, dated as of June 1, 2009, by and between
Hiland Partners, LP, Hiland Partners GP, LLC, Hiland Holdings
GP, LP, Hiland Partners GP Holdings, LLC, HH GP Holding, LLC and
HLND MergerCo, LLC (incorporated by reference to
Exhibit 2.3 of Registrants
Form 8-K
filed on June 1, 2009).
|
|
2
|
.5
|
|
|
|
Agreement and Plan of Merger, dated as of June 1, 2009, by
and between Hiland Holdings GP, LP, Hiland Partners GP Holdings,
LLC, HH GP Holding, LLC and HPGP MergerCo, LLC (incorporated by
reference to Exhibit 2.1 of Hiland Holdings
Form 8-K
filed on June 1, 2009). Schedules and Exhibits are omitted
pursuant to Section 601(b)(2) of
Regulation S-K.
|
|
2
|
.6
|
|
|
|
Equity Commitment Letter Agreement, dated as of June 1,
2009, by and between Harold Hamm and HH GP Holding, LLC
(incorporated by reference to Exhibit 2.3 of Hiland
Holdings
Form 8-K
filed on June 1, 2009).
|
|
2
|
.7
|
|
|
|
Support Agreement, dated as of June 1, 2009, by and between
Hiland Holdings GP, LP, Hiland Partners GP Holdings, LLC, Harold
Hamm, Continental Gas Holdings, Inc., Bert Mackie, as trustee of
the Harold Hamm DST Trust and the Harold Hamm HJ Trust, HH GP
Holding, LLC and HPGP MergerCo, LLC (incorporated by reference
to Exhibit 2.1 of Hiland Holdings
Form 8-K
filed on June 1, 2009).
|
|
3
|
.1
|
|
|
|
Certificate of Limited Partnership of Hiland Partners, LP.
(incorporated by reference to Exhibit 3.1 of
Registrants Registration Statement on
Form S-1
(File
No. 333-119908)).
|
|
3
|
.2
|
|
|
|
First Amended and Restated Limited Partnership Agreement of
Hiland Partners, LP (incorporated by reference to
exhibit 3.2 of Registrants annual report on
Form 10-K
filed on March 30, 2005).
|
|
3
|
.3
|
|
|
|
Certificate of Formation of Hiland Partners GP, LLC
(incorporated by reference to Exhibit 3.3 of
Registrants Registration Statement on
Form S-1
(File
No. 333-119908)).
|
|
3
|
.4
|
|
|
|
Second Amended and Restated Limited Liability Company Agreement
of Hiland Partners GP, LLC (incorporated by reference to
exhibit 10.2 of Registrants
Form 8-K
filed on September 29, 2006).
|
|
4
|
.1
|
|
|
|
Certificate of Limited Partnership of Hiland Partners, LP.
(incorporated by reference to Exhibit 3.1 of
Registrants Registration Statement on
Form S-1
(File
No. 333-119908)).
|
|
4
|
.2
|
|
|
|
First Amended and Restated Limited Partnership Agreement of
Hiland Partners, LP (incorporated by reference to
exhibit 3.2 of Registrants annual report on
Form 10-K
filed on March 30, 2005).
|
|
4
|
.3
|
|
|
|
Certificate of Formation of Hiland Partners GP, LLC
(incorporated by reference to Exhibit 3.3 of
Registrants Registration Statement on
Form S-1
(File
No. 333-119908)).
|
|
4
|
.4
|
|
|
|
Second Amended and Restated Limited Liability Company Agreement
of Hiland Partners GP, LLC (incorporated by reference to
exhibit 10.2 of Registrants
Form 8-K
filed on September 29, 2006).
|
|
19
|
.1
|
|
|
|
Code of Ethics for Chief Executive Officer and Senior Finance
Officers (incorporated by reference to exhibit 19.1 of
Registrants annual report on
Form 10-K
filed on March 30, 2005).
|
|
31
|
.1
|
|
|
|
Certification of Chief Executive Officer under Section 302
of the Sarbanes-Oxley Act of 2002.
|
|
31
|
.2
|
|
|
|
Certification of Chief Financial Officer under Section 302
of the Sarbanes-Oxley Act of 2002.
|
|
32
|
.1
|
|
|
|
Certification of Chief Executive Officer under Section 906
of the Sarbanes-Oxley Act of 2002.
|
|
32
|
.2
|
|
|
|
Certification of Chief Financial Officer under Section 906
of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
Portions of this exhibit have been omitted pursuant to a request
for confidential treatment.
|
|
*
|
|
Constitutes management contracts or compensatory plans or
arrangements.
|
57
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized in Enid, Oklahoma, on this
10th day of August, 2009.
HILAND PARTNERS, LP
By: Hiland Partners GP, LLC, its general partner
|
|
|
|
By:
|
/s/ Joseph
L. Griffin
|
Joseph L. Griffin
Chief Executive Officer, President and Director
(principal executive officer)
|
|
|
|
By:
|
/s/ Matthew
S. Harrison
|
Matthew S. Harrison
Chief Financial Officer, Vice President-Finance, Secretary
and Director
(principal financial and accounting officer)
58
Exhibit Index
|
|
|
|
|
|
|
|
2
|
.1
|
|
|
|
Acquisition Agreement by and among Hiland Operating, LLC and
Hiland Partners, LLC dated as of September 1, 2005
(incorporated by referenced to Exhibit 2.1 of
Registrants
Form 8-K
filed September 29, 2005).
|
|
2
|
.2
|
|
|
|
Agreement and Plan of Merger, dated as of June 1, 2009, by
and between Hiland Partners, LP, Hiland Partners GP, LLC,
HH GP Holding, LLC and HLND MergerCo, LLC (incorporated by
reference to Exhibit 2.1 of Registrants
Form 8-K
filed on June 1, 2009). Schedules and Exhibits are omitted
pursuant to Section 601(b)(2) of
Regulation S-K.
|
|
2
|
.3
|
|
|
|
Equity Commitment Letter Agreement, dated as of June 1,
2009, by and between Harold Hamm and HH GP Holding, LLC
(incorporated by reference to Exhibit 2.2 of
Registrants
Form 8-K
filed on June 1, 2009).
|
|
2
|
.4
|
|
|
|
Support Agreement, dated as of June 1, 2009, by and between
Hiland Partners, LP, Hiland Partners GP, LLC, Hiland Holdings
GP, LP, Hiland Partners GP Holdings, LLC, HH GP Holding, LLC and
HLND MergerCo, LLC (incorporated by reference to
Exhibit 2.3 of Registrants
Form 8-K
filed on June 1, 2009).
|
|
2
|
.5
|
|
|
|
Agreement and Plan of Merger, dated as of June 1, 2009, by
and between Hiland Holdings GP, LP, Hiland Partners GP Holdings,
LLC, HH GP Holding, LLC and HPGP MergerCo, LLC (incorporated by
reference to Exhibit 2.1 of Hiland Holdings
Form 8-K
filed on June 1, 2009). Schedules and Exhibits are omitted
pursuant to Section 601(b)(2) of
Regulation S-K.
|
|
2
|
.6
|
|
|
|
Equity Commitment Letter Agreement, dated as of June 1,
2009, by and between Harold Hamm and HH GP Holding, LLC
(incorporated by reference to Exhibit 2.3 of Hiland
Holdings
Form 8-K
filed on June 1, 2009).
|
|
2
|
.7
|
|
|
|
Support Agreement, dated as of June 1, 2009, by and between
Hiland Holdings GP, LP, Hiland Partners GP Holdings, LLC, Harold
Hamm, Continental Gas Holdings, Inc., Bert Mackie, as trustee of
the Harold Hamm DST Trust and the Harold Hamm HJ Trust, HH GP
Holding, LLC and HPGP MergerCo, LLC (incorporated by reference
to Exhibit 2.1 of Hiland Holdings
Form 8-K
filed on June 1, 2009).
|
|
3
|
.1
|
|
|
|
Certificate of Limited Partnership of Hiland Partners, LP.
(incorporated by reference to Exhibit 3.1 of
Registrants Registration Statement on
Form S-1
(File
No. 333-119908)).
|
|
3
|
.2
|
|
|
|
First Amended and Restated Limited Partnership Agreement of
Hiland Partners, LP (incorporated by reference to
exhibit 3.2 of Registrants annual report on
Form 10-K
filed on March 30, 2005).
|
|
3
|
.3
|
|
|
|
Certificate of Formation of Hiland Partners GP, LLC
(incorporated by reference to Exhibit 3.3 of
Registrants Registration Statement on
Form S-1
(File
No. 333-119908)).
|
|
3
|
.4
|
|
|
|
Second Amended and Restated Limited Liability Company Agreement
of Hiland Partners GP, LLC (incorporated by reference to
exhibit 10.2 of Registrants
Form 8-K
filed on September 29, 2006).
|
|
4
|
.1
|
|
|
|
Certificate of Limited Partnership of Hiland Partners, LP.
(incorporated by reference to Exhibit 3.1 of
Registrants Registration Statement on
Form S-1
(File
No. 333-119908)).
|
|
4
|
.2
|
|
|
|
First Amended and Restated Limited Partnership Agreement of
Hiland Partners, LP (incorporated by reference to
exhibit 3.2 of Registrants annual report on
Form 10-K
filed on March 30, 2005).
|
|
4
|
.3
|
|
|
|
Certificate of Formation of Hiland Partners GP, LLC
(incorporated by reference to Exhibit 3.3 of
Registrants Registration Statement on
Form S-1
(File
No. 333-119908)).
|
|
4
|
.4
|
|
|
|
Second Amended and Restated Limited Liability Company Agreement
of Hiland Partners GP, LLC (incorporated by reference to
exhibit 10.2 of Registrants
Form 8-K
filed on September 29, 2006).
|
|
19
|
.1
|
|
|
|
Code of Ethics for Chief Executive Officer and Senior Finance
Officers (incorporated by reference to exhibit 19.1 of
Registrants annual report on
Form 10-K
filed on March 30, 2005).
|
|
31
|
.1
|
|
|
|
Certification of Chief Executive Officer under Section 302
of the Sarbanes-Oxley Act of 2002.
|
|
31
|
.2
|
|
|
|
Certification of Chief Financial Officer under Section 302
of the Sarbanes-Oxley Act of 2002.
|
|
32
|
.1
|
|
|
|
Certification of Chief Executive Officer under Section 906
of the Sarbanes-Oxley Act of 2002.
|
|
32
|
.2
|
|
|
|
Certification of Chief Financial Officer under Section 906
of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
Portions of this exhibit have been omitted pursuant to a request
for confidential treatment.
|
|
*
|
|
Constitutes management contracts or compensatory plans or
arrangements.
|
59
Exhibit 31.1
CERTIFICATION
I, Joseph L. Griffin, certify that:
1. I have reviewed this report on
Form 10-Q
of Hiland Partners, LP;
2. Based on my knowledge, this report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and
other financial information included in this report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
4. The registrants other certifying officer(s) and I
are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act
Rules 13a 15(e) and 15d 15(e)) and
internal control over financial reporting (as defined in
Exchange Act Rules 13a 15(f) and
15d 15 (f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information
relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is
being prepared;
b) Designed such internal control over financial reporting,
or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrants
disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
d) Disclosed in this report any change in the
registrants internal control over financial reporting that
occurred during the registrants most recent fiscal quarter
(the registrants fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably
likely to materially affect, the registrants internal
control over financial reporting; and
5. The registrants other certifying officer(s) and I
have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrants
auditors and the audit committee of the registrants board
of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in
the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrants ability to record, process, summarize and
report financial information; and
b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrants internal control over financial reporting.
Joseph L. Griffin
Chief Executive Officer and President
Date: August 10, 2009
60
Exhibit 31.2
CERTIFICATION
I, Matthew S. Harrison, certify that:
1. I have reviewed this report on
Form 10-Q
of Hiland Partners, LP;
2. Based on my knowledge, this report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and
other financial information included in this report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
4. The registrants other certifying officer(s) and I
are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act
Rules 13a 15(e) and 15d 15(e)) and
internal control over financial reporting (as defined in
Exchange Act Rules 13a 15(f) and
15d 15 (f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information
relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is
being prepared;
b) Designed such internal control over financial reporting,
or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrants
disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
d) Disclosed in this report any change in the
registrants internal control over financial reporting that
occurred during the registrants most recent fiscal quarter
(the registrants fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably
likely to materially affect, the registrants internal
control over financial reporting; and
5. The registrants other certifying officer(s) and I
have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrants
auditors and the audit committee of the registrants board
of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in
the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrants ability to record, process, summarize and
report financial information; and
b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrants internal control over financial reporting.
Matthew S. Harrison
Chief Financial Officer, Vice President-Finance
and Secretary
Date: August 10, 2009
61
Exhibit 32.1
CERTIFICATION
OF CHIEF EXECUTIVE
OFFICER OF GENERAL PARTNER OF HILAND PARTNERS, LP
PURSUANT TO 18 U.S.C. SECTION 1350
In connection with the report on
Form 10-Q
for the three and six months ended June 30, 2009 of Hiland
Partners, LP (the Company) and filed with the
Securities and Exchange Commission on the date hereof (the
Report), I, Joseph L. Griffin, Chief Executive
Officer and President of Hiland Partners GP, LLC, the general
partner of the Company, hereby certify, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of
1934; and
2. The information contained in the Report fairly presents,
in all material respects, the financial condition and results of
operations of the Company.
Joseph L. Griffin
Chief Executive Officer and President
Date: August 10, 2009
62
Exhibit 32.2
CERTIFICATION
OF CHIEF FINANCIAL
OFFICER OF GENERAL PARTNER OF HILAND PARTNERS, LP
PURSUANT TO 18 U.S.C. SECTION 1350
In connection with the report on
Form 10-Q
for the three and six months ended June 30, 2009 of Hiland
Partners LP (the Company) and filed with the
Securities and Exchange Commission on the date hereof (the
Report), I, Matthew S. Harrison, Chief
Financial Officer, Vice President-Finance and Secretary of
Hiland Partners GP, LLC, the general partner of Company, hereby
certify, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, that:
1. The Report fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of
1934; and
2. The information contained in the Report fairly presents,
in all material respects, the financial condition and results of
operations of the Company.
Matthew S. Harrison
Chief Financial Officer, Vice President-Finance
and Secretary
Date: August 10, 2009
63
Annex I
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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þ
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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|
For the fiscal year ended
December 31,
2008
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Commission file number:
001-33018
Hiland Holdings GP,
LP
(Exact name of Registrant as
specified in its charter)
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DELAWARE
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76-0828238
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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205 West Maple, Suite 1100
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73701
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Enid, Oklahoma
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(Zip code)
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(Address of principal executive
offices)
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Registrants telephone number including area code
(580) 242-6040
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Limited Partner Units
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The NASDAQ Stock Market, LLC
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Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of Securities
Act. Yes
o
No
þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or 15(d) of
Act. Yes
o
No
þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes
þ
No
o
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 during the
preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). Yes
o
No
o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K.
þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large
accelerated
filer
o
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Accelerated
filer
þ
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Non-accelerated
filer
o
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Smaller
reporting
company
o
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(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes
o
No
þ
The aggregate market value of common limited partner units held
by non-affiliates of the registrant was approximately
$226.7 million on June 30, 2008 based on the closing
price of $26.97 on the NASDAQ National Market.
The number of the registrants outstanding equity units at
March 5, 2009 was 21,607,500 common units.
DOCUMENTS
INCORPORATED BY REFERENCE:
None
PART I
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Items 1.
and 2.
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Business
and Properties
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Unless the context requires otherwise, references to
we, our, us, Hiland
Holdings or the Partnership are intended to
mean the consolidated business and operations of Hiland Holdings
GP, LP. References to Hiland Partners are intended
to mean the consolidated business and operations of Hiland
Partners, LP and its subsidiaries.
Our
Formation and Public Offering
Hiland Holdings GP, LP is a Delaware limited partnership formed
in May 2006 to own Hiland Partners GP, LLC, the general partner
of Hiland Partners, LP, (Hiland Partners) and
certain other common and subordinated units in Hiland Partners,
LP. Hiland Partners, LP a publicly traded Delaware limited
partnership (NASDAQ: HLND) formed in October 2004, is
principally engaged in gathering, compressing, dehydrating,
treating, processing and marketing natural gas, fractionating
natural gas liquids and providing air compression and water
injection services for oil and gas secondary recovery
operations. The operations of Hiland Partners, LP are primarily
located in the Mid-Continent and Rocky Mountain regions of the
United States.
Overview
Our cash generating assets consist of our ownership interests in
Hiland Partners. Our aggregate ownership interests in Hiland
Partners consist of the following: the 2% general partner
interest in Hiland Partners, all of the incentive distribution
rights in Hiland Partners, and 2,321,471 common units and
3,060,000 subordinated units of Hiland Partners, representing a
57.4% limited partner interest in Hiland Partners.
Our primary objective is to increase our cash distributions to
our unitholders by actively assisting Hiland Partners in
executing its business strategy. We support Hiland Partners in
implementing its business strategy by assisting in identifying,
evaluating and pursuing growth opportunities. We may support the
growth of Hiland Partners through the use of our capital
resources, including purchasing Hiland Partners units or lending
funds to Hiland Partners to provide funding for the acquisition
of a business or an asset or for an internal growth project. In
addition, we may provide Hiland Partners with other forms of
credit support, such as guarantees relating to financing a
project or other types of support related to a merger or
acquisition transaction.
Hiland Partners is a midstream energy partnership engaged in
purchasing, gathering, compressing, dehydrating, treating,
processing and marketing of natural gas, and fractionating, or
separating, and marketing of natural gas liquids, or NGLs.
Hiland Partners also provides air compression and water
injection services to Continental Resources, Inc.
(CLR), a publicly traded exploration and production
company controlled by affiliates of our general partner, for use
in its oil and gas secondary recovery operations. Hiland
Partners operations are primarily located in the
Mid-Continent and Rocky Mountain regions of the United States.
In Hiland Partners midstream segment, it connects the
wells of natural gas producers in its market areas to its
gathering systems, treats natural gas to remove impurities,
processes natural gas for the removal of NGLs, fractionates NGLs
into NGL products and provides an aggregate supply of natural
gas and NGL products to a variety of natural gas transmission
pipelines and markets. In Hiland Partners compression segment,
it provides compressed air and water to CLR. CLR uses the
compressed air and water in its oil and gas secondary recovery
operations in North Dakota by injecting them into its oil and
gas reservoirs to increase oil and gas production from those
reservoirs. This increased production of natural gas flows
through Hiland Partners Badlands gathering system.
Hiland Partners midstream assets consist of 14 natural gas
gathering systems with approximately 2,111 miles of gas
gathering pipelines, five natural gas processing plants, seven
natural gas treating facilities and three NGL fractionation
facilities. Hiland Partners compression assets consist of
two air compression facilities and a water injection plant.
3
Recent
Developments
Going Private Proposals.
On January 15,
2009, the board of directors of the general partner of each of
Hiland Holdings and Hiland Partners received a proposal from
Harold Hamm to acquire all of the outstanding common units of
each of Hiland Holdings and Hiland Partners that are not owned
by Mr. Hamm, his affiliates or the Hamm family trusts.
Consummation of each transaction is conditioned upon the
consummation of the other. The proposals contemplate a merger of
each of Hiland Holdings and Hiland Partners with a separate new
acquisition vehicle to be formed by Mr. Hamm and the Hamm
family trusts. Under the terms proposed by Mr. Hamm, Hiland
Holdings unitholders would receive $3.20 in cash per common unit
and Hiland Partners unitholders would receive $9.50 in cash per
common unit. Mr. Hamm is the Chairman of the board of
directors of the general partner of each of Hiland Holdings and
Hiland Partners. Mr. Hamm, either individually or together
with his affiliates or the Hamm family trusts, beneficially owns
100% of Hiland Partners GP Holdings, LLC, our general partner,
and approximately 61% of the outstanding common units of Hiland
Holdings. Hiland Holdings owns 100% of Hiland Partners
general partner and approximately 37% of Hiland Partners
outstanding common units.
It is anticipated that the conflicts committee of the boards of
directors of the general partner of each of Hiland Holdings and
Hiland Partners will consider the proposals. In reviewing the
proposals, each conflicts committee has retained its own
financial advisers and legal counsel to assist in its work. The
board of directors of the general partners of each of Hiland
Holdings and Hiland Partners caution our unitholders and the
unitholders of Hiland Partners respectively, and others
considering trading in the securities of Hiland Holdings and
Hiland Partners, that each conflicts committee of the board of
directors is reviewing its respective proposal and no decisions
have been made by either conflicts committee of either board of
directors with respect to the response of either us or Hiland
Partners to the proposals. There can be no assurance that any
agreement will be executed or that any transaction will be
approved or consummated.
On February 26, 2009, a unitholder of Hiland Holdings and
Hiland Partners filed a complaint alleging claims relating to
Mr. Hamms proposal on behalf of a purported class of
common unitholders of Hiland Holdings and Hiland Partners
against Hiland Holdings, Hiland Partners, the general partner of
each of Hiland Holdings and Hiland Partners, and certain members
of the board of directors of each of Hiland Holdings and Hiland
Partners in the Court of Chancery of the State of Delaware. For
additional information, please see Item 3. Legal
Proceedings.
On January 27, 2009, we received a Deficiency Letter from
NASDAQ indicating that we no longer comply with the audit
committee composition requirements as set forth in Marketplace
Rule 4350(d), which requires Hiland Partners GP Holdings,
LLC, our general partner, to have an audit committee of at least
three independent members. Following the resignation of Shelby
E. Odell from the board of directors of our general partner on
January 21, 2009, the audit committee of our general
partner consists of only two independent members. Mr. Odell
resigned from the board of directors of our general partner so
that he would be eligible to serve as a member of the conflicts
committee of the board of directors of Hiland Partners
general partner. In accordance with Marketplace
Rule 4350(d)(4), NASDAQ has provided us a cure period to
regain compliance until the earlier of our next annual
unitholders meeting or January 21, 2010, or, if the
next annual unitholders meeting is held before
July 20, 2009, then we must evidence compliance no later
than July 20, 2009.
Midstream
Segment
Hiland Partners midstream operations consist of the
following:
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gathering and compressing natural gas to facilitate its
transportation to Hiland Partners processing plants, third
party pipelines, utilities and other consumers;
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dehydrating natural gas to remove water from the natural gas
stream to meet pipeline quality specifications;
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treating natural gas to remove or reduce impurities such as
carbon dioxide, nitrogen, hydrogen sulfide and other
contaminants to ensure that the natural gas meets pipeline
quality specifications;
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4
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processing natural gas to extract NGLs and selling the resulting
residue natural gas and, in most cases, the NGLs; and
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fractionating a portion of NGLs into a mix of NGL products,
including propane, butanes and natural gasoline or various
combinations of these NGLs, and selling these NGL products to
third parties.
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Hiland Partners midstream assets include the following:
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Bakken Gathering System.
The Bakken gathering
system is a
374-mile
gas
gathering system located in eastern Montana that gathers
compresses, dehydrates and processes natural gas, and
fractionates NGLs. This system includes the Bakken processing
plant, three compressor stations and one fractionation facility,
and has approximately 11,050 horsepower installed. Hiland
Partners acquired the Bakken gathering system and the Bakken
processing plant in September 2005. Hiland Partners Bakken
gathering system has capacity of 25,000 Mcf/d and average
throughput was 22,687 Mcf/d of natural gas which produced
approximately 2,264 Bbls/d of NGLs for the year ended
December 31, 2008. The system represented approximately
33.5% of our total segment margin for the year ended
December 31, 2008.
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Badlands Gathering System.
The Badlands
gathering system is a
221-mile
gas
gathering system primarily located in southwest North Dakota
that gathers, compresses, dehydrates, treats and processes
natural gas, and fractionates NGLs. The system includes the
Badlands processing plant, seven compressor stations, one
treating facility and one fractionation facility, and has
approximately 18,550 horsepower installed. Hiland Partners
constructed the original Badlands gathering system and
processing plant in 1997. Hiland Partners Badlands
gathering system has capacity of 46,000 Mcf/d and average
throughput was 22,930 Mcf/d of natural gas which produced
approximately 962 Bbls/d of NGLs for the year ended
December 31, 2008. The system represented approximately
17.5% of our total segment margin for the year ended
December 31, 2008.
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Eagle Chief Gathering System.
The Eagle Chief
gathering system is a
609-mile
gas
gathering system located in northwest Oklahoma that gathers,
compresses, dehydrates and processes natural gas. The system
includes the Eagle Chief processing plant and eight compressor
stations and has approximately 17,500 horsepower installed.
Hiland Partners constructed the Eagle Chief gathering system in
1990 and constructed the Eagle Chief processing plant in 1995.
Hiland Partners acquired the Carmen gathering system in August
2003, which consists solely of gathering lines to expand the
Eagle Chief gathering system. Hiland Partners Eagle Chief
gathering system has a capacity of 35,500 Mcf/d and average
throughput was 25,259 Mcf/d of natural gas which produced
approximately 980 Bbls/d of NGLs for the year ended
December 31, 2008. The system represented approximately
12.6% of our total segment margin for the year ended
December 31, 2008.
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Kinta Area Gathering Systems.
The Kinta Area
gathering system was acquired by Hiland Partners on May 1,
2006 and is a
601-mile
gathering system located in southeastern Oklahoma that includes
five separate low pressure natural gas gathering systems. The
systems are comprised of four 10,000 Mcf/d capacity amine
treating facilities and thirteen compressor stations with an
aggregate of approximately 43,750 horsepower. Hiland
Partners Kinta Area gathering systems have an aggregate
capacity of 200,000 Mcf/d and average throughput was
133,755 Mcf/d for the year ended December 31, 2008.
The systems represented approximately 12.5% of our total segment
margin for the year ended December 31, 2008.
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Woodford Shale Gathering System.
The Woodford
Shale gathering system is a
55-mile
gathering system located in southeastern Oklahoma and is
designed to provide low-pressure gathering, compression and
dehydrating services. The system includes four compressor
stations and has approximately 17,400 horsepower installed.
Natural gas gathered on the Woodford Shale gathering system is
processed at third party processing facilities. Hiland
Partners Woodford Shale gathering system has a capacity of
65,000 Mcf/d and average throughput was 27,447 Mcf/d
of natural gas which produced approximately 1,214 Bbls/d of
NGLs for the year ended December 31, 2008. The system
represented approximately 9.2% of our total segment margin for
the year ended December 31, 2008.
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Matli Gathering System.
The Matli gathering
system is a
58-mile
gas
gathering system located in northcentral Oklahoma that gathers,
compresses, dehydrates, treats and processes natural gas. The
system includes the Matli processing plant, three compressor
stations and one treating facility which combined have
approximately 9,450 horsepower. Hiland Partners constructed the
Matli gathering system in 1999, and in December 2006 Hiland
Partners completed the construction of a new processing plant.
Hiland Partners Matli gathering system has a capacity of
25,000 Mcf/d and average throughput was 15,627 Mcf/d
of natural gas which produced approximately 343 Bbls/d of
NGLs for the year ended December 31, 2008. The system
represented approximately 5.7% of our total segment margin for
the year ended December 31, 2008.
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Worland Gathering System.
The Worland
gathering system is a
153-mile
gas
gathering system located in central Wyoming that gathers,
compresses, dehydrates, treats and processes natural gas, and
fractionates NGLs. The system includes the Worland processing
plant, seven compressor stations, one treating facility and one
fractionation facility, and has approximately 5,700 horsepower
installed. The Worland gathering system and the Worland
processing plant were contributed to Hiland Partners on
February 15, 2005 in connection with Hiland Partners
formation and its initial public offering. Hiland Partners
Worland gathering system has a capacity of 8,000 Mcf/d and
average throughput was 2,603 Mcf/d of natural gas which
produced approximately 157 Bbls/d of NGLs for the year
ended December 31, 2008. The system represented
approximately 4.3% of our total segment margin for the year
ended December 31, 2008.
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Other Systems.
Hiland Partners also owns three
other natural gas gathering systems located in Texas,
Mississippi and Oklahoma. These systems represented
approximately 0.4% of our total segment margin for the year
ended December 31, 2008.
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North Dakota Bakken Gathering System.
The
North Dakota Bakken gathering system presently consists of a
23-mile
gathering system located in northwestern North Dakota that will
gather natural gas associated with crude oil produced from the
Bakken shale and Three Forks/Sanish formations. The gathering
system, associated compression and treating facilities and a
processing plant are currently under construction by Hiland
Partners with an expected start up in the second quarter of
2009. Construction of the processing plant and gathering system
commenced in October 2008. As of December 31, 2008, Hiland
Partners has invested approximately $9.2 million in the
project.
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Hiland Partners midstream revenues represented 98.8%, 98.3% and
97.8% of total revenues for the years ended December 31,
2008, 2007 and 2006, respectively.
6
The table set forth below contains certain information regarding
Hiland Partners gathering systems as of or for the year
ended December 31, 2008:
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Percent
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of Total
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Length
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Receipt
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Throughput
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Throughput
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Capacity
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Segment
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Asset
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Type
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(Miles)
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Points
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Capacity(1)
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Average(1)
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Utilization
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Margin
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Bakken gathering system
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Gathering pipelines
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374
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292
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25,000
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22,687
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90.8
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%
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Refrigeration Plant Constructed in 2004
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25,000
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22,687
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90.8
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%
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Fractionation facility (Bbls/d)
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6,500
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3,354
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51.6
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%
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33.5
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%
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Badlands gathering system
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Gathering pipelines
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221
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44
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46,000
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22,930
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49.9
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%
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Cryogenic and Refrigeration Plant Constructed in 2007
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40,000
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22,930
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57.3
|
%
|
|
|
|
|
|
|
Treating facility
|
|
|
|
|
|
|
|
|
|
|
40,000
|
|
|
|
22,930
|
|
|
|
57.3
|
%
|
|
|
|
|
|
|
Fractionation facility (Bbls/d)
|
|
|
|
|
|
|
|
|
|
|
4,000
|
|
|
|
836
|
|
|
|
20.9
|
%
|
|
|
17.5
|
%
|
Eagle Chief gathering system
|
|
Gathering pipelines
|
|
|
609
|
|
|
|
447
|
|
|
|
35,500
|
|
|
|
25,259
|
|
|
|
71.2
|
%
|
|
|
|
|
|
|
Mix Refrigeration/JT Plant Constructed in 1995
|
|
|
|
|
|
|
|
|
|
|
35,000
|
|
|
|
25,259
|
|
|
|
72.2
|
%
|
|
|
12.6
|
%
|
Kinta Area gathering systems(2)
|
|
Gathering pipelines
|
|
|
601
|
|
|
|
710
|
|
|
|
200,000
|
|
|
|
133,755
|
|
|
|
66.9
|
%
|
|
|
|
|
|
|
Treating facilities
|
|
|
|
|
|
|
|
|
|
|
40,000
|
|
|
|
21,116
|
|
|
|
52.9
|
%
|
|
|
12.5
|
%
|
Woodford Shale gathering system
|
|
Gathering pipelines
|
|
|
55
|
|
|
|
53
|
|
|
|
65,000
|
|
|
|
27,447
|
|
|
|
42.2
|
%
|
|
|
9.2
|
%
|
Matli gathering system
|
|
Gathering pipelines
|
|
|
58
|
|
|
|
57
|
|
|
|
25,000
|
|
|
|
15,627
|
|
|
|
62.5
|
%
|
|
|
|
|
|
|
Mix Refrigeration Plant Constructed in 2006
|
|
|
|
|
|
|
|
|
|
|
25,000
|
|
|
|
15,627
|
|
|
|
62.5
|
%
|
|
|
|
|
|
|
Treating facility
|
|
|
|
|
|
|
|
|
|
|
20,000
|
|
|
|
11,336
|
|
|
|
56.7
|
%
|
|
|
5.7
|
%
|
Worland gathering system
|
|
Gathering pipelines
|
|
|
153
|
|
|
|
24
|
|
|
|
8,000
|
|
|
|
2,603
|
|
|
|
32.5
|
%
|
|
|
|
|
|
|
Refrigeration Plant Constructed in mid 1980s
|
|
|
|
|
|
|
|
|
|
|
8,000
|
|
|
|
2,603
|
|
|
|
32.5
|
%
|
|
|
|
|
|
|
Treating facility
|
|
|
|
|
|
|
|
|
|
|
8,000
|
|
|
|
2,603
|
|
|
|
32.5
|
%
|
|
|
|
|
|
|
Fractionation facility (Bbls/d)
|
|
|
|
|
|
|
|
|
|
|
650
|
|
|
|
260
|
|
|
|
40.0
|
%
|
|
|
4.3
|
%
|
Other systems(3)
|
|
Gathering pipelines
|
|
|
17
|
|
|
|
21
|
|
|
|
7,000
|
|
|
|
2,362
|
|
|
|
33.7
|
%
|
|
|
0.4
|
%
|
North Dakota Bakken gathering System(4)
|
|
Gathering pipelines
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,111
|
|
|
|
1,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Throughput capacity and average throughput are measured in Mcf/d
for the gathering pipelines, processing plants and treating
facilities and in Bbls/d for the fractionation facilities shown
on this chart.
|
|
(2)
|
|
The Kinta Area gathering systems includes five separate natural
gas gathering systems.
|
|
(3)
|
|
Other systems include three natural gas gathering systems
located in Texas, Mississippi and Oklahoma.
|
|
(4)
|
|
The North Dakota Bakken natural gas gathering system is
currently under construction.
|
Compression
Segment
Hiland Partners provides air and water compression services to
CLR for use in its oil and gas secondary recovery operations
under a four-year, monthly fixed-fee contract (which Hiland
Partners entered into in connection with its initial public
offering) that expired on January 28, 2009 and now
automatically renews for additional one-month terms at its Cedar
Hills compression facility, its Horse Creek compression facility
and its
7
water injection plant located next to Hiland Partners
Cedar Hills compression facility. These assets are located in
North Dakota in close proximity to Hiland Partners
Badlands gathering system. At the compression facilities, Hiland
Partners compresses air to pressures in excess of 4,000 pounds
per square inch, and at the water injection plant, Hiland
Partners pumps water to pressures in excess of 2,000 pounds per
square inch. The air and water are delivered at the tailgate of
Hiland Partners facilities into pipelines operated by CLR
and are ultimately utilized by CLR in its oil and gas secondary
recovery operations. The natural gas produced by CLR flows
through Hiland Partners Badlands gathering system. Our
compression segment represented approximately 4.3% of our total
segment margin for the year ended December 31, 2008. Our
compression revenues represented 1.2%, 1.7% and 2.2% of our
total revenues for the years ended December 31, 2008, 2007
and 2006, respectively.
Financial
Information About Segments
See Part II, Item 8 Financial Statements
and Supplementary Data.
Business
Strategies
Multiple events during 2008 and early 2009 involving numerous
financial institutions have effectively restricted current
liquidity with the capital markets throughout the United States
and around the world. Despite efforts by treasury and banking
regulators in the United States, Europe and other nations around
the world to provide liquidity to the financial sector, capital
markets currently remain constrained. Additionally, Hiland
Partners cash flows are impacted by the price of natural
gas, crude oil and natural gas liquids. During 2008, Hiland
Partners experienced extreme swings in its average realized
natural gas and NGL sales prices. Hiland Partners average
realized natural gas sales price increased from $6.44/MMBtu in
January 2008 to a high sales price of $10.05/MMBtu in July 2008,
then decreased to a low sales price of $3.38/MMBtu in November
2008. Hiland Partners average realized NGL sales price
increased from $1.42 per gallon in January 2008 to a high sales
price of $1.74 per gallon in June 2008, then decreased to a low
sales price of $0.61 per gallon in December 2008. The current
pricing environment, particularly in combination with the
constrained capital and credit markets and overall economic
downturn, resulted in a decline in drilling activity by some
producers. Sustained declines in drilling activity could have a
negative impact on the natural gas volumes Hiland Partners
gathers and processes. In the near term, we and Hiland
Partners management team are committed to managing costs
and expenditures during this difficult commodity price and
capital markets cycle. For the longer term, and assuming the
financial and energy markets stabilize, we and Hiland
Partners management team continue to be committed to
increasing the amount of cash available for distribution per
unit by executing the following strategies:
|
|
|
|
|
Engaging in construction and expansion
opportunities.
Hiland Partners intends to
leverage its existing infrastructure and customer relationships
by constructing and expanding systems to meet any new or
increased demand for Hiland Partners midstream services.
These projects may include expansion of existing systems and
construction of new facilities.
|
|
|
|
Pursuing complementary acquisitions.
Hiland
Partners intends to evaluate making complementary acquisitions
of midstream assets in its operating areas that provide
opportunities to expand or increase the utilization of its
existing assets. Hiland Partners would consider acquisitions
that it believes will allow Hiland Partners to capitalize on its
existing infrastructure, personnel, and producer and customer
relationships to provide an integrated package of natural gas
midstream services. In addition, Hiland Partners would consider
selected acquisitions in new geographic areas to the extent they
present growth opportunities similar to those Hiland Partners is
pursuing in its existing areas of operations.
|
|
|
|
Increasing volumes on Hiland Partners existing
assets.
Hiland Partners gathering systems
have excess capacity, which provides Hiland Partners with
opportunities to increase throughput volume with minimal
incremental operating costs and thereby increase cash flow.
Hiland Partners intends to aggressively market Hiland
Partners services to producers in order to connect new
supplies of natural gas, increase volumes and more fully utilize
its capacity.
|
8
|
|
|
|
|
Taking measures that reduce Hiland Partners exposure to
commodity price risk.
Because of the significant
volatility of natural gas, crude oil and NGL prices, Hiland
Partners attempts to operate its business in a manner that
allows Hiland Partners to mitigate the impact of fluctuations in
commodity prices. In order to reduce Hiland Partners
exposure to commodity price risk, Hiland Partners intends to
pursue fee-based arrangements, where market conditions permit,
and to enter into forward sales contracts or hedging
arrangements to cover a portion of its operations that are not
conducted under fee-based arrangements. In addition, when
processing margins (or the difference between NGL sales prices
and the cost of natural gas) are unfavorable, Hiland Partners
can elect not to process natural gas at its Eagle Chief
processing plant and third parties processors providing
processing services on Hiland Partners behalf downstream
of the Woodford Shale system can reject ethane or elect not to
process natural gas.
|
Midstream
Assets
Hiland Partners natural gas gathering systems include
approximately 2,111 miles of pipeline. A substantial
majority of revenues are derived from purchasing, gathering,
compressing, dehydrating, treating, processing and marketing of
natural gas that flows through gathering pipelines and from
fractionating and marketing of NGLs resulting from the
processing of natural gas into NGL products. Hiland
Partners principal systems are described below.
Bakken
Gathering System
General.
The Bakken gathering system is
located in eastern Montana and consists of approximately
374 miles of natural gas gathering pipelines, ranging from
three inches to twelve inches in diameter, and the Bakken
processing plant, which includes seven compressors and a
fractionation facility. The gathering system has a capacity of
approximately 25,000 Mcf/d, and average throughput was
approximately 22,687 Mcf/d for the year ended
December 31, 2008. There are three compressor stations
located within the gathering system. The compressor stations and
plant combined have approximately 11,050 horsepower.
The Bakken processing plant processes natural gas that flows
through the Bakken gathering system to produce residue gas and
NGLs. The plant has processing capacity of approximately
25,000 Mcf/d. For the year ended December 31, 2008,
the facility processed approximately 22,687 Mcf/d of
natural gas and produced approximately 2,264 Bbls/d of NGLs.
The Bakken gathering system also includes a fractionation
facility that separates NGLs into propane, butane and natural
gasoline. The fractionation facility has a current capacity to
fractionate approximately 6,500 Bbls/d of NGLs. For the
year ended December 31, 2008, the facility fractionated an
average of approximately 3,354 Bbls/d which included
volumes from Hiland Partners Badlands processing plant. In
the third quarter of 2007, Hiland Partners completed the
expansion of its NGL fractionation facilities at Hiland
Partners Bakken processing plant to fractionate NGL
volumes from both the Bakken processing plant and the Badlands
processing plant.
Natural Gas Supply.
As of December 31,
2008, 292 receipt points were connected to Hiland Partners
Bakken gathering system. The wells behind these receipt points,
which are located in the Williston Basin of Montana, primarily
produce crude oil from the Bakken formation. The associated
natural gas produced from these wells flows through Hiland
Partners Bakken gathering system. The primary suppliers of
natural gas to the Bakken gathering system are Enerplus
Resources (USA) Corporation, CLR and ConocoPhillips Company,
which represented approximately 55%, 34% and 10%, respectively,
of the Bakken gathering systems natural gas supply for the
year ended December 31, 2008.
Substantially all of the natural gas supplied to the Bakken
gathering system is dedicated to Hiland Partners under three
individually negotiated
percentage-of-proceeds
contracts. Two of these contracts have an initial term of ten
years, expiring in 2014, and one is for the life of the lease.
Under these contracts, natural gas is purchased at the wellhead
from the producers. For a more complete discussion of natural
gas purchase and gathering contracts, please read Item 7.
Managements Discussion and Analysis of Financial
Condition and Results of Operations Hiland
Partners Natural Gas Purchase and Gathering
Contracts.
9
Markets for Sale of Natural Gas and
NGLs.
Residue gas derived from Hiland
Partners processing operations is sold at the tailgate of
the Bakken processing plant on the Williston Basin Interstate
Pipeline to third parties. Depending on prevailing market prices
at each delivery point, Hiland Partners either sells its NGLs
produced by Hiland Partners fractionation facility to
SemStream, L.P. at the tailgate of the plant or transport the
same NGLs through a pipeline to a rail terminal and then sell to
SemStream, L.P. From July 18, 2008 through
September 30, 2008, Hiland Partners sold NGLs to other
third parties, including CLR. Prior to July 18, 2008 and
since October 2008 Hiland Partners has sold NGLs to SemStream,
L.P., who is fully performing under these contracts.
Hiland Partners primary purchasers of residue gas and NGLs
on the Bakken gathering system were SemStream, L.P.,
Montana-Dakota Utilities Co. and Rainbow Gas Company, which
represented approximately 37%, 29% and 19% respectively, of the
revenues from such sales for the year ended December 31,
2008.
Badlands
Gathering System and Air Compression and Water Injection
Facilities
General.
The Badlands gathering system is
located primarily in southwestern North Dakota and consists of
approximately 221 miles of natural gas gathering pipelines,
ranging from two inches to twelve inches in diameter, the
Badlands processing plant, natural gas treating facilities, a
fractionation facility and seven compressor stations. The total
horsepower for the system was approximately 18,550 at
December 31, 2008. The gathering system has a capacity of
approximately 46,000 Mcf/d and average throughput was
approximately 22,930 Mcf/d for the year ended
December 31, 2008.
In order to fulfill Hiland Partners obligations under an
agreement with CLR to gather, treat and process additional
natural gas, produced as a by-product of CLRs secondary
oil recovery operations, in the areas specified by the contract,
Hiland Partners expanded its Badlands gas gathering system and
processing plant located in Bowman County, North Dakota. Hiland
Partners completed the expansion of its Badlands gathering
system, the associated field gathering infrastructure,
processing plant and treating facilities, which included the
completion of Hiland Partners 40,000 Mcf/d nitrogen
rejection plant, and amine and hydrogen sulfide treating
facilities during the third quarter of 2007. As a result,
gathering pipelines, processing plant, treating facility and
fractionation facility throughput capacities increased
significantly.
Hiland Partners completed construction and commenced operation
of the Badlands gathering system, including the original
Badlands processing plant, in 1997. The Badlands processing
plant processes natural gas that flows through the Badlands
gathering system to produce residue gas and NGLs. The natural
gas gathered in this system must be processed and treated for
high levels of contaminates, including carbon dioxide, hydrogen
sulfide and nitrogen, in order to meet pipelines quality
specifications. The plant has processing capacity of
approximately 40,000 Mcf/d. During the year ended
December 31, 2008, the facility processed approximately
22,930 Mcf/d of natural gas and produced approximately
962 Bbls/d of NGLs.
The Badlands gathering system also includes a fractionation
facility that separates NGLs into propane and a mixture of
butane and natural gasoline. At December 31, 2008, the
fractionation facility had a capacity to fractionate
approximately 4,000 Bbls/d of NGLs. For the year ended
December 31, 2008, the facility fractionated an average of
approximately 836 Bbls/d.
Natural Gas Supply.
As of December 31,
2008, 44 receipt points were connected to Hiland Partners
Badlands gathering system. The wells behind these receipt points
are located in the Williston Basin of southwestern North Dakota
and northwestern South Dakota and primarily produce crude oil
from the Red River formation. The associated natural gas
produced from these wells flows through Hiland Partners
Badlands gathering system. The primary supplier of natural gas
to the Badlands gathering system is CLR, which represented
approximately 97% of the Badlands gathering systems
natural gas supply for the year ended December 31, 2008.
The natural gas supplied to the Badlands gathering system is
generally dedicated to Hiland Partners under individually
negotiated long-term contracts. Hiland Partners agreement
with CLR has an initial term of 15 years, expiring in
August 2022. Under this agreement, Hiland Partners receives 50%
of the proceeds attributable to residue gas and natural gas
liquids sales as well as certain fixed fees associated with
gathering
10
and treating the natural gas, including a $0.60 per Mcf fee for
the first 36.0 Bcf of natural gas gathered. As of
December 31, 2008, Hiland Partners has gathered
approximately 9.8 Bcf of natural gas since inception of the
agreement. This agreement replaced Hiland Partners prior
agreement with CLR in the area as the new plant and treating
facilities became operational in August 2007. Following the
initial term of the contracts, they generally continue on a year
to year basis, unless terminated by one of the parties. For the
other agreements, natural gas is purchased at the wellhead from
the producers under
percentage-of-proceeds
arrangements. For a more complete discussion of natural gas
purchase and gathering contracts, please read
Managements Discussion and Analysis of Financial
Condition and Results of Operations Hiland
Partners Natural Gas Purchase and Gathering
Contracts.
Air Compression and Water Injection
Facilities.
In order to enhance the production of
natural gas that flows through Hiland Partners Badlands
gathering system, Hiland Partners currently provides air
compression and water injection services to CLR at its Cedar
Hills compression facility, its Horse Creek compression facility
and its water injection plant, all of which are located in North
Dakota in close proximity to Hiland Partners Badlands
gathering system.
Markets for Sale of Natural Gas and
NGLs.
Residue gas derived from Hiland
Partners processing operations is sold at the tailgate of
the Badlands processing plant primarily to CLR for their
secondary recovery operations or on the Williston Basin
Interstate Pipeline to third parties. Hiland Partners sells the
propane produced by its fractionation facility at the tailgate
of the plant to SemStream, L.P. The remaining NGL products are
either sold to SemStream, L.P. at the tailgate of the plant, or
trucked to the Bakken fractionation facility for further
fractionation, and then sold to SemStream, L.P. From
July 18, 2008 through September 30, 2008, Hiland
Partners sold NGLs to other third parties, including CLR. Prior
to July 18, 2008 and since October 2008 Hiland Partners has
sold NGLs to SemStream, L.P., who is fully performing under
these contracts.
Hiland Partners primary purchasers of the residue gas and
NGLs from the Badlands gathering system were SemStream, L.P. and
CLR, which represented approximately 73% and 10%, respectively,
of the revenues from such sales for the year ended
December 31, 2008.
Eagle
Chief Gathering System
General.
The Eagle Chief gathering system is
located in northwest Oklahoma and consists of approximately
609 miles of natural gas gathering pipelines, ranging from
two inches to sixteen inches in diameter, and the Eagle Chief
processing plant. The gathering system has a capacity of
approximately 35,500 Mcf/d, and average throughput was
approximately 25,259 Mcf/d for the year ended
December 31, 2008. There are eight gas compressor stations
located within the gathering system, comprised of fifteen units.
The plant and compressor stations combined have an aggregate of
approximately 17,500 horsepower.
Hiland Partners completed construction and commenced operation
of the Eagle Chief gathering system in 1990 and constructed the
Eagle Chief processing plant in 1995. Since its construction,
Hiland Partners has expanded the size of the Eagle Chief
gathering system through the acquisition of approximately
377 miles of gathering pipelines in five separate
acquisitions, including Hiland Partners acquisition of the
Carmen gathering system, and the construction of approximately
232 miles of gathering pipelines. In the first quarter of
2007, Hiland Partners completed the installation of additional
pipelines and compression facilities at Hiland Partners
Eagle Chief gathering system and increased its system capacity
from 30,000 Mcf/d to 35,500 Mcf/d.
The Eagle Chief processing plant processes natural gas that
flows through the Eagle Chief gathering system to produce
residue gas and NGLs. The natural gas gathered in this system,
depending on delivery points, may not be required to be
processed to meet pipeline quality specifications when Hiland
Partners sells into interstate markets. The plant has processing
capacity of approximately 35,000 Mcf/d. During the year
ended December 31, 2008, the facility processed
approximately 25,259 Mcf/d of natural gas and produced
approximately 980 Bbls/d of NGLs.
Natural Gas Supply.
As of December 31,
2008, 447 receipt points were connected to Hiland Partners
Eagle Chief gathering system. The wells behind these receipt
points are located in the Anadarko Basin of
11
northwestern Oklahoma and primarily produce natural gas from the
Chester, Mississippi, Hunton and Manning formations. The primary
suppliers of natural gas to the Eagle Chief gathering system are
various subsidiaries of Chesapeake Energy Corporation and CLR,
which represented approximately 64% and 10%, respectively, of
the Eagle Chief gathering systems natural gas supply for
the year ended December 31, 2008.
The natural gas supplied to the Eagle Chief gathering system is
generally dedicated to Hiland Partners under individually
negotiated long-term contracts. Some of Hiland Partners
contracts have an initial term of five years. Following the
initial term, these contracts generally continue on a
year-to-year
basis unless terminated by one of the parties. In addition, some
of Hiland Partners contracts are for the life of the
lease. Natural gas is purchased at the wellhead from the
producers under
percentage-of-proceeds
contracts,
percentage-of-index
contracts or index-minus-fees contracts. For the year ended
December 31, 2008, approximately 67%, 30% and 3% of Hiland
Partners total wellhead volumes at the Eagle Chief
gathering system was derived from
percentage-of-proceeds,
percentage-of-index
and index-minus-fees contracts, respectively. For a more
complete discussion of natural gas purchase and gathering
contracts, please read Item 7. Managements
Discussion and Analysis of Financial Condition and Results of
Operations Hiland Partners Natural Gas
Purchase and Gathering Contracts.
Markets for Sale of Natural Gas and NGLs.
The
residue gas can be either delivered at the tailgate of the Eagle
Chief processing plant on the ONEOK Gas Transportation, L.L.C.
pipeline to intrastate markets or on the Panhandle Eastern
Pipeline Company, L.P. pipeline to interstate markets. Hiland
Partners is able to bypass its Eagle Chief processing plant by
selling into the interstate markets when processing margins are
unfavorable. The NGLs extracted from the gas at the Eagle Chief
processing are sold to ONEOK Hydrocarbon, L.P. at the tailgate
of Hiland Partners plant.
Hiland Partners primary purchasers of residue gas and NGLs
on the Eagle Chief gathering system were BP Energy Company,
ONEOK Hydrocarbon, L.P. and OGE Energy Resources, Inc., which
represented approximately 40%, 26% and 17%, respectively, of the
revenues from such sales for the year ended December 31,
2008.
Kinta
Area Gathering Systems
General.
The Kinta Area gathering systems,
which Hiland Partners acquired from Enogex Gas Gathering, L.L.C.
on May 1, 2006, are located in southeastern Oklahoma and
consist of five separate natural gas gathering systems with
601 miles of natural gas gathering pipelines ranging from
four inches to twelve inches in diameter and 13 compressor
stations with an aggregate of approximately 43,750 horsepower.
Some of the natural gas supplied to the Kinta Area gathering
systems has high carbon dioxide content; consequently, during
the first quarter of 2007, Hiland Partners installed four
10,000 Mcf/d capacity amine-treating facilities on two of
the five
sub-systems
to remove excess carbon dioxide levels from the gas gathered by
these gathering systems. The gathering systems have a combined
capacity of approximately 200,000 Mcf/d, and average
throughput was 133,755 Mcf/d for the year ended
December 31, 2008. Hiland Partners operations include
gathering, dehydration, compression and treating of the natural
gas supplied to the Kinta Area gathering systems and the
redelivery of such natural gas primarily for a fixed fee. In the
third quarter of 2008, Hiland Partners completed the
installation of additional compression facilities on these
gathering systems to increase the capacity by approximately
20,000 Mcf/d from 180,000 Mcf/d. During 2008, Hiland
Partners treated 21,166 Mcf/d of natural gas.
Natural Gas Supply.
As of December 31,
2008, approximately 710 receipt points were connected to Hiland
Partners Kinta Area gathering systems. The wells behind
these receipt points, which are located in the Arkoma Basin of
southeastern Oklahoma, primarily produce natural gas from the
Atoka, Cromwell, Booch, Hartshorne, Spiro, Fanshaw and Red Oak
formations. The primary suppliers of natural gas to these
gathering systems are BP America Production Company, various
subsidiaries of Chesapeake Energy Corporation. and Chevron North
America Exploration and Production Co., which represented
approximately 52%, 13% and 6%, respectively, of the Kinta Area
gathering systems natural gas supply for the year ended
December 31, 2008.
Hiland Partners does not take title on the majority of the
natural gas gathered on the systems and Hiland Partners
generally receives fixed-fees for its services under fixed fee
gathering arrangements. A small amount
12
of the natural gas gathered on the systems is purchased at the
wellhead under percentage of index contract arrangements. The
initial term of the Kinta agreements generally range from
monthly to ten years. Following the initial term, these
contracts generally continue on a
month-to-month
basis unless terminated by one of the parties. For the year
ended December 31, 2008, approximately 93% and 7% of Hiland
Partners total inlet wellhead volumes at the Kinta
gathering system was derived from fixed fee gathering contract
arrangements and index-minus-fees contract arrangements,
respectively. For a more complete discussion of natural gas
purchase and gathering contracts, please read Item 7.
Managements Discussion and Analysis of Financial
Condition and Results of Operations Hiland
Partners Natural Gas Purchase and Gathering
Contracts.
Woodford
Shale Gathering System
General.
The Woodford Shale gathering system
is located in southeastern Oklahoma, just to the west of Hiland
Partners Kinta Area gathering systems. As of
December 31, 2008 Hiland Partners had installed
55 miles of gathering pipelines and the gathering system
had a capacity of approximately 65,000 Mcf/d. Average
throughput for the year ended December 31, 2008 was
approximately 27,447 Mcf/d of natural gas, which produced
approximately 1,214 Bbls/d of NGLs. Hiland Partners
current operations provide only gathering and compression
services. The gathering infrastructure consists of field
gathering, four compressor stations and associated equipment,
which includes approximately 17,400 horsepower of compression.
Initial production from this gathering system commenced in April
2007.
Natural Gas Supply.
As of December 31,
2008, 53 receipt points were connected to Hiland Partners
Woodford Shale gathering system, which primarily produce natural
gas from the Woodford shale formation. Presently, the suppliers
of natural gas to this gathering system are CLR and Antero
Resources Midstream Corporation, which provided all of the
Woodford Shale gathering systems natural gas supply for
the year ended December 31, 2008.
Natural gas is purchased at the wellhead from CLR under
index-minus-fees contract arrangements. Hiland Partners receives
a fixed gathering fee for natural gas supplied by Antero
Resources Midstream Corporation under a fixed fee gathering
contract arrangement. The initial term of the Woodford Shale
agreements is ten years. Following the initial term, these
contracts generally continue on a
year-to-year
basis unless terminated by one of the parties. For the year
ended December 31, 2008, approximately 77% and 23% of
Hiland Partners total inlet wellhead volumes at the
Woodford Shale gathering system was derived from
index-minus-fees contract arrangements and fixed fee gathering
contract arrangements, respectively. For a more complete
discussion of natural gas purchase and gathering contracts,
please read Item 7. Managements Discussion and
Analysis of Financial Condition and Results of
Operations Hiland Partners Natural Gas
Purchase and Gathering Contracts.
Markets for Sale of Natural Gas and NGLs.
The
Woodford Shale gathering system has numerous market outlets for
the residue natural gas and NGLs that Hiland Partners produce on
the system. The residue gas can be sold at the tailgate of three
different processing plants and can be delivered to Enogex, Inc.
or CenterPoint Energy Gas Transmission Company. The third
parties processors providing processing services on behalf of
the Partnership downstream of the Woodford Shale system can
reject ethane or elect not to process natural gas.
Hiland Partners primary purchasers of residue gas and NGLs
on the Woodford Shale gathering system were OGE Energy Corp (and
affiliates), Tenaska Marketing Ventures, Devon Gas Services,
L.P. and ConocoPhillips Company, which represented approximately
24%, 20%, 14% and 10%, respectively, of the revenues from such
sales for the year ended December 31, 2008.
Matli
Gathering System
General.
The Matli Gathering System is located
in central Oklahoma and consists of approximately 58 miles
of natural gas gathering pipelines, ranging from three inches to
twelve inches in diameter, the Matli processing plant, a natural
gas treating facility and three compressor stations, all
totaling approximately 9,450 horsepower. The gathering system
has a capacity of approximately 25,000 Mcf/d, and average
throughput was approximately 15,627 Mcf/d for the year
ended December 31, 2008.
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Hiland Partners commenced operation of the Matli gathering
system in 1999. During the fourth quarter of 2006, Hiland
Partners completed the construction of a 25,000 Mcf/d
natural gas processing facility along Hiland Partners
existing gas gathering system, which replaced its
10,000 Mcf/d processing facility it had constructed in
2003. The Matli processing plant processes natural gas on the
Matli gathering system to produce residue gas and NGLs. The
natural gas gathered in this system must be processed in order
to meet pipeline quality specifications. The current plant has
processing capacity of approximately 25,000 Mcf/d. During
the year ended December 31, 2008, the facilities processed
approximately 15,627 Mcf/d of natural gas and produced
approximately 343 Bbls/d of NGLs. The 10,000 Mcf/d
natural gas processing facility constructed in 2003 is currently
idle.
The Matli gathering system includes a natural gas treating
facility that uses a liquid chemical to remove hydrogen sulfide
from natural gas that is gathered into Hiland Partners
system before the natural gas is introduced to transportation
pipelines to ensure it meets pipeline quality specifications.
The throughput capacity on Hiland Partners Matli treating
facility is approximately 20,000 Mcf/d. During the year
ended December 31, 2008, the facility treated approximately
11,336 Mcf/d of natural gas.
Natural Gas Supply.
As of December 31,
2008, 57 receipt points were connected to Hiland Partners
Matli gathering system. The wells behind these receipt points
are located in the Anadarko Basin of northcentral Oklahoma and
produce natural gas from the Morrow and Springer formations. The
primary suppliers of natural gas to the Matli gathering system
are CLR and Range Resources Corporation, which represented
approximately 62% and 23%, respectively, of the Matli gathering
systems natural gas supply for the year ended
December 31, 2008.
The natural gas supplied to the Matli gathering system is
generally dedicated to Hiland Partners under individually
negotiated long-term contracts. The initial term of such
agreements is generally from life of lease to five years.
Following the initial term, these contracts usually continue on
a
year-to-year
basis, unless terminated by one of the parties. Natural gas is
purchased at the wellhead from the producers under
index-minus-fees contract arrangements. For a more complete
discussion of natural gas purchase and gathering contracts,
please read Item 7. Managements Discussion and
Analysis of Financial Condition and Results of
Operations Hiland Partners Natural Gas
Purchase and Gathering Contracts.
Markets for Sale of Natural Gas and
NGLs.
Residue gas resulting from Hiland
Partners processing operations is sold at the tailgate of
the plant on the ONEOK Gas Transportation, L.L.C. intrastate
pipeline. As part of Hiland Partners expansion project
completed in late 2006, it converted an existing natural gas
pipeline into a NGL pipeline and now transport NGLs to a ONEOK
Hydrocarbon, L.P. pipeline.
Hiland Partners primary purchasers of residue gas and NGLs
on the Matli gathering system were ONEOK Hydrocarbon, L.P., OGE
Energy Resources, ConocoPhillips Company and BP Energy Company,
which represented approximately 25%, 25%, 17 and 14%,
respectively, of the revenues from such sales for the year ended
December 31, 2008.
Worland
Gathering System
General.
The Worland gathering system is
located in central Wyoming and consists of approximately
153 miles of natural gas gathering pipelines, ranging from
two inches to eight inches in diameter, the Worland processing
plant, a natural gas treating facility and a fractionation
facility. The gathering system has a capacity of approximately
8,000 Mcf/d, and average throughput was approximately
2,603 Mcf/d for the year ended December 31, 2008.
There are seven compressor stations located within the gathering
system. The plant and compressor stations have approximately
5,700 horsepower installed.
The Worland gathering system and the Worland processing plant
were contributed to Hiland Partners on February 15, 2005 in
connection with Hiland Partners formation and its initial
public offering. This gathering system, including the Worland
processing plant, was originally built in the mid 1980s. A
substantial portion of the equipment on the Worland gathering
system, including portions of the Worland processing plant and
the fractionation facility, was replaced in 1997.
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The Worland processing plant processes natural gas that flows
through the Worland gathering system to produce residue gas and
NGLs. The natural gas gathered in this system is rich gas that
must be processed in order to meet pipeline quality
specifications. The plant has processing capacity of
approximately 8,000 Mcf/d. During the year ended
December 31, 2008, the facility processed approximately
2,603 Mcf/d of natural gas and produced approximately
157 Bbls/d of NGLs.
The Worland gathering system includes a natural gas amine
treating facility that removes carbon dioxide and hydrogen
sulfide from natural gas that is gathered into Hiland
Partners system before the natural gas is introduced to
transportation pipelines to ensure that it meets pipeline
quality specifications. Generally, the natural gas gathered in
this system contains a high concentration of hydrogen sulfide, a
highly toxic and corrosive chemical that must be removed prior
to transporting the gas via pipeline.
The Worland gathering system also includes a fractionation
facility that separates NGLs into propane and a mixture of
butane and natural gasoline. The fractionation facility has a
capacity to fractionate approximately 650 Bbls/d of NGLs.
For the year ended December 31, 2008, the facility
fractionated an average of 260 Bbls/d.
Natural Gas Supply.
As of December 31,
2008, 24 receipt points were connected to Hiland Partners
Worland gathering system. The wells behind these receipt points
are located in the Bighorn Basin of central Wyoming and produce
crude oil primarily from the Frontier formation. The associated
natural gas produced from these wells flows through Hiland
Partners Worland gathering system. The primary suppliers
of natural gas to the Worland gathering system are CLR and Saga
Petroleum Corp., which represented approximately 50% and 43%,
respectively, of the Worland gathering systems natural gas
supply for the year ended December 31, 2008.
The natural gas supplied to the Worland gathering system is
generally dedicated to Hiland Partners under individually
negotiated long-term contracts. Following the initial term of
the contracts, they generally continue on a year to year basis,
unless terminated by one of the producers. Natural gas is
purchased at the wellhead from the producers under
percentage-of-index
contracts,
percentage-of-proceeds
contracts and index-minus-fees contracts. For the year ended
December 31, 2008, approximately 67%, 29% and 4% of Hiland
Partners total system inlet wellhead volumes at the
Worland gathering system was derived from
percentage-of-index
contracts,
percentage-of-proceeds
contracts and index-minus-fees contracts, respectively. For a
more complete discussion of natural gas purchase and gathering
contracts, please read Item 7. Managements
Discussion and Analysis of Financial Condition and Results of
Operations Hiland Partners Natural Gas
Purchase and Gathering Contracts.
Markets for Sale of Natural Gas and
NGLs.
Residue gas derived from Hiland
Partners processing operations is sold at the tailgate of
the Worland processing plant on the Williston Basin Interstate
Pipeline to third parties. Hiland Partners sells the NGLs to KM
Upstream LLC and Kinder Morgan Operating, L.P. A,
subsidiaries of Kinder Morgan Energy Partners, LP, at the
tailgate of the plant.
Hiland Partners primary purchasers of residue gas and NGLs
on the Worland gathering system were Rainbow Gas Company, KM
Upstream LLC and Kinder Morgan Operating, L.P. A,
subsidiaries of Kinder Morgan Energy Partners, LP, and CLR,
which represented approximately 43%, 41% and 16%, respectively,
of revenues from such sales on the Worland gathering system for
the year ended December 31, 2008.
Other
Systems
In addition to the midstream assets described above, Hiland
Partners owns two gathering systems located in Texas and
Mississippi and a gathering pipeline system in Oklahoma. These
assets do not provide Hiland Partners with material cash flows
and consist of the following:
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Driscoll Gathering System.
Hiland
Partners Driscoll gathering system is located in south
Texas and consists of approximately 4 miles of natural gas
gathering pipeline and a compressor station.
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Stovall Gathering System.
Hiland
Partners Stovall gathering system is located in northern
Mississippi and consists of approximately 8 miles of
natural gas gathering pipeline and a compressor station.
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Enid Gathering Pipeline System.
Hiland
Partners Enid gathering pipeline system is located in
northern Oklahoma and consists of approximately 5 miles of
pipeline.
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North
Dakota Bakken Gathering System
Hiland Partners North Dakota Bakken gathering system
presently consists of a
23-mile
gathering system located in northwestern North Dakota that will
gather natural gas associated with crude oil produced from the
Bakken shale and Three Forks/Sanish formations. The gathering
system, associated compression and treating facilities and a
processing plant are currently under construction with an
expected start up in the second quarter of 2009. Construction of
the processing plant and gathering system commenced in October
2008. As of December 31, 2008, Hiland Partners has invested
approximately $9.2 million in the project.
Compression
Assets
Hiland Partners provides air and water compression services to
CLR for use in its oil and gas secondary recovery operations
under a four-year, monthly fixed-fee contract (which Hiland
Partners entered into in connection with its initial public
offering) that expired on January 28, 2009 and now
automatically renews for additional one-month terms at its Cedar
Hills compression facility, its Horse Creek compression facility
and its water injection plant located next to its Cedar Hills
compression facility. Hiland Partners completed construction of
its Cedar Hills compression facility and acquired the Horse
Creek compression facility in 2002. The Horse Creek compression
facility is comprised of two units with an aggregate of
approximately 5,300 horsepower. The Cedar Hills compression
facility is comprised of ten units with an aggregate of
approximately 40,000 horsepower. Hiland Partners water
injection plant has six pumps with a total of
1,800 horsepower.
At the compression facilities, Hiland Partners compresses air to
pressures in excess of 4,000 pounds per square inch. At Hiland
Partners water injection plant, water is produced from
source wells located near the water plant site. Produced water
is run through a filter system to remove impurities and is then
cooled prior to being pumped to pressures in excess of 2,000
pounds per square inch. The air and water are delivered at the
tailgate of Hiland Partners facilities into pipelines
owned by CLR and are ultimately utilized by CLR in its oil and
gas secondary recovery operations. For a description of the
services agreement Hiland Partners entered into with CLR in
connection with its initial public offering, please read
Managements Discussion and Analysis of Financial
Condition and Results of Operations Hiland
Partners Contracts Compression Services
Agreement.
Credit
Risk
Counterparties pursuant to the terms of their contractual
obligations expose Hiland Partners to potential losses as a
result of nonperformance. SemStream, L.P., BP Energy Company,
OGE Energy Resources, Inc. and ONEOK Energy Services Company, LP
were Hiland Partners largest customers for the year ended
December 31, 2008, accounting for approximately 16%, 14%,
11% and 10%, respectively, of Hiland Partners revenues.
Consequently, changes within one or more of these
customers operations have the potential to impact, both
positively and negatively, Hiland Partners credit exposure
and make us subject to risks of loss resulting from nonpayment
or nonperformance by these or any of Hiland Partners
customers. Any material nonpayment or nonperformance by such key
customers could materially and adversely affect Hiland
Partners business, financial condition or results of
operations and reduce Hiland Partners ability to make
distributions to its unitholders. Additionally, Hiland Partners
derives its revenues primarily from customers in the energy
industry. This industry concentration has the potential to
impact Hiland Partners overall exposure to credit risk,
either positively or negatively, in that its customers could be
affected by similar changes in economic, industry or other
conditions, including changing commodities prices. Furthermore,
some of Hiland Partners customers may be highly leveraged
and subject to their own operating and regulatory risks, which
increases the risk that they may default on their obligations to
Hiland Partners. Hiland Partners counterparties to its
commodity based derivative instruments as of December 31,
2008 were BP Energy Company and Bank of Oklahoma, N.A. Hiland
Partners counterparty to its interest rate swap is Wells
Fargo Bank, N.A.
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Competition
The natural gas gathering, treating, processing and marketing
industries are highly competitive. Hiland Partners faces strong
competition in acquiring new natural gas supplies. Hiland
Partners competitors include other natural gas gatherers
that gather, compress, treat, process and market natural gas.
Competition for natural gas supplies is primarily based on the
reputation, efficiency, flexibility and reliability of the
gatherer, the pricing arrangements offered by the gatherer and
the location of the gatherers pipeline facilities. Hiland
Partners provides flexible services to natural gas producers,
including natural gas gathering, compression, dehydrating,
treating and processing. Hiland Partners believes its ability to
furnish these services gives it an advantage in competing for
new supplies of natural gas because Hiland Partners can provide
the services that producers, marketers and others require to
connect their natural gas quickly and efficiently. In addition,
using centralized treating and processing facilities, Hiland
Partners can in most cases attract producers that require these
services and at a lower initial capital cost. For natural gas
that exceeds the maximum contaminant levels and NGL
specifications for interconnecting natural gas pipelines and
downstream markets, Hiland Partners believe that it offers
treating and other processing services on competitive terms. In
addition, with respect to natural gas suppliers attached to its
pipeline systems, Hiland Partners provides such natural gas
supplies on a flexible basis.
Hiland Partners believes that its producers prefer a midstream
energy company with the flexibility to accept natural gas not
meeting typical industry standard gas quality requirements. The
primary difference between Hiland Partners and its competitors
is that Hiland Partners provides an integrated and responsive
package of midstream services, while most of its competitors
typically offer only a few select services. Hiland Partners
believes that offering an integrated package of services, while
remaining flexible in the types of contractual arrangements that
it offers producers, allows Hiland Partners to compete more
effectively for new natural gas supplies.
Many of Hiland Partners competitors have capital resources
and control supplies of natural gas greater than the supplies
controlled by Hiland Partners. Hiland Partners primary
competitors on the Eagle Chief gathering system are Atlas
Pipeline Partners, Mustang Fuel Corporation, Duke Energy Field
Services and SemGas, L.P. Hiland Partners primary
competitor on the Bakken gathering system and the Badlands
gathering system is Bear Paw Energy, and on the Matli gathering
system, Hiland Partners competitor is Enogex, Inc. Hiland
Partners primary competitors on the Kinta Area gathering
systems are CenterPoint Energy Field Services and Superior
Pipeline Company. Hiland Partners primary competitors on
the Woodford Shale gathering system are MarkWest Energy
Partners, Enogex, Inc., Antero Resources Midstream Corporation
and Copano Energy, L.L.C. Hiland Partners does not have a major
competitor on the Worland gathering system.
Regulation
Regulation by the FERC of Interstate Natural Gas
Pipelines.
Hiland Partners does not own any
interstate natural gas pipelines, so the Federal Energy
Regulatory Commission, or the FERC, does not directly regulate
any of Hiland Partners operations. However, the
FERCs regulation influences certain aspects of Hiland
Partners business and the market for its products and
services. In general, the FERC has authority over natural gas
companies that provide natural gas pipeline transportation
services in interstate commerce, and its authority to regulate
those services includes:
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the certification and construction of new facilities;
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the extension or abandonment of services and facilities;
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the maintenance of accounts and records;
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the acquisition and disposition of facilities;
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the initiation and discontinuation of services; and
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various other matters.
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In recent years, the FERC has pursued pro-competitive policies
in its regulation of interstate natural gas pipelines. However,
Hiland Partners can provide no assurance that the FERC will
continue this approach as it considers matters such as pipeline
rates and rules and policies that may affect rights of access to
natural gas transportation capacity.
Regulation of Intrastate Natural Gas Transportation
Pipelines.
Hiland Partners does not own any
pipelines that provide intrastate natural gas transportation, so
state regulation of non-gathering pipeline transportation does
not directly affect its operations. As with FERC regulation
described above, however, state regulation of pipeline
transportation may influence certain aspects of Hiland
Partners business and the market for its products.
Gathering Pipeline
Regulation.
Section 1(b) of the Natural Gas
Act of 1938, or NGA, exempts natural gas gathering from the
jurisdiction of the FERC. Hiland Partners owns a number of
natural gas pipelines that it believes would meet the
traditional tests the FERC has used to establish a
pipelines status as a gatherer not subject to the FERC
jurisdiction. However, there is no bright-line distinction
between FERC-regulated natural gas transportation services and
federally unregulated gathering services. Moreover, this
distinction is the subject of regular litigation. Thus, the
classification and regulation of some of Hiland Partners
gathering facilities may be subject to change based on future
determinations by the FERC and the courts.
In the states in which Hiland Partners operates, regulation of
gathering facilities generally includes various safety,
environmental and, in some circumstances, nondiscriminatory take
requirement and complaint-based rate regulation. For example,
Hiland Partners is subject to state ratable take and common
purchaser statutes. Ratable take statutes generally require
gatherers to take, without undue discrimination, natural gas
production that may be tendered to the gatherer for handling. In
certain circumstances, such laws will apply even to gatherers
like Hiland Partners that do not provide third party, fee-based
gathering service and may require Hiland Partners to provide
such third party service at a regulated rate. Similarly, common
purchaser statutes generally require gatherers to purchase
without undue discrimination as to source of supply or producer.
These statutes are designed to prohibit discrimination in favor
of one producer over another producer or one source of supply
over another source of supply. These statutes have the effect of
restricting Hiland Partners right as an owner of gathering
facilities to decide with whom it will contract to purchase or
gather natural gas.
Natural gas gathering may receive greater regulatory scrutiny at
both the state and federal levels now that the FERC has taken a
less stringent approach to regulation of the gathering
activities of interstate pipeline transmission companies and a
number of such companies have transferred gathering facilities
to unregulated affiliates.
Hiland Partners gathering operations could be adversely
affected should they be subject in the future to the application
of state or federal regulation of rates and services. Hiland
Partners gathering operations also may be or become
subject to safety and operational regulations relating to the
design, installation, testing, construction, operation,
replacement and management of gathering facilities. Additional
rules and legislation pertaining to these matters are considered
or adopted from time to time. Hiland Partners cannot predict
what effect, if any, such changes might have on its operations,
but the industry could be required to incur additional capital
expenditures and increased costs depending on future legislative
and regulatory changes.
Sales of Natural Gas, NGLs and Other
Products.
The price at which Hiland Partners buys
and sells natural gas currently is not subject to federal
regulation and, for the most part, is not subject to state
regulation. The price at which Hiland Partners buys and sells
NGLs and other products is not subject to regulation. Hiland
Partners sales of natural gas, NGLs and other products are
affected by the availability, terms and cost of pipeline
transportation. Pipeline rates, terms of access and terms and
conditions of service are subject to extensive federal and state
regulation. The FERC is continually proposing and implementing
new rules and regulations affecting those segments of the
natural gas industry, most notably interstate natural gas
transmission companies that remain subject to the FERCs
jurisdiction. These initiatives also may affect the intrastate
transportation of natural gas under certain circumstances. The
stated purpose of many of these regulatory changes is to promote
competition among the various sectors of the natural gas
industry, and these initiatives generally reflect more
light-handed regulation. Hiland Partners cannot predict the
ultimate impact of
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these regulatory changes to its natural gas marketing
operations. Hiland Partners does not believe that it will be
affected by any such FERC action materially differently than
other natural gas marketers with whom it competes.
Under the Energy Policy Act of 2005, FERC possesses regulatory
oversight over natural gas markets, including the purchase, sale
and transportation activities of non-interstate pipelines and
other natural gas market participants. The Commodity Futures
Trading Commission, or the CFTC, also holds authority to monitor
certain segments of the physical and futures energy commodities
market pursuant to the Commodity Exchange Act. With regard to
physical purchases and sales of natural gas, NGLs and other
products, Hiland Partners gathering services related to
these energy commodities, and any related hedging activities
that it undertakes, Hiland Partners is required to observe these
anti-market manipulation laws and related regulations enforced
by FERC
and/or
the
CFTC. These agencies hold substantial enforcement authority,
including the ability to assess civil penalties of up to
$1 million per day per violation, to order disgorgement of
profits and to recommend criminal penalties. FERC has continued
to impose additional regulations intended to prevent market
manipulation and to promote price transparency. For example, new
FERC rules require wholesale purchasers and sellers of natural
gas to report to FERC certain aggregated volume and other
purchase and sales data for the previous calendar year. Should
Hiland Partners violate the anti-market manipulation laws and
regulations, it could also be subject to related third party
damage claims by, among others, sellers, royalty owners and
taxing authorities.
Environmental
Matters
The operation of pipelines, plants and other facilities for
gathering, compressing, dehydrating, treating, and processing of
natural gas and fractionating NGLs and other products is subject
to stringent and complex laws and regulations pertaining to
health, safety and the environment. As an owner or operator of
these facilities, Hiland Partners must comply with these laws
and regulations at the federal, regional, state and local
levels. These laws and regulations can restrict or impact Hiland
Partners business activities in many ways, such as:
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requiring the acquisition of permits or other approvals to
conduct regulated activities;
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restricting the way Hiland Partners can handle or dispose of its
wastes;
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limiting or prohibiting construction activities in sensitive
areas such as wetlands, coastal regions, or areas inhabited by
endangered species;
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requiring remedial action to mitigate pollution conditions
caused by Hiland Partners operations, or attributable to
former operations; and
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enjoining the operations of facilities deemed in non-compliance
with permits issued pursuant to such environmental laws and
regulations.
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Failure to comply with these laws and regulations may trigger a
variety of administrative, civil and criminal enforcement
measures, including the assessment of monetary penalties, the
imposition of remedial requirements, and the issuance of orders
enjoining future operations. Certain environmental statutes
impose strict and, under certain circumstances, joint and
several liability for costs required to clean up and restore
sites where hazardous substances have been disposed or otherwise
released. Moreover, it is not uncommon for neighboring
landowners and other third parties to file claims for personal
injury and property damage allegedly caused by the release of
substances or other waste products into the environment.
The trend in environmental regulation is to place more
restrictions and limitations on activities that may affect the
environment, and thus there can be no assurance as to the amount
or timing of future expenditures for environmental compliance or
remediation. Actual future expenditures may be different from
the amounts Hiland Partners currently anticipates. Hiland
Partners tries to anticipate future regulatory requirements that
might be imposed and plan accordingly to remain in compliance
with changing environmental laws and regulations and to minimize
the costs of such compliance. While Hiland Partners believe that
they are in substantial compliance with current applicable
federal and state environmental laws and regulations and that
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continued compliance with existing requirements will not have a
material adverse impact on its results of operations or
financial condition, there is no assurance that this trend of
compliance will continue in the future. Moreover, while Hiland
Partners believes that the various environmental activities in
which it is presently engaged will not affect its operational
ability to gather, compress, dehydrate, treat and process
natural gas or fractionate NGLs, Hiland Partners cannot assure
you that future events, such as changes in existing laws, the
promulgation of new laws, or the development or discovery of new
facts or conditions will not cause Hiland Partners to incur
significant costs.
The following is a summary of the more significant existing
environmental laws to which Hiland Partners business operations
is subject and with which compliance may have a material adverse
effect on its capital expenditures, earnings or competitive
position.
Air Emissions.
Hiland Partners
operations are subject to the federal Clean Air Act, as amended
and comparable state laws. These laws regulate emissions of air
pollutants from various industrial sources, including processing
and treatment plants, fractionation facilities and compressor
stations, and also impose various monitoring and reporting
requirements. Such laws may require Hiland Partners to obtain
pre-approval for the construction or modification of certain
projects or facilities expected to produce air emissions or
result in the increase of existing air emissions, obtain and
comply with air permits containing various emissions and
operational limitations, or utilize specific emission control
technologies to limit emissions. Hiland Partners failure
to comply with these requirements could subject it to monetary
penalties, injunctions, conditions or restrictions on
operations, and potentially criminal enforcement actions. Hiland
Partners will be required to incur certain capital expenditures
in the future for air pollution control equipment in connection
with obtaining and maintaining operating permits and approvals
for air emissions. Hiland Partners believes, however, that its
operations will not be materially adversely affected by such
requirements, and the requirements are not expected to be any
more burdensome to Hiland Partners than to other similarly
situated companies.
Hazardous Waste.
Hiland Partners
operations generate wastes, including hazardous wastes that are
subject to the federal Resource Conservation and Recovery Act,
as amended, or RCRA and comparable state laws, which impose
detailed requirements for the handling, storage, treatment and
disposal of hazardous and solid waste. While RCRA currently
excludes from the definition of hazardous waste produced waters
and other wastes associated with the exploration, development,
or production of crude oil and natural gas, these oil and gas
exploration and production wastes may still be regulated under
state law or the less stringent solid waste requirements of
RCRA. Moreover, ordinary industrial wastes such as paint wastes,
waste solvents, laboratory wastes, and waste compressor oils may
be regulated as hazardous waste. The transportation of natural
gas in pipelines may also generate wastes that are subject to
RCRA or comparable state law requirements.
Site Remediation.
The Comprehensive
Environmental Response, Compensation and Liability Act, as
amended, or CERCLA, also known as Superfund, and
comparable state laws impose liability, without regard to fault
or the legality of the original conduct, on certain classes of
persons responsible for the release of hazardous substances into
the environment. Such classes of persons include the current and
past owners or operators of sites where a hazardous substance
was released, and companies that disposed or arranged for
disposal of hazardous substances at offsite locations such as
landfills. Although petroleum as well as natural gas is excluded
from CERCLAs definition of hazardous
substance, in the course of Hiland Partners ordinary
operations Hiland Partners will generate wastes that may fall
within the definition of a hazardous substance.
CERCLA authorizes the Environmental Protection Agency, or EPA
and, in some cases, third parties to take actions in response to
threats to the public health or the environment and to seek to
recover from the responsible classes of persons the costs they
incur. Under CERCLA, Hiland Partners could be subject to joint
and several liability for the costs of cleaning up and restoring
sites where hazardous substances have been released, for damages
to natural resources, and for the costs of certain health
studies.
Hiland Partners currently owns or leases, and in the past have
owned or leased, properties that have been used for natural gas
and NGL gathering, treating, processing, and fractionating
activities for many years. Although Hiland Partners believes
that they have utilized operating and waste disposal practices
that were standard in the industry at the time, hazardous
substances, wastes, or hydrocarbons may have been released on
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or under the properties owned or leased by them, or on or under
other locations where such substances have been taken for
recycling or disposal. In addition, some of Hiland Partners
properties have been operated by third parties whose treatment
and disposal of hazardous substances, wastes, or hydrocarbons
was not under its control. These properties and the substances
disposed or released on them may be subject to CERCLA, RCRA, and
analogous state laws. Under such laws, Hiland Partners could be
required to remove previously disposed hazardous substances,
wastes and hydrocarbons or remediate contaminated property.
Water Discharges.
Hiland Partners
operations are subject to the Federal Water Pollution Control
Act, as amended, also known as the Clean Water Act, and
analogous state laws. These laws impose detailed requirements
and strict controls regarding the discharge of pollutants into
state waters and waters of the United States. The unpermitted
discharge of pollutants, including discharges resulting from a
spill or leak incident, is prohibited by the
U.S. Environmental Protection Agency, or EPA, or analogous
state agencies. The Clean Water Act and regulations implemented
thereunder also prohibit discharges of dredged and fill material
into wetlands and other waters of the United States unless
authorized by an appropriately issued permit. Any unpermitted
release of pollutants from pipelines or facilities could result
in administrative civil and criminal penalties as well as
significant remedial obligations.
Global Warming and Climate Change.
In response
to public concerns suggesting that emissions of certain gases,
referred to as greenhouse gases and including carbon
dioxide and methane, may be contributing to warming of the
Earths atmosphere, President Obama has expressed support
for, and it is anticipated that the current session of the
U.S. Congress will consider climate change-related
legislation to reduce greenhouse gas emissions. In addition, at
least one-third of the states, either individually or through
multistate regional initiatives, already have taken legal
measures to reduce emissions of greenhouse gases, primarily
through the planned development of greenhouse gas emission
inventories
and/or
greenhouse gas cap and trade programs. As an alternative to
reducing emissions of greenhouse gases under cap and trade
programs, the Congress may consider the implementation of a
program to tax the emission of carbon dioxide and other
greenhouse gases. The cap and trade programs could require major
sources of emissions, such as electric power plants, or major
producers of fuels, such as refineries or gas processing plants,
to acquire and surrender emission allowances. Depending on the
particular cap and trade program, Hiland Partners could be
required to purchase and surrender allowances, either for
greenhouse gas emissions resulting from its operations (e.g.,
compressor stations) or from combustion of fuels (
e.g.
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natural gas or NGLs) it processes. Similarly, depending on the
design and implementation of a program to tax emissions or
greenhouse gases, Hiland Partners operations could face
additional taxes and higher cost of doing business. Although
Hiland Partners would not be impacted to a greater degree than
other similarly situated gatherers and processors of natural gas
or NGLs, a stringent greenhouse gas control or taxing program
could have an adverse effect on its cost of doing business and
could reduce demand for the natural gas and NGLs it gathers and
processes.
Also, as a result of the U.S. Supreme Courts decision
in 2007 in
Massachusetts, et al. v. EPA
, the EPA may
regulate carbon dioxide and other greenhouse gas emissions from
mobile sources such as cars and trucks, even if Congress does
not adopt new legislation specifically addressing emissions of
greenhouse gases. The Courts holding in
Massachusetts
that greenhouse gases including carbon dioxide fall under
the federal Clean Air Acts definition of air
pollutant may also result in future regulation of carbon
dioxide and other greenhouse gas emissions from stationary
sources under certain Clean Air Act programs. In July 2008, EPA
released an Advance Notice of Proposed Rulemaking
regarding possible future regulation of greenhouse gas emissions
under the Clean Air Act, in response to the Supreme Courts
decision in
Massachusetts.
In the notice, EPA evaluated
the potential regulation of greenhouse gases under the Clean Air
Act and other potential methods of regulating greenhouse gases.
Although the notice did not propose any specific, new regulatory
requirements for greenhouse gases, it indicates that federal
regulation of greenhouse gas emissions could occur in the near
future even if Congress does not adopt new legislation
specifically addressing emissions of greenhouse gases. Although
it is not possible at this time to predict how legislation or
new regulations that may be adopted to address greenhouse gas
emissions would impact Hiland Partners business, any such
new federal, regional or state restrictions on or taxing of
emissions of carbon dioxide in areas of the United States in
which Hiland Partners conducts business could adversely affect
its cost of doing business and demand for the natural gas and
NGLs it gathers and processes.
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Pipeline Safety.
Some of Hiland Partners
pipelines are subject to regulation by the U.S. Department
of Transportation, or the DOT, under the Natural Gas Pipeline
Safety Act of 1968, as amended, or the NGPSA, pursuant to which
the DOT has established requirements relating to the design,
installation, testing, construction, operation, replacement and
management of pipeline facilities. The NGPSA covers the pipeline
transportation of natural gas and other gases, and the
transportation and storage of liquefied natural gas and requires
any entity that owns or operates pipeline facilities to comply
with the regulations under the NGPSA, to permit access to and
allow copying of records and to make certain reports and provide
information as required by the Secretary of Transportation.
Hiland Partners believes its natural gas pipeline operations are
in substantial compliance with applicable NGPSA requirements;
however, due to the possibility of new or amended laws and
regulations or reinterpretation of existing laws and
regulations, future compliance with the NGPSA could result in
increased costs that, at this time, cannot reasonably be
quantified.
The DOT, through the Pipeline and Hazardous Materials Safety
Administration, adopted regulations to implement the Pipeline
Safety Improvement Act of 2002, as amended by the Pipeline
Inspection, Protection, Enforcement and Safety Act of 2006,
which requires pipeline operators to, among other things,
develop integrity management programs for gas transmission
pipelines that, in the event of a failure, could affect
high consequence areas. High consequence
areas are defined as areas with specified population
densities, buildings containing populations of limited mobility,
and areas where people gather that are located along the route
of a pipeline. States in which Hiland Partners operates have
adopted similar regulations applicable to intrastate gathering
and transmission lines. Hiland Partners pipeline systems
are largely excluded from these regulations and are not
generally situated within areas that would be designated
high consequence. Therefore, compliance with these
regulations has not had a significant impact on Hiland
Partners operations.
Employee Health and Safety.
Hiland Partners is
subject to the requirements of the Occupational Safety and
Health Act, or OSHA, and comparable state laws that regulate the
protection of the health and safety of workers. In addition, the
OSHA hazard communication standard requires that information be
maintained about hazardous materials used or produced in Hiland
Partners operations and that this information be provided
to employees, state and local government authorities and
citizens.
Hydrogen Sulfide.
Exposure to gas containing
high levels of hydrogen sulfide, referred to as sour gas, is
harmful to humans, and exposure can result in death. The gas
handled at Hiland Partners Worland gathering system
contains high levels of hydrogen sulfide, and Hiland Partners
employs numerous safety precautions at the system to ensure the
safety of its employees. There are various federal and state
environmental and safety requirements for handling sour gas, and
Hiland Partners is in substantial compliance with all such
requirements.
Anti-Terrorism Measures.
The federal
Department of Homeland Security Appropriations Act of 2007
required the Department of Homeland Security, or DHS, to issue
regulations establishing risk-based performance standards for
the security of chemical and industrial facilities, including
oil and gas facilities that are deemed to present high
levels of security risk. The DHS issued an interim final
rule in April 2007 regarding risk-based performance standards to
be attained pursuant to the act and, on November 20, 2007,
further issued an Appendix A to the interim rule that
established chemicals of interest and their respective threshold
quantities that will trigger compliance with the interim rule.
Facilities possessing greater than threshold levels of these
chemicals of interest were required to prepare and submit to the
DHS in January 2008 initial screening surveys that the agency
would use to determine whether the facilities presented a high
level of security risk. Covered facilities that are determined
by DHS to pose a high level of security risk will be notified by
DHS and will be required to prepare and submit Security
Vulnerability Assessments and Site Security Plans as well as
comply with other regulatory requirements, including those
regarding inspections, audits, recordkeeping, and protection of
chemical-terrorism vulnerability information. In January 2008,
Hiland Partners prepared and submitted to the DHS initial
screening surveys five certain facilities operated by them that
possess regulated chemicals of interest in excess of the
Appendix A threshold levels. In June 2008, the DHS advised
Hiland Partners that these five facilities were determined by
the agency not to present high levels of security risk and thus
did not require further assessment under the interim rules.
22
Title to
Properties
Substantially all of Hiland Partners pipelines are
constructed on
rights-of-way
granted by the apparent record owners of the property. Lands
over which pipeline
rights-of-way
have been obtained may be subject to prior liens that have not
been subordinated to the
right-of-way
grants. Hiland Partners has obtained, where necessary, license
or permit agreements from public authorities and railroad
companies to cross over or under, or to lay facilities in or
along, waterways, county roads, municipal streets, railroad
properties and state highways, as applicable. In some cases,
property on which pipelines were built was purchased in fee.
Some Hiland Partners leases, easements,
rights-of-way,
permits, licenses and franchise ordinances require the consent
of the current landowner to transfer these rights, which in some
instances is a governmental entity. Hiland Partners believes
that it has obtained or will obtain sufficient third party
consents, permits and authorizations for the transfer of the
assets necessary for it to operate its business in all material
respects. With respect to any consents, permits or
authorizations that have not been obtained, Hiland Partners
believes that these consents, permits or authorizations will be
obtained reasonably soon, or that the failure to obtain these
consents, permits or authorizations will have no material
adverse effect on the operation of its business.
Hiland Partners leases the majority of the surface land on which
its gathering systems operate. With respect to Hiland
Partners Bakken gathering system, Hiland Partners owns the
land on which the processing plant is located and the land on
which the three compressor stations are located. With respect to
Hiland Partners Badlands gathering system, Hiland Partners
owns the land on which the Badlands processing plant is located
and leases the land on which the seven compressor sites are
located. With respect to Hiland Partners Eagle Chief
gathering system, Hiland Partners leases the surface land on
which the Eagle Chief processing plant, seven of the eight
compressor stations, a produced water dumping station and the
three pumping stations are located. Hiland Partners leases the
surface lands on which twelve of the thirteen Kinta Area
compressors are located. At Hiland Partners Woodford Shale
gathering system, Hiland Partners owns the land on which one
compressor station is located and leases the surface land on
three compressor station locations. Hiland Partners leases the
surface lands on which its Matli processing plant and three
compressor stations are located and at Hiland Partners
Worland gathering system, Hiland Partners leases the surface
land on which the Worland processing plant and the seven
compressor stations are located. Hiland Partners owns the land
on which the North Dakota Bakken processing plant is being
constructed.
Hiland Partners believes that it holds satisfactory title to all
of its assets. Record title to some of Hiland Partners
assets may continue to be held by its affiliates until Hiland
Partners has made the appropriate filings in the jurisdictions
in which such assets are located and obtained any consents and
approvals that are not obtained prior to transfer. Title to
property may be subject to encumbrances. Hiland Partners
believes that none of these encumbrances will materially detract
from the value of its properties or from its interest in these
properties, nor will they materially interfere with the use of
these properties in the operation of Hiland Partners
business.
Hiland Partners believes that it either owns in fee or holds
leases, easements,
rights-of-way
or licenses and has obtained the necessary consents, permits and
franchise ordinances to conduct its operations in all material
respects.
Office
Facilities
We occupy approximately 12,358 square feet of space at our
executive offices in Enid, Oklahoma, under leases expiring
April 30, 2011. While we may require additional office
space as our business expands, we believe that our existing
facilities are adequate to meet our needs for the immediate
future and that additional facilities will be available on
commercially reasonable terms as needed.
Employees
We have no employees. Prior to September 25, 2006, all of
Hiland Partners employees were employees of Hiland
Partners GP, LLC, its general partner. On September 25,
2006, concurrent with our initial public offering, Hiland
Partners GP Holdings, LLC, our general partner became the
employer of all employees. As of
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December 31, 2008, Hiland Partners GP Holdings, LLC had
121 full-time employees who provide services to us and
Hiland Partners. We are not a party to any collective bargaining
agreements, and we have not had any significant labor disputes
in the past. We believe we have good relations with the
employees of Hiland Partners GP Holdings, LLC.
Address,
Internet Web site and Availability of Public Filings
We maintain our principal corporate offices at 205 West
Maple, Suite 1100 Enid, Oklahoma 73701. Our telephone
number is
(580) 242-6040.
Our Internet address is
www.hilandpartners.com.
We make
the following information available free of charge on our
Internet Web site:
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Annual Report on
Form 10-K;
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Quarterly Reports on
Form 10-Q;
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Current Reports on
Form 8-K;
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Amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of
1934;
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Charters for our Audit, Conflicts, and Compensation Committees;
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Code of Business Conduct and Ethics;
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Code of Ethics for Chief Executive Officer and Senior Financial
Officers; and
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Environmental, Health and Safety Policy Statements.
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We make our SEC filings available on our Web site as soon as
reasonably practicable after we electronically file such
material with, or furnish such material to, the SEC. The above
information is available in print to anyone who requests it.
24
Limited partner interests are inherently different from
capital stock of a corporation, although many of the business
risks to which we are subject are similar to those that would be
faced by a corporation engaged in a similar business. The
following risks could materially and adversely affect our
business, the business of Hiland Partners, our financial
condition or results of operations. In that case, the amount of
the distributions on our common units could be materially and
adversely affected, and the trading price of our common units
could decline.
Risks
Inherent in an Investment in Us
Our
only cash-generating assets are our 2% general partner interest,
all of the incentive distribution rights and a 57.4% limited
partner interest in Hiland Partners. Our cash flow and our
ability to make distributions are therefore completely dependent
upon the ability of Hiland Partners to make cash distributions
to its partners, including us.
The amount of cash that Hiland Partners can distribute to its
partners each quarter, including us, principally depends upon
the amount of cash it generates from its operations, which will
fluctuate from quarter to quarter based on several factors, some
of which are beyond Hiland Partners control, including:
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the amount of natural gas gathered on Hiland Partners
pipelines;
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the throughput volumes at Hiland Partners processing,
treating and fractionation plants;
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the price of natural gas and crude oil;
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the price of NGLs;
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the relationship between natural gas and NGL prices;
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the level of Hiland Partners operating costs;
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the weather in Hiland Partners operating areas;
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the level of competition from other midstream energy companies;
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the fees Hiland Partners charges and the margins Hiland Partners
realizes for its services; and
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our continued success in our operation and management of Hiland
Partners through our ownership of its general partner.
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In addition, the actual amount of cash Hiland Partners will have
available for distribution will depend on other factors, some of
which are beyond its control, including:
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the level of capital expenditures it makes;
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the availability, if any, and cost of acquisitions;
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debt service requirements;
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the ability to access capital markets and borrow money
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fluctuations in working capital needs;
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restrictions on distributions contained in Hiland Partners
credit facility;
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Hiland Partners ability to make working capital borrowings
under its credit facility to pay distributions;
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prevailing economic conditions; and
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the amount, if any, of cash reserves established by the board of
directors of Hiland Partners general partner in its sole
discretion for the proper conduct of Hiland Partners
business.
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Because of these factors, Hiland Partners may not have
sufficient available cash each quarter to pay distributions at
the current level, or any other amount. You should also be aware
that the amount of cash that Hiland Partners has available for
distribution depends primarily upon its cash flow, including
cash flow from financial reserves and working capital
borrowings, and is not solely a function of profitability, which
will be affected by non-cash items. As a result, Hiland Partners
may be able to make cash distributions during periods when
Hiland Partners records losses and may not be able to make cash
distributions during periods when Hiland Partners records net
income, which could adversely affect our ability to pay
distributions on our common units.
If we
are presented with certain business opportunities, Hiland
Partners will have the first right to pursue such opportunities.
As a result, any expansion of our operations beyond our current
ownership interests in Hiland Partners will require us to engage
in activities falling outside the purview of the non-competition
agreement and in which we may have little or no operational
experience.
We are party to a non-competition agreement with Hiland Partners
and its general partner pursuant to which we and our general
partner will not engage in (subject to certain exceptions),
whether by acquisition, construction, investment in debt or
equity interests of any person or otherwise, the business of
gathering, treating, processing and transportation of natural
gas in North America, the transportation and fractionation of
NGLs in North America and constructing, buying or selling any
assets related to the foregoing businesses other than through
our interests in Hiland Partners. These non-competition
obligations will not terminate unless we no longer control
Hiland Partners. If an acquisition opportunity in respect of any
of the above businesses is presented to us, then we must notify
Hiland Partners of such opportunity and Hiland Partners will
have the first right to acquire such assets. If we desire to
construct assets related to the foregoing businesses, we must
first offer to sell those assets to Hiland Partners at our
actual construction costs. As a result, any expansion of our
operations beyond our current ownership interests in Hiland
Partners will require us to engage in activities falling outside
the purview of the non-competition agreement and in which we may
have little or no operational experience.
A
substantial portion of our partnership interests in Hiland
Partners are subordinated to Hiland Partners common units,
which would result in decreased distributions to us if Hiland
Partners is unable to meet its minimum quarterly
distribution.
We own, directly or indirectly, 5,381,471 units
representing limited partner interests in Hiland Partners, of
which approximately 75.8% are subordinated units and 24.2% are
common units. During the subordination period, the subordinated
units will not receive any distributions in a quarter until
Hiland Partners has paid the minimum quarterly distribution of
$0.45 per unit, plus any arrearages in the payment of the
minimum quarterly distribution from prior quarters, on all of
the outstanding Hiland Partners common units. Distributions on
the subordinated units are therefore more uncertain than
distributions on Hiland Partners common units.
Furthermore, no distributions may be made on the incentive
distribution rights until the minimum quarterly distribution has
been paid on all outstanding Hiland Partners units. Therefore,
distributions with respect to the incentive distribution rights
are even more uncertain than distributions on the subordinated
units. Neither the subordinated units nor the incentive
distribution rights are entitled to any arrearages from prior
quarters. Generally, the subordination period ends, and the
subordinated units convert into common units of Hiland Partners,
only after March 31, 2010 and only upon the satisfaction of
certain financial tests.
Hiland
Partners general partner, with our consent, may limit or
modify the incentive distributions we are entitled to receive in
order to facilitate Hiland Partners growth strategy
without the consent of our unitholders. If these distributions
were reduced, the total amount of cash distributions we would
receive from Hiland Partners, and therefore the amount of cash
distributions we could pay to our unitholders, would be
reduced.
We indirectly own the incentive distribution rights in Hiland
Partners that entitle us to receive increasing percentages, up
to a maximum of 48%, of any cash distributed by Hiland Partners
as certain target distribution levels are reached in excess of
$0.495 per Hiland Partners unit in any quarter. A substantial
portion of the cash
26
flow we receive from Hiland Partners is provided by these
incentive distribution rights. The board of directors of Hiland
Partners general partner may reduce the level of the
incentive distribution rights payable to us with our consent,
which we may provide without the approval of our unitholders if
our general partner determines that such reduction does not
adversely affect our limited partners in any material respect.
For example, the board of directors of Hiland Partners may elect
to limit the incentive distribution we are entitled to receive
with respect to a particular acquisition or unit issuance by
Hiland Partners. This situation could arise if a potential
acquisition might not be accretive to Hiland Partners
unitholders if a significant portion of that acquisitions
cash flows would be paid as incentive distributions to us. By
limiting the level of incentive distributions in connection with
a particular acquisition or issuance of Hiland Partners
units, the cash flows associated with such acquisition could be
accretive to Hiland Partners unitholders as well as
substantially beneficial to us. Prior to approving such a
reduction, the board of directors of Hiland Partners
general partner would be required to consider its fiduciary
obligations to Hiland Partners common unitholders as well
as to us. Our partnership agreement specifically permits our
general partner to authorize the general partner of Hiland
Partners to limit or modify the incentive distribution rights
held by us if our general partner determines that such reduction
does not adversely affect our limited partners in any material
respect. These reductions may be permanent reductions in the
incentive distribution rights or may be reductions with respect
to cash flows from the potential acquisition. If these
distributions were reduced, the total amount of cash
distributions we would receive from Hiland Partners, and
therefore the amount of cash distributions we could pay to our
unitholders, would be reduced.
A
reduction in Hiland Partners distributions will
disproportionately affect the amount of cash distributions to
which we are currently entitled.
Our ownership of the incentive distribution rights in Hiland
Partners entitles us to receive our pro rata share of specified
percentages of total cash distributions made by Hiland Partners
with respect to any particular quarter only in the event that
Hiland Partners distributes more than $0.495 per Hiland Partners
unit for such quarter. As a result, the holders of Hiland
Partners common units have a priority over the holders of
Hiland Partners incentive distribution rights to the
extent of cash distributions by Hiland Partners up to and
including $0.45 per unit for any quarter. Our incentive
distribution rights entitle us to receive increasing
percentages, up to 48%, of all cash distributed by Hiland
Partners. The distribution of $0.45 per limited partner unit
declared by Hiland Partners for the quarter ended
December 31, 2008 entitles us to receive the minimum
quarterly distribution in respect to our 2,321,471 common units
and 3,060,000 subordinated units. At the current distribution
rate, we are not entitled to incentive distributions.
Our
ability to meet our financial needs may be adversely affected by
our cash distribution policy and our lack of operational
assets.
Our partnership agreement requires us to distribute all of our
available cash quarterly. Our only cash generating assets are
our direct and indirect ownership interests in Hiland Partners,
and we currently have no independent operations separate from
those of Hiland Partners. Moreover, as discussed above, a
reduction in Hiland Partners distributions will
disproportionately affect the amount of cash distributions we
receive. Given that our cash distribution policy is to
distribute available cash and not retain it and that our only
cash generating assets are direct and indirect ownership
interests in Hiland Partners, we may not have enough cash to
meet our needs if any of the following events occur:
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an increase in general and administrative expenses;
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an increase in principal and interest payments on our
outstanding debt; or
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an increase in cash needs of Hiland Partners or its subsidiaries
that reduces Hiland Partners distributions.
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The occurrence of any of these events would reduce our available
cash and adversely affect our ability to make cash distributions
to our unitholders.
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Our
rate of growth may be reduced to the extent we purchase
additional units from Hiland Partners, which will reduce the
percentage of the cash we receive from the incentive
distribution rights.
Our business strategy includes supporting the growth of Hiland
Partners through the use of our capital resources, including
purchasing Hiland Partners units or lending funds to Hiland
Partners to provide funding for the acquisition of a business or
an asset or for an internal growth project. To the extent we
purchase common or subordinated units or securities not entitled
to a current distribution from Hiland Partners, the rate of our
distribution growth may be reduced, at least in the short term,
as less of our cash distributions will come from our ownership
of Hiland Partners incentive distribution rights, whose
distributions increase at a faster rate than those of our other
securities.
Our
unitholders do not elect our general partner or vote on our
general partners directors, and affiliates of our general
partner own a sufficient number of our common units to allow
them to block any attempt to remove our general partner. As a
result of these provisions, the price at which our common units
will trade may be lower because of the absence or reduction of a
takeover premium in the trading price.
Unlike the holders of common stock in a corporation, our
unitholders have only limited voting rights on matters affecting
our business and, therefore, limited ability to influence
managements decisions regarding our business. Our
unitholders did not elect our general partner or the directors
of our general partner and will have no right to elect our
general partner or the directors of our general partner on an
annual or other continuing basis in the future. Furthermore, if
our unitholders are dissatisfied with the performance of our
general partner, they will have little ability to remove our
general partner. Our general partner cannot be removed except
upon the vote of the holders of at least
66
2
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3
%
of the outstanding units voting together as a single class.
Affiliates of our general partner own 60.6% of our common units.
This ownership level will enable our general partner and its
affiliates to prevent our general partners involuntary
removal. Our unitholders voting rights are further
restricted by the provision in our partnership agreement stating
that any units held by a person that owns 20% or more of any
class of units then outstanding, other than our general partner,
its affiliates, their transferees and persons who acquired such
units with the prior approval of the board of directors of the
general partner, cannot be voted on any matter. In addition, our
partnership agreement contains provisions limiting the ability
of our unitholders to call meetings or to acquire information
about our operations, as well as other provisions limiting the
ability of our unitholders to influence the manner or direction
of our management. As a result of these provisions, the price at
which our common units will trade may be lower because of the
absence or reduction of a takeover premium in the trading price.
Restrictions
in our credit facility could limit our ability to make
distributions to our unitholders, borrow additional funds or
capitalize on business opportunities.
Our credit facility contains various operating and financial
restrictions and covenants. Our ability to comply with these
restrictions and covenants may be affected by events beyond our
control, including prevailing economic, financial and industry
conditions. If we are unable to comply with these restrictions
and covenants, a significant portion of any future indebtedness
under our credit facility may become immediately due and
payable, and our lenders commitment to make further loans
to us under our credit facility may terminate. We might not
have, or be able to obtain, sufficient funds to make these
accelerated payments. In addition, our obligations under our
credit facility will be secured by substantially all of our
assets, and if we are unable to repay any future indebtedness
under our credit facility, the lenders could seek to foreclose
on such assets. Our payment of principal and interest on any
future indebtedness will reduce our cash available for
distribution on our units. Our credit facility will limit our
ability to pay distributions to our unitholders if we are not in
compliance with our financial covenants, during an event of
default or if an event of default would result from the
distribution.
In addition, any future levels of indebtedness may:
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adversely affect our ability to obtain additional financing for
future operations or capital needs;
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limit our ability to pursue acquisitions and other business
opportunities; or
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make our results of operations more susceptible to adverse
economic or operating conditions.
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28
Various limitations in our credit facility and any future
financing agreements may reduce our ability to incur additional
indebtedness, to engage in some transactions or to capitalize on
business opportunities.
We may
issue an unlimited number of limited partner interests without
the consent of our unitholders, which will dilute your ownership
interest in us and may increase the risk that we will not have
sufficient available cash to maintain or increase our per unit
distribution level.
At any time we may issue an unlimited number of limited partner
interests of any type without the approval of our unitholders on
terms and conditions established by our general partner. The
issuance by us of additional common units or other equity
securities of equal or senior rank will have the following
effects:
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our unitholders proportionate ownership interest in us
will decrease;
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the amount of cash available for distribution on each unit may
decrease;
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the relative voting strength of each previously outstanding unit
may be diminished;
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the ratio of taxable income to distributions may
increase; and
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the market price of the common units may decline.
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The
control of our general partner may be transferred to a third
party without unitholder consent. The new owner of our general
partner could implement different business strategies, which
could have an adverse impact on our growth or future
prospects.
Our general partner may transfer its general partner interest to
a third party in a merger or in a sale of all or substantially
all of its assets without the consent of our unitholders.
Furthermore, there is no restriction in our partnership
agreement on the ability of Harold Hamm or the owners of our
general partner to transfer their ownership interests in our
general partner to a third party. The new owner of our general
partner would then be in a position to replace the board of
directors and officers of our general partner and the general
partner of Hiland Partners and to control the decisions taken by
the board of directors and officers. The new owner of our
general partner could implement different business strategies,
which could have an adverse impact on our growth or future
prospects.
Hiland
Partners unitholders have the right to remove Hiland
Partners general partner with the approval of
66
2
/
3
%
of all units, which would cause us to lose our general partner
interest and incentive distribution rights in Hiland Partners
and the ability to manage Hiland Partners.
We currently manage Hiland Partners through Hiland Partners GP
our wholly-owned subsidiary. Hiland Partners partnership
agreement, however, gives unitholders of Hiland Partners the
right to remove the general partner of Hiland Partners upon the
affirmative vote of holders of
66
2
/
3
%
of Hiland Partners outstanding units. If Hiland Partners
GP, LLC were removed as general partner of Hiland Partners, it
would receive cash or common units in exchange for its 2%
general partner interest and the incentive distribution rights
and would lose its ability to manage Hiland Partners. While the
common units or cash we would receive are intended under the
terms of Hiland Partners partnership agreement to fully
compensate us in the event such an exchange is required, the
value of these common units or investments we make with the cash
over time may not be equivalent to the value of the general
partner interest and the incentive distribution rights had we
retained them.
You
may not have limited liability if a court finds that unitholder
action constitutes control of our business.
As a limited partner in a partnership organized under Delaware
law, you could be held liable for our obligations to the same
extent as a general partner if a court determined that the right
or the exercise of the right by our unitholders as a group to
remove or replace our general partner, to approve some
amendments to the partnership agreement or to take other action
under our partnership agreement constituted participation in the
control of our business. Our general partner
generally has unlimited liability for the obligations of the
29
partnership, except for those contractual obligations of the
partnership that are expressly made without recourse to our
general partner. Additionally, the limitations on the liability
of holders of limited partner interests for the obligations of a
limited partnership have not been clearly established in many
jurisdictions. Under certain circumstances, our unitholders may
have to repay amounts wrongfully distributed to them. Under
Section 17-607
of the Delaware Revised Uniform Limited Partnership Act, neither
we nor Hiland Partners may make a distribution to our
unitholders if the distribution would cause our or Hiland
Partners respective liabilities to exceed the fair value
of our respective assets. Delaware law provides that for a
period of three years from the date of the impermissible
distribution, partners who received the distribution and who
knew at the time of the distribution that it violated Delaware
law will be liable to the partnership for the distribution
amount. Liabilities to partners on account of their partnership
interest and liabilities that are non-recourse to the
partnership are not counted for purposes of determining whether
a distribution is permitted.
If in
the future we cease to manage and control Hiland Partners
through our ownership of the general partner interest in Hiland
Partners, we may be deemed to be an investment company under the
Investment Company Act of 1940.
If we cease to manage and control Hiland Partners and are deemed
to be an investment company under the Investment Company Act of
1940 because of our ownership interests in Hiland Partners, we
would either have to register as an investment company under the
Investment Company Act of 1940, obtain exemptive relief from the
Commission or modify our organizational structure or our
contract rights to fall outside the definition of an investment
company. Registering as an investment company could, among other
things, materially limit our ability to engage in transactions
with affiliates, including the purchase and sale of certain
securities or other property to or from our affiliates, restrict
our ability to borrow funds or engage in other transactions
involving leverage and require us to add additional directors
who are independent of us or our affiliates. The occurrence of
all or some of these events would adversely affect the price of
our common units.
Hiland
Partners may issue additional common units or other equity
securities, which may increase the risk that Hiland Partners
will not have sufficient available cash to maintain or increase
its cash distribution level.
Hiland Partners has wide latitude to issue additional Hiland
Partners common units on the terms and conditions established by
Hiland Partners general partner. The payment of
distributions on these additional Hiland Partners common units
may increase the risk that Hiland Partners will be unable to
maintain or increase its quarterly cash distribution per unit,
which in turn may reduce the amount of incentive distributions
we receive and the available cash that we have to distribute to
our unitholders.
If
Hiland Partners general partner is not fully reimbursed or
indemnified for obligations and liabilities it incurs in
managing the business and affairs of Hiland Partners, it may not
be able to satisfy its obligations, and its cash flows will be
reduced, which will in turn reduce distributions to
you.
The general partner of Hiland Partners and its affiliates may
make expenditures on behalf of Hiland Partners for which they
will seek reimbursement from Hiland Partners. In addition, under
Delaware partnership law, the general partner, in its capacity
as the general partner of Hiland Partners, has unlimited
liability for the obligations of Hiland Partners, such as its
debts and environmental liabilities, except for those
contractual obligations of Hiland Partners that are expressly
made without recourse to the general partner. For example,
Hiland Partners credit facility and certain of its gas
purchase agreements do not contain such an express non-recourse
contractual provision, and Hiland Partners may, from time to
time, enter into other agreements that do not contain such
provisions. To the extent Hiland Partners GP, LLC incurs
obligations on behalf of Hiland Partners, it is entitled to be
reimbursed or indemnified by Hiland Partners. If Hiland Partners
does not reimburse or indemnify its general partner, Hiland
Partners GP, LLC may be unable to satisfy these liabilities or
obligations, which would reduce its cash flows, which will in
turn reduce distributions to you.
30
Increases
in interest rates could increase our borrowing costs, adversely
impact our unit price and our ability to issue additional
equity, which could have an adverse effect on our cash flows and
our ability to fund our growth.
Due to the recent volatility and decline in the credit markets,
the interest rate on our credit facility could increase, which
would reduce our cash flows. In addition, interest rates on
future credit facilities and debt offerings could be higher than
current levels, causing our financing costs to increase
accordingly. As with other yield-oriented securities, the market
price for our units will be affected by the level of our cash
distributions and implied distribution yield. The distribution
yield is often used by investors to compare and rank
yield-oriented securities for investment decision-making
purposes. Therefore, changes in interest rates, either positive
or negative, may affect the yield requirements of investors who
invest in our units, and a rising interest rate environment
could have an adverse effect on our unit price and our ability
to issue additional equity in order to make acquisitions, to
reduce debt or for other purposes.
Our
cash flow is affected by the volatility of natural gas and NGL
product prices, which could adversely affect its ability to make
distributions to its unitholders.
Hiland Partners is subject to significant risks due to frequent
and often substantial fluctuations in commodity prices. In the
past, the prices of natural gas and NGLs have been extremely
volatile, and Hiland Partners expect this volatility to
continue. For the year ended December 31, 2008, Hiland
Partners average realized natural gas sales price
increased from $6.44/MMBtu in January to a high sales price of
$10.05/MMBtu in July, then decreased to a low sales price of
$3.38/MMBtu in November. Hiland Partners average realized
NGL sales price increased from $1.42 per gallon in January 2008
to a high sales price of $1.74 per gallon in June 2008, then
decreased to a low sales price of $0.61 per gallon in December
2008. The markets and prices for natural gas and NGLs depend
upon factors beyond Hiland Partners control. These factors
include demand for oil, natural gas and NGLs, which fluctuate
with changes in market and economic conditions and other
factors, including:
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the impact of weather on the demand for oil and natural gas;
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the level of domestic oil and natural gas production;
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the availability of imported oil and natural gas;
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actions taken by foreign oil and gas producing nations;
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the availability of local, intrastate and interstate
transportation systems;
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the availability and marketing of competitive fuels;
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the impact of energy conservation efforts; and
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the extent of governmental regulation and taxation.
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Hiland Partners operates under three types of contractual
arrangements under which its total segment margin is exposed to
increases and decreases in the price of natural gas, NGLs and
the relationship between natural gas and NGL prices:
percentage-of-proceeds,
percentage-of-index
and index-minus-fees arrangements. Under
percentage-of-proceeds
arrangements, Hiland Partners generally purchases natural gas
from producers for an agreed percentage of proceeds or upon an
index related price, and then sells the resulting residue gas
and NGLs or NGL products at index related prices. Under
percentage-of-index
arrangements, Hiland Partners purchases natural gas from
producers at a fixed percentage of the index price for the
natural gas they produce and subsequently sells the residue gas
and NGLs or NGL products at market prices. Under index-
minus-fees arrangements, we purchase natural gas from producers
at an expected index related price less fees to gather,
dehydrate, compress, treat
and/or
process the natural gas. Under these types of contracts our
revenues and total segment margin increase or decrease,
whichever is applicable, as the price of natural gas and NGLs
fluctuates.
31
Risks
Inherent in Hiland Partners Business
Because we are substantially dependent on the distributions we
receive from Hiland Partners, risks to Hiland Partners
operations are also risks to us. We have set forth below risks
to Hiland Partners business and operations, the occurrence
of which could negatively impact its financial performance and
decrease the amount of cash it is able to distribute to us.
If
commodity prices do not significantly improve above the expected
prices for 2009, Hiland Partners may be in violation of the
maximum consolidated funded debt to EBITDA ratio as early as
June 30, 2009, unless the ratio is amended, the senior
secured revolving credit facility is restructured or it receives
an infusion of equity capital. Failure to comply with the
covenants could cause an event of default under Hiland
Partners credit facility.
Hiland Partners credit facility contains covenants
requiring Hiland Partners to maintain certain financial ratios
and comply with certain financial tests, which, among other
things, require Hiland Partners and its subsidiary guarantors,
on a consolidated basis, to maintain specified ratios or
conditions as follows:
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EBITDA to interest expense of not less than 3.0 to 1.0; and
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consolidated funded debt to EBITDA of not more than 4.0 to 1.0
with the option to increase the consolidated funded debt to
EBITDA ratio to not more than 4.75 to 1.0 for a period of up to
nine months following an acquisition or a series of acquisitions
totaling $40 million in a
12-month
period (subject to an increased applicable interest rate margin
and commitment fee rate).
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As of December 31, 2008, Hiland Partners was in compliance
with each of these ratios, which are tested quarterly. Hiland
Partners EBITDA to interest expense ratio was 5.0 to 1.0
and its consolidated funded debt to EBITDA ratio was 3.7 to 1.0.
Hiland Partners intends to elect to increase the ratio to
4.75:1.0 on March 31, 2009. Hiland Partners ability
to remain in compliance with these restrictions and covenants in
the future is uncertain and will be affected by the levels of
cash flow from Hiland Partners operations and events or
circumstances beyond Hiland Partners control. If commodity
prices do not significantly improve above the expected prices
for 2009, Hiland Partners may be in violation of the maximum
consolidated funded debt to EBITDA ratio as early as
June 30, 2009, unless the ratio is amended, the senior
secured revolving credit facility is restructured or it receives
an infusion of equity capital.
Hiland Partners failure to comply with any of the
restrictions and covenants under its revolving credit facility
could lead to an event of default and the acceleration of Hiland
Partners obligations under those agreements. Hiland Partners may
not have sufficient funds to make such payments. If Hiland
Partners is unable to satisfy its obligations with cash on hand,
Hiland Partners could attempt to refinance such debt, sell
assets or repay such debt with the proceeds from an equity
offering. Hiland Partners cannot assure that it will be able to
generate sufficient cash flow to pay the interest on its debt or
that future borrowings, equity financings or proceeds from the
sale of assets will be available to pay or refinance such debt.
The terms of Hiland Partners financing agreements may also
prohibit Hiland Partners from taking such actions. Factors that
will affect Hiland Partners ability to raise cash through
an offering of its common units or other equity, a refinancing
of its debt or a sale of assets include financial market
conditions and Hiland Partners market value and operating
performance at the time of such offering or other financing.
Hiland Partners cannot assure that any such proposed offering,
refinancing or sale of assets can be successfully completed or,
if completed, that the terms will be favorable to Hiland
Partners.
For additional information about the restrictions under our
credit facility, please see Item 7. Managements
Discussion and Analysis of Financial Condition and Results of
Operations Liquidity and Capital
Resources Credit Facility.
32
Hiland
Partners may not have sufficient cash after the establishment of
cash reserves and payment of its general partners fees and
expenses to enable Hiland Partners to pay distributions at the
current level, or at all.
Hiland Partners may not have sufficient available cash each
quarter to pay distributions at the current level, or at all.
Under the terms of Hiland Partners partnership agreement,
Hiland Partners must pay its general partners fees and
expenses and set aside any cash reserve amounts before making a
distribution to its unitholders. The amount of cash Hiland
Partners can distribute on its units principally depends upon
the amount of cash Hiland Partners generates from its
operations, which will fluctuate from quarter to quarter based
on several factors, some of which are beyond Hiland
Partners control, including:
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the amount of natural gas gathered on its pipelines;
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the throughput volumes at its processing, treating and
fractionation plants;
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the price of natural gas and crude oil;
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the price of NGLs;
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the relationship between natural gas and NGL prices;
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the level of Hiland Partners operating costs;
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the weather in its operating areas;
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the level of competition from other midstream energy
companies; and
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the fees Hiland Partners charges and the margins it realizes for
its services.
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In addition, the actual amount of cash Hiland Partners will have
available for distribution will depend on other factors, some of
which are beyond its control, including:
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the level of capital expenditures Hiland Partners makes;
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the availability, if any, and cost of acquisitions;
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Hiland Partners debt service requirements;
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Hiland Partners ability to access capital markets and
borrow money;
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fluctuations in Hiland Partners working capital needs;
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restrictions on distributions contained in Hiland Partners
credit facility;
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restrictions on Hiland Partners ability to make working
capital borrowings under its credit facility to pay
distributions;
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prevailing economic conditions; and
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the amount, if any, of cash reserves established by Hiland
Partners general partners board of directors in its
sole discretion for the proper conduct of its business.
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Hiland
Partners cash flow is affected by the volatility of
natural gas and NGL product prices, which could adversely affect
its ability to make distributions to its
unitholders.
Hiland Partners is subject to significant risks due to frequent
and often substantial fluctuations in commodity prices. In the
past, the prices of natural gas and NGLs have been extremely
volatile, and Hiland Partners expects this volatility to
continue. For the year ended December 31, 2008, Hiland
Partners average realized natural gas sales price
increased from $6.44/MMBtu in January to a high sales price of
$10.05/MMBtu in July, then decreased to a low sales price of
$3.38/MMBtu in November. Hiland Partners average realized
NGL sales price increased from $1.42 per gallon in January 2008
to a high sales price of $1.74 per gallon in June 2008, then
decreased to a low sales price of $0.61 per gallon in December
2008. The markets and prices for natural gas and
33
NGLs depend upon factors beyond Hiland Partners control.
These factors include demand for oil, natural gas and NGLs,
which fluctuate with changes in market and economic conditions
and other factors, including:
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the impact of weather on the demand for oil and natural gas;
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|
the level of domestic oil and natural gas production;
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|
the availability of imported oil and natural gas;
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|
actions taken by foreign oil and gas producing nations;
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|
the availability of local, intrastate and interstate
transportation systems;
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the availability and marketing of competitive fuels;
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the impact of energy conservation efforts; and
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the extent of governmental regulation and taxation.
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Hiland Partners operates under three types of contractual
arrangements under which its total segment margin is exposed to
increases and decreases in the price of natural gas, NGLs and
the relationship between natural gas and NGL prices:
percentage-of-proceeds,
percentage-of-index
and index-minus-fees arrangements. Under
percentage-of-proceeds
arrangements, Hiland Partners generally purchases natural gas
from producers for an agreed percentage of proceeds or upon an
index related price, and then sells the resulting residue gas
and NGLs or NGL products at index related prices. Under
percentage-of-index
arrangements, Hiland Partners purchases natural gas from
producers at a fixed percentage of the index price for the
natural gas they produce and subsequently sells the residue gas
and NGLs or NGL products at market prices. Under index-
minus-fees arrangements, Hiland Partners purchases natural gas
from producers at an expected index related price less fees to
gather, dehydrate, compress, treat
and/or
process the natural gas. Under these types of contracts Hiland
Partners revenues and total segment margin increase or
decrease, whichever is applicable, as the price of natural gas
and NGLs fluctuates.
Because
of the natural decline in production from existing wells, Hiland
Partners success depends on its ability to obtain new
supplies of natural gas, which involves factors beyond its
control. Any decrease in supplies of natural gas in Hiland
Partners areas of operation could adversely affect Hiland
Partners business and operating results and reduce its
ability to make distributions to its unitholders, including us,
or to service its debt.
Hiland Partners gathering systems and processing plants
are dependent on the level of production from oil and natural
gas wells that supply its systems with natural gas and from
which production will naturally decline over time. As a result,
Hiland Partners cash flows associated with these wells
will also decline over time. In order to maintain or increase
throughput volume levels on Hiland Partners gathering
systems and the asset utilization rates at its natural gas
processing plants, Hiland Partners must continually obtain new
supplies of natural gas. The primary factors affecting Hiland
Partners ability to obtain new supplies of natural gas and
attract new customers to its assets are the level of successful
drilling activity near Hiland Partners gathering systems
and its ability to compete with other gathering and processing
companies for volumes from successful new wells.
The level of drilling activity is dependent on economic and
business factors beyond Hiland Partners control.
Fluctuations in energy prices can greatly affect production
rates and investments by third parties in the development of new
oil and natural gas reserves. Drilling activity generally
decreases as oil and natural gas prices decrease. Natural gas,
crude oil and NGL prices have been high in recent years compared
to historical periods, but have decreased significantly during
the fourth quarter of 2008 and thus far in 2009. This decline in
natural gas prices coupled with the effect of illiquid capital
markets has led to a decrease in drilling activity in Hiland
Partners areas of operation.
In addition, producers may decrease their drilling activity
levels due to the current deterioration in the credit markets.
Many of Hiland Partners customers finance their drilling
activities though cash flow from operations, the incurrence of
debt or the issuance of equity. Recently, there has been a
significant decline in
34
the credit markets and the availability of credit. Additionally,
many of Hiland Partners customers equity values have
substantially declined. The combination of a reduction of cash
flow resulting from declines in commodity prices, a reduction in
borrowing bases under reserve-based credit facilities and the
lack of availability of debt or equity financing may result in a
significant reduction in the spending of Hiland Partners
customers. For example, a number of Hiland Partners
customers have announced reduced capital expenditure budgets for
2009.
Other factors that impact production decisions include
producers capital budget limitations, the ability of
producers to obtain necessary drilling and other governmental
permits and regulatory changes. Because of these factors, even
if additional crude oil or natural gas reserves were discovered
in areas served by Hiland Partners assets, producers may
choose not to develop those reserves. If Hiland Partners was not
able to obtain new supplies of natural gas to replace the
natural decline in volumes from existing wells due to reductions
in drilling activity or competition, throughput volumes on
Hiland Partners pipelines and the utilization rates of its
processing facilities would decline, which could have a material
adverse effect on its business, results of operations and
financial condition.
If
Hiland Partners fails to obtain new sources of natural gas
supply, its revenues and cash flow may be adversely affected,
and its ability to make distributions to its unitholders,
including us, may be reduced.
Hiland Partners faces competition in acquiring new natural gas
supplies. Competition for natural gas supplies is primarily
based on the location of pipeline facilities, pricing
arrangements, reputation, efficiency, flexibility and
reliability. Hiland Partners major competitors for natural
gas supplies and markets include (1) Atlas Pipeline
Partners, Mustang Fuel Corporation, Duke Energy Field Services,
LLC and SemGas, L.P. at its Eagle Chief gathering system,
(2) Enogex, Inc. at its Matli gathering system,
(3) Bear Paw Energy, a subsidiary of ONEOK Partners, L.P.,
at its Badlands and Bakken gathering systems,
(4) CenterPoint Energy Field Services and Superior Pipeline
Company, L.L.C., a subsidiary of Unit Corporation, at its Kinta
Area gathering system and (5) MarkWest Energy Partners,
Enogex, Inc., Antero Resources Midstream Corporation and Copano
Energy, L.L.C. at its Woodford Shale gathering system. Many of
Hiland Partners competitors have greater financial
resources than Hiland Partners does, which may better enable
them to pursue additional gathering and processing opportunities
than Hiland Partners.
Hiland
Partners depends on certain key producers for a significant
portion of its supply of natural gas and the loss of any of
these key producers could reduce Hiland Partners supply of
natural gas and adversely affect its financial
results.
For the year ended December 31, 2008, CLR, Chesapeake
Energy Corporation and Enerplus Resources (USA) Corporation
supplied Hiland Partners with approximately 49%, 13% and 10%,
respectively, of its total natural gas volumes purchased. BP
America Production Company and Chesapeake Energy Corporation
supplied Hiland Partners with approximately 52% and 13%,
respectively, of its natural gas volumes gathered. Certain of
Hiland Partners natural gas gathering systems is dependent
on one or more of these producers. To the extent that these
producers reduce the volumes of natural gas that they supply as
a result of competition or otherwise, Hiland Partners would be
adversely affected unless it was able to acquire comparable
supplies of natural gas on comparable terms from other
producers, which may not be possible in areas where the producer
that reduces its volumes is the primary producer in the area.
Hiland
Partners ability to grow depends in part on its ability to
make acquisitions that result in an increase in the cash
generated from operations per unit. If Hiland Partners does not
make acquisitions on economically acceptable terms, its future
growth may be limited.
Hiland Partners ability to grow depends in part on its
ability to make acquisitions that result in an increase in the
cash generated from operations per unit. If Hiland Partners is
unable to make these accretive acquisitions either because it
is: (1) unable to identify attractive acquisition
candidates or negotiate acceptable purchase contracts with them,
(2) unable to obtain financing for these acquisitions on
economically acceptable terms, or (3) outbid by
competitors, then Hiland Partners future growth and
ability to increase distributions may be limited. Furthermore,
even if Hiland Partners does make acquisitions that it believes
will be accretive,
35
these acquisitions may nevertheless result in a decrease in the
cash generated from operations per unit and reduce our cash
available to pay distributions. Any acquisition involves
potential risks, including, among other things:
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mistaken assumptions about revenues and costs, including
synergies;
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an inability to integrate successfully the businesses acquired;
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the assumption of unknown liabilities;
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limitations on rights to indemnity from the seller;
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the diversion of managements attention from other business
concerns;
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unforeseen difficulties operating in new product areas or new
geographic areas; and
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customer or key employee losses at the acquired businesses.
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If Hiland Partners consummates any future acquisitions, its
capitalization and results of operations may change
significantly, and you will not have the opportunity to evaluate
the economic, financial and other relevant information that
Hiland Partners will consider in determining the application of
these funds and other resources.
Hiland Partners acquisition strategy is based, in part, on
its expectation of ongoing divestitures of midstream assets by
large industry participants. A material decrease in such
divestitures would limit Hiland Partners opportunities for
future acquisitions and could adversely affect its operations
and cash flows available for distribution to unitholders.
Hiland
Partners ability to engage in construction projects and to
make acquisitions will require access to a substantial amount of
capital. The inability of Hiland Partners to obtain adequate
sources of financing on economically acceptable terms may limit
Hiland Partners growth opportunities, which could have a
negative impact on our cash available to pay
distributions.
Hiland Partners ability to engage in construction projects
or to make acquisitions is dependent on obtaining adequate
sources of outside financing, including commercial borrowings
and other debt and equity issuances. While the initial funding
of Hiland Partners acquisitions may consist of debt
financing, Hiland Partners financial strategy is to
finance acquisitions approximately equally with equity and debt,
and Hiland Partners would expect to repay such debt with
proceeds of equity issuances to achieve this relatively balanced
financing ratio.
Global market and economic conditions have been, and continue to
be, disruptive and volatile. The debt and equity capital markets
have been adversely affected by significant write-offs in the
financial services sector relating to subprime mortgages, and
the re-pricing of credit risk in the broadly syndicated market,
among other things. These events have led to worsening general
economic conditions. In particular, the cost of capital in the
debt and equity capital markets has increased substantially,
while the availability of funds from those markets has
diminished significantly. Also, concerns about the stability of
financial markets generally and the solvency of counterparties
specifically have led to increases in the cost of obtaining
money from the credit markets as many lenders and institutional
investors have increased interest rates, enacted tighter lending
standards and reduced funding and, in some cases, ceased to
provide funding to borrowers.
If Hiland Partners is unable to finance its growth through
external sources or is unable to achieve its targeted
debt/equity ratios, or if the cost of such financing is higher
than expected, Hiland Partners may be required to forgo certain
construction projects or acquisition opportunities or such
construction projects or acquisition opportunities may not
result in expected increases in distributable cash flow.
Accordingly, Hiland Partners inability to obtain adequate
sources of financing on economically acceptable terms may limit
its growth opportunities, which could have a negative impact on
its cash available to pay distributions.
For additional information on our access to capital markets, see
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations
Liquidity and Capital Resources.
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Hiland
Partners generally does not obtain independent evaluations of
natural gas reserves dedicated to it gathering systems;
therefore, volumes of natural gas gathered on its gathering
systems in the future could be less than anticipated. A decline
in the volumes of natural gas gathered on its gathering systems
would have an adverse effect on Hiland Partners results of
operations, financial condition and ability to make
distributions.
Hiland Partners generally does not obtain independent
evaluations of natural gas reserves connected to its gathering
systems due to the unwillingness of producers to provide reserve
information as well as the cost of such evaluations.
Accordingly, Hiland Partners does not have estimates of total
reserves dedicated to its systems or the anticipated life of
such reserves. If the total reserves or estimated life of the
reserves connected to Hiland Partners gathering systems is
less than anticipated and Hiland Partners is unable to secure
additional sources of natural gas, then the volumes of natural
gas gathered on its gathering systems in the future could be
less than anticipated. A decline in the volumes of natural gas
gathered on its gathering systems would have an adverse effect
on Hiland Partners results of operations, financial
condition and ability to make distributions.
Hiland
Partners is exposed to the credit risks of its key customers,
and any material nonpayment or nonperformance by these key
customers could reduce Hiland Partners ability to make
distributions to its unitholders or to service its
debt.
Hiland Partners is subject to risks of loss resulting from
nonpayment or nonperformance by its customers. Any material
nonpayment or nonperformance by Hiland Partners key
customers could reduce its ability to make distributions to its
unitholders. Furthermore, some of Hiland Partners
customers may be highly leveraged and subject to their own
operating and regulatory risks, which increases the risk that
they may default on their obligations to Hiland Partners.
Additionally, Hiland Partners derives its revenues primarily
from customers in the energy industry. This industry
concentration has the potential to impact Hiland Partners
overall exposure to credit risk, either positively or
negatively, in that its customers could be affected by similar
changes in economic, industry or other conditions, including
changing commodities prices.
Hiland
Partners may not successfully balance its purchases of natural
gas and its sales of residue gas and NGLs, which increases its
exposure to commodity price risks.
Hiland Partners may not be successful in balancing its purchases
and sales. In addition, a producer could fail to deliver
promised volumes or deliver in excess of contracted volumes, or
a purchaser could purchase less than contracted volumes. Any of
these actions could cause Hiland Partners purchases and
sales not to be balanced. If Hiland Partners purchases and
sales are not balanced, it will face increased exposure to
commodity price risks and could have increased volatility in its
operating income.
Hiland
Partners construction of new assets or the expansion of
existing assets may not result in revenue increases and is
subject to regulatory, environmental, political, legal and
economic risks, which could adversely affect its results of
operations and financial condition.
One of the ways Hiland Partners may grow its business is through
the construction of new midstream assets or the expansion of
existing systems. The construction of additions or modifications
to existing systems, and the construction of new midstream
assets involve numerous regulatory, environmental, political and
legal uncertainties beyond Hiland Partners control and
require the expenditure of significant amounts of capital. If
Hiland Partners undertakes these projects, they may not be
completed on schedule at the budgeted cost, or at all. Moreover,
revenues may not increase immediately upon the expenditure of
funds on a particular project. For instance, if Hiland Partners
expands a new pipeline, the construction may occur over an
extended period of time, and Hiland Partners will not receive
any material increases in revenues until the project is
completed. Moreover, Hiland Partners may construct facilities to
capture anticipated future growth in production in a region in
which such growth does not materialize. Since Hiland Partners is
not engaged in the exploration for and development of oil and
natural gas reserves, it often does not have access to estimates
of potential reserves in an area prior to constructing
facilities in such area. To the extent Hiland Partners relies on
estimates of future production in its
37
decision to construct additions to its systems, such estimates
may prove to be inaccurate because there are numerous
uncertainties inherent in estimating quantities of future
production. As a result, new facilities may not be able to
attract enough throughput to achieve expected investment return,
which could adversely affect Hiland Partners results of
operations, financial condition and ability to make
distributions.
A
change in the characterization of some of Hiland Partners
assets by federal, state or local regulatory agencies or a
change in policy by those agencies may result in increased
regulation of Hiland Partners assets, which may cause its
revenues to decline and operating expenses to
increase.
Hiland Partners gathering facilities are exempt from FERC
regulation under the Natural Gas Act of 1938, or NGA, but FERC
jurisdiction still affects Hiland Partners business and
the market for its products. FERCs policies and practices
affect a wide range of activities bearing directly or indirectly
on Hiland Partners business and operations, including, for
example, FERCs regulations and policies related to open access
transportation, ratemaking, capacity release, market center
promotion, intrastate transportation, and market transparency.
In recent years, FERC has pursued pro-competitive policies in
its regulation of interstate natural gas pipelines. However,
Hiland Partners cannot assure you that FERC will continue this
approach as it considers matters such as pipeline rates and
rules and policies that may affect rights of access to natural
gas transportation capacity. In addition, there is no
bright-line distinction between FERC-regulated transmission
service and federally unregulated gathering services. Moreover,
this distinction is the subject of regular litigation.
Consequently, the classification and regulation of some of
Hiland Partners gathering facilities may be subject to
change based on future determinations by the FERC and the
courts. A change in jurisdictional characterization may cause
the affected facilitys revenues to decline and its
operating expenses to increase.
Other state and local regulations also affect Hiland
Partners business. Hiland Partners gathering lines
are subject to ratable take and common purchaser statutes in
states in which it operates. Ratable take statutes generally
require gatherers to take, without undue discrimination, natural
gas production that may be tendered to the gatherer for
handling. Similarly, common purchaser statutes generally require
gatherers to purchase without undue discrimination as to source
of supply or producer. These statutes restrict Hiland
Partners right as an owner of gathering facilities to
decide with whom it contracts to purchase or transport natural
gas. Federal law leaves any economic regulation of natural gas
gathering to the states. States in which Hiland Partners
operates have adopted complaint based regulation of natural gas
gathering activities, which allows natural gas producers and
shippers to file complaints with state regulators in an effort
to resolve grievances relating to natural gas gathering access
and rate discrimination. While Hiland Partners proprietary
gathering lines currently are subject to limited state
regulation, there is a risk that state laws will be changed,
which may give producers a stronger basis to challenge
proprietary status of a line, or the rates, terms and conditions
of a gathering line providing transportation service.
Hiland
Partners may incur significant costs and liabilities in the
future resulting from a failure to comply with new or existing
environmental laws and regulations or an accidental release of
hazardous substances, wastes or hydrocarbons into the
environment. These costs could have an adverse effect on Hiland
Partners ability to make distributions to its
unitholders.
Hiland Partners operations are subject to stringent and
complex federal, regional, state and local environmental laws
and regulations governing the discharge of substances into the
environment and environmental protection. These laws and
regulations require Hiland Partners to acquire permits to
conduct regulated activities, to incur capital expenditures to
limit or prevent releases of substances from its facilities, and
to respond to liabilities for pollution resulting from its
operations. Governmental authorities enforce compliance with
these laws and regulations and the permits issued under them,
oftentimes requiring difficult and costly actions. Failure to
comply with these laws and regulations or newly adopted laws or
regulations may trigger a variety of administrative, civil and
criminal enforcement measures, including the assessment of
monetary penalties, the imposition of remedial requirements, and
the issuance of orders enjoining future operations. Certain
environmental statutes impose strict and, under certain
circumstances, joint and several liability for costs required to
clean up and restore sites where hazardous substances have been
disposed or otherwise released. Moreover, it is not uncommon for
neighboring landowners and other third parties to file claims
for personal injury and property damage allegedly caused by the
release of hazardous substances, wastes or hydrocarbons into the
environment.
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There is inherent risk of the incurring significant
environmental costs and liabilities in Hiland Partners
business due to its handling of natural gas, NGLs and wastes,
the release of water discharges or air emissions related to its
operations, and historical industry operations and waste
disposal practices conducted by Hiland Partners or predecessor
operators. For example, an accidental release from one of Hiland
Partners pipelines or processing facilities could subject
it to substantial liabilities arising from environmental cleanup
and restoration costs, claims made by neighboring landowners and
other third parties for personal injury and property or natural
resource damage, and fines or penalties for related violations
of environmental laws or regulations. Moreover, the possibility
exists that stricter laws, regulations or enforcement policies
could significantly increase Hiland Partners compliance
costs and the cost of any remediation that may become necessary.
Hiland Partners may not be able to recover some or any of these
costs from insurance.
If
Hiland Partners is unable to obtain new
rights-of-way
or the cost of renewing existing
rights-of-way
increases, then it may be unable to fully execute its growth
strategy and its cash flows and ability to make distributions
could be adversely affected.
The construction of additions to Hiland Partners existing
gathering assets may require it to obtain new
rights-of-way
prior to constructing new pipelines. Hiland Partners may be
unable to obtain such
rights-of-way
to connect new natural gas supplies to its existing gathering
lines or capitalize on other attractive expansion opportunities.
Additionally, it may become more expensive for Hiland Partners
to obtain new
rights-of-way
or to renew existing
rights-of-way.
If the cost of obtaining new
rights-of-way,
or renewing existing
rights-of-way
increases, Hiland Partners cash flows and cash available
for distribution could be adversely affected.
If
Hiland Partners fails to renew any of its significant contracts
as they expire under the terms of the particular agreement, its
revenues and cash flow may be adversely affected and its ability
to make distributions to its unitholders or service its debt may
be reduced.
If Hiland Partners fails to renew any of its significant natural
gas sales contracts, NGL sales arrangements, hedging contracts,
natural gas purchase and gathering contracts or its compression
services agreement as they expire under the terms of the
particular agreement, Hiland Partners would be adversely
affected unless it was able to replace such contract with a
contract containing similar terms. For example, Hiland
Partners compression services agreement with CLR had an
initial term that ended on January 28, 2009 and now
automatically renews for one-month terms unless terminated by
either party by giving notice at least 15 days prior to the
end of the then current term. If CLR elects to terminate the
monthly agreement and Hiland Partners fails to renew the monthly
agreement with CLR, Hiland Partners would be adversely affected
unless it was able to provide air and water compression services
to other parties in the area where its air and compression
facilities are located.
Hiland
Partners business involves many hazards and operational
risks, some of which may not be fully covered by insurance. If a
significant accident or event occurs that is not fully insured,
its operations and financial results could be adversely
affected.
Hiland Partners operations are subject to the many hazards
inherent in the gathering, treating, processing and
fractionation of natural gas and NGLs, including:
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damage to pipelines, related equipment and surrounding
properties caused by tornadoes, floods, fires and other natural
disasters and acts of terrorism;
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inadvertent damage from construction and farm equipment;
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leaks of natural gas, NGLs and other hydrocarbons or losses of
natural gas or NGLs as a result of the malfunction of
measurement equipment or facilities at receipt or delivery
points;
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fires and explosions; and
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other hazards, including those associated with high-sulfur
content, or sour gas, that could also result in personal injury
and loss of life, pollution and suspension of operations.
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These risks could result in substantial losses due to personal
injury
and/or
loss
of life, severe damage to and destruction of property and
equipment and pollution or other environmental damage and may
result in curtailment or suspension of Hiland Partners
related operations. A natural disaster or other hazard affecting
the areas in which Hiland Partners operates could have a
material adverse effect on its operations. Hiland Partners is
not fully insured against all risks incident to its business. In
accordance with typical industry practice, Hiland Partners does
not have any property insurance on any of its underground
pipeline systems that would cover damage to the pipelines.
Hiland Partners is not insured against all environmental
accidents that might occur, other than those considered to be
sudden and accidental. In addition, Hiland Partners does not
have business interruption insurance. If a significant accident
or event occurs that is not fully insured, it could adversely
affect Hiland Partners operations and financial condition.
Restrictions
in Hiland Partners credit facility limits its ability to
make distributions and may limit its ability to capitalize on
acquisition and other business opportunities.
Hiland Partners credit facility contains various covenants
limiting its ability to incur indebtedness, grant liens, engage
in transactions with affiliates, make distributions to its
unitholders and capitalize on acquisition or other business
opportunities. It also contains covenants requiring Hiland
Partners to maintain certain financial ratios and tests. Hiland
Partners is prohibited from making any distribution to
unitholders if such distribution would cause a default or an
event of default under its credit facility.
Any subsequent refinancing of Hiland Partners current
indebtedness or any new indebtedness could have similar or
greater restrictions. As of December 31, 2008, Hiland
Partners total outstanding long-term indebtedness was
approximately $252.1 million, all under its senior secured
revolving credit facility. Payments of principal and interest on
the indebtedness will reduce the cash available for distribution
on Hiland Partners units.
For additional information about the restrictions under our
credit facility, please see Item 7. Managements
Discussion and Analysis of Financial Condition and Results of
Operations Liquidity and Capital
Resources Credit Facility.
Due to
Hiland Partners lack of asset diversification, adverse
developments in its midstream operations would reduce its
ability to make distributions to its unitholders.
Hiland Partners relies exclusively on the revenues generated
from its gathering, dehydration, treating, processing,
fractionation and compression services businesses, and as a
result, its financial condition depends upon prices of, and
continued demand for, natural gas and NGLs. Due to Hiland
Partners lack of diversification in asset type, an adverse
development in one of these businesses would have a
significantly greater impact on Hiland Partners financial
condition and results of operations than if it maintained more
diverse assets.
Hiland
Partners hedging activities may not be as effective as
intended in reducing the volatility of its cash flows, and in
certain circumstances may actually increase the volatility of
its cash flows, which could adversely affect its ability to make
distributions to unitholders, including us.
Hiland Partners utilizes derivative financial instruments
related to the future price of natural gas and the future price
of NGLs with the intent of reducing volatility in its cash flows
due to fluctuations in commodity prices. While Hiland
Partners hedging activities are designed to reduce
commodity price risk, Hiland Partners remains exposed to
fluctuations in commodity prices to some extent.
The extent of Hiland Partners commodity price exposure is
related largely to the effectiveness and scope of its hedging
activities. For example, the derivative instruments Hiland
Partners utilizes are based on posted market prices, which may
differ significantly from the actual natural gas prices or NGLs
prices that Hiland Partners realizes in its operations.
Furthermore, Hiland Partners hedges relate to only a
portion of the volume of its expected sales and, as a result,
Hiland Partners will continue to have direct commodity price
exposure to the unhedged portion. Hiland Partners actual
future sales may be significantly higher or lower than estimated
at the time it entered into derivative transactions for such
period. If the actual amount is higher than estimated,
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Hiland Partners will have greater commodity price exposure than
intended. If the actual amount is lower than the amount that is
subject to Hiland Partners derivative financial
instruments, Hiland Partners might be forced to satisfy all or a
portion of its derivative transactions without the benefit of
the cash flow from its sale or purchase of the underlying
physical commodity, resulting in a substantial diminution of
liquidity.
As a result of these factors, Hiland Partners hedging
activities may not be as effective as intended in reducing the
volatility of its cash flows, and in certain circumstances may
actually increase the volatility of its cash flows, which could
adversely affect its ability to make distributions to
unitholders, including us. In addition, Hiland Partners
hedging activities are subject to the risks that a counterparty
may not perform its obligation under the applicable derivative
instrument, the terms of the derivative instruments are
imperfect, and Hiland Partners hedging procedures may not
be properly followed. Hiland Partners cannot assure you that the
steps it takes to monitor its derivative financial instruments
will detect and prevent violations of its risk management
policies and procedures, particularly if deception or other
intentional misconduct is involved.
Completion
of significant, unbudgeted expansion projects may require debt
and/or equity financing which may not be available to Hiland
Partners on acceptable terms, or at all.
Hiland Partners plans to fund its expansion capital
expenditures, including any future expansions it may undertake,
with proceeds from sales of its debt and equity securities and
borrowings under its revolving credit facility; however, Hiland
Partners cannot be certain that it will be able to issue its
debt and equity securities on terms or in the proportions that
it expects, or at all, and Hiland Partners may be unable
refinance its revolving credit facility when it expires. In
addition, Hiland Partners may be unable to obtain adequate
funding under its current revolving credit facility because its
lending counterparties may be unwilling or unable to meet their
funding obligations.
Global financial markets and economic conditions have been, and
continue to be, disrupted and volatile. The debt and equity
capital markets have been exceedingly distressed. These issues,
along with significant write-offs in the financial services
sector, the re-pricing of credit risk and the current weak
economic conditions have made, and will likely continue to make,
it difficult to obtain funding.
The cost of raising money in the debt and equity capital markets
has increased substantially while the availability of funds from
those markets generally has diminished significantly. Also, as a
result of concerns about the stability of financial markets
generally and the solvency of counterparties specifically, the
cost of obtaining money from the credit markets generally has
increased as many lenders and institutional investors have
increased interest rates, enacted tighter lending standards,
refused to refinance existing debt at maturity at all or on
terms similar to our current debt and reduced and, in some
cases, ceased to provide funding to borrowers.
A significant increase in Hiland Partners indebtedness, or
an increase in Hiland Partners indebtedness that is
proportionately greater than its issuances of equity, as well as
the credit market and debt and equity capital market conditions
discussed above could negatively impact Hiland Partners
ability to remain in compliance with the financial covenants
under its revolving credit agreement which could have a material
adverse effect on its financial condition, results of operations
and cash flows. If Hiland Partners is unable to finance its
expansion projects as expected, it could be required to seek
alternative financing, the terms of which may not be attractive
to Hiland Partners, or to revise or cancel its expansion plans.
If Hiland Partners is unable to finance its expansion projects
as expected, this could have a material adverse effect on Hiland
Partners operations, which could reduce Hiland
Partners ability to make distributions to its unitholders,
including us.
Increases
in interest rates could increase Hiland Partners borrowing
costs, adversely impact its unit price and its ability to issue
additional equity, which could have an adverse effect on Hiland
Partners cash flows and its ability to fund its
growth.
Due to the recent volatility and decline in the credit markets,
the interest rate on Hiland Partners credit facility could
increase, which would reduce its cash flows. In addition,
interest rates on future credit facilities and debt offerings
could be higher than current levels, causing Hiland
Partners financing costs to increase
41
accordingly. As with other yield-oriented securities, the market
price for Hiland Partners units will be affected by the
level of its cash distributions and implied distribution yield.
The distribution yield is often used by investors to compare and
rank yield-oriented securities for investment decision-making
purposes. Therefore, changes in interest rates, either positive
or negative, may affect the yield requirements of investors who
invest in Hiland Partners units, and a rising interest
rate environment could have an adverse effect on Hiland
Partners unit price and its ability to issue additional
equity in order to make acquisitions, to reduce debt or for
other purposes.
Risks
Related to Conflicts of Interest
Harold
Hamm and his affiliates control our general partner, which has
sole responsibility for conducting our business and managing our
operations. Affiliates of Harold Hamm and our general partner
have conflicts of interest and limited fiduciary duties, which
may permit them to favor their own interests to your
detriment.
Harold Hamm and the Hamm family trusts directly or indirectly
own a 60.8% limited partner interest in us. In addition, Harold
Hamm controls our general partner. Conflicts of interest may
arise between Harold Hamm and the Hamm family trusts and their
affiliates, including our general partner, on the one hand, and
us and our unitholders, on the other hand. As a result of these
conflicts, our general partner may favor its own interests and
the interests of its affiliates over the interests of our
unitholders. These conflicts include, among others, the
following situations:
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Harold Hamm and his affiliates control CLR; neither our
partnership agreement nor any other agreement requires CLR to
pursue a business strategy that favors us;
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our general partner is allowed to take into account the
interests of parties other than us, in resolving conflicts of
interest;
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our general partner has limited its liability and reduced its
fiduciary duties, and has also restricted the remedies available
to our unitholders for actions that, without the limitations,
might constitute breaches of fiduciary duty;
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our general partner determines the amount and timing of asset
purchases and sales, capital expenditures, borrowings, issuance
of additional limited partner securities, and reserves, each of
which can affect the amount of cash that is distributed to
unitholders;
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our general partner determines which costs incurred by it and
its affiliates are reimbursable by us;
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our partnership agreement does not restrict our general partner
from causing us to pay it or its affiliates for any services
rendered to us or entering into additional contractual
arrangements with any of these entities on our behalf;
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our general partner controls the enforcement of obligations owed
to us by our general partner and its affiliates; and
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our general partner decides whether to retain separate counsel,
accountants, or others to perform services for us.
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Although
we control and manage Hiland Partners through our ownership of
its general partner, Hiland Partners general partner owes
fiduciary duties to Hiland Partners and Hiland Partners
unitholders, which may conflict with our
interests.
Conflicts of interest exist and may arise in the future as a
result of the relationships between us and our affiliates,
including Hiland Partners general partner, on the one
hand, and Hiland Partners and its limited partners, on the other
hand. The directors and officers of Hiland Partners
general partner have fiduciary duties to manage Hiland Partners
in a manner beneficial to us, its owner. At the same time,
Hiland Partners general partner has a fiduciary duty to
manage Hiland Partners in a manner beneficial to Hiland Partners
and its limited partners. The board of directors of Hiland
Partners general partner will resolve any such conflict
and
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has broad latitude to consider the interests of all parties to
the conflict. The resolution of these conflicts may not always
be in our best interest or that of our unitholders. For example,
conflicts of interest may arise in the following situations:
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the allocation of shared overhead expenses to Hiland Partners
and us;
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the terms and conditions of any contractual agreements between
us and our affiliates, on the one hand, and Hiland Partners, on
the other hand;
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the interpretation and enforcement of contractual obligations
between us and our affiliates, on the one hand, and Hiland
Partners, on the other hand;
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the determination of the amount of cash to be distributed to
Hiland Partners unitholders and the amount of cash to be
reserved for the future conduct of Hiland Partners
business;
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the decision whether Hiland Partners should make acquisitions
and on what terms; and
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the determination of whether Hiland Partners should use cash on
hand, borrow or issue equity to raise cash to finance
acquisitions or expansion capital projects, repay indebtedness,
meet working capital needs, pay distributions to Hiland
Partners unitholders or otherwise.
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The
fiduciary duties of our general partners officers and
directors may conflict with those of Hiland Partners GP, LLC,
Hiland Partners general partner.
Conflicts of interest may arise because of the relationships
between Hiland Partners general partner, Hiland Partners
and us. Our general partners directors and officers have
fiduciary duties to manage our business in a manner beneficial
to us, our unitholders and the owners of our general partner.
Some of our general partners directors and all of its
officers are also directors and officers of Hiland
Partners general partner, and have fiduciary duties to
manage the business of Hiland Partners in a manner beneficial to
Hiland Partners and Hiland Partners unitholders. The
resolution of these conflicts may not always be in our best
interest or that of our unitholders.
Our
partnership agreement limits our general partners
fiduciary duties to us and our unitholders and restricts the
remedies available to our unitholders for actions taken by our
general partner that might otherwise constitute breaches of
fiduciary duty.
Our partnership agreement contains provisions that reduce the
standards to which our general partner would otherwise be held
by state fiduciary duty law. For example, our partnership
agreement:
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permits our general partner to make a number of decisions in its
individual capacity, as opposed to in its capacity as our
general partner. This entitles our general partner to consider
only the interests and factors that it desires, and it has no
duty or obligation to give any consideration to any interest of,
or factors affecting, us, our affiliates or any limited partner.
Examples include the exercise of our general partners
limited call right, its rights to vote or transfer the units it
owns, its registration rights and its determination whether or
not to consent to any merger or consolidation of our partnership
or amendment to our partnership agreement;
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provides that our general partner will not have any liability to
us or our unitholders for decisions made in its capacity as a
general partner so long as it acted in good faith, meaning it
believed the decisions were in the best interests of our
partnership;
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generally provides that affiliated transactions and resolutions
of conflicts of interest not approved by the conflicts committee
of the board of directors of our general partner and not
involving a vote of unitholders must be on terms no less
favorable to us than those generally being provided to or
available from unrelated third parties or be fair and
reasonable to us and that, in determining whether a
transaction or resolution is fair and reasonable,
our general partner may consider the totality of the
relationships among the parties involved, including other
transactions that may be particularly advantageous or beneficial
to us;
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provides that in resolving conflicts of interest, it will be
presumed that in making its decision the general partner acted
in good faith, and in any proceeding brought by or on behalf of
any limited partner or us, the person bringing or prosecuting
such proceeding will have the burden of overcoming such
presumption; and
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provides that our general partner and its officers and directors
will not be liable for monetary damages to us, our limited
partners for any acts or omissions unless there has been a final
and non-appealable judgment entered by a court of competent
jurisdiction determining that the general partner or those other
persons acted in bad faith or engaged in fraud or willful
misconduct or, in the case of a criminal matter, acted with
knowledge that such persons conduct was criminal.
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In order to become a limited partner of our partnership, our
unitholders are required to agree to be bound by the provisions
in the partnership agreement, including the provisions discussed
above.
Our
general partners affiliates may compete with
us.
Our partnership agreement provides that our general partner will
be restricted from engaging in any business activities other
than acting as our general partner and those activities
incidental to its ownership of interests in us. While Harold
Hamm and his affiliates, including CLR, are prohibited through
February 2010, subject to certain exceptions, from engaging in,
whether by acquisition, construction, investment in debt or
equity interests of any person or otherwise, the business of
gathering, treating, processing and transportation of natural
gas in North America, the transportation and fractionation of
NGLs in North America, and constructing, buying or selling any
assets related to the foregoing businesses, nothing prohibits
Harold Hamm or his affiliates, including CLR, from competing
with us in other business opportunities. If Harold Hamm and his
affiliates compete with us or Hiland Partners, our results of
operations and cash available for distribution may be adversely
affected.
Our
ability to obtain debt financing will be affected by Hiland
Partners and Hiland Holdings GPs credit
ratings.
If we decide to obtain our own credit rating, any future
downgrading of Hiland Partners or Hiland Holdings
GPs credit rating would likely also result in a
downgrading of our credit rating. Regardless of whether we have
our own credit rating, a downgrading of Hiland Partners or
Hiland Holdings GPs credit rating could limit our ability
to obtain financing in the future upon favorable terms, if at
all.
All of
our executive officers face conflicts in the allocation of their
time to our business.
Our general partner shares officers and administrative personnel
with Hiland Partners general partner to operate both our
business and Hiland Partners business. Our general
partners officers, who are also the officers of Hiland
Partners general partner, will allocate the time they and
our general partners other employees spend on our behalf
and on behalf of Hiland Partners. These officers face conflicts
regarding the allocation of their and our other employees
time, which may adversely affect our or Hiland Partners
results of operations, cash flows and financial condition. These
allocations may not necessarily be the result of
arms-length negotiations between Hiland Partners
general partner and our general partner.
Our
general partner has a limited call right that may require you to
sell your common units at an undesirable time or
price.
If at any time more than 80% of our outstanding common units are
owned by our general partner and its affiliates, our general
partner will have the right, but not the obligation, which it
may assign to any of its affiliates or to us, to acquire all,
but not less than all, of the remaining common units held by
unaffiliated persons at a price not less than their then-current
market price. As a result, you may be required to sell your
common units at an undesirable time or price and may not receive
any return on your investment. You may also incur a tax
liability upon a sale of your common units. As of March 5,
2009, affiliates of our general partner owned 60.8% of our
common units.
44
Tax Risks
to Our Common Unitholders
Our
tax treatment depends on our status as a partnership for federal
income tax purposes, as well as our not being subject to
entity-level taxation by individual states. If we or Hiland
Partners were to be treated as a corporation for federal income
tax purposes, or we were to become subject to additional amounts
of entity level taxation for state tax purposes, taxes paid, if
any, would reduce the amount of cash available for distribution
to you.
The value of our investment in Hiland Partners depends largely
on Hiland Partners being treated as a partnership for federal
income tax purposes, which requires that 90% or more of Hiland
Partners gross income for every taxable year consist of
qualifying income, as defined in Section 7704 of the
Internal Revenue Code. Hiland Partners may not meet this
requirement or current law may change so as to cause, in either
event, Hiland Partners to be treated as a corporation for
federal income tax purposes or otherwise subject Hiland Partners
to federal income tax. Moreover, the anticipated after-tax
benefit of an investment in our common units depends largely on
our being treated as a partnership for federal income tax
purposes. We have not requested, and do not plan to request, a
ruling from the Internal Revenue Services, or IRS, on this or
any other matter affecting us.
Despite the fact that we are a limited partnership under
Delaware law, it is possible in certain circumstances for a
partnership such as ours to be treated as a corporation for
federal income tax purposes. Although we do not believe based
upon our current operations that we are so treated, a change in
our business (or a change in current law) could cause us to be
treated as a corporation for federal income tax purposes or
otherwise subject us to taxation as an entity.
If Hiland Partners were treated as a corporation for federal
income tax purposes, it would pay federal income tax on its
taxable income at the corporate tax rate, which is currently a
maximum of 35%and would likely pay state income tax at varying
rates. Distributions to us would generally be taxed again as
corporate distributions, and no income, gains, losses,
deductions or credits would flow through to us. As a result,
there would be a material reduction in our anticipated cash flow
and distributions to you, likely causing a substantial reduction
in the value of our units. If we were treated as a corporation
for federal income tax purposes, we would pay federal income tax
on our taxable income at the corporate tax rate. Distributions
to you would generally be taxed again as corporate
distributions, and no income, gains, losses, deductions or
credits would flow through to you. Because a tax would be
imposed upon us as a corporation, our cash available for
distribution to you would be substantially reduced. Thus,
treatment of us as a corporation would result in a material
reduction in our anticipated cash flow and after-tax return to
the unitholders, likely causing a substantial reduction in the
value of our common units.
Current law may change, causing us or Hiland Partners to be
treated as a corporation for federal income tax purposes or
otherwise subjecting us or Hiland Partners to entity level
taxation. Because of widespread state budget deficits and other
reasons, several states are evaluating ways to subject
partnerships to entity level taxation through the imposition of
state income, franchise or other forms of taxation. For example,
Hiland Partners is required to pay Texas franchise tax at a
maximum effective rate of 0.7% of its gross income apportioned
to Texas in the prior year. Imposition of this tax on us or
Hiland Partners by Texas, or similar taxes by any other state,
will reduce our cash available for distribution to you.
Hiland Partners partnership agreement provides that if a
law is enacted or existing law is modified or interpreted in a
manner that subjects Hiland Partners to taxation as a
corporation or otherwise subjects Hiland Partners to
entity-level taxation for federal, state or local income tax
purposes, the minimum quarterly distribution amount and the
target distribution amounts will be adjusted to reflect the
impact of that law on Hiland Partners. Likewise, our cash
distributions will be reduced if we or Hiland Partners are
subjected to any form of an entity-level taxation.
45
The
tax treatment of publicly traded partnerships or an investment
in our common units could be subject to potential legislative,
judicial or administrative changes and differing
interpretations, possibly on a retroactive basis.
The present U.S. federal income tax treatment of publicly
traded partnerships, including us, or an investment in our
common units may be modified by administrative, legislative or
judicial interpretation at any time. For example, members of
Congress have recently considered substantive changes to the
existing U.S. federal income tax laws that affect publicly
traded partnerships, including us. Any modification to the
U.S. federal income tax laws and interpretations thereof
may or may not be applied retroactively. Although the considered
legislation would not have appeared to have affected our tax
treatment as a partnership, we are unable to predict whether any
of these changes, or other proposals, will be introduced or will
ultimately be enacted. Any such changes could negatively impact
the value of an investment in our common units.
If the
IRS contests the federal income tax positions we or Hiland
Partners take, the market for our common units or Hiland
Partners limited partner units may be adversely impacted,
and the costs of any contest will reduce cash available for
distribution to our unitholders.
We have not requested a ruling from the IRS with respect to our
treatment as a partnership for federal income tax purposes or
any other matter that affects us. Moreover, Hiland Partners has
not requested any ruling from the IRS with respect to its
treatment as a partnership for federal income tax purposes or
any other matter that affects it. The IRS may adopt positions
that differ from the positions we or Hiland Partners take. It
may be necessary to resort to administrative or court
proceedings to sustain some or all of the positions we or Hiland
Partners take. A court may disagree with some or all of the
positions we or Hiland Partners take. Any contest with the IRS
may materially and adversely impact the market for our common
units or Hiland Partners units and the price at which they
trade. In addition, the cost of any contest between Hiland
Partners and the IRS will result in a reduction in cash
available for distribution to Hiland Partners unitholders and
thus indirectly by us, as a unitholder and as the owner of the
general partner of Hiland Partners. Moreover, the costs of any
contest between us and the IRS will result in a reduction in
cash available for distribution to our unitholders and thus will
be borne indirectly by our unitholders.
You
may be required to pay taxes on income from us even if you do
not receive any cash distributions from us.
Because our unitholders will be treated as partners to whom we
will allocate taxable income which could be different in amount
than the cash we distribute, you will be required to pay any
federal income taxes and, in some cases, state and local income
taxes on your share of our taxable income, whether or not you
receive cash distributions from us. You may not receive cash
distributions from us equal to your share of our taxable income
or even equal to the tax liability that results from the
taxation of your share of our taxable income.
Tax
gain or loss on the disposition of our common units could be
more or less than expected.
If you sell your common units, you will recognize a gain or loss
equal to the difference between the amount realized and your tax
basis in those common units. Because distributions in excess of
your allocable share of our net taxable income decrease your tax
basis in your common units, the amount, if any, of such prior
excess distributions with respect to the units you sell will, in
effect, become taxable income to you if you sell such units at a
price greater than your tax basis in those units, even if the
price you receive is less than your original cost. Furthermore,
a substantial portion of the amount realized, whether or not
representing gain, may be taxed as ordinary income due to
potential recapture items, including depreciation recapture. In
addition, because the amount realized includes a
unitholders share of our nonrecourse liabilities, if you
sell your units, you may incur a tax liability in excess of the
amount of cash you receive from the sale.
46
Tax-exempt
entities and
non-U.S.
persons face unique tax issues from owning common units that may
result in adverse tax consequences to them.
Investment in units by tax-exempt entities, including employee
benefit plans and individual retirement accounts (known as IRAs)
and
non-U.S. persons
raises issues unique to them. For example, virtually all of our
income allocated to organizations exempt from federal income
tax, including IRAs and other retirement plans, will be
unrelated business taxable income and will be taxable to such a
unitholder. Distributions to
non-U.S. persons
will be reduced by withholding taxes imposed at the highest
effective applicable tax rate, and
non-U.S. persons
will be required to file United States federal income tax
returns and pay tax on their share of our taxable income. If you
are a tax exempt entity or a
non-U.S. person,
you should consult your tax advisor before investing in our
common units.
We
treat each purchaser of our common units as having the same tax
benefits without regard to the actual common units purchased.
The IRS may challenge this treatment, which could adversely
affect the value of our common units.
Because we cannot match transferors and transferees of common
units and because of other reasons, we have adopted depreciation
and amortization positions that may not conform with all aspects
of existing Treasury Regulations. A successful IRS challenge to
those positions could adversely affect the amount of tax
benefits available to our unitholders. It also could affect the
timing of these tax benefits or the amount of gain on the sale
of common units and could have a negative impact on the value of
our common units or result in audits of and adjustments to our
unitholders tax returns.
We
prorate our items of income, gain, loss and deduction between
transferors and transferees of our common units each month based
upon the ownership of our common units on the first business day
of each month, instead of on the basis of the date a particular
common unit is transferred. The IRS may challenge this
treatment, and, if successful, we would be required to change
the allocation of items of income, gain, loss and deduction
among our unitholders.
We prorate our items of income, gain, loss and deduction between
transferors and transferees of our common units each month based
upon the ownership of our common units on the first day of each
month, instead of on the basis of the date a particular common
unit is transferred. The use of this proration method may not be
permitted under existing Treasury Regulations. If the IRS were
to successfully challenge this method or new Treasury
Regulations were issued, we could be required to change the
allocation of items of income, gain, loss and deduction among
our unitholders.
A
unitholder whose units are loaned to a short seller
to cover a short sale of units may be considered as having
disposed of those units. If so, he would no longer be treated
for tax purposes as a partner with respect to those units during
the period of the loan and may recognize gain or loss from the
disposition.
Because a unitholder whose units are loaned to a short
seller to cover a short sale of units may be considered as
having disposed of the loaned units, he may no longer be treated
for tax purposes as a partner with respect to those units during
the period of the loan to the short seller and the unitholder
may recognize gain or loss from such disposition. Moreover,
during the period of the loan to the short seller, any of our
income, gain, loss or deduction with respect to those units may
not be reportable by the unitholder and any cash distributions
received by the unitholder as to those units could be fully
taxable as ordinary income. Unitholders desiring to assure their
status as partners and avoid the risk of gain recognition from a
loan to a short seller are urged to modify any applicable
brokerage account agreements to prohibit their brokers from
borrowing their units.
47
We
have adopted certain valuation methodologies that could result
in a shift of income, gain, loss and deduction between the
general partner and the unitholders. The IRS may successfully
challenge this treatment, which could adversely affect the value
of the common units.
When we or Hiland Partners issue additional units or engage in
certain other transactions, Hiland Partners determines the fair
market value of its assets and allocates any unrealized gain or
loss attributable to such assets to the capital accounts of
Hiland Partners unitholders and us. Although Hiland
Partners may from time to time consult with professional
appraisers regarding valuation matters, including the valuation
of its assets, Hiland Partners makes many of the fair market
value estimates of its assets itself using a methodology based
on the market value of its common units as a means to measure
the fair market value of its assets. Hiland Partners
methodology may be viewed as understating the value of Hiland
Partners assets. In that case, there may be a shift of
income, gain, loss and deduction between certain Hiland Partners
unitholders and us, which may be unfavorable to such Hiland
Partners unitholders. Moreover, under our current valuation
methods, subsequent purchasers of our common units may have a
greater portion of their Internal Revenue Code
Section 743(b) adjustment allocated to Hiland
Partners intangible assets and a lesser portion allocated
to Hiland Partners tangible assets. The IRS may challenge
Hiland Partners valuation methods, or our or Hiland
Partners allocation of Section 743(b) adjustment
attributable to Hiland Partners tangible and intangible
assets, and allocations of income, gain, loss and deduction
between us and certain of Hiland Partners unitholders.
A successful IRS challenge to these methods or allocations could
adversely affect the amount of taxable income or loss being
allocated to our unitholders. It also could affect the amount of
gain from our unitholders sale of common units and could
have a negative impact on the value of the common units or
result in audit adjustments to our unitholders tax returns
without the benefit of additional deductions.
The
sale or exchange of 50% or more of our capital and profits
interests, or the capital and profits interests in Hiland
Partners during any twelve-month period will result in the
termination of our partnership or Hiland Partners for federal
income tax purposes.
We will be considered to have terminated for federal income tax
purposes if there is a sale or exchange of 50% or more of the
total interests in our capital and profits within a twelve-month
period. For purposes of determining whether the 50% threshold
has been met, multiple sales of the same unit will be counted
only once. Our termination would, among other things, result in
the closing of our taxable year for all unitholders, which would
result in us filing two tax returns (and our unitholders could
receive two Schedules K-1) for one fiscal year and could result
in a significant deferral of depreciation deductions allowable
in computing our taxable income. In the case of a unitholder
reporting on a taxable year other than a fiscal year ending
December 31, the closing of our taxable year may also
result in more than twelve months of our taxable income or loss
being includable in his taxable income for the year of
termination. Our termination currently would not affect our
classification as a partnership for federal income tax purposes,
but instead, we would be treated as a new partnership for tax
purposes. If treated as a new partnership, we must make new tax
elections and could be subject to penalties if we are unable to
determine that a termination occurred.
You
will likely be subject to state and local taxes and return
filing requirements in states where you do not live as a result
of investing in our common units.
In addition to federal income taxes, our unitholders will likely
be subject to other taxes, including state and local taxes,
unincorporated business taxes and estate, inheritance or
intangible taxes that are imposed by the various jurisdictions
in which we or Hiland Partners conduct business or own property
now or in the future, even if our unitholders do not reside in
any of those jurisdictions. Our unitholders likely will be
required to file state and local income tax returns and pay
state and local income taxes in some or all of these
jurisdictions. Further, unitholders may be subject to penalties
for failure to comply with those requirements. Hiland Partners
currently does business or owns property in various states, most
of which impose income tax on individuals, corporations and
other entities. As Hiland Partners makes acquisitions or expand
its business, it may own assets or conduct business in
additional states that impose similar income taxes. It is the
responsibility of each unitholder to file all United States
federal, foreign, state and local tax returns that may be
required of such unitholder.
48
|
|
Item 1B.
|
Unresolved
Staff Comments
|
None.
|
|
Item 3.
|
Legal
Proceedings
|
On February 26, 2009, a unitholder of Hiland Holdings and
Hiland Partners filed a complaint alleging claims on behalf of a
purported class of common unitholders of Hiland Holdings and
Hiland Partners against Hiland Holdings, Hiland Partners, the
general partner of each of Hiland Holdings and Hiland Partners,
and certain members of the board of directors of each of Hiland
Holdings and Hiland Partners in the Court of Chancery of the
State of Delaware. The complaint challenges a proposal made by
Harold Hamm to acquire all of the outstanding common units of
each of Hiland Holdings and Hiland Partners that are not owned
by Mr. Hamm, his affiliates or Hamm family trusts. The
complaint alleges, among other things, that the consideration
offered is unfair and grossly inadequate, that the conflicts
committee of the board of directors of the general partner of
each of Hiland Holdings and Hiland Partners cannot be expected
to act independently, and that the management of Hiland Holdings
and Hiland Partners has manipulated its public statements to
depress the price of the common units of Hiland Holdings and
Hiland Partners. The plaintiffs seek to enjoin Hiland Partners,
Hiland Holdings, and their respective board members from
proceeding with any transaction that may arise from
Mr. Hamms going private proposal, along with
compensatory damages. For more information on the going private
proposal, please see Items 1. and 2. Business and
Properties Recent Developments Going
Private Proposal. We cannot predict the outcome of this
lawsuit, or others, nor can we predict the amount of time and
expense that will be required to resolve the lawsuit.
We are not aware of any legal or governmental proceedings
against us, or contemplated to be brought against us, under the
various environmental protection statutes to which we are
subject. We maintain insurance policies with insurers in amounts
and with coverage and deductibles as our general partner
believes are reasonable and prudent. However, we cannot assure
you that this insurance will be adequate to protect us from all
material expenses related to potential future claims for
personal and property damage or that these levels of insurance
will be available in the future at economical prices.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
None.
Part II
|
|
Item 5.
|
Market
for Registrants Common Units and Related Unitholder
Matters and Issuer Purchases of Equity Securities
|
Our limited partner common units began trading on the NASDAQ
National Market under the symbol HPGP commencing
with our initial public offering on September 20, 2006 at
an initial public offering price of $18.50 per common unit. As
of March 5, 2009, the market price for the common units was
$2.48 per unit and there were approximately 2,700 common
unitholders, including beneficial owners of common units held in
street name. Common units and Class B units represent
limited partner interests in the Partnership that entitle the
holders to the rights and privileges specified in the
Partnership Agreement.
We consider cash distributions to unitholders on a quarterly
basis, although there is no assurance as to the future cash
distributions since they are dependent upon future earnings,
cash flows, capital requirements, financial condition and other
factors. Our ability to distribute available cash is
contractually restricted by the terms of our credit facility.
Our credit facility contains covenants requiring us to maintain
certain financial ratios. We are prohibited from making any
distributions to unitholders if the distribution would cause an
event of default, or an event of default exists, under our
credit facility. Please read Item 7.
Managements Discussion and Analysis of Financial Condition
and Results of Operations Liquidity and Capital
Resources Description of Indebtedness
Credit Facility.
49
The following table shows the high and low prices per common
unit, as reported by the NASDAQ National Market, for the periods
indicated. Cash distributions shown below were paid within
50 days after the end of each quarter.
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|
|
|
|
|
|
|
|
|
|
|
|
Common Unit
|
|
|
|
|
|
|
Price Ranges
|
|
|
Cash Distribution
|
|
|
|
High
|
|
|
Low
|
|
|
Paid per Unit
|
|
|
Year Ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended December 31
|
|
$
|
21.87
|
|
|
$
|
1.90
|
|
|
$
|
0.1000
|
|
Quarter Ended September 30
|
|
$
|
27.22
|
|
|
$
|
18.51
|
|
|
$
|
0.3175
|
|
Quarter Ended June 30
|
|
$
|
28.08
|
|
|
$
|
22.12
|
|
|
$
|
0.3050
|
|
Quarter Ended March 31
|
|
$
|
28.90
|
|
|
$
|
21.08
|
|
|
$
|
0.2800
|
|
Year Ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended December 31
|
|
$
|
31.50
|
|
|
$
|
22.49
|
|
|
$
|
0.2550
|
|
Quarter Ended September 30
|
|
$
|
42.22
|
|
|
$
|
25.81
|
|
|
$
|
0.2300
|
|
Quarter Ended June 30
|
|
$
|
35.95
|
|
|
$
|
27.35
|
|
|
$
|
0.2200
|
|
Quarter Ended March 31
|
|
$
|
31.50
|
|
|
$
|
26.65
|
|
|
$
|
0.2075
|
|
Common Units.
As of December 31, 2008, we
had 21,607,500 common units outstanding, of which 8,359,544 were
held by the public and 13,247,956 were held by affiliates,
including our general partners directors. Our common units
are registered under the Securities Exchange Act of 1934, as
amended and are listed for trading on the NASDAQ. Each holder of
a common unit is entitled to one vote per unit on all matters
presented to the limited partners for a vote. The common units
are entitled to distributions of Available Cash as described
below under Cash Distribution Policy. The common
units represent limited partner interests in the Partnership.
The holders of the units are entitled to participate in
partnership distributions and exercise the rights and privileges
available to limited partners under the partnership agreement of
the Partnership. Partnership income or loss is allocated to
limited partners in accordance with their percentage interest.
Our Cash
Distribution Policy.
Within 50 days after the end of each quarter, we will
distribute all of our available cash (as defined in our
partnership agreement) to unitholders of record on the
applicable record date. The amount of available cash generally
is all cash on hand at the date of the determination of
available cash with respect to such quarter: less the amount of
cash reserves established by our general partner to provide for
the proper conduct of our business; comply with applicable law,
any of our debt instruments, or other agreements; or provide
funds for distributions to our unitholders for any one or more
of the next four quarters.
Cash received for available distributions to the limited
partners is derived from distributions on common units and
general partner units, including incentive distributions, of
Hiland Partners. There are no minimum or guaranteed partnership
distributions. Partnership distributions are allocated to
limited partners in accordance with their percentage interest.
Our general partner has no right to receive distributions in
respect of its general partner interest, and accordingly does
not participate in allocations of income or loss or
distributions.
Our distributions will not be cumulative. Consequently, if we do
not pay distributions on our common units with respect to any
fiscal quarter at the anticipated initial quarterly distribution
rate, our unitholders will not be entitled to receive such
payments in the future. We will pay our distributions within
50 days after the end of each quarter ending March, June,
September and December to holders of record. If the distribution
date does not fall on a business day, we will make the
distribution on the business day immediately preceding the
indicated distribution date.
The equity compensation plan information required by
Item 201(d) of
Regulation S-K
in response to this item is incorporated by reference into
Item 12. Security Ownership of Certain Beneficial
Owners and Management and Related Unitholder Matters, of
this annual report on
Form 10-K.
50
Hiland
Partners Cash Distribution Policy
Hiland Partners limited partner common units began trading
on the NASDAQ National Market under the symbol HLND
commencing with its initial public offering on February 10,
2005 at an initial public offering price of $22.50 per common
unit. As of March 5, 2009, the market price for Hiland
Partners common units was $7.40 per unit and there were
approximately 3,700 common unitholders, including beneficial
owners of common units held in street name and one record holder
of our subordinated units. There is no established public
trading market for Hiland Partners subordinated units.
Hiland Partners considers cash distributions to unitholders on a
quarterly basis, although there is no assurance as to the future
cash distributions since they are dependent upon future
earnings, cash flows, capital requirements, financial condition
and other factors. Hiland Partners ability to distribute
available cash is contractually restricted by the terms of its
credit facility. Hiland Partners credit facility contains
covenants requiring them to maintain certain financial ratios
which are tested quarterly, and, as of December 31, 2008,
Hiland Partners was in compliance with each of those covenants.
Hiland Partners ability to remain in compliance with these
restrictions and covenants in the future is uncertain and will
be affected by the levels of cash flow from its operations and
events or circumstances beyond Hiland Partners control. If
commodity prices do not significantly improve above the expected
prices for 2009, Hiland Partners may be in violation of the
maximum consolidated funded debt to EBITDA ratio as early as
June 30, 2009, unless the ratio is amended, the senior
secured revolving credit facility is restructured or it receives
an infusion of equity capital. Hiland Partners is prohibited
from making any distributions to unitholders if the distribution
would cause an event of default, or an event of default exists,
under its credit facility. Please read Item 7.
Managements Discussion and Analysis of Financial Condition
and Results of Operations Liquidity and Capital
Resources Description of Indebtedness
Credit Facility.
The following table shows the high and low prices per common
unit for Hiland Partners, as reported by the NASDAQ National
Market, for the periods indicated. Cash distributions shown
below were paid within 45 days after the end of each
quarter.
|
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|
|
|
|
|
|
|
|
|
|
|
|
Common Unit
|
|
|
|
|
|
|
Price Ranges
|
|
|
Cash Distribution
|
|
|
|
High
|
|
|
Low
|
|
|
Paid per Unit(a)
|
|
|
Year Ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended December 31
|
|
$
|
36.49
|
|
|
$
|
3.64
|
|
|
$
|
0.4500
|
|
Quarter Ended September 30
|
|
$
|
50.44
|
|
|
$
|
33.95
|
|
|
$
|
0.8800
|
|
Quarter Ended June 30
|
|
$
|
52.00
|
|
|
$
|
43.11
|
|
|
$
|
0.8625
|
|
Quarter Ended March 31
|
|
$
|
51.23
|
|
|
$
|
41.83
|
|
|
$
|
0.8275
|
|
Year Ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended December 31
|
|
$
|
53.00
|
|
|
$
|
41.60
|
|
|
$
|
0.7950
|
|
Quarter Ended September 30
|
|
$
|
60.50
|
|
|
$
|
46.02
|
|
|
$
|
0.7550
|
|
Quarter Ended June 30
|
|
$
|
61.75
|
|
|
$
|
52.05
|
|
|
$
|
0.7325
|
|
Quarter Ended March 31
|
|
$
|
58.49
|
|
|
$
|
52.54
|
|
|
$
|
0.7125
|
|
|
|
|
(a)
|
|
For each quarter, an identical per unit cash distribution was
paid on all outstanding subordinated units
|
Within 45 days after the end of each quarter, Hiland
Partners will distribute all of its available cash (as defined
in its partnership agreement) to unitholders of record on the
applicable record date. The amount of available cash generally
is all cash on hand at the end of the quarter plus all cash on
hand on the date of determination of available cash for the
quarter resulting from working capital borrowings made after the
end of the quarter less the amount of cash reserves established
by Hiland Partners GP, LLC, its general partner to provide for
the proper conduct of its business, to comply with applicable
law, any debt instrument or other agreement or to provide funds
for distributions to unitholders and its general partner in
respect of any one or more of the next four quarters. Working
capital borrowings are generally borrowings that are made under
the working capital portion of Hiland Partners credit
facility and in all cases are used solely for working capital
purposes or to pay distributions to partners.
51
Upon the closing of Hiland Partners initial public
offering, affiliates of Harold Hamm, the Hamm Trusts and an
affiliate of Randy Moeder, our past Chief Executive Officer,
received an aggregate of 4,080,000 subordinated units. The
subordinated units were contributed to Hiland Holdings GP, LP, a
publicly owned limited partnership on the date of its initial
public offering, September 25, 2006. During the
subordination period, the common units will have the right to
receive distributions of available cash from operating surplus
in an amount equal to the minimum quarterly distribution of
$0.45 per quarter, plus any arrearages in the payment of the
minimum quarterly distribution on the common units from prior
quarters, before any distributions of available cash from
operating surplus may be made on the subordinated units. The
purpose of the subordinated units is to increase the likelihood
that during the subordination period there will be available
cash to be distributed on the common units. The subordination
period will extend until the first day of any quarter beginning
after March 31, 2010 that each of the following tests are
met: distributions of available cash from operating surplus on
each of the outstanding common units and subordinated units
equaled or exceeded the minimum quarterly distribution for each
of the three consecutive, non-overlapping four-quarter periods
immediately preceding that date; the adjusted operating
surplus (as defined in its partnership agreement)
generated during each of the three consecutive, non-overlapping
four-quarter periods immediately preceding that date equaled or
exceeded the sum of the minimum quarterly distributions on all
of the outstanding common units and subordinated units during
those periods on a fully diluted basis and the related
distribution on the 2% general partner interest during those
periods; and there are no arrearages in payment of the minimum
quarterly distribution on the common units. If the unitholders
remove the general partner without cause, the subordination
period may end before March 31, 2010.
In addition, if the tests for ending the subordination period
are satisfied for any three consecutive four-quarter periods
ending on or after March 31, 2008, 25% of the subordinated
units will convert into an equal number of common units. On
May 16, 2008 these tests were met and accordingly,
1,020,000, or 25%, of the subordinated units converted into an
equal number of common units. Similarly, if those tests are also
satisfied for any three consecutive four-quarter periods ending
on or after March 31, 2009, an additional 25% of the
subordinated units will convert into an equal number of common
units. The second early conversion of subordinated units may not
occur, however, until at least one year following the end of the
period for the first early conversion of subordinated units.
Hiland Partners will make distributions of available cash from
operating surplus for any quarter during any subordination
period in the following manner: first, 98% to the common
unitholders, pro rata, and 2% to Hiland Partners GP, LLC, its
general partner until Hiland Partners distributes for each
outstanding common unit an amount equal to the minimum quarterly
distribution for that quarter; second, 98% to the common
unitholders, pro rata, and 2% to Hiland Partners GP, LLC, its
general partner, until Hiland Partners distributes for each
outstanding common unit an amount equal to any arrearages in
payment of the minimum quarterly distribution on the common
units for any prior quarters during the subordination period;
third, 98% to the subordinated unitholders, pro rata, and 2% to
Hiland Partners GP, LLC, its general partner, until Hiland
Partners distributes for each subordinated unit an amount equal
to the minimum quarterly distribution for that quarter; and
thereafter, cash in excess of the minimum quarterly
distributions is distributed to the unitholders and its general
partner based on the percentages below.
Since we own Hiland Partners GP, LLC, Hiland Partners
general partner, we are entitled to incentive distributions if
the amount Hiland Partners distributes with respect to any
quarter exceeds the specified target levels as shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marginal Percentage
|
|
|
|
Total Quarterly Distribution
|
|
Interest in Distributions
|
|
|
|
Target Amount
|
|
Unitholders
|
|
|
General Partner
|
|
|
Minimum Quarterly Distribution
|
|
$0.45
|
|
|
98
|
%
|
|
|
2
|
%
|
First Target Distribution
|
|
Up to $0.495
|
|
|
98
|
%
|
|
|
2
|
%
|
Second Target Distribution
|
|
Above $0.495 up to $0.5625
|
|
|
85
|
%
|
|
|
15
|
%
|
Third Target Distribution
|
|
Above $0.5625 up to $0.675
|
|
|
75
|
%
|
|
|
25
|
%
|
Thereafter
|
|
Above $0.675
|
|
|
50
|
%
|
|
|
50
|
%
|
52
Equity
Compensation Plans Information
The following table presents information about the unit options
contained in our long-term incentive plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Units
|
|
|
|
|
|
|
|
|
|
Remaining Available for
|
|
|
|
Number of Units to
|
|
|
|
|
|
Future Issuance under
|
|
|
|
be Issued upon Exercise
|
|
|
Weighted-Average Price
|
|
|
Equity Compensation Plan
|
|
|
|
of Outstanding Options
|
|
|
of Outstanding Options
|
|
|
(Excluding Securities
|
|
Plan Category
|
|
and Rights
|
|
|
and Rights
|
|
|
Reflected in Column(a))
|
|
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
Equity Compensation Plans Approved By Security Holders
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Equity Compensation Plans Not Approved By Security Holders
|
|
|
0
|
|
|
|
N/A
|
|
|
|
2,136,000
|
|
Our general partner has adopted and maintains a long term
incentive plan for employees and directors of our general
partner and employees of its affiliates. The plan currently
provides for issuance of a total of 2,160,000 common units to be
issued with respect to unit options, restricted units and
phantom units granted under the plan. For a more complete
description of our long-term incentive plan, please read
Note 9 of the accompanying Notes to Financial Statements.
The following table presents information about the unit options
and restricted units contained in Hiland Partners
long-term incentive plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Units
|
|
|
|
|
|
|
|
|
|
Remaining Available for
|
|
|
|
Number of Units to
|
|
|
|
|
|
Future Issuance under
|
|
|
|
be Issued upon Exercise
|
|
|
Weighted-Average Price
|
|
|
Equity Compensation Plan
|
|
|
|
of Outstanding Options
|
|
|
of Outstanding Options
|
|
|
(Excluding Units
|
|
Plan Category
|
|
and Rights
|
|
|
and Rights
|
|
|
Reflected in Column(a))
|
|
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
Equity Compensation Plans Approved By Security Holders
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Equity Compensation Plans Not Approved By Security Holders
|
|
|
33,336
|
(1)
|
|
$
|
37.92
|
(2)
|
|
|
386,375
|
|
|
|
|
(1)
|
|
Hiland Partners general partner has adopted and maintains
a long term incentive plan for employees and directors of its
general partner and employees of its affiliates. The plan
currently provides for issuance of a total of 680,000 common
units to be issued with respect to unit options, restricted
units and phantom units granted under the plan. For a more
complete description of Hiland Partners long-term
incentive plan, please read Note 9 of the accompanying
Notes to Financial Statements.
|
|
(2)
|
|
The exercise prices for outstanding options under Hiland
Partners plan as of December 31, 2008 range from
$22.50 to $40.70 per unit
|
Issuer
Purchases of Equity Securities
We did not repurchase any of our common units during the fourth
quarter of fiscal 2008.
53
|
|
Item 6.
|
Selected
Historical Financial and Operating Data
|
We were formed in May, 2006 and therefore do not have any
historical financial statements prior to that date. Since we own
Hiland Partners GP, LLC, the general partner of Hiland Partners,
the historical financial data presented below is of Hiland
Partners GP, LLC on a consolidated basis, including Hiland
Partners, and the predecessor of Hiland Partners GP, LLC. Our
historical financial data for periods prior to February 15,
2005 is the historical financial data of Continental Gas, Inc.
(CGI) and Hiland Partners GP, LLC (Hiland Partners
predecessors). The selected historical financial data for the
year ended December 31, 2004 is derived from the audited
financial statements of CGI.
The following table includes the non-GAAP financial measure of
total segment margin, which consists of midstream segment margin
and compression segment margin. We view total segment margin, a
non-GAAP financial measure, as an important performance measure
of the core profitability of our operations because it is
directly related to our volumes and commodity price changes. We
review total segment margin monthly for consistency and trend
analysis. We define midstream segment margin as midstream
revenue less midstream purchases. Midstream revenue includes
revenue from the sale of natural gas, NGLs and NGL products
resulting from Hiland Partners gathering, treating,
processing and fractionation activities and fixed fees
associated with the gathering of natural gas and the
transportation and disposal of saltwater. Midstream purchases
include the following costs and expenses: cost of natural gas
and NGLs purchased by Hiland Partners from third parties, cost
of natural gas and NGLs purchased by Hiland Partners from
affiliates, and costs of crude oil purchased by Hiland Partners
from third parties. We define compression segment margin as the
payments received under Hiland Partners compression
services agreement with CLR which was restructured as described
in Item 7. Managements Discussion and Analysis
of Financial Condition and Results of Operations
Items Impacting Comparability of Our Financial
Results Restructuring of Compression Facilities
Lease. For a reconciliation of this non-GAAP financial
measure to its most directly comparable financial measure
calculated and presented in accordance with GAAP, please refer
to the reconciliation following the table below.
Maintenance capital expenditures represent capital expenditures
made to replace partially or fully depreciated assets to
maintain the existing operating capacity of Hiland
Partners assets and to extend their useful lives, or other
capital expenditures that are incurred in maintaining existing
system volumes and related cash flows. Expansion capital
expenditures represent capital expenditures made to expand or
increase the efficiency of the existing operating capacity of
Hiland Partners assets. Expansion capital expenditures
include expenditures that facilitate an increase in volumes
within Hiland Partners operations, whether through
construction or acquisition. Expenditures that reduce Hiland
Partners operating costs will be considered expansion
capital expenditures only if the reduction in operating expenses
exceeds cost reductions typically resulting from routine
maintenance. Hiland Partners treats costs that (i) are
incurred for the repair and minor renewal of facilities to
maintain the facilities in operating condition and that
(ii) do not extend the useful life of existing assets, as
operations and maintenance expenses as they are incurred.
54
The following table sets forth our selected historical financial
data, which has been derived from our audited historical
financial statements. The table should also be read together
with Item 7. Managements Discussion and
Analysis of Financial Condition and Results of Operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
|
|
|
Hiland
|
|
|
|
|
|
|
|
|
|
Partners
|
|
|
Continental
|
|
|
|
Hiland Holdings GP, LP
|
|
|
GP, LLC
|
|
|
Gas, Inc.
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except per unit and operating data)
|
|
|
Summary of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
387,999
|
|
|
$
|
278,043
|
|
|
$
|
219,686
|
|
|
$
|
166,601
|
|
|
$
|
98,296
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Midstream purchases (exclusive of items shown separately below)
|
|
|
276,600
|
|
|
|
195,212
|
|
|
|
156,193
|
|
|
|
133,089
|
|
|
|
82,532
|
|
Operations and maintenance
|
|
|
30,526
|
|
|
|
23,279
|
|
|
|
16,071
|
|
|
|
7,359
|
|
|
|
4,933
|
|
Depreciation, amortization and accretion
|
|
|
38,650
|
|
|
|
31,002
|
|
|
|
22,863
|
|
|
|
11,112
|
|
|
|
4,127
|
|
Gain on asset sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19
|
)
|
Bad Debt
|
|
|
304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
10,337
|
|
|
|
9,321
|
|
|
|
5,299
|
|
|
|
2,542
|
|
|
|
1,082
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
356,417
|
|
|
|
258,814
|
|
|
|
200,426
|
|
|
|
154,102
|
|
|
|
92,655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
31,582
|
|
|
|
19,229
|
|
|
|
19,260
|
|
|
|
12,499
|
|
|
|
5,641
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other income
|
|
|
357
|
|
|
|
445
|
|
|
|
323
|
|
|
|
192
|
|
|
|
40
|
|
Amortization of deferred loan costs
|
|
|
(663
|
)
|
|
|
(499
|
)
|
|
|
(513
|
)
|
|
|
(484
|
)
|
|
|
(102
|
)
|
Interest expense
|
|
|
(13,674
|
)
|
|
|
(11,371
|
)
|
|
|
(6,543
|
)
|
|
|
(1,942
|
)
|
|
|
(702
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense), net:
|
|
|
(13,980
|
)
|
|
|
(11,425
|
)
|
|
|
(6,733
|
)
|
|
|
(2,234
|
)
|
|
|
(764
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interest
|
|
|
17,602
|
|
|
|
7,804
|
|
|
|
12,527
|
|
|
|
10,265
|
|
|
|
4,877
|
|
Affiliate minority interest in Hiland Partners
|
|
|
|
|
|
|
|
|
|
|
(6,494
|
)
|
|
|
(5,993
|
)
|
|
|
|
|
Non-affiliate minority interest in Hiland Partners
|
|
|
(5,902
|
)
|
|
|
(2,638
|
)
|
|
|
(3,670
|
)
|
|
|
(3,387
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
11,700
|
|
|
|
5,166
|
|
|
|
2,363
|
|
|
|
885
|
|
|
|
4,877
|
|
Discontinued operations, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
|
|
Net income from continuing operations
|
|
$
|
11,700
|
|
|
$
|
5,166
|
|
|
$
|
2,363
|
|
|
$
|
885
|
|
|
$
|
4,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less loss attributable to predecessor
|
|
|
|
|
|
|
|
|
|
|
(407
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
11,700
|
|
|
$
|
5,166
|
|
|
$
|
1,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per limited partner unit basic(1)
|
|
$
|
0.54
|
|
|
$
|
0.24
|
|
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per limited partner unit diluted(1)
|
|
$
|
0.54
|
|
|
$
|
0.24
|
|
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash distributions per limited partner unit(2)
|
|
$
|
1.00
|
|
|
$
|
0.91
|
|
|
$
|
0.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data (at end of period):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, at cost, net
|
|
|
349,159
|
|
|
$
|
323,073
|
|
|
$
|
257,003
|
|
|
$
|
120,715
|
|
|
$
|
37,075
|
|
Total assets
|
|
|
435,560
|
|
|
|
420,286
|
|
|
|
355,198
|
|
|
|
194,085
|
|
|
|
49,175
|
|
Accounts payable affiliates
|
|
|
7,823
|
|
|
|
7,957
|
|
|
|
4,412
|
|
|
|
5,819
|
|
|
|
2,998
|
|
Long-term debt, net of current maturities
|
|
|
256,466
|
|
|
|
226,459
|
|
|
|
147,318
|
|
|
|
33,784
|
|
|
|
12,643
|
|
Minority interests
|
|
|
125,851
|
|
|
|
126,409
|
|
|
|
137,302
|
|
|
|
|
|
|
|
|
|
Net equity
|
|
|
15,497
|
|
|
|
22,135
|
|
|
|
41,157
|
|
|
|
2,791
|
|
|
|
24,510
|
|
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
|
|
|
Hiland
|
|
|
|
|
|
|
|
|
|
Partners
|
|
|
Continental
|
|
|
|
Hiland Holdings GP, LP
|
|
|
GP, LLC
|
|
|
Gas, Inc.
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except per unit and operating data)
|
|
|
Cash Flow Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flow provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
52,484
|
|
|
$
|
39,379
|
|
|
$
|
38,476
|
|
|
$
|
8,159
|
|
|
$
|
7,957
|
|
Investing activities
|
|
|
(54,342
|
)
|
|
|
(83,408
|
)
|
|
|
(158,426
|
)
|
|
|
(74,888
|
)
|
|
|
(5,290
|
)
|
Financing activities
|
|
|
(7,011
|
)
|
|
|
44,062
|
|
|
|
124,201
|
|
|
|
72,830
|
|
|
|
(2,946
|
)
|
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Midstream segment margin
|
|
$
|
106,580
|
|
|
$
|
78,012
|
|
|
$
|
58,674
|
|
|
$
|
29,295
|
|
|
$
|
15,764
|
|
Compression segment margin
|
|
|
4,819
|
|
|
|
4,819
|
|
|
|
4,819
|
|
|
|
4,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment margin
|
|
$
|
111,399
|
|
|
$
|
82,831
|
|
|
$
|
63,493
|
|
|
$
|
33,512
|
|
|
$
|
15,764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maintenance capital expenditures
|
|
$
|
5,994
|
|
|
$
|
3,423
|
|
|
$
|
3,434
|
|
|
$
|
2,225
|
|
|
$
|
1,693
|
|
Expansion capital expenditures
|
|
|
52,275
|
|
|
|
87,530
|
|
|
|
155,103
|
|
|
|
72,723
|
|
|
|
3,474
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital expenditures
|
|
$
|
58,269
|
|
|
$
|
90,953
|
|
|
$
|
158,537
|
|
|
$
|
74,948
|
|
|
$
|
5,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inlet natural gas (Mcf/d)
|
|
|
252,670
|
|
|
|
215,551
|
|
|
|
157,556
|
|
|
|
57,545
|
|
|
|
50,283
|
|
Natural gas sales (MMBtu/d)
|
|
|
90,910
|
|
|
|
80,731
|
|
|
|
66,947
|
|
|
|
47,096
|
|
|
|
40,560
|
|
NGL sales (Bbls/d)
|
|
|
5,920
|
|
|
|
4,696
|
|
|
|
3,347
|
|
|
|
1,965
|
|
|
|
1,133
|
|
|
|
|
(1)
|
|
Net income per unit is not applicable for periods prior to our
initial public offering.
|
|
(2)
|
|
Includes our cash distribution of $0.10 per unit paid on
February 18, 2009 for 2008, $0.255 per unit paid on
February 19, 2008 for 2007 and $0.2075 per unit paid on
February 19, 2007 for 2006.
|
Reconciliation
of Non-GAAP Financial Measure
The following table presents a reconciliation of the non-GAAP
financial measure of total segment margin (which consists of the
sum of midstream segment margin and compression segment margin)
to operating income on a historical basis for each of the
periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
|
|
|
Hiland
|
|
|
|
|
|
|
|
|
|
Partners
|
|
|
Continental
|
|
|
|
Hiland Holdings GP, LP
|
|
|
GP, LLC
|
|
|
Gas, Inc.
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Reconciliation of Total Segment Margin to Operating Income
(Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$
|
31,582
|
|
|
$
|
19,229
|
|
|
$
|
19,260
|
|
|
$
|
12,499
|
|
|
$
|
5,641
|
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations and maintenance expenses
|
|
|
30,526
|
|
|
|
23,279
|
|
|
|
16,071
|
|
|
|
7,359
|
|
|
|
4,933
|
|
Depreciation, amortization and accretion
|
|
|
38,650
|
|
|
|
31,002
|
|
|
|
22,863
|
|
|
|
11,112
|
|
|
|
4,127
|
|
Gain on asset sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19
|
)
|
Bad Debt
|
|
|
304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
10,337
|
|
|
|
9,321
|
|
|
|
5,299
|
|
|
|
2,542
|
|
|
|
1,082
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment margin
|
|
$
|
111,399
|
|
|
$
|
82,831
|
|
|
$
|
63,493
|
|
|
$
|
33,512
|
|
|
$
|
15,764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
You should read the following discussion in conjunction with our
Consolidated Financial Statements and notes thereto included
elsewhere in this report.
Overview
We are a Delaware limited partnership formed in May 2006 to own
Hiland Partners GP, LLC, the general partner of Hiland Partners,
and certain other common and subordinated units in Hiland
Partners.
We reflect our ownership interest in Hiland Partners on a
consolidated basis, which means that our financial results are
combined with Hiland Partners financial results. The
non-controlling limited partner interest in Hiland Partners is
reflected as an expense in our results of operations and as a
liability on our consolidated balance sheet.
Hiland Partners GP, LLCs results of operations, are
reported beginning February 15, 2005 through
September 24, 2006 and principally reflect the results of
operations of Hiland Partners and are adjusted for
non-controlling partners interests in Hiland
Partners net income. Our historical financial information
for periods prior to February 15, 2005 reflect the
financial results of Hiland Partners predecessor, CGI.
Accordingly, the discussion of our financial position and
results of operations in this Managements Discussion
and Analysis of Financial Condition and Results of
Operations reflects the operating activities and results
of operations of us for the period September 25, 2006 to
December 31, 2006, Hiland Partners GP, LLC for periods
after February 15, 2005 through September 24, 2006 and
CGI for periods before February 15, 2005.
Our cash generating assets consist of our direct or indirect
ownership interests in Hiland Partners. Hiland Partners is
principally engaged in gathering, compressing, dehydrating,
treating, processing and marketing natural gas, fractionating
natural gas liquids and providing air compression and water
injection services for oil and gas secondary recovery
operations. Our aggregate ownership interests in Hiland Partners
consist of the following:
|
|
|
|
|
the 2% general partner interest in Hiland Partners;
|
|
|
|
100% of the incentive distribution rights in Hiland
Partners; and
|
|
|
|
2,321,471 common units and 3,060,000 subordinated units of
Hiland Partners, representing a 57.4% limited partner interest
in Hiland Partners.
|
Hiland Partners is required by its partnership agreement to
distribute all of its cash on hand at the end of each quarter,
after establishing reserves to provide for the proper conduct of
its business or to provide funds for future distributions. Until
the current fiscal quarter ended December 31, 2008, Hiland
Partners had increased its quarterly distribution on its common
units by 76.7% since its initial public offering in February
2005 and had increased its quarterly distribution in all but one
of the last eight fiscal quarters. Most recently, due to the
unexpected descending movement in its market price as a result
of significant declines in natural gas index prices and posted
prices for NGLs during the fourth quarter of 2008, Hiland
Partners reduced its quarterly distribution to its minimum
quarterly distribution of $0.45 per unit for the quarter ended
December 31, 2008. This distribution was paid on
February 13, 2009 to unitholders of record on
February 5, 2009.
Our primary objective is to increase our cash distributions to
our unitholders by actively assisting Hiland Partners in
executing its business strategy. We intend to support Hiland
Partners in implementing its business strategy by assisting in
identifying, evaluating and pursuing growth opportunities. In
the future, it is possible that we may also support the growth
of Hiland Partners through the use of our capital resources,
which could involve loans or capital contributions to Hiland
Partners to provide funding for the acquisition of a business or
an asset or for an internal growth project. In addition, we may
provide Hiland Partners with other forms of credit support, such
as guarantees relating to financing a project or other types of
support related to a merger or acquisition transaction.
57
Cash Distributions.
The following table sets
forth the distributions that we have received from Hiland
Partners during the periods indicated (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hiland Partners
|
|
|
|
|
|
|
GP, LLC
|
|
|
|
Hiland Holdings GP, LP
|
|
|
Predecessor
|
|
|
|
Year Ended December 31,
|
|
Hiland Partners Distributions
|
|
2008
|
|
|
2007
|
|
|
2006(a)
|
|
|
2006(b)
|
|
|
Common units
|
|
$
|
6,158
|
|
|
$
|
3,790
|
|
|
$
|
59
|
|
|
$
|
1,012
|
|
Subordinated units
|
|
|
11,952
|
|
|
|
11,883
|
|
|
|
186
|
|
|
|
|
|
Ownership interest in Hiland Partners general partner
|
|
|
798
|
|
|
|
626
|
|
|
|
9
|
|
|
|
503
|
|
General partners incentive distribution rights
|
|
|
7,656
|
|
|
|
3,567
|
|
|
|
42
|
|
|
|
1,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
26,564
|
|
|
$
|
19,866
|
|
|
$
|
296
|
|
|
$
|
3,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Because we own Hiland Partners GP, LLC the distributions to us
includes the distributions made to Hiland Partners GP, LLC and
to us in 2006 prorated following our initial public offering
closing date from September 25, 2006 through
December 31, 2006.
|
|
(b)
|
|
The distributions to our predecessor in 2006 represent the
prorated amount for the period January 1, 2006 to
September 24, 2006, prior to our initial public offering
and our ownership in Hiland Partners GP, LLC.
|
Overview
of Hiland Partners
Hiland Partners is a Delaware limited partnership formed in
October 2004. Hiland Partners is engaged in gathering,
compressing, dehydrating, treating, processing and marketing
natural gas, fractionating NGLs and providing air compression
and water injection services for oil and gas secondary recovery
operations. Hiland Partners operations are primarily
located in the Mid-Continent and Rocky Mountain regions of the
United States.
Hiland Partners completed its initial public offering of
2,300,000 common units on February 15, 2005, receiving net
proceeds of $48.1 million. The proceeds from the public
offering were used to (1) pay remaining offering costs of
$2.2 million and deferred debt issuance costs of
$0.6 million, (2) pay outstanding indebtedness of
$22.9 million, (3) redeem $6.3 million of common
units from an affiliate of Harold Hamm and the Hamm Trusts, and
(4) make a $3.9 million distribution to the previous
owners of Hiland Partners, LLC. Hiland Partners retained
$12.2 million of the net proceeds to replenish working
capital.
Effective September 1, 2005, Hiland Partners consummated
the Bakken acquisition pursuant to which it acquired the
outstanding membership interests in Hiland Partners, LLC, an
Oklahoma limited liability company, for approximately
$92.7 million in cash, $35.0 million of which was used
to retire outstanding Hiland Partners, LLC indebtedness. Hiland
Partners, LLCs principal asset is the Bakken gathering
system located in eastern Montana.
Hiland Partners completed a follow-on offering of 1,630,000
common units on November 21, 2005, receiving net proceeds
of $66.1 million, including a contribution from its general
partner of $1.4 million. Hiland Partners used
$65.2 million of the proceeds from the public offering to
repay borrowings under the credit facility, which were used for
the Bakken acquisition.
On May 1, 2006, Hiland Partners acquired Enogex Gas
Gathering, L.L.C.s eastern Oklahoma Kinta Area gathering
assets for $96.4 million. Hiland Partners financed the
acquisition with $61.2 million of borrowings from its
credit facility and $35.0 million of proceeds from the
issuance to Hiland Partners GP, LLC of 761,714 common units and
15,545 general partner equivalent units at $45.03 per unit. The
purchase price was equal to the average closing price of Hiland
Partners common units for the three trading days
immediately proceeding May 1, 2006. Hiland Partners GP, LLC
entered into a credit agreement under which it borrowed
$35.0 million to purchase the Hiland Partner units. The
obligation was unsecured and guaranteed by the members of Hiland
58
Partners GP, LLC. Hiland Partners GP, LLCs board of
directors, as well as the conflicts committee of the board of
directors, consisting of two independent directors, approved the
transaction.
Hiland Partners is engaged in purchasing, gathering,
compressing, dehydrating, treating, processing and marketing of
natural gas and fractionating and marketing of NGLs and
providing air compression and water injection services for oil
and gas secondary recovery operations. Hiland Partners
operations are primarily located in the Mid-Continent and Rocky
Mountain regions of the United States.
Hiland Partners manages its business and analyzes and reports
its results of operations on a segment basis. Hiland
Partners operations are divided into two business segments:
Midstream Segment,
which is engaged in purchasing,
gathering, compressing, dehydrating, treating, processing and
marketing of natural gas and the fractionation and marketing of
NGLs. Hiland Partners operations are primarily located in
the Mid-Continent and Rocky Mountain regions of the United
States. The midstream segment generated 95.7%, 94.2% and 92.4%
of the total segment margin for the years ended
December 31, 2008, 2007 and 2006, respectively.
Compression Segment,
which is engaged in providing air
compression and water injection services for oil and gas
secondary recovery operations that are ongoing in North Dakota.
The compression segment generated 4.3%, 5.8% and 7.6% of the
total segment margin for the years ended December 31, 2008,
2007 and 2006, respectively.
Hiland Partners midstream assets consist of 14 natural gas
gathering systems with approximately 2,111 miles of gas
gathering pipelines, five natural gas processing plants, seven
natural gas treating facilities and three NGL fractionation
facilities. Hiland Partners compression assets consist of
two air compression facilities and a water injection plant.
Hiland Partners results of operations are determined
primarily by five interrelated variables: (1) the volume of
natural gas gathered through its pipelines; (2) the volume
of natural gas processed; (3) the volume of NGLs
fractionated; (4) the levels and relationship of natural
gas and NGL prices; and (5) Hiland Partners current
contract portfolio. Because Hiland Partners profitability
is a function of the difference between the revenues it receives
from its operations, including revenues from the products it
sells, and the costs associated with conducting its operations,
including the costs of products it purchases, increases or
decreases in Hiland Partners revenues alone are not
necessarily indicative of increases or decreases in its
profitability. To a large extent, Hiland Partners contract
portfolio and the pricing environment for natural gas and NGLs
will dictate increases or decreases in its profitability. Hiland
Partners profitability is also dependent upon prices and
market demand for natural gas and NGLs, which fluctuate with
changes in market and economic conditions and other factors.
How
Hiland Partners Evaluates Its Operations
Hiland Partners management uses a variety of financial and
operational measurements to analyze its segment performance.
These measurements include the following: (1) natural gas
and NGL sales volumes, throughput volumes and fuel consumption
by Hiland Partners facilities; (2) total segment
margin; (3) operations and maintenance expenses;
(4) general and administrative expenses; and
(5) EBITDA.
Volumes and Fuel Consumption.
Natural gas and
NGL sales volumes, throughput volumes and fuel consumption
associated with Hiland Partners business are an important
part of its operational analysis. Hiland Partners continually
monitors volumes on its pipelines to ensure that there is
adequate throughput to meet its financial objectives. It is
important that Hiland Partners continually add new volumes to
its gathering systems to offset or exceed the normal decline of
existing volumes that are connected to those systems. The
performance at Hiland Partners compressing, processing,
fractionation and treating facilities is significantly
influenced by the volumes of natural gas that flows through
those systems. In addition, Hiland Partners monitors fuel
consumption, which affects the total segment margin realized
from Hiland Partners midstream operations and compression
services operations.
59
Total Segment Margin.
Hiland Partners views
total segment margin as an important performance measure of the
core profitability of its operations because it is directly
related to Hiland Partners volumes and commodity price
changes. Hiland Partners reviews total segment margin monthly
for consistency and trend analysis.
With respect to its midstream segment, Hiland Partners defines
midstream segment margin as its midstream revenue minus
midstream purchases. Midstream revenue includes revenue from the
sale of natural gas, NGLs and NGL products resulting from its
gathering, treating, processing and fractionation activities and
fixed fees associated with its gathering of natural gas and
transportation and disposal of saltwater. Midstream purchases
include the cost of natural gas, condensate and NGLs purchased
from third parties the cost of natural gas, condensate and NGLs
purchased by Hiland Partners from affiliates, and the costs of
crude oil purchased by Hiland Partners from third parties.
Hiland Partners midstream segment margin is impacted by
its midstream contract portfolio, which is described in more
detail below.
With respect to Hiland Partners compression segment, following
the restructuring of its lease arrangement to become a service
arrangement in connection with Hiland Partners initial
public offering as described in
Items Impacting Comparability of Our
Financial Results, Hiland Partners compression
segment margin equals the fee it earns under the compression
services agreement with CLR for providing air compression and
water injection services. The fee earned under this agreement is
fixed so long as Hiland Partners facilities meet specified
availability requirements, regardless of CLRs utilization.
As a result, the compression segment margin is dependent on
Hiland Partners ability to meet their utilization levels.
For a discussion of this agreement, please read
Hiland Partners Contracts
Compression Services Agreement.
Total segment margin is a Non-GAAP performance measure. For a
reconciliation of Total Segment Margin to the most comparable
GAAP financial measure, please see Item 6. Selected
Historical Financial and Operating Data.
Operations and Maintenance
Expenses.
Operations and maintenance expenses are
costs associated with the operation of a specific asset. Direct
labor, insurance, ad valorem taxes, repair and maintenance,
utilities and contract services comprise the most significant
portion of Hiland Partners operations and maintenance
expenses. These expenses remain relatively stable independent of
the volumes through Hiland Partners systems but fluctuate
slightly depending on the activities performed during a specific
period.
General and Administrative Expenses.
General
and administrative expenses include the cost of employee and
officer compensation and related benefits, office lease and
expenses, professional fees, information technology expenses, as
well as other expenses not directly associated with field
operations.
How
Hiland Partners Manages Its Operations
Hiland Partners management team uses a variety of tools to
manage its business. These tools include: (1) flow and
transaction monitoring systems; (2) producer activity
evaluation and reporting; and (3) imbalance monitoring and
control.
Flow and transaction monitoring
systems.
Hiland Partners uses a customized system
that tracks commercial activity on a daily basis at each of its
gathering systems, processing plants and treating and
fractionation facilities. Hiland Partners tracks and monitors
inlet volumes to its facilities, fuel consumption, NGLs and NGL
products extracted, condensate volumes and residue sales
volumes. Hiland Partners also monitors daily operational
throughput at its air compression and water injection facilities.
Producer activity evaluation and
reporting.
The continued connection of natural
gas production to Hiland Partners gathering systems is
critical to its business and directly impacts its financial
performance. Hiland Partners monitors the producer drilling and
completion activity in its primary areas of operation to
identify anticipated changes in production and potential
well-attachment opportunities. Hiland Partners receives daily
summaries of new drilling permits and completion reports filed
with the state regulatory agencies that govern these activities
on all of its gathering systems. Producers that have dedicated
acreage to the Bakken gathering system provide Hiland Partners
with their projected annual drilling schedules, which are
updated periodically. Additionally, Hiland Partners field
personnel report the locations of new wells in their respective
60
areas and anticipated changes in production volumes to supply
representatives and operating personnel at Hiland Partners
corporate offices. These processes enhance Hiland Partners
awareness of new well activity in its operating areas and allow
Hiland Partners to be responsive to producers in connecting new
volumes of natural gas to its pipelines.
Imbalance monitoring and control.
Hiland
Partners continually monitors volumes it delivers to pipelines
and volumes nominated for sale on pipelines to ensure it remains
within acceptable imbalance limits during a calendar month.
Hiland Partners seeks to reduce imbalances between deliveries
and sales of natural gas because of the inherent commodity risk
that results when deliveries and sales of natural gas are not
balanced concurrently.
Hiland
Partners Contracts
Because of the significant volatility of natural gas and NGL
prices, Hiland Partners contract mix can have a
significant impact on its profitability. In order to reduce its
exposure to commodity price risk and where market conditions
permit, Hiland Partners pursues arrangements under which it
purchases natural gas from the producers at the wellhead at an
index based price less a fixed fee to gather, dehydrate,
compress, treat
and/or
process their natural gas, referred to as fee based arrangements
or contracts. Actual contract terms are based upon a variety of
factors, including natural gas quality, geographical location,
the competitive environment at the time the contract is executed
and customer requirements. Hiland Partners contract mix
and, accordingly, its exposure to natural gas and NGL prices,
may change as a result of producer preferences, its expansion in
regions where some types of contracts are more common and other
market factors.
Hiland
Partners Natural Gas Sales Contracts
Hiland Partners sells natural gas on intrastate and interstate
pipelines to marketing affiliates of natural gas pipelines,
marketing affiliates of integrated oil companies and utilities.
Hiland Partners typically sells natural gas on a monthly basis
under index-related pricing terms.
Hiland Partners also uses cash flow hedges to limit its exposure
to changing natural gas prices. Under these hedges, Hiland
Partners settles monthly on the difference between the sales or
purchases of future production to or from its counterparty at
fixed prices and the price that will be established on the date
of hedge settlement by reference to a specified index price.
These hedges cover periods of up to twenty-four months from the
date of the hedge.
Hiland
Partners NGL Sales Arrangements
Hiland Partners sells NGLs and NGL products at the tailgate of
its facilities to ONEOK Hydrocarbon, LP, SemStream, L.P., and a
subsidiary of Kinder Morgan Energy Partners, L.P. Hiland
Partners typically sells NGLs and NGL products on a monthly
basis under index related pricing terms in its Mid-Continent
region and at market prices in its Rocky Mountain region. Hiland
Partners also uses cash flow hedges to limit its exposure to
changing NGL prices. Under these hedges, Hiland Partners settles
monthly on the difference between the sales of future production
to its counterparty at a fixed price and the price that will be
established on the date of hedge settlement by reference to a
specified index price. In the past these hedges have covered
periods of up to twelve months from the date of the hedge. As of
January 1, 2009, Hiland Partners had no NGL hedging
contracts outstanding.
Hiland
Partners Hedging Contracts
To insure that Hiland Partners financial instruments will
be used solely for hedging price risks and not for speculative
purposes, Hiland Partners continually reviews its hedges for
compliance with its hedging policies and procedures. Hiland
Partners recognizes gains and losses from the settlement of its
hedges as revenue when it sells the associated physical residue
natural gas or NGLs. Any gain or loss realized as a result of
hedging is substantially offset in the market when Hiland
Partners sells the physical residue natural gas or NGLs. Hiland
Partners hedges that qualify for hedge accounting are
characterized as cash flow hedges as defined in Statement of
Financial Accounting Standards No. 133, Accounting
for Derivative Instruments and
61
Hedging Activities, as amended. Hiland Partners determines
gains or losses on open and closed hedging transactions based
upon the difference between the hedge price and the physical
price. For a more detailed discussion on Hiland Partners
hedging activity, please read commodity price risks included in
Item 7A. Quantitative and Qualitative Disclosures
about Market Risk.
Hiland
Partners Natural Gas Purchase and Gathering
Contracts
With respect to Hiland Partners natural gas gathering,
compression, dehydrating, treating, processing and marketing
activities and its NGL fractionation activities, Hiland Partners
contracts under four types of arrangements. Under all contracts
except the fixed-fee gathering arrangement, Hiland Partners is
required to purchase the supplied gas, subject to the demands of
resale purchasers and the operating conditions and capacity of
its facilities. Hiland Partners does not guarantee the purchase
of any particular quantity of the gas which is available for
sale. The supplier delivers the gas to Hiland Partners at the
inlet of its gathering systems and Hiland Partners obtains title
to the gas at the delivery point. The gas delivered to Hiland
Partners is required to meet specified quality requirements.
Under the fixed-fee gathering arrangement, Hiland Partners takes
custody of, but does not purchase or take title to the gas
supplied to them.
The following is a summary of the four types of natural gas
purchase or gathering contract arrangements that account for the
largest percentage of volumes purchased for the years ended
December 31, 2008, 2007, and 2006.
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Percentage-of-proceeds
arrangements.
Under
percentage-of-proceeds
contracts, Hiland Partners generally purchases natural gas from
producers at the wellhead, gathers, treats, and processes the
natural gas, in some cases fractionates the NGLs into NGL
products, and then sells the resulting residue gas and NGLs or
NGL products at index related prices. Hiland Partners remits to
the producers an agreed upon percentage of the proceeds for the
natural gas and the NGLs.
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Under these types of contracts, Hiland Partners revenues
and total segment margin correlate directly with the price of
natural gas and NGLs. For the years ended December 31,
2008, 2007, and 2006 Hiland Partners purchased 51%, 56% and 52%
of its total purchased volumes under these types of fee
contracts, respectively.
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Percentage-of-index
arrangements.
Under
percentage-of-index
contracts, Hiland Partners purchases natural gas from the
producers at the wellhead at a price that is at a fixed
percentage of the expected index-related price for the resale of
the natural gas they produce. Hiland Partners then gathers,
treats and processes the natural gas, in some cases fractionates
the NGLs into NGL products and then sells the residue gas and
NGLs or NGL products pursuant to natural gas or NGL contracts
described above. Because under these types of contracts Hiland
Partners costs to purchase the natural gas from the
producer is based on the price of natural gas, Hiland
Partners total segment margin under these contracts
increases as the realized price of NGLs increases relative to
the expected index-related price of natural gas, and Hiland
Partners total segment margin under these contracts
decreases as the expected index-related price of natural gas
increases relative to the realized price of NGLs (keep-whole
exposure). For the years ended December 31, 2008, 2007 and
2006 Hiland Partners purchased 8%, 12% and 17% of its total
purchased volumes under these types of fee contracts,
respectively.
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Index-minus-fees arrangements.
Under
index-minus-fees contracts, Hiland Partners purchases natural
gas from the producers at the wellhead at an expected index
related price less fees to gather, dehydrate, compress, treat
and/or
process their natural gas. These types of contracts typically
require Hiland Partners to pay the producer for the value of the
wellhead gas less the applicable fees. Because under these types
of contracts Hiland Partners costs to purchase the natural
gas from the producer is based on the expected index-related
price of natural gas, Hiland Partners total segment margin
under these contracts increases as the realized price of NGLs
increases relative to the expected index-related price of
natural gas, and Hiland Partners total segment margin
under these contracts decreases as the expected index-related
price of natural gas increases relative to the realized price of
NGLs (keep-whole exposure). For the years ended
December 31, 2008, 2007, and 2006, Hiland Partners
purchased 41%, 32% and 31% of its total purchased volumes under
these types of fee contracts, respectively.
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62
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Fixed-fee gathering arrangements.
Under
fixed-fee gathering contracts, Hiland Partners gathers,
dehydrates, compresses and treats natural gas supplied to Hiland
Partners gathering systems and redelivers the compressed
natural gas for a fixed fee. Under these contracts, Hiland
Partners takes custody of, but does not take title to, the
natural gas. Hiland Partners gathered an average of
133,755 MMBtu/d for 2008, 123,008 MMBtu/d for 2007 and
from the period May 1, 2006, the date Hiland Partners
acquired the Kinta Area gas gathering assets, through
December 31, 2006, Hiland Partners gathered an average of
134,140 MMBtu/d.
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Compression
Services Agreement
Under the compression services agreement that Hiland Partners
entered into with CLR in connection with its initial public
offering and effective as of January 28, 2005, CLR pays
Hiland Partners a fixed monthly fee to provide compressed air
and water at pressures sufficient to allow for the injection of
either air or water into underground reservoirs for oil and gas
secondary recovery operations. Under the compression services
agreement, CLR is responsible for the provision to Hiland
Partners of power and water to be utilized in the compression
process. If Hiland Partners facilities do not meet the
monthly volume requirements for compressed air and water, and
the failure is not attributable to CLR, failure to supply power
or water or a force majeure, the fixed monthly payment will be
reduced in proportion to the volumes of air or water Hiland
Partners was unable to deliver during such month. CLR may
terminate the compression services agreement if Hiland Partners
is unable to deliver any compressed air and water for a period
of more than 20 consecutive days and the failure is not
attributable to CLRs failure to supply power or water or a
force majeure. The agreements initial term ended on
January 28, 2009 and the agreement now automatically renews
on a
month-to-month
basis unless terminated by either party by giving notice at
least 15 days prior to the end of the then current month.
Items Impacting
Comparability of Our Financial Results
Our historical results of operations for the periods presented
may not be comparable, either from period to period or going
forward, for the reasons described below.
Hiland
Holdings, Hiland Partners GP, LLCs and Hiland
Partners Formation
We were formed in May 2006 to own Hiland Partners GP, LLC, the
general partner of Hiland Partners, and certain other common and
subordinated units in Hiland Partners. Hiland Partners GP, LLC
and Hiland Partners were formed in October 2004 to own and
operate the assets that have historically been owned and
operated by CGI Immediately prior to consummation of Hiland
Partners initial public offering, the former owners of CGI
and Hiland Partners, LLC contributed to Hiland Partners all of
the assets and operations of CGI other than a portion of its
working capital assets, and all of the assets and operations of
Hiland Partners, LLC, other than a portion of its working
capital assets and the assets related to the Bakken gathering
system. Effective September 1, 2005, Hiland Partners
acquired Hiland Partners, LLC, which owned the Bakken gathering
system.
CGI is Hiland Partners GP, LLCs and Hiland Partners
predecessor for accounting purposes and historically owned all
of Hiland Partners natural gas gathering, processing and
fractionation assets other than the Worland and Bakken gathering
systems, the Kinta Area gathering systems Hiland Partners
acquired on May 1, 2006 and its internally constructed
Woodford Shale gathering system, which commenced operations in
April 2007. As a result, Hiland Partners GP, LLCs and
Hiland Partners historical financial statements for the
periods prior to February 15, 2005 are the financial
statements of CGI
Hiland Partners, LLC historically owned the Worland gathering
system, the Horse Creek compression facility, the Cedar Hills
water injection plant located next to Hiland Partners
Cedar Hills compression facility and the Bakken gathering
system.
63
Restructuring
of Compression Facilities Lease
Prior to Hiland Partners initial public offering, Hiland
Partners, LLC owned Hiland Partners Horse Creek air
compression facility and its Cedar Hills water injection
facility. In 2002, Hiland Partners, LLC entered into a five year
lease agreement with CLR, pursuant to which Hiland Partners, LLC
leased the facilities to CLR. CLR used its own personnel to
operate the facilities, and Hiland Partners, LLC made no
operational decisions. In connection with Hiland Partners
formation and initial public offering, Hiland Partners entered
into a four-year services agreement with CLR, effective as of
January 28, 2005, that replaced the existing lease. The
four year services agreement terminated on January 28,
2009. Hiland Partners is currently operating on a
month-to-month
basis which can be terminated by either party by giving notice
at least 15 days prior to the end of the then current
month. Under the services agreement, Hiland Partners owns and
operates the facilities and provides air compression and water
injection services to CLR for a fee. As part of the
restructuring in January 2005, the personnel at CLR that
operated the facilities were transferred to Hiland Partners.
Under the current services agreement, Hiland Partners receives a
fixed payment of approximately $4.8 million per year as
compared to $3.8 million per year under the prior lease
agreement. In connection with this services arrangement, Hiland
Partners incurs approximately $1.0 million per year in
additional operating costs. For a description of the
restructured agreement, please read Hiland
Partners Contracts Compression Services
Agreement.
Construction
and Acquisition Activities of Hiland Partners
Since its inception, Hiland Partners has grown through a
combination of building gas gathering and processing assets and
acquisitions. For example, Hiland Partners commenced operation
of the original Matli gathering system in 1999, constructed the
original Matli processing plant in 2003 and completed the
construction of a new processing plant in 2006. Additionally,
Hiland Partners acquired the Worland gathering system in 2000.
Hiland Partners acquired the Carmen gathering system in 2003 as
an expansion of the Eagle Chief gathering system. Prior to its
acquisition of the Carmen gathering system, Hiland Partners
purchased the gas from the previous owner, processed it and
returned it to the previous owner pursuant to a keep-whole
arrangement. After Hiland Partners acquired the Carmen gathering
system, Hiland Partners terminated this keep-whole arrangement
and now sells the gas at the tailgate of the Eagle Chief
processing plant. More recently, Hiland Partners completed the
Bakken acquisition in September 2005 and the acquisition of the
Kinta Area gathering assets in May 2006. Hiland Partners
historical acquisitions were completed at different dates and
with numerous sellers and were accounted for using the purchase
method of accounting. Under the purchase method of accounting,
results from such acquisitions are recorded in the financial
statements only from the date of acquisition.
Hiland Partners acquired the Kinta Area gathering assets in May
2006 and operates the gathering assets substantially differently
than were operated by the previous owner. Since there was no
sufficient continuity of the Kinta Area gathering assets
operations prior to and after the acquisition, disclosure of
prior financial information would not be material to an
understanding of future operations. Therefore, the acquisition
has been recorded as a purchase of assets and not of a business.
Hiland Partners expanded its processing plant and the existing
field-gathering infrastructure and constructed a
40,000 Mcf/d nitrogen rejection plant at its Badlands gas
gathering system located in Bowman County, North Dakota. Hiland
Partners also entered into a five-year definitive purchase
agreement with a producer and has constructed additional
compression facilities and expanded its existing Badlands gas
gathering system into South Dakota.
Hiland Partners has installed additional gathering and
compression infrastructure at its Bakken gathering system to
increase the systems capacity from approximately
20,000 Mcf/d to 25,000 Mcf/d and in 2007, expanded the
existing NGL fractionation facilities at the processing plant to
fractionate increased NGL volumes from both the Bakken
processing plant and the Badlands processing plant.
In 2009, Hiland Partners completed the installation of
additional pipelines and compression facilities and increased
system capacity at its Eagle Chief gathering system from
approximately 30,000 Mcf/d to approximately
35,500 Mcf/d due to increased volumes on this system.
Hiland Partners has also completed the
64
construction a 25,000 Mcf/d natural gas processing facility
along its existing Matli gas gathering system which now provides
additional plant processing capacity for increased system
volumes.
In 2007, Hiland Partners installed four 10,000 Mcf/d
capacity amine-treating facilities at several of its Kinta Area
gathering system locations to remove excess carbon dioxide
levels from the natural gas. In the third quarter of 2008,
Hiland Partners completed the installation of additional
compression facilities on the Kinta Area gathering system to
increase the capacity by approximately 20,000 Mcf/d to
200,000 Mcf/d.
In December 2006, Hiland Partners entered into an agreement to
construct and operate gathering pipelines and related facilities
associated with the development of a portion of the acreage
owned by CLR in the Woodford shale play in the Arkoma Basin of
southeastern Oklahoma. Hiland Partners has installed field
gathering, compression and associated equipment designed to
provide low-pressure gathering, compression and dehydration
services. The gathering infrastructure currently includes more
than 17,400 horsepower of compression to provide takeaway
capacity of approximately 65,000 Mcf/d.
Hiland Partners construction of a processing plant and
gathering pipeline at its North Dakota Bakken system located in
the Bakken Shale play in northwestern North Dakota commenced in
October 2008. As of December 31, 2008, the gathering system
consisted of 23 miles of natural gas gathering pipelines.
Our
Results of Operations
The results of our operations discussed below principally
reflect the activities of Hiland Partners. Because our
consolidated financial statements include the results of Hiland
Partners, our financial statements are substantially similar to
the financial statements of Hiland Partners and its predecessor,
CGI. However, our consolidated balance sheet includes a minority
interest amount that reflects the proportion of Hiland Partners
owned by its unitholders other than us. Similarly, the ownership
interests in Hiland Partners held by its unitholders other than
us are reflected in our consolidated income statement as
minority interest. The minority interest amounts are not
reflected on Hiland Partners financial statements.
The following table presents a reconciliation of the non-GAAP
financial measure of total segment margin (which consists of the
sum of midstream segment margin and compression segment margin)
to operating income on a historical basis for each of the
periods indicated. We view total segment margin, a non-GAAP
financial measure, as an important performance measure of the
core profitability of our operations because it is directly
related to Hiland Partners volumes and commodity price
changes. We review total segment margin monthly for consistency
and trend analysis. We define midstream segment margin as
midstream revenue less midstream purchases. Midstream revenue
includes revenue from the sale of natural gas, NGLs and NGL
products resulting from our gathering, treating, processing and
fractionation activities and fixed fees associated with the
gathering of natural gas and the transportation and disposal of
saltwater. Midstream purchases include the following costs and
expenses: cost of natural gas, condensate and NGLs purchased by
us from third parties, cost of natural gas, condensate and NGLs
purchased by Hiland Partners from affiliates, and cost of crude
oil purchased by Hiland Partners from third parties. We define
compression segment margin as the revenue derived from Hiland
Partners compression segment. Our total segment margin may
not be comparable to similarly titled measures of other
companies as other companies may not calculate total segment
margin in the same manner.
65
Set forth in the tables below are financial and operating data
for us and our predecessor, Hiland Partners GP, LLC for the
periods indicated. Operations from the acquisition of the Kinta
Area gathering assets are reflected only from May 1, 2006.
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Year Ended December 31
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|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
Hiland
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|
|
|
|
|
Hiland
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|
Hiland
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Partners,
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|
|
|
|
|
Holdings
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|
|
Holdings
|
|
|
GP, LLC
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|
|
|
|
|
GP, LP
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|
GP, LP(1)
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Predecessor(2)
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|
Total
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|
|
|
(In thousands)
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|
|
Total Segment Margin Data:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Midstream revenues
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|
$
|
383,180
|
|
|
$
|
273,224
|
|
|
$
|
65,489
|
|
|
$
|
149,378
|
|
|
$
|
214,867
|
|
Midstream purchases
|
|
|
276,600
|
|
|
|
195,212
|
|
|
|
45,921
|
|
|
|
110,272
|
|
|
|
156,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Midstream segment margin
|
|
|
106,580
|
|
|
|
78,012
|
|
|
|
19,568
|
|
|
|
39,106
|
|
|
|
58,674
|
|
Compression revenues
|
|
|
4,819
|
|
|
|
4,819
|
|
|
|
1,440
|
|
|
|
3,379
|
|
|
|
4,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total segment margin(3)
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$
|
111,399
|
|
|
$
|
82,831
|
|
|
$
|
21,008
|
|
|
$
|
42,485
|
|
|
$
|
63,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Summary of Operations Data:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Midstream revenues
|
|
$
|
383,180
|
|
|
$
|
273,224
|
|
|
$
|
65,489
|
|
|
$
|
149,378
|
|
|
$
|
214,867
|
|
Compression revenues
|
|
|
4,819
|
|
|
|
4,819
|
|
|
|
1,440
|
|
|
|
3,379
|
|
|
|
4,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
387,999
|
|
|
|
278,043
|
|
|
|
66,929
|
|
|
|
152,757
|
|
|
|
219,686
|
|
Operating costs and expenses:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Midstream purchases (exclusive of items shown separately below)
|
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|
276,600
|
|
|
|
195,212
|
|
|
|
45,921
|
|
|
|
110,272
|
|
|
|
156,193
|
|
Operations and maintenance expenses
|
|
|
30,526
|
|
|
|
23,279
|
|
|
|
5,658
|
|
|
|
10,413
|
|
|
|
16,071
|
|
Depreciation and amortization expenses
|
|
|
38,650
|
|
|
|
31,002
|
|
|
|
7,661
|
|
|
|
15,202
|
|
|
|
22,863
|
|
Bad Debt
|
|
|
304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
10,337
|
|
|
|
9,321
|
|
|
|
1,857
|
|
|
|
3,442
|
|
|
|
5,299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
356,417
|
|
|
|
258,814
|
|
|
|
61,097
|
|
|
|
139,329
|
|
|
|
200,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Operating income
|
|
|
31,582
|
|
|
|
19,229
|
|
|
|
5,832
|
|
|
|
13,428
|
|
|
|
19,260
|
|
Other income (expense), net
|
|
|
(13,980
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)
|
|
|
(11,425
|
)
|
|
|
(2,150
|
)
|
|
|
(4,583
|
)
|
|
|
(6,733
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Income from continuing operations before minority interest in
Hiland Partners, LP
|
|
|
17,602
|
|
|
|
7,804
|
|
|
|
3,682
|
|
|
|
8,845
|
|
|
|
12,527
|
|
Minority interest in income of Hiland Partners, LP
|
|
|
(5,902
|
)
|
|
|
(2,638
|
)
|
|
|
(1,726
|
)
|
|
|
(8,438
|
)
|
|
|
(10,164
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
11,700
|
|
|
$
|
5,166
|
|
|
$
|
1,956
|
|
|
$
|
407
|
|
|
$
|
2,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Amounts presented in the Hiland Holdings GP, LP column include
only the consolidated operations beginning on September 25,
2006. These amounts include the contribution of assets and
member interest from Hiland Partners GP, LLC at the completion
of our initial public offering.
|
|
(2)
|
|
Amounts presented in the Hiland Partners GP, LLC predecessor
column include only the consolidated operations for the period
beginning January 1, 2006 to September 25, 2006 the
date of our initial public offering.
|
|
(3)
|
|
Compression revenues and compression segment margin are the
same. There are no compression purchases associated with the
compression segment.
|
66
|
|
|
(4)
|
|
Reconciliation of total segment margin to operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
Hiland
|
|
|
|
|
|
|
Hiland
|
|
|
Hiland
|
|
|
Partners,
|
|
|
|
|
|
|
Holdings
|
|
|
Holdings
|
|
|
GP, LLC
|
|
|
|
|
|
|
GP, LP
|
|
|
GP, LP(1)
|
|
|
Predecessor(2)
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Operating income
|
|
$
|
31,582
|
|
|
$
|
19,229
|
|
|
$
|
5,832
|
|
|
$
|
13,428
|
|
|
$
|
19,260
|
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations and maintenance expenses
|
|
|
30,526
|
|
|
|
23,279
|
|
|
|
5,658
|
|
|
|
10,413
|
|
|
|
16,071
|
|
Depreciation, amortization and accretion
|
|
|
38,650
|
|
|
|
31,002
|
|
|
|
7,661
|
|
|
|
15,202
|
|
|
|
22,863
|
|
Bad Debt
|
|
|
304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
10,337
|
|
|
|
9,321
|
|
|
|
1,857
|
|
|
|
3,442
|
|
|
|
5,299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment margin
|
|
$
|
111,399
|
|
|
$
|
82,831
|
|
|
$
|
21,008
|
|
|
$
|
42,485
|
|
|
$
|
63,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Amounts presented in the Hiland Holdings GP, LP column include
only the consolidated operations beginning on September 25,
2006. These amounts include the contribution of assets and
member interest from Hiland Partners GP, LLC at the completion
of our initial public offering.
|
|
(2)
|
|
Amounts presented in the Hiland Partners GP, LLC predecessor
column include only the consolidated operations for the period
beginning January 1, 2006 to September 25, 2006 the
date of our initial public offering.
|
Year
Ended December 31, 2008 Compared with Year Ended
December 31, 2007
Revenues.
Total revenues (midstream and
compression) were $388.0 million for the year ended
December 31, 2008 compared to $278.0 million for the
year ended December 31, 2007, an increase of
$110.0 million, or 39.6%. This $110.0 million increase
was primarily due to: (i) increased natural gas sales
volumes of 13,852 MMBtu/day (MMBtu per day) and increased
NGL sales volumes of 771 Bbls/day (Bbls per day) related to
the Woodford Shale gathering system which commenced operation in
April 2007, (ii) increased NGL sales volumes of
502 Bbls/day attributable to the expanded Badlands
gathering system, including the processing and nitrogen
rejection plants and other treating facilities, which commenced
operation in August 2007 and (iii) significantly higher
average realized natural gas and NGL sales prices for the year
ended December 31, 2008 as compared to the year ended
December 31, 2007, resulting in increased revenue at all of
the gathering systems. Revenues from compression assets were the
same for both periods.
Midstream revenues were $383.2 million for the year ended
December 31, 2008 compared to $273.2 million for the
year ended December 31, 2007, an increase of
$110.0 million, or 40.2%. Of this $110.0 million
increase in midstream revenues, approximately $48.5 million
was attributable to revenues from increased natural gas and NGL
sales volumes at the Woodford Shale, Badlands, Bakken and Matli
gathering systems and approximately $61.5 million was
attributable to significantly higher average realized natural
gas and NGL sales prices for the year ended December 31,
2008 as compared to the same period in 2007, resulting in
increased revenues for all of the gathering systems.
Inlet natural gas was 252,670 Mcf/d (Mcf per day) for the
year ended December 31, 2008 compared to 215,551 Mcf/d
for the year ended December 31, 2007, an increase of
37,119 Mcf/d, or 17.2%. This increase is primarily
attributable to volume growth at the Woodford Shale and Badlands
gathering systems, offset by volume declines at the Eagle Chief
gathering system.
Natural gas sales volumes were 90,910 MMBtu/d for the year
ended December 31, 2008 compared to 80,731 MMBtu/d for
the year ended December 31, 2007, an increase of
10,179 MMBtu/d, or 12.6%. This 10,179 MMBtu/d net
increase in natural gas sales volumes was attributable to
increased natural gas sales volumes at the Woodford Shale,
Bakken and Matli gathering systems, offset by reduced natural
gas sales volumes at the Eagle Chief and Kinta gathering systems.
67
NGL sales volumes were 5,920 Bbls/d for the year ended
December 31, 2008 compared to 4,696 Bbls/d for the
year ended December 31, 2007, a net increase of
1,224 Bbls/d, or 26.1%. This net increase is primarily
attributable to volume growth at the Woodford Shale and Badlands
gathering systems, offset by reduced NGL sales volumes at the
Bakken and Eagle Chief gathering systems.
During 2008, Hiland Partners experienced extreme swings in its
average realized natural gas and NGL sales prices. Average
realized natural gas sales price increased from $6.44/MMBtu in
January 2008 to a high sales price of $10.05/MMBtu in July 2008,
then decreased to a low sales price of $3.38/MMBtu in November
2008. Average realized NGL sales price increased from $1.42 per
gallon in January 2008 to a high sales price of $1.74 per gallon
in June 2008, then decreased to a low sales price of $0.61 per
gallon in December 2008. Consequently, for the year ended
December 31, 2008, average realized natural gas sales
prices were $7.00 per MMBtu compared to $5.75 per MMBtu for the
year ended December 31, 2007, an increase of $1.25 per
MMBtu, or 21.7%. Average realized NGL sales prices for the year
ended December 31, 2008 were $1.33 per gallon compared to
$1.18 per gallon for the year ended December 31, 2007, an
increase of $0.15 per gallon or 12.7%. The overall increase in
Hiland Partners average realized natural gas and NGL sales
prices was a result of higher index prices for natural gas and
posted prices for NGLs during the year ended December 31,
2008 compared to the year ended December 31, 2007.
Cash received from Hiland Partners counterparty on cash
flow swap contracts for natural gas derivative transactions that
closed during the year ended December 31, 2008 totaled
$2.8 million compared to $4.8 million for the year
ended December 31, 2007. The $2.8 million gain for the
year ended December 31, 2008 increased averaged realized
natural gas prices to $7.00 per MMBtu from $6.91 per MMBtu, an
increase of $0.09 per MMBtu. The $4.8 million gain for the
year ended December 31, 2007 increased averaged realized
natural gas prices to $5.75 per MMBtu from $5.59 per MMBtu, an
increase of $0.16 per MMBtu. Cash paid to Hiland Partners
counterparty on cash flow swap contracts for NGL derivative
transactions that closed during the year ended December 31,
2008 totaled $5.9 million compared to $3.0 million for
the year ended December 31, 2007. The $5.9 million
loss for the year ended December 31, 2008 reduced averaged
realized NGL prices to $1.33 per gallon from $1.39 per gallon, a
decrease of $0.06 per gallon. The $3.0 million loss for the
year ended December 31, 2007 reduced averaged realized NGL
prices to $1.18 per gallon from $1.22 per gallon, a decrease of
$0.04 per gallon.
Hiland Partners compression revenues were
$4.8 million for each of the years ended December 31,
2008 and 2007.
Midstream Purchases.
Midstream purchases were
$276.6 million for the year ended December 31, 2008
compared to $195.2 million for the year ended
December 31, 2007, an increase of $81.4 million, or
41.7%. The $81.4 million increase is primarily due to
volume growth at the Woodford Shale gathering system which
commenced operation in April 2007, the expanded Badlands
gathering system, including the processing and nitrogen
rejection plants and the other treating facilities, which
commenced operation in August 2007, increased volume growth at
the Matli gathering system and higher natural gas and NGL
purchase prices, resulting in increased midstream purchases for
all of the gathering systems.
Midstream Segment Margin.
Midstream segment
margin was $106.6 million for the year ended
December 31, 2008 compared to $78.0 million for the
year ended December 31, 2007, an increase of
$28.6 million, or 36.6%. The increase is primarily due to
favorable average gross processing spreads, higher average
realized natural gas and NGL prices, volume growth at the
expanded Badlands gathering system, including the processing and
nitrogen rejection plants and the other treating facilities,
which commenced operations in August 2007, volume growth at the
Woodford Shale gathering system which commenced operation in
April 2007, and volume growth at the Matli gathering system. As
a percent of midstream revenues, midstream segment margin was
27.8% and 28.6% for the year ended December 31, 2008 and
2007, respectively, a reduction of 0.8%. This reduction is
attributable to net losses on closed/settled derivative
transactions and unrealized non-cash losses on derivative
transactions for the year ended December 31, 2008 totaling
$3.0 million, offset by an unrealized non-cash gain of
$6.7 million related to a non-qualifying
mark-to-market
cash flow derivative for forecasted natural gas sales in 2010,
compared to net gains totaling $1.8 million on
closed/settled derivative transactions and $0.4 million
unrealized non-cash gains on derivative
68
transactions for the year ended December 31, 2007. The
increase in midstream segment margin was offset by approximately
$2.3 million of forgone margin as a result of the Badlands
nitrogen rejection plant being temporarily taken out of service
due to equipment failure during the first quarter in 2008.
Operations and Maintenance.
Operations and
maintenance expense totaled $30.5 million for the year
ended December 31, 2008 compared with $23.3 million
for the year ended December 31, 2007, an increase of
$7.2 million, or 31.1%. Of this increase, $4.0 million
was attributable to increased operations and maintenance at the
expanded Badlands gathering system and $2.0 million was
attributable to increased operations and maintenance at the
Woodford Shale gathering system.
Depreciation, Amortization and
Accretion.
Depreciation, amortization and
accretion expense totaled $38.7 million for the year ended
December 31, 2008 compared with $31.0 million for the
year ended December 31, 2007, an increase of
$7.7 million, or 24.7%. Of this increase, $2.3 million
was attributable to increased depreciation on the expanded
Badlands gathering system, $2.3 million was attributable to
increased depreciation on the Woodford Shale gathering system,
$1.3 million was attributable to increased depreciation on
the Bakken gathering system and $1.0 million was
attributable to increased depreciation on the Kinta Area
gathering systems.
General and Administrative.
General and
administrative expense totaled $10.3 million for the year
ended December 31, 2008 compared with $9.3 million for
the year ended December 31, 2007, an increase of
$1.0 million or 10.9%. Salaries increased $1.4 million
in the year ended December 31, 2008 as compared to the year
ended December 31, 2007 due to increased non-cash unit
based compensation and increased staffing during the year ended
December 31, 2008 as compared to the year ended
December 31, 2007. Additionally, audit, tax and costs of
being a public company increased by $0.4 million in the
year ended December 31, 2008 as compared to the year ended
December 31, 2007. General and administrative expenses
included $1.1 million of unsuccessful acquisition costs
incurred in the year ended December 31, 2007 compared to
only $0.1 million in the year ended December 31, 2008.
Other Income (Expense).
Other income (expense)
totaled $(14.0) million for the year ended
December 31, 2008 compared with $(11.4) million for
the year ended December 31, 2007, an increase in expense of
$2.6 million. The increase is primarily attributable to
additional interest expense from borrowings on Hiland
Partners credit facility to fund expansions at the
Badlands and Kinta Area gathering systems and to fund internal
growth projects at the Woodford Shale and the North Dakota
Bakken gathering systems, after being offset by lower interest
rates incurred during the year ended December 31, 2008
compared to interest rates incurred during the year ended
December 31, 2007.
Minority Interest.
Minority interest in income
of Hiland Partners, which represents the allocation of Hiland
Partners earnings to its limited partner interests not owned by
us totaled $5.9 million for the year ended
December 31, 2008 compared to $2.6 million for the
year ended December 31, 2007, an increase of
$3.3 million.
Year
Ended December 31, 2007 Compared with Year Ended
December 31, 2006
Revenues.
Total revenues (midstream and
compression) were $278.0 million for the year ended
December 31, 2007 compared to $219.7 million for the
year ended December 31, 2006, an increase of
$58.4 million, or 26.6%. This $58.4 million increase
was largely due to (i) revenues associated with natural gas
sales volumes related to the Woodford Shale gathering system
which commenced production in late April 27, 2007,
(ii) a full year of natural gas sales volumes in 2007
related to Hiland Partners acquisition of the Kinta Area
gathering assets effective May 1, 2006,
(iii) increased natural gas sales volumes at the Eagle
Chief and Bakken gathering systems, (iv) revenues related
to increased NGL sales volumes at Hiland Partners Woodford
Shale, Bakken, Badlands and Eagle Chief gathering systems and
(v) increased average realized NGL sales prices partially
offset by lower average realized natural gas sales prices in
2007 as compared to the same period in 2006. Revenues from
compression assets were the same for both periods.
Midstream revenues were $273.2 million for the year ended
December 31, 2007 compared to $214.9 million for the
year ended December 31, 2006, a net increase of
$58.4 million, or 27.2%. Of this increase in midstream
revenues, approximately $57.4 million was attributable to
natural gas sales volumes related to the Woodford
69
Shale gathering system, a full year of natural gas sales volumes
and gathering fee volumes in 2007 associated with the Kinta Area
gathering assets acquisition effective May 1, 2006 and
increased natural gas and NGL sales volumes at Hiland
Partners Bakken, Badlands and Eagle Chief gathering
systems. Midstream revenues increased by approximately
$12.7 million due to increased NGL sales prices offset by
$11.7 million as a result of lower natural gas sales prices
compared to 2006. The Woodford Shale gathering system, which
began production in late April, 2007 accounted for 28.8% of the
$58.4 million increase contributing $16.8 million to
midstream revenues.
Inlet natural gas volumes were 215,551 Mcf/d for the year
ended December 31, 2007 compared to 157,556 Mcf/d for
the year ended December 31, 2006, an increase of
57,995 Mcf/d, or 36.8%. Of the 57,995 Mcf/d increase,
41,915 Mcf/d, or 72.3% was attributable to inlet Mcf/d at
the Kinta Area gathering system for a full year in 2007 which
Hiland Partners acquired effective May 1, 2006, and the
remaining 16,080 Mcf/d increase was primarily attributable
to inlet Mcf/d at the Woodford Shale gathering system and
increased inlet Mcf/d at Hiland Partners Eagle Chief,
Bakken and Badlands gathering systems. Natural gas sales volumes
were 80,731 MMBtu/d for the year ended December 31,
2007 compared to 66,947 MMBtu/d for the year ended
December 31, 2006, an increase of 13,784 MMBtu/d, or
20.6%. The increase of 13,784 MMBtu/d was primarily
attributable to the increased natural gas volumes as a result of
a full year of operations in 2007 at the Kinta Area gathering
system which Hiland Partners acquired effective May 1, 2006
and to increased volumes at both the Bakken and Eagle Chief
gathering systems and the new Woodford Shale gathering system,
which contributed 4,649 MMBtu/d to the increase in natural
gas sales volumes. Hiland Partners NGL sales volumes were
4,696 Bbls/d for the year ended December 31, 2007
compared to 3,347 Bbls/d for the year ended
December 31, 2006, an increase of 1,349 Bbls/d, or
40.3%. Of the 1,349 Bbls/d increase, 443 Bbls/d, or
32.8% was attributable to NGL sales volumes at the Woodford
Shale gathering system and 834 Bbls/d, or 61.8% was
attributable to increased NGL sales volumes at the Bakken, Eagle
Chief and Badlands gathering systems.
Average realized natural gas sales prices were $5.75 per MMBtu
for the year ended December 31, 2007 compared to $6.11 per
MMBtu for the year ended December 31, 2006, a decrease of
$0.36 per MMBtu, or 5.9%. Hiland Partners average realized
NGL sales prices were $1.18 per gallon for the year ended
December 31, 2007 compared to $1.02 per gallon for the year
ended December 31, 2006, an increase of $0.16 per gallon or
15.7%. The change in its average realized natural gas sales
prices was primarily a result of lower index prices due to a
softening of supply and demand fundamentals for energy, which
caused natural gas prices to fall during the year ended
December 31, 2007 compared to the year ended
December 31, 2006. The change in its average realized NGL
sales prices was primarily a result of higher index prices due
to a tightening of supply and demand fundamentals for energy,
which caused NGL prices to rise during the year ended
December 31, 2007 compared to the year ended
December 31, 2006.
Net cash received from Hiland Partners counterparty on
cash flow swap contracts that began on May 1, 2006 for
natural gas derivative transactions that closed during the year
ended December 31, 2007 was $4.8 million and compared
to $3.6 million for the year ended December 31, 2006.
These receipts increased average realized natural gas sales
prices by $0.16 per MMBtu in 2007 and by $0.14 per MMBtu in
2006. Cash paid to Hiland Partners counterparty on cash
flow swap contracts that began on September 1, 2006 for NGL
derivative transactions that closed during the year ended
December 31, 2007 was $3.0 million. These payments
decreased average realized natural gas sales prices by $0.04 per
gallon in 2007. Closed NGL derivative transactions during the
year ended December 31, 2006 were insignificant.
Fees earned from 123,008 MMBtu/d of natural gas gathered,
in which Hiland Partners does not take title to the gas, related
to its Kinta Area gathering assets acquired on May 1, 2006
were $11.1 million for the year ended December 31,
2007. Similar fees earned from May 1, 2006 through
December 31, 2006 averaging 127,437 MMBtu/d of natural
gas gathered was $7.2 million. The increase of
$3.9 million in fees earned was primarily due to a full
year of operations in 2007 as compared to eight months of
operations in 2006, and partially attributable to treating fees
earned related to the four amine treating facilities installed
in early 2007. Gathering fees earned during the year ended
December 2007 as compared to the eight month period in 2006 were
somewhat offset by a 4,429 MMBtu/d reduction in volumes
gathered.
70
Hiland Partners compression revenues were
$4.8 million for the each of the years ended
December 31, 2007 and 2006.
Midstream Purchases.
Midstream purchases were
$195.2 million for the year ended December 31, 2007
compared to $156.2 million for the year ended
December 31, 2006, an increase of $39.0 million, or
25.0%. The $39.0 million increase primarily consists of
$12.8 million, or 32.8% attributable to purchased natural
gas from the Woodford Shale gathering system and
$10.8 million, or 27.6%, attributable to purchased natural
gas from the Kinta Area gathering assets for a full year of
operations in 2007. The remaining increase in midstream
purchases was attributable to increased purchased residue gas
volumes at Hiland Partners Bakken, Eagle Chief and
Badlands gathering systems. The increase in volumes was offset
by reduced payments to producers due primarily to lower natural
gas purchase prices, which generally are closely related to
fluctuations in natural gas sales prices.
Midstream Segment Margin.
Midstream segment
margin was $78.0 million for the year ended
December 31, 2007 compared to $58.7 million for the
year ended December 31, 2006, an increase of
$19.3 million, or 33.0%. The increase is primarily due to
favorable gross processing spreads for the year, higher average
realized natural gas and NGL prices for the year, volume growth
at the expanded Badlands gathering system, including the
processing and nitrogen rejection plants and the other treating
facilities, which commenced operations in August 2007, volume
growth at the Woodford Shale gathering system which commenced
operation in April 2007, volume growth at the Kinta Area
gathering system which we acquire in May 2006 and volume growth
at the Bakken and Eagle Chief gathering systems. As a percent of
midstream revenues, midstream segment margin was 28.6% and 27.3%
for the year ended December 31, 2007 and 2006,
respectively, an increase of 1.3%. This increase is primarily
attributable to increased volumes on gathering systems with more
accretive segment margins for the year ended December 31,
2007 as compared to the year ended December 31, 2006. These
increases were offset by a decrease of $1.8 million on
closed/settled derivative transactions of $1.8 million
during the year ended December 31, 2007 compared to
$3.6 million on closed/settled derivative transactions
during the year ended December 31, 2006.
Operations and Maintenance.
Operations and
maintenance expense totaled $23.3 million for the year
ended December 31, 2007 compared with $16.1 million
for the year ended December 31, 2006, an increase of
$7.2 million, or 44.9%. Of this increase,
$2.9 million, or 40.0% was attributable to a full year of
operations and maintenance expense at the Kinta Area gathering
system. Operations and maintenance expense also increased by
$2.5 million, or 35.2% at the Badlands gathering facility
largely due to compressor rentals and other related costs
associated with its expansion project. Hiland Partners new
Woodford Shale gathering system contributed $0.9 million to
the increase in operations and maintenance expense and its
Bakken and Eagle Chief gathering systems, as a result of
increased volumes, contributed $0.8 million to the increase
in operations and maintenance expense.
Depreciation, Amortization and
Accretion.
Depreciation, amortization and
accretion expense totaled $31.0 million for the year ended
December 31, 2007 compared with $22.9 million for the
year ended December 31, 2006, an increase of
$8.1 million, or 35.6%. Of this increase,
$3.1 million, or 38.1% was attributable to depreciation and
amortization on the Kinta Area gathering system for a full year
of operations in 2007. The increase is also attributable to
additional depreciation related to Hiland Partners
internal organic growth projects completed in 2007 of
$2.2 million, or 27.1% at the Bakken gathering system and
$1.4 million, or 16.9% at the Badlands gathering system,
General and Administrative.
General and
administrative expense totaled $9.3 million for the year
ended December 31, 2007 compared with $5.3 million for
the year ended December 31, 2006, an increase of
$4.0 million, or 75.9%. The increase is primarily
attributable to $1.2 million of acquisition evaluation
expenses, $0.9 million of non-cash compensation expense
related to unit option awards and restricted and phantom unit
awards and $0.06 million due to increased salaries and
salary related expenses as a result of additional staffing,
including costs of recruitment.
Other Income (Expense).
Our other income
(expense) totaled ($11.4) million for the year ended
December 31, 2007 compared with ($6.7) million for the
year ended December 31, 2006, an increase in expense of
$4.7 million. The increase is primarily attributable to
additional interest expense from a full year of
71
borrowings on credit facility for the acquisition of the Kinta
Area gathering assets effective May 1, 2006 and to interest
expense for Hiland Partners internal plant and pipeline
expansion projects at its Badlands, Woodford Shale and Bakken
gathering systems in 2007.
General
Trends and Outlook
We expect Hiland Partners business to continue to be
affected by the following key trends. These expectations are
based on assumptions made by us and information currently
available to us. To the extent our underlying assumptions about
or interpretations of available information prove to be
incorrect, our expectations may vary materially from actual
results. Please see Forward-Looking Statements.
U.S. Gas Supply and Outlook.
Natural gas
prices declined dramatically since the peak New York Mercantile
Exchange (NYMEX) Henry Hub last day settle price of
$13.11/MMBtu in July 2008 to the low NYMEX Henry Hub last day
settle price of $4.48 in February 2009. U.S. natural gas
drilling rig counts have declined by approximately 29% to 1,018
as of February 20, 2009, compared to 1,430 natural gas
drilling rigs in the comparable period of 2008, and
approximately 37% compared to the peak natural gas drilling rig
count of 1,606 in August and September 2008. We believe that
current natural gas prices will continue to result in reduced
natural gas-related drilling activity as producers seek to
decrease their level of natural gas production. We also believe
that current reduced natural gas drilling activity will persist
until the economic environment in the United States improves and
increases the demand for natural gas.
U.S. Crude Oil Supply and Outlook.
The
domestic and global recession and resulting drop in demand for
crude oil products has significantly impacted the price for
crude oil. West Texas Intermediate (WTI) crude oil pricing has
declined from a peak of $134.62/bbl in July 2008 to a low of
$33.87/Bbl in January 2009, a 74.8% decline. U.S. crude oil
drilling rig counts have declined by approximately 19% to 269 as
of February 20, 2009, compared to 333 crude oil drilling
rigs in the comparable period of 2008, and approximately 39%
compared to the peak crude oil drilling rig count of 442 in
November 2008. The forward curve for WTI crude oil pricing
reflects continued reductions in demand for crude oil. We also
believe that current reduced crude oil drilling activity will
persist until the economic environment in the United States
improves and increases the demand for crude oil.
U.S. NGL Supply and Outlook.
The domestic
and global recession and resulting drop in demand for NGL
products has significantly impacted the price for NGLs. NGL
prices have dropped dramatically since the peak NGL basket
pricing of $2.21/gallon in June 2008 to a January 2009 NGL
basket pricing of $0.68/gallon, a 69.2% decline. NGL basket
pricing correlates to WTI crude oil pricing. WTI crude oil
pricing has declined from a peak of $134.62/Bbl in July 2008 to
a low of $33.87/Bbl in January 2009, a 74.8% decline. The
forward curve for NGL basket pricing and WTI crude oil pricing
reflects continued reductions in demand for NGL products. We
also believe that the current reduced NGL products pricing will
persist until the economic environment in the United States
improves and increases the demand for NGL products.
A number of the areas in which Hiland Partners operates are
experiencing a significant decline in drilling activity as a
result of the recent dramatic decline in natural gas and crude
oil prices. While we anticipate continued exploration and
production activities in the areas in which Hiland Partners
operates, albeit at depressed levels, fluctuations in energy
prices can greatly affect production rates and investments by
third parties in the development of natural gas and oil
reserves. Drilling activity generally decreases as natural gas
and oil prices decrease. Hiland Partners has no control over the
level of drilling activity in the areas of its operations.
Midstream Segment Margins.
During 2008, Hiland
Partners midstream segment margins were positively
impacted by increased natural gas and NGL volumes, increased
natural gas and NGL sales prices and increased processing
spreads resulting in an increase in our midstream segment
margins from 2007. During 2007, Hiland Partners midstream
segment margins were positively impacted due to increased
volumes and NGL prices but were negatively impacted due to
reduced natural gas prices resulting in a net increase in its
midstream segment margins from 2006. During 2006, Hiland
Partners midstream segment margins were positively
impacted due to increased volumes but were negatively impacted
due to reduced natural gas prices and NGL prices, resulting in a
net increase in margins from 2005. Hiland Partners
profitability is dependent
72
upon pricing and market demand for natural gas and NGLs, which
are beyond its control and have experienced substantial
volatility in 2008.
Interest Rate Environment.
Interest rates on
future credit facility borrowings and debt offerings could be
higher than current levels, causing Hiland Partners
financing costs to increase accordingly. Although this could
limit Hiland Partners ability to raise funds in the debt
capital markets, Hiland Partners expects to remain competitive
with respect to acquisitions and capital projects, as
competitors would face similar circumstances. As with other
yield-oriented securities, our unit price and Hiland
Partners unit price are impacted by the level of cash
distributions and an associated implied distribution yield. The
distribution yield is often used by investors to compare and
rank related yield oriented securities for investment decision
making purposes. Therefore, changes in interest rates, either
positive or negative, may affect the yield requirements of
investors who invest in our and Hiland Partners units, and
a rising interest rate environment could have an adverse impact
on our and Hiland Partners unit price and our and Hiland
Partners ability to issue additional equity to make
acquisitions, reduce debt or for other purposes.
Impact of
Inflation
Inflation in the United States has been relatively low in recent
years and did not have a material impact on our results of
operations for the periods presented.
Liquidity
and Capital Resources
Overview
Due to the recent decline in natural gas and NGL prices, we
believe that our cash generated from operations will decrease in
2009 relative to comparable periods in 2008. Hiland
Partners senior secured revolving credit facility requires
Hiland Partners to meet certain financial tests, including a
maximum consolidated funded debt to EBITDA ratio of 4.0:10 as of
the last day of any fiscal quarter; provided that in the event
that Hiland Partners makes certain permitted acquisitions or
capital expenditures, this ratio may be increased to 4.75:1.0
for the three fiscal quarters following the quarter in which
such acquisition or capital expenditure occurs. Hiland Partners
intends to elect to increase the ratio to 4.75:1.0 on
March 31, 2009. During this
step-up
period, the applicable margin with respect to loans under the
credit facility will be increased by 35 basis points per
annum and the unused commitment fee will be increased by
12.5 basis points per annum. Additionally, if commodity
prices do not significantly improve above the expected prices
for 2009, Hiland Partners may be in violation of the maximum
consolidated funded debt to EBITDA ratio as early as
June 30, 2009, unless the ratio is amended, the senior
secured revolving credit facility is restructured or Hiland
Partners receives an infusion of equity capital.
Cash
Flows
Year
ended December 31, 2008 Compared to Year ended
December 31, 2007
Cash Flows from Operating Activities.
Cash
flows from operating activities increased by $13.1 million
to $52.5 million for the year ended December 31, 2008
from $39.4 million for the year ended December 31,
2007. During the year ended December 31, 2008 Hiland
Partners received cash flows from its customers of approximately
$387.5 million, had cash payments to suppliers and
employees of approximately $321.3 million and payment of
interest expense of $13.7 million, net of amounts
capitalized, resulting in cash received from operating
activities of $52.5 million. During year ended
December 31, 2007, Hiland Partners received cash flows from
customers of approximately $269.6 million, had cash
payments to our suppliers and employees of approximately
$218.8 million and payment of interest expense of
$11.4 million, net of amounts capitalized, resulting in
cash received from operating activities of $39.4 million.
The increase in cash flows for the year ended December 31,
2008, as compared to the year ended December 31, 2007, was
attributable to increased natural gas and NGLs volumes and
higher average realized natural gas and NGL sales prices.
Changes in cash receipts and payments are primarily due to the
timing of collections at the end of our reporting periods.
Hiland Partners collects and pays large receivables and payables
at the end of each calendar
73
month. The timing of these payments and receipts may vary by a
day or two between month-end periods and cause fluctuations in
cash received or paid. Working capital items, exclusive of cash,
provided $0.4 million to cash flows from operating
activities during the year ended December 31, 2008 and used
$1.0 million of cash flows from operating activities during
the year ended December 31, 2007.
Net income for the year ended December 31, 2008 was
$11.7 million, an increase of $6.5 million from a net
income of $5.2 million for the year ended December 31,
2007. Depreciation and amortization increased by
$7.6 million to $38.5 million for the year ended
December 31, 2008 from $30.9 million for the year
ended December 31, 2007. Bad debt expense was
$0.3 million for the year ended December 31, 2008
compared to zero for the year ended December 31, 2007.
Cash Flows Used for Investing Activities.
Cash
flows used for investing activities, which represent investments
in property and equipment decreased by $29.1 million to
$54.3 million for the year ended December 31, 2008
from $83.4 million for the year ended December 31,
2007 primarily due to reduced capital investing in the year
ended December 31, 2008 related to the Badlands nitrogen
rejection plant which was under construction during the first
eight months of 2007.
Cash Flows from Financing Activities.
Cash
flows from financing activities decreased to $(7.0) million
for the year ended December 31, 2008 from
$44.1 million for the year ended December 31, 2007, a
decrease of $51.1 million. During the year ended
December 31, 2008, Hiland Partners borrowed
$41.0 million under its credit facility to fund internal
expansion and organic growth projects, made payments of
$10.0 million to its credit facility, received capital
contributions of $1.0 million as a result of issuing Hiland
Partners common units in connection with the exercise of 40,705
vested unit options, incurred debt issuance costs of
$0.4 million associated with the fourth amendment to Hiland
Partners credit facility in February 2008 and made
$0.5 million payments on capital lease obligations. During
the year ended December 31, 2008, we borrowed
$0.4 million under our credit facility, made distributions
of $25.0 million to our unitholders and Hiland Partners
distributed $13.4 million to its minority interest
unitholders.
During the year ended December 31, 2007, Hiland Partners
borrowed $74.0 million under its credit facility to fund
internal expansion projects, received capital contributions of
$1.0 million as a result of issuing common units due to the
exercise of 42,660 vested unit options, distributed
$31.3 million to unitholders, incurred offering costs of
$0.2 million associated with the preparation and filing of
a registration statement filed with the SEC on January 23,
2007 and paid debt issuance costs of $0.5 million
associated with our third amendment to our credit facility in
July 2007. During the year ended December 31, 2007, we made
distributions of $18.7 million to our unitholders and
Hiland Partners distributed $11.4 million to its minority
interest unitholders.
Year
ended December 31, 2007 Compared to Year ended
December 31, 2006
Cash Flows from Operating Activities.
Cash
flows from operating activities increased by $0.9 million
to $39.4 million for the year ended December 31, 2007
from $38.5 million for the year ended December 31,
2006. During the year ended December 31, 2007, Hiland
Partners received cash flows from customers of approximately
$269.6 million, had cash payments to suppliers and
employees of approximately $218.9 million and payment of
interest expense of $11.4 million, net of amounts
capitalized, resulting in cash received from operating
activities of $30.4 million. During the year ended
December 31, 2006, Hiland Partners received cash flows from
customers of approximately $217.8 million, had cash
payments to our suppliers and employees of approximately
$172.6 million and payment of interest expense of
$6.4 million, net of amounts capitalized, resulting in cash
received from our operating activities of $38.5 million.
Changes in cash receipts and payments are primarily due to the
timing of collections at the end of our reporting periods.
Hiland Partners collects and pays large receivables and payables
at the end of each calendar month. The timing of these payments
and receipts may vary by a day or two between month-end periods
and cause fluctuations in cash received or paid. Natural gas and
NGL volumes from Hiland Partners new Woodford Shale
gathering system and increased natural gas and NGL volumes from
its Bakken, Badlands and Eagle Chief gathering systems combined
with increased NGL sales prices, but offset by lower natural gas
sales prices contributed to increases in accounts receivable,
accrued midstream revenues, accounts payable and accrued
midstream purchases during
74
the year ended December 31, 2007. Working capital items,
exclusive of cash, used $1.0 million in cash flows from
operating activities and contributed $2.3 million to cash
flows from operating activities during the years ended
December 31, 2007 and 2006, respectively. Net income for
the year ended December 31, 2007 was $5.2 million, an
increase of $2.8 million from a net income of
$2.4 million for the year ended December 31, 2006.
Depreciation, amortization and accretion increased by
$8.1 million or 20.9%, to $30.9 million for the year
ended December 31, 2007 from $22.8 million for the
year ended December 31, 2006.
Cash Flows Used for Investing Activities.
Cash
flows used for investing activities representing internal
organic growth investments in property and equipment, increased
by $21.3 million to $83.4 million for the year ended
December 31, 2007 from $62.1 million for the year
ended December 31, 2006. This $21.3 million increase
is largely attributable to cash invested at the new Woodford
Shale gathering system, the Badlands expansion project and
continued growth at the Bakken gathering system. There were no
acquisitions in 2007. In May 2006, $96.4 million of cash
flows was used for the Kinta Area gathering assets acquisition.
Cash Flows from Financing Activities.
Our cash
flows from financing activities decreased by $80.1 million
to $44.1 million for the year ended December 31, 2007
from $124.2 million for the year ended December 31,
2006. During the year ended December 31, 2007, Hiland
Partners borrowed $74.0 million under its credit facility
to fund internal expansion projects and we borrowed
$0.1 million under our credit facility. Hiland Partners
received capital contributions of $1.0 million as a result
of issuing common units due to the exercise of 42,660 vested
unit options, made capital lease obligation payments of
$0.3 million, incurred offering costs of $0.2 million
associated with its
S-3/A
registration statement filed with the SEC on January 23,
2007 and paid debt issuance costs of $0.5 million
associated with its third amended credit facility. Hiland
Partners distributed $11.4 million to its minority interest
owners and we distributed $18.7 million to our unitholders.
During the year ended December 31, 2006, Hiland Partners
borrowed $113.3 million under its credit facility to
partially fund the Kinta Area gathering assets acquisition on
May 1, 2006 and to fund its internal expansion projects at
both its Badlands and Bakken gathering systems. Also during the
year ended December 31, 2006, we received capital
contributions of $35.0 million from our general partner in
exchange for the issuance of 761,714 common units and general
partner equivalent units, received $1.3 million as a result
of issuing common units due to the exercise of 52,699 vested
unit options, paid debt issuance costs of $0.9 million and
distributed $25.6 million to our unitholders.
Capital
Requirements
The midstream energy business is capital intensive, requiring
significant investment to maintain and upgrade existing
operations. Our capital requirements have consisted primarily
of, and we anticipate will continue to be:
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maintenance capital expenditures, which are capital expenditures
made to replace partially or fully depreciated assets to
maintain the existing operating capacity of Hiland
Partners assets and to extend their useful lives, or other
capital expenditures that are incurred in maintaining existing
system volumes and related cash flows; and
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expansion capital expenditures such as those to acquire
additional assets to grow Hiland Partners business, to
expand and upgrade gathering systems, processing plants,
treating facilities and fractionation facilities and to
construct or acquire similar systems or facilities.
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75
Total Contractual Cash Obligations.
A summary
of our contractual cash obligations as of December 31,
2008, including leases renewed and entered into subsequent to
year end is presented below:
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|
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Payment Due by Period
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Total
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Due in
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Due in
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Due in
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Due in
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Due in
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Type of Obligation
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Obligation
|
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2009
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2010
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2011
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2012
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2013
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Thereafter
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|
(In thousands)
|
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|
Senior secured revolving credit facilities
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$
|
252,769
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|
$
|
705
|
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|
$
|
|
|
|
$
|
252,064
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|
|
$
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|
|
|
$
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|
$
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Estimated interest expense on credit facilities(1)
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19,650
|
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|
|
8,283
|
|
|
|
8,267
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|
|
3,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligations(2)
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|
7,378
|
|
|
|
1,256
|
|
|
|
1,256
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|
|
|
1,256
|
|
|
|
1,107
|
|
|
|
1,001
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|
|
1,502
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Operating leases, service agreements and other
|
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|
3,959
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|
|
|
1,700
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|
|
|
858
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|
|
|
465
|
|
|
|
299
|
|
|
|
211
|
|
|
|
426
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|
|
|
|
|
|
|
|
|
|
|
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|
|
|
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|
|
|
|
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|
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|
|
|
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Total contractual cash obligations
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$
|
283,756
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|
|
$
|
11,944
|
|
|
$
|
10,381
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|
|
$
|
256,885
|
|
|
$
|
1,406
|
|
|
$
|
1,212
|
|
|
$
|
1,928
|
|
|
|
|
|
|
|
|
|
|
|
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(1)
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Interest rates on the senior secured revolving credit facilities
are variable. Estimated interest payments are based on the
interest rates and the amounts outstanding as of
December 31, 2008. For a discussion of ours and Hiland
Partners senior secured revolving credit facilities,
please read Credit Facility below.
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(2)
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Contractual cash commitments on our capital lease obligations
include $2,335 of interest expense.
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Financial Derivatives and Commodity
Hedges.
Hiland Partners has entered into certain
financial derivative instruments that are classified as cash
flow hedges in accordance with Statement of Financial Accounting
Standards (SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended,
and relate to forecasted sales and purchases in 2008, 2009 and a
mark-to-market
cash flow derivative which relates to forecasted sales in 2010.
Hiland Partners entered into these instruments to hedge the
forecasted natural gas sales and NGL sales or purchases against
the variability in expected future cash flows attributable to
changes in commodity prices. Under these swap agreements, Hiland
Partners receives a fixed price and pays a floating price or
pays a fixed price and receives a floating price based on
certain indices for the relevant contract period as the
underlying natural gas is sold or purchased or NGL is sold. The
following table provides information about the commodity based
derivative instruments at December 31, 2008.
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Average
|
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Fair Value
|
|
|
|
|
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Fixed/Open
|
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Asset
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|
Description and Production Period
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Volume
|
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Price
|
|
|
(Liability)
|
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|
(MMBtu)
|
|
|
(Per MMBtu)
|
|
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Natural Gas Sold Fixed for Floating Price Swaps
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|
|
|
|
|
|
|
|
|
|
|
January 2009 December 2009
|
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|
2,136,000
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$
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7.30
|
|
|
$
|
6,851
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|
January 2010 December 2010
|
|
|
2,136,000
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|
$
|
10.50
|
|
|
|
7,141
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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$
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13,992
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|
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The following table provides information about Hiland
Partners interest rate swap at December 31, 2008:
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Fair Value
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Notional
|
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Interest
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Asset
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|
Description and Period
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Amount
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|
|
Rate
|
|
|
(Liability)
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Interest Rate Swap
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|
|
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|
|
|
|
|
|
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January 2009 December 2009
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$
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100,000,000
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2.245
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%
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$
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(1,439
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)
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Off-Balance Sheet Arrangements.
We had no
significant off-balance sheet arrangements as of
December 31, 2008 or December 31, 2007.
76
Credit
Facility
Hiland
Partners GP, LLC
On May 1, 2006, Hiland Partners GP, LLC entered into an
unsecured credit agreement under which it borrowed
$35.0 million to purchase 761,714 common units and 15,545
general partner units from Hiland Partners. The loan was
guaranteed by all Hiland Partners GP, LLCs members and
matured and was paid in full upon the completion of our initial
public offering on September 25, 2006. Hiland Partners GP,
LLCs board of directors, as well as the conflicts
committee of its board of directors, consisting of independent
directors, approved the transaction.
Hiland
Holdings
On September 25, 2006, concurrently with the closing of our
initial public offering, Hiland Holdings entered into a
three-year $25.0 million secured revolving credit facility.
The facility will permit us, if certain conditions are met, to
increase borrowing capacity by up to an additional
$25.0 million. The facility is secured by all of our
ownership interests in Hiland Partners and its general partner,
other than the 2% general partner interest and the incentive
distribution rights.
The facility will mature on September 25, 2009, at which
time all outstanding amounts thereunder become due and payable.
Indebtedness under the credit facility will bear interest, at
our option, at either: (i) an alternate base rate plus an
applicable margin ranging from 100 to 150 basis points per
annum or (ii) LIBOR plus an applicable margin ranging from
200 to 250 basis points per annum in each case based on our
ratio of consolidated funded debt to EBITDA. The alternate base
rate is equal to the greatest of: (a) the prime rate in
effect on such day, (b) the base CD rate in effect on such
day plus 1.50% and (c) the federal funds effective rate in
effect on such day plus
1
/
2
of 1%. We have elected for the indebtedness to bear interest at
LIBOR plus the applicable margin. A letter of credit fee will be
payable for the aggregate amount of letters of credit issued
under the credit facility at a percentage per annum equal to
2.0%. A commitment fee ranging from 25 to 50 basis points
per annum based on our ratio of consolidated funded debt to
EBITDA will be payable on the average daily unused portion of
the credit facility for the quarter most recently ended.
The credit facility contains several covenants that, among other
things, require the maintenance of two financial performance
ratios, restrict the payment of distributions to unitholders,
and require financial reports to be submitted periodically to
the financial institutions.
The credit facility also contains covenants requiring a maximum
consolidated funded debt to EBITDA ratio of 3.0:1.0 for the four
fiscal quarters most recently ended and a minimum interest
coverage ratio of 3.0:1.0.
The amount we may borrow under the credit facility is limited to
the lesser of: (i) 50% of the sum of the value of the
Hiland Partners common and subordinated units and certain other
assets held by us and certain of our subsidiaries at the end of
each fiscal quarter and (ii) the maximum available amount
of the credit facility (currently $25.0 million). For
purposes of this calculation, the value of (i) the Hiland
Partners common units on any date shall be the closing price for
such units as reflected on the NASDAQ National Market on any
date and (ii) the Hiland Partners subordinated units on any
date shall be deemed to equal 85% of the value of the Hiland
Partners common units on such date.
The credit facility prohibits us from making distributions to
unitholders if any default or event of default, as defined in
the credit facility, has occurred and is continuing or would
result from the distribution. In addition, the credit facility
contains various covenants that limit, among other things,
subject to certain exceptions and negotiated
baskets, our ability to incur indebtedness, grant
liens, enter into agreements restricting our ability to grant
liens on our assets or amend the credit facility, make certain
loans, acquisitions and investments or enter into a merger,
consolidation or sale of assets.
The facility limits distributions to our unitholders to our
available cash, as defined in our partnership agreement.
Restricted payments under the credit facility are subject to an
annual clean-down period of 15
77
consecutive days in which the amount outstanding that relates to
funding the restricted payments under the credit facility must
be reduced to zero.
As of December 31, 2008, we had $0.7 million
outstanding under this credit facility and were in compliance
with our financial covenants. The outstanding $0.7 million,
which matures on September 25, 2009, is included in accrued
liabilities and other in the balance sheet.
Hiland
Partners
On February 6, 2008, Hiland Partners entered into a fourth
amendment to its credit facility dated as of February 15,
2005. Pursuant to the fourth amendment, Hiland Partners has
among other things, increased its borrowing base from
$250 million to $300 million and decreased the
accordion feature in the facility from $100 million to
$50 million. Hiland Partners original credit facility dated
May 2005 was first amended in September 2005, amended a second
time in June 2006 and amended a third time in July 2007.
The fourth amendment increases Hiland Partners borrowing
capacity under its senior secured revolving credit facility to
$300 million such that the facility now consists of a
$291 million senior secured revolving credit facility to be
used for funding acquisitions and other capital expenditures,
issuance of letters of credit and general corporate purposes
(the Acquisition Facility) and a $9.0 million
senior secured revolving credit facility to be used for working
capital and to fund distributions (the Working Capital
Facility).
In addition, Hiland Partners credit facility provides for
an accordion feature, which permits Hiland Partners, if certain
conditions are met, to increase the size of the revolving
acquisition facility by up to an additional $50.0 million
and allows for the issuance of letters of credit of up to
$15.0 million in the aggregate. The senior secured
revolving credit facility also requires us to meet certain
financial tests, including a maximum consolidated funded debt to
EBITDA ratio of 4.0:1.0 as of the last day of any fiscal
quarter; provided that in the event that the Partnership makes
certain permitted acquisitions or capital expenditures, this
ratio may be increased to 4.75:1.0 for the three fiscal quarters
following the quarter in which such acquisition or capital
expenditure occurs; and a minimum interest coverage ratio of
3.0:1.0. The credit facility will mature in May 2011. At that
time, the agreement will terminate and all outstanding amounts
thereunder will be due and payable.
Due to the recent decline in natural gas and NGL prices, we
believe our cash flow from operating activities will decrease
relative to the level experienced in 2008. Consequently, Hiland
Partners anticipates electing to step up Hiland
Partners debt covenants on its credit facility to 4:75:1.0
debt to EBITDA at the end of the first quarter 2009.
Additionally, given the current natural gas and NGL forward
price strips, Hiland Partners may require additional equity as
soon as June 30, 2009 to remain in compliance with Hiland
Partners existing debt covenants contained in its credit
facility.
Hiland Partners obligations under the credit facility are
secured by substantially all of its assets and guaranteed by
Hiland Partners and all of its subsidiaries, other than Hiland
Operating, LLC its operating company, which is the borrower
under the credit facility.
Indebtedness under the credit facility will bear interest, at
Hiland Partners option, at either (i) an Alternate
Base Rate plus an applicable margin ranging from 50 to
125 basis points per annum or (ii) LIBOR plus an
applicable margin ranging from 150 to 225 basis points per
annum based on Hiland Partners ratio of consolidated
funded debt to EBITDA. The Alternate Base Rate is a rate per
annum equal to the greatest of (a) the Prime Rate in effect
on such day, (b) the base CD rate in effect on such day
plus 1.50% and (c) the Federal Funds effective rate in
effect on such day plus
1
/
2
of 1%. A letter of credit fee will be payable for the aggregate
amount of letters of credit issued under the credit facility at
a percentage per annum equal to 1.0%. An unused commitment fee
ranging from 25 to 50 basis points per annum based on
Hiland Partners ratio of consolidated funded debt to
EBITDA will be payable on the unused portion of the credit
facility. During any
step-up
period, the applicable margin with respect to loans under the
credit facility will be increased by 35 basis points per
annum and the unused commitment fee will be increased by
12.5 basis points per annum. At December 31, 2008, the
interest rate on outstanding borrowings from our credit facility
was 3.28%
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The credit facility prohibits Hiland Partners from making
distributions to unitholders if any default or event of default,
as defined in the credit facility, has occurred and is
continuing or would result from the distribution. In addition,
the credit facility contains various covenants that limit, among
other things, subject to certain exceptions and negotiated
baskets, Hiland Partners ability to incur
indebtedness, grant liens, make certain loans, acquisitions and
investments, make any material changes to the nature of its
business, amend its material agreements, including the Omnibus
Agreement or enter into a merger, consolidation or sale of
assets.
The credit facility defines EBITDA as Hiland Partners
consolidated net income, plus income tax expense, interest
expense, depreciation and amortization expense, amortization of
intangibles and organizational costs, non-cash unit based
compensation expense, and adjustments for non-cash gains and
losses on specified derivative transactions and for other
extraordinary items.
Upon the occurrence of an event of default defined in the credit
facility, the lenders may, among other things, be able to
accelerate the maturity of the credit facility and exercise
other rights and remedies as set forth in the credit facility.
The credit facility limits distributions to Hiland
Partners unitholders to available cash, and borrowings to
fund such distributions are only permitted under the revolving
working capital facility. The revolving working capital facility
is subject to an annual clean-down period of 15
consecutive days in which the amount outstanding under the
revolving working capital facility is reduced to zero.
As of December 31, 2008, Hiland Partners had
$252.1 million outstanding under the credit facility and
were in compliance with its financial covenants.
Recent
Accounting Pronouncements
On April 25, 2008, the Financial Accounting Standards Board
(FASB) FASB issued Staff Position
No. FAS 142-3,
Determination of the Useful Life of Intangible
Assets
(FSP 142-3).
FSP 142-3
amends the factors that an entity should consider in developing
renewal or extension assumptions used in determining the useful
life of recognized intangible assets under FASB Statement
No. 142, Goodwill and Other Intangible Assets
(SFAS 142). In determining the useful life of
an acquired intangible asset,
FSP 142-3
removes the requirement from SFAS 142 for an entity to
consider whether renewal of the intangible asset requires
significant costs or material modifications to the related
arrangement.
FSP 142-3
also replaces the previous useful life assessment criteria with
a requirement that an entity considers its own experience in
renewing similar arrangements. If the entity has no relevant
experience, it would consider market participant assumptions
regarding renewal.
FSP 142-3
will be effective as of January 1, 2009 and will apply only
to intangible assets acquired after that date. Retroactive
application to previously acquired intangible assets is
prohibited. The adoption of
FSP 142-3
is not expected to have a material impact on our financial
position, results of operations or cash flows.
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 entitys derivative instruments
and hedging activities and their effects on the entitys
financial position, financial performance, and cash flows.
SFAS 161 is effective prospectively for financial
statements issued for fiscal years and interim periods beginning
after November 15, 2008, with early application encouraged.
SFAS 161 encourages, but does not require, comparative
disclosures for periods prior to its initial adoption.
SFAS 161 amends the current qualitative and quantitative
disclosure requirements for derivative instruments and hedging
activities set forth in SFAS 133 and generally increases
the level of aggregation/disaggregation that will be required in
an entitys financial statements. We are currently
reviewing SFAS 161 to determine the effect it will have on
our financial statements and disclosures therein.
On March 12, 2008, the Emerging Issues Task Force
(EITF) reached consensus opinion on EITF Issue
07-4,
Application of the two-class method under FASB Statement
No. 128, Earnings per Share, to Master Limited
Partnerships
(EITF 07-4),
which the FASB ratified at its March 26, 2008 meeting.
EITF 07-4
requires the calculation of a Master Limited Partnerships
(MLPs) net earnings per limited partner unit for
79
each period presented according to distributions declared and
participation rights in undistributed earnings as if all of the
earnings for that period had been distributed. In periods with
undistributed earnings above specified levels, the calculation
per the two-class method results in an increased allocation of
such undistributed earnings to the general partner and a
dilution of earnings to the limited partners.
EITF 07-4
is effective for fiscal years beginning after December 15,
2008, and is to be applied retrospectively to all periods
presented. Early application is not permitted. We will apply the
requirements of
EITF 07-4
as it pertains to MLPs upon its adoption during the quarter
ended March 31, 2009 and do not expect a significant impact
when adopted.
In December 2007, the FASB issued SFAS No. 141(R),
Business Combinations
(SFAS 141(R)). SFAS 141(R) amends and
replaces SFAS 141, but retains the fundamental requirements
in SFAS 141 that the purchase method of accounting be used
for all business combinations and an acquirer be identified for
each business combination. SFAS 141(R) provides for how the
acquirer recognizes and measures the identifiable assets
acquired, liabilities assumed and any non-controlling interest
in the acquiree. SFAS 141(R) provides for how the acquirer
recognizes and measures the goodwill acquired in the business
combination or a gain from a bargain purchase. SFAS 141(R)
also determines what information to disclose to enable users to
be able to evaluate the nature and financial effects of the
business combination. The provisions of SFAS 141(R) apply
prospectively to business combinations for which the acquisition
date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008 and do not
allow early adoption. We are evaluating the new requirements of
SFAS 141(R) and the impact it will have on business
combinations completed in 2009 and thereafter.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements an amendment of ARB No. 51
(SFAS 160). SFAS 160 establishes
accounting and reporting standards that require the ownership
interests in subsidiaries held by parties other than the parent
(minority interest) be clearly identified, labeled, and
presented in the consolidated balance sheet within equity, but
separate from the parents 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 parents ownership interest while the
parent retains its controlling financial interest in its
subsidiary be accounted for consistently and similarly as equity
transactions. Consolidated net income and comprehensive income
will be determined without deducting minority interest; however,
earnings-per-share
information will continue to be calculated on the basis of the
net income attributable to the parents shareholders.
Additionally, SFAS 160 establishes a single method for
accounting for changes in a parents ownership interest in
a subsidiary that does not result in deconsolidation and that
the parent recognize a gain or loss in net income when a
subsidiary is deconsolidated. SFAS 160 is effective for
fiscal years beginning on or after December 15, 2008. Early
adoption is not permitted. We will apply the requirements of
SFAS 160 upon our adoption on January 1, 2009 and do
not expect it to have a material impact on our financial
position, results of operations or cash flows.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities. (SFAS 159). SFAS 159
expands opportunities to use fair value measurement in financial
reporting and permits entities to choose to measure many
financial instruments and certain other items at fair value.
SFAS 159 is effective for fiscal years beginning after
November 15, 2007. SFAS 159 was adopted by us
effective January 1, 2008, at which time no financial
assets or liabilities, not previously required to be recorded at
fair value by other authoritative literature, were designated to
be recorded at fair value. As such, the adoption of
SFAS 159 did not have any impact on our financial position,
results of operations or cash flows.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements (SFAS 157).
SFAS 157 defines fair value as the price that would be
received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the
measurement date, establishes a framework for measuring fair
value in generally accepted accounting principles
(GAAP) such as fair value hierarchy used to classify
the source of information used in fair value measurements (i.e.,
market based or non-market based) and expands disclosure about
fair value measurements based on their level in the hierarchy.
SFAS 157 applies to derivatives and other financial
instruments, which SFAS 133 requires be measured at fair
value at initial recognition and for all subsequent periods.
SFAS 157 establishes a fair value hierarchy which requires
an entity to maximize the use of observable inputs and minimize
the use of unobservable inputs when measuring fair value.
80
SFAS 157s hierarchy defines three levels of inputs
that may be used to measure fair value. Level 1 refers to
assets that have observable market prices, level 2 assets
do not have an observable price but do have inputs
that are based on such prices in which components have
observable data points and level 3 refers to assets in
which one or more of the inputs do not have observable prices
and calibrated model parameters, valuation techniques or
managements assumptions are used to derive the fair value.
SFAS 157 is effective for financial statements issued for
fiscal years beginning after November 15, 2007 and interim
periods within those fiscal years. We elected to implement
SFAS 157 prospectively in the first quarter of 2008 with
the one-year deferral permitted by FASB Staff Position (FSP)
157-2
for
nonfinancial assets and nonfinancial liabilities measured at
fair value, except those that are recognized or disclosed on a
recurring basis (at least annually). The deferral applies to
nonfinancial assets and liabilities measured at fair value in a
business combination; impaired properties, plants and equipment;
intangible assets and goodwill; and initial recognition of asset
retirement obligations and restructuring costs for which we use
fair value. We do not expect any significant impact to our
consolidated financial statements when we implement
SFAS 157 for these assets and liabilities.
Significant
Accounting Policies and Estimates
The selection and application of accounting policies is an
important process that has developed as our business activities
have evolved and as the accounting rules have developed.
Accounting rules generally do not involve a selection among
alternatives, but involve the implementation and interpretation
of existing rules, and the use of judgment applied to the
specific set of circumstances existing in our business. We make
every effort to properly comply with all applicable rules on or
before their adoption, and we believe the proper implementation
and consistent application of the accounting rules are critical.
For further details on our accounting policies, you should read
Note 1 of the accompanying Notes to Financial Statements.
Revenue Recognition.
Revenues for sales and
gathering of natural gas and NGLs product sales are recognized
at the time the product is delivered and title, if applicable,
is transferred. Revenues for compression services are recognized
when the services under the agreement are performed.
Depreciation and Amortization.
Depreciation of
all equipment is determined under the straight-line method using
various rates based on useful lives, 10 to 22 years for
pipeline and processing plants, and 3 to 10 years for
corporate and other assets. The cost of assets and related
accumulated depreciation is removed from the accounts when such
assets are disposed of, and any related gains or losses are
reflected in current earnings. Maintenance, repairs and minor
replacements are expensed as incurred. Costs of replacements
constituting improvement are capitalized. Intangible assets
consist of the acquired value of existing contracts to sell
natural gas and other NGLs, compression contracts and
identifiable customer relationships, which do not have
significant residual value. The contracts are being amortized
over their estimated lives of ten years.
Derivatives.
Hiland Partners utilizes
derivative financial instruments to reduce commodity price
risks. Hiland Partners does not hold or issue derivative
financial instruments for trading purposes. Statement of
Financial Accounting Standards (or SFAS) No. 133,
Accounting for Derivative Instruments and Hedging
Activities, which was amended in June 2000 by
SFAS No. 138 and in May 2003 by
SFAS No. 149, establishes accounting and reporting
standards for derivative instruments and hedging activities. It
requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial condition
and measure those instruments at fair value. Derivatives that
are not designated as hedges are adjusted to fair value through
income. If the derivative is designated as a hedge, depending
upon the nature of the hedge, changes in the fair value of the
derivatives are either offset against the fair value of assets,
liabilities or firm commitments through income, or recognized in
other comprehensive income until the hedged item is recognized
in income. The ineffective portion of a derivatives change
in fair value is immediately recognized into income. If a
derivative no longer qualifies for hedge accounting, the amounts
in accumulated other comprehensive income will be immediately
charged to operations.
Asset Retirement
Obligations.
SFAS No. 143
Accounting for Asset Retirement Obligations
(SFAS 143) requires entities to record the fair
value of a liability for an asset retirement obligation in the
period in which it is incurred and a corresponding increase in
the carrying amount of the related long-lived asset.
Subsequently, the asset retirement cost is allocated to expense
using a systematic and rational method and the liability is
accreted to measure the change in liability due to the passage
of time. The primary impact
81
of this standard relates to our estimated costs for dismantling
and site restoration of certain of Hiland Partners plants
and pipelines. Estimating future asset retirement obligations
requires us to make estimates and judgments regarding timing,
existence of a liability, as well as what constitutes adequate
restoration. Hiland Partners uses the present value of estimated
cash flows related to asset retirement obligation to determine
the fair value, generally as estimated by third party
consultants. The present value calculation requires us to make
numerous assumptions and judgments, including the ultimate costs
of dismantling and site restoration, inflation factors, credit
adjusted discount rates, timing of settlement and changes in the
legal, regulatory, environmental and political environments. To
the extent future revisions to these assumptions impact the
present value of the existing asset retirement obligation
liability, a corresponding adjustment will be required to the
related asset. We believe the estimates and judgments reflected
in our financial statements are reasonable but are necessarily
subject to the uncertainties we have just described.
Accordingly, any significant variance in any of the above
assumptions or factors could materially affect our cash flows.
Impairment of Long-Lived Assets.
In accordance
with Statement of Financial Accounting Standards (SFAS)
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, we evaluate long-lived assets,
including intangible assets, of identifiable business activities
for impairment when events or changes in circumstances indicate,
in managements judgment, that the carrying value of such
assets may not be recoverable. The determination of whether
impairment has occurred is based on managements estimate
of undiscounted future cash flows attributable to the assets as
compared to the carrying value of the assets. If impairment has
occurred, the amount of the impairment recognized is determined
by estimating the fair value for the assets and recording a
provision for loss if the carrying value is greater than fair
value. For assets identified to be disposed of in the future,
the carrying value of these assets is compared to the estimated
fair value less the cost to sell to determine if impairment is
required. Until the assets are disposed of, an estimate of the
fair value is re-determined when related events or circumstances
change.
When determining whether impairment of one of Hiland
Partners long-lived assets has occurred, we must estimate
the undiscounted cash flows attributable to the asset or asset
group. Our estimate of cash flows is based on assumptions
regarding the volume of reserves providing asset cash flow and
future NGL product and natural gas prices. The amount of
reserves and drilling activity are dependent in part on natural
gas prices. Projections of reserves and future commodity prices
are inherently subjective and contingent upon a number of
variable factors, including, but not limited to:
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changes in general economic conditions in regions in which the
Partnerships products are located;
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the availability and prices of NGL products and competing
commodities;
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the availability and prices of raw natural gas supply;
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the ability of Hiland Partners to negotiate favorable marketing
agreements;
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the risks that third party oil and gas exploration and
production activities will not occur or be successful;
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the dependence of Hiland Partners on certain significant
customers and producers of natural gas; and
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competition from other midstream service providers and
processors, including major energy companies.
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Any significant variance in any of the above assumptions or
factors could materially affect our cash flows, which could
require us to record an impairment of an asset.
Share Based Compensation.
In October 1995 the
FASB issued SFAS No. 123, Share-Based
Payment, which was revised in December 2004
(SFAS 123R). SFAS 123R requires that the
compensation cost relating to share-based payment transactions
be recognized in the financial statements and that cost be
measured based on the fair value of the equity or liability
instruments issued. We adopted SFAS 123R September 25,
2006 and Hiland Partners adopted SFAS 123R January 1,
2006. We have applied SFAS 123R using the permitted
modified prospective method beginning as of the same date.
Hiland Partners had unearned deferred compensation of $289 as of
January 1, 2006 which has been eliminated against Hiland
Partners common unit equity. Prior to January 1, 2006,
Hiland Partners recorded any unamortized compensation related to
restricted unit awards as unearned compensation in equity.
82
We estimate the fair value of each option granted on the date of
grant using the American Binomial option-pricing model. In
estimating the fair value of each option, we use our peer group
volatility averages as determined on the option grant dates. We
calculate expected lives of the options under the simplified
method as prescribed by the SEC Staff Accounting
Bulletin 107 and have used a risk free interest rate based
on the applicable U.S. Treasury yield in effect at the time
of grant. Our compensation expense for these awards is
recognized on the graded vesting attribution method. Units to be
issued under our unit incentive plan may be from newly issued
units. Prior to Hiland Partners adoption of SFAS 123R on
January 1, 2006, they applied Accounting Principles Board
Opinion No. 25 and related interpretations in accounting
for the unit-based compensation awards.
Disclosure
Regarding Forward-Looking Statements
This annual report on
Form 10-K
includes certain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933
and Section 21E of the Securities Exchange Act of 1934.
These statements include statements regarding our plans, goals,
beliefs or current expectations. Statements using words such as
anticipate, believe, intend,
project, plan, continue,
estimate, forecast, may,
will, or similar expressions help identify
forward-looking statements. Although we believe such
forward-looking statements are based on reasonable assumptions
and current expectations and projections about future events, no
assurance can be given that every objective will be reached.
Actual results may differ materially from any results projected,
forecasted, estimated or expressed in forward-looking statements
since many of the factors that determine these results are
subject to uncertainties and risks, difficult to predict, and
beyond managements control. Such factors include:
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the ability to comply with the certain covenants in our or
Hiland Partners credit facilities;
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our ability to pay distributions to our unitholders;
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our expected receipt of distributions from Hiland Partners;
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Hiland Partners cash flow is affected by the volatility of
natural gas and NGL product prices, which could adversely affect
Hiland Partners ability to make distributions to its
unitholders, including us;
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Hiland Partners continued ability to find and contract for
new sources of natural gas supply;
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the general economic conditions in the United States of America
as well as the general economic conditions and currencies in
foreign countries;
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the amount of natural gas transported on Hiland Partners
gathering systems;
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the level of throughput in Hiland Partners natural gas
processing and treating facilities;
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the fees Hiland Partners charges and the margins realized for
its services;
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the prices and market demand for, and the relationship between,
natural gas and NGLs;
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energy prices generally;
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the level of domestic oil and natural gas production;
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the availability of imported oil and natural gas;
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actions taken by foreign oil and gas producing nations;
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the political and economic stability of petroleum producing
nations;
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the weather in Hiland Partners operating areas;
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the extent of governmental regulation and taxation;
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hazards or operating risks incidental to the transporting,
treating and processing of natural gas and NGLs that may not be
fully covered by insurance;
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competition from other midstream companies;
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loss of key personnel;
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the availability and cost of capital and Hiland Partners
ability to access certain capital sources;
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changes in laws and regulations to which we and Hiland Partners
are subject, including tax, environmental, transportation and
employment regulations;
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the costs and effects of legal and administrative proceedings;
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the ability to successfully identify and consummate strategic
acquisitions at purchase prices that are accretive to the Hiland
Partners financial results; and
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risks associated with the construction of new pipelines and
treating and processing facilities or additions to Hiland
Partners existing pipelines and facilities;
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the completion of significant, unbudgeted expansion projects may
require debt
and/or
equity financing which may not be available to Hiland Partners
on acceptable terms, or at all; and
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increases in interest rates could increase Hiland Partners
borrowing costs, adversely impact its unit price and its ability
to issue additional equity, which could have an adverse effect
on Hiland Partners cash flows and its ability to fund its
growth.
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These factors are not necessarily all of the important factors
that could cause actual results to differ materially from those
expressed in any of our forward-looking statements. Our future
results will depend upon various other risks and uncertainties,
including those described elsewhere in Item 1A.
Risk Factors. Other unknown or unpredictable factors
also could have material adverse effects on our future results.
You should not put undue reliance on any forward-looking
statements.
All forward-looking statements attributable to us are qualified
in their entirety by this cautionary statement. We undertake no
duty to update our forward-looking statements to reflect the
impact of events or circumstances after the date of the
forward-looking statements
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Item 7A.
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Quantitative
and Qualitative Disclosures about Market Risk
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Market risk is the risk of loss arising from adverse changes in
market rates and prices. The principal market risk to which
Hiland Partners is exposed is commodity price risk for natural
gas and NGLs. Hiland Partners also incurs, to a lesser extent,
risks related to interest rate fluctuations. Hiland Partners
does not engage in commodity energy trading activities.
Commodity Price Risks.
Hiland Partners
profitability is affected by volatility in prevailing NGL and
natural gas prices. Historically, changes in the prices of most
NGL products have generally correlated with changes in the price
of crude oil. NGL and natural gas prices are volatile and are
impacted by changes in the supply and demand for NGLs and
natural gas, as well as market uncertainty. For a discussion of
the volatility of natural gas and NGL prices, please read
Item 1A. Risk Factors Risk Factors
Related to our Business. Hiland Partners cash flow is
affected by the volatility of natural gas and NGL product
prices, which could adversely affect our ability to make
distributions to unitholders. To illustrate the impact of
changes in prices for natural gas and NGLs on our operating
results, we have provided the table below, which reflects, for
the year ended December 31, 2008 and December 31,
2007, respectively, the impact on our midstream segment margin
of a $0.01 per gallon change (increase or decrease) in NGL
prices coupled with a $0.10 per MMBtu change (increase or
decrease) in the price of natural gas.
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Natural Gas Price Change ($/MMBtu)
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2008
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2007
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$
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0.10
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$
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(0.10
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$
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0.10
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$
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(0.10
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NGL Price Change ($/gal)
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$
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0.01
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$
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615,000
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$
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548,000
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$
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642,000
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$
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194,000
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$
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(0.01
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$
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(472,000
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$
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(649,000
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$
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(207,000
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$
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(645,000
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)
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The increase in commodity exposure is the result of increased
natural gas and NGL product volumes in the year ended
December 31, 2008 compared to the year ended
December 31, 2007. The magnitude of the
84
impact on total segment margin of changes in natural gas and NGL
prices presented may not be representative of the magnitude of
the impact on total segment margin for different commodity
prices or contract portfolios. Natural gas prices can also
affect our profitability indirectly by influencing the level of
drilling activity and related opportunities for our services.
Hiland Partners manages this commodity price exposure through an
integrated strategy that includes management of its contract
portfolio, optimization of its assets and the use of derivative
contracts. As a result of these derivative swap contracts,
Hiland Partners has hedged a portion of its expected exposure to
natural gas prices in 2009 and 2010. Hiland Partners continually
monitors its hedging and contract portfolio and expects to
continue to adjust its hedge position as conditions warrant. The
following table provides information about Hiland Partners
derivative instruments at December 31, 2008:
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Average
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Fair Value
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Fixed/Open
|
|
|
Asset
|
|
Description and Production Period
|
|
Volume
|
|
|
Price
|
|
|
(Liability)
|
|
|
|
(MMBtu)
|
|
|
(Per MMBtu)
|
|
|
|
|
|
Natural Gas Sold Fixed for Floating Price Swaps
|
|
|
|
|
|
|
|
|
|
|
|
|
January 2009 December 2009
|
|
|
2,136,000
|
|
|
$
|
7.30
|
|
|
$
|
6,851
|
|
January 2010 December 2010
|
|
|
2,136,000
|
|
|
$
|
10.50
|
|
|
|
7,141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
13,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Risk.
We have elected for the
indebtedness to bear interest at LIBOR plus the applicable
margin. We are exposed to changes in the LIBOR rate as a result
of our credit facility and Hiland Partners credit
facility, which is partially subject to floating interest rates.
As of December 31, 2008 we had approximately
$0.7 million of indebtedness outstanding under our credit
facility which was used to finance the costs related to the
closing of our $25.0 million secured revolving credit
facility. On October 7, 2008, Hiland Partners entered into
a
floating-to-fixed
interest rate swap agreement with an investment grade
counterparty whereby they pay a monthly fixed interest rate of
2.245% and receive a monthly variable rate based on the one
month posted LIBOR interest rate on a notional amount of
$100.0 million. This swap agreement is effective on
January 2, 2009 and terminates on January 1, 2010. As
of December 31, 2008, Hiland Partners had approximately
$252.1 million of indebtedness outstanding under its credit
facility, of which $152.1 million is exposed to changes in
the LIBOR rate. The impact of a 100 basis point increase in
interest rates on the amount of current debt exposed to variable
interest rates would result in an increase in annualized
interest expense and a corresponding decrease in annualized net
income of approximately $1.5 million. The following table
provides information about Hiland Partners interest rate
swap at December 31, 2008 for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
Notional
|
|
|
Interest
|
|
|
Asset
|
|
Description and Period
|
|
Amount
|
|
|
Rate
|
|
|
(Liability)
|
|
|
Interest Rate Swap
|
|
|
|
|
|
|
|
|
|
|
|
|
January 2009 December 2009
|
|
$
|
100,000,000
|
|
|
|
2.245
|
%
|
|
$
|
(1,439
|
)
|
Credit Risk.
Counterparties pursuant to the
terms of their contractual obligations expose Hiland Partners to
potential losses as a result of nonperformance. SemStream, L.P.,
BP Energy Company, OGE Energy Resources, Inc., ONEOK Energy
Services Company, LP and ConocoPhillips, Inc. were Hiland
Partners largest customers for the year ended
December 31, 2008, accounting for approximately 16%, 14%,
11%, 10% and 9%, respectively, of our revenues. Consequently,
changes within one or more of these companies operations
have the potential to impact, both positively and negatively,
our credit exposure and make us subject to risks of loss
resulting from nonpayment or nonperformance by these or any of
Hiland Partners other customers. Any material nonpayment
or nonperformance by its key customers could materially and
adversely affect our business, financial condition or results of
operations and reduce Hiland Partners ability to make
distributions to its unitholders. Furthermore, some of Hiland
Partners customers may be highly leveraged and subject to
their own operating and regulatory risks, which increases the
risk that they may default on their obligations to Hiland
Partners. The counterparties to Hiland Partners commodity
based derivative instruments as of December 31, 2008 are BP
Energy Company and Bank of Oklahoma, N.A. The counterparty to
Hiland Partners interest rate swap as of December 31,
2008 is Wells Fargo Bank, N.A.
85
On July 22, 2008, SemGroup, L.P. and certain subsidiaries
filed voluntary petitions for reorganization under
Chapter 11 of the U.S. Bankruptcy Code. Affiliates of
SemGroup, L.P. purchase Hiland Partners NGLs and condensate,
primarily at their Bakken and Badlands plants and gathering
systems. During the second quarter 2008, Hiland Partners
increased their allowance for doubtful accounts and bad debt
expense by $8.1 million for related product sales through
June 30, 2008. On October 20, 2008, the United States
Bankruptcy Court for the District of Delaware entered an order
approving the assumption of a Natural Gas Liquids Marketing
Agreement (the SemStream Agreement) between
SemStream, L.P., an affiliate of SemGroup, L.P., and Hiland
Partners relating to the sale of NGLs and condensate at our
Bakken and Badlands plants and gathering systems. As a result of
the assumption, and in accordance with the order, on
October 21, 2008, SemStream paid $12.1 million to
Hiland Partners, representing amounts owed to Hiland Partners
from SemStream for June and July 2008 product sales under the
SemStream Agreement. The assumption of the SemStream Agreement
restores Hiland Partners and SemStream, L.P. to their
pre-bankruptcy contractual relationship.
Hiland Partners third quarter results of operations
reflect a reversal of $7.8 million of the $8.1 million
allowance for doubtful accounts and bad debt expense previously
recorded on their income statement in the second quarter of
2008. After receipt of the October 21 payment, Hiland
Partners total pre-petition credit exposure to SemGroup,
related to condensate sales to SemCrude, LLC, and outside of the
SemStream Agreement, is approximately $0.3 million, which
Hiland Partners has reserved as of December 31, 2008.
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
See our Financial Statements beginning on
page F-1
for the information required by this Item.
|
|
Item 9.
|
Changes
in and Disagreements on Accounting and Financial
Disclosure
|
None.
|
|
Item 9A.
|
Controls
and Procedures
|
Evaluation
of Disclosure Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
As required by
Rule 13a-15(b)
under the Securities Exchange Act of 1934, as amended, we have
evaluated, under the supervision and with the participation of
our management, including our principal executive officer and
principal financial officer, the effectiveness of the design and
operation of our disclosure controls and procedures (as defined
in
Rules 13a-15(e)
and
15d-15(e)
under the Exchange Act) as of the end of the period covered by
this Annual Report on
Form 10-K.
Based upon that evaluation, our principal executive officer and
principal financial officer concluded that our disclosure
controls and procedures were effective as of December 31,
2008, to ensure that information is accumulated and communicated
to our management, including our principal executive officer and
principal financial officer, as appropriate, to allow timely
decisions regarding required disclosure and is recorded,
processed, summarized and reported within the time periods
specified in the rules and forms of the SEC.
(b) Changes in internal control over financial reporting.
During the three months ended December 31, 2008, there were
no changes in our system of internal control over financial
reporting (as defined in
Rules 13a-15(f)
and
15d-15(f)
under the Exchange Act) that has materially affected, or is
reasonably likely to materially affect, our internal control
over financial reporting.
Internal
Control Over Financial Reporting
See Managements Report on Internal Control over
Financial Reporting on
page F-2.
|
|
Item 9B.
|
Other
Information
|
There have been no events that occurred in the fourth quarter of
2008 that would need to be reported on
Form 8-K
that have not been previously reported.
86
PART III
|
|
Item 10.
|
Directors
and Executive Officers of the Registrant
|
As is the case with many publicly traded partnerships, we do not
have officers, directors or employees. Our operations and
activities are managed by our general partner, Hiland Partners
GP Holdings, LLC. References to our directors, officers, and
employees are references to the officers, directors and
employees of Hiland Partners GP Holdings, LLC. Unitholders do
not directly or indirectly participate in our management or
operation. Our general partner owes a fiduciary duty to our
unitholders, as limited by our partnership agreement.
Directors are elected for one-year terms. The following table
shows information regarding the current directors and executive
officers of Hiland Partners GP Holdings, LLC.
|
|
|
|
|
|
|
Name
|
|
Age
|
|
|
Position with Our General Partner
|
|
Harold Hamm
|
|
|
63
|
|
|
Chairman of the Board of Directors
|
Joseph L. Griffin
|
|
|
48
|
|
|
Chief Executive Officer, President and Director
|
Matthew S. Harrison
|
|
|
38
|
|
|
Chief Financial Officer, Vice President Finance,
Secretary and Director
|
Robert W. Shain
|
|
|
58
|
|
|
Chief Commercial Officer, Vice President
|
Kent C. Christopherson
|
|
|
51
|
|
|
Chief Operations Officer, Vice President
|
Michael L. Greenwood
|
|
|
53
|
|
|
Director
|
Edward D. Doherty
|
|
|
73
|
|
|
Director
|
Rayford T. Reid
|
|
|
60
|
|
|
Director
|
Dr. Cheryl L. Evans
|
|
|
46
|
|
|
Director
|
Dr. Bobby B. Lyle
|
|
|
68
|
|
|
Director
|
Harold Hamm
has been Chairman of the Board of Directors
of our general partner since May 2006 and serves as the chairman
of the compensation committee of the board of directors of our
general partner. Mr. Hamm served as Chairman of the Board
of Directors of the general partner of Hiland Partners since
October 2004 and serves as a chairman of the compensation
committee of the board of directors of Hiland Partners
general partner. In December 1994, Mr. Hamm began serving
as President and Chief Executive Officer and as a director of
Continental Gas, Inc., and he subsequently served as Chief
Executive Officer and a director of Continental Gas, Inc. until
2004. Since its inception in 1967 until October 2005,
Mr. Hamm served as President and Chief Executive Officer
and a director of Continental Resources, Inc. and currently
serves as its Chief Executive Officer and Chairman of its board
of directors. Mr. Hamm is also immediate past President of
the National Stripper Well Association, a member of the
executive board of the Oklahoma Independent Petroleum
Association and a member of the executive board of the Oklahoma
Energy Explorers. In addition, Mr. Hamm is a director of
Complete Production Services, Inc., a publicly traded oilfield
service company.
Joseph L. Griffin
was appointed Chief Executive Officer,
President and a director of our general partner in June 2007.
Mr. Griffin has also served as Chief Executive Officer,
President and a director of the general partner of Hiland
Partners since June 2007. Mr. Griffin has more than
20 years of experience in the midstream natural gas
industry. Mr. Griffin has more than 20 years of
experience in the midstream natural gas industry. From 2004 to
June 2007, Mr. Griffin served as executive vice president
over multiple facets of the business of Lumen Midstream
Partnership, a subsidiary of the Southern Ute Indian Tribe, in
Tulsa, OK. In 1989, Mr. Griffin co-founded Lumen Midstream,
held various senior level management positions and served as a
director until Lumen was sold in 2004 to the Southern Ute Indian
Tribe. Mr. Griffin holds a Bachelor of Science degree in
Business Administration from Oklahoma State University and is
also a Certified Public Accountant.
Matthew S. Harrison
was appointed Chief Financial
Officer, Vice President Finance, Secretary and a
director of our general partner in April 2008. Mr. Harrison
has served as Chief Financial Officer, Vice
President
87
Finance, Secretary and a director of the general partner of
Hiland Partners since April 2008. Mr. Harrison joined
Hiland as Vice President of Business Development in February
2008 from Wachovia Securities where he most recently was a
director for its Energy & Power Mergers &
Acquisitions Group. Prior to joining Wachovia in 2007,
Mr. Harrison spent eight years with A.G. Edwards Capital
Markets Mergers & Acquisitions Group, most
recently leading its energy mergers & acquisitions
effort. Prior to joining A.G. Edwards, Mr. Harrison spent
five years with Price Waterhouse as a senior accountant. He
holds a B.S. degree in Accounting from the University of
Tennessee, a Masters of Business Administration degree from the
Kellogg Graduate School of Management at Northwestern University
and is a Certified Public Accountant.
Robert W. Shain
was appointed Vice President
Chief Commercial Officer of our general partner in August 2008.
Mr. Shain has served as Vice President Chief
Commercial Officer of the general partner of Hiland Partners
since August 2008. Prior to August 2008, Mr. Shain served
as Vice President Operations and Engineering of the
general partner of Hiland Partners. Mr. Shain has over
30 years of experience in the oil and gas industry. The
majority of his experience has been in the engineering and
operations of midstream natural gas gathering, compression,
processing and treating, along with business development and
marketing. From July 2003 until March 2006, Mr. Shain
served as Vice President of Operations and Engineering for
Seminole Gas Company, LLC (successor to Impact Energy, LTD) in
Tulsa, Oklahoma. From May 1995 until July 2003 Mr. Shain
served in a variety of commercial roles, most recently of which
was Vice President of Commercial Services, for CMS Field
Services, LLC (successor to Heritage Gas Services,
LLC) also in Tulsa, Oklahoma, in which he was responsible
for the development and management of operating and capital
budgets. Mr. Shain holds a B.S degree in Mechanical
Engineering from Texas A & M University.
Kent C. Christopherson
was appointed Vice
President Chief Operations Officer of our general
partner in August 2008. Mr. Christopherson has served as
Vice President Chief Operations Officer of the
general partner of Hiland Partners since August 2008.
Mr. Christopherson joined Hiland from DCP Midstream
Partners, L.P. where he served as Senior Director of Operating
Excellence and Reliability Services since 2002. Prior to joining
DCP, Mr. Christopherson was employed by Western Gas
Resources and Flopetrol Johnson Schlumberger.
Mr. Christopherson earned a B.S. degree in Mining
Engineering & Geology from the South Dakota School of
Mines and Technology, a Masters of Business Administration
degree from Nova Southeastern University and is a Certified
Maintenance & Reliability Professional by the Society
of Maintenance & Reliability Professionals and a
Certified Lubrication Specialist by the Society of
Tribologists & Lubrication Engineers.
Michael L. Greenwood
was elected as director of our
general partner in September 2006, and serves as chairman of the
audit committee of the board of directors of our general
partner. Mr. Greenwood has served as a director of the
general partner of Hiland Partners since February 2005, and
serves as chairman of the audit committee of the board of
directors of Hiland Partners general partner.
Mr. Greenwood is founder and managing director of Carnegie
Capital LLC, a financial advisory services firm providing
investment banking assistance to the energy industry.
Mr. Greenwood previously served as Vice
President Finance and Treasurer of Energy Transfer
Partners, L.P. until August 2004. Prior to its merger with
Energy Transfer, Mr. Greenwood served as Vice President and
Chief Financial Officer & Treasurer of Heritage
Propane Partners, L.P. from 2002 to 2003. Prior to joining
Heritage Propane, Mr. Greenwood was Senior Vice President,
Chief Financial Officer and Treasurer for Alliance Resource
Partners, L.P. from 1994 to 2002. Mr. Greenwood has over
25 years of diverse financial and management experience in
the energy industry during his career with several major public
energy companies including MAPCO Inc., Penn Central Corporation,
and The Williams Companies. Mr. Greenwood holds a Bachelor
of Science in Business Administration degree from Oklahoma State
University and a Master of Business Administration degree from
the University of Tulsa
Edward D. Doherty
was elected as director of our general
partner in September 2006, and serves as a member of the audit
committee of the board of directors of our general partner.
Mr. Doherty has served as a director of the general partner
of Hiland Partners since February 2005, and serves as a member
of the audit committee of the board of directors of Hiland
Partners general partner. Mr. Doherty served as the
Chairman and Chief Executive Officer of Kaneb Pipe Line Company
LLC, the general partner of Kaneb Pipe Line Partners L.P. since
its inception in September 1989 until July 2005. Prior to
joining Kaneb, Mr. Doherty was President and Chief
Executive Officer of two private companies, which provided
restructuring services to
88
troubled companies and was President and Chief Executive Officer
of Commonwealth Oil Refining Company, Inc., a public refining
and petrochemical company. Mr. Doherty holds a Bachelor of
Arts degree from Lafayette College and a Doctor of Jurisprudence
from Columbia University School of Law.
Rayford T. Reid
was elected as director of our general
partner in September 2006 and serves as a member of the
compensation committee of the board of directors of our general
partner. Mr. Reid has served as a director of the general
partner of Hiland Partners since May 2005, and serves as a
member of the compensation committee of the board of directors
of Hiland Partners general partner. Mr. Reid has more
than 35 years of investment banking, financial advisory and
commercial banking experience, including 30 years focused
on the oil and gas industry. Mr. Reid is President of
Kentucky Downs Partners, LLC (KDP). KDPs
principal business is the ownership of a controlling interest in
a thoroughbred horse racing track in Franklin, Kentucky. Prior
to forming KDP in 2007, Mr. Reid served as President of R.
Reid Investments Inc., a private investment banking firm which
exclusively serves companies engaged in the energy industry.
Mr. Reid holds a Bachelor of Arts degree from Oklahoma
State University and a Master of Business Administration degree
from the Wharton School of the University of Pennsylvania.
Dr. Cheryl L. Evans
was elected as director of our
general partner in September 2006, and serves as a member of the
conflicts committee of the board of directors of our general
partner. Dr. Evans is in her 13th year of service at
Northwestern Oklahoma State University and has been a faculty
member since 1994. In 2004, Dr. Evans was appointed Dean of
the institutions Enid campus. From 2002 to 2004, Evans
chaired the communication department on the Alva campus, and
from 1996 to 2002 she chaired the mass communication department.
She earned her doctorate at Oklahoma State University in higher
education, her Master of Arts in communication degree at Wichita
State University and her Bachelor of Arts degree in mass
communications/public relations at Northwestern Oklahoma State
University. Dr. Evans is a 2004 graduate of Harvards
Management Development Program for academic leaders. In addition
to her administrative duties for Northwestern Oklahoma State
University, she presently teaches in the Northwestern Oklahoma
State University graduate program. Dr. Evans is an active
community volunteer and currently serves on numerous civic and
charitable boards.
Dr. Bobby B. Lyle
was elected as director of our
general partner in September 2006, and he serves as chairman of
the conflicts committee and as a member of the compensation
committee of the board of directors of our general partner.
Dr. Lyle has over 29 years of experience in oil and
gas exploration and development. From 1977 to 1981, he was
President of Cornell Oil Company. In 1981, he formed Lyco Energy
Corporation, and served as its Chairman, President and CEO until
the company was sold to Enerplus Resources (USA) Corporation in
August 2005. After assisting with the transition of ownership to
Enerplus, he formed Lyco Holdings Incorporated in March 2006 and
currently serves as its Chairman, President and CEO. Lyco
Holdings Incorporated is a private company engaged in private
equity investments and ranching. From 1968 1976
Dr. Lyle served as Dean
ad interim
of the Southern
Methodist University School of Business and subsequently as
Trustee of the University for 18 years. Prior to joining
SMU, he worked as a professional engineer with General Dynamics
and Geotech, a Teledyne Industries company. He has helped
organize and served as director of a number of private companies
covering a broad range of industries, including banking, energy
software, real estate, retail, and home and industrial
insulation. Dr. Lyle has been an active member of numerous
industry organizations, including the Independent Petroleum
Association of America, where he served as regional Vice
President and a member of the Executive Committee, Texas
Independent Producers and Royalty Owners Association and the
Texas Alliance for Energy. Dr. Lyle holds a Bachelor of
Science degree in Mechanical Engineering from Louisiana Tech
University; a Masters in Engineering Administration degree from
Southern Methodist University; and a Doctorate in Education,
with emphasis on Strategic Planning and Leadership in Higher
Education, from the University of Massachusetts.
Board
Committees
The board appoints committees to help carry out its duties. In
particular, board committees work on key issues in greater
detail than would be possible at full board meetings. Only
non-employee directors may serve on the audit, compensation and
conflicts
committees
. Each committee has a written
charter. The charters are
89
posted on our Web site and are available free of charge on
request to the Secretary at the address given under
Contact Us. The table below shows the current
membership of each board committee.
The table below shows the current membership of each board
committee.
|
|
|
|
|
|
|
Name
|
|
Audit
|
|
Conflicts
|
|
Compensation
|
|
Mr. Hamm
|
|
|
|
|
|
C
|
Mr. Greenwood
|
|
C
|
|
|
|
|
Mr. Doherty
|
|
*
|
|
|
|
|
Mr. Reid
|
|
|
|
|
|
*
|
Dr. Evans
|
|
|
|
*
|
|
|
Dr. Lyle
|
|
|
|
C
|
|
*
|
Audit
Committee
The audit committee of our general partners board of
directors is currently comprised of two non-employee members of
the board. The committee is appointed by the board of directors
to assist the board in fulfilling its oversight
responsibilities. Its primary responsibility is to monitor the
quality, integrity and reliability of the financial reporting
process, review the adequacy of our systems of internal controls
for financial reporting, legal compliance and ethics established
by management and the board and review procedures for internal
auditing. Responsibilities also include the appointment,
compensation, retention and oversight of the work of the
independent registered public accounting firm engaged to prepare
the audit report or perform other audit, review or attest
services. The committee reviews proposed audit plans for the
year and the coordination of these plans with the independent
registered public accounting firm. The committee also reviews
the financial statements and other information contained in
quarterly and annual Securities and Exchange Commissions
(the SEC) reports with management and the
independent registered public accounting firm to determine that
the independent registered public accounting firm is satisfied
with the disclosure and content of the financial statements. The
committee shall have authority to obtain advice and assistance
from internal or external legal, financial and other advisors.
The board has determined that all members of the committee are
independent within the meaning of both the SEC rules and NASDAQ
listing standards. The board has further determined that all
members are financially literate within the meaning of the
NASDAQ standards and that Mr. Greenwood is an audit
committee financial expert as defined in the SEC rules. In
making these determinations, the board reviewed information from
each of these non-employee directors concerning all of their
respective relationships with us and analyzed the materiality of
those relationships.
On January 27, 2009, we received a Deficiency Letter from
NASDAQ indicating that we no longer comply with the audit
committee composition requirements as set forth in Marketplace
Rule 4350(d), which requires Hiland Partners GP Holdings,
LLC, our general partner, to have an audit committee of at least
three independent members. Following the resignation of Shelby
E. Odell from the board of directors of our general partner on
January 21, 2009, the audit committee of our general
partner consists of only two independent members. Mr. Odell
resigned from the board of directors of our general partner so
that he would be eligible to serve as a member of the conflicts
committee of the board of directors of Hiland Partners
general partner. In accordance with NASDAQ Marketplace
Rule 4350(d)(4), NASDAQ has provided us a cure period to
regain compliance until the earlier of our next annual
unitholders meeting or January 21, 2010, or, if the
next annual unitholders meeting is held before
July 20, 2009, then we must evidence compliance no later
than July 20, 2009.
Conflicts
Committee
The conflicts committee of our general partners board of
directors is comprised of two non-employee members of the board.
The committee is appointed by the board of directors of our
general partner to carry
90
out the duties delegated by the board that relate to specific
matters that the board believes may involve conflicts of
interests between us and our affiliates, on the one hand and us
and any other group member, any partner or any assignee, on the
other hand. The committee is composed solely of two independent
directors who are not unitholders, officers or employees of us
or our general partner, officers, directors or employees of any
affiliate or holders of any ownership interest in us other than
our common units and who also meet the independence and
experience standards established by NASDAQ and any applicable
laws and regulations.
The committee shall advise the board on actions to be taken by
us or matters related to us upon request of the board. The
committee determines if the resolution of such conflicts of
interest is fair and reasonable to us. Any matters approved by
the conflicts committee will be conclusively deemed to be fair
and reasonable to us, approved by all of our partners, and not a
breach by our general partner of any duties it may owe to us or
to our unitholders. In connection with the committees
resolution of any conflict of interest, the committee is
authorized to consider the relative interests of any party to
such conflict, agreement, transaction or situation and the
benefits and burdens relating to such interest, any customary or
accepted industry practices and any customary or historical
dealings with a particular person. The committee is also
authorized to consider any applicable generally accepted
accounting practices or principles and such additional factors
as the committee determines in its sole discretion to be
relevant, reasonable or appropriate under the circumstances.
With respect to any contribution of assets to the Partnership in
exchange for Partnership securities, the committee, in
determining whether the appropriate number of Partnership
securities are being issued, may take into account, among other
things, the fair market value of the assets, the liquidated and
contingent liabilities assumed, the tax basis in the assets, the
extent to which tax-only allocations to the transferor will
protect the existing partners of the Partnership against a low
tax basis, and such other factors as the committee deems
relevant under the circumstances. The committee shall have
authority to obtain advice and assistance from internal or
external legal, financial and other advisors.
Compensation
Committee
The compensation committee of our general partners board
of directors is comprised of three non-employee members of the
board. The committee has overall responsibility for approving
and evaluating the general partners director and officer
compensation plans, policies and programs.
The committee oversees the compensation for our senior
executives, including their salary, bonus, and incentive and
equity awards. The committee is responsible primarily for
reviewing, approving and reporting to the board on major
compensation and benefits plans, policies and programs of the
company; reviewing and evaluating the performance and approving
the compensation of senior executive officers; and overseeing
management development programs, performance assessment of
senior executives and succession planning. Other specific duties
and responsibilities include: annually reviewing and approving
corporate goals and objectives relevant to the chief executive
officer (CEO) base compensation,
incentive-compensation plans and equity-based plans; evaluating
the CEOs performance in light of those goals and
objectives, and recommending to the board either as a committee
or together with the other independent directors, the CEOs
compensation levels based on this evaluation; and producing the
required annual report on executive compensation.
The compensation committee has the sole authority to retain,
amend the engagement with, and terminate any compensation
consultant to be used to assist it in the evaluation of
director, CEO or officer compensation. The committee has sole
authority to approve the consultants fees and other
retention terms and shall have authority to cause us to pay the
fees and expenses of such consultants. The committee shall also
have authority to obtain advice and assistance from internal or
external legal, accounting or other advisors, to approve the
fees and expenses of such outside advisors, and to cause us to
pay the fees and expenses of such outside advisors.
91
Report of
the Audit Committee for the Year Ended December 31,
2008
Our management is responsible for our internal controls and our
financial reporting process. Grant Thornton LLP, our Independent
Registered Public Accounting Firm for the year ended
December 31, 2008, is responsible for performing an
integrated audit of the effectiveness of internal control over
financial reporting and an independent audit of our consolidated
financial statements in accordance with standards of the Public
Company Accounting Oversight Board and to issue a report
thereon. Our audit committee monitors and oversees these
processes. Our audit committee, made up of members of our
general partners Board of Directors, selects our
independent registered public accounting firm.
Our audit committee has reviewed and discussed our audited
consolidated financial statements with our management and the
independent registered public accounting firm. Our audit
committee has discussed with Grant Thornton LLP the matters
required to be discussed by Statement on Auditing Standards
No. 61, as amended, Communications with Audit
Committees, including that firms independence.
Members of the Audit Committee:
Michael L. Greenwood
Edward D. Doherty
Code of
Ethics
Our general partner has adopted a Financial Officers Code of
Ethics applicable to the Chief Executive Officer and Chief
Financial Officer, Controller and all other senior financial and
accounting officers (the Senior Financial Officers)
with regard to Partnership-related activities. This Code of
Ethics contains the policies that relate to the legal and
ethical standards of conduct that the Senior Financial Officers
of our general partner are expected to comply with while
carrying out their duties and responsibilities on behalf of the
Company. The Code of Ethics also incorporates expectations of
Senior Financial Officers that enable us to provide accurate and
timely disclosure in our filings with the SEC and other public
communications. The Code of Ethics is publicly available on our
website under the Governance Section (at
www.hilandpartners.com
) and is also available free of
charge on request to the Secretary at the address given under
Contact Us.
Section 16(a)
Beneficial Ownership Reporting Compliance
Based upon our records, except as set forth below, we believe
that during 2008 all reporting persons complied with the
Section 16(a) filing requirements applicable to them.
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Item 11.
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Executive
Compensation
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COMPENSATION
DISCUSSION AND ANALYSIS
The executive officers of our general partner also serve as
executive officers of the general partner of Hiland Partners.
Our general partner allocates a portion of the cost of our
executive officers cash compensation to us based on the
percentage of their time allocated to our business and allocates
the remainder of their compensation to Hiland Partners. Due to
the overlapping of our executive officers and compensation
committee members our executive compensation plan was
established to be substantially the same as that of the general
partner of Hiland Partners. The information set forth in this
section is generally disclosures of the general partner of
Hiland Partners.
Compensation
Objectives and Philosophy
The executive compensation program of our general partner is
designed to enable our general partner to execute our business
objectives by attracting, retaining, and motivating the highest
quality of executive talent and by rewarding superior
performance. Performance management focuses on building
competencies required for our business and achieving the highest
level of contribution from each employee. Our compensation and
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benefits policies and practices are designed to motivate and
reward officers and employees to achieve goals and objectives
that are expected to lead to long-term enhancement of unitholder
value, provide total compensation that is competitive within the
market place and align individual compensation with competency
and contribution so that performance, tied to measurable
objectives and results, will be rewarded appropriately. We
identify our marketplace as the following publicly traded
midstream and pipeline master limited partnerships within our
peer group: Atlas Pipeline Partners, L.P., Copano Energy,
L.L.C., Crosstex Energy, L.P., DCP Midstream Partners, LP, Eagle
Rock Energy Partners, L.P., MarkWest Energy Partners, L.P.,
Quicksilver Gas Services, LP, Regency Energy Partners LP, Targa
Resources Partners LP, Western Gas Partners, LP and Williams
Partners, L.P. The compensation committee, established in May
2005, believes this definition of our marketplace along with
third-party industry compensation surveys provides a good
benchmark for analyzing the competitiveness of our executive
compensation program.
In addition to base salary, executive officers are compensated
on a performance-oriented basis through the use of incentive
compensation linking both annual and longer-term results. The
annual incentive cash bonus permits team and individual
performance to be recognized and is based, in part, on an
evaluation of the contribution made by the officer to our
performance. Equity compensation awards are included in the
compensation program to reward executive officers for long-term
strategic actions that increase our value and thus unitholder
value and to link a significant amount of an executives
current and potential future net worth to our success. This use
of equity compensation directly relates a portion of each
executive officers long-term remuneration to our unit
price, and therefore aligns the executives compensation
with the interests of our unitholders. The discretionary
granting of unit options, as well as the use of restricted and
phantom units, is used to (1) recognize promotions of
executives into positions of significant responsibilities;
(2) recognize significant accomplishments of executives,
particularly as the accomplishments impact growth, profits
and/or
competitive positioning; and (3) attract and retain high
level executive talent.
Oversight
of Executive Compensation Program
The compensation committee of our general partner administers
our executive officer compensation program. The compensation
committee is primarily responsible for reviewing, approving and
reporting to the board on major compensation and benefits plans,
policies and programs of the Partnership; reviewing and
evaluating the performance and approving the compensation of
senior executive officers; and overseeing management development
programs, performance assessment of senior executives and
succession planning. Other specific duties and responsibilities
include: annually reviewing and approving corporate goals and
objectives relevant to the chief executive officer
(CEO) base compensation, incentive-compensation
plans and equity-based plans; evaluating the CEOs
performance in light of those goals and objectives, and
recommending to the board, either as a committee or together
with the other independent directors, the CEOs
compensation levels based on this evaluation; and producing the
required annual report on executive compensation. The
compensation committee annually evaluates the effectiveness of
the executive compensation program in meeting its objectives.
The CEO serves in an advisory role to the compensation committee
with respect to executive compensation for the executive
officers other than himself. In addition, the compensation
committee may request the CEO to provide management feedback and
recommendations on changes in the design of the executive
compensation programs and executive compensation policies. The
CEO does not participate in determining or recommending the form
or amount of compensation for himself or for the outside
directors. The CEOs recommendations are given significant
weight by the compensation committee, but the compensation
committee remains responsible for all final decisions regarding
compensation levels for the executive officers, the executive
compensation policies and executive compensation programs. The
CEO is not present during the compensation committees
discussions regarding his own compensation. In the CEOs
advisory role to the compensation committee, he does not have
the authority to call a meeting of the compensation committee.
Only the chairperson of the committee, two or more members of
the committee or the Chairman of the Board of Directors may call
a committee meeting pursuant to the compensation
committees charter. However, the CEO is involved in the
agenda setting for compensation committee meetings and generally
attends such
93
meetings (other than the portions of the meetings during which
his compensation and performance are discussed).
The CEO submits annual base compensation, incentive-compensation
and equity-based compensation recommendations of senior
executive officers below the CEO to the compensation committee
based on each executives contribution to our performance
and each executives responsibilities and management
abilities. The compensation committee evaluates compensation
with reference to our financial and operating performance,
distribution performance, relative unitholder total return for
the prior fiscal year, competitive compensation data of
executives in our marketplace and each executives
individual performance evaluation, length of service with the
company and previous work experience. The compensation committee
annually advises the board on the compensation to be paid to the
executive officers and approves the compensation for executive
officers.
The compensation committee has the sole authority to retain,
amend the engagement with, and terminate any compensation
consultant to be used to assist it in the evaluation of
director, CEO and executive officer compensation, as
appropriate. The committee has sole authority to approve the
consultants fees and other retention terms and shall have
authority to cause us to pay the fees and expenses of such
consultants. The committee shall also have authority to obtain
advice and assistance from internal or external legal,
accounting or other advisors, to approve the fees and expenses
of such outside advisors, and to cause us to pay the fees and
expenses of such outside advisors.
Elements
of Compensation
Our general partners executive compensation program
currently consists of the following elements:
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base salaries;
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annual incentive cash bonuses; and
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long-term incentive compensation.
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Base
Salaries
Base salary for each executive officer is determined annually by
an assessment of our overall financial and operating
performance, each executive officers performance
evaluation, changes in executive officer responsibilities and
relevant marketplace data. While many aspects of performance can
be measured in financial terms, the compensation committee also
evaluates senior management in areas of performance that are
more subjective. These areas include the development and
execution of strategic plans, the exercise of leadership in the
development of management and other employees, innovation and
improvement in our business activities, as well as the
executives involvement in industry groups and in the
communities that we serve. Our general partner seeks to
compensate executives for their performance throughout the year
with annual base salaries that are fair and competitive within
our marketplace. Our general partner believes that executive
base salaries should be targeted near the median of the range of
salaries for executives in similar positions and with similar
responsibilities in our marketplace and adjusted for financial
and operating performance and each executives performance
evaluation, length of service with the company and previous work
experience. Individual salaries are generally established in
alignment with these considerations to ensure the attraction,
development and retention of superior talent, as well as in
relation to individual executive performance. Base salaries are
reviewed annually to ensure continuing consistency with market
levels and our level of financial performance during the
previous fiscal year. Future adjustments to base salaries and
salary ranges will reflect average movement in the competitive
market as well as individual performance. The compensation
committee approves annual base salary adjustments, if any, for
the CEO, and for each officer below the CEO level based on the
CEOs recommendations.
Base salaries in 2008 for the past Chief Financial Officer
(past CFO) and the Vice President of Operations and
Engineering were set based on (1) the latest available
financial results of operations; (2) each executives
performance evaluation; and (3) the comparable base
salaries of executives within our marketplace and our most
recent third-party industry compensation survey. The past
CFOs annual base salary was
94
$250,000 for the period of November 2007 through April 2008,
upon his resignation. The past CFOs annual base salary,
established by the compensation committee in November 2007,
approximated the median annual base salaries within our
marketplace for 2006 and our most recent third-party industry
compensation survey for his position. The Vice President of
Operations and Engineerings annual base salary was
$190,000 for the period of March 2007 to March 2008. On
August 7, 2008, the Vice President of Operations and
Engineering was appointed to Vice President Chief
Commercial Officer. The Vice President Chief
Commercial Officers current annual base salary,
established at the compensation committees meeting in
March 2008, is $210,000 and approximated 83% of the median
annual base salary within our most recent third-party industry
compensation survey for his position. The CEOs annual base
salary for the period from November 2007 to present was $290,000
and approximated 83% of the median annual base salary within our
marketplace for 2006 for his position. The CEOs current
annual base salary was set based on his initial performance
evaluation. The Vice President of Business Developments
annual base salary, established upon his February 4, 2008
hire date, was $200,000 for the period February 2008 to present.
The Vice President of Business Developments annual base
salary was primarily determined by the comparable base salaries
of similar executives within our marketplace and previous work
experience. On April 16, 2008, the Vice President of
Business Development was appointed to Chief Financial Officer
upon resignation of our past CFO. The Vice President and Chief
Operations Officers annual base salary, established upon
his August 4, 2008 hire date, was $205,000 for the period
August 2008 to present. The Vice President and Chief Operations
Officers annual base salary was primarily determined by
the comparable base salaries of similar executives within our
marketplace and previous work experience. Base salaries for our
four named executive officers are to be addressed at the
compensation committee meeting to be held in March 2009.
Annual
Incentive Cash Bonus
As one way of accomplishing its compensation objectives, the
compensation committee of the general partner rewards executive
officers for their contribution to our financial and operational
success through the award of discretionary annual incentive cash
bonuses intended to encourage the attainment of strategic,
operational and financial goals and for individual performance
measures. The compensation committee approves the annual
incentive award, if any, for the CEO, and for each officer below
the CEO level based on the CEOs recommendations.
While target bonuses are initially set at 50% of base salaries,
the compensation committee has broad discretion to retain,
reduce or increase the award amounts when making its final bonus
determinations in March. The awards are also contingent on the
executive officers continued employment with the
Partnership at the time of the award in March. Further, bonuses
(similar to other elements of the compensation provided to the
executive officers) are not based on a prescribed formula or
pre-determined goals or performance targets but rather have been
determined on a subjective basis and generally have been based
on a subjective evaluation of individual, company and industry
performance. The compensation committee believes that this
approach to assessing performance results in more comprehensive
evaluation and fairer compensation decisions.
From an enterprise-wide perspective and industry perspective,
the compensation committee recognized the following factors
during its March 2008 meeting (without assigning any particular
weighting to any factor):
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financial performance for the prior fiscal year, including
EBITDA and distributions, in comparison to guidance provided to
the marketplace during the prior fiscal year;
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operating performance for the prior fiscal year, including inlet
natural gas volumes, natural gas sales volumes and NGL sales
volumes, in comparison to the prior fiscal years actual
results;
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distribution performance for the prior fiscal year compared to
the peer group;
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unitholder total return for the prior fiscal year compared to
the peer group; and
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competitive compensation data of executive officers in the peer
group.
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95
These factors were selected as the most appropriate measures
upon which to base the annual incentive cash bonus decisions
because they will most directly result in long-term value to our
unitholders.
The personal performance criteria considered by the compensation
committee during its March 2008 meeting related to factors
unique to the individual executive officer, including, for
example:
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each executive officers performance evaluation based upon
responsibilities unique to each executive officer and
leadership/management competencies applicable to all executive
officers;
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length of service with the Partnership; and
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the scope, level of expertise and experience required for the
executive officers position.
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These factors were selected as the most appropriate measures
upon which to base the annual incentive cash bonus decisions
because they help to align individual compensation with
competency and contribution.
EBITDA, distributions per unit, inlet natural gas volumes,
natural gas sales, and NGL sales increased approximately 23%,
21%, 40% and 10%, respectively in 2007 as compared to 2006. Our
unitholder total return for 2007 was approximately -2% compared
to the median for our marketplace of approximately 15%.
Discretionary cash bonuses were awarded in March 2008 to our
CEO, past CFO, and the Vice President of Operations and
Engineering (now our Vice President Chief Commercial
Officer) in the amounts of $150,000, $125,000 and $95,000,
respectively, representing approximately 58%, 102% and 72% of
the median incentive cash bonuses for such positions within our
marketplace for 2006. The past Vice President of Business
Development received a discretionary cash bonus of $42,000 in
March 2008. Discretionary cash bonuses for our four named
executive officers are to be addressed at the compensation
committee meeting to be held in March 2009.
Long-Term
Incentive Compensation
Our general partner, Hiland Partners GP, LLC adopted the Hiland
Partners, LP Long-Term Incentive Plan for its employees and
directors of our general partner and employees of its
affiliates. The compensation plan is administered by the
compensation committee of our general partners board of
directors and will continue in effect until the earliest of
(i) the date determined by the board of directors of our
general partner; (ii) the date that common units are no
longer available for payment of awards under the plan; or
(iii) the tenth anniversary of the plan.
The long-term incentive compensation plan is designed to reward
executives and other key employees for the attainment of
financial goals and other performance objectives approved
annually by the compensation committee and to encourage
responsible and profitable growth while taking into account
non-routine factors that may be integral to our success.
Long-term incentive compensation in the form of equity grants of
our common units, such as incentive unit option grants and
grants of restricted units and phantom units, are used to incent
performance that leads to enhanced unitholder value, encourage
retention and closely align the executives interests with
unitholders long-term interests. Equity grants provide a
vital link between the long-term results achieved for our
unitholders and the rewards provided to executives and other key
employees. The equity grants we adopted upon the formation of
our long-term incentive compensation plan were designed to be
comparable with long-term incentive plans of other midstream and
pipeline master limited partnerships.
Under the unit option grant agreement, granted options of common
units vest and become exercisable in one-third increments on the
anniversary of the grant date over three years. Vested unit
options are exercisable within the options contractual
life of ten years after the grant date. Restricted units vest in
quarterly increments over a four-year period from the date of
issuance. Phantom units vest in increments and over a period of
time as determined by the compensation committee. Unvested unit
options, restricted units and phantom units generally become
fully vested upon the disability, death or termination other
than for cause of the holder or a change of control of our
general partner. If the holder ceases to be an officer or
employee of our general partner for any other reason, his or her
unvested unit options, restricted units or phantom units are
forfeited. Unit option awards are less attractive than
restricted units or phantom units to the recipient because
96
the fair value of the unit option at the grant date is generally
less than the fair value of the restricted unit or phantom unit
at the grant date, which bears no cost to the recipient.
The size of the unit option, restricted unit and phantom unit
grants is determined relative to our size and our market,
employee qualifications and position, as well as master limited
partnership peer group data. All grants to executive officers
require board approval. Neither our general partner nor the
compensation committee has a program, plan or practice to time
options or grants to its executives in coordination with the
release of material nonpublic information. Any unit options,
restricted units or phantom units grants made to non-executive
employees typically will occur concurrently with grants to named
executive officers. All unit options are granted at the fair
market value of our units on the date of grant. The compensation
committee determines the aggregate amounts, terms and timing of
unit option, restricted unit and phantom unit awards. The number
of units covered by each award reflects the executives
level of responsibility along with past and anticipated future
contributions to us.
Initially, based on comparable options granted to executives of
similar midstream and pipeline master limited partnerships at
their respective initial public offerings, the past CEO
recommended to the chairman of the board the number of options
to be granted to executive officers and key employees at our
initial public offering in February 2005. In November 2005, the
compensation committee approved 15,000 and 13,000 unit
options to be granted to our Vice President of Operations and
Engineering (now our Vice President Chief Commercial
Officer) and our past Vice President of Business Development,
respectively, on their hire dates in early 2006. In November
2006, the compensation committee approved 3,000 restricted units
to be granted to the Vice President of Operations and
Engineering (now our Vice President Chief Commercial
Officer) and 2,000 restricted units to be granted to key
employees.
In June 2007, the compensation committee approved 10,000 phantom
units to be granted to our current CEO. In November 2007, the
compensation committee approved 5,000 phantom units to be
granted to the past CFO, 5,000 phantom units to be granted to
the Vice President of Operations and Engineering (now our Vice
President Chief Commercial Officer) and 21,825
phantom units to be granted to key employees. In December 2007,
our CEO awarded 1,000 phantom units to a key employee. The
compensation committee approved 7,500 phantom units to be
granted to our Vice President of Business Development (now our
Chief Financial Officer) in February 2008 and approved 7,500
phantom units to be granted to our Vice President
Chief Operations Officer in July 2008. Additionally in 2008, our
CEO approved a total of 7,300 phantom units to be granted to
four key employees.
Employment,
Change in Control and Salary Continuation Agreements
No employment agreements exist with any employee of our general
partner.
Change in control agreements exist only with respect to all
unexercised unit options, restricted units and phantom units
held by employees and directors of our general partner which in
the event of any of the following change of control events
become fully vested and exercisable. A change of control
generally shall be deemed to occur upon the occurrence of one or
more of the following events: (i) any sale, lease, exchange
or other transfer or disposition of all or substantially all of
the assets of the Partnership to any party not affiliated with
the Partnership
and/or
any
of our affiliates; (ii) the consolidation, reorganization,
merger or other transaction pursuant to which more than 50% of
the combined voting power of the outstanding equity interests in
the Partnership cease to be directly or indirectly owned by our
current majority owner group or their affiliate; or
(iii) our general partner ceases to be the general partner
of the Partnership. If a qualifying change in control event had
occurred as of December 31, 2008, the estimated value of
payments and benefits that would inure to the benefit of the
executive officers and directors as a group would have been
approximately $0.2 million.
Our general partner currently has no salary continuation
agreement, or agreement having similar effect, in place with any
employee of our general partner other than the change in control
agreements described above.
97
Summary
Compensation Table
The following table sets forth information regarding
compensation earned by our CEO, our CFO and three other most
highly compensated executive officers employed in 2008, 2007 and
2006:
SUMMARY
COMPENSATION TABLE
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Annual
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Long-Term Compensation
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Compensation
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Unit
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Option
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All Other
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Salary
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Bonus
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Awards
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Awards
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Compensation
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Total
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Name and Principal Position
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Year
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($)(1)
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($)(2)
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($)(3)
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($)(4)
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($)
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($)
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Joseph Griffin
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2008
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$
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290,000
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$
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150,000
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$
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208,690
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$
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$
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12,000
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$
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660,690
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President and Chief Executive Officer
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2007
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$
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144,731
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$
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40,000
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$
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154,426
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$
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$
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31,667
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$
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370,824
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Matthew Harrison
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2008
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$
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173,077
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$
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5,000
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$
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182,976
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$
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$
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88,847
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$
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449,900
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Vice President Finance, Secretary and Chief
Financial Officer
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Robert Shain
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2008
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$
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205,385
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$
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95,000
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$
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150,629
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$
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$
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11,019
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$
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462,033
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Vice President Chief
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2007
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$
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184,961
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$
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88,000
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$
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95,217
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$
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20,559
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$
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9,154
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$
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397,891
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Commercial Officer
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2006
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$
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126,151
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$
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40,000
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$
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4,071
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$
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27,858
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$
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69,950
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$
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268,030
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Kent Christopherson
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2008
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$
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75,692
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$
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40,000
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$
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61,425
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$
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$
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76,246
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$
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253,363
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Vice President Chief Operating Officer
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Ken Maples
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2008
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$
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95,531
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$
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125,000
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$
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$
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$
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4,995
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$
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225,526
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Past Vice President Finance,
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2007
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$
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229,808
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$
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113,750
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$
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17,306
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$
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11,838
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$
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11,250
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$
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383,952
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Secretary and Chief Financial Officer
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2006
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$
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195,385
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$
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55,000
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$
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$
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32,834
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$
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9,701
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$
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292,920
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Ron Hill
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2007
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$
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166,211
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$
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51,000
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$
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2,855
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$
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17,792
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$
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8,250
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$
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246,108
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Past Vice President of Business Development
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2006
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$
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147,692
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$
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$
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$
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37,624
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$
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3,173
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$
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188,489
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Randy Moeder
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2007
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$
|
106,338
|
|
|
$
|
130,000
|
|
|
$
|
|
|
|
$
|
29,342
|
|
|
$
|
5,871
|
|
|
$
|
271,551
|
|
Past President and Chief Executive Officer
|
|
|
2006
|
|
|
$
|
234,693
|
|
|
$
|
85,000
|
|
|
$
|
|
|
|
$
|
52,534
|
|
|
$
|
11,000
|
|
|
$
|
383,227
|
|
Clint Duty
|
|
|
2006
|
|
|
$
|
46,577
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
12,325
|
|
|
$
|
2,598
|
|
|
$
|
61,500
|
|
Past Vice President of Operations and Engineering
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Salary includes base salary and payment in respect of accrued
vacation, holidays and sick days. Mr. Christopherson was
appointed Vice President Chief Operations Officer on
August 7, 2008. Mr. Harrison was appointed Vice
President of Business Development on February 4, 2008 and
was later appointed Vice President Finance,
Secretary, Chief Financial Officer and director on April 5,
2008. Mr. Griffin was appointed President, Chief Executive
Officer and director on June 19, 2007. Mr. Hill was
reassigned in January 2008. Mr. Moeder left our employment
in April 2007 and Mr. Duty left our employment in April
2006. Salaries for our CEO and CFO are allocated between us and
Hiland Holdings for each of the years presented. Generally,
salaries allocated to us represent 5% of total salaries and the
remaining 95% is allocated to Hiland Partners.
|
|
(2)
|
|
Bonuses paid in 2008 to Messrs. Griffin, Maples and Shain
were awarded in March 2008. Bonuses paid in 2007 were awarded in
March 2007. Bonuses paid in 2006 to Mr. Moeder and
Mr. Maples were awarded in March 2006.
Mr. Christopherson and Mr. Harrison were awarded sign
on bonuses of $40,000 and $5,000, respectively, on their
respective dates of hire in 2008 and Mr. Griffin and
Mr. Shain were each awarded a sign on bonus of $40,000 on
their respective dates of hire in 2007 and 2006.
|
|
(3)
|
|
Mr. Christopherson was awarded 7,500 phantom units on
August 7, 2008, which vest equally on the anniversary of
the grant date over a four year period. Mr. Harrison was
awarded 7,500 phantom units on
|
98
|
|
|
|
|
February 4, 2008, which vest equally on the anniversary of
the grant date over a three year period. Mr. Griffin was
awarded 10,000 phantom units on June 19, 2007, which vest
equally on the anniversary of the grant date over a four year
period. Periodic distributions on Messrs. Christopherson,
Harrison and Griffins phantom units are held in trust by
our general partner until the units vest. On November 6,
2007 Messrs. Maples, Shain and Hill were awarded phantom
units that also vest equally on the anniversary of the grant
date over a four year period, but do not accumulate
distributions. Mr. Maples forfeited 5,000 phantom units
when he resigned on April 4, 2008. Mr. Shain was
awarded 3,000 restricted units on November 10, 2006.
Mr. Shains restricted units vest in quarterly
increments on the anniversary of the grant date over a period of
four years and periodic distributions are held in trust by our
general partner until the units vest.
|
|
(4)
|
|
Mr. Moeder, Mr. Maples and Mr. Duty were granted
32,000, 20,000 and 20,000 unit options, respectively, at an
exercise price of $22.50 per unit on February 10, 2005. The
grant date fair value of $5.11 per unit was determined in
accordance with FAS 123R using the American Binomial
option-pricing model. Mr. Duty forfeited his remaining
unvested 13,333 unit options when he left our employment.
Mr. Hill was hired on January 5, 2006 and was awarded
13,000 unit options at a per unit exercise price of $38.72
with a grant date fair value of $4.82 per unit. Mr. Shain
was hired on March 20, 2006 and was awarded
15,000 unit options at a per unit exercise price of $40.70
with a grant date fair value of $3.91 per unit. The exercise
price of the options granted equaled the market price of the
units on the grant date. The fair value of each option granted,
as determined in accordance with SFAS 123R, was estimated
on the date of grant using the American Binomial option-pricing
model. All unit options vest over a three-year period beginning
on their respective date of grant.
|
|
(5)
|
|
All other compensation includes our discretionary contributions
to our defined contribution retirement plan under which we make
contributions to the plan based on a percentage of eligible
employees compensation. Additionally, in 2008, we paid
relocation expenses of $75,965 for Mr. Christopherson and
$85,113 for Mr. Harrison. In 2007, we paid relocation
expenses of $31,667 for Mr. Griffin and in 2006, $68,104
for Mr. Shain.
|
Hiland
Partners-Grants of Plan Based Awards
The following table provides information regarding Hiland
Partners unit options and restricted and phantom units awarded
in 2008:
GRANTS OF
PLAN BASED AWARDS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards:
|
|
|
Exercise or
|
|
|
Grant Date
|
|
|
|
|
|
|
All Other
|
|
|
Base Price
|
|
|
Number of
|
|
|
Base Price
|
|
|
Fair Value
|
|
|
|
|
|
|
Unit Awards:
|
|
|
of Unit
|
|
|
Securities
|
|
|
of Option
|
|
|
of Option
|
|
|
|
Grant
|
|
|
Number of
|
|
|
Awards
|
|
|
Underlying
|
|
|
Awards
|
|
|
Awards
|
|
Name
|
|
Date
|
|
|
Units (#)
|
|
|
($/Unit)
|
|
|
Options (#)
|
|
|
($/Unit)
|
|
|
($/Unit)
|
|
|
Mr. Harrison
|
|
|
2/4/2008
|
|
|
|
7,500
|
|
|
$
|
49.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mr. Christopherson
|
|
|
8/7/2008
|
|
|
|
7,500
|
|
|
$
|
43.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mr. Christopherson was awarded 7,500 phantom units on
August 7, 2008, which vest in equal annual installments on
the anniversary of the grant date over a four year period.
Mr. Harrison was awarded 7,500 phantom units on
February 4, 2008, which vest in equal annual installments
on the anniversary of the grant date over a three year period.
Quarterly distributions on the phantom units awarded to
Mr. Harrison and Mr. Christopherson are held in trust
by our general partner until the units vest, at which time they
are distributed to the award recipient.
99
Hiland
Partners-Outstanding Equity Awards at Fiscal Year-End
Table
The following table provides information regarding Hiland
Partners outstanding awards that have been granted to our
executive officers as of December 31, 2008, but the
ultimate outcomes of which have not been realized:
OUTSTANDING
EQUITY AWARDS AS FISCAL YEAR-END
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Number of
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Market
|
|
|
|
Securities
|
|
|
Securities
|
|
|
|
|
|
|
|
|
Restricted
|
|
|
Value of
|
|
|
|
Underlying
|
|
|
Underlying
|
|
|
|
|
|
|
|
|
and Phantom
|
|
|
Units and
|
|
|
|
Unexercised
|
|
|
Unexercised
|
|
|
Option
|
|
|
Option
|
|
|
Units That
|
|
|
Options That
|
|
|
|
Options (#)
|
|
|
Options (#)
|
|
|
Exercise
|
|
|
Expiration
|
|
|
Have Not
|
|
|
Have Not
|
|
Name
|
|
Exercisable
|
|
|
Unexercisable
|
|
|
Price ($)
|
|
|
Date
|
|
|
Vested (#)
|
|
|
Vested ($)
|
|
|
Mr. Griffin(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,500
|
|
|
$
|
38,475
|
|
Mr. Harrison(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,500
|
|
|
$
|
38,475
|
|
Mr. Shain(3)
|
|
|
10,000
|
|
|
|
5,000
|
|
|
$
|
40.70
|
|
|
|
03/20/16
|
|
|
|
5,250
|
|
|
$
|
26,933
|
|
Mr. Christopherson(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,500
|
|
|
$
|
38,475
|
|
|
|
|
(1)
|
|
Mr. Griffins phantom units vest in equal annual
increments over three years from his first anniversary date of
June 19, 2008.
|
|
(2)
|
|
Mr. Harrisons phantom units vest in equal annual
increments over three years from his February 4, 2008 grant
date.
|
|
(3)
|
|
Mr. Shains 15,000 unit options awarded on
March 20, 2006 vest in one-third annual increments.
Mr. Shains 3,750 phantom units vest in equal annual
increments over three years from his first anniversary date of
November 6, 2008 and 1,500 of his 3,000 restricted units
granted on November 10, 2006 vest in equal annual
increments over a two year remaining period beginning on
November 10, 2008.
|
|
(4)
|
|
Mr. Christophersons phantom units vest in equal
annual increments over four years from his August 7, 2008
grant date.
|
Hiland
Partners-Option Exercises and Units Vested Table
The table presented below provides information of the values
realized upon the exercise of options and the vesting of
restricted and phantom units of our executive officers during
2008 based on the difference between the market price of the
underlying units at exercise and the exercise or base price of
the unit options:
OPTION
EXERCISES AND UNITS VESTED
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
|
Unit Awards
|
|
|
|
Number
|
|
|
Value
|
|
|
Number
|
|
|
Value
|
|
|
|
of Units
|
|
|
Realized
|
|
|
of Units
|
|
|
Realized
|
|
|
|
Acquired on
|
|
|
Upon
|
|
|
Acquired on
|
|
|
Upon
|
|
|
|
Exercise
|
|
|
Exercise
|
|
|
Vesting
|
|
|
Vesting
|
|
Name
|
|
(#)
|
|
|
($)
|
|
|
(#)
|
|
|
($)
|
|
|
Mr. Griffin
|
|
|
|
|
|
|
|
|
|
|
1,807
|
|
|
$
|
132,775
|
|
Mr. Shain
|
|
|
|
|
|
|
|
|
|
|
1,582
|
|
|
$
|
50,883
|
|
On June 19, 2008, 2,500 of the 10,000 phantom units awarded
to Mr. Griffin on June 19, 2007 vested. Upon vesting,
Mr. Griffin elected to redeem 693 units in cash. On
November 6, 2008, 1,250 of the 5,000 phantom units awarded
to Mr. Shain on November 6, 2007 vested. Upon vesting,
Mr. Shain elected to redeem 418 units in cash. On
November 10, 2008, 750 of the restricted units awarded to
Mr. Shain on November 10, 2006 vested.
Hiland
Partners GP Holdings,
LLC-Director
Compensation
Mr. Harold Hamm, the chairman of the board of directors of
our general partner and a non-employee director, received no
form of director compensation. Mr. Griffin, our CEO and
Mr. Harrison our CFO, who are
100
employees of our general partner, are also non-compensated
members of the board of directors of our general partner.
Mr. Maples, our past CFO was also a non-compensated member
of the board of directors of our general partner. The table
below shows the total compensation paid in 2008 to each of our
current non-employee directors:
DIRECTOR
COMPENSATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
|
|
|
Restricted
|
|
|
|
|
|
|
Annual
|
|
|
|
|
|
Unit
|
|
|
Unit
|
|
|
|
|
|
|
Base Fee(1)
|
|
|
Committee
|
|
|
Awards(2)
|
|
|
Distributions(3)
|
|
|
Total
|
|
Name
|
|
($)
|
|
|
Fees ($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
Michael L. Greenwood
|
|
$
|
31,000
|
|
|
$
|
9,000
|
|
|
$
|
15,555
|
|
|
$
|
1,127
|
|
|
$
|
56,682
|
|
Edward D. Doherty
|
|
$
|
31,000
|
|
|
$
|
4,000
|
|
|
$
|
15,555
|
|
|
$
|
1,127
|
|
|
$
|
51,682
|
|
Rayford T. Reid
|
|
$
|
31,000
|
|
|
$
|
3,000
|
|
|
$
|
15,555
|
|
|
$
|
1,127
|
|
|
$
|
50,682
|
|
Shelby E. Odell(4)
|
|
$
|
31,000
|
|
|
$
|
4,000
|
|
|
$
|
15,555
|
|
|
$
|
1,127
|
|
|
$
|
51,682
|
|
Dr. Cheryl L. Evans
|
|
$
|
31,000
|
|
|
$
|
2,000
|
|
|
$
|
15,555
|
|
|
$
|
1,127
|
|
|
$
|
49,682
|
|
Dr. Bobby B. Lyle
|
|
$
|
31,000
|
|
|
$
|
7,500
|
|
|
$
|
15,555
|
|
|
$
|
1,127
|
|
|
$
|
55,182
|
|
|
|
|
(1)
|
|
Includes an annual base fee of $25,000 per director plus $1,500
per director for each quarterly board of directors meeting
attended.
|
|
(2)
|
|
The value shown is the number of restricted units granted in
2008 times the closing price of our units on the day of grant.
The value given does not reflect a reduction for the fact that
the shares are subject to potential forfeiture in the event the
director leaves the board before the four-year vesting period.
All six non-employee directors each received 1,000 restricted
units each on their anniversary date.
|
|
(3)
|
|
Represents the aggregate cash distributions paid at the time the
units vested on all restricted units held by the director.
|
|
(4)
|
|
Shelby Odell resigned from the board of directors of our general
partner on January 21, 2009 so that he would be eligible to
serve as a member of the conflicts committee of the board of
directors of Hiland Partners general partner.
|
No additional remuneration is paid to officers of our general
partner who also serve as directors. Our independent directors
receive (a) a $25,000 annual cash retainer fee,
(b) $1,500 for each regularly scheduled meeting attended,
(c) $750 for each special meeting attended, (d) 2,000
restricted units upon becoming a director and 1,000 restricted
units on each anniversary date of becoming a director and
(e) during 2007, CEO search committee fees to secure a
replacement for our CEO who resigned in April 2007. The
restricted units vest in quarterly increments on the anniversary
of the grant date over a period of four years. In addition to
the foregoing, each director who serves on a committee receives
$1,000 for each committee meeting attended, the chairman of our
audit committee receives an annual retainer of $5,000 and the
chairman of our other committees receive an annual retainer of
$2,500. In addition, each independent director is reimbursed for
his
out-of-pocket
expenses in connection with attending meetings of the board of
directors or committees. Each director is fully indemnified for
his actions associated with being a director to the fullest
extent permitted under Delaware law.
Reimbursement
of Expenses of Our General Partner
Our general partner will not receive any management fee or other
compensation for its management of our partnership. Our general
partner and its affiliates will be reimbursed for all expenses
incurred on our behalf. These expenses include the cost of
employee, officer and director compensation benefits properly
allocable to our partnership and all other expenses necessary or
appropriate to the conduct of our business and allocable to us.
The partnership agreement provides that our general partner will
determine the expenses that are allocable to us in any
reasonable manner determined by our general partner in its
discretion. There is no cap on the amount that may be paid or
reimbursed to our general partner for compensation or expenses
incurred on our behalf. CLR currently provides us with certain
general and administration services. For a
101
description of these services, please read Certain
Relationships and Related Party Transactions
Agreements with Harold Hamm and His Affiliates
Omnibus Agreement Services. In the omnibus
agreement, CLR agreed to continue to provide these services to
us for two years after our initial public offering, at the lower
of CLRs cost to provide the services or $50,000 per year.
During the third quarter of 2006, we hired a director of
information technology and a director of human resources and
transitioned these services away from CLR. The remainder of
general and administration services provided by CLR under this
agreement expired on February 15, 2007.
Hiland
Holdings GP, LP Long-Term Incentive Plan
Our general partner has adopted the Hiland Holdings GP, LP
Long-Term Incentive Plan for the employees and directors of our
general partner and employees of our affiliates who perform
services for us. 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 may
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 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. 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.
Restricted Units and Phantom Units.
A
restricted unit is a common unit that is subject to forfeiture.
Upon vesting, the grantee receives a common unit that is not
subject to forfeiture. A phantom unit is a notional unit that
entitles the grantee to receive a common unit upon the vesting
of the phantom unit or, in the discretion of the compensation
committee, cash equivalent to the value of a common unit. The
compensation committee may make grants of restricted units and
phantom units under the plan to employees and directors
containing such terms as the compensation committee shall
determine under the plan, including the period over which
restricted units and phantom units granted will vest. The
compensation committee may, in its discretion, base its
determination on the grantees period of service or upon
the achievement of specified financial objectives. In addition,
the restricted and phantom units will vest upon a change of
control of us or our general partner, subject to additional or
contrary provisions in the award agreement.
If a grantees employment or membership on the board of
directors terminates for any reason, the grantees
restricted units and phantom units will be automatically
forfeited unless, and to the extent, the compensation committee
provides otherwise or unless otherwise provided in the grant
agreement between the grantee and our general partner or its
affiliates. Common units to be delivered with respect to these
awards may be common units acquired by our general partner in
the open market, common units already owned by our general
partner, common units acquired by our general partner directly
from us or any other person or any combination of the foregoing.
Our general partner will be entitled to reimbursement by us for
the cost incurred in acquiring common units. If we issue new
common units with respect to these awards, the total number of
common units outstanding will increase.
Distributions on restricted units may be subject to the same
vesting requirements as the restricted units, in the
compensation committees discretion. The compensation
committee, in its discretion, may also grant tandem distribution
equivalent rights with respect to phantom units. These are
rights that entitle the grantee to receive cash equal to the
cash distributions made on the common units.
We intend for the restricted units and phantom units under the
plan to serve as a means of incentive compensation for
performance and not primarily as an opportunity to participate
in the equity appreciation of
102
the common units. Therefore, plan participants will not pay any
consideration for the common units they receive, and we will
receive no remuneration for the units.
Unit Options.
The long-term incentive plan
permits the grant of options covering common units. The
compensation committee may make grants under the plan to
employees and directors containing such terms as the committee
shall determine. Except in the case of substitute options
granted to new employees or directors in connection with a
merger, consolidation or acquisition, unit options may not have
an exercise price that is less than the fair market value of the
units on the date of grant. In addition, unit options granted
will generally become exercisable over a period determined by
the compensation committee and, in the compensation
committees discretion, may provide for accelerated vesting
upon the achievement of specified performance objectives. The
unit options will become exercisable upon a change of control of
us. Unless otherwise provided in an award agreement, unit
options may be exercised only by the participant during his
lifetime or by the person to whom the participants right
will pass by will or the laws of descent and distribution. If a
grantees employment or membership on the board of
directors terminates for any reason, the grantees unvested
options will be automatically forfeited unless, and to the
extent, the compensation committee provides otherwise or unless
otherwise provided in a written employment agreement or the
option agreement between the grantee and our general partner or
its affiliates. If the exercise of an option is to be settled in
common units rather than cash, our general partner will acquire
common units in the open market or directly from us or any other
person or use common units already owned by our general partner
or any combination of the foregoing. Our general partner will be
entitled to reimbursement by us for the difference between the
cost incurred by it in acquiring these common units and the
proceeds it receives from a grantee at the time of exercise.
Thus, the cost of the unit options above the proceeds from
grantees will be borne by us. If we issue new common units upon
exercise of the unit options, the total number of common units
outstanding will increase, and our general partner will pay us
the proceeds it received from the grantee upon exercise of the
unit option. The plan has been designed to furnish additional
compensation to employees and directors and to align their
economic interests with those of common unitholders.
Hiland
Partners, LP-Long-Term Incentive Plan
Hiland Partners general partner has adopted the Hiland
Partners Long-Term Incentive Plan for employees and directors of
its general partner and employees of its affiliates. The plan is
intended to promote Hiland Partners interests and the
interests of its general partner by providing to employees and
directors of its general partner and its affiliates
incentive compensation awards for superior performance that are
based on units. The plan is also contemplated to enhance the
ability of its general partner, its affiliates or Hiland
Partners to attract and retain the services of individuals who
are essential for growth and profitability and to encourage them
to devote their best efforts to advancing our business. The
long-term incentive plan currently permits an aggregate of
680,000 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 our general
partners board of directors. The plan will continue in
effect until the earliest of (i) the date determined by the
board of directors of our general partner; (ii) the date
that common units are no longer available for payment of awards
under the plan; or (iii) the tenth anniversary of the plan.
Hiland Partners general partners 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. Our general partners 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.
Restricted Units and Phantom Units.
A
restricted unit is a common unit that is subject to forfeiture.
Upon vesting, the grantee receives a common unit that is not
subject to forfeiture. A phantom unit is a notional unit that
entitles the grantee to receive a common unit upon the vesting
of the phantom unit or, in the
103
discretion of the compensation committee, cash equivalent to the
value of a common unit. The compensation committee may make
grants of restricted units and phantom units under the plan to
employees and directors containing such terms as the
compensation committee shall determine under the plan, including
the period over which restricted units and phantom units granted
will vest. The committee may, in its discretion, base its
determination on the grantees period of service or upon
the achievement of specified financial objectives. In addition,
the restricted and phantom units will vest upon a change of
control of us or our general partner, subject to additional or
contrary provisions in the award agreement.
If a grantees employment or membership on the board of
directors terminates for any reason, the grantees
restricted units and phantom units will be automatically
forfeited unless, and to the extent, the compensation committee
provides otherwise or unless otherwise provided in a written
employment agreement between the grantee and our general partner
or its affiliates. Common units to be delivered with respect to
these awards may be common units acquired by our general partner
in the open market, common units already owned by our general
partner, common units acquired by our general partner directly
from us or any other person or any combination of the foregoing.
Our general partner will be entitled to reimbursement by us for
the cost incurred in acquiring common units. If we issue new
common units with respect to these awards, the total number of
common units outstanding will increase.
Distributions on restricted units may be subject to the same
vesting requirements as the restricted units, in the
compensation committees discretion. The compensation
committee, in its discretion, may also grant tandem distribution
equivalent rights with respect to phantom units. These are
rights that entitle the grantee to receive cash equal to the
cash distributions made on the common units.
Hiland Partners intends for the restricted units and phantom
units under the plan to serve as a means of incentive
compensation for performance and not primarily as an opportunity
to participate in the equity appreciation of the common units.
Therefore, plan participants will not pay any consideration for
the common units they receive, and we will receive no
remuneration for the units.
Unit Options.
The long-term incentive plan
permits the grant of options covering common units. The
compensation committee may make grants under the plan to
employees and directors containing such terms as the committee
shall determine. Except in the case of substitute options
granted to new employees or directors in connection with a
merger, consolidation or acquisition, unit options may not have
an exercise price that is less than the fair market value of the
units on the date of grant. In addition, unit options granted
will generally become exercisable over a period determined by
the compensation committee and, in the compensation
committees discretion, may provide for accelerated vesting
upon the achievement of specified performance objectives. The
unit options will become exercisable upon a change in control of
us or of our operating company. Unless otherwise provided in an
award agreement, unit options may be exercised only by the
participant during his lifetime or by the person to whom the
participants right will pass by will or the laws of
descent and distribution. If a grantees employment or
membership on the board of directors terminates for any reason,
the grantees unvested options will be automatically
forfeited unless, and to the extent, the compensation committee
provides otherwise or unless otherwise provided in a written
employment agreement or the option agreement between the grantee
and our general partner or its affiliates. If the exercise of an
option is to be settled in common units rather than cash, the
general partner will acquire common units in the open market or
directly from us or any other person or use common units already
owned by our general partner or any combination of the
foregoing. The general partner will be entitled to reimbursement
by us for the difference between the cost incurred by it in
acquiring these common units and the proceeds it receives from a
grantee at the time of exercise. Thus, the cost of the unit
options above the proceeds from grantees will be borne by us. If
we issue new common units upon exercise of the unit options, the
total number of common units outstanding will increase, and our
general partner will pay us the proceeds it received from the
grantee upon exercise of the unit option. The plan has been
designed to furnish additional compensation to employees and
directors and to align their economic interests with those of
common unitholders.
Unit Option Grant Agreement.
As of
January 1, 2009, Hiland Partners has outstanding unit
options to employees, officers and directors of its general
partner to purchase an aggregate of 33,336 common units with a
weighted average exercise price of $37.92. No unit options were
granted in 2008 or 2007. Under the unit
104
option grant agreements, the options vest and may be exercised
in one third increments on the anniversary of the grant date
over a period of three years. In addition, the unit options will
vest and become exercisable, subject to certain conditions, upon
the occurrence of any of the following
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the grantee becomes disabled;
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the grantee dies;
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the grantees employment is terminated other than for
cause; and
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upon a change of control of the Partnership.
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Of the 75,041 outstanding unit options at January 1, 2008,
40,705 were exercised in 2008, resulting in cash contributions
to Hiland Partners of $1.1 million and 1,000 unit
options were forfeited. Of the remaining 33,336 outstanding unit
options at December 31, 2008, 24,002 were exercisable. On
January 5, 2009, the 4,334 unit options granted on
January 5, 2006 vested, and on March 20, 2009, the
final 5,000 unit options will vest.
Compensation
Committee Interlocks and Insider Participation
Harold Hamm serves as the chairman of our Compensation
Committee. Mr. Hamm controls CLR, and the required
disclosure concerning related party transactions involving
Mr. Hamm, Continental Resources Inc and us are set forth
below. Other members of the compensation committee include
Mr. Rayford T. Reid and Dr. Bobby B Lyle.
Report
of the Compensation Committee
The compensation committee of the Board of Directors of Hiland
Partners GP Holdings, LLC administers the executive compensation
program. The compensation committee is primarily responsible for
reviewing, approving and reporting to the Board of Directors on
major compensation and benefits plans, policies and programs,
reviewing and evaluating the performance and approving the
compensation of senior executive officers; and overseeing
management development programs, performance assessment of
senior executives and succession planning. Other specific duties
and responsibilities include: annually reviewing and approving
corporate goals and objectives relevant to the CEO base
compensation, incentive-compensation plans and equity-based
plans; evaluating the CEOs performance in light of those
goals and objectives, and recommending to the Board of
Directors, either as a committee or together with the other
independent directors, the CEOs compensation levels based
on this evaluation; and producing the required annual report on
executive compensation. The compensation committee annually
evaluates the effectiveness of the executive compensation
program in meeting its objectives.
As required by applicable regulations of the Securities and
Exchange Commission, the compensation committee reviewed and
discussed with management the compensation discussion and
analysis contained in this Annual Report on
Form 10-K.
Based on the reviews and discussions referred to above, the
compensation committee recommended to the Board of Directors of
Hiland Partners GP Holdings, LLC that the compensation
discussion and analysis be included in the Annual Report on
Form 10-K
for the year ended December 31, 2008 for filing with the
SEC.
Respectively submitted on March 5, 2009 by the members of
the compensation committee of the Board of Directors of Hiland
Partners GP Holdings, LLC:
Harold Hamm, Chairman
Rayford T. Reid
Dr. Bobby B Lyle
105
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Item 12.
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Security
Ownership of Certain Beneficial Owners and Management and
Related Unitholder Matters
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Beneficial Ownership of Hiland Holdings GP,
LP.
The following table sets forth the beneficial
ownership of units of Hiland Holdings GP, LP as of March 5,
2009 held by each person who beneficially owns 5% or more of the
then outstanding units and all of the directors, named executive
officers, and directors and executive officers as a group of
Hiland Holdings GP, LP.
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Percentage of
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Common Units
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Common Units
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Beneficially
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Beneficially
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Name of Beneficial Owner(1)
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Owned
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Owned
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Harold Hamm(2)
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7,752,184
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35.9
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%
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Harold Hamm DST Trust(2)
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3,232,346
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15.0
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%
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Harold Hamm HJ Trust(2)
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2,153,522
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10.0
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%
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Joseph L. Griffin(1)
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*
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Matthew S. Harrison(1)
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*
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Robert W. Shain(1)
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*
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Kent C. Christopherson(1)
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*
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Michael L. Greenwood(3)
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4,000
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*
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Edward D. Doherty(3)
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4,500
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*
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Rayford T. Reid(3)
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29,000
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*
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Shelby E. Odell(3)
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9,000
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*
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Dr. Cheryl L. Evans(3)
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4,500
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*
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Dr. Bobby B. Lyle(3)
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63,904
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*
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Swank Capital, LLC(4)
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1,962,285
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9.1
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%
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Kayne Anderson Capital Advisors, L.P.(5)
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1,166,036
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5.4
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%
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All directors and executive officers as a group
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7,867,088
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36.4
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%
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*
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Less than 1%.
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(1)
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The address of each person listed above is 205 West Maple,
Suite 1100, Enid, Oklahoma 73701, except for the Harold
Hamm DST Trust and the Harold Hamm HJ Trust, which Mr. Bert
Mackie is the trustee for both trusts and his address is
302 N. Independence, Enid, Oklahoma 73701.
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(2)
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Harold Hamm, the Harold Hamm DST Trust and the Harold Hamm HJ
Trust have a 90.7%, 5.6% and a 3.7% ownership interest,
respectively, in Continental Gas Holdings, Inc., which
beneficially owns 8,481,350 common units. The units held by
Continental Gas Holdings, Inc. are reported in this table as
beneficially owned by Mr. Hamm, the Harold Hamm DST Trust
and the Harold Hamm HJ Trust in proportion to their respective
ownership interest in Continental Gas Holdings, Inc. The address
of Continental Gas Holdings, Inc. is 205 West Maple,
Suite 1100, Enid, Oklahoma 73701.
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(3)
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1,000, 750 and 1,000 of the indicated common units are
restricted units that vest on the anniversary of each grant date
over periods of two, three and four years, respectively.
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(4)
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Represents holdings as of December 31, 2008 as reported on
Schedule 13G filed on February 17, 2009. The address
of this person is 3300 Oak Lawn Avenue, Suite 650, Dallas,
TX 75219.
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(5)
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Represents holdings as of December 31, 2008 as reported on
Schedule 13G filed on February 9, 2009. The address of
this person is 1800 Avenue of the Stars, Second Floor, Los
Angeles, CA 90067.
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106
Beneficial Ownership of Hiland Partners,
LP.
The following table sets forth the beneficial
ownership of Hiland Partners units as of March 5, 2009 held
by each person who beneficially owns 5% or more of the then
outstanding units and all of the directors, named executive
officers, and directors and executive officers as a group of its
general partner.
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Percentage
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Percentage
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of
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of
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Percentage
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Common
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Subordinate
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Subordinated
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of
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Common Units
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Units
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Units
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Units
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Total Units
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Beneficially
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Beneficially
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Beneficially
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Beneficially
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Beneficially
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Name of Beneficial Owner
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Owned
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Owned
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Owned
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Owned
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Owned
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Harold Hamm(1)(2)(3)
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2,321,471
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36.8
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%
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3,060,000
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100.0
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%
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57.4
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%
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Hiland Holdings GP, LP(1)(3)
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2,321,471
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36.8
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%
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3,060,000
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100.0
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%
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57.4
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%
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Joseph L. Griffin(1)
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1,807
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*
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*
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Matthew S. Harrison(1)
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2,500
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*
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*
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Robert W. Shain(1)(4)
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18,832
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*
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*
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Kent C. Christopherson(1)
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*
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*
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Michael L. Greenwood(1)(2)(5)
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13,291
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*
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*
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Edward D. Doherty(1)(2)(5)
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5,000
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*
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*
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Rayford T. Reid(1)(2)(5)
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11,818
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*
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*
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Shelby E. Odell(1)(2)(5)
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15,000
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*
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*
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John T. McNabb, II(1)(6)
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4,000
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*
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*
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Dr. David L. Boren(1)(6)
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4,000
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*
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*
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Kayne Anderson Capital Advisors, L.P.(7)
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686,439
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10.9
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%
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7.3
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%
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All directors and executive officers as a group
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2,397,719
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38.0
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%
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3,060,000
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100.0
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%
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58.3
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%
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*
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Less than 1%.
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(1)
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The address of this person is 205 West Maple,
Suite 1100, Enid, Oklahoma 73701.
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(2)
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These individuals each hold an ownership interest in Hiland
Holdings GP, LP as indicated in the following table.
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(3)
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Mr. Hamm indirectly owns 100% of Hiland Partners GP
Holdings, LLC, the general partner of Hiland Holdings GP, LP.
Accordingly, Mr. Hamm is deemed to be the beneficial owner
of the 2,321,471 common units and 3,060,000 subordinated units
held by Hiland Holdings GP, LP.
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(4)
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1,500 of the indicated common units are restricted units that
vest on the anniversary of the grant date over a period of three
years and 15,000 of these units underly unit options and are
deemed to be outstanding pursuant to
Rule 13d-3.
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(5)
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500, 500, 750 and 1,000 of the indicated common units are
restricted units that vest on the anniversary of each grant date
over periods of one, two, three and four years, respectively.
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(6)
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1,000, 750 and 1,000 of the indicated common units are
restricted units that vest on the anniversary of each grant date
over periods of two, three and four years, respectively.
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(7)
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Represents holdings as of December 31, 2008 as reported on
Schedule 13G filed on February 11, 2009. The address
of this person is 1800 Avenue of the Stars, Second Floor, Los
Angeles, CA 90067.
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Beneficial Ownership of Hiland Partners General Partner
Interest.
Hiland Holdings GP, LP owns all of the
2% general partner interest, all of the incentive distributions
rights, 2,321,471 of Hiland Partners common units and 3,060,000
of Hiland Partners subordinated units.
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Item 13.
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Certain
Relationships and Related Transactions and Director
Independence
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For a discussion of director independence, see Item 10.
Directors and Executive Officers of the Registrant.
107
Harold Hamm, the Harold Hamm DST Trust and the Harold Hamm HJ
Trust own 60.8% of Hiland Holdings GP, LP, who owns all of the
2% general partner interest and all of the incentive
distributions rights of Hiland Partners GP. LLC and 2,311,471 of
Hiland Partners common units and 3,060,000 of Hiland Partners
subordinated units. Mr. Harold Hamm owns 72.8% of the
ownership interest of Continental Resources, Inc. Since its
inception in 1967, Mr. Hamm has served as Chief Executive
Officer and a director of Continental Resources, Inc. and
currently serves as Chairman of the Board of Directors and Chief
Executive Officer.
Distributions
and Payments to Our General Partner and its Affiliates
Our general partner and its affiliates do not receive any
management fee or other compensation for the management of our
business and affairs, but they are reimbursed for all expenses
that they incur on our behalf, including general and
administrative expenses, salaries and benefits for all of our
employees and other corporate overhead. Our general partner
determines the amount of these expenses. In the omnibus
agreement, CLR has agreed to continue to provide certain general
and administrative services to us for two years after Hiland
Partners initial public offering, at the lower of
CLRs cost to provide the services or $50,000 per year.
During the third quarter of 2006, we hired a director of
information technology and a director of human resources and
transitioned these services away from CLR The remainder of
general and administration services provided by CLR under this
agreement expired on February 15, 2007. Please read
Omnibus Agreement Services
below. In addition, our general partner owns the 2% general
partner interest and all of the incentive distribution rights.
Our general partner is entitled to receive incentive
distributions if the amount we distribute with respect to any
quarter exceeds levels specified in our partnership agreement.
Omnibus
Agreement
Upon the closing of Hiland Partners initial public offering,
they entered into an omnibus agreement with CLR, Hiland
Partners, LLC, Harold Hamm, Continental Gas Holdings, Inc. and
its general partner that addressed the following matters:
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Harold Hamms agreement not to compete and to cause his
affiliates (including CLR) not to compete with us under certain
circumstances;
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an indemnity by CLR, Hiland Partners, LLC and Continental Gas
Holdings, Inc. for prior tax liabilities resulting from the
assets contributed to the partnership;
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an indemnity by CLR for liabilities associated with oil and gas
properties conveyed by Continental Gas, Inc. to CLR by dividend;
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Hiland Partners two-year exclusive option to purchase the
Bakken gathering system owned by Hiland Partners, LLC; and
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for a two-year period, CLR will provide certain general and
administrative services.
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Non-Competition
Harold Hamm will not, and will cause his affiliates not to
engage in, whether by acquisition, construction, investment in
debt or equity interests of any person or otherwise, the
business of gathering, treating, processing and transportation
of natural gas in North America, the transportation and
fractionation of NGLs in North America, and constructing, buying
or selling any assets related to the foregoing businesses. This
restriction does not apply to:
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any business that is primarily related to the exploration for
and production of oil or natural gas, including the sale and
marketing of oil and natural gas derived from such exploration
and production activities;
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the purchase and ownership of not more than five percent of any
class of securities of any entity engaged in the business
described above;
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any business conducted by Harold Hamm or his affiliates as of
the date of the omnibus agreement;
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108
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any business that Harold Hamm or his affiliates acquires or
constructs that has a fair market value or construction cost, as
applicable, of less than $5.0 million;
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any business that Harold Hamm or his affiliates acquires or
constructs that has a fair market value or construction cost, as
applicable, of $5.0 million or more if we have been offered
the opportunity to purchase the business for the fair market
value or construction cost, as applicable, and we decline to do
so with the concurrence of the conflicts committee of our
general partner; and
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any business conducted by Harold Hamm or his affiliates, with
the approval of the conflicts committee.
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These non-competition obligations will terminate on the first to
occur of the following events:
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the first day on which the Hamm Parties no longer control us;
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the death of Harold Hamm; and
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February 15, 2010.
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Indemnification
CLR, Hiland Partners, LLC and Continental Gas Holdings, Inc.
agreed to indemnify us for all federal, state and local income
tax liabilities attributable to the operation of the assets
contributed by such entities to us prior to the closing of
Hiland Partners initial public offering. In addition, CLR
agreed to indemnify us for a period of five years from the
closing date of Hiland Partners initial public offering
for liabilities associated with oil and gas properties conveyed
by Continental Gas, Inc. to CLR by dividend.
Contracts
with CLR
Compression
Services Agreement
In connection with Hiland Partners initial public
offering, they entered into a four-year compression services
agreement with CLR as described under Managements
Discussion and Analysis of Financial Condition and Results of
Operations Hiland Partners
Contracts Compression Services Agreement. For
the year ended December 31, 2008, Hiland Partners received
revenues of $4.8 million from CLR under this arrangement.
Gas
Purchase Contracts
Hiland Partners purchases natural gas and NGLs from CLR and its
affiliates. Hiland Partners purchased natural gas and NGLs from
CLR and its affiliates in the amount of approximately
$116.7 million for the year ended December 31, 2008.
Badlands
Purchase Contract
On November 8, 2005, Hiland Partners entered into a new
15-year
definitive gas purchase agreement with CLR under which they will
gather, treat and process additional natural gas, which is
produced as a by-product of CLRs secondary oil recovery
operations, in the areas specified by the contract. In return,
Hiland Partners will receive 50% of the proceeds attributable to
residue gas and natural gas liquids sales as well as certain
fixed fees associated with gathering and treating the natural
gas, including a $0.60 per Mcf fee for the first 36 Bcf of
natural gas gathered. The board of directors, as well as the
conflicts committee of the board of directors, of Hiland
Partners general partner has approved the agreement.
In order to fulfill the obligations under the agreement, Hiland
Partners expanded its Badlands gas gathering system and
processing plant located in Bowman County, North Dakota. This
expansion project included the construction of a
40,000 Mcf/d nitrogen rejection plant, which became
operational in the third quarter of 2007, and the expansion of
its existing Badlands field-gathering infrastructure.
109
Other
Agreements
Historically, Hiland Partners predecessor and Hiland Partners,
LLC have contracted for down hole well services, fluid supply
and oil field services from businesses in which Harold Hamm and
members of his family have historically owned equity interests.
Mr. Hamm and members of his family sold these businesses to
Complete Production Services, Inc. in October 2004.
Mr. Hamm is currently a director and stockholder of
Complete Production Services. Payments made for these services
were $463,000 during the year ended December 31, 2008.
Hiland Partners has continued to obtain services from these
companies following the completion of its initial public
offering. Based on various bids received by its general partner
from unaffiliated third parties, its general partner believes
that amounts paid for these services are comparable to amounts
which would be charged by an unaffiliated third party.
We lease office space under operating leases from an entity
wholly owned by Harold Hamm. Rents paid under these leases
totaled approximately $157,000 for the year ended
December 31, 2008. These rates are consistent with the
rates charged to other non-affiliated tenants in the building
which we office.
In connection with the completion of our initial public
offering, we adopted an ethics policy that requires related
party transactions be reviewed to ensure that they are fair and
reasonable to us. This requirement is also contained in our
partnership agreement.
While we do not have formal, specified policies or procedures
for the review, approval or ratification of transactions
required to be reported under paragraph (a) of
Regulation S-K
Item 404, as related person transactions may result in
potential conflicts of interest among management and board-level
decision makers, our partnership agreement does set forth
procedures that our board of directors may utilize in connection
with resolutions of potential conflicts of interest, including
referral of such matters to an independent conflicts committee
for its review and approval or disapproval of such matters. For
a discussion of our conflicts committee, see Item 10.
Directors and Executive Officers of the Registrant.
|
|
Item 14.
|
Principal
Accountant Fees and Services
|
Our audit committee has adopted an audit committee charter,
which is available on our website at
www.hilandpartners.com
. The charter requires our audit
committee to approve in advance all audit and non-audit services
to be provided by our independent registered public accounting
firm. Our audit committee ratified Grant Thornton LLP,
Independent Registered Public Accounting Firm, to audit the
books, records and accounts of Hiland Holdings GP, LP for the
year ended December 31, 2007. Audit fees paid to Grant
Thornton LLP in 2008 include fees for our annual integrated
audit, review of documents filed with the Securities and
Exchange Commission and review of our quarterly reports on
Form 10-Q.
Tax fees include tax compliance matters. Fees paid in 2007 to
Grant Thornton LLP for audit services included fees associated
with our annual integrated audit, review of documents filed with
the Securities and Exchange Commission and reviews of our
quarterly reports on
Form 10-Q.
Tax fees paid to Grant Thornton LLP are for tax compliance and
acquisition matters. Fees paid to Grant Thornton LLP for the
periods indicated are as follows:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Audit Fees
|
|
$
|
121,000
|
|
|
$
|
125,000
|
|
Audit Related Fees
|
|
|
|
|
|
|
|
|
Tax Fees
|
|
|
92,000
|
|
|
|
85,000
|
|
All Other Fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
213,000
|
|
|
$
|
210,000
|
|
|
|
|
|
|
|
|
|
|
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
(a)
Financial Statements
The financial statements listed in the accompanying Index to
Consolidated Financial Statements are filed as part of this
Annual Report on
Form 10-K.
110
(b)
Other Information
None.
EXHIBITS
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
Description
|
|
|
1
|
.1
|
|
|
|
Underwriting Agreement by and between Hiland Holdings GP, LP and
Lehman Brothers Inc., as representative of the underwriters
named therein dated as of September 19, 2006. (incorporated
by reference to Exhibit 1.1 of Registrants Statement
on
Form S-1
(File
No. 333-134491))
|
|
2
|
.1
|
|
|
|
Contribution Agreement among Hiland Holdings GP, LP, Hiland
Partners GP Holdings, LLC, Hiland Partners GP, Inc., Continental
Gas Holdings, Inc., HHGP Holding, LLC, Harold Hamm DST Trust,
Harold Hamm HJ Trust, Randy Moeder, Equity Financial Services,
Inc. and Ken Maples dated May 24, 2006. (incorporated by
reference to Exhibit 2.1 of Registrants Statement on
Form S-1
(File No. 333-134491))
|
|
2
|
.2
|
|
|
|
Acquisition Agreement by and among Hiland Operating, LLC, Hiland
Partners, LLC and the members of Hiland Partners, LLC dated as
of September 1, 2005 (incorporated by reference to
Exhibit 2.2 of Hiland Partners, LPs
Form 8-K
filed on September 29, 2005)
|
|
2
|
.3
|
|
|
|
Amendment No. 1 dated September 12, 2006 to
Contribution Agreement among Hiland Holdings GP, LP, Hiland
Partners GP Holdings, LLC, Hiland Partners GP, Inc., Continental
Gas Holdings, Inc., HHGP Holding, LLC, Harold Hamm DST Trust,
Harold Hamm HJ Trust, Randy Moeder, Equity Financial Services,
Inc. and Ken Maples dated May 24, 2006. (incorporated by
reference to Exhibit 2.3 of Registrants Statement on
Form S-1
(File No. 333-134491))
|
|
3
|
.1
|
|
|
|
Certificate of Limited Partnership of Hiland Holdings GP, LP
(incorporated by reference to Exhibit 3.1 of
Registrants Statement on
Form S-1
(File No. 333-134491))
|
|
3
|
.2
|
|
|
|
Amended and Restated Agreement of Limited Partnership of Hiland
Holdings GP, LP (incorporated by reference to Exhibit 3.1
of Registrants
Form 10-Q
filed on November 13, 2006)
|
|
3
|
.3
|
|
|
|
Certificate of Formation of Hiland Partners GP Holdings, LLC
(incorporated by reference to Exhibit 3.3 of
Registrants Statement on
Form S-1
(File No. 333-134491))
|
|
3
|
.4
|
|
|
|
Amended and Restated Limited Liability Company Agreement of
Hiland Partners GP Holdings, LLC (incorporated by reference to
Exhibit 3.2 of Registrants
Form 10-Q
filed on November 13, 2006)
|
|
4
|
.1
|
|
|
|
Certificate of Limited Partnership of Hiland Holdings GP, LP
(incorporated by reference to Exhibit 3.1 of
Registrants Statement on
Form S-1
(File No. 333-134491))
|
|
4
|
.2
|
|
|
|
Amended and Restated Agreement of Limited Partnership of Hiland
Holdings GP, LP (incorporated by reference to Exhibit 3.1
of Registrants
Form 10-Q
filed on November 13, 2006)
|
|
4
|
.3
|
|
|
|
Certificate of Formation of Hiland Partners GP Holdings, LLC
(incorporated by reference to Exhibit 3.3 of
Registrants Statement on
Form S-1
(File No. 333-134491))
|
|
4
|
.4
|
|
|
|
Amended and Restated Limited Liability Company Agreement of
Hiland Partners GP Holdings, LLC (incorporated by reference to
Exhibit 3.2 of Registrants
Form 10-Q
filed on November 13, 2006)
|
|
10
|
.1
|
|
|
|
Credit Agreement dated as of February 15, 2005 among Hiland
Operating, LLC and MidFirst Bank (incorporated by reference to
Exhibit 10.1 of Hiland Partners, LPs annual report on
Form 10-K
filed on March 30, 2005)
|
|
10
|
.2+
|
|
|
|
Hiland Partners, LP Long-Term Incentive Plan (incorporated by
reference to Exhibit 10.2 of Hiland Partners, LPs
Registration Statement on
Form S-1
(File No. 333-119908))
|
|
10
|
.3
|
|
|
|
Compression Services Agreement, effective as of January 28,
2005, by and among Hiland Partners, LP and CLR (incorporated by
reference to Exhibit 10.3 of Hiland Partners, LPs
annual report on
Form 10-K
filed on March 30, 2005)
|
|
10
|
.4
|
|
|
|
Gas Purchase Contract between CLR and Continental Gas, Inc.
dated as of August 1, 1999 (incorporated by reference to
Exhibit 10.5 of Hiland Partners, LPs Registration
Statement or
Form S-1
(File No. 333-119908))
|
111
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
Description
|
|
|
10
|
.5
|
|
|
|
Gas Purchase Contract between Chesapeake Energy Marketing, Inc.
and Continental Gas, Inc. (incorporated by reference to
Exhibit 10.5 of Hiland Partners, LPs Registration
Statement or
Form S-1
(File No. 333-119908))
|
|
10
|
.6
|
|
|
|
Gas Purchase Contract between Magic Circle Energy Corporation
and Magic Circle Gas (incorporated by reference to
Exhibit 10.6 of Hiland Partners, LPs Registration
Statement on
Form S-1
(File No. 333-119908))
|
|
10
|
.7
|
|
|
|
Gas Purchase Contract between Range Resources Corporation and
Continental Gas, Inc. (incorporated by reference to
Exhibit 10.7 of Hiland Partners, LPs Registration
Statement on
Form S-1
(File No. 333-119908))
|
|
10
|
.8+
|
|
|
|
Form of Unit Option Grant (incorporated by reference to
Exhibit 10.9 of Hiland Partners, LPs Registration
Statement on
Form S-1
(File No. 333-119908))
|
|
10
|
.9
|
|
|
|
Omnibus Agreement among CLR, Hiland Partners, LLC, Harold Hamm,
Hiland Partners GP, LLC, Continental Gas Holdings, Inc., and
Hiland Partners, LP effective as of February 15, 2005
(incorporated by reference to Exhibit 10.10 of Hiland
Partners, LPs annual report on
Form 10-K
filed on March 30, 2005)
|
|
10
|
.10+
|
|
|
|
Directors Compensation Summary (incorporated by reference
to Exhibit 10.11 of Hiland Partners, LPs annual
report on
Form 10-K
filed on March 30, 2005)
|
|
10
|
.11+
|
|
|
|
Form of Restricted Unit Grant Agreement (incorporated by
reference to Exhibit 10.1 of Hiland Partners, LPs
Form 8-K
filed on November 14, 2005)
|
|
10
|
.12
|
|
|
|
First Amendment, dated as of September 26, 2005 to Credit
Agreement dated as of February 15, 2005 among Hiland
Operating, LLC and the lenders thereto (incorporated by
reference to Exhibit 10.1 of Hiland Partners, LPs
Form 8-K
filed on September 29, 2005)
|
|
10
|
.13
|
|
|
|
Gas Purchase Agreement among Hiland Partners, LP and CLR dated
November 8, 2005 (incorporated by reference to
Exhibit 10.1 of Hiland Partners, LPs
form 8-K
filed on November 10, 2005)
|
|
10
|
.14+
|
|
|
|
Form of Hiland Holdings GP, LP Long-Term Incentive Plan
(incorporated by reference to Exhibit 10.14 of
Registrants Statement on
Form S-1
(File No. 333-134491))
|
|
10
|
.15
|
|
|
|
Credit Agreement dated as of May 1, 2006 between Hiland
Partners GP, LLC and MidFirst Bank (incorporated by reference to
Exhibit 10.15 of Registrants Statement on
Form S-1
(File No. 333-134491))
|
|
10
|
.16
|
|
|
|
Unit Purchase Agreement dated May 1, 2006 by and between
Hiland Partners, LP and Hiland Partners GP, LLC (incorporated by
reference to Exhibit 10.1 of Hiland Partners, LPs
Form 8-K
filed on May 3, 2005)
|
|
10
|
.17
|
|
|
|
Asset Purchase Agreement dated March 30, 2006 by and
between Hiland Operating, LLC and Energy Gas Gathering, L.L.C.
(incorporated by reference to Exhibit 10.2 of Hiland
Partners, LPs
Form 8-K
filed on May 3, 2005)
|
|
10
|
.18
|
|
|
|
Second Amendment, dated as of June 8, 2006, to Credit
Agreement dated as of February 15, 2005 among Hiland
Operating, LLC and the lenders thereto (incorporated by
reference to Exhibit 10.1 of Hiland Partners, LPs
Form 8-K
filed on June 13, 2006)
|
|
10
|
.19
|
|
|
|
Form of Restricted Unit Grant Agreement of Hiland Holdings GP,
LP (incorporated by reference to Exhibit 10.19 of
Registrants Statement on
Form S-1
(File No. 333-134491))
|
|
10
|
.20+
|
|
|
|
Form of Unit Option Grant Agreement of Hiland Holdings GP, LP
(incorporated by reference to Exhibit 10.20 of
Registrants Statement on
Form S-1
(File No. 333-134491))
|
|
10
|
.21+
|
|
|
|
Form of Phantom Unit Grant Agreement of Hiland Holdings GP, LP
(incorporated by reference to Exhibit 10.21 of
Registrants Statement on
Form S-1
(File No. 333-134491))
|
|
10
|
.22
|
|
|
|
Non-Competition Agreement dated September 25, 2006 (2006 by
and among Hiland Partners, LP, Hiland Holdings GP, LP and Hiland
Partners GP Holdings, LLC (incorporated by reference to
Exhibit 10.22 of Hiland Partners, LPs
Form 8-K
filed on September 29, 2006)
|
112
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
Description
|
|
|
10
|
.23
|
|
|
|
Credit Agreement dated as of September 25, 2006 between
Hiland Holdings GP, LP and MidFirst Bank (incorporated by
reference to Exhibit 10.23 of Registrants Statement
on
Form S-1
(File No. 333-134491))
|
|
10
|
.24
|
|
|
|
Retention Agreement, dated as of March 14, 2007, by and
among Randy Moeder, Hiland Partners GP, LLC, Hiland Partners GP
Holdings, LLC and the other parties listed on the signature page
thereto. (incorporated by reference to Exhibit 10.1 of
Registrants
Form 8-K
filed on March 15, 2007
|
|
10
|
.25
|
|
|
|
Third Amendment, dated as of July 13, 2007, to Credit
Agreement dated as of February 15, 2005 among Hiland
Operating, LLC and the lenders thereto (incorporated by
reference to Exhibit 10.1 of Hiland Partners, LP
Form 8-K
filed on July 18, 2007)
|
|
10
|
.26
|
|
|
|
Form of Phantom Unit Grant Agreement (incorporated by reference
to Exhibit 10.1 of Hiland Partners, LP
Form 8-K
filed on November 13, 2007)
|
|
10
|
.27
|
|
|
|
Fourth Amendment, dated as of February 6, 2008, to Credit
Agreement dated as of February 15, 2005 among Hiland
Operating, LLC and the lenders thereto (incorporated by
reference to Exhibit 10.1 of Hiland Partners, LP
Form 8-K
filed on February 12, 2008)
|
|
10
|
.28
|
|
|
|
Compensation of Conflicts Committee Members
|
|
19
|
.1
|
|
|
|
Code of Ethics for Chief Executive Officer and Senior Finance
Officers (incorporated by reference to Exhibit 19.1 of
Registrants annual report on Form 10-K filed on March 20,
2007)
|
|
21
|
.1
|
|
|
|
List of Subsidiaries of Hiland Holdings GP, LP (incorporated by
reference to Exhibit 21.1 of Registrants Statement on Form
S-1 (File No. 333-134491))
|
|
31
|
.1
|
|
|
|
Certification of Chief Executive Officer under Section 302 of
the Sarbanes-Oxley Act of 2002
|
|
31
|
.2
|
|
|
|
Certification of Chief Financial Officer under Section 302 of
the Sarbanes-Oxley Act of 2002
|
|
32
|
.1
|
|
|
|
Certification of Chief Executive Officer under Section 906 of
the Sarbanes-Oxley Act of 2002
|
|
32
|
.2
|
|
|
|
Certification of Chief Financial Officer under Section 906 of
the Sarbanes-Oxley Act of 2002
|
|
|
|
+
|
|
Denotes a management contract or compensatory plan or
arrangement.
|
|
|
|
Portions of this exhibit have been omitted pursuant to a request
for confidential treatment.
|
113
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized in the city of Enid, Oklahoma, on the
9th day of March, 2009.
HILAND HOLDINGS GP, LP
|
|
|
|
By:
|
Hiland Partners GP Holdings, LLC, its general partner
|
|
|
|
|
By:
|
/s/
JOSEPH
L. GRIFFIN
|
Joseph L. Griffin
Chief Executive Officer, President and Director
(principal executive officer)
|
|
|
|
By:
|
/s/
MATTHEW
S. HARRISON
|
Matthew S. Harrison
Chief Financial Officer, Vice President
Finance,
Secretary and Director
(principal financial and accounting officer)
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant in the capacities indicated on the
9th day of March, 2009.
|
|
|
|
|
Signature
|
|
Title
|
|
|
|
|
/s/
HAROLD
HAMM
Harold
Hamm
|
|
Chairman of the Board
|
|
|
|
/s/
JOSEPH
L. GRIFFIN
Joseph
L. Griffin
|
|
Chief Executive Officer, President and Director
|
|
|
|
/s/
MATTHEW
S. HARRISON
Matthew
S. Harrison
|
|
Chief Financial Officer,
Vice President Finance, Secretary and Director
|
|
|
|
/s/
MICHAEL
L. GREENWOOD
Michael
L. Greenwood
|
|
Director
|
|
|
|
/s/
EDWARD
D. DOHERTY
Edward
D. Doherty
|
|
Director
|
|
|
|
/s/
RAYFORD
T. REID
Rayford
T. Reid
|
|
Director
|
|
|
|
/s/
DR. CHERYL
L. EVANS
Dr. Cheryl
L. Evans
|
|
Director
|
|
|
|
/s/
DR. BOBBY
B. LYLE
Dr. Bobby
B. Lyle
|
|
Director
|
114
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
Hiland Holdings GP, LP Consolidated Financial Statements:
|
|
|
|
|
|
|
|
F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
|
|
|
F-8
|
|
|
|
|
F-9
|
|
F-1
Managements
Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting (as defined
in Rules 13a 15(f) and 15d 15(f)
under the Securities and Exchange Act of 1934). Our internal
control over financial reporting is a process designed by
management, under the supervision of the Chief Executive Officer
and Chief Financial Officer, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with accounting principles generally accepted in the
United States of America, and includes those policies and
procedures that:
(i) pertain to the maintenance of records that in
reasonable detail accurately and fairly reflect the transactions
and dispositions of our assets;
(ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial
statements in accordance with accounting principles generally
accepted in the United States, and that our receipts and
expenditures are being made only in accordance with
authorizations of management and our directors; and
(iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition
of our assets that could have a material effect on our
consolidated financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies and procedures may deteriorate.
Accordingly, even effective internal control over financial
reporting can only provide reasonable assurance of achieving
their control objectives.
Our management, under the supervision and with the participation
of our Chief Executive Officer and Chief Financial Officer,
assessed the effectiveness of the Companys internal
control over financial reporting as of December 31, 2008.
In making this assessment, management used the criteria set
forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in
Internal Control
Integrated Framework
.
Based on our evaluation under the framework in Internal
Control-Integrated Framework, our management concluded that, as
of December 31, 2008, our internal control over financial
reporting was effective.
Grant Thornton LLP, the independent registered accounting firm
who audited the consolidated financial statements included in
this Annual Report, has issued a report on our internal control
over financial reporting. This report, dated March 9, 2009,
appears on
page F-3.
Joseph L. Griffin
Chief Executive Officer
March 9, 2009
Matthew S. Harrison
Chief Financial Officer
March 9, 2009
F-2
Report of
Independent Registered Public Accounting Firm
Board of Directors
Hiland Partners GP Holdings, LLC
We have audited internal control over financial reporting of
Hiland Holdings GP, LP and subsidiaries (the Partnership) as of
December 31, 2008, based on criteria established in
Internal Control Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Partnerships management is
responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness
of internal control over financial reporting, included in the
accompanying Managements Report on Internal Control
Over Financial Reporting. Our responsibility is to express
an opinion on the Partnerships internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, the Partnership maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2008, based on
Internal
Control Integrated Framework
issued by COSO.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of the Partnership as of
December 31, 2008 and 2007, and the related consolidated
statements of operations, cash flows, and changes in
owners equity and comprehensive income for each of the
three years in the period ended December 31, 2008 and our
report dated March 9, 2009 expressed an unqualified opinion.
Oklahoma City, Oklahoma
March 9, 2009
F-3
Report of
Independent Registered Public Accounting Firm
Board of Directors
Hiland Partners GP Holdings, LLC
We have audited the accompanying consolidated balance sheets of
Hiland Holdings GP, LP and subsidiaries (the Partnership) as of
December 31, 2008 and 2007, and the related consolidated
statements of operations, cash flows, and changes in
owners equity and comprehensive income for each of the
three years in the period ended December 31, 2008. These
financial statements are the responsibility of the
Partnerships management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Hiland Holdings GP, LP and subsidiaries as of
December 31, 2008 and 2007, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2008 in conformity with
accounting principles generally accepted in the United States of
America.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
Partnerships internal control over financial reporting as
of December 31, 2008, based on criteria established in
Internal Control Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) and our report dated March 9, 2009
expressed an unqualified opinion.
Oklahoma City, Oklahoma
March 9, 2009
F-4
HILAND
HOLDINGS GP, LP
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except unit amounts)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,733
|
|
|
$
|
10,602
|
|
Accounts receivable:
|
|
|
|
|
|
|
|
|
Trade net of allowance for doubtful accounts of $304
in 2008
|
|
|
23,864
|
|
|
|
31,842
|
|
Affiliates
|
|
|
2,346
|
|
|
|
1,178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,210
|
|
|
|
33,020
|
|
Fair value of derivative assets
|
|
|
6,851
|
|
|
|
2,718
|
|
Other current assets
|
|
|
1,936
|
|
|
|
1,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
36,730
|
|
|
|
47,760
|
|
Property and equipment, net
|
|
|
349,159
|
|
|
|
323,073
|
|
Intangibles, net
|
|
|
40,780
|
|
|
|
46,937
|
|
Fair value of derivative assets
|
|
|
7,141
|
|
|
|
418
|
|
Other assets, net
|
|
|
1,750
|
|
|
|
2,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
435,560
|
|
|
$
|
420,286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND PARTNERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
22,833
|
|
|
$
|
24,713
|
|
Accounts payable-affiliates
|
|
|
7,823
|
|
|
|
7,957
|
|
Fair value of derivative liabilities
|
|
|
1,439
|
|
|
|
8,238
|
|
Accrued liabilities and other
|
|
|
3,168
|
|
|
|
2,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
35,263
|
|
|
|
42,983
|
|
Commitments and contingencies (Note 10)
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
256,466
|
|
|
|
226,459
|
|
Fair value of derivative liabilities
|
|
|
|
|
|
|
141
|
|
Asset retirement obligations
|
|
|
2,483
|
|
|
|
2,159
|
|
Minority interests
|
|
|
125,851
|
|
|
|
126,409
|
|
Partners equity
|
|
|
|
|
|
|
|
|
Common unitholders (21,607,500 and 21,603,000 units issued
and outstanding at December 31, 2008 and December 31,
2007, respectively)
|
|
|
12,386
|
|
|
|
25,560
|
|
Accumulated other comprehensive income (loss)
|
|
|
3,111
|
|
|
|
(3,425
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total partners equity
|
|
|
15,497
|
|
|
|
22,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and partners equity
|
|
$
|
435,560
|
|
|
$
|
420,286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
HILAND
HOLDINGS GP, LP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except per unit amounts)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Midstream operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Third parties
|
|
$
|
371,686
|
|
|
$
|
269,769
|
|
|
$
|
210,732
|
|
Affiliates
|
|
|
11,494
|
|
|
|
3,455
|
|
|
|
4,135
|
|
Compression services, affiliate
|
|
|
4,819
|
|
|
|
4,819
|
|
|
|
4,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
387,999
|
|
|
|
278,043
|
|
|
|
219,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Midstream purchases (exclusive of items shown separately below)
|
|
|
159,906
|
|
|
|
135,134
|
|
|
|
105,884
|
|
Midstream purchases affiliate (exclusive of items
shown separately below)
|
|
|
116,694
|
|
|
|
60,078
|
|
|
|
50,309
|
|
Operations and maintenance
|
|
|
30,526
|
|
|
|
23,279
|
|
|
|
16,071
|
|
Depreciation, amortization and accretion
|
|
|
38,650
|
|
|
|
31,002
|
|
|
|
22,863
|
|
Bad debt
|
|
|
304
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
10,337
|
|
|
|
9,321
|
|
|
|
5,299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
356,417
|
|
|
|
258,814
|
|
|
|
200,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
31,582
|
|
|
|
19,229
|
|
|
|
19,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other income
|
|
|
357
|
|
|
|
445
|
|
|
|
323
|
|
Amortization of deferred loan costs
|
|
|
(663
|
)
|
|
|
(499
|
)
|
|
|
(513
|
)
|
Interest expense
|
|
|
(13,674
|
)
|
|
|
(11,371
|
)
|
|
|
(6,543
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net
|
|
|
(13,980
|
)
|
|
|
(11,425
|
)
|
|
|
(6,733
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interest in income of Hiland Partners,
LP
|
|
|
17,602
|
|
|
|
7,804
|
|
|
|
12,527
|
|
Minority interest in income of Hiland Partners, LP
|
|
|
(5,902
|
)
|
|
|
(2,638
|
)
|
|
|
(10,164
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
11,700
|
|
|
|
5,166
|
|
|
|
2,363
|
|
Less income attributable to predecessor
|
|
|
|
|
|
|
|
|
|
|
(407
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Limited partners interest in net income
|
|
$
|
11,700
|
|
|
$
|
5,166
|
|
|
$
|
1,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per limited partners unit
basic
|
|
$
|
0.54
|
|
|
$
|
0.24
|
|
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per limited partners unit
diluted
|
|
$
|
0.54
|
|
|
$
|
0.24
|
|
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average limited partners units
outstanding basic
|
|
|
21,604
|
|
|
|
21,601
|
|
|
|
21,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average limited partners units
outstanding diluted
|
|
|
21,609
|
|
|
|
21,608
|
|
|
|
21,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
HILAND
HOLDINGS GP, LP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
11,700
|
|
|
$
|
5,166
|
|
|
|
2,363
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
38,512
|
|
|
|
30,886
|
|
|
|
22,797
|
|
Accretion of asset retirement obligation
|
|
|
138
|
|
|
|
116
|
|
|
|
66
|
|
Amortization of deferred loan cost
|
|
|
663
|
|
|
|
499
|
|
|
|
513
|
|
Gain on derivative transactions
|
|
|
(6,834
|
)
|
|
|
(373
|
)
|
|
|
(113
|
)
|
Unit based compensation
|
|
|
1,689
|
|
|
|
1,450
|
|
|
|
522
|
|
Bad debt
|
|
|
304
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in other assets
|
|
|
60
|
|
|
|
|
|
|
|
(144
|
)
|
Minority interest in income of Hiland Partners, LP
|
|
|
5,902
|
|
|
|
2,638
|
|
|
|
10,164
|
|
(Increase) decrease in current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable trade
|
|
|
7,674
|
|
|
|
(8,139
|
)
|
|
|
(1,809
|
)
|
Accounts receivable affiliates
|
|
|
(863
|
)
|
|
|
46
|
|
|
|
709
|
|
Other current assets
|
|
|
(516
|
)
|
|
|
(475
|
)
|
|
|
(550
|
)
|
Increase (decrease) in current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable trade
|
|
|
(5,791
|
)
|
|
|
3,889
|
|
|
|
5,812
|
|
Accounts payable affiliates
|
|
|
(438
|
)
|
|
|
3,603
|
|
|
|
(2,175
|
)
|
Accrued liabilities and other
|
|
|
284
|
|
|
|
73
|
|
|
|
321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
52,484
|
|
|
|
39,379
|
|
|
|
38,476
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property and equipment
|
|
|
(54,367
|
)
|
|
|
(83,408
|
)
|
|
|
(62,137
|
)
|
Payments for businesses acquired, less cash received
|
|
|
|
|
|
|
|
|
|
|
(96,400
|
)
|
Proceeds from disposals of property and equipment
|
|
|
25
|
|
|
|
|
|
|
|
111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(54,342
|
)
|
|
|
(83,408
|
)
|
|
|
(158,426
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from public
offering-net
of underwriter discount
|
|
|
|
|
|
|
|
|
|
|
139,617
|
|
Proceeds from long-term borrowings
|
|
|
41,350
|
|
|
|
74,100
|
|
|
|
148,534
|
|
Payments on long-term borrowings
|
|
|
(10,000
|
)
|
|
|
|
|
|
|
(35,000
|
)
|
Payments on capital lease obligations
|
|
|
(534
|
)
|
|
|
(296
|
)
|
|
|
|
|
Increase in deferred offering cost
|
|
|
(7
|
)
|
|
|
(157
|
)
|
|
|
(1,810
|
)
|
Debt issuance costs
|
|
|
(369
|
)
|
|
|
(501
|
)
|
|
|
(1,280
|
)
|
Cash distribution to controlling members for net assets of
Hiland Partners, GP, LLC
|
|
|
|
|
|
|
|
|
|
|
(101,812
|
)
|
Capital contributions
|
|
|
|
|
|
|
|
|
|
|
501
|
|
Proceeds from Hiland Partners, LP unit options exercise
|
|
|
1,021
|
|
|
|
1,035
|
|
|
|
1,284
|
|
General partner contribution for issuance of restricted common
units
|
|
|
5
|
|
|
|
|
|
|
|
|
|
Proceeds from conversion of vested phantom units
|
|
|
3
|
|
|
|
|
|
|
|
|
|
Redemption of vested phantom units
|
|
|
(60
|
)
|
|
|
|
|
|
|
|
|
Minority interest cash distributions to unitholders of Hiland
Partners, LP
|
|
|
(13,395
|
)
|
|
|
(11,423
|
)
|
|
|
(22,745
|
)
|
Cash distribution to members of Hiland Partners GP, LLC
|
|
|
|
|
|
|
|
|
|
|
(1,750
|
)
|
Cash distribution to controlling members
|
|
|
|
|
|
|
|
|
|
|
(1,053
|
)
|
Cash distributions to unitholders
|
|
|
(25,025
|
)
|
|
|
(18,696
|
)
|
|
|
(285
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
(7,011
|
)
|
|
|
44,062
|
|
|
|
124,201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) for the period
|
|
|
(8,869
|
)
|
|
|
33
|
|
|
|
4,251
|
|
Beginning of period
|
|
|
10,602
|
|
|
|
10,569
|
|
|
|
6,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period
|
|
$
|
1,733
|
|
|
$
|
10,602
|
|
|
$
|
10,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplementary information
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest, net of amounts capitalized
|
|
$
|
13,467
|
|
|
$
|
11,355
|
|
|
$
|
6,408
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment financed under capital lease obligations
in the third quarter of 2007
|
|
|
|
|
|
|
|
|
|
$
|
5,881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 10, 2006 purchase of limited partner common units of
Hiland Partners, LP in excess of proportionate historical
financial cost basis of Hiland Partners, LP allocated to
property and equipment and intangible assets as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
|
|
|
|
|
|
|
$
|
4,488
|
|
Customer contracts
|
|
|
|
|
|
|
|
|
|
|
6,980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess of cost over proportionate equity interest
|
|
|
|
|
|
|
|
|
|
$
|
11,468
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed asset retirement obligations on May 1, 2006 in
connection with acquisition of Kinta Area gathering assets
|
|
|
|
|
|
|
|
|
|
$
|
1,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
HILAND
HOLDINGS GP, LP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
Members
|
|
|
Common
|
|
|
Comprehensive
|
|
|
|
|
|
Comprehensive
|
|
|
|
Equity
|
|
|
Units
|
|
|
Income (Loss)
|
|
|
Total
|
|
|
Income (Loss)
|
|
|
|
(In thousands, except unit amounts)
|
|
|
Balance, January 1, 2006
|
|
$
|
2,770
|
|
|
$
|
|
|
|
$
|
21
|
|
|
$
|
2,791
|
|
|
|
|
|
Capital contributions
|
|
|
501
|
|
|
|
|
|
|
|
|
|
|
|
501
|
|
|
|
|
|
Cash distributions
|
|
|
(1,750
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,750
|
)
|
|
|
|
|
Member compensation
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
24
|
|
|
|
|
|
Net income from January 1, 2006 through September 25,
2006
|
|
|
407
|
|
|
|
|
|
|
|
|
|
|
|
407
|
|
|
$
|
407
|
|
Contribution of member interest in Hiland Partners GP, LLC
|
|
|
(1,952
|
)
|
|
|
1,952
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from initial public offering, net of underwriter
discount (8,050,000 common units)
|
|
|
|
|
|
|
139,617
|
|
|
|
|
|
|
|
139,617
|
|
|
|
|
|
Offering costs of initial public offering
|
|
|
|
|
|
|
(1,810
|
)
|
|
|
|
|
|
|
(1,810
|
)
|
|
|
|
|
Cash distribution to controlling members for contribution of
units of Hiland Partners and member interest of Hiland Partners,
LLC
|
|
|
|
|
|
|
(101,812
|
)
|
|
|
|
|
|
|
(101,812
|
)
|
|
|
|
|
Cash distributions to controlling members
|
|
|
|
|
|
|
(1,053
|
)
|
|
|
|
|
|
|
(1,053
|
)
|
|
|
|
|
Periodic cash distributions
|
|
|
|
|
|
|
(285
|
)
|
|
|
|
|
|
|
(285
|
)
|
|
|
|
|
Issuance of 12,000 restricted common units
|
|
|
|
|
|
|
16
|
|
|
|
|
|
|
|
16
|
|
|
|
|
|
Unit based compensation
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
Other comprehensive income reclassified to income on closed
derivative transactions
|
|
|
|
|
|
|
|
|
|
|
(2,111
|
)
|
|
|
(2,111
|
)
|
|
|
(2,111
|
)
|
Change in fair value of derivatives
|
|
|
|
|
|
|
|
|
|
|
4,657
|
|
|
|
4,657
|
|
|
|
4,657
|
|
Net income
|
|
|
|
|
|
|
1,956
|
|
|
|
|
|
|
|
1,956
|
|
|
|
1,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2006
|
|
|
|
|
|
|
38,590
|
|
|
|
2,567
|
|
|
|
41,157
|
|
|
|
|
|
Periodic cash contributions
|
|
|
|
|
|
|
(18,696
|
)
|
|
|
|
|
|
|
(18,696
|
)
|
|
|
|
|
Unit based compensation
|
|
|
|
|
|
|
500
|
|
|
|
|
|
|
|
500
|
|
|
|
|
|
Other comprehensive income reclassified to income on closed
derivative transactions
|
|
|
|
|
|
|
|
|
|
|
(1,056
|
)
|
|
|
(1,056
|
)
|
|
$
|
(1,056
|
)
|
Change in fair value of derivatives
|
|
|
|
|
|
|
|
|
|
|
(4,936
|
)
|
|
|
(4,936
|
)
|
|
|
(4,936
|
)
|
Net income
|
|
|
|
|
|
|
5,166
|
|
|
|
|
|
|
|
5,166
|
|
|
|
5,166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(826
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2007
|
|
|
|
|
|
|
25,560
|
|
|
|
(3,425
|
)
|
|
|
22,135
|
|
|
|
|
|
Periodic cash contributions
|
|
|
|
|
|
|
(25,025
|
)
|
|
|
|
|
|
|
(25,025
|
)
|
|
|
|
|
Unit based compensation
|
|
|
|
|
|
|
151
|
|
|
|
|
|
|
|
151
|
|
|
|
|
|
Other comprehensive income reclassified to income on closed
derivative transactions
|
|
|
|
|
|
|
|
|
|
|
1,806
|
|
|
|
1,806
|
|
|
$
|
1,806
|
|
Change in fair value of derivatives
|
|
|
|
|
|
|
|
|
|
|
4,730
|
|
|
|
4,730
|
|
|
|
4,730
|
|
Net income
|
|
|
|
|
|
|
11,700
|
|
|
|
|
|
|
|
11,700
|
|
|
|
11,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
18,236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2008
|
|
$
|
|
|
|
$
|
12,386
|
|
|
$
|
3,111
|
|
|
$
|
15,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of this financial
statement.
F-8
|
|
Note 1:
|
Organization,
Basis of Presentation and Principles of Consolidation
|
Organization
Unless the context requires otherwise, references to
we, our, us, Hiland
Holdings or the Partnership are intended to
mean the consolidated business and operations of Hiland Holdings
GP, LP. References to Hiland Partners are intended
to mean the consolidated business and operations of Hiland
Partners, LP and its subsidiaries.
Hiland Holdings GP, LP, a Delaware limited partnership was
formed in May 2006 to own Hiland Partners GP, LLC, the general
partner of Hiland Partners, LP and certain other common and
subordinated units in Hiland Partners. Hiland Partners GP, LLC
was formed in October 2004 to hold the 2% general partner
ownership interest in Hiland Partners and serve as its general
partner. Hiland Partners GP, LLC manages the operations of
Hiland Partners. In connection with the closing of our initial
public offering, all of the membership interests in Hiland
Partners GP, LLC were contributed to us. Hiland Partners GP, LLC
constitutes our predecessor.
Our general partner, Hiland Holdings GP, 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.
CGI constitutes Hiland Partners predecessor. 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. Accordingly, the
consolidated financial statements include the historical
operations of CGI prior to the transfer to Hiland Partners. CGI
was formed in 1990 as a wholly owned subsidiary of CLR.
CGI operated in one segment, midstream, which involved the
purchasing, gathering, compressing, dehydrating, treating, and
processing of natural gas and fractionating and marketing of
natural gas liquids, or NGLs. CGI historically has owned all of
Hiland Partners natural gas gathering, processing,
treating and fractionation assets other than the Worland and
Bakken gathering systems. Hiland Partners, LLC historically
owned the Worland gathering system and compression services
assets, which Hiland Partners acquired on February 15,
2005, and the Bakken gathering system. The net assets acquired
by Hiland Partners on February 15, 2005 had a fair value of
$48.6 million. 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 Hiland Partners
761,714 common units and 15,545 general partner equivalent
units, both at $45.03 per unit.
F-9
HILAND
HOLDINGS GP, LP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007 (Continued)
Principles
of Consolidation
Because we own the general partner of Hiland Partners, the
consolidated financial statements include our accounts, the
accounts of Hiland Partners GP, LLC and the accounts of Hiland
Partners and its subsidiaries. All significant intercompany
transactions and balances have been eliminated. The consolidated
financial statements include the assets of Hiland Partners GP,
LLC that were contributed to us concurrently with the completion
of our initial public offering on September 25, 2006.
Hiland Partners GP, LLC commenced operations on
February 15, 2005, therefore amounts presented in these
consolidated financial statements and accompanying notes for the
period February 15, 2005 to September 25, 2006 relate
to the consolidated accounts of Hiland Partners GP, LLC, Hiland
Partners, its subsidiaries and its predecessor (CGI). The net
assets and operations of CGI (Hiland Partners predecessor)
are reflected for all periods prior to February 15, 2005.
Certain assets of Hiland Partners, LLC that were contributed to
Hiland Partners concurrently with the completion of its initial
public offering are reflected beginning February 15, 2005
and the remaining net assets and operations of Hiland Partners,
LLC acquired are reflected beginning September 1, 2005.
Operations from the acquisition of the Kinta Area gathering
assets are reflected only from May 1, 2006.
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.
Cash
and Cash Equivalents
For financial reporting, we consider all highly liquid
investments with maturity of three months or less at the time of
purchase to be cash equivalents.
Accounts
Receivable
The majority of the accounts receivable are due from companies
in the oil and gas industry as well as the utility industry.
Credit is extended based on evaluation of Hiland Partners
customers financial condition. In certain circumstances,
collateral, such as letters of credit or guarantees, is
required. Accounts receivable are due within 30 days and
are stated at amounts due from customers. Hiland Partners has
established various procedures to manage its credit exposure,
including initial credit approvals, credit limits and rights of
offset. Credit losses are charged to income when accounts are
deemed uncollectible, determined on a
case-by-case
basis when Hiland Partners believes the required payment of
specific amounts owed is unlikely to occur. Prior to 2008,
losses were minimal. In 2008, Hiland Partners has established an
allowance for uncollectible accounts.
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 natural 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 December 31, 2008 are BP
F-10
HILAND
HOLDINGS GP, LP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007 (Continued)
Energy Company and Bank of Oklahoma, N.A. The counterparty to
Hiland Partners interest rate swap as of December 31,
2008 is Wells Fargo Bank, N.A.
Fair
Value of Financial Instruments
Hiland Partners 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 Hiland Partners
financial 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 Hiland Partners
derivative instruments is determined based on management
estimates through utilization of market data including
forecasted forward natural gas and NGL prices as a function of
forward New York Mercantile Exchange (NYMEX) natural
gas and light crude prices. The fair value of long-term debt
approximates its carrying value due to the variable interest
rate feature of such debt.
Interest
Rate Risk Management
Hiland Partners is exposed to interest rate risk on our variable
rate bank credit facility and have entered into an interest rate
swap to reduce this risk. They manage a portion of their
interest rate exposure on our variable rate debt 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.
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 a hedge, the price
movements in the commodity derivatives must be highly correlated
with the underlying hedged commodity. Gains and losses related
to commodity derivatives which qualify as hedges are recognized
in income when the underlying hedged physical transaction closes
and are included in the consolidated statements of operations as
revenues from midstream operations. Gains and losses related to
commodity derivatives that are not designated as hedges or do
not qualify as hedges are recognized in income immediately, and
are included in midstream revenues in the consolidated statement
of operations.
SFAS 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities.
SFAS No. 133 requires that an entity recognize all
derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value.
However, if a derivative does qualify for hedge accounting,
depending on the nature of the hedge, changes in fair value can
be offset against the change in fair value of the hedged item
through earnings or recognized in other comprehensive income
until such time as the hedged item is recognized in earnings. To
qualify for cash flow hedge accounting, the cash flows from the
hedging instrument must be highly effective in offsetting
changes in cash flows due to changes in the underlying item
being hedged. In addition, all hedging relationships must be
designated, documented, and reassessed periodically.
SFAS No. 133 also provides that normal purchases and
normal sales contracts are not subject to the statement. Normal
purchases and normal sales are contracts that provide for the
purchase or sale of something other than
F-11
HILAND
HOLDINGS GP, LP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007 (Continued)
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 fixed price physical forward
natural gas sales contract in which it contracted to sell
natural gas quantities at a fixed price was designated as normal
sale. This forward sales contract expired on December 31,
2008.
Currently, 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 asset or liability related to the
derivative instruments is recorded on the balance sheet as fair
value of derivative assets or liabilities. Any ineffective
portion of the gain or loss is recognized in earnings
immediately.
Property
and Equipment, Intangible Assets, Depreciation and
Amortization
Hiland Partners property and equipment are carried at
cost. Depreciation and amortization of all equipment is
determined under the straight-line method using various rates
based on useful lives, 10 to 22 years for pipeline and
processing plants, and 3 to 10 years for corporate and
other assets. The cost of assets and related accumulated
depreciation is removed from the accounts when such assets are
disposed of, and any related gains or losses are reflected in
current earnings. Maintenance, repairs and minor replacements
are expensed as incurred. Costs of replacements constituting
improvement are capitalized.
Intangible assets consist of the acquired value of existing
contracts to sell natural gas and other NGLs, compression
contracts and identifiable customer relationships, which do not
have significant residual value. The contracts are being
amortized over their estimated lives of ten years. Hiland
Partners reviews 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, Hiland
Partners reduces the carrying amount of such assets to fair
value based on the discounted probable cash flows of the
intangible assets.
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 managements judgment, that the
carrying value of such assets may not be recoverable. The
determination of whether impairment has occurred is based on
Hiland Partners managements estimate of undiscounted
future cash flows attributable to the assets as compared to the
carrying value of the assets. If impairment has occurred, the
amount of the impairment recognized is determined by estimating
the fair value of the assets and recording a provision for loss
if the carrying value is greater than the fair value. For assets
identified to be disposed of in the future, the carrying value
of these assets is compared to the estimated fair value less the
cost to sell to determine if impairment is required. Until the
assets are disposed of, an estimate of the fair value is
re-determined when related events or circumstances change.
When determining whether impairment of one of Hiland
Partners long-lived assets has occurred, 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 activity are dependent in part
on
F-12
HILAND
HOLDINGS GP, LP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007 (Continued)
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 NGL products and competing
commodities;
|
|
|
|
the availability and prices of raw natural gas supply;
|
|
|
|
the ability of Hiland Partners to negotiate favorable marketing
agreements;
|
|
|
|
the risks that third party oil and gas exploration and
production activities will not occur or be successful;
|
|
|
|
the dependence of Hiland Partners on certain significant
customers and producers of natural gas; and
|
|
|
|
competition against Hiland Partners 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 Hiland Partners to record an impairment of an asset.
No impairment charges were recognized during the years ended
December 31, 2008, 2007 and 2006.
Other
Assets
Unamortized deferred loan costs related to the long-term debt on
our bank credit facility totaling $1,502 and $1,796 as of
December 31, 2008 and 2007, respectively, are included in
other noncurrent assets. The deferred loan costs are amortized
using the straight-line method over the term of the debt for the
bank credit facility.
Revenue
Recognition
Revenues for sales and gathering of natural gas and NGLs are
recognized at the time all gathering and processing activities
are completed, the product is delivered and title, if
applicable, is transferred. Revenues related to our compression
segment are recognized as monthly services are rendered under a
four-year fixed-fee contract that Hiland Partners entered into
concurrently with its initial public offering.
Comprehensive
Income
Comprehensive income includes net income and other comprehensive
income, which includes, but is not limited to, changes in the
fair value of derivative financial instruments. Pursuant to
SFAS 133, for derivatives qualifying as hedges, the
effective portion of changes in fair value are recognized in
partners equity as accumulated other comprehensive income
and reclassified to earnings when the underlying hedged physical
transaction closes, to the extent of our interest in Hiland
Partners. Comprehensive income consisted of the following for
the indicated periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Net income
|
|
$
|
11,700
|
|
|
$
|
5,166
|
|
|
$
|
2,363
|
|
Closed derivative transactions reclassified to income
|
|
|
1,806
|
|
|
|
(1,056
|
)
|
|
|
(2,111
|
)
|
Change in fair value of derivatives
|
|
|
4,730
|
|
|
|
(4,936
|
)
|
|
|
4,657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
18,236
|
|
|
$
|
(826
|
)
|
|
$
|
4,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-13
HILAND
HOLDINGS GP, LP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007 (Continued)
Net
Income per Limited Partner Unit
Net income per limited partners unit is computed based on the
weighted-average number of common units outstanding during the
period. The computation of diluted net income per limited
partner unit further assumes the dilutive effect of unit options
and restricted unit awards. Net income per limited partner unit
is computed by dividing net income applicable to limited
partners, after deducting net income prior to the contribution
of membership interests in Hiland Partners GP, LLC (before
September 25, 2006), by both the basic and diluted
weighted-average number of limited partnership units outstanding.
Minority
Interests
The minority interest on our consolidated balance sheet as of
December 31, 2008 and 2007 reflects the outside ownership
interest of Hiland Partners. Minority interest in income is
calculated by multiplying the minority interest owners
proportionate ownership of limited partner units in Hiland
Partners by the limited partners allocation of Hiland
Partners net income. Hiland Partners net income is
allocated to its limited partners and its general partner based
on the proportionate share of the contractually-determined cash
distributions for the period, with adjustments made for
incentive distributions specifically allocated to its general
partner. All amounts we have received from Hiland Partners
issuance and sale of limited partner units have been recorded as
increases to the minority interest balance on the consolidated
balance sheet.
Environmental
Costs
Environmental costs are expensed if they relate to an existing
condition caused by past operations and do not contribute to
current or future revenue generation. Liabilities are recorded
when site restoration and environmental remediation and cleanup
obligations are either known or considered probable and can be
reasonably estimated. Recoveries of environmental costs through
insurance, indemnification arrangements or other sources are
included in other assets to the extent such recoveries are
considered probable.
Contributions
to Subsidiary
The Partnership directly and indirectly owns all of the equity
interests in Hiland Partners GP, LLC, the General Partner of
Hiland Partners. Hiland Partners GP, LLC is required to make
contributions to Hiland Partners each time Hiland Partners
issues common units in order to maintain its 2% general partner
ownership in Hiland Partners. Hiland Holdings or Hiland Partners
GP, LLC prior to September 25, 2006 was required to
contribute $738 for the year ended December 31, 2006.
Income
Taxes
As a partnership, we are not subject to income taxes. Therefore,
there is no provision for income taxes included in our
consolidated financial statements. Taxable income, gain, loss
and deductions are allocated to the unitholders who are
responsible for payment of any income taxes thereon.
Net income for financial statement purposes may differ
significantly from taxable income reportable to unitholders as a
result of differences between the tax basis and financial
reporting basis of assets and liabilities and the taxable income
allocation requirements under the partnership agreement.
Individual unitholders have different investment bases depending
upon the timing and price of acquisition of their partnership
units. Furthermore, each unitholders tax accounting, which
is partially dependent upon the unitholders tax position,
differs from the accounting followed in the consolidated
financial statements. Accordingly, the aggregate difference in
the basis of our net assets for financial and tax reporting
purposes cannot be readily determined because information
regarding each unitholders tax attributes in our
partnership is not available to us.
F-14
HILAND
HOLDINGS GP, LP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007 (Continued)
Transportation
and Exchange Imbalances
In the course of gathering natural gas and NGLs for others,
Hiland Partners may receive for redelivery different quantities
of natural gas or NGLs than the quantities actually redelivered.
These transactions result in transportation and exchange
imbalance receivables or payables that are recovered or repaid
through the receipt or delivery of natural gas or NGLs in future
periods, if not subject to cashout provisions. Imbalance
receivables are included in accounts receivable and imbalance
payables are included in accounts payable on the balance sheets
and
marked-to-market
using current market prices in effect for the reporting period
of the outstanding imbalances. Changes in market value and the
settlement of any such imbalance at a price greater than or less
than the recorded imbalance results in either an upward or
downward adjustment, as appropriate, to the cost of natural gas
sold. As of December 31, 2008 and 2007 Hiland Partners had
imbalance receivables of $1,221 and $454, respectively.
Imbalance payables were $560 at December 31, 2008. Hiland
Partners had no significant imbalance payables at
December 31, 2007.
Recent
Accounting Pronouncements
On April 25, 2008, the Financial Accounting Standards Board
(FASB) FASB issued Staff Position
No. FAS 142-3,
Determination of the Useful Life of Intangible
Assets
(FSP 142-3).
FSP 142-3
amends the factors that an entity should consider in developing
renewal or extension assumptions used in determining the useful
life of recognized intangible assets under FASB Statement
No. 142 (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
will be effective as of January 1, 2009 and will apply only
to intangible assets acquired after that date. Retroactive
application to previously acquired intangible assets is
prohibited. The adoption of
FSP 142-3
is not expected to have a material impact on our financial
position, results of operations or cash flows.
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 entitys derivative instruments
and hedging activities and their effects on the entitys
financial position, financial performance, and cash flows.
SFAS 161 is effective prospectively for financial
statements issued for fiscal years and interim periods beginning
after November 15, 2008, with early application encouraged.
SFAS 161 encourages, but does not require, comparative
disclosures for periods prior to its initial adoption.
SFAS 161 amends the current qualitative and quantitative
disclosure requirements for derivative instruments and hedging
activities set forth in SFAS 133 and generally increases
the level of aggregation/disaggregation that will be required in
an entitys financial statements. We are currently
reviewing SFAS 161 to determine the effect it will have on
our financial statements and disclosures therein.
On March 12, 2008, the Emerging Issues Task Force
(EITF) reached consensus opinion on EITF Issue
07-4,
Application of the two-class method under FASB Statement
No. 128, Earnings per Share, to Master Limited
Partnerships
(EITF 07-4),
which the FASB ratified at its March 26, 2008 meeting.
EITF 07-4
requires the calculation of a Master Limited Partnerships
(MLPs) net earnings per limited partner unit for
each period presented according to distributions declared and
participation rights in undistributed earnings as if all of the
earnings for that period had been distributed. In periods with
undistributed earnings above specified levels, the calculation
per the two-class method results in an increased allocation of
such undistributed earnings to the general partner and a
dilution of earnings to the limited partners.
EITF 07-4
is effective for
F-15
HILAND
HOLDINGS GP, LP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007 (Continued)
fiscal years beginning after December 15, 2008, and is to
be applied retrospectively to all periods presented. Early
application is not permitted. We will apply the requirements of
EITF 07-4
as it pertains to MLPs upon its adoption during the quarter
ended March 31, 2009 and do not expect a significant impact
when adopted.
In December 2007, the FASB issued SFAS No. 141(R),
Business Combinations
(SFAS 141(R)). SFAS 141(R) amends and
replaces SFAS 141, but retains the fundamental requirements
in SFAS 141 that the purchase method of accounting be used
for all business combinations and an acquirer be identified for
each business combination. SFAS 141(R) provides for how the
acquirer recognizes and measures the identifiable assets
acquired, liabilities assumed and any non-controlling interest
in the acquiree. SFAS 141(R) provides for how the acquirer
recognizes and measures the goodwill acquired in the business
combination or a gain from a bargain purchase. SFAS 141(R)
also determines what information to disclose to enable users to
be able to evaluate the nature and financial effects of the
business combination. The provisions of SFAS 141(R) apply
prospectively to business combinations for which the acquisition
date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008 and do not
allow early adoption. We are evaluating the new requirements of
SFAS 141(R) and the impact it will have on business
combinations completed in 2009 and thereafter.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements an amendment of ARB No. 51
(SFAS 160). SFAS 160 establishes
accounting and reporting standards that require the ownership
interests in subsidiaries held by parties other than the parent
(minority interest) be clearly identified, labeled and presented
in the consolidated balance sheet within equity, but separate
from the parents 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 parents ownership interest while the
parent retains its controlling financial interest in its
subsidiary be accounted for consistently and similarly as equity
transactions. Consolidated net income and comprehensive income
will be determined without deducting minority interest; however,
earnings-per-share
information will continue to be calculated on the basis of the
net income attributable to the parents shareholders.
Additionally, SFAS 160 establishes a single method for
accounting for changes in a parents ownership interest in
a subsidiary that does not result in deconsolidation and that
the parent recognize a gain or loss in net income when a
subsidiary is deconsolidated. SFAS 160 is effective for
fiscal years beginning on or after December 15, 2008. Early
adoption is not permitted. We will apply the requirements of
SFAS 160 upon our adoption on January 1, 2009 and do
not expect it to have a material impact on our financial
position, results of operations or cash flows.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities (SFAS 159). SFAS 159
expands opportunities to use fair value measurement in financial
reporting and permits entities to choose to measure many
financial instruments and certain other items at fair value.
SFAS 159 is effective for fiscal years beginning after
November 15, 2007. SFAS 159 was adopted by us
effective January 1, 2008, at which time no financial
assets or liabilities, not previously required to be recorded at
fair value by other authoritative literature, were designated to
be recorded at fair value. As such, the adoption of
SFAS 159 did not have any impact on our financial position,
results of operations or cash flows.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements (SFAS 157).
SFAS 157 defines fair value as the price that would be
received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the
measurement date, establishes a framework for measuring fair
value in generally accepted accounting principles
(GAAP) such as fair value hierarchy used to classify
the source of information used in fair value measurements (i.e.,
market based or non-market based) and expands disclosure about
fair value measurements based on their level in the hierarchy.
SFAS 157 applies to derivatives and other financial
instruments, which SFAS 133 requires be measured at fair
value at initial recognition and
F-16
HILAND
HOLDINGS GP, LP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007 (Continued)
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 157s hierarchy
defines three levels of inputs that may be used to measure fair
value. Level 1 refers to assets that have observable market
prices, level 2 assets do not have an observable
price but do have inputs that are based on such prices in
which components have observable data points and level 3
refers to assets in which one or more of the inputs do not have
observable prices and calibrated model parameters, valuation
techniques or managements assumptions are used to derive
the fair value. SFAS 157 is effective for financial
statements issued for fiscal years beginning after
November 15, 2007 and interim periods within those fiscal
years. We elected to implement SFAS 157 prospectively in
the first quarter of 2008 with the one-year deferral permitted
by FASB Staff Position (FSP)
157-2
for
nonfinancial assets and nonfinancial liabilities measured at
fair value, except those that are recognized or disclosed on a
recurring basis (at least annually). The deferral applies to
nonfinancial assets and liabilities measured at fair value in a
business combination; impaired properties, plants and equipment;
intangible assets and goodwill; and initial recognition of asset
retirement obligations and restructuring costs for which we use
fair value. We do not expect any significant impact to our
consolidated financial statements when we implement
SFAS 157 for these assets and liabilities. See Note 7
Fair Value Measurements of Financial Instruments.
|
|
Note 2:
|
Initial
Public Offering
|
On May 26, 2006, a Registration Statement on
Form S-1
was filed with the United States Securities and Exchange
Commission (the SEC) relating to a proposed initial
public offering of limited partnership interests in Hiland
Holdings.
On September 13, 2006, the SEC declared our registration
statement on
Form S-1
effective. On September 19, 2006, we priced 7,000,000
common units in connection with our initial public offering at a
price of $18.50 per unit. On September 20, 2006, our common
units began trading on the NASDAQ National Market under the
symbol HPGP. On September 25, 2006, we closed
our initial public offering of 8,050,000 common units, which
included 1,050,000 common units issued pursuant to an
over-allotment option that was exercised by the underwriters.
Total proceeds from the sale of the units were
$139.6 million, net of $9.3 million of underwriting
commissions.
In connection with the closing of our initial public offering,
all of the membership interests in Hiland Partners GP, LLC
(which owns the 2% general partner interest and all of the
incentive distribution rights in Hiland Partners), 1,301,471
Hiland Partners common units (including 761,714 Hiland Partners
common units previously owned by Hiland Partners GP,
LLC) and 4,080,000 subordinated units of Hiland Partners
were contributed to us, resulting in our ownership of a 57.0%
limited partner interest in Hiland Partners. Contributions of
Hiland Partners GP, LLCs assets are reflected at their
historical carrying basis because the contributions are from a
related party. As consideration for this contribution,
substantially all of the net proceeds from our initial public
offering, after the retirement of $36.0 million of
outstanding debt and accrued interest of Hiland Partners GP,
LLC, were distributed to Harold Hamm, The Harold Hamm DST Trust,
The Harold Hamm HJ Trust, Randy Moeder and Ken Maples (the
Contributing Parties) and 13,550,000 common units
and Class B common units in us were issued to the
Contributing Parties.
On May 1, 2006, Hiland Partners acquired certain gas
gathering assets from Enogex Gas Gathering, L.L.C. for
$96.4 million cash, including certain closing costs,
financed with borrowings under its credit facility and an
additional note payable to a bank. We refer to these assets as
the Kinta Area gathering assets. A determination was made by our
management of the fair value of these assets and liabilities as
required by SFAS 141, Business Combinations,
primarily using current replacement cost for the acquired gas
gathering
F-17
HILAND
HOLDINGS GP, LP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007 (Continued)
assets and related equipment less estimated accumulated
depreciation on such replacement costs and estimated discounted
cash flows arising from future renegotiated customer contracts.
The acquired assets, which are located in the eastern Oklahoma
Arkoma Basin, have approximately 672 wellhead receipt
points and include five separate low pressure natural gas
gathering systems consisting of 569 miles of natural gas
gathering pipelines and 23 compressors with an aggregate of
approximately 40,000 horsepower. The natural gas gathering
systems operate under contracts with producers that provide for
services under fixed-fee arrangements. Hiland Partners operates
the Kinta Area gathering assets substantially differently than
were operated by the previous owner. Since there was no
sufficient continuity of the Kinta Area gathering assets
operations prior to and after the acquisition by Hiland
Partners, disclosure of prior financial information would not be
material to an understanding of future operations. Therefore,
the acquisition has been recorded as a purchase of assets and
not of a business and no pro forma financial information is
required to be presented.
The following table presents the resulting allocation to the net
assets acquired and liabilities assumed on May 1, 2006:
|
|
|
|
|
Pipelines, including right of ways
|
|
$
|
56,175
|
|
Compressors
|
|
|
22,221
|
|
Other equipment and buildings
|
|
|
8,618
|
|
Customer relationships
|
|
|
10,492
|
|
|
|
|
|
|
|
|
|
97,506
|
|
Asset retirement obligations assumed
|
|
|
1,106
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
96,400
|
|
|
|
|
|
|
The Kinta Area gathering assets and operations are included in
the consolidated financial statements from May 1, 2006
forward.
|
|
Note 4:
|
Property
and Equipment and Asset Retirement Obligations
|
Property and equipment consisted of the following for the
periods indicated:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Land
|
|
$
|
295
|
|
|
$
|
295
|
|
Construction in progress
|
|
|
19,523
|
|
|
|
12,030
|
|
Midstream pipeline, plants and compressors
|
|
|
406,390
|
|
|
|
356,491
|
|
Compression and water injection equipment
|
|
|
19,391
|
|
|
|
19,258
|
|
Other
|
|
|
4,621
|
|
|
|
3,958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
450,220
|
|
|
|
392,032
|
|
Less: accumulated depreciation and amortization
|
|
|
101,061
|
|
|
|
68,959
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
349,159
|
|
|
$
|
323,073
|
|
|
|
|
|
|
|
|
|
|
On May 10, 2006, Hiland Partners GP, LLC purchased 761,714
common units and 15,545 general partner units of Hiland Partners
for $35.0 million. Hiland Partners GP, LLC recorded
additional pipeline and processing plant cost of $4,488 for a
portion of the amount that the unit purchase price exceeded the
proportionate interest in the underlying equity of Hiland
Partners.
F-18
HILAND
HOLDINGS GP, LP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007 (Continued)
During the third quarter 2007, we purchased two separate capital
assets under capital lease obligations for a total cost of
$5,881. Accumulated depreciation related to the assets purchased
under capital lease obligations was $541 as of December 31,
2008 and $175 as of December 31, 2007.
We capitalized interest of $176, $2,580 and $1,467 during the
years ended December 31, 2008, 2007 and 2006, respectively.
Depreciation charged to expense totaled $32,354, $25,015 and
$17,241 for the years ended December 31, 2008, 2007 and
2006.
No impairment charges were recognized during the years ended
December 31, 2008, 2007 and 2006.
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 our asset retirement obligations as
of December 31, 2008 and have determined that revisions in
the carrying values are not necessary at this time.
The following table summarizes Hiland Partners activity
related to asset retirement obligations for the indicated period:
|
|
|
|
|
Asset retirement obligations, January 1, 2007
|
|
$
|
2,196
|
|
Add: additions on various leased locations
|
|
|
505
|
|
Revisions of prior estimates
|
|
|
(658
|
)
|
Add: accretion expense
|
|
|
116
|
|
|
|
|
|
|
Asset retirement obligations, December 31, 2007
|
|
|
2,159
|
|
Add: additions on various leased locations
|
|
|
186
|
|
Add: accretion expense
|
|
|
138
|
|
|
|
|
|
|
Asset retirement obligations, December 31, 2008
|
|
$
|
2,483
|
|
|
|
|
|
|
|
|
Note 5:
|
Intangible
Assets
|
Intangible assets consist of the acquired value of customer
relationships, existing contracts to sell natural gas and other
NGLs and compression contracts, which do not have significant
residual value. The customer relationships and the contracts are
being amortized over 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. On
May 10, 2006, Hiland Partners GP, LLC purchased 761,714
common units and 15,545 general partner units of Hiland Partners
for $35.0 million. Hiland Partners GP, LLC recorded an
additional $6,979 in contracts to sell natural gas for a portion
of the amount that the purchase price exceeded the proportionate
interest in the underlying equity of Hiland Partners. No
impairments of intangible assets were recorded during the years
ended December 31, 2008, 2007 and 2006.
F-19
HILAND
HOLDINGS GP, LP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007 (Continued)
Intangible assets consisted of the following for the periods
indicated:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Gas sales contracts
|
|
$
|
32,564
|
|
|
$
|
32,564
|
|
Compression contracts
|
|
|
18,515
|
|
|
|
18,515
|
|
Customer relationships
|
|
|
10,492
|
|
|
|
10,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61,571
|
|
|
|
61,571
|
|
Less accumulated amortization
|
|
|
20,791
|
|
|
|
14,634
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
$
|
40,780
|
|
|
$
|
46,937
|
|
|
|
|
|
|
|
|
|
|
During the years ended December 31, 2008, 2007 and 2006, we
recorded amortization expense of $6,157, $6,157, and $5,556,
respectively. Estimated aggregate amortization expense for each
of the five succeeding fiscal years is $6,157 from 2009 through
2013 and a total of $9,995 for all years thereafter.
Interest
Rate Swap
Hiland Partners is subject to interest rate risk on its credit
facility and has entered into an interest rate swap to reduce
this risk. Hiland Partners entered into a one year interest rate
swap agreement with its counterparty on October 7, 2008 for
the period from January 2009 through December 2009 at a rate of
2.245% on a notional amount of $100.0 million. The swap
fixes the one month LIBOR rate at 2.245% for the notional amount
of debt outstanding over the term of the swap agreement.
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 a
mark-to-market
cash flow derivative which relates to forecasted natural gas
sales in 2010. The 2010 derivative does not qualify for cash
flow hedge accounting. Hiland Partners entered into these
instruments to hedge forecasted natural gas sales against the
variability in expected future cash flows attributable to
changes in commodity prices. Under these contractual swap
agreements with Hiland Partners counterparties, Hiland
Partners receives a fixed price and pays a floating price based
on certain indices for the relevant contract period as the
underlying natural gas is sold.
Hiland Partners formally documents all relationships between
hedging instruments and the items being hedged, including its
risk management objective and strategy for undertaking the
hedging transactions. This includes matching the natural gas and
NGL futures, the sold fixed for floating price or
buy fixed for floating price contracts, to the
forecasted transactions. Hiland Partners assesses, both at the
inception of the hedge and on an ongoing basis, whether the
derivatives are highly effective in offsetting changes in the
fair value of hedged items. A derivative is deemed to be highly
effective when changes in its cash flows correlate within a
range of 80% to 125% to offsetting 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.
F-20
HILAND
HOLDINGS GP, LP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007 (Continued)
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 and reclassified to earnings when the
underlying hedged physical transaction closes. Changes in fair
value of non-qualifying derivatives and the ineffective portion
of qualifying derivatives are recognized in earnings as they
occur. Actual amounts that will be reclassified will vary as a
result of future changes in prices. Hedge ineffectiveness is
recorded in income while the hedge contract is open and may
increase or decrease until settlement of the contract. Realized
cash gains and losses on
closed/settled
instruments and hedge ineffectiveness are reflected in the
contract month being hedged as an adjustment to our midstream
revenue.
On May 27, 2008, Hiland Partners entered into a financial
swap instrument related to forecasted natural gas sales in 2010
whereby Hiland Partners receives a fixed price and pays a
floating price based on NYMEX Henry Hub pricing for the relevant
contract period as the underlying natural gas is sold. At
December 31, 2008, this financial swap instrument did not
qualify for hedge accounting as there was inadequate correlation
between NYMEX Henry Hub natural gas prices and actual prices
received for the natural gas sold.
The following table summarizes Hiland Partners activity
related to derivative transactions for the indicated periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Net (losses) gains on closed/settled transactions Reclassified
(to) from accumulated other comprehensive income
|
|
$
|
(1,806
|
)
|
|
$
|
1,056
|
|
|
$
|
2,111
|
|
(Decreases) increases in fair values of open derivatives
recorded (from) to accumulated other comprehensive income
|
|
$
|
(4,730
|
)
|
|
$
|
4,936
|
|
|
$
|
(4,657
|
)
|
Unrealized non-cash gains (losses) on ineffective portions of
qualifying derivative transactions
|
|
$
|
67
|
|
|
$
|
(27
|
)
|
|
$
|
76
|
|
Unrealized non-cash gains on non-qualifying derivatives
|
|
$
|
3,992
|
|
|
$
|
248
|
|
|
$
|
|
|
At December 31, 2008, our accumulated other comprehensive
income related to derivatives was $5,232, which we anticipate
will be reclassified to earnings during the next twelve months.
Minority interest on the balance sheet has been increased by
$4,425 for the favorable change in the net fair value of
derivatives during the year ended December 31, 2008
attributable to minority interest.
The fair value of derivative assets and liabilities related to
the interest rate swap and the commodity swaps are as follows
for the indicated periods:
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Fair value of derivative assets current
|
|
$
|
6,851
|
|
|
$
|
2,718
|
|
Fair value of derivative assets long term
|
|
|
7,141
|
|
|
|
418
|
|
Fair value of derivative liabilities current
|
|
|
(1,439
|
)
|
|
|
(8,238
|
)
|
Fair value of derivative liabilities long term
|
|
|
|
|
|
|
(141
|
)
|
|
|
|
|
|
|
|
|
|
Net fair value of derivatives
|
|
$
|
12,553
|
|
|
$
|
(5,243
|
)
|
|
|
|
|
|
|
|
|
|
The terms of Hiland Partners derivative contracts
currently extend as far as December 2010. Hiland Partners
counterparties to its 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.
F-21
HILAND
HOLDINGS GP, LP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007 (Continued)
The following table provides information about Hiland
Partners commodity derivative instruments at
December 31, 2008 for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Fair Value
|
|
|
|
|
|
|
Fixed Price
|
|
|
Asset
|
|
Description and Production Period
|
|
(MMBtu)
|
|
|
per MMBtu
|
|
|
(Liability)
|
|
|
Natural Gas Sold Fixed for Floating Price Swaps
|
|
|
|
|
|
|
|
|
|
|
|
|
January 2009 December 2009
|
|
|
2,136,000
|
|
|
$
|
7.30
|
|
|
$
|
6,851
|
|
January 2010 December 2010
|
|
|
2,136,000
|
|
|
$
|
10.50
|
|
|
|
7,141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
13,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table provides information about Hiland
Partners interest rate swap at December 31, 2008 for
the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
Notional
|
|
|
Interest
|
|
|
Asset
|
|
Description and Period
|
|
Amount
|
|
|
Rate
|
|
|
(Liability)
|
|
|
Interest Rate Swap
|
|
|
|
|
|
|
|
|
|
|
|
|
January 2009 December 2009
|
|
$
|
100,000,000
|
|
|
|
2.245
|
%
|
|
$
|
(1,439
|
)
|
|
|
Note 7:
|
Fair
Value Measurements of Financial Instruments
|
We adopted SFAS No. 157, Fair Value
Measurements (SFAS 157) beginning in the
first quarter of 2008. SFAS 157 defines fair value as the
price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market
participants at the measurement date, establishes a framework
for measuring fair value in GAAP such as fair value hierarchy
used to classify the source of information used in fair value
measurements (i.e., market based or non-market 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 157s hierarchy
defines three levels of inputs that may be used to measure fair
value. Level 1 refers to assets that have observable market
prices, level 2 assets do not have an observable
price but do have inputs that are based on such prices in
which components have observable data points and level 3
refers to assets in which one or more of the inputs do not have
observable prices and calibrated model parameters, valuation
techniques or managements assumptions are used to derive
the fair value.
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 Hiland
Partners natural gas and propane derivative contracts are
based on published forward price curves for natural gas and
propane and, as such, are defined as Level 2 fair value
hierarchy assets and liabilities. There are no published forward
price curves for butanes or natural gasoline, and therefore, our
butanes and natural gasoline derivative contracts are defined as
Level 3 fair value hierarchy assets and liabilities. We
value our butanes and natural gasoline derivative contracts
based on calibrated model parameters relative to forward
published price curves for crude oil and comparative
mark-to-market
values received from our counterparty. We valued our interest
rate-based derivative on a comparative
mark-to-market
value received from our counterparty. The following table
represents the fair value hierarchy for Hiland Partners
assets and liabilities at December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Commodity based derivative assets
|
|
$
|
|
|
|
$
|
13,992
|
|
|
$
|
|
|
|
$
|
13,992
|
|
Interest rate based derivative liabilities
|
|
|
|
|
|
|
|
|
|
|
(1,439
|
)
|
|
|
(1,439
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
13,992
|
|
|
$
|
(1,439
|
)
|
|
$
|
12,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-22
HILAND
HOLDINGS GP, LP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007 (Continued)
The following table provides a summary of changes in the fair
value of Hiland Partners Level 3 commodity-based
derivatives for the nine months ended December 31, 2008:
|
|
|
|
|
Balance, January 1, 2008
|
|
$
|
(4,489
|
)
|
Cash settlements from other comprehensive income
|
|
|
3,484
|
|
Net change in other comprehensive income
|
|
|
1,005
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
$
|
|
|
|
|
|
|
|
The following table provides a summary of changes in the fair
value of our Level 3 interest rate-based derivatives for
the year ended December 31, 2008:
|
|
|
|
|
Balance, January 1, 2008
|
|
$
|
|
|
Cash settlements from other comprehensive income
|
|
|
|
|
Net change in other comprehensive income
|
|
|
(1,439
|
)
|
|
|
|
|
|
Balance, December 31, 2008
|
|
$
|
(1,439
|
)
|
|
|
|
|
|
Long-term debt consisted of the following for the indicated
periods:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Hiland Partners revolving credit facility
|
|
$
|
252,064
|
|
|
$
|
221,064
|
|
Hiland Holdings revolving credit facility
|
|
|
705
|
|
|
|
355
|
|
Capital lease obligations
|
|
|
5,051
|
|
|
|
5,585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
257,820
|
|
|
|
227,004
|
|
Less current portion:
|
|
|
|
|
|
|
|
|
Capital lease obligations
|
|
|
649
|
|
|
|
545
|
|
Hiland Holdings revolving credit facility
|
|
|
705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
256,466
|
|
|
$
|
226,459
|
|
|
|
|
|
|
|
|
|
|
Hiland
Partners Credit Facility
On February 6, 2008, Hiland Partners entered into a fourth
amendment to its credit facility dated as of February 15,
2005. Pursuant to the fourth amendment, Hiland Partners has,
among other things, increased its borrowing base from
$250 million, to $300 million and decreased the
accordion feature in the facility from $100 million to
$50 million. Hiland Partners original credit facility dated
February 15, 2005 was first amended in September 2005,
amended a second time in June 2006 and amended a third time in
July 2007.
The fourth amendment increases Hiland Partners borrowing
capacity under its senior secured revolving credit facility to
$300 million such that the facility now consists of a
$291 million senior secured revolving credit facility to be
used for funding acquisitions and other capital expenditures,
issuance of letters of credit and general corporate purposes
(the Acquisition Facility) and a $9.0 million
senior secured revolving credit facility to be used for working
capital and to fund distribution (the Working Capital
Facility).
In addition, the fourth amendment to the 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 of letters of credit of up to $15 million
in the aggregate.
F-23
HILAND
HOLDINGS GP, LP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007 (Continued)
The senior secured revolving credit facility also requires
Hiland Partners to meet certain financial tests, including a
maximum consolidated funded debt to EBITDA ratio of 4.0:1.0 as
of the last day of any fiscal quarter; provided that in the
event that the Partnership makes certain permitted acquisitions
or capital expenditures, this ratio may be increased to 4.75:1.0
for the three fiscal quarters following the quarter in which
such acquisition or capital expenditure occurs; and a minimum
interest coverage ratio of 3.0:1.0. The credit facility will
mature in May 2011. At that time, the agreement will terminate
and all outstanding amounts thereunder will be due and payable.
Due to the recent decline in natural gas and NGL prices, Hiland
Partners believes that its cash generated from operations will
decrease in 2009 relative to comparable periods in 2008. Hiland
Partners senior secured revolving credit facility requires
it to meet certain financial tests, including a maximum
consolidated funded debt to EBITDA ratio of 4.0:1.0 as of the
last day of any fiscal quarter; provided that in the event that
Hiland Partners makes certain permitted acquisitions or capital
expenditures, this ratio may be increased to 4.75:1.0 for the
three fiscal quarters following the quarter in which such
acquisition or capital expenditure occurs. Hiland Partners
intends to elect to increase the ratio to 4.75:1.0 on
March 31, 2009. During this
step-up
period, the applicable margin with respect to loans under the
credit facility will be increased by 35 basis points per
annum and the unused commitment fee will be increased by
12.5 basis points per annum. Additionally, if commodity
prices do not significantly improve above the expected prices
for 2009, Hiland Partners may be in violation of the maximum
consolidated funded debt to EBITDA ratio as early as
June 30, 2009, unless the ratio is amended, the senior
secured revolving credit facility is restructured or Hiland
Partners receives an infusion of equity capital.
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 6 Derivatives for a
discussion of Hiland Partners interest rate swap.
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 our ratio of
consolidated funded debt to EBITDA will be payable on the unused
portion of the credit facility. During any
step-up
period, the applicable margin with respect to loans under the
credit facility will be increased by 35 basis points per
annum and the unused commitment fee will be increased by
12.5 basis points per annum. At December 31, 2008, the
interest rate on outstanding borrowings from Hiland
Partners credit facility was 3.28%.
The credit facility prohibits Hiland Partners from making
distributions to unitholders if any default or event of default,
as defined in the credit facility, has occurred and is
continuing or would result from the distribution. In addition,
the credit facility contains various covenants that limit, among
other things, subject to certain exceptions and negotiated
baskets, Hiland Partners ability to incur
indebtedness, grant liens, make certain loans, acquisitions and
investments, make any material changes to the nature of its
business, amend its material agreements, including its Omnibus
Agreement, which contains non-compete and indemnity provisions
with affiliates, or enter into a merger, consolidation or sale
of assets.
F-24
HILAND
HOLDINGS GP, LP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007 (Continued)
The credit facility defines EBITDA as Hiland Partners
consolidated net income (loss), plus income tax expense,
interest expense, depreciation and amortization expense,
amortization of intangibles and organizational costs, non-cash
unit based compensation expense, and adjustments for non-cash
gains and losses on specified derivative transactions and for
other extraordinary items.
Upon the occurrence of an event of default as defined in the
credit facility, the lenders may, among other things, be able to
accelerate the maturity of the credit facility and exercise
other rights and remedies as set forth in the credit facility.
The credit facility limits distributions to Hiland
Partners unitholders to available cash, as defined by the
agreement, and borrowings to fund such distributions are only
permitted under the revolving working capital facility. The
revolving working capital facility is subject to an annual
clean-down period of 15 consecutive days in which
the amount outstanding under the revolving working capital
facility is reduced to zero.
As of December 31, 2008, Hiland Partners had
$252.1 million outstanding under this credit facility and
was in compliance with its financial covenants.
Hiland
Partners GP, LLC Credit Facility
On May 1, 2006, Hiland Partners GP, LLC entered into an
unsecured credit agreement under which it borrowed
$35.0 million to purchase 761,714 common units and 15,545
general partner units from Hiland Partners. The loan was
guaranteed by all Hiland Partners GP, LLCs members and
matured and was paid in full upon the completion of our initial
public offering on September 25, 2006. Hiland Partners GP,
LLCs board of directors, as well as the conflicts
committee of its board of directors, consisting of independent
directors, approved the transaction.
Hiland
Holdings Credit Facility
On September 25, 2006, concurrently with the closing of our
initial public offering, we entered into a three-year
$25.0 million secured revolving credit facility. The credit
facility will permit us, if certain conditions are met, to
increase borrowing capacity by up to an additional
$25.0 million. The credit facility is secured by all of our
ownership interests in Hiland Partners and its general partner,
other than the 2% general partner interest and the incentive
distribution rights.
The credit facility will mature on September 25, 2009, at
which time all outstanding amounts thereunder become due and
payable.
Indebtedness under the credit facility bears interest, at our
option, at either (i) an alternate base rate plus an
applicable margin ranging from 100 to 150 basis points per
annum or (ii) LIBOR plus an applicable margin ranging from
200 to 250 basis points per annum in each case based on our
ratio of consolidated funded debt to EBITDA. The alternate base
rate is equal to the greatest of (a) the prime rate in
effect on such day, (b) the base CD rate in effect on such
day plus 1.50% and (c) the federal funds effective rate in
effect on such day plus
1
/2 of
1%. We have elected for the indebtedness to bear interest at
LIBOR plus the applicable margin. A letter of credit fee will be
payable for the aggregate amount of letters of credit issued
under the credit facility at a percentage per annum equal to
2.0%. A commitment fee ranging from 25 to 50 basis points
per annum based on our ratio of consolidated funded debt to
EBITDA will be payable on the average daily unused portion of
the credit facility for the quarter most recently ended. At
December 31, 2008, the interest rate on outstanding
borrowings from our credit facility was 2.96%.
The credit facility contains several covenants that, among other
things, require the maintenance of two financial performance
ratios, restrict the payment of distributions to unitholders,
and require financial reports to be submitted periodically to
the financial institutions.
F-25
HILAND
HOLDINGS GP, LP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007 (Continued)
The credit facility also contains covenants requiring a maximum
consolidated funded debt to EBITDA ratio of 3.0:1.0 for the four
fiscal quarters most recently ended and a minimum interest
coverage ratio of 3.0:1.0.
The amount we may borrow under the credit facility is limited to
the lesser of: (i) 50% of the sum of the value of the
Hiland Partners common and subordinated units and certain other
assets held by us and certain of our subsidiaries at the end of
each fiscal quarter and (ii) the maximum available amount
of the credit facility (currently $25.0 million).
The credit facility prohibits us from making distributions to
unitholders if any default or event of default, as defined in
the credit facility, has occurred and is continuing or would
result from the distribution. In addition, the credit facility
contains various covenants that limit, among other things,
subject to certain exceptions and negotiated
baskets, our ability to incur indebtedness, grant
liens, enter into agreements restricting our ability to grant
liens on our assets or amend the credit facility, make certain
loans, acquisitions and investments or enter into a merger,
consolidation or sale of assets.
The credit facility limits distributions to our unitholders to
our available cash, as defined in our partnership agreement.
Restricted payments under the credit facility are subject to an
annual clean-down period of 15 consecutive days in
which the amount outstanding that relates to funding the
restricted payments under the credit facility must be reduced to
zero.
As of December 31, 2008, we had $0.7 million
outstanding under this credit facility and were in compliance
with our financial covenants. The outstanding $0.7 million,
which matures on September 25, 2009, is included in accrued
liabilities and other in the balance sheet.
Capital
Lease Obligations
During the third quarter 2007, Hiland Partners incurred two
separate capital lease obligation at its Bakken and Badlands
gathering systems. Under the terms of a capital lease agreement
for a rail loading facility and an associated products pipeline
at Hiland Partners Bakken gathering system, Hiland
Partners has agreed to repay a counterparty a predetermined
amount over a period of eight years. Once fully paid, title to
the leased assets will transfer to Hiland Partners no later than
the end of the eight-year period commencing from the inception
date of the lease. Hiland Partners also incurred a capital lease
obligation to a counterparty for the aid to construct several
electric substations at Hiland Partners Badlands gathering
system which, by agreement, will be repaid in equal monthly
installments over a period of five years.
During the years ended December 31, 2008 and 2007, Hiland
Partners made principal payments of $534 and $296, respectively,
on the above described capital lease obligations. The current
portion of the capital lease obligations presented in the table
above is included accrued liabilities and other in the balance
sheet.
|
|
Note 9:
|
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.
F-26
HILAND
HOLDINGS GP, LP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007 (Continued)
The board of directors of our general partner and the
compensation committee of the board may terminate or amend the
long-term incentive plan at any time with respect to any units
for which a grant has not yet been made. Our board of directors
and the compensation committee of the board also have the right
to alter or amend the long-term incentive plan or any part of
the plan from time to time, including increasing the number of
units that may be granted subject to unitholder approval as may
be required by applicable law or stock exchange rules. However,
no change in any outstanding grant may be made that would
materially reduce the benefits of the participant without the
consent of the participant. Restricted common units granted vest
and become exercisable in one-fourth increments on the
anniversary of the grant date over four years. A restricted unit
is a common unit that is subject to forfeiture, and upon
vesting, the grantee receives a common unit that is not subject
to forfeiture. Distributions on unvested restricted common units
are held in trust by our general partner until the units vest,
at which time the distributions are distributed to the grantee.
As provided for in the long-term incentive plan, each
non-employee board member of Hiland Partners GP Holdings, LLC on
each anniversary date of the initial award is entitled to
receive an additional 1,000 restricted common units.
Accordingly, we issued a total of 6,000 restricted units to our
six non-employee board members during the year ended
December 31, 2008. Also during the year ended
December 31, 2008, a total of 4,500 restricted units issued
to non-employee board members in 2006 and 2007 vested and were
converted into common units. Non-cash unit based compensation
expense related to restricted units issued is to be recognized
over their respective four-year vesting period on the graded
vesting attribution method. The following table summarizes
information about our restricted units for the year ended
December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
Fair Value at
|
|
Restricted Units
|
|
Units
|
|
|
Grant Date ($)
|
|
|
Non-vested at January 1, 2008
|
|
|
15,000
|
|
|
$
|
23.30
|
|
Granted
|
|
|
6,000
|
|
|
$
|
20.74
|
|
Vested
|
|
|
(4,500
|
)
|
|
$
|
22.75
|
|
Forfeited or expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested at December 31, 2008
|
|
|
16,500
|
|
|
$
|
22.52
|
|
|
|
|
|
|
|
|
|
|
We recorded non-cash compensation expense related to the
restricted units of $151, $150 and $16, respectively, during the
years ended December 31, 2008, 2007 and 2006. We will
record additional non-cash unit based compensation expense of
$217 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 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
our general partners board of directors. The plan will
continue in effect until the earliest of (i) the date
determined by the board of directors of our general partner;
(ii) the date common units are no longer available for
payment of awards under the plan; or (iii) the tenth
anniversary of the plan.
Hiland Partners GP, LLCs board of directors or
compensation committee may, in their discretion, terminate,
suspend or discontinue the long-term incentive plan at any time
with respect to any units for which a grant has not yet been
made. Hiland Partners GP, LLCs board of directors or its
compensation committee also has the right to alter or amend the
long-term incentive plan or any part of the plan from time to
time, including increasing the number of units that may be
granted, subject to unitholder approval if required by the
F-27
HILAND
HOLDINGS GP, LP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007 (Continued)
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 will vest and become
exercisable in one-third increments on the anniversary of the
grant date over three years. Vested options are exercisable
within the options contractual life of ten years after the
grant date. Restricted common units granted vest and become
exercisable in one-fourth increments on the anniversary of the
grant date over four years. A restricted unit is a common unit
that is subject to forfeiture, and upon vesting, the grantee
receives a common unit that is not subject to forfeiture.
Distributions on unvested restricted common units are held in
trust by our general partner until the units vest, at which time
the distributions are distributed to the grantee. Granted
phantom common units are generally more flexible than restricted
units and vesting periods and distribution rights may vary with
each grant. A phantom unit is a common unit that is subject to
forfeiture and is not considered issued until it vests. Upon
vesting, holders of phantom units will receive (i) a common
unit that is not subject to forfeiture, cash in lieu of the
delivery of such unit equal to the fair market value of the unit
on the vesting date, or a combination thereof, at the discretion
of our general partners board of directors and
(ii) the distributions held in trust, if applicable,
related to the vested units.
Phantom
Units
On February 4, 2008, Hiland Partners granted 7,500 phantom
units to our Vice President Business Development,
Matthew S. Harrison, who on April 16, 2008, was appointed
Chief Financial Officer. Mr. Harrisons phantom units
vest over a three-year period from the date of issuance and
distributions on the phantom units will be held in trust by
Hiland Partners general partner until the units vest. On
February 4, 2009, 2,500 phantom units vested and
Mr. Harrison settled 2,500 of the phantom units for 2,500
common units.
On August 7, 2008, Hiland Partners granted 7,500 phantom
units to Mr. Kent C. Christopherson, our Chief Operations
Officer, appointed on August 4, 2008.
Mr. Christophersons phantom units vest over a
four-year period from the dates of issuance and distributions
are held in trust by Hiland Partners general partner until
such units vest. Additionally, in 2008, Hiland Partners granted
7,300 phantom units to key employees.
A total of 7,031 phantom units awarded in 2007 vested during the
year ended December 31, 2008, of which 5,227 phantom units
were converted to common units resulting in contributions of $3
to Hiland Partners from its general partner to maintain its 2%
ownership interest and 1,804 phantom units were redeemed.
The following table summarizes information about Hiland
Partners phantom units for the year ended
December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
|
Fair Value
|
|
|
Fair Value at
|
|
|
|
|
|
|
at Grant
|
|
|
Redemption
|
|
|
|
Units
|
|
|
Date ($)
|
|
|
Date ($)
|
|
|
Unvested January 1, 2008
|
|
|
42,825
|
|
|
$
|
50.12
|
|
|
|
|
|
Granted
|
|
|
22,300
|
|
|
$
|
44.49
|
|
|
|
|
|
Vested and converted
|
|
|
(5,227
|
)
|
|
$
|
50.76
|
|
|
|
|
|
Vested and redeemed
|
|
|
(1,804
|
)
|
|
$
|
50.96
|
|
|
$
|
33.46
|
|
Forfeited
|
|
|
(7,300
|
)
|
|
$
|
48.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested December 31, 2008
|
|
|
50,794
|
|
|
$
|
47.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the year ended December 31, 2008 and 2007, Hiland
Partners incurred non-cash unit based compensation expense of
$1,149 and 249, respectively, related to the phantom units. As
of December 31, 2008, there was $1,455 of total
unrecognized cost related to the unvested phantom units which is
to be is to be
F-28
HILAND
HOLDINGS GP, LP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007 (Continued)
recognized over a weighted average period of 2.9 years. At
December 31, 2007, there was $1,721 of total unrecognized
cost related to the unvested phantom units.
Restricted
Units
During 2008, Hiland Partners issued a total of 1,000 restricted
units each to its six non-employee board members of its general
partner on their one-year anniversary dates, and accordingly,
its general partner contributed $5 to Hiland Partners to
maintain its 2% ownership interest. On the same anniversary
dates of the six non-employee board members, 5,500 previously
granted restricted units vested and were converted to common
units. Additionally, 1,000 restricted units granted to key
employees in 2006 vested and were converted to common units. On
August 1, 2008, 375 restricted units granted in November
2006 were forfeited and cancelled and the associated accumulated
distributions held in trust by Hiland Partners general
partner were returned to Hiland Partners.
The following table summarizes information about Hiland Partners
restricted units for the year ended December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Fair Value
|
|
|
|
|
|
|
at Grant
|
|
Restricted Units
|
|
Units
|
|
|
Date ($)
|
|
|
Non-vested at January 1, 2008
|
|
|
19,375
|
|
|
$
|
46.57
|
|
Granted
|
|
|
6,000
|
|
|
$
|
43.97
|
|
Vested
|
|
|
(6,500
|
)
|
|
$
|
37.89
|
|
Forfeited or expired
|
|
|
(375
|
)
|
|
$
|
48.85
|
|
|
|
|
|
|
|
|
|
|
Non-vested at December 31, 2008
|
|
|
18,500
|
|
|
$
|
48.73
|
|
|
|
|
|
|
|
|
|
|
Non-cash unit based compensation expense related to the
restricted units was $356 and $537 for the years ended
December 31, 2008 and 2007, respectively. As of
December 31, 2008, there was $429 of total unrecognized
cost related to the unvested restricted units. This cost is to
be recognized over a weighted average period of 2.4 years.
At December 31, 2007 there was $533 of total unrecognized
cost related to the unvested restricted units.
Unit
Options
The following table summarizes information about outstanding
options with respect to Hiland Partners outstanding
options for the year ended December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
Options
|
|
Units
|
|
|
Price ($)
|
|
|
Term (Years)
|
|
|
Value ($)
|
|
|
Outstanding at January 1, 2008
|
|
|
75,041
|
|
|
$
|
31.11
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(40,705
|
)
|
|
$
|
25.32
|
|
|
|
|
|
|
$
|
975
|
|
Forfeited or expired
|
|
|
(1,000
|
)
|
|
$
|
40.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2008
|
|
|
33,336
|
|
|
$
|
37.92
|
|
|
|
7.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2008
|
|
|
24,002
|
|
|
$
|
37.01
|
|
|
|
6.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-29
HILAND
HOLDINGS GP, LP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007 (Continued)
There have been no unit options granted since March 2006. The
weighted average grant date fair value of the 28,000 unit
options granted during the year ended December 31, 2006 was
$4.33 per unit. The weighted average grant date fair value of
167,500 unit options granted during the year ended
December 31, 2005 was $5.30 per unit. The weighted average
grant date fair value of 47,400 unit options vested during
the year ended December 31, 2008 was $5.25 per unit.
The aggregate intrinsic value of options exercised were $975,
$1,315 and $876 for the years ended December 31, 2008, 2007
and 2006, respectively.
On March 14, 2007, Randy Moeder, Hiland Partners past
President, Chief Executive Officer and a director of its general
partner announced his intention to resign. In connection with
Mr. Moeders resignation, Hiland Partners and its
general partner entered into a retention agreement with
Mr. Moeder that allowed Mr. Moeder to continue his
employment for a mutually agreeable period of time, but no
longer than six months. Under the agreement, as long as
Mr. Moeder continued his employment, a pro rata portion of
his 10,666 unvested options to purchase our common units, issued
to him on February 10, 2005, would vest. Accordingly, as
required by SFAS 123R Share-Based Payment, as
amended, on March 14, 2007 Hiland Partners recalculated the
fair value of the remaining unvested options to purchase our
common units as a modification of the options awarded to
Mr. Moeder on February 10, 2005. The recalculated fair
value of the options of $33.65 per unit was determined by using
the American Binomial option pricing model.
On April 16, 2007, Mr. Moeder resigned and 1,899 of
his 10,666 unvested options to purchase our common units vested.
As a result of the recalculated fair value of $33.65 per unit,
Hiland Partners recorded an additional $24 of expense for the
period from March 15, 2007 through April 16, 2007. On
the same day, Mr. Moeder forfeited his remaining 8,767
unvested unit options. The forfeiture of Mr. Moeders
8,767 unvested unit options reduced compensation expense for the
period from April 1, 2007 through April 16, 2007 by
$16. On April 19, 2007, Mr. Moeder exercised his 1,899
vested options to purchase our common units.
On April 14, 2006, 13,333 of the unit options issued on
February 10, 2005, were forfeited. Hiland Partners assumed
no forfeitures in its fair value calculations, as Hiland
Partners believes this forfeiture is an isolated incident and is
not indicative of the future. Compensation expense for the year
ended December 31, 2006 has been reduced by $21 as a result
of the forfeiture.
As a result of adopting SFAS 123R on the modified
prospective basis beginning on January 1, 2006, Hiland
Partners expensed $32, $165 and $354 in 2008, 2007 and 2006,
respectively, related to unit options awarded in 2006 and 2005.
Hiland Partners basic and diluted earnings per unit were
each reduced by $0.04 for the year ended December 31, 2006
as a result of the additional compensation recognized under
SFAS 123R.
|
|
Note 10:
|
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 expenses for the
years ended December 31, 2008, 2007 and 2006 of $320, $262
and $201, respectively.
Prior to January 1, 2007, we jointly participated with
other affiliated companies in a self-insurance pool (the
Pool) covering health and workers compensation
claims made by employees up to the first $150 and $500,
respectively, per claim. Any amounts paid above these were
reinsured through third party providers. Premiums charged to us
were based on estimated costs per employee of the Pool.
Effective January 1, 2007, we obtained our own health and
workers compensation insurance through third-party
providers. Property and general liability insurance is also
maintained through third-party providers with a $100 deductible
on each policy.
F-30
HILAND
HOLDINGS GP, LP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007 (Continued)
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 regulatory proceedings in which we or
Hiland Partners 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.
We lease office space from a related entity (Note 12). We
lease certain facilities, vehicles and equipment under operating
leases, most of which contain annual renewal options. For the
years ended December 31, 2008, 2007 and 2006, rent expense
was $2,834, $2,285 and $779, respectively, under these leases.
A summary of contractual cash obligations as of
December 31, 2008, including minimum future rental
commitments under operating leases having non-cancelable lease
terms in excess of one year, and leases renewed and entered into
subsequent to year end but prior to financial statement
issuance, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Due by Period
|
|
|
|
|
|
|
Total
|
|
|
Due in
|
|
|
Due in
|
|
|
Due in
|
|
|
Due in
|
|
|
Due in
|
|
|
|
|
Type of Obligation
|
|
|
|
|
Obligation
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Senior secured revolving credit facilities
|
|
|
|
|
|
$
|
252,769
|
|
|
$
|
705
|
|
|
$
|
|
|
|
$
|
252,064
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Estimated interest expense on credit facilities(1)
|
|
|
|
|
|
|
19,650
|
|
|
|
8,283
|
|
|
|
8,267
|
|
|
|
3,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligations(2)
|
|
|
|
|
|
|
7,378
|
|
|
|
1,256
|
|
|
|
1,256
|
|
|
|
1,256
|
|
|
|
1,107
|
|
|
|
1,001
|
|
|
|
1,502
|
|
Operating leases, service agreements and other
|
|
|
|
|
|
|
3,959
|
|
|
|
1,700
|
|
|
|
858
|
|
|
|
465
|
|
|
|
299
|
|
|
|
211
|
|
|
|
426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations
|
|
|
|
|
|
$
|
283,756
|
|
|
$
|
11,944
|
|
|
$
|
10,381
|
|
|
$
|
256,885
|
|
|
$
|
1,406
|
|
|
$
|
1,212
|
|
|
$
|
1,928
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Interest rates on the senior secured revolving credit facilities
are variable. Estimated interest payments are based on the
interest rates and the amounts outstanding as of
December 31, 2008. For a discussion of ours and Hiland
Partners senior secured revolving credit facilities,
please read Credit Facility below.
|
|
(2)
|
|
Contractual cash commitments on our capital lease obligations
include $2,335 of interest expense.
|
|
|
Note 11:
|
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 Years Ended
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Customer 1
|
|
|
16
|
%
|
|
|
19
|
%
|
|
|
14
|
%
|
Customer 2
|
|
|
14
|
%
|
|
|
6
|
%
|
|
|
13
|
%
|
Customer 3
|
|
|
11
|
%
|
|
|
19
|
%
|
|
|
20
|
%
|
Customer 4
|
|
|
10
|
%
|
|
|
9
|
%
|
|
|
8
|
%
|
Customer 5
|
|
|
9
|
%
|
|
|
12
|
%
|
|
|
4
|
%
|
F-31
HILAND
HOLDINGS GP, LP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007 (Continued)
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 Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Supplier 1 (affiliated company)
|
|
|
42
|
%
|
|
|
31
|
%
|
|
|
32
|
%
|
Supplier 2
|
|
|
18
|
%
|
|
|
25
|
%
|
|
|
24
|
%
|
Supplier 3
|
|
|
15
|
%
|
|
|
14
|
%
|
|
|
13
|
%
|
|
|
Note 12:
|
Related
Party Transactions
|
Hiland Partners purchases natural gas and NGLs from affiliated
companies. Purchases of product from affiliates totaled
$116.7 million, $60.1 million, and $50.3 million
for the years ended December 31, 2008, 2007 and 2006,
respectively. Hiland Partners also sells natural gas and NGLs to
affiliated companies. Sales of product to affiliates totaled
$11.5 million, $3.5 million, and $4.1 million for
the years ended December 31, 2008, 2007 and 2006,
respectively. Compression revenues from affiliates were
$4.8 million each for 2008, 2007 and 2006.
Accounts receivable-affiliates of 2,181 and $1,178 at
December 31, 2008 and 2007, respectively, includes $2,083
and $1,090 from one affiliate for midstream sales.
Accounts payable-affiliates of $7,823 and $7,957 at
December 31, 2008 and 2007, respectively, includes $6,682
and $7,094 due to one affiliate for midstream purchases.
Hiland Partners utilizes affiliated companies to provide
services to its plants and pipelines and certain administrative
costs. The total amount paid to these companies was $555, $525
and $353 during the years ended December 31, 2008, 2007 and
2006, respectively.
We lease office space under operating leases directly or
indirectly from an affiliate. Rents paid associated with these
leases totaled $157, $143 and $118 for the years ended
December 31, 2008, 2007 and 2006 respectively.
|
|
Note 13:
|
Reportable
Segments
|
Hiland Partners has distinct operating segments for which
additional financial information must be reported. Hiland
Partners operations are classified into two reportable segments:
(1) Midstream, which is the purchasing, gathering,
compressing, dehydrating, treating, processing and marketing of
natural gas and fractionating and marketing of NGLs.
(2) Compression, which is providing air compression and
water injection services for oil and gas secondary recovery
operations that are ongoing in North Dakota.
These business segments reflect the way Hiland Partners manages
its operations. Hiland Partners operations are conducted
in the United States. General and administrative costs, which
consist of executive management, accounting and finance,
operations and engineering, marketing and business development,
are allocated to the individual segments based on revenues.
Midstream assets totaled $411,220, $392,439 and $323,813 at
December 31, 2008, 2007 and 2006, respectively. On the same
dates, assets attributable to compression operations totaled
$24,340, $27,847 and $31,385, respectively. All but $80 of the
total capital expenditures of $58,455 for the year ended
December 31, 2008 was attributable to midstream operations.
All but $48 of the total capital expenditures of $90,953 for the
year ended December 31, 2007 was attributable to midstream
operations.
F-32
HILAND
HOLDINGS GP, LP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007 (Continued)
The tables below present information about the operating income
for the reportable segments for the years ended
December 31, 2008, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Midstream
|
|
|
Compression
|
|
|
|
|
|
|
Segment
|
|
|
Segment
|
|
|
Total
|
|
|
For the Year Ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
383,180
|
|
|
$
|
4,819
|
|
|
$
|
387,999
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Midstream purchases (exclusive of items shown separately below)
|
|
|
276,600
|
|
|
|
|
|
|
|
276,600
|
|
Operations and maintenance
|
|
|
29,476
|
|
|
|
1,050
|
|
|
|
30,526
|
|
Depreciation and amortization
|
|
|
35,067
|
|
|
|
3,583
|
|
|
|
38,650
|
|
Bad debt
|
|
|
304
|
|
|
|
|
|
|
|
304
|
|
General and administrative
|
|
|
10,210
|
|
|
|
137
|
|
|
|
10,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
351,657
|
|
|
|
4,770
|
|
|
|
356,417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
31,523
|
|
|
|
49
|
|
|
|
31,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other income
|
|
|
|
|
|
|
|
|
|
|
357
|
|
Amortization of deferred loan costs
|
|
|
|
|
|
|
|
|
|
|
(663
|
)
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
(13,674
|
)
|
Minority interest in income of Hiland Partners, LP
|
|
|
|
|
|
|
|
|
|
|
(5,902
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
$
|
11,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
273,224
|
|
|
$
|
4,819
|
|
|
$
|
278,043
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Midstream purchases (exclusive of items shown separately below)
|
|
|
195,212
|
|
|
|
|
|
|
|
195,212
|
|
Operations and maintenance
|
|
|
22,472
|
|
|
|
807
|
|
|
|
23,279
|
|
Depreciation and amortization
|
|
|
27,424
|
|
|
|
3,578
|
|
|
|
31,002
|
|
General and administrative
|
|
|
9,159
|
|
|
|
162
|
|
|
|
9,321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
254,267
|
|
|
|
4,547
|
|
|
|
258,814
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
18,957
|
|
|
|
272
|
|
|
|
19,229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other income
|
|
|
|
|
|
|
|
|
|
|
445
|
|
Amortization of deferred loan costs
|
|
|
|
|
|
|
|
|
|
|
(499
|
)
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
(11,371
|
)
|
Minority interest in income of Hiland Partners, LP
|
|
|
|
|
|
|
|
|
|
|
(2,638
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
$
|
5,166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-33
HILAND
HOLDINGS GP, LP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007 (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Midstream
|
|
|
Compression
|
|
|
|
|
|
|
Segment
|
|
|
Segment
|
|
|
Total
|
|
|
For the Year Ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
214,867
|
|
|
$
|
4,819
|
|
|
$
|
219,686
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Midstream purchases (exclusive of items shown separately below)
|
|
|
156,193
|
|
|
|
|
|
|
|
156,193
|
|
Operations and maintenance
|
|
|
15,228
|
|
|
|
843
|
|
|
|
16,071
|
|
Depreciation and amortization
|
|
|
19,292
|
|
|
|
3,571
|
|
|
|
22,863
|
|
General and administrative
|
|
|
5,189
|
|
|
|
110
|
|
|
|
5,299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
195,902
|
|
|
|
4,524
|
|
|
|
200,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
18,965
|
|
|
|
295
|
|
|
|
19,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other income
|
|
|
|
|
|
|
|
|
|
|
323
|
|
Amortization of deferred loan costs
|
|
|
|
|
|
|
|
|
|
|
(513
|
)
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
(6,543
|
)
|
Minority interest in income of Hiland Partners, LP
|
|
|
|
|
|
|
|
|
|
|
(10,164
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
$
|
2,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 14:
|
Selected
Quarterly Financial Data Unaudited
|
The following is a summary of selected quarterly financial data
for the years ended December 31, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 Quarter
|
|
|
|
1st
|
|
|
2nd
|
|
|
3rd
|
|
|
4th
|
|
|
Revenues
|
|
$
|
91,479
|
|
|
$
|
115,441
|
|
|
$
|
115,753
|
|
|
$
|
65,326
|
|
Operating income (loss)
|
|
|
4,192
|
|
|
|
(75
|
)*
|
|
|
21,337
|
*
|
|
|
6,128
|
|
Limited partners interest in net income (loss)
|
|
|
840
|
|
|
|
(1,108
|
)*
|
|
|
11,188
|
*
|
|
|
780
|
|
Net income (loss) per limited partner unit basic
|
|
$
|
0.04
|
|
|
$
|
(0.05
|
)*
|
|
$
|
0.52
|
*
|
|
$
|
0.03
|
|
|
|
|
*
|
|
The second quarter includes a bad debt expense of $8,103 related
to SemGroup, L.P. which was subsequently reduced to $304 by a
$7,799 recovery in the third quarter. For a more detailed
discussion on SemGroup, L.P., please read Item 7A.
Quantitative and Qualitative Disclosures about Market
Risk Credit Risk.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 Quarter
|
|
|
|
1st
|
|
|
2nd
|
|
|
3rd
|
|
|
4th
|
|
|
Revenues
|
|
$
|
61,054
|
|
|
$
|
66,616
|
|
|
$
|
67,636
|
|
|
$
|
82,737
|
|
Operating income
|
|
|
3,396
|
|
|
|
4,109
|
|
|
|
5,766
|
|
|
|
5,958
|
|
Limited partners interest in net income
|
|
|
748
|
|
|
|
1,139
|
|
|
|
1,735
|
|
|
|
1,544
|
|
Net income per limited partner unit basic and diluted
|
|
$
|
0.03
|
|
|
$
|
0.05
|
|
|
$
|
0.08
|
|
|
$
|
0.08
|
|
F-34
HILAND
HOLDINGS GP, LP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007 (Continued)
|
|
Note 15:
|
Net
Income per Limited Partner Unit
|
The computation of net income per limited partners unit is
based on the weighted-average number of common units outstanding
during the period. The computation of diluted net income per
limited partners unit further assumes the dilutive effect
of restricted units. Net income per unit applicable to limited
partners is computed by dividing net income applicable to
limited partners by the weighted-average number of limited
partnership units outstanding.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
|
|
|
|
|
|
|
|
|
|
Available to
|
|
|
|
|
|
|
|
|
|
Limited
|
|
|
Limited
|
|
|
|
|
|
|
Partners
|
|
|
Partner Units
|
|
|
Per Unit
|
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
|
|
(In thousands)
|
|
|
For the Year Ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per limited partner unit basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to limited partners
|
|
$
|
11,700
|
|
|
|
|
|
|
$
|
0.54
|
|
Weighted average limited partner units outstanding
|
|
|
|
|
|
|
21,604
|
|
|
|
|
|
Income per limited partner unit diluted: Restricted
units
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to limited partners plus assumed conversions
|
|
$
|
11,700
|
|
|
|
21,609
|
|
|
$
|
0.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per limited partner unit basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to limited partners
|
|
$
|
5,166
|
|
|
|
|
|
|
$
|
0.24
|
|
Weighted average limited partner units outstanding
|
|
|
|
|
|
|
21,601
|
|
|
|
|
|
Income per limited partner unit diluted: Restricted
units
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to limited partners plus assumed conversions
|
|
$
|
5,166
|
|
|
|
21,608
|
|
|
$
|
0.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per limited partner unit basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to limited partners
|
|
$
|
1,956
|
|
|
|
|
|
|
$
|
0.09
|
|
Weighted average limited partner units outstanding
|
|
|
|
|
|
|
2,600
|
|
|
|
|
|
Income per limited partner unit diluted: Restricted
units
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to limited partners plus assumed conversions
|
|
$
|
1,956
|
|
|
|
2,601
|
|
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 16:
|
Partners
Capital and Cash Distributions
|
Hiland
Holdings
Hiland Holdings unitholders (limited partners) have only limited
voting rights on matters affecting our operations and activities
and, therefore, limited ability to influence our
managements decisions regarding our business. Unitholders
did not select our general partner or elect the board of
directors of our general partner and effectively have no right
to select our general partner or elect its board of directors in
the future. Unitholders voting rights are further
restricted by our partnership agreement, which provides that any
units held by a person that owns 20% or more of any class of
units then outstanding, other than the general partner, its
affiliates, their transferees and persons who acquired such
units with the prior approval of the board of directors of our
general partner, cannot be voted on any matter. In addition, our
partnership agreement contains provisions limiting the ability
of our unitholders to call meetings or to acquire information
about our
F-35
HILAND
HOLDINGS GP, LP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007 (Continued)
operations, as well as other provisions limiting a
unitholders ability to influence the manner or direction
of our management.
Our partnership agreement requires that we distribute all of our
cash on hand at the end of each quarter less reserves
established at our general partners discretion. We refer
to this as available cash. Initially our only
cash-generating assets are our interests in Hiland Partners from
which we receive quarterly distributions. The amount of
available cash may be greater than or less than the minimum
quarterly distributions.
All distributions paid by Hiland Holdings to common unitholders
from January 1, 2007 forward, including amounts paid to
affiliate owners, were as follows (in thousands, except per unit
amounts):
|
|
|
|
|
|
|
|
|
|
|
Per Unit Cash
|
|
|
|
|
|
|
Distribution
|
|
|
Total Cash
|
|
Date Cash Distribution Paid
|
|
Amount
|
|
|
Distribution
|
|
|
02/19/07
|
|
$
|
0.2075
|
|
|
$
|
4,484
|
|
05/18/07
|
|
|
0.2075
|
|
|
|
4,484
|
|
08/17/07
|
|
|
0.2200
|
|
|
|
4,755
|
|
11/19/07
|
|
|
0.2300
|
|
|
|
4,972
|
|
02/19/08
|
|
|
0.2550
|
|
|
|
5,513
|
|
05/19/08
|
|
|
0.2800
|
|
|
|
6,053
|
|
08/19/08
|
|
|
0.3050
|
|
|
|
6,594
|
|
11/19/08
|
|
|
0.3175
|
|
|
|
6,866
|
|
02/18/09(a)
|
|
|
0.1000
|
|
|
|
2,162
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2.1225
|
|
|
$
|
45,883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
This cash distribution was announced on January 26, 2009
and was paid on February 18, 2009 to all unitholders of
record as of February 5, 2009.
|
Hiland
Partners
The unitholders (limited partners) of Hiland Partners have only
limited voting rights on matters affecting its operations and
activities and, therefore, limited ability to influence its
managements decisions regarding its business. Unitholders
did not select Hiland Partners GP, LLC as general partner or
elect its board of directors and effectively have no right to
select a general partner or elect its board of directors in the
future. Unitholders voting rights are further restricted
by Hiland Partners partnership agreement provision
providing 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, Hiland Partners partnership agreement
contains provisions limiting the ability of its unitholders to
call meetings or to acquire information about its operations, as
well as other provisions limiting a unitholders ability to
influence the manner or direction of Hiland Partners
management.
Hiland Partners partnership agreement requires that it
distribute all of its cash on hand at the end of each quarter,
less reserves established at Hiland Partners GP, LLCs
discretion. We refer to this as available cash. The
amount of available cash may be greater than or less than the
minimum quarterly distributions described below. In general,
Hiland Partners will pay any cash distribution made each quarter
in the following manner:
|
|
|
|
|
first, 98% to the common units, pro rata, and 2% to Hiland
Partners GP, LLC, until each common unit has received a minimum
quarterly distribution of $0.45 plus any arrearages from prior
quarters;
|
F-36
HILAND
HOLDINGS GP, LP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007 (Continued)
|
|
|
|
|
second, 98% to the subordinated units, pro rata, and 2% to
Hiland Partners GP, LLC, until each subordinated unit has
received a minimum quarterly distribution of $0.45; and
|
|
|
|
third, 98% to all units, pro rata, and 2% to Hiland Partners GP,
LLC, until each unit has received a distribution of $0.495.
|
If cash distributions per unit exceed $0.495 in any quarter,
Hiland Partners GP, LLC as general partner will receive
increasing percentages, up to a maximum of 50% of the cash
Hiland Partners distributes in excess of that amount. We refer
to these distributions as incentive distributions.
The distributions on the subordinated units may be reduced or
eliminated if necessary to ensure the common units receive their
minimum quarterly distribution. Subordinated units do not accrue
arrearages. The subordination period will end with respect to
certain portions of the subordinated units once Hiland Partners
meets certain financial tests, but will not end with respect to
all subordinated units before March 31, 2010. These
financial tests require Hiland Partners to have earned and paid
the minimum quarterly distribution on all of its outstanding
units for three consecutive four-quarter periods. When the
subordination period ends, all remaining subordinated units will
convert into common units on a
one-for-one
basis and the common units will no longer be entitled to
arrearages. Following Hiland Partners distribution on
May 14, 2008, these financial tests were met for the
immediate preceding three consecutive four-quarter periods, and
accordingly, 25%, or 1,020,000, of the subordinated units were
converted to common units on May 19, 2008. As of
December 31, 2008, we own 3,060,000 subordinated units,
which is all of, Hiland Partners subordinated units.
Presented below are cash distributions paid by Hiland Partners
to common and subordinated unitholders, including amounts to
affiliate owners and regular and incentive distributions paid to
Hiland Partners GP, LLC for 2008 and 2007 (in thousands, except
per unit amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution
|
|
|
Common
|
|
|
Subordinated
|
|
|
General Partner
|
|
|
Total Cash
|
|
Distribution Paid
|
|
Amount
|
|
|
Units
|
|
|
Units
|
|
|
Regular
|
|
|
Incentive
|
|
|
Distribution
|
|
|
02/14/07
|
|
$
|
0.7125
|
|
|
$
|
3,694
|
|
|
$
|
2,907
|
|
|
$
|
150
|
|
|
$
|
749
|
|
|
$
|
7,500
|
|
05/15/07
|
|
|
0.7125
|
|
|
|
3,724
|
|
|
|
2,907
|
|
|
|
151
|
|
|
|
752
|
|
|
|
7,534
|
|
08/14/07
|
|
|
0.7325
|
|
|
|
3,837
|
|
|
|
2,989
|
|
|
|
158
|
|
|
|
932
|
|
|
|
7,916
|
|
11/14/07
|
|
|
0.7550
|
|
|
|
3,959
|
|
|
|
3,080
|
|
|
|
167
|
|
|
|
1,134
|
|
|
|
8,340
|
|
02/14/08
|
|
|
0.7950
|
|
|
|
4,169
|
|
|
|
3,243
|
|
|
|
182
|
|
|
|
1,492
|
|
|
|
9,086
|
|
05/14/08
|
|
|
0.8275
|
|
|
|
4,364
|
|
|
|
3,376
|
|
|
|
194
|
|
|
|
1,789
|
|
|
|
9,723
|
|
08/14/08
|
|
|
0.8625
|
|
|
|
5,446
|
|
|
|
2,639
|
|
|
|
208
|
|
|
|
2,107
|
|
|
|
10,400
|
|
11/14/08
|
|
|
0.8800
|
|
|
|
5,574
|
|
|
|
2,694
|
|
|
|
214
|
|
|
|
2,268
|
|
|
|
10,750
|
|
02/13/09(a)
|
|
|
0.4500
|
|
|
|
2,849
|
|
|
|
1,377
|
|
|
|
86
|
|
|
|
|
|
|
|
4,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6.7275
|
|
|
$
|
37,616
|
|
|
$
|
25,212
|
|
|
$
|
1,510
|
|
|
$
|
11,223
|
|
|
$
|
75,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
This cash distribution was announced on January 26, 2009
and was paid on February 13, 2009 to all unitholders of
record as of February 5, 2009.
|
F-37
HILAND
HOLDINGS GP, LP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007 (Continued)
Presented below are cash distributions paid by Hiland Partners
to us and to Hiland Partners GP, LLC for 2008 and 2007 (in
thousands, except per unit amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Unit Cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution
|
|
|
Common
|
|
|
Subordinated
|
|
|
General Partner
|
|
|
Total Cash
|
|
Date Cash Distribution Paid
|
|
Amount
|
|
|
Units
|
|
|
Units
|
|
|
Regular
|
|
|
Incentive
|
|
|
Distribution
|
|
|
02/14/07
|
|
$
|
0.7125
|
|
|
$
|
927
|
|
|
$
|
2,907
|
|
|
$
|
150
|
|
|
$
|
749
|
|
|
$
|
4,733
|
|
05/14/07
|
|
|
0.7125
|
|
|
|
927
|
|
|
|
2,907
|
|
|
|
151
|
|
|
|
752
|
|
|
|
4,737
|
|
08/14/07
|
|
|
0.7325
|
|
|
|
953
|
|
|
|
2,989
|
|
|
|
158
|
|
|
|
932
|
|
|
|
5,032
|
|
11/14/07
|
|
|
0.7550
|
|
|
|
983
|
|
|
|
3,080
|
|
|
|
167
|
|
|
|
1,134
|
|
|
|
5,364
|
|
02/14/08
|
|
|
0.7950
|
|
|
|
1,035
|
|
|
|
3,243
|
|
|
|
182
|
|
|
|
1,492
|
|
|
|
5,952
|
|
05/14/08
|
|
|
0.8275
|
|
|
|
1,077
|
|
|
|
3,376
|
|
|
|
194
|
|
|
|
1,789
|
|
|
|
6,436
|
|
08/14/08
|
|
|
0.8625
|
|
|
|
2,003
|
|
|
|
2,639
|
|
|
|
208
|
|
|
|
2,107
|
|
|
|
6,957
|
|
11/14/08
|
|
|
0.8800
|
|
|
|
2,043
|
|
|
|
2,694
|
|
|
|
214
|
|
|
|
2,268
|
|
|
|
7,219
|
|
02/13/09(a)
|
|
|
0.4500
|
|
|
|
1,045
|
|
|
|
1,377
|
|
|
|
86
|
|
|
|
|
|
|
|
2,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6.7275
|
|
|
$
|
10,993
|
|
|
$
|
25,212
|
|
|
$
|
1,510
|
|
|
$
|
11,223
|
|
|
$
|
48,938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
This cash distribution was announced on January 26, 2009
and was paid to us on February 13, 2009.
|
|
|
Note 17:
|
Supplemental
Information
|
Following are the financial statements of Hiland Holdings which
are included to provide additional information with respect to
the Hiland Holdings financial position, results of
operations and cash flows on a stand-alone basis.
F-38
HILAND
HOLDINGS GP, LP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007 (Continued)
HILAND
HOLDINGS GP, LP
BALANCE
SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except unit amounts)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
561
|
|
|
$
|
105
|
|
Accounts receivable affiliates
|
|
|
2
|
|
|
|
6
|
|
Other current assets
|
|
|
351
|
|
|
|
265
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
914
|
|
|
|
376
|
|
Investment in subsidiary
|
|
|
4,195
|
|
|
|
16,183
|
|
Property and equipment, net
|
|
|
3,304
|
|
|
|
3,753
|
|
Intangibles, net
|
|
|
5,138
|
|
|
|
5,835
|
|
Other assets, net
|
|
|
66
|
|
|
|
155
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
13,617
|
|
|
$
|
26,302
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND PARTNERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
363
|
|
|
$
|
4
|
|
Accounts payable affiliates
|
|
|
163
|
|
|
|
383
|
|
Other current liabilities
|
|
|
705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
1,231
|
|
|
|
387
|
|
Long-term debt, net of current maturities
|
|
|
|
|
|
|
355
|
|
Partners equity
|
|
|
|
|
|
|
|
|
Common unitholders (21,607,500 and 21,603,000 units issued
and outstanding at December 31, 2008 and December 31,
2007, respectively)
|
|
|
12,386
|
|
|
|
25,560
|
|
|
|
|
|
|
|
|
|
|
Total partners equity
|
|
|
12,641
|
|
|
|
25,560
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and partners equity
|
|
$
|
13,617
|
|
|
$
|
26,302
|
|
|
|
|
|
|
|
|
|
|
F-39
HILAND
HOLDINGS GP, LP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007 (Continued)
HILAND
HOLDINGS GP, LP
STATEMENTS
OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
(1,147
|
)
|
|
$
|
(1,147
|
)
|
|
$
|
(733
|
)
|
General and administrative expenses
|
|
|
(1,585
|
)
|
|
|
(1,735
|
)
|
|
|
(305
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(2,732
|
)
|
|
|
(2,882
|
)
|
|
|
(1,038
|
)
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings of affiliates
|
|
|
14,545
|
|
|
|
8,146
|
|
|
|
4,517
|
|
Interest and other income
|
|
|
12
|
|
|
|
15
|
|
|
|
|
|
Amortization of deferred loan costs
|
|
|
(89
|
)
|
|
|
(89
|
)
|
|
|
(106
|
)
|
Interest expense
|
|
|
(36
|
)
|
|
|
(24
|
)
|
|
|
(1,010
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net
|
|
|
14,432
|
|
|
|
8,048
|
|
|
|
3,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
11,700
|
|
|
$
|
5,166
|
|
|
$
|
2,363
|
|
Less income attributable to predecessor
|
|
|
|
|
|
|
|
|
|
|
(407
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Limited partners interest in net income
|
|
$
|
11,700
|
|
|
$
|
5,166
|
|
|
$
|
1,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-40
HILAND
HOLDINGS GP, LP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007 (Continued)
HILAND
HOLDINGS GP, LP
STATEMENTS
OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
11,700
|
|
|
$
|
5,166
|
|
|
$
|
2,363
|
|
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,147
|
|
|
|
1,147
|
|
|
|
733
|
|
Amortization of deferred loan cost
|
|
|
89
|
|
|
|
89
|
|
|
|
106
|
|
Unit based compensation
|
|
|
151
|
|
|
|
499
|
|
|
|
49
|
|
Earnings in Hiland Partners, LP
|
|
|
(14,545
|
)
|
|
|
(8,146
|
)
|
|
|
(4,517
|
)
|
(Increase) decrease in current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable affiliates
|
|
|
4
|
|
|
|
(6
|
)
|
|
|
470
|
|
Other current assets
|
|
|
(86
|
)
|
|
|
(45
|
)
|
|
|
(220
|
)
|
Increase (decrease) in current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable trade
|
|
|
359
|
|
|
|
(124
|
)
|
|
|
101
|
|
Accounts payable affiliates
|
|
|
(220
|
)
|
|
|
381
|
|
|
|
(179
|
)
|
Accrued liabilities and other
|
|
|
|
|
|
|
(285
|
)
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
(1,401
|
)
|
|
|
(1,324
|
)
|
|
|
(1,109
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in subsidiaries
|
|
|
(31
|
)
|
|
|
(27
|
)
|
|
|
(35,040
|
)
|
Cash distributions received from subsidiaries
|
|
|
26,564
|
|
|
|
19,867
|
|
|
|
2,888
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
26,533
|
|
|
|
19,840
|
|
|
|
(32,152
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from public
offering-net
of underwriter discount
|
|
|
|
|
|
|
|
|
|
|
139,617
|
|
Proceeds from long-term borrowings
|
|
|
350
|
|
|
|
100
|
|
|
|
35,255
|
|
Payments on long-term borrowings
|
|
|
|
|
|
|
|
|
|
|
(35,000
|
)
|
Debt issuance costs
|
|
|
(1
|
)
|
|
|
|
|
|
|
(350
|
)
|
Public offering costs
|
|
|
|
|
|
|
|
|
|
|
(1,810
|
)
|
Cash distribution to controlling members for net assets of
Hiland Partners, GP, LLC
|
|
|
|
|
|
|
|
|
|
|
(101,812
|
)
|
Capital contributions
|
|
|
|
|
|
|
|
|
|
|
500
|
|
Cash distribution to members of Hiland Partners GP, LLC
|
|
|
|
|
|
|
|
|
|
|
(1,750
|
)
|
Cash distribution to controlling members
|
|
|
|
|
|
|
|
|
|
|
(1,052
|
)
|
Cash distributions to unitholders
|
|
|
(25,025
|
)
|
|
|
(18,695
|
)
|
|
|
(285
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(24,676
|
)
|
|
|
(18,595
|
)
|
|
|
33,313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) for the period
|
|
|
456
|
|
|
|
(79
|
)
|
|
|
52
|
|
Beginning of period
|
|
|
105
|
|
|
|
184
|
|
|
|
132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period
|
|
$
|
561
|
|
|
$
|
105
|
|
|
$
|
184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplementary information
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
37
|
|
|
$
|
23
|
|
|
$
|
5
|
|
F-41
HILAND
HOLDINGS GP, LP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007 (Continued)
|
|
Note 18:
|
Subsequent
Events (unaudited)
|
On January 15, 2009, the board of directors of the general
partner of each of Hiland Holdings and Hiland Partners received
a proposal from Harold Hamm to acquire all of the outstanding
common units of each of Hiland Holdings and Hiland Partners that
are not owned by Mr. Hamm, his affiliates or Hamm family
trusts. Consummation of each transaction is conditioned upon the
consummation of the other. The proposals contemplate a merger of
each of Hiland Holdings and Hiland Partners with a separate new
acquisition vehicle to be formed by Mr. Hamm and the Hamm
family trusts. Under the terms proposed by Mr. Hamm, Hiland
Holdings GP, LP unitholders would receive $3.20 in cash per
common unit and Hiland Partners, LP unitholders would receive
$9.50 in cash per common unit. Mr. Hamm is the Chairman of
the board of directors of the general partner of each of Hiland
Holdings and Hiland Partners. Mr. Hamm, either individually
or together with his affiliates or the Hamm family trusts,
beneficially owns 100% of Hiland Partners GP Holdings, LLC, the
general partner of Hiland Holdings, and approximately 61% of the
outstanding common units of Hiland Holdings. Hiland Holdings
owns 100% of Hiland Partners general partner and
approximately 37% of Hiland Partners outstanding common
units.
It is anticipated that the conflicts committee of the board of
directors of the general partner of each of Hiland Holdings and
Hiland Partners will consider the proposals. In reviewing the
proposals, each conflicts committee has retained its own
financial advisers and legal counsel to assist in its work. The
boards of directors of the general partners of each of Hiland
Holdings and Hiland Partners caution our unitholders and
unitholders of Hiland Partners respectively, and others
considering trading in the securities of Hiland Holdings and
Hiland Partners, that each conflicts committee of the board of
directors is reviewing its respective proposal and no decisions
have been made by either conflicts committee of either board of
directors with respect to the response of either us or Hiland
Partners to the proposals. There can be no assurance that any
agreement will be executed or that any transaction will be
approved or consummated.
On February 26, 2009, a unitholder of Hiland Holdings and
Hiland Partners filed a complaint alleging direct and derivative
claims on behalf of a purported class of common unitholders of
Hiland Holdings and Hiland Partners against Hiland Partners,
Hiland Holdings, the general partner of each of Hiland Holdings
and Hiland Partners, and certain members of the board of
directors of each of Hiland Holdings and Hiland Partners in the
Court of Chancery of the State of Delaware. The complaint
challenges a proposal made by Harold Hamm to acquire all of the
outstanding common units of each of Hiland Holdings and Hiland
Partners that are not owned by Mr. Hamm, his affiliates or
Hamm family trusts. The complaint alleges, among other things,
that the consideration offered is unfair and grossly inadequate,
that the conflicts committee of the board of directors of the
general partner of each of Hiland Holdings and Hiland Partners
cannot be expected to act independently, and that the management
of Hiland Holdings and Hiland Partners has manipulated its
public statements to depress the price of the common units of
Hiland Holdings and Hiland Partners. The plaintiffs seek to
enjoin Hiland Partners, Hiland Holdings, and their respective
board members from proceeding with any transaction that may
arise from Mr. Hamms going private proposal, along
with compensatory damages. For more information on the going
private proposal, please see Items 1. and 2. Business
and Properties Recent Developments Going
Private Proposal.
We cannot predict the outcome of this lawsuit, or others, nor
can we predict the amount of time and expense that will be
required to resolve the lawsuit. We dispute the merits of these
claims and intend to vigorously defend against them. If the
plaintiffs ultimately prevail in this lawsuit, our insurance
coverage may not cover our total liabilities and expenses
associated with the lawsuit as we have deductibles on certain
aspects of the coverage. We currently hold insurance policies
for the benefit of our current directors and officers.
On January 27, 2009, we received a Deficiency Letter from
NASDAQ indicating that we no longer comply with the audit
committee composition requirements as set forth in Marketplace
Rule 4350(d), which
F-42
HILAND
HOLDINGS GP, LP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007 (Continued)
requires Hiland Partners GP Holdings, LLC, our general partner,
to have an audit committee of at least three independent
members. Following the resignation of Shelby E. Odell from the
board of directors of our general partner on January 21,
2009, the audit committee of our general partner consists of
only two independent members. Mr. Odell resigned from the
board of directors of our general partner so that he would be
eligible to serve as a member of the conflicts committee of the
board of directors of Hiland Partners general partner. In
accordance with Marketplace Rule 4350(d)(4), NASDAQ has
provided us a cure period to regain compliance until the earlier
of our next annual unitholders meeting or January 21,
2010, or, if the next annual unitholders meeting is held
before July 20, 2009, then we must evidence compliance no
later than July 20, 2009.
On January 13, 2009 and January 15, 2009, Hiland
Partners entered into financial swap instruments related to
forecasted natural gas sales in 2010 whereby Hiland Partners
receives a fixed price and pays a floating price based on
Colorado Interstate Gas (CIG) basis differential to
the contract NYMEX Henry Hub price for the relevant contract
period as the underlying gas is sold. These series of derivative
contracts related to forecasted natural gas sales in 2010 will
be classified as cash flow hedges in accordance with
SFAS 133 for the remainder of their respective contract
periods.
F-43
Annex J
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
|
|
|
þ
|
|
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
incorporation or organization)
|
|
(I.R.S. Employer
Identification No.)
|
|
|
|
205 West Maple, Suite 1100
Enid, Oklahoma
(Address of principal
executive offices)
|
|
73701
(Zip Code)
|
(580) 242-6040
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes
þ
No
o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if
any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes
o
No
o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a
non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2
of the
Exchange Act. (Check one):
|
|
|
|
Large
accelerated
filer
o
|
Accelerated
filer
þ
|
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). Yes
o
No
þ
The number of the registrants outstanding equity units as
of August 7, 2009 was 21,607,500 common units.
HILAND
HOLDINGS GP, LP
INDEX
2
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
(In thousands,
|
|
|
|
except unit amounts)
|
|
|
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.
3
For the Three and Six Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands, except per unit amounts)
|
|
|
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.
4
For the Three and Six Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited, in thousands)
|
|
|
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.
5
For the Six Months Ended
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited,
|
|
|
|
in thousands)
|
|
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.
6
For the Six Months Ended June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Partners
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
Interest in
|
|
|
|
|
|
|
Common
|
|
|
Comprehensive
|
|
|
Hiland
|
|
|
|
|
|
|
Unitholders
|
|
|
Income
|
|
|
Partners
|
|
|
Total
|
|
|
|
(Unaudited, in thousands)
|
|
|
Balance, January 1, 2009
|
|
$
|
12,386
|
|
|
$
|
3,111
|
|
|
$
|
125,851
|
|
|
$
|
141,348
|
|
Periodic cash distributions
|
|
|
(2,162
|
)
|
|
|
|
|
|
|
(1,803
|
)
|
|
|
(3,965
|
)
|
Unit based compensation
|
|
|
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.
7
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.
8
HILAND
HOLDINGS GP, LP
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
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.
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.
9
HILAND
HOLDINGS GP, LP
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
Interest
Rate Risk Management
Hiland Partners is exposed to interest rate risk on its variable
rate bank credit facility. Hiland Partners manages a portion of
the interest rate exposure by utilizing an interest rate swap to
convert a portion of variable rate debt into fixed rate debt.
The swap fixes the one month LIBOR rate at the indicated rates
for a specified amount of related debt outstanding over the term
of the swap agreement. Hiland Partners has elected to designate
the interest rate swap as a cash flow hedge for 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 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 managements judgment, that the
carrying value of such assets may not be recoverable. The
determination of whether impairment has occurred is based on
managements estimate of undiscounted future cash flows
attributable to the assets as compared to the carrying value of
the assets. If impairment has occurred, the amount of the
impairment recognized is determined by estimating the fair value
10
HILAND
HOLDINGS GP, LP
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
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:
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changes in general economic conditions in regions in which
Hiland Partners assets are located;
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the availability and prices of NGLs and NGL products and
competing commodities;
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the availability and prices of raw natural gas supply;
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Hiland Partners ability to negotiate favorable marketing
agreements;
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the risks that third party oil and gas exploration and
production activities will not occur or be successful;
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Hiland Partners dependence on certain significant
customers and producers of natural gas; and
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competition from other midstream service providers and
processors, including major energy companies.
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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 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
11
HILAND
HOLDINGS GP, LP
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
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
tm
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
(FAS 107-1).
FAS 107-1
increases the frequency of fair value disclosures to a quarterly
basis instead of annual basis.
FAS 107-1
specifically relates to fair value disclosures for any financial
instruments that are not currently reflected on the balance
sheet at fair value.
FAS 107-1
is effective for interim and annual periods ending after
June 15, 2009.
FAS 107-1
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.
12
HILAND
HOLDINGS GP, LP
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
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 dont 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 entitys derivative instruments
and hedging activities and their effects on the entitys
financial position, financial performance, and cash flows.
SFAS 161 is effective prospectively for financial
statements issued for fiscal years and interim periods beginning
after November 15, 2008, with early application encouraged.
SFAS 161 encourages, but does not require, comparative
disclosures for periods prior to its initial adoption.
SFAS 161 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
entitys 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 Partnerships
(MLPs) net earnings per limited partner unit for
each period presented according to distributions declared and
participation rights in undistributed earnings as if all of the
earnings for that period had been distributed. In periods with
undistributed earnings above specified levels, the calculation
per the two-class method results in an increased allocation of
such undistributed earnings to the general partner and a
dilution of earnings to the limited partners.
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
13
HILAND
HOLDINGS GP, LP
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
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 157s hierarchy defines three levels of inputs
that may be used to measure fair value. Level 1 refers to
assets that have observable market prices, level 2 assets
do not have an observable price but do have inputs
that are based on such prices in which components have
observable data points and level 3 refers to assets in
which one or more of the inputs do not have observable prices
and calibrated model parameters, valuation techniques or
managements assumptions are used to derive the fair value.
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 parents 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 parents ownership interest while the
parent retains its controlling financial interest in its
subsidiary be accounted for consistently and similarly as equity
transactions. Consolidated net income and comprehensive income
are now determined without deducting minority interest; however,
earnings-per-share
information continues to be calculated on the basis of the net
income attributable to the parents shareholders.
Additionally, SFAS 160 establishes a single method for
accounting for changes in a parents ownership interest in
a subsidiary that does not result in deconsolidation and that
the parent recognize a gain or loss in net income when a
subsidiary is deconsolidated. 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
14
HILAND
HOLDINGS GP, LP
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
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.
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
Partnerships 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,
15
HILAND
HOLDINGS GP, LP
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
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 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 committees respective
board of directors lacked any meaningful independence,
(iii) the defendants acted in bad faith in recommending and
approving the Hiland Partners Merger or the Hiland Holdings
Merger, and (iv) the disclosures in the Preliminary Proxy
Statement filed by the Partnership and Hiland Partners are
materially misleading. The
Pasternack
plaintiff seeks to
preliminarily enjoin the defendants from proceeding with or
consummating the mergers and seeks an order requiring defendants
to supplement the Preliminary Proxy Statement with certain
information. 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
16
HILAND
HOLDINGS GP, LP
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
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
|
|
|
|
|
|
|
|
|
|
|
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
17
HILAND
HOLDINGS GP, LP
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
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.
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
18
HILAND
HOLDINGS GP, LP
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
2.245%. 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.
19
HILAND
HOLDINGS GP, LP
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
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
|
)
|
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
20
HILAND
HOLDINGS GP, LP
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
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 157s hierarchy
defines three levels of inputs that may be used to measure fair
value. Level 1 refers to assets that have observable market
prices, level 2 assets do not have an observable
price but do have inputs that are based on such prices in
which components have observable data points and level 3
refers to assets in which one or more of the inputs do not have
observable prices and calibrated model parameters, valuation
techniques or managements assumptions are used to derive
the fair value.
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 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 propertys estimated expected future cash flows to the
carrying amount of the property to determine if the carrying
amount is recoverable. If the carrying amount of the property
exceeds its estimated undiscounted future cash flows, the
carrying amount of the property is reduced to its estimated fair
value. Fair value may be estimated using comparable market data,
a discounted cash flow method, or a combination of the two. In
the discounted cash flow method, estimated future cash flows are
based on managements expectations for the future and
include estimates of future oil and gas reserves, commodity
prices based on commodity futures price strips as of the date of
the estimate, operating and development costs, and a
risk-adjusted discount rate.
21
HILAND
HOLDINGS GP, LP
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
As a result of volume declines combined with significantly
reduced natural gas prices, Hiland Partners determined that
carrying amounts totaling approximately $950 related to natural
gas gathering systems located in Texas and Mississippi were not
recoverable from future cash flows and, therefore, were impaired
at March 31, 2009. Hiland Partners reduced the carrying
amounts of these nonrecurring level 3 hierarchy assets to
their estimated fair values of approximately $249 by using the
discounted cash flow method described above, as comparable
market data was not available.
Long-term debt consisted of the following for the indicated
periods:
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of
|
|
|
|
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 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
22
HILAND
HOLDINGS GP, LP
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
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 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.
23
HILAND
HOLDINGS GP, LP
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
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 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.
24
HILAND
HOLDINGS GP, LP
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
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, LLCs board
of directors. The plan will continue in effect until the
earliest of (i) a date determined by the board of directors
of the general
25
HILAND
HOLDINGS GP, LP
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
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, LLCs board of directors or
compensation committee may, in their discretion, terminate,
suspend or discontinue the long-term incentive plan at any time
with respect to any units for which a grant has not yet been
made. Hiland Partners GP, LLCs board of directors or its
compensation committee also has the right to alter or amend the
long-term incentive plan or any part of the plan from time to
time, including increasing the number of units that may be
granted, subject to unitholder approval if required by the
exchange upon which the common units are listed at that time. No
change in any outstanding grant may be made, however, that would
materially impair the rights of the participant without the
consent of the participant. Under the unit option grant
agreement, granted options of common units vest and become
exercisable in one-third increments on the anniversary of the
grant date over three years. Vested options are exercisable
within the options contractual life of ten years after the
grant date. Restricted common units granted vest and become
exercisable in one-fourth increments on the anniversary of the
grant date over four years. A restricted unit is a common unit
that is subject to forfeiture, and upon vesting, the grantee
receives a common unit that is not subject to forfeiture.
Distributions on unvested restricted common units are held in
trust by Hiland Partners general partner until the units
vest, at which time the distributions are distributed to the
grantee. Granted phantom common units are generally more
flexible than restricted units and vesting periods and
distribution rights may vary with each grant. A phantom unit is
a common unit that is subject to forfeiture and is not
considered issued until it vests. Upon vesting, holders of
phantom units will receive (i) a common unit that is not
subject to forfeiture, cash in lieu of the delivery of such unit
equal to the fair market value of the unit on the vesting date,
or a combination thereof, at the discretion of Hiland
Partners general partners board of directors and
(ii) the distributions held in trust, if applicable,
related to the vested units.
Phantom Units.
On 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 $992 over the next
four years, and the additional expense is to be recognized over
a weighted average period of 2.5 years.
26
HILAND
HOLDINGS GP, LP
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
Restricted Units.
Hiland Partners issued no
restricted units during the three and six months ended
June 30, 2009. On April 1, 2009, our former Chief
Commercial Officer retired and forfeited 1,500 restricted units.
The following table summarizes information about Hiland Partners
restricted units for the six months ended June 30, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Fair Value
|
|
|
|
|
|
|
per Unit
|
|
|
|
|
|
|
at Grant
|
|
Restricted Units
|
|
Units
|
|
|
Date ($)
|
|
|
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.
|
|
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.
27
HILAND
HOLDINGS GP, LP
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
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 committees respective
board of directors lacked any meaningful independence,
(iii) the defendants acted in bad faith in recommending and
approving the Hiland Partners Merger or the Hiland Holdings
Merger, and (iv) the disclosures in the Preliminary Proxy
Statement filed by the Partnership and Hiland Partners are
materially misleading. The
Pasternack
plaintiff seeks to
preliminarily enjoin the defendants from proceeding with or
consummating the mergers and seeks an order requiring defendants
to supplement the Preliminary Proxy Statement with certain
information. 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
|
|
|
For the Six
|
|
|
|
Months Ended
|
|
|
Months Ended
|
|
|
|
June 30,
|
|
|
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
|
%
|
28
HILAND
HOLDINGS GP, LP
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
Customer 1 above is SemStream, L.P., a subsidiary of SemGroup,
L.P., who filed a voluntary petition for reorganization under
Chapter 11 of the U.S. Bankruptcy Code on
July 22, 2008. In March 2009, Hiland Partners received
a good faith deposit from SemStream, L.P. for $3,000 in lieu of
renewing a letter of credit to our benefit. The $3,000 deposit
received is included in accrued liabilities and other in the
balance sheet.
All of Hiland Partners purchases are from domestic
sources. The following table presents Hiland Partners top
midstream suppliers as a percent of total midstream purchases
for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three
|
|
|
For the Six
|
|
|
|
Months Ended
|
|
|
Months Ended
|
|
|
|
June 30,
|
|
|
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.
29
HILAND
HOLDINGS GP, LP
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
These business segments reflect the way Hiland Partners manages
its operations. Hiland Partners operations are conducted
in the United States. General and administrative costs, which
consist of executive management, accounting and finance,
operations and engineering, marketing and business development,
are allocated to the individual segments based on revenues.
Midstream assets totaled $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.
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
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
HILAND
HOLDINGS GP, LP
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
HILAND
HOLDINGS GP, LP
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
|
|
Note 13:
|
Net
Income (Loss) per Limited Partners Unit
|
The computation of basic net income (loss) per limited
partners unit is based on the weighted-average number of
common units outstanding during the period. The computation of
diluted net income (loss) per unit further assumes the dilutive
effect of restricted units. Net income (loss) per unit
applicable to limited partners is computed by dividing net
income (loss) applicable to limited partners by the
weighted-average number of limited partnership units
outstanding. The following is a reconciliation of the limited
partner units used in the calculations of net income (loss) per
limited partner unit basic and net income (loss) per
limited partner unit diluted assuming dilution for
the three and six months ended June 30, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Loss
|
|
|
|
|
|
|
|
|
Loss
|
|
|
|
|
|
|
|
|
|
Attributable
|
|
|
|
|
|
|
|
|
Attributable
|
|
|
|
|
|
|
|
|
|
to Limited
|
|
|
Limited
|
|
|
|
|
|
to Limited
|
|
|
Limited
|
|
|
|
|
|
|
Partners
|
|
|
Partner Units
|
|
|
Per Unit
|
|
|
Partners
|
|
|
Partner Units
|
|
|
Per Unit
|
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
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
|
|
|
|
|
|
|
|
|
Loss
|
|
|
|
|
|
|
|
|
|
Available to
|
|
|
|
|
|
|
|
|
Available to
|
|
|
|
|
|
|
|
|
|
Limited
|
|
|
Limited
|
|
|
|
|
|
Limited
|
|
|
Limited
|
|
|
|
|
|
|
Partners
|
|
|
Partner Units
|
|
|
Per Unit
|
|
|
Partners
|
|
|
Partner Units
|
|
|
Per Unit
|
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
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
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 managements
decisions regarding our business. Unitholders did not select our
general partner or elect the board of directors of our general
partner and
32
HILAND
HOLDINGS GP, LP
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
effectively have no right to select our general partner or elect
its board of directors in the future. Unitholders voting
rights are further restricted by our partnership agreement,
which provides that any units held by a person that owns 20% or
more of any class of units then outstanding, other than the
general partner, its affiliates, their transferees and persons
who acquired such units with the prior approval of the board of
directors of our general partner, cannot be voted on any matter.
In addition, our partnership agreement contains provisions
limiting the ability of our unitholders to call meetings or to
acquire information about our operations, as well as other
provisions limiting a unitholders ability to influence the
manner or direction of our management.
Our partnership agreement requires that we distribute all of our
cash on hand at the end of each quarter, less reserves
established at our general partners discretion. We refer
to this as available cash. Our only cash-generating
assets are our interests in Hiland Partners from which we may
receive quarterly distributions. The amount of available cash
may be greater than or less than the minimum quarterly
distributions.
We have suspended quarterly cash distributions beginning with
the first quarter distribution of 2009 and Hiland Partners has
also suspended quarterly cash distributions on its common and
subordinated units beginning with the first quarter distribution
of 2009 due to the impact of lower commodity prices and reduced
drilling activity on Hiland Partners current and projected
throughput volumes, midstream segment margins and cash flows
combined with future required levels of capital expenditures and
the outstanding indebtedness under Hiland Partners senior
secured revolving credit facility. Under the terms of the Hiland
Partners partnership agreement, the Hiland Partners common units
carry an arrearage of $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):
|
|
|
|
|
|
|
|
|
|
|
Per Unit Cash
|
|
|
|
|
|
|
Distribution
|
|
|
Total Cash
|
|
Date Cash Distribution 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
managements 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, LLCs board of
directors, cannot be voted on any matter. In addition, Hiland
Partners partnership agreement contains provisions
limiting the ability of its unitholders to call meetings or to
acquire information about its operations, as well as other
provisions limiting a unitholders ability to influence the
manner or direction of Hiland Partners management.
33
HILAND
HOLDINGS GP, LP
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
Hiland Partners partnership agreement requires that it
distribute all of its cash on hand at the end of each quarter,
less reserves established at Hiland Partners GP, LLCs
discretion. Hiland Partners refers to this as available
cash. The amount of available cash may be greater than or
less than the minimum quarterly distributions described below.
In general, Hiland Partners will pay any cash distribution made
each quarter in the following manner:
|
|
|
|
|
first, 98% to the common units, pro rata, and 2% to Hiland
Partners GP, LLC, until each common unit has received a minimum
quarterly distribution of $0.45 plus any arrearages from prior
quarters;
|
|
|
|
second, 98% to the subordinated units, pro rata, and 2% to
Hiland Partners GP, LLC, until each subordinated unit has
received a minimum quarterly distribution of $0.45; and
|
|
|
|
third, 98% to all units, pro rata, and 2% to Hiland Partners GP,
LLC, until each unit has received a distribution of $0.495.
|
If cash distributions per unit exceed $0.495 in any quarter,
Hiland Partners GP, LLC as general partner will receive
increasing percentages, up to a maximum of 50% of the cash
Hiland Partners distributes in excess of that amount. Hiland
Partners refers to these distributions as incentive
distributions.
The distributions on the subordinated units may be reduced or
eliminated if necessary to ensure the common units receive their
minimum quarterly distribution. Subordinated units do not accrue
arrearages. The subordination period will extend until the first
day of any quarter beginning after March 31, 2010 that each
of the following tests are met: distributions of available cash
from operating surplus on each of the outstanding common units
and subordinated units equaled or exceeded the minimum quarterly
distribution for each of the three consecutive, non-overlapping
four-quarter periods immediately preceding that date; the
adjusted operating surplus (as defined in the
partnership agreement) generated during each of the three
consecutive, non-overlapping four-quarter periods immediately
preceding that date equaled or exceeded the sum of the minimum
quarterly distributions on all of the outstanding common units
and subordinated units during those periods on a fully diluted
basis and the related distribution on the 2% general partner
interest during those periods; and there are no arrearages in
payment of the minimum quarterly distribution on the common
units. In addition, if the tests for ending the subordination
period are satisfied for any three consecutive four quarter
periods ending on or after March 31, 2008, 25% of the
subordinated units will convert into an equal number of common
units. On May 14, 2008 these tests were met and
accordingly, 1,020,000, or 25%, of the subordinated units
converted into an equal number of common units.
34
HILAND
HOLDINGS GP, LP
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
Hiland Partners has suspended quarterly cash distributions on
its common and subordinated units beginning with the first
quarter distribution of 2009 due to the impact of lower
commodity prices and reduced drilling activity on Hiland
Partners current and projected throughput volumes,
midstream segment margins and cash flows combined with future
required levels of capital expenditures and the outstanding
indebtedness under Hiland Partners senior secured
revolving credit facility. Under the terms of the Hiland
Partners partnership agreement, the Hiland Partners common units
carry an arrearage of $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. We own 3,060,000 of the Hiland Partners
subordinated units which will not receive a cash distribution
until the distribution arrearage to the Hiland Partners common
units is paid. Presented below are cash distributions to the
Hiland Partners common and subordinated unitholders, including
amounts to affiliate owners and regular and incentive
distributions to Hiland Partners GP, LLC paid by Hiland Partners
from January 1, 2008 forward (in thousands, except per unit
amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Unit Cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution
|
|
|
Common
|
|
|
Subordinated
|
|
|
General Partner
|
|
|
Total Cash
|
|
Date Cash Distribution Paid
|
|
Amount
|
|
|
Units
|
|
|
Units
|
|
|
Regular
|
|
|
Incentive
|
|
|
Distribution
|
|
|
02/14/08
|
|
$
|
0.7950
|
|
|
$
|
4,169
|
|
|
$
|
3,243
|
|
|
$
|
182
|
|
|
$
|
1,492
|
|
|
$
|
9,086
|
|
05/14/08
|
|
|
0.8275
|
|
|
|
4,364
|
|
|
|
3,376
|
|
|
|
194
|
|
|
|
1,789
|
|
|
|
9,723
|
|
08/14/08
|
|
|
0.8625
|
|
|
|
5,446
|
|
|
|
2,639
|
|
|
|
208
|
|
|
|
2,107
|
|
|
|
10,400
|
|
11/14/08
|
|
|
0.8800
|
|
|
|
5,574
|
|
|
|
2,694
|
|
|
|
214
|
|
|
|
2,268
|
|
|
|
10,750
|
|
02/13/09
|
|
|
0.4500
|
|
|
|
2,849
|
|
|
|
1,377
|
|
|
|
86
|
|
|
|
|
|
|
|
4,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3.8150
|
|
|
$
|
22,402
|
|
|
$
|
13,329
|
|
|
$
|
884
|
|
|
$
|
7,656
|
|
|
$
|
44,271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Presented below are cash distributions by Hiland Partners to us
and Hiland Partners GP, LLC from January 1, 2008 forward
(in thousands, except per unit amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Unit Cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution
|
|
|
Common
|
|
|
Subordinated
|
|
|
General Partner
|
|
|
Total Cash
|
|
Date Cash Distribution Paid
|
|
Amount
|
|
|
Units
|
|
|
Units
|
|
|
Regular
|
|
|
Incentive
|
|
|
Distribution
|
|
|
02/14/08
|
|
$
|
0.7950
|
|
|
$
|
1,035
|
|
|
$
|
3,243
|
|
|
$
|
182
|
|
|
$
|
1,492
|
|
|
$
|
5,952
|
|
05/15/08
|
|
|
0.8275
|
|
|
|
1,077
|
|
|
|
3,376
|
|
|
|
194
|
|
|
|
1,789
|
|
|
|
6,436
|
|
08/14/08
|
|
|
0.8625
|
|
|
|
2,003
|
|
|
|
2,639
|
|
|
|
208
|
|
|
|
2,107
|
|
|
|
6,957
|
|
11/14/08
|
|
|
0.8800
|
|
|
|
2,043
|
|
|
|
2,694
|
|
|
|
214
|
|
|
|
2,268
|
|
|
|
7,219
|
|
02/13/09
|
|
|
0.4500
|
|
|
|
1,045
|
|
|
|
1,377
|
|
|
|
86
|
|
|
|
|
|
|
|
2,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3.8150
|
|
|
$
|
7,203
|
|
|
$
|
13,329
|
|
|
$
|
884
|
|
|
$
|
7,656
|
|
|
$
|
29,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 15:
|
Supplemental
Information
|
Following are the financial statements of Hiland Holdings which
are included to provide additional information with respect to
Hiland Holdings financial position, results of operations
and cash flows on a stand-alone basis.
35
HILAND
HOLDINGS GP, LP
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
HILAND
HOLDINGS GP, LP
Balance
Sheets
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
(In thousands, except unit amounts)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
159
|
|
|
$
|
561
|
|
Accounts receivable affiliates
|
|
|
|
|
|
|
2
|
|
Other current assets
|
|
|
265
|
|
|
|
351
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
424
|
|
|
|
914
|
|
Investment in subsidiary
|
|
|
(569
|
)
|
|
|
4,195
|
|
Property and equipment, net
|
|
|
3,080
|
|
|
|
3,304
|
|
Intangibles, net
|
|
|
4,789
|
|
|
|
5,138
|
|
Other assets, net
|
|
|
22
|
|
|
|
66
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
7,746
|
|
|
$
|
13,617
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND PARTNERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,334
|
|
|
$
|
363
|
|
Accounts payable affiliates
|
|
|
345
|
|
|
|
163
|
|
Other current liabilities
|
|
|
1,205
|
|
|
|
705
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
2,884
|
|
|
|
1,231
|
|
Long-term debt
|
|
|
|
|
|
|
|
|
Partners equity
|
|
|
|
|
|
|
|
|
Common unitholders (21,607,500 units issued and outstanding)
|
|
|
4,862
|
|
|
|
12,386
|
|
|
|
|
|
|
|
|
|
|
Total partners equity
|
|
|
4,862
|
|
|
|
12,386
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and partners equity
|
|
$
|
7,746
|
|
|
$
|
13,617
|
|
|
|
|
|
|
|
|
|
|
36
HILAND
HOLDINGS GP, LP
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
HILAND
HOLDINGS GP, LP
Statements
of Operations
For the
Three and Six Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited, in thousands)
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
(286
|
)
|
|
$
|
(286
|
)
|
|
$
|
(573
|
)
|
|
$
|
(573
|
)
|
General and administrative
|
|
|
(1,667
|
)
|
|
|
(470
|
)
|
|
|
(2,554
|
)
|
|
|
(853
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(1,953
|
)
|
|
|
(756
|
)
|
|
|
(3,127
|
)
|
|
|
(1,426
|
)
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in (loss) earnings of affiliates
|
|
|
(553
|
)
|
|
|
(317
|
)
|
|
|
(2,252
|
)
|
|
|
1,216
|
|
Interest and other income
|
|
|
|
|
|
|
3
|
|
|
|
1
|
|
|
|
6
|
|
Amortization of deferred loan costs
|
|
|
(22
|
)
|
|
|
(23
|
)
|
|
|
(44
|
)
|
|
|
(45
|
)
|
Interest expense
|
|
|
(7
|
)
|
|
|
(15
|
)
|
|
|
(12
|
)
|
|
|
(19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net
|
|
|
(582
|
)
|
|
|
(352
|
)
|
|
|
(2,307
|
)
|
|
|
1,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(2,535
|
)
|
|
$
|
(1,108
|
)
|
|
$
|
(5,434
|
)
|
|
$
|
(268
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37
HILAND
HOLDINGS GP, LP
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
HILAND
HOLDINGS GP, LP
Statements
of Cash Flows
For the
Six Months Ended
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited, in thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(5,434
|
)
|
|
$
|
(268
|
)
|
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
573
|
|
|
|
573
|
|
Amortization of deferred loan cost
|
|
|
44
|
|
|
|
45
|
|
Unit based compensation
|
|
|
72
|
|
|
|
77
|
|
Loss (earnings) in Hiland Partners, LP
|
|
|
2,252
|
|
|
|
(1,216
|
)
|
Increase in other assets
|
|
|
|
|
|
|
(1
|
)
|
(Increase) decrease in current assets:
|
|
|
|
|
|
|
|
|
Accounts receivable affiliates
|
|
|
2
|
|
|
|
3
|
|
Other current assets
|
|
|
86
|
|
|
|
(40
|
)
|
Increase (decrease) in current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable trade
|
|
|
971
|
|
|
|
332
|
|
Accounts payable affiliates
|
|
|
182
|
|
|
|
(254
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(1,252
|
)
|
|
|
(749
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Investment in subsidiaries
|
|
|
(1
|
)
|
|
|
(23
|
)
|
Cash distributions received from subsidiaries
|
|
|
2,513
|
|
|
|
12,388
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities
|
|
|
2,512
|
|
|
|
12,365
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from short-term borrowings
|
|
|
500
|
|
|
|
|
|
Cash distributions to unitholders
|
|
|
(2,162
|
)
|
|
|
(11,566
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(1,662
|
)
|
|
|
(11,566
|
)
|
|
|
|
|
|
|
|
|
|
Increase (decrease) for the period
|
|
|
(402
|
)
|
|
|
50
|
|
Beginning of period
|
|
|
561
|
|
|
|
105
|
|
|
|
|
|
|
|
|
|
|
End of period
|
|
$
|
159
|
|
|
$
|
155
|
|
|
|
|
|
|
|
|
|
|
Supplementary information
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
12
|
|
|
$
|
20
|
|
38
HILAND
HOLDINGS GP, LP
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
|
|
Note 16:
|
Subsequent
Events
|
On July 1, 2009, (i) the Partnership, Hiland Partners
and its general partner, Hiland Partners GP, LLC, 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 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.
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. See Note 7 Long-Term
Debt.
39
Cautionary
Statement About Forward-Looking Statements
This report on
Form 10-Q
includes certain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933
and Section 21E of the Securities Exchange Act of 1934.
These statements include statements regarding our plans, goals,
beliefs or current expectations. Statements using words such as
anticipate, believe, intend,
project, plan, continue,
estimate, forecast, may,
will or similar expressions help identify
forward-looking statements. Although we believe such
forward-looking statements are based on reasonable assumptions
and current expectations and projections about future events, no
assurance can be given that every objective will be reached.
Actual results may differ materially from any results projected,
forecasted, estimated or expressed in forward-looking statements
since many of the factors that determine these results are
subject to uncertainties and risks, difficult to predict, and
beyond managements control. Such factors include:
|
|
|
|
|
with respect to the mergers: (1) the occurrence of any
event, change or other circumstances that could give rise to the
termination of the merger agreements or the failure of required
conditions to close the mergers; (2) the outcome of any
legal proceedings that have been or may be instituted against
Hiland Partners
and/or
the
Partnership and others; (3) the inability to obtain
unitholder approval or the failure to satisfy other conditions
to completion of the mergers, including the receipt of certain
regulatory approvals; (4) risks that the proposed
transaction disrupts current plans and operations and the
potential difficulties in employee retention as a result of the
mergers; (5) the performance of Mr. Hamm, his
affiliates and the Hamm family trusts and (6) the amount of
the costs, fees, expenses and related charges;
|
|
|
|
the ability to comply with the certain covenants in our or
Hiland Partners credit facilities and the ability to reach
agreement with ours or Hiland Partners lenders in the
event of a breach of such covenants;
|
|
|
|
the ability to pay distributions to our unitholders;
|
|
|
|
our expected receipt of distributions from Hiland Partners;
|
|
|
|
Hiland Partners cash flow is affected by the volatility of
natural gas and NGL product prices, which could adversely affect
Hiland Partners ability to make distributions to its
unitholders, including us;
|
|
|
|
Hiland Partners continued ability to find and contract for
new sources of natural gas supply;
|
|
|
|
the general economic conditions in the United States of America
as well as the general economic conditions and currencies in
foreign countries;
|
|
|
|
the amount of natural gas gathered on Hiland Partners
gathering systems;
|
|
|
|
the level of throughput in Hiland Partners natural gas
processing and treating facilities given the recent reduction in
drilling activity in its areas of operations;
|
|
|
|
the fees Hiland Partners charges and the margins realized for
its services;
|
|
|
|
the prices and market demand for, and the relationship between,
natural gas and NGLs;
|
|
|
|
energy prices generally;
|
|
|
|
the level of domestic crude oil and natural gas production;
|
|
|
|
the availability of imported crude oil and natural gas;
|
|
|
|
actions taken by foreign crude oil and natural gas producing
nations;
|
|
|
|
the political and economic stability of petroleum producing
nations;
|
|
|
|
the weather in Hiland Partners operating areas;
|
|
|
|
the extent of governmental regulation and taxation;
|
40
|
|
|
|
|
hazards or operating risks incidental to the gathering, treating
and processing of natural gas and NGLs that may not be fully
covered by insurance;
|
|
|
|
competition from other midstream companies;
|
|
|
|
loss of key personnel;
|
|
|
|
the availability and cost of capital and Hiland Partners
ability to access certain capital sources;
|
|
|
|
changes in laws and regulations to which we and Hiland Partners
are subject, including tax, environmental, transportation and
employment regulations;
|
|
|
|
the costs and effects of legal and administrative proceedings;
|
|
|
|
the ability to successfully identify and consummate strategic
acquisitions at purchase prices that are accretive to Hiland
Partners financial results;
|
|
|
|
risks associated with the construction of new pipelines and
treating and processing facilities or additions to Hiland
Partners existing pipelines and facilities;
|
|
|
|
the completion of significant, unbudgeted expansion projects may
require debt
and/or
equity financing which may not be available to Hiland Partners
on acceptable terms, or at all; and
|
|
|
|
increases in interest rates could increase Hiland Partners
borrowing costs, adversely impact its unit price and its ability
to issue additional equity, which could have an adverse effect
on Hiland Partners cash flows and its ability to fund its
growth.
|
These factors are not necessarily all of the important factors
that could cause our actual results to differ materially from
those expressed in any of our forward-looking statements. Our
future results will depend upon various other risks and
uncertainties, including, but not limited to those described
above. Other unknown or unpredictable factors also could have
material adverse effects on our future results. You should not
place undue reliance on any forward-looking statements.
All forward-looking statements attributable to us are qualified
in their entirety by this cautionary statement. We undertake no
duty to update our forward-looking statements to reflect the
impact of events or circumstances after the date of the
forward-looking statements.
41
|
|
Item 2.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Unless the context requires otherwise, references to
we, our, us, Hiland
Holdings or the Partnership are intended to
mean the consolidated business and operations of Hiland Holdings
GP, LP. References to Hiland Partners are intended
to mean the consolidated business and operations of Hiland
Partners, LP and its subsidiaries.
General
Trends and Outlook
We expect Hiland Partners business to continue to be
affected by the key trends described below. These expectations
are based on assumptions made by us and information currently
available to us. To the extent our underlying assumptions about
or interpretations of available information prove to be
incorrect, our expectations may vary materially from actual
results. Please see Forward-Looking Statements.
U.S. Natural Gas Supply and
Outlook.
Natural gas prices have declined
significantly since the peak New York Mercantile Exchange
(NYMEX) Henry Hub last day settle price of
$13.11/MMBtu in July 2008 to the NYMEX Henry Hub last day settle
price of $3.95 in July 2009, a 70% decline. According to data
published by Baker Hughes Incorporated (Baker
Hughes), U.S. natural gas drilling rig counts have
declined by approximately 57% to 675 as of July 24, 2009,
compared to 1,555 natural gas drilling rigs as of July 25,
2008, and have declined approximately 58% compared to the peak
natural gas drilling rig count of 1,606 in September 2008. We
believe that current natural gas prices will continue to result
in reduced natural gas-related drilling activity as producers
seek to decrease their level of natural gas production. We also
believe that current reduced natural gas drilling activity will
persist until the economic environment in the United States
improves and increases the demand for natural gas.
U.S. Crude Oil Supply and Outlook.
The
domestic and global recession and resulting drop in demand for
crude oil products continues to significantly impact the price
for crude oil. West Texas Intermediate (WTI) crude oil pricing
has declined from a peak of $134.62/bbl in July 2008 to a low of
$33.87/Bbl in January 2009, a 75% decline, increasing to
$66.93/Bbl in July 2009, a 50% decline from July 2008. According
to data published by Baker Hughes, U.S. crude oil drilling
rig counts have declined by approximately 35% to 257 as of
July 24, 2009, compared to 393 crude oil drilling rigs as
of July 25, 2008, and have declined approximately 42%
compared to the peak crude oil drilling rig count of 442 in
November 2008. Baker Hughes also published that U.S. crude
oil drilling rig counts have recently increased from a low of
179 as of June 5, 2009 to 257 as of July 24, 2009, an
increase of 44%. Even though crude oil prices have steadily
increased from $33.87/Bbl in January 2009 to $66.93/Bbl in July
2009, the forward curve for WTI crude oil pricing continues to
reflect reductions in demand for crude oil. We also believe that
current reduced crude oil drilling activity will persist until
the economic environment in the United States improves and
increases the demand for crude oil.
U.S. NGL Supply and Outlook.
The domestic
and global recession and resulting drop in demand for NGL
products has significantly impacted the price for NGLs. NGL
prices have dropped dramatically since the peak NGL basket
pricing of $2.21/gallon in June 2008 to a low of $0.70/gallon in
January 2009, a 68% decline, increasing to $0.95/gallon in July
2009, a 57% decline from June 2008. NGL basket pricing
historically correlated to WTI crude oil pricing. WTI crude oil
pricing has declined from a peak of
$134.62/bbl
in July 2008 to a low of $33.87/Bbl in January 2009, a 75%
decline, increasing to $66.93/Bbl in July 2009, a 50% decline
from July 2008. The forward curve for NGL basket pricing and WTI
crude oil pricing reflects continued reductions in demand for
NGL products. We also believe that the current reduced NGL
products pricing will persist until the economic environment in
the United States improves and increases the demand for NGL
products.
A number of the areas in which Hiland Partners operates are
experiencing a significant decline in drilling activity as a
result of the recent decline in natural gas and crude oil
prices. Along Hiland Partners systems, excluding its North
Dakota Bakken gathering system, which commenced operations in
late April 2009, Hiland Partners connected 23 wells during
the first six months of 2009 as compared to 55 wells
connected during the same period in 2008. Currently, there is
one rig drilling along Hiland Partners dedicated acreage
company wide. While we anticipate continued exploration and
production activities in the areas in which Hiland Partners
operates, albeit at depressed levels, fluctuations in energy
prices can greatly affect production rates
42
and investments by third parties in the development of natural
gas and crude oil reserves. Drilling activity generally
decreases as natural gas and crude oil prices decrease. Hiland
Partners has no control over the level of drilling activity in
the areas of its operations.
Disruption
to functioning of capital markets
Multiple events during 2008 and 2009 involving numerous
financial institutions have effectively restricted current
liquidity within the capital markets throughout the United
States and around the world. Despite efforts by treasury and
banking regulators in the United States, Europe and other
nations around the world to provide liquidity to the financial
sector, capital markets currently remain constrained. We expect
that ours and Hiland Partners ability to raise debt and
equity at prices that are similar to offerings in recent years
to be limited over the next three to six months and possibly
longer should capital markets remain constrained.
Overview
of Hiland Holdings
We are a Delaware limited partnership formed in May 2006 to own
Hiland Partners GP, LLC, the general partner of Hiland Partners,
and certain other common and subordinated units in Hiland
Partners. We reflect our ownership interest in Hiland Partners
on a consolidated basis, which means that our financial results
are combined with Hiland Partners financial results. The
noncontrolling partners interest in income (loss) of
Hiland Partners is reflected as an equity amount of consolidated
net income (loss) attributable to the noncontrolling
partners interest on our consolidated statements of
operations and the ownership interests of the noncontrolling
partners interest in Hiland Partners is presented within
the equity section of our consolidated balance sheets. Hiland
Partners GP, LLCs results of operations principally
reflect the results of operations of Hiland Partners and are
adjusted for noncontrolling partners interests in Hiland
Partners net income (loss).
Our cash generating assets consist of our direct or indirect
ownership interests in Hiland Partners. Hiland Partners is
principally engaged in purchasing, gathering, compressing,
dehydrating, treating, processing and marketing of natural gas,
fractionating and marketing of NGLs and providing air
compression and water injection services for oil and gas
secondary recovery operations. Our aggregate ownership interests
in Hiland Partners consist of the following:
|
|
|
|
|
the 2% general partner interest in Hiland Partners;
|
|
|
|
100% of the incentive distribution rights in Hiland
Partners; and
|
|
|
|
2,321,471 common units and 3,060,000 subordinated units of
Hiland Partners, representing a 57.5% limited partner interest
in Hiland Partners.
|
Hiland Partners is required by its partnership agreement to
distribute all of its cash on hand at the end of each quarter,
after establishing reserves to provide for the proper conduct of
its business or to provide funds for future distributions. If
commodity prices do not significantly improve above the current
forward prices for 2009, Hiland Partners 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.
43
Cash Distributions.
Hiland Partners has
suspended quarterly cash distributions on its common and
subordinated units beginning with the first quarter distribution
of 2009 due to the impact of lower commodity prices and reduced
drilling activity on Hiland Partners current and projected
throughput volumes, midstream segment margins and cash flows
combined with future required levels of capital expenditures and
the outstanding indebtedness under Hiland Partners senior
secured revolving credit facility. Under the terms of the Hiland
Partners partnership agreement, the Hiland Partners common units
carry an arrearage of $0.90 per unit, representing the minimum
quarterly distribution to the Hiland Partners common units for
the first and second quarter of 2009 that must be paid before
Hiland Partners can make distributions to the Hiland Partners
subordinated units. We own 3,060,000 of the Hiland Partners
subordinated units which will not receive a cash distribution
until the distribution arrearage to the Hiland Partners common
units is paid. The following table presents Hiland
Partners distributions paid to us on August 14, 2008
for the three and six months ended June 30, 2008.
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Six Months
|
|
|
|
Ended
|
|
|
Ended
|
|
Hiland Partners Distributions
|
|
June 30, 2008
|
|
|
June 30, 2008
|
|
|
Common units
|
|
$
|
2,003
|
|
|
$
|
3,080
|
|
Subordinated units
|
|
|
2,639
|
|
|
|
6,015
|
|
Ownership interest in Hiland Partners general partner
|
|
|
208
|
|
|
|
402
|
|
General partners incentive distribution rights
|
|
|
2,107
|
|
|
|
3,896
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,957
|
|
|
$
|
13,393
|
|
|
|
|
|
|
|
|
|
|
Because we own Hiland Partners GP, LLC, the distributions to us
include the distributions made to Hiland Partners GP, LLC.
Overview
of Hiland Partners
Hiland Partners is engaged in purchasing, gathering,
compressing, dehydrating, treating, processing and marketing of
natural gas, fractionating and marketing of NGLs, and providing
air compression and water injection services for oil and gas
secondary recovery operations. Hiland Partners operations
are primarily located in the Mid-Continent and Rocky Mountain
regions of the United States.
Hiland Partners manages its business and analyzes and reports
its results of operations on a segment basis. Hiland
Partners operations are divided into two business segments:
|
|
|
|
|
Midstream Segment
, which is engaged in purchasing,
gathering, compressing, dehydrating, treating, processing and
marketing of natural gas and the fractionating and marketing of
NGLs. The midstream segment generated 94.9% and 95.6% of total
segment margin for the three months ended June 30, 2009 and
2008, respectively and 94.6% and 95.2% of total segment margin
for the six months ended June 30, 2009 and 2008,
respectively.
|
|
|
|
Compression Segment
, which is engaged in providing air
compression and water injection services for oil and gas
secondary recovery operations that are ongoing in North Dakota.
The compression segment generated 5.1% and 4.4% of total segment
margin for the three months ended June 30, 2009 and 2008,
respectively and 5.4% and 4.8% of total segment margin for the
six months ended June 30, 2009 and 2008, respectively.
|
Hiland Partners midstream assets currently consist of 15
natural gas gathering systems with approximately
2,147 miles of gas gathering pipelines, six natural gas
processing plants, seven natural gas treating facilities and
three NGL fractionation facilities. Hiland Partners
compression assets consist of two air compression facilities and
a water injection plant.
Hiland Partners results of operations are determined
primarily by five interrelated variables: (1) the volume of
natural gas gathered through its pipelines; (2) the volume
of natural gas processed; (3) the volume of NGLs
fractionated; (4) the levels and relationship of natural
gas and NGL prices; and (5) Hiland Partners current
contract portfolio. Because Hiland Partners profitability
is a function of the difference between the
44
revenues it receives from its operations, including revenues
from the products it sells, and the costs associated with
conducting its operations, including the costs of products it
purchases, increases or decreases in Hiland Partners
revenues alone are not necessarily indicative of increases or
decreases in its profitability. To a large extent, Hiland
Partners contract portfolio, the pricing environment for
natural gas and NGLs and the price of NGLs relative to natural
gas prices will dictate increases or decreases in its
profitability. Hiland Partners profitability is also
dependent upon prices and market demand for natural gas and
NGLs, which fluctuate with changes in market and economic
conditions and other factors.
Recent
Events
Merger Agreements.
On June 1, 2009, the
Partnership and Hiland Partners 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
Partnerships 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 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.
SEC Filings.
On July 1, 2009,
(i) the Partnership, Hiland Partners and its general
partner, Hiland Partners GP, LLC, 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 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.
45
Hedging Transactions.
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.
Class Action Lawsuits.
Three putative
unitholder class action lawsuits have been filed relating to the
Hiland Partners Merger and the Hiland Holdings Merger. These
lawsuits are as follows: (i)
Robert Pasternack v.
Hiland Partners, LP et al.
, In the Court of Chancery of the
State of Delaware, Civil Action
No. 4397-VCS;
(ii)
Andrew Jones v. Hiland Partners, LP et
al.
, In the Court of Chancery of the State of Delaware,
Civil Action
No. 4558-VCS;
and (iii)
Arthur G. Rosenberg v. Hiland Partners,
LP et al.
, In the District Court of Garfield County, State
of Oklahoma, Case
No. C3-09-211-02.
The lawsuits name as defendants the Partnership, Hiland
Partners, the general partner of each of the Partnership and
Hiland Partners, and the members of the board of directors of
each of the Partnership and Hiland Partners. The lawsuits
challenge both the Hiland Partners Merger and the Hiland
Holdings Merger. The lawsuits allege claims of breach of the
Partnership Agreement and breach of fiduciary duty on behalf of
(i) a purported class of common unitholders of the
Partnership and (ii) a purported class of our common
unitholders of Hiland Partners.
On July 10, 2009, the court in which the Oklahoma case is
pending granted our motion to stay the Oklahoma lawsuit in favor
of the Delaware lawsuits. On July 31, 2009, the plaintiff
in the first-filed Delaware case
(Pasternack)
filed an
Amended Class Action Complaint and a motion to enjoin the
mergers. This Amended Class Action Complaint alleges, among
other things, that (i) the original consideration and
revised consideration offered by the Hamm Parties is unfair and
inadequate, (ii) the members of the conflicts committees of
the general partner of each of the Partnership and Hiland
Partners that were charged with reviewing the proposals and
making a recommendation to each committees respective
board of directors lacked any meaningful independence,
(iii) the defendants acted in bad faith in recommending and
approving the Hiland Partners Merger or the Hiland Holdings
Merger, and (iv) the disclosures in the Preliminary Proxy
Statement filed by the Partnership and Hiland Partners are
materially misleading. The
Pasternack
plaintiff seeks to
preliminarily enjoin the defendants from proceeding with or
consummating the mergers and seeks an order requiring defendants
to supplement the Preliminary Proxy Statement with certain
information. 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.
Distributions.
We and Hiland Partners have
suspended quarterly cash distributions on common and
subordinated units beginning with the first quarter distribution
of 2009 due to the impact of lower commodity prices and reduced
drilling activity on Hiland Partners current and projected
throughput volumes, midstream segment margins and cash flows
combined with future required levels of capital expenditures and
the outstanding indebtedness under ours and Hiland
Partners senior secured revolving credit facilities. Under
the terms of Hiland Partners partnership agreement, Hiland
Partners common units will carry an arrearage of $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.
Credit Facility.
Pursuant to the terms of our
existing credit agreement, we elected to reduce the commitment
level on the credit facility from $10.0 million to
$3.0 million on August 7, 2009. Concurrently with the
reduction of the commitment level to $3.0 million, the
existing lenders under the credit facility assigned their
interests in the facility to 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.
46
Historical
Results of Operations
Our historical results of operations for the periods presented
may not be comparable, either from period to period or going
forward primarily due to decreased natural gas and natural gas
liquid prices and significantly increased volumes and operating
expenses at Hiland Partners Woodford Shale and Badlands
gathering systems.
Our
Results of Operations
The following table presents a reconciliation of the non-GAAP
financial measure of total segment margin (which consists of the
sum of midstream segment margin and compression segment margin)
to operating income on a historical basis for each of the
periods indicated. We view total segment margin, a non-GAAP
financial measure, as an important performance measure of the
core profitability of our operations because it is directly
related to our volumes and commodity price changes. We review
total segment margin monthly for consistency and trend analysis.
We define midstream segment margin as midstream revenue less
midstream purchases. Midstream revenue includes revenue from the
sale of natural gas, NGLs and NGL products resulting from Hiland
Partners gathering, treating, processing and fractionation
activities and fixed fees associated with the gathering of
natural gas and the transportation and disposal of saltwater.
Midstream purchases include the cost of natural gas, condensate
and NGLs purchased by Hiland Partners from third parties, the
cost of natural gas, condensate and NGLs purchased by Hiland
Partners from affiliates, and the cost of crude oil purchased by
Hiland Partners from third parties. We define compression
segment margin as the revenue derived from Hiland Partners
compression segment. Total segment margin may not be comparable
to similarly titled measures of other companies as other
companies may not calculate total segment margin in the same
manner.
The results of our operations discussed below principally
reflect the activities of Hiland Partners. Because our
consolidated financial statements include the results of Hiland
Partners, our financial statements are substantially similar to
the financial statements of Hiland Partners. However, the
noncontrolling partners interest in income (loss) of
Hiland Partners is reflected as an equity amount of consolidated
net income (loss) attributable to the noncontrolling limited
partners interest on our consolidated statements of
operations and the ownership interests of the noncontrolling
partners interest in Hiland Partners is presented within
the equity section of our consolidated balance sheets. The
noncontrolling partners interest in Hiland Partners is not
reflected on Hiland Partners consolidated financial
statements.
47
Set forth in the tables below are certain financial and
operating data for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Total Segment Margin Data:
|
|
|
|
|
|
|
|
|
Midstream revenues
|
|
$
|
48,874
|
|
|
$
|
114,236
|
|
Midstream purchases
|
|
|
26,999
|
|
|
|
88,073
|
|
|
|
|
|
|
|
|
|
|
Midstream segment margin
|
|
|
21,875
|
|
|
|
26,163
|
|
Compression revenues(1)
|
|
|
1,205
|
|
|
|
1,205
|
|
|
|
|
|
|
|
|
|
|
Total segment margin(2)
|
|
$
|
23,080
|
|
|
$
|
27,368
|
|
|
|
|
|
|
|
|
|
|
Summary of Operations Data:
|
|
|
|
|
|
|
|
|
Midstream revenues
|
|
$
|
48,874
|
|
|
$
|
114,236
|
|
Compression revenues
|
|
|
1,205
|
|
|
|
1,205
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
50,079
|
|
|
|
115,441
|
|
Midstream purchases (exclusive of items shown separately below)
|
|
|
26,999
|
|
|
|
88,073
|
|
Operations and maintenance
|
|
|
7,785
|
|
|
|
7,551
|
|
Depreciation, amortization and accretion
|
|
|
10,824
|
|
|
|
9,456
|
|
Bad debt
|
|
|
|
|
|
|
8,103
|
|
General and administrative
|
|
|
4,606
|
|
|
|
2,333
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
50,214
|
|
|
|
115,516
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(135
|
)
|
|
|
(75
|
)
|
Other income (expense), net
|
|
|
(2,795
|
)
|
|
|
(3,225
|
)
|
|
|
|
|
|
|
|
|
|
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
|
)
|
|
|
|
|
|
|
|
|
|
Hiland Partners Operating Data:
|
|
|
|
|
|
|
|
|
Inlet natural gas (Mcf/d)
|
|
|
272,666
|
|
|
|
246,339
|
|
Natural gas sales (MMBtu/d)
|
|
|
87,273
|
|
|
|
86,203
|
|
NGL sales (Bbls/d)
|
|
|
7,260
|
|
|
|
5,979
|
|
48
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Total Segment Margin Data:
|
|
|
|
|
|
|
|
|
Midstream revenues
|
|
$
|
100,017
|
|
|
$
|
204,510
|
|
Midstream purchases
|
|
|
58,215
|
|
|
|
156,691
|
|
|
|
|
|
|
|
|
|
|
Midstream segment margin
|
|
|
41,802
|
|
|
|
47,819
|
|
Compression revenues(1)
|
|
|
2,410
|
|
|
|
2,410
|
|
|
|
|
|
|
|
|
|
|
Total segment margin(2)
|
|
$
|
44,212
|
|
|
$
|
50,229
|
|
|
|
|
|
|
|
|
|
|
Summary of Operations Data:
|
|
|
|
|
|
|
|
|
Midstream revenues
|
|
$
|
100,017
|
|
|
$
|
204,510
|
|
Compression revenues
|
|
|
2,410
|
|
|
|
2,410
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
102,427
|
|
|
|
206,920
|
|
Midstream purchases (exclusive of items shown separately below)
|
|
|
58,215
|
|
|
|
156,691
|
|
Operations and maintenance
|
|
|
15,480
|
|
|
|
14,320
|
|
Depreciation, amortization and accretion
|
|
|
21,082
|
|
|
|
18,671
|
|
Property impairments
|
|
|
950
|
|
|
|
|
|
Bad debt
|
|
|
|
|
|
|
8,103
|
|
General and administrative
|
|
|
8,433
|
|
|
|
5,018
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
104,160
|
|
|
|
202,803
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(1,733
|
)
|
|
|
4,117
|
|
Other income (expense), net
|
|
|
(5,311
|
)
|
|
|
(6,783
|
)
|
|
|
|
|
|
|
|
|
|
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
|
)
|
|
|
|
|
|
|
|
|
|
Hiland Partners Operating Data:
|
|
|
|
|
|
|
|
|
Inlet natural gas (MCF/d)
|
|
|
274,521
|
|
|
|
236,885
|
|
Natural gas sales (MMBTU/d)
|
|
|
89,579
|
|
|
|
86,174
|
|
NGL sales (Bbls/d)
|
|
|
7,155
|
|
|
|
5,626
|
|
|
|
|
(1)
|
|
Compression revenues and compression segment margin are the
same. There are no compression purchases associated with the
compression segment.
|
|
(2)
|
|
Reconciliation of total segment margin to operating income:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
2009
|
|
2008
|
|
|
(In thousands)
|
|
Reconciliation of Total Segment Margin to Operating Loss
|
|
|
|
|
|
|
|
|
Operating loss
|
|
$
|
(135
|
)
|
|
$
|
(75
|
)
|
Add:
|
|
|
|
|
|
|
|
|
Operations and maintenance expenses
|
|
|
7,785
|
|
|
|
7,551
|
|
Depreciation, amortization and accretion
|
|
|
10,824
|
|
|
|
9,456
|
|
Bad debt
|
|
|
|
|
|
|
8,103
|
|
General and administrative
|
|
|
4,606
|
|
|
|
2,333
|
|
|
|
|
|
|
|
|
|
|
Total segment margin
|
|
$
|
23,080
|
|
|
$
|
27,368
|
|
|
|
|
|
|
|
|
|
|
49
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Reconciliation of Total Segment Margin to Operating (loss)
Income
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
$
|
(1,733
|
)
|
|
$
|
4,117
|
|
Add:
|
|
|
|
|
|
|
|
|
Operations and maintenance expenses
|
|
|
15,480
|
|
|
|
14,320
|
|
Depreciation, amortization and accretion
|
|
|
21,082
|
|
|
|
18,671
|
|
Property impairments
|
|
|
950
|
|
|
|
|
|
Bad debt
|
|
|
|
|
|
|
8,103
|
|
General and administrative
|
|
|
8,433
|
|
|
|
5,018
|
|
|
|
|
|
|
|
|
|
|
Total segment margin
|
|
$
|
44,212
|
|
|
$
|
50,229
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended June 30, 2009 Compared with Three Months Ended
June 30, 2008
Revenues.
Total revenues (midstream and
compression) were $50.1 million for the three months ended
June 30, 2009 compared to $115.4 million for the three
months ended June 30, 2008, a decrease of
$65.4 million, or (56.7%). This $65.4 million decrease
was primarily due to significantly lower average realized
natural gas and NGL sales prices for all of our gathering
systems. Natural gas sales volumes increased by
7,297 MMBtu/d (MMBtu per day) at the Woodford Shale and
Kinta Area gathering systems and NGL sales volumes increased by
1,299 Bbls/d (Bbls per day) at the Woodford Shale, Badlands
and Matli gathering systems for the three months ended
June 30, 2009 compared to the same period in 2008. The
North Dakota Bakken gathering system, which commenced operations
in late April 2009, contributed natural gas sales volumes of
1,323 MMBtu/d and NGL sales volumes of 919 Bbls/d
during the three months ended June 30, 2009. Natural gas
sales volumes decreased by 7,225 MMBtu/d at the Eagle
Chief, Matli and Badlands gathering systems and NGL sales
volumes decreased by 223 Bbls/d at the Bakken and Eagle
Chief gathering systems compared to the same period in 2008.
Revenues from compression assets were the same for both periods.
Midstream revenues were $48.9 million for the three months
ended June 30, 2009 compared to $114.2 million for the
three months ended June 30, 2008, a decrease of
$65.4 million, or (57.2%). Of this $65.4 million
decrease in midstream revenues, approximately $73.9 million
was attributable to significantly lower average realized natural
gas and NGL sales prices for all of our gathering systems,
partially offset by approximately $8.5 million attributable
to revenues from overall increases in natural gas and NGL sales
volumes for the three months ended June 30, 2009 as
compared to the same period in 2008.
Inlet natural gas was 272,666 Mcf/d (Mcf per day) for the
three months ended June 30, 2009 compared to
246,339 Mcf/d for the three months ended June 30,
2008, an increase of 26,327 Mcf/d, or 10.7%. This increase
is primarily attributable to volume growth totaling
31,111 Mcf/d at the Kinta Area, Woodford Shale and Badlands
gathering systems and volumes of 2,171 Mcf/d at the North
Dakota Bakken gathering system, which commenced operations in
late April 2009, offset by volume declines totaling
6,616 Mcf/d at the Eagle Chief and Matli gathering systems.
Natural gas sales volumes were 87,273 MMBtu/d for the three
months ended June 30, 2009 compared to 86,203 MMBtu/d
for the three months ended June 30, 2008, an increase of
1,070 MMBtu/d, or 1.2%. This 1,070 MMBtu/d net
increase in natural gas sales volumes was attributable to
increased natural gas sales volumes of 7,297 MMBtu/d at the
Woodford Shale and Kinta Area gathering systems and natural gas
sales volumes of 1,323 MMBtu/d at the North Dakota Bakken
gathering system which commenced operations in late April 2009,
offset by reduced natural gas sales volumes totaling
7,225 MMBtu/d at our Eagle Chief, Matli and Badlands
gathering systems.
NGL sales volumes were 7,260 Bbls/d for the three months
ended June 30, 2009 compared to 5,979 Bbls/d for the
three months ended June 30, 2008, a net increase of
1,281 Bbls/d, or 21.4%. This 1,281 Bbls/d net
50
increase in NGL sales volumes is primarily attributable to
increased NGL sales volumes totaling 1,299 Bbls/d at the
Woodford Shale, Badlands and Matli gathering systems and NGL
sales volumes of 206 Bbls/d at the North Dakota Bakken
gathering system, which commenced operations in late April 2009,
offset by reduced NGL sales volumes totaling 223 Bbls/d at
our Bakken and Eagle Chief gathering systems.
Average realized natural gas sales prices were $3.02 per MMBtu
for the three months ended June 30, 2009 compared to $9.29
per MMBtu for the three months ended June 30, 2008, a
decrease of $6.27 per MMBtu, or (67.5%). Average realized NGL
sales prices were $0.66 per gallon for the three months ended
June 30, 2009 compared to $1.64 per gallon for the three
months ended June 30, 2008, a decrease of $0.98 per gallon
or (59.8%). The decrease in our average realized natural gas and
NGL sales prices was primarily a result of significantly lower
index prices for natural gas and posted prices for NGLs during
the three months ended June 30, 2009 compared to the three
months ended June 30, 2008.
Net cash received from our counterparty on cash flow swap
contracts for natural gas sales and natural gas purchase
derivative transactions that closed during the three months
ended June 30, 2009 totaled $2.6 million compared to
$0.1 million for the three months ended June 30, 2008.
The $2.6 million gain for the three months ended
June 30, 2009 increased averaged realized natural gas
prices to $3.02 per MMBtu from $2.69 per MMBtu, an increase of
$0.33 per MMBtu. The $0.1 million net gain was immaterial
to average realized natural gas sales prices for the three
months ended June 30, 2008. We had no cash flow swap
contracts for NGLs during the three months ended June 30,
2009. Cash paid to our counterparty on cash flow swap contracts
for NGL derivative transactions that closed during the three
months ended June 30, 2008 totaled $3.1 million. The
$3.1 million loss for the three months ended June 30,
2008 reduced averaged realized NGL prices to $1.64 per gallon
from $1.76 per gallon, a decrease of $0.12 per gallon.
Compression revenues were $1.2 million for the each of the
three months ended June 30, 2009 and 2008.
Midstream Purchases.
Midstream purchases were
$27.0 million for the three months ended June 30, 2009
compared to $88.1 million for the three months ended
June 30, 2008, a decrease of $61.1 million, or
(69.3%). This $61.1 million decrease is due to
significantly reduced natural gas and NGL purchase prices,
resulting in decreased midstream purchases for all of our
gathering systems compared to the same period in 2008, with the
exception of $0.6 million of midstream purchases at the
North Dakota Bakken gathering system, which commenced operations
in late April 2009.
Midstream Segment Margin.
Midstream segment
margin was $21.9 million for the three months ended
June 30, 2009 compared to $26.2 million for the three
months ended June 30, 2008, a decrease of
$4.3 million, or (16.4%). The decrease is primarily due to
unfavorable gross processing spreads and significantly lower
average realized natural gas and NGL prices despite the overall
increase in volumes. As a percent of midstream revenues,
midstream segment margin was 44.8% for the three months ended
June 30, 2009 compared to 22.9% for the three months ended
June 30, 2008, an increase of 21.9%. This increase is
attributable to (i) the positive impact of fixed fee
arrangement contracts which are not affected by realized natural
gas and NGL selling prices, (ii) improvements in third
party processing arrangements at the Woodford Shale gathering
system, (iii) increased volumes under favorable
percentage-of-proceeds
contracts at the North Dakota Bakken and Badlands gathering
systems and (iv) gains on closed/settled derivative
transactions and unrealized non-cash gains on open derivative
transactions for the three months ended June 30, 2009
totaling $2.8 million compared to net losses of
$3.1 million on closed/settled derivative transactions and
unrealized non-cash losses on open derivative transactions for
the three months ended June 30, 2008, including an
unrealized non-cash loss of $1.5 million related to a
non-qualifying
mark-to-market
cash flow hedge for forecasted sales in 2010.
Operations and Maintenance.
Operations and
maintenance expense totaled $7.8 million for the three
months ended June 30, 2009 compared with $7.6 million
for the three months ended June 30, 2008, a net increase of
only $0.2 million, or 3.1%. The net increase in operations
and maintenance of $0.2 million compared to the same period
in 2008 includes (i) an increase of $0.2 million at
the Badlands gathering system, (ii) $0.4 million
attributable to the North Dakota Bakken gathering system, which
commenced operations in late April 2009, (iii) decreases
totaling $0.4 million at the Kinta Area, Worland, Eagle
Chief and Matli gathering systems and (iv) a decrease of
$0.1 million related to compression operations.
51
Depreciation, Amortization and
Accretion.
Depreciation, amortization and
accretion expense totaled $10.8 million for the three
months ended June 30, 2009 compared with $9.5 million
for the three months ended June 30, 2008, an increase of
$1.4 million, or 14.5%. This $1.4 million increase was
primarily attributable to increased depreciation of
$0.5 million on the Kinta Area gathering system,
$0.3 million each on the Woodford Shale and Badlands
gathering systems and $0.2 million attributable to the
North Dakota Bakken gathering system, which commenced operations
in late April 2009.
Bad Debt.
Neither we nor Hiland Partners had a
bad debt for the three months ended June 30, 2009. For the
three months ended June 30, 2008, Hiland Partners
determined that collection of a trade accounts receivable from a
significant customer totaling $8.1 million was doubtful.
Accordingly, Hiland Partners increased its reserve for doubtful
accounts and recorded a bad debt expense of $8.1 million.
General and Administrative.
General and
administrative expense totaled $4.6 million for the three
months ended June 30, 2009 compared with $2.3 million
for the three months ended June 30, 2008, an increase of
$2.3 million, or 97.4%. Expenses related to the going
private proposals were $2.4 million for the three months
ended June 30, 2009. Public company expenses and directors
fees decreased by $0.1 million for the three months ended
June 30, 2009 as compared to the three months ended
June 30, 2008.
Other Income (Expense).
Other income (expense)
totaled $(2.8) million for the three months ended
June 30, 2009 compared with $(3.2) million for the
three months ended June 30, 2008, a decrease in expense of
$0.4 million. The decrease is primarily attributable lower
interest rates incurred on Hiland Partners credit facility
during the three months ended June 30, 2009 compared to
interest rates incurred during the three months ended
June 30, 2008, offset by interest expense of
$0.5 million related to Hiland Partners interest rate
swap during the three months ended June 30, 2009 which did
not exist in 2008 and increased interest expense on our and
Hiland Partners additional borrowings for the three months
ended June 30, 2009 compared to the same period in 2008.
Noncontrolling Partners Interest in Loss of Hiland
Partners.
The noncontrolling partners
interest in loss of Hiland Partners, which represents the
allocation of Hiland Partners earnings or loss to its limited
partner interests not owned by us, totaled a loss of
$0.4 million for the three months ended June 30, 2009
compared to a $2.2 million loss for the three months ended
June 30, 2008, a decreased loss of $1.8 million.
Six
Months Ended June 30, 2009 Compared with Six Months Ended
June 30, 2008
Revenues.
Total revenues (midstream and
compression) were $102.4 million for the six months ended
June 30, 2009 compared to $206.9 million for the six
months ended June 30, 2008, a decrease of
$104.5 million, or (51.0%). This $104.5 million
decrease was primarily due to significantly lower average
realized natural gas and NGL sales prices for all of our
gathering systems. Natural gas sales volumes increased by
7,838 MMBtu/d at the Woodford Shale, Kinta Area, Badlands
and Bakken gathering systems and NGL sales volumes increased by
1,637 Bbls/d at the Woodford Shale, Badlands and Matli
gathering systems for the six months ended June 30, 2009
compared to the same period in 2008. The North Dakota Bakken
gathering system, which commenced operations in late April 2009,
contributed natural gas sales volumes of 1,323 MMBtu/d and
NGL sales volumes of 919 Bbls/d during the six months ended
June 30, 2009. Natural gas sales volumes decreased by
4,700 MMBtu/d at the Eagle Chief and Matli gathering
systems and NGL sales volumes decreased by 200 Bbls/d at
the Eagle Chief and Bakken gathering systems compared to the
same period in 2008. Revenues from compression assets were the
same for both periods.
Midstream revenues were $100.0 million for the six months
ended June 30, 2009 compared to $204.5 million for the
six months ended June 30, 2008, a decrease of
$104.5 million, or (51.1%). Of this $104.5 million
decrease in midstream revenues, approximately
$126.9 million was attributable to significantly lower
average realized natural gas and NGL sales prices for all of our
gathering systems, partially offset by approximately
$22.4 million attributable to revenues from overall
increases in natural gas and NGL sales volumes for the six
months ended June 30, 2009 as compared to the same period
in 2008.
Inlet natural gas was 274,521 Mcf/d (Mcf per day) for the
six months ended June 30, 2009 compared to
236,885 Mcf/d for the six months ended June 30, 2008,
an increase of 37,636 Mcf/d, or 15.9%. This increase
52
is primarily attributable to volume growth totaling
42,260 Mcf/d at the Woodford Shale, Kinta Area and Badlands
gathering systems, volumes of 1,091 Mcf/d at the North
Dakota Bakken gathering system, which commenced operations in
late April 2009, offset by volume declines totaling
5,316 Mcf/d at the Eagle Chief and Matli gathering systems.
Natural gas sales volumes were 89,579 MMBtu/d for the six
months ended June 30, 2009 compared to 86,174 MMBtu/d
for the six months ended June 30, 2008, an increase of
3,405 MMBtu/d, or 4.0%. This 3,405 MMBtu/d net
increase in natural gas sales volumes was attributable to
increased natural gas sales volumes of 7,640 MMBtu/d at the
Woodford Shale and Kinta Area gathering systems, natural gas
sales volumes of 665 MMBtu/d at the North Dakota Bakken
gathering system, which commenced operations in late April 2009,
offset by reduced natural gas sales volumes totaling
4,700 MMBtu/d at our Eagle Chief and Matli gathering
systems.
NGL sales volumes were 7,155 Bbls/d for the six months
ended June 30, 2009 compared to 5,626 Bbls/d for the
six months ended June 30, 2008, a net increase of
1,529 Bbls/d, or 27.2%. This 1,529 Bbls/d net increase
in NGL sales volumes is primarily attributable to increased NGL
sales volumes totaling 1,637 Bbls/d at our Woodford Shale,
Badlands and Matli gathering systems, NGL sales volumes of
104 Bbls/d at the North Dakota Bakken gathering system,
which commenced operations in late April 2009, offset by reduced
NGL sales volumes totaling 200 Bbls/d at our Eagle Chief
and Bakken gathering systems.
Average realized natural gas sales prices were $3.36 per MMBtu
for the six months ended June 30, 2009 compared to $8.29
per MMBtu for the six months ended June 30, 2008, a
decrease of $4.93 per MMBtu, or (59.5%). Average realized NGL
sales prices were $0.62 per gallon for the six months ended
June 30, 2009 compared to $1.53 per gallon for the six
months ended June 30, 2008, a decrease of $0.91 per gallon
or (59.5%). The decrease in our average realized natural gas and
NGL sales prices was primarily a result of significantly lower
index prices for natural gas and posted prices for NGLs during
the six months ended June 30, 2009 compared to the six
months ended June 30, 2008.
Net cash received from our counterparty on cash flow swap
contracts for natural gas sales and natural gas purchase
derivative transactions that closed during the six months ended
June 30, 2009 totaled $4.8 million compared to
$0.2 million for the six months ended June 30, 2008.
The $4.8 million gain for the six months ended
June 30, 2009 increased averaged realized natural gas
prices to $3.36 per MMBtu from $3.06 per MMBtu, an increase of
$0.3 per MMBtu. The $0.2 million net gain for the six
months ended June 30, 2008 increased averaged realized
natural gas prices to $8.29 per MMBtu from $8.28 per MMBtu, an
increase of $0.01 per MMBtu. We had no cash flow swap contracts
for NGLs during the six months ended June 30, 2009. Cash
paid to our counterparty on cash flow swap contracts for NGL
derivative transactions that closed during the six months ended
June 30, 2008 totaled $5.3 million. The
$5.3 million loss for the six months ended June 30,
2008 reduced averaged realized NGL prices to $1.53 per gallon
from $1.64 per MMBtu, a decrease of $0.11 per gallon.
Compression revenues were $2.4 million for the each of the
six months ended June 30, 2009 and 2008.
Midstream Purchases.
Midstream purchases were
$58.2 million for the six months ended June 30, 2009
compared to $156.7 million for the six months ended
June 30, 2008, a decrease of $98.5 million, or
(62.9%). This $98.5 million decrease is due to
significantly reduced natural gas and NGL purchase prices,
resulting in decreased midstream purchases for all of the
gathering systems compared to the same period in 2008, with the
exception of $0.6 million of midstream purchases at the
North Dakota Bakken gathering system, which commenced operations
in late April 2009.
Midstream Segment Margin.
Midstream segment
margin was $41.8 million for the six months ended
June 30, 2009 compared to $47.8 million for the six
months ended June 30, 2008, a decrease of
$6.0 million, or (12.6%). The decrease is primarily due to
unfavorable gross processing spreads and significantly lower
average realized natural gas and NGL prices despite the overall
increase in volumes and approximately $2.3 million of
foregone margin as a result of the nitrogen rejection plant at
the Badlands gathering system being taken out of service due to
equipment failure during the three months ended March 31,
2008. As a percent of midstream revenues, midstream segment
margin was 42.2% for the six months ended June 30, 2009
53
compared to 23.4% for the six months ended June 30, 2008,
an increase of 18.8%. This increase is attributable to
(i) the positive impact of fixed fee arrangement contracts
which are not affected by realized natural gas and NGL selling
prices, (ii) improvements in third party processing
arrangements at the Woodford Shale gathering system,
(iii) increased volumes under favorable
percentage-of-proceeds
contracts at the North Dakota Bakken and Badlands gathering
systems and (iv) gains on closed/settled derivative
transactions and unrealized non-cash gains on open derivative
transactions for the six months ended June 30, 2009
totaling $4.9 million compared to net losses of
$5.5 million on closed/settled derivative transactions and
unrealized non-cash losses on open derivative transactions for
the six months ended June 30, 2008, including an unrealized
non-cash loss of $1.5 million related to a non-qualifying
mark-to-market
cash flow hedge for forecasted sales in 2010.
Operations and Maintenance.
Operations and
maintenance expense totaled $15.5 million for the six
months ended June 30, 2009 compared with $14.3 million
for the six months ended June 30, 2008, an increase of
$1.2 million, or 8.1%. The net increase in operations and
maintenance of $1.2 million compared to the same period in
2008 includes (i) increases of $0.9 million and
$0.1 million at the Badlands and Woodford Shale gathering
systems, respectively,( ii) $0.5 million attributable
to the North Dakota Bakken gathering system, which commenced
operations in late April 2009, (iii) decreases totaling
$0.3 million at the Worland, Kinta Area, Bakken, Eagle
Chief and Matli gathering systems and (iv) a decrease of
$0.1 million related to compression operations.
Depreciation, Amortization and
Accretion.
Depreciation, amortization and
accretion expense totaled $21.1 million for the six months
ended June 30, 2009 compared with $18.7 million for
the six months ended June 30, 2008, an increase of
$2.4 million, or 12.9%. This $2.4 million increase was
primarily attributable to increased depreciation of
$0.8 million on the Woodford Shale gathering system
$0.7 million on the Kinta Area gathering system,
$0.5 million on the Badlands gathering system and
$0.2 million attributable to the North Dakota Bakken
gathering system, which commenced operations in late April 2009.
Property Impairments.
Property impairment
expense related to natural gas gathering systems in Texas and
Mississippi totaled $1.0 million for the six months ended
June 30, 2009. Hiland Partners had no property impairments
during the six months ended June 30, 2008.
Bad Debt.
Neither we nor Hiland Partners had a
bad debt for the six months ended June 30, 2009. For the
six months ended June 30, 2008 Hiland Partners determined
that collection of a trade accounts receivable from a
significant customer totaling $8.1 million was doubtful.
Accordingly, Hiland Partners increased its reserve for doubtful
accounts and recorded a bad debt expense of $8.1 million.
General and Administrative.
General and
administrative expense totaled $8.4 million for the six
months ended June 30, 2009 compared with $5.0 million
for the six months ended June 30, 2008, an increase of
$3.4 million, or 68.1%. Expenses related to the going
private proposals were $3.2 million for the six months
ended June 30, 2009. Salaries expense increased by
$0.3 million as a result of increased staffing and public
company expenses decreased by $0.1 million during the six
months ended June 30, 2009 as compared to the six months
ended June 30, 2008.
Other Income (Expense).
Other income (expense)
totaled $(5.3) million for the six months ended
June 30, 2009 compared with $(6.8) million for the six
months ended June 30, 2008, a decrease in expense of
$1.5 million. The decrease is primarily attributable lower
interest rates incurred on Hiland Partners credit facility
during the six months ended June 30, 2009 compared to
interest rates incurred during the six months ended
June 30, 2008, offset by interest expense of
$0.9 million related to Hiland Partners interest rate
swap during the six months ended June 30, 2009 which did
not exist in 2008 and increased interest expense on our and
Hiland Partners additional borrowings for the six months
ended June 30, 2009 compared to the same period in 2008.
Noncontrolling Partners Interest in Loss of Hiland
Partners.
The noncontrolling partners
interest in loss of Hiland Partners, which represents the
allocation of Hiland Partners earnings or loss to its limited
partner interests not owned by us, totaled a loss of
$1.6 million for the six months ended June 30, 2009
compared to a $2.4 million loss for the six months ended
June 30, 2008, a decreased loss of $0.8 million.
54
LIQUIDITY
AND CAPITAL RESOURCES
U.S.
Natural Gas, Crude Oil and NGL Supplies and
Outlook
The drop in demand for natural gas, crude oil and NGL products
since the third quarter of 2008 continues to impact the price
for natural gas, crude oil and NGLs. Natural gas prices have
declined significantly since the peak NYMEX Henry Hub last day
settle price of $13.11/MMBtu in July 2008 to the NYMEX Henry Hub
last day settle price of $3.95 in July 2009, a 70% decline. WTI
crude oil pricing has declined from a peak of $134.62/bbl in
July 2008 to a low of $33.87/Bbl in January 2009, a 75% decline,
increasing to $66.93/Bbl in July 2009, a 50% decline from July
2008. NGL basket pricing, which historically has correlated to
WTI crude oil pricing, has dropped since the peak NGL basket
pricing of $2.21/gallon in June 2008 to a low of
$0.70/gallon
in January 2009, a 68% decline, increasing to $0.95/gallon in
July 2009, a 57% decline from June 2008. Forward curves for
natural gas, crude oil and NGL basket pricing reflect continued
reductions in demand for natural gas, crude oil and NGL
products. A number of the areas in which Hiland Partners
operates are experiencing a significant decline in drilling
activity as a result of the recent decline in natural gas and
crude oil prices. While Hiland Partners anticipates continued
exploration and production activities in the areas in which it
operates, albeit at depressed levels, fluctuations in energy
prices can greatly affect production rates and investments by
third parties in the development of natural gas and crude oil
reserves. Drilling activity generally decreases as natural gas
and crude oil prices decrease. Hiland Partners has no control
over the level of drilling activity in the areas of its
operations.
Disruption
to Functioning of Capital Markets
Multiple events during 2008 and 2009 involving numerous
financial institutions have effectively restricted current
liquidity within the capital markets throughout the United
States and around the world. Despite efforts by treasury and
banking regulators in the United States, Europe and other
nations around the world to provide liquidity to the financial
sector, capital markets currently remain constrained. We expect
that our ability to issue debt and equity at prices that are
similar to offerings in recent years will be limited over the
next three to six months and possibly longer should capital
markets remain constrained. Although Hiland Partners intends to
move forward with its planned capital expenditures attributable
to its existing facilities, Hiland Partners may revise the
timing and scope of these projects as necessary to adapt to
existing economic conditions and the benefits expected to accrue
to our and Hiland Partners unitholders from Hiland
Partners capital expenditures may be muted by substantial
cost of capital increases during this period.
Overview
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,
Hiland Partners 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
55
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.
We rely on distributions from Hiland Partners to fund cash
requirements for our operations. Cash generated from operations,
borrowings under Hiland Partners credit facility and funds
from private or public equity and future debt offerings have
historically been Hiland Partners primary sources of
liquidity. We believe that funds from these sources should be
sufficient to meet both Hiland Partners short-term working
capital requirements and its long-term capital expenditure
requirements. Hiland Partners ability to pay distributions
to unitholders, to fund planned capital expenditures and to make
acquisitions depends upon Hiland Partners future operating
performance and, more broadly, on the availability of equity and
debt financing, which will be affected by prevailing economic
conditions in Hiland Partners industry and financial,
business and other factors, many of which are beyond Hiland
Partners control. Due to (i) the impact of lower
commodity prices and drilling activity on Hiland Partners
current and projected throughput volumes, midstream segment
margin and cash flows; (ii) future required levels of
capital expenditures; (iii) the level of Hiland
Partners indebtedness relative to its projections and
(iv) managements expectation that Hiland Partners may
be in violation of the maximum consolidated funded debt to
EBITDA covenant ratio contained in its senior secured credit
facility as early as September 30, 2009, unless the ratio
is amended, Hiland Partners receives an infusion of equity
capital, Hiland Partners debt is restructured or Hiland
Partners is able to monetize
in-the-money
hedges positions. Hiland Partners has suspended quarterly cash
distributions on common and subordinated units beginning with
the first quarter distribution of 2009.
Cash
Flows from Operating Activities
Cash flows from operating activities increased by
$2.5 million to $24.5 million for the six months ended
June 30, 2009 from $22.0 million for the six months
ended June 30, 2009. During the six months ended
June 30, 2009 we received cash flows from customers of
approximately $108.4 million attributable to significantly
lower average realized natural gas and NGL sales prices,
partially offset by increased natural gas and NGLs volumes,
received $3.2 million from early settlements of derivative
contracts, made cash payments to our suppliers and employees of
approximately $81.9 million and made payments of interest
expense of $5.2 million, net of amounts capitalized,
resulting in cash received from operating activities of
$24.5 million. During the same six month period in 2008, we
received cash flows from customers of approximately
$184.3 million attributable to increased natural gas and
NGLs volumes and significantly higher average realized natural
gas and NGL sales prices, had cash payments to our suppliers and
employees of approximately $155.9 million and payment of
interest expense of $6.4 million, net of amounts
capitalized, resulting in cash received from operating
activities of $22.0 million.
Changes in cash receipts and payments are primarily due to the
timing of collections at the end of our reporting periods.
Hiland Partners collects and pays large receivables and payables
at the end of each calendar month. The timing of these payments
and receipts may vary by a day or two between month-end periods
and cause fluctuations in cash received or paid. Working capital
items, exclusive of cash, provided $5.0 million of cash
flows from operating activities during the six months ended
June 30, 2009. Working capital items, exclusive of cash,
used $5.0 million of cash flows from operating activities
during the six months ended June 30, 2008.
Net loss for the six months ended June 30, 2009 was
$(7.0) million, a increase in net loss of $4.4 million
from a net loss of $(2.7) million for the six months ended
June 30, 2008. Depreciation, amortization, accretion and
property impairments increased by $3.4 million to
$22.0 million for the six months ended June 30, 2009
from $18.7 million for the six months ended June 30,
2008.
Cash
Flows Used for Investing Activities
Cash flows used for investing activities, which represent
investments in property and equipment increased by
$6.9 million to $27.2 million for the six months ended
June 30, 2009 from $20.3 million for the six months
56
ended June 30, 2008 primarily due to cash flows invested
related to the construction of the North Dakota Bakken gathering
system.
Cash
Flows from Financing Activities
Cash flows from financing activities increased to
$5.2 million for the six months ended June 30, 2009
from $1.4 million for the six months ended June 30,
2008, an increase of $3.8 million. During the six months
ended June 30, 2009, Hiland Partners (i) borrowed
$12.0 million under its credit facility to fund its
internal expansion projects, (ii) repaid $3.0 million
on its credit facility upon net receipt of $3.2 million
early hedge settlements, (iii) distributed
$1.8 million to its noncontrolling partners and
(iv) made $0.4 million payments on capital lease
obligations. During the six months ended June 30, 2009, we
borrowed $0.5 million on our credit facility and made
distributions of $2.2 million to our unitholders.
During the six months ended June 30, 2008, Hiland Partners
(i) borrowed $19.0 million under its credit facility
to fund its internal expansion projects, (ii) received
capital contributions of $1.0 million as a result of
issuing Hiland Partners common units due to the exercise of
40,705 vested unit options, (iii) incurred debt issuance
costs of $0.3 million associated with the fourth amendment
to its credit facility amended in February 2008,
(iv) distributed $6.4 million to its minority interest
unitholders and (v) made $0.2 million payments on
capital lease obligations. During the six months ended
June 30, 2008, we made distributions of $11.6 million
to our unitholders.
Capital
Requirements
Hiland Partners midstream energy business is capital
intensive, requiring significant investment to maintain and
upgrade existing operations. Hiland Partners capital
requirements have consisted primarily of, and we anticipate will
continue to be:
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maintenance capital expenditures, which are capital expenditures
made to replace partially or fully depreciated assets to
maintain the existing operating capacity of Hiland
Partners assets and to extend their useful lives, or other
capital expenditures that are incurred in maintaining existing
system volumes and related cash flows; and
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expansion capital expenditures such as those to acquire
additional assets to grow Hiland Partners business, to
expand and upgrade gathering systems, processing plants,
treating facilities and fractionation facilities and to
construct or acquire similar systems or facilities.
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We believe that cash generated from the operations of Hiland
Partners business will be sufficient to meet its
anticipated maintenance capital expenditures for the next twelve
months. We anticipate that Hiland Partners expansion
capital expenditures will be funded through long-term borrowings
or other debt financings
and/or
equity offerings. See Credit Facility below for
information related to our and Hiland Partners credit
agreements.
Hiland Partners suspended quarterly cash distributions on common
and subordinated units beginning with the first quarter
distribution of 2009. As our only cash-generating assets are our
2% general partner interest, all of the incentive distribution
rights and a 57.4% 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.
57
North
Dakota Bakken
Hiland Partners North Dakota Bakken gathering system
presently consists of a
55-mile
gathering system located in northwestern North Dakota that will
gather natural gas associated with crude oil produced from the
Bakken shale and Three Forks/Sanish formations. Construction of
the gathering system, associated compression and treating
facilities and a processing plant commenced in October 2008 and
became fully operational in May 2009. As of June 30, 2009,
Hiland Partners has invested approximately $22.9 million in
the project.
Financial
Derivatives and Commodity Hedges
Hiland Partners has entered into certain financial derivative
instruments that are classified as cash flow hedges in
accordance with SFAS 133 and relate to forecasted sales in
2009 and 2010. Hiland Partners entered into these financial swap
instruments to hedge the forecasted natural gas sales against
the variability in expected future cash flows attributable to
changes in commodity prices. Under these swap agreements, Hiland
Partners receives a fixed price and pays a floating price based
on certain indices for the relevant contract period as the
underlying natural gas is sold.
The following table provides information about Hiland Partners
commodity based derivative instruments at June 30, 2009:
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Average
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Fixed
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Fair Value
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Description and Production Period
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Volume
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Price
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Asset
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(MMBtu)
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(Per MMBtu)
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Natural Gas Sold Fixed for Floating Price Swaps
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July 2009 June 2010
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2,136,000
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$
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7.01
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$
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6,188
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July 2010 December 2010
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1,068,000
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$
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6.73
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1,450
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$
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7,638
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Hiland Partners has entered into a financial derivative
instrument that is classified as a cash flow hedge in accordance
with SFAS 133 and relates to forecasted interest payments
under its credit facility in 2009. Hiland Partners entered into
this financial swap instrument to hedge forecasted interest
payments against the variable interest payments under its credit
facility. Under this contractual swap agreement, Hiland Partners
pays a fixed interest rate and receives a floating rate based on
one month LIBOR on the notional amount for the contract period.
The following table provides information about Hiland Partners
interest rate swap at June 30, 2009 for the periods
indicated:
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Fair Value
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Notional
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Interest
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Asset
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Description and Period
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Amount
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Rate
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(Liability)
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Interest Rate Swap
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July 2009 December 2009
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$
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100,000
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2.245
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%
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$
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(921
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)
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Off-Balance
Sheet Arrangements
Neither we nor Hiland Partners had any significant off-balance
sheet arrangements as of June 30, 2009.
Available
Credit
Credit markets in the United States and around the world remain
constrained due to a lack of liquidity and confidence in a
number of financial institutions. Investors continue to seek
perceived safe investments in securities of the United States
government rather than corporate issues. We and Hiland Partners
may at times experience difficulty accessing the long-term
credit markets due to prevailing market conditions.
Additionally, existing constraints in the credit markets may
increase the rates we and Hiland Partners is charged for
utilizing these markets.
58
Credit
Facilities
Hiland
Holdings Credit Facility
On September 25, 2006, concurrently with the closing of our
initial public offering, we entered into a three-year
$25.0 million senior secured credit facility. Pursuant to
the terms of the agreement, we elected to reduce the commitment
level on the credit facility to $10.0 million effective
May 15, 2009 and we elected to further reduce the
commitment level on the credit facility to $3.0 million on
August 7, 2009. Concurrently with the reduction of the
commitment level to $3.0 million, the existing lenders
under the credit facility assigned their interests in the
facility to 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.
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 of letters of credit of up to
$15 million in the aggregate. The senior secured revolving
credit facility also requires Hiland Partners to meet certain
financial tests, including a maximum consolidated funded debt to
EBITDA ratio of 4.0:1.0 as of the last day of any fiscal
quarter; provided that in the event that Hiland Partners makes
certain permitted acquisitions or capital expenditures, this
ratio may be increased to 4.75:1.0 for the three fiscal quarters
following the quarter in which such acquisition or capital
expenditure occurs; and a minimum interest coverage ratio of
3.0:1.0. 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.
59
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,
Hiland Partners 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 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 the credit facility will bear interest, at
Hiland Partners option, at either; (i) an Alternate
Base Rate plus an applicable margin ranging from 50 to
125 basis points per annum or (ii) LIBOR plus an
applicable margin ranging from 150 to 225 basis points per
annum based on Hiland Partners ratio of consolidated
funded debt to EBITDA. The Alternate Base Rate is a rate per
annum equal to the greatest of (a) the Prime Rate in effect
on such day, (b) the base CD rate in effect on such day
plus 1.50% and (c) the Federal Funds effective rate in
effect on such day plus
1
/
2
of 1%. 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
60
certain loans, acquisitions and investments, make any material
changes to the nature of its business, amend its material
agreements, including the Omnibus Agreement or enter into a
merger, consolidation or sale of assets.
The credit facility defines EBITDA as Hiland Partners
consolidated net income (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 items.
The credit facility limits distributions to Hiland
Partners unitholders to available cash, as defined by the
agreement, and borrowings to fund such distributions are only
permitted under the revolving working capital facility. The
revolving working capital facility is subject to an annual
clean-down period of 15 consecutive days in which
the amount outstanding under the revolving working capital
facility is reduced to zero.
As of June 30, 2009, Hiland Partners had
$261.1 million outstanding under the 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.
Impact
of Inflation
Inflation in the United States has been relatively low in recent
years and did not have a material impact on our results of
operations for the periods presented.
Recent
Accounting Pronouncements
On June 30, 2009, the Financial Accounting Standards Board
(FASB) issued FASB Statement No. 168, The
FASB Accounting Standards
Codification
tm
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
(FAS 107-1).
FAS 107-1
increases the frequency of fair value disclosures to a quarterly
basis instead of annual basis.
FAS 107-1
specifically relates to fair value disclosures for any financial
instruments that are not currently reflected on the balance
sheet at fair value.
FAS 107-1
is effective for interim and annual periods ending after
June 15, 2009.
FAS 107-1
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 Financial Accounting Standards Board
(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.
61
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 dont 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 entitys derivative instruments
and hedging activities and their effects on the entitys
financial position, financial performance, and cash flows.
SFAS 161 is effective prospectively for financial
statements issued for fiscal years and interim periods beginning
after November 15, 2008, with early application encouraged.
SFAS 161 encourages, but does not require, comparative
disclosures for periods prior to its initial adoption.
SFAS 161 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
entitys 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 Partnerships
(MLPs) net earnings per limited partner unit for
each period presented according to distributions declared and
participation rights in undistributed earnings as if all of the
earnings for that period had been distributed. In periods with
undistributed earnings above specified levels, the calculation
per the two-class method results in an increased allocation of
such undistributed earnings to the general partner and a
dilution of earnings to the limited partners.
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
62
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 157s hierarchy defines three levels of inputs
that may be used to measure fair value. Level 1 refers to
assets that have observable market prices, level 2 assets
do not have an observable price but do have inputs
that are based on such prices in which components have
observable data points and level 3 refers to assets in
which one or more of the inputs do not have observable prices
and calibrated model parameters, valuation techniques or
managements assumptions are used to derive the fair value.
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.
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 parents 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 parents ownership interest while the
parent retains its controlling financial interest in its
subsidiary be accounted for consistently and similarly as equity
transactions. Consolidated net income and comprehensive income
are now determined without deducting minority interest; however,
earnings-per-share
information continues to be calculated on the basis of the net
income attributable to the parents shareholders.
Additionally, SFAS 160 establishes a single method for
accounting for changes in a parents ownership interest in
a subsidiary that does not result in deconsolidation and that
the parent recognize a gain or loss in net income when a
subsidiary is deconsolidated. 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
63
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.
Significant
Accounting Policies and Estimates
The selection and application of accounting policies is an
important process that has developed as our business activities
have evolved and as the accounting rules have developed.
Accounting rules generally do not involve a selection among
alternatives, but involve the implementation and interpretation
of existing rules, and the use of judgment applied to the
specific set of circumstances existing in our business. We make
every effort to properly comply with all applicable rules on or
before their adoption, and we believe the proper implementation
and consistent application of the accounting rules are critical.
There have been no material changes in our significant
accounting policies and estimates during the three months ended
June 30, 2009. See our disclosure of significant accounting
policies and estimates in Item 7. Managements
Discussion and Analysis of Financial Condition and Results of
Operations on our Annual Report on
Form 10-K
for the year ended December 31, 2008, filed with the SEC on
March 9, 2009.
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Item 3.
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Quantitative
and Qualitative Disclosures about Market Risk
|
Market risk is the risk of loss arising from adverse changes in
market rates and prices. The principal market risk to which
Hiland Partners is exposed is commodity price risk for natural
gas and NGLs. Hiland Partners also incurs, to a lesser extent,
risks related to interest rate fluctuations. Hiland Partners
does not engage in commodity energy trading activities.
Commodity Price Risks.
Hiland Partners
profitability is affected by volatility in prevailing NGL and
natural gas prices. Historically, changes in the prices of most
NGL products have generally correlated with changes in the price
of crude oil. NGL and natural gas prices are volatile and are
impacted by changes in the supply and demand for NGLs and
natural gas, as well as market uncertainty. Hiland
Partners cash flow is affected by the volatility of
natural gas and NGL product prices, which could adversely affect
our ability to make distributions to unitholders. To illustrate
the impact of changes in prices for natural gas and NGLs on our
operating results, we have provided the table below, which
reflects, for the three months ended June 30, 2009 and
June 30, 2008, respectively, the impact on our midstream
segment margin of a $0.01 per gallon change (increase or
decrease) in NGL prices coupled with a $0.10 per MMBtu change
(increase or decrease) in the price of natural gas.
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|
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|
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|
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|
|
Natural Gas Price Change
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
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|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
($/MMBtu)
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|
|
|
|
|
|
|
|
$
|
0.10
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|
|
$
|
(0.10
|
)
|
|
$
|
0.10
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|
|
$
|
(0.10
|
)
|
NGL Price Change ($/gal)
|
|
$
|
0.01
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|
|
$
|
163,000
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|
|
$
|
181,000
|
|
|
$
|
151,000
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|
|
$
|
142,000
|
|
|
|
$
|
(0.01
|
)
|
|
$
|
(213,000
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)
|
|
$
|
(216,000
|
)
|
|
$
|
(127,000
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)
|
|
$
|
(189,000
|
)
|
The increase in commodity exposure is the result of increased
natural gas and NGL product volumes during the three months
ended June 30, 2009 compared to the three months ended
June 30, 2008 and the increased exposure to NGL product
prices in 2009 as the result of no NGL hedging contracts in
2009. The magnitude of the impact on total segment margin of
changes in natural gas and NGL prices presented may not be
representative of the magnitude of the impact on total segment
margin for different commodity prices or
64
contract portfolios. Natural gas and crude oil prices can also
affect our profitability indirectly by influencing the level of
drilling activity and related opportunities for our services.
We manage this commodity price exposure through an integrated
strategy that includes management of our contract portfolio,
optimization of our assets and the use of derivative contracts.
As a result of these derivative swap contracts, we have hedged a
portion of our expected exposure to natural gas prices in 2009
and 2010. We continually monitor our hedging and contract
portfolio and expect to continue to adjust our hedge position as
conditions warrant. The following table provides information
about our commodity-based derivative instruments at
June 30, 2009 for the periods indicated:
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Average
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Fixed
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Fair Value
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Description and Production Period
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Volume
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Price
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Asset
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|
(MMBtu)
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|
(Per MMBtu)
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Natural Gas Sold Fixed for Floating Price Swaps
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July 2009 June 2010
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2,136,000
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$
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7.01
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$
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6,188
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July 2010 December 2010
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1,068,000
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$
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6.73
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1,450
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$
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7,638
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Interest Rate Risk.
We are exposed to changes
in the LIBOR rate as a result of Hiland Partners credit
facility, and the prime rate as a result of our credit facility,
which are both subject to floating interest rates. On
October 7, 2008, Hiland Partners entered into a
floating-to-fixed
interest rate swap agreement with an investment grade
counterparty whereby Hiland Partners pays a monthly fixed
interest rate of 2.245% and receives a monthly variable rate
based on the one month posted LIBOR interest rate on a notional
amount of $100.0 million. This swap agreement was effective
on January 2, 2009 and terminates on January 1, 2010.
As of June 30, 2009, Hiland Partners had approximately
$261.1 million of indebtedness outstanding under its credit
facility, of which $161.1 million is exposed to changes in
the LIBOR rate. The impact of a 100 basis point increase in
interest rates on the amount of current debt exposed to variable
interest rates would for the remainder of 2009, result in an
increase in annualized interest expense and a corresponding
decrease in annualized net income of approximately
$1.6 million. The following table provides information
about Hiland Partners interest rate swap at June 30,
2009 for the periods indicated:
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|
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|
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Fair Value
|
|
|
|
Notional
|
|
|
Interest
|
|
|
Asset
|
|
Description and Period
|
|
Amount
|
|
|
Rate
|
|
|
(Liability)
|
|
|
Interest Rate Swap
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|
|
|
|
|
|
|
|
|
|
|
|
July 2009 December 2009
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|
$
|
100,000
|
|
|
|
2.245
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%
|
|
$
|
(921
|
)
|
Credit Risk.
Counterparties pursuant to the
terms of their contractual obligations expose Hiland Partners to
potential losses as a result of nonperformance. Hiland
Partners four largest customers for the six months ended
June 30, 2009 accounted for approximately 20%, 15%, 11% and
10%, respectively, of revenues. Consequently, changes within one
or more of these companies operations have the potential
to impact, both positively and negatively, our credit exposure
and make us subject to risks of loss resulting from nonpayment
or nonperformance by these or any of Hiland Partners other
customers. Any material nonpayment or nonperformance by its key
customers could materially and adversely affect our business,
financial condition or results of operations and reduce Hiland
Partners ability to make distributions to its unitholders.
Furthermore, some of Hiland Partners customers may be
highly leveraged and subject to their own operating and
regulatory risks, which increases the risk that they may default
on their obligations to Hiland Partners. Hiland Partners
counterparties for Hiland Partners derivative instruments
as of June 30, 2009 are BP Energy Company and Bank of
Oklahoma, N.A. Our counterparty to our interest rate swap as of
June 30, 2009 is Wells Fargo Bank, N.A.
On July 22, 2008, SemGroup, L.P. and certain subsidiaries
filed voluntary petitions for reorganization under
Chapter 11 of the U.S. Bankruptcy Code. In October
2008, the United States Bankruptcy Court for the District of
Delaware entered an order approving the assumption of a Natural
Gas Liquids Marketing Agreement (the SemStream
Agreement) between SemStream, L.P., an affiliate of
SemGroup, L.P., and
65
Hiland Partners relating to the sale of natural gas liquids and
condensate at our Bakken and Badlands plants and gathering
systems, restoring Hiland Partners and SemStream, L.P. to its
pre-bankruptcy contractual relationship. Hiland Partners
pre-petition credit exposure to SemGroup, L.P. relating to
condensate sales to SemCrude, LLC in our mid-continent region is
approximately $0.3 million, which continues to be reserved
as of June 30, 2009.
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Item 4.
|
Controls
and Procedures
|
Evaluation
of Disclosure Controls and Procedures
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|
(a)
|
Evaluation
of disclosure controls and procedures.
|
As required by
Rule 13a-15(b)
under the Securities Exchange Act of 1934, as amended, we have
evaluated, under the supervision and with the participation of
our management, including our principal executive officer and
principal financial officer, the effectiveness of the design and
operation of our disclosure controls and procedures (as defined
in
Rules 13a-15(e)
and
15d-15(e)
under the Exchange Act) as of the end of the period covered by
this Quarterly Report on
Form 10-Q.
Based upon that evaluation, our principal executive officer and
principal financial officer concluded that our disclosure
controls and procedures were effective as of June 30, 2009,
to ensure that information is accumulated and communicated to
our management, including our principal executive officer and
principal financial officer, as appropriate, to allow timely
decisions regarding required disclosure and is recorded,
processed, summarized and reported within the time periods
specified in the rules and forms of the SEC.
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(b)
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Changes
in internal control over financial reporting.
|
During the three months ended June 30, 2009, there were no
changes in our system of internal control over financial
reporting (as defined in
Rules 13a-15(f)
and
15d-15(f)
under the Exchange Act) that has materially affected, or is
reasonably likely to materially affect, our internal control
over financial reporting.
PART II
OTHER INFORMATION
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|
Item 1.
|
Legal
Proceedings
|
Three putative unitholder class action lawsuits have been filed
relating to the Hiland Partners Merger and the Hiland Holdings
Merger. These lawsuits are as follows: (i)
Robert
Pasternack v. Hiland Partners, LP et al.
, In the Court
of Chancery of the State of Delaware, Civil Action
No. 4397-VCS;
(ii)
Andrew Jones v. Hiland Partners, LP et
al.
, In the Court of Chancery of the State of Delaware,
Civil Action
No. 4558-VCS;
and (iii)
Arthur G. Rosenberg v. Hiland Partners,
LP et al.
, In the District Court of Garfield County, State
of Oklahoma, Case
No. C3-09-211-02.
The lawsuits name as defendants the Partnership, Hiland
Partners, the general partner of each of the Partnership and
Hiland Partners, and the members of the board of directors of
each of the Partnership and Hiland Partners. The lawsuits
challenge both the Hiland Partners Merger and the Hiland
Holdings Merger. The lawsuits allege claims of breach of the
Partnership Agreement and breach of fiduciary duty on behalf of
(i) a purported class of common unitholders of the
Partnership and (ii) a purported class of our common
unitholders of Hiland Partners.
On July 10, 2009, the court in which the Oklahoma case is
pending granted our motion to stay the Oklahoma lawsuit in favor
of the Delaware lawsuits. On July 31, 2009, the plaintiff
in the first-filed Delaware case (
Pasternack
) filed an
Amended Class Action Complaint and a motion to enjoin the
mergers. This Amended Class Action Complaint alleges, among
other things, that (i) the original consideration and
revised consideration offered by the Hamm Parties is unfair and
inadequate, (ii) the members of the conflicts committees of
the general partner of each of the Partnership and Hiland
Partners that were charged with reviewing the proposals and
making a recommendation to each committees respective
board of directors lacked any meaningful independence,
(iii) the defendants acted in bad faith in recommending and
approving the Hiland Partners Merger or the Hiland Holdings
Merger, and (iv) the disclosures in the Preliminary Proxy
Statement filed by the Partnership and Hiland Partners are
materially misleading. The
Pasternack
plaintiff
66
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 are not aware of any legal or governmental proceedings
against us, or contemplated to be brought against us, under the
various environmental protection statutes to which we are
subject. We maintain insurance policies with insurers in amounts
and with coverage and deductibles as our general partner
believes are reasonable and prudent. However, we cannot assure
you that this insurance will be adequate to protect us from all
material expenses related to potential future claims for
personal and property damage or that these levels of insurance
will be available in the future at economical prices.
The
failure to complete the Hiland Holdings Merger could adversely
affect the price of our common units and otherwise have an
adverse effect on us.
There can be no assurance that the conditions to the completion
of the Hiland Holdings Merger, many of which are out of our
control, will be satisfied by the November 1, 2009 deadline
set forth in the merger agreement. Among other things, we cannot
be certain that (i) holders of a majority of our common
units (other than Mr. Hamm, certain of his affiliates and
the Hamm family trusts) will vote in favor of the Hiland
Holdings Merger and the merger agreement; (ii) no
injunction will be granted in any of the three pending
unitholder lawsuits challenging the Hiland Holdings Merger (as
described elsewhere in this
Form 10-Q);
or (iii) that the Hiland Partners Merger will be completed
concurrently with the Hiland Holdings Merger (the completion of
which is a condition to Mr. Hamms obligation to
complete the Hiland Holdings Merger).
If the Hiland Holdings Merger is not completed, the price of our
common units will likely fall to the extent that the current
market price of our common units reflects an assumption that a
transaction will be completed. Further, a failed transaction may
result in negative publicity
and/or
a
negative impression of us in the investment community and may
affect our relationship with employees, vendors, creditors and
other business partners.
Additionally, we are subject to the following risks related to
the Hiland Holdings Merger:
|
|
|
|
|
Certain costs relating to the Hiland Holdings Merger, including
legal, accounting and financial advisory fees, are payable by us
whether or not the Hiland Holdings Merger is completed.
|
|
|
|
Under circumstances set out in the merger agreement, if the
Hiland Holdings Merger is not completed we may be required to
reimburse up to $800,000 availability of Mr. Hamm and his
affiliates expenses associated with the Hiland Holdings
Merger.
|
|
|
|
Our managements and our employees attention will
have been diverted from our
day-to-day
operations, we may experience unusually high employee attrition
and our business and customer relationships may be disrupted.
|
We are
subject to litigation related to the Hiland Holdings
Merger.
We are actively defending three putative unitholder class action
lawsuits which have been filed relating to the Hiland Partners
Merger and the Hiland Holdings Merger. These lawsuits are as
follows: (i)
Robert Pasternack v. Hiland
Partners, LP et al.
, In the Court of Chancery of the State
of Delaware, Civil Action
No. 4397-VCS;
(ii)
Andrew Jones v. Hiland Partners, LP et
al.
, In the Court of Chancery of the State of Delaware,
Civil Action
No. 4558-VCS;
and (iii)
Arthur G. Rosenberg v. Hiland Partners,
LP et al.
, In the District Court of Garfield County, State
of Oklahoma, Case
No. C3-09-211-02.
The lawsuits name as defendants the Partnership, Hiland
Partners, the general partner of each of the Partnership and
Hiland Partners, and the members of the board of directors of
each of the Partnership and Hiland Partners. The lawsuits
67
challenge both the Hiland Partners Merger and the Hiland
Holdings Merger. The lawsuits allege claims of breach of the
Partnership Agreement and breach of fiduciary duty on behalf of
(i) a purported class of common unitholders of the
Partnership and (ii) a purported class of our common
unitholders of Hiland Partners.
On July 10, 2009, the court in which the Oklahoma case is
pending granted our motion to stay the Oklahoma lawsuit in favor
of the Delaware lawsuits. On July 31, 2009, the plaintiff
in the first-filed Delaware case (Pasternack) filed an Amended
Class Action Complaint and a motion to enjoin the mergers.
This Amended Class Action Complaint alleges, among other
things, that (i) the original consideration and revised
consideration offered by the Hamm Parties is unfair and
inadequate, (ii) the members of the conflicts committees of
the general partner of each of the Partnership and Hiland
Partners that were charged with reviewing the proposals and
making a recommendation to each committees respective
board of directors lacked any meaningful independence,
(iii) the defendants acted in bad faith in recommending and
approving the Hiland Partners Merger or the Hiland Holdings
Merger, and (iv) the disclosures in the Preliminary Proxy
Statement filed by the Partnership and Hiland Partners are
materially misleading. The Pasternack plaintiff seeks to
preliminarily enjoin the defendants from proceeding with or
consummating the mergers and seeks an order requiring defendants
to supplement the Preliminary Proxy Statement with certain
information. It is possible that additional claims beyond those
that have already been filed will be brought by the current
plaintiffs or by others in an effort to enjoin the Hiland
Holdings Merger or seek monetary relief from us.
While the Hiland Companies do not believe these lawsuits have
merit and intend to defend themselves vigorously, we cannot
predict the outcome of these lawsuits, or others, nor can we
predict the amount of time and expense that will be required to
resolve the lawsuits. An unfavorable resolution of any such
litigation surrounding the Hiland Holdings Merger could delay or
prevent the consummation of the Hiland Holdings Merger. In
addition, the cost to us of defending the litigation, even if
resolved in our favor, could be substantial. Such litigation
could also divert the attention of our management and our
resources in general from
day-to-day
operations.
If
commodity prices do not significantly improve above the expected
prices for 2009, Hiland Partners may be in violation of its
maximum consolidated funded debt to EBITDA covenant ratio as
early as September 30, 2009, unless the ratio is amended,
its senior secured revolving credit facility is restructured,
Hiland Partners receives an infusion of equity capital or Hiland
Partners is able to monetize
in-the-money
hedge positions. Failure to comply with the covenants could
cause an event of default under the Hiland Partners credit
facility.
The Hiland Partners credit facility contains covenants requiring
Hiland Partners to maintain certain financial ratios and comply
with certain financial tests, which, among other things, require
Hiland Partners and its subsidiary guarantors, on a consolidated
basis, to maintain specified ratios or conditions as follows:
|
|
|
|
|
EBITDA to interest expense of not less than 3.0 to 1.0; and
|
|
|
|
consolidated funded debt to EBITDA of not more than 4.0 to 1.0
with the option to increase the consolidated funded debt to
EBITDA ratio to not more than 4.75 to 1.0 for a period of up to
nine months following an acquisition or a series of acquisitions
totaling $40 million in a
12-month
period (subject to an increased applicable interest rate margin
and commitment fee rate).
|
As of June 30, 2009, Hiland Partners was in compliance with
each of these ratios, which are tested quarterly. Hiland
Partners EBITDA to interest expense ratio was 4.95 to 1.0
and its consolidated funded debt to EBITDA covenant ratio was
4.40 to 1.0. Hiland Partners temporarily increased the ratio to
4.75:1.0 on March 31, 2009, but such ratio will be reduced
to 4.0:1.0 on December 31, 2009. Hiland Partners
ability to remain in compliance with these restrictions and
covenants in the future is uncertain and will be affected by the
levels of cash flow from our operations and events or
circumstances beyond our control. If commodity prices do not
significantly improve above the expected prices for 2009, Hiland
Partners may be in violation of the maximum consolidated funded
debt to EBITDA ratio as early as September 30, 2009, unless
the ratio is amended, the senior secured revolving credit
facility is restructured, Hiland Partners receives an infusion
of equity capital or Hiland Partners is able to monetize
in-the-money
hedge positions. Hiland Partners failure
68
to comply with any of the restrictions and covenants under our
revolving credit facility could lead to an event of default and
the acceleration of our obligations under those agreements.
Hiland Partners may not have sufficient funds to make such
payments. If Hiland Partners is unable to satisfy its
obligations with cash on hand, Hiland Partners could attempt to
refinance such debt, sell assets or repay such debt with the
proceeds from an equity offering. We cannot assure that Hiland
Partners will be able to generate sufficient cash flow to pay
the interest on its debt or that future borrowings, equity
financings or proceeds from the sale of assets will be available
to pay or refinance such debt. The terms of Hiland
Partners financing agreements may also prohibit it from
taking such actions. Factors that will affect Hiland
Partners ability to raise cash through an offering of its
common units or other equity, a refinancing of its debt or a
sale of assets include financial market conditions and Hiland
Partners market value and operating performance at the
time of such offering or other financing. We cannot assure that
any such proposed offering, refinancing or sale of assets can be
successfully completed or, if completed, that the terms will be
favorable to Hiland Partners or to us.
If the
Hiland Partners Merger is completed and the Hiland Holdings
Merger is not completed, it could create certain conflicts of
interest between us and Harold Hamm, who, with his affiliates,
controls our general partner and the general partner of Hiland
Partners.
Harold Hamm and his affiliates own 100% of our general partner,
which has sole responsibility for conducting our business and
managing our operations. We control the general partner of
Hiland Partners, which has sole responsibility for conducting
the business of Hiland Partners and managing its operations.
If the Hiland Holdings Merger is not completed but the Hiland
Partners Merger is completed, Mr. Hamm, his affiliates and
the Hamm family trusts will acquire all of the outstanding
common units of Hiland Partners not owned by us. We own,
directly or indirectly, a 2% general partner interest, the
incentive distribution rights, 3,060,000 subordinated units and
2,321,471 common units in Hiland Partners. Since the common
units have different rights to distributions than the
subordinated units and the incentive distribution rights,
Mr. Hamms ownership of common units of Hiland
Partners could increase the likelihood that conflicts of
interest may arise between Mr. Hamm and his affiliates,
including our general partner, on the one hand, and us and our
unitholders, on the other hand, particularly with regard to the
amount of cash to be distributed to the Hiland Partners
unitholders and the amount of cash to be reserved for the future
conduct of Hiland Partners business.
A
substantial portion of our partnership interests in Hiland
Partners are subordinated to Hiland Partners common units,
which will result in decreased distributions to us in the future
until Hiland Partners has paid all distribution arrearages on
the Hiland Partners common units. Additionally, if Hiland
Partners is unable to meet its minimum quarterly distribution in
the future, distributions to us could further
decrease.
We own, directly or indirectly, 5,381,471 units
representing limited partner interests in Hiland Partners, of
which approximately 56.9% are subordinated units and 43.1% are
common units. During the subordination period, the subordinated
units will not receive any distributions in a quarter until
Hiland Partners has paid the minimum quarterly distribution of
$0.45 per unit, plus any arrearages in the payment of the
minimum quarterly distribution from prior quarters, on all of
the outstanding Hiland Partners common units. Distributions on
the subordinated units are therefore more uncertain than
distributions on Hiland Partners common units.
Furthermore, no distributions may be made on the incentive
distribution rights for any quarter unless Hiland Partners has
paid that quarters minimum quarterly distribution of $0.45
per unit for all outstanding Hiland Partners common units and
subordinated units, plus any arrearages in the payment of the
minimum quarterly distribution from prior quarters on all the
outstanding Hiland Partners common units. Therefore,
distributions with respect to the incentive distribution rights
are even more uncertain than distributions on the subordinated
units. Neither the subordinated units nor the incentive
distribution rights are entitled to any arrearages from prior
quarters. Generally, the subordination period ends, and the
subordinated units convert into common units of Hiland Partners,
only after March 31, 2010 and only upon the satisfaction of
certain financial tests.
Hiland Partners has suspended quarterly cash distributions on
its common and subordinated units beginning with the first
quarter of 2009. Under the terms of the Hiland Partners
partnership agreement, the
69
Hiland Partners common units now carry an arrearage of $0.90 per
unit, representing the minimum quarterly distribution to the
Hiland Partners common units for the first and second quarter of
2009 that must be paid before Hiland Partners can make
distributions to the Hiland Partners subordinated units or on
the incentive distribution rights. This decrease in
distributions to us could adversely affect our ability to pay
distributions on our common units.
If we
fail to renegotiate our credit facility, we may be required to
sell common units in Hiland Partners to satisfy our outstanding
debt obligations and any current liabilities that we may incur
in the operation of our business in the future.
Hiland Partners suspended quarterly cash distributions on common
and subordinated units beginning with the first quarter
distribution of 2009. As our only cash-generating assets are our
2% general partner interest, all of the incentive distribution
rights and a 57.4% limited partner interest in Hiland Partners,
our cash flow is 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 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.
In addition to the other information set forth in this report,
you should carefully consider the factors discussed in
Part I, Item 1A. Risk Factors in our
Annual Report on
Form 10-K
for the year ended December 31, 2008, which could
materially affect our business, financial condition or future
results. The risks described in our Annual Report on
Form 10-K
are not the only risks facing the Partnership. Additional risks
and uncertainties not currently known to us or that we currently
deem to be immaterial also may materially adversely affect our
business, financial condition and/ or operating results.
|
|
Item 2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
None.
|
|
Item 3.
|
Defaults
Upon Senior Securities
|
None.
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|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
None.
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|
Item 5.
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Other
Information
|
NASDAQ Deficiency Letter.
On January 27,
2009, we received a Deficiency Letter from NASDAQ indicating
that we no longer comply with the audit committee composition
requirements as set forth in Marketplace Rule 4350(d),
which requires Hiland Partners GP Holdings, LLC, our general
partner, to have an audit committee of at least three
independent members. Following the resignation of Shelby E.
Odell from the board of directors of our general partner on
January 21, 2009, the audit committee of our general
partner consists of only two independent members. Mr. Odell
resigned from the board of directors of our general partner so
that he would be eligible to serve as a member of the conflicts
committee of the board of directors of Hiland Partners
general partner. In accordance with Marketplace
Rule 4350(d)(4), NASDAQ has provided us a cure period to
regain compliance until the earlier of our next annual
unitholders meeting or January 21, 2010.
First Amended and Restated Credit
Agreement.
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
70
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 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.
The credit facility 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.
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. The outstanding $1.2 million at
June 30, 2009, which matures on December 31, 2009, is
included in accrued liabilities and other in the balance sheet.
EXHIBITS
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Exhibit
|
|
|
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|
Number
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|
|
|
Description
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|
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1
|
.1
|
|
|
|
Underwriting Agreement by and between Hiland Holdings GP, LP and
Lehman Brothers Inc., as representative of the underwriters
named therein dated as of September 19, 2006. (incorporated
by reference to Exhibit 1.1 of Registrants Statement
on
Form S-1
(File
No. 333-134491))
|
|
2
|
.1
|
|
|
|
Contribution Agreement among Hiland Holdings GP, LP, Hiland
Partners GP Holdings, LLC, Hiland Partners GP, Inc., Continental
Gas Holdings, Inc., HHGP Holding, LLC, Harold Hamm DST Trust,
Harold Hamm HJ Trust, Randy Moeder, Equity Financial Services,
Inc. and Ken Maples dated May 24, 2006. (incorporated by
reference to Exhibit 2.1 of Registrants Statement on
Form S-1
(File
No. 333-134491))
|
|
2
|
.2
|
|
|
|
Acquisition Agreement by and among Hiland Operating, LLC, Hiland
Partners, LLC and the members of Hiland Partners, LLC dated as
of September 1, 2005 (incorporated by reference to
Exhibit 2.2 of Hiland Partners, LPs
Form 8-K
filed on September 29, 2005)
|
|
2
|
.3
|
|
|
|
Amendment No. 1 dated September 12, 2006 to
Contribution Agreement among Hiland Holdings GP, LP, Hiland
Partners GP Holdings, LLC, Hiland Partners GP, Inc., Continental
Gas Holdings, Inc., HHGP Holding, LLC, Harold Hamm DST Trust,
Harold Hamm HJ Trust, Randy Moeder, Equity Financial Services,
Inc. and Ken Maples dated May 24, 2006. (incorporated by
reference to Exhibit 2.3 of Registrants Statement on
Form S-1
(File
No. 333-134491))
|
|
2
|
.4
|
|
|
|
Agreement and Plan of Merger, dated as of June 1, 2009, by
and between Hiland Holdings GP, LP, Hiland Partners GP Holdings,
LLC, HH GP Holding, LLC and HPGP MergerCo, LLC (incorporated by
reference to Exhibit 2.1 of the Registrants
Form 8-K
filed on June 1, 2009). Schedules and Exhibits are omitted
pursuant to Section 601(b)(2) of
Regulation S-K.
|
71
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
Description
|
|
|
2
|
.5
|
|
|
|
Equity Commitment Letter Agreement, dated as of June 1,
2009, by and between Harold Hamm and HH GP Holding, LLC
(incorporated by reference to Exhibit 2.3 of the
Registrants
Form 8-K
filed on June 1, 2009).
|
|
2
|
.6
|
|
|
|
Support Agreement, dated as of June 1, 2009, by and between
Hiland Holdings GP, LP, Hiland Partners GP Holdings, LLC, Harold
Hamm, Continental Gas Holdings, Inc., Bert Mackie, as trustee of
the Harold Hamm DST Trust and the Harold Hamm HJ Trust, HH GP
Holding, LLC and HPGP MergerCo, LLC (incorporated by reference
to Exhibit 2.5 of the Registrants
Form 8-K
filed on June 1, 2009).
|
|
2
|
.7
|
|
|
|
Agreement and Plan of Merger, dated as of June 1, 2009, by
and between Hiland Partners, LP, Hiland Partners GP, LLC, HH GP
Holding, LLC and HLND MergerCo, LLC (incorporated by reference
to Exhibit 2.2 of the Registrants
Form 8-K
filed on June 1, 2009). Schedules and Exhibits are omitted
pursuant to Section 601(b)(2) of
Regulation S-K.
|
|
2
|
.8
|
|
|
|
Equity Commitment Letter Agreement, dated as of June 1,
2009, by and between Harold Hamm and HH GP Holding, LLC
(incorporated by reference to Exhibit 2.4 of the
Registrants
Form 8-K
filed on June 1, 2009).
|
|
2
|
.9
|
|
|
|
Support Agreement, dated as of June 1, 2009, by and between
Hiland Partners, LP, Hiland Partners GP, LLC, Hiland Holdings
GP, LP, Hiland Partners GP Holdings, LLC, HH GP Holding, LLC and
HLND MergerCo, LLC (incorporated by reference to
Exhibit 2.6 of the Registrants
Form 8-K
filed on June 1, 2009).
|
|
3
|
.1
|
|
|
|
Certificate of Limited Partnership of Hiland Holdings GP, LP
(incorporated by reference to Exhibit 3.1 of
Registrants Statement on
Form S-1
(File
No. 333-134491))
|
|
3
|
.2
|
|
|
|
Amended and Restated Agreement of Limited Partnership of Hiland
Holdings GP, LP (incorporated by reference to Exhibit 3.1
of Registrants
Form 10-Q
filed on November 13, 2006)
|
|
3
|
.3
|
|
|
|
Certificate of Formation of Hiland Partners GP Holdings, LLC
(incorporated by reference to Exhibit 3.3 of
Registrants Statement on
Form S-1
(File
No. 333-134491))
|
|
3
|
.4
|
|
|
|
Amended and Restated Limited Liability Company Agreement of
Hiland Partners GP Holdings, LLC(incorporated by reference to
Exhibit 3.2 of Registrants
Form 10-Q
filed on November 13, 2006)
|
|
4
|
.1
|
|
|
|
Certificate of Limited Partnership of Hiland Holdings GP, LP
(incorporated by reference to Exhibit 3.1 of
Registrants Statement on
Form S-1
(File
No. 333-134491))
|
|
4
|
.2
|
|
|
|
Amended and Restated Agreement of Limited Partnership of Hiland
Holdings GP, LP (incorporated by reference to Exhibit 3.1
of Registrants
Form 10-Q
filed on November 13, 2006)
|
|
4
|
.3
|
|
|
|
Certificate of Formation of Hiland Partners GP Holdings, LLC
(incorporated by reference to Exhibit 3.3 of
Registrants Statement on
Form S-1
(File
No. 333-134491))
|
|
4
|
.4
|
|
|
|
Amended and Restated Limited Liability Company Agreement of
Hiland Partners GP Holdings, LLC(incorporated by reference to
Exhibit 3.2 of Registrants
Form 10-Q
filed on November 13, 2006)
|
|
10
|
.1
|
|
|
|
First Amended and Restated Senior Secured Credit Agreement
|
|
19
|
.1
|
|
|
|
Code of Ethics for Chief Executive Officer and Senior Finance
Officers (incorporated by reference to Exhibit 19.1 of
Registrants annual report on
Form 10-K
filed on March 20, 2007)
|
|
21
|
.1
|
|
|
|
List of Subsidiaries of Hiland Holdings GP, LP (incorporated by
reference to Exhibit 21.1 of Registrants Statement on
Form S-1
(File
No. 333-134491))
|
|
31
|
.1
|
|
|
|
Certification of Chief Executive Officer under Section 302
of the Sarbanes-Oxley Act of 2002
|
|
31
|
.2
|
|
|
|
Certification of Chief Financial Officer under Section 302
of the Sarbanes-Oxley Act of 2002
|
|
32
|
.1
|
|
|
|
Certification of Chief Executive Officer under Section 906
of the Sarbanes-Oxley Act of 2002
|
|
32
|
.2
|
|
|
|
Certification of Chief Financial Officer under Section 906
of the Sarbanes-Oxley Act of 2002
|
|
|
|
+
|
|
Denotes a management contract or compensatory plan or
arrangement.
|
|
|
|
Portions of this exhibit have been omitted pursuant to a request
for confidential treatment.
|
72
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized in Enid, Oklahoma, on this 10th day of
August, 2009.
HILAND HOLDINGS GP, LP
|
|
|
|
By:
|
Hiland Partners GP Holdings, LLC, its general partner
|
|
|
|
|
By:
|
/s/ Joseph
L. Griffin
|
Joseph L. Griffin
Chief Executive Officer, President and Director
(principal executive officer)
|
|
|
|
By:
|
/s/ Matthew
S. Harrison
|
Matthew S. Harrison
Chief Financial Officer, Vice President-Finance, Secretary
and Director
(principal financial and accounting officer)
73
Exhibit Index
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
Description
|
|
|
1
|
.1
|
|
|
|
Underwriting Agreement by and between Hiland Holdings GP, LP and
Lehman Brothers Inc., as representative of the underwriters
named therein dated as of September 19, 2006. (incorporated
by reference to Exhibit 1.1 of Registrants Statement
on
Form S-1
(File
No. 333-134491))
|
|
2
|
.1
|
|
|
|
Contribution Agreement among Hiland Holdings GP, LP, Hiland
Partners GP Holdings, LLC, Hiland Partners GP, Inc., Continental
Gas Holdings, Inc., HHGP Holding, LLC, Harold Hamm DST Trust,
Harold Hamm HJ Trust, Randy Moeder, Equity Financial Services,
Inc. and Ken Maples dated May 24, 2006. (incorporated by
reference to Exhibit 2.1 of Registrants Statement on
Form S-1
(File
No. 333-134491))
|
|
2
|
.2
|
|
|
|
Acquisition Agreement by and among Hiland Operating, LLC, Hiland
Partners, LLC and the members of Hiland Partners, LLC dated as
of September 1, 2005 (incorporated by reference to
Exhibit 2.2 of Hiland Partners, LPs
Form 8-K
filed on September 29, 2005)
|
|
2
|
.3
|
|
|
|
Amendment No. 1 dated September 12, 2006 to
Contribution Agreement among Hiland Holdings GP, LP, Hiland
Partners GP Holdings, LLC, Hiland Partners GP, Inc., Continental
Gas Holdings, Inc., HHGP Holding, LLC, Harold Hamm DST Trust,
Harold Hamm HJ Trust, Randy Moeder, Equity Financial Services,
Inc. and Ken Maples dated May 24, 2006. (incorporated by
reference to Exhibit 2.3 of Registrants Statement on
Form S-1
(File
No. 333-134491))
|
|
2
|
.4
|
|
|
|
Agreement and Plan of Merger, dated as of June 1, 2009, by
and between Hiland Holdings GP, LP, Hiland Partners GP Holdings,
LLC, HH GP Holding, LLC and HPGP MergerCo, LLC (incorporated by
reference to Exhibit 2.1 of the Registrants
Form 8-K
filed on June 1, 2009). Schedules and Exhibits are omitted
pursuant to Section 601(b)(2) of
Regulation S-K.
|
|
2
|
.5
|
|
|
|
Equity Commitment Letter Agreement, dated as of June 1,
2009, by and between Harold Hamm and HH GP Holding, LLC
(incorporated by reference to Exhibit 2.3 of the
Registrants
Form 8-K
filed on June 1, 2009).
|
|
2
|
.6
|
|
|
|
Support Agreement, dated as of June 1, 2009, by and between
Hiland Holdings GP, LP, Hiland Partners GP Holdings, LLC, Harold
Hamm, Continental Gas Holdings, Inc., Bert Mackie, as trustee of
the Harold Hamm DST Trust and the Harold Hamm HJ Trust, HH GP
Holding, LLC and HPGP MergerCo, LLC (incorporated by reference
to Exhibit 2.5 of the Registrants
Form 8-K
filed on June 1, 2009).
|
|
2
|
.7
|
|
|
|
Agreement and Plan of Merger, dated as of June 1, 2009, by
and between Hiland Partners, LP, Hiland Partners GP, LLC, HH GP
Holding, LLC and HLND MergerCo, LLC (incorporated by reference
to Exhibit 2.2 of the Registrants
Form 8-K
filed on June 1, 2009). Schedules and Exhibits are omitted
pursuant to Section 601(b)(2) of
Regulation S-K.
|
|
2
|
.8
|
|
|
|
Equity Commitment Letter Agreement, dated as of June 1,
2009, by and between Harold Hamm and HH GP Holding, LLC
(incorporated by reference to Exhibit 2.4 of the
Registrants
Form 8-K
filed on June 1, 2009).
|
|
2
|
.9
|
|
|
|
Support Agreement, dated as of June 1, 2009, by and between
Hiland Partners, LP, Hiland Partners GP, LLC, Hiland Holdings
GP, LP, Hiland Partners GP Holdings, LLC, HH GP Holding, LLC and
HLND MergerCo, LLC (incorporated by reference to
Exhibit 2.6 of the Registrants
Form 8-K
filed on June 1, 2009).
|
|
3
|
.1
|
|
|
|
Certificate of Limited Partnership of Hiland Holdings GP, LP
(incorporated by reference to Exhibit 3.1 of
Registrants Statement on
Form S-1
(File
No. 333-134491))
|
|
3
|
.2
|
|
|
|
Amended and Restated Agreement of Limited Partnership of Hiland
Holdings GP, LP (incorporated by reference to Exhibit 3.1
of Registrants
Form 10-Q
filed on November 13, 2006)
|
|
3
|
.3
|
|
|
|
Certificate of Formation of Hiland Partners GP Holdings, LLC
(incorporated by reference to Exhibit 3.3 of
Registrants Statement on
Form S-1
(File
No. 333-134491))
|
|
3
|
.4
|
|
|
|
Amended and Restated Limited Liability Company Agreement of
Hiland Partners GP Holdings, LLC(incorporated by reference to
Exhibit 3.2 of Registrants
Form 10-Q
filed on November 13, 2006)
|
|
4
|
.1
|
|
|
|
Certificate of Limited Partnership of Hiland Holdings GP, LP
(incorporated by reference to Exhibit 3.1 of
Registrants Statement on
Form S-1
(File
No. 333-134491))
|
74
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
Description
|
|
|
4
|
.2
|
|
|
|
Amended and Restated Agreement of Limited Partnership of Hiland
Holdings GP, LP (incorporated by reference to Exhibit 3.1
of Registrants
Form 10-Q
filed on November 13, 2006)
|
|
4
|
.3
|
|
|
|
Certificate of Formation of Hiland Partners GP Holdings, LLC
(incorporated by reference to Exhibit 3.3 of
Registrants Statement on
Form S-1
(File
No. 333-134491))
|
|
4
|
.4
|
|
|
|
Amended and Restated Limited Liability Company Agreement of
Hiland Partners GP Holdings, LLC(incorporated by reference to
Exhibit 3.2 of Registrants
Form 10-Q
filed on November 13, 2006)
|
|
10
|
.1
|
|
|
|
First Amended and Restated Senior Secured Credit Agreement
|
|
19
|
.1
|
|
|
|
Code of Ethics for Chief Executive Officer and Senior Finance
Officers (incorporated by reference to Exhibit 19.1 of
Registrants annual report on
Form 10-K
filed on March 20, 2007)
|
|
21
|
.1
|
|
|
|
List of Subsidiaries of Hiland Holdings GP, LP (incorporated by
reference to Exhibit 21.1 of Registrants Statement on
Form S-1
(File
No. 333-134491))
|
|
31
|
.1
|
|
|
|
Certification of Chief Executive Officer under Section 302
of the Sarbanes-Oxley Act of 2002
|
|
31
|
.2
|
|
|
|
Certification of Chief Financial Officer under Section 302
of the Sarbanes-Oxley Act of 2002
|
|
32
|
.1
|
|
|
|
Certification of Chief Executive Officer under Section 906
of the Sarbanes-Oxley Act of 2002
|
|
32
|
.2
|
|
|
|
Certification of Chief Financial Officer under Section 906
of the Sarbanes-Oxley Act of 2002
|
|
|
|
+
|
|
Denotes a management contract or compensatory plan or
arrangement.
|
|
|
|
Portions of this exhibit have been omitted pursuant to a request
for confidential treatment.
|
75
Exhibit 31.1
CERTIFICATION
I, Joseph L. Griffin, certify that:
1. I have reviewed this report on
Form 10-Q
of Hiland Holdings GP, LP;
2. Based on my knowledge, this report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and
other financial information included in this report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
4. The registrants other certifying officer(s) and I
are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act
Rules 13a 15(e) and 15d 15(e)) and
internal control over financial reporting (as defined in
Exchange Act Rules 13a 15(f) and
15d 15 (f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information
relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is
being prepared;
b) Designed such internal control over financial reporting,
or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrants
disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
d) Disclosed in this report any change in the
registrants internal control over financial reporting that
occurred during the registrants most recent fiscal quarter
(the registrants fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably
likely to materially affect, the registrants internal
control over financial reporting; and
5. The registrants other certifying officer(s) and I
have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrants
auditors and the audit committee of the registrants board
of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in
the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrants ability to record, process, summarize and
report financial information; and
b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrants internal control over financial reporting.
Joseph L. Griffin
Chief Executive Officer and President
Date: August 10, 2009
76
Exhibit 31.2
CERTIFICATION
I, Matthew S. Harrison, certify that:
1. I have reviewed this report on
Form 10-Q
of Hiland Holdings GP, LP;
2. Based on my knowledge, this report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and
other financial information included in this report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
4. The registrants other certifying officer and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act
Rules 13a 15(e) and 15d 15(e)) and
internal control over financial reporting (as defined in
Exchange Act Rules 13a 15(f) and
15d 15 (f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information
relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is
being prepared;
b) Designed such internal control over financial reporting,
or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrants
disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
d) Disclosed in this report any change in the
registrants internal control over financial reporting that
occurred during the registrants most recent fiscal quarter
(the registrants fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably
likely to materially affect, the registrants internal
control over financial reporting; and
5. The registrants other certifying officer(s) and I
have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrants
auditors and the audit committee of the registrants board
of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in
the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrants ability to record, process, summarize and
report financial information; and
b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrants internal control over financial reporting.
Matthew S. Harrison
Chief Financial Officer, Vice President-Finance
and Secretary
Date: August 10, 2009
77
Exhibit 32.1
CERTIFICATION
OF CHIEF EXECUTIVE
OFFICER OF GENERAL PARTNER OF HILAND HOLDINGS GP, LP
PURSUANT TO 18 U.S.C. SECTION 1350
In connection with the report on
Form 10-Q
for the three and six months ended June 30, 2009 of Hiland
Holdings GP, LP (the Company) and filed with the
Securities and Exchange Commission on the date hereof (the
Report), I, Joseph L. Griffin, Chief Executive
Officer and President of Hiland Partners GP Holdings, LLC, the
general partner of the Company, hereby certify, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of
1934; and
2. The information contained in the Report fairly presents,
in all material respects, the financial condition and results of
operations of the Company.
Joseph L. Griffin
Chief Executive Officer and President
Date: August 10, 2009
78
Exhibit 32.2
CERTIFICATION
OF CHIEF FINANCIAL
OFFICER OF GENERAL PARTNER OF HILAND HOLDINGS GP, LP
PURSUANT TO 18 U.S.C. SECTION 1350
In connection with the report on
Form 10-Q
for the three and six months ended June 30, 2009 of Hiland
Holdings GP, LP (the Company) and filed with the
Securities and Exchange Commission on the date hereof (the
Report), I, Matthew S. Harrison, Chief
Financial Officer, Vice President-Finance and Secretary of
Hiland Partners GP Holdings, LLC, the general partner of the
Company, hereby certify, pursuant to U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
1. The Report fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of
1934; and
2. The information contained in the Report fairly presents,
in all material respects, the financial condition and results of
operations of the Company.
Matthew S. Harrison
Chief Financial Officer, Vice President-Finance
and Secretary
Date: August 10, 2009
79
Preliminary
Copy
HILAND HOLDINGS GP, LP
SPECIAL MEETING OF UNITHOLDERS
, 2009
THIS PROXY IS SOLICITED ON BEHALF OF THE
BOARD OF DIRECTORS OF HILAND PARTNERS GP HOLDINGS, LLC
The undersigned holder of common units of Hiland Holdings GP, LP, a Delaware limited
partnership, hereby acknowledges receipt of the Notice of Special Meeting of Unitholders and Joint
Proxy Statement, each dated , 2009, and revoking all prior proxies, hereby appoints [ ] and [ ]
(together, the Proxies), each with the full
power and authority to act as proxy of the undersigned, with full power of substitution, to vote
all of the common units which the undersigned may be entitled to vote at the special meeting of
unitholders of Hiland Holdings GP, LP to be held at , at on
, , 2009, and at any adjournment or postponement thereof, on the matters set
forth in this form of proxy and described in the Joint Proxy Statement, and in their discretion
with respect to such other matters as may be properly brought before the meeting or any
adjournments or postponement thereof, in accordance with the following instructions:
1.
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To approve (a) the Agreement and Plan of Merger, dated as of June 1, 2009, among Hiland
Holdings GP, LP, Hiland Partners GP Holdings, LLC, HH GP Holding, LLC and HPGP MergerCo,
LLC, as the same may be amended from time to time, which agreement provides, among other
things, that HPGP MergerCo, LLC will merge with and into Hiland Holdings GP, LP, with Hiland
Holdings GP, LP continuing as the surviving entity (the Hiland Holdings merger) and (b)
the Hiland Holdings merger.
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FOR
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AGAINST
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ABSTAIN
2.
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To transact such other business as may properly come before the special meeting or any
adjournment or postponement thereof.
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This proxy when properly executed will be voted in the manner directed herein by the undersigned
unitholder. Proxy cards properly executed and returned without direction will be voted FOR each
proposal listed above. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the meeting and any adjournment thereof.
Signature must be that of the unitholder himself or herself. If common units are held jointly, each
unitholder named should sign. If the signer is a corporation, please sign the full corporate name
by duly authorized officer. If the signer is a partnership, please sign partnership name by
authorized person. Executors, administrators, trustees, guardians, attorneys-in-fact, etc., should
so indicate when signing.
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Dated: , 2009
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IMPORTANT: Please insert date.
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INDIVIDUAL HOLDER:
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Signature
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SignaturePlease write legibly
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Print Name Here
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Signature (if held jointly)
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Print Name Here
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CORPORATE OR PARTNERSHIP HOLDER:
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Company Name
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By:
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Its:
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