Table of
Contents
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-Q
x
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
FOR THE
QUARTERLY PERIOD ENDED JUNE 30, 2009
OR
o
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
FOR THE
TRANSITION PERIOD
FROM TO
Commission
file number: 001-33018
Hiland
Holdings GP, LP
(Exact name of
Registrant as specified in its charter)
DELAWARE
|
|
76-0828238
|
(State or other
jurisdiction of
|
|
(I.R.S. Employer
|
incorporation or
organization)
|
|
Identification No.)
|
|
|
|
205
West Maple, Suite 1100
|
|
|
Enid,
Oklahoma
|
|
73701
|
(Address of
principal executive offices)
|
|
(Zip Code)
|
(580)
242-6040
(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.
x
Yes
o
No
Indicate by check mark
whether the registrant has submitted electronically and posted on its corporate
Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files). Yes
¨
No
¨
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of large accelerated filer, accelerated filer and smaller
reporting company in Rule 12b-2 of the Exchange Act.
Large
accelerated filer
o
|
|
Accelerated
filer
x
|
|
|
|
Non-accelerated
filer
o
|
|
Smaller
reporting company
o
|
(Do not check if
a smaller reporting company)
|
|
|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
o
Yes
x
No
The number of the registrants outstanding equity units as of August 7,
2009 was 21,607,500 common units.
Table of
Contents
HILAND
HOLDINGS GP, LP
Consolidated Balance Sheets
(in
thousands, except unit amounts)
|
|
June 30,
|
|
December 31,
|
|
|
|
2009
|
|
2008
|
|
|
|
(unaudited)
|
|
|
|
ASSETS
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
4,248
|
|
$
|
1,733
|
|
Accounts receivable:
|
|
|
|
|
|
Trade - net of allowance for doubtful accounts of
$304
|
|
17,820
|
|
23,864
|
|
Affiliates
|
|
2,745
|
|
2,346
|
|
|
|
20,565
|
|
26,210
|
|
Fair value of derivative assets
|
|
6,188
|
|
6,851
|
|
Other current assets
|
|
1,348
|
|
1,936
|
|
Total current assets
|
|
32,349
|
|
36,730
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
349,473
|
|
349,159
|
|
Intangibles, net
|
|
37,702
|
|
40,780
|
|
Fair value of derivative assets
|
|
1,597
|
|
7,141
|
|
Other assets, net
|
|
1,464
|
|
1,750
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
422,585
|
|
$
|
435,560
|
|
|
|
|
|
|
|
LIABILITIES AND PARTNERSHIP EQUITY
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Accounts payable
|
|
$
|
14,136
|
|
$
|
22,833
|
|
Accounts payable - affiliates
|
|
5,236
|
|
7,823
|
|
Fair value of derivative liabilities
|
|
921
|
|
1,439
|
|
Accrued liabilities and other
|
|
6,362
|
|
3,168
|
|
Total current liabilities
|
|
26,655
|
|
35,263
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 9)
|
|
|
|
|
|
Long-term debt
|
|
265,117
|
|
256,466
|
|
Fair value of derivative liabilities
|
|
147
|
|
|
|
Asset retirement obligation
|
|
2,560
|
|
2,483
|
|
|
|
|
|
|
|
Partners equity:
|
|
|
|
|
|
Common unitholders (21,607,500 units issued and
outstanding)
|
|
4,862
|
|
12,386
|
|
Accumulated other comprehensive income
|
|
1,370
|
|
3,111
|
|
Total limited partners equity
|
|
6,232
|
|
15,497
|
|
Noncontrolling partners interest in Hiland Partners
|
|
121,874
|
|
125,851
|
|
Total partners equity
|
|
128,106
|
|
141,348
|
|
|
|
|
|
|
|
Total liabilities and partners
equity
|
|
$
|
422,585
|
|
$
|
435,560
|
|
The accompanying
notes are an integral part of these consolidated financial statements.
3
Table of Contents
HILAND
HOLDINGS GP, LP
Consolidated Statements of Operations
For
the Three and Six Months Ended (Unaudited)
(in
thousands, except per unit amounts)
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Midstream operations
|
|
|
|
|
|
|
|
|
|
Third parties
|
|
$
|
48,007
|
|
$
|
112,214
|
|
$
|
98,118
|
|
$
|
201,467
|
|
Affiliates
|
|
867
|
|
2,022
|
|
1,899
|
|
3,043
|
|
Compression services, affiliate
|
|
1,205
|
|
1,205
|
|
2,410
|
|
2,410
|
|
Total revenues
|
|
50,079
|
|
115,441
|
|
102,427
|
|
206,920
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
Midstream purchases (exclusive of items
shown separately below)
|
|
16,646
|
|
51,191
|
|
34,417
|
|
93,642
|
|
Midstream purchases - affiliate (exclusive of items
shown separately below)
|
|
10,353
|
|
36,882
|
|
23,798
|
|
63,049
|
|
Operations and maintenance
|
|
7,785
|
|
7,551
|
|
15,480
|
|
14,320
|
|
Depreciation, amortization and accretion
|
|
10,824
|
|
9,456
|
|
21,082
|
|
18,671
|
|
Property impairments
|
|
|
|
|
|
950
|
|
|
|
Bad debt
|
|
|
|
8,103
|
|
|
|
8,103
|
|
General and administrative
|
|
4,606
|
|
2,333
|
|
8,433
|
|
5,018
|
|
Total operating costs and expenses
|
|
50,214
|
|
115,516
|
|
104,160
|
|
202,803
|
|
Operating (loss) income
|
|
(135
|
)
|
(75
|
)
|
(1,733
|
)
|
4,117
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
Interest and other income
|
|
68
|
|
73
|
|
81
|
|
177
|
|
Amortization of deferred loan costs
|
|
(172
|
)
|
(168
|
)
|
(343
|
)
|
(324
|
)
|
Interest expense
|
|
(2,691
|
)
|
(3,130
|
)
|
(5,049
|
)
|
(6,636
|
)
|
Other income (expense), net
|
|
(2,795
|
)
|
(3,225
|
)
|
(5,311
|
)
|
(6,783
|
)
|
Net loss
|
|
(2,930
|
)
|
(3,300
|
)
|
(7,044
|
)
|
(2,666
|
)
|
Less: Noncontrolling partners interest in loss
of Hiland Partners
|
|
(395
|
)
|
(2,192
|
)
|
(1,610
|
)
|
(2,398
|
)
|
Limited Partners interest in net
loss
|
|
$
|
(2,535
|
)
|
$
|
(1,108
|
)
|
$
|
(5,434
|
)
|
$
|
(268
|
)
|
|
|
|
|
|
|
|
|
|
|
Net loss per limited partners unit
- basic
|
|
$
|
(0.12
|
)
|
$
|
(0.05
|
)
|
$
|
(0.25
|
)
|
$
|
(0.01
|
)
|
Net loss per limited partners unit
- diluted
|
|
$
|
(0.12
|
)
|
$
|
(0.05
|
)
|
$
|
(0.25
|
)
|
$
|
(0.01
|
)
|
Weighted average limited partners units
outstanding - basic
|
|
21,608
|
|
21,603
|
|
21,608
|
|
21,603
|
|
Weighted average limited partners units
outstanding - diluted
|
|
21,608
|
|
21,603
|
|
21,608
|
|
21,603
|
|
The accompanying
notes are an integral part of these consolidated financial statements.
4
Table of
Contents
HILAND HOLDINGS GP, LP
Consolidated
Statements of Comprehensive Income
For the Three and Six Months Ended (Unaudited, in
thousands)
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Net loss
|
|
$
|
(2,930
|
)
|
$
|
(3,300
|
)
|
$
|
(7,044
|
)
|
$
|
(2,666
|
)
|
Closed derivative transactions reclassified to
income
|
|
(2,171
|
)
|
3,028
|
|
(3,879
|
)
|
5,083
|
|
Change in fair value of derivatives
|
|
(1,332
|
)
|
(7,737
|
)
|
950
|
|
(10,253
|
)
|
Comprehensive loss
|
|
$
|
(6,433
|
)
|
$
|
(8,009
|
)
|
$
|
(9,973
|
)
|
$
|
(7,836
|
)
|
Less: Comprehensive loss attributable to noncontrolling
interest in Hiland Partners
|
|
(1,816
|
)
|
(4,106
|
)
|
(2,798
|
)
|
(4,506
|
)
|
Comprehensive loss attributable to limited partners
|
|
$
|
(4,617
|
)
|
$
|
(3,903
|
)
|
$
|
(7,175
|
)
|
$
|
(3,330
|
)
|
The accompanying
notes are an integral part of these consolidated financial statements.
5
Table of
Contents
HILAND
HOLDINGS GP, LP
Consolidated Statements of Cash Flows
For
the Six Months Ended (Unaudited, in thousands)
|
|
June 30,
|
|
June 30,
|
|
|
|
2009
|
|
2008
|
|
Cash flows
from operating activities:
|
|
|
|
|
|
Net loss
|
|
$
|
(7,044
|
)
|
$
|
(2,666
|
)
|
Adjustments to reconcile
net loss to net cash provided by operating activities:
|
|
|
|
|
|
Depreciation and
amortization
|
|
21,004
|
|
18,605
|
|
Accretion of asset
retirement obligation
|
|
78
|
|
66
|
|
Property impairments
|
|
950
|
|
|
|
Amortization of deferred
loan cost
|
|
343
|
|
324
|
|
(Gain) loss on derivative
transactions
|
|
(247
|
)
|
1,935
|
|
Net proceeds from
settlement of derivative contracts
|
|
3,155
|
|
|
|
Unit based compensation
|
|
673
|
|
840
|
|
Bad debt
|
|
|
|
8,103
|
|
Gain on sale of assets
|
|
(3
|
)
|
|
|
Increase in other assets
|
|
(48
|
)
|
(146
|
)
|
(Increase) decrease in
current assets:
|
|
|
|
|
|
Accounts receivable - trade
|
|
6,044
|
|
(21,989
|
)
|
Accounts receivable -
affiliates
|
|
(399
|
)
|
(1,773
|
)
|
Other current assets
|
|
588
|
|
(951
|
)
|
Increase (decrease) in
current liabilities:
|
|
|
|
|
|
Accounts payable
|
|
(671
|
)
|
11,218
|
|
Accounts payable -
affiliates
|
|
(2,587
|
)
|
7,454
|
|
Accrued liabilities and
other
|
|
2,695
|
|
1,013
|
|
Net cash
provided by operating activities
|
|
24,531
|
|
22,033
|
|
Cash flows
from investing activities:
|
|
|
|
|
|
Purchases of property and
equipment
|
|
(27,225
|
)
|
(20,276
|
)
|
Proceeds from disposals of
property and equipment
|
|
12
|
|
6
|
|
Net cash
used in investing activities
|
|
(27,213
|
)
|
(20,270
|
)
|
Cash flows
from financing activities:
|
|
|
|
|
|
Proceeds from short-term
borrowings
|
|
500
|
|
|
|
Proceeds from long-term
borrowings
|
|
12,000
|
|
19,000
|
|
Payments on long-term
borrowings
|
|
(3,000
|
)
|
|
|
Increase in deferred
offering cost
|
|
|
|
(7
|
)
|
Debt issuance costs
|
|
(10
|
)
|
(339
|
)
|
Proceeds from Hiland
Partners, LP unit options exercise
|
|
|
|
1,031
|
|
Redemption of vested
phantom units
|
|
|
|
(35
|
)
|
Distributions held in trust
refunded to Hiland Partners on forfeited unvested restricted common units
|
|
22
|
|
|
|
Payments on capital lease
obligations
|
|
(350
|
)
|
(235
|
)
|
Cash distributions to non-controlling
partners of Hiland Partners, LP
|
|
(1,803
|
)
|
(6,421
|
)
|
Cash distributions to
unitholders
|
|
(2,162
|
)
|
(11,566
|
)
|
Net cash
provided by financing activities
|
|
5,197
|
|
1,428
|
|
|
|
|
|
|
|
Increase for the period
|
|
2,515
|
|
3,191
|
|
Beginning of period
|
|
1,733
|
|
10,602
|
|
End of
period
|
|
$
|
4,248
|
|
$
|
13,793
|
|
Supplementary information
|
|
|
|
|
|
Cash paid for interest, net
of amounts capitalized
|
|
$
|
5,191
|
|
$
|
6,437
|
|
The accompanying notes
are an integral part of these consolidated financial statements.
6
Table of Contents
HILAND HOLDINGS GP, LP
Consolidated
Statement of Changes in Partners Equity
For the Six Months Ended June 30, 2009 (Unaudited,
in thousands)
|
|
|
|
|
|
Noncontrolling
|
|
|
|
|
|
|
|
Accumulated
|
|
Partners
|
|
|
|
|
|
|
|
Other
|
|
Interest in
|
|
|
|
|
|
Common
|
|
Comprehensive
|
|
Hiland
|
|
|
|
|
|
Unitholders
|
|
Income
|
|
Partners
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1,
2009
|
|
$
|
12,386
|
|
$
|
3,111
|
|
$
|
125,851
|
|
$
|
141,348
|
|
Periodic cash distributions
|
|
(2,162
|
)
|
|
|
(1,803
|
)
|
(3,965
|
)
|
Unit based compensation
|
|
72
|
|
|
|
601
|
|
673
|
|
Distributions held in trust
refunded to Hiland Partners on 4,250 forfeited unvested restricted common
units
|
|
|
|
|
|
23
|
|
23
|
|
Other comprehensive income
reclassified to income on closed derivative transactions
|
|
|
|
(2,307
|
)
|
(1,572
|
)
|
(3,879
|
)
|
Change in fair value of
derivatives
|
|
|
|
566
|
|
384
|
|
950
|
|
Net loss
|
|
(5,434
|
)
|
|
|
(1,610
|
)
|
(7,044
|
)
|
Balance June 30, 2009
|
|
$
|
4,862
|
|
$
|
1,370
|
|
$
|
121,874
|
|
$
|
128,106
|
|
The accompanying notes are an integral part of this consolidated
financial statement.
7
Table of
Contents
HILAND
HOLDINGS GP, LP
CONDENSED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
THREE AND
SIX MONTHS ENDED JUNE 30, 2009 and 2008
(in
thousands, except unit information or unless otherwise noted)
Note 1: Organization, Basis of Presentation
and Principles of Consolidation
Unless the context requires otherwise, references to we, us, our,
Hiland Holdings or the Partnership are intended to mean the consolidated
business and operations of Hiland Holdings GP, LP. References to Hiland
Partners are intended to mean the consolidated business and operations of
Hiland Partners, LP and its subsidiaries.
Hiland Holdings GP, LP, a Delaware limited partnership, was formed in May 2006
to own Hiland Partners GP, LLC, the general partner of Hiland Partners, LP, and
certain other common and subordinated units in Hiland Partners. Hiland Partners
GP, LLC was formed in October 2004 to hold the 2% general partner ownership
interest in Hiland Partners and serve as its general partner. Hiland Partners
GP, LLC manages the operations of Hiland Partners. In connection with the
closing of our initial public offering, all of the membership interests in
Hiland Partners GP, LLC were contributed to us. Hiland Partners GP, LLC
constitutes our predecessor.
Our general partner, Hiland Partners GP Holdings, LLC manages our
operations and activities, including, among other things, paying our expenses
and establishing the quarterly cash distribution levels for our common units
and reserves that our general partner determines, in good faith, are necessary
or appropriate to provide for the conduct of our business, to comply with
applicable law, any of our debt instruments or other agreements or to provide
for future distributions to our unitholders for any one or more of the upcoming
four quarters.
Hiland Partners, a Delaware limited partnership, was formed in October 2004
to acquire and operate certain midstream natural gas plants, gathering systems
and compression and water injection assets located in the states of Oklahoma,
North Dakota, Wyoming, Texas and Mississippi that were previously owned by
Continental Gas, Inc. (CGI) and Hiland Partners, LLC. Hiland
Partners commenced operations on February 15, 2005, and concurrently with
the completion of its initial public offering, CGI contributed a substantial
portion of its net assets to Hiland Partners. The transfer of ownership of net
assets from CGI to Hiland Partners represented a reorganization of entities
under common control and was recorded at historical cost. CGI was formed in
1990 as a wholly owned subsidiary of Continental Resources, Inc. (CLR).
CGI operated in one segment, midstream, which involved the purchasing,
gathering, compressing, dehydrating, treating, processing and marketing of
natural gas and fractionating and marketing of natural gas liquids, or NGLs.
CGI historically owned all of Hiland Partners natural gas gathering,
processing, treating and fractionation assets other than the Worland, Bakken, Kinta Area, Woodford Shale and North
Dakota Bakken gathering systems. Hiland Partners, LLC historically owned the
Worland gathering system and compression services assets, which Hiland Partners
acquired on February 15, 2005, and the Bakken gathering system. Since its
initial public offering, Hiland Partners has operated in midstream and
compression services segments. On September 26, 2005, Hiland Partners
acquired Hiland Partners, LLC, which at such time owned the Bakken gathering
system, consisting of certain southeastern Montana gathering assets, for
$92.7 million, $35.0 million of which was used to retire outstanding
Hiland Partners, LLC indebtedness. On May 1, 2006, Hiland Partners
acquired the Kinta Area gathering assets from Enogex Gas
Gathering, L.L.C., consisting of certain eastern Oklahoma gas gathering
assets, for $96.4 million. Hiland
Partners financed this acquisition with $61.2 million of borrowings from its
credit facility and $35.0 million of proceeds from the issuance to Hiland
Partners GP, LLC, its general partner, of 761,714 common units and 15,545
general partner equivalent units, both at $45.03 per unit. Hiland Partners
began construction of the Woodford Shale gathering system in the first quarter
of 2007 and commenced initial start-up of its operations in April 2007.
Construction on the North Dakota Bakken gathering system and processing plant
began in October 2008 and became fully operational in May 2009. As of June 30, 2009, Hiland Partners has
invested approximately $22.9 million in the North Dakota Bakken gathering
system.
The unaudited financial statements for the three and six months ended June 30,
2009 and 2008 included herein have been prepared pursuant to the rules and
regulations of the United States Securities and Exchange Commission (the SEC).
The interim financial statements reflect all adjustments, which in the opinion
of our management, are necessary for a fair presentation of our results for the
interim periods. Such adjustments are considered to be of a normal recurring
nature.
Subsequent e
vents
have been evaluated through August 10, 2009. Results of operations for the
three and six months ended June 30, 2009 are not necessarily indicative of
the results of operations that will be realized for the year ending December 31,
2009. The accompanying consolidated
financial statements and notes thereto should be read in conjunction with the
consolidated financial statements and notes thereto included in our Annual
Report on Form 10-K for the fiscal year ended December 31, 2008.
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Principles
of Consolidation
Because we own the general partner of Hiland Partners, the consolidated
financial statements include our accounts, the accounts of Hiland Partners GP,
LLC and the accounts of Hiland Partners and its subsidiaries. All significant
intercompany transactions and balances have been eliminated.
Use of Estimates
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual results could differ
from those estimates.
Concentration and Credit Risk
Financial instruments that potentially subject
us to concentrations of credit risk consist principally of cash and cash
equivalents and receivables. Hiland
Partners places cash and cash equivalents with high-quality institutions and in
money market funds. Hiland Partners derives its revenue from customers
primarily in the oil and gas and utility industries. These industry
concentrations have the potential to impact Hiland Partners overall exposure
to credit risk, either positively or negatively, in that its customers could be
affected by similar changes in economic, industry or other conditions. However,
we believe that the credit risk posed by this industry concentration is offset
by the creditworthiness of Hiland Partners customer base. Hiland Partners
portfolio of accounts receivable is comprised primarily of mid-size to large
domestic corporate entities. The
counterparties to Hiland Partners commodity based derivative instruments as of
June 30, 2009 are BP Energy Company and Bank of Oklahoma, N.A. The counterparty to Hiland Partners interest
rate swap as of June 30, 2009 is Wells Fargo Bank, N.A.
Fair Value of Financial
Instruments
Our financial instruments, which require fair value disclosure, consist
primarily of cash and cash equivalents, accounts receivable, financial
derivatives, accounts payable and long-term debt. The carrying value of cash
and cash equivalents, accounts receivable and accounts payable are considered
to be representative of their respective fair values, due to the short maturity
of these instruments. Derivative instruments are reported in the accompanying
consolidated financial statements at fair value in accordance with Statement of
Financial Accounting Standards (SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended (SFAS 133). Fair
value of our derivative instruments is determined based on management estimates
through utilization of market data including forecasted forward natural gas and
NGL prices as a function of forward New York Mercantile Exchange (NYMEX)
natural gas and light crude prices and forecasted forward interest rates as a
function of forward London Interbank Offered Rate (LIBOR) interest rates. The
fair value of long-term debt approximates its carrying value due to the
variable interest rate feature of such debt.
Interest Rate Risk Management
Hiland Partners is exposed to interest rate risk on its variable rate
bank credit facility. Hiland Partners manages a portion of the interest rate
exposure by utilizing an interest rate swap to convert a portion of variable
rate debt into fixed rate debt. The swap fixes the one month LIBOR rate at the
indicated rates for a specified amount of related debt outstanding over the
term of the swap agreement. Hiland Partners has elected to designate the
interest rate swap as a cash flow hedge for SFAS 133 accounting treatment.
Accordingly, unrealized gains and losses relating to the interest rate swap are
recorded in accumulated other comprehensive income until the related interest
rate expense is recognized in earnings. Any ineffective portion of the gain or
loss is recognized in earnings immediately.
Commodity Risk Management
Hiland Partners engages in price risk management activities in order to
minimize the risk from market fluctuation in the prices of natural gas and
NGLs. To qualify as an accounting hedge, the price movements in the commodity
derivatives must be highly correlated with the underlying hedged commodity.
Gains and losses related to commodity derivatives that qualify as accounting
hedges are recognized in income when the underlying hedged physical transaction
closes and are included in the consolidated statement of operations as revenues
from midstream operations. Gains and losses related to commodity derivatives
that are not designated as accounting hedges or do not qualify as accounting
hedges are recognized in income immediately and are included in revenues from
midstream operations in the consolidated statement of operations.
SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. SFAS 133 requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. However, if a
derivative does qualify for hedge accounting, depending on the nature of the
hedge, changes in fair value can be offset against the change in fair value of
the
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hedged item
through earnings or recognized in other comprehensive income until such time as
the hedged item is recognized in earnings. To qualify for cash flow hedge
accounting, the cash flows from the hedging instrument must be highly effective
in offsetting changes in cash flows due to changes in the underlying item being
hedged. In addition, all hedging relationships must be designated, documented
and reassessed periodically. SFAS 133 also provides that normal purchases and
normal sales contracts are not subject to the statement. Normal purchases and
normal sales are contracts that provide for the purchase or sale of something
other than a financial instrument or derivative instrument that will be
delivered in quantities expected to be used or sold by the reporting entity over
a reasonable period in the normal course of business.
Hiland Partners derivative financial instruments that qualify for
hedge accounting are designated as cash flow hedges. The cash flow hedge
instruments hedge the exposure of variability in expected future cash flows
that is attributable to a particular risk. The effective portion of the gain or
loss on these derivative instruments is recorded in accumulated other
comprehensive income in partners equity and reclassified into earnings in the
same period in which the hedged transaction closes. The assets or liabilities
related to the derivative instruments are recorded on the balance sheet as fair
value of derivative assets or liabilities. Any ineffective portion of the gain
or loss is recognized in earnings immediately.
Long Lived Assets
In accordance with SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets, Hiland Partners evaluates
its long-lived assets of identifiable business activities for impairment when
events or changes in circumstances indicate, in 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 of the assets
and recording a provision for loss if the carrying value is greater than the
fair value. For assets identified to be disposed of in the future, the carrying
value of these assets is compared to the estimated fair value less the cost to
sell to determine if impairment is required. Until the assets are disposed of,
an estimate of the fair value is redetermined when related events or
circumstances change.
When determining whether impairment of one of
its long-lived assets has occurred, Hiland Partners must estimate the
undiscounted future cash flows attributable to the asset or asset group. The
estimate of cash flows is based on assumptions regarding the volume of reserves
providing asset cash flow and future NGL product and natural gas prices. The
amount of reserves and drilling activities are dependent in part on crude oil
and natural gas prices. Projections of reserves and future commodity prices are
inherently subjective and contingent upon a number of variable factors,
including, but not limited to:
·
changes in general economic
conditions in regions in which Hiland Partners assets are located;
·
the availability and prices
of NGLs and NGL products and competing commodities;
·
the availability and prices
of raw natural gas supply;
·
Hiland Partners ability to
negotiate favorable marketing agreements;
·
the risks that third party
oil and gas exploration and production activities will not occur or be
successful;
·
Hiland Partners dependence
on certain significant customers and producers of natural gas; and
·
competition from other
midstream service providers and processors, including major energy companies.
Any significant variance in any of the above
assumptions or factors could materially affect our cash flows, which could
require us to record an impairment of an asset.
As a result of volume declines at natural gas gathering systems located
in Texas and Mississippi, combined with significantly reduced natural gas
prices, Hiland Partners recognized impairment charges of $950 in March 2009. No impairment charges were recognized during
the three and six months ended June 30, 2008.
Net Income (Loss) per Limited
Partners Unit
Net income (loss) per limited partners unit is computed based on the
weighted-average number of common units outstanding during the period. The
computation of diluted net income (loss) per limited partner unit further
assumes the dilutive effect of restricted units. Net income (loss) per limited
partners unit is computed by dividing net income (loss) applicable to limited
partners by both the basic and diluted weighted-average number of limited
partnership units outstanding.
Noncontrolling Partners Interest
in Hiland Partners
The noncontrolling partners interest in Hiland Partners presented in
partners equity on our consolidated balance sheets as of June 30, 2009
and December 31, 2008 reflects the outside ownership interest of Hiland
Partners. This noncontrolling partners interest in Hiland Partners presented
as Minority interests in the mezzanine section of the balance sheet at December 31,
2008 has been reclassified to the partners equity section on the consolidated
balance sheet in accordance with SFAS No. 160, Noncontrolling
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Interests in
Consolidated Financial Statements an amendment of ARB No. 51 (SFAS 160).
The noncontrolling partners interest in income (loss) of Hiland Partners is
calculated by multiplying the noncontrolling partners proportionate ownership
of limited partner units in Hiland Partners by the limited partners allocation
of Hiland Partners net income (loss). Hiland Partners net income (loss) is
allocated to its limited partners and its general partner based on the
proportionate share of the cash distributions declared for the period, with
adjustments made for incentive distributions specifically allocated to its
general partner. All amounts we have received from Hiland Partners issuance
and sale of limited partner units have been recorded as increases to the
noncontrolling partners interest in Hiland Partners in the partners equity
section on the consolidated balance sheet.
Contributions to Subsidiary
The Partnership directly and indirectly owns all of the equity
interests in Hiland Partners GP, LLC, the general partner of Hiland Partners.
Hiland Partners GP, LLC is required to make contributions to Hiland Partners
each time Hiland Partners issues common units or restricted common units in
order to maintain its 2% general partner ownership in Hiland Partners.
Contributions for the three and six months ended June 30, 2009 and 2008
were insignificant.
Recent Accounting Pronouncements
On June 30, 2009, the Financial Accounting
Standards Board (FASB) issued FASB Statement No. 168,
The
FASB Accounting Standards Codification
and
The Hierarchy of Generally Accepted Accounting Principles (FASB ASC), a
replacement of SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles.
On the effective date, FASB
ASC became the source of authoritative
U.S. accounting and reporting standards for nongovernmental entities, in
addition to guidance issued by the SEC,
and preparers must begin to use the Codification for
periods that begin on or about July 1, 2009. All existing accounting
standard documents are superseded and all other accounting literature not
included in the Codification will be considered nonauthoritative. FASB ASC
significantly changes the way financial statement preparers, auditors, and
academics perform accounting research.
The FASB expects that FASB ASC will reduce the amount
of time and effort required to research an accounting issue, mitigate the risk
of noncompliance with standards through improved usability of the literature,
provide accurate information with real-time updates as new standards are released,
and assist the FASB with the research efforts required during the
standard-setting process. FASB ASC was adopted effective July 1, 2009 and
will not have a material impact on our financial statements and disclosures
therein.
On May 28, 2009, the FASB issued FASB Statement No. 165,
Subsequent
Events
(SFAS 165)
.
SFAS 165 requires entities to disclose the date through which they have
evaluated subsequent events and whether the date corresponds with the release
of their financial statements. SFAS 165 is effective for interim and annual
periods ending after June 15, 2009.
SFAS No. 165 was adopted effective June 30, 2009 and did not
have a material impact on our financial statements and disclosures therein.
On April 9, 2009, the FASB issued Staff Position No. FAS
107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial
Instruments (FAS107-1)
.
FAS107-1 increases the frequency of fair value disclosures to a
quarterly basis instead of annual basis.
FAS107-1 specifically relates to fair value disclosures for any
financial instruments that are not currently reflected on the balance sheet at
fair value. FAS107-1 is effective for
interim and annual periods ending after June 15, 2009. FAS107-1 was adopted effective June 30,
2009 and did not have a material impact on our financial statements and
disclosures therein.
On April 1, 2009, the FASB issued Staff Position No. FAS
141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business
Combination That Arise from Contingencies (FSP141(R)-1). FSP 141(R)-1 amends and clarifies SFAS 141,
revised 2007, Business Combinations to address application issues on initial
and subsequent recognition, measurement, accounting and disclosure of assets
and liabilities arising from contingencies in a business combination. FSP 141(R)-1 is effective for assets and
liabilities arising from contingencies in business combinations for which the
acquisition date is on or after the first annual reporting period beginning on
or after December 15, 2008. FSP 141(R)-1 was adopted effective January 1,
2009 and did not have a material impact on our financial statements and
disclosures therein.
On April 25, 2008, the FASB issued Staff Position No. FAS
142-3, Determination of the Useful
Life of Intangible Assets (FSP 142-3). FSP 142-3 amends the factors that an entity
should consider in developing renewal or extension assumptions used in
determining the useful life of recognized intangible assets under FASB
Statement No. 142 (SFAS 142), Goodwill
and Other Intangible Assets. In determining the useful life of an
acquired intangible asset, FSP 142-3 removes the requirement from SFAS 142 for
an entity to consider whether renewal of the intangible asset requires
significant costs or material modifications to the related arrangement. FSP
142-3 also replaces the previous useful life assessment criteria with a
requirement that an entity considers its own experience in renewing similar
arrangements. If the entity has no relevant experience, it would consider
market participant assumptions regarding renewal. FSP 142-3 was adopted
effective January 1, 2009 and will apply to future intangible assets
acquired. We 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
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performance, and
cash flows. SFAS 161 is effective prospectively for financial statements issued
for fiscal years and interim periods beginning after November 15, 2008,
with early application encouraged. SFAS 161 encourages, but does not require,
comparative disclosures for periods prior to its initial adoption. SFAS 161
amended the qualitative and quantitative disclosure requirements for derivative
instruments and hedging activities set forth in SFAS 133 and generally
increased the level of aggregation/disaggregation required in an 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 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
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interest in its
subsidiary be accounted for consistently and similarly as equity transactions.
Consolidated net income and comprehensive income are now determined without
deducting minority interest; however, earnings-per-share information continues
to be calculated on the basis of the net income attributable to the 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 position, results of operations
or cash flows. However, it did result in certain changes to our financial
statement presentation, including the change in classification of
noncontrolling interest (minority interests) from liabilities to equity on the
consolidated balance sheet.
Upon adoption of SFAS 160 effective January 1, 2009, we
reclassified $125,851 from minority interests liabilities to noncontrolling
partners interest in Hiland Partners in our consolidated balance sheet as of December 31,
2008. In addition, we reclassified $2,192 and $2,398 of minority interest
in loss of Hiland Partners to net loss attributable to noncontrolling partners
interest in loss of Hiland Partners in our consolidated statement of operations
for the three and six months ended June 30, 2008, respectively. Net
income per limited partner unit has not been affected as a result of the
adoption of SFAS 160.
Note 2: Recent
Events
On June 1, 2009, the Partnership and Hiland Partners (together
with the Partnership, the Hiland Companies) signed separate definitive merger
agreements with an affiliate of Harold Hamm, pursuant to which affiliates of Mr. Hamm
have agreed to acquire for cash (i) all
of the outstanding common units of Hiland Partners (other than certain
restricted common units owned by officers and employees) not owned by the
Partnership (the Hiland Partners Merger); and (ii) all of the
outstanding common units of the Partnership (other than certain restricted
common units owned by officers and employees) not owned by Mr. Hamm, his
affiliates or the Hamm family trusts (the Hiland Holdings Merger).
Upon consummation of the mergers, the common units of the Hiland Companies will
no longer be publicly owned or publicly traded.
In the mergers, the 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
PresidentFinance and Secretary of the Hiland Companies, in connection with the
Agreement and Plan of Merger, dated June 1, 2009, among Hiland Partners,
Hiland Partners GP, LLC, HH GP Holding, LLC, and HLND MergerCo, LLC filed a
Transaction Statement on Schedule 13E-3 with the SEC and (ii) the Partnership, Hiland
Partners GP Holdings, LLC, HH GP Holding, LLC, HPGP MergerCo, LLC, Continental
Gas Holdings, Inc. (an affiliate of Mr. Hamm) and Messrs. Hamm,
Griffin and Harrison, in connection with the Agreement and Plan of Merger,
dated June 1, 2009, among the Partnership, Hiland Partners GP Holdings,
LLC, HH GP Holding, LLC and HPGP MergerCo, LLC, also filed a Transaction
Statement on Schedule 13E-3 with the SEC. Concurrently with the filing
of these Schedule 13E-3s, the Partnership and Hiland Partners jointly
filed a Preliminary Proxy Statement on Schedule 14A pursuant to the definitive
version of which the boards of directors of the general partner of each of the
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Partnership and
Hiland Partners will be soliciting proxies from unitholders of the Partnership
and Hiland Partners in connection with the mergers of both Hiland Companies.
On July 10, 2009, the United States Federal Trade Commission
granted early termination of the waiting period under the Hart-Scott-Rodino Act
with respect to the Hiland Partners Merger.
On June 26, 2009, Hiland Partners executed a series of hedging transactions
that involved the unwinding of a portion of existing net in-the-money natural
gas swaps and entered into a new 2010 Colorado Interstate Gas (CIG) natural
gas swap. Hiland Partners received net proceeds of approximately $3.2 million
from the unwinding of the net in-the-money positions, of which $3.0 million
was used to reduce indebtedness under its senior secured revolving credit
facility.
Three putative unitholder class action lawsuits have been filed
relating to the proposed mergers with Mr. Hamm, his affiliates, and
certain Hamm family trusts (the Hamm Parties). These lawsuits are as follows: (i)
Robert Pasternack v. Hiland Partners, LP et al.
, In the
Court of Chancery of the State of Delaware, Civil Action No. 4397-VCS; (ii)
Andrew Jones v. Hiland Partners, LP et al.
, In the Court of
Chancery of the State of Delaware, Civil Action No. 4558-VCS; and (iii)
Arthur G. Rosenberg v. Hiland Partners, LP et al.
, In the
District Court of Garfield County, State of Oklahoma, Case No. C3-09-211-02. The lawsuits name as defendants the
Partnership, Hiland Holdings, the general partner of each of the Partnership
and Hiland Partners, and the members of the board of directors of each of the
Partnership and Hiland Partners. The
lawsuits challenge both the Hiland Partners Merger and the Hiland Holdings
Merger. The lawsuits allege claims of
breach of the Partnership Agreement and breach of fiduciary duty on behalf of (i) a
purported class of common unitholders of the Partnership and (ii) a
purported class of our common unitholders of Hiland Partners.
On July 10, 2009, the court in which the Oklahoma case is pending
granted our motion to stay the Oklahoma lawsuit in favor of the Delaware
lawsuits. On July 31, 2009, the
plaintiff in the first-filed Delaware case (
Pasternack
)
filed an Amended Class Action Complaint and a motion to enjoin the
mergers. This Amended Class Action
Complaint alleges, among other things, that (i) the original consideration
and revised consideration offered by the Hamm Parties is unfair and inadequate,
(ii) the members of the conflicts committees of the general partner of
each of the Partnership and Hiland Partners that were charged with reviewing
the proposals and making a recommendation to each 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 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
|
|
14
Table of
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During the three and six months ended June 30, 2009, we
capitalized interest of $42 and $104, respectively. We capitalized interest of
$24 and $155 during the three and six months ended June 30, 2008,
respectively. Hiland Partners recognized $950 of property impairment charges
related to natural gas gathering systems in Texas and Mississippi during the
six months ended June 30, 2009. Hiland Partners incurred no impairment
charges during the six months ended June 30, 2008.
In accordance with SFAS No. 143, Accounting for Asset Retirement
Obligations (SFAS 143), we have recorded the fair value of liabilities for
asset retirement obligations in the periods in which they are incurred and
corresponding increases in the carrying amounts of the related long-lived
assets. The asset retirement costs are subsequently allocated to expense using
a systematic and rational method and the liabilities are accreted to measure the
change in liability due to the passage of time. The provisions of SFAS 143
primarily apply to dismantlement and site restoration of certain of Hiland
Partners plants and pipelines. We have evaluated Hiland Partners asset
retirement obligations as of June 30, 2009 and have determined that
revisions in the carrying values are not necessary at this time.
The following table summarizes our activity related to asset retirement
obligations for the indicated period:
Asset retirement obligation, January 1, 2009
|
|
$
|
2,483
|
|
Less: obligation extinguished
|
|
(10
|
)
|
Add: additions on leased locations
|
|
9
|
|
Add: accretion expense
|
|
78
|
|
Asset retirement obligation, June 30, 2009
|
|
$
|
2,560
|
|
Note 4: Intangible Assets
Intangible assets consist of the acquired value of customer
relationships, existing contracts to purchase, gather and sell natural gas and
other NGLs and compression contracts, which do not have significant residual
value. The customer relationships and the contracts are being amortized over
their estimated lives of ten years. We review intangible assets for impairment
whenever events or circumstances indicate that the carrying amounts may not be
recoverable. If such a review should indicate that the carrying amount of
intangible assets is not recoverable, we reduce the carrying amount of such
assets to fair value based on the discounted probable cash flows of the
intangible assets. No impairments of intangible assets were recorded during the
three and six months ended June 30, 2009 or 2008.
Intangible assets consisted of the following for the periods indicated:
|
|
As of
|
|
As of
|
|
|
|
June 30,
|
|
December 31,
|
|
|
|
2009
|
|
2008
|
|
Gas sales contracts
|
|
$
|
32,564
|
|
$
|
32,564
|
|
Compression contracts
|
|
18,515
|
|
18,515
|
|
Customer relationships
|
|
10,492
|
|
10,492
|
|
|
|
61,571
|
|
61,571
|
|
Less accumulated amortization
|
|
23,869
|
|
20,791
|
|
Intangible assets, net
|
|
$
|
37,702
|
|
$
|
40,780
|
|
During each of the three months ended June 30, 2009 and 2008, we
recorded $1,540 of amortization expense.
During each of the six months ended June 30, 2009 and 2008, we
recorded $3,079 of amortization expense.
Estimated aggregate amortization expense for the remainder of 2009 is
$3,080 and $6,157 for each of the four succeeding fiscal years from 2010
through 2013 and a total of $9,994 for all years thereafter.
Note 5: Derivatives
Interest
Rate Swap
Hiland Partners is subject to
interest rate risk on its credit facility and has entered into an interest rate
swap to reduce this risk. Hiland Partners entered into a one year interest rate
swap agreement with its counterparty on October 7, 2008 for the period
from January 2009 through December 2009 at a rate of 2.245% on a
notional amount of $100.0 million. The swap fixes the one month LIBOR rate
at 2.245% for the notional amount of debt outstanding over the term of the swap
agreement. During the three and six
months ended June 30, 2009, one month LIBOR interest rates were lower than
the contracted fixed interest rate of 2.245%.
15
Table of Contents
Consequently, for the three and six months ended June 30,
2009, Hiland Partners incurred additional interest expense of $462 and $905,
respectively, upon monthly settlements of the interest rate swap agreement.
The following table provides information about Hiland Partners
interest rate swap at June 30, 2009 for the periods indicated:
|
|
|
|
|
|
Fair Value
|
|
|
|
Notional
|
|
Interest
|
|
Asset
|
|
Description and Period
|
|
Amount
|
|
Rate
|
|
(Liability)
|
|
Interest Rate Swap
|
|
|
|
|
|
|
|
July 2009 - December 2009
|
|
$
|
100,000
|
|
2.245
|
%
|
$
|
(921
|
)
|
|
|
|
|
|
|
|
|
|
|
Commodity
Swaps
Hiland Partners has entered into
certain derivative contracts that are classified as cash flow hedges in
accordance with SFAS 133 which relate to forecasted natural gas sales in
2009 and 2010. Hiland Partners entered into these financial swap instruments to
hedge forecasted natural gas sales against the variability in expected future
cash flows attributable to changes in commodity prices. Under these swap
agreements with its counterparties, Hiland Partners receives a fixed price and
pays a floating price based on certain indices for the relevant contract period
as the underlying natural gas is sold.
Hiland Partners formally documents all relationships between hedging
instruments and the items being hedged, including its risk management objective
and strategy for undertaking the hedging transactions. This includes matching
the natural gas futures, the sold fixed for floating price or buy fixed for
floating price contracts, to the forecasted transactions. Hiland Partners
assesses, both at the inception of the hedge and on an ongoing basis, whether
the derivatives are highly effective in offsetting changes in the fair value of
hedged items. Highly effective is deemed to be a correlation range from 80% to
125% of the change in cash flows of the derivative in offsetting the cash flows
of the hedged transaction. If it is determined that a derivative is not highly
effective as a hedge or it has ceased to be a highly effective hedge, due to
the loss of correlation between changes in natural gas reference prices under a
hedging instrument and actual natural gas prices, Hiland Partners will
discontinue hedge accounting for the derivative and subsequent changes in fair
value for the derivative will be recognized immediately into earnings. Hiland
Partners assesses effectiveness using regression analysis and ineffectiveness
using the dollar offset method.
Derivatives are recorded on our consolidated balance sheet as assets or
liabilities at fair value. For derivatives qualifying as hedges, the effective
portion of changes in fair value is recognized in partners equity as
accumulated other comprehensive income (loss) and reclassified to earnings when
the underlying hedged physical transaction closes. The ineffective portions of
qualifying derivatives are recognized in earnings as they occur. Actual amounts
that will be reclassified will vary as a result of future changes in prices.
Hedge ineffectiveness is recorded in income while the hedge contract is open
and may increase or decrease until settlement of the contract. Realized cash
gains and losses on closed/settled instruments and hedge ineffectiveness are
reflected in the contract month being hedged as an adjustment to our midstream
revenue.
On June 26, 2009, Hiland Partners unwound (cash settled) a 2010
coupled qualified hedge for a discounted net amount of $3,155 and entered into
a new cash flow swap agreement for the same underlying forecasted natural gas
sales which settle in the same monthly periods in 2010. The coupled qualified hedge Hiland Partners
cash settled on June 26, 2009 consisted of a receipt of $4,499 from one
counterparty offset by a payment of $1,344 to another counterparty. Of the
$4,499 cash received, $3,571 had previously been recognized as midstream
revenues in 2008 as the hedge, at that time, did not qualify for hedge
accounting. The net unrecognized loss of $416 has been recorded to accumulated
other comprehensive income and will be recorded as reductions in midstream
revenues as the hedged transactions settle in 2010. Under the terms of the new
derivative contract, Hiland Partners receives a fixed price of $5.08 and pays a
floating CIG index price for the same relevant volumes and contract period as
the underlying natural gas is sold.
Presented in the table below is information related to Hiland Partners
derivatives for the indicated periods:
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Net gains (losses) on closed/settled transactions reclassified
from (to) accumulated other comprehensive income
|
|
$
|
2,171
|
|
$
|
(3,028
|
)
|
$
|
3,879
|
|
$
|
(5,083
|
)
|
Increases (decreases) in fair values of open derivatives
recorded to (from) accumulated other comprehensive income
|
|
$
|
(1,332
|
)
|
$
|
(7,737
|
)
|
$
|
950
|
|
$
|
(10,253
|
)
|
Unrealized non-cash gains (losses) on ineffective portions
of qualifying derivative transactions
|
|
$
|
(137
|
)
|
$
|
(22
|
)
|
$
|
247
|
|
$
|
(5
|
)
|
Unrealized non-cash gains on non-qualifying
derivatives
|
|
$
|
|
|
$
|
(1,512
|
)
|
$
|
|
|
$
|
(1,930
|
)
|
16
Table of
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At June 30, 2009, Hiland Partners accumulated other comprehensive
income was $2,304. Of this amount, Hiland Partners anticipates $4,003 will be
reclassified to earnings during the next twelve months and $(1,699) will be
reclassified to earnings in subsequent periods.
The fair value of derivative assets and liabilities
are as follows for the indicated periods:
|
|
As of
|
|
As of
|
|
|
|
June 30,
|
|
December 31,
|
|
|
|
2009
|
|
2008
|
|
Fair value of derivative assets - current
|
|
$
|
6,188
|
|
$
|
6,851
|
|
Fair value of derivative assets - long term
|
|
1,597
|
|
7,141
|
|
Fair value of derivative liabilities - current
|
|
(921
|
)
|
(1,439
|
)
|
Fair value of derivative liabilities - long term
|
|
(147
|
)
|
|
|
Net fair value of derivatives
|
|
$
|
6,717
|
|
$
|
12,553
|
|
The terms of Hiland Partners derivative contracts currently extend as
far as December 2010. The counterparties to Hiland Partners
commodity-based derivative instruments are BP Energy Company and Bank of
Oklahoma, N.A. The counterparty to Hiland Partners interest rate swap is Wells
Fargo Bank, N.A.
The following table provides information about Hiland Partners
commodity derivative instruments at June 30, 2009 for the periods
indicated:
|
|
|
|
Average
|
|
|
|
|
|
|
|
Fixed
|
|
Fair Value
|
|
Description
and Production Period
|
|
Volume
|
|
Price
|
|
Asset
|
|
|
|
(MMBtu)
|
|
(per MMBtu)
|
|
|
|
Natural Gas - Sold Fixed
for Floating Price Swaps
|
|
|
|
|
|
|
|
July 2009 -
June 2010
|
|
2,136,000
|
|
$
|
7.01
|
|
$
|
6,188
|
|
July 2010 -
December 2010
|
|
1,068,000
|
|
$
|
6.73
|
|
1,450
|
|
|
|
|
|
|
|
$
|
7,638
|
|
Note 6: Fair Value Measurements
We adopted SFAS No. 157, Fair Value Measurements (SFAS 157)
beginning in the first quarter of 2008.
We adopted FSP 157-2 for nonfinancial assets and nonfinancial
liabilities measured at fair value, except those that are recognized or
disclosed on a recurring basis (at least annually) effective January 1,
2009, which applies to nonfinancial assets and liabilities measured at fair
value in a business combination; impaired properties, plants and equipment;
intangible assets and goodwill; and initial recognition of asset retirement
obligations and restructuring costs for which we use fair value. SFAS 157
defines fair value as the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants
at the measurement date, establishes a framework for measuring fair value in
GAAP such as fair value hierarchy used to classify the source of information
used in fair value measurements (i.e., market based or non-market based) and
expands disclosure about fair value measurements based on their level in the
hierarchy. SFAS 157 establishes a fair
value hierarchy which requires an entity to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair value.
SFAS 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
17
Table of
Contents
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.
As a result of volume declines combined with significantly reduced
natural gas prices, Hiland Partners determined that carrying amounts totaling
approximately $950 related to natural gas gathering systems located in Texas
and Mississippi were not recoverable from future cash flows and, therefore,
were impaired at March 31, 2009.
Hiland Partners reduced the carrying amounts of these nonrecurring level
3 hierarchy assets to their estimated fair values of approximately $249 by
using the discounted cash flow method described above, as comparable market
data was not available.
Note 7: Long-Term
Debt
Long-term debt consisted of the following for the indicated periods:
|
|
As of
|
|
As of
|
|
|
|
June 30,
|
|
December 31,
|
|
|
|
2009
|
|
2008
|
|
Hiland Partners-revolving credit facility
|
|
$
|
261,064
|
|
$
|
252,064
|
|
Hiland Holdings-revolving credit facility
|
|
1,205
|
|
705
|
|
Capital lease obligations
|
|
4,701
|
|
5,051
|
|
|
|
266,970
|
|
257,820
|
|
Less current portion:
|
|
|
|
|
|
Capital lease obligations
|
|
648
|
|
649
|
|
Hiland Holdings-revolving credit facility
|
|
1,205
|
|
705
|
|
Long-term debt
|
|
$
|
265,117
|
|
$
|
256,466
|
|
Hiland
Partners Credit Facility
Hiland Partners borrowing capacity under its senior secured revolving
credit facility, as amended, is $300 million consisting of a
$291 million senior secured revolving credit facility to be used for
funding acquisitions and other capital expenditures, issuance of letters of
credit and general corporate purposes (the Acquisition Facility) and a
$9.0 million senior secured revolving credit facility to be used for
working capital and to fund distributions (the Working Capital Facility).
In addition, Hiland Partners senior secured revolving credit facility
provides for an accordion feature, which permits Hiland Partners, if certain
conditions are met, to increase the size of the Acquisition Facility by up to
$50 million and allows for the issuance
18
Table of
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of letters of
credit of up to $15 million in the aggregate. The credit facility will
mature in May 2011. At that time, the agreement will terminate and all
outstanding amounts thereunder will be due and payable.
Due to lower natural gas and NGL prices and the impact of reduced
drilling activity on Hiland Partners current and projected throughput volumes,
Hiland Partners believes that cash generated from operations will decrease for
the remainder of 2009 relative to comparable periods in 2008. Hiland Partners senior secured revolving
credit facility requires Hiland Partners to meet certain financial tests,
including a maximum consolidated funded debt to EBITDA covenant ratio of
4.0:1.0 as of the last day of any fiscal quarter; provided that in the event
that Hiland Partners makes certain permitted acquisitions or capital
expenditures, this ratio may be increased to 4.75:1.0 for the three fiscal
quarters following the quarter in which such permitted acquisition or capital
expenditure occurs. Hiland Partners met
the permitted capital expenditure requirements for the four quarter period
ended March 31, 2009 and elected to increase the ratio to 4.75:1.0 on March 31,
2009 for the quarters ended March 31, 2009, June 30, 2009 and September 30,
2009. During this step-up period, the
applicable margin with respect to loans under the credit facility increases by
35 basis points per annum and the unused commitment fee increases by 12.5 basis
points per annum. The ratio will revert back to 4.0:1.0 for the quarter ended December 31,
2009. If commodity prices do not
significantly improve above the current forward prices for 2009, the
Partnership could be in violation of the maximum consolidated funded debt to
EBITDA covenant ratio as early as September 30, 2009, unless this ratio is
amended, Hiland Partners receives an infusion of equity capital, Hiland
Partners debt is restructured or Hiland Partners is able to monetize in-the-money
hedge positions. Management is
continuing extensive discussions with certain lenders under the credit facility
as to ways to address a potential covenant violation. While no potential
solution has been agreed to, Hiland Partners expects that any solution will
require the assessment of fees and increased rates, the infusion of additional
equity capital or the incurrence of subordinated indebtedness by Hiland
Partners and the suspension of distributions for a certain period of time.
There can be no assurance that any such agreement will be reached with the
lenders, that any required equity or debt financing will be available to Hiland
Partners, or that Hiland Partners hedge positions will be in-the-money.
Upon the occurrence of an event of default as defined in the credit
facility, the lenders may, among other things, be able to accelerate the
maturity of the credit facility and exercise other rights and remedies as set
forth in the credit facility.
Hiland Partners obligations under the credit facility are secured by
substantially all of its assets and guaranteed by Hiland Partners, and all of
its subsidiaries, other than Hiland Operating, LLC, its operating company,
which is the borrower under the credit facility.
Indebtedness under Hiland Partners credit facility will bear interest,
at its option, at either (i) an Alternate Base Rate plus an applicable
margin ranging from 50 to 125 basis points per annum or (ii) LIBOR plus an
applicable margin ranging from 150 to 225 basis points per annum based on its
ratio of consolidated funded debt to EBITDA. The Alternate Base Rate is a rate
per annum equal to the greatest of (a) the Prime Rate in effect on such
day, (b) the base CD rate in effect on such day plus 1.50% and (c) the
Federal Funds effective rate in effect on such day plus
1
/
2
of 1%. Hiland Partners has elected for
the indebtedness to bear interest at LIBOR plus the applicable margin. A letter
of credit fee will be payable for the aggregate amount of letters of credit
issued under the credit facility at a percentage per annum equal to 1.0%. An
unused commitment fee ranging from 25 to 50 basis points per annum based on
Hiland Partners ratio of consolidated funded debt to EBITDA will be payable on
the unused portion of the credit facility. During the step-up period, the
applicable margin with respect to loans under the credit facility will be
increased by 35 basis points per annum and the unused commitment fee will be
increased by 12.5 basis points per annum. At June 30, 2009, the interest
rate on outstanding borrowings from Hiland Partners credit facility was 2.92%.
Hiland Partners is subject to interest rate risk on its credit facility
and has entered into an interest rate swap to reduce this risk. See Note 5
Derivatives for a discussion of Hiland Partners interest rate swap.
The credit facility prohibits Hiland Partners from making distributions
to unitholders if any default or event of default, as defined in the credit
facility, has occurred and is continuing or would result from such
distributions. In addition, the credit facility contains various covenants that
limit, among other things, subject to certain exceptions and negotiated baskets,
Hiland Partners ability to incur indebtedness, grant liens, make certain
loans, acquisitions and investments, make any material changes to the nature of
its business, amend its material agreements, including its Omnibus Agreement,
which contains non-compete and indemnity provisions with affiliates, or enter
into a merger, consolidation or sale of assets.
The credit facility defines EBITDA as Hiland Partners consolidated net
income (loss), plus income tax expense, interest expense, depreciation,
amortization and accretion expense, amortization of intangibles and
organizational costs, non-cash unit based compensation expense, and adjustments
for non-cash gains and losses on specified derivative transactions and for
other extraordinary or non-recurring items.
The credit facility limits distributions to Hiland Partners
unitholders to available cash, as defined by the agreement, and borrowings to
fund such distributions are only permitted under the revolving working capital
facility. The revolving working capital
19
Table of
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facility is
subject to an annual clean-down period of 15 consecutive days in which the
amount outstanding under the revolving working capital facility is reduced to
zero.
As of June 30, 2009, Hiland Partners had $261.1 million
outstanding under this credit facility and was in compliance with its financial
covenants. Hiland Partners EBITDA to
interest expense ratio was 4.95 to 1.0 and its consolidated funded debt to
EBITDA ratio was 4.40 to 1.0.
Hiland Holdings Credit Facility
On September 25,
2006, concurrently with the closing of our initial public offering, we entered
into a three-year $25.0 million senior secured credit facility. Pursuant to the
terms of the agreement, we elected to reduce the commitment level on the credit
facility to $10.0 million effective May 15, 2009 and we elected to further
reduce the commitment level on the credit facility to $3.0 million on August 7,
2009. Concurrently with the reduction of
the commitment level to $3.0 million, the existing lenders under the credit
facility assigned their interests in the facility to The Security National Bank
of Enid and we entered into a first amended and restated senior secured credit
agreement with The Security National Bank of Enid. The credit facility is secured by all of our
ownership interests in Hiland Partners and its general partner, other than the
2% general partner interest and the incentive distribution rights. The credit facility will mature on December
31, 2009, at which time all outstanding amounts thereunder become due and
payable.
Indebtedness under
the credit facility bears interest at the prime rate plus 1% per annum, but in
no event less than 5% per annum, to be adjusted as changes occur in the prime
rate. At August 7, 2009, the interest
rate on outstanding borrowings from our credit facility was 5.0%.
The credit
facility contains several covenants that, among other things, require the
maintenance of a debt-to-worth ratio and require financial reports to be
submitted periodically. The credit
facility also contains various covenants that limit, among other things,
subject to certain exceptions, our ability to grant liens, enter into
agreements restricting our ability to grant liens on our assets or amend the
credit facility, make certain loans, acquisitions and investments or enter into
a merger, consolidation or sale of assets.
The amount we may
borrow under the credit facility is limited to the lesser of: (i) 50% of the
sum of the value of the Hiland Partners common and subordinated units and (ii)
the maximum available amount of the credit facility (currently $3.0
million). For purposes of this
calculation, the value of (i) the Hiland Partners common units on any date
shall be the closing price for such units as reflected on the NASDAQ National
Market on any date and (ii) the Hiland Partners subordinated units on any date
shall be deemed to equal 85% of the value of the Hiland Partners common units
on such date. At August 7, 2009, the
borrowing base was $3.0 million.
As of August 7,
2009, we had $2.5 million outstanding under this credit facility and were in
compliance with our debt-to-worth ratio covenant. As of June 30, 2009, we
had $1.2 million outstanding under our prior credit facility and were in
compliance with our financial covenants. The outstanding $1.2 million at
June 30, 2009, which now matures on December 31, 2009, is included in
accrued liabilities and other in the balance sheet.
Capital Lease Obligations
Hiland Partners is obligated under two separate capital lease
agreements entered into with respect to its Bakken and Badlands gathering
systems in the third quarter of 2007. Under the terms of a capital lease
agreement for a rail loading facility and an associated products pipeline at
its Bakken gathering system, Hiland Partners is repaying a counterparty a
predetermined amount over a period of eight years. Once fully paid, title to
the leased assets will transfer to Hiland Partners no later than the end of the
eight-year period
20
Table of
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commencing from
the inception date of the lease. Hiland Partners also incurred a capital lease
obligation to a counterparty for the aid to construct several electric
substations at its Badlands gathering system which, by agreement, is being
repaid in equal monthly installments over a period of five years.
During the three and six months ended June 30, 2009, Hiland
Partners made principal payments of $185 and $350, respectively, on the above
described capital lease obligations. The
current portion of the capital lease obligations presented in the table above is
included in accrued liabilities and other in the balance sheet.
Note 8: Share-Based
Compensation
Hiland Holdings GP, LP Long Term
Incentive Plan
Hiland Partners GP Holdings, LLC, the general partner of Hiland
Holdings, adopted the Hiland Holdings GP, LP Long-Term Incentive Plan for its
employees and directors of its general partner and employees of its affiliates.
The long-term incentive plan consists of three components: unit options,
restricted units and phantom units. The long-term incentive plan limits the
number of units that are permitted to be delivered pursuant to awards to
2,160,000 units. The plan is administered by the board of directors of our
general partner or the compensation committee of the board of directors of our
general partner. The plan will expire upon the first to occur of its
termination by the board of directors or the compensation committee, the date
when no units remain available under the plan for awards or the tenth
anniversary of the date the plan is approved by our unitholders. Awards then outstanding
will continue pursuant to the terms of their grants.
The board of directors of our general partner and the compensation
committee of the board may terminate or amend the long-term incentive plan at
any time with respect to any units for which a grant has not yet been made. Our
board of directors and the compensation committee of the board also have the
right to alter or amend the long-term incentive plan or any part of the plan
from time to time, including increasing the number of units that may be granted
subject to unitholder approval as may be required by applicable law or stock
exchange rules. However, no change in any outstanding grant may be made that
would materially reduce the benefits of the participant without the consent of
the participant. Restricted common units granted vest and become exercisable in
one-fourth increments on the anniversary of the grant date over four years. A
restricted unit is a common unit that is subject to forfeiture, and upon
vesting, the grantee receives a common unit that is not subject to forfeiture.
Distributions on unvested restricted common units are held in trust by our
general partner until the units vest, at which time the distributions are
distributed to the grantee.
As provided for in the long-term incentive
plan, each non-employee board member of Hiland Partners GP Holdings, LLC on
each anniversary date of the initial reward is entitled to receive an
additional 1,000 restricted common units. We issued no restricted units during
the three and six months ended June 30, 2009. Non-cash unit based
compensation expense related to restricted units issued is to be recognized
over their respective four-year vesting period on the graded vesting
attribution method. As of June 30, 2009, we have 16,500 unvested restricted
units outstanding with a weighted average fair value at grant date of $22.52
per unit.
We recorded non-cash compensation expense related to the restricted
units of $36 and $72 for the three and six months ended June 30, 2009,
respectively, and $38 and $77 for the three and six months ended June 30,
2008, respectively. We will record additional non-cash unit based compensation
expense of $145 over the next four years.
Hiland Partners, LP Long Term
Incentive Plan
Hiland Partners GP, LLC, the general partner of Hiland Partners,
adopted the Hiland Partners, LP Long-Term Incentive Plan for its employees and
directors of its general partner and employees of its affiliates. The long-term
incentive plan currently permits an aggregate of 680,000 of Hiland Partners
common units to be issued with respect to unit options, restricted units and
phantom units granted under the plan. No more than 225,000 of the 680,000
common units may be issued with respect to vested restricted or phantom units.
The plan is administered by the compensation committee of Hiland Partners GP,
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
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
21
Table of
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forfeiture.
Distributions on unvested restricted common units are held in trust by Hiland
Partners general partner until the units vest, at which time the distributions
are distributed to the grantee. Granted phantom common units are generally more
flexible than restricted units and vesting periods and distribution rights may
vary with each grant. A phantom unit is a common unit that is subject to
forfeiture and is not considered issued until it vests. Upon vesting, holders
of phantom units will receive (i) a common unit that is not subject to
forfeiture, cash in lieu of the delivery of such unit equal to the fair market
value of the unit on the vesting date, or a combination thereof, at the
discretion of Hiland Partners general 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 $992 over the next four
years, and the additional expense is to be recognized over a weighted average
period of 2.5 years.
Restricted Units.
Hiland
Partners issued no restricted units during the three and six months ended June 30,
2009. On April 1, 2009, our former
Chief Commercial Officer retired and forfeited 1,500 restricted units. The following table summarizes information
about Hiland Partners restricted units for the six months ended June 30,
2009.
|
|
|
|
Weighted
|
|
|
|
|
|
Average
|
|
|
|
|
|
Fair Value
|
|
|
|
|
|
Per Unit
|
|
|
|
|
|
At Grant
|
|
Restricted Units
|
|
Units
|
|
Date ($)
|
|
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.
22
Table of
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Note 9: Commitments and Contingencies
We maintain a defined contribution retirement plan for our employees
under which we make discretionary contributions to the plan based on a
percentage of eligible employees compensation. Contributions to the plan are
5.0% of eligible employees compensation and resulted in expense for the three
months ended June 30, 2009 and 2008 of $101 and $80, respectively and for
the six months ended June 30, 2009 and 2008 was $190 and $155,
respectively.
We maintain our health and workers compensation insurance through
third-party providers. Property and general liability insurance is also
maintained through third-party providers with a $100 deductible on each policy.
The operation of pipelines, plants and other facilities for gathering,
compressing, treating, or processing natural gas, NGLs and other products is
subject to stringent and complex laws and regulations pertaining to health,
safety and the environment. Our management believes that compliance with
federal, state or local environmental laws and regulations will not have a
material adverse effect on our business, financial position or results of
operations.
Although there are no significant regulatory proceedings in which we
are currently involved, periodically we may be a party to regulatory
proceedings. The results of regulatory proceedings cannot be predicted with
certainty; however, our management believes that we presently do not have
material potential liability in connection with regulatory proceedings that
would have a significant financial impact on our consolidated financial
condition, results of operations or cash flows.
Hiland Partners leases certain equipment, vehicles and facilities under
operating leases, most of which contain annual renewal options. We and Hiland
Partners also lease office space from a related entity. See Note 11 Related
Party Transactions. Under these lease agreements, rent expense was $751 and
$636, respectively, for the three months ended June 30, 2009 and 2008,
respectively and $1,594 and $1,252 for the six months ended June 30, 2009
and 2008, respectively.
Three putative unitholder class action lawsuits have been filed
relating to the Hiland Partners Merger and the Hiland Holdings Merger. These lawsuits are as follows: (i)
Robert Pasternack v. Hiland Partners, LP et al.
, In the
Court of Chancery of the State of Delaware, Civil Action No. 4397-VCS; (ii)
Andrew Jones v. Hiland Partners, LP et al.
, In the Court of
Chancery of the State of Delaware, Civil Action No. 4558-VCS; and (iii)
Arthur G. Rosenberg v. Hiland Partners, LP et al.
, In the
District Court of Garfield County, State of Oklahoma, Case No. C3-09-211-02. The lawsuits name as defendants the
Partnership, Hiland Partners, the general partner of each of the Partnership
and Hiland Partners, and the members of the board of directors of each of the
Partnership and Hiland Partners. The
lawsuits challenge both the Hiland Partners Merger and the Hiland Holdings
Merger. The lawsuits allege claims of
breach of the Partnership Agreement and breach of fiduciary duty on behalf of (i) a
purported class of common unitholders of the Partnership and (ii) a
purported class of our common unitholders of Hiland Partners.
On July 10, 2009, the court in which the Oklahoma case is pending
granted our motion to stay the Oklahoma lawsuit in favor of the Delaware
lawsuits. On July 31, 2009, the
plaintiff in the first-filed Delaware case (
Pasternack
)
filed an Amended Class Action Complaint and a motion to enjoin the
mergers. This Amended Class Action
Complaint alleges, among other things, that (i) the original consideration
and revised consideration offered by the Hamm Parties is unfair and inadequate,
(ii) the members of the conflicts committees of the general partner of
each of the Partnership and Hiland Partners that were charged with reviewing
the proposals and making a recommendation to each 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 Months
Ended June 30,
|
|
For the Six Months
Ended June 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Customer 1
|
|
23
|
%
|
22
|
%
|
20
|
%
|
21
|
%
|
Customer 2
|
|
12
|
%
|
1
|
%
|
10
|
%
|
0
|
%
|
Customer 3
|
|
12
|
%
|
9
|
%
|
15
|
%
|
9
|
%
|
Customer 4
|
|
12
|
%
|
9
|
%
|
8
|
%
|
14
|
%
|
Customer 5
|
|
10
|
%
|
14
|
%
|
11
|
%
|
11
|
%
|
Customer 6
|
|
5
|
%
|
15
|
%
|
5
|
%
|
15
|
%
|
Customer 7
|
|
3
|
%
|
10
|
%
|
3
|
%
|
8
|
%
|
23
Table of
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Customer 1 above is SemStream, L.P., a subsidiary of SemGroup, L.P.,
who filed a voluntary petition for reorganization under Chapter 11 of the U.S.
Bankruptcy Code on July 22, 2008.
In March 2009, Hiland Partners received a good faith deposit from
SemStream, L.P. for $3,000 in lieu of renewing a letter of credit to our
benefit. The $3,000 deposit received is
included in accrued liabilities and other in the balance sheet.
All of Hiland Partners purchases are from domestic sources. The
following table presents Hiland Partners top midstream suppliers as a percent
of total midstream purchases for the periods indicated:
|
|
For the Three Months
Ended June 30,
|
|
For the Six Months
Ended June 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Supplier 1 (affiliated
company)
|
|
40
|
%
|
42
|
%
|
42
|
%
|
40
|
%
|
Supplier 2
|
|
20
|
%
|
16
|
%
|
18
|
%
|
15
|
%
|
Supplier 3
|
|
17
|
%
|
18
|
%
|
16
|
%
|
18
|
%
|
Note 11: Related Party Transactions
Hiland Partners purchases natural gas and NGLs from affiliated
companies. Purchases of product from affiliates totaled $10,353 and $36,882 for
the three months ended June 30, 2009 and 2008, respectively and totaled
$23,798 and $63,049 for the six months ended June 30, 2009 and 2008,
respectively. Hiland Partners also sells natural gas and NGLs to affiliated
companies. Sales of product to affiliates totaled $867 and $2,022 for the three
months ended June 30, 2009 and 2008, respectively and totaled $1,899 and
$3,043 for the six months ended June 30, 2009 and 2008, respectively.
Compression revenues from affiliates were $1,205 and $2,410 for each of the
three and six months ended June 30, 2009 and 2008, respectively.
Accounts receivable - affiliates of $2,745 at June 30, 2009
include $2,649 from one affiliate for midstream sales. Accounts receivable -
affiliates of $2,346 at December 31, 2008, includes $2,083 from one
affiliate for midstream sales.
Accounts payable - affiliates of $5,236 at June 30, 2009 include
$4,018 due to one affiliate for midstream purchases. Accounts payable -
affiliates of $7,823 at December 31, 2008 include $6,682 payable to the
same affiliate for midstream purchases.
Hiland Partners utilizes affiliated companies to provide services to
its plants and pipelines and certain administrative services. The total
expenditures to these companies were $82 and $111 during the three months ended
June 30, 2009 and 2008, respectively and were $256 and $263 during the six
months ended June 30, 2009 and 2008, respectively.
We and Hiland Partners lease office space under operating leases
directly or indirectly from an affiliate. Rent expense associated with these
leases totaled $41 and $37 for the three months ended June 30, 2009 and
2008, respectively and totaled $80 and $75 for the six months ended June 30,
2009 and 2008, respectively.
Note 12: Reportable Segments
Hiland Partners has distinct operating segments for which additional
financial information must be reported. Hiland Partners operations are
classified into two reportable segments:
(1) Midstream, which is the purchasing,
gathering, compressing, dehydrating, treating, processing and marketing of
natural gas and the fractionating and marketing of NGLs.
(2) Compression, which is providing air
compression and water injection services for oil and gas secondary recovery
operations that are ongoing in North Dakota.
These business segments reflect the way Hiland Partners manages its
operations. Hiland Partners operations are conducted in the United States.
General and administrative costs, which consist of executive management,
accounting and finance, operations and engineering, marketing and business
development, are allocated to the individual segments based on revenues.
Midstream assets totaled $398,812 at June 30, 2009. Assets
attributable to compression operations totaled $23,773. All but $27 of the
total capital expenditures of $19,189 for the six months ended June 30,
2009 was attributable to midstream operations. All but $24 of the total capital
expenditures of $18,368 for the six months ended June 30, 2008 was
attributable to midstream operations.
24
Table of Contents
The tables below present information for the reportable segments for
the three and six months ended June 30, 2009 and 2008.
|
|
For the Three Months Ended June 30,
|
|
|
|
2009
|
|
2008
|
|
|
|
Midstream
|
|
Compression
|
|
|
|
Midstream
|
|
Compression
|
|
|
|
|
|
Segment
|
|
Segment
|
|
Total
|
|
Segment
|
|
Segment
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
48,874
|
|
$
|
1,205
|
|
$
|
50,079
|
|
$
|
114,236
|
|
$
|
1,205
|
|
$
|
115,441
|
|
Operating costs and
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Midstream purchases
(exclusive of items shown separately below)
|
|
26,999
|
|
|
|
26,999
|
|
88,073
|
|
|
|
88,073
|
|
Operations and maintenance
|
|
7,575
|
|
210
|
|
7,785
|
|
7,271
|
|
280
|
|
7,551
|
|
Depreciation and
amortization
|
|
9,927
|
|
897
|
|
10,824
|
|
8,561
|
|
895
|
|
9,456
|
|
Property impairments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bad debt
|
|
|
|
|
|
|
|
8,103
|
|
|
|
8,103
|
|
General and administrative
|
|
4,502
|
|
104
|
|
4,606
|
|
2,314
|
|
19
|
|
2,333
|
|
Total operating costs and
expenses
|
|
49,003
|
|
1,211
|
|
50,214
|
|
114,322
|
|
1,194
|
|
115,516
|
|
Operating (loss) income
|
|
$
|
(129
|
)
|
$
|
(6
|
)
|
(135
|
)
|
$
|
(86
|
)
|
$
|
11
|
|
(75
|
)
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other income
|
|
|
|
|
|
68
|
|
|
|
|
|
73
|
|
Amortization of deferred
loan costs
|
|
|
|
|
|
(172
|
)
|
|
|
|
|
(168
|
)
|
Interest expense
|
|
|
|
|
|
(2,691
|
)
|
|
|
|
|
(3,130
|
)
|
Net loss
|
|
|
|
|
|
(2,930
|
)
|
|
|
|
|
(3,300
|
)
|
Less: Noncontrolling
partners interest in loss of Hiland Partners
|
|
|
|
|
|
(395
|
)
|
|
|
|
|
(2,192
|
)
|
Limited partners interest
in net loss
|
|
|
|
|
|
$
|
(2,535
|
)
|
|
|
|
|
$
|
(1,108
|
)
|
|
|
Six Months Ended June 30,
|
|
|
|
2009
|
|
2008
|
|
|
|
Midstream
|
|
Compression
|
|
|
|
Midstream
|
|
Compression
|
|
|
|
|
|
Segment
|
|
Segment
|
|
Total
|
|
Segment
|
|
Segment
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
100,017
|
|
$
|
2,410
|
|
$
|
102,427
|
|
$
|
204,510
|
|
$
|
2,410
|
|
$
|
206,920
|
|
Operating costs and
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Midstream purchases
(exclusive of items shown separately below)
|
|
58,215
|
|
|
|
58,215
|
|
156,691
|
|
|
|
156,691
|
|
Operations and maintenance
|
|
15,053
|
|
427
|
|
15,480
|
|
13,811
|
|
509
|
|
14,320
|
|
Depreciation and
amortization
|
|
19,287
|
|
1,795
|
|
21,082
|
|
16,881
|
|
1,790
|
|
18,671
|
|
Property impairments
|
|
950
|
|
|
|
950
|
|
|
|
|
|
|
|
Bad debt
|
|
|
|
|
|
|
|
8,103
|
|
|
|
8,103
|
|
General and administrative
|
|
8,234
|
|
199
|
|
8,433
|
|
4,969
|
|
49
|
|
5,018
|
|
Total operating costs and
expenses
|
|
101,739
|
|
2,421
|
|
104,160
|
|
200,455
|
|
2,348
|
|
202,803
|
|
Operating income (loss)
|
|
$
|
(1,722
|
)
|
$
|
(11
|
)
|
(1,733
|
)
|
$
|
4,055
|
|
$
|
62
|
|
4,117
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other income
|
|
|
|
|
|
81
|
|
|
|
|
|
177
|
|
Amortization of deferred
loan costs
|
|
|
|
|
|
(343
|
)
|
|
|
|
|
(324
|
)
|
Interest expense
|
|
|
|
|
|
(5,049
|
)
|
|
|
|
|
(6,636
|
)
|
Net loss
|
|
|
|
|
|
(7,044
|
)
|
|
|
|
|
(2,666
|
)
|
Less: Noncontrolling
partners interest in loss of Hiland Partners
|
|
|
|
|
|
(1,610
|
)
|
|
|
|
|
(2,398
|
)
|
Limited partners interest
in net loss
|
|
|
|
|
|
$
|
(5,434
|
)
|
|
|
|
|
$
|
(268
|
)
|
25
Table of Contents
Note 13: Net Income (Loss) per Limited
Partners Unit
The computation of basic net income (loss) per limited partners unit
is based on the weighted-average number of common units outstanding during the
period. The computation of diluted net income (loss) per unit further assumes
the dilutive effect of restricted units. Net income (loss) per unit applicable
to limited partners is computed by dividing net income (loss) applicable to
limited partners by the weighted-average number of limited partnership units
outstanding. The following is a reconciliation of the limited partner units
used in the calculations of net income (loss) per limited partner unitbasic
and net income (loss) per limited partner unitdiluted assuming dilution for
the three and six months ended June 30, 2009 and 2008:
|
|
For the Three Months Ended June 30,
|
|
|
|
2009
|
|
2008
|
|
|
|
Loss
Attributable
to Limited
Partners
(Numerator)
|
|
Limited
Partner Units
(Denominator)
|
|
Per Unit
Amount
|
|
Loss
Attributable
to Limited
Partners
(Numerator)
|
|
Limited
Partner Units
(Denominator)
|
|
Per Unit
Amount
|
|
Loss per limited partner
unit-basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss attributable to
limited partners
|
|
$
|
(2,535
|
)
|
|
|
$
|
(0.12
|
)
|
$
|
(1,108
|
)
|
|
|
$
|
(0.05
|
)
|
Weighted average limited
partner units outstanding
|
|
|
|
21,607,500
|
|
|
|
|
|
21,603,000
|
|
|
|
Loss per limited partner
unit-diluted: Restricted units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss attributable to
limited partners plus assumed conversions
|
|
$
|
(2,535
|
)
|
21,607,500
|
|
$
|
(0.12
|
)
|
$
|
(1,108
|
)
|
21,603,000
|
|
$
|
(0.05
|
)
|
|
|
For the Six Months Ended June 30,
|
|
|
|
2009
|
|
2008
|
|
|
|
Loss
Available to
Limited
Partners
(Numerator)
|
|
Limited
Partner Units
(Denominator)
|
|
Per Unit
Amount
|
|
Loss
Available to
Limited
Partners
(Numerator)
|
|
Limited
Partner Units
(Denominator)
|
|
Per Unit
Amount
|
|
Loss per limited partner
unit-basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss attributable to
limited partners
|
|
$
|
(5,434
|
)
|
|
|
$
|
(0.25
|
)
|
$
|
(268
|
)
|
|
|
$
|
(0.01
|
)
|
Weighted average limited
partner units outstanding
|
|
|
|
21,607,500
|
|
|
|
|
|
21,603,000
|
|
|
|
Loss per limited partner
unit-diluted: Restricted units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss attributable to
limited partners plus assumed conversions
|
|
$
|
(5,434
|
)
|
21,607,500
|
|
$
|
(0.25
|
)
|
$
|
(268
|
)
|
21,603,000
|
|
$
|
(0.01
|
)
|
26
Table of
Contents
For the three and six months ended June 30, 2009, approximately
16,500 restricted units were excluded from the computation of diluted earnings
attributable to limited partner units because the inclusion of such units would
have been anti-dilutive.
Note 14: Partners Capital and Cash
Distributions
Hiland Holdings
Our unitholders (limited partners) have only limited voting rights on
matters affecting our operations and activities and, therefore, limited ability
to influence our 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 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):
Date Cash
|
|
Per Unit Cash
|
|
|
|
Distribution
|
|
Distribution
|
|
Total Cash
|
|
Paid
|
|
Amount
|
|
Distribution
|
|
02/19/08
|
|
$
|
0.2550
|
|
$
|
5,513
|
|
05/19/08
|
|
0.2800
|
|
6,053
|
|
08/19/08
|
|
0.3050
|
|
6,593
|
|
11/19/08
|
|
0.3175
|
|
6,866
|
|
02/18/09
|
|
0.1000
|
|
2,162
|
|
|
|
$
|
1.2575
|
|
$
|
27,187
|
|
Hiland Partners
The unitholders (limited partners) of Hiland Partners have only limited
voting rights on matters affecting its operations and activities and,
therefore, limited ability to influence its 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.
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:
27
Table of Contents
·
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.
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):
Date Cash
|
|
Per Unit Cash
|
|
|
|
|
|
|
|
|
|
|
|
Distribution
|
|
Distribution
|
|
Common
|
|
Subordinated
|
|
General Partner
|
|
Total Cash
|
|
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):
Date Cash
|
|
Per Unit Cash
|
|
|
|
|
|
|
|
|
|
|
|
Distribution
|
|
Distribution
|
|
Common
|
|
Subordinated
|
|
General Partner
|
|
Total Cash
|
|
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
|
|
28
Table of Contents
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.
HILAND HOLDINGS GP, LP
Balance Sheets
(in
thousands, except unit amounts)
|
|
June 30,
|
|
December 31,
|
|
|
|
2009
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
|
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
|
|
29
Table of Contents
HILAND
HOLDINGS GP, LP
Statements
of Operations
For
the Three and Six Months Ended (Unaudited, in thousands)
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
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
|
)
|
HILAND
HOLDINGS GP, LP
Statements
of Cash Flows
For
the Six Months Ended (Unaudited, in thousands)
|
|
Six Months Ended June 30,
|
|
|
|
2009
|
|
2008
|
|
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
|
|
30
Table of Contents
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 PresidentFinance 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.
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;
31
Table of Contents
·
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;
·
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.
32
Table of Contents
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 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
33
Table of Contents
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.
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
|
|
|
|
June 30,
|
|
June 30,
|
|
Hiland
Partners Distributions
|
|
2008
|
|
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.
34
Table of Contents
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
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
PresidentFinance 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
35
Table of Contents
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.
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.
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
36
Table of Contents
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.
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
|
|
37
Table of Contents
|
|
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
|
|
38
Table of Contents
|
|
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 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
39
Table of Contents
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.
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 facilty 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.
40
Table of
Contents
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 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
41
Table of Contents
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 $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 facilty
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.
42
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Contents
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 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
43
Table of Contents
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 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:
·
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
44
Table of Contents
·
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.
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.
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:
|
|
|
|
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
|
|
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:
|
|
|
|
|
|
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
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.
45
Table of Contents
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
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Table of
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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.
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
½ 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 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.
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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
and
The Hierarchy of Generally Accepted Accounting Principles (FASB ASC), a
replacement of SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles.
On the effective date, FASB
ASC became the source of authoritative
U.S. accounting and reporting standards for nongovernmental entities, in
addition to guidance issued by the SEC,
and preparers must begin to use the Codification for
periods that begin on or about July 1, 2009. All existing accounting
standard documents are superseded and all other accounting literature not
included in the Codification will be considered nonauthoritative. FASB ASC significantly
changes the way financial statement preparers, auditors, and academics perform
accounting research.
The FASB expects that FASB ASC will reduce the amount of time and
effort required to research an accounting issue, mitigate the risk of noncompliance
with standards through improved usability of the literature, provide accurate
information with real-time updates as new standards are released, and assist
the FASB with the research efforts required during the standard-setting
process. FASB ASC was adopted effective July 1, 2009 and will not have a
material impact on our financial statements and disclosures therein.
On May 28, 2009, the FASB issued FASB Statement No. 165,
Subsequent
Events
(SFAS 165)
.
SFAS 165 requires entities to disclose the date through which they have
evaluated subsequent events and whether the date corresponds with the release
of their financial statements. SFAS 165 is effective for interim and annual
periods ending after June 15, 2009.
SFAS No. 165 was adopted effective June 30, 2009 and did not
have a material impact on our financial statements and disclosures therein.
On April 9, 2009, the FASB issued Staff Position No. FAS
107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial
Instruments (FAS107-1)
.
FAS107-1
increases the frequency of fair value disclosures to a quarterly basis instead
of annual basis. FAS107-1 specifically
relates to fair value disclosures for any financial instruments that are not
currently reflected on the balance sheet at fair value. FAS107-1 is effective for interim and annual
periods ending after June 15, 2009.
FAS107-1 was adopted effective June 30, 2009 and did not have a
material impact on our financial statements and disclosures therein.
On April 1, 2009, the 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. 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
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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 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
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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 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.
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 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 $0.10 per
MMBtu change (increase or decrease) in the price of natural gas.
|
|
Natural
Gas Price Change ($/MMBtu)
Three Months Ended June 30,
|
|
|
|
2009
|
|
2008
|
|
NGL
Price Change ($/gal)
|
|
$0.10
|
|
$(0.10)
|
|
$0.10
|
|
$(0.10)
|
|
$
|
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
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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 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:
|
|
|
|
|
|
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
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 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.
Item 4.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
(a) Evaluation
of disclosure controls and procedures.
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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.
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 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.
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 1A. Risk Factors
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
52
Table of
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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 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,
53
Table of Contents
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 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
54
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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 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.
Item 4.
Submission of Matters to a Vote of Security Holders
None.
Item 5.
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 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.
Item 6. Exhibits
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)
|
55
Table of Contents
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))
|
|
|
|
|
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
|
56
Table of Contents
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.
SIG
N
ATURES
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 10
th
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)
|
57
Table of
Contents
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))
|
|
|
|
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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.
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|
|
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|
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).
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|
|
|
|
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).
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|
|
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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).
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|
|
|
|
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).
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|
|
|
|
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)
|
58
Table of Contents
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))
|
|
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|
|
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
|
|
|
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|
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.
59
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