UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE
QUARTERLY PERIOD ENDED SEPTEMBER 30,
2009
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OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE TRANSITION PERIOD
FROM TO
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Commission file number:
000-51120
Hiland Partners, LP
(Exact name of Registrant as
specified in its charter)
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DELAWARE
(State or other jurisdiction
of
incorporation or organization)
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71-0972724
(I.R.S. Employer
Identification No.)
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205 West Maple, Suite 1100
Enid, Oklahoma
(Address of principal
executive offices)
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73701
(Zip Code)
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(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. þ 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 o No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
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Large
accelerated
filer o
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Accelerated
filer þ
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Non-accelerated
filer o
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Smaller
reporting
company o
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(Do not check if a smaller reporting company)
Indicate by a check mark whether the registrant is a shell
company (as defined in
rule 12b-2
of the Exchange
Act). o Yes þ No
The number of the registrants outstanding equity units as
of November 5, 2009 was 6,300,624 common units, 3,060,000
subordinated units and a 2% general partnership interest.
HILAND
PARTNERS, LP
INDEX
2
HILAND
PARTNERS, LP
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September 30,
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December 31,
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2009
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2008
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(Unaudited)
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(In thousands, except unit amounts)
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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3,557
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$
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1,173
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Accounts receivable:
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Trade net of allowance for doubtful accounts of $304
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17,872
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23,863
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Affiliates
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1,262
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2,346
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19,134
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26,209
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Fair value of derivative assets
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3,860
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6,851
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Other current assets
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816
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1,584
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Total current assets
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27,367
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35,817
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Property and equipment, net
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322,681
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345,855
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Intangibles, net
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29,902
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35,642
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Fair value of derivative assets
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608
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7,141
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Other assets, net
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1,303
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1,684
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Total assets
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$
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381,861
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$
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426,139
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LIABILITIES AND PARTNERS EQUITY
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Current liabilities:
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Accounts payable
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$
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11,221
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$
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22,470
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Accounts payable affiliates
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4,298
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7,662
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Fair value of derivative liabilities
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835
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1,439
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Accrued liabilities and other
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5,466
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2,463
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Total current liabilities
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21,820
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34,034
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Commitments and contingencies (Note 9)
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Long-term debt
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256,934
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256,466
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Fair value of derivative liabilities
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267
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Asset retirement obligation
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2,593
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2,483
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Partners equity
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Limited partners interest:
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Common unitholders (6,300,624 and 6,286,755 units issued and
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outstanding at September 30, 2009 and December 31,
2008, respectively)
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105,226
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122,666
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Subordinated unitholders (3,060,000 units issued and
outstanding)
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(5,816
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)
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3,055
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General partner interest
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1,645
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2,202
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Accumulated other comprehensive income (loss)
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(808
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)
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5,233
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Total partners equity
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100,247
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133,156
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Total liabilities and partners equity
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$
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381,861
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$
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426,139
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The accompanying notes are an integral part of these
consolidated financial statements.
3
HILAND
PARTNERS, LP
For the Three and Nine Months Ended
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Three Months Ended September 30,
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Nine Months Ended September 30,
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2009
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2008
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2009
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2008
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(Unaudited)
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(In thousands, except per unit amounts)
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Revenues:
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Midstream operations
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Third parties
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$
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53,015
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$
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107,158
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$
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151,133
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$
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308,625
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Affiliates
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626
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7,390
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2,525
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10,433
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Compression services, affiliate
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1,205
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1,205
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3,615
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3,615
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Total revenues
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54,846
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115,753
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157,273
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322,673
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Operating costs and expenses:
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Midstream purchases (exclusive of items shown separately below)
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18,526
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45,616
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52,943
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139,258
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Midstream purchases affiliate (exclusive of items
shown separately below)
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11,740
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36,279
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35,538
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99,328
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Operations and maintenance
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7,736
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7,881
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23,216
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22,201
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Depreciation, amortization and accretion
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10,472
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9,554
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30,981
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27,652
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Property impairments
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20,500
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21,450
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Bad debt
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(7,799
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)
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304
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General and administrative
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2,579
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2,259
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8,458
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6,423
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Total operating costs and expenses
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71,553
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93,790
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172,586
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295,166
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Operating (loss) income
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(16,707
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)
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21,963
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(15,313
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)
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27,507
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Other income (expense):
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Interest and other income
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10
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96
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91
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267
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Amortization of deferred loan costs
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(149
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)
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(147
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)
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(448
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)
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(426
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)
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Interest expense
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(2,702
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)
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(3,271
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)
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(7,739
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)
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(9,888
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)
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Other income (expense), net
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(2,841
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)
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(3,322
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)
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(8,096
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)
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(10,047
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)
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Net (loss) income
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(19,548
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)
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18,641
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(23,409
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)
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17,460
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Less general partners interest in net (loss) income
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(391
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)
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2,641
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(468
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)
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6,513
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Limited partners interest in net (loss) income
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$
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(19,157
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)
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$
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16,000
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$
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(22,941
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)
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$
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10,947
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Net (loss) income per limited partners unit
basic
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$
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(2.05
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)
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$
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1.71
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$
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(2.45
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)
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$
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1.17
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Net (loss) income per limited partners unit
diluted
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$
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(2.05
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)
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$
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1.71
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$
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(2.45
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)
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$
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1.17
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Weighted average limited partners units
outstanding basic
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9,356
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9,339
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9,352
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9,323
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Weighted average limited partners units
outstanding diluted
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|
9,356
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9,365
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9,352
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9,364
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The accompanying notes are an integral part of these
consolidated financial statements.
4
HILAND
PARTNERS, LP
For the Nine Months Ended
|
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|
|
|
|
|
|
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September 30,
|
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September 30,
|
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|
2009
|
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2008
|
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(Unaudited, in thousands)
|
|
|
Cash flows from operating activities:
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Net (loss) income
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$
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(23,409
|
)
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|
$
|
17,460
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Adjustments to reconcile net (loss) income to net cash provided
by operating activities:
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|
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Depreciation and amortization
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30,864
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27,550
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Accretion of asset retirement obligation
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|
117
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|
102
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Property impairments
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21,450
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|
|
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Amortization of deferred loan cost
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|
448
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426
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Gain on derivative transactions
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(9
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)
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(3,685
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)
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Net proceeds from settlement of derivative contracts
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3,155
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Unit based compensation
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|
837
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|
1,159
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Bad debt
|
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|
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|
304
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|
Gain on sale of assets
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|
(3
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)
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|
(12
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)
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Increase in other assets
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|
(57
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)
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|
|
(72
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)
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(Increase) decrease in current assets:
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Accounts receivable trade
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|
5,991
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|
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|
(10,036
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)
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Accounts receivable affiliates
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|
1,084
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|
|
|
(3,846
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)
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Other current assets
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|
|
768
|
|
|
|
(1,459
|
)
|
Increase (decrease) in current liabilities:
|
|
|
|
|
|
|
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Accounts payable
|
|
|
(2,366
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)
|
|
|
(2,856
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)
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Accounts payable affiliates
|
|
|
(3,364
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)
|
|
|
435
|
|
Accrued liabilities and other
|
|
|
3,031
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|
|
|
1,241
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
38,537
|
|
|
|
26,711
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|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
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|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(32,299
|
)
|
|
|
(37,164
|
)
|
Proceeds from disposals of property and equipment
|
|
|
12
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(32,287
|
)
|
|
|
(37,146
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from long-term borrowings
|
|
|
12,000
|
|
|
|
41,000
|
|
Payments on long-term borrowings
|
|
|
(11,000
|
)
|
|
|
|
|
Increase in deferred offering cost
|
|
|
|
|
|
|
(7
|
)
|
Debt issuance costs
|
|
|
(10
|
)
|
|
|
(355
|
)
|
Proceeds from unit options exercise
|
|
|
|
|
|
|
1,052
|
|
General partner contribution for issuance of restricted common
units and from conversion of vested phantom units
|
|
|
(2
|
)
|
|
|
7
|
|
Redemption of vested phantom units
|
|
|
|
|
|
|
(35
|
)
|
Forfeiture of unvested restricted common units
|
|
|
18
|
|
|
|
|
|
Payments on capital lease obligations
|
|
|
(560
|
)
|
|
|
(369
|
)
|
Cash distributions to unitholders
|
|
|
(4,312
|
)
|
|
|
(29,208
|
)
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(3,866
|
)
|
|
|
12,085
|
|
|
|
|
|
|
|
|
|
|
Increase for the period
|
|
|
2,384
|
|
|
|
1,650
|
|
Beginning of period
|
|
|
1,173
|
|
|
|
10,497
|
|
|
|
|
|
|
|
|
|
|
End of period
|
|
$
|
3,557
|
|
|
$
|
12,147
|
|
|
|
|
|
|
|
|
|
|
Supplementary information
|
|
|
|
|
|
|
|
|
Cash paid for interest, net of amounts capitalized
|
|
$
|
7,923
|
|
|
$
|
9,707
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
5
HILAND
PARTNERS, LP
For the Nine Months Ended September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
Subordinated
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Limited
|
|
|
Limited
|
|
|
General
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
Partner
|
|
|
Partner
|
|
|
Partner
|
|
|
Comprehensive
|
|
|
|
|
|
Comprehensive
|
|
|
|
Interest
|
|
|
Interest
|
|
|
Interest
|
|
|
Income (Loss)
|
|
|
Total
|
|
|
Income (Loss)
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands, except unit amounts)
|
|
|
Balance, January 1, 2009
|
|
$
|
122,666
|
|
|
$
|
3,055
|
|
|
$
|
2,202
|
|
|
$
|
5,233
|
|
|
$
|
133,156
|
|
|
|
|
|
Issuance of 7,869 common units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
from 8,250 vested phantom units
|
|
|
(3
|
)
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
Forfeiture of 4,250 unvested
|
|
|
22
|
|
|
|
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
18
|
|
|
|
|
|
restricted common units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Periodic cash distributions
|
|
|
(2,849
|
)
|
|
|
(1,377
|
)
|
|
|
(86
|
)
|
|
|
|
|
|
|
(4,312
|
)
|
|
|
|
|
Unit based compensation
|
|
|
837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
837
|
|
|
|
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
reclassified to income on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
closed derivative transactions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,848
|
)
|
|
|
(5,848
|
)
|
|
$
|
(5,848
|
)
|
Change in fair value of derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(193
|
)
|
|
|
(193
|
)
|
|
|
(193
|
)
|
Net loss
|
|
|
(15,447
|
)
|
|
|
(7,494
|
)
|
|
|
(468
|
)
|
|
|
|
|
|
|
(23,409
|
)
|
|
|
(23,409
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(29,450
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2009
|
|
$
|
105,226
|
|
|
$
|
(5,816
|
)
|
|
$
|
1,645
|
|
|
$
|
(808
|
)
|
|
$
|
100,247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of this consolidated
financial statement.
6
HILAND
PARTNERS, LP
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 and 2008
(in thousands, except unit information or unless otherwise
noted)
|
|
Note 1:
|
Organization,
Basis of Presentation and Principles of Consolidation
|
Hiland Partners, LP, a Delaware limited partnership
(we, us, our or the
Partnership), was formed in October 2004 to acquire
and operate certain midstream natural gas plants, gathering
systems and compression and water injection assets located in
the states of Oklahoma, North Dakota, Wyoming, Texas and
Mississippi that were previously owned by Continental Gas, Inc.
(CGI) and Hiland Partners, LLC. We commenced
operations on February 15, 2005, and concurrently with the
completion of our initial public offering, CGI contributed a
substantial portion of its net assets to us. The transfer of
ownership of net assets from CGI to us represented a
reorganization of entities under common control and was recorded
at historical cost. CGI was formed in 1990 as a wholly owned
subsidiary of Continental Resources, Inc. (CLR).
CGI operated in one segment, midstream, which involved the
purchasing, gathering, compressing, dehydrating, treating,
processing and marketing of natural gas and fractionating and
marketing of natural gas liquids, or NGLs. CGI historically
owned all of our natural gas gathering, processing, treating and
fractionation assets other than our Worland, Bakken, Kinta Area,
Woodford Shale and North Dakota Bakken gathering systems. Hiland
Partners, LLC historically owned our Worland gathering system
and our compression services assets, which we acquired on
February 15, 2005, and our Bakken gathering system. Since
our initial public offering, we have operated in midstream and
compression services segments. On September 26, 2005, we
acquired Hiland Partners, LLC, which at such time owned the
Bakken gathering system, consisting of certain southeastern
Montana gathering assets, for $92.7 million,
$35.0 million of which was used to retire outstanding
Hiland Partners, LLC indebtedness. On May 1, 2006, we
acquired the Kinta Area gathering assets from Enogex Gas
Gathering, L.L.C., consisting of certain eastern Oklahoma gas
gathering assets, for $96.4 million. We financed this
acquisition with $61.2 million of borrowings from our
credit facility and $35.0 million of proceeds from the
issuance to Hiland Partners GP, LLC, our general partner, of
761,714 common units and 15,545 general partner equivalent
units, both at $45.03 per unit. We began construction of the
Woodford Shale gathering system in the first quarter of 2007 and
commenced initial
start-up of
its operations in April 2007. Construction on the North Dakota
Bakken gathering system and processing plant began in October
2008 and became fully operational in May 2009. As of
September 30, 2009, we have invested approximately
$24.0 million in the North Dakota Bakken gathering system.
The unaudited financial statements for the three and nine months
ended September 30, 2009 and 2008 included herein have been
prepared pursuant to the rules and regulations of the United
States Securities and Exchange Commission (the SEC).
The interim financial statements reflect all adjustments, which
in the opinion of our management, are necessary for a fair
presentation of our results for the interim periods. Such
adjustments are considered to be of a normal recurring nature.
Subsequent events have been evaluated through November 8,
2009. Results of operations for the three and nine months ended
September 30, 2009 are not necessarily indicative of the
results of operations that will be realized for the year ending
December 31, 2009. The accompanying consolidated financial
statements and notes thereto should be read in conjunction with
the consolidated financial statements and notes thereto included
in our Annual Report on
Form 10-K
for the fiscal year ended December 31, 2008.
Principles
of Consolidation
The consolidated financial statements include our accounts and
those of our subsidiaries. All significant intercompany
transactions and balances have been eliminated.
7
HILAND
PARTNERS, LP
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED) (Continued)
Use of
Estimates
The preparation of financial statements in accordance with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those
estimates.
Concentration
and Credit Risk
Financial instruments that potentially subject us to
concentrations of credit risk consist principally of cash and
cash equivalents and receivables. We place our cash and cash
equivalents with high-quality institutions and in money market
funds. We derive our revenue from customers primarily in the oil
and gas and utility industries. These industry concentrations
have the potential to impact our overall exposure to credit
risk, either positively or negatively, in that our customers
could be affected by similar changes in economic, industry or
other conditions. However, we believe that the credit risk posed
by this industry concentration is offset by the creditworthiness
of our customer base. Our portfolio of accounts receivable is
comprised primarily of mid-size to large domestic corporate
entities. The counterparties to our commodity based derivative
instruments as of September 30, 2009 are BP Energy Company
and Bank of Oklahoma, N.A. Our counterparty to our interest rate
swap is Wells Fargo Bank, N.A.
Fair
Value of Financial Instruments
Our financial instruments, which require fair value disclosure,
consist primarily of cash and cash equivalents, accounts
receivable, financial derivatives, accounts payable and
long-term debt. The carrying value of cash and cash equivalents,
accounts receivable and accounts payable are considered to be
representative of their respective fair values, due to the short
maturity of these instruments. Derivative instruments are
reported in the accompanying consolidated financial statements
at fair value. Fair value of our derivative instruments is
determined based on management estimates through utilization of
market data including forecasted forward natural gas and NGL
prices as a function of forward New York Mercantile Exchange
(NYMEX) natural gas and light crude prices and
forecasted forward interest rates as a function of forward
London Interbank Offered Rate (LIBOR) interest
rates. The fair value of long-term debt approximates its
carrying value due to the variable interest rate feature of such
debt.
Interest
Rate Risk Management
We are exposed to interest rate risk on our variable rate bank
credit facility. We manage a portion of our interest rate
exposure by utilizing an interest rate swap to convert a portion
of variable rate debt into fixed rate debt. The swap fixes the
one month LIBOR rate at the indicated rates for a specified
amount of related debt outstanding over the term of the swap
agreement. We have elected to designate the interest rate swap
as a cash flow hedge for accounting treatment. Accordingly,
unrealized gains and losses relating to the interest rate swap
are recorded in accumulated other comprehensive income until the
related interest rate expense is recognized in earnings. Any
ineffective portion of the gain or loss is recognized in
earnings immediately.
Commodity
Risk Management
We engage in price risk management activities in order to
minimize the risk from market fluctuation in the prices of
natural gas and NGLs. To qualify as an accounting hedge, the
price movements in the commodity derivatives must be highly
correlated with the underlying hedged commodity. Gains and
losses related to commodity derivatives that qualify as
accounting hedges are recognized in income when the underlying
hedged physical transaction closes and are included in the
consolidated statement of operations as revenues 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.
8
HILAND
PARTNERS, LP
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED) (Continued)
US GAAP requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial
position and measure those instruments at fair value. However,
if a derivative does qualify for hedge accounting, depending on
the nature of the hedge, changes in fair value can be offset
against the change in fair value of the hedged item through
earnings or recognized in accumulated 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. Certain
normal purchases and normal sales contracts are not subject to
fair value measurement. Normal purchases and normal sales are
contracts that provide for the purchase or sale of something
other than a financial instrument or a derivative instrument
that will be delivered in quantities expected to be used or sold
by the reporting entity over a reasonable period in the normal
course of business.
Our derivative financial instruments that qualify for hedge
accounting are designated as cash flow hedges. The cash flow
hedge instruments hedge the exposure of variability in expected
future cash flows that is attributable to a particular risk. The
effective portion of the gain or loss on these derivative
instruments is recorded in accumulated other comprehensive
income in partners equity and reclassified into earnings
in the same period in which the hedged transaction closes. The
assets or liabilities related to the derivative instruments are
recorded on the balance sheet as fair value of derivative assets
or liabilities. Any ineffective portion of the gain or loss is
recognized in earnings immediately.
Long
Lived Assets
We evaluate our long-lived assets of identifiable business
activities for impairment when events or changes in
circumstances indicate, in our managements judgment, that
the carrying value of such assets may not be recoverable. The
determination of whether impairment has occurred is based on our
managements estimate of undiscounted future cash flows
attributable to the assets as compared to the carrying value of
the assets. If impairment has occurred, the amount of the
impairment recognized is determined by estimating the fair value
of the assets and recording a provision for loss if the carrying
value is greater than the fair value. For assets identified to
be disposed of in the future, the carrying value of these assets
is compared to the estimated fair value less the cost to sell to
determine if impairment is required. Until the assets are
disposed of, an estimate of the fair value is re-determined when
related events or circumstances change.
When determining whether impairment of one or more of our
long-lived assets has occurred, we estimate the undiscounted
future cash flows attributable to the asset or asset group.
Estimates of cash flows are based on assumptions regarding the
volume of reserves providing asset cash flow, future natural gas
and NGL product prices, estimated future operating and
maintenance capital expenditures. The amount of reserves and
drilling activities are dependent in part on natural gas and
crude oil prices. Projections of reserves, future commodity
prices and operating and maintenance capital expenditures are
inherently subjective and contingent upon a number of variable
factors, including, but not limited to:
|
|
|
|
|
changes in general economic conditions in regions in which the
assets are located;
|
|
|
|
the availability and prices of NGLs and NGL products and
competing commodities;
|
|
|
|
the availability and prices of raw natural gas supply;
|
|
|
|
our ability to negotiate favorable marketing agreements;
|
|
|
|
the risks that third party oil and gas exploration and
production activities will not occur or be successful;
|
|
|
|
our dependence on certain significant customers and producers of
natural gas; and
|
|
|
|
competition from other midstream service providers and
processors, including major energy companies.
|
9
HILAND
PARTNERS, LP
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED) (Continued)
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 recent volume declines and projected future
volume declines at our Kinta Area gathering system located in
southeastern Oklahoma, we recognized impairment charges of
$20,500 in September 2009. Additionally, as a result of volume
declines at our natural gas gathering systems located in Texas
and Mississippi, combined with significantly reduced natural gas
prices, we recognized impairment charges of $950 in March 2009.
No impairment charges were recognized during the three and nine
months ended September 30, 2008.
Comprehensive
Income (Loss)
Comprehensive income (loss) includes net income (loss) and other
comprehensive income, which includes, but is not limited to,
changes in the fair value of derivative financial instruments.
For derivatives qualifying as accounting hedges, the effective
portion of changes in fair value is recognized in partners
equity as accumulated other comprehensive income and
reclassified to earnings when the underlying hedged physical
transaction closes. Our comprehensive income (loss) for the
three and nine months ended September 30, 2009 and 2008 is
presented in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Net (loss) income
|
|
$
|
(19,548
|
)
|
|
$
|
18,641
|
|
|
$
|
(23,409
|
)
|
|
$
|
17,460
|
|
Closed derivative transactions reclassified to income
|
|
|
(1,969
|
)
|
|
|
1,395
|
|
|
|
(5,848
|
)
|
|
|
6,478
|
|
Change in fair value of derivatives
|
|
|
(1,143
|
)
|
|
|
13,219
|
|
|
|
(193
|
)
|
|
|
2,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (loss) income
|
|
$
|
(22,660
|
)
|
|
$
|
33,255
|
|
|
$
|
(29,450
|
)
|
|
$
|
26,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income (Loss) per Limited Partners Unit
Net income (loss) per limited partners unit is computed
based on the weighted-average number of common and subordinated
units outstanding during the period. The computation of diluted
net income (loss) per limited partner unit further assumes the
dilutive effect of unit options and restricted and phantom
units. Net income (loss) per limited partners unit is
computed by dividing net income (loss) applicable to limited
partners, after deducting the general partners 2% interest
and incentive distributions, by both the basic and diluted
weighted-average number of limited partnership units outstanding.
Recent
Accounting Pronouncements
In September 2009, the FASB issued new authoritative accounting
guidance, effective for financial statements issued for interim
and annual periods ending after September 15, 2009, which
identifies the FASB Accounting Standards Codification
(Codification) as the authoritative source of GAAP
in the United States. Rules and interpretive releases of the SEC
under federal securities laws are also sources of authoritative
GAAP for SEC registrants. Codification is not intended to change
GAAP. The adoption of this new accounting guidance had no impact
on our financial statements and disclosures therein.
In May 2009, the FASB issued new authoritative accounting
guidance on subsequent events that establishes general standards
of accounting for and disclosure of events that occur after the
balance sheet date but before financial statements are issued or
are available to be issued. This new accounting guidance is
effective for interim or annual periods ending after
June 15, 2009. The adoption of this new guidance was
effective June 30, 2009 and did not have a material impact
on our financial statements and disclosures therein.
10
HILAND
PARTNERS, LP
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED) (Continued)
In April 2009, the FASB issued new authoritative accounting
guidance on interim disclosures about fair value of financial
instruments which expands the fair value disclosures required
for all financial instruments to interim periods. This new
guidance also requires entities to disclose in interim periods
the methods and significant assumptions used to estimate the
fair value of financial instruments. This new accounting
guidance is effective for interim reporting periods ending after
June 15, 2009. The adoption of this new guidance was
effective June 30, 2009 and did not have a material impact
on our financial statements and disclosures therein.
In April 2009, the FASB revised the authoritative guidance
related to the initial recognition and measurement, subsequent
measurement and accounting, and disclosure of assets and
liabilities arising from contingencies in a business
combination. Generally, assets acquired and liabilities assumed
in a business combination that arise from contingencies must be
recognized at fair value at the acquisition date. This guidance
was adopted January 1, 2009. As this guidance is applied
prospectively to business combinations with an acquisition date
on or after the date the guidance became effective, the impact
cannot be determined until the transactions occur. No such
transactions have occurred during 2009.
In April 2008, the FASB issued amended guidance on the factors
that an entity should consider in developing renewal or
extension assumptions used in determining the useful life of
recognized intangible assets, including goodwill. In determining
the useful life of an acquired intangible asset, this guidance
removes the requirement for an entity to consider whether
renewal of the intangible asset requires significant costs or
material modifications to the related arrangement and replaces
the previous useful life assessment criteria with a requirement
that an entity considers its own experience or market
participant assumptions in renewing similar arrangements. This
guidance was adopted effective January 1, 2009, and will
apply to future intangible assets acquired. We dont
believe the adoption will have a material impact on our
financial position, results of operations or cash flows.
In March 2008, the FASB amended and expanded the disclosure
requirements related to derivative instruments and hedging
activities 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. The revised guidance requires qualitative
disclosures about objectives and strategies for using
derivatives, quantitative disclosures about fair value amounts
of and gains and losses on derivative instruments, and
disclosures about credit-risk-related contingent features in
derivative agreements. This guidance was adopted effective
January 1, 2009 and did not have a material impact on our
financial statements and disclosures therein.
In March 2008, the FASB issued authoritative accounting guidance
which 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. This guidance 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 revised the authoritative guidance
for business combinations which provides guidance for how the
acquirer recognizes and measures goodwill acquired in the
business combination or a gain from a bargain purchase, the
identifiable assets acquired, liabilities assumed and any
noncontrolling interest in the acquiree. This guidance also
determines what information to disclose to enable users to be
able to evaluate the nature and financial effects of the
business combination. This guidance was adopted effective
January 1, 2009 and will apply to future business
combinations.
In December 2007, the FASB issued authoritative guidance
clarifying that a noncontrolling interest in a subsidiary is an
ownership interest in the consolidated entity that should be
reported as equity in the consolidated financial statements.
This guidance requires the equity amount of consolidated net
income
11
HILAND
PARTNERS, LP
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED) (Continued)
attributable to the parent and to the noncontrolling interest be
clearly identified and presented on the face of the consolidated
income statement and that changes in a parents ownership
interest while the parent retains its controlling financial
interest in its subsidiary be accounted for consistently and
similarly as equity transactions. Consolidated net income and
comprehensive income are now determined without deducting
minority interest; however,
earnings-per-share
information continues to be calculated on the basis of the net
income attributable to the parents shareholders.
Additionally, this guidance 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. This guidance is effective for
fiscal years beginning on or after December 15, 2008, was
adopted effective January 1, 2009 and did not have a
material impact on our financial position, results of operations
or cash flows.
In February 2007, the FASB expanded guidance on fair value
measurements which 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. This guidance 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. The adoption of this guidance did not
have any impact on our financial position, results of operations
or cash flows.
In September 2006, the FASB issued new authoritative accounting
guidance for fair value measurements, which 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. This guidance 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 and 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.
This guidance was adopted effective January 1, 2009 and did
not have a material impact on our financial statements or
disclosures therein.
|
|
Note 2:
|
Merger
Agreements
|
On November 3, 2009, the Partnership amended its merger
agreement with affiliates of Harold Hamm, pursuant to which
Mr. Hamms affiliates had agreed to acquire all of the
outstanding common units of the Partnership (other than certain
restricted common units owned by officers and employees) not
owned by Hiland Holdings (the Hiland Partners
Merger). The amendment increased the consideration payable
to common unitholders of the Partnership from $7.75 to $10.00
per common unit and extended the end date under the merger
agreement to December 11, 2009. On the same day, Hiland
Holdings amended its merger agreement with affiliates of Harold
Hamm, pursuant to which Mr. Hamms affiliates had
agreed to acquire all of the outstanding common units of Hiland
Holdings (other than certain restricted common units owned by
officers and employees) not owned by Mr. Hamm, his
affiliates and the Hamm family trusts (the Hiland Holdings
Merger). The amendment increased the consideration payable
to common unitholders of Hiland Holdings from $2.40 to $3.20 per
common unit and extended the end date under the merger agreement
to December 11, 2009.
Upon consummation of the mergers, the common units of the Hiland
companies will no longer be publicly owned or publicly traded.
Conflicts committees comprised entirely of independent members
of the boards of directors of the general partners of the
Partnership and Hiland Holdings separately determined that
12
HILAND
PARTNERS, LP
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED) (Continued)
the merger agreements, as amended, and 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 opinion
received from its respective financial advisor related to the
fairness of the increased merger consideration. Based on the
recommendation of its conflicts committee, the board of
directors of the general partner of each of the Partnership and
Hiland Holdings has approved the applicable merger agreement and
has recommended, along with its respective conflicts committee,
that the public unitholders of the Partnership and Hiland
Holdings, respectively, approve the applicable merger.
Consummation of the Hiland Partners Merger is subject to certain
conditions, including the approval of holders of a majority of
our outstanding common units not owned by the general partner of
the Partnership and its affiliates, including Hiland Holdings,
the absence of any restraining order or injunction, and other
customary closing conditions. Additionally, the obligation of
Mr. Hamm and his affiliates to complete the Hiland Partners
Merger is contingent upon the concurrent completion of the
Hiland Holdings Merger, and the Hiland Holdings Merger is
subject to closing conditions similar to those described above.
There can be no assurance that the Hiland Partners Merger or any
other transaction will be approved or consummated.
In connection with amending the merger agreements, each Hiland
company has adjourned its special meeting of unitholders until
December 4, 2009, to allow the unitholders of each Hiland
company additional time to consider the proposals to approve the
applicable merger agreement and merger. The Partnership and
Hiland Holdings intend to file with the SEC a supplement to the
definitive joint proxy statement on Schedule 14A, which,
upon clearance by the SEC, the Hiland companies intend to mail
to all holders of record of the Hiland companies as of
September 9, 2009, the record date for the special
meetings. The definitive joint proxy statement on
Schedule 14A was filed with the SEC on September 11,
2009 and first mailed to unitholders on or around
September 16, 2009.
Each of the Hiland companies had previously amended the
respective merger agreement between that Hiland company and
affiliates of Harold Hamm on October 26, 2009 to extend the
end date under the merger agreement from November 1 to
November 6. Those amendments were to provide the boards of
directors and conflicts committees of each of the Hiland
companies additional time to consider the proposals made by
Harold Hamm in letters delivered to the conflicts committees on
October 26, 2009, to increase the consideration payable to
common unitholders of the Partnership and Hiland Holdings under
the respective merger agreements.
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.
13
HILAND
PARTNERS, LP
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED) (Continued)
|
|
Note 3:
|
Property
and Equipment and Asset Retirement Obligations
|
Property and equipment consisted of the following for the
periods indicated:
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Land
|
|
$
|
295
|
|
|
$
|
295
|
|
Construction in progress
|
|
|
2,558
|
|
|
|
15,583
|
|
Midstream pipeline, plants and compressors
|
|
|
441,853
|
|
|
|
405,842
|
|
Compression and water injection equipment
|
|
|
19,421
|
|
|
|
19,391
|
|
Other
|
|
|
4,987
|
|
|
|
4,621
|
|
|
|
|
|
|
|
|
|
|
|
|
|
469,114
|
|
|
|
445,732
|
|
Less: accumulated depreciation and amortization
|
|
|
146,433
|
|
|
|
99,877
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
322,681
|
|
|
$
|
345,855
|
|
|
|
|
|
|
|
|
|
|
As a result of recent volume declines and projected future
volume declines at our Kinta Area gathering system located in
southeastern Oklahoma, we recognized impairment charges
consisting of
right-of-ways,
pipelines, compressors and related equipment of $18,854 in
September 2009. Additionally, as a result of volume declines at
our natural gas gathering systems located in Texas and
Mississippi, combined with significantly reduced natural gas
prices, we recognized impairment charges of $950 in March 2009.
No impairment charges were recognized during the three and nine
months ended September 30, 2008. During the three and nine
months ended September 30, 2009, we capitalized interest of
$2 and $106, respectively. We capitalized interest of $5 and
$160 during the three and nine months ended September 30,
2008, respectively.
We recorded the fair value of liabilities for asset retirement
obligations in the periods in which they are incurred with
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. Our asset retirement obligations
primarily relate to dismantlement and site restoration of
certain of our plants, pipelines and compressor stations. We
have evaluated our asset retirement obligations as of
September 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
|
|
|
(17
|
)
|
Add: additions on leased locations
|
|
|
10
|
|
Add: accretion expense
|
|
|
117
|
|
|
|
|
|
|
Asset retirement obligation, September 30, 2009
|
|
$
|
2,593
|
|
|
|
|
|
|
|
|
Note 4:
|
Intangible
Assets
|
Intangible assets consist of the acquired value of customer
relationships and existing contracts to purchase, gather and
sell natural gas and other NGLs and compression contracts, which
do not have significant residual value. The customer
relationships and the contracts are being amortized over their
estimated lives of ten years. We review intangible assets for
impairment whenever events or circumstances indicate that the
carrying amounts may not be recoverable. If such a review should
indicate that the carrying amount of intangible assets is not
recoverable, we reduce the carrying amount of such assets to
fair value based on the
14
HILAND
PARTNERS, LP
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED) (Continued)
discounted probable cash flows of the intangible assets. As a
result of recent volume declines and projected future volume
declines at our Kinta Area gathering system located in
southeastern Oklahoma, we recognized impairment charges related
to customer relationships of $1,646 in September 2009. No
impairments of intangible assets were recorded during the three
and nine months ended September 30, 2008.
Intangible assets consisted of the following for the periods
indicated:
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Gas sales contracts
|
|
$
|
25,585
|
|
|
$
|
25,585
|
|
Compression contracts
|
|
|
18,515
|
|
|
|
18,515
|
|
Customer relationships
|
|
|
10,492
|
|
|
|
10,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54,592
|
|
|
|
54,592
|
|
Less accumulated amortization
|
|
|
24,690
|
|
|
|
18,950
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
$
|
29,902
|
|
|
$
|
35,642
|
|
|
|
|
|
|
|
|
|
|
During each of the three months ended September 30, 2009
and 2008, we recorded $1,365 of amortization expense. During
each of the nine months ended September 30, 2009 and 2008,
we recorded $4,094 of amortization expense. Estimated aggregate
amortization expense for the remainder of 2009 is $1,303 and
$5,209 for each of the four succeeding fiscal years from 2010
through 2013 and a total of $7,763 for all years thereafter.
Interest
Rate Swap
We are subject to interest rate risk on our credit facility and
have entered into an interest rate swap to reduce this risk. We
entered into a one year interest rate swap agreement with our
counterparty on October 7, 2008 for the period from January
2009 through December 2009 at a rate of 2.245% on a notional
amount of $100.0 million. The swap fixes the one month
LIBOR rate at 2.245% for the notional amount of debt outstanding
over the term of the swap agreement. During the three and nine
months ended September 30, 2009, one month LIBOR interest
rates were lower than the contracted fixed interest rate of
2.245%. Consequently, for the three and nine months ended
September 30, 2009, we incurred additional interest expense
of $501 and $1,406, respectively, upon monthly settlements of
the interest rate swap agreement.
The following table provides information about our interest rate
swap at September 30, 2009 for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional
|
|
|
Interest
|
|
|
Fair Value
|
|
Description and Period
|
|
Amount
|
|
|
Rate
|
|
|
(Liability)
|
|
|
Interest Rate Swap
|
|
|
|
|
|
|
|
|
|
|
|
|
October 2009 December 2009
|
|
$
|
100,000
|
|
|
|
2.245
|
%
|
|
$
|
(512
|
)
|
Commodity
Swaps
We have entered into certain derivative contracts that are
classified as cash flow hedges which relate to forecasted
natural gas sales in 2009 and 2010. We entered into these
financial swap instruments to hedge forecasted natural gas sales
against the variability in expected future cash flows
attributable to changes in commodity prices. Under these swap
agreements with our counterparties, we receive a fixed price and
pay a floating price based on certain indices for the relevant
contract period as the underlying natural gas is sold.
15
HILAND
PARTNERS, LP
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED) (Continued)
We formally document all relationships between hedging
instruments and the items being hedged, including our risk
management objective and strategy for undertaking the hedging
transactions. This includes matching the natural gas futures,
the sold fixed for floating price or buy fixed
for floating price contracts, to the forecasted
transactions. We assess, both at the inception of the hedge and
on an ongoing basis, whether the derivatives are highly
effective in offsetting changes in the fair value of hedged
items. Highly effective is deemed to be a correlation range from
80% to 125% of the change in cash flows of the derivative in
offsetting the cash flows of the hedged transaction. If it is
determined that a derivative is not highly effective as a hedge
or it has ceased to be a highly effective hedge, due to the loss
of correlation between changes in natural gas reference prices
under a hedging instrument and actual natural gas prices, we
will discontinue hedge accounting for the derivative and
subsequent changes in fair value for the derivative will be
recognized immediately into earnings. We assess effectiveness
using regression analysis and measure ineffectiveness using the
dollar offset method.
Derivatives are recorded on our consolidated balance sheet as
assets or liabilities at fair value. For derivatives qualifying
as hedges, the effective portion of changes in fair value are
recognized in partners equity as accumulated other
comprehensive income (loss) and reclassified to earnings when
the underlying hedged transaction closes. The ineffective
portions of qualifying derivatives are recognized in earnings as
they occur. Actual amounts that will be reclassified will vary
as a result of future changes in prices. Hedge ineffectiveness
is recorded in income while the hedge contract is open and may
increase or decrease until settlement of the contract. Realized
cash gains and losses on closed/settled instruments and hedge
ineffectiveness are reflected in the contract month being hedged
as an adjustment to our midstream revenue.
On June 26, 2009, we unwound (cash settled) a 2010 coupled
qualified hedge for a discounted net amount of $3,155 and
entered into a new cash flow swap agreement for the same
underlying forecasted natural gas sales which settle in the same
monthly periods in 2010. The coupled qualified hedge we cash
settled on June 26, 2009 consisted of a receipt of $4,499
from one counterparty offset by a payment of $1,344 to another
counterparty. Of the $4,499 cash received, $3,571 had previously
been recognized as midstream revenues in 2008 as the hedge, at
that time, did not qualify for hedge accounting. The net
unrecognized loss of $416 has been recorded to accumulated other
comprehensive income and will be recorded as reductions in
midstream revenues as the hedged transactions settle in 2010.
Under the terms of the new derivative contract, we receive a
fixed price of $5.08 and pay a floating CIG index price for the
same relevant volumes and contract period as the underlying
natural gas is sold.
On October 1, 2009, we entered into a financial swap
agreement related to forecasted natural gas sales in 2010
whereby we receive a fixed price and pay a floating price based
on NYMEX Henry Hub pricing for the relevant contract period as
the underlying natural gas is sold. This swap agreement with BP
Energy Company replaces a previous swap agreement we entered
into with Bank of Oklahoma, N.A. on May 27, 2008. The terms
of the new swap agreement are identical to the May 27, 2008
swap agreement. The new swap agreement is coupled with a
derivative contract entered into on January 13, 2009
whereby we receive a floating NYMEX Henry Hub index price less a
differential of $2.13 and pay a CIG index price for the same
relevant volumes and contract period as the underlying natural
gas related to the October 1, 2009 derivative contract is
sold, qualifying the coupled agreements for hedge accounting.
16
HILAND
PARTNERS, LP
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED) (Continued)
Presented in the table below is information related to our
derivatives for the indicated periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Net gains (losses) on closed/settled transactions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
reclassified from (to) accumulated other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
comprehensive income
|
|
$
|
1,969
|
|
|
$
|
(1,395
|
)
|
|
$
|
5,848
|
|
|
$
|
(6,478
|
)
|
Increases (decreases) in fair values of open
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
derivatives recorded to (from) accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
other comprehensive income
|
|
$
|
(1,143
|
)
|
|
$
|
13,219
|
|
|
$
|
(193
|
)
|
|
$
|
2,965
|
|
Unrealized non-cash gains (losses) on ineffective
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
portions of qualifying derivative transactions
|
|
$
|
(238
|
)
|
|
$
|
133
|
|
|
$
|
9
|
|
|
$
|
128
|
|
Unrealized non-cash gains on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
non-qualifying derivatives
|
|
$
|
|
|
|
$
|
5,487
|
|
|
$
|
|
|
|
$
|
3,557
|
|
At September 30, 2009, our accumulated other comprehensive
income (loss) was $(808). Of this amount, we anticipate $1,786
will be reclassified to earnings during the next twelve months
and $(2,594) 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
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Fair value of derivative assets current
|
|
$
|
3,860
|
|
|
$
|
6,851
|
|
Fair value of derivative assets long term
|
|
|
608
|
|
|
|
7,141
|
|
Fair value of derivative liabilities current
|
|
|
(835
|
)
|
|
|
(1,439
|
)
|
Fair value of derivative liabilities long term
|
|
|
(267
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net fair value of derivatives
|
|
$
|
3,366
|
|
|
$
|
12,553
|
|
|
|
|
|
|
|
|
|
|
The terms of our derivative contracts currently extend as far as
December 2010. At September 30, 2009, the counterparties to
our commodity-based derivative contracts were BP Energy Company
and Bank of Oklahoma, N.A. Effective October 1, 2009, the
counterparty to our commodity-based derivative contracts is BP
Energy Company. Our counterparty to our interest rate swap is
Wells Fargo Bank, N.A.
The following table provides information about our commodity
derivative instruments at September 30, 2009 for the
periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
Fair
|
|
|
|
|
|
Fixed
|
|
Value
|
|
Description and Production Period
|
|
Volume
|
|
Price
|
|
Asset
|
|
|
|
(MMBtu)
|
|
(Per MMBtu)
|
|
|
|
|
Natural Gas Sold Fixed for Floating Price Swaps
|
|
|
|
|
|
|
|
|
October 2009 September 2010
|
|
2,136,000
|
|
$6.87
|
|
$
|
3,537
|
|
October 2010 December 2010
|
|
534,000
|
|
$6.73
|
|
|
341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,878
|
|
|
|
|
|
|
|
|
|
|
17
HILAND
PARTNERS, LP
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED) (Continued)
|
|
Note 6:
|
Fair
Value Measurements
|
We adopted FASB authoritative accounting guidance on fair value
measurement beginning in the first quarter of 2008. We adopted
amended guidance 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. The adopted fair value guidance 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 and 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. The adopted fair value guidance further
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. The fair value
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.
US GAAP 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 to value
assets and liabilities for our outstanding fixed price cash flow
swap derivative contracts. Valuations of our natural gas
derivative contracts are based on published forward price curves
for natural gas and, as such, are defined as Level 2 fair
value hierarchy assets and liabilities. We valued our interest
rate-based derivative on a comparative
mark-to-market
value received from our counterparty and, as such, is defined as
Level 3. The following table represents the fair value
hierarchy for our assets and liabilities measured at fair value
on a recurring basis at September 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Commodity based derivative assets
|
|
$
|
|
$
|
4,468
|
|
|
$
|
|
|
|
$
|
4,468
|
|
Commodity based derivative liabilities
|
|
|
|
|
(590
|
)
|
|
|
|
|
|
|
(590
|
)
|
Interest based derivative liabilities
|
|
|
|
|
|
|
|
|
(512
|
)
|
|
|
(512
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
$
|
3,878
|
|
|
$
|
(512
|
)
|
|
$
|
3,366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table provides a summary of changes in the fair
value of our Level 3 interest rate-based derivative for the
nine months ended September 30, 2009:
|
|
|
|
|
Balance, January 1, 2009
|
|
$
|
(1,439
|
)
|
Cash settlements from other comprehensive income
|
|
|
1,406
|
|
Change in fair value of derivative
|
|
|
(479
|
)
|
|
|
|
|
|
Balance, September 30, 2009
|
|
$
|
(512
|
)
|
|
|
|
|
|
We review properties for impairment when events and
circumstances indicate a possible decline in the recoverability
of the carrying value of such property. We compare each
propertys estimated expected future cash flows to the
carrying amount of the property to determine if the carrying
amount is recoverable. If the carrying amount of the property
exceeds its estimated undiscounted future cash flows, the
carrying amount of the property is reduced to its estimated fair
value. Fair value may be estimated using comparable market data,
a discounted cash flow method, or a combination of the two. In
the discounted cash flow method, estimated
18
HILAND
PARTNERS, LP
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED) (Continued)
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 recent volume declines and projected future
volume declines at our Kinta Area gathering system located in
southeastern Oklahoma, we determined that tangible and
intangible carrying amounts totaling approximately $20,500 were
not recoverable from future cash flows and, therefore, were
impaired at September 30, 2009. We reduced the carrying
amounts of these nonrecurring level 3 hierarchy assets to
their estimated fair values of approximately $72,600 by using a
combination of estimated future cash flows and comparable market
data. Additionally, as a result of volumes declines combined
with significantly reduced natural gas prices, we determined
that carrying amounts totaling approximately $950 related to
natural gas gathering systems located in Texas and Mississippi
were not recoverable from future cash flows and, therefore, were
impaired at March 31, 2009. We reduced the carrying amounts
of these nonrecurring level 3 hierarchy assets to their
estimated fair values of approximately $249 by using the
discounted cash flow method described above, as comparable
market data was not available.
Long-term debt consisted of the following for the indicated
periods:
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Credit facility
|
|
$
|
253,064
|
|
|
$
|
252,064
|
|
Capital lease obligations
|
|
|
4,492
|
|
|
|
5,051
|
|
|
|
|
|
|
|
|
|
|
|
|
|
257,556
|
|
|
|
257,115
|
|
Less: current portion of capital lease obligations
|
|
|
622
|
|
|
|
649
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
256,934
|
|
|
$
|
256,466
|
|
|
|
|
|
|
|
|
|
|
Credit Facility. Our borrowing capacity under
our senior secured revolving credit facility, as amended, is
$300.0 million, consisting of a $291.0 million senior
secured revolving credit facility to be used for funding
acquisitions and other capital expenditures, issuance of letters
of credit and general corporate purposes (the Acquisition
Facility) and a $9.0 million senior secured revolving
credit facility to be used for working capital and to fund
distributions (the Working Capital Facility).
In addition, the senior secured revolving credit facility
provides for an accordion feature, which permits us, if certain
conditions are met, to increase the size of the Acquisition
Facility by up to $50.0 million and allows for the issuance
of letters of credit of up to $15.0 million in the
aggregate. The credit facility will mature in May 2011. At that
time, the agreement will terminate and all outstanding amounts
thereunder will be due and payable.
Our senior secured revolving credit facility requires us to meet
certain financial tests, including a maximum consolidated funded
debt to EBITDA covenant ratio of 4.0 to 1.0 as of the last day
of any fiscal quarter; provided that in the event that we make
certain permitted acquisitions or capital expenditures, this
ratio may be increased to 4.75 to 1.0 for the three fiscal
quarters following the quarter in which such permitted
acquisition or capital expenditure occurs. We met the permitted
capital expenditure requirements for the four quarter period
ended March 31, 2009 and elected to increase the ratio to
4.75 to 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 to 1.0 for the
quarter ended December 31, 2009. If commodity prices and
inlet natural gas volumes do not improve
19
HILAND
PARTNERS, LP
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED) (Continued)
above the current forward prices and expected inlet natural gas
volumes for the fourth quarter of 2009, the Partnership could be
in violation of the maximum consolidated funded debt to EBITDA
covenant ratio as early as December 31, 2009, unless this
ratio is amended, the Partnership receives an infusion of equity
capital, the Partnerships debt is restructured or the
Partnership is able to monetize
in-the-money
hedge positions. Management is continuing discussions with
certain lenders under the credit facility as to ways to address
a potential covenant violation. While no potential solution has
been agreed to, the Partnership expects that any solution will
require the assessment of fees and increased rates, the infusion
of additional equity capital or the incurrence of subordinated
indebtedness by the Partnership and the suspension of
distributions for a certain period of time. There can be no
assurance that any such agreement will be reached with the
lenders, that any required equity or debt financing will be
available to the Partnership, or that the Partnership will have
sufficient
in-the-money
hedges to monetize to address the maximum consolidated funded
debt to EBITDA covenant ratio.
Upon the occurrence of an event of default as defined in the
credit facility, the lenders may, among other things, be able to
accelerate the maturity of the credit facility and exercise
other rights and remedies as set forth in the credit facility.
Our obligations under the credit facility are secured by
substantially all of our assets and guaranteed by us, and all of
our subsidiaries, other than our operating company, which is the
borrower under the credit facility.
Indebtedness under the credit facility will bear interest, at
our option, at either (i) an Alternate Base Rate plus an
applicable margin ranging from 50 to 125 basis points per
annum or (ii) LIBOR plus an applicable margin ranging from
150 to 225 basis points per annum based on our ratio of
consolidated funded debt to EBITDA. The Alternate Base Rate is a
rate per annum equal to the greatest of (a) the Prime Rate
in effect on such day, (b) the base CD rate in effect on
such day plus 1.50% and (c) the Federal Funds effective
rate in effect on such day plus
1/2 of
1%. We have elected for the indebtedness to bear interest at
LIBOR plus the applicable margin. A letter of credit fee will be
payable for the aggregate amount of letters of credit issued
under the credit facility at a percentage per annum equal to
1.0%. An unused commitment fee ranging from 25 to 50 basis
points per annum based on our ratio of consolidated funded debt
to EBITDA will be payable on the unused portion of the credit
facility. During the
step-up
period, the applicable margin with respect to loans under the
credit facility will be increased by 35 basis points per
annum and the unused commitment fee will be increased by
12.5 basis points per annum. At September 30, 2009,
the interest rate on outstanding borrowings from our credit
facility was 2.87%.
We are subject to interest rate risk on our credit facility and
have entered into an interest rate swap to reduce this risk. See
Note 5 Derivatives for a discussion of our
interest rate swap.
The credit facility prohibits us from making distributions to
unitholders if any default or event of default, as defined in
the credit facility, has occurred and is continuing or would
result from such distributions. In addition, the credit facility
contains various covenants that limit, among other things,
subject to certain exceptions and negotiated
baskets, our ability to incur indebtedness, grant
liens, make certain loans, acquisitions and investments, make
any material changes to the nature of its business, amend its
material agreements, including the Omnibus Agreement, which
contains non-compete and indemnity provisions, or enter into a
merger, consolidation or sale of assets.
The credit facility defines EBITDA as our consolidated net
income (loss), plus income tax expense, interest expense,
depreciation, amortization and accretion expense, amortization
of intangibles and organizational costs, non-cash unit based
compensation expense, and adjustments for non-cash gains and
losses on specified derivative transactions and for other
extraordinary or non-recurring items.
The credit facility limits distributions to our unitholders to
available cash, as defined by the agreement, and borrowings to
fund such distributions are only permitted under the revolving
working capital facility. The
20
HILAND
PARTNERS, LP
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED) (Continued)
revolving working capital facility is subject to an annual
clean-down period of 15 consecutive days in which
the amount outstanding under the revolving working capital
facility is reduced to zero.
As of September 30, 2009, we had $253.1 million
outstanding under the credit facility and were in compliance
with its financial covenants. Our EBITDA to interest expense
ratio was 4.93 to 1.0 and our consolidated funded debt to EBITDA
ratio was 4.50 to 1.0.
Capital Lease Obligations. We are obligated
under two separate capital lease agreements entered into with
respect to our Bakken and Badlands gathering systems in the
third quarter of 2007. Under the terms of a capital lease
agreement for a rail loading facility and an associated products
pipeline at our Bakken gathering system, we are repaying a
counterparty a predetermined amount over a period of eight
years. Once fully paid, title to the leased assets will transfer
to us no later than the end of the eight-year period commencing
from the inception date of the lease. We also incurred a capital
lease obligation to a counterparty for the aid to construct
several electric substations at our Badlands gathering system
which, by agreement, is being repaid in equal monthly
installments over a period of five years.
During the three and nine months ended September 30, 2009,
we made principal payments of $210 and $560, respectively, on
the above described capital lease obligations. The current
portion of the capital lease obligations presented in the table
above is included in accrued liabilities and other in the
balance sheet.
|
|
Note 8:
|
Share-Based
Compensation
|
Our general partner, Hiland Partners GP, LLC adopted the Hiland
Partners, LP Long-Term Incentive Plan for its employees and
directors of our general partner and employees of its
affiliates. The long-term incentive plan currently permits an
aggregate of 680,000 common units to be issued with respect to
unit options, restricted units and phantom units granted under
the plan. No more than 225,000 of the 680,000 common units may
be issued with respect to vested restricted or phantom units.
The plan is administered by the compensation committee of our
general partners board of directors. The plan will
continue in effect until the earliest of (i) a date
determined by the board of directors of our general partner;
(ii) the date common units are no longer available for
payment of awards under the plan; or (iii) the tenth
anniversary of the plan.
Our general partners board of directors or compensation
committee may, in their discretion, terminate, suspend or
discontinue the long-term incentive plan at any time with
respect to any units for which a grant has not yet been made.
Our general partners board of directors or its
compensation committee also has the right to alter or amend the
long-term incentive plan or any part of the plan from time to
time, including increasing the number of units that may be
granted, subject to unitholder approval if required by the
exchange upon which the common units are listed at that time. No
change in any outstanding grant may be made, however, that would
materially impair the rights of the participant without the
consent of the participant. Under the unit option grant
agreement, granted options of common units vest and become
exercisable in one-third increments on the anniversary of the
grant date over three years. Vested options are exercisable
within the options contractual life of ten years after the
grant date. Restricted common units granted vest and become
exercisable in one-fourth increments on the anniversary of the
grant date over four years. A restricted unit is a common unit
that is subject to forfeiture, and upon vesting, the grantee
receives a common unit that is not subject to forfeiture.
Distributions on unvested restricted common units are held in
trust by our general partner until the units vest, at which time
the distributions are distributed to the grantee. Granted
phantom common units are generally more flexible than restricted
units and vesting periods and distribution rights may vary with
each grant. A phantom unit is a common unit that is subject to
forfeiture and is not considered issued until it vests. Upon
vesting, holders of phantom units will receive (i) a common
unit that is not subject to forfeiture, cash in lieu of the
delivery of such unit equal to the fair market value of the unit
on the vesting date, or a combination thereof, at the discretion
of our general partners board of directors and
(ii) the distributions held in trust, if applicable,
related to the vested units.
21
HILAND
PARTNERS, LP
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED) (Continued)
Phantom Units. On August 8, 2009, 1,875
phantom units awarded to our Chief Operations Officer in August
2008 vested, of which 1,494 were converted to common units and
381 were redeemed.
The following table summarizes information about our phantom
units for the nine months ended September 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
|
Fair Value
|
|
|
Fair Value at
|
|
|
|
|
|
|
at Grant
|
|
|
Redemption
|
|
Phantom Units
|
|
Units
|
|
|
Date ($)
|
|
|
Date ($)
|
|
|
Unvested at January 1, 2009
|
|
|
50,794
|
|
|
$
|
47.74
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and converted or redeemed
|
|
|
(8,250
|
)
|
|
$
|
49.34
|
|
|
$
|
7.40
|
|
Forfeited
|
|
|
(5,050
|
)
|
|
$
|
45.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested at September 30, 2009
|
|
|
37,494
|
|
|
$
|
47.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three and nine months ended September 30, 2009,
we incurred non-cash unit based compensation expense of $189 and
$652, respectively, related to phantom units. During the three
and nine months ended September 30, 2008, we incurred
non-cash unit based compensation expense of $297 and $877,
respectively, related to phantom units. We will recognize
additional expense of $803 over the next four years, and the
additional expense is to be recognized over a weighted average
period of 2.2 years.
Restricted Units. Each non-employee board
member of Hiland Partners GP, LLC received an additional 1,000
restricted common units on each anniversary date of the initial
reward with the exception of the anniversary date on
August 10, 2009. We issued no restricted units during the
three and nine months ended September 30, 2009. During the
three months ended September 30, 2009, a total of 6,000
restricted common units issued to non-employee board members of
our general partner in 2005, 2006, 2007 and 2008 vested and were
converted into common units. Non-cash unit based compensation
expense related to restricted units issued is to be recognized
over their respective four-year vesting period on the graded
vesting attribution method.
The following table summarizes information about our restricted
units for the nine months ended September 30, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Fair Value
|
|
|
|
|
|
|
per Unit
|
|
|
|
|
|
|
at Grant
|
|
Restricted Units
|
|
Units
|
|
|
Date ($)
|
|
|
Unvested at January 1, 2009
|
|
|
18,500
|
|
|
$
|
48.73
|
|
Granted
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(6,000
|
)
|
|
$
|
44.29
|
|
Forfeited
|
|
|
(4,250
|
)
|
|
$
|
47.56
|
|
|
|
|
|
|
|
|
|
|
Unvested at September 30, 2009
|
|
|
8,250
|
|
|
$
|
52.56
|
|
|
|
|
|
|
|
|
|
|
Non-cash unit based compensation expense related to the
restricted units was $46 and $183 for the three and nine months
ended September 30, 2009, respectively, and was $91 and
$258 for the three and nine months ended September 30,
2008, respectively. As of September 30, 2009, there was
$166 of total unrecognized cost related to the unvested
restricted units. This cost is to be recognized over a weighted
average period of 2.1 years.
22
HILAND
PARTNERS, LP
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED) (Continued)
Unit Options. At September 30, 2009, all
common unit options awarded have vested. The weighted average
exercise price of 33,336 outstanding exercisable common unit
options at September 30, 2009 is $37.79 per unit, and such
common unit options have a weighted average remaining
contractual term of 6.2 years. Non-cash unit based
compensation expense related to the unit options was
insignificant for the three and nine months ended
September 30, 2009 and 2008, respectively.
|
|
Note 9:
|
Commitments
and Contingencies
|
We maintain a defined contribution retirement plan for our
employees under which we make discretionary contributions to the
plan based on a percentage of eligible employees
compensation. Contributions to the plan are 5.0% of eligible
employees compensation and resulted in expense for the
three months ended September 30, 2009 and 2008 of $100 and
$83, respectively, and for the nine months ended
September 30, 2009 and 2008 was $290 and $238, respectively.
We maintain our health and workers compensation insurance
through third-party providers. Property and general liability
insurance is also maintained through third-party providers with
a $100 deductible on each policy.
The operation of pipelines, plants and other facilities for
gathering, compressing, treating, or processing natural gas,
NGLs and other products is subject to stringent and complex laws
and regulations pertaining to health, safety and the
environment. Our management believes that compliance with
federal, state and local environmental laws and regulations will
not have a material adverse effect on our business, financial
position or results of operations.
Although there are no significant regulatory proceedings in
which we are currently involved, periodically we may be a party
to regulatory proceedings. The results of regulatory proceedings
cannot be predicted with certainty; however, our management
believes that we presently do not have material potential
liability in connection with regulatory proceedings that would
have a significant financial impact on our consolidated
financial condition, results of operations or cash flows.
We lease certain equipment, vehicles and facilities under
operating leases, most of which contain annual renewal options.
We also lease office space from a related entity. See
Note 11 Related Party Transactions. Under these
lease agreements, rent expense was $437 and $731, respectively,
for the three months ended September 30, 2009 and 2008 and
$2,031 and $1,983 for the nine months ended September 30,
2009 and 2008, respectively.
Three putative unitholder class action lawsuits have been filed
relating to the Hiland Partners Merger and the Hiland Holdings
Merger. These lawsuits are as follows: (i) Robert
Pasternack v. Hiland Partners, LP et al., In the Court
of Chancery of the State of Delaware, Civil Action
No. 4397-VCS;
(ii) Andrew Jones v. Hiland Partners, LP et
al., In the Court of Chancery of the State of Delaware,
Civil Action
No. 4558-VCS;
and (iii) Arthur G. Rosenberg v. Hiland Partners,
LP et al., In the District Court of Garfield County, State
of Oklahoma, Case
No. C3-09-211-02.
The lawsuits name as defendants the Partnership, Hiland
Holdings, the general partner of each of the Partnership and
Hiland Holdings, and the members of the board of directors of
each of the Partnership and Hiland Holdings. The lawsuits
challenge both the Hiland Partners Merger and the Hiland
Holdings Merger. The lawsuits allege claims of breach of the
Partnership Agreement and breach of fiduciary duty on behalf of
(i) a purported class of common unitholders of the
Partnership and (ii) a purported class of our common
unitholders of Hiland Holdings.
On July 10, 2009, the court in which the Oklahoma case is
pending granted our motion to stay the Oklahoma lawsuit in favor
of the Delaware lawsuits. On July 31, 2009, the plaintiff
in the first-filed Delaware case (Pasternack) filed an
Amended Class Action Complaint and a motion to enjoin the
mergers. This Amended Class Action Complaint alleges, among
other things, that (i) the original consideration and
revised consideration offered by the Hamm Parties is unfair and
inadequate, (ii) the members of the conflicts
23
HILAND
PARTNERS, LP
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED) (Continued)
committees of the general partner of each of the Partnership and
Hiland Holdings that were charged with reviewing the proposals
and making a recommendation to each committees respective
board of directors lacked any meaningful independence,
(iii) the defendants acted in bad faith in recommending and
approving the Hiland Partners Merger or the Hiland Holdings
Merger, and (iv) the disclosures in the Preliminary Proxy
Statement filed by the Partnership and Hiland Holdings are
materially misleading. The Pasternack plaintiff seeks to
preliminarily enjoin the defendants from proceeding with or
consummating the mergers and seeks an order requiring defendants
to supplement the Preliminary Proxy Statement with certain
information. On August 13, 2009, the Partnership, Hiland
Holdings and certain individual defendants moved to dismiss the
claims added in the July 31, 2009 Amended Class Action
Complaint. The plaintiffs moved to expedite proceedings on
September 4, 2009. On September 4, 2009, the
plaintiffs filed a motion to expedite the proceedings. On
September 9, 2009, the Delaware Chancery Court requested
that the defendants file a response to plaintiffs motion
that same day and set a hearing on plaintiffs motion for
September 11, 2009. Defendants responded to
plaintiffs motion as ordered by the Court, and, following
the hearing on September 11, 2009, plaintiffs motion
to expedite the proceedings was denied.
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.
|
|
Note 10:
|
Significant
Customers and Suppliers
|
All of our revenues are domestic revenues. The following table
presents our top midstream customers as a percent of total
revenue for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
For the Nine Months
|
|
|
|
Ended September 30,
|
|
|
Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Customer 1
|
|
|
24
|
%
|
|
|
5
|
%
|
|
|
21
|
%
|
|
|
15
|
%
|
Customer 2
|
|
|
18
|
%
|
|
|
7
|
%
|
|
|
12
|
%
|
|
|
12
|
%
|
Customer 3
|
|
|
12
|
%
|
|
|
10
|
%
|
|
|
14
|
%
|
|
|
9
|
%
|
Customer 4
|
|
|
7
|
%
|
|
|
18
|
%
|
|
|
9
|
%
|
|
|
13
|
%
|
Customer 5
|
|
|
2
|
%
|
|
|
14
|
%
|
|
|
2
|
%
|
|
|
10
|
%
|
Customer 1 above is SemStream, L.P., a subsidiary of SemGroup,
L.P., who filed a voluntary petition for reorganization under
Chapter 11 of the U.S. Bankruptcy Code on
July 22, 2008. In March 2009, we received a good faith
deposit from SemStream, L.P. for $3,000 in lieu of renewing a
letter of credit to our benefit. The $3,000 deposit received is
included in accrued liabilities and other in the balance sheet.
All of our purchases are from domestic sources. The following
table presents our top midstream suppliers as a percent of total
midstream purchases for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
For the Nine Months
|
|
|
|
Ended September 30,
|
|
|
Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Supplier 1 (affiliated company)
|
|
|
39
|
%
|
|
|
45
|
%
|
|
|
41
|
%
|
|
|
42
|
%
|
Supplier 2
|
|
|
20
|
%
|
|
|
14
|
%
|
|
|
19
|
%
|
|
|
15
|
%
|
Supplier 3
|
|
|
16
|
%
|
|
|
17
|
%
|
|
|
16
|
%
|
|
|
18
|
%
|
|
|
Note 11:
|
Related
Party Transactions
|
We purchase natural gas and NGLs from affiliated companies.
Purchases of product from affiliates totaled $11,740 and $36,279
for the three months ended September 30, 2009 and 2008,
respectively and totaled $35,538 and $99,328 for the nine months
ended September 30, 2009 and 2008, respectively. We also
sell natural gas and NGLs to affiliated companies. Sales of
product to affiliates totaled $626 and $7,390 for the
24
HILAND
PARTNERS, LP
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED) (Continued)
three months ended September 30, 2009 and 2008,
respectively and totaled $2,525 and $10,433 for the nine months
ended September 30, 2009 and 2008, respectively.
Compression revenues from affiliates were $1,205 and $3,615 for
each of the three and nine months ended September 30, 2009
and 2008, respectively.
Accounts receivable affiliates of $1,262 at
September 30, 2009 include $823 from one affiliate for
midstream sales. Accounts receivable affiliates of
$2,346 at December 31, 2008 include $2,083 from one
affiliate for midstream sales.
Accounts payable affiliates of $4,298 at
September 30, 2009 include $3,365 due to one affiliate for
midstream purchases. Accounts payable affiliates of
$7,662 at December 31, 2008 include $6,682 payable to the
same affiliate for midstream purchases.
We utilize affiliated companies to provide services to our
plants and pipelines and certain administrative services. The
total expenditures to these companies were $94 and $157 during
the three months ended September 30, 2009 and 2008,
respectively and were $350 and $420 during the nine months ended
September 30, 2009 and 2008, respectively.
We lease office space under operating leases directly or
indirectly from an affiliate. Rent expense associated with these
leases totaled $41 and $42 for the three months ended
September 30, 2009 and 2008, respectively and totaled $121
and $117 for the nine months ended September 30, 2009 and
2008, respectively.
|
|
Note 12:
|
Reportable
Segments
|
We have distinct operating segments for which additional
financial information must be reported. Our operations are
classified into two reportable segments:
(1) Midstream, which is the purchasing, gathering,
compressing, dehydrating, treating, processing and marketing of
natural gas and the fractionating and marketing of NGLs.
(2) Compression, which is providing air compression and
water injection services for oil and gas secondary recovery
operations that are ongoing in North Dakota.
These business segments reflect the way we manage our
operations. Our operations are conducted in the United States.
General and administrative costs, which consist of executive
management, accounting and finance, operations and engineering,
marketing and business development, are allocated to the
individual segments based on revenues.
Midstream assets totaled $360,590 at September 30, 2009.
Assets attributable to compression operations totaled $21,271.
All but $30 of the total capital expenditures of $23,413 for the
nine months ended September 30, 2009 was attributable to
midstream operations. All but $63 of the total capital
expenditures of $38,043 for the nine months ended
September 30, 2008 was attributable to midstream operations.
The tables below present information for the reportable segments
for the three and nine months ended September 30, 2009 and
2008.
25
HILAND
PARTNERS, LP
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED) (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Midstream
|
|
|
Compression
|
|
|
|
|
|
Midstream
|
|
|
Compression
|
|
|
|
|
|
|
Segment
|
|
|
Segment
|
|
|
Total
|
|
|
Segment
|
|
|
Segment
|
|
|
Total
|
|
|
Revenues
|
|
$
|
53,641
|
|
|
$
|
1,205
|
|
|
$
|
54,846
|
|
|
$
|
114,548
|
|
|
$
|
1,205
|
|
|
$
|
115,753
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Midstream purchases (exclusive of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
items shown separately below)
|
|
|
30,266
|
|
|
|
|
|
|
|
30,266
|
|
|
|
81,895
|
|
|
|
|
|
|
|
81,895
|
|
Operations and maintenance
|
|
|
7,559
|
|
|
|
177
|
|
|
|
7,736
|
|
|
|
7,617
|
|
|
|
264
|
|
|
|
7,881
|
|
Depreciation and amortization
|
|
|
9,575
|
|
|
|
897
|
|
|
|
10,472
|
|
|
|
8,658
|
|
|
|
896
|
|
|
|
9,554
|
|
Property impairments
|
|
|
20,500
|
|
|
|
|
|
|
|
20,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bad debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,799
|
)
|
|
|
|
|
|
|
(7,799
|
)
|
General and administrative
|
|
|
2,522
|
|
|
|
57
|
|
|
|
2,579
|
|
|
|
2,235
|
|
|
|
24
|
|
|
|
2,259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
70,422
|
|
|
|
1,131
|
|
|
|
71,553
|
|
|
|
92,606
|
|
|
|
1,184
|
|
|
|
93,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
$
|
(16,781
|
)
|
|
$
|
74
|
|
|
|
(16,707
|
)
|
|
$
|
21,942
|
|
|
$
|
21
|
|
|
|
21,963
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other income
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
96
|
|
Amortization of deferred loan costs
|
|
|
|
|
|
|
|
|
|
|
(149
|
)
|
|
|
|
|
|
|
|
|
|
|
(147
|
)
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
(2,702
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,271
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
|
|
|
|
|
|
|
|
(2,841
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,322
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
|
|
|
|
|
|
|
$
|
(19,548
|
)
|
|
|
|
|
|
|
|
|
|
$
|
18,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Midstream
|
|
|
Compression
|
|
|
|
|
|
Midstream
|
|
|
Compression
|
|
|
|
|
|
|
Segment
|
|
|
Segment
|
|
|
Total
|
|
|
Segment
|
|
|
Segment
|
|
|
Total
|
|
|
Revenues
|
|
$
|
153,658
|
|
|
$
|
3,615
|
|
|
$
|
157,273
|
|
|
$
|
319,058
|
|
|
$
|
3,615
|
|
|
$
|
322,673
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Midstream purchases (exclusive of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
items shown separately below)
|
|
|
88,481
|
|
|
|
|
|
|
|
88,481
|
|
|
|
238,586
|
|
|
|
|
|
|
|
238,586
|
|
Operations and maintenance
|
|
|
22,612
|
|
|
|
604
|
|
|
|
23,216
|
|
|
|
21,428
|
|
|
|
773
|
|
|
|
22,201
|
|
Depreciation and amortization
|
|
|
28,289
|
|
|
|
2,692
|
|
|
|
30,981
|
|
|
|
24,966
|
|
|
|
2,686
|
|
|
|
27,652
|
|
Property impairments
|
|
|
21,450
|
|
|
|
|
|
|
|
21,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bad debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
304
|
|
|
|
|
|
|
|
304
|
|
General and administrative
|
|
|
8,262
|
|
|
|
196
|
|
|
|
8,458
|
|
|
|
6,350
|
|
|
|
73
|
|
|
|
6,423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
169,094
|
|
|
|
3,492
|
|
|
|
172,586
|
|
|
|
291,634
|
|
|
|
3,532
|
|
|
|
295,166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
$
|
(15,436
|
)
|
|
$
|
123
|
|
|
|
(15,313
|
)
|
|
$
|
27,424
|
|
|
$
|
83
|
|
|
|
27,507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other income
|
|
|
|
|
|
|
|
|
|
|
91
|
|
|
|
|
|
|
|
|
|
|
|
267
|
|
Amortization of deferred loan costs
|
|
|
|
|
|
|
|
|
|
|
(448
|
)
|
|
|
|
|
|
|
|
|
|
|
(426
|
)
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
(7,739
|
)
|
|
|
|
|
|
|
|
|
|
|
(9,888
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
|
|
|
|
|
|
|
|
(8,096
|
)
|
|
|
|
|
|
|
|
|
|
|
(10,047
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
|
|
|
|
|
|
|
$
|
(23,409
|
)
|
|
|
|
|
|
|
|
|
|
$
|
17,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
HILAND
PARTNERS, LP
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED) (Continued)
|
|
Note 13:
|
Net
Income (Loss) per Limited Partners Unit
|
The computation of net income (loss) per limited partners
unit is based on the weighted-average number of common and
subordinated units outstanding during the period. The
computation of diluted net income (loss) per limited partner
unit further assumes the dilutive effect of unit options and
restricted and phantom units. Net income (loss) per unit
applicable to limited partners is computed by dividing net
income (loss) applicable to limited partners, after deducting
the general partners 2% interest and incentive
distributions, by the weighted-average number of limited
partnership units outstanding. The following is a reconciliation
of the limited partner units used in the calculations of (loss)
per limited partner unit basic and (loss) per
limited partner unit diluted assuming dilution for
the three and nine months ended September 30, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Loss)
|
|
|
|
|
|
|
|
|
Income
|
|
|
|
|
|
|
|
|
|
Attributable
|
|
|
|
|
|
|
|
|
Attributable
|
|
|
|
|
|
|
|
|
|
to Limited
|
|
|
Limited
|
|
|
|
|
|
to Limited
|
|
|
Limited
|
|
|
|
|
|
|
Partners
|
|
|
Partner Units
|
|
|
Per Unit
|
|
|
Partners
|
|
|
Partner Units
|
|
|
Per Unit
|
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
|
(Loss) income per limited partner unit basic and
diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income attributable to limited partners
|
|
$
|
(19,157
|
)
|
|
|
|
|
|
$
|
(2.05
|
)
|
|
$
|
16,000
|
|
|
|
|
|
|
$
|
1.71
|
|
Weighted average limited partner units outstanding
|
|
|
|
|
|
|
9,356,000
|
|
|
|
|
|
|
|
|
|
|
|
9,339,000
|
|
|
|
|
|
Income per limited partner unit diluted: Unit
Options, restricted and phantom units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income attributable to limited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
partners plus assumed conversions
|
|
$
|
(19,157
|
)
|
|
|
9,356,000
|
|
|
$
|
(2.05
|
)
|
|
$
|
16,000
|
|
|
|
9,365,000
|
|
|
$
|
1.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Loss)
|
|
|
|
|
|
|
|
|
Income
|
|
|
|
|
|
|
|
|
|
Attributable
|
|
|
|
|
|
|
|
|
Attributable
|
|
|
|
|
|
|
|
|
|
to Limited
|
|
|
Limited
|
|
|
|
|
|
to Limited
|
|
|
Limited
|
|
|
|
|
|
|
Partners
|
|
|
Partner Units
|
|
|
Per Unit
|
|
|
Partners
|
|
|
Partner Units
|
|
|
Per Unit
|
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
|
(Loss) income per limited partner unit basic and
diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income attributable to limited partners
|
|
$
|
(22,941
|
)
|
|
|
|
|
|
$
|
(2.45
|
)
|
|
$
|
10,947
|
|
|
|
|
|
|
$
|
1.17
|
|
Weighted average limited partner units outstanding
|
|
|
|
|
|
|
9,352,000
|
|
|
|
|
|
|
|
|
|
|
|
9,323,000
|
|
|
|
|
|
Income per limited partner unit diluted: Unit
Options, restricted and phantom units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income attributable to limited partners plus assumed
conversions
|
|
$
|
(22,941
|
)
|
|
|
9,352,000
|
|
|
$
|
(2.45
|
)
|
|
$
|
10,947
|
|
|
|
9,364,000
|
|
|
$
|
1.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three and nine months ended September 30, 2009,
approximately 79,000 unit options and restricted and
phantom units, respectively, were excluded from the computation
of diluted earnings attributable to limited partner units
because the inclusion of such units would have been
anti-dilutive.
27
HILAND
PARTNERS, LP
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED) (Continued)
|
|
Note 14:
|
Partners
Capital and Cash Distributions
|
Our unitholders (limited partners) have only limited voting
rights on matters affecting our operations and activities and,
therefore, limited ability to influence our managements
decisions regarding our business. Unitholders did not select our
general partner or elect the board of directors of our general
partner and effectively have no right to select our general
partner or elect its board of directors in the future.
Unitholders voting rights are further restricted by our
partnership agreement provision providing that any units held by
a person that owns 20% or more of any class of units then
outstanding, other than the general partner, its affiliates,
their transferees and persons who acquired such units with the
prior approval of the board of directors of our general partner,
cannot be voted on any matter. In addition, our partnership
agreement contains provisions limiting the ability of our
unitholders to call meetings or to acquire information about our
operations, as well as other provisions limiting the
unitholders ability to influence the manner or direction
of our management.
Our partnership agreement requires that we distribute all of our
cash on hand at the end of each quarter, less reserves
established at our general partners discretion. We refer
to this as available cash. The amount of available
cash may be greater than or less than the minimum quarterly
distributions. In general, we will pay any cash distribution
made each quarter in the following manner:
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|
|
|
|
first, 98% to the common units and 2% to our general
partner, until each common unit has received a minimum quarterly
distribution of $0.45 plus any arrearages from prior quarters;
|
|
|
|
second, 98% to the subordinated units and 2% to our
general partner, until each subordinated unit has received a
minimum quarterly distribution of $0.45; and
|
|
|
|
third, 98% to all units pro rata, and 2% to our general
partner, until each unit has received a distribution of $0.495.
|
If cash distributions per unit exceed $0.495 in any quarter, our
general partner will receive increasing percentages, up to a
maximum of 50% of the cash we distribute in excess of that
amount. We refer to these distributions as incentive
distributions.
The distributions on the subordinated units may be reduced or
eliminated if necessary to ensure the common units receive their
minimum quarterly distribution. Subordinated units do not accrue
arrearages. The subordination period will extend until the first
day of any quarter beginning after March 31, 2010 that each
of the following tests are met: distributions of available cash
from operating surplus on each of the outstanding common units
and subordinated units equaled or exceeded the minimum quarterly
distribution for each of the three consecutive, non-overlapping
four-quarter periods immediately preceding that date; the
adjusted operating surplus (as defined in the
partnership agreement) generated during each of the three
consecutive, non-overlapping four-quarter periods immediately
preceding that date equaled or exceeded the sum of the minimum
quarterly distributions on all of the outstanding common units
and subordinated units during those periods on a fully diluted
basis and the related distribution on the 2% general partner
interest during those periods; and there are no arrearages in
payment of the minimum quarterly distribution on the common
units. In addition, if the tests for ending the subordination
period are satisfied for any three consecutive four quarter
periods ending on or after March 31, 2008, 25% of the
subordinated units will convert into an equal number of common
units. On May 14, 2008 these tests were met and
accordingly, 1,020,000, or 25%, of the subordinated units
converted into an equal number of common units.
We have suspended quarterly cash distributions on common and
subordinated units beginning with the first quarter distribution
of 2009 due to the impact of lower commodity prices and reduced
drilling activity on our current and projected throughput
volumes, midstream segment margins and cash flows combined with
future required levels of capital expenditures and the
outstanding indebtedness under our senior secured revolving
credit facility. Under the terms of the partnership agreement,
the common units carry an arrearage of
28
HILAND
PARTNERS, LP
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED) (Continued)
$1.35 per unit, representing the minimum quarterly distribution
to common units for the first three quarters of 2009 that must
be paid before the Partnership can make distributions to the
subordinated units. Presented below are cash distributions to
common and subordinated unitholders, including amounts to
affiliate owners and regular and incentive distributions to our
general partner paid by us from January 1, 2008 forward (in
thousands, except per unit amounts):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution
|
|
Date Cash
|
|
|
Per Unit Cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for Quarter
|
|
Distribution
|
|
|
Distribution
|
|
|
Common
|
|
|
Subordinated
|
|
|
General Partner
|
|
|
Total Cash
|
|
Ending
|
|
Paid
|
|
|
Amount
|
|
|
Units
|
|
|
Units
|
|
|
Regular
|
|
|
Incentive
|
|
|
Distribution
|
|
|
12/31/07
|
|
|
02/14/08
|
|
|
|
0.7950
|
|
|
$
|
4,169
|
|
|
$
|
3,243
|
|
|
$
|
182
|
|
|
$
|
1,492
|
|
|
$
|
9,086
|
|
03/31/08
|
|
|
05/14/08
|
|
|
|
0.8275
|
|
|
|
4,364
|
|
|
|
3,376
|
|
|
|
194
|
|
|
|
1,789
|
|
|
|
9,723
|
|
06/30/08
|
|
|
08/14/08
|
|
|
|
0.8625
|
|
|
|
5,446
|
|
|
|
2,639
|
|
|
|
208
|
|
|
|
2,107
|
|
|
|
10,400
|
|
09/30/08
|
|
|
11/14/08
|
|
|
|
0.8800
|
|
|
|
5,574
|
|
|
|
2,694
|
|
|
|
214
|
|
|
|
2,268
|
|
|
|
10,750
|
|
12/31/08
|
|
|
02/13/09
|
|
|
|
0.4500
|
|
|
|
2,849
|
|
|
|
1,377
|
|
|
|
86
|
|
|
|
|
|
|
|
4,312
|
|
03/31/09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
06/30/09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
09/30/09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3.8150
|
|
|
$
|
22,402
|
|
|
$
|
13,329
|
|
|
$
|
884
|
|
|
$
|
7,656
|
|
|
$
|
44,271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 15:
|
Subsequent
Events
|
On November 3, 2009, the Partnership amended its merger
agreement with affiliates of Harold Hamm, pursuant to which
Mr. Hamms affiliates had agreed to acquire all of the
outstanding common units of the Partnership (other than certain
restricted common units owned by officers and employees) not
owned by Hiland Holdings. The amendment increased the
consideration payable to common unitholders of the Partnership
from $7.75 to $10.00 per common unit and extended the end date
under the merger agreement to December 11, 2009. On the
same day, Hiland Holdings amended its merger agreement with
affiliates of Harold Hamm, pursuant to which
Mr. Hamms affiliates had agreed to acquire all of the
outstanding common units of Hiland Holdings (other than certain
restricted common units owned by officers and employees) not
owned by Mr. Hamm, his affiliates or the Hamm family
trusts. The amendment increased the consideration payable to
common unitholders of Hiland Holdings from $2.40 to $3.20 per
common unit and extended the end date under the merger agreement
to December 11, 2009.
On November 3, 2009, in connection with amending the merger
agreements, each Hiland company has adjourned its special
meeting of unitholders until December 4, 2009, to allow the
unitholders of each Hiland company additional time to consider
the proposals to approve the applicable merger agreement and
merger. The Partnership and Hiland Holdings intend to file with
the SEC a supplement to the definitive joint proxy statement on
Schedule 14A, which, upon clearance by the SEC, the Hiland
companies intend to mail to all holders of record of the Hiland
companies as of September 9, 2009, the record date for the
special meetings.
Concurrently with the filing of the supplement to the joint
proxy statement, (i) the Partnership, our general partner,
Hiland Holdings and its general partner, HH GP Holding, LLC, an
affiliate of Harold Hamm, HLND MergerCo, LLC, a wholly-owned
subsidiary of HH GP Holding, LLC, Harold Hamm, Chairman of the
Hiland Companies, Joseph L. Griffin, Chief Executive Officer and
President of the Hiland Companies, and Matthew S. Harrison,
Chief Financial Officer, Vice President Finance and
Secretary of the Hiland Companies will file Amendment No. 7
to their Transaction Statement on
Schedule 13E-3
with the SEC and (ii) Hiland Holdings, its general partner,
HH GP Holding, LLC, HPGP MergerCo, LLC, Continental Gas
Holdings, Inc. (an affiliate of Mr. Hamm) and
Messrs. Hamm, Griffin and Harrison will file Amendment
No. 7 to their Transaction Statement on
Schedule 13E-3
with the SEC.
29
HILAND
PARTNERS, LP
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED) (Continued)
The definitive joint proxy statement on Schedule 14A was
filed with the SEC on September 11, 2009 and first mailed
to unitholders on or around September 16, 2009.
Each of the Hiland companies had previously amended the
respective merger agreement between that Hiland company and
affiliates of Harold Hamm on October 26, 2009 to extend the
end date under the merger agreement from November 1 to
November 6. Those amendments were to provide the boards of
directors and conflicts committees of each of the Hiland
companies additional time to consider the proposals made by
Harold Hamm in letters delivered to the conflicts committees on
October 26, 2009, to increase the consideration payable to
common unitholders of the Partnership and Hiland Holdings under
the respective merger agreements.
On October 1, 2009, the Partnership entered into a
financial swap agreement related to forecasted natural gas sales
in 2010 whereby the Partnership receives a fixed price and pays
a floating price based on NYMEX Henry Hub pricing for the
relevant contract period as the underlying natural gas is sold.
This swap agreement with BP Energy Company replaces a previous
swap agreement the Partnership entered into with Bank of
Oklahoma, N.A. on May 27, 2008. The terms of the new swap
agreement are identical to the May 27, 2008 swap agreement.
30
Cautionary
Statement About Forward-Looking Statements
This report on
Form 10-Q
includes certain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933
and Section 21E of the Securities Exchange Act of 1934.
These statements include statements regarding our plans, goals,
beliefs or current expectations. Statements using words such as
anticipate, believe, intend,
project, plan, continue,
estimate, forecast, may,
will or similar expressions help identify
forward-looking statements. Although we believe such
forward-looking statements are based on reasonable assumptions
and current expectations and projections about future events, no
assurance can be given that every objective will be reached.
Our actual results may differ materially from any results
projected, forecasted, estimated or expressed in forward-looking
statements since many of the factors that determine these
results are subject to uncertainties and risks, difficult to
predict, and beyond managements control. Such factors
include:
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|
|
|
|
with respect to the mergers: (1) the occurrence of any
event, change or other circumstances that could give rise to the
termination of the merger agreements or the failure of required
conditions to close the mergers; (2) the outcome of any
legal proceedings that have been or may be instituted against
the Partnership
and/or
Hiland Holdings and others; (3) the inability to obtain
unitholder approval or the failure to satisfy other conditions
to completion of the mergers, including the receipt of certain
regulatory approvals; (4) risks that the proposed
transaction disrupts current plans and operations and the
potential difficulties in employee retention as a result of the
mergers; (5) the performance of Harold Hamm, his affiliates
and the Hamm family trusts , (6) the amount of the costs,
fees, expenses and related charges and (7) the ability of
the Hiland companies to receive clearance of the supplement to
the definitive joint proxy statement a sufficient amount of time
prior to the reconvened special meeting date to permit
distribution of the supplement;
|
|
|
|
the ability to comply with certain covenants in our credit
facility and the ability to reach agreement with our lenders in
the event of a breach of such covenants;
|
|
|
|
the ability to pay distributions to our unitholders;
|
|
|
|
our cash flow is affected by the volatility of natural gas and
NGL product prices, which could adversely affect our ability to
make distributions to unitholders.
|
|
|
|
the continued ability to find and contract for new sources of
natural gas supply;
|
|
|
|
the general economic conditions in the United States of America
as well as the general economic conditions and currencies in
foreign countries;
|
|
|
|
the amount of natural gas gathered on our gathering systems and
the associated level of throughput in our natural gas processing
and treating facilities given the recent reduction in drilling
activity in our areas of operations;
|
|
|
|
the fees we charge and the margins realized for our services;
|
|
|
|
the prices and market demand for, and the relationship between,
natural gas and NGLs;
|
|
|
|
energy prices generally;
|
|
|
|
the level of domestic crude oil and natural gas production;
|
|
|
|
the availability of imported crude oil and natural gas;
|
|
|
|
actions taken by foreign crude oil and natural gas producing
nations;
|
|
|
|
the political and economic stability of petroleum producing
nations;
|
|
|
|
the weather in our operating areas;
|
|
|
|
the extent of governmental regulation and taxation;
|
31
|
|
|
|
|
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 our ability to access
certain capital sources;
|
|
|
|
margin call risk with counterparties on our derivative
instruments;
|
|
|
|
changes in laws and regulations to which we are subject,
including tax, environmental, transportation and employment
regulations;
|
|
|
|
the costs and effects of legal and administrative proceedings;
|
|
|
|
the ability to successfully identify and consummate strategic
acquisitions at purchase prices that are accretive to our
financial results;
|
|
|
|
risks associated with the construction of new pipelines and
treating and processing facilities or additions to our existing
pipelines and facilities;
|
|
|
|
the completion of significant, unbudgeted expansion projects may
require debt
and/or
equity financing which may not be available to us on acceptable
terms, or at all; and;
|
|
|
|
increases in interest rates could increase our borrowing costs,
adversely impact our unit price and our ability to issue
additional equity, which could have an adverse effect on our
cash flows and our ability to fund our growth.
|
These factors are not necessarily all of the important factors
that could cause our actual results to differ materially from
those expressed in any of our forward-looking statements. Our
future results will depend upon various other risks and
uncertainties, including, but not limited to those described
above. Other unknown or unpredictable factors also could have
material adverse effects on our future results. You should not
place undue reliance on any forward-looking statements.
All forward-looking statements attributable to us are qualified
in their entirety by this cautionary statement. We undertake no
duty to update our forward-looking statements to reflect the
impact of events or circumstances after the date of the
forward-looking statements.
32
|
|
Item 2.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
General
Trends and Outlook
We expect our business to continue to be affected by the key
trends described below. Our expectations are based on
assumptions made by us, and information currently available to
us. To the extent our underlying assumptions about or
interpretations of available information prove to be incorrect,
our expectations may vary materially from actual results. Please
see Forward Looking Statements.
U.S. Natural Gas Supply and
Outlook. Natural gas prices have declined
significantly since the peak New York Mercantile Exchange
(NYMEX) Henry Hub last day settle price of
$13.11/MMBtu in July 2008 to the NYMEX Henry Hub last day settle
price of $3.73 in October 2009, a 72% decline. NYMEX Henry Hub
last day settle prices averaged $3.92 for the first ten months
of 2009 compared to an average of $9.51 for the same periods in
2008, a decrease of $5.59, or 59%. According to data published
by Baker Hughes Incorporated (Baker Hughes),
U.S. natural gas drilling rig counts have declined by
approximately 53% to 728 as of October 30, 2009, compared
to 1,552 natural gas drilling rigs as of October 31, 2008,
and have declined approximately 55% compared to the peak natural
gas drilling rig count of 1,606 in September 2008. Natural gas
storage levels have recently approached 3.7 Tcf (trillion
cubic feet), which surpassed the November 2007 record
working gas storage of 3.5 Tcf. We believe that current natural
gas prices will continue to result in reduced natural
gas-related drilling in our service territories until the
economic environment in the United States improves and increases
the demand for natural gas.
U.S. Crude Oil Supply and Outlook. A
weaker economic environment and the resulting drop in demand for
crude oil products in 2009 compared to 2008 continues to 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 $71.55/Bbl in
October 2009, a 47% decline from July 2008. West Texas
Intermediate (WTI) crude oil prices averaged $54.52 for the
first ten months of 2009 compared to an average of $113.25 for
the same periods in 2008, a decrease of $58.73, or 52%.
According to data published by Baker Hughes, U.S. crude oil
drilling rig counts have declined by approximately 19% to 330 as
of October 30, 2009, compared to 408 crude oil drilling
rigs as of October 24, 2008, and have declined
approximately 25% 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 steadily increased
from a low of 179 as of June 5, 2009 to 330 as of
October 30, 2009, an increase of 84% from June 5,
2009. Crude oil prices have steadily increased from $33.87/Bbl
in January 2009 to $71.55/Bbl in October 2009. In addition, the
forward curve for WTI crude oil pricing has recently improved.
U.S. NGL Supply and Outlook. A weaker
economic environment and the resulting drop in demand for NGL
products in 2009 compared to 2008 has impacted the price for
NGLs. Conway NGL prices have dropped dramatically since the peak
Conway NGL basket pricing of $1.97/gallon in June 2008 to a low
of $0.61/gallon in December 2008, a 69% decline, increasing to
$1.12/gallon in October 2009, a 43% decline from June 2008.
Conway NGL basket pricing has historically correlated to WTI
crude oil pricing. In addition, the forward curve for Conway NGL
basket pricing and WTI crude oil pricing has recently improved.
A number of the areas in which we operate have experienced a
significant decline in drilling activity as a result of this
years decline in natural gas and crude oil prices as compared to
last year. Excluding our North Dakota Bakken gathering system,
which commenced operations in April 2009, we connected
26 wells during the first nine months of 2009 as compared
to 83 wells connected during the same period in 2008, a 69%
decrease. At our North Dakota Bakken gathering system, we
connected 41 wells during the nine months ended
September 30, 2009. Currently, there are two rigs drilling
along our dedicated acreage company wide, both of which are
located at our North Dakota Bakken gathering system. We
anticipate that the dedicated rig count will increase during the
remainder of 2009 and into 2010. While we anticipate continued
exploration and production activities in the areas in which we
operate, albeit at depressed levels, fluctuations in energy
prices can greatly affect production rates and investments by
third parties in the development of natural gas and crude oil
reserves. Drilling activity generally decreases as natural gas
and crude oil prices decrease. We have no control over the level
of drilling activity in the areas of our operations.
33
Disruption
to functioning of capital markets
Multiple events during 2008 and 2009 involving numerous
financial institutions have effectively restricted current
liquidity within the capital markets throughout the United
States and around the world. Despite efforts by treasury and
banking regulators in the United States, Europe and other
nations around the world to provide liquidity to the financial
sector, capital markets currently remain constrained,
particularly for non-investment grade midstream companies like
Hiland. We expect that our ability to raise debt and equity at
prices that are similar to offerings in recent years to be
limited over the next three to six months and possibly longer
should capital markets remain constrained.
Overview
We are engaged in purchasing, gathering, compressing,
dehydrating, treating, processing and marketing of natural gas,
fractionating and marketing of NGLs, and providing air
compression and water injection services for oil and gas
secondary recovery operations. Our operations are primarily
located in the Mid-Continent and Rocky Mountain regions of the
United States.
We manage our business and analyze and report our results of
operations on a segment basis. Our operations are divided into
two business segments:
|
|
|
|
|
Midstream Segment, which is engaged in purchasing,
gathering, compressing, dehydrating, treating, processing and
marketing of natural gas and the fractionating and marketing of
NGLs. The midstream segment generated 95.1% and 96.4% of total
segment margin for the three months ended September 30,
2009 and 2008, respectively and 94.7% and 95.7% of total segment
margin for the nine months ended September 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 4.9% and 3.6% of total segment
margin for the three months ended September 30, 2009 and
2008, respectively and 5.3% and 4.3% of total segment margin for
the nine months ended September 30, 2009 and 2008,
respectively.
|
Our midstream assets currently consist of 15 natural gas
gathering systems with approximately 2,160 miles of gas
gathering pipelines, six natural gas processing plants, seven
natural gas treating facilities and three NGL fractionation
facilities. Our compression assets consist of two air
compression facilities and a water injection plant.
Our results of operations are determined primarily by five
interrelated variables: (1) the volume of natural gas
gathered through our pipelines; (2) the volume of natural
gas processed; (3) the volume of NGLs fractionated;
(4) the level and relationship of natural gas and NGL
prices; and (5) our current contract portfolio. Because our
profitability is a function of the difference between the
revenues we receive from our operations, including revenues from
the products we sell, and the costs associated with conducting
our operations, including the costs of products we purchase,
increases or decreases in our revenues alone are not necessarily
indicative of increases or decreases in our profitability. To a
large extent, our contract portfolio, the pricing environment
for natural gas and NGLs and the price of NGLs relative to
natural gas prices will dictate increases or decreases in our
profitability. Our profitability is also dependent upon prices
and market demand for natural gas and NGLs, which fluctuate with
changes in market and economic conditions and other factors.
Recent
Events
Merger Agreements. On November 3, 2009,
the Partnership amended its merger agreement with affiliates of
Harold Hamm, pursuant to which Mr. Hamms affiliates
had agreed to acquire all of the outstanding common units of the
Partnership (other than certain restricted common units owned by
officers and employees) not owned by Hiland Holdings. The
amendment increased the consideration payable to common
unitholders of the Partnership from $7.75 to $10.00 per common
unit and extended the end date under the merger agreement to
December 11, 2009. On the same day, Hiland Holdings amended
its merger agreement with affiliates of Harold Hamm, pursuant to
which Mr. Hamms affiliates had agreed to acquire all
34
of the outstanding common units of Hiland Holdings (other than
certain restricted common units owned by officers and employees)
not owned by Mr. Hamm, his affiliates or the Hamm family
trusts. The amendment increased the consideration payable to
common unitholders of Hiland Holdings from $2.40 to $3.20 per
common unit and extended the end date under the merger agreement
to December 11, 2009.
Each of the Hiland companies had previously amended the
respective merger agreement between that Hiland company and
affiliates of Harold Hamm on October 26, 2009 to extend the
end date under the merger agreement from November 1 to
November 6. Those amendments were to provide the boards of
directors and conflicts committees of each of the Hiland
companies additional time to consider the proposals made by
Harold Hamm in letters delivered to the conflicts committees on
October 26, 2009, to increase the consideration payable to
common unitholders of the Partnership and Hiland Holdings under
the respective merger agreements.
Hedging Transactions. On October 1, 2009,
we entered into a financial swap agreement related to forecasted
natural gas sales in 2010 whereby we receive a fixed price and
pay a floating price based on NYMEX Henry Hub pricing for the
relevant contract period as the underlying natural gas is sold.
This swap agreement with BP Energy Company replaces a previous
swap agreement we entered into with Bank of Oklahoma, N.A. on
May 27, 2008. The terms of the new swap agreement are
identical to the May 27, 2008 swap agreement.
SEC Filings. The Partnership and Hiland
Holdings intend to file with the SEC a supplement to the
definitive joint proxy statement on Schedule 14A, which,
upon clearance by the SEC, the Hiland companies intend to mail
to all holders of record of the Hiland companies as of
September 9, 2009, the record date for the special meetings.
Concurrently with the filing of the supplement to the joint
proxy statement, (i) the Partnership, our general partner,
Hiland Holdings and its general partner, HH GP Holding, LLC, an
affiliate of Harold Hamm, HLND MergerCo, LLC, a wholly-owned
subsidiary of HH GP Holding, LLC, Harold Hamm, Chairman of the
Hiland Companies, Joseph L. Griffin, Chief Executive Officer and
President of the Hiland Companies, and Matthew S. Harrison,
Chief Financial Officer, Vice President Finance and
Secretary of the Hiland Companies will file Amendment No. 7
to their Transaction Statement on
Schedule 13E-3
with the SEC and (ii) Hiland Holdings, its general partner,
HH GP Holding, LLC, HPGP MergerCo, LLC, Continental Gas
Holdings, Inc. (an affiliate of Mr. Hamm) and
Messrs. Hamm, Griffin and Harrison will file Amendment
No. 7 to their Transaction Statement on
Schedule 13E-3
with the SEC.
The definitive joint proxy statement on Schedule 14A was
filed with the SEC on September 11, 2009 and first mailed
to unitholders on or around September 16, 2009.
Distributions. We have suspended quarterly
cash distributions on common and subordinated units beginning
with the first quarter distribution of 2009 due to the impact of
lower commodity prices and reduced drilling activity on our
current and projected throughput volumes, midstream segment
margins and cash flows combined with future required levels of
capital expenditures and the outstanding indebtedness under our
senior secured revolving credit facility. Under the terms of the
partnership agreement, the common units will carry an arrearage
of $1.35 per unit, representing the minimum quarterly
distribution to common units for the first three quarters of
2009 that must be paid before the Partnership can make
distributions to the subordinated units.
Historical
Results of Operations
Our historical results of operations for the periods presented
may not be comparable, either from period to period or going
forward primarily due to significantly decreased natural gas and
NGL sales prices, volumes at our North Dakota Bakken gathering
system, which commenced operations in April 2009, and increased
volumes and operating expenses at our Woodford Shale and
Badlands gathering systems.
35
Our
Results of Operations
The following table presents a reconciliation of the non-GAAP
financial measure of total segment margin (which consists of the
sum of midstream segment margin and compression segment margin)
to operating income on a historical basis for each of the
periods indicated. We view total segment margin, a non-GAAP
financial measure, as an important performance measure of the
core profitability of our operations because it is directly
related to our volumes and commodity price changes. We review
total segment margin monthly for consistency and trend analysis.
We define midstream segment margin as midstream revenue less
midstream purchases. Midstream revenue includes revenue from the
sale of natural gas, NGLs and NGL products resulting from our
gathering, treating, processing and fractionation activities and
fixed fees associated with the gathering of natural gas and the
transportation and disposal of saltwater. Midstream purchases
include the cost of natural gas, condensate and NGLs purchased
by us from third parties, the cost of natural gas, condensate
and NGLs purchased by us from affiliates, and the cost of crude
oil purchased by us from third parties. We define compression
segment margin as the revenue derived from our compression
segment. Our total segment margin may not be comparable to
similarly titled measures of other companies as other companies
may not calculate total segment margin in the same manner.
Set forth in the tables below are certain financial and
operating data for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Total Segment Margin Data:
|
|
|
|
|
|
|
|
|
Midstream revenues
|
|
$
|
53,641
|
|
|
$
|
114,548
|
|
Midstream purchases
|
|
|
30,266
|
|
|
|
81,895
|
|
|
|
|
|
|
|
|
|
|
Midstream segment margin
|
|
|
23,375
|
|
|
|
32,653
|
|
Compression revenues(1)
|
|
|
1,205
|
|
|
|
1,205
|
|
|
|
|
|
|
|
|
|
|
Total segment margin(2)
|
|
$
|
24,580
|
|
|
$
|
33,858
|
|
|
|
|
|
|
|
|
|
|
Summary of Operations Data:
|
|
|
|
|
|
|
|
|
Midstream revenues
|
|
$
|
53,641
|
|
|
$
|
114,548
|
|
Compression revenues
|
|
|
1,205
|
|
|
|
1,205
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
54,846
|
|
|
|
115,753
|
|
Midstream purchases (exclusive of items shown separately below)
|
|
|
30,266
|
|
|
|
81,895
|
|
Operations and maintenance
|
|
|
7,736
|
|
|
|
7,881
|
|
Depreciation, amortization and accretion
|
|
|
10,472
|
|
|
|
9,554
|
|
Property impairments
|
|
|
20,500
|
|
|
|
|
|
Bad debt
|
|
|
|
|
|
|
(7,799
|
)
|
General and administrative
|
|
|
2,579
|
|
|
|
2,259
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
71,553
|
|
|
|
93,790
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(16,707
|
)
|
|
|
21,963
|
|
Other income (expense)
|
|
|
(2,841
|
)
|
|
|
(3,322
|
)
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
(19,548
|
)
|
|
|
18,641
|
|
Add:
|
|
|
|
|
|
|
|
|
Depreciation, amortization and accretion
|
|
|
10,472
|
|
|
|
9,554
|
|
Property impairments
|
|
|
20,500
|
|
|
|
|
|
Amortization of deferred loan costs
|
|
|
149
|
|
|
|
147
|
|
Interest expense
|
|
|
2,702
|
|
|
|
3,271
|
|
|
|
|
|
|
|
|
|
|
EBITDA(3)
|
|
$
|
14,275
|
|
|
$
|
31,613
|
|
|
|
|
|
|
|
|
|
|
Operating Data:
|
|
|
|
|
|
|
|
|
Inlet natural gas (Mcf/d)
|
|
|
257,950
|
|
|
|
261,345
|
|
Natural gas sales (MMBtu/d)
|
|
|
86,979
|
|
|
|
95,889
|
|
NGL sales (Bbls/d)
|
|
|
7,115
|
|
|
|
6,036
|
|
36
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Total Segment Margin Data:
|
|
|
|
|
|
|
|
|
Midstream revenues
|
|
$
|
153,658
|
|
|
$
|
319,058
|
|
Midstream purchases
|
|
|
88,481
|
|
|
|
238,586
|
|
|
|
|
|
|
|
|
|
|
Midstream segment margin
|
|
|
65,177
|
|
|
|
80,472
|
|
Compression revenues(1)
|
|
|
3,615
|
|
|
|
3,615
|
|
|
|
|
|
|
|
|
|
|
Total segment margin(2)
|
|
$
|
68,792
|
|
|
$
|
84,087
|
|
|
|
|
|
|
|
|
|
|
Summary of Operations Data:
|
|
|
|
|
|
|
|
|
Midstream revenues
|
|
$
|
153,658
|
|
|
$
|
319,058
|
|
Compression revenues
|
|
|
3,615
|
|
|
|
3,615
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
157,273
|
|
|
|
322,673
|
|
Midstream purchases (exclusive of items shown separately below)
|
|
|
88,481
|
|
|
|
238,586
|
|
Operations and maintenance
|
|
|
23,216
|
|
|
|
22,201
|
|
Depreciation, amortization and accretion
|
|
|
30,981
|
|
|
|
27,652
|
|
Property impairments
|
|
|
21,450
|
|
|
|
|
|
Bad debt
|
|
|
|
|
|
|
304
|
|
General and administrative
|
|
|
8,458
|
|
|
|
6,423
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
172,586
|
|
|
|
295,166
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(15,313
|
)
|
|
|
27,507
|
|
Other income (expense)
|
|
|
(8,096
|
)
|
|
|
(10,047
|
)
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
(23,409
|
)
|
|
|
17,460
|
|
Add:
|
|
|
|
|
|
|
|
|
Depreciation, amortization and accretion
|
|
|
30,981
|
|
|
|
27,652
|
|
Property impairments
|
|
|
21,450
|
|
|
|
|
|
Amortization of deferred loan costs
|
|
|
448
|
|
|
|
426
|
|
Interest expense
|
|
|
7,739
|
|
|
|
9,888
|
|
|
|
|
|
|
|
|
|
|
EBITDA(3)
|
|
$
|
37,209
|
|
|
$
|
55,426
|
|
|
|
|
|
|
|
|
|
|
Operating Data:
|
|
|
|
|
|
|
|
|
Inlet natural gas (Mcf/d)
|
|
|
268,937
|
|
|
|
245,098
|
|
Natural gas sales (MMBtu/d)
|
|
|
88,703
|
|
|
|
89,615
|
|
NGL sales (Bbls/d)
|
|
|
7,141
|
|
|
|
5,763
|
|
|
|
|
(1) |
|
Compression revenues and compression segment margin are the
same. There are no compression purchases associated with the
compression segment. |
37
|
|
|
(2) |
|
Reconciliation of total segment margin to operating income: |
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Reconciliation of Total Segment Margin to Operating Income
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
$
|
(16,707
|
)
|
|
$
|
21,963
|
|
Add:
|
|
|
|
|
|
|
|
|
Operations and maintenance expenses
|
|
|
7,736
|
|
|
|
7,881
|
|
Depreciation, amortization and accretion
|
|
|
10,472
|
|
|
|
9,554
|
|
Property impairments
|
|
|
20,500
|
|
|
|
|
|
Bad debt
|
|
|
|
|
|
|
(7,799
|
)
|
General and administrative
|
|
|
2,579
|
|
|
|
2,259
|
|
|
|
|
|
|
|
|
|
|
Total segment margin
|
|
$
|
24,580
|
|
|
$
|
33,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Reconciliation of Total Segment Margin to Operating Income
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
$
|
(15,313
|
)
|
|
$
|
27,507
|
|
Add:
|
|
|
|
|
|
|
|
|
Operations and maintenance expenses
|
|
|
23,216
|
|
|
|
22,201
|
|
Depreciation, amortization and accretion
|
|
|
30,981
|
|
|
|
27,652
|
|
Property impairments
|
|
|
21,450
|
|
|
|
|
|
Bad debt
|
|
|
|
|
|
|
304
|
|
General and administrative expenses
|
|
|
8,458
|
|
|
|
6,423
|
|
|
|
|
|
|
|
|
|
|
Total segment margin
|
|
$
|
68,792
|
|
|
$
|
84,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3) |
|
We define EBITDA, a non-GAAP financial measure, as net income
(loss) plus interest expense, provisions for income taxes and
depreciation, amortization and accretion expense. EBITDA is used
as a supplemental financial measure by our management and by
external users of our financial statements such as investors,
commercial banks, research analysts and others to assess:
(1) the financial performance of our assets without regard
to financial methods, capital structure or historical cost
basis; (2) the ability of our assets to generate cash
sufficient to pay interest costs and support our indebtedness;
(3) our operating performance and return on capital as
compared to those of other companies in the midstream energy
sector, without regard to financing or structure; and
(4) the viability of acquisitions and capital expenditure
projects and the overall rates of return on alternative
investment opportunities. EBITDA is also a financial measurement
that, with certain negotiated adjustments, is reported to our
lenders and is used as a gauge for compliance with our financial
covenants under our credit facility. EBITDA should not be
considered an alternative to net income (loss), operating
income, cash flows from operating activities or any other
measure of financial performance presented in accordance with
GAAP. Our EBITDA may not be comparable to EBITDA of similarly
titled measures of other entities, as other entities may not
calculate EBITDA in the same manner as we do. |
Three
Months Ended September 30, 2009 Compared with Three Months
Ended September 30, 2008
Revenues. Total revenues (midstream and
compression) were $54.8 million for the three months ended
September 30, 2009 compared to $115.8 million for the
three months ended September 30, 2008, a decrease of
$60.9 million, or (52.6%). This $60.9 million decrease
was primarily due to significantly lower average realized
natural gas and NGL sales prices for all of our gathering
systems combined with decreased natural
38
gas and NGL sales volumes in all but three of our gathering
systems. As a result of significant reduced drilling activity in
2009 at our mid-continent areas of operations, natural gas sales
volumes decreased by 3,906 MMBtu/d (MMBtu per day), or
(17.4%) at the Eagle Chief gathering system, 4,654 MMBtu/d,
or (29.3%) at the Matli gathering system and 5,113 MMBtu/d,
or (23.1%) at the Woodford Shale gathering systems for the three
months ended September 30, 2009 compared to the same period
in 2008. Additionally, NGL sales volumes decreased by
72 Bbls/d (Bbls per day), or (7.2%) at the Eagle Chief
gathering system and 136 Bbls/d, or (39.4%) at the Matli
gathering system for the three months ended September 30,
2009 compared to the same period in 2008. The North Dakota
Bakken gathering system, which commenced operations in April
2009, contributed natural gas sales volumes of
4,005 MMBtu/d and NGL sales volumes of 370 Bbls/d
during the three months ended September 30, 2009. Natural
gas sales volumes increased by 429 MMBtu/d, or 4.2% at the
Montana Bakken gathering system and NGL sales volumes increased
by 277 Bbls/d, or 25.8% at the Badlands gathering systems
for the three months ended September 30, 2009 compared to
the same period in 2008. Revenues from compression assets were
the same for both periods.
Midstream revenues were $53.6 million for the three months
ended September 30, 2009 compared to $114.5 million
for the three months ended September 30, 2008, a decrease
of $60.9 million, or (53.2%). Of this $60.9 million
decrease in midstream revenues, approximately $61.2 million
was attributable to significantly lower average realized natural
gas and NGL sales prices for all of our gathering systems,
approximately $6.7 million was attributable to revenues
from overall decreases in natural gas sales volumes, offset by
approximately $7.0 million attributable to revenues from
increased NGL sales volumes for the three months ended
September 30, 2009 as compared to the same period in 2008.
The North Dakota Bakken gathering system, which commenced
operations in April 2009, contributed $2.2 million in
midstream revenues for the three months ended September 30,
2009.
Inlet natural gas was 257,950 Mcf/d (Mcf per day) for the
three months ended September 30, 2009 compared to
261,345 Mcf/d for the three months ended September 30,
2008, a decrease of 3,395 Mcf/d, or (1.3%). This decrease
is primarily attributable to mid-continent volume declines
totaling 13,378 Mcf/d, or (17.9%) at the Eagle Chief, Matli
and Woodford Shale gathering systems offset by volumes of
4,194 Mcf/d at the North Dakota Bakken gathering system,
which commenced operations in April 2009, and volume increases
totaling 5,930 Mcf/d, or 3.7% at the Badlands and Kinta
Area gathering systems.
Natural gas sales volumes were 86,979 MMBtu/d for the three
months ended September 30, 2009 compared to
95,889 MMBtu/d for the three months ended
September 30, 2008, a decrease of 8,910 MMBtu/d, or
(9.3%). This 8,910 MMBtu/d decrease in natural gas sales
volumes was attributable to decreased mid-continent natural gas
sales volumes of 13,673 MMBtu/d, or (22.6%) at the Eagle
Chief, Matli and Woodford Shale gathering systems, offset by
natural gas sales volumes of 4,005 MMBtu/d at the North
Dakota Bakken gathering system, which commenced operations in
April 2009, and increased natural gas sales volumes totaling
1,108 MMBtu/d, or 3.7% at our Bakken and Kinta Area
gathering systems.
NGL sales volumes were 7,115 Bbls/d for the three months
ended September 30, 2009 compared to 6,036 Bbls/d for
the three months ended September 30, 2008, an increase of
1,079 Bbls/d, or 17.9%. This 1,079 Bbls/d increase in
NGL sales volumes is primarily attributable to increased NGL
sales volumes totaling 984 Bbls/d, or 43.6% at the Woodford
Shale and Badlands gathering systems and NGL sales volumes of
370 Bbls/d at the North Dakota Bakken gathering system,
which commenced operations in April 2009, offset by reduced NGL
sales volumes totaling 266 Bbls/d, or (7.4%) at our Bakken,
Eagle Chief and Matli gathering systems.
Average realized natural gas sales prices were $3.25 per MMBtu
for the three months ended September 30, 2009 compared to
$7.57 per MMBtu for the three months ended September 30,
2008, a decrease of $4.32 per MMBtu, or (57.1%). Average
realized NGL sales prices were $0.76 per gallon for the three
months ended September 30, 2009 compared to $1.55 per
gallon for the three months ended September 30, 2008, a
decrease of $0.79 per gallon or (51.0%). 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
September 30, 2009 compared to the three months ended
September 30, 2008.
39
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 September 30, 2009 totaled $2.5 million compared
to $1.1 million for the three months ended
September 30, 2008. The $2.5 million gain for the
three months ended September 30, 2009 increased averaged
realized natural gas prices to $3.25 per MMBtu from $2.94 per
MMBtu, an increase of $0.31 per MMBtu, or 10.5%. The
$1.1 million net gain for the three months ended
September 30, 2008 increased averaged realized natural gas
prices to $7.57 per MMBtu from $7.44 per MMBtu, an increase of
$0.13 per MMBtu, or 1.7%. We had no cash flow swap contracts for
NGLs during the three months ended September 30, 2009. Cash
paid to our counterparty on cash flow swap contracts for NGL
derivative transactions that closed during the three months
ended September 30, 2008 totaled $2.5 million. The
$2.5 million loss for the three months ended
September 30, 2008 reduced averaged realized NGL prices to
$1.55 per gallon from $1.65 per gallon, a decrease of $0.10 per
gallon, or (6.1%).
Compression revenues were $1.2 million for the each of the
three months ended September 30, 2009 and 2008.
Midstream Purchases. Midstream purchases were
$30.3 million for the three months ended September 30,
2009 compared to $81.9 million for the three months ended
September 30, 2008, a decrease of $51.6 million, or
(63.0%). This $51.6 million decrease is primarily 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, offset by
$1.2 million of midstream purchases at the North Dakota
Bakken gathering system, which commenced operations in April
2009.
Midstream Segment Margin. Midstream segment
margin was $23.4 million for the three months ended
September 30, 2009 compared to $32.7 million for the
three months ended September 30, 2008, a decrease of
$9.3 million, or (28.4%). The decrease is primarily due to
unfavorable gross processing spreads, significantly lower
average realized natural gas and NGL prices, an overall decrease
in natural gas sales volumes, offset by an overall increase in
NGL sales volumes. As a percent of midstream revenues, midstream
segment margin was 43.6% for the three months ended
September 30, 2009 compared to 28.5% for the three months
ended September 30, 2008, an increase of 15.1%. 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 September 30, 2009
totaling $2.2 million compared to net losses of
$1.4 million on closed/settled derivative transactions and
unrealized non-cash losses on open derivative transactions for
the three months ended September 30, 2008, offset by an
unrealized non-cash gain of $5.6 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 $7.7 million for the three
months ended September 30, 2009 compared with
$7.9 million for the three months ended September 30,
2008, a net decrease of $0.1 million, or (1.8%). The net
decrease in operations and maintenance of $0.2 million
compared to the same period in 2008 includes decreases totaling
$0.8 million attributable to all gathering systems with the
exception of insignificant increases in the Montana Bakken and
Badlands gathering systems and a decrease of $0.1 million
related to compression operations, offset by $0.5 million
attributable to the North Dakota Bakken gathering system, which
commenced operations in April 2009.
Depreciation, Amortization and
Accretion. Depreciation, amortization and
accretion expense totaled $10.5 million for the three
months ended September 30, 2009 compared with
$9.6 million for the three months ended September 30,
2008, an increase of $0.9 million, or 9.6%. This
$0.9 million increase was primarily attributable to
depreciation of $0.3 million on the North Dakota Bakken
gathering system, which commenced operations in April 2009,
increased depreciation of $0.3 million on the Kinta Area
gathering system and increases of $0.1 million each on the
Badlands and Woodford Shale and gathering systems.
Property Impairments. As a result of recent
volume declines and projected future volume declines at our
Kinta Area gathering system located in southeastern Oklahoma, we
recognized impairment charges of $20,500 in September 2009. We
had no property impairments during the three months ended
September 30, 2008.
40
Bad Debt. We had no bad debt expense for the
three months ended September 30, 2009. For the three months
ended September 30, 2008, we had recorded a reversal of an
uncollectible trade accounts receivable of $7.8 million
related to a receivable from a significant customer in which we
had previously reserved an allowance for uncollectible accounts
of $8.1 million during the second quarter of 2008.
Accordingly, we decreased our reserve for doubtful accounts to
$0.3 million.
General and Administrative. General and
administrative expense totaled $2.6 million for the three
months ended September 30, 2009 compared with
$2.3 million for the three months ended September 30,
2008, a net increase of $0.3 million, or 14.2%. General and
administrative expenses of a recurring nature decreased by
$0.4 million compared to the same period in 2008, but were
offset by $0.7 million of expenses attributable to the
going private proposals incurred in the three months ended
September 30, 2009.
Other Income (Expense). Other income (expense)
totaled $(2.8) million for the three months ended
September 30, 2009 compared with $(3.3) million for
the three months ended September 30, 2008, a decrease in
expense of $0.5 million, or (15.2%). The decrease is
primarily attributable lower interest rates incurred during the
three months ended September 30, 2009 compared to interest
rates incurred during the three months ended September 30,
2008, offset by interest expense of $0.5 million related to
an interest rate swap during the three months ended
September 30, 2009 which did not exist in 2008.
Nine
Months Ended September 30, 2009 Compared with Nine Months
Ended September 30, 2008
Revenues. Total revenues (midstream and
compression) were $157.3 million for the nine months ended
September 30, 2009 compared to $322.7 million for the
nine months ended September 30, 2008, a decrease of
$165.4 million, or (51.3%). This $165.4 million
decrease was primarily due to significantly lower average
realized natural gas and NGL sales prices for all of our
gathering systems combined with decreased natural gas and NGL
sales volumes in all but three of our gathering systems. As a
result of significant reduced drilling activity in 2009 at our
mid-continent areas of operations, natural gas sales volumes
decreased by 4,046 MMBtu/d, or (17.5%) at the Eagle Chief
gathering system and 1,954 MMBtu/d, or (13.5%) at the Matli
gathering system for the nine months ended September 30,
2009 compared to the same period in 2008. NGL sales volumes
decreased by 100 Bbls/d, or (9.9%) at the Eagle Chief
gathering system for the nine months ended September 30,
2009 compared to the same period in 2008. Conversely, due to a
36.5% increase in inlet Mcf/d at the Woodford Shale gathering
system for the nine months ended September 30, 2009,
natural gas sales volumes increased by 3,011 MMBtu/d, or
18.1% and NGL sales volumes increased by 917 Bbls/d, or
80.5% compared to the same period in 2008. Due to a 44.4%
increase in inlet Mcf/d at the Badlands gathering system for the
nine months ended September 30, 2009, NGL sales volumes
increased by 451 Bbls/d, a 50.4% increase compared to the
same period in 2008. The North Dakota Bakken gathering system,
which commenced operations in April 2009, contributed natural
gas sales volumes of 1,791 MMBtu/d and NGL sales volumes of
193 Bbls/d during the nine months ended September 30,
2009. Revenues from compression assets were the same for both
periods.
Midstream revenues were $153.7 million for the nine months
ended September 30, 2009 compared to $319.1 million
for the nine months ended September 30, 2008, a decrease of
$165.4 million, or (51.8%). Of this $165.4 million net
decrease in midstream revenues, approximately
$188.1 million was attributable to significantly lower
average realized natural gas and NGL sales prices for all of our
gathering systems, approximately $2.0 million attributable
to revenues from overall decreases in natural gas sales volumes,
offset by approximately $24.7 million attributable to
increases in NGL sales volumes for the nine months ended
September 30, 2009 as compared to the same period in 2008.
The North Dakota Bakken gathering system, which commenced
operations in April 2009, contributed $3.2 million in
midstream revenues for the three months ended September 30,
2009.
Inlet natural gas was 268,937 Mcf/d for the nine months
ended September 30, 2009 compared to 245,098 Mcf/d for
the nine months ended September 30, 2008, an increase of
23,839 Mcf/d, or 9.7%. This increase is primarily
attributable to volume growth totaling 28,544 Mcf/d, or
16.2% at the Kinta Area, Badlands and Woodford Shale gathering
systems, volumes of 2,137 Mcf/d at the North Dakota Bakken
41
gathering system, which commenced operations in April 2009,
primarily offset by volume declines totaling 6,530 Mcf/d,
or (15.8%) at the Eagle Chief and Matli gathering systems.
Natural gas sales volumes were 88,703 MMBtu/d for the nine
months ended September 30, 2009 compared to
89,615 MMBtu/d for the nine months ended September 30,
2008, a net decrease of 912 MMBtu/d, or (1.0%). This
912 MMBtu/d net increase in natural gas sales volumes was
attributable to decreased natural gas sales volumes totaling
6,000 MMBtu/d, or (15.9%) at the Eagle Chief and Matli
gathering systems, offset by natural gas sales volumes of
1,791 MMBtu/d at the North Dakota Bakken gathering system,
which commenced operations in April 2009, and increased natural
gas sales volumes totaling 3,402 MMBtu/d, or 13.2% at the
Woodford Shale and Kinta Area gathering systems.
NGL sales volumes were 7,141 Bbls/d for the nine months
ended September 30, 2009 compared to 5,763 Bbls/d for
the nine months ended September 30, 2008, a net increase of
1,378 Bbls/d, or 23.9%. This 1,378 Bbls/d net increase
in NGL sales volumes is primarily attributable to increased NGL
sales volumes totaling 1,368 Bbls/d, or 67.3% at our
Woodford Shale and Badlands gathering systems, NGL sales volumes
of 193 Bbls/d at the North Dakota Bakken gathering system,
which commenced operations in April 2009, offset by reduced NGL
sales volumes totaling 177 Bbls/d, or (5.4%) at our Eagle
Chief and Montana Bakken gathering systems.
Average realized natural gas sales prices were $3.32 per MMBtu
for the nine months ended September 30, 2009 compared to
$8.00 per MMBtu for the nine months ended September 30,
2008, a decrease of $4.68 per MMBtu, or (58.5%). Average
realized NGL sales prices were $0.67 per gallon for the nine
months ended September 30, 2009 compared to $1.53 per
gallon for the nine months ended September 30, 2008, a
decrease of $0.86 per gallon or (56.2%). 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 nine months ended
September 30, 2009 compared to the nine months ended
September 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 nine months ended
September 30, 2009 totaled $7.3 million compared to
$1.4 million for the nine months ended September 30,
2008. The $7.3 million gain for the nine months ended
September 30, 2009 increased averaged realized natural gas
prices to $3.32 per MMBtu from $3.02 per MMBtu, an increase of
$0.30 per MMBtu, or 9.9%. The $1.4 million net gain for the
nine months ended September 30, 2008 increased averaged
realized natural gas prices to $8.00 per MMBtu from $7.95 per
MMBtu, an increase of $0.05 per MMBtu, or 0.6%. We had no cash
flow swap contracts for NGLs during the nine months ended
September 30, 2009. Cash paid to our counterparty on cash
flow swap contracts for NGL derivative transactions that closed
during the nine months ended September 30, 2008 totaled
$7.9 million. The $7.9 million loss for the nine
months ended September 30, 2008 reduced averaged realized
NGL prices to $1.53 per gallon from $1.64 per MMBtu, a decrease
of $0.11 per gallon, or (6.7%).
Compression revenues were $3.6 million for the each of the
nine months ended September 30, 2009 and 2008.
Midstream Purchases. Midstream purchases were
$88.5 million for the nine months ended September 30,
2009 compared to $238.6 million for the nine months ended
September 30, 2008, a decrease of $150.1 million, or
(62.9%). This $150.1 million decrease is primarily 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 $1.7 million of midstream purchases at the
North Dakota Bakken gathering system, which commenced operations
in April 2009.
Midstream Segment Margin. Midstream segment
margin was $65.2 million for the nine months ended
September 30, 2009 compared to $80.5 million for the
nine months ended September 30, 2008, a decrease of
$15.3 million, or (19.0%). The decrease is primarily due to
unfavorable gross processing spreads and significantly lower
average realized natural gas and NGL prices, an overall decrease
in natural gas sales volumes, offset by an overall increase in
NGL sales volumes, and additionally offset by 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
42
percent of midstream revenues, midstream segment margin was
42.4% for the nine months ended September 30, 2009 compared
to 25.2% for the nine months ended September 30, 2008, an
increase of 17.2%. 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 nine months ended September 30, 2009
totaling $7.1 million compared to net losses of
$6.4 million on closed/settled derivative transactions and
unrealized non-cash losses on open derivative transactions for
the nine months ended September 30, 2008, offset by an
unrealized non-cash gain of $3.6 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 $23.2 million for the nine
months ended September 30, 2009 compared with
$22.2 million for the nine months ended September 30,
2008, a net increase of $1.0 million, or 4.6%. The net
increase in operations and maintenance of $0.9 million
compared to the same period in 2008 includes (i) increases
of $1.0 million at the Badlands gathering system,
(ii) $1.0 million attributable to the North Dakota
Bakken gathering system, which commenced operations in April
2009, (iii) decreases totaling $0.9 million at the
Kinta Area, Worland, Eagle Chief, Matli and Woodford Shale
gathering systems and (iv) a decrease of $0.2 million
related to compression operations.
Depreciation, Amortization and
Accretion. Depreciation, amortization and
accretion expense totaled $31.0 million for the nine months
ended September 30, 2009 compared with $27.7 million
for the nine months ended September 30, 2008, an increase
of $3.3 million, or 12.0%. This $3.3 million increase
was primarily attributable to increased depreciation of
$1.1 million on the Kinta Area gathering system,
$0.9 million on the Woodford Shale gathering system,
$0.6 million on the Badlands gathering system and
$0.5 million attributable to the North Dakota Bakken
gathering system, which commenced operations in April 2009.
Property Impairments. As a result of recent
volume declines and projected future volume declines at our
Kinta Area gathering system located in southeastern Oklahoma, we
recognized impairment charges of $20.5 million in September
2009. Additionally, as a result of volume declines at our
natural gas gathering systems located in Texas and Mississippi,
combined with significantly reduced natural gas prices, we
recognized impairment charges of $1.0 million in March
2009. We had no property impairments during the nine months
ended September 30, 2008.
Bad Debt. We had no bad debts for the nine
months ended September 30, 2009. For the nine months ended
September 30, 2008, we recorded an uncollectible trade
accounts receivable of $0.3 million from a significant
customer. We initially reserved an allowance for uncollectible
accounts of $8.1 million from this customer during the
second quarter of 2008, but reversed $7.8 million in the
third quarter of 2008 upon determination that the trade
receivable was collectible.
General and Administrative. General and
administrative expense totaled $8.4 million for the nine
months ended September 30, 2009 compared with
$6.4 million for the nine months ended September 30,
2008, an increase of $2.0 million, or 31.0%. Expenses
related to the going private proposals were $2.1 million
for the nine months ended September 30, 2009. All other
general and administrative expenses decreased by
$0.1 million during the nine months ended
September 30, 2009 as compared to the nine months ended
September 30, 2008.
Other Income (Expense). Other income (expense)
totaled $(8.1) million for the nine months ended
September 30, 2009 compared with $(10.0) million for
the nine months ended September 30, 2008, a decrease in
expense of $2.0 million, or (20.0%). The decrease is
primarily attributable lower interest rates incurred during the
nine months ended September 30, 2009 compared to interest
rates incurred during the nine months ended September 30,
2008, offset by interest expense of $1.4 million related to
an interest rate swap during the nine months ended
September 30, 2009 which did not exist in 2008.
43
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 $3.73 in October 2009, a 72% decline.
Natural gas storage levels have recently approached 3.7 Tcf,
which surpassed the November 2007 record working gas storage of
3.5 Tcf. We believe that current natural gas prices will
continue to result in reduced natural gas-related drilling in
our service areas until the economic environment in the United
States improves and increases the demand for natural gas. 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 $71.55/Bbl in October 2009, a 47% decline from
July 2008. Conway NGL basket pricing, which historically has
correlated to WTI crude oil pricing, has dropped since the peak
Conway NGL basket pricing of $1.97/gallon in June 2008 to a low
of $0.61/gallon in December 2008, a 69% decline, increasing to
$0.99/gallon in September 2009, a 50% decline from June 2008. In
addition, current pricing and the forward curve pricing for WTI
crude oil and the Conway NGL basket has recently improved. A
number of the areas in which we operate are experiencing a
significant decline in drilling activity as a result of the
recent decline in natural gas and crude oil prices. While we
anticipate continued exploration and production activities in
the areas in which we operate, albeit at depressed levels,
fluctuations in energy prices can greatly affect production
rates and investments by third parties in the development of
natural gas and crude oil reserves. Drilling activity generally
decreases as natural gas and crude oil prices decrease. We have
no control over the level of drilling activity in the areas of
our operations.
Disruption
to Functioning of Capital Markets
Multiple events during 2008 and 2009 involving numerous
financial institutions have effectively restricted current
liquidity within the capital markets throughout the United
States and around the world. Despite efforts by treasury and
banking regulators in the United States, Europe and other
nations around the world to provide liquidity to the financial
sector, capital markets currently remain constrained,
particularly for non-investment grade midstream companies like
Hiland. We expect that our ability to issue debt and equity at
prices that are similar to offerings in recent years will be
limited over the next three to six months and possibly longer
should capital markets remain constrained. Although we intend to
move forward with our planned capital expenditures attributable
to our existing facilities, we may revise the timing and scope
of these projects as necessary to adapt to existing economic
conditions and the benefits expected to accrue to our
unitholders from our capital expenditures may be muted by
substantial cost of capital increases during this period.
Overview
Our senior secured revolving credit facility requires us to meet
certain financial tests, including a maximum consolidated funded
debt to EBITDA covenant ratio of 4.0 to 1.0 as of the last day
of any fiscal quarter; provided that in the event that we make
certain permitted acquisitions or capital expenditures, this
ratio may be increased to 4.75 to 1.0 for the three fiscal
quarters following the quarter in which such permitted
acquisition or capital expenditure occurs. We met the permitted
capital expenditure requirements for the four quarter period
ended March 31, 2009 and elected to increase the ratio to
4.75 to 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 to 1.0 for the
quarter ended December 31, 2009. If commodity prices and
inlet natural gas volumes do not improve above the current
forward prices and expected inlet natural gas volumes for the
fourth quarter of 2009, the Partnership could be in violation of
the maximum consolidated funded debt to EBITDA covenant ratio as
early as December 31, 2009, unless this ratio is amended,
the Partnership receives an infusion of equity capital, the
Partnerships debt is restructured or the Partnership is
able to monetize
in-the-money
hedge positions. Management is continuing discussions with
certain lenders under the credit facility as to ways to address
a potential covenant violation. While no potential solution has
been agreed to, the Partnership expects that any
44
solution will require the assessment of fees and increased
rates, the infusion of additional equity capital or the
incurrence of subordinated indebtedness by the Partnership and
the suspension of distributions for a certain period of time.
There can be no assurance that any such agreement will be
reached with the lenders, that any required equity or debt
financing will be available to the Partnership, or that the
Partnership will have sufficient
in-the-money
hedges to monetize to address the maximum consolidated funded
debt to EBITDA covenant ratio.
Cash
Flows from Operating Activities
Our cash flows from operating activities increased by
$11.8 million to $38.5 million for the nine months
ended September 30, 2009 from $26.7 million for the
nine months ended September 30, 2008. During the nine
months ended September 30, 2009 we received cash flows from
customers of approximately $165.2 million attributable to
significantly lower average realized natural gas and NGL sales
prices and decreased natural gas sales volumes, partially offset
by increased NGL sales volumes, received $3.2 million from
early settlements of derivative contracts, made cash payments to
our suppliers and employees of approximately $122.7 million
and made payments of interest expense of $8.0 million, net
of amounts capitalized, resulting in cash received from
operating activities of $37.7 million. During the same nine
month period in 2008, we received cash flows from customers of
approximately $303.9 million attributable to increased
natural gas and NGL volumes and significantly higher average
realized natural gas and NGL sales prices, made cash payments to
our suppliers and employees of approximately $267.5 million
and made payments of interest expense of $9.7 million, net
of amounts capitalized, resulting in cash received from
operating activities of $26.7 million.
Changes in cash receipts and payments are primarily due to the
timing of collections at the end of our reporting periods. We
collect and pay large receivables and payables at the end of
each calendar month. The timing of these payments and receipts
may vary by a day or two between month-end periods and cause
fluctuations in cash received or paid. Working capital items,
exclusive of cash, provided $5.0 million of cash flows from
operating activities during the nine months ended
September 30, 2009 and used $16.5 million of cash
flows from operating activities during the nine months ended
September 30, 2008.
Net loss for the nine months ended September 30, 2009 was
$(23.4) million, an increase in net loss of
$40.9 million from a net income of $17.5 million for
the nine months ended September 30, 2008. Depreciation,
amortization, accretion and property impairments increased by
$24.8 million to $52.4 million for the nine months
ended September 30, 2009 from $27.7 million for the
nine months ended September 30, 2008.
Cash
Flows Used for Investing Activities
Our cash flows used for investing activities, which represent
investments in property and equipment, decreased by
$4.9 million to $32.3 million for the nine months
ended September 30, 2009 from $37.1 million for the
nine months ended September 30, 2008 primarily due to
reduced capital expenditures in nearly all of our gathering
systems, offset by cash flows invested related to the
construction of the North Dakota Bakken gathering system.
Cash
Flows from Financing Activities
Our cash flows used in financing activities was
$3.9 million for the nine months ended September 30,
2009, a decrease of $16.0 million from $12.1 million
provided by financing activities for the nine months ended
September 30, 2008. During the nine months ended
September 30, 2009, we borrowed $12.0 million under
our credit facility to fund internal expansion projects, repaid
$11.0 million on our credit facility, distributed
$4.3 million to our unitholders, and made $0.6 million
payments on capital lease obligations.
During the nine months ended September 30, 2008, we
borrowed $41.0 million under our credit facility to fund
internal expansion projects, we received capital contributions
of $1.1 million as a result of issuing common units due to
the exercise of 40,705 vested unit options, we distributed
$29.2 million to our unitholders, incurred debt issuance
costs of $0.4 million associated with the fourth amendment
to our credit facility amended in February 2008 and made
$0.4 million payments on capital lease obligations.
45
Capital
Requirements
The midstream energy business is capital intensive, requiring
significant investment to maintain and upgrade existing
operations. Our capital requirements have consisted primarily
of, and we anticipate will continue to be:
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maintenance capital expenditures, which are capital expenditures
made to replace partially or fully depreciated assets to
maintain the existing operating capacity of our assets and to
extend their useful lives, or other capital expenditures that
are incurred in maintaining existing system volumes and related
cash flows; and
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expansion capital expenditures such as those to acquire
additional assets to grow our business, to expand and upgrade
gathering systems, processing plants, treating facilities and
fractionation facilities and to construct or acquire similar
systems or facilities.
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We believe that cash generated from the operations of our
business will be sufficient to meet anticipated maintenance
capital expenditures for the next twelve months. We anticipate
that any future expansion capital expenditures may be funded
through operating cash flow, long-term borrowings or other debt
financings
and/or
equity offerings. See Credit Facility below for
information related to our credit agreement.
North
Dakota Bakken
Our North Dakota Bakken gathering system presently consists of a
68-mile
gathering system located in northwestern North Dakota that
gathers 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 September 30,
2009, we have invested approximately $24.0 million in the
project.
Financial
Derivatives and Commodity Hedges
We have entered into certain financial derivative instruments
that are classified as cash flow hedges and relate to forecasted
natural gas sales in 2009 and 2010. We entered into these
financial swap instruments to hedge the forecasted natural gas
sales against the variability in expected future cash flows
attributable to changes in commodity prices. Under these swap
agreements, we receive a fixed price and pay a floating price
based on certain indices for the relevant contract period as the
underlying natural gas is sold.
The following table provides information about our commodity
based derivative instruments at September 30, 2009:
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Average
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Fair
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Fixed
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Value
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Description and Production Period
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Volume
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Price
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Asset
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(MMBtu)
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(per MMBtu)
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Natural Gas Sold Fixed for Floating Price Swaps
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October 2009 September 2010
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2,136,000
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$
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6.87
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$
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3,537
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October 2010 December 2010
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534,000
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$
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6.73
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341
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$
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3,878
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We have entered into a financial derivative instrument that is
classified as a cash flow hedge and relates to forecasted
interest payments under our credit facility in 2009. We entered
into this financial swap instrument to hedge forecasted interest
payments against the variable interest payments under our credit
facility. Under this swap agreement, we pay a fixed interest
rate and receive a floating rate based on one
46
month LIBOR on the notional amount for the contract period. The
following table provides information about our interest rate
swap at September 30, 2009 for the periods indicated:
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Fair Value
|
|
|
Notional
|
|
Interest
|
|
Asset
|
Description and Period
|
|
Amount
|
|
Rate
|
|
(Liability)
|
|
Interest Rate Swap
|
|
|
|
|
|
|
|
|
|
|
|
|
October 2009 December 2009
|
|
$
|
100,000
|
|
|
|
2.245
|
%
|
|
$
|
(512
|
)
|
Off-Balance
Sheet Arrangements
We had no significant off-balance sheet arrangements as of
September 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. As a non-investment grade
midstream company, we are currently experiencing difficulty
accessing bank credit markets. Additionally, existing
constraints in the credit markets may increase the rates we are
charged for utilizing these markets.
Credit
Facility
Our borrowing capacity under our senior secured revolving credit
facility, as amended, is $300.0 million consisting of a
$291.0 million senior secured revolving credit facility to
be used for funding acquisitions and other capital expenditures,
issuance of letters of credit and general corporate purposes
(the Acquisition Facility) and a $9.0 million
senior secured revolving credit facility to be used for working
capital and to fund distributions (the Working Capital
Facility).
In addition, the senior secured revolving credit facility
provides for an accordion feature, which permits us, if certain
conditions are met, to increase the size of the Acquisition
Facility by up to $50.0 million and allows for the issuance
of letters of credit of up to $15.0 million in the
aggregate. The credit facility will mature in May 2011. At that
time, the agreement will terminate and all outstanding amounts
thereunder will be due and payable.
Our senior secured revolving credit facility requires us to meet
certain financial tests, including a maximum consolidated funded
debt to EBITDA covenant ratio of 4.0 to 1.0 as of the last day
of any fiscal quarter; provided that in the event that we make
certain permitted acquisitions or capital expenditures, this
ratio may be increased to 4.75 to 1.0 for the three fiscal
quarters following the quarter in which such permitted
acquisition or capital expenditure occurs. We met the permitted
capital expenditure requirements for the four quarter period
ended March 31, 2009 and elected to increase the ratio to
4.75 to 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 to 1.0 for the
quarter ended December 31, 2009. If commodity prices and
inlet natural gas volumes do not improve above the current
forward prices and expected inlet natural gas volumes for the
fourth quarter of 2009, the Partnership could be in violation of
the maximum consolidated funded debt to EBITDA covenant ratio as
early as December 31, 2009, unless this ratio is amended,
the Partnership receives an infusion of equity capital, the
Partnerships debt is restructured or the Partnership is
able to monetize
in-the-money
hedge positions. Management is continuing discussions with
certain lenders under the credit facility as to ways to address
a potential covenant violation. While no potential solution has
been agreed to, the Partnership expects that any solution will
require the assessment of fees and increased rates, the infusion
of additional equity capital or the incurrence of subordinated
indebtedness by the Partnership and the suspension of
distributions for a certain period of time. There can be no
assurance that any such agreement will be reached with the
lenders, that any required equity or debt financing will be
available to the Partnership, or that the Partnership will have
sufficient
in-the-money
hedges to monetize to address the maximum consolidated funded
debt to EBITDA covenant ratio.
47
Upon the occurrence of an event of default as defined in the
credit facility, the lenders may, among other things, be able to
accelerate the maturity of the credit facility and exercise
other rights and remedies as set forth in the credit facility.
Our obligations under the credit facility are secured by
substantially all of our assets and guaranteed by us, and all of
our subsidiaries, other than our operating company, which is the
borrower under the credit facility.
Indebtedness under the credit facility will bear interest, at
our option, at either: (i) an Alternate Base Rate plus an
applicable margin ranging from 50 to 125 basis points per
annum or (ii) LIBOR plus an applicable margin ranging from
150 to 225 basis points per annum based on our ratio of
consolidated funded debt to EBITDA. The Alternate Base Rate is a
rate per annum equal to the greatest of: (a) the Prime Rate
in effect on such day, (b) the base CD rate in effect on
such day plus 1.50% and (c) the Federal Funds effective
rate in effect on such day plus
1/2
of 1%. We have elected for the indebtedness to bear interest at
LIBOR plus the applicable margin. A letter of credit fee will be
payable for the aggregate amount of letters of credit issued
under the credit facility at a percentage per annum equal to
1.0%. An unused commitment fee ranging from 25 to 50 basis
points per annum based on our ratio of consolidated funded debt
to EBITDA will be payable on the unused portion of the credit
facility. During the
step-up
period, the applicable margin with respect to loans under the
credit facility will be increased by 35 basis points per
annum and the unused commitment fee will be increased by
12.5 basis points per annum. At September 30, 2009,
the interest rate on outstanding borrowings from our credit
facility was 2.87%.
We are subject to interest rate risk on our credit facility and
have entered into an interest rate swap to reduce this risk. See
Note 5 Derivatives for a discussion of our
interest rate swap.
The credit facility prohibits us from making distributions to
unitholders if any default or event of default, as defined in
the credit facility, has occurred and is continuing or would
result from such distributions. In addition, the credit facility
contains various covenants that limit, among other things,
subject to certain exceptions and negotiated
baskets, our ability to incur indebtedness, grant
liens, make certain loans, acquisitions and investments, make
any material changes to the nature of its business, amend its
material agreements, including the Omnibus Agreement or enter
into a merger, consolidation or sale of assets.
The credit facility defines EBITDA as our consolidated net
income (loss), plus income tax expense, interest expense,
depreciation, amortization and accretion expense, amortization
of intangibles and organizational costs, non-cash unit based
compensation expense, and adjustments for non-cash gains and
losses on specified derivative transactions and for other
extraordinary or non-recurring items.
The credit facility limits distributions to our unitholders to
available cash, as defined by the agreement, and borrowings to
fund such distributions are only permitted under the revolving
working capital facility. The revolving working capital facility
is subject to an annual clean-down period of 15
consecutive days in which the amount outstanding under the
revolving working capital facility is reduced to zero.
As of September 30, 2009, we had $253.1 million
outstanding under the credit facility and were in compliance
with its financial covenants. Our EBITDA to interest expense
ratio was 4.93 to 1.0 and our consolidated funded debt to EBITDA
ratio was 4.50 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
In September 2009, the FASB issued new authoritative accounting
guidance, effective for financial statements issued for interim
and annual periods ending after September 15, 2009, which
identifies the FASB Accounting Standards Codification
(Codification) as the authoritative source of GAAP
in the United States. Rules and interpretive releases of the SEC
under federal securities laws are also sources of authoritative
GAAP
48
for SEC registrants. Codification is not intended to change
GAAP. The adoption of this new accounting guidance had no impact
on our financial statements and disclosures therein.
In May 2009, the FASB issued new authoritative accounting
guidance on subsequent events that establishes general standards
of accounting for and disclosure of events that occur after the
balance sheet date but before financial statements are issued or
are available to be issued. This new accounting guidance is
effective for interim or annual periods ending after
June 15, 2009. The adoption of this new guidance was
effective June 30, 2009 and did not have a material impact
on our financial statements and disclosures therein.
In April 2009, the FASB issued new authoritative accounting
guidance on interim disclosures about fair value of financial
instruments which expands the fair value disclosures required
for all financial instruments to interim periods. This new
guidance also requires entities to disclose in interim periods
the methods and significant assumptions used to estimate the
fair value of financial instruments. This new accounting
guidance is effective for interim reporting periods ending after
June 15, 2009. The adoption of this new guidance was
effective June 30, 2009 and did not have a material impact
on our financial statements and disclosures therein.
In April 2009, the FASB revised the authoritative guidance
related to the initial recognition and measurement, subsequent
measurement and accounting, and disclosure of assets and
liabilities arising from contingencies in a business
combination. Generally, assets acquired and liabilities assumed
in a business combination that arise from contingencies must be
recognized at fair value at the acquisition date. This guidance
was adopted January 1, 2009. As this guidance is applied
prospectively to business combinations with an acquisition date
on or after the date the guidance became effective, the impact
cannot be determined until the transactions occur. No such
transactions have occurred during 2009.
In April 2008, the FASB issued amended guidance on the factors
that an entity should consider in developing renewal or
extension assumptions used in determining the useful life of
recognized intangible assets, including goodwill. In determining
the useful life of an acquired intangible asset, this guidance
removes the requirement for an entity to consider whether
renewal of the intangible asset requires significant costs or
material modifications to the related arrangement and replaces
the previous useful life assessment criteria with a requirement
that an entity considers its own experience or market
participant assumptions in renewing similar arrangements. This
guidance was adopted effective January 1, 2009, and will
apply to future intangible assets acquired. We dont
believe the adoption will have a material impact on our
financial position, results of operations or cash flows.
In March 2008, the FASB amended and expanded the disclosure
requirements related to derivative instruments and hedging
activities 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. The revised guidance requires qualitative
disclosures about objectives and strategies for using
derivatives, quantitative disclosures about fair value amounts
of and gains and losses on derivative instruments, and
disclosures about credit-risk-related contingent features in
derivative agreements. This guidance was adopted effective
January 1, 2009 and did not have a material impact on our
financial statements and disclosures therein.
In March 2008, the FASB issued authoritative accounting guidance
which 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. This guidance 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 revised the authoritative guidance
for business combinations which provides guidance for how the
acquirer recognizes and measures goodwill acquired in the
business combination or a gain from a bargain purchase, the
identifiable assets acquired, liabilities assumed and any
noncontrolling interest in the acquiree. This guidance also
determines what information to disclose to enable users to be
able
49
to evaluate the nature and financial effects of the business
combination. This guidance was adopted effective January 1,
2009 and will apply to future business combinations.
In December 2007, the FASB issued authoritative guidance
clarifying that a noncontrolling interest in a subsidiary is an
ownership interest in the consolidated entity that should be
reported as equity in the consolidated financial statements.
This guidance requires the equity amount of consolidated net
income attributable to the parent and to the noncontrolling
interest be clearly identified and presented on the face of the
consolidated income statement and that changes in a
parents ownership interest while the parent retains its
controlling financial interest in its subsidiary be accounted
for consistently and similarly as equity transactions.
Consolidated net income and comprehensive income are now
determined without deducting minority interest; however,
earnings-per-share
information continues to be calculated on the basis of the net
income attributable to the parents shareholders.
Additionally, this guidance 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. This guidance is effective for
fiscal years beginning on or after December 15, 2008, was
adopted effective January 1, 2009 and did not have a
material impact on our financial position, results of operations
or cash flows.
In February 2007, the FASB expanded guidance on fair value
measurements which 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. This guidance 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. The adoption of this guidance did not
have any impact on our financial position, results of operations
or cash flows.
In September 2006, the FASB issued new authoritative accounting
guidance for fair value measurements, which 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. This guidance 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 and 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.
This guidance was adopted effective January 1, 2009 and did
not have a material impact on our financial statements or
disclosures therein.
Significant
Accounting Policies and Estimates
The selection and application of accounting policies is an
important process that has developed as our business activities
have evolved and as the accounting rules have developed.
Accounting rules generally do not involve a selection among
alternatives, but involve the implementation and interpretation
of existing rules, and the use of judgment applied to the
specific set of circumstances existing in our business. We make
every effort to properly comply with all applicable rules on or
before their adoption, and we believe the proper implementation
and consistent application of the accounting rules are critical.
There have been no material changes in our significant
accounting policies and estimates during the three and nine
months ended September 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.
50
|
|
Item 3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
Market risk is the risk of loss arising from adverse changes in
market rates and prices. The principal market risk to which we
are exposed is commodity price risk for natural gas and NGLs. We
also incur, to a lesser extent, risks related to interest rate
fluctuations. We do not engage in commodity energy trading
activities.
Commodity Price Risks. Our profitability is
affected by volatility in prevailing NGL and natural gas prices.
Historically, changes in the prices of most NGL products have
generally correlated with changes in the price of crude oil. NGL
and natural gas prices are volatile and are impacted by changes
in the supply and demand for NGLs and natural gas, as well as
market uncertainty. Our cash flow is affected by the volatility
of natural gas and NGL product prices, which could adversely
affect our ability to make distributions to unitholders. To
illustrate the impact of changes in prices for natural gas and
NGLs on our operating results, we have provided the table below,
which reflects, for the three months ended September 30,
2009 and 2008, respectively, the impact on our midstream segment
margin of a $0.01 per gallon change (increase or decrease) in
NGL prices coupled with a $0.10 per MMBtu change (increase or
decrease) in the price of natural gas.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural Gas Price Change ($/MMBtu)
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
$
|
0.10
|
|
|
$
|
(0.10
|
)
|
|
$
|
0.10
|
|
|
$
|
(0.10
|
)
|
NGL Price Change ($/gal)
|
|
$
|
0.01
|
|
|
$
|
177,000
|
|
|
$
|
159,000
|
|
|
$
|
130,000
|
|
|
$
|
156,000
|
|
|
|
$
|
(0.01
|
)
|
|
$
|
(159,000
|
)
|
|
$
|
(177,000
|
)
|
|
$
|
(159,000
|
)
|
|
$
|
(134,000
|
)
|
The increase in commodity exposure is the result of increased
NGL product sales volumes offset by decreased natural gas sales
volumes during the three months ended September 30, 2009
compared to the three months ended September 30, 2008 and
the increased exposure to NGL product prices in 2009 as the
result of no NGL hedging contracts in 2009 compared to NGL
products hedged during the three months ended September 30,
2008. The magnitude of the impact on total segment margin of
changes in natural gas and NGL sales 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
September 30, 2009 for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Fair
|
|
|
|
|
|
|
Fixed
|
|
|
Value
|
|
Description and Production Period
|
|
Volume
|
|
|
Price
|
|
|
Asset
|
|
|
|
(MMBtu)
|
|
|
(Per MMBtu)
|
|
|
|
|
|
Natural Gas Sold Fixed for Floating Price Swaps
|
|
|
|
|
|
|
|
|
|
|
|
|
October 2009 September 2010
|
|
|
2,136,000
|
|
|
$
|
6.87
|
|
|
$
|
3,537
|
|
October 2010 December 2010
|
|
|
534,000
|
|
|
$
|
6.73
|
|
|
|
341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Risk. We have elected for the
indebtedness under our credit facility to bear interest at LIBOR
plus the applicable margin. We are exposed to changes in the
LIBOR rate as a result of our credit facility, which is subject
to floating interest rates. On October 7, 2008, we entered
into a
floating-to-fixed
interest rate swap agreement with an investment grade
counterparty whereby we pay a monthly fixed interest rate of
2.245% and receive a monthly variable rate based on the one
month posted LIBOR interest rate on a notional amount of
$100.0 million. This swap agreement was effective on
January 2, 2009 and terminates on January 1, 2010. As
of September 30, 2009, we had approximately
$253.1 million of indebtedness outstanding
51
under our credit facility, of which $153.1 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 $1.5 million. The following table provides
information about our interest rate swap at September 30,
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
Notional
|
|
Interest
|
|
Asset
|
Description and Period
|
|
Amount
|
|
Rate
|
|
(Liability)
|
|
Interest Rate Swap
|
|
|
|
|
|
|
|
|
|
|
|
|
October 2009 December 2009
|
|
$
|
100,000
|
|
|
|
2.245
|
%
|
|
$
|
(512
|
)
|
Credit Risk. Counterparties pursuant to the
terms of their contractual obligations expose us to potential
losses as a result of nonperformance. Our four largest customers
for the nine months ended September 30, 2009, accounted for
approximately 21%, 14%, 12% and 9%, respectively, of our
revenues. Consequently, changes within one or more of these
companies operations have the potential to impact, both
positively and negatively, our credit exposure and make us
subject to risks of loss resulting from nonpayment or
nonperformance by these or any of our other customers. Any
material nonpayment or nonperformance by our key customers could
materially and adversely affect our business, financial
condition or results of operations and reduce our ability to
make distributions to our unitholders. Furthermore, some of our
customers may be highly leveraged and subject to their own
operating and regulatory risks, which increases the risk that
they may default on their obligations to us. Our counterparties
for our commodity based derivative instruments as of
September 30, 2009 are BP Energy Company and Bank of
Oklahoma, N.A. Our counterparty to our interest rate swap as of
September 30, 2009 is Wells Fargo Bank, N.A.
On July 22, 2008, SemGroup, L.P. and certain subsidiaries
filed voluntary petitions for reorganization under
Chapter 11 of the U.S. Bankruptcy Code. In October
2008, the United States Bankruptcy Court for the District of
Delaware entered an order approving the assumption of a Natural
Gas Liquids Marketing Agreement (the SemStream
Agreement) between SemStream, L.P., an affiliate of
SemGroup, L.P., and us relating to sales of natural gas liquids
and condensate at our Bakken and Badlands plants and gathering
systems, restoring us and SemStream, L.P. to our pre-bankruptcy
contractual relationship. Our pre-petition credit exposure to
SemGroup, L.P. relating to condensate sales to SemCrude, LLC in
our mid-continent region is approximately $0.3 million,
which continues to be reserved as of September 30, 2009.
|
|
Item 4.
|
Controls
and Procedures
|
Evaluation
of Disclosure Controls and Procedures
(a) Evaluation
of disclosure controls and procedures.
As required by
Rule 13a-15(b)
under the Securities Exchange Act of 1934, as amended, we have
evaluated, under the supervision and with the participation of
our management, including our principal executive officer and
principal financial officer, the effectiveness of the design and
operation of our disclosure controls and procedures (as defined
in
Rules 13a-15(e)
and
15d-15(e)
under the Exchange Act) as of the end of the period covered by
this Quarterly Report on
Form 10-Q.
Based upon that evaluation, our principal executive officer and
principal financial officer concluded that our disclosure
controls and procedures were effective as of September 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 September 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.
52
|
|
Item 1.
|
Legal
Proceedings
|
Three putative unitholder class action lawsuits have been filed
relating to the Hiland Partners Merger and the Hiland Holdings
Merger. These lawsuits are as follows: (i) Robert
Pasternack v. Hiland Partners, LP et al., In the Court
of Chancery of the State of Delaware, Civil Action
No. 4397-VCS;
(ii) Andrew Jones v. Hiland Partners, LP et
al., In the Court of Chancery of the State of Delaware,
Civil Action
No. 4558-VCS;
and (iii) Arthur G. Rosenberg v. Hiland Partners,
LP et al., In the District Court of Garfield County, State
of Oklahoma, Case
No. C3-09-211-02.
The lawsuits name as defendants the Partnership, Hiland
Holdings, the general partner of each of the Partnership and
Hiland Holdings, and the members of the board of directors of
each of the Partnership and Hiland Holdings. The lawsuits
challenge both the Hiland Partners Merger and the Hiland
Holdings Merger. The lawsuits allege claims of breach of the
Partnership Agreement and breach of fiduciary duty on behalf of
(i) a purported class of common unitholders of the
Partnership and (ii) a purported class of our common
unitholders of Hiland Holdings.
On July 10, 2009, the court in which the Oklahoma case is
pending granted our motion to stay the Oklahoma lawsuit in favor
of the Delaware lawsuits. On July 31, 2009, the plaintiff
in the first-filed Delaware case (Pasternack) filed an
Amended Class Action Complaint and a motion to enjoin the
mergers. This Amended Class Action Complaint alleges, among
other things, that (i) the original consideration and
revised consideration offered by the Hamm Parties is unfair and
inadequate, (ii) the members of the conflicts committees of
the general partner of each of the Partnership and Hiland
Holdings that were charged with reviewing the proposals and
making a recommendation to each committees respective
board of directors lacked any meaningful independence,
(iii) the defendants acted in bad faith in recommending and
approving the Hiland Partners Merger or the Hiland Holdings
Merger, and (iv) the disclosures in the Preliminary Proxy
Statement filed by the Partnership and Hiland Holdings are
materially misleading. The Pasternack plaintiff seeks to
preliminarily enjoin the defendants from proceeding with or
consummating the mergers and seeks an order requiring defendants
to supplement the Preliminary Proxy Statement with certain
information. On August 13, 2009, the Partnership, Hiland
Holdings and certain individual defendants moved to dismiss the
claims added in the July 31, 2009 Amended Class Action
Complaint. The plaintiffs moved to expedite proceedings on
September 4, 2009. On September 4, 2009, the
plaintiffs filed a motion to expedite the proceedings. On
September 9, 2009, the Delaware Chancery Court requested
that the defendants file a response to plaintiffs motion
that same day and set a hearing on plaintiffs motion for
September 11, 2009. Defendants responded to
plaintiffs motion as ordered by the Court, and, following
the hearing on September 11, 2009, plaintiffs motion
to expedite the proceedings was denied.
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.
We are not aware of any legal or governmental proceedings
against us, or contemplated to be brought against us, under the
various environmental protection statutes to which we are
subject. We maintain insurance policies with insurers in amounts
and with coverage and deductibles as our general partner
believes are reasonable and prudent. However, we cannot assure
you that this insurance will be adequate to protect us from all
material expenses related to potential future claims for
personal and property damage or that these levels of insurance
will be available in the future at economical prices.
The
failure to complete the Hiland Partners Merger could adversely
affect the price of our common units and otherwise have an
adverse effect on us.
There can be no assurance that the conditions to the completion
of the Hiland Partners Merger, many of which are out of our
control, will be satisfied by the December 11, 2009
deadline set forth in the amended merger agreement. Among other
things, we cannot be certain that (i) holders of a majority
of our common units (other than Hiland Holdings) will vote in
favor of the Hiland Partners Merger and the merger agreement;
(ii) no injunction will be granted in any of the three
pending unitholder lawsuits challenging the Hiland
53
Partners Merger (as described elsewhere in this
Form 10-Q);
or (iii) that the Hiland Holdings Merger will be completed
concurrently with the Hiland Partners Merger (the completion of
which is a condition to Harold Hamms obligation to
complete the Hiland Partners Merger). Additionally, if we do not
receive the required unitholder approval of the Hiland Partners
Merger Agreement and the Hiland Partners Merger at a special
meeting held on or before December 4, 2009, pursuant to the
terms of our Partnership Agreement, we will have to set a new
record date and resolicit proxies in connection with a new vote
on the proposals. Whether or not we will be able to hold a
unitholder vote on or before December 4, 2009 is subject to
a variety of risks, including the risk that we will not receive
clearance of the proxy supplement a sufficient amount of time
prior to December 4, 2009 to permit distribution of the
supplement. This could materially delay the completion of the
Hiland Partners Merger.
If the Hiland Partners Merger is not completed, the price of our
common units could fall to the extent that the current market
price of our common units reflects an assumption that a
transaction will be completed. Further, a failed transaction may
result in negative publicity
and/or a
negative impression of us in the investment community and may
affect our relationship with employees, vendors, creditors and
other business partners.
Additionally, we are subject to the following risks related to
the Hiland Partners Merger:
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|
|
|
|
Certain costs relating to the Hiland Partners Merger, including
legal, accounting and financial advisory fees, are payable by us
whether or not the Hiland Partners Merger is completed.
|
|
|
|
Under circumstances set out in the merger agreement, if the
Hiland Partners Merger is not completed we may be required to
reimburse up to $1,420,000 of Mr. Hamm and his
affiliates expenses associated with the Hiland Partners
Merger.
|
|
|
|
Our managements and our employees attention will
have been diverted from our
day-to-day
operations, we may experience unusually high employee attrition
and our business and customer relationships may be disrupted.
|
We are
subject to litigation related to the Hiland Partners
Merger.
We are actively defending three putative unitholder class action
lawsuits which have been filed relating to the Hiland Partners
Merger and the Hiland Holdings Merger. These lawsuits are as
follows: (i) Robert Pasternack v. Hiland Partners,
LP et al., In the Court of Chancery of the State of
Delaware, Civil Action
No. 4397-VCS;
(ii) Andrew Jones v. Hiland Partners, LP et
al., In the Court of Chancery of the State of Delaware,
Civil Action
No. 4558-VCS;
and (iii) Arthur G. Rosenberg v. Hiland Partners,
LP et al., In the District Court of Garfield County, State
of Oklahoma, Case
No. C3-09-211-02.
The lawsuits name as defendants the Partnership, Hiland
Holdings, the general partner of each of the Partnership and
Hiland Holdings, and the members of the board of directors of
each of the Partnership and Hiland Holdings. The lawsuits
challenge both the Hiland Partners Merger and the Hiland
Holdings Merger. The lawsuits allege claims of breach of the
Partnership Agreement and breach of fiduciary duty on behalf of
(i) a purported class of common unitholders of the
Partnership and (ii) a purported class of our common
unitholders of Hiland Holdings.
On July 10, 2009, the court in which the Oklahoma case is
pending granted our motion to stay the Oklahoma lawsuit in favor
of the Delaware lawsuits. On July 31, 2009, the plaintiff
in the first-filed Delaware case (Pasternack) filed an
Amended Class Action Complaint and a motion to enjoin the
mergers. This Amended Class Action Complaint alleges, among
other things, that (i) the original consideration and
revised consideration offered by the Hamm Parties is unfair and
inadequate, (ii) the members of the conflicts committees of
the general partner of each of the Partnership and Hiland
Holdings that were charged with reviewing the proposals and
making a recommendation to each committees respective
board of directors lacked any meaningful independence,
(iii) the defendants acted in bad faith in recommending and
approving the Hiland Partners Merger or the Hiland Holdings
Merger, and (iv) the disclosures in the Preliminary Proxy
Statement filed by the Partnership and Hiland Holdings are
materially misleading. The Pasternack plaintiff seeks to
preliminarily enjoin the defendants from proceeding with or
consummating the mergers and seeks an
54
order requiring defendants to supplement the Preliminary Proxy
Statement with certain information. It is possible that
additional claims beyond those that have already been filed will
be brought by the current plaintiffs or by others in an effort
to enjoin the Hiland Partners Merger or seek monetary relief
from us.
While the Hiland Companies do not believe these lawsuits have
merit and intend to defend themselves vigorously, we cannot
predict the outcome of these lawsuits, or others, nor can we
predict the amount of time and expense that will be required to
resolve the lawsuits. An unfavorable resolution of any such
litigation surrounding the Hiland Partners Merger could delay or
prevent the consummation of the Hiland Partners Merger. In
addition, the cost to us of defending the litigation, even if
resolved in our favor, could be substantial. Such litigation
could also divert the attention of our management and our
resources in general from
day-to-day
operations.
If
commodity prices and inlet natural gas volumes do not improve
above the expected prices and inlet natural gas volumes for the
fourth quarter of 2009, we may be in violation of the maximum
consolidated funded debt to EBITDA covenant ratio as early as
December 31, 2009, unless the ratio is amended, the senior
secured revolving credit facility is restructured, we receive an
infusion of equity capital or the Partnership is able to
monetize
in-the-money
hedge positions. Failure to comply with the covenants could
cause an event of default under our credit
facility.
Our credit facility contains covenants requiring us to maintain
certain financial ratios and comply with certain financial
tests, which, among other things, require us and our subsidiary
guarantors, on a consolidated basis, to maintain specified
ratios or conditions as follows:
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EBITDA to interest expense of not less than 3.0 to 1.0; and
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|
consolidated funded debt to EBITDA of not more than 4.0 to 1.0
with the option to increase the consolidated funded debt to
EBITDA ratio to not more than 4.75 to 1.0 for a period of up to
nine months following an acquisition or a series of acquisitions
totaling $40 million in a
12-month
period (subject to an increased applicable interest rate margin
and commitment fee rate).
|
As of September 30, 2009, we were in compliance with each
of these ratios, which are tested quarterly. Our EBITDA to
interest expense ratio was 4.93 to 1.0 and our consolidated
funded debt to EBITDA ratio was 4.50 to 1.0. We temporarily
increased the ratio to 4.75 to 1.0 on March 31, 2009, but
such ratio will be reduced to 4.0 to 1.0 on December 31,
2009. Our ability to remain in compliance with these
restrictions and covenants in the future is uncertain and will
be affected by the levels of cash flow from our operations and
events or circumstances beyond our control. If commodity prices
and inlet natural gas volumes do not improve above the expected
prices and inlet natural gas volumes for the fourth quarter of
2009, we may be in violation of the maximum consolidated funded
debt to EBITDA ratio as early as December 31, 2009, unless
the ratio is amended, the senior secured revolving credit
facility is restructured, we receive an infusion of equity
capital or the Partnership is able to monetize
in-the-money
hedge positions. Our failure to comply with any of the
restrictions and covenants under our revolving credit facility
could lead to an event of default and the acceleration of our
obligations under those agreements. We may not have sufficient
funds to make such payments. If we are unable to satisfy our
obligations with cash on hand, we could attempt to refinance
such debt, sell assets or repay such debt with the proceeds from
an equity offering. We cannot assure that we will be able to
generate sufficient cash flow to pay the interest on our debt or
that future borrowings, equity financings or proceeds from the
sale of assets will be available to pay or refinance such debt.
The terms of our financing agreements may also prohibit us from
taking such actions. Factors that will affect our ability to
raise cash through an offering of our common units or other
equity, a refinancing of our debt or a sale of assets include
financial market conditions and our market value and operating
performance at the time of such offering or other financing. We
cannot assure that any such proposed offering, refinancing or
sale of assets can be successfully completed or, if completed,
that the terms will be favorable to us.
In addition to the other information set forth in this report,
you should carefully consider the factors discussed in
Part I, Item 1A. Risk Factors in our
Annual Report on
Form 10-K
for the year ended December 31, 2008, which could
materially affect our business, financial condition or future
results. The risks described in our Annual Report on
Form 10-K
are not the only risks facing the Partnership. Additional risks
55
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.
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|
Item 2.
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Unregistered
Sales of Equity Securities and Use of Proceeds
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None.
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Item 3.
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Defaults
Upon Senior Securities
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None.
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Item 4.
|
Submission
of Matters to a Vote of Security Holders
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None.
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|
Item 5.
|
Other
Information
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None.
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|
Exhibit
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|
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Number
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|
|
|
Description
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2
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.1
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|
Acquisition Agreement by and among Hiland Operating, LLC and
Hiland Partners, LLC dated as of September 1, 2005 (incorporated
by referenced to Exhibit 2.1 of Registrants Form 8-K filed
September 29, 2005).
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2
|
.2
|
|
|
|
Agreement and Plan of Merger, dated as of June 1, 2009, by and
between Hiland Partners, LP, Hiland Partners GP, LLC, HH GP
Holding, LLC and HLND MergerCo, LLC (incorporated by reference
to Exhibit 2.1 of Registrants Form 8-K filed on June 1,
2009). Schedules and Exhibits are omitted pursuant to Section
601(b)(2) of Regulation S-K.
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|
2
|
.3
|
|
|
|
Equity Commitment Letter Agreement, dated as of June 1, 2009, by
and between Harold Hamm and HH GP Holding, LLC (incorporated by
reference to Exhibit 2.2 of Registrants
Form 8-K
filed on June 1, 2009).
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|
2
|
.4
|
|
|
|
Support Agreement, dated as of June 1, 2009, by and between
Hiland Partners, LP, Hiland Partners GP, LLC, Hiland Holdings
GP, LP, Hiland Partners GP Holdings, LLC, HH GP Holding, LLC and
HLND MergerCo, LLC (incorporated by reference to Exhibit 2.3 of
Registrants Form 8-K filed on June 1, 2009).LLC
(incorporated by reference to Exhibit 2.3 of Registrants
Form 8-K filed on June 1, 2009).
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2
|
.5
|
|
|
|
Agreement and Plan of Merger, dated as of June 1, 2009, by and
between Hiland Holdings GP, LP, Hiland Partners GP Holdings,
LLC, HH GP Holding, LLC and HPGP MergerCo, LLC (incorporated by
reference to Exhibit 2.1 of Hiland Holdings Form 8-K filed
on June 1, 2009). Schedules and Exhibits are omitted pursuant to
Section 601(b)(2) of Regulation S-K.
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|
2
|
.6
|
|
|
|
Equity Commitment Letter Agreement, dated as of June 1, 2009, by
and between Harold Hamm and HH GP Holding, LLC (incorporated by
reference to Exhibit 2.3 of Hiland Holdings
Form 8-K
filed on June 1, 2009).
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2
|
.7
|
|
|
|
Support Agreement, dated as of June 1, 2009, by and between
Hiland Holdings GP, LP, Hiland Partners GP Holdings, LLC, Harold
Hamm, Continental Gas Holdings, Inc., Bert Mackie, as trustee of
the Harold Hamm DST Trust and the Harold Hamm HJ Trust, HH GP
Holding, LLC and HPGP MergerCo, LLC (incorporated by reference
to Exhibit 2.1 of Hiland Holdings
Form 8-K
filed on June 1, 2009).
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2
|
.8
|
|
|
|
Amendment No. 1, dated October 26, 2009, to the Agreement and
Plan of Merger, dated as of June 1, 2009, by and between Hiland
Partners, LP, Hiland Partners GP, LLC, HH GP Holding, LLC and
HLND MergerCo, LLC (incorporated by reference to Exhibit 2.1 of
Registrants
Form 8-K
filed on October 27, 2009).
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56
|
|
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|
|
Exhibit
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|
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|
Number
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|
|
|
Description
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|
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2
|
.9
|
|
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|
Amendment No. 1, dated October 26, 2009, to the Agreement and
Plan of Merger, dated as of June 1, 2009, by and between Hiland
Holdings GP, LP, Hiland Partners GP Holdings, LLC, HH GP
Holding, LLC and HPGP MergerCo, LLC (incorporated by reference
to Exhibit 2.1 of Hiland Holdings Form 8-K filed on
October 27, 2009).
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3
|
.2
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|
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|
First Amended and Restated Limited Partnership Agreement of
Hiland Partners, LP (incorporated by reference to Exhibit 3.2 of
Registrants annual report on Form 10-K filed on March 30,
2005).
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3
|
.3
|
|
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|
Certificate of Formation of Hiland Partners GP, LLC
(incorporated by reference to Exhibit 3.3 of Registrants
Registration Statement on Form S-1 (File No. 333-119908)).
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3
|
.4
|
|
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|
Second Amended and Restated Limited Liability Company Agreement
of Hiland Partners GP, LLC (incorporated by reference to exhibit
10.2 of Registrants Form 8-K filed on September 29, 2006).
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4
|
.1
|
|
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|
Certificate of Limited Partnership of Hiland Partners, LP.
(incorporated by reference to Exhibit 3.1 of Registrants
Registration Statement on Form S-1 (File No. 333-119908)).
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4
|
.2
|
|
|
|
First Amended and Restated Limited Partnership Agreement of
Hiland Partners, LP (incorporated by reference to Exhibit 3.2 of
Registrants annual report on Form 10-K filed on March 30,
2005).
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4
|
.3
|
|
|
|
Certificate of Formation of Hiland Partners GP, LLC
(incorporated by reference to Exhibit 3.3 of Registrants
Registration Statement on Form S-1 (File No. 333-119908)).
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4
|
.4
|
|
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|
Second Amended and Restated Limited Liability Company Agreement
of Hiland Partners GP, LLC (incorporated by reference to exhibit
10.2 of Registrants Form 8-K filed on September 29, 2006).
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19
|
.1
|
|
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|
Code of Ethics for Chief Executive Officer and Senior Finance
Officers (incorporated by reference to Exhibit 19.1 of
Registrants annual report on Form 10-K filed on March 30,
2005).
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|
31
|
.1
|
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Certification of Chief Executive Officer under Section 302 of
the Sarbanes-Oxley Act of 2002.
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31
|
.2
|
|
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|
Certification of Chief Financial Officer under Section 302 of
the Sarbanes-Oxley Act of 2002.
|
|
32
|
.1
|
|
|
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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.
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|
|
|
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Portions of this exhibit have been omitted pursuant to a request
for confidential treatment. |
|
* |
|
Constitutes management contracts or compensatory plans or
arrangements. |
57
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized in Enid, Oklahoma, on this
9th day of November, 2009.
HILAND PARTNERS, LP
By: Hiland Partners GP, LLC, its general partner
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By:
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/s/ Joseph
L. Griffin
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Joseph L. Griffin
Chief Executive Officer, President and Director
(principal executive officer)
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By:
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/s/ Matthew
S. Harrison
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Matthew S. Harrison
Chief Financial Officer, Vice President-Finance, Secretary
and Director (principal financial and accounting officer)
58
Exhibit Index
|
|
|
|
|
|
|
|
2
|
.1
|
|
|
|
Acquisition Agreement by and among Hiland Operating, LLC and
Hiland Partners, LLC dated as of September 1, 2005 (incorporated
by referenced to Exhibit 2.1 of Registrants Form 8-K filed
September 29, 2005).
|
|
2
|
.2
|
|
|
|
Agreement and Plan of Merger, dated as of June 1, 2009, by and
between Hiland Partners, LP, Hiland Partners GP, LLC, HH GP
Holding, LLC and HLND MergerCo, LLC (incorporated by reference
to Exhibit 2.1 of Registrants Form 8-K filed on June 1,
2009). Schedules and Exhibits are omitted pursuant to Section
601(b)(2) of Regulation S-K.
|
|
2
|
.3
|
|
|
|
Equity Commitment Letter Agreement, dated as of June 1, 2009, by
and between Harold Hamm and HH GP Holding, LLC (incorporated by
reference to Exhibit 2.2 of Registrants Form 8-K filed on
June 1, 2009).
|
|
2
|
.4
|
|
|
|
Support Agreement, dated as of June 1, 2009, by and between
Hiland Partners, LP, Hiland Partners GP, LLC, Hiland Holdings
GP, LP, Hiland Partners GP Holdings, LLC, HH GP Holding, LLC and
HLND MergerCo, LLC (incorporated by reference to Exhibit 2.3 of
Registrants Form 8-K filed on June 1, 2009).
|
|
2
|
.5
|
|
|
|
Agreement and Plan of Merger, dated as of June 1, 2009, by and
between Hiland Holdings GP, LP, Hiland Partners GP Holdings,
LLC, HH GP Holding, LLC and HPGP MergerCo, LLC (incorporated by
reference to Exhibit 2.1 of Hiland Holdings Form 8-K filed
on June 1, 2009). Schedules and Exhibits are omitted pursuant to
Section 601(b)(2) of Regulation S-K.
|
|
2
|
.6
|
|
|
|
Equity Commitment Letter Agreement, dated as of June 1, 2009, by
and between Harold Hamm and HH GP Holding, LLC (incorporated by
reference to Exhibit 2.3 of Hiland Holdings
Form 8-K
filed on June 1, 2009).
|
|
2
|
.7
|
|
|
|
Support Agreement, dated as of June 1, 2009, by and between
Hiland Holdings GP, LP, Hiland Partners GP Holdings, LLC, Harold
Hamm, Continental Gas Holdings, Inc., Bert Mackie, as trustee of
the Harold Hamm DST Trust and the Harold Hamm HJ Trust, HH GP
Holding, LLC and HPGP MergerCo, LLC (incorporated by reference
to Exhibit 2.1 of Hiland Holdings
Form 8-K
filed on June 1, 2009).
|
|
2
|
.8
|
|
|
|
Amendment No. 1, dated October 26, 2009, to the Agreement and
Plan of Merger, dated as of June 1, 2009, by and between Hiland
Partners, LP, Hiland Partners GP, LLC, HH GP Holding, LLC and
HLND MergerCo, LLC (incorporated by reference to Exhibit 2.1 of
Registrants
Form 8-K
filed on October 27, 2009).
|
|
2
|
.9
|
|
|
|
Amendment No. 1, dated October 26, 2009, to the Agreement and
Plan of Merger, dated as of June 1, 2009, by and between Hiland
Holdings GP, LP, Hiland Partners GP Holdings, LLC, HH GP
Holding, LLC and HPGP MergerCo, LLC (incorporated by reference
to Exhibit 2.1 of Hiland Holdings Form 8-K filed on
October 27, 2009).
|
|
3
|
.1
|
|
|
|
Certificate of Limited Partnership of Hiland Partners, LP.
(incorporated by reference to Exhibit 3.1 of Registrants
Registration Statement on Form S-1 (File No. 333-119908)).
|
|
3
|
.2
|
|
|
|
First Amended and Restated Limited Partnership Agreement of
Hiland Partners, LP (incorporated by reference to exhibit 3.2 of
Registrants annual report on Form 10-K filed on March 30,
2005).
|
|
3
|
.3
|
|
|
|
Certificate of Formation of Hiland Partners GP, LLC
(incorporated by reference to Exhibit 3.3 of Registrants
Registration Statement on Form S-1 (File No. 333-119908)).
|
|
3
|
.4
|
|
|
|
Second Amended and Restated Limited Liability Company Agreement
of Hiland Partners GP, LLC (incorporated by reference to Exhibit
10.2 of Registrants Form 8-K filed on September 29, 2006).
|
|
4
|
.1
|
|
|
|
Certificate of Limited Partnership of Hiland Partners, LP.
(incorporated by reference to Exhibit 3.1 of Registrants
Registration Statement on Form S-1 (File No. 333-119908)).
|
|
4
|
.2
|
|
|
|
First Amended and Restated Limited Partnership Agreement of
Hiland Partners, LP (incorporated by reference to Exhibit 3.2 of
Registrants annual report on Form 10-K filed on March 30,
2005).
|
|
4
|
.3
|
|
|
|
Certificate of Formation of Hiland Partners GP, LLC
(incorporated by reference to Exhibit 3.3 of Registrants
Registration Statement on Form S-1 (File No. 333-119908)).
|
|
4
|
.4
|
|
|
|
Second Amended and Restated Limited Liability Company Agreement
of Hiland Partners GP, LLC (incorporated by reference to Exhibit
10.2 of Registrants Form 8-K filed on September 29, 2006).
|
59
|
|
|
|
|
|
|
|
19
|
.1
|
|
|
|
Code of Ethics for Chief Executive Officer and Senior Finance
Officers (incorporated by reference to Exhibit 19.1 of
Registrants annual report on Form 10-K filed on March 30,
2005).
|
|
31
|
.1
|
|
|
|
Certification of Chief Executive Officer under Section 302 of
the Sarbanes-Oxley Act of 2002.
|
|
31
|
.2
|
|
|
|
Certification of Chief Financial Officer under Section 302 of
the Sarbanes-Oxley Act of 2002.
|
|
32
|
.1
|
|
|
|
Certification of Chief Executive Officer under Section 906 of
the Sarbanes-Oxley Act of 2002.
|
|
32
|
.2
|
|
|
|
Certification of Chief Financial Officer under Section 906 of
the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
Portions of this exhibit have been omitted pursuant to a request
for confidential treatment. |
|
* |
|
Constitutes management contracts or compensatory plans or
arrangements. |
60