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UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-K

ý

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2008Commission file number: 000-51120


Hiland Partners, LP(Exact name of Registrant as specified in its charter)

DELAWARE

71-0972724(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification No.)205 West Maple, Suite 1100
Enid, Oklahoma

73701(Address of principal executive offices)

(Zip code)


Registrant's
telephone number including area code(580) 242-6040

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Name of each exchange on which registeredCommon Limited Partner Units

The NASDAQ Stock Market, LLC


Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of Securities Act.
Yes o    No ý

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of Act.
Yes o    No ý

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. ý

Indicate by check whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.

Large accelerated filer o

Accelerated filer ý

Non-accelerated filer o (Do not check if a smaller
reporting company)

Smaller reporting company o


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

The aggregate market value of common limited partner units held by non-affiliates of the registrant was approximately $197.8 million on
June 30, 2008 based on the closing price of $49.77 on the NASDAQ National Market.

The
number of the registrant's outstanding equity units as of March 7, 2009 was 6,289,880 common units, 3,060,000 subordinated units and a 2% general partnership interest.

DOCUMENTS
INCORPORATED BY REFERENCE:None



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TABLE OF CONTENTS



Part IItems 1. and 2.

Business and Properties

3Item 1A.

Risk Factors

24Item 1B.

Unresolved Staff Comments

45Item 3.

Legal Proceedings

45Item 4.

Submission of Matters to a Vote of Security Holders

46Part IIItem 5.

Market for Registrant's Common Units and Related Unitholder Matters and Issuer Purchases of Equity Securities

47Item 6.

Selected Financial Data

49Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations

54Item 7A.

Quantitative and Qualitative Disclosures about Market Risk

80Item 8.

Financial Statements and Supplementary Data

82Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

82Item 9A.

Controls and Procedures

82Item 9B.

Other Information

83Part IIIItem 10.

Directors and Executive Officers of the Registrant

83Item 11.

Executive Compensation

89Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Unitholder Matters

103Item 13.

Certain Relationships and Related Transactions

105Item 14.

Principal Accountant Fees and Services

107Part IVItem 15.

Exhibits and Financial Statement Schedules

109


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PART I

Items 1. and 2.    Business and Properties

References in this annual report on Form 10-K to "Hiland Partners," "we," "our," "us" or similar terms refer to
Hiland Partners, LP and its operating subsidiaries after giving effect to the formation transactions described in Item 7. "Management's Discussion and Analysis of Financial Condition and
Results of OperationsOverview." References to "Hiland Holdings" refer to Hiland Holdings GP, LP, a public partnership that owns our general partner and 2,321,471 common
units and 3,060,000 subordinated units in us. References to "our general partner" refer to Hiland Partners GP, LLC.

Overview

We are a midstream energy partnership engaged in purchasing, gathering, compressing, dehydrating, treating, processing and marketing of
natural gas and the fractionating, or separating, and marketing of natural gas liquids, or NGLs. We also provide air compression and water injection services to Continental Resources, Inc.
("CLR"), a publicly traded exploration and production company controlled by affiliates of our general partner for use in its oil and gas secondary recovery operations. Our operations are primarily
located in the Mid-Continent and Rocky Mountain regions of the United States. In our midstream segment, we connect the wells of natural gas and crude oil producers in our operating areas
to our gathering systems, treat natural gas to remove impurities, process natural gas for the removal of NGLs, fractionate NGLs into NGL products and provide an aggregate supply of natural gas and NGL
products to a variety of transmission pipelines and markets. In our compression segment, we provide compressed air and water to CLR. CLR uses the compressed air and water in its oil and gas secondary
recovery operations in North Dakota by injecting them into its oil and gas reservoirs to increase oil and gas production from those reservoirs. This increased production of natural gas flows through
our Badlands gathering system.

Our
midstream assets consist of 14 natural gas gathering systems with approximately 2,111 miles of gas gathering pipelines, five natural gas processing plants, seven natural gas treating
facilities and three NGL fractionation facilities. Our compression assets consist of two air compression facilities and a water injection plant.

Recent Developments

Going Private Proposals.On January 15, 2009, the board of directors of the general partner of each of Hiland Partners and Hiland
Holdings
received a proposal from Harold Hamm to acquire all of the outstanding common units of each of Hiland Partners and Hiland Holdings that are not owned by Mr. Hamm, his affiliates or the Hamm
family trusts. Consummation of each transaction is conditioned upon the consummation of the other. The proposals contemplate a merger of each of Hiland Partners and Hiland Holdings with a separate new
acquisition vehicle to be formed by Mr. Hamm and the Hamm family trusts. Under the terms proposed by Mr. Hamm, Hiland Partners unitholders would receive $9.50 in cash per common unit and
Hiland Holdings unitholders would receive $3.20 in cash per common unit. Mr. Hamm is the Chairman of the board of directors of the general partner of each of Hiland Partners and Hiland
Holdings. Mr. Hamm, either individually or together with his affiliates or the Hamm family trusts, beneficially owns 100% of Hiland Partners GP Holdings, LLC, the general partner
of Hiland Holdings, and approximately 61% of the outstanding common units of Hiland
Holdings. Hiland Holdings owns 100% of our general partner and approximately 37% of our outstanding common units.

It
is anticipated that the conflicts committee of the board of directors of the general partner of each of Hiland Partners and Hiland Holdings will consider the proposals. In reviewing
the proposals, each conflicts committee has retained its own financial advisers and legal counsel to assist in its work. The board of directors of the general partner of each of Hiland Partners and
Hiland Holdings caution

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our
unitholders and the unitholders of Hiland Holdings respectively, and others considering trading in the securities of Hiland Partners and Hiland Holdings, that each conflicts committee of the board
of directors is reviewing its respective proposal and no decisions have been made by either conflicts committee of either board of directors with respect to the response of either us or Hiland
Holdings to the proposals. There can be no assurance that any agreement will be executed or that any transaction will be approved or consummated.

On
February 26, 2009, a unitholder of Hiland Partners and Hiland Holdings filed a complaint alleging claims relating to Mr. Hamm's proposal on behalf of a purported class
of common unitholders of Hiland Partners and Hiland Holdings against Hiland Partners, Hiland Holdings, the general partner of each of Hiland Partners and Hiland Holdings, and certain members of the
board of directors of each of Hiland Partners and Hiland Holdings in the Court of Chancery of the State of Delaware. For additional information, please see Item 3. "Legal Proceedings."

Midstream Segment

Our midstream operations consist of the following:



Our
midstream assets include the following:



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Our
midstream revenues represented 98.8%, 98.3% and 97.8% of our total revenues for the years ended December 31, 2008, 2007 and 2006, respectively.

The
following table contains certain information regarding our gathering systems as of or for the year ended December 31, 2008:

Asset

Type

Length
(Miles)

Receipt
Points

Throughput
Capacity(1)

Throughput
Average(1)

Capacity
Utilization

Percent
of Total
Segment
MarginBakken gathering system

Gathering pipelines


374


292


25,000


22,687


90.8
%Refrigeration Plant Constructed in 2004








25,000


22,687


90.8
%Fractionation facility (Bbls/d)








6,500


3,354


51.6
%

33.5
%Badlands gathering system

Gathering pipelines


221


44


46,000


22,930


49.9
%Cryogenic and Refrigeration PlantConstructed in 2007








40,000


22,930


57.3
%Treating facility








40,000


22,930


57.3
%Fractionation facility (Bbls/d)








4,000


836


20.9
%

17.5
%Eagle Chief gathering system

Gathering pipelines


609


447


35,500


25,259


71.2
%Mix Refrigeration/JT Plant Constructed in 1995








35,000


25,259


72.2
%

12.6
%Kinta Area gathering systems(2)

Gathering pipelines


601


710


200,000


133,755


66.9
%Treating facilities








40,000


21,116


52.9
%

12.5
%Woodford Shale gathering system

Gathering pipelines


55


53


65,000


27,447


42.2
%

9.2
%Matli gathering system

Gathering pipelines


58


57


25,000


15,627


62.5
%Mix Refrigeration Plant Constructed in 2006








25,000


15,627


62.5
%Treating facility








20,000


11,336


56.7
%

5.7
%Worland gathering system

Gathering pipelines


153


24


8,000


2,603


32.5
%Refrigeration PlantConstructed in mid 1980's








8,000


2,603


32.5
%Treating facility








8,000


2,603


32.5
%Fractionation facility (Bbls/d)








650


260


40.0
%

4.3
%Other systems(3)

Gathering pipelines


17


21


7,000


2,362


33.7
%

0.4
%North Dakota Bakken gathering System(4)

Gathering pipelines


23














Total


2,111


1,648











95.7
%


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Compression Segment

We provide air and water compression services to CLR for use in its oil and gas secondary recovery operations under a
four-year, monthly fixed-fee contract (which we entered into in connection with our initial public offering) that expired on January 28, 2009 and now automatically
renews for additional one-month terms at our Cedar Hills compression facility, our Horse Creek compression facility and our water injection plant located next to our Cedar Hills
compression facility. These assets are located in North Dakota in close proximity to our Badlands gathering system. At the compression facilities, we compress air to pressures in excess of 4,000
pounds per square inch, and at the water injection plant, we pump water to pressures in excess of 2,000 pounds per square inch. The air and water are delivered at the tailgate of our facilities into
pipelines operated by CLR and are ultimately utilized by CLR in its oil and gas secondary recovery operations. The natural gas produced by CLR flows through our Badlands gathering system. Our
compression segment represented approximately 4.3% of our total segment margin for the year ended December 31, 2008. Our compression revenues represented 1.2%, 1.7% and 2.2% of our total
revenues for the years ended December 31, 2008, 2007 and 2006, respectively.

Financial Information About Segments

See Part II, Item 8.Financial Statements and Supplementary Data.

Business Strategies

Multiple events during 2008 and early 2009 involving numerous financial institutions have effectively restricted current liquidity with
the capital markets throughout the United
States and around the world. Despite efforts by treasury and banking regulators in the United States, Europe and other nations around the world to provide liquidity to the financial sector, capital
markets currently remain constrained. Additionally, our cash flows are impacted by the price of natural gas, crude oil and natural gas liquids. During 2008, we experienced extreme swings in our
average realized natural gas and NGL sales prices. Our average realized natural gas sales price increased from $6.44/MMBtu in January 2008 to a high sales price of $10.05/MMBtu in July 2008, then
decreased to a low sales price of $3.38/MMBtu in November 2008. Our average realized NGL sales price increased from $1.42 per gallon in January 2008 to a high sales price of $1.74 per gallon in June
2008, then decreased to a low sales price of $0.61 per gallon in December 2008. The current pricing environment, particularly in combination with the constrained capital and credit markets and overall
economic downturn, resulted in a decline in drilling activity by some producers. Sustained declines in drilling activity could have a negative impact on the natural gas volumes we gather and process.
In the near term, our management team is committed to managing costs and expenditures during this difficult commodity price and capital markets cycle. For the longer term, and assuming the financial
and energy markets stabilize, our management team continues to be committed to increasing the amount of cash available for distribution per unit by executing the following
strategies:



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Midstream Assets

Our natural gas gathering systems include approximately 2,111 miles of pipeline. A substantial majority of our revenues are derived
from purchasing, gathering, compressing, dehydrating, treating, processing and marketing of natural gas that flows through our gathering pipelines and from fractionating and marketing of NGLs
resulting from the processing of natural gas into NGL products. We describe our principal systems below.

Bakken Gathering System

General.The Bakken gathering system is located in eastern Montana and consists of approximately 374 miles of natural gas gathering
pipelines,
ranging from three inches to twelve inches in diameter, and the Bakken processing plant, which includes seven compressors and a fractionation facility. The gathering system has a capacity of
approximately 25,000 Mcf/d, and average throughput was approximately 22,687 Mcf/d for the year ended December 31, 2008. There are three compressor stations located within the gathering system.
The compressor stations and plant combined have approximately 11,050 horsepower.

The
Bakken processing plant processes natural gas that flows through the Bakken gathering system to produce residue gas and NGLs. The plant has processing capacity of approximately
25,000 Mcf/d. For
the year ended December 31, 2008, the facility processed approximately 22,687 Mcf/d of natural gas and produced approximately 2,264 Bbls/d of NGLs.

The
Bakken gathering system also includes a fractionation facility that separates NGLs into propane, butane and natural gasoline. The fractionation facility has a current capacity to
fractionate approximately 6,500 Bbls/d of NGLs. For the year ended December 31, 2008, the facility fractionated an average of approximately 3,354 Bbls/d which included volumes from our Badlands
processing plant. In the third quarter of 2007, we completed the expansion of our NGL fractionation facilities at our Bakken processing plant to fractionate NGL volumes from both the Bakken processing
plant and the Badlands processing plant.

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Natural Gas Supply.As of December 31, 2008, 292 receipt points were connected to our Bakken gathering system. The wells behind
these receipt
points, which are located in the Williston Basin of Montana, primarily produce crude oil from the Bakken formation. The associated natural gas produced from these wells flows through our Bakken
gathering system. The primary suppliers of natural gas to the Bakken gathering system are Enerplus Resources (USA) Corporation, CLR and ConocoPhillips Company, which represented approximately 55%, 34%
and 10%, respectively, of the Bakken gathering system's natural gas supply for the year ended December 31, 2008.

Substantially
all of the natural gas supplied to the Bakken gathering system is dedicated to us under three individually negotiated percentage-of-proceeds
contracts. Two of these contracts have an initial term of ten years, expiring in 2014, and one is for the life of the lease. Under these contracts, natural gas is purchased at the wellhead from the
producers. For a more complete discussion of natural gas purchase and gathering contracts, please read Item 7. "Management's Discussion and Analysis of Financial Condition and Results of
OperationsOur Natural Gas Purchase and Gathering Contracts."

Markets for Sale of Natural Gas and NGLs.Residue gas derived from our processing operations is sold at the tailgate of the Bakken
processing plant
on the Williston Basin Interstate Pipeline to third parties. Depending on prevailing market prices at each delivery point, we either sell our NGLs produced by our fractionation facility to
SemStream, L.P. at the tailgate of the plant or transport the same NGLs through a pipeline to a rail terminal and then sell to SemStream, L.P. From July 18, 2008 through
September 30, 2008, we sold NGLs to other third parties, including CLR. Prior to July 18, 2008 and since October 2008, we have sold NGLs to SemStream, L.P., who is fully
performing under these contracts.

Our
primary purchasers of residue gas and NGLs on the Bakken gathering system were SemStream, L.P., Montana-Dakota Utilities Co. and Rainbow Gas Company, which represented
approximately 37%, 29% and 19% respectively, of the revenues from such sales for the year ended December 31, 2008.

Badlands Gathering System and Air Compression and Water Injection Facilities

General.The Badlands gathering system is located primarily in southwestern North Dakota and consists of approximately 221 miles of
natural gas
gathering pipelines, ranging from two inches to twelve inches in diameter, the Badlands processing plant, natural gas treating facilities, a fractionation facility and seven compressor stations. The
total horsepower for the system was approximately 18,550 at December 31, 2008. The gathering system has a capacity of approximately 46,000 Mcf/d and average throughput was approximately 22,930
Mcf/d for the year ended December 31, 2008.

In
order to fulfill our obligations under an agreement with CLR to gather, treat and process additional natural gas, produced as a by-product of CLR's secondary oil recovery
operations, in the areas specified by the contract, we expanded our Badlands gas gathering system and processing plant located in Bowman County, North Dakota. We completed the expansion of our
Badlands gathering system, the associated field gathering infrastructure, processing plant and treating facilities, which included the completion of our 40,000 Mcf/d nitrogen rejection plant, and
amine and hydrogen sulfide treating facilities during the third quarter of 2007. As a result, gathering pipelines, processing plant, treating facility and fractionation facility throughput capacities
increased significantly.

We
completed construction and commenced operation of the Badlands gathering system, including the original Badlands processing plant, in 1997. The Badlands processing plant processes
natural gas that flows through the Badlands gathering system to produce residue gas and NGLs. The natural gas gathered in this system must be processed and treated for high levels of contaminates,
including carbon dioxide, hydrogen sulfide and nitrogen, in order to meet pipelines quality specifications. The plant has processing capacity of approximately 40,000 Mcf/d. During the year ended
December 31, 2008, the

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facility
processed approximately 22,930 Mcf/d of natural gas and produced approximately 962 Bbls/d of NGLs.

The
Badlands gathering system also includes a fractionation facility that separates NGLs into propane and a mixture of butane and natural gasoline. At December 31, 2008, the
fractionation facility had a capacity to fractionate approximately 4,000 Bbls/d of NGLs. For the year ended December 31, 2008, the facility fractionated an average of approximately 836 Bbls/d.

Natural Gas Supply.As of December 31, 2008, 44 receipt points were connected to our Badlands gathering system. The wells behind
these receipt
points are located in the Williston Basin of southwestern North Dakota and northwestern South Dakota and primarily produce crude oil from the Red River formation. The associated natural gas produced
from these wells flows through our Badlands gathering system. The primary supplier of natural gas to the Badlands gathering system is CLR, which represented approximately 97% of the Badlands gathering
system's natural gas supply for the year ended December 31, 2008.

The
natural gas supplied to the Badlands gathering system is generally dedicated to us under individually negotiated long-term contracts. Our agreement with CLR has an
initial term of 15 years, expiring in August 2022. Under this agreement, we receive 50% of the proceeds attributable to residue gas and natural gas liquids sales as well as certain fixed fees
associated with gathering and treating the natural gas, including a $0.60 per Mcf fee for the first 36.0 Bcf of natural gas gathered. As of December 31, 2008, we have gathered approximately 9.8
Bcf of natural gas since inception of the agreement. This agreement replaced our prior agreement with CLR in the area as the new plant and treating facilities became operational in August 2007.
Following the initial term of the contracts, they generally continue on a year to year basis, unless terminated by one of the parties. For the other agreements, natural gas is purchased at the
wellhead from the producers under percentage-of-proceeds arrangements. For a more complete discussion of natural gas purchase and gathering contracts, please read
Item 7. "Management's Discussion and Analysis of Financial Condition and Results of OperationsOur Natural Gas Purchase and Gathering Contracts."

Air Compression and Water Injection Facilities.In order to enhance the production of natural gas that flows through our Badlands
gathering system,
we currently provide air compression and water injection services to CLR at our Cedar Hills compression facility, our Horse Creek compression facility and our water injection plant, all of which are
located in North Dakota in close proximity to our Badlands gathering system.

Markets for Sale of Natural Gas and NGLs.Residue gas derived from our processing operations is sold at the tailgate of the Badlands
processing plant
primarily to CLR for their secondary recovery operations or on the Williston Basin Interstate Pipeline to third parties. We sell the propane produced by our fractionation facility at the tailgate of
the plant to SemStream, L.P. The remaining NGL products are either sold to SemStream, L.P. at the tailgate of the plant, or trucked to the Bakken fractionation
facility for further fractionation, and then sold to SemStream, L.P. From July 18, 2008 through September 30, 2008, we sold NGLs to other third parties, including CLR. Prior to
July 18, 2008 and since October 2008, we have sold NGLs to SemStream, L.P., who is fully performing under these contracts.

Our
primary purchasers of the residue gas and NGLs from the Badlands gathering system were SemStream, L.P. and CLR, which represented approximately 73% and 10%, respectively, of
the revenues from such sales for the year ended December 31, 2008.

Eagle Chief Gathering System

General.The Eagle Chief gathering system is located in northwest Oklahoma and consists of approximately 609 miles of natural gas
gathering
pipelines, ranging from two inches to sixteen inches in

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diameter,
and the Eagle Chief processing plant. The gathering system has a capacity of approximately 35,500 Mcf/d, and average throughput was approximately 25,259 Mcf/d for the year ended
December 31, 2008. There are eight gas compressor stations located within the gathering system, comprised of fifteen units. The plant and compressor stations combined have an aggregate of
approximately 17,500 horsepower.

We
completed construction and commenced operation of the Eagle Chief gathering system in 1990 and constructed the Eagle Chief processing plant in 1995. Since its construction, we have
expanded the size of the Eagle Chief gathering system through the acquisition of approximately 377 miles of gathering pipelines in five separate acquisitions, including our acquisition of the Carmen
gathering system, and the construction of approximately 232 miles of gathering pipelines. In the first quarter of 2007, we completed the installation of additional pipelines and compression facilities
at our Eagle Chief gathering system and increased our system capacity from 30,000 Mcf/d to 35,500 Mcf/d.

The
Eagle Chief processing plant processes natural gas that flows through the Eagle Chief gathering system to produce residue gas and NGLs. The natural gas gathered in this system,
depending on delivery points, may not be required to be processed to meet pipeline quality specifications when we sell into interstate markets. The plant has processing capacity of approximately
35,000 Mcf/d. During
the year ended December 31, 2008, the facility processed approximately 25,259 Mcf/d of natural gas and produced approximately 980 Bbls/d of NGLs.

Natural Gas Supply.As of December 31, 2008, 447 receipt points were connected to our Eagle Chief gathering system. The wells
behind these
receipt points are located in the Anadarko Basin of northwestern Oklahoma and primarily produce natural gas from the Chester, Mississippi, Hunton and Manning formations. The primary suppliers of
natural gas to the Eagle Chief gathering system are various subsidiaries of Chesapeake Energy Corporation and CLR, which represented approximately 64% and 10%, respectively, of the Eagle Chief
gathering system's natural gas supply for the year ended December 31, 2008.

The
natural gas supplied to the Eagle Chief gathering system is generally dedicated to us under individually negotiated long-term contracts. Some of our contracts have an
initial term of five years. Following the initial term, these contracts generally continue on a year-to-year basis unless terminated by one of the parties. In addition, some of
our contracts are for the life of the lease. Natural gas is purchased at the wellhead from the producers under percentage-of-proceeds contracts,
percentage-of-index contracts or index-minus-fees contracts. For the year ended December 31, 2008, approximately 67%, 30% and 3% of our total wellhead
volumes at the Eagle Chief gathering system was derived from percentage-of-proceeds, percentage-of-index and index-minus-fees contracts,
respectively. For a more complete discussion of natural gas purchase and gathering contracts, please read Item 7. "Management's Discussion and Analysis of Financial Condition and Results of
OperationsOur Natural Gas Purchase and Gathering Contracts."

Markets for Sale of Natural Gas and NGLs.The residue gas can be either delivered at the tailgate of the Eagle Chief processing plant on
the ONEOK
Gas Transportation, L.L.C. pipeline to intrastate markets or on the Panhandle Eastern Pipeline Company, L.P. pipeline to interstate markets. We are able to bypass our Eagle Chief processing
plant by selling into the interstate markets when processing margins are unfavorable. The NGLs extracted from the gas at the Eagle Chief processing are sold to ONEOK Hydrocarbon, L.P. at the
tailgate of our plant.

Our
primary purchasers of residue gas and NGLs on the Eagle Chief gathering system were BP Energy Company, ONEOK Hydrocarbon, L.P. and OGE Energy Resources, Inc.,
which represented approximately 40%, 26% and 17%, respectively, of the revenues from such sales for the year ended December 31, 2008.

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Kinta Area Gathering Systems

General.The Kinta Area gathering systems, which we acquired from Enogex Gas Gathering, L.L.C. on May 1, 2006, are located in
southeastern Oklahoma and consist of five separate natural gas gathering systems with 601 miles of natural gas gathering pipelines ranging from four inches to twelve inches in diameter and 13
compressor stations with an aggregate of approximately 43,750 horsepower. Some of the natural gas supplied to the Kinta Area gathering systems has high carbon dioxide content; consequently, during the
first quarter of 2007, we installed four 10,000 Mcf/d capacity amine-treating facilities on two of the five sub-systems to remove excess carbon dioxide levels from the gas gathered by
these gathering systems. The gathering systems have a combined capacity of approximately 200,000 Mcf/d, and average throughput was 133,755 Mcf/d for the year ended December 31, 2008. Our
operations include gathering, dehydration, compression and treating of the natural gas supplied to the Kinta Area gathering systems and the redelivery of such natural gas primarily for a fixed fee. In
the third quarter of 2008, we completed the installation of additional compression facilities on these gathering systems to increase the capacity by approximately 20,000 Mcf/d from 180,000 Mcf/d.
During 2008, we treated 21,166 Mcf/d of natural gas.

Natural Gas Supply.As of December 31, 2008, approximately 710 receipt points were connected to our Kinta Area gathering systems.
The wells
behind these receipt points, which are located in the Arkoma Basin of southeastern Oklahoma, primarily produce natural gas from the Atoka, Cromwell, Booch, Hartshorne, Spiro, Fanshaw and Red Oak
formations. The primary suppliers of natural gas to these gathering systems are BP America Production Company, various subsidiaries of Chesapeake Energy Corporation and Chevron North America
Exploration and Production Co., which represented approximately 52%, 13% and 6%, respectively, of the Kinta Area gathering system's natural gas supply for the year ended December 31,
2008.

We
do not take title on the majority of the natural gas gathered on the systems and we generally receive fixed-fees for our services under fixed fee gathering arrangements. A
small amount of the natural gas gathered on the systems is purchased at the wellhead under percentage of index contract arrangements. The initial term of the Kinta agreements generally range from
monthly to ten years. Following the initial term, these contracts generally continue on a
month-to-month basis unless terminated by one of the parties. For the year ended December 31, 2008, approximately 93% and 7% of our total inlet wellhead volumes at the
Kinta gathering system was derived from fixed fee gathering contract arrangements and index-minus-fees contract arrangements, respectively. For a more complete discussion of natural gas
purchase and gathering contracts, please read Item 7. "Management's Discussion and Analysis of Financial Condition and Results of OperationsOur Natural Gas Purchase and Gathering
Contracts."

Woodford Shale Gathering System

General.The Woodford Shale gathering system is located in southeastern Oklahoma, just to the west of our Kinta Area gathering systems.
As of
December 31, 2008 we had installed 55 miles of gathering pipelines and the gathering system had a capacity of approximately 65,000 Mcf/d. Average throughput for the year ended
December 31, 2008 was approximately 27,447 Mcf/d of natural gas, which produced approximately 1,214 Bbls/d of NGLs. Our current operations provide only gathering and compression services. The
gathering infrastructure consists of field gathering, four compressor stations and associated equipment, which includes approximately 17,400 horsepower of compression. Initial production from this
gathering system commenced in April 2007.

Natural Gas Supply.As of December 31, 2008, 53 receipt points were connected to our Woodford Shale gathering system, which
primarily produce
natural gas from the Woodford shale formation. Presently, the suppliers of natural gas to this gathering system are CLR and Antero Resources

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Midstream
Corporation, which provided all of the Woodford Shale gathering system's natural gas supply for the year ended December 31, 2008.

Natural
gas is purchased at the wellhead from CLR under index-minus-fees contract arrangements. We receive a fixed gathering fee for natural gas supplied by Antero Resources
Midstream Corporation under a fixed fee gathering contract arrangement. The initial term of the Woodford Shale agreements is ten years. Following the initial term, these contracts generally continue
on a year-to-year basis unless terminated by one of the parties. For the year ended December 31, 2008, approximately 77% and 23% of our total inlet wellhead volumes at
the Woodford Shale gathering system was derived from index-minus-fees contract
arrangements and fixed fee gathering contract arrangements, respectively. For a more complete discussion of natural gas purchase and gathering contracts, please read Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of OperationsOur Natural Gas Purchase and Gathering Contracts."

Markets for Sale of Natural Gas and NGLs.The Woodford Shale gathering system has numerous market outlets for the residue natural gas
and NGLs that
we produce on the system. The residue gas can be sold at the tailgate of three different processing plants and can be delivered to Enogex, Inc. or CenterPoint Energy Gas Transmission Company.
The third parties processors providing processing services on behalf of the Partnership downstream of the Woodford Shale system can reject ethane or elect not to process natural gas.

Our
primary purchasers of residue gas and NGLs on the Woodford Shale gathering system were OGE Energy Corp (and affiliates), Tenaska Marketing Ventures, Devon Gas Services, L.P.
and ConocoPhillips Company, which represented approximately 24%, 20%, 14% and 10%, respectively, of the revenues from such sales for the year ended December 31, 2008.

Matli Gathering System

General.The Matli Gathering System is located in central Oklahoma and consists of approximately 58 miles of natural gas gathering
pipelines, ranging
from three inches to twelve inches in diameter, the Matli processing plant, a natural gas treating facility and three compressor stations, all totaling approximately 9,450 horsepower. The gathering
system has a capacity of approximately 25,000 Mcf/d, and average throughput was approximately 15,627 Mcf/d for the year ended December 31, 2008.

We
commenced operation of the Matli gathering system in 1999. During the fourth quarter of 2006, we completed the construction of a 25,000 Mcf/d natural gas processing facility along our
existing gas gathering system, which replaced our 10,000 Mcf/d processing facility we had constructed in 2003. The Matli processing plant processes natural gas on the Matli gathering system to produce
residue gas and NGLs. The natural gas gathered in this system must be processed in order to meet pipeline quality specifications. The current plant has processing capacity of approximately 25,000
Mcf/d. During the year ended December 31, 2008, the facilities processed approximately 15,627 Mcf/d of natural gas and produced approximately 343 Bbls/d of NGLs. The 10,000 Mcf/d natural gas
processing facility constructed in 2003 is currently idle.

The
Matli gathering system includes a natural gas treating facility that uses a liquid chemical to remove hydrogen sulfide from natural gas that is gathered into our system before the
natural gas is introduced to transportation pipelines to ensure it meets pipeline quality specifications. The throughput capacity on our Matli treating facility is approximately 20,000 Mcf/d. During
the year ended December 31, 2008, the facility treated approximately 11,336 Mcf/d of natural gas.

Natural Gas Supply.As of December 31, 2008, 57 receipt points were connected to our Matli gathering system. The wells behind
these receipt
points are located in the Anadarko Basin of northcentral Oklahoma and produce natural gas from the Morrow and Springer formations. The primary suppliers of natural gas to the Matli gathering system
are CLR and Range Resources

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Corporation,
which represented approximately 62% and 23%, respectively, of the Matli gathering system's natural gas supply for the year ended December 31, 2008.

The
natural gas supplied to the Matli gathering system is generally dedicated to us under individually negotiated long-term contracts. The initial term of such agreements is
generally from life of lease to five years. Following the initial term, these contracts usually continue on a year-to-year basis, unless terminated by one of the parties.
Natural gas is purchased at the wellhead from the producers under index-minus-fees contract arrangements. For a more complete discussion of natural gas purchase and gathering contracts,
please read Item 7. "Management's Discussion and Analysis of Financial Condition and Results of OperationsOur Natural Gas Purchase and Gathering Contracts."

Markets for Sale of Natural Gas and NGLs.Residue gas resulting from our processing operations is sold at the tailgate of the plant on
the ONEOK Gas
Transportation, L.L.C. intrastate pipeline. As part of our expansion project completed in late 2006, we converted an existing natural gas pipeline into a NGL pipeline and now transport NGLs to a ONEOK
Hydrocarbon, L.P. pipeline.

Our
primary purchasers of residue gas and NGLs on the Matli gathering system were ONEOK Hydrocarbon, L.P., OGE Energy Resources, ConocoPhillips Company and BP Energy Company,
which represented approximately 25%, 25%, 17% and 14%, respectively, of the revenues from such sales for the year ended December 31, 2008.

Worland Gathering System

General.The Worland gathering system is located in central Wyoming and consists of approximately 153 miles of natural gas gathering
pipelines,
ranging from two inches to eight inches in diameter, the Worland processing plant, a natural gas treating facility and a fractionation facility. The gathering system has a capacity of approximately
8,000 Mcf/d, and average throughput was approximately 2,603 Mcf/d for the year ended December 31, 2008. There are seven compressor stations located within the gathering system. The plant and
compressor stations have approximately 5,700 horsepower installed.

The
Worland gathering system and the Worland processing plant were contributed to us on February 15, 2005 in connection with our formation and our initial public offering. This
gathering system, including the Worland processing plant, was originally built in the mid 1980s. A substantial portion of the equipment on the Worland gathering system, including portions of the
Worland processing plant and the fractionation facility, was replaced in 1997.

The
Worland processing plant processes natural gas that flows through the Worland gathering system to produce residue gas and NGLs. The natural gas gathered in this system is rich gas
that must be processed in order to meet pipeline quality specifications. The plant has processing capacity of approximately 8,000 Mcf/d. During the year ended December 31, 2008, the facility
processed approximately 2,603 Mcf/d of natural gas and produced approximately 157 Bbls/d of NGLs.

The
Worland gathering system includes a natural gas amine treating facility that removes carbon dioxide and hydrogen sulfide from natural gas that is gathered into our system before the
natural gas is introduced to transportation pipelines to ensure that it meets pipeline quality specifications. Generally, the natural gas gathered in this system contains a high concentration of
hydrogen sulfide, a highly toxic and corrosive chemical that must be removed prior to transporting the gas via pipeline.

The
Worland gathering system also includes a fractionation facility that separates NGLs into propane and a mixture of butane and natural gasoline. The fractionation facility has a
capacity to fractionate approximately 650 Bbls/d of NGLs. For the year ended December 31, 2008, the facility fractionated an average of 260 Bbls/d.

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Natural Gas Supply.As of December 31, 2008, 24 receipt points were connected to our Worland gathering system. The wells behind
these receipt
points are located in the Bighorn Basin of central Wyoming and produce crude oil primarily from the Frontier formation. The associated natural gas produced from these wells flows through our Worland
gathering system. The primary suppliers of natural gas to the Worland gathering system are CLR and Saga Petroleum Corp., which represented approximately 50% and 43%, respectively, of the Worland
gathering system's natural gas supply for the year ended December 31, 2008.

The
natural gas supplied to the Worland gathering system is generally dedicated to us under individually negotiated long-term contracts. Following the initial term of the
contracts, they generally continue on a year to year basis, unless terminated by one of the producers. Natural gas is purchased at the wellhead from the producers under
percentage-of-index contracts, percentage-of-proceeds contracts and index-minus-fees contracts. For the year ended December 31, 2008,
approximately 67%, 29% and 4% of our total system inlet wellhead volumes at the Worland gathering system was derived from percentage-of-index contracts,
percentage-of-proceeds contracts and index-minus-fees contracts, respectively. For a more complete discussion of natural gas purchase and gathering contracts,
please read Item 7. "Management's Discussion and Analysis of Financial Condition and Results of OperationsOur Natural Gas Purchase and Gathering Contracts."

Markets for Sale of Natural Gas and NGLs.Residue gas derived from our processing operations is sold at the tailgate of the Worland
processing plant
on the Williston Basin Interstate Pipeline to third parties. We sell the NGLs to KM Upstream LLC and Kinder Morgan Operating, L.P. "A", subsidiaries of Kinder Morgan Energy
Partners, LP, at the tailgate of the plant.

Our
primary purchasers of residue gas and NGLs on the Worland gathering system were Rainbow Gas Company, KM Upstream LLC and Kinder Morgan Operating, L.P. "A", subsidiaries
of Kinder Morgan Energy Partners, LP, and CLR, which represented approximately 43%, 41% and 16%, respectively, of revenues from such sales on the Worland gathering system for the year ended
December 31, 2008.

Other Systems

In addition to the midstream assets described above, we own two gathering systems located in Texas and Mississippi and a gathering
pipeline system in Oklahoma. These assets do not provide us with material cash flows and consist of the following:



North Dakota Bakken Gathering System

Our North Dakota Bakken gathering system presently consists of a 23-mile gathering system located in northwestern North
Dakota that will gather natural gas associated with crude oil produced from the Bakken shale and Three Forks / Sanish formations. The gathering system, associated compression and treating facilities
and a processing plant are currently under construction with an expected start up in the second quarter of 2009. Construction of the processing plant and gathering system commenced in October 2008. As
of December 31, 2008, we have invested approximately $9.2 million in the project.

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Compression Assets

We provide air and water compression services to CLR for use in its oil and gas secondary recovery operations under a
four-year, monthly fixed-fee contract (which we entered into in connection with our initial public offering) that expired on January 28, 2009 and now automatically
renews for additional one-month terms at our Cedar Hills compression facility, our Horse Creek compression facility and our water injection plant located next to our Cedar Hills
compression facility. We completed construction of our Cedar Hills compression facility and acquired the Horse Creek compression facility in 2002. The Horse Creek compression facility is comprised of
two units with an aggregate of approximately 5,300 horsepower. The Cedar Hills compression facility is comprised of ten units with an aggregate of approximately 40,000 horsepower. Our water injection
plant has six pumps with a total of 1,800 horsepower.

At
the compression facilities, we compress air to pressures in excess of 4,000 pounds per square inch. At our water injection plant, water is produced from source wells located near the
water plant site. Produced water is run through a filter system to remove impurities and is then cooled prior to being pumped to pressures in excess of 2,000 pounds per square inch. The air and water
are delivered at the tailgate of our facilities into pipelines owned by CLR and are ultimately utilized by CLR in its oil and gas secondary recovery operations. For a description of the services
agreement we entered into with CLR in connection with our initial public offering, please read "Management's Discussion and Analysis of Financial Condition and Results of OperationsOur
ContractsCompression Services Agreement."

Credit Risks

Counterparties pursuant to the terms of their contractual obligations expose us to potential losses as a result of nonperformance.
SemStream, L.P., BP Energy Company, OGE Energy Resources, Inc. and ONEOK Energy Services Company, LP were our largest customers for the year ended December 31, 2008,
accounting for approximately 16%, 14%, 11% and 10%, respectively, of our revenues. Consequently, changes within one or more of these companies' operations have the potential to impact, both positively
and negatively, our credit exposure and make us subject to risks of loss resulting from nonpayment or nonperformance by these or any of our other customers. Any material nonpayment or nonperformance
by our key customers could materially and adversely affect our business, financial condition or results of operations and reduce our ability to make distributions to our unitholders. Additionally, we
derive our revenues primarily from customers in the energy industry. This industry concentration has the potential to impact our overall exposure to credit risk, either positively or negatively, in
that our customers could be affected by similar changes in economic, industry or other conditions, including changing commodities prices. Furthermore, some of our customers may be highly leveraged and
subject to their own operating and regulatory risks, which increases the risk that they may default on their obligations to us. Our counterparties to our commodity based derivative instruments as of
December 31, 2008 were BP Energy Company and Bank of Oklahoma, N.A. Our counterparty to our interest rate swap is Wells Fargo Bank, N.A.

Competition

The natural gas gathering, treating, processing and marketing industries are highly competitive. We face strong competition in
acquiring new natural gas supplies. Our competitors include other natural gas gatherers that gather, compress, treat, process and market natural gas. Competition for natural gas supplies is primarily
based on the reputation, efficiency, flexibility and reliability of the gatherer, the pricing arrangements offered by the gatherer and the location of the gatherer's pipeline facilities. We provide
flexible services to natural gas producers, including natural gas gathering, compression, dehydrating, treating and processing. We believe our ability to furnish these services gives us an advantage
in competing for new supplies of natural gas because we can provide the services that

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producers,
marketers and others require to connect their natural gas quickly and efficiently. In addition, using centralized treating and processing facilities, we can in most cases attract producers
that require these services and at a lower initial capital cost. For natural gas that exceeds the maximum contaminant levels and NGL specifications for interconnecting natural gas pipelines and
downstream markets, we believe that we offer treating and other processing services on competitive terms. In addition, with respect to natural gas suppliers attached to our pipeline systems, we
provide such natural gas supplies on a flexible basis.

We
believe that our producers prefer a midstream energy company with the flexibility to accept natural gas not meeting typical industry standard gas quality requirements. The primary
difference between us and our competitors is that we provide an integrated and responsive package of midstream services, while most of our competitors typically offer only a few select services. We
believe that offering an integrated package of services, while remaining flexible in the types of contractual arrangements that we offer producers, allows us to compete more effectively for new
natural gas supplies.

Many
of our competitors have capital resources and control supplies of natural gas greater than ours. Our primary competitors on the Eagle Chief gathering system are Atlas Pipeline
Partners, Mustang Fuel Corporation, Duke Energy Field Services and SemGas, L.P. Our primary competitor on the Bakken gathering system and the Badlands gathering system is Bear Paw Energy, and
on the Matli gathering system, our competitor is Enogex, Inc. Our primary competitors on the Kinta Area gathering systems are CenterPoint Energy Field Services and Superior Pipeline Company.
Our primary competitors on the Woodford Shale gathering system are MarkWest Energy Partners, Enogex, Inc., Antero Resources Midstream Corporation and Copano Energy, L.L.C. We do not have a
major competitor on the Worland gathering system.

Regulation

Regulation by the FERC of Interstate Natural Gas Pipelines.We do not own any interstate natural gas pipelines, so the Federal Energy
Regulatory
Commission, or the FERC, does not directly regulate any of our operations. However, the FERC's regulation influences certain aspects of our business and the market for our products and services. In
general, the FERC has authority over natural gas companies that provide natural gas pipeline transportation services in interstate commerce, and its authority to regulate those services
includes:



In
recent years, the FERC has pursued pro-competitive policies in its regulation of interstate natural gas pipelines. However, we can provide no assurance that the FERC will
continue this approach as it considers matters such as pipeline rates and rules and policies that may affect rights of access to natural gas transportation capacity.

Regulation of Intrastate Natural Gas Transportation Pipelines.We do not own any pipelines that provide intrastate natural gas
transportation, so
state regulation of non-gathering pipeline transportation does not directly affect our operations. As with FERC regulation described above,

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however,
state regulation of pipeline transportation may influence certain aspects of our business and the market for our products.

Gathering Pipeline Regulation.Section 1(b) of the Natural Gas Act, or NGA, exempts natural gas gathering facilities from the
jurisdiction of
the FERC. We own a number of natural gas pipelines that we believe would meet the traditional tests the FERC has used to establish a pipeline's status as a gatherer not subject to the FERC
jurisdiction. However, there is no bright-line distinction between FERC-regulated natural gas transportation services and federally
unregulated gathering services. Moreover, this distinction is the subject of regular litigation. Thus, the classification and regulation of some of our gathering facilities may be subject to change
based on future determinations by the FERC and the courts.

In
the states in which we operate, regulation of gathering facilities generally includes various safety, environmental and, in some circumstances, nondiscriminatory take requirement and
complaint based rate regulation. For example, we are subject to state ratable take and common purchaser statutes. Ratable take statutes generally require gatherers to take, without undue
discrimination, natural gas production that may be tendered to the gatherer for handling. In certain circumstances, such laws will apply even to gatherers like us that do not provide third party,
fee-based gathering service and may require us to provide such third party service at a regulated rate. Similarly, common purchaser statutes generally require gatherers to purchase without
undue discrimination as to source of supply or producer. These statutes are designed to prohibit discrimination in favor of one producer over another producer or one source of supply over another
source of supply. These statutes have the effect of restricting our right as an owner of gathering facilities to decide with whom we contract to purchase or gather natural gas.

Natural
gas gathering may receive greater regulatory scrutiny at both the state and federal levels now that the FERC has taken a less stringent approach to regulation of the gathering
activities of interstate pipeline transmission companies and a number of such companies have transferred gathering facilities to unregulated affiliates.

Our
gathering operations could be adversely affected should they be subject in the future to the application of state or federal regulation of rates and services. Our gathering
operations also may be or become subject to safety and operational regulations relating to the design, installation, testing, construction, operation, replacement and management of gathering
facilities. Additional rules and legislation pertaining to these matters are considered or adopted from time to time. We cannot predict what effect, if any, such changes might have on our operations,
but the industry could be required to incur additional capital expenditures and increased costs depending on future legislative and regulatory changes.

Sales of Natural Gas, NGLs and Other Products.The price at which we buy and sell natural gas currently is not subject to federal
regulation and, for
the most part, is not subject to state regulation. The price at which we buy and sell NGLs and other products is not subject to regulation. Our sales of natural gas, NGLs and other products are
affected by the availability, terms and cost of pipeline transportation. Pipeline rates, terms of access and terms and conditions of service are subject to extensive federal and state regulation. The
FERC is continually proposing and implementing new rules and regulations affecting those segments of the natural gas industry, most notably interstate natural gas transmission companies that remain
subject to the FERC's jurisdiction. These initiatives also may affect the intrastate transportation of natural gas under certain circumstances. The stated purpose of many of these regulatory changes
is to promote competition among the various sectors of the natural gas industry, and these initiatives generally reflect more light handed regulation. We cannot predict the ultimate impact of these
regulatory changes to our natural gas marketing operations. We do not believe
that we will be affected by any such FERC action materially differently than other natural gas marketers with whom we compete.

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Under
the Energy Policy Act of 2005, FERC possesses regulatory oversight over natural gas markets, including the purchase, sale and transportation activities of
non-interstate pipelines and other natural gas market participants. The Commodity Futures Trading Commission, or the CFTC, also holds authority to monitor certain segments of the physical
and futures energy commodities market pursuant to the Commodity Exchange Act. With regard to physical purchases and sales of natural gas, NGLs and other products, our gathering services related to
these energy commodities, and any related hedging activities that we undertake, we are required to observe these anti-market manipulation laws and related regulations enforced by FERC
and/or the CFTC. These agencies hold substantial enforcement authority, including the ability to assess civil penalties of up to $1 million per day per violation, to order disgorgement of
profits and to recommend criminal penalties. FERC has continued to impose additional regulations intended to prevent market manipulation and to promote price transparency. For example, new FERC rules
require wholesale purchasers and sellers of natural gas to report to FERC certain aggregated volume and other purchase and sales data for the previous calendar year. Should we violate the
anti-market manipulation laws and regulations, we could also be subject to related third party damage claims by, among others, sellers, royalty owners and taxing authorities.

Environmental Matters

The operation of pipelines, plants and other facilities for gathering, compressing, dehydrating, treating, and processing of natural
gas and fractionating NGLs and other products is subject to stringent and complex laws and regulations pertaining to health, safety and the environment. As an owner or operator of these facilities, we
must comply with these laws and regulations at the federal, regional, state and local levels. These laws and regulations can restrict or impact our business activities in many ways, such
as:



Failure
to comply with these laws and regulations may trigger a variety of administrative, civil and criminal enforcement measures, including the assessment of monetary penalties, the
imposition of remedial requirements, and the issuance of orders enjoining future operations. Certain environmental statutes impose strict and, under certain circumstances, joint and several liability
for costs required to clean up and restore sites where hazardous substances have been disposed or otherwise released. Moreover, it is not uncommon for neighboring landowners and other third parties to
file claims for personal injury and property damage allegedly caused by the release of substances or waste products into the environment.

The
trend in environmental regulation is to place more restrictions and limitations on activities that may affect the environment, and thus there can be no assurance as to the amount or
timing of future expenditures for environmental compliance or remediation. Actual future expenditures may be different from the amounts we currently anticipate. We try to anticipate future regulatory
requirements that might be imposed and plan accordingly to remain in compliance with changing environmental laws and regulations and to minimize the costs of such compliance. While we believe that we
are in substantial compliance with current applicable federal and state environmental laws and regulations and that continued compliance with existing requirements will not have a material adverse
impact on our

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results
of operations or financial condition, there is no assurance that this trend of compliance will continue in the future. Moreover, while we believe that the various environmental activities in
which we are presently engaged will not affect our operational ability to gather, compress, treat and process natural gas or fractionate NGLs, we cannot assure you that future events, such as changes
in existing
laws, the promulgation of new laws, or the development or discovery of new facts or conditions will not cause us to incur significant costs.

The
following is a summary of the more significant existing environmental laws to which our business operations are subject and with which compliance may have a material adverse effect
on our capital expenditures, earnings or competitive position.

Air Emissions.Our operations are subject to the federal Clean Air Act, as amended and comparable state laws. These laws regulate
emissions of air
pollutants from various industrial sources, including processing and treatment plants, fractionation facilities and compressor stations, and also impose various monitoring and reporting requirements.
Such laws may require that we obtain pre-approval for the construction or modification of certain projects or facilities expected to produce air emissions or result in the increase of
existing air emissions, obtain and comply with air permits containing various emissions and operational limitations, or utilize specific emission control technologies to limit emissions. Our failure
to comply with these requirements could subject us to monetary penalties, injunctions, conditions or restrictions on operations, and potentially criminal enforcement actions. We will be required to
incur certain capital expenditures in the future for air pollution control equipment in connection with obtaining and maintaining operating permits and approvals for air emissions. We believe,
however, that our operations will not be materially adversely affected by such requirements, and the requirements are not expected to be any more burdensome to us than to other similarly situated
companies.

Hazardous Waste.Our operations generate wastes, including hazardous wastes that are subject to the federal Resource Conservation and
Recovery Act,
as amended, or RCRA, and comparable state laws, which impose detailed requirements for the handling, storage, treatment and disposal of hazardous and solid waste. While RCRA currently excludes from
the definition of hazardous waste produced waters and other wastes associated with the exploration, development, or production of crude oil and natural gas, these oil and gas exploration and
production wastes may still be regulated under state law or the less stringent solid waste requirements of RCRA. Moreover, ordinary industrial wastes such as paint wastes, waste solvents, laboratory
wastes, and waste compressor oils may be regulated as hazardous waste. The transportation of natural gas in pipelines may also generate wastes that are subject to RCRA or comparable state law
requirements.

Site Remediation.The Comprehensive Environmental Response, Compensation and Liability Act, as amended, or CERCLA, also known as
"Superfund," and
comparable state laws impose liability, without regard to fault or the legality of the original conduct, on certain classes of persons responsible for the release of hazardous substances into the
environment. Such classes of persons include the current and past owners or operators of sites where a hazardous substance was released, and companies that disposed or arranged for disposal of
hazardous substances at offsite locations such as landfills. Although petroleum as well as natural gas is excluded from CERCLA's definition of "hazardous
substance," in the course of our ordinary operations we will generate wastes that may fall within the definition of a "hazardous substance." CERCLA authorizes the EPA and, in some cases, third parties
to take actions in response to threats to the public health or the environment and to seek to recover from the responsible classes of persons the costs they incur. Under CERCLA, we could be subject to
joint and several liability for the costs of cleaning up and restoring sites where hazardous substances have been released, for damages to natural resources, and for the costs of certain health
studies.

We
currently own or lease, and in the past have owned or leased, properties that have been used for natural gas and NGL gathering, treating, processing, and fractionating activities for
many years.

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Although
we believe that we have utilized operating and waste disposal practices that were standard in the industry at the time, hazardous substances, wastes, or hydrocarbons may have been released on
or under the properties owned or leased by us, or on or under other locations where such substances have been taken for recycling or disposal. In addition, some of our properties have been operated by
third parties whose treatment and disposal of hazardous substances, wastes, or hydrocarbons was not under our control. These properties and the substances disposed or released on them may be subject
to CERCLA, RCRA, and analogous state laws. Under such laws, we could be required to remove previously disposed substances, hazardous wastes and hydrocarbons or remediate contaminated property.

Water Discharges.Our operations are subject to the Federal Water Pollution Control Act, as amended, also known as the Clean Water Act,
and analogous
state laws. These laws impose detailed requirements and strict controls regarding the discharge of pollutants into state waters and waters of the United States. The unpermitted discharge of
pollutants, including discharges resulting from a spill or leak incident, is prohibited by the U.S. Environmental Protection Agency, or EPA, or analogous state agencies. The Clean Water Act and
regulations implemented thereunder also prohibit discharges of dredged and fill material into wetlands and other waters of the United States unless authorized by an appropriately issued permit. Any
unpermitted release of pollutants from our pipelines or facilities could result in administrative civil and criminal penalties as well as significant remedial obligations.

Global Warming and Climate Change.In response to public concerns suggesting that emissions of certain gases, referred to as "greenhouse
gases" and
including carbon dioxide and methane, may be contributing to warming of the Earth's atmosphere, President Obama has expressed support for, and it is anticipated that the current session of the U.S.
Congress will consider climate change-related legislation to reduce greenhouse gas emissions. In addition, at least one-third of the states, either individually or through multi-state
regional initiatives, already have taken legal measures to reduce emissions of greenhouse gases, primarily through the planned development of greenhouse gas emission inventories and/or greenhouse gas
cap and trade programs. As an alternative to reducing emissions of greenhouse gases under cap and trade programs, the Congress may consider the implementation of a program to tax the emission of
carbon dioxide and other greenhouse gases. The
cap and trade programs could require major sources of emissions, such as electric power plants, or major producers of fuels, such as refineries or gas processing plants, to acquire and surrender
emission allowances. Depending on the particular cap and trade program, we could be required to purchase and surrender allowances, either for greenhouse gas emissions resulting from our operations
(e.g., compressor stations) or from combustion of fuels (e.g., natural gas or NGLs) we process. Similarly, depending on the design and
implementation of a program to tax emissions or greenhouse gases, our operations could face additional taxes and higher cost of doing business. Although we would not be impacted to a greater degree
than other similarly situated gatherers and processors of natural gas or NGLs, a stringent greenhouse gas control or taxing program could have an adverse effect on our cost of doing business and could
reduce demand for the natural gas and NGLs we gather and process.

Also,
as a result of the U.S. Supreme Court's decision in 2007 inMassachusetts, et al. v. EPA, the EPA may regulate carbon dioxide and
other greenhouse gas emissions from mobile sources such as cars and trucks, even if Congress does not adopt new legislation specifically addressing emissions of greenhouse gases. The Court's holding
inMassachusettsthat greenhouse gases including carbon dioxide fall under the federal Clean Air Act's definition of "air pollutant" may also result in
future regulation of carbon dioxide and other greenhouse gas emissions from stationary sources under certain Clean Air Act programs. In July 2008, the EPA released an "Advance Notice of Proposed
Rulemaking" regarding possible future regulation of greenhouse gas emissions under the Clean Air Act, in response to the Supreme Court's decision in Massachusetts.In the notice, the EPA evaluated the
potential regulation of greenhouse gases under the Clean Air Act and other potential methods of
regulating greenhouse gases. Although the notice did not propose any specific, new regulatory requirements for greenhouse gases, it

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indicates
that federal regulation of greenhouse gas emissions could occur in the near future even if Congress does not adopt new legislation specifically addressing emissions of greenhouse gases.
Although it is not possible at this time to predict how legislation or new regulations that may be adopted to address greenhouse gas emissions would impact our business, any such new federal, regional
or state restrictions on or taxing of emissions of carbon dioxide in areas of the United States in which we conduct business could adversely affect our cost of doing business and demand for the
natural gas and NGLs we gather and process.

Pipeline Safety.Some of our pipelines are subject to regulation by the U.S. Department of Transportation, or the DOT, under the
Natural Gas Pipeline
Safety Act of 1968, as amended, or the NGPSA, pursuant to which the DOT has established requirements relating to the design, installation, testing, construction, operation, replacement and management
of pipeline facilities. The NGPSA covers the pipeline transportation of natural gas and other gases, and the transportation and storage of liquefied natural gas and requires any entity that owns or
operates pipeline facilities to comply with the regulations under the NGPSA, to permit access to and allow copying of records and to make certain reports and provide information as required by the
Secretary of Transportation. We believe that our natural gas pipeline operations are in substantial compliance with applicable NGPSA requirements; however, due to the possibility of new or amended
laws and regulations or reinterpretation of existing laws and regulations, future compliance with the NGPSA could result in increased costs that, at this time, cannot reasonably be quantified.

The
DOT, through the Pipeline and Hazardous Materials Safety Administration, adopted regulations to implement the Pipeline Safety Improvement Act of 2002, as amended by the Pipeline
Inspection, Protection, Enforcement and Safety Act of 2006, which requires pipeline operators to, among other things, develop integrity management programs for gas transmission pipelines that, in the
event of a failure, could affect "high consequence areas." "High consequence areas" are defined as areas with specified population densities, buildings containing populations of limited mobility, and
areas where people gather that are located along the route of a pipeline. States in which we operate have adopted similar regulations applicable to intrastate gathering and transmission lines. Our
pipeline systems are largely excluded from these regulations and are not generally situated within areas that would be designated "high consequence."Therefore, compliance with these regulations has
not had a significant impact on our operations.

Employee Health and Safety.We are subject to the requirements of the Occupational Safety and Health Act, or OSHA, and comparable state
laws that
regulate the protection of the health and safety of workers. In addition, the OSHA hazard communication standard requires that information be maintained about hazardous materials used or produced in
our operations and that this information be provided to employees, state and local government authorities and citizens.

Hydrogen Sulfide.Exposure to gas containing high levels of hydrogen sulfide, referred to as sour gas, is harmful to humans, and
exposure can result
in death. The gas handled at our Worland gathering system contains high levels of hydrogen sulfide, and we employ numerous safety precautions at the system to ensure the safety of our employees. There
are various federal and state environmental and safety requirements for handling sour gas, and we are in substantial compliance with all such requirements.

Anti-Terrorism Measures.The federal Department of Homeland Security Appropriations Act of 2007 required the Department of Homeland
Security, or DHS, to issue regulations establishing risk-based performance standards for the security of chemical and industrial facilities, including oil and gas facilities that are
deemed to present "high levels of security risk." The DHS issued an interim final rule in April 2007 regarding risk-based performance standards to be attained pursuant to the act and, on
November 20, 2007, further issued an Appendix A to the interim rule that established chemicals of interest and their respective threshold quantities that will trigger compliance with the
interim rule.

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Facilities
possessing greater than threshold levels of these chemicals of interest were required to prepare and submit to the DHS in January 2008 initial screening surveys that the agency would use to
determine whether the facilities presented a high level of security risk. Covered facilities that are determined by DHS to pose a high level of security risk will be notified by DHS and will be
required to prepare and submit Security Vulnerability Assessments and Site Security Plans as well as comply with other regulatory requirements, including those regarding inspections, audits,
recordkeeping, and protection of chemical-terrorism vulnerability information. In January 2008, we prepared and submitted to the DHS initial screening surveys for five facilities operated by us that
possess regulated chemicals of interest in excess of the Appendix A threshold levels. In June 2008, the DHS advised us that theses five facilities were determined by the agency not to present
high levels of security risk and thus did not require further assessment under the interim rules.

Title to Properties

Substantially all of our pipelines are constructed on rights-of-way granted by the apparent record owners of
the property. Lands over which pipeline rights-of-way have been obtained may be subject to prior liens that have not been subordinated to the
right-of-way grants. We have obtained, where necessary, license or permit agreements from public authorities and railroad companies to cross over or under, or to lay facilities
in or along, waterways, county roads, municipal streets, railroad properties and state highways, as applicable. In some cases, property on which our pipelines were built was purchased in fee.

Some
of our leases, easements, rights-of-way, permits, licenses and franchise ordinances require the consent of the current landowner to transfer these rights,
which in some instances is a governmental entity. We believe that we have obtained or will obtain sufficient third party consents, permits and authorizations for the transfer of the assets necessary
for us to operate our business in all material respects. With respect to any consents, permits or authorizations that have not been obtained, we believe that these consents, permits or authorizations
will be obtained reasonably soon, or that the failure to obtain these consents, permits or authorizations will have no material adverse effect on the operation of our business.

We
lease the majority of the surface land on which our gathering systems operate. With respect to our Bakken gathering system, we own the land on which the processing plant is located
and the land on which the three compressor stations are located. With respect to our Badlands gathering system, we own the land on which the Badlands processing plant is located and we lease the land
on which the seven compressor sites are located. With respect to our Eagle Chief gathering system, we lease the surface land on which the Eagle Chief processing plant, seven of the eight compressor
stations, a produced water dumping station and the three pumping stations are located. We lease the surface lands on which twelve of the thirteen Kinta Area compressors are located. At our Woodford
Shale gathering system, we own the land on which one compressor station is located and lease the surface land on three compressor station locations. We lease the surface lands on which our Matli
processing plant and three compressor stations are located and in our Worland gathering system, we lease the surface land on which the Worland processing plant and the seven compressor stations are
located. We own the land on which the North Dakota Bakken processing plant is being constructed.

We
believe that we have satisfactory title to all of our assets. Record title to some of our assets may continue to be held by our affiliates until we have made the appropriate filings
in the jurisdictions in which such assets are located and obtained any consents and approvals that are not obtained prior to transfer. Title to property may be subject to encumbrances. We believe that
none of these encumbrances will materially detract from the value of our properties or from our interest in these properties, nor will they materially interfere with their use of these properties in
the operation of our business.

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We
believe that we either own in fee or have leases, easements, rights-of-way or licenses and have obtained the necessary consents, permits and franchise
ordinances to conduct our operations in all material respects.

Office Facilities

We occupy approximately 12,358 square feet of space at our executive offices in Enid, Oklahoma, under leases expiring April 30,
2011. While we may require additional office space as our business expands, we believe that our existing facilities are adequate to meet our needs for the immediate future and that additional
facilities will be available on commercially reasonable terms as needed.

Employees

We have no employees. Prior to September 25, 2006, employees of our general partner, Hiland Partners GP, LLC,
provided services to us. In connection with the initial public offering of Hiland Holdings, LP, all of the employees of our general partner became employees of the general partner of Hiland
Holdings, LP, Hiland Partners GP Holdings, LLC. As of December 31, 2008, Hiland Partners GP Holdings, LLC had 121 full-time employees who provide
services to us. We are not a party to any collective bargaining agreements, and we have not had any significant labor disputes in the past. We believe we have good relations with the employees of
Hiland Partners GP Holdings, LLC.

Address, Internet Web site and Availability of Public Filings

We maintain our principal corporate offices at 205 West Maple, Suite 1100, Enid, Oklahoma 73701. Our telephone number is
(580) 242-6040. Our Internet address iswww.hilandpartners.com. We make the following information available free of charge on our
Internet Web site:



We
make our SEC filings available on our Web site as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the SEC. The above
information is available in print to anyone who requests it.

Item 1A.    Risk Factors

Limited partner interests are inherently different from capital stock of a corporation, although many of the
business risks to which we are subject are similar to those that would be faced by a corporation engaged in a similar business. The following risks could materially and adversely affect our business,
financial condition or results of operations. In that case, the amount of the distributions on our common units could be materially and adversely affected and the trading price of our common units
could decline.

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Risks Related to Our Business

If commodity prices do not significantly improve above the expected prices for 2009, we may be in violation of the maximum consolidated funded debt to EBITDA ratio as early
as June 30, 2009, unless the ratio is amended, the senior secured revolving credit facility is restructured or we receive an infusion of equity capital. Failure to comply with the covenants
could cause an event of default under our credit facility.

Our credit facility contains covenants requiring us to maintain certain financial ratios and comply with certain financial tests,
which, among other things, require us and our subsidiary guarantors, on a consolidated basis, to maintain specified ratios or conditions as follows:



As
of December 31, 2008, we were in compliance with each of these ratios, which are tested quarterly. Our EBITDA to interest expense ratio was 5.0 to 1.0 and our consolidated
funded debt to EBITDA ratio was 3.7 to 1.0. We intend to elect to increase the ratio to 4.75:1.0 on March 31, 2009. Our ability to remain in compliance with these restrictions and covenants in
the future is uncertain and will be affected by the levels of cash flow from our operations and events or circumstances beyond our control. If commodity prices do not significantly improve above the
expected prices for 2009, we may be in violation of the maximum consolidated funded debt to EBITDA ratio as early as June 30, 2009, unless the ratio is amended, the senior secured revolving
credit facility is restructured or we receive an infusion of equity capital.

Our
failure to comply with any of the restrictions and covenants under our revolving credit facility could lead to an event of default and the acceleration of our obligations under those
agreements. We may not have sufficient funds to make such payments. If we are unable to satisfy our obligations with cash on hand, we could attempt to refinance such debt, sell assets or repay such
debt with the proceeds from an equity offering. We cannot assure that we will be able to generate sufficient cash flow to pay the interest on our debt or that future borrowings, equity financings or
proceeds from the sale of assets will be available to pay or refinance such debt. The terms of our financing agreements may also prohibit us from taking such actions. Factors that will affect our
ability to raise cash through an offering of our common units or other equity, a refinancing of our debt or a sale of assets include financial market conditions and our market value and operating
performance at the time of such offering or
other financing. We cannot assure that any such proposed offering, refinancing or sale of assets can be successfully completed or, if completed, that the terms will be favorable to us.

For
additional information about the restrictions under our credit facility, please see Item 7. "Management's Discussion and Analysis of Financial Condition and Results of
OperationsLiquidity and Capital ResourcesCredit Facility."

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We may not have sufficient cash after the establishment of cash reserves and payment of our general partner's fees and expenses to enable us to pay distributions at the
current level, or at all.

We may not have sufficient available cash each quarter to pay distributions at the current level, or at all. Under the terms of our
partnership agreement, we must pay our general partner's fees and expenses and set aside any cash reserve amounts before making a distribution to our unitholders. The amount of cash we can distribute
on our units principally depends upon the amount of cash we generate from our operations, which will fluctuate from quarter to quarter based on several factors, some of which are beyond our control,
including:



In
addition, the actual amount of cash we will have available for distribution will depend on other factors, some of which are beyond our control, including:



Our cash flow is affected by the volatility of natural gas and NGL product prices, which could adversely affect our ability to make distributions to unitholders or to
service our debt.

We are subject to significant risks due to frequent and often substantial fluctuations in commodity prices. In the past, the prices of
natural gas and NGLs have been extremely volatile, and we expect this volatility to continue. For the year ended December 31, 2008, our average realized natural gas sales price increased from
$6.44/MMBtu in January to a high sales price of $10.05/MMBtu in July, then decreased to a low sales price of $3.38/MMBtu in November. Our average realized NGL sales price increased from $1.42 per
gallon in January 2008 to a high sales price of $1.74 per gallon in June 2008, then decreased to a low sales price of $0.61 per gallon in December 2008. The markets and prices for

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natural
gas and NGLs depend upon factors beyond our control. These factors include demand for oil, natural gas and NGLs, which fluctuate with changes in market and economic conditions and other
factors, including:



We
operate under three types of contractual arrangements under which our total segment margin is exposed to increases and decreases in the price of natural gas, NGLs and the relationship
between natural gas and NGL prices: percentage-of-proceeds, percentage-of-index and index-minus-fees arrangements. Under
percentage-of-proceeds arrangements, we generally purchase natural gas from producers for an agreed percentage of proceeds or upon an index related price, and then sell the
resulting residue gas and NGLs or NGL products at index related prices. Under percentage-of-index arrangements, we purchase natural gas from producers at a fixed percentage of
the index price for the natural gas they produce and subsequently sell the residue gas and NGLs or NGL products at market prices. Under index-minus-fees arrangements, we purchase natural
gas from producers at an expected index related price less fees to gather, dehydrate, compress, treat and/or process the natural gas. Under these types of contracts our revenues and total segment
margin increase or decrease, whichever is applicable, as the price of natural gas and NGLs fluctuates.

Because of the natural decline in production from existing wells, our success depends on our ability to obtain new supplies of natural gas, which involves factors beyond our
control. Any decrease in supplies of natural gas in our areas of operation could adversely affect our business and operating results and reduce our ability to make distributions to our unitholders or
to service our debt.

Our gathering systems and processing plants are dependent on the level of production from oil and natural gas wells that supply our
systems with natural gas and from which production will naturally decline over time. As a result, our cash flows associated with these wells will also decline over time. In order to maintain or
increase throughput volume levels on our gathering systems and the asset utilization rates at our natural gas processing plants, we must continually obtain new supplies of natural gas. The primary
factors affecting our ability to obtain new supplies of natural gas and attract new customers to our assets are the level of successful drilling activity near our gathering systems and our ability to
compete with other gathering and processing companies for volumes from successful new wells.

The
level of drilling activity is dependent on economic and business factors beyond our control. Fluctuations in energy prices can greatly affect production rates and investments by
third parties in the development of new oil and natural gas reserves. Drilling activity generally decreases as oil and natural gas prices decrease. Natural gas, crude oil and NGL prices have been high
in recent years compared to historical periods, but have decreased significantly during the fourth quarter of 2008 and thus far in 2009. This decline in natural gas prices coupled with the effect of
illiquid capital markets has led to a decrease in drilling activity in our areas of operation.

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In
addition, producers may decrease their drilling activity levels due to the current deterioration in the credit markets. Many of our customers finance their drilling activities though
cash flow from operations, the incurrence of debt or the issuance of equity. Recently, there has been a significant decline in the credit markets and the availability of credit. Additionally, many of
our customers' equity values have substantially declined. The combination of a reduction of cash flow resulting from declines in commodity prices, a reduction in borrowing bases under reserve-based
credit facilities and the lack of availability of debt or equity financing may result in a significant reduction in our customers' spending. For example, a number of our customers have announced
reduced capital expenditure budgets for 2009.

Other
factors that impact production decisions include producers' capital budget limitations, the ability of producers to obtain necessary drilling and other governmental permits and
regulatory changes. Because of these factors, even if additional crude oil or natural gas reserves were discovered in areas served by our assets, producers may choose not to develop those reserves. If
we were not able to obtain new supplies of natural gas to replace the natural decline in volumes from existing wells due to reductions in drilling activity or competition, throughput volumes on our
pipelines and the utilization rates of our processing facilities would decline, which could have a material adverse effect on our business, results of operations and financial condition.

If we fail to obtain new sources of natural gas supply, our revenues and cash flow may be adversely affected and our ability to make distributions to our unitholders or
service our debt.

We face competition in acquiring new natural gas supplies. Competition for natural gas supplies is primarily based on the location of
pipeline facilities, pricing arrangements, reputation, efficiency, flexibility and reliability. Our major competitors for natural gas supplies and markets include (1) Atlas Pipeline Partners,
Mustang Fuel Corporation, Duke Energy Field Services, LLC and SemGas, L.P. at our Eagle Chief gathering system, (2) Enogex, Inc. at our Matli gathering system,
(3) Bear Paw Energy, a subsidiary of ONEOK Partners, L.P., at our Badlands and Bakken gathering systems, (4) CenterPoint Energy Field Services and Superior Pipeline Company,
L.L.C., a subsidiary of Unit Corporation, at the Kinta Area gathering system and (5) MarkWest Energy Partners, Enogex, Inc., Antero Resources Midstream Corporation and Copano
Energy, L.L.C. at the Woodford Shale gathering system. Many of our competitors have greater financial resources than we do, which may better enable them to pursue additional gathering and processing
opportunities than us.

We depend on certain key producers for a significant portion of our supply of natural gas, and the loss of any of these key producers could reduce our supply of natural gas
and adversely affect our financial results.

For the year ended December 31, 2008, CLR, Chesapeake Energy Corporation and Enerplus Resources (USA) Corporation supplied us
with approximately 49%, 13% and 10%, respectively, of our total natural gas volumes purchased. BP America Production Company and Chesapeake Energy Corporation supplied us with approximately 52% and
13%, respectively, of our natural gas volumes gathered. Certain of our natural gas gathering systems is dependent on one or more of these producers. To the extent that these producers reduce the
volumes of natural gas that they supply us as a result of competition or otherwise, we would be adversely affected unless we were able to acquire comparable supplies of natural gas on comparable terms
from other producers, which may not be possible in areas where the producer that reduces its volumes is the primary producer in the area.

Our ability to grow depends in part on our ability to make acquisitions that result in an increase in the cash generated from operations per unit. If we do not make
acquisitions on economically acceptable terms, our future growth may be limited.

Our ability to grow depends in part on our ability to make acquisitions that result in an increase in the cash generated from
operations per unit. If we are unable to make these accretive acquisitions

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because
we are: (1) unable to identify attractive acquisition candidates or negotiate acceptable purchase contracts with them, (2) unable to obtain financing for these acquisitions on
economically acceptable terms, or (3) outbid by competitors, then our future growth and ability to increase distributions may be limited. Furthermore, even if we do make acquisitions that we
believe will be accretive, these acquisitions may nevertheless result in a decrease in the cash generated from operations per unit. Any acquisition involves potential risks, including, among other
things:



If
we consummate any future acquisitions, our capitalization and results of operations may change significantly, and you will not have the opportunity to evaluate the economic, financial
and other relevant information that we will consider in determining the application of these funds and other resources.

Our
acquisition approach is based, in part, on ongoing divestitures of midstream assets by large industry participants. A material decrease in such divestitures would limit our
opportunities for future acquisitions and could adversely affect our operations and cash flows available for distribution to our unitholders.

Our ability to engage in construction projects and to make acquisitions will require access to a substantial amount of capital. Our inability to obtain adequate sources of
financing on economically acceptable terms may limit our growth opportunities, which could have a negative impact on our cash available to pay distributions.

Our ability to engage in construction projects or to make acquisitions is dependent on obtaining adequate sources of outside financing,
including commercial borrowings and other debt and equity issuances. While the initial funding of our acquisitions may consist of debt financing, our financial strategy is to finance acquisitions
approximately equally with equity and debt, and we would expect to repay such debt with proceeds of equity issuances to achieve this relatively balanced financing ratio.

Global
market and economic conditions have been, and continue to be, disruptive and volatile. The debt and equity capital markets have been adversely affected by significant
write-offs in the financial services sector relating to subprime mortgages, and the re-pricing of credit risk in the broadly syndicated market, among other things. These events
have led to worsening general economic conditions. In particular, the cost of capital in the debt and equity capital markets has increased substantially, while the availability of funds from those
markets has diminished significantly. Also, concerns about the stability of financial markets generally and the solvency of counterparties specifically have led to increases in the cost of obtaining
money from the credit markets as many lenders and institutional investors have increased interest rates, enacted tighter lending standards and reduced funding and, in some cases, ceased to provide
funding to borrowers.

If
we are unable to finance our growth through external sources or are unable to achieve our targeted debt/equity ratios, or if the cost of such financing is higher than expected, we may
be required to forgo certain construction projects or acquisition opportunities or such construction projects or acquisition opportunities may not result in expected increases in distributable cash
flow. Accordingly,

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our
inability to obtain adequate sources of financing on economically acceptable terms may limit our growth opportunities, which could have a negative impact on our cash available to pay
distributions.

For
additional information on our access to capital markets, see Item 7. "Management's Discussion and Analysis of Financial Condition and Results of
OperationsLiquidity and Capital Resources."

We generally do not obtain independent evaluations of natural gas reserves dedicated to our gathering systems; therefore, volumes of natural gas gathered on our gathering
systems in the future could be less than we anticipate. A decline in the volumes of natural gas gathered on our gathering systems would have an adverse effect on our results of operations and
financial condition.

We generally do not obtain independent evaluations of natural gas reserves connected to our gathering systems due to the unwillingness
of producers to provide reserve information as well as the cost of such evaluations. Accordingly, we do not have estimates of total reserves dedicated to our systems or the anticipated life of such
reserves. If the total reserves or estimated life of the reserves connected to our gathering systems is less than we anticipate and we are unable to secure additional sources of natural gas, then the
volumes of natural gas gathered on our gathering systems in the future could be less than we anticipate. A decline in the volumes of natural gas gathered on our gathering systems would have an adverse
effect on our results of operations and financial condition.

We are exposed to the credit risks of our key customers, and any material nonpayment or nonperformance by our key customers could reduce our ability to make distributions to
our unitholders or to service our debt.

We are subject to risks of loss resulting from nonpayment or nonperformance by our customers. Any material nonpayment or nonperformance
by our key customers could reduce our ability to make distributions to our unitholders. Furthermore, some of our customers may be highly leveraged and subject to their own operating and regulatory
risks, which increases the risk that they may default on their obligations to us.

Additionally,
we derive our revenues primarily from customers in the energy industry. This industry concentration has the potential to impact our overall exposure to credit risk, either
positively or negatively, in that our customers could be affected by similar changes in economic, industry or other conditions, including changing commodities prices.

We may not successfully balance our purchases of natural gas and our sales of residue gas and NGLs, which increases our exposure to commodity price risks.

We may not be successful in balancing our purchases and sales. In addition, a producer could fail to deliver expected volumes or
deliver in excess of contracted volumes, or a purchaser could purchase less than contracted volumes. Any of these actions could cause our purchases and sales not to be balanced. If our purchases and
sales are not balanced, we will face increased exposure to commodity price risks and could have increased volatility in our operating income.

Our construction of new assets or the expansion of existing assets may not result in revenue increases and is subject to regulatory, environmental, political, legal and
economic risks, which could adversely affect our results of operations and financial condition.

One of the ways we may grow our business is through the construction of new midstream assets or the expansion of existing systems. The
construction of additions or modifications to our existing systems, and the construction of new midstream assets involve numerous regulatory, environmental, political and legal uncertainties beyond
our control and require the expenditure of significant amounts of capital. If we undertake these projects, they may not be completed on schedule at the budgeted cost, or at all. Moreover, our revenues
may not increase immediately upon the expenditure of funds on a particular project. For instance, if we expand a new pipeline, the construction may occur over an

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extended
period of time, and we will not receive any material increases in revenues until the project is completed. Moreover, we may construct facilities to capture anticipated future growth in
production in a region in which such growth does not materialize. Since we are not engaged in the exploration for and development of oil and natural gas reserves, we often do not have access to
estimates of potential reserves in an area prior to constructing facilities in such area. To the extent we rely on estimates of future production in our decision to construct additions to our systems,
such estimates may prove to be inaccurate because there are numerous uncertainties inherent in estimating quantities of future production. As a result, new facilities may not be able to attract enough
throughput to achieve our expected investment return, which could adversely affect our results of operations and financial condition.

A change in the characterization of some of our assets by federal, state or local regulatory agencies or a change in policy by those agencies may result in increased
regulation of our assets, which may cause our revenues to decline and operating expenses to increase.

Our gathering facilities are exempt from FERC regulation under the Natural Gas Act of 1938, or NGA, but FERC jurisdiction still affects
our business and the market for our products. FERC's policies and practices affect a wide range of activities bearing directly or indirectly on our business and operations, including, for example,
FERCs regulations and policies related to open access transportation, ratemaking, capacity release, market center promotion, intrastate transportation, and market transparency. In recent years, FERC
has pursued pro-competitive policies in its regulation of interstate natural gas pipelines. However, we cannot assure you that FERC will continue this approach as it considers matters such
as pipeline rates and rules and policies that may affect rights of access to natural gas transportation capacity. In addition, there is no bright-line distinction between
FERC-regulated transmission service and federally unregulated gathering services. Moreover, this distinction is the subject of regular litigation. Consequently, the classification and
regulation of some of our gathering
facilities may be subject to change based on future determinations by the FERC and the courts. A change in jurisdictional characterization may cause the affected facility's revenues to decline and its
operating expenses to increase.

Other
state and local regulations also affect our business. Our gathering lines are subject to ratable take and common purchaser statutes in states in which we operate. Ratable take
statutes generally require gatherers to take, without undue discrimination, natural gas production that may be tendered to the gatherer for handling. Similarly, common purchaser statutes generally
require gatherers to purchase without undue discrimination as to source of supply or producer. These statutes restrict our right as an owner of gathering facilities to decide with whom we contract to
purchase or transport natural gas. Federal law leaves any economic regulation of natural gas gathering to the states. States in which we operate have adopted complaint based regulation of natural gas
gathering activities, which allows natural gas producers and shippers to file complaints with state regulators in an effort to resolve grievances relating to natural gas gathering access and rate
discrimination. While our proprietary gathering lines currently are subject to limited state regulation, there is a risk that state laws will be changed, which may give producers a stronger basis to
challenge proprietary status of a line, or the rates, terms and conditions of a gathering line providing transportation service.

We may incur significant costs and liabilities in the future resulting from a failure to comply with new or existing environmental laws and regulations or an accidental
release of hazardous substances, wastes or hydrocarbons into the environment. These costs could have an adverse effect on our ability to make distributions to unitholders.

Our operations are subject to stringent and complex federal, regional, state and local environmental laws and regulations governing the
discharge of substances into the environment and environmental protection. These laws and regulations require us to acquire permits to conduct

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regulated
activities, to incur capital expenditures to limit or prevent releases of substances from our facilities, and to respond to liabilities for pollution resulting from our operations.
Governmental authorities enforce compliance with these laws and regulations and the permits issued under them, oftentimes requiring difficult and costly actions. Failure to comply with these laws and
regulations or newly adopted laws or regulations may trigger a variety of administrative, civil and criminal enforcement measures, including the assessment of monetary penalties, the imposition of
remedial requirements, and the issuance of orders enjoining future operations. Certain environmental statutes impose strict and, under certain circumstances, joint and several liability for costs
required to clean up and restore sites where hazardous substances have been disposed or otherwise released. Moreover, it is not uncommon for neighboring landowners and other third parties to file
claims for personal injury and property damage allegedly caused by the release of hazardous substances, wastes or hydrocarbons into the environment.

There
is inherent risk of incurring significant environmental costs and liabilities in our business due to our handling of natural gas, condensate, oil, NGLs and wastes, the release of
water discharges or air emissions related to our operations, and historical industry operations and waste disposal practices conducted by us or predecessors operators. For example, an accidental
release from one of our pipelines or processing facilities could subject us to substantial liabilities arising from environmental cleanup and restoration costs, claims made by neighboring landowners
and other third parties for personal injury and property or natural resource damage, and fines or penalties for related violations of environmental laws or regulations. Moreover, the possibility
exists that stricter laws, regulations or enforcement policies could significantly increase our compliance costs and the cost of any remediation that may become necessary. We may not be able to
recover some or any of these costs from insurance.

If we are unable to obtain new rights-of-way or the cost of renewing existing rights-of-way increases, then we may be unable
to fully execute our growth strategy and our cash flows could be adversely affected.

The construction of additions to our existing gathering assets may require us to obtain new rights-of-way prior
to constructing new pipelines. We may be unable to obtain such rights-of-way to connect new natural gas supplies to our existing gathering lines or capitalize on other
attractive expansion opportunities. Additionally, it may become more expensive for us to obtain new rights-of-way or to renew existing rights-of-way. If
the cost of obtaining new rights-of-way, or renewing existing rights-of-way increases, our cash flows could be adversely affected.

If we fail to renew any of our significant contracts as they expire under the terms of the particular agreement, our revenues and cash flow may be adversely affected and our
ability to make distributions to our unitholders or service our debt may be reduced.

If we fail to renew any of our significant natural gas sales contracts, NGL sales arrangements, hedging contracts, natural gas purchase
and gathering contracts or our compression services agreement as they expire under the terms of the particular agreement, we would be adversely affected unless we were able to replace such contract
with a contract containing similar terms. For example, our compression services agreement with CLR had an initial term that ended on January 28, 2009 and now automatically renews for additional
one-month terms unless terminated by either party by giving notice at least 15 days prior to the end of the then current term. If CLR elects to terminate the monthly agreement and
we fail to renew the monthly agreement with CLR, we would be adversely affected unless we were able to provide air and water compression services to other parties in the area where our air and
compression facilities are located.

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Our business involves many hazards and operational risks, some of which may not be fully covered by insurance. If a significant accident or event occurs that is not fully
insured, our operations and financial results could be adversely affected.

Our operations are subject to the many hazards inherent in the gathering, treating, processing and fractionation of natural gas and
NGLs, including:



These
risks could result in substantial losses due to personal injury and/or loss of life, severe damage to and destruction of property and equipment and pollution or other environmental
damage and may result in curtailment or suspension of our related operations. A natural disaster or other hazard affecting the areas in which we operate could have a material adverse effect on our
operations. We are not fully insured against all risks incident to our business. In accordance with typical industry practice, we do not have any property insurance on any of our underground pipeline
systems that would cover damage to the pipelines. We are not insured against all environmental accidents that might occur, other than those considered to be sudden and accidental. In addition, we do
not have business interruption insurance. If a significant accident or event occurs that is not fully insured, it could adversely affect our operations and financial condition.

Restrictions in our credit facility limit our ability to make distributions to you and may limit our ability to capitalize on acquisitions and other business opportunities.

Our credit facility contains various covenants limiting our ability to incur indebtedness, grant liens, engage in transactions with
affiliates, make distributions to our unitholders and capitalize on acquisition or other business opportunities. It also contains covenants requiring us to maintain certain financial ratios and tests.
We are prohibited from making any distribution to unitholders if such distribution would cause a default or an event of default under our credit facility. Any subsequent refinancing of our current
indebtedness or any new indebtedness could have similar or greater restrictions. At December 31, 2008, our outstanding long-term indebtedness was approximately $252.1 million
under our senior secured revolving credit facility. Payments of principal and interest on the indebtedness will reduce the cash available for distribution on our units.

For
additional information about the restrictions under our credit facility, please see Item 7. "Management's Discussion and Analysis of Financial Condition and Results of
OperationsLiquidity and Capital ResourcesCredit Facility."

Due to our lack of asset diversification, adverse developments in our midstream operations would reduce our ability to make distributions to our unitholders or to service
our debt.

We rely exclusively on the revenues generated from our gathering, dehydration, treating, processing, fractionation and compression
services businesses, and as a result, our financial condition depends upon prices of, and continued demand for, natural gas, crude oil and NGLs. Due to our lack of diversification in asset type, an
adverse development in one of these businesses would have a

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significantly
greater impact on our financial condition and results of operations than if we maintained more diverse assets.

Our hedging activities may not be as effective as we intend in reducing the volatility of our cash flows, and in certain circumstances may actually increase the volatility
of our cash flows.

We utilize derivative financial instruments related to the future price of natural gas and to the future price of NGLs with the intent
of reducing volatility in our cash flows due to fluctuations in commodity prices. While our hedging activities are designed to reduce commodity price risk, we remain exposed to fluctuations in
commodity prices.

The
extent of our commodity price exposure is related largely to the effectiveness and scope of our hedging activities. For example, the derivative instruments we utilize are based on
posted market prices, which may differ significantly from the actual natural gas prices or NGLs prices that we realize in our operations. Furthermore, our hedges relate to only a portion of the volume
of our expected sales and, as a result, we will continue to have direct commodity price exposure to the unhedged portion. Our actual future sales may be significantly higher or lower than we estimate
at the time we enter into derivative transactions for such period. If the actual amount is higher than we estimate, we will have greater commodity price exposure than we intended. If the actual amount
is lower than the amount that is subject to our derivative financial instruments, we might be forced to satisfy all or a portion of our derivative transactions without the benefit of the cash flow
from our sale or purchase of the underlying physical commodity, resulting in a substantial diminution of our liquidity.

As
a result of these factors, our hedging activities may not be as effective as we intend in reducing the volatility of our cash flows, and in certain circumstances may actually increase
the volatility of our cash flows. In addition, our hedging activities are subject to the risks that a counterparty may not perform its obligation under the applicable derivative instrument, the terms
of the derivative instruments are imperfect, and our hedging procedures may not be properly followed. We cannot assure you that the steps we take to monitor our derivative financial instruments will
detect and prevent violations of our
risk management policies and procedures, particularly if deception or other intentional misconduct is involved.

Completion of significant, unbudgeted expansion projects may require debt and/or equity financing which may not be available to us on acceptable terms, or at all.

We plan to fund our expansion capital expenditures, including any future expansions we may undertake, with proceeds from sales of our
debt and equity securities and borrowings under our revolving credit facility; however, we cannot be certain that we will be able to issue our debt and equity securities on terms or in the proportions
that we expect, or at all, and we may be unable to refinance our revolving credit facility when it expires. In addition, we may be unable to obtain adequate funding under our current revolving credit
facility because our lending counterparties may be unwilling or unable to meet their funding obligations.

Global
financial markets and economic conditions have been, and continue to be, disrupted and volatile. The debt and equity capital markets have been exceedingly distressed. These
issues, along with significant write-offs in the financial services sector, the re-pricing of credit risk and the current weak economic conditions have made, and will likely
continue to make, it difficult to obtain funding.

The
cost of raising money in the debt and equity capital markets has increased substantially while the availability of funds from those markets generally has diminished significantly.
Also, as a result of concerns about the stability of financial markets generally and the solvency of counterparties specifically, the cost of obtaining money from the credit markets generally has
increased as many lenders and institutional investors have increased interest rates, enacted tighter lending standards,

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refused
to refinance existing debt at maturity at all or on terms similar to our current debt and reduced and, in some cases, ceased to provide funding to borrowers.

A
significant increase in our indebtedness, or an increase in our indebtedness that is proportionately greater than our issuances of equity, as well as the credit market and debt and
equity capital market conditions discussed above could negatively impact our ability to remain in compliance with the financial covenants under our revolving credit agreement which could have a
material adverse effect on our financial condition, results of operations and cash flows. If we are unable to finance our expansion projects as expected, we could be required to seek alternative
financing, the terms of which may not be attractive to us, or to revise or cancel our expansion plans. If we are unable to finance our expansion projects as expected, this could have a material
adverse effect on our operations, which could reduce our ability to make distributions to our unitholders.

Increases in interest rates could increase our borrowing costs, adversely impact our unit price and our ability to issue additional equity, which could have an adverse
effect on our cash flows and our ability to fund our growth.

Due to the recent volatility and decline in the credit markets, the interest rate on our credit facility could increase, which would
reduce our cash flows. In addition, interest rates on future credit facilities and debt offerings could be higher than current levels, causing our financing costs to increase accordingly. As with
other yield-oriented securities, the market price for our units will be affected by the level of our cash distributions and implied distribution yield. The distribution yield is often used by
investors to compare and rank yield-oriented securities for investment decision-making purposes. Therefore, changes in interest rates, either positive or negative, may affect the yield requirements of
investors who invest in our units, and a rising interest rate environment could have an adverse effect on our unit price and our ability to issue additional equity in order to make acquisitions, to
reduce debt or for other purposes.

Risks Inherent in an Investment in Us

Harold Hamm and his affiliates control our general partner, which has sole responsibility for conducting our business and managing our operations. Affiliates of Harold Hamm
and our general partner have conflicts of interest and limited fiduciary duties, which may permit them to favor their own interests to your detriment.

Harold Hamm and his affiliates control Hiland Partners GP Holdings, LLC, the general partner of Hiland Holdings, a
publicly traded Delaware limited partnership that directly or indirectly owns 100% of our general partner. As a result, Harold Hamm and his affiliates control our general partner, which has sole
responsibility for conducting our business and managing our operations. Conflicts of interest may arise between Harold Hamm and his affiliates, including our general partner, on the one hand, and us
and our unitholders, on the other hand. As a result of these conflicts, the general partner may favor its own interests and the interests of its affiliates over the interests of our unitholders. These
conflicts include, among others, the following situations:



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Unitholders have limited voting rights and limited ability to influence our operations and activities.

Unitholders have only limited voting rights on matters affecting our operations and activities and, therefore, limited ability to
influence management's decisions regarding our business. Unitholders did not select our general partner or elect the board of directors of our general partner and effectively have no right to select
our general partner or elect its board of directors in the future.

Unitholders'
voting rights are further restricted by the partnership agreement provision providing that any units held by a person that owns 20% or more of any class of units then
outstanding, other than the general partner, its affiliates, their transferees and persons who acquired such units with the prior approval of the board of directors of our general partner, cannot be
voted on any matter. In addition, the partnership agreement contains provisions limiting the ability of unitholders to call meetings or to acquire information about our operations, as well as other
provisions limiting the unitholders' ability to influence the manner or direction of management.

Our general partner determines the cost reimbursement and fees payable to it from us; such payments may be substantial and could reduce our cash available for distribution
to you.

Prior to making any distributions on our common units, we will reimburse our general partner for expenses it incurs on our behalf.
Payments to our general partner may be substantial and will reduce the amount of available cash for distribution to unitholders. We will reimburse our general partner for the provision by it and its
affiliates of various general and administrative services for our benefit, including the salaries and costs of employee benefits for employees of the general partner and its affiliates that provide
services to us. Our general partner determines the amount of expenses allocable to us. There is no cap on the amount that may be paid or reimbursed to our general partner for compensation or expenses
incurred on our behalf. Our general partner and its affiliates also may provide us other services for which we will be charged fees as determined by our general partner.

Our partnership agreement limits our general partner's fiduciary duties to our unitholders and restricts the remedies available to unitholders for actions taken by our
general partner that might otherwise constitute breaches of fiduciary duty.

Our partnership agreement contains provisions that reduce the standards to which our general partner would otherwise be held by state
fiduciary duty law. For example, our partnership agreement:



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In
order to become a limited partner of our partnership, a common unitholder is required to agree to be bound by the provisions in the partnership agreement, including the provisions
discussed above.

Harold Hamm and CLR may engage in limited competition with us.

Harold Hamm and CLR and their affiliates may engage in limited competition with us. Pursuant to the omnibus agreement entered into in
connection with our initial public offering, Harold Hamm has agreed that neither he nor any of his affiliates (including CLR) will engage in, whether by acquisition, construction, investment in debt
or equity interests of any person or otherwise, the business of gathering, treating, processing and transportation of natural gas in North America, the transportation and fractionation of NGLs in
North America, and constructing, buying or selling any assets related to the foregoing businesses. This restriction does not apply to:



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These non-competition obligations will terminate on the first to occur of the following events:



In
addition, in connection with the initial public offering of Hiland Holdings, Hiland Holdings and its general partner entered into a non-competition agreement with us
pursuant to which Hiland Holdings and its general partner have agreed that they will not, and they will cause any person
or entity controlled by Hiland Holdings or its general partner (other than our general partner, our subsidiaries and us) not to, engage in, whether by acquisition, construction, investment in debt or
equity interests of any person or otherwise, the business of gathering, treating, processing and transportation of natural gas in North America, the transportation and fractionation of NGLs in North
America, and constructing, buying or selling any assets related to the foregoing businesses. The non-competition agreement has the same permitted exceptions as the omnibus agreement and
will terminate on the first day on which neither Hiland Holdings nor its general partner control us.

Even if unitholders are dissatisfied, they cannot remove our general partner without its consent.

Unlike the holders of common stock in a corporation, unitholders have only limited voting rights on matters affecting our business and,
therefore, limited ability to influence management's decisions regarding our business. Unitholders did not elect our general partner or the board of directors of our general partner and will have no
right to elect our general partner or the board of directors of our general partner on an annual or other continuing basis. The board of directors of our general partner is chosen by the members of
our general partner. Furthermore, if the unitholders were dissatisfied with the performance of our general partner, they would have little ability to remove our general partner. As a result of these
limitations, the price at which the common units will trade could be diminished because of the absence or reduction of a takeover premium in the trading price.

The
unitholders are unable initially to remove the general partner without its consent because the general partner and its affiliates own sufficient units to be able to prevent removal.
The vote of the holders of at least 662/3% of all outstanding units voting together as a single class is required to remove the general partner. As of March 5, 2009, affiliates
of the general partner owned 57.4% of the limited partner units outstanding. Also, if the general partner is removed without cause during the subordination period and units held by the general partner
and its affiliates are not voted in favor of that removal, all remaining subordinated units will automatically convert into common units and any existing arrearages on the common units will be
extinguished. A removal of the general partner under these circumstances would adversely affect the common units by prematurely eliminating their distribution and liquidation preference over the
subordinated units, which would otherwise have continued until we had met certain distribution and performance tests. Cause is narrowly defined to mean that a court of competent jurisdiction has
entered a final, non-appealable judgment finding the general partner liable for actual fraud, gross negligence, or willful or wanton misconduct in its capacity as our general partner.
Cause does not include most cases of charges of poor management of the business, so the removal of the general partner because of the unitholder's dissatisfaction with the general partner's
performance in managing our partnership would most likely result in the termination of the subordination period.

Furthermore,
unitholders' voting rights are further restricted by the partnership agreement provision providing that any units held by a person that owns 20% or more of any class of
units then outstanding, other than the general partner, its affiliates, their transferees, and persons who acquired such units with the prior approval of the board of directors of the general
partner's general partner, cannot vote on any matter. Our partnership agreement also contains provisions limiting the ability of

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unitholders
to call meetings or to acquire information about our operations, as well as other provisions limiting the unitholders' ability to influence the manner or direction of management.

The control of our general partner may be transferred to a third party without unitholder consent.

Our general partner may transfer its general partner interest to a third party in a merger or in a sale of all or substantially all of
its assets without the consent of the unitholders. Furthermore, our partnership agreement does not restrict the ability of the members of our general partner from transferring their respective
membership interests in our general partner to a third party. The new members of our general partner would then be in a position to replace the board of directors of our general partner with their own
choices and to control the decisions taken by the board of directors.

We do not have our own officers and employees and rely solely on the officers and employees of our general partner and its affiliates to manage our business and affairs.

We do not have our own officers and employees and rely solely on the officers and employees of our general partner and its affiliates
to manage our business and affairs. We can provide no assurance that the general partner will continue to provide us the officers and employees that are necessary for the conduct of our business nor
that such provision will be on terms that are acceptable to us. Other than option agreements, neither we nor our general partner have entered into any employment agreements with any officers of our
general partner. If the general partner fails to provide us with adequate personnel, our operations could be adversely impacted. In addition, certain of the officers of our general partner, including
the chief executive officer and chief financial officer, may also serve as officers and directors of affiliates of the general partner.

We may issue additional common units without your approval, which would dilute your existing ownership interests.

During the subordination period, our general partner, without the approval of our unitholders, may cause us to issue up to 1,360,000
additional common units. Our general partner may also cause us to issue an unlimited number of additional common units or other equity securities of equal rank with the common units, without
unitholder approval, in a number of circumstances such as:



In
addition, our partnership agreement does not prohibit the issuance by our subsidiaries of equity securities, which may effectively rank senior to the common units.

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The
issuance of additional common units or other equity securities of equal or senior rank will have the following effects:



After
the end of the subordination period, we may issue an unlimited number of limited partner interests of any type without the approval of our unitholders. Our partnership agreement
does not give our unitholders the right to approve our issuance of equity securities ranking junior to the common units at any time.

Our general partner's discretion in determining the level of cash reserves may reduce the amount of available cash for distribution to you.

Our partnership agreement requires our general partner to deduct from operating surplus cash reserves that it determines are necessary
to fund our future operating expenditures. In addition, our partnership agreement also permits our general partner to reduce available cash by establishing cash reserves for the proper conduct of our
business, to comply with applicable law or agreements to which we are a party, or to provide funds for future distributions to partners. These reserves will affect the amount of cash available for
distribution to you.

Our general partner may cause us to borrow funds in order to make cash distributions, even where the purpose or effect of the borrowing benefits our general partner or its
affiliates.

In some instances, our general partner may cause us to borrow funds in order to permit the payment of cash distributions. These
borrowings are permitted even if the purpose and effect of the borrowing is to enable us to make a distribution on the subordinated units, to make incentive distributions, or to hasten the expiration
of the subordination period.

All of the membership interests in our general partner and all of the common and subordinated units in us that are owned by Hiland Holdings are pledged as security under
Hiland Holdings' credit facility. Upon an event of default under Hiland Holdings' credit facility, a change in ownership or control of us could ultimately result.

The 100% membership interest in our general partner and the 2,321,471 common units and 3,060,000 subordinated units in us that are
owned by Hiland Holdings are pledged under Hiland Holdings' credit facility. Hiland Holdings' credit facility contains customary and other events of default. Upon an event of default, the lenders
under Hiland Holdings' credit facility could foreclose on Hiland Holdings' assets, which could ultimately result in a change in control of our general partner and a change in the ownership of our
units held by Hiland Holdings.

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Our general partner has a limited call right that may require you to sell your units at an undesirable time or price.

If at any time our general partner and its affiliates own more than 80% of the common units, our general partner will have the right,
but not the obligation, which it may assign to any of its affiliates or to us, to acquire all, but not less than all, of the common units held by unaffiliated persons at a price not less than their
then-current market price. As a result, you may be required to sell your common units at an undesirable time or price and may not receive any return on your investment. You may also incur
a tax liability upon a sale of your units. As of March 5, 2009, affiliates of our general partner owned approximately 36.8% of our common units and, at the end of the subordination period,
assuming no additional issuances of common units, affiliates of our general partner will own approximately 57.4% of our common units.

You could be liable for any and all of our obligations if a court finds that unitholder action constitutes control of our business.

A general partner of a partnership generally has unlimited liability for the obligations of the partnership, except for those
contractual obligations of the partnership that are expressly made without recourse to the general partner. Our partnership is organized under Delaware law and we conduct business in a number of other
states. The limitations on the liability of holders of limited partner interests for the obligations of a limited partnership have not been clearly established in some of the other states in which we
do business. You could be liable for any and all of our obligations as if you were a general partner if:



Unitholders may have liability to repay distributions that were wrongfully distributed to them.

Under certain circumstances, unitholders may have to repay amounts wrongfully returned or distributed to them. Under
Section 17-607 of the Delaware Revised Uniform Limited Partnership Act, we may not make a distribution to you if the distribution would cause our liabilities to exceed the fair
value of our assets. Delaware law provides that for a period of three years from the date of the impermissible distribution, limited partners who received the distribution and who knew at the time of
the distribution that it violated Delaware law will be liable to the limited partnership for the distribution amount. Substituted limited partners are liable for the obligations of the assignor to
make contributions to the partnership that are known to the substituted limited partner at the time it became a limited partner and for unknown obligations if the liabilities could be determined from
the partnership agreement. Liabilities to partners on account of their partnership interest and liabilities that are non-recourse to the partnership are not counted for purposes of
determining whether a distribution is permitted.

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Tax Risks to Common Unitholders

Our tax treatment depends on our status as a partnership for federal income tax purposes, as well as our not being subject to entity-level taxation by individual states. If
we were to be treated as a corporation for federal income tax purposes or we were to become subject to additional amounts of entity-level taxation for state tax purposes, taxes paid, if any, would
reduce the amount of cash available for distribution to you.

The anticipated after-tax economic benefit of an investment in our common units depends largely on our being treated as a
partnership for federal income tax purposes. We have not requested, and do not plan to request, a ruling from the IRS on this or any other tax matter affecting us.

Despite
the fact that we are a limited partnership under Delaware law, it is possible in certain circumstances for a partnership such as ours to be treated as a corporation for federal
income tax purposes. Although we do not believe based upon our current operations that we are so treated, a change in our business (or a change in current law) could cause us to be treated as a
corporation for federal income tax purposes or otherwise subject us to taxation as an entity.

If
we were treated as a corporation for federal income tax purposes, we would pay federal income tax on our taxable income at the corporate tax rate, which is currently a maximum of 35%,
and would likely pay state income tax at varying rates. Distributions to you would generally be taxed again as corporate distributions, and no income, gains, losses or deductions would flow through to
you. Because a tax would be imposed upon us as a corporation, our cash available for distribution to you would be substantially reduced. Therefore, treatment of us as a corporation would result in a
material reduction in the anticipated cash flow and after-tax return to the unitholders, likely causing a substantial reduction in the value of our common units.

Current
law may change so as to cause us to be treated as a corporation for federal income tax purposes or otherwise subject us to entity-level taxation. In addition, because of
widespread state budget deficits and other reasons, several states are evaluating ways to subject partnerships to entity-level taxation through the imposition of state income, franchise and other
forms of taxation. For example, we are required to pay Texas margin tax at a maximum effective rate of 0.7% of our gross income apportioned to Texas in the prior year. Imposition of this tax on us by
Texas, or similar taxes by any other state in which we operate, will reduce the cash available for distribution to you.

Our
partnership agreement provides that if a law is enacted or existing law is modified or interpreted in a manner that subjects us to taxation as a corporation or otherwise subjects us
to entity-level taxation for federal, state or local income tax purposes, the minimum quarterly distribution amount and the target distribution amounts will be adjusted to reflect the impact of that
law on us.

The tax treatment of publicly traded partnerships or an investment in our common units could be subject to potential legislative, judicial or administrative changes and
differing interpretations, possibly on a retroactive basis.

The present U.S. federal income tax treatment of publicly traded partnerships, including us, or an investment in our common units may
be modified by administrative, legislative or judicial interpretation at any time. For example, members of Congress recently considered substantive changes to the existing U.S. federal income tax laws
that affect publicly traded partnerships, including us. Any modification to the U.S. federal income tax laws and interpretations thereof may or may not be applied retroactively. Although the
considered legislation would not have appeared to have affected our tax treatment as a partnership, we are unable to predict whether any of these changes, or other proposals, will be introduced or
will ultimately be enacted. Any such changes could negatively impact the value of an investment in our common units.

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If the IRS contests the federal income tax positions we take, the market for our common units may be adversely impacted and the cost of any IRS contest will reduce our cash
available for distribution to you.

We have not requested a ruling from the IRS with respect to our treatment as a partnership for federal income tax purposes or any other
matter affecting us. The IRS may adopt positions that differ from the positions we take. It may be necessary to resort to administrative or court proceedings to sustain some or all of the positions we
take. A court may not agree with some or all of the positions we take. Any contest with the IRS may materially and adversely impact the market for our common units and the price at which they trade.
In addition, our costs of any contest with the IRS will be borne indirectly by our unitholders and our general partner because the costs will reduce our cash available for distribution.

You may be required to pay taxes on your share of our income even if you do not receive any cash distributions from us.

Because our unitholders will be treated as partners to whom we will allocate taxable income which could be different in amount than the
cash we distribute, you will be required to pay any federal income taxes and, in some cases, state and local income taxes on your share of our taxable income even if you receive no cash distributions
from us. You may not receive cash distributions from us equal to your share of our taxable income or even equal to the actual tax liability that results from that income.

Tax gain or loss on the disposition of our common units could be more or less than expected.

If you sell your common units, you will recognize a gain or loss equal to the difference between the amount realized and your tax basis
in those common units. Because distributions in excess of your allocable share of our net taxable income decrease your tax basis in your common units, the amount, if any, of such prior excess
distributions with respect to the units you sell will, in effect, become taxable income to you if you sell such units at a price greater than your tax basis in those units, even if the price you
receive is less than your original cost. Furthermore, a substantial portion of the amount realized, whether or not representing gain, may be taxed as ordinary income due to potential recapture items,
including depreciation recapture. In addition, because the amount realized includes a unitholder's share of nonrecourse liabilities if you sell your units, you may incur a tax liability in excess of
the amount of cash you receive from the sale.

Tax-exempt entities and non-U.S. persons face unique tax issues from owning our common units that may result in adverse tax consequences to them.

Investment in units by tax-exempt entities, including employee benefit plans and individual retirement accounts (known as
IRAs), and non-U.S. persons raises issues unique to them. For example, virtually all of our income allocated to organizations exempt from federal income tax, including IRAs and other
retirement plans, will be unrelated business taxable income and will be taxable to such a unitholder. Distributions to non-U.S. persons will be reduced by withholding taxes imposed at the
highest effective applicable tax rate, and such non-U.S. persons will be required to file United States federal income tax returns and pay tax on their share of our taxable income. If you
are a tax exempt entity or a non-U.S. person, you should consult your tax advisor before investing in our common units.

We treat each purchaser of common units as having the same tax benefits without regard to the actual common units purchased. The IRS may challenge this treatment, which
could adversely affect the value of the common units.

Because we cannot match transferors and transferees of common units and because of other reasons, we have adopted depreciation and
amortization positions that may not conform to all aspects

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of
existing Treasury Regulations. A successful IRS challenge to those positions could adversely affect the amount of tax benefits available to you. It also could affect the timing of these tax
benefits or the amount of gain from your sale of common units and could have a negative impact on the value of our common units or result in audit adjustments to your tax returns.

We prorate our items of income, gain, loss and deduction between transferors and transferees of our common units each month based upon the ownership of our common units on
the first day of each month, instead of on the basis of the date a particular common unit is transferred. The IRS may challenge this treatment, and, if successful, we would be required to change the
allocation of items of income, gain, loss and deduction among our unitholders.

We prorate our items of income, gain, loss and deduction between transferors and transferees of our common units each month based upon
the ownership of our common units on the first day of each month, instead of on the basis of the date a particular common unit is transferred. The use of this proration method may not be permitted
under existing Treasury Regulations. If the IRS were to successfully challenge this method or new Treasury Regulations were issued, we could be required to change the allocation of items of income,
gain, loss and deduction among our unitholders.

A unitholder whose units are loaned to a "short seller" to cover a short sale of units may be considered as having disposed of those units. If so, he would no longer be
treated for tax purposes as a partner with respect to those units during the period of the loan and may recognize gain or loss from the disposition.

Because a unitholder whose units are loaned to a "short seller" to cover a short sale of units may be considered as having disposed of
the loaned units, he may no longer be treated for tax purposes as a partner with respect to those units during the period of the loan to the short seller and the unitholder may recognize gain or loss
from such disposition. Moreover, during the period of the loan to the short seller, any of our income, gain, loss or deduction with respect to those
units may not be reportable by the unitholder and any cash distributions received by the unitholder as to those units could be fully taxable as ordinary income. Unitholders desiring to assure their
status as partners and avoid the risk of gain recognition from a loan to a short seller are urged to modify any applicable brokerage account agreements to prohibit their brokers from borrowing their
units.

We have adopted certain valuation methodologies that could result in a shift of income, gain, loss and deduction between the general partner and the unitholders. The IRS may
successfully challenge this treatment, which could adversely affect the value of the common units.

When we issue additional units or engage in certain other transactions, we will determine the fair market value of our assets and
allocate any unrealized gain or loss attributable to our assets to the capital accounts of our unitholders and our general partner. Our methodology may be viewed as understating the value of our
assets. In that case, there may be a shift of income, gain, loss and deduction between certain unitholders and the general partner, which may be unfavorable to such unitholders. Moreover, under our
valuation methods, subsequent purchasers of common units may have a greater portion of their Internal Revenue Code Section 743(b) adjustment allocated to our tangible assets and a lesser
portion allocated to our intangible assets. The IRS may challenge our valuation methods, or our allocation of the Section 743(b) adjustment attributable to our tangible and intangible assets,
and allocations of income, gain, loss and deduction between the general partner and certain of our unitholders.

A
successful IRS challenge to these methods or allocations could adversely affect the amount of taxable income or loss being allocated to our unitholders. It also could affect the amount
of gain from our unitholders' sale of common units and could have a negative impact on the value of the common units or result in audit adjustments to our unitholders' tax returns without the benefit
of additional deductions.

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The sale or exchange of 50% or more of our capital and profits interests during any twelve-month period will result in the termination of our partnership for federal income
tax purposes.

We will be considered to have terminated for federal income tax purposes if there is a sale or exchange of 50% or more of the total
interests in our capital and profits within a twelve-month period. For purposes of determining whether the 50% threshold has been met, multiple sales of the same interest will be counted only once.
Our termination would, among other things, result in the closing of our taxable year for all unitholders, which would result in us filing two tax returns (and our unitholders could receive two
Schedules K-1) for one fiscal year and could
result in a significant deferral of depreciation deductions allowable in computing our taxable income. In the case of a unitholder reporting on a taxable year other than a fiscal year ending
December 31, the closing of our taxable year may also result in more than twelve months of our taxable income or loss being includable in his taxable income for the year of termination. Our
termination currently would not affect our classification as a partnership for federal income tax purposes, but instead, we would be treated as a new partnership for tax purposes. If treated as a new
partnership, we must make new tax elections and could be subject to penalties if we are unable to determine that a termination occurred.

You will likely be subject to state and local taxes and return filing requirements in states where you do not live as a result of investing in our common units.

In addition to federal income taxes, you will likely be subject to other taxes, including foreign, state and local taxes,
unincorporated business taxes and estate, inheritance or intangible taxes that are imposed by the various jurisdictions in which we do business or own property, even if you do not live in any of those
jurisdictions. You will likely be required to file foreign, state and local income tax returns and pay state and local income taxes in some or all of these various jurisdictions. Further, you may be
subject to penalties for failure to comply with those requirements. We currently do business or own property in various states, most of which impose a tax on individuals, corporations and other
entities. As we make acquisitions or expand our business, we may own assets or conduct business in additional states that impose similar income taxes. It is your responsibility to file all United
States federal, foreign, state and local tax returns.

Item 1B.    Unresolved Staff Comments

None.

Item 3.    Legal Proceedings

On February 26, 2009, a unitholder of Hiland Partners and Hiland Holdings filed a complaint alleging claims on behalf of a
purported class of common unitholders of Hiland Partners and Hiland Holdings against Hiland Partners, Hiland Holdings, the general partner of each of Hiland Partners and Hiland Holdings, and certain
members of the board of directors of each of Hiland Partners and Hiland Holdings in the Court of Chancery of the State of Delaware. The complaint challenges a proposal made by Harold Hamm to acquire
all of the outstanding common units of each of Hiland Partners and Hiland Holdings that are not owned by Mr. Hamm, his affiliates or Hamm family trusts. The complaint alleges, among other
things, that the consideration offered is unfair and grossly inadequate, that the conflicts committee of the board of directors of the general partner of each of Hiland Partners and Hiland Holdings
cannot be expected to act independently, and that the management of Hiland Partners and Hiland Holdings has manipulated its public statements to depress the price of the common units of Hiland
Partners and Hiland Holdings. The plaintiffs seek to enjoin Hiland Partners, Hiland Holdings, and their respective board members from proceeding with any transaction that may arise from
Mr. Hamm's going private proposal, along with compensatory damages. For more information on the going private proposal, please see Items 1. and 2. "Business and
PropertiesRecent

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DevelopmentsGoing
Private Proposal." We cannot predict the outcome of this lawsuit, or others, nor can we predict the amount of time and expense that will be required to resolve the
lawsuit.

We
are not aware of any legal or governmental proceedings against us, or contemplated to be brought against us, under the various environmental protection statutes to which we are
subject. We maintain insurance policies with insurers in amounts and with coverage and deductibles as our general partner believes are reasonable and prudent. However, we cannot assure you that this
insurance will be adequate to protect us from all material expenses related to potential future claims for personal and property damage or that these levels of insurance will be available in the
future at economical prices.

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

None.

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Table of Contents

PART II

Item 5.    Market for Registrant's Common Units and Related Unitholder Matters and Issuer Purchases of Equity Securities

Our limited partner common units began trading on the NASDAQ National Market under the symbol "HLND" commencing with our initial public
offering on February 10, 2005 at an initial public offering price of $22.50 per common unit. As of March 5, 2009, the market price for the common units was $7.40 per unit and there were
approximately 3,700 common unitholders, including beneficial owners of common units held in street name, and one record holder of our subordinated units. There is no established public trading market
for our subordinated units. We consider cash distributions to unitholders on a quarterly basis, although there is no assurance as to the future cash distributions since they are dependent upon future
earnings, cash flows, capital requirements, financial condition and other factors. Our ability to distribute available cash is contractually restricted by the terms of our credit facility. Our credit
facility contains covenants
requiring us to maintain certain financial ratios, which are tested quarterly, and, as of December 31, 2008, we were in compliance with each of those covenants. Our ability to remain in
compliance with these restrictions and covenants in the future is uncertain and will be affected by the levels of cash flow from our operations and events or circumstances beyond our control. If
commodity prices do not significantly improve above the expected prices for 2009, we may be in violation of the maximum consolidated funded debt to EBITDA ratio as early as June 30, 2009,
unless the ratio is amended, the senior secured revolving credit facility is restructured or we receive an infusion of equity capital. We are prohibited from making any distributions to unitholders if
the distribution would cause an event of default, or an event of default exists, under our credit facility. Please read "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of OperationsLiquidity and Capital ResourcesDescription of IndebtednessCredit Facility."

The
following table shows the high and low prices per common unit, as reported by the NASDAQ National Market, for the periods indicated. Cash distributions shown were paid within
45 days after the end of each quarter.

Common Unit
Price RangesCash Distribution
Paid Per Unit(a)High

LowYear Ended December 31, 2008Quarter Ended December 31

$
36.49

$
3.64

$
0.4500Quarter Ended September 30

$
50.44

$
33.95

$
0.8800Quarter Ended June 30

$
52.00

$
43.11

$
0.8625Quarter Ended March 31

$
51.23

$
41.83

$
0.8275Year Ended December 31, 2007Quarter Ended December 31

$
53.00

$
41.60

$
0.7950Quarter Ended September 30

$
60.50

$
46.02

$
0.7550Quarter Ended June 30

$
61.75

$
52.05

$
0.7325Quarter Ended March 31

$
58.49

$
52.54

$
0.7125






Cash Distribution Policy

Within 45 days after the end of each quarter, we will distribute all of our available cash (as defined in our partnership
agreement) to unitholders of record on the applicable record date. The amount of available cash generally is all cash on hand at the end of the quarter less the amount of cash reserves

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established
by our general partner to provide for the proper conduct of our business, to comply with applicable law, any of our debt instruments, or other agreements, or to provide funds for
distributions to our unitholders and to our general partner for any one or more of the next four quarters. Working capital borrowings are generally borrowings that are made under the working capital
portion of our credit facility and in all cases are used solely for working capital purposes or to pay distributions to partners.

Upon
the closing of our initial public offering, affiliates of Harold Hamm, the Hamm Trusts and an affiliate of Randy Moeder, our past Chief Executive Officer, received an aggregate of
4,080,000 subordinated units. The subordinated units were contributed to Hiland Holdings GP, LP, a publicly owned limited partnership on the date of its initial public offering,
September 25, 2006. During the subordination period, the common units will have the right to receive distributions of available cash from operating surplus in an amount equal to the minimum
quarterly distribution of $0.45 per quarter, plus any arrearages in the payment of the minimum quarterly distribution on the common units from prior quarters, before any distributions of available
cash from operating surplus may be made on the subordinated units. The purpose of the subordinated units is to increase the likelihood that during the subordination period there will be available cash
to be distributed on the common units. The subordination period will extend until the first day of any quarter beginning after March 31, 2010 that each of the following tests are met:
distributions of available cash from operating surplus on each of the outstanding common units and subordinated units equaled or exceeded the minimum quarterly distribution for each of the three
consecutive, non-overlapping four-quarter periods immediately preceding that date; the "adjusted operating surplus" (as defined in its partnership agreement) generated during
each of the three consecutive, non-overlapping four-quarter periods immediately preceding that date equaled or exceeded the sum of the minimum quarterly distributions on all of
the outstanding common units and subordinated units during those periods on a fully diluted basis and the related distribution on the 2% general partner interest during those periods; and there are no
arrearages in payment of the minimum quarterly distribution on the common units. If the unitholders remove the general partner without cause, the subordination period may end before March 31,
2010.

In
addition, if the tests for ending the subordination period are satisfied for any three consecutive four-quarter periods ending on or after March 31, 2008, 25% of
the subordinated units will convert into an equal number of common units. On May 16, 2008 these tests were met and accordingly, 1,020,000, or 25%, of the subordinated units converted into an
equal number of common units. Similarly, if the tests are also satisfied for any three consecutive four-quarter periods ending on or after March 31, 2009, an additional 25% of the
subordinated units will convert into an equal number of common units. The second early conversion of subordinated units may not occur, however, until at least one year following the end of the period
for the first early conversion of subordinated units.

We
will make distributions of available cash from operating surplus for any quarter during any subordination period in the following manner: first, 98% to the common unitholders, pro
rata, and 2% to the general partner, until we distribute for each outstanding common unit an amount equal to the minimum quarterly distribution for that quarter; second, 98% to the common unitholders,
pro rata, and 2% to the general partner, until we distribute for each outstanding common unit an amount equal to any arrearages in payment of the minimum quarterly distribution on the common units for
any prior quarters during the subordination period; third, 98% to the subordinated unitholders, pro rata, and 2% to the general partner, until we distribute for each subordinated unit an amount equal
to the minimum quarterly distribution for that quarter; and thereafter, cash in excess of the minimum quarterly distributions is distributed to the unitholders and the general partner based on the
percentages below.

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Our
general partner, Hiland Partners GP, LLC, is entitled to incentive distributions if the amount we distribute with respect to any quarter exceeds the specified target
levels shown below:

Marginal Percentage
Interest in DistributionsTotal Quarterly DistributionGeneral PartnerTarget Amount

UnitholdersMinimum Quarterly Distribution

$0.45


98
%

2
%First Target Distribution

Up to $0.495


98
%

2
%Second Target Distribution

Above $0.495 up to $0.5625


85
%

15
%Third Target Distribution

Above $0.5625 up to $0.675


75
%

25
%Thereafter

Above $0.675


50
%

50
%


Equity Compensation Plan Information

The following table presents information about the unit options contained in our long-term incentive plan:

Plan Category

Number of Units to
be Issued upon Exercise
of Outstanding Options
and Rights

Weighted-Average Price
of Outstanding Options
and Rights

Number of Units
Remaining Available for
Future Issuance under
Equity Compensation Plan
(Excluding Units
Reflected in Column (a))(a)

(b)

(c)Equity Compensation Plans Approved By Security Holders


N/A


N/A


N/AEquity Compensation Plans Not Approved By Security Holders


33,336
(1)
$
37.92
(2)

386,375


---

Issuer Purchases of Equity Securities

We did not repurchase any of our common units during the fourth quarter of fiscal 2008.

Item 6.    Selected Historical Financial and Operating Data

The following table sets forth selected historical financial and operating data of Hiland Partners, LP and our predecessor,
Continental Gas, Inc. ("CGI") as of and for the periods indicated. The selected historical financial data as of, and for the years ended December 31, 2008, 2007, 2006 and 2005 are
derived from the audited financial statements of Hiland Partners, LP. The selected historical financial data for the year ended December 31, 2004 is derived from the audited financial
statements of CGI.

The
following table includes the non-GAAP financial measures of (1) EBITDA and (2) total segment margin, which consists of midstream segment margin and
compression segment margin. We define EBITDA, a non-GAAP financial measure, as net income (loss) plus interest expense, provision for income taxes and depreciation, amortization and
accretion expense. EBITDA is used as a

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supplemental
financial measure by our management and by external users of our financial statements such as investors, commercial banks, research analysts and others to assess: (1) the financial
performance of our assets without regard to financing methods, capital structure or historical cost basis; (2) the ability of our assets to generate cash sufficient to pay interest costs and
support our indebtedness; (3) our operating performance and return on capital as compared to those of other companies in the midstream energy sector, without regard to financing or structure;
and (4) the viability of acquisitions and capital expenditure projects and the overall rates of return on alternative investment opportunities. EBITDA is also a financial measurement that, with
certain negotiated adjustments, is reported to our banks and is used as a gauge for compliance with our financial covenants under our credit facility. EBITDA should not be considered an alternative to
net income (loss), operating income, cash flows from operating activities or any other measure of financial performance presented in accordance with GAAP. Our EBITDA may not be comparable to EBITDA of
similarly titled measures of other entities, as other entities may not calculate EBITDA in the same manner as we do. We view total segment margin, a non-GAAP financial measure, as an
important performance measure of the core profitability of our operations because it is directly related to our volumes and commodity price changes. We review total segment margin monthly for
consistency and trend analysis. We define midstream segment margin as midstream revenue less midstream purchases. Midstream revenue includes revenue from the sale of natural gas, NGLs and NGL products
resulting from our gathering, treating, processing and fractionation activities and fixed fees associated with the gathering of natural gas and the transportation and disposal of saltwater. Midstream
purchases include the following costs and expenses: cost of natural gas and NGLs purchased by us from third parties, cost of natural gas and NGLs purchased by us from affiliates, and costs of crude
oil purchased by us from third parties. We define compression segment margin as the payments received under our compression services agreement with CLR which was restructured as described in
"Item 7. Management's Discussion and Analysis of Financial Condition and Results of OperationsItems Impacting Comparability of Our Financial ResultsRestructuring of
Compression Facilities Lease." For a reconciliation of these non-GAAP financial measures to their most directly comparable financial measures calculated and presented in accordance with
GAAP, please refer to the reconciliation following the table below.

Maintenance
capital expenditures represent capital expenditures made to replace partially or fully depreciated assets to maintain the existing operating capacity of our assets and to
extend their useful lives, or other capital expenditures that are incurred in maintaining existing system volumes and related
cash flows. Expansion capital expenditures represent capital expenditures made to expand or increase the efficiency of the existing operating capacity of our assets. Expansion capital expenditures
include expenditures that facilitate an increase in volumes within our operations, whether through construction or acquisition. Expenditures that reduce our operating costs will be considered
expansion capital expenditures only if the reduction in operating expenses exceeds cost reductions typically resulting from routine maintenance. We treat costs for repairs and minor renewals to
maintain facilities in operating condition and that do not extend the useful life of existing assets as operations and maintenance expenses as we incur them.

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The
following table sets forth our selected historical financial data, which has been derived from our audited historical financial statements. The table should be read together with
"Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations."

Hiland Partners, LP

Predecessor
Continental
Gas, Inc.Year Ended December 31,2008

2007

2006

2005

2004(in thousands, except per unit and operating data)Summary of Operations Data:Total revenues

$
387,999

$
278,043

$
219,686

$
166,601

$
98,296Operating costs and expenses:Midstream purchases (exclusive of items shown separately below)


276,600


195,212


156,193


133,089


82,532Operations and maintenance


30,526


23,279


16,071


7,359


4,933Depreciation, amortization and accretion


37,502


29,855


22,130


11,112


4,127Bad debt


304











Gain on asset sales














(19
)General and administrative


8,753


7,587


4,994


2,470


1,082Total operating costs and expenses


353,685


255,933


199,388


154,030


92,655Operating income


34,314


22,110


20,298


12,571


5,641Other income (expense):Interest expense


(13,639
)

(11,346
)

(5,532
)

(1,942
)

(702
)Amortization of deferred loan costs


(574
)

(410
)

(407
)

(484
)

(102
)Interest income and other


346


430


323


192


40Total other income (expense)


(13,867
)

(11,326
)

(5,616
)

(2,234
)

(764
)Income from continuing operations


20,447


10,784


14,682


10,337


4,877Discontinued operations, net














35Net income

$
20,447

$
10,784

$
14,682

$
10,337

$
4,912Less income attributable to predecessor











493Less general partner interest in net income


6,572


4,526


2,409


464Limited partners' interest in net income

$
13,875

$
6,258

$
12,273

$
9,380Net income per limited partner unitbasic(1)

$
1.49

$
0.67

$
1.37

$
1.33Net income per limited partner unitdiluted(1)

$
1.48

$
0.67

$
1.36

$
1.32Cash distributions per limited partner unit(2)

$
3.02

$
3.00

$
2.74

$
1.83Balance Sheet Data (at end of period):Property and equipment, at cost, net

$
345,855

$
319,320

$
252,801

$
120,715

$
37,075Total assets


426,139


410,473


343,816


193,969


49,175Accounts payableaffiliates


7,662


7,880


4,412


6,122


2,998Long-term debt, net of current maturities


256,466


226,104


147,064


33,784


12,643Net equity


133,156


139,167


167,746


138,589


24,510


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Hiland Partners, LP

Predecessor
Continental
Gas, Inc.Year Ended December 31,2008

2007

2006

2005

2004(in thousands, except per unit and operating data)Cash Flow Data:Net cash flow provided by (used in):Operating activities


53,886

$
40,702

$
39,580

$
8,122

$
7,957Investing activities


(54,342
)

(83,408
)

(158,426
)

(74,888
)

(5,290
)Financing activities


(8,868
)

42,817


123,045


72,736


(2,946
)Other Financial Data:Midstream segment margin

$
106,580

$
78,012

$
58,674

$
29,295

$
15,764Compression segment margin


4,819


4,819


4,819


4,217


Total segment margin

$
111,399

$
82,831

$
63,493

$
33,512

$
15,764EBITDA

$
72,162

$
52,395

$
42,751

$
23,875

$
9,843Non-cash unrealized gain on derivatives

$
(6,981
)
$
(373
)
$
(113
)




Non-cash unit based compensation expense

$
1,538

$
951

$
473





Maintenance capital expenditures

$
5,994

$
3,423

$
3,434

$
2,225

$
1,693Expansion capital expenditures


52,275


87,530


155,103


72,723


3,474Discontinued operations














159Total capital expenditures

$
58,269

$
90,953

$
158,537

$
74,948

$
5,326Operating Data:Inlet natural gas (Mcf/d)


252,670


215,551


157,556


57,545


50,283Natural gas sales (MMBtu/d)


90,910


80,731


66,947


47,096


40,560NGL sales (Bbls/d)


5,920


4,696


3,347


1,965


1,133


---

Reconciliation of Non-GAAP Financial Measures

The following table presents a reconciliation of the non-GAAP financial measures of (1) EBITDA to the GAAP financial
measure of net income and (2) total segment margin (which consists of the sum

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of
midstream segment margin and compression segment margin) to operating income, in each case, on a historical basis for each of the periods indicated.

Hiland Partners, LP

Predecessor
Continental
Gas, Inc.Year Ended December 31,2008

2007

2006

2005

2004(in thousands)Reconciliation of EBITDA to Net Income:Net income

$
20,447

$
10,784

$
14,682

$
10,337

$
4,912Add:Depreciation, amortization and accretion


37,502


29,855


22,130


11,112


4,127Amortization of deferred loan costs


574


410


407


484


102Interest expense


13,639


11,346


5,532


1,942


702EBITDA

$
72,162

$
52,395

$
42,751

$
23,875

$
9,843Reconciliation of Total Segment Margin to Operating Income (Loss):Operating income (loss)

$
34,314

$
22,110

$
20,298

$
12,571

$
5,641Add:Operations and maintenance expenses


30,526


23,279


16,071


7,359


4,933Depreciation, amortization and accretion


37,502


29,855


22,130


11,112


4,127Bad debt


304











Gain on asset sales














(19
)General and administrative expenses


8,753


7,587


4,994


2,470


1,082Total segment margin

$
111,399

$
82,831

$
63,493

$
33,512

$
15,764


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Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion in conjunction with our Consolidated Financial Statements and notes thereto included elsewhere
in this report.

Overview

We are a Delaware limited partnership formed in October 2004 to own and operate the assets that had historically been owned and
operated by CGI and Hiland Partners, LLC.

CGI
historically owned all of our natural gas gathering, processing, treating and fractionation assets other than our Worland and Bakken gathering systems, the Kinta Area gathering
systems we acquired on May 1, 2006 and our internally constructed Woodford Shale gathering system, which commenced operations in April 2007. Hiland Partners, LLC historically owned our
Worland gathering system, our compression services assets and the Bakken gathering system. CGI is our predecessor for accounting purposes. As a result, our historical financial statements for periods
prior to February 15, 2005, the date of our initial public offering, are the financial statements of CGI.

In
connection with our initial public offering, the former owners of CGI and Hiland Partners, LLC and certain of our affiliates, including our general partner, contributed to us
all of the assets and operations of CGI, other than a portion of its working capital assets, and substantially all of the assets and operations of Hiland Partners, LLC, other than a portion of
its working capital assets and the assets related to the Bakken gathering system, in exchange for an aggregate of 720,000 common units and 4,080,000 subordinated units, a 2% general partner interest
in us and all of our incentive distribution rights, which entitle the general partner to increasing percentages of the cash we distribute in excess of $0.495 per unit per quarter.

We
completed our initial public offering of 2,300,000 common units on February 15, 2005, receiving net proceeds of $48.1 million. The proceeds from the public offering were
used to (1) pay remaining offering costs of $2.2 million and deferred debt issuance costs of $0.6 million, (2) pay outstanding indebtedness of $22.9 million,
(3) redeem $6.3 million of common units from an affiliate of Harold Hamm and the Hamm Trusts, and (4) make a $3.9 million distribution to the previous owners of Hiland
Partners, LLC. We retained $12.2 million of the net proceeds to replenish working capital.

Effective
September 1, 2005, we consummated the Bakken acquisition pursuant to which we acquired the outstanding membership interests in Hiland Partners, LLC, an Oklahoma
limited liability company, for approximately $92.7 million in cash, $35.0 million of which was used to retire outstanding Hiland Partners, LLC indebtedness. Hiland
Partners, LLC's principal asset is the Bakken gathering system located in eastern Montana.

We
completed a follow-on offering of 1,630,000 common units on November 21, 2005, receiving net proceeds of $66.1 million, including our general partner's
contribution of $1.4 million. We used $65.2 million of the proceeds from the public offering to repay a portion of our credit facility borrowings that we had previously used to fund the
Bakken acquisition.

On
May 1, 2006, we acquired the Kinta Area gathering assets from Enogex Gas Gathering, L.L.C., consisting of certain eastern Oklahoma gas gathering assets, for
$96.4 million. We financed this acquisition with $61.2 million of borrowings from our credit facility and $35.0 million of proceeds from the issuance of 761,714 common units at
$45.03 per unit to Hiland Partners GP, LLC, our general partner, and from its 2% general partner contribution.

On
September 25, 2006, certain affiliated unitholders contributed (i) all of the membership interests in our general partner, which owns the 2% general partner interest and
all of the incentive distribution rights in us and (ii) 1,301,471 common units (including 761,714 common units held by our general partner) and 4,080,000 subordinated units in us to Hiland
Holdings GP, LP, a publicly owned

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limited
partnership (NASDAQ: HPGP), in exchange for 13,550,000 limited partner units of Hiland Holdings GP, LP, representing a 62.7% ownership in Hiland Holdings GP, LP.
Hiland Partners GP Holdings, LLC, a Delaware limited liability company formed on May 10, 2006, is the general partner of Hiland Holdings GP, LP.

We
are engaged in purchasing, gathering, compressing, dehydrating, treating, processing and marketing of natural gas and fractionating and marketing of NGLs and providing air compression
and water injection services for oil and gas secondary recovery operations. Our operations are primarily located in the Mid-Continent and Rocky Mountain regions of the United States.

We
manage our business and analyze and report our results of operations on a segment basis. Our operations are divided into two business segments:



Our
midstream assets consist of 14 natural gas gathering systems with approximately 2,111 miles of gas gathering pipelines, five natural gas processing plants, seven natural gas treating
facilities and three NGL fractionation facilities. Our compression assets consist of two air compression facilities and a water injection plant.

Our
results of operations are determined primarily by five interrelated variables: (1) the volume of natural gas gathered through our pipelines; (2) the volume of natural
gas processed; (3) the volume of NGLs fractionated; (4) the level and relationship of natural gas and NGL prices; and (5) our current contract portfolio. Because our profitability
is a function of the difference between the revenues we receive from our operations, including revenues from the products we sell, and the costs associated with conducting our operations, including
the costs of products we purchase, increases or decreases in our revenues alone are not necessarily indicative of increases or decreases in our profitability. To a large extent, our contract portfolio
and the pricing environment for natural gas and NGLs will dictate increases or decreases in our profitability. Our profitability is also dependent upon prices and market demand for natural gas and
NGLs, which fluctuate with changes in market and economic condition and other factors.

How We Evaluate Our Operations

Our management uses a variety of financial and operational measurements to analyze our segment performance. These measurements include
the following: (1) natural gas and NGL sales volumes, throughput volumes and fuel consumption by our facilities; (2) total segment margin; (3) operations and maintenance expenses;
(4) general and administrative expenses; and (5) EBITDA.

Volumes and Fuel Consumption.Natural gas and NGL sales volumes, throughput volumes and fuel consumption associated with our business
are an
important part of our operational analysis. We continually monitor volumes on our pipelines to ensure that we have adequate throughput to meet our financial objectives. It is important that we
continually add new volumes to our gathering systems to offset or exceed the normal decline of existing volumes that are connected to those systems. The performance at our compressing, processing,
fractionation and treating facilities is significantly influenced by the volumes of natural gas that flow through our systems. In addition, we monitor fuel

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consumption
because it has an impact on the total segment margin realized from our midstream operations and our compression services operations.

Total Segment Margin.We view total segment margin as an important performance measure of the core profitability of our operations
because it is
directly related to our volumes and commodity price changes. We review total segment margin monthly for consistency and trend analysis.

With
respect to our midstream segment, we define midstream segment margin as our midstream revenue minus midstream purchases. Midstream revenue includes revenue from the sale of natural
gas, NGLs and NGL products resulting from our gathering, treating, processing and fractionation activities and fixed fees associated with the gathering of natural gas and the transportation and
disposal of saltwater. Midstream purchases include the cost of natural gas, condensate and NGLs purchased by us from third parties, the cost of natural gas, condensate and NGLs purchased by us from
affiliates, and the costs of crude oil purchased by us from third parties. Our midstream segment margin is impacted by our midstream contract portfolio, which is described in more detail below.

With
respect to our compression segment, following the restructuring of our lease arrangement to become a service arrangement in connection with our initial public offering as described
in "Items Impacting Comparability of Our Financial Results," our compression segment margin equals the fee we earn under our Compression Services Agreement with CLR for providing air
compression and water injection services. The fee that we earn under this agreement is fixed so long as our facilities meet specified availability requirements, regardless of CLR's utilization. As a
result, our compression segment margin is dependent on our ability to meet their utilization levels. For a discussion of this agreement, please read "Our ContractsCompression
Services Agreement."

Total
segment margin is a Non-GAAP performance measure. For a reconciliation of Total Segment Margin to the most comparable GAAP financial measure, please see "Item 6.
Selected Historical Financial and Operating Data."

Operations and Maintenance Expenses.Operations and maintenance expenses are costs associated with the operation of a specific asset.
Direct labor,
insurance, ad valorem taxes, repair and maintenance, utilities and contract services comprise the most significant portion of our operations and maintenance expenses. These expenses remain relatively
stable independent of the volumes through our systems but fluctuate slightly depending on the activities performed during a specific period.

General and Administrative Expenses.Our general and administrative expenses include the cost of employee and officer compensation and
related
benefits, office lease and expenses, professional fees, information technology expenses, as well as other expenses not directly associated with our field operations.

EBITDA.We define EBITDA, a non-GAAP financial measure, as net income (loss) plus interest expense, provision for income taxes and
depreciation, amortization and accretion expense. EBITDA is used as a supplemental financial measure by our management and by external users of our
financial statements such as investors, commercial banks, research analysts and others, to assess:



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EBITDA
is also a financial measurement that, with certain negotiated adjustments, is reported to our lenders and is used as a gauge for compliance with some of our financial covenants
under our credit facility. EBITDA should not be considered an alternative to net income, operating income, cash flows from operating activities or any other measure of financial performance presented
in accordance with GAAP. Our EBITDA may not be comparable to EBITDA of similarly titled measures of other entities as other entities may not calculate EBITDA in the same manner as we do. For a
reconciliation of EBITDA to the most comparable GAAP financial measure, please see "Item 6. Selected Historical Financial and Operating Data."

How We Manage Our Operations

Our management team uses a variety of tools to manage our business. These tools include: (1) flow and transaction monitoring
systems; (2) producer activity evaluation and reporting; and (3) imbalance monitoring and control.

Flow and transaction monitoring systems.We utilize a customized system that tracks commercial activity on a daily basis at each of our
gathering
systems, processing plants and treating and fractionation facilities. We track and monitor inlet volumes to our facilities, fuel consumption, NGLs and NGL products extracted, condensate volumes and
residue sales volumes. We also monitor daily operational throughput at our air compression and water injection facilities.

Producer activity evaluation and reporting.The continued connection of natural gas production to our gathering systems is critical to
our business
and directly impacts our financial performance. We monitor the producer drilling and completion activity in our primary areas of operation to identify anticipated changes in production and potential
new well attachment opportunities. We receive daily summaries of new drilling permits and completion reports filed with the state regulatory agencies that govern these activities on all of our
gathering systems. Producers that have dedicated acreage to our Bakken gathering system provide us with their projected annual drilling schedules, which are updated periodically. Additionally, our
field personnel report the locations of new wells in their respective areas and anticipated changes in production volumes to supply representatives and operating personnel at our corporate offices.
These processes enhance our awareness of new well activity in our operating areas and allow us to be responsive to producers in connecting new volumes of natural gas to our pipelines.

Imbalance monitoring and control.We continually monitor volumes we deliver to pipelines and volumes nominated for sale on pipelines to
ensure we
remain within acceptable imbalance limits during a calendar month. We seek to reduce imbalances because of the inherent commodity risk that results when deliveries and sales of natural gas are not
balanced concurrently.

Our Contracts

Because of the significant volatility of natural gas and NGL prices, our contract mix can have a significant impact on our
profitability. In order to reduce our exposure to commodity price risk and where market conditions permit, we pursue arrangements under which we purchase natural gas from the producers at the wellhead
at an index-based price less a fixed fee to gather, dehydrate, compress, treat and/or process their natural gas, referred to as fee-based arrangements or contracts. Actual contract terms
are based upon a variety of factors, including natural gas quality, geographical location, the competitive environment at the time the contract is executed and customer requirements. Our contract mix
and, accordingly, our exposure to natural gas and NGL prices, may change as a result of producer preferences, our expansion in regions where some types of contracts are more common and other market
factors.

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Our Natural Gas Sales Contracts

We sell natural gas on intrastate and interstate pipelines to marketing affiliates of natural gas pipelines, marketing affiliates of
integrated oil companies and utilities. We typically sell natural gas on a monthly basis under index related pricing terms.

We
also use cash flow hedges to limit our exposure to changing natural gas prices. Under these hedges, we settle monthly on the difference between the sales or purchases of future
production to or from our counterparty at fixed prices and the price that will be established on the date of hedge settlement by reference to a specified index price. These hedge contracts currently
cover periods of up to twenty-four months from the date of the hedge.

Our NGL Sales Arrangements

We sell NGLs and NGL products at the tailgate of our facilities to ONEOK Hydrocarbon, LP, SemStream, L.P., and KM
Upstream LLC and Kinder Morgan Operating, L.P.
"A", subsidiaries of Kinder Morgan Energy Partners, LP. We typically sell NGLs and NGL products on a monthly basis under index related pricing terms in our Mid-Continent region and
at market prices in our Rocky Mountain region. We also use cash flow hedges to limit our exposure to changing NGL prices. Under these hedges we settle monthly on the difference between the sales of
future production to our counterparty at a fixed price and the price that will be established on the date of hedge settlement by reference to a specified index price. In the past, these hedges have
covered periods of up to twelve months from the date of the hedge. As of January 1, 2009, we had no NGL hedging contracts outstanding.

Hedging Contracts

To insure that our hedging financial instruments will be used solely for hedging commodity price risks and not for speculative
purposes, we continually review our hedges for compliance with our hedging policies and procedures. We recognize gains and losses from the settlement of our hedges in revenue when we either sell or
buy the associated physical residue natural gas or sell the associated physical natural gas liquid. Any gain or loss realized as a result of hedging is substantially offset in the market when we
either sell or buy the physical residue natural gas or sell the physical natural gas liquid. Our hedges that qualify for hedge accounting are characterized as cash flow hedges as defined in Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended. We determine gains or losses on open and closed hedging transactions based
upon the difference between the hedge price and the physical price. For a more detailed discussion on our hedging activity, please read commodity price risks included in Item 7A. "Quantitative
and Qualitative Disclosures about Market Risk."

Our Natural Gas Purchase and Gathering Contracts

With respect to our natural gas gathering, compression, dehydrating, treating, processing and marketing activities and our NGL
fractionation activities, we contract under four types of arrangements. Under all contracts except the fixed-fee gathering arrangement, we are required to purchase the supplied gas,
subject to the demands of our resale purchasers and the operating conditions and capacity of our facilities. We do not guarantee the purchase of any particular quantity of the gas which is available
for sale. The supplier delivers the gas to us at the inlet of our gathering systems and we obtain title to the gas at the delivery point. The gas delivered to us is required to meet certain specified
quality requirements. Under the fixed-fee gathering arrangement, we take custody of, but do not purchase or take title to, the gas supplied to us.

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The
following is a summary of the four types of natural gas purchase or gathering contract arrangements that accounted for the largest percentage of volumes purchased for the years ended
December 31, 2008, 2007, and 2006.



Compression Services Agreement

Under the compression services agreement that we entered into with CLR in connection with our initial public offering and effective as
of January 28, 2005, CLR pays us a fixed monthly fee to provide compressed air and water at pressures sufficient to allow for the injection of either air or water into underground reservoirs
for oil and gas secondary recovery operations. Under the compression services agreement, CLR is responsible for the provision to us of power and water to be utilized in the compression process. If our
facilities do not meet the monthly volume requirements for compressed air

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and
water, and the failure is not attributable to CLR's failure to supply power or water or a force majeure, the fixed monthly payment will be reduced in proportion to the volumes of air or water we
were unable to deliver during such month. CLR may terminate the compression services agreement if we are unable to deliver any compressed air and water for a period of more than 20 consecutive days
and the failure is not attributable to CLR's failure to supply power or water or a force majeure. The agreement's initial term ended on January 28, 2009 and the agreement now automatically
renews on a month-to-month basis unless terminated by either party by giving notice at least 15 days prior to the end of the then current month.

Items Impacting Comparability of Our Financial Results

Our historical results of operations for the periods presented may not be comparable, either from period to period or going forward,
for the reasons described below.

Our Formation

We were formed in October 2004 to own and operate the assets that have historically been owned and operated by CGI and Hiland
Partners, LLC. As part of our formation, immediately prior to consummation of our initial public offering, the former owners of CGI and Hiland Partners, LLC contributed to us all of the
assets and operations of CGI other than a portion of its working capital assets and all of the assets and operations of Hiland Partners, LLC, other than a portion of its working capital assets
and the assets related to the Bakken gathering system. Effective September 1, 2005, we acquired Hiland Partners, LLC, which owns the Bakken gathering system.

CGI
is our predecessor for accounting purposes and historically owned all of our natural gas gathering, processing and fractionation assets other than the Worland and Bakken gathering
systems, the Kinta Area gathering systems we acquired on May 1, 2006 and our internally constructed Woodford Shale gathering system, which commenced operations in April 2007. As a result, our
historical financial statements for the periods prior to February 15, 2005 are the financial statements of CGI.

Hiland
Partners, LLC historically owned our Worland gathering system, our Horse Creek compression facility, our Cedar Hills water injection plant located next to our Cedar Hills
compression facility and the Bakken gathering system.

Restructuring of Compression Facilities Lease

Prior to our initial public offering, Hiland Partners, LLC owned our Horse Creek air compression facility and our Cedar Hills
water injection facility. In 2002, Hiland Partners, LLC entered into a five year lease agreement with CLR, pursuant to which Hiland Partners, LLC leased the facilities to CLR. CLR used
its own personnel to operate the facilities, and Hiland Partners, LLC made no operational decisions. In connection with our formation and our initial public offering, we entered into a
four-year services agreement with CLR, effective as of
January 28, 2005, that replaced the existing lease. The four year services agreement terminated on January 28, 2009. We are currently operating on a
month-to-month basis and the agreement can be terminated by either party by giving notice at least 15 days prior to the end of the then current month. Under the services
agreement, we own and operate the facilities and provide air compression and water injection services to CLR for a fee. As part of the restructuring in January 2005, the personnel at CLR that operated
the facilities were transferred to us. Under the current services agreement, we receive a fixed payment of approximately $4.8 million per year as compared to $3.8 million per year under
the prior lease agreement. In connection with this services arrangement, we incur approximately $1.0 million per year in additional operating costs. For a description of the restructured
agreement, please read "Our ContractsCompression Services Agreement."

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Construction and Acquisition Activities

Since our inception, we have grown through a combination of building gas gathering and processing assets and acquisitions. For example,
we commenced operation of the Matli gathering system in 1999, constructed the original Matli processing plant in 2003 and completed the construction of a new processing plant in 2006. Additionally, we
acquired the Worland gathering system in 2000. We acquired the Carmen gathering system in 2003 as an expansion of our Eagle Chief gathering system. Prior to our acquisition of the Carmen gathering
system, we purchased the gas from the previous owner, processed it and returned it to the previous owner pursuant to a keep-whole arrangement. After we acquired the Carmen gathering
system, we terminated this keep-whole arrangement and now sell the gas at the tailgate of the Eagle Chief processing plant. In addition, we completed the Bakken acquisition in September
2005 and the acquisition of the Kinta Area gathering assets in May 2006. These historical acquisitions were completed at different dates and with numerous sellers and were accounted for using the
purchase method of accounting. Under the purchase method of accounting, results from such acquisitions are recorded in the financial statements only from the date of acquisition.

We
acquired the Kinta Area gathering assets in May 2006 and operate the gathering assets substantially differently than were operated by the previous owner. Since there was no sufficient
continuity of the Kinta Area gathering assets' operations prior to and after our acquisition, disclosure of prior financial information would not be material to an understanding of future operations.
Therefore, the acquisition has been recorded as a purchase of assets and not of a business.

We
expanded our processing plant and our existing field-gathering infrastructure and constructed a 40,000 Mcf/d nitrogen rejection plant at our Badlands gas gathering system located in
Bowman County,
North Dakota. We also entered into a five-year definitive purchase agreement with a producer and have constructed additional compression facilities and expanded our existing Badlands gas
gathering system into South Dakota.

We
installed additional gathering and compression infrastructure at our Bakken gathering system in 2006 to increase the system's capacity from approximately 20,000 Mcf/d to 25,000 Mcf/d
and in 2007, we expanded the existing NGL fractionation facilities at the processing plant to fractionate increased NGL volumes from both the Bakken processing plant and the Badlands processing plant.

In
2006, we completed the installation of additional pipelines and compression facilities and increased our system capacity at our Eagle Chief gathering system from approximately 30,000
Mcf/d to approximately 35,500 Mcf/d due to increased volumes on this system and completed the construction of a 25,000 Mcf/d natural gas processing facility along our existing Matli gas gathering
system which now provides additional plant processing capacity for increased system volumes.

In
2007, we installed four 10,000 Mcf/d capacity amine-treating facilities at several of our Kinta Area gathering system locations to remove excess carbon dioxide levels from the natural
gas. In the third quarter of 2008, we completed the installation of additional compression facilities on the Kinta Area gathering system to increase the capacity by approximately 20,000 Mcf/d to
200,000 Mcf/d.

In
December 2006, we entered into an agreement to construct and operate gathering pipelines and related facilities associated with the development of a portion of the acreage owned by
CLR in the Woodford shale play in the Arkoma Basin of southeastern Oklahoma. We have installed field gathering, compression and associated equipment designed to provide low-pressure
gathering, compression and dehydration services. The gathering infrastructure currently includes more than 17,400 horsepower of compression to provide takeaway capacity of approximately 65,000 Mcf/d.

Construction
of a processing plant and gathering pipeline at our North Dakota Bakken system located in the Bakken Shale play in northwestern North Dakota commenced in October 2008. As of
December 31, 2008, the gathering system consisted of 23 miles of natural gas gathering pipelines.

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Our Results of Operations

The following table presents a reconciliation of the non-GAAP financial measure of total segment margin (which consists of
the sum of midstream segment margin and compression segment margin) to operating income on a historical basis for each of the periods indicated. We view total segment margin, a non-GAAP
financial measure, as an important performance measure of the core profitability of our operations because it is directly related to our volumes and commodity price changes. We review total segment
margin monthly for consistency and trend analysis. We define midstream segment margin as midstream revenue less midstream purchases. Midstream revenue includes revenue from the sale of natural gas,
NGLs and NGL products resulting from our gathering, treating, processing and fractionation activities and fixed fees associated with the gathering of natural gas and the transportation and disposal of
saltwater. Midstream purchases include the following costs and expenses: cost of natural gas, condensate and NGLs purchased by us from third parties, cost of natural gas, condensate and NGLs purchased
by us from affiliates, and cost of crude oil purchased by us from third parties. We define compression segment margin as the revenue derived from our compression segment. Our total segment margin may
not be comparable to similarly titled measures of other companies as other companies may not calculate total segment margin in the same manner.

Set
forth in the tables below are financial and operating data for the periods indicated. Operations from our acquisition of the Kinta Area gathering assets are reflected only from
May 1, 2006.

Year Ended December 31,2008

2007

2006(in thousands)Total Segment Margin Data:Midstream revenues

$
383,180

$
273,224

$
214,867Midstream purchases


276,600


195,212


156,193Midstream segment margin


106,580


78,012


58,674Compression revenues(1)


4,819


4,819


4,819Total segment margin(2)

$
111,399

$
82,831

$
63,493Summary of Operations Data:Midstream revenues

$
383,180

$
273,224

$
214,867Compression revenues


4,819


4,819


4,819Total revenues


387,999


278,043


219,686Operating costs and expenses:Midstream purchases (exclusive of items shown separately below)


276,600


195,212


156,193Operations and maintenance


30,526


23,279


16,071Depreciation, amortization and accretion


37,502


29,855


22,130Bad debt


304





General and administrative


8,753


7,587


4,994Total operating costs and expenses


353,685


255,933


199,388Operating income


34,314


22,110


20,298Other income (expense)


(13,867
)

(11,326
)

(5,616
)Net income

$
20,447

$
10,784

$
14,682Operating Data:Inlet natural gas (Mcf/d)


252,670


215,551


157,556Natural gas sales (MMBtu/d)


90,910


80,731


66,947NGL sales (Bbls/d)


5,920


4,696


3,347






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Year Ended December 31,2008

2007

2006(in thousands)Reconciliation of Total Segment Margin to Operating IncomeOperating income

$
34,314

$
22,110

$
20,298Add:Operations and maintenance expenses


30,526


23,279


16,071Depreciation, amortization and accretion


37,502


29,855


22,130Bad debt


304





General and administrative expenses


8,753


7,587


4,994Total segment margin

$
111,399

$
82,831

$
63,493


Year Ended December 31, 2008 Compared with Year Ended December 31, 2007

Revenues.Total revenues (midstream and compression) were $388.0 million for the year ended December 31, 2008 compared
to
$278.0 million for the year ended December 31, 2007, an increase of $110.0 million, or 39.6%. This $110.0 million increase was primarily due to: (i) increased
natural gas sales volumes of 13,852 MMBtu/day (MMBtu per day) and increased NGL sales volumes of 771 Bbls/day (Bbls per day) related to the Woodford Shale gathering system which commenced operation in
April 2007, (ii) increased NGL sales volumes of 502 Bbls/day attributable to the expanded Badlands gathering system, including the processing and nitrogen rejection plants and other treating
facilities, which commenced operation in August 2007 and (iii) significantly higher average realized natural gas and NGL sales prices for the year ended December 31, 2008 as compared to
the year ended December 31,
2007, resulting in increased revenue at all of our gathering systems. Revenues from compression assets were the same for both periods.

Midstream
revenues were $383.2 million for the year ended December 31, 2008 compared to $273.2 million for the year ended December 31, 2007, an increase of
$110.0 million, or 40.2%. Of this $110.0 million increase in midstream revenues, approximately $48.5 million was attributable to revenues from increased natural gas and NGL sales
volumes at the Woodford Shale, Badlands, Bakken and Matli gathering systems and approximately $61.5 million was attributable to significantly higher average realized natural gas and NGL sales
prices for the year ended December 31, 2008 as compared to the same period in 2007, resulting in increased revenues for all of our gathering systems.

Inlet
natural gas was 252,670 Mcf/d (Mcf per day) for the year ended December 31, 2008 compared to 215,551 Mcf/d for the year ended December 31, 2007, an increase of 37,119
Mcf/d, or 17.2%. This increase is primarily attributable to volume growth at our Woodford Shale and Badlands gathering systems, offset by volume declines at our Eagle Chief gathering system.

Natural
gas sales volumes were 90,910 MMBtu/d for the year ended December 31, 2008 compared to 80,731 MMBtu/d for the year ended December 31, 2007, an increase of 10,179
MMBtu/d, or 12.6%. This 10,179 MMBtu/d net increase in natural gas sales volumes was attributable to increased natural gas sales volumes at our Woodford Shale, Matli and Bakken gathering systems,
offset by reduced natural gas sales volumes at our Eagle Chief and Kinta gathering systems.

NGL
sales volumes were 5,920 Bbls/d for the year ended December 31, 2008 compared to 4,696 Bbls/d for the year ended December 31, 2007, a net increase of 1,224 Bbls/d, or
26.1%. This net increase is primarily attributable to volume growth at our Woodford Shale and Badlands gathering systems, offset by reduced NGL sales volumes at our Bakken and Eagle Chief gathering
systems.

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During
2008, we experienced extreme swings in our average realized natural gas and NGL sales prices. Our average realized natural gas sales price steadily increased from $6.44/MMBtu in
January 2008 to a high sales price of $10.05/MMBtu in July 2008, then sharply decreased to a low sales price of $3.38/MMBtu in November 2008. Our average realized NGL sales price steadily increased
from $1.42 per gallon in January 2008 to a high sales price of $1.74 per gallon in June 2008, then sharply decreased to a low sales price of $0.61 per gallon in December 2008. Consequently, for the
year ended December 31, 2008, average realized natural gas sales prices were $7.00 per MMBtu compared to $5.75 per MMBtu for the year ended December 31, 2007, an increase of $1.25 per
MMBtu, or 21.7%. Average realized NGL sales prices for the year ended December 31, 2008 were $1.33 per gallon compared to $1.18 per gallon for the year ended December 31, 2007, an
increase of $0.15 per gallon or
12.7%. The overall increase in our average realized natural gas and NGL sales prices was a result of higher index prices for natural gas and posted prices for NGLs during the year ended
December 31, 2008 compared to the year ended December 31, 2007.

Cash
received from our counterparty on cash flow swap contracts for natural gas derivative transactions that closed during the year ended December 31, 2008 totaled
$2.8 million compared to $4.8 million for the year ended December 31, 2007. The $2.8 million gain for the year ended December 31, 2008 increased averaged realized
natural gas prices to $7.00 per MMBtu from $6.91 per MMBtu, an increase of $0.09 per MMBtu. The $4.8 million gain for the year ended December 31, 2007 increased averaged realized natural
gas prices to $5.75 per MMBtu from $5.59 per MMBtu, an increase of $0.16 per MMBtu. Cash paid to our counterparty on cash flow swap contracts for NGL derivative transactions that closed during the
year ended December 31, 2008 totaled $5.9 million compared to $3.0 million for the year ended December 31, 2007. The $5.9 million loss for the year ended
December 31, 2008 reduced averaged realized NGL prices to $1.33 per gallon from $1.39 per gallon, a decrease of $0.06 per gallon. The $3.0 million loss for the year ended
December 31, 2007 reduced averaged realized NGL prices to $1.18 per gallon from $1.22 per gallon, a decrease of $0.04 per gallon.

Our
compression revenues were $4.8 million for each of the years ended December 31, 2008 and 2007.

Midstream Purchases.Midstream purchases were $276.6 million for the year ended December 31, 2008 compared to
$195.2 million for
the year ended December 31, 2007, an increase of $81.4 million, or 41.7%. The $81.4 million increase is primarily due to volume growth at the Woodford Shale gathering system which
commenced operation in April 2007, the expanded Badlands gathering system, including the processing and nitrogen rejection plants and the other treating facilities, which commenced operation in August
2007, increased volume growth at our Matli gathering system and higher natural gas and NGL purchase prices, resulting in increased midstream purchases for all of our gathering systems.

Midstream Segment Margin.Midstream segment margin was $106.6 million for the year ended December 31, 2008 compared to
$78.0 million for the year ended December 31, 2007, an increase of $28.6 million, or 36.6%. The increase is primarily due to favorable average gross processing spreads, higher
average realized natural gas and NGL prices, volume growth at the expanded Badlands gathering system, including the processing and nitrogen rejection plants and the other treating facilities, which
commenced operations in August 2007, volume growth at the Woodford Shale gathering system which commenced operation in April 2007, and volume growth at our Matli gathering system. As a percent of
midstream revenues, midstream segment margin was 27.8% and 28.6% for the year ended December 31, 2008 and 2007, respectively, a reduction of 0.8%. This reduction is attributable to net losses
on closed/settled derivative transactions and unrealized non-cash losses on derivative transactions for the year ended December 31, 2008 totaling $3.0 million, offset by an
unrealized non-cash gain of $6.7 million related to a non-qualifying mark-to-market cash flow derivative for forecasted natural gas sales in
2010, compared to net gains totaling $1.8 million on closed/settled derivative transactions and $0.4 million unrealized non-cash gains on derivative transactions for the year
ended December 31,

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2007.
The increase in midstream segment margin was offset by approximately $2.3 million of forgone margin as a result of the Badlands nitrogen rejection plant being temporarily taken out of
service due to equipment failure during the first quarter in 2008.

Operations and Maintenance.Operations and maintenance expense totaled $30.5 million for the year ended December 31,
2008 compared with
$23.3 million for the year ended December 31, 2007, an increase of $7.2 million, or 31.1%. Of this increase, $4.0 million was attributable to increased operations and
maintenance at the expanded Badlands gathering system and $2.0 million was attributable to increased operations and maintenance at the Woodford Shale gathering system.

Depreciation, Amortization and Accretion.Depreciation, amortization and accretion expense totaled $37.5 million for the
year ended
December 31, 2008 compared with $29.9 million for the year ended December 31, 2007, an increase of $7.6 million, or 25.6%. Of this increase, $2.3 million was
attributable to increased depreciation on the expanded Badlands gathering system, $2.3 million was attributable to increased depreciation on the Woodford Shale gathering system,
$1.3 million was attributable to increased depreciation on the Bakken gathering system and $1.0 million was attributable to increased depreciation on the Kinta Area gathering systems.

General and Administrative.General and administrative expense totaled $8.8 million for the year ended
December 31, 2008 compared with $7.6 million for the year ended December 31, 2007, an increase of $1.2 million, or 15.4%. Salaries increased $1.8 million in the year
ended December 31, 2008 as compared to the year ended December 31, 2007 due to increased non-cash unit based compensation and increased staffing during the year ended
December 31, 2008 as compared to the year ended December 31, 2007. General and administrative expenses included $1.1 million of unsuccessful acquisition costs incurred in the year
ended December 31, 2007 compared to only $0.1 million in the year ended December 31, 2008.

Other Income (Expense).Other income (expense) totaled $(13.9) million for the year ended December 31, 2008 compared with
$(11.3) million for
the year ended December 31, 2007, an increase in expense of $2.5 million. The increase is primarily attributable to additional interest expense from borrowings on our credit facility to
fund expansions at the Badlands and Kinta Area gathering systems and to fund internal growth projects at the Woodford Shale and the North Dakota Bakken gathering systems, after being offset by lower
interest rates incurred during the year ended December 31, 2008 compared to interest rates incurred during the year ended December 31, 2007.

Year Ended December 31, 2007 Compared with Year Ended December 31, 2006

Revenues.Total revenues (midstream and compression) were $278.0 million for the year ended December 31, 2007 compared
to
$219.7 million for the year ended December 31, 2006, an increase of $58.4 million, or 26.6%. This $58.4 million increase was largely due to (i) revenues associated
with natural gas sales volumes related to our Woodford Shale gathering system which commenced production on April 27, 2007, (ii) a full year of natural gas sales volumes in 2007 related
to our acquisition of the Kinta Area gathering assets effective May 1, 2006, (iii) increased natural gas sales volumes at our Eagle Chief and Bakken gathering systems,
(iv) revenues related to increased NGL sales volumes at our Woodford Shale, Bakken, Badlands and Eagle Chief gathering systems and (v) increased average realized NGL sales prices
partially offset by lower average realized natural gas sales prices in 2007 as compared to the same period in 2006. Revenues from compression assets were the same for both periods.

Our
midstream revenues were $273.2 million for the year ended December 31, 2007 compared to $214.9 million for the year ended December 31, 2006, a net
increase of $58.4 million, or 27.2%. Of this increase in midstream revenues, approximately $57.4 million was attributable to natural gas sales volumes related to our Woodford Shale
gathering system, a full year of natural gas sales volumes and

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gathering
fee volumes in 2007 associated with the Kinta Area gathering assets acquisition effective May 1, 2006 and increased natural gas and NGL sales volumes at our Bakken, Badlands and Eagle
Chief gathering systems. Midstream revenues increased by approximately $12.7 million due to increased NGL sales prices offset by $11.7 million as a result of lower natural gas sales
prices compared to 2006. Our Woodford Shale gathering system, which began production in late April, 2007 accounted for 28.8% of the $58.4 million increase contributing $16.8 million to
midstream revenues.

Inlet
natural gas volumes were 215,551 Mcf/d for the year ended December 31, 2007 compared to 157,556 Mcf/d for the year ended December 31, 2006, an increase of 57,995
Mcf/d, or 36.8%. Of the 57,995 Mcf/d increase, 41,915 Mcf/d, or 72.3% was attributable to inlet Mcf/d at our Kinta Area gathering system for a full year in 2007 which we acquired effective
May 1, 2006, and the remaining 16,080 Mcf/d increase was primarily attributable to inlet Mcf/d at our Woodford Shale gathering system and increased inlet Mcf/d at our Eagle Chief, Bakken and
Badlands gathering systems. Natural gas sales volumes were 80,731 MMBtu/d for the year ended December 31, 2007 compared to 66,947 MMBtu/d for the year ended December 31, 2006, an
increase of 13,784 MMBtu/d, or 20.6%. The increase of 13,784 MMBtu/d was primarily attributable to the increased natural gas volumes as a result of a full year of operations in 2007 at our Kinta Area
gathering system which we acquired effective May 1, 2006 and to increased volumes at both our Bakken and Eagle Chief gathering systems and our new Woodford Shale gathering system, which
contributed 4,649 MMBtu/d to the increase in natural gas sales volumes. Our NGL sales volumes were 4,696 Bbls/d for the year ended December 31, 2007 compared to 3,347 Bbls/d for the year ended
December 31, 2006, an increase of 1,349 Bbls/d, or 40.3%. Of the 1,349 Bbls/d increase, 443 Bbls/d, or 32.8% was attributable to NGL sales volumes at our Woodford Shale gathering system and 834
Bbls/d, or 61.8% was attributable to increased NGL sales volumes at our Bakken, Eagle Chief and Badlands gathering systems.

Our
average realized natural gas sales prices were $5.75 per MMBtu for the year ended December 31, 2007 compared to $6.11 per MMBtu for the year ended December 31, 2006, a
decrease of $0.36 per MMBtu, or 5.9%. Our average realized NGL sales prices were $1.18 per gallon for the year ended December 31, 2007 compared to $1.02 per gallon for the year ended
December 31, 2006, an increase of $0.16 per gallon or 15.7%. The change in our average realized natural gas sales prices was primarily a result of lower index prices due to a softening of
supply and demand fundamentals for energy, which caused natural gas prices to fall during the year ended December 31, 2007 compared to the year ended December 31, 2006. The change in our
average realized NGL sales prices was primarily a result of higher index prices due to a tightening of supply and demand fundamentals for energy, which caused NGL prices to rise during the year ended
December 31, 2007 compared to the year ended December 31, 2006.

Net
cash received from our counterparty on cash flow swap contracts that began on May 1, 2006 for natural gas derivative transactions that closed during the year ended
December 31, 2007 was $4.8 million compared to $3.6 million for the year ended December 31, 2006. These receipts increased average realized natural gas sales prices by
$0.16 per MMBtu in 2007 and by $0.14 per MMBtu in 2006. Cash paid to our counterparty on cash flow swap contracts that began on September 1, 2006 for NGL derivative transactions that closed
during the year ended December 31, 2007 was $3.0 million. These payments decreased average realized natural gas sales prices by $0.04 per gallon in 2007. Closed NGL derivative
transactions during the year ended December 31, 2006 were insignificant.

Fees
earned from 123,008 MMBtu/d of natural gas gathered, in which we do not take title to the gas, related to our Kinta Area gathering assets we acquired on May 1, 2006 were
$11.1 million for the year ended December 31, 2007. Similar fees earned from May 1, 2006 through December 31, 2006 averaging 127,437 MMBtu/d of natural gas gathered was
$7.2 million. The increase of $3.9 million in fees earned was primarily due to a full year of operations in 2007 as compared to eight months of operations in 2006, and partially
attributable to treating fees earned related to the four amine treating facilities installed in early 2007. Gathering fees earned during the year ended December 2007 as

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compared
to the eight month period in 2006 were somewhat offset by a 4,429 MMBtu/d reduction in volumes gathered.

Our
compression revenues were $4.8 million for the each of the years ended December 31, 2007 and 2006.

Midstream Purchases.Our midstream purchases were $195.2 million for the year ended December 31, 2007 compared to
$156.2 million
for the year ended December 31, 2006, an increase of $39.0 million, or 25.0%. The $39.0 million increase primarily consists of $12.8 million, or 32.8% attributable to
purchased natural gas from our Woodford Shale gathering system and $10.8 million, or 27.6%, attributable to purchased natural gas from our Kinta Area gathering assets for a full year of
operations in 1007. The remaining increase in midstream purchases was attributable to increased purchased residue gas volumes at our Bakken, Eagle Chief and Badlands gathering systems. The increase in
volumes was offset by reduced payments to producers due primarily to lower natural gas purchase prices, which generally are closely related to fluctuations in natural gas sales prices.

Midstream Segment Margin.Midstream segment margin was $78.0 million for the year ended December 31, 2007 compared to
$58.7 million for the year ended December 31, 2006, an increase of $19.3 million, or 33.0%. The increase is primarily due to favorable gross processing spreads for the year,
higher average realized natural gas and NGL prices for the year, volume growth at the expanded Badlands gathering system, including the processing and nitrogen rejection plants and the other treating
facilities, which commenced operations in August 2007, volume growth at the Woodford Shale gathering system which commenced operation in April 2007, volume growth at the Kinta Area gathering system
which we acquire in May 2006 and volume growth at the Bakken and Eagle Chief gathering systems. As a percent of midstream revenues, midstream segment margin was 28.6% and 27.3% for the year ended
December 31, 2007 and 2006, respectively, an increase of 1.3%. This increase is primarily attributable to increased volumes on gathering systems with more accretive segment margins for the year
ended December 31, 2007 as compared to the year ended December 31, 2006. These increases were offset by a decrease of $1.8 million on closed/settled derivative transactions of
$1.8 million during the year ended December 31, 2007 compared to $3.6 million on closed/settled derivative transactions during the year ended December 31, 2006.

Operations and Maintenance.Our operations and maintenance expense totaled $23.3 million for the year ended
December 31, 2007 compared
with $16.1 million for the year ended December 31, 2006, an increase of $7.2 million, or 44.9%. Of this increase, $2.9 million, or 40.0% was attributable to a full year of
operations and maintenance expense at our Kinta Area gathering system. Operations and maintenance expense also increased by $2.5 million, or 35.2% at our Badlands gathering facility largely due
to compressor rentals and other related costs associated with our expansion project. Our new Woodford Shale gathering system contributed $0.9 million to the increase in operations and
maintenance expense and our Bakken and Eagle Chief gathering systems, as a result of increased volumes, contributed $0.8 million to the increase in operations and maintenance expense.

Depreciation, Amortization and Accretion.Our depreciation, amortization and accretion expense totaled $29.9 million for
the year ended
December 31, 2007 compared with $22.1 million for the year ended December 31, 2006, an increase of $7.7 million, or 34.9%. Of this increase, $3.1 million, or 40.1%
was attributable to depreciation and amortization on our Kinta Area gathering system for a full year of operations in 2007. The increase is also attributable to additional depreciation related to our
internal organic growth projects completed in 2007 of $1.8 million, or 23.2% at our Bakken gathering system and $1.4 million, or 17.8% at our Badlands gathering system,

General and Administrative.Our general and administrative expense totaled $7.6 million for the year ended December 31,
 2007 compared
with $5.0 million for the year ended December 31, 2006, an increase of $2.6 million, or 51.9%. The increase is primarily attributable to $1.1 million of acquisition

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evaluation
expenses, $0.5 million of non-cash compensation expense related to unit option awards and restricted and phantom unit awards and $0.5 million due to increased
salaries and salary related expenses as a result of additional staffing, including costs of recruitment.

Other Income (Expense).Our other income (expense) totaled ($11.3) million for the year ended December 31, 2007 compared
with ($5.6) million
for the year ended December 31, 2006, an increase in expense of $5.7 million. The increase is primarily attributable to additional interest expense from a full year of borrowings on our
credit facility for the acquisition of the Kinta Area gathering assets effective May 1, 2006 and to interest expense for our internal plant and pipeline expansion projects at our Badlands,
Woodford Shale and Bakken gathering systems in 2007.

General Trends and Outlook

We expect our business to continue to be affected by the following key trends. Our expectations are based on assumptions made by us,
and information currently available to us. To the extent our underlying assumptions about or interpretations of available information prove to be incorrect, our expectations may vary materially from
actual results. Please see "Forward Looking Statements."

U.S. Natural Gas Supply and Outlook.Natural gas prices declined dramatically since the peak New York Mercantile Exchange ("NYMEX")
Henry Hub last
day settle price of $13.11/MMBtu in July 2008 to the low NYMEX Henry Hub last day settle price of $4.48 in February 2009. U.S. natural gas drilling rig counts have declined by approximately 29%
to 1,018 as of February 20, 2009, compared to 1,430 natural gas drilling rigs in the comparable period of 2008, and approximately 37% compared to the peak natural gas drilling rig count of
1,606 in August and September 2008. We believe that current natural gas prices will continue to result in reduced natural gas-related drilling activity as producers seek to decrease their
level of natural gas production. We also believe that current reduced natural gas drilling activity will persist until the economic environment in the United States improves and increases the demand
for natural gas.

U.S. Crude Oil Supply and Outlook.The domestic and global recession and resulting drop in demand for crude oil products has
significantly impacted
the price for crude oil. West Texas Intermediate (WTI) crude oil pricing has declined from a peak of $134.62/bbl in July 2008 to a low of $33.87/Bbl in January 2009, a 74.8% decline.
U.S. crude oil drilling rig counts have declined by approximately 19% to 269 as of February 20, 2009, compared to 333 crude oil drilling rigs in the comparable period of 2008, and approximately
39% compared to the peak crude oil drilling rig count of 442 in November 2008. The forward curve for WTI crude oil pricing reflects continued reductions in demand for crude oil. We also believe
that current reduced crude oil drilling activity will persist until the economic environment in the United States improves and increases the demand for crude oil.

U.S. NGL Supply and Outlook.The domestic and global recession and resulting drop in demand for NGL products has significantly impacted
the price for
NGLs. NGL prices have dropped dramatically since the peak NGL basket pricing of $2.21/gallon in June 2008 to a January 2009 NGL basket pricing of $0.68/gallon, a 69.2% decline. NGL
basket pricing correlates to WTI crude oil pricing. WTI crude oil pricing has declined from a peak of $134.62/Bbl in July 2008 to a low of $33.87/Bbl in January 2009, a 74.8% decline.
The forward curve for NGL basket pricing and WTI crude oil pricing reflects continued reductions in demand for NGL products. We also believe that the current reduced NGL products pricing will persist
until the economic environment in the United States improves and increases the demand for NGL products.

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A number of the areas in which we operate are experiencing a significant decline in drilling activity as a result of the recent dramatic decline in natural gas
and crude oil prices. While we anticipate continued exploration and production activities in the areas in which we operate, albeit at depressed levels, fluctuations in energy prices can greatly affect
production rates and investments by third parties in the development of natural gas and oil reserves. Drilling activity generally decreases as natural gas and oil prices decrease. We have no control
over the level of drilling activity in the areas of our operations.

Midstream Segment Margins.During 2008, our midstream segment margins were positively impacted by increased natural gas and NGL volumes,
increased
natural gas and NGL sales prices and increased gross processing spreads resulting in an increase in our midstream segment margins from 2007. During 2007, our midstream segment margins were positively
impacted due to increased volumes and NGL prices but were negatively impacted due to reduced natural gas prices resulting in a net increase in our midstream segment margins from 2006. During 2006, our
midstream segment margins were positively impacted due to increased volumes but were negatively impacted due to reduced natural gas prices and NGL prices, resulting in a net increase in margins from
2005. Our profitability is dependent upon pricing and market demand for natural gas and NGLs, which are beyond our control and have experienced substantial volatility in 2008.

Interest Rate Environment.Interest rates on future credit facility borrowings and debt offerings could be higher than current levels,
causing our
financing costs to increase accordingly. Although this could limit our ability to raise funds in the debt capital markets, we expect to remain competitive with respect to acquisitions and capital
projects, as our competitors would face similar circumstances. As with other yield-oriented securities, our unit price is impacted by the level of our cash distributions and an associated implied
distribution yield. The distribution yield is often used by investors to compare and rank related yield-oriented securities for investment decision making purposes. Therefore, changes in interest
rates, either positive or negative, may affect the yield requirements of investors who invest in our units, and a rising interest rate environment could have an adverse impact on our unit price and
our ability to issue additional equity to make acquisitions, reduce debt or for other purposes.

Impact of Inflation

Inflation in the United States has been relatively low in recent years and did not have a material impact on our results of operations
for the periods presented.

Liquidity and Capital Resources

Overview

Due to the recent decline in natural gas and NGL prices, we believe that our cash generated from operations will decrease in 2009
relative to comparable periods in 2008. Our senior secured revolving credit facility requires us to meet certain financial tests, including a maximum consolidated funded debt to EBITDA ratio of
4.0:1.0 as of the last day of any fiscal quarter; provided that in the event that we make certain permitted acquisitions or capital expenditures, this ratio may be increased to 4.75:1.0 for the three
fiscal quarters following the quarter in which such acquisition or capital expenditure occurs. We intend to elect to increase the ratio to 4.75:1.0 on March 31, 2009. During this
step-up period, the applicable margin with respect to loans under the credit facility will be increased by 35 basis points per annum and the unused commitment fee will be increased by 12.5
basis points per annum. Additionally, if commodity prices do not significantly improve above the expected prices for 2009, we may be in violation of the maximum consolidated funded debt to EBITDA
ratio as early as June 30, 2009, unless the ratio is amended, the senior secured revolving credit facility is restructured or we receive an infusion of equity capital.

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Cash Flows

Year ended December 31, 2008 Compared to Year ended December 31, 2007

Cash Flows from Operating Activities.Our cash flows from operating activities increased by $13.2 million to $53.9 million for
the year
ended December 31, 2008, from $40.7 million for the year ended December 31, 2007. During the year ended December 31, 2008 we received cash flows from customers of
approximately $387.9 million, had cash payments to our suppliers and employees of approximately $320.3 million and payment of interest expense of $13.7 million, net of amounts
capitalized, resulting in cash received from operating activities of $53.9 million. During the year ended December 31, 2007, we received cash flows from customers of approximately
$195.8 million, had cash payments to our suppliers and employees of approximately $159.3 million and payment of interest expense of $7.4 million, net of amounts capitalized,
resulting in cash received from our operating activities of $29.1 million. The increase in cash flows for the year ended December 31, 2008, as compared to the year ended
December 31, 2007, was attributable to increased natural gas and NGLs volumes and higher average realized natural gas and NGL sales prices.

Changes
in cash receipts and payments are primarily due to the timing of collections at the end of our reporting periods. We collect and pay large receivables and payables at the end of
each calendar month. The timing of these payments and receipts may vary by a day or two between month-end periods and cause fluctuations in cash received or paid. Working capital items,
exclusive of cash, provided $0.3 million to cash flows from operating activities during the year ended December 31, 2008 and used $0.9 million of cash flows from operating
activities during the year ended December 31, 2007.

Net
income for the year ended December 31, 2008 was $20.4 million, an increase of $9.7 million from a net income of $10.8 million for the year ended
December 31, 2007. Depreciation, amortization and accretion increased by $7.7 million to $37.5 million for the year ended December 31, 2008 from $29.9 million for
the year ended December 31, 2007. Bad debt expense was $0.3 million for the year ended December 31, 2008 compared to zero for the year ended December 31, 2007.

Cash Flows Used for Investing Activities.Our cash flows used for investing activities, which represent investments in property and
equipment,
decreased by $29.1 million to $54.3 million for the year ended December 31, 2008 from $83.4 million for the year ended December 31, 2007, primarily due to reduced
capital investing in the year ended December 31, 2008 related to the Badlands nitrogen rejection plant, which was under construction during the first eight months of 2007.

Cash Flows from Financing Activities.Our cash flows from financing activities decreased to $(8.9) million for the year ended
December 31, 2008 from $42.8 million for the year ended December 31, 2007, a decrease of $51.7 million. During the year ended December 31, 2008, we borrowed
$41.0 million under our credit facility to fund internal expansion and organic growth projects, made payments of $10.0 million to our credit facility, received capital contributions of
$1.1 million as a result of issuing common units in connection with the exercise of 40,705 vested unit options, incurred debt issuance costs of $0.4 million associated with the fourth
amendment to our credit facility in February 2008, made $0.5 million payments on capital lease obligations and distributed $40.0 million to our unitholders.

During
the year ended December 31, 2007, we borrowed $74.0 million under our credit facility to fund internal expansion projects, received capital contributions of
$1.1 million as a result of issuing common units in connection with the exercise of 42,660 vested unit options, distributed $31.3 million to unitholders, incurred offering costs of
$0.2 million associated with the preparation and filing of a registration statement filed with the SEC on January 23, 2007 and paid debt issuance costs of $0.5 million associated
with our third amendment to our credit facility in July 2007.

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Year ended December 31, 2007 Compared to Year ended December 31, 2006

Cash Flows from Operating Activities.Our cash flows from operating activities increased by $1.1 million to $40.7 million for
the year
ended December 31, 2007 from $39.6 million for the year ended December 31, 2006. During the year ended December 31, 2007, we received cash flows from customers of
approximately $269.3 million, had cash payments to our suppliers and employees of approximately $217.3 million and payment of interest expense of $11.3 million, net of amounts
capitalized, resulting in cash received from our operating activities of $40.7 million. During the year ended December 31, 2006, we received cash flows from customers of approximately
$218.0 million, had cash payments to our suppliers and employees of approximately $173.0 million and payment of interest expense of $5.4 million, net of amounts capitalized,
resulting in cash received from our operating activities of $39.6 million. Changes in cash receipts and payments are primarily due to the timing of collections at the end of our reporting
periods. We collect and pay large receivables and payables at the end of each calendar month. The timing of these payments and receipts may vary by a day or two between month-end periods
and cause fluctuations in cash received or paid. Natural gas and NGL volumes from our new Woodford Shale gathering system and increased natural gas and NGL volumes from our Bakken, Badlands and Eagle
Chief gathering systems combined with increased NGL sales prices, but offset by lower natural gas sales prices contributed to increases in accounts receivable, accrued midstream revenues, accounts
payable and accrued midstream purchases during the year ended December 31, 2007. Working capital items, exclusive of cash, used $0.9 million in cash flows from operating activities and
contributed $2.1 million to cash flows from operating activities during the year ended December 31, 2007 and 2006, respectively. Net income for the year ended December 31, 2007
was $10.8 million, a decrease of $3.9 million from a net income of $14.7 million for the year ended December 31, 2006. Depreciation, amortization and accretion increased by
$7.7 million or 20.9%, to $29.7 million for the year ended December 31, 2007 from $22.1 million for the year ended December 31, 2006.

Cash Flows Used for Investing Activities.Our cash flows used for investing activities representing our internal organic growth
investments in
property and equipment, increased by $21.3 million to $83.4 million for the year ended December 31, 2007 from $62.1 million for the year ended December 31, 2006.
This $21.3 million increase is largely attributable to cash invested at our new Woodford Shale gathering system, our Badlands expansion project and continued growth at our Bakken gathering
system. We had no asset acquisitions in 2007. In May 2006, $96.4 million of cash flows was used for our Kinta Area gathering assets acquisition.

Cash Flows from Financing Activities.Our cash flows from financing activities decreased by $80.2 million to $42.8 million
for the year
ended December 31, 2007 from $123.0 million for the year ended December 31, 2006. During the year ended December 31, 2007, we borrowed $74.0 million under our credit
facility to fund our internal expansion projects, received capital contributions of $1.1 million as a result of issuing common units due to the exercise of 42,660 vested unit options, made
capital lease obligation payments of $0.3 million, distributed $31.3 million to our unitholders, incurred offering costs of $0.2 million associated with our S-3/A
registration statement filed with the SEC on January 23, 2007 and paid debt issuance costs of $0.5 million associated with our third amended credit facility. During the year ended
December 31, 2006, we borrowed $113.3 million under our credit facility to partially fund the Kinta Area gathering assets acquisition on May 1, 2006 and to fund our internal
expansion projects at both our Badlands and Bakken gathering systems. Also during the year ended December 31, 2006, we received capital contributions of $35.0 million from our general
partner in exchange for the issuance of 761,714 common units and general partner equivalent units, received $1.3 million as a result of issuing common units due to the exercise of 52,699 vested
unit options, paid debt issuance costs of $0.9 million and distributed $25.6 million to our unitholders.

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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:



Total Contractual Cash Obligations.A summary of our total contractual cash obligations as of December 31, 2008 including leases
renewed and
entered into subsequent to year end is presented below:

Payment Due by PeriodType of Obligation

Total
Obligation

Due in
2009

Due in
2010

Due in
2011

Due in
2012

Due in
2013

Thereafter(in thousands)Senior secured revolving credit facility

$
252,064

$


$


$
252,064

$


$


$
Estimated interest expense on credit facility(1)


19,634


8,267


8,267


3,100








Capital lease obligations(2)


7,378


1,256


1,256


1,256


1,107


1,001


1,502Operating leases, service agreements and other


3,959


1,700


858


465


299


211


426Total contractual cash obligations

$
283,035

$
11,223

$
10,381

$
256,885

$
1,406

$
1,212

$
1,928


---

Financial Derivatives and Commodity Hedges.We have entered into certain financial derivative instruments that are classified as cash
flow hedges in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended, and relate to forecasted sales and
purchases in 2008, 2009 and mark-to-market cash flow derivative which relates to forecasted sales in 2010. We entered into these financial swap instruments to hedge the
forecasted natural gas sales or purchases and NGL sales against the variability in expected future cash flows attributable to changes in commodity prices. Under these swap agreements, we receive a
fixed price and pay a floating price or we pay a fixed price and receive a floating price based on certain indices for the relevant contract period as the underlying natural gas is

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sold
or purchased or NGL is sold. The following table provides information about our commodity based derivative instruments at December 31, 2008:

Description and Production Period

Volume

Average
Fixed/Open
Price

Fair Value
Asset
(Liability)(MMBtu)

(per MMBtu)Natural GasSold Fixed for Floating Price SwapsJanuary 2009 - December 2009


2,136,000

$
7.30

$
6,851January 2010 - December 2010


2,136,000

$
10.50


7,141$
13,992


The
following table provides information about our interest rate swap at December 31, 2008:

Description and Period

Notional
Amount

Interest
Rate

Fair Value
Asset
(Liability)Interest Rate SwapJanuary 2009 - December 2009

$
100,000,000


2.245
%
$
(1,439
)


Off-Balance Sheet Arrangements.We had no significant off-balance sheet arrangements as of December 31, 2008 or
December 31, 2007.

Credit Facility

On February 6, 2008, we entered into a fourth amendment to our credit facility dated February 15, 2005. Pursuant to the
fourth amendment, we have, among other things, increased our borrowing base from $250 million to $300 million and decreased the accordion feature in the facility from $100 million
to $50 million. Our original credit facility dated February 15, 2005 was first amended in September 2005, amended a second time in June 2006 and amended a third time in
July 2007.

The
fourth amendment increases our borrowing capacity under our senior secured revolving credit facility to $300 million such that the facility now consists of a
$291 million senior secured revolving credit facility to be used for funding acquisitions and other capital expenditures, issuance of letters of credit and general corporate purposes (the
"Acquisition Facility") and a $9.0 million senior secured revolving credit facility to be used for working capital and to fund distributions (the "Working Capital Facility").

In
addition, the fourth amendment provides for an accordion feature, which permits us, if certain conditions are met, to increase the size of the Acquisition Facility by up to
$50 million and allows for the issuance of letters of credit of up to $15 million in the aggregate. The senior secured revolving credit facility also requires us to meet certain
financial tests, including a maximum consolidated funded debt to EBITDA ratio of 4.0:1.0 as of the last day of any fiscal quarter; provided that in the event that the Partnership makes certain
permitted acquisitions or capital expenditures, this ratio may be increased to 4.75:1.0 for the three fiscal quarters following the quarter in which such acquisition or capital expenditure occurs; and
a minimum interest coverage ratio of 3.0:1.0. The credit facility will mature in May 2011. At that time, the agreement will terminate and all outstanding amounts thereunder will be due and
payable.

Due
to the recent decline in natural gas and NGL prices, we believe our cash flow from operating activities will decrease relative to the level experienced in 2008. Consequently, we
anticipate electing to "step up" our debt covenants on our credit facility to 4:75:1.0 debt to EBITDA at the end of the first quarter 2009. Additionally, given the current natural gas and NGL forward
price strips, we may require

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additional
equity as soon as June 30, 2009 to remain in compliance with our existing debt covenants contained in our credit facility.

Our
obligations under the credit facility are secured by substantially all of our assets and guaranteed by us, and all of our subsidiaries, other than our operating company, which is the
borrower under the credit facility.

Indebtedness
under the credit facility will bear interest, at our option, at either: (i) an Alternate Base Rate plus an applicable margin ranging from 50 to 125 basis points per
annum or (ii) LIBOR plus an applicable margin ranging from 150 to 225 basis points per annum based on our ratio of consolidated funded debt to EBITDA. The Alternate Base Rate is a rate per
annum equal to the greatest of: (a) the Prime Rate in effect on such day, (b) the base CD rate in effect on such day plus 1.50% and (c) the Federal Funds effective rate in effect
on such day plus 1/2 of 1%. We have elected for the indebtedness to bear interest at LIBOR plus the applicable margin. A letter of credit fee will be payable for the aggregate amount of
letters of credit issued under the credit facility at a percentage per annum equal to 1.0%. An unused commitment fee ranging from 25 to 50 basis points per annum based on our ratio of consolidated
funded debt to EBITDA will be payable on the unused portion of the credit facility. During any step-up period, the applicable margin with respect to loans under the credit facility will be
increased by 35 basis points per annum and the unused commitment fee will be increased by 12.5 basis points per annum. At December 31, 2008, the interest rate on outstanding borrowings from our
credit facility was 3.28%

The
credit facility prohibits us from making distributions to unitholders if any default or event of default, as defined in the credit facility, has occurred and is continuing or would
result from the distribution. In addition, the credit facility contains various covenants that limit, among other things, subject to certain exceptions and negotiated "baskets," our ability to incur
indebtedness, grant liens, make certain loans, acquisitions and investments, make any material changes to the nature of its business, amend its material agreements, including the Omnibus Agreement or
enter into a merger, consolidation or sale of assets.

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

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

The
credit facility limits distributions to our unitholders to available cash, as defined by the agreement, and borrowings to fund such distributions are only permitted under the
revolving working capital facility. The revolving working capital facility is subject to an annual "clean-down" period of 15 consecutive days in which the amount outstanding under the
revolving working capital facility is reduced to zero.

As
of December 31, 2008, we had $252.1 million outstanding under the credit facility and were in compliance with its financial covenants.

Recent Accounting Pronouncements

On April 25, 2008, the Financial Accounting Standards Board ("FASB") FASB issued Staff Position No.
FAS 142-3, "Determination of the Useful Life of Intangible Assets" ("FSP 142-3"). FSP 142-3 amends the factors that an entity should consider
in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets under FASB Statement No. 142, "Goodwill and Other Intangible Assets"
("SFAS 142"). In determining the useful life of an

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acquired
intangible asset, FSP 142-3 removes the requirement from SFAS 142 for an entity to consider whether renewal of the intangible asset requires significant costs or
material modifications to the related arrangement. FSP 142-3 also replaces the previous useful life assessment criteria with a requirement that an entity considers its own
experience in renewing similar arrangements. If the entity has no relevant experience, it would consider market participant assumptions regarding renewal. FSP 142-3 will be
effective as of January 1, 2009 and will apply only to intangible assets acquired after that date. Retroactive application to previously acquired intangible assets is prohibited. The adoption
of FSP 142-3 is not expected to have a material impact on our financial position, results of operations or cash flows.

On
March 19, 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities," an amendment of SFAS 133 ("SFAS 161").
SFAS 161 is intended to improve transparency in financial reporting by requiring enhanced disclosures of an entity's derivative instruments and hedging activities and their effects on the
entity's financial position, financial performance, and cash flows. SFAS 161 is effective prospectively for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008, with early application encouraged. SFAS 161 encourages, but does not require, comparative disclosures for periods prior to
its initial adoption. SFAS 161 amends the current qualitative and quantitative disclosure requirements for derivative instruments and hedging activities set forth in SFAS 133 and
generally increases the level of aggregation/disaggregation that will be required in an entity's financial statements. We are currently reviewing SFAS 161 to determine the effect it will have
on our financial statements and disclosures therein.

On
March 12, 2008, the Emerging Issues Task Force ("EITF") reached consensus opinion on EITF Issue 07-4, "Application of the two-class method under
FASB Statement No. 128, Earnings per Share, to Master Limited Partnerships" ("EITF 07-4"), which the FASB ratified at its March 26, 2008 meeting.
EITF 07-4 requires the calculation of a Master Limited Partnership's ("MLPs") net earnings per limited partner unit for each period presented according to distributions declared and
participation rights in undistributed earnings as if all of the earnings for that period had been distributed. In periods with undistributed earnings above specified levels, the calculation per the
two-class method results in an increased allocation of such undistributed earnings to the general partner and a dilution of earnings to the limited partners. EITF 07-4
is effective for fiscal years beginning after December 15, 2008, and is to be applied retrospectively to all periods presented. Early application is not permitted. We will apply the
requirements of EITF 07-4 as it pertains to MLPs upon its adoption during the quarter ended March 31, 2009 and do not expect a significant impact when adopted.

In
December 2007, the FASB issued SFAS No. 141(R), "Business Combinations" ("SFAS 141(R)"). SFAS 141(R) amends and replaces SFAS 141, but retains the
fundamental requirements in SFAS 141 that the purchase method of accounting be used for all business combinations and an acquirer be identified for each business combination. SFAS 141(R)
provides for how the acquirer recognizes and measures the identifiable assets acquired, liabilities assumed and any non-controlling interest in the acquiree. SFAS 141(R) provides
for how the acquirer recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase. SFAS 141(R) also determines what information to disclose to
enable users to be able to evaluate the nature and financial effects of the business combination. The provisions of SFAS 141(R) apply prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008 and do not allow early adoption. We are evaluating the new
requirements of SFAS 141(R) and the impact it will have on business combinations completed in 2009 and thereafter.

In
December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statementsan amendment of ARB No. 51"
("SFAS 160"). SFAS 160 establishes accounting and reporting standards that require the ownership interests in subsidiaries held by parties other than

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the
parent (minority interest) be clearly identified, labeled and presented in the consolidated balance sheet within equity, but separate from the parent's equity. SFAS 160 requires the equity
amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated income statement and that changes in
a
parent's ownership interest while the parent retains its controlling financial interest in its subsidiary be accounted for consistently and similarly as equity transactions. Consolidated net income
and comprehensive income will be determined without deducting minority interest; however, earnings-per-share information will continue to be calculated on the basis of the net
income attributable to the parent's shareholders. Additionally, SFAS 160 establishes a single method for accounting for changes in a parent's ownership interest in a subsidiary that does not
result in deconsolidation and that the parent recognize a gain or loss in net income when a subsidiary is deconsolidated. SFAS 160 is effective for fiscal years beginning on or after
December 15, 2008. Early adoption is not permitted. We do not expect SFAS 160 will have a material impact on our financial position, results of operations or cash flows.

In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities" ("SFAS 159"). SFAS 159 expands
opportunities to use fair value measurement in financial reporting and permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS 159 is
effective for fiscal years beginning after November 15, 2007. SFAS 159 was adopted by us effective January 1, 2008, at which time no financial assets or liabilities, not
previously required to be recorded at fair value by other authoritative literature, were designated to be recorded at fair value. As such, the adoption of SFAS 159 did not have any impact on
our financial position, results of operations or cash flows.

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

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Significant Accounting Policies and Estimates

The selection and application of accounting policies is an important process that has developed as our business activities have evolved
and as the accounting rules have developed. Accounting rules generally do not involve a selection among alternatives, but involve the implementation and interpretation of existing rules, and the use
of judgment applied to the specific set of circumstances existing in our business. We make every effort to properly comply with all applicable rules on or before their adoption, and we believe the
proper implementation and consistent application of the accounting rules are critical. For further details on our accounting policies, you should read Note 1 of the accompanying Notes to
Consolidated Financial Statements.

Revenue Recognition.Revenues for sales and gathering of natural gas and NGLs product sales are recognized at the time the product is
delivered and
title is transferred. Revenues for compression services are recognized when the services under the agreement are performed.

Depreciation and Amortization.Depreciation of all equipment is determined under the straight-line method using various rates based on
useful lives, 10 to 22 years for pipeline and processing plants, and 3 to 10 years for corporate and other assets. The cost of assets and related accumulated depreciation is removed from
the accounts when such assets are disposed of, and any related gains or losses are reflected in current earnings. Maintenance, repairs and minor replacements are expensed as incurred. Costs of
replacements constituting improvement are capitalized. Intangible assets consist of the acquired value of existing contracts to sell natural gas and other NGLs, compression contracts and identifiable
customer relationships, which do not have significant residual value. The contracts are being amortized over their estimated lives of ten years.

Derivatives.We utilize derivative financial instruments to reduce commodity price risks. We do not hold or issue derivative financial
instruments
for trading purposes. Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities", which was amended in June 2000 by
SFAS 138 and in May 2003 by SFAS 149, establishes accounting and reporting standards for derivative instruments and hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial condition and measure those instruments at fair value. Derivatives that are not designated as hedges are adjusted to fair
value through income. If the derivative is designated as a hedge, depending upon the nature of the hedge, changes in the fair value of the derivatives are either offset against the fair value of
assets, liabilities or firm commitments through income, or recognized in other comprehensive income until the hedged item is recognized in income. The ineffective portion of a derivative's change in
fair value is immediately recognized into income. If a derivative no longer qualifies for hedge accounting the amounts in accumulated other comprehensive income will be immediately charged to
operations.

Asset Retirement Obligations.SFAS No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"), requires entities to
record the
fair value of a liability for an asset retirement obligation in the period in which it is incurred and a corresponding increase in the carrying amount of the related long-lived asset.
Subsequently, the asset retirement cost is allocated to expense using a systematic and rational method and the liability is accreted to measure the change in liability due to the passage of time. The
primary impact of SFAS 143 relates to our estimated costs for primarily dismantling and site restoration of leased compression facility locations. Estimating future asset retirement obligations
requires us to make estimates and judgments regarding timing, existence of a liability, as well as what constitutes adequate restoration. We use the present value of estimated cash flows related to
our asset retirement obligation to determine the fair value, generally as estimated by third party consultants. The present value calculation requires us to make numerous assumptions and judgments,
including the ultimate costs of dismantling and site restoration, inflation factors, credit adjusted discount rates, timing of settlement and changes in the legal, regulatory, environmental and
political environments. To the extent future revisions to these assumptions impact the present value of the existing asset retirement

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obligation
liability, a corresponding adjustment will be required to the related asset. We believe the estimates and judgments reflected in our financial statements are reasonable but are necessarily
subject to the uncertainties we have just described. Accordingly, any significant variance in any of the above assumptions or factors could materially affect our cash flows.

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

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



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

Share Based Compensation.In October 1995 the FASB issued SFAS No. 123, "Share-Based Payment," which was revised in
December 2004 ("SFAS 123R"). SFAS 123R requires that the compensation cost relating to share-based payment transactions be recognized in the financial statements and that cost be
measured based on the fair value of the equity or liability instruments issued. We adopted SFAS 123R as of January 1, 2006 and applied SFAS 123R using the permitted modified
prospective method beginning as of the same date and our unearned deferred compensation of $289 as of January 1, 2006 has been eliminated against common unit equity. Prior to January 1,
2006 we recorded any unamortized compensation related to restricted unit awards as unearned compensation in equity.

We
estimate the fair value of each option granted on the date of grant using the American Binomial option-pricing model. In estimating the fair value of each option, we use our peer
group

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volatility
averages as determined on the option grant dates. We calculate expected lives of the options under the simplified method as prescribed by the SEC Staff Accounting Bulletin 107 and have used
a risk free interest rate based on the applicable U.S. Treasury yield in effect at the time of grant. We estimate the fair value of each restricted unit and phantom unit granted on the date of grant
based on the unit closing price on that same date. Our compensation expense for these awards is recognized on the graded vesting attribution method. Units to be issued under our unit incentive plan
may be from newly issued units. Prior to our adoption of SFAS 123R on January 1, 2006, we applied Accounting Principles Board Opinion No. 25 and related interpretations in
accounting for our unit-based compensation awards.

Disclosure Regarding Forward-Looking Statements

This annual report on Form 10-K includes certain "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements include statements regarding our plans, goals, beliefs or current
expectations. Statements using words such as "anticipate," "believe," "intend," "project," "plan," "continue," "estimate," "forecast," "may," "will," or similar expressions help identify
forward-looking statements. Although we believe such forward-looking statements are based on reasonable assumptions and current expectations and projections about future events, no assurance can be
given that every objective will be reached.

Actual
results may differ materially from any results projected, forecasted, estimated or expressed in forward-looking statements since many of the factors that determine these results
are subject to uncertainties and risks, difficult to predict, and beyond management's control. Such factors include:



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These
factors are not necessarily all of the important factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements. Our
future results will depend upon various other risks and uncertainties, including, but not limited to those described under Item 1A. "Risk Factors." Other unknown or unpredictable factors also
could have material adverse effects on our future results. You should not put undue reliance on any forward-looking statements.

All
forward-looking statements attributable to us are qualified in their entirety by this cautionary statement. We undertake no duty to update our forward-looking statements to reflect
the impact of events or circumstances after the date of the forward-looking statements.

Item 7A.    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. For a discussion of the volatility of natural gas and NGL prices, please read Item 1A. "Risk FactorsRisk Factors Related to our Business." Our
cash flow is affected by the volatility of natural gas and NGL product prices, which could adversely affect our ability to make distributions to unitholders. To illustrate the impact of changes in
prices for natural gas and NGLs on our operating results, we have provided the table below, which reflects, for the years ended December 31, 2008 and 2007, the impact on our total segment

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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)2008

2007$0.10

$(0.10)

$0.10

$(0.10)NGL Price Change ($/gal)

$
0.01

$
615,000

$
548,000

$
642,000

$
194,000$
(0.01
)
$
(472,000
)
$
(649,000
)
$
(207,000
)
$
(645,000
)


The
increase in commodity exposure is the result of increased natural gas and NGL product volumes in the year ended December 31, 2008 compared to the year ended
December 31, 2007. The magnitude of the impact on total segment margin of changes in natural gas and NGL prices presented may not be representative of the magnitude of the impact on total
segment margin for different commodity prices or contract portfolios. Natural gas prices can also affect our profitability indirectly by influencing the level of drilling activity and related
opportunities for our services.

We
manage this commodity price exposure through an integrated strategy that includes management of our contract portfolio, optimization of our assets and the use of derivative contracts.
As a result of these derivative swap contracts, we have hedged a portion of our expected exposure to natural gas prices and natural gas liquids prices in 2009 and 2010. We continually monitor our
hedging and contract portfolio and expect to continue to adjust our hedge position as conditions warrant. The following table provides information about our commodity based derivative instruments at
December 31, 2008 for the periods indicated:

Description and Production Period

(MMBtu)

Average
Fixed Price
Per MMBtu

Fair Value
Asset
(Liability)Natural GasSold Fixed for Floating Price SwapsJanuary 2009 - December 2009


2,136,000

$
7.30

$
6,851January 2010 - December 2010


2,136,000

$
10.50


7,141$
13,992


Interest Rate Risk.We have elected for the indebtedness under our credit facility to bear interest at LIBOR plus the applicable
margin. We are
exposed to changes in the LIBOR rate as a result of our credit facility, which is partially subject to floating interest rates. On October 7, 2008, we entered into a
floating-to-fixed interest rate swap agreement with an investment grade counterparty whereby we pay a monthly fixed interest rate of 2.245% and receive a monthly variable rate
based on the one month posted LIBOR interest rate on a notional amount of $100.0 million. This swap agreement is effective on January 2, 2009 and terminates on January 1, 2010. As
of December 31, 2008, we had approximately $252.1 million of indebtedness outstanding under our credit facility, of which $152.1 million is exposed to changes in the LIBOR rate.
The impact of a 100 basis point increase in interest rates on the amount of current debt exposed to variable interest rates would result in an increase in annualized interest expense and a
corresponding decrease in annualized net income of approximately $1.5 million. The following table provides information about our interest rate swap at December 31, 2008 for the periods
indicated:

Description and Period

Notional Amount

Interest Rate

Fair Value Asset (Liability)Interest Rate SwapJanuary 2009 - December 2009

$
100,000,000


2.245
%
$
(1,439
)


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Credit Risk.Counterparties pursuant to the terms of their contractual obligations expose us to potential losses as a result of
nonperformance.
SemStream, L.P., BP Energy Company, OGE Energy Resources, Inc., ONEOK Energy Services Company, LP and ConocoPhillips, Inc. were our largest customers for the year ended
December 31, 2008, accounting for approximately 16%, 14%, 11%, 10% and 9%, respectively, of our revenues. Consequently, changes within one or more of these companies' operations have the
potential to impact, both positively and negatively, our credit exposure and make us subject to risks of loss resulting from nonpayment or nonperformance by these or any of our other customers. Any
material nonpayment or nonperformance by our key customers could materially and adversely affect our business, financial condition or results of operations and reduce our ability to make distributions
to our unitholders. Furthermore, some of our customers may be highly leveraged and subject to their own operating and regulatory risks, which increases the risk that they may default on their
obligations to us. Our counterparties to our commodity based derivative instruments as of December 31, 2008 are BP Energy Company and Bank of Oklahoma, N.A. Our counterparty to our interest
rate swap as of December 31, 2008 is Wells Fargo Bank, N.A.

On
July 22, 2008, SemGroup, L.P. and certain subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code. Affiliates of
SemGroup, L.P. purchase our NGLs and condensate, primarily at our Bakken and Badlands plants and gathering systems. During the second quarter 2008, we increased our allowance for doubtful
accounts and bad debt expense by $8.1 million for related product sales through June 30, 2008. On October 20, 2008, the United States Bankruptcy Court for the District of Delaware
entered an order approving the assumption of a Natural Gas Liquids Marketing Agreement (the "SemStream Agreement") between SemStream, L.P., an affiliate of SemGroup, L.P., and us
relating to the sale of NGLs and condensate at our Bakken and Badlands plants and gathering systems. As a result of the assumption, and in accordance with the order, on October 21, 2008,
SemStream paid $12.1 million to us, representing amounts owed to us from SemStream for June and July 2008 product sales under the SemStream Agreement. The assumption of the SemStream
Agreement restores us and SemStream, L.P. to our pre-bankruptcy contractual relationship.

Our
third quarter 2008 results of operations reflected a reversal of $7.8 million of the $8.1 million allowance for doubtful accounts and bad debt expense previously
recorded on our income statement in the second quarter of 2008. After receipt of the October 21 payment, our total pre-petition credit exposure to SemGroup, related to condensate
sales to
SemCrude, LLC, and outside of the SemStream Agreement, is approximately $0.3 million, which we have reserved as of December 31, 2008.

Item 8.    Financial Statements and Supplementary Data

The See our Financial Statements beginning on page F-1 for the information required by this Item.

Item 9.    Changes in and Disagreements on Accounting and Financial Disclosure

None.

Item 9A.    Controls and Procedures

Evaluation of Disclosure Controls and Procedures



As
required by Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended, we have evaluated, under the supervision and with the participation of our
management, including our principal executive officer and principal financial officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Annual Report on Form 10-K. Based upon that

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evaluation,
our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of December 31, 2008, to ensure that
information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required
disclosure and is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC.



During
the three months ended December 31, 2008, there were no changes in our system of internal control over financial reporting (as defined in Rules 13a-15(f)
and 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Internal Control Over Financial Reporting

See "Management's Report on Internal Control over Financial Reporting" on page F-2.

Item 9B.    Other Information

There have been no events that occurred in the fourth quarter of 2008 that would need to be reported on Form 8-K
that have not been previously reported.

PART III

Item 10.    Directors and Executive Officers of the Registrant

As is the case with many publicly traded partnerships, we do not have officers, directors or employees. Our operations and activities
are managed by our general partner, Hiland Partners GP, LLC. References to our directors and officers are references to the directors and officers of Hiland
Partners GP, LLC. Unitholders do not directly or indirectly participate in our management or operation. Our general partner owes a fiduciary duty to our unitholders, as limited by our
partnership agreement.

Directors
are elected for one-year terms. The following table shows information regarding the current directors and executive officers of Hiland
Partners GP, LLC.

Name

Age

Position with Hiland Partners GP, LLCHarold Hamm


63

Chairman of the Board of DirectorsJoseph L. Griffin


48

Chief Executive Officer, President and DirectorMatthew S. Harrison


38

Chief Financial Officer, Vice PresidentFinance, Secretary and DirectorRobert W. Shain


58

Chief Commercial Officer, Vice PresidentKent C. Christopherson


51

Chief Operations Officer, Vice PresidentMichael L. Greenwood


53

DirectorEdward D. Doherty


73

DirectorRayford T. Reid


60

DirectorShelby E. Odell


69

DirectorJohn T. McNabb, II


64

DirectorDr. David L. Boren


67

Director


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Harold Hammwas elected Chairman of the Board of Directors of our general partner in October 2004 and
serves as chairman of the compensation committee of the board of directors of our general partner. Mr. Hamm has served as chairman of the board of directors of the general partner of Hiland
Holdings GP, LP since September 2006 and also serves as chairman of the compensation committee of the board of directors of Hiland Holdings GP, LP's general partner.
Mr. Hamm served as President and Chief Executive Officer and as a director of Continental Gas, Inc. since December 1994 and then served as Chief Executive Officer and a director
to 2004. Since its inception in 1967 until October 2005, Mr. Hamm served as President and Chief Executive Officer and a director of Continental Resources, Inc. and currently
serves as its Chief Executive Officer and Chairman of its board of directors. Mr. Hamm is also immediate past President of the National Stripper Well Association, a member of the executive
board of the Oklahoma Independent Petroleum Association and a member of the executive board of the Oklahoma Energy Explorers. In addition, Mr. Hamm is a director of Complete Production
Services, Inc., a publicly traded oilfield service company.

Joseph L. Griffinwas appointed Chief Executive Officer, President and a director of our general partner in June 2007.
Mr. Griffin has also served as Chief Executive Officer, President and a director of the general partner of Hiland Holdings since June 2007. Mr. Griffin has more than
20 years of experience in the midstream natural gas industry. From 2004 to June 2007, Mr. Griffin served as executive vice president over multiple facets of the business of Lumen
Midstream Partnership, a subsidiary of the Southern Ute Indian Tribe, in Tulsa, OK. In 1989, Mr. Griffin co-founded Lumen Midstream, held various senior level management positions
and served as a director until Lumen was sold in 2004 to the Southern Ute Indian Tribe. Mr. Griffin holds a Bachelor of Science degree in Business Administration from Oklahoma State University
and is also a Certified Public Accountant.

Matthew S. Harrisonwas appointed Chief Financial Officer, Vice PresidentFinance, Secretary and a director of our
general partner in April 2008. Mr. Harrison has served as Chief Financial Officer, Vice PresidentFinance, Secretary and a director of the general partner of Hiland Holdings
since April 2008. Mr. Harrison joined Hiland as Vice President of Business Development in February 2008 from Wachovia Securities where he most recently was a director for its
Energy & Power Mergers & Acquisitions Group. Prior to joining Wachovia in 2007, Mr. Harrison spent eight years with A.G. Edwards Capital Markets' Mergers & Acquisitions
Group, most recently leading its energy mergers & acquisitions effort. Prior to joining A.G. Edwards, Mr. Harrison spent five years with Price Waterhouse as a senior accountant. He holds
a B.S. degree in Accounting from the University of Tennessee, a Masters of Business Administration degree from the Kellogg Graduate School of Management at Northwestern University and is a Certified
Public Accountant.

Robert W. Shainwas elected as our Vice President Northern Region Operations & Engineering in March 2006, was
appointed Vice PresidentOperations and Engineering in June 2006 and most recently was appointed Vice PresidentChief Commercial Officer in August 2008.
Mr. Shain has also served as Vice PresidentChief Commercial Officer of the general partner of Hiland Holdings since August 2008. Mr. Shain has over 30 years of
experience in the oil and gas industry. The majority of his experience has been in the engineering and operations of midstream natural gas gathering, compression, processing and treating, along with
business development, gas supply and marketing. From July 2003 until March 2006, Mr. Shain served as Vice President of Operations and Engineering for Seminole Gas
Company, LLC (successor to Impact Energy, LTD) in Tulsa, Oklahoma. From May 1995 until July 2003 Mr. Shain served in a variety of commercial roles, most recently of
which was Vice President of Commercial Services, for CMS Field Services, LLC (successor to Heritage Gas Services, LLC) also in Tulsa, Oklahoma, in which he was responsible for the
development and management of operating and capital budgets. Mr. Shain holds a B.S degree in Mechanical Engineering from Texas A & M University.

Kent C. Christophersonwas appointed Vice PresidentChief Operations Officer in August 2008.
Mr. Christopherson has also served as Vice PresidentChief Operations Officer of the general partner

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of
Hiland Holdings since August 2008. Mr. Christopherson joined Hiland from DCP Midstream Partners, L.P. where he served as Senior Director of Operating Excellence and Reliability
Services since 2002. Prior to joining DCP, Mr. Christopherson was employed by Western Gas Resources and Flopetrol-Johnson Schlumberger. Mr. Christopherson earned a B.S. degree in Mining
Engineering & Geology from the South Dakota School of Mines and Technology, a Masters of Business Administration degree from Nova Southeastern University and is a Certified Maintenance &
Reliability Professional by the Society of Maintenance & Reliability Professionals and a Certified Lubrication Specialist by the Society of Tribologists & Lubrication Engineers.

Michael L. Greenwoodwas elected as a director of our general partner in February 2005, and serves as chairman of the audit
committee of our general partner. Mr. Greenwood has served as a director of the general partner of Hiland Holdings GP, LP since September 2006, and serves as chairman of
the audit
committee of the board of directors of Hiland Holdings GP, LP's general partner. Mr. Greenwood is founder and managing director of Carnegie Capital LLC, a financial
advisory services firm providing investment banking assistance to the energy industry. Mr. Greenwood previously served as Vice PresidentFinance and Treasurer of Energy Transfer
Partners, L.P. until August 2004. Prior to its merger with Energy Transfer, Mr. Greenwood served as Vice President and Chief Financial Officer & Treasurer of Heritage
Propane Partners, L.P. from 2002 to 2003. Prior to joining Heritage Propane, Mr. Greenwood was Senior Vice President, Chief Financial Officer and Treasurer for Alliance Resource
Partners, L.P. from 1994 to 2002. Mr. Greenwood has over 25 years of diverse financial and management experience in the energy industry during his career with several major public
energy companies including MAPCO Inc., Penn Central Corporation, and The Williams Companies. Mr. Greenwood holds a Bachelor of Science in Business Administration degree from Oklahoma
State University and a Master of Business Administration degree from the University of Tulsa.

Edward D. Dohertywas elected as a director of our general partner in February 2005, and serves as a member of the audit
committee of the board of directors of our general partner. Mr. Doherty has served as a director of the general partner of Hiland Holdings GP, LP since September 2006, and
serves as a member of the audit committee of the board of directors of Hiland Holdings GP, LP's general partner. Since March 2006, Mr. Doherty has been a partial owner and
CEO of ANZ Terminals Pty. Ltd., an Australian company which owns and operates eight liquid storage terminals in Australia and New Zealand. Mr. Doherty also provides consulting services
on terminal acquisitions. Mr. Doherty served as the Chairman and Chief Executive Officer of Kaneb Pipe Line Company LLC, the general partner of Kaneb Pipe Line Partners L.P. since
its inception in September 1989 until July 2005. Prior to joining Kaneb, Mr. Doherty was President and Chief Executive Officer of two private companies, which provided
restructuring services to troubled companies and was President and Chief Executive Officer of Commonwealth Oil Refining Company, Inc., a public refining and petrochemical company.
Mr. Doherty holds a Bachelor of Arts degree from Lafayette College and a Doctor of Jurisprudence from Columbia University School of Law.

Rayford T. Reidwas elected as a director of our general partner in May 2005, and serves as a member of the compensation committee
of the board of directors of our general partner. Mr. Reid has served as a director of the general partner of Hiland Holdings GP, LP since September 2006, and serves as a
member of the compensation committee of the board of directors of Hiland Holdings GP, LP's general partner. Mr. Reid has more than 35 years of investment banking, financial
advisory and commercial banking experience, including 30 years focused on the oil and gas industry. Mr. Reid is President of Kentucky Downs Partners, LLC ("KDP"). KDP's principal
business is the ownership of a controlling interest in a thoroughbred horse racing track in Franklin, Kentucky. Prior to forming KDP in 2007, Mr. Reid served as President of R. Reid
Investments Inc., a private investment banking firm which exclusively served companies engaged in the energy industry. Mr. Reid holds a Bachelor of Arts degree from Oklahoma State
University and a Master of Business Administration degree from the Wharton School of the University of Pennsylvania.

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Shelby E. Odellwas elected as a director of our general partner in September 2005. Mr. Odell serves as a member of our
audit committee of the board of directors of our general partner and, as of January 21, 2009, as a member of our conflicts committee of the board of directors of our general partner.
Mr. Odell served as a director of the general partner of Hiland Holdings GP, LP from September 2006 to January 2009. Mr. Odell has 40 years of
experience in the petroleum business, including marketing, distribution, acquisitions, innovation of new asset opportunities, and management. From 1974 to 2000, Mr. Odell held several positions
with Koch Industries. He retired in 2000 as President of Koch Hydrocarbon Company and Sr. Vice President of Koch Industries. Prior to joining Koch, Mr. Odell advanced through several positions
with Phillips Petroleum Company. He is a past member of the Board of Directors of the Gas Processors Association and holds an Associate Degree in Accounting from Enid Business College.

John T. McNabb, IIwas elected as a director of our general partner in August 2006, and he serves as chairman of the
conflicts committee and as a member of the compensation committee of the board of directors of our general partner. Mr. McNabb is the founder of Growth Capital Partners, LP, a merchant
banking firm that provides financial advisory services to middle market companies throughout the United States, and he has served as the chairman of its board of directors since 1992.
Mr. McNabb was a Managing Director of Bankers Trust Company, managing commercial banking, investment banking and financial advisory activities in the Southwest for Bankers Trust Company, and a
director of BT Southwest, Inc., an affiliate of Bankers Trust New York Corporation. Mr. McNabb has served on six public boards. He currently serves as Chairman of the board of directors
of Willbros Group, Inc. He started his career, after serving in the U.S. Air Force during the Vietnam conflict, with Mobil Oil in its exploration and production division. Mr. McNabb
holds a Bachelor of Arts in History and a Masters of Business Administration from Duke University.

Dr. David L. Borenwas elected as a director of our general partner in August 2006. Dr. Boren served as a
member of the conflicts committee of the board of directors of our general partner from August 2006 until January 21, 2009. Dr. Boren serves as President of the University of
Oklahoma, a position he has held since November of 1994. Prior to becoming President of the university, he served in the United States Senate representing Oklahoma from 1979 to 1994. During his
service in the Senate he was the longest serving Chairman of the U.S. Select Committee on Intelligence. From 1975 to 1979, Dr. Boren was Governor of Oklahoma. Before being elected Governor, he
served 8 years in the Oklahoma House of Representatives. He engaged in the private practice of law from 1969 to 1974. He also served as a professor of Political Sciences at Oklahoma Baptist
University from 1970 to 1974. In 1986 Dr. Boren founded the Oklahoma Foundation for Excellence, a private foundation which rewards and encourages excellence in public education. He continues to
serve as its Chairman. Dr. Boren received his BA degree from Yale University in 1963, his Master's Degree in Economics from Oxford University in 1965 as a Rhodes Scholar and his Juris Doctorate
Degree from the University of Oklahoma in 1968. He previously served as a director of ConocoPhillips Inc. and currently serves as a director of Texas Instruments, AMR Corporation and Torchmark
Corporation.

Board Committees

The board appoints committees to help carry out its duties. In particular, the board committees work on key issues in greater detail
than would be possible at full board meetings. Only non-employee directors may serve on the audit, compensation and conflicts committees. Each committee has a written charter. The charters
are posted on our Web site and are available free of charge on request to our Secretary at the address given under "Contact Us".

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The
table below shows the current membership of each board committee.

Name

Audit

Conflicts

CompensationMr. Hamm








CMr. Greenwood


CMr. Doherty


*Mr. Reid








*Mr. Odell


*


*Mr. McNabb, II





C


*Dr. Boren






Audit Committee

The audit committee of our general partner's board of directors is comprised of three non-employee members of the board.
The committee is appointed by the board of directors to assist the board in fulfilling its oversight responsibilities. Its primary responsibility is to monitor the quality, integrity and reliability
of the financial reporting process, review the adequacy of our systems of internal controls for financial reporting, legal compliance and ethics established by management and the board and review
procedures for internal auditing. Responsibilities also include the appointment, compensation, retention and oversight of the work of the independent registered public accounting firm engaged to
prepare the audit report or perform other audit, review or attestation services. The committee reviews proposed audit plans for the year and the coordination of these plans with the independent
registered public accounting firm. The committee also reviews, in conjunction with management and the independent registered public accounting firm, the financial statements and other information
contained in our quarterly and annual reports filed with the SEC to determine that the independent registered public accounting firm is satisfied with the disclosure and content of such financial
statements and other information included in the reports. The committee shall have authority to obtain advice and assistance from internal or external legal, financial and other advisors.

The
board has determined that all members of the committee are independent within the meaning of both the SEC rules and NASDAQ listing standards. The board has further determined that
all members are financially literate within the meaning of the NASDAQ standards and that Mr. Greenwood is an "audit committee financial expert" as defined in the SEC rules. In making these
determinations, the board reviewed information from each of these non-employee directors concerning all of their respective relationships with us and analyzed the materiality of those
relationships.

Conflicts Committee

The conflicts committee of our general partner's board of directors is comprised of two non-employee members of the board.
The committee is appointed by the board of directors of our general partner to carry out the duties delegated by the board that relate to specific matters that the board believes may involve conflicts
of interests between us and our affiliates, on the one hand and us and any other group member, any partner or any assignee, on the other hand. The committee is composed solely of two independent
directors who are not unitholders, officers or employees of us or our general partner, officers, directors or employees of any affiliate or holders of any ownership interest in us other than our
common units and who also meet the independence and experience standards established by NASDAQ and any applicable laws and regulations.

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The
committee shall advise the board on actions to be taken by us or matters related to us upon request of the board. The committee determines if the resolution of such conflicts of
interest is fair and reasonable to us. Any matters approved by the conflicts committee will be conclusively deemed to be fair and reasonable to us, approved by all of our partners, and not a breach by
our general partner of any duties it may owe to us or to our unitholders. In connection with the committee's resolution of any conflict of interest, the committee is authorized to consider the
relative interests of any party to such conflict, agreement, transaction or situation and the benefits and burdens relating to such interest, any customary or accepted industry practices and any
customary or historical dealings with a particular person. The committee is also authorized to consider any applicable generally accepted accounting practices or principles and such additional factors
as the committee determines in its sole discretion to be relevant, reasonable or appropriate under the circumstances.

With
respect to any contribution of assets to the Partnership in exchange for Partnership securities, the committee, in determining whether the appropriate number of Partnership
securities are being issued, may take into account, among other things, the fair market value of the assets, the liquidated and contingent liabilities assumed, the tax basis in the assets, the extent
to which tax-only allocations to the transferor will protect the existing partners of the Partnership against a low tax basis, and such other factors as the committee deems relevant under
the circumstances. The committee shall have authority to obtain advice and assistance from internal or external legal, financial and other advisors.

Compensation Committee

The compensation committee of our general partner's board of directors is comprised of three non-employee members of the
board. The committee has overall responsibility for approving and evaluating the general partner's director and officer compensation plans, policies and programs.

The
committee oversees the compensation for our senior executives, including their salary, bonus, and incentive and equity awards. The committee is responsible primarily for reviewing,
approving and reporting to the board on major compensation and benefits plans, policies and programs of the company; reviewing and evaluating the performance and approving the compensation of senior
executive officers; and overseeing management development programs, performance assessment of senior executives and succession planning. Other specific duties and responsibilities include: annually
reviewing and approving corporate goals and objectives relevant to the chief executive officer ("CEO") base compensation, incentive-compensation plans and equity-based plans; evaluating the CEO's
performance in light of those goals and objectives, and recommending to the board either as a committee or together with the other independent directors, the CEO's compensation levels based on this
evaluation; and producing the required annual report on executive compensation.

The
compensation committee has the sole authority to retain, amend the engagement with, and terminate any compensation consultant to be used to assist it in the evaluation of director,
CEO or officer compensation. The committee has sole authority to approve the consultant's fees and other retention terms and shall have authority to cause us to pay the fees and expenses of such
consultants. The committee shall also have authority to obtain advice and assistance from internal or external legal, accounting or other advisors, to approve the fees and expenses of such outside
advisors, and to cause us to pay the fees and expenses of such outside advisors.

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Report of the Audit Committee for the Year Ended December 31, 2008

Our management is responsible for our internal controls and our financial reporting process. Grant Thornton LLP, our Independent
Registered Public Accounting Firm for the year ended December 31, 2008, is responsible for performing an integrated audit of the effectiveness of internal control over financial reporting and
an independent audit of our consolidated financial statements in accordance with standards of the Public Company Accounting Oversight Board and to issue a report thereon. Our audit committee monitors
and oversees these processes. Our audit committee, made up of members of our general partner's Board of Directors, selects our independent registered public accounting firm.

Our
audit committee has reviewed and discussed our audited consolidated financial statements with our management and the independent registered public accounting firm. Our audit
committee has discussed with Grant Thornton LLP the matters required to be discussed by Statement on Auditing Standards No. 61, as amended, "Communications with Audit Committees,"
including that firm's independence.

Members
of the Audit Committee:
Michael L. Greenwood
Edward D. Doherty
Shelby E. Odell

Code of Ethics

Our general partner has adopted a Financial Officers Code of Ethics applicable to the Chief Executive Officer and the Chief Financial
Officer, Controller and all other senior financial and accounting officers (the "Senior Financial Officers") with regard to Partnership-related activities. This Code of Ethics contains the policies
that relate to the legal and ethical standards of conduct that the Senior Financial Officers of our general partner are expected to comply with while carrying out their duties and responsibilities on
behalf of the Company. The Code of Ethics also incorporates expectations of Senior Financial Officers that enable us to provide accurate and timely disclosure in our filings with the SEC and other
public communications. The Code of Ethics is publicly available on our website under the "Governance" section (atwww.hilandpartners.com) and is also
available free of charge on request to the Secretary at the address given under "Contact Us."

Section 16(a) Beneficial Ownership Reporting Compliance

Based upon our records, we believe that during 2008 all reporting persons complied with the Section 16(a) filing requirements
applicable to them.

Item 11.    Executive Compensation

COMPENSATION DISCUSSION AND ANALYSIS

Compensation Objectives and Philosophy

The executive compensation program of our general partner is designed to enable our general partner to execute our business objectives
by attracting, retaining, and motivating the highest quality of executive talent and by rewarding superior performance. Performance management focuses on building competencies required for our
business and achieving the highest level of contribution from each employee. Our compensation and benefits policies and practices are designed to motivate and reward officers and employees to achieve
goals and objectives that are expected to lead to long-term enhancement of unitholder value, provide total compensation that is competitive within the market place and align individual
compensation with competency and contribution so that performance, tied to measurable objectives and results, will be rewarded appropriately. We identify our marketplace as the following publicly
traded midstream and pipeline master limited partnerships within our peer group:

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Atlas
Pipeline Partners, L.P., Copano Energy, L.L.C., Crosstex Energy, L.P., DCP Midstream Partners, LP, Eagle Rock Energy Partners, L.P., MarkWest Energy
Partners, L.P., Quicksilver Gas Services, LP, Regency Energy Partners LP, Targa Resources Partners LP, Western Gas Partners, LP and Williams Partners, L.P.
The compensation committee, established in May 2005, believes this definition of our marketplace along with third-party industry compensation surveys provides a good benchmark for analyzing the
competitiveness of our executive compensation program.

In
addition to base salary, executive officers are compensated on a performance-oriented basis through the use of incentive compensation linking both annual and longer-term
results. The annual incentive cash bonus permits team and individual performance to be recognized and is based, in part, on an evaluation of the contribution made by the officer to our performance.
Equity compensation awards are included in the compensation program to reward executive officers for long-term strategic actions that increase our value and thus unitholder value and to
link a significant amount of an executive's current and potential future net worth to our success. This use of equity compensation directly relates a portion of each executive officer's
long-term remuneration to our unit price, and therefore aligns the executive's compensation with the interests of our unitholders. The discretionary granting of unit options, as well as
the use of restricted and phantom units, is used to (1) recognize promotions of executives into positions of significant responsibilities; (2) recognize significant accomplishments of
executives, particularly as the accomplishments impact growth, profits and/or competitive positioning; and (3) attract and retain high level executive talent.

Oversight of Executive Compensation Program

The compensation committee of our general partner administers our executive officer compensation program. The compensation committee is
primarily responsible for reviewing, approving and reporting to the board on major compensation and benefits plans, policies and programs of the Partnership; reviewing and evaluating the performance
and approving the compensation of senior executive officers; and overseeing management development programs, performance assessment of senior executives and succession planning. Other specific duties
and responsibilities include: annually reviewing and approving corporate goals and objectives relevant to the chief executive officer ("CEO") base compensation, incentive-compensation plans and
equity-based plans; evaluating the CEO's performance in light of those goals and objectives, and recommending to the board, either as a committee or together with the other independent directors, the
CEO's compensation levels based on this evaluation; and producing the required annual report on executive compensation. The compensation committee annually evaluates the effectiveness of the executive
compensation program in meeting its objectives.

The
CEO serves in an advisory role to the compensation committee with respect to executive compensation for the executive officers other than himself. In addition, the compensation
committee may request the CEO to provide management feedback and recommendations on changes in the design of the executive compensation programs and executive compensation policies. The CEO does not
participate in determining or recommending the form or amount of compensation for himself or for the outside directors. The CEO's recommendations are given significant weight by the compensation
committee, but the compensation committee remains responsible for all final decisions regarding compensation levels for the executive officers, the executive compensation policies and executive
compensation programs. The CEO is not present during the compensation committee's discussions regarding his own compensation. In the CEO's advisory role to the compensation committee, he does not have
the authority to call a meeting of the compensation committee. Only the chairperson of the committee, two or more members of the committee or the Chairman of the Board of Directors may call a
committee meeting pursuant to the compensation committee's charter. However, the CEO is involved in setting the agenda for compensation committee meetings and generally attends such

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meetings
(other than the portions of the meetings during which his compensation and performance are discussed).

The
CEO submits annual base compensation, incentive-compensation and equity-based compensation recommendations of senior executive officers below the CEO to the compensation committee
based on each executive's contribution to our performance and each executive's responsibilities and management abilities. The compensation committee evaluates compensation with reference to our
financial and operating performance, distribution performance, relative unitholder total return for the prior fiscal year, competitive compensation data of executives in our marketplace and each
executive's individual performance evaluation, length of service with the company and previous work experience. The
compensation committee annually advises the board on the compensation to be paid to the executive officers and approves the compensation for executive officers.

The
compensation committee has the sole authority to retain, amend the engagement with, and terminate any compensation consultant to be used to assist it in the evaluation of director,
CEO and executive officer compensation, as appropriate. The committee has sole authority to approve the consultant's fees and other retention terms and shall have authority to cause us to pay the fees
and expenses of such consultants. The committee shall also have authority to obtain advice and assistance from internal or external legal, accounting or other advisors, to approve the fees and
expenses of such outside advisors, and to cause us to pay the fees and expenses of such outside advisors.

Elements of Compensation

Our general partner's executive compensation program currently consists of the following elements:



Base Salaries

Base salary for each executive officer is determined annually by an assessment of our overall financial and operating performance, each
executive officer's performance evaluation, changes in executive officer responsibilities and relevant marketplace data. While many aspects of performance can be measured in financial terms, the
compensation committee also evaluates senior management in areas of performance that are more subjective. These areas include the
development and execution of strategic plans, the exercise of leadership in the development of management and other employees, innovation and improvement in our business activities, as well as the
executive's involvement in industry groups and in the communities that we serve. Our general partner seeks to compensate executives for their performance throughout the year with annual base salaries
that are fair and competitive within our marketplace. Our general partner believes that executive base salaries should be targeted near the median of the range of salaries for executives in similar
positions and with similar responsibilities in our marketplace and adjusted for financial and operating performance and each executive's performance evaluation, length of service with the company and
previous work experience. Individual salaries are generally established in alignment with these considerations to ensure the attraction, development and retention of superior talent, as well as in
relation to individual executive performance. Base salaries are reviewed annually to ensure continuing consistency with market levels and our level of financial performance during the previous fiscal
year. Future adjustments to base salaries and salary ranges will reflect average movement in the competitive market as well as individual performance. The compensation committee approves annual base
salary adjustments, if any, for the CEO, and for each officer below the CEO level based on the CEO's recommendations.

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Base
salaries in 2008 for the past Chief Financial Officer ("past CFO") and the Vice President of Operations and Engineering were set based on (1) the latest available financial
results of operations; (2) each executive's performance evaluation; and (3) the comparable base salaries of executives within our marketplace and our most recent third-party industry
compensation survey. The past CFO's annual base salary was $250,000 for the period of November 2007 through April 2008, upon his resignation. The past CFO's annual base salary,
established by the compensation committee in November 2007, approximated the median annual base salaries within our marketplace for 2006 and our most recent third-party industry compensation
survey for his position. The Vice President of Operations and Engineering's annual base salary was $190,000 for the period of March 2007 to March 2008. On August 7, 2008, the Vice
President of Operations and Engineering was appointed to Vice PresidentChief Commercial Officer. The Vice PresidentChief Commercial Officer's current annual base salary,
established at the compensation committee's meeting in March 2008, is $210,000 and approximated 83% of the median annual base salary within our most recent third-party industry compensation
survey for his position. The CEO's annual base salary for the period from November 2007 to present was $290,000 and approximated 83% of the median annual base salary within our marketplace for
2006 for his position. The CEO's current annual base salary was set based on his initial performance evaluation. The Vice President of Business Development's annual base salary, established upon his
February 4, 2008 hire date, was $200,000 for the period February 2008 to present. The Vice President of Business Development's annual base salary was primarily determined by the
comparable base salaries of similar executives within our marketplace and previous work experience. On April 16, 2008, the Vice President of Business Development was appointed to Chief
Financial Officer upon resignation of our past CFO. The Vice President and Chief Operations Officer's annual base salary, established upon his August 4, 2008 hire date, was $205,000 for the
period August 2008 to present. The Vice President and Chief Operations Officer's annual base salary was primarily determined by the comparable base salaries of similar executives within our
marketplace and previous work experience. Base salaries for our four named executive officers are to be addressed at the compensation committee meeting to be held in March 2009.

Annual Incentive Cash Bonus

As one way of accomplishing its compensation objectives, the compensation committee of the general partner rewards executive officers
for their contribution to our financial and operational success through the award of discretionary annual incentive cash bonuses intended to encourage the attainment of strategic, operational and
financial goals and for individual performance measures. The compensation committee approves the annual incentive award, if any, for the CEO, and for each officer below the CEO level based on the
CEO's recommendations.

While
target bonuses are initially set at 50% of base salaries, the compensation committee has broad discretion to retain, reduce or increase the award amounts when making its final
bonus determinations in March. The awards are also contingent on the executive officer's continued employment with the Partnership at the time of the award in March. Further, bonuses (similar to other
elements of the compensation provided to the executive officers) are not based on a prescribed formula or pre-determined goals or performance targets but rather have been determined on a
subjective basis and generally have been based on a subjective evaluation of individual, company and industry performance. The compensation committee believes that this approach to assessing
performance results in more comprehensive evaluation and fairer compensation decisions.

From
an enterprise-wide perspective and industry perspective, the compensation committee recognized the following factors during its March 2008 meeting (without
assigning any particular weighting to any factor):



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These
factors were selected as the most appropriate measures upon which to base the annual incentive cash bonus decisions because they will most directly result in long-term
value to our unitholders.

The
personal performance criteria considered by the compensation committee during its March 2008 meeting related to factors unique to the individual executive officer, including,
for example:



These
factors were selected as the most appropriate measures upon which to base the annual incentive cash bonus decisions because they help to align individual compensation with
competency and contribution.

EBITDA,
distributions per unit, inlet natural gas volumes, natural gas sales, and NGL sales increased approximately 23%, 10%, 37%, 21% and 40%, respectively in 2007 as compared to 2006.
Our unitholder total return for 2007 was approximately -2% compared to the median for our marketplace of approximately 15%. Discretionary cash bonuses were awarded in March 2008 to
our CEO, past CFO, and the Vice President of Operations and Engineering (now our Vice PresidentChief Commercial Officer) in the amounts of $150,000, $125,000 and $95,000, respectively,
representing approximately 58%, 102% and 72% of the median incentive cash bonuses for such positions within our marketplace for 2006. The past Vice President of Business Development received a
discretionary cash bonus of $42,000 in March 2008. Discretionary cash bonuses for our four named executive officers are to be addressed at the compensation committee meeting to be held in
March 2009.

Long-Term Incentive Compensation

Our general partner, Hiland Partners GP, LLC adopted the Hiland Partners, LP Long-Term Incentive Plan
for its employees and directors of our general partner and employees of its affiliates. The compensation plan is administered by the compensation committee of our general partner's board of directors
and will continue in effect until the earliest of (i) the date determined by the board of directors of our general partner; (ii) the date that common units are no longer available for
payment of awards under the plan; or (iii) the tenth anniversary of the plan.

The
long-term incentive compensation plan is designed to reward executives and other key employees for the attainment of financial goals and other performance objectives
approved annually by the compensation committee and to encourage responsible and profitable growth while taking into account non-routine factors that may be integral to our success.
Long-term incentive compensation in the form of equity grants of our common units, such as incentive unit option grants and grants of restricted units and phantom units, are used to incent
performance that leads to enhanced unitholder value, encourage retention and closely align the executive's interests with unitholders' long-term interests. Equity grants provide a vital
link between the long-term results achieved for our unitholders and the rewards provided to executives and other key employees. The equity grants we adopted upon

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the
formation of our long-term incentive compensation plan were designed to be comparable with long-term incentive plans of other midstream and pipeline master limited
partnerships.

Under
the unit option grant agreement, granted options of common units vest and become exercisable in one-third increments on the anniversary of the grant date over three
years. Vested unit options are exercisable within the option's contractual life of ten years after the grant date. Restricted units vest in quarterly increments over a four-year period
from the date of issuance. Phantom units vest in increments and over a period of time as determined by the compensation committee. Unvested unit options, restricted units and phantom units generally
become fully vested upon the disability, death or termination other than for cause of the holder or a change of control of our general partner. If the holder ceases to be an officer or employee of our
general partner for any other reason, his or her unvested unit options, restricted units or phantom units are forfeited. Unit option awards are less attractive than restricted units or phantom units
to the recipient because the fair value of the unit option at the grant date is generally less than the fair value of the restricted unit or phantom unit at the grant date, which bears no cost to the
recipient.

The
size of the unit option, restricted unit and phantom unit grants is determined relative to our size and our market, employee qualifications and position, as well as master limited
partnership peer group data. All grants to executive officers require board approval. Neither our general partner nor the compensation committee has a program, plan or practice to time options or
grants to its executives in coordination with the release of material nonpublic information. Any unit options, restricted units or phantom units grants made to non-executive employees
typically will occur concurrently with grants to named executive officers. All unit options are granted at the fair market value of our units on the date of grant. The compensation committee
determines the aggregate amounts, terms and timing of unit option, restricted unit and phantom unit awards. The number of units covered by each award reflects the executive's level of responsibility
along with past and anticipated future contributions to us.

Initially,
based on comparable options granted to executives of similar midstream and pipeline master limited partnerships at their respective initial public offerings, the past CEO
recommended to the chairman of the board the number of options to be granted to executive officers and key employees at our initial public offering in February 2005. In November 2005,
the compensation committee approved 15,000 and 13,000 unit options to be granted to our Vice President of Operations and Engineering (now our Vice PresidentChief Commercial Officer) and
our past Vice President of Business Development, respectively, on their hire dates in early 2006. In November 2006, the compensation committee approved 3,000 restricted units to be granted to
the Vice President of Operations and Engineering (now our Vice PresidentChief Commercial Officer) and 2,000 restricted units to be granted to key employees.

In
June 2007, the compensation committee approved 10,000 phantom units to be granted to our current CEO. In November 2007, the compensation committee approved 5,000 phantom
units to be granted to the past CFO, 5,000 phantom units to be granted to the Vice President of Operations and Engineering (now our Vice PresidentChief Commercial Officer) and 21,825
phantom units to be granted to key employees. In December 2007, our CEO awarded 1,000 phantom units to a key employee. The compensation committee approved 7,500 phantom units to be granted to
our Vice President of Business Development (now our Chief Financial Officer) in February 2008 and approved 7,500 phantom units to be granted to our Vice PresidentChief Operations
Officer in July 2008. Additionally in 2008, our CEO approved a total of 7,300 phantom units to be granted to four key employees.

Employment, Change in Control and Salary Continuation Agreements

No employment agreements exist with any employee of our general partner.

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Change
in control agreements exist only with respect to all unexercised unit options, restricted units and phantom units held by employees and directors of our general partner which in
the event of any of the following change of control events become fully vested and exercisable. A change of control generally shall be deemed to occur upon the occurrence of one or more of the
following events: (i) any sale, lease, exchange or other transfer or disposition of all or substantially all of the assets of the Partnership to any party not affiliated with the Partnership
and/or any of our affiliates; (ii) the consolidation, reorganization, merger or other transaction pursuant to which more than 50% of the combined voting power of the outstanding equity
interests in the Partnership cease to be directly or indirectly owned by our current majority owner group or their affiliate; or (iii) our general partner ceases to be the general partner of
the Partnership. If a qualifying change in control event had occurred as of December 31, 2008, the estimated value of payments and benefits that would inure to the benefit of the executive
officers and directors as a group would have been approximately $0.2 million.

Our
general partner currently has no salary continuation agreement, or agreement having similar effect, in place with any employee of our general partner other than the change in control
agreements described above.

Hiland Holdings GP, LP Class B Common Units

In connection with our initial public offering on February 15, 2005, our general partner issued Class B member interests
in our general partner to our past CEO and past CFO as compensation for services to be rendered exclusively for the benefit of our general partner. In addition, in connection with the initial public
offering of Hiland Holdings GP, LP on September 25, 2006, Class B common units in Hiland Holdings, GP, LP, who, at that time, became a majority common
unitholder of Hiland Partners, LP, were issued to our past CEO and past CFO as consideration for their unvested Class B member interests in our general partner. The Hiland
Holdings GP, LP Class B common
units have substantially identical rights as Hiland Holdings GP, LP common units and, upon vesting, become convertible at the election of the holder into common units. Prior to
conversion, the Class B common units are non-transferable. The Class B common units vested in equal increments on February 15, 2007 and February 15, 2008. In
February and April 2007, our past CEO elected to convert his vested Class B common units to common units. In April 2007, our past CEO resigned and his unvested
Class B common units in Hiland Holdings, GP, LP, were forfeited and transferred to the Hiland Holdings GP, LP's contributing parties on a pro rata basis based on
their vested ownership of Hiland Partners GP, LLC immediately prior to the contribution of those interests in connection with their formation. In February 2008, our past CFO
elected to convert his Class B common units to common units.

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Summary Compensation Table

The following table sets forth information regarding compensation earned by our CEO, our CFO and three other most highly compensated
executive officers employed in 2008, 2007 and 2006:

SUMMARY COMPENSATION TABLE

Annual
Compensation

Long-Term CompensationName and Principal Position

Year

Salary
($)(1)

Bonus
($)(2)

Unit
Awards
($)(3)

Option
Awards
($)(4)

All Other
Compensation
($)

Total
($)Joseph Griffin


2008

$
275,500

$
150,000

$
208,690

$


$
12,000

$
646,190President and Chief Executive Officer


2007

$
137,494

$
40,000

$
154,426

$


$
31,667

$
363,587Matthew Harrison


2008

$
172,709

$
5,000

$
182,976

$


$
88,847

$
449,532Vice PresidentFinance, Secretary and Chief Financial OfficerRobert Shain


2008

$
205,385

$
95,000

$
150,629

$


$
11,019

$
462,033Vice President Chief Commercial Officer


2007

$
184,961

$
88,000

$
95,217

$
20,559

$
9,154

$
397,8912006

$
126,151

$
40,000

$
4,071

$
27,858

$
69,950

$
268,030Kent Christopherson


2008

$
75,692

$
40,000

$
61,425

$


$
76,246

$
253,363Vice President Chief Operations OfficerKen Maples


2008

$
84,505

$
125,000

$


$
895

$
4,995

$
215,395Past Vice PresidentFinance, Secretary


2007

$
218,318

$
113,750

$
17,306

$
11,838

$
10,687

$
371,899and Chief Financial Officer


2006

$
192,490

$
55,000

$


$
32,834

$
9,560

$
289,884Ron Hill


2007

$
166,211

$
51,000

$
2,855

$
17,792

$
8,250

$
246,108Past Vice President of Business Development


2006

$
147,692

$


$


$
37,624

$
3,173

$
188,489Randy Moeder


2007

$
101,021

$
130,000

$


$
29,342

$
5,577

$
265,940Past President and Chief Executive Officer


2006

$
231,058

$
85,000

$


$
52,534

$
10,855

$
379,447Clint Duty


2006

$
46,577

$


$


$
12,325

$
2,598

$
61,500Past Vice President of Operations and Engineering


---

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Grants of Plan Based Awards

The following table provides information regarding unit options and restricted and phantom units awarded to our executive officers in
2008:

GRANTS OF PLAN BASED AWARDS

Name

Grant Date

All Other
Unit
Awards:
Number of
Units (#)

Base Price
of Unit
Awards
($/Unit)

All Other
Option
Awards:
Number of
Securities
Underlying
Options (#)

Exercise or
Base Price
of Option
Awards
($/Unit)

Grant Date
Fair Value
of Option
Awards
($/Unit)Mr. Harrison


2/4/2008


7,500

$
49.45








Mr. Christopherson


8/7/2008


7,500

$
43.87











Mr. Christopherson
was awarded 7,500 phantom units on August 7, 2008, which vest in equal annual installments on the anniversary of the grant date over a four year period.
Mr. Harrison was awarded 7,500 phantom units on February 4, 2008, which vest in equal annual installments on the anniversary of the grant date over a three year period. Quarterly
distributions on the phantom units awarded to Mr. Harrison and Mr. Christopherson are held in trust by our general partner until the units vest, at which time they are distributed to the
award recipient.

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Outstanding Equity Awards at Fiscal Year-End Table

The following table provides information regarding outstanding awards that have been granted to our executive officers, but the
ultimate outcomes of which have not been realized:

OUTSTANDING EQUITY AWARDS AS FISCAL YEAR-END

Name

Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable

Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable

Option
Exercise
Price ($)

Option
Expiration
Date

Number of
Restricted
and Phantom
Units That
Have Not
Vested (#)

Market
Value of
Units and
Options That
Have Not
Vested ($)Mr. Griffin(1)














7,500

$
38,475Mr. Harrison(2)














7,500

$
38,475Mr. Shain(3)


10,000


5,000

$
40.70


03/20/16


5,250

$
26,933Mr. Christopherson(4)














7,500

$
38,475


---

Option Exercises and Units Vested Table

The table presented below provides information of the values realized upon the exercise of options and the vesting of restricted and
phantom units of our executive officers
during 2008 based on the difference between the market price of the underlying units at exercise and the exercise or base price of the unit options:

OPTION EXERCISES AND UNITS VESTED

Option Awards

Unit AwardsName

Number
of Units
Acquired on
Exercise (#)

Value
Realized
Upon
Exercise ($)

Number
of Units
Acquired on
Vesting (#)

Value
Realized
Upon
Vesting ($)Mr. Griffin








1,807

$
132,775Mr. Shain








1,582

$
50,883


On
June 19, 2008, 2,500 of the 10,000 phantom units awarded to Mr. Griffin on June 19, 2007 vested. Upon vesting, Mr. Griffin elected to redeem 693 units in
cash. On November 6, 2008, 1,250 of the 5,000 phantom units awarded to Mr. Shain on November 6, 2007 vested. Upon vesting, Mr. Shain elected to redeem 418 units in cash. On
November 10, 2008, 750 of the restricted units awarded to Mr. Shain on November 10, 2006 vested.

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Director Compensation

Mr. Harold Hamm, the chairman of the board of directors of our general partner and a non-employee director, received
no form of director compensation. Mr. Griffin, our CEO and Mr. Harrison our CFO, who are employees of our general partner, are also non-compensated members of the board of
directors of our general partner. Mr. Maples, our past CFO was also a non-compensated member of the board of directors of our general partner. The table below shows the total
compensation paid in 2008 to each of our current non-employee directors:

DIRECTOR COMPENSATION

Name

Annual
Base Fee(1)
($)

Committee
Fees
($)

Restricted
Unit
Awards(2)
 ($)

Restricted
Unit
Distributions(3)
($)

Total
($)Michael L. Greenwood

$
31,000

$
10,500

$
44,790

$
6,614

$
92,904Edward D. Doherty

$
31,000

$
5,500

$
44,790

$
6,614

$
87,904Rayford T. Reid

$
31,000

$
6,500

$
44,790

$
6,614

$
88,904Shelby E. Odell

$
31,000

$
5,500

$
36,300

$
6,614

$
79,414John T. McNabb, II

$
31,000

$
12,000

$
33,592

$
3,859

$
80,451Dr. David L. Boren

$
31,000

$
3,750

$
33,592

$
3,859

$
72,201


---

No
additional remuneration is paid to officers of our general partner who also serve as directors. In 2006 through November 2008, our non-employee directors, other than
Mr. Hamm, received (a) a $25,000 annual cash retainer fee, (b) $1,500 for each regularly scheduled meeting attended, (c) $750 for each special meeting attended and
(d) 2,000 restricted units upon becoming a director and 1,000 restricted units on each anniversary date of becoming a director. The restricted units vest in quarterly increments on the
anniversary of the grant date over a period of four years. In addition to the foregoing, each director who serves on a committee receives $1,000 for each committee meeting attended, the chairman of
our audit committee receives an annual retainer of $5,000 and the chairmen of our other committees, excluding the compensation committee, receive an annual retainer of $2,500. In November 2008, the
compensation committee of our general partner approved the following remuneration changes (a) an increase in the annual cash retainer fee from $25,000 to $30,000, (b) an increase in the
annual retainer fee of the chairman of the audit committee from $5,000 to $7,500, (c) an increase in the annual retainer fee of the chairman of the compensation committee from $0 to $2,500, and
(d) the remuneration of Mr. Hamm consistent with other non-employee directors. In addition, each independent director is reimbursed for his
out-of-pocket expenses in connection with attending meetings of the board of directors or committees. Each director is fully indemnified for his actions associated with being a
director to the fullest extent permitted under Delaware law.

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Reimbursement of Expenses of Our General Partner

Our general partner will not receive any management fee or other compensation for its management of our partnership. Our general
partner and its affiliates will be reimbursed for all expenses incurred on our behalf. These expenses include the cost of employee, officer and director compensation benefits properly allocable to our
partnership and all other expenses necessary or appropriate to the conduct of our business and allocable to us. The partnership agreement provides that our general partner will determine the expenses
that are allocable to us in any reasonable manner determined by our general partner in its discretion. There is no cap on the amount that may be paid or reimbursed to our general partner for
compensation or expenses incurred on our behalf. CLR currently provides us with certain general and administration services. For a description of these services, please read "Certain Relationships and
Related Party TransactionsAgreements with Harold Hamm and His AffiliatesOmnibus AgreementServices." In the omnibus agreement, CLR agreed to continue to provide
these services to us for two years after our initial public offering, at the lower of CLR's cost to provide the services or $50,000 per year. During the third quarter of 2006, we hired a director of
information technology and a director of human resources and transitioned these services away from CLR. The remainder of general and administration services provided by CLR under this agreement
expired on February 15, 2007.

Long-Term Incentive Plan

Our general partner, Hiland Partners GP, LLC adopted the Hiland Partners, LP Long-Term Incentive Plan
for its employees and directors of our general partner and employees of its affiliates. The plan is intended to promote our interests and the interests of our general partner by providing to employees
and directors of our general partner and its affiliates incentive compensation awards for superior performance that are based on units. The plan is also contemplated to enhance the ability of our
general partner, its affiliates or us to attract and retain the services of individuals who are essential for our growth and profitability and to encourage them to devote their best efforts to
advancing our business. The long-term incentive plan currently permits an aggregate of 680,000 common units to be issued with respect to unit options, restricted units and phantom units
granted under the plan. No more than 225,000 of the 680,000 common units may be issued with respect to vested restricted or phantom units. The plan is administered by the compensation committee of our
general partner's board of directors. The plan will continue in effect until the earliest of (i) the date determined by the board of directors of our general partner; (ii) the date
common units are no longer available for payment of awards under the plan; or (iii) the tenth anniversary of the plan.

Our
general partner's board of directors or compensation committee may, in their discretion, terminate, suspend or discontinue the long-term incentive plan at any time with
respect to any units for which a grant has not yet been made. Our general partner's board of directors or its compensation committee also has the right to alter or amend the long-term
incentive plan or any part of the plan from time to time, including increasing the number of units that may be granted, subject to unitholder approval, if required, by the exchange upon which the
common units are listed at that time. No change in any outstanding grant may be made, however, that would materially impair the rights of the participant without the consent of the participant.

Restricted Units and Phantom Units.A restricted unit is a common unit that is subject to forfeiture. Upon vesting, the grantee
receives a common
unit that is not subject to forfeiture. Distributions on unvested restricted common units are held in trust by our general partner until the units vest, at which time the distributions are distributed
to the grantee. A phantom unit is a notional unit that is subject to forfeiture and is not considered issued until it vests. Upon vesting, holders of phantom units will receive (i) a common
unit that is not subject to forfeiture, cash in lieu of the delivery of such unit equal to the fair market value of the unit on the vesting date, or a combination thereof, at the discretion of the our
general partner's board of directors, and (ii) the distributions held

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in
trust, if applicable, related to the vested units. The compensation committee may make grants of restricted units and phantom units under the plan to employees and directors containing such terms
as the compensation committee shall determine under the plan, including the period over which restricted units and phantom units granted will vest. The compensation committee may, in its discretion,
base its determination on the grantee's period of service or upon the achievement of specified financial objectives. In addition, the restricted and phantom units will vest upon a change of control of
us or our general partner, subject to additional or contrary provisions in the award agreement.

If
a grantee's employment or membership on the board of directors terminates for any reason, the grantee's restricted units and phantom units will be automatically forfeited unless, and
to the extent, the compensation committee provides otherwise or unless otherwise provided in a written employment agreement between the grantee and our general partner or its affiliates. Common units
to be delivered with respect to these awards may be common units acquired by our general partner in the open market, common units already owned by our general partner, common units acquired by our
general partner directly from us or any other person or any combination of the foregoing. Our general partner will be entitled to reimbursement by us for the cost incurred in acquiring common units.
If we issue new common units with respect to these awards, the total number of common units outstanding will increase.

Distributions
on restricted units may be subject to the same vesting requirements as the restricted units, in the compensation committee's discretion. The compensation committee, in its
discretion, may also
grant tandem distribution equivalent rights with respect to phantom units. These are rights that entitle the grantee to receive cash equal to the cash distributions made on the common units.

We
intend for the restricted units and phantom units under the plan to serve as a means of incentive compensation for performance and not primarily as an opportunity to participate in
the equity appreciation of the common units. Therefore, plan participants will not pay any consideration for the common units they receive, and we will receive no remuneration for the units.

Unit Options.The long-term incentive plan permits the grant of options covering common units. The compensation committee may make
grants
under the plan to employees and directors containing such terms as the committee shall determine. Except in the case of substitute options granted to new employees or directors in connection with a
merger, consolidation or acquisition, unit options may not have an exercise price that is less than the fair market value of the units on the date of grant. In addition, unit options granted will
generally become exercisable over a period determined by the compensation committee and, in the compensation committee's discretion, may provide for accelerated vesting upon the achievement of
specified performance objectives. The unit options will become exercisable upon a change in control of us or of our operating company. Unless otherwise provided in an award agreement, unit options may
be exercised only by the participant during his lifetime or by the person to whom the participant's right will pass by will or the laws of descent and distribution. If a grantee's employment or
membership on the board of directors terminates for any reason, the grantee's unvested options will be automatically forfeited unless, and to the extent, the compensation committee provides otherwise
or unless otherwise provided in a written employment agreement or the option agreement between the grantee and our general partner or its affiliates. If the exercise of an option is to be settled in
common units rather than cash, the general partner will acquire common units in the open market or directly from us or any other person or use common units already owned by our general partner or any
combination of the foregoing. The general partner will be entitled to reimbursement by us for the difference between the cost incurred by it in acquiring these common units and the proceeds it
receives from a grantee at the time of exercise. Thus, the cost of the unit options above the proceeds from grantees will be borne by us. If we issue new common units upon exercise of the unit
options, the total number of common units outstanding will increase, and our general partner will pay us the proceeds it received from the grantee upon exercise of the unit option.

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The
plan has been designed to furnish additional compensation to employees and directors and to align their economic interests with those of common unitholders.

Unit Option Grant Agreement.As of January 1, 2009, we have outstanding unit options to officers, directors and employees of our
general
partner to purchase an aggregate of 33,336 common units with a weighted average exercise price of $37.92. No unit options were granted in 2008 or 2007. Under the unit option grant agreements, the
options vest and may be exercised in one third increments on the
anniversary of the grant date over a period of three years. In addition, the unit options will vest and become exercisable, subject to certain conditions, upon the occurrence of any of the
following:



Of
the 75,041 outstanding unit options at January 1, 2008, 40,705 were exercised in 2008, resulting in cash contributions to us of $1.1 million and 1,000 unit options were
forfeited. Of the remaining 33,336 outstanding unit options at December 31, 2008, 24,002 were exercisable. On January 5, 2009, the 4,334 unit options granted on January 5, 2006
vested, and on March 20, 2009, the final 5,000 unit options will vest.

Compensation Committee Interlocks and Insider Participation

Harold Hamm serves as the chairman of our Compensation Committee. Mr. Hamm controls CLR, and the required disclosure concerning
related party transactions involving Mr. Hamm, CLR and us are set forth below. Other members of the compensation committee include Mr. John T. McNabb, II and Mr. Rayford T. Reid.

Report of the Compensation Committee

The compensation committee of the Board of Directors of Hiland Partners GP, LLC administers the executive compensation
program of Hiland Partners, LP. The compensation committee is primarily responsible for reviewing, approving and reporting to the Board of Directors of Hiland Partners GP, LLC on
major compensation and benefits plans, policies and programs of Hiland Partners, LP; reviewing and evaluating the performance and approving the compensation of senior executive officers; and
overseeing management development programs, performance assessment of senior executives and succession planning. Other specific duties and responsibilities include: annually reviewing and approving
corporate goals and objectives relevant to the CEO base compensation, incentive-compensation plans and equity-based plans; evaluating the CEO's performance in light of those goals and objectives, and
recommending to the Board of Directors, either as a committee or together with the other independent directors, the CEO's compensation levels based on this evaluation; and producing the required
annual report on executive compensation. The compensation committee annually evaluates the effectiveness of the executive compensation program in meeting its objectives.

As
required by applicable regulations of the Securities and Exchange Commission, the compensation committee reviewed and discussed with management the compensation discussion and
analysis contained in this Annual Report on Form 10-K. Based on the reviews and discussions referred to above, the compensation committee recommended to the Board of Directors of
Hiland Partners GP, LLC that the compensation discussion and analysis be included in the Annual Report on Form 10-K for the year ended December 31, 2008 for
filing with the SEC.

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Table of Contents

Respectively
submitted on March 5, 2009 by the members of the compensation committee of the Board of Directors of Hiland Partners GP, LLC:

Harold
Hamm, Chairman
John T. McNabb, II
Rayford T. Reid

Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Unitholder Matters

Beneficial Ownership of Hiland Partners, LP.The following table sets forth the beneficial ownership of our units as of
March 5, 2009
held by each person who beneficially owned more than 5% or more of the then outstanding units and all of the directors, named executive officers, and directors and executive officers as a group of our
general partner.

Name of Beneficial Owner

Common Units
Beneficially
Owned

Percentage of
Common Units
Beneficially
Owned

Subordinate
Units
Beneficially
Owned

Percentage of
Subordinated
Units
Beneficially
Owned

Percentage of
Total Units
Beneficially
OwnedHarold Hamm(1)(2)(3)


2,321,471


36.8
%

3,060,000


100.0
%

57.4
%Hiland Holdings GP, LP(1)(3)


2,321,471


36.8
%

3,060,000


100.0
%

57.4
%Joseph L. Griffin(1)


1,807


*








*Matthew S. Harrison(1)


2,500


*








*Robert W. Shain(1)(4)


18,832


*








*Kent C. Christopherson(1)





*








*Michael L. Greenwood(1)(2)(5)


13,291


*








*Edward D. Doherty(1)(2)(5)


5,000


*








*Rayford T. Reid(1)(2)(5)


11,818


*








*Shelby E. Odell(1)(2)(5)


15,000


*








*John T. McNabb, II(1)(6)


4,000


*








*Dr. David L. Boren(1)(6)


4,000


*








*Kayne Anderson Capital Advisors, L.P.(7)


686,439


10.9
%







7.3
%All directors and executive officers as a group


2,397,719


38.0
%

3,060,000


100.0
%

58.3
%


---

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Table of Contents

Beneficial Ownership of Hiland Holdings GP, LP.The following table sets forth the beneficial ownership of units of Hiland
Holdings GP, LP as of March 5, 2009 held by each person who beneficially owned more than 5% or more of the then outstanding units and all of the directors, named executive
officers, and directors and executive officers as a group of Hiland Holdings GP, LP.

Name of Beneficial Owner(1)

Common Units
Beneficially
Owned

Percentage of
Common Units
Beneficially
OwnedHarold Hamm(2)


7,752,184


35.9
%Harold Hamm DST Trust(2)


3,232,346


15.0
%Harold Hamm HJ Trust(2)


2,153,522


10.0
%Joseph L. Griffin(1)





*Matthew S. Harrison(1)





*Robert W. Shain(1)





*Kent C. Christopherson(1)





*Michael L. Greenwood(3)


4,000


*Edward D. Doherty(3)


4,500


*Rayford T. Reid(3)


29,000


*Shelby E. Odell(3)


9,000


*Dr. Cheryl L. Evans(3)


4,500


*Dr. Bobby B. Lyle(3)


63,904


*Swank Capital, LLC(4)


1,962,285


9.1
%Kayne Anderson Capital Advisors, L.P.(5)


1,166,036


5.4
%All directors and executive officers as a group


7,867,088


36.4
%






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Beneficial Ownership of Our General Partner Interest.Hiland Holdings GP, LP owns all of our 2% general partner interest, all
of our
incentive distributions rights, 2,321,471 of our common units and 3,060,000 of our subordinated units.

For
information on our equity compensation plans, see Item 5. "Equity Compensation Plan Information."

Item 13.    Certain Relationships and Related Transactions and Director Independence

For a discussion of director independence, see Item 10. "Directors and Executive Officers of the Registrant."

Harold
Hamm, the Harold Hamm DST Trust and the Harold Hamm HJ Trust own 60.8% of Hiland Holdings GP, LP, who owns all of our 2% general partner interest, all of our
incentive distributions rights, 2,321,471 of our common units and 3,060,000 of our subordinated units. Mr. Harold Hamm owns 72.8% of the ownership interest of Continental Resources, Inc.
Since its inception in 1967, Mr. Hamm
has served as Chief Executive Officer and a director of Continental Resources, Inc. and currently serves as Chairman of the Board of Directors and Chief Executive Officer.

Distributions and Payments to Our General Partner and its Affiliates

Our general partner and its affiliates do not receive any management fee or other compensation for the management of our business and
affairs, but they are reimbursed for all expenses that they incur on our behalf, including general and administrative expenses, salaries and benefits for all of our employees and other corporate
overhead. Our general partner determines the amount of these expenses. In the omnibus agreement, CLR agreed to continue to provide certain general and administrative services to us for two years after
our initial public offering, at the lower of CLR's cost to provide the services or $50,000 per year. During the third quarter of 2006, we hired a director of information technology and a director of
human resources and transitioned these services away from CLR. The remainder of general and administration services provided by CLR under this agreement expired on February 15, 2007. Please
read "Omnibus AgreementServices" below. In addition, our general partner owns the 2% general partner interest and all of the incentive distribution rights. Our general
partner is entitled to receive incentive distributions if the amount we distribute with respect to any quarter exceeds levels specified in our partnership agreement.

Omnibus Agreement

Upon the closing of our initial public offering, we entered into an omnibus agreement with CLR, Hiland Partners, LLC, Harold
Hamm, Continental Gas Holdings, Inc. and our general partner that addressed the following matters:



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Non-Competition

Harold Hamm will not, and will cause his affiliates not to engage in, whether by acquisition, construction, investment in debt or
equity interests of any person or otherwise, the business of gathering, treating, processing and transportation of natural gas in North America, the transportation and fractionation of NGLs in North
America, and constructing, buying or selling any assets related to the foregoing businesses. This restriction does not apply to:



These
non-competition obligations will terminate on the first to occur of the following events:



Indemnification

CLR, Hiland Partners, LLC and Continental Gas Holdings, Inc. agreed to indemnify us for all federal, state and local
income tax liabilities attributable to the operation of the assets contributed by such entities to us prior to the closing of our initial public offering. In addition, CLR agreed to indemnify us for a
period of five years from the closing date of our initial public offering for liabilities associated with oil and gas properties conveyed by CGI to CLR by dividend.

Contracts with CLR

Compression Services Agreement

In connection with our initial public offering, we entered into a four-year compression services agreement with CLR as
described under "Management's Discussion and Analysis of Financial Condition and Results of OperationsOur ContractsCompression Services Agreement." For the year ended
December 31, 2008 we received revenues of $4.8 million from CLR under this arrangement.

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Table of Contents

Gas Purchase Contracts

We purchase natural gas and NGLs from CLR and its affiliates. We purchased natural gas and NGLs from CLR and its affiliates in the
amount of approximately $116.7 million for the year ended December 31, 2008.

Badlands Purchase Contract

On November 8, 2005, we entered into a new 15-year definitive gas purchase agreement with CLR under which we will
gather, treat and process additional natural gas, which is produced as a by-product of CLR's secondary oil recovery operations, in the areas specified by the contract. In return, we will
receive 50% of the proceeds attributable to residue gas and natural gas liquids sales as well as certain fixed fees associated with gathering and treating the natural gas, including a $0.60 per Mcf
fee for the first 36 Bcf of natural gas gathered. The board of directors, as well as the conflicts committee of the board of directors, of our general partner have approved the agreement.

In
order to fulfill our obligations under the agreement, we expanded our Badlands gas gathering system and processing plant located in Bowman County, North Dakota. This expansion project
included the construction of a 40,000 Mcf/d nitrogen rejection plant, which became operational in the third quarter of 2007, and the expansion of our existing Badlands field-gathering infrastructure.

Other Agreements

Historically, our predecessor and Hiland Partners, LLC have contracted for down hole well services, fluid supply and oil field
services from businesses in which Harold Hamm and members of his family have historically owned equity interests. Mr. Hamm and members of his family sold these businesses to Complete Production
Services, Inc. in October 2004. Mr. Hamm is currently a director and stockholder of Complete Production Services. Payments made for these services were $463,000 during the year ended
December 31, 2008. We have continued to obtain services from these companies following the completion of our initial public offering. Based on various bids received by our general partner from
unaffiliated third parties, our general partner believes that amounts paid for these services are comparable to amounts which would be charged by an unaffiliated third party.

We
lease office space under operating leases from an entity wholly owned by Harold Hamm. Rents paid under these leases totaled approximately $157,000 for the year ended
December 31, 2008. These rates are consistent with the rates charged to other non-affiliated tenants in the building which we office.

In
connection with the completion of our initial public offering, we adopted an ethics policy that requires related party transactions be reviewed to ensure that they are fair and
reasonable to us. This requirement is also contained in our partnership agreement.

While
we do not have formal, specified policies or procedures for the review, approval or ratification of transactions required to be reported under paragraph (a) of
Regulation S-K Item 404, as related person transactions may result in potential conflicts of interest among management and board-level decision makers, our partnership
agreement does set forth procedures that our board of directors may utilize in connection with resolutions of potential conflicts of interest, including referral of such matters to an independent
conflicts committee for its review and approval or disapproval of such matters. For a discussion of our conflicts committee, see Item 10. ""Directors and Executive Officers of the Registrant."

Item 14.    Principal Accountant Fees and Services

Our audit committee has adopted an audit committee charter, which is available on our Web site at www.hilandpartners.com. The charter
requires our audit committee to approve in advance all audit

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Table of Contents

and
non-audit services to be provided by our independent registered public accounting firm. Our audit committee ratified Grant Thornton LLP, Independent Registered Public Accounting
Firm, to audit the books, records and accounts of Hiland Partners, LP for the year ended December 31, 2008. Audit fees paid to Grant Thornton LLP in 2008 include fees for our
annual integrated audit, review of documents filed with the Securities and Exchange Commission and review of our quarterly reports on Form 10-Q. Tax fees include tax compliance
matters. Fees paid in 2007 to Grant Thornton LLP for audit services included fees for our annual integrated audit, review of documents filed with the Securities and Exchange Commission and
reviews of our quarterly reports on Form 10-Q. Fees for audit related services relate to consultation regarding various business transactions. Tax fees include tax compliance and
acquisition matters. Fees paid to Grant Thornton LLP for the periods indicated are as follows:

2008

2007Audit Fees

$
355,000

$
338,000Audit Related Fees





11,000Tax Fees


88,000


121,000All Other Fees





Total

$
443,000

$
470,000


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PART IV

Item 15.    Exhibits and Financial Statement Schedules

(a)   Financial
Statements

The
financial statements listed in the accompanying Index to Consolidated Financial Statements are filed as part of this Annual Report on Form 10-K.

(b)   Other
Information

None.

EXHIBITS

Exhibit
Number



Description2.1



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 Registrant's Form 8-K filed
September 29, 2005)3.1



Certificate of Limited Partnership of Hiland Partners, LP. (incorporated by reference to Exhibit 3.1 of Registrant's 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 Registrant's 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 Registrant's 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 Registrant's 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 Registrant's 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 Registrant's 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 Registrant's 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 Registrant's Form 8-K filed on September 29,
2006).10.1



Credit Agreement dated as of February 15, 2005 among Hiland Operating, LLC and MidFirst Bank (incorporated by reference to Exhibit 10.1 of Registrant's annual report on Form 10-K filed on
March 30, 2005)10.2*



Hiland Partners, LP Long-Term Incentive Plan (incorporated by reference to Exhibit 10.2 of Registrant's Registration Statement on Form S-1 (File No. 333-119908))10.3



Compression Services Agreement, effective as of January 28, 2005, by and among Hiland Partners, LP and Continental Resources, Inc. (incorporated by reference to Exhibit 10.3 of Registrant's annual
report on Form 10-K filed on March 30, 2005)


109

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Table of Contents

Exhibit
Number



Description10.4



Gas Purchase Contract between Continental Resources, Inc. and Continental Gas, Inc. (incorporated by reference to Exhibit 10.4 of Registrant's Registration Statement on Form S-1 (File
No. 333-119908))10.5



Gas Purchase Contract Chesapeake Energy Marketing, Inc. and Continental Gas, Inc. (incorporated by reference to Exhibit 10.5 of Registrant's Registration Statement on Form S-1 (File
No. 333-119908))10.6



Gas Purchase Contract between Magic Circle Energy Corporation and Magic Circle Gas (incorporated by reference to Exhibit 10.6 of Registrant's Registration Statement on Form S-1 (File No. 333-119908))10.7



Gas Purchase Contract between Range Resources Corporation and Continental Gas, Inc. (incorporated by reference to Exhibit 10.7 of Registrant's Registration Statement on Form S-1 (File
No. 333-119908))10.8



Contribution, Conveyance and Assumption Agreement among Hiland Partners, LP, Hiland Operating, LLC, Hiland GP, LLC, Hiland LP, LLC, Continental Gas, Inc., Hiland Partners GP,
 LLC, Hiland Partners, LLC, Continental Gas Holdings, Inc., Hiland Energy Partners, LLC, Harold Hamm, Harold Hamm HJ Trust, Harold Hamm DST Trust, Equity Financial Services, Inc., Randy Moeder, and Ken Maples effective as of
February 15, 2005 (incorporated by reference to Exhibit 10.8 of Registrant's annual report on Form 10-K filed on March 30, 2005)10.9*



Form of Unit Option Grant (incorporated by reference to Exhibit 10.9 of Registrant's Registration Statement on Form S-1 (File No. 333-119908))10.10



Omnibus Agreement among Continental Resources, Inc., Hiland Partners, LLC, Harold Hamm, Hiland Partners GP, LLC, Continental Gas Holdings, Inc., and Hiland Partners, LP effective as of
February 15, 2005 (incorporated by reference to exhibit 10.10 of Registrant's annual report on Form 10-K filed on March 30, 2005)10.11*



Director's Compensation Summary (incorporated by reference to exhibit 10.11 of Registrant's annual report on Form 10-K filed on March 30, 2005)10.12*



Form of Restricted Unit Grant Agreement (incorporated by reference to exhibit 10.1 of Registrant's Form 8-K filed on November 14, 2005)10.13



First Amendment, dated as of September 26, 2005 to Credit Agreement dated as of February 15, 2005 among Hiland Operating, LLC and the lenders thereto (incorporated by reference to Exhibit 10.1 of
Registrant's Form 8-K filed on September 29, 2005)10.14



Gas Purchase Agreement among Hiland Partners, LP and Continental Resources, Inc. dated November 8, 2005 (incorporated by reference to Exhibit 10.1 of Registrant's Form 8-K filed on
November 10, 2005)10.15



Unit Purchase Agreement dated May 1, 2006 by and between Hiland Partners, LP and Hiland Partners GP, LLC (incorporated by reference to Exhibit 10.1 of Registrant's Form 8-K filed on
May 3, 2006)10.16



Asset Purchase Agreement dated March 30, 2006 by and between Hiland Operating, LLC and Enogex Gas Gathering, L.L.C. (incorporated by reference to Exhibit 10.2 of Registrant's Form 8-K filed on
May 3, 2006)


110

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Table of Contents

Exhibit
Number



Description10.17



Second Amendment, dated as of June 8, 2006, to Credit Agreement dated as of February 15, 2005 among Hiland Operating, LLC and the lenders thereto (incorporated by reference to Exhibit 10.1 of
Registrant's Form 8-K filed on June 13, 2006)10.18



Non-Competition Agreement dated September 25, 2006 (2006 by and among Hiland Partners, LP, Hiland Holdings GP, LP and Hiland Partners GP Holdings, LLC (incorporated by reference to
Exhibit 10.1 of Registrant's Form 8-K filed on September 29, 2006)10.19



Retention Agreement, dated as of March 14, 2007, by and among Randy Moeder, Hiland Partners GP, LLC, Hiland Partners GP Holdings, LLC and the other parties listed on the signature page
thereto. (incorporated by reference to Exhibit 10.1 of Registrant's Form 8-K filed on March 15, 2007)10.20



Third Amendment, dated as of July 13, 2007, to Credit Agreement dated as of February 15, 2005 among Hiland Operating, LLC and the lenders thereto (incorporated by reference to Exhibit 10.1 of
Registrant's Form 8-K filed on July 18, 2007)10.21*



Form of Phantom Unit Grant Agreement (incorporated by reference to Exhibit 10.1 of Registrant's Form 8-K filed on November 13, 2007)10.22



Fourth Amendment, dated as of February 6, 2008, to Credit Agreement dated as of February 15, 2005 among Hiland Operating, LLC and the lenders thereto (incorporated by reference to exhibit 10.1 of
Registrant's Form 8-K filed on February 12, 2008)10.23



Compensation of Conflicts Committee Members19.1



Code of Ethics for Chief Executive Officer and Senior Finance Officers (incorporated by reference to Exhibit 19.1 of Registrant's annual report on Form 10-K filed on March 30, 2005)21.1



List of Subsidiaries of Hiland Partners, LP (incorporated by reference to Exhibit 21.1 of Registrant's annual report on Form 10-K filed on March 30, 2005)23.1



Consent of Grant Thornton LLP31.1



Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 200231.2



Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 200232.1



Certification of Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 200232.2



Certification of Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002


---

111

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Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized in the city of Enid, Oklahoma, on the 9th day of March, 2009.

HILAND PARTNERS, LPBy:

Hiland Partners GP, LLC, its general partnerBy:

/s/ JOSEPH L. GRIFFIN Joseph L. Griffin Chief Executive Officer, President and Director
(principal executive officer)By:

/s/ MATTHEW S. HARRISON Matthew S. Harrison Chief Financial Officer, Vice PresidentFinance,
Secretary and Director
(principal financial and accounting officer)


Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities indicated on
the 9th day of March, 2009.

Signature

Title/s/ HAROLD HAMM Harold Hamm

Chairman of the Board/s/ JOSEPH L. GRIFFIN Joseph L. Griffin

Chief Executive Officer, President and
Director/s/ MATTHEW S. HARRISON Matthew S. Harrison

Chief Financial Officer,
Vice PresidentFinance, Secretary and
Director/s/ MICHAEL L. GREENWOOD Michael L. Greenwood

Director/s/ EDWARD D. DOHERTY Edward D. Doherty

Director


112

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Table of Contents

Signature

Title/s/ RAYFORD T. REID Rayford T. Reid

Director/s/ SHELBY E. ODELL Shelby E. Odell

Director/s/ JOHN T. MCNABB, II John T. McNabb, II

Director/s/ DR. DAVID L. BOREN Dr. David L. Boren

Director


113

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Table of Contents

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



Hiland Partners, LP Consolidated Financial Statements:Management's Report on Internal Control Over Financial Reporting

F-2Reports of Independent Registered Public Accounting Firm

F-3Consolidated Balance Sheets as of December 31, 2008 and 2007

F-5Consolidated Statements of Operations for the years ended December 31, 2008, 2007 and 2006

F-6Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007 and 2006

F-7Consolidated Statement of Changes in Partner's Equity and Comprehensive Income for the years ended
December 31, 2008, 2007 and 2006

F-9Notes to Consolidated Financial Statements

F-10


F-1

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Table of Contents

Management's Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in
Rules 13a15(f) and 15d15(f) under the Securities and Exchange Act of 1934). Our internal control over financial reporting is a process designed by management, under
the supervision of the Chief Executive Officer and Chief Financial Officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with accounting principles generally accepted in the United States of America, and includes those policies and procedures that:



Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate. Accordingly,
even effective internal control over financial reporting can only provide reasonable assurance of achieving their control objectives.

Our
management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of the Company's internal control
over financial reporting as of December 31, 2008. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) inInternal Control-Integrated Framework.

Based
on our evaluation under the framework in Internal Control-Integrated Framework, our management concluded that, as of December 31, 2008, our internal control over financial
reporting was effective.

Grant
Thornton LLP, the independent registered accounting firm who audited the consolidated financial statements included in this Annual Report, has issued a report on our
internal control over financial reporting. This report, dated March 9, 2009, appears on page F-3.

/s/ JOSEPH L. GRIFFIN Joseph L. Griffin Chief Executive OfficerMarch 9, 2009/s/ MATTHEW S. HARRISON Matthew S. Harrison Chief Financial OfficerMarch 9, 2009


F-2

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Table of Contents

Report of Independent Registered Public Accounting Firm

Board
of Directors
Hiland Partners GP, LLC

We
have audited internal control over financial reporting of Hiland Partners, LP and subsidiaries (the Partnership) as of December 31, 2008, based on criteria established
inInternal ControlIntegrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The
Partnership's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting,
included in the accompanying "Management's Report on Internal Control Over Financial Reporting". Our responsibility is to express an opinion on the Partnership's internal control over financial
reporting based on our audit.

We
conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A
company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In
our opinion, the Partnership maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on Internal ControlIntegrated Frameworkissued by COSO.

We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Partnership as of
December 31, 2008 and 2007, and the related consolidated statements of operations, cash flows, and changes in partners' equity and comprehensive income for each of the three years in the period
ended December 31, 2008 and our report dated March 9, 2009 expressed an unqualified opinion.

/s/
GRANT THORNTON LLP

Oklahoma
City, Oklahoma
March 9, 2009

F-3

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Table of Contents

Report of Independent Registered Public Accounting Firm

Board
of Directors
Hiland Partners GP, LLC

We
have audited the accompanying consolidated balance sheets of Hiland Partners, LP and subsidiaries (the Partnership) as of December 31, 2008 and 2007 and the related
consolidated statements of operations, cash flows, and changes in partner's equity and comprehensive income for each of the three years in the period ended December 31, 2008. These financial
statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.

In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Hiland Partners, LP and subsidiaries as
of December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2008 in conformity with accounting
principles generally accepted in the United States of America.

We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Partnership's internal control over financial reporting as of
December 31, 2008, based on criteria established inInternal ControlIntegrated Frameworkissued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) and our report dated March 9, 2009 expressed an unqualified opinion.

/s/
GRANT THORNTON LLP

Oklahoma
City, Oklahoma
March 9, 2009

F-4

---





Table of Contents

HILAND PARTNERS, LP        Consolidated Balance Sheets        (in thousands, except unit amounts)

December 31,
2008

December 31,
2007ASSETSCurrent assets:Cash and cash equivalents

$
1,173

$
10,497Accounts receivable:Tradenet of allowance for doubtful accounts of $304 in 2008


23,863


31,841Affiliates


2,346


1,47926,209


33,320Fair value of derivative assets


6,851


2,718Other current assets


1,584


1,155Total current assets


35,817


47,690Property and equipment, net


345,855


319,320Intangibles, net


35,642


41,102Fair value of derivative assets


7,141


418Other assets, net


1,684


1,943Total assets

$
426,139

$
410,473LIABILITIES AND PARTNERS' EQUITYCurrent liabilities:Accounts payable

$
22,470

$
24,709Accounts payable-affiliates


7,662


7,880Fair value of derivative liabilities


1,439


8,238Accrued liabilities and other


2,463


2,075Total current liabilities


34,034


42,902Commitments and contingencies (Note 9)Long-term debt


256,466


226,104Fair value of derivative liabilities





141Asset retirement obligations


2,483


2,159Partners' equityLimited partners' interest:Common unitholders (6,286,755 and 5,214,323 units issued and outstanding at December 31, 2008 and December 31, 2007, respectively)


122,666


130,066Subordinated unitholders (3,060,000 and 4,080,000 units issued and outstanding at December 31, 2008 and December 31, 2007, respectively)


3,055


10,774General partner's interest


2,202


4,056Accumulated other comprehensive income (loss)


5,233


(5,729
)Total partners' equity


133,156


139,167Total liabilities and partners' equity

$
426,139

$
410,473


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

F-5

---





Table of Contents

HILAND PARTNERS, LP        Consolidated Statements of Operations        (in thousands, except per unit amounts)

Year Ended December 31,2008

2007

2006Revenues:Midstream operationsThird parties

$
371,686

$
269,769

$
210,732Affiliates


11,494


3,455


4,135Compression services, affiliate


4,819


4,819


4,819Total revenues


387,999


278,043


219,686Operating costs and expenses:Midstream purchases (exclusive of items shown separately below)


159,906


135,134


105,884Midstream purchasesaffiliate (exclusive of items shown separately below)


116,694


60,078


50,309Operations and maintenance


30,526


23,279


16,071Depreciation, amortization and accretion


37,502


29,855


22,130Bad debt


304





General and administrative


8,753


7,587


4,994Total operating costs and expenses


353,685


255,933


199,388Operating income


34,314


22,110


20,298Other income (expense):Interest and other income


346


430


323Amortization of deferred loan costs


(574
)

(410
)

(407
)Interest expense


(13,639
)

(11,346
)

(5,532
)Other income (expense), net


(13,867
)

(11,326
)

(5,616
)Net income


20,447


10,784


14,682Less general partner's interest in net income


6,572


4,526


2,409Limited partners' interest in net income

$
13,875

$
6,258

$
12,273Net income per limited partners' unitbasic

$
1.49

$
0.67

$
1.37Net income per limited partners' unitdiluted

$
1.48

$
0.67

$
1.36Weighted average limited partners' units outstandingbasic


9,328


9,284


8,961Weighted average limited partners' units outstandingdiluted


9,354


9,334


9,010


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

F-6

---





Table of Contents

HILAND PARTNERS, LP        Consolidated Statements of Cash Flows        (in thousands)

Year Ended December 31,2008

2007

2006Cash flows from operating activities:Net income

$
20,447

$
10,784

$
14,682Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization


37,364


29,739


22,064Accretion of asset retirement obligation


138


116


66Amortization of deferred loan cost


574


410


407Gain on derivative transactions


(6,834
)

(373
)

(113
)Unit based compensation


1,538


951


473Bad debt


304





Decrease (increase) in other assets


60





(144
)(Increase) decrease in current assets:Accounts receivabletrade


7,674


(8,139
)

(1,809
)Accounts receivableaffiliates


(867
)

(195
)

239Other current assets


(429
)

(430
)

(330
)Increase (decrease) in current liabilities:Accounts payable


(6,149
)

4,013


5,708Accounts payableaffiliates


(218
)

3,468


(1,710
)Accrued liabilities


284


358


47Net cash provided by operating activities


53,886


40,702


39,580Cash flows from investing activities:Purchases of property and equipment


(54,367
)

(83,408
)

(62,137
)Payment for Kinta Area gathering assets acquired








(96,400
)Proceeds from disposals of property and equipment


25





111Net cash used in investing activities


(54,342
)

(83,408
)

(158,426
)Cash flows from financing activities:Proceeds from long-term borrowings


41,000


74,000


113,280Payments on long-term borrowings


(10,000
)




Increase in deferred offering cost


(7
)

(157
)

Debt issuance costs


(368
)

(501
)

(930
)Common units issued to our general partner








35,000Proceeds from unit options exercise


1,052


1,055


1,312General partner contribution for issuance of restricted common units and from conversion of vested phantom units


8


6


12Redemption of vested phantom units


(60
)




Payments on capital lease obligations


(534
)

(296
)

Cash distributions to unitholders


(39,959
)

(31,290
)

(25,629
)Net cash (used in) provided by financing activities


(8,868
)

42,817


123,045(Decrease) increase for the period


(9,324
)

111


4,199Beginning of period


10,497


10,386


6,187End of period

$
1,173

$
10,497

$
10,386Supplementary informationCash paid for interest, net of amounts capitalized

$
13,430

$
11,332

$
4,514


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

F-7

---



Table of Contents

HILAND PARTNERS, LP

Consolidated Statements of Cash Flows (Continued)

(in thousands)

Non-cash investing and financing activities:Property and equipment financed under capital lease obligations in the third quarter of 2007

$
5,881Assumed asset retirement obligations on May 1, 2006 in connection with acquisition of Kinta Area gathering assets

$
1,106


F-8

---





Table of Contents

HILAND PARTNERS, LP        Consolidated Statement of Changes in Partners' Equity and Comprehensive Income        (in thousands, except unit amounts)

Common
Limited
Partner
Interest

Subordinated
Limited
Partner
Interest

General
Partner
Interest

Unearned
Compensation

Accumulated
Other
Comprehensive
Income (loss)

Total

Total
Comprehensive
IncomeBalance, January 1, 2006

$
110,027

$
25,126

$
2,676

$
(289
)
$
1,049

$
138,589Elimination of unearned compensation upon adoption of SFAS 123R


(289
)







289





Issuance of 761,714 common units to our general partner


34,300





700








35,000Proceeds from 52,699 unit options exercise


1,286





26








1,312Issuance of 13,000 restricted common units








12








12Periodic cash distributions


(12,690
)

(10,812
)

(2,127
)







(25,629
)Unit based compensation


473














473Other comprehensive losses reclassified to income on closed derivative transactions














(3,582
)

(3,582
)
$
(3,582
)Change in fair value of derivatives














6,889


6,889


6,889Net income


6,674


5,599


2,409








14,682


14,682Comprehensive income




















17,989Balance, December 31, 2006

$
139,781

$
19,913

$
3,696

$


$
4,356

$
167,746Proceeds from 42,660 unit options exercise


1,034





21








1,055Issuance of 6,000 restricted common units








6








6Periodic cash distributions


(15,214
)

(11,883
)

(4,193
)







(31,290
)Unit based compensation


951














951Other comprehensive losses reclassified to income on closed derivative transactions














(1,783
)

(1,783
)
$
(1,783
)Change in fair value of derivatives














(8,302
)

(8,302
)

(8,302
)Net income


3,514


2,744


4,526








10,784


10,784Comprehensive income



















$
699Balance, December 31, 2007

$
130,066

$
10,774

$
4,056

$


$
(5,729
)
$
139,167Proceeds from 40,705 unit options exercise


1,031





21








1,052Conversion of 1,020,000 subordinated units to common units

















Issuance of 5,227 common units from 5,227 vested phantom units








3








3Redemption of 1,804 vested phantom units


(60
)













(60
)Issuance of 6,000 restricted common units








5








5Forfeiture of 375 restricted common units


2





(1
)







1Periodic cash distributions


(19,553
)

(11,952
)

(8,454
)







(39,959
)Unit based compensation


1,538














1,538Other comprehensive income reclassified to income on closed derivative transactions














2,996


2,996

$
2,996Change in fair value of derivatives














7,966


7,966


7,966Net income


9,642


4,233


6,572








20,447


20,447Comprehensive income




















31,409Balance, December 31, 2008

$
122,666

$
3,055

$
2,202

$


$
5,233

$
133,156


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

F-9

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Table of Contents

HILAND PARTNERS, LP        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        December 31, 2008 and 2007        (in thousands, except unit
information or unless otherwise noted)

Note 1: Description of Business and Summary of Significant Accounting Policies

Description of Business

Hiland Partners, LP, a Delaware limited partnership ("we," "us," "our," or the "Partnership"), was formed in October 2004 to
acquire and operate certain midstream natural gas plants, gathering systems and compression and water injection assets located in the states of Oklahoma,
North Dakota, Wyoming, Texas and Mississippi that were previously owned by Continental Gas, Inc. ("Predecessor" or "CGI") and Hiland Partners, LLC. We commenced operations on
February 15, 2005, and concurrently with the completion of our initial public offering, CGI contributed a substantial portion of its net assets to us. The transfer of ownership of net assets
from CGI to us represented a reorganization of entities under common control and was recorded at historical cost. CGI was formed in 1990 as a wholly owned subsidiary of Continental
Resources, Inc. ("CLR").

CGI
operated in one segment, midstream, which involved the purchasing, gathering, compressing, dehydrating, treating, and processing of natural gas and fractionating and marketing of
natural gas liquids, or NGLs. CGI historically has owned all of our natural gas gathering, processing, treating and fractionation assets other than our Worland gathering system and our Bakken
gathering system. Hiland Partners, LLC historically owned our Worland gathering system and our compression services assets, which we acquired on February 15, 2005, and our Bakken
gathering system. Since our initial public offering on February 15, 2005, we have operated in midstream and compression services segments. On September 26, 2005, we acquired Hiland
Partners, LLC, which at such time owned the Bakken gathering system, consisting of certain southeastern Montana gathering assets, for $92.7 million, $35.0 million of which was
used to retire outstanding Hiland Partners, LLC indebtedness. On May 1, 2006, we acquired the Kinta Area gathering assets from Enogex Gas Gathering, L.L.C., consisting of certain eastern
Oklahoma gas gathering assets, for $96.4 million. We financed this acquisition with $61.2 million of borrowings from our credit facility and $35.0 million of proceeds from the
issuance to Hiland Partners GP, LLC, our general partner, of 761,714 common units and 15,545 general partner equivalent units, both at $45.03 per unit.

Principles of Consolidation

The consolidated financial statements include our accounts and those of our subsidiaries. All significant intercompany transactions and
balances have been eliminated. The consolidated financial statements include the net assets and operations of assets owned by CGI and Hiland Partners, LLC that were contributed to us
concurrently with the completion of our initial public offering and also include the net assets and operations of Hiland Partners, LLC acquired effective September 1, 2005. Operations
from the acquisition of the Kinta Area gathering assets are reflected only from May 1, 2006.

Use of Estimates

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

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Table of Contents

HILAND PARTNERS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2008 and 2007

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

Note 1: Description of Business and Summary of Significant Accounting Policies (Continued)

Cash and Cash Equivalents

For financial reporting, we consider all highly liquid investments with maturity of three months or less at date of purchase to be cash
equivalents.

Accounts Receivable

The majority of our accounts receivable are due from companies in the oil and gas industry as well as the utility industry. Credit is
extended based on evaluation of the customer's financial condition. In certain circumstances, collateral, such as letters of credit or guarantees, is required. Accounts receivable are due within
30 days and are stated at amounts due from customers. We have established various procedures to manage our credit exposure, including initial credit approvals, credit limits and rights of
offset. Credit losses are charged to income when accounts are deemed uncollectible, determined on a case-by-case basis when we believe the required payment of specific amounts
owed is unlikely to occur. Prior to 2008, losses were minimal. In 2008, an allowance for uncollectible accounts was established.

Concentration and Credit Risk

Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash and cash equivalents and
receivables. We place our cash and cash equivalents with high-quality institutions and in money market funds. We derive our revenue from customers primarily in the oil and gas and utility
industries. These industry concentrations have the potential to impact our overall exposure to credit risk, either positively or negatively, in that our customers could be affected by similar changes
in economic, industry or other conditions. However, we believe that the credit risk posed by this industry concentration is offset by the creditworthiness of our customer base. Our portfolio of
accounts receivable is comprised primarily of mid-size to large domestic corporate entities. Our counterparties to our commodity based derivative instruments as of December 31, 2008
were BP Energy Company and Bank of Oklahoma, N.A. Our counterparty to our interest rate swap is Wells Fargo Bank, N.A.

Fair Value of Financial Instruments

Our financial instruments, which require fair value disclosure, consist primarily of cash and cash equivalents, accounts receivable,
financial derivatives, accounts payable and long-term debt. The carrying value of cash and cash equivalents, accounts receivable and accounts payable are considered to be representative of
their respective fair values, due to the short maturity of these instruments. Derivative instruments are reported in the accompanying consolidated financial statements at fair value in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended ("SFAS 133"). Fair value of our derivative
instruments is determined based on management estimates through utilization of market data including forecasted forward natural gas and NGL prices as a function of forward New York Mercantile Exchange
("NYMEX") natural gas and light crude prices and forecasted forward interest rates as a function of forward London Interbank Offered Rate ("LIBOR") interest rates. The fair value of
long-term debt approximates its carrying value due to the variable interest rate feature of such debt.

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Table of Contents

HILAND PARTNERS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2008 and 2007

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

Note 1: Description of Business and Summary of Significant Accounting Policies (Continued)

Interest Rate Risk Management

We are exposed to interest rate risk on our variable rate bank credit facility and have entered into an interest rate swap to reduce
this risk. We manage a portion of our interest rate exposure on our variable rate debt by utilizing an interest rate swap to convert a portion of variable rate debt into fixed rate debt. The swap
fixes the one month LIBOR rate at the indicated rates for a specified amount of related debt outstanding over the term of the swap agreement. We have elected to designate the interest rate swap as a
cash flow hedge for SFAS 133 accounting treatment. Accordingly, unrealized gains and losses relating to the interest rate swap are recorded in accumulated other comprehensive income until the
related interest rate expense is recognized in earnings.

Commodity Risk Management

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

SFAS 133
establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging
activities. SFAS 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value.
However, if a derivative does qualify for hedge accounting, depending on the nature of the hedge, changes in fair value can be offset against the change in fair value of the hedged item through
earnings or recognized in other comprehensive income until such time as the hedged item is recognized in earnings. To qualify for cash flow hedge accounting, the cash flows from the hedging instrument
must be highly effective in offsetting changes in cash flows due to changes in the underlying item being hedged. In addition, all hedging relationships must be designated, documented and reassessed
periodically. SFAS 133 also provides that normal purchases and normal sales contracts are not subject to the statement. Normal purchases and normal sales are contracts that provide for the
purchase or sale of something other than a financial instrument or a derivative instrument that will be delivered in quantities expected to be used or sold by the reporting entity over a reasonable
period in the normal course of business. Our fixed price physical forward natural gas sales contract in which we contracted to sell natural gas quantities at a fixed price was designated as a normal
sale. This forward sales contract expired on December 31, 2008.

Currently,
our derivative financial instruments that qualify for hedge accounting are designated as cash flow hedges. The cash flow hedge instruments hedge the exposure of variability in
expected future cash flows that is attributable to a particular risk. The effective portion of the gain or loss on these derivative instruments is recorded in accumulated other comprehensive income
(loss) in partners' equity

F-12

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Table of Contents

HILAND PARTNERS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2008 and 2007

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

Note 1: Description of Business and Summary of Significant Accounting Policies (Continued)

and
reclassified into earnings in the same period in which the hedged transaction closes. The asset or liability related to the derivative instruments is recorded on the balance sheet as fair value of
derivative assets or liabilities. Any ineffective portion of the gain or loss is recognized in earnings immediately.

Property and Equipment, Intangible Assets, Depreciation and Amortization

Our property and equipment are carried at cost. Depreciation and amortization of all equipment is determined under the
straight-line method using various rates based on useful lives, 10 to 22 years for pipeline and processing plants, and 3 to 10 years for corporate and other assets. The cost
of assets and related accumulated depreciation is removed from the accounts when such assets are disposed of, and any related gains or losses are reflected in current earnings. Maintenance, repairs
and minor replacements are expensed as incurred. Costs of replacements constituting improvement are capitalized.

Intangible
assets consist of the acquired value of existing contracts to sell natural gas and other NGLs, compression contracts and identifiable customer relationships, which do not have
significant residual value. The contracts are being amortized over their estimated lives of ten years. We review intangible assets for impairment whenever events or circumstances indicate that the
carrying amounts may not be recoverable. If such a review should indicate that the carrying amount of intangible assets is not recoverable, we reduce the carrying amount of such assets to fair value
based on the discounted probable cash flows of the intangible assets.

Long Lived Assets

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

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



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Table of Contents

HILAND PARTNERS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2008 and 2007

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

Note 1: Description of Business and Summary of Significant Accounting Policies (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.

No
impairment charges were recognized during the years ended December 31, 2008, 2007 and 2006.

Other Assets

Unamortized deferred loan costs related to the long-term debt on our bank credit facility totaling $1,435 and $1,641 as of
December 31, 2008 and 2007, respectively, are included in other noncurrent assets. The deferred loan costs are amortized using the straight-line method over the term of the debt for
the bank credit facility.

Revenue Recognition

Revenues for sales and gathering of natural gas and NGLs are recognized at the time all gathering and processing activities are
completed, the product is delivered and title, if applicable, is transferred. Revenues related to our compression segment are recognized as monthly services are rendered under a four-year
fixed-fee contract that we entered into concurrently with our initial public offering.

Comprehensive Income

Comprehensive income includes net income and other comprehensive income, which includes, but is not limited to, changes in the fair
value of derivative financial instruments. Pursuant to SFAS 133, for derivatives qualifying as hedges, the effective portion of changes in fair value are recognized in partners' equity as
accumulated other comprehensive income and reclassified to earnings when the underlying hedged physical transaction closes. Comprehensive income consisted of the following for the indicated periods:

Year Ended December 31,2008

2007

2006Net income

$
20,447

$
10,784

$
14,682Closed derivative transactions reclassified to income


2,996


(1,783
)

(3,582
)Change in fair value of derivatives


7,966


(8,302
)

6,889Comprehensive income

$
31,409

$
699

$
17,989


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Table of Contents

HILAND PARTNERS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2008 and 2007

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

Note 1: Description of Business and Summary of Significant Accounting Policies (Continued)

Net Income per Limited Partners' Unit

Net income per limited partners' unit is computed based on the weighted-average number of common and subordinated units outstanding
during the period. The computation of diluted net income per limited partner unit further assumes the dilutive effect of unit options and restricted and phantom units. Net income per limited partners'
unit is computed by dividing net income applicable to limited partners, after deducting the general partner's 2% interest and incentive distributions, by both the basic and diluted weighted-average
number of limited partnership units outstanding.

Environmental Costs

Environmental costs are expensed if they relate to an existing condition caused by past operations and do not contribute to current or
future revenue generation. Liabilities are recorded when site restoration and environmental remediation and cleanup obligations are either known or considered probable and can be reasonably estimated.
Recoveries of environmental costs through insurance, indemnification arrangements or other sources are included in other assets to the extent such recoveries are considered probable.

Income Taxes

As a partnership, we are not subject to income taxes. Therefore, there is no provision for income taxes included in our consolidated
financial statements. Taxable income, gain, loss and deductions are allocated to the unitholders who are responsible for payment of any income taxes thereon.

Net
income for financial statement purposes may differ significantly from taxable income reportable to unitholders as a result of differences between the tax basis and financial
reporting basis of assets and liabilities and the taxable income allocation requirements under the partnership agreement. Individual unitholders have different investment bases depending upon the
timing and price of acquisition of their partnership units. Furthermore, each unitholder's tax accounting, which is partially dependent upon the unitholder's tax position, differs from the accounting
followed in the consolidated financial statements. Accordingly, the aggregate difference in the basis of our net assets for financial and tax reporting purposes cannot be readily determined because
information regarding each unitholder's tax attributes in our partnership is not available to us.

Transportation and Exchange Imbalances

In the course of gathering natural gas and NGLs for others, we may receive for redelivery different quantities of natural gas or NGLs
than the quantities actually redelivered. These transactions result in transportation and exchange imbalance receivables or payables that are recovered or repaid through the receipt or delivery of
natural gas or NGLs in future periods, if not subject to cashout provisions. Imbalance receivables are included in accounts receivable and imbalance payables are included in accounts payable on the
balance sheets and marked-to-market using current market prices in effect for the reporting period of the outstanding imbalances. Changes in market value and the settlement of
any such imbalance at a price greater than or less than the recorded imbalance results in either an upward or downward adjustment, as appropriate, to the cost of natural gas sold. As of
December 31, 2008 and

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Table of Contents

HILAND PARTNERS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2008 and 2007

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

Note 1: Description of Business and Summary of Significant Accounting Policies (Continued)

2007,
we had imbalance receivables of $1,221 and $454, respectively. Imbalance payables were $560 at December 31, 2008. We had no significant imbalance payables at December 31, 2007.

Recent Accounting Pronouncements

On April 25, 2008, the Financial Accounting Standards Board ("FASB") FASB issued Staff Position No.
FAS 142-3, "Determination of the Useful Life of Intangible Assets" ("FSP 142-3"). FSP 142-3 amends the factors that an entity should consider in
developing renewal or extension assumptions used in determining the useful life of recognized intangible assets under FASB Statement No. 142 ("SFAS 142"), "Goodwill and Other Intangible
Assets". In determining the useful life of an acquired intangible asset, FSP 142-3 removes the requirement from SFAS 142 for an entity to consider whether renewal of the intangible
asset requires significant costs or material modifications to the related arrangement. FSP 142-3 also replaces the previous useful life assessment criteria with a requirement that
an entity considers its own experience in renewing similar arrangements. If the entity has no relevant experience, it would consider market participant assumptions regarding renewal.
FSP 142-3 will be effective as of January 1, 2009 and will apply only to intangible assets acquired after that date. Retroactive application to previously acquired intangible
assets is prohibited. The adoption of FSP 142-3 is not expected to have a material impact on our financial position, results of operations or cash flows.

On
March 19, 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities", an amendment of SFAS 133 ("SFAS 161").
SFAS 161 is intended to improve transparency in financial reporting by requiring enhanced disclosures of an entity's derivative instruments and hedging activities and their effects on the
entity's financial position, financial performance, and cash flows. SFAS 161 is effective prospectively for financial statements issued for fiscal years and interim periods beginning after
November 15, 2008, with early application encouraged. SFAS 161 encourages, but does not require, comparative disclosures for periods prior to its initial adoption. SFAS 161 amends
the current qualitative and quantitative disclosure requirements for derivative instruments and hedging activities set forth in SFAS 133 and generally increases the level of
aggregation/disaggregation that will be required in an entity's financial statements. We are currently reviewing SFAS 161 to determine the effect it will have on our financial statements and
disclosures therein.

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

F-16

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Table of Contents

HILAND PARTNERS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2008 and 2007

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

Note 1: Description of Business and Summary of Significant Accounting Policies (Continued)

requirements
of EITF 07-4 as it pertains to MLPs upon its adoption during the quarter ended March 31, 2009 and do not expect a significant impact when adopted.

In
December 2007, the FASB issued SFAS No. 141(R), "Business Combinations" ("SFAS 141(R)"). SFAS 141(R) amends and replaces SFAS 141, but retains the
fundamental requirements in SFAS 141 that the purchase method of accounting be used for all business combinations and an acquirer be identified for each business combination. SFAS 141(R)
provides for how the acquirer recognizes and measures the identifiable assets acquired, liabilities assumed and any non-controlling interest in the acquiree. SFAS 141(R) provides
for how the acquirer recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase. SFAS 141(R) also determines what information to disclose to
enable users to be able to evaluate the nature and financial effects of the business combination. The provisions of SFAS 141(R) apply prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008 and do not allow early adoption. We are evaluating the new
requirements of SFAS 141(R) and the impact it will have on business combinations completed in 2009 and thereafter.

In
December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statementsan amendment of ARB No. 51" ("SFAS 160").
SFAS 160 establishes accounting and reporting standards that require the ownership interests in subsidiaries held by parties other than the parent (minority interest) be clearly identified,
labeled and presented in the consolidated balance sheet within equity, but separate from the parent's equity. SFAS 160 requires the equity amount of consolidated net income attributable to the
parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated income statement and that changes in a parent's ownership interest while the parent
retains its controlling financial interest in its subsidiary be accounted for consistently and similarly as equity transactions. Consolidated net income and comprehensive income will be determined
without deducting minority interest; however, earnings-per-share information will continue to be calculated on the basis of the net income attributable to the parent's
shareholders. Additionally, SFAS 160 establishes a single method for accounting for changes in a parent's ownership interest in a subsidiary that does not result in deconsolidation and that the
parent recognize a gain or loss in net income when a subsidiary is deconsolidated. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008. Early adoption is not
permitted. We do not expect SFAS 160 will have a material impact on our financial position, results of operations or cash flows.

In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities" ("SFAS 159"). SFAS 159 expands opportunities
to use fair value measurement in financial reporting and permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS 159 is effective for fiscal
years beginning after November 15, 2007. SFAS 159 was adopted by us effective January 1, 2008, at which time no financial assets or liabilities, not previously required to be
recorded at fair value by other authoritative literature, were designated to be recorded at fair value. As such, the adoption of SFAS 159 did not have any impact on our financial position,
results of operations or cash flows.

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Table of Contents

HILAND PARTNERS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2008 and 2007

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

Note 1: Description of Business and Summary of Significant Accounting Policies (Continued)

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

Note 2: Acquisitions

On May 1, 2006, we acquired certain gas gathering assets from Enogex Gas Gathering, L.L.C. for $96.4 million cash, including certain closing costs, financed with the
issuance of 761,714 common units and 15,545 general partner equivalent units to our general partner for proceeds of $35.0 million and borrowings of $61.2 million under our credit
facility. We refer to these assets as the Kinta Area gathering assets. A determination was made by our management of the fair value of these assets and liabilities as required by SFAS 141,
"Business Combinations", primarily using current replacement cost for the acquired gas gathering assets and related equipment less estimated accumulated depreciation on such replacement costs; and
estimated discounted cash flows arising from future renegotiated customer contracts. The acquired assets at the time of the acquisition, which are located in the eastern Oklahoma Arkoma Basin, had
approximately 672 wellhead receipt points and included five separate low pressure natural gas gathering systems, which consisted of over 569 miles of natural gas gathering pipelines and 23 compressors
with an aggregate of approximately 40,000 horsepower. The natural gas gathering systems operate under contracts with producers that provide for services under fixed-fee arrangements. We
operate the Kinta Area gathering assets substantially differently than were operated by the previous owner. Since there was no sufficient continuity of the Kinta Area gathering assets'

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Table of Contents

HILAND PARTNERS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2008 and 2007

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

Note 2: Acquisitions (Continued)

operations
prior to and after our acquisition, disclosure of prior financial information would not be material to an understanding of future operations. Therefore, the acquisition has been recorded as
a purchase of assets and not of a business and no pro forma financial information is required to be presented.

The
following table presents the resulting allocation to the net assets acquired and liabilities assumed on May 1, 2006:

Pipelines, including right of ways

$
56,175Compressors


22,221Land, buildings and other equipment


8,618Customer relationships


10,49297,506Asset retirement obligations assumed


1,106Net assets acquired

$
96,400


The
Kinta Area gathering assets and operations are included in the consolidated financial statements from May 1, 2006 forward.

Note 3: Property and Equipment and Asset Retirement Obligations

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

As of December 31,2008

2007Land

$
295

$
295Construction in progress


19,523


12,030Midstream pipeline, plants and compressors


401,902


352,003Compression and water injection equipment


19,391


19,258Other


4,621


3,958445,732


387,544Less: accumulated depreciation and amortization


99,877


68,224$
345,855

$
319,320


During
the third quarter 2007, we purchased two separate capital assets under capital lease obligations for a total cost of $5,881. Accumulated depreciation related to the assets
purchased under capital lease obligations was $541 as of December 31, 2008 and $175 as of December 31, 2007.

We
capitalized interest of $176, $2,580 and $1,467 during the years ended December 31, 2008, 2007 and 2006, respectively. Depreciation charged to expense totaled $31,906, $24,280
and $16,954 for the years ended December 31, 2008, 2007 and 2006, respectively.

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Table of Contents

HILAND PARTNERS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2008 and 2007

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

Note 3: Property and Equipment and Asset Retirement Obligations (Continued)

No
impairment charges were recognized during each of the years ended December 31, 2008, 2007 and 2006.

In
accordance with SFAS No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"), we have recorded the fair value of liabilities for asset retirement obligations
in the periods in which they are incurred and corresponding increases in the carrying amounts of the related
long-lived assets. The asset retirement costs are subsequently allocated to expense using a systematic and rational method and the liabilities are accreted to measure the change in
liability due to the passage of time. The provisions of SFAS 143 primarily apply to dismantlement and site restoration of certain of our plants and pipelines. We have evaluated our asset
retirement obligations as of December 31, 2008 and have determined that revisions in the carrying values are not necessary at this time.

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

Asset retirement obligations, January 1, 2007

$
2,196Add: additions on various leased locations


505Revisions of prior estimates


(658
)Add: accretion expense


116Asset retirement obligations, December 31, 2007


2,159Add: additions on various leased locations


186Add: accretion expense


138Asset retirement obligations, December 31, 2008

$
2,483


Note 4: Intangible Assets

Intangible assets consist of the acquired value of customer relationships and existing contracts to sell natural gas and other NGLs and compression contracts, which do not have
significant residual value. The customer relationships and the contracts are being amortized over their estimated lives of ten years. We review intangible assets for impairment whenever events or
circumstances indicate that the carrying amounts may not be recoverable. If such a review should indicate that the carrying amount of intangible assets is not recoverable, we reduce the carrying
amount of such assets to fair value based on
the discounted probable cash flows of the intangible assets. No impairments of intangible assets were recorded during the years ended December 30, 2008, 2007 and 2006, respectively.

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Table of Contents

HILAND PARTNERS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2008 and 2007

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

Note 4: Intangible Assets (Continued)

Intangible
assets consisted of the following for the periods indicated:

As of December 31,2008

2007Gas sales contracts

$
25,585

$
25,585Compression contracts


18,515


18,515Customer relationships


10,492


10,49254,592


54,592Less accumulated amortization


18,950


13,490Intangible assets, net

$
35,642

$
41,102


During
the years ended December 31, 2008 and 2007, we recorded amortization expense of $5,460 and $5,459, respectively. Estimated aggregate amortization expense for each of the
five succeeding fiscal years is $5,459 from 2009 through 2013 and a total of $8,347 for all years thereafter.

Note 5: Derivatives

Interest Rate Swap

We are subject to interest rate risk on our credit facility and have entered into an interest rate swap to reduce this risk. We entered
into a one year interest rate swap agreement with our counterparty on October 7, 2008 for the period from January 2009 through December 2009 at a rate of 2.245% on a notional amount of
$100.0 million. The swap fixes the one month LIBOR rate at 2.245% for the notional amount of debt outstanding over the term of the swap agreement.

Commodity Swaps

We have entered into certain derivative contracts that are classified as cash flow hedges in accordance with SFAS 133 which
relate to forecasted natural gas sales in 2009 and a mark-to-market cash flow derivative which relates to forecasted natural gas sales in 2010. The 2010 derivative does not
qualify for cash flow hedge accounting. We entered into these financial swap instruments to hedge forecasted natural gas sales against the variability in expected future cash flows attributable to
changes in commodity prices. Under these contractual swap agreements with our counterparties, we receive a fixed price and pay a floating price based on certain indices for the relevant contract
period as the underlying natural gas is sold.

We
formally document all relationships between hedging instruments and the items being hedged, including our risk management objective and strategy for undertaking the hedging
transactions. This includes matching the natural gas futures, "sold fixed for floating price" or "buy fixed for floating price" contracts, to the forecasted transactions. We assess, both at the
inception of the hedge and on an ongoing basis, whether the derivatives are highly effective in offsetting changes in the fair value of hedged items. Highly effective is 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

F-21

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Table of Contents

HILAND PARTNERS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2008 and 2007

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

Note 5: Derivatives (Continued)

to
the loss of correlation between changes in natural gas reference prices under a hedging instrument and actual natural gas prices, we will discontinue hedge accounting for the derivative and
subsequent changes in fair value for the derivative will be recognized immediately into earnings. We assess effectiveness using regression analysis and ineffectiveness using the dollar offset method.

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

On
May 27, 2008, we entered into a financial swap instrument related to forecasted natural gas sales in 2010 whereby we receive a fixed price and pay a floating price based on
NYMEX Henry Hub pricing for the relevant contract period as the underlying natural gas is sold. At December 31, 2008, this financial swap instrument did not qualify for hedge accounting as
there was inadequate correlation between NYMEX Henry Hub natural gas prices and actual prices received for the natural gas sold.

The
following table summarizes our activity related to derivative transactions for the indicated periods:

For the Years Ended
December 31,2008

2007

2006Net (losses) gains on closed/settled transactions reclassified (to) from accumulated other comprehensive income

$
(2,996
)
$
1,783

$
3,582Increases (decreases) in fair values of open derivatives recorded to (from) accumulated other comprehensive income

$
7,966

$
(8,302
)
$
6,889Unrealized non-cash gains (losses) on ineffective portions of qualifying derivative transactions

$
112

$
(45
)
$
113Unrealized non-cash gains on non-qualifying derivatives

$
6,722

$
418

$



At
December 31, 2008, our accumulated other comprehensive income related to derivatives was $5,233, which we anticipate will be reclassified to earnings during the next twelve
months.

F-22

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Table of Contents

HILAND PARTNERS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2008 and 2007

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

Note 5: Derivatives (Continued)

The fair value of derivative assets and liabilities related to the interest rate swap and the commodity swaps are as follows for the indicated periods:

As of
December 31,
2008

As of
December 31,
2007Fair value of derivative assetscurrent

$
6,851

$
2,718Fair value of derivative assetslong term


7,141


418Fair value of derivative liabilitiescurrent


(1,439
)

(8,238
)Fair value of derivative liabilitieslong term





(141
)Net fair value of derivatives

$
12,553

$
(5,243
)


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

The
following table provides information about our commodity derivative instruments at December 31, 2008 for the periods indicated:

Description and Production Period

(MMBtu)

Average
Fixed Price
Per MMBtu

Fair Value
Asset
(Liability)Natural GasSold Fixed for Floating Price SwapsJanuary 2009 - December 2009


2,136,000

$
7.30

$
6,851January 2010 - December 2010


2,136,000

$
10.50


7,141$
13,992


The
following table provides information about our interest rate swap at December 31, 2008 for the periods indicated:

Description and Period

Notional
Amount

Interest
Rate

Fair Value
Asset
(Liability)Interest Rate SwapJanuary 2009 - December 2009

$
100,000,000


2.245
%
$
(1,439
)


Note 6: Fair Value Measurements of Financial Instruments

We adopted SFAS No. 157, "Fair Value Measurements" ("SFAS 157") beginning in the first quarter of 2008. SFAS 157 defines fair value as the price that would be
received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, establishes a framework for measuring fair value in GAAP such
as fair value hierarchy used to classify the source of information used in fair value measurements (i.e., market based or non-market based) and expands disclosure about fair value
measurements based on their level in the hierarchy. SFAS 157

F-23

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Table of Contents

HILAND PARTNERS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2008 and 2007

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

Note 6: Fair Value Measurements of Financial Instruments (Continued)

applies
to derivatives and other financial instruments, which SFAS 133 requires be measured at fair value at initial recognition and for all subsequent periods. SFAS 157 establishes a
fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. SFAS 157's hierarchy defines three
levels of inputs that may be used to measure fair value. Level 1 refers to assets that have observable market prices, level 2 assets do not have an "observable price" but do have inputs
that are based on such prices in which components have observable data points and level 3 refers to assets in which one or more of the inputs do not have observable prices and calibrated model
parameters, valuation techniques or management's assumptions are used to derive the fair value.

We
use the fair value methodology outlined in SFAS 157 to value assets and liabilities for our outstanding fixed price cash flow swap derivative contracts. Valuations of our
natural gas and propane derivative contracts are based on published forward price curves for natural gas and propane and, as such, are defined as Level 2 fair value hierarchy assets and
liabilities. There are no published forward price curves for butanes or natural gasoline, and therefore, our butanes and natural gasoline derivative contracts are defined as Level 3 fair value
hierarchy assets and liabilities. We value our butanes and natural gasoline derivative contracts based on calibrated model parameters relative to forward published price curves for crude oil and
comparative mark-to-market values received from our counterparty. We value our interest rate-based derivative on a comparative mark-to-market value
received from our counterparty. The following table represents the fair value hierarchy for our assets and liabilities at December 31, 2008:

Level 1

Level 2

Level 3

TotalCommodity-based derivative assets

$


$
13,992

$


$
13,992Interest rate-based derivative liabilities








(1,439
)

(1,439
)Total

$


$
13,992

$
(1,439
)
$
12,553


The
following table provides a summary of changes in the fair value of our Level 3 commodity-based derivatives for the year ended December 31, 2008:

Balance, January 1, 2008

$
(4,489
)Cash settlements from other comprehensive income


3,484Net change in other comprehensive income


1,005Balance, December 31, 2008

$



F-24

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Table of Contents

HILAND PARTNERS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2008 and 2007

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

Note 6: Fair Value Measurements of Financial Instruments (Continued)

The
following table provides a summary of changes in the fair value of our Level 3 interest rate-based derivatives for the year ended December 31, 2008:

Balance, January 1, 2008

$
Cash settlements from other comprehensive income


Net change in other comprehensive income


(1,439
)Balance, December 31, 2008

$
(1,439
)


Note 7: Long-Term Debt

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

As of December 31,2008

2007Revolving credit facility

$
252,064

$
221,064Capital lease obligations


5,051


5,585257,115


226,649Less: current portion of capital lease obligations


649


545Long-term debt

$
256,466

$
226,104


Credit Facility.On February 6, 2008, we entered into a fourth amendment to our credit facility dated as of February 15,
2005. Pursuant
to the fourth amendment, we have, among other things, increased our borrowing base from $250 million to $300 million and decreased the accordion feature in the facility from
$100 million to $50 million. Our original credit facility dated February 15, 2005 was first amended in September 2005, amended a second time in June 2006 and amended a third time
in July 2007.

The
fourth amendment increases our borrowing capacity under our senior secured revolving credit facility to $300 million such that the facility now consists of a
$291 million senior secured revolving credit facility to be used for funding acquisitions and other capital expenditures, issuance of letters of credit and general corporate purposes (the
"Acquisition Facility") and a $9.0 million senior secured revolving credit facility to be used for working capital and to fund distribution (the "Working Capital Facility").

In
addition, the fourth amendment provides for an accordion feature, which permits us, if certain conditions are met, to increase the size of the Acquisition Facility by up to
$50 million and allows for the issuance of letters of credit of up to $15 million in the aggregate. The senior secured revolving credit facility also requires us to meet certain
financial tests, including a maximum consolidated funded debt to EBITDA ratio of 4.0:1.0 as of the last day of any fiscal quarter; provided that in the event that the Partnership makes certain
permitted acquisitions or capital expenditures, this ratio may be increased to 4.75:1.0 for the three fiscal quarters following the quarter in which such acquisition or capital expenditure occurs; and
a minimum interest coverage ratio of 3.0:1.0. The credit facility will

F-25

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Table of Contents

HILAND PARTNERS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2008 and 2007

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

Note 7: Long-Term Debt (Continued)

mature
in May 2011. At that time, the agreement will terminate and all outstanding amounts thereunder will be due and payable.

Due
to the recent decline in natural gas and NGL prices, we believe that our cash generated from operations will decrease in 2009 relative to comparable periods in 2008. Our senior
secured revolving credit facility requires us to meet certain financial tests, including a maximum consolidated funded debt to EBITDA ratio of 4.0:1.0 as of the last day of any fiscal quarter;
provided that in the event that we make certain permitted acquisitions or capital expenditures, this ratio may be increased to 4.75:1.0 for the three fiscal quarters following the quarter in which
such acquisition or capital expenditure occurs. We intend to elect to increase the ratio to 4.75:1.0 on March 31, 2009. During this
step-up period, the applicable margin with respect to loans under the credit facility will be increased by 35 basis points per annum and the unused commitment fee will be increased by 12.5
basis points per annum. Additionally, if commodity prices do not significantly improve above the expected prices for 2009, we may be in violation of the maximum consolidated funded debt to EBITDA
ratio as early as June 30, 2009, unless the ratio is amended, the senior secured revolving credit facility is restructured or we receive an infusion of equity capital.

We
are subject to interest rate risk on our credit facility and have entered into an interest rate swap to reduce this risk. See Note 5 "Derivatives" for a discussion of our
interest rate swap.

Our
obligations under the credit facility are secured by substantially all of our assets and guaranteed by us, and all of our subsidiaries, other than our operating company, which is the
borrower under the credit facility.

Indebtedness
under the credit facility will bear interest, at our option, at either (i) an Alternate Base Rate plus an applicable margin ranging from 50 to 125 basis points per
annum or (ii) LIBOR plus an applicable margin ranging from 150 to 225 basis points per annum based on our ratio of consolidated funded debt to EBITDA. The Alternate Base Rate is a rate per
annum equal to the greatest of (a) the Prime Rate in effect on such day, (b) the base CD rate in effect on such day plus 1.50% and (c) the Federal Funds effective rate in effect
on such day plus 1/2 of 1%. We have elected for the indebtedness to bear interest at LIBOR plus the applicable margin. A letter of credit fee will be payable for the aggregate amount of
letters of credit issued under the credit facility at a percentage per annum equal to 1.0%. An unused commitment fee ranging from 25 to 50 basis points per annum based on our ratio of consolidated
funded debt to EBITDA will be payable on the unused portion of the credit facility. During any step-up period, the applicable margin with respect to loans under the credit facility will be
increased by 35 basis points per annum and the unused commitment fee will be increased by 12.5 basis points per annum. At December 31, 2008, the interest rate on outstanding borrowings from our
credit facility was 3.28%.

The
credit facility prohibits us from making distributions to unitholders if any default or event of default, as defined in the credit facility, has occurred and is continuing or would
result from the distribution. In addition, the credit facility contains various covenants that limit, among other things, subject to certain exceptions and negotiated "baskets," our ability to incur
indebtedness, grant liens, make certain loans, acquisitions and investments, make any material changes to the nature of its

F-26

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Table of Contents

HILAND PARTNERS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2008 and 2007

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

Note 7: Long-Term Debt (Continued)

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.

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

The
credit facility limits distributions to our unitholders to available cash, as defined by the agreement, and borrowings to fund such distributions are only permitted under the
revolving working capital facility. The revolving working capital facility is subject to an annual "clean-down" period of 15 consecutive days in which the amount outstanding under the
revolving working capital facility is reduced to zero.

As
of December 31, 2008, we had $252.1 million outstanding under the credit facility and were in compliance with its financial covenants.

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

During
the years ended December 31, 2008 and 2007, we made principal payments of $534 and $296, respectively, on the above described capital lease obligations. The current portion
of the capital lease obligations presented in the table above is included accrued liabilities and other in the balance sheet.

Note 8: Share-Based Compensation

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

F-27

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Table of Contents

HILAND PARTNERS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2008 and 2007

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

Note 8: Share-Based Compensation (Continued)

Our
general partner's board of directors or compensation committee may, in their discretion, terminate, suspend or discontinue the long-term incentive plan at any time with
respect to any units for which a grant has not yet been made. Our general partner's board of directors or its compensation committee also has the right to alter or amend the long-term
incentive plan or any part of the plan from time to time, including increasing the number of units that may be granted, subject to unitholder approval if required by the exchange upon which the common
units are listed at that time. No change in any outstanding grant may be made, however, that would materially impair the rights of the participant without the consent of the participant. Under the
unit option grant agreement, granted options of common units vest and become exercisable in one-third increments on the anniversary of the grant date over three years. Vested options are
exercisable within the option's contractual life of ten years after the grant date. Restricted common units granted vest and become exercisable in one-fourth increments on the anniversary
of the grant date over four years. A restricted unit is a common unit that is subject to forfeiture, and upon vesting, the grantee receives a common unit that is not subject to forfeiture.
Distributions on unvested restricted 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 partner's board of
directors and (ii) the distributions held in trust, if applicable, related to the vested units.

Phantom Units

On February 4, 2008, we granted 7,500 phantom units under the plan to our Vice PresidentBusiness Development,
Matthew S. Harrison, who on April 16, 2008, was appointed Chief Financial Officer. Mr. Harrison's phantom units vest over a three-year period from the date of issuance and
distributions on the phantom units will be held in trust by our general partner until the units vest. On February 4, 2009, 2,500 phantom units vested and Mr. Harrison settled 2,500 of
the phantom units for 2,500 common units.

On
August 7, 2008, we granted 7,500 phantom units under the plan to Mr. Kent C. Christopherson, our Chief Operations Officer, appointed on August 4, 2008.
Mr. Christopherson's phantom units vest over a four-year period from the date of issuance and distributions on the phantom units will be held in trust by our general partner until
such units vest. Additionally, in 2008, we granted 7,300 phantom units to key employees.

A
total of 7,031 phantom units awarded in 2007 vested during the year ended December 31, 2008, of which 5,227 phantom units were converted to common units resulting in
contributions of $3 from our general partner to maintain its 2% ownership interest and 1,804 phantom units were redeemed.

The
following table summarizes information about phantom units for the year ended December 31, 2008.

F-28

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Table of Contents

HILAND PARTNERS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2008 and 2007

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

Note 8: Share-Based Compensation (Continued)

Units

Weighted
Average
Fair Value
At Grant
Date ($)

Weighted
Average
Fair Value At
Redemption
Date ($)Unvested January 1, 2008


42,825

$
50.12Granted


22,300

$
44.49Vested and converted


(5,227
)
$
50.76Vested and redeemed


(1,804
)
$
50.96

$
33.46Forfeited


(7,300
)
$
48.80Unvested December 31, 2008


50,794

$
47.74


During
the years ended December 31, 2008 and 2007, we incurred non-cash unit based compensation expense of $1,149 and $249, respectively, related to
the phantom units. As of December 31, 2008, there was $1,455 of total unrecognized cost related to the unvested phantom units which is to be is to be recognized over a weighted average period
of 2.9 years. At December 31, 2007, there was $1,721 of total unrecognized cost related to the unvested phantom units.

Restricted Units

During 2008, we issued 1,000 restricted units each to six non-employee board members of our general partner on their
one-year anniversary dates, and accordingly, our general partner contributed $5 to us to maintain its 2% ownership interest. On the same anniversary dates of the six
non-employee board members, 5,500 previously granted restricted units vested and were converted to common units. Additionally, 1,000 restricted units granted to key employees in 2006
vested and were converted to common units. On August 1, 2008, 375 restricted units granted in November 2006 were forfeited and cancelled and the associated accumulated distributions held in
trust by our general partner were returned to us.

The
following table summarizes information about restricted units for the year ended December 31, 2008.

Restricted Units

Units

Weighted
Average
Fair Value
At Grant
Date ($)Non-vested at January 1, 2008


19,375

$
46.57Granted


6,000

$
43.97Vested


(6,500
)
$
37.89Forfeited or expired


(375
)
$
48.85Non-vested at December 31, 2008


18,500

$
48.73


Non-cash
unit based compensation expense related to the restricted units was $356 and $537 for the years ended December 31, 2008 and 2007, respectively. As of
December 31, 2008, there was $429 of total unrecognized cost related to the unvested restricted units. This cost is to be recognized over a

F-29

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Table of Contents

HILAND PARTNERS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2008 and 2007

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

Note 8: Share-Based Compensation (Continued)

weighted
average period of 2.4 years. At December 31, 2007, there was $533 of total unrecognized cost related to the unvested restricted units.

Unit Options

The following table summarizes information about outstanding options for the year ended December 31, 2008.

Options

Units

Weighted
Average
Exercise
Price ($)

Weighted-
Average
Remaining
Contractual
Term (Years)

Aggregate
Intrinsic
Value ($)Outstanding at January 1, 2008


75,041

$
31.11Granted


Exercised


(40,705
)
$
25.32




$
975Forfeited or expired


(1,000
)
$
40.11Outstanding at December 31, 2008


33,336

$
37.92


7.0Exercisable at December 31, 2008


24,002

$
37.01


6.8


There
have been no unit options granted since March 2006. The weighted average grant date fair value of the 28,000 unit options granted during the year ended December 31, 2006 was
$4.33 per unit. The weighted average grant date fair value of 167,500 unit options granted during the year ended December 31, 2005 was $5.30 per unit. The weighted average grant date fair value
of 47,400 unit options vested during the year ended December 31, 2008 was $5.25 per unit.

The
aggregate intrinsic value of options exercised were $975 and $1,315 for the years ended December 31, 2008 and 2007, respectively.

On
March 14, 2007, Randy Moeder, our past President, Chief Executive Officer and a director of our general partner announced his intention to resign. In connection with
Mr. Moeder's resignation, we and our general partner entered into a retention agreement with Mr. Moeder that allowed Mr. Moeder to continue his employment for a mutually agreeable
period of time, but no longer than six months. Under the agreement, as long as Mr. Moeder continued his employment, a pro rata portion of his 10,666 unvested options to purchase our common
units, issued to him on February 10, 2005, would vest. Accordingly, as required by SFAS 123R "Share-Based Payment," as amended, on March 14, 2007 we recalculated the fair value of
the remaining unvested options to purchase our common units as a modification of the options awarded to Mr. Moeder on February 10, 2005. The recalculated fair value of the options of
$33.65 per unit was determined by using the American Binomial option pricing model.

On
April 16, 2007, Mr. Moeder resigned and 1,899 of his 10,666 unvested options to purchase our common units vested. As a result of the recalculated fair value of $33.65
per unit, we recorded an additional $24 of expense for the period from March 15, 2007 through April 16, 2007. On the same day, Mr. Moeder forfeited his remaining 8,767 unvested
unit options. The forfeiture of Mr. Moeder's

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Table of Contents

HILAND PARTNERS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2008 and 2007

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

Note 8: Share-Based Compensation (Continued)

8,767
unvested unit options reduced compensation expense for the period from April 1, 2007 through April 16, 2007 by $16. On April 19, 2007, Mr. Moeder exercised his 1,899
vested options to purchase our common units.

On
April 14, 2006, 13,333 of the unit options issued on February 10, 2005, were forfeited. Compensation expense for the year ended December 31, 2006 has been reduced
by $21 as a result of the forfeiture.

As
a result of adopting SFAS 123R on the modified prospective basis beginning on January 1, 2006, we expensed $32, $165 and $354 in 2008, 2007 and 2006, respectively,
related to unit options awarded in 2006 and 2005. Basic and diluted earnings per unit were each reduced by $0.04 for the year ended December 31, 2006 as a result of the additional compensation
recognized under SFAS 123R.

Note 9: Commitments and Contingencies

We maintain a defined contribution retirement plan for our employees under which we make discretionary contributions to the plan based on a percentage of eligible employees'
compensation. Contributions to the plan are 5.0% of eligible employees' compensation and resulted in expenses for the three years ended December 31, 2008, 2007 and 2006 of $320, $262 and $201,
respectively.

Prior
to January 1, 2007, we jointly participated with other affiliated companies in a self-insurance pool (the "Pool") covering health and workers' compensation
claims made by employees up to the first $150 and $500, respectively, per claim. Any amounts paid above these were reinsured through third party providers. Premiums charged to us were based on
estimated costs per employee of the Pool. Effective January 1, 2007, we obtained our own health and workers' compensation insurance through third-party providers. Property and general liability
insurance is also maintained through third-party providers with a $100 deductible on each policy.

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

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

We
lease office space from a related entity (Note 11). We also lease certain facilities, vehicles and equipment under operating leases, most of which contain annual renewal
options. For the years ended
December 31, 2008, 2007 and 2006, rent expense was $2,834, $2,285 and $779, respectively, under these leases.

F-31

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Table of Contents

HILAND PARTNERS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2008 and 2007

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

Note 9: Commitments and Contingencies (Continued)

A
summary of our contractual cash obligations as of December 31, 2008, including minimum future rental commitments under operating leases having non-cancelable lease
terms in excess of one year, and leases renewed and entered into subsequent to year end but prior to financial statement issuance, is presented below:

Payment Due by PeriodType of Obligation

Total
Obligation

Due in
2009

Due in
2010

Due in
2011

Due in
2012

Due in
2013

Thereafter(in thousands)Senior secured revolving credit facility

$
252,064

$


$


$
252,064

$


$


$
Estimated interest expense on credit facility(1)


19,634


8,267


8,267


3,100








Capital lease obligations(2)


7,378


1,256


1,256


1,256


1,107


1,001


1,502Operating leases, service agreements and other


3,959


1,700


858


465


299


211


426Total contractual cash obligations

$
283,035

$
11,223

$
10,381

$
256,885

$
1,406

$
1,212

$
1,928


---

Note 10: Significant Customers and Suppliers

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

For the Years Ended
December 31,2008

2007

2006Customer 1


16
%

19
%

14
%Customer 2


14
%

6
%

13
%Customer 3


11
%

19
%

20
%Customer 4


10
%

9
%

8
%Customer 5


9
%

12
%

4
%


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

For the Years Ended
December 31,2008

2007

2006Supplier 1 (affiliated company)


42
%

31
%

32
%Supplier 2


18
%

25
%

24
%Supplier 3


15
%

14
%

13
%


F-32

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Table of Contents

HILAND PARTNERS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2008 and 2007

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

Note 11: Related Party Transactions

We purchase natural gas and NGLs from affiliated companies. Purchases of product from affiliates totaled $116.7 million, $60.1 million, and $50.3 million for the
years ended December 31, 2008, 2007 and 2006, respectively. We sell natural gas and NGLs to affiliated companies. Sales of product to affiliates totaled $11.5 million,
$3.5 million, and $4.1 million for the years ended December 31, 2008, 2007 and 2006, respectively. Compression revenues from affiliates were $4.8 million each for 2008,
2007 and 2006.

Accounts
receivable-affiliates of $2,346 and $1,479 at December 31, 2008 and 2007, respectively, includes $2,083 and $1,090 from one affiliate for midstream sales.

Accounts
payable-affiliates of $7,662 and $7,880 at December 31, 2008 and 2007, respectively, includes $6,682 and $7,094 due to one affiliate for midstream purchases.

We
utilize affiliated companies to provide services to our plants and pipelines and certain administrative costs. The total amount paid to these companies was $555, $525, and $353 during
the years ended December 31, 2008, 2007 and 2006, respectively.

We
lease office space under operating leases directly or indirectly from an affiliate. Rents paid associated with these leases totaled $157, $143, and $118 for the years ended
December 31, 2008, 2007 and 2006, respectively.

Note 12: Reportable Segments

We have distinct operating segments for which additional financial information must be reported. Our operations are classified into two reportable segments:



These
business segments reflect the way we manage our operations. Our operations are conducted in the United States. General and administrative costs, which consist of executive
management, accounting and finance, operations and engineering, marketing and business development, are allocated to the individual segments based on revenues.

Midstream
assets totaled $401,799, $382,626 and $312,431 at December 31, 2008, 2007 and 2006, respectively. On the same dates, assets attributable to compression operations
totaled $24,340, $27,847 and $31,385, respectively. All but $80 of the $58,455 total additions to property and equipment for the year ended December 31, 2008 was attributable to midstream
operations. All but $48 of the $90,953 total additions to property and equipment for the year ended December 31, 2007 was attributable to midstream operations. All but $72 of the total
additions to property and equipment of $62,137 and Kinta Area gathering assets acquired of $96,400 for the year ended December 31, 2006 was attributable to midstream operations.

F-33

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Table of Contents

HILAND PARTNERS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2008 and 2007

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

Note 12: Reportable Segments (Continued)

The
table below presents information about operating income for the reportable segments for the years ended December 31, 2008, 2007 and 2006.

Midstream
Segment

Compression
Segment

TotalFor the Year Ended December 31, 2008Revenues

$
383,180


4,819

$
387,999Operating costs and expenses:Midstream purchases (exclusive of items shown separately below)


276,600





276,600Operations and maintenance


29,476


1,050


30,526Depreciation and amortization


33,919


3,583


37,502Bad debt


304





304General and administrative


8,634


119


8,753Total operating costs and expenses


348,933


4,752


353,685Operating income


34,247


67


34,314Other income (expense):Interest and other income








346Amortization of deferred loan costs








(574
)Interest expense








(13,639
)Total other income (expense)








(13,867
)Net income







$
20,447For the Year Ended December 31, 2007Revenues

$
273,224

$
4,819

$
278,043Operating costs and expenses:Midstream purchases (exclusive of items shown separately below)


195,212





195,212Operations and maintenance


22,472


807


23,279Depreciation and amortization


26,277


3,578


29,855General and administrative


7,456


131


7,587Total operating costs and expenses


251,417


4,516


255,933Operating income


21,807


303


22,110Other income (expense):Interest and other income








430Amortization of deferred loan costs








(410
)Interest expense








(11,346
)Total other income (expense)








(11,326
)Net income







$
10,784


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Table of Contents

HILAND PARTNERS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2008 and 2007

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

Note 12: Reportable Segments (Continued)

Midstream
Segment

Compression
Segment

TotalFor the Year Ended December 31, 2006Revenues

$
214,867

$
4,819

$
219,686Operating costs and expenses:Midstream purchases (exclusive of items shown separately below)


156,193





156,193Operations and maintenance


15,228


843


16,071Depreciation and amortization


18,559


3,571


22,130General and administrative


4,884


110


4,994Total operating costs and expenses


194,864


4,524


199,388Operating income


20,003


295


20,298Other income (expense):Interest and other income








323Amortization of deferred loan costs








(407
)Interest expense








(5,532
)Total other income (expense)








(5,616
)Net income







$
14,682


Note 13: Selected Quarterly Financial DataUnaudited

The following is a summary of selected quarterly financial data for the years ended December 31, 2008 and 2007.

2008 Quarter1st

2nd

3rd

4thRevenues

$
91,479

$
115,441

$
115,753

$
65,326Operating income


4,862


682


21,963


6,807Net income (loss)


1,327


(2,508
)*

18,641
*

2,987General partner interest in net income


1,815


2,057
*

2,641
*

59Limited partners' interest in net income (loss)

$
(488
)
$
(4,565
)*
$
16,000
*
$
2,928Net income (loss) per limited partner unitbasic

$
(0.05
)
$
(0.49
)*
$
1.71
*
$
0.32Net income (loss) per limited partner unitdiluted

$
(0.05
)
$
(0.49
)*
$
1.71
*
$
0.31


---

F-35

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Table of Contents

HILAND PARTNERS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2008 and 2007

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

Note 13: Selected Quarterly Financial DataUnaudited (Continued)



2007 Quarter1st

2nd

3rd

4thRevenues

$
61,054

$
66,616

$
67,636

$
82,737Operating income


4,213


4,802


6,392


6,703Net income


2,162


2,496


3,254


2,872General partner interest in net income


795


982


1,199


1,550Limited partners' interest in net income

$
1,367

$
1,514

$
2,055

$
1,322Net income per limited partner unitbasic

$
0.15

$
0.16

$
0.22

$
0.14Net income per limited partner unitdiluted

$
0.15

$
0.16

$
0.22

$
0.14


Note 14: Net Income per Limited Partners' Unit

The computation of net income per limited partners' unit is based on the weighted-average number of common and subordinated units outstanding during the period. The computation of
diluted net income per limited partner unit further assumes the dilutive effect of unit options and restricted and phantom units. Net income per unit applicable to limited partners is computed by
dividing net income applicable to limited partners, after deducting the general partner's 2% interest and incentive distributions by the weighted-average number of limited partnership units
outstanding. The following is a reconciliation of the limited partner units used in the calculations of income per limited partner

F-36

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Table of Contents

HILAND PARTNERS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2008 and 2007

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

Note 14: Net Income per Limited Partners' Unit (Continued)

unitbasic
and income per limited partner unitdiluted assuming dilution for the years ended December 31, 2008, 2007 and 2006:

Income
Available to
Limited
Partners
(Numerator)

Limited
Partner Units
(Denominator)

Per Unit
AmountFor the Year Ended December 31, 2008Income per limited partner unitbasic:Income available to limited unitholders

$
13,875




$
1.49Weighted average limited partner units outstanding





9,328,000Income per limited partner unitdiluted:Unit Options, restricted and phantom units





26,000Income available to common unitholders plus assumed conversions

$
13,875


9,354,000

$
1.48For the Year Ended December 31, 2007Income per limited partner unitbasic:Income available to limited unitholders

$
6,258




$
0.67Weighted average limited partner units outstanding





9,284,000Income per limited partner unitdiluted:Unit Options, restricted and phantom units





50,000Income available to common unitholders plus assumed conversions

$
6,258


9,334,000

$
0.67For the Year Ended December 31, 2006Income per limited partner unitbasic:Income available to limited unitholders

$
12,273




$
1.37Weighted average limited partner units outstanding





8,961,000Income per limited partner unitdiluted:Unit Options, restricted and phantom units





49,000Income available to common unitholders plus assumed conversions

$
12,273


9,010,000

$
1.36


Note 15: Partners' Capital and Cash Distributions

Our unitholders (limited partners) have only limited voting rights on matters affecting our operations and activities and, therefore, limited ability to influence our management's
decisions regarding our business. Unitholders did not select our general partner or elect the board of directors of our general partner and effectively have no right to select our general partner or
elect its board of directors in the future. Unitholders' voting rights are further restricted by our partnership agreement 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

F-37

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Table of Contents

HILAND PARTNERS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2008 and 2007

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

Note 15: Partners' Capital and Cash Distributions (Continued)

unitholders
to call meetings or to acquire information about our operations, as well as other provisions limiting a unitholders' ability to influence the manner or direction of our management.

Our
partnership agreement requires that we distribute all of our cash on hand at the end of each quarter, less reserves established at our general partner's discretion. We refer to this
as "available cash." 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:



If
cash distributions per unit exceed $0.495 in any quarter, our general partner will receive increasing percentages, up to a maximum of 50% of the cash we distribute in excess of that
amount. We refer to these distributions as "incentive distributions."

The
distributions on the subordinated units may be reduced or eliminated if necessary to ensure the common units receive their minimum quarterly distribution. Subordinated units do not
accrue arrearages. The subordination period will end with respect to certain portions of the subordinated units once we meet certain financial tests, but will not end with respect to all subordinated
units before March 31, 2010. These financial tests require us to have earned and paid the minimum quarterly distribution on all of our outstanding units for three consecutive
four-quarter periods. When the subordination period ends, all remaining subordinated units will convert into common units on a one-for-one basis and the common
units will no longer be entitled to arrearages. Following our distribution on May 14, 2008, these financial tests were met for the immediate preceding three consecutive four-quarter
periods, and accordingly, 25%, or 1,020,000, of the subordinated units were converted to common units on May 19, 2008.

F-38

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Table of Contents

HILAND PARTNERS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2008 and 2007

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

Note 15: Partners' Capital and Cash Distributions (Continued)

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

General PartnerPer Unit Cash
Distribution
Amount

Common
Units

Subordinated
Units

Total Cash
DistributionDate Cash Distribution Paid

Regular

Incentive02/14/07

$
0.7125

$
3,694

$
2,907

$
150

$
749

$
7,50005/15/07


0.7125


3,724


2,907


151


752


7,53408/14/07


0.7325


3,837


2,989


158


932


7,91611/14/07


0.7550


3,959


3,080


167


1,134


8,34002/14/08


0.7950


4,169


3,243


182


1,492


9,08605/14/08


0.8275


4,364


3,376


194


1,789


9,72308/14/08


0.8625


5,446


2,639


208


2,107


10,40011/14/08


0.8800


5,574


2,694


214


2,268


10,75002/13/09(a)


0.4500


2,849


1,377


86





4,312$
6.7275

$
37,616

$
25,212

$
1,510

$
11,223

$
75,561


---

Note 16: Subsequent Events (unaudited)

On January 15, 2009, the board of directors of the general partner of each of Hiland Partners and Hiland Holdings received a proposal from Harold Hamm to acquire all of the
outstanding common units of each of Hiland Partners and Hiland Holdings that are not owned by Mr. Hamm, his affiliates or Hamm family trusts. Consummation of each transaction is conditioned
upon the consummation of the other. The proposals contemplate a merger of each of Hiland Partners and Hiland Holdings with a separate new acquisition vehicle to be formed by Mr. Hamm and the
Hamm family trusts. Under the terms proposed by Mr. Hamm, Hiland Partners unitholders would receive $9.50 in cash per common unit and Hiland Holdings unitholders would receive $3.20 in cash per
common unit. Mr. Hamm is the Chairman of the board of directors of the general partner of each of Hiland Partners and Hiland Holdings. Mr. Hamm, either individually or together with his
affiliates or the Hamm family trusts, beneficially owns 100% of Hiland Partners GP Holdings, LLC, the general partner of Hiland Holdings, and approximately 61% of the outstanding common
units of Hiland Holdings. Hiland Holdings owns 100% of our general partner and approximately 37% of our outstanding common units.

It
is anticipated that the conflicts committee of the board of directors of the general partner of each of Hiland Partners and Hiland Holdings will consider the proposals. In reviewing
the proposals, each conflicts committee has retained its own financial advisers and legal counsel to assist in its work. The boards of directors of the general partners of each of Hiland Partners and
Hiland Holdings caution our unitholders and unitholders of Hiland Holdings respectively, and others considering trading in the securities of Hiland Partners and Hiland Holdings, that each conflicts
committee of the board of

F-39

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Table of Contents

HILAND PARTNERS, LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2008 and 2007

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

Note 16: Subsequent Events (unaudited) (Continued)

directors
is reviewing its respective proposal and no decisions have been made by either conflicts committee of either board of directors with respect to the response of either us or Hiland Holdings
to the proposals. There can be no assurance that any agreement will be executed or that any transaction will be approved or consummated.

On
February 26, 2009, a unitholder of Hiland Partners and Hiland Holdings filed a complaint alleging claims on behalf of a purported class of common unitholders of Hiland Partners
and Hiland Holdings against Hiland Partners, Hiland Holdings, the general partner of each of Hiland Partners and Hiland Holdings, and certain members of the board of directors of each of Hiland
Partners and Hiland Holdings in the Court of Chancery of the State of Delaware. The complaint challenges a proposal made by Harold Hamm to acquire all of the outstanding common units of each of Hiland
Partners and Hiland Holdings that are not owned by Mr. Hamm, his affiliates or Hamm family trusts. The complaint alleges, among other things, that the consideration offered is unfair and
grossly inadequate, that the conflicts committee of the board of directors of the general partner of each of Hiland Partners and Hiland Holdings cannot be expected to act independently, and that the
management of Hiland Partners and Hiland Holdings has manipulated its public statements to depress the price of the common units of Hiland Partners and Hiland Holdings. The plaintiffs seek to enjoin
Hiland Partners, Hiland Holdings, and their respective board members from proceeding with any transaction that may arise from Mr. Hamm's going private proposal, along with compensatory damages.
For more information on the going private proposal, please see Items 1. and 2. "Business and PropertiesRecent DevelopmentsGoing Private Proposal." We cannot predict
the outcome of this lawsuit, or others, nor can we predict the amount of time and expense that will be required to resolve the lawsuit.

On
January 13, 2009 and January 15, 2009, we entered into financial swap instruments related to forecasted natural gas sales in 2010 whereby we receive a fixed price and
pay a floating price based on Colorado Interstate Gas ("CIG") basis differential to the contract NYMEX Henry Hub price for the relevant contract period as the underlying gas is sold. These series of
derivative contracts related to forecasted natural gas sales in 2010 will be classified as cash flow hedges in accordance with SFAS 133 for the remainder of their respective contract periods.

F-40

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