** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-Q**

** **

**ý**QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934

 

**FOR THE QUARTERLY PERIOD ENDED June 30,2005**

 

**OR**

 

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

 

**FOR THE TRANSITION PERIOD FROM                 TO                   .**

 

**Commission file number:  000-51120**

 

**Hiland Partners, LP**

**(Exact name of Registrant as specified in its charter)**

 
| **DELAWARE**                                                     | ** ** | **71-0972724**                         |
|------------------------------------------------------------------|------------|----------------------------------------|
| (State  or other jurisdiction of  incorporation or organization) |       | (I.R.S.  Employer  Identification No.) |
|                                                             |       |                                   |
| **205 West Maple, Suite 1100****Enid, Oklahoma**            | ** ** | **73701**                              |
| (Address  of principal executive offices)                        |       | (Zip  code)                            |

 

Registrant’s telephone number including areacode **(580) 242-6040**

 

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

 

Indicate bycheck mark whether the registrant is an accelerated filer (as defined in Rule 12b-2of the Act).  Yes  o  No  ý

 

The number ofthe registrant’s outstanding equity units at August 3, 2005 was 2,720,000common units, 4,080,000 subordinated units and a 2% general partnershipinterest. 

 

 

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**HILANDPARTNERS, LP**

**INDEX**

 
| **PART I. FINANCIAL INFORMATION**.                                                                 | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|
| **Item 1. Financial  Statements (Unaudited, except December 31, 2004 Balance Sheet)**              | ** ** |
| **Consolidated Balance  Sheets**                                                                        | ** ** |
| **Consolidated  Combined Statements of Operations.**                                                    | ** ** |
| **Consolidated  Combined Statements of Cash Flows**                                                     | ** ** |
| **Consolidated Combined  Statement of Owners’ Equity**                                             | ** ** |
| **Condensed Notes to  Consolidated Combined Financial Statements.**                                     | ** ** |
| **Item 2. Management’s  Discussion and Analysis of Financial Condition and Results of Operations** | ** ** |
| **Item 3. Quantitative  and Qualitative Disclosures About Market Risks**                                | ** ** |
| **Item 4. Controls and  Procedures**                                                                    | ** ** |
| **PART II.  OTHER INFORMATION**                                                                    | ** ** |
| **Item 1. Legal Proceedings**                                                                           | ** ** |
| **Item 2. Unregistered Sales of  Equity Securities and Use of Proceeds.**                               | ** ** |
| **Item 3. Defaults Upon Senior  Securities.**                                                           | ** ** |
| **Item 4. Submission of Matters to  a Vote of Security Holders.**                                       | ** ** |
| **Item 5. Other Information**                                                                           | ** ** |
| **Item 6. Exhibits**                                                                                    | ** ** |
| **SIGNATURES**                                                                                          | ** ** |
| **Certification of CEO under Section 302**                                                         | ** ** |
| **Certification of CFO under Section 302**                                                         | ** ** |
| **Certification of CEO under Section 906**                                                         | ** ** |
| **Certification of CFO under Section 906**                                                         | ** ** |

 

2

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**Item 1. Financial Statements**

 

**HILAND PARTNERS, LP**

**CONTINENTAL GAS, INC. (PREDECESSOR)**

**ConsolidatedBalance Sheets**

 
| ** **                                                                                              | ** ** | **Hiland Partners, LP  June 30, 2005** | ** ** | **Continental Gas, Inc.  (Predecessor)  December 31, 2004** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                                                              | ** ** | **(Unaudited)**                             | ** ** | **(Audited)**                                                         | ** ** |
| ** **                                                                                              | ** ** | **(in thousands, except unit amounts)**     | ** ** |
| **ASSETS**                                                                                              |       |                                        |       |                                                                  |       |
| **Current assets:**                                                                                     |       |                                        |       |                                                                  |       |
| Cash and cash equivalents                                                                               |       | $                                           | 6,093      |                                                                  | $          | 217 |   |
| Accounts receivable:                                                                                    |       |                                        |       |                                                                  |       |
| Trade                                                                                                   |       | 8,857                                       |       | 9,663                                                                 |       |
| Affiliates                                                                                              |       | 1,105                                       |       | 758                                                                   |       |
|                                                                                                    |       | 9,962                                       |       | 10,421                                                                |       |
| Inventories                                                                                             |       | 153                                         |       | 153                                                                   |       |
| Other current assets                                                                                    |       | 336                                         |       | 118                                                                   |       |
| Total current assets                                                                                    |       | 16,544                                      |       | 10,909                                                                |       |
|                                                                                                    |       |                                        |       |                                                                  |       |
| Property and equipment, net                                                                             |       | 67,015                                      |       | 37,075                                                                |       |
| Intangibles, net                                                                                        |       | 25,765                                      |       | —                                                                |       |
| Other assets, net                                                                                       |       | 1,098                                       |       | 1,191                                                                 |       |
|                                                                                                    |       |                                        |       |                                                                  |       |
| **Total assets**                                                                                        |       | $                                           | 110,422    |                                                                  | $          | 49,175 |   |
|                                                                                                    |       |                                        |       |                                                                  |       |
| **LIABILITIES AND OWNERS’ EQUITY**                                                                 | ** ** | ** **                                  | ** ** | ** **                                                            | ** ** |
| **Current liabilities:**                                                                                |       |                                        |       |                                                                  |       |
| Accounts payable                                                                                        |       | $                                           | 6,053      |                                                                  | $          | 5,649 |   |
| Accounts payable-affiliates                                                                             |       | 2,583                                       |       | 2,998                                                                 |       |
| Accrued liabilities                                                                                     |       | 980                                         |       | 327                                                                   |       |
| Current maturities of long-term debt                                                                    |       | —                                      |       | 2,429                                                                 |       |
| Total current liabilities                                                                               |       | 9,616                                       |       | 11,403                                                                |       |
| Commitments and contingencies                                                                           |       |                                        |       |                                                                  |       |
| Long-term debt, net of current maturities                                                               |       | —                                      |       | 12,643                                                                |       |
| Asset retirement obligation                                                                             |       | 1,033                                       |       | 619                                                                   |       |
|                                                                                                    |       |                                        |       |                                                                  |       |
| **Owners’ equity**                                                                                 |       |                                        |       |                                                                  |       |
| Predecessor stockholders’ equity                                                                   |       | —                                      |       | 24,510                                                                |       |
| Common unitholders (2,720,000 units issued  and outstanding at June 30, 2005)                      |       | 47,978                                      |       | —                                                                |       |
| Subordinated unitholders (4,080,000 units  issued and outstanding at June 30, 2005)                |       | 49,977                                      |       | —                                                                |       |
| General partner interest (2% interest with  138,776 equivalent units outstanding at June 30, 2005) |       | 1,818                                       |       | —                                                                |       |
| **Total owners’ equity**                                                                           |       | 99,773                                      |       | 24,510                                                                |       |
|                                                                                                    |       |                                        |       |                                                                  |       |
| **Total liabilities and owners’ equity**                                                           |       | $                                           | 110,422    |                                                                  | $          | 49,175 |   |

 

The accompanying notes are an integral part of these financialstatements.

 

3

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**HILAND PARTNERS, LP**

**CONTINENTAL GAS, INC. (PREDECESSOR)**

**ConsolidatedCombined Statements of Operations**

**(Unaudited)**

 
| ** **                                                                  | ** ** | **Three Months Ended June 30,**    | ** ** | **Six Months Ended June 30,**              | ** ** |
|-----------------------------------------------------------------------------|------------|-----------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                                  | ** ** | **Hiland  Partners, LP  2005**          | ** ** | **Continental Gas,  Inc.  (Predecessor)  2004** | ** ** | **Hiland  Partners, LP  2005** | ** ** | **Continental Gas,  Inc.  (Predecessor)  2004** | ** ** |
| ** **                                                                  | ** ** | **(in thousands except per unit data)** | ** ** |
| **Revenues:**                                                               |       |                                    |       |                                            |       |   |   |   |   |
| Midstream operations                                                        |       |                                    |       |                                            |       |   |   |   |   |
| Third parties                                                               |       | $                                       | 27,980     |                                            | $          | 23,056 |   | $ | 52,172 |   | $ | 43,291 |   |
| Affiliates                                                                  |       | 1,418                                   |       | 793                                             |       | 2,402 |   | 1,608 |   |
| Compression services, affiliate                                             |       | 1,205                                   |       | —                                          |       | 1,807 |   | — |   |
| Total revenues                                                              |       | 30,603                                  |       | 23,849                                          |       | 56,381 |   | 44,899 |   |
|                                                                        |       |                                    |       |                                            |       |   |   |   |   |
| **Operating costs and expenses:**                                           |       |                                    |       |                                            |       |   |   |   |   |
| Midstream purchases (exclusive of items  shown separately below)            |       | 15,177                                  |       | 13,848                                          |       | 29,037 |   | 24,675 |   |
| Midstream purchases -affiliate (exclusive  of items shown separately below) |       | 8,855                                   |       | 6,664                                           |       | 15,198 |   | 13,647 |   |
| Operations and maintenance                                                  |       | 1,609                                   |       | 1,033                                           |       | 3,186 |   | 2,229 |   |
| Depreciation, amortization and accretion                                    |       | 2,335                                   |       | 963                                             |       | 4,012 |   | 1,810 |   |
| General and administrative                                                  |       | 665                                     |       | 215                                             |       | 1,018 |   | 479 |   |
| Total operating costs and expenses                                          |       | 28,641                                  |       | 22,723                                          |       | 52,451 |   | 42,840 |   |
| Operating income                                                            |       | 1,962                                   |       | 1,126                                           |       | 3,930 |   | 2,059 |   |
|                                                                        |       |                                    |       |                                            |       |   |   |   |   |
| **Other income (expense):**                                                 |       |                                    |       |                                            |       |   |   |   |   |
| Interest and other income                                                   |       | 35                                      |       | 3                                               |       | 41 |   | 16 |   |
| Amortization of deferred loan costs                                         |       | (71                                     | )          | (26                                             | )          | (277 | ) | (51 | ) |
| Interest expense                                                            |       | (47                                     | )          | (166                                            | )          | (181 | ) | (335 | ) |
| Total other income (expense)                                                |       | (83                                     | )          | (189                                            | )          | (417 | ) | (370 | ) |
|                                                                        |       |                                    |       |                                            |       |   |   |   |   |
| **Income from continuing operations**                                       |       | 1,879                                   |       | 937                                             |       | 3,513 |   | 1,689 |   |
| **Discontinued operations, net**                                            |       | —                                  |       | 71                                              |       | — |   | 86 |   |
|                                                                        |       |                                    |       |                                            |       |   |   |   |   |
| **Net income**                                                              |       | 1,879                                   |       | $                                               | 1,008      |   | 3,513 |   | $ | 1,775 |   |
|                                                                        |       |                                    |       |                                            |       |   |   |   |   |
| Less income attributable to predecessor                                     |       | —                                  |       |                                            |       | 493 |   |   |   |
| Less general partner interest in net income                                 |       | 37                                      |       |                                            |       | 60 |   |   |   |
| **Limited partners’ interest in net income**                           |       | $                                       | 1,842      |                                            |       |   | $ | 2,960 |   |   |   |
|                                                                        |       |                                    |       |                                            |       |   |   |   |   |
| **Net income per limited partners’ unit –  basic**                |       | $                                       | 0.27       |                                            |       |   | $ | 0.44 |   |   |   |
|                                                                        |       |                                    |       |                                            |       |   |   |   |   |
| **Net income per limited partners’ unit –  diluted**              |       | $                                       | 0.27       |                                            |       |   | $ | 0.43 |   |   |   |
|                                                                        |       |                                    |       |                                            |       |   |   |   |   |
| **Weighted average limited partners’ units  outstanding -basic**       |       | 6,800                                   |       |                                            |       | 6,800 |   |   |   |
|                                                                        |       |                                    |       |                                            |       |   |   |   |   |
| **Weighted average limited partners’ units  outstanding -diluted**     |       | 6,851                                   |       |                                            |       | 6,848 |   |   |   |

 

The accompanying notes are an integral part of these financialstatements.

 

4

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**HILAND PARTNERS, LP**

**CONTINENTAL GAS, INC. (PREDECESSOR)**

**ConsolidatedCombined Statements of Cash Flows**

**For the Six Months Ended (Unaudited)**

 
| ** **                                                                                   | ** ** | **Hiland Partners, LP  June 30, 2005** | ** ** | **Continental Gas,  Inc. (Predecessor)  June 30, 2004** | ** ** |
|----------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                                                                   | ** ** | **(in thousands)**                          | ** ** |
| **Cash flows from operating activities:**                                                    |       |                                        |       |                                                         |       |
| Net income                                                                                   |       | $                                           | 3,513      |                                                         | $          | 1,775 |   |
| Adjustments to reconcile net income to net  cash provided by (used in) operating activities: |       |                                        |       |                                                         |       |
| Depreciation and amortization                                                                |       | 3,995                                       |       | 1,862                                                        |       |
| Change in asset retirement obligation                                                        |       | 17                                          |       | 14                                                           |       |
| Amortization of deferred loan cost                                                           |       | 277                                         |       | 51                                                           |       |
| (Increase) decrease in current assets:                                                       |       |                                        |       |                                                         |       |
| Accounts receivable                                                                          |       | (8,376                                      | )          | (1,006                                                       | )          |
| Accounts receivable - affiliates                                                             |       | (151                                        | )          | 170                                                          |       |
| Inventories                                                                                  |       | —                                      |       | 122                                                          |       |
| Other current assets                                                                         |       | (172                                        | )          | —                                                       |       |
| Increase (decrease) in current liabilities:                                                  |       |                                        |       |                                                         |       |
| Accounts payable                                                                             |       | (387                                        | )          | 812                                                          |       |
| Accounts payable-affiliates                                                                  |       | (300                                        | )          | 358                                                          |       |
| Accrued liabilities                                                                          |       | 588                                         |       | 86                                                           |       |
| Surety deposit for production taxes                                                          |       | (330                                        | )          | —                                                       |       |
| **Net cash provided by (used in) operating  activities**                                     |       | (1,326                                      | )          | 4,244                                                        |       |
|                                                                                         |       |                                        |       |                                                         |       |
| **Cash flows from investing activities:**                                                    |       |                                        |       |                                                         |       |
| Additions to property and equipment                                                          |       | (1,300                                      | )          | (3,429                                                       | )          |
| **Net cash used in investing activities**                                                    |       | (1,300                                      | )          | (3,429                                                       | )          |
|                                                                                         |       |                                        |       |                                                         |       |
| **Cash flows from financing activities:**                                                    |       |                                        |       |                                                         |       |
| Proceeds from public offering - net                                                          |       | 48,128                                      |       | —                                                       |       |
| Redemption of common units                                                                   |       | (6,278                                      | )          | —                                                       |       |
| Distributions to organizers                                                                  |       | (3,851                                      | )          | —                                                       |       |
| Cash not contributed to organizers                                                           |       | (869                                        | )          | —                                                       |       |
| Repayments to affiliates                                                                     |       | —                                      |       | (1,214                                                       | )          |
| Payments on long-term borrowings                                                             |       | (23,951                                     | )          | —                                                       |       |
| Debt issuance costs                                                                          |       | (867                                        | )          | (6                                                           | )          |
| Payment of offering costs                                                                    |       | (2,249                                      | )          | —                                                       |       |
| Cash distribution to unitholders                                                             |       | (1,561                                      | )          | —                                                       |       |
| **Net cash provided by (used in) financing  activities**                                     |       | 8,502                                       |       | (1,220                                                       | )          |
|                                                                                         |       |                                        |       |                                                         |       |
| Increase (decrease) for the period                                                           |       | 5,876                                       |       | (405                                                         | )          |
| Beginning of period                                                                          |       | 217                                         |       | 496                                                          |       |
| **End of period**                                                                            |       | $                                           | 6,093      |                                                         | $          | 91 |   |
|                                                                                         |       |                                        |       |                                                         |       |
| Supplementary information                                                                    |       |                                        |       |                                                         |       |
| Cash paid for interest                                                                       |       | $                                           | 153        |                                                         | $          | 432 |   |

 

See Notes 2 and 10 for non-cash business transactions.

 

The accompanying notes are an integral part of these financialstatements.

 

5

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**HILAND PARTNERS, LP**

**CONTINENTAL GAS, INC. (PREDECESSOR)**

**ConsolidatedCombined Statement of Owners’ Equity**

**(Unaudited)**

 
| ** **                                                           | ** ** | **Continental Gas, Inc. (Predecessor)** | ** ** | **Common  Units** | ** ** | **Subordinated  Units** | ** ** | **General  Partner  Interest** | ** ** | **Total** | ** ** |
|----------------------------------------------------------------------|------------|----------------------------------------------|------------|-------------------|------------|-------------------------|------------|--------------------------------|------------|-----------|------------|
| ** **                                                           | ** ** | **(in thousands)**                           | ** ** |
|                                                                 |       |                                         |       |              |       |                    |       |                           |       |      |       |
| Balance, December 31, 2004                                      |       | $                                            | 24,510     |              | $          | —                  |       | $                              | —     |      | $          | — |   | $ | 24,510 |   |
|                                                                 |       |                                         |       |              |       |                    |       |                           |       |      |       |
| Assets not contributed to Hiland Partners,  LP                       |       | (9,972                                       | )          | —            |       | —                  |       | —                         |       | (9,972    | )          |
|                                                                 |       |                                         |       |              |       |                    |       |                           |       |      |       |
| Net income from January 1, 2005 through  February 14, 2005 |       | 493                                          |       | —            |       | —                  |       | —                         |       | 493       |       |
|                                                                 |       |                                         |       |              |       |                    |       |                           |       |      |       |
| Allocation of net parent investment to  unitholders                  |       | (15,031                                      | )          | 2,191             |       | 12,418                  |       | 422                            |       | —    |       |
|                                                                 |       |                                         |       |              |       |                    |       |                           |       |      |       |
| Contribution of Hiland Partners, LLC by  owners                      |       | —                                       |       | 7,092             |       | 40,190                  |       | 1,367                          |       | 48,649    |       |
|                                                                 |       |                                         |       |              |       |                    |       |                           |       |      |       |
| Proceeds from initial public offering, net  of underwriter discount  |       | —                                       |       | 48,128            |       | —                  |       | —                         |       | 48,128    |       |
|                                                                 |       |                                         |       |              |       |                    |       |                           |       |      |       |
| Offering costs                                                       |       | —                                       |       | (3,365            | )          | —                  |       | —                         |       | (3,365    | )          |
|                                                                 |       |                                         |       |              |       |                    |       |                           |       |      |       |
| Redemption of Common Units from Organizers                           |       | —                                       |       | (6,278            | )          | —                  |       | —                         |       | (6,278    | )          |
|                                                                 |       |                                         |       |              |       |                    |       |                           |       |      |       |
| Distributions at organization                                        |       | —                                       |       | (362              | )          | (3,489                  | )          | —                         |       | (3,851    | )          |
|                                                                 |       |                                         |       |              |       |                    |       |                           |       |      |       |
| Periodic cash distributions                                          |       | —                                       |       | (612              | )          | (918                    | )          | (31                            | )          | (1,561    | )          |
|                                                                 |       |                                         |       |              |       |                    |       |                           |       |      |       |
| Net income from February 15, 2005  through June 30, 2005   |       | —                                       |       | 1,184             |       | 1,776                   |       | 60                             |       | 3,020     |       |
|                                                                 |       |                                         |       |              |       |                    |       |                           |       |      |       |
| Balance, June 30, 2005                                          |       | $                                            | —     |              | $          | 47,978                  |       | $                              | 49,977     |      | $          | 1,818 |   | $ | 99,773 |   |

 

The accompanying notes are an integral partof these financial statements.

 

6

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**HILANDPARTNERS, LP**

**CONTINENTALGAS, INC. (PREDECESSOR)**

CONDENSED NOTES TO CONSOLIDATED COMBINED FINANCIALSTATEMENTS (UNAUDITED)

THREE AND SIX MONTHS ENDED JUNE 30,2005 AND 2004

 

**(inthousands, except unit amounts and per unit amounts or unless otherwise noted)**

 

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

 

Hiland Partners, LP, a Delaware limited partnership, was formed in October 2004to acquire and operate certain of the midstream natural gas plants, gatheringsystems, and compression and water injection assets previously owned by ContinentalGas, Inc. and Hiland Partners, LLC. References in this quarterly report on Form 10-Q to “we,” “our,” “us,”or similar terms refer to Hiland Partners, LP and its operating subsidiariesafter giving effect to the formation transactions described above.

 

Continental Gas, Inc. historically has owned all of our naturalgas gathering, processing, treating and fractionation assets other than ourWorland gathering system.  Prior to July 21, 2004, Continental Gas, Inc.was owned by Continental Resources, Inc., an independent exploration anddevelopment company owned by Harold Hamm, the Chairman of the Board ofDirectors of our general partner and the Harold Hamm DST and the Harold Hamm HJTrusts, which are trusts established for the benefit of Harold Hamm’s childrenand which we refer to herein as the “Hamm Trusts.”  On July 21, 2004,Continental Resources, Inc. completed the transfer of Continental Gas, Inc.to Harold Hamm and the Hamm Trusts.  Hiland Partners, LLC historicallyowned our Worland gathering system, our compression services assets and theBakken gathering system.  Hiland Partners, LLC was owned by the HammTrusts and Equity Financial Services, Inc., an entity owned by RandyMoeder, our President and Chief Executive Officer and a director of our generalpartner.

 

In October 2004, Hiland Partners, LP filed a registrationstatement on Form S-1 with the Securities and Exchange Commission,relating to its proposed initial public offering.  On February 15, 2005, the Partnershipclosed its offering and (a) substantially all of Continental Gas, Inc.’sassets and liabilities were transferred to Continental Gas Operating, LP, (b) substantiallyall of Hiland Partners, LLC’s assets less the Bakken gathering system weretransferred to Hiland Energy Partners, LLC, and (c) all of the interestsin these two operating entities were transferred to Hiland Partners, LP.  Harold Hamm and members of our management owna 100% managing member interest in Hiland Partners GP, LLC, our generalpartner.

 

Concurrently with the closing of our initial public offering, weestablished a $55.0 million credit facility through our operating company,Hiland Operating, LLC, with MidFirst Bank, a federally chartered savingsassociation located in Oklahoma City, Oklahoma, as administrative agent and alender, with an option to increase the amount to $90.0 million under certainconditions.  As of August 3, 2005, we had no indebtedness outstandingunder the credit facility.

 

Thefinancial statements for the three and six months ended June 30, 2005 and2004 included herein have been prepared without audit, pursuant to the rules andregulation of the United States Securities and Exchange Commission (the “SEC”).  The statements of operations, cash flow andpartners’ equity include the accounts of Continental Gas, Inc. through February 14,2005 and Hiland Partners, LP for the period only from February 15, 2005 toJune 30, 2005.  The accompanyingcondensed consolidated financial statements and related notes should be read inconjunction with the audited financial statements of Continental Gas, Inc.(Predecessor) and Hiland Partners, LLC, and notes thereto, for the year ended December 31,2004 as presented in the Partnership’s Form 10-K for the year ended December 31,2004.

 

Theinterim financial statements reflect all adjustments, which are in the opinionof management, necessary for a fair presentation of our results for the interimperiods to the extent permitted by GAAP. Such adjustments are considered to be of a normal recurring nature.  Results of operations for the three and sixmonths ended June 30, 2005 are not necessarily indicative of the resultsof operations that will be realized for the year ending December 31, 2005.  Thepreparation of financial statements in accordance with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the amounts reported in the financialstatements and accompanying notes. Actual results could differ from those estimates.

 

Theconsolidated financial statements include our accounts and those of oursubsidiaries.  All significantintercompany transactions and balances have been eliminated. In addition, theconsolidated financial statements include the financial position and results ofoperations of assets owned by Continental Gas, Inc. or Hiland Partners,LLC that were contributed to the Partnership concurrently with the completionof our initial public offering.

 

In accordancewith Statement of Financial Accounting Standards (SFAS) No. 144, “Accountingfor the Impairment or Disposal of Long-Lived Assets,” we evaluate ourlong-lived assets of identifiable business activities for impairment whenevents or changes in circumstances indicate, in management’s judgment, that thecarrying value of such assets may not be recoverable.  The determination of whether impairment hasoccurred is based on management’s estimate of undiscounted future cash flowsattributable to the assets as compared to the carrying value of theassets.  If impairment has occurred, theamount of the impairment recognized is determined by

 

7

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estimating thefair value for the assets and recording a provision for loss if the carryingvalue is greater than fair value.  Forassets identified to be disposed of in the future, the carrying value of theseassets is compared to the estimated fair value less the cost to sell todetermine if impairment is required. Until the assets are disposed of, an estimate of the fair value isre-determined when related events or circumstances change or for each reportingperiod.

 

Intangibleassets consist of the acquired value of existing contracts to sell natural gasand other NGLs and compression contracts, which have a significant residualvalue.  The contracts are being amortized over ten years.  Thedeferred loan costs are being amortized over the life of the credit facility.

 

***Shared Based Compensation***

*** ***

In October 1995, the FASB issued SFAS No. 123, “Share-BasedPayments,” which was revised in December 2004 (collectively, “FASB 123R”). FASB 123R requires that the compensation cost relating to share-based paymenttransactions be recognized in financial statements.  That cost will bemeasured based on the fair value of the equity or liability instrumentsissued.  The effect of the standard will be to require entities to measurethe cost of employee services received in exchange for stock options based onthe grant-date fair value of the award, and to recognize the cost over theperiod the employee is required to provide services for the award.

 

In accordance with SEC Release No. 33-8568, the Partnership willadopt SFAS 123R as of the first interim period beginning on or after January 1,2006.  The Partnership expects to apply the Statement using the permittedmodified retrospective method beginning January 1, 2006. The Partnershipis still evaluating the impact of this statement on its financial statements.

 

None of the entities (the Partnership, Continental Gas, Inc., orHiland Partners, LLC) had issued any options prior to February 10, 2005.

 

The Partnership applies Accounting PrinciplesBoard Opinion No. 25 and related interpretations in accounting for itsshare-based compensation awards.  Accordingly, no compensation cost hasbeen recognized for unit options granted in the accompanying consolidatedfinancial statements.  The following pro forma data is calculated as ifcompensation cost for the Partnership’s share-based compensation awards wasdetermined based upon the fair value at the grant date consistent with themethodology prescribed under SFAS No. 123.

 
| ** **                                                   | ** ** | **Three Months  Ended June 30,  2005** | ** ** | **Six Months  Ended June 30,  2005** | ** ** |
|--------------------------------------------------------------|------------|---------------------------------------------|------------|-------------------------------------------|------------|
| Net income as reported                                       |       | $                                           | 1,879      |                                      | $          | 3,513 |   |
| Less income attributable to predecessor                      |       | —                                      |       | 493                                       |       |
| Net income (net of predecessor income)                       |       | 1,879                                       |       | 3,020                                     |       |
| Share based compensation adjustment                          |       | (317                                        | )          | (450                                      | )          |
| Pro forma net income                                         |       | 1,562                                       |       | 2,570                                     |       |
| Less general partner interest                                |       | (31                                         | )          | (51                                       | )          |
| Limited partner’s interest in pro forma net  income     |       | $                                           | 1,531      |                                      | $          | 2,519 |   |
| Net income per limited partner unit as  reported, basic      |       | $                                           | 0.27       |                                      | $          | 0.44 |   |
| Net income per limited partner unit as  reported, diluted    |       | $                                           | 0.27       |                                      | $          | 0.43 |   |
| Adjustment, basic                                            |       | $                                           | (0.05      | )                                         | $          | (0.07 | ) |
| Adjustment, diluted                                          |       | $                                           | (0.05      | )                                         | $          | (0.06 | ) |
| Proforma net income per limited partner  unit, basic         |       | $                                           | 0.22       |                                      | $          | 0.37 |   |
| Proforma net income per limited partner  unit, diluted       |       | $                                           | 0.22       |                                      | $          | 0.37 |   |
| Weighted average limited partner units  outstanding, basic   |       | 6,800,000                                   |       | 6,800,000                                 |       |
| Weighted average limited partner units  outstanding, diluted |       | 6,851,000                                   |       | 6,848,000                                 |       |

 

Asof June 30, 2005, there were 143,000 options outstanding.  The fair value of each option grant isestimated on the date of grant using the American Binomial option pricing modelwith the following weighted average assumptions used for grants in 2005:risk-free interest rates of 3.77 percent; 5.00 percent dividend yield; noassumed forfeitures; expected lives of 5.9 years; and volatility of 32percent.  The pro forma amounts above are not likely to be representativeof future years because there is no assurance that additional awards will bemade each year.

 

8

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**Note 2:  Initial Public Offeringof Hiland Partners, LP**

 

OnOctober 22, 2004, a Registration Statement on Form S-1 was filed withthe SEC relating to a proposed initial public offering of limited partnershipinterests in Hiland Partners, LP.  HilandPartners, LP was formed to own and operate the assets that have historicallybeen owned and operated by Continental Gas, Inc. and Hiland Partners,LLC.  On February 9, 2005, we priced2,000,000 common units for the public offering; and on February 10, 2005,our common units began trading on the NASDAQ National Market under the symbol “HLND”.  On February 15, 2005, we closed ourinitial public offering of 2,300,000 common units, which included a 300,000unit over-allotment option that was exercised by the underwriters.  Proceeds from the sale of the units were$48.1 million, net of $3.6 million of underwriting commissions.

 

Allof our initial assets were contributed by the former owners of Continental Gas, Inc.,Hiland Partners, LLC, and certain of our affiliates, including our generalpartner, in exchange for an aggregate of 720,000 common units and 4,080,000subordinated units, a 2% general partner interest in us and all of ourincentive distribution rights, which entitle the general partner to increasingpercentages of the cash we distribute in excess of $0.495 per unit per quarter.The assets of Continental Gas, Inc. transferred to the Partnership arerecorded at historical cost as it is considered to be a reorganization ofentities under common control and Continental Gas, Inc. is considered thePartnership’s accounting predecessor.  In consideration for the transfer, Harold Hamm and the Hamm Trustsreceived 467,073 common units and 2,646,749 subordinated units of thePartnership.  Immediately following theclosing of the offering, 195,991 of the common units were redeemed forapproximately $4.1 million.

 

The following tablepresents the assets and liabilities of our predecessor immediately prior tocontributing assets to Hiland Partners, LP, and assets and liabilities contributedto Hiland Partners, LP, and the predecessor’s assets and liabilities that werenot contributed to Hiland Partners, LP.

 

**Continental Gas, Inc. (Predecessor)**

**As of February 14, 2005**

**(in thousands)**

 

| ** **                                | ** ** | **Continental Gas, Inc.  (Predecessor)  14-Feb-05** | ** ** | **Net Assets  Not  Contributed** | ** ** | **Contributed to  Hiland Partners, LP  15-Feb-05** | ** ** |
|-------------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------|------------|----------------------------------------------------|------------|
| **ASSETS**                                |       |                                                     |       |                             |       |                                               |       |
| Current assets:                           |       |                                                     |       |                             |       |                                               |       |
| Cash and cash equivalents                 |       | $                                                        | 869        |                             | $          | 869                                                |       | $ | — |   |
| Accounts Receivable                       |       | 10,521                                                   |       | 9,101                            |       | 1,420                                              |       |
| Inventories                               |       | 153                                                      |       | —                           |       | 153                                                |       |
| Other current assets                      |       | 291                                                      |       | 2                                |       | 289                                                |       |
| Total Current Assets                      |       | 11,834                                                   |       | 9,972                            |       | 1,862                                              |       |
| Property and equipment, at cost, net      |       | 36,805                                                   |       | —                           |       | 36,805                                             |       |
| Other assets, net                         |       | 3,388                                                    |       | —                           |       | 3,388                                              |       |
| Total assets                              |       | 52,027                                                   |       | 9,972                            |       | 42,055                                             |       |
|                                      |       |                                                     |       |                             |       |                                               |       |
| **LIABILITIES**                           |       |                                                     |       |                             |       |                                               |       |
| Current liabilities:                      |       |                                                     |       |                             |       |                                               |       |
| Accounts payable                          |       | 11,703                                                   |       | —                           |       | 11,703                                             |       |
| Accrued liabilities                       |       | 700                                                      |       | —                           |       | 700                                                |       |
| Current maturities of long term debt      |       | 2,429                                                    |       | —                           |       | 2,429                                              |       |
| Total current liabilities                 |       | 14,832                                                   |       | —                           |       | 14,832                                             |       |
| Commitments and contingencies             |       | —                                                   |       | —                           |       | —                                             |       |
| Long term debt, net of current maturities |       | 11,570                                                   |       | —                           |       | 11,570                                             |       |
| Asset retirement obligation               |       | 622                                                      |       | —                           |       | 622                                                |       |
| Total liabilities                         |       | 27,024                                                   |       | —                           |       | 27,024                                             |       |
|                                      |       |                                                     |       |                             |       |                                               |       |
| **NET ASSETS**                            |       | $                                                        | 25,003     |                             | $          | 9,972                                              |       | $ | 15,031 |   |

 

Theacquisition of the assets of Hiland Partners, LLC was accounted for as apurchase and, as a result, these assets were recorded at their fair value atthe time of purchase.  Inconsideration for the transfer ofassets and liabilities of Hiland Partners, LLC, the Hamm Trusts received247,868 common units and 1,404,586 subordinated units of the Partnership.  Immediately following the closing of the

 

9

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offering, 104,009 of the common units were redeemed for approximately$2.2 million.  Equity Financial Services, Inc.received 5,059 common units and 28,665 subordinated units of the Partnership,none of which were redeemed.

 

Asa part of the transactions, Harold Hamm, the Hamm Trusts, Equity FinancialServices, Inc., Mr. Moeder, and Mr. Maples received an aggregateof 138,776 equivalent units of the General Partner, representing substantiallyall of the ownership of the general partner and a 2% equity ownership of thePartnership.

 

Weused the proceeds of the public offering to: redeem an aggregate of 300,000 common units from Harold Hamm and theHamm Trusts for $6.3 million; repay $14.0 million in debt owed by ContinentalGas, Inc. and $8.9 million in debt acquired from Hiland Partners, LLC; paythe remaining $2.2 million of expenses associated with the offering andformation transactions; pay $0.6 million of debt issuance costs related to thecredit facility; distribute $3.9 million to the former owners of HilandPartners, LLC in reimbursement of certain capitalized expenditures related tothe assets of Hiland Partners, LLC that were contributed to the Partnership;and replenish approximately $12.2 million of working capital.

 

Inconnection with this offering, we entered into a four-year agreement withContinental Resources, Inc., an affiliate of Harold Hamm, under which theyagreed to pay us an operating fee of approximately $400 per month for us toprovide air and water compression service for Continental Resources, Inc.’ssecondary recovery operations in North Dakota. We have recorded $1.8 million of revenues from Continental Resources, Inc.under the compression services agreement for the period from February 15,2005 through June 30, 2005.

 

Wealso entered into an omnibus agreement with Continental Resources, Inc.that became effective February 15, 2005 (the “Omnibus Agreement”) anddetermines the services Continental Resources, Inc. will provide to us andthe liabilities from which Continental Resources, Inc. will indemnifyus.  Under the agreement, ContinentalResources, Inc. will charge us the lower of Continental Resources, Inc.’scost or $50 per year for a two-year period for certain general, administrativeand information technology support. Continental Resources, Inc., Hiland Partners, LLC, and ContinentalGas Holdings, Inc. agreed to indemnify the Partnership for income taxliabilities arising from operations prior to the closing of the offering andContinental Resources, Inc. agreed to indemnify the Partnership forliabilities associated with oil and gas properties conveyed by Continental Gas, Inc.to Continental Resources, Inc. for a period of five years from the closingdate of the offering.  In addition,Harold Hamm, Hiland Partners, LLC, and Continental Resources, Inc. agreed,with certain exceptions, not to engage in, whether by acquisition or otherwise,midstream and NGL gathering and processing in the continental UnitedStates.  In addition, Hiland Partners,LLC has granted the Partnership a two-year option to purchase its Bakken gasgathering system pursuant to the Omnibus Agreement.  For a description of this agreement, pleaseread “Item 13.  Certain Relationships andRelated Party Transactions – Omnibus Agreement” of the Partnership’s Form 10-Kfor the fiscal year ended December 31, 2004.

 

**Note 3:  Proforma Operations**

 

Theacquisition of assets from Hiland Partners, LLC discussed above occurred on February 15,2005. Had the acquisition been made effective January 1, 2004, theoperations of the assets acquired from Hiland Partners, LLC would have beenincluded in our consolidated financial statements for each subsequent periodwith the following pro forma impact on the consolidated combined statements ofoperations.

 
| ** **                                                   | ** ** | **Three Months  Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------------------------------|------------|---------------------------------------|------------|------------------------------------|------------|
| ** **                                                   | ** ** | **2004**                              | ** ** | **2005**                           | ** ** | **2004** | ** ** |
| ** **                                                   | ** ** | **(in thousands)**                    | ** ** |
| Revenues as reported                                         |       | $                                     | 23,849     |                               | $          | 56,381 |   | $ | 44,899 |   |
| Revenues from Hiland Partners, LLC                           |       | 2,852                                 |       | 1,318                              |       | 5,758 |   |
| Pro forma revenues                                           |       | $                                     | 26,701     |                               | $          | 57,699 |   | $ | 50,657 |   |
|                                                         |       |                                  |       |                               |       |   |   |
| Net income as reported                                       |       | $                                     | 1,008      |                               | $          | 3,513 |   | $ | 1,775 |   |
| Additional income from acquired interest                     |       | 994                                   |       | 377                                |       | 2,192 |   |
| Pro forma net income                                         |       | $                                     | 2,002      |                               | 3,890      |   | $ | 3,967 |   |
| Less income attributable to predecessor                      |       |                                  |       | 870                                |       |   |   |
| Less general partner interest in proforma  net income        |       |                                  |       | 60                                 |       |   |   |
| Limited partners’ interest in proforma net  income      |       |                                  |       | $                                  | 2,960      |   |   |   |
| Proforma net income per limited partner  unit, basic         |       |                                  |       | $                                  | 0.44       |   |   |   |
| Proforma net income per limited partner  unit, diluted       |       |                                  |       | $                                  | 0.43       |   |   |   |
| Weighted average limited partner units  outstanding, basic   |       |                                  |       | 6,800,000                          |       |   |   |
| Weighted average limited partner units  outstanding, diluted |       |                                  |       | 6,848,000                          |       |   |   |

 

10

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**Note 4: Net Income per Limited Partners’ Unit**

 

The computation of net income per limited partners’ unit is based onthe weighted-average number of common and subordinated units outstanding duringthe period. Net income per unit applicable to limited partners is computed bydividing net income applicable to limited partners, after deducting the generalpartner’s 2% interest and incentive distributions, and after deducting netincome attributable to the Predecessor (before February 15, 2005), by theweighted-average number of limited partnership units outstanding. The followingis a reconciliation of the limited partner units used in the calculations ofincome per limited partner unit – basic and income per limited partner unit –diluted assuming dilution for the quarter ended June 30, 2005 and for thesix months ended June 30, 2005:

 
| ** **                                                       | ** ** | **Income  Available to  Limited  Partners  (Numerator)** | ** ** | **Limited  Partner Units  (Denominator)** | ** ** | **Per Unit  Amount** | ** ** |
|------------------------------------------------------------------|------------|----------------------------------------------------------|------------|-------------------------------------------|------------|----------------------|------------|
| **For the quarter ended June 30, 2005:**                    |       |                                                     |       |                                      |       |                 |       |
| Income per limited partner unit -basic:                          |       |                                                     |       |                                      |       |                 |       |
| Income available to limited unitholders                          |       | $                                                        | 1,842      |                                      |       |                 | $          | 0.27 |   |
| Weighted average limited partner units  outstanding              |       |                                                     |       | 6,800,000                                 |       |                 |       |
| Income per limited partner unit – diluted:                  |       |                                                     |       |                                      |       |                 |       |
| Unit Options                                                     |       |                                                     |       | 51,000                                    |       |                 |       |
| Income available to common unitholders plus  assumed conversions |       | $                                                        | 1,842      |                                      | 6,851,000  |                 | $          | 0.27 |   |

 
| ** **                                                       | ** ** | **Income  Available to  Limited  Partners  (Numerator)** | ** ** | **Limited  Partner Units  (Denominator)** | ** ** | **Per Unit  Amount** | ** ** |
|------------------------------------------------------------------|------------|----------------------------------------------------------|------------|-------------------------------------------|------------|----------------------|------------|
| **For the six months ended June 30,  2005:**                |       |                                                     |       |                                      |       |                 |       |
| Income per limited partner unit -basic:                          |       |                                                     |       |                                      |       |                 |       |
| Income available to limited unitholders                          |       | $                                                        | 2,960      |                                      |       |                 | $          | 0.44 |   |
| Weighted average limited partner units  outstanding              |       |                                                     |       | 6,800,000                                 |       |                 |       |
| Income per limited partner unit – dilued:                   |       |                                                     |       |                                      |       |                 |       |
| Unit Options                                                     |       |                                                     |       | 48,000                                    |       |                 |       |
| Income available to common unitholders plus  assumed conversions |       | $                                                        | 2,960      |                                      | 6,848,000  |                 | $          | 0.43 |   |

 

**Note 5: Distribution to Unitholders**

 

On April 25,2005, we announced our first regular cash distribution in 2005 of $0.225 perunit, based on the minimum quarterly cash distribution of $0.45 prorated forthe period since the initial public offering on February 15, 2005. Thedistribution to all common, subordinated and general partner units was paid May 13,2005, to all unitholders of record on May 5, 2005. The aggregate amount ofthe distribution was $1.6 million.

 

On July 26,2005, we announced a regular cash distribution of $0.4625 per unit for thesecond quarter of 2005.  This representsan increase of $0.0125 per unit over our minimum quarterly distribution rate of$0.45.  The distribution to all common,subordinated and general partner units is to be paid on August 12, 2005 toall unitholders of record on August 5, 2005. The aggregate amount of thedistribution will be $3.2 million.

 

**Note 6: Other Assets**

 

In April, 2005, a cash deposit of$330 representing an estimate of one months production taxes was made to theState of Oklahoma in lieu of a surety bond. The deposit is included in other assets at June 30, 2005.

 

11

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**Note 7: Commitments and Contingencies**

 

The Partnership hasexecuted fixed price physical forward sales contracts on approximately 50,000MMBtu per month through December 2007 with weighted average fixed pricesper MMBtu of $4.53, $4.47 and $4.49, respectively, for years 2005 through 2007.Such contracts qualify as normal sales under SFAS No. 133 and aretherefore not marked to market as derivatives.

 

The Partnership maintains a defined contribution retirement plan forits employees under which it makes discretionary contributions to the planbased on a percentage of eligible employees’ compensation. Through June 30,2005 and 2004, contributions to the plan were 5.0% of eligible employees’compensation. Expense for the three months ended June 30, 2005 and 2004was $27 and $18, respectively.  Expensefor the six months ended June 30, 2005 and 2004 was $41 and $34,respectively.

 

 The Partnership and other affiliatedcompanies participate jointly in a self-insurance pool (the “Pool”) coveringhealth and workers’ compensation claims made by employees up to the first $150and $500, respectively, per claim. Any amounts paid above these are reinsuredthrough third party providers. Premiums charged to the Partnership are based onestimated costs per employee of the Pool. No additional premium assessments areanticipated for periods prior to June 30, 2005. Property and generalliability insurance is maintained through third-party providers with a $100deductible on each policy.

 

The Partnership is aparty to various regulatory proceedings and various other litigation that itbelieves will not have a materially adverse impact on the Partnership’sfinancial condition, results of operations or cash flows.

 

The operation of pipelines, plants and other facilities for gathering,compressing, treating, or processing natural gas, NGLs and other products issubject to stringent and complex laws and regulations pertaining to health,safety and the environment. Management believes that compliance with federal,state or local environmental laws and regulations will not have a materialadverse effect on the Partnership’s business, financial position or results ofoperations.

 

**Note 8: Related Party Transactions**

 

The Partnershipsells natural gas and NGLs to affiliated companies.   Sales of product totaled $1,418 and $793 forthe quarters ended June 30, 2005 and 2004, respectively.  Sales of product were $2,402 and $1,608 forthe six month periods ended June 30, 2005 and 2004, respectively.  Compression revenues of $1,205 and $1,807 forthe three and six month periods ended June 30, 2005 are exclusively to anaffiliated company.  There were nocompression revenues in the similar periods in 2004.

 

The Partnership purchases natural gas and NGLs from affiliatedcompanies. Purchases of product totaled $8,855 and $6,664 for the quartersended June 30, 2005 and 2004, respectively.  Purchases of product were $15,198 and $13,647for the six month periods ended June 30, 2005 and 2004, respectively.

 

The Partnership utilizes unconsolidated affiliated companies to provideservices to its plants and pipelines and certain administrative costs. Thetotal amount paid to these companies was $28 and $36 during the quarters ended June 30,2005 and 2004, respectively.  Amountspaid in the six months ended June 30, 2005 and 2004 were $59 and $82,respectively.

 

The Partnership leases office space under operating leases directly orindirectly from the principal unitholder. Rent expense for these leases totaled$19 and $9 for the quarters ended June 30, 2005 and 2004, respectively,and $28 and $19 for the six months ended June 30, 2005 and 2004,respectively.

 

Pursuant to anoption agreement contained in an omnibus agreement we entered into with HilandPartners, LLC and Harold Hamm and his affiliates in connection with our initialpublic offering, Hiland Partners, LLC granted us an exclusive two-year optionto purchase its Bakken gathering system, located in eastern Montana, at fairmarket value at the time of purchase.  OnMay 11, 2005, the Partnership provided written notice to Hiland Partners,LLC advising of its intent to exercise the option.  The valuation process outlined in the omnibusagreement is currently underway.  As of June 30,2005, the Bakken gathering system consisted of approximately 223 miles of gasgathering pipeline, a processing plant, two compressor stations, which arecomprised of three units with an aggregate of approximately 4,434 horsepower,and one fractionation facility.  TheBakken processing plant and a portion of the gathering system becameoperational on November 8, 2004 and total plant throughput on June 30,2005 was 8,568 Mcf.  The gathering systemhas an initial capacity of approximately 21,000 Mcf/d.

 

12

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**Note 9: Business Segments**

 

As a part of the transaction discussed inNote 2, Hiland Partners, LP acquired an operating segment from Hiland Partners,LLC.  Continental Gas, Inc. (Precedessor)did not have operating segments.  HilandPartners, LP’s operations are classified into two reportable segments:

 

(1)   Midstream,which is the gathering, compressing, dehydrating, treating and processing ofnatural gas and fractionating NGLs.

 

(2)   Compression,which is providing air compression and water injection services for ContinentalResources, Inc.’s oil and gas secondary recovery operations that areongoing in North Dakota.

 

Hiland Partners, LP evaluates the performance of its segments and allocatesresources to them based on operating income. Hiland Partners, LP’s operationsare conducted in the United States.

 

Midstream assets totaled $72,305 at June 30, 2005.  Assets attributable to compression operationstotaled $38,117.  Capital expenditures of$1,300 for the six months ended June 30, 2005 were entirely related to themidstream segment.  The tables belowpresent information about operating income for the reportable segments for thequarter ended June 30, 2005 and for the six months ended June 30,2005.

 
| ** **                                                       | ** ** | **Quarter Ended June 30, 2005** | ** ** |
|------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                       | ** ** | **Midstream**                        | ** ** | **Compression** | ** ** | **Total** | ** ** |
| Revenues                                                         |       | $                                    | 29,398     |   | $ | 1,205 |   | $ | 30,603 |   |
| Operating costs and expenses:                                    |       |                                 |       |   |   |   |   |
| Midstream purchases (exclusive of items  shown separately below) |       | 24,032                               |       | — |   | 24,032 |   |
| Operations and maintenance                                       |       | 1,459                                |       | 150 |   | 1,609 |   |
| Depreciation and amortization                                    |       | 1,442                                |       | 893 |   | 2,335 |   |
| General and administrative                                       |       | 648                                  |       | 17 |   | 665 |   |
| Total operating costs and expenses                               |       | 27,581                               |       | 1,060 |   | 28,641 |   |
| Income from operations                                           |       | $                                    | 1,817      |   | $ | 145 |   | 1,962 |   |
| Other income (expense):                                          |       |                                 |       |   |   |   |   |
| Interest and other income                                        |       |                                 |       |   |   | 35 |   |
| Amortization of deferred loan costs                              |       |                                 |       |   |   | (71 | ) |
| Interest expense                                                 |       |                                 |       |   |   | (47 | ) |
| Total other income (expense)                                     |       |                                 |       |   |   | (83 | ) |
| Net income                                                       |       |                                 |       |   |   | $ | 1,879 |   |

** **
| ** **                                                       | ** ** | **Six Months Ended June 30, 2005** | ** ** |
|------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                       | ** ** | **Midstream**                           | ** ** | **Compression** | ** ** | **Total** | ** ** |
| Revenues                                                         |       | $                                       | 54,574     |   | $ | 1,807 |   | $ | 56,381 |   |
| Operating costs and expenses:                                    |       |                                    |       |   |   |   |   |
| Midstream purchases (exclusive of items  shown separately below) |       | 44,235                                  |       | — |   | 44,235 |   |
| Operations and maintenance                                       |       | 2,968                                   |       | 218 |   | 3,186 |   |
| Depreciation and amortization                                    |       | 2,673                                   |       | 1,339 |   | 4,012 |   |
| General and administrative                                       |       | 985                                     |       | 33 |   | 1,018 |   |
| Total operating costs and expenses                               |       | 50,861                                  |       | 1,590 |   | 52,451 |   |
| Income from operations                                           |       | $                                       | 3,713      |   | $ | 217 |   | 3,930 |   |
| Other income (expense):                                          |       |                                    |       |   |   |   |   |
| Interest and other income                                        |       |                                    |       |   |   | 41 |   |
| Amortization of deferred loan costs                              |       |                                    |       |   |   | (277 | ) |
| Interest expense                                                 |       |                                    |       |   |   | (181 | ) |
| Total other income (expense)                                     |       |                                    |       |   |   | (417 | ) |
| Net income                                                       |       |                                    |       |   |   | $ | 3,513 |   |

 

13

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**Note 10:  Discontinued Operations**

 

During the first quarter of 2004, Continental Gas, Inc. determinedit would no longer pursue its interests in direct production of oil and gas.Amounts for oil and gas income and expense are presented in these statements asdiscontinued operations. Effective May 31, 2004, Continental Gas, Inc.transferred all its interests in its oil and gas properties to ContinentalResources, Inc..  Net assetstransferred consisted leaseholds, capitalized intangibles, lease and wellequipment and asset retirement costs totaling $2,489 offset by accounts payableand asset retirement obligation of $348.

 

A summary of oil andgas operations for the periods indicated are shown below:

 
| ** **                    | ** ** | **Quarter Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------|------------|----------------------------------|------------|-------------------------------------|------------|
| ** **                    | ** ** | **2005**                         | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues                      |       | $                                | —     |                                | $          | 182 |   | $ | — |   | $ | 319 |   |
| Expenses                      |       | —                           |       | (86                                 | )          | — |   | (167 | ) |
| Depreciation and amortization |       | —                           |       | (25                                 | )          | — |   | (66 | ) |
| Net income                    |       | $                                | —     |                                | $          | 71 |   | $ | — |   | $ | 86 |   |

 

14

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**HILAND PARTNERS, LP**

 

**Item 2.Management’s Discussion and Analysis of Financial Condition and Results ofOperations**

 

You should readthe following discussion in conjunction with our Financial Statements and notesthereto included elsewhere in this quarterly report on Form 10-Q.

 

**Cautionary Statement About Forward-LookingStatements**

 

This Quarterly Report on Form 10-Q includes certain “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of1933 and Section 21E of the Securities Exchange Act of 1934.  Thesestatements include statements regarding our plans, goals, beliefs or currentexpectations. Statements using words such as “anticipate,” “believe,” “intend,”“project,” “plan,” “continue,” “estimate,” “forecast,” “may,” “will,” orsimilar expressions help identify forward-looking statements.  Although webelieve such forward-looking statements are based on reasonable assumptions andcurrent expectations and projections about future events, no assurance can begiven 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 ofthe factors that determine these results are subject to uncertainties andrisks, difficult to predict, and beyond management’s control.  Suchfactors include:

 

•      thegeneral economic conditions in the United States of America as well as thegeneral economic conditions and currencies in foreign countries;

•      thecontinued ability to find and contract for new sources of natural gas supply;

•      theamount of natural gas transported on our gathering systems;

•      thelevel of throughput in our natural gas processing and treating facilities;

•      the feeswe charge and the margins realized for our services;

•      theprices and market demand for, and the relationship between, natural gas andNGLs;

•      energyprices generally;

•      thelevel of domestic oil and natural gas production;

•      theavailability of imported oil and natural gas;

•      actionstaken by foreign oil and gas producing nations;

•      thepolitical and economic stability of petroleum producing nations;

•      theweather in our operating areas;

•      theextent of governmental regulation and taxation;

•      hazardsor operating risks incidental to the transporting, treating and processing ofnatural gas and NGLs that may not be fully covered by insurance;

•      competitionfrom other midstream companies;

•      loss ofkey personnel;

•      theavailability and cost of capital and our ability to access certain capitalsources;

•      changesin laws and regulations to which we are subject, including tax, environmental,transportation and employment regulations;

•      thecosts and effects of legal and administrative proceedings;

•      theability to successfully identify and consummate strategic acquisitions atpurchase prices that are accretive to the our financial results; and

•      risksassociated with the construction of new pipelines and treating and processingfacilities or additions to our existing pipelines and facilities.

 

These factors are not necessarily all of the important factors thatcould cause actual results to differ materially from those expressed in any ofour forward-looking statements.  Our future results will depend uponvarious other risks and uncertainties, including, but not limited to thosedescribed above.  Other unknown or unpredictable factors also could havematerial adverse effects on our future results.  You should not put unduereliance on any forward-looking statements.

 

All forward-looking statements attributable to us are qualified intheir entirety by this cautionary statement.   We undertake no dutyto update our forward-looking statements to reflect the impact of events orcircumstances after the date of the forward-looking statements.

 

15

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**OVERVIEW**

** **

In connectionwith our initial public offering, the former owners of Continental Gas, Inc.and Hiland Partners, LLC and certain of our affiliates, including our generalpartner, contributed to us, all of the assets and operations of Continental Gas, Inc.,other than a portion of its working capital assets, and substantially all ofthe assets and operations of Hiland Partners, LLC, other than a portion of itsworking 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 subordinatedunits, a 2% general partner interest in us and all of our incentivedistribution rights, which entitle the general partner to increasingpercentages of the cash we distribute in excess of $0.495 per unit per quarter.

 

Continental Gas, Inc.historically has owned all of our natural gas gathering, processing, treatingand fractionation assets other than our Worland gathering system.  Hiland Partners, LLC historically has ownedour Worland gathering system, our compression services assets and the Bakkengathering system. The Bakken gathering system was not contributed to thePartnership.

 

On February 15,2005, we closed our initial public offering of 2,300,000 common units.  Total proceeds from the sale of the unitswere $48.1 million, net of $3.6 million of underwriting commissions.  See “Liquidity and Capital Resources” belowfor further discussion of the proceeds.

 

We are engagedin gathering, compressing, dehydrating, treating, processing and marketingnatural gas, fractionating NGLs and providing air compression and waterinjection services for oil and gas secondary recovery operations.  Our operations are primarily located in theMid-Continent and Rocky Mountain regions of the United States.

 

We manage ourbusiness and analyze and report our results of operations on a segmentbasis.  Our operations are divided intotwo business segments:

 

•                  *MidstreamSegment*, whichis engaged in gathering and processing of natural gas primarily in theMid-Continent and Rocky Mountain regions. Within this segment, we also provide certain related services forcompression, dehydrating, and treating of natural gas and the fractionation ofNGLs.  This segment generatedapproximately 82% of our total segment margin for the quarter ended June 30,2005.  This segment generatedapproximately 85% of our total segment margin for the six months ended June 30,2005.

 

•                  *CompressionSegment*, whichis engaged in providing air compression and water injection services for oiland gas secondary recovery operations that are ongoing in North Dakota.  For the three months ended June 30, 2005,this segment generated approximately 18% of our total segment margin.  This segment generated approximately 15% ofour total segment margin for the six months ended June 30, 2005.

 

Our midstream assets consist of seven naturalgas gathering systems with approximately 865 miles of gas gathering pipelines,four natural gas processing plants, three natural gas treating facilities andtwo NGL fractionation facilities.  Ourcompression assets consist of two air compression facilities and a waterinjection plant.

 

The financial statements and financialinformation for the three month period ended June 30, 2004 and the sixmonth period ended June 30, 2004 reflect the operations of Continental Gas, Inc.,the predecessor to Hiland Partners, LP. The financial statements and financial information for the six monthperiod ended June 30, 2005 reflect the operations of the predecessor priorto February 15, 2005 and operations of Hiland Partners, LP from February 15,2005 upon completion of our initial public offering.

 

***HistoricalResults of Operations***

 

Our historical results of operations for theperiods presented may not be comparable, either from period to period or goingforward, for the reasons described below:

 

•                  The assets of Continental Gas, Inc.(Predecessor) were transferred to us at historical cost as it is considered areorganization of entities under common control.

 

•                  The acquisition of the assets ofHiland Partners, LLC was accounted for as a purchase and, as a result, theseassets are recorded at their fair value at the time of purchase, which occurredconcurrent with the closing of our initial public offering on February 15,2005.  Therefore, the results ofoperations from our Worland gathering system and compression assets are onlyreflected from February 15, 2005, the date Hiland Partners, LP commencedoperations.

 

•                  As stated above, prior to ourformation, Hiland Partners, LLC owned our Horse Creek air compression and ourCedar Hills water injection facility. These assets have historically been under a lease agreement with ContinentalResources, Inc.  In connection withour formation and our initial public offering, we entered into a four-yearservices agreement with Continental Resources, Inc., effective as of January 28,2005, that replaced the existing lease. Under the services agreement, we own and operate the facilities andprovide air compression and water injection services to Continental Resources, Inc.for a fee.  As part of the new

 

16

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agreement, the personnel at ContinentalResources, Inc. that operated the facilities are now employed by us.  Under the new services agreement, we willreceive a fixed payment of approximately $4.8 million per year as compared to$3.8 million under the prior lease agreement. In connection with the new services arrangement, we expect to incurapproximately $1.0 million per year in additional operating costs.

 

**Other Financial and Operating Data (Unaudited)**

 

**Results of Operations**

 

Set forth inthe table below is financial and operating data for Continental Gas, Inc.(predecessor) and Hiland Partners, LP for the periods indicated. Operationsfrom our Worland gathering system and compression assets acquired from HilandPartners, LLC are reflected only from February 15, 2005, the date HilandPartners, LP commenced operations.

 
| ** **                                                       | ** ** | **Three Months Ended June 30,** | ** ** |
|------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                       | ** ** | **2005**                             | ** ** | **2004** | ** ** |
| ** **                                                       | ** ** | **Hiland  Partners, LP**             | ** ** | **Continental  Gas, Inc.  (Predecessor) (1)** | ** ** |
| ** **                                                       | ** ** | **(in thousands)**                   | ** ** |
| **Total Segment Margin Data:**                                   | ** ** | ** **                           | ** ** | ** ** | ** ** |
| Midstream revenues                                               |       | $                                    | 29,398     |   | $ | 23,849 |   |
| Midstream purchases                                              |       | 24,032                               |       | 20,512 |   |
| Midstream segment margin                                         |       | 5,366                                |       | 3,337 |   |
| Compression revenues (2)                                         |       | 1,205                                |       | — |   |
| Total segment margin (3)                                         |       | $                                    | 6,571      |   | $ | 3,337 |   |
|                                                             |       |                                 |       |   |   |
| **Summary of Operations Data:**                                  | ** ** | ** **                           | ** ** | ** ** | ** ** |
| Midstream revenues                                               |       | $                                    | 29,398     |   | $ | 23,849 |   |
| Compression revenues                                             |       | 1,205                                |       | — |   |
| Total revenues                                                   |       | 30,603                               |       | 23,849 |   |
|                                                             |       |                                 |       |   |   |
| Midstream purchases (exclusive of items shown  separately below) |       | 24,032                               |       | 20,512 |   |
| Operations and maintenance                                       |       | 1,609                                |       | 1,033 |   |
| Depreciation, amortization and accretion                         |       | 2,335                                |       | 963 |   |
| General and administrative                                       |       | 665                                  |       | 215 |   |
| Total operating costs and expenses                               |       | 28,641                               |       | 22,723 |   |
| Operating income                                                 |       | 1,962                                |       | 1,126 |   |
| Other income (expense)                                           |       | (83                                  | )          | (189 | ) |
| Income from continuing operations                                |       | 1,879                                |       | 937 |   |
| Discontinued operations, net                                     |       | —                               |       | 71 |   |
|                                                             |       |                                 |       |   |   |
| **Net income**                                                   |       | 1,879                                |       | 1,008 |   |
|                                                             |       |                                 |       |   |   |
| Add:                                                             |       |                                 |       |   |   |
| Depreciation, amortization and accretion                         |       | 2,335                                |       | 963 |   |
| Amortization of deferred loan costs                              |       | 71                                   |       | 26 |   |
| Interest expense                                                 |       | 47                                   |       | 166 |   |
|                                                             |       |                                 |       |   |   |
| **EBITDA (4)**                                                   |       | $                                    | 4,332      |   | $ | 2,163 |   |
|                                                             |       |                                 |       |   |   |
| Operating Data:                                                  |       |                                 |       |   |   |
| Natural gas sales (MMBTU/d)                                      |       | 43,241                               |       | 41,470 |   |
| NGL sales (Bbls/d)                                               |       | 1,449                                |       | 1,155 |   |

 

17

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| ** **                                                       | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                       | ** ** | **2005**                           | ** ** | **2004** | ** ** |
| ** **                                                       | ** ** | **Hiland  Partners,  LP (5)**      | ** ** | **Continental  Gas, Inc.  (Predecessor) (1)** | ** ** | **Total (6)** | ** ** | **Continental  Gas, Inc.  (Predecessor) (1)** | ** ** |
| ** **                                                       | ** ** | **(in thousands)**                 | ** ** |
| **Total Segment Margin Data:**                                   | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Midstream revenues                                               |       | $                                  | 42,761     |   | $ | 11,813 |   | $ | 54,574 |   | $ | 44,899 |   |
| Midstream purchases                                              |       | 34,488                             |       | 9,747 |   | 44,235 |   | 38,322 |   |
| Midstream segment margin                                         |       | 8,273                              |       | 2,066 |   | 10,339 |   | 6,577 |   |
| Compression revenues (2)                                         |       | 1,807                              |       | — |   | 1,807 |   | — |   |
| Total segment margin (3)                                         |       | $                                  | 10,080     |   | $ | 2,066 |   | $ | 12,146 |   | $ | 6,577 |   |
|                                                             |       |                               |       |   |   |   |   |   |   |
| **Summary of Operations Data:**                                  | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Midstream revenues                                               |       | $                                  | 42,761     |   | $ | 11,813 |   | $ | 54,574 |   | $ | 44,899 |   |
| Compression revenues                                             |       | 1,807                              |       | — |   | 1,807 |   | — |   |
| Total revenues                                                   |       | 44,568                             |       | 11,813 |   | 56,381 |   | 44,899 |   |
|                                                             |       |                               |       |   |   |   |   |   |   |
| Midstream purchases (exclusive of items shown  separately below) |       | 34,488                             |       | 9,747 |   | 44,235 |   | 38,322 |   |
| Operations and maintenance                                       |       | 2,406                              |       | 780 |   | 3,186 |   | 2,229 |   |
| Depreciation, amortization and accretion                         |       | 3,500                              |       | 512 |   | 4,012 |   | 1,810 |   |
| General and administrative                                       |       | 852                                |       | 166 |   | 1,018 |   | 479 |   |
| Total operating costs and expenses                               |       | 41,246                             |       | 11,205 |   | 52,451 |   | 42,840 |   |
| Operating income                                                 |       | 3,322                              |       | 608 |   | 3,930 |   | 2,059 |   |
| Other income (expense)                                           |       | (302                               | )          | (115 | ) | (417 | ) | (370 | ) |
| Income from continuing operations                                |       | 3,020                              |       | 493 |   | 3,513 |   | 1,689 |   |
| Discontinued operations, net                                     |       | —                             |       | — |   | — |   | 86 |   |
|                                                             |       |                               |       |   |   |   |   |   |   |
| **Net income**                                                   |       | 3,020                              |       | 493 |   | 3,513 |   | 1,775 |   |
|                                                             |       |                               |       |   |   |   |   |   |   |
| Add:                                                             |       |                               |       |   |   |   |   |   |   |
| Depreciation, amortization and accretion                         |       | 3,500                              |       | 512 |   | 4,012 |   | 1,810 |   |
| Amortization of deferred loan costs                              |       | 264                                |       | 13 |   | 277 |   | 51 |   |
| Interest expense                                                 |       | 73                                 |       | 108 |   | 181 |   | 335 |   |
|                                                             |       |                               |       |   |   |   |   |   |   |
| **EBITDA (4)**                                                   |       | $                                  | 6,857      |   | $ | 1,126 |   | $ | 7,983 |   | $ | 3,971 |   |
|                                                             |       |                               |       |   |   |   |   |   |   |
| Operating Data:                                                  |       |                               |       |   |   |   |   |   |   |
| Natural gas sales (MMBTU/d)                                      |       | 42,475                             |       | 37,052 |   | 41,127 |   | 39,860 |   |
| NGL sales (Bbls/d)                                               |       | 1,442                              |       | 1,206 |   | 1,383 |   | 1,047 |   |

 

----

(1)   Amounts presented in the Predecessor column include only theactivity of Continental Gas, Inc. for the period prior to the formation ofHiland Partners, LP on February 15, 2005.

 

(2)   Compression revenues and compression segment margin are thesame. There are no compression purchases associated with the compressionsegment.

 

18

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(3)   Reconciliationof total segment margin to operating income:

 
| ** **                               | ** ** | **Three Months Ended June 30,** | ** ** |
|------------------------------------------|------------|--------------------------------------|------------|
| ** **                               | ** ** | **2005**                             | ** ** | **2004** | ** ** |
| ** **                               | ** ** | **Hiland  Partners, LP**             | ** ** | **Continental  Gas, Inc.  (Predecessor) (1)** | ** ** |
| ** **                               | ** ** | **(in thousands)**                   | ** ** |
| Operating income                         |       | $                                    | 1,962      |   | $ | 1,126 |   |
| Add:                                     |       |                                 |       |   |   |
| Operations and maintenance               |       | 1,609                                |       | 1,033 |   |
| Depreciation, amortization and accretion |       | 2,335                                |       | 963 |   |
| General and administrative               |       | 665                                  |       | 215 |   |
| Total segment margin                     |       | $                                    | 6,571      |   | $ | 3,337 |   |

 
| ** **                               | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------|------------|------------------------------------|------------|
| ** **                               | ** ** | **2005**                           | ** ** | **2004** | ** ** |
| ** **                               | ** ** | **Hiland  Partners, LP (5)**       | ** ** | **Continental  Gas, Inc.  (Predecessor)** | ** ** | **Total (6)** | ** ** | **Continental  Gas, Inc.  (Predecessor) (1)** | ** ** |
| ** **                               | ** ** | **(in thousands)**                 | ** ** |
| Operating income                         |       | $                                  | 3,322      |   | $ | 608 |   | $ | 3,930 |   | $ | 2,059 |   |
| Add:                                     |       |                               |       |   |   |   |   |   |   |
| Operations and maintenance               |       | 2,406                              |       | 780 |   | 3,186 |   | 2,229 |   |
| Depreciation, amortization and accretion |       | 3,500                              |       | 512 |   | 4,012 |   | 1,810 |   |
| General and administrative               |       | 852                                |       | 166 |   | 1,018 |   | 479 |   |
| Total segment margin                     |       | $                                  | 10,080     |   | $ | 2,066 |   | $ | 12,146 |   | $ | 6,577 |   |

 

We view totalsegment margin, a non-GAAP financial measure, as an important performancemeasure of the core profitability of our operations. We review total segmentmargin monthly for a consistency and trend analysis. We define midstreamsegment margin as midstream revenue less midstream purchases. Midstreampurchases include the following costs and expenses: cost of natural gas andNGLs purchased by us from third parties, cost of natural gas and NGLs purchasedby us from affiliates, and cost of crude oil purchased by us from thirdparties. Our compression segment margin will equal the fee we will earn underour Compression Services Agreement with Continental Resources, Inc. forproviding air compression and water injection services. The fee that we willearn under this agreement will be fixed as long as our facilities meetspecified availability requirements, regardless of Continental Resources, Inc.’sutilization. As a result, our compression segment margin will be dependent onour ability to meet their utilization levels.

 

(4)   We define EBITDA, a non-GAAP financial measure, as netincome plus interest expense, provisions for income taxes and depreciation,amortization and accretion expense. EBITDA is used as a supplemental financialmeasure by our management and by external users of our financial statementssuch as investors, commercial banks, research analysts and others to assess:(1) the financial performance of our assets without regard to financialmethods, capital structure or historical cost basis; (2) the ability ofour assets to generate cash sufficient to pay interest costs and support ourindebtedness; (3) our operating performance and return on capitalstructure; and (4) the viability of acquisitions and capital expenditureprojects and the overall rates of return on alternative investmentopportunities. EBITDA is also a financial measurement that, with certainnegotiated adjustments, is reported to our banks and is used as a gauge forcompliance with our financial covenants under our credit facilities.

 

(5)   Amounts presented in the Hiland Partners, LP column includeonly the activity for the period beginning on the formation date February 15,2005. Amounts include the operations of the assets acquired from HilandPartners, LLC at closing of the initial public offering (Worland gatheringsystem and compression assets).

 

(6)   Total income and expense items included in the ConsolidatedCombined Statements of Operations of Hiland Partners, LP and its predecessorare included in this Form 10-Q for the stated period.

 

19

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**Basis of Presentation**

 

WE AREREQUIRED TO PRESENT, DISCUSS AND ANALYZE THE FINANCIAL CONDITION AND RESULTS OFOPERATIONS OF CONTINENTAL GAS, INC., PREDECESSOR, FOR THE THREE MONTH AND SIXMONTH PERIODS ENDED JUNE 30, 2004 AND THE FINANCIAL CONDITION AND RESULTSOF OPERATIONS OF HILAND PARTNERS, LP FOR THE THREE MONTH AND SIX MONTH PERIODSENDED JUNE 30, 2005, WHICH INCLUDES THE RESULTS OF OPERATIONS FOR THEASSETS ACQUIRED FROM HILAND PARTNERS, LLC (WORLAND GATHERING SYSTEM ANDCOMPRESSION ASSETS) FROM FEBRUARY 15, 2005.

 

**Three Months Ended June 30, 2005 Compared with Three Months Ended June 30,2004**

 

***Revenues.***  Total revenues (midstream and compression)were $30.6 million for the three months ended June 30, 2005 compared to$23.8 million for the three months ended June 30, 2004, an increase of$6.8 million, or 28.3%.  This increasewas primarily attributable to higher average realized natural gas prices andNGL sales prices and increased volumes associated with the acquisition of theWorland gathering system and the compression operation from Hiland Partners,LLC on February 15, 2005.

 

Midstream revenueswere $29.4 million for the three months ended June 30, 2005 compared to$23.8 million for the three months ended June 30, 2004, an increase of$5.6 million, or 23.3%.  Of thisincrease, $3.8 million was attributable to higher average realized natural gasprices and NGL sales prices and $1.8 million was attributable to higher residuenatural gas and NGL sales volumes. The volume increase is primarilyattributable to the acquisition of the Worland gathering system from HilandPartners, LLC on February 15, 2005.

 

Natural gas sales volumes were 43,241 MMBtu per day, or MMBtu/d, forthe three months ended June 30, 2005 compared to 41,470 MMBtu/d for thethree months ended June 30, 2004, an increase of 1,771 MMBtu/d, or4.3%.  NGL sales volumes were 1,449 Bblsper day, or Bbls/d, for the three months ended June 30, 2005 compared to1,155 Bbls/d for the three months ended June 30, 2004, an increase of 294Bbls/d, or 25.5%.  The increase involumes is primarily associated with the acquisition of the Worland gatheringsystem from Hiland Partners, LLC on February 15, 2005.

 

Average realized natural gas sales prices were $6.03 per MMBtu for thethree months ended June 30, 2005 compared to $5.29 per MMBtu for the threemonths ended June 30, 2004, an increase of $0.74 per MMBtu, or 14.0%.  In addition, average realized NGL salesprices were $0.87 per gallon for the three months ended June 30, 2005compared to $0.68 per gallon for the three months ended June 30, 2004, anincrease of $0.19 per gallon or 27.9%. The change in our average realized natural gas and NGL sales prices wasprimarily a result of higher index prices due to a tightening of supply anddemand fundamentals for energy, which caused crude oil and natural gas pricesto rise during the three months ended June 30, 2005 compared to the threemonths ended June 30, 2004.

 

Compression revenues were $1.2 million for the three months ended June 30,2005.  The compression assets wereacquired from Hiland Partners, LLC on February 15, 2005, the date HilandPartners, LP commenced operations. Continental Gas, Inc., our predecessor, did not have a compressionsegment, therefore, there were no compression revenues reported for the threemonths ended June 30, 2004.

 

***Midstream Purchases.***  Midstream purchases were $24.0 million forthe three months ended June 30, 2005 compared to $20.5 million for thethree months ended June 30, 2004, an increase of $3.5 million, or17.2%.  This increase is primarilyattributable to higher average realized natural gas prices and NGL sales pricesand the acquisition of the Worland gathering system from Hiland Partners, LLCon February 15, 2005.

 

***Operations andMaintenance.*** Operations and maintenance totaled $1.6 million for the three monthsended June 30, 2005 compared with $1.0 million for the three months ended June 30,2004, an increase of $0.6 million, or 55.8%. This increase is primarily attributable to the acquisition of theWorland gathering system and the compression assets from Hiland Partners, LLCon February 15, 2005.

 

***Depreciation,Amortization and Accretion.***  Depreciation, amortization and accretiontotaled $2.3 million for the three months ended June 30, 2005 comparedwith $1.0 million for the three months ended June 30, 2004, an increase of$1.3 million, or 142.5 %.  This increaseis primarily attributable to the acquisition of the Worland gathering systemand the compression assets from Hiland Partners, LLC on February 15, 2005.

 

20

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***General andAdministrative.*** General and administrative totaled $0.7 million for the three monthsended June 30, 2005 compared with $0.2 million for the three months ended June 30,2004, an increase of $0.5 million, or 209.3%. The increase is primarily attributable to adding staff as a result ofour growth and the additional inherent costs of being a public company.

 

***Other Income(Expense).*** Other income (expense) totaled ($0.1) millionfor the three months ended June 30, 2005 compared with ($0.2) million forthe three months ended June 30, 2004, a decrease in expense of $0.1million, or 56.1%.  The decrease isprimarily attributable to decreased interest expense offset by increasedamortization of deferred debt issuance costs associated with our new creditfacility.  As of August 3, 2005, wehad no indebtedness outstanding under the credit facility.

 

**Six Months Ended June 30, 2005 Compared with Six Months Ended June 30,2004**

 

***Revenues.***  Total revenues (midstream and compression)were $56.4 million for the six months ended June 30, 2005 compared to$44.9 million for the six months ended June 30, 2004, an increase of $11.5million, or 25.6%.  This increase wasprimarily attributable to higher average realized natural gas prices and NGLsales prices and increased volumes associated with the acquisition of theWorland gathering system and the compression operation from Hiland Partners,LLC on February 15, 2005.

 

Midstream revenueswere $54.6 million for the six months ended June 30, 2005 compared to$44.9 million for the six months ended June 30, 2004, an increase of $9.7million, or 21.5%.  Of this increase,$6.7 million was attributable to higher average realized natural gas prices andNGL sales prices and $3.0 million was attributable to higher residue naturalgas and NGL sales volumes. The volume increase is primarily attributable to theacquisition of the Worland gathering system from Hiland Partners, LLC on February 15,2005.

 

Natural gas sales volumes were 41,127 MMBtu/d for the six months ended June 30,2005 compared to 39,860 MMBtu/d for the six months ended June 30, 2004, anincrease of 1,267 MMBtu/d, or 3.2%.  NGLsales volumes were 1,383 Bbls/d for the six months ended June 30, 2005compared to 1,047 Bbls/d for the six months ended June 30, 2004, anincrease of 336 Bbls/d, or 32.1%.  Theincrease in volumes is primarily associated with the acquisition of the Worlandgathering system from Hiland Partners, LLC on February 15, 2005.

 

Average realized natural gas sales prices were $5.81 per MMBtu for thesix months ended June 30, 2005 compared to $5.24 per MMBtu for the sixmonths ended June 30, 2004, an increase of $0.57 per MMBtu, or 10.9%.  In addition, average realized NGL salesprices were $0.86 per gallon for the six months ended June 30, 2005compared to $0.66 per gallon for the six months ended June 30, 2004, anincrease of $0.20 per gallon or 30.3%. The change in our average realized natural gas and NGL sales prices wasprimarily a result of higher index prices due to a tightening of supply anddemand fundamentals for energy, which caused crude oil and natural gas pricesto rise during the six months ended June 30, 2005 compared to the sixmonths ended June 30, 2004.

 

Compression revenues were $1.8 million for the six months ended June 30,2005.  The compression assets wereacquired from Hiland Partners, LLC on February 15, 2005, the date HilandPartners, LP commenced operations. Continental Gas, Inc., our predecessor, did not have a compressionsegment, therefore, there were no compression revenues reported for the sixmonths ended June 30, 2004.

 

***Midstream Purchases.***  Midstream purchases were $44.2 million forthe six months ended June 30, 2005 compared to $38.3 million for the sixmonths ended June 30, 2004, an increase of $5.9 million, or 15.4%.  This increase is primarily attributable tohigher average realized natural gas prices and NGL sales prices and theacquisition of the Worland gathering system from Hiland Partners, LLC on February 15,2005.

 

***Operations andMaintenance.*** Operations and maintenance totaled $3.2 million for the six months endedJune 30, 2005 compared with $2.2 million for the six months ended June 30,2004, an increase of $1.0 million, or 42.9%. This increase is primarily attributable to the acquisition of theWorland gathering system and the compression assets from Hiland Partners, LLCon February 15, 2005.

 

***Depreciation,Amortization and Accretion.***  Depreciation, amortization and accretion totaled$4.0 million for the six months ended June 30, 2005 compared with $1.8million for the six months ended June 30, 2004, an increase of $2.2million, or 121.7 %.  This increase isprimarily attributable to the acquisition of the Worland gathering system andthe compression assets from Hiland Partners, LLC on February 15, 2005.

 

***General andAdministrative.*** General and administrative totaled $1.0 million for the six months endedJune 30, 2005 compared with $0.5 million for the six months ended June 30,2004, an increase of $0.5 million, or 112.5%. The increase is primarily attributable to adding staff as a result ofour growth and the additional inherent costs of being a public company.

 

***Other Income(Expense****). *Other income was relativelyunchanged for the six months ended June 30, 2005 compared with the sixmonths ended June 30, 2004. Amortization of deferred debt issuance costs associated with our newcredit facility increased $0.2 million, offset by a decrease in interestexpense of $0.2 million.  As of August 3,2005, we had no indebtedness outstanding under the credit facility.

 

21

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**LIQUIDITY ANDCAPITAL RESOURCES**

 

# ***Overview***

 

We completed our initial public offering of 2,300,000 common units ofHiland Partners, LP on February 15, 2005, realizing proceeds of $48.1million, net of $3.6 million of underwriting commissions.

 

We now have $55 million available and unused under our creditagreement.  We believe our current cashbalances, future internally-generated funds and funds available under ourcredit agreement will provide sufficient resources to meet our working capitalliquidity needs for the foreseeable future.

 

On July 26,2005, we announced a regular cash distribution of $0.4625 per unit for the secondquarter of 2005.  This represents anincrease of $.0125 per unit over our minimum quarterly distribution rate of$0.45.  The distribution to all common,subordinated and general partner units is to be paid on August 12, 2005 toall unitholders of record on August 5, 2005. The aggregate amount of thedistribution will be $3.2 million.

 

# ***CashFlows from Operating Activities***

#  

Cashflows from operating activities decreased by $5.5 million to ($1.3) million forthe six months ended June 30, 2005 from $4.2 million for the six monthsended June 30, 2004.  Workingcapital items, exclusive of cash, decreased cash flows by $8.8 million duringthe first six months ended June 30, 2005, primarily as a result ofrebuilding our accounts receivable after the closing of the initial publicoffering.  Receivables not contributedfrom Continental Gas, Inc. totaled $9.1 million.  A surety deposit for production taxes totaled$0.3 million.  Net income for the sixmonths ended June 30, 2005 was $3.5 million, an increase of $1.7 millionfrom a net income of $1.8 million for the six months ended June 30,2004.  The non-cash items ofdepreciation, amortization, accretion, and deferred loan costs increased $2.4million in the first six months of 2005 compared with the same period in 2004.

 

# ***CashFlows Used for Investing Activities***

#  

Cashflows used for investing activities decreased to $1.3 million for the sixmonths ended June 30, 2005 from $3.4 million for the six months ended June 30,2004.  These amounts representedinvestments in property and equipment for both periods.

 

# ***CashFlows from Financing Activities***

#  

Wecompleted 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 publicoffering were used to (1) pay remaining offering costs of $2.2 million anddeferred debt issuance costs of $0.6 million, (2) repay debt of $22.9million owed to banks, (3) redeem $6.3 million of common units from anaffiliate of Harold Hamm and the Hamm Trusts, and (4) make a $3.9 milliondistribution to the previous owners of Hiland Partners, LLC.  We retained $12.2 million to replenishworking capital.  In May, 2005, adistribution of $1.6 million was made to unitholders.  During the period from January 1, 2005to February 14, 2005, Continental Gas, Inc. paid $1.1 million on itsbank debt.

 

# ***CapitalRequirements***

#  

The midstreamenergy business is capital intensive, requiring significant investment tomaintain and upgrade existing operations. Our capital requirements have consisted primarily of, and we anticipatewill continue to be:

 

•                  maintenance capitalexpenditures, which are capital expenditures made to replace partially or fullydepreciated assets to maintain the existing operating capacity of our assetsand to extend their useful lives, or other capital expenditures that areincurred in maintaining existing system volumes and related cash flows; and

 

•                  expansion capital expendituressuch as those to acquire additional assets to grow our business, to expand andupgrade gathering systems, processing plants, treating facilities andfractionation facilities and to construct or acquire similar systems orfacilities.

 

We believe thatcash generated from the operations of our business will be sufficient to meetanticipated maintenance capital expenditures, which we have budgeted $2.0million for in 2005.  We anticipate thatexpansion capital expenditures will be funded through long-term borrowings orother debt financings and/or equity capital offerings.  See “Credit Facility” below for informationrelated to the credit agreement we entered into in February 2005.

 

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***Credit Facility***

 

Concurrentlywith the closing of our initial public offering, we entered into a three-year$55.0 million senior secured revolving credit facility.  MidFirst Bank, a federally chartered savingsassociation located in Oklahoma City, Oklahoma, is a lender and serves asadministrative agent under this facility. As of August 3, 2005, we had no indebtedness outstanding under thecredit facility.  The credit facilityconsists of:

 

•                  a $47.5 million senior securedrevolving credit facility to be used for funding acquisitions and other capitalexpenditures, issuance of letters of credit and general corporate purposes (the“revolving acquisition facility”); and

 

•                  a $7.5 million senior securedrevolving credit facility to be used for working capital and to funddistributions (the “revolving working capital facility”).

 

We have theright, no more than once in each fiscal year, to increase the size of therevolving acquisition facility; provided that each such increase shall be atleast $10.0 million and in no event may the amount of the revolving acquisitionfacility exceed $82.5 million in the aggregate, and provided further that atthe time of such request no default has occurred or would result due to suchincrease and subject to additional conditions set forth in the creditfacility.  In addition, the revolvingacquisition facility allows for the issuance of letters of credit of up to $5.0million in the aggregate.  The creditfacility will mature in February 2008. At that time, the agreement will terminate and all outstanding amountsthereunder will be due and payable.

 

Our obligationsunder the credit facility are secured by substantially all of our assets andguaranteed by us and all of our subsidiaries, other than our operating company,which is the borrower under the credit facility.  The credit facility is non-recourse to ourgeneral partner.

 

Indebtedness underthe credit facility will bear interest, at our option, at either (i) anAlternate Base Rate plus an applicable margin ranging from 50 to 175 basispoints per annum or (ii) LIBOR plus an applicable margin ranging from 150to 275 basis points per annum based on our ratio of total debt to EBITDA.  The Alternate Base Rate is a rate per annumequal to the greatest of (a) the Prime Rate in effect on such day, (b) thebase CD rate in effect on such day plus 1.50% and (c) the Federal Fundseffective rate in effect on such day plus 1⁄2 of 1%.  A letter of credit fee will be payable forthe aggregate amount of letters of credit issued under the credit facility at apercentage per annum equal to 1.0%.  Anunused commitment fee ranging from 30 to 50 basis points per annum based on ourratio of total debt to EBITDA will be payable on the unused portion of thecredit facility.

 

The creditfacility imposes certain requirements, including: prohibition againstdistribution to unitholders if, before or after the distribution, a potentialdefault or an event of default as defined in the agreement would occur;limitations on our ability to incur debt, grant liens, make loans,acquisitions, and investments, change the nature of our business, enter amerger or consolidation, or sell assets, amend material agreements; andcovenants that require maintenance of certain levels of tangible net worth,EBITDA to interest expense ratio, and debt to EBITDA ratio.  If an event of default exists under theagreement, the lenders will be able to accelerate the maturity of the debt andexercise other rights and remedies.  Asof June 30, 2005, the Partnership was in compliance with all of thecovenants associated with the credit facility.

 

***Impact of Inflation***

 

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

 

**Recent AccountingPronouncements**

 

**In October 1995,the FASB issued SFAS No. 123, “Share-Based Payments,” which was revised inDecember 2004 (collectively, “FASB 123R”). FASB 123R requires that the compensation cost relating to share-basedpayment transactions be recognized in financial statements and that cost willbe measured based on the fair value of the equity or liability instrumentsissued.  The effect of the standard willbe to require entities to measure the cost of employee services received inexchange for stock or unit options based on the grant-date fair value of theaward, and to recognize the cost over the period the employee is required toprovide services for the award.  Inaccordance with SEC Release No. 33-8568, we will adopt SFAS 123R as of thefirst interim period beginning on or after January 1, 2006.  We expect to apply the statement using thepermitted modified retrospective method, presenting all interim periods of theyear of adoption, beginning January 1, 2006.  We had 143,000 options outstanding as of June 30,2005.**

 

**SignificantAccounting Policies and Estimates**

 

The selectionand application of accounting policies is an important process that hasdeveloped as our business activities have evolved and as the accounting rules havedeveloped.  Accounting rules generallydo not involve a selection among alternatives, but involve the implementationand interpretation of existing rules, and the use of judgment applied to thespecific set of circumstances existing in our business.  We make every effort to properly comply withall applicable rules on or before their adoption, and we believe theproper

 

23

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implementationand consistent application of the accounting rules are critical.  For further details on our accountingpolicies, you should read Note 1 of the accompanying Notes to FinancialStatements.

 

***Asset Retirement Obligations*****.**   SFAS No. 143, “Accounting for AssetRetirement Obligations,” requires entities to record the fair value of aliability for an asset retirement obligation in the period in which it isincurred and a corresponding increase in the carrying amount of the relatedlong-lived asset.  Subsequently, theasset retirement cost is allocated to expense using a systematic and rationalmethod and the liability is accreted to measure the change in liability due tothe passage of time.  The primary impact ofthis standard relates to our estimated costs for dismantling and siterestoration of certain of our plants and pipelines.  Estimating future asset retirementobligations requires us to make estimates and judgments regarding timing,existence of a liability, as well as what constitutes adequaterestoration.  We use the present value ofestimated cash flows related to our asset retirement obligation to determinethe fair value, generally as estimated by third party consultants.  The present value calculation requires us tomake numerous assumptions and judgments, including the ultimate costs ofdismantling and site restoration, inflation factors, credit adjusted discountrates, timing of settlement and changes in the legal, regulatory, environmentaland political environments.  To theextent future revisions to these assumptions impact the present value of theexisting asset retirement obligation liability, a corresponding adjustment willbe required to the related asset.  Webelieve the estimates and judgments reflected in our financial statements arereasonable but are necessarily subject to the uncertainties we have justdescribed.  Accordingly, any significantvariance in any of the above assumptions or factors could materially affect ourcash flows.

 

***Impairment of Long-Lived Assets*****.**   In accordance with SFAS No. 144, “Accountingfor the Impairment or Disposal of Long-Lived Assets,” we evaluate ourlong-lived assets of identifiable business activities for impairment whenevents or changes in circumstances indicate, in management’s judgment, that thecarrying value of such assets may not be recoverable.  The determination of whether impairment hasoccurred is based on management’s estimate of undiscounted future cash flowsattributable to the assets as compared to the carrying value of theassets.  If impairment has occurred, theamount of the impairment recognized is determined by estimating the fair valuefor the assets and recording a provision for loss if the carrying value isgreater than fair value.  For assetsidentified to be disposed of in the future, the carrying value of these assetsis compared to the estimated fair value less the cost to sell to determine ifimpairment is required.  Until the assetsare disposed of, an estimate of the fair value is re-determined when relatedevents or circumstances change or for each reporting period.

 

Whendetermining whether impairment of one of our long-lived assets has occurred, wemust estimate the undiscounted cash flows attributable to the asset or assetgroup.  Our estimate of cash flows isbased on assumptions regarding the volume of reserves providing asset cash flowand future NGL product and natural gas prices. The amount of reserves and drilling activity are dependent in part onnatural gas prices.  Projections ofreserves and future commodity prices are inherently subjective and contingentupon a number of variable factors, including, but not limited to:

 

•                  changes in general economicconditions in regions in which our products are located;

 

•                  the availability and prices ofNGL products and competing commodities;

 

•                  the availability and prices ofraw natural gas supply;

 

•                  our ability to negotiatefavorable marketing agreements;

 

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

 

•                  our dependence on certainsignificant customers and producers of natural gas; and

 

•                  competition from other midstreamservice providers, processors, including major energy companies.

 

Any significantvariance in any of the above assumptions or factors could materially affect ourcash flows, which could require us to record an impairment of an asset.

 

No impairmentcharges were recognized during each of the three or six months ended June 30,2005 and 2004.

 

***Revenue Recognition*****.**   Revenues for sales of natural gas and NGLsproduct sales are recognized at the time the product is delivered and title istransferred.  Revenues for compressionservices are recognized when the services under the agreement areperformed.  Revenues from oil and gasproduction (discontinued operations) are recorded in the month produced andtitle is transferred to the purchaser.

 

24

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**Item 3.    Quantitativeand Qualitative Disclosures about Market Risk**

 

Market risk isthe risk of loss arising from adverse changes in market rates and prices.  The principal market risk to which we areexposed is commodity price risk for natural gas and NGLs.  We also incur, to a lesser extent, risksrelated to interest rate fluctuations. We do not engage in commodity energy trading activities.

 

***CommodityPrice Risks.*** Our profitability is affected by volatility in prevailing NGL andnatural gas prices.  Historically,changes in the prices of most NGL products have generally correlated withchanges in the price of crude oil.  NGLand natural gas prices are volatile and are impacted by changes in the supplyand demand for NGLs and natural gas, as well as market uncertainty.  The magnitude of the impact on total segmentmargin of changes in natural gas and NGL prices presented may not berepresentative of the magnitude of the impact on total segment margin fordifferent commodity prices or contract portfolios.  Natural gas prices can also affect ourprofitability indirectly by influencing the level of drilling activity andrelated opportunities for our services. To illustrate the impact of changes in prices for natural gas and NGL’son our operating results, we have provided below, a matrix that reflects, forthe six months ended June 30, 2005, the impact on our gross 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.

 

| **NGL  Price**      |   |                                    |   |    |   |
|---------------------|--------|-----------------------------------------|--------|---------|--------|
| **Change  ($/gal)** |   | **Natural  Gas Price Change ($/MMBtu)** |   |
| ** **          |   | $                                       | 0.10   |    | $      | (0.10 | ) |
| ** **          |   |                                    |   |    |   |
| $                   | 0.01   |                                    | $      | 222,000 |   | $ | 125,000 |   |
| $                   | (0.01  | )                                       | $      | 102,000 |   | $ | (41,000 | ) |

 

***Interest Rate Risk*****.**   We are exposed to changes in interest ratesas a result of our credit facility, which has floating interest rates.  We had no indebtedness outstanding under ourcredit facility at August 3, 2005.

 

***Credit Risk*****.**   Counterparties pursuant to the terms oftheir contractual obligations expose us to potential losses as a result ofnonperformance.  OGE Energy Resources, Inc.and BP Energy Company were our largest customers for the six months ended June 30,2005, accounting for approximately 32.7% and 23.8%, respectively, of ourrevenues.  Consequently, changes withinBP Energy Company’s or OGE Energy Resources, Inc.’s operations have thepotential to impact, both positively and negatively, our credit exposure.

 

**Item 4.    Controlsand Procedures**

 

**Evaluation ofDisclosure Controls and Procedures**

 

(a)           Evaluation of disclosure controls andprocedures.

 

Our principalexecutive officer and principal financial officer have evaluated, as requiredby Rule 13a-15(b) under the Securities

Exchange Act of1934 (the “Exchange Act”), our disclosure controls and procedures (as definedin Exchange Act Rule 13a-15(e)) as

of the end ofthe period covered by this quarterly report on Form 10-Q.   Based on that evaluation, the principalexecutive officer

and principalfinancial officer concluded that the design and operation of our disclosurecontrols and procedures are effective in

ensuring thatinformation we are required to disclose in the reports that we file or submitunder the Exchange Act is recorded,

processed,summarized and reported within the time periods specified in the Securities andExchange Commission’s rules and forms.

 

(b)           Changes in internal control overfinancial reporting.

 

There have beenno changes in our internal control over financial reporting (as defined in Rule 13a-15(f) underthe Exchange Act)

that occurredduring our last fiscal quarter that have materially affected or are reasonablylikely to materially affect our internal control

over financialreporting.

 

25

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**PART II. OTHER INFORMATION**

 

**Item 1. Legal Proceedings**

 

We are a partyto various legal and regulatory proceedings, none of which we believe will havea material adverse impact on our financial condition, results of operations orcash flows.

 

**Item 2. Unregistered Sales of EquitySecurities and Use of Proceeds**

 

None.

 

**Item 3. Defaults Upon Senior Securities**

 

None.

 

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

 

None.

 

**Item 5. Other Matters**

 

None.

 

**Item 6. Exhibits**

 
| **Exhibit  Number** | ** ** | ** ** | ** ** | **Description**                                                                                                                                                                                                                                                                                                         |
|---------------------|------------|------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1                 |       | —     |       | Certificate  of Limited Partnership of Hiland Partners, LP. (incorporated by referenced 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 Registrants Annual Report on Form 10-K for  the fiscal year ended December 31, 2004, filed with the SEC 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                 |       | —     |       | Amended  and Restated Limited Liability Company Agreement of Hiland Partners GP,  LLC(incorporated by reference to Registrants Annual Report on Form 10-K  for the fiscal year ended December 31, 2004, filed with the SEC on  March 30, 2005)                                                           |
| 10.1                |       | —     |       | Credit  Agreement dated as of February 15, 2005 among Hiland Operating, LLC and  MidFirst Bank (incorporated by reference to Registrants Annual Report on  Form 10-K for the fiscal year ended December 31, 2004, filed with  the SEC 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 Registrants Annual Report on Form 10-K for the fiscal year  ended December 31, 2004, filed with the SEC on March 30, 2005) |
| †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                                                                                                                      |

 

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|   |   |   |   | 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 Registrants Annual  Report on Form 10-K for the fiscal year ended December 31, 2004,  filed with the SEC 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 Registrants Annual Report on Form 10-K for the fiscal  year ended December 31, 2004, filed with the SEC on March 30, 2005)                             |
| 10.11* |   | — |   | Director’s  Compensation Summary (incorporated by reference to Registrants Annual Report  on Form 10-K for the fiscal year ended December 31, 2004, filed  with the SEC on March 30, 2005)                                                                                                                                                                                                                    |
| 31.1   |   | — |   | Certification  of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act  of 2002                                                                                                                                                                                                                                                                                                                               |
| 31.2   |   | — |   | Certification  of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act  of 2002                                                                                                                                                                                                                                                                                                                               |
| 32.1   |   | — |   | Certification  of Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act  of 2002                                                                                                                                                                                                                                                                                                                               |
| 32.2   |   | — |   | Certification  of Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act  of 2002                                                                                                                                                                                                                                                                                                                               |

 

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†**   Portionsof this exhibit have been omitted pursuant to a request for confidentialtreatment.**

** **

***   Constitutesmanagement contracts or compensatory plans or arrangements.**

 

27

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**SIGNATURES**

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized in the city of Enid, Oklahoma, onthe 12th day of August, 2005.

 
| ** ** | **HILAND  PARTNERS, LP**                              |
|------------|-------------------------------------------------------|
|       |                                                  |
| ** ** | **By:  Hiland Partners GP, LLC, its general partner** |
| ** ** | ** **                                            |
|       |                                                  |
|       | By:                                                   | /s/ Randy Moeder |   |
|       |                                                  | Randy Moeder |
|       |                                                  | Chief Executive  Officer, President and Director |
|       |                                                  |   |
|       |                                                  |   |
|       | By:                                                   | /s/ Ken Maples |   |
|       |                                                  | Ken Maples |
|       |                                                  | Chief Financial Officer, Vice  President–Finance, |
|       |                                                  | Secretary and Director |

 

**Exhibit Index**

 
| 31.1   |   | — |   | Certification of Chief Executive Officer under Section 302 of  the Sarbanes-Oxley Act of 2002 |
|--------|--------|--------|--------|----------------------------------------------------------------------------------------------------|
|   |   |   |   |                                                                                               |
| 31.2   |   | — |   | Certification of Chief Financial Officer under Section 302 of  the Sarbanes-Oxley Act of 2002 |
|   |   |   |   |                                                                                               |
| 32.1   |   | — |   | Certification of Chief Executive Officer under Section 906 of  the Sarbanes-Oxley Act of 2002 |
|   |   |   |   |                                                                                               |
| 32.2   |   | — |   | Certification of Chief Financial Officer under Section 906 of  the Sarbanes-Oxley Act of 2002 |

 

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