UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No.  )

Filed by the Registrant þ
Filed by a Party other than the Registrant o

Check the appropriate box:

þ		Preliminary Proxy Statement
o		Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
o		Definitive Proxy Statement
o		Definitive Additional Materials
o		Soliciting Material Pursuant to §240.14a-12

 

Hiland Partners, LP

(Name of Registrant as Specified In Its Charter)

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

o		No fee required.
þ		Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

	(1)		Title of each class of securities to which transaction applies:
			Common units representing limited partner interests
	(2)		Aggregate number of securities to which transaction applies:
			3,986,659 common units representing limited partner interests (including 15,750 restricted common units held by non-employee directors)
	(3)		Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):
			$7.75 per common unit (the price per common unit negotiated in the transaction)
	(4)		Proposed maximum aggregate value of transaction:
			$30,896,608
	(5)		Total fee paid:
			$1,724, computed in accordance with Exchange Act Rule 0-11(c)(1) and Section 14(g) of the Exchange Act by multiplying the proposed aggregate value of the transaction by 0.0000558

o		Fee paid previously with preliminary materials.
o		Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

	(1)		Amount Previously Paid:
	(2)		Form, Schedule or Registration Statement No.:
	(3)		Filing Party:
	(4)		Date Filed:

 

PROPOSED MERGERS — YOUR VOTE IS VERY IMPORTANT

 

Dear Common Unitholders of Hiland Partners and Hiland Holdings:

 

As a holder of common units representing limited partner interests (“common units”) in Hiland Partners, LP (“Hiland Partners”) or Hiland Holdings GP, LP (“Hiland Holdings,” and together with Hiland Partners, the “Hiland Companies”), respectively, you are cordially invited to attend a special meeting of the unitholders of the Hiland Company in which you own common units. The attached joint proxy statement includes information about the matters to be acted on at the special meeting of each of the Hiland Companies, including at any adjournment or postponement thereof.

 

At the special meeting of unitholders of Hiland Partners, the holders of common units of Hiland Partners will be asked to consider and vote on a proposal to approve (a) the Agreement and Plan of Merger dated June 1, 2009 (the “Hiland Partners merger agreement”) among Hiland Partners, Hiland Partners GP, LLC (the general partner of Hiland Partners), HH GP Holding, LLC (an affiliate of Harold Hamm and Hiland Partners (“Parent”)), and HLND MergerCo, LLC (a wholly-owned subsidiary of Parent formed to effect the merger (“HLND Merger Sub”)), which agreement provides, among other things, that HLND Merger Sub will merge with and into Hiland Partners, with Hiland Partners continuing as the surviving entity (the “Hiland Partners merger”), and (b) the Hiland Partners merger. At the effective time of the Hiland Partners merger, each common unit of Hiland Partners (other than common units of Hiland Partners held by Hiland Holdings and any restricted common units held by officers and employees of Hiland Partners) will be converted into the right to receive $7.75 in cash (the “Hiland Partners merger consideration”). The Hiland Partners merger consideration will be paid without interest and reduced by any applicable tax withholding.

 

At the special meeting of unitholders of Hiland Holdings, the holders of common units of Hiland Holdings will be asked to consider and vote on a proposal to approve (a) the Agreement and Plan of Merger dated June 1, 2009 (the “Hiland Holdings merger agreement”) among Hiland Holdings, Hiland Partners GP Holdings, LLC (the general partner of Hiland Holdings), Parent (an affiliate of Harold Hamm and the sole member of the general partner of Hiland Holdings), and HPGP MergerCo, LLC (a wholly-owned subsidiary of Parent formed to effect the merger (“HPGP Merger Sub” and, together with HLND Merger Sub, the “Merger Subs”)), which agreement provides, among other things, that HPGP Merger Sub will merge with and into Hiland Holdings, with Hiland Holdings continuing as the surviving entity (the “Hiland Holdings merger”) and (b) the Hiland Holdings merger. At the effective time of the Hiland Holdings merger, each common unit of Hiland Holdings (other than common units of Hiland Holdings held by Harold Hamm, Continental Gas Holdings, Inc., an affiliate of Mr. Hamm (“Continental Gas”), the Harold Hamm DST Trust and the Harold Hamm HJ Trust (the “Hamm family trusts”) and any restricted common units held by officers and employees of Hiland Holdings) will be converted into the right to receive $2.40 in cash (the “Hiland Holdings merger consideration”). The Hiland Holdings merger consideration will be paid without interest and reduced by any applicable tax withholding.

 

As a result and upon completion of the mergers, both Hiland Companies will be privately owned by Harold Hamm, certain of his affiliates and the Hamm family trusts. A copy of the Hiland Partners merger agreement is included as Annex A, and a copy of the Hiland Holdings merger agreement is included as Annex D to the attached joint proxy statement.

 

YOUR VOTE IS IMPORTANT.  Approval of the Hiland Partners merger agreement and the Hiland Partners merger requires the affirmative vote of holders of (a) a majority of the outstanding common units of Hiland Partners, other than Hiland Partners common units held by the general partner of Hiland Partners, its

affiliates (including Hiland Holdings) and the directors and officers of Hiland Partners’ general partner, entitled to vote thereon voting as a class (whom we refer to as the “Hiland Partners public unitholders”), and (b) holders of a majority of the outstanding subordinated units of Hiland Partners entitled to vote thereon voting as a class. Approval of the Hiland Holdings merger agreement and the Hiland Holdings merger requires the affirmative vote of (a) holders of a majority of the outstanding common units of Hiland Holdings entitled to vote thereon voting as a class, and (b) holders of a majority of the outstanding common units of Hiland Holdings, other than Hiland Holdings common units held by Harold Hamm, his affiliates (including Continental Gas), the Hamm family trusts and the directors and officers of the general partner of Hiland Holdings (whom we refer to as the “Hiland Holdings public unitholders”), entitled to vote thereon voting as a class. The obligations of Parent and the applicable Merger Sub to complete a Hiland Company merger are conditioned upon, among other things, the concurrent completion of the other Hiland Company merger. Parent and the applicable Merger Sub may waive the condition requiring the concurrent completion of both Hiland Company mergers under limited circumstances, but is under no obligation to do so.

 

Hiland Partners will hold a special meeting on     , 2009 at     , local time, at     . Hiland Holdings will hold a special meeting on     , 2009 at     , local time, at     . Whether or not you plan to attend your meeting, to ensure your common units are represented at the meeting, please complete and submit the enclosed proxy card as soon as possible or transmit your voting instructions by using the telephone or Internet procedures described on your proxy card. If your common units are held in “street name,” please instruct your broker or bank how to vote your common units.

 

The Conflicts Committee of the Board of Directors of the general partner of Hiland Partners (which we refer to as the “Hiland Partners Conflicts Committee”), consisting of two independent directors, has unanimously determined that the Hiland Partners merger agreement is advisable, fair to, and in the best interests of, Hiland Partners and the Hiland Partners public unitholders and approved the Hiland Partners merger agreement and the Hiland Partners merger. The Hiland Partners Conflicts Committee recommended to the Board of Directors of the general partner of Hiland Partners (which we refer to as the “Hiland Partners Board of Directors”) that the Hiland Partners Board of Directors approve the Hiland Partners merger agreement and the Hiland Partners merger. In determining to make its recommendation to the Hiland Partners Board of Directors, the Hiland Partners Conflicts Committee considered, among other things, the opinion of Jefferies & Company, Inc., the financial advisor to the Hiland Partners Conflicts Committee, to the effect that, as of the date of its opinion, the cash merger consideration of $7.75 per common unit to be received by the Hiland Partners public unitholders pursuant to the Hiland Partners merger agreement was fair, from a financial point of view, to the Hiland Partners public unitholders. The opinion of Jefferies & Company, Inc. is subject to the assumptions, limitations and qualifications set forth in that opinion, which is included as Annex C in the attached joint proxy statement.

 

The Hiland Partners Board of Directors, after considering various factors, including the unanimous determination and recommendation of the Hiland Partners Conflicts Committee, determined that the Hiland Partners merger agreement is advisable, fair to, and in the best interests of, Hiland Partners and the Hiland Partners public unitholders and approved the Hiland Partners merger agreement and the Hiland Partners merger. Accordingly, the Hiland Partners Board of Directors and the Hiland Partners Conflicts Committee both recommend that the Hiland Partners public unitholders vote in favor of the approval of the Hiland Partners merger agreement and the Hiland Partners merger.

 

The Conflicts Committee of the Board of Directors of the general partner of Hiland Holdings (which we refer to as the “Hiland Holdings Conflicts Committee”), consisting of two independent directors, has unanimously determined that the Hiland Holdings merger agreement is advisable, fair to, and in the best interests of, Hiland Holdings and the Hiland Holdings public unitholders and approved the Hiland Holdings merger agreement and the Hiland Holdings merger. The Hiland Holdings Conflicts Committee recommended to the Board of Directors of the general partner of Hiland Holdings (which we refer to as the “Hiland Holdings Board of Directors”) that the Hiland Holdings Board of Directors approve the Hiland Holdings merger agreement and the Hiland Holdings merger. In determining to make its recommendation to the Hiland Holdings Board of Directors, the Hiland Holdings Conflicts Committee considered, among other things, the opinion of Barclays Capital Inc., the financial advisor to the Hiland Holdings Conflicts Committee, to the effect that, as of the date of its opinion, the cash merger consideration of $2.40 per common unit offered to

the Hiland Holdings public unitholders pursuant to the Hiland Holdings merger was fair, from a financial point of view, to the Hiland Holdings public unitholders. The opinion of Barclays Capital Inc. is subject to the assumptions, limitations and qualifications set forth in that opinion, which is included as Annex F in the attached joint proxy statement.

 

The Hiland Holdings Board of Directors, after considering various factors including the unanimous determination and recommendation of the Hiland Holdings Conflicts Committee, determined that the Hiland Holdings merger agreement is advisable, fair to, and in the best interests of, Hiland Holdings and the Hiland Holdings public unitholders and approved the Hiland Holdings merger agreement and the Hiland Holdings merger. Accordingly, the Hiland Holdings Board of Directors and the Hiland Holdings Conflicts Committee both recommend that the Hiland Holdings public unitholders vote in favor of the approval of the Hiland Holdings merger agreement and the Hiland Holdings merger.

 

The attached joint proxy statement provides you with detailed information about the merger agreements and the mergers. We urge you to read the entire joint proxy statement carefully, following which you are asked to return your proxy at your earliest convenience.

 

If you have any questions or need assistance voting your units, please call    , which is assisting each of the Hiland Companies, toll-free at    .

 

 

Sincerely,

 

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of this transaction, or passed upon the fairness or merits of this transaction or the adequacy or accuracy of the attached joint proxy statement. Any contrary representation is a criminal offense.

 

The attached joint proxy statement is dated     , 2009 and is first being mailed to unitholders on or about     , 2009.

 

Hiland Partners, LP
205 West Maple, Suite 1100
Enid, Oklahoma 73701

 

NOTICE OF SPECIAL MEETING OF UNITHOLDERS

To Be Held On

 

To the Holders of Common Units of Hiland Partners, LP:

 

We will hold a special meeting of the holders of common units representing limited partner interests (“common units”) in Hiland Partners, LP (“Hiland Partners”) on     , 2009 at     , local time, at     . The purpose of the special meeting is:

 

1. To consider and vote on a proposal to approve (a) the Agreement and Plan of Merger dated June 1, 2009 (the “Hiland Partners merger agreement”) among Hiland Partners, Hiland Partners GP, LLC (the general partner of Hiland Partners), HH GP Holding, LLC (an affiliate of Harold Hamm and Hiland Partners (“Parent”)), and HLND MergerCo, LLC (a wholly-owned subsidiary of Parent formed to effect the merger (“HLND Merger Sub”)), which agreement provides, among other things, that HLND Merger Sub will merge with and into Hiland Partners, with Hiland Partners continuing as the surviving entity (the “Hiland Partners merger”) and (b) the Hiland Partners merger.

 

2. To transact such other business as may properly come before the special meeting or any adjournment or postponement of the special meeting.

 

Only holders of Hiland Partners common units at the close of business on     , 2009, the record date established for the special meeting, are entitled to notice of, and to vote at, the special meeting. A complete list of unitholders entitled to vote at the special meeting will be available for examination at Hiland Partners’ headquarters, 205 West Maple, Suite 1100, Enid, Oklahoma 73701, after     , 2009 and at the special meeting.

 

The obligations of Parent and HLND Merger Sub to complete the Hiland Partners merger are conditioned upon, among other things, the simultaneous merger of HPGP MergerCo, LLC, a subsidiary of Parent, with and into Hiland Holdings GP, LP (“Hiland Holdings”), as contemplated by the Agreement and Plan of Merger dated June 1, 2009 (the “Hiland Holdings merger agreement”) among Hiland Holdings, Hiland Partners GP Holdings, LLC (the general partner of Hiland Holdings), Parent and HPGP MergerCo, LLC. We have described both merger agreements and the associated mergers in the attached joint proxy statement, which you should read in its entirety before voting. A copy of the Hiland Partners merger agreement is included as Annex A and a copy of the Hiland Holdings merger agreement is included as Annex D to the attached joint proxy statement.

 

YOUR VOTE IS VERY IMPORTANT

 

The affirmative vote of the holders of a majority of the outstanding common units of Hiland Partners, other than common units held by Hiland Partners GP, LLC, its affiliates (including Hiland Holdings) and the directors and officers of Hiland Partners GP, LLC, entitled to vote thereon voting as a class and the affirmative vote of the holders of a majority of the outstanding subordinated units of Hiland Partners entitled to vote thereon voting as a class are required to approve the Hiland Partners merger agreement and the Hiland Partners merger. Accordingly, a failure to vote, or an abstention from voting, will have the same effect as a vote “against” the Hiland Partners merger agreement and the Hiland Partners merger.

 

Whether or not you plan to attend the special meeting, please complete, sign, date and promptly mail the enclosed proxy card as soon as possible or vote via telephone or the Internet using the procedures described on the enclosed proxy card to make sure your common units are represented at the special meeting. If you attend the special meeting and wish to vote in person, then you may revoke your proxy and vote in person. If you have instructed a broker to vote your common units, then you must follow directions received from the broker to change or revoke your proxy.

 

By Order of the Board of Directors of Hiland Partners GP, LLC, the general partner of Hiland Partners, LP,

 

Matthew S. Harrison
Secretary

 

Enid, Oklahoma

          , 2009

 

Hiland Holdings GP, LP
205 West Maple, Suite 1100
Enid, Oklahoma 73701

 

NOTICE OF SPECIAL MEETING OF UNITHOLDERS

To Be Held On

 

To the Holders of Common Units of Hiland Holdings GP, LP:

 

We will hold a special meeting of the holders of common units representing limited partner interests (“common units”) in Hiland Holdings GP, LP (“Hiland Holdings”) on     , 2009 at     , local time, at     . The purpose of the special meeting is:

 

1. To consider and vote on a proposal to approve (a) the Agreement and Plan of Merger dated June 1, 2009 (the “Hiland Holdings merger agreement”) among Hiland Holdings, Hiland Partners GP Holdings, LLC (the general partner of Hiland Holdings), HH GP Holding, LLC (an affiliate of Harold Hamm and the sole member of the general partner of Hiland Holdings (“Parent”)), and HPGP MergerCo, LLC (a wholly-owned subsidiary of Parent formed to effect the merger (“HPGP Merger Sub”)), which agreement provides, among other things, that HPGP Merger Sub will merge with and into Hiland Holdings, with Hiland Holdings continuing as the surviving entity (the “Hiland Holdings merger”) and (b) the Hiland Holdings merger.

 

2. To transact such other business as may properly come before the special meeting or any adjournment or postponement of the special meeting.

 

Only holders of Hiland Holdings common units at the close of business on     , 2009, the record date established for the special meeting, are entitled to notice of, and to vote at, the special meeting. A complete list of unitholders entitled to vote at the special meeting will be available for examination at Hiland Holdings’ headquarters, 205 West Maple, Suite 1100, Enid, Oklahoma 73701, after     , 2009 and at the special meeting.

 

The obligations of Parent and HPGP Merger Sub to complete the Hiland Holdings merger are conditioned upon, among other things, the simultaneous merger of HLND MergerCo, LLC, a subsidiary of Parent, with and into Hiland Partners, LP (“Hiland Partners”), as contemplated by the Agreement and Plan of Merger dated June 1, 2009 (the “Hiland Partners merger agreement”) among Hiland Partners, Hiland Partners GP, LLC (the general partner of Hiland Partners), Parent, and HLND MergerCo, LLC. We have described both merger agreements and the associated mergers in the attached joint proxy statement, which you should read in its entirety before voting. A copy of the Hiland Holdings merger agreement is included as Annex D and a copy of the Hiland Partners merger agreement is included as Annex A to the attached joint proxy statement.

 

YOUR VOTE IS VERY IMPORTANT

 

The affirmative vote of the holders of a majority of the outstanding common units of Hiland Holdings entitled to vote thereon voting as a class and the affirmative vote of the holders of a majority of the outstanding common units of Hiland Holdings, other than common units held by Harold Hamm, his affiliates (including Continental Gas Holdings, Inc. (“Continental Gas”)), the Harold Hamm DST Trust, the Harold Hamm HJ Trust (together with the Harold Hamm DST Trust, the “Hamm family trusts”) and the directors and officers of the general partner of Hiland Holdings entitled to vote thereon voting as a class are required to approve the Hiland Holdings merger agreement and the Hiland Holdings merger. Accordingly, a failure to vote, or an abstention from voting, will have the same effect as a vote “against” the Hiland Holdings merger agreement and the Hiland Holdings merger.

 

Whether or not you plan to attend the special meeting, please complete, sign, date and promptly mail the enclosed proxy card as soon as possible or vote via telephone or the Internet using the procedures described on the enclosed proxy card to make sure your common units are represented at the special meeting. If you attend the special meeting and wish to vote in person, then you may revoke your proxy and vote in person. If you have instructed a broker to vote your common units, then you must follow directions received from the broker to change or revoke your proxy.

 

By Order of the Board of Directors of Hiland Partners GP Holdings, LLC, the general partner of Hiland Holdings GP, LP,

 

Matthew S. Harrison
Secretary

 

Enid, Oklahoma

          , 2009

 

Table of Contents

 

 

The following summary, together with “Questions and Answers About the Mergers and the Special Meetings,” highlight selected information contained in this joint proxy statement and may not contain all of the information that may be important in your consideration of the proposed mergers. We encourage you to read carefully this joint proxy statement and the documents we refer to and have incorporated by reference herein before voting. See “Where You Can Find More Information” beginning on page 191. We also encourage you to read the merger agreements in their entirety as they are the legal documents that govern the respective mergers. We have included section references to direct you to a more complete description of the topics described in this summary.

 

The Hiland Companies

 

Hiland Partners, LP (which we sometimes refer to as “Hiland Partners”) is a midstream energy limited partnership engaged in purchasing, gathering, compressing, dehydrating, treating, processing and marketing natural gas and fractionating, or separating, and marketing natural gas liquids, or “NGLs.”

 

Hiland Holdings GP, LP (which we sometimes refer to as “Hiland Holdings”) was formed in May 2006 to own the general partner of Hiland Partners and common units and subordinated units in Hiland Partners. Currently, Hiland Holdings owns:

 

 

During the subordination period, the subordinated units are not entitled to receive any distributions in a quarter until Hiland Partners has paid the minimum quarterly distribution of $0.45 per unit (“MQD”), plus any arrearages in the payment of the MQD from prior quarters, on all of the outstanding Hiland Partners common units. The incentive distribution rights entitle Hiland Holdings to receive increasing percentages (up to 48%) of the cash distributed by Hiland Partners to its unitholders above the MQD. No distributions may be made in any particular quarter on the incentive distribution rights until the MQD has been paid on all outstanding Hiland Partners common units and subordinated units in respect of such quarter and any arrearages have been paid in respect of the common units.

 

Hiland Partners and Hiland Holdings (which we collectively refer to as the “Hiland Companies”) share a majority of their directors as well as all of their officers, including the chief executive officer and chief financial officer, and other key management team members. See “Information Concerning the Hiland Companies” beginning on page 170.

 

Harold Hamm, Parent and Merger Subs

 

Harold Hamm, the chairman of the board of directors of the general partner of each of the Hiland Companies, Continental Gas Holdings, Inc., an affiliate of Mr. Hamm (“Continental Gas”), and the Harold Hamm DST Trust and the Harold Hamm HJ Trust (the “Hamm family trusts”), beneficially own common units representing a 60.8% limited partner interest in Hiland Holdings. Mr. Hamm, the Harold Hamm DST Trust and the Harold Hamm HJ Trust own 90.7%, 5.6% and 3.7%, respectively, of Continental Gas.

 

HH GP Holding, LLC (which we sometimes refer to as “Parent”) owns 100% of the membership interests in the general partner of Hiland Holdings. Mr. Hamm owns 100% of the membership interests in Parent. HLND MergerCo, LLC (which we sometimes refer to as “HLND Merger Sub”) and HPGP MergerCo, LLC (which we sometimes refer to as “HPGP Merger Sub” and together with HLND Merger Sub, the “Merger

Subs”), each currently a wholly-owned subsidiary of Parent, have been organized by Mr. Hamm and certain of his affiliates to effect the mergers.

 

As used in this joint proxy statement, “Hamm Continuing Investors” refers (i) with respect to the Hiland Partners merger, to Harold Hamm, Parent, the general partner of Hiland Holdings, Hiland Holdings and the Hamm family trusts, who will collectively own all of the outstanding equity interests in Hiland Partners (other than restricted common units, phantom units and unit options issued and outstanding under the Hiland Partners, LP Long-Term Incentive Plan at the effective time of the Hiland Partners merger) immediately following the Hiland Partners merger, and (ii) with respect to the Hiland Holdings merger, to Harold Hamm, Parent, Continental Gas and the Hamm family trusts, who will collectively own all of the outstanding equity interests in Hiland Holdings (other than restricted common units, phantom units and unit options issued and outstanding under the Hiland Holdings GP, LP Long-Term Incentive Plan at the effective time of the Hiland Holdings merger) immediately following the Hiland Holdings merger.

 

See “Information Concerning Harold Hamm, Parent and Merger Subs” beginning on page 185.

 

The Hiland Companies have each separately agreed with Parent to be acquired by Parent pursuant to the merger agreements described in this joint proxy statement.

 

The Hiland Partners Merger

 

Under the terms of the Agreement and Plan of Merger dated June 1, 2009 among Parent, HLND Merger Sub, Hiland Partners GP, LLC (the general partner of Hiland Partners) and Hiland Partners (which we sometimes refer to as the “Hiland Partners merger agreement”), HLND Merger Sub will be merged with and into Hiland Partners, with Hiland Partners continuing its existence as the surviving entity (which we sometimes refer to as the “Hiland Partners merger”). The Hiland Partners merger agreement is attached to this joint proxy statement as Annex A and is incorporated herein by reference. We encourage you to read the Hiland Partners merger agreement in its entirety because it is the legal document that governs the Hiland Partners merger. See “The Hiland Partners Merger Agreement” beginning on page 133.

 

The Hiland Holdings Merger

 

Under the terms of the Agreement and Plan of Merger dated June 1, 2009 among Parent, HPGP Merger Sub, Hiland Partners GP Holdings, LLC (the general partner of Hiland Holdings) and Hiland Holdings (which we sometimes refer to as the “Hiland Holdings merger agreement”), HPGP Merger Sub will be merged with and into Hiland Holdings, with Hiland Holdings continuing its existence as the surviving entity (which we sometimes refer to as the “Hiland Holdings merger”). The Hiland Holdings merger agreement is attached to this joint proxy statement as Annex D and is incorporated herein by reference. We encourage you to read the Hiland Holdings merger agreement in its entirety because it is the legal document that governs the Hiland Holdings merger. See “The Hiland Holdings Merger Agreement” beginning on page 152.

 

The Hiland Partners Merger Consideration

 

If the Hiland Partners merger is completed, holders of common units of Hiland Partners (other than Hiland Holdings and, only to the extent that they hold restricted common units, officers and employees of Hiland Partners (collectively, the “Hiland Partners rollover common unitholders”)) will receive the merger consideration of $7.75 in cash for each common unit of Hiland Partners that they own. We refer to such amount in this joint proxy statement as the “Hiland Partners merger consideration.” See “The Hiland Partners Merger Agreement” beginning on page 133.

The Hiland Holdings Merger Consideration

 

If the Hiland Holdings merger is completed, holders of common units of Hiland Holdings (other than Harold Hamm, Continental Gas, the Hamm family trusts and, only to the extent that they hold restricted common units, officers and employees of Hiland Holdings (collectively, the “Hiland Holdings rollover common unitholders”)) will receive the merger consideration of $2.40 in cash for each common unit of Hiland Holdings that they own. We refer to such amount in this joint proxy statement as the “Hiland Holdings merger consideration.” See “The Hiland Holdings Merger Agreement” beginning on page 133.

 

Effects of the Hiland Partners Merger on Outstanding Partnership Interests in Hiland Partners

 

If the Hiland Partners merger is completed, holders of Hiland Partners common units (other than the Hiland Partners rollover common unitholders) will receive $7.75 per unit in cash for each Hiland Partners common unit that they own. Restricted common units issued pursuant to the Hiland Partners, LP Long-Term Incentive Plan that are held by non-employee members of the Board of Directors of the general partner of Hiland Partners (which we sometimes refer to as the “Hiland Partners Board of Directors”) will vest immediately prior to the closing and automatically convert into the right to receive the Hiland Partners merger consideration. Other restricted common units, phantom units and unit option awards issued pursuant to the Hiland Partners, LP Long-Term Incentive Plan that are outstanding as of the effective time of the Hiland Partners merger will remain outstanding in accordance with their respective terms as equity awards in the surviving entity in the Hiland Partners merger. Additionally, the following partnership interests will be unaffected and remain outstanding as partnership interests in the surviving entity of the Hiland Partners merger, and their holders will not receive any consideration therefor as part of the Hiland Partners merger:

 

 

See “The Hiland Partners Merger Agreement — Effect of the Merger on the Common Units and Certain Other Securities of Hiland Partners and HLND Merger Sub” beginning on page 134.

 

Effects of the Hiland Holdings Merger on Outstanding Partnership Interests in Hiland Holdings

 

If the Hiland Holdings merger is completed, holders of Hiland Holdings common units (other than the Hiland Holdings rollover common unitholders) will receive $2.40 per unit in cash for each Hiland Holdings common unit that they own. Restricted common units issued pursuant to the Hiland Holdings GP, LP Long-Term Incentive Plan that are held by non-employee members of the Board of Directors of the general partner of Hiland Holdings (which we sometimes refer to as the “Hiland Holdings Board of Directors”) will vest immediately prior to the closing and automatically convert into the right to receive the Hiland Holdings merger consideration. Other restricted common units, phantom units and unit option awards issued pursuant to the Hiland Holdings GP, LP Long-Term Incentive Plan that are outstanding as of the effective time of the Hiland Holdings merger will remain outstanding in accordance with their respective terms as equity awards of the surviving entity in the Hiland Holdings merger. Additionally, the following partnership interests will be unaffected and remain outstanding as partnership interests in the surviving entity in the Hiland Holdings merger, and their holders will not receive any consideration therefor as part of the Hiland Holdings merger:

 

 

 

See “The Hiland Holdings Merger Agreement — Effect of the Merger on the Common Units and Certain Other Securities of Hiland Holdings and HPGP Merger Sub” beginning on page 153.

 

Continued Investment by Harold Hamm, certain of his Affiliates and the Hamm family trusts

 

Upon consummation of the mergers, the Hamm Continuing Investors will (i) retain their equity interests in the Hiland Companies, if any; and (ii) directly and indirectly acquire all other outstanding equity interests in each of the Hiland Companies (other than restricted common units, phantom units and unit options of Hiland Partners issued to officers and employees pursuant to the Hiland Partners, LP Long-Term Incentive Plan and restricted common units, phantom units and unit options of Hiland Holdings issued to officers and employees pursuant to the Hiland Holdings GP, LP Long-Term Incentive Plan, in each case that remain outstanding as of the effective time of the mergers).

 

As a result of the mergers, the Hamm Continuing Investors will own 100% of the outstanding equity interests in each of Hiland Partners and Hiland Holdings (other than the equity interests of officers and employees issued and outstanding at the effective time of the mergers under the equity plans described above). See “Special Factors — Structure and Steps of the Mergers” and “Special Factors — Interests of Certain Persons in the Mergers” beginning on pages 122 and 108, respectively.

 

Going Private Transaction

 

If the mergers are completed, (i) the Hiland Partners public unitholders will no longer have an equity interest in Hiland Partners and the Hiland Holdings public unitholders will no longer have an equity interest in Hiland Holdings, (ii) the common units of the Hiland Companies will no longer be listed on the NASDAQ Global Select Market, and (iii) the registration of the common units of the Hiland Companies under Section 12 of the Exchange Act will be terminated. Each of the Hiland Companies will continue to file periodic reports with the Securities and Exchange Commission (the “SEC”) to the extent required by the agreements governing such Hiland Company’s indebtedness or applicable law.

 

It is expected that the Hamm family trusts will subscribe for limited liability company units in each Merger Sub immediately prior to the effective time of the applicable merger, thereby reducing Mr. Hamm’s capital commitment and ultimate ownership of the Merger Subs. The following charts depict the organization and ownership of Hiland Holdings and Hiland Partners and its subsidiaries (i) immediately prior to any subscription by the Hamm family trusts for limited liability company units in the Merger Subs and (ii) after giving effect to the mergers.

Pre-Mergers Organizational Chart

 

 

 

Post-Mergers Organizational Chart†

 

 

 

 

Time, Date and Place

 

The Hiland Partners special meeting will be held on     , 2009 at     , local time, at     . The Hiland Holdings special meeting will be held on     , 2009 at     , local time, at     .

 

Purpose

 

Purpose of the Hiland Partners Unitholder Vote

 

The unitholders of Hiland Partners are being asked to consider and vote on a proposal to approve the Hiland Partners merger agreement and the Hiland Partners merger. The persons named in the accompanying proxy card will have discretionary authority to vote on other business, if any, that properly comes before the Hiland Partners special meeting and any adjournment or postponement thereof.

 

Purpose of the Hiland Holdings Unitholder Vote

 

The unitholders of Hiland Holdings are being asked to consider and vote on a proposal to approve the Hiland Holdings merger agreement and the Hiland Holdings merger. The persons named in the accompanying proxy card will have discretionary authority to vote on other business, if any, that properly comes before the Hiland Holdings special meeting and any adjournment or postponement thereof.

 

Unitholders Entitled to Vote

 

Holders of Hiland Partners common units as of     , 2009, the record date for the Hiland Partners special meeting, will be entitled to vote at the Hiland Partners special meeting. Holders of Hiland Holdings common units as of     , 2009, the record date for the Hiland Holdings special meeting, will be entitled to vote at the Hiland Holdings special meeting. Each unitholder may cast one vote at the applicable special meeting for each common unit of the applicable Hiland Company that such unitholder owned at the close of business on the record date. On the record date, there were      Hiland Partners common units and      Hiland Holdings common units outstanding and entitled to be voted at their respective special meetings.

 

Required Unitholder Votes; Support Agreements

 

Required Hiland Partners Vote

 

Under the terms of the Hiland Partners merger agreement and the First Amended and Restated Agreement of Limited Partnership of Hiland Partners, which we refer to in this joint proxy statement as the “Hiland Partners partnership agreement,” the Hiland Partners merger agreement and the Hiland Partners merger must be approved by the holders of:

 

 

Holders of common units of Hiland Partners, other than the general partner of Hiland Partners, its affiliates (including Hiland Holdings) and the directors and officers of the general partner of Hiland Partners, are referred to in this joint proxy statement as the “Hiland Partners public unitholders.”

 

Based on the number of common units of Hiland Partners expected to be outstanding on the record date, approximately      Hiland Partners common units owned by Hiland Partners public unitholders must be voted in favor of the proposal to approve the Hiland Partners merger agreement and the Hiland Partners merger in order for the proposal to be approved.

 

Hiland Holdings, which owns 2,321,471 common units and all of the outstanding subordinated units of Hiland Partners, has entered into a support agreement with its general partner, Hiland Partners, the general

partner of Hiland Partners, Parent and HLND Merger Sub (which we refer to as the “Hiland Partners support agreement”) in which it has agreed to (i) maintain the ownership of Hiland Partners common units and subordinated units held by it, except in certain circumstances, and (ii) vote its common units and subordinated units in favor of the approval of the Hiland Partners merger agreement and the Hiland Partners merger. The Hiland Partners support agreement assures that the approval of holders of a majority of the subordinated units will be obtained, except in certain limited circumstances. See “Information about the Special Meetings and Voting — Vote Required at Hiland Partners Special Meeting; How Units Are Voted” beginning on page 130.

 

Required Hiland Holdings Vote

 

Under the terms of the Hiland Holdings merger agreement and the Amended and Restated Agreement of Limited Partnership of Hiland Holdings, which we refer to in this joint proxy statement as the “Hiland Holdings partnership agreement,” the Hiland Holdings merger agreement and the Hiland Holdings merger must be approved by the holders of:

 

 

Holders of common units of Hiland Holdings, other than Harold Hamm, his affiliates (including Continental Gas), the Hamm family trusts and the directors and officers of the general partner of Hiland Holdings, are referred to in this joint proxy statement as the “Hiland Holdings public unitholders.”

 

Based on the number of common units of Hiland Holdings expected to be outstanding on the record date, approximately           Hiland Holdings common units owned by Hiland Holdings public unitholders must be voted in favor of the proposal to approve the Hiland Holdings merger agreement and the Hiland Holdings merger in order for the proposal to be approved.

 

Harold Hamm, Continental Gas, and Bert Mackie, as trustee of the Hamm family trusts which, as of     , 2009, collectively held an aggregate of 13,138,052 Hiland Holdings common units representing approximately 60.8% of the total voting power of the Hiland Holdings common units, have entered into a support agreement with Hiland Holdings and the general partner of Hiland Holdings (which we refer to as the “Hiland Holdings support agreement”) in which they have agreed to (i) maintain the ownership of their common units, except in certain circumstances, and (ii) vote their common units in favor of the approval of the Hiland Holdings merger agreement and the Hiland Holdings merger. The Hiland Holdings support agreement assures that the approval of holders of a majority of the outstanding Hiland Holdings common units will be obtained, except in certain limited circumstances. See “Information about the Special Meetings and Voting — Vote Required at Hiland Holdings Special Meeting; How Units are Voted” beginning on page 131.

 

The obligations of Parent and HLND Merger Sub to complete the Hiland Partners merger are conditioned upon, among other things, the concurrent completion of the Hiland Holdings merger. In addition, the obligations of Parent and HPGP Merger Sub to complete the Hiland Holdings merger are conditioned upon, among other things, the concurrent completion of the Hiland Partners merger. Accordingly, the Hiland Partners merger may not be completed, even if it is approved by the unitholders of Hiland Partners, if the Hiland Holdings merger is not completed concurrently. Likewise, the Hiland Holdings merger may not be completed, even if it is approved by the unitholders of Hiland Holdings, if the Hiland Partners merger is not completed concurrently.

 

In certain circumstances, however, Parent and its applicable Merger Sub will have the option to complete one of the mergers without completing the other merger. In particular:

 

 

 

See “The Hiland Partners Merger Agreement — Conditions to Completion of the Hiland Partners Merger” beginning on page 147 and “The Hiland Holdings Merger Agreement — Conditions to Completion of the Hiland Holdings Merger” beginning on page 165.

 

Recommendations of Hiland Partners Board of Directors and Conflicts Committee

 

The Hiland Partners Conflicts Committee, which was delegated the authority to review and evaluate the acquisition proposal made by Harold Hamm, and any potential alternatives thereto, has unanimously approved the Hiland Partners merger agreement and the Hiland Partners merger and determined that the Hiland Partners merger agreement and the Hiland Partners merger are advisable, fair to, and in the best interests of, Hiland Partners and the Hiland Partners public unitholders and has recommended to the Hiland Partners Board of Directors that the Hiland Partners Board of Directors approve the Hiland Partners merger agreement and the Hiland Partners merger. Accordingly, the Hiland Partners Conflicts Committee recommends that the Hiland Partners public unitholders vote in favor of the approval of the Hiland Partners merger agreement and the Hiland Partners merger.

 

The material factors that led the Hiland Partners Conflicts Committee to draw such conclusions included:

 

 

 

After considering various factors, including the unanimous recommendation of the Hiland Partners Conflicts Committee and the delivery of the opinion of Jefferies & Company to the Hiland Partners Conflicts Committee, the Hiland Partners Board of Directors:

 

 

Accordingly, the Hiland Partners Board of Directors recommends that the Hiland Partners public unitholders approve the Hiland Partners merger agreement and the Hiland Partners merger.

 

See “Special Factors — Recommendations of the Hiland Partners Conflicts Committee and Hiland Partners Board of Directors; Reasons for Recommending Approval of the Merger” beginning on page 53.

 

Recommendations of Hiland Holdings Board of Directors and Conflicts Committee

 

The Hiland Holdings Conflicts Committee, which was delegated the authority to review and evaluate the acquisition proposal made by Harold Hamm, and any potential alternatives thereto, has unanimously approved the Hiland Holdings merger agreement and the Hiland Holdings merger and determined that the Hiland Holdings merger agreement and the Hiland Holdings merger are advisable, fair to, and in the best interests of, Hiland Holdings and the Hiland Holdings public unitholders and recommended to the Hiland Holdings Board of Directors that the Hiland Holdings Board of Directors approve the Hiland Holdings merger agreement and the Hiland Holdings merger. Accordingly, the Hiland Holdings Conflicts Committee recommends that the Hiland Holdings public unitholders vote in favor of the approval of the Hiland Holdings merger agreement and the Hiland Holdings merger.

 

The material factors that led the Hiland Holdings Conflicts Committee to draw such conclusions included:

 

 

 

After considering various factors, including the unanimous recommendation of the Hiland Holdings Conflicts Committee and the delivery of the opinion of Barclays Capital to the Hiland Holdings Conflicts Committee, the Hiland Holdings Board of Directors:

 

 

Accordingly, the Hiland Holdings Board of Directors recommends that the Hiland Holdings public unitholders approve the Hiland Holdings merger agreement and the Hiland Holdings merger.

 

See “Special Factors — Recommendations of the Hiland Holdings Conflicts Committee and Hiland Holdings Board of Directors; Reasons for Recommending Approval of the Merger” beginning on page 67.

 

Opinion of Hiland Partners Conflicts Committee Financial Advisors

 

The Hiland Partners Conflicts Committee received an opinion from Jefferies & Company to the effect that, as of the date of its opinion, the cash merger consideration of $7.75 per common unit to be received by the Hiland Partners public unitholders pursuant to the Hiland Partners merger agreement was fair, from a financial point of view, to such holders. The opinion is subject to the assumptions, limitations and qualifications set forth in the opinion, which is attached as Annex C to this joint proxy statement. See “Special Factors — Opinion of Financial Advisor of Hiland Partners” beginning on page 59.

 

Opinion of Hiland Holdings Conflicts Committee Financial Advisors

 

The Hiland Holdings Conflicts Committee received an opinion from Barclays Capital to the effect that, as of the date of its opinion, the cash merger consideration of $2.40 per common unit to be offered to the Hiland Holdings public unitholders pursuant to the Hiland Holdings merger was fair, from a financial point of view, to such holders. The opinion is subject to the assumptions, limitations and qualifications set forth in the opinion, which is attached as Annex F to this joint proxy statement. See “Special Factors — Opinion of Financial Advisor of Hiland Holdings” beginning on page 74.

 

When considering the mergers, you should be aware that some unitholders, directors and officers of the Hiland Companies have interests in the mergers that may be different from, or in addition to, your interests as a unitholder generally, including:

 

 

 

These arrangements are more fully described under “Special Factors — Interests of Certain Persons in the Mergers” beginning on page 108.

 

As of     , 2009, the record date for the Hiland Partners special meeting, the directors and executive officers of the general partner of Hiland Partners held and were entitled to vote, in the aggregate, Hiland Partners common units representing approximately     % of the outstanding Hiland Partners common units. Hiland Partners believes that the directors and executive officers of the general partner of Hiland Partners intend to vote all of their Hiland Partners common units FOR the approval of the Hiland Partners merger agreement and the Hiland Partners merger. However, because the directors and executive officers of the general partner of Hiland Partners are affiliates of the general partner of Hiland Partners, their votes will not be counted towards determining if a majority of the Hiland Partners public unitholders have approved the Hiland Partners merger agreement and the Hiland Partners merger.

 

As of     , 2009, the record date for the Hiland Holdings special meeting, the directors of the general partner of Hiland Holdings (other than Mr. Hamm) held and were entitled to vote, in the aggregate, Hiland Holdings common units representing approximately  % of the outstanding Hiland Holdings common units. Hiland Holdings believes that the directors of the general partner of Hiland Holdings intend to vote all of their Hiland Holdings common units FOR the approval of the Hiland Holdings merger agreement and the Hiland Holdings merger. However, pursuant to the provisions of the Hiland Holdings merger agreement, the votes of directors and executive officers of the general partner of Hiland Holdings will not be counted toward determining if a majority of the public unitholders of Hiland Holdings have approved the Hiland Holdings merger agreement and the Hiland Holdings merger.

 

See “Information About the Special Meetings and Voting — Vote Required at Hiland Partners Special Meeting; How Units are Voted,” beginning on page 130 and “Information About the Special Meetings and Voting — Vote Required at the Hiland Holdings Special Meeting; How Units are Voted,” beginning on page 131.

 

Conditions to the Completion of the Hiland Partners Merger

 

Before the Hiland Partners merger can be completed, a number of conditions must be satisfied or waived. These include:

 

 

 

Hiland Partners can give no assurance when or if all of the conditions to the Hiland Partners merger will be either satisfied or, to the extent possible, waived, or that the Hiland Partners merger will be consummated. See “The Hiland Partners Merger Agreement — Conditions to Completion of the Hiland Partners Merger” beginning on page 147.

 

Conditions to the Completion of the Hiland Holdings Merger

 

Before the Hiland Holdings merger can be completed, a number of conditions must be satisfied or waived. These include:

 

 

 

Hiland Holdings can give no assurance when or if all of the conditions to the Hiland Holdings merger will be either satisfied or, to the extent possible, waived, or that the Hiland Holdings merger will be consummated. See “The Hiland Holdings Merger Agreement — Conditions to Completion of the Hiland Holdings Merger” beginning on page 165.

 

For purposes of the Hiland Partners merger agreement and subject to specified exceptions, a “material adverse effect” means, with respect to Hiland Partners, any fact, circumstance, event, change, effect or occurrence that, individually or in the aggregate with all other facts, circumstances, events, changes, effects or occurrences, has had or would be reasonably likely to have a material adverse effect on the assets, liabilities, properties, business, results of operations or condition (financial or otherwise) of Hiland Partners and its subsidiaries, taken as a whole, or on the ability of Hiland Partners and its general partner to perform their obligations under the Hiland Partners merger agreement or to consummate the Hiland Partners merger. See “The Hiland Partners Merger Agreement — Representations and Warranties” beginning on page 135.

 

For purposes of the Hiland Holdings merger agreement and subject to specified exceptions, a “material adverse effect” means, with respect to Hiland Holdings, any fact, circumstance, event, change, effect or occurrence that, individually or in the aggregate with all other facts, circumstances, events, changes, effects or occurrences, has had or would be reasonably likely to have a material adverse effect on the assets, liabilities, properties, business, results of operations or condition (financial or otherwise) of Hiland Holdings and its general partner, taken as a whole, or on the ability of Hiland Holdings and its general partner to perform their obligations under the Hiland Holdings merger agreement or to consummate the Hiland Holdings merger. See “The Hiland Holdings Merger Agreement — Representations and Warranties” beginning on page 154.

 

In order to consummate the Hiland Partners merger, Parent, HLND Merger Sub and Hiland Partners must make the requisite filings with the Justice Department and the Federal Trade Commission under the HSR Act, and all applicable waiting periods thereunder must expire or be terminated. See “Special Factors — Certain Legal Matters — HSR Act,” beginning on page 127.

 

Termination of the Hiland Partners Merger Agreement

 

The Hiland Partners merger agreement may be terminated and the Hiland Partners merger may be abandoned at any time prior to the effective time of the Hiland Partners merger, whether before or after Hiland Partners’ unitholders approve the Hiland Partners merger agreement and the Hiland Partners merger:

 

 

 

 

 

provided that the right to terminate the Hiland Partners merger agreement pursuant to the provision summarized above will not be available to the Hiland Parties if, at such time, a condition to the HLND Parent Parties’ obligation to complete the Hiland Partners merger is not capable of being satisfied; or

 

 

 

See “The Hiland Partners Merger Agreement — Termination” beginning on page 148.

 

Termination of the Hiland Holdings Merger Agreement

 

The Hiland Holdings merger agreement may be terminated and the Hiland Holdings merger may be abandoned at any time prior to the effective time of the Hiland Holdings merger, whether before or after Hiland Holdings’ unitholders approve the Hiland Holdings merger agreement and the Hiland Holdings merger:

 

 

 

 

 

provided that the right to terminate the Hiland Holdings merger agreement pursuant to the provision summarized above will not be available to the Holdings Parties if, at such time, a condition to the HPGP Parent Parties’ obligation to complete the Hiland Holdings merger is not capable of being satisfied; or

 

 

 

See “The Hiland Holdings Merger Agreement — Termination” beginning on page 167.

 

Hiland Partners; Reimbursement of Certain Expenses

 

Generally, each party to the Hiland Partners merger agreement is responsible for its own expenses, including the fees and expenses of its advisors, except that in the event that:

 

 

 

 

then Hiland Partners must pay to Parent all of the expenses of the HLND Parent Parties, up to $1,100,000; provided that no expense for which a HLND Parent Party has received reimbursement pursuant to the Hiland Holdings merger agreement shall be paid pursuant to this reimbursement obligation. See “The Hiland Partners Merger Agreement— Reimbursement of Certain Expenses,” beginning on page 150.

 

Hiland Holdings; Reimbursement of Certain Expenses

 

Generally, each party to the Hiland Holdings merger agreement is responsible for its own expenses, including the fees and expenses of its advisors, except that in the event that:

 

 

 

then Hiland Holdings must pay to Parent all of the expenses of the HPGP Parent Parties, up to $800,000; provided that no expense for which a HPGP Parent Party has received reimbursement pursuant to the Hiland

Partners merger agreement shall be paid pursuant to this reimbursement obligation. See “The Hiland Holdings Merger Agreement— Reimbursement of Certain Expenses,” beginning on page 168.

 

Effect of Termination; Remedies

 

In the event of termination of either merger agreement as summarized above under “— Termination of the Merger Agreements,” the applicable merger agreement will terminate, except for certain provisions including the provision relating to reimbursement of expenses summarized above, and there shall be no liability on the part of the Hiland Parties or the Holdings Parties, as the case may be, or the HLND Parent Parties or HPGP Parent Parties, as the case may be, to the other except as provided in the provision relating to reimbursement of expenses summarized above. No such termination, however, shall relieve any party from liability arising out of any willful breach of any of the representations, warranties or covenants in the applicable merger agreement (subject to any express limitations set forth in such merger agreement), in which case the aggrieved party shall be entitled to all rights and remedies available at law or in equity.

 

See “The Hiland Partners Merger Agreement — Effect of Termination; Remedies” beginning on page 149 and “The Hiland Holdings Merger Agreement — Effect of Termination; Remedies” beginning on page 168.

 

The mergers will be financed entirely with cash contributed by Mr. Hamm and the Hamm family trusts to Parent and the Merger Subs. There is no financing condition to the obligations of Mr. Hamm and his affiliates to consummate the transactions.

 

Mr. Hamm has delivered to Parent a funding commitment letter related to the Hiland Partners merger, which we refer to in this joint proxy statement as the “Hiland Partners commitment letter,” pursuant to which Mr. Hamm has committed to contribute approximately $32.0 million to Parent prior to the closing of the Hiland Partners merger, representing the aggregate Hiland Partners merger consideration plus related fees and expenses. Under the Hiland Partners commitment letter, Mr. Hamm’s funding commitment is reduced by the amount of cash, if any, contributed by the Hamm family trusts to fund the Hiland Partners merger. Pursuant to its terms, Hiland Partners is a third-party beneficiary of the Hiland Partners commitment letter.

 

Mr. Hamm has also delivered to Parent a funding and equity rollover commitment letter related to the Hiland Holdings merger, which we refer to in this joint proxy statement as the “Hiland Holdings commitment letter,” pursuant to which Mr. Hamm has committed to contribute approximately $21.2 million to Parent prior to the closing of the Hiland Holdings merger, representing the aggregate Hiland Holdings merger consideration plus related fees and expenses. Under the Hiland Holdings commitment letter, Mr. Hamm’s funding commitment is reduced by the amount of cash, if any, contributed by the Hamm family trusts to fund the Hiland Holdings merger. Pursuant to its terms, Hiland Holdings is a third-party beneficiary of the Hiland Holdings commitment letter. See “Special Factors — Financing of the Mergers” beginning on page 124.

 

The merger agreements generally restrict the ability of each of the Hiland Companies and their respective general partners to, among other things, solicit or engage in discussions or negotiations with a third party regarding specified transactions involving the Hiland Companies or their respective subsidiaries and each of the Hiland Companies’ Board of Directors’ or their respective Conflicts Committee’s ability to change or withdraw its recommendation of its respective merger agreement. Notwithstanding these restrictions, under circumstances specified in the merger agreements, each Hiland Company may respond to an unsolicited “alternative proposal” as the term is defined in the sections entitled “The Hiland Partners Merger Agreement — Other Covenants and Agreements — No Solicitation” and “The Hiland Holdings Merger Agreement — Other Covenants and Agreements — No Solicitation”, so long as it complies with the terms of the applicable merger agreement. Each Hiland Company Board of Directors or Conflicts Committee may also withdraw its recommendation of its respective merger agreement which it had previously recommended if it determines in good faith, after consultation with its respective outside counsel and financial advisors, that doing so would be in the best interests of the public unitholders of the respective Hiland Company. See “The

Hiland Partners Merger Agreement — Other Covenants and Agreements — No Solicitation,” beginning on page 140 and “The Hiland Holdings Merger Agreement — Other Covenants and Agreements — No Solicitation,” beginning on page 158.

 

Holders of Hiland Partners common units and Hiland Holdings common units are not entitled to dissenters’ rights of appraisal under their respective partnership agreements or applicable Delaware law.

 

The Hiland Partners merger and the Hiland Holdings merger will each be a taxable transaction for U.S. federal income tax purposes (and also may be taxed under applicable foreign, state and local tax laws). For U.S. federal income tax purposes, a common unitholder receiving merger consideration will recognize gain or loss in an amount equal to the difference, if any, between (1) the amount realized by that common unitholder (equal to the sum of the merger consideration received and the common unitholder’s share of the respective Hiland Company’s nonrecourse liabilities) as a result of the applicable Hiland Company merger and (2) that common unitholder’s adjusted tax basis in its common units of the respective Hiland Company. Moreover, because a portion (which will likely be substantial) of a common unitholder’s gain or loss will be separately computed and taxed as ordinary income, a common unitholder may recognize both ordinary income and a capital loss as a result of the mergers. For an explanation of the amount realized and the character of any gain recognized by a common unitholder as a result of the mergers and more information regarding the U.S. federal income tax consequences of the mergers, see “Special Factors — Material United States Federal Income Tax Considerations” beginning on page 116.

 

The tax consequences of the mergers to you will depend upon your own personal circumstances. You should consult your tax advisors for a full understanding of the U.S. federal, state, local and foreign tax consequences of the mergers to you.

 

 

 

 

          

 

This joint proxy statement, including information set forth or incorporated by reference in this document, contains statements that constitute forward-looking information, including disclosures relating to the mergers, projected financial information, valuation information, possible outcomes from strategic alternatives other than the mergers, the expected amounts, timing and availability of financing, availability under credit facilities, levels of capital expenditures, sources of funds, and funding requirements, among others. You are cautioned that such forward-looking statements are not guarantees of future performance or results and involve risks and uncertainties and that actual results or developments may differ materially from the forward-looking statements as a result of various factors. Factors that may cause such differences to occur include, but are not limited to:

 

 

 

The Hiland Companies disclaim any obligation to update or revise the forward-looking statements contained herein, except as otherwise required by applicable federal securities laws. A Transaction Statement on Schedule 13E-3 filed with the SEC with respect to each of the proposed mergers (each a “Schedule 13E-3”) will be amended to report any material changes in the information set forth in the most recent Schedule 13E-3 filed with the SEC by either Hiland Partners or Hiland Holdings.

 

Overview

 

It is part of the Hiland Companies’ business strategy to consistently evaluate strategic alternatives in an effort to maximize unitholder value as the Hiland Companies, and the environment in which they operate, evolve.

 

Like many natural gas gathering and processing companies, Hiland Partners’ earnings and cash flows are impacted by changes in commodity prices. The margins generated under some of Hiland Partners’ gathering and processing contracts fluctuate based on the price of natural gas and NGLs and, in some cases, the relationship between the price of natural gas and NGLs. Hiland Partners’ systems are also dependent on the level of production from crude oil and natural gas wells that supply natural gas to its systems. Production from wells naturally declines over time. Accordingly, in order to maintain or increase throughput levels on its gathering systems, Hiland Partners must continually obtain new supplies of natural gas from newly drilled wells near its gathering systems. Fluctuations in energy prices, as well as the accessibility of capital to fund drilling, can greatly affect the level of drilling activity by producers.

 

Beginning in the third quarter of 2008, fears of an economic recession, a significant reduction in the availability of credit nationwide and significant declines in crude oil, natural gas and NGLs prices from highs experienced in 2008 led to a sell-off by investors in master limited partnerships, or “MLPs,” particularly ones that face commodity price exposure in their business, such as gathering and processing MLPs like Hiland Partners. This sell-off intensified shortly after the mid-September bankruptcy filing of Lehman Brothers, Inc., which worsened the global credit crisis.

 

In the late summer and fall of 2008, commodity prices declined precipitously. The prompt month New York Mercantile Exchange, or NYMEX, crude oil price declined from a record high of $145.18 per barrel on July 14, 2008 to $67.81 per barrel on October 31, 2008. The prompt month NYMEX natural gas price was halved from $13.51 per MMBtu on July 1, 2008 to $6.75 per MMBtu on October 31, 2008. And the OPIS Conway NGL simple average price more than halved, from $2.08 per gallon on July 17, 2008 to a closing price of $0.89 per gallon on October 31, 2008.

 

Accordingly, like most gathering and processing MLPs, both Hiland Partners’ common unit price and Hiland Holdings’ common unit price declined significantly in the third quarter. For example, Hiland Partners’ common unit price declined from $49.26, or at a 7.00% yield to investors based on the most recent quarterly distribution (on an annualized basis) (“yield”), on July 1, 2008, and to $26.06 by October 31, 2008, representing a 13.51% yield. Likewise, Hiland Holdings’ common unit price declined from $26.75, representing a 4.56% yield, as of July 1, 2008 to $12.40, representing a 10.24% yield, as of October 31, 2008.

 

As a result of the decline in unit prices and the substantial reduction in the availability of credit nationwide during this period, the Hiland Companies’ cost of raising additional capital increased significantly at a time when Hiland Partners was pursuing its growth strategy of expanding organically, including in the Bakken shale play in northwestern North Dakota and at its Woodford Shale and Kinta gathering systems in southeastern Oklahoma. During this time, management believed that Hiland Partners had adequate capital resources to fund its announced expansion projects and ongoing system expansions without having to access the capital markets for debt or equity. However, given the significant disruption in the capital markets, the lack of access to debt capital and the uncertainty regarding the direction of commodity prices, Joseph L. Griffin, the President and Chief Executive Officer of each of the Hiland Companies, and Matthew S. Harrison, the Chief Financial Officer of each of the Hiland Companies, decided to review a number of potential alternatives to more efficiently capitalize the companies, to better position the companies to be able to adapt to further changes in economic conditions, to fund future unplanned expansion projects and to otherwise maximize unitholder value. The alternatives considered included: (i) raising equity capital, (ii) amending the Hiland Operating Credit Agreement to expand the borrowing capacity thereunder, (iii) having Hiland Partners acquire Hiland Holdings in a transaction that would result in Hiland Partners owning its general partner and the

cancellation of the incentive distribution rights held by the general partner and (iv) having Harold Hamm acquire the Hiland Companies in going private transactions.

 

As of September 30, 2008, Hiland Partners had borrowed $262.1 million against a borrowing base of $300 million under the Hiland Operating Credit Agreement. In this regard, Messrs. Griffin and Harrison and Mr. Derek Gipson, Director of Business Development and Investor Relations of each of the Hiland Companies (who, together with Messrs. Griffin and Harrison we sometimes refer to as the “management team”), had a series of formal discussions with representatives of MidFirst Bank and the other lenders under the Hiland Operating Credit Agreement during October and November of 2008 regarding amendments to the Hiland Operating Credit Agreement, including expanding the borrowing base under the Hiland Operating Credit Agreement from $300 million to $350 million. Based on these discussions, management determined by mid-November that the borrowing base could not be expanded on terms acceptable to Hiland Partners at that time. In fact, through such discussions, management learned that many lenders were looking for opportunities to reduce their credit commitments to gathering and processing companies.

 

On November 6, 2008, the Board of Directors of each of the Hiland Companies held a regularly-scheduled board meeting. At those meetings, Messrs. Griffin and Harrison discussed, among other things, recent equity market conditions for the Hiland Companies and their peers, including increases in yields, changes in commodity prices and Hiland Partners’ commodity price hedge position and the discussions management had with MidFirst Bank regarding potentially expanding the borrowing base under the Hiland Operating Credit Agreement. At those meetings, Messrs. Griffin and Harrison also summarized management’s financial projections and estimates for the 2009 fiscal year, which included then-current forward pricing estimates and lower growth capital expenditures planned for 2009 than in 2008 (the “November Projections”). In particular, management advised each Board of Directors that, based on the November Projections, the Hiland Companies were expected to generate distribution growth and remain in compliance with all financial covenants in the Hiland Operating Credit Agreement through 2009.

 

On or about November 10, 2008, the management team spoke telephonically with representatives of Barclays Capital to informally discuss various potential capitalization alternatives. The management team discussed several options, including raising equity, expanding the borrowing base under the Hiland Operating Credit Agreement, having Hiland Partners acquire Hiland Holdings and going private transactions involving Harold Hamm.

 

On November 12, 2008, Messrs. Griffin, Harrison and Gipson met with representatives of Wachovia Capital Markets, LLC (“Wachovia Securities”) for a capital markets update. During those discussions, the concept of potential going private transactions was discussed and Wachovia Securities offered to do some preliminary analytical work on various alternatives available with respect to the Hiland Companies.

 

On November 14, 2008, management spoke telephonically with representatives of Barclays Capital to further discuss potential alternatives, with an emphasis on the alternative of having Hiland Partners acquire Hiland Holdings.

 

On November 17, 2008, Messrs. Hamm, Griffin, Harrison and Gipson met with representatives of Barclays Capital in Enid, Oklahoma for an informal discussion. At the meeting, Barclays Capital outlined various capitalization strategy alternatives, including (i) maintaining the status quo, (ii) going private transactions involving both Hiland Companies, (iii) an acquisition of Hiland Holdings by Hiland Partners, and (iv) a going private transaction involving only Hiland Holdings. Meeting participants were provided written discussion materials prepared by Barclays Capital that provided, as of the date thereof, (a) an overview of the current financial performance and position of each of the Hiland Companies, (b) certain financial analyses based on assumed premiums paid for the common units of Hiland Holdings, (c) certain implications of the alternative transactions, (d) preliminary timing of the various alternatives and (e) an analysis of a then-pending MLP going private transaction. The management team also discussed with Barclays Capital the outlook for commodity pricing and reviewed with Barclays Capital the November Projections and guidance to be announced for the 2009 fiscal year (the “Initial 2009 Guidance”).

At the close of market on November 18, 2008, Hiland Partners’ common unit price was $11.90, representing a yield of 29.58%, and Hiland Holdings’ common unit price was $5.34, representing a yield of 23.78%. Additionally, at the close of market on November 18, 2008, the prompt month NYMEX crude oil price was $54.39 per barrel, the prompt month NYMEX natural gas price was $6.52 per MMBtu, and the OPIS Conway NGL simple average price was $0.68 per gallon.

 

On November 18, 2008, the Hiland Companies issued a joint press release announcing the Initial 2009 Guidance, which was consistent with the November Projections, but updated to reflect the most recently available forward commodity strip pricing. In the release, Hiland Partners projected that 2009 earnings before interest, taxes, depreciation and amortization (“EBITDA”) would range between $68 million and $80 million based on the following assumptions, each of which was noted in the press release: (i) $70.00 to $80.00 per barrel NYMEX crude oil pricing, (ii) $6.50 to $7.50 per MMBtu NYMEX natural gas pricing, (iii) then-current estimated forward quotes for natural gas pipeline basis differentials and (iv) trailing 12-month average NGL pricing correlations to crude oil, with all pricing subject to Hiland Partners’ commodity hedging portfolio. EBITDA is a non-GAAP financial measure. Please read “Non-GAAP Financial Measures of Hiland Partners.”

 

The press release also noted that, despite the recent decline in commodity prices, as of November 18, 2008, management did not believe the Hiland Partners’ unit price reflected Hiland Partners’ historical operating results or long-term prospects for constructing and operating natural gas midstream facilities. In particular, management mentioned, among other things, that it continued to be encouraged by the increased rig count in the Williston basin, along with increased initial production rates from wells drilled on its North Dakota Bakken, Montana Bakken and Woodford Shale dedicated acreage.

 

On November 18, 2008, Messrs. Hamm and Harrison contacted Baker Botts L.L.P. (“Baker Botts”), in its capacity as prospective counsel to Mr. Hamm, and discussed the possibility of exploring transactions by which Mr. Hamm would acquire the outstanding public common units of the Hiland Companies and take the Hiland Companies private.

 

On November 20, 2008, Messrs. Hamm and Harrison met with representatives of Baker Botts and Barclays Capital to discuss further the possible buyout of public unitholders of the Hiland Companies by Mr. Hamm. At this meeting, potential acquisition structures for going private transactions and other strategic and legal matters were discussed, including the potential participation by the Hamm family trusts in the transactions. Mr. Hamm informed Baker Botts that he wished to engage the firm to represent him as legal counsel in the potential transactions. Also available at the meeting were written materials prepared by Barclays Capital supplementing certain portions of Barclays Capital’s November 17 presentation concerning going private transactions involving both Hiland Companies. The November 20 materials included preliminary valuation analyses of the Hiland Companies based on management’s projected financial results as of the date thereof. However, Barclays Capital did not make a presentation at the meeting nor were any preliminary valuations discussed. Mr. Hamm later requested a fee proposal from Barclays Capital for potential going private transactions, but he did not pursue further engagement negotiations with Barclays Capital thereafter and did not engage Barclays Capital as his financial advisor, nor did Hiland Partners engage Barclays Capital.

 

From November 18 through December 5, 2008, crude oil, natural gas and NGL prices continued to fall, with the prompt month NYMEX crude oil price reaching $40.81 per barrel, a decrease of $13.58, or 25%, and the prompt month NYMEX natural gas price reaching $5.75 per MMBtu, a decrease of $0.77, or 11%, on December 5, 2008. Also, the OPIS Conway NGL simple average price reached $0.49 per gallon on December 5, 2008, a decrease of $0.19, or 28%, from November 18, 2008. The fractionation or “frac” spread, which represents the difference in the cost of natural gas to be processed and the value of the resulting NGL stream, decreased significantly during that same period due to the comparatively greater declines in the value of NGLs compared to natural gas. The combination of the continued decline in commodity prices, the credit crisis gripping the global economy and the further sell-off in MLP securities caused the unit prices of the Hiland Companies to further decline. By December 5, 2008, Hiland Partners’ unit price had declined to $8.11 per unit and Hiland Holdings’ unit price had declined to $2.78 per unit.

From November 21 through December 7, 2008, Messrs. Griffin and Harrison had several discussions, with the participation of Mr. Gipson in some cases, with Baker Botts regarding potential going private transactions for the Hiland Companies, including acquisition structures, tax matters, debt covenant matters and potential transaction terms. During these discussions, the management team, in consultation with Baker Botts, determined that going private transactions with Mr. Hamm would not trigger any change of control provision under the Hiland Operating Credit Agreement. During the last week of November 2008, Mr. Hamm also discussed with Wachovia Securities his potential interest in pursuing going private transactions. On December 1, 2008, Mr. Hamm requested a fee proposal from Wachovia Securities to advise him on potential going private transactions.

 

On December 5, 2008, Wachovia Securities met with Messrs. Hamm, Griffin, Harrison and Gipson, during which meeting Wachovia Securities made a presentation on its qualifications to serve as financial advisor to Mr. Hamm in connection with the going private transactions.

 

The December 5 Special Meeting and Evaluation of Alternatives

 

On December 5, 2008, Mr. Hamm called a special meeting of the Board of Directors of each of the Hiland Companies to discuss the continued significant decline in crude oil, natural gas and NGL prices since the meeting of each Board of Directors on November 6, 2008 and the effects the decline in prices were having on the current and projected financial condition of the Hiland Companies. At the special meetings, Messrs. Griffin and Harrison presented management’s revised projections for the 2009 fiscal year (the “December Projections”), which updated the November Projections to reflect the most recently-available forward commodity strip pricing for 2009.

 

Based upon forward commodity strip pricing for 2009, as of December 1, 2008, management projected that EBITDA would approximate $38 million in 2009, a decrease of approximately $49 million from the November Projections. The December Projections were based on the following commodity price assumptions: (i) $57.72 per barrel NYMEX crude oil pricing as compared to the $70.00 to $80.00 per barrel prices used in connection with the Initial 2009 Guidance, (ii) $6.73 per MMBtu NYMEX natural gas pricing as compared to the $6.50 to $7.50 per MMBtu prices used in connection with the Initial 2009 Guidance and (iii) $0.64 per gallon NGL pricing for OPIS Conway compared to the $1.09 to $1.24 per gallon prices used in connection with the Initial 2009 Guidance, which were based on trailing 12-month average NGL pricing correlations to crude oil, with all pricing subject to Hiland Partners’ commodity hedging portfolio. Management also informed the Board of Directors of each of the Hiland Companies that if management had used current spot prices as opposed to 2009 forward prices, expected EBITDA for 2009 would be approximately $45 million.

 

Additionally, management cautioned the Board of Directors of each of the Hiland Companies that, if commodity prices did not increase significantly from their stated assumptions, Hiland Partners would likely violate one or more financial covenants under the Hiland Operating Credit Agreement as early as June 30, 2009. In particular, management expressed concerns about Hiland Partners’ ability to continue to meet the Hiland Operating Credit Agreement’s required ratio of consolidated funded debt to EBITDA (which we refer to as the “leverage ratio”), on a trailing four-quarters basis, of no greater than 4.0 to 1.0.

 

To avoid a situation in which Hiland Partners violated any of its debt covenants under the Hiland Operating Credit Agreement, the Board of Directors of each of the Hiland Companies charged management to begin exploring any and all alternatives, including potential going private transactions.

 

Following the December 5, 2008 special meetings, Messrs. Griffin and Harrison continued exploring various capitalization alternatives and potential transactions, with the principal consideration being the avoidance of a violation of the Hiland Operating Credit Agreement. In this regard, management continued to explore potential asset sales, the issuance of equity or debt and the renegotiation of the Hiland Operating Credit Agreement, in addition to the going private transactions.

 

Management estimated that, based on the December Projections, Hiland Partners would have to raise a minimum of approximately $120 million of equity capital to pay down sufficient debt to ensure compliance with the leverage ratio covenant through December 31, 2009. Management estimated that, because of the rapid decline in unit prices of both Hiland Companies, raising that much equity capital in the public markets would

result in significant dilution to existing unitholders and likely trigger change of control provisions under the Hiland Operating Credit Agreement. Additionally, the disruption in the MLP markets raised questions as to whether Hiland Partners could raise that level of equity. Thus, Mr. Hamm and management also began to consider alternatives involving capital contributions, primarily from Mr. Hamm, that would not trigger change of control provisions under the Hiland Operating Credit Agreement.

 

Also following the December 5, 2008 special meeting, Messrs. Griffin, Harrison and Gipson contacted Wachovia Securities to provide Wachovia Securities an update on the December 5 special meeting, to convey that Mr. Hamm was interested in further analysis of going private transactions and to ask Wachovia to use the December Projections that management had provided in its analysis.

 

On December 12, 2008, Messrs. Hamm, Griffin and Gipson had discussions with MidFirst Bank, in which they provided MidFirst Bank with an update on the Hiland Companies’ business and financial position, including potential covenant compliance issues under the Hiland Operating Credit Agreement during 2009.

 

On December 16, 2008 and again on December 18, 2008, Wachovia Securities met telephonically with Messrs. Griffin, Harrison, Gipson and Hamm (with Mr. Hamm only participating in the December 18, 2008 meeting) to consider several strategic alternatives for the Hiland Companies (which alternatives would need to avoid any covenant defaults under the Hiland Operating Credit Agreement). Among the alternatives presented were maintaining the status quo, renegotiating the Hiland Operating Credit Agreement to achieve temporary covenant relief, selling certain existing assets, issuing convertible securities or issuing new equity to repay bank debt, merging with a third party to alleviate credit concerns, and engaging in going private transactions led by Mr. Hamm coupled with a capital contribution by Mr. Hamm.

 

From December 19, 2008 to January 9, 2009, Messrs. Hamm, Griffin, Harrison and Gipson continued to analyze the strategic alternatives outlined by Wachovia Securities. During this time, Mr. Hamm informed Messrs. Griffin and Harrison that he personally remained committed to the business of the Hiland Companies and the retention of its employees even following going private transactions.

 

On December 23, 2008, Hiland Partners’ common unit price declined to a closing price of $3.80 and Hiland Holdings’ common unit price declined to a closing price of $1.97. The December 23, 2008 closing price was the then-lowest closing price in its respective public trading history.

 

Wachovia Securities met telephonically again with Messrs. Griffin, Harrison and Gipson on four separate occasions from January 5 to January 9, 2009 and with Mr. Hamm on January 8, 2009 to further discuss strategic alternatives. In addition to the previously analyzed scenarios, which had been updated with more current financial data, Wachovia Securities discussed a possible subordinated debt issuance funded by Mr. Hamm and his affiliates to partially repay bank debt. Among the alternatives analyzed, Mr. Hamm concluded that going private transactions would enable the public unitholders of Hiland Partners and Hiland Holdings to receive cash in exchange for their investments in the Hiland Companies while avoiding the significant dilution they would experience in connection with an equity infusion that would ultimately be necessary to stabilize the Hiland Companies. Later on January 9, 2009, Messrs. Griffin and Harrison informed representatives of Wachovia Securities and Baker Botts that Mr. Hamm wished to proceed with making proposals to the Boards of Directors of the Hiland Companies for the acquisition by Mr. Hamm, certain of his affiliates and the Hamm family trusts of all outstanding common units of the Hiland Companies held by the public, as he believed that such a transaction was the best strategic alternative currently available to the Hiland Companies to maximize unitholder value.

 

On January 14, 2009, Messrs. Hamm, Griffin, Harrison and Gipson met with Bert Mackie, the trustee of the Hamm family trusts, and the beneficiaries of the Hamm DST Trust and informed them that Mr. Hamm intended to propose going private transactions involving the Hiland Companies. Mr. Mackie and the beneficiaries indicated their support for such a proposal.

 

On January 14, 2009, Mr. Hamm engaged Wachovia Securities as his financial advisor in connection with a potential acquisition by Mr. Hamm and/or certain of his affiliates of the assets or the capital stock of the Hiland Companies.

The January 15 Proposal

 

On the evening of January 14, 2009, Mr. Hamm called or attempted to call each of the members of the Board of Directors of each Hiland Company to inform them that he intended to deliver the following day a proposal to acquire each of the Hiland Companies in going private transactions.

 

On January 15, 2009, the Hiland Partners Board of Directors received a letter from Mr. Hamm, on behalf of himself and certain affiliates, proposing to take Hiland Partners private for $9.50 per common unit in cash. Concurrently, the Hiland Holdings Board of Directors received a letter from Mr. Hamm, on behalf of himself and certain affiliates, proposing to take Hiland Holdings private for $3.20 per common unit in cash (collectively, we refer to these proposals as the “January 15 Proposal”). In the letters, Mr. Hamm mentioned that he believed that, if the adverse impact of commodity prices on gathering and processing fundamentals and the challenges presented by the global economic crisis persist, Hiland Partners would experience a meaningful decrease in future distributable cash flow and would need substantial new equity capital to remain in continued compliance with its debt covenants. He also mentioned that obtaining such equity capital in the current environment on acceptable terms did not appear feasible and would be significantly dilutive to current unitholders. Accordingly, Mr. Hamm stated that he was of the view that going private transactions were the best strategic alternative currently available to the Hiland Companies to maximize unitholder value during a time of significant market and industry turmoil.

 

In the January 15 Proposal, Mr. Hamm stated that he was interested only in acquiring common units in the Hiland Companies and that he was not interested in selling (or causing his affiliates to sell) interests in the Hiland Companies. The January 15 Proposal also stated that Mr. Hamm anticipated that each of the Hiland Companies Board of Directors would authorize its standing Conflicts Committee of independent directors to retain its own legal and financial advisors and to respond to the proposal on behalf of the Hiland Partners and Hiland Holdings public unitholders.

 

On January 15, 2009, Hiland Holdings, the general partner of Hiland Holdings, Parent and Messrs. Hamm, Griffin and Harrison, having determined that they may be deemed to constitute a “group” for Schedule 13D reporting purposes, filed with the SEC a Schedule 13D with respect to Hiland Partners, which included as exhibits each of the letters containing the proposals to the respective Hiland Company Board of Directors. That same day, Mr. Hamm, Continental Gas, and Mr. Mackie, as trustee of the Hamm family trusts, as members of a “group” for Schedule 13D reporting purposes, filed with the SEC a Schedule 13D with respect to Hiland Holdings, which included as exhibits each of the letters containing the proposals to the respective Hiland Company Board of Directors.

 

Updated 2009 Guidance

 

On January 26, 2009, the Hiland Companies issued a joint press release announcing updated guidance for the 2009 fiscal year. In the release, Hiland Partners projected that EBITDA would range between $38 million and $50 million (the “Updated 2009 Guidance”) based on the following assumptions, each of which was noted in the press release: (i) $45.00 to $55.00 per barrel NYMEX crude oil pricing, (ii) $5.00 to $6.00 per MMBtu NYMEX natural gas pricing, (iii) then-current estimated forward quotes for natural gas pipeline basis differentials and (iv) trailing 12-month average NGL pricing correlations to crude oil, with all pricing subject to Hiland Partners’ commodity hedging portfolio. The Updated 2009 Guidance also contemplated reduced drilling activity in Hiland Partners’ service territories and lower throughput volumes in Hiland Partners’ gathering systems as compared to the Initial 2009 Guidance as a result of lower commodity prices. As a result of the then current pricing environment, particularly in combination with the constrained capital and credit markets and overall economic downturn, Hiland Partners began to experience a decline in drilling activity by some producers in its areas of operations, resulting in lower than expected volumes for 2009. In the release, the Hiland Companies also noted that if commodity prices did not significantly improve above the expected prices for 2009, Hiland Partners might be in violation of the leverage ratio in the Hiland Operating Credit Agreement as early as June 30, 2009, unless the ratio was amended, the debt was restructured or Hiland Partners received an infusion of equity capital to reduce indebtedness. Additionally, the Hiland Partners Board of Directors also announced a cash distribution for the fourth quarter of 2008 of $0.45 per unit, which

represented a $0.43 per unit decrease from the prior quarter. The Hiland Holdings Board of Directors announced a cash distribution for the fourth quarter of 2008 of $0.10 per unit, which represented a $0.2175 per unit decrease from the prior quarter.

 

Authorization of Conflicts Committees

 

On January 21, 2009, by order of Mr. Hamm, as the Chairman of each of the Hiland Companies’ Board of Directors, each of the Hiland Companies’ Board of Directors held a special meeting to consider the January 15 Proposal. The meetings were held consecutively, with the Hiland Partners Board of Directors meeting in the morning and the Hiland Holdings Board of Directors meeting in the afternoon. At each of the special meetings, Vinson & Elkins L.L.P. (“Vinson & Elkins”), as outside counsel to each of the Hiland Companies, reviewed with the directors their duties and responsibilities under the respective partnership agreements of the Hiland Companies and Delaware law, as well as the process to be expected in connection with addressing the January 15 Proposal. In addition, Wachovia Securities presented an overview of the January 15 Proposal, including a review of the factors that led to the proposal and the key terms of the January 15 Proposal, to the Hiland Holdings Board of Directors.

 

With the assistance of Vinson & Elkins, the Hiland Partners Board of Directors and the Hiland Holdings Board of Directors proceeded to consider the independence of each of the members of their respective Conflicts Committees. At the Hiland Partners’ January 21, 2009 special meeting, the Hiland Partners Board of Directors considered the independence of Mr. John T. McNabb II and Dr. David L. Boren, the two members of the standing Hiland Partners Conflicts Committee. At the outset of the consideration, Dr. Boren informed the Hiland Partners Board of Directors that he would prefer to resign from the Hiland Partners Conflicts Committee out of concerns that certain charitable ties between himself, his employer (the University of Oklahoma) and Mr. Hamm could give the appearance that Dr. Boren lacked independence. The Hiland Partners Board of Directors then accepted Dr. Boren’s resignation from the Hiland Partners Conflicts Committee. In order to fill the vacancy on the Hiland Partners Conflicts Committee, the Hiland Partners Board of Directors reviewed the independence of the remaining board members before nominating Mr. Shelby E. Odell. In connection with his nomination to the Hiland Partners Conflicts Committee, Mr. Odell agreed to resign from the Hiland Holdings Board of Directors. Mr. Odell tendered his resignation on the afternoon of January 21, 2009 and the Hiland Holdings Board of Directors accepted his resignation. The Hiland Partners Board of Directors then determined that there were no relationships that would interfere with the independence of Mr. McNabb or Mr. Odell, subject to satisfactory review of Mr. Odell’s completed director independence questionnaire.

 

At the Hiland Holdings special meeting, the Hiland Holdings Board of Directors considered the independence of Dr. Bobby B. Lyle and Dr. Cheryl L. Evans, the two members of the standing Hiland Holdings Conflicts Committee. The Hiland Holdings Board of Directors determined that there were no relationships that would interfere with the independence of Dr. Lyle and Dr. Evans, subject to the confirmation of certain information regarding certain business relationships between Dr. Lyle, the Hiland Companies and Harold Hamm.

 

At the conclusion of each of the January 21 meetings, the Hiland Partners Board of Directors and the Hiland Holdings Board of Directors each generally authorized their respective Conflicts Committees to engage legal and financial advisors and begin evaluating the January 15 Proposal and alternatives thereto, with final authorization subject to finalization of authorizing resolutions with their legal counsel and satisfactory confirmation of the independence of Mr. Odell and Dr. Lyle.

 

On February 19, 2009, each of the Hiland Companies Boards of Directors held a special meeting to follow-up on the outstanding items from the January 21 meetings. After reviewing all additional information and confirming the independence of their respective Conflicts Committee members, both the Hiland Partners Board of Directors and the Hiland Holdings Board of Directors determined to authorize their respective standing Conflicts Committees to exercise certain power and authority of the respective full Board of Directors

with respect to the January 15 Proposal or any revised proposal, including the exclusive power and authority to:

 

 

Each of the Hiland Partners Board of Directors and the Hiland Holdings Board of Directors also resolved at its respective special meeting that it would not recommend, authorize, approve or endorse the January 15 Proposal or any other merger, acquisition or similar proposal involving Hiland Partners or Hiland Holdings, as applicable, and the Hamm Continuing Investors or any of their affiliates unless such transaction was recommended to such Board of Directors by its Conflicts Committee. In addition, both the Hiland Partners Board of Directors and the Hiland Holdings Board of Directors formalized the authorization granted to their respective Conflicts Committee during the January 21 meetings to retain the services of its own legal and financial advisors at the expense of Hiland Partners or Hiland Holdings, respectively.

 

The Hiland Partners Conflicts Committee’s Process and Negotiations and Deliberations related to Hiland Partners

 

Upon receiving initial authorization to hire legal and financial advisors and begin considering the January 15 Proposal from the Hiland Partners Board of Directors on January 21 as described above, the Hiland Partners Conflicts Committee considered the retention of legal and financial advisors and interviewed potential candidates. The Hiland Partners Conflicts Committee spoke with three law firms and seven financial advisory firms. After due consideration, the Hiland Partners Conflicts Committee selected Conner & Winters, LLP (“Conner & Winters”) to serve as legal counsel to the Hiland Partners Conflicts Committee and Jefferies & Company for the purpose of providing a fairness opinion to the Hiland Partners Conflicts Committee, in light of both firms’ relevant industry experience and prior representation of special committees and conflicts committees.

 

On January 29, 2009, the Hiland Partners Conflicts Committee met formally for the first time following the January 21 Hiland Partners Board of Directors meeting. In addition to Messrs. McNabb and Odell, representatives of Conner & Winters attended the meeting. Mr. McNabb acted as Chairman and Mr. Odell acted as Secretary of the meeting (as well as all subsequent meetings of the Hiland Partners Conflicts Committee). At such meeting, Mr. McNabb reviewed with the Hiland Partners Conflicts Committee the delegation of authority and responsibility to the Hiland Partners Conflicts Committee from the Hiland Partners Board of Directors and the Hiland Partners Conflicts Committee’s mandate. Conner & Winters then reviewed with the Hiland Partners Conflicts Committee the requirements to serve as a member of such Conflicts Committee and questioned the members of the Hiland Partners Conflicts Committee regarding matters that might affect their independence. The Hiland Partners Conflicts Committee and counsel concluded that the members of the Hiland Partners Conflicts Committee did not have any relationships that would interfere with the exercise of their independent judgment in carrying out their responsibilities as members of the Hiland Partners Conflicts Committee and further that they met the independence standards and other requirements to serve as members of the Hiland Partners Conflicts Committee. Mr. McNabb recommended that the Hiland

Partners Conflicts Committee confirm the retention of Conner & Winters as counsel and retain Jefferies & Company. After concluding that both firms were independent in the context of the January 15 Proposal, the Hiland Partners Conflicts Committee unanimously ratified and approved the retention by the Hiland Partners Conflicts Committee of Conner & Winters and Jefferies & Company in such capacities. Conner & Winters then reviewed with the Hiland Partners Conflicts Committee its duties and responsibilities under the Hiland Partners partnership agreement with respect to the January 15 Proposal. Conner & Winters further briefed the Hiland Partners Conflicts Committee on the appropriate process guidelines to be followed by the Hiland Partners Conflicts Committee. The Hiland Partners Conflicts Committee then generally discussed alternatives available to Hiland Partners other than the January 15 Proposal, including renegotiating the Hiland Operating Credit Agreement, selling assets, issuing debt or equity capital and merging with a third party. The Hiland Partners Conflicts Committee reached the preliminary conclusion that there were no viable alternatives, but agreed to further examine all such alternatives later in the process. The Hiland Partners Conflicts Committee then decided that the most appropriate next step would be a meeting in Enid, Oklahoma, in which management of the Hiland Companies would brief the Hiland Partners Conflicts Committee and its counsel and financial advisor on all pertinent matters relating to the Hiland Companies.

 

During the latter part of January through the middle of February 2009, the Hiland Partners Conflicts Committee and Conner & Winters engaged in negotiations with representatives of Jefferies & Company regarding the terms of the engagement with Jefferies & Company, which culminated in the Hiland Partners Conflicts Committee’s entering into an engagement letter with Jefferies & Company on February 13, 2009.

 

On the evening of February 6, 2009, Baker Botts distributed initial drafts of the Hiland Partners merger agreement, the Hiland Holdings merger agreement and related documents to Conner & Winters, which forwarded them to the Hiland Partners Conflicts Committee.

 

The Hiland Partners Conflicts Committee next met on February 13, 2009, in conjunction with a management briefing session in Enid, Oklahoma, in which management of the Hiland Companies (including Messrs. Griffin, Harrison and Gipson) provided a presentation of the current status of the Hiland Companies, including financial and operating forecasts, management’s assessment of the Hiland Companies’ credit arrangements and the likelihood that Hiland Partners would violate the leverage ratio covenant in the Hiland Operating Credit Agreement as early as June 30, 2009. Additionally, the management team reviewed the alternatives to the January 15 Proposal explored by the management team, including maintaining the status quo, renegotiating or replacing the Hiland Operating Credit Agreement, selling Hiland Partners’ assets or issuing debt or equity securities. Also present at the February 13 meeting were representatives of Barclays Capital and Fulbright & Jaworski L.L.P. (“Fulbright”), the financial and legal advisors, respectively, to the Hiland Holdings Conflicts Committee, since the briefing session also covered matters relevant to Hiland Holdings.

 

Following the briefing session, the Hiland Partners Conflicts Committee discussed with Conner & Winters and Jefferies & Company the next steps to be taken. It was concluded that Jefferies & Company would review the information received during the briefing session, obtain additional information from management as advisable, conduct a preliminary financial analysis of the January 15 Proposal and report back to the Hiland Partners Conflicts Committee. The Hiland Partners Conflicts Committee also formally approved the engagement letter with Jefferies & Company. The Hiland Partners Conflicts Committee further discussed and also clarified the role of the Hiland Partners Conflicts Committee with respect to the January 15 Proposal and the authority to be delegated to the Hiland Partners Conflicts Committee by the Hiland Partners Board of Directors. Although the Hiland Partners Conflicts Committee and its counsel had done a preliminary review of the proposed Hiland Partners merger agreement, the Hiland Partners Conflicts Committee decided to defer any response or negotiations with respect to the Hiland Partners merger agreement and the January 15 Proposal until Jefferies & Company had an opportunity to complete its preliminary financial analysis.

 

Following the Hiland Partners Conflicts Committee meeting held on February 13, 2009, Jefferies & Company proceeded with a due diligence review of the Hiland Companies, and in particular Hiland Partners, for purposes of conducting a fairness analysis of the January 15 Proposal. In developing this analysis, Jefferies & Company participated in several telephone conferences with management of the Hiland Companies,

including with respect to the management team’s financial model and the projections underlying that financial model.

 

The depressed commodity price environment that began in the fourth quarter of 2008 continued into the first quarter of 2009. During the third week of February, the NYMEX crude oil contract for March 2009 settled at $38.94 per barrel. In addition, for the first quarter of 2009, the NYMEX crude oil last day settle averaged $37.18 per barrel. Natural gas prices continued to decline with the NYMEX natural gas contract for March 20009 settling at $4.06 per MMBtu during the third week of February, which was 34% lower than the January 2009 NYMEX natural gas settle price of $6.14 per MMBtu.

 

On February 26, 2009, the first of several lawsuits challenging the January 15 Proposal and related matters was filed. For more information regarding these lawsuits, please see “Special Factors — Certain Legal Matters.”

 

On March 3, 2009, Wachovia Securities met with Mr. Hamm to review market developments since the January 15 Proposal and present updated analyses. Separately, Wachovia Securities met with the management team to discuss certain of its analyses which were based on the Hiland Companies’ most recent financial projections and commodity price information.

 

In order to assess alternatives to the January 15 Proposal, on March 5, 2009, Mr. McNabb met with representatives of MidFirst Bank to determine what arrangements could be reached with the lending group. Mr. Odell joined in this meeting via telephone. During that meeting, representatives of MidFirst Bank indicated that they were willing to discuss the renegotiation of the Hiland Operating Credit Agreement, but that they were not encouraging about the possibility of renegotiating or restructuring the Hiland Operating Credit Agreement on terms that would present a viable alternative to the January 15 Proposal.

 

During a joint meeting of the Hiland Partners Board of Directors and the Hiland Holdings Board of Directors later that day, Mr. McNabb informed both Boards of Directors that members of the Hiland Partners Conflicts Committee had met with representatives of MidFirst Bank earlier that day and reported his findings.

 

On March 6, 2009, Wachovia Securities met with Messrs. Hamm and Mackie to discuss certain alternatives to the going private transactions. Among the alternatives discussed was a rights offering in which a right to subscribe for additional Hiland Partners common units at a discount to the public trading price would be distributed to each Hiland Partners unitholder. Such rights would offer current unitholders the opportunity to participate in an equity infusion in Hiland Partners. In addition, Wachovia Securities discussed the possible merger of Hiland Holdings with and into Hiland Partners followed by a rights offering. During the meeting, Mr. Hamm requested further information about a rights offering, and he, Mr. Mackie and Wachovia Securities contacted Baker Botts to request a preliminary analysis of potential legal implications of a rights offering.

 

On March 10, 2009, Mr. Hamm and Rayford T. Reid, a member of the Board of Directors of each of the Hiland Companies, met with Messrs. Griffin and Harrison and requested that they continue to pursue alternatives available to the Hiland Companies with respect to the Hiland Operating Credit Agreement.

 

On March 14, 2009, Messrs. Hamm and Reid met telephonically with Wachovia Securities to compare the proposed going private transactions with both a stand-alone rights offering by Hiland Partners and a merger of Hiland Holdings and Hiland Partners followed by a rights offering. Wachovia Securities also presented a case study for a recent amended credit agreement of a midstream MLP and discussed the possibility of negotiating with the lenders under the Hiland Operating Credit Agreement.

 

Messrs. Hamm and Reid met telephonically with Wachovia Securities on March 16, 2009 and again on March 17, 2009 to compare the proposed going private transactions with a subordinated debt issuance funded by Mr. Hamm and his affiliates. Later on March 17, 2009, Messrs. Hamm and Harrison met with representatives of MidFirst Bank to discuss the possibility of renegotiating the Hiland Operating Credit Agreement in the context of both of the proposed going private transactions and a possible subordinated debt issuance.

From March 20 to March 23, 2009, Jefferies & Company reviewed a new volume forecast from the Hiland Companies and had several calls and discussions with Messrs. Griffin and Harrison regarding this information.

 

The new volume forecasts were based on declines in commodity prices which were resulting in substantially reduced drilling activity along Hiland Partners’ systems. At this time, Hiland Partners was experiencing the reduction in drilling activity seen throughout the United States during this time period. For example, U.S. natural gas drilling rig counts declined by approximately 29% to 1,018 as of February 20, 2009, compared to 1,430 natural gas drilling rigs in the comparable period of 2008, and approximately 37% compared to the peak natural gas drilling rig count of 1,606 in August and September 2008. Due to the substantial reduction in drilling activity, Hiland Partners connected 10 new wells during the first quarter of 2009 as compared to 24 wells during the fourth quarter of 2008, representing a 58% decline.

 

On or about March 24, 2009, a representative of Wachovia Securities indicated to Jefferies & Company that, while Mr. Hamm’s offer with respect to the proposed transaction was still outstanding, Mr. Hamm was not ready to enter into direct negotiations at that time because he and management were in ongoing discussions with MidFirst Bank regarding the continued financing of the Hiland Companies following the consummation of the transactions proposed in the January 15 Proposal and that Mr. Hamm was considering other alternatives for the Hiland Companies, including a capital infusion into the Hiland Companies by him.

 

From March 25 to April 16, 2009, Jefferies & Company continued to conduct its financial analyses with respect to the January 15 Proposal and Conner & Winters continued to evaluate the Hiland Partners merger agreement and exchanged perspectives with Fulbright who had been evaluating the Hiland Holdings merger agreement. During this period, on April 1, 2009, management delivered updated 2009 projections to Jefferies & Company, which projections reflected updated 2009 forward strip pricing and lower expected natural gas volumes for 2009 than contained in management’s earlier projections as a result of a continued reduction in the level of drilling activity in Hiland Partners’ areas of operation.

 

On April 7, 2009, MidFirst Bank formally notified the lenders under the Hiland Operating Credit Agreement of requested modifications to such credit agreement to increase the leverage ratio under the Hiland Operating Credit Agreement to (i) 5.25 to 1.0 through June 30, 2010, (ii) 5.0 to 1.0 for the period from July 1, 2010 through December 31, 2010, and (iii) 4.75 to 1.0 for the period from January 1, 2011 to maturity. The modifications would require Mr. Hamm to inject $50 million of equity into Hiland Partners in conjunction with the consummation of the going private transactions and would prohibit distributions unless the leverage ratio was less than 4.25 to 1.0. The modification would also require an amendment fee and increased interest rates and was subject to formal documentation.

 

On April 16, 2009, Wachovia Securities met telephonically with Messrs. Hamm, Reid and Mackie to review its financial analysis of going private transactions in light of developments in the market and the Hiland Companies’ financial outlook since the January 15 Proposal. Messrs. Griffin, Harrison and Gipson were invited to listen to Wachovia Securities’ presentation and to provide an update on management’s negotiations with the lenders under the Hiland Operating Credit Agreement.

 

On April 17, 2009, MidFirst Bank informed the management team that it had received non-binding indications of interests to the proposed modifications to the Hiland Operating Credit Agreement contained in the April 7, 2009 notice from the required lenders (more than 50% of commitments). Subsequently, MidFirst Bank informed management it had received non-binding indications of interests to the proposed modifications to the Hiland Operating Credit Agreement from all lenders.

 

On April 17, 2009, the Hiland Partners Conflicts Committee, together with Conner & Winters and representatives of Jefferies & Company, met to review the status of the fairness analysis of Jefferies & Company and review and discuss the proposed Hiland Partners merger agreement. Conner & Winters was instructed to complete a mark-up of the Hiland Partners merger agreement and, after review of the mark-up by the Hiland Partners Conflicts Committee, provide it to Baker Botts.

 

On April 20, 2009, both members of the Hiland Partners Conflicts Committee received a telephone call from Mr. Hamm, during which Mr. Hamm stated that he and his representatives had engaged in lengthy

discussions with MidFirst Bank regarding the terms on which the Hiland Companies’ lenders would agree to amend the Hiland Operating Credit Agreement in connection with the closing of the acquisition of the Hiland Companies by Mr. Hamm and his affiliates, as well as the adverse effect that continued declines in commodity prices, particularly natural gas prices, and drilling activity along Hiland Partners’ systems had on the Hiland Companies’ current financial performance and long-term prospects. In the call, Mr. Hamm stated that he would no longer continue with the prior proposed offer of $9.50 per Hiland Partners common unit, based upon the terms under which the lenders were willing to amend the existing credit arrangements and the worsening outlook for the Hiland Companies.

 

Later that same day, the Hiland Partners Conflicts Committee received a letter from Mr. Hamm amending the January 15 Proposal. Under the revised terms proposed by Mr. Hamm, holders of Hiland Partners common units (other than the Hiland Partners rollover common unitholders) would receive $7.75 in cash per common unit, reduced from $9.50 in cash per common unit under the January 15 Proposal, and holders of Hiland Holdings common units (other than the Hiland Holdings rollover common unitholders) would receive $2.40 in cash per common unit, reduced from $3.20 in cash per common unit under the January 15 Proposal (collectively, we refer to the revised proposal as the “April 20 Revised Proposal”). In his letter reducing the offered consideration, Mr. Hamm cited the adverse effect that continued declines in natural gas prices and drilling activity along Hiland Partners’ systems had had on the Hiland Companies’ current and long-term projected throughput volumes, midstream segment margins and cash flows since the January 15 Proposal.

 

On April 21, 2009, Mr. Hamm, Parent, Hiland Holdings, the general partner of Hiland Holdings, and Messrs. Griffin and Harrison filed an amendment to their Schedule 13D with the SEC, which included as exhibits Mr. Hamm’s letters to each of the Conflicts Committees. The amendment also included disclosures that Messrs. Griffin and Harrison had agreed to participate in the going private proposals with the Hamm Continuing Investors by agreeing to vote their Hiland Partners common units in favor of the proposed Hiland Partners merger.

 

On April 24, 2009, the Hiland Holdings Board of Directors and the Hiland Partners Board of Directors both unanimously voted to suspend quarterly distributions with respect to each entity’s partnership units beginning with the first quarter distribution of 2009, based on each of the Hiland Companies Board of Directors’ consideration of the impact of lower commodity prices and drilling activity on Hiland Partners’ current and projected throughput volumes, midstream segment margins and cash flows, as well as future required levels of capital expenditures and the level of Hiland Partners’ outstanding indebtedness under the Hiland Operating Credit Agreement.

 

From April 20 through April 30, 2009, Conner & Winters had a number of telephone conferences with Fulbright and with counsel and management of the general partner of Hiland Partners regarding the current status of discussions with the Hiland Companies’ bank group. On April 30, 2009, Conner & Winters, Fulbright and Barclays Capital participated in a call with Messrs. Griffin and Harrison regarding the status of Hiland Partners’ discussions with MidFirst Bank and the potential violation of the leverage ratio covenant under the Hiland Operating Credit Agreement. Mr. Harrison reported that MidFirst Bank was still willing to discuss an amendment or waiver, but as it had previously informed Mr. Harrison, such an amendment would involve high up-front fees, a significant increase in the interest rate and the indefinite suspension of distributions by Hiland Partners. Additionally, Mr. Harrison reported that, while MidFirst Bank had indicated that it might grant a temporary waiver for the potential leverage ratio covenant violation if the proposed transaction did not close prior to the default, it would not agree to do so in advance.

 

On April 28, 2009, Baker Botts distributed revised drafts of the Hiland Partners merger agreement, the Hiland Holdings merger agreement and related documents to the Hiland Partners Conflicts Committee, Jefferies & Company and Conner & Winters.

 

On May 1, 2009, the Hiland Partners Conflicts Committee met to discuss the current status of negotiations on the Hiland Partners merger agreement and the proposed price level. Conner & Winters reported on its telephone conferences with Fulbright, including a phone call in which Conner & Winters was informed that the Hiland Holdings Conflicts Committee was considering asking for a higher price. Conner & Winters also reported on the April 30, 2009 telephone conference with Hiland Partners management regarding the

status of the discussion with MidFirst Bank. The Hiland Partners Conflicts Committee and its advisors then engaged in a discussion regarding the negotiation strategy that the Hiland Partners Conflicts Committee should employ with Mr. Hamm, including the possible advantages and disadvantages to the Hiland Partners public unitholders, weighing an attempt to negotiate for an increase in the purchase price from Mr. Hamm against the risk that aggressive negotiations regarding the price might cause Mr. Hamm to decide not to go forward with the proposed transaction. After discussions with its advisors, the Hiland Partners Conflicts Committee reached the preliminary view was that the $7.75 per common unit price appeared to be fair to Hiland Partners and the public unitholders. The Hiland Partners Conflicts Committee made a tentative decision to request an increase in price but agreed to consider and readdress the price issue at its next meeting. At this meeting, the Hiland Partners Conflicts Committee and its advisors also generally discussed open issues with respect to the Hiland Partners merger agreement.

 

On May 3, 2009, the Hiland Partners Conflicts Committee met to review the outstanding issues regarding the Hiland Partners merger agreement and finalize its strategy with respect to price. The Hiland Partners Conflicts Committee discussed a number of open issues with respect to the Hiland Partners merger agreement and developed a position on each issue. Conner & Winters was instructed to convey the Hiland Partners Conflicts Committee’s position on all of the issues to Baker Botts. The Hiland Partners Conflicts Committee then returned to a discussion of the price. After discussion, the Hiland Partners Conflicts Committee decided to request an increase in the price from $7.75 per unit to $8.00 per unit to test whether the $7.75 per common unit was the best offer that the Committee could obtain from Mr. Hamm. Jefferies & Company was instructed to convey that request to Wachovia Securities.

 

On May 4, 2009, on behalf of the Hiland Holdings Conflicts Committee, a representative of Fulbright contacted Conner & Winters to ascertain the Hiland Partners Conflicts Committee’s position regarding the April 20 Revised Proposal and whether the Hiland Partners Conflicts Committee intended to approach Mr. Hamm to ask for a price increase. Conner & Winters replied that the Hiland Partners Conflicts Committee intended to ask Mr. Hamm to increase his bid for the Hiland Partners common units by $0.25 per common unit. Fulbright, in turn, confirmed to Conner & Winters that the Hiland Holdings Conflicts Committee was considering asking for a price increase without specifying the amount. On that same day, Conner & Winters submitted updated proposed drafts of the Hiland Partners merger agreement and related documentation to Baker Botts.

 

On May 4, 2009, a representative of Jefferies & Company contacted Wachovia Securities to request an increase in the offer price to $8.00 per unit. Wachovia Securities relayed the request to Mr. Hamm and subsequently on May 5, 2009 replied to Jefferies & Company that Mr. Hamm would not agree to increase the offer price.

 

On May 5, 2009, Baker Botts distributed revised drafts of the Hiland Partners merger agreement, the Hiland Holdings merger agreement and related documents to the Hiland Partners Conflicts Committee, Jefferies & Company and Conner & Winters. On May 12, 2009, Conner & Winters and Baker Botts had a telephone conference during which they further negotiated the terms of the Hiland Partners merger agreement.

 

At a meeting of the Hiland Partners Conflicts Committee later on May 12, 2009, Mr. McNabb reported that Mr. Hamm had rejected the requested increase in price. He also reported on his conversation with the chairman of the Hiland Holdings Conflicts Committee and on the differences in strategic negotiation approaches of the respective Conflicts Committees with respect to the proposed merger agreements. Conner & Winters then reported on their numerous discussions with counsel to the Hiland Holdings Conflicts Committee on the Hiland Holdings Conflicts Committee’s approach to the issues in the Hiland Holdings Merger Agreement and the response that the Hiland Holdings Conflicts Committee had received from Mr. Hamm. A discussion was then held regarding the response by Mr. Hamm to the Hiland Partners Conflicts Committee’s proposed changes in the Hiland Partners merger agreement.

 

On May 13, 2009, the Hiland Partners Conflicts Committee met again. Conner & Winters summarized the current state of the negotiations with Mr. Hamm and the remaining open issues with respect to the Hiland Partners merger agreement. A discussion ensued in which the Hiland Partners Conflicts Committee concluded it was very unlikely that the Hiland Companies could continue without some capital infusion or renegotiation

of the Hiland Operating Credit Agreement since, based on management’s projections, the Hiland Companies would likely be in violation of certain of the financial covenants in the Hiland Operating Credit Agreement as early as June 30, 2009. The Hiland Partners Conflicts Committee also concluded that, based upon the experience of the Hiland Partners Conflicts Committee and its advisors, as well as information provided by Hiland Partners management, seeking covenant waivers and amendments of credit facilities or any renegotiation of the existing Hiland Operating Credit Agreement would likely require the Hiland Companies to pay a significant up-front fee, involve a significant increase in the effective interest rate and require the reduction of growth capital expenditures and the indefinite suspension of quarterly distributions to unitholders. The meeting then turned to the subject of consideration of alternatives to the proposed merger transaction and, after discussion of each such alternative with its advisors, the Hiland Partners Conflicts Committee concluded as follows:

 

 

After a discussion of the above alternatives and other relevant considerations, the Hiland Partners Conflicts Committee concluded that the best (and probably only viable) alternative available to Hiland Partners

was the Hiland Partners merger as contemplated in the April 20 Revised Proposal. The Jefferies & Company representatives indicated that they expected that they would be able to render a fairness opinion when requested by the Hiland Partners Conflicts Committee.

 

On May 15, 2009, Baker Botts distributed revised drafts of the Hiland Partners merger agreement, the Hiland Holdings merger agreement and related documents to the Hiland Partners Conflicts Committee, Jefferies & Company and Conner & Winters. Through May 17, 2009, the Hiland Partners Conflicts Committee and Conner & Winters continued to negotiate the final remaining open issues pertaining to the Hiland Partners merger agreement with Mr. Hamm and Baker Botts until such time as the Hiland Partners Conflicts Committee and Conner & Winters were satisfied on all substantive issues. From May 17, 2009 through May 26, 2009, the Hiland Holdings Conflicts Committee and Fulbright continued to negotiate certain open issues pertaining to the Hiland Holdings merger agreement with Mr. Hamm and Baker Botts and, during such time, Baker Botts would periodically update Conner & Winters on the status of negotiations with the Hiland Holdings Conflicts Committee and propose further revisions to the Hiland Partners merger agreement to conform the two merger agreements. All such changes were approved by the Hiland Partners Conflicts Committee and Conner & Winters.

 

On May 28, 2009, management delivered updated 2009 projections to Jefferies & Company, which projections reflected updated 2009 forward strip pricing and lower expected natural gas volumes for 2009 than contained in management’s earlier projections as a result of a continued reduction in the level of drilling activity in Hiland Partners’ areas of operation.

 

On June 1, 2009, the Hiland Partners Conflicts Committee met again with its advisors. Messrs. Griffin, Harrison and Gipson were also present at the meeting by invitation. Messrs. Griffin, Harrison and Gipson updated the Hiland Partners Conflicts Committee and its advisors on the current business and financial status of the Hiland Companies and responded to various questions from the Hiland Partners Conflicts Committee and its advisors. At that point in the meeting, Messrs. Griffin, Harrison and Gipson were excused from the meeting. Conner & Winters advised the Hiland Holdings Conflicts Committee that the terms of the Hiland Partners merger agreement and related documents had not changed in a material way since the Hiland Partners Conflicts Committee was last updated on May 29, 2009. Jefferies & Company made a presentation to the Hiland Partners Conflicts Committee on its financial analysis regarding the proposed transaction, a copy of which had been provided to the Hiland Partners Conflicts Committee prior to the meeting. Jefferies & Company representatives responded to numerous questions from the Hiland Partners Conflicts Committee and counsel. At the conclusion of their presentation, Jefferies & Company issued its oral opinion that the transaction was fair, from a financial point of view, to the Hiland Partners public unitholders. After hearing from its advisors and following a subsequent discussion, the Hiland Partners Conflicts Committee resolved unanimously (a) that the Hiland Partners merger agreement and the Hiland Partners merger are advisable, fair to, and in the best interests of, Hiland Partners and the Hiland Partners public unitholders; (b) to approve and recommend that the Hiland Partners Board of Directors approve, on behalf of Hiland Partners (i) the Hiland Partners merger and (ii) the Hiland Partners merger agreement and related documents; (c) to recommend to the Hiland Partners Board of Directors that it should recommend that the Hiland Partners public unitholders should approve the Hiland Partners merger and the Hiland Partners merger agreement; and (d) to recommend to the Hiland Partners public unitholders that such public unitholders should approve the Hiland Partners merger and the Hiland Partners merger agreement.

 

The Hiland Holdings Conflicts Committee’s Process and Negotiations and Deliberations related to Hiland Holdings

 

On February 4, 2009, after receiving the initial authorization from the Hiland Holdings Board of Directors to respond to the January 15 Proposal described above, the Hiland Holdings Conflicts Committee met to consider the retention of legal and financial advisors and interviewed potential candidates to serve as such. After deliberation, the Hiland Holdings Conflicts Committee selected Fulbright to serve as legal counsel to the Hiland Holdings Conflicts Committee and Morris, Nichols, Arsht & Tunnell LLP (“Morris Nichols”) to serve as special Delaware counsel to the Hiland Holdings Conflicts Committee, in light of both firms’ experience in the Hiland Companies’ industry and in representation of special committees and conflicts committees.

Following the retention of Fulbright and Morris Nichols, the Hiland Holdings Conflicts Committee interviewed four potential financial advisors.

 

On February 6, 2009, the Hiland Holdings Conflicts Committee held a meeting, at which representatives from Fulbright and Morris Nichols were present. At the meeting, the Hiland Holdings Conflicts Committee continued its discussions regarding the candidates to serve as financial advisor to the Hiland Holdings Conflicts Committee and their qualifications, experience, independence and fee proposals. In particular, the Hiland Holdings Conflicts Committee discussed the independence of Barclays Capital, including Barclays Capital’s November 2008 meetings with Mr. Hamm and the management team in which Barclays Capital analyzed potential strategic alternatives available to the Hiland Companies, including going private transactions led by Mr. Hamm. Following the discussion, the Hiland Holdings Conflicts Committee determined to contact representatives of both Barclays Capital and one of the other three firms for further information regarding their firms and fees.

 

On the evening of February 6, 2009, Baker Botts distributed initial drafts of the Hiland Holdings merger agreement, the Hiland Partners merger agreement and related documents to Fulbright, which forwarded them to the members of the Hiland Holdings Conflicts Committee. While the Hiland Holdings Conflicts Committee and its legal advisors preliminarily reviewed and discussed the provisions of the draft Hiland Holdings merger agreement, the Hiland Holdings Conflicts Committee decided not to engage in negotiations of the merger agreement provisions until it had retained a financial advisor and the Hiland Holdings Conflicts Committee’s advisors had a chance to engage in diligence meetings with management of the Hiland Companies, which meetings were scheduled to take place in Enid, Oklahoma, on February 13, 2009.

 

On February 11, 2009, the Hiland Holdings Conflicts Committee held a meeting, at which representatives from Fulbright and Morris Nichols were present, to further consider the retention of a financial advisor. After deliberation and determining that Barclays Capital had no current or prior relationships that compromised its independence, the Hiland Holdings Conflicts Committee determined that Barclays Capital should be engaged as the financial advisor to the Hiland Holdings Conflicts Committee (subject to the negotiation of the terms of an engagement letter) based on Barclays Capital’s expertise and extensive experience advising companies in the Hiland Companies’ industry and in advising special and conflicts committees in transactions similar to the one proposed by Mr. Hamm. Over the next several days, Fulbright and the Hiland Holdings Conflicts Committee engaged in negotiations with representatives of Barclays Capital regarding the terms of Barclays Capital’s engagement.

 

On February 12, 2009, the Hiland Holdings Conflicts Committee and representatives of Fulbright and Morris Nichols met telephonically to discuss the scope of the duties that had been delegated to the Hiland Holdings Conflicts Committee by the Hiland Holdings Board of Directors.

 

On February 13, 2009, members of the management team of the Hiland Companies, including Messrs. Griffin, Harrison and Gipson, met with representatives of Barclays Capital and Fulbright, as well as with the Hiland Partners Conflicts Committee and its legal and financial advisors, in Enid, Oklahoma, to provide a presentation of the current status of the Hiland Companies, including financial and operating forecasts, management’s assessment of the Hiland Companies’ credit arrangements and management’s anticipation that Hiland Partners would violate the leverage ratio covenant in the Hiland Operating Credit Agreement as early as June 30, 2009. Additionally, the management team reviewed the alternatives to the January 15 Proposal explored by the management team, including maintaining the status quo, renegotiating or replacing the Hiland Operating Credit Agreement, selling Hiland Partners’ assets or issuing debt or equity securities. Immediately following that meeting, the Hiland Holdings Conflicts Committee met telephonically with its advisors to receive a report of the meeting.

 

On February 17, 2009, the Hiland Holdings Conflicts Committee and its legal advisors concluded negotiations with representatives of Barclays Capital regarding the terms of Barclays Capital’s engagement, and the Hiland Holdings Conflicts Committee and Barclays Capital executed Barclays Capital’s engagement letter.

On February 18, 2009, at a meeting of the Hiland Holdings Conflicts Committee, with representatives from Fulbright in attendance and representatives of Barclays Capital joining telephonically, Messrs. Griffin and Harrison reviewed with the Hiland Holdings Conflicts Committee the management team’s assessment of alternatives to the January 15 Proposal as set forth in the management team’s presentation made on February 13, 2009. Messrs. Griffin and Harrison also repeated their position, previously stated in the February 13, 2009 meeting, that the continued decline in the price of crude oil, natural gas and NGLs in 2009 had further increased the risk that Hiland Partners would violate the leverage ratio covenant under the Hiland Operating Credit Agreement as early as June 30, 2009. Following the discussion, in response to a query from the members of the Hiland Holdings Conflicts Committee, Messrs. Griffin and Harrison indicated that neither Hiland Holdings nor Hiland Partners had received any offers or inquiries from any third parties regarding an alternative to the January 15 Proposal.

 

Later that day, the Hiland Holdings Conflicts Committee met telephonically with representatives from Fulbright and Barclays Capital to discuss Barclays Capital’s proposed timing and process for completing its diligence review and financial analysis of the Hiland Companies and the January 15 Proposal. At that meeting, the Hiland Holdings Conflicts Committee also instructed Barclays Capital that its analysis should include an exploration of alternatives to the January 15 Proposal, including the alternatives discussed by the management team and any other alternatives that Barclays Capital determined the Hiland Holdings Conflicts Committee should consider.

 

Over the next several weeks, representatives of Barclays Capital engaged in a diligence review of the Hiland Companies, including requests for documents and data and discussions with members of the management team regarding the management team’s financial model and the projections underlying that financial model. In addition, Fulbright and members of the Hiland Holdings Conflicts Committee engaged in a series of telephone calls regarding Fulbright’s initial impressions of the draft merger agreement proposed by Mr. Hamm. During this period, Fulbright periodically contacted representatives of Conner & Winters to discuss their respective impressions of the draft merger agreements.

 

The depressed commodity price environment that began in the fourth quarter of 2008 continued into the first quarter of 2009. During the third week of February, the NYMEX crude oil contract for March 2009 settled at $38.94 per barrel. In addition, for the first quarter of 2009, the NYMEX crude oil last day settle averaged $37.18 per barrel. Natural gas prices continued to decline with the NYMEX natural gas contract for March 20009 settling at $4.06 per MMBtu during the third week of February, which was 34% lower than the January 2009 NYMEX natural gas settle price of $6.14 per MMBtu.

 

On February 26, 2009, the first of several lawsuits challenging the January 15 Proposal and related matters was filed. For more information regarding these lawsuits, please see “Special Factors — Certain Legal Matters.”

 

On March 2, 2009, the Hiland Holdings Conflicts Committee held a meeting, with representatives from Fulbright, Morris Nichols and Barclays Capital in attendance, to hear Barclays Capital’s preliminary analyses, from a financial point of view, of the Hiland Companies and the January 15 Proposal. At this meeting, Barclays Capital reviewed with the Hiland Holdings Conflicts Committee preliminary materials relating to its valuation of the Hiland Companies, including an analysis of the depressed state of the current and projected crude oil, natural gas and NGL commodities markets, as well as the recent financial performance of midstream energy companies. Barclays Capital’s preliminary analyses indicated that the January 15 Proposal price of $3.20 per Hiland Holdings common unit exceeded or was within the range of the values of the Hiland Holdings common units implied by a valuation of Hiland Holdings on either a discounted cash flow basis, a valuation derived from publicly available trading or sale values of comparable companies, or an analysis of the net asset value of the Hiland Companies. Barclays Capital’s preliminary analyses also included analyses, from a financial point of view, of potential strategic alternatives to the January 15 Proposal including alternatives

involving the issuance of debt or equity (or both) by the Hiland Companies. Barclays Capital noted in particular that:

 

 

Following Barclays Capital’s presentation, the Hiland Holdings Conflicts Committee asked Barclays Capital to provide clarification on several of the alternatives, including an analysis of a potential structured equity investment in the Hiland Companies by Mr. Hamm or his affiliates. The Hiland Holdings Conflicts Committee also directed Barclays Capital to perform further diligence investigations and analysis of the volume forecasts by the management team.

 

On March 3, 2009, Wachovia Securities met with Mr. Hamm to review market developments since the January 15 Proposal and present updated analyses. Separately, Wachovia Securities met with the management team to discuss certain of its analyses which were based on the Hiland Companies’ most recent financial projections and commodity price information.

 

On March 4, 2009, the members of the Hiland Holdings Conflicts Committee met by telephone, along with representatives of Fulbright and Morris Nichols, to review Barclays Capital’s March 2, 2009 presentation and to discuss other specific analyses and investigations that the Hiland Holdings Conflicts Committee wanted Barclays Capital to conduct on behalf of the Hiland Holdings Conflicts Committee. The Hiland Holdings Conflicts Committee also determined to seek the assistance of the management team in arranging a direct meeting between Dr. Lyle, on behalf of the Hiland Holdings Conflicts Committee, and a member of the lending group under the Hiland Operating Credit Agreement, to investigate the possibility of renegotiating the Hiland Operating Credit Agreement and to confirm the potential terms and conditions that might be expected in connection with such a renegotiation.

 

On March 5, 2009, during a joint meeting of the Hiland Holdings Board of Directors and the Hiland Partners Board of Directors, Mr. McNabb informed both Boards of Directors that members of the Hiland Partners Conflicts Committee had met with MidFirst Bank earlier that day to determine what arrangements could be reached with the lending group that would be a viable alternative to the January 15 Proposal. Mr. McNabb informed both Boards of Directors that MidFirst Bank was willing to discuss the renegotiation of the Hiland Operating Credit Agreement, but that it was not encouraging about the possibility of renegotiating or restructuring the Hiland Operating Credit Agreement on terms that would present a viable alternative to the January 15 Proposal.

 

On March 6, 2009, the Hiland Holdings Conflicts Committee met by telephone with its advisors to discuss its advisors’ reaction to the report of Mr. McNabb regarding the Hiland Partners Conflicts Committee’s discussions with MidFirst Bank. The Hiland Holdings Conflicts Committee determined that Dr. Lyle or Barclays Capital should meet with Wells Fargo, another prominent member of the lending group under the Hiland Operating Credit Agreement, to determine if other members of the lending group might be more receptive than MidFirst Bank to restructuring the Hiland Operating Credit Agreement on acceptable terms.

On March 6, 2009, Wachovia Securities met with Messrs. Hamm and Mackie to discuss further alternatives to going private transactions. Among the alternatives discussed was a rights offering in which a right to subscribe for additional Hiland Partners common units at a discount to the public trading price would be distributed to each Hiland Partners unitholder. Such rights would offer current unitholders the opportunity to participate in an equity infusion in Hiland Partners. In addition, Wachovia discussed the possible merger of Hiland Holdings with and into Hiland Partners to be followed by a rights offering. During the meeting, Mr. Hamm requested further information about a rights offering and he, Mr. Mackie and Wachovia Securities contacted Baker Botts to request a preliminary analysis of potential legal implications of a rights offering.

 

On March 10, 2009, Messrs. Hamm and Reid met with Messrs. Griffin and Harrison and requested that they continue to pursue alternatives available to the Hiland Companies with respect to the Hiland Operating Credit Agreement.

 

On March 14, 2009, Messrs. Hamm and Reid met telephonically with Wachovia Securities to compare the proposed going private transactions with both a stand-alone rights offering and a merger of Hiland Holdings and Hiland Partners in conjunction with a rights offering. Wachovia Securities also presented a case study for a recent amended credit agreement of a midstream MLP and discussed the possibility of negotiating with the lenders under the Hiland Operating Credit Agreement.

 

The Hiland Holdings Conflicts Committee met with its financial advisors on March 13, 2009 to receive an update to Barclays Capital’s preliminary analysis based upon any changes in market conditions since its initial report on March 2, 2009 and to discuss the results of its continued analysis of the January 15 Proposal and any strategic alternatives to that proposal. Representatives of Barclays Capital indicated its preliminary view that as of the date thereof the $3.20 per common unit cash consideration being offered by Mr. Hamm appeared to be within or above the range of values of the Hiland Holdings common units implied by a valuation of Hiland Holdings. The Hiland Holdings Conflicts Committee also asked Barclays Capital to follow up with Wachovia Securities regarding the possibility of a structured equity investment by Mr. Hamm as an alternative to the January 15 Proposal.

 

Messrs. Hamm and Reid met telephonically with Wachovia Securities on March 16, 2009 and again on March 17, 2009 to compare the proposed going private transactions with a subordinated debt issuance funded by Mr. Hamm and his affiliates. Later on March 17, 2009, Messrs. Hamm and Harrison met with representatives of MidFirst Bank to discuss the possibility of renegotiating the Hiland Operating Credit Agreement in the context of both the proposed going private transactions and a subordinated debt issuance.

 

On March 17, 2009, Dr. Lyle held a telephonic meeting with representatives of Wells Fargo in which Wells Fargo confirmed that it might be willing to discuss a renegotiation of the Hiland Operating Credit Agreement, but that any such renegotiation or waiver would require a significant upfront restructuring fee, a significant increase in the applicable interest rate and other modifications demanded by the lenders to the loan agreement, including a significant reduction or elimination of distributions.

 

On March 18, 2009, the Hiland Holdings Conflicts Committee had a telephone call with its advisors during which Barclays Capital confirmed its preliminary view that as of the date thereof the January 15 Proposal offered consideration of $3.20 per common unit of Hiland Holdings was within or above the range of fairness, from a financial point of view, to the Hiland Holdings public unitholders. The Hiland Holdings Conflicts Committee and Barclays Capital also noted that decreases in distributions by Hiland Partners had a more significant impact on the market price and value of Hiland Holdings common units since Hiland Holdings’ only source of cash flow was distributions from Hiland Partners.

 

From March 20, 2009 through March 24, 2009, the Hiland Holdings Conflicts Committee held several telephone calls with its advisors, including Barclays Capital, Fulbright, and Morris Nichols, to discuss possible negotiating strategies with Mr. Hamm regarding the January 15 Proposal. The Hiland Holdings Conflicts Committee determined that Barclays Capital should contact representatives of Wachovia Securities and indicate that the Hiland Holdings Conflicts Committee might be able to support the currently proposed price of $3.20 per common unit, but that there were significant issues to discuss with respect to the terms of the

draft Hiland Holdings merger agreement. The Hiland Holdings Conflicts Committee then instructed Fulbright to distribute a revised version of the draft Hiland Holdings merger agreement to Wachovia Securities and Baker Botts reflecting the comments and proposed changes of the Hiland Holdings Conflicts Committee and its advisors.

 

On March 24, 2009, Fulbright transmitted comments to the draft merger agreement to Baker Botts, and a representative of Barclays Capital called a representative of Wachovia Securities to inform them of the Hiland Holdings Conflicts Committee’s position. The representative of Wachovia Securities indicated to Barclays Capital that, while Mr. Hamm’s offer with respect to the proposed transaction was still outstanding, Mr. Hamm was not ready to enter into direct negotiations at that time because they were in ongoing discussions with MidFirst Bank regarding the continued financing of the Hiland Companies following the consummation of the transactions proposed in the January 15 Proposal and that they were considering other alternatives for the Hiland Companies, including a capital infusion into the Hiland Companies by Mr. Hamm.

 

The Hiland Holdings Conflicts Committee reconvened by telephone later that same day to receive a report from Barclays Capital regarding its discussions with Wachovia Securities. A representative of Barclays Capital summarized for the Hiland Holdings Conflicts Committee its call earlier that day with Wachovia Securities and indicated to the Hiland Holdings Conflicts Committee that Barclays Capital believed the proposed transaction continued to be a superior option for the Hiland Holdings public unitholders, when compared with the alternative of an equity infusion by Mr. Hamm, because such an equity infusion would likely include significant dilution of Hiland Holdings’ interest in Hiland Partners, a significant reduction or elimination in distributions by Hiland Partners (and, consequently, a reduction in value of the subordinated units and incentive distribution rights in Hiland Partners owned by Hiland Holdings as arrearages built up with regard to minimum quarterly distributions on the Hiland Partners common units).

 

From March 24, 2009, until April 20, 2009, there were no active negotiations between the Hiland Holdings Conflicts Committee and its representatives and Mr. Hamm and his representatives related to the January 15 Proposal, though representatives of Fulbright and Conner & Winters periodically discussed their respective impressions of the draft merger agreements.

 

On April 1, 2009, management delivered updated 2009 projections to Barclays Capital, which projections reflected updated 2009 forward strip pricing and lower expected natural gas volumes for 2009 than contained in management’s earlier projections as a result of a continued reduction in the level of drilling activity in Hiland Partners’ areas of operation.

 

At this time, Hiland Partners was experiencing the effects of the reduction in drilling activity seen throughout the United States during this time period. For example, U.S. natural gas drilling rig counts declined by approximately 29% to 1,018 as of February 20, 2009, compared to 1,430 natural gas drilling rigs in the comparable period of 2008, and approximately 37% compared to the peak natural gas drilling rig count of 1,606 in August and September 2008. Due to the substantial reduction in drilling activity, Hiland Partners connected 10 new wells during the first quarter of 2009 as compared to 24 wells during the fourth quarter of 2008, representing a 58% decline.

 

On April 7, 2009, MidFirst Bank formally notified the lenders under Hiland’s Operating Credit Agreement of requested modifications to such credit agreement to increase the leverage ratio under the Hiland Operating Credit Agreement to (i) 5.25 to 1.0 through June 30, 2010, (ii) 5.0 to 1.0 for the period from July 1, 2010 through December 31, 2010, and (iii) 4.75 to 1.0 for the period from January 1, 2011 to maturity. The modifications would require Mr. Hamm to inject $50 million of equity into Hiland Partners in conjunction with the consummation of the going private transactions and would prohibit distributions unless the leverage ratio was less than 4.25 to 1.0. The modification would also require an amendment fee and increased interest rates and was subject to formal documentation.

 

On April 16, 2009, Wachovia Securities met telephonically with Messrs. Hamm, Reid and Mackie to review its financial analysis of going private transactions in light of developments in the market and the Hiland Companies’ financial outlook since the January 15 Proposal. Messrs. Griffin, Harrison and Gipson were invited to listen to the Wachovia Securities’ presentation and to provide an update on management’s negotiations with the lenders under the Hiland Operating Credit Agreement.

On April 17, 2009, MidFirst Bank informed the management team that it had received non-binding indications of interests to the proposed modifications to the Hiland Operating Credit Agreement contained in the April 7, 2009 notice from the required lenders (more than 50% of commitments). Subsequently, MidFirst Bank informed management it had received non-binding indications of interests to the proposed modifications to the Hiland Operating Credit Agreement from all lenders.

 

On April 20, 2009, Dr. Lyle received a telephone call from Mr. Hamm, during which Mr. Hamm stated that he and his representatives had engaged in lengthy discussions with MidFirst Bank regarding the terms on which the Hiland Companies’ lenders would agree to amend the Hiland Operating Credit Agreement in connection with the closing of the acquisition of the Hiland Companies by Mr. Hamm and his affiliates, as well as the adverse effect that continued declines in commodity prices, particularly natural gas prices, and drilling activity along Hiland Partners’ systems had on the Hiland Companies’ current financial performance and long-term prospects. In the call, Mr. Hamm stated that Mr. Hamm would no longer continue with the prior proposed offer of $3.20 per Hiland Holdings common unit, based upon the terms under which the lenders were willing to amend the existing credit arrangements and the worsening outlook for the Hiland Companies. Dr. Lyle then asked Mr. Hamm if Mr. Hamm, his affiliates or the Hamm family trusts had considered making a direct equity investment into the Hiland Companies as an alternative to the proposed transaction. Mr. Hamm replied that he had considered such an investment as an alternative, but had concluded that his proposed going private transactions were a superior alternative, in part because he believed a direct equity investment would be overly dilutive to the common unitholders.

 

Later that same day, the Hiland Holdings Conflicts Committee and the Hiland Partners Conflicts Committee each received a letter from Harold Hamm amending the January 15 Proposal and describing the terms of the April 20 Revised Proposal summarized above in “— The Hiland Partners Conflicts Committee’s Process, Negotiations and Deliberations.” Under the revised terms proposed by Mr. Hamm, holders of Hiland Holdings common units would receive $2.40 in cash per common unit, reduced from $3.20 in cash per common unit under the January 15 Proposal. In his letter reducing the offered consideration, Mr. Hamm cited the adverse effect that continued declines in natural gas prices and drilling activity along Hiland Partners’ systems had had on the Hiland Companies’ current and long-term projected throughput volumes, midstream segment margins and cash flows since the January 15 Proposal.

 

On April 24, 2009, the Hiland Holdings Board of Directors and the Hiland Partners Board of Directors both unanimously voted to suspend quarterly distributions with respect to each entity’s partnership units beginning with the first quarter distribution of 2009, based on each of the Hiland Companies Board of Directors’ consideration of the impact of lower commodity prices and drilling activity on Hiland Partners’ current and projected throughput volumes, midstream segment margins and cash flows, as well as future required levels of capital expenditures and the level of Hiland Partners’ outstanding indebtedness under the Hiland Operating Credit Agreement.

 

On April 27, 2009, the Hiland Holdings Conflicts Committee held a telephone call with representatives of Fulbright and Barclays Capital to discuss the April 20 call with Mr. Hamm and the April 20 Revised Proposal. During the call, the Hiland Holdings Conflicts Committee instructed Barclays Capital to evaluate the April 20 Revised Proposal and report back to the Hiland Holdings Conflicts Committee as soon as possible.

 

Later that same evening, Baker Botts transmitted a revised draft of the Hiland Holdings merger agreement to Fulbright.

 

On April 28, 2009, representatives of Barclays Capital held a telephonic discussion with representatives of Wachovia Securities during which the financial advisors reviewed the status of discussions between the Hiland Companies and MidFirst Bank regarding the potential covenant violation under the Hiland Operating Credit Agreement.

 

On the morning of April 30, 2009, the Hiland Holdings Conflicts Committee held a telephonic meeting with its advisors, including Fulbright and Barclays Capital. Representatives of Barclays Capital recounted the call it had with Wachovia Securities regarding the operational update and status regarding MidFirst Bank and Hiland Partners’ potential violation of the leverage ratio covenant under the Hiland Operating Credit

Agreement. Fulbright also briefed the Hiland Holdings Conflicts Committee on the revised draft of the Hiland Holdings merger agreement and indicated that while some progress had been made on the Hiland Holdings merger agreement, there were still issues to resolve, including the extent of the representations, warranties and covenants and whether the potential covenant violation under the Hiland Operating Credit Agreement following signing could be the basis for Mr. Hamm and his affiliates to refuse to close the Hiland Holdings merger. The Hiland Holdings Conflicts Committee decided to finalize its strategy on the Hiland Holdings merger agreement following Barclays Capital’s completion of its updated financial analysis of the April 20 Revised Proposal.

 

Later that morning, Fulbright, Barclays Capital and Conner & Winters participated in a call with Messrs. Griffin and Harrison and Vinson & Elkins regarding the status of Hiland Partners’ discussions with MidFirst Bank and the potential violation of the leverage ratio covenant under the Hiland Operating Credit Agreement. Mr. Harrison reported that MidFirst Bank was still willing to discuss an amendment or waiver, but as it had previously informed Mr. Harrison, such an amendment would involve high up-front fees, a significant increase in the interest rate and the indefinite suspension of distributions by Hiland Partners. Additionally, Mr. Harrison reported that, while MidFirst Bank had indicated that it might grant a temporary waiver for the potential violation of the leverage ratio covenant if the proposed transaction did not close prior to the default, it would not agree to do so in advance.

 

On May 1, 2009, the Hiland Holdings Conflicts Committee conducted a telephone call with its advisors, including Fulbright, Morris Nichols and Barclays Capital. During the call, Barclays Capital provided its preliminary analysis that as of the date thereof and in light of subsequent developments, the April 20 Revised Proposal cash consideration of $2.40 per Hiland Holdings common unit was within or above the range of values of the Hiland Holdings common units implied by a valuation of Hiland Holdings, and therefore appeared to be fair to the Hiland Holdings public unitholders from a financial point of view. In addition, Barclays Capital reported that it had received a description of the terms on which the lenders would amend the Hiland Operating Credit Agreement following a closing of the proposed Hiland Holdings merger, and that, as anticipated, Mr. Hamm would be required to contribute a substantial amount of equity to Hiland Partners to pay down indebtedness under the Hiland Operating Credit Agreement. Barclays Capital also preliminarily reaffirmed its prior view that, based on Barclays Capital’s experience and expertise in the current credit markets, if the Hiland Companies were to reject the April 20 Revised Proposal and attempt to refinance or replace the Hiland Operating Credit Agreement, the terms of that refinancing or replacement would likely be worse financially for the Hiland Holdings public unitholders than the April 20 Revised Proposal, especially considering that any refinancing of the existing indebtedness would likely involve the continued suspension of distributions by Hiland Partners for a considerable period of time.

 

On May 4, 2009, the Hiland Holdings Conflicts Committee held a telephone conference with Fulbright and Barclays Capital, in which a representative of Fulbright reported that he had spoken to Conner & Winters and confirmed that the Hiland Partners Conflicts Committee intended to seek an increase in the offer price of $0.25 per common unit. After a brief discussion, the Hiland Holdings Conflicts Committee determined that it would seek a price increase from Mr. Hamm to test whether the April 20 Revised Proposal was the best offer that the Hiland Holdings Conflicts Committee could obtain from Mr. Hamm. The Hiland Holdings Conflicts Committee instructed Barclays Capital to contact Wachovia Securities to pass along the Hiland Holdings Conflicts Committee’s request that the price per common unit offered by Mr. Hamm be increased by a “meaningful amount.” After discussions with Messrs. Griffin and Harrison, Wachovia Securities responded later that day at the direction of Mr. Griffin and requested that the Hiland Holdings Conflicts Committee propose a specific increase.

 

On May 5, 2009, the Hiland Holdings Conflicts Committee met again with Barclays Capital and Fulbright by telephone to discuss the specific amount of the price increase it should request from Mr. Hamm. After deliberating and obtaining the preliminary financial views of Barclays Capital, the Hiland Holdings Conflicts Committee determined that Barclays Capital should contact Wachovia Securities and request that the offer proposed by the Hamm Continuing Investors’ be increased by $0.40 per common unit. The Hiland Holdings Conflicts Committee also discussed with Fulbright issues raised by the Hamm Continuing Investors and Baker Botts in the April 27 draft of the Hiland Holdings merger agreement. Specifically, the Hiland Holdings

Conflicts Committee felt that Fulbright should attempt to limit operational representations and warranties and interim operating covenants of Hiland Holdings in the Hiland Holdings merger agreement, which would limit the ability of Mr. Hamm and his affiliates to terminate or avoid closing the proposed going private transaction.

 

Later that day, representatives of Barclays Capital contacted Wachovia Securities to request, on behalf of the Hiland Holdings Conflicts Committee, that the offer proposed by Mr. Hamm be increased by $0.40 per Hiland Holdings common unit. Wachovia Securities relayed the request to Mr. Hamm, and at his direction contacted Barclays Capital again that afternoon to report that Mr. Hamm would not agree to increase the offer price of $2.40 per Hiland Holdings common unit in the April 20 Revised Proposal.

 

Barclays Capital relayed Mr. Hamm’s refusal to the Hiland Holdings Conflicts Committee in a telephone conference the next morning, May 6, 2009, at which representatives of Fulbright were present. The Hiland Holdings Conflicts Committee members then indicated that they thought that they should personally appeal to Mr. Hamm to increase his offer price so that they could confirm whether the offer price of $2.40 per common unit was the best price that they could obtain from Mr. Hamm.

 

Later that day, following the Hiland Holdings Board of Directors meeting in Enid, Oklahoma, both members of the Hiland Holdings Conflicts Committee met directly with Mr. Hamm to again request that he increase the offered price of $2.40 per Hiland Holdings common unit by $0.40 per common unit. Mr. Hamm agreed to evaluate the Hiland Holdings Conflicts Committee’s request, but on May 8, 2009, at the direction of Mr. Hamm, Wachovia Securities contacted Barclays Capital to report that Mr. Hamm had again rejected the Hiland Holdings Conflicts Committee’s request to increase the offer price. Barclays Capital reported this to the Hiland Holdings Conflicts Committee in a telephone conference later that day. The Hiland Holdings Conflicts Committee determined that it would likely not be productive to seek further price increases from Mr. Hamm, and that Barclays Capital should work to confirm that it could opine as to the fairness to Hiland Holdings public unitholders, from a financial point of view, of the $2.40 per Hiland Holdings common unit offered in the April 20 Revised Proposal. Additionally, the Hiland Holdings Conflicts Committee directed Fulbright to continue negotiations with Baker Botts regarding the Hiland Holdings merger agreement and related documents, and that Fulbright should make efforts to coordinate with Conner & Winters in its negotiations regarding the Hiland Partners merger agreement with Baker Botts and Mr. Hamm.

 

Between May 8, 2009 and May 26, 2009, representatives of Fulbright, on behalf of the Hiland Holdings Conflicts Committee, continued to negotiate the terms of the Hiland Holdings merger agreement with representatives of Baker Botts in accordance with the instructions of the Hiland Holdings Conflicts Committee. Fulbright coordinated directly with Conner & Winters in its negotiations with Baker Botts, periodically discussing the various provisions of the Hiland Holdings merger agreement with Conner & Winters and reviewing and receiving information from Conner & Winters about the status of the Hiland Partners’ draft merger agreement. During this period, Fulbright and Baker Botts participated in several calls and meetings regarding the Hiland Holdings merger agreement and related documents. In particular, the Hiland Holdings Conflicts Committee, in consultation with Fulbright, determined that Fulbright should continue to seek to limit operational representations, warranties and interim operating covenants of Hiland Holdings, as well as to limit the circumstances where Mr. Hamm and his affiliates could terminate the Hiland Holdings merger agreement or refuse to close the Hiland Holdings merger following execution of the Hiland Holdings merger agreement.

 

On May 27, 2009, the Hiland Holdings Conflicts Committee met with Barclays Capital and Fulbright to discuss the status of negotiations on the Hiland Holdings merger agreement and to receive an updated, preliminary presentation from Barclays Capital regarding its analysis of the April 20 Revised Proposal, from a financial point of view. At the meeting, representatives of Fulbright reviewed with the Hiland Holdings Conflicts Committee its obligations and duties under the Hiland Holdings partnership agreement and applicable law. Fulbright also provided the Hiland Holdings Conflicts Committee with a review of the terms of the Hiland Holdings draft merger agreement and related documents. Following Fulbright’s presentation, a representative of Barclays Capital presented the Hiland Holdings Conflicts Committee an update of recent trends in the equity markets and commodity prices and a review of its financial analysis of the April 20 Revised Proposal. In particular, Barclays Capital confirmed its preliminary view that as of the date thereof, the cash merger consideration of $2.40 per common unit of Hiland Holdings was fair, from a financial point of

view, to the Hiland Holdings public unitholders. Barclays Capital also stated in its presentation that, for the same reasons it had indicated in its March 2, 2009 presentation to the Hiland Holdings Conflicts Committee, it did not appear likely that there were alternatives to the April 20 Revised Proposal that were superior, from a financial point of view, to the Hiland Holdings public unitholders.

 

On May 28, 2009, management delivered updated 2009 projections to Barclays Capital, which projections reflected updated 2009 forward strip pricing and lower expected natural gas volumes for 2009 than contained in management’s earlier projections as a result of a continued reduction in the level of drilling activity in Hiland Partners’ areas of operation.

 

On June 1, 2009, the Hiland Holdings Conflicts Committee met again with its advisors. At the meeting, Fulbright confirmed that the terms of the Hiland Holdings merger agreement and related documents had not materially changed since the May 27 meeting of the Hiland Holdings Conflicts Committee. Barclays Capital also briefly updated its financial analysis from the May 27 meeting of the Hiland Holdings Conflicts Committee (based on updated market and company information) and delivered its opinion that the merger consideration of $2.40 per common unit offered to the Hiland Holdings public unitholders pursuant to the Hiland Holdings merger was fair, from a financial point of view, to such holders. After hearing from its advisors, the Hiland Holdings Conflicts Committee resolved unanimously (a) that the Hiland Holdings merger agreement and the Hiland Holdings merger are advisable, fair to, and in the best interests of, Hiland Holdings and the Hiland Holdings public unitholders, (b) to approve and recommend that the Hiland Holdings Board of Directors approve, on behalf of Hiland Holdings (i) the Hiland Holdings merger agreement and related documents, and (ii) the Hiland Holdings merger, (c) to recommend to the Hiland Holdings Board of Directors that it should recommend that the Hiland Holdings public unitholders should approve the Hiland Holdings merger agreement and the Hiland Holdings merger, and (d) to recommend to the Hiland Holdings public unitholders that such public unitholders should approve the Hiland Holdings merger agreement and the Hiland Holdings merger.

 

Approval of the Mergers by the Boards of Directors

 

On June 1, 2009, following the meetings of each Conflicts Committee during which each Conflicts Committees approved the applicable merger agreement and merger and recommended that their respective full Board of Directors approve the applicable merger agreement and merger, each of the Boards of Directors of the Hiland Companies convened a special meeting to consider the recommendation.

 

At the Hiland Partners Board of Directors meeting, Vinson & Elkins again reviewed with the Hiland Partners Board of Directors its duties under the Hiland Partners partnership agreement, and Messrs. Griffin and Harrison provided an update on Hiland Partners’ business. Following the update, Jefferies & Company presented its financial analysis of the $7.75 per common unit merger consideration and summarized its opinion, delivered earlier to the Hiland Partners Conflicts Committee, that the Hiland Partners merger consideration was fair, from a financial point of view, to the Hiland Partners public unitholders. Conner & Winters then reviewed the terms of the Hiland Partners merger agreement and the related agreements. After hearing from its advisors and the members of the Hiland Partners Conflicts Committee and their advisors, the Hiland Partners Board of Directors approved the Hiland Partners merger agreement and the Hiland Partners merger, recommended approval of the Hiland Partners merger agreement and the Hiland Partners merger to the Hiland Partners public unitholders and took other related actions.

 

Following the conclusion of the special meeting of the Hiland Partners Board of Directors, the Hiland Holdings Board of Directors also convened a special meeting. At this meeting, Vinson & Elkins again reviewed with the Hiland Holdings Board of Directors its duties under the Hiland Holdings partnership agreement, and Messrs. Griffin and Harrison provided an update on the Hiland Companies’ business. Following the update, Barclays Capital presented its financial analysis of the $2.40 per common unit merger consideration and summarized its opinion, delivered earlier to the Hiland Holdings Conflicts Committee, that the Hiland Holdings merger consideration was fair, from a financial point of view, to the Hiland Holdings public unitholders. Fulbright then reviewed the terms of the Hiland Holdings merger agreement and the related agreements. After hearing from its advisors and the members of the Hiland Holdings Conflicts Committee and

their advisors, the Hiland Holdings Board of Directors approved the Hiland Holdings merger agreement and the Hiland Holdings merger, recommended approval of the Hiland Holdings merger agreement and the Hiland Holdings merger to the Hiland Holdings public unitholders and took other related actions.

 

On the afternoon of June 1, 2009, Hiland Partners, the general partner of Hiland Partners, Parent and HLND Merger Sub executed the Hiland Partners merger agreement and related documents and Hiland Holdings, the general partner of Hiland Holdings, Parent and HPGP Merger Sub executed the Hiland Holdings merger agreement and the related documents. The Hiland Companies then issued a joint press release announcing the signing of the merger agreements.

 

The Hiland Partners Conflicts Committee

 

The Hiland Partners Conflicts Committee consists of two independent directors: John T. McNabb, II, and Shelby E. Odell. In resolutions approved by the Hiland Partners Board of Directors on February 19, 2009, the Hiland Partners Conflicts Committee was authorized to review, evaluate and make recommendations to the Hiland Partners Board of Directors with respect to Mr. Hamm’s proposed acquisition of the publicly-held Hiland Partners common units and potential alternative transactions. The Hiland Partners Conflicts Committee retained Jefferies & Company as its independent financial advisor and Conner & Winters as its independent legal counsel. The Hiland Partners Conflicts Committee oversaw the performance of financial and legal due diligence by its advisors, conducted an extensive review and evaluation of Mr. Hamm’s proposal and potential alternative transactions and conducted negotiations with Mr. Hamm and his representatives with respect to the Hiland Partners merger agreement and the various other agreements related to the Hiland Partners merger.

 

The Hiland Partners Conflicts Committee, by unanimous vote at a meeting held on June 1, 2009, determined that the Hiland Partners merger agreement and the transactions contemplated by the Hiland Partners merger agreement were advisable, fair to, and in the best interests of, Hiland Partners and the Hiland Partners public unitholders. In addition, at the June 1, 2009 meeting, the Hiland Partners Conflicts Committee recommended that (1) the Hiland Partners Board of Directors approve the Hiland Partners merger agreement and the related agreements, and the consummation of the transactions contemplated thereby, including the Hiland Partners merger and (2) the Hiland Partners public unitholders vote in favor of approval of the Hiland Partners merger agreement and the Hiland Partners merger. In reaching its determination, the Hiland Partners Conflicts Committee consulted with and received the advice of its independent financial and legal advisors, considered the potential alternatives of Hiland Partners, including the uncertainties and risks facing it, and considered the interests of the Hiland Partners public unitholders.

 

In determining that the Hiland Partners merger agreement was advisable, fair to, and in the best interests of, Hiland Partners and the Hiland Partners public unitholders and recommending the approval of the Hiland Partners merger agreement and the related agreements, and the consummation of the transactions contemplated thereby, including the Hiland Partners merger, to the Hiland Partners Board of Directors on June 1, 2009, the Hiland Partners Conflicts Committee considered a number of factors. The material factors are summarized below.

 

The Hiland Partners Conflicts Committee viewed the following factors as being generally positive or favorable in coming to its determination and recommendation:

 

1. The Hiland Partners merger would provide the Hiland Partners public unitholders with cash consideration of $7.75 per common unit, a price the Hiland Partners Conflicts Committee viewed as fair in light of Hiland Partners’ recent and projected financial performance and recent trading prices of the Hiland Partners common units. In making this determination, the Hiland Partners Conflicts Committee concluded that the best alternative was the proposed Hiland Partners merger.

 

2. The opinion received by the Hiland Partners Conflicts Committee from its financial advisor, Jefferies & Company, delivered orally at the Hiland Partners Conflicts Committee meeting on June 1, 2009, and subsequently confirmed in writing later that day, to the effect that, as of the date of the

opinion, the $7.75 per common unit merger consideration to be received by the Hiland Partners public unitholders pursuant to the Hiland Partners merger, was fair, from a financial point of view, to those holders.

 

3. The presentation of Jefferies & Company on June 1, 2009, in connection with the foregoing opinion, which is described under “— Opinion of Financial Advisor of Hiland Partners.”

 

4. The difficult business environment currently facing Hiland Partners, including commodity prices, in particular natural gas prices, and the significant reduction in drilling activity and the resulting negative effect on the financial condition and results of operations of Hiland Partners.

 

5. The Hiland Partners Conflicts Committee’s belief that it was unlikely that any other transaction with a third party involving a sale of the Hiland Companies or a significant interest in the Hiland Companies could be consummated at this time in light of the position of Mr. Hamm (contained in his letter, dated January 15, 2009, to the Hiland Partners Board of Directors and subsequently confirmed to the Hiland Partners Conflicts Committee) that he was interested only in acquiring common units in the Hiland Companies and that he was not interested in selling (or causing his affiliates to sell) interests in the Hiland Companies and the lack of any indications of interest from any third parties since the public announcement of the January 15 Proposal.

 

6. The Hiland Partners Conflicts Committee’s belief that the $7.75 per common unit cash merger consideration represented the highest per common unit consideration that could be negotiated.

 

7. The likelihood that Hiland Partners would be in violation of the leverage ratio covenant under the Hiland Operating Credit Agreement as soon as June 30, 2009. In that regard, the Hiland Partners Conflicts Committee noted that:

 

 

8. The terms of the Hiland Partners commitment letter from Mr. Hamm to Parent to fund the full amount of the HLND Parent Parties’ obligation to pay the merger consideration, including the provision making Hiland Partners a third-party beneficiary under the Hiland Partners commitment letter.

 

9. The terms of the Hiland Partners merger agreement, principally:

 

 

 

The Hiland Partners Conflicts Committee considered the following factors to be generally negative or unfavorable in making its determination and recommendation:

 

1. The Hiland Partners public unitholders will have no ongoing equity participation in Hiland Partners following the Hiland Partners merger, and such unitholders will cease to participate in Hiland Partners’ future earnings or growth, if any, or to benefit from increases, if any, in the value of Hiland Partners’ common units and would not participate in any potential future sale of Hiland Partners to a third party.

 

2. Given that Mr. Hamm (who together with Continental Gas and the Hamm family trusts own a 60.8% limited partner interest in Hiland Holdings, which owns a controlling interest in Hiland Partners) had publicly expressed an interest only in acquiring common units of the Hiland Companies and lack of interest in selling, or causing his affiliates to sell, interests in the Hiland Companies, it would be impracticable to sell the general partner of Hiland Partners or Hiland Partners without his approval. Therefore, no attempt was made to contact third parties that might otherwise consider an acquisition of Hiland Partners. The Hiland Partners Conflicts Committee recognized that it was possible (although not considered to be likely) that a sale process open to all possible bidders might result in a higher sale price than the cash consideration payable in the Hiland Partners merger.

 

3. The Hiland Partners merger agreement’s limitation on Hiland Partners’ ability to solicit third party offers.

 

4. The possibility that the Hamm Continuing Investors could sell some or all of Hiland Partners, as the surviving entity following the Hiland Partners merger, or its assets to one or more purchasers at a valuation higher than that available in the Hiland Partners merger.

 

The foregoing discussion of the information and factors considered by the Hiland Partners Conflicts Committee is not intended to be exhaustive, but includes the material factors considered by the Hiland Partners Conflicts Committee. In view of the variety of factors considered in connection with its evaluation of the Hiland Partners merger, the Hiland Partners Conflicts Committee did not find it practicable to, and did not, quantify or otherwise assign specific weights to the factors considered in reaching its determination and recommendation. In addition, each of the members of the Hiland Partners Conflicts Committee may have given differing weights to different factors. On balance, the Hiland Partners Conflicts Committee believed that the positive factors discussed above outweighed the negative factors discussed above.

The Hiland Partners Conflicts Committee believes that sufficient procedural safeguards were and are present to ensure the fairness of the Hiland Partners merger and to permit the Hiland Partners Conflicts Committee to represent effectively the interests of the Hiland Partners public unitholders, each of which the Hiland Partners Conflicts Committee believes supports its decision and provides assurance of the fairness of the Hiland Partners merger to the Hiland Partners public unitholders. The Hiland Partners Conflicts Committee believes that the process it followed in making its determination and recommendation with respect to the Hiland Partners merger agreement was fair because:

 

1. The Hiland Partners Conflicts Committee consisted solely of directors who are not officers or controlling unitholders of Hiland Partners, or affiliated with Mr. Hamm or any of the Hamm Continuing Investors.

 

2. The members of the Hiland Partners Conflicts Committee were adequately compensated for their services and their compensation was in no way contingent on their approving the Hiland Partners merger agreement or the Hiland Partners merger.

 

3. Other than by the immediate vesting of any restricted common units issued and outstanding to non-employee directors of Hiland Partners pursuant to the Hiland Partners, LP Long-Term Incentive Plan immediately prior to the effective time of the Hiland Partners merger, the members of the Hiland Partners Conflicts Committee will not personally benefit from the completion of the Hiland Partners merger in a manner different from the Hiland Partners public unitholders.

 

4. The Hiland Partners Conflicts Committee retained and was advised by independent legal counsel, Conner & Winters, and an independent financial advisor, Jefferies & Company.

 

5. From the date that the January 15 Proposal was announced to the time of the Hiland Partners Conflicts Committee’s determination and recommendations, no third parties indicated any interest in pursuing a transaction with Hiland Partners or Hiland Holdings.

 

6. The Hiland Partners Conflicts Committee and its legal counsel and financial advisor conducted due diligence regarding the Hiland Companies and their prospects and considered all viable alternatives for Hiland Partners in addition to the proposed Hiland Partners merger agreement.

 

7. The Hiland Partners Conflicts Committee received the opinion of Jefferies & Company that, as of June 1, 2009, and based on and subject to the factors and assumptions set forth in the opinion, the merger consideration to be received by the Hiland Partners public unitholders pursuant to the Hiland Partners merger agreement was fair, from a financial point of view, to such holders.

 

8. The Hiland Partners Conflicts Committee had the ultimate authority to decide whether or not to proceed with the proposed transaction or any alternatives, and the Hiland Partners Board of Directors resolved not to recommend, authorize, approve or endorse the January 15 Proposal or any other merger, acquisition or similar proposal involving Hiland Partners and the Hamm Continuing Investors or any of their affiliates unless such transaction was recommended to the Hiland Partners Board of Directors by the Hiland Partners Conflicts Committee.

 

9. The requirement that the Hiland Partners merger agreement and the Hiland Partners merger be approved by holders of a majority of the Hiland Partners common units held by Hiland Partners public unitholders entitled to vote thereon voting as a class.

 

10. The Hiland Partners Conflicts Committee, with the assistance of its legal and financial advisors, negotiated the terms of the Hiland Partners merger agreement on an arm’s-length basis with Mr. Hamm and his legal and financial advisors.

 

11. The Hiland Partners Conflicts Committee was aware that it had no obligation to recommend any transaction, including the proposal put forth by Mr. Hamm.

 

The Hiland Partners Conflicts Committee did not consider liquidation value in determining the fairness of the Hiland Partners merger to the Hiland Partners public unitholders because of its belief, after consulting with its financial advisor, that liquidation value does not present a meaningful valuation for Hiland Partners and its

business as Hiland Partners’ value is derived from the cash flows generated from its continuing operations rather than from the value of assets that might be realized in a liquidation.

 

The Hiland Partners Conflicts Committee also did not consider net book value in determining the fairness of the merger to the Hiland Partners public unitholders because of its belief, after consulting with its financial advisor, that net book value does not present a meaningful valuation metric for Hiland Partners and its business as Hiland Partners’ value is derived from the cash flows generated from its continuing operations.

 

The Hiland Partners Board of Directors

 

The Hiland Partners Board of Directors consists of eight directors: Harold Hamm, Joseph L. Griffin, Matthew S. Harrison, Edward D. Doherty, Michael L. Greenwood, John T. McNabb, II, Shelby E. Odell, and Rayford T. Reid. When the Hiland Partners Board of Directors received the January 15 Proposal, Dr. David L. Boren was also a member of the Hiland Partners Board of Directors. Mr. Boren subsequently resigned on March 13, 2009.

 

The directors of Hiland Partners have different interests in the Hiland Partners merger than the Hiland Partners public unitholders, generally. In particular:

 

 

 

For a complete discussion of these and other interests of the members of the Hiland Partners Board of Directors in the Hiland Partners merger, see “Special Factors — Interests of Certain Persons in the Mergers.”

 

Because of such actual and potential conflicts, the Hiland Partners Board of Directors authorized the Hiland Partners Conflicts Committee to review, evaluate and make recommendations to the Hiland Partners Board of Directors and the Hiland Partners public unitholders regarding Mr. Hamm’s proposal and any potential alternatives thereto. On June 1, 2009, the Hiland Partners Board of Directors met to consider the report and recommendation of the Hiland Partners Conflicts Committee. On the basis of the Hiland Partners Conflicts Committee’s recommendation and the other factors described below, each of the six members of the Hiland Partners Board of Directors participating in the meeting unanimously (1) determined that the Hiland Partners merger agreement and the transactions contemplated by the Hiland Partners merger agreement, including the Hiland Partners merger, were advisable, fair to, and in the best interests of, Hiland Partners and Hiland Partners public unitholders and (2) recommended that the Hiland Partners public unitholders vote to approve the Hiland Partners merger agreement and the Hiland Partners merger.

 

Neither of Messrs. Hamm nor Reid participated in the Hiland Partners Board of Directors’ consideration or vote on these matters. Mr. Hamm did not feel his participation was appropriate given that the Hiland Partners Board of Directors was evaluating his offer to acquire Hiland Partners. Mr. Reid did not feel participation was appropriate given his professional relationship with Mr. Hamm, through which he has historically provided Mr. Hamm and the Hamm family trusts with financial advisory services, including in connection with evaluating strategic alternatives with respect to the Hiland Companies.

 

Because Messrs. Hamm and Reid abstained from voting on the Hiland Partners merger agreement and the Hiland Partners merger, only four of the six non-employee members of the Hiland Partners Board of Directors voted to approve the Hiland Partners merger agreement and the Hiland Partners merger.

 

In determining that the Hiland Partners merger agreement is advisable, fair to, and in the best interests of, Hiland Partners and the Hiland Partners public unitholders and approving the Hiland Partners merger agreement and the transactions contemplated by the Hiland Partners merger agreement, including the Hiland Partners merger, and recommending that the Hiland Partners public unitholders vote for the approval of the Hiland Partners merger agreement and the Hiland Partners merger, the Hiland Partners Board of Directors considered a number of factors, including the following material factors:

 

 

 

In doing so, the Hiland Partners Board of Directors expressly adopted the analysis of the Hiland Partners Conflicts Committee, which is discussed above.

 

The foregoing discussion of the information and factors considered by the Hiland Partners Board of Directors includes the material factors considered by the Hiland Partners Board of Directors. In view of the variety of factors considered in connection with its evaluation of the Hiland Partners merger, the Hiland Partners Board of Directors did not find it practicable to, and did not, quantify or otherwise assign relative weights to the specific factors considered in reaching its determination and recommendation. In addition, individual directors may have given different weights to different factors. The Hiland Partners Board of Directors approved and recommends the Hiland Partners merger agreement and the Hiland Partners merger based upon the totality of the information presented to and considered by it.

 

The Hiland Partners Board of Directors did not consider liquidation value in determining the fairness of the Hiland Partners merger to the Hiland Partners public unitholders because of its belief, after considering the factors considered by the Hiland Partners Conflicts Committee, that liquidation value does not present a meaningful valuation for Hiland Partners and its business as Hiland Partners’ value is derived from the cash flows generated from its continuing operations rather than from the value of assets that might be realized in a liquidation.

 

The Hiland Partners Board of Directors also did not consider net book value in determining the fairness of the merger to the Hiland Partners public unitholders because of its belief, after considering the factors considered by the Hiland Partners Conflicts Committee, that net book value does not present a meaningful valuation metric for Hiland Partners and its business as Hiland Partners’ value is derived from the cash flows generated from its continuing operations.

 

The Hiland Partners Board of Directors believes that the Hiland Partners merger is procedurally fair because (1) of the independence, absence of conflicts of interest and role and actions of the Hiland Partners Conflicts Committee members (permitting them to represent effectively the interests of the Hiland Partners public unitholders), (2) of the approval of the Hiland Partners merger agreement by a majority of the directors who are not employees of Hiland Partners and (3) the terms of the Hiland Partners merger agreement require the approval of a majority of the publicly-held Hiland Partners common units. The Hiland Partners Board of Directors believes that each of these procedural safeguards supports its decision and provides assurance of the fairness of the Hiland Partners merger to the Hiland Partners public unitholders.

 

Jefferies & Company was engaged to render an opinion to the Hiland Partners Conflicts Committee as to whether the merger consideration of $7.75 in cash per common unit to be received by the Hiland Partners public unitholders pursuant to the Hiland Partners merger agreement was fair, from a financial point of view, to such holders. On June 1, 2009, Jefferies & Company delivered to the Hiland Partners Conflicts Committee its oral opinion, subsequently confirmed in writing, that, as of the date of its opinion, based upon and subject to the assumptions, limitations, qualifications and factors contained in its opinion, the merger consideration to be received by the Hiland Partners public unitholders pursuant to the Hiland Partners merger agreement was fair, from a financial point of view, to such holders. The June 1, 2009 opinion of Jefferies & Company is referred to hereinafter in this “Opinion of Jefferies & Company, Inc.” section as the “opinion.”

The full text of the opinion is attached as Annex C to this joint proxy statement and incorporated into this joint proxy statement by reference. We urge you to read the opinion in its entirety for the assumptions made, procedures followed, other matters considered and limits of the review undertaken in arriving at the opinion.

 

The opinion is for the use and benefit of the general partner of Hiland Partners and the Hiland Partners Conflicts Committee in their consideration of the Hiland Partners merger. The opinion does not address the relative merits of the transactions contemplated by the Hiland Partners merger agreement as compared to any alternative transaction or opportunity that might be available to Hiland Partners, nor does it address the underlying business decision by Hiland Partners to engage in the Hiland Partners merger or the terms of the Hiland Partners merger agreement or the documents referred to therein. The opinion does not constitute a recommendation as to whether any holder of common units should vote on the Hiland Partners merger or any matter related thereto. In addition, the Hiland Partners Conflicts Committee did not ask Jefferies & Company to address, and the opinion does not address, the fairness to, or any other consideration of, the holders of any class of securities, creditors or other constituencies of Hiland Partners, other than the holders of common units of Hiland Partners. Jefferies & Company expresses no opinion as to the price at which common units will trade at any time. Furthermore, Jefferies & Company does not express any view or opinion as to the fairness, financial or otherwise, of the amount or nature of any compensation payable to or to be received by, any of Hiland Partners’ officers, directors or employees, or any such class of such persons, in connection with the Hiland Partners merger agreement relative to the merger consideration to be received by holders of common units. The opinion has been authorized by a Fairness Committee of Jefferies & Company.

 

In arriving at its opinion, Jefferies & Company has, among other things:

 

(i) reviewed a draft of the Hiland Partners merger agreement dated May 28, 2009;

 

(ii) reviewed certain publicly available financial and other information about Hiland Partners;

 

(iii) reviewed certain information furnished by Hiland Partners’ management, including financial forecasts and analyses, relating to the business, operations and prospects of Hiland Partners;

 

(iv) held discussions with members of senior management of Hiland Partners concerning the matters described in clauses (ii) and (iii) above;

 

(v) reviewed the trading price history and valuation multiples for the common units and compared them with those of certain publicly traded entities that Jefferies & Company deemed relevant;

 

(vi) compared the proposed financial terms of the Hiland Partners merger under the Hiland Partners merger agreement with the financial terms of certain other transactions that Jefferies & Company deemed relevant; and

 

(vii) conducted such other financial studies, analyses and investigations as Jefferies & Company deemed appropriate.

 

In Jefferies & Company’s review and analysis and in rendering its opinion, Jefferies & Company assumed and relied upon, but did not assume any responsibility to independently investigate or verify, the accuracy and completeness of all financial and other information that was supplied or otherwise made available to Jefferies & Company or that was publicly available (including, without limitation, the information described above), or that was otherwise reviewed by Jefferies & Company. In Jefferies & Company’s review, Jefferies & Company did not obtain any independent evaluation or appraisal of any of the assets or liabilities, nor did Jefferies & Company conduct a physical inspection of any of the properties or facilities, of Hiland Partners, nor was Jefferies & Company furnished with any such evaluations or appraisals of such physical inspections, nor does Jefferies & Company have any responsibility to obtain any such evaluations or appraisals.

 

With respect to the financial forecasts provided to and examined by Jefferies & Company, Jefferies & Company notes that projecting future results of any company is inherently subject to uncertainty. Hiland Partners informed Jefferies & Company, however, and Jefferies & Company assumed, that such financial forecasts were reasonably prepared on bases reflecting the best currently available estimates and good faith

judgments of the management of Hiland Partners as to the future financial performance of Hiland Partners. Jefferies & Company expresses no opinion as to any such financial forecasts or the assumptions on which they were made.

 

Jefferies & Company’s opinion was based on economic, monetary, regulatory, market and other conditions existing and that could be evaluated as of the date of its opinion. Jefferies & Company has no obligation to advise any person of any change in any fact or matter affecting its opinion of which Jefferies & Company may have become aware after the date of its opinion.

 

Jefferies & Company made no independent investigation of any legal or accounting matters affecting Hiland Partners, and Jefferies & Company assumed the correctness in all respects material to its analysis of all legal and accounting advice given to Hiland Partners and the Hiland Partners Board of Directors, including, without limitation, advice as to the legal, accounting and tax consequences of the terms of, and transactions contemplated by, the Hiland Partners merger agreement to Hiland Partners and the holders of Hiland Partners common units. In addition, in preparing its opinion, Jefferies & Company did not take into account any tax consequences of the transaction to any holder of Hiland Partners common units. Jefferies & Company assumed that the final form of the Hiland Partners merger agreement would be substantially similar to the draft, dated May 28, 2009, reviewed by Jefferies & Company. Jefferies & Company also assumed that, in the course of obtaining the necessary regulatory or third party approvals, consents and releases for the Hiland Partners merger, no delay, limitation, restriction or condition would be imposed that would have an adverse effect on Hiland Partners, Parent or the contemplated benefits of the Hiland Partners merger in any way meaningful to Jefferies & Company’s analysis.

 

The following is a brief summary of the analyses performed by Jefferies & Company in connection with its opinion. This summary is not intended to be an exhaustive description of the analyses performed by Jefferies & Company but includes all material factors considered by Jefferies & Company in rendering its opinion. Jefferies & Company drew no specific conclusions from any individual analysis, but subjectively factored its observations from all of these analyses into its qualitative assessment of the merger consideration. Each analysis performed by Jefferies & Company is a common methodology utilized in determining valuations. Although other valuation techniques may exist, Jefferies & Company believes that the analyses described below, when taken as a whole, provide the most appropriate analyses for Jefferies & Company to arrive at its opinion.

 

Comparable Public Company Analysis

 

Jefferies & Company utilized comparable public company analysis, which values a target company by reference to publicly-traded companies with similar products, similar operating and financial characteristics and similar service markets. Jefferies & Company reviewed and compared selected financial data for eleven publicly traded companies in the energy industry. Five of the companies chosen derived more than 50% of their estimated 2009 cash flow from fee-based contracts, and six of the companies chosen derived more than 50% of their estimated 2009 cash flow from non fee-based contracts, although Copano Energy, L.L.C. was excluded from trimmed mean calculations due to its significant hedge positions that reduce sensitivity to commodity prices over the next three years. Hiland Partners has a high percentage of its contract mix tied to non-fee based revenue streams, which are sensitive to commodity prices. The comparable companies chosen by Jefferies & Company included:

 

Fee-Based

 

 

Non Fee-Based

 

 

For each of the comparable companies, Jefferies & Company calculated the total enterprise value as a multiple of (i) that company’s revenue for the noted last twelve month (“LTM”) periods; (ii) that company’s projected revenue, to the extent available, for the year ending December 31, 2009, as reflected in certain First Call estimates; (iii) that company’s projected revenue, to the extent available, for the year ending December 31, 2010, as reflected in certain First Call estimates; (iv) that company’s estimated EBITDA for the noted LTM periods; (v) that company’s EBITDA, to the extent available, for the year ending December 31, 2009, as reflected in certain First Call estimates; and (vi) that company’s estimated EBITDA, to the extent available, for the year ending December 31, 2010, as reflected in certain First Call estimates. Total enterprise value (“TEV”) was calculated as equity market value, plus net debt, all as of May 28, 2009. Net debt equals total debt plus minority interest less cash and cash equivalents. Jefferies & Company then calculated each company’s distributable cash yield using (a) that company’s most recent declared distribution, annualized, divided by that company’s unit price as of May 28, 2009, (b) that company’s estimated distributable cash, to the extent available, for the year ending December 31, 2009, as reflected in certain First Call estimates and dividing by that company’s unit price as of May 28, 2009, and (c) that company’s estimated distributable cash, to the extent available, for the year ending December 31, 2010, as reflected in certain first call estimates and dividing by that company’s unit price as of May 28, 2009.

 

Utilizing the most representative multiple range within the comparable public company set, Jefferies & Company then calculated a range of implied values per common unit based on (i) Hiland Partners’ LTM EBITDA; (ii) Hiland Partners’ projected EBITDA for the year ending December 31, 2009, based on Hiland Partners management’s estimates, where the estimated downside projected EBITDA assumed inlet natural gas volumes were risked at 95%; and (iii) Hiland Partners’ projected EBITDA for the year ending December 31, 2010, based on Hiland Partners management’s estimates, where the estimated downside projected EBITDA assumed inlet natural gas volumes were risked at 95%. Jefferies & Company then calculated a range of implied values per common unit by dividing (i) Hiland Partners’ current distributable cash; (ii) Hiland Partners’ projected distributable cash for the year ending December 31, 2009, based on Hiland Partners management’s estimates; and (iii) Hiland Partners’ projected distributable cash for the year ending December 31, 2010, based on Hiland Partners management’s estimates, in each case, by the most representative range of distributable cash yields within the comparable public company set. The resulting ranges of implied values per common unit are set forth in the table below:

 

 

 

 

Jefferies & Company then compared the ranges of implied values per common unit against (i) the Hiland Partners closing unit price of $5.40 per unit on May 28, 2009; and (ii) the merger consideration of $7.75 per unit to be received by the Hiland Partners public unitholders.

 

No company utilized in the comparable public company analysis is identical to Hiland Partners. Jefferies & Company made judgments and assumptions with regard to industry performance, general business, economic, market and financial conditions and other matters, many of which are beyond the control of Hiland Partners. Mathematical analysis of comparable public companies in isolation from other analyses is not an effective method of evaluating transactions.

 

Premiums Paid Analysis

 

Jefferies & Company utilized a premiums paid analysis, a method of valuing a target business by analyzing the premiums paid in selected merger and acquisition transactions. Using publicly available information, Jefferies & Company conducted a premiums paid analysis of 19 change of control transactions involving target companies in the energy industry announced since April 7, 2004.

 

For each of the target companies involved in the 19 transactions, Jefferies & Company examined the closing unit price one trading day prior to announcement of the initial offer in connection with each transaction in order to calculate the high and low premiums paid by the acquiror over the target company’s closing unit price at such point in time. Jefferies & Company then compared those premiums to (i) the premium implied by the January 15 Proposal of $9.50 per common unit of Hiland Partners over Hiland Partners’ common unit price on one trading day prior to the announcement of the January 15 Proposal ($7.90), and (ii) the $7.75 proposed merger consideration over Hiland Partners’ common unit price on one trading day prior to the announcement of the revised offer of $7.75 per common unit of Hiland Partners ($8.18). Jefferies & Company believed that this method was less illustrative of value because of the significant deterioration in Hiland Partners’ operations since the date of the January 15 Proposal. A summary of the premiums observed in the premiums paid analysis is set forth in the table below:

 

 

Discounted Cash Flow Analysis

 

Jefferies & Company utilized discounted cash flow analysis, which values a company as the sum of its unlevered (before financing costs) free cash flows over a forecast period and the company’s terminal or residual value at the end of the forecast period. Jefferies & Company examined the value of Hiland Partners based on projected free cash flow estimates, which were generated utilizing financial projections from April 1, 2009 through December 31, 2013. Those internal financial projections were prepared by Hiland Partners’ management and were approved for Jefferies & Company’s use by the Hiland Partners Conflict Committee. As instructed by Hiland Partners, Jefferies & Company considered the risks and uncertainties of achieving the

Hiland Partners forecasts and the possibility that the Hiland Partners forecasts will not be realized. Accordingly, Jefferies & Company performed a sensitivity analysis to illustrate the effect of different assumptions for changes in projected annual revenue growth and projected annual EBITDA margins from the Hiland Partners’ management forecasts.

 

Jefferies & Company ascribed EBITDA exit multiples, which ranged from 7.5x to 8.5x, to the projected EBITDA for the LTM ending December 31, 2013, giving effect to Jefferies & Company’s sensitivity analysis. Jefferies & Company calculated a range of discount factors of 18.0% — 20.0% based on the Capital Asset Pricing Model using the average levered beta of the comparable public companies listed in the “Comparable Public Company Analysis” section. Based on those ranges of EBITDA exit multiples and discount rates, Jefferies & Company calculated the implied equity price per common unit value ranging from $0.00 to $2.35. Jefferies & Company then compared the implied equity prices per common unit values against the $7.75 per common unit in cash to be received in the Hiland Partners merger.

 

While discounted cash flow analysis is a widely accepted and practiced valuation methodology, it relies on a number of assumptions, including growth rates and discount rates. The valuation derived from the discounted cash flow analysis is not necessarily indicative of Hiland Partners’ present or future value or results. Discounted cash flow analysis in isolation from other analyses is not an effective method of evaluating transactions.

 

Conclusion

 

The preparation of a fairness opinion is a complex process and is not necessarily susceptible to partial analysis or summary description. In arriving at its opinion, Jefferies & Company considered the results of all of its analyses as a whole and did not attribute any particular weight to any analysis or factor considered by it. Furthermore, Jefferies & Company believes that selecting any portion of its analysis, without considering all analyses, would create an incomplete view of the process underlying its opinion. In performing its analyses, Jefferies & Company made numerous assumptions with respect to industry performance and general business and economic conditions and other matters, many of which are beyond the control of Hiland Partners. The analyses performed by Jefferies & Company are not necessarily indicative of actual values or actual future results, which may be significantly more or less favorable than suggested by such analyses. Jefferies & Company did not recommend any specific consideration to the Hiland Partners Conflicts Committee or that any specific consideration constituted the only appropriate consideration with respect to the Hiland Partners merger agreement and the transactions contemplated thereby, including the Hiland Partners merger. A copy of the presentation materials presented by Jefferies & Company to the Hiland Partners Conflicts Committee in connection with the delivery of its opinion has been filed with the SEC as an exhibit to the Schedule 13E-3 filed by Hiland Partners.

 

Miscellaneous

 

Jefferies & Company may seek, in the future, to provide financial advisory and financing services to Hiland Partners, the general partner of Hiland Partners or entities that are affiliated with Hiland Partners or its general partner, for which Jefferies & Company would expect to receive compensation.

 

Jefferies & Company was engaged by the Hiland Partners Conflicts Committee in connection with the delivery of the opinion and is entitled to a fee of $550,000 for its services from Hiland Partners, a portion of which was payable prior to the delivery of the opinion and the remainder of which was payable upon the delivery of the opinion. Jefferies & Company also will be reimbursed for expenses incurred. Hiland Partners has agreed to indemnify Jefferies & Company against liabilities arising out of or in connection with the services rendered and to be rendered by Jefferies & Company under such engagement.

 

In the ordinary course of its business, Jefferies & Company and its affiliates maintain a market in the securities of Hiland Partners and may trade or hold securities of Hiland Partners and/or its affiliates for Jefferies & Company and its affiliates’ own accounts and for accounts of their customers and, accordingly, may, at any time hold long or short positions in those securities.

 

Under SEC rules, Parent, HLND Merger Sub, Hiland Holdings, the general partner of Hiland Holdings, and Messrs. Hamm, Griffin and Harrison (collectively the “HLND Schedule 13E-3 Filing Persons”) are required to provide certain information regarding their position as to the substantive and procedural fairness of the Hiland Partners merger to the Hiland Partners public unitholders. The HLND Schedule 13E-3 Filing Persons are making the statements included in this section solely for purposes of complying with such requirements. The HLND Schedule 13E-3 Filing Persons’ views as to the fairness of the Hiland Partners merger should not be construed as a recommendation to any unitholder as to how that unitholder should vote on the proposals to approve the Hiland Partners merger agreement and the Hiland Partners merger.

 

The HLND Schedule 13E-3 Filing Persons, other than Messrs. Griffin and Harrison, did not participate in the deliberations of the Hiland Partners Board of Directors or the Hiland Partners Conflicts Committee regarding, and did not receive advice from the Hiland Partners Conflicts Committee’s legal or financial advisors as to, the fairness of the Hiland Partners merger. Mr. Hamm engaged Wachovia Securities as his financial advisor to provide certain financial advisory services with respect to a potential acquisition by Mr. Hamm and/or certain of his affiliates of the assets or capital stock of the Hiland Companies. Wachovia Securities did not provide an opinion with respect to the fairness of the Hiland Partners merger or the Hiland Partners merger consideration.

 

The discussion below of the information and factors considered by the HLND Schedule 13E-3 Filing Persons is not intended to be exhaustive, but includes the material factors considered by the HLND Schedule 13E-3 Filing Persons. In view of the variety of factors considered in connection with their evaluation of the fairness of Hiland Partners merger, the HLND Schedule 13E-3 Filing Persons did not find it practicable to, and did not, quantify or otherwise assign specific weights to the factors considered in reaching their determination. In addition, each of the HLND Schedule 13E-3 Filing Persons may have given differing weights to different factors. On balance, the HLND Schedule 13E-3 Filing Persons believed that the positive factors discussed above outweighed the negative factors discussed above and arrived at the conclusion that the Hiland Partners merger was fair to the Hiland Partners public unitholders.

 

The HLND Schedule 13E-3 Filing Persons, other than Messrs. Griffin and Harrison, believe that the Hiland Partners merger consideration is substantively fair to the Hiland Partners public unitholders based on the following factors:

 

 

 

The HLND Schedule 13E-3 Filing Persons, other than Messrs. Griffin and Harrison, believe that the Hiland Partners merger is procedurally fair to the Hiland Partners public unitholders based on the following factors:

 

 

 

Messrs. Griffin and Harrison believe that the Hiland Partners merger is both substantively and procedurally fair to the Hiland Partners public unitholders based on the factors described in “— Recommendation of the Hiland Partners Conflicts Committee and the Hiland Partners Board of Directors; Reasons for Recommending Approval of the Merger — The Hiland Partners Board of Directors” beginning on page 57.

 

The Hiland Holdings Conflicts Committee

 

The Hiland Holdings Conflicts Committee consists of two independent directors: Dr. Bobby B. Lyle and Dr. Cheryl L. Evans. In resolutions approved by the Hiland Holdings Board of Directors on February 19, 2009, the Hiland Holdings Conflicts Committee was authorized to review, evaluate and make recommendations to the Hiland Holdings Board of Directors with respect to Mr. Hamm’s proposed acquisition of the publicly-held Hiland Holdings common units and potential alternative transactions. The Hiland Holdings Conflicts Committee retained Barclays Capital as its independent financial advisor, Fulbright as its independent legal counsel and Morris Nichols as its independent special Delaware legal counsel. The Hiland Holdings Conflicts Committee oversaw the performance of financial and legal due diligence by its advisors, conducted an extensive review and evaluation of Mr. Hamm’s proposal and potential alternative transactions and conducted negotiations with Mr. Hamm and their representatives with respect to the Hiland Holdings merger agreement and the various other agreements related to the Hiland Holdings merger.

 

The Hiland Holdings Conflicts Committee, by unanimous vote at a meeting held on June 1, 2009, determined that the Hiland Holdings merger agreement and the transactions contemplated by the Hiland Holdings merger agreement were advisable, fair to, and in the best interests of, Hiland Holdings and the Hiland Holdings public unitholders. In addition, at the June 1, 2009 meeting, the Hiland Holdings Conflicts Committee recommended that (1) the Hiland Holdings Board of Directors approve the Hiland Holdings merger agreement and the related agreements, and the consummation of the transactions contemplated thereby, including the Hiland Holdings merger and (2) the Hiland Holdings public unitholders vote in favor of approval of the Hiland Holdings merger agreement and the Hiland Holdings merger. In reaching its determination, the Hiland Holdings Conflicts Committee consulted with and received the advice of its independent financial and legal advisors, considered the potential alternatives of Hiland Holdings, including the uncertainties and risks facing it, and considered the interests of the Hiland Holdings public unitholders.

 

In determining that the Hiland Holdings merger agreement was advisable, fair to, and in the best interests of, Hiland Holdings and the Hiland Holdings public unitholders and recommending the approval of the Hiland Holdings merger agreement and the related agreements, and the consummation of the transactions contemplated thereby, including the Hiland Holdings merger, to the Hiland Holdings Board of Directors on June 1, 2009, the Hiland Holdings Conflicts Committee considered a number of factors. The material factors are summarized below.

 

The Hiland Holdings Conflicts Committee viewed the following factors as being generally positive or favorable in coming to its determination and recommendation:

 

1. The Hiland Holdings merger would provide the Hiland Holdings public unitholders with cash consideration of $2.40 per common unit, a price the Hiland Holdings Conflicts Committee viewed as fair in light of recent and projected financial performance of Hiland Holdings and recent trading prices of the Hiland Holdings common units. In making this determination, the Hiland Holdings Conflicts Committee also considered that Hiland Holdings’ only cash flowing assets are its partnership interests in Hiland Partners, consisting of 2,321,471 common units, 3,060,000 subordinated units, the 2% general partner interest and all the incentive distribution rights, and, moreover, that on April 27, 2009 Hiland Partners

announced the suspension of quarterly distributions on the common units and subordinated units beginning with the first quarter of 2009. The Hiland Holdings Conflicts Committee also considered the following related facts:

 

 

2. The opinion received by the Hiland Holdings Conflicts Committee from its financial advisor, Barclays Capital, delivered orally at the Hiland Holdings Conflicts Committee meeting on June 1, 2009, and subsequently confirmed in writing later that day, to the effect that as of the date of the opinion, the $2.40 per common unit cash merger consideration to be received by the Hiland Holdings public unitholders, pursuant to the Hiland Holdings merger, was fair, from a financial point of view, to those holders.

 

3. The presentation of Barclays Capital on June 1, 2009, in connection with the foregoing opinion, which is described under “— Opinion of Financial Advisor of Hiland Holdings.”

 

4. The difficult business environment currently facing the Hiland Companies, including commodity prices, in particular natural gas prices, and the significant reduction in drilling activity and the resulting negative effect on the financial condition and results of operations of the Hiland Companies.

 

5. The Hiland Holdings Conflicts Committee’s belief that there were no alternatives to the April 20 Revised Proposal that would likely be viable or financially superior to the Hiland Holdings public unitholders. In that regard, the Hiland Holdings Conflicts Committee noted that:

 

 

 

6. The Hiland Holdings Conflicts Committee’s belief that the $2.40 per common unit cash merger consideration represented the highest per common unit consideration that could be negotiated.

 

7. The terms of the Hiland Holdings commitment letter from Mr. Hamm to Parent to fund the full amount of the HPGP Parent Parties’ obligation to pay the merger consideration, including the provision making the Holdings Parties third-party beneficiaries under the Hiland Holdings commitment letter.

 

8. The terms of the Hiland Holdings merger agreement, principally:

 

 

 

The Hiland Holdings Conflicts Committee considered the following factors to be generally negative or unfavorable in making its determination and recommendation:

 

1. The Hiland Holdings public unitholders will have no ongoing equity participation in Hiland Holdings following the Hiland Holdings merger, and such unitholders will cease to participate in Hiland Holdings’ future earnings or growth, if any, or benefit from increases, if any, in the value of Hiland Holdings’ common units and would not participate in any potential future sale of Hiland Holdings to a third party.

 

2. Given that Mr. Hamm (who together with Continental Gas and the Hamm family trusts own a 60.8% limited partner interest in Hiland Holdings) had publicly expressed an interest only in acquiring common units of the Hiland Companies and no interest in selling, or causing his affiliates to sell, interests in the Hiland Companies, it would be impracticable to sell the general partner of Hiland Partners or Hiland Partners without his approval. Therefore no attempt was made to contact, third parties that might otherwise consider an acquisition of Hiland Holdings. The Hiland Holdings Conflicts Committee recognized that it was possible (although did not consider it to be likely) that a sale process open to all possible bidders might result in a higher sale price than the cash consideration payable in the Hiland Holdings merger.

 

3. The Hiland Holdings merger agreement’s limitation on Hiland Holdings’ ability to solicit third party offers.

 

4. The possibility that the Hamm Continuing Investors could sell some or all of Hiland Holdings, as the surviving entity following the Hiland Holdings merger, or its assets to one or more purchasers at a valuation higher than that available in the Hiland Holdings merger.

 

The foregoing discussion of the information and factors considered by the Hiland Holdings Conflicts Committee is not intended to be exhaustive, but includes the material factors considered by the Hiland Holdings Conflicts Committee. In view of the variety of factors considered in connection with its evaluation of the Hiland Holdings merger, the Hiland Holdings Conflicts Committee did not find it practicable to, and did not, quantify or otherwise assign specific weights to the factors considered in reaching its determination and recommendation. In addition, each of the members of the Hiland Holdings Conflicts Committee may have given differing weights to different factors. On balance, the Hiland Holdings Conflicts Committee believed that the positive factors discussed above outweighed the negative factors discussed above.

 

The Hiland Holdings Conflicts Committee believes that sufficient procedural safeguards were and are present to ensure the fairness of the Hiland Holdings merger and to permit the Hiland Holdings Conflicts Committee to represent effectively the interests of the Hiland Holdings public unitholders, each of which the Hiland Holdings Conflicts Committee believes supports its decision and provides assurance of the fairness of the Hiland Holdings merger to the Hiland Holdings public unitholders. The Hiland Holdings Conflicts

Committee believes that the process it followed in making its determination and recommendation with respect to the Hiland Holdings merger agreement was fair because:

 

1. The Hiland Holdings Conflicts Committee consisted solely of directors who are not officers or controlling unitholders of Hiland Holdings, or affiliated with Mr. Hamm or any of the Hamm Continuing Investors.

 

2. The members of the Hiland Holdings Conflicts Committee were adequately compensated for their services and their compensation was in no way contingent on their approving the Hiland Holdings merger agreement or the Hiland Holdings merger.

 

3. Other than by the immediate vesting of any restricted common units issued and outstanding to non-employee directors of Hiland Holdings pursuant to the Hiland Holdings GP, LP Long-Term Incentive Plan immediately prior to the effective time of the Hiland Holdings merger, the members of the Hiland Holdings Conflicts Committee will not personally benefit from the completion of the Hiland Holdings merger in a manner different from the Hiland Holdings public unitholders.

 

4. The Hiland Holdings Conflicts Committee retained and was advised by independent legal counsel, Fulbright and Morris Nichols, and an independent financial advisor, Barclays Capital.

 

5. Barclays Capital’s right to receive its advisory fee was not contingent upon it delivering a favorable opinion.

 

6. From the date that the January 15 Proposal was announced to the time of the Hiland Holdings Conflicts Committee’s determination and recommendations, no third parties indicated any interest in pursuing a transaction with Hiland Holdings or Hiland Partners.

 

7. The Hiland Holdings Conflicts Committee and its legal counsel and financial advisor conducted due diligence regarding the Hiland Companies and their prospects and considered all viable alternatives for Hiland Holdings in addition to the proposed Hiland Holdings merger agreement.

 

8. The Hiland Holdings Conflicts Committee received the opinion of Barclays Capital that, as of June 1, 2009, and based on and subject to the factors and assumptions set forth in the opinion, the merger consideration to be offered to the Hiland Holdings public unitholders in the Hiland Holdings merger was fair to such unitholders, from a financial point of view.

 

9. The requirement that the Hiland Holdings merger agreement and the Hiland Holdings merger must be approved by holders of a majority of the Hiland Holdings common units held by Hiland Holdings public unitholders entitled to vote thereon voting as a class.

 

10. The Hiland Holdings Conflicts Committee was involved in extensive deliberations over a period of approximately three months regarding both the January 15 Proposal and the April 20 Revised Proposal.

 

11. The Hiland Holdings Conflicts Committee, with the assistance of its legal and financial advisors, negotiated the terms of the Hiland Holdings merger agreement on an arm’s-length basis with Mr. Hamm and his legal and financial advisors.

 

12. The Hiland Holdings Conflicts Committee had the ultimate authority to decide whether or not to proceed with the proposed transaction or any alternatives, and the Hiland Holdings Board of Directors resolved not to recommend, authorize, approve or endorse the January 15 Proposal or any other merger, acquisition or similar proposal involving Hiland Holdings and the Hamm Continuing Investors or any of their affiliates unless such transaction was recommended to the Hiland Holdings Board of Directors by the Hiland Holdings Conflicts Committee.

 

13. The Hiland Holdings Conflicts Committee was aware that it had no obligation to recommend any transaction, including the proposal put forth by Mr. Hamm.

 

The Hiland Holdings Conflicts Committee did not consider liquidation value in determining the fairness of the Hiland Partners merger to the Hiland Holdings public unitholders because of its belief, after consulting

with its financial advisor, that liquidation value does not present a meaningful valuation for Hiland Holdings and its business because Hiland Holdings’ value is derived from the cash flows generated from its continuing operations rather than from the value of assets that might be realized in a liquidation.

 

The Hiland Holdings Conflicts Committee also did not consider net book value in determining the fairness of the merger to the Hiland Holdings public unitholders because of its belief, after consulting with its financial advisor, that net book value does not present a meaningful valuation metric for Hiland Holdings and its business because Hiland Holdings’ value is derived from the cash flows generated from its continuing operations.

 

The Hiland Holdings Board of Directors

 

The Hiland Holdings Board of Directors consists of eight directors: Harold Hamm, Joseph L. Griffin, Matthew S. Harrison, Edward D. Doherty, Dr. Cheryl L. Evans, Michael L. Greenwood, Dr. Bobby B. Lyle, and Rayford T. Reid.

 

The directors of Hiland Holdings have different interests in the Hiland Holdings merger than the Hiland Holdings public unitholders generally. In particular:

 

 

 

For a complete discussion of these and other interests of the members of the Hiland Holdings Board of Directors in the Hiland Holdings merger, see “Special Factors — Interests of Certain Persons in the Mergers.”

 

Because of such actual and potential conflicts, the Hiland Holdings Board of Directors authorized the Hiland Holdings Conflicts Committee to review, evaluate and make recommendations to the Hiland Holdings Board of Directors and the Hiland Holdings public unitholders regarding Mr. Hamm’s proposal and any potential alternatives thereto. On June 1, 2009, the Hiland Holdings Board of Directors met to consider the report and recommendation of the Hiland Holdings Conflicts Committee. On the basis of the Hiland Holdings Conflicts Committee’s recommendation and the other factors described below, each of the six members of the Hiland Holdings Board of Directors participating in the meeting unanimously (1) determined that the Hiland Holdings merger agreement and the transactions contemplated by the Hiland Holdings merger agreement, including the Hiland Holdings merger, were advisable, fair to, and in the best interests of, Hiland Holdings and the Hiland Holdings public unitholders and (2) recommended that the Hiland Holdings public unitholders vote to approve the Hiland Holdings merger agreement and the Hiland Holdings merger.

 

Neither of Messrs. Hamm nor Reid participated in the Hiland Holdings Board of Directors’ consideration or vote on these matters. Mr. Hamm did not feel his participation was appropriate given that the Hiland Holdings Board of Directors was evaluating his offer to acquire Hiland Holdings. Mr. Reid did not feel participation was appropriate given his professional relationship with Mr. Hamm, through which he has historically provided Mr. Hamm and the Hamm family trusts with financial advisory services, including in connection with evaluating strategic alternatives with respect to the Hiland Companies.

 

Because Messrs. Hamm and Reid abstained from voting on the Hiland Holdings merger agreement and the Hiland Holdings merger, only four of the six non-employee members of the Hiland Holdings Board of Directors voted to approve the Hiland Holdings merger agreement and the Hiland Holdings merger.

 

In determining that the Hiland Holdings merger agreement is advisable, fair to, and in the best interests of, Hiland Holdings and the Hiland Holdings public unitholders and approving the Hiland Holdings merger agreement and the transactions contemplated thereby, including the Hiland Holdings merger, and recommending that the Hiland Holdings public unitholders vote for the approval of the Hiland Holdings merger agreement and the Hiland Holdings merger, the Hiland Holdings Board of Directors considered a number of factors, including the following material factors:

 

 

 

In doing so, the Hiland Holdings Board of Directors expressly adopted the analysis of the Hiland Holdings Conflicts Committee, which is discussed above.

 

The foregoing discussion of the information and factors considered by the Hiland Holdings Board of Directors includes the material factors considered by the Hiland Holdings Board of Directors. In view of the variety of factors considered in connection with its evaluation of the Hiland Holdings merger, the Hiland Holdings Board of Directors did not find it practicable to, and did not, quantify or otherwise assign relative weights to the specific factors considered in reaching its determination and recommendation. In addition, individual directors may have given different weights to different factors. The Hiland Holdings Board of Directors approved and recommends the Hiland Holdings merger agreement and the Hiland Holdings merger based upon the totality of the information presented to and considered by it.

 

The Hiland Holdings Board of Directors did not consider liquidation value in determining the fairness of the Hiland Holdings merger to the Hiland Holdings public unitholders because of its belief, after considering the factors considered by the Hiland Holdings Conflicts Committee, that liquidation value does not present a meaningful valuation for Hiland Holdings and its business as Hiland Holdings’ value is derived from the cash flows generated from its continuing operations rather than from the value of assets that might be realized in a liquidation.

 

The Hiland Holdings Board of Directors also did not consider net book value in determining the fairness of the merger to the Hiland Holdings public unitholders because of its belief, after considering the factors considered by the Hiland Holdings Conflicts Committee, that net book value does not present a meaningful valuation metric for Hiland Holdings and its business as Hiland Holdings’ value is derived from the cash flows generated from its continuing operations.

 

The Hiland Holdings Board of Directors believes that the Hiland Holdings merger is procedurally fair because (1) of the independence, absence of conflicts of interest and role and actions of the Hiland Holdings Conflicts Committee members (permitting them to represent effectively the interests of the Hiland Holdings public unitholders), (2) of the approval of the Hiland Holdings merger agreement by a majority of the directors who are not employees of Hiland Holdings and (3) the terms of the Hiland Holdings merger agreement require the approval of a majority of the publicly-held Hiland Holdings common units. The Hiland Holdings Board of Directors believes that each of these procedural safeguards supports its decision and provides assurance of the fairness of the Hiland Holdings merger to the Hiland Holdings public unitholders.

 

The general partner of Hiland Holdings engaged Barclays Capital to act as financial advisor to the Hiland Holdings Conflicts Committee with respect to the proposed Hiland Holdings merger between HPGP Merger Sub and Hiland Holdings on February 17, 2009. At the request of the Hiland Holdings Conflicts Committee, Barclays Capital prepared and updated several presentations to the Hiland Holdings Conflicts Committee over the course of its engagement. On June 1, 2009, Barclays Capital rendered its oral opinion (which was subsequently confirmed in writing) to the Hiland Holdings Conflicts Committee that, as of such date and based upon and subject to the qualifications, limitations and assumptions stated in its opinion, the consideration to be offered to the unitholders of Hiland Holdings, other than Mr. Hamm, Continental Gas and the Hamm family trusts, is fair, from a financial point of view, to such unitholders.

 

The full text of Barclays Capital’s written opinion, dated as of June 1, 2009, is attached as Annex F to this joint proxy statement. Barclays Capital’s written opinion sets forth, among other things, the assumptions made, procedures followed, factors considered and limitations upon the review undertaken by Barclays Capital in rendering its opinion. You are encouraged to read the opinion carefully in its entirety. The following is a summary of Barclays Capital’s opinion and the methodology that Barclays

used to render its opinion. This summary is qualified in its entirety by reference to the full text of the opinion.

 

Barclays Capital’s opinion, the issuance of which was approved by Barclays Capital’s Fairness Opinion Committee, is addressed to the Hiland Holdings Conflicts Committee, addresses only the fairness, from a financial point of view, of the consideration to be received by the unitholders of Hiland Holdings, other than the Hamm Continuing Investors, and does not constitute a recommendation to any unitholder of Hiland Holdings as to how such unitholder should vote with respect to the proposed transaction or any other matter. The terms of the proposed transaction were determined through arm’s-length negotiations between the general partner of Hiland Holdings and Parent and were unanimously approved by the Hiland Holdings Board of Directors, with Messrs. Hamm and Reid abstaining. Barclays Capital did not recommend any specific form of consideration to the Hiland Holdings Conflicts Committee or the general partner of Hiland Holdings or that any specific form of consideration constituted the only appropriate consideration for the proposed transaction. Barclays Capital was not requested to address, and its opinion does not in any manner address, Hiland Holdings’ underlying business decision (i) to proceed with or effect the proposed transaction or (ii) with respect to the timing of entering into or consummating the proposed transaction. Further, Barclays was not requested to opine as to, and its opinion does not in any manner address, the Hiland Partners merger. In addition, Barclays Capital expressed no opinion on, and its opinion does not in any manner address, the fairness of the amount or the nature of any compensation to any officers, directors or employees of any parties to the proposed transaction, or any class of such persons, relative to the consideration to be offered to the unitholders of Hiland Holdings other than the Hamm Continuing Investors in the proposed transaction. No limitations were imposed by the Hiland Holdings Conflicts Committee upon Barclays Capital with respect to the investigations made or procedures followed by it in rendering its opinion.

 

Barclays Capital understands, based on discussions with the management of Hiland Holdings and Hiland Partners, that Hiland Holdings derives all of its cash flows from its ownership of (i) common units and subordinated units in Hiland Partners, (ii) the general partner interest in Hiland Partners, and (iii) the associated incentive distribution rights, and as such, Barclays Capital’s analysis involved, in part, a review of Hiland Partners’ financial and operating information provided by the management of Hiland Partners.

 

In arriving at its opinion, Barclays Capital, among other things, reviewed and analyzed:

 

 

 

Barclays Capital had discussions with the management of Hiland Holdings and Hiland Partners concerning their respective businesses, operations, assets, liabilities, financial condition and prospects and has undertaken such other studies, analyses and investigations as deemed appropriate.

 

In arriving at its opinion, Barclays Capital assumed and relied upon the accuracy and completeness of the financial and other information used by Barclays Capital without any independent verification of such information. Barclays Capital also relied upon the assurances of management of Hiland Partners that they were not aware of any facts or circumstances that would make such information inaccurate or misleading. With respect to the financial projections of Hiland Holdings and Hiland Partners, upon advice of Hiland Partners, Barclays Capital assumed that such projections were reasonably prepared on a basis reflecting the best currently available estimates and judgments of the management of Hiland Partners as to Hiland Partners’ and Hiland Holdings’ future financial performance and that Hiland Partners and Hiland Holdings would perform substantially in accordance with such projections. In arriving at its opinion, Barclays Capital assumed no responsibility for and expressed no view as to any such projections or estimates or the assumptions on which they were based. In arriving at its opinion, Barclays Capital did not conduct a physical inspection of the properties and facilities of Hiland Partners and did not make or obtain any evaluations or appraisals of the assets or liabilities of Hiland Holdings and Hiland Partners. In addition, Barclays Capital was not authorized by Hiland Holdings to solicit, and did not solicit, any indications of interest from any third party with respect to the purchase of all or a part of Hiland Holdings, or Hiland Partners’ business. Barclays Capital’s opinion was necessarily based upon market, economic and other conditions as they existed on, and could be evaluated as of, June 1, 2009. Barclays Capital assumed no responsibility for updating or revising its opinion based on events or circumstances that may have occurred after June 1, 2009.

 

In connection with rendering its opinion, Barclays Capital performed certain financial, comparative and other analyses as summarized below. In arriving at its opinion, Barclays Capital did not ascribe a specific range of values to the Hiland Holdings units but rather made its determination as to fairness, from a financial point of view, to Hiland Holdings’ unitholders other than the Hamm Continuing Investors of the consideration to be offered to such unitholders in the proposed transaction on the basis of various financial and comparative analyses. The preparation of a fairness opinion is a complex process and involves various determinations as to the most appropriate and relevant methods of financial and comparative analyses and the application of those methods to the particular circumstances. Therefore, a fairness opinion is not readily susceptible to summary description.

In arriving at its opinion, Barclays Capital did not attribute any particular weight to any single analysis or factor considered by it but rather made qualitative judgments as to the significance and relevance of each analysis and factor relative to all other analyses and factors performed and considered by it and in the context of the circumstances of the particular transaction. Accordingly, Barclays Capital believes that its analyses must be considered as a whole, as considering any portion of such analyses and factors, without considering all analyses and factors as a whole, could create a misleading or incomplete view of the process underlying its opinion.

 

The following is a summary of the material financial analyses used by Barclays Capital in preparing its opinion to the Hiland Holdings Conflicts Committee. Certain financial analyses summarized below include information presented in tabular format. In order to fully understand the financial analyses used by Barclays Capital, the tables must be read together with the text of each summary, as the tables alone do not constitute a complete description of the financial analyses. In performing its analyses, Barclays Capital made numerous assumptions with respect to industry performance, general business and economic conditions and other matters, many of which are beyond the control of Hiland Holdings or any other parties to the proposed transaction. None of Hiland Partners, Hiland Holdings, Barclays Capital or any other person assumes responsibility if future results are materially different from those discussed. Any estimates contained in these analyses are not necessarily indicative of actual values or predictive of future results or values, which may be significantly more or less favorable than as set forth below. In addition, analyses relating to the value of the businesses do not purport to be appraisals or reflect the prices at which the businesses may actually be sold.

 

Strategic Alternatives Analysis

 

As of June 1, 2009, according to the management of Hiland Partners, Hiland Partners was likely to be in breach of the leverage ratio covenant under the Hiland Operating Credit Agreement as early as June 30, 2009. Due to these circumstances, Barclays Capital considered and evaluated various strategic alternatives with the goal of determining certain scenarios under which Hiland Partners and Hiland Holdings could continue to operate their respective businesses as going concern entities. Generally, Barclays Capital looked at strategic alternatives regarding (i) debt, (ii) equity and (iii) mergers and acquisitions. Below is a more detailed explanation of each alternative considered.

 

Debt Related Alternatives

 

 

 

Equity Related Alternatives

 

Barclays Capital also examined certain equity related alternatives for Hiland Partners. An important factor that developed during the course of Barclays Capital’s analyses was Hiland Partners’ and Hiland Holdings’ announcement, on April 27, 2009, of the suspension of distributions, beginning with the first quarter distribution of 2009. As a result, Hiland Partners will accrue arrearages on the common units, such that no distributions on the subordinated units or related to the incentive distribution rights are permitted until such time as the common unit arrearages are repaid in full.

 

 

 

Mergers and Acquisitions Alternatives

 

In addition to the proposed transaction with Mr. Hamm, Barclays Capital evaluated several additional merger and acquisition-related alternatives.

 

 

Additionally, in considering these various strategic alternatives, Barclays Capital took into consideration: (i) the likelihood of transaction consummation, including cost and willingness of Hiland Partners and Hiland Holdings to participate; (ii) the marketplace availability and timing of each alternative, particularly in certain debt and equity alternatives; (iii) counterparty availability, willingness, and timing of each alternative,

particularly in the mergers and acquisitions alternatives; (iv) the financial impact on Hiland Partners and Hiland Holdings; and (v) whether the alternatives would be sufficient to resolve Hiland Partners’ pending credit facility issues. In its analysis, Barclays Capital also considered the likelihood of Hiland Partners embarking on any given alternative; while the Hiland Holdings Conflicts Committee holds no specific authorization to pursue any of the alternatives, the Hiland Holdings Conflicts Committee and Barclays Capital determined that it was important to evaluate strategic alternatives which could potentially offer greater value to Hiland Holdings’ public unitholders. After the analysis and evaluation, Barclays Capital determined that the following “financial case” alternatives were the only alternatives which were reasonably available to Hiland Partners (and thus Hiland Holdings).

 

Financial Cases

 

 

Operating Scenarios

 

Based on discussions with Hiland Partners’ and Hiland Holdings’ management, Barclays Capital analyzed three different operational scenarios, as described below:

 

 

Cash distribution assumptions and growth capital expenditure assumptions vary with each alternative based on the financial cases described below and Hiland Partners’ ability to remain in compliance with its covenants under the Hiland Operating Credit Agreement.

Barclays Capital’s Summary Valuation Analysis

 

Hiland Holdings’ only assets are partnership interests in Hiland Partners. Accordingly, Barclays Capital’s valuation of Hiland Holdings is highly dependent on the underlying prospects and performance of Hiland Partners. The economic assets owned by Hiland Holdings consist of: (i) 2,321,471 common units of Hiland Partners, (ii) 3,060,000 subordinated units of Hiland Partners, (iii) the 2% general partner interest and (iv) the incentive distribution rights. Given the organizational and ownership structure of Hiland Holdings and Hiland Partners, any valuation of Hiland Holdings is highly dependent on the cash distributions received by Hiland Holdings from Hiland Partners. In any scenario where Hiland Partners reduces or suspends cash distributions, Hiland Holdings will receive reduced or no cash distributions. Further affecting the valuation is Hiland Holdings’ ownership of both (i) the subordinated units of Hiland Partners, which do not receive distributions until the MQD and all arrearages have been paid to the common unitholders and (ii) the incentive distribution rights, which do not receive cash distributions unless the common unitholders are paid the MQD and all arrearages, the subordinated units have been paid the MQD and certain target distribution levels above the MQD are met. When Hiland Partners distributions are lowered below the MQD level, Hiland Holdings receives reduced cash distributions on its common units and general partner interest, and no cash distributions on the subordinated units and the incentive distribution rights.

 

Following is a summary of per unit values for Hiland Holdings based on Barclays Capital’s different methodologies. Additional description of the valuation methodologies used by Barclays Capital can be found on the following pages.

 

 

Discounted Cash Flow Analysis

 

In order to estimate the value of Hiland Holdings, Barclays Capital performed discounted cash flow analyses on Hiland Holdings assuming various operating scenarios and financial cases. A discounted cash flow analysis is a traditional valuation methodology used to derive a valuation of an asset by calculating the “present value” of estimated future cash flows of the asset. “Present value” refers to the current value of future cash flows and is obtained by discounting those future cash flows or amounts by a discount rate that takes into account macroeconomic assumptions and estimates of risk, the opportunity cost of capital, expected returns and other appropriate factors.

 

The discounted cash flow analysis was performed on the cash flows expected to be received by equity holders of Hiland Holdings and thus is necessarily based upon distributions received from Hiland Partners. In scenarios where Hiland Partners is unable to pay distributions, performing a discounted cash flow analysis on Hiland Holdings is not possible. In the management and downside operating scenarios under the Renegotiate Credit Facility case, Barclays Capital assumed that given the high leverage, the lenders would not allow Hiland Partners to pay distributions until such time as Hiland Partners was in compliance with its credit facility covenants. Without Hiland Partners distributions, there can be no distributions at Hiland Holdings,

rendering an equity valuation not possible. Therefore, Barclays Capital excluded these two scenarios from the summary valuation.

 

The discounted cash flow analyses were performed using a “sum-of-the-parts” approach. Hiland Holdings has four separate cash flow streams: (i) cash distributions on its Hiland Partners common units; (ii) cash distributions on its subordinated units; (iii) cash distributions on the general partner interest and incentive distribution rights; and (iv) general and administrative (“G&A”) expenses at the Hiland Holdings level.

 

Barclays Capital performed a discounted cash flow analysis of the projected equity cash flow distributions of Hiland Holdings for the five fiscal years beginning January 1, 2009 and ending December 31, 2013. Barclays Capital used the following discount rates as an estimate of the cost of equity:

 

 

In calculating the terminal values, Barclays Capital used a perpetuity of projected equity cash flows and assumed growth rates of: (i) 0.0% - 1.0% for the common units and subordinated units; (ii) 0.0% - 2.0% for the G&A cash flows; and (iii) 0.0% - 5.0% for the GP cash flows. The growth rates for the projected equity cash flows beyond 2013 were based on estimated growth rates for Hiland Partners.

 

The table below shows the resulting valuations based on discounted cash flow analyses of equity distributions at Hiland Holdings. Barclays Capital noted that on the basis of the discounted cash flow analysis, the transaction consideration of $2.40 per unit was within the implied value ranges per unit.

 

 

Publicly-Derived Valuations

 

In addition to the discounted cash flow analyses, Barclays Capital also performed valuations based upon observations regarding (i) comparable publicly traded MLPs and comparable publicly traded general partner holding companies (“GP Holdcos”) and (ii) comparable transactions involving publicly traded MLPs and publicly traded GP Holdcos.

 

Selected Comparable Company Analysis

 

Barclays Capital reviewed and compared specific financial and operating data relating to Hiland Holdings with selected companies that Barclays Capital, based on its experience in the midstream segment of the energy industry, deemed comparable to Hiland Holdings. The selected comparable companies (divided into “Selected GP Holdcos” and “Selected MLPs”) were:

 

Selected GP Holdcos

 

 

 

Selected MLPs

 

 

The Selected GP Holdcos were selected by Barclays Capital because they are publicly traded general partners which for the purposes of analysis may be considered similar to Hiland Holdings due to corporate structure and broadly, due to the nature of the business of the underlying MLP. The Selected MLPs were selected because they are publicly traded partnerships with operations which for the purposes of analysis may be considered similar to those of Hiland Partners. However, because of the inherent differences between the business, operations and prospects of Hiland Holdings and Hiland Partners and those of the selected comparable companies, Barclays Capital believed that it was inappropriate to, and therefore did not, rely solely on the quantitative results of the selected comparable company analysis. Accordingly, Barclays Capital also made qualitative judgments concerning differences between the business, financial and operating characteristics and prospects of Hiland Holdings, Hiland Partners and the selected comparable companies that could affect the public trading values of each in order to provide a context in which to consider the results of the quantitative analysis. Barclays Capital calculated various multiples for the Selected GP Holdcos and used the multiples as a reference point to develop an indicative valuation for the 2% general partner interest and incentive distribution rights owned by Hiland Holdings. Given the suspension of distributions, utilizing distributable cash flow estimates results in a more meaningful result. For the Selected GP Holdcos, Barclays Capital utilized a range of distributable cash flow multiples (“DCF Multiples”), the estimates for which were based on publicly available Wall Street equity research. In determining appropriate DCF Multiples for the 2% general partner interest incentive distribution rights, Barclays Capital calculated the implied value of the general partner interest of each Selected GP Holdco by first calculating the total enterprise value of each Selected GP Holdco, then subtracting the value of any limited partner interests owned by the Selected GP Holdco as well as any other business assets not specifically related to the general partner interest and incentive distribution rights of the underlying MLP. Barclays Capital used its judgment in determining which Selected GP Holdcos were most comparable to Hiland Holdings in terms of business mix and subsector participation. Currently, several of the Selected GP Holdcos are considered to be in financial distress. Barclays Capital analyzed the Selected GP Holdcos on an after-G&A basis, then valued Hiland Holdings’ negative G&A cash flow stream using the same multiple range. In determining appropriate DCF Multiples for the limited partner

interest owned by Hiland Holdings, Barclays Capital analyzed the distributable cash flow yields of the Selected MLPs, again using its judgment in determining the most comparable companies to Hiland Partners.

 

The results of this selected comparable company analysis are summarized below:

 

 

 

Barclays Capital noted that on the basis of the selected comparable company analysis, the transaction consideration of $2.40 per unit was above the range of implied values of $0.51 to $1.04 per unit.

 

Selected Comparable Transaction Analysis

 

Barclays Capital reviewed and compared the purchase prices and financial multiples paid in selected other transactions that Barclays Capital, based on its experience with merger and acquisition transactions, deemed relevant. These transactions principally involved publicly traded MLPs and GP Holdcos. Barclays Capital chose such transactions based on, among other things, the similarity of the applicable target companies in the transactions to Hiland Holdings and Hiland Partners primarily with respect to nature of business and corporate structure.

 

The reasons for and the circumstances surrounding each of the selected precedent transactions analyzed were diverse, and there are inherent differences in the business, operations, financial conditions and prospects of Hiland Holdings and Hiland Partners and the companies included in the selected precedent transaction analysis. Accordingly, Barclays Capital believed that a purely quantitative selected precedent transaction analysis would not be particularly meaningful in the context of considering the proposed transaction. Barclays Capital therefore made qualitative judgments concerning differences between the characteristics of the selected precedent transactions and the proposed transaction which would affect the acquisition values of the selected target companies and Hiland Holdings. In particular, Barclays Capital noted that the majority of the precedent transactions were consummated in different capital market and industry conditions than at present. In deriving the comparable transaction valuation, Barclays Capital first valued Hiland Partners as a whole and then calculated the portion of that value attributable to Hiland Holdings’ limited partner interest in Hiland Partners. Barclays Capital then valued the 2% general partner interest and incentive distribution rights in Hiland Partners owned by Hiland Holdings, and added that value to the limited partner interest to derive a total value for Hiland Holdings.

 

Barclays Capital examined the following publicly traded MLP transactions and GP Holdco transactions:

 

Publicly Traded MLP Transactions

 

 

GP Holdco Transactions

 

 

 

Barclays Capital noted that there were no recent publicly traded MLP transactions or GP Holdco transactions. Given the depressed market environment, Barclays Capital believed that the implied multiples associated with these transactions were not achievable at the time of its analysis. Accordingly, Barclays Capital applied a discount intended to reflect the potential of a distressed sale of Hiland Partners or Hiland Holdings in today’s environment. Barclays Capital estimated this discount to be 35% - 50%, and applied this to the derived per unit valuation to establish the low end of the valuation range. These discounts were derived by examining recent asset sales in the market and the corresponding percentage decline in those multiples relative to the multiples received in a more normalized market environment.

 

Selected MLP Transactions

 

 

Selected MLP Transactions (35% Discount)

 

 

Selected GP Holdco Transactions

 

Barclays Capital noted that on the basis of the selected precedent transaction analysis, the transaction consideration of $2.40 per Hiland Holdings unit was within the range of implied values of $2.16 to $6.55 per unit.

 

Net Asset Valuation

 

Because of the significant disruption in the capital markets and the challenging environment for gathering and processing MLPs, Barclays Capital performed a net asset valuation of Hiland Partners and Hiland Holdings in order to derive a valuation based on the underlying business that is not dependent on cash distributions being paid. The net asset valuation consisted of two main components: (i) comparable gathering and processing asset transactions and (ii) a discounted cash flow analysis on the unlevered cash flows generated by Hiland Partners’ assets.

 

Comparable Asset Transactions Analysis

 

Barclays reviewed and compared the purchase prices and financial multiples paid in selected other asset transactions that Barclays, based on its experience with merger and acquisition transactions, deemed relevant. Barclays chose such transactions based on, among other things, the similarity of the applicable target assets in the transactions to Hiland Holdings and Hiland Partners primarily with respect to nature of business. Below are the asset transactions Barclays reviewed:

 

 

The reasons for and the circumstances surrounding each of the selected precedent transactions analyzed were diverse and there are inherent differences in the business, operations, financial conditions and prospects of Hiland Holdings and the companies included in the selected precedent transaction analysis. Accordingly, Barclays believed that a purely quantitative selected precedent transaction analysis would not be particularly meaningful in the context of considering the proposed transaction. Barclays therefore made qualitative

judgments concerning differences between the characteristics of the selected precedent transactions and the proposed transaction which would affect the acquisition values of the selected target companies and Hiland Holdings. In particular, Barclays noted that the majority of the precedent transactions were consummated in different capital market and industry conditions than at present.

 

After arriving at an equity valuation range for Hiland Partners, Barclays then calculated the proportion of this value range attributable to the limited partners and the general partner based on distributable cash flow attributable to the limited partners and general partner of Hiland Partners. Barclays then calculated the implied value of Hiland Holdings. Barclays then subtracted the value of the general and administrative expenses and the net debt at Hiland Holdings to derive an equity valuation range for Hiland Holdings.

 

Selected Asset Transactions

 

 

Barclays noted that on the basis of the selected comparable asset transactions analysis, the transaction consideration of $2.40 per unit was within the range of implied values of $0.89 to $3.32 per unit.

 

Asset Discounted Cash Flow Analysis

 

Barclays also performed an asset-based discounted cash flow analysis on Hiland Partners using the Management Case projections. This discounted cash flow analysis was performed on the unlevered cash flows generated by Hiland Partners’ assets for the five fiscal years beginning January 1, 2009 and ending December 31, 2013. Barclays used discount rates of 12% to 16% as an estimate of the weighted average cost of capital.

 

In calculating the terminal values, Barclays used a perpetuity of projected unlevered free cash flows and assumed growth rates of 1% to 3%. The growth rates for the projected unlevered free cash flows beyond 2013 were based on estimated growth rates for Hiland Partners’ assets.

 

After arriving at an equity valuation range for Hiland Partners, Barclays then calculated the proportion of this value range attributable to the limited partners and the general partner based on distributable cash flow attributable to the limited partners and general partner of Hiland Partners. Barclays then calculated the implied value of Hiland Holdings. Barclays then subtracted the value of the general and administrative expenses and the net debt at Hiland Holdings to derive an equity valuation range for Hiland Holdings.

 

Valuation Analysis — Discounted Cash Flow Sensitivity

 

 

Barclays noted that on the basis of the discounted cash flow analysis, the transaction consideration of $2.40 per unit was above the range of implied values of ($1.90) to $2.31 per unit.

 

General

 

Barclays is an internationally recognized investment banking firm and, as part of its investment banking activities, is regularly engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, investments for passive and control purposes, negotiated underwritings, competitive bids, secondary distributions of listed and unlisted securities, private placements and valuations for estate, corporate and other purposes. The Hiland Holdings Conflicts Committee selected Barclays because of its familiarity with

Hiland Partners and Hiland Holdings and its qualifications, reputation and experience in the valuation of businesses and securities in connection with mergers and acquisitions generally, as well as substantial experience in transactions comparable to the proposed transaction.

 

Barclays is acting as financial advisor to the Hiland Holdings Conflicts Committee in connection with the proposed transaction. As compensation for its services in connection with the proposed transaction, Hiland Holdings paid Barclays a fee of $250,000 upon execution of Barclays’ engagement letter with Hiland Holdings and $1,000,000 upon the delivery of Barclays’ opinion. At the sole and absolute discretion of the Hiland Holdings Conflicts Committee, Hiland Holdings may pay Barclays a limited discretionary fee of $250,000 (in cash) based on the Hiland Holdings Conflicts Committee’s evaluation of the quality and quantity of the work performed. Hiland Holdings has agreed to reimburse Barclays for certain of its expenses and to indemnify Barclays for certain liabilities that may arise out of its engagement. Barclays has performed various investment banking and financial services for Hiland Partners, Hiland Holdings, their affiliates and Parent in the past, and may expect to perform such services in the future, and has received, and expects to receive, customary fees for such services. However, in the past two years, Barclays has performed only limited services for Hiland Partners, Hiland Holdings and their affiliates, for which Barclays received no compensation.

 

Barclays is a full service securities firm engaged in a wide range of businesses from investment and commercial banking, lending, asset management and other financial and non-financial services. In the ordinary course of its business, Barclays and affiliates may actively trade and effect transactions in the equity, debt and/or other securities (and any derivatives thereof) and financial instruments (including loans and other obligations) of Hiland Partners, Hiland Holdings and their affiliates for its own account and for the accounts of its customers and, accordingly, may at any time hold long or short positions and investments in such securities and financial instruments.

 

Copies of the presentation materials presented by Barclays to the Hiland Holdings Conflicts Committee in connection with the delivery of its opinion have been filed with the SEC as exhibits to the Schedule 13E-3 filed by Hiland Holdings.

 

Under SEC rules, Parent, HPGP Merger Sub, Continental Gas and Messrs. Hamm, Griffin and Harrison (collectively the “HPGP Schedule 13E-3 Filing Persons”) are required to provide certain information regarding their position as to the substantive and procedural fairness of the Hiland Holdings merger to the Hiland Holdings public unitholders. The HPGP Schedule 13E-3 Filing Persons are making the statements included in this section solely for purposes of complying with such requirements. The HPGP Schedule 13E-3 Filing Persons’ views as to the fairness of the Hiland Holdings merger should not be construed as a recommendation to any unitholder as to how that unitholder should vote on the proposals to approve the Hiland Holdings merger agreement and the Hiland Holdings merger.

 

The HPGP Schedule 13E-3 Filing Persons, other than Messrs. Griffin and Harrison, did not participate in the deliberations of the Hiland Holdings Board of Directors or the Hiland Holdings Conflicts Committee regarding, and did not receive advice from the Hiland Holdings Conflicts Committee’s legal or financial advisors as to, the fairness of the Hiland Holdings merger. Mr. Hamm engaged Wachovia Securities as his financial advisor to provide certain financial advisory services with respect to a potential acquisition by Mr. Hamm and/or certain of his affiliates of the assets or the capital stock of the Hiland Companies. Wachovia Securities did not provide an opinion with respect to the fairness of the Hiland Holdings merger or the Hiland Holdings merger consideration.

 

The discussion below of the information and factors considered by the HPGP Schedule 13E-3 Filing Persons is not intended to be exhaustive, but includes the material factors considered by the HPGP Schedule 13E-3 Filing Persons. In view of the variety of factors considered in connection with their evaluation of the fairness of Hiland Holdings merger, the HPGP Schedule 13E-3 Filing Persons did not find it practicable to, and did not, quantify or otherwise assign specific weights to the factors considered in reaching their determination. In addition, each of the HPGP Schedule 13E-3 Filing Persons may have given differing weights to different factors. On balance, the HPGP Schedule 13E-3 Filing Persons believed that the positive factors

discussed above outweighed the negative factors discussed above and arrived at the conclusion that the Hiland Holdings merger was fair to the Hiland Holdings public unitholders.

 

The HPGP Schedule 13E-3 Filing Persons, other than Messrs. Griffin and Harrison, believe that the Hiland Holdings merger consideration is substantively fair to the Hiland Holdings public unitholders based on the following factors:

 

 

The HPGP Schedule 13E-3 Filing Persons (other than Messrs. Griffin and Harrison) believe that the Hiland Holdings merger is procedurally fair to the Hiland Holdings public unitholders based on the following factors:

 

 

 

Messrs. Griffin and Harrison believe that the Hiland Holdings merger is both substantively and procedurally fair to the Hiland Holdings public unitholders based on the factors described in “— Recommendation of the Hiland Holdings Conflicts Committee and the Hiland Holdings Board of Directors; Reasons for Approving the Merger — The Hiland Holdings Board of Directors” beginning on page 72.

 

Under the SEC rules governing “going private” transactions, each of the HLND Schedule 13E-3 Filing Persons and the HPGP Schedule 13E-3 Filing Persons (collectively, the “Combined Schedule 13E-3 Filing Persons”) are deemed to be engaged in a “going private” transaction and therefore are required to express their reasons for the proposed mergers to the unaffiliated unitholders, as defined in Rule 13e-3 of the Exchange Act, of Hiland Partners and Hiland Holdings, respectively. The Combined Schedule 13E-3 Filing Persons are making the statements included in this section solely for the purpose of complying with the requirements of Rule 13e-3 and related rules under the Exchange Act.

 

The Combined Schedule 13E-3 Filing Persons decided to pursue the Hiland Partners merger and the Hiland Holdings merger because they believe that taking the Hiland Companies private would eliminate the exposure of the Hiland Partners and Hiland Holdings public unitholders to various risks and volatility that began to have serious effects on the businesses of the Hiland Companies in the third quarter of 2008. In particular, substantial volatility in NGL prices and frac spreads and declines in drilling activity along Hiland Partners’ systems negatively impacted the Hiland Companies’ forecasted throughput volumes, midstream

segment margins and cash flows, resulting in a suspension of quarterly distributions and a meaningful increase in the risk of a default under the Hiland Operating Credit Agreement. In addition, the Hiland Companies experienced significant increases in the cost of capital and other negative effects of global economic turmoil. Going private transactions would enable the public unitholders to receive cash in exchange for their investments in the Hiland Companies while avoiding the significant dilution they would experience in connection with an equity infusion ultimately necessary to stabilize the Hiland Companies. Further, the Combined Schedule 13E-3 Filing Persons believe that responding to the developments experienced by the Hiland Companies will require tolerance for volatility in the performance of the business of Hiland Partners and Hiland Holdings and a willingness to make long-term investment decisions that carry substantial risks. As private companies, the Hiland Companies would have increased flexibility to address these developments through strategies that might negatively affect short-term results, that would not be feasible with a public unitholder base or that may exceed the risk tolerance of public unitholders.

 

From September 2008 to January 2009, Messrs. Hamm, Griffin and Harrison began a review of potential alternatives to address the challenges and risks identified above. During this period, consideration was given to several approaches including maintaining the status quo, renegotiating the Hiland Operating Credit Agreement to achieve temporary covenant relief, selling certain existing assets to repay debt, issuing convertible securities to repay bank debt, issuing new equity to maintain compliance with debt-to-equity ratios required under the Hiland Operating Credit Agreement, merging with a third party to alleviate credit concerns, and engaging in going private transactions led by Mr. Hamm. Also considered during the same time frame by Messrs. Hamm, Griffin and Harrison was a potential subordinated debt issuance funded by Mr. Hamm to pay down existing debt under the Hiland Operating Credit Agreement. In subsequent meetings through April 2009 with Wachovia Securities, these directors and officers also considered a subordinated debt offering, a rights offering and a merger of Hiland Holdings with and into Hiland Partners in conjunction with a rights offering. Please see “Special Factors — Summary of Analyses of Wachovia Securities — Summary of Strategic Alternatives Analysis” for a more detailed description of each alternative.

 

Based on his review of potential alternatives, Mr. Hamm believed that the going private transactions were the best strategic alternative then available to the Hiland Companies to maximize unitholder value. Mr. Hamm and the other the Combined Schedule 13E-3 Filing Persons believe that structuring the transactions as cash mergers is preferable to other transaction structures because it provides the unitholders of both Hiland Partners and Hiland Holdings with cash for all of their common units and allows for a prompt and orderly transfer of ownership of the common units in a single step for each company, without the timing complexities and uncertainty associated with interdependent tender offers.

 

Mr. Hamm retained Wachovia Securities to act as his financial advisor in connection with a potential acquisition by Mr. Hamm and/or certain of his affiliates of the assets or capital stock of the Hiland Companies. Over the course of several months, at the request of Mr. Hamm, Wachovia Securities prepared and updated a number of financial, comparative and other analyses including an analysis of the various strategic alternatives involving the Hiland Companies to assist Mr. Hamm in pursuing such potential acquisition of the Hiland Companies. The financial, comparative and other analyses conducted by Wachovia Securities, including the analysis of the various strategic alternatives involving the Hiland Companies, were prepared solely for Mr. Hamm’s review and consideration (other than the presentation dated as of January 21, 2009 which was presented to the Board of Directors of Hiland Holdings). None of the analyses conducted by Wachovia Securities was intended to provide advice to any other person including the management team the Hiland Companies, their Boards of Directors or any unitholder of the Hiland Companies. Below is a summary of the material strategic alternatives analyses contained in Wachovia Securities’ presentations made on December 18, 2008, January 5, 2009 (dated as of January 5, 2008), January 8, 2009, March 3, 2009, March 13, 2009 and March 16, 2009, and the final presentation of Wachovia Securities made to Mr. Hamm on April 16, 2009 analyzing certain financial aspects of a going private transaction. The aforementioned summaries are provided in this joint proxy statement solely for the purpose of complying with applicable disclosure requirements. The following summaries, however, do not purport to be a complete description of the financial, comparative and

other analyses performed by Wachovia Securities. The preparation of financial, comparative and other analyses is a complex analytical process involving various determinations as to the most appropriate and relevant methods of analysis and the application of those methods to the particular circumstances and therefore, is not readily susceptible to partial analysis or summary description. Some of the summaries of the financial analyses include information presented in tabular format. The tables must be read together with the full text of each summary and are alone not a complete description of Wachovia Securities’ financial analyses. The analyses described herein, the order in which they are presented and the results of the analyses do not represent relative importance or weight given to those analyses by Wachovia Securities. Wachovia Securities believes that selecting portions of the analyses and the factors considered or focusing on information presented in tabular format, without considering all analyses and factors, the narrative description and the full text of the analyses, could create a misleading or incomplete view of the processes underlying Wachovia Securities’ analyses. The fact that any specific analysis has been referred to in the summary below is not meant to indicate that such analysis was viewed as any more significant or was or should be given any greater weight than any other analysis in any presentation. The presentations of Wachovia Securities are filed as Exhibits 4 through 16 of the Schedule 13e-3 filed by Hiland Partners and as Exhibits 4 through 16 of the Schedule 13e-3 filed by Hiland Holdings and are incorporated herein by reference. The descriptions of the analyses below are qualified by reference to the full text of such analyses. Copies of the presentations may be obtained from the SEC. See “Where You Can Find More Information” beginning on page 191.

 

Mr. Hamm did not request, and Wachovia Securities did not provide, any opinion as to the fairness of the merger consideration or any other aspect of the mergers to Mr. Hamm, the other Hamm Continuing Investors, Hiland Partners, the unitholders of Hiland Partners, Hiland Holdings, the unitholders of Hiland Holdings or any other person, or any other valuation of Hiland Partners or Hiland Holdings for the purpose of assessing the fairness of the merger consideration or any other aspect of the mergers to Mr. Hamm, the other Hamm Continuing Investors, Hiland Partners, the unitholders of Hiland Partners, Hiland Holdings, the unitholders of Hiland Holdings or any other person.

 

Wachovia Securities has established procedures for rendering a fairness opinion, including review of the fairness opinion and the underlying information, comparisons and analyses by a fairness committee composed of senior investment bankers with relevant expertise. Because Wachovia Securities was not requested to and did not render a fairness opinion, it was not necessary to, and it did not, submit the information, comparisons and analyses described below to a fairness opinion committee for review, nor did Wachovia Securities follow all of the procedures that it ordinarily follows in connection with rendering a fairness opinion. Had Wachovia Securities been requested to provide an opinion or been requested to recommend or provide support for a fair or appropriate valuation of Hiland Partners’ and/or Hiland Holdings’ securities and submitted the information, comparisons and analyses in its presentations to its full fairness opinion process, including review by a fairness committee, the information, comparisons and analyses presented by Wachovia Securities following that process may have been different from those included in the presentations and described below.

 

Wachovia Securities delivered its analyses for the information of Mr. Hamm in connection with his consideration of the Hiland Partners merger and the Hiland Holdings merger. Wachovia Securities did not make, and its analyses do not constitute, a recommendation to Mr. Hamm or any other person or as to how any Hiland Partners or Hiland Holdings unitholder should vote with respect to the Hiland Partners merger, the Hiland Holdings merger, or any other matter.

 

In connection with providing financial advice and preparing its financial analysis, Wachovia Securities made such reviews, analyses and inquiries as it deemed necessary and appropriate under the circumstances. Among other things, Wachovia Securities:

 

 

 

In connection with its review, Wachovia Securities assumed and relied upon the accuracy and completeness of the financial and other information reviewed by it, including all information, analyses and assumptions relating to accounting, legal and tax matters, and Wachovia Securities did not assume any responsibility for, nor did it independently verify, such information or physically inspect any of the Hiland Companies’ assets. Wachovia Securities relied upon the assurances of the management of the Hiland Companies that they are not aware of any facts or circumstances that would make such information about the Hiland Companies inaccurate or misleading, Wachovia Securities relied upon financial forecasts, as well as estimates, judgments, allocations and assumptions of management of the Hiland Companies regarding the future financial performance of the Hiland Companies furnished to it by the management of the Hiland Companies and was advised by the management of the Hiland Companies and assumed, at Mr. Hamm’s direction, that such financial forecasts, as well as the estimates, judgments, allocations and assumptions upon which such financial forecasts are based, have been reasonably formulated and reflect the best then currently available estimates, judgments, allocations and assumptions of the management of the Hiland Companies regarding the future financial performance of the Hiland Companies. Wachovia Securities assumed no responsibility for, and expressed no view as to, any such financial forecasts or the estimates, judgments, allocations or assumptions on which they were based. In developing its financial analysis, Wachovia Securities did not prepare or obtain any independent evaluations or appraisals of the assets or liabilities of the Hiland Companies, including any contingent liabilities, nor was Wachovia Securities provided with any such evaluations or appraisals. Unless otherwise stated, Wachovia Securities also assumed that there had been no material changes in the condition (financial or otherwise), results of operations, business or prospects of the Hiland Companies since the date of the last financial statements provided to it. In addition, Wachovia Securities did not consider or analyze the price at which the securities of the Hiland Companies may trade following the announcement of the mergers. Wachovia Securities’ presentations were necessarily based on economic, market and other conditions as in effect on, and information made available to it as of, the date of such presentations. Hence, although subsequent developments may affect the information contained in the presentations Wachovia Securities did not assume any obligation to update, revise or reaffirm the contents of the presentations. At the direction of Mr. Hamm, other than with respect to the presentations dated as of March 13, 2009, March 16, 2009 and March 17, 2009, Wachovia Securities assumed the continuation of all existing contracts with the current customers of the Hiland Companies.

 

Except as otherwise set forth in this section of “Summary of Analyses of Wachovia Securities”, Mr. Hamm imposed no instructions or limitations on Wachovia Securities with respect to the investigations made or the procedures followed by Wachovia Securities.

 

Summary of Strategic Alternatives Analysis

 

The following is a summary of the material strategic alternatives analyses contained in Wachovia Securities’ presentations made on December 18, 2008, January 5, 2009 (dated as of January 5, 2008), January 8, 2009, March 3, 2009, March 13, 2009 and March 16, 2009.

Status Quo.  According to the management of Hiland Partners, Hiland Partners was likely to be in violation of the leverage ratio covenant under the Hiland Operating Credit Agreement as early as June 30, 2009. Wachovia Securities identified the following as potential impacts in the event that Hiland Partners would not change its operations, organizational structure or capital structure: (i) Hiland Partners’ general recovery and continued compliance with its financial covenants under the Hiland Operating Credit Agreement would likely be dependent on a sharp increase in near term commodity prices, (ii) in the absence of such increase in commodity prices, distributions on Hiland Partners’ common units could not be sustainable and capital expenditures would likely be curtailed, (iii) the prospects of a capital raise could be low, and (iv) the potential for a default under the Hiland Operating Credit Agreement could remain high. Wachovia Securities also analyzed a scenario in which Hiland Partners would discontinue growth capital expenditures and a scenario in which Hiland Partners’ would discontinue growth capital expenditures and eliminate distributions. Under both of these scenarios, compliance with Hiland Partners’ financial covenants would still be dependent on a sharp increase in near-term commodity prices.

 

Renegotiate Hiland Operating Credit Agreement.  Wachovia Securities analyzed a scenario in which Hiland Partners would renegotiate the terms of the Hiland Operating Credit Agreement with the lenders thereunder in an effort to secure relief from certain financial covenants including the leverage ratio covenant. Wachovia Securities identified the following considerations with respect to such a scenario: (i) the ability to maintain Hiland Partners’ asset base and the ability of all unitholders to participate in any future upside generated by those assets, and (ii) the protection of investors from dilution that would occur through alternative financing alternatives. However, given the unsuccessful attempt by Hiland Partners in November 2008 to increase the borrowing base under the Hiland Operating Credit Agreement on acceptable terms and the global financial crisis regarding financial institutions Wachovia Securities also identified the following as potential impacts of such a scenario: (i) there was a strong likelihood of disapproval from banks who were members of the lender group to any such renegotiation of terms, and (ii) given the magnitude of the covenant violation, the terms on which the lenders would be willing to renegotiate the Hiland Operating Credit Agreement were likely to be onerous for Hiland Partners.

 

Sale of Selected Existing Assets.  Another option analyzed by Wachovia Securities was a sale of selected assets, the proceeds of which would be used to partially repay existing debt under the Hiland Operating Credit Agreement. A sale of selected assets could potentially provide proceeds to Hiland Partners in the near term. However, given the global credit crisis and limited ability of companies to secure acquisition financing and the depressed equity markets, Wachovia Securities identified the following considerations with respect to a sale of selected assets: (i) the existence of a limited universe of potential buyers, and (ii) the anticipation that such buyers would likely seek Hiland Partners’ highest quality assets in any such transaction for a price at the low range of their valuation. This would result in Hiland Partners becoming an entity that could be too small to remain public. Wachovia Securities also analyzed that the benefits of an asset sale would likely be mitigated by the negative impact on the borrowing capacity under Hiland Operating Credit Agreement.

 

Issuance of Convertible Security.  A further strategic alternative analyzed by Wachovia Securities was the potential issuance of a convertible security by Hiland Partners, the proceeds of which would be used to partially repay existing debt under the Hiland Operating Credit Agreement. If such a transaction could be executed, it could strengthen Hiland Partners’ balance sheet and allow for Hiland Partners’ continued independence compared to a business combination or strategic transaction with Mr. Hamm or a third party. Wachovia Securities identified the following additional considerations with respect to any such transaction: (i) the need for approval of the unitholders of Hiland Partners, (ii) likely significant dilution of ownership and cash distributions to existing unitholders, including Hiland Holdings, upon conversion of the security to common equity, (iii) given the financial condition of Hiland Partners, the existence of a potentially limited universe of investors in such a security, and (iv) significant execution risk as a result of the foregoing.

 

Issuance of Subordinated Debt.  Wachovia Securities also analyzed a subordinated debt issuance by Hiland Partners, the proceeds of which would be used to partially repay existing debt under the Hiland Operating Credit Agreement. The subordinated debt issuance would take the form of a subordinated loan with a blended coupon paid in cash and in-kind. Such a transaction could enable Hiland Partners to make distributions on common and subordinated units through the end of 2011, and could give unitholders the

ability to participate in future prospects of Hiland Partners which could be positive in the event of a recovery by Hiland Partners. A subordinated debt issuance could likely enable Hiland Partners to preserve its independence. Wachovia Securities identified the following additional considerations with respect to any such transaction: (i) such a transaction would require the consent of existing lenders under the Hiland Operating Credit Agreement, including their agreement to modify certain financial covenants, (ii) even though a subordinated debt issuance was not anticipated to result in an immediate dilution of unitholders, it would likely need to be refinanced with new equity, which would lead to significant dilution of ownership and cash distributions to unitholders, including Hiland Holdings, and (iii) given the financial condition of Hiland Partners, there would likely be a potentially limited universe of investors in such a security.

 

Issuance of New Common Equity.  Wachovia Securities also analyzed the possibility of Hiland Partners issuing new common equity to the public, the proceeds of which would be used to partially repay existing debt under the Hiland Operating Credit Agreement. If such a transaction could be executed, it could strengthen Hiland Partners’ balance sheet and allow for Hiland Partners’ continued independence. Wachovia Securities identified the following as potential impacts of any such transaction: (i) such a transaction would result in dilution of ownership and cash distributions to existing unitholders and would likely require their approval, (ii) issuance of new common equity to the public could permanently impair the value of Hiland Partners’ subordinated units and incentive distribution rights (all of which are owned by Hiland Holdings) by increasing the number of common units that would be entitled to receive minimum quarterly distribution (and arrearages) prior to any distributions on the subordinated units and incentive distribution rights, and (iii) the size of equity transaction required to achieve financial covenant compliance could be challenging given the existing equity market capitalization, float and financial condition of Hiland Partners. As a result of the foregoing and given the high volatility of public equity markets, this alternative possessed significant execution risk.

 

Merger with Third Party.  Wachovia Securities also analyzed the possibility of merging Hiland Partners with an unaffiliated third party, which could generate synergies and potentially alleviate concerns related to the Hiland Operating Credit Agreement. Such merger transaction could preserve unitholder participation in the event of a future recovery, provide business and financial diversification and mitigate operational and financial risk. Wachovia Securities identified the following as additional considerations with respect to any such transaction: (i) given the financial condition of Hiland Partners, there could be a potentially limited universe of investors, and (ii) any such merger transaction would likely result in the loss of control of the surviving entity by Mr. Hamm, who had indicated that he was interested only in acquiring common units of Hiland Partners and not selling his interest in Hiland Partners.

 

Rights Offering.  An additional strategic alternative analyzed by Wachovia Securities was a rights offering by Hiland Partners, the proceeds of which would be used to partially repay existing debt under the Hiland Operating Credit Agreement. Under the contemplated rights offering, existing unitholders would be issued rights on a pro rata basis to acquire newly issued common units of Hiland Partners. In addition, Mr. Hamm would act as the standby purchaser in the offering. Existing unitholders who had an interest could maintain their relative percentage ownership of Hiland Partners by exercising their rights to purchase common units issued by Hiland Partners at a discount to the public trading price. Such a transaction could potentially result in a smaller cash outlay from Mr. Hamm compared to a going private alternative. Wachovia Securities identified the following as additional potential impacts of any such transaction: (i) it would not provide liquidity at a premium for investors who were interested in selling their common units, (ii) it would effectively force Hiland Holdings to raise equity to participate in the rights offering in order to avoid dilution of its ownership interest in Hiland Partners, (iii) it would require approval by the unitholders; (iv) given the impaired financial condition of Hiland Partners, the existing unitholders’ participation in a rights offering would likely be limited, (v) any such transaction would increase the aggregate number of units of Hiland Partners and could consequently limit the ability of Hiland Partners to pay its minimum quarterly distribution to its common unitholders, resulting in the obligation to pay arrearages prior to any distributions on the subordinated units and incentive distribution rights could be made and as a result diminishing the value of each of the Hiland Partners common units, subordinated units and incentive distribution rights as well as Hiland Holdings units.

 

Merger of Hiland Holdings with Hiland Partners.  Wachovia Securities also analyzed a potential merger of Hiland Holdings with and into Hiland Partners to be followed by a rights offering. By merging Hiland

Holdings with and into Hiland Partners, the organizational structure of the Hiland Companies would be simplified and the public company expenses of Hiland Holdings would be eliminated. Wachovia Securities identified the following considerations with respect to any such transaction: (i) any such transaction presented complexity and timing issues, (ii) there could be difficulty valuing Hiland Holdings as a stand alone entity and determining an exchange ratio between each Hiland Partners unit and Hiland Holdings unit, (iii) there would likely be a need to raise substantial equity in the follow-up rights offering which would result in dilution to unitholders of the combined entity and potentially reduce any future distributions to the unitholders of such entity, and (iv) any such transaction would be subject to approval of the unitholders of each of Hiland Partners and Hiland Holdings.

 

Going Private Transactions.  Wachovia Securities analyzed a potential going private transaction of each of Hiland Partners and Hiland Holdings. Such transactions would potentially provide investors in the Hiland Companies with greater transaction certainty, liquidity at a premium at a time when Hiland Partners’ financial condition was considered to be impaired and Hiland Partners was expected to violate certain of its financial covenants, including the leverage ratio covenant. Wachovia Securities identified the following additional considerations with respect to any such transaction: (i) it would prevent current public unitholders from participating in the future prospects and risks of equity ownership in the Hiland Companies, (ii) the Hiland Companies could operate without the constraints, including costs, of being a public company, retain cash flows (instead of paying quarterly cash distributions) and pursue long-term projects, and (iii) as notified by MidFirst Bank, Mr. Hamm would likely be required to contribute substantial new equity to reduce existing debt of Hiland Partners and negotiate revisions to the Hiland Operating Credit Agreement.

 

The following is a summary of the material financial analyses contained in Wachovia Securities’ final presentation made to Mr. Hamm on April 16, 2009. The summary of the selected comparable transactions analysis is based in part on information included in Wachovia Securities’ presentation on January 5, 2009 (dated as of January 5, 2008), which was referenced in summary format and updated in Wachovia Securities’ final presentation made to Mr. Hamm on April 16, 2009. Management of the Hiland Companies provided Wachovia Securities financial projections to assist Wachovia Securities in performing its financial analysis. These financial projections consisted of management’s estimates with respect to the Hiland Companies’ future financial performance for the years 2009 through 2013 based on numerous assumptions made by management of the Hiland Companies, which are described in more detail under the heading “Projected Financial Information,” below.

 

Selected Comparable Transactions Analysis.  For reference purposes only, using publicly available information, including research analysts’ estimates and public filings, Wachovia Securities reviewed the following six selected transactions involving midstream MLPs announced during 2008: