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 1

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Hiland Partners, LP

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Supplement to Proxy Statement

 

AMENDMENTS TO MERGER AGREEMENTS — YOUR VOTE IS VERY IMPORTANT

 

Dear Common Unitholders of Hiland Partners and Hiland Holdings:

 

On or about September 16, 2009, we mailed to you a joint definitive proxy statement dated September 11, 2009 and invited you, 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, to attend a special meeting of the unitholders of the Hiland Company in which you own common units. Each of the special meetings was scheduled to occur on October 20, 2009.

 

Hiland Partners unitholders were invited to a special meeting to consider and vote on a proposal to approve the Agreement and Plan of Merger dated June 1, 2009 among Hiland Partners, Hiland Partners GP, LLC, HH GP Holding, LLC (“Parent”), and HLND MergerCo, LLC and the merger provided for therein (the “Hiland Partners merger”). Hiland Holdings unitholders were invited to a special meeting to consider and vote on a proposal to approve the Agreement and Plan of Merger dated June 1, 2009 among Hiland Holdings, Hiland Partners GP Holdings, LLC, Parent, and HPGP MergerCo, LLC and the merger provided for therein (the “Hiland Holdings merger”).

 

As you may know, on November 3, 2009, each Hiland Company amended its merger agreement to, among other things, increase the consideration payable to common unitholders of that Hiland Company and extend the end date of each merger agreement to December 11, 2009. The consideration payable to Hiland Partners common unitholders was increased from $7.75 to $10.00 per common unit, and the consideration payable to Hiland Holdings unitholders was increased from $2.40 to $3.20 per common unit.

 

Each of the Hiland Companies has adjourned its special meeting until December 4, 2009 to permit the solicitation of additional votes in favor of the approval of that Hiland Company’s merger agreement, as amended, and to provide its common unitholders additional time to (i) consider the amendments to the Hiland Partners merger agreement or the Hiland Holdings merger agreement, as applicable, including the increased merger consideration, and (ii) review the enclosed supplement.

 

Each of the reconvened special meetings will be held on Friday, December 4, 2009 at 302 N. Independence, Oak Room, First Floor, Enid, Oklahoma 73701. The Hiland Partners reconvened special meeting will be held at 9:00 a.m., local time, and the Hiland Holdings reconvened special meeting will be held at 10:30 a.m., local time.

 

The board of directors of the general partner of Hiland Partners (the “Hiland Partners Board of Directors”), after considering various factors, including the unanimous determination and recommendation of its independent conflicts committee (the “Hiland Partners Conflicts Committee”), determined that the Hiland Partners merger agreement, as amended, is advisable, fair to and in the best interests of Hiland Partners and the Hiland Partners common unitholders other than the general partner of Hiland Partners, its affiliates (as defined in the joint definitive proxy statement) and the directors and officers of Hiland Partners’ general partner (the “Hiland Partners public unitholders”). Accordingly, the Hiland Partners Board of Directors and the Hiland Partners Conflicts Committee both recommend that the Hiland Partners public unitholders vote “FOR” the approval of the Hiland Partners merger agreement, as amended, and the Hiland Partners merger.

 

The board of directors of the general partner of Hiland Holdings (the “Hiland Holdings Board of Directors”), after considering various factors, including the unanimous determination and recommendation of its independent conflicts committee (the “Hiland Holdings Conflicts Committee”), determined that the Hiland

Holdings merger agreement, as amended, is advisable, fair to and in the best interests of Hiland Holdings and the Hiland Holdings common unitholders other than Harold Hamm, his affiliates (as defined in the joint definitive proxy statement, including Continental Gas Holdings, Inc.), the Harold Hamm HJ Trust, the Harold Hamm DST Trust and the directors and officers of Hiland Holdings’ general partner (the “Hiland Holdings public unitholders”). Accordingly, the Hiland Holdings Board of Directors and the Hiland Holdings Conflicts Committee both recommend that the Hiland Holdings public unitholders vote “FOR” the approval of the Hiland Holdings merger agreement, as amended, and the Hiland Holdings merger.

 

Attached to this letter is a supplement to the joint definitive proxy statement dated September 11, 2009 that was previously sent to you. The proxy supplement contains additional and updated information about the Hiland Companies and the amended merger agreements. Please read this document carefully in its entirety. We also encourage you, if you have not done so already, to review carefully the joint definitive proxy statement.

 

The record date for each special meeting has not changed and remains September 9, 2009. This means that only unitholders of record of Hiland Partners or Hiland Holdings as of the close of business on September 9, 2009 are entitled to vote at the special meeting of the unitholders of that Hiland Company.

 

YOUR VOTE IS VERY IMPORTANT, regardless of the number of common units you own. For your convenience, we have enclosed proxy and instruction cards with this proxy supplement. If you have already delivered a properly executed proxy or instruction card regarding the merger proposal related to the Hiland Company in which you own common units or if you have already voted by telephone or over the Internet, you do not need to do anything unless you wish to change your vote. If you have not previously voted or if you wish to revoke or change your vote, please vote by telephone or over the Internet, or complete, date, sign and return your proxy or instruction card as soon as possible. If you are a registered holder and have already submitted a properly executed proxy card or otherwise voted by telephone or over the Internet, you can also attend the applicable reconvened special meeting and vote in person to change your vote.

 

If you have any questions, please contact D.F. King & Co., Inc., which is assisting each of the Hiland Companies, toll-free at 1-800-967-4612.

 

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 joint definitive proxy statement as supplemented by the proxy supplement. Any contrary representation is a criminal offense.

 

The attached proxy supplement is dated November 18, 2009 and is first being mailed to unitholders on or about November 20, 2009.

 

Table of Contents

 

 

This proxy supplement is being sent to you because (i) Hiland Partners, LP (“Hiland Partners”) has amended its Agreement and Plan of Merger, dated June 1, 2009 (the “Hiland Partners original merger agreement”), among Hiland Partners, Hiland Partners GP, LLC, HH GP Holding, LLC (“Parent”), and HLND MergerCo, LLC (“HLND Merger Sub”) and (ii) Hiland Holdings GP, LP (“Hiland Holdings,” and together with Hiland Partners, the “Hiland Companies”) has amended its Agreement and Plan of Merger, dated June 1, 2009 (the “Hiland Holdings original merger agreement”), among Hiland Holdings, Hiland Partners GP Holdings, LLC, Parent, and HPGP MergerCo, LLC (“HPGP Merger Sub” and, together with HLND Merger Sub, the “Merger Subs”). The holders of common units representing limited partner interests (“common units”) in Hiland Partners or Hiland Holdings, respectively, are being asked to approve the applicable merger agreements, as amended, and mergers at reconvened special meetings to be held on December 4, 2009. This proxy supplement provides information on the amended merger agreements and mergers and updates the joint definitive proxy statement dated September 11, 2009 previously mailed to the unitholders of the Hiland Companies on or about September 16, 2009 (the “joint definitive proxy statement”). The information provided in the joint definitive proxy statement continues to apply, except as described in this proxy supplement. To the extent information in this proxy supplement differs from, updates or conflicts with information contained in the joint definitive proxy statement, the information in this proxy supplement is the more current information. The joint definitive proxy statement may be found on the Internet at http://www.sec.gov or under “Investor Relations” on the Hiland Companies’ joint web site at http://www.hilandpartners.com.

 

The following summary, together with “Questions and Answers About the Amendments and the Adjourned Special Meetings,” highlights selected information contained in this proxy supplement 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 proxy supplement, as well as the joint definitive proxy statement that was previously mailed to you and the documents we refer to and have incorporated by reference herein, before voting or changing your vote. We also encourage you to read the original merger agreements and the amendments thereto 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.

 

Amendments to the Hiland Partners Merger Agreement

 

On October 26, 2009, Hiland Partners entered into Amendment No. 1 to the Hiland Partners original merger agreement (“Hiland Partners Amendment No. 1”) to extend the end date under the Hiland Partners original merger agreement from November 1, 2009 to November 6, 2009. The end date is the date after which either Hiland Partners and Hiland Partners GP, LLC, the general partner of Hiland Partners (together, the “Hiland Parties”), on the one hand, or Parent and HLND Merger Sub (together, the “HLND Parent Parties”), on the other hand, may terminate the Hiland Partners merger agreement and abandon the Hiland Partners merger if the Hiland Partners merger is not consummated by that date.

 

On November 3, 2009, Hiland Partners entered into Amendment No. 2 to the Hiland Partners original merger agreement (“Hiland Partners Amendment No. 2”), which further amends the Hiland Partners original merger agreement, to increase the consideration payable per 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) from $7.75 to $10.00 in cash (the “Hiland Partners merger consideration”). Hiland Partners Amendment No. 2 also extends the end date from November 6, 2009 to December 11, 2009.

 

Hiland Holdings and, only to the extent that they hold restricted common units, the officers and employees of Hiland Partners, are referred to in this proxy supplement as the “Hiland Partners rollover common unitholders.” We refer to the Hiland Partners original merger agreement, as amended by Hiland Partners Amendment No. 1 and Hiland Partners Amendment No. 2, as the “Hiland Partners amended merger agreement.”

 

See “Summary of Amendments to the Merger Agreements — Summary of Amendments to Hiland Partners Merger Agreement” beginning on page 62.

 

Amendments to the Hiland Holdings Merger Agreement

 

On October 26, 2009, Hiland Holdings entered into Amendment No. 1 to the Hiland Holdings original merger agreement (“Hiland Holdings Amendment No. 1”) to extend the end date under the Hiland Holdings original merger agreement from November 1, 2009 to November 6, 2009. The end date is the date after which either Hiland Holdings and Hiland Partners GP Holdings, LLC, the general partner of Hiland Holdings (together, the “Holdings Parties”), on the one hand, or Parent and HPGP Merger Sub (together, the “HPGP Parent Parties”), on the other hand, may terminate the Hiland Holdings merger agreement and abandon the Hiland Holdings merger if the Hiland Holdings merger is not consummated by that date.

 

On November 3, 2009, Hiland Holdings entered into Amendment No. 2 to the Hiland Holdings original merger agreement (“Hiland Holdings Amendment No. 2”), which further amends the Hiland Holdings original merger agreement, to increase the consideration payable per 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) from $2.40 to $3.20 in cash (the “Hiland Holdings merger consideration”). Hiland Holdings Amendment No. 2 also extends the end date from November 6, 2009 to December 11, 2009.

Harold Hamm, Continental Gas, the Hamm family trusts and, only to the extent that they hold restricted common units, the officers and employees of Hiland Holdings, are referred to in this proxy supplement as the “Hiland Holdings rollover common unitholders.” We refer to the Hiland Holdings original merger agreement, as amended by Hiland Holdings Amendment No. 1 and Hiland Holdings Amendment No. 2, as the “Hiland Holdings amended merger agreement.”

 

See “Summary of Amendments to the Merger Agreements — Summary of Amendments to Hiland Holdings Merger Agreement” beginning on page 63.

 

The Hiland Partners special meeting will be held on Friday, December 4, 2009 at 9:00 a.m., local time, at 302 N. Independence, Oak Room, First Floor, Enid, Oklahoma 73701. The Hiland Holdings special meeting will be held on Friday, December 4, 2009 at 10:30 a.m., local time, at 302 N. Independence, Oak Room, First Floor, Enid, Oklahoma 73701.

 

See “Questions and Answers About the Amendments and the Adjourned Special Meetings” beginning on page 7.

 

Recommendations of Hiland Partners Board of Directors and Conflicts Committee

 

After considering the various positive and negative factors more fully described in “Update to Special Factors — Recommendations of the Hiland Partners Conflicts Committee and Hiland Partners Board of Directors; Reasons for Recommending Approval of the Merger,” 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:

 

 

Accordingly, the Hiland Partners Conflicts Committee recommends that the Hiland Partners public unitholders vote in favor of the approval of the Hiland Partners amended merger agreement and the Hiland Partners merger.

 

After considering various factors, including the unanimous recommendation of the Hiland Partners Conflicts Committee and the delivery of the opinion of Jefferies & Company, Inc., the financial advisor to the Hiland Partners Conflicts Committee (whom we sometimes refer to as “Jefferies & Company”), to the Hiland Partners Conflicts Committee, the Hiland Partners Board of Directors has:

 

 

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

 

See “Update to 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 15.

 

Recommendations of Hiland Holdings Board of Directors and Conflicts Committee

 

After considering the various positive and negative factors more fully described in “Update to Special Factors — Recommendations of the Hiland Holdings Conflicts Committee and Hiland Holdings Board of Directors; Reasons for Recommending Approval of the Merger,” 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:

 

 

Accordingly, the Hiland Holdings Conflicts Committee recommends that the Hiland Holdings public unitholders vote in favor of the approval of the Hiland Holdings amended merger agreement and the Hiland Holdings merger.

 

After considering various factors, including the unanimous recommendation of the Hiland Holdings Conflicts Committee and the delivery of the opinion of Barclays Capital Inc., the financial advisor to the Hiland Holdings Conflicts Committee (whom we sometimes refer to as “Barclays Capital”), to the Hiland Holdings Conflicts Committee, the Hiland Holdings Board of Directors has:

 

 

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

 

See “Update to 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 29.

 

Opinion of Hiland Partners Conflicts Committee Financial Advisor

 

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 $10.00 per common unit to be received by the Hiland Partners public unitholders in the merger pursuant to the Hiland Partners amended 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 B to this proxy supplement. See “Update to Special Factors — Opinion of Financial Advisor of the Hiland Partners Conflicts Committee” beginning on page 19.

 

Opinion of Hiland Holdings Conflicts Committee Financial Advisor

 

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 $3.20 per common unit to be offered to the Hiland Holdings public unitholders in the merger pursuant to the Hiland Holdings amended 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 D to this proxy supplement. See “Update to Special Factors — Opinion of Financial Advisor of the Hiland Holdings Conflicts Committee” beginning on page 35.

 

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. These interests are more fully described under “Special Factors — Interests of Certain Persons in the Mergers” in the joint definitive proxy statement and “Update to Special Factors — Updates to Interests of Certain Persons in the Mergers” beginning on page 57.

 

Financing of the Mergers

 

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 proxy supplement as the “Hiland Partners commitment letter,” and an amendment to the Hiland Partners commitment letter, pursuant to which Mr. Hamm has committed to contribute approximately $41.3 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, as amended (the “Hiland Partners amended 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. According to the Schedule 13D amendment filed by Mr. Hamm, the Hamm family trusts and other group members on November 4, 2009, Mr. Hamm and the Hamm family trusts have agreed in principle for the Hamm family trusts to contribute an aggregate of approximately $16.3 million to fund the Hiland Partners merger, which would reduce Mr. Hamm’s funding obligation to approximately $25.0 million. Pursuant to its terms, Hiland Partners is a third-party beneficiary of the Hiland Partners amended 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 proxy supplement as the “Hiland Holdings commitment letter,” and an amendment to the Hiland Holdings commitment letter, pursuant to which Mr. Hamm has committed to contribute approximately $28.2 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, as amended (the “Hiland Holdings amended 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. According to the Schedule 13D amendment filed by Mr. Hamm, the Hamm family trusts and other group members on November 4, 2009, Mr. Hamm and the Hamm family trusts have agreed in principle for the Hamm family trusts to contribute an aggregate of approximately $11.1 million to fund the Hiland Holdings merger, which would reduce Mr. Hamm’s funding obligation to approximately $17.1 million. Pursuant to its terms, Hiland Holdings is a third-party beneficiary of the Hiland Holdings amended commitment letter.

 

See “Update to Special Factors— Financing of the Mergers” beginning on page 59.

 

Hiland Partners; Reimbursement of Certain Expenses

 

Generally, each party to the Hiland Partners amended merger agreement is responsible for its own expenses, including the fees and expenses of its advisors, except in certain circumstances when Hiland Partners must pay to Parent all of the expenses of the HLND Parent Parties, up to $1,420,000. These circumstances are more fully described in “Summary of Amendments to the Merger Agreements — Summary of Amendments to Hiland Partners Merger Agreement,” beginning on page 62.

 

Hiland Holdings; Reimbursement of Certain Expenses

 

Generally, each party to the Hiland Holdings amended merger agreement is responsible for its own expenses, including the fees and expenses of its advisors, except in certain circumstances when Hiland Holdings must pay to Parent all of the expenses of the HPGP Parent Parties, up to $1,067,000. These circumstances are more fully described in “Summary of Amendments to the Merger Agreements — Summary of Amendments to Hiland Holdings Merger Agreement,” beginning on page 63.

 

The following section provides brief answers to some of the more likely questions raised in connection with (i) the amendments to the Hiland Partners original merger agreement and the Hiland Partners merger and (ii) the amendments to the Hiland Holdings original merger agreement and the Hiland Holdings merger. This section is not intended to contain all of the information that is important to you. You are urged to read the entire supplement and joint definitive proxy statement carefully, including the annexes.

 

 

 

 

 

D.F. King & Co., Inc.
48 Wall Street, 22nd Floor
New York, NY 10005
Toll Free: 1-800-967-4612

 

The following updates “Special Factors — Background of the Mergers” contained in the joint definitive proxy statement for the period after the mailing of the joint definitive proxy statement.

 

On or around September 16, 2009, the Hiland Companies mailed the joint definitive proxy statement to the common unitholders of each Hiland Company and began the process of soliciting votes with respect to the original merger agreements and the mergers.

 

From October 12, 2009 through October 16, 2009, Matthew S. Harrison, the Chief Financial Officer, Vice President — Finance and Secretary of each of the Hiland Companies, distributed to the members of each Hiland Company Board of Directors, the most current information regarding the status of the votes on the mergers based upon information provided by the Hiland Companies’ proxy solicitor.

 

During this period, Robert Curry, a partner at Conner & Winters, LLP (“Conner & Winters”), counsel to the Hiland Partners Conflicts Committee and John McNabb, the Chairman of the Hiland Partners Conflicts Committee, had numerous telephonic discussions regarding the status of such votes and the possibility of the postponement of the Hiland Partners and Hiland Holdings special meetings. During the same time, the members of the Hiland Partners Conflicts Committee also had numerous telephonic discussions regarding the status of such votes and potential postponements of the special meetings.

 

On October 16, 2009, the Hiland Holdings Conflicts Committee conducted a telephone call with its legal advisors, including Kenneth L. Stewart and Bryn A. Sappington, partners at Fulbright & Jaworski L.L.P. (“Fulbright”), and Frederick H. Alexander and Louis G. Hering, partners at Morris, Nichols, Arsht & Tunnell LLP (“Morris Nichols”), in which Fulbright updated the Hiland Holdings Conflicts Committee on the status of the vote of the Hiland Holdings public unitholders and discussed a possible adjournment of the special meeting, which was scheduled for October 20, 2009.

 

Following a telephonic discussion on October 19, 2009, the Hiland Partners Conflicts Committee pursuant to a unanimous written consent (a) determined that it was in the best interest of Hiland Partners and the Hiland Partners public unitholders to adjourn the Hiland Partners special meeting for a period of not more than seven days to allow the Hiland Partners public unitholders additional time to consider and vote on the proposal to approve the Hiland Partners original merger agreement and the Hiland Partners merger, and (b) recommended that the Hiland Partners Board of Directors authorize such appropriate persons to adjourn the special meeting until such further time.

 

On October 20, 2009, the date of the originally scheduled special meetings, neither Hiland Company had received proxies representing the votes required to approve its respective original merger agreement and merger. As of the end of the day on October 19, 2009, approximately 59% of the common units represented by proxies received from Hiland Partners public unitholders had voted “FOR” approval of the Hiland Partners merger. These proxies amounted to approximately 43% of all outstanding common units held by Hiland Partners public unitholders. As of the end of the day on October 19, 2009, approximately 58% of the common units represented by proxies received from Hiland Holdings public unitholders had voted “FOR” approval of the Hiland Holdings merger. These proxies amounted to approximately 43% of all outstanding common units held by Hiland Holdings public unitholders.

 

On the morning of October 20, 2009, prior to the time of the special meeting of unitholders of Hiland Holdings scheduled for later that day, the Hiland Holdings Conflicts Committee held a telephone conference with Mr. Sappington and other representatives of Fulbright in which Dr. Bobby B. Lyle, the Chairman of the Hiland Holdings Conflicts Committee, updated the Hiland Holdings Conflicts Committee on the status of the vote of the Hiland Holdings public unitholders. The Hiland Holdings Conflicts Committee and Mr. Sappington discussed that the trend in the votes that had been submitted to Hiland Holdings’ proxy solicitor had been towards approval of Hiland Holdings merger and the Hiland Holdings original merger agreement, but not enough proxies had been submitted to achieve the approval of holders of a majority of the common units held by the Hiland Holdings public unitholders entitled to vote thereon. Given the foregoing, the Hiland Holdings

Conflicts Committee agreed to recommend to the Hiland Holdings Board of Directors that if the anticipated vote total would not be sufficient at the time of the special meeting to achieve the approval of holders of a majority of the common units held by the Hiland Holdings public unitholders entitled to vote thereon, the Hiland Holdings Board of Directors should adjourn the special meeting for a period of seven days to allow additional votes to be submitted by the Hiland Holdings unitholders.

 

Following the conclusion of the Hiland Holdings Conflicts Committee meeting on October 20, 2009, each Hiland Company held a special telephonic meeting of its Board of Directors. At each special meeting, Douglas McWilliams, a partner at Vinson & Elkins L.L.P. (“Vinson & Elkins”), outside counsel to each of the Hiland Companies, advised the members of the respective Boards of Directors of their duties under the applicable partnership agreement and Delaware law with respect to adjourning the special meetings. Based on the recommendation of its Conflicts Committee, each Hiland Company’s Board of Directors unanimously determined that it was in the best interests of such Hiland Company and its public unitholders to adjourn its special meeting until October 27, 2009 to allow additional time to solicit proxies from the applicable Hiland Company’s public unitholders. Later that morning, Joseph L. Griffin, President and Chief Executive Officer of each of the Hiland Companies, who had been appointed chairman of the special meetings, adjourned both the special meeting of the Hiland Partners unitholders and the special meeting of Hiland Holdings unitholders until October 27, 2009.

 

Following the adjournment of the October 20, 2009 special meetings and continuing through October 23, 2009, Messrs. Griffin and Harrison, and 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 “Hiland management team”) contacted or attempted to contact 26 of the largest non-objecting beneficial owners or institutional holders of each Hiland Company who had not yet voted their units or who had voted against the applicable merger, including Kayne Anderson Capital Advisors, L.P. and the Pennsylvania Public Schools Employees Retirement System. On each call, Messrs. Griffin, Harrison or Gipson offered to answer any questions the unitholder may have had and to listen to any comments the unitholder desired to make on the mergers or the solicitation process. During the course of these conversations, Kayne Anderson Capital Advisors indicated that, given recent increases in commodity prices, consideration in the range of $9.50 to $10.00 per Hiland Partners common unit and $3.20 per Hiland Holdings common unit seemed more appropriate than the consideration reflected in the original merger agreements. Similarly, the Pennsylvania Public School Employees Retirement System indicated that consideration for the Hiland Partners merger that was comparable to Mr. Hamm’s original offer on January 15, 2009 of $9.50 per common unit seemed appropriate under the circumstances. The Hiland management team conveyed the substance of these conversations to Mr. Hamm.

 

On October 23, 2009, in connection with the completion of the quarterly period ending September 30, 2009 and the preparation of the quarterly financial statements, the Hiland management team prepared updated financial projections for Hiland Partners (the “October Projections”). The October Projections updated the projections previously provided to the Conflicts Committees to reflect an improvement in crude oil, NGL and natural gas forward prices and lower forecasted natural gas volumes, in each case from those reflected in the August 27, 2009 projections. The October Projections are included in this proxy supplement under “Recent Developments — Updated Projected Financial Information” beginning on page 52. Later on October 23, 2009, the management team distributed the October Projections via email to the members of each Hiland Company’s Board of Directors, including Mr. Hamm and the members of each Conflicts Committee, and to each Conflicts Committee’s financial advisor.

 

On October 25, 2009 and again on October 26, 2009, Mr. Hamm discussed the possibility of making increased offers for the common units of the Hiland Companies not held by rollover common unitholders with Frank Murphy, managing director at Wells Fargo Securities, LLC (“Wells Fargo”), and other representatives of Wells Fargo and discussed procedural aspects of revising his proposal with Joshua Davidson, a partner at Baker Botts L.L.P. (“Baker Botts”), counsel to Mr. Hamm.

 

On October 26, 2009, at the direction of Mr. Hamm, Baker Botts transmitted letters to the Hiland Holdings Conflicts Committee and the Hiland Partners Conflicts Committee offering to increase the merger

consideration payable under each original merger agreement. Under the revised terms proposed by Mr. Hamm, (i) holders of Hiland Holdings common units would receive $3.20 in cash per common unit, increased from $2.40 in cash per common unit reflected in the Hiland Holdings original merger agreement, and (ii) holders of Hiland Partners common units would receive $10.00 in cash per common unit, increased from $7.75 in cash per common unit reflected in the Hiland Partners original merger agreement (the “October 26 Revised Proposal”).

 

In order to provide the Conflicts Committees and Boards of Directors with additional time to review the October 26 Revised Proposal, Mr. Hamm offered to amend each merger agreement to extend the end date, the earliest date that a party would have the right to terminate a merger agreement because the applicable merger had not yet closed, from November 1, 2009 to November 6, 2009. Following the delivery of the October 26 Revised Proposal, Baker Botts circulated initial drafts of Hiland Partners Amendment No. 1 and Hiland Holdings Amendment No. 1 to Conner & Winters and Fulbright, respectively.

 

On October 26, 2009, each Hiland Company’s Conflicts Committee met telephonically to discuss the October 26 Revised Proposal, the October Projections and Amendment No. 1 to the applicable merger agreement and adjournment of the special meeting of its unitholders. After discussion, each Conflicts Committee approved and recommended that the applicable Board of Directors approve (i) the adjournment of the special meeting of its unitholders to November 3, 2009, and (ii) Amendment No. 1 to the applicable merger agreement.

 

On the evening of October 26, 2009, each Hiland Company held a special telephonic meeting of its Board of Directors to consider the appropriate response to the October 26 Revised Proposal. At each special meeting, Mr. Griffin reviewed the October Projections and summarized the most recent preliminary voting results related to the mergers. Mr. McWilliams advised the members of the respective Boards of Directors of their duties under the applicable partnership agreement and Delaware law with respect to responding to the October 26 Revised Proposal, amending the applicable merger agreement and adjourning the applicable special meeting. Mr. McWilliams also summarized the provisions of the applicable amendments.

 

Based on the recommendation of its Conflicts Committee, each Hiland Company’s Board of Directors unanimously (i) approved the applicable amendment to its merger agreement and (ii) authorized the adjournment of its special meeting until November 3, 2009 to allow its Conflicts Committee and its Board of Directors additional time to consider the October 26 Revised Proposal. Later that night, Hiland Partners entered into Hiland Partners Amendment No. 1 and Hiland Holdings entered into Hiland Holdings Amendment No. 1. On the morning of October 27, 2009, Mr. Griffin further adjourned both the special meeting of the Hiland Partners unitholders and the special meeting of Hiland Holdings unitholders to November 3, 2009.

 

Between October 26, 2009 and November 2, 2009, at the instruction of the Hiland Holdings Conflicts Committee, Barclays Capital reviewed the October Projections and the financial terms of Mr. Hamm’s revised offer and had several calls and discussions with Messrs. Griffin and Harrison regarding this information. In addition, during this time period the members of the Hiland Holdings Conflicts Committee together held telephonic discussions with Messrs. Stewart and Sappington and other representatives of Fulbright, Mr. Alexander and other representatives of Morris Nichols and Scott Rogan and Jeremy Michael, Managing Directors of Barclays Capital, and other representatives of Barclays Capital regarding the October 26 Revised Proposal.

 

On October 26, 2009, the Hiland Partners Conflicts Committee and Jefferies & Company had a conference call with the Hiland management team regarding the October Projections and, on October 27, 2009, the Hiland Partners Conflicts Committee formally re-engaged Jefferies & Company to update its fairness opinion based upon the October Projections, the October 26 Revised Proposal and other relevant factors.

 

On the afternoon of October 29, 2009, Fulbright distributed an initial draft of Hiland Holdings Amendment No. 2 and an amendment to the Hiland Holdings commitment letter to Baker Botts reflecting the terms of the revised offer and proposing to further extend the end date and requesting Mr. Hamm to increase his commitment to contribute cash to consummate the Hiland Holdings merger to reflect the revised consideration in the October 26 Revised Proposal and expenses of the Hiland Holdings Conflicts Committee.

 

Also on October 29, 2009, Ryan Sacra, a partner at Conner & Winters, had separate conversations with Troy Lee, a senior associate at Baker Botts and with Mr. Sappington of Fulbright regarding possible amendments to the merger agreements and what their respective clients proposed to be included in such amendments. Later the same day, Fulbright sent to Conner & Winters the initial draft of Hiland Holdings Amendment No. 2 that Fulbright had sent to Baker Botts earlier that day and an initial draft of the amendment to the Hiland Holdings commitment letter.

 

On October 30, 2009, the Barclays Capital engagement letter was amended to provide for a fairness opinion related to Mr. Hamm’s revised offer of $3.20 per Hiland Holdings common unit.

 

From October 29, 2009 through November 2, 2009, Robert Curry, a partner at Conner & Winters, and Mr. Sacra of Conner & Winters had a number of telephonic conversations with the Hiland Partners Conflicts Committee regarding Hiland Partners Amendment No. 2 and an amendment to the Hiland Partners commitment letter in light of the October 26 Revised Proposal.

 

On November 2, 2009, at the direction of the Hiland Partners Conflicts Committee, Conner & Winters negotiated with Baker Botts a draft of Hiland Partners Amendment No. 2 and a draft amendment to the Hiland Partners commitment letter, which proposed to increase Mr. Hamm’s commitment to contribute cash to consummate the Hiland Partners merger to reflect the increased merger consideration and expenses of Mr. Hamm and his affiliates in connection with the October 26 Revised Proposal.

 

Later that day, Dr. Lyle, on behalf of the Hiland Holdings Conflicts Committee, discussed telephonically with Mr. Griffin the ability of Hiland Holdings to meet its short-term financial obligations, including payment of incremental expenses associated with the October 26 Revised Proposal and the Hiland Holdings merger. Mr. Griffin informed Dr. Lyle that Hiland Holdings had been pursuing various loans from its existing lender and other potential sources, but that so far, it had not been able to obtain credit from third parties to enable it to pay those obligations. Mr. Griffin informed Dr. Lyle that he had initiated discussions with Mr. Hamm to lend money to Hiland Holdings at an interest rate identical to the rate applicable to Hiland Holdings’ existing bank credit facility, but subordinated to the indebtedness under that credit facility. Dr. Lyle asked Mr. Griffin to continue those discussions with Mr. Hamm.

 

On the evening of November 2, the Hiland Holdings Conflicts Committee met with Messrs. Stewart and Sappington and other representatives of Fulbright and Scott Rogan and Jeremy Michael, Managing Directors of Barclays Capital, and other representatives of Barclays Capital (with Mr. Michael participating telephonically). At the meeting, Barclays Capital provided its updated financial analysis and delivered its oral opinion, confirmed in writing the following day, that the revised merger consideration of $3.20 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. At this meeting, Barclays Capital updated the Hiland Holdings Conflicts Committee with its analyses relating to its valuation of the Hiland Companies, including a summary of the value of Mr. Hamm’s offer, and an overview of commodities markets, including the state of the current and projected crude oil, natural gas and natural gas liquids (“NGLs”) commodities markets. Barclays Capital’s presentation also included updated analyses, from a financial point of view, of potential strategic alternatives which had been previously reviewed by Barclays Capital with the Hiland Holdings Conflicts Committee. Barclays Capital also stated in its presentation that it did not appear likely that there were alternatives to Mr. Hamm’s revised offer that were superior, from a financial point of view, to the Hiland Holdings public unitholders.

 

Barclays Capital noted in particular that:

 

compliance with this covenant beyond 2009 was dependent upon commodity prices exceeding current levels;

 

 

On November 3, 2009, Mr. Sappington and other representatives of Fulbright contacted Mr. Lee of Baker Botts to finalize the draft Hiland Holdings Amendment No. 2. Additionally, Mr. Griffin informed Dr. Lyle that Mr. Hamm had agreed to lend Hiland Holdings $1.5 million until December 31, 2009 according to the terms discussed the previous day to allow it to meet its short term working capital needs, including the payment of the Hiland Holdings Conflicts Committee’s independent advisors’ fees and expenses and other expenses associated with the Hiland Holdings merger.

 

Later that day, the Hiland Holdings Conflicts Committee met with Messrs. Stewart and Sappington of Fulbright. At the meeting, the Hiland Holdings Conflicts Committee discussed further Barclays Capital’s analyses and opinion delivered the previous evening. In addition, Mr. Sappington discussed with the Hiland Holdings Conflicts Committee the latest drafts of Hiland Holdings Amendment No. 2 and the Hiland Holdings amended commitment letter. After hearing from its advisors and deliberating, the Hiland Holdings Conflicts Committee resolved unanimously (a) that the Hiland Holdings amended 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 amended 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 amended merger agreement and the Hiland Holdings merger, and (d) to recommend to the Hiland Holdings public unitholders that such public unitholders should approve the amended Hiland Holdings merger agreement and the Hiland Holdings merger. In addition, the Hiland Holdings Conflicts Committee approved Mr. Hamm’s loan of $1.5 million to Hiland Holdings and the adjournment of the Hiland Holdings special meeting of unitholders until December 4, 2009 and resolved to recommend that the Hiland Holdings Board of directors also approve these matters.

 

Also on November 3, 2009, the Hiland Partners Conflicts Committee met with Mr. Curry of Conner & Winters and Jefferies & Company, which was engaged by the Hiland Partners Conflicts Committee to consider the fairness, from a financial point of view, of the Hiland Partners merger consideration to the Hiland Partners public unitholders. Representatives of Jefferies & Company, including Stephen Straty, Managing Director of Jefferies & Company, and Jay C. Parkinson, Senior Vice President of Jefferies & Company, participating in the meeting telephonically, made a presentation to the Hiland Partners Conflicts Committee on their financial analysis regarding the proposed Hiland Partners merger consideration considering the October Projections, the October 26 Revised Proposal and other relevant information, a copy of which had been provided to the Hiland Partners Conflicts Committee prior to the meeting. Messrs. Straty and Parkinson responded to numerous questions from the Hiland Partners Conflicts Committee and counsel with respect to the Jefferies & Company presentation. At the conclusion of their presentation, Jefferies & Company issued its oral opinion, subsequently confirmed in writing, that the transaction was fair, from a financial point of view, to the Hiland Partners public unitholders. After Jefferies & Company left the meeting, discussion ensued about the various alternatives to the proposed merger, which had been previously discussed at the May 13, 2009 meeting of the Hiland Partners Conflicts Committee, and the Hiland Partners Conflicts Committee concluded that the best (and probably only

viable) alternative available to Hiland Partners continued to be the Hiland Partners merger as contemplated in Hiland Partners amended merger agreement.

 

Following these discussions, the Hiland Partners Conflicts Committee resolved unanimously: (i) that Hiland Partners Amendment No. 2, the Hiland Partners amended merger agreement and the Hiland Partners merger, were advisable, fair to, and in the best interests of Hiland Partners and the Hiland Partners public unitholders; (ii) to recommend that the Hiland Partners Board of Directors approve Hiland Partners Amendment No. 2 (in its individual capacity and in its capacity as the general partner of the Partnership) and recommend that the Hiland Partners public unitholders approve the Hiland Partners amended merger agreement and the Hiland Partners merger; (iii) that it was in the best interest of Hiland Partners and the Hiland Partners public unitholders to adjourn the Hiland Partners special meeting until December 4, 2009; and (vi) to recommend that the Hiland Partners Board of Directors approve the adjournment the Hiland Partners special meeting until December 4, 2009.

 

That same day, following the meetings of each Conflicts Committee during which each Conflicts Committee approved the applicable amended merger agreement and merger and recommended that their respective full Board of Directors approve the applicable amended merger agreement and merger, each Board of Directors of the Hiland Companies convened regularly scheduled meetings to consider the applicable recommendation along with other items of business.

 

At the Hiland Partners Board of Directors meeting, Mr. McWilliams again reviewed with the Hiland Partners Board of Directors its duties under the Hiland Partners partnership agreement and Delaware law, and Messrs. Griffin and Harrison provided an update on Hiland Partners’ business. Following the update, Messrs. Straty and Parkinson and other representatives of Jefferies & Company presented its financial analysis of the $10.00 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. Mr. McWilliams then reviewed the terms of the Hiland Partners Amendment No. 2 and the amendment to the Hiland Partners commitment letter. After hearing from its advisors and the members of the Hiland Partners Conflicts Committee and their advisors, the Hiland Partners Board of Directors (i) determined that the Hiland Partners amended merger agreement and the Hiland Partners merger were advisable, fair to, and in the best interests of Hiland Partners and the Hiland Partners public unitholders and approved the Hiland Partners amended merger agreement and the Hiland Partners merger, (ii) recommended approval of the Hiland Partners amended merger agreement and the Hiland Partners merger to the Hiland Partners public unitholders, (iii) authorized the adjournment of the Hiland Partners special meeting of unitholders until December 4, 2009, and (iv) took other related actions.

 

Following the conclusion of the regular meeting of the Hiland Partners Board of Directors, the Hiland Holdings Board of Directors also convened a special meeting. At this meeting, Mr. McWilliams again reviewed with the Hiland Holdings Board of Directors its duties under the Hiland Holdings partnership agreement and Delaware law, and Messrs. Griffin and Harrison provided an update on the Hiland Companies’ business. Following the update, Messrs. Rogan and Michael and other representatives of Barclays Capital presented its financial analysis of the $3.20 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. Mr. McWilliams then reviewed the terms of the Hiland Holdings Amendment No. 2, the amendment to the Hiland Partners commitment letter and the $1.5 million loan from Mr. Hamm. After hearing from its advisors and the members of the Hiland Holdings Conflicts Committee and their advisors, the Hiland Holdings Board of Directors (i) determined that the Hiland Holdings amended merger agreement and the Hiland Holdings merger were advisable, fair to, and in the best interests of Hiland Holdings and the Hiland Holdings public unitholders and approved the Hiland Holdings amended merger agreement and the Hiland Holdings merger, (ii) recommended approval of the Hiland Holdings amended merger agreement and the Hiland Holdings merger to the Hiland Holdings public unitholders, (iii) authorized the adjournment of the Hiland Holdings special meeting of unitholders until December 4, 2009, (iv) approved the $1.5 million loan from Mr. Hamm, and (iv) took other related actions.

On the evening of November 3, 2009, Hiland Partners, the general partner of Hiland Partners, Parent and HLND Merger Sub executed Hiland Partners Amendment No. 2 and related documents and Hiland Holdings, the general partner of Hiland Holdings, Parent and HPGP Merger Sub executed Hiland Holdings Amendment No. 2 and the related documents. The Hiland Companies then issued a joint press release announcing the signing of the amendments to the merger agreements and the adjournment of the special meetings.

 

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 revised proposal and potential alternative transactions and conducted negotiations with Mr. Hamm and his representatives with respect to the Hiland Partners merger agreement, including the amendments to that 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 November 3, 2009, determined that the Hiland Partners amended merger agreement and the transactions contemplated by the Hiland Partners amended merger agreement were advisable, fair to, and in the best interests of, Hiland Partners and the Hiland Partners public unitholders. In addition, at the November 3, 2009, meeting, the Hiland Partners Conflicts Committee recommended that (1) the Hiland Partners Board of Directors approve the Hiland Partners amended merger agreement and the Hiland Partners merger and (2) the Hiland Partners public unitholders vote in favor of approval of the Hiland Partners amended 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 reaching its determination, the Hiland Partners Conflicts Committee did not consider any potential alternatives other than the alternatives previously considered while evaluating the January 15 Proposal and described in the joint definitive proxy statement.

 

In determining that the Hiland Partners amended 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 amended 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 November 3, 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 $10.00 per common unit, a price the Hiland Partners Conflicts Committee viewed as fair in light of Hiland Partners’ recent and projected financial performance, updated as of October 23, 2009, 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 November 3, 2009, and subsequently confirmed in writing later that day, to the effect that, as of the date of the opinion, the $10.00 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 November 3, 2009, in connection with the foregoing opinion, which is described under “— Opinion of Financial Advisor of the Hiland Partners Conflicts Committee.”

 

4. The difficult business environment currently facing Hiland Partners, including commodity prices, in particular natural gas prices, and the lack of current drilling activity in Hiland Partners’ area of interest as of November 3, 2009, 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 January 15 Proposal.

 

6. The Hiland Partners Conflicts Committee’s belief that the $10.00 per common unit cash merger consideration represented the highest per common unit consideration that could be negotiated given the current economic conditions and lack of drilling activity.

 

7. The likelihood that Hiland Partners would be in violation of the leverage ratio covenant under the Hiland Operating Credit Agreement at some point, possibly as early as December 31, 2009, based upon estimates and projections provided by the management of the Hiland Companies, updated as of October 23, 2009. In that regard, the Hiland Partners Conflicts Committee concluded that:

 

 

8. The terms of the Hiland Partners amended 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 amended commitment letter.

 

9. The terms of the Hiland Partners amended 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. However, in considering this unfavorable factor, the Hiland Partners Conflicts Committee noted that before the Hiland Partners merger could be consummated, the holders of a majority of the outstanding Hiland Partners common units held by Hiland Partners public unitholders would have to approve the Hiland Partners amended merger agreement and the Hiland Partners merger.

 

2. Given that Mr. Hamm (who, together with Continental Gas and the Hamm family trusts, owns 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. However, in considering this factor, the Hiland Partners Conflicts Committee noted that although the Hiland Companies had not been proactively shopped, the proposed transaction had been known to the public for almost ten months, and no third party had expressed an interest in buying either Hiland Partners or the general partner of Hiland Partners.

 

3. The Hiland Partners amended merger agreement’s limitations on Hiland Partners’ ability to solicit third party offers. However, in considering this factor, the Hiland Partners Conflicts Committee noted that although the Hiland Companies had not been proactively shopped, the proposed transaction had been

known to the public for almost ten months, and no third party had expressed an interest in buying either Hiland Partners or the general partner of Hiland Partners.

 

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 expressly adopted the analysis of Jefferies & Company and considered such analysis and opinion, among other factors, in reaching its determination as to the substantive fairness of the going private transactions contemplated by the Hiland Partners amended merger agreement to the Hiland Partners public unitholders.

 

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 determined that the process it followed in making its determination and recommendation with respect to the Hiland Partners amended merger agreement was procedurally fair to the Hiland Partners public unitholders for the reasons discussed in the joint definitive proxy statement.

 

The Hiland Partners Conflicts Committee did not consider liquidation value, net book value or going concern value in determining the fairness of the Hiland Partners merger to the Hiland Partners public unitholders for the reasons discussed in the joint definitive proxy statement.

 

The Hiland Partners Board of Directors

 

On November 3, 2009, the Hiland Partners Board of Directors met to consider the report and recommendation of the Hiland Partners Conflicts Committee related to the October 26 Revised Proposal. 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 (1) determined that the Hiland Partners amended merger agreement and the transactions contemplated by the Hiland Partners amended 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 amended merger agreement and the Hiland Partners merger.

 

As was the case in connection with the Hiland Partners Board of Directors’ consideration and vote on the original merger agreement, neither of Messrs. Hamm nor Reid participated in the Hiland Partners Board of Directors’ consideration or vote on these matters.

 

Because Messrs. Hamm and Reid abstained from voting on the Hiland Partners amended 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 amended merger agreement and the Hiland Partners merger.

 

In determining that the Hiland Partners amended 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 amended merger agreement and the transactions contemplated by the Hiland Partners amended merger agreement, including the Hiland Partners merger, and recommending that the Hiland Partners public unitholders vote for the approval of the Hiland Partners amended 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 amended 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 or net book value in determining the fairness of the Hiland Partners merger to the Hiland Partners public unitholders for the reasons discussed in the joint definitive proxy statement.

 

The Hiland Partners Board of Directors believes that the Hiland Partners merger is procedurally fair for the reasons discussed in the joint definitive proxy statement.

 

Jefferies & Company was engaged by the Hiland Partners Conflicts Committee to render an opinion to the Hiland Partners Conflicts Committee as to whether the merger consideration of $10.00 in cash per common unit to be received by the Hiland Partners public unitholders pursuant to the Hiland Partners amended merger agreement was fair, from a financial point of view, to such holders. The Hiland Partners Conflicts Committee spoke with seven financial advisory firms, and after due consideration, the Hiland Partners Conflicts Committee selected Jefferies & Company for the purpose of providing a fairness opinion to the Hiland Partners Conflicts Committee, in light of Jefferies & Company’s relevant industry experience and prior representation of special committees and conflicts committees. On November 3, 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 and described below, the merger consideration to be received by the Hiland Partners public unitholders pursuant to the Hiland Partners amended merger agreement was fair, from a financial point of view, to such holders. The November 3, 2009 opinion of Jefferies & Company is referred to hereinafter in this “Opinion of Hiland Partners Conflicts Committee Financial Advisors” section as the “opinion.”

 

The full text of the opinion is attached as Annex B to this proxy supplement and incorporated into this proxy supplement 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 amended merger agreement as compared to any alternative transaction or opportunity that was, or 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 amended 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 amended 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 the Hiland Partners original merger agreement and a draft of Hiland Partners Amendment No. 2, dated November 2, 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 amended 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. Included in the financial information provided to Jefferies & Company were certain financial forecasts, dated October 23, 2009, which are disclosed herein beginning on page 53. 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 amended 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 Hiland Partners Amendment No. 2 would be substantially similar to the draft, dated November 2, 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.

 

Jefferies & Company’s opinion was based on and subject to a number of assumptions, factors, and limitations. Specifically, Jefferies & Company assumed:

 

 

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 servicing similar markets. Jefferies & Company reviewed and compared selected financial data for eleven publicly traded companies in the energy industry. Six of the companies chosen derived more than 50% of their estimated 2009 cash flow from non fee-based contracts, and five of the companies chosen derived more than 50% of their estimated 2009 cash flow from fee-based contracts. 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:

 

Non Fee-Based

 

 

Fee-Based

 

 

For each of the comparable companies, Jefferies & Company calculated the total enterprise value as a multiple of (i) that company’s EBITDA for the noted last twelve month (“LTM”) periods; (ii) that company’s EBITDA, to the extent available, for the year ending December 31, 2009, as reflected in certain First Call estimates; (iii) that company’s estimated EBITDA, to the extent available, for the year ending December 31, 2010, as reflected in certain First Call estimates; (iv) that company’s estimated earnings per unit (“EPU”), to the extent available, for the year ending December 31, 2009, as reflected in certain First Call estimates; and (v) that company’s estimated EPU, 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, as of October 30, 2009 and September 30, 2009, respectively. 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 October 30, 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 October 30, 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 October 30, 2009.

 

Utilizing the most representative multiple range, which emphasized companies with low or no projected distribution yields, 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%; (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%; (iv) Hiland Partners’ projected EPU for the year ending December 31, 2009, based on Hiland Partners management’s estimates, where the estimated downside projected EPU assumed inlet natural gas volumes were risked at 95%; and (v) Hiland Partners’ projected EPU for the year ending December 31, 2010, based on Hiland Partners management’s estimates, where the estimated downside projected EPU 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. For further detail regarding the results of the calculations described above for each of the comparable companies, please see page 31 of Jefferies & Company’s presentation to the Hiland Partners Conflicts Committee filed as Exhibit (c)(18) to the Transaction Statement on Schedule 13E-3 (a “Schedule 13E-3”) filed by Hiland Partners on November 9, 2009. 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 $9.81 per unit on October 30, 2009; and (ii) the merger consideration of $10.00 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. Relative valuation methodologies, such as comparable public company analysis, are less illustrative given Hiland Partners’ limited public float, small market capitalization relative to its peers, and lower trading volume relative to its peers.

Premiums Paid Analysis

 

Jefferies & Company utilized a premiums paid analysis, a method of applying premiums paid in selected merger transactions to closing share prices of a company. Using publicly available information, Jefferies & Company conducted a premiums paid analysis using a sample of 23 transactions announced since April 7, 2004. Each of the 23 transactions (i) was a change of control transaction and (ii) involved companies in the energy industry, which is the industry in which Hiland Partners operates. Based on these factors and Jefferies & Company’s experience with transactions in the energy industry, Jefferies & Company determined that these 23 transactions were relevant for purposes of the premiums paid analysis. The 23 change of control transactions used by Jefferies & Company in its premiums paid analysis were:

 

 

For each of the target companies involved in the 23 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 $10.00 proposed merger consideration over Hiland Partners’ common unit price on one trading

day prior to the announcement of the revised offer of $10.00 per common unit of Hiland Partners ($7.80). A summary of the premiums observed in the premiums paid analysis is set forth in the table below:

 

 

Comparable Transactions Analysis

 

Using publicly available information, Jefferies & Company examined the 24 transactions listed below, announced since January 1, 2005, that involved gathering and processing companies. Jefferies & Company selected these transactions because they involved companies with businesses that are reasonably similar to that

of Hiland Partners. The transactions considered and the month and year each transaction was announced were as follows:

 

 

Using publicly available estimates and other publicly available information for each of these transactions, Jefferies & Company reviewed the total enterprise value as a multiple of the target company’s EBITDA immediately preceding announcement of the transaction, which is referred to below as “Enterprise Value/EBITDA.”

 

This analysis indicated the following:

 

Selected Comparable Transactions Multiples

 

 

Using a reference range of 6.0x to 7.0x and Hiland Partners’ LTM EBITDA of $54.5 million, Jefferies & Company calculated an implied equity value range for Hiland Partners of $7.72 to $13.43 and compared this range to the Hiland Partners merger consideration of $10.00 per common unit. For further detail regarding the results of the calculations described above for each of the comparable transactions, please see page 33 of Jefferies & Company’s presentation to the Hiland Partners Conflicts Committee filed as Exhibit (c)(18) to the Schedule 13E-3 filed by Hiland Partners on November 9, 2009.

 

No transaction utilized as a comparison in the comparable transaction analysis is identical to the merger. In evaluating the merger, Jefferies & Company made numerous judgments and assumptions with regard to industry performance, general business, economic, market, and financial conditions and other matters, many of

which are beyond Hiland Partners’ and Jefferies & Company’s control. A purely mathematical analysis is not in itself a meaningful method of using comparable transaction data.

 

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 October 1, 2009 through December 31, 2013. Those internal financial projections, dated October 23, 2009, and disclosed herein beginning on page 52, 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 7.0x to 8.0x, 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 $4.20. Jefferies & Company then compared the implied equity prices per common unit values against the $10.00 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. For further detail regarding the calculation of the implied equity price per common unit value range described above, please see pages 34 and 35 of Jefferies & Company’s presentation to the Hiland Partners Conflicts Committee filed as Exhibit (c)(18) to the Schedule 13E-3 filed by Hiland Partners on November 9, 2009.

 

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. The merger consideration was determined through negotiations between the Hiland Partners Conflicts Committee and Mr. Hamm and was recommended by the Hiland Partners Conflicts Committee for approval by the Hiland Partners Board of Directors and approved by the Hiland Partners Board of Directors. Jefferies & Company did not recommend any specific merger consideration to Hiland Partners, the Hiland Partners Conflicts Committee or the Hiland Partners Board of Directors or that any specific consideration constituted the only appropriate consideration with respect to the Hiland Partners amended 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 on November 9, 2009.

 

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. In the past two years, Jefferies & Company has received no compensation from Hiland Partners or its affiliates other than a fee of $550,000 for financial advisory services provided to the Hiland Partners Conflicts Committee in connection with evaluating the Hiland Partners merger and delivery of its opinion on June 1, 2009 in connection with the original merger agreement.

 

Pursuant to an amended engagement letter dated October 27, 2009, 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 $350,000 for its services from Hiland Partners, all 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.

 

Harold Hamm and the other HLND Schedule 13E-3 Filing Persons (with the exception of Messrs. Griffin and Harrison, who express their views below) believe that the Hiland Partners merger consideration, as increased in the Hiland Partners amended merger agreement, is substantively fair to the Hiland Partners public unitholders and that Hiland Partners Amendment No. 2 is procedurally fair to those unitholders. The HLND Schedule 13E-3 Filing Persons did not perform, or engage a financial advisor to perform, any financial analysis in connection with the Hiland Partners merger agreement amendments for the purposes of assessing the fairness of the Hiland Partners merger to the Hiland Partners public unitholders. Each of Harold Hamm and the other HLND Schedule 13E-3 Filing Persons (with the exception of Messrs. Griffin and Harrison) believe that the reasons described in the joint definitive proxy statement that lead them to conclude that the prior Hiland Partners merger consideration of $7.75 per common unit to be, and related process was, substantively and procedurally, fair continue to remain applicable in light of the enhanced Hiland Partners merger consideration of $10.00 per common unit. In addition, each of Harold Hamm and the other HLND Schedule 13E-3 Filing Persons (with the exception of Messrs. Griffin and Harrison) took into consideration the following factors:

 

 

 

The HLND Schedule 13E-3 Filing Persons did not consider the net book value of Hiland Partners common units for the reasons discussed in the joint definitive proxy statement.

 

Messrs. Griffin and Harrison believe that the Hiland Partners merger, as amended, is both substantively and procedurally fair to the Hiland Partners public unitholders based on the factors described in “— Recommendations of the Hiland Partners Conflicts Committee and Hiland Partners Board of Directors; Reasons for Recommending Approval of the Merger — The Hiland Partners Board of Directors” beginning on page 15 of this proxy supplement and page 48 of the joint definitive proxy statement. In doing so, Messrs. Griffin and Harrison expressly adopted the analysis of the Hiland Partners Conflicts Committee, which is discussed above.

 

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 Fulbright as its independent legal counsel and Morris Nichols as its independent special Delaware legal counsel. In addition, the Hiland Holdings Conflicts Committee selected and the general partner of Hiland Holdings retained Barclays Capital as the independent financial advisor of the Hiland Holdings Conflict Committee. 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 revised proposal and potential alternative transactions and conducted negotiations with Mr. Hamm and their representatives with respect to the Hiland Holdings merger agreement, including the amendments to that 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 November 3, 2009, determined that the Hiland Holdings amended merger agreement and the transactions contemplated by the Hiland Holdings amended merger agreement were advisable, fair to, and in the best interests of, Hiland Holdings and the Hiland Holdings public unitholders. In addition, at the November 3, 2009 meeting, the Hiland Holdings Conflicts Committee recommended that (1) the Hiland Holdings Board of Directors approve the Hiland Holdings amended 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 amended 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 reaching its determination, the Hiland Holdings Conflicts Committee did not consider any potential alternatives other than the alternatives previously considered while evaluating the January 15 Proposal and described in the joint definitive proxy statement.

 

In determining that the Hiland Holdings amended 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 amended 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 November 3, 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 $3.20 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 trading prices of the Hiland Holdings common units prior to the announcement of the original transaction. 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 November 2, 2009, and subsequently confirmed in writing the next day, to the effect that as of the date of the opinion, the $3.20 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 November 2, 2009, in connection with the foregoing opinion, which is described under “— Opinion of Financial Advisor of the Hiland Holdings Conflicts Committee.”

 

4. The difficult business environment currently facing the Hiland Companies, including 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 October 26 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 $3.20 per common unit cash merger consideration represented the highest per common unit consideration that could be negotiated given the significant arrearages accrued with respect to the Hiland Partners common units and the current economic conditions and lack of drilling activity.

 

7. The agreement by Mr. Hamm to lend $1,500,000 to Hiland Holdings to enable Hiland Holdings to fund its working capital requirements for the remainder of 2009, including the fees and expenses associated with the Hiland Holdings merger.

 

8. The terms of the Hiland Holdings amended 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 amended commitment letter.

 

9. The terms of the Hiland Holdings amended 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 amended 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 expressly adopted the analyses of Barclays Capital and considered such analyses and opinion, among other factors considered, in reaching its determination as to the substantive fairness of the going private transactions contemplated by the Hiland Holdings amended merger agreement to the Hiland Holdings public unitholders.

 

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 determined that the Hiland Holdings merger was procedurally fair to the Hiland Holdings public unitholders and believes that the process it followed in making its determination and recommendation with respect to the Hiland Holdings amended merger agreement was fair for the reasons discussed in the joint definitive proxy statement.

 

The Hiland Holdings Conflicts Committee did not consider liquidation value or net book value in determining the fairness of the Hiland Holdings merger to the Hiland Holdings public unitholders for the reasons discussed in the joint definitive proxy statement.

 

The Hiland Holdings Conflicts Committee also did not consider the going concern value in determining the fairness of the Hiland Holdings merger to the Hiland Holdings public unitholders because of its belief, after consulting with its financial advisor, that going concern value does not present a meaningful valuation metric for Hiland Holdings, as (i) it would be difficult for Hiland Partners to maintain compliance with the leverage ratio covenant under the Hiland Operating Credit Agreement beyond 2009 since compliance beyond that date likely depended upon commodity prices exceeding current levels and a continued suspension of Hiland Partners distributions, and (ii) if a default occurred, the Hiland Companies could not continue operating without some sort of capital infusion or resolution of this default, and obtaining such a capital infusion or a waiver or amendment under the Hiland Operating Credit Agreement were not viable alternatives.

 

The Hiland Holdings Board of Directors

 

On November 3, 2009, the Hiland Holdings Board of Directors met to consider the report and recommendation of the Hiland Holdings Conflicts Committee related to the October 26 Revised Proposal. 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 (1) determined that the Hiland Holdings amended merger agreement and the transactions contemplated by the Hiland Holdings amended merger agreement, including the Hiland Holdings merger, were advisable, fair to, and in the best interests of, Hiland Holdings and Hiland Holdings public unitholders and (2) recommended that the Hiland Holdings public unitholders vote to approve the Hiland Holdings amended merger agreement and the Hiland Holdings merger.

 

As was the case in connection with the Hiland Holdings Board of Directors’ consideration and vote on the original merger agreement, neither of Messrs. Hamm nor Reid participated in the Hiland Holdings Board of Directors’ consideration or vote on these matters.

 

Because Messrs. Hamm and Reid abstained from voting on the Hiland Holdings amended 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 amended merger agreement and the Hiland Holdings merger.

In determining that the Hiland Holdings amended 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 amended 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 amended 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 amended 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 or net book value in determining the fairness of the Hiland Holdings merger to the Hiland Holdings public unitholders for the reasons discussed in the joint definitive proxy statement.

 

The Hiland Holdings Board of Directors believes that the Hiland Holdings merger is procedurally fair for the reasons discussed in the joint definitive proxy statement.

 

Pursuant to the authority granted by the Hiland Holdings Board of Directors, the Hiland Holdings Conflicts Committee selected 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. The Hiland Holdings Conflicts Committee interviewed four potential financial advisors, including

Barclays Capital. After due consideration, and after determining that Barclays Capital had no current or prior relationships that compromised its independence, the Hiland Holdings Conflicts Committee selected Barclays Capital as its financial advisor 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. On February 17, 2009, the general partner of Hiland Holdings executed an engagement letter with Barclays Capital to retain Barclays Capital as the financial advisor to the Hiland Holdings Conflicts Committee and on October 30, 2009, the engagement letter was amended, among other things, to provide for the fairness opinion related to Mr. Hamm’s revised offer of $3.20 per Hiland Holdings common unit. 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 November 3, 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 revised 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 November 3, 2009, is attached as Annex D to this proxy supplement. 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 Capital 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 revised 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. The merger consideration was determined through negotiations between the Hiland Holdings Conflicts Committee and Mr. Hamm and was recommended by the Hiland Holdings Conflicts Committee for approval by the Hiland Holdings Board of Directors and approved by the Hiland Holdings Board of Directors. Barclays Capital provided advice to the Hiland Holdings Conflicts Committee during these negotiations. Barclays Capital did not, however, recommend any specific form or amount of consideration to the Hiland Holdings Conflicts Committee or the general partner of Hiland Holdings or that any specific form or amount 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 Capital 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:

 

 

In addition, Barclays Capital assumed:

 

 

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, November 3, 2009. Barclays Capital assumed no responsibility for updating or revising its opinion based on events or circumstances that may have occurred after November 3, 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 October 28, 2009, according to the management of Hiland Partners, Hiland Partners’ leverage ratios for the first and second fiscal quarters of 2009 were in excess of the maximum permissible leverage ratio of 4.0x that would be in effect upon the “step-down” of the leverage ratio at the end of the fourth quarter of 2009. Based on management’s projections, absent paying down a sufficient level of indebtedness using proceeds from hedge monetizations or capital infusions, Hiland Partners is currently projecting to be in violation of the leverage ratio covenant as early as December 31, 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. The basis upon which Barclays Capital selected the various strategic alternatives was to identify possible alternatives which could potentially assist Hiland Partners and Hiland Holdings in meeting their present and future operating and financial objectives. In Barclays Capital’s judgment, the strategic alternatives evaluated as part of its analysis represented a comprehensive list of possible alternatives, not all of which were even viable at the time of its opinion for reasons further explained below. At the time of its opinion, Barclays Capital was not aware of any viable strategic alternatives that were not evaluated as part of its analysis. Below is a more detailed explanation of each alternative considered.

 

Debt Related Alternatives

 

Effective starting in the first quarter 2009, Hiland Partners elected to use the “step-up” provision in the Hiland Operating Credit Agreement related to the leverage ratio covenant. The step-up provision increased Hiland Partners’ permitted leverage ratio to allow for a maximum of 4.75x Debt/Trailing 12-Month EBITDA, versus the 4.0x Debt / Trailing 12-Month EBITDA otherwise required pursuant to the Hiland Operating Credit Agreement. This step-up provision expires beginning with the compliance requirements for the fourth quarter of 2009. Based on management’s projections, absent paying down a sufficient level of indebtedness using proceeds from hedge monetizations or capital infusions, Hiland Partners is currently projecting to be in violation of the leverage ratio covenant as early as December 31, 2009. Barclays Capital notes that the management case is based on current market-based prices for commodities, and as such, actual leverage ratio levels may be higher or lower than projected, depending on future commodity price fluctuations.

 

 

 

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 has been accruing 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. As noted above, Barclays Capital and the Hiland Holdings Conflicts Committee determined each of the alternatives considered were not feasible given the Hiland Companies’ financial condition and market factors.

 

Financial Case

 

Based on discussions with Hiland Partners’ and Hiland Holdings’ management, Barclays Capital analyzed one viable financial case in connection with its November 3, 2009 fairness opinion. Barclays Capital and the Hiland Holdings Conflicts Committee determined that the only current viable financial case for Hiland Partners involved continuing to attempt to maintain covenant compliance under the Hiland Operating Credit Agreement until maturity in May 2011, at which time Hiland Partners will have to renegotiate with lenders for a new credit facility. Under this financial case, Hiland Partners will not be able to pay distributions for the foreseeable future. Barclays Capital determined that the hypothetical status quo case analyzed previously in connection with its June 1, 2009 fairness opinion in which Hiland Partners continued to operate its business and pay distributions without regard to Hiland Operating Credit Agreement covenant compliance is not a viable case because such case would likely result in Hiland Partners being in violation of the Hiland Operating Credit Agreement. Similarly, Barclays Capital determined that the hypothetical private investment case in which Mr. Hamm or private investors would invest in the equity of Hiland Partners for the purpose of paying down debt outstanding under the Hiland Operating Credit Agreement to address potential covenant issues was also not a viable case for the reasons described in “— Equity Related Alternatives.” Barclays Capital assumed that Hiland Partners would be able to maintain covenant compliance throughout 2010 by paying down a sufficient level of indebtedness using proceeds from hedge monetizations or capital infusions, and that the

refinancing of the Hiland Operating Credit Agreement in early 2011 would be at pricing and terms similar to current market precedents which are less attractive than the terms of the Hiland Operating Credit Agreement. In contrast, management assumed in its projections that the Hiland Operating Credit Agreement, including its current pricing and terms, continued throughout the projection period. Based on these assumptions, Barclays Capital did not analyze the financial case where Hiland Partners was immediately required to renegotiate its credit facility in order to be in compliance.

 

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 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, including incentive distribution rights, 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 in Hiland Partners, 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 of Hiland Holdings 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. As noted above, on April 27, 2009, Hiland Partners and Hiland Holding announced that they each had suspended indefinitely their quarterly distributions.

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.

 

 

In connection with its analyses, Barclays Capital examined the current and historical market trading prices of Hiland Holdings and Hiland Partners. However, Barclays Capital determined that historical market prices had limited utility in the Barclays Capital analyses because market prices existing at the time of its analyses had been impacted, in part, by (i) publicly-disclosed concerns about Hiland Partners’ and Hiland Holdings’ ability to pay future cash distributions; and (ii) the possible impact the merger proposals had on the market prices for Hiland Holdings and Hiland Partners units. Given the overall economic and industry conditions, as well as the challenges specific to the Hiland Companies, Barclays Capital concluded that historical trading prices were of limited utility in its analyses.

 

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. 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 the management and downside operating scenarios, Barclays Capital assumed that given the high leverage under the Hiland Operating Credit Agreement, the lenders would not allow Hiland Partners to pay distributions until such time as Hiland Partners was in compliance with its credit facility covenants. In these cases, the only positive cash flows to the equity holders of Hiland Holdings are the receipt of accumulated arrearages, which receipt is not projected to occur for several years, depending on the scenario. In the upside case, due to Hiland Partners being in compliance with its credit facility covenants, the positive cash flows include both the receipt of accumulated arrearages and regular distributions.

 

The discounted cash flow analyses were performed using a “sum-of-the-parts” approach. Hiland Holdings has four separate possible 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, 2010 and ending December 31, 2014. These projections, dated October 23, 2009 with updated pricing as of October 28, 2009, and disclosed beginning on

page 51, were prepared by Hiland Partners management. Barclays Capital used the following discount rates as an estimate of the cost of equity:

 

 

Barclays Capital determined appropriate discount rate ranges after taking into account a variety of factors, including distribution yields, assumed growth rates and estimated long-term debt interest rates. However, Barclays Capital noted that, due to the suspension of the distributions at both Hiland Partners and Hiland Holdings, the equity securities of Hiland Partners and Hiland Holdings did not provide any distribution yield. Furthermore, given the challenges in the debt capital markets at the time of the analysis, any estimate of interest rates was purely hypothetical.

 

Barclays Capital used the perpetuity growth methodology in determining the terminal value in the discounted cash flows. This methodology is based on growing the projected cash flows using assumed growth rates, as opposed to using multiple ranges of some financial metric to determine terminal value. 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 general partner cash flows. The growth rates for the projected equity cash flows beyond 2014 were based on estimated growth rates for Hiland Partners.

 

After performing the discounted cash flows analysis related to the common units, subordinated units and general partner cash flows (including G&A expenses) of Hiland Partners, Barclays Capital multiplied the resulting valuation by the appropriate number of common units or subordinated units, as applicable, to determine the aggregate value of the common units and subordinated units of Hiland Partners held by Hiland Holdings. Barclays Capital then added the value of the general partner interest and incentive distribution rights and subtracted G&A expenses value to derive a total equity value for Hiland Holdings. This amount was then divided by the number of outstanding Hiland Holdings common units to result in a per common unit equity value of Hiland Holdings.

 

The table below shows the resulting valuations based on discounted cash flow analyses of equity distributions at Hiland Holdings. For further detail regarding the discounted cash flow analysis and resulting calculation of implied equity value ranges per unit, please see pages 25-27 of Barclays Capital’s presentation to the Hiland Holdings Conflicts Committee filed as Exhibit (c)(21) to the Schedule 13E-3 filed by Hiland Holdings on November 9, 2009.

 

 

Publicly-Derived Valuations

 

In addition to the discounted cash flow analyses, Barclays Capital also performed a valuation based upon observations regarding comparable publicly traded MLPs and comparable publicly traded general partner holding companies (“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 organizational 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 in Hiland Partners 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 and 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 and using estimates based on publicly available Wall Street equity research.

 

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

 

 

For further detail regarding the multiples of 2010E distributable cash flow (after G&A expenses) for each Selected GP Holdco, please see page 30 of Barclays Capital’s presentation to the Hiland Holdings Conflicts Committee filed as Exhibit (c)(21) to the Schedule 13E-3 filed by Hiland Holdings on November 9, 2009.

 

 

For further detail regarding the multiples of 2010E distributable cash flow for each Selected MLP, please see page 29 of Barclays Capital’s presentation to the Hiland Holdings Conflicts Committee filed as Exhibit (c)(21) to the Schedule 13E-3 filed by Hiland Holdings on November 9, 2009.

 

For the selected comparable company analysis, Barclays Capital applied a multiple range of 3.0x — 5.0x to Hiland Holdings’ estimated 2010 distributable cash flow (before G&A expenses). This multiple range was selected by Barclays Capital after deliberation regarding the most comparable GP Holdco peers for Hiland Holdings. This resulted in a value for the general partner interest and incentive distribution rights of Hiland Partners held by Hiland Holdings. Barclays Capital applied the same multiple range to the G&A expenses. In determining the value of the common units and subordinated units of Hiland Partners owned by Hiland Holdings, Barclays Capital applied a range of yields, specifically 40%— 25%, to Hiland Partners’ estimated 2010 distributable cash flow per unit to derive a value per Hiland Partners common unit. Barclays Capital noted that due to the suspension of Hiland Partners’ distributions, any metric based on estimated 2010 distribution yield was not meaningful to the analysis. Barclays Capital applied a 50% discount to the Hiland Partners’ common unit value to estimate the value of a subordinated unit of Hiland Partners. This discount, while subjective, was based in part on Barclays Capital’s industry and market experience, investor knowledge and overall judgment. Barclays Capital multiplied the implied value of a common unit of Hiland Partners by the number of common units of Hiland Partners owned by Hiland Holdings and the implied value of a subordinated unit of Hiland Partners by the number of subordinated units of Hiland Partners owned by Hiland Holdings to result in the implied value of the Hiland Partners units owned by Hiland Holdings. Barclays Capital then added the values of (i) the general partner interest and incentive distribution rights, (ii) G&A expenses, and (iii) Hiland Partners interest, and next subtracted the net debt at Hiland Holdings to result in the implied equity value of Hiland Holdings. Barclays Capital then divided this value by the number of Hiland Holdings units outstanding to derive the implied equity value per Hiland Holdings common unit.

 

Barclays Capital noted that on the basis of the selected comparable company analysis, the transaction consideration of $3.20 per unit was above the range of implied values of $1.81 to $3.01 per unit.

 

Selected Comparable Transaction Analysis

 

While Barclays Capital performed a selected comparable transaction analysis in connection with its June 1, 2009 fairness opinion where it compared purchase prices and financial multiples from selected other transactions principally involving publicly traded MLPs and GP Holdcos to the financial results of the Hiland Companies, it also noted that such analysis was not particularly meaningful at that time in the context of

considering the proposed transaction. Barclays Capital did not perform a similar selected comparable transaction analysis in connection with its November 3, 2009 fairness opinion because it deemed such precedent transaction analysis to be even more limited in the context of evaluating the October 26 Revised Proposal. The majority of the precedent transactions were consummated during different capital market and industry conditions than exist currently, and between parties with larger capitalizations and differing business prospects. Further, Barclays Capital concluded that such analysis was not useful in consideration of the October 26 Revised Proposal because of the further deterioration in the operating condition of the Hiland Companies and their limited capitalization, Mr. Hamm’s continued indication that he was interested only in acquiring common units in the Hiland Companies and not selling interests, and the lack of any indications of interest from any third parties since the public announcement of the January 15 Proposal.

 

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 Capital reviewed and compared the purchase prices and financial multiples paid in selected other asset transactions that Barclays Capital, based on its experience with merger and acquisition transactions, deemed relevant. Barclays Capital 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 Capital 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 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.

 

For the selected asset transactions analysis, Barclays Capital applied a multiple range of 6.0x - 8.0x to Hiland Partners’ estimated 2010 EBITDA. This multiple range was selected by Barclays Capital based on recently observed transactions involving the acquisition of assets by various MLPs, generally in the midstream segment and particularly in the gathering & processing sub-segment. This resulted in a reference enterprise value range, from which was subtracted Hiland Partners’ net debt, resulting in a preliminary equity value for Hiland Partners. Based on the relative percentages of distributable cash flow attributable to the general partner and the limited partners of Hiland Partners as a whole, Barclays Capital multiplied the aggregate equity value by 90% to derive the value attributable to the limited partners and 10% to derive the value attributable to the general partner in Hiland Partners owned by Hiland Holdings. Based on Hiland Holdings’ ownership percentage of Hiland Partners’ total common and subordinated units outstanding, Barclays Capital calculated the value of the Hiland Partners common and subordinated units held by Hiland Holdings, then added the value for the general partner interest of Hiland Partners owned by Hiland Holdings to derive a value attributable to Hiland Holdings. From this value, Barclays Capital subtracted the value of the Hiland Holdings G&A expense, based on the same 6.0x - 8.0x multiple, as well as the net debt at Hiland Holdings to derive an implied equity value of Hiland Holdings. This value was then divided by the number of Hiland Holdings’ common units outstanding to derive the equity value per Hiland Holdings common unit.

 

Selected Asset Transactions

 

For further detail regarding the multiples of EBITDA for each selected asset transaction upon which Barclays Capital based its analysis, please see pages 32-34 of Barclays Capital’s presentation to the Hiland Holdings Conflicts Committee filed as Exhibit (c)(21) to the Schedule 13E-3 filed by Hiland Holdings on November 9, 2009.

 

Barclays noted that on the basis of the selected comparable asset transactions analysis, the transaction consideration of $3.20 per unit was within the range of implied values of $1.96 to $5.07 per unit.

 

Asset Discounted Cash Flow Analysis

 

Barclays Capital 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, 2010 and ending December 31, 2014. Barclays Capital used discount rates of 12% to 14% as an estimate of the weighted average cost of capital.

 

In calculating the terminal values, Barclays Capital 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 2014 were based on estimated growth rates for Hiland Partners’ assets.

 

After arriving at an equity valuation range for Hiland Partners, Barclays Capital 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 Capital then calculated the implied value of Hiland Holdings. Barclays Capital 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. For further detail regarding the asset discounted cash flow analysis and resulting calculation of implied equity value ranges per unit, please see page 38 of Barclays Capital’s presentation to the Hiland Holdings Conflicts Committee filed as Exhibit (c)(21) to the Schedule 13E-3 filed by Hiland Holdings on November 9, 2009.

 

Valuation Analysis — Discounted Cash Flow Sensitivity

 

 

Barclays Capital noted that on the basis of the discounted cash flow analysis, the transaction consideration of $3.20 per unit was within the range of implied values of $1.00 to $5.07 per unit.

 

General

 

Barclays Capital 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 Capital 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 Capital 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 Capital a retainer fee of $250,000 upon execution of Barclays Capital’s

engagement letter with the general partner of Hiland Holdings and $1,000,000 upon the delivery of Barclays Capital’s original opinion dated June 1, 2009. In addition, Hiland Holdings paid Barclays Capital an additional fee of $500,000 upon the delivery of Barclays Capital’s second opinion dated November 3, 2009 related to Mr. Hamm’s revised offer and an additional advisory fee of $150,000 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 Capital for certain liabilities that may arise out of its engagement. Barclays Capital 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 Capital has performed only limited services for Hiland Partners, Hiland Holdings and their affiliates, for which Barclays Capital received no compensation. Barclays Capital 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 Capital 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 Capital to the Hiland Holdings Conflicts Committee in connection with the delivery of this opinion have been filed with the SEC as exhibits to the Schedule 13E-3 filed by Hiland Holdings.

 

Harold Hamm and the other HPGP Schedule 13E-3 Filing Persons (with the exception of Messrs. Griffin and Harrison, who express their views below) believe that the Hiland Holdings merger consideration, as increased in the Hiland Holdings amended merger agreement, is substantively fair to the Hiland Holdings public unitholders and that Hiland Holdings Amendment No. 2 is procedurally fair to those unitholders. The HPGP Schedule 13E-3 Filing Persons did not perform, or engage a financial advisor to perform, any financial analysis in connection with the Hiland Holdings merger agreement amendments for the purposes of assessing the fairness of the Hiland Holdings merger to the Hiland Holdings public unitholders. Each of Harold Hamm and the other HPGP Schedule 13E-3 Filing Persons (with the exception of Messrs. Griffin and Harrison) believe that the reasons described in the joint definitive proxy statement that lead them to conclude that the prior Hiland Holdings merger consideration of $2.40 per common unit to be, and related process was, substantively and procedurally, fair continue to remain applicable in light of the enhanced Hiland Holdings merger consideration of $3.20 per common unit. In addition, each of Harold Hamm and the other HPGP Schedule 13E-3 Filing Persons (with the exception of Messrs. Griffin and Harrison) took into consideration the following factors:

 

 

 

The HPGP Schedule 13E-3 Filing Persons did not consider the net book value of Hiland Holdings common units for the reasons discussed in the definitive proxy statement.

 

Messrs. Griffin and Harrison believe that the Hiland Holdings merger, as amended, is both substantively and procedurally fair to the Hiland Holdings public unitholders based on the factors described in “— Recommendations of the Hiland Holdings Conflicts Committee and Hiland Holdings Board of Directors; Reasons for Recommending Approval of the Merger — The Hiland Holdings Board of Directors” beginning on page 34 of this proxy supplement and page 71 of the joint definitive proxy statement. In doing so, Messrs. Griffin and Harrison expressly adopted the analysis of the Hiland Holdings Conflicts Committee, which is discussed above.

 

Updated Projected Financial Information

 

In connection with their ongoing review of the financial condition of the Hiland Companies and their consideration of the October 26 Revised Proposal, each of the Conflicts Committees and their respective financial advisors received certain projected financial information, the October Projections, which management updated to include the most recently available information on drilling activity and then-current forward commodity pricing.

Management first provided the October Projections to the Conflicts Committees on October 23, 2009.

 

Projected Financial Data for Hiland Partners
(Provided on October 23, 2009)

 

 

 

 

As with the previous projections, management also included in its projections a calculation of the leverage ratio under the Hiland Operating Credit Agreement based upon the updated projected financial information. Management’s calculations showed that, assuming no distributions were made to Hiland Partners’ unitholders, Hiland Partners’ leverage ratio would be 4.21x at the end of the fourth quarter of 2009, in excess of the then maximum permissible leverage ratio of 4.0x under the Hiland Operating Credit Agreement. Based on these updated projections, management estimated that at least $12 million of equity would need to be infused into Hiland Partners by December 31, 2009 to be in compliance with the leverage ratio covenant.

 

Projections of this type are based on estimates and assumptions that are subject to significant uncertainties and contingencies, all of which are difficult to predict and many of which are beyond the Hiland Companies’ control. They are, in general, prepared solely for internal use in assessing strategic direction, related capital and resource needs and allocations and other management decisions.

 

Since the projections cover multiple years, such information by its nature becomes less reliable with each successive year. Consequently, there can be no assurance that the underlying assumptions will prove to be accurate, that the projected results will be realized or that actual results will not be significantly different than projected. These projections were prepared solely for internal use and not for publication or with a view of complying with the published guidelines of the SEC regarding projections or with guidelines established by the American Institute of Certified Public Accountants for preparation and presentation of prospective financial information. The projected financial data set forth above is included in this proxy supplement only because such projected financial information was provided to the Conflicts Committees and, through Harold Hamm, to the Hamm Continuing Investors and their financial advisors. The merger agreements include no representations by either of the Hiland Companies, their management or the Hamm Continuing Investors as to this projected financial information. In light of the uncertainties inherent in projections of this type, neither the Hiland Companies nor the Hamm Continuing Investors or any other person has expressed any opinion or assurance on this information or its achievability. None of the projections reflect any impact of the mergers.

 

In addition to the assumptions regarding inlet natural gas volumes, commodity prices and capital expenditures summarized above, management’s projections are subject to the following additional important assumptions:

 

 

 

Litigation Update

 

As disclosed in the joint definitive proxy statement, on June 25, 2009, certain of the individual defendants moved to dismiss the allegations that were then-pending in Pasternack and Jones lawsuits brought in connection with the mergers, and the Hiland Companies and certain other defendants subsequently joined in that motion. On August 13, 2009, the Hiland Companies and certain individual defendants moved to dismiss the claims added in the July 31, 2009 Amended Class Action Complaint. On September 4, 2009, the plaintiffs filed a motion to expedite the proceedings. On September 9, 2009, the Delaware Chancery Court requested that the defendants file a response to plaintiffs’ motion that same day and set a hearing on plaintiffs’ motion for September 11, 2009. Defendants responded to plaintiffs’ motion as ordered by the Delaware Chancery Court. On September 11, 2009, the Delaware Chancery Court denied plaintiffs’ motion to expedite the proceedings.

 

For additional information about the Pasternack and Jones lawsuits and additional litigation related to the mergers, please see “Certain Legal Matters — Certain Litigation” in the joint definitive proxy statement.

 

The following updates certain information contained in “Special Factors — Effects of the Mergers” of the joint definitive proxy statement.

 

Effect on Interests of HLND Schedule 13E-3 Filing Persons in Hiland Partners’ Net Book Value and Net Earnings

 

If the Hiland Partners merger is completed, the Hiland Partners public unitholders will have no interests in Hiland Partners’ net book value or net earnings after the Hiland Partners merger. The table below sets forth the interest of each of the HLND Schedule 13E-3 Filing Persons in Hiland Partners’ net book value and net earnings prior to and immediately following the Hiland Partners merger, based on Hiland Partners’ net book value as of September 30, 2009, and the net income of Hiland Partners for the nine months ended September 30, 2009.

 

 

 

 

 

Effect on Interests of HPGP Schedule 13E-3 Filing Persons in Hiland Holdings’ Net Book Value and Net Earnings

 

If the Hiland Holdings merger is completed, the Hiland Holdings public unitholders will have no interests in Hiland Holdings’ net book value or net earnings after the Hiland Holdings merger. The table below sets forth the interest of each of the HPGP Schedule 13E-3 Filing Persons in Hiland Holdings’ net book value and net earnings prior to and immediately following the Hiland Holdings merger, based on Hiland Holdings’ net book value as of September 30, 2009, and net income of Hiland Holdings for the nine months ended September 30, 2009.

 

 

 

 

 

The following updates certain information contained in “Special Factors — Interests of Certain Persons in the Mergers” of the joint definitive proxy statement.

 

Hiland Partners Merger

 

Harold Hamm and the other Hamm Continuing Investors

 

In connection with Hiland Partners Amendment No. 2, Harold Hamm, Hiland Partners’ Chairman, entered into an amendment to the Hiland Partners commitment letter, pursuant to which Mr. Hamm agreed to contribute approximately $41.3 million in cash (compared to $32.0 million in the original commitment letter) to Parent to fund the Hiland Partners merger consideration and estimated expenses, less the amount of cash, if any, contributed by the Hamm family trusts to Parent or HLND Merger Sub. According to the Schedule 13D amendment filed by Mr. Hamm, the Hamm family trusts and other group members on November 4, 2009, Mr. Hamm and the Hamm family trusts have agreed in principle for the Hamm family trusts to contribute an aggregate of approximately $16.3 million to fund the Hiland Partners merger.

 

Based on the cash purchase price of $10.00 per common unit, the aggregate value of the continued holding of the Hiland Partners common units by Hiland Holdings is approximately $23.2 million as compared to $18.0 million based on the original $7.75 purchase price per common unit.

 

Equity Interests in Hiland Partners

 

The following table sets forth the current beneficial ownership of Mr. Hamm, the other Hamm Continuing Investors, their respective affiliates and the directors and officers of Hiland Partners in the equity of Hiland Partners as of the date of this proxy supplement and the total cash to be received in the Hiland Partners merger.

 

Equity Interests of Hamm Continuing Investors, Directors and Officers in Hiland Partners (1)

 

 

 

 

 

Hiland Holdings Merger

 

Harold Hamm and the other Hamm Continuing Investors

 

In connection with Hiland Holdings Amendment No. 2, Harold Hamm, Hiland Holdings’ Chairman, entered into an amendment to the Hiland Holdings commitment letter, pursuant to which Mr. Hamm agreed to contribute $28.2 million in cash (compared to $21.2 million in the original commitment letter) to Parent to fund the Hiland Holdings merger consideration and estimated expenses, less the amount of cash, if any, contributed by the Hamm family trusts to Parent or HPGP Merger Sub. According to the Schedule 13D amendment filed by Mr. Hamm, the Hamm family trusts and other group members on November 4, 2009, Mr. Hamm and the Hamm family trusts have agreed in principle for the Hamm family trusts to contribute an aggregate of approximately $11.1 million to fund the Hiland Holdings merger.

 

Based on the cash purchase price of $3.20 per common unit, the aggregate value of the continued holding of the Hiland Holdings common units by Mr. Hamm, Continental Gas and the Hamm family trusts is approximately $42.0 million as compared to $31.5 million based on the original $2.40 purchase price per common unit.

 

Equity Interests in Hiland Holdings

 

The following table sets forth the current beneficial ownership of Mr. Hamm, the other Hamm Continuing Investors, their respective affiliates and the directors and officers of Hiland Holdings in the equity of Hiland Holdings as of the date of this proxy supplement and the total cash to be received in the Hiland Holdings merger.

 

Equity Interests of Hamm Continuing Investors, Directors and Officers in Hiland Holdings