UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED June 30, 2005

OR

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

FOR THE TRANSITION PERIOD FROM                  TO                   .

Commission file number:  000-51120

Hiland Partners, LP

(Exact name of Registrant as specified in its charter)

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

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

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

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

HILAND PARTNERS, LP

INDEX

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Item 1. Financial Statements

HILAND PARTNERS, LP

CONTINENTAL GAS, INC. (PREDECESSOR)

Consolidated Balance Sheets

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

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HILAND PARTNERS, LP

CONTINENTAL GAS, INC. (PREDECESSOR)

Consolidated Combined Statements of Operations

(Unaudited)

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

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HILAND PARTNERS, LP

CONTINENTAL GAS, INC. (PREDECESSOR)

Consolidated Combined Statements of Cash Flows

For the Six Months Ended (Unaudited)

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

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

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HILAND PARTNERS, LP

CONTINENTAL GAS, INC. (PREDECESSOR)

Consolidated Combined Statement of Owners’ Equity

(Unaudited)

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

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HILAND PARTNERS, LP

CONTINENTAL GAS, INC. (PREDECESSOR)

CONDENSED NOTES TO CONSOLIDATED COMBINED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND SIX MONTHS ENDED JUNE 30, 2005 AND 2004

(in thousands, except unit amounts and per unit amounts or unless otherwise noted)

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

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

Continental Gas, Inc. historically has owned all of our natural gas gathering, processing, treating and fractionation assets other than our Worland gathering system.  Prior to July 21, 2004, Continental Gas, Inc. was owned by Continental Resources, Inc., an independent exploration and development company owned by Harold Hamm, the Chairman of the Board of Directors of our general partner and the Harold Hamm DST and the Harold Hamm HJ Trusts, which are trusts established for the benefit of Harold Hamm’s children and which we refer to herein as the “Hamm Trusts.”  On July 21, 2004, Continental Resources, Inc. completed the transfer of Continental Gas, Inc. to Harold Hamm and the Hamm Trusts.  Hiland Partners, LLC historically owned our Worland gathering system, our compression services assets and the Bakken gathering system.  Hiland Partners, LLC was owned by the Hamm Trusts and Equity Financial Services, Inc., an entity owned by Randy Moeder, our President and Chief Executive Officer and a director of our general partner.

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

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

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

The interim financial statements reflect all adjustments, which are in the opinion of management, necessary for a fair presentation of our results for the interim periods to the extent permitted by GAAP.  Such adjustments are considered to be of a normal recurring nature.  Results of operations for the three and six months ended June 30, 2005 are not necessarily indicative of the results of operations that will be realized for the year ending December 31, 2005.  The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.  Actual results could differ from those estimates.

The consolidated financial statements include our accounts and those of our subsidiaries.  All significant intercompany transactions and balances have been eliminated. In addition, the consolidated financial statements include the financial position and results of operations of assets owned by Continental Gas, Inc. or Hiland Partners, LLC that were contributed to the Partnership concurrently with the completion of our initial public offering.

In accordance with Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” we evaluate our long-lived assets of identifiable business activities for impairment when events or changes in circumstances indicate, in management’s judgment, that the carrying value of such assets may not be recoverable.  The determination of whether impairment has occurred is based on management’s estimate of undiscounted future cash flows attributable to the assets as compared to the carrying value of the assets.  If impairment has occurred, the amount of the impairment recognized is determined by

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estimating the fair value for the assets and recording a provision for loss if the carrying value is greater than fair value.  For assets identified to be disposed of in the future, the carrying value of these assets is compared to the estimated fair value less the cost to sell to determine if impairment is required.  Until the assets are disposed of, an estimate of the fair value is re-determined when related events or circumstances change or for each reporting period.

Intangible assets consist of the acquired value of existing contracts to sell natural gas and other NGLs and compression contracts, which have a significant residual value.  The contracts are being amortized over ten years.  The deferred loan costs are being amortized over the life of the credit facility.

Shared Based Compensation

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

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

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

The Partnership applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its share-based compensation awards.  Accordingly, no compensation cost has been recognized for unit options granted in the accompanying consolidated financial statements.  The following pro forma data is calculated as if compensation cost for the Partnership’s share-based compensation awards was determined based upon the fair value at the grant date consistent with the methodology prescribed under SFAS No. 123.

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

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Note 2:  Initial Public Offering of Hiland Partners, LP

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

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

The following table presents the assets and liabilities of our predecessor immediately prior to contributing assets to Hiland Partners, LP, and assets and liabilities contributed to Hiland Partners, LP, and the predecessor’s assets and liabilities that were not contributed to Hiland Partners, LP.

Continental Gas, Inc. (Predecessor)

As of February 14, 2005

(in thousands)

The acquisition of the assets of Hiland Partners, LLC was accounted for as a purchase and, as a result, these assets were recorded at their fair value at the time of purchase.  In consideration for the transfer of assets and liabilities of Hiland Partners, LLC, the Hamm Trusts received 247,868 common units and 1,404,586 subordinated units of the Partnership.  Immediately following the closing of the

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

As a part of the transactions, Harold Hamm, the Hamm Trusts, Equity Financial Services, Inc., Mr. Moeder, and Mr. Maples received an aggregate of 138,776 equivalent units of the General Partner, representing substantially all of the ownership of the general partner and a 2% equity ownership of the Partnership.

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

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

We also entered into an omnibus agreement with Continental Resources, Inc. that became effective February 15, 2005 (the “Omnibus Agreement”) and determines the services Continental Resources, Inc. will provide to us and the liabilities from which Continental Resources, Inc. will indemnify us.  Under the agreement, Continental Resources, Inc. will charge us the lower of Continental Resources, Inc.’s cost or $50 per year for a two-year period for certain general, administrative and information technology support.  Continental Resources, Inc., Hiland Partners, LLC, and Continental Gas Holdings, Inc. agreed to indemnify the Partnership for income tax liabilities arising from operations prior to the closing of the offering and Continental Resources, Inc. agreed to indemnify the Partnership for liabilities associated with oil and gas properties conveyed by Continental Gas, Inc. to Continental Resources, Inc. for a period of five years from the closing date of the offering.  In addition, Harold Hamm, Hiland Partners, LLC, and Continental Resources, Inc. agreed, with certain exceptions, not to engage in, whether by acquisition or otherwise, midstream and NGL gathering and processing in the continental United States.  In addition, Hiland Partners, LLC has granted the Partnership a two-year option to purchase its Bakken gas gathering system pursuant to the Omnibus Agreement.  For a description of this agreement, please read “Item 13.  Certain Relationships and Related Party Transactions – Omnibus Agreement” of the Partnership’s Form 10-K for the fiscal year ended December 31, 2004.

Note 3:  Pro forma Operations

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

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Note 4: Net Income per Limited Partners’ Unit

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

Note 5: Distribution to Unitholders

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

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

Note 6: Other Assets

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

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Note 7:  Commitments and Contingencies

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

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

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

The Partnership is a party to various regulatory proceedings and various other litigation that it believes will not have a materially adverse impact on the Partnership’s financial condition, results of operations or cash flows.

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

Note 8:  Related Party Transactions

The Partnership sells natural gas and NGLs to affiliated companies.   Sales of product totaled $1,418 and $793 for the quarters ended June 30, 2005 and 2004, respectively.  Sales of product were $2,402 and $1,608 for the six month periods ended June 30, 2005 and 2004, respectively.  Compression revenues of $1,205 and $1,807 for the three and six month periods ended June 30, 2005 are exclusively to an affiliated company.  There were no compression revenues in the similar periods in 2004.

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

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

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

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

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Note 9: Business Segments

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

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

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

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

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

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Note 10:  Discontinued Operations

During the first quarter of 2004, Continental Gas, Inc. determined it would no longer pursue its interests in direct production of oil and gas. Amounts for oil and gas income and expense are presented in these statements as discontinued operations. Effective May 31, 2004, Continental Gas, Inc. transferred all its interests in its oil and gas properties to Continental Resources, Inc..  Net assets transferred consisted leaseholds, capitalized intangibles, lease and well equipment and asset retirement costs totaling $2,489 offset by accounts payable and asset retirement obligation of $348.

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

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HILAND PARTNERS, LP

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

You should read the following discussion in conjunction with our Financial Statements and notes thereto included elsewhere in this quarterly report on Form 10-Q.

Cautionary Statement About Forward-Looking Statements

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

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

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

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

•      the amount of natural gas transported on our gathering systems;

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

•      the fees we charge and the margins realized for our services;

•      the prices and market demand for, and the relationship between, natural gas and NGLs;

•      energy prices generally;

•      the level of domestic oil and natural gas production;

•      the availability of imported oil and natural gas;

•      actions taken by foreign oil and gas producing nations;

•      the political and economic stability of petroleum producing nations;

•      the weather in our operating areas;

•      the extent of governmental regulation and taxation;

•      hazards or operating risks incidental to the transporting, treating and processing of natural gas and NGLs that may not be fully covered by insurance;

•      competition from other midstream companies;

•      loss of key personnel;

•      the availability and cost of capital and our ability to access certain capital sources;

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

•      the costs and effects of legal and administrative proceedings;

•      the ability to successfully identify and consummate strategic acquisitions at purchase prices that are accretive to the our financial results; and

•      risks associated with the construction of new pipelines and treating and processing facilities or additions to our existing pipelines and facilities.

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

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

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OVERVIEW

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

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

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

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

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

•                  Midstream Segment, which is engaged in gathering and processing of natural gas primarily in the Mid-Continent and Rocky Mountain regions.  Within this segment, we also provide certain related services for compression, dehydrating, and treating of natural gas and the fractionation of NGLs.  This segment generated approximately 82% of our total segment margin for the quarter ended June 30, 2005.  This segment generated approximately 85% of our total segment margin for the six months ended June 30, 2005.

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

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

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

Historical Results of Operations

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

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

•                  The acquisition of the assets of Hiland Partners, LLC was accounted for as a purchase and, as a result, these assets are recorded at their fair value at the time of purchase, which occurred concurrent with the closing of our initial public offering on February 15, 2005.  Therefore, the results of operations from our Worland gathering system and compression assets are only reflected from February 15, 2005, the date Hiland Partners, LP commenced operations.

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

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

Other Financial and Operating Data (Unaudited)

Results of Operations

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