UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2008

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 Holdings GP, LP

(Exact name of Registrant as specified in its charter)

DELAWARE		76-0828238
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

205 West Maple, Suite 1100
Enid, Oklahoma		73701
(Address of principal executive offices)		(Zip Code)

(580) 242-6040

(Registrant’s telephone number including area code)

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 x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer x

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

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

The number of the registrant’s outstanding equity units at May 5, 2008 was 21,603,000 common units.

HILAND HOLDINGS GP, LP
Consolidated Balance Sheets

	March 31,			December 31,
	2008			2007
	(unaudited)
	(in thousands, except unit amounts)
ASSETS
Current assets:
Cash and cash equivalents	$	11,483		$	10,602
Accounts receivable:
Trade	37,411			31,842
Affiliates	1,098			1,178
	38,509			33,020
Fair value of derivative assets	1,050			2,718
Other current assets	2,730			1,420
Total current assets	53,772			47,760

Property and equipment, net	323,552			323,073
Intangibles, net	45,398			46,937
Fair value of derivative assets	594			418
Other assets, net	2,355			2,098

Total assets	$	425,671		$	420,286

LIABILITIES AND PARTNERS’ EQUITY
Current liabilities:
Accounts payable	$	26,105		$	24,713
Accounts payable-affiliates	10,638			7,957
Fair value of derivative liabilities	7,748			8,238
Accrued liabilities and other	2,593			2,075
Total current liabilities	47,084			42,983

Commitments and contingencies (Note 8)
Long-term debt, net of current maturities	235,307			226,459
Fair value of derivative liabilities	—			141
Asset retirement obligation	2,191			2,159
Minority interests	123,856			126,409

Partners’ equity
Common unitholders (21,603,000 units issued and outstanding)	20,925			25,560
Accumulated other comprehensive loss	(3,692		)	(3,425		)
Total partners’ equity	17,233			22,135

Total liabilities and partners’ equity	$	425,671		$	420,286

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

HILAND HOLDINGS GP, LP

Consolidated Statements of Operations

For the Three Months Ended (unaudited)

	March 31,			March 31,
	2008			2007
	(in thousands, except per unit amounts)
Revenues:
Midstream operations
Third parties	$	89,253		$	58,860
Affiliates	1,021			989
Compression services, affiliate	1,205			1,205
Total revenues	91,479			61,054
Operating costs and expenses:
Midstream purchases (exclusive of items shown separately below)	42,451			31,881
Midstream purchases -affiliate (exclusive of items shown separately below)	26,167			11,734
Operations and maintenance	6,769			4,970
Depreciation, amortization and accretion	9,216			7,028
General and administrative expenses	2,684			2,045
Total operating costs and expenses	87,287			57,658
Operating income	4,192			3,396
Other income (expense):
Interest and other income	104			127
Amortization of deferred loan costs	(156		)	(110		)
Interest expense	(3,506		)	(2,091		)
Other income (expense), net	(3,558		)	(2,074		)
Income before minority interest in loss (income) of Hiland Partners, LP	634			1,322
Minority interest in loss (income) of Hiland Partners, LP	206			(574		)
Net income	$	840		$	748

Net income per limited partners’ unit - basic	$	0.04		$	0.03
Net income per limited partners’ unit -diluted	$	0.04		$	0.03
Weighted average limited partners’ units outstanding - basic	21,603			21,600
Weighted average limited partners’ units outstanding - diluted	21,609			21,605

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

HILAND HOLDINGS GP, LP

Consolidated Statements of Cash Flows

For the Three Months Ended (unaudited)

	March 31,			March 31,
	2008			2007
	(in thousands)
Cash flows from operating activities:
Net income	$	840		$	748
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization	9,184			7,009
Accretion of asset retirement obligation	32			19
Amortization of deferred loan cost	156			110
Loss (gain) on derivative transactions	401			(69		)
Unit based compensation	409			464
Increase in other assets	(91		)	—
Minority interest in income (loss) of Hiland Partners, LP	(206		)	574
(Increase) decrease in current assets:
Accounts receivable - trade	(5,569		)	(783		)
Accounts receivable - affiliates	80			93
Other current assets	(1,310		)	104
Increase (decrease) in current liabilities:
Accounts payable - trade	3,665			587
Accounts payable - affiliates	2,681			130
Accrued liabilities and other	473			(45		)
Net cash provided by operating activities	10,745			8,941
Cash flows from investing activities:
Additions to property and equipment	(10,403		)	(16,538		)
Proceeds from disposals of property and equipment	6			—
Net cash used in investing activities	(10,397		)	(16,538		)
Cash flows from financing activities:
Proceeds from long-term borrowings	9,000			12,100
Payments on Capital lease obligations	(107		)	—
Debt issuance costs	(317		)	—
Public offering costs	(7		)	(142		)
Proceeds from Hiland Partners, LP unit options exercise	611			969
Minority interest cash distributions to unitholders of Hiland Partners, LP	(3,134		)	(2,767		)
Cash distributions to unitholders	(5,513		)	(4,484		)

Net cash provided by financing activities	533			5,676

Increase (decrease) for the period	881			(1,921		)
Beginning of period	10,602			10,569
End of period	$	11,483		$	8,648
Supplementary information
Cash paid for interest, net of amounts capitalized	$	3,226		$	2,072

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

Hiland Holdings GP, LP

Consolidated Statement of Changes in Partners’ Equity and Comprehensive Income

For the Three Months Ended March 31, 2008 (unaudited)

				Accumulated
				Other						Total
	Common			Comprehensive						Comprehensive
	Units			(loss)			Total			Income
	(in thousands)

Balance January 1, 2008	$	25,560		$	(3,425	)	$	22,135

Periodic cash distributions	(5,513		)	—			(5,513		)
Unit based compensation	38			—			38
Other comprehensive income reclassified to income on closed derivative transactions	—			1,233			1,233			$	1,233
Change in fair value of derivatives	—			(1,500		)	(1,500		)	(1,500		)
Net income	840			—			840			840
Comprehensive income										$	573
Balance March 31, 2008	$	20,925		$	(3,692)		$	17,233

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

HILAND HOLDINGS GP, LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE MONTHS ENDED MARCH 31, 2008 and 2007

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

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

Unless the context requires otherwise, references to “we”, “our,” “us,” “Hiland Holdings” or “the Partnership” are intended to mean the consolidated business and operations of Hiland Holdings GP, LP. References to “Hiland Partners” are intended to mean the consolidated business and operations of Hiland Partners, LP and its subsidiaries.

Hiland Holdings GP, LP, a Delaware limited partnership, was formed in May 2006 to own Hiland Partners GP, LLC, the general partner of Hiland Partners, LP and certain other common and subordinated units in Hiland Partners. Hiland Partners GP, LLC was formed in October 2004 to hold the 2% general partner ownership interest in Hiland Partners and serve as its general partner. Hiland Partners GP, LLC manages the operations of Hiland Partners. In connection with the closing of our initial public offering, all of the membership interests in Hiland Partners GP, LLC were contributed to us. Hiland Partners GP, LLC constitutes our predecessor.

Our general partner, Hiland Partners GP Holdings, LLC manages our operations and activities, including, among other things, paying our expenses and establishing the quarterly cash distribution levels for our common units and reserves that our general partner determines, in good faith, are necessary or appropriate to provide for the conduct of our business, to comply with applicable law, any of our debt instruments or other agreements or to provide for future distributions to our unitholders for any one or more of the upcoming four quarters.

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

Continental Gas, Inc. operated in one segment, midstream, which involved the gathering, compressing, dehydrating, treating, and processing of natural gas and fractionating natural gas liquids, or NGLs. Continental Gas, Inc. historically has owned all of Hiland Partners’ natural gas gathering, processing, treating and fractionation assets other than the Worland, Bakken and Woodford Shale gathering systems. Hiland Partners, LLC historically owned the Worland gathering system and compression services assets, which Hiland Partners acquired on February 15, 2005, and the Bakken gathering system. The net assets acquired by Hiland Partners on February 15, 2005 had a fair value of $48.6 million. Since its initial public offering, Hiland Partners has operated in midstream and compression services segments. On September 26, 2005, Hiland Partners acquired Hiland Partners, LLC, which at such time owned the Bakken gathering system, for $92.7 million, $35.0 million of which was used to retire outstanding Hiland Partners, LLC indebtedness. On May 1, 2006, Hiland Partners acquired the Kinta Area gathering assets from Enogex Gas Gathering, L.L.C., consisting of certain eastern Oklahoma gas gathering assets, for $96.4 million. Hiland Partners financed this acquisition with $61.2 million of borrowings from its credit facility and $35.0 million of proceeds from the issuance to Hiland Partners GP, LLC, its general partner, of 761,714 common units and 15,545 general partner equivalent units, both at $45.03 per unit. Hiland Partners began construction of the Woodford Shale gathering system in the first quarter of 2007. As of March 31, 2008, Hiland Partners has invested approximately $25.7 million in the gathering system.

The unaudited financial statements for the three months ended March 31, 2008 and 2007 included herein have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). The interim financial statements reflect all adjustments, which in the opinion of our management, are necessary for a fair presentation of our results for the interim periods. Such adjustments are considered to be of a normal recurring nature. Results of operations for the three months ended March 31, 2008 are not necessarily indicative of the results of operations that will be realized for the year ending December 31, 2008. The accompanying consolidated financial statements and notes thereto should be read in conjunction with the consolidated financial statements and notes thereto included in our Form 10-K for the fiscal year ended December 31, 2007.

Principles of Consolidation

Because we own the general partner of Hiland Partners, the consolidated financial statements include our accounts, the accounts of Hiland Partners GP, LLC and the accounts of Hiland Partners and its subsidiaries. All significant intercompany transactions and balances have been eliminated.

Use of Estimates

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

Fair Value of Financial Instruments

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

Commodity Risk Management

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

SFAS No. 133, as amended, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. SFAS No. 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. However, if a derivative does qualify for hedge accounting, depending on the nature of the hedge, changes in fair value can be offset against the change in fair value of the hedged item through earnings or recognized in other comprehensive income until such time as the hedged item is recognized in earnings. To qualify for cash flow hedge accounting, the cash flows from the hedging instrument must be highly effective in offsetting changes in cash flows due to changes in the underlying item being hedged. In addition, all hedging relationships must be designated, documented and reassessed periodically. SFAS No. 133 also provides that normal purchases and normal sales contracts are not subject to the statement. Normal purchases and normal sales are contracts that provide for the purchase or sale of something other than a financial instrument or derivative instrument that will be delivered in quantities expected to be used or sold by the reporting entity over a reasonable period in the normal course of business. Our fixed price physical forward natural gas sales contract in which we have contracted to sell natural gas quantities at a fixed price is designated as a normal sale. This forward sales contract expires on December 31, 2008.

Currently, our derivative financial instruments that qualify for hedge accounting are designated as cash flow hedges. The cash flow hedge instruments hedge the exposure of variability in expected future cash flows that is attributable to a particular risk. The effective portion of the gain or loss on these derivative instruments is recorded in accumulated other comprehensive income in partners’ equity and reclassified into earnings in the same period in which the hedged transaction closes. The asset or liability related to the derivative instruments is recorded on the balance sheet as fair value of derivative assets or liabilities. Any ineffective portion of the gain or loss is recognized in earnings immediately.

Comprehensive Income

Comprehensive income includes net income and other comprehensive income, which includes, but is not limited to, changes in the fair value of derivative financial instruments. Pursuant to SFAS No. 133, for derivatives qualifying as accounting hedges, the effective portion of changes in fair value are recognized in partners’ equity as accumulated other comprehensive income and reclassified to earnings when the underlying hedged physical transaction closes, to the extent of our interest in Hiland Partners. Our comprehensive income for the three months ended March 31, 2008 and 2007 is presented in the table below:

	For the Three Months Ended March 31,
	2008			2007
Net income	$	840		$	748
Closed derivative transactions reclassified from income	1,233			(332		)
Change in fair value of derivatives	(1,500		)	(832		)
Comprehensive income (loss)	$	573		$	(416	)

Net Income per Limited Partners’ Unit

Net income per limited partners’ unit is computed based on the weighted-average number of common units outstanding during the period. The computation of diluted net income per limited partner unit further assumes the dilutive effect of restricted unit awards. Net income per limited partners’ unit is computed by dividing net income applicable to limited partners by both the basic and diluted weighted-average number of limited partnership units outstanding.

Minority Interests

The minority interest on our consolidated balance sheets as of March 31, 2008 and December 31, 2007 reflects the outside ownership interest of Hiland Partners. Minority interest in income is calculated by multiplying the minority interest owners’ proportionate ownership of limited partner units in Hiland Partners by the limited partners’ allocation of Hiland Partners’ net income. Hiland Partners’ net income is allocated to its limited partners and its general partner based on the proportionate share of the cash distributions declared for the period, with adjustments made for incentive distributions specifically allocated to its general partner. All amounts we have received from Hiland Partners’ issuance and sale of limited partner units have been recorded as increases to the minority interest balance on the consolidated balance sheet.

Contributions to Subsidiary

The Partnership directly and indirectly owns all of the equity interests in Hiland Partners GP, LLC, the general partner of Hiland Partners. Hiland Partners GP, LLC is required to make contributions to Hiland Partners each time Hiland Partners issues common units in order to maintain its 2% general partner ownership in Hiland Partners. Hiland Holdings or Hiland Partners GP, LLC was required to contribute $12 and $18 for the three months ended March 31, 2008 and 2007.

Recent Accounting Pronouncements

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

(“EITF No. 07-4”), which the FASB ratified at its March 26, 2008 meeting. EITF No. 07-4 requires the calculation of a Master Limited Partnership’s (“MLPs”) net earnings per limited partner unit for each period presented according to distributions declared and participation rights in undistributed earnings as if all of the earnings for that period had been distributed. In periods with undistributed earnings above specified levels, the calculation per the two-class method results in an increased allocation of such undistributed earnings to the general partner and a dilution of earnings to the limited partners. EITF No. 07-4 is effective for fiscal years beginning after December 15, 2008, and is to be applied retrospectively to all periods presented. Early application is not permitted. We will apply the requirements of EITF No. 07-4 as it pertains to MLPs upon its adoption during the quarter ended March 31, 2009.

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

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

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

In September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements.” SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP) such as fair value hierarchy used to classify the source of information used in fair value measurements (i.e., market based or non-market based) and expands disclosure about fair value measurements based on their level in the hierarchy. SFAS No. 157 applies to derivatives and other financial instruments, which SFAS No 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, requires be measured at fair value at initial recognition and for all subsequent periods. SFAS No. 157 establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. SFAS No. 157’s hierarchy defines three levels of inputs that may be used to measure fair value. Level 1 refers to assets that have observable market prices, level 2 assets do not have an “observable price” but do have inputs that are based on such prices in which components have observable data points and level 3 refers to assets in which one or more of the inputs do not have observable prices and calibrated model parameters, valuation techniques or management’s assumptions are used to derive the fair value. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. We elected to implement SFAS No. 157 prospectively in the first quarter of 2008 with the one-year

deferral permitted by FASB Staff Position (FSP) 157-2 for nonfinancial assets and nonfinancial liabilities measured at fair value, except those that are recognized or disclosed on a recurring basis (at least annually). The deferral applies to nonfinancial assets and liabilities measured at fair value in a business combination; impaired properties, plants and equipment; intangible assets and goodwill; and initial recognition of asset retirement obligations and restructuring costs for which we use fair value. We do not expect any significant impact to our consolidated financial statements when we implement SFAS No. 157 for these assets and liabilities. See Note 5 “Fair Value Measurements of Financial Instruments.”

Note 2: Property and Equipment and Asset Retirement Obligations

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

	As of		As of
	March 31,		December 31,
	2008		2007
Land	$	298	$	295
Construction in progress	6,777		12,030
Midstream pipeline, plants and compressors	369,577		356,491
Compression and water injection equipment	19,310		19,258
Other	4,189		3,958
	400,151		392,032
Less: accumulated depreciation and amortization	76,599		68,959
	$	323,552	$	323,073

During the three months ended March 31, 2008 and 2007, we capitalized interest of $131 and $669, respectively.

In accordance with SFAS No. 143, “Accounting for Asset Retirement Obligations,” we have recorded the fair value of liabilities for asset retirement obligations in the periods in which they are incurred and corresponding increases in the carrying amounts of the related long-lived assets. The asset retirement costs are subsequently allocated to expense using a systematic and rational method and the liabilities are accreted to measure the change in liability due to the passage of time. The provisions of this standard primarily apply to dismantlement and site restoration of certain of our plants and pipelines. We have evaluated our asset retirement obligations as of March 31, 2008 and have determined that revisions in the carrying values are not necessary at this time. Asset retirement obligations totaling $2,159 at January 1, 2008 increased to $2,191 at March 31, 2008 as a result of accreting the obligation by $32.

Note 3: Intangible Assets

Intangible assets consist of the acquired value of customer relationships, existing contracts to sell natural gas and other NGLs and compression contracts, which do not have significant residual value. The customer relationships and the contracts are being amortized over their estimated lives of ten years. We review intangible assets for impairment whenever events or circumstances indicate that the carrying amounts may not be recoverable. If such a review should indicate that the carrying amount of intangible assets is not recoverable, we reduce the carrying amount of such assets to fair value based on the discounted probable cash flows of the intangible assets. No impairments of intangible assets were recorded during the three months ended March 31, 2008 or 2007. Intangible assets consisted of the following at March 31, 2008 and December 31, 2007:

	As of		As of
	March 31,		December 31,
	2008		2007
Gas sales contracts	$	32,564	$	32,564
Compression contracts	18,515		18,515
Customer relationships	10,492		10,492
	61,571		61,571
Less accumulated amortization	16,173		14,634
Intangible assets, net	$	45,398	$	46,937

During each of the three months ended March 31, 2008 and 2007 we recorded $1,539 of amortization expense. Estimated aggregate amortization expense for the remainder of 2008 is $4,618 and $6,157 for each of the four succeeding fiscal years from 2009 through 2012 and a total of $16,152 for all years thereafter.

Note 4: Derivatives

Hiland Partners has entered into certain derivative contracts that are classified as cash flow hedges in accordance with SFAS No. 133, as amended, and relate to forecasted sales in 2008 and 2009. Hiland Partners entered into these financial swap instruments to hedge forecasted natural gas and natural gas liquids (NGLs) sales or purchases against the variability in expected future cash flows attributable to changes in commodity prices. Under these contractual swap agreements with Hiland Partners’ counterparty, Hiland Partners receives a fixed price and pays a floating price or pays a fixed price and receives a floating price based on certain indices for the relevant contract period as the underlying natural gas or NGL is sold or purchased.

Hiland Partners formally documents all relationships between hedging instruments and the items being hedged, including its risk management objective and strategy for undertaking the hedging transactions. This includes matching the natural gas and NGL futures, the “sold fixed for floating price” or “buy fixed for floating price” contracts, to the forecasted transactions. Hiland Partners assesses, both at the inception of the hedge and on an ongoing basis, whether the derivatives are highly effective in offsetting changes in the fair value of hedged items. Highly effective is deemed to be a correlation range from 80% to 125% of the change in cash flows of the derivative in offsetting the cash flows of the hedged transaction. If it is determined that a derivative is not highly effective as a hedge or it has ceased to be a highly effective hedge, due to the loss of correlation between changes in natural gas or NGL reference prices under a hedging instrument and actual natural gas or NGL prices, Hiland Partners will discontinue hedge accounting for the derivative and subsequent changes in fair value for the derivative will be recognized immediately into earnings. Hiland Partners assesses effectiveness using regression analysis and ineffectiveness using the dollar offset method.

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

Hiland Partners did not enter into any new derivative contracts in the three months ended March 31, 2008. At December 31, 2007, Hiland Partners had entered into one financial instrument that was designated as an open trade, in which Hiland Partners received a NYMEX index price less a basis differential and paid a floating price based on certain indices for the relevant contract period as the underlying natural gas was sold. This open trade financial swap instrument was not designated as a hedge and did not qualify for hedge accounting. On January 8, 2008, Hiland Partners negotiated a fixed price on the open trade and the financial swap instrument now qualifies for hedge accounting. During the three months ended March 31, 2008, we reclassified net losses of $1,233 on closed/settled hedge transactions to midstream revenues out of accumulated other comprehensive income and also recorded $1,500 out of accumulated other comprehensive income for the increase in fair value of open derivatives. Included in minority interest on the balance sheet is $2,498 of the changes in the net fair value of derivatives during the three months ended March 31, 2008 attributable to minority interest. During the three months ended March 31, 2008, we recorded losses of $401 on the ineffective portions of our qualifying open derivative transactions. At March 31, 2008, our accumulated other comprehensive loss related to qualifying derivatives was $(3,692). Of this amount, we anticipate $4,046 will be reclassified from earnings during the next twelve months and $354 will be reclassified to earnings in subsequent periods.

During the three months ended March 31, 2007 we reclassified net gains of $332 on closed/settled hedge transactions to midstream revenues out of accumulated other comprehensive loss and also recorded $832 out of accumulated other comprehensive loss for the decrease in fair value of open derivatives. Included in minority interest on the balance sheet is $800 of the changes in the net fair value of derivatives during the three months ended March 31, 2007 attributable to minority interest. During the three months ended March 31, 2007, Hiland Partners recorded a gain of $83, on the non-qualifying open trade financial instrument and losses of $14 on the ineffective portions of qualifying open derivative transactions.

The fair value of derivative assets and liabilities are as follows for the indicated periods:

	As of			As of
	March 31,			December 31,
	2008			2007
Fair value of derivative assets - current	$	1,050		$	2,718
Fair value of derivative assets - long term	594			418
Fair value of derivative liabilities - current	(7,748		)	(8,238		)
Fair value of derivative liabilities - long term	—			(141		)
Net fair value of derivatives	$	(6,104	)	$	(5,243	)

The terms of Hiland Partners’ derivative contracts currently extend out as far as December 2009. Our counterparty to all of our derivative contracts is BP Energy Company. Set forth below is the summarized notional amount and terms of all instruments held for price risk management purposes at March 31, 2008.

		Average		Fair Value
		Fixed/Open		Asset
	Volume	Price		(Liability)
Description and Production Period	(MMBtu)	(per MMBtu)
Natural Gas - Sold Fixed for Floating Price Swaps
April 2008 - March 2009	2,019,000	$	7.70	$	(2,026	)
April 2009 - December 2009	1,602,000	$	7.30	594
				$	(1,432	)

	(MMBtu)	(per MMBtu)
Natural Gas - Buy Fixed for Floating Price Swaps
April 2008 - December 2008	540,864	$	6.93	$	1,050

	(Bbls)	(per Gallon)
Natural Gas Liquids - Sold Fixed for Floating Price Swaps
April 2008 - December 2008	331,326	$	1.31	$	(5,722	)

Note 5: Fair Value Measurements of Financial Instruments

We adopted SFAS No. 157 “Fair Value Measurements” beginning in the first quarter of 2008. SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP) such as fair value hierarchy used to classify the source of information used in fair value measurements (i.e., market based or non-market based) and expands disclosure about fair value measurements based on their level in the hierarchy. SFAS No. 157 applies to derivatives and other financial instruments, which SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, requires be measured at fair value at initial recognition and for all subsequent periods. SFAS No. 157 establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. SFAS No. 157’s hierarchy defines three levels of inputs that may be used to measure fair value. Level 1 refers to assets that have observable market prices, level 2 assets do not have an “observable price” but do have inputs that are based on such prices in which components have observable data points and level 3 refers to assets in which one or more of the inputs do not have observable prices and calibrated model parameters, valuation techniques or management’s assumptions are used to derive the fair value.

We use the fair value methodology outlined in SFAS No. 157 to value assets and liabilities for our outstanding fixed price cash flow swap derivative contracts. Valuations of our natural gas and propane derivative contracts are based on published forward price curves for natural gas and propane and, as such, are defined as Level 2 fair value hierarchy assets and liabilities. There are no published forward price curves for butanes or natural gasoline, and therefore, our butanes and natural gasoline derivative contracts are defined as Level 3 fair value hierarchy assets and liabilities. We value our butanes and natural gasoline derivative contracts based on calibrated model parameters relative to forward published price curves for crude oil and comparative mark-to-market values received from our counterparty. The following table represents the fair value hierarchy for our assets and liabilities at March 31, 2008:

	Level 1		Level 2			Level 3			Total
Commodity -based derivative assets	$	—	$	1,644		$	—		$	1,644
Commodity -based derivative liabilities	—		(4,312		)	(3,436		)	(7,748		)
Total	$	—	$	(2,668	)	$	(3,436	)	$	(6,104	)

The following table provides a summary of changes in the fair value of Hiland Partners’Level 3 commodity-based derivatives for the three months ended March 31, 2008:

	Fixed Price
	Cash Flow
	Swaps
Balance January 1, 2008	$	(4,489	)
Cash settlements from other comprehensive income (loss)	1,418
Net change in other comprehensive income	(365		)
Balance March 31, 2008	$	(3,436	)

Note 6: Long-Term Debt

	As of		As of
	March 31,		December 31,
	2008		2007
Hiland Partners-Revolving Credit Facility	$	230,064	$	221,064
Hiland Holdings-Revolving Credit Facility	355		355
Capital lease obligation	5,478		5,585
	235,897		227,004
Less current portion of capital lease obligations	590		545
Long-term debt	$	235,307	$	226,459

Hiland Partners

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

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

In addition, the credit facility provides for an accordion feature, which permits Hiland Partners, if certain conditions are met, to increase the size of the Acquisition Facility by up to $50 million and allows for the issuance of letters of credit of up

to $15 million in the aggregate. The senior secured revolving credit facility also requires HIiland Partners to meet certain financial tests, including a maximum consolidated funded debt to EBITDA ratio of 4.0:1.0 as of the last day of any fiscal quarter; provided that in the event that Hiland Partners makes certain permitted acquisitions or capital expenditures, this ratio may be increased to 4.75:1.0 for the three fiscal quarters following the quarter in which such acquisition or capital expenditure occurs; and a minimum interest coverage ratio of 3.0:1.0. The credit facility will mature in May 2011. At that time, the agreement will terminate and all outstanding amounts thereunder will be due and payable.

Hiland Partners’ obligations under the credit facility are secured by substantially all of its assets and guaranteed by Hiland Partners, and all of its subsidiaries, other than Hiland Operating, LLC its operating company, which is the borrower under the credit facility.

Indebtedness under the credit facility will bear interest, at Hiland Partners’ option, at either (i) an Alternate Base Rate plus an applicable margin ranging from 50 to 125 basis points per annum or (ii) LIBOR plus an applicable margin ranging from 150 to 225 basis points per annum based on our ratio of consolidated funded debt to EBITDA. The Alternate Base Rate is a rate per annum equal to the greatest of (a) the Prime Rate in effect on such day, (b) the base CD rate in effect on such day plus 1.50% and (c) the Federal Funds effective rate in effect on such day plus ½ of 1%. A letter of credit fee will be payable for the aggregate amount of letters of credit issued under the credit facility at a percentage per annum equal to 1.0%. An unused commitment fee ranging from 25 to 50 basis points per annum based on our ratio of consolidated funded debt to EBITDA will be payable on the unused portion of the credit facility. During any step-up period, the applicable margin with respect to loans under the credit facility will be increased by 35 basis points per annum and the unused commitment fee will be increased by 12.5 basis points per annum. At March 31, 2008, the interest rate on outstanding borrowings from Hiland Partners’ credit facility was 5.32%.

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

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

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

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

As of March 31, 2008, Hiland Partners had $230.1 million outstanding under this credit facility and was in compliance with its financial covenants.

Hiland Holdings

On September 25, 2006, concurrently with the closing of our initial public offering, the Partnership entered into a three-year $25.0 million secured revolving credit facility. The facility will permit us, if certain conditions are met, to increase borrowing capacity by up to an additional $25.0 million. The facility is secured by all of our ownership interests in Hiland Partners and its general partner, other than the 2% general partner interest and the incentive distribution rights.

The facility will mature on September 25, 2009 at which time all outstanding amounts thereunder become due and payable.

Indebtedness under the facility bears interest, at our option, at either (i) an alternate base rate plus an applicable margin ranging from 100 to 150 basis points per annum or (ii) LIBOR plus an applicable margin ranging from 200 to 250 basis points per annum in each case based on our ratio of consolidated funded debt to EBITDA. The alternate base rate is equal to the greatest of (a) the prime rate in effect on such day, (b) the base CD rate in effect on such day plus 1.50% and (c) the federal funds effective rate in effect on such day plus ¹/₂ of 1%. A letter of credit fee will be payable for the aggregate amount of letters of credit issued under the facility at a percentage per annum equal to 2.0%. A commitment fee ranging from 25 to 50 basis points per annum based on our ratio of consolidated funded debt to EBITDA will be payable on the average daily unused portion of the facility for the quarter most recently ended. At March 31, 2008, the interest rate on outstanding borrowings from our credit facility was 5.06%.

The facility contains several covenants that, among other things, require the maintenance of two financial performance ratios, restrict the payment of distributions to unitholders, and require financial reports to be submitted periodically to the financial institutions.

The credit facility also contains covenants requiring a maximum consolidated funded debt to EBITDA ratio of 3.0:1.0 for the four fiscal quarters most recently ended and a minimum interest coverage ratio of 3.0:1.0.

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

The facility limits distributions to our unitholders to our available cash, as defined in our partnership agreement. Restricted payments under the facility are subject to an annual “clean-down” period of 15 consecutive days in which the amount outstanding that relates to funding the restricted payments under the facility must be reduced to zero.

As of March 31, 2008, we had $0.4 million outstanding under this credit facility and were in compliance with our financial covenants.

Capital Lease Obligations

During the third quarter of 2007, Hiland Partners incurred two separate capital lease obligations at the Bakken and Badlands gathering systems. Under the terms of a capital lease agreement for a rail loading facility and an associated products pipeline at the Bakken gathering system, Hiland Partners has agreed to repay a business partner a predetermined amount over a period of eight years. Once fully paid, title to the leased assets will transfer to Hiland Partners no later than the end of the eight-year period commencing from the inception date of the lease. Hiland Partners also incurred a capital lease obligation for the aid to construct several electric substations at Hiland Partners’ Badlands gathering system which, by agreement, will be repaid in equal monthly installments over a period of five years.

During the three months ended March 31, 2008, Hiland Partners made principal payments of $107 on the above described capital lease obligations. The current portion of the capital lease obligations presented in the table above is included in accrued liabilities and other in the balance sheet.

Note 7: Share-Based Compensation

Hiland Holdings GP, LP Long Term Incentive Plan

Hiland Holdings GP, the general partner of Hiland Holdings, adopted the Hiland Holdings GP, LP Long-Term Incentive Plan for its employees and directors of its general partner and employees of its affiliates. The long-term incentive plan consists of three components: unit options, restricted units and phantom units. The long-term incentive plan limits the number of units that be delivered pursuant to awards to 2,160,000 units. The plan is administered by the board of directors of our general partner or the compensation committee of the board of directors of our general partner. The plan will expire upon the

first to occur of its termination by the board of directors or the compensation committee, the date when no units remain available under the plan for awards or the tenth anniversary of the date the plan is approved by our unitholders. Awards then outstanding will continue pursuant to the terms of their grants.

The board of directors of our general partner and the compensation committee of the board may terminate or amend the long-term incentive plan at any time with respect to any units for which a grant has not yet been made. Our board of directors and the compensation committee of the board also have the right to alter or amend the long-term incentive plan or any part of the plan from time to time, including increasing the number of units that may be granted subject to unitholder approval as may be required by applicable law or stock exchange rules. However, no change in any outstanding grant may be made that would materially reduce the benefits of the participant without the consent of the participant. Restricted common units granted vest and become exercisable in one-fourth increments on the anniversary of the grant date over four years. A restricted unit is a common unit that is subject to forfeiture, and upon vesting, the grantee receives a common unit that is not subject to forfeiture. Distributions on unvested restricted common units are held in trust by our general partner until the units vest, at which time the distributions are distributed to the grantee.

As provided for in the long-term incentive plan, each non-employee board member of Hiland Partners GP Holdings, LLC on each anniversary date of the initial reward is entitled to receive an additional 1,000 restricted common units. We issued no restricted units during the three months ended March 31, 2008. As of March 31, 2008 and December 31, 2007, we had 15,000 restricted common units outstanding with a weighted average fair value at grant date of $23.30 per restricted unit. Compensation expense related to the 12,000 restricted units issued is to be recognized over their respective four-year vesting period on the graded vesting attribution method. We recorded compensation expense related to the restricted units of $35 and $32 for the three months ended March 31, 2008 and 2007, respectively, and will record additional compensation expense of $206 over the next four years.

Hiland Partners, LP Long Term Incentive Plan

Hiland Partners GP, LLC, the general partner of Hiland Partners adopted the Hiland Partners, LP Long-Term Incentive Plan for its employees and directors of its general partner and employees of its affiliates. The long-term incentive plan currently permits an aggregate of 680,000 of Hiland Partners common units to be issued with respect to unit options, restricted units and phantom units granted under the plan. No more than 225,000 of the 680,000 common units may be issued with respect to vested restricted or phantom units. The plan is administered by the compensation committee of Hiland Partners GP, LLC’s board of directors. The plan will continue in effect until the earliest of (i) the date determined by the board of directors of the general partner; (ii) the date that common units are no longer available for payment of awards under the plan; or (iii) the tenth anniversary of the plan.

Hiland Partners GP, LLC’s board of directors or compensation committee may, in their discretion, terminate, suspend or discontinue the long-term incentive plan at any time with respect to any units for which a grant has not yet been made. Hiland Partners GP, LLC’s board of directors or its compensation committee also has the right to alter or amend the long-term incentive plan or any part of the plan from time to time, including increasing the number of units that may be granted, subject to unitholder approval if required by the exchange upon which the common units are listed at that time. No change in any outstanding grant may be made, however, that would materially impair the rights of the participant without the consent of the participant. Under the unit option grant agreement, granted options of common units will vest and become exercisable in one-third increments on the anniversary of the grant date over three years. Vested options are exercisable within the option’s contractual life of ten years after the grant date. Restricted common units granted vest and become exercisable in one-fourth increments on the anniversary of the grant date over four years. A restricted unit is a common unit that is subject to forfeiture, and upon vesting, the grantee receives a common unit that is not subject to forfeiture. Distributions on unvested restricted common units are held in trust by Hiland Partners’ general partner until the units vest, at which time the distributions are distributed to the grantee. Granted phantom common units are generally more flexible than restricted units and vesting periods and distribution rights may vary with each grant. A phantom unit is a common unit that is subject to forfeiture and is not considered issued until it vests. Upon vesting, holders of phantom units will receive (i) a common unit that is not subject to forfeiture, cash in lieu of the delivery of such unit equal to the fair market value of the unit on the vesting date, or a combination thereof, at the discretion of our general partner’s board of directors and (ii) the distributions held in trust, if applicable, related to the vested units.

Phantom Units. On February 4, 2008, Hiland Partners granted 7,500 phantom units to Mr. Matthew S. Harrison, ours and Hiland Partners’ new Chief Financial Officer (“CFO”), formerly Vice President of Business Development. The phantom units granted vest over a three-year period from the date of issuance and distributions are held in trust by Hiland Partners’

general partner until the units vest. On February 25, 2008, Hiland Partners granted 2,500 phantom units to a key employee that vest over a four-year period from the date of issuance and do not accumulate distributions. On March 19, 2008, Mr. Ken Maples, ours and Hiland Partners’ former CFO, resigned and the 5,000 phantom units Hiland Partners granted to him in November 2007 were forfeited. Hiland Partners granted no phantom units during the three months ended March 31, 2007.

The following table summarizes information about Hiland Partners’ phantom units for the three months ended March 31, 2008:

			Weighted
			Average
			Fair Value
			At Grant
	Units		Date ($)
Unvested January 1, 2008	42,825		$	50.12
Granted	10,000		$	49.36
Forfeited	(5,000	)	$	48.80
Unvested March 31, 2008	47,825		$	50.10

During the three months ended March 31, 2008, Hiland Partners incurred compensation expense of $279 related to phantom units. Hiland Partners will recognize additional expense of $1,881 over the next four years, and the additional expense is to be recognized over a weighted average period of 3.4 years.

Restricted Units. Hiland Partners issued no restricted units during the three months ended March 31, 2008. As of March 31, 2008 and December 31, 2007, Hiland Partners had 19,375 restricted common units outstanding with a weighted average fair value at grant date of $46.57 per restricted unit outstanding. Total compensation expense related to restricted units was $84 and $120 for the three months ended March 31, 2008 and 2007, respectively. As of March 31, 2008, there was $475 of total unrecognized cost related to unvested restricted units. This cost is to be recognized over a weighted average period of 2.5 years.

Unit Options. There have been no unit options granted since March 2006. As a result of adopting SFAS No. 123R on the modified prospective basis beginning on January 1, 2006, during the three months ended March 31, 2008 and 2007, Hiland Partners expensed $8 and $58, respectively, related to unit options that were awarded in both 2006 and 2005. Hiland Partners’ basic and diluted earnings per unit were reduced by $0.01 for the three months ended March 31, 2007 as a result of the $87 additional compensation recognized under SFAS No. 123R.

The following table summarizes information about Hiland Partners’ common unit options for the three months ended March 31, 2008:

					Weighted-
			Weighted		Average
			Average		Remaining	Aggregate
			Exercise		Contractual	Intrinsic
Options	Units		Price ($)		Term (Years)	Value ($)
Outstanding at January 1, 2008	75,041		$	28.24
Granted	—
Exercised	(22,039	)	$	27.71		$	462
Forfeited or expired	(500	)	$	43.00
Outstanding at March 31, 2008	52,502		$	32.43	7.4	$	686
Exercisable at March 31, 2008	35,834		$	23.87	7.2	$	775

Note 8: Commitments and Contingencies

Hiland Partners has executed a natural gas fixed price physical forward sales contract on 100,000 MMBtu per month for the remainder of 2008 with a fixed price of $8.43 per MMBtu. This contract has been designated as a normal sale under SFAS No. 133 and is therefore not marked to market as a derivative.

We maintain a defined contribution retirement plan for our employees under which we make discretionary contributions to the plan based on a percentage of eligible employees’ compensation. Contributions to the plan are 5.0% of eligible employees’ compensation and resulted in expenses for the three months ended March 31, 2008 and 2007 of $75 and $63, respectively.

We maintain our health and workers’ compensation insurance through third-party providers. Property and general liability insurance is also maintained through third-party providers with a $100 deductible on each policy.

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

Although there are no significant regulatory proceedings in which we are currently involved, periodically we may be a party to regulatory proceedings. The results of regulatory proceedings cannot be predicted with certainty; however, our management believes that we presently do not have material potential liability in connection with regulatory proceedings that would have a significant financial impact on our consolidated financial condition, results of operations or cash flows.

We and Hiland Partners lease office space from a related entity (Note 10). We lease certain facilities, vehicles and equipment under operating leases, most of which contain annual renewal options. For the three months ended March 31, 2008 and 2007, rent expense was $616 and $514, respectively, under these leases.

Note 9: Significant Customers and Suppliers

All of Hiland Partners’ revenues are domestic revenues. The following table presents Hiland Partners’ top midstream customers as a percent of total revenue for the periods indicated:

	For the Three Months Ended March 31,
	2008		2007
Customer 1	21	%	29	%
Customer 2	19	%	14	%
Customer 3	15	%	16	%
Customer 4	10	%	6	%

All of Hiland Partners’ purchases are from domestic sources. The following table presents Hiland Partners’ top midstream suppliers as a percent of total midstream purchases for the periods indicated:

	For the Three Months Ended March 31,
	2008		2007
Supplier 1 (affiliated company)	38	%	27	%
Supplier 2	19	%	26	%
Supplier 3	15	%	15	%

The tables below present information for the reportable segments for the three months ended March 31, 2008 and 2007.

	For the Three Months Ended March 31,
	2008							2007
	Midstream		Compression					Midstream		Compression
	Segment		Segment		Total			Segment		Segment		Total

Revenues	$	90,274	$	1,205	$	91,479		$	59,849	$	1,205	$	61,054
Operating costs and expenses:
Midstream purchases (exclusive of items shown separately below)	68,618		—		68,618			43,615		—		43,615
Operations and maintenance	6,541		228		6,769			4,802		168		4,970
Depreciation and amortization	8,321		895		9,216			6,135		893		7,028
General and administrative expenses	2,654		30		2,684			2,005		40		2,045
Total operating costs and expenses	86,134		1,153		87,287			56,557		1,101		57,658
Operating income (loss)	$	4,140	$	52	4,192			$	3,292	$	104	3,396
Other income (expense):
Interest and other income					104							127
Amortization of deferred loan costs					(156		)					(110		)
Interest expense					(3,506		)					(2,091		)
Minority interest in loss (income) of Hiland Partners, LP					206							(574		)
Net income					$	840						$	748

Note 12: Net Income per Limited Partners’ Unit

The computation of basic net income per limited partners’ unit is based on the weighted-average number of common units outstanding during the period. The computation of diluted earnings per unit further assumes the dilutive effect of restricted units. Net income per unit applicable to limited partners is computed by dividing net income applicable to limited partners 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 three months ended March 31, 2008 and 2007:

	Income
	Available to
	Limited		Limited
	Partners		Partner Units	Per Unit
	(Numerator)		(Denominator)	Amount
	(in thousands)
For the Three Months Ended March 31, 2008
Income per limited partner unit -basic:
Income available to limited partners	$	840		$	0.04
Weighted average limited partner units outstanding			21,603
Income per limited partner unit – diluted:
Restricted units			6
Income available to limited partners plus assumed conversions	$	840	21,609	$	0.04

For the Three Months Ended March 31, 2007
Income per limited partner unit -basic:
Income available to limited partners	$	748		$	0.03
Weighted average limited partner units outstanding			21,600
Income per limited partner unit – diluted:
Restricted units			5
Income available to limited partners plus assumed conversions	$	748	21,605	$	0.03

Note 13: Partners’ Equity and Cash Distributions

Hiland Holdings

Our unitholders (limited partners) have only limited voting rights on matters affecting our operations and activities and, therefore, limited ability to influence our management’s decisions regarding our business. Unitholders did not select our general partner or elect the board of directors of our general partner and effectively have no right to select our general partner or elect its board of directors in the future. Unitholders’ voting rights are further restricted by our partnership agreement, which provides that any units held by a person that owns 20% or more of any class of units then outstanding, other than the general partner, its affiliates, their transferees and persons who acquired such units with the prior approval of the board of directors of our general partner, cannot be voted on any matter. In addition, our partnership agreement contains provisions limiting the ability of our unitholders to call meetings or to acquire information about our operations, as well as other provisions limiting a unitholders’ ability to influence the manner or direction of our management.

Our Partnership Agreement requires that we distribute all of our cash on hand at the end of each quarter, less reserves established at our general partner’s discretion. We refer to this as “available cash.” Initially our only cash-generating assets are our interests in Hiland Partners from which we receive quarterly distributions. The amount of available cash may be greater than or less than the minimum quarterly distributions.

All distributions paid by Hiland Holdings to common unitholders from January 1, 2007 forward, including amounts paid to affiliate owners, were as follows (in thousands, except per unit amounts):

Date Cash	Per Unit Cash
Distribution	Distribution		Total Cash
Paid	Amount		Distribution

02/19/07	$	0.2075	$	4,484
05/18/07	0.2075		4,484
08/17/07	0.2200		4,755
11/19/07	0.2300		4,972
02/19/08	0.2550		5,513
05/19/08 (a)	0.2800		6,053
	$	1.4000	$	30,261

(a) This cash distribution was announced on April 25, 2008 and will be paid on May 19, 2008 to all unitholders of record as of May 5, 2008.

Hiland Partners

The unitholders (limited partners) of Hiland Partners have only limited voting rights on matters affecting its operations and activities and, therefore, limited ability to influence its management’s decisions regarding its business. Unitholders did not select Hiland Partners GP, LLC as general partner or elect its board of directors and effectively have no right to select a general partner or elect its board of directors in the future. Unitholders’ voting rights are further restricted by Hiland Partners’ partnership agreement, which provides that any units held by a person that owns 20% or more of any class of units then outstanding, other than the general partner, its affiliates, their transferees and persons who acquired such units with the prior approval of Hiland Partners GP, LLC’s board of directors, cannot be voted on any matter. In addition, Hiland Partners’ partnership agreement contains provisions limiting the ability of its unitholders to call meetings or to acquire information about its operations, as well as other provisions limiting a unitholder’s ability to influence the manner or direction of Hiland Partners’ management.

Hiland Partners’ partnership agreement requires that it distribute all of its cash on hand at the end of each quarter, less reserves established at Hiland Partners GP, LLC’s discretion. We refer to this as “available cash.” The amount of available

cash may be greater than or less than the minimum quarterly distributions described below. In general, Hiland Partners will pay any cash distribution made each quarter in the following manner:

· first, 98% to the common units, pro rata, and 2% to Hiland Partners GP, LLC, until each common unit has received a minimum quarterly distribution of $0.45 plus any arrearages from prior quarters;

· second, 98% to the subordinated units, pro rata, and 2% to Hiland Partners GP, LLC, until each subordinated unit has received a minimum quarterly distribution of $0.45; and

· third, 98% to all units, pro rata, and 2% to Hiland Partners GP, LLC, until each unit has received a distribution of $0.495.

If cash distributions per unit exceed $0.495 in any quarter, Hiland Partners GP, LLC as general partner will receive increasing percentages, up to a maximum of 50% of the cash Hiland Partners distributes in excess of that amount. We refer to these distributions as “incentive distributions.”

The distributions on the subordinated units may be reduced or eliminated if necessary to ensure the common units receive their minimum quarterly distribution. Subordinated units will not accrue arrearages. The subordination period will end with respect to certain portions of the subordinated units once Hiland Partners meets certain financial tests, but will not end with respect to all subordinated units before March 31, 2010. These financial tests require Hiland Partners to have earned and paid the minimum quarterly distribution on all of its outstanding units for three consecutive four-quarter periods. When the subordination period ends, all remaining subordinated units will convert into common units on a one-for-one basis and the common units will no longer be entitled to arrearages. Hiland Partners expects that certain financial tests will have been met when Hiland Partners makes its distribution for the quarter ended March 31, 2008 on May 14, 2008, such that 25% of the subordinated units will be converted to common units on the second day following distribution. As of March 31, 2008 we own 4,080,000 subordinated units, which is all of Hiland Partners’ subordinated units.

Presented below are cash distributions to Hiland Partners common and subordinated unitholders, including amounts to affiliate owners and regular and incentive distributions to Hiland Partners GP, LLC paid by Hiland Partners from January 1, 2007 forward (in thousands, except per unit amounts):

Date Cash	Per Unit Cash
Distribution	Distribution		Common		Subordinated		General Partner				Total Cash
Paid	Amount		Units		Units		Regular		Incentive		Distributions
02/14/07	$	0.7125	$	3,694	$	2,907	$	150	$	749	$	7,500
05/15/07	0.7125		3,724		2,907		151		752		7,534
08/14/07	0.7325		3,837		2,989		158		932		7,916
11/14/07	0.7550		3,959		3,080		167		1,134		8,340
02/14/08	0.7950		4,169		3,243		182		1,492		9,086
05/14/08 (a)	0.8275		4,364		3,376		194		1,789		9,723
	$	4.5350	$	23,747	$	18,502	$	1,002	$	6,848	$	50,099

(a) This cash distribution was announced on April 25, 2008 and will be paid on May 14, 2008 to all unitholders of record as of May 5, 2008.

Presented below are cash distributions by Hiland Partners to us and Hiland Partners GP, LLC from January 1, 2007 forward (in thousands, except per unit amounts):

Date Cash	Per Unit Cash
Distribution	Distribution		Common		Subordinated		General Partner				Total Cash
Paid	Amount		Units		Units		Regular		Incentive		Distributions
02/14/07	$	0.7125	$	927	$	2,907	$	150	$	749	$	4,733
05/15/07	0.7125		927		2,907		151		752		4,737
08/14/07	0.7325		953		2,989		158		932		5,032
11/14/07	0.7550		983		3,080		167		1,134		5,364
02/14/08	0.7950		1,035		3,243		182		1,492		5,952
05/14/08 (a)	0.8275		1,077		3,376		194		1,789		6,436
	$	4.5350	$	5,902	$	18,502	$	1,002	$	6,848	$	32,254

(a) This cash distribution was announced on April 25, 2008 and will be paid on May 14, 2008 to all unitholders of record as of May 5, 2008.

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:

· our ability to pay distributions to our unitholders;

· our expected receipt of distributions from Hiland Partners;

· 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 of Hiland Partners to find and contract for new sources of natural gas supply;

· the amount of natural gas transported on Hiland Partners’ gathering systems;

· the level of throughput in Hiland Partners’ natural gas processing and treating facilities;

· the fees Hiland Partners charges and the margins realized for its services;

· the prices and market demand for, and the relationship between, natural gas and natural gas liquids, or (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 Hiland Partners’ 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 Hiland Partners’ ability to access certain capital sources;

· changes in laws and regulations to which we and Hiland Partners 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 Hiland Partners’ financial results; and

· risks associated with the construction of new pipelines and treating and processing facilities or additions to Hiland Partners’ existing pipelines and facilities.

These factors are not necessarily all of the important factors that could cause our 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.

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

Overview of Hiland Holdings

We are a Delaware limited partnership formed in May 2006 to own Hiland Partners GP, LLC, the general partner of Hiland Partners, and certain other common and subordinated units in Hiland Partners We reflect our ownership interest in Hiland Partners on a consolidated basis, which means that our financial results are combined with Hiland Partners’ financial results. The non-controlling limited partner interest in Hiland Partners is reflected as an expense in our results of operations and as a liability on our consolidated balance sheet. Hiland Partners GP, LLC’s results of operations principally reflect the results of operations of Hiland Partners and are adjusted for non-controlling partners’ interests in Hiland Partners’ net income.

Our cash generating assets consist of our direct or indirect ownership interests in Hiland Partners. Hiland Partners is principally engaged in gathering, compressing, dehydrating, treating, processing and marketing natural gas, fractionating natural gas liquids and providing air compression and water injection services for oil and gas secondary recovery operations. Our aggregate ownership interests in Hiland Partners consist of the following:

· the 2% general partner interest in Hiland Partners;

· 100% of the incentive distribution rights in Hiland Partners; and

· 1,301,471 common units and 4,080,000 subordinated units of Hiland Partners, representing a 57.6% limited partner interest in Hiland Partners.

Hiland Partners is required by its partnership agreement to distribute all of its cash on hand at the end of each quarter, after establishing reserves to provide for the proper conduct of its business or to provide funds for future distributions. Hiland Partners announced its quarterly distribution to $0.8275 per unit for the quarter ended March 31, 2008. This distribution will be paid on May 14, 2008 to unitholders of record on May 5, 2008.

Our primary objective is to increase our cash distributions to our unitholders by actively assisting Hiland Partners in executing its business strategy. We intend to support Hiland Partners in implementing its business strategy by assisting in identifying, evaluating and pursuing growth opportunities. In the future, it is possible that we may also support the growth of Hiland Partners through the use of our capital resources, which could involve loans or capital contributions to Hiland Partners to provide funding for the acquisition of a business or an asset or for an internal growth project. In addition, we may provide Hiland Partners with other forms of credit support, such as guarantees relating to financing a project or other types of support related to a merger or acquisition transaction.

Cash Distributions. The following table sets forth the distributions that we have received from Hiland Partners during the periods indicated.

	Three Months Ended March 31,
	2008		2007
Distributions on Hiland Partners’ common units	$	1,035	$	927
Distributions on Hiland Partners’ subordinated units	3,243		2,907
Distributions from ownership interest in Hiland Partners’ general partner	182		150
Distributions from Hiland Partners’ incentive distribution rights	1,492		749
Total	$	5,952	$	4,733

Because we own Hiland Partners GP, LLC the distributions to us include the distributions made to Hiland Partners GP, LLC.

Overview of Hiland Partners

Hiland Partners is 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. Hiland Partners’ operations are primarily located in the Mid-Continent and Rocky Mountain regions of the United States.

Hiland Partners manages its business and analyzes and reports its results of operations on a segment basis. Hiland Partners’ 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, Hiland Partners also provides certain related services for compression, dehydrating, and treating of natural gas and the fractionation of NGLs. The midstream segment generated 94.7% of total segment margin for the three months ended March 31, 2008 and 93.1% of total segment margin for the three months ended March 31, 2007.

· 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. The compression segment generated 5.3% of total segment margin for the three months ended March 31, 2008 and 6.9% of total segment margin for the three months ended March 31, 2007.

Hiland Partners’ midstream assets currently consist of 14 natural gas gathering systems with approximately 2,030 miles of gas gathering pipelines, five natural gas processing plants, seven natural gas treating facilities and three NGL fractionation facilities. Hiland Partners’ compression assets consist of two air compression facilities and a water injection plant.

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

Recent Events

Distribution Increase. On April 25, 2008, we declared a cash distribution for the first quarter of 2008. This declared quarterly distribution on our common units increased to $0.28 per unit (an annualized rate of $1.12 per unit) from our most recent distribution of $0.255 per unit (an annualized rate of $1.02 per unit). This represents a 9.8% increase over the prior quarter and a 34.9% increase over the distribution for the same quarter of the prior year. The distribution will be paid on May 19, 2008 to unitholders of record on May 4, 2008.

Officer Selection. On April 16, 2008, we appointed Mr. Matthew S. Harrison to the positions of Chief Financial Officer, Vice President - Finance, Secretary and director of our general partner. Mr. Harrison had been serving as Interim CFO since April 4, 2008 subsequent to the resignation of our former CFO, Ken Maples, on March 19, 2008. Mr. Harrison first joined Hiland Partners’ executive management team on February 4, 2008 when he was appointed to the position of Vice President of Business Development of Hiland Partners’ general partner.

Badlands Gathering System. The nitrogen rejection plant at Hiland Partners’ Badlands gathering system in North Dakota was inoperable for 29 days from February 5, 2008 to March 5, 2008. The plant was taken out of service when it was discovered that a primary piece of equipment had failed.

Hiland Partners’ Credit Facility Amendment. On February 6, 2008, Hiland Partners completed a fourth amendment to its existing credit agreement to increase its borrowing base by $50 million from $250 million to $300 million. For a more complete discussion of Hiland Partners’ credit facility, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Credit Facility.”

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 due to (i) increased volumes and associated operationg expenses and Hiland Partners’ Badlands gathering system as a result of the construction of Hiland Partners’ nitrogen rejection plant, which became operational in August 2007 and (ii) volumes and operating expenses at Hiland Partners’ Woodford Shale gathering system, which commenced production in April 2007.

Our Results of Operations

The results of our operations discussed below principally reflect the activities of Hiland Partners. Because our consolidated financial statements include the results of Hiland Partners, our financial statements are substantially similar to the financial statements of Hiland Partners. However, our consolidated balance sheet includes a minority interest amount that reflects the proportion of Hiland Partners owned by its unitholders other than us. Similarly, the ownership interests in Hiland Partners held by its unitholders other than us are reflected in our consolidated income statement as minority interest. The minority interest amounts are not reflected on Hiland Partners’ financial statements.

Set forth in the tables below are certain financial and operating data for the periods indicated.

	Three Months Ended March 31,
	2008		2007
	(in thousands)
Total Segment Margin Data:
Midstream revenues	$	90,274	$	59,849
Midstream purchases	68,618		43,615
Midstream segment margin	21,656		16,234
Compression revenues (1)	1,205		1,205
Total segment margin (2)	$	22,861	$	17,439

Summary of Operations Data:
Midstream revenues	$	90,274	$	59,849
Compression revenues	1,205		1,205
Total revenues	91,479		61,054

Midstream purchases (exclusive of items shown separately below)	68,618		43,615
Operations and maintenance	6,769		4,970
Depreciation, amortization and accretion	9,216		7,028
General and administrative	2,684		2,045
Total operating costs and expenses	87,287		57,658
Operating income	4,192		3,396
Other income (expense), net	(3,558)		(2,074)
Income before minority interest in loss (income) of Hiland Partners, LP	634		1,322
Minority interest in loss (income) of Hiland Partners, LP	206		(574)
Net income	$	840	$	748

Hiland Partners Operating Data:
Inlet natural gas (MCF/d)	227,431		200,088
Natural gas sales (MMBTU/d)	85,773		74,521
NGL sales (Bbls/d)	5,275		3,986

(1) Compression revenues and compression segment margin are the same. There are no compression purchases associated with the compression segment.

(2) Reconciliation of total segment margin to operating income:

	Three Months Ended March 31,
	2008		2007
	(in thousands)
Reconciliation of Total Segment Margin to Operating Income
Operating income	$	4,192	$	3,396
Add:
Operations and maintenance expenses	6,769		4,970
Depreciation, amortization and accretion	9,216		7,028
General and administrative expenses	2,684		2,045
Total segment margin	$	22,861	$	17,439

We view total segment margin, a non-GAAP financial measure, as an important performance measure of the core profitability of our operations. We review total segment margin monthly for a consistency and trend analysis. We define midstream segment margin as midstream revenue less midstream purchases. Midstream purchases include the following costs and expenses: cost of natural gas and NGLs purchased by us from third parties, cost of natural gas and NGLs purchased by us from affiliates, and the cost of crude oil purchased by us from third parties. We define compression segment margin as the revenue derived from our compression segment.

Three Months Ended March 31, 2008 Compared with Three Months Ended March 31, 2007

Revenues. Total revenues (midstream and compression) were $91.5 million for the three months ended March 31, 2008 compared to $61.1 million for the three months ended March 31, 2007, an increase of $30.4 million, or 49.8%. This $30.4 million increase was due to (i) increased natural gas sales volumes of 11,252 MMBtu/day (MMBtu per day) primarily related to our Woodford Shale gathering system which commenced production in April 2007, (ii) increased NGL sales volumes of 1,286 Bbls/day (Bbls per day) largely attributable to our Badlands and Woodford Shale gathering systems and (iii) significantly higher average realized natural gas and NGL sales prices for the three months ended March 31, 2008 as compared to the same period in 2007, resulting in increased revenue at our Bakken, Eagle Chief and Matli gathering systems. Revenues from compression assets were the same for both periods.

Midstream revenues were $90.3 million for the three months ended March 31, 2008 compared to $59.8 million for the three months ended March 31, 2007, a net increase of $30.4 million, or 50.8%. Of this net increase in midstream revenues, approximately $11.5 million was attributable to revenues from natural gas and NGL sales volumes at the Woodford Shale gathering system and increased natural gas and NGL sales volumes at the Bakken and Badlands gathering systems, and $18.9 million was attributable to significantly higher average realized natural gas and NGL sales prices for the three months ended

March 31, 2008 as compared to the same period in 2007, resulting in increased revenues for nearly all of our gathering systems.

Inlet natural gas was 227,431 Mcf/d (Mcf per day) for the three months ended March 31, 2008 compared to 200,088 Mcf/d for the three months ended March 31, 2007, a net increase of 27,343 Mcf/d, or 13.7%. This increase is primarily attributable to volume growth at the Woodford Shale and Badlands gathering systems.

Natural gas sales volumes were 85,773 MMBtu/d for the three months ended March 31, 2008 compared to 74,521 MMBtu/d for the three months ended March 31, 2007, an increase of 11,252 MMBtu/d, or 15.1%. The 11,252 MMBtu/d increase was almost entirely attributable to the natural gas sales volumes at the Woodford Shale gathering system. NGL sales volumes were 5,272 Bbls/d for the three months ended March 31, 2008 compared to 3,986 Bbls/d for the three months ended March 31, 2007, an increase of 1,286 Bbls/d, or 32.3%. This increase is primarily attributable to volume growth at the Woodford Shale and Badlands gathering systems.

Average realized natural gas sales prices were $7.33 per MMBtu for the three months ended March 31, 2008 compared to $6.19 per MMBtu for the three months ended March 31, 2007, an increase of $1.14 per MMBtu, or 18.4%. In addition, average realized NGL sales prices were $1.40 per gallon for the three months ended March 31, 2008 compared to $0.94 per gallon for the three months ended March 31, 2007, an increase of $0.46 per gallon or 48.9%. The increase in average realized natural gas and NGL sales prices was primarily a result of higher index prices for natural gas and posted prices for NGLs during the three months ended March 31, 2008 compared to the three months ended March 31, 2007.

Cash received from Hiland Partners’ counterparty on cash flow swap contracts for natural gas derivative transactions that closed during the three months ended March 31, 2008 totaled $0.2 million. This gain increased average realized natural gas sales prices to $7.33 per MMBtu from $7.31 per MMBtu, an increase of $0.02 per MMBtu. Cash paid to Hiland Partners’ counterparty on cash flow swap contracts for NGL derivative transactions that closed during the three months ended March 31, 2008 totaled $2.2 million. This loss decreased average realized NGL sales prices to $1.40 per gallon from $1.51 per gallon, a decrease of $0.11 per gallon. Cash received from Hiland Partners’ counterparty on cash flow swap contracts for natural gas derivative transactions that closed during the three months ended March 31, 2007 totaled $0.6 million. This gain increased average realized natural gas sales prices to $6.19 per MMBtu from $6.10 per MMBtu, an increase of $0.09 per MMBtu, or 1.5%. Cash paid to Hiland Partners’ counterparty on cash flow swap contracts for NGL derivative transactions that closed during the three months ended March 31, 2007 were insignificant.

Compression revenues were $1.2 million for the each of the three months ended March 31, 2008 and 2007.

Midstream Purchases. Midstream purchases were $68.6 million for the three months ended March 31, 2008 compared to $43.6 million for the three months ended March 31, 2007, an increase of $25.0 million, or 57.3%. The $25.0 million increase primarily consists of $11.7 million attributable to purchased gas from the Woodford Shale gathering system and $11.4 million attributable to increased purchased gas volumes at the Bakken, Eagle Chief and Matli gathering systems. The remaining $1.9 million increase in midstream purchases was primarily attributable to increased payments to producers due to higher natural gas and NGL purchase prices, which generally are closely related to fluctuations in natural gas and NGL sales prices.

Midstream Segment Margin . Midstream segment margin was $21.7 million for the three months ended March 31, 2008 compared to $16.2 million for the three months ended March 31, 2007, an increase of $5.5 million, or 33.4%. The increase is primarily due to favorable gross processing spreads, significantly higher average realized natural gas and NGL prices and the volume growth at the Woodford Shale and appreciably expanded Badlands gathering systems which commenced production in April 2007 and August 2007, respectively. The increase in midstream segment margin was offset by approximately $2.3 million of forgone margin as a result of the nitrogen rejection plant being taken out of service due to equipment failure during the three months ended March 31, 2008.

Operations and Maintenance. Operations and maintenance expense totaled $6.8 million for the three months ended March 31, 2008 compared with $5.0 million for the three months ended March 31, 2007, an increase of $1.8 million, or 36.2%. Of this increase, $0.9 million, or 51.5%, was attributable to increased operations and maintenance at the Badlands gathering system and $0.6 million, or 35.4%, was attributable to operations at the Woodford Shale gathering system.

Depreciation, Amortization and Accretion. Depreciation, amortization and accretion expense totaled $9.2 million for the three months ended March 31, 2008 compared with $7.0 million for the three months ended March 31, 2007, an increase of $2.2 million, or 31.1 %. Of this increase, $0.8 million was attributable to increased depreciation on the Badlands gathering

system, $0.5 million was attributable to increased depreciation on the Bakken gathering system and another $0.5 million was attributable to the Woodford Shale gathering system.

General and Administrative. General and administrative expense totaled $2.7 million for the three months ended March 31, 2008 compared with $2.0 million for the three months ended March 31, 2007, an increase of $0.7 million, or 31.3%. Of this increase, $0.5 million, or 73.1%, is attributable to the timing of executive annual cash bonuses and additional staffing, and $0.1 million, or 21.3%, is attributable to increased costs of being a public company, including the costs of audit and tax preparation fees..

Other Income (Expense). Other income (expense) totaled ($3.6) million for the three months ended March 31, 2008 compared with ($2.1) million for the three months ended March 31, 2007, an increase in expense of $1.4 million. The increase is primarily attributable to additional interest expense from borrowings on Hiland Partners’ credit facility to fund the expansion project at the Badlands gathering system and to construct the Woodford Shale gathering system.

Minority Interest. Minority interest in (loss) income of Hiland Partners, which represents the allocation of Hiland Partners loss or earnings to its limited partner interests not owned by Hiland Holdings, totaled $(0.2) million for the three months ended March 31, 2008 compared to $0.6 million for the three months ended March 31, 2007. The $0.2 million loss for the three months ended March 31, 2008 is the result of the excess of net income allocated to us related to our 2% general partner interest, including 100% of the incentive distribution rights, over Hiland Partners’ net income for the three months ended March 31, 2008.

LIQUIDITY AND CAPITAL RESOURCES

Overview

We rely on distributions from Hiland Partners to fund cash requirements for our operations. Cash generated from operations, borrowings under Hiland Partners’ credit facility and funds from private or public equity and future debt offerings are Hiland Partners’ primary sources of liquidity. We believe that funds from these sources should be sufficient to meet both Hiland Partners’ short-term working capital requirements and its long-term capital expenditure requirements. Hiland Partners’ ability to pay distributions to unitholders, to fund planned capital expenditures and to make acquisitions depends upon Hiland Partners’ future operating performance, and more broadly, on the availability of equity and debt financing, which will be affected by prevailing economic conditions in Hiland Partners’ industry and financial, business and other factors, many of which are beyond Hiland Partners’ control.

Cash Flows from Operating Activities

Cash flows from operating activities increased by $1.8 million to $10.7 million for the three months ended March 31, 2008 from $8.9 million for the three months ended March 31, 2007. During the three months ended March 31, 2008 we received cash flows from customers of approximately $85.2 million attributable to increased natural gas and NGLs volumes and significantly higher average realized natural gas and NGL sales prices, had cash payments to our suppliers and employees of approximately $71.3 million and payment of interest expense of $3.2 million, net of amounts capitalized, resulting in cash received from operating activities of $10.7 million. During the same three month period in 2007, we received cash flows from customers of approximately $60.5 million attributable to increased volumes of natural gas and NGLs decreased by lower natural gas and NGL sales prices, had cash payments to our suppliers and employees of approximately $49.5 million and payment of interest expense of $2.1 million, net of amounts capitalized, resulting in cash received from our operating activities of $8.9 million. Changes in cash receipts and payments are primarily due to the timing of collections at the end of our reporting periods. We collect and pay large receivables and payables at the end of each calendar month. The timing of these payments and receipts may vary by a day or two between month-end periods and cause fluctuations in cash received or paid. Contributions to cash flows from operating activities from workling capital items exclusive of cash was insignificant for the three months ended March 31, 2008 compared to $0.1 million for the three months ended March 31, 2007. Net income for the three months ended March 31, 2008 was $.8 million, an increase of $0.1 million from a net income of $0.7 million for the three months ended March 31, 2007. Depreciation increased by $2.2 million to $9.2 million for the three months ended March 31, 2008 from $7.0 million for the three months ended March 31, 2007.

Cash Flows Used for Investing Activities

Cash flows used in investing activities, which represent investments in property and equipment decreased by $6.1 million to $10.4 million for the three months ended March 31, 2008 from $16.5 million for the three months ended March 31,

2007 predominately due to reduced capital investing in the three months ended March 31, 2008 related to the Badlands nitrogen rejection plant that was under construction during the first three months of 2007.

Cash Flows from Financing Activities

Cash flows from financing activities decreased to $0.5 million for the three months ended March 31, 2008 from $5.7 million for the three months ended March 31, 2007. During the three months ended March 31, 2008, Hiland Partners borrowed $9.0 million under its credit facility to fund its internal expansion projects and received $0.6 million from issuing Hiland Partners common units as a result of the exercise of 22,039 vested unit options. During the three months ended March 31, 2008, Hiland Partners also incurred debt issuance costs of $0.3 million associated with the fourth amendment to its credit facility amended in February 2008 and made $0.1 million payments on capital lease obligations. During the three months ended March 31, 2008, we made a distribution of $5.5 million to our unitholders and Hiland Partners distributed $3.1 million to its minority interest unitholders. During the three months ended March 31, 2007, Hiland Partners borrowed $12.1 million under its credit facility to fund its internal expansion projects and received $1.0 million from issuing Hiland Partners common units as a result of the exercise of 39,930 vested unit options. During the three months ended March 31, 2007, we made a distribution of $4.5 million to our unitholders, Hiland Partners distributed $2.8 million to its minority interest unitholders and Hiland Partners paid deferred offering costs of $0.1 million associated with Hiland Partners’ S-3/A registration statement filed with the SEC on January 23, 2007.

Capital Requirements

The midstream energy business is capital intensive, requiring significant investment to maintain and upgrade existing operations. Our capital requirements have consisted primarily of, and we anticipate will continue to be:

· maintenance capital expenditures, which are capital expenditures made to replace partially or fully depreciated assets to maintain the existing operating capacity of Hiland Partners’ assets and to extend their useful lives, or other capital expenditures that are incurred in maintaining existing system volumes and related cash flows; and

· expansion capital expenditures such as those to acquire additional assets to grow Hiland Partners’ business, to expand and upgrade gathering systems, processing plants, treating facilities and fractionation facilities and to construct or acquire similar systems or facilities.

We believe that cash generated from the operations of Hiland Partners’ business will be sufficient to meet anticipated maintenance capital expenditures for the next twelve months. Given Hiland Partners objective of growth through acquisitions and expansions, Hiland Partners anticipates that it will continue to invest significant amounts of capital to grow and acquire assets. Hiland Partners actively considers a variety of assets for potential acquisitions. We anticipate that expansion capital expenditures will be funded through long-term borrowings or other debt financings and/or equity offerings. See “Credit Facility” below for information related to our credit agreements.

Woodford Shale

Hiland Partners is continuing to develop the Woodford Shale gathering system located in the Woodford Shale reservoir area in the Arkoma Basin of southeastern Oklahoma, just to the west of our Kinta Area gathering systems. The gathering system is being designed to provide low-pressure and highly reliable gathering, compression and dehydration services. During the third quarter of 2008, the gathering infrastructure is expected to include up to 17,400 horsepower of compression to provide takeaway capacity in excess of 65,000 Mcf/d. As of March 31, 2008, Hiland Partners has invested $25.7 million in this internal expansion project.

Financial Derivatives and Commodity Hedges.

Hiland Partners has entered into certain derivative contracts that are classified as cash flow hedges in accordance with SFAS No. 133, as amended, and relate to forecasted sales in 2008 and 2009. Hiland Partners entered into these financial swap instruments to hedge the forecasted natural gas and NGL sales or purchases against the variability in expected future cash flows attributable to changes in commodity prices. The swap instruments are contractual agreements between counterparties to exchange obligations of money as the underlying natural gas or natural gas liquids are sold or purchased. Under these swap agreements, Hiland Partners receives a fixed price and pays a floating price or pays a fixed price and receives a floating price based on certain indices for the relevant contract period as the underlying natural gas or NGL is sold or purchased.

The following table provides information about these financial derivative instruments for the periods indicated:

		Average		Fair Value
		Fixed/Open		Asset
Description and Production Period	Volume	Price		(Liability)
	(MMBtu)	(per MMBtu)
Natural Gas - Sold Fixed for Floating Price Swaps
April 2008 - March 2009	2,019,000	$	7.70	$	(2,026	)
April 2009 - December 2009	1,602,000	$	7.30	594
				$	(1,432	)

	(MMBtu)	(per MMBtu)
Natural Gas - Buy Fixed for Floating Price Swaps
April 2008 - December 2008	540,864	$	6.93	$	1,050

	(Bbls)	(per Gallon)
Natural Gas Liquids - Sold Fixed for Floating Price Swaps
April 2008 - December 2008	331,326	$	1.31	$	(5,722)

In addition to the contractual obligations noted in the table above, Hiland Partners has executed one natural gas fixed price physical forward sales contract on 100,000 MMBtu per month with a fixed price of $8.43 per MMBtu for the remainder of 2008. This contract has been designated as normal sales under SFAS No. 133 and is therefore not marked to market as a derivative.

Off-Balance Sheet Arrangements.

We had no significant off-balance sheet arrangements as of March 31, 2008.

Credit Facility

Hiland Holdings

On September 25, 2006, concurrently with the closing of our initial public offering, the Partnership entered into a three-year $25.0 million secured revolving credit facility. The facility will permit us, if certain conditions are met, to increase borrowing capacity by up to an additional $25.0 million. The facility will be secured by all of our ownership interests in Hiland Partners and its general partner, other than the 2% general partner interest and the incentive distribution rights.

The facility will mature on September 25, 2009, at which time all outstanding amounts thereunder become due and payable.

Loans under the facility will bear interest, at our option, at either (i) an alternate base rate plus an applicable margin ranging from 100 to 150 basis points per annum or (ii) LIBOR plus an applicable margin ranging from 200 to 250 basis points per annum in each case based on our ratio of consolidated funded debt to EBITDA. The alternate base rate is equal to the greatest of (a) the prime rate in effect on such day, (b) the base CD rate in effect on such day plus 1.50% and (c) the federal funds effective rate in effect on such day plus 1/2 of 1%. A letter of credit fee will be payable for the aggregate amount of letters of credit issued under the facility at a percentage per annum equal to 2.0%. A commitment fee ranging from 25 to 50 basis points per annum based on our ratio of consolidated funded debt to EBITDA will be payable on the average daily unused portion of the facility for the quarter most recently ended. At March 31, 2008, the interest rate on outstanding borrowings from our credit facility was 5.06%.

The amount we may borrow under the facility is limited to the lesser of: (i) 50% of the sum of the value of the Hiland Partners common and subordinated units and certain other assets held by us and certain of our subsidiaries at the end of each fiscal quarter and (ii) the maximum available amount of the facility (currently $25.0 million). For purposes of this calculation, the value of (i) the Hiland Partners common units on any date shall be the closing price for such units as reflected on the Nasdaq National Market on any date, and (ii) the Hiland Partners subordinated units on any date shall be deemed to equal 85% of the value of the Hiland Partners common units on such date.

As of March 31, 2008, we had $0.4 million outstanding under this credit facility and were in compliance with our financial covenants.

Hiland Partners

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

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

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

points per annum and the unused commitment fee will be increased by 12.5 basis points per annum. At March 31, 2008, the interest rate on outstanding borrowings from Hiland Partners’ credit facility was 5.32%

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

As of March 31, 2008, Hiland Partners had $230.1 million outstanding under its credit facility and was in compliance with its financial covenants.

Impact of Inflation

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

Recent Accounting Pronouncements

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

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

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

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

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

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

Significant Accounting Policies and Estimates

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

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

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

Asset Retirement Obligations. SFAS No. 143, “Accounting for Asset Retirement Obligations” requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred and a corresponding increase in the carrying amount of the related long-lived asset. Subsequently, the asset retirement cost is allocated to expense using a systematic and rational method and the liability is accreted to measure the change in liability due to the passage of time. The primary impact of this standard relates to our estimated costs for dismantling and site restoration of certain of our plants and pipelines. Estimating future asset retirement obligations requires us to make estimates and judgments regarding timing, existence of a liability, as well as what constitutes adequate restoration. We use the present value of estimated cash flows related to our asset retirement obligation to determine the fair value, generally as estimated by third party consultants. The present value calculation requires us to make numerous assumptions and judgments, including the ultimate costs of dismantling and site restoration, inflation factors, credit adjusted discount rates, timing of settlement and changes in the legal, regulatory, environmental and political environments. To the extent future revisions to these assumptions impact the present value of the existing asset retirement obligation liability, a corresponding adjustment will be required to the related asset. We believe the estimates and judgments reflected in our financial statements are reasonable but are necessarily subject to the uncertainties we have just described. Accordingly, any significant variance in any of the above assumptions or factors could materially affect our cash flows.

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

When determining whether impairment of one of our long-lived assets has occurred, we must estimate the undiscounted cash flows attributable to the asset or asset group. Our estimate of cash flows is based on assumptions regarding the volume of reserves providing asset cash flow and future NGL product and natural gas prices. The amount of reserves and drilling

activity are dependent in part on natural gas prices. Projections of reserves and future commodity prices are inherently subjective and contingent upon a number of variable factors, including, but not limited to:

· changes in general economic conditions in regions in which the Partnership’s products are located;

· the availability and prices of NGL products and competing commodities;

· the availability and prices of raw natural gas supply;

· our ability to negotiate favorable marketing agreements;

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

· our dependence on certain significant customers and producers of natural gas; and

· competition from other midstream service providers and processors, including major energy companies.

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

Share Based Compensation. In October 1995 the FASB issued SFAS No. 123, “Share-Based Payment,” which was revised in December 2004 (“SFAS 123R”). SFAS 123R requires that the compensation cost relating to share-based payment transactions be recognized in the financial statements and that cost be measured based on the fair value of the equity or liability instruments issued. We adopted SFAS 123R September 25, 2006 and Hiland Partners adopted SFAS 123R January 1, 2006. We have applied SFAS 123R using the permitted modified prospective method beginning as of the same date. Hiland Partners had unearned deferred compensation of $289 as of January 1, 2006 which has been eliminated against Hiland Partners common unit equity. Prior to January 1, 2006 Hiland Partners recorded any unamortized compensation related to restricted unit awards as unearned compensation in equity. We expect no change to cash flow presentation from the adoption of SFAS 123R since no tax benefits were recognized by Hiland Partners as a pass through entity.

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

Commodity Price Risks. Our profitability is affected by volatility in prevailing NGL and natural gas prices. Historically, changes in the prices of most NGL products have generally correlated with changes in the price of crude oil. NGL and natural gas prices are volatile and are impacted by changes in the supply and demand for NGLs and natural gas, as well as market uncertainty. Our cash flow is affected by the volatility of natural gas and NGL product prices, which could adversely affect our ability to make distributions to unitholders. To illustrate the impact of changes in prices for natural gas and NGLs on our operating results, we have provided the table below, which reflects, for the three months ended March 31, 2008, the impact on our midstream segment margin of a $0.01 per gallon change (increase or decrease) in NGL prices coupled with a $0.10 per MMBtu change (increase or decrease) in the price of natural gas. The magnitude of the impact on total segment margin of changes in natural gas and NGL prices presented may not be representative of the magnitude of the impact on total segment margin for different commodity prices or contract portfolios. Natural gas prices can also affect our profitability indirectly by influencing the level of drilling activity and related opportunities for our services.

				Natural Gas Price Change ($/MMBtu)
				$0.10			$(0.10)
NGL Price	$	0.01		$	144,000		$	113,000
Change ($/gal)	$	(0.01	)	$	(112,000	)	$	(144,000	)

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

		Average		Fair Value
		Fixed/Open		Asset
Description and Production Period	Volume	Price		(Liability)
Natural Gas - Sold Fixed for Floating Price Swaps	(MMBtu)	(per MMBtu)
April 2008 - March 2009	2,019,000	$	7.70	$	(2,026	)
April 2009 - December 2009	1,602,000	$	7.30	594
				$	(1,432	)

Natural Gas - Buy Fixed for Floating Price Swaps	(MMBtu)	(per MMBtu)
April 2008 - December 2008	540,864	$	6.93	$	1,050

Natural Gas Liquids - Sold Fixed for Floating Price Swaps	(Bbls)	(per Gallon)
April 2008 - December 2008	331,326	$	1.31	$	(5,722	)

In addition to the derivative instruments noted in the table above, Hiland Partners has executed one natural gas fixed price physical forward sales contract on 100,000 MMBtu per month with a fixed price of $8.43 per MMBtu for the remainder of 2008. This contract has been designated as normal sales under SFAS No. 133 and is therefore not marked to market as a derivative.

Interest Rate Risk. We are exposed to changes in interest rates as a result of our credit facilities, which have floating interest rates. As of March 31, 2008 we had approximately $0.4 million of indebtedness outstanding under our credit facility which was used to finance the costs related to the closing of our $25.0 million secured revolving credit facility. As of March 31, 2008, Hiland Partners had approximately $230.1 million of indebtedness outstanding under its credit facility. The impact of a 100 basis point increase in interest rates on the amount of current debt would result in an increase in interest expense and a corresponding decrease in net income of approximately $2.3 million annually.

Credit Risk. Counterparties pursuant to the terms of their contractual obligations expose us to potential losses as a result of nonperformance. Hiland Partners’ four largest customers for the three months ended March 31, 2008 accounting for approximately 22%, 19%, 14% and 10%, respectively, of revenues. Consequently, changes within one or more of these companies’ operations have the potential to impact, both positively and negatively, our credit exposure. Hiland Partners’ counterparty for all of its derivative instruments as of March 31, 2008 is BP Energy Company.

Item 4. Controls and Procedures)

Evaluation of Disclosure Controls and Procedures

(a) Evaluation of disclosure controls and procedures.

As required by Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended, we have evaluated, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of March 31, 2008, to ensure that information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC.

(b) Changes in internal control over financial reporting.

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

PART II OTHER INFORMATION

Item 1. Legal Proceedings

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2007, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/ or operating results.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

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

None.

Item 5. Other Information

None.

Item 6. Exhibits

Exhibit Number		Description
3.1	—	Certificate of Limited Partnership of Hiland Holdings GP, LP (incorporated by reference to Exhibit 3.1 of Registrant’s Statement on form S-1 (File No. 333-134491))
3.2	—	Form of Amended and Restated Agreement of Limited Partnership of Hiland Holdings GP, LP (incorporated by reference to Exhibit 3.2 of Registrant’s Statement on form S-1 (File No. 333-134491))
3.3	—	Certificate of Formation of Hiland Partners GP Holdings, LLC (incorporated by reference to Exhibit 3.3 of Registrant’s Statement on form S-1 (File No. 333-134491))
3.4	—	Form of Amended and Restated Limited Liability Company Agreement of Hiland Partners GP Holdings, LLC(incorporated by reference to Exhibit 3.4 of Registrant’s Statement on form S-1
31.1	—	Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002
31.2	—	Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002
32.1	—	Certification of Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002
32.2	—	Certification of Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002

	HILAND HOLDINGS GP, LP
	By:	Hiland Partners GP Holdings, LLC, its general partner
	By:	/s/ Joseph L. Griffin
		Joseph L. Griffin
		Chief Executive Officer, President and Director


	By:	/s/ Matthew S. Harrison
		Matthew S. Harrison
		Chief Financial Officer, Vice President-Finance, Secretary and Director

Date: May 9, 2008		/s/ Joseph L. Griffin
		Joseph L.Griffin
		Chief Executive Officer and President

Date: May 9, 2008		/s/ Matthew S. Harrison
		Matthew S. Harrison
		Chief Financial Officer, Vice President-Finance and Secretary

Date: May 9, 2008		/s/ Joseph L. Griffin
		Joseph L. Griffin
		Chief Executive Officer and President

Date: May 9, 2008		/s/ Matthew S. Harrison
		Matthew S. Harrison
		Chief Financial Officer, Vice President-Finance and Secretary

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited, except December 31, 2007 Balance Sheet)
Consolidated Balance Sheets		3
Consolidated Statements of Operations		4
Consolidated Statements of Cash Flows		5
Consolidated Statement of Changes in Partners’ Equity and Comprehensive Income		6
Condensed Notes to Consolidated Financial Statements		7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		25
Item 3. Quantitative and Qualitative Disclosures About Market Risks		37
Item 4. Controls and Procedures		38
PART II. OTHER INFORMATION		39
Item 1. Legal Proceedings		39
Item 1A. Risk Factors		39
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		39
Item 3. Defaults Upon Senior Securities		39
Item 4. Submission of Matters to a Vote of Security Holders		39
Item 5. Other Information		39
Item 6. Exhibits		39
SIGNATURES		40
Certification of CEO under Section 302
Certification of CFO under Section 302
Certification of CEO under Section 906
Certification of CFO under Section 906