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.

Disruption to functioning of capital markets

Multiple events during 2008 involving numerous financial institutions have effectively restricted current liquidity within the capital markets throughout the United States and around the world. Despite efforts by treasury and banking regulators in the United States, Europe and other nations around the world to provide liquidity to the financial sector, capital markets currently remain constrained. We expect that ours and Hiland Partners' ability to raise debt and equity at prices that are similar to offerings in recent years to be limited over the next three to six months and possibly longer should capital markets remain constrained.

In the weeks following the third quarter, our unit price declined to a closing low of $8.41 on October 10, 2008. Since that date our unit price recovered partially to a level of $[ † ] on November 7, 2008. Hiland Partners currently intends to move forward with its planned internal growth projects, and in the near-term Hiland Partners will focus on maintaining sufficient liquidity to fund its growth programs, see "Liquidity and Capital Resources." Maintaining adequate liquidity may involve the issuance of debt and/or equity at less attractive terms.

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 purchasing, gathering, compressing, dehydrating, treating, processing and marketing of natural gas, fractionating and marketing of 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

† 2,321,471 common units and 3,060,000 subordinated units of Hiland Partners, representing a 57.5% 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 of $0.88 per unit for the quarter ended September 30, 2008. This distribution will be paid on November 14, 2008 to unitholders of record on November 4, 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 September 30,             Nine Months Ended September 30,
Hiland Partner's Distributions               2008                  2007                  2008                  2007
Common units                           $           2,002     $             953     $           4,114     $           2,808
Subordinated units                                 2,640                 2,989                 9,259                 8,803
Ownership interest in Hiland
Partners' general partner                            208                   158                   584                   459
General partners' incentive
distribution rights                                2,107                   932                 5,388                 2,433
                                       $           6,957     $           5,032     $          19,345     $          14,503

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 purchasing, gathering, compressing, dehydrating, treating, processing and marketing of natural gas, fractionating and marketing of 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 purchasing, gathering, compressing, dehydrating, treating, processing and marketing of natural gas and the fractionating and marketing of NGLs. The midstream segment generated 96.4% and 94.5% of total segment margin for the three months ended September 30, 2008 and 2007, respectively, and 95.7% and 93.8% of total segment margin for the nine months ended September 30, 2008 and 2007, respectively.

† 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 3.6% and 5.5% of total segment margin for the three months ended September 30, 2008 and 2007, respectively, and 4.3% and 6.2% of total segment margin for the nine months ended September 30, 2008 and 2007, respectively.

Hiland Partners' midstream assets currently consist of 14 natural gas gathering systems with approximately 2,087 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, the pricing environment for natural gas and NGLs and the price of NGLs relative to natural gas prices 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

Hiland Partners Distribution Increase. On October 24, 2008, Hiland Partners declared a cash distribution for the third quarter of 2008. This declared quarterly distribution on its common and subordinated units increased to $0.88 per unit (an annualized rate of $3.52 per unit) from its most recent distribution of $0.8625 per unit (an annualized rate of $3.45 per unit). This represents a 2.0% increase over the prior quarter and a 16.6% increase over the distribution for the same quarter of the prior year. The distribution will be paid on November 14, 2008 to unitholders of record on November 4, 2008. Under Hiland Partners' partnership agreement, generally, its general partner is entitled to 15% of the amount it distributes to each unitholder in excess of $0.495 per unit per quarter up to $0.5625 per unit per quarter, 25% of the amount it distributes to each unitholder in excess of $0.5625 per unit per quarter up to $0.675 per unit per quarter and 50% of the excess over $0.675 per unit per quarter.

Our Distribution Increase. On October 24, 2008, we declared a cash distribution for the third quarter of 2008. This declared quarterly distribution on our common units increased to $0.3175 per unit (an annualized rate of $1.27 per unit) from our most recent distribution of $0.305 per unit (an annualized rate of $1.22 per unit). This represents a 4.1% increase over the prior quarter and a 38.0% increase over the distribution for the same quarter of the prior year. The distribution will be paid on November 19, 2008 to unitholders of record on November 4, 2008.

Significant Trade Account Receivable. On July 22, 2008, SemGroup, L.P. and certain subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code. Affiliates of SemGroup, L.P. purchase Hiland Partners' natural gas liquids and condensate, primarily at its Bakken and Badlands plants and gathering systems. During the second quarter 2008, Hiland Partners increased its allowance for doubtful accounts and bad debt expense by $8.1 million for related product sales through June 30, 2008. On October 20, 2008, the United States Bankruptcy Court for the District of Delaware entered an order approving the assumption of a Natural Gas Liquids Marketing Agreement (the "SemStream Agreement") between SemStream, L.P., an affiliate of SemGroup, L.P., and Hiland Partners relating to the sale of natural gas liquids and condensate at its Bakken and Badlands plants and gathering systems. As a result of the assumption, and in accordance with the order, on October 21, 2008, SemStream paid $12.1 million to Hiland Partners, representing amounts owed to them from SemStream for June and July 2008 product sales under the SemStream Agreement. The assumption of the SemStream Agreement restores Hiland Partners and SemStream, L.P. to its pre-bankruptcy contractual relationship.

Third quarter results of operations reflect a reversal of $7.8 million of the $8.1 million allowance for doubtful accounts and bad debt expense previously recorded on the statement of operations in the second quarter of 2008. After receipt of the October 21 payment, Hiland Partners' total pre-petition credit exposure to SemGroup, related to condensate sales to SemCrude, LLC, and outside of the SemStream Agreement, is approximately $0.3 million, which Hiland Partners' has reserved as of September 30, 2008.

Financial Hedge Agreement. On October 7, 2008, Hiland Partners entered into a floating-to-fixed interest rate swap agreement with an investment grade counterparty whereby Hiland Partners pays a monthly fixed interest rate of 2.245% and receives a monthly variable rate based on the one month posted LIBOR interest rate on a notional amount of $100.0 million. The swap agreement is effective January 2, 2009 and terminates on January 1, 2010.

Organic Growth Projects.During the second quarter 2008, Hiland Partners entered into an agreement with CLR to construct and operate gathering pipelines, processing plants and related facilities in the Bakken Shale play in northwestern North Dakota in which CLR has dedicated approximately 129,000 gross acres to Hiland Partners. The initial term of the agreement is for 10 years and grants Hiland Partners the right to process natural gas, share in the sales proceeds of the natural gas liquids and residue gas and receive certain fixed fees for treating the natural gas. Hiland Partners plans to make an initial capital investment of approximately $10.0 million by the end of 2008 with additional investments of up to $17.0 million over the next three years to build processing and treating facilities and install field gathering, compression and associated equipment. As of September 30, 2008, Hiland Partners has initially invested $0.4 million in the project. The expected startup of the initial phase of the project should occur no later than the second quarter of 2009.

During the third quarter of 2008, Hiland Partners invested approximately $10.4 million to expand the Woodford Shale gathering system's throughput capacity to approximately 65,000 Mcf/d.

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 increased volumes and associated operating expenses at Hiland Partners' Badlands gathering system as a result of the

construction of Hiland Partners' nitrogen rejection plant which became operational in August 2007 and volumes and operating expenses at Hiland Partners' Woodford Shale gathering system which commenced operation 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 September 30,
                                                         2008                2007
                                                              (in thousands)
Total Segment Margin Data:
Midstream revenues                                 $         114,548    $        66,431
Midstream purchases                                           81,895             45,789
Midstream segment margin                                      32,653             20,642
Compression revenues (1)                                       1,205              1,205
Total segment margin (2)                           $          33,858    $        21,847

Summary of Operations Data:
Midstream revenues                                 $         114,548    $        66,431
Compression revenues                                           1,205              1,205
Total revenues                                               115,753             67,636

Midstream purchases (exclusive of items shown
separately below)                                             81,895             45,789
Operations and maintenance                                     7,881              6,157
Depreciation, amortization and accretion                       9,842              7,870
Bad debt                                                      (7,799 )                -
General and administrative                                     2,597              2,054
Total operating costs and expenses                            94,416             61,870
Operating income                                              21,337              5,766
Other income (expense), net                                   (3,349 )           (3,164 )
Income before minority interest in income of
Hiland Partners, LP                                           17,988              2,602
Minority interest in income of Hiland Partners,
LP                                                            (6,800 )             (867 )
Net income                                         $          11,188    $         1,735

Hiland Partners Operating Data:
Inlet natural gas (MCF/d)                                    261,345            219,544
Natural gas sales (MMBTU/d)                                   95,889             84,281
NGL sales (Bbls/d)                                             6,036              4,721

                                                     Nine Months Ended September 30,
                                                         2008                2007
                                                              (in thousands)
Total Segment Margin Data:
Midstream revenues                                 $        319,058    $        191,691
Midstream purchases                                         238,586             137,320
Midstream segment margin                                     80,472              54,371
Compression revenues (1)                                      3,615               3,615
Total segment margin (2)                           $         84,087    $         57,986

Summary of Operations Data:
Midstream revenues                                 $        319,058    $        191,691
Compression revenues                                          3,615               3,615
Total revenues                                              322,673             195,306

Midstream purchases (exclusive of items shown
separately below)                                           238,586             137,320
Operations and maintenance                                   22,201              16,108
Depreciation, amortization and accretion                     28,513              22,222
Bad debt                                                        304                   -
General and administrative                                    7,615               6,383
Total operating costs and expenses                          297,219             182,033
Operating income                                             25,454              13,273
Other income (expense), net                                 (10,132 )            (7,570 )
Income before minority interest in income of
Hiland Partners, LP                                          15,322               5,703
Minority interest in income of Hiland Partners,
LP                                                           (4,402 )            (2,080 )
Net income                                         $         10,920    $          3,623

Hiland Partners Operating Data:
Inlet natural gas (MCF/d)                                   245,098             210,878
Natural gas sales (MMBTU/d)                                  89,615              78,998
NGL sales (Bbls/d)                                            5,763               4,340

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

                                                      Three Months Ended September 30,
                                                         2008                  2007
                                                               (in thousands)
Reconciliation of Total Segment Margin to
Operating Income
Operating income                                   $          21,337     $           5,766
Add:
Operations and maintenance expenses                            7,881                 6,157
Depreciation, amortization and accretion                       9,842                 7,870
Bad debt                                                      (7,799 )                   -
General and administrative expenses                            2,597                 2,054
Total segment margin                               $          33,858     $          21,847

                                                       Nine Months Ended September 30,
                                                         2008                  2007
                                                               (in thousands)
Reconciliation of Total Segment Margin to
Operating Income
Operating income                                   $          25,454     $          13,273
Add:
Operations and maintenance expenses                           22,201                16,108
Depreciation, amortization and accretion                      28,513                22,222
Bad debt                                                         304                     -
General and administrative expenses                            7,615                 6,383
Total segment margin                               $          84,087     $          57,986

We view total segment margin, a non-GAAP financial measure, as an important performance measure of the core profitability of our operations because it is directly related to our volumes and commodity price changes. 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. Our total segment margin may not be comparable to similarly titled measures of other companies as other companies may not calculate total segment margin in the same manner.

Three Months Ended September 30, 2008 Compared with Three Months Ended September 30, 2007

Revenues. Total revenues (midstream and compression) were $115.7 million for the three months ended September 30, 2008 compared to $67.6 million for the three months ended September 30, 2007, an increase of $48.1 million, or 71.1%. This $48.1 million increase was primarily due to: (i) increased natural gas sales volumes of 15,830 MMBtu/day (MMBtu per day) and increased NGL sales volumes of 609 Bbls/day (Bbls per day) related to the Woodford Shale gathering system, (ii) increased NGL sales volumes of 646 Bbls/day attributable to the expanded Badlands gathering system, including the nitrogen rejection plant, which commenced operation in August 2007 and (iii) significantly higher average realized natural gas and NGL sales prices for the three months ended September 30, 2008 as compared to the same period in 2007, resulting in increased revenues for nearly all of the gathering systems. Revenues from compression assets were the same for both periods.

Midstream revenues were $114.5 million for the three months ended September 30, 2008 compared to $66.4 million for the three months ended September 30, 2007, an increase of $48.1 million, or 72.4%. Of this $48.1 million increase in midstream revenues, approximately $13.3 million was attributable to revenues from increased natural gas and NGL sales volumes at the Woodford Shale, Badlands, Bakken and Matli gathering systems and approximately $34.8 million was attributable to significantly higher average realized natural gas and NGL sales prices for the three months ended September 30, 2008 as compared to the same period in 2007, resulting in increased revenues for all of the gathering systems.

Inlet natural gas was 261,345 Mcf/d (Mcf per day) for the three months ended September 30, 2008 compared to 219,544 Mcf/d for the three months ended September 30, 2007, an increase of 41,801 Mcf/d, or 19.0%. This increase is primarily attributable to volume growth at the Woodford Shale and Badlands gathering systems offset by volume declines at the Eagle Chief and Worland gathering systems.

Natural gas sales volumes were 95,889 MMBtu/d for the three months ended September 30, 2008 compared to 84,281 MMBtu/d for the three months ended September 30, 2007, an increase of 11,608 MMBtu/d, or 13.8%. This 11,608 MMBtu/d net increase in natural gas sales volumes was attributable to increased natural gas sales volumes at the Woodford Shale, Bakken and Matli gathering systems offset by reduced natural gas sales volumes at the Eagle Chief, Worland and Kinta gathering systems.

NGL sales volumes were 6,036 Bbls/d for the three months ended September 30, 2008 compared to 4,721 Bbls/d for the three months ended September 30, 2007, an increase of 1,315 Bbls/d, or 27.9%. This net increase is primarily attributable to volume growth at the Woodford Shale and Badlands gathering systems.

Average realized natural gas sales prices were $7.57 per MMBtu for the three months ended September 30, 2008 compared to $5.20 per MMBtu for the three months ended September 30, 2007, an increase of $2.37 per MMBtu, or 45.6%. Average realized NGL sales prices were $1.55 per gallon for the three months ended September 30, 2008 compared to $1.16 per gallon for the three months ended September 30, 2007, an increase of $0.39 per gallon or 33.6%. The increase in our average realized natural gas and NGL sales prices was primarily a result of significantly higher index prices for natural gas and posted prices for NGLs during the three months ended September 30, 2008 compared to the three months ended September 30, 2007.

Cash received from our counterparty on cash flow swap contracts for natural gas derivative transactions that closed during the three months ended September 30, 2008 totaled $1.1 million compared to $1.5 million for the three months ended September 30, 2007. The $1.1 million gain for the three months ended September 30, 2008 increased averaged realized natural gas prices to $7.57

per MMBtu from $7.44 per MMBtu, an increase of $0.13 per MMBtu. The $1.5 million gain for the three months ended September 30, 2007 increased averaged realized natural gas prices to $5.20 per MMBtu from $5.00 per MMBtu, an increase of $0.20 per MMBtu. Cash paid to our counterparty on cash flow swap contracts for NGL derivative transactions that closed during the three months ended . . .