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 September 30, 2013
 
OR
 
o         Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
for the transition period from               to               
 
Commission file number: 000-50067
 
CROSSTEX ENERGY, L.P.
(Exact name of registrant as specified in its charter) 
Delaware
 
16-1616605
(State of organization)
 
(I.R.S. Employer Identification No.)
 
 
 
2501 CEDAR SPRINGS
 
 
DALLAS, TEXAS
 
75201
(Address of principal executive offices)
 
(Zip Code)
 
(214) 953-9500
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x
 
Accelerated filer o
 
 
 
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
 
As of October 25, 2013, the Registrant had 90,135,937 common units outstanding.
 

Table of Contents

TABLE OF CONTENTS
 
Item
 
Description
 
Page
 
 
 
 
 
 
 
PART I—FINANCIAL INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2
Table of Contents



CROSSTEX ENERGY, L.P.
 
Condensed Consolidated Balance Sheets
 
 
September 30, 2013
 
December 31, 2012
 
(Unaudited)
 
 
 
(In thousands)
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
9

 
$
124

Accounts receivable:
 

 
 

Trade, net of allowance for bad debt of $520 and $535, respectively
82,072

 
63,690

Accrued revenue and other
123,612

 
155,720

Fair value of derivative assets
1,110

 
3,234

Natural gas and natural gas liquids inventory, prepaid expenses and other
20,309

 
11,853

Assets held for disposition
—

 
22,599

Total current assets
227,112

 
257,220

Property and equipment, net of accumulated depreciation of $573,701 and $503,867,
    respectively
1,791,619

 
1,471,248

Intangible assets, net of accumulated amortization of $219,056 and $263,305,
    respectively
320,804

 
425,005

Goodwill
153,802

 
152,627

Investment in limited liability company
99,561

 
90,500

Other assets, net
23,456

 
25,989

Total assets
$
2,616,354

 
$
2,422,589

 
 
 
 
LIABILITIES AND PARTNERS’ EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable, drafts payable and other
$
29,927

 
$
32,265

Accrued gas and crude oil purchases
127,325

 
140,344

Fair value of derivative liabilities
600

 
1,310

Other current liabilities
82,349

 
71,340

Accrued interest
14,936

 
26,712

Liabilities held for disposition
—

 
3,572

Total current liabilities
255,137

 
275,543

Long-term debt
1,042,728

 
1,036,305

Other long-term liabilities
27,889

 
30,256

Deferred tax liability
65,907

 
71,404

Fair value of derivative liabilities
19

 
—

Commitments and contingencies
—

 
—

Partners’ equity
1,224,674

 
1,009,081

Total liabilities and partners’ equity
$
2,616,354

 
$
2,422,589

 


See accompanying notes to condensed consolidated financial statements.
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CROSSTEX ENERGY, L.P.
 
Condensed Consolidated Statements of Operations
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
 
 
 
(As Adjusted)
 
 
 
(As Adjusted)
 
(Unaudited)
(In thousands, except per unit amounts)
Revenues
$
468,362

 
$
444,947

 
$
1,368,640

 
$
1,265,308

Operating costs and expenses:
 
 
 
 
 

 
 

Purchased gas, NGLs and crude oil
368,349

 
345,202

 
1,068,464

 
975,507

Operating expenses
39,090

 
35,551

 
113,204

 
93,928

General and administrative
15,605

 
16,470

 
50,053

 
44,398

(Gain) loss on sale of property
(270
)
 
109

 
(175
)
 
(395
)
(Gain) loss on derivatives
1,634

 
759

 
1,662

 
(1,977
)
Depreciation and amortization
33,205

 
45,059

 
101,566

 
110,107

Impairment
72,576

 
—

 
72,576

 
—

Total operating costs and expenses
530,189

 
443,150

 
1,407,350

 
1,221,568

Operating income (loss)
(61,827
)
 
1,797

 
(38,710
)
 
43,740

Other income (expense):
 
 
 
 
 

 
 

Interest expense, net of interest income
(16,430
)
 
(23,229
)
 
(54,874
)
 
(63,932
)
Equity in income (loss) of limited liability company
(65
)
 
1,511

 
(106
)
 
1,511

Other income
38

 
4,439

 
368

 
4,464

Total other expense
(16,457
)
 
(17,279
)
 
(54,612
)
 
(57,957
)
Loss before non-controlling interest and income taxes
(78,284
)
 
(15,482
)
 
(93,322
)
 
(14,217
)
Income tax provision
(554
)
 
(672
)
 
(2,097
)
 
(1,507
)
Net loss
(78,838
)
 
(16,154
)
 
(95,419
)
 
(15,724
)
Less: Net loss attributable to the non-controlling interest
—

 
(54
)
 
—

 
(163
)
Net loss attributable to Crosstex Energy, L.P.
$
(78,838
)
 
$
(16,100
)
 
$
(95,419
)
 
$
(15,561
)
Preferred interest in net loss attributable to Crosstex Energy,
    L.P.
$
8,286

 
$
5,640

 
$
23,497

 
$
15,346

General partner interest in net loss
$
(1,451
)
 
$
(309
)
 
$
(3,007
)
 
$
(420
)
Limited partners’ interest in net loss attributable to Crosstex
    Energy, L.P.
$
(85,673
)
 
$
(21,431
)
 
$
(115,909
)
 
$
(30,487
)
Net loss attributable to Crosstex Energy, L.P. per limited partners’
    unit:
 
 
 
 
 

 
 

  Basic and diluted per common unit
$
(0.95
)
 
$
(0.34
)
 
$
(1.38
)
 
$
(0.53
)
 


See accompanying notes to condensed consolidated financial statements.
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CROSSTEX ENERGY, L.P.
 
Consolidated Statements of Comprehensive Income (Loss)
 
 
Three Months Ended  
 September 30,
 
Nine Months Ended 
 September 30,
 
2013
 
2012
 
2013
 
2012
 
(Unaudited)
(In thousands)
Net loss
$
(78,838
)
 
$
(16,154
)
 
$
(95,419
)
 
$
(15,724
)
Hedging gains reclassified to earnings
(448
)
 
(593
)
 
(939
)
 
(168
)
Adjustment in fair value of derivatives
(745
)
 
(179
)
 
262

 
1,578

Comprehensive loss
(80,031
)
 
(16,926
)
 
(96,096
)
 
(14,314
)
Comprehensive loss attributable to non-controlling interest
—

 
54

 
—

 
163

Comprehensive loss attributable to Crosstex Energy,
   L.P.
$
(80,031
)
 
$
(16,872
)
 
$
(96,096
)
 
$
(14,151
)
 


See accompanying notes to condensed consolidated financial statements.
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CROSSTEX ENERGY, L.P.
 
Consolidated Statements of Changes in Partners’ Equity
Nine Months Ended September 30, 2013
 
 
Common Units
 
Preferred Units
 
General Partner
Interest

Accumulated
Other
Comprehensive Income (loss)
 
 
 
$ 
 
Units
 
$ 
 
Units
 
$ 
 
Units
 
 
Total
 
(Unaudited)
 
(In thousands)
Balance, December 31, 2012
$
832,529

 
66,743

 
$
154,137

 
15,072

 
$
21,784

 
1,553

 
$
631

 
$
1,009,081

Issuance of common units
389,186

 
22,975

 
—

 
—

 
—

 
—

 
—

 
389,186

Proceeds from exercise of unit options
737

 
133

 
—

 
—

 
—

 
—

 
—

 
737

Conversion of restricted units, net of units withheld for taxes
(1,928
)
 
283

 
—

 
—

 
—

 
—

 
—

 
(1,928
)
Stock-based compensation
5,534

 
—

 
—

 
—

 
5,544

 
—

 
—

 
11,078

Distributions
(82,303
)
 
—

 
—

 
1,154

 
(5,080
)
 
24

 
—

 
(87,383
)
Net income (loss)
(115,909
)
 
—

 
23,497

 
—

 
(3,007
)
 
—

 
—

 
(95,419
)
Hedging gains reclassified to earnings
—

 
—

 
—

 
—

 
—

 
—

 
(939
)
 
(939
)
Adjustment in fair value of derivatives
—

 
—

 
—

 
—

 
—

 
—

 
262

 
262

Balance, September 30, 2013
$
1,027,846

 
90,134

 
$
177,634

 
16,226

 
$
19,241

 
1,577

 
$
(46
)
 
$
1,224,675



See accompanying notes to condensed consolidated financial statements.
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CROSSTEX ENERGY, L.P.
 
Consolidated Statements of Cash Flows

 
Nine Months Ended September 30,
 
2013
 
2012
 
(Unaudited)
(In thousands)
Cash flows from operating activities:
 

 
 

Net loss
$
(95,419
)
 
$
(15,724
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 

 
 

Depreciation and amortization
101,566

 
110,107

Impairment
72,576

 
—

Gain on sale of property and other assets
(175
)
 
(3,381
)
Deferred tax benefit
(6,031
)
 
(375
)
Non-cash stock-based compensation
11,078

 
7,496

(Gain) loss on derivatives recognized in net loss
(1,662
)
 
1,977

Cash received (paid) on derivatives not recognized as revenue
2,418

 
(7,500
)
Amortization of debt issue costs
4,558

 
3,940

Amortization of discount on notes
1,423

 
1,423

Distribution of earnings from limited liability company
3,144

 
—

Equity in (income) loss from limited liability company
106

 
(1,511
)
Changes in assets and liabilities:
 

 
 

Accounts receivable, accrued revenue and other
12,548

 
(18,431
)
Natural gas and natural gas liquids, prepaid expenses and other
(6,642
)
 
(7,144
)
Accounts payable, accrued gas and crude oil purchases and other accrued liabilities
(10,857
)
 
(26,296
)
Net cash provided by operating activities
88,631

 
44,581

Cash flows from investing activities:
 

 
 

Additions to property and equipment
(397,354
)
 
(141,319
)
Acquisition of business
—

 
(212,521
)
Proceeds from sale of property
18,459

 
11,677

Investment in limited liability company
(22,261
)
 
(52,250
)
Distribution from limited liability company in excess of earnings
9,951

 
—

Net cash used in investing activities
(391,205
)
 
(394,413
)
Cash flows from financing activities:
 

 
 

Proceeds from borrowings
314,500

 
696,500

Payments on borrowings
(309,500
)
 
(526,000
)
Payments on capital lease obligations
(2,433
)
 
(2,337
)
Increase in drafts payable
1,306

 
4,319

Debt refinancing costs
(2,026
)
 
(6,896
)
Conversion of restricted units, net of units withheld for taxes
(1,928
)
 
(1,030
)
Issuance of common units
389,186

 
232,791

Distribution to partners
(87,383
)
 
(72,947
)
Proceeds from exercise of unit options
737

 
347

Contributions from general partner
—

 
3,460

Net cash provided by financing activities
302,459

 
328,207

Net decrease in cash and cash equivalents
(115
)
 
(21,625
)
Cash and cash equivalents, beginning of period
124

 
24,143

Cash and cash equivalents, end of period
$
9

 
$
2,518

Cash paid for interest
$
78,334

 
$
70,460

Cash paid for income taxes
$
6,565

 
$
953

 

See accompanying notes to condensed consolidated financial statements.
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CROSSTEX ENERGY, L.P.
 
Notes to Condensed Consolidated Financial Statements
 
September 30, 2013
(Unaudited)
 
(1) General
 
Unless the context requires otherwise, references to “we,” “us,” “our” or the “Partnership” mean Crosstex Energy, L.P. and its consolidated subsidiaries.
 
Crosstex Energy, L.P., a Delaware limited partnership formed on July 12, 2002, is engaged in the gathering, processing, transmission and marketing to producers of natural gas, natural gas liquids ("NGLs") and crude oil.  We also provide crude oil, condensate and brine services to producers. We connect the wells of natural gas producers in our market areas to our gathering systems, process natural gas for the removal of NGLs, fractionate NGLs into purity products and market those products for a fee, transport natural gas and ultimately provide natural gas to a variety of markets. We purchase natural gas from natural gas producers and other supply sources and sell that natural gas to utilities, industrial consumers, other marketers and pipelines. We operate processing plants that process gas transported to the plants by major interstate pipelines or from our own gathering systems under a variety of fee arrangements. In addition, we purchase natural gas from producers not connected to our gathering systems for resale and sell natural gas on behalf of producers for a fee.  We provide a variety of crude services throughout the Ohio River Valley ("ORV") which include crude oil gathering via pipelines and trucks and oilfield brine disposal. We also have crude oil terminal facilities in south Louisiana that provide access for crude oil producers to the premium markets in this area.
 
Crosstex Energy GP, LLC (the “General Partner”) is the general partner of the Partnership. Crosstex Energy GP, LLC is a direct, wholly-owned subsidiary of Crosstex Energy, Inc. ("CEI").
 
(a) Basis of Presentation
 
The accompanying condensed consolidated financial statements are prepared in accordance with the instructions to Form 10-Q, are unaudited and do not include all the information and disclosures required by generally accepted accounting principles in the United States of America ("US GAAP") for complete financial statements. All adjustments that, in the opinion of management, are necessary for a fair presentation of the results of operations for the interim periods have been made and are of a recurring nature unless otherwise disclosed herein. The results of operations for such interim periods are not necessarily indicative of results of operations for a full year. All significant intercompany balances and transactions have been eliminated in consolidation. Certain reclassifications have been made to the consolidated financial statements for the prior year to conform to the current presentation. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Partnership’s annual report on Form 10-K for the year ended December 31, 2012.
 
The preparation of financial statements in accordance with US GAAP requires management of the Partnership to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from these estimates.
 
(b) Comprehensive Income (Loss)
 
Accumulated Other Comprehensive Income Reclassifications. In February 2013, the Financial Accounting Standards Board ("FASB") issued ASU 2013-2, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income ("ASU 2013-2”). ASU 2013-2 requires disclosure of amounts reclassified out of accumulated other comprehensive income ("AOCI") by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of AOCI by the respective line items of net income but only if the amount reclassified is required to be reclassified to net income in its entirety in the same reporting period. For amounts not reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures that provide additional detail about those amounts.  For the three months ended September 30, 2013 and 2012, we reclassified cash flow hedge gains in the amounts of $0.4 million and $0.6 million, respectively, and $0.9 million and $0.2 million for the nine months ended September 30, 2013 and 2012, respectively, included in other comprehensive income to revenues on the condensed consolidated statement of operations.

8
Table of Contents


(c) Intangible Asset Impairment

In August 2013, the Partnership shutdown the Eunice processing plant (the “Plant”), which is located in south Louisiana and is part of our PNGL segment, due to adverse economics driven by low NGL prices and low processing volumes which we do not see improving in the near future based on forecasted price curves. The Partnership recorded an impairment expense of $72.6 million during the third quarter of 2013 related to the intangible assets for the terminated customer relationships attributable to the Plant shut-down. 
(d) Goodwill

Goodwill is the cost of an acquisition less the fair value of the net identifiable assets of the acquired business. The Partnership evaluates goodwill for impairment annually as of July 1, and whenever events or changes in circumstances indicate it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The Partnership first assesses qualitative factors to evaluate whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as the basis for determining whether it is necessary to perform the two-step goodwill impairment test. The Partnership may elect to perform the two-step goodwill impairment test without completing a qualitative assessment. If a two-step process goodwill impairment test is elected or required, the first step involves comparing the fair value of the reporting unit, to which goodwill has been allocated, with its carrying amount. If the carrying amount of a reporting unit exceeds its fair value, the second step of the process involves comparing the implied fair value to the carrying value of the goodwill for that reporting unit. If the carrying value of the goodwill of a reporting unit exceeds the implied fair value of that goodwill, the excess of the carrying value over the implied fair value is recognized as an impairment loss. There were no impairment charges resulting from the Partnership's July 1, 2013 impairment testing, and no event indicating impairment has occurred subsequent to that date.


(2) Acquisition
 
On July 2, 2012, the Partnership, through a wholly-owned subsidiary, acquired all of the issued and outstanding common stock of Clearfield Energy, Inc. and its wholly owned subsidiaries (collectively, “Clearfield”). Clearfield’s business included crude oil pipelines, a barge loading terminal on the Ohio River, a rail loading terminal on the Ohio Central Railroad network, a trucking fleet and brine disposal wells.  All of these assets are included in the Partnership’s ORV segment.

 Purchase Price Allocation

The Partnership paid approximately $215.4 million in cash in the acquisition.  The following table is a summary of the consideration paid in the Clearfield acquisition and the purchase price allocation for the fair value of the assets acquired and liabilities assumed at the acquisition date:

Purchase Price Allocation (in thousands):


Purchase Price to Clearfield Energy, Inc.

$
215,397

     Total Purchase Price

$
215,397




Assets acquired:


     Current assets

17,622

     Assets held for disposition

19,358

     Property, plant and equipment

91,422

     Goodwill

153,802

     Intangibles

37,600

Liabilities assumed:


     Current liabilities

(28,274
)
     Liabilities held for disposition

(1,400
)
     Deferred taxes

(65,228
)
     Long term liabilities

(9,505
)
     Total purchase price

$
215,397


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CROSSTEX ENERGY, L.P.
 
Notes to Condensed Consolidated Financial Statements-(Continued)



From the period July 2, 2012 to September 30, 2012, the Partnership recognized $52.9 million of crude oil buy/sell, crude oil transportation and brine service sales related to properties acquired in the Clearfield acquisition. For the period July 2, 2012 to September 30, 2012, the Partnership recognized $46.1 million of net operating expense related to properties acquired in the Clearfield acquisition.

Pro Forma Information
 
The following unaudited pro forma condensed financial data for the nine months ended September 30, 2012 gives effect to the Clearfield acquisition as if it had occurred on January 1, 2012. The unaudited pro forma condensed financial information has been included for comparative purposes only and is not necessarily indicative of the results that might have occurred had the transactions taken place on the dates indicated and is not intended to be a projection of future results.
 
 
 
Nine Months Ended 
 September 30, 2012
 
 
Pro forma total revenues
 
$
1,371,219

Pro forma net loss
 
$
(18,005
)
Pro forma net loss attributable to Crosstex Energy, L.P.
 
$
(17,892
)
Pro forma net loss per common unit:
 


Basic and Diluted
 
$
(0.32
)
 
(3) Long-Term Debt
 
As of September 30, 2013 and December 31, 2012, long-term debt consisted of the following (in thousands):
 
 
September 30, 2013
 
December 31, 2012
Bank credit facility (due 2016), interest based on Prime and/or LIBOR plus an applicable
    margin, interest rate at September 30, 2013 and December 31, 2012 was 3.6% and 4.3%,
    respectively
$
76,000


$
71,000

Senior unsecured notes (due 2018), net of discount of $8.3 million and $9.7 million,
    respectively, which bear interest at the rate of 8.875%
716,728


715,305

Senior unsecured notes (due 2022), which bear interest at the rate of 7.125%
250,000


250,000

 Debt classified as long-term
$
1,042,728

 
$
1,036,305

 
Credit Facility.  As of September 30, 2013, there was $62.3 million in outstanding letters of credit and $76.0 million in outstanding borrowings under the Partnership’s bank credit facility, leaving approximately $496.7 million available for future borrowing based on the borrowing capacity of $635.0 million. As of September 30, 2013, based on our maximum permitted consolidated leverage ratio (as defined in the amended credit facility), we could borrow approximately $271.4 million of additional funds.

In January 2013, the Partnership amended the credit facility to, among other things, (i) decrease the minimum consolidated interest coverage ratio (as defined in the amended credit facility, being generally computed as the ratio of consolidated earnings before interest, taxes, depreciation, amortization and certain other non-cash charges to consolidated interest charges) to 2.25 to 1.0 for the fiscal quarters ending September 30, 2013 and December 31, 2013, with a minimum ratio of 2.50 to 1.0 for each fiscal quarter ending thereafter, (ii) increase the maximum permitted consolidated leverage ratio (as defined in the amended credit facility, being generally computed as the ratio of total funded debt to consolidated earnings before interest, taxes, depreciation, amortization and certain other non-cash charges) to 5.50 to 1.0 for each fiscal quarter ending on or prior to December 31, 2013, with a maximum ratio of 5.25 to 1.0 for each fiscal quarter ending thereafter, and (iii) eliminate the existing and any future step-up in the maximum permitted consolidated leverage ratio for acquisitions.
 
In August 2013, the Partnership amended the credit facility to, among other things, (i) allow the Partnership to make additional investments in joint ventures and subsidiaries that are not guarantors of the Partnership's obligations under the

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CROSSTEX ENERGY, L.P.
 
Notes to Condensed Consolidated Financial Statements-(Continued)


amended credit facility, (ii) decrease the minimum consolidated interest coverage ratio (as defined in the amended credit facility, being generally computed as the ratio of consolidated earnings before interest, taxes, depreciation, amortization and certain other non-cash charges to consolidated interest charges) to 2.25 to 1.0 for the fiscal quarters ending March 31, 2014, June 30, 2014, September 30, 2014 and December 31, 2014, with a minimum ratio of 2.50 to 1.0 for each fiscal quarter ending thereafter and (iii) increase the maximum permitted consolidated leverage ratio (as defined in the amended credit facility, being generally computed as the ratio of total funded debt to consolidated earnings before interest, taxes, depreciation, amortization and certain other non-cash charges) to 5.50 to 1.0 for the fiscal quarters ending March 31, 2014, June 30, 2014 and September 30, 2014, with a maximum ratio of 5.25 to 1.0 for each fiscal quarter ending thereafter.
 
The credit facility is guaranteed by substantially all of our subsidiaries and is secured by first priority liens on substantially all of our assets and those of the guarantors, including all material pipeline, gas gathering and processing assets, all material working capital assets and a pledge of all of our equity interests in substantially all of our subsidiaries. We may prepay all loans under the credit facility at any time without premium or penalty (other than customary LIBOR breakage costs), subject to certain notice requirements. The credit facility requires mandatory prepayments of amounts outstanding thereunder with the net proceeds of certain asset sales, extraordinary receipts, equity issuances and debt incurrences, but these mandatory prepayments do not require any reduction of the lenders’ commitments under the credit facility.
 
All other material terms of the credit facility are described in Part II, “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Indebtedness” in the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2012. The Partnership expects to be in compliance with all credit facility covenants for at least the next twelve months.
 
Non-Guarantors.  All senior unsecured notes are jointly and severally guaranteed by each of the Partnership’s current material subsidiaries (the "Guarantors"), with the exception of its regulated Louisiana subsidiaries (which may only guarantee up to $500.0 million of the Partnership’s debt) and Crosstex Energy Finance Corporation (a wholly owned Delaware corporation that was organized for the sole purpose of being a co-issuer of certain of the Partnership’s indebtedness, including the senior unsecured notes). Guarantors may not sell or otherwise dispose of all or substantially all of their properties or assets, or consolidate with or merge into another company if such a sale would cause a default under the terms of the senior unsecured notes. There are no significant restrictions on the ability of the Partnership or any Guarantor to obtain funds from its subsidiaries by dividend or loan. Since certain wholly owned subsidiaries do not guarantee the senior unsecured notes, the condensed consolidating financial statements of the Guarantors and non-guarantors for the three and nine months ended September 30, 2013 and 2012 are disclosed below in accordance with Rule 3-10 of Regulation S-X. Comprehensive income (loss) is not included in the condensed consolidating statements of operations of the Guarantors and non-guarantors for the three and nine months ended September 30, 2013 and 2012 as these amounts are not considered material.



11
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CROSSTEX ENERGY, L.P.
 
Notes to Condensed Consolidated Financial Statements-(Continued)


Condensed Consolidating Balance Sheets
September 30, 2013
 
 
Guarantors
 
Non-Guarantors
 
Elimination
 
Consolidated
 
(In thousands)
ASSETS
 

 
 

 
 

 
 

Total current assets
$
216,038

 
$
11,074

 
$
—

 
$
227,112

Property, plant and equipment, net
1,579,845

 
211,774

 
—

 
1,791,619

Total other assets
597,623

 
—

 
—

 
597,623

Total assets
$
2,393,506

 
$
222,848

 
$
—

 
$
2,616,354

 
 
 
 
 
 
 
 
LIABILITIES & PARTNERS’ CAPITAL
 
 
 
 
 
 
 
Total current liabilities
$
247,714

 
$
7,423

 
$
—

 
$
255,137

Long-term debt
1,042,728

 
—

 
—

 
1,042,728

Other long-term liabilities
93,815

 
—

 
—

 
93,815

Partners’ capital
1,009,249

 
215,425

 
—

 
1,224,674

Total liabilities & partners’ capital
$
2,393,506

 
$
222,848

 
$
—

 
$
2,616,354

 
December 31, 2012
 
 
Guarantors
 
Non-Guarantors
 
Elimination
 
Consolidated
 
(In thousands)
ASSETS
 

 
 

 
 

 
 

Total current assets
$
246,165

 
$
11,055

 
$
—

 
$
257,220

Property, plant and equipment, net
1,276,097

 
195,151

 
—

 
1,471,248

Total other assets
694,121

 
—

 
—

 
694,121

Total assets
$
2,216,383

 
$
206,206

 
$
—

 
$
2,422,589

 
 
 
 
 
 
 
 
LIABILITIES & PARTNERS’ CAPITAL
 

 
 

 
 

 
 
Total current liabilities
$
273,151

 
$
2,392

 
$
—

 
$
275,543

Long-term debt
1,036,305

 
—

 
—

 
1,036,305

Other long-term liabilities
101,660

 
—

 
—

 
101,660

Partners’ capital
805,267

 
203,814

 
—

 
1,009,081

Total liabilities & partners’ capital
$
2,216,383

 
$
206,206

 
$
—

 
$
2,422,589




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Table of Contents
CROSSTEX ENERGY, L.P.
 
Notes to Condensed Consolidated Financial Statements-(Continued)


Condensed Consolidating Statements of Operations
For the Three Months Ended September 30, 2013
 
Guarantors
 
Non-Guarantors
 
Elimination
 
Consolidated
 
(In thousands)
Total revenues
$
456,177

 
$
17,955

 
$
(5,770
)
 
$
468,362

Total operating costs and expenses
(527,346
)
 
(8,613
)
 
5,770

 
(530,189
)
Operating income (loss)
(71,169
)
 
9,342

 
—

 
(61,827
)
Interest expense, net
(16,430
)
 
—

 
—

 
(16,430
)
Other expense
(27
)
 
—

 
—

 
(27
)
Income (loss) before non-controlling interest and income
    taxes
(87,626
)
 
9,342

 
—

 
(78,284
)
Income tax provision
(554
)
 
—

 
—

 
(554
)
Net income (loss) attributable to Crosstex Energy, L.P.
$
(88,180
)
 
$
9,342

 
$
—

 
$
(78,838
)
 
For the Three Months Ended September 30, 2012  
 
Guarantors
 
Non-Guarantors
 
Elimination
 
Consolidated
(As Adjusted)
 
(In thousands)
Total revenues
$
430,064

 
$
20,468

 
$
(5,585
)
 
$
444,947

Total operating costs and expenses
(438,876
)
 
(9,859
)
 
5,585

 
(443,150
)
Operating income (loss)
(8,812
)
 
10,609

 
—

 
1,797

Interest expense, net
(23,220
)
 
(9
)
 
—

 
(23,229
)
Other income
5,950

 
—

 
—

 
5,950

Income (loss) before non-controlling interest and income
    taxes
(26,082
)
 
10,600

 
—

 
(15,482
)
Income tax provision
(665
)
 
(7
)
 
—

 
(672
)
Net loss attributable to non-controlling interest
—

 
54

 
—

 
54

Net income (loss) attributable to Crosstex Energy, L.P.
$
(26,747
)
 
$
10,647

 
$
—

 
$
(16,100
)
 
For the Nine Months Ended September 30, 2013  
 
Guarantors
 
Non-Guarantors
 
Elimination
 
Consolidated
 
(In thousands)
Total revenues
$
1,331,143

 
$
56,461

 
$
(18,964
)
 
$
1,368,640

Total operating costs and expenses
(1,401,180
)
 
(25,134
)
 
18,964

 
(1,407,350
)
Operating income (loss)
(70,037
)
 
31,327

 
—

 
(38,710
)
Interest expense, net
(54,874
)
 
—

 
—

 
(54,874
)
Other income
262

 
—

 
—

 
262

Income (loss) before non-controlling interest and income
    taxes
(124,649
)
 
31,327

 
—

 
(93,322
)
Income tax provision
(2,097
)
 
—

 
—

 
(2,097
)
Net income (loss) attributable to Crosstex Energy, L.P.
$
(126,746
)
 
$
31,327

 
$
—

 
$
(95,419
)


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Table of Contents
CROSSTEX ENERGY, L.P.
 
Notes to Condensed Consolidated Financial Statements-(Continued)


For the Nine Months Ended September 30, 2012  
 
Guarantors
 
Non-Guarantors
 
Elimination
 
Consolidated
(As Adjusted)
 
(In thousands)
Total revenues
$
1,221,502

 
$
64,946

 
$
(21,140
)
 
$
1,265,308

Total operating costs and expenses
(1,213,993
)
 
(28,715
)
 
21,140

 
(1,221,568
)
Operating income
7,509

 
36,231

 
—

 
43,740

Interest expense, net
(63,867
)
 
(65
)
 
—

 
(63,932
)
Other income
5,975

 
—

 
—

 
5,975

Income (loss) before non-controlling interest and income
    taxes
(50,383
)
 
36,166

 
—

 
(14,217
)
Income tax provision
(1,493
)
 
(14
)
 
—

 
(1,507
)
Net loss attributable to non-controlling interest
—

 
163

 
—

 
163

Net income (loss) attributable to Crosstex Energy, L.P.
$
(51,876
)
 
$
36,315

 
$
—

 
$
(15,561
)

Condensed Consolidating Statements of Cash Flows
For the Nine Months Ended September 30, 2013  
 
Guarantors
 
Non-Guarantors
 
Elimination
 
Consolidated
 
(In thousands)
Net cash flows provided by operating activities
$
46,028

 
$
42,603

 
$
—

 
$
88,631

Net cash flows used in investing activities
$
(368,318
)
 
$
(22,887
)
 
$
—

 
$
(391,205
)
Net cash flows provided by (used in) financing activities
$
302,459

 
$
(19,716
)
 
$
19,716

 
$
302,459

 
For the Nine Months Ended September 30, 2012  
 
Guarantors
 
Non-Guarantors
 
Elimination
 
Consolidated
 
(In thousands)
Net cash flows provided by (used in) operating activities
$
(3,335
)
 
$
47,916

 
$
—

 
$
44,581

Net cash flows used in investing activities
$
(393,866
)
 
$
(547
)
 
$
—

 
$
(394,413
)
Net cash flows provided by (used in) financing activities
$
328,207

 
$
(46,989
)
 
$
46,989

 
$
328,207

 

(4) Other Long-term Liabilities
 
The Partnership has the following assets under capital leases as of September 30, 2013 (in thousands):
 
Compressor equipment
$
37,199

Less: Accumulated amortization
(16,401
)
Net assets under capital leases
$
20,798

 

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The following are the minimum lease payments to be made in each of the following years indicated for the capital leases in effect as of September 30, 2013 (in thousands):
 
Fiscal Year
 
2013
$
1,146

2014
4,582

2015
4,582

2016
4,582

2017
6,910

Thereafter
5,189

Less: Interest
(4,169
)
Net minimum lease payments under capital lease
22,822

Less: Current portion of net minimum lease payments
(4,449
)
Long-term portion of net minimum lease payments
$
18,373

 
(5)      Partners’ Capital
 
(a) Issuance of Common Units

In June 2013, the Partnership issued 8,280,000 common units representing limited partner interests in the Partnership (including 1,080,000 common units issued pursuant to the exercise of the underwriters' option to purchase additional common units) at a public offering price of $20.33 per common unit for net proceeds of $162.0 million. The net proceeds from the common unit offering were used for capital expenditures for currently identified projects, including the Cajun-Sibon NGL pipeline expansion, and for general partnership purposes. Pending such use, the Partnership repaid outstanding borrowings under its credit facility. The General Partner did not exercise its option to make a general partner contribution to maintain its then current general partner percentage interest in connection with this offering.

In January 2013, the Partnership issued 8,625,000 common units representing limited partner interests in the Partnership at a public offering price of $15.15 per common unit for net proceeds of $125.4 million.  Concurrent with the public offering, the Partnership issued 2,700,000 common units representing limited partner interests in the Partnership at an offering price of $14.55 per unit for net proceeds of $39.2 million.  The net proceeds from both common unit offerings were used for capital expenditures, to repay bank borrowings and for general partnership purposes. The General Partner did not exercise its option to make a general partner contribution to maintain its then current general partner percentage interest in connection with these offerings.
 
In May 2013, the Partnership entered into an Equity Distribution Agreement (the “EDA”) with BMO Capital Markets Corp. (“BMOCM”). This EDA replaced the previous equity distribution agreement entered into in March 2013 between BMOCM and the Partnership. Pursuant to the terms of the EDA, the Partnership may from time to time through BMOCM, as its sales agent, sell common units representing limited partner interests having an aggregate offering price of up to $75.0 million. Sales of such common units will be made by means of ordinary brokers’ transactions through the facilities of the Nasdaq Global Select Market LLC at market prices, in block transactions or as otherwise agreed by BMOCM and the Partnership.  Under the terms of the EDA, the Partnership may sell common units from time to time to BMOCM as principal for its own account at a price to be agreed upon at the time of sale. For any such sales, the Partnership will enter into a separate terms agreement with BMOCM.
 
Through September 30, 2013, the Partnership sold an aggregate of 3,370,486 common units under the EDA and prior equity distribution agreement with BMOCM, generating proceeds of approximately $62.9 million (net of approximately $0.9 million of commissions to BMOCM). The Partnership used the net proceeds for general partnership purposes, including working capital, capital expenditures and repayments of indebtedness.

(b)  Distributions
 
Unless restricted by the terms of the Partnership’s credit facility and/or the indentures governing the Partnership’s 8.875% senior notes due 2018 (the “2018 Notes”) or the Partnership’s 7.125% senior notes due 2022 (the “2022 Notes” and, together with the 2018 Notes, “all senior unsecured notes”), the Partnership must make distributions of 100% of available cash, as

15
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defined in the partnership agreement, within 45 days following the end of each quarter. A summary of the distribution activity relating to the common units and the preferred units (which are paid-in-kind "PIK") for the nine months ended September 30, 2013 is provided below:

Declaration period
Distribution/unit
PIK Units Distributed (1)
Date paid/payable
Q4 2012
$
0.33

375,382

February 14, 2013
Q1 2013
$
0.33

384,731

May 13, 2013
Q2 2013
$
0.33

394,313

August 12, 2013
Q3 2013
$
0.34

—

November 12, 2013
(1) Represents distributions on preferred units paid-in-kind through the issuance of additional preferred units.
 
(c) Earnings per Unit and Dilution Computations
 
The Partnership had common units and preferred units outstanding during the three and nine months ended September 30, 2013 and 2012.
 
The preferred units are entitled to a quarterly distribution PIK in the form of additional preferred units equal to the greater of $0.2125 per unit or the amount of the quarterly distribution per unit paid to common unitholders, subject to certain adjustments. Income is allocated to the preferred units in an amount equal to the quarterly distribution with respect to the period earned.  The fair value of the PIK preferred unit distributions is based on the market value of common units on the record date of such distributions.
 
As required under FASB Accounting Standards Codification ("ASC") 260-10-45-61A, unvested share-based payments that entitle employees to receive non-forfeitable distributions are considered participating securities, as defined in FASB ASC 260-10-20, for earnings per unit calculations.  The following table reflects the computation of basic earnings per limited partner unit for the periods presented (in thousands except per unit amounts):
 
 
Three Months Ended  
 September 30,
 
Nine Months Ended 
 September 30,
 
2013
 
2012
 
2013
 
2012
Limited partners’ interest in net loss
$
(85,673
)

$
(21,431
)
 
$
(115,909
)
 
$
(30,487
)
Distributed earnings allocated to:
 

 
 
 
 
 
Common units (1)(2)
$
30,308


$
20,948

 
$
82,623

 
$
55,752

Unvested restricted units (1)(2)
399


310

 
1,195

 
1,008

Total distributed earnings
$
30,707


$
21,258

 
$
83,818

 
$
56,760

Undistributed loss allocated to:
 

 
 
 
 
 
Common units
$
(114,848
)

$
(41,977
)
 
$
(196,879
)
 
$
(85,676
)
Unvested restricted units
(1,532
)

(712
)
 
(2,848
)
 
(1,571
)
Total undistributed loss
$
(116,380
)

$
(42,689
)
 
$
(199,727
)
 
$
(87,247
)
Net loss allocated to:
 

 
 
 
 
 
Common units
$
(84,540
)

$
(21,029
)
 
$
(114,256
)
 
$
(29,924
)
Unvested restricted units
(1,133
)

(402
)
 
(1,653
)
 
(563
)
Total limited partners’ interest in net loss
$
(85,673
)

$
(21,431
)
 
$
(115,909
)
 
$
(30,487
)
Basic and diluted net loss per unit:
 

 
 
 
 
0

Basic and diluted common unit
$
(0.95
)

$
(0.34
)
 
$
(1.38
)
 
$
(0.53
)
__________________________________________________
(1) Three months ended September 30, 2013 represents a declared distribution of $0.34 per unit payable on November 12, 2013 and nine months ended September 30, 2013 represents distributions paid of $0.66 per unit and distributions declared of $0.34 per unit payable November 12, 2013.

16
Table of Contents

 
(2) Three months ended September 30, 2012 represents a declared distribution of $0.33 per unit paid on November 14, 2012. Nine months ended September 30, 2012 represents distributions paid of $0.66 per unit and distributions declared of $0.33 per unit paid November 14, 2012.
 
The following are the unit amounts used to compute the basic and diluted earnings per limited partner unit for the three and nine months ended September 30, 2013 and 2012 (in thousands):
 
 
Three Months Ended  
 September 30,
 
Nine Months Ended 
 September 30,
 
2013
 
2012
 
2013
 
2012
Basic and diluted weighted average units outstanding:
 

 
 

 
 
 
 
Weighted average limited partner common units outstanding
89,229

 
62,027

 
82,623

 
56,315

 
All common unit equivalents were antidilutive in the three and nine months ended September 30, 2013 and 2012 because the limited partners were allocated net losses in these periods.
 
The General Partner is entitled to a distribution in relation to its percentage interest with respect to all distributions made to common unitholders. If the distributions are in excess of $0.2125 per unit, distributions are made to the General Partner in accordance with its current percentage interest with the remainder to the common and preferred unitholders, subject to the payment of incentive distributions as described below to the extent that certain target levels of cash distributions are achieved.
 
When quarterly distributions are made pro-rata to common and preferred unitholders, net income for the General Partner consists of incentive distributions to the extent earned, a deduction for stock-based compensation attributable to CEI’s stock options and restricted shares and the percentage interest of the original Partnership’s net income (loss) adjusted for the CEI stock-based compensation specifically allocated to the General Partner. When quarterly distributions are made solely to the preferred unitholders, the net income for the General Partner consists of the CEI stock-based compensation deduction and the General Partner’s percentage interest of the Partnership’s net income (loss) after the allocation of income to the preferred unitholders with respect to their preferred distribution adjusted for the CEI stock-based compensation specifically allocated to the General Partner.
 
Under the quarterly incentive distribution provisions, generally the General Partner is entitled to 13.0% of amounts the Partnership distributes in excess of $0.25 per unit, 23.0% of the amounts the Partnership distributes in excess of $0.3125 per unit and 48.0% of amounts the Partnership distributes in excess of $0.375 per unit. The net income (loss) allocated to the General Partner is as follows (in thousands):
 
 
Three Months Ended  
 September 30,
 
Nine Months Ended 
 September 30,
 
2013
 
2012
 
2013
 
2012
Income allocation for incentive distributions
$
1,296

 
$
1,157

 
$
4,170

 
$
3,266

Stock-based compensation attributable to CEI’s restricted shares
(1,480
)
 
(1,166
)
 
(5,457
)
 
(3,443
)
General Partner interest in net income (loss)
(1,267
)
 
(300
)
 
(1,720
)
 
(243
)
General Partner share of net loss
$
(1,451
)
 
$
(309
)
 
$
(3,007
)
 
$
(420
)
 
(6) Employee Incentive Plans
 
(a)         Long-Term Incentive Plans
 
The Partnership accounts for share-based compensation in accordance with FASB ASC 718, which requires that compensation related to all stock-based awards, including stock options, be recognized in the consolidated financial statements. On May 9, 2013, the Partnership’s unitholders approved the amended and restated Crosstex Energy GP, LLC Long-Term Incentive Plan (the “Plan”). Amendments to the Plan include an increase in the number of common units representing limited partner interests in the Partnership authorized for issuance under the Plan by 3,470,000 common units to an aggregate of

17
Table of Contents

9,070,000 common units. In addition, the Plan includes technical amendments to certain other provisions of the Plan (i) to describe awards of restricted units as restricted incentive units, (ii) to revise the change in control definition to (among other things) eliminate and clarify certain change in control events, (iii) to make minor changes to better conform certain provisions to applicable law and (iv) to include minor updates to clarify the meaning of, and consistently describe, certain terms thereunder.
 
The Partnership and CEI each have similar unit or share-based payment plans for employees, which are described below.  Share-based compensation associated with the CEI share-based compensation plan awarded to officers and employees of the Partnership are recorded by the Partnership since CEI has no substantial or managed operating activities other than its interest in the Partnership. Amounts recognized in the condensed consolidated financial statements with respect to these plans are as follows (in thousands):
 
 
Three Months Ended  
 September 30,
 
Nine Months Ended 
 September 30,
 
2013
 
2012
 
2013
 
2012
Cost of share-based compensation charged to general and administrative
    expense
$
2,599

 
$
2,193

 
$
9,675

 
$
6,546

Cost of share-based compensation charged to operating expense
423

 
310

 
1,403

 
950

Total amount charged to income
$
3,022

 
$
2,503

 
$
11,078

 
$
7,496

 
(b)  Restricted Incentive Units
 
The restricted incentive units are valued at their fair value at the date of grant which is equal to the market value of common units on such date. A summary of the restricted incentive unit activity for the nine months ended September 30, 2013 is provided below:
 
 
 
Nine Months Ended September 30, 2013
Crosstex Energy, L.P. Restricted Incentive Units:
 
Number of
Units
 
Weighted
Average
Grant-Date
 Fair Value
Non-vested, beginning of period
 
1,003,159

 
$
13.31

Granted
 
625,339

 
16.19

Vested*
 
(396,927
)
 
9.50

Forfeited
 
(52,648
)
 
13.52

Non-vested, end of period
 
1,178,923

 
$
16.11

Aggregate intrinsic value, end of period (in thousands)
 
$
23,461

 
 

_____________________________________________
* Vested units include 113,804 units withheld for payroll taxes paid on behalf of employees.
 
The Partnership issued restricted incentive units in 2013 to officers and other employees. These restricted incentive units typically vest at the end of three years and are included in the restricted incentive units outstanding and the current share-based compensation cost calculations at September 30, 2013.  In March 2013, the Partnership issued 57,897 restricted incentive units with a fair value of $1.0 million to officers and certain employees as bonus payments for 2012, which vested immediately and are included in the restricted incentive units granted and vested line items above.
 
A summary of the restricted incentive units’ aggregate intrinsic value (market value at vesting date) and fair value of units vested during the three and nine months ended September 30, 2013 and 2012 are provided below (in thousands):
 

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Table of Contents

 
 
Three Months Ended  
 September 30,
 
Nine Months Ended 
 September 30,
Crosstex Energy, L.P. Restricted Incentive Units:
 
2013
 
2012
 
2013
 
2012
Aggregate intrinsic value of units vested
 
$
2,457

 
$
448

 
$
6,750

 
$
4,031

Fair value of units vested
 
$
1,275

 
$
452

 
$
3,771

 
$
2,060

 
As of September 30, 2013, there was $9.0 million of unrecognized compensation cost related to non-vested restricted incentive units. That cost is expected to be recognized over a weighted-average period of 1.5 years.
 
(c)  Unit Options
 
A summary of the unit option activity for the nine months ended September 30, 2013 is provided below:
 
 
 
Nine Months Ended September 30, 2013
Crosstex Energy, L.P. Unit Options:
 
Number of Units
 
Weighted
Average
Exercise 
Price
Outstanding, beginning of period
 
349,018

 
$
7.25

Exercised
 
(132,986
)
 
5.56

Forfeited
 
(3,109
)
 
23.60

Outstanding, end of period
 
212,923

 
$
8.07

Options exercisable at end of period
 
212,923

 
 

Weighted average contractual term (years) end of period:
 


 
 

Options outstanding
 
5.5

 
 

Options exercisable
 
5.5

 
 

Aggregate intrinsic value end of period (in thousands):
 


 
 

Options outstanding
 
$
2,803

 
 

Options exercisable
 
$
2,803

 
 

 
A summary of the unit options intrinsic value exercised (market value in excess of exercise price at date of exercise) and fair value of units exercised (value per Black-Scholes-Merton option pricing model at date of grant) during the three and nine months ended September 30, 2013 and 2012 are provided below (in thousands):
 
 
 
Three Months Ended  
 September 30,
 
Nine Months Ended 
 September 30,
Crosstex Energy, L.P. Unit Options:
 
2013
 
2012
 
2013
 
2012
Intrinsic value of unit options exercised
 
$
356

 
$
327

 
$
1,716

 
$
805

Fair value of unit options vested
 
$
—

 
$
—

 
$
254

 
$
277

 
As of September 30, 2013, all options were vested and fully expensed.
 
(d)         Crosstex Energy, Inc.’s Restricted Stock
 
On May 9, 2013, CEI's stockholders approved the amended and restated Crosstex Energy, Inc. 2009 Long-Term Incentive Plan (the “CEI Plan”). Amendments to the CEI Plan included an increase in the number of shares of CEI's common stock authorized for issuance under the CEI Plan by 1,785,000 shares to an aggregate of 4,385,000 shares of common stock. In addition, the CEI Plan amendments included technical amendments to certain other provisions of the CEI Plan (i) to clarify that awards of restricted stock units may be granted as stock awards, (ii) to revise the change of control definition to (among other things) eliminate and clarify certain change of control events, (iii) to make minor changes to better conform certain provisions

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to applicable law and (iv) to include minor updates to clarify the meaning of, and consistently describe, certain terms thereunder.
CEI’s restricted shares are valued at their fair value at the date of grant which is equal to the market value of the common stock on such date. A summary of the restricted share activities for the nine months ended September 30, 2013 is provided below:
 
 
 
Nine Months Ended September 30, 2013
Crosstex Energy, Inc. Restricted Shares:
 
Number of
Shares
 
Weighted
Average
Grant-Date
Fair Value
Non-vested, beginning of period
 
1,329,162

 
$
9.75

Granted
 
632,912

 
15.08

Vested*
 
(445,177
)
 
7.43

Forfeited
 
(63,864
)
 
11.69

Non-vested, end of period
 
1,453,033

 
$
12.69

Aggregate intrinsic value, end of period (in thousands)
 
$
30,354

 
 

__________________________________________________
* Vested shares include 124,493 shares withheld for payroll taxes paid on behalf of employees.
 
CEI issued restricted shares in 2013 to officers and other employees. These restricted shares typically vest at the end of three years and are included in restricted shares outstanding and the current share-based compensation cost calculations at September 30, 2013.  In March 2013, CEI issued 60,018 restricted shares with a fair value of $1.0 million to officers and certain employees as bonus payments for 2012, which vested immediately and are included in restricted shares granted and vested in the above line items.
 
A summary of the restricted shares’ aggregate intrinsic value (market value at vesting date) and fair value of shares vested during the three and nine months ended September 30, 2013 and 2012 are provided below (in thousands):
 
 
 
Three Months Ended  
 September 30,
 
Nine Months Ended 
 September 30,
Crosstex Energy, Inc. Restricted Shares:
 
2013
 
2012
 
2013
 
2012
Aggregate intrinsic value of shares vested
 
$
3,290

 
$
537

 
$
7,593

 
$
3,963

Fair value of shares vested
 
$
1,123

 
$
448

 
$
3,307

 
$
1,714

 
As of September 30, 2013, there was $9.0 million of unrecognized compensation costs related to non-vested CEI restricted shares. The cost is expected to be recognized over a weighted average period of 1.4 years.
 
(e)          Crosstex Energy, Inc.’s Stock Options
 
CEI stock options have not been granted to officers or employees of the Partnership since 2005. There are 37,500 CEI stock options vested and exercisable at September 30, 2013.
 
(7) Derivatives
 
Commodity Swaps
 
The Partnership manages its exposure to fluctuations in commodity prices by hedging the impact of market fluctuations. Swaps are used to manage and hedge price and location risks related to these market exposures. Swaps are also used to manage margins on offsetting fixed-price purchase or sale commitments for physical quantities of natural gas and NGLs.
 

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CROSSTEX ENERGY, L.P.
 
Notes to Condensed Consolidated Financial Statements-(Continued)


The Partnership commonly enters into various derivative financial transactions which it does not designate as accounting hedges. These transactions include “swing swaps,” “storage swaps,” “basis swaps,” “processing margin swaps,” “liquids swaps” and “put options.”  Swing swaps are generally short-term in nature (one month) and are usually entered into to protect against changes in the volume of daily versus first-of-month index priced gas supplies or markets.  Storage swap transactions protect against changes in the value of products that the Partnership has stored to serve various operational requirements (gas) or has in inventory due to short term constraints in moving the product to market (liquids/condensate). Basis swaps are used to hedge basis location price risk due to buying gas into one of the Partnership’s systems on one index and selling gas off that same system on a different index. Processing margin financial swaps are used to hedge fractionation spread risk at the Partnership’s processing plants relating to the option to process versus bypassing the Partnership’s equity gas.  Liquids financial swaps are used to hedge price risk on percent of liquids contracts. Put options are purchased to hedge against declines in pricing and as such, represent options, not obligations, to sell the related underlying volumes at a fixed price.

Changes in the fair value of the Partnership’s mark to market derivatives are recognized in earnings in the period of change. The effective portion of changes in the fair value of cash flow hedges is recorded in AOCI until the related anticipated future cash flow is recognized in earnings. The ineffective portion is recorded in earnings immediately.
 
The components of (gain) loss on derivatives in the condensed consolidated statements of operations relating to commodity swaps are provided below (in thousands):
 
 
Three Months Ended  
 September 30,
 
Nine Months Ended 
 September 30,
 
2013
 
2012
 
2013
 
2012
Change in fair value of derivatives that are not designated as hedging
    instruments
$
1,012

 
$
433

 
$
768

 
$
(5,481
)
Realized losses on derivatives
591

 
308

 
906

 
3,547

Ineffective portion of derivatives designated as hedging instruments
31

 
18

 
(12
)
 
(43
)
(Gains) losses on derivatives
$
1,634

 
$
759

 
$
1,662

 
$
(1,977
)
 
The fair value of derivative assets and liabilities relating to commodity swaps are as follows (in thousands):

 
September 30, 2013
 
December 31, 2012
Fair value of derivative assets — current, designated
$
287

 
$
724

Fair value of derivative assets — current, non-designated
823

 
2,510

Fair value of derivative liabilities — current, designated
(313
)
 
(105
)
Fair value of derivative liabilities — current, non-designated
(287
)
 
(1,205
)
Fair value of derivative liabilities — long term, designated
(19
)
 
—

Net fair value of derivatives
$
491

 
$
1,924

 

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CROSSTEX ENERGY, L.P.
 
Notes to Condensed Consolidated Financial Statements-(Continued)



Set forth below are the summarized notional volumes and fair value of all instruments held for price risk management purposes and related physical offsets as of September 30, 2013 (all gas volumes are expressed in million British thermal units ("MMBtus") and liquids volumes are expressed in gallons). The remaining terms of the contracts extend no later than December 2014.
 
 
September 30, 2013
Transaction Type
 
Volume
 
Fair Value
 
 
(In thousands)
Cash Flow Hedges:
 
 

 
 

Liquids swaps (short contracts)
 
(9,322
)
 
$
(45
)
Total swaps designated as cash flow hedges
 
 
 
$
(45
)

 

 

Mark to Market Derivatives:*
 
 
 
 
Swing swaps (long contracts)
 
1,659

 
$
4

Physical offsets to swing swap transactions (short contracts)
 
(1,659
)
 
(1
)
 
 

 

Processing margin hedges — liquids (short contracts)
 
(3,926
)
 
256

Processing margin hedges — gas (long contracts)
 
422

 
(125
)
 
 

 

Liquids swaps - non-designated (short contracts)
 
(1,369
)
 
308

 
 

 

Storage swap transactions — (short contracts)
 
(100
)
 
21

Storage swap transactions — liquids inventory (long contracts)
 
420

 
3

Storage swap transactions — liquids inventory (short contracts)
 
(1,680
)
 
70

Total mark to market derivatives
 
 
 
$
536

__________________________________________________
*                 All are gas contracts except as otherwise noted.
 
On all transactions where the Partnership is exposed to counterparty risk, the Partnership analyzes the counterparty’s financial condition prior to entering into an agreement, establishes limits and monitors the appropriateness of these limits on an ongoing basis. The Partnership primarily deals with two types of counterparties, financial institutions and other energy companies, when entering into financial derivatives on commodities. The Partnership has entered into Master International Swaps and Derivatives Association Agreements ("ISDAs") with its counterparties. If the Partnership’s counterparties failed to perform under existing swap contracts entered into under these ISDAs, the Partnership’s maximum loss as of September 30, 2013 of $0.9 million would be reduced to $0.7 million due to the offsetting of gross fair value payables against gross fair value receivables as allowed by the ISDAs.
 
Impact of Cash Flow Hedges
 
The impact of realized gains or losses from derivatives designated as cash flow hedge contracts in the condensed consolidated statements of operations is summarized below (in thousands):
 
 
 
Three Months Ended  
 September 30,
 
Nine Months Ended
September 30,
Increase in Midstream Revenue
 
2013
 
2012
 
2013
 
2012
Liquids realized gain included in Midstream revenue
 
$
159

 
$
456

 
$
819

 
$
851


Natural Gas
 
As of September 30, 2013, the Partnership had no balances in AOCI related to natural gas.

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CROSSTEX ENERGY, L.P.
 
Notes to Condensed Consolidated Financial Statements-(Continued)


 
Liquids
 
As of September 30, 2013, an unrealized derivative fair value net loss of less than $0.1 million related to cash flow hedges of liquids price risk was recorded in AOCI. Of that amount, a net loss of less than $0.1 million is expected to be reclassified into earnings through September 2014. The actual reclassification to earnings will be based on mark to market prices at the contract settlement date, along with the realization of the gain or loss on the related physical volume, which is not reflected in the above table.
 
Derivatives Other Than Cash Flow Hedges
 
Assets and liabilities related to third party derivative contracts, swing swaps, basis swaps, storage swaps, processing margin swaps and liquids swaps are included in the fair value of derivative assets and liabilities and the profit and loss on the mark to market value of these contracts are recorded net as (gain) loss on derivatives in the condensed consolidated statement of operations. The Partnership estimates the fair value of all of its energy trading contracts using Level 1 and Level 2 inputs for future commodity prices that are readily available in public markets or can be derived from information available in publicly quoted markets. The estimated fair value of energy trading contracts by maturity date was as follows (in thousands):
 
 
Maturity Periods
 
Less than one year
 
One to two years
 
More than two years
 
Total fair value
September 30, 2013
$
536

 
$
—

 
$
—

 
$
536

 
(8)      Fair Value Measurements
 
FASB ASC 820 sets forth a framework for measuring fair value and required disclosures about fair value measurements of assets and liabilities. Fair value under FASB ASC 820 is defined as the price at which an asset could be exchanged in a current transaction between knowledgeable, willing parties. A liability’s fair value is defined as the amount that would be paid to transfer the liability to a new obligor, not the amount that would be paid to settle the liability with the creditor. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, use of unobservable prices or inputs are used to estimate the current fair value, often using an internal valuation model. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the item being valued.
 
FASB ASC 820 established a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
 
The Partnership’s derivative contracts primarily consist of commodity swap contracts which are not traded on a public exchange. The fair values of commodity swap contracts are determined using discounted cash flow techniques. The techniques incorporate Level 1 and Level 2 inputs for future commodity prices that are readily available in public markets or can be derived from information available in publicly quoted markets. These market inputs are utilized in the discounted cash flow calculation considering the instrument’s term, notional amount, discount rate and credit risk and are classified as Level 2 in hierarchy.
 

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Net assets measured at fair value on a recurring basis are summarized below (in thousands):
 
 
September 30, 2013
Level 2
 
December 31, 2012
Level 2
Commodity Swaps*
$
491

 
$
1,924

Total
$
491

 
$
1,924

 
__________________________________________________
*                 Unrealized gains or losses on commodity derivatives qualifying for hedge accounting are recorded in AOCI at each measurement date.  The fair value of derivative contracts included in assets or liabilities for risk management activities represents the amount at which the instruments could be exchanged in a current arms-length transaction adjusted for credit risk of the Partnership and/or the counterparty as required under FASB ASC 820.
 
Fair Value of Financial Instruments
 
The estimated fair value of the Partnership’s financial instruments has been determined by the Partnership using available market information and valuation methodologies. Considerable judgment is required to develop the estimates of fair value; thus, the estimates provided below are not necessarily indicative of the amount the Partnership could realize upon the sale or refinancing of such financial instruments (in thousands):
 
 
September 30, 2013
 
December 31, 2012
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
Long-term debt
$
1,042,728

 
$
1,102,563

 
$
1,036,305

 
$
1,118,875

Obligations under capital lease
$
22,822

 
$
24,381

 
$
25,257

 
$
27,667

 
The carrying amounts of the Partnership’s cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to the short-term maturities of these assets and liabilities.
 
The Partnership had $76.0 million in borrowings under its revolving credit facility included in long-term debt as of September 30, 2013 and $71.0 million at December 31, 2012. As borrowings under the credit facility accrue interest under floating interest rate structures, the carrying value of such indebtedness approximates fair value for the amounts outstanding under the credit facility. As of September 30, 2013 and December 31, 2012, the Partnership also had borrowings totaling $716.7 million and $715.3 million, net of discount, respectively, under the 2018 Notes with a fixed rate of 8.875% and borrowings of $250.0 million under the 2022 Notes with a fixed rate of 7.125%.  The fair value of all senior unsecured notes as of September 30, 2013 and December 31, 2012 was based on Level 1 inputs from third-party market quotations.  The fair value of obligations under capital leases was calculated using Level 2 inputs from third-party banks.
 
(9) Commitments and Contingencies
 
(a) Employment and Severance Agreements
 
Certain members of management of the Partnership are parties to employment and/or severance agreements with the General Partner. The employment and severance agreements provide those managers with severance payments in certain circumstances and, in the case of employment agreements, prohibit each such person from competing with the General Partner or its affiliates for a certain period of time following the termination of such person’s employment.
 
(b) Environmental Issues
 
The Partnership acquired LIG Pipeline Company and its subsidiaries on April 1, 2004. Contamination from historical operations was identified during due diligence at a number of sites owned by the acquired companies. The seller, AEP, has indemnified the Partnership for these identified sites. Moreover, AEP has entered into an agreement with a third party company pursuant to which the remediation costs associated with these sites have been assumed by this third party company that specializes in remediation work. To date, 23 of the 25 sites requiring remediation have been completed and have received a “No

24
Table of Contents

Further Action” status from the Louisiana Department of Environmental Quality.  The remaining two sites continuing with remediation efforts are expected to reach closure in 2013. The Partnership does not expect to incur any material liability with these sites; however, there can be no assurance that the third parties who have assumed responsibility for remediation of site conditions will fulfill their obligations.
 
(c) Other
 
The Partnership is involved in various litigation and administrative proceedings arising in the normal course of business. In the opinion of management, any liabilities that may result from these claims would not individually or in the aggregate have a material adverse effect on its financial position or results of operations.
 
At times, the Partnership’s subsidiaries acquire pipeline easements and other property rights by exercising rights of eminent domain and common carrier. As a result, the Partnership (or its subsidiaries) is a party to a number of lawsuits under which a court will determine the value of pipeline easements or other property interests obtained by the Partnership’s subsidiaries by condemnation. Damage awards in these suits should reflect the value of the property interest acquired and the diminution in the value of the remaining property owned by the landowner. However, some landowners have alleged unique damage theories to inflate their damage claims or assert valuation methodologies that could result in damage awards in excess of the amounts anticipated. Although it is not possible to predict the ultimate outcomes of these matters, the Partnership does not expect that awards in these matters will have a material adverse impact on its consolidated results of operations or financial condition.
 
The Partnership (or its subsidiaries) is defending lawsuits filed by owners of property located near processing facilities or compression facilities constructed by the Partnership as part of its systems. The suits generally allege that the facilities create a private nuisance and have damaged the value of surrounding property. Claims of this nature have arisen as a result of the industrial development of natural gas gathering, processing and treating facilities in urban and occupied rural areas.  In January 2012, a plaintiff in one of these lawsuits was awarded a judgment of $2.0 million.  The Partnership has appealed the matter and has posted a bond to secure the judgment pending its resolution.  The Partnership has accrued a $2.0 million liability related to this matter.  Although it is not possible to predict the ultimate outcomes of these matters, the Partnership does not expect that awards in these matters will have a material adverse impact on its consolidated results of operations or financial condition.

In July 2013, the Board of Commissioners for the Southeast Louisiana Flood Protection Authority for New Orleans and surrounding areas filed a lawsuit against approximately 100 energy companies, seeking, among other relief, restoration of wetlands allegedly lost due to historic industry operations in those areas. The suit was filed in Louisiana state court in New Orleans, but was removed to federal court.  The amount of damages is unspecified. The Partnership's subsidiary, Crosstex LIG, LLC, is one of the named defendants as the owner of pipelines in the area.  The validity of the causes of action, as well as the Partnership's costs and legal exposure, if any, related to the lawsuit are not currently determinable.  The Partnership intends to vigorously defend the case. 
(10) Segment Information
 
Identification of operating segments is based principally upon regions served.  The Partnership’s reportable segments consist of the natural gas gathering, processing and transmission operations located in north Texas and in the Permian Basin in west Texas ("NTX"), the pipelines and processing plants located in Louisiana ("LIG"), the south Louisiana processing and NGL assets ("PNGL") and rail, truck, pipeline, and barge facilities in the ORV. Operating activity for intersegment eliminations is shown in the corporate segment.  The Partnership’s sales are derived from external domestic customers.
 
The Partnership evaluates the performance of its operating segments based on operating revenues and segment profits. Corporate expenses include general partnership expenses associated with managing all reportable operating segments. Corporate assets consist primarily of property and equipment, including software, for general corporate support, working capital, debt financing costs and its investment in Howard Energy Partners ("HEP").

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Table of Contents


Summarized financial information concerning the Partnership’s reportable segments is shown in the following table.
 
 
LIG
 
NTX
 
PNGL
 
ORV
 
Corporate
 
Totals
 
(In thousands)
Three Months Ended September 30, 2013
 

 
 

 
 

 
 

 
 

 
 

Sales to external customers
$
119,716


$
72,129


$
181,327


$
95,190


$
—


$
468,362

Sales to affiliates
22,949


21,839


3,140


—


(47,928
)

—

Purchased gas, NGLs and crude oil
(121,910
)

(54,460
)

(159,991
)

(79,916
)

47,928


(368,349
)
Operating expenses
(8,487
)

(13,853
)

(6,847
)

(9,903
)

—


(39,090
)
Segment profit
$
12,268


$
25,655


$
17,629


$
5,371


$
—


$
60,923

Loss on derivatives
$
(584
)

$
(510
)

$
(271
)

$
(269
)

$
—


$
(1,634
)
Depreciation, amortization and impairments
$
(3,149
)

$
(19,887
)
 
$
(78,652
)

$
(3,264
)

$
(829
)

$
(105,781
)
Capital expenditures
$
10,842


$
4,821


$
101,406


$
5,412


$
1,464


$
123,945

Identifiable assets
$
282,088


$
989,583


$
869,156


$
327,496


$
148,031


$
2,616,354

Three Months Ended September 30, 2012