XTEX-2013.6.30-10Q

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 June 30, 2013

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 July 25, 2013, the Registrant had 88,688,424 common units outstanding.

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TABLE OF CONTENTS



Item	Description	Page

	PART I—FINANCIAL INFORMATION

1.	Financial Statements	3

2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27

3.	Quantitative and Qualitative Disclosures About Market Risk	40

4.	Controls and Procedures	43

	PART II—OTHER INFORMATION

1.	Legal Proceedings	43

1A.	Risk Factors	44

6.	Exhibits	45

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CROSSTEX ENERGY, L.P.

Condensed Consolidated Balance Sheets



	June 30, 2013		December 31, 2012
	(Unaudited)
	(In thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	41,938	$	124
Accounts receivable:
Trade, net of allowance for bad debt of $890 and $535, respectively	66,385		63,690
Accrued revenue and other	134,747		155,720
Fair value of derivative assets	3,288		3,234
Natural gas and natural gas liquids inventory, prepaid expenses and other	23,102		11,853
Assets held for disposition	—		22,599
Total current assets	269,460		257,220
Property and equipment, net of accumulated depreciation of $549,443 and $503,867, respectively	1,691,446		1,471,248
Fair value of derivative assets	112		—
Intangible assets, net of accumulated amortization of $286,061 and $263,305, respectively	402,248		425,005
Goodwill	153,802		152,627
Investment in limited liability company	99,354		90,500
Other assets, net	24,504		25,989
Total assets	$	2,640,926	$	2,422,589

LIABILITIES AND PARTNERS’ EQUITY
Current liabilities:
Accounts payable, drafts payable and other	$	24,669	$	32,265
Accrued gas and crude oil purchases	129,902		140,344
Fair value of derivative liabilities	673		1,310
Other current liabilities	90,962		71,340
Accrued interest	26,689		26,712
Liabilities held for disposition	—		3,572
Total current liabilities	272,895		275,543
Long-term debt	966,254		1,036,305
Other long-term liabilities	28,732		30,256
Deferred tax liability	65,839		71,404
Commitments and contingencies	—		—
Partners’ equity	1,307,206		1,009,081
Total liabilities and partners’ equity	$	2,640,926	$	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 June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
				(As Adjusted)						(As Adjusted)
	(Unaudited) (In thousands, except per unit amounts)
Revenues	$	454,589		$	394,402		$	900,278		$	820,361
Operating costs and expenses:
Purchased gas, NGLs and crude oil	359,093			304,098			700,115			630,304
Operating expenses	36,779			30,571			74,115			58,378
General and administrative	16,212			12,965			34,448			27,928
(Gain) loss on sale of property	84			(406		)	95			(504		)
(Gain) loss on derivatives	(445		)	(4,905		)	27			(2,736		)
Depreciation and amortization	34,635			32,870			68,361			65,048
Total operating costs and expenses	446,358			375,193			877,161			778,418
Operating income	8,231			19,209			23,117			41,943
Other income (expense):
Interest expense, net of interest income	(18,173		)	(21,320		)	(38,444		)	(40,703		)
Equity in income (loss) of limited liability company	37			—			(41		)	—
Other income	109			11			329			25
Total other expense	(18,027		)	(21,309		)	(38,156		)	(40,678		)
Income (loss) before non-controlling interest and income taxes	(9,796		)	(2,100		)	(15,039		)	1,265
Income tax provision	(833		)	(411		)	(1,542		)	(835		)
Net income (loss)	(10,629		)	(2,511		)	(16,581		)	430
Less: Net loss attributable to the non-controlling interest	—			(71		)	—			(109		)
Net income (loss) attributable to Crosstex Energy, L.P.	$	(10,629	)	$	(2,440	)	$	(16,581	)	$	539
Preferred interest in net income (loss) attributable to Crosstex Energy, L.P.	$	8,131		$	4,853		$	15,210		$	9,706
General partner interest in net income (loss)	$	(312	)	$	(40	)	$	(1,556	)	$	(111	)
Limited partners’ interest in net income (loss) attributable to Crosstex Energy, L.P.	$	(18,448	)	$	(7,253	)	$	(30,235	)	$	(9,056	)
Net loss attributable to Crosstex Energy, L.P. per limited partners’ unit:
Basic and diluted per common unit	$	(0.23	)	$	(0.13	)	$	(0.38	)	$	(0.17	)

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 June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
	(Unaudited) (In thousands)
Net income (loss)	$	(10,629	)	$	(2,511	)	$	(16,581	)	$	430
Hedging (gains) losses reclassified to earnings	(232		)	71			(491		)	425
Adjustment in fair value of derivatives	875			1,796			1,007			1,757
Comprehensive income (loss)	(9,986		)	(644		)	(16,065		)	2,612
Comprehensive loss attributable to non-controlling interest	—			71			—			109
Comprehensive income (loss) attributable to Crosstex Energy, L.P.	$	(9,986	)	$	(573	)	$	(16,065	)	$	2,721

See accompanying notes to condensed consolidated financial statements.

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CROSSTEX ENERGY, L.P.

Consolidated Statements of Changes in Partners’ Equity

Six Months Ended June 30, 2013



	Common Units				Preferred Units			General Partner Interest				Accumulated Other Comprehensive Income (loss)
	$			Units	$		Units	$			Units	Accumulated Other Comprehensive Income (loss)			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	362,778			21,553	—		—	—			—	—			362,778
Proceeds from exercise of unit options	617			109	—		—	—			—	—			617
Conversion of restricted units, net of units withheld for taxes	(1,261		)	196	—		—	—			—	—			(1,261		)
Stock-based compensation	4,013			—	—		—	4,042			—	—			8,055
Distributions	(52,687		)	—	—		760	(3,312		)	16	—			(55,999		)
Net income (loss)	(30,235		)	—	15,210		—	(1,556		)	—	—			(16,581		)
Hedging gains or losses reclassified to earnings	—			—	—		—	—			—	(491		)	(491		)
Adjustment in fair value of derivatives				—	—		—	—			—	1,007			1,007
Balance, June 30, 2013	$	1,115,754		88,601	$	169,347	15,832	$	20,958		1,569	$	1,147		$	1,307,206

See accompanying notes to condensed consolidated financial statements.

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CROSSTEX ENERGY, L.P.

Consolidated Statements of Cash Flows



	Six Months Ended June 30,
	2013			2012
	(Unaudited) (In thousands)
Cash flows from operating activities:
Net income (loss)	$	(16,581	)	$	430
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization	68,361			65,048
(Gain) loss on sale of property	95			(504		)
Deferred tax benefit	(5,931		)	(250		)
Non-cash stock-based compensation	8,055			4,993
Non-cash portion of derivatives gain	(287		)	(5,975		)
Amortization of debt issue costs	3,019			1,321
Amortization of discount on notes	948			948
Distribution of earnings from limited liability company	3,209			—
Changes in assets and liabilities:
Accounts receivable, accrued revenue and other	17,099			24,906
Natural gas and natural gas liquids, prepaid expenses and other	(9,435		)	(8,971		)
Accounts payable, accrued gas and crude oil purchases and other accrued liabilities	(6,588		)	(29,655		)
Net cash provided by operating activities	61,964			52,291
Cash flows from investing activities:
Additions to property and equipment	(258,910		)	(90,046		)
Proceeds from sale of property	18,072			632
Investment in limited liability company	(17,609		)	(52,250		)
Distribution from limited liability company in excess of earnings	5,546			—
Net cash used in investing activities	(252,901		)	(141,664		)
Cash flows from financing activities:
Proceeds from borrowings	196,500			548,500
Payments on borrowings	(267,500		)	(335,500		)
Increase in restricted cash	—			(245,100		)
Payments on capital lease obligations	(1,625		)	(1,536		)
Increase (decrease) in drafts payable	775			(5,985		)
Debt refinancing costs	(1,534		)	(4,962		)
Conversion of restricted units, net of units withheld for taxes	(1,261		)	(980		)
Issuance of common units	362,778			158,014
Distribution to partners	(55,999		)	(45,914		)
Proceeds from exercise of unit options	617			203
Contributions from general partner	—			3,449
Net cash provided by financing activities	232,751			70,189
Net increase (decrease) in cash and cash equivalents	41,814			(19,184		)
Cash and cash equivalents, beginning of period	124			24,143
Cash and cash equivalents, end of period	$	41,938		$	4,959
Cash paid for interest	$	44,314		$	36,252
Cash paid for income taxes	$	4,698		$	784

See accompanying notes to condensed consolidated financial statements.

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CROSSTEX ENERGY, L.P.

Notes to Condensed Consolidated Financial Statements

June 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 June 30, 2013 and 2012, we reclassified cash flow hedge (gains)/losses in the amounts of $(0.2) million and $0.1 million, respectively, and $(0.5) million and $0.4 million for the six months ended June 30, 2013 and 2012, respectively, included in other comprehensive income to revenues on the condensed consolidated statement of operations.

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(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

Pro Forma Information

The following unaudited pro forma condensed financial data for the three and six months ended June 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.



	Three Months Ended June 30, 2012			Six Months Ended June 30, 2012
	(in thousands)
Pro forma total revenues	$	433,653		$	926,272
Pro forma net loss	$	(3,885	)	$	(1,852	)
Pro forma net loss attributable to Crosstex Energy, L.P.	$	(3,814	)	$	(1,743	)
Pro forma net loss per common unit:
Basic and Diluted	$	(0.14	)	$	(0.18	)

(3) Long-Term Debt

As of June 30, 2013 and December 31, 2012, long-term debt consisted of the following (in thousands):

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CROSSTEX ENERGY, L.P.

Notes to Condensed Consolidated Financial Statements-(Continued)



	June 30, 2013		December 31, 2012
Bank credit facility (due 2016), interest based on Prime and/or LIBOR plus an applicable margin, interest rate at June 30, 2013 and December 31, 2012 was 5.0% and 4.3%, respectively	$	—	$	71,000
Senior unsecured notes (due 2018), net of discount of $8.7 million and $9.7 million, respectively, which bear interest at the rate of 8.875%	716,254		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	$	966,254	$	1,036,305

Credit Facility. As of June 30, 2013, there was $63.2 million in outstanding letters of credit and no outstanding borrowings under the Partnership’s bank credit facility, leaving approximately $571.8 million available for future borrowing based on the borrowing capacity of $635.0 million. As of June 30, 2013, based on our maximum permitted consolidated leverage ratio (as defined in the amended credit facility), we could borrow approximately $363.5 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 agreement, 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 agreement, 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.

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 Subsidiary 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 six months ended June 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 six months ended June 30, 2013 and 2012 as these amounts are not considered material.

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CROSSTEX ENERGY, L.P.

Notes to Condensed Consolidated Financial Statements-(Continued)

Condensed Consolidating Balance Sheets

June 30, 2013



	Guarantors		Non-Guarantors		Elimination		Consolidated
	(In thousands)
ASSETS
Total current assets	$	257,718	$	11,742	$	—	$	269,460
Property, plant and equipment, net	1,489,733		201,713		—		1,691,446
Total other assets	680,020		—		—		680,020
Total assets	$	2,427,471	$	213,455	$	—	$	2,640,926

LIABILITIES & PARTNERS’ CAPITAL
Total current liabilities	$	268,786	$	4,109	$	—	$	272,895
Long-term debt	966,254		—		—		966,254
Other long-term liabilities	94,571		—		—		94,571
Partners’ capital	1,097,860		209,346		—		1,307,206
Total liabilities & partners’ capital	$	2,427,471	$	213,455	$	—	$	2,640,926

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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CROSSTEX ENERGY, L.P.

Notes to Condensed Consolidated Financial Statements-(Continued)

Condensed Consolidating Statements of Operations

For the Three Months Ended June 30, 2013



	Guarantors			Non-Guarantors			Elimination			Consolidated
	(In thousands)
Total revenues	$	441,891		$	19,227		$	(6,529	)	$	454,589
Total operating costs and expenses	(444,078		)	(8,809		)	6,529			(446,358		)
Operating income (expense)	(2,187		)	10,418			—			8,231
Interest expense, net	(18,170		)	(3		)	—			(18,173		)
Other income	146			—			—			146
Income (loss) before non-controlling interest and income taxes	(20,211		)	10,415			—			(9,796		)
Income tax provision	(833		)	—			—			(833		)
Net income (loss) attributable to Crosstex Energy, L.P.	$	(21,044	)	$	10,415		$	—		$	(10,629	)

For the Three Months Ended June 30, 2012



	Guarantors			Non-Guarantors			Elimination			Consolidated
	(In thousands)
Total revenues	$	380,036		$	22,200		$	(7,834	)	$	394,402
Total operating costs and expenses	(373,280		)	(9,747		)	7,834			(375,193		)
Operating income	6,756			12,453			—			19,209
Interest expense, net	(21,320		)	—			—			(21,320		)
Other income	11			—			—			11
Income (loss) before non-controlling interest and income taxes	(14,553		)	12,453			—			(2,100		)
Income tax provision	(408		)	(3		)	—			(411		)
Net loss attributable to non-controlling interest	—			71			—			71
Net income (loss) income attributable to Crosstex Energy, L.P.	$	(14,961	)	$	12,521		$	—		$	(2,440	)

For the Six Months Ended June 30, 2013



	Guarantors			Non-Guarantors			Elimination			Consolidated
	(In thousands)
Total revenues	$	874,966		$	38,506		$	(13,194	)	$	900,278
Total operating costs and expenses	(873,835		)	(16,520		)	13,194			(877,161		)
Operating income	1,131			21,986			—			23,117
Interest expense, net	(38,444		)	—			—			(38,444		)
Other income	288			—			—			288
Income (loss) before non-controlling interest and income taxes	(37,025		)	21,986			—			(15,039		)
Income tax provision	(1,542		)	—			—			(1,542		)
Net income (loss) attributable to Crosstex Energy, L.P.	$	(38,567	)	$	21,986		$	—		$	(16,581	)

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CROSSTEX ENERGY, L.P.

Notes to Condensed Consolidated Financial Statements-(Continued)

For the Six Months Ended June 30, 2012



	Guarantors			Non-Guarantors			Elimination			Consolidated
	(In thousands)
Total revenues	$	791,439		$	44,477		$	(15,555	)	$	820,361
Total operating costs and expenses	(775,117		)	(18,856		)	15,555			(778,418		)
Operating income	16,322			25,621			—			41,943
Interest expense, net	(40,646		)	(57		)	—			(40,703		)
Other income	25			—			—			25
Income (loss) before non-controlling interest and income taxes	(24,299		)	25,564			—			1,265
Income tax provision	(828		)	(7		)	—			(835		)
Net loss attributable to non-controlling interest	—			109			—			109
Net income (loss) income attributable to Crosstex Energy, L.P.	$	(25,127	)	$	25,666		$	—		$	539

Condensed Consolidating Statements of Cash Flows

For the Six Months Ended June 30, 2013



	Guarantors			Non-Guarantors			Elimination		Consolidated
	(In thousands)
Net cash flows provided by operating activities	$	33,165		$	28,799		$	—	$	61,964
Net cash flows used in investing activities	$	(240,557	)	$	(12,344	)	$	—	$	(252,901	)
Net cash flows provided by (used in) financing activities	$	232,751		$	(16,455	)	$	16,455	$	232,751

For the Six Months Ended June 30, 2012



	Guarantors			Non-Guarantors			Elimination		Consolidated
	(In thousands)
Net cash flows provided by operating activities	$	20,468		$	31,823		$	—	$	52,291
Net cash flows used in investing activities	$	(141,037	)	$	(627	)	$	—	$	(141,664	)
Net cash flows provided by (used in) financing activities	$	70,189		$	(30,626	)	$	30,626	$	70,189

(4) Other Long-term Liabilities

The Partnership has the following assets under capital leases as of June 30, 2013 (in thousands):



Compressor equipment	$	37,199
Less: Accumulated amortization	(15,538		)
Net assets under capital leases	$	21,661

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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 June 30, 2013 (in thousands):



Fiscal Year
2013	$	2,291
2014	4,582
2015	4,582
2016	4,582
2017	6,910
Thereafter	5,189
Less: Interest	(4,492		)
Net minimum lease payments under capital lease	23,644
Less: Current portion of net minimum lease payments	(4,449		)
Long-term portion of net minimum lease payments	$	19,195

(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.

On January 14, 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 June 30, 2013, the Partnership sold an aggregate of 1,947,576 common units under the EDA and prior equity distribution agreement with BMOCM, generating proceeds of approximately $36.4 million (net of approximately $0.6 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

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with the 2018 Notes, “all senior unsecured notes”), the Partnership must make distributions of 100% of available cash, as defined in the partnership agreement, within 45 days following the end of each quarter.

The Partnership’s fourth quarter 2012 distributions on its common and preferred units of $0.33 per unit were paid on February 14, 2013 with the preferred units paid-in-kind (“PIK”) through the issuance of 375,382 preferred units. The Partnership's first quarter 2013 distributions on its common and preferred units of $0.33 per unit were paid on May 13, 2013, with the preferred units paid-in-kind through the issuance of 384,731 preferred units. The Partnership declared a second quarter 2013 distribution on its common and preferred units of $0.33 per unit to be paid on August 12, 2013, with the distribution on the preferred units to be paid-in-kind.

The Partnership had common units and preferred units outstanding during the three and six months ended June 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 June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
Limited partners’ interest in net loss	$	(18,448	)	$	(7,253	)	$	(30,235	)	$	(9,056	)
Distributed earnings allocated to:
Common units (1)(2)	$	26,955		$	18,021		$	52,315		$	34,804
Unvested restricted units (1)(2)	410			359			797			698
Total distributed earnings	$	27,365		$	18,380		$	53,112		$	35,502
Undistributed loss allocated to:
Common units	$	(45,127	)	$	(25,148	)	$	(82,096	)	$	(43,699	)
Unvested restricted units	(686		)	(485		)	(1,250		)	(859		)
Total undistributed loss	$	(45,813	)	$	(25,633	)	$	(83,346	)	$	(44,558	)
Net loss allocated to:
Common units	$	(18,172	)	$	(7,127	)	$	(29,782	)	$	(8,896	)
Unvested restricted units	(276		)	(126		)	(453		)	(160		)
Total limited partners’ interest in net loss	$	(18,448	)	$	(7,253	)	$	(30,235	)	$	(9,056	)
Basic and diluted net loss per unit:
Basic and diluted common unit	$	(0.23	)	$	(0.13	)	$	(0.38	)	$	(0.17	)

__________________________________________________

(1) Three months ended June 30, 2013 represents a declared distribution of $0.33 per unit payable on August 12, 2013 and

Six months ended June 30, 2013 represents distributions paid of $0.33 per unit on May 13, 2013 and distributions

declared of $0.33 per unit payable August 12, 2013.

(2) Three months ended June 30, 2012 represents a declared distribution of $0.33 per unit paid on August 14, 2012.

Six months ended June 30, 2012 represents distributions paid of $0.33 per unit on May 15, 2012 and distributions

declared of $0.33 per unit paid August 14, 2012.

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The following are the unit amounts used to compute the basic and diluted earnings per limited partner unit for the three and six months ended June 30, 2013 and 2012 (in thousands):



	Three Months Ended June 30,		Six Months Ended June 30,
	2013	2012	2013	2012
Basic and diluted weighted average units outstanding:
Weighted average limited partner common units outstanding	81,670	55,998	79,265	53,427

All common unit equivalents were antidilutive in the three and six months ended June 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 June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
Income allocation for incentive distributions	$	1,470		$	1,130		$	2,874		$	2,108
Stock-based compensation attributable to CEI’s restricted shares	(1,507		)	(1,144		)	(3,977		)	(2,276		)
General Partner interest in net income (loss)	(275		)	(26		)	(453		)	57
General Partner share of net loss	$	(312	)	$	(40	)	$	(1,556	)	$	(111	)

(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 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

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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 June 30,				Six Months Ended June 30,
	2013		2012		2013		2012
Cost of share-based compensation charged to general and administrative expense	$	2,583	$	2,179	$	7,075	$	4,353
Cost of share-based compensation charged to operating expense	421		316		980		640
Total amount charged to income	$	3,004	$	2,495	$	8,055	$	4,993

(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 six months ended June 30, 2013 is provided below:



	Six Months Ended June 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	580,785			15.83
Vested*	(277,404		)	9.00
Forfeited	(36,758		)	12.43
Non-vested, end of period	1,269,782			$	15.43
Aggregate intrinsic value, end of period (in thousands)	$	26,183

_____________________________________________

* Vested units include 81,321 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 June 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 six months ended June 30, 2013 and 2012 are provided below (in thousands):



	Three Months Ended June 30,				Six Months Ended June 30,
Crosstex Energy, L.P. Restricted Incentive Units:	2013		2012		2013		2012
Aggregate intrinsic value of units vested	$	279	$	280	$	4,293	$	3,806
Fair value of units vested	$	222	$	281	$	2,496	$	1,608

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As of June 30, 2013, there was $9.8 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.

A summary of the unit option activity for the six months ended June 30, 2013 is provided below:



	Six Months Ended June 30, 2013
Crosstex Energy, L.P. Unit Options:	Number of Units			Weighted Average Exercise Price
Outstanding, beginning of period	349,018			$	7.25
Exercised	(109,438		)	5.68
Forfeited	(2,681		)	26.75
Outstanding, end of period	236,899			$	7.76
Options exercisable at end of period	236,899
Weighted average contractual term (years) end of period:
Options outstanding	5.8
Options exercisable	5.8
Aggregate intrinsic value end of period (in thousands):
Options outstanding	$	3,312
Options exercisable	$	3,312

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 six months ended June 30, 2013 and 2012 are provided below (in thousands):



	Three Months Ended June 30,				Six Months Ended June 30,
Crosstex Energy, L.P. Unit Options:	2013		2012		2013		2012
Intrinsic value of unit options exercised	$	546	$	67	$	1,361	$	478
Fair value of unit options vested	$	—	$	—	$	254	$	277

As of June 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 the Crosstex Energy, Inc. 2009 Long-Term Incentive Plan (the “CEI Plan”). Amendments to the CEI Plan include 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 includes 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 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 six months ended June 30, 2013 is provided below:

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	Six Months Ended June 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	587,571			14.69
Vested*	(281,145		)	7.77
Forfeited	(43,692		)	11.43
Non-vested, end of period	1,591,896			$	11.87
Aggregate intrinsic value, end of period (in thousands)	$	31,456

__________________________________________________

* Vested shares include 79,723 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 June 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 six months ended June 30, 2013 and 2012 are provided below (in thousands):



	Three Months Ended June 30,				Six Months Ended June 30,
Crosstex Energy, Inc. Restricted Shares:	2013		2012		2013		2012
Aggregate intrinsic value of shares vested	$	298	$	391	$	4,303	$	3,127
Fair value of shares vested	$	217	$	260	$	2,184	$	1,266

As of June 30, 2013, there was $9.8 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 June 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.

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

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CROSSTEX ENERGY, L.P.

Notes to Condensed Consolidated Financial Statements-(Continued)

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 June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
Change in fair value of derivatives that are not designated as hedging instruments	$	388		$	(7,095	)	$	(244	)	$	(5,913	)
Realized (gains) losses on derivatives	(802		)	2,213			314			3,238
Ineffective portion of derivatives designated as hedging instruments	(31		)	(23		)	(43		)	(61		)
(Gains) losses on derivatives	$	(445	)	$	(4,905	)	$	27		$	(2,736	)

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



	June 30, 2013			December 31, 2012
Fair value of derivative assets — current, designated	$	1,070		$	724
Fair value of derivative assets — current, non-designated	2,218			2,510
Fair value of derivative assets — long term, designated	112			—
Fair value of derivative liabilities — current, designated	(3		)	(105		)
Fair value of derivative liabilities — current, non-designated	(670		)	(1,205		)
Net fair value of derivatives	$	2,727		$	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 June 30, 2013 (all gas volumes are expressed in million British thermal units ("MMBtus"), liquids volumes are expressed in gallons and condensate volumes are expressed in barrels). The remaining terms of the contracts extend no later than December 2014.



	June 30, 2013
Transaction Type	Volume		Fair Value
	(In thousands)
Cash Flow Hedges:
Liquids swaps (short contracts)	(9,285	)	$	1,179
Total swaps designated as cash flow hedges			$	1,179

Mark to Market Derivatives:*
Swing swaps (long contracts)	930		$	135
Physical offsets to swing swap transactions (short contracts)	(930	)	(112		)
Swing swaps (short contracts)	(1,008	)	—
Physical offsets to swing swap transactions (long contracts)	1,008		—

Basis swaps (long contracts)	636		(35		)
Physical offsets to basis swap transactions (short contracts)	(636	)	2,042
Basis swaps (short contracts)	(636	)	4
Physical offsets to basis swap transactions (long contracts)	636		(2,255		)

Processing margin hedges — liquids (short contracts)	(4,634	)	1,182
Processing margin hedges — gas (long contracts)	494		(89		)

Liquids swaps - non-designated (short contracts)	(2,559	)	837

Storage swap transactions — gas (short contracts)	(100	)	14
Storage swap transactions — liquids inventory (short contracts)	(1,890	)	16
Storage swap transactions — condensate inventory (short contracts)	(31	)	(191		)
Total mark to market derivatives			$	1,548

__________________________________________________

* All are gas contracts except for liquids swaps (designated or non-designated), processing margin hedges - liquids, storage swap transactions - liquids inventory and storage swap transactions - condensate inventory.

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 June 30, 2013 of $3.4 million would be reduced to $3.1 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):

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CROSSTEX ENERGY, L.P.

Notes to Condensed Consolidated Financial Statements-(Continued)



	Three Months Ended June 30,				Six Months Ended June 30,
Increase (Decrease) in Midstream Revenue	2013		2012		2013		2012
Liquids realized gain included in Midstream revenue	$	380	$	407	$	660	$	395

Natural Gas

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

Liquids

As of June 30, 2013, an unrealized derivative fair value net gain of $1.1 million related to cash flow hedges of liquids price risk was recorded in AOCI. Of that amount, a net gain of $1.0 million is expected to be reclassified into earnings through June 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
June 30, 2013	$	1,548	$	—	$	—	$	1,548

(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 (liabilities) measured at fair value on a recurring basis are summarized below (in thousands):



	June 30, 2013 Level 2		December 31, 2012 Level 2
Commodity Swaps*	$	2,727	$	1,924
Total	$	2,727	$	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):



	June 30, 2013				December 31, 2012
	Carrying Value		Fair Value		Carrying Value		Fair Value
Long-term debt	$	966,254	$	1,025,875	$	1,036,305	$	1,118,875
Obligations under capital lease	$	23,644	$	25,384	$	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 no borrowings under its revolving credit facility included in long-term debt as of June 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 June 30, 2013 and December 31, 2012, the Partnership also had borrowings totaling $716.3 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% as of June 30, 2013 and December 31, 2012. The fair value of all senior unsecured notes as of June 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

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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.

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.

(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").

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 June 30, 2013
Sales to external customers	$	119,725		$	85,360		$	185,562		$	63,942		$	—		$	454,589
Sales to affiliates	16,119			17,108			92			—			(33,319		)	—
Purchased gas, NGLs and crude oil	(115,395		)	(59,677		)	(166,906		)	(50,434		)	33,319			(359,093		)
Operating expenses	(7,813		)	(12,474		)	(8,003		)	(8,489		)	—			(36,779		)
Segment profit	$	12,636		$	30,317		$	10,745		$	5,019		$	—		$	58,717

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Gain (loss) on derivatives	$	582		$	(271	)	$	314		$	(180	)	$	—		$	445
Depreciation, amortization and impairments	$	(3,152	)	$	(19,850	)	$	(8,215	)	$	(2,748	)	$	(670	)	$	(34,635	)
Capital expenditures	$	7,935		$	2,229		$	131,499		$	4,738		$	988		$	147,389
Identifiable assets	$	280,976		$	1,024,118		$	842,767		$	314,459		$	178,606		$	2,640,926
Three Months Ended June 30, 2012
Sales to external customers	$	121,479		$	61,236		$	211,687