Attached files
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EX-31.2 - EXHIBIT 31.2 - CROSSTEX ENERGY INC | c00195exv31w2.htm |
EX-32.1 - EXHIBIT 32.1 - CROSSTEX ENERGY INC | c00195exv32w1.htm |
EX-31.1 - EXHIBIT 31.1 - CROSSTEX ENERGY INC | c00195exv31w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
þ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended March 31, 2010
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: 000-50536
CROSSTEX ENERGY, INC.
(Exact name of registrant as specified in its charter)
Delaware | 52-2235832 | |
(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
(Registrants telephone number, including area code)
(Registrants 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 þ
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 o
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 o | Accelerated filer þ | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes o No þ
As of April 30, 2010, the Registrant had 46,575,010 shares of common stock outstanding.
TABLE OF CONTENTS
Item | Page | |||||||
DESCRIPTION |
||||||||
PART IFINANCIAL INFORMATION |
||||||||
1. FINANCIAL STATEMENTS |
3 | |||||||
25 | ||||||||
32 | ||||||||
35 | ||||||||
PART IIOTHER INFORMATION |
||||||||
35 | ||||||||
35 | ||||||||
35 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 |
2
Table of Contents
CROSSTEX ENERGY, INC.
Condensed Consolidated Balance Sheets
Condensed Consolidated Balance Sheets
March 31, | December 31, | |||||||
2010 | 2009 | |||||||
(Unaudited) | ||||||||
(In thousands) | ||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 6,561 | $ | 10,703 | ||||
Accounts and notes receivable, net: |
||||||||
Trade, accrued revenue and other |
201,963 | 214,750 | ||||||
Fair value of derivative assets |
8,366 | 9,112 | ||||||
Natural gas and natural gas liquids, prepaid expenses and other |
12,131 | 14,692 | ||||||
Total current assets |
229,021 | 249,257 | ||||||
Property and equipment, net of accumulated depreciation of $272,480 and $259,057, respectively |
1,239,300 | 1,280,197 | ||||||
Fair value of derivative assets |
6,168 | 5,665 | ||||||
Intangible assets, net of accumulated amortization of $124,681 and $115,813, respectively |
526,028 | 534,897 | ||||||
Other assets, net |
30,756 | 10,217 | ||||||
Total assets |
$ | 2,031,273 | $ | 2,080,233 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable, drafts payable and accrued gas purchases |
$ | 170,536 | $ | 179,710 | ||||
Fair value of derivative liabilities |
12,468 | 30,337 | ||||||
Current portion of long-term debt |
10,995 | 28,602 | ||||||
Other current liabilities |
39,821 | 52,399 | ||||||
Total current liabilities |
233,820 | 291,048 | ||||||
Long-term debt |
755,148 | 845,100 | ||||||
Other long-term liabilities |
20,252 | 20,797 | ||||||
Deferred tax liability |
92,237 | 95,272 | ||||||
Fair value of derivative liabilities |
5,927 | 12,106 | ||||||
Commitments and contingencies |
¾ | ¾ | ||||||
Stockholders equity |
923,889 | 815,910 | ||||||
Total liabilities and stockholders equity |
$ | 2,031,273 | $ | 2,080,233 | ||||
See accompanying notes to condensed consolidated financial statements.
3
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CROSSTEX ENERGY, INC.
Consolidated Statements of Operations
Consolidated Statements of Operations
Three Months Ended March 31, | ||||||||
2010 | 2009 | |||||||
(Unaudited) | ||||||||
(In thousands, except per share | ||||||||
amounts) | ||||||||
Revenues: |
||||||||
Midstream |
$ | 432,452 | $ | 352,437 | ||||
Gas and NGL marketing activities |
2,340 | 721 | ||||||
Total revenues |
434,792 | 353,158 | ||||||
Operating costs and expenses: |
||||||||
Purchased gas |
353,597 | 284,212 | ||||||
Operating expenses |
26,465 | 27,879 | ||||||
General and administrative |
13,481 | 14,500 | ||||||
Gain on sale of property |
(14,343 | ) | (828 | ) | ||||
(Gain) loss on derivatives |
3,696 | (4,336 | ) | |||||
Impairments |
998 | ¾ | ||||||
Depreciation and amortization |
27,110 | 28,777 | ||||||
Total operating costs and expenses |
411,004 | 350,204 | ||||||
Operating income |
23,788 | 2,954 | ||||||
Other income (expense): |
||||||||
Interest expense, net of interest income |
(26,855 | ) | (17,534 | ) | ||||
Loss on extinguishment of debt |
(14,713 | ) | (4,669 | ) | ||||
Other income (expense) |
182 | (22 | ) | |||||
Total other income (expense) |
(41,386 | ) | (22,225 | ) | ||||
Loss from continuing operations before income taxes |
(17,598 | ) | (19,271 | ) | ||||
Income tax (provision) benefit from continuing operations |
2,585 | (2,041 | ) | |||||
Loss from continuing operations |
(15,013 | ) | (21,312 | ) | ||||
Income from discontinued operations, net of tax of $0 and $(484),
respectively |
¾ | 3,265 | ||||||
Net loss |
(15,013 | ) | (18,047 | ) | ||||
Less: Interest of non-controlling partners in the Partnerships net loss: |
||||||||
Interest of non-controlling partners in the Partnerships continuing
operations |
(9,611 | ) | (11,648 | ) | ||||
Interest of non-controlling partners in the Partnerships
discontinued operations |
¾ | 2,443 | ||||||
Total interest of non-controlling partners in the Partnership |
(9,611 | ) | (9,205 | ) | ||||
Net loss attributable to Crosstex Energy, Inc. |
$ | (5,402 | ) | $ | (8,842 | ) | ||
Net loss per common share: |
||||||||
Basic and diluted |
$ | (0.11 | ) | $ | (0.19 | ) | ||
Weighted average shares outstanding: |
||||||||
Basic and diluted |
46,575 | 46,439 | ||||||
Amounts attributable to Crosstex Energy, Inc. common shareholders: |
||||||||
Loss from continuing operations, net of tax and non-controlling
interest |
$ | (5,402 | ) | $ | (9,664 | ) | ||
Discontinued operations, net of tax and non-controlling interest |
| 822 | ||||||
Net loss attributable to Crosstex Energy, Inc. |
$ | (5,402 | ) | $ | (8,842 | ) | ||
See accompanying notes to condensed consolidated financial statements.
4
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CROSSTEX ENERGY, INC.
Consolidated Statement of Changes in Stockholders Equity
Three Months Ended March 31, 2010
Consolidated Statement of Changes in Stockholders Equity
Three Months Ended March 31, 2010
Accumulated | ||||||||||||||||||||||||||||
Additional | Retained | Other | Non- | Total | ||||||||||||||||||||||||
Common Stock | Paid In | Earnings | Comprehensive | Controlling | Stockholders | |||||||||||||||||||||||
Shares | Amount | Capital | (Deficit) | Income | Interest | Equity | ||||||||||||||||||||||
(Unaudited) | ||||||||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||
Balance, December 31, 2009 |
46,524 | $ | 464 | $ | 271,669 | $ | (43,279 | ) | $ | (568 | ) | $ | 587,624 | $ | 815,910 | |||||||||||||
Issuance of units by the Partnership to non-controlling
interest |
¾ | ¾ | ¾ | ¾ | ¾ | 120,786 | 120,786 | |||||||||||||||||||||
Change in equity due to issuance of units by the
Partnership |
¾ | ¾ | (32,769 | ) | ¾ | 115 | 32,586 | (68 | ) | |||||||||||||||||||
Stock-based compensation |
¾ | ¾ | 1,160 | ¾ | ¾ | 1,424 | 2,584 | |||||||||||||||||||||
Net loss |
¾ | ¾ | ¾ | (5,402 | ) | ¾ | (9,611 | ) | (15,013 | ) | ||||||||||||||||||
Conversion of restricted stock to common, net of shares
withheld for taxes |
51 | 1 | (130 | ) | ¾ | ¾ | ¾ | (129 | ) | |||||||||||||||||||
Hedging gains or losses reclassified to earnings |
¾ | ¾ | ¾ | ¾ | 238 | 1,024 | 1,262 | |||||||||||||||||||||
Adjustment in fair value of derivatives |
¾ | ¾ | ¾ | ¾ | 70 | 303 | 373 | |||||||||||||||||||||
Non-controlling partners impact of conversion of
restricted units and option
exercises |
¾ | ¾ | ¾ | ¾ | ¾ | (1,632 | ) | (1,632 | ) | |||||||||||||||||||
Distributions to non-controlling interest |
¾ | ¾ | ¾ | ¾ | ¾ | (184 | ) | (184 | ) | |||||||||||||||||||
Balance, March 31, 2010 |
46,575 | $ | 465 | $ | 239,930 | $ | (48,681 | ) | $ | (145 | ) | $ | 732,320 | $ | 923,889 | |||||||||||||
5
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CROSSTEX ENERGY, INC.
Consolidated Statements of Comprehensive Income
Consolidated Statements of Comprehensive Income
Three Months Ended March 31, | ||||||||
2010 | 2009 | |||||||
(Unaudited) | ||||||||
(In thousands) | ||||||||
Net loss |
$ | (15,013 | ) | $ | (18,047 | ) | ||
Non-controlling partners share of other comprehensive income in
the Partnership, net of taxes of $68 |
115 | ¾ | ||||||
Hedging gains (losses) reclassified to earnings, net of taxes of
$140 and $(537), respectively |
238 | (912 | ) | |||||
Adjustment in fair value of derivatives, net of taxes of $41 and
$(40), respectively |
70 | (67 | ) | |||||
Comprehensive loss |
(14,590 | ) | (19,026 | ) | ||||
Comprehensive loss attributable to the non-controlling interest |
(9,611 | ) | (9,205 | ) | ||||
Comprehensive loss attributable to Crosstex Energy, Inc. |
$ | (4,979 | ) | $ | (9,821 | ) | ||
See accompanying notes to condensed consolidated financial statements.
6
Table of Contents
CROSSTEX ENERGY, INC.
Consolidated Statements of Cash Flows
Consolidated Statements of Cash Flows
Three Months Ended March 31, | ||||||||
2010 | 2009 | |||||||
(Unaudited) | ||||||||
(In thousands) | ||||||||
Cash flows from operating activities: |
||||||||
Net loss |
$ | (15,013 | ) | $ | (18,047 | ) | ||
Adjustments to reconcile net income to net cash provided by (used in)
operating activities: |
||||||||
Depreciation and amortization |
27,110 | 34,735 | ||||||
Gain on sale of property |
(14,343 | ) | (879 | ) | ||||
Impairments |
998 | ¾ | ||||||
Deferred tax expense (benefit) |
(3,285 | ) | 1,813 | |||||
Non-cash stock-based compensation |
2,584 | 1,632 | ||||||
Amortization of debt issue costs |
2,128 | 1,439 | ||||||
Amortization of discount on notes |
263 | |||||||
Derivatives mark to market interest rate settlement |
(24,160 | ) | | |||||
Non-cash derivatives loss |
2,288 | 202 | ||||||
Non-cash loss on debt extinguishment |
5,396 | 4,669 | ||||||
Payment of debt from interest paid-in-kind |
(11,558 | ) | ¾ | |||||
Changes in assets and liabilities: |
||||||||
Accounts receivable, accrued revenue and other |
12,701 | 95,915 | ||||||
Natural gas, natural gas liquids , prepaid expenses and other |
2,214 | 2,522 | ||||||
Accounts payable, accrued gas purchases, and other accrued liabilities |
(12,646 | ) | (113,968 | ) | ||||
Net cash provided by (used in) operating activities |
(25,323 | ) | 10,033 | |||||
Cash flows from investing activities: |
||||||||
Additions to property and equipment |
(9,670 | ) | (48,708 | ) | ||||
Insurance recoveries on property and equipment |
874 | 3,115 | ||||||
Proceeds from sale of property |
39,675 | 11,019 | ||||||
Net cash provided by (used in) investing activities |
30,879 | (34,574 | ) | |||||
Cash flows from financing activities: |
||||||||
Proceeds from borrowings |
809,862 | 189,550 | ||||||
Payments on borrowings |
(908,160 | ) | (118,903 | ) | ||||
Proceeds from capital lease obligations |
¾ | 1,489 | ||||||
Payments on capital lease obligations |
(556 | ) | (624 | ) | ||||
Decrease in drafts payable |
(1,622 | ) | (21,514 | ) | ||||
Debt refinancing costs |
(28,063 | ) | (13,364 | ) | ||||
Distributions to non-controlling partners in the Partnership |
(184 | ) | (7,488 | ) | ||||
Common dividends paid |
¾ | (4,234 | ) | |||||
Partnership equity transactions |
(1,632 | ) | (64 | ) | ||||
Conversion of restricted stock, net of shares withheld for taxes |
(129 | ) | (268 | ) | ||||
Proceeds from issuance of Partnership units |
120,786 | ¾ | ||||||
Net cash provided by (used in) financing activities |
(9,698 | ) | 24,580 | |||||
Net increase (decrease) in cash and cash equivalents |
(4,142 | ) | 39 | |||||
Cash and cash equivalents, beginning of period |
10,703 | 13,959 | ||||||
Cash and cash equivalents, end of period |
$ | 6,561 | $ | 13,998 | ||||
Cash paid for interest |
$ | 22,974 | $ | 17,333 | ||||
Cash paid (refund) from income taxes |
$ | 1,195 | $ | (178 | ) |
See accompanying notes to condensed consolidated financial statements.
7
Table of Contents
CROSSTEX ENERGY, INC.
Notes to Condensed Consolidated Financial Statements (Continued)
Notes to Condensed Consolidated Financial Statements (Continued)
(1) General
Unless the context requires otherwise, references to we, us, our, CEI or the Company
mean Crosstex Energy, Inc. and its consolidated subsidiaries.
CEI, a Delaware corporation formed on April 28, 2000, is engaged, through its subsidiaries, in
the gathering, transmission, processing and marketing of natural gas and natural gas liquids
(NGLs). The Company connects the wells of natural gas producers in the geographic areas of its
gathering systems in order to gather for a fee or purchase the gas production, processes natural
gas for the removal of NGLs, transports natural gas and NGLs and ultimately provides natural gas
and NGLs to a variety of markets. In addition, the Company purchases natural gas and NGLs from
producers not connected to its gathering systems for resale and markets natural gas and NGLs on
behalf of producers for a fee.
The accompanying condensed consolidated financial statements include the assets, liabilities
and results of operations of the Company, its majority owned subsidiaries and Crosstex Energy, L.P.
(herein referred to as the Partnership or CELP), a publicly traded Delaware limited partnership.
The Partnership is included because CEI controls the general partner of the Partnership.
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 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 Companys annual report on Form
10-K for the year ended December 31, 2009.
(a) Managements Use of Estimates
The preparation of financial statements in accordance with accounting principles generally
accepted in the United States of America requires management of the Company 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) Recent Accounting Pronouncements
In January 2010, the FASB issued Accounting Standards Update (ASU) 2010-06, Improving
Disclosures about Fair Value Measurements, which amends FASB ASC Topic 820, Fair Value Measurements
and Disclosures. The ASU requires reporting entities to make new disclosures about recurring or
nonrecurring fair-value measurements including significant transfers into and out of Level 1 and
Level 2 fair-value measurements and information about purchases, sales, issuances, and settlements
on a gross basis in the reconciliation of Level 3 fair-value measurements. The ASU also clarifies
existing fair-value measurement disclosure guidance about the level of disaggregation, inputs, and
valuation techniques. The Company has evaluated the ASU and determined that it is not currently
impacted by the update.
(2) Asset Dispositions
The Partnership sold its Midstream assets in Alabama, Mississippi and south Texas for $217.6
million in August 2009. Sales proceeds, net of transaction costs and other obligations associated
with the sale, of $212.0 million were used to repay long-term indebtedness and the Partnership
recognized a gain on sale of $97.2 million. On October 1, 2009, the Partnership sold its Treating
assets for net proceeds of $265.4 million. Sales proceeds, net of transaction costs and other
obligations associated with the sale, of $258.1 million were used to repay long-term indebtedness
and the Partnership recognized a gain on sale of $86.3 million.
8
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CROSSTEX ENERGY, INC.
Notes to Condensed Consolidated Financial Statements (Continued)
The revenues, operating expenses, general and administrative expenses associated directly with
the sold assets, depreciation and amortization expense, allocated income taxes and an allocated
interest expense related to the operations of the sold assets have been segregated from continuing
operations and reported as discontinued operations for the three months ended March 31, 2009.
Interest expense of $9.1 million for the three months ended March 31, 2009 was allocated to
discontinued operations related to the
debt repaid from the proceeds from the asset dispositions using average historical interest rates.
No corporate office general and administrative expenses have been allocated to income from
discontinued operations. Following are revenues and income from discontinued operations (in
thousands):
Three Months Ended | ||||
March 31, 2009 | ||||
Midstream revenues |
$ | 179,200 | ||
Treating revenues |
16,277 | |||
Income from discontinued operations, net of tax |
3,265 |
(3) Long-Term Debt
As of March 31, 2010 and December 31, 2009, long-term debt consisted of the following (in
thousands):
March 31, | December 31, | |||||||
2010 | 2009 | |||||||
Bank credit facility, interest based on Prime and/or LIBOR plus an applicable margin, interest
rate (per the facility) at December 31, 2009 was 6.75% |
$ | ¾ | $ | 529,614 | ||||
New credit facility, interest based on Prime and/or LIBOR plus an applicable margin, interest rate (per the new facility) at March 31, 2010 was 4.66% |
38,000 | ¾ | ||||||
Senior secured notes (including PIK notes (1) of $9.5 million), weighted average interest rate at December 31, 2009 was 10.5% |
¾ | 326,034 | ||||||
Senior unsecured notes, net of discount of $14,911, which bear interest at the rate of 8.875% |
710,089 | ¾ | ||||||
Series B secured note assumed in the Eunice transaction, which bears interest at the rate of 9.5% |
18,054 | 18,054 | ||||||
766,143 | 873,702 | |||||||
Less current portion |
(10,995 | ) | (28,602 | ) | ||||
Debt classified as long-term |
$ | 755,148 | $ | 845,100 | ||||
(1) | The senior secured notes began accruing additional interest of 1.25% per annum in February 2009 (the PIK notes) in the form of an increase in the principal amounts unless the leverage ratio is less than 4.25 to 1.00 at the end of any fiscal quarter. These notes were paid in full in February 2010. |
New Credit Facility. In February 2010, the Partnership amended and restated its existing
secured bank credit facility with a new syndicated secured bank credit facility (the new credit
facility). The new credit facility has a borrowing capacity of $420.0 million and matures in
February 2014. Net proceeds from the new credit facility along with net proceeds from the senior
unsecured notes discussed under Senior Unsecured Notes below were used to, among other things,
repay the Partnerships credit facility and senior secured notes including PIK notes in February
2010. The Partnership recognized a loss on extinguishment of debt of $14.7 million when the debt
was repaid due to make-whole interest payments on the senior secured debt of $9.3 million and the
write-off of unamortized debt costs of $5.4 million. Debt refinancing costs totaling $28.1 million
associated with new borrowings, including the senior unsecured notes, are included in other noncurrent assets
as of March 31, 2010 and amortized to interest expense over the term of the related debt.
As of March 31, 2010, $187.5 million was outstanding under the new bank credit facility,
including $149.5 million of letters of credit, leaving approximately $232.5 million available for
future borrowing.
The new credit facility is guaranteed by substantially all of the Partnerships subsidiaries
and is secured by first priority liens on substantially all of the Partnerships 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 the Partnerships equity interests in
substantially all of its subsidiaries.
The Partnership may prepay all loans under the new credit facility at any time without premium
or penalty (other than
customary LIBOR breakage costs), subject to certain notice requirements. The new 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 will not require any reduction of the lenders commitments under the new
credit facility.
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CROSSTEX ENERGY, INC.
Notes to Condensed Consolidated Financial Statements (Continued)
Under the new credit facility, borrowings bear interest at the Partnerships option at the
Eurodollar Rate (the British Bankers Association LIBOR Rate) plus an applicable margin or the Base
Rate (the highest of the Federal Funds Rate plus 0.50%, the 30-day Eurodollar Rate plus 1.0%, or
the administrative agents prime rate) plus an applicable margin. The Partnership pays a per annum
fee on all letters of credit issued under the new credit facility and a commitment fee of 0.50% per
annum on the unused availability under the new credit facility. The letter of credit fee and the
applicable margins for the interest rate vary quarterly based on the leverage ratio (as defined in
the new 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) and
are as follows:
Eurodollar Rate | Letter of Credit | |||||||||||
Leverage Ratio | Base Rate Loans | Loans | Fees | |||||||||
Greater than or equal to 5.00 to 1.00 |
3.25 | % | 4.25 | % | 4.25 | % | ||||||
Greater than or equal to 4.50 to
1.00 and less than 5.00 to 1.00 |
3.00 | % | 4.00 | % | 4.00 | % | ||||||
Greater than or equal to 4.00 to
1.00 and less than 4.50 to 1.00 |
2.75 | % | 3.75 | % | 3.75 | % | ||||||
Greater than or equal to 3.50 to
1.00 and less than 4.00 to 1.00 |
2.50 | % | 3.50 | % | 3.50 | % | ||||||
Less than 3.50 to 1.00 |
2.25 | % | 3.25 | % | 3.25 | % |
Based on the forecasted leverage ratio for 2010, the Partnership expects the applicable margin
for the interest rate and letter of credit fee to be at the mid-point of these ranges. The new
credit facility does not have a floor for the Base Rate or the Eurodollar Rate.
The new credit facility includes financial covenants that are tested on a quarterly basis,
based on the rolling four-quarter period that ends on the last day of each fiscal quarter (except
for the interest coverage ratio, which builds to a four-quarter test during 2010).
The maximum permitted leverage ratio is as follows:
| 5.75 to 1.00 for the fiscal quarters ending March 31, 2010 and June 30, 2010; | ||
| 5.50 to 1.00 for the fiscal quarter ending September 30, 2010; | ||
| 5.25 to 1.00 for the fiscal quarter ending December 31, 2010; | ||
| 5.00 to 1.00 for the fiscal quarter ending March 31, 2011; | ||
| 4.75 to 1.00 for the fiscal quarter ending June 30, 2011; and | ||
| 4.50 to 1.00 for the fiscal quarter ending September 30, 2011 and each fiscal quarter thereafter. |
The maximum permitted senior leverage ratio (as defined in the new credit facility, but
generally computed as the ratio of total secured funded debt to consolidated earnings before
interest, taxes, depreciation, amortization and certain other non-cash charges), is 2.50 to 1.00.
The minimum consolidated interest coverage ratio (as defined in the new credit facility, but
generally computed as the ratio of consolidated earnings before interest, taxes, depreciation,
amortization and certain other non-cash charges to consolidated interest charges) is as follows:
| 1.50 to 1.00 for the fiscal quarter ending March 31, 2010; | ||
| 1.75 to 1.00 for the fiscal quarters ending June 30, 2010 through December 31, 2010; | ||
| 2.00 to 1.00 for the fiscal quarter ending March 31, 2011; | ||
| 2.25 to 1.00 for the fiscal quarter ending June 30, 2011; and | ||
| 2.50 to 1.00 for the fiscal quarter ending September 30, 2011 and each fiscal quarter thereafter. |
10
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CROSSTEX ENERGY, INC.
Notes to Condensed Consolidated Financial Statements (Continued)
In addition, the new credit facility contains various covenants that, among other
restrictions, limit the Partnerships ability to:
| grant or assume liens; | ||
| make investments; | ||
| incur or assume indebtedness; | ||
| engage in mergers or acquisitions; | ||
| sell, transfer, assign or convey assets; | ||
| repurchase its equity, make distributions and certain other restricted payments; | ||
| change the nature of its business; | ||
| engage in transactions with affiliates; | ||
| enter into certain burdensome agreements; | ||
| make certain amendments to the omnibus agreement or its subsidiaries organizational documents; | ||
| prepay the senior unsecured notes and certain other indebtedness; and | ||
| enter into certain hedging contracts. |
The new credit facility permits the Partnership to make quarterly distributions to unitholders
so long as no default exists under the new credit facility.
Each of the following is an event of default under the new credit facility:
| failure to pay any principal, interest, fees, expenses or other amounts when due; | ||
| failure to meet the quarterly financial covenants; | ||
| failure to observe any other agreement, obligation, or covenant in the new credit facility or any related loan document, subject to cure periods for certain failures; | ||
| the failure of any representation or warranty to be materially true and correct when made; | ||
| the Partnership or any of its subsidiaries default under other indebtedness that exceeds a threshold amount; | ||
| judgments against the Partnership or any of its material subsidiaries, in excess of a threshold amount; | ||
| certain ERISA events involving the Partnership or any of its material subsidiaries, in excess of a threshold amount; | ||
| bankruptcy or other insolvency events involving the Partnership or any of its material subsidiaries; and | ||
| a change in control (as defined in the new credit facility). |
If an event of default relating to bankruptcy or other insolvency events occurs, all
indebtedness under the new credit facility will immediately become due and payable. If any other
event of default exists under the new credit facility, the lenders may accelerate the maturity of
the obligations outstanding under the new credit facility and exercise other rights and remedies.
In addition, if any event of default exists under the new credit facility, the lenders may commence
foreclosure or other actions against the collateral.
If any default occurs under the new credit facility, or if the Partnership is unable to make
any of the representations and warranties in the new credit facility, the Partnership will be
unable to borrow funds or have letters of credit issued under the new credit facility.
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CROSSTEX ENERGY, INC.
Notes to Condensed Consolidated Financial Statements (Continued)
The Partnership is subject to interest rate risk on its new credit facility and may enter into
interest rate swaps to reduce this risk.
The Partnership expects to be in compliance with the covenants in the new credit facility for
the next twelve months.
Series B Secured Note. On October 20, 2009, the Partnership acquired the Eunice natural gas
liquids processing plant and fractionation facility which includes an $18.1 million series B
secured note. This note bears an interest rate of 9.5%. Payments including interest of $12.2
million and $7.4 million are due in 2010 and 2011, respectively.
Senior Unsecured Notes. On February 10, 2010, the Partnership issued $725.0 million in
aggregate principal amount of 8.875% senior unsecured notes (the notes) due on February 15, 2018
at an issue price of 97.907% to yield 9.25% to maturity. Net proceeds from the sale of the notes of
$689.7 million (net of transaction costs and original issue discount), together with borrowings
under the credit facility discussed above, were used to repay in full amounts outstanding under the
old bank credit facility and senior secured notes and to pay related fees, costs and expenses,
including the settlement of interest rate swaps associated with the existing credit facility. The
notes are unsecured and unconditionally guaranteed on a senior basis by certain of the
Partnerships direct and indirect wholly-owned subsidiaries, including all of the Partnerships
current subsidiaries other than Crosstex LIG, LLC and Crosstex Tuscaloosa, LLC, its Louisiana
regulated entities, and Crosstex DC Gathering, J.V. Interest payments are due semi-annually in
arrears starting on August 15, 2010.
The indenture governing the notes contains covenants that, among other things, limit the
Partnerships ability and the ability of certain of its subsidiaries to:
| sell assets including equity interests in its subsidiaries; | ||
| pay distributions on, redeem or repurchase units or redeem or repurchase its subordinated debt (as discussed in more detail below); | ||
| make investments; | ||
| incur or guarantee additional indebtedness or issue preferred units; | ||
| create or incur certain liens; | ||
| enter into agreements that restrict distributions or other payments from its restricted subsidiaries to the Partnership; | ||
| consolidate, merge or transfer all or substantially all of its assets; | ||
| engage in transactions with affiliates; | ||
| create unrestricted subsidiaries; | ||
| enter into sale and leaseback transactions; or | ||
| engage in certain business activities. |
The indenture provides that if the Partnerships fixed charge coverage ratio (the ratio of its
consolidated cash flow to its fixed charges, each as defined in the indenture) for the most
recently ended four full fiscal quarters is not less than 2.0 to 1.0, the Partnership will be
permitted to pay distributions to its unitholders in an amount equal to available cash from
operating surplus (each as defined in the partnership agreement) with respect to the Partnerships
preceding fiscal quarter plus a number of items, including the net cash proceeds received by the
Partnership as a capital contribution or from the issuance of equity interests since the date of
the indenture, to the extent not previously expended. If the Partnerships fixed charge coverage
ratio is less than 2.0 to 1.0, the Partnership will be able
to pay distributions to its unitholders in an amount equal to an $80.0 million basket (less amounts
previously expended pursuant to such basket), plus the same number of items discussed in the
preceding sentence to the extent not previously expended.
If the notes achieve an investment grade rating from each of Moodys Investors Service, Inc.
and Standard & Poors Ratings Services, many of the covenants discussed above will terminate.
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CROSSTEX ENERGY, INC.
Notes to Condensed Consolidated Financial Statements (Continued)
The Partnership may redeem up to 35% of the notes at any time prior to February 15, 2013 with
the cash proceeds from equity offerings at a redemption price of 108.875% of the principal amount
of the notes (plus accrued and unpaid interest to the redemption date) provided that:
| at least 65% of the aggregate principal amount of the senior notes remains outstanding immediately after the occurrence of such redemption; and | ||
| the redemption occurs within 120 days of the date of the closing of the equity offering. |
Prior to February 15, 2014, the Partnership may redeem the notes, in whole or in part, at a
make-whole redemption price. On or after February 15, 2014, the Partnership may redeem all or a
part of the notes at redemption prices (expressed as percentages of principal amount) equal to
104.438% for the twelve-month period beginning on February 15, 2014, 102.219% for the twelve-month
period beginning February 15, 2015 and 100.00% for the twelve-month period beginning on February
15, 2016 and at any time thereafter, plus accrued and unpaid interest, if any, to the applicable
redemption date on the notes.
Each of the following is an event of default under the indenture:
| failure to pay any principal or interest when due; | ||
| failure to observe any other agreement, obligation, or other covenant in the indenture, subject to the cure periods for certain failures; | ||
| the Partnership or any of its subsidiaries default under other indebtedness that exceeds a certain threshold amount; | ||
| failures by the Partnership or any of its subsidiaries to pay final judgments that exceed a certain threshold amount; and | ||
| bankruptcy or other insolvency events involving the Partnership or any of its material subsidiaries. |
If an event of default relating to bankruptcy or other insolvency events occurs, the senior
unsecured notes will immediately become due and payable. If any other event of default exists under
the indenture, the trustee under the indenture or the holders of the senior unsecured notes may
accelerate the maturity of the senior unsecured notes and exercise other rights and remedies.
(4) Other Long-Term Liabilities
The Partnership entered into 9 and 10-year capital leases for certain equipment. Assets under
capital leases as of March 31, 2010 are summarized as follows (in thousands):
Equipment |
$ | 27,192 | ||
Less: Accumulated amortization |
(4,595 | ) | ||
Net assets under capital lease. |
$ | 22,597 | ||
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 March 31, 2010 (in thousands):
2010 |
$ | 2,295 | ||
2011 through 2014 ($3,034 annually) |
12,136 | |||
Thereafter |
12,747 | |||
Less: Interest |
(3,932 | ) | ||
Net minimum lease payments under capital lease |
23,246 | |||
Less: Current portion of net minimum lease payments |
(2,994 | ) | ||
Long-term portion of net minimum lease payments |
$ | 20,252 | ||
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CROSSTEX ENERGY, INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(5) Certain Provisions of the Partnership Agreement
(a) Sale of Preferred Units
On January 19, 2010, the Partnership issued approximately $125.0 million of Series A
Convertible Preferred Units to an affiliate of Blackstone/GSO Capital Solutions for net proceeds of
$120.8 million. Crosstex Energy, GP, L.P. made a general partner contribution of $2.6 million in
connection with the issuance to maintain its 2% general partner interest. The 14,705,882 preferred
units are convertible by the holders thereof at any time into common units on a one-for-one basis,
subject to certain adjustments in the event of certain dilutive issuances of common units. The
Partnership has the right to force conversion of the preferred units after three years if (i) the
daily volume-weighted average trading price of the common units is greater than 150% of the
then-applicable conversion price for 20 out of the trailing 30 days ending on two trading days
before the date on which the Partnership delivers notice of such conversion, and (ii) the average
daily trading volume of common units must have exceeded 250,000 common units for 20 out of the
trailing 30 trading days ending on two trading days before the date on which the Partnership
delivers notice of such conversion. The preferred units are not redeemable but will pay a quarterly
distribution that will be the greater of $0.2125 per unit or the amount of the quarterly
distribution per unit paid to common unitholders, subject to certain adjustments. Such quarterly
distribution may be paid in cash, in additional preferred units issued in kind or any combination
thereof, provided that the distribution may not be paid in additional preferred units if the
Partnership pays a cash distribution on common units.
The Company reflects changes in its ownership interest in the Partnership as equity
transactions. The carrying amount of the non-controlling interest is adjusted to reflect the
change in the Companys ownership interest in the Partnership. Any difference between the fair
value of the consideration received and the amount by which the non-controlling interest is
adjusted is recognized in additional paid-in capital. The Companys book carrying amount per
Partnership unit exceeded the price per unit received by the Partnership for its January 2010 sale
of preferred units resulting in a change in equity of $32.8 million. The change of $32.8 million
and $0.1 million was recorded as a reduction in additional paid-in capital within stockholders
equity with a corresponding adjustments of $32.6 million and $0.1 million to non-controlling
interest and accumulated other comprehensive income, respectively, during the three months ended
March 31, 2010. The Company recorded a deferred tax asset in the amount of $12.2 million relating
to this equity adjustment; however, because the Company can only realize this deferred tax asset
upon liquidation of the Partnership, and to the extent of capital gains, the Company has provided a
full valuation allowance against this deferred tax asset. The future conversion of the preferred
units to common units will cause the Company to recognize an adjustment to the value of its tax
basis in the Partnership. The Company will record the deferred tax adjustment through equity at
the time of the conversion.
(b) Cash Distributions from the Partnership
Unless restricted by the terms of the Partnerships credit facility and/or senior unsecured
note indenture, 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. As described under (a)
Sale of Preferred Units above, the preferred units are entitled to a quarterly distribution 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. The general partner is not entitled to a 2%
distribution with respect to the quarterly preferred distribution of $0.2125 per unit that is made
solely to the preferred unitholders. The general partner is entitled to a 2% distribution with
respect to all distributions made to common unitholders. If the distributions are in excess of
$0.2125 per unit, distributions are made 98% to the common and preferred unitholders and 2% to the
general partner, subject to the payment of incentive distributions as described below to the extent
that certain target levels of cash distributions are achieved. Under the quarterly incentive
distribution provisions, generally the Partnerships general partner is entitled to 13% of amounts
the Partnership distributes in excess of $0.25 per unit, 23% of the amounts the Partnership
distributes in excess of $0.3125 per unit and 48% of amounts the Partnership distributes in excess
of $0.375 per unit. No incentive distributions were earned by the Company as general partner for
the three months ended March 31, 2010 and 2009.
(6) Earnings per Share and Dilution Computations
Basic earnings per share was computed by dividing net income by the weighted average number of
common shares outstanding for the three months ended March 31, 2010 and 2009. The computation of
diluted earnings per share further assumes the dilutive effect of common share options and
restricted shares. All common share equivalents were antidilutive in the three months ended March
31, 2010 and 2009 because the Company had net losses for both periods.
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CROSSTEX ENERGY, INC.
Notes to Condensed Consolidated Financial Statements (Continued)
The following table reflects the computation of basic earnings per share for the periods
presented (in thousands except per unit amounts):
Three Months Ended | ||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
Net loss attributable to Crosstex Energy, Inc. |
$ | (5,402 | ) | $ | (8,842 | ) | ||
Distributed earnings allocated to: |
||||||||
Common shares |
$ | ¾ | $ | 4,184 | ||||
Unvested restricted shares |
¾ | 50 | ||||||
Total distributed earnings |
$ | ¾ | $ | 4,234 | ||||
Undistributed loss allocated to: |
||||||||
Common shares |
$ | (5,250 | ) | $ | (12,917 | ) | ||
Unvested restricted shares |
(152 | ) | (159 | ) | ||||
Total undistributed loss |
$ | (5,402 | ) | $ | (13,076 | ) | ||
Net loss allocated to: |
||||||||
Common shares |
$ | (5,250 | ) | $ | (8,733 | ) | ||
Unvested restricted shares |
(152 | ) | (109 | ) | ||||
Total net loss |
$ | (5,402 | ) | $ | (8,842 | ) | ||
Income from discontinued operations: |
||||||||
Common shares |
$ | ¾ | $ | 813 | ||||
Unvested restricted shares |
¾ | 9 | ||||||
Total income from discontinued operations |
$ | ¾ | $ | 822 | ||||
Three Months Ended | ||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
Basic and diluted net loss per share from continuing operations: |
||||||||
Common basic and diluted |
$ | (0.11 | ) | $ | (0.21 | ) | ||
Basic and diluted net income on discontinued operations: |
||||||||
Common basic and diluted |
$ | ¾ | $ | 0.02 | ||||
Total basic and diluted net loss per share: |
||||||||
Common basic and diluted |
$ | (0.11 | ) | $ | (0.19 | ) | ||
The following are the common share amounts used to compute the basic and diluted earnings per
common share for the three months ended March 31, 2010 and 2009 (in thousands):
Three Months Ended | ||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
Basic and diluted earnings per share: |
||||||||
Weighted average common shares outstanding |
46,575 | 46,439 |
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CROSSTEX ENERGY, INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(7) Employee Incentive Plans
(a) Long-Term Incentive Plans
The Company accounts for share-based compensation in accordance with the FASB ASC 718 which
requires compensation related to all stock-based awards, including stock options, be recognized in
the consolidated financial statements.
The Company and the Partnership each have similar unit or share-based payment plans for
employees, which are described below. Amounts recognized in the consolidated financial statements
with respect to these plans are as follows (in thousands):
Three Months Ended March 31, | ||||||||
2010 | 2009 | |||||||
Cost of share-based compensation charged to general and administrative expense |
$ | 2,162 | $ | 1,313 | ||||
Cost of share-based compensation charged to operating expense |
422 | 319 | ||||||
Total amount charged to income |
$ | 2,584 | $ | 1,632 | ||||
Interest of non-controlling partners in share-based compensation |
$ | 1,032 | $ | 619 | ||||
Amount of related income tax benefit recognized in income |
$ | 575 | $ | 367 | ||||
(b) Partnership Restricted Units
The restricted 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 unit activity for the three
months ended March 31, 2010 is provided below:
Three Months Ended March 31,2010 | ||||||||
Weighted | ||||||||
Average | ||||||||
Number of | Grant-Date | |||||||
Units | Fair Value | |||||||
Crosstex Energy, L.P. Restricted Units: |
||||||||
Non-vested, beginning of period |
2,088,005 | $ | 7.31 | |||||
Vested* |
(731,240 | ) | 3.44 | |||||
Forfeited |
(13,776 | ) | 10.40 | |||||
Non-vested, end of period |
1,342,989 | $ | 9.20 | |||||
Aggregate intrinsic value, end of period (in thousands) |
$ | 14,437 | ||||||
* | Vested units include 204,651 units withheld for payroll taxes paid on behalf of employees. |
The Partnership issued performance-based restricted units in 2008 to executive officers. The
minimum level of performance-based awards is included in restricted units outstanding and is
included in the current share-based compensation cost calculations at March 31, 2010. The
achievement of greater than the minimum performance targets in the current business environment is
less than probable. All performance-based awards are subject to reevaluation and adjustment until
the restricted units vest in March 2011.
A summary of the restricted units aggregate intrinsic value (market value at vesting date)
and fair value (market value at date of grant) of units vested during the three ended March 31,
2010 and 2009 are provided below (in thousands):
Three Months Ended | ||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
Crosstex Energy, L.P. Restricted Units: |
||||||||
Aggregate intrinsic value of units vested |
$ | 6,316 | $ | 353 | ||||
Fair value of units vested |
$ | 2,518 | $ | 2,301 |
As of March 31, 2010, there was $6.0 million of unrecognized compensation cost related to
non-vested restricted units. That cost is expected to be recognized over a weighted-average period
of 2.2 years.
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CROSSTEX ENERGY, INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(c) Partnership Unit Options
A summary of the unit option activity for the three months ended March 31, 2010 is provided
below:
Three Months Ended March 31, 2010 | ||||||||
Weighted | ||||||||
Average | ||||||||
Number of | Exercise | |||||||
Units | Price | |||||||
Crosstex Energy, L.P. Unit Options: |
||||||||
Outstanding, beginning of period |
882,836 | $ | 6.43 | |||||
Exercised |
(29,058 | ) | 4.78 | |||||
Forfeited |
(35,674 | ) | 12.09 | |||||
Outstanding, end of period |
818,104 | $ | 6.24 | |||||
Options exercisable at end of period |
788,439 | $ | 6.27 | |||||
Weighted average contractual term (years) end of period: |
||||||||
Options outstanding |
8.6 | |||||||
Options exercisable |
4.7 | |||||||
Aggregate intrinsic value end of period (in thousands): |
||||||||
Options outstanding |
$ | 4,544 | ||||||
Options exercisable |
$ | 379 |
A summary of the unit options intrinsic value (market value in excess of exercise price at
date of exercise) exercised and fair value of units vested (value per Black-Scholes option pricing
model at date of grant) during the three months ended March 31, 2010 and 2009 are provided below
(in thousands):
Three Months Ended | ||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
Crosstex Energy, L.P. Unit Options: |
||||||||
Intrinsic value of units options exercised |
$ | 159 | $ | ¾ | ||||
Fair value of units vested |
$ | 35 | $ | ¾ |
As of March 31, 2010, there was $1.2 million of unrecognized compensation cost related to
non-vested unit options. That cost is expected to be recognized over a weighted-average period of
2.1 years.
(d) Crosstex Energy, Inc.s Stock and Option Plan
The Companys restricted shares are included 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
activity for the three months ended March 31, 2010 is provided below:
Three Months Ended March 31, 2010 | ||||||||
Weighted | ||||||||
Average | ||||||||
Number of | Grant-Date | |||||||
Shares | Fair Value | |||||||
Crosstex Energy, Inc. Restricted Shares: |
||||||||
Non-vested, beginning of period |
1,391,973 | $ | 9.37 | |||||
Vested* |
(44,745 | ) | 22.92 | |||||
Forfeited |
(13,320 | ) | 10.30 | |||||
Non-vested, end of period |
1,333,908 | $ | 8.73 | |||||
Aggregate intrinsic value, end of period (in
thousands) |
$ | 11,605 | ||||||
* | Vested shares include 17,627 shares withheld for payroll taxes paid on behalf of employees |
The Company issued performance-based restricted shares in 2008 to executive officers. The
minimum level of performance-based awards is included in restricted shares outstanding and is
included in the current share-based compensation cost calculations at March 31, 2010. The
achievement of greater than the minimum performance targets in the current business environment is
less than probable. All performance-based awards are subject to reevaluation and adjustment until
the restricted shares vest in March 2011.
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CROSSTEX ENERGY, INC.
Notes to Condensed Consolidated Financial Statements (Continued)
A summary of the restricted shares aggregate intrinsic value (market value at vesting date)
and fair value (market value at date of grant) of shares vested during the three months ended March
31, 2010 and 2009 are provided below (in thousands):
Three Months Ended | ||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
Crosstex Energy, Inc. Restricted Shares: |
||||||||
Aggregate intrinsic value of shares vested |
$ | 315 | $ | 618 | ||||
Fair value of shares vested |
$ | 1,026 | $ | 2,860 |
As of March 31, 2010 there was $5.1 million of unrecognized compensation costs related to
non-vested CEI restricted shares for officers and employees. The cost is expected to be recognized
over a weighted average period of 2.0 years.
CEI Stock Options
CEI stock options have not been granted as a means of compensation since 2005. All units
outstanding at December 31, 2009, were vested and exercisable with all associated costs recognized.
The following is a summary of the CEI stock options outstanding as of March 31, 2010:
Three Months Ended March 31, 2010 | ||||||||
Weighted | ||||||||
Number of | Average | |||||||
Units | Exercise Price | |||||||
Crosstex Energy, Inc. Stock Options: |
||||||||
Outstanding, beginning of period |
67,500 | $ | 9.54 | |||||
Forfeited |
(30,000 | ) | 13.33 | |||||
Outstanding end of period |
37,500 | $ | 6.50 | |||||
Options exercisable at end of period |
37,500 | $ | 6.50 | |||||
Weighted average contractual term (years) end of period |
4.7 |
(8) Derivatives
Interest Rate Swaps
In conjunction with the repayment of its old credit facility in February 2010, the Partnership
settled all of its interest rate swaps for total payments of $27.2 million. The balance of $0.6
million in accumulated other comprehensive income related to the interest rate swaps was moved to
realized loss as a part of the settlement.
The impact of the interest rate swaps on net income is included in other income (expense) in
the consolidated statements of operations as part of interest expense, net, as follows (in
thousands):
Three Months Ended | ||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
Change in fair value of derivatives that do not
qualify for hedge accounting |
$ | 22,405 | $ | 382 | ||||
Realized losses on derivatives |
(26,542 | ) | (4,556 | ) | ||||
$ | (4,137 | ) | $ | (4,174 | ) | |||
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 prices and location risk 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, INC.
Notes to Condensed Consolidated Financial Statements (Continued)
The Partnership commonly enters into various derivative financial transactions which it does
not designate as hedges. These transactions include swing swaps, third party on-system
financial swaps, marketing financial swaps, storage swaps, basis swaps and processing
margin swaps. 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. Third party on-system financial swaps are hedges that the Partnership enters
into on behalf of its customers who are connected to its systems, wherein the Partnership fixes a
supply or market price for a period of time for its customers, and simultaneously enters into the
derivative transaction. Marketing financial swaps are similar to on-system financial swaps, but
are entered into for customers not connected to the Partnerships systems. Storage swap
transactions protect against changes in the value of gas that the Partnership has stored to serve
various operational requirements. Basis swaps are used to hedge basis location price risk due to
buying gas into one of the Partnerships 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 Partnerships processing plants relating to the option to process versus bypassing the
Partnerships equity gas.
The components of (gain) loss on derivatives in the consolidated statements of operations
relating to commodity swaps are (in thousands):
Three Months Ended | ||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
Change in fair value of derivatives that
do not qualify for hedge accounting |
$ | 2,348 | $ | 524 | ||||
Realized (gain) loss on derivatives |
1,408 | (5,942 | ) | |||||
Ineffective portion of derivatives
qualifying for hedge accounting |
(60 | ) | (5 | ) | ||||
Net (gain) loss related to commodity swaps |
3,696 | (5,423 | ) | |||||
Net loss included in income from discontinued operations |
| 1,087 | ||||||
(Gain) loss on derivatives included in
continuing operations |
$ | 3,696 | $ | (4,336 | ) | |||
The fair value of derivative assets and liabilities relating to commodity swaps are as follows
(in thousands):
March 31, | December 31, | |||||||
2010 | 2009 | |||||||
Fair value of derivative assets current, designated |
$ | 232 | $ | 369 | ||||
Fair value of derivative assets current, non-designated |
8,134 | 8,743 | ||||||
Fair value of derivative assets long term, non-designated |
6,168 | 5,665 | ||||||
Fair value of derivative liabilities current, designated |
(1,090 | ) | (2,536 | ) | ||||
Fair value of derivative liabilities current, non-designated |
(11,378 | ) | (9,841 | ) | ||||
Fair value of derivative liabilities long term, non-designated |
(5,927 | ) | (5,338 | ) | ||||
Net fair value of derivatives |
$ | (3,861 | ) | $ | (2,938 | ) | ||
Set forth below is the summarized notional volumes and fair values of all instruments held for
price risk management purposes and related physical offsets at March 31, 2010 (all gas volumes are
expressed in MMBtus and liquids are expressed in gallons). The remaining term of the contracts
extend no later than June 2011 for derivatives, except for certain basis swaps that extend to March
2012. Changes in the fair value of the Partnerships mark to market derivatives are recorded in
earnings in the period the transaction is entered into. The effective portion of changes in the
fair value of cash flow hedges is recorded in accumulated other
comprehensive income until the related anticipated future cash flow is recognized in earnings.
The ineffective portion is recorded in earnings immediately.
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CROSSTEX ENERGY, INC.
Notes to Condensed Consolidated Financial Statements (Continued)
March 31, 2010 | ||||||||
Transaction Type | Volume | Fair Value | ||||||
(In thousands) | ||||||||
Cash Flow Hedges:* |
||||||||
Liquids swaps (short contracts) |
(7,475 | ) | $ | (944 | ) | |||
Liquids swaps (long contracts) |
494 | 86 | ||||||
Total swaps designated as cash flow hedges |
$ | (858 | ) | |||||
Mark to Market Derivatives:* |
||||||||
Swing swaps (long contracts) |
263 | $ | (5 | ) | ||||
Physical offsets to swing swap transactions (short contracts) |
¾ | ¾ | ||||||
Swing swaps (short contracts) |
(3,450 | ) | (15 | ) | ||||
Physical offsets to swing swap transactions (long contracts) |
3,713 | 9 | ||||||
Basis swaps (long contracts) |
48,011 | 11,317 | ||||||
Physical offsets to basis swap transactions (short contracts) |
(3,340 | ) | 11,033 | |||||
Basis swaps (short contracts) |
(42,221 | ) | (9,162 | ) | ||||
Physical offsets to basis swap transactions (long contracts) |
3,340 | (12,647 | ) | |||||
Third-party on-system financial swaps (long contracts) |
36 | (153 | ) | |||||
Third-party on-system financial swaps (short contracts) |
(37 | ) | 41 | |||||
Processing margin hedges liquids (short contracts) |
(12,491 | ) | (1,631 | ) | ||||
Processing margin hedges gas (long contracts) |
1,303 | (1,893 | ) | |||||
Storage swap transactions (short contracts) |
(80 | ) | 103 | |||||
Total mark to market derivatives |
$ | (3,003 | ) | |||||
* | All are gas contracts, volume in MMBtus, except for processing margin hedges liquids and liquids swaps (volume in gallons). |
On all transactions where the Partnership is exposed to counterparty risk, the Partnership
analyzes the counterpartys 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 that allow for netting of
swap contract receivables and payables in the event of default by either party. If the
Partnerships counterparties failed to perform under existing swap contracts, the Partnerships
maximum loss of $25.5 million would be reduced to $13.4 million due to the netting feature which
all relates to other energy companies.
Impact of Cash Flow Hedges
The impact of realized gain or loss from derivatives designated as cash flow hedge contracts
in the consolidated statements of operations is summarized below (in thousands):
Three Months Ended March 31, | ||||||||
2010 | 2009 | |||||||
Increase (decrease) in Midstream revenue |
||||||||
Natural gas |
$ | ¾ | $ | 488 | ||||
Liquids |
(842 | ) | 5,178 | |||||
Realized (gain) loss included in income
from discontinued operations |
¾ | (356 | ) | |||||
Realized gain (loss) included in income
from continuing operations |
$ | (842 | ) | $ | 5,310 | |||
Natural Gas
As of March 31, 2010, the Partnership has no balances in accumulated other comprehensive
income related to natural gas.
Liquids
As of March 31, 2010, an unrealized derivative fair value net loss of $0.9 million related to
cash flow hedges of liquids price risk was recorded in accumulated other comprehensive income
(loss), all of which is expected to be reclassified into earnings through March 2011. 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 amount
is not reflected above.
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CROSSTEX ENERGY, INC.
Notes to Condensed Consolidated Financial Statements (Continued)
Derivatives Other Than Cash Flow Hedges
Assets and liabilities related to third party derivative contracts, swing swaps, basis swaps,
storage swaps and processing margin 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 consolidated statements of operations. The Partnership
estimates the fair value of all of its energy trading contracts using actively quoted prices. 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 | |||||||||||||
March 31, 2010 |
$ | (3,244 | ) | $ | 241 | $ | ¾ | $ | (3,003 | ) |
(9) 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 liabilitys 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 Partnerships derivative contracts primarily consist of commodity swaps and interest rate
swap contracts which are not traded on a public exchange. The fair values of commodity swap
contracts are determined using discounted cash flow techniques. These techniques incorporate
Level 1 and Level 2 inputs for future interest rates and 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 instruments term, notional amount, discount rate and credit risk and are classified as
Level 2 in hierarchy. The Partnership determines the
value of interest rate swap contracts by utilizing inputs and quotes from the counterparties to
these contracts. The reasonableness of these inputs and quotes is verified by comparing similar
inputs and quotes from other counterparties as of each date for which financial statements are
prepared. The market inputs for valuing the Partnerships interest rate swap contracts are
also classified as Level 2 in hierarchy.
Net assets (liabilities) measured at fair value on a recurring basis are summarized below (in
thousands):
March 31, | December 31, | |||||||
2010 | 2009 | |||||||
Level 2 | Level 2 | |||||||
Interest Rate Swaps |
$ | ¾ | $ | (24,728 | ) | |||
Commodity Swaps* |
(3,861 | ) | (2,938 | ) | ||||
Total |
$ | (3,861 | ) | $ | (27,666 | ) | ||
* | Unrealized gains or losses on commodity derivatives qualifying for hedge accounting are recorded in accumulated other comprehensive income at each measurement date. |
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CROSSTEX ENERGY, INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(10) Fair Value of Financial Instruments
The estimated fair value of the Companys financial instruments has been determined by the
Company 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 Company could realize upon the sale or refinancing of such
financial instruments (in thousands).
March 31, 2010 | December 31, 2009 | |||||||||||||||
Carrying | Fair | Carrying | Fair | |||||||||||||
Value | Value | Value | Value | |||||||||||||
Cash and cash equivalents |
$ | 6,561 | $ | 6,561 | $ | 10,703 | $ | 10,703 | ||||||||
Trade accounts receivable and
accrued revenues |
198,982 | 198,982 | 207,655 | 207,655 | ||||||||||||
Fair value of derivative assets |
14,534 | 14,534 | 14,777 | 14,777 | ||||||||||||
Accounts payable, drafts payable
and accrued gas purchases |
167,744 | 167,744 | 174,008 | 174,008 | ||||||||||||
Long-term debt |
766,143 | 803,709 | 873,702 | 872,340 | ||||||||||||
Obligations under capital lease |
23,246 | 21,070 | 23,799 | 22,399 | ||||||||||||
Fair value of derivative liabilities |
18,395 | 18,395 | 42,443 | 42,443 |
The carrying amounts of the Companys cash and cash equivalents, accounts receivable, and
accounts payable approximate fair value due to the short-term maturities of these assets and
liabilities.
The Partnerships long-term debt included borrowings under revolving credit facilities
totaling $38.0 million as of March 31, 2010 and $529.6 million as of December 31, 2009,
respectively, and accrued interest under floating interest rate facilities. Accordingly, the
carrying value of such indebtedness approximates fair value for the amounts outstanding under the
new and old credit facilities. As of March 31, 2010, the Partnership also had borrowings totaling
$725.0 million under senior unsecured notes with a fixed rate of 8.875% and a series B secured note
with a principal amount of $18.1 million with a fixed rate of 9.5%. As of December 31, 2009 the
Partnership also had borrowings totaling $326.0 million under senior secured notes with a weighted
average interest rate of 10.5% and a series B secured note with a principal amount of $18.1 million
with a fixed rate of 9.5%. The fair value of the senior unsecured notes as of March 31, 2010 was
based on third party market quotations. The fair values of the senior secured notes as of December 31, 2009
and the series B secured note as of March 31, 2010 and December 31,
2009 were adjusted to reflect current market interest rate for such borrowings on the applicable 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.
(11) Income Tax
The Company has recorded a deferred tax asset in the amount of $20.2 million and $8.0 million
relating to the difference between its book and tax basis of its investment in the Partnership as
of March 31, 2010 and December 31, 2009, respectively. Because the Company can only realize this
deferred tax asset upon the liquidation of the Partnership and to the extent of capital gains, the
Company has provided a full valuation allowance against this deferred tax asset. The deferred tax
asset and related valuation allowance increased by $12.2 million during the first quarter of 2010
due to the issuance of the Partnerships Series A preferred units. The income tax provision for the
three months ended March 31, 2010 reflects a tax benefit of $2.6 million for current period loss
from continuing operations.
Taxes are shown in the statements of operations as follows (in thousands):
Three Months Ended | ||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
Income tax provision (benefit) |
$ | (2,585 | ) | $ | 2,041 | |||
Tax provision on discontinued operations |
¾ | 484 | ||||||
Total tax provision (benefit) |
$ | (2,585 | ) | $ | 2,525 | |||
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CROSSTEX ENERGY, INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(12) Commitments and Contingencies
(a) Employment Agreements
Certain members of management of the Company are parties to employment contracts with the
general partner of the Partnership. The employment agreements provide those senior managers with
severance payments in certain circumstances and prohibit each such person from competing with the
general partner of the Partnership or its affiliates for a certain period of time following the
termination of such persons 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. The Company 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. In
addition, the Partnership has disclosed possible Clean Air Act monitoring deficiencies it has
discovered to the Louisiana Department of Environmental Quality (LDEQ) and is working with the
department to correct these deficiencies and to address modifications to facilities to bring them
into compliance. The Company does not expect to incur any material environmental liability
associated with these issues.
(c) Other
The Company 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.
In December 2008, Denbury Onshore, LLC (Denbury) initiated formal arbitration proceedings
against Crosstex CCNG Processing Ltd. (Crosstex Processing), Crosstex Energy Services, L.P.
(Crosstex Energy), Crosstex North Texas Gathering, L.P. (Crosstex Gathering) and Crosstex Gulf
Coast Marketing Ltd. (Crosstex Marketing), all wholly-owned subsidiaries of the Partnership,
asserting a claim for breach of contract under a gas processing agreement. Denbury alleged damages
in the amount of $16.2 million, plus interest and attorneys fees. Crosstex denied any liability
and sought to have the action dismissed. A three-person arbitration panel conducted a hearing on
the merits in December 2009. At the close of the evidence at the hearing, the panel granted
judgment for Crosstex on one of Denburys claims, and on February 16, 2010, the panel granted
judgment for Denbury on its remaining claims in the amount of $3.0 million plus interest,
attorneys fees and costs. The panel will conduct additional proceedings to determine the amount of
attorneys fees and costs, if any, that should be awarded to Denbury. The Company estimates that
the total award will be between $3.0 million and $4.0 million at the conclusion of these additional
proceedings. The Company has accrued $3.7 million in other current liabilities for this award as of
December 31, 2009 and reflected the related expense in purchased gas costs in the fourth quarter of
2009. This liability remains unsettled at March 31, 2010.
At times, the Partnerships gas-utility subsidiaries acquire pipeline easements and other
property rights by exercising rights of eminent domain provided under state law. 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 Partnerships
gas utility 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 several 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.
Although it is not possible to predict the ultimate outcomes of these matters, the Partnership does
not believe that these claims will have a material adverse impact on its consolidated results of
operations or financial condition.
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CROSSTEX ENERGY, INC.
Notes to Condensed Consolidated Financial Statements (Continued)
On July 22, 2008, SemStream, L.P. and certain of its subsidiaries filed voluntary petitions
for reorganization under Chapter 11 of the U.S. Bankruptcy Code. As of July 22, 2008, SemStream,
L.P. owed the Partnership approximately $6.2 million, including approximately $3.9 million for June
2008 sales and approximately $2.3 million for July 2008 sales. During 2008 and 2009, the
Partnership fully reserved the unsecured claim of $3.9 million and the receivable was written-off
as of December 31, 2009. In April 2010, the Partnership settled with the Estate its $2.3 million
administrative claim for $2.1 million. The additional $0.2 million loss was realized as of March
31, 2010.
(13) Subsequent Events
Subsequent to the quarter end March 31, 2010 and prior to issuance of the financial
statements, the Partnership sold a non-operational processing plant held in inventory for $19.5
million which approximates the carrying value of the plant. No further events material to the financial statement presentation were noted during this
review of subsequent events.
24
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion of our financial condition and results of operations
in conjunction with the financial statements and notes thereto included elsewhere in this report.
Overview
Crosstex Energy, Inc. is a Delaware corporation formed on April 28, 2000 to engage in the
gathering, transmission, treating, processing and marketing of natural gas and natural gas liquids
(NGLs) through its subsidiaries. On July 12, 2002, we formed Crosstex Energy, L.P., a Delaware
limited partnership, to acquire indirectly substantially all of the assets, liabilities and
operations of its predecessor, Crosstex Energy Services, Ltd. Our assets consist almost
exclusively of partnership interests in Crosstex Energy, L.P., a publicly traded limited
partnership engaged in the gathering, transmission, processing and marketing of natural gas and
NGLs. These partnership interests consist of (i) 16,414,830 common units, representing
approximately 25.0% of the limited partner interests in Crosstex Energy, L.P., and (ii) 100%
ownership interest in Crosstex Energy GP, L.P., the general partner of Crosstex Energy, L.P., which
owns a 2.0% general partner interest and all of the incentive distribution rights in Crosstex
Energy, L.P.
Since we control the general partner interest in the Partnership, we reflect our ownership
interest in the Partnership on a consolidated basis, which means that our financial results are
combined with the Partnerships financial results and the results of our other subsidiaries. We
have no separate operating activities apart from those conducted by the Partnership, and our cash
flows consist almost exclusively of distributions from the Partnership on the partnership interests
we own. Our consolidated results of operations are derived from the results of operations of the
Partnership and also include our deferred taxes, interest income (expense) and general and
administrative expenses not reflected in the Partnerships results of operation. Accordingly, the
discussion of our financial position and results of operations in this Managements Discussion and
Analysis of Financial Condition and Results of Operations primarily reflects the operating
activities and results of operations of the Partnership.
Historically, the Partnership has operated in two industry segments, Midstream and Treating,
with a geographic focus along the Texas Gulf Coast, in the north Texas Barnett Shale area, and in
Louisiana and Mississippi. In February 2009, the Oklahoma assets were sold; in August 2009 the
Alabama, Mississippi and south Texas Midstream assets were sold; in October 2009 the Treating
assets were sold; and in January 2010 the east Texas assets were sold. The Partnerships primary
focus for continuing operations is on the gathering, processing, transmission and marketing of
natural gas and NGLs, as well as providing certain producer services which constitute one reporting
segment of midstream activity. Currently the geographic focus is in the north Texas Barnett shale
area and in Louisiana. The Partnership focuses on gross margin to manage its operations because its
business is generally to purchase and resell natural gas for a margin, or to gather, process,
transport or market natural gas and NGLs for a fee.
The Partnerships margins are determined primarily by the volumes of natural gas gathered,
transported, purchased and sold through its pipeline systems, processed at its processing
facilities and the volumes of NGLs handled at its fractionation facilities. The Partnership
generates revenues from four primary sources:
| purchasing and reselling or transporting natural gas on the pipeline systems it owns; | ||
| processing natural gas at its processing plants and fractionating and marketing the recovered NGLs; | ||
| providing compression services; and | ||
| providing off-system marketing services for producers. |
The Partnership generally gathers or transports gas owned by others through its facilities for
a fee, or the Partnership buys natural gas from a producer, plant or shipper at either a fixed
discount to a market index or a percentage of the market index, then transports and resells the
natural gas. The Partnership attempts to execute all purchases and sales substantially
concurrently, or it enters into a future delivery obligation, thereby establishing the basis for
the margin it will receive for each natural gas transaction. The Partnership is also party to
certain long-term gas sales commitments that it satisfies through supplies purchased under
long-term gas purchase agreements. When the Partnership enters into those arrangements, its sales
obligations generally match its purchase obligations. However, over time the supplies that are
under contract may decline due to reduced drilling or other causes and the Partnership may be
required to satisfy the sales obligations by buying additional gas at prices that may exceed the
prices received under the sales commitments. In the Partnerships purchase/sale transactions, the
resale price is generally based on the same index at which the gas was purchased. However, the
Partnership has certain purchase/sale transactions in which the purchase price is based on a
production-area index and the sales price is based on a market-area index, and it captures the
difference in the indices (also referred to as basis spread), less the transportation expenses from
the two areas, as its margin. Changes in the basis spread can increase or decrease margins (or even
be negative at times). For example, the Partnership is a party to a contract with a term to 2019
to supply approximately 150 MMBtu/d of gas. It buys the gas for this contract on
several different production-area indices
into its North Texas Pipeline and sells the gas into a different market area index. For the first
quarter of 2010, this imbalance resulted in a loss of approximately $0.7 million on this contract
due to the basis differentials between the various market prices,
which may be more or less in future quarters
depending on market conditions.
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The Partnership also realizes gross margins from processing services primarily through three
different contract arrangements: processing margins (margin), percentage of liquids (POL) or
fixed-fee based. Under a margin contract arrangement the gross margins are higher during periods
of high liquid prices relative to natural gas prices. Gross margin results under a POL contract
are impacted only by the value of the liquids produced with margins higher during periods of
relatively high liquids prices. Under fixed-fee based contracts margins are driven by throughput
volume. See Item 3. Quantitative and Qualitative Disclosures about Market Risk-Commodity Price
Risk.
Operating expenses are costs directly associated with the operations of a particular asset.
Among the most significant of these costs are those associated with direct labor and supervision
and associated transportation and communication costs, property insurance, ad valorem taxes, repair
and maintenance expenses, measurement and utilities. These costs are normally fairly stable across
broad volume ranges, and therefore, do not normally decrease or increase significantly in the short
term with decreases or increases in the volume of gas moved through the asset.
Recent Developments and Business Strategy
During the past 18 months, the Partnership repositioned itself through asset dispositions and
by recapitalizing and reorganizing its operations. The Partnership is now well positioned to focus
on the performance and growth of its existing assets, to pursue strategic acquisitions and to
undertake selective construction and expansion opportunities. During the first quarter of 2010,
the Partnership recapitalized its operations with the following transactions:
| Sale of Preferred Units. On January 19, 2010, the Partnership issued approximately $125.0 million of Series A Convertible Preferred Units to an affiliate of Blackstone/GSO Capital Solutions for net proceeds of $120.8 million. Crosstex Energy, GP, L.P. made a general partner contribution of $2.6 million in connection with the issuance to maintain its 2% general partner interest. The 14,705,882 preferred units are convertible by the holders thereof at any time into common units on a one-for-one basis, subject to certain adjustments in the event of certain dilutive issuances of common units. The Partnership has the right to force conversion of the preferred units after three years if (i) the daily volume-weighted average trading price of the common units is greater than 150% of the then-applicable conversion price for 20 out of the trailing 30 days ending on two trading days before the date on which the Partnership delivers notice of such conversion, and (ii) the average daily trading volume of common units must have exceeded 250,000 common units for 20 out of the trailing 30 trading days ending on two trading days before the date on which the Partnership delivers notice of such conversion. The preferred units are not redeemable. They will receive a quarterly distribution that will be the greater of $0.2125 per unit or the amount of the quarterly distribution per unit paid to common unitholders, subject to certain adjustments. Such quarterly distribution may be paid in cash, in additional preferred units issued in kind or any combination thereof, provided that the distribution may not be paid in additional preferred units if the Partnership pays a cash distribution on common units. | ||
| Issuance of Senior Unsecured Notes. On February 10, 2010, the Partnership issued $725.0 million in aggregate principal amount of 8.875% senior unsecured notes due 2018 at an issue price of 97.907% to yield 9.25% to maturity, including the original issue discount (OID). Net proceeds from the sale of the notes of $689.7 million (net of transaction costs and OID), together with borrowings under its new credit facility discussed below, were used to repay in full amounts outstanding under its old bank credit facility and senior secured notes and to pay related fees, costs and expenses, including the settlement of interest rate swaps associated with its old credit facility. The notes are unsecured and unconditionally guaranteed on a senior basis by certain of the Partnerships direct and indirect subsidiaries, including substantially all of its current subsidiaries. Interest payments are due semi-annually in arrears starting in August 2010. The Partnership has the option to redeem all or a portion of the notes at any time on or after February 15, 2014, at the specified redemption prices. Prior to February 15, 2014, the Partnership may redeem the notes, in whole or in part, at a make-whole redemption price. In addition, the Partnership may redeem up to 35% of the notes prior to February 15, 2013 with the cash proceeds from certain equity offerings. | ||
| New Credit Facility. In February 2010, the Partnership amended and restated its secured bank credit facility with a new secured bank credit facility, which is guaranteed by substantially all of the Partnerships subsidiaries. The new credit facility has a borrowing capacity of $420.0 million and matures in February 2014. Obligations under the new credit facility are secured by first priority liens on substantially all of the Partnerships 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 the equity interests in substantially all of the Partnerships subsidiaries. Under the new credit facility, borrowings bear interest at the Partnerships option at the British Bankers Association LIBOR Rate plus an applicable margin, or the highest of the Federal Funds Rate plus 0.50%, the 30-day Eurodollar Rate plus 1.0%, or the administrative agents prime rate, in each case plus an applicable margin. The Partnership pays a per annum fee on all letters of credit issued under the new credit facility, and pays a commitment fee of 0.50% per annum on the unused availability under the new credit facility. The letter of credit fee and the applicable margins for its interest rate vary quarterly based on the Partnerships leverage ratio. |
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The Partnership also completed the sale of its east Texas assets for $40.0 million in January
2010 and recognized a $14.1 million gain on disposition.
Results of Operations
Set forth in the table below is certain financial and operating data for the periods
indicated, which excludes financial and operating data for discontinued operations.
Three Months Ended March 31, | ||||||||
2010 | 2009 | |||||||
(Dollars in millions) | ||||||||
Midstream revenues |
$ | 432.5 | $ | 352.4 | ||||
Purchased gas |
(353.6 | ) | (284.2 | ) | ||||
Gas and NGL marketing activities |
2.3 | 0.7 | ||||||
Total gross margin |
$ | 81.2 | $ | 68.9 | ||||
Midstream Volumes (MMBtu/d): |
||||||||
Gathering and transportation. |
1,998,000 | 2,031,000 | ||||||
Processing |
1,393,000 | 1,098,000 | ||||||
Producer services |
57,000 | 110,000 |
Three Months Ended March 31, 2010 Compared to Three Months Ended March 31, 2009
Gross Margin and Gas and NGL Marketing Activities. Gross margin was $81.2 million for the
three months ended March 31, 2010 compared to $68.9 million for the three months ended March 31,
2009, an increase of $12.2 million, or 17.8%. The increase was primarily due to gross margin
improvement in the processing business due to a favorable NGL market. Gross margin from gas and
NGL marketing activities increased for the comparative periods by approximately $1.6 million
primarily due to an improved fee structure and an increase in activity in the liquids marketing
business.
The favorable processing environment led to significant gross margin growth for processing
plants in Louisiana for the three months ended March 31, 2010 over the same period in 2009.
Overall the plants in the region reported a gross margin increase of approximately $9.3 million.
The primary contributors to this improvement were the Plaquemine, Gibson and Eunice processing
plants which had gross margin increases of $3.4 million, $2.5 million and $1.7 million,
respectively. The LIG gathering and transmission system contributed gross margin growth of $4.9
million for the three months ended March 31, 2010, primarily due to improved pricing and higher
volumes on the northern part of the system. In addition, the LIG results include a one time
adjustment to revenue due to the refund of fees related to the settlement of a rate case on the
system. The total financial impact of this adjustment is a reduction in gross margin of $1.2
million. The north Texas region had an overall gross margin decline for the comparable periods of
$1.4 million. A throughput volume decrease on the gathering and transmission systems contributed to
a gross margin decline of $2.0 million for the three months ended March 31, 2010 over the same
period in 2009. This was partially offset by a gross margin increase of $0.6 million on the north
Texas processing assets. The east Texas pipeline system and the Arkoma system, which were sold in
January 2010 and April 2009, respectively, but not reported in discontinued operations, contributed
a total gross margin decline of $2.1 million.
Operating Expenses. Operating expenses were $26.5 million for the three months ended March
31, 2010, compared to $27.9 million for the three months ended March 31, 2009, a decrease of $1.4
million, or 5.1%. The decrease is a result of strategic initiatives undertaken to reduce expenses.
General and Administrative Expenses. General and administrative expenses were $13.5 million
for the three months ended March 31, 2010 compared to $14.5 million for the three months ended
March 31, 2009, a decrease of $1.0 million, or 7.0%. The decrease is a result of strategic
initiatives undertaken to reduce expenses which yielded reductions of $1.6 million and $0.7 million
in compensation related costs and utilities and rent, respectively. These reductions were
partially offset by increased bad debt of $0.3 million on the SemStream bankruptcy settlement and
$0.8 million in professional and consulting fees.
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Gain on Sale of Property. Assets sold during the three months ended March 31, 2010 generated
a net gain of $14.3 million, resulting primarily from the sale of the east Texas assets.
Gain/Loss on Derivatives. The Partnership had a loss on derivatives of $3.7 million for the
three months ended March 31, 2010 compared to a gain of $4.3 million for the three months ended
March 31, 2009. The derivative transaction types contributing to the net (gain) loss are as
follows (in millions):
Three Months Ended March 31, | ||||||||||||||||
2010 | 2009 | |||||||||||||||
Total | Realized | Total | Realized | |||||||||||||
(Gain)/Loss on Derivatives: |
||||||||||||||||
Basis swaps |
$ | 2.1 | $ | (0.5 | ) | $ | (0.9 | ) | $ | (0.7 | ) | |||||
Processing margin hedges |
1.8 | 1.9 | (4.1 | ) | (4.1 | ) | ||||||||||
Storage |
(0.1 | ) | | (0.2 | ) | (1.0 | ) | |||||||||
Other |
(0.1 | ) | | (0.2 | ) | (0.2 | ) | |||||||||
Net gains (losses) related to commodity swaps |
3.7 | 1.4 | (5.4 | ) | (6.0 | ) | ||||||||||
Derivative gains included in income from
discontinued operations |
| | 1.1 | 0.4 | ||||||||||||
$ | 3.7 | $ | 1.4 | $ | (4.3 | ) | $ | (5.6 | ) | |||||||
Impairments. Impairment expense was $1.0 million for the three months ended March 31, 2010
and there were no impairments during the three months ended March 31, 2009. The impairment in 2010
relates to expected loss on the sale of pipe in inventory during the second quarter of 2010.
Depreciation and Amortization. Depreciation and amortization expenses were $27.1 million for
the three months ended March 31, 2010 compared to $28.8 million for the three months ended March
31, 2009, a decrease of $1.7 million, or 5.8%, resulting primarily from the decision made in the fourth quarter of 2009 to extend the
depreciable lives on processing plants.
Interest Expense. Interest expense was $26.9 million for the three months ended March 31,
2010 compared to $17.5 million for the three months ended March 31, 2009, an increase of $9.3
million, or 53.2%. The increase in interest expense between periods was primarily due to increased
borrowing rates on the facilities between periods and additional expense totaling $1.6 million
associated with make-whole interest payments and the write-off of debt issue costs for the January
repayment of debt with proceeds from the preferred unit sale and the east Texas asset sale. The
Partnerships borrowing rates are higher in 2010 due to the late February 2009 amendments to the
old credit facility and senior secured notes which were repaid in full in mid-February 2010 with
proceeds from the issuance of the $725.0 million senior unsecured notes. Net interest expense
consists of the following (in millions):
Three Months Ended | ||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
Senior notes (secured and unsecured) |
$ | 12.8 | $ | 6.1 | ||||
PIK interest on senior secured notes |
1.4 | 0.4 | ||||||
Bank credit facility |
3.8 | 4.2 | ||||||
Mark to market interest rate swaps |
(22.4 | ) | (0.4 | ) | ||||
Realized interest rate swaps |
26.5 | 4.6 | ||||||
Amortization of debt issue cost |
2.1 | 1.5 | ||||||
Other |
2.7 | 1.1 | ||||||
Total |
$ | 26.9 | $ | 17.5 | ||||
Loss on Extinguishment of Debt. The Partnership recognized a loss on extinguishment of debt
during the three months ended March 31, 2010 and 2009 of $14.7 million and $4.7 million,
respectively. In February 2010, the Partnership repaid its existing credit facility and senior
secured notes which resulted in make-whole interest payments on the senior secured notes and the
write-off of unamortized debt costs totaling $14.7 million. The loss of $4.7 million on
extinguishment of debt incurred in the three months ended March 31, 2009 related to the amendment
of the old credit facility and senior secured notes.
Income Taxes. Income tax benefit was $2.6 million for the three months ended March 31, 2010
compared to a tax expense of $2.0 million for the three months ended March 31, 2009. The income
tax provision for the three months ended March 31, 2010 reflects a net tax benefit of $2.6 million
for the current period loss. The income tax provision for the three months ended March 31, 2009
reflects a tax benefit of $2.2 million for current period loss offset by a $4.6 million income tax
expense attributable to a tax basis adjustment in the Partnership related to the conversion of the
senior subordinated series D units to common units on March 23, 2009.
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Interest of Non-Controlling Partners in the Partnerships Net Loss from Continuing Operations.
The interest of non-controlling partners in the Partnerships net loss was $9.6 million for the
three months ended March 31, 2010 compared to a loss of
$11.6 million for the three months ended March 31, 2009 due to the changes shown in the following
summary (in millions):
For the Three Months Ended | ||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
Net loss for the Partnership from continuing operations |
$ | (17.4 | ) | $ | (19.1 | ) | ||
Stock-based compensation costs allocated to CEI for its stock options and
restricted stock granted to Partnership officers, employees and directors |
1.1 | 0.6 | ||||||
Loss allocation to CEI for its 2% general partner share of Partnership loss |
0.4 | 0.4 | ||||||
Net loss from continuing operations allocable to limited partners |
(15.9 | ) | (18.1 | ) | ||||
Less: CEIs share of net loss allocable to limited partners |
(6.3 | ) | (6.5 | ) | ||||
Non-controlling partners share of Partnership net loss from continuing
operations |
$ | (9.6 | ) | $ | (11.6 | ) | ||
Discontinued Operations. During 2009 the Partnership sold certain non-strategic assets. In
accordance with FASB ASC 360-10-05-4 the results of operations related to the assets sold are
presented in income from discontinued operations for the three months ended March 31, 2009 in the
statements of operations. Revenues, the related costs of operations, depreciation and
amortization, and allocated interest are reflected in the income from discontinued operations. No
general and administrative expenses have been allocated to income from discontinued operations.
Following are the components of revenues and earnings from discontinued operations and operating
data (dollars in millions):
Three Months Ended | ||||
March 31, 2009 | ||||
Midstream revenues |
$ | 179.2 | ||
Treating revenues |
$ | 16.3 | ||
Net income from discontinued operations net of tax |
$ | 3.3 | ||
Gathering and Transmission Volumes (MMBtu/d) |
574,000 | |||
Processing Volumes (MMBtu/d) |
194,000 |
Critical Accounting Policies
Information regarding the Companys Critical Accounting Policies is included in Item 7 of the
Companys Annual Report on Form 10-K for the year ended December 31, 2009.
Liquidity and Capital Resources
Cash Flows from Operating Activities. Net cash used in operating activities was $25.3 million
for the three months ended March 31, 2010 compared to net cash provided by operations of $10.0
million for the three months ended March 31, 2009. Income before non-cash income and expenses and
changes in working capital for comparative periods were as follows (in millions):
Three Months Ended | ||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
Income before non-cash income and expenses |
$ | (27.6 | ) | $ | 25.6 | |||
Changes in working capital |
2.3 | (15.5 | ) |
The primary reason for the decrease in cash flow from income before non-cash income and
expenses of $53.2 million from 2009 to 2010 relates to interest payments for settlements of
interest rate swaps, make-whole payments, and PIK notes.
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Cash Flows from Investing Activities. Net cash provided from investing activities was $30.9
million for the three months ended March 31, 2010 and net cash used in investing activities was
$34.6 million for the three months ended March 31, 2009. The primary investing outflows were
capital expenditures, net of accrued amounts, as follows (in millions):
Three Months Ended | ||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
Growth capital expenditures |
$ | 7.5 | $ | 46.6 | ||||
Maintenance capital expenditures |
2.2 | 2.1 | ||||||
Total |
$ | 9.7 | $ | 48.7 | ||||
Cash flows from investing activities for the three months ended March 31, 2010 and 2009 also
include proceeds from property sales of $39.7 million and $11.0 million, respectively. The east
Texas asset were sold in the quarter ending March 31, 2010 for $40.0 million. The Arkoma asset was
sold in the quarter ending March 31, 2009 for $11.0 million.
Cash Flows from Financing Activities. Net cash used by financing activities was $9.7 million
and net cash provided by financing was $24.6 million for the three months ended March 31, 2010 and
2009, respectively. Financing activities during 2010 primarily relate to the issuance of senior
unsecured notes during 2009, sale of preferred units and establishment of a new credit facility and
repaying the Partnerships prior credit facility and senior secured notes. Financing activities
primarily relate to funding of capital expenditures. The Partnerships financings have primarily
consisted of borrowings and repayments under the old and new bank credit facilities, borrowings and
repayments under capital lease obligations, senior secured note repayments, senior unsecured note
borrowings and debt refinancing costs during 2010 and 2009 as follows (in millions):
Three Months Ended | ||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
Net borrowings (repayments) under bank
credit facilities |
$ | (491.6 | ) | $ | 73.0 | |||
Senior secured note repayments |
(316.5 | ) | (2.4 | ) | ||||
Senior unsecured note borrowings (net
of discount on the note) |
709.8 | | ||||||
Net borrowings (repayments) under
capital lease obligations |
(0.6 | ) | 0.9 | |||||
Debt refinancing costs |
(28.1 | ) | (13.4 | ) |
Historically dividends to shareholders and distributions to non-controlling partners in the
Partnership represented our primary use of cash in financing activities. We ceased making
dividends to our shareholders and the Partnership ceased making distributions to its unitholders in
the first quarter of 2009 due to liquidity issues and because the terms of the Partnerships old
credit facility and senior secured note agreement restricted its ability to make distributions
unless certain conditions were met. No dividends or cash distributions were paid during the three
months ended March 31, 2010. Total cash distributions made during the three months ended March 31,
2009 were as follows (in millions):
Three Months Ended | ||||
March 31, 2009 | ||||
Dividend to shareholders |
$ | 4.2 | ||
Non-controlling partner distributions |
7.5 | |||
Total |
$ | 11.7 | ||
Although the Partnerships new credit facility does not limit its ability to make
distributions as long as the Partnership is not in default of such facility (and the indenture
governing the Partnerships senior unsecured notes only requires it to meet a minimum fixed charge coverage
ratio test in order to make distributions), any decision to make cash distributions on its
units and the amount of any such distributions will consider maintaining sufficient cash flow in
excess of the distribution to continue to move towards lower leverage ratios. The Partnership has
established a target over the next couple of years of achieving a ratio of total debt to Adjusted
EBITDA (earnings before interest, income taxes, depreciation and amortization, impairments,
non-cash mark-to-market items and other miscellaneous non-cash items) of less than 4.0 to 1.0, and
the Partnership does not currently expect to make cash distributions on outstanding units unless
such ratio is less than 4.5 to 1.0 (pro forma for any distribution). The Partnership will also
consider general economic conditions and its outlook for business as it determines to pay any
distribution. We will not resume dividends to shareholders until the Partnership resumes cash
distributions to us.
In May 2010, the Partnership declared a cash distribution on its preferred units of $0.2125
per unit for a total $3.1 million payable in May 2010. As described under Recent Developments and
Business Strategy Sale of Preferred Units above, the quarterly distributions on preferred units
may be paid in cash, in additional preferred units issued in kind or any combination thereof at the
Partnerships discretion. The distribution payment in cash to the preferred units was in compliance
with the Partnerships financial guidelines of achieving a ratio of debt to Adjusted EBITDA of less
than 4.5 to 1.0 on a pro forma basis before making cash distributions.
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In order to reduce our interest costs, the Partnership does not borrow money to fund
outstanding checks until they are presented to the bank. Fluctuations in drafts payable are caused
by timing of disbursements, cash receipts and draws on the Partnerships revolving credit facility.
The Partnership borrows money under its $420.0 million new credit facility to fund checks as they
are presented. As of March 31, 2010, the Partnership had approximately $232.5 million of available
borrowing capacity under this facility. Changes in drafts payable for the three months ended 2010
and 2009 were as follows (in millions):
Three Months Ended | ||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
Decrease in drafts payable |
$ | 1.6 | $ | 21.5 |
Working Capital Deficit. We had a working capital deficit of $4.8 million as of March 31,
2010 primarily due to a net liability for the fair value of derivatives of $4.1 million and drafts
payable of $3.6 million. The fair value of derivatives reflects the mark to market of commodity
derivatives. As discussed under Cash Flows from Financing Activities above, in order to reduce
interest costs the Partnership does not borrow money to fund outstanding checks until they are
presented to the bank.
Off-Balance Sheet Arrangements. We had no off-balance sheet arrangements as of March 31,
2010.
Capital Requirements of the Partnership. The Partnerships 2010 capital budget includes
approximately $25.0 million of identified growth projects. Although the Partnership expects to
identify more growth projects during 2010 in addition to projects currently budgeted, it does not
anticipate that capital expenditures during 2010 will exceed $100.0 million. During the first
quarter of 2010, growth capital investments were $7.5 million which were funded by internally
generated cash flow.
Total Contractual Cash Obligations. A summary of the Partnerships total contractual cash
obligations as of March 31, 2010, is as follows (in millions):
Payments Due by Period | ||||||||||||||||||||||||||||
Total | 2010 | 2011 | 2012 | 2013 | 2014 | Thereafter | ||||||||||||||||||||||
Long-term debt |
$ | 781.1 | $ | 11.0 | $ | 7.1 | $ | | $ | | $ | 38.0 | $ | 725.0 | ||||||||||||||
Interest payable on
fixed long-term
debt obligations |
509.3 | 33.8 | 63.8 | 63.5 | 63.5 | 63.5 | 221.2 | |||||||||||||||||||||
Capital lease
obligations |
27.2 | 2.4 | 3.0 | ` 3.0 | 3.0 | 3.0 | 12.8 | |||||||||||||||||||||
Operating leases |
51.2 | 9.0 | 12.4 | 9.6 | 6.4 | 4.9 | 8.9 | |||||||||||||||||||||
Uncertain tax
position
obligations |
3.3 | 3.3 | | | | | | |||||||||||||||||||||
Total contractual
obligations |
$ | 1,372.1 | $ | 59.5 | $ | 86.3 | $ | 76.1 | $ | 72.9 | $ | 109.4 | $ | 967.9 | ||||||||||||||
The above table does not include any physical or financial contract purchase commitments for
natural gas.
Indebtedness
As of March 31, 2010 and December 31, 2009, long-term debt consisted of the following (in
thousands):
March 31, | December 31, | |||||||
2010 | 2009 | |||||||
Bank credit facility, interest
based on Prime and/or LIBOR plus an
applicable margin, interest rate
(per the facility) at December 31,
2009 was 6.75% |
$ | | $ | 529,614 | ||||
New credit facility, interest based
on Prime and/or LIBOR plus an
applicable margin, interest rate
(per the new facility) at March 31,
2010 was 4.66% |
38,000 | | ||||||
Senior secured notes (including PIK
notes (1) of $9.5 million),
weighted average interest rate at
December 31, 2009 was 10.5% |
| 326,034 | ||||||
Senior unsecured notes, net of
discount of $14,911 which bear
interest at the rate of 8.875%, |
710,089 | | ||||||
Series B secured note assumed in
the Eunice transaction, which bears
interest at the rate of 9.5% |
18,054 | 18,054 | ||||||
766,143 | 873,702 | |||||||
Less current portion |
(10,995 | ) | (28,602 | ) | ||||
Debt classified as long-term |
$ | 755,148 | $ | 845,100 | ||||
(1) | The senior secured notes began accruing additional interest of 1.25% per annum in February 2009 (the PIK notes) in the form of an increase in the principal amounts unless the leverage ratio is less than 4.25 to 1.00 at the end of any fiscal quarter. These notes were paid in full in February 2010. |
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New Credit Facility. As of March 31, 2010, the Partnership had a new bank credit facility
with a borrowing capacity of $420.0 million that matures in February 2014. As of March 31,
2010, $187.5 million was outstanding under the new bank credit facility, including $149.5
million of letters of credit, leaving approximately $232.5 million available for future
borrowing. The new bank credit facility is guaranteed by substantially all of the Partnerships
subsidiaries.
Recent Accounting Pronouncements
In January 2010, the FASB issued Accounting Standards Update (ASU) 2010-06, Improving
Disclosures about Fair Value Measurements, which amends FASB ASC Topic 820, Fair Value Measurements
and Disclosures. The ASU requires reporting entities to make new disclosures about recurring or
nonrecurring fair-value measurements including significant transfers into and out of Level 1 and
Level 2 fair-value measurements and information about purchases, sales, issuances, and settlements
on a gross basis in the reconciliation of Level 3 fair-value measurements. The ASU also clarifies
existing fair-value measurement disclosure guidance about the level of disaggregation, inputs, and
valuation techniques. We have evaluated the ASU and determined that we are not currently impacted
by the update.
Disclosure Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended, that are based on information currently available to management as well as
managements assumptions and beliefs. Statements included in this report which are not historical
facts are forward-looking statements. These statements can be identified by the use of
forward-looking terminology including forecast, may, believe, will, expect, anticipate,
estimate, continue or other similar words. These statements discuss future expectations,
contain projections of results of operations or of financial condition or state other
forward-looking information. Such statements reflect our current views with respect to future
events based on what we believe are reasonable assumptions; however, such statements are subject to
certain risks and uncertainties. In addition to specific uncertainties discussed elsewhere in this
Form 10-Q, the risk factors set forth in Part I, Item 1A. Risk Factors in our Annual Report on
Form 10-K for the year ended December 31, 2009, and those set forth in Part II, Item 1A. Risk
Factors of this report, if any, may affect our performance and results of operations. Should one
or more of these risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may differ materially from those in the forward-looking statements. We
disclaim any intention or obligation to update or review any forward-looking statements or
information, whether as a result of new information, future events or otherwise.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk is the risk of loss arising from adverse changes in market rates and prices. The
Partnerships primary market risk is the risk related to changes in the prices of natural gas and
NGLs. In addition, it is exposed to the risk of changes in interest rates on floating rate debt.
Interest Rate Risk
The Partnership is exposed to interest rate risk on its variable rate new bank credit
facility. At March 31, 2010, the new bank credit facility had outstanding borrowings of $38.0
million which approximated fair value. Based on the amount outstanding on its new bank credit
facility as of March 31, 2010, the Partnership estimates that a 1% increase or decrease in the
interest rate would change its annual interest expense by approximately $0.4 million.
At March 31, 2010, the Partnership had total fixed rate debt obligations of $743.1 million,
consisting of its senior unsecured notes with an interest rate of 8.875% and a series B secured
note with an interest rate of 9.5%. The fair value of these fixed rate obligations was
approximately $765.7 million as of March 31, 2010. The Partnership estimates that a 1% increase or
decrease in interest rates would increase or decrease the fair value of the fixed rate debt (its
senior unsecured notes) by $33.7 million based on the debt obligations as of March 31, 2010.
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Table of Contents
Commodity Price Risk
The Partnership is subject to significant risks due to fluctuations in commodity prices. Its
exposure to these risks is primarily in the gas processing component of its business. The
Partnership currently processes gas under three main types of contractual arrangements:
1. | Processing margin contracts: Under this type of contract, the Partnership pays the producer for the full amount of inlet gas to the plant, and makes a margin based on the difference between the value of liquids recovered from the processed natural gas as compared to the value of the natural gas volumes lost (shrink) and the cost of fuel used in processing. The shrink and fuel losses are referred to as plant thermal reduction or PTR. The Partnerships margins from these contracts are high during periods of high liquids prices relative to natural gas prices, and can be negative during periods of high natural gas prices relative to liquids prices. However, the Partnership mitigates its risk of processing natural gas when margins would be negative primarily through its ability to bypass processing when it is not profitable for the Partnership, or by contracts that revert to a minimum fee for processing if the natural gas must be processed to meet pipeline quality specifications. | ||
2. | Percent of liquids contracts: Under these contracts, the Partnership receives a fee in the form of a percentage of the liquids recovered, and the producer bears all the cost of the natural gas shrink. Therefore, its margins from these contracts are greater during periods of high liquids prices. The Partnerships margins from processing cannot become negative under percent of liquids contracts, but do decline during periods of low NGL prices. | ||
3. | Fee based contracts: Under these contracts the Partnership has no commodity price exposure, and is paid a fixed fee per unit of volume that is processed. |
The gross margin presentation in the table below is calculated net of results from
discontinued operations. Gas processing margins by contract types and gathering and transportation
margins as a percent of total gross margin for the comparative year-to-date periods are as follows:
Three Months Ended | ||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
Gathering and transportation margin |
60.2 | % | 69.0 | % | ||||
Gas processing margins: |
||||||||
Processing margin |
13.4 | % | 4.6 | % | ||||
Percent of liquids |
13.7 | % | 15.5 | % | ||||
Fee based |
12.7 | % | 10.9 | % | ||||
Total gas processing |
39.8 | % | 31.0 | % | ||||
Total |
100.0 | % | 100.0 | % | ||||
The Partnership has hedges in place at March 31, 2010 covering a portion of the liquids
volumes it expects to receive under percent of liquids (POL) contracts as set forth in the
following table. The relevant payment index price is the monthly average of the daily closing
price for deliveries of commodities into Mont Belvieu, Texas as reported by the Oil Price
Information Service (OPIS).
The | The | Fair Value | ||||||||||||||||
Notional | Partnership | Partnership | Asset/(Liability) | |||||||||||||||
Period | Underlying | Volume | Pays | Receives* | (In thousands) | |||||||||||||
April 2010-September 2010 |
Ethane | 46 (MBbls) | Index | $0.6418/gal | $ | 147 | ||||||||||||
April 2010-December 2010 |
Propane | 79 (MBbls) | Index | $0.9597/gal | (561 | ) | ||||||||||||
April 2010-December 2010 |
Normal Butane | 26 (MBbls) | Index | $1.2597/gal | (227 | ) | ||||||||||||
April 2010-December 2010 |
Natural Gasoline | 13 (MBbls) | Index | $1.4655/gal | (213 | ) | ||||||||||||
$ | (854 | ) | ||||||||||||||||
* | weighted average |
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The | The | |||||||||||||||||
Notional | Partnership | Partnership | Fair Value | |||||||||||||||
Period | Underlying | Volume | Pays | Receives* | Asset/(Liability) | |||||||||||||
(In thousands) | ||||||||||||||||||
January 2011-March 2011 |
Natural Gasoline | 2 (MBbls) | Index | $1.8075/gal | $ | (4 | ) | |||||||||||
$ | (4 | ) | ||||||||||||||||
* | weighted average |
The Partnership has hedged its exposure to declines in prices for NGL volumes produced for our
account. The NGL volumes hedged, as set forth above, focus on POL contracts. The Partnership
hedges POL exposure based on volumes considered hedgeable (volumes committed under contracts that
are long term in nature) versus total POL volumes that include volumes that may fluctuate due to
contractual terms, such as contracts with month to month processing options. The Partnership has
hedged 51.9% of its hedgeable volumes at risk through December of 2010 (21.3% of total volumes at
risk through December of 2010). The Partnership has begun hedging its POL exposure for 2011 as set
forth above.
The Partnership also has hedges in place at March 31, 2010 covering the fractionation spread
risk related to its processing margin contracts as set forth in the following table:
The | The | |||||||||||||||||
Notional | Partnership | Partnership | Fair Value | |||||||||||||||
Period | Underlying | Volume | Pays | Receives* | Asset/(Liability) | |||||||||||||
April 2010-December 2010 |
Ethane | 138 (MBbls) | Index | $0.5191/gal* | $ | (241 | ) | |||||||||||
April 2010-December 2010 |
Propane | 58 (MBbls) | Index | $0.9359/gal* | (466 | ) | ||||||||||||
April 2010-December 2010 |
Normal Butane | 39 (MBbls) | Index | $1.2241/gal* | (401 | ) | ||||||||||||
April 2010-December 2010 |
Natural Gasoline | 38 (MBbls) | Index | $1.5533/gal* | (474 | ) | ||||||||||||
April 2010-December 2010 |
Natural Gas | 1,174 (MMbtu/d) | $5.8411/MMBtu* | Index | (1,883 | ) | ||||||||||||
$ | (3,465 | ) | ||||||||||||||||
* | weighted average |
The | The | |||||||||||||||||
Notional | Partnership | Partnership | Fair Value | |||||||||||||||
Period | Underlying | Volume | Pays | Receives* | Asset/(Liability) | |||||||||||||
January 2011 June 2011 |
Propane | 12 (MBbls | Index | $1.0660/gal* | $ | (23 | ) | |||||||||||
January 2011 June 2011 |
Iso Butane | 4 (MBbls) | Index | $1.4737/gal* | (5 | ) | ||||||||||||
January 2011 June 2011 |
Normal Butane | 4 (MBbls) | Index | $1.4192/gal* | (5 | ) | ||||||||||||
January 2011 June 2011 |
Natural Gasoline | 5 (MBbls | Index | $1.7623/gal* | (16 | ) | ||||||||||||
January 2011 June 2011 |
Natural Gas | 129 (MMbtu/d)) | $5.3181/MMBtu* | Index | (10 | ) | ||||||||||||
$ | (59 | ) | ||||||||||||||||
* | weighted average |
In relation to its fractionation spread risk, as set forth above, the Partnership has hedged
55.0% of its hedgeable liquids volumes at risk through December 2010 (24.0% of total liquids
volumes at risk) and 56.2% of the related hedgeable PTR volumes through December 2010 (23.7% of
total PTR volumes). The Partnership has begun hedging its fractionation spread risk for 2011 as set
forth above.
The Partnership is also subject to price risk to a lesser extent for fluctuations in natural
gas prices with respect to a portion of its gathering and transport
services. Approximately 10% of
the natural gas the Partnership markets is purchased at a percentage of the relevant natural gas
index price, as opposed to a fixed discount to that price.
Another price risk the Partnership faces is the risk of mismatching volumes of gas bought or
sold on a monthly price versus volumes bought or sold on a daily price. The Partnership enters
each month with a balanced book of natural gas bought and sold on the same basis. However, it is
normal to experience fluctuations in the volumes of natural gas bought or sold under either basis,
which leaves it with short or long positions that must be covered. The Partnership uses financial
swaps to mitigate the exposure at the time it is created to maintain a balanced position.
The Partnerships primary commodity risk management objective is to reduce volatility in its
cash flows. The Partnership maintains a risk management committee, including members of senior
management, which oversees all hedging activity. The Partnership enters into hedges for natural gas
and NGLs using over-the-counter derivative financial instruments with only certain well-capitalized
counterparties which have been approved by its risk management committee.
The use of financial instruments may expose the Partnership to the risk of financial loss in
certain circumstances, including instances when (1) sales volumes are less than expected requiring
market purchases to meet commitments or (2) counterparties fail to purchase the contracted
quantities of natural gas or otherwise fail to perform. To the extent that the Partnership engages
in hedging activities it may be prevented from realizing the benefits of favorable price changes in
the physical market. However, the Partnership is similarly insulated against unfavorable changes in
such prices.
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As of March 31, 2010, outstanding natural gas swap agreements, NGL swap agreements, swing swap
agreements, storage swap agreements and other derivative instruments were a net fair value
liability of $3.9 million. The aggregate effect of a hypothetical
10% increase in gas and NGLs prices would result in an increase of approximately $1.4 million
in the net fair value liability of these contracts as of March 31, 2010.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of our disclosure controls and procedures as of the end of the period covered by this
report pursuant to Exchange Act Rules 13a-15 and 15d-15. Based on that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures
were effective as of March 31, 2010 in alerting them in a timely manner to material information
required to be disclosed in our reports filed with the Securities and Exchange Commission.
(b) Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting that occurred in the
three months ended March 31, 2010 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
PART IIOTHER INFORMATION
Item 1. Legal Proceedings
We are involved in various litigation and administrative proceedings arising in the normal
course of businesss. 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 our financial
position or results of operations
For a discussion of certain litigation and similar proceedings, please refer to Note 12,
Commitments and Contingencies, of the Notes to Condensed Consolidated Financial Statements, which
is incorporated by reference herein.
Item 1A. Risk Factors
Information about risk factors for the three months ended March 31, 2010, does not differ
materially from that set forth in Part I, Item 1A, of our Annual Report on Form 10-K for the year
ended December 31, 2009.
Item 6. Exhibits
The exhibits filed as part of this report are as follows (exhibits incorporated by reference
are set forth with the name of the registrant, the type of report and registration number or last
date of the period for which it was filed, and the exhibit number in such filing):
Number | Description | |||||
3.1 | | Amended and Restated Certificate of Incorporation of
Crosstex Energy, Inc. (incorporated by reference to
Exhibit 3.1 to Crosstex Energy, Inc.s Current Report
on Form 8-K dated October 26, 2006, filed with the
Commission on October 31, 2006). |
||||
3.2 | | Third Amended and Restated Bylaws of Crosstex Energy,
Inc. (incorporated by reference from Exhibit 3.1 to
Crosstex Energy, Inc.s Current Report on Form 8-K
dated March 22, 2006, filed with the Commission on
March 28, 2006). |
||||
3.3 | | Certificate of Limited Partnership of Crosstex Energy,
L.P. (incorporated by reference to Exhibit 3.1 to
Crosstex Energy, L.P.s Registration Statement on Form
S-1, file No. 333-97779). |
||||
3.4 | | Sixth Amended and Restated Agreement of Limited
Partnership of Crosstex Energy, L.P., dated as of March
23, 2007 (incorporated by reference to Exhibit 3.1 to
Crosstex Energy, L.P.s current report on Form 8-K
dated March 23, 2007, filed with the Commission on
March 27, 2007). |
35
Table of Contents
Number | Description | |||||
3.5 | | Amendment No. 1 to Sixth Amended and Restated Agreement
of Limited Partnership of Crosstex Energy, L.P., dated
December 20, 2007 (incorporated by reference to Exhibit
3.1 to Crosstex Energy, L.P.s Current Report on Form
8-K dated December 20, 2007, filed with the Commission
on December 21, 2007). |
||||
3.6 | | Amendment No. 2 to Sixth Amended and Restated Agreement
of Limited Partnership of Crosstex Energy, L.P., dated
March 23, 2008 (incorporated by reference to Exhibit
3.1 to Crosstex Energy, L.P.s Current Report on Form
8-K dated March 27, 2008, filed with the Commission on
March 28, 2008). |
||||
3.7 | | Amendment No. 3 to Sixth Amended and Restated Agreement
of Limited Partnership of Crosstex Energy, L.P., dated
as of January 19, 2010 (incorporated by reference to
Exhibit 3.1 to Crosstex Energy, L.P.s Current Report
on Form 8-K dated January 19, 2010, filed with the
Commission on January 22, 2010). |
||||
3.8 | | Certificate of Limited Partnership of Crosstex Energy
Services, L.P. (incorporated by reference to Exhibit
3.3 to Crosstex Energy, L.P.s Registration Statement
on Form S-1, file No. 333-97779). |
||||
3.9 | | Second Amended and Restated Agreement of Limited
Partnership of Crosstex Energy Services, L.P., dated as
of April 1, 2004 (incorporated by reference to Exhibit
3.5 to Crosstex Energy, L.P.s Quarterly Report on Form
10-Q for the quarterly period ended March 31, 2004,
file No. 0-50067). |
||||
3.10 | | Certificate of Limited Partnership of Crosstex Energy
GP, L.P. (incorporated by reference to Exhibit 3.5 to
Crosstex Energy, L.P.s Registration Statement on Form
S-1, file No. 333-97779). |
||||
3.11 | | Agreement of Limited Partnership of Crosstex Energy GP,
L.P., dated as of July 12, 2002 (incorporated by
reference to Exhibit 3.6 to Crosstex Energy, L.P.s
Registration Statement on Form S-1, file No.
333-97779). |
||||
3.12 | | Certificate of Formation of Crosstex Energy GP, LLC
(incorporated by reference to Exhibit 3.7 to Crosstex
Energy, L.P.s Registration Statement on Form S-1, file
No. 333-97779). |
||||
3.13 | | Amended and Restated Limited Liability Company
Agreement of Crosstex Energy GP, LLC, dated as of
December 17, 2002 (incorporated by reference to Exhibit
3.8 to Crosstex Energy, L.P.s Registration Statement
on Form S-1, file No. 333-97779). |
||||
3.14 | | Amendment No. 1 to Amended and Restated Limited
Liability Company Agreement of Crosstex Energy GP, LLC,
dated as of January 19, 2010 (incorporated by reference
to Exhibit 3.2 to Crosstex Energy, L.P.s Current
Report on Form 8-K dated January 19, 2010, filed with
the Commission on January 22, 2010). |
||||
4.1 | | Indenture, dated as of February 10, 2010, by and among
the Registrant, Crosstex Energy Finance Corporation,
the Guarantors named therein and Wells Fargo Bank,
National Association, as trustee (incorporated by
reference to Exhibit 4.1 to Crosstex Energy, L.P.s
Current Report on Form 8-K dated February 10, 2010,
filed with the Commission on February 16, 2010). |
||||
10.1 | | Board Representation Agreement, dated as of January 19,
2010, by and among Crosstex Energy GP, LLC, Crosstex
Energy GP, L.P., Crosstex Energy, L.P., Crosstex
Energy, Inc. and GSO Crosstex Holdings LLC
(incorporated by reference to Exhibit 10.1 to Crosstex
Energy, L.P.s Current Report on Form 8-K dated January
19, 2010, filed with the Commission on January 22,
2010). |
||||
10.2 | | Purchase Agreement, dated as of February 3, 2010, by
and among Crosstex Energy, L.P., Crosstex Energy
Finance Corporation, the Guarantors named therein and
the Initial Purchasers named therein (incorporated by
reference to Exhibit 10.1 to Crosstex Energy, L.P.s
Current Report on Form 8-K dated February 3, 2010,
filed with the Commission on February 5, 2010). |
||||
10.3 | | Amended and Restated Credit Agreement, dated as of
February 10, 2010, by and among Crosstex Energy, L.P.,
Bank of America, N.A., as Administrative Agent and L/C
Issuer thereunder, and the other lenders party thereto
(incorporated by reference to Exhibit 10.1 to Crosstex
Energy, L.P.s Current Report on Form 8-K dated
February 10, 2010, filed with the Commission on
February 16, 2010). |
||||
10.4 | | Registration Rights Agreement, dated as of January 19,
2010, by and among Crosstex Energy, L.P. and GSO
Crosstex Holdings LLC (incorporated by reference to
Exhibit 4.1 to Crosstex Energy, L.P.s Current Report
on Form 8-K dated January 19, 2010, filed with the
Commission on January 22, 2010). |
||||
10.5 | | Registration Rights Agreement, dated as of February 10,
2010, by and among Crosstex Energy, L.P., Crosstex
Energy Finance Corporation, the Guarantors named
therein and the Initial Purchasers named therein
(incorporated by reference to Exhibit 4.2 to Crosstex
Energy, L.P.s Current Report on Form 8-K dated
February 10, 2010, filed with the Commission on
February 16, 2010). |
||||
31.1 | * | | Certification of the Principal Executive Officer. |
|||
31.2 | * | | Certification of the Principal Financial Officer. |
|||
32.1 | * | | Certification of the Principal Executive Officer and
Principal Financial Officer of the Company pursuant to
18 U.S.C. Section 1350. |
* | Filed herewith. |
36
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CROSSTEX ENERGY, INC. |
||||
By: | /s/ WILLIAM W. DAVIS | |||
William W. Davis, | ||||
May 7, 2010 | Executive Vice President and Chief Financial Officer |
37