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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

Form 10-Q

 

x

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

for the quarterly period ended June 30, 2011

 

OR

 

o

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

for the transition period from                 to                

 

Commission file number: 000-50067

 

CROSSTEX ENERGY, L.P.

(Exact name of registrant as specified in its charter)

 

Delaware

 

16-1616605

(State of organization)

 

(I.R.S. Employer Identification No.)

 

 

 

2501 CEDAR SPRINGS

 

 

DALLAS, TEXAS

 

75201

(Address of principal executive offices)

 

(Zip Code)

 

(214) 953-9500

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes 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 x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

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

 

As of July 22, 2011, the Registrant had 50,629,793 common units outstanding.

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

Item

 

Description

 

Page

 

 

 

 

 

 

 

PART I—FINANCIAL INFORMATION

 

 

 

 

 

 

 

1.

 

Financial Statements

 

3

 

 

 

 

 

2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

25

 

 

 

 

 

3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

35

 

 

 

 

 

4.

 

Controls and Procedures

 

37

 

 

 

 

 

 

 

PART II—OTHER INFORMATION

 

 

 

 

 

 

 

1.

 

Legal Proceedings

 

38

 

 

 

 

 

1A.

 

Risk Factors

 

38

 

 

 

 

 

6.

 

Exhibits

 

39

 

2



Table of Contents

 

CROSSTEX ENERGY, L.P.

 

Condensed Consolidated Balance Sheets

 

 

 

June 30,

 

December 31,

 

 

 

2011

 

2010

 

 

 

(Unaudited)

 

 

 

 

 

(In thousands)

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

2,331

 

$

17,697

 

Accounts and notes receivable, net:

 

 

 

 

 

Trade receivable

 

21,688

 

16,350

 

Accrued revenue and other

 

198,970

 

193,669

 

Fair value of derivative assets

 

4,811

 

5,523

 

Natural gas and natural gas liquids, prepaid expenses and other

 

13,821

 

9,741

 

Total current assets

 

241,621

 

242,980

 

Property and equipment, net of accumulated depreciation of $368,508 and $329,315, respectively

 

1,225,671

 

1,215,104

 

Fair value of derivative assets

 

88

 

1,169

 

Intangible assets, net of accumulated amortization of $173,830 and $151,735, respectively

 

476,880

 

498,975

 

Investment in limited liability company

 

34,764

 

 

Other assets, net

 

26,446

 

26,712

 

Total assets

 

$

2,005,470

 

$

1,984,940

 

 

 

 

 

 

 

LIABILITIES AND PARTNERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable, drafts payable and other

 

$

26,835

 

$

18,028

 

Accrued gas purchases

 

163,011

 

160,909

 

Fair value of derivative liabilities

 

8,303

 

7,980

 

Current portion of long-term debt

 

 

7,058

 

Other current liabilities

 

66,292

 

66,645

 

Total current liabilities

 

264,441

 

260,620

 

Long-term debt

 

764,460

 

711,512

 

Other long-term liabilities

 

25,416

 

26,879

 

Deferred tax liability

 

7,587

 

7,837

 

Fair value of derivative liabilities

 

185

 

1,156

 

Commitments and contingencies

 

 

 

Partners’ equity

 

943,381

 

976,936

 

 

 

 

 

 

 

Total liabilities and partners’ equity

 

$

2,005,470

 

$

1,984,940

 

 

See accompanying notes to condensed consolidated financial statements.

 

3



Table of Contents

 

CROSSTEX ENERGY, L.P.

 

Condensed Consolidated Statements of Operations

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

(Unaudited)

 

 

 

(In thousands, except per unit amounts)

 

Revenues

 

$

496,147

 

$

442,048

 

$

946,462

 

$

910,706

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

Purchased gas and NGLs

 

399,589

 

358,038

 

760,068

 

745,501

 

Operating expenses

 

27,913

 

25,424

 

52,957

 

51,889

 

General and administrative

 

12,643

 

11,704

 

24,399

 

24,393

 

(Gain) loss on sale of property

 

(60

)

564

 

(80

)

(13,779

)

Loss on derivatives

 

1,536

 

1,594

 

4,957

 

5,290

 

Impairments

 

 

313

 

 

1,311

 

Depreciation and amortization

 

31,636

 

26,820

 

61,289

 

53,912

 

Total operating costs and expenses

 

473,257

 

424,457

 

903,590

 

868,517

 

Operating income

 

22,890

 

17,591

 

42,872

 

42,189

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest expense, net of interest income

 

(20,676

)

(19,998

)

(40,444

)

(46,853

)

Loss on extinguishment of debt

 

 

 

 

(14,713

)

Other income (expense)

 

(241

)

23

 

(129

)

205

 

Total other expense

 

(20,917

)

(19,975

)

(40,573

)

(61,361

)

Income (loss) before non-controlling interest and income taxes

 

1,973

 

(2,384

)

2,299

 

(19,172

)

Income tax provision

 

(358

)

(74

)

(611

)

(649

)

Net income (loss)

 

1,615

 

(2,458

)

1,688

 

(19,821

)

Less: Net income (loss) attributable to the non-controlling interest

 

(52

)

10

 

(107

)

(25

)

Net income (loss) attributable to Crosstex Energy, L.P.

 

$

1,667

 

$

(2,468

)

$

1,795

 

$

(19,796

)

Preferred interest in net income (loss) attributable to Crosstex Energy, L.P.

 

$

4,559

 

$

3,125

 

$

8,824

 

$

6,250

 

Beneficial conversion feature attributable to preferred units

 

$

 

$

 

$

 

$

22,279

 

General partner interest in net income (loss)

 

$

(111

)

$

(1,279

)

$

(633

)

$

(2,775

)

Limited partners’ interest in net income (loss) attributable to Crosstex Energy, L.P

 

$

(2,781

)

$

(4,314

)

$

(6,396

)

$

(45,550

)

Net income (loss) attributable to Crosstex Energy, L.P. per limited partners’ unit:

 

 

 

 

 

 

 

 

 

Basic and diluted common unit

 

$

(0.05

)

$

(0.08

)

$

(0.12

)

$

(0.89

)

 

See accompanying notes to condensed consolidated financial statements.

 

4



Table of Contents

 

CROSSTEX ENERGY, L.P.

 

Consolidated Statements of Comprehensive Income (Loss)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

(Unaudited)

 

 

 

(In thousands)

 

Net income (loss)

 

$

1,615

 

$

(2,458

)

$

1,688

 

$

(19,821

)

Hedging losses reclassified to earnings

 

701

 

316

 

1,089

 

1,718

 

Adjustment in fair value of derivatives

 

(138

)

606

 

(1,535

)

1,020

 

Comprehensive income (loss)

 

2,178

 

(1,536

)

1,242

 

(17,083

)

Comprehensive (income) loss attributable to non-controlling interest

 

52

 

(10

)

107

 

25

 

Comprehensive income (loss) attributable to Crosstex Energy, L.P.

 

$

2,230

 

$

(1,546

)

$

1,349

 

$

(17,058

)

 

See accompanying notes to condensed consolidated financial statements.

 

5



Table of Contents

 

CROSSTEX ENERGY, L.P.

 

Consolidated Statements of Changes in Partners’ Equity

Six Months Ended June 30, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General Partner

 

Other

 

 

 

 

 

 

 

Common Units

 

Preferred Units

 

Interest

 

Comprehensive

 

Non-Controlling

 

 

 

 

 

$

 

Units

 

$

 

Units

 

$

 

Units

 

Income (loss)

 

Interest

 

Total

 

 

 

(Unaudited)

 

 

 

(In thousands)

 

Balance, December 31, 2010

 

$

807,020

 

50,255

 

$

146,888

 

14,706

 

$

20,979

 

1,325

 

$

(859

)

$

2,908

 

$

976,936

 

Proceeds from exercise of unit options

 

392

 

85

 

 

 

 

 

 

 

392

 

Conversion of restricted units for common units, net of units withheld for taxes

 

(1,740

)

278

 

 

 

 

 

 

 

(1,740

)

Capital contributions

 

 

 

 

 

145

 

8

 

 

 

145

 

Stock-based compensation

 

2,250

 

 

 

 

1,745

 

 

 

 

3,995

 

Distributions

 

(28,261

)

 

(8,088

)

 

(1,240

)

 

 

 

(37,589

)

Net income (loss)

 

(6,396

)

 

8,824

 

 

(633

)

 

 

(107

)

1,688

 

Hedging gains or losses reclassified to earnings

 

 

 

 

 

 

 

1,089

 

 

1,089

 

Adjustment in fair value of derivatives

 

 

 

 

 

 

 

(1,535

)

 

(1,535

)

Balance, June 30, 2011

 

$

773,265

 

50,618

 

$

147,624

 

14,706

 

$

20,996

 

1,333

 

$

(1,305

)

$

2,801

 

$

943,381

 

 

See accompanying notes to condensed consolidated financial statements.

 

6



Table of Contents

 

CROSSTEX ENERGY, L.P.

 

Consolidated Statements of Cash Flows

 

 

 

Six Months Ended June 30,

 

 

 

2011

 

2010

 

 

 

(Unaudited)

 

 

 

(In thousands)

 

Cash flows from operating activities:

 

 

 

 

 

Net income (loss)

 

$

1,688

 

$

(19,821

)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

61,289

 

53,912

 

Gain on sale of property

 

(80

)

(13,779

)

Impairments

 

 

1,311

 

Deferred tax benefit

 

(250

)

(250

)

Non-cash stock-based compensation

 

3,995

 

5,245

 

Derivatives mark to market interest rate settlement

 

 

(24,160

)

Non-cash portion of derivatives (gain) loss

 

828

 

(581

)

Non-cash portion of loss on debt extinguishment

 

 

5,396

 

Payment of interest paid-in-kind debt

 

 

(11,558

)

Amortization of debt issue costs

 

4,065

 

3,751

 

Amortization of discount on notes

 

948

 

738

 

Equity in loss of limited liability company

 

236

 

 

Changes in assets and liabilities:

 

 

 

 

 

Accounts receivable, accrued revenue and other

 

(10,638

)

24,098

 

Natural gas and natural gas liquids, prepaid expenses and other

 

(5,403

)

1,212

 

Accounts payable, accrued gas purchases and other accrued liabilities

 

8,478

 

(6,958

)

Net cash provided by operating activities

 

65,156

 

18,556

 

Cash flows from investing activities:

 

 

 

 

 

Additions to property and equipment

 

(49,643

)

(18,632

)

Insurance recoveries on property and equipment

 

 

874

 

Proceeds from sale of property

 

107

 

59,484

 

Investment in limited liability company

 

(35,000

)

 

Net cash provided by (used in) investing activities

 

(84,536

)

41,726

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from borrowings

 

277,250

 

893,112

 

Payments on borrowings

 

(232,308

)

(1,040,405

)

Payments on capital lease obligations

 

(1,509

)

(1,114

)

Increase (decrease) in drafts payable

 

3,165

 

(1,595

)

Debt refinancing costs

 

(3,792

)

(28,485

)

Conversion of restricted units, net of units withheld for taxes

 

(1,740

)

(1,725

)

Distributions to non-controlling interest

 

 

(188

)

Distribution to partners

 

(37,589

)

(3,125

)

Proceeds from issuance of preferred units

 

 

120,786

 

Proceeds from exercise of unit options

 

392

 

233

 

Contributions from general partner

 

145

 

2,706

 

Net cash provided by (used in) financing activities

 

4,014

 

(59,800

)

Net increase (decrease) in cash and cash equivalents

 

(15,366

)

482

 

Cash and cash equivalents, beginning of period

 

17,697

 

779

 

Cash and cash equivalents, end of period

 

$

2,331

 

$

1,261

 

Cash paid for interest

 

$

35,936

 

$

29,449

 

Cash paid for income taxes

 

$

752

 

$

1,447

 

 

See accompanying notes to condensed consolidated financial statements.

 

7



Table of Contents

 

CROSSTEX ENERGY, L.P.

 

Notes to Condensed Consolidated Financial Statements

 

June 30, 2011

(Unaudited)

 

(1) General

 

Unless the context requires otherwise, references to “we,” “us,” “our” or the “Partnership” mean Crosstex Energy, L.P. and its consolidated subsidiaries.

 

Crosstex Energy, L.P., a Delaware limited partnership formed on July 12, 2002, is engaged in the gathering, transmission, processing and marketing of natural gas and natural gas liquids (NGLs). The Partnership 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 Partnership 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.

 

Crosstex Energy GP, LLC is the general partner of the Partnership. Crosstex Energy GP, LLC is a direct, wholly-owned subsidiary of Crosstex Energy, Inc. (CEI).

 

(a) Basis of Presentation

 

The accompanying condensed consolidated financial statements are prepared in accordance with the instructions to Form 10-Q, are unaudited and do not include all the information and disclosures required by generally accepted accounting principles for complete financial statements. All adjustments that, in the opinion of management, are necessary for a fair presentation of the results of operations for the interim periods have been made and are of a recurring nature unless otherwise disclosed herein. The results of operations for such interim periods are not necessarily indicative of results of operations for a full year. All significant intercompany balances and transactions have been eliminated in consolidation. Certain reclassifications have been made to the consolidated financial statements for the prior year to conform to the current presentation. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Partnership’s annual report on Form 10-K for the year ended December 31, 2010.

 

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management of the Partnership to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from these estimates.

 

(b) Investment in Limited Liability Company

 

On June 22, 2011, the Partnership entered into a limited liability agreement with Howard Energy Partners (“HEP”) for an initial capital contribution of $35.0 million in exchange for an individual ownership interest in HEP of approximately 35.0%.  In addition to our contribution, an unrelated party also provided a capital contribution of $35.0 million for a 35.0% ownership in HEP with HEP management and a few private investors owning the remaining 30.0% interest.  HEP will operate and manage midstream services as well as pipeline and plant construction primarily in the Eagle Ford Shale in south Texas.  This investment in HEP will be accounted for under the equity method accounting and is reflected on the balance sheet as “Investment in limited liability company.”

 

(2) Long-Term Debt

 

As of June 30, 2011 and December 31, 2010, long-term debt consisted of the following (in thousands):

 

 

 

June 30,

 

December 31,

 

 

 

2011

 

2010

 

Bank credit facility (due 2016), interest based on Prime and/or LIBOR plus an applicable margin, interest rate at June 30, 2011 and December 31, 2010 was 2.68% and 4.0%, respectively

 

$

52,000

 

$

 

Senior unsecured notes (due 2018), net of discount of $12.5 million and $13.5 million, respectively, which bear interest at the rate of 8.875%

 

712,460

 

711,512

 

Series B secured note assumed in the Eunice transaction, which bore interest at the rate of 9.5%

 

 

7,058

 

 

 

764,460

 

718,570

 

Less current portion

 

 

(7,058

)

Debt classified as long-term

 

$

764,460

 

$

711,512

 

 

8



Table of Contents

 

CROSSTEX ENERGY, L.P.

 

Notes to Condensed Consolidated Financial Statements-(Continued)

 

Credit Facility. As of June 30, 2011, there was $71.3 million in outstanding letters of credit and $52.0 million borrowed under the Partnership’s bank credit facility, leaving approximately $361.7 million available for future borrowing based on the borrowing capacity of $485.0 million.

 

In July 2011, the Partnership amended its bank credit facility. The amendment to the Partnership’s credit facility, among other things, (i) permitted Apache Midstream LLC (“Apache”) to have a first priority lien on certain assets that are the subject of a joint interest arrangement between Apache and Crosstex Permian, LLC (“Permian”) (including a new-build natural gas processing facility and related assets in the Permian Basin in West Texas) to secure obligations that Permian would owe to Apache should Permian fail to fund its obligations pursuant to the joint interest arrangement and (ii) increased the Partnership’s ability to make investments in joint ventures and subsidiaries without such joint ventures and subsidiaries becoming guarantors under the credit agreement.

 

In May 2011, the Partnership amended its bank credit facility. The borrowing capacity under the credit facility was increased from $420.0 million to $485.0 million and the maturity was extended from February 2014 to May 2016. Additionally, the amendment to the Partnership’s credit facility, among other things, (i) increased the maximum permitted leverage ratios during certain fiscal quarters, (ii) decreased the minimum consolidated interest rate coverage ratio during certain fiscal quarters and (iii) decreased the interest rate the Partnership pays on the obligations under the credit facility. Also under the amended credit facility, the Partnership increased the accordian from $100.0 million to $150.0 million, which permits the Partnership to increase its borrowing capacity if any bank in the credit facility or a new bank is willing to undertake such commitment.

 

The credit facility is guaranteed by substantially all of the Partnership’s subsidiaries and is secured by first priority liens on substantially all of the Partnership’s 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 Partnership’s equity interests in substantially all of its subsidiaries and its interest in HEP.

 

The Partnership may prepay all loans under the amended credit facility at any time without premium or penalty (other than customary LIBOR breakage costs), subject to certain notice requirements.

 

Under the amended credit facility, borrowings bear interest at the Partnership’s 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 agent’s prime rate) plus an applicable margin. The Partnership pays a per annum fee (as described below) on all letters of credit issued under the amended credit facility and a commitment fee of between 0.375% and 0.50% per annum on the unused availability under the amended credit facility. The commitment fee, letter of credit fee and the applicable margins for the interest rate vary quarterly based on the Partnership’s leverage ratio (as defined in the 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:

 

 

 

Base Rate

 

Eurodollar
Rate

 

Letter of Credit

 

Leverage Ratio 

 

Loans

 

Loans

 

Fees

 

Greater than or equal to 4.50 to 1.00

 

2.00

%

3.00

%

3.00

%

Greater than or equal to 4.00 to 1.00 and less than 4.50 to 1.00

 

1.75

%

2.75

%

2.75

%

Greater than or equal to 3.50 to 1.00 and less than 4.00 to 1.00

 

1.50

%

2.50

%

2.50

%

Greater than or equal to 3.00 to 1.00 and less than 3.50 to 1.00

 

1.25

%

2.25

%

2.25

%

Less than 3.00 to 1.00

 

1.00

%

2.00

%

2.00

%

 

The amended 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.

 

9



Table of Contents

 

CROSSTEX ENERGY, L.P.

 

Notes to Condensed Consolidated Financial Statements-(Continued)

 

The maximum permitted leverage ratio is 4.75 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 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 2.75 to 1.00.

 

The minimum consolidated interest coverage ratio (as defined in the 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:

 

·                       2.25 to 1.00 for the fiscal quarters ending September 30, 2011, December 31, 2011, March 31, 2012 and June 30, 2012;

 

·                       2.50 to 1.00 for September 30, 2012 and each fiscal quarter thereafter.

 

All other material terms of the credit facility are described in the Partnership’s Annual Report on Form 10-K filing for the year ended December 31, 2010. The Partnership expects to be in compliance with all credit facility covenants for at least 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 included an $18.1 million series B secured note. The note bears interest at a rate of 9.5%. We paid $11.0 million of principal of the series B secured note in May 2010 and paid the remaining $7.1 million in May 2011.

 

Non Guarantors.  The senior unsecured notes are jointly and severally guaranteed by each of the Partnership’s current material subsidiaries (the “Guarantors”), with the exception of its regulated Louisiana subsidiaries (which may only guarantee up to $500.0 million of the Partnership’s debt), CDC (the Partnership’s joint venture in Denton County, Texas which is not 100% owned by the Partnership) and Crosstex Energy Finance Corporation (a wholly owned Delaware corporation that was organized for the sole purpose of being a co-issuer of certain of the Partnership’s indebtedness, including the senior unsecured notes). Guarantors may not sell or otherwise dispose of all or substantially all of their properties or assets, or consolidate with or merge into another company if such a sale would cause a default under the terms of the senior unsecured notes. Since certain wholly owned subsidiaries do not guarantee the senior unsecured notes, the condensed consolidating financial statements of the guarantors and non-guarantors for the three and  six months ended June 30, 2011 and 2010 are disclosed below in accordance with Rule 3-10 of Regulation S-X.

 

Condensed Consolidating Balance Sheets

June 30, 2011

 

 

 

Guarantors

 

Non Guarantors

 

Elimination

 

Consolidated

 

 

 

(In thousands)

 

ASSETS

 

 

 

 

 

 

 

 

 

Total current assets

 

$

226,908

 

$

14,713

 

$

 

$

241,621

 

Property, plant and equipment, net

 

1,003,271

 

222,400

 

 

1,225,671

 

Total other assets

 

538,175

 

3

 

 

538,178

 

Total assets

 

$

1,768,354

 

$

237,116

 

$

 

$

2,005,470

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES & PARTNERS’ CAPITAL

 

 

 

 

 

 

 

 

 

Total current liabilities

 

$

258,413

 

$

6,028

 

$

 

$

264,441

 

Long-term debt

 

764,460

 

 

 

764,460

 

Other long-term liabilities

 

33,188

 

 

 

33,188

 

Partners’ capital

 

712,293

 

231,088

 

 

943,381

 

Total liabilities & partners’ capital

 

$

1,768,354

 

$

237,116

 

$

 

$

2,005,470

 

 

10



Table of Contents

 

CROSSTEX ENERGY, L.P.

 

Notes to Condensed Consolidated Financial Statements-(Continued)

 

December 31, 2010

 

 

 

Guarantors

 

Non Guarantors

 

Elimination

 

Consolidated

 

 

 

(In thousands)

 

ASSETS

 

 

 

 

 

 

 

 

 

Total current assets

 

$

229,997

 

$

12,983

 

$

 

$

242,980

 

Property, plant and equipment, net

 

987,018

 

228,086

 

 

1,215,104

 

Total other assets

 

526,853

 

3

 

 

526,856

 

Total assets

 

$

1,743,868

 

$

241,072

 

$

 

$

1,984,940

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES & PARTNERS’ CAPITAL

 

 

 

 

 

 

 

 

 

Total current liabilities

 

$

254,460

 

$

6,160

 

$

 

$

260,620

 

Long-term debt

 

711,512

 

 

 

711,512

 

Other long-term liabilities

 

35,872

 

 

 

35,872

 

Partners’ capital

 

742,024

 

234,912

 

 

976,936

 

Total liabilities & partners’ capital

 

$

1,743,868

 

$

241,072

 

$

 

$

1,984,940

 

 

Condensed Consolidating Statements of Operations

For the Three Months Ended June 30, 2011

 

 

 

Guarantors

 

Non Guarantors

 

Elimination

 

Consolidated

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

$

481,516

 

$

21,957

 

$

(7,326

)

$

496,147

 

Total operating costs and expenses

 

(469,833

)

(10,750

)

7,326

 

(473,257

)

Operating income

 

11,683

 

11,207

 

 

22,890

 

Interest expense, net

 

(20,676

)

 

 

(20,676

)

Other expense

 

(241

)

 

 

(241

)

Income (loss) before non-controlling interest and income taxes

 

(9,234

)

11,207

 

 

1,973

 

Income tax provision

 

(354

)

(4

)

 

(358

)

Net loss attributable to non-controlling interest

 

 

52

 

 

52

 

Net income (loss) attributable to Crosstex Energy, L.P.

 

$

(9,588

)

$

11,255

 

$

 

$

1,667

 

 

For the Three Months Ended June 30, 2010

 

 

 

Guarantors

 

Non Guarantors

 

Elimination

 

Consolidated

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

$

428,972

 

$

20,758

 

$

(7,682

)

$

442,048

 

Total operating costs and expenses

 

(423,392

)

(8,747

)

7,682

 

(424,457

)

Operating income

 

5,580

 

12,011

 

 

17,591

 

Interest expense, net

 

(19,994

)

(4

)

 

(19,998

)

Other income

 

23

 

 

 

23

 

Income (loss) before non-controlling interest and income taxes

 

(14,391

)

12,007

 

 

(2,384

)

Income tax provision

 

(70

)

(4

)

 

(74

)

Net income attributable to non-controlling interest

 

 

(10

)

 

(10

)

Net income (loss) attributable to Crosstex Energy, L.P.

 

$

(14,461

)

$

11,993

 

$

 

$

(2,468

)

 

11



Table of Contents

 

CROSSTEX ENERGY, L.P.

 

Notes to Condensed Consolidated Financial Statements-(Continued)

 

For the Six Months Ended June 30, 2011

 

 

 

Guarantors

 

Non Guarantors

 

Elimination

 

Consolidated

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

$

917,001

 

$

43,860

 

$

(14,399

)

$

946,462

 

Total operating costs and expenses

 

(898,530

)

(19,459

)

14,399

 

(903,590

)

Operating income

 

18,471

 

24,401

 

 

42,872

 

Interest expense, net

 

(40,444

)

 

 

(40,444

)

Other expense

 

(129

)

 

 

(129

)

Income (loss) before non-controlling interest and income taxes

 

(22,102

)

24,401

 

 

2,299

 

Income tax provision

 

(603

)

(8

)

 

(611

)

Net loss attributable to non-controlling interest

 

 

107

 

 

107

 

Net income (loss) attributable to Crosstex Energy, L.P.

 

$

(22,705

)

$

24,500

 

$

 

$

1,795

 

 

For the Six Months Ended June 30, 2010

 

 

 

Guarantors

 

Non Guarantors

 

Elimination

 

Consolidated

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

$

882,546

 

$

42,165

 

$

(14,005

)

$

910,706

 

Total operating costs and expenses

 

(864,837

)

(17,685

)

14,005

 

(868,517

)

Operating income

 

17,709

 

24,480

 

 

42,189

 

Interest expense, net

 

(46,848

)

(5

)

 

(46,853

)

Other expense

 

(14,508

)

 

 

(14,508

)

Income (loss) before non-controlling interest and income taxes

 

(43,647

)

24,475

 

 

(19,172

)

Income tax provision

 

(643

)

(6

)

 

(649

)

Net loss attributable to non-controlling interest

 

 

25

 

 

25

 

Net income (loss) attributable to Crosstex Energy, L.P.

 

$

(44,290

)

$

24,494

 

$

 

$

(19,796

)

 

Condensed Consolidating Statements of Cash Flow

For the Six Months Ended June 30, 2011

 

 

 

Guarantors

 

Non Guarantors

 

Elimination

 

Consolidated

 

 

 

(In thousands)

 

Net cash flows provided by operating activities

 

$

33,900

 

$

31,256

 

$

 

$

65,156

 

Net cash flows used in investing activities

 

$

(82,176

)

$

(2,360

)

$

 

$

(84,536

)

Net cash flows provided by (used in) financing activities

 

$

4,014

 

$

(28,217

)

$

28,217

 

$

4,014

 

 

12



Table of Contents

 

CROSSTEX ENERGY, L.P.

 

Notes to Condensed Consolidated Financial Statements-(Continued)

 

For the Six Months Ended June 30, 2010

 

 

 

Guarantors

 

Non Guarantors

 

Elimination

 

Consolidated

 

 

 

(In thousands)

 

Net cash flows provided by (used in) operating activities

 

$

(8,505

)

$

27,061

 

$

 

$

18,556

 

Net cash flows provided by (used in) investing activities

 

$

46,922

 

$

(5,196

)

$

 

$

41,726

 

Net cash flows provided by (used in) financing activities

 

$

(59,613

)

$

(22,071

)

$

21,884

 

$

(59,800

)

 

(3) Other Long-term Liabilities

 

Prior to January 1, 2011, the Partnership entered into 9 and 10-year capital leases for certain equipment. Assets under capital leases as of June 30, 2011 are summarized as follows (in thousands):

 

Compressor equipment

 

$

37,199

 

Less: Accumulated amortization

 

(8,636

)

Net assets under capital lease

 

$

28,563

 

 

The following are the minimum lease payments to be made in each of the following years indicated for the capital lease in effect as of June 30, 2011 (in thousands):

 

2011

 

$

2,291

 

2012 through 2015 ($4,582 annually)

 

18,328

 

Thereafter

 

16,680

 

Less: Interest

 

(7,435

)

Net minimum lease payments under capital lease

 

29,864

 

Less: Current portion of net minimum lease payments

 

(4,448

)

Long-term portion of net minimum lease payments

 

$

25,416

 

 

(4)      Partners’ Capital

 

(a) Cash Distributions

 

Unless restricted by the terms of the Partnership’s 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.

 

The Partnership’s first quarter 2011 distribution on its common and preferred units of $0.29 per unit was paid on May 13, 2011.  The Partnership increased its second quarter 2011 distribution on its common and preferred units to $0.31 per unit to be paid on August 12, 2011.

 

(b) Earnings per Unit and Dilution Computations

 

The Partnership had common units and preferred units outstanding during the three and six months ended June 30, 2011 and June 30, 2010.  The preferred units were issued in January 2010 at a discount, which represents a beneficial conversion feature (BCF), totaling $22.3 million to the market price of the common units into which they are convertible. The BCFs attributable to the preferred units represent non-cash distributions that are treated in the same way as a cash distribution for earnings per unit computations for the three and six months ended June 30, 2010.

 

13



Table of Contents

 

CROSSTEX ENERGY, L.P.

 

Notes to Condensed Consolidated Financial Statements-(Continued)

 

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. Income is allocated to the preferred units in an amount equal to the quarterly distribution with respect to the period earned.

 

As required under FASB ASC 260-10-45-61A, unvested share-based payments that entitle employees to receive non-forfeitable distributions are considered participating securities, as defined in FASB ASC 260-10-20, for earnings per unit calculations.  The following table reflects the computation of basic earnings per limited partner units for the periods presented (in thousands except per unit amounts):

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

Limited partners’ interest in net loss

 

$

(2,781

)

$

(4,314

)

$

(6,396

)

$

(45,550

)

Distributed earnings allocated to:

 

 

 

 

 

 

 

 

 

Common units (1)

 

$

15,691

 

$

 

$

30,316

 

$

 

Unvested restricted units (1)

 

286

 

 

585

 

 

Total distributed earnings

 

$

15,977

 

$

 

$

30,901

 

$

 

Undistributed loss allocated to:

 

 

 

 

 

 

 

 

 

Common units

 

$

(18,374

)

$

(4,198

)

$

(36,605

)

$

(44,327

)

Unvested restricted units

 

(384

)

(116

)

(692

)

(1,223

)

Total undistributed loss

 

$

(18,758

)

$

(4,314

)

$

(37,297

)

$

(45,550

)

Net loss allocated to:

 

 

 

 

 

 

 

 

 

Common units

 

$

(2,683

)

$

(4,198

)

$

(6,289

)

$

(44,327

)

Unvested restricted units

 

(98

)

(116

)

(107

)

(1,223

)

Total limited partners’ interest in net loss

 

$

(2,781

)

$

(4,314

)

$

(6,396

)

$

(45,550

)

Basic and diluted net loss per unit:

 

 

 

 

 

 

 

 

 

Basic and diluted common unit

 

$

(0.05

)

$

(0.08

)

$

(0.12

)

$

(0.89

)

 


(1)          For three months ended June 30, 2011,  represents declared distribution of $0.31 per unit payable on August 12, 2011.  For six months ended June 30, 2011, represents distributions paid of $0.29 and distributions declared of $0.31 payable August 12, 2011.

 

The following are the unit amounts used to compute the basic and diluted earnings per limited partner unit for the three and six months ended June 30, 2011 and 2010 (in thousands):

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

Basic and diluted weighted average units outstanding:

 

 

 

 

 

 

 

 

 

Weighted average limited partner common units outstanding

 

50,563

 

49,781

 

50,518

 

49,734

 

 

All common unit equivalents were antidilutive in the three and six months ended June 30, 2011 and June 30, 2010 because the limited partners were allocated net losses in these periods.

 

The general partner is entitled to a 2.0% distribution with respect to all distributions made to common unitholders. If the distributions are in excess of $0.2125 per unit, distributions are made 98.0% to the common and preferred unitholders and 2.0% 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.

 

When quarterly distributions are made pro-rata to common and preferred unitholders, net income for the general partner consists of incentive distributions to the extent earned, a deduction for stock-based compensation attributable to CEI’s stock options and restricted shares and 2.0% of the original Partnership’s net income (loss) adjusted for the CEI stock-based compensation specifically allocated to

 

14



Table of Contents

 

CROSSTEX ENERGY, L.P.

 

Notes to Condensed Consolidated Financial Statements-(Continued)

 

the general partner. When quarterly distributions are made solely to the preferred unitholders, the net income for the general partner consists of the CEI stock-based compensation deduction and 2.0% of the Partnership’s net income (loss) after the allocation of income to the preferred unitholders with respect to their preferred distribution adjusted for the CEI stock-based compensation specifically allocated to the general partner.

 

Under the quarterly incentive distribution provisions, generally the Partnership’s general partner is entitled to 13.0% of amounts the Partnership distributes in excess of $0.25 per unit, 23.0% of the amounts the Partnership distributes in excess of $0.3125 per unit and 48.0% of amounts the Partnership distributes in excess of $0.375 per unit. The net income (loss) allocated to the general partner is as follows (in thousands):

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

Income allocation for incentive distributions

 

$

599

 

$

 

$

997

 

$

 

Stock-based compensation attributable to CEI’s restricted shares

 

(759

)

(1,191

)

(1,700

)

(2,300

)

2% general partner interest in net income (loss)

 

49

 

(88

)

70

 

(475

)

General partner share of net loss

 

$

(111

)

$

(1,279

)

$

(633

)

$

(2,775

)

 

(5) Employee Incentive Plans

 

(a)         Long-Term Incentive Plans

 

The Partnership accounts for share-based compensation in accordance with FASB ASC 718, which requires compensation related to all stock-based awards, including stock options, be recognized in the consolidated financial statements.

 

The Partnership and CEI each have similar unit or share-based payment plans for employees, which are described below.  Share-based compensation associated with the CEI share-based compensation plan awarded to officers and employees of the Partnership are recorded by the Partnership since CEI has no operating activities other than its interest in the Partnership. Amounts recognized in the condensed consolidated financial statements with respect to these plans are as follows (in thousands):

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

Cost of share-based compensation charged to general and administrative expense

 

$

1,540

 

$

2,271

 

$

3,266

 

$

4,381

 

Cost of share-based compensation charged to operating expense

 

265

 

443

 

729

 

864

 

Total amount charged to income

 

$

1,805

 

$

2,714

 

$

3,995

 

$

5,245

 

 

(b)  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 six months ended June 30, 2011 is provided below:

 

 

 

Six Months Ended June 30, 2011

 

Crosstex Energy, L.P. Restricted Units:

 

Number of
Units

 

Weighted
Average
Grant-Date
Fair Value

 

Non-vested, beginning of period

 

1,047,374

 

$

10.30

 

Granted

 

289,800

 

15.16

 

Vested*

 

(391,543

)

14.19

 

Forfeited

 

(23,518

)

14.51

 

Non-vested, end of period

 

922,113

 

$

10.07

 

Aggregate intrinsic value, end of period (in thousands)

 

$

16,736

 

 

 

 


* Vested units include 113,241 units withheld for payroll taxes paid on behalf of employees.

 

15



Table of Contents

 

CROSSTEX ENERGY, L.P.

 

Notes to Condensed Consolidated Financial Statements-(Continued)

 

The Partnership issued restricted units in 2011 to officers and other employees. These restricted units typically vest at the end of three years and are included in the restricted units outstanding and the current share-based compensation cost calculations at June 30, 2011.

 

A summary of the restricted units’ aggregate intrinsic value (market value at vesting date) and fair value of units vested (market value at date of grant) during the three and six months ended June 30, 2011 and 2010 are provided below (in thousands):

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

Crosstex Energy, L.P. Restricted Units:

 

2011

 

2010

 

2011

 

2010

 

Aggregate intrinsic value of units vested

 

$

1,870

 

$

783

 

$

6,109

 

$

7,099

 

Fair value of units vested

 

$

2,383

 

$

337

 

$

5,556

 

$

2,856

 

 

As of June 30, 2011, there was $6.3 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 years.

 

(c)  Unit Options

 

A summary of the unit option activity for the six months ended June 30, 2011 is provided below:

 

 

 

Six Months Ended June 30, 2011

 

 

 

 

 

Weighted

 

 

 

Number of

 

Average

 

Crosstex Energy, L.P. Unit Options:

 

Units

 

Exercise Price

 

Outstanding, beginning of period

 

611,311

 

$

6.77

 

Exercised

 

(85,409

)

4.69

 

Forfeited

 

(14,539

)

7.20

 

Expired

 

 

 

Outstanding, end of period

 

511,363

 

$

7.14

 

Options exercisable at end of period

 

367,156

 

 

 

Weighted average contractual term (years) end of period:

 

 

 

 

 

Options outstanding

 

7.7

 

 

 

Options exercisable

 

7.4

 

 

 

Aggregate intrinsic value end of period (in thousands):

 

 

 

 

 

Options outstanding

 

$

6,162

 

 

 

Options exercisable

 

$

4,410

 

 

 

 

A summary of the unit options intrinsic value exercised (market value in excess of exercise price at date of exercise) and fair value of units vested (value per Black-Scholes-Merton option pricing model at date of grant) during the three and six months ended June 30, 2011 and June 30, 2010 are provided below (in thousands):

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

Crosstex Energy, L.P. Unit Options:

 

2011

 

2010

 

2011

 

2010

 

Intrinsic value of unit options exercised

 

$

479

 

$

130

 

$

985

 

$

289

 

Fair value of units vested

 

$

236

 

$

259

 

$

561

 

$

294

 

 

16



Table of Contents

 

CROSSTEX ENERGY, L.P.

 

Notes to Condensed Consolidated Financial Statements-(Continued)

 

As of June 30, 2011, there was $0.4 million of unrecognized compensation cost related to non-vested unit options. That cost is expected to be recognized over a weighted average period of 1.5 years.

 

(d)         Crosstex Energy, Inc.’s Restricted Stock

 

CEI’s 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 activities for the six months ended June 30, 2011 is provided below:

 

 

 

Six Months Ended

 

 

 

June 30, 2011

 

 Crosstex Energy, Inc. Restricted Shares:

 

Number of
Shares

 

Weighted
Average
Grant-Date
Fair Value

 

Non-vested, beginning of period

 

1,108,998

 

$

8.64

 

Granted

 

472,343

 

8.65

 

Vested*

 

(392,452

)

13.46

 

Forfeited

 

(28,407

)

10.61

 

Non-vested, end of period

 

1,160,482

 

$

6.96

 

Aggregate intrinsic value, end of period (in thousands)

 

$

13,810

 

 

 

 


* Vested shares include 109,032 shares withheld for payroll taxes paid on behalf of employees.

 

CEI issued restricted shares in 2011 to officers and other employees. These restricted shares typically vest at the end of three years and are included in restricted shares outstanding and the current share-based compensation cost calculations at June 30, 2011.

 

A summary of the restricted shares’ aggregate intrinsic value (market value at vesting date) and fair value of shares vested (market value at date of grant) during the three and six months ended June 30, 2011 and June 30, 2010 are provided below (in thousands):

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

Crosstex Energy, Inc. Restricted Shares:

 

2011

 

2010

 

2011

 

2010

 

Aggregate intrinsic value of shares vested

 

$

1,111

 

$

498

 

$

3,689

 

$

813

 

Fair value of shares vested

 

$

2,391

 

$

311

 

$

5,281

 

$

1,337

 

 

As of June 30, 2011 there was $5.5 million of unrecognized compensation costs related to CEI non-vested restricted shares. The cost is expected to be recognized over a weighted average period of 2 years.

 

(e)       Crosstex Energy, Inc.’s Stock Options

 

CEI stock options have not been granted to officers or employees of the Partnership since 2005. There are 37,500 CEI stock options vested and exercisable at June 30, 2011.

 

17



Table of Contents

 

CROSSTEX ENERGY, L.P.

 

Notes to Condensed Consolidated Financial Statements-(Continued)

 

(6) Derivatives

 

Commodity Swaps

 

The Partnership manages its exposure to fluctuations in commodity prices by hedging the impact of market fluctuations. Swaps are used to manage and hedge price and location risks related to these market exposures. Swaps are also used to manage margins on offsetting fixed-price purchase or sale commitments for physical quantities of natural gas and NGLs.

 

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

 

The components of loss on derivatives in the condensed consolidated statements of operations relating to commodity swaps are (in thousands):

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

Change in fair value of derivatives that do not qualify for hedge accounting

 

$

(825

)

$

(2,863

)

$

730

 

$

(515

)

Realized losses on derivatives

 

2,368

 

4,458

 

4,128

 

5,866

 

Ineffective portion of derivatives qualifying for hedge accounting

 

(101

)

(1

)

(82

)

(61

)

Net losses related to commodity swaps

 

$

1,442

 

$

1,594

 

$

4,776

 

$

5,290

 

Put option premium mark to market

 

94

 

 

181

 

 

Losses on derivatives

 

$

1,536

 

$

1,594

 

$

4,957

 

$

5,290

 

 

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

 

 

 

June 30,

 

December 31,

 

 

 

2011

 

2010

 

 

 

 

 

 

 

Fair value of derivative assets — current, designated

 

$

42

 

$

1

 

Fair value of derivative assets — current, non-designated

 

4,769

 

5,522

 

Fair value of derivative assets — long term, designated

 

44

 

 

Fair value of derivative assets — long term, non-designated

 

44

 

1,169

 

Fair value of derivative liabilities — current, designated

 

(1,443

)

(1,066

)

Fair value of derivative liabilities — current, non-designated

 

(6,860

)

(6,914

)

Fair value of derivative liabilities — long term, designated

 

(72

)

 

Fair value of derivative liabilities — long term, non-designated

 

(113

)

(1,156

)

Net fair value of derivatives

 

$

(3,589

)

$

(2,444

)

 

Set forth below is the summarized notional volumes and fair value of all instruments held for price risk management purposes and related physical offsets as of June 30, 2011 (all gas volumes are expressed in MMBtu’s and liquids volumes are expressed in gallons). The remaining term of the contracts extend no later than December 2012 for derivatives. Changes in the fair value of the Partnership’s 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.

 

18



Table of Contents

 

CROSSTEX ENERGY, L.P.

 

Notes to Condensed Consolidated Financial Statements-(Continued)

 

 

 

June 30, 2011

 

Transaction Type

 

Volume

 

Fair Value

 

 

 

(In thousands)

 

Cash Flow Hedges:*

 

 

 

 

 

Liquids swaps (short contracts)

 

(9,954

)

$

(1,429

)

Total swaps designated as cash flow hedges

 

 

 

$

(1,429

)

 

 

 

 

 

 

Mark to Market Derivatives:*

 

 

 

 

 

Swing swaps (short contracts)

 

(5,109

)

$

2

 

Physical offsets to swing swap transactions (long contracts)

 

5,109

 

9

 

 

 

 

 

 

 

Basis swaps (long contracts)

 

15,135

 

3,649

 

Physical offsets to basis swap transactions (short contracts)

 

(155

)

564

 

Basis swaps (short contracts)

 

(13,905

)

(3,548

)

Physical offsets to basis swap transactions (long contracts)

 

155

 

(663

)

 

 

 

 

 

 

Processing margin hedges — liquids (short contracts)

 

(14,967

)

(2,134

)

Processing margin hedges — gas (long contracts)

 

1,799

 

(208

)

Processing margin hedges — gas (short contracts)

 

(86

)

13

 

 

 

 

 

 

 

Storage swap transactions — gas (short contracts)

 

(70

)

23

 

Storage swap transactions — liquids inventory (short contracts)

 

(5,460

)

121

 

 

 

 

 

 

 

Liquid put options (purchased)

 

5,552

 

12

 

Total mark to market derivatives

 

 

 

$

(2,160

)

 


*                 All are gas contracts, volume in MMBtu’s, except for liquids swaps, processing margin hedges - liquids, storage swaps — liquids inventory and liquid put options (volume in gallons).

 

On all transactions where the Partnership is exposed to counterparty risk, the Partnership analyzes the counterparty’s financial condition prior to entering into an agreement, establishes limits and monitors the appropriateness of these limits on an ongoing basis. The Partnership primarily deals with two types of counterparties, financial institutions and other energy companies, when entering into financial derivatives on commodities. The Partnership has entered into Master International Swaps and Derivatives Association Agreements that allow for netting of swap contract receivables and payables in the event of default by either party. If the Partnership’s counterparties failed to perform under existing swap contracts, the Partnership’s maximum loss as of June 30, 2011 of $5.4 million would be reduced to $2.3 million due to the netting feature, all of which relates to other energy companies.

 

Impact of Cash Flow Hedges

 

The impact of realized gains or losses from derivatives designated as cash flow hedge contracts in the condensed consolidated statements of operations is summarized below (in thousands):

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

Increase (Decrease) in Midstream Revenue

 

2011

 

2010

 

2011

 

2010

 

Liquids

 

$

(1,048

)

$

(268

)

$

(1,708

)

$

(1,110

)

Realized loss included in Midstream revenue

 

$

(1,048

)

$

(268

)

$

(1,708

)

$

(1,110

)

 

19



Table of Contents

 

CROSSTEX ENERGY, L.P.

 

Notes to Condensed Consolidated Financial Statements-(Continued)

 

Natural Gas

 

As of June 30, 2011, the Partnership has no balances in accumulated other comprehensive income related to natural gas.

 

Liquids

 

As of June 30, 2011, an unrealized derivative fair value net loss of $1.3 million related to cash flow hedges of liquids price risk was recorded in accumulated other comprehensive loss,  all of which is expected to be reclassified into earnings through June 2012. The actual reclassification to earnings will be based on mark to market prices at the contract settlement date, along with the realization of the gain or loss on the related physical volume, which is not reflected in the above table.

 

Derivatives Other Than Cash Flow Hedges

 

Assets and liabilities related to third party derivative contracts, swing swaps, basis swaps, storage swaps, processing margin swaps and put options purchased are included in the fair value of derivative assets and liabilities and the profit and loss on the mark to market value of these contracts are recorded net as (gain) loss on derivatives in the condensed consolidated statement of operations. The Partnership estimates the fair value of all of its energy trading contracts using 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

 

June 30, 2011

 

$

(2,091

)

$

(69

)

$

 

$

(2,160

)

 

(7)      Fair Value Measurements

 

FASB ASC 820 sets forth a framework for measuring fair value and required disclosures about fair value measurements of assets and liabilities. Fair value under FASB ASC 820 is defined as the price at which an asset could be exchanged in a current transaction between knowledgeable, willing parties. A liability’s fair value is defined as the amount that would be paid to transfer the liability to a new obligor, not the amount that would be paid to settle the liability with the creditor. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, use of unobservable prices or inputs are used to estimate the current fair value, often using an internal valuation model. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the item being valued.

 

FASB ASC 820 established a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

 

The Partnership’s derivative contracts primarily consist of commodity swap contracts which are not traded on a public exchange. The fair values of commodity swap contracts are determined using discounted cash flow techniques. The techniques incorporate Level 1 and Level 2 inputs for future commodity prices that are readily available in public markets or can be derived from information available in publicly quoted markets. These market inputs are utilized in the discounted cash flow calculation considering the instrument’s term, notional amount, discount rate and credit risk and are classified as Level 2 in hierarchy.

 

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

 

 

 

June 30, 2011

 

December 31, 2010

 

 

 

Level 2

 

Level 2

 

Commodity Swaps*

 

$

(3,589

)