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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 September 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: 000-50536

 

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

(Registrant’s telephone number, including area code)

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer 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 October 21, 2011, the Registrant had 47,187,511 shares of common stock 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

 

22

 

 

 

 

 

3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

33

 

 

 

 

 

4.

 

Controls and Procedures

 

36

 

 

 

 

 

 

 

PART II—OTHER INFORMATION

 

 

 

 

 

 

 

1.

 

Legal Proceedings

 

37

 

 

 

 

 

1A.

 

Risk Factors

 

37

 

 

 

 

 

6.

 

Exhibits

 

37

 



Table of Contents

 

CROSSTEX ENERGY, INC.

 

Condensed Consolidated Balance Sheets

 

 

 

September 30,

 

December 31,

 

 

 

2011

 

2010

 

 

 

(Unaudited)

 

 

 

 

 

(In thousands)

 

ASSETS

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

11,050

 

$

22,780

 

Accounts receivable:

 

 

 

 

 

Trade, net of allowance for bad debt of $1,343 and $163, respectively

 

24,287

 

16,351

 

Accrued revenue and other

 

155,553

 

193,647

 

Fair value of derivative assets

 

4,160

 

5,523

 

Natural gas and natural gas liquids, prepaid expenses and other

 

11,925

 

9,780

 

Total current assets

 

206,975

 

248,081

 

Property and equipment, net of accumulated depreciation of $387,632 and $329,741, respectively

 

1,218,821

 

1,216,166

 

Fair value of derivative assets

 

288

 

1,169

 

Intangible assets, net of accumulated amortization of $186,402 and $151,735, respectively

 

464,308

 

498,975

 

Investment in limited liability company

 

35,000

 

 

Other assets, net

 

25,377

 

26,712

 

Total assets

 

$

1,950,769

 

$

1,991,103

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

Current liabilities:

 

 

 

 

 

Accounts payable, drafts payable, and other

 

$

17,094

 

$

18,027

 

Accrued gas purchases

 

126,171

 

160,910

 

Fair value of derivative liabilities

 

6,453

 

7,980

 

Current portion of long-term debt

 

 

7,058

 

Other current liabilities

 

53,191

 

66,887

 

Total current liabilities

 

202,909

 

260,862

 

Long-term debt

 

787,934

 

711,512

 

Other long-term liabilities

 

24,672

 

26,879

 

Deferred tax liability

 

86,440

 

89,216

 

Fair value of derivative liabilities

 

166

 

1,156

 

Commitments and contingencies

 

 

 

Stockholders’ equity

 

848,648

 

901,478

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

1,950,769

 

$

1,991,103

 

 

See accompanying notes to condensed consolidated financial statements.

 

3



Table of Contents

 

CROSSTEX ENERGY, INC.

 

Condensed Consolidated Statements of Operations

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

(Unaudited)

 

 

 

(In thousands, except per share amounts)

 

Revenues

 

$

517,498

 

$

454,735

 

$

1,533,003

 

$

1,365,441

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

Purchased gas and NGLs

 

426,539

 

371,072

 

1,255,650

 

1,116,573

 

Operating expenses

 

28,126

 

26,476

 

81,083

 

78,365

 

General and administrative

 

14,331

 

11,964

 

40,084

 

37,900

 

(Gain) loss on sale of property

 

397

 

(588

)

317

 

(14,367

)

Loss on derivatives

 

563

 

1,582

 

5,520

 

6,872

 

Impairments

 

 

 

 

1,311

 

Depreciation and amortization

 

31,930

 

28,203

 

93,257

 

82,153

 

Total operating costs and expenses

 

501,886

 

438,709

 

1,475,911

 

1,308,807

 

Operating income

 

15,612

 

16,026

 

57,092

 

56,634

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest expense, net of interest income

 

(19,506

)

(20,334

)

(59,946

)

(67,184

)

Loss on extinguishment of debt

 

 

 

 

(14,713

)

Other income

 

786

 

109

 

656

 

314

 

Total other expense

 

(18,720

)

(20,225

)

(59,290

)

(81,583

)

Loss before non-controlling interest and income taxes

 

(3,108

)

(4,199

)

(2,198

)

(24,949

)

Income tax benefit

 

1,156

 

1,536

 

2,054

 

5,325

 

Net loss

 

(1,952

)

(2,663

)

(144

)

(19,624

)

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

 

(364

)

(683

)

4,054

 

(10,061

)

Net loss attributable to Crosstex Energy, Inc.

 

$

(1,588

)

$

(1,980

)

$

(4,198

)

$

(9,563

)

Net loss per common share:

 

 

 

 

 

 

 

 

 

Basic common share

 

$

(0.04

)

$

(0.04

)

$

(0.09

)

$

(0.20

)

Diluted common share

 

$

(0.04

)

$

(0.04

)

$

(0.09

)

$

(0.20

)

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

47,191

 

46,887

 

47,136

 

46,677

 

Diluted

 

47,191

 

46,887

 

47,136

 

46,677

 

 

See accompanying notes to condensed consolidated financial statements.

 

4



Table of Contents

 

CROSSTEX ENERGY, INC.

 

Consolidated Statements of Comprehensive Income

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

(Unaudited)

 

 

 

(In thousands)

 

Net loss

 

$

(1,952

)

$

(2,663

)

(144

)

(19,624

)

Change in Non-controlling interest’s portion of accumulated other comprehensive income due to the issuance of units by Partnership, net of taxes of $68

 

 

 

 

115

 

Hedging (gains) losses reclassified to earnings, net of taxes of $42, $(8), $150 and $164, respectively

 

380

 

(74

)

1,360

 

1,473

 

Adjustment in fair value of derivatives, net of taxes of $33, $(59), $(119), $43, respectively

 

301

 

(543

)

(1,083

)

377

 

Comprehensive income (loss)

 

(1,271

)

(3,280

)

133

 

(17,659

)

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

 

191

 

(1,186

)

4,278

 

(8,561

)

Comprehensive loss attributable to Crosstex Energy, Inc.

 

$

(1,462

)

$

(2,094

)

$

(4,145

)

$

(9,098

)

 

See accompanying notes to condensed consolidated financial statements.

 

5



Table of Contents

 

CROSSTEX ENERGY, INC.

 

Consolidated Statements of Changes in Stockholders’ Equity

Nine Months Ended September 30, 2011

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Additional

 

Retained

 

Other

 

Non-

 

 

 

 

 

Common Stock

 

Paid in

 

Earnings

 

Comprehensive

 

Controlling

 

 

 

 

 

Shares

 

Amount

 

Capital

 

(Deficit)

 

Income (loss)

 

Interest

 

Total

 

 

 

(Unaudited)

 

 

 

(In thousands)

 

Balance, December 31, 2010

 

46,894

 

$

468

 

$

242,390

 

$

(58,298

)

$

(145

)

$

717,063

 

$

901,478

 

Adjustment to additional paid in capital

 

 

 

(522

)

 

 

 

(522

)

Stock-based compensation

 

 

 

2,517

 

 

 

3,171

 

5,688

 

Common dividends

 

 

 

 

(13,025

)

 

 

(13,025

)

Net income (loss)

 

 

 

 

(4,198

)

 

4,054

 

(144

)

Conversion of restricted stock for common, net of shares withheld for taxes

 

299

 

3

 

(1,069

)

 

 

 

(1,066

)

Hedging gains or losses reclassified to earnings

 

 

 

 

 

254

 

1,106

 

1,360

 

Adjustment in fair value of derivatives

 

 

 

 

 

(202

)

(881

)

(1,083

)

Non-controlling partner’s impact of conversion of restricted units and options exercise

 

 

 

 

 

 

(1,285

)

(1,285

)

Distribution to non-controlling interest

 

 

 

 

 

 

(42,753

)

(42,753

)

Balance, September 30, 2011

 

47,193

 

$

471

 

$

243,316

 

$

(75,521

)

$

(93

)

$

680,475

 

$

848,648

 

 

See accompanying notes to condensed consolidated financial statements.

 

6



Table of Contents

 

CROSSTEX ENERGY, INC.

 

Consolidated Statements of Cash Flows

 

 

 

Nine Months Ended September 30,

 

 

 

2011

 

2010

 

 

 

(Unaudited)

 

 

 

(In thousands)

 

Cash flows from operating activities:

 

 

 

 

 

Net loss

 

$

(144

)

$

(19,624

)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

93,257

 

82,153

 

(Gain) loss on sale of property

 

317

 

(14,367

)

Impairments

 

 

1,311

 

Deferred tax benefit

 

(3,703

)

(6,509

)

Non-cash stock-based compensation

 

5,688

 

7,313

 

Derivatives mark to market interest rate settlement

 

 

(24,160

)

Non-cash portion of derivatives loss

 

165

 

892

 

Non-cash portion of loss on debt extinguishment

 

 

5,396

 

Payment of interest paid-in-kind debt

 

 

(11,558

)

Amortization of debt issue costs

 

5,278

 

5,213

 

Amortization of discount on notes

 

1,423

 

1,212

 

Changes in assets and liabilities:

 

 

 

 

 

Accounts receivable, accrued revenue and other

 

30,156

 

37,500

 

Natural gas and natural gas liquids, prepaid expenses and other

 

(3,468

)

457

 

Accounts payable, accrued gas purchases and other accrued liabilities

 

(46,815

)

(20,869

)

Net cash provided by operating activities

 

82,154

 

44,360

 

Cash flows from investing activities:

 

 

 

 

 

Additions to property and equipment

 

(62,829

)

(29,762

)

Insurance recoveries on property and equipment

 

 

2,599

 

Proceeds from sale of property

 

425

 

60,053

 

Investment in limited liability company

 

(35,000

)

 

Net cash provided by (used in) investing activities

 

(97,404

)

32,890

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from borrowings

 

390,250

 

990,912

 

Payments on borrowings

 

(322,308

)

(1,138,205

)

Payments on capital lease obligations

 

(2,254

)

(1,671

)

Decrease in drafts payable

 

(103

)

(5,214

)

Debt refinancing costs

 

(3,936

)

(28,520

)

Conversion of restricted stock, net of shares withheld for taxes

 

(1,066

)

(693

)

Distributions to non-controlling partners in the Partnership

 

(42,753

)

(6,511

)

Common dividend paid

 

(13,025

)

 

Conversion of restricted units, net of units withheld for taxes

 

(1,798

)

(2,637

)

Proceeds from exercise of Partnership unit options

 

513

 

571

 

Proceeds from issuance of Partnership units

 

 

120,786

 

Net cash provided by (used in) financing activities

 

3,520

 

(71,182

)

Net decrease in cash and cash equivalents

 

(11,730

)

6,068

 

Cash and cash equivalents, beginning of period

 

22,780

 

10,703

 

Cash and cash equivalents, end of period

 

$

11,050

 

$

16,771

 

Cash paid for interest

 

$

70,074

 

$

63,769

 

Cash paid for income taxes

 

$

905

 

$

1,500

 

 

See accompanying notes to condensed consolidated financial statements.

 

7



Table of Contents

 

CROSSTEX ENERGY, INC.

 

Notes to Condensed Consolidated Financial Statements

 

September 30, 2011

(Unaudited)

 

(1) General

 

Unless the context requires otherwise, references to “we,” “us,” “our,” “CEI” or the “Company” mean Crosstex Energy, Inc. and its consolidated subsidiaries.

 

Crosstex Energy, Inc., 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.

 

(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 Company’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 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) 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 the Partnership’s contribution, an unrelated party also provided a capital contribution of $35.0 million for a 35.0% ownership interest in HEP with HEP management and a few private investors owning the remaining 30.0% interest.  HEP operates and manages midstream services as well as pipeline and plant construction primarily in the Eagle Ford Shale in south Texas.  This investment in HEP is accounted for under the equity method of accounting and is reflected on the balance sheet as “Investment in limited liability company.”  Per the terms of the agreement, the Partnership will not recognize any income from this investment until HEP’s income exceeds approximately $9.9 million on an inception to date basis due to preferred interests owned by HEP management.  If HEP has losses on an inception to date basis, the Partnership will recognize 39.3% of the losses.

 

8



Table of Contents

 

CROSSTEX ENERGY, INC.

 

Notes to Condensed Consolidated Financial Statements

 

(2) Long-Term Debt

 

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

 

 

 

September 30,

 

December 31,

 

 

 

2011

 

2010

 

Bank credit facility (due 2016), interest based on Prime and/or LIBOR plus an applicable margin, interest rate at September 30, 2011 and December 31, 2010 was 2.73% and 4.0%, respectively

 

$

75,000

 

$

 

Senior unsecured notes (due 2018), net of discount of $12.1 million and $13.5 million, respectively, which bear interest at the rate of 8.875%

 

712,934

 

711,512

 

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

 

 

7,058

 

 

 

787,934

 

718,570

 

Less current portion

 

 

(7,058

)

Debt classified as long-term

 

$

787,934

 

$

711,512

 

 

Credit Facility. As of September 30, 2011, there was $69.9 million in outstanding letters of credit and $75.0 million borrowed under the Partnership’s bank credit facility, leaving approximately $340.1 million available for future borrowing based on the borrowing capacity of $485.0 million.

 

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 accordion 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.

 

In July 2011, the Partnership amended its bank credit facility again. 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.

 

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

%

 

9



Table of Contents

 

CROSSTEX ENERGY, INC.

 

Notes to Condensed Consolidated Financial Statements

 

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.  The maximum permitted leverage ratio is 4.75 to 1.00.  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 Company’s Annual Report on Form 10-K filing for the year ended December 31, 2010. The Company 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 Partnership paid $11.0 million of principal on the series B secured note in May 2010 and paid the remaining $7.1 million in May 2011.

 

(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 September 30, 2011 are summarized as follows (in thousands):

 

Compressor equipment 

 

$

37,199

 

Less: Accumulated amortization

 

(9,499

)

Net assets under capital leases

 

$

27,700

 

 

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

 

2011 

 

$

1,146

 

2012 through 2015 ($4,582 annually)

 

18,328

 

Thereafter

 

16,680

 

Less: Interest

 

(7,034

)

Net minimum lease payments under capital lease

 

29,120

 

Less: Current portion of net minimum lease payments

 

(4,448

)

Long-term portion of net minimum lease payments

 

$

24,672

 

 

(4) Certain Provisions of the Partnership Agreement

 

Unless restricted by the terms of the Partnership’s credit facility, the Partnership must make distributions of 100.0% of available cash, as defined in the partnership agreement, within 45 days following the end of each quarter. Distributions will generally be made 98.0% to the common 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.

 

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. Incentive distributions totaling $0.6 million and $1.6 million were earned by the Company for the three and nine months ended September 30, 2011, respectively.  No incentive distributions were earned by the general partner for the three and nine months ended September 30, 2010.

 

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CROSSTEX ENERGY, INC.

 

Notes to Condensed Consolidated Financial Statements

 

The Partnership’s first and second quarter 2011 distributions on its common and preferred units of $0.29 and $0.31 per unit were paid on May 13, 2011 and August 12, 2011, respectively.  The Partnership’s third quarter 2011 distribution on its common and preferred units of $0.31 per unit is to be paid on November 11, 2011.

 

(5) 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 and nine months ended September 30, 2011 and 2010.  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 and nine months ended September 30, 2011 and September 30, 2010 because the Company had a net loss for the periods.

 

The following table reflects the computation of basic earnings per share for the periods presented (in thousands except per share amounts):

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

Net loss attributable to Crosstex Energy, Inc.

 

$

(1,588

)

$

(1,980

)

$

(4,198

)

(9,563

)

Distributed earnings allocated to:

 

 

 

 

 

 

 

 

 

Common shares

 

$

4,719

 

$

 

$

12,720

 

$

 

Unvested restricted shares

 

115

 

 

305

 

 

Total distributed earnings

 

$

4,834

 

$

 

$

13,025

 

$

 

Undistributed loss allocated to:

 

 

 

 

 

 

 

 

 

Common shares

 

$

(6,275

)

$

(1,938

)

$

(16,821

)

$

(9,313

)

Unvested restricted shares

 

(147

)

(42

)

(402

)

(250

)

Total undistributed loss

 

$

(6,422

)

$

(1,980

)

$

(17,223

)

$

(9,563

)

Net loss allocated to:

 

 

 

 

 

 

 

 

 

Common shares

 

$

(1,556

)

$

(1,938

)

$

(4,101

)

$

(9,313

)

Unvested restricted shares

 

(32

)

(42

)

(97

)

(250

)

Total net loss

 

$

(1,588

)

$

(1,980

)

$

(4,198

)

$

(9,563

)

Basic and diluted net loss per share:

 

 

 

 

 

 

 

 

 

Basic common share

 

$

(0.04

)

$

(0.04

)

$

(0.09

)

$

(0.20

)

Diluted common share

 

(0.04

)

(0.04

)

(0.09

)

(0.20

)

 

The following are the common share amounts used to compute the basic and diluted earnings per common share for the three and nine months ended September 30, 2011 and 2010 (in thousands):

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

Basic and diluted weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

47,191

 

46,887

 

47,136

 

46,677

 

 

(6) Employee Incentive Plans

 

(a)         Long-Term Incentive Plans

 

The Company 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.

 

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Table of Contents

 

CROSSTEX ENERGY, INC.

 

Notes to Condensed 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 condensed consolidated financial statements with respect to these plans are as follows (in thousands):

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

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

 

$

1,367

 

$

1,715

 

$

4,753

 

$

6,218

 

Cost of share-based compensation charged to operating expense

 

205

 

231

 

935

 

1,095

 

Total amount charged to income

 

$

1,572

 

$

1,946

 

$

5,688

 

$

7,313

 

Interest of non-controlling partners in share-based compensation

 

$

638

 

$

798

 

$

2,310

 

$

2,935

 

Amount of related income tax benefit recognized in income

 

$

347

 

$

393

 

$

1,252

 

$

1,591

 

 

(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 nine months ended September 30, 2011 is provided below:

 

 

 

Nine Months Ended September 30, 2011

 

 

 

 

 

Weighted

 

 

 

 

 

Average

 

 

 

Number of

 

Grant-Date

 

Crosstex Energy, L.P. Restricted Units:

 

Units

 

Fair Value

 

Non-vested, beginning of period

 

1,047,374

 

$

10.30

 

Granted

 

384,910

 

15.39

 

Vested*

 

(410,418

)

14.48

 

Forfeited

 

(61,851

)

12.24

 

Non-vested, end of period

 

960,015

 

$

10.42

 

Aggregate intrinsic value, end of period (in thousands)

 

$

15,571

 

 

 

 


* Vested units include 116,458 units withheld for payroll taxes paid on behalf of employees.

 

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 September 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 nine months ended September 30, 2011 and 2010 are provided below (in thousands):

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

Crosstex Energy, L.P. Restricted Units:

 

2011

 

2010

 

2011

 

2010

 

Aggregate intrinsic value of units vested

 

$

329

 

$

3,735

 

$

6,438

 

$

10,835

 

Fair value of units vested

 

$

389

 

$

2,643

 

$

5,945

 

$

5,497

 

 

As of September 30, 2011, there was $6.5 million of unrecognized compensation cost related to non-vested restricted units. That cost is expected to be recognized over a weighted-average period of 2.0 years.

 

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CROSSTEX ENERGY, INC.

 

Notes to Condensed Consolidated Financial Statements

 

(c) Partnership Unit Options

 

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

 

 

 

Nine Months Ended September 30, 2011

 

 

 

 

 

Weighted

 

 

 

Number of

 

Average

 

Crosstex Energy, L.P. Unit Options:

 

Units

 

Exercise Price

 

Outstanding, beginning of period

 

611,311

 

$

6.77

 

Exercised

 

(111,729

)

4.61

 

Forfeited

 

(27,031

)

13.92

 

Expired

 

 

 

Outstanding, end of period

 

472,551

 

$

6.90

 

Options exercisable at end of period

 

333,557

 

 

 

Weighted average contractual term (years) end of period:

 

 

 

 

 

Options outstanding

 

7.5

 

 

 

Options exercisable

 

7.2

 

 

 

Aggregate intrinsic value end of period (in thousands):

 

 

 

 

 

Options outstanding

 

$

4,887

 

 

 

Options exercisable

 

$

3,466

 

 

 

 

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

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

Crosstex Energy, L.P. Unit Options:

 

2011

 

2010

 

2011

 

2010

 

Intrinsic value of unit options exercised

 

$

348

 

$

727

 

$

1,333

 

$

1,016

 

Fair value of unit options vested

 

$

1

 

$

469

 

$

562

 

$

762

 

 

As of September 30, 2011, there was $0.3 million of unrecognized compensation cost related to non-vested unit options. That cost is expected to be recognized over a weighted average period of 1.3 years.

 

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

 

The Company’s restricted shares are valued at their fair value at the date of grant which is equal to the market value of the common stock on such date. A summary of the restricted share activities for the nine months ended September 30, 2011 is provided below:

 

 

 

Nine Months Ended

 

 

 

September 30, 2011

 

 

 

 

 

Weighted

 

 

 

 

 

Average

 

 

 

Number of 

 

Grant-Date

 

Crosstex Energy, Inc. Restricted Shares:

 

Shares

 

Fair Value

 

Non-vested, beginning of period

 

1,108,998

 

$

8.64

 

Granted

 

616,284

 

9.44

 

Vested*

 

(412,185

)

13.64

 

Forfeited

 

(79,994

)

8.28

 

Non-vested, end of period

 

1,233,103

 

$

7.39

 

Aggregate intrinsic value, end of period (in thousands)

 

$

16,622

 

 

 

 


* Vested shares include 113,021 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 September 30, 2011.

 

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CROSSTEX ENERGY, INC.

 

Notes to Condensed Consolidated Financial Statements

 

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 nine months ended September 30, 2011 and September 30, 2010 are provided below (in thousands):

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

Crosstex Energy, Inc. Restricted Shares:

 

2011

 

2010

 

2011

 

2010

 

Aggregate intrinsic value of shares vested

 

$

226

 

$

2,330

 

$

3,915

 

$

3,143

 

Fair value of shares vested

 

$

342

 

$

2,972

 

$

5,623

 

$

4,309

 

 

As of September 30, 2011 there was $6.0 million of unrecognized compensation cost related to CEI restricted shares for directors, officers and employees. The cost is expected to be recognized over a weighted average period of 2.1 years.

 

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

 

CEI stock options have not been granted as a means of compensation since 2005. All options 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 September 30, 2011:

 

 

 

Nine Months Ended September 30, 2011

 

 

 

 

 

Weighted

 

 

 

Number of

 

Average

 

Crosstex Energy, Inc. Stock Options:

 

Shares

 

Exercise Price

 

Outstanding, beginning of period

 

37,500

 

$

6.50

 

Forfeited

 

 

 

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

 

3.2

 

 

 

 

(7) Derivatives

 

Commodity Swaps

 

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

 

The Partnership commonly enters into various derivative financial transactions which it does not designate as accounting hedges. These transactions include “swing swaps,” “third party on-system financial swaps,” “storage swaps,” “basis swaps,” “processing margin swaps,” “liquids swaps” and “put options.”  Swing swaps are generally short-term in nature (one month) and are usually entered into to protect against changes in the volume of daily versus first-of-month index priced gas supplies or markets. 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.  Liquids financial swaps are used to hedge price risk on percent of liquids (POL) contracts. Put options are purchased to hedge against declines in pricing and as such represent options, not obligations, to sell the related underlying volumes at a fixed price.

 

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Table of Contents

 

CROSSTEX ENERGY, INC.

 

Notes to Condensed Consolidated Financial Statements

 

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

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

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

 

$

(619

)

$

1,473

 

$

111

 

$

958

 

Realized losses on derivatives

 

1,227

 

109

 

5,355

 

5,975

 

Ineffective portion of derivatives qualifying for hedge accounting

 

(45

)

 

(127

)

(61

)

Net losses related to commodity swaps

 

$

563

 

$

1,582

 

$

5,339

 

$

6,872

 

Put option premium mark to market

 

 

 

181

 

 

Losses on derivatives

 

$

563

 

$

1,582

 

$

5,520

 

$

6,872

 

 

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

 

 

 

September 30,

 

December 31,

 

 

 

2011

 

2010

 

 

 

 

 

 

 

Fair value of derivative assets — current, designated

 

$

230

 

$

1

 

Fair value of derivative assets — current, non-designated

 

3,930

 

5,522

 

Fair value of derivative assets — long term, designated

 

101

 

 

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

 

187

 

1,169

 

Fair value of derivative liabilities — current, designated

 

(945

)

(1,066

)

Fair value of derivative liabilities — current, non-designated

 

(5,508

)

(6,914

)

Fair value of derivative liabilities — long term, designated

 

(15

)

 

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

 

(151

)

(1,156

)

Net fair value of derivatives

 

$

(2,171

)

$

(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 September 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.

 

 

 

September 30, 2011

 

Transaction Type

 

Volume

 

Fair Value

 

 

 

(In thousands)

 

Cash Flow Hedges:*

 

 

 

 

 

Liquids swaps (short contracts)

 

(8,668

)

$

(629

)

Total swaps designated as cash flow hedges

 

 

 

$

(629

)

 

 

 

 

 

 

Mark to Market Derivatives:*

 

 

 

 

 

Swing swaps (short contracts)

 

(1,519

)

$

(11

)

Physical offsets to swing swap transactions (long contracts)

 

1,519

 

 

 

 

 

 

 

 

Basis swaps (long contracts)

 

9,615

 

2,669

 

Physical offsets to basis swap transactions (short contracts)

 

(155

)

465

 

Basis swaps (short contracts)

 

(9,305

)

(2,626

)

Physical offsets to basis swap transactions (long contracts)

 

155

 

(558

)

 

 

 

 

 

 

Processing margin hedges — liquids (short contracts)

 

(12,523

)

(438

)

Processing margin hedges — gas (long contracts)

 

1,576

 

(1,175

)

Processing margin hedges — gas (short contracts)

 

(86

)

59

 

 

 

 

 

 

 

Liquids swaps - non-designated (short contracts)

 

(730

)

(12

)

 

 

 

 

 

 

Storage swap transactions — gas (short contracts)

 

(70

)

73

 

 

 

 

 

 

 

Liquid put options (purchased)

 

3,122

 

12

 

Total mark to market derivatives

 

 

 

$

(1,542

)

 


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

 

15



Table of Contents

 

CROSSTEX ENERGY, INC.

 

Notes to Condensed Consolidated Financial Statements

 

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 September 30, 2011 of $4.9 million would be reduced to $1.9 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

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

Increase (Decrease) in Midstream Revenue

 

2011

 

2010

 

2011

 

2010

 

Liquids realized loss included in Midstream revenue

 

$

(527

)

$

(13

)

$

(2,235

)

$

(1,123

)

 

Natural Gas

 

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

 

Liquids

 

As of September 30, 2011, an unrealized derivative fair value net loss of $0.6 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 September 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, liquids 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

 

September 30, 2011

 

$

(1,578

)

$

36

 

$

 

$

(1,542

)

 

16



Table of Contents

 

CROSSTEX ENERGY, INC.

 

Notes to Condensed Consolidated Financial Statements

 

(8)      Fair Value Measurements

 

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

 

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

 

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

 

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

 

 

 

September 30, 2011

 

December 31, 2010

 

 

 

Level 2

 

Level 2

 

Commodity Swaps*

 

$

(2,171

)

$

(2,444

)

Total

 

$

(2,171

)

$

(2,444

)

 


*

Unrealized gains or losses on commodity derivatives qualifying for hedge accounting are recorded in accumulated other comprehensive income at each measurement date. The fair value of derivative contracts included in assets or liabilities for risk management activities represents the amount at which the instruments could be exchanged in a current arms-length transaction transaction adjusted for credit risk of the Partnership and/or the counterparty as required under FASB ASC 820.

 

Fair Value of Financial Instruments

 

The estimated fair value of the Company’s 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):

 

 

 

September 30, 2011

 

December 31, 2010

 

 

 

Carrying

 

Fair

 

Carrying

 

Fair

 

 

 

Value

 

Value

 

Value

 

Value

 

Long-term debt

 

$

787,934

 

$

818,125

 

$

718,570

 

$

768,308

 

Obligations under capital lease

 

$

29,120

 

$

25,971

 

$

31,327

 

$

28,807

 

 

The carrying amounts of the Company’s cash and cash equivalents, accounts receivable, and accounts payable approximate fair value due to the short-term maturities of these assets and liabilities.

 

The Partnership had $75.0 million in borrowings under its revolving credit facility included in long-term debt as of September 30, 2011 and no borrowings at December 31, 2010.  As borrowings under the credit facility accrue interest under floating interest rate structures, the carrying value of such indebtedness approximates fair value for the amounts outstanding under the credit facility. As of September 30, 2011 and December 31, 2010, the Partnership also had borrowings totaling $712.9 million and $711.5 million, net of discount, respectively, under senior unsecured notes with a fixed rate of 8.875% and a series B secured note with a principal amount of $7.1 million as of December 31, 2010 with a fixed rate of 9.5%. The fair value of the senior unsecured notes as of September 30,

 

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Table of Contents

 

CROSSTEX ENERGY, INC.

 

Notes to Condensed Consolidated Financial Statements

 

2011 and December 31, 2010 was based on third party market quotations. The fair value of the series B secured note as of December 31, 2010 was adjusted to reflect current market interest rates for such borrowings on that date.

 

(9) Income Tax

 

The Company has recorded a deferred tax asset in the amount of $20.5 million relating to the difference between its book and tax basis of its investment in the Partnership as of September 30, 2011 and December 31, 2010.  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 income tax provision for the nine months ended September 30, 2011 reflects a tax benefit of $2.1 million for the current period loss. Unrecognized tax benefits increased $0.3 million during the nine months ended September 30, 2011, and the increase, if recognized, would affect the effective tax rate.

 

(10) Commitments and Contingencies

 

(a) Employment and Severance Agreements

 

Certain members of management of the Company are parties to employment and/or severance agreements with the general partner of the Partnership. The employment and severance agreements provide those managers with severance payments in certain circumstances and, in the case of employment agreements, prohibit each such person from competing with the general partner of the Partnership or its affiliates for a certain period of time following the termination of such person’s employment.

 

(b) Environmental Issues

 

The Partnership acquired LIG Pipeline Company and its subsidiaries on April 1, 2004. Contamination from historical operations was identified during due diligence at a number of sites owned by the acquired companies. The seller, AEP, has indemnified the Partnership for these identified sites. Moreover, AEP has entered into an agreement with a third party company pursuant to which the remediation costs associated with these sites have been assumed by this third party company that specializes in remediation work. The Partnership does not expect to incur any material liability with these sites; however, there can be no assurance that the third parties who have assumed responsibility for remediation of site conditions will fulfill their obligations.

 

In addition, the Partnership disclosed possible Clean Air Act monitoring deficiencies it has discovered to the Louisiana Department of Environmental Quality (LDEQ) and is working with the agency to correct these deficiencies and to address modifications to facilities to ensure compliance. The Partnership does not expect to incur any material environmental liability associated with these issues.

 

In June 2011, the Partnership notified the Texas Commission of Environmental Quality that it would conduct an internal audit of its North Texas operations under the Texas Environmental, Health & Safety Audit Privilege Act (Audit Act).  Under the Audit Act, the Partnership will be able to conduct an audit of its facilities and make disclosures pursuant to Section 10(g) of the Audit Act, which provides immunity from penalties for violations voluntarily disclosed as a result of the compliance audit.  Pursuant to Section 4(e), the audits will be completed no later than six (6) months after the date of their commencement. The Partnership is targeting December 2011 for completion of the audit.

 

(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.

 

On June 7, 2010, Formosa Plastics Corporation, Texas, Formosa Plastics Corporation, America, Formosa Utility Venture, Ltd., and Nan Ya Plastics Corporation, America filed a lawsuit against Crosstex Energy, Inc., Crosstex Energy, L.P., Crosstex Energy GP, L.P., Crosstex Energy GP, LLC, Crosstex Energy Services, L.P., and Crosstex Gulf Coast Marketing, Ltd. in the 24th Judicial District Court of Calhoun County, Texas, asserting claims for negligence, res ipsa loquitor, products liability and strict liability relating to the alleged receipt by the plaintiffs of natural gas liquids into their facilities from facilities operated by the Partnership.  The lawsuit alleges that the plaintiffs have incurred at least $65.0 million in damages, including damage to equipment and lost profits.  The Partnership has submitted the claim to its insurance carriers and intends to vigorously defend the lawsuit.  The Partnership believes that any recovery would be within applicable policy limits. Although it is not possible to predict the ultimate outcome of this matter,

 

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Table of Contents

 

CROSSTEX ENERGY, INC.

 

Notes to Condensed Consolidated Financial Statements

 

the Partnership does not expect that an award in this matter will have a material adverse impact on its consolidated results of operations or financial condition.

 

At times, the Partnership’s 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 Partnership’s 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 a number of 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.

 

(11) Segment Information

 

Identification of operating segments is based principally upon regions served.  The Partnership’s reportable segments consist of the natural gas gathering, processing and transmission operations located in north Texas and in the Permian Basin in west Texas (NTX), the pipelines and processing plants located in Louisiana (LIG) and the south Louisiana processing and NGL assets (PNGL). Operating activity for assets sold in the comparative periods that was not considered discontinued operations as well as intersegment eliminations is shown in the corporate segment.

 

The Partnership evaluates the performance of its operating segments based on operating revenues and segment profits. Corporate expenses include general partnership expenses associated with managing all reportable operating segments and the Company’s general and administrative expenses, including the Partnership’s general and administrative expenses. Corporate assets consist primarily of property and equipment, including software, for general corporate support, working capital, debt financing costs, and the investment in HEP.

 

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Table of Contents

 

CROSSTEX ENERGY, INC.

 

Notes to Condensed Consolidated Financial Statements

 

Summarized financial information concerning the Partnership’s reportable segments as consolidated into the Company’s condensed financial statements is shown in the following table.

 

 

 

LIG

 

NTX

 

PNGL

 

Corporate

 

Totals

 

 

 

(In thousands)

 

Three Months Ended September 30, 2011:

 

 

 

 

 

 

 

 

 

 

 

Sales to external customers

 

$

200,161

 

$

83,684

 

$

233,653

 

$

 

$

517,498

 

Sales to affiliates

 

22,059

 

26,755

 

82

 

(48,896

)

 

Purchased gas and NGLs

 

(189,393

)

(67,041

)

(219,001

)

48,896

 

(426,539

)

Operating expenses

 

(8,944

)

(11,957

)

(7,225

)

 

(28,126

)

Segment profit

 

$

23,883

 

$

31,441

 

$

7,509

 

$

 

$

62,833

 

Gain (loss) on derivatives

 

$

(509

)

$

(225

)

$

171

 

$

 

$

(563

)

Depreciation, amortization and impairments

 

$

(3,216

)

$

(19,861

)

$

(7,859

)

$

(994

)

$

(31,930

)

Capital expenditures

 

$

58

 

$

8,205

 

$

3,362

 

$

660

 

$

12,285

 

Identifiable assets

 

$

304,906

 

$

1,092,754

 

$

475,580

 

$

77,529

 

$

1,950,769

 

Three Months Ended September 30, 2010:

 

 

 

 

 

 

 

 

 

 

 

Sales to external customers

 

$

232,220

 

$

85,510

 

$

137,005

 

$

 

$

454,735

 

Sales to affiliates

 

18,228

 

20,516

 

 

(38,744

)

 

Purchased gas and NGLs

 

(221,624

)

(66,207

)

(121,985

)

38,744

 

(371,072

)

Operating expenses

 

(7,877

)

(11,525

)

(7,074

)

 

(26,476

)

Segment profit

 

$

20,947

 

$

28,294

 

$

7,946

 

$

 

$

57,187

 

Gain (loss) on derivatives

 

$

(1,561

)

$

(70

)

$

49

 

$

 

$

(1,582

)

Depreciation, amortization and impairments

 

$

(3,132

)

$

(15,896

)

$

(8,058

)

$

(1,117

)

$

(28,203

)

Capital expenditures

 

$

3,006

 

$

14,635

 

$

1,389

 

$

810

 

$

19,840

 

Identifiable assets

 

$

328,499

 

$

1,111,274

 

$

473,668

 

$

56,984

 

$

1,970,425

 

Nine Months Ended September 30, 2011:

 

 

 

 

 

 

 

 

 

 

 

Sales to external customers

 

$

624,558

 

$

252,462

 

$

655,983

 

$

 

$

1,533,003

 

Sales to affiliates

 

68,110

 

69,635

 

773

 

(138,518

)

 

Purchased gas and NGLs

 

(596,313

)

(194,560

)

(603,295

)

138,518

 

(1,255,650

)

Operating expenses

 

(25,912

)

(35,417

)

(19,754

)

 

(81,083

)

Segment profit

 

$

70,443

 

$

92,120

 

$

33,707

 

$

 

$

196,270

 

Gain (loss) on derivatives

 

$

(4,463

)

$

(1,319

)

$

262

 

$

 

$

(5,520

)

Depreciation, amortization and impairments

 

$

(10,423

)

$

(56,325

)

$

(23,400

)

$

(3,109

)

$

(93,257

)

Capital expenditures

 

$

2,738

 

$

43,216

 

$

12,998

 

$

1,862

 

$

60,814

 

Identifiable assets

 

$

304,906

 

$

1,092,754

 

$

475,580

 

$

77,529

 

$

1,950,769

 

Nine Months Ended September 30, 2010:

 

 

 

 

 

 

 

 

 

 

 

Sales to external customers

 

$

677,750

 

$

236,517

 

$

451,174

 

$

 

$

1,365,441

 

Sales to affiliates

 

62,201

 

66,106

 

6

 

(128,313

)

 

Purchased gas and NGLs

 

(653,515

)

(184,370

)

(407,001

)

128,313

 

(1,116,573

)

Operating expenses

 

(24,140

)

(34,793

)

(19,432

)

 

(78,365

)

Segment profit

 

$

62,296

 

$

83,460

 

$

24,747

 

$

 

$

170,503

 

Gain (loss) on derivatives

 

$

(2,465

)

$

(4,577

)

$

170

 

$

 

$

(6,872

)

Depreciation, amortization and impairments

 

$

(9,242

)

$

(47,000

)

$

(23,886

)

$

(3,336

)

$

(83,464

)

Capital expenditures

 

$

8,908

 

$

20,015

 

$

2,309

 

$

1,491

 

$

32,723

 

Identifiable assets

 

$

328,499

 

$

1,111,274

 

$

473,668

 

$

56,984

 

$

1,970,425

 

 

The following table reconciles the segment profits reported above to the operating income as reported in the condensed consolidated statements of operations (in thousands):

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

Segment profits

 

$

62,833

 

$

57,187

 

$

196,270

 

$

170,503

 

General and administrative expenses

 

(14,331

)

(11,964

)

(40,084

)

(37,900

)

Loss on derivatives

 

(563

)

(1,582

)

(5,520

)

(6,872

)

Gain (loss) on sale of property

 

(397

)

588

 

(317

)

14,367

 

Depreciation, amortization and impairments

 

(31,930

)

(28,203

)

(93,257

)

(83,464

)

Operating income

 

$

15,612

 

$

16,026

 

$

57,092

 

$

56,634

 

 

20



Table of Contents

 

CROSSTEX ENERGY, INC.

 

Notes to Condensed Consolidated Financial Statements

 

(12) Immaterial Correction of Prior Period Financial Statements

 

During the three months ended September 30, 2011, the Company determined certain immaterial corrections were required for previously-issued financial statements as discussed below. The corrections did not impact the Company’s operating income and were not considered material to the Company’s revenues and costs for the applicable periods.

 

The Company determined that revenues and purchased gas costs related to a new gas purchase arrangement were improperly classified as energy trading activities resulting in the netting of revenue and purchased gas which should have been shown on a gross basis in its previously-issued financial statements for the three months ended March 31, 2011 and June 30, 2011.  As a result both revenues and purchased gas were understated by $39.5 million and $29.6 million for the three months ended March 31, 2011 and June 30, 2011. The following table reflects the revenues, purchased gas costs and total operating costs and expenses as previously reported and as corrected for the three months ended March 31, 2011 and June 30, 2011 (in thousands):

 

 

 

Three Months Ended

 

Three Months Ended

 

 

 

March 31, 2011

 

June 30, 2011

 

As previously reported:

 

 

 

 

 

Total revenues

 

$

450,315

 

$

496,147

 

Purchased gas and NGLs

 

360,478

 

399,589

 

Total operating costs and expenses

 

431,077

 

473,904

 

Operating income

 

19,238

 

22,243

 

 

 

 

 

 

 

As corrected:

 

 

 

 

 

Total revenues

 

$

489,770

 

$

525,735

 

Purchased gas and NGLs

 

399,933

 

429,177

 

Total operating costs and expenses

 

470,532

 

503,492

 

Operating income

 

19,238

 

22,243

 

 

(13) Subsequent Event

 

Subsequent to the quarter ended September 30, 2011 and prior to the issuance of the unaudited condensed consolidated financial statements, the Company evaluated and found no events material to the financial statement presentation during this period.

 

21


 


Table of Contents

 

Item 2. Management’s 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, processing and marketing of natural gas and natural gas liquids (NGLs) through its subsidiaries. Our assets consist almost exclusively of partnership interests in Crosstex Energy, L.P., a publicly traded limited partnership engaged in the gathering, processing, transmission 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, LLC, 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.

 

Our cash flows consist almost exclusively of distributions from the Partnership on the partnership interests we own. Unless restricted by the terms of the Partnership’s credit facility and/or senior unsecured note indenture, the Partnership is required by its partnership agreement to distribute all its cash on hand at the end of each quarter, less reserves established by its general partner in its sole discretion to provide for the proper conduct of the Partnership’s business or to provide for future distributions.

 

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 Partnership’s 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 condensed consolidated results of operations are derived from the results of operations of the Partnership and also include our deferred taxes, interest of non-controlling partners in the Partnership’s net income, interest income (expense) and general and administrative expenses not reflected in the Partnership’s results of operation.  Accordingly, the discussion of our financial position and results of operations in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” primarily reflects the operating activities and results of operations of the Partnership.

 

The Partnership’s primary focus is on the gathering, processing, transmission and marketing of NGLs, which it manages in regional reporting segments of midstream activity.  The Partnership’s ge