Attached files

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EX-4.4 - EX-4.4 - EnLink Midstream Partners, LPa12-13922_1ex4d4.htm
EX-3.2 - EX-3.2 - EnLink Midstream Partners, LPa12-13922_1ex3d2.htm
EX-4.3 - EX-4.3 - EnLink Midstream Partners, LPa12-13922_1ex4d3.htm
EX-10.3 - EX-10.3 - EnLink Midstream Partners, LPa12-13922_1ex10d3.htm
EX-31.1 - EX-31.1 - EnLink Midstream Partners, LPa12-13922_1ex31d1.htm
EX-32.1 - EX-32.1 - EnLink Midstream Partners, LPa12-13922_1ex32d1.htm
EX-31.2 - EX-31.2 - EnLink Midstream Partners, LPa12-13922_1ex31d2.htm

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, 2012

 

OR

 

o

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

 

for the transition period from                to               

 

Commission file number: 000-50067

 

CROSSTEX ENERGY, L.P.

(Exact name of registrant as specified in its charter)

 

Delaware

 

16-1616605

(State of organization)

 

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

 

 

 

2501 CEDAR SPRINGS

 

 

DALLAS, TEXAS

 

75201

(Address of principal executive offices)

 

(Zip Code)

 

(214) 953-9500

(Registrant’s telephone number, including area code)

 

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

 

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

 

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

 

Large accelerated filer 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 27, 2012, the Registrant had 61,022,866 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

 

36

 

 

 

 

 

4.

 

Controls and Procedures

 

39

 

 

 

 

 

 

 

PART II—OTHER INFORMATION

 

 

 

 

 

 

 

1.

 

Legal Proceedings

 

39

 

 

 

 

 

1A.

 

Risk Factors

 

40

 

 

 

 

 

5.

 

Other Information

 

40

 

 

 

 

 

6.

 

Exhibits

 

42

 



Table of Contents

 

CROSSTEX ENERGY, L.P.

 

Condensed Consolidated Balance Sheets

 

 

 

June 30,

 

December 31,

 

 

 

2012

 

2011

 

 

 

(Unaudited)

 

 

 

 

 

(In thousands)

 

ASSETS

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

4,959

 

$

24,143

 

Restricted cash (1)

 

245,100

 

 

Accounts receivable:

 

 

 

 

 

Trade, net of allowance for bad debt of $362 and $405, respectively

 

37,258

 

22,680

 

Accrued revenue and other

 

103,622

 

143,115

 

Fair value of derivative assets

 

6,680

 

2,867

 

Natural gas and natural gas liquids, prepaid expenses and other

 

22,860

 

9,951

 

Total current assets

 

420,479

 

202,756

 

Property and equipment, net of accumulated depreciation of $445,795 and $406,273, respectively

 

1,285,968

 

1,241,901

 

Fair value of derivative assets

 

1,604

 

 

Intangible assets, net of accumulated amortization of $224,729 and $199,248, respectively

 

425,981

 

451,462

 

Investment in limited liability company

 

87,250

 

35,000

 

Other assets, net

 

22,953

 

24,212

 

Total assets

 

$

2,244,235

 

$

1,955,331

 

 

 

 

 

 

 

LIABILITIES AND PARTNERS’ EQUITY

 

Current liabilities:

 

 

 

 

 

Accounts payable, drafts payable and other

 

$

27,887

 

$

22,550

 

Accrued gas purchases

 

76,787

 

106,232

 

Fair value of derivative liabilities

 

2,839

 

5,587

 

Current portion of long-term debt (1)

 

250,000

 

 

Other current liabilities

 

45,162

 

66,065

 

Accrued interest

 

27,036

 

24,918

 

Total current liabilities

 

429,711

 

225,352

 

Long-term debt

 

762,357

 

798,409

 

Other long-term liabilities

 

22,383

 

23,919

 

Deferred tax liability

 

6,941

 

7,192

 

Fair value of derivative liabilities

 

7

 

 

Commitments and contingencies

 

 

 

Partners’ equity

 

1,022,836

 

900,459

 

 

 

 

 

 

 

Total liabilities and partners’ equity

 

$

2,244,235

 

$

1,955,331

 

 


(1) See Footnote 2 - 2022 Notes for additional information.

 

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,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(Unaudited)

 

 

 

(In thousands, except per unit amounts)

 

Revenues

 

$

351,194

 

$

525,735

 

$

722,903

 

$

1,015,505

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

Purchased gas and NGLs

 

260,890

 

429,177

 

532,846

 

829,111

 

Operating expenses

 

30,571

 

27,913

 

58,378

 

52,957

 

General and administrative

 

12,965

 

12,643

 

27,928

 

24,399

 

Gain on sale of property

 

(406

)

(60

)

(504

)

(80

)

(Gain) loss on derivatives

 

(4,905

)

1,536

 

(2,736

)

4,957

 

Depreciation and amortization

 

32,870

 

31,636

 

65,048

 

61,289

 

Total operating costs and expenses

 

331,985

 

502,845

 

680,960

 

972,633

 

Operating income

 

19,209

 

22,890

 

41,943

 

42,872

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest expense, net of interest income

 

(21,320

)

(20,676

)

(40,703

)

(40,444

)

Other income (expenses)

 

11

 

(241

)

25

 

(129

)

Total other expense

 

(21,309

)

(20,917

)

(40,678

)

(40,573

)

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

 

(2,100

)

1,973

 

1,265

 

2,299

 

Income tax provision

 

(411

)

(358

)

(835

)

(611

)

Net income (loss)

 

(2,511

)

1,615

 

430

 

1,688

 

Less: Net loss attributable to the non-controlling interest

 

(71

)

(52

)

(109

)

(107

)

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

 

$

(2,440

)

$

1,667

 

$

539

 

$

1,795

 

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

 

$

4,853

 

$

4,559

 

$

9,706

 

$

8,824

 

General partner interest in net income (loss)

 

$

(40

)

$

(111

)

$

(111

)

$

(633

)

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

 

$

(7,253

)

$

(2,781

)

$

(9,056

)

$

(6,396

)

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

 

 

 

 

 

 

 

 

 

Basic and diluted per common unit

 

$

(0.13

)

$

(0.05

)

$

(0.17

)

$

(0.12

)

 

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,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(Unaudited)

 

 

 

(In thousands)

 

Net income (loss)

 

$

(2,511

)

$

1,615

 

$

430

 

$

1,688

 

Hedging (gains) losses reclassified to earnings

 

71

 

701

 

425

 

1,089

 

Adjustment in fair value of derivatives

 

1,796

 

(138

)

1,757

 

(1,535

)

Comprehensive income (loss)

 

(644

)

2,178

 

2,612

 

1,242

 

Comprehensive loss attributable to non-controlling interest

 

71

 

52

 

109

 

107

 

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

 

$

(573

)

$

2,230

 

$

2,721

 

$

1,349

 

 

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, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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, 2011

 

$

730,010

 

50,677

 

$

147,770

 

14,706

 

$

20,322

 

1,334

 

$

(503

)

$

2,860

 

$

900,459

 

Issuance of common units

 

158,014

 

10,120

 

 

 

3,362

 

207

 

 

 

161,376

 

Proceeds from exercise of unit options

 

203

 

40

 

 

 

 

 

 

 

203

 

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

 

(980

)

172

 

 

 

 

 

 

 

(980

)

Capital contributions

 

 

 

 

 

87

 

4

 

 

 

87

 

Stock-based compensation

 

2,662

 

 

 

 

2,331

 

 

 

 

4,993

 

Distributions

 

(33,694

)

 

(9,559

)

 

(2,661

)

 

 

 

(45,914

)

Net income (loss)

 

(9,056

)

 

9,706

 

 

(111

)

 

 

(109

)

430

 

Hedging gains or losses reclassified to earnings

 

 

 

 

 

 

 

425

 

 

425

 

Adjustment in fair value of derivatives

 

 

 

 

 

 

 

1,757

 

 

1,757

 

Balance, June 30, 2012

 

$

847,159

 

61,009

 

$

147,917

 

14,706

 

$

23,330

 

1,545

 

$

1,679

 

$

2,751

 

$

1,022,836

 

 

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,

 

 

 

2012

 

2011

 

 

 

(Unaudited)

 

 

 

(In thousands)

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

430

 

$

1,688

 

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

 

 

 

 

 

Depreciation and amortization

 

65,048

 

61,289

 

Gain on sale of property

 

(504

)

(80

)

Deferred tax benefit

 

(250

)

(250

)

Non-cash stock-based compensation

 

4,993

 

3,995

 

Non-cash portion of derivatives (gain) loss

 

(5,975

)

828

 

Amortization of debt issue costs

 

1,321

 

4,065

 

Amortization of discount on notes

 

948

 

948

 

Equity in loss of limited liability company

 

 

236

 

Changes in assets and liabilities:

 

 

 

 

 

Accounts receivable, accrued revenue and other

 

24,906

 

(10,638

)

Natural gas and natural gas liquids, prepaid expenses and other

 

(8,971

)

(5,403

)

Accounts payable, accrued gas purchases and other accrued liabilities

 

(29,655

)

8,478

 

Net cash provided by operating activities

 

52,291

 

65,156

 

Cash flows from investing activities:

 

 

 

 

 

Additions to property and equipment

 

(90,046

)

(49,643

)

Proceeds from sale of property

 

632

 

107

 

Investment in limited liability company

 

(52,250

)

(35,000

)

Net cash used in investing activities

 

(141,664

)

(84,536

)

Cash flows from financing activities:

 

 

 

 

 

Proceeds from borrowings

 

548,500

 

277,250

 

Payments on borrowings

 

(335,500

)

(232,308

)

Increase in restricted cash

 

(245,100

)

 

Payments on capital lease obligations

 

(1,536

)

(1,509

)

Increase (decrease) in drafts payable

 

(5,985

)

3,165

 

Debt refinancing costs

 

(4,962

)

(3,792

)

Conversion of restricted units, net of units withheld for taxes

 

(980

)

(1,740

)

Issuance of common units

 

158,014

 

 

Distribution to partners

 

(45,914

)

(37,589

)

Proceeds from exercise of unit options

 

203

 

392

 

Contributions from general partner

 

3,449

 

145

 

Net cash provided by financing activities

 

70,189

 

4,014

 

Net decrease in cash and cash equivalents

 

(19,184

)

(15,366

)

Cash and cash equivalents, beginning of period

 

24,143

 

17,697

 

Cash and cash equivalents, end of period

 

$

4,959

 

$

2,331

 

Cash paid for interest

 

$

36,252

 

$

35,936

 

Cash paid for income taxes

 

$

784

 

$

752

 

 

See accompanying notes to condensed consolidated financial statements.

 

7



Table of Contents

 

CROSSTEX ENERGY, L.P.

 

Notes to Condensed Consolidated Financial Statements

 

June 30, 2012

(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, natural gas liquids, or NGLs, and providing terminal services for crude oil. 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.  The Partnership operates processing plants that process gas transported to the plants by major interstate pipelines or from our own gathering systems under a variety of fee arrangements.  In addition, 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.  The Partnership recently added crude oil terminal facilities in south Louisiana to provide access for crude oil producers to the premium markets in this area.

 

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, 2011.

 

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. In 2012, the Partnership made an additional capital contribution of $52.3 million to HEP related to HEP’s acquisition of substantially all of Meritage Midstream Services’ natural gas gathering assets in south Texas. HEP owns midstream assets and provides midstream and construction services to Eagle Ford Shale producers.  The Partnership owns 30.6 percent of HEP and accounts for this investment under the equity method of accounting. This investment is reflected on the balance sheet as “Investment in limited liability company.”

 

(c) Potential Changes in use of Sabine Plant during 2012

 

Currently, the Partnership’s Sabine plant has a contract with a third-party to fractionate the raw-make NGLs produced by the Sabine plant.  The primary term of the contract expired on June 30, 2012 and is currently renewed on a month-to-month basis.  The Partnership will negotiate with this third-party to try to establish a long-term fractionation agreement. If this third-party ceases to fractionate the produced NGLs from the Sabine plant and the Partnership is unsuccessful in determining another alternative for our Sabine customers, the Partnership will cease operation of the Sabine plant.  Although the Partnership does not have specific plans at this time to relocate the Sabine plant if it is idled, the Partnership may utilize it elsewhere in its operations.  The net book value of the Sabine plant was $46.4 million (including $13.3 million of intangible assets attributable to customer relationships) as of June 30, 2012.  If the plant is idled on a long-term basis, an impairment may be recorded to expense the non-recoverable costs associated with the plant’s current location, which are estimated to be approximately $27.0 million based on the net book value as of June 30, 2012.

 

8



Table of Contents

 

CROSSTEX ENERGY, L.P.

 

Notes to Condensed Consolidated Financial Statements

 

(d) Clearfield Acquisition

 

On July 2, 2012, the Partnership, through a wholly-owned subsidiary, completed its previously announced acquisition of all of the issued and outstanding common stock of Clearfield Energy, Inc. and Clearfield Energy’s wholly-owned subsidiaries (collectively, “Clearfield”). Clearfield is a well-established crude oil, condensate and water services company with operations in Ohio, Kentucky and West Virginia. Clearfield’s business includes crude oil pipelines, a barge loading terminal on the Ohio River, a rail loading terminal on the Ohio Central Railroad network, a trucking fleet, and brine water disposal wells.

 

The Partnership paid approximately $210.0 million in cash for the acquisition and the purchase was funded from restricted cash that resulted from the senior notes offering in May 2012. The assets associated with this acquisition will be included in a new reporting segment that will be referred to as Ohio River Valley. Pro-forma financial statements for the Clearfield acquisition are available on our amended Current Report on Form 8-K/A filed on August 1, 2012.

 

(2) Long-Term Debt

 

As of June 30, 2012 and December 31, 2011, long-term debt consisted of the following (in thousands):

 

 

 

June 30,

 

December 31,

 

 

 

2012

 

2011

 

Bank credit facility (due 2016), interest based on Prime and/or LIBOR plus an applicable margin, interest rate at June 30, 2012 and December 31, 2011 was 3.33% and 2.9%, respectively

 

$

48,000

 

$

85,000

 

Senior unsecured notes (due 2018), net of discount of $10.6 million and $11.6 million, respectively, which bear interest at the rate of 8.875%

 

714,357

 

713,409

 

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

 

250,000

 

 

 

 

1,012,357

 

798,409

 

Less current portion

 

(250,000

)

 

Debt classified as long-term

 

$

762,357

 

$

798,409

 

 

Credit Facility.  As of June 30, 2012, there was $57.6 million in outstanding letters of credit and $48.0 million borrowed under the Partnership’s bank credit facility, leaving approximately $529.4 million available for future borrowing based on the borrowing capacity of $635.0 million.

 

In January, 2012, the Partnership amended its credit facility.  This amendment increased its borrowing capacity from $485.0 million to $635.0 million and amended certain terms under the facility to provide additional financial flexibility during the remaining four-year term of the facility.

 

In May 2012, the Partnership amended its credit facility.  The amendment to the Partnership’s credit facility, among other things, (i) increased the maximum permitted consolidated leverage ratio (as defined in the amended credit facility, being generally computed as the ratio of total funded debt to consolidated earnings before interest, taxes, depreciation, amortization and certain other non-cash charges) during the Clearfield acquisition period (as defined in the amended credit facility, being generally the four quarterly

 

9



Table of Contents

 

CROSSTEX ENERGY, L.P.

 

Notes to Condensed Consolidated Financial Statements

 

measurement periods after closing the Clearfield acquisition) from 5.0 to 1.0 to 5.5 to 1.0, and (ii) increased the maximum permitted consolidated leverage ratio during any other acquisition period (as defined in the amended credit facility, being generally the three quarterly measurement periods after closing certain material acquisitions) from 5.0 to 1.0 to 5.5 to 1.0.

 

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.

 

All material terms of the credit facility are described in Part II, “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Indebtedness” in the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2011. The Partnership expects to be in compliance with all credit facility covenants for at least the next twelve months.

 

2022 Notes.  On May 24, 2012, the Partnership issued $250.0 million in aggregate principal amount of 7.125% senior unsecured notes (the “2022 Notes”) due on June 1, 2022 at an issue price of 100% of the principal amount to yield 7.125% to maturity. The interest payments are due semi-annually in arrears in June and December.  The Partnership placed into escrow the net proceeds of $245.1 million from the offering of the 2022 Notes pending completion of the Clearfield acquisition. The net proceeds are classified as restricted cash as of June 30, 2012 and the 2022 Notes are classified as current debt as of June 30, 2012. Upon closing of the Clearfield acquisition on July 2, 2012, the 2022 Notes were reclassified as long term debt and the restricted cash was used to fund the Clearfield acquisition and for general partnership purposes, including capital expenditures for the Cajun-Sibon natural gas liquids pipeline expansion.

 

The Partnership may redeem up to 35% of the 2022 Notes at any time prior to June 1, 2015 with the cash proceeds from equity offerings at a redemption price of 107.125% of the principal amount of the 2022 Notes (plus accrued and unpaid interest to the redemption date).

 

Prior to June 1, 2017, the Partnership may redeem all or a part of the 2022 Notes at the redemption price equal to the sum of the principal amount thereof, plus a make-whole premium at the redemption date, plus accrued and unpaid interest to the redemption date.

 

On or after June 1, 2017, the Partnership may redeem all or a part of the 2022 Notes at redemption prices (expressed as percentages of principal amount) equal to 103.563% for the twelve-month period beginning on June 1, 2017, 102.375% for the twelve-month period beginning on June 1, 2018, 101.188% for the twelve-month period beginning on June 1, 2019 and 100.000% for the twelve-month period beginning on June 1, 2020 and at any time thereafter, plus accrued and unpaid interest, if any, to the applicable redemption date on the 2022 Notes.

 

Under the terms of the indenture governing the 2022 Notes agreement, repurchase offer obligations would be triggered by a change of control combined with a ratings decline on the notes. All other material terms of the senior unsecured notes are described in footnote 4 to the consolidated financial statements in the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2011.

 

Non-Guarantors.  All senior unsecured notes are jointly and severally guaranteed by each of the Partnership’s current material subsidiaries (the “Guarantors”), with the exception of its regulated Louisiana subsidiaries (which may only guarantee up to $500.0 million of the Partnership’s debt), 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, 2012 and 2011 are disclosed below in accordance with Rule 3-10 of Regulation S-X. Comprehensive income (loss) is not included in the condensed consolidating statements of operations of the guarantors and non-guarantors for the three and six months ended June 30, 2012 and 2011 as these amounts are not considered material.

 

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Table of Contents

 

CROSSTEX ENERGY, L.P.

 

Notes to Condensed Consolidated Financial Statements

 

Condensed Consolidating Balance Sheets

June 30, 2012

 

 

 

Guarantors

 

Non-Guarantors

 

Elimination

 

Consolidated

 

 

 

(In thousands)

 

ASSETS

 

 

 

 

 

 

 

 

 

Total current assets

 

$

405,623

 

$

14,856

 

$

 

$

420,479

 

Property, plant and equipment, net

 

1,076,248

 

209,720

 

 

1,285,968

 

Total other assets

 

537,788

 

 

 

537,788

 

Total assets

 

$

2,019,659

 

$

224,576

 

$

 

$

2,244,235

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES & PARTNERS’ CAPITAL

 

 

 

 

 

 

 

 

 

Total current liabilities

 

$

424,239

 

$

5,472

 

$

 

$

429,711

 

Long-term debt

 

762,357

 

 

 

762,357

 

Other long-term liabilities

 

29,331

 

 

 

29,331

 

Partners’ capital

 

803,732

 

219,104

 

 

1,022,836

 

Total liabilities & partners’ capital

 

$

2,019,659

 

$

224,576

 

$

 

$

2,244,235

 

 

December 31, 2011

 

 

 

Guarantors

 

Non-Guarantors

 

Elimination

 

Consolidated

 

 

 

(In thousands)

 

ASSETS

 

 

 

 

 

 

 

 

 

Total current assets

 

$

189,410

 

$

13,346

 

$

 

$

202,756

 

Property, plant and equipment, net

 

1,026,537

 

215,364

 

 

1,241,901

 

Total other assets

 

510,671

 

3

 

 

510,674

 

Total assets

 

$

1,726,618

 

$

228,713

 

$

 

$

1,955,331

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES & PARTNERS’ CAPITAL

 

 

 

 

 

 

 

 

 

Total current liabilities

 

$

220,811

 

$

4,541

 

$

 

$

225,352

 

Long-term debt

 

798,409

 

 

 

798,409

 

Other long-term liabilities

 

31,111

 

 

 

31,111

 

Partners’ capital

 

676,287

 

224,172

 

 

900,459

 

Total liabilities & partners’ capital

 

$

1,726,618

 

$

228,713

 

$

 

$

1,955,331

 

 

Condensed Consolidating Statements of Operations

For the Three Months Ended June 30, 2012

 

 

 

Guarantors

 

Non-Guarantors

 

Elimination

 

Consolidated

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

$

336,828

 

$

22,200

 

$

(7,834

)

$

351,194

 

Total operating costs and expenses

 

(330,072

)

(9,747

)

7,834

 

(331,985

)

Operating income

 

6,756

 

12,453

 

 

19,209

 

Interest expense, net

 

(21,320

)

 

 

(21,320

)

Other income

 

11

 

 

 

11

 

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

 

(14,553

)

12,453

 

 

(2,100

)

Income tax provision

 

(408

)

(3

)

 

(411

)

Net loss attributable to non-controlling interest

 

 

71

 

 

71

 

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

 

$

(14,961

)

$

12,521

 

$

 

$

(2,440

)

 

11



Table of Contents

 

CROSSTEX ENERGY, L.P.

 

Notes to Condensed Consolidated Financial Statements

 

For the Three Months Ended June 30, 2011

 

 

 

Guarantors

 

Non-Guarantors

 

Elimination

 

Consolidated

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

$

511,104

 

$

21,957

 

$

(7,326

)

$

525,735

 

Total operating costs and expenses

 

(499,421

)

(10,750

)

7,326

 

(502,845

)

Operating income

 

11,683

 

11,207

 

 

22,890

 

Interest expense, net

 

(20,676

)

 

 

(20,676

)

Other expense

 

(241

)

 

 

(241

)

(Loss) income before non-controlling interest and income taxes

 

(9,234

)

11,207

 

 

1,973

 

Income tax provision

 

(354

)

(4

)

 

(358

)

Net income attributable to non-controlling interest

 

 

52

 

 

52

 

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

 

$

(9,588

)

$

11,255

 

$

 

$

1,667

 

 

For the Six Months Ended June 30, 2012

 

 

 

Guarantors

 

Non-Guarantors

 

Elimination

 

Consolidated

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

$

693,981

 

$

44,477

 

$

(15,555

)

$

722,903

 

Total operating costs and expenses

 

(677,659

)

(18,856

)

15,555

 

(680,960

)

Operating income

 

16,322

 

25,621

 

 

41,943

 

Interest expense, net

 

(40,646

)

(57

)

 

(40,703

)

Other income

 

25

 

 

 

25

 

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

 

(24,299

)

25,564

 

 

1,265

 

Income tax provision

 

(828

)

(7

)

 

(835

)

Net loss attributable to non-controlling interest

 

 

109

 

 

109

 

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

 

$

(25,127

)

$

25,666

 

$

 

$

539

 

 

For the Six Months Ended June 30, 2011

 

 

 

Guarantors

 

Non-Guarantors

 

Elimination

 

Consolidated

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

$

986,044

 

$

43,860

 

$

(14,399

)

$

1,015,505

 

Total operating costs and expenses

 

(967,573

)

(19,459

)

14,399

 

(972,633

)

Operating income

 

18,471

 

24,401

 

 

42,872

 

Interest expense, net

 

(40,444

)

 

 

(40,444

)

Other expense

 

(129

)

 

 

(129

)

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

 

$

(22,705

)

$

24,500

 

$

 

$

1,795

 

 

12



Table of Contents

 

CROSSTEX ENERGY, L.P.

 

Notes to Condensed Consolidated Financial Statements

 

Condensed Consolidating Statements of Cash Flow

For the Six Months Ended June 30, 2012

 

 

 

Guarantors

 

Non-Guarantors

 

Elimination

 

Consolidated

 

 

 

(In thousands)

 

Net cash flows provided by operating activities

 

$

20,468

 

$

31,823

 

$

 

$

52,291

 

Net cash flows used in investing activities

 

$

(141,037

)

$

(627

)

$

 

$

(141,664

)

Net cash flows provided by (used in) financing activities

 

$

70,189

 

$

(30,626

)

$

30,626

 

$

70,189

 

 

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

 

 

(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, 2012 are summarized as follows (in thousands):

 

Compressor equipment

 

$

37,199

 

Less: Accumulated amortization

 

(12,087

)

Net assets under capital leases

 

$

25,112

 

 

The following are the minimum lease payments to be made in each of the following years indicated for the capital leases in effect as of June 30, 2012 (in thousands):

 

2012

 

$

2,291

 

2013 through 2016 ($4,582 annually)

 

18,328

 

Thereafter

 

12,100

 

Less: Interest

 

(5,888

)

Net minimum lease payments under capital lease

 

26,831

 

Less: Current portion of net minimum lease payments

 

(4,448

)

Long-term portion of net minimum lease payments

 

$

22,383

 

 

(4) Partners’ Capital

 

(a) Issuance of Common Units

 

On May 15, 2012, we issued 10,200,000 common units representing limited partner interests in the Partnership at a public offering price of $16.28 per unit for net proceeds of $158.0 million.  In addition, Crosstex Energy GP, LLC made a general partner contribution of $3.4 million in connection with the issuance to maintain its 2% general partner interest. The net proceeds from the common units offering were used for general partnership purposes.

 

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Table of Contents

 

CROSSTEX ENERGY, L.P.

 

Notes to Condensed Consolidated Financial Statements

 

(b) Cash Distributions

 

Unless restricted by the terms of the Partnership’s credit facility and/or the indentures governing our 2022 Notes and our 8 7/8% senior unsecured notes due 2018 (“2018 Notes” and, together with the 2022 Notes, “all senior unsecured notes”), the Partnership must make distributions of 100% of available cash, as defined in the partnership agreement, within 45 days following the end of each quarter.

 

The Partnership’s first quarter 2012 distribution on its common and preferred units of $0.33 per unit was paid on May 15, 2012. The Partnership declared its second quarter 2012 distribution on its common and preferred units of $0.33 per unit to be paid on August 14, 2012.

 

(c) Earnings per Unit and Dilution Computations

 

The Partnership had common units and preferred units outstanding during the three and six months ended June 30, 2012 and June 30, 2011.

 

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,

 

 

 

2012

 

2011

 

2012

 

2011

 

Limited partners’ interest in net loss

 

$

(7,253

)

$

(2,781

)

$

(9,056

)

$

(6,396

)

Distributed earnings allocated to:

 

 

 

 

 

 

 

 

 

Common units (1)(2)

 

$

18,021

 

$

15,691

 

$

34,804

 

$

30,316

 

Unvested restricted units (1)(2)

 

359

 

286

 

698

 

585

 

Total distributed earnings

 

$

18,380

 

$

15,977

 

$

35,502

 

$

30,901

 

Undistributed loss allocated to:

 

 

 

 

 

 

 

 

 

Common units

 

$

(25,148

)

$

(18,374

)

$

(43,699

)

$

(36,605

)

Unvested restricted units

 

(485

)

(384

)

(859

)

(692

)

Total undistributed loss

 

$

(25,633

)

$

(18,758

)

$

(44,558

)

$

(37,297

)

Net loss allocated to:

 

 

 

 

 

 

 

 

 

Common units

 

$

(7,127

)

$

(2,683

)

$

(8,895

)

$

(6,289

)

Unvested restricted units

 

(126

)

(98

)

(161

)

(107

)

Total limited partners’ interest in net loss

 

$

(7,253

)

$

(2,781

)

$

(9,056

)

$

(6,396

)

Basic and diluted net loss per unit:

 

 

 

 

 

 

 

 

 

Basic and diluted common unit

 

$

(0.13

)

$

(0.05

)

$

(0.17

)

$

(0.12

)

 


(1)          Three months ended June 30, 2012 represents a declared distribution of $0.33 per unit payable on August 14, 2012.  Six months ended June 30, 2012 represents distributions paid of $0.33 per unit and distributions declared of $0.33 payable August 14, 2012.

(2)          Three months ended June 30, 2011 represents a declared distribution of $0.31 per unit paid on August 12, 2011. Six months ended June 30, 2011 represents distributions paid of $0.29 per unit and distributions declared of $0.31 paid August 12, 2011.

 

14



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CROSSTEX ENERGY, L.P.

 

Notes to Condensed Consolidated Financial Statements

 

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, 2012 and 2011 (in thousands):

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Basic and diluted weighted average units outstanding:

 

 

 

 

 

 

 

 

 

Weighted average limited partner common units outstanding

 

55,998

 

50,563

 

53,427

 

50,518

 

 

All common unit equivalents were antidilutive in the three and six months ended June 30, 2012 and June 30, 2011 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 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,

 

 

 

2012

 

2011

 

2012

 

2011

 

Income allocation for incentive distributions

 

$

1,130

 

$

599

 

$

2,108

 

$

997

 

Stock-based compensation attributable to CEI’s restricted shares

 

(1,144

)

(759

)

(2,276

)

(1,700

)

2% general partner interest in net income (loss)

 

(26

)

49

 

57

 

70

 

General partner share of net loss

 

$

(40

)

$

(111

)

$

(111

)

$

(633

)

 

(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,

 

 

 

2012

 

2011

 

2012

 

2011

 

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

 

$

2,179

 

$

1,540

 

$

4,353

 

$

3,266

 

Cost of share-based compensation charged to operating expense

 

316

 

265

 

640

 

729

 

Total amount charged to income

 

$

2,495

 

$

1,805

 

$

4,993

 

$

3,995

 

 

15



Table of Contents

 

CROSSTEX ENERGY, L.P.

 

Notes to Condensed Consolidated Financial Statements

 

(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, 2012 is provided below:

 

 

 

Six Months Ended June 30, 2012

 

Crosstex Energy, L.P. Restricted Units:

 

Number of
Units

 

Weighted
Average
Grant-Date
Fair Value

 

Non-vested, beginning of period

 

949,844

 

$

10.45

 

Granted

 

352,912

 

16.53

 

Vested*

 

(232,700

)

6.91

 

Forfeited

 

(13,954

)

12.73

 

Non-vested, end of period

 

1,056,102

 

$

13.23

 

Aggregate intrinsic value, end of period (in thousands)

 

$

17,320

 

 

 

 


* Vested units include 60,401 units withheld for payroll taxes paid on behalf of employees.

 

The Partnership issued restricted units in 2012 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, 2012.

 

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, 2012 and 2011 are provided below (in thousands):

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

Crosstex Energy, L.P. Restricted Units:

 

2012

 

2011

 

2012

 

2011

 

Aggregate intrinsic value of units vested

 

$

280

 

$

1,870

 

$

3,806

 

$

6,109

 

Fair value of units vested

 

$

281

 

$

2,383

 

$

1,608

 

$

5,556

 

 

As of June 30, 2012, there was $7.6 million of unrecognized compensation cost related to non-vested restricted units. That cost is expected to be recognized over a weighted-average period of 1.6 years.

 

(c)  Unit Options

 

A summary of the unit option activity for the six months ended June 30, 2012 is provided below:

 

 

 

Six Months Ended June 30, 2012

 

 

 

 

 

Weighted

 

 

 

Number of

 

Average

 

Crosstex Energy, L.P. Unit Options:

 

Units

 

Exercise Price

 

Outstanding, beginning of period

 

451,574

 

$

6.99

 

Exercised

 

(40,246

)

5.06

 

Forfeited

 

(10,433

)

16.34

 

Outstanding, end of period

 

400,895

 

$

6.95

 

Options exercisable at end of period

 

334,326

 

 

 

Weighted average contractual term (years) end of period:

 

 

 

 

 

Options outstanding

 

6.7

 

 

 

Options exercisable

 

6.5

 

 

 

Aggregate intrinsic value end of period (in thousands):

 

 

 

 

 

Options outstanding

 

$

4,201

 

 

 

Options exercisable

 

$

3,508

 

 

 

 

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Table of Contents

 

CROSSTEX ENERGY, L.P.

 

Notes to Condensed Consolidated Financial Statements

 

A summary of the unit options intrinsic value exercised (market value in excess of exercise price at date of exercise) and fair value of units exercised (value per Black-Scholes-Merton option pricing model at date of grant) during the three and six months ended June 30, 2012 and June 30, 2011 are provided below (in thousands):

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

Crosstex Energy, L.P. Unit Options:

 

2012

 

2011

 

2012

 

2011

 

Intrinsic value of unit options exercised

 

$

67

 

$

479

 

$

478

 

$

985

 

Fair value of unit options vested

 

$

 

$

236

 

$

277

 

$

561

 

 

As of June 30, 2012, there was $0.1 million of unrecognized compensation cost related to non-vested unit options. That cost is expected to be recognized over a weighted average period of 0.5 years.

 

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

 

CEI’s restricted shares are valued at their fair value at the date of grant which is equal to the market value of the common stock on such date. A summary of the restricted share activities for the six months ended June 30, 2012 is provided below:

 

 

 

Six Months Ended

 

 

 

June 30, 2012

 

Crosstex Energy, Inc. Restricted Shares:

 

Number of
Shares

 

Weighted
Average
Grant-Date
Fair Value

 

Non-vested, beginning of period

 

1,221,351

 

$

7.40

 

Granted

 

454,146

 

13.28

 

Vested*

 

(244,195

)

5.18

 

Forfeited

 

(18,850

)

8.60

 

Non-vested, end of period

 

1,412,452

 

$

9.66

 

Aggregate intrinsic value, end of period (in thousands)

 

$

19,774

 

 

 

 


* Vested shares include 58,247 shares withheld for payroll taxes paid on behalf of employees.

 

CEI issued restricted shares in 2012 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, 2012.

 

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, 2012 and June 30, 2011 are provided below (in thousands):

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

Crosstex Energy, Inc. Restricted Shares:

 

2012

 

2011

 

2012

 

2011

 

Aggregate intrinsic value of shares vested

 

$

391

 

$

1,111

 

$

3,127

 

$

3,689

 

Fair value of shares vested

 

$

260

 

$

2,391

 

$

1,266

 

$

5,281

 

 

As of June 30, 2012 there was $7.6 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 1.6 years.

 

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Table of Contents

 

CROSSTEX ENERGY, L.P.

 

Notes to Condensed Consolidated Financial Statements

 

(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, 2012.

 

(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,” “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.

 

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

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

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

 

$

(7,095

)

$

(825

)

$

(5,913

)

$

730

 

Realized losses on derivatives

 

2,213

 

2,368

 

3,238

 

4,128

 

Ineffective portion of derivatives qualifying for hedge accounting

 

(23

)

(101

)

(61

)

(82

)

Net (gains) losses related to commodity swaps

 

$

(4,905

)

$

1,442

 

$

(2,736

)

$

4,776

 

Put option premium mark to market

 

 

94

 

 

181

 

(Gains) losses on derivatives

 

$

(4,905

)

$

1,536

 

$

(2,736

)

$

4,957

 

 

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

 

 

 

June 30,

 

December 31,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Fair value of derivative assets — current, designated

 

$

1,568

 

$

151

 

Fair value of derivative assets — current, non-designated

 

5,112

 

2,716

 

Fair value of derivative assets — long term, designated

 

125

 

 

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

 

1,479

 

 

Fair value of derivative liabilities — current, designated

 

 

(702

)

Fair value of derivative liabilities — current, non-designated

 

(2,839

)

(4,885

)

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

 

(7

)

 

Net fair value of derivatives

 

$

5,438

 

$

(2,720

)

 

18



Table of Contents

 

CROSSTEX ENERGY, L.P.

 

Notes to Condensed Consolidated Financial Statements

 

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, 2012 (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 2013 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.

 

 

 

June 30, 2012

 

Transaction Type

 

Volume

 

Fair Value

 

 

 

(In thousands)

 

Cash Flow Hedges:*

 

 

 

 

 

Liquids swaps (short contracts)

 

(5,705

)

$

1,693

 

Total swaps designated as cash flow hedges

 

 

 

$

1,693

 

 

 

 

 

 

 

Mark to Market Derivatives:*

 

 

 

 

 

Swing swaps (long contracts)

 

419

 

$

3

 

Physical offsets to swing swap transactions (short contracts)

 

(419

)

 

Swing swaps (short contracts)

 

(4,588

)

(35

)

Physical offsets to swing swap transactions (long contracts)

 

4,588

 

 

 

 

 

 

 

 

Basis swaps (long contracts)

 

2,501

 

(30

)

Physical offsets to basis swap transactions (short contracts)

 

(2,501

)

5,189

 

Basis swaps (short contracts)

 

(2,501

)

15

 

Physical offsets to basis swap transactions (long contracts)

 

2,501

 

(6,624

)

 

 

 

 

 

 

Third-party on-system swaps (long contracts)

 

155

 

 

Physical offsets to third-party on-system swap transactions (short contracts)

 

(155

)

(22

)

 

 

 

 

 

 

Processing margin hedges — liquids (short contracts)

 

(9,064

)

4,210

 

Processing margin hedges — gas (long contracts)

 

1,188

 

(1,035

)

Processing margin hedges — gas (short contracts)

 

(187

)

240

 

 

 

 

 

 

 

Liquids swaps - non-designated (short contracts)

 

(4,393

)

1,471

 

 

 

 

 

 

 

Storage swap transactions — gas (long contracts)

 

210

 

116

 

Storage swap transactions — gas (short contracts)

 

(290

)

62

 

Storage swap transactions — liquids inventory (long contracts)

 

1,470

 

(25

)

Storage swap transactions — liquids inventory (short contracts)

 

(4,830

)

210

 

 

 

 

 

 

 

Total mark to market derivatives

 

 

 

$

3,745

 

 


*                 All are gas contracts, volume in MMBtu’s, except for liquids swaps (designated or non-designated) and processing margin hedges - liquids (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 (ISDAs) with its counterparties. If the Partnership’s counterparties failed to perform under existing swap contracts entered into under these ISDAs, the Partnership’s maximum loss as of June 30, 2012 of $13.5 million would be reduced to $12.1 million due to the offsetting of gross fair value payables against gross fair value receivables as allowed by the ISDAs.

 

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Table of Contents

 

CROSSTEX ENERGY, L.P.

 

Notes to Condensed Consolidated Financial Statements

 

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

 

2012

 

2011

 

2012

 

2011

 

Liquids realized loss included in Midstream revenue

 

$

407

 

$

(1,048

)

$

395

 

$

(1,708

)

 

Natural Gas

 

As of June 30, 2012, the Partnership has no balances in accumulated other comprehensive income related to natural gas.

 

Liquids

 

As of June 30, 2012, an unrealized derivative fair value net gain of $1.7 million related to cash flow hedges of liquids price risk was recorded in accumulated other comprehensive income. Of that amount, a net gain of $1.6 million is expected to be reclassified into earnings through June 2013. The actual reclassification to earnings will be based on mark to market prices at the contract settlement date, along with the realization of the gain or loss on the related physical volume, which is not reflected in the above table.

 

Derivatives Other Than Cash Flow Hedges

 

Assets and liabilities related to third party derivative contracts, swing swaps, basis swaps, storage swaps, processing margin swaps and liquids swaps are included in the fair value of derivative assets and liabilities and the profit and loss on the mark to market value of these contracts are recorded net as (gain) loss on derivatives in the condensed consolidated statement of operations. The Partnership estimates the fair value of all of its energy trading contracts using 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, 2012

 

$

2,272

 

$

1,473

 

$

 

$

3,745

 

 

(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.

 

20



Table of Contents

 

CROSSTEX ENERGY, L.P.

 

Notes to Condensed Consolidated Financial Statements

 

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

 

 

 

June 30, 2012

 

December 31, 2011

 

 

 

Level 2

 

Level 2

 

Commodity Swaps*

 

$

5,438

 

$

(2,720

)

Total

 

$

5,438

 

$

(2,720

)

 


*                 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 adjusted for credit risk of the Partnership and/or the counterparty as required under FASB ASC 820.

 

Fair Value of Financial Instruments

 

The estimated fair value of the Partnership’s financial instruments has been determined by the Partnership using available market information and valuation methodologies. Considerable judgment is required to develop the estimates of fair value; thus, the estimates provided below are not necessarily indicative of the amount the Partnership could realize upon the sale or refinancing of such financial instruments (in thousands):

 

 

 

June 30, 2012

 

December 31, 2011