CROSSTEX ENERGY INC - 10-Q Quarterly Report

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		for the quarterly period ended March 31, 2005

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, 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 (Address of principal executive offices)		75201 (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 þ No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes þ No o

As of May 5, 2005, the Registrant had 12,760,158 shares of common stock outstanding.

TABLE OF CONTENTS


Item		Page

DESCRIPTION
PART I — FINANCIAL INFORMATION
1.	FINANCIAL STATEMENTS		3
2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		19
3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		26
4.	CONTROLS AND PROCEDURES		28

PART II — OTHER INFORMATION
6.	EXHIBITS		29
Certification of the Principal Executive Officer
Certification of the Principal Financial Officer
Certification Pursuant to 18 U.S.C. Section 1350

CROSSTEX ENERGY, INC.

Consolidated Balance Sheets


			March 31,		December 31,
			2005		2004

			(Unaudited)
			(In thousands)
ASSETS
Current assets:
	Cash and cash equivalents		$	21,481	$	22,519
	Accounts and notes receivable, net:
		Trade, accrued revenue and other		231,453		233,777
		Related party		—		61
	Fair value of derivative assets			4,291		3,025
	Other current assets			5,894		5,251

		Total current assets		263,119		264,633

Property and equipment, net of accumulated depreciation of $52,442 and $45,090, respectively				340,202		325,653
Account receivable from Enron (net of allowance of $6,931)				1,312		1,312
Fair value of derivative assets				934		166

Intangible assets, net of accumulated amortization of $3,650 and $3,301, respectively				4,806		5,155
Goodwill, net of accumulated amortization of $674				6,164		6,164
Other assets, net				4,354		3,685

		Total assets	$	620,891	$	606,768


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable, drafts payable and accrued gas purchases		$	236,800	$	257,746
	Fair value of derivative liabilities			8,752		2,085
	Current portion of long-term debt			50		50
	Other current liabilities			10,943		23,017

		Total current liabilities		256,545		282,898

Long-term debt				195,650		148,650
Deferred tax liability				29,723		32,754
Interest of non-controlling partners in the Partnership				61,784		65,399
Fair value of derivative liabilities				783		134
Stockholders equity				76,406		76,933

Total liabilities and stockholders equity			$	620,891	$	606,768

See accompanying notes to consolidated financial statements.

CROSSTEX ENERGY, INC.

Consolidated Statements of Operations


			Three Months Ended
			March 31,

			2005			2004

			(Unaudited)
			(In thousands, except
			per share amounts)
Revenues:
	Midstream		$	539,564		$	318,214
	Treating			9,907			7,144
	Profit on energy trading activities			45			421

		Total revenues		549,516			325,779

Operating costs and expenses:
	Midstream purchased gas			516,416			302,876
	Treating purchased gas			1,493			1,376
	Operating expenses			11,500			6,225
	General and administrative			6,452			3,865
	Stock-based compensation			276			209
	(Gain) loss on sale of property			(44	)		296
	Depreciation and amortization			6,946			4,418

		Total operating costs and expenses		543,039			319,265

		Operating income		6,477			6,514
Other income (expense):
	Interest expense, net			(3,288	)		(1,117	)
	Other income			26			92

		Total other income (expense)		(3,262	)		(1,025	)

Income before income taxes and interest of non-controlling partners in the Partnership’s net income				3,215			5,489
Income tax expense				(987	)		(1,182	)
Interest of non-controlling partners in the Partnership’s net income				(656	)		(2,110	)

		Net income	$	1,572		$	2,197

Preferred dividends				—		$	132

Net income available to common shareholders			$	1,572		$	2,065

Basic earnings per common share			$	0.13		$	0.19

Diluted earnings per common share			$	0.12		$	0.17

Weighted average shares outstanding:
	Basic			12,346			10,946

	Diluted			12,949			12,759

See accompanying notes to consolidated financial statements.

CROSSTEX ENERGY, INC.

Consolidated Statements of Changes in Stockholders’ Equity

Three Months ended March 31, 2005

(Unaudited)


											Accumulated
		Common Stock				Additional					Other			Total
						Paid-In		Retained			Comprehensive			Stockholders’
		Shares		Amount		Capital		Earnings			Income			Equity

		(In thousands, except share amounts)
Balance, December 31, 2004			12,256,890	$	122	$	72,593	$	4,214		$	4		$	76,933
	Dividends paid		—		—		—		(4,783	)		—			(4,783	)
	Stock based compensation		—		—		139		—			—			139
	Net income		—		—		—		1,572			—			1,572
	Proceeds from exercise of share options		275,775		3		1,038		—			—			1,041
	Capital contribution related to deferred tax benefits of stock options exercised		—		—		3,040		—			—			3,040
	Hedging gains or losses reclassified to earnings		—		—		—		—			(67	)		(67	)
	Adjustment in fair value of derivatives		—		—		—		—			(1,469	)		(1,469	)

Balance, March 31, 2005			12,532,665	$	125	$	76,810	$	1,003		$	(1,532	)	$	76,406

See accompanying notes to consolidated financial statements.

CROSSTEX ENERGY, INC.

Consolidated Statements of Comprehensive Income

(Unaudited)


		Three Months Ended
		March 31,

		2005			2004

		(In thousands)
Net income		$	1,572		$	2,197
Hedging gains or losses reclassified to earnings			(67	)		(271	)
Adjustment in fair value of derivatives			(1,469	)		746

	Comprehensive income	$	36		$	2,672

See accompanying notes to consolidated financial statements.

CROSSTEX ENERGY, INC.

Consolidated Statements of Cash Flows


					Three Months Ended
					March 31,

					2005			2004

					(Unaudited)
					(In thousands)
Cash flows from operating activities:
	Net income				$	1,572		$	2,197
	Adjustments to reconcile net income to net cash provided by (used in) operating activities:
		Depreciation and amortization				6,946			4,418
		Income on investment in affiliated companies				—			(88	)
		Interest of non-controlling partners in the Partnership’s net income				656			2,110
		Deferred tax expense				836			1,182
		Non-cash stock-based compensation				276			160
		(Gain) loss on sale of property				(44	)		296
		Changes in assets and liabilities, net of acquisition effects:
			Accounts receivable and accrued revenue			2,444			(3,162	)
			Prepaid expenses			(643	)		104
			Accounts payable, accrued gas purchases, and other accrued liabilities			(18,819	)		(292	)
			Fair value of derivatives			1,073			181
			Other			377			133

				Net cash provided by (used in) operating activities		(5,326	)		7,239

Cash flows from investing activities:
	Additions to property and equipment					(12,038	)		(8,051	)
	Assets acquired					(9,257	)		—
	Proceeds from sale of property					193			100
	Investments in affiliated companies					—			(154	)

				Net cash used in investing activities		(21,102	)		(8,105	)

Cash flows from financing activities:
	Proceeds from borrowings					255,000			25,500
	Payments on borrowings					(208,000	)		(23,500	)
	Increase (decrease) in drafts payable					(14,202	)		7,468
	Dividends paid					(4,784	)		(3,603	)
	Repayment of shareholder notes					—			4,910
	Proceeds from exercise of common stock options					1,040			313
	Net distributions to non-controlling partners in the Partnership					(2,732	)		(3,030	)
	Proceeds from exercise of Partnership unit options					173			—
	Debt refinancing costs					(1,105	)		—

				Net cash provided by financing activities		25,390			13,731

				Net increase (decrease) in cash and cash equivalents		(1,038	)		12,865
Cash and cash equivalents, beginning of period						22,519			1,479

Cash and cash equivalents, end of period					$	21,481		$	14,344

Cash paid for interest					$	3,045		$	899

See accompanying notes to consolidated financial statements.

CROSSTEX ENERGY, INC.

Notes to Consolidated Financial Statements

March 31, 2005

(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.

CEI, a Delaware corporation formed on April 28, 2000, is engaged, through its subsidiaries, in the gathering, transmission, treating, processing and marketing of natural gas. The Company connects the wells of natural gas producers to its gathering systems in the geographic areas of its gathering systems in order to purchase the gas production, treats natural gas to remove impurities to ensure that it meets pipeline quality specifications, processes natural gas for the removal of natural gas liquids or NGLs, transports natural gas and ultimately provides an aggregated supply of natural gas to a variety of markets. In addition, the Company purchases natural gas from producers not connected to its gathering systems for resale and sells natural gas on behalf of producers for a fee.

The accompanying consolidated financial statements include the assets, liabilities and results of operations of the Company and its majority owned subsidiaries, including Crosstex Energy, L.P. (herein referred to as “the Partnership” or “CELP”), a publicly traded master limited partnership.

The accompanying 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. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our annual report on Form 10-K for the year ended December 31, 2004.


*(a)*	*Management’s Use of Estimates*

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


*(b)*	*Initial Public Offering*

On January 12, 2004 the Company completed an initial public offering of its common stock. In conjunction with the public offering, the Company converted all of its preferred stock to common stock, cancelled its treasury stock and made a two-for-one stock split, affected in the form of a stock dividend. The Company’s existing shareholders sold 2,306,000 common shares (on a post-split basis) and the Company issued 345,900 common shares (on a post-split basis) at a public offering price of $19.50 per common share. The Company received net proceeds of approximately $4.8 million from the common stock issuance. The Company’s existing stockholders also repaid approximately $4.9 million in stockholder notes receivable in connection with the public offering. As of March 31, 2005, Energy Partners IV, L.P. and Yorktown Partners V, L.P., collectively Yorktown, owned 40.9% of the Company’s outstanding common shares, Company management and directors owned 17.7% of the common shares and the remaining 41.4% was held publicly.

CROSSTEX ENERGY, INC.

Notes to Consolidated Financial Statements — (Continued)


*(c)*	*Long-Term Incentive Plans*

The Company applies the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25), and the related interpretations in accounting for the long-term incentive plans. In accordance with APB No. 25 for fixed stock and unit options, compensation is recorded to the extent the fair value of the stock or unit exceeds the exercise price of the option at the measurement date. Compensation costs for fixed awards with pro rata vesting are recognized on a straight-line basis over the vesting period. In addition, compensation expense is recorded for variable options based on the difference between fair value of the stock or unit and exercise price of the options at period end. Compensation expense of $276,000 and $209,000 was recognized during the three months ended March 31, 2005 and 2004, respectively.

Had compensation cost for the Company been determined based on the fair value at the grant date for awards in accordance with SFAS No. 123, Accounting for Stock Based Compensation, the Company’s net income would have been as follows (in thousands, except per share amounts):


		Three Months
		Ended March 31,

		2005			2004

Net income, as reported		$	1,572		$	2,197
Add: Stock-based employee compensation expense included in reported net income			98			76
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards			(131	)		(99	)

Pro forma net income		$	1,539		$	2,174

Net income per common share, as reported:
	Basic	$	0.13		$	0.19
	Diluted	$	0.12		$	0.17
Pro forma net income per common share:
	Basic	$	0.12		$	0.19
	Diluted	$	0.12		$	0.17

The fair value of each option is estimated on the date of grant using the Black Scholes option-pricing model with the following weighted average assumptions used for Company common stock grants to Company directors in 2005:


	Crosstex
	Energy, Inc.

Options granted		20,000
Weighted average dividend yield		3.8	%
Weighted average expected volatility		36.0	%
Weighted average risk free interest rate		3.7	%
Weighted average expected life		5.0
Contractual life		10.0
Weighted average of fair value of unit options granted	$	10.62

No Partnership options were granted to officers or employees in 2005. Stock-based compensation associated with the CEI option plan with respect to officers and employees is recorded by the Partnership since CEI has no operating activities, other than its interest in the Partnership. Stock-based compensation associated with the CEI option plan with respect to CEI directors is an expense to CEI only.

CROSSTEX ENERGY, INC.

Notes to Consolidated Financial Statements — (Continued)

In 2004, 85,000 restricted shares in CEI were issued to members of management under its long-term incentive plan with an intrinsic value of $2,579,000. 80,000 of the CEI restricted shares vest over a five-year period and 5,000 of the restricted shares vest over a three-year period. The intrinsic value of the restricted shares is amortized into stock-based compensation expense over the vesting periods.

In May 2005, the Partnership’s managing general partner amended its long-term incentive plan to increase the aggregate common unit options and restricted units under the plan from 1.4 million to 1.8 million.


*(d)*	*Earnings per Share and Anti-Dilutive Computations*

Basic earnings per share was computed by dividing net income by the weighted average number of common shares outstanding for the three months ended March 31, 2005 and 2004. The computation of diluted earnings per share further assumes the dilutive effect of common share options, restricted shares and convertible preferred stock.

In conjunction with the Company’s initial public offering, the Company affected a two-for-one split. All share amounts for prior periods presented herein have been restated to reflect this stock split.

The following are the common share amounts used to compute the basic and diluted earnings per common share for the three months ended March 31, 2005 and 2004 (in thousands):


		Three Months
		Ended March 31,

		2005		2004

Basic earnings per share:
	Weighted average common shares outstanding		12,346		10,946
Diluted earnings per share:
	Weighted average common shares outstanding		12,346		10,946
	Dilutive effect of restricted shares

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