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TABLE OF CONTENTS DESCRIPTION
INDEX TO FINANCIAL STATEMENTS

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K


ý

 

ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2010

OR

o

 

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

For the transition period from                           to                          

Commission file number: 000-50067

CROSSTEX ENERGY, L.P.
(Exact name of registrant as specified in its charter)

Delaware
(State of organization)
  16-1616605
(I.R.S. Employer Identification No.)

2501 CEDAR SPRINGS
DALLAS, TEXAS

(Address of principal executive offices)

 

75201
(Zip Code)

(Registrant's telephone number, including area code)
(214) 953-9500

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

Title of Each Class   Name of Exchange on which Registered
Common Units Representing Limited
Partnership Interests
  The NASDAQ Global Select Market

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None.

         Indicate by check mark if registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o    No ý

         Indicate by check mark if registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o    No ý

         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 ý    No o

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

         Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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 Securities Exchange Act. (Check one):

Large accelerated filer o   Accelerated filer ý   Non-accelerated filer o
(Do not check if a
smaller reporting company)
  Smaller reporting company o

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

         The aggregate market value of the Common Units representing limited partner interests held by non-affiliates of the registrant was approximately $253,615,778 on June 30, 2010, based on $10.54 per unit, the closing price of the Common Units as reported on The NASDAQ Global Select Market on such date.

         At February 11, 2011, there were 50,452,761 common units outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:

None.


Table of Contents


TABLE OF CONTENTS

DESCRIPTION

Item
   
  Page  

PART I

 

1.

 

BUSINESS

   
3
 

1A.

 

RISK FACTORS

   
19
 

1B.

 

UNRESOLVED STAFF COMMENTS

   
40
 

2.

 

PROPERTIES

   
40
 

3.

 

LEGAL PROCEEDINGS

   
41
 

4.

 

RESERVED

   
41
 

PART II

 

5.

 

MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED UNITHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

   
42
 

6.

 

SELECTED FINANCIAL DATA

   
43
 

7.

 

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

   
47
 

7A.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

   
71
 

8.

 

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

   
74
 

9.

 

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

   
74
 

9A.

 

CONTROLS AND PROCEDURES

   
74
 

9B.

 

OTHER INFORMATION

   
75
 

PART III

 

10.

 

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

   
75
 

11.

 

EXECUTIVE COMPENSATION

   
81
 

12.

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED UNITHOLDER MATTERS

   
101
 

13.

 

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

   
104
 

14.

 

PRINCIPAL ACCOUNTING FEES AND SERVICES

   
106
 

PART IV

 

15.

 

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

   
107
 

2


Table of Contents


CROSSTEX ENERGY, L.P.

PART I

Item 1.    Business

General

        Crosstex Energy, L.P. is a publicly traded Delaware limited partnership formed in 2002. Our Common Units are listed on The NASDAQ Global Select Market under the symbol "XTEX". Our business activities are conducted through our subsidiary, Crosstex Energy Services, L.P., a Delaware limited partnership (the "Operating Partnership") and the subsidiaries of the Operating Partnership. Our executive offices are located at 2501 Cedar Springs, Dallas, Texas 75201, and our telephone number is (214) 953-9500. Our Internet address is www.crosstexenergy.com. In the "Investors" section of our web site, we post the following filings as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission: our annual report on Form 10-K; our quarterly reports on Form 10-Q; our current reports on Form 8-K; and any amendments to those reports or statements filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended. All such filings on our web site are available free of charge. In this report, the terms "Partnership" and "Registrant," as well as the terms "our," "we," "us" and "its," are sometimes used as abbreviated references to Crosstex Energy, L.P. itself or Crosstex Energy, L.P. together with its consolidated subsidiaries, including the Operating Partnership.

        We are an independent midstream energy company engaged in the gathering, transmission, processing and marketing of natural gas and natural gas liquids, or NGLs. We connect the wells of natural gas producers in our market areas to our gathering systems, process natural gas for the removal of NGLs, fractionate NGLs into purity products and market those products for a fee, transport natural gas and ultimately provide natural gas to a variety of markets. We purchase natural gas from natural gas producers and other supply sources and sell that natural gas to utilities, industrial consumers, other marketers and pipelines. We operate 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, we purchase natural gas from producers not connected to our gathering systems for resale and sell natural gas on behalf of producers for a fee.

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        Crosstex Energy GP, LLC, a Delaware limited liability company, is our general partner. Crosstex Energy GP, LLC manages our operations and activities. Crosstex Energy GP, LLC is a wholly owned subsidiary of Crosstex Energy, Inc., or CEI. Crosstex Energy, Inc.'s shares are listed on The NASDAQ Global Select Market under the symbol "XTXI." The following diagram depicts the organization and ownership of the Partnership as of January 1, 2011.

GRAPHIC

        As generally used in the energy industry and in this document, the following terms have the following meanings:

    /d = per day
    Bbls = barrels
    Bcf = billion cubic feet
    Btu = British thermal units
    Gal = gallon
    Mcf = thousand cubic feet
    MMBtu = million British thermal units
    MMcf = million cubic feet
    NGL = natural gas liquid

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        Capacity volumes for our facilities are measured based on physical volume and stated in cubic feet (Bcf, Mcf or MMcf). Throughput volumes are measured based on energy content and stated in British thermal units (Btu or MMBtu). A volume capacity of 100 MMcf generally correlates to volume throughput of 100,000 MMBtu. Fractioned volumes are measured based on physical volumes and stated in gallons (Gal).

Our Operations

        We focus on the gathering, processing, transmission and marketing of natural gas and NGLs, which we manage as regional reporting segments. Our geographic focus is in the North Texas Barnett Shale (NTX) and in Louisiana which has two reportable business segments (the Crosstex LIG and the south Louisiana processing and NGL assets, or PNGL). Our combined midstream assets consist of over 3,300 miles of natural gas gathering and transmission and NGL pipelines, nine natural gas processing plants and three fractionators. Our gathering systems consist of a network of pipelines that collect natural gas from points near producing wells and transport it to larger pipelines for further transmission. Our transmission pipelines primarily receive natural gas from our gathering systems and from third party gathering and transmission systems and deliver natural gas to industrial end-users, utilities and other pipelines. Our processing plants remove NGLs from a natural gas stream and our fractionators separate the NGLs into separate NGL products, including ethane, propane, iso- and normal butanes and natural gasoline. See Note 15 to the consolidated financial statements for financial information about these operating segments.

        Our assets include the following:

    North Texas Assets.  Our North Texas Assets are comprised of gathering, processing and transmission assets serving producers active in the Barnett Shale. Our gathering systems in north Texas, or NTG, consist of approximately 670 miles of gathering lines with total capacity of approximately 1,200 MMcf/d and total throughput was approximately 730,000 MMBtu/d for the year ended December 31, 2010. Our processing facilities in north Texas include three gas processing plants with a total processing capacity of 280 MMcf/d. Total processing throughput averaged 209,000 MMBtu/d for the year ended December 31, 2010. Our transmission asset consists of a 140-mile pipeline from an area near Fort Worth, Texas to a point near Paris, Texas and related facilities. The capacity on the North Texas Pipeline, or NTP, is approximately 375 MMcf/d. The NTP connects production from the Barnett Shale to markets in north Texas and to markets accessed by the Natural Gas Pipeline Company, or NGPL, Kinder Morgan, Houston Pipeline, or HPL, Atmos, Gulf Crossing and other markets. For the year ended December 31, 2010, the total throughput on the NTP was approximately 339,000 MMBtu/d.

    Crosstex LIG System.  The Crosstex LIG system is one of the largest intrastate pipeline systems in Louisiana, consisting of approximately 2,000 miles of gathering and transmission pipeline, with an average total throughput of approximately 902,000 MMBtu/d for the year ended December 31, 2010. The system also includes two operating, on-system processing plants, our Plaquemine and Gibson plants, with an average throughput of approximately 283,000 MMBtu/d for the year ended December 31, 2010. Total volume of fractionated liquids at Plaquemine averaged 2,600 Bbls/d for the year ended December 31, 2010. The system has access to both rich and lean gas supplies. These supplies reach from the Haynesville Shale in north Louisiana to onshore production in south central and southeast Louisiana. Crosstex LIG has a variety of transportation and industrial sales customers, with the majority of its sales being made into the industrial Mississippi River corridor between Baton Rouge and New Orleans.

    South Louisiana Processing and NGL Assets.  Our south Louisiana natural gas processing and liquids assets include approximately 2.0 Bcf/d of processing capacity, 64,000 Bbls/d of fractionation capacity, 2.4 million barrels of underground storage and approximately 440 miles of

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      liquids transport lines. The assets include the Eunice processing plant and fractionation facility; the Pelican, Sabine and Blue Water processing plants; the Riverside fractionation plant; the Napoleonville storage facility; the Cajun Sibon pipeline system and the Intracoastal Pipeline. Total processing throughput averaged 874,000 MMBtu/d for the year ended December 31, 2010. Total volume of fractionated liquids averaged 19,000 Bbls/d for the year ended December 31, 2010. The Eunice plant is connected to onshore gas supply, as well as continental shelf and deepwater gas production. The Pelican and Sabine plants are connected with continental shelf and deepwater gas. The various plants have downstream connections to the ANR Pipeline, Florida Gas Transmission, Texas Gas Transmission, Tennessee Gas Pipeline and Transco.

Our Business Strategy

        During 2010, we successfully executed our business plan by improving existing system profitability, improving our financial flexibility and resuming our distributions to partners. We are now well positioned to focus on increasing our distributable cash flow by (i) expanding our existing assets, (ii) capitalizing on our NGL capabilities, (iii) pursuing accretive acquisitions or construction of facilities in new areas and (iv) focusing on operational excellence. Key elements of our strategy will include the following:

    Undertake selective construction and expansion opportunities on our existing systems. We intend to leverage our existing infrastructure and producer and customer relationships by expanding existing systems to meet new or increased demand for our gathering, transmission, processing and marketing services. We have two expansion projects that are underway in north Texas and scheduled for completion near the end of the first quarter of 2011. We are constructing a compressor station on an existing gathering line in north Texas at an estimated cost of less than $10.0 million to accommodate 50 MMcf/d of natural gas. This project will provide the capacity to meet the transportation requirements under a 10 year firm transportation agreement with a major Barnett Shale producer. The annual cash flow from the agreement is expected to be approximately $8.0 million. Our second project involves a 15 mile expansion of our natural gas gathering system in the Barnett Shale with an estimated cost of $25.0 million. The project is supported by volumetric commitments from a major gas producer. Cash flow from this project is expected to average approximately $10.0 million per year for the first four years.

    Capitalizing on our NGL capabilities.  We believe there are near-term growth opportunities for our NGL business based on our ability to increase the utilization of our asset infrastructure which has excess capacity. We are targeting projects that create incremental stable fee-based income from our NGL fractionation business. We see a growing need for fractionation and NGL handling from liquids-rich gas production from the developing shale plays, including the Eagle Ford shale play in south Texas, the Granite Wash in the Texas Panhandle and Oklahoma, the Marcellus shale play in West Virginia and Pennsylvania and the Bakken shale play in North Dakota. These areas have limited NGL markets and/or inadequate NGL infrastructure. We are currently offering producers in these regions an interim solution by transporting NGLs via rail or truck to our fractionators in Louisiana. During 2010, we were handling approximately 7,300 Bbls/d under these type of arrangements. We have initiated construction on a project to bring 15,000 Bbls/d of idle fractionation capacity at our Eunice plant back into service which is expected to be completed during the first quarter of 2011 with an estimated cost of $9.0 million. The project is supported with existing system volumes and is expected to generate annual cash flow of approximately $3.0 million and will provide capacity for continued growth from our NGL rail aggregation business.

    Pursue accretive acquisitions or construction of facilities in new areas.  We will also consider the acquisition and construction of facilities and systems in new areas in regions with significant natural gas reserves and high levels of drilling activity or with growing demand for natural gas

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      that lack midstream infrastructure to process and/or transport the natural gas. We believe our existing infrastructure, personnel, producer and consumer relationships, and construction experience, including experience in large shale developments, provide us with a competitive advantage for such expansion opportunities. We believe our spare NGL fractionation capacity in south Louisiana will provide a strategic advantage in competing to provide midstream services in many of the newly developing liquids-rich, unconventional gas resources. We intend to use our acquisition and integration experience to make strategic acquisitions of assets that offer the opportunity for operational efficiencies and the potential for increased utilization and expansion of the acquired asset.

    Focus on operational excellence.  We continue to operate our existing asset base to maximize cost efficiencies, provide flexibility for our customers and provide reliable capacity for our customers. We will continue to focus on safety, environmental integrity, innovation and customer service.

Recent Developments

        We resumed making quarterly distributions to our common unitholders during the third quarter of 2010. In November 2010, we paid a quarterly distribution of $0.25 per unit related to the three months ended September 30, 2010. We declared a quarterly distribution of $0.26 per unit in January 2011 that was paid in February 2011 related to the three months ended December 31, 2010. We believe the resumption of our distributions is an important milestone in accessing the capital markets to support our future growth strategies.

        Prior to December 31, 2010, our general partner was Crosstex GP, L.P., and Crosstex Energy GP, LLC, as the general partner of Crosstex Energy GP, L.P., managed our operations and activities on behalf of Crosstex Energy GP, L.P. On December 31, 2010, Crosstex Energy GP, L.P. merged with and into Crosstex Energy GP, LLC, thereby eliminating the separate existence of Crosstex Energy GP, L.P. In connection with such merger, Crosstex Energy GP, LLC became the general partner of the Partnership and is responsible for managing the operations and activities of the Partnership and for employing the Partnership's officers.

Our Assets

        North Texas Assets.    Our NTP which commenced service in April 2006, consists of a 140-mile pipeline and associated gathering lines from an area near Fort Worth, Texas to a point near Paris, Texas. The capacity of the NTP is approximately 375 MMcf/d. The NTP connects production from the Barnett Shale to markets in north Texas and to markets accessed by the Natural Gas Pipeline Company, or NGPL, Kinder Morgan, Houston Pipeline, or HPL, Atmos, Gulf Crossing and other markets. NTP's interconnect with Gulf Crossing Pipeline provides our customers access to mid-west and east coast markets. For the year ended December 31, 2010, the total throughput on the NTP was approximately 339,000 MMBtu/d.

        On June 29, 2006, we acquired the natural gas gathering pipeline systems and related facilities of Chief in the Barnett Shale for $475.3 million. The acquired systems included gathering pipelines, a 125 MMcf/d carbon dioxide treating plant and compression facilities with 26,000 horsepower. At the closing of that transaction, approximately 160,000 net acres previously owned by Chief and acquired by Devon simultaneously with our acquisition, as well as 60,000 net acres owned by other producers, were dedicated to the systems. Immediately following the closing of the Chief acquisition, we began expanding our north Texas gathering system.

    Gathering System.  Since the date of the acquisition through December 31, 2010, we have expanded our gathering system and connected in excess of 600 new wells to our north Texas gathering system, including approximately 100 wells connected in 2010, and significantly increased the productive acreage dedicated to the system. As of December 31, 2010, total

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      capacity on our north Texas gathering system was approximately 1,200 MMcf/d and total throughput averaged approximately 730,000 MMBtu/d for the year ended December 31, 2010. We have two expansion projects that are underway on our north Texas gathering system and scheduled for completion by the end of the first quarter of 2011. These two expansion projects are supported by volumetric commitments from two separate producers on our north Texas gathering system. We are constructing a compressor station on an existing gathering line to accommodate 50 MMcf/d of natural gas to meet transportation requirements under a 10-year firm transportation agreement with one major producer and adding 15 miles of gathering pipeline in the Barnett Shale for another major producer. The total cost of these two projects is estimated to be approximately $35.0 million.

    Processing Facilities.  Since 2006, we have constructed three gas processing plants with a total processing capacity in the Barnett Shale of 280 MMcf/d, including our Silver Creek plant, which is a 200 MMcf/d cryogenic processing plant, our Azle plant, which is a 50 MMcf/d cryogenic processing plant and our Goforth plant, which is a 30 MMcf/d processing plant. Total processing throughput averaged 209,000 MMBtu/d for the year ended December 31, 2010.

        We have budgeted approximately $30.0 million for continued development of our north Texas assets during 2011, primarily related to our two north Texas gathering system projects discussed above.

        Crosstex LIG Assets.    The Crosstex LIG system is one of the largest intrastate pipeline systems in Louisiana, consisting of approximately 2,000 miles of gathering and transmission pipeline, with an average throughput of approximately 902,000 MMBtu/d for the year ended December 31, 2010. The system also includes two operating, on-system processing plants, our Plaquemine and Gibson plants, with an average throughput of 283,000 MMBtu/d for the year ended December 31, 2010 and total capacity of 335 MMcf/d. The Plaquemine plant also has a fractionation capacity of 10,800 Bbls/d of liquid products which we are connecting to our south Louisiana NGL system in conjunction with the restart of our Eunice fractionator as discussed below. The system has access to both rich and lean gas supplies. These supplies reach from north Louisiana to onshore production in south central and southeast Louisiana. Crosstex LIG has a variety of transportation and industrial sales customers, with the majority of its sales being made into the industrial Mississippi River corridor between Baton Rouge and New Orleans.

        In 2007, we expanded our Crosstex LIG system in the north to reach additional productive areas in the developing natural gas fields south of Shreveport, Louisiana, primarily in the Cotton Valley formation. This north Louisiana expansion consists of 63 miles of 24" mainline with 9 miles of gathering lateral pipeline. Our north Louisiana expansion bisects the developing Haynesville Shale gas play in north Louisiana. The north Louisiana expansion was operating at near capacity during 2008 as the Haynesville gas was beginning to develop so we added 35 MMcf/d of capacity by adding compression during the third quarter of 2008 bringing the total capacity of the north Louisiana expansion to approximately 275 MMcf/d. We continued the expansion of our north Louisiana system and increased capacity by 135 MMcf/d during 2009 and 55 MMcf/d in 2010 by adding compression and by building new interconnects to nearby pipelines bringing capacity to 465 MMcf/d by the end of 2010. We have long-term firm transportation agreements subscribing to all of the incremental capacity added during 2009 and 2010. In addition, we added compression during 2009 between the southern portion of our Crosstex LIG system and the northern expansion of our Crosstex LIG system, which increased the capacity to move gas from the north LIG system to our markets in the south to 145 MMcf/d. Interconnects on the north Louisiana expansion include connections with the interstate pipelines of ANR Pipeline, Columbia Gulf Transmission, Texas Gas Transmission, Trunkline Gas and Tennessee Gas Pipeline.

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        South Louisiana Processing and NGL Assets.    Our south Louisiana assets are NGL fractionation, storage and pipeline assets and natural gas processing plants generally located near the Louisiana Gulf Coast and include the following:

    NGL Assets.  Our NGL assets include our Eunice processing plant and fractionation facility, our Riverside fractionation plant, our Cajun Sibon pipeline system and our Napoleonville storage facility. We had excess capacity on our NGL assets during 2008 and 2009 and have made numerous operational changes and reconfigured operations to manage the lower utilization and reduce operating costs. During 2010, we have increased our focus on our NGL business in response to growing NGL supplies from new shale development by seeking additional volumes for fractionation through increased rail and truck deliveries and increased third-party pipeline rich gas supplies. Looking into 2011, we believe NGL supplies will continue to grow so we expect to see continued growth in our NGL business which will increase utilization of our facilities.

    Eunice Processing Plant and Fractionation Facility.    The Eunice processing plant is located in south central Louisiana, has a capacity of 750 MMcf/d and processed approximately 412,000 MMBtu/d for the year ended December 31, 2010. The plant is connected to onshore gas supply, as well as continental shelf and deepwater gas production and has downstream connections to the ANR Pipeline, Florida Gas Transmission and Texas Gas Transmission, or TGT. The Eunice fractionation facility has a capacity of 36,000 Bbls/d of liquid products, including ethane, propane, iso-butane, normal butane and natural gasoline, and is directly connected to the southeast propane market and pipelines to the Anse La Butte storage facility. The plant was idled in August 2007, and the liquids from the Eunice processing plant were transported through our Cajun Sibon pipeline system to our Riverside plant for fractionation. We plan to restart our Eunice fractionator by the end of the first quarter of 2011 to take advantage of the activity around the liquid rich shale-plays, including the Eagle Ford, Permian, Granite Wash, Marcellus and Bakken plays. As part of this project, we will connect the Plaquemine fractionator into our NGL system for increased operational flexibility. This expansion will give us operational flexibility, increased fractionation capacity, and the ability to capture new NGL-related business. We expect to resume operations with an initial capacity to accommodate 15,000 Bbls/d of NGLs at Eunice and 10,800 Bbls/d at Plaquemine with the additional 21,000 Bbls/d of capacity at Eunice available for restart at a later date, as needed. The estimated cost to restart the fractionator and associated pipelines and facilities will be approximately $9.0 million. The project is supported by existing system volumes and is expected to generate annual cash flow of approximately $3.0 million and will provide capacity for continued growth from our NGL rail aggregation business.

    Riverside Fractionation Plant.    The Riverside fractionator and loading facility is located on the Mississippi River upriver from Geismar, Louisiana. The Riverside plant has a fractionation capacity of approximately 28,000 Bbls/d of liquids products and fractionates liquids delivered by the Cajun Sibon pipeline system from the Eunice, Pelican and Blue Water plants or by truck. The Riverside facility has above-ground storage capacity of approximately 102,000 barrels. We have recently completed a project to reduce the fuel requirements at this facility by 15.0%.

    Cajun Sibon Pipeline System.    The Cajun Sibon pipeline system consists of approximately 440 miles of 6" and 8" pipelines with a system capacity of approximately 28,000 Bbls/d and includes the 62 mile Intracoastal Pipeline acquired in December 2009. The pipeline transports unfractionated NGLs, referred to as raw make, from the Eunice, Pelican and Blue Water plants to either the Riverside or Eunice fractionators or to third party fractionators when necessary, and will be connected to the Plaquemine fractionator in 2011.

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      Napoleonville Storage Facility.    The Napoleonville NGL storage facility, located outside of Belle Rose, Louisiana, is connected to the Riverside facility and has a total capacity of approximately 2.4 million barrels of underground storage from two existing caverns. The caverns are currently operated in propane and butane service and space is leased to customers for a fee.

    Pelican Processing Plant.  The Pelican processing plant complex is located in Patterson, Louisiana and has a designed capacity of 600 MMcf/d of natural gas. For the year ended December 31, 2010, the plant processed approximately 278,000 MMBtu/d. The Pelican plant is connected with continental shelf and deepwater production and has downstream connections to the ANR Pipeline. We have recently established an interconnection with the LIG pipeline for optimization of processing opportunities.

    Sabine Pass Processing Plant.  The Sabine Pass processing plant is located east of the Sabine River at Johnson's Bayou, Louisiana and has a processing capacity of 300 MMcf/d of natural gas. The Sabine Pass plant is connected to continental shelf and deepwater gas production with downstream connections to Florida Gas Transmission, Tennessee Gas Pipeline (TGP) and Transco. The plant processed approximately 107,000 MMBtu/d for the year ended December 31, 2010.

    Blue Water Gas Processing Plant.  We own a 59.27% interest in the Blue Water gas processing plant and operate the plant. The Blue Water plant is located in Crowley, Louisiana and is connected to the Blue Water pipeline system. The plant has a net capacity to our interest of 300 MMcf/d. In January 2009, the flow of the gas on the pipeline was reversed by the TGP, the owner of the pipeline, thereby removing access to all the gas processed at our Blue Water plant from the Blue Water offshore system. The gas composition of the reverse TGP stream is leaner in NGL content, but is profitable to process during periods of high fractionation spreads. The plant has operated periodically during 2010 and is expected to continue to operate periodically in the future as fractionation spreads and volumes dictate.

        We have budgeted approximately $9.5 million of capital expenditures for our south Louisiana processing and NGL assets during 2011, primarily comprised of the costs associated with the Eunice restart project and the Plaquemine interconnection.

Industry Overview

        The following diagram illustrates the gathering, processing, fractionation and transmission process.

GRAPHIC

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        The midstream natural gas industry is the link between exploration and production of natural gas and the delivery of its components to end-user markets. The midstream industry is generally characterized by regional competition based on the proximity of gathering systems and processing plants to natural gas producing wells.

        Natural gas gathering.    The natural gas gathering process follows the drilling of wells into gas bearing rock formations. Once a well has been completed, the well is connected to a gathering system. Gathering systems typically consist of a network of small diameter pipelines and, if necessary, compression systems that collect natural gas from points near producing wells and transport it to larger pipelines for further transmission.

        Compression.    Gathering systems are operated at pressures that will maximize the total throughput from all connected wells. Because wells produce at progressively lower field pressures as they age, it becomes increasingly difficult to deliver the remaining production in the ground against the higher pressure that exists in the connected gathering system. Natural gas compression is a mechanical process in which a volume of gas at an existing pressure is compressed to a desired higher pressure, allowing gas that no longer naturally flows into a higher-pressure downstream pipeline to be brought to market. Field compression is typically used to allow a gathering system to operate at a lower pressure or provide sufficient discharge pressure to deliver gas into a higher-pressure downstream pipeline. If field compression is not installed, then the remaining natural gas in the ground will not be produced because it will be unable to overcome the higher gathering system pressure. In contrast, if field compression is installed, a declining well can continue delivering natural gas.

        Natural gas processing.    The principal components of natural gas are methane and ethane, but most natural gas also contains varying amounts of heavier NGLs and contaminants, such as water, sulfur compounds, nitrogen or helium. Natural gas produced by a well may not be suitable for long-haul pipeline transportation or commercial use and may need to be processed to remove the heavier hydrocarbon components and contaminants. Natural gas in commercial distribution systems is composed almost entirely of methane and ethane, with moisture and other contaminants removed to very low concentrations. Natural gas is processed not only to remove unwanted contaminants that would interfere with pipeline transportation or use of the natural gas, but also to separate from the gas those hydrocarbon liquids that have higher value as NGLs. The removal and separation of individual hydrocarbons by processing is possible because of differences in weight, boiling point, vapor pressure and other physical characteristics. Natural gas processing involves the separation of natural gas into pipeline quality natural gas and a mixed NGL stream, as well as the removal of contaminants.

        NGL fractionation.    Fractionation is the process by which NGLs are further separated into individual, more valuable components. NGL fractionation facilities separate mixed NGL streams into discrete NGL products: ethane, propane, isobutane, normal butane, natural gasoline and stabilized condensate. Ethane is primarily used in the petrochemical industry as feedstock for ethylene, one of the basic building blocks for a wide range of plastics and other chemical products. Propane is used both as a petrochemical feedstock in the production of ethylene and propylene and as a heating fuel, an engine fuel and industrial fuel. Isobutane is used principally to enhance the octane content of motor gasoline. Normal butane is used as a petrochemical feedstock in the production of ethylene and butylene (a key ingredient in synthetic rubber), as a blend stock for motor gasoline and to derive isobutene through isomerization. Natural gasoline, a mixture of pentanes and heavier hydrocarbons, is used primarily as motor gasoline blend stock or petrochemical feedstock.

        Natural gas transmission.    Natural gas transmission pipelines receive natural gas from mainline transmission pipelines, processing plants, and gathering systems and deliver it to industrial end-users, utilities and to other pipelines.

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Balancing of Supply and Demand

        As we purchase natural gas, we establish a margin normally by selling natural gas for physical delivery to third-party users. We can also use over-the-counter derivative instruments or enter into a future delivery obligation under futures contracts on the NYMEX. Through these transactions, we seek to maintain a position that is substantially balanced between purchases, on the one hand, and sales or future delivery obligations, on the other hand. Our policy is not to acquire and hold natural gas futures contracts or derivative products for the purpose of speculating on price changes.

Competition

        The business of providing gathering, transmission, processing and marketing services for natural gas and NGLs is highly competitive. We face strong competition in obtaining natural gas supplies and in the marketing and transportation of natural gas and NGLs. Our competitors include major integrated oil companies, natural gas producers, interstate and intrastate pipelines and other natural gas gatherers and processors. Competition for natural gas supplies is primarily based on geographic location of facilities in relation to production or markets, the reputation, efficiency and reliability of the gatherer and the pricing arrangements offered by the gatherer. Many of our competitors offer more services or have greater financial resources and access to larger natural gas supplies than we do. Our competition differs in different geographic areas.

        In marketing natural gas and NGLs, we have numerous competitors, including marketing affiliates of interstate pipelines, major integrated oil and gas companies, and local and national natural gas producers, gatherers, brokers and marketers of widely varying sizes, financial resources and experience. Local utilities and distributors of natural gas are, in some cases, engaged directly, and through affiliates, in marketing activities that compete with our marketing operations.

        We face strong competition for acquisitions and development of new projects from both established and start-up companies. Competition increases the cost to acquire existing facilities or businesses, and results in fewer commitments and lower returns for new pipelines or other development projects. Many of our competitors have greater financial resources or lower capital costs, or are willing to accept lower returns or greater risks. Our competition differs by region and by the nature of the business or the project involved.

Natural Gas Supply

        Our transmission pipelines have connections with major interstate and intrastate pipelines, which we believe have ample supplies of natural gas in excess of the volumes required for these systems. In connection with the construction and acquisition of our gathering systems, we evaluate well and reservoir data publicly available or furnished by producers or other service providers to determine the availability of natural gas supply for the systems and/or obtain a minimum volume commitment from the producer that results in a rate of return on investment. Based on these facts, we believe that there should be adequate natural gas supply to recoup our investment with an adequate rate of return. We do not routinely obtain independent evaluations of reserves dedicated to our systems due to the cost and relatively limited benefit of such evaluations. Accordingly, we do not have estimates of total reserves dedicated to our systems or the anticipated life of such producing reserves.

Credit Risk and Significant Customers

        We are diligent in attempting to ensure that we issue credit to only credit-worthy customers. However, our purchase and resale of gas exposes us to significant credit risk, as the margin on any sale is generally a very small percentage of the total sale price. Therefore, a credit loss can be very large relative to our overall profitability.

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        During the year ended December 31, 2010, we had three customers that represented greater than 10.0% individually of our revenue. Two customers in our LIG segment represented 14.5% and 10.6% of our consolidated revenue. One customer in our NTX segment represented 10.2% of our consolidated revenue. While these customers represents a significant percentage of consolidated revenues, the loss of these customers would not have a material impact on our results of operations because the gross operating margins received from transactions with these customers are not material to our total gross operating margin and we believe the sales to these customers could be easily replaced with other buyers at comparable sales prices.

Regulation

        Regulation by FERC of Interstate Natural Gas Pipelines.    We do not own any interstate natural gas pipelines, so the Federal Energy Regulatory Commission, or FERC, does not directly regulate our operations under the National Gas Act, or NGA. However, FERC's regulation of interstate natural gas pipelines influences certain aspects of our business and the market for our products. In general, FERC has authority over natural gas companies that provide natural gas pipeline transportation services in interstate commerce and its authority to regulate those services includes:

    the certification and construction of new facilities;

    the extension or abandonment of services and facilities;

    the maintenance of accounts and records;

    the acquisition and disposition of facilities;

    maximum rates payable for certain services; and

    the initiation and discontinuation of services.

        While we do not own any interstate pipelines, we do transport gas in interstate commerce. The rates, terms and conditions of service under which we transport natural gas in our pipeline systems in interstate commerce are subject to FERC jurisdiction under Section 311 of the Natural Gas Policy Act, or NGPA. In addition, FERC has adopted, or is in the process of adopting, various regulations concerning natural gas market transparency that will apply to some of our pipeline operations. The maximum rates for services provided under Section 311 of the NGPA may not exceed a "fair and equitable rate," as defined in the NGPA. The rates are generally subject to review every three years by FERC or by an appropriate state agency. The inability to obtain approval of rates at acceptable levels could result in refund obligations, the inability to achieve adequate returns on investments in new facilities and the deterrence of future investment or growth of the regulated facilities.

        Intrastate Pipeline Regulation.    Our intrastate natural gas pipeline operations are subject to regulation by various agencies of the states in which they are located. Most states have agencies that possess the authority to review and authorize natural gas transportation transactions and the construction, acquisition, abandonment and interconnection of physical facilities. Some states also have state agencies that regulate transportation rates, service terms and conditions and contract pricing to ensure their reasonableness and to ensure that the intrastate pipeline companies that they regulate do not discriminate among similarly situated customers.

        Gathering Pipeline Regulation.    Section 1(b) of the NGA exempts natural gas gathering facilities from the jurisdiction of FERC under the NGA. We own a number of natural gas pipelines that we believe meet the traditional tests FERC has used to establish a pipeline's status as a gatherer not subject to FERC jurisdiction. State regulation of gathering facilities generally includes various safety, environmental and, in some circumstances, nondiscriminatory take requirements, and in some instances complaint-based rate regulation.

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        We are subject to some state ratable take and common purchaser statutes. The ratable take statutes generally require gatherers to take, without undue discrimination, natural gas production that may be tendered to the gatherer for handling. Similarly, common purchaser statutes generally require gatherers to purchase without undue discrimination as to source of supply or producer. These statutes are designed to prohibit discrimination in favor of one producer over another producer or one source of supply over another source of supply.

        Sales of Natural Gas.    The price at which we sell natural gas currently is not subject to federal regulation and, for the most part, is not subject to state regulation. Our sales of natural gas are affected by the availability, terms and cost of pipeline transportation. As noted above, the price and terms of access to pipeline transportation are subject to extensive federal and state regulation. FERC is continually proposing and implementing new rules and regulations affecting those segments of the natural gas industry, most notably interstate natural gas transmission companies that remain subject to FERC's jurisdiction. These initiatives also may affect the intrastate transportation of natural gas under certain circumstances. We cannot predict the ultimate impact of these regulatory changes on our natural gas marketing operations but we do not believe that we will be affected by any such FERC action materially differently than other natural gas marketers with whom we compete.

Environmental Matters

        General.    Our operation of processing and fractionation plants, pipelines and associated facilities in connection with the gathering and processing of natural gas and the transportation, fractionation and storage of NGLs is subject to stringent and complex federal, state and local laws and regulations relating to release of hazardous substances or wastes into the environment or otherwise relating to protection of the environment. As with the industry generally, compliance with existing and anticipated environmental laws and regulations increases our overall costs of doing business, including costs of planning, constructing, and operating plants, pipelines, and other facilities. Included in our construction and operation costs are capital cost items necessary to maintain or upgrade equipment and facilities. Similar costs are likely upon changes in laws or regulations and upon any future acquisition of operating assets.

        Any failure to comply with applicable environmental laws and regulations, including those relating to equipment failures and obtaining required governmental approvals, may result in the assessment of administrative, civil or criminal penalties, imposition of investigatory or remedial activities and, in less common circumstances, issuance of injunctions or construction bans or delays. We believe that we currently hold all material governmental approvals required to operate our major facilities. As part of the regular overall evaluation of our operations, we have implemented procedures to review and update governmental approvals as necessary. We believe that our operations and facilities are in substantial compliance with applicable environmental laws and regulations and that the cost of compliance with such laws and regulations currently in effect will not have a material adverse effect on our operating results or financial condition.

        The clear trend in environmental regulation is to place more restrictions and limitations on activities that may affect the environment, and thus there can be no assurance as to the amount or timing of future expenditures for environmental compliance or remediation, and actual future expenditures may be different from the amounts we currently anticipate. Moreover, risks of process upsets, accidental releases or spills are associated with our possible future operations, and we cannot assure you that we will not incur significant costs and liabilities, including those relating to claims for damage to property and persons as a result of any such upsets, releases, or spills. In the event of future increases in environmental costs, we may be unable to pass on those cost increases to our customers. A discharge of hazardous substances or wastes into the environment could, to the extent losses related to the event are not insured, subject us to substantial expense, including both the cost to comply with applicable laws and regulations and to pay fines or penalties that may be assessed and the cost related

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to claims made by neighboring landowners and other third parties for personal injury or damage to natural resources or property. We will attempt to anticipate future regulatory requirements that might be imposed and plan accordingly to comply with changing environmental laws and regulations and to minimize costs with respect to more stringent future laws and regulations of more rigorous enforcement of existing laws and regulations.

        Hazardous Substance and Waste.    To a large extent, the environmental laws and regulations affecting our operations relate to the release of hazardous substances or solid wastes into soils, groundwater and surface water, and include measures to prevent and control pollution. These laws and regulations generally regulate the generation, storage, treatment, transportation and disposal of solid and hazardous wastes, and may require investigatory and corrective actions at facilities where such waste may have been released or disposed. For instance, the Comprehensive Environmental Response, Compensation and Liability Act, or CERCLA, also known as the "Superfund" law, and comparable state laws, impose liability without regard to fault or the legality of the original conduct, on certain classes of persons that contributed to a release of "hazardous substance" into the environment. Potentially liable persons include the owner or operator of the site where a release occurred and companies that disposed or arranged for the disposal of the hazardous substances found at the site. Under CERCLA, these persons may be subject to joint and several liability for the costs of cleaning up the hazardous substances that have been released into the environment, for damages to natural resources, and for the costs of certain health studies. CERCLA also authorizes the EPA and, in some cases, third parties to take actions in response to threats to the public health or the environment and to seek to recover from the potentially responsible classes of persons the costs they incur. It is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by hazardous substances or other wastes released into the environment. Although "petroleum" as well as natural gas and NGLs are excluded from CERCLA's definition of a "hazardous substance," in the course of ordinary operations, we may generate wastes that may fall within the definition of a "hazardous substance." In addition, there are other laws and regulations that can create liability for releases of petroleum, natural gas or NGLs. Moreover, we may be responsible under CERCLA or other laws for all or part of the costs required to clean up sites at which such wastes have been disposed. We have not received any notification that we may be potentially responsible for cleanup costs under CERCLA or any analogous federal or state laws.

        We also generate, and may in the future generate, both hazardous and nonhazardous solid wastes that are subject to requirements of the federal Resource Conservation and Recovery Act, or RCRA, and/or comparable state statutes. From time to time, the Environmental Protection Agency, or EPA, and state regulatory agencies have considered the adoption of stricter disposal standards for nonhazardous wastes, including crude oil and natural gas wastes. Moreover, it is possible that some wastes generated by us that are currently classified as nonhazardous may in the future be designated as "hazardous wastes," resulting in the wastes being subject to more rigorous and costly management and disposal requirements. Changes in applicable laws or regulations may result in an increase in our capital expenditures or plant operating expenses or otherwise impose limits or restrictions on our production and operations.

        We currently own or lease, and have in the past owned or leased, and in the future we may own or lease, properties that have been used over the years for natural gas gathering, treating or processing and for NGL fractionation, transportation or storage. Solid waste disposal practices within the NGL industry and other oil and natural gas related industries have improved over the years with the passage and implementation of various environmental laws and regulations. Nevertheless, some hydrocarbons and other solid wastes have been disposed of on or under various properties owned or leased by us during the operating history of those facilities. In addition, a number of these properties may have been operated by third parties over whom we had no control as to such entities' handling of hydrocarbons or other wastes and the manner in which such substances may have been disposed of or released. These

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properties and wastes disposed thereon may be subject to CERCLA, RCRA, and analogous state laws. Under these laws, we could be required to remove or remediate previously disposed wastes or property contamination, including groundwater contamination, or to take action to prevent future contamination.

        Air Emissions.    Our current and future operations are subject to the federal Clean Air Act and comparable state laws and regulations. These laws and regulations regulate emissions of air pollutants from various industrial sources, including our facilities, and impose various controls together with monitoring and reporting requirements. Pursuant to these laws and regulations, we may be required to obtain environmental agency pre-approval for the construction or modification of certain projects or facilities expected to produce air emissions or result in an increase in existing air emissions, obtain and comply with the terms of air permits, which include various emission and operational limitations, or use specific emission control technologies to limit emissions. We likely will be required to incur certain capital expenditures in the future for air pollution control equipment in connection with maintaining or obtaining governmental approvals addressing air-emission related issues. Failure to comply with applicable air statutes or regulations may lead to the assessment of administrative, civil or criminal penalties, and may result in the limitation or cessation of construction or operation of certain air emission sources. Although we can give no assurances, we believe such requirements will not have a material adverse effect on our financial condition or operating results, and the requirements are not expected to be more burdensome to us than any similarly situated company.

        Air emissions associated with operations in the Barnett Shale area have come under recent scrutiny. In 2009 and 2010, the Texas Commission on Environmental Quality (TCEQ) conducted comprehensive monitoring of air emissions in the Barnett Shale area, in response to public concerns about high concentrations of benzene and other potential emissions in the air near drilling sites and natural gas processing facilities. In addition, environmental groups have advocated increased regulation in the Barnett Shale area and these groups as well as at least one state representative have further advocated a moratorium on permits for new gas wells until TCEQ completes its analysis. Also, the EPA recently entered into a settlement that requires it to reevaluate regulations for the control of air emissions from natural gas production facilities. Changes in laws or regulations imposing emission limitations, pollution control technology requirements or other regulatory requirements or any restriction on permitting of natural gas production facilities in the Barnett Shale area could have an adverse effect on our business.

        Climate Change.    In response to concerns suggesting that emissions of certain gases, commonly referred to as "greenhouse gases" (including carbon dioxide and methane), may be contributing to warming of the earth's atmosphere, EPA is taking steps that would result in the regulation of greenhouse gases as pollutants under the federal Clean Air Act.

        In September 2009, EPA finalized its Mandatory Reporting Rule for greenhouse gases, which requires the monitoring and reporting of greenhouse gas emissions on an annual basis. Some of our facilities include source categories that are subject to the greenhouse gas reporting requirements included in the final rule as promulgated in September 2009. In November 2010, EPA expanded the scope of the Mandatory Reporting Rule to include petroleum and natural gas systems, which applies the Mandatory Reporting Rule's requirements to, among other sources, fugitive and vented methane emissions from the oil and gas sector, including natural gas transmission compression. Although the Mandatory Reporting Rule does not control greenhouse gas emission levels from any facilities, it has still caused us to incur monitoring and reporting costs for emissions that are subject to the rule. Further, the rule's new requirements for reporting of fugitive and vented methane emissions from the oil and gas industry can be expected to increase our monitoring and reporting costs during 2011.

        After a series of regulatory actions finalized by EPA between December 2009 and May 2010, greenhouse gases became pollutants "subject to regulation" under the Clean Air Act's Prevention of Significant Deterioration (PSD) air quality permit program for stationary sources, and the largest of

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these sources have also become subject to permitting requirements under the Clean Air Act's Title V permitting program. As a result, new major stationary sources of greenhouse gas emissions, and modifications of existing major stationary sources that significantly increase their greenhouse gas emissions will require a permit setting forth Best Available Control Technology (BACT) for those emissions. EPA has, through its "Tailoring Rule," acted to limit these permitting requirements to only the largest sources of greenhouse gas emissions initially, but these new requirements could in the future affect our operations and our ability to obtain air permits for new or modified facilities.

        The U.S. Congress has also considered legislation to mandate reductions of greenhouse gas emissions, and at least one-third of the states, either individually or through multi-state regional initiatives, have already taken legal measures intended to reduce greenhouse gas emissions, primarily through the planned development of greenhouse gas emission inventories and/or greenhouse gas cap and trade programs.

        Federal or state legislative or regulatory initiatives that regulate or restrict emissions of greenhouse gases in areas in which we conduct business could adversely affect the demand for the products we store, transport, and process, and depending on the particular program adopted could increase the costs of our operations, including costs to operate and maintain our facilities, install new emission controls on our facilities, acquire allowances to authorize our greenhouse gas emissions, pay any taxes related to our greenhouse gas emissions and/or administer and manage a greenhouse gas emissions program. We may be unable to recover any such lost revenues or increased costs in the rates we charge our customers, and any such recovery may depend on events beyond our control, including the outcome of future rate proceedings before the FERC or state regulatory agencies and the provisions of any final legislation or regulations. Reductions in our revenues or increases in our expenses as a result of climate control initiatives could have adverse effects on our business, financial position, results of operations and prospects.

        Clean Water Act.    The Federal Water Pollution Control Act, also known as the Clean Water Act, and comparable state laws impose restrictions and strict controls regarding the discharge of pollutants, including natural gas liquid related wastes, into state waters or waters of the United States. Regulations promulgated pursuant to these laws require that entities that discharge into federal and state waters obtain National Pollutant Discharge Elimination System, or NPDES, and/or state permits authorizing these discharges. The Clean Water Act and analogous state laws assess administrative, civil and criminal penalties for discharges of unauthorized pollutants into the water and impose substantial liability for the costs of removing spills from such waters. In addition, the Clean Water Act and analogous state laws require that individual permits or coverage under general permits be obtained by covered facilities for discharges of storm water runoff. We believe that we are in substantial compliance with Clean Water Act permitting requirements as well as the conditions imposed thereunder, and that continued compliance with such existing permit conditions will not have a material effect on our results of operations.

        It is customary to recover natural gas from deep shale formations through the use of hydraulic fracturing, combined with sophisticated horizontal drilling. Hydraulic fracturing is an important and commonly used process in the completion of wells by our customers, particularly in Barnett Shale and Haynesville Shale regions of our operations. Hydraulic fracturing involves the injection of water, sand and chemical additives under pressure into rock formations to stimulate gas production. Due to public concerns raised regarding potential impacts of hydraulic fracturing on groundwater quality, legislative and regulatory efforts at the federal level and in some states have been initiated to require or make more stringent the permitting and compliance requirements for hydraulic fracturing operations. At the federal level, the last U.S. Congress introduced legislation that would have amended the federal Safe Drinking Water Act to subject hydraulic fracturing operations to regulation under that Act and to require the disclosure of chemicals used by the oil and gas industry in the hydraulic fracturing process. As support for the chemical disclosure requirements included in the legislation, sponsors of the

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legislation asserted that chemicals used in the fracturing process could adversely affect drinking water supplies. Disclosure of chemicals used in the fracturing process could make it easier for third parties opposing hydraulic fracturing to initiate legal proceedings against producers and service providers based on allegations that specific chemicals used in the fracturing process could adversely affect groundwater. This legislation could be reintroduced to the current Congress. If adopted, this or other similar legislation could establish an additional level of regulation and permitting of hydraulic fracturing operations at the federal level, which could lead to operational delays, increased operating costs and additional regulatory burdens that could make it more difficult for our customers to perform hydraulic fracturing. In addition, during the first quarter of 2010, the EPA initiated a detailed scientific study of hydraulic fracturing and its potential impacts on surface and ground waters. The initial study results are expected to be available in late 2012. In early 2010, EPA also indicated in a website posting that it intended to regulate hydraulic fracturing under the Safe Drinking Water Act and require permitting for any well where hydraulic fracturing was conducted with the use of diesel as an additive. While industry groups have challenged EPA's website posting as improper rulemaking, the Agency's position, if upheld could require additional permitting and could lead to operations delays, increased costs and regulatory burdens that could make it more difficult for our customers to perform hydraulic fracturing. State and local governments have also considered proposed regulations addressing public concerns related to hydraulic fracturing operations. Some state and local governments in the Marcellus Shale region, have considered or imposed moratoriums on drilling operations using hydraulic fracturing until further study of the potential environmental and human health impacts by EPA or the relative state agencies are completed. Any increased federal, state or local regulation could reduce the volumes of natural gas that our customers move through our gathering systems which would materially adversely affect our revenues and results of operations.

        Employee Safety.    We are subject to the requirements of the Occupational Safety and Health Act, referred to as OSHA, and comparable state laws that regulate the protection of the health and safety of workers. In addition, the OSHA hazard communication standard requires that information be maintained about hazardous materials used or produced in operations and that this information be provided to employees, state and local government authorities and citizens. We believe that our operations are in substantial compliance with the OSHA requirements, including general industry standards, record keeping requirements, and monitoring of occupational exposure to regulated substances.

        DOT Safety Regulations.    Our pipelines are subject to regulation by the U.S. Department of Transportation. The Department of Transportation's (DOT) and the Pipeline Hazardous Material Safety Administration (PHMSA), acting through the Office of Pipeline Safety (OPS), administers the national regulatory program to assure the safe transportation of natural gas, petroleum, and other hazardous materials by pipeline. OPS develops regulations and other approaches to risk management to assure safety in design, construction, testing, operation, maintenance, and emergency response of pipeline facilities. These safety regulations are listed under 49 CFR, Parts 192 and 195 and those referenced therein. Pipelines that transport natural gas are governed under DOT 49 CFR 192. Pipelines that transport crude oil, carbon dioxide, NGL and petroleum products are governed under DOT 49 CFR 195. PHMSA requires any entity which owns or operates pipeline facilities to comply with the regulations under these and referenced regulations, regarding access to and allow copying of records, and to make certain reports and provide information as required by the Secretary of Transportation. The Pipeline Integrity Management in High Consequence Areas, amendments to 49 CFR Part 192 and 195 (PIM) requires operators of transmission pipelines to ensure the integrity of their pipelines through hydrostatic pressure testing, the use of in-line inspection tools or through risk-based direct assessment techniques. In addition, the Railroad Commission of Texas, or TRRC, regulates our pipelines in Texas under its own pipeline integrity management rules. The Texas rule includes certain transmission based upon pipeline diameter and operating pressures. We believe that our pipeline operations are in substantial compliance with applicable PHMSA and PIM requirements; however, due to the possibility

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of new or amended laws and regulations or reinterpretation of existing laws and regulations, there can be no assurance that future compliance with the PHMSA or PIM requirements will not have a material adverse effect on our results of operations or financial positions.

Office Facilities

        We occupy approximately 95,400 square feet of space at our executive offices in Dallas, Texas under a lease expiring in June 2014, approximately 25,100 square feet of office space for our Louisiana operations in Houston, Texas with lease terms expiring in January 2013. We have approximately 17,000 square feet of office space in Fort Worth, Texas with lease terms expiring in April 2013 and currently have this space sub-leased to other tenants.

Employees

        As of December 31, 2010, we (through our subsidiaries) employed approximately 469 full-time employees. Approximately 173 of our employees were general and administrative, engineering, accounting and commercial personnel and the remainder were operational employees. We are not party to any collective bargaining agreements, and we have not had any significant labor disputes in the past. We believe that we have good relations with our employees.

Item 1A.    Risk Factors

        The following risk factors and all other information contained in this report should be considered carefully when evaluating us. These risk factors could affect our actual results. Other risks and uncertainties, in addition to those that are described below, may also impair our business operations. If any of the following risks occur, our business, financial condition or results of operations could be affected materially and adversely. In that case, we may be unable to make distributions to our unitholder and the trading price of our common unit could decline. These risk factors should be read in conjunction with the other detailed information concerning us set forth in our accompanying financial statements and notes and contained in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" included herein.

Risks Inherent In Our Business

Our profitability is dependent upon prices and market demand for natural gas and NGLs, which are beyond our control and have been volatile.

        We are subject to significant risks due to fluctuations in commodity prices. We are directly exposed to these risks primarily in the gas processing component of our business. For the year ended December 31, 2010 approximately 10.6% of our processed gas arrangements, based on volume, was processed under percent of liquids (POL) contracts. Under these contracts we receive a fee in the form of a percentage of the liquids recovered and the producer bears all the cost of the natural gas shrink. Accordingly, our revenues under these contracts are directly impacted by the market price of NGLs.

        We also realize processing gross margins under processing margin (margin) contracts. For the year ended December 31, 2010 approximately 12.9% of our processed gas arrangements, based on volume, was processed under margin contracts. We have a number of margin contracts on our Plaquemine and Gibson processing plants. Under this type of contract, we pay the producer for the full amount of inlet gas to the plant, and we make a margin based on the difference between the value of liquids recovered from the processed natural gas as compared to the value of the natural gas volumes lost ("shrink") and the cost of fuel used in processing. The shrink and fuel losses are referred to as plant thermal reduction or PTR. Our margins from these contracts can be negative during periods of high natural gas prices relative to liquids prices.

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        We are also indirectly exposed to commodity prices due to the negative impacts on production and the development of production of natural gas and NGLs connected to or near our assets and on our margins for transportation between certain market centers. Low prices for these products will reduce the demand for our services and volumes on our systems.

        In the past, the prices of natural gas and NGLs have been extremely volatile and we expect this volatility to continue. For example, prices of natural gas in 2010 were below the market price realized throughout most of 2009 while prices for oil and NGLs were higher than 2009 market prices. Crude oil prices (based on the New York Mercantile Exchange (the "NYMEX") futures daily close prices for the prompt month) in 2010 ranged from a low of $68.01 per Bbl in May 2010 to a high of $91.51 per Bbl in December 2010. Weighted average NGL prices in 2010 (based on the Oil Price Information Service (OPIS) Napoleonville daily average spot liquids prices) ranged from a low of $0.84 per gallon in July 2010 to a high of $1.23 per gallon in January 2010. Natural gas prices (based on Gas Daily Henry Hub closing prices) during 2010 ranged from a high of $7.51 per MMBtu in January 2010 to a low of $3.18 per MMBtu in October 2010.

        The markets and prices for natural gas and NGLs depend upon factors beyond our control. These factors include the supply and demand for oil, natural gas and NGLs, which fluctuate with changes in market and economic conditions and other factors, including:

    the impact of weather on the demand for oil and natural gas;

    the level of domestic oil and natural gas production;

    technology, including improved production techniques (particularly with respect to shale development);

    the level of domestic industrial and manufacturing activity;

    the availability of imported oil, natural gas and NGLs;

    international demand for oil and NGLs;

    actions taken by foreign oil and gas producing nations;

    the availability of local, intrastate and interstate transportation systems;

    the availability of downstream NGL fractionation facilities;

    the availability and marketing of competitive fuels;

    the impact of energy conservation efforts; and

    the extent of governmental regulation and taxation, including the regulation of "greenhouse gases."

        Changes in commodity prices may also indirectly impact our profitability by influencing drilling activity and well operations, and thus the volume of gas we gather and process. The volatility in commodity prices may cause our gross operating margin and cash flows to vary widely from period to period. Our hedging strategies may not be sufficient to offset price volatility risk and, in any event, do not cover all of our throughput volumes. Moreover, hedges are subject to inherent risks, which we describe in "—Our use of derivative financial instruments does not eliminate our exposure to fluctuations in commodity prices and interest rates and has in the past and could in the future result in financial losses or reduce our income." For a discussion of our risk management activities, please read "Item 7A. Quantitative and Qualitative Disclosure about Market Risk."

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Our substantial indebtedness could limit our flexibility and adversely affect our financial health.

        We have a substantial amount of indebtedness. As of December 31, 2010, we had approximately $732.1 million of indebtedness outstanding primarily comprised of $725.0 million (including $13.5 million of original issue discount) of senior unsecured notes. We also have a bank credit facility with a borrowing capacity of $420.0 million that had approximately $86.6 million of letters of credit outstanding, leaving available capacity of $333.4 million as of December 31, 2010.

        Our substantial indebtedness could limit our flexibility and adversely affect our financial health. For example, it could:

    make us more vulnerable to general adverse economic and industry conditions;

    require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow for operations and other purposes;

    limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; and

    place us at a competitive disadvantage compared to competitors that may have proportionately less indebtedness.

        In addition, our ability to make scheduled payments or to refinance our obligations depends on our successful financial and operating performance. We cannot assure you that our operating performance will generate sufficient cash flow or that our capital resources will be sufficient for payment of our indebtedness obligations in the future. Our financial and operating performance, cash flow and capital resources depend upon prevailing economic conditions and certain financial, business and other factors, many of which are beyond our control.

        If our cash flow and capital resources are insufficient to fund our debt service obligations, we may be forced to sell material assets or operations, obtain additional capital or restructure our debt. In the event that we are required to dispose of material assets or operations or restructure our debt to meet our debt service and other obligations, we cannot assure you as to the terms of any such transaction or how quickly any such transaction could be completed, if at all.

We may not be able to access new capital to fund our acquisition and growth strategies which could impair our ability to fund future capital needs and to grow.

        Global financial markets and economic conditions recently have been disrupted and volatile. These conditions, along with significant write-offs in the financial services sector and current weak economic conditions, have made, and could in the future make, it difficult to obtain funding for our capital needs. As a result, the cost of raising money in the debt and equity capital markets could increase substantially while the availability of funds from those markets could diminish significantly. Due to these factors, we cannot be certain that new debt or equity financing will be available to us on acceptable terms or at all. Without adequate funding, we may be unable to execute our growth strategy, complete future acquisitions or future construction projects or other capital expenditures, take advantage of other business opportunities or respond to competitive pressures, any of which could have a material adverse effect on our revenues and results of operations. Further, our customers may increase collateral requirements from us, including letters of credit which reduce available borrowing capacity, or reduce the business they transact with us to reduce their credit exposure to us.

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Due to our lack of asset diversification, adverse developments in our gathering, transmission, processing and NGL services businesses would materially impact our financial condition.

        We rely exclusively on the revenues generated from our gathering, transmission, processing and NGL services businesses and as a result our financial condition depends upon prices of, and continued demand for, natural gas and NGLs. Due to our lack of asset diversification, an adverse development in one of these businesses would have a significantly greater impact on our financial condition and results of operations than if we maintained more diverse assets.

We may not be successful in balancing our purchases and sales.

        We are a party to certain long-term gas sales commitments that we satisfy through supplies purchased under long-term gas purchase agreements. When we enter into those arrangements, our sales obligations generally match our purchase obligations. However, over time the supplies that we have under contract may decline due to reduced drilling or other causes and we may be required to satisfy the sales obligations by buying additional gas at prices that may exceed the prices received under the sales commitments. In addition, a producer could fail to deliver contracted volumes or deliver in excess of contracted volumes, or a consumer could purchase more or less than contracted volumes. Any of these actions could cause our purchases and sales not to be balanced. If our purchases and sales are not balanced, we will face increased exposure to commodity price risks and could have increased volatility in our operating income.

        We make certain commitments to purchase natural gas in production areas based on production-area indices and to sell the natural gas into market areas based on market-area indices, pay the costs to transport the natural gas between the two points and capture the difference between the indices as margin. Changes in the index prices relative to each other (also referred to as basis spread) can significantly affect our margins or even result in losses. For example, we are a party to one contract with a term to 2019 to supply approximately 150,000 MMBtu/day of gas. We buy gas for this contract on several different production-area indices on our NTP and sell the gas into a different market area index. For the year ended December 31, 2010 we have recorded a loss of approximately $8.4 million on this contract, and we currently expect that we will record a loss of approximately $10.0 million to $14.0 million on this contract in 2011. Reduced supplies and narrower basis spreads in recent periods have increased the losses on this contract, and greater losses on this contract could occur in future periods if these conditions persist or become worse. For additional information on this contract, please see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Overview."

We must continually compete for natural gas supplies, and any decrease in our supplies of natural gas could adversely affect our financial condition and results of operations.

        Our gathering systems are connected to oil and natural gas wells from which production will naturally decline over time, which means that its cash flows associated with these sources of natural gas will likely also decline over time. In order to maintain or increase throughput levels in our natural gas gathering systems and asset utilization rates at our processing plants and to fulfill our current sales commitments, we must continually contract for new natural gas supplies. We may not be able to obtain additional contracts for natural gas supplies. The primary factors affecting our ability to connect new wells to our gathering facilities include our success in contracting for existing natural gas supplies that are not committed to other systems and the level of drilling activity near our gathering systems. If we are unable to maintain or increase the throughput on our systems by accessing new natural gas supplies to offset the natural decline in reserves, our business and financial results could be materially, adversely affected. In addition, our future growth will depend in part upon whether we can contract for additional supplies at a greater rate than the rate of natural decline in our currently connected supplies.

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        Fluctuations in energy prices can greatly affect production rates and investments by third parties in the development of new oil and natural gas reserves. Natural gas prices were relatively low in 2010 and continue to be depressed. Prolonged periods of low natural gas prices in the future may put downward pressure on drilling activity in the future which may result in lower volumes. Tax policy changes or additional regulatory restrictions on development could also have a negative impact on drilling activity, reducing supplies of natural gas available to our systems. We have no control over producers and depend on them to maintain sufficient levels of drilling activity. A material decrease in natural gas production or in the level of drilling activity in our principal geographic areas for a prolonged period, as a result of depressed commodity prices or otherwise, likely would have a material adverse effect on our results of operations and financial position.

A substantial portion of our assets is connected to natural gas reserves that will decline over time, and the cash flows associated with those assets will decline accordingly.

        A substantial portion of our assets, including our gathering systems, is dedicated to certain natural gas reserves and wells for which the production will naturally decline over time. Accordingly, our cash flows associated with these assets will also decline. If we are unable to access new supplies of natural gas either by connecting additional reserves to our existing assets or by constructing or acquiring new assets that have access to additional natural gas reserves, our cash flows may decline.

We are vulnerable to operational, regulatory and other risks due to our concentration of assets in south Louisiana and the Gulf of Mexico, including the effects of adverse weather conditions such as hurricanes.

        Our operations and revenues will be significantly impacted by conditions in south Louisiana and the Gulf of Mexico because we have a significant portion of our assets located in these two areas. Our concentration of activity in Louisiana and the Gulf of Mexico makes us more vulnerable than many of our competitors to the risks associated with these areas, including:

    adverse weather conditions, including hurricanes and tropical storms;

    delays or decreases in production, the availability of equipment, facilities or services; and

    changes in the regulatory environment.

        Because a significant portion of our operations could experience the same condition at the same time, these conditions could have a relatively greater impact on our results of operations than they might have on other midstream companies who have operations in more diversified geographic areas.

Our use of derivative financial instruments does not eliminate our exposure to fluctuations in commodity prices and interest rates and has in the past and could in the future result in financial losses or reduce our income.

        Our operations expose us to fluctuations in commodity prices, and our credit facility exposes us to fluctuations in interest rates. We use over-the-counter price and basis swaps with other natural gas merchants and financial institutions. Use of these instruments is intended to reduce our exposure to short-term volatility in commodity prices. As of December 31, 2010, we have hedged only portions of our expected exposures to commodity price risk. In addition, to the extent we hedge our commodity price risk using swap instruments, we will forego the benefits of favorable changes in commodity prices. Although we do not currently have any financial instruments to eliminate our exposure to interest rate fluctuations, we may use financial instruments in the future to offset our exposure to interest rate fluctuations.

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        Even though monitored by management, our hedging activities may fail to protect us and could reduce our earnings and cash flow. Our hedging activity may be ineffective or adversely affect cash flow and earnings because, among other factors:

    hedging can be expensive, particularly during periods of volatile prices;

    our counterparty in the hedging transaction may default on its obligation to pay or otherwise fail to perform; and

    available hedges may not correspond directly with the risks against which we seek protection. For example:

    the duration of a hedge may not match the duration of the risk against which we seek protection;

    variations in the index we use to price a commodity hedge may not adequately correlate with variations in the index we use to sell the physical commodity (known as basis risk); and

    we may not produce or process sufficient volumes to cover swap arrangements we enter into for a given period. If our actual volumes are lower than the volumes we estimated when entering into a swap for the period, we might be forced to satisfy all or a portion of our derivative obligation without the benefit of cash flow from our sale or purchase of the underlying physical commodity, which could adversely affect our liquidity.

        Our financial statements may reflect gains or losses arising from exposure to commodity prices for which we are unable to enter into fully effective hedges. In addition, the standards for cash flow hedge accounting are rigorous. Even when we engage in hedging transactions that are effective economically, these transactions may not be considered effective cash flow hedges for accounting purposes. Our earnings could be subject to increased volatility to the extent our derivatives do not continue to qualify as cash flow hedges, and, if we assume derivatives as part of an acquisition, to the extent we cannot obtain or choose not to seek cash flow hedge accounting for the derivatives we assume. Please read "Item 7A. Quantitative and Qualitative Disclosures about Market Risk" for a summary of our hedging activities.

A reduction in demand for NGL products by the petrochemical, refining or other industries or by the fuel markets could materially adversely affect our results of operations and financial condition.

        The NGL products we produce have a variety of applications, including as heating fuels, petrochemical feedstocks and refining blend stocks. A reduction in demand for NGL products, whether because of general or industry specific economic conditions, new government regulations, global competition, reduced demand by consumers for products made with NGL products (for example, reduced petrochemical demand observed due to lower activity in the automobile and construction industries), increased competition from petroleum-based feedstocks due to pricing differences, mild winter weather for some NGL applications or other reasons, could result in a decline in the volume of NGL products we handle or reduce the fees we charge for our services. Our NGL products and the demand for these products are affected as follows:

    Ethane.  Ethane is typically supplied as purity ethane or as part of ethane-propane mix. Ethane is primarily used in the petrochemical industry as feedstock for ethylene, one of the basic building blocks for a wide range of plastics and other chemical products. Although ethane is typically extracted as part of the mixed NGL stream at gas processing plants, if natural gas prices increase significantly in relation to NGL product prices or if the demand for ethylene falls, it may be more profitable for natural gas processors to leave the ethane in the natural gas stream thereby reducing the volume of NGLs delivered for fractionation and marketing.

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    Propane.  Propane is used as a petrochemical feedstock in the production of ethylene and propylene, as a heating, engine and industrial fuel, and in agricultural applications such as crop drying. Changes in demand for ethylene and propylene could adversely affect demand for propane. The demand for propane as a heating fuel is significantly affected by weather conditions. The volume of propane sold is at its highest during the six-month peak heating season of October through March. Demand for our propane may be reduced during periods of warmer-than-normal weather.

    Normal Butane.  Normal butane is used in the production of isobutane, as a refined product blending component, as a fuel gas, and in the production of ethylene and propylene. Changes in the composition of refined products resulting from governmental regulation, changes in feedstocks, products and economics, demand for heating fuel and for ethylene and propylene could adversely affect demand for normal butane.

    Isobutane.  Isobutane is predominantly used in refineries to produce alkylates to enhance octane levels. Accordingly, any action that reduces demand for motor gasoline or demand for isobutane to produce alkylates for octane enhancement might reduce demand for isobutane.

    Natural Gasoline.  Natural gasoline is used as a blending component for certain refined products and as a feedstock used in the production of ethylene and propylene. Changes in the mandated composition resulting from governmental regulation of motor gasoline and in demand for ethylene and propylene could adversely affect demand for natural gasoline.

        NGLs and products produced from NGLs also compete with global markets. Any reduced demand for ethane, propane, normal butane, isobutane or natural gasoline in the markets we access for any of the reasons stated above could adversely affect demand for the services we provide as well as NGL prices, which would negatively impact our results of operations and financial condition.

Growing our business by constructing new pipelines and processing facilities subjects us to construction risks, risks that natural gas or NGL supplies will not be available upon completion of the facilities and risks of construction delay and additional costs due to obtaining rights-of-way and complying with federal, state and local laws.

        One of the ways we intend to grow our business is through the construction of additions to our existing gathering systems and construction of new pipelines and gathering and processing facilities. The construction of pipelines and gathering and processing facilities requires the expenditure of significant amounts of capital, which may exceed our expectations. Generally, we may have only limited natural gas or NGL supplies committed to these facilities prior to their construction. Moreover, we may construct facilities to capture anticipated future growth in production in a region in which anticipated production growth does not materialize. We may also rely on estimates of proved reserves in our decision to construct new pipelines and facilities, which may prove to be inaccurate because there are numerous uncertainties inherent in estimating quantities of proved reserves. As a result, new facilities may not be able to attract enough natural gas to achieve our expected investment return, which could adversely affect our results of operations and financial condition. In addition, we face the risks of construction delay and additional costs due to obtaining rights-of-way and local permits and complying with federal or state laws and city ordinances, particularly as we expand our operations into more urban, populated areas such as the Barnett Shale.

If we do not make acquisitions on economically acceptable terms or efficiently and effectively integrate the acquired assets with our asset base, our future growth will be limited.

        Our ability to grow depends, in part, on our ability to make acquisitions that result in an increase in cash generated from operations on a per unit basis. If we are unable to make accretive acquisitions either because we are (1) unable to identify attractive acquisition candidates or negotiate acceptable

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purchase contracts with them, (2) unable to obtain financing for these acquisitions on economically acceptable terms or (3) outbid by competitors, then our future growth and our ability to increase distributions will be limited.

        From time to time, we may evaluate and seek to acquire assets or businesses that we believe complement our existing business and related assets. We may acquire assets or businesses that we plan to use in a manner materially different from their prior owner's use. Any acquisition involves potential risks, including:

    the inability to integrate the operations of recently acquired businesses or assets, especially if the assets acquired are in a new business segment or geographic area;

    the diversion of management's attention from other business concerns;

    the failure to realize expected volumes, revenues, profitability or growth;

    the failure to realize any expected synergies and cost savings;

    the coordination of geographically disparate organizations, systems and facilities;

    the assumption of unknown liabilities;

    the loss of customers or key employees from the acquired businesses;

    a significant increase in our indebtedness; and

    potential environmental or regulatory liabilities and title problems.

        Management's assessment of these risks is necessarily inexact and may not reveal or resolve all existing or potential problems associated with an acquisition. Realization of any of these risks could adversely affect our operations and cash flows. If we consummate any future acquisition, our capitalization and results of operations may change significantly, and you will not have the opportunity to evaluate the economic, financial and other relevant information that we will consider in determining the application of these funds and other resources.

        Additionally, our ability to grow our asset base in the near future through acquisitions may be limited due to constrained capital markets.

The terms of our credit facility and indenture may restrict our current and future operations, particularly our ability to respond to changes in business or to take certain actions.

        Our credit agreement and the indenture governing our senior notes contain, and any future indebtedness we incur will likely contain, a number of restrictive covenants that impose significant operating and financial restrictions, including restrictions on our ability to engage in acts that may be in our best long-term interest. These agreements include covenants that, among other things, restrict our ability to:

    incur or guarantee additional indebtedness or issue preferred stock;

    pay dividends on our equity securities or redeem, repurchase or retire our equity securities or subordinated indebtedness;

    make investments;

    create restrictions on the payment of dividends or other distributions to its equity holders;

    engage in transactions with our affiliates;

    sell assets, including equity securities of our subsidiaries;

    consolidate or merge;

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    incur liens;

    prepay, redeem and repurchase certain debt;

    make certain acquisitions;

    transfer assets;

    enter into sale and lease back transactions;

    make capital expenditures; and

    change business activities we conduct.

        In addition, our credit facility requires us to satisfy and maintain specified financial ratios and other financial condition tests. Our ability to meet those financial ratios and tests can be affected by events beyond our control, and we cannot assure you that we will meet those ratios and tests.

        A breach of any of these covenants could result in an event of default under our credit facility and indenture. Upon the occurrence of such an event of default, all amounts outstanding under the applicable debt agreements could be declared to be immediately due and payable and all applicable commitments to extend further credit could be terminated. If we are unable to repay the accelerated debt under our senior secured credit facility, the lenders under senior secured credit facility could proceed against the collateral granted to them to secure that indebtedness. We have pledged substantially all of our assets as collateral under our senior secured credit facility. If indebtedness under our senior secured credit facility or indentures is accelerated, we cannot assure you that we will have sufficient assets to repay the indebtedness. The operating and financial restrictions and covenants in these debt agreements and any future financing agreements may adversely affect our ability to finance future operations or capital needs or to engage in other business activities.

We do not own most of the land on which our pipelines and compression facilities are located, which could disrupt our operations.

        We do not own most of the land on which our pipelines and compression facilities are located, and we are therefore subject to the possibility of more onerous terms and/or increased costs to retain necessary land use if we do not have valid rights-of-way or leases or if such rights-of-way or leases lapse or terminate. We sometimes obtain the rights to land owned by third parties and governmental agencies for a specific period of time. Our loss of these rights, through our inability to renew right-of-way contracts, leases or otherwise, could cause us to cease operations on the affected land, increase costs related to continuing operations elsewhere, and reduce our revenue.

We expect to encounter significant competition in any new geographic areas into which we seek to expand and our ability to enter such markets may be limited.

        If we expand our operations into new geographic areas, we expect to encounter significant competition for natural gas supplies and markets. Competitors in these new markets will include companies larger than us, which have both lower capital costs and greater geographic coverage, as well as smaller companies, which have lower total cost structures. As a result, we may not be able to successfully develop acquired assets and markets located in new geographic areas and our results of operations could be adversely affected.

We may not be able to retain existing customers or acquire new customers, which would reduce our revenues and limit our future profitability.

        The renewal or replacement of existing contracts with our customers at rates sufficient to maintain current revenues and cash flows depends on a number of factors beyond our control, including

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competition from other pipelines, and the price of, and demand for, natural gas in the markets we serve. The inability of our management to renew or replace our current contracts as they expire and to respond appropriately to changing market conditions could have a negative effect on our profitability.

        In particular, our ability to renew or replace our existing contracts with industrial end-users and utilities impacts our profitability. For the year ended December 31, 2010, approximately 49% of our sales of gas that was transported using our physical facilities were to industrial end-users and utilities. As a consequence of the increase in competition in the industry and volatility of natural gas prices, end-users and utilities are reluctant to enter into long-term purchase contracts. Many end-users purchase natural gas from more than one natural gas company and have the ability to change providers at any time. Some of these end-users also have the ability to switch between gas and alternate fuels in response to relative price fluctuations in the market. Because there are numerous companies of greatly varying size and financial capacity that compete with us in the marketing of natural gas, we often compete in the end-user and utilities markets primarily on the basis of price.

We depend on certain key customers, and the loss of any of our key customers could adversely affect our financial results.

        We derive a significant portion of our revenues from contracts with key customers. To the extent that these and other customers may reduce volumes of natural gas purchased or transported under existing contracts, we would be adversely affected unless we were able to make comparably profitable arrangements with other customers. Certain agreements with key customers provide for minimum volumes of natural gas or natural gas services that require the customer to transport, process or purchase until the expiration of the term of the applicable agreement, subject to certain force majeure provisions. Customers may default on their obligations to transport, process or purchase the minimum volumes of natural gas or natural gas services required under the applicable agreements.

We are exposed to the credit risk of our customers and counterparties, and a general increase in the nonpayment and nonperformance by our customers could have an adverse effect on our financial condition and results of operations.

        Risks of nonpayment and nonperformance by our customers are a major concern in our business. We are subject to risks of loss resulting from nonpayment or nonperformance by our customers and other counterparties, such as our lenders and hedging counterparties. Any increase in the nonpayment and nonperformance by our customers could adversely affect our results of operations and reduce our ability to make distributions to our unitholders.

Federal, state or local regulatory measures could adversely affect our business.

        Our natural gas gathering and processing activities generally are exempt from FERC regulation under the Natural Gas Act. However, the distinction between FERC-regulated transmission services and federally unregulated gathering services is the subject of substantial, on-going litigation, so the classification and regulation of our gathering facilities are subject to change based on future determinations by FERC and the courts. Natural gas gathering may receive greater regulatory scrutiny at both the state and federal levels since FERC has less extensively regulated the gathering activities of interstate pipeline transmission companies and a number of such companies have transferred gathering facilities to unregulated affiliates. Our gathering operations also may be or become subject to safety and operational regulations relating to the design, installation, testing, construction, operation, replacement and management of gathering facilities. Additional rules and legislation pertaining to these matters are considered or adopted from time to time. We cannot predict what effect, if any, such changes might have on our operations, but the industry could be required to incur additional capital expenditures and increased costs depending on future legislative and regulatory changes.

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        The rates, terms and conditions of service under which we transport natural gas in our pipeline systems in interstate commerce are subject to FERC regulation under the Section 311 of the Natural Gas Policy Act. Under these regulations, we are required to justify our rates for interstate transportation service on a cost-of-service basis, every three years. Our intrastate natural gas pipeline operations are subject to regulation by various agencies of the states in which they are located. Should FERC or any of these state agencies determine that our rates for Section 311 transportation service or intrastate transportation service should be lowered, our business could be adversely affected.

        Other state and local regulations also affect our business. We are subject to some ratable take and common purchaser statutes in the states where we operate. Ratable take statutes generally require gatherers to take, without undue discrimination, natural gas production that may be tendered to the gatherer for handling. Similarly, common purchaser statutes generally require gatherers to purchase without undue discrimination as to source of supply or producer. These statutes have the effect of restricting our right as an owner of gathering facilities to decide with whom we contract to purchase or transport natural gas. Federal law leaves any economic regulation of natural gas gathering to the states, and some of the states in which we operate have adopted complaint-based or other limited economic regulation of natural gas gathering activities. States in which we operate that have adopted some form of complaint-based regulation, like Texas, generally allow natural gas producers and shippers to file complaints with state regulators in an effort to resolve grievances relating to natural gas gathering access and rate discrimination.

        The states in which we conduct operations administer federal pipeline safety standards under the Pipeline Safety Act of 1968. The "rural gathering exemption" under the Natural Gas Pipeline Safety Act of 1968 presently exempts substantial portions of our gathering facilities from jurisdiction under that statute, including those portions located outside of cities, towns, or any area designated as residential or commercial, such as a subdivision or shopping center. The "rural gathering exemption," however, may be restricted in the future, and it does not apply to our natural gas transmission pipelines. In response to recent pipeline accidents in other parts of the country, Congress and the Department of Transportation, or DOT, have passed or are considering heightened pipeline safety requirements.

        Compliance with pipeline integrity regulations issued by the United States Department of Transportation in December 2003 or those issued by the TRRC could result in substantial expenditures for testing, repairs and replacement. TRRC regulations require periodic testing of all intrastate pipelines meeting certain size and location requirements. Our costs relating to compliance with the required testing under the TRRC regulations, adjusted to exclude costs associated with discontinued operations, were approximately at $1.4 million, $1.1 million, and $1.4 million for the years ended December 31, 2010, 2009, and 2008, respectively. We expect the costs for compliance with TRRC and DOT regulations to be approximately $1.6 million during 2011. If our pipelines fail to meet the safety standards mandated by the TRRC or the DOT regulations, then we may be required to repair or replace sections of such pipelines, the cost of which cannot be estimated at this time.

        As our operations continue to expand into and around urban, or more populated areas, such as the Barnett Shale, we may incur additional expenses to mitigate noise, odor and light that may be emitted in our operations, and expenses related to the appearance of our facilities. Municipal and other local or state regulations are imposing various obligations, including, among other things, regulating the location of our facilities, imposing limitations on the noise levels of our facilities and requiring certain other improvements that increase the cost of our facilities. We are also subject to claims by neighboring landowners for nuisance related to the construction and operation of our facilities, which could subject us to damages for declines in neighboring property values due to our construction and operation of facilities.

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Our business involves hazardous substances and may be adversely affected by environmental regulation.

        Many of the operations and activities of our gathering systems, processing plants, fractionators and other facilities are subject to significant federal, state and local environmental laws and regulations. The obligations imposed by these laws and regulations include obligations related to air emissions and discharge of pollutants from our facilities and the cleanup of hazardous substances and other wastes that may have been released at properties currently or previously owned or operated by us or locations to which we have sent wastes for treatment or disposal. Various governmental authorities have the power to enforce compliance with these laws and regulations and the permits issued under them, and violators are subject to administrative, civil and criminal penalties, including civil fines, injunctions or both. Strict, joint and several liability may be incurred under these laws and regulations for the remediation of contaminated areas. Private parties, including the owners of properties near our facilities or upon or through which our gathering systems traverse, may also have the right to pursue legal actions to enforce compliance as well as to seek damages for non-compliance with environmental laws and regulations for releases of contaminants or for personal injury or property damage.

        There is inherent risk of the incurrence of significant environmental costs and liabilities in our business due to our handling of natural gas and other petroleum substances, air emissions related to our operations, historical industry operations, waste disposal practices and the prior use of natural gas flow meters containing mercury. In addition, the possibility exists that stricter laws, regulations or enforcement policies could significantly increase our compliance costs and the cost of any remediation that may become necessary. We may incur material environmental costs and liabilities. Furthermore, our insurance may not provide sufficient coverage in the event an environmental claim is made against us.

        Our business may be adversely affected by increased costs due to stricter pollution control requirements or liabilities resulting from non-compliance with required operating or other regulatory permits. New environmental laws or regulations, including, for example, legislation being considered by the U.S. Congress relating to the control of greenhouse gas emissions or changes in existing environmental laws or regulations might adversely affect our products and activities, including processing, storage and transportation, as well as waste management and air emissions. Federal and state agencies could also impose additional safety requirements, any of which could affect our profitability. Changes in laws or regulations could also limit our production or the operation of our assets or adversely affect our ability to comply with applicable legal requirements or the demand for natural gas, which could adversely affect our business and our profitability.

Recent events in the Gulf of Mexico may decrease the supplies of natural gas to our south Louisiana assets.

        On April 20, 2010, the Transocean Deepwater Horizon drilling rig exploded and subsequently sank 130 miles south of New Orleans, Louisiana, and the resulting release of crude oil into the Gulf of Mexico was declared a Spill of National Significance by the United States Department of Homeland Security. We cannot predict with any certainty the impact of this oil spill, the extent of cleanup activities associated with this spill, or possible changes in laws or regulations that may be enacted in response to this spill, but this event and its aftermath could adversely affect our operations. Our operations in south Louisiana are dependent upon continued conventional and deep shelf drilling in the Gulf of Mexico. Additional governmental regulation of, or delays in issuance of permits for, the offshore exploration and production industry may negatively impact current or future volumes being processed by our facilities, and may potentially reduce volumes in our NGL marketing business.

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Increased regulation of hydraulic fracturing could result in reductions or delays in natural gas production by our customers, which could adversely impact our revenues by decreasing the volumes of natural gas that we gather, transport and process.

        Hydraulic fracturing is a process used by oil and gas exploration and production operators in the completion of certain oil and gas wells whereby water, sand and chemicals are injected under pressure into subsurface formations to stimulate gas and, to a lesser extent, oil production. Due to concerns that hydraulic fracturing may adversely affect drinking water supplies, in the first quarter of 2010, the EPA initiated a detailed scientific study to investigate the potential adverse impact that hydraulic fracturing may have on water quality and public health. The initial study results are expected to be available in late 2012. Additionally, legislation was introduced in the previous session of the U.S. Congress to amend the federal Safe Drinking Water Act to subject hydraulic fracturing operations to regulation under that Act and to require the disclosure of chemicals used by the oil and gas industry in the hydraulic fracturing process. This legislation could be reintroduced by the current session of Congress. If enacted, this or similar legislation could require hydraulic fracturing activities to meet permitting and financial assurance requirements, adhere to certain construction specifications, fulfill monitoring, reporting and recordkeeping requirements and meet plugging and abandonment requirements. Disclosure of chemicals used in the fracturing process could make it easier for third parties opposing hydraulic fracturing to initiate legal proceedings based on allegations that specific chemicals used in the fracturing process could adversely affect groundwater. Adoption of legislation or the implementation of regulations placing restrictions on hydraulic fracturing activities could impose operational delays, increased operating costs and additional regulatory burdens on exploration and production operators, which could reduce their production of natural gas and, in turn, adversely affect our revenues and results of operations by decreasing the volumes of natural gas that we gather, transport and process.

Our business involves many hazards and operational risks, some of which may not be fully covered by insurance.

        Our operations are subject to the many hazards inherent in the gathering, compressing, processing and storage of natural gas and NGLs, including:

    damage to pipelines, related equipment and surrounding properties caused by hurricanes, floods, fires and other natural disasters and acts of terrorism;

    inadvertent damage from construction and farm equipment;

    leaks of natural gas, NGLs and other hydrocarbons; and

    fires and explosions.

        These risks could result in substantial losses due to personal injury and/or loss of life, severe damage to and destruction of property and equipment and pollution or other environmental damage and may result in curtailment or suspension of our related operations. We are not fully insured against all risks incident to our business. In accordance with typical industry practice, we do not have any property insurance on any of our underground pipeline systems that would cover damage to the pipelines. We are not insured against all environmental accidents that might occur, other than those considered to be sudden and accidental. If a significant accident or event occurs that is not fully insured, it could adversely affect our operations and financial condition.

The recent adoption of derivatives legislation by the United States Congress could have an adverse effect on our ability to hedge risks associated with our business.

        The United States Congress has adopted comprehensive financial reform legislation that establishes federal oversight and regulation of the over-the-counter derivatives market and entities, such as us, that participate in that market. The new legislation was signed into law by the President on

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July 21, 2010, and requires the Commodities Futures Trading Commission (the "CFTC") and the SEC to promulgate rules and regulations implementing the new legislation within 360 days from the date of enactment. The CFTC has also proposed regulations to set position limits for certain futures and option contracts in the major energy markets, although it is not possible at this time to predict whether or when the CFTC will adopt those rules or include comparable provisions in its rulemaking under the new legislation. The financial reform legislation may also require us to comply with margin requirements in connection with our derivative activities, although the application of those provisions to us is uncertain at this time. The CFTC has proposed regulations that may provide to us the certainty that we will not be required to comply with margin requirements, but the timing of the adoption of any such regulations, and their scope, are uncertain. If margin requirements and other trading structures apply to us, the new legislation and any new regulations could significantly increase the cost of derivative contracts, materially alter the terms of derivative contracts, reduce the availability of derivatives to protect against risks we encounter, and reduce our ability to monetize or restructure our existing derivative contracts. If we reduce our use of derivatives as a result of the legislation and regulations, our results of operations may become more volatile and our cash flows may be less predictable, which could adversely affect our ability to plan for and fund capital expenditures. Finally, the legislation was intended, in part, to reduce the volatility of oil and natural gas prices, which some legislators attributed to speculative trading in derivatives and commodity instruments related to oil and natural gas. Our revenues could therefore be adversely affected if a consequence of the legislation and regulations is to lower commodity prices. Any of these consequences could have a material, adverse effect on our financial condition and results of operations.

Climate change legislation and regulatory initiatives could result in increased operating costs and reduced demand for the natural gas and NGL services we provide.

        On December 15, 2009, the EPA published its findings that emissions of carbon dioxide, methane and other greenhouse gases ("GHGs") present an endangerment to public health and the environment because emissions of such gases are, according to the EPA, contributing to warming of the earth's atmosphere and other climatic changes. These findings allow the EPA to proceed with the adoption and implementation of regulations restricting emissions of GHGs under existing provisions of the federal Clean Air Act. Accordingly, the EPA has adopted two sets of regulations under the Clean Air Act that would require a reduction in emissions of GHGs from motor vehicles and could trigger permit review for GHG emissions from certain stationary sources. Moreover, on October 30, 2009, the EPA published a "Mandatory Reporting of Greenhouse Gases" final rule that establishes a new comprehensive scheme requiring operators of stationary sources emitting more than established annual thresholds of carbon dioxide-equivalent GHGs to inventory and report their GHG emissions annually on a facility-by-facility basis. On April 12, 2010, the EPA proposed to expand its existing GHG reporting rule to include owners and operators of onshore oil and natural gas production, processing, transmission, storage and distribution facilities. If the proposed rule is finalized in its current form, reporting of GHG emissions from such onshore activities would be required on an annual basis beginning in 2012 for emissions occurring in 2011.

        In addition, both houses of Congress have actively considered legislation to reduce emissions of GHGs, and almost half of the states have already taken legal measures to reduce emissions of GHGs, primarily through the planned development of GHG emission inventories and/or regional GHG cap and trade programs. Most of these cap and trade programs work by requiring either major sources of emissions, such as electric power plants, or major producers of fuels, such as refineries and NGL fractionation plants, to acquire and surrender emission allowances with the number of allowances available for purchase reduced each year until the overall GHG emission reduction goal is achieved. The adoption of legislation or regulations imposing reporting or permitting obligations on, or limiting emissions of GHGs from, our equipment and operations could require us to incur additional costs to reduce emissions of GHGs associated with our operations, could adversely affect our performance of

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operations in the absence of any permits that may be required to regulate emission of greenhouse gases, or could adversely affect demand for the natural gas we gather, process or otherwise handle in connection with our services.

We typically do not obtain independent evaluations of natural gas reserves dedicated to our gathering pipeline systems; therefore, volumes of natural gas on our systems in the future could be less than we anticipate.

        We typically do not obtain independent evaluations of natural gas reserves connected to our gathering systems due to the unwillingness of producers to provide reserve information as well as the cost of such evaluations. Accordingly, we do not have independent estimates of total reserves dedicated to our gathering systems or the anticipated life of such reserves. If the total reserves or estimated life of the reserves connected to our gathering systems is less than we anticipate and we are unable to secure additional sources of natural gas, then the volumes of natural gas transported on our gathering systems in the future could be less than anticipated. A decline in the volumes of natural gas on our systems could have a material adverse effect on our results of operations and financial condition.

The threat of terrorist attacks has resulted in increased costs, and future war or risk of war may adversely impact our results of operations and our ability to raise capital.

        Terrorist attacks or the threat of terrorist attacks cause instability in the global financial markets and other industries, including the energy industry. Infrastructure facilities, including pipelines, production facilities, and transmission and distribution facilities, could be direct targets, or indirect casualties, of an act of terror. Our insurance policies generally exclude acts of terrorism. Such insurance is not available at what we believe to be acceptable pricing levels.

Our success depends on key members of our management, the loss or replacement of whom could disrupt our business operations.

        We depend on the continued employment and performance of the officers of our general partner and key operational personnel. Our general partner has entered into employment agreements with each of its executive officers. If any of these officers or other key personnel resign or become unable to continue in their present roles and are not adequately replaced, our business operations could be materially adversely affected. We do not maintain any "key man" life insurance for any officers.

Risk Inherent In An Investment In the Partnership

Cash distributions are not guaranteed and may fluctuate with our performance and the establishment of financial reserves.

        Because distributions on our common units are dependent on the amount of cash we generate, distributions may fluctuate based on our performance. The actual amount of cash that is available to be distributed each quarter will depend on numerous factors, some of which are beyond our control and the control of our general partner. Cash distributions are dependent primarily on cash flow, including cash flow from financial reserves and working capital borrowings and not solely on profitability, which is affected by non-cash items. Therefore, cash distributions might be made during periods when we record losses and might not be made during periods when we record profits.

        We may not have sufficient available cash from operating surplus each quarter to enable us to make cash distributions at our current distribution rate under our cash distribution policy. The amount of cash we can distribute on our units principally depends upon the amount of cash we generate from our operations, which will fluctuate from quarter to quarter based on, among other things:

    the fees we charge and the margins we realize for our services;

    the prices of, levels of production of and demand for, natural gas and NGLs;

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    the volume of natural gas we gather, treat, compress, process, transport and sell and the volume of NGLs we process or fractionate and sell;

    the relationship between natural gas and NGL prices;

    cash settlements of hedging positions;

    the level of competition from other midstream energy companies;

    the level of our operating and maintenance and general and administrative costs; and

    prevailing economic conditions.

        In addition, the actual amount of cash we will have available for distribution will depend on other factors, some of which are beyond our control, including:

    the level of capital expenditures we make;

    our ability to make borrowings under our credit facility to pay distributions;

    the cost of acquisitions;

    our debt service requirements and other liabilities;

    fluctuations in our working capital needs;

    general and administrative expenses;

    restrictions on distributions contained in our debt agreements; and

    the amount of cash reserves established by our general partner for the proper conduct of our business.

Crosstex Energy, Inc., or CEI, controls our general partner and owned a 25.0% fully diluted limited partner interest in us as of December 31, 2010. Our general partner has conflicts of interest and limited fiduciary responsibilities, which may permit our general partner to favor its own interests.

        As of December 31, 2010, CEI indirectly owned an aggregate fully diluted limited partner interest of approximately 25.0% in us. In addition, CEI owns and controls our general partner. Due to its control of our general partner and the size of its limited partner interest in us, CEI effectively controls all limited partnership decisions, including any decisions related to the removal of our general partner. Conflicts of interest may arise in the future between CEI and its affiliates, including our general partner, on the one hand, and our partnership, on the other hand. As a result of these conflicts our general partner may favor its own interests and those of its affiliates over our interests. These conflicts include, among others, the following situations:

    Conflicts Relating to Control

    our partnership agreement limits our general partner's liability and reduces its fiduciary duties, while also restricting the remedies available to our unitholders for actions that might, without these limitations, constitute breaches of fiduciary duty by our general partner;

    in resolving conflicts of interest, our general partner is allowed to take into account the interests of parties in addition to unitholders, which has the effect of limiting its fiduciary duties to the unitholders;

    our general partner's affiliates may engage in limited competition with us;

    our general partner controls the enforcement of obligations owed to us by our general partner and its affiliates;

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    our general partner decides whether to retain separate counsel, accountants or others to perform services for us;

    in some instances our general partner may cause us to borrow funds from affiliates of the general partner or from third parties in order to permit the payment of cash distributions, even if the purpose or effect of the borrowing is to make incentive distributions; and

    our partnership agreement gives our general partner broad discretion in establishing financial reserves for the proper conduct of our business. These reserves also will affect the amount of cash available for distribution.

    Conflicts Relating to Costs

    our general partner determines the amount and timing of asset purchases and sales, capital expenditures, borrowings, issuance of additional limited partner interests and reserves;

    our general partner determines which costs incurred by it and its affiliates are reimbursable by us; and

    our general partner is not restricted from causing us to pay it or its affiliates for any services rendered on terms that are fair and reasonable to us or entering into additional contractual arrangements with any of these entities on our behalf.

Our unitholders have no right to elect our general partner or the directors of its general partner and have limited ability to remove our general partner.

        Unlike the holders of common stock in a corporation, unitholders have only limited voting rights on matters affecting our business, and therefore limited ability to influence management's decisions regarding our business. Unitholders did not elect our general partner or the board of directors of its general partner and have no right to elect our general partner or the board of directors of its general partner on an annual or other continuing basis.

        Furthermore, if unitholders are dissatisfied with the performance of our general partner, they will have little ability to remove our general partner. The general partner generally may not be removed except upon the vote of the holders of 662/3% of the outstanding units voting together as a single class. Affiliates of the general partner controlled approximately 27.0% of all the units as December 31, 2010.

        In addition, unitholders' voting rights are further restricted by the partnership agreement. It provides that any units held by a person that owns 20.0% or more of any class of units then outstanding, other than our general partner, its affiliates, their transferees and persons who acquired such units with the prior approval of the board of directors of the general partner's general partner, cannot be voted on any matter. In addition, the partnership agreement contains provisions limiting the ability of unitholders to call meetings or to acquire information about our operations, as well as other provisions limiting the unitholders' ability to influence the manner or direction of management.

        As a result of these provisions, it will be more difficult for a third party to acquire our partnership without first negotiating such a purchase with our general partner and, as a result, our unitholders are less likely to receive a takeover premium.

Cost reimbursements due our general partner may be substantial and will reduce the cash available for distribution to our unitholders.

        Prior to making any distributions on the units, we reimburse our general partner and its affiliates, including officers and directors of our general partner, for all expenses they incur on our behalf. The reimbursement of expenses could adversely affect our ability to make distributions to our unitholders. Our general partner has sole discretion to determine the amount of these expenses.

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The control of our general partner may be transferred to a third party without unitholder consent.

        The general partner may transfer its general partner interest to a third party in a merger or in a sale of all or substantially all of its assets without the consent of the unitholders. Furthermore, there is no restriction in the partnership agreement on the ability of the owner of the general partner from transferring its ownership interest in the general partner to a third party. The new owner of the general partner would then be in a position to replace the board of directors and officers of the general partner with its own choices and to control the decisions taken by the board of directors and officers.

Our general partner's absolute discretion in determining the level of cash reserves may adversely affect our ability to make cash distributions to our unitholders.

        Our partnership agreement requires our general partner to deduct from operating surplus cash reserves that in its reasonable discretion are necessary to fund our future operating expenditures. In addition, the partnership agreement permits our general partner to reduce available cash by establishing cash reserves for the proper conduct of our business, to comply with applicable law or agreements to which we are a party or to provide funds for future distributions to partners. These cash reserves will affect the amount of cash available for distribution to our unitholders.

Our partnership agreement contains provisions that reduce the remedies available to our unitholders for actions that might otherwise constitute a breach of fiduciary duty by our general partner.

        Our partnership agreement limits the liability and reduces the fiduciary duties of our general partner to our unitholders. The partnership agreement also restricts the remedies available to our unitholders for actions that would otherwise constitute breaches of our general partner's fiduciary duties. If you choose to purchase a common unit, you will be treated as having consented to the various actions contemplated in the partnership agreement and conflicts of interest that might otherwise be considered a breach of fiduciary duties under applicable state law.

We may issue additional units without our unitholders' approval, which would dilute our unitholders' ownership interests.

        We may issue an unlimited number of limited partner interests of any type without the approval of our unitholders. The issuance of additional limited partner interests will have the following effects:

    our unitholders' proportionate ownership interest in us will decrease;

    the amount of cash available for distribution on each unit may decrease;

    the relative voting strength of each previously outstanding unit may be diminished; and

    the market price of the common units may decline.

Our general partner has a limited call right that may require our unitholders to sell their common units at an undesirable time or price.

        If at any time our general partner and its affiliates own more than 80.0% of the common units, our general partner will have the right, but not the obligation, which it may assign to any of its affiliates or to us, to acquire all, but not less than all, of the common units held by unaffiliated persons at a price not less than their then-current market price. As a result, our unitholders may be required to sell their common units at an undesirable time or price and may therefore not receive any return on their investment. Our unitholders may also incur a tax liability upon a sale of their units.

Our unitholders may not have limited liability if a court finds that unitholder action constitutes control of our business.

        Our unitholders could be held liable for our obligations to the same extent as a general partner if a court determined that the right or the exercise of the right by our unitholders to remove or replace

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our general partner, to approve amendments to our partnership agreement, or to take other action under our partnership agreement constituted participation in the "control" of our business, to the extent that a person who has transacted business with the partnership reasonably believes, based on our unitholders' conduct, that our unitholders are a general partner. Our general partner generally has unlimited liability for the obligations of the partnership, such as its debts and environmental liabilities, except for those contractual obligations of the partnership that are expressly made without recourse to our general partner. In addition, Section 17-607 of the Delaware Revised Uniform Limited Partnership Act provides that a limited partner who receives a distribution and knew at the time of the distribution that the distribution was in violation of that section may be liable to the limited partnership for the amount of the distribution for a period of three years from the date of the distribution. The limitations on the liability of holders of limited partner interests for the obligations of a limited partnership have not been clearly established in some of the other states in which we do business.

Tax Risks to Our Unitholders

Our tax treatment depends on our status as a partnership for federal income tax purposes, as well as our not being subject to entity level taxation by individual states. If the IRS treats us as a corporation or we become subject to entity level taxation for state tax purposes, it would substantially reduce the amount of cash available for distribution to you.

        The anticipated after-tax economic benefit of an investment in us depends largely on our being treated as a partnership for federal income tax purposes. We have not requested, and do not plan to request, a ruling from the IRS on this or any other matter affecting us.

        If we were treated as a corporation for federal income tax purposes, we would pay additional tax on our income at corporate rates of up to 35.0% (under the law as of the date of this report) and we would probably pay state income taxes as well. In addition, distributions to unitholders would generally be taxed again as corporate distributions and none of our income, gains, losses, or deductions would flow through to unitholders. Because a tax would be imposed upon us as a corporation, the cash available for distribution to unitholders would be substantially reduced. Therefore, treatment of us as a corporation would result in a material reduction in the anticipated cash flow and after-tax return to the unitholders and thus would likely result in a material reduction in the value of the common units.

        Current law may change so as to cause us to be treated as a corporation for federal income tax purposes or otherwise subject us to entity-level taxation. At the federal level, members of Congress have considered substantive changes to the existing U.S. tax laws that would have affected certain publicly traded partnerships. Although the legislation considered would not have appeared to affect our tax treatment, we are unable to predict whether any such change or other proposals will ultimately be enacted. Moreover, any modification to the federal income tax laws and interpretations thereof may or may not be applied retroactively. At the state level, because of widespread state budget deficits, several states are evaluating ways to subject partnerships to entity level taxation through the imposition of state income, franchise and other forms of taxation. For example, we are required to pay Texas franchise tax at a maximum effective rate of 1.0% of our gross income apportioned to Texas in the prior year. If federal income tax or material amounts of additional state tax were to be imposed on us, the cash available for distribution to unitholders could be reduced and/or the value of an investment in our common units would be adversely impacted. Our partnership agreement provides that, if a law is enacted or existing law is modified or interpreted in a manner that subjects us to taxation as a corporation or otherwise subjects us to entity-level taxation for federal, state, or local income tax purposes, the minimum quarterly distribution amount and the target distribution amounts will be decreased to reflect the impact of that law on us.

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If the IRS contests the federal income tax positions we take, the market for our common units may be adversely impacted and the costs of any contest could reduce the cash available for distribution to our unitholders.

        We have not requested any ruling from the IRS with respect to our treatment as a partnership for federal income tax purposes or any other matter affecting us. The IRS may adopt positions that differ from our counsel's conclusions expressed in this annual report or from the positions we take. It may be necessary to resort to administrative or court proceedings to sustain some or all of our counsel's conclusions or the positions we take. A court may not agree with all of our counsel's conclusions or the positions we take. Any contest with the IRS may materially and adversely impact the market for our common units and the prices at which our common units trade. In addition, our costs of any contest with the IRS will be borne by us and therefore indirectly by our unitholders and our general partner since such costs will reduce the amount of cash available for distribution by us.

Unitholders may be required to pay taxes on our income even if they do not receive any cash distributions from us.

        Because our unitholders will be treated as partners to whom we will allocate taxable income which could be different in amount than the cash we distribute, they will be required to pay federal income taxes and, in some cases, state, local, and foreign income taxes on their share of our taxable income even if they do not receive cash distributions from us. Unitholders may not receive cash distributions equal to their share of our taxable income or even the tax liability that results from that income.

Tax gain or loss on the disposition of our common units could be different than expected.

        Unitholders who sell common units will recognize gain or loss equal to the difference between the amount realized and their tax basis in those common units. Prior distributions in excess of the total net taxable income allocated for a common unit, which decreased the tax basis in that common unit, will, in effect, become taxable income to the unitholder if the common unit is sold at a price greater than the tax basis in that common unit, even if the price received is less than the original cost. A substantial portion of the amount realized, whether or not representing gain, may be ordinary income to the unitholder due to potential recapture items, including depreciation recapture. In addition, because the amount realized includes a unitholder's share of our non-recourse liabilities, a unitholder who sells units may incur a tax liability in excess of the amount of cash received from the sale.

Tax-exempt entities and foreign persons face unique tax issues from owning common units that may result in adverse tax consequences to them.

        Investment in common units by tax-exempt entities, such as individual retirement accounts (known as IRAs), pension plans, and non-U.S. persons, raises issues unique to them. For example, virtually all of our income allocated to organizations exempt from federal income tax, including individual retirement accounts and other qualified retirement plans, will be unrelated business income and will be taxable to them. Distributions to non-U.S. persons will be reduced by withholding taxes, at the highest applicable effective tax rate, and non-U.S. persons will be required to file federal income tax returns and generally pay tax on their share of our taxable income. If you are a tax-exempt entity or a foreign person, you should consult your tax advisor before investing in our common units.

We will determine the tax benefits that are available to an owner of units without regard to the specific units purchased. The IRS may challenge this treatment, which could adversely affect the value of the common units.

        Because we cannot match transferors and transferees of common units and because of other reasons, we will take depreciation and amortization positions that may not conform to all aspects of the Treasury regulations. A successful IRS challenge to those positions could adversely affect the amount of

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tax benefits available to unitholders. It also could affect the timing of these tax benefits or the amount of gain from the sale of common units and could have a negative impact on the value of our common units or result in audit adjustments to the tax returns of unitholders.

The sale or exchange of 50% or more of our capital and profits interests within a 12-month period will result in the termination of our partnership for federal income tax purposes.

        We will be considered to have terminated our partnership for federal income tax purposes if there is a sale or exchange of 50% or more of the total interests in our capital and profits within a 12-month period. Our termination would, among other things, result in the closing of our taxable year for all unitholders. Our termination could also result in a deferral of depreciation deductions allowable in computing our taxable income. In the case of a unitholder who has adopted a taxable year other than a fiscal year ending December 31, the closing of our taxable year may also result in more than twelve months of our taxable income or loss being includable in such unitholder's taxable income for the year of termination. Our termination would cause us to be treated as a new partnership for tax purposes, and we could be subject to penalties if we were to fail to recognize and properly report on our tax return that a termination occurred.

The tax treatment of publicly traded partnerships or an investment in our common units could be subject to potential legislative, judicial or administrative changes and differing interpretations, possibly on a retroactive basis.

        The present federal income tax treatment of publicly traded partnerships, including us, or an investment in our common units, may be modified by administrative, legislative or judicial interpretation at any time. Any modification to the federal income tax laws and interpretations thereof may or may not be applied retroactively. Moreover, any such modification could make it more difficult or impossible for us to meet the exception which allows publicly traded partnerships that generate qualifying income to be treated as partnerships (rather than corporations) for U.S. federal income tax purposes, affect or cause us to change our business activities, or affect the tax consequences of an investment in our common units. For example, members of Congress have been considering substantive changes to the definition of qualifying income and the treatment of certain types of income earned from profits interests in partnerships. While these specific proposals would not appear to affect our treatment as a partnership, we are unable to predict whether any of these changes, or other proposals, will ultimately be enacted. Any such changes could negatively impact the value of an investment in our common units.

As a result of investing in our common units, you will likely be subject to state and local taxes and return filing or withholding requirements in jurisdictions where you do not live.

        In addition to federal income taxes, you will likely be subject to other taxes such as state and local income taxes, unincorporated business taxes and estate, inheritance or intangible taxes that are imposed by the various jurisdictions in which we do business or own property. You will likely be required to file state and local tax returns and pay state and local income taxes in some or all of the various jurisdictions in which we do business or own property and you may be subject to penalties for failure to comply with those requirements. We own property or conduct business in Texas and Louisiana. Louisiana imposes an income tax, generally. Texas does not impose a state income tax on individuals, but does impose a franchise tax to which we are subject. We may do business or own property in other states or foreign countries in the future. It is our unitholders' responsibility to file all federal, state, local, and foreign tax returns. Under the tax laws of some states where we will conduct business, we may be required to withhold a percentage from amounts to be distributed to a unitholder who is not a resident of that state. Our counsel has not rendered an opinion on the state, local, or foreign tax consequences of owning our common units.

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We prorate our items of income, gain, loss and deduction between transferors and transferees of our units each month based upon the ownership of our units on the first day of each month, instead of on the basis of the date a particular unit is transferred. The IRS may challenge this treatment, which could change the allocation of items of income, gain, loss and deduction among our unitholders.

        We prorate our items of income, gain, loss and deduction between transferors and transferees of our units each month based upon the ownership of our units on the first day of each month, instead of on the basis of the date a particular unit is transferred. The use of this proration method may not be permitted under existing Treasury Regulations, and, accordingly, our counsel is unable to opine as to the validity of this method. Recently, the U.S. Treasury Department issued proposed Treasury Regulations that provide a safe harbor pursuant to which publicly traded partnerships may use a similar monthly simplifying convention to allocate tax items among transferor and transferee unitholders. Nonetheless, the proposed regulations do not specifically authorize the use of the proration method we have adopted. If the IRS were to challenge this method or new Treasury regulations were issued, we may be required to change the allocation of items of income, gain, loss and deduction among our unitholders.

A unitholder whose units are loaned to a "short seller" to cover a short sale of units may be considered as having disposed of those units. If so, he would no longer be treated for tax purposes as a partner with respect to those units during the period of the loan and may recognize gain or loss from the disposition.

        Because a unitholder whose units are loaned to a "short seller" to cover a short sale of units may be considered as having disposed of the loaned units, he may no longer be treated for tax purposes as a partner with respect to those units during the period of the loan to the short seller and the unitholder may recognize gain or loss from such disposition. Moreover, during the period of the loan to the short seller, any of our income, gain, loss or deduction with respect to those units may not be reportable by the unitholder and any cash distributions received by the unitholder as to those units could be fully taxable as ordinary income. Our counsel has not rendered an opinion regarding the treatment of a unitholder where common units are loaned to a short seller to cover a short sale of common units; therefore, unitholders desiring to assure their status as partners and avoid the risk of gain recognition from a loan to a short seller are urged to modify any applicable brokerage account agreements to prohibit their brokers from borrowing their units.

Item 1B.    Unresolved Staff Comments

        We do not have any unresolved staff comments.

Item 2.    Properties

        A description of our properties is contained in "Item 1. Business."

Title to Properties

        Substantially all of our pipelines are constructed on rights-of-way granted by the apparent record owners of the property. Lands over which pipeline rights-of-way have been obtained may be subject to prior liens that have not been subordinated to the right-of-way grants. We have obtained, where necessary, easement agreements from public authorities and railroad companies to cross over or under, or to lay facilities in or along, watercourses, county roads, municipal streets, railroad properties and state highways, as applicable. In some cases, property on which our pipeline was built was purchased in fee. Our processing plants are located on land that we lease or own in fee.

        We believe that we have satisfactory title to all of our rights-of-way and land assets. Title to these assets may be subject to encumbrances or defects. We believe that none of such encumbrances or

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defects should materially detract from the value of our assets or from our interest in these assets or should materially interfere with their use in the operation of the business.

Item 3.    Legal Proceedings

        Our operations are subject to a variety of risks and disputes normally incident to our business. As a result, at any given time we may be a defendant in various legal proceedings and litigation arising in the ordinary course of business, including litigation on disputes related to contracts, property use or damage and personal injury. Additionally, as we continue to expand operations into more urban, populated areas, such as the Barnett Shale, we may see an increase in claims brought by area landowners, such as nuisance claims and other claims based on property rights. Except as otherwise set forth herein, we do not believe that any pending or threatened claim or dispute is material to our financial results on our operations. We maintain insurance policies with insurers in amounts and with coverage and deductibles as our general partner believes are reasonable and prudent. However, we cannot assure that this insurance will be adequate to protect us from all material expenses related to potential future claims for personal and property damage or that these levels of insurance will be available in the future at economical prices.

        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, 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, our 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.

Item 4.    Reserved

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PART II

Item 5.    Market for Registrant's Common Equity, Related Unitholder Matters and Issuer Purchases of Equity Securities

        Our common units are listed on The NASDAQ Global Select Market under the symbol "XTEX". On February 11, 2011, the closing market price for the common units was $15.63 per unit and there were approximately 14,151 record holders and beneficial owners (held in street name) of our common units.

        The following table shows the high and low closing sales prices per common unit, as reported by The NASDAQ Global Select Market, for the periods indicated.

 
  Range   Cash
Distribution
Declared
Per Unit(a)
 
 
  High   Low  

2010:

                   
 

Quarter Ended December 31

  $ 14.40   $ 12.82   $ 0.26  
 

Quarter Ended September 30

    13.22     10.17     0.25  
 

Quarter Ended June 30

    11.99     8.73      
 

Quarter Ended March 31

    11.44     8.90      

2009:

                   
 

Quarter Ended December 31

  $ 8.60   $ 4.92      
 

Quarter Ended September 30

    5.34     2.45      
 

Quarter Ended June 30

    4.16     1.92      
 

Quarter Ended March 31

    7.17     1.17      

(a)
For each quarter in which a distribution was paid, an identical cash distribution was paid on all outstanding preferred units.

        Unless restricted by the terms of our credit facility, within 45 days after the end of each quarter, we will distribute all of our available cash, as defined in our partnership agreement, to unitholders of record on the applicable record date. Our available cash consists generally of all cash on hand at the end of the fiscal quarter, less reserves that our general partner determines are necessary to:

    provide for the proper conduct of our business;

    comply with applicable law, any of our debt instruments, or other agreements; or

    provide funds for distributions to our unitholders and to our general partner for any one or more of the next four quarters;

    plus all cash on hand for the quarter resulting from working capital borrowings made after the end of the quarter on the date of determination of available cash.

        We do not currently intend to make cash distributions on our outstanding units unless our total debt to adjusted EBITDA is less than 4.5 to 1.0 (pro forma for any distribution). See discussion under "Item 6. Selected Financial Data—Non-GAAP Financial Measures."

        Our general partner has broad discretion to establish cash reserves that it determines are necessary or appropriate to properly conduct our business. These can include cash reserves for future capital and maintenance expenditures, reserves to stabilize distributions of cash to the unitholders and our general partner, reserves to reduce debt, or, as necessary, reserves to comply with the terms of any of our agreements or obligations. Our distributions are effectively made 98.0% to unitholders and two percent to our general partner, subject to the payment of incentive distributions to our general partner if certain target cash distribution levels to common unitholders are achieved. Incentive distributions to our general partner increase to 13.0%, 23.0% and 48.0% based on incremental distribution thresholds as set forth in our partnership agreement.

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        We resumed making quarterly distributions to our common unitholders for the third quarter of 2010. In November 2010, we paid a quarterly distribution of $0.25 per unit related to the three months ended September 30, 2010. In February 2011, we paid a quarterly distribution of $0.26 per unit, related to the three months ended December 31, 2010.

        On January 19, 2010, we issued approximately $125.0 million of Series A Convertible Preferred Units to an affiliate of Blackstone/GSO Capital Solutions. The 14,705,882 preferred units are convertible at any time into common units on a one-for-one basis, subject to certain adjustments in the event of certain dilutive issuances of common units. We have the right to force conversion of the preferred units after three years from the issuance date if (i) the daily volume-weighted average trading price of our common units is greater than 150% of the then-applicable conversion price for 20 out of the trailing 30 days ending on two trading days before the date on which we deliver notice of such conversion, and (ii) the average daily trading volume of common units must have exceeded 250,000 common units for 20 out of the trailing 30 trading days ending on two trading days before the date on which we deliver notice of such conversion. The preferred units are not redeemable but will pay a quarterly distribution that is the greater of $0.2125 per unit or the amount of the quarterly distribution per unit paid to common unitholders, subject to certain adjustments. Such quarterly distribution may be paid in cash, in additional preferred units issued in kind or any combination thereof, provided that the distribution may not be paid in additional preferred units if we pay a cash distribution on common units. We paid aggregate cash distributions on the preferred units of $3.1 million, $3.1 million, $3.7 million and $3.8 million related to the first, second, third and fourth quarters of 2010, respectively.

Item 6.    Selected Financial Data

        The following table sets forth selected historical financial and operating data of Crosstex Energy, L.P. as of and for the dates and periods indicated. The selected historical financial data are derived from the audited financial statements of Crosstex Energy, L.P. and have been revised to reflect certain immaterial corrections. The corrections did not impact the Partnership's operating income and were not material to the Partnership's revenues and costs for the applicable period. These corrections include reporting, on a gross basis, certain revenues and purchased gas and NGL costs associated with its NGL marketing activities previously reported on a net basis for the years ended December 31, 2009 and 2008. In addition, the revised financials also reflect a reclassification of certain intercompany revenues and purchased gas costs associated with discontinued operations that were not properly identified and eliminated when discontinued operations were segregated from continued operations for the years ended December 31, 2009, 2008, 2007 and 2006.

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        The table should be read together with "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations."

 
  Crosstex Energy, L.P.  
 
  Years Ended December 31,  
 
  2010   2009   2008   2007   2006  
 
  (In thousands, except per unit data)
 

Statement of Operations Data:

                               
 

Revenues:

                               
   

Midstream

  $ 1,792,676   $ 1,583,551   $ 3,558,213   $ 2,635,329   $ 1,835,048  
 

Operating costs and expenses:

                               
   

Purchased gas and NGLs

    1,454,376     1,272,329     3,250,427     2,375,503     1,676,692  
   

Operating expenses

    105,060     110,394     125,754     91,202     65,871  
   

General and administrative

    48,414     59,854     68,864     59,493     43,710  
   

Gain on sale of property

    (13,881 )   (666 )   (947 )   (1,024 )   (1,936 )
   

(Gain) loss on derivatives

    9,100     (2,994 )   (8,619 )   (4,147 )   (174 )
   

Impairments

    1,311     2,894     29,373          
   

Depreciation and amortization

    111,551     119,088     107,521     83,315     56,349  
                       
     

Total operating costs and expenses

    1,715,931     1,560,899     3,572,373     2,604,342     1,840,512  
                       
     

Operating income (loss)

    76,745     22,652     (14,160 )   30,987     (5,464 )
 

Other income (expense):

                               
   

Interest expense, net

    (87,035 )   (95,078 )   (74,971 )   (48,059 )   (19,889 )
   

Loss on extinguishment of debt

    (14,713 )   (4,669 )            
   

Other income

    295     1,400     27,770     538     212  
                       
     

Total other income (expense)

    (101,453 )   (98,347 )   (47,201 )   (47,521 )   (19,677 )
                       
 

Loss from continuing operations before non-controlling interest and income taxes

    (24,708 )   (75,695 )   (61,361 )   (16,534 )   (25,141 )
 

Income tax provision

    (1,121 )   (1,790 )   (2,369 )   (760 )   (222 )
                       
 

Loss from continuing operations, net of tax

    (25,829 )   (77,485 )   (63,730 )   (17,294 )   (25,363 )
 

Income (loss) from discontinued operations, net of tax

        (1,796 )   25,007     31,343     20,714  
 

Gain from sale of discontinued operations, net of tax

        183,747     49,805          
                       
 

Discontinued operations

        181,951     74,812     31,343     20,714  
                       
 

Net income (loss) before cumulative effect of change in accounting principle

    (25,829 )   104,466     11,082     14,049     (4,649 )
 

Cumulative effect of change in accounting principle

                    689  
                       
 

Net income (loss)

    (25,829 )   104,466     11,082     14,049     (3,960 )
 

Less: Net income from continuing operations attributable to the non-controlling interest

    19     60     311     160     231  
                       
 

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

  $ (25,848 ) $ 104,406   $ 10,771   $ 13,889   $ (4,191 )
                       
 

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

  $ 13,750   $   $   $   $  
                       
 

Beneficial conversion feature attributable to preferred units

  $ 22,279   $   $   $   $  
                       
 

General partner interest in net income (loss)

  $ (4,371 ) $ (819 ) $ 26,415   $ 19,252   $ 16,456  
                       
 

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

  $ (57,506 ) $ 105,225   $ (15,644 ) $ (5,363 ) $ (20,647 )
                       
 

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

                               
   

Basic common unit

  $ (1.12 ) $ 1.44   $ (3.19 ) $ (0.20 ) $ (1.09 )
   

Diluted common unit

  $ (1.12 ) $ 1.40   $ (3.19 ) $ (0.20 ) $ (1.09 )
 

Net income per limited partner senior subordinated unit

  $   $ 8.85   $ 9.44   $   $ 5.31  
 

Distributions declared per limited partner unit(1)

  $ 0.51   $   $ 2.00   $ 2.33   $ 2.18  

Balance Sheet Data (end of period):

                               

Working capital deficit

  $ (17,640 ) $ (50,320 ) $ (32,910 ) $ (46,888 ) $ (79,936 )

Property and equipment, net

    1,215,104     1,279,060     1,527,280     1,425,162     1,105,813  

Total assets

    1,984,940     2,069,181     2,533,266     2,592,874     2,194,474  

Long-term and current maturities of debt

    718,570     873,702     1,263,706     1,223,118     987,130  

Capital lease obligations (including current maturities)

    31,327     23,799     27,896     3,988      

Partners' equity including non- controlling interest

    976,936     893,282     797,931     788,641     715,532  

Cash Flow Data:

                               

Net cash flow provided by (used in)(4):

                               
 

Operating activities

  $ 87,187   $ 80,978   $ 173,750   $ 114,818   $ 113,010  
 

Investing activities

    14,638     379,874     (186,810 )   (411,382 )   (885,825 )
 

Financing activities

    (84,907 )   (461,709 )   14,554     295,882     772,234  

Non-GAAP Financial Measures:

                               
 

Gross operating margin(3)

  $ 338,300   $ 311,222   $ 307,786   $ 259,826   $ 158,356  
 

Adjusted EBITDA(4)

  $ 186,880   $ 158,682   $ 163,394   $ 126,944   $ 58,773  

Operating Data:

                               
 

Pipeline throughput (MMBtu/d)

    1,971,000     2,040,000     2,002,000     1,555,000     845,000  
 

Natural gas processed (MMBtu/d)

    1,366,000     1,235,000     1,608,000     1,835,000     1,817,000  
 

Producer services (MMBtu/d)

    99,000     75,000     85,000     94,000     138,000  
 

NGL Fractionation (Gals/d)

    922,000     686,000     956,000     980,000     1,497,000  

(1)
Distributions include fourth quarter 2010 distributions of $0.26 per unit paid in February 2011; fourth quarter 2008 distributions of $0.25 per unit paid in February 2009; fourth quarter 2007 distributions of $0.61 per unit paid in February 2008; and fourth quarter 2006 distributions of $0.56 per unit paid in February 2007.

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(2)
Cash flow data includes cash flows from discontinued operations.

(3)
Gross operating margin is defined as revenue less related cost of purchased gas and NGLs.

(4)
Adjusted EBITDA is defined as net income plus interest expense, provision for income taxes and depreciation and amortization expense, impairments, stock-based compensation, loss on extinguishment of debt, (gain) loss on noncash derivatives, minority interest and certain severance and exit expenses; less (income) loss from discontinued operations and gain on sale of assets related to discontinued operations.

Non-GAAP Financial Measures

        We include the following non-GAAP financial measures: adjusted EBITDA from continuing operations and gross operating margin. We provide reconciliations of these non-GAAP financial measures to their most directly comparable financial measures as calculated and presented in accordance with generally accepted accounting principles, or GAAP.

        We define adjusted EBITDA from continuing operations as net income plus interest expense, provision for income taxes and depreciation and amortization expense, impairments, stock-based compensation, loss on extinguishment of debt, (gain) loss on noncash derivatives, minority interest and certain severance and exit expenses; less (income) loss from discontinued operations and gain on sale of assets related to discontinued operations. Adjusted EBITDA is used as a supplemental performance measure by our management and by external users of our financial statements such as investors, commercial banks, research analysts and others, to assess:

    financial performance of our assets without regard to financing methods, capital structure or historical cost basis;

    the ability of our assets to generate cash sufficient to pay interest costs, support our indebtedness and make cash distributions to our unitholders and our general partner;

    our operating performance and return on capital as compared to those of other companies in the midstream energy sector, without regard to financing methods or capital structure; and

    the viability of acquisitions and capital expenditure projects and the overall rates of return on alternative investment opportunities.

        Adjusted EBITDA from continuing operations is one of the critical inputs into the financial covenants within our credit facility. The rates we pay for borrowings under our credit facility are determined by the ratio of our debt to adjusted EBITDA. The calculation of these ratios allows for further adjustments to adjusted EBITDA for recent acquisitions and dispositions. In addition, we have established a target over the next couple of year of achieving a ratio of total debt to adjusted EBITDA of less than 4.0 to 1.0.

        Adjusted EBITDA should not be considered an alternative to, or more meaningful than, net income, operating income, cash flows from operating activities or any other measure of financial performance presented in accordance with GAAP. Our Adjusted EBITDA may not be comparable to similarly titled measures of other companies because other entities may not calculate adjusted EBITDA in the same manner.

        Adjusted EBITDA does not include interest expense, income taxes or depreciation and amortization expense. Because we have borrowed money to finance our operations, interest expense is a necessary element of our costs and our ability to generate cash available for distribution. Because we use capital assets, depreciation and amortization are also necessary elements of our costs. Therefore, any measures that exclude these elements have material limitations. To compensate for these limitations, we believe that it is important to consider both net earnings determined under GAAP, as well as adjusted EBITDA, to evaluate our overall performance.

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        Reconciliation of adjusted EBITDA to net income (loss):

 
  Years Ended December 31,  
 
  2010   2009   2008   2007   2006  
 
  (In thousands)
 

Net income (loss)

  $ (25,848 ) $ 104,406   $ 10,771   $ 13,889   $ (4,191 )

Interest expense

    87,035     95,078     74,971     48,059     19,889  

Depreciation and amortization

    111,551     119,088     107,521     83,315     56,349  

Impairment

    1,311     2,894     29,373          

Loss on extinguishment of debt

    14,713     4,669              

Gain on sale of property

    (13,881 )   (666 )   (947 )   (1,024 )   (1,936 )

Stock-based compensation

    9,276     8,742     11,243     12,283     8,557  

(Income) loss from discontinued opertations, net of tax

        1,796     (25,007 )   (31,343 )   (20,714 )

Gain on sale of discontinued operations, net of tax

        (183,747 )   (49,805 )        

Other(a)

    2,723     6,422     5,274     1,765     819  
                       

Adjusted EBITDA

  $ 186,880   $ 158,682   $ 163,394   $ 126,944   $ 58,773  
                       

(a)
Includes financial derivatives marked-to-market; income taxes; minority interest and severance and exit expenses (as allowed for adjustment under our credit facility).

        We define gross operating margin, generally, as revenues minus cost of sales. We present gross operating margin by segment in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations." We disclose gross operating margin in addition to total revenue because it is the primary performance measure used by our management. We believe gross operating margin is an important measure because our business is generally to purchase and resell natural gas for a margin or to gather, process, transport or market natural gas and NGLs for a fee. Operation and maintenance expense is a separate measure used by management to evaluate operating performance of field operations. Direct labor and supervision, property insurance, property taxes, repair and maintenance, utilities and contract services comprise the most significant portion of our operation and maintenance expenses. These expenses are largely independent of the volumes we transport or process and fluctuate depending on the activities performed during a specific period. We do not deduct operation and maintenance expenses from total revenue in calculating gross operating margin because we separately evaluate commodity volume and price changes in these margin amounts. As an indicator of our operating performance, gross operating margin should not be considered an alternative to, or more meaningful than, net income as determined in accordance with GAAP. Our gross operating margin may not be comparable to similarly titled measures of other companies because other entities may not calculate these amounts in the same manner.

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        The following table provides a reconciliation of gross operating margin to operating income (in thousands):

 
  Years Ended December 31,  
 
  2010   2009   2008   2007   2006  

Total gross operating margin

  $ 338,300   $ 311,222   $ 307,786   $ 259,826   $ 158,356  

Add (deduct):

                               

Operating expenses

    (105,060 )   (110,394 )   (125,754 )   (91,202 )   (65,871 )

General and administrative expenses

    (48,414 )   (59,854 )   (68,864 )   (59,493 )   (43,710 )

Gain on sale of property

    13,881     666     947     1,024     1,936  

Gain (loss) on derivatives

    (9,100 )   2,994     8,619     4,147     174  

Depreciation, amortization and impairments

    (112,862 )   (121,982 )   (136,894 )   (83,315 )   (56,349 )
                       

Operating income

  $ 76,745   $ 22,652   $ (14,160 ) $ 30,987   $ (5,464 )
                       

Item 7.    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. For more detailed information regarding the basis of presentation for the following information, you should read the notes to the financial statements included in this report.

Overview

        We are a Delaware limited partnership formed on July 12, 2002 to indirectly acquire substantially all of the assets, liabilities and operations of our predecessor, Crosstex Energy Services, Ltd. Our primary focus is on the gathering, processing, transmission and marketing of natural gas and NGLs, which we manage as regional reporting segments of midstream activity. Our geographic focus is in the North Texas Barnett shale (NTX) and in Louisiana which has two reportable business segments (the LIG and the south Louisiana processing and NGL assets, or PNGL). We manage our operations by focusing on gross operating margin because our business is generally to purchase and resell natural gas for a margin, or to gather, process, transport or market natural gas and NGLs for a fee. We define gross operating margin as operating revenue minus cost of purchased gas and NGLs.

        Our gross operating margins are determined primarily by the volumes of natural gas gathered, transported, purchased and sold through our pipeline systems, processed at our processing facilities, and the volumes of NGLs handled at our fractionation facilities. We generate revenues from four primary sources:

    purchasing and reselling or transporting natural gas on the pipeline systems we own;

    processing natural gas at our processing plants;

    fractionating and marketing the recovered NGLs; and

    providing compression services.

        We generally gather or transport gas owned by others through our facilities for a fee, or we buy natural gas from a producer, plant or shipper at either a fixed discount to a market index or a percentage of the market index, then transport and resell the natural gas at the market index. We attempt to execute all purchases and sales substantially concurrently, or we enter into a future delivery obligation, thereby establishing the basis for the margin we will receive for each natural gas transaction. Our gathering and transportation margins related to a percentage of the index price can be adversely affected by declines in the price of natural gas. We are also party to certain long-term gas sales commitments that we satisfy through supplies purchased under long-term gas purchase agreements.

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When we enter into those arrangements, our sales obligations generally match our purchase obligations. However, over time the supplies that we have under contract may decline due to reduced drilling or other causes and we may be required to satisfy the sales obligations by buying additional gas at prices that may exceed the prices received under the sales commitments. In our purchase/sale transactions, the resale price is generally based on the same index at which the gas was purchased. However, on occasion we have entered into certain purchase/sale transactions in which the purchase price is based on a production-area index and the sales price is based on a market-area index, and we capture the difference in the indices (also referred to as basis spread), less the transportation expenses from the two areas, as our margin. Changes in the basis spread can increase or decrease our margins.

        One contract (the "Delivery Contract") has a term to 2019 that obligates us to supply approximately 150,000 MMBtu/d of gas. At the time that we entered into the Delivery Contract in 2008, we had dedicated supply sources in the Barnett Shale that exceeded the delivery obligations under the Delivery Contract. Our agreements with these suppliers generally provided that the purchase price for the gas was equal to a portion of our sales price for such gas less certain fees and costs. Accordingly, we were initially able to generate a positive margin under the Delivery Contract. However, since entering into the Delivery Contract, there has been both (1) a reduction in the gas available under our supply contracts and (2) the discovery of other shale reserves, most notably the Haynesville and the Marcellus Shales, which has increased the supplies available to East Coast markets and reduced the basis spread between north Texas-area production and the market indices used in the Delivery Contract. Due to these factors, we have had to purchase a portion of the gas to fulfill our obligations under the Delivery Contract at market prices, resulting in negative margins under the Delivery Contract.

        We have recorded a loss of approximately $8.4 million during the year ended December 31, 2010 on the Delivery Contract. We currently expect that we will record a loss of approximately $10.0 million to $14.0 million on the Delivery Contract for the year ending December 31, 2011. This estimate is based on forward prices, basis spreads and other market assumptions as of year end 2010. These assumptions are subject to change if market conditions change during 2011, and actual results under the Delivery Contract in 2011 could be substantially different from year end 2010 estimates, which may result in a greater loss than currently estimated.

        We also realize gross operating margins from our processing services primarily through three different contract arrangements: processing margins (margin), percentage of liquids (POL) or fixed-fee based. Under margin contract arrangements our margins are higher during periods of high liquid prices relative to natural gas prices. Gross operating margin results under POL contracts are impacted only by the value of the liquids produced with margins higher during periods of relatively high liquids prices. Under fixed-fee based contracts our margins are driven by throughput volume. See "—Commodity Price Risk."

        Operating expenses are costs directly associated with the operations of a particular asset. Among the most significant of these costs are those associated with direct labor and supervision, property insurance, property taxes, repair and maintenance expenses, contract services and utilities. These costs are normally fairly stable across broad volume ranges, and therefore do not normally decrease or increase significantly in the short term with decreases or increases in the volume of gas moved through the asset.

        Our general and administrative expenses are dictated by the terms of our partnership agreement. These expenses include the costs of employee, officer and director compensation and benefits properly allocable to us, and all other expenses necessary or appropriate to the conduct of business and allocable to us. Our partnership agreement provides that our general partner determines the expenses that are allocable to us in any reasonable manner determined by our general partner in its sole discretion.

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Business Strategy

        Our business strategy will focus on increasing our distributable cash flow. Key elements of our strategy will include the following:

    Undertake selective construction and expansion opportunities on our existing systems.  We intend to leverage our existing infrastructure and producer and customer relationships by expanding existing systems to meet new or increased demand for our gathering, transmission, processing and marketing services.

    Capitalize on our NGL capabilities.  We believe there are near-term growth opportunities for our NGL business based on our ability to increase the utilization of our asset infrastructure which has excess capacity. We are targeting projects that create incremental stable fee-based income from our NGL fractionation business.

    Pursue accretive acquisitions or construction of facilities in new areas.  We will also consider the acquisition and construction of facilities and systems in new areas in regions with significant natural gas reserves and high levels of drilling activity or with growing demand for natural gas that lack midstream infrastructure to process and/or transport the natural gas.

    Focus on operational excellence.  We continue to operate our existing asset base to maximize cost efficiencies, provide flexibility for our customers and provide reliable capacity for our customers. We will continue to focus on safety, environmental integrity, innovation and customer service.

Asset Dispositions

        During the past two years, we have repositioned our business through asset dispositions, debt restructuring and improving existing system profitability. These transactions and our improved profitability allowed us to resume distributions to our common unit holders in the third quarter of 2010. We believe the resumption of our distribution is an important milestone in accessing the capital markets to support our future growth strategies.

        Historically, we have operated two industry segments, Midstream and Treating, with a geographic focus along the Texas Gulf Coast, in the North Texas Barnett Shale area, and in Louisiana and Mississippi.

        In February 2009, we sold our Oklahoma assets; in August 2009 we sold our Alabama, Mississippi and south Texas Midstream properties; and in October 2009 we sold our Treating assets.

Commodity Price Risk

        We are subject to significant risks due to fluctuations in commodity prices. Our exposure to these risks is primarily in the gas processing component of our business. For the year ended December 31, 2010 approximately 10.6% of our processed gas arrangements, based on volume, was processed under percent of liquids (POL) contracts. A significant volume of inlet gas at our south Louisiana and north Texas processing plants is settled under POL agreements. Under these contracts we receive a fee in the form of a percentage of the liquids recovered and the producer bears all the costs of the natural gas volumes lost ("shrink"). Accordingly, our revenues under these contracts are directly impacted by the market price of NGLs.

        We also realize processing gross margins under processing margin (margin) contracts. For the year ended December 31, 2010 approximately 12.9% of our processed gas arrangements, based on volume, was processed under margin contracts. We have a number of margin contracts on our Plaquemine and Gibson processing plants. Under this type of contract, we pay the producer for the full amount of inlet gas to the plant, and we make a margin based on the difference between the value of liquids recovered from the processed natural gas as compared to the value of the natural gas shrink and the cost of fuel

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used in processing. The shrink and fuel losses are referred to as plant thermal reduction or PTR. Our margins from these contracts can be negative during periods of high natural gas prices relative to liquids prices.

        We are also indirectly exposed to commodity prices due to the negative impacts on production and the development of production of natural gas and NGLs connected to or near our assets and on our margins for transportation between certain market centers. Low prices for these products will reduce the demand for our services and volumes on our systems.

        In the past, the prices of natural gas and NGLs have been extremely volatile and we expect this volatility to continue. For example, prices of natural gas in 2010 were below the market price realized throughout most of 2009 while prices for oil and NGLs were higher than 2009 market prices. Crude oil prices (based on the New York Mercantile Exchange (the "NYMEX") futures daily close prices for the prompt month) in 2010 ranged from a low of $68.01 per Bbl in May 2010 to a high of $91.51 per Bbl in December 2010. Weighted average NGL prices in 2010 (based on the Oil Price Information Service (OPIS) Napoleonville daily average spot liquids prices) ranged from a low of $0.84 per gallon in July 2010 to a high of $1.23 per gallon in January 2010. Natural gas prices (based on Gas Daily Henry Hub closing prices) during 2010 ranged from a high of $7.51 per MMBtu in January 2010 to a low of $3.18 per MMBtu in October 2010.

        Changes in commodity prices may also indirectly impact our profitability by influencing drilling activity and well operations, and thus the volume of gas we gather and process. The volatility in commodity prices may cause our gross operating margin and cash flows to vary widely from period to period. Our hedging strategies may not be sufficient to offset price volatility risk and, in any event, do not cover all of our throughput volumes. For a discussion of our risk management activities, please read "Item 7A. Quantitative and Qualitative Disclosures about Market Risk."

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Results of Operations

        Set forth in the table below is certain financial and operating data for the periods indicated, which excludes financial and operating data deemed discontinued operations. We manage our operations by focusing on gross operating margin which we define as operating revenue minus cost of purchased gas and NGLs as reflected in the table below.

 
  Years ended December 31,  
 
  2010   2009   2008  
 
  (Dollars in millions)
 

LIG Segment

                   

Revenues

  $ 963.0   $ 893.8   $ 2,198.0  

Purchased gas and NGLs

    (845.6 )   (793.0 )   (2,097.3 )
               

Total gross operating margin

  $ 117.4   $ 100.8   $ 100.7  
               

NTX Segment

                   

Revenues

  $ 399.5   $ 509.4   $ 976.7  

Purchased gas and NGLs

    (240.1 )   (352.8 )   (830.7 )
               

Total gross operating margin

  $ 159.4   $ 156.6   $ 146.0  
               

PNGL Segment

                   

Revenues

  $ 602.6   $ 297.9   $ 561.5  

Purchased gas and NGLs

    (541.1 )   (250.1 )   (512.0 )
               

Total gross operating margin

  $ 61.5   $ 47.8   $ 49.5  
               

Corporate

                   

Revenues

  $ (172.4 ) $ (117.6 ) $ (178.0 )

Purchased gas and NGLs

    172.4     123.6     189.6  
               

Total gross operating margin

  $   $ 6.0   $ 11.6  
               

Total

                   

Revenues

  $ 1,792.7   $ 1,583.5   $ 3,558.2  

Purchased gas and NGLs

    (1,454.4 )   (1,272.3 )   (3,250.4 )
               

Total gross operating margin

  $ 338.3   $ 311.2   $ 307.8  
               

Midstream Volumes:

                   

LIG

                   

Gathering and Transportation (MMBtu/d)

    902,000     900,000     960,000  

Processing (MMBtu/d)

    283,000     269,000     310,000  

NTX

                   

Gathering and Transportation (MMBtu/d)

    1,069,000     1,111,000     1,000,000  

Processing (MMBtu/d)

    209,000     219,000     200,000  

PNGL

                   

Processing (MMBtu/d)

    874,000     747,000     1,098,000  

NGL Fractionation (Gals/d)

    922,000     686,000     956,000  

Commercial Services (MMBtu/d)

    99,000     75,000     85,000  

Corporate

                   

Gathering and Transportation (MMBtu/d)

        29,000     42,000  

    Year ended December 31, 2010 Compared to Year ended December 31, 2009

        Gross Operating Margin.    Gross operating margin was $338.3 million for the year ended December 31, 2010 compared to $311.2 million for the year ended December 31, 2009, an increase of $27.1 million, or 8.7%. The increase was due to higher margins on our gathering and transmission

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throughput volume, as well as a favorable NGL market throughout the year. The following provides additional details regarding this change in gross operating margins:

    The LIG segment contributed gross operating margin growth of $16.6 million for the year ended December 31, 2010 over the same period in 2009. The gathering and transmission assets generated approximately $11.6 million of gross operating margin growth primarily due to improved pricing and higher volumes on the northern part of the system. The improved processing environment contributed to a gain in the gross operating margins for the LIG processing plants for the period. The Plaquemine and Gibson plants had gross operating margin gains of $2.9 million and $2.0 million, respectively.

    The NTX segment had gross operating margin improvement of $2.8 million for the year ended December 31, 2010. A $3.7 million charge associated with an adverse arbitration award was included in 2009. Increased losses of $4.5 million under a certain supply agreement were offset by improvements in a number of areas that enhanced liquids recoveries and unit margins, in addition to better processing margins.

    The improved processing and NGL marketing environment contributed to a $13.7 million increase in gross operating margin for the PNGL segment for the comparative periods. Fractionation and marketing activity generated a gross operating margin increase of approximately $10.0 million. In addition to the improved marketing environment, the inlet volume supplied to the fractionators was significantly increased through deliveries from rail cars and trucks. The Eunice and Pelican processing plants contributed gross operating margin increases of $2.9 million and $2.4 million, respectively. The Sabine Pass plant had a gross operating margin decline of $2.2 million due to a decrease in inlet volumes.

    The corporate segment reported a gross operating margin decrease of approximately $6.0 million for the year ended December 31, 2010 over the same period in 2009. The Crosstex Pipeline system in east Texas which was sold in the first quarter of 2010, created a negative gross operating margin variance of $5.8 million when compared to the prior period.

        Operating Expenses.    Operating expenses were $105.1 million for the year ended December 31, 2010 compared to $110.4 million for the year ended December 31, 2009, a decrease of $5.3 million, or 4.8%. The decrease is primarily the result of the following:

    We purchased the Eunice plant in late 2009 that resulted in $9.5 million decrease in rent expense;

    We sold our east Texas system which was not considered discontinued operations early in 2010 and this resulted in $3.9 million of reduced operating expenses;

    We were successful in renegotiating our existing compressor leases that resulted in $1.3 million of cost savings;

    We have expanded our Louisiana operations which caused operating expenses to increase by approximately $4.9 million;

    We experienced an increase in our operating expenses of $1.8 million related to ad valorem taxes, insurance costs and regulatory costs; and

    Our repairs and maintenance costs increased operating expenses by $3.3 million in 2010 over 2009.

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        General and Administrative Expenses.    General and administrative expenses were $48.4 million for the year ended December 31, 2010 compared to $59.9 million for the year ended December 31, 2009, a decrease of $11.4 million, or 19.1%. The decrease is primarily a result of the following:

    We reduced our workforce in 2009 which resulted in a decrease of $9.4 million in labor and benefits; and

    We lowered our legal and professional costs by $2.4 million in 2010.

        Gain on sale of Property from Continuing Operations.    Gains on sale of property were $13.9 million for the year ended December 31, 2010 compared to $0.7 million for the year ended December 31, 2009. The gain on sale of property for the year ended December 31, 2010 was related to the sale of our east Texas assets in January 2010.

        Gain/Loss on Derivatives.    We had a loss on derivatives of $9.1 million for the year ended December 31, 2010 compared to a gain of $3.0 million for the year ended December 31, 2009. The derivative transaction types contributing to the net (gain) loss are as follows (in millions):

 
  Years Ended December 31,  
 
  2010   2009  
(Gain) Loss on Derivatives:
  Total   Realized   Total   Realized  

Basis swaps

  $ 5.6   $ 2.3   $ (4.4 ) $ (2.5 )

Processing margin hedges

    3.5     5.5     1.4     (2.2 )

Other

        0.1     (0.3 )   (1.4 )
                   

    9.1     7.9     (3.3 )   (6.1 )

Derivative losses included in income from discontinued operations

            0.3     0.5  
                   

Net (gain) loss from continuing operations

  $ 9.1   $ 7.9   $ (3.0 ) $ (5.6 )
                   

        Impairments.    During the year ended December 31, 2010, we had an impairment expense of $1.3 million compared to $2.9 million for the year ended December 31, 2009. During 2009, impairments totaling $2.9 million were taken on the Bear Creek processing plant and the Vermillion treating plant to bring the fair value of the plants to a marketable value for these idle assets, which were subsequently sold. During 2010, impairments totaling $1.3 million were taken on excess pipe that was ultimately sold later during 2010.

        Depreciation and Amortization.    Depreciation and amortization expenses were $111.6 million for the year ended December 31, 2010 compared to $119.1 million for the year ended December 31, 2009, a decrease of $7.5 million, or 6.3%. The decrease of $7.5 million was the result of an increase in estimated depreciable lives for certain of our processing plants based on 2009 depreciation study that resulted in a depreciation expense decrease of $9.1 million partially offset by $1.6 million increase in depreciation on the Eunice natural gas processing plants and fractionation facility purchased during fourth quarter 2009.

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        Interest Expense.    Interest expense was $87.0 million for the year ended December 31, 2010 compared to $95.1 million for the year ended December 31, 2009, a decrease of $8.0 million, or 8.5%. Net interest expense consists of the following (in millions):

 
  Years Ended
December 31,
 
 
  2010   2009  

Senior notes (secured and unsecured)

  $ 62.5   $ 28.8  

Paid-in-kind interest on senior secured notes

    1.4     4.9  

Bank credit facility

    10.0     35.4  

Series B secured notes

    1.1     0.4  

Capitalized interest

    (0.1 )   (1.1 )

Mark to market interest rate swaps

    (22.4 )   (0.8 )

Interest income

        (0.2 )

Realized interest rate swap losses

    26.5     19.0  

Amortization of debt issue costs

    6.6     7.6  

Other

    1.4     1.1  
           
 

Total

  $ 87.0   $ 95.1  
           

        Loss on Extinguishment of Debt.    We recognized a loss on extinguishment of debt during the years ended December 31, 2010 and 2009 of $14.7 million and $4.7 million, respectively. In February 2010, we repaid our prior credit facility and senior secured notes which resulted in make-whole interest payments on our senior secured notes and the write-off of unamortized debt costs totaling $14.7 million. The loss of $4.7 million on extinguishment of debt incurred in the year ended December 31, 2009 related to the amendment of our prior credit facility and the senior secured notes in February 2009.

        Income Taxes.    Income tax expense was $1.1 million for the year ended December 31, 2010 compared to $1.8 million for year ended December 31, 2009, decrease of $0.7 million. The decrease primarily relates to the impact of the Texas margin tax on our Texas operations.

        Discontinued Operations.    During 2009, we sold the following non-strategic assets and used the proceeds from such sales to repay long-term indebtedness:

Assets
  Date of Sale

Oklahoma assets (Arkoma system)

  February 2009

Alabama, Mississippi and south Texas assets

  August 2009

Treating assets

  October 2009

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        In accordance with FASB ASC 360-10-05-4, the results of operations related to each of the assets listed above (except the Oklahoma assets, which were immaterial to the financial statement presentations) are presented in income from discontinued operations for the comparative periods in the statements of operations. Revenues, operating expenses, general and administrative expenses associated directly to the assets sold, depreciation and amortization, allocated Texas margin tax and allocated interest are reflected in the income from discontinued operations. No corporate office general and administrative expenses have been allocated to income from discontinued operations. Following are the components of revenues and earnings from discontinued operations and operating data (dollars in millions):

 
  Year ended
December 31, 2009
 

Midstream revenues

  $ 327.2  

Treating revenues

  $ 45.5  

Income from discontinued operations, net of tax

  $ (1.8 )

Gain from sale of discontinued operations, net of tax

  $ 183.7  

Gathering and Transmission Volumes (MMBtu/d)

    564,000  

Processing Volumes (MMBtu/d)

    191,000  

    Year ended December 31, 2009 Compared to Year ended December 31, 2008

        Gross Operating Margin.    Gross operating margin was $311.2 million for the year ended December 31, 2009 compared to $307.8 million for the year ended December 31, 2008, an increase of $3.4 million, or 1.1%. The increase was primarily due to higher margins on our gathering and transmission throughput volume. These increases were partially offset by gross operating margin declines in the processing business due to a less favorable NGL market. The following provides additional details regarding this change in gross operating margin:

    The LIG segment contributed gross operating margin growth of $0.1 million for the year ended December 31, 2009 over the same period in 2008. The gathering and transmission assets generated approximately $17.1 million of gross operating margin growth primarily due to improved pricing and higher volumes on the northern part of the system offsetting a decrease in sales volume at southern delivery points. The weaker processing environment contributed to a significant decline in the gross margins for the LIG processing plants for the period. The primary contributors to this decrease were the Gibson and Plaquemine plants which had gross operating margin declines of $9.8 million and $7.6 million, respectively, for the year ended December 31, 2009.

    The NTX segment contributed $10.6 million of gross operating margin growth for the year ended December 31, 2009 over the same period in 2008 due to increased volume on the gathering systems.

    The weaker processing environment contributed to a $1.7 million decline in gross operating margin for the PNGL segment for the comparative periods. Overall the plants in the region reported a margin decrease of approximately $9.1 million. The primary contributor to this decrease was the Blue Water processing plant which had a gross operating margin decline of $3.5 million for the period. These declines were offset by increases in the fractionation and liquids marketing activities in the region.

    The corporate segment reported a gross operating margin decrease of approximately $5.7 million for the year ended December 31, 2009 over the same period in 2008. The Arkoma system, which was sold in April 2009, created a negative gross margin variance of $4.0 million when compared to the same period in 2008. The Crosstex Pipeline system in east Texas had a gross operating margin decline of $1.7 million primarily due to a decline in throughput volumes.

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        Operating Expenses.    Operating expenses were $110.4 million for the year ended December 31, 2009 compared to $125.8 million for the year ended December 31, 2008, a decrease of $15.4 million, or 12.2%, resulting primarily from initiatives undertaken in late 2008 and early 2009 to reduce expenses. The key initiatives undertaken to reduce operating costs included:

    We ran only one of the Eunice processing trains during 2009 as compared to running two trains in 2008 thereby reducing the overall operating expenses for the plant;

    We reduced the use of contract labor in our field operations by reallocating available capacity of in-house personnel due to the slow down in our field expansion projects;

    We reduced rental cost by renegotiating compressor rental rates, consolidated compressor operations for facilities that were not fully utilized and buying out the Eunice plant operating lease in October 2009; and

    We renegotiated rates for various materials and supplies, primarily chemical costs, to reduce such costs.

        These cost initiatives resulted in a reduction of contractor services and related costs of $6.7 million, chemical and material costs of $3.2 million and rental costs of $3.1 million. We also reduced our operating costs by $2.1 million between 2009 and 2008 as a result of the April 2009 sale of Arkoma system.

        General and Administrative Expenses.    General and administrative expenses were $59.9 million for the year ended December 31, 2009 compared to $68.9 million for the year ended December 31, 2008, a decrease of $9.0 million, or 13.1%. The decrease is primarily a result of the following:

    We reduced our general and administrative staff in 2009 and realized a cost savings from this workforce reduction;

    Our workforce reduction also resulted in the non-recurring increase of cost in 2009 for severance payments and the termination of office space; and

    We also recognized increased bad debt expense related to the bankruptcy of SemStream, L.P.

        Gain/Loss on Derivatives.    We had a gain on derivatives of $3.0 million for the year ended December 31, 2009 compared to a gain of $8.6 million for the year ended December 31, 2008. The derivative transaction types contributing to the net (gain) loss are as follows (in millions):

 
  Years Ended December 31,  
 
  2009   2008  
(Gain) Loss on Derivatives:
  Total   Realized   Total   Realized  

Basis swaps

  $ (4.4 ) $ (2.5 ) $ (8.7 ) $ (8.8 )

Processing margin hedges

    1.4     (2.2 )   (3.6 )   (3.6 )

Other

    (0.3 )   (1.4 )   (1.4 )   (0.9 )
                   

  $ (3.3 ) $ (6.1 ) $ (13.7 ) $ (13.3 )

Derivative losses included in income from discontinued operations

    0.3     0.5     5.1     5.4  
                   

Net gain from continuing operations

  $ (3.0 ) $ (5.6 ) $ (8.6 ) $ (7.9 )
                   

        Impairments.    Impairment expense was $2.9 million for the year ended December 31, 2009 compared to $29.4 million during the year ended December 31, 2008. During 2009, impairments totaling $2.9 million were taken on the Bear Creek processing plant and the Vermillion treating plant

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to bring the fair value of the plants to a marketable value for these idle assets, which were subsequently sold. The impairment expense during 2008 is comprised of:

    $17.8 million related to the Blue Water gas processing plant located in south Louisiana—The impairment on our 59.27% interest in the Blue Water gas processing plant was recognized because the pipeline company which owns the offshore Blue Water system and supplies gas to our Blue Water plant reversed the flow of the gas on its pipeline in early January 2009 thereby removing access to all the gas processed at the Blue Water plant from the Blue Water offshore system. As of January 2009, we had not found an alternative source of new gas for the Blue Water plant so the plant ceased operation from January 2009 until November 2009. An impairment of $17.8 million was recognized for the carrying amount of the plant in excess of the estimated fair value of the plant as of December 31, 2008.

    $4.9 million related to goodwill—We determined that the carrying amount of goodwill attributable to the Midstream segment was impaired because of the significant decline in our Midstream operations due to negative impacts on cash flows caused by the significant declines in natural gas and NGL prices during the last half of 2008 coupled with the global economic decline.

    $4.1 million related to leasehold improvements—We had planned to relocate our corporate headquarters during 2008 to a larger office facility. We had leased office space and were close to completing the renovation of this office space when the global economic decline began impacting our operations in October 2008. On December 31, 2008, the decision was made to cancel the new office lease and not relocate the corporate offices from its existing office location. The impairment relates to the leasehold improvements on the office space for the cancelled lease.

    $2.6 million related to the Arkoma gathering system—The impairment on the Arkoma gathering system was recognized because we sold this asset in February 2009 for $10.7 million and the carrying amount of the plant exceeded the sale price by approximately $2.6 million.

        Depreciation and Amortization.    Depreciation and amortization expenses were $119.1 million for the year ended December 31, 2009 compared to $107.5 million for the year ended December 31, 2008, an increase of $11.6 million, or 10.8%, resulting primarily from growth and expansion in the NTP, NTG and north Louisiana areas that was completed and put in-service during the latter part of 2008 and early 2009.

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        Interest Expense.    Interest expense was $95.1 million for the year ended December 31, 2009 compared to $75.0 million for the year ended December 31, 2008, an increase of $20.1 million, or 26.8%. Net interest expense consists of the following (in millions):

 
  Years Ended
December 31,
 
 
  2009   2008  

Senior notes (secured)

  $ 28.8   $ 24.3  

Paid-in-kind interest on senior secured notes

    4.9      

Bank credit facility

    35.4     23.3  

Series B secured notes

    0.4      

Capitalized interest

    (1.1 )   (2.6 )

Mark to market interest rate swaps

    (0.8 )   22.1  

Realized interest rate swap losses

    19.0     4.6  

Interest income

    (0.2 )   (0.3 )

Amortization of debt issue costs

    7.6     2.9  

Other

    1.1     0.7  
           
 

Total

  $ 95.1   $ 75.0  
           

        Loss on Extinguishment of Debt.    We recognized a loss on extinguishment of debt during the year ended December 31, 2009 of $4.7 million due to the February 2009 amendment to the senior secured notes agreement. The modifications to this agreement pursuant to this amendment were substantive as defined in FASB ASC 470-50 and were accounted for as the extinguishment of the old debt and the creation of new debt. As a result, the unamortized costs associated with the senior secured notes prior to the amendment as well as the fees paid to the senior secured lenders for the February 2009 amendment were expensed during the year ended December 31, 2009.

        Other Income.    Other income was $1.4 million for the year ended December 31, 2009 compared to $27.8 million for the year ended December 31, 2008. In November 2008, the Partnership sold a contract right for firm transportation capacity on a third party pipeline to an unaffiliated third party for $20.0 million. The entire amount of such proceeds was reflected in other income because the Partnership had no basis in this contract right. In February 2008, the Partnership recorded $7.0 million from the settlement of disputed liabilities that were assumed with an acquisition.

        Income Taxes.    Income tax expense was $1.8 million for the year ended December 31, 2009 compared to $2.4 million for the year ended December 31, 2008, a decrease of $0.6 million. The decrease in expense between periods was because the income tax expense for the year ended December 31, 2008 included an adjustment of $0.9 million for an unrecognized tax benefit related to the Texas margin tax.

        Discontinued Operations.    During 2008 and 2009, we sold non-strategic assets and used the proceeds from such sales to repay long-term indebtedness.

Assets
  Date of Sale

12.4% interest in the Seminole Gas Processing Plant

  November 2008

Oklahoma assets (Arkoma system)

  February 2009

Alabama, Mississippi and south Texas assets

  August 2009

Treating assets

  October 2009

        In accordance with FASB ASC 360-10-05-4, the results of operations related to these assets (except the Oklahoma assets, which were immaterial to the financial statement presentations) are presented in income from discontinued operations for the comparative periods in the statements of operations.

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Revenues, operating expenses, general and administrative expenses associated directly to the assets sold, depreciation and amortization, allocated Texas margin tax and allocated interest are reflected in the income from discontinued operations. Following are the components of revenues and earnings from discontinued operations and operating data (dollars in millions):

 
  Years Ended
December 31,
 
 
  2009   2008  

Midstream revenues

  $ 327.2   $ 1,349.7  

Treating revenues

  $ 45.5   $ 73.5  

Income from discontinued operations, net of tax

  $ (1.8 ) $ 25.0  

Gain from sale of discontinued operations, net of tax

  $ 183.7   $ 49.8  

Gathering and Transmission Volumes (MMBtu/d)

    564,000     617,000  

Processing Volumes (MMBtu/d)

    191,000     204,000  

Critical Accounting Policies

        The selection and application of accounting policies is an important process that has developed as our business activities have evolved and as the accounting rules have developed. Accounting rules generally do not involve a selection among alternatives, but involve an implementation and interpretation of existing rules, and the use of judgment to the specific set of circumstances existing in our business. Compliance with the rules necessarily involves reducing a number of very subjective judgments to a quantifiable accounting entry or valuation. We make every effort to properly comply with all applicable rules on or before their adoption, and we believe the proper implementation and consistent application of the accounting rules is critical. Our critical accounting policies are discussed below. See Note 2 of the Notes to Consolidated Financial Statements for further details on our accounting policies.

        Revenue Recognition and Commodity Risk Management.    We recognize revenue for sales or services at the time the natural gas or NGLs are delivered or at the time the service is performed. We generally accrue one month of sales and the related gas purchases and reverse these accruals when the sales and purchases are actually invoiced and recorded in the subsequent months. Actual results could differ from the accrual estimates.

        We utilize extensive estimation procedures to determine the sales and cost of gas purchase accruals for each accounting cycle. Accruals are based on estimates of volumes flowing each month from a variety of sources. We use actual measurement data, if it is available, and will use such data as producer/shipper nominations, prior month average daily flows, estimated flow for new production and estimated end-user requirements (all adjusted for the estimated impact of weather patterns) when actual measurement data is not available. Throughout the month or two following production, actual measured sales and transportation volumes are received and invoiced and used in a process referred to as "actualization". Through the actualization process, any estimation differences recorded through the accrual are reflected in the subsequent month's accounting cycle when the accrual is reversed and actual amounts are recorded. Actual volumes purchased, processed or sold may differ from the estimates due to a variety of factors including, but not limited to: actual wellhead production or customer requirements being higher or lower than the amount nominated at the beginning of the month; liquids recoveries being higher or lower than estimated because gas processed through the plants was richer or leaner than estimated; the estimated impact of weather patterns being different from the actual impact on sales and purchases; and pipeline maintenance or allocation causing actual deliveries of gas to be different than estimated. We believe that our accrual process for sales and purchases provides a reasonable estimate of such sales and purchases.

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        We engage in price risk management activities in order to minimize the risk from market fluctuations in the price of natural gas and NGLs. We also manage our price risk related to future physical purchase or sale commitments by entering into either corresponding physical delivery contracts or financial instruments with an objective to balance our future commitments and significantly reduce our risk to the movement in natural gas prices.

        We use derivatives to hedge against changes in cash flows related to product prices and interest rate risk, as opposed to their use for trading purposes. FASB ASC 815 requires that all derivatives and hedging instruments are recognized as assets or liabilities at fair value. If a derivative qualifies for hedge accounting, changes in the fair value can be offset against the change in the fair value of the hedged item through earnings or recognized in other comprehensive income until such time as the hedged item is recognized in earnings.

        We conduct "off-system" gas marketing operations as a service to producers on systems that we do not own. We refer to these activities as part of energy trading activities. In some cases, we earn an agency fee from the producer for arranging the marketing of the producer's natural gas. In other cases, we purchase the natural gas from the producer and enter into a sales contract with another party to sell the natural gas. The revenue and cost of sales for these activities are included in revenue on a net basis in the statement of operations.

        We manage our price risk related to future physical purchase or sale commitments for energy trading activities by entering into either corresponding physical delivery contracts or financial instruments with an objective to balance future commitments and significantly reduce risk related to the movement in natural gas prices. However, we are subject to counter-party risk for both the physical and financial contracts. Our energy trading contracts qualify as derivatives, and we use mark-to-market accounting for both physical and financial contracts of the energy trading business. Accordingly, any gain or loss associated with changes in the fair value of derivatives and physical delivery contracts relating to energy trading activities are recognized in earnings as gain or loss on derivatives immediately.

        Impairment of Long-Lived Assets.    In accordance with FASB ASC 360-10-05, we evaluate the long-lived assets, including related intangibles, of identifiable business activities for impairment when events or changes in circumstances indicate, in management's judgment, that the carrying value of such assets may not be recoverable. The determination of whether impairment has occurred is based on management's estimate of undiscounted future cash flows attributable to the assets as compared to the carrying value of the assets. If impairment has occurred, the amount of the impairment recognized is determined by estimating the fair value for the assets and recording a provision for loss if the carrying value is greater than fair value.

        When determining whether impairment of one of our long-lived assets has occurred, we must estimate the undiscounted cash flows attributable to the asset. Our estimate of cash flows is based on assumptions regarding the purchase and resale margins on natural gas, volume of gas available to the asset, markets available to the asset, operating expenses, and future natural gas prices and NGL product prices. The amount of availability of gas to an asset is sometimes based on assumptions regarding future drilling activity, which may be dependent in part on natural gas prices. Projections of gas volumes and future commodity prices are inherently subjective and contingent upon a number of variable factors, including but not limited to:

    changes in general economic conditions in regions in which our markets are located;

    the availability and prices of natural gas supply;

    our ability to negotiate favorable sales agreements;

    the risks that natural gas exploration and production activities will not occur or be successful;

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    our dependence on certain significant customers, producers, and transporters of natural gas; and

    competition from other midstream companies, including major energy producers.

        Any significant variance in any of the above assumptions or factors could materially affect our cash flows, which could require us to record an impairment of an asset.

        Depreciation Expense and Cost Capitalization.    Our assets consist primarily of natural gas gathering pipelines, processing plants, and transmission pipelines. We capitalize all construction-related direct labor and material costs, as well as indirect construction costs. Indirect construction costs include general engineering and the costs of funds used in construction. Capitalized interest represents the cost of funds used to finance the construction of new facilities and is expensed over the life of the constructed assets through the recording of depreciation expense. We capitalize the costs of renewals and betterments that extend the useful life, while we expense the costs of repairs, replacements and maintenance projects as incurred.

        We generally compute depreciation using the straight-line method over the estimated useful life of the assets. Certain assets such as land, NGL line pack and natural gas line pack are non-depreciable. The computation of depreciation expense requires judgment regarding the estimated useful lives and salvage value of assets. As circumstances warrant, we may review depreciation estimates to determine if any changes are needed. Such changes could involve an increase or decrease in estimated useful lives or salvage values, which would impact future depreciation expense.

Liquidity and Capital Resources

        Cash flow presented in liquidity discussions includes cash flow from discontinued operations.

        Cash Flows from Operating Activities.    Net cash provided by operating activities was $87.2 million, $81.0 million and $173.8 million for the years ended December 31, 2010, 2009 and 2008, respectively. Income before non-cash income and expenses and changes in working capital for 2010, 2009 and 2008 were as follows (in millions):

 
  Years Ended December 31,  
 
  2010   2009   2008  

Income before non-cash income and expenses

  $ 61.2   $ 89.8   $ 160.9  

Changes in working capital

  $ 26.0   $ (8.8 ) $ 12.9  

        The primary reason for the decrease in cash flow from income before non-cash income and expenses of $28.6 million from 2009 to 2010 relates to payment for settlement of interest rate swaps, make-whole payments and PIK notes. The primary reason for the decreased cash flow from income before noncash income and expenses of $71.1 million from 2008 to 2009 was increased interest expense of $19.4 million, decreased operating income of $11.2 million, decreased other income of $26.8 million, and decreased gain on derivatives of $7.2 million.

        The change in working capital for 2010 primarily relates to accrued interest on our long-term debt. As previously discussed, we pay interest semi-annually in February and August on our new senior unsecured notes which caused the balance in accrued interest to increase by approximately $19.0 million as of December 31, 2010 as compared to December 31, 2009. The remaining change in working capital for 2010 and the changes in working capital for the 2009 and 2008 are due to normal fluctuations in trade receivables and payable balances due to timing of collections and payments.

        Cash Flows from Investing Activities.    Net cash was provided from investing activities of $14.6 million and $379.9 million for the years ended December 31, 2010 and 2009, respectively, primarily due to proceeds from asset sales. Net cash used in investing activity was $186.8 million for the year ended December 31, 2008. Cash flows from investing activities for the years ended December 31,

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2010, 2009 and 2008 included proceeds from property sales of $60.2 million, $503.9 million and $88.8 million, respectively. The east Texas assets and a non-operational processing plant held in inventory were the primary assets sold in 2010 for $39.8 million and $19.5 million, respectively. In 2009, we sold our Arkoma system for approximately $10.7 million, we sold our midstream assets in Alabama, Mississippi and south Texas for approximately $217.6 million and we sold our natural gas treating business for $265.4 million. In 2008, we sold our 12.4% interest in the Seminole gas processing plant for $85.0 million. Our primary use of cash related to investing activities for the years ended December 31, 2010, 2009 and 2008 were capital expenditures and acquisitions, net of accrued amounts, as follows (in millions):

 
  Years Ended December 31,  
 
  2010   2009   2008  

Growth capital expenditures

  $ 37.4   $ 90.5   $ 257.3  

Acquisition and asset purchases

        35.1      

Maintenance capital expenditures

    10.8     10.9     18.3  
               
 

Total

  $ 48.2   $ 136.5   $ 275.6  
               

        Cash Flows from Financing Activities.    Net cash used in financing activities was $84.9 million and $461.7 million for the years ended December 31, 2010 and 2009, respectively, and financing activities provided net cash of $14.6 million for the year ended December 31, 2008. Financing activities during 2010 primarily relate to the issuance of senior unsecured notes, sale of preferred units and establishment of a new credit facility and repaying our old credit facility and senior secured notes. Our 2009 financing activities included disposal of non-core assets and repayment of outstanding debt. Our financings have primarily consisted of borrowings and repayments under bank credit facilities, borrowings and repayments under capital lease obligations, borrowings and repayments of senior secured and unsecured notes, debt refinancing costs and unit issuances during 2010, 2009 and 2008 as follows (in millions):

 
  Years Ended December 31,  
 
  2010   2009   2008  

Net borrowings (repayments) under bank credit facilities(1)

  $ (529.6 ) $ (254.4 ) $ 50.0  

Senior secured note repayments(2)

    (316.5 )   (163.2 )   (9.4 )

Senior unsecured note borrowings (net of discount on the note)

    711.5          

Series B secured note repayment

    (11.0 )        

Net borrowings (payments) under capital lease obligations

    (2.4 )   (0.7 )   23.9  

Debt refinancing costs

    (28.6 )   (15.0 )   (4.9 )

Common unit offerings(3)

            101.9  

Issuance of preferred units(3)

    120.8          

                                    

                   

(1)
Year ended December 31, 2009 includes a $143.0 million and $173.3 million payment due to the sale of the Alabama, Mississippi and south Texas assets and the Treating assets, respectively.

(2)
Year ended December 31, 2009 includes a $69.0 million and $84.8 million payment due to sale of the Alabama, Mississippi and south Texas assets and the Treating assets, respectively.

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(3)
Includes our general partner's proportionate contribution and net of costs associated with the offering.

        Distributions to unitholders and our general partner represent one of our primary uses of cash in financing activities. During 2010, we paid distributions on our preferred units of $9.9 million which represented distributions paid for the first three quarters of 2010. A distribution on the preferred units of $3.8 million has been declared for the three months ended December 31, 2010 and was paid in February 2011. We also paid distributions to our common unitholders of $12.8 million in 2010. Total cash distributions made during the years ended December 31, 2010, 2009 and 2008 were as follows (in millions):

 
  Years ended December 31,  
 
  2010   2009   2008  

Common units

  $ 12.8   $ 11.4   $ 94.4  

Subordinated units (converted to common in 2008)

            2.8  

Preferred units

    9.9          

General partner interest

    0.4     0.2     41.2  
               
 

Total

  $ 23.1   $ 11.6   $ 138.4  
               

        The indenture governing our senior unsecured notes provides the ability to pay distributions if a minimum fixed charged coverage ratio is met, and also provides baskets to make payments if such minimum is not met. However, we have established a target over the next couple of years of achieving a ratio of total debt to adjusted EBITDA of less than 4.0 to 1.0. Our ratio of debt to adjusted EBITDA was 4.1 to 1.0 for the year ended December 31, 2010. The distribution payments paid during 2010 are in compliance with our internal financial guidelines.

        In order to reduce our interest costs, we do not borrow money to fund outstanding checks until they are presented to the bank. Fluctuations in drafts payable are caused by timing of disbursements, cash receipts and draws on our revolving credit facility. We borrow money under our $420.0 million credit facility to fund checks as they are presented. As of December 31, 2010, we had approximately $333.4 million of available borrowing capacity under this facility. Changes in drafts payable for 2010, 2009 and 2008 were as follows (in millions):

 
  Years ended December 31,  
 
  2010   2009   2008  

Decrease in drafts payable

  $ (5.1 ) $ (16.3 ) $ (7.4 )

        Working Capital Deficit.    We had a working capital deficit of $17.6 million as of December 31, 2010. Changes in working capital may fluctuate significantly between periods even though our trade receivables and payables are typically collected and paid in 30 to 60 day pay cycles. A large volume of our revenues are collected and a large volume of our gas purchases are paid near each month end or the first few days of the following month so receivable and payable balances at any month end may fluctuate significantly depending on the timing of these receipts and payments. In addition, although we strive to minimize our natural gas and NGLs in inventory, these working inventory balances may fluctuate significantly from period to period due to operational reasons and due to changes in natural gas and NGL prices. Working capital also includes our mark to market derivative assets and liabilities associated with our commodity derivatives which fluctuated significantly due to the changes in natural gas and NGL prices and associated with our interest rate swap derivatives which fluctuated significantly due to changes in interest rates. The changes in working capital during the years ended December 31, 2010, 2009 and 2008 are due to the impact of the fluctuations discussed above.

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        Off-Balance Sheet Arrangements.    We had no off-balance sheet arrangements as of December 31, 2010 and 2009.

        April 2008 Sale of Common Units.    On April 9, 2008, we issued 3,333,334 common units in a private offering at $30.00 per unit, which represented an approximate 7.0% discount from the market price on such date. Crosstex Energy GP, L.P. made a general partner contribution of $2.0 million in connection with the issuance to maintain its 2.0% general partner interest.

        January 2010 Sale of Preferred Units.    On January 19, 2010, we issued approximately $125.0 million of Series A Convertible Preferred Units to an affiliate of Blackstone/GSO Capital Solutions for net proceeds of $120.8 million. Crosstex Energy, GP, L.P. made a general partner contribution of $2.6 million in connection with the issuance to maintain its 2% general partner interest. The 14,705,882 preferred units are convertible by the holders thereof at any time into common units on a one-for-one basis, subject to certain adjustments in the event of certain dilutive issuances of common units. They are entitled to a quarterly distribution that is the greater of $0.2125 per unit or the amount of the quarterly distribution per unit paid to common unitholders, subject to certain adjustments. Such quarterly distribution may be paid in cash, in additional preferred units issued in kind or any combination thereof, provided that the distribution may not be paid in additional preferred units if we pay a cash distribution on common units. The first and second quarterly preferred unit distributions of $3.1 million were paid in cash in May 2010 and August 2010. The third quarterly preferred unit distribution of $3.7 million was paid in November 2010 and the fourth quarter distribution of $3.8 million was paid in February 2011.

        Capital Projects for 2011.    Our 2011 capital budget includes approximately $42.7 million of identified growth projects, and we expect to fund such expenditures with internally generated cash flow. Our primary capital projects for 2011 include two expansion projects in north Texas and the restart of the Eunice fractionator in south Louisiana, all of which were underway as of December 31, 2010 with expected completions near the end of the first quarter of 2011. The construction of a new compressor station on an existing gathering line in north Texas at an estimated cost of $10.0 million is expected to generate annual cash flow of approximately $8.0 million. The second project in north Texas is a 15 mile expansion of our natural gas gathering system in the Barnett shale with an estimated cost of $25.0 million and is expected to generate average annual cash flows of $10.0 million per year for the first four years. The Eunice restart project is estimated to cost $9.0 million and generate annual cash flow of $3.0 million. We may identify more growth projects during 2011 in addition to projects currently budgeted.

        Total Contractual Cash Obligations.    A summary of our total contractual cash obligations as of December 31, 2010, is as follows (in millions):

 
  Payments Due by Period  
 
  Total   2011   2012   2013   2014   2015   Thereafter  

Long-term debt obligations

  $ 732.1   $ 7.1   $   $   $   $   $ 725.0  

Interest payable on fixed long-term debt obligations

    481.9     64.7     64.3     64.3     64.3     64.3     160.0  

Capital lease obligations

    39.6     4.6     4.6     4.6     4.6     4.6     16.6  

Operating lease obligations

    43.7     13.5     9.6     6.6     5.0     3.7     5.3  

Purchase obligations

    2.4     2.4                      

Uncertain tax position obligations

    3.7     3.7                      
                               

Total contractual obligations

  $ 1,303.4   $ 96.0   $ 78.5   $ 75.5   $ 73.9   $ 72.6   $ 906.9  
                               

        The above table does not include any physical or financial contract purchase commitments for natural gas due to the nature of both the price and volume components of such purchases, which vary on a daily or monthly basis. Additionally, we do not have contractual commitments for fixed price and/or fixed quantities of any material amount.

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Indebtedness

        As of December 31, 2010 and 2009, long-term debt consisted of the following (in millions):

 
  2010   2009  

Prior credit facility, interest based on Prime and/or LIBOR plus an applicable margin interest rate at December 31, 2009 was 6.75%

  $   $ 529.6  

Bank credit facility, interest based on Prime and/or LIBOR plus an applicable margin interest rate at December 31, 2010 was 4.0%

         

Senior secured notes (including PIK notes(1) of $9.5 million), weighted average interest rate at December 31 2009 was 10.5%

        326.0  

Senior unsecured notes, net of discount of $13.5 million, which bear interest at the rate of 8.875%

    711.5      

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

    7.1     18.1  
           

    718.6     873.7  

Less current portion

    (7.1 )   (28.6 )
           
 

Debt classified as long-term

  $ 711.5   $ 845.1  
           

(1)
The senior secured notes began accruing additional interest of 1.25% per annum in February 2009 in the form of an increase in the principal amounts thereof (the "PIK notes"). These notes were paid in full in February 2010.

        Credit Facility.    In February 2010, we amended and restated our prior secured bank credit facility with a new syndicated secured bank credit facility. The credit facility has a borrowing capacity of $420.0 million and matures in February 2014. Net proceeds from the credit facility along with net proceeds from the senior unsecured notes discussed under "Senior Unsecured Notes" below were used to, among other things, repay our prior credit facility and repay and retire all outstanding senior secured notes (including PIK notes) in February 2010. We recognized a loss on extinguishment of debt of $14.7 million when the debt was repaid due to make-whole interest payments on the senior secured debt of $9.3 million and the write-off of unamortized debt costs of $5.4 million. Debt refinancing costs totaling $26.7 million associated with new borrowings, including the senior unsecured notes, are included in other noncurrent assets as of December 31, 2010 and amortized to interest expense over the term of the related debt.

        As of December 31, 2010, there was $86.6 million in outstanding letters of credit, under the bank credit facility leaving approximately $333.4 million available for future borrowing.

        The credit facility is guaranteed by substantially all of the subsidiaries and is secured by first priority liens on substantially all of our 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 our equity interests in substantially all of our subsidiaries.

        We may prepay all loans under the credit facility at any time without premium or penalty (other than customary LIBOR breakage costs), subject to certain notice requirements. The credit facility requires mandatory prepayments of amounts outstanding thereunder with the net proceeds of certain asset sales, extraordinary receipts, equity issuances and debt incurrences, but these mandatory prepayments do not require any reduction of the lenders' commitments under the credit facility.

        Under the credit facility, borrowings bear interest at our 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

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prime rate) plus an applicable margin. We pay a per annum fee on all letters of credit issued under the credit facility and a commitment fee of 0.50% per annum on the unused availability under the credit facility. The letter of credit fee and the applicable margins for the interest rate vary quarterly based on our leverage ratio (as defined in the credit facility, being generally computed as the ratio of total funded debt to adjusted EBITDA) and are as follows:

Leverage Ratio
  Base Rate
Loans
  Eurodollar Rate
Loans
  Letter of Credit
Fees
 

Greater than or equal to 5.00 to 1.00

    3.25 %   4.25 %   4.25 %

Greater than or equal to 4.50 to 1.00 and less than 5.00 to 1.00

    3.00 %   4.00 %   4.00 %

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

    2.75 %   3.75 %   3.75 %

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

    2.50 %   3.50 %   3.50 %

Less than 3.50 to 1.00

    2.25 %   3.25 %   3.25 %

        Based on our forecasted leverage ratio for 2011, we expect the applicable margin for the interest rate and letter of credit fee to be at the mid-point of these ranges. The credit facility does not have a floor for the Base Rate or the Eurodollar Rate.

        The 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 as follows:

    5.25 to 1.00 for the fiscal quarter ending December 31, 2010;

    5.00 to 1.00 for the fiscal quarter ending March 31, 2011;

    4.75 to 1.00 for the fiscal quarter ending June 30, 2011; and

    4.50 to 1.00 for the fiscal quarter ending September 30, 2011 and each fiscal quarter thereafter.

        The maximum permitted senior leverage ratio (as defined in the credit facility, but generally computed as the ratio of total secured funded debt to adjusted EBITDA), is 2.50 to 1.00.

        The minimum consolidated interest coverage ratio (as defined in the credit facility, but generally computed as the ratio of adjusted EBITDA to consolidated interest charges) is as follows:

    1.75 to 1.00 for the fiscal quarter ending December 31, 2010;

    2.00 to 1.00 for the fiscal quarter ending March 31, 2011;

    2.25 to 1.00 for the fiscal quarter ending June 30, 2011; and

    2.50 to 1.00 for the fiscal quarter ending September 30, 2011 and each fiscal quarter thereafter.

        In addition, the credit facility contains various covenants that, among other restrictions, limit our ability to:

    grant or assume liens;

    make investments;

    incur or assume indebtedness;

    engage in mergers or acquisitions;

    sell, transfer, assign or convey assets;

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    repurchase our equity, make distributions and certain other restricted payments;

    change the nature of our business;

    engage in transactions with affiliates;

    enter into certain burdensome agreements;

    make certain amendments to the omnibus agreement or our subsidiaries' organizational documents;

    prepay the senior unsecured notes and certain other indebtedness; and

    enter into certain hedging contracts.

        The credit facility permits us to make quarterly distributions to unitholders so long as no default exists under the new credit facility.

        Each of the following is an event of default under the credit facility:

    failure to pay any principal, interest, fees, expenses or other amounts when due;

    failure to meet the quarterly financial covenants;

    failure to observe any other agreement, obligation, or covenant in the credit facility or any related loan document, subject to cure periods for certain failures;

    the failure of any representation or warranty to be materially true and correct when made;

    our or any of our subsidiaries default under other indebtedness that exceeds a threshold amount;

    judgments against us or any of our material subsidiaries, in excess of a threshold amount;

    certain ERISA events involving us or any of our material subsidiaries, in excess of a threshold amount;

    bankruptcy or other insolvency events involving us or any of our material subsidiaries; and

    a change in control (as defined in the credit facility).

        If an event of default relating to bankruptcy or other insolvency events occurs, all indebtedness under the credit facility will immediately become due and payable. If any other event of default exists under the credit facility, the lenders may accelerate the maturity of the obligations outstanding under the credit facility and exercise other rights and remedies. In addition, if any event of default exists under the credit facility, the lenders may commence foreclosure or other actions against the collateral.

        If any default occurs under the credit facility, or if we are unable to make any of the representations and warranties in the credit facility, we will be unable to borrow funds or have letters of credit issued under the credit facility.

        We expect to be in compliance with the covenants in the credit facility 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. This note bears an interest rate of 9.5%. We paid $11.0 million in May 2010 and the remaining payment of $7.1 million is due in May 2011.

        Senior Unsecured Notes.    On February 10, 2010, we issued $725.0 million in aggregate principal amount of 8.875% senior unsecured notes (the "notes") due on February 15, 2018 at an issue price of 97.907% to yield 9.25% to maturity including the original issue discount (OID). Net proceeds from the sale of the notes of $689.7 million (net of transaction costs and OID), together with borrowings under

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our credit facility discussed above, were used to repay in full amounts outstanding under our prior bank credit facility and senior secured notes and to pay related fees, costs and expenses, including the settlement of interest rate swaps associated with the prior credit facility. Interest payments are due semi-annually in arrears in February and August.

        The indenture governing the notes contains covenants that, among other things, limit our ability and the ability of certain of our subsidiaries to:

    sell assets including equity interests in our subsidiaries;

    pay distributions on, redeem or repurchase units or redeem or repurchase our subordinated debt (as discussed in more detail below);

    make investments;

    incur or guarantee additional indebtedness or issue preferred units;

    create or incur certain liens;

    enter into agreements that restrict distributions or other payments from our restricted subsidiaries to us;

    consolidate, merge or transfer all or substantially all of our assets;

    engage in transactions with affiliates;

    create unrestricted subsidiaries;

    enter into sale and leaseback transactions; or

    engage in certain business activities.

        The indenture provides that if our fixed charge coverage ratio (the ratio of consolidated cash flow to fixed charges, which generally represents the ratio of adjusted EBITDA to interest charges with further adjustments as defined per the indenture) for the most recently ended four full fiscal quarters is not less than 2.0 to 1.0, we will be permitted to pay distributions to our unitholders in an amount equal to available cash from operating surplus (each as defined in our partnership agreement) with respect to our preceding fiscal quarter plus a number of items, including the net cash proceeds received by us as a capital contribution or from the issuance of equity interests since the date of the indenture, to the extent not previously expended. If our fixed charge coverage ratio is less than 2.0 to 1.0, we will be able to pay distributions to our unitholders in an amount equal to an $80.0 million basket (less amounts previously expended pursuant to such basket), plus the same number of items discussed in the preceding sentence to the extent not previously expended. We were in compliance with this ratio as of December 31, 2010.

        If the notes achieve an investment grade rating from each of Moody's Investors Service, Inc. and Standard & Poor's Ratings Services, many of the covenants discussed above will terminate.

        We may redeem up to 35% of the notes at any time prior to February 15, 2013 with the cash proceeds from equity offerings at a redemption price of 108.875% of the principal amount of the notes (plus accrued and unpaid interest to the redemption date) provided that:

    at least 65% of the aggregate principal amount of the senior notes remains outstanding immediately after the occurrence of such redemption; and

    the redemption occurs within 120 days of the date of the closing of the equity offering.

        Prior to February 15, 2014, we may redeem the notes, in whole or in part, at a "make-whole" redemption price. On or after February 15, 2014, we may redeem all or a part of the notes at redemption prices (expressed as percentages of principal amount) equal to 104.438% for the twelve-

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month period beginning on February 15, 2014, 102.219% for the twelve-month period beginning February 15, 2015 and 100.00% for the twelve-month period beginning on February 15, 2016 and at any time thereafter, plus accrued and unpaid interest, if any, to the applicable redemption date on the notes.

        Each of the following is an event of default under the indenture:

    failure to pay any principal or interest when due;

    failure to observe any other agreement, obligation, or other covenant in the indenture, subject to the cure periods for certain failures;

    our or any of our subsidiaries' default under other indebtedness that exceeds a certain threshold amount;

    failures by us or any of our subsidiaries to pay final judgments that exceed a certain threshold amount; and

    bankruptcy or other insolvency events involving us or any of our material subsidiaries.

        If an event of default relating to bankruptcy or other insolvency events occurs, the senior unsecured notes will immediately become due and payable. If any other event of default exists under the indenture, the trustee under the indenture or the holders of the senior unsecured notes may accelerate the maturity of the senior unsecured notes and exercise other rights and remedies.

Credit Risk

        Risks of nonpayment and nonperformance by our customers are a major concern in our business. We are subject to risks of loss resulting from nonpayment or nonperformance by our customers and other counterparties, such as our lenders and hedging counterparties. Any increase in the nonpayment and nonperformance by our customers could adversely affect our results of operations and reduce our ability to make distributions to our unitholders.

Inflation

        Inflation in the United States has been relatively low in recent years in the economy as a whole. The midstream natural gas industry experienced an increase in labor and material costs during 2008, but 2009 and 2010 remained relatively unchanged. These increases did not have a material impact on our results of operations for the periods presented. Although the impact of inflation has been insignificant in recent years, it is still a factor in the United States economy and may increase the cost to acquire or replace property, plant and equipment and may increase the costs of labor and supplies. To the extent permitted by competition, regulation and our existing agreements, we have and will continue to pass along increased costs to our customers in the form of higher fees.

Environmental

        Our operations are subject to environmental laws and regulations adopted by various governmental authorities in the jurisdictions in which these operations are conducted. We believe we are in material compliance with all applicable laws and regulations. For a more complete discussion of the environmental laws and regulations that impact us, see Item 1. "Business—Environmental Matters."

Contingencies

        In December 2008, Denbury Onshore, LLC ("Denbury") initiated formal arbitration proceedings against Crosstex CCNG Processing Ltd. ("Crosstex Processing"), Crosstex Energy Services, L.P. ("Crosstex Energy"), Crosstex North Texas Gathering, L.P. ("Crosstex Gathering") and Crosstex Gulf

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Coast Marketing, Ltd. ("Crosstex Marketing"), all wholly-owned subsidiaries of the Partnership, asserting a claim for breach of contract under a gas processing agreement. Denbury alleged damages in the amount of $16.2 million, plus interest and attorneys' fees. Crosstex denied any liability and sought to have the action dismissed. An arbitration hearing was held in December 2009 and February 2010 Denbury was awarded $3.0 million plus interest, attorneys' fees and costs for its claims. The Partnership accrued an estimate of $3.7 million, reflecting the related expense in purchased gas costs for this award as of December 31, 2009. The final award totaling $3.5 million was paid in May 2010.

        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, 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.

        On October 23, 2006, Crosstex North Texas Gathering, L.P. filed a lawsuit against Robert L. Dow in the County Court at Law No. 1 of Tarrant County, Texas seeking a pipeline easement across portion of the defendant's sand and gravel mining operation. The court awarded the defendant $0.1 million in damages, but the defendant appealed and claimed damages for the taking, damages to the remainder of this property and damages due to lost profits from the sale of frac sand in excess of $90.0 million. On October 8, 2010, the Partnership settled this matter and received a pipeline easement in exchange for a payment of $6.75 million. This settlement was paid in 2010 and included as a property cost.

        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.

        On July 22, 2008, SemStream, L.P. and certain of its subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code. As of July 22, 2008, SemStream, L.P.

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owed us approximately $6.2 million, including approximately $3.9 million for June 2008 sales and approximately $2.3 million for July 2008 sales. On or around April 6, 2010, we settled the administrative claim and received a payment of $2.1 million.

Disclosure Regarding Forward-Looking Statements

        This Annual Report on Form 10-K contains forward-looking statements that are based on information currently available to management as well as management's assumptions and beliefs. All statements, other than statements of historical fact, included in this Form 10-K constitute forward-looking statements, including but not limited to statements identified by the words "forecast," "may," "believe," "will," "should," "plan," "predict," "anticipate," "intend," "estimate" and "expect" and similar expressions. Such statements reflect our current views with respect to future events, based on what we believe are reasonable assumptions; however, such statements are subject to certain risks and uncertainties. In addition to the specific uncertainties discussed elsewhere in this Form 10-K, the risk factors set forth in "Item 1A. Risk Factors" may affect our performance and results of operations. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may differ materially from those in the forward-looking statements. We disclaim any intention or obligation to update or review any forward-looking statements or information, whether as a result of new information, future events or otherwise.

Item 7A.    Quantitative and Qualitative Disclosures about Market Risk

        Market risk is the risk of loss arising from adverse changes in market rates and prices. Our primary market risk is the risk related to changes in the prices of natural gas and NGLs. In addition, we are also exposed to the risk of changes in interest rates on floating rate debt.

        On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Act") into law, a part of which relates to increased regulation of the markets for derivative products of the type we use to manage areas of market risk. While the Commodity Futures Trading Commission has yet to issue regulations to implement this increased regulation, Dodd-Frank may result in increased costs to us to implement our market risk management strategy.

Interest Rate Risk

        We are exposed to interest rate risk on our variable rate bank credit facility. At December 31, 2010, we had no outstanding borrowings under this facility.

        At December 31, 2010 and 2009, we had total fixed rate debt obligations of $718.6 million and $344.1 million, respectively. The balance at December 31, 2010 consists of our senior unsecured notes with an interest rate of 8.875% and the series B secured note with an interest rate of 9.5%. The December 31, 2009 balance consisted of senior secured notes with a weighted average interest rate of 10.5% and the series B note with an interest rate of 9.5%. The fair value of these fixed rate obligations was approximately $768.3 million and $342.7 million as of December 31, 2010 and 2009, respectively. We estimate that a 1% increase or decrease in interest rates would increase or decrease the fair value of the fixed rate debt (the senior unsecured notes) by $ 30.1 million based on the debt obligations as of December 31, 2010.

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Commodity Price Risk

        We are subject to significant risks due to fluctuations in commodity prices. Our exposure to these risks is primarily in the gas processing component of our business. We currently process gas under three main types of contractual arrangements:

    1.
    Processing margin contracts:    Under this type of contract, we pay the producer for the full amount of inlet gas to the plant, and we make a margin based on the difference between the value of liquids recovered from the processed natural gas as compared to the value of the natural gas volumes lost ("shrink") and the cost of fuel used in processing. The shrink and fuel losses are referred to as plant thermal reduction or PTR. Our margins from these contracts are high during periods of high liquids prices relative to natural gas prices, and can be negative during periods of high natural gas prices relative to liquids prices. However, we mitigate our risk of processing natural gas when margins are negative primarily through our ability to bypass processing when it is not profitable for us, or by contracts that revert to a minimum fee for processing if the natural gas must be processed to meet pipeline quality specifications.

    2.
    Percent of liquids contracts:    Under these contracts, we receive a fee in the form of a percentage of the liquids recovered, and the producer bears all the cost of the natural gas shrink. Therefore, our margins from these contracts are greater during periods of high liquids prices. Our margins from processing cannot become negative under percent of liquids contracts, but do decline during periods of low NGL prices.

    3.
    Fee based contracts:    Under these contracts we have no commodity price exposure and are paid a fixed fee per unit of volume that is processed.

        The gross operating margin presentation in the table below is calculated net of results from discontinued operations. Gas processing margins by contract types and gathering and transportation margins as a percent of total gross operating margin for the comparative year-to-date periods are as follows:

 
  Years ended December 31,  
 
  2010   2009   2008  

Gathering and transportation margin

    62.2 %   65.8 %   57.6 %

Gas processing margins:

                   
 

Processing margin

    12.9 %   8.9 %   15.4 %
 

Percent of liquids

    10.6 %   13.2 %   17.9 %
 

Fee based

    14.3 %   12.1 %   9.1 %
               
 

Total gas processing

    37.8 %   34.2 %   42.4 %

Total

   
100.0

%
 
100.0

%
 
100.0

%
               

        We have hedges in place at December 31, 2010 covering a portion of the liquids volumes we expect to receive under percent of liquids (POL) contracts. The hedges done via swaps are set forth in the following table. The relevant payment index price is the monthly average of the daily closing price

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for deliveries of commodities into Mont Belvieu, Texas as reported by the Oil Price Information Service (OPIS).

Period
  Underlying   Notional
Volume
  We Pay   We Receive*   Fair Value
Asset/(Liability)
 
 
   
   
   
   
  (In thousands)
 

January 2011 - December 2011

  Ethane   122 (MBbls)     Index   $ 0.4880/gal   $ (339 )

January 2011 - December 2011

  Propane   24 (MBbls)     Index   $ 1.0531/gal     (191 )

January 2011 - December 2011

  Normal Butane   18 (MBbls)     Index   $ 1.4399/gal     (136 )

January 2011 - December 2011

  Natural Gasoline   26 (MBbls)     Index   $ 1.7543/gal     (399 )
                           

                      $ (1,065 )
                           

*
weighted average

        In addition, we have hedges in place covering 90 MBbls of Ethane for the final two quarters of 2011 done via the purchase of puts. The net fair value asset of the puts as of December 31, 2010 was less than $0.1 million.

        We have hedged our exposure to declines in prices for NGL volumes produced for our account. The NGL volumes hedged, as set forth above, focus on our POL contracts. We hedge our POL exposure based on volumes we consider hedgeable (volumes committed under contracts that are long term in nature) versus total POL volumes that include volumes that may fluctuate due to contractual terms, such as contracts with month to month processing options. We have hedged 60.9% of our hedgeable volumes at risk through December 2011 (24.9% of total volumes at risk through December 2011).

        We also have hedges in place at December 31, 2010 covering the fractionation spread risk related to our processing margin contracts as set forth in the following table:

Period
  Underlying   Notional
Volume
  We Pay   We Receive   Fair Value
Asset/(Liability)
 
 
   
   
   
   
  (In thousands)
 

January 2011 - December 2011

  Ethane   169 (MBbls)     Index   $ 0.5048 /gal * $ (312 )

January 2011 - December 2011

  Propane   94 (MBbls)     Index   $ 1.1293 /gal *   (435 )

January 2011 - December 2011

  Iso Butane   6 (MBbls)     Index   $ 1.4991 /gal *   (43 )

January 2011 - December 2011

  Normal Butane   54 (MBbls)     Index   $ 1.5219 /gal *   (219 )

January 2011 - December 2011

  Natural Gasoline   55 (MBbls)     Index   $ 1.9272 /gal *   (450 )

January 2011 - December 2011

  Natural Gas   4,612 (MMBtu/d)   $ 4.536 /MMBtu *   Index     (87 )
                           

                      $ (1,546 )
                           

*
weighted average

        In relation to our fractionation spread risk, as set forth above, we have hedged 57.8% of our hedgeable liquids volumes at risk through December 2011 (21.4% of total liquids volumes at risk) and 60.8% of the related hedgeable PTR volumes through December 2011 (22.3% of total PTR volumes).

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        We are also subject to price risk to a lesser extent for fluctuations in natural gas prices with respect to a portion of our gathering and transport services. Approximately 7.6% of the natural gas we market is purchased at a percentage of the relevant natural gas index price, as opposed to a fixed discount to that price. As a result of purchasing the natural gas at a percentage of the index price, our resale margins are higher during periods of high natural gas prices and lower during periods of lower natural gas prices.

        Another price risk we face is the risk of mismatching volumes of gas bought or sold on a monthly price versus volumes bought or sold on a daily price. We enter each month with a balanced book of natural gas bought and sold on the same basis. However, it is normal to experience fluctuations in the volumes of natural gas bought or sold under either basis, which leaves us with short or long positions that must be covered. We use financial swaps to mitigate the exposure at the time it is created to maintain a balanced position.

        Our primary commodity risk management objective is to reduce volatility in our cash flows. We maintain a risk management committee, including members of senior management, which oversees all hedging activity. We enter into hedges for natural gas and NGLs using over-the-counter derivative financial instruments with only certain well-capitalized counterparties which have been approved by our risk management committee.

        The use of financial instruments may expose us to the risk of financial loss in certain circumstances, including instances when (1) sales volumes are less than expected requiring market purchases to meet commitments or (2) our counterparties fail to purchase the contracted quantities of natural gas or otherwise fail to perform. To the extent that we engage in hedging activities we may be prevented from realizing the benefits of favorable price changes in the physical market. However, we are similarly insulated against unfavorable changes in such prices.

        As of December 31, 2010, outstanding natural gas swap agreements, NGL swap agreements, swing swap agreements, storage swap agreements and other derivative instruments were a net fair value liability of $2.4 million. The aggregate effect of a hypothetical 10% increase in gas and NGL prices would result in an increase of approximately $2.0 million in the net fair value liability of these contracts as of December 31, 2010 to a net fair value liability of approximately $4.4 million.

Item 8.    Financial Statements and Supplementary Data

        The Report of Independent Registered Public Accounting Firm, Consolidated Financial Statements and supplementary financial data required by this Item are set forth on pages F-1 through F-54 of this Report and are incorporated herein by reference.

Item 9.    Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

        None.

Item 9A.    Controls and Procedures

    (a)    Evaluation of Disclosure Controls and Procedures

        We carried out an evaluation, under the supervision and with the participation of the management, including the Chief Executive Officer and Chief Financial Officer of Crosstex Energy GP LLC, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Exchange Act Rules 13a-15 and 15d-15. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report (December 31, 2010), our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the

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time period specified in the applicable rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding disclosure.

    (b)    Changes in Internal Control Over Financial Reporting

        There has been no change in our internal control over financial reporting that occurred in the three months ended December 31, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Internal Control Over Financial Reporting

        See "Management's Report on Internal Control over Financial Reporting" on page F-2.

Item 9B.    Other Information

        None.


PART III

Item 10.    Directors, Executive Officers and Corporate Governance

        As is the case with many publicly traded partnerships, we do not have officers, directors or employees. Our operations and activities are managed by our general partner, Crosstex Energy GP, LLC. Our operational personnel are employees of the Operating Partnership. References to our officers, directors and employees are references to the officers, directors and employees of our general partner or the Operating Partnership.

        Unitholders do not directly or indirectly participate in our management or operation. Our general partner owes a fiduciary duty to the unitholders, as limited by our partnership agreement. As general partner, Crosstex Energy GP, LLC is liable for all of our debts (to the extent not paid from our assets), except for indebtedness or other obligations that are made specifically non-recourse to it. Whenever possible, our general partner intends to incur indebtedness or other obligations on a non-recourse basis.

        The following table shows information for the directors and executive officers of our general partner. Executive officers and directors serve until their successors are duly appointed or elected.

Name
  Age   Position with Crosstex Energy GP, LLC

Barry E. Davis

    49  

President, Chief Executive Officer and Director

William W. Davis

    57  

Executive Vice President and Chief Financial Officer

Joe A. Davis

    50  

Executive Vice President, General Counsel and Secretary

Michael J. Garberding

    42  

Senior Vice President-Finance

Stan Golemon

    47  

Senior Vice President-Engineering and Operations

Steven R. Spaulding

    45  

Senior Vice President-Processing and NGLs

Rhys J. Best**

    64  

Chairman of the Board and Member of the Conflicts, Finance* and Compensation Committees

Leldon E. Echols**

    55  

Director and Member of the Audit* and Finance Committees

Bryan H. Lawrence

    68  

Director

Sheldon B. Lubar**

    81  

Director and Member of the Governance* Committee

Cecil E. Martin**

    69  

Director and Member of the Audit and Compensation* Committees

D. Dwight Scott

    47  

Director and Member of the Compensation and Finance Committee

Kyle D. Vann**

    63  

Director and Member of the Governance, Conflicts* and Audit Committees


*
Denotes chairman of committee.

**
Denotes independent director.

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        Barry E. Davis, President, Chief Executive Officer and Director, led the management buyout of the midstream assets of Comstock Natural Gas, Inc. in December 1996, which transaction resulted in the formation of our predecessor. Mr. Davis has served as director since our IPO in December 2002. Mr. Davis was President and Chief Operating Officer of Comstock Natural Gas and founder of Ventana Natural Gas, a gas marketing and pipeline company that was purchased by Comstock Natural Gas. Mr. Davis started Ventana Natural Gas in June 1992. Prior to starting Ventana, he was Vice President of Marketing and Project Development for Endevco, Inc. Before joining Endevco, Mr. Davis was employed by Enserch Exploration in the marketing group. Mr. Davis holds a B.B.A. in Finance from Texas Christian University. Mr. Davis also serves as Chairman of the Board for Crosstex Energy, Inc. Mr. Davis is not related to William W. Davis or Joe A. Davis. Mr. Davis' leadership skills and experience in the midstream natural gas industry, among other factors, led the Board to conclude that he should serve as a director.

        William W. Davis, Executive Vice President and Chief Financial Officer, joined our predecessor in September 2001, and has over 30 years of finance and accounting experience. For more than the last seven years, Mr. Davis has served as our Chief Financial Officer. Prior to joining our predecessor, Mr. Davis held various positions with Sunshine Mining and Refining Company from 1983 to September 2001, including Executive Vice President and Chief Financial Officer from 1991 to 2001. In addition, Mr. Davis served as Chief Operating Officer in 2000 and 2001. Mr. Davis graduated magna cum laude from Texas A&M University with a B.B.A. in Accounting and is a Certified Public Accountant. Mr. Davis is not related to Barry E. Davis or Joe A. Davis.

        Joe A. Davis, Executive Vice President, General Counsel and Secretary, joined Crosstex in October 2005. He began his legal career in 1985 with the Dallas firm of Worsham Forsythe, which merged with the international law firm of Hunton & Williams in 2002. Most recently, he served as a partner in the firm's Energy Practice Group, and served on the firm's Executive Committee. Mr. Davis specialized in facility development, sales, acquisitions and financing for the energy industry, representing entrepreneurial start up/development companies, growth companies, large public corporations and large electric and gas utilities. He received his J.D. from Baylor Law School in Waco and his B.S. degree from the University of Texas in Dallas. Mr. Davis is not related to Barry E. Davis or William W. Davis.

        Michael J. Garberding, Senior Vice President—Finance joined our general partner in February 2008. Mr. Garberding has 20 years experience in finance and accounting. From 2002 to 2008, Mr. Garberding held various finance and business development positions at TXU Corporation, including assistant treasurer. In addition, Mr. Garberding worked at Enron North America as a Finance Manager and Arthur Andersen LLP as an Audit Manager. He received his Masters in Business Administration from the University of Michigan in 1999 and his B.B.A. in Accounting from Texas A&M University in 1991.

        Steven R. Spaulding, Senior Vice President—Processing and NGLs joined our general partner in April of 2010. Mr. Spaulding has 20 years of experience in engineering, operations, and commercial development in the midstream industry. From 1990 to 2010, Mr. Spaulding held various midstream engineering, commercial, and management positions with Chevron, including Manager of Equity NGL Supply and Trading and Midstream Commercial and Business Development Manager. Mr. Spaulding graduated from the University of Oklahoma with a Bachelor of Science degree in Chemical Engineering.

        Stan Golemon, Senior Vice President—Engineering and Operations, joined our general partner in May of 2008. Mr. Golemon has 25 years of experience in engineering, operations, and commercial development in the midstream and exploration and production industries. From 1997 to 2008, Mr. Golemon held various midstream engineering, commercial, and management positions with Union Pacific Resources and its successor company Anadarko Petroleum Corporation, including General Manager of Midstream Engineering and Engineering Supervisor. Mr. Golemon also spent 3 years with

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The Arrington Corporation consulting on sulfur recovery operations and Process Safety Management. Mr. Golemon began his career with ARCO Oil and Gas Company where he worked in plant engineering, onshore facilities engineering, and offshore facilities engineering. Mr. Golemon graduated summa cum laude from Louisiana Tech University in 1985 with a Bachelor of Science degree in Chemical Engineering.

        Rhys J. Best joined Crosstex Energy GP, LLC as a director in June 2004 and became Chairman of the Board in February 2009. Mr. Best was Chairman and Chief Executive Officer of Lone Star Technologies, Inc., until its merger into United States Steel Company in June of 2007. Mr. Best held the position of Chief Executive Officer from June 1998 and he assumed the additional responsibilities of Chairman in January 1999. He began his career at Lone Star as the President and Chief Executive Officer of Lone Star Steel Company, a position he held for eight years before becoming President and Chief Operating Officer of the parent company in 1997. Before joining Lone Star, Mr. Best held several leadership positions in the banking industry. Mr. Best also serves on the boards of Trinity Industries (NYSE: TRN), Cabot Oil & Gas Corp. (NYSE: COG), Commercial Metals Company (NYSE:CMC), Austin Industries, Inc., and McJunkin Red Man Corporation. Trinity is a leading diversified holding company with a subsidiary group that provides a variety of products and services for the transportation, industrial, construction and energy sectors. Cabot is an oil and gas exploration and production company. Commercial Metals Company manufactures, recycles and markets steel, other metals and related products. Austin Industries and McJunkin Red Man are private companies in the construction and energy sectors. Mr. Best graduated from the University of North Texas with a Bachelor of Business degree and later earned a Masters of Business Administration degree at Southern Methodist University. Mr. Best's experience in the financial sector and pipe manufacturing industry, leadership skills and experience as Chairman and Chief Executive Officer of public companies, among other factors, led the Board to conclude that he should serve as a director.

        Leldon E. Echols joined Crosstex Energy GP, LLC as a director in January 2008. Mr. Echols is a private investor. Mr. Echols also currently serves as an independent director of Trinity Industries, Inc. (NYSE: TRN), a leading diversified holding company with a subsidiary group that provides a variety of products and services for the transportation, industrial, construction and energy sectors, and Holly Corporation (NYSE: HOC), an independent petroleum refiner and marketer. Mr. Echols brings 30 years of financial and business experience to Crosstex. After 22 years with the accounting firm Arthur Andersen LLP, which included serving as managing partner of the firm's audit and business advisory practice in North Texas, Colorado and Oklahoma, Mr. Echols spent six years with Centex Corporation as executive vice president and chief financial officer. He retired from Centex Corporation in June 2006. Mr. Echols is also a member of the board of directors, Roofing Supply Group Holdings, Inc., a private company. He also served on the board of TXU Corp. (NYSE: TXU) where he chaired the Audit Committee and was a member of the Strategic Transactions Committee until the completion of the private equity buyout of TXU in October 2007. Mr. Echols earned a Bachelor of Science degree in accounting from Arkansas State University and is a Certified Public Accountant. He is a member of the American Institute of Certified Public Accountants and the Texas Society of CPAs. Mr. Echols has also served as a director of Crosstex Energy, Inc. since January 2008. Mr. Echols' accounting and financial experience, service as the Chief Financial Officer for a public company, among other factors, led the Board to conclude that he should serve as a director.

        Bryan H. Lawrence, joined Crosstex Energy GP, LLC as a director upon the completion of our initial public offering in December 2002 and served as Chairman of the Board until May 2008. Mr. Lawrence is a founder and senior manager of Yorktown Partners LLC, the manager of the Yorktown group of investment partnerships, which make investments in companies engaged in the energy industry. The Yorktown partnerships were formerly affiliated with the investment firm of Dillon, Read & Co. Inc., where Mr. Lawrence had been employed since 1966, serving as a Managing Director until the merger of Dillon Read with SBC Warburg in September 1997. Mr. Lawrence also serves as a

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director of Hallador Petroleum Company (OTC BB: HPCO.OB), Star Gas Partners L.P. (NYSE: SGU), Winstar Resources Ltd. (a Canadian public company), Compass Petroleum Ltd. (a Canadian public company) Approach Resources, Inc. (NASDAQ: AREX) and certain non-public companies in the energy industry in which Yorktown partnerships hold equity interests. Mr. Lawrence is a graduate of Hamilton College and also has an M.B.A. from Columbia University. Mr. Lawrence has also served as a director of Crosstex Energy, Inc. since 2000. Mr. Lawrence's financial and investment experience, and experience in the energy industry, among other factors, led the Board to conclude that he should serve as a director.

        Sheldon B. Lubar joined Crosstex Energy GP, LLC as a director upon the completion of our initial public offering in December 2002. Mr. Lubar has been Chairman of the Board of Lubar & Co. Incorporated, a private investment and venture capital firm he founded, since 1977. He was Chairman of the Board of Christiana Companies, Inc., a logistics and manufacturing company, from 1987 until its merger with Weatherford International in 1995 and also served as a director of Weatherford International, Inc. (NYSE: WFT) until 2008. Mr. Lubar also served as Chairman and a director of Total Logistics, Inc. until its merger with Super Value Companies (NYSE: SVU) in 2005. Mr. Lubar also serves as a director of Hallador Petroleum Company (OTC BB: HPCO.OB), Star Gas Partners L.P. (NYSE: SGU) and Approach Resources, Inc. (NASDAQ: AREX), an oil and gas exploration and production company. Mr. Lubar holds a bachelor's degree in Business Administration and a law degree from the University of Wisconsin—Madison. He was awarded an honorary Doctor of Commercial Science degree from the University of Wisconsin—Milwaukee in 1988 and a Doctor of Humanities degree from the University of Wisconsin—Madison in 2009. Mr. Lubar has also served as a director of Crosstex Energy, Inc. since January 2004. Mr. Lubar's investment experience, industry experience and service on other public company boards, among other factors, led the Board to conclude that he should serve as a director.

        Cecil E. Martin, Jr. joined Crosstex Energy GP, LLC as a director in January 2006. He has been an independent residential and commercial real estate investor since 1991. From 1973 to 1991 he served as chairman of the public accounting firm Martin, Dolan and Holton in Richmond, Virginia. He began his career as an auditor at Ernst and Ernst. He holds a B.B.A. degree from Old Dominion University and is a Certified Public Accountant. Mr. Martin also serves on the board and as chairman of the audit committee for Comstock Resources, Inc. (NYSE: CRK), an independent energy company engaged in oil and gas acquisitions, exploration and development. Mr. Martin served on the board and as chairman of the audit committee for Bois d'Arc Energy, Inc. (NYSE: BDE) until its merger into Stone Energy Corporation, (NYSE: SGY) in 2008. Mr. Martin also has served as a director of Crosstex Energy, Inc. since January 2006. Mr. Martin's accounting and financial experience, experience on audit committees of other public companies, and related industry experience, among other factors, led the Board to conclude that he should serve as a director.

        Donald (Dwight) Scott joined Crosstex Energy GP, LLC as a director in January 2010. He is a Senior Managing Director of GSO Capital Partners LP and head of GSO's Houston Office. Mr. Scott focuses on investments in the energy and power markets and is a member of GSO's Investment Committee. Before joining GSO in 2005, Mr. Scott was an Executive Vice President and Chief Financial Officer of El Paso Corporation (NYSE: EP). Prior to joining El Paso, Mr. Scott served as a managing director in the energy investment banking practice of Donaldson, Lufkin & Jenrette. Mr. Scott earned a BA from the University of North Carolina at Chapel Hill and a MBA from The University of Texas at Austin. He is currently a Director of SandRidge Energy, Inc. (NYSE: SD) and certain non-public companies, including Bear Tracker Energy LLC, MCV Investors, Inc., and United Engines Holding Company, LLC. Mr. Scott is a member of the Board of Trustees of KIPP, Inc. and the River Oaks Baptist School. Mr. Scott brings to the Board investment, financial and industry experience. Mr. Scott was selected as a director pursuant to a Board Representation Agreement entered into on January 19, 2010 between us, our general partner, CEI and GSO Crosstex Holdings LLC. Pursuant to

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the Board Representation Agreement, each of the Crosstex entities agreed to take all actions necessary or advisable to cause one director serving on the Board to be designated by GSO Crosstex Holdings LLC, in its sole discretion.

        Kyle D. Vann joined Crosstex Energy GP, LLC as a director in April 2006. Mr. Vann began his career with Exxon Corporation in 1969. After ten years at Exxon, he joined Koch Industries and served in various leadership capacities, including senior vice president from 1995 to 2000. In 2001, he then took on the role of CEO of Entergy-Koch, LP, an energy trading and transportation company, which was sold in 2004. Currently, Mr. Vann, continues to consult with Entergy and Texon, L.P. He also serves on the boards of Texon, L.P. and Legacy Reserves, LLC and on the Advisory Board for Haddington Ventures, LLC. Mr. Vann graduated from the University of Kansas with a Bachelor of Science degree in chemical engineering. He is a member of the Board of Advisors for the University of Kansas School of Engineering, the board of Generous Giving and Mars Hill productions. Mr. Vann serves on the boards of various charitable organizations. Mr. Vann's industry experience, and leadership roles in the energy trading and transportation businesses, among other factors, led the Board to conclude that he should serve as a director.

Independent Directors

        Messrs. Best, Echols, Lubar, Martin, and Vann qualify as "independent" directors in accordance with the published listing requirements of The NASDAQ Global Select Market (NASDAQ). The NASDAQ independence definition includes a series of objective tests, such as that the director is not an employee of the company and has not engaged in various types of business dealings with the company. In addition, as further required by the NASDAQ rules, the board of directors has made a subjective determination as to each independent director that no relationships exist which, in the opinion of the board, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.

        In addition, the members of the Audit Committee also each qualify as "independent" under special standards established by the SEC for members of audit committees, and the Audit Committee includes at least one member who is determined by the board of directors to meet the qualifications of an "audit committee financial expert" in accordance with SEC rules, including that the person meets the relevant definition of an "independent" director. Messrs. Echols and Martin are both independent directors who have been determined to be audit committee financial experts. Unitholders should understand that this designation is a disclosure requirement of the SEC related to experience and understanding with respect to certain accounting and auditing matters. The designation does not impose any duties, obligations or liabilities that are greater than those generally imposed on a member of the Audit Committee and board of directors, and the designation of a director as an audit committee financial expert pursuant to this SEC requirement does not affect the duties, obligations or liabilities of any other member of the Audit Committee or board of directors.

Board Committees

        The board of directors of our general partner, has, and appoints the members of, standing Audit, Compensation, Finance, Governance and Conflicts Committees. Each member of the Audit, Compensation, Finance, Governance and Conflicts Committees is an independent director in accordance with NASDAQ standards described above. Each of the board committees has a written charter approved by the board. Copies of the charters are available to any person, free of charge, at our web site: www.crosstexenergy.com.

        The Audit Committee, comprised of Messrs. Echols (chair), Martin and Vann, assists the board of directors in its general oversight of our financial reporting, internal controls and audit functions, and is

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directly responsible for the appointment, retention, compensation and oversight of the work of our independent auditors.

        The Finance Committee, comprised of Messrs. Best (chair), Echols and Scott, assists the board of directors in discharging its duties in connection with financial planning and significant financial transactions, and is directly responsible for reviewing and evaluating distribution policy, transactions that involve issuance of equity or debt securities, oversight of credit facilities, and review of material transactions.

        The Conflicts Committee, comprised of Messrs. Vann (chair) and Best, reviews specific matters that the board believes may involve conflicts of interest between our general partner and Crosstex Energy, L.P. The Conflicts Committee determines if the resolution of a conflict of interest is fair and reasonable to us. The members of the Conflicts Committee are not directors, officers or employees of Crosstex Energy, Inc., the owner of our general partner. Any matters approved by the Conflicts Committee will be conclusively deemed to be fair and reasonable to us, approved by all of our partners, and not a breach by our general partner of any duties owed to us or our unitholders.

        The Compensation Committee, comprised of Messrs. Martin (chair), Scott and Best, oversees compensation decisions for the officers of our general partner as well as the compensation plans described herein.

        The Governance Committee, comprised of Messrs. Lubar (chair) and Vann, reviews matters involving governance including assessing the effectiveness of current policies, monitoring industry developments, recommending committee structures within the Board, managing the assessment process of the Board and individual directors, annually reviewing and recommending the compensation of directors and performing other duties as delegated from time to time. The Governance Committee is responsible for identifying board candidates and making recommendations to the board of directors regarding the election of directors. When board vacancies are created or occur, the Governance Committee reviews applicable legal requirements, listing requirements, and the competencies of the continuing directors, and develops a candidate profile that identifies any specific competencies or expertise that the Committee believes the board of directors needs to add or supplement. The Governance Committee solicits referrals from existing directors and other industry contacts to identify candidates that possess those specific competencies or that specific expertise. In the past, the Governance Committee has also used search firms to identify potential candidates. The Governance Committee then interviews interested candidates to assess the candidate's qualifications and to assess the ability of the candidate to work with the other directors. The Governance Committee evaluates candidates and makes its recommendations on the basis of the qualifications of each candidate individually, including the candidate's reputation, professional experience, experience in the same or related industries, service on other public company boards, other time commitments, the diversity of the board members' backgrounds and professional experience, and the ability of the candidate to work with other board members. Under the terms of our partnership agreement, unitholders do not participate in the appointment or election of the directors of our general partner.

Code of Ethics

        Our general partner has adopted a Code of Business Conduct and Ethics (the "Code of Ethics") applicable to all of our employees, officers and directors with regard to Partnership-related activities. The Code of Ethics incorporates guidelines designed to deter wrongdoing and to promote honest and ethical conduct and compliance with applicable laws and regulations. It also incorporates expectations of our employees that enable us to provide accurate and timely disclosure in our filings with the SEC and other public communications. A copy of the Code of Ethics is available to any person, free of charge, at our web site www.crosstexenergy.com. If any substantive amendments are made to the Code of Ethics or if we or our general partner grants any waiver, including any implicit waiver, from a

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provision of the Code of Ethics to any of our general partner's executive officers and directors, we will disclose the nature of such amendment or waiver on our web site.

Section 16(a)—Beneficial Ownership Reporting Compliance

        Based on our records, except as set forth below, we believe that during 2010 all reporting persons complied with the Section 16(a) filing requirements applicable to them. Due to administrative errors, Forms 4 were filed late on behalf of Susan J. McAden on January 28, 2010, regarding a grant of restricted units under our long-term incentive plan and on February 4, 2011, regarding a disposition of units on July 2, 2010 to cover tax liabilities upon the vesting of restricted units. Due to administrative errors, two Forms 3 were filed late on behalf of GSO Crosstex Holdings LLC in connection with its acquisitions of the Partnership's Series A Convertible Preferred Units on January 6, 2010 and one Form 3 was filed late on behalf of each of Blackstone Group L.P., Blackstone Holdings I/II GP Inc., Douglas I. Ostrover, Albert J. Smith III, Bennett J. Goodman, Blackstone Holdings I L.P., GSO Holdings I LLC, Blackstone/GSO Capital Solutions Associates LLC, Blackstone/GSO Capital Solutions Fund LP, Blackstone Group Management L.L.C. and Stephen A. Schwarzman in connection with the acquisition of the Partnership's Series A Convertible Preferred Units on January 6, 2010.

Reimbursement of Expenses of our General Partner and its Affiliates

        Our general partner does not receive any management fee or other compensation in connection with its management of our partnership. However, our general partner performs services for us and is reimbursed by us for all expenses incurred on our behalf, including the costs of employee, officer and director compensation and benefits, as well as all other expenses necessary or appropriate to the conduct of our business. The partnership agreement provides that our general partner will determine the expenses that are allocable to us in any reasonable manner determined by our general partner in its sole discretion.

Item 11.    Executive Compensation

        We do not directly employ any of the persons responsible for managing our business. Crosstex Energy GP, LLC, our general partner, manages our operations and activities, and its board of directors and officers make decisions on our behalf. The compensation of the executive officers of Crosstex Energy GP, LLC is determined by the board of directors of Crosstex Energy GP, LLC upon the recommendation of its Compensation Committee. The compensation of the directors of Crosstex Energy GP, LLC is determined by the board of directors of Crosstex Energy GP, LLC upon the recommendation of its Governance Committee. Our named executive officers also serve as officers of Crosstex Energy, Inc. and the compensation of the named executive officers discussed below reflects total compensation for services to all Crosstex entities. We pay or reimburse all expenses incurred on our behalf, including the costs of employee, officer and director compensation and benefits, as well as all other expenses necessary or appropriate to the conduct of our business. Our partnership agreement provides that our general partner will determine the expenses allocable to us in any reasonable manner determined by our general partner in its sole discretion. Crosstex Energy, Inc. currently pays a monthly fee to us to cover its portion of administrative and compensation costs, including compensation costs relating to the named executive officers.

        Based on the information that we track regarding the amount of time spent by each of our named executive officers on business matters relating to Crosstex Energy, L.P., we estimate that such officers

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devoted the following percentage of their time to the business of Crosstex Energy, L.P. and to Crosstex Energy, Inc., respectively, for 2010:

Executive Officer or Director
  Percentage of
Time Devoted
to Business
of Crosstex
Energy, L.P.
  Percentage of
Time Devoted
to Business
of Crosstex
Energy, Inc.
 

Barry E. Davis

    83 %   17 %

William W. Davis

    74 %   26 %

Joe A. Davis

    88 %   12 %

Michael J. Garberding

    97 %   3 %

Steven R. Spaulding

    100 %    

Compensation Committee Report

        Each member of Crosstex Energy GP, LLC's Compensation Committee is an independent director in accordance with NASDAQ standards. The Committee has reviewed and discussed with management the following section titled "Compensation Discussion and Analysis." Based upon its review and discussions, the Committee has recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Annual Report on Form 10-K.

    Cecil E. Martin (Chairman)
    Rhys J. Best
    D. Dwight Scott

Compensation Discussion and Analysis

        The Charter of the Compensation Committee of the Board of Directors of Crosstex Energy GP, LLC, includes the following:

    The Committee has general oversight responsibility for the Company's compensation plans, policies and programs. This general oversight responsibility includes reviewing and approving compensation policies and practices for all employees, overall payroll, bonus plans, overall bonus payouts, setting bonus targets, and other general compensation matters.

    Not less than annually, the Committee will review the Company's executive compensation plans and policies. The Committee will review the corporate goals and objectives relevant to the compensation of the Chief Executive Officer, the other executive officers, and each other senior officer that the Committee or the Board may designate (collectively referred to as the "Executive Officers"). The Committee will evaluate the performance of the Chief Executive Officer, and together with the Chief Executive Officer, the performance of each other Executive Officer. The Committee will at least annually review each Executive Officer's base compensation, bonus, awards under the Company's Long Term Incentive Plans, and any other compensation, and make recommendations to the Board regarding each Executive Officer's compensation.

    The Committee will review and approve the terms of any employment contracts, severance agreements, or other contracts with any Executive Officer, provided that the Board reserves to itself the approval of the compensation of the Executive Officers.

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        In order to compete effectively in our industry, it is critical that we attract, retain and motivate leaders that are best positioned to deliver financial and operational results that benefit our unitholders. It is the Committee's responsibility to design and administer compensation programs that achieve these goals, and to make recommendations to the Board of Directors to approve and adopt these programs.

Compensation Philosophy and Principles.

        Our executive compensation is designed to attract, retain and motivate top-tier executives, and align their individual interests with the interests of the unitholders. The compensation of each of our executives is comprised of base salary, bonus opportunity and restricted equity grants or option awards under long term incentive plans. The Committee's philosophy is to generally target the 50th percentile of our Peer Group (discussed below) for base salaries, target the 50th percentile of our Peer Group for bonuses (but retain discretion to reduce or increase bonus amounts to address individual performance), and to provide executives the opportunity to earn long-term compensation, in the form of equity, in the top quartile relative to our Peer Group.

        The Committee considers the following principles in determining the total compensation of the named executive officers:

    in order to achieve its goals, it is critical that we attract, retain and motivate highly qualified executive officers;

    base salary and bonus opportunities must be competitive in order to attract, retain and motivate highly qualified executive officers;

    equity incentive compensation should represent a significant portion of the executive's total compensation in order to retain and incentivize highly qualified executives, and align their individual long term interests with the interests of unitholders;

    compensation programs must be sufficiently flexible to address special circumstances, which include payments under retention plans specifically targeted to retain highly qualified officers during challenging times; and

    the overall compensation program should drive performance and reward contributions in support of our business strategies and achievements.

Compensation Methodology.

        Annually, the Committee reviews our executive compensation program in total and each element of compensation specifically. The review includes an analysis of the compensation practices of other companies in our industry, the competitive market for executive talent, the evolving demands of the business, specific challenges that we may face, and individual contributions to our partnership. The Committee recommends to the Board adjustments to the overall compensation program and to its individual components as the Committee determines necessary to achieve our goals. The Committee periodically retains consultants to assist in its review and to provide input regarding its compensation program and each of its elements.

        In 2010, the Committee retained Hewitt Associates, LLC ("Hewitt") as its independent compensation consultant to conduct a compensation review and advise the Committee on certain matters relating to compensation programs applicable to the named executive officers and other employees of our general partner. Hewitt provided a report and presentation to the Committee regarding the compensation programs of the Crosstex entities in September of 2010.

        With respect to compensation objectives and decisions regarding the named executive officers for fiscal 2010, the Committee has reviewed market data with respect to peer companies provided by Hewitt in determining relevant compensation levels and compensation program elements for our

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named executive officers, including establishing their respective base salaries. In addition, Hewitt has also provided guidance on current industry trends and best practices to the committee. The market data that we reviewed included the base salary, bonus structure, bonus methodology and short and long-term compensation elements paid to executive officers in similar positions at our peer companies as well as thirty-five energy related companies that participated in Hewitt's proprietary database. For 2010, we identified the following companies as "Peer Companies" for comparison purposes: Atlas Pipeline Partners, L.P., DCP Midstream Partners, L.P., Energy Transfer Partners, L.P., Enbridge Energy Partners, L.P., ONEOK Partners, L.P., Magellan Midstream Holdings, L.P., Copano Energy, LLC, Regency Energy Partners, L.P., MarkWest Energy Partners, L.P., Boardwalk Pipeline Partners, L.P., Atmos Energy Corporation, El Paso Corporation, Pioneer Natural Resources Company, Plains Exploration & Production Company, Plains All American Pipeline, L.P., and Range Resources Corporation. We believe that this group of companies is representative of the industry in which we operate and the individual companies were chosen because of such companies' relative position in our industry, their relative size/market capitalization, the relative complexity of the business, similar organizational structure, competition for similar executive talent, and the named executive officers' roles and responsibilities.

        In addition, the Committee has reviewed various relevant compensation surveys with respect to determining compensation for the named executive officers. In determining the long-term incentive component of compensation of the senior executives of Crosstex Energy GP, LLC (including the named executive officers), the Committee considers individual performance and relative equity holder benefit, the value of similar incentive awards to senior executives at comparable companies, awards made to the company's senior executives in past years, the value of all unvested awards held by the executive, and such other factors as the Committee deems relevant.

Elements of Compensation.

        The primary elements of Crosstex Energy GP, LLC's compensation program are a combination of annual cash and long-term equity-based compensation. For fiscal year 2010, the principal elements of compensation for the named executive officers were the following:

    base salary;

    bonuses and annual cash bonus plan awards;

    long-term incentive plan awards; and

    retirement and health benefits.

        The Committee reviews and makes recommendations regarding the mix of compensation, both among short and long-term compensation and cash and non-cash compensation, to establish structures that it believes are appropriate for each of the named executive officers. We believe that the mix of base salary, cash bonus awards, awards under the long-term incentive plan, retirement and health benefits and perquisites and other compensation fit our overall compensation objectives. We believe this mix of compensation provides competitive compensation opportunities to align and drive employee performance in support of our business strategies and to attract, motivate and retain high quality talent with the skills and competencies that we require.

        Base Salary.    The Committee recommends base salaries for the named executive officers based on the historical salaries for services rendered to Crosstex Energy GP, LLC and its affiliates, market data and responsibilities of the named executive officers. Salaries are generally determined by considering the employee's performance and prevailing levels of compensation in areas in which a particular employee works. As discussed above, except with respect to the monthly reimbursement payment received from Crosstex Energy, Inc., all of the base salaries of the named executive officers were allocated to us by Crosstex Energy GP, LLC as general and administration expenses. The base salaries

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paid to our named executive officers during fiscal year 2010 are shown in the Summary Compensation Table on page 72. Effective January 1, 2011, the base salaries payable to our named executive officers were adjusted to equal the following: Barry E. Davis $460,000, William W. Davis $345,000; Joe A. Davis $315,000; Steven R. Spaulding $250,000 and Michael Garberding $245,000.

        Bonuses and Annual Cash Bonus Plan Awards.    The Committee oversees the Annual Cash Bonus Plan and makes recommendations regarding cash bonuses to be awarded to each of the named executive officers. The Annual Cash Bonus Plan is applicable to all employees. Under the plan, bonuses are awarded to our named executive officers based on a formulaic approach that is initially determined using a performance metric tied to adjusted EBITDA (see page 35 for definition). The same adjusted EBITDA performance metric is used for bonuses for all employees. The adjusted EBITDA goals are determined at the beginning of the year by the board of directors of Crosstex Energy GP, LLC, upon the recommendation of the Committee. Discretionary bonuses in addition to bonuses under the Annual Cash Bonus Plan are awarded from time to time by the Committee to reward outstanding service to the Company.

        Approximately two-thirds of the bonuses calculated under the formula applicable to each of our named executive officers for fiscal 2010 are strictly formulaic and nondiscretionary. The remaining one-third of the amount determined by the formula is at the discretion of the Committee, based upon the Committee's assessment of the executive's meeting his or her performance objectives established at the beginning of the performance period. These performance objectives include the quality of leadership within the named executive officer's assigned area of responsibility, the achievement of technical and professional proficiencies by the named executive officer, the execution of identified priority objectives by the named executive officer and the named executive officer's contribution to, and enhancement of, the desired company culture. These performance objectives are reviewed and evaluated by our Committee as a whole. All of our named executive officers met or exceeded their personal performance objectives for 2010.

        The Committee believes that a portion of executive compensation must remain discretionary, and exercises its discretion with respect to a portion of the cash bonus awards payable to its named executive officers. The Committee may exercise its discretion to reduce the amount calculated under the formula as described above, or to supplement the amount to reward or address extraordinary individual performance, challenges and opportunities not reasonably foreseeable at the beginning of a performance period, internal equities, and external competition or opportunities.

        Target adjusted EBITDA is based upon a standard of reasonable market expectations and company performance, and varies from year to year. Several factors are reviewed in determining target adjusted EBITDA, including market expectations, internal forecasts and available investment opportunities. For 2010, our targets for bonuses, after adjustments to account for the effects of discontinued operations and certain other adjustments, were $165.0 million for minimum bonuses, $185.0 million for mid-point bonuses and $210.0 million for maximum bonuses. The 2010 plan provided for named executive officers to receive bonus payouts of 10% at the minimum threshold, payouts ranging from 35% to 90% at the mid-point target and maximum payouts ranging from 60% to 180% of an executive officer's base salary. We met the target for mid-point bonuses in 2010.

        For 2011, the Board has approved a continuation of the Annual Cash Bonus Plan with adjusted EBITDA as the performance metric. Under the 2011 plan, bonuses will be determined based on adjusted EBITDA levels ranging from a threshold of $175.0 million to a maximum of $235.0 million, with a mid-point adjusted EBITDA of $205.0 million.

        The Board also approved payments to our named executive officers and certain other senior executives and key leaders under a Key Employee Retention Plan for the first six months of 2010. Under the plan, participants received quarterly retention payments equal up to 25% of base salary for each of the first two quarters of the year. Payments made under the Key Employee Retention Plan

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were credited against payments that would have otherwise been payable to a participant under the Annual Cash Bonus Plan. The Key Employee Retention Plan was designed to retain and incentivize employees that are very important for the accomplishment of the Partnership's objectives during critical times. Participation in the plan was determined in the discretion of the Committee and the Board.

        Long-Term Incentive Plans.    Our officers and directors are eligible to participate in long-term incentive plans adopted by each of Crosstex Energy GP, LLC and Crosstex Energy, Inc. We believe that equity awards are instrumental in attracting, retaining, and motivating employees, and align the interests of our officers and directors with the interests of the unitholders. The board of directors of Crosstex Energy GP, LLC, at the recommendation of the Committee, approves the grants of Partnership units or options to our executive officers. The Committee believes that equity compensation should comprise a significant portion of a named executive officer's compensation, and considers a number of factors when determining the grants to each individual. The considerations include: the general goal of allowing the named executive officer the opportunity to earn aggregate equity compensation (comprised of Partnership units and Crosstex Energy, Inc. stock) in the upper quartile of our Peer Group; the amount of unvested equity held by the individual executive; the executive's performance; and other factors as determined by the Committee.

        A discussion of each plan follows:

        Crosstex Energy GP, LLC Long-Term Incentive Plan.    Crosstex Energy GP, LLC has adopted a long-term incentive plan for employees and directors of Crosstex Energy GP, LLC and its affiliates who perform services for us. The long-term incentive plan is administered by the Committee and permits the grant of awards covering an aggregate of 5,600,000 common units, which may be awarded in the form of restricted units or unit options. Of the 5,600,000 common units that may be awarded under the long-term incentive plan, 1,438,424 common units remain eligible for future grants by Crosstex Energy GP, LLC as of January 1, 2011. The long-term compensation structure is intended to align the employee's performance with long-term performance for our unitholders.

        Crosstex Energy GP, LLC's board of directors in its discretion may terminate or amend the long-term incentive plan at any time with respect to any units for which a grant has not yet been made. Crosstex Energy GP, LLC's board of directors also has the right to alter or amend the long-term incentive plan or any part of the plan from time to time, including increasing the number of units that may be granted subject to the approval requirements of the exchange upon which the common units are listed at that time. However, no change in any outstanding grant may be made that would materially impair the rights of the participant without the consent of the participant.

    Unit Options.  The long-term incentive plan currently permits the grant of options covering common units. Under current policy all unit option grants will have an exercise price equal to or more than the fair market value of the units on the date of grant. In general, unit options granted will become exercisable over a period determined by the Committee. In addition, the unit options will become exercisable upon a change in control of us or our general partner, as discussed below under "—Potential Payments Upon a Change of Control or Termination." Upon exercise of a unit option, Crosstex Energy GP, LLC will acquire common units in the open market or directly from us or any other person or use common units already owned, or any combination of the foregoing. Crosstex Energy GP, LLC will be entitled to reimbursement by us for the difference between the cost incurred by it in acquiring these common units and the proceeds received by it from an optionee at the time of exercise. Thus, the cost of the unit options will be borne by us. If we issue new common units upon exercise of the unit options, the total number of common units outstanding will increase, and Crosstex Energy GP, LLC will pay us the proceeds it received from the optionee upon exercise of the unit option. The unit option plan has been designed to furnish additional compensation to employees and directors and to align their economic interests with those of common unitholders.

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    Restricted Units.  A restricted unit is a "phantom" unit that entitles the grantee to receive a common unit upon the vesting of the phantom unit. In the future, the Committee may make grants under the plan to employees and directors containing such terms as it shall determine under the plan. The Committee may base its determination upon the achievement of specified financial objectives. In addition, the restricted units will vest upon a change of control of us or of our general partner, as discussed below under "—Potential Payments Upon a Change of Control or Termination." Common units to be delivered upon the vesting of restricted units may be common units acquired by Crosstex Energy GP, LLC in the open market, common units already owned by Crosstex Energy GP, LLC, common units acquired by Crosstex Energy GP, LLC directly from us or any other person or any combination of the foregoing. Crosstex Energy GP, LLC will be entitled to reimbursement by us for the cost incurred in acquiring common units. If we issue new common units upon vesting of the restricted units, the total number of common units outstanding will increase. The Committee, in its discretion, may grant tandem distribution equivalent rights with respect to restricted units which entitles the grantee to distributions attributable to the restricted units prior to vesting of such units. We intend the issuance of the common units upon vesting of the restricted units under the plan to serve as a means of incentive compensation for performance and not primarily as an opportunity to participate in the equity appreciation of the common units. Therefore, under current policy, plan participants will not pay any consideration for the common units they receive, and we will receive no remuneration for the units.

    Performance Units.  A performance unit represents a contractual commitment to grant restricted units in the future if certain conditions are satisfied. In the past performance unit agreements have only been entered into with members of our senior management. We did not grant any performance unit agreements in 2010. Under the terms of past performance unit agreements, to be eligible to receive the restricted units, the executive officer must continuously be employed from the date of the agreement through January 1 of the third calendar year following such date, and no units will be credited to an award recipient under our long term incentive plan until such future date. Each agreement provides for a target number of units that are to be granted in the future. As of January 1, 2011, only performance units granted in 2008 remain outstanding. The performance units granted in 2008 that did not lapse vested at the minimum amount of 30% of the target number of units and became unrestricted units as of March 1, 2011.

        The total value of the equity compensation granted to our named executive officers generally has been allocated 50% in restricted units of Crosstex Energy, L.P. and 50% in restricted stock of Crosstex Energy, Inc. For fiscal year 2010, Crosstex Energy GP, LLC granted 12,425 and 25,273 restricted units to Michael J. Garberding and Steven R. Spaulding, respectively. No restricted units were granted to Barry E. Davis, William W. Davis and Joe A. Davis during fiscal year 2010. All performance and restricted units that we grant are charged against earnings according to FASB ASC 718.

        Crosstex Energy, Inc. Long-Term Incentive Plans.    The Crosstex Energy, Inc. long-term incentive plans provide for the award of stock options and restricted stock (collectively, "Awards") for up to 7,190,000 shares of Crosstex Energy, Inc.'s common stock. As of January 1, 2011, approximately 2,166,934 shares remained available under the long-term incentive plans for future issuance to participants. A participant may not receive in any calendar year options relating to more than 250,000 shares of common stock. The maximum number of shares set forth above are subject to appropriate adjustment in the event of a recapitalization of the capital structure of Crosstex Energy, Inc. or reorganization of Crosstex Energy, Inc. Shares of common stock underlying Awards that are forfeited, terminated or expire unexercised become immediately available for additional Awards under the long-term incentive plan.

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        The Compensation Committee of Crosstex Energy, Inc.'s board of directors administers the long-term incentive plans. The administrator has the power to determine the terms of the options or other awards granted, including the exercise price of the options or other awards, the number of shares subject to each option or other award, the exercisability thereof and the form of consideration payable upon exercise. In addition, the administrator has the authority to grant waivers of long-term incentive plan terms, conditions, restrictions and limitations, and to amend, suspend or terminate the plan, provided that no such action may affect any share of common stock previously issued and sold or any option previously granted under the plan without the consent of the holder. Awards may be granted to employees, consultants and outside directors of Crosstex Energy, Inc.

        The Compensation Committee of Crosstex Energy, Inc. will determine the type or types of Awards made under the plans and will designate the individuals who are to be the recipients of Awards. Each Award may be embodied in an agreement containing such terms, conditions and limitations as determined by the Compensation Committee of Crosstex Energy, Inc. Awards may be granted singly or in combination. Awards to participants may also be made in combination with, in replacement of, or as alternatives to, grants or rights under the plans or any other employee benefit plan of the company. All or part of an Award may be subject to conditions established by the Compensation Committee of Crosstex Energy, Inc., including continuous service with the company.

    Stock Options.  Stock options are rights to purchase a specified number of shares of common stock at a specified price. An option granted pursuant to the plan may consist of either an incentive stock option that complies with the requirements of section 422 of the Code, or a nonqualified stock option that does not comply with such requirements. Only employees may receive incentive stock options and such options must have an exercise price per share that is not less than 100% of the fair market value of the common stock underlying the option on the date of grant. Nonqualified stock options also must have an exercise price per share that is not less than the fair market value of the common stock underlying the option on the date of grant. The exercise price of an option must be paid in full at the time an option is exercised.

    Restricted Stock Awards.  Stock awards consist of restricted shares of common stock of Crosstex Energy, Inc. The Compensation Committee of Crosstex Energy, Inc. will determine the terms, conditions and limitations applicable to any restricted stock awards. Rights to dividends or dividend equivalents may be extended to and made part of any stock award at the discretion of the Crosstex Energy, Inc. Compensation Committee. Restricted stock awards will have a vesting period established in the sole discretion of the Compensation Committee, provided that the Compensation Committee may provide for earlier vesting by reason of death, disability, retirement or otherwise.

    Performance Shares.  A performance share represents a contractual commitment to grant restricted shares in the future if certain conditions are satisfied. In the past, performance share agreements have only been entered into with members of our senior management. We did not grant any performance share agreements in 2010. Under the terms of past performance share agreements, to be eligible to receive the restricted shares, the executive officer must continuously be employed from the date of the agreement through January 1 of the third calendar year following such date, and no shares will be credited to an award recipient under our long term incentive plan until such future date. Each agreement provides for a target number of shares that are to be granted in the future. As of January 1, 2011, only performance shares granted in 2008 remained outstanding. The performance shares granted in 2008 that did not lapse vested at the minimum amount of 30% of the target number of units and became unrestricted units as of March 1, 2011.

        Crosstex Energy, Inc.'s board of directors may amend, modify, suspend or terminate the long-term incentive plans for the purpose of addressing any changes in legal requirements or for any other

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purpose permitted by law, except that no amendment that would impair the rights of any participant to any Award may be made without the consent of such participant, and no amendment requiring stockholder approval under any applicable legal requirements will be effective until such approval has been obtained. No incentive stock options may be granted after the tenth anniversary of the effective date of the plan.

        In the event of any corporate transaction such as a merger, consolidation, reorganization, recapitalization, separation, stock dividend, stock split, reverse stock split, split up, spin-off or other distribution of stock or property of Crosstex Energy, Inc., the Crosstex Energy, Inc. board of directors shall substitute or adjust, as applicable: (i) the number of shares of common stock reserved under the plans and the number of shares of common stock available for issuance pursuant to specific types of Awards as described in the plans, (ii) the number of shares of common stock covered by outstanding Awards, (iii) the grant price or other price in respect of such Awards and (iv) the appropriate fair market value and other price determinations for such Awards, in order to reflect such transactions, provided that such adjustments shall only be such that are necessary to maintain the proportionate interest of the holders of Awards and preserve, without increasing, the value of such Awards.

        The total value of the equity compensation granted to our executive officers generally has been awarded 50% in restricted units of Crosstex Energy, L.P. and 50% in restricted stock of Crosstex Energy, Inc. In addition, our executive officers may receive additional grants of equity compensation in certain circumstances, such as promotions. For fiscal year 2010, Crosstex Energy, Inc. granted 17,077 and 30,778 restricted shares to Michael J. Garberding and Steven R. Spaulding, respectively. No restricted shares were granted to Barry E. Davis, William W. Davis and Joe A. Davis during fiscal year 2010. All performance and restricted shares that we grant are charged against earnings according to FASB ASC 718.

        Retirement and Health Benefits.    Crosstex Energy GP, LLC offers a variety of health and welfare and retirement programs to all eligible employees. The named executive officers are generally eligible for the same programs on the same basis as other employees of Crosstex Energy GP, LLC. Crosstex Energy GP, LLC maintains a tax-qualified 401(k) retirement plan that provides eligible employees with an opportunity to save for retirement on a tax deferred basis. In 2010, Crosstex Energy GP, LLC matched 100% of every dollar contributed for contributions of up to 6% of salary (not to exceed the maximum amount permitted by law) made by eligible participants. The retirement benefits provided to the named executive officers were allocated to us as general and administration expenses. Our executive officers are also eligible to participate in any additional retirement and health benefits available to our other employees.

        Perquisites and Other Compensation.    Crosstex Energy GP, LLC generally does not pay for perquisites for any of the named executive officers, other than payment of dues, sales tax and related expenses for membership in an industry related private lunch club (totaling less than $2,500 per year per person).

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Employment and Severance Agreements

        Barry E. Davis, William W. Davis, and Joe A. Davis have entered into employment agreements with Crosstex Energy GP, LLC. All of these employment agreements are substantially similar. Each of the employment agreements has a term of one year that will automatically be extended such that the remaining term of the agreements will not be less than one year. The employment agreements include obligations not to disclose confidential information and also provide for a noncompetition period that will continue for one year after the termination of the employee's employment or the date on which the employee is no longer entitled to receive payments under the employment agreement. During the noncompetition period, the employees are generally prohibited from engaging in any business that competes with us or our affiliates in areas in which we conduct business as of the date of termination and from soliciting or inducing any of our employees to terminate their employment with us.

        Steven R. Spaulding, Michael Garberding and Stan Golemon are participants in the Crosstex Energy Services, L.P. Severance Pay Plan (the "Severance Plan"), which provides substantially similar severance benefits payable to the employee if employment is terminated without cause or in the event of a change in control (as defined in the Severance Plan). Other members of senior management and certain other key leaders participate in the Severance Plan.

Potential Payments Upon a Change of Control or Termination.

        Under the employment and severance agreements with our named executive officers, we may be required to pay certain amounts upon a change of control of us or our affiliates or upon the termination of the executive officer in certain circumstances. Except in the event of our becoming bankrupt or ceasing operations, termination for cause or termination by the employee other than for good reason, or if a change in control occurs during the term of an employee's employment and either party to the agreement terminates the employee's employment as a result thereof, the employment and severance agreements entered into between Crosstex Energy GP, LLC and each of the named executive officers provide for continued salary payments, accrued bonuses and benefits following termination of employment for the one year period following termination. The terms contained in the employment and severance agreements were established at the time we entered into such agreements with our named executive officers. These terms were determined based on past practice and our understanding of similar agreements utilized by public companies generally at the time we entered into such agreements. The determination of the reasonable consequences of a change of control is periodically reviewed by the Committee. For purposes of the employment and severance agreements:

    "Cause" means that:

    the employee has failed to perform the duties assigned to him and such failure has continued for 30 days following delivery by Crosstex Energy GP, LLC of written notice to the employee of such failure;

    the employee has been convicted of a felony or misdemeanor involving moral turpitude;

    the employee has engaged in acts or omissions against Crosstex Energy GP, LLC constituting dishonesty, breach of fiduciary obligation or intentional wrongdoing or misfeasance;

    the employee has acted intentionally or in bad faith in a manner that results in a material detriment to the assets, business or prospects of Crosstex Energy GP, LLC; or

    the employee has breached any obligation under the employment agreement, if applicable.

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    "Good Reason" includes any of the following:

    the assignment to employee of any duties materially inconsistent with the employee's position (including a materially adverse change in the employee's office, title and reporting requirements), authority, duty or responsibilities;

    Crosstex Energy GP, LLC requiring the employee to be based at any office other than the offices in the greater Dallas, Texas area;

    regarding the severance agreements, any reduction in the employee's base salary; and

    regarding the employment agreements, any termination by Crosstex Energy GP, LLC of the employee's employment other than as expressly permitted by the employment agreement, or a breach or violation by Crosstex Energy GP, LLC of any material provision of the employment agreement, which breach or violation remains unremedied for more than 30 days after written notice thereof is given to Crosstex Energy GP, LLC by the employee.

      No act or failure to act on Crosstex Energy GP, LLC's part shall be considered "good reason" unless the employee has given Crosstex Energy GP, LLC written notice of such act or failure to act within 30 days thereof and Crosstex Energy GP, LLC fails to remedy such act or failure to act within 30 days of its receipt of such notice.

    A "change in control" shall be deemed to have occurred—

    under the employment agreements, (i) if Crosstex Energy, Inc. and/or its affiliates, collectively, no longer directly or indirectly hold a controlling interest in Crosstex Energy GP, L.P. or Crosstex Energy GP, LLC and the named executive officer does not remain employed by Crosstex Energy GP, LLC upon the occurrence of such event (whether the employee's employment is terminated voluntarily or by Crosstex Energy GP, LLC); (ii) upon the consummation of any transaction as a result of which any person (other than Yorktown Partners LLC, or its affiliates including any funds under its management) becomes the "beneficial owner" (as defined in Rule 13d-3 under the Securities Exchange Act of 1934, as amended), directly or indirectly, of at least 50% of the total voting power represented by the outstanding voting securities of Crosstex Energy, Inc. at a time when Crosstex Energy, Inc. still beneficially owns 50% or more of the voting power of the outstanding equity interests of Crosstex Energy GP, L.P. or Crosstex Energy GP, LLC; or (iii) Crosstex Energy GP, LLC has caused the sale of at least 50% of our assets; or

    under the severance agreements, if (i) a person or group of persons acting together acquire more than 50% of the currently issued and outstanding equity securities of Crosstex Energy Inc. in one transaction or a series of transactions (provided, however, that Crosstex Energy Inc.'s issuance of additional equity securities to a person or persons that, after such issuance, comprise more than 50% of the issued and outstanding equity securities of Crosstex Energy, Inc. is not a "Change in Control"); (ii) individuals who constitute the Board of Directors of Crosstex Energy, Inc. (the "Board") as of the date of the severance agreement (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board (provided, however, that any individual becoming a director subsequent to the date of the agreement whose election by the Board was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual was a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an election contest with respect to the election or removal of directors or other solicitation of proxies or consents by or on behalf of a person other than the Board); or (iii) all or substantially all of our assets have been sold, transferred or are otherwise owned by an entity that is not directly or indirectly controlled or governed by Crosstex Energy, Inc.

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        If a termination of a named executive officer by Crosstex Energy GP, LLC other than for cause, a termination by a named executive officer for good reason or upon a change in control were to have occurred as of December 31, 2010, our named executive officers would have been entitled to the following:

    Barry E. Davis would have received $435,000 representing base salary for the remainder of the term of the employment agreement (i.e., one year's salary paid at regularly scheduled times), $427,970 representing bonuses earned under any incentive plans in which he is a participant earned up to the date of termination or change in control (less any advance bonus payments previously made), and continued participation in Crosstex Energy GP, LLC's health plans for the remainder of the term of the employment agreement;

    William W. Davis would have received $330,000 representing base salary for the remainder of the term of the employment agreement (i.e., one year's salary paid at regularly scheduled times), $280,315 representing bonuses earned under any incentive plans in which he is a participant earned up to the date of termination or change in control (less any advance bonus payments previously made), and continued participation in Crosstex Energy GP, LLC's health plans for the remainder of the term of the employment agreement;

    Joe A. Davis would have received $300,000 representing base salary for the remainder of the term of the employment agreement (i.e., one year's salary paid at regularly scheduled times), $254,832 representing bonuses earned under any incentive plans in which he is a participant earned up to the date of termination or change in control (less any advance bonus payments previously made), and continued participation in Crosstex Energy GP, LLC's health plans for the remainder of the term of the employment agreement;

    Michael J. Garberding would have received $230,000 representing one year base salary (paid in a lump sum), $106,084 representing bonuses earned under any incentive plans in which he is a participant earned up to the date of termination or change in control (less any advance bonus payments previously made), and an amount equal to his cost under COBRA to extend medical insurance benefits for a period of one year; and

    Steven R. Spaulding would have received $240,000 representing one year base salary (paid in a lump sum), $88,512 representing bonuses earned under any incentive plans in which he is a participant earned up to the date of termination or change in control (less any advance bonus payments previously made), and an amount equal to his cost under COBRA to extend medical insurance benefits for a period of one year.

        Long-Term Incentive Plans.    With respect to the Long-Term Incentive Plans, the amounts to be received by our named executive officers in these circumstances will be automatically determined based on the number of unvested stock or unit awards or restricted stock or units held by a named executive officer at the time of a change in control. The terms of the Long-Term Incentive Plans were determined based on past practice and our understanding of similar plans utilized by public companies generally at the time we adopted such plans. The determination of the reasonable consequences of a change of control is periodically reviewed by the Compensation Committee.

        Crosstex Energy GP, LLC Long-Term Incentive Plan.    Under current policy, if a grantee's employment is terminated for any reason other than death or disability, depending on the particular terms of the agreement in question, a grantee's unit options and restricted units granted under the long-term incentive plan may automatically be forfeited unless, and to the extent, the Committee provides otherwise. A grantee's options and restricted units will generally vest in the event of death or disability. Upon a change in control of us or our general partner, all unit options and restricted units will automatically vest and become payable or exercisable, as the case may be, in full and any restricted

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periods or performance criteria shall terminate or be deemed to have been achieved at the maximum level.

        For purposes of the long-term incentive plan, a "change in control" means, and shall be deemed to have occurred upon: (i) the consummation of a merger or consolidation of Crosstex Energy GP, LLC with or into another entity or any other transaction if persons who were not holders of equity interests of Crosstex Energy GP, LLC immediately prior to such merger, consolidation or other transaction, own 50% or more of the voting power of the outstanding equity interests of the continuing or surviving entity; (ii) the sale, transfer or other disposition of all or substantially all of Crosstex Energy GP, LLC's or our assets; (iii) a change in the composition of the board of directors as a result of which fewer than 50% of the incumbent directors are directors who either had been directors of Crosstex Energy GP, LLC on the date 12 months prior to the date of the event that may constitute a change in control (the "original directors") or were elected, or nominated for election, to the board of directors of Crosstex Energy GP, LLC with the affirmative votes of at least a majority of the aggregate of the original directors who were still in office at the time of the election or nomination and the directors whose election or nomination was previously so approved; or (iv) the consummation of any transaction as a result of which any person (other than Yorktown Partners LLC, or its affiliates including any funds under its management) becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of Crosstex Energy, Inc. representing at least 50% of the total voting power represented by Crosstex Energy, Inc.'s then outstanding voting securities at a time when Crosstex Energy, Inc. still beneficially owns more than 50% of securities of Crosstex Energy GP, LLC representing at least 50% of the total voting power represented by Crosstex Energy GP, LLC's then outstanding voting securities.

        If a change in control were to have occurred as of December 31, 2010, unit options and restricted units (because there are no longer any performance units outstanding they have been omitted from this discussion) held by the named executive officers would have automatically vested and become payable or exercisable, as follows:

    Barry E. Davis held 104,167 restricted units that would have become fully vested, payable and/or exercisable as a result of such change in control;

    William W. Davis held 91,667 restricted units that would have become fully vested, payable and/or exercisable as a result of such change in control;.

    Joe A. Davis held 91,667 restricted units that would have become fully vested, payable and/or exercisable as a result of such change in control;

    Michael J. Garberding held 46,919 restricted units that would have become fully vested, payable and/or exercisable as a result of such change in control; and

    Steven R. Spaulding held 25,273 restricted units that would have become fully vested, payable and/or exercisable as a result of such change in control.

        Crosstex Energy, Inc. Long-Term Incentive Plans.    Under current policy, if a grantee's employment is terminated for any reason other than death or disability, depending on the particular terms of the agreement in question, a grantee's options and restricted shares that have been granted may automatically be forfeited unless, and to the extent, the Crosstex Energy, Inc. Compensation Committee provides otherwise. With respect to performance shares, however, in the case of a termination without cause or for good reason, the pro-rata portion of the number of shares that have accrued to the date of termination will vest and become payable to the participant. A grantee's options, restricted shares and performance shares will generally vest in the event of death or disability. Immediately prior to a "change of control" of Crosstex Energy, Inc., all option awards, restricted stock awards and performance shares will automatically vest and become payable or exercisable, as the case may be, in full and all vesting periods will terminate.

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        For purposes of the long-term incentive plans, a "change of control" means: (i) the consummation of a merger or consolidation of Crosstex Energy, Inc. with or into another entity or any other transaction, if persons who were not shareholders of Crosstex Energy, Inc. immediately prior to such merger, consolidation or other transaction beneficially own immediately after such merger, consolidation or other transaction 50% or more of the voting power of the outstanding securities of each of (a) the continuing or surviving entity and (b) any direct or indirect parent entity of such continuing or surviving entity; (ii) the sale, transfer or other disposition of all or substantially all of Crosstex Energy, Inc.'s assets; (iii) a change in the composition of the board of directors of Crosstex Energy, Inc. as a result of which fewer than 50% of the incumbent directors are directors who either (a) had been directors of Crosstex Energy, Inc. on the date 12 months prior to the date of the event that may constitute a change of control (the "original directors") or (b) were elected, or nominated for election, to the board of directors of Crosstex Energy, Inc. with the affirmative votes of at least a majority of the aggregate of the original directors who were still in office at the time of the election or nomination and the directors whose election or nomination was previously so approved; or (iv) any transaction as a result of which any person is the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of Crosstex Energy, Inc. representing at least 50% of the total voting power represented by Crosstex Energy, Inc.'s then outstanding voting securities.

        If a change in control were to have occurred as of December 31, 2010, options and restricted stock (because there are no longer any performance shares outstanding they have been omitted from this discussion) held by the named executive officers would have automatically vested and become payable or exercisable, and any vesting periods of restricted stock would have terminated, as follows:

    Barry E. Davis held 104,167 shares of restricted stock that would have become fully vested, payable and/or exercisable as a result of such change in control;

    William W. Davis held 91,667 shares of restricted stock that would have become fully vested, payable and/or exercisable as a result of such change in control;

    Joe A. Davis held 91,667 shares of restricted stock that would have become fully vested, payable and/or exercisable as a result of such change in control;

    Michael J. Garberding held 51,156 shares of restricted stock would have become fully vested, payable and/or exercisable as a result of such change in control; and

    Steven R. Spaulding held 30,778 shares of restricted stock would have become fully vested, payable and/or exercisable as a result of such change in control; and

Role of Executive Officers in Executive Compensation.

        The board of directors of Crosstex Energy GP, LLC, upon recommendation of the Committee, determines the compensation payable to each of the named executive officers. None of the named executive officers serves as a member of the Committee. Barry E. Davis, the Chief Executive Officer, reviews his recommendations regarding the compensation of his leadership team with the Committee, including specific recommendations for each element of compensation for the named executive officers. Barry E. Davis does not make any recommendations regarding his personal compensation.

Tax and Accounting Considerations.

        The equity compensation grant policies of the Crosstex entities have been impacted by the implementation of FASB ACS 718, which we adopted effective January 1, 2006. Under this accounting pronouncement, we are required to value unvested unit options granted prior to our adoption of FASB ACS 718 under the fair value method and expense those amounts in the income statement over the stock option's remaining vesting period. As a result, the Crosstex entities currently intend to discontinue grants of unit option and stock option awards and instead grant restricted unit and

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restricted stock awards to the named executive officers and other employees. The Crosstex entities have structured the compensation program to comply with Internal Revenue Code Section 409A. If an executive is entitled to nonqualified deferred compensation benefits that are subject to Section 409A, and such benefits do not comply with Section 409A, then the benefits are taxable in the first year they are not subject to a substantial risk of forfeiture. In such case, the service provider is subject to regular federal income tax, interest and an additional federal income tax of 20% of the benefit includible in income. None of the named executive officers or other employees had non-performance based compensation paid in excess of the $1.0 million tax deduction limit contained in Internal Revenue Code Section 162(m).

Summary Compensation Table

        The following table sets forth certain compensation information for our named executive officers.

Name and
Principal Position
  Year   Salary
($)
  Bonus
($)(1)
  Stock
Awards
($)(2)
  Option
Awards
($)
  Non-Equity
Incentive
Plan
Compensation
($)
  Change in
Pension
value and
Nonqualified
Deferred
Compensation
Earnings
($)
  All Other
Compensation
($)
  Total
($)
 
Barry E. Davis     2010     435,000     427,970                     71,725 (3)   934,695  
  President and Chief     2009     435,000     435,000     1,117,712                 45,327     2,033,039  
  Executive Officer     2008     435,000     78,000     1,154,104                 356,580     2,023,684  

William W. Davis

 

 

2010

 

 

330,000

 

 

280,315

 

 


 

 


 

 


 

 


 

 

63,083

(4)

 

673,398

 
  Executive Vice President     2009     315,000     315,000     983,587                 37,120     1,650,707  
  and Chief Financial     2008     315,000     147,000     557,137                 220,452     1,239,589  
  Officer                                                        

Joe A. Davis

 

 

2010

 

 

300,000

 

 

254,832

 

 


 

 


 

 


 

 


 

 

62,181

(5)

 

617,013

 
  Executive Vice President     2009     285,000     385,000     983,587                 32,370     1,685,957  
  and General Counsel     2008     285,000     43,000     504,085                 234,324     1,066,409  

Michael J. Garberding

 

 

2010

 

 

225,385

 

 

106,084

 

 

240,157

 

 


 

 


 

 


 

 

31,811

(6)

 

603,437

 
  Senior Vice President     2009     198,000     117,000     312,962                 18,274     646,236  

Steven R. Spaulding

 

 

2010

 

 

175,385

 

 

88,512

 

 

479,541

 

 


 

 


 

 


 

 

18,441

(7)

 

761,879

 
  Senior Vice President                                                        

(1)
Bonuses include all payments made under the Annual Cash Bonus Plan and Key Employee Retention Plan. See discussion on page 85.

(2)
The amounts shown represent the grant date fair value of awards computed in accordance with FASB ACS 718. See Note 9 to our audited financial statements included in Item 8 herein for the assumptions made in our valuation of such awards. Values for awards subject to performance conditions are computed based upon the probable outcome of the performance condition as of the grant date of the award. With respect to the performance units and shares received during 2008 (see discussion on page 87), the table below shows (i) minimum and maximum possible payouts based upon the grant date fair value of the underlying securities, and (ii) the currently expected payouts at the closing prices as of December 31, 2010 of $14.40 for Crosstex Energy, L.P.'s common units and $8.86 for Crosstex Energy, Inc.'s common shares:

Name
  Grant
Year
  Payout
Date
  Maximum
Payout (at
grant date fair
value)
  Minimum
Payout (at
grant date
fair value)
  Expected
Payout (at
12/31/10
market value)
 

Barry E. Davis

    2008     3/1/2011   $ 11,154,116   $ 1,154,105   $ 423,931  

William W. Davis

    2008     3/1/2011   $ 5,571,538   $ 557,138   $ 204,650  

Joe A. Davis

    2008     3/1/2011   $ 4,259,968   $ 504,085   $ 185,161  
(3)
Amount of all other compensation for Mr. Barry Davis includes professional organization and social club dues, a matching 401(k) contribution of $16,500, distributions on restricted units and performance units of Crosstex Energy, L.P. in the amount $41,538 in 2010, and dividends on restricted stock and performance shares of Crosstex Energy, Inc. in the amount of $11,404 in 2010.

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(4)
Amount of all other compensation for Mr. William Davis includes professional organization and social club dues, a matching 401(k) contribution of $22,000, distributions on restricted units and performance units of Crosstex Energy, L.P. in the amount of $30,398 in 2010 and dividends on restricted stock and performance shares of Crosstex Energy, Inc. in the amount of $8,402 in 2010.

(5)
Amount of all other compensation for Mr. Joe Davis includes professional organization and social club dues, a matching 401(k) contribution of $22,000, distributions on restricted units and performance units of Crosstex Energy, L.P. in the amount of $29,685 in 2010, and dividends on restricted stock and performance shares of Crosstex Energy, Inc. in the amount of $8,213 in 2010.

(6)
Amount of all other compensation for Mr. Michael Garberding includes a matching 401(k) contribution of $16,500, distributions on restricted units of Crosstex Energy, L.P. in the amount of $11,730 in 2010, and dividends on restricted stock of Crosstex Energy, Inc. in the amount of $3,581 in 2010.

(7)
Amount of all other compensation for Mr. Steven R. Spaulding includes a matching 401(k) contribution of $9,969, distributions on restricted units of Crosstex Energy, L.P. in the amount of $6,318 in 2010, and dividends on restricted stock of Crosstex Energy, Inc. in the amount of $2,154 in 2010.

Grants of Plan-Based Awards for Fiscal Year 2010 Table

        The following tables provide information concerning each grant of an award made to a named executive officer for fiscal year 2010, including, but not limited to, awards made under the Crosstex Energy GP, LLC Long-Term Incentive Plan and the Crosstex Energy, Inc. Long-Term Incentive Plans.


CROSSTEX ENERGY GP, LLC—GRANTS OF PLAN-BASED AWARDS

Name(1)
  Grant Date   Number of Units(2)   Grant Date
Fair Value of
Unit Awards
 

Michael J. Garberding

    6/15/2010     12,425 (3) $ 127,108  

Steven R. Spaulding

    5/7/2010     25,273 (4) $ 254,246  

(1)
Messrs. Barry E. Davis, William W. Davis and Joe A. Davis did not receive any awards during 2010.

(2)
These grants include Distribution Equivalent Rights (DERs) that provide for distribution on restricted units if made on unrestricted common units during the restriction period unless otherwise forfeited.

(3)
This award vests 331/3% on July 1, 2011, 2012 and 2013.

(4)
This award vests 100% on April 12, 2013.


CROSSTEX ENERGY, INC—GRANTS OF PLAN-BASED AWARDS

Name(1)
  Grant Date   Number of Shares(2)   Grant Date
Fair Value of
Unit Awards
 

Michael J. Garberding

    6/15/2010     17,077 (3) $ 113,050  

Steven R. Spaulding

    5/7/2010     30,778 (4) $ 225,295  

(1)
Messrs. Barry E. Davis, William W. Davis and Joe A. Davis did not receive any awards during 2010.

(2)
These grants include right to receive dividends on restricted shares if made on unrestricted common shares during the restricted period unless otherwise forfeited.

(3)
This award vests 331/3% on July 1, 2011, 2012 and 2013.

(4)
This award vests 100% on April 12, 2013.

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Outstanding Equity Awards at Fiscal Year-End Table for Fiscal Year 2010

        The following tables provide information concerning all outstanding equity awards made to a named executive officer as of December 31, 2010, including, but not limited to, awards made under the Crosstex Energy GP, LLC Long-Term Incentive Plan and the Crosstex Energy, Inc. Long-Term Incentive Plans.


CROSSTEX ENERGY GP, LLC—OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

 
  Option Awards   Stock Awards  
Name
  Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
  Number of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
  Equity Incentive
Plan Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options
(#)
  Option
Exercise
Price
($)
  Option
Expiration
Date
  Number
of Units
That
Have Not
Vested
(#)
  Market
Value of
Units
That
Have Not
Vested
($)(2)
  Equity Incentive
Plan Awards:
Number of
Unearned
Shares, Units
or Other Rights
That Have Not
Vested
(#)(3)
  Equity Incentive
Plan Awards:
Market or
Payout Value of
Unearned
Shares, Units
or Other Rights
That Have Not
Vested
($)(2)
 

Barry E. Davis

                        104,167 (1)   1,500,005     18,596 (4)   267,782  

William W. Davis

   
   
   
   
   
   
91,667

(1)
 
1,320,005
   
8,977

(4)
 
129,269
 

Joe A. Davis

   
   
   
   
   
   
91,667

(1)
 
1,320,005
   
8,122

(4)
 
116,957
 

Michael J. Garberding

   
   
   
   
   
   
29,167

(1)
 
420,005
   
   
 

                                  5,327 (5)   76,709              

                                  12,425 (6)   178,920              

Steven R. Spaulding

   
   
   
   
   
   
25,273

(7)
 
363,931
   
   
 

(1)
Restricted units vest in three equal installments on January 1, 2011, 2012 and 2013.

(2)
The closing price for the common units was $14.40 as of December 31, 2010.

(3)
Performance units reported at the threshold (minimum) number of units. See discussion on page 87.

(4)
Performance units vest on March 1, 2011.

(5)
Restricted units vest on April 1, 2011.

(6)
Restricted units vest in three equal installments on June 15, 2011, 2012 and 2013.

(7)
Restricted units vest on April 12, 2013.

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CROSSTEX ENERGY, INC.—OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

 
  Option Awards   Stock Awards  
Name
  Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
  Number of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
  Equity Incentive
Plan Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options
(#)
  Option
Exercise
Price
($)
  Option
Expiration
Date
  Number
of
Shares
or Units
That
Have Not
Vested
(#)
  Market
Value of
Shares
or Units
That
Have Not
Vested
($)(2)
  Equity Incentive
Plan Awards:
Number of
Unearned
Shares, Units
or Other Rights
That Have Not
Vested
(#)(3)
  Equity Incentive
Plan Awards:
Market or
Payout Value of
Unearned
Shares, Units
or Other Rights
That Have Not
Vested
($)(2)
 

Barry E. Davis

                        104,167 (1)   922,920     17,624 (4)   156,149  

William W. Davis

   
   
   
   
   
   
91,667

(1)
 
812,170
   
8,508

(4)
 
75,381
 

Joe A. Davis

   
   
   
   
   
   
91,667

(1)
 
812,170
   
7,698

(4)
 
68,204
 

Michael J. Garberding

   
   
   
   
   
   
29,167

(1)
 
258,420
   
   
 

                                  4,912 (5)   43,520              

                                  17,077 (6)   151,302              

Steven R. Spaulding

   
   
   
   
   
   
30,778

(7)
 
272,693
   
   
 

(1)
Restricted shares vest in three equal installments on January 1, 2011, 2012 and 2013.

(2)
The closing price for the common shares was $8.86 as of December 31, 2010.

(3)
Performance shares reported at the threshold (minimum) number of units. See discussion on page 88.

(4)
Performance shares vest on March 1, 2011.

(5)
Restricted shares vest on April 1, 2011.

(6)
Restricted shares vest in three equal installments on January 1, 2012, 2013 and 2014.

(7)
Restricted shares vest on April 12, 2013.

Option Exercises and Units and Shares Vested Table for Fiscal Year 2010

        The following table provides information related to the exercise of options and vesting of restricted units and restricted shares during fiscal year ended 2010.


OPTION EXERCISES AND UNITS AND SHARES VESTED

 
  Crosstex Energy, L.P.
Unit Awards
  Crosstex Energy, Inc.
Share Awards
 
Name(1)
  Number of
Units
Acquired
on Vesting
  Value
Realized on
Vesting(2)
  Number of
Shares
Acquired
on Vesting
  Value
Realized on
Vesting(2)
 

Barry E. Davis

    4,824   $ 45,732     5,625   $ 43,481  

William W. Davis

    2,331   $ 22,098     2,692   $ 20,809  

Joe A. Davis

    1,598   $ 15,149     1,845   $ 14,262  

(1)
Messrs. Spaulding and Garberding did not have any awards vest in 2010.

(2)
Based on unit price of $9.48 on vesting date.

(3)
Based on share price of $7.73 on vesting date.

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Table of Contents

Compensation of Directors for Fiscal Year 2010

DIRECTOR COMPENSATION

Name
  Fees Earned or Paid
in Cash ($)
  Unit Awards(1)
($)
  All Other
Compensation(2)
($)
  Total
($)
 

Rhys J. Best

    160,333     309,246     2,485     472,064  

Leldon E. Echols

    63,375     37,504     932     101,811  

Bryan H. Lawrence

                 

Sheldon B. Lubar

    52,710     37,504     932     91,146  

Cecil E. Martin

    67,437     37,504     932     105,873  

Kyle D. Vann