(3) Public Offering of Units by CELP and Certain Provisions of the Partnership Agreement

On January 19, 2010, the Partnership 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. The general partner of the Partnership made a 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. The Partnership has the right to force conversion of the preferred units after three years from the issue date if (i) the daily volume-weighted average trading price of its common units is greater than $12.75 per unit for 20 out of the trailing 30 days ending on two trading days before the date on which the notice is delivered 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 it delivers notice of such conversion. The preferred units are not redeemable. 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 the Partnership pays a cash distribution on common units. During 2011 and 2010, the Partnership paid quarterly distributions on its preferred units of $17.2 million and $9.9 million, respectively. A distribution on the preferred units of $4.7 million has been declared for the three months ended December 31, 2011 and was paid in February 2012.

On March 23, 2007, the Partnership issued an aggregate of 3,875,340 senior subordinated series D units representing limited partner interests of the Partnership in a private offering. These senior subordinated series D units converted into common units representing limited partner interests of the Partnership on March 23, 2009. The Partnership did not make distributions of available cash from operating surplus, as defined in the partnership agreement, of at least $0.62 per unit on each outstanding common units for the quarter ending December 31, 2008, therefore each senior subordinated series D unit converted into 1.05 common units for a total issuance of 4,069,106 common units.

Unless restricted by the terms of the Partnership's credit facility, the Partnership must make distributions of 100.0% of available cash, as defined in the partnership agreement, within 45 days following the end of each quarter commencing with the quarter ending on March 31, 2003. Distributions will generally be made 98.0% to the common and subordinated unitholders and 2.0% to the general partner, subject to the payment of incentive distributions as described below to the extent that certain target levels of cash distributions are achieved.

Under the quarterly incentive distribution provisions, generally its general partner is entitled to 13.0% of amounts the Partnership distributes in excess of $0.25 per unit, 23.0% of the amounts the Partnership distributes in excess of $0.3125 per unit and 48.0% of amounts the Partnership distributes in excess of $0.375 per unit. Incentive distributions totaling $2.4 million and $0.1 million were earned by the Company for the year ended December 31, 2011 and 2010, respectively. No incentive distributions were earned by the general partner for the year ended December 31, 2009. The Partnership paid annual per common unit distributions of $1.17, $0.25, and $0.25 in the years ended December 31, 2011, 2010 and 2009, respectively.

The Partnership increased its fourth quarter distribution on its common units to $0.32 per unit, which was paid February 11, 2012.

Net income is allocated to Crosstex Energy GP, L.P., a wholly-owned subsidiary of the Company, as the Partnership's general partner in an amount equal to its incentive distributions as described in Note 3(c) above. The general partner's share of the Partnership's net income is reduced by stock-based compensation expense attributed to the Company's stock options and restricted stock awarded to officers and employees of the Partnership. The remaining net income after incentive distributions and Company-related stock-based compensation is allocated pro rata between the 2.0% general partner interest, the subordinated units (excluding senior subordinated units), and the common units. The following table reflects the Company's general partner share of the Partnership's net income (in thousands):


		Years Ended December 31,
		2011		2010		2009
Income allocation for incentive distributions		$	2,372	$	99	$	0
Stock-based compensation attributable to CEI's stock options and
	restricted shares		(3,119)		(3,906)		(2,966)
2.0% general partner interest in net income (loss)			15		(564)		2,147
General partner share of net income (loss)		$	(732)	$	(4,371)	$	(819)

The Company also owned limited partner common units and limited partner subordinated units. The Company's share of the Partnership's net income attributable to its limited partner common units was net income (loss) of $(6.4) million, $(11.6) million and $34.8 million for the years ended December 31, 2011, 2010 and 2009, respectively.