(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 (the “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 beginning on the business day following the distribution for the quarter ending December 31, 2013 if (i) the daily volume-weighted average trading price of the common units is greater than $12.75 per unit for 20 out of the trailing 30 trading days ending on two trading days before the date on which the Partnership delivers 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 the Partnership delivers notice of such conversion. The preferred units are not redeemable, but are entitled to a quarterly distribution that will be the greater of $0.2125 per unit or the amount of the quarterly distribution per unit paid to common unitholders, subject to certain adjustments. During 2012 and 2011, the Partnership paid distributions on its preferred units of $14.4 million and $17.2 million, respectively. The distribution for the three months ended September 30, 2012 was paid-in-kind through the issuance of 366,000 preferred units. A distribution on the preferred units of $0.33 per unit was declared for the three months ended December 31, 2012 and was paid-in-kind.

On September 13, 2012, the board of directors of Crosstex Energy GP, LLC amended the Partnership's partnership agreement to amend certain terms and conditions of the preferred units, including, among other corresponding modifications, the following amendments:

 Distributions Paid-In-Kind (PIK): for each quarter through the quarter ending December 31, 2013 (the “PIK Period”), the Partnership will pay distributions in-kind on the Preferred Units (“PIK Preferred Units”) without penalty and without affecting the Partnership's ability to pay cash distributions on the common units.

 PIK Preferred Unit Price: during the PIK Period, the fixed price used to determine the number of PIK Preferred Units to be paid instead of cash distributions will increase from $8.50 per Preferred Unit to $13.25 per Preferred Unit.

 Optional Redemption: the existing right of the holders of Preferred Units to convert the Preferred Units into common units was modified so that such right may not be exercised until the earlier of (i) the business day following the record date for the distribution for the quarter ending December 31, 2013 and (ii) February 10, 2014.

 Mandatory Redemption: the right of the Partnership to convert the Preferred Units into common units on January 19, 2013 was modified so that such right may not be exercised until the business day following the distribution for the quarter ending December 31, 2013 (subject to the satisfaction of the existing conditions applicable to such right).

On May 15, 2012, the Partnership issued 10,120,000 common units representing limited partner interests in the Partnership at a public offering price of $16.28 per unit for net proceeds of $158.0 million. In addition, Crosstex Energy GP, LLC made a general partner contribution of $3.4 million in connection with the issuance to maintain its 2% general partner interest. The net proceeds from the common units offering were used for general partnership purposes.

On September 14, 2012, the Partnership issued 5,660,378 common units representing limited partner interests in the Partnership at an offering price of $13.25 per unit for net proceeds of $74.8 million. The net proceeds from the common units issuance were used primarily to fund the Partnership's currently identified projects, including the Cajun-Sibon NGL pipeline expansion, and for general partnership purposes. Crosstex Energy GP, LLC did not exercise its option to make a general partner contribution to maintain its then current general partner percentage interest in connection with this offering.

On January 14, 2013, the Partnership issued 8,625,000 common units representing limited partner interests in the Partnership at a public offering price of $15.15 per common unit for net proceeds of $125.5 million. Concurrent with the public offering, the Partnership issued 2,700,000 common units representing limited partner interest in the Partnership at an offering price of $14.55 per unit for net proceeds of $39.3 million. The net proceeds from both common unit offerings will be used for capital expenditures for currently identified projects, including the Cajun-Sibon natural gas liquids pipeline extension, and for general partnership purposes. Crosstex Energy GP, LLC did not exercise its option to make a general partner contribution to maintain its then current general partner percentage interest in connection with this offering.

The Company reflects changes in its ownership interest in the Partnership as equity transactions. The carrying amount of the non-controlling interest is adjusted to reflect the change in the Company's ownership interest in the Partnership. Any difference between the fair value of the consideration received and the amount by which the non-controlling interest is adjusted is recognized in additional paid-in-capital. The Company's book carrying amount per Partnership unit was below the price per unit received by the Partnership for its May 2012 and September 2012 sales of common units resulting in changes in equity of $12.3 million and $3.6 million, respectively. The changes were recorded as an increase in additional paid-in-capital and a reduction in non-controlling interest during the period ended December 31, 2012. The Company also reduced its deferred tax liability in the amount of $5.1 million and $6.0 million, respectively, relating to the difference between its book and tax investment in the Partnership with the offset to additional paid-in-capital.

Unless restricted by the terms of the Partnership's credit facility and/or senior unsecured note indentures, the Partnership must make distributions of 100% of available cash, as defined in the partnership agreement, within 45 days following the end of each quarter. As described under (a) Issuance of Preferred Units above, the preferred units are entitled to a quarterly distribution equal to the greater of $0.2125 per unit or the amount of the quarterly distribution per unit paid to common unitholders, subject to certain adjustments. The general partner is not entitled to a distribution in relation to its percentage interest with respect to the quarterly preferred distribution of $0.2125 per unit that is made solely to the preferred unitholders. The general partner is entitled to a distribution in relation to its percentage interest with respect to all distributions made to common unitholders. If the distributions are in excess of $0.2125 per unit, distributions are made 100% to the common and preferred unitholders minus the general partner's percentage interest, subject to the payment of incentive distributions as described below to the extent that certain target levels of cash distributions are achieved.

Under the quarterly incentive distribution provisions, generally the Partnership's general partner is entitled to 13% of amounts the Partnership distributes in excess of $0.25 per unit, 23% of the amounts the Partnership distributes in excess of $0.3125 per unit and 48% of amounts the Partnership distributes distribute in excess of $0.375 per unit. Incentive distributions totaling $4.5 million, $2.4 million and $0.1 million were earned by our general partner for the years ended 2012, 2011 and 2010, respectively. The Partnership paid annual distributions per common unit of $1.31, $1.17 and $0.25 in the years ended December 31, 2012, 2011 and 2010, respectively.

The Partnership's fourth quarter distribution on its common units is $0.33 per unit which was paid February 14, 2013.

Net income is allocated to Crosstex Energy GP, LLC, 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 a relational interest percentage of the 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,
		2012		2011		2010
Income allocation for incentive distributions		$	4,489	$	2,372	$	99
Stock-based compensation attributable to CEI's stock options and
	restricted shares		(4,205)		(3,119)		(3,906)
General partner interest in net loss			(818)		15		(564)
General partner share of net loss		$	(534)	$	(732)	$	(4,371)

The Company also owns limited partner common units. The Company's share of the Partnership's net income attributable to its limited partner common units was net loss of $15.5 million, $6.4 million and $11.6 million for the years ended December 31, 2012, 2011 and 2010, respectively.