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

(a) Issuance of Preferred Units

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 Partnership's general partner 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 were 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 preferred units were entitled to a quarterly distribution with a value 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. Income is allocated to the preferred units in an amount equal to the quarterly distribution with respect to the period earned. During 2012 and 2011, the Partnership paid distributions on its preferred units of $14.4 million and $17.2 million, respectively.

Beginning in the third quarter of 2012 through the fourth quarter of 2013, distributions on the preferred units were paid-in-kind ("PIK"). The number of PIK preferred unit distributions is based on a fixed price of $13.25. The distributions for the year ended December 31, 2012 also included 366,260 of PIK preferred units and the distributions for the year ended December 31, 2013 were paid-in-kind through the issuance of 1,570,806 preferred units. A distribution on the preferred units of $0.36 per unit was declared for the three months ended December 31, 2013, which was also paid-in-kind on February 12, 2014 in the amount of 452,186 preferred units.

The Partnership had the right to force conversion of the preferred units 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 trading volume of common units exceeds a specified number of common units (the “trading volume threshold”) 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. On February 27, 2014, the board of directors of the Partnership’s general partner amended the Partnership’s partnership agreement to reduce the trading volume threshold from 250,000 common units to 215,000, and on that same date the Partnership delivered a notice of conversion of all outstanding preferred units.

(b) Issuance of Common Units

In June 2013, the Partnership issued 8,280,000 common units representing limited partner interests in the Partnership (including 1,080,000 common units issued pursuant to the exercise of the underwriters' option to purchase additional common units) at a public offering price of $20.33 per common unit for net proceeds of $162.0 million. In January 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. Concurrently with the public offering, in a privately negotiated transaction, 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 were used for capital expenditures for currently identified projects, including the Cajun-Sibon projects, 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 these offerings.

In September 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.

In May 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 then current general partner interest. The net proceeds from the common units offering were used for general partnership purposes.

In March 2013, the Partnership entered into an Equity Distribution Agreement (the “ EDA”) with BMO Capital Markets Corp. (“BMOCM”). Pursuant to the terms of the EDA, the Partnership could sell from time to time through BMOCM, as its sales agent, common units representing limited partner interests having an aggregate offering price of up to $75.0 million. Sales of such common units could be made by means of ordinary brokers’ transactions through the facilities of the NASDAQ Global Select Market LLC at market prices, in block transactions or as otherwise agreed by BMOCM and the Partnership.

In May 2013, the Partnership entered into an Equity Distribution Agreement ("Replacement EDA") with BMOCM. This EDA replaced the previous EDA. Pursuant to the terms of the Replacement EDA, the Partnership could sell from time to time through BMOCM, as its sales agent, common units representing limited partner interests having an aggregate offering price of up to $75.0 million. Sales of such common units could be made by means of ordinary brokers’ transactions through the facilities of the NASDAQ Global Select Market LLC at market prices, in block transactions or as otherwise agreed by BMOCM and the Partnership.

Through December 31, 2013, the Partnership sold an aggregate of 1,181,628 common units and 3,348,213 common units under the EDA and Replacement EDA, respectively, generating proceeds of approximately $20.9 million and $72.3 million (net of approximately $0.3 million and $0.9 million of commissions to BMOCM), respectively. The Partnership used the net proceeds for general partnership purposes, including working capital, capital expenditures and repayments of indebtedness. The Partnership exhausted its capacity under the Replacement EDA on January 3, 2014.

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 all of its sales of common units during 2013 and 2012, resulting in changes in equity of $35.1 million and $15.9 million, respectively. The changes were recorded as an increase in additional paid-in-capital and a reduction in non-controlling interest during the year ended December 31, 2013 and 2012. The Company also increased its deferred tax liability in the amount of $7.2 million during the year ended December 31, 2013 and decreased its deferred tax liability in the amount of $11.1 million during the year ended December 31, 2012 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) Sale 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 $6.4 million, $4.5 million and $2.4 million were earned by our general partner for the years ended 2013, 2012 and 2011, respectively. The Partnership paid annual distributions per common unit of $1.33, $1.31 and $1.17 in the years ended December 31, 2013, 2012 and 2011, respectively.

The Partnership's fourth quarter distribution on its common units is $0.36 per unit which was paid February 14, 2014.

(d) Allocation of Partnership Income

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 (loss) 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 (loss) 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 (loss) (in thousands):



	Years Ended December 31,
	2013			2012			2011
Income allocation for incentive distributions	$	6,390		$	4,489		$	2,372
Stock-based compensation attributable to CEI's restricted shares	(6,973		)	(4,205		)	(3,119		)
General partner interest in net income (loss)	(2,138		)	(818		)	15
General partner share of net loss	$	(2,721	)	$	(534	)	$	(732	)

The Company also owns limited partner common units. The Company's share of the Partnership's net income (loss) attributable to its limited partner common units was net loss of $27.6 million, $15.5 million and $6.4 million for the years ended December 31, 2013, 2012 and 2011, respectively.