Crosstex Energy 10-Q 2008 Q3 Quarterly report

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

Form 10-Q

þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended September 30, 2008
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:000-50536

CROSSTEX ENERGY, INC.

(Exact name of registrant as specified in its charter)

Delaware
(State of organization)

2501 CEDAR SPRINGS
DALLAS, TEXAS
(Address of principal executive offices) 52-2235832
(I.R.S. Employer
Identification No.)

75201
(Zip Code)

(Registrant’s telephone number, including area code)

(214) 953-9500

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ     No o

Indicate by check mark whether the registrant is 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” inRule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ Accelerated filer o Non-accelerated filer o Smaller reporting company o

(Do not check if a smaller reporting company)                         

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

As of October 31, 2008, the Registrant had 46,310,864 shares of common stock outstanding.

TABLE OF CONTENTS

DESCRIPTION

Item			Page
PART I — FINANCIAL INFORMATION
	1.	Financial Statements		3
	2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		28
	3.	Quantitative and Qualitative Disclosures about Market Risk		42
	4.	Controls and Procedures		44
PART II — OTHER INFORMATION
	1A.	Risk Factors		45
	5.	Other Information		45
	6.	Exhibits		46
EX-10.1
EX-10.2
EX-31.1
EX-31.2
EX-32.1

2

CROSSTEX ENERGY, INC.

Condensed Consolidated Balance Sheets

	September 30,		December 31,
	2008		2007
	(Unaudited)
	(In thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	110,434	$	7,853
Accounts and notes receivable, net:
Trade, accrued revenues and other		458,797		497,311
Fair value of derivative assets		15,021		8,589
Natural gas and natural gas liquids, prepaid expenses and other		20,838		16,098
Asset held for disposition		33,313		—
Total current assets		638,403		529,851
Property and equipment, net of accumulated depreciation of $273,580 and $213,480, respectively		1,529,741		1,426,546
Fair value of derivative assets		3,973		1,337
Intangible assets, net of accumulated amortization of $80,306 and $60,118, respectively		587,021		610,076
Goodwill		25,344		25,402
Other assets, net		8,012		9,617
Total assets	$	2,792,494	$	2,602,829
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable, drafts payable and accrued gas purchases	$	508,047	$	479,398
Fair value of derivative liabilities		17,804		21,066
Current portion of long-term debt		9,412		9,412
Other current liabilities		58,117		59,305
Total current liabilities		593,380		569,181
Long-term debt		1,325,457		1,213,706
Obligations under capital lease		19,100		3,553
Deferred tax liability		82,360		71,563
Fair value of derivative liabilities		9,272		9,426
Interest of non-controlling partners in the Partnership		532,317		489,034
Commitments and contingencies		—		—
Stockholders’ equity		230,608		246,366
Total liabilities and stockholders’ equity	$	2,792,494	$	2,602,829

See accompanying notes to condensed consolidated financial statements.

3

CROSSTEX ENERGY, INC.

Consolidated Statements of Operations

	Three Months Ended September 30,						Nine Months Ended September 30,
	2008			2007			2008			2007
				(Unaudited)
	(In thousands, except per share amounts)
Revenues:
Midstream	$	1,310,226		$	926,726		$	4,087,683		$	2,721,193
Treating		19,036			13,080			48,106			40,160
Profit on energy trading activities		648			587			2,332			2,180
Total revenues		1,329,910			940,393			4,138,121			2,763,533
Operating costs and expenses:
Midstream purchased gas		1,213,547			841,580			3,796,074			2,503,523
Treating purchased gas		6,164			1,617			11,618			6,208
Operating expenses		46,998			31,706			127,415			87,678
General and administrative		17,613			16,886			51,767			45,074
(Gain) loss on sale of property		68			2			(1,591	)		(1,819	)
(Gain) loss on derivatives		1,295			526			(7,193	)		(3,969	)
Depreciation and amortization		32,848			27,477			97,039			76,880
Total operating costs and expenses		1,318,533			919,794			4,075,129			2,713,575
Operating income		11,377			20,599			62,992			49,958
Other income(expense):
Interest expense, net		(17,056	)		(20,643	)		(54,302	)		(56,347	)
Other income		153			253			7,760			521
Total other income(expense)		(16,903	)		(20,390	)		(46,542	)		(55,826	)
Income (loss) from continuing operations before income taxes, gain on issuance of Partnership units and interest of non-controlling partners in the Partnership’s net income (loss)		(5,526	)		209			16,450			(5,868	)
Income tax provision		(2,061	)		(914	)		(10,731	)		(2,111	)
Gain on issuance of Partnership units		—			—			14,748			—
Interest of non-controlling partners in the Partnership’s net income (loss) from continuing operations		7,833			2,533			7,280			11,402
Income from continuing operations		246			1,828			27,747			3,423
Income from discontinued operations — net of tax and net of minority interest		294			352			951			1,024
Net income	$	540		$	2,180		$	28,698		$	4,447
Net income from continuing operations per common share:
Basic	$	0.01		$	0.04		$	0.60		$	0.07
Diluted	$	0.01		$	0.04		$	0.60		$	0.07
Net income from discontinued operations per common share:
Basic	$	0.01		$	0.01		$	0.02		$	0.02
Diluted	$	0.01		$	0.01		$	0.02		$	0.02
Net income per common share:
Basic	$	0.01		$	0.05		$	0.62		$	0.10
Diluted	$	0.01		$	0.05		$	0.62		$	0.10
Weighted average shares outstanding:
Basic		46,299			45,996			46,285			45,978
Diluted		46,649			46,655			46,626			46,591

See accompanying notes to condensed consolidated financial statements.

4

CROSSTEX ENERGY, INC.

Consolidated Statements of Changes in Stockholders’ Equity

Nine Months Ended September 30, 2008

											Accumulated
					Additional			Retained			Other			Total
	Common Stock				Paid-in			Earnings			Comprehensive			Stockholders’
	Shares		Amount		Capital			(Deficit)			Income (Loss)			Equity
	(Unaudited)
	(In thousands)
Balance, December 31, 2007		46,019	$	463	$	267,859		$	(16,878	)	$	(5,078	)	$	246,366
Dividends paid		—		—		—			(46,973	)		—			(46,973	)
Stock-based compensation		—		—		3,393			—			—			3,393
Net income		—		—		—			28,698			—			28,698
Conversion of restricted stock to common, net of shares withheld for taxes		254		—		(3,711	)		—			—			(3,711	)
Options exercised		38		1		243			—			—			244
Non-controlling partners’ share of other comprehensive income in the Partnership		—		—		—			—			431			431
Hedging gains or losses reclassified to earnings		—		—		—			—			4,545			4,545
Adjustment in fair value of derivatives		—		—		—			—			(2,385	)		(2,385	)
Balance, September 30, 2008		46,311	$	464	$	267,784		$	(35,153	)	$	(2,487	)	$	230,608

See accompanying notes to condensed consolidated financial statements.

5

CROSSTEX ENERGY, INC.

Consolidated Statements of Comprehensive Income

	Three Months Ended September 30,					Nine Months Ended September 30,
	2008		2007			2008			2007
	(Unaudited)
	(In thousands)
Net income	$	540	$	2,180		$	28,698		$	4,447
Non-controlling partners’ share of other comprehensive income in the Partnership		—		—			431			—
Hedging gains (losses) reclassified to earnings		1,898		(238	)		4,545			(1,103	)
Adjustment in fair value of derivatives		4,489		(1,514	)		(2,385	)		(2,688	)
Comprehensive income	$	6,927	$	428		$	31,289		$	656

See accompanying notes to condensed consolidated financial statements.

6

CROSSTEX ENERGY, INC.

Consolidated Statements of Cash Flows

	Nine Months Ended
	September 30,
	2008			2007
	(Unaudited)
	(In thousands)
Cash flows from operating activities:
Net income	$	28,698		$	4,447
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		98,752			78,560
(Gain) loss on sale of property		(1,591	)		(1,819	)
Interest of non-controlling partners in the Partnership’s net income		(4,471	)		(8,377	)
Deferred tax expense		9,237			2,193
Non-cash stock-based compensation		8,261			8,605
Amortization of debt issue costs		2,055			1,953
Gain on issuance of units of the Partnership		(14,748	)		—
Non-cash derivatives (gain) loss		(2,216	)		2,669
Changes in assets and liabilities:
Accounts receivable, accrued revenue and other		38,515			(19,604	)
Natural gas and natural gas liquids, prepaid expenses and other		(4,821	)		(15,119	)
Accounts payable, accrued gas purchases, and other accrued liabilities		57,895			47,882
Fair value of derivatives		—			1,088
Net cash provided by operating activities		215,566			102,478
Cash flows from investing activities:
Additions to property and equipment		(217,868	)		(328,677	)
Proceeds from sale of property		3,775			2,977
Net cash used in investing activities		(214,093	)		(325,700	)
Cash flows from financing activities:
Proceeds from borrowings		1,357,260			1,012,000
Payments on borrowings		(1,245,508	)		(782,659	)
Proceeds from capital lease obligations		18,348			—
Payments on capital lease obligations		(789	)		—
Decrease in drafts payable		(28,931	)		(37,988	)
Debt refinancing costs		(369	)		(879	)
Distributions to non-controlling partners in the Partnership		(47,856	)		(28,799	)
Common dividends paid		(46,973	)		(31,323	)
Proceeds from exercised common stock options		244			98
Conversion of restricted units, net of units withheld for taxes		(1,373	)		(1,097	)
Conversion of restricted stock, net of shares withheld for taxes		(3,711	)		—
Net proceeds from issuance of units of the Partnership		99,928			99,942
Proceeds from exercise of Partnership unit options		729			1,590
Contributions from non-controlling partners in the Partnership		109			—
Net cash provided by financing activities		101,108			230,885
Net increase (decrease) in cash and cash equivalents		102,581			7,663
Cash and cash equivalents, beginning of period		7,853			10,635
Cash and cash equivalents, end of period	$	110,434		$	18,298
Cash paid for interest	$	55,636		$	57,925
Cash paid for income taxes	$	1,229		$	38

See accompanying notes to condensed consolidated financial statements.

7

CROSSTEX ENERGY, INC.

Notes to Condensed Consolidated Financial Statements

September 30, 2008

(Unaudited)

(1)   General

Unless the context requires otherwise, references to “we”,“us”,“our”, “CEI” or the “Company” mean Crosstex Energy, Inc. and its consolidated subsidiaries.

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

The accompanying condensed consolidated financial statements include the assets, liabilities and results of operations of the Company, its majority owned subsidiaries and Crosstex Energy, L.P. (herein referred to as the Partnership or CELP), a publicly traded Delaware limited partnership. The Partnership is included because CEI controls the general partner of the Partnership.

The accompanying condensed consolidated financial statements are prepared in accordance with the instructions toForm 10-Q, are unaudited and do not include all the information and disclosures required by generally accepted accounting principles for complete financial statements. All adjustments that, in the opinion of management, are necessary for a fair presentation of the results of operations for the interim periods have been made and are of a recurring nature unless otherwise disclosed herein. The results of operations for such interim periods are not necessarily indicative of results of operations for a full year. All significant intercompany balances and transactions have been eliminated in consolidation. Certain reclassifications have been made to the consolidated financial statements for the prior years to conform to the current presentation. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s annual report onForm 10-K for the year ended December 31, 2007.

(a)   Management’s Use of Estimates

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

(b)   Long-Term Incentive Plans

The Company accounts for share-based compensation in accordance with the provisions of Statement of Financial Accounting Standards No. 123R, “Share-Based Compensation”(SFAS No. 123R), which requires compensation related to all stock-based awards, including stock options, be recognized in the consolidated financial statements.

8

CROSSTEX ENERGY, INC.

Notes to Condensed Consolidated Financial Statements — (Continued)

The Company and the Partnership each have similar share-based payment plans for employees, which are described below. Amounts recognized in the consolidated financial statements with respect to these plans are as follows (in thousands):

	Three Months				Nine Months
	Ended				Ended
	September 30,				September 30,
	2008		2007		2008		2007
Cost of share-based compensation charged to general and administrative expense	$	1,385	$	3,034	$	6,878	$	7,428
Cost of share-based compensation charged to operating expense		503		520		1,383		1,177
Total amount charged to expense	$	1,888	$	3,554	$	8,261	$	8,605
Interest of non-controlling partners in share-based compensation	$	681	$	1,246	$	2,963	$	2,914
Amount of related income tax benefit recognized in income	$	447	$	855	$	1,964	$	2,109

CELP Restricted Units

The restricted units are valued at their fair value at the date of grant which is equal to the market value of common units on such date. A summary of the restricted unit activity for the nine months ended September 30, 2008 is provided below:

	Nine Months Ended
	September 30, 2008
				Weighted Average
	Number of			Grant-Date Fair
Crosstex Energy, L.P. Restricted Units:	Units			Value
Non-vested, beginning of period		504,518		$	34.29
Granted		419,872			29.98
Vested*		(179,333	)		32.89
Forfeited		(33,918	)		29.54
Reduced estimated performance units		(154,499	)		31.66
Non-vested, end of period		556,640		$	32.49
Aggregate intrinsic value, end of period (in thousands)	$	10,164

* Vested shares include 44,680 units withheld for payroll taxes paid on behalf of employees.

During the nine months ended September 30, 2008, the Partnership’s executive officers were granted restricted units, the number of which may increase or decrease based on the accomplishment of certain performance targets. The target number of restricted units for all executives of 175,982 for 2008 will be increased (up to a maximum of 300% of the target number of units) or decreased (to a minimum of 30% of the target number of units) based on the Partnership’s average growth rate (defined as the percentage increase or decrease in distributable cash flow per common unit over the three-year period from January 2008 through January 2011) for grants issued in 2008 compared to the Partnership’s target three-year average growth rate of 9.0%. The restricted unit grants for the nine months ended September 30, 2008 reflects the 175,982 performance-based restricted unit grants for executive officers at target levels of performance. The Partnership made an adjustment to non-vested end of period units outstanding in the three months ended September 30, 2008 to reflect estimated performance at minimum levels. The

9

CROSSTEX ENERGY, INC.

Notes to Condensed Consolidated Financial Statements — (Continued)

performance-based restricted units are included in the current share-based compensation calculations as required by SFAS No. 123(R) when it is deemed probable of achieving the performance criteria.

The Partnership’s executive officers were granted restricted units during 2008 and 2007, the number of which may increase or decrease based on the accomplishment of certain performance targets. The minimum number of restricted units for all executives of 52,795 and 14,319 for 2008 and 2007, respectively, are included in the non-vested, end of period units column in the table above. Target performance grants were previously included in the non-vested, end of period column and were included in share-based compensation as it appeared probable that target thresholds would be achieved. However, during the third quarter of 2008, the Partnership’s assets were negatively impacted by hurricanes Gustav and Ike. The Partnership has also been negatively impacted by the recent tightening of capital markets. The Partnership expects that its access to capital will be limited due to the lack of liquidity in the capital markets, which will in turn limit its ability to grow until capital for growth is accessible. The impact of these events was significant enough to make the achievement of target performance goals less than probable. Therefore, an expense of $0.7 million previously recorded for target performance-based restricted units has been retroactively reversed and is shown as a reduction to stock-based compensation expense and a reduction in the number of estimated performance units outstanding of 154,499 units in the quarter ending September 30, 2008. All performance-based awards greater than the minimum performance grant levels will be subject to reevaluation and adjustment until the restricted units vest.

A summary of the restricted units aggregate intrinsic value (market value at vesting date) and fair value (market value at date of grant) of units vested during the three and nine months ended September 30, 2008 and 2007 are provided below (in thousands):

	Three Months				Nine Months
	Ended				Ended
	September 30,				September 30,
Crosstex Energy, L.P. Restricted Units:	2008		2007		2008		2007
Aggregate intrinsic value of units vested	$	303	$	514	$	5,515	$	1,216
Fair value of units vested	$	463	$	498	$	5,898	$	751

As of September 30, 2008, there was $8.8 million of unrecognized compensation cost related to non-vested restricted units. That cost is expected to be recognized over a weighted-average period of 2.7 years.

CELP Unit Options

The following weighted average assumptions were used for the Black-Scholes option pricing model for grants during the three months and nine months ended September 30, 2008 and 2007:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
Crosstex Energy, L.P. Unit Options Granted:	2008			2007			2008			2007
Weighted average distribution yield		7.90	%		5.75	%		7.15	%		5.75	%
Weighted average expected volatility		27.0	%		32.0	%		29.98	%		32.0	%
Weighted average risk free interest rate		2.99	%		4.55	%		1.81	%		4.40	%
Weighted average expected life		6 years			6 years			6 years			6 years
Weighted average contractual life		10 years			10 years			10 years			10 years
Weighted average of fair value of unit options granted	$	2.13		$	7.23		$	3.48		$	6.23

10

CROSSTEX ENERGY, INC.

Notes to Condensed Consolidated Financial Statements — (Continued)

A summary of the unit option activity for the nine months ended September 30, 2008 is provided below:

	Nine Months Ended
	September 30, 2008
	Number of			Weighted Average
Crosstex Energy, L.P. Unit Options:	Units			Exercise Price
Outstanding, beginning of period		1,107,309		$	29.65
Granted		402,185			31.58
Exercised		(45,578	)		15.17
Forfeited		(68,901	)		31.13
Expired		(47,301	)		33.86
Outstanding, end of period		1,347,714		$	30.49
Options exercisable at end of period		563,099
Weighted average contractual term (years) end of period:
Options outstanding		7.6
Options exercisable		6.7
Aggregate intrinsic value end of period (in thousands):
Options outstanding	$	652
Options exercisable	$	640

A summary of the unit options intrinsic value exercised (market value in excess of exercise price at date of exercise) and fair value (value per Black-Scholes option pricing model at date of grant) of units vested during the three and nine months ended September 30, 2008 and 2007 are provided below (in thousands):

	Three Months				Nine Months
	Ended				Ended
	September 30,				September 30,
Crosstex Energy, L.P. Unit Options:	2008		2007		2008		2007
Intrinsic value of units options exercised	$	71	$	208	$	742	$	1,595
Fair value of units vested	$	77	$	75	$	265	$	169

As of September 30, 2008, there was $2.1 million of unrecognized compensation cost related to non-vested unit options. That cost is expected to be recognized over a weighted-average period of 1.6 years.

11

CROSSTEX ENERGY, INC.

Notes to Condensed Consolidated Financial Statements — (Continued)

CEI Restricted Shares

CEI’s restricted shares are included at their fair value at the date of grant which is equal to the market value of the common stock on such date. A summary of restricted share activity for the nine months ended September 30, 2008 is provided below:

	Nine Months Ended
	September 30, 2008
				Weighted Average
	Number of			Grant-Date Fair
Crosstex Energy, Inc. Restricted Shares:	Shares			Value
Non-vested, beginning of period		860,275		$	21.16
Granted		347,263			33.46
Vested*		(356,004	)		17.95
Forfeited		(63,105	)		21.88
Reduced estimated performance shares		(153,038	)		32.10
Non-vested, end of period		635,391		$	27.57
Aggregate intrinsic value, end of period (in thousands)	$	15,866

* Vested shares include 101,875 shares withheld for payroll taxes paid on behalf of employees.

During the nine months ended September 30, 2008, the Partnership’s executive officers were granted restricted shares, the number of which may increase or decrease based on the accomplishment of certain performance targets. The target number of restricted shares for all executives of 166,971 for 2008 will be increased (up to a maximum of 300% of the target number of units) or decreased (to a minimum of 30% of the target number of units) based on the Partnership’s average growth rate (defined as the percentage increase or decrease in distributable cash flow per common unit over the three-year period from January 2008 through January 2011) for grants issued in 2008 compared to the Partnership’s target three-year average growth rate of 9.0%. The restricted shares granted for the nine months ended September 30, 2008 reflects the 166,971 performance-based restricted share grants for executive officers at target levels of performance. The Partnership made an adjustment to non-vested end of period units outstanding in the three months ended September 30, 2008 to reflect estimated performance at minimum levels. The performance-based restricted shares are included in the current share-based compensation calculations as required by SFAS No. 123(R) when it is deemed probable of achieving the performance criteria.

The Partnership’s executive officers were granted restricted shares during 2008 and 2007, the number of which may increase or decrease based on the accomplishment of certain performance targets. The minimum number of restricted shares for all executives of 50,090 and 16,536 for 2008 and 2007, respectively, are included in the non-vested, end of period shares column in the table above. Target performance grants were previously included in the non-vested, end of period column and were included in share-based compensation as it appeared probable that target thresholds would be achieved. However, during the third quarter of 2008, the Partnership’s assets were negatively impacted by hurricanes Gustav and Ike. The Partnership has also been negatively impacted by the recent tightening of capital markets. The Partnership expects that its access to capital will be limited due to the lack of liquidity in the capital markets, which will in turn limit its ability to grow until capital for growth is accessible. The impact of these events was significant enough to make the achievement of target performance goals less than probable. Therefore, an expense of $0.7 million previously recorded for target performance-based restricted shares has been retroactively reversed and is shown as a reduction to stock-based compensation expense and a reduction in the number of estimated performance shares outstanding of 153,038 shares in the quarter ending September 30, 2008. All performance-based awards greater than the minimum performance grant levels will be subject to reevaluation and adjustment until the restricted shares vest.

12

CROSSTEX ENERGY, INC.

Notes to Condensed Consolidated Financial Statements — (Continued)

A summary of the restricted shares’ aggregate intrinsic value (market value at vesting date) and fair value (market value at date of grant) of shares vested during the three and nine months ended September 30, 2008 and 2007 are provided below (in thousands):

					Nine Months Ended
	Three Months Ended September 30,				September 30,
Crosstex Energy, Inc. Restricted Shares:	2008		2007		2008		2007
Aggregate intrinsic value of shares vested	$	606	$	867	$	12,979	$	2,498
Fair value of units vested	$	517	$	603	$	6,390	$	1,076

As of September 30, 2008, there was $8.4 million of unrecognized compensation costs related to non-vested CEI restricted stock. The cost is expected to be recognized over a weighted average period of 2.5 years.

CEI Stock Options

A summary of the Company’s stock option activity for the nine months ended September 30, 2008 is provided below:

	Nine Months Ended
	September 30, 2008
	Number of			Weighted Average
Crosstex Energy, Inc. Stock Options:	Shares			Exercise Price
Outstanding, beginning of period		105,000		$	8.45
Granted		—			—
Exercised		(37,500	)	$	6.50
Outstanding, end of period		67,500		$	9.54
Options exercisable at end of period		15,000		$	9.92
Weighted average contractual term (years) end of period
Options outstanding		6.2
Options exercisable		6.2
Aggregate intrinsic value end of period (in thousands).
Options outstanding	$	1,042
Options exercisable	$	226

A summary of the stock options intrinsic value exercised (market value in excess of exercise price at date of exercise) and fair value (value per Black-Scholes option pricing model at date of grant) of units vested during the nine months ended September 30, 2008 is provided below (in thousands):

	Nine Months
	Ended
	September 30,
Crosstex Energy, Inc. Stock Options:	2008		2007
Intrinsic value of stock options exercised	$	1,089	$	366
Fair value of shares vested	$	14	$	21

No stock options were exercised or vested during the three months ended September 30, 2008. The total intrinsic value of stock options exercised during the three months ended September 30, 2007 was $0.2 million. There were no shares vested during the three months ended September 30, 2007. As of September 30, 2008 there was approximately $24,000 of unrecognized compensation costs related to CEI stock options expected to be recognized over a weighted average period of 0.9 years.

13

CROSSTEX ENERGY, INC.

Notes to Condensed Consolidated Financial Statements — (Continued)

(c)   Recent Accounting Pronouncements

In May 2008, the Financial Accounting Standards Board (FASB) issued Staff Position FSPEITF 03-6-1 (the FSP) which requires unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents to be treated asparticipating securitiesas defined in EITF IssueNo. 03-6, “Participating Securities and the Two-Class Method under FASB Statement No. 128,” and, therefore, included in the earnings allocation in computing earnings per share under the two-class method described in FASB Statement No. 128,Earnings per Share. The FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those years. Upon adoption, the Company will consider restricted shares with nonforfeitable dividend rights in the calculation of earnings per share and will adjust all prior reporting periods retrospectively to conform to the requirements, although the impact should not be material.

In February 2007, the FASB issued SFAS No. 159,“Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment to FASB Statement No. 115”(SFAS 159). SFAS 159 permits entities to choose to measure many financial assets and financial liabilities at fair value. Changes in the fair value on items for which the fair value option has been elected are recognized in earnings each reporting period. SFAS 159 also establishes presentation and disclosure requirements designed to draw comparisons between the different measurement attributes elected for similar types of assets and liabilities. SFAS 159 was adopted effective January 1, 2008 and did not have a material impact on our financial statements.

In December 2007, the FASB issued SFAS No. 141R,“Business Combinations” (SFAS 141R) and SFAS No. 160,“Noncontrolling Interests in Consolidated Financial Statements”(SFAS 160). SFAS 141R requires most identifiable assets, liabilities, noncontrolling interests and goodwill acquired in a business combination to be recorded at “full fair value.” The Statement applies to all business combinations, including combinations among mutual entities and combinations by contract alone. Under SFAS 141R, all business combinations will be accounted for by applying the acquisition method. SFAS 141R is effective for periods beginning on or after December 15, 2008. SFAS 160 will require noncontrolling interests (previously referred to as minority interests) to be treated as a separate component of equity, not as a liability or other item outside of permanent equity. The statement applies to the accounting for noncontrolling interests and transactions with noncontrolling interest holders in consolidated financial statements. SFAS 160 is effective for periods beginning on or after December 15, 2008 and will be applied prospectively to all noncontrolling interests, including any that arose before the effective date, except that comparative period information must be recast to classify noncontrolling interests in equity, attribute net income and other comprehensive income to noncontrolling interests and provide other disclosures required by SFAS 160.

In March of 2008, the FASB issued SFAS No. 161,“Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133”(SFAS 161). SFAS 161 requires entities to provide greater transparency about how and why the entity uses derivative instruments, how the instruments and related hedged items are accounted for under SFAS 133 and how the instruments and related hedged items affect the financial position, results of operations and cash flows of the entity. SFAS 161 is effective for fiscal years beginning after November 15, 2008. The principal impact to the Company will be to require expanded disclosure regarding derivative instruments.

(2)   Asset Held for Disposition

As part of the Partnership’s strategy to increase liquidity in response to the tightening financial markets, the Partnership began marketing a non-strategic asset for sale in late September 2008. In early October 2008, the Partnership entered into an agreement to sell the asset to a third party for $85.0 million. The transaction is expected to be completed prior to end of November 2008. This asset was previously presented in the Partnership’s Treating segment.

The consolidated balance sheet at September 30, 2008 reflects the asset held for disposition comprised of $33.1 million of property and equipment and $0.2 million of intangible assets (stated at depreciated cost).

14

CROSSTEX ENERGY, INC.

Notes to Condensed Consolidated Financial Statements — (Continued)

The revenues, operating expenses and depreciation and amortization expense related to the operations of the asset held for disposition have been segregated from continuing operations and reported as discontinued operations for all periods. Following are revenues and income from discontinued operations (in thousands):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2008		2007		2008		2007
Treating revenues	$	2,641	$	2,875	$	7,903	$	8,403
Income before taxes	$	467	$	559	$	1,511	$	1,628
Net income from discontinued operations	$	294	$	352	$	951	$	1,024

(3)   Long-Term Debt

As of September 30, 2008 and December 31, 2007, long-term debt consisted of the following (in thousands):

	September 30,			December 31,
	2008			2007
Bank credit facility, interest based on Prime and/or LIBOR plus an applicable margin, interest rate (per the facility) at September 30, 2008 and December 31, 2007 were 5.73% and 6.71%, respectively	$	852,810		$	734,000
Senior secured notes, weighted average interest rate at September 30, 2008 and December 31, 2007 was 6.75%		482,059			489,118
		1,334,869			1,223,118
Less current portion		(9,412	)		(9,412	)
Debt classified as long-term	$	1,325,457		$	1,213,706

Credit Facility.  As of September 30, 2008, the Partnership has a bank credit facility with a borrowing capacity of $1.185 billion that matures in June 2011. As of September 30, 2008, $983.0 million was outstanding under the bank credit facility, including $130.2 million of letters of credit, leaving approximately $202.0 million available for future borrowing. The bank credit facility is guaranteed by certain of the Partnership’s subsidiaries.

The Partnership is subject to interest rate risk on its credit facility and has entered into interest rate swaps to reduce this risk. See Note (7) below for a discussion of interest rate swaps.

See Note (13) Subsequent Events for disclosure regarding bank amendments.

(4)   Obligations Under Capital Lease

The Partnership entered into 9 and10-year capital leases for certain compressor equipment. Assets under capital leases as of September 30, 2008 are summarized as follows (in thousands):

Compressor equipment	$	22,359
Less: Accumulated amortization		(956	)
Net assets under capital lease	$	21,403

15

CROSSTEX ENERGY, INC.

Notes to Condensed Consolidated Financial Statements — (Continued)

The following are the minimum lease payments to be made in the following years indicated for the capital lease in effect as of September 30, 2008 (in thousands):

2008 through 2012	$	10,475
Thereafter		15,268
Less: Interest		(4,196	)
Net minimum lease payments under capital lease		21,547
Less: Current portion of net minimum lease payments		(2,447	)
Long-term portion of net minimum lease payments	$	19,100

(5)   Certain Provisions of the Partnership Agreement

(a)   Issuance of Common Units

On April 9, 2008, the Partnership issued 3,333,334 common units in a private offering at $30.00 per unit, which represented an approximate 7% discount from the market price. Net proceeds from the issuance, including our general partner contribution less expenses associated with the issuance, were approximately $102.0 million.

(b)   Conversion of Subordinated and Senior Subordinated Series C Units

The subordination period for the Partnership’s subordinated units ended and the remaining 4,668,000 subordinated units converted into common units representing limited partner interests of the Partnership effective February 16, 2008. We own all 4,668,000 of the units that converted.

The 12,829,650 senior subordinated series C units of the Partnership also converted into common units representing limited partner interests of the Partnership effective February 16, 2008. The Company owns 6,414,830 of the senior subordinated series C units that converted to common units.

(c)   Conversion of Senior Subordinated Series D Units

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 will convert into common units representing limited partner interests of the Partnership on March 23, 2009 on a one-for-one basis; provided that if the Partnership does 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 unit for the quarter ending December 31, 2008 or does not generate adjusted operating surplus, as defined in the partnership agreement, of at least $0.62 per unit on each outstanding common unit for the quarter ending December 31, 2008, then each senior subordinated series D unit will convert into 1.05 common units.

(d)   Cash Distributions from the Partnership

In accordance with its partnership agreement, 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. Distributions will generally be made 98% to the common and subordinated unitholders and 2% to the general partner, subject to the payment of incentive distributions 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 it distributes in excess of $0.3125 per unit and 48% of amounts it distributes in excess of $0.375 per unit. Incentive distributions totaling $6.7 million and $6.3 million were earned by the Company through its ownership of the general partner for the three months ended September 30, 2008 and 2007, respectively. Incentive distributions totaling $30.8 million and $17.5 million were earned in the nine month period ended September 30, 2008 and 2007, respectively.

16

CROSSTEX ENERGY, INC.

Notes to Condensed Consolidated Financial Statements — (Continued)

(e)   Allocation of Partnership Income

Net income for the general partner consists of incentive distributions as described in Note (d) above, a deduction for stock-based compensation attributable to CEI’s stock options and restricted shares and 2% of the original Partnership’s net income adjusted for the CEI stock-based compensation specifically allocated to the general partner. The remaining net income after incentive distributions and CEI-related stock-based compensation is allocated pro rata between the 2% 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:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
Income allocation for incentive distributions	$	6,674		$	6,281		$	30,772		$	17,545
Stock-based compensation attributable to CEI’s stock options and restricted shares		(775	)		(1,491	)		(3,383	)		(3,822	)
2% general partner interest in net income (loss)		(89	)		(53	)		472			(279	)
General partner share of net income	$	5,810		$	4,737		$	27,861		$	13,444

The Company also owns limited partner common units in the Partnership. The Company’s share of the Partnership’s net income (loss) attributable to its limited partner common units was a loss of $4.0 million and $1.0 million for the three months ended September 30, 2008 and 2007, respectively, and a loss of $2.9 million and $5.1 million for the nine months ended September 30, 2008 and 2007, respectively.

(6)   Earning per Share and Dilution Computations

Basic earnings per share was computed by dividing net income by the weighted average number of common shares outstanding for the three and nine months ended September 30, 2008 and 2007. The computation of diluted earnings per share further assumes the dilutive effect of common share options and restricted shares.

The following are the common share amounts used to compute the basic and diluted earnings per common share for the three and nine months ended September 30, 2008 and 2007 (in thousands):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2008		2007		2008		2007
Basic earnings per share:
Weighted average common shares outstanding		46,299		45,996		46,285		45,978
Diluted earnings per share:
Weighted average common shares outstanding		46,299		45,996		46,285		45,978
Dilutive effect of restricted shares		304		581		292		531
Dilutive effect of exercise of options outstanding		46		78		49		82
Diluted shares		46,649		46,655		46,626		46,591

(7)   Derivatives

Interest Rate Swaps

The Partnership is subject to interest rate risk on its credit facility and has entered into interest rate swaps to reduce this risk.

17

CROSSTEX ENERGY, INC.

Notes to Condensed Consolidated Financial Statements — (Continued)

The Partnership has entered into eight interest rate swaps as of September 30, 2008 as shown below:

Trade Date	Term	From	To	Rate			Notional Amounts
							(In thousands):
November 14, 2006	4 years	November 28, 2006	November 30, 2010		4.3800	%	$	50,000
March 13, 2007	4 years	March 30, 2007	March 31, 2011		4.3950	%		50,000
July 30, 2007	4 years	August 30, 2007	August 30, 2011		4.6850	%		100,000
August 6, 2007	4 years	August 30, 2007	August 31, 2011		4.6150	%		50,000
August 9, 2007	3 years	November 30, 2007	November 30, 2010		4.4350	%		50,000
August 16, 2007*	4 years	October 31, 2007	October 31, 2011		4.4875	%		100,000
September 5, 2007	4 years	September 28, 2007	September 28, 2011		4.4900	%		50,000
January 22, 2008	1 year	January 31, 2008	January 31, 2009		2.8300	%		100,000
							$	550,000

* Amended swap is a combination of two swaps that each had a notional amount of $50,000,000 with the same original term.

Each swap fixes the three month LIBOR rate, prior to credit margin, at the indicated rates for the specified amounts of related debt outstanding over the term of each swap agreement. In January 2008, the Partnership amended existing swaps with the counterparties in order to reduce the fixed rates and extend the terms of the existing swaps by one year. The Partnership also entered into one new swap in January 2008.

The Partnership had previously elected to designate all interest rate swaps (except the November 2006 swap) as cash flow hedges for FAS 133 accounting treatment. Accordingly, unrealized gains and losses relating to the designated interest rate swaps were recorded in accumulated other comprehensive income. Immediately prior to the January 2008 amendments, these swaps were de-designated as cash flow hedges. The net present value of the unrealized loss in accumulated other comprehensive income of $17.0 million at the de-designation dates is being reclassified to earnings over the remaining original terms of the swaps using the effective interest method. The related loss reclassified to earnings and included in (gain) loss on derivatives during the three and nine months ended September 30, 2008 is $1.7 million and $4.7 million, respectively.

The Partnership has elected not to designate any of the amended swaps or the new swap entered into in January 2008 as cash flow hedges for FAS 133 treatment. Accordingly, unrealized gains and losses are recorded through the consolidated statement of operations in (gain) loss on derivatives over the period hedged.

In September 2008, the Partnership entered into four additional interest rate swaps. The effect of the new interest rate swaps was to convert the floating rate portion of the original swaps on $450.0 million (all swaps except the January 22, 2008 swap that expires January 31, 2009) from three month LIBOR to one month LIBOR. The Partnership received a cash settlement in September of $1.4 million which represented the present value of the basis point differential between one month LIBOR and three month LIBOR. The $1.4 million was recorded in the consolidated statement of operations in (gain) loss on derivatives.

18

CROSSTEX ENERGY, INC.

Notes to Condensed Consolidated Financial Statements — (Continued)

The table below aligns the new swap which receives one month LIBOR and pays three month LIBOR with the original interest rate swaps.

Original Swap Trade Date	New Trade Date	From	To	Notional Amounts
				(In thousands)
March 13, 2007	September 12, 2008	September 30, 2008	March 31, 2011	$	50,000
September 5, 2007	September 12, 2008	September 30, 2008	September 28, 2011		50,000
August 16, 2007	September 12, 2008	October 30, 2008	October 31, 2011		100,000
November 14, 2006	September 12, 2008	November 28, 2008	November 30, 2010		50,000
August 9, 2007	September 12, 2008	November 28, 2008	November 30, 2010		50,000
July 30, 2007	September 12, 2008	November 28, 2008	August 30, 2011		100,000
August 6, 2007	September 23, 2008	November 28, 2008	August 30, 2011		50,000
				$	450,000

The components of (gain) loss on derivatives in the consolidated statements of operations relating to interest rate swaps are (in thousands):

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2008		2007			2008			2007
Change in fair value of derivatives that do not qualify for hedge accounting	$	3,852	$	745		$	(2,210	)	$	460
Realized (gain) loss on derivatives		584		(180	)		2,547			(361	)
	$	4,436	$	565		$	337		$	99

The fair value of derivative assets and liabilities relating to interest rate swaps are as follows (in thousands):

	September 30,			December 31,
	2008			2007
Fair value of derivative assets — current	$	239		$	68
Fair value of derivative assets — long-term		—			—
Fair value of derivative liabilities — current		(6,461	)		(3,266	)
Fair value of derivative liabilities — long-term		(5,642	)		(8,057	)
Net fair value of derivatives	$	(11,864	)	$	(11,255	)

Commodity Swaps

The Partnership manages its exposure to fluctuations in commodity prices by hedging the impact of market fluctuations. Swaps are used to manage and hedge prices and location risk related to these market exposures. Swaps are also used to manage margins on offsetting fixed-price purchase or sale commitments for physical quantities of natural gas and NGLs.

The Partnership commonly enters into various derivative financial transactions which it does not designate as hedges. These transactions include “swing swaps”, “third party on-system financial swaps”, “marketing financial swaps”, “storage swaps”, “basis swaps” and “processing margin swaps”. Swing swaps are generally short-term in nature (one month), and are usually entered into to protect against changes in the volume of daily versus first-of-month index priced gas supplies or markets. Third party on-system financial swaps are hedges that the Partnership enters into on behalf of its customers who are connected to its systems, wherein the Partnership fixes a supply or market price for a period of time for its customers, and simultaneously enters into the derivative transaction. Marketing financial swaps are similar to on-system financial swaps, but are entered into for customers not

19

CROSSTEX ENERGY, INC.

Notes to Condensed Consolidated Financial Statements — (Continued)

connected to the Partnership’s systems. Storage swaps transactions protect against changes in the value of gas that the Partnership has stored to serve various operational requirements. Basis swaps are used to hedge basis location price risk due to buying gas into one of our systems on one index and selling gas off that same system on a different index. Processing margin financial swaps are used to hedge frac spread risk at our processing plants relating to the option to process versus bypassing our equity gas.

The components of (gain) loss on derivatives in the consolidated statements of operations, excluding interest rate swaps, are (in thousands):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
Change in fair value of derivatives that do not qualify for hedge accounting	$	99		$	2,248		$	(713	)	$	2,172
Realized (gains) losses on derivatives		(3,087	)		(2,344	)		(6,800	)		(6,360	)
Ineffective portion of derivatives qualifying for hedge accounting		(152	)		57			(17	)		120
	$	(3,140	)	$	(39	)	$	(7,530	)	$	(4,068	)

The fair value of derivative assets and liabilities, excluding interest rate swaps, are as follows (in thousands):

	September 30,			December 31,
	2008			2007
Fair value of derivative assets — current	$	14,782		$	8,521
Fair value of derivative assets — long term		3,973			1,337
Fair value of derivative liabilities — current		(11,343	)		(17,800	)
Fair value of derivative liabilities — long term		(3,630	)		(1,369	)
Net fair value of derivatives	$	3,782		$	(9,311	)

20

CROSSTEX ENERGY, INC.

Notes to Condensed Consolidated Financial Statements — (Continued)

Set forth below is the summarized notional amount and fair values of all instruments held for price risk management purposes and related physical offsets at September 30, 2008 (all gas volumes are expressed in MMBtu’s and all liquid quantities are expressed in gallons). The remaining term of the contracts extend no later than June 2010 for derivatives except for certain basis swaps that extend to March 2012. The Partnership’s counterparties to hedging contracts include BP Corporation, Total Gas & Power, Fortis, Morgan Stanley, Sempra Energy, Mitsui & Co. and J. Aron & Co., a subsidiary of Goldman Sachs. Changes in the fair value of the Partnership’s mark to market derivatives are recorded in earnings in the period the transaction is entered into. The effective portion of changes in the fair value of cash flow hedges is recorded in accumulated other comprehensive income until the related anticipated future cash flow is recognized in earnings. The ineffective portion is recorded in earnings immediately.

	September 30, 2008
Transaction Type	Volume			Fair Value		��
	(In thousands)
Cash Flow Hedges:
Natural gas swaps (short contracts) (MMBtu’s)		(1,098	)	$	409
Natural gas swaps (long contracts) (MMBtu’s)		90			(5	)
Liquids swaps (short contracts) (gallons)		(26,856	)		654
Total swaps designated as cash flow hedges				$	1,058
Mark to Market Derivatives:*
Swing swaps (short contracts)		(656	)	$	(6	)
Physical offsets to swing swap transactions (long contracts)		656			—
Swing swaps (long contracts)		465			70
Physical offsets to swing swap transactions (short contracts)		(465	)		—
Basis swaps (long contracts)		93,098			1,855
Physical offsets to basis swap transactions (short contracts)		(5,148	)		24,160
Basis swaps (short contracts)		(87,708	)		(897	)
Physical offsets to basis swap transactions (long contracts)		3,783			(23,924	)
Third-party on-system financial swaps (long contracts)		4,840			(7,342	)
Physical offsets to third-party on-system transactions (short contracts)		(4,530	)		7,621
Third-party on-system financial swaps (short contracts)		(607	)		(10	)
Physical offsets to third-party on-system transactions (long contracts)		297			14
Processing margin hedges — liquids (short contracts)		(14,948	)		1,472
Processing margin hedges — gas (long contracts)		1,636			(504	)
Storage swap transactions (short contracts)		(173	)		216
Storage swap transactions (long contracts)		30			(1	)
Total mark to market derivatives				$	2,724

* All are gas contracts, volume in MMBtu’s, except for processing margin hedges — liquids (volume in gallons)

On all transactions where the Partnership is exposed to counterparty risk, the Partnership analyzes the counterparty’s financial condition prior to entering into an agreement, establishes limits and monitors the appropriateness of these limits on an ongoing basis.

21

CROSSTEX ENERGY, INC.

Notes to Condensed Consolidated Financial Statements — (Continued)

Impact of Cash Flow Hedges

The impact of realized gains or losses from derivatives designated as cash flow hedge contracts in the consolidated statements of operations is summarized below (in thousands):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
Increase (Decrease) in Midstream Revenue	2008			2007			2008			2007
Natural gas	$	(811	)	$	1,573		$	(691	)	$	4,321
Liquids		(3,369	)		(366	)		(14,305	)		(614	)
	$	(4,180	)	$	1,207		$	(14,996	)	$	3,707

Natural Gas

As of September 30, 2008, an unrealized derivative fair value net gain of $0.4 million related to cash flow hedges of gas price risk was recorded in accumulated other comprehensive income (loss). Of this net amount, a $0.5 million gain is expected to be reclassified into earnings through September 2009. The actual reclassification to earnings will be based on mark to market prices at the contract settlement date, along with the realization of the gain or loss on the related physical volume, which amount is not reflected above.

The settlement of cash flow hedge contracts related to October 2008 gas production increased gas revenue by approximately $0.2 million.

Liquids

As of September 30, 2008, an unrealized derivative fair value gain of $0.7 million related to cash flow hedges of liquids price risk was recorded in accumulated other comprehensive income (loss). Of this net amount, a $0.5 million gain is expected to be reclassified into earnings through September 2009. The actual reclassification to earnings will be based on mark to market prices at the contract settlement date, along with the realization of the gain or loss on the related physical volume, which amount is not reflected above.

Derivatives Other Than Cash Flow Hedges

Assets and liabilities related to third party derivative contracts, swing swaps, basis swaps, storage swaps and processing margin swaps are included in the fair value of derivative assets and liabilities and the profit and loss on the mark to market value of these contracts are recorded net as (gain) loss on derivatives in the consolidated statement of operations. The Partnership estimates the fair value of all of its energy trading contracts using prices actively quoted. The estimated fair value of energy trading contracts by maturity date was as follows (in thousands):

	Maturity Periods
	Less Than		One to		More Than		Total
	One Year		Two Years		Two Years		Fair Value
September 30, 2008	$	2,503	$	146	$	75	$	2,724

(8)   Fair Value Measurements

In September 2006, the FASB issued SFAS No. 157,“Fair Value Measurements” (SFAS 157). SFAS 157 introduces a framework for measuring fair value and expands required disclosure about fair value measurements of assets and liabilities. SFAS 157 for financial assets and liabilities is effective for fiscal years beginning after November 15, 2007. The Partnership has adopted the standard for those assets and liabilities as of January 1, 2008 and the impact of adoption was not significant.

Fair value is defined as the price at which an asset could be exchanged in a current transaction between knowledgeable, willing parties. A liability’s fair value is defined as the amount that would be paid to transfer the

22

CROSSTEX ENERGY, INC.

Notes to Condensed Consolidated Financial Statements — (Continued)

liability to a new obligor, not the amount that would be paid to settle the liability with the creditor. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, use of unobservable prices or inputs are used to estimate the current fair value, often using an internal valuation model. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the item being valued.

SFAS 157 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

The Partnership’s derivative contracts primarily consist of commodity swaps and interest rate swap contracts which are not traded on a public exchange. The fair values of commodity swap contracts are determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets. The Partnership determines the value of interest rate swap contracts by utilizing inputs and quotes from the counterparties to these contracts. The reasonableness of these inputs and quotes is verified by comparing similar inputs and quotes from other counterparties as of each date for which financial statements are prepared.

Net assets (liabilities) measured at fair value on a recurring basis are summarized below (in thousands):

	Total			Level 1		Level 2			Level 3
Interest rate swaps*	$	(11,864	)		—	$	(11,864	)		—
Commodity swaps*		3,782			—		3,782			—
Total	$	(8,082	)		—	$	(8,082	)		—

* Unrealized gains or losses on commodity derivatives qualifying for hedge accounting are recorded in accumulated other comprehensive income (loss) at each measurement date. Accumulated other comprehensive income also includes the net present value of unrealized losses on interest rate swaps of $17.0 million recorded prior to de-designation in January 2008, of which $4.7 million has been amortized to earnings through September 2008.

(9)   Other Income

The Partnership recorded $7.8 million in other income during the nine months ended September 30, 2008, primarily from settlement of disputed liabilities that were assumed with an acquisition.

(10)   Income Tax

The Company has recorded a deferred tax asset in the amount of $3.9 million and $9.1 million relating to the difference between its book and tax basis of its investment in the Partnership as of September 30, 2008 and December 31, 2007, respectively. Because the Company can only realize this deferred tax asset upon the liquidation of the Partnership and to the extent of capital gains, the Company has provided a full valuation allowance against this deferred tax asset. The deferred tax asset and the related valuation allowance decreased $6.1 million during the first quarter of 2008 due to the conversion of the Partnership’s senior subordinated series C units to common units and increased $0.9 million during the second quarter for the issuance of Partnership common units. The income tax provision for the nine months ended September 30, 2008 of $10.7 million reflects a provision of $15.9 million for current period income offset by a $5.2 million net income tax benefit attributable to a tax basis adjustment in the Partnership related to the Company’s share of senior subordinated series C units that converted to common units and the issuance of Partnership common units. Included in the tax provision for the nine months ended September 30, 2008 was $1.4 million related to the Texas margin tax of which $0.8 million related to an increase in unrecognized tax benefits and $0.3 related to an increase in deferred taxes.

23

CROSSTEX ENERGY, INC.

Notes to Condensed Consolidated Financial Statements — (Continued)

(11)   Commitments and Contingencies

(a)   Employment Agreements

Certain members of management of the Company are parties to employment contracts with the general partner of the Partnership. The employment agreements provide those senior managers with severance payments in certain circumstances and prohibit each such person from competing with the general partner of the Partnership or its affiliates for a certain period of time following the termination of such person’s employment.

(b)   Environmental Issues

The Partnership did not have any changes in environmental quality issues in the nine months ended September 30, 2008.

(c)   Other

The Partnership is involved in various litigation and administrative proceedings arising in the normal course of business. In the opinion of management, any liabilities that may result from these claims would not individually or in the aggregate have a material adverse effect on its financial position or results of operations.

On November 15, 2007, Crosstex CCNG Processing Ltd. (Crosstex CCNG), a wholly-owned subsidiary of the Partnership, received a demand letter from Denbury Onshore, LLC (Denbury) asserting a claim for breach of contract and seeking payment of approximately $11.4 million in damages. The claim arises from a contract under which Crosstex CCNG processed natural gas owned or controlled by Denbury in north Texas. Denbury contends that Crosstex CCNG breached the contract by failing to build a processing plant of a certain size and design, resulting in Crosstex CCNG’s failure to properly process the gas over a ten month period. Denbury also alleges that Crosstex CCNG failed to provide specific notices required under the contract. On December 4, 2007 and February 14, 2008, Denbury sent Crosstex CCNG letters requesting that its claim be arbitrated pursuant to an arbitration provision in the contract. Although it is not possible to predict with certainty the ultimate outcome of this matter, we do not believe this will have a material adverse impact on our consolidated results of operations or financial position.

The Partnership (or its subsidiaries) is defending several lawsuits filed by owners of property located near processing facilities or compression facilities constructed by the Partnership as part of its systems in north Texas. 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, SemGroup, 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, SemGroup, L.P. owed the Partnership approximately $6.3 million, including approximately $3.9 million for June 2008 sales and approximately $2.3 million for July 2008 sales. The Partnership believes the July sales of $2.3 million will receive “administrative claim” status in the bankruptcy proceeding. The Partnership evaluated these receivables for collectibility and provided a valuation allowance of $1.6 million during the three months ended September 30, 2008.

(12)   Segment Information

Identification of operating segments is based principally upon differences in the types and distribution channel of products. The Partnership’s reportable segments consist of Midstream and Treating. The Midstream division consists of the Partnership’s natural gas gathering and transmission operations and includes the south Louisiana processing and liquids assets, the processing and transmission assets located in north and south Texas, the LIG pipelines and processing plants located in Louisiana, the Mississippi System, the Arkoma system located in

24

CROSSTEX ENERGY, INC.

Notes to Condensed Consolidated Financial Statements — (Continued)

Oklahoma and various other small systems. Also included in the Midstream division are the Partnership’s energy trading operations. The operations in the Midstream segment are similar in the nature of the products and services, the nature of the production processes, the type of customer, the methods used for distribution of products and services and the nature of the regulatory environment. The Treating division generates fees from its plants either through volume-based treating contracts or though fixed monthly payments.

The Partnership evaluates the performance of its operating segments based on operating revenues and segment profits. Corporate expenses include general partnership expenses associated with managing all reportable operating segments. Corporate assets consist principally of property and equipment, including software, for general corporate support, working capital and debt financing costs.

Summarized financial information concerning the Partnership’s reportable segments is shown in the following table.

	Midstream			Treating			Corporate			Totals
				(In thousands)
Three months ended September 30, 2008:
Sales to external customers	$	1,310,226		$	19,036		$	—		$	1,329,262
Sales to affiliates		6,663			2,097			(8,760	)		—
Profit on energy trading activities		648			—			—			648
Purchased gas		(1,220,210	)		(6,164	)		6,663			(1,219,711	)
Operating expenses		(41,267	)		(7,828	)		2,097			(46,998	)
Segment profit	$	56,060		$	7,141		$	—		$	63,201
Gain (loss) on derivatives	$	3,137		$	4		$	(4,436	)	$	(1,295	)
Depreciation and amortization	$	(28,351	)	$	(3,160	)	$	(1,337	)	$	(32,848	)
Capital expenditures (excluding acquisitions)	$	52,055		$	6,492		$	2,814		$	61,361
Identifiable assets	$	2,405,882		$	235,154		$	151,458		$	2,792,494
Three months ended September 30, 2007:
Sales to external customers	$	926,726		$	13,080		$	—		$	939,806
Sales to affiliates		2,182			1,239			(3,421	)		—
Profit on energy trading activities		587			—			—			587
Purchased gas		(843,762	)		(1,617	)		2,182			(843,197	)
Operating expenses		(27,584	)		(5,361	)		1,239			(31,706	)
Segment profit	$	58,149		$	7,341		$	—		$	65,490
Gain (loss) on derivatives	$	(776	)	$	—		$	250		$	(526	)
Depreciation and amortization	$	(23,891	)	$	(2,393	)	$	(1,193	)	$	(27,477	)
Capital expenditures (excluding acquisitions)	$	91,258		$	4,858		$	2,077		$	98,193
Identifiable assets	$	2,202,164		$	219,659		$	54,997		$	2,476,820
Nine months ended September 30, 2008:
Sales to external customers	$	4,087,683		$	48,106		$	—		$	4,135,789
Sales to affiliates		12,900			5,286			(18,186	)		—
Profit on energy trading activities		2,332			—			—			2,332
Purchased gas		(3,808,974	)		(11,618	)		12,900			(3,807,692	)
Operating expenses		(111,090	)		(21,611	)		5,286			(127,415	)
Segment profit	$	182,851		$	20,163		$	—		$	203,014
Gain (loss) on derivatives	$	7,530		$	—		$	(337	)	$	7,193
Depreciation and amortization	$	(82,845	)	$	(9,361	)	$	(4,833	)	$	(97,039	)
Capital expenditures (excluding acquisitions)	$	174,716		$	23,699		$	7,212		$	205,627
Identifiable assets	$	2,405,882		$	235,154		$	151,458		$	2,792,494

25

CROSSTEX ENERGY, INC.

Notes to Condensed Consolidated Financial Statements — (Continued)

	Midstream			Treating			Corporate			Totals
				(In thousands)
Nine months ended September 30, 2007:
Sales to external customers	$	2,721,193		$	40,160		$	—		$	2,761,353
Sales to affiliates		7,320			3,451			(10,771	)		—
Profit on energy trading activities		2,180			—			—			2,180
Purchased gas		(2,510,843	)		(6,208	)		7,320			(2,509,731	)
Operating expenses		(76,369	)		(14,760	)		3,451			(87,678	)
Segment profit	$	143,481		$	22,643		$	—		$	166,124
Gain (loss) on derivatives	$	4,082		$	(14	)	$	(99	)	$	3,969
Depreciation and amortization	$	(65,035	)	$	(8,581	)	$	(3,264	)	$	(76,880	)
Capital expenditures (excluding acquisitions)	$	302,057		$	17,753		$	4,824		$	324,634
Identifiable assets	$	2,202,164		$	219,659		$	54,997		$	2,476,820

The following table reconciles the segment profits reported above to the operating income as reported in the consolidated statements of operations (in thousands):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
Segment profits	$	63,201		$	65,490		$	203,014		$	166,124
General and administrative expenses		(17,613	)		(16,886	)		(51,767	)		(45,074	)
Gain (loss) on derivatives		(1,295	)		(526	)		7,193			3,969
Gain (loss) on sale of property		(68	)		(2	)		1,591			1,819
Depreciation and amortization		(32,848	)		(27,477	)		(97,039	)		(76,880	)
Operating income	$	11,377		$	20,599		$	62,992		$	49,958

(13)   Subsequent Events

(a)   Asset Dispositions

Subsequent to September 30, 2008, the Partnership executed agreements to sell certain non-strategic assets that together will generate approximately $105.0 million in proceeds, including $85.0 million for the asset disclosed in Note (2) Asset Held for Disposition. These transactions are expected to be completed before the end of November 2008.

(b)   Amendments to Bank Credit Facility and Senior Secured Notes

On November 7, 2008, the Partnership entered into the Fifth Amendment and Consent to its bank credit facility and the Waiver and Letter Amendment No. 3 to its Amended and Restated Note Purchase Agreement. The Fifth Amendment amended the agreement governing the Partnership’s credit facility to, among other things, (i) increase the maximum permitted leverage ratio the Partnership must maintain for the fiscal quarters ending December 31, 2008 through September 30, 2009, (ii) lower the minimum interest coverage ratio the Partnership must maintain for the fiscal quarter ending December 31, 2008 and each fiscal quarter thereafter, (iii) permit the Partnership to sell a non-strategic asset discussed in (a) above (iv) increase the interest rate the Partnership pays on the obligations under the credit facility and (v) lower the maximum permitted leverage ratio the Partnership must maintain if the Partnership or its subsidiaries incur unsecured note indebtedness.

Under the amended credit agreement, borrowings will bear interest at the Partnership’s option at the administrative agent’s reference rate plus 0.50% to 2.00% (ranges were 0% to 0.25% prior to amendment) or

26

CROSSTEX ENERGY, INC.

Notes to Condensed Consolidated Financial Statements — (Continued)

LIBOR plus 1.50% to 3.00% (ranges were 1.00% to 1.75% prior to amendment). The applicable margins for the Partnership’s interest rate, letter of credit fees and commitment fees all vary quarterly based on the Partnership’s leverage ratio. The fees charged for letters of credit range from 1.50% to 3.00% per annum (ranges were 1.00% to 1.75% prior to amendment) plus a fronting fee of 0.125% per annum. The Partnership will incur quarterly commitment fees ranging from 0.20% to 0.50% (ranges were 0.20% to 0.375% prior to amendment) on the unused amount of the credit facility.

Under the amended credit facility, the maximum leverage ratio (total funded debt to consolidated earnings before interest, taxes, depreciation and amortization) is as follows:

•  5.00 to 1.00 for any fiscal quarter ending through June 30, 2009;

•  4.75 to 1.00 for the fiscal quarter ending September 30, 2009; and

•  4.50 to 1.00 for any fiscal quarter ending thereafter.

For any fiscal quarter ending after December 31, 2010, during an acquisition period, as defined in the credit facility, the maximum leverage ratio shall be increased by 0.50 to 1.00 from the otherwise applicable rate set forth above. In addition, if the maximum leverage ratio is greater than 4.50 to 1.00 during an acquisition period, then borrowings will bear interest at the Partnership’s option at the administrative agent’s reference rate plus 2.25% or LIBOR plus 3.25%.

The minimum interest coverage ratio (as defined in the agreement, measured quarterly on a rolling four-quarter basis) was also lowered to 2.50 to 1.00 from 3.00 to 1.00 prior to amendment.

On November 7, 2008, the Partnership also entered into the Waiver and Letter Amendment No. 3 (“Letter Amendment No. 3”) to its Amended and Restated Note Purchase Agreement with Prudential Investment Management, Inc. and the other holders of its senior secured notes. A copy of Letter Amendment No. 3 is filed as Exhibit 10.2 to this Quarterly Report onForm 10-Q. Letter Amendment No. 3 amended the agreement governing the Partnership’s senior secured notes to, among other things, (i) increase the maximum permitted leverage ratio the Partnership must maintain for the fiscal quarters ending December 31, 2008 through September 30, 2009 consistent with the ratios under the amendment to the bank credit facility, (ii) lower the minimum interest coverage ratio the Partnership must maintain for the fiscal quarter ending December 31, 2008 and each fiscal quarter thereafter consistent with the ratio under the amendment to the bank credit facility, (iii) permit the Partnership to sell a non-strategic asset discussed in (a) above and (iv) increase the interest rate the Partnership pays on the senior secured notes. The interest rate the Partnership pays on the senior secured notes will increase by 0.5%. In addition, the interest rate on the senior secured notes will increase by an additional 0.75% (referred to as an excess leverage fee) if its leverage ratio is greater than 3.75 to 1.00 as of the end of any fiscal quarter, commencing with the fiscal quarter ended on September 30, 2008.

27

Item 2.   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.

Overview

Crosstex Energy, Inc. is a Delaware corporation formed on April 28, 2000 to engage in the gathering, transmission, treating, processing and marketing of natural gas and natural gas liquids (NGLs), through its subsidiaries. On July 12, 2002, we formed Crosstex Energy, L.P., a Delaware limited partnership, to acquire indirectly substantially all of the assets, liabilities and operations of its predecessor, Crosstex Energy Services, Ltd. Our assets consist almost exclusively of partnership interests in Crosstex Energy, L.P., a publicly traded limited partnership engaged in the gathering, transmission, treating, processing and marketing of natural gas and NGLs. These partnership interests consist of (i) 16,414,830 common units, representing approximately 35.0% of the limited partner interests in Crosstex Energy, L.P., and (ii) 100% ownership interest in Crosstex Energy GP, L.P., the general partner of Crosstex Energy, L.P., which owns a 2.0% general partner interest and all of the incentive distribution rights in Crosstex Energy, L.P.

Since we control the general partner interest in the Partnership, we reflect our ownership interest in the Partnership on a consolidated basis, which means that our financial results are combined with the Partnership’s financial results and the results of our other subsidiaries. The interest owned by non-controlling partners’ share of income is reflected as an expense in our results of operations. We have no separate operating activities apart from those conducted by the Partnership, and our cash flows consist almost exclusively of distributions from the Partnership on the partnership interests we own. Our consolidated results of operations are derived from the results of operations of the Partnership and also include our gains on the issuance of units in the Partnership, deferred taxes, interest of non-controlling partners in the Partnership’s net income, interest income (expense) and general and administrative expenses not reflected in the Partnership’s results of operation. Accordingly, the discussion of our financial position and results of operations in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” primarily reflects the operating activities and results of operations of the Partnership.

The Partnership has two industry segments, Midstream and Treating, with a geographic focus along the Texas gulf coast, in the north Texas Barnett Shale area and in Mississippi and Louisiana. The Partnership’s Midstream division focuses on the gathering, processing, transmission and marketing of natural gas and NGLs, as well as providing certain producer services, while the Treating division focuses on the removal of contaminants from natural gas and NGLs to meet pipeline quality specifications. For the nine months ended September 30, 2008, 89% of the Partnership’s gross margin was generated in the Midstream division, with the balance in the Treating division. The Partnership focuses on gross margin to manage its operations because its business is generally to purchase and resell natural gas for a margin, or to gather, process, transport, market or treat natural gas or NGLs for a fee. The Partnership buys and sells most of its natural gas at a fixed relationship to the relevant index price so margins are not significantly affected by changes in natural gas prices. In addition, the Partnership receives certain fees for processing based on a percentage of the liquids produced and enters into hedge contracts for its expected share of liquids produced to protect margins from changes in liquid prices. As explained under “Commodity Price Risk” below, the Partnership enters into financial instruments to reduce volatility in gross margin due to price fluctuations.

The Partnership’s Midstream segment margins are determined primarily by the volumes of natural gas gathered, transported, purchased and sold through its pipeline systems, processed at its processing facilities and the volumes of NGLs handled at its fractionation facilities. Treating segment margins are largely a function of the number and size of treating plants as well as fees earned for removing impurities at a non-operated processing plant. The Partnership generates revenues from five primary sources:

•  purchasing and reselling or transporting natural gas on the pipeline systems it owns;

•  processing natural gas at its processing plants and fractionating and marketing the recovered NGLs;

•  treating natural gas at its treating plants;

28

•  recovering carbon dioxide and NGLs at a non-operated processing plant; and

•  providing off-system marketing services for producers.

The bulk of the Partnership’s operating profits have historically been derived from the margins it realizes for gathering and transporting natural gas through its pipeline systems. Generally, the Partnership buys gas from a producer, plant, or transporter at either a fixed discount to a market index or a percentage of the market index. The Partnership then transports and resells the gas. The resale price is generally based on the same index price at which the gas was purchased, and, if the Partnership is to be profitable, at a smaller discount or larger premium to the index than it was purchased. The Partnership attempts to execute all purchases and sales substantially concurrently, or it enters into a future delivery obligation, thereby establishing the basis for the margin it will receive for each natural gas transaction. The Partnership’s gathering and transportation margins related to a percentage of the index price can be adversely affected by declines in the price of natural gas. See “Commodity Price Risk” below for a discussion of how it manages its business to reduce the impact of price volatility.

Processing revenues are generally based on either a percentage of the liquids volume recovered, or a margin based on the value of liquids recovered less the reduced energy value in the remaining gas after the liquids are removed, or a fixed fee per unit processed. Fractionation and marketing fees are generally a fixed per unit of products.

The Partnership generates treating revenues under three arrangements:

•  a volumetric fee based on the amount of gas treated, which accounted for approximately 14% and 12%, of the operating income in the Treating division for the nine months ended September 30, 2008 and 2007, respectively;

•  a fixed fee for operating the plant for a certain period, which accounted for approximately 60% and 58% of the operating income in the Treating division for the nine months ended September 30, 2008 and 2007, respectively; and

•  a fee arrangement in which the producer operates the plant, which accounted for approximately 26% and 30% of the operating income in the Treating division for the nine months ended September 30, 2008 and 2007, respectively.

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 and associated transportation and communication costs, property insurance, ad valorem taxes, repair and maintenance expenses, measurement 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.

Impact of Recent Reduction in Partnership Distribution Level

Since our cash flows consist almost exclusively of distributions from the Partnership on the partnership interests we own, any reduction in the Partnership’s distribution level reduces our cash flows. The Partnership is required by its partnership agreement to distribute all its cash on hand at the end of each quarter, less reserves established by its general partner in its sole discretion to provide for the proper conduct of the Partnership’s business or to provide for future distributions. Due to the recent tightening of capital markets coupled with the negative impact of hurricanes Ike and Gustav on the Partnership’s assets, the Partnership has reduced its third quarter 2008 distribution (to be paid in November 2008) from $0.63 per common unit to $0.50 per common unit. In addition, the Partnership anticipates that its distributions will remain at a reduced level for the remainder of 2008 and during 2009 because it will be required to use cash flows from operations to fund its capital expenditures due to the lack of access to capital markets.

The incentive distribution rights that we indirectly hold entitle us to receive an increasing percentage of cash distributed by the Partnership as certain target distribution levels are reached. Specifically, they entitle us to receive the following:

•  13.0% of all cash distributed in a quarter after each unit has received $0.25 for that quarter,

29

•  23.0% of all cash distributed after each unit has received $0.3125 for that quarter, and

•  48.0% of all cash distributed after each unit has received $0.375 for that quarter.

The following table shows the distributions we received from the Partnership during 2008 and 2007:

	Quarter Ended				Nine Months Ended
	September 30,*				September 30,*
	2008		2007		2008		2007
Common and subordinated units owned by us	$	8,207	$	5,900	$	28,726	$	17,200
2% general partner interest		594		450		2,230		1,295
Incentive distribution right		6,675		6,281		30,772		17,545
Total distributions from the Partnership	$	15,476	$	12,631	$	61,728	$	36,040

* Distributions with respect to calendar quarters are paid approximately 45 days following quarter end.

Under its current capital structure, each $0.01 per unit increase or decrease in distributions by the Partnership increases or decreases total quarterly distributions by $0.9 million and we would receive $0.6 million or 68% of that increase.

Recent Developments

Since early September 2008, the economy and financial markets have declined at rates and to levels that were not anticipated. In addition to these declines, our business has also been significantly impacted by the following changes:

•  The majority of the Partnership’s assets in Texas and Louisiana sustained minimal physical damage as a result of hurricanes Gustav and Ike, which came ashore in September. Most of the Partnership’s facilities along the Gulf Coast promptly resumed operations. However, the Sabine plant, because of its proximity to the Louisiana Gulf coast, sustained some damage which should be repaired bymid-December. In addition, several offshore production platforms and pipelines transporting gas production to the Pelican and Bluewater processing plants were damaged by the storm, and repairs to these facilities are continuing during the fourth quarter of 2008. These storms resulted in an adverse impact to the Partnership’s gross margin of approximately $12.0 million and $2.0 million in operating expenses in the third quarter of 2008, and the Partnership anticipates that it will experience a further negative impact to its gross margin in the fourth quarter of 2008 of approximately $11.0 million.

•  Commodity prices have continued to decline. Since the beginning of October until the beginning of November, oil prices have fallen about 35%, natural gas prices about 13% and NGL prices about 38%. These declines have impacted the Partnership’s margins expected from processing for the remainder of 2008 and 2009.

•  In the north Texas Barnett Shale play, continued delays in infrastructure development, equipment delivery andright-of-way access have led to further delays in the growth of volumes on the Partnership’s systems.

•  Gas producers have revised their drilling budgets as they react to turbulent capital market conditions. Consequently, the Partnership has adjusted its business outlook to account for the general slowdown in industry drilling activity.

Our Business Strategy through 2009

We are adjusting our overall business strategy in response to the recent events discussed above. We are implementing a strategy to increase our liquidity and improve our profitability by undertaking the following steps:

•  Lowering the distribution level on the Partnership’s common units and the dividend level on our common shares, which is being effected with the distribution and dividend payable in November 2008.

30

•  Selling certain non-strategic assets. We have executed agreements to sell certain non-strategic assets that together will generate approximately $105.0 million in proceeds. These transactions are expected to be completed before the end of November 2008.

•  Reducing capital expenditures significantly through 2009. Total growth capital investments in the fourth quarter of 2008 and calendar year 2009 are currently anticipated to be approximately $180.0 million.

•  Decreasing balances outstanding under the letters of credit.

Expansions

During the nine months ended 2008, the Partnership continued the expansion of its north Texas pipeline gathering system in the Barnett Shale which was acquired in June 2006. Since the date of acquisition through September 30, 2008, it connected approximately 421 new wells to its gathering systems including approximately 135 new wells connected during 2008. Total throughput on the north Texas gathering systems, including throughput on our north Johnson County expansion discussed below, was approximately 771,000 MMBtu/d for the month of September 2008, up from a monthly throughput of approximately 525,000 MMBtu/d in December 2007.

We continued the construction of our29-mile north Johnson County expansion, which is part of our north Texas pipeline gathering system, during 2008. The first phase of this expansion commenced operation in September 2007. The last two phases of the expansion commenced operation in May and July of 2008. The total gathering capacity for this29-mile expansion is approximately400 MMcf/d.

The Partnership completed its east Texas natural gas gathering system expansion in May 2008. The Partnership added a new pipeline next to our existing system which increased capacity to approximately100 MMcf/d and added two refrigeration plants to improve the system’s ability to process the gas.

On April 28, 2008, the Partnership announced plans to construct an $80 million natural gas processing facility called Bear Creek in the Barnett Shale region of north Texas. The new plant will have a gas processing capacity of200 MMcf/d, increasing the Partnership’s total processing capacity in the Barnett Shale to485 MMcf/d. The Bear Creek plant will be strategically located near existing Partnership midstream assets in Hood County. The Partnership had originally planned to complete the Bear Creek plant by the third quarter of 2009. Although the Partnership has commenced construction of the plant, the Partnership is now planning to delay certain portions of the construction project because the Partnership does not anticipate that the additional capacity provided by the Bear Creek plant will be needed until mid to late 2010 due to reductionsand/or delays in drilling activity in the Barnett Shale area.

31

Results of Operations

Set forth in the table below is certain financial and operating data for the Midstream and Treating divisions for the periods indicated.

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
	(Dollars in millions)
Midstream revenues	$	1,310.2		$	926.7		$	4,087.7		$	2,721.2
Midstream purchased gas		(1,213.5	)		(841.6	)		(3,796.0	)		(2,503.5	)
Profit on energy trading activities		0.6			0.6			2.3			2.2
Midstream gross margin		97.3			85.7			294.0			219.9
Treating revenues		19.1			13.1			48.0			40.2
Treating purchased gas		(6.2	)		(1.6	)		(11.6	)		(6.3	)
Treating gross margin		12.9			11.5			36.4			33.9
Total gross margin	$	110.2		$	97.2		$	330.4		$	253.8
Midstream Volumes (MMBtu/d):
Gathering and transportation		2,643,000			2,343,000			2,594,000			2,040,000
Processing		1,683,000			2,156,000			2,005,000			2,079,000
Producer services		74,000			92,000			81,000			95,000
Plants in service at end of period		195			195			195			195

Three Months Ended September 30, 2008 Compared to Three Months Ended September 30, 2007

Gross Margin and Profit on Energy Trading Activities.  Midstream gross margin was $97.3 million for the three months ended September 30, 2008 compared to $85.7 million for the three months ended September 30, 2007, an increase of $11.6 million, or 13.5%. The increase was primarily due to system expansion projects and increased throughput on our gathering and transmission systems. These increases were partially offset by margin decreases in the processing business due to a less favorable NGL market and operating downtime due to the impact of recent hurricanes. Profit on energy trading activities was unchanged for the comparative periods.

System expansion in the north Texas region and increased throughput on the North Texas Pipeline (NTP) contributed $14.9 million of gross margin growth for the three months ended September 30, 2008 over the same period in 2007. The gathering systems in the region and NTP accounted for $10.7 million and $2.3 million of this increase, respectively. The processing facilities in the region contributed an additional $1.9 million of this gross margin increase. System expansion and volume increases on the LIG system contributed margin growth of $1.2 million during the third quarter of 2008 over the same period in 2007. Processing plants in Louisiana reported a margin decline of $2.9 million for the comparative three month periods due to a less favorable NGL processing environment and business interruptions due to the impact of recent hurricanes. These unfavorable processing conditions also impacted the south Texas region where the Vanderbilt system and Gregory Processing Plant had margin declines of $0.8 million and $0.7 million, respectively.

The Partnership’s processing and gathering systems were negatively impacted by events beyond our control during the third quarter that had a significant effect on gross margin results for the period. Hurricanes Gustav and Ike came ashore along the Gulf coast in September. These storms are estimated to have cost the Partnership approximately $12.0 million in gross margin for the three months ended September 30, 2008. The lost margin was primarily experienced at gas processing facilities along the Gulf coast. However, processing facilities further inland in Louisiana and north Texas were indirectly impacted due to disruption in the NGL markets. In addition, approximately $0.9 million in gross margin was lost at the Sabine plant in August due to downtime from fire damage. The fire occurred during an attempt to bring the plant back on line following tropical storm Eduardo.

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Treating gross margin was $12.9 million for the three months ended September 30, 2008 compared to $11.5 million in the same period in 2007, an increase of $1.4 million, or 12.3%. Treating plants, dew point control plants, and related equipment in service remained at 195 plants in September 30, 2008 which is unchanged from September 30, 2007. Gross margin growth for the period of $1.1 million is attributed primarily to increased fees per plant and an increase in throughput on the volume based plants. Upstream services also contributed gross margin growth of $0.3 million for the comparable periods.

Operating Expenses.  Operating expenses were $47.0 million for the three months ended September 30, 2008 compared to $31.7 million for the three months ended September 30, 2007, an increase of $15.3 million, or 48.2%. The increase is primarily attributable to the following factors:

•  $10.9 million increase in Midstream operating expenses primarily due to expansion and growth of our Midstream assets in the NTP, NTG, and north Louisiana and east Texas areas. Chemicals and materials increased by $2.3 million, compressor rentals increased by $1.6 million, contractor services and labor costs increased by $5.2 million, and ad valorem taxes increased by $1.0 million;

•  $2.0 million in Midstream operating expense due to hurricanes Gustav and Ike. $7.6 million total repair and replacement costs were sustained at our Sabine processing plant, $5.6 million of which will be claimed through our property damage insurer; and

•  $2.5 million increase in Treating operating expenses, consisting of a $0.6 million increase for materials and supplies, a $0.8 million increase in contractor services costs to support maintenance projects and a $0.7 million increase in labor costs as a result of market adjustments for field service employees and additional headcount.

General and Administrative Expenses.  General and administrative expenses were $17.6 million for the three months ended September 30, 2008 compared to $16.9 million for the three months ended September 30, 2007, an increase of $0.7 million, or 4.3%. The increase is primarily attributable to the following factors:

•  $1.6 million increase in bad debt expense due to the SemGroup, L.P. bankruptcy;

•  $0.8 million increase in rental expense resulting primarily from the addition of office rent for the expansion of our corporate headquarters; and

•  $1.6 million decrease in stock-based compensation expense resulting primarily from the reduction of estimated performance-based restricted units and restricted shares.

Gain/Loss on Derivatives.  The Partnership had a loss on derivatives of $1.3 million for the three months ended September 30, 2008 compared to a loss of $0.5 million for the three months ended September 30, 2007. The derivative transaction types contributing to the net loss are as follows (in millions):

	Three Months Ended September 30,
	2008						2007
(Gain) Loss on Derivatives:	Total			Realized			Total			Realized
Interest rate swaps	$	4.4		$	0.6		$	0.6		$	(0.2	)
Basis swaps		(1.4	)		(2.7	)		(0.5	)		(2.1	)
Third-party on-system swaps		(0.3	)		(0.3	)		(0.2	)		(0.7	)
Processing margin hedges		(0.9	)		—			0.6			0.5
Other		(0.5	)		(0.1	)		—			—
	$	1.3		$	(2.5	)	$	0.5		$	(2.5	)

Depreciation and Amortization.  Depreciation and amortization expenses were $32.8 million for the three months ended September 30, 2008 compared to $27.5 million for the three months ended September 30, 2007, an increase of $5.4 million, or 19.5%. The increase primarily relates to the NTP and NTG expansion project assets.

Interest Expense.  Interest expense was $17.1 million for the three months ended September 30, 2008 compared to $20.6 million for the three months ended September 30, 2007, a decrease of $3.6 million, or 17.4%.

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The decrease relates primarily to lower interest rates between three month periods (weighted average rate of 6.0% in the 2008 period compared to 7.0% in the 2007 period). Net interest expense consists of the following (in millions):

	Three Months Ended
	September 30,
	2008			2007
Senior notes	$	8.2		$	8.3
Credit facility		8.4			12.8
Other		1.1			0.9
Capitalized interest		(0.5	)		(1.2	)
Interest income		(0.1	)		(0.2	)
Total	$	17.1		$	20.6

Income taxes.  Income tax expense was $2.1 million for the three months ended September 30, 2008 compared to $1.1 million for the three months ended September 30, 2007, an increase of $1.0 million. The increase relates primarily to the Texas margin tax.

Interest of Non-Controlling Partners in the Partnership’s Net Income/Loss From Continuing Operations.  The interest of non-controlling partners in the Partnership’s net loss from continuing operations increased by $5.3 million to a loss of $7.8 million for the three months ended September 30, 2008 compared to a loss of $2.5 million for the three months ended September 30, 2007 due to the changes shown in the following summary (in millions):

	For the Three Months Ended
	September 30,
	2008			2007
Net income (loss) for the Partnership	$	(5.2	)	$	2.1
(Income) allocation to CEI for the general partner incentive distributions		(6.7	)		(6.3	)
Stock-based compensation costs allocated to CEI for its stock options and restricted stock granted to Partnership officers, employees and directors		0.8			1.5
Loss allocation to CEI for its 2% general partner share of Partnership (income) loss		0.1			0.1
Net loss allocable to limited partners		(11.0	)		(2.6	)
Less: CEI’s share of net loss allocable to limited partners		4.1			1.0
Less: Non-controlling partners’ share of income from discontinued operations		(0.9	)		(1.0	)
Plus: Non-controlling partners’ share of net income in Crosstex Denton County Gathering, J.V.		—			0.1
Non-controlling partners’ share of Partnership net loss from continuing operations	$	(7.8	)	$	(2.5	)

Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007

Gross Margin and Profit on Energy Trading Activities.  Midstream gross margin was $294.0 million for the nine months ended September 30, 2008 compared to $219.9 million for the nine months ended September 30, 2007, an increase of $74.1 million, or 33.7%. The increase was primarily due to system expansion projects and increased throughput on our gathering and transmission systems. These increases were partially offset by margin decreases in the processing business due to a less favorable NGL market and operating downtime due to the impact of recent hurricanes. Profit on energy trading activities increased for the comparative periods by approximately $0.2 million.

System expansion in the north Texas region and increased throughput on the NTP contributed $47.8 million of gross margin growth for the nine months ended September 30, 2008 over the same period in 2007. The gathering systems in the region and NTP accounted for $32.3 million and $6.9 million of this increase, respectively. The processing facilities in the region contributed an additional $8.6 million of this gross margin increase. System

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expansion and volume increases on the LIG system contributed margin growth of $13.0 million during the nine months ended September 30, 2008 over the same period in 2007. Processing plants in Louisiana contributed margin growth of $8.5 million for the comparative nine month period in 2007 due to higher NGL prices and increased volumes at the Gibson and Plaquemine plants and the Riverside fractionation facility during the first half of the year. These gains were offset primarily by a less favorable NGL processing environment in the third quarter and business interruptions due to the impact of recent hurricanes. The Vanderbilt system in the south Texas region had a margin increase of $3.6 million for the comparative nine-month periods primarily due to growth in the first half of the year offset by a decline in the third quarter due to the less favorable processing conditions. The Mississippi system had a margin increase of $2.1 million for the nine months ended due to increased throughput. The Arkoma system in Oklahoma experienced a throughput decline for the comparable periods that resulted in a negative margin variance of $1.2 million.

The Partnership’s processing and gathering systems were negatively impacted by events beyond our control during the third quarter that had a significant effect on gross margin results for the period. Hurricanes Gustav and Ike came ashore along the Gulf coast in September. These storms are estimated to have cost the Partnership approximately $12.0 million in gross margin and $1.5 million in repair costs for the three months ended September 30, 2008. The lost margin was primarily experienced at gas processing facilities along the Gulf coast. However, processing facilities further inland in Louisiana and north Texas were indirectly impacted due to disruption in the NGL market. In addition, approximately $0.9 million in gross margin was lost at the Sabine plant in August due to downtime from fire damage. The fire occurred during an attempt to bring the plant back on line following tropical storm Eduardo.

Treating gross margin was $36.4 million for the nine months ended September 30, 2008 compared to $33.9 million for the same period in 2007, an increase of $2.5 million, or 7.5%. Treating plants, dew point control plants and related equipment in service remained at 195 plants at September 30, 2008 which is unchanged from September 30, 2007. Gross margin growth for the period of $1.6 million is attributed primarily to increased fees due to larger GPM plants and an increase in throughput on the volume based plants. Upstream services also contributed gross margin growth of $1.0 million for the comparable periods.

Operating Expenses.  Operating expenses were $127.4 million for the nine months ended September 30, 2008 compared to $87.7 million for the nine months ended September 30, 2007, an increase of $39.7 million, or 45.3%. The increase is primarily attributable to the following factors:

•  $29.6 million increase in Midstream operating expenses primarily due to expansion and growth of our Midstream assets in the NTP, NTG, and north Louisiana and east Texas areas. Chemicals and materials increased by $6.8 million, equipment rental increased by $6.0 million, contractor services and labor costs increased by $11.9 million, and ad valorem increased by $1.8 million;

•  $2.0 million in Midstream operating expense due to hurricanes Gustav and Ike. $7.6 million total repair and replacement costs were sustained at our Sabine processing plant, $5.6 million of which will be claimed through our property damage insurer;

•  $6.8 million increase in Treating operating expenses including $2.1 million for materials and supplies, contractor services costs of $1.5 million to support maintenance projects and labor costs of $1.9 million as a result of market adjustments for field service employees and additional headcount;

•  $1.1 million increase in technical services operating expenses; and

•  $0.2 million increase in stock-based compensation expense.

General and Administrative Expenses.  General and administrative expenses were $51.8 million for the nine months ended September 30, 2008 compared to $45.1 million for the nine months ended September 30, 2007, an increase of $6.7 million, or 14.8%. The increase is primarily attributable to the following factors:

•  $3.0 million increase in labor and benefits related to staff additions associated with the requirements of the NTP and the NTG assets and the expansion in north Louisiana;

•  $1.6 million increase in bad debt expense due to the SemGroup, L.P. bankruptcy;

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•  $1.3 million increase in rental expense resulting primarily from the addition of office rent for the expansion of our corporate headquarters;

•  $1.4 million increase in other expenses, including professional fees and services and travel and training expenses; and

•  $0.6 million decrease in stock-based compensation expense resulting primarily from the reduction of estimated performance-based restricted units and restricted shares.

Gain on Sale of Property.  The $1.6 million gain on sale of property for the nine months ended September 30, 2008 represents disposition of various small Treating and Midstream assets. The $1.8 million gain on sale of property for the nine months ended September 30, 2007 consisted of the disposition of unused catalyst material for $1.0 million and the sale of a treating plant for $1.0 million, partially offset by losses of $0.2 million on disposition of other treating equipment.

Gain/Loss on Derivatives.  The Partnership had a gain on derivatives of $7.2 million for the nine months ended September 30, 2008 compared to a gain of $4.0 million for the nine months ended September 30, 2007. The derivative transaction types contributing to the net gain are as follows (in millions):

	Nine Months Ended September 30,
	2008						2007
(Gain) Loss on Derivatives:	Total			Realized			Total			Realized
Basis swaps	$	(6.1	)	$	(6.3	)	$	(5.7	)	$	(4.9	)
Third-party on-system swaps		(0.5	)		(0.5	)		(0.1	)		(0.5	)
Processing margin hedges		(0.8	)		0.2			1.1			0.6
Puts		—			—			0.8			—
Other		0.2			2.4	*		(0.1	)		(2.0	)
	$	(7.2	)	$	(4.2	)	$	(4.0	)	$	(6.8	)

* Includes realized interest rate swaps of $0.8 not received until fourth quarter.

Depreciation and Amortization.  Depreciation and amortization expenses were $97.0 million for the nine months ended September 30, 2008 compared to $76.9 million for the nine months ended September 30, 2007, an increase of $20.2 million, or 26.2% Midstream depreciation and amortization increased $18.6 million due to the NTP, NTG and north Louisiana expansion project assets. Software additions and depreciation acceleration of Dallas office leasehold improvements accounted for an increase between periods of $1.5 million.

Interest Expense.  Interest expense was $54.3 million for the nine months ended September 30, 2008 compared to $56.3 million for the nine months ended September 30, 2007, a decrease of $2.0 million, or 3.6%. The decrease relates primarily to lower interest rates between nine-month periods (weighted average rate of 6.1% in 2008 compared to 7.0% in 2007). Net interest expense consists of the following (in millions):

	Nine Months Ended
	September 30,
	2008			2007
Senior notes	$	24.6		$	25.1
Credit facility		29.1			33.5
Other		3.3			2.8
Capitalized interest		(2.2	)		(4.3	)
Realized interest rate swap gains		(0.2	)		—
Interest income		(0.3	)		(0.8	)
Total	$	54.3		$	56.3

Income Taxes.  Income tax expense was $10.7 million for the nine months ended September 30, 2008 compared to $2.1 million for the nine months ended September 30, 2007, an increase of $8.6 million. The increase

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includes $12.5 million related to the increase in book net income between the periods and $1.3 million related to the Texas margin tax. The income tax provision for the nine months ended September 30, 2008 also includes $5.2 million benefit related to the issuance of Partnership common units.

Other Income.  The Partnership recorded $7.8 million in other income during the nine months ended September 30, 2008, primarily from the settlement of disputed liabilities that were assumed with an acquisition.

Gain on Issuance of Units of the Partnership.  As a result of the Partnership issuing common units in April 2008 to unrelated parties at a price per unit greater than our equivalent carrying value, our share of net assets of the Partnership increased by $14.7 million and we recognized a gain on issuance of such units during the nine months ended September 30, 2008.

Interest of Non-Controlling Partners in the Partnership’s Net Loss from Continuing Operations.  The interest of non-controlling partners in the Partnership’s net loss from continuing operations decreased by $4.1 million to a loss of $7.3 million for the nine months ended September 30, 2008 compared to a loss of $11.4 million for the nine months ended September 30, 2007 due to the changes shown in the following summary (in millions):

	For the Nine Months Ended
	September 30,
	2008			2007
Net income (loss) for the Partnership	$	20.2		$	(0.3	)
(Income) allocation to CEI for the general partner incentive distribution		(30.8	)		(17.5	)
Stock-based compensation costs allocated to CEI for its stock options and restricted stock granted to Partnership officers, employees and directors		3.4			3.8
(Income) loss allocation to CEI for its 2% general partner share of Partnership (income) loss		(0.5	)		0.3
Net loss allocable to limited partners		(7.7	)		(13.7	)
Less: CEI’s share of net loss allocable to limited partners		3.0			5.1
Less: Non-controlling partners’ share of income from discontinued operations		(2.8	)		(3.0	)
Plus: Non-controlling partners’ share of net income in Crosstex Denton County Gathering, J.V.		0.2			0.2
Non-controlling partners’ share of Partnership net loss from continuing operations	$	(7.3	)	$	(11.4	)

The general partner incentive distributions increased between these nine-month periods due to an increase in the distribution amounts per unit and due to an increase in the number of common units outstanding.

Critical Accounting Policies

Information regarding the Company’s Critical Accounting Policies is included in Item 7 of the Company’s Annual Report onForm 10-K for the year ended December 31, 2007.

Liquidity and Capital Resources

Cash Flows.  Net cash provided by operating activities was $215.6 million for the nine months ended September 30, 2008 compared to cash provided by operations of $102.5 million for the nine months ended September 30, 2007. Income before non-cash income and expenses and changes in working capital for comparative periods were as follows (in millions):

	Nine Months Ended
	September 30,
	2008		2007
Income before non-cash income and expenses	$	124.0	$	88.2
Changes in working capital	$	91.6	$	14.2

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The primary reason for the increased income before non-cash income and expenses of $35.8 million from 2007 to 2008 was increased operating income from expansions in north Texas and north Louisiana during 2007 and 2008. Changes in working capital may fluctuate significantly between periods even though the Partnership’s trade receivables and payables are typically collected and paid in 30 to 60 day pay cycles. A large volume of its revenues are collected and a large volume of its 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 the Partnership strives to minimize 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 mark to market derivative assets and liabilities associated with derivative cash flow hedges which may fluctuate significantly due to the changes in natural gas and NGL prices. The changes in working capital during the nine months ended September 30, 2007 and 2008 are due to the impact of the fluctuations discussed above and are not indicative of any change in operating cash flow trends.

Cash Flows from Investing Activities.  Net cash used in investing activities was $214.1 million and $325.7 million for the nine months ended September 30, 2008 and 2007, respectively. The primary investing activities were capital expenditures for internal growth, net of accrued amounts, as follows (in millions):

	Nine Months Ended
	September 30,
	2008		2007
Growth capital expenditures	$	205.1	$	322.5
Maintenance capital expenditures		12.8		6.2
Total	$	217.9	$	328.7

Net cash invested in Midstream assets was $178.2 million for the nine months ended September 30, 2008 down from $304.8 million for 2007. Midstream spending declined in the nine month period from 2007 to 2008 because the north Louisiana project was in progress and is reflected in the midstream capital expenditures for the nine months ended September 30, 2007. Net cash invested in Treating assets was $32.5 million for the nine months ended September 30, 2008 and $18.8 million for the nine months ended September 30, 2007. Net cash invested in other corporate assets was $7.2 million for the nine months ended September 30, 2008 and $5.1 million for the nine months ended September 30, 2007.

Cash flows from investing activities for the nine months ended September 30, 2008 and 2007 also includes proceeds from property sales of $3.8 million and $3.0 million, respectively. These sales primarily related to sales of various small Midstream and Treating assets.

Cash Flows from Financing Activities.  Net cash provided by financing activities was $101.1 million and $230.9 million for the nine months ended September 30, 2008 and 2007, respectively. Financing activities primarily relate to funding of capital expenditures. The Partnership’s financings have primarily consisted of borrowings under its bank credit facility, borrowings under capital lease obligations, equity offerings and senior note repayments during 2008 and 2007 as follows (in millions):

	Nine Months Ended
	September 30,
	2008			2007
Net borrowings under bank credit facility	$	118.8		$	237.0
Senior note repayments		(7.1	)		(7.1	)
Net borrowings under capital lease obligations		17.6			—
Senior subordinated unit offerings(1)		—			99.9
Common unit offerings(1)		99.9			—

(1) Net of offering costs.

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Dividends to shareholders and distributions to non-controlling partners in the Partnership represent our primary use of cash in financing activities. Total cash distributions made during the nine months ended were as follows (in millions):

	Nine Months Ended September 30,
	2008		2007
Dividend to shareholders	$	47.0	$	31.3
Non-controlling partner distributions		47.9		28.8
Total	$	94.9	$	60.1

In order to reduce its interest costs, the Partnership does 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 the Partnership’s revolving credit facility. The Partnership borrows money under its $1.185 billion credit facility to fund checks as they are presented. As of September 30, 2008, the Partnership had approximately $202.0 million of available borrowing capacity under this facility. Changes in drafts payable for the nine months ended 2008 and 2007 were as follows (in millions):

	Nine Months Ended September 30,
	2008		2007
Decrease in drafts payable	$	28.9	$	38.0

Potential Shutdown of Blue Water Plant in First Quarter of 2009.  The Partnership owns a 59.27% interest in the Blue Water gas processing plant located near Crowley, Louisiana and it also operates this plant. The Blue Water facility is connected to continental shelf and deepwater production volumes through the Blue Water pipeline system which is owned by Tennessee Gas Pipeline (TGP). During 2008, TGP sought and received approval from the Federal Energy Regulatory Commission, or FERC, to acquire Columbia Gulf Transmission’s ownership share in the Blue Water pipeline. TGP intends to reverse the flow of the gas on the pipeline thereby removing access to all the gas processed at the Blue Water plant from the Blue Water offshore system. This action was originally planned for September 2008, but has been postponed until the first quarter of 2009 due to damage sustained as a result of hurricane activity in the third quarter of 2008. The Partnership is continuing to evaluate alternative sources of new gas for the Blue Water plant which may include moving gas from the LIG system over to the Blue Water system or relocating the Blue Water plant to support the LIG system. The Blue Water plant contributed gross margin of $0.8 million and $3.3 million and incurred operating expenses of $0.3 million and $0.9 million for the three and nine months ended September 30, 2008, respectively. The net book value of the Blue Water plant was $28.5 million as of September 30, 2008.

Off-Balance Sheet Arrangements.  We had no off-balance sheet arrangements as of September 30, 2008.

Capital Requirements of the Partnership.  As discussed under “Recent Events” and “Our Business Strategy through 2009,” the Partnership will be reducing its budgeted capital expansion projects during the remainder of 2008 and for 2009 to approximately $180.0 million which will be funded from its cash flow from operations and from proceeds from sales of certain non-strategic assets, including approximately $105.0 million from transactions expected to close before the end of November 2008. Global market and economic conditions have been, and continue to be, disruptive and volatile. The cost of capital in the debt and equity capital markets has increased substantially, while the availability of funds from those markets has diminished significantly. If the Partnership needs to raise capital, we cannot be certain that additional capital will be available to the extent required and on acceptable terms.

Since a portion of the Partnership’s cash flow from operations will be used to fund its capital projects during the remainder of 2008 and for 2009, the Partnership has reduced its quarterly distribution rate from $0.63 per common unit to $0.50 per common unit with respect to the third quarter of 2008 and anticipates that the distribution level will remain at a reduced level with respect to the remainder of 2008 and 2009. Our ability to pay dividends to our shareholders and to fund planned capital expenditures will depend upon the Partnership’s future operating performance, which will be affected by prevailing economic conditions in its industry and financial, business and other factors, some of which are beyond its control.

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Total Contractual Cash Obligations.  A summary of our total contractual cash obligations as of September 30, 2008 is as follows (in millions):

	Payments Due by Period
	Total		2008		2009		2010		2011		2012		Thereafter
Long-term debt	$	1,334.9	$	2.4	$	9.4	$	20.3	$	884.8	$	93.0	$	325.0
Interest payable on fixed long-term debt obligations		171.7		8.1		32.1		31.0		29.8		26.3		44.4
Capital lease obligations		25.7		0.6		2.5		2.5		2.4		2.4		15.3
Operating leases		99.1		7.1		25.9		22.0		20.7		16.6		6.8
Unconditional purchase obligations		31.5		14.2		17.3		—		—		—		—
Total contractual obligations	$	1,662.9	$	32.4	$	87.2	$	75.8	$	937.7	$	138.3	$	391.5

The above table does not include any physical or financial purchase contract commitments for natural gas.

The unconditional purchase obligations for 2008 relate to purchase commitments for equipment.

Indebtedness

As of September 30, 2008 and December 31, 2007, long-term debt consisted of the following (in thousands):

	September 30,			December 31,
	2008			2007
Bank credit facility, interest based on Prime and/or LIBOR plus an applicable margin, interest rates (per the facility) at September 30, 2008 and December 31, 2007 were 5.73% and 6.71%, respectively	$	852,810		$	734,000
Senior secured notes, weighted average interest rate at September 30, 2008 and December 31, 2007 was 6.75%		482,059			489,118
		1,334,869			1,223,118
Less current portion		(9,412	)		(9,412	)
Debt classified as long-term	$	1,325,457		$	1,213,706

Credit FacilityAs of September 30, 2008, the Partnership had a bank credit facility with a borrowing capacity of $1.185 billion that matures in June 2011. As of September 30, 2008, $983.0 million was outstanding under the bank credit facility, including $130.2 million of letters of credit, leaving approximately $202.0 million available for future borrowing. The bank credit facility is guaranteed by certain of the Partnership’s subsidiaries.

The Partnership was in compliance with all debt covenants as of September 30, 2008 and expects to be in compliance with debt covenants for the next twelve months. If the Partnership does not comply with the covenants and restrictions in its credit facility agreement or instruments governing its other indebtedness, the Partnership could be in default under those agreements, and the debt incurred under those agreements, together with accrued interest, could then be declared immediately due and payable. If the Partnership is unable to repay any borrowings when due, the lenders under its credit facility agreement and its senior secured noteholders could proceed against their collateral, which includes substantially all of the assets the Partnership owns. If the indebtedness under the Partnership’s credit facility agreement and its other debt instruments is accelerated, the Partnership may not have sufficient assets to repay amounts due under its credit facility agreement or its other debt instruments. The Partnership’s ability to comply with these provisions of its credit facility agreement and other agreements governing its other indebtedness may be affected by the factors discussed in this “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” or other events beyond the Partnership’s control.

On November 7, 2008, the Partnership entered into the Fifth Amendment and Consent to its bank credit facility and the Waiver and Letter Amendment No. 3 to its Amended and Restated Note Purchase Agreement. For a description of these amendments, please read “Item 5. Other Information” below.

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Recent Accounting Pronouncements

In May 2008, the FASB issued Staff Position FSPEITF 03-6-1 (the FSP) which requires unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents to be treated asparticipating securitiesas defined in EITF IssueNo. 03-6, “Participating Securities and the Two-Class Method under FASB Statement No. 128,” and, therefore, included in the earnings allocation in computing earnings per share under the two-class method described in FASB Statement No. 128,Earnings per Share. The FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. Upon adoption, the Company will consider restricted shares with nonforfeitable dividend rights in the calculation of earnings per share and will adjust all prior reporting periods retrospectively to conform to the requirements.

In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 157,“Fair Value Measurements” (SFAS 157). SFAS 157 introduces a framework for measuring fair value and expands required disclosure about fair value measurements of assets and liabilities. SFAS 157 for financial assets and liabilities is effective for fiscal years beginning after November 15, 2007. The Partnership has adopted the standard for those assets and liabilities as of January 1, 2008 and the impact of adoption was not significant.

In February 2007, the FASB issued SFAS No. 159,“Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment to FASB Statement No. 115”(SFAS 159). SFAS 159 permits entities to choose to measure many financial assets and financial liabilities at fair value. Changes in the fair value on items for which the fair value option has been elected are recognized in earnings each reporting period. SFAS 159 also establishes presentation and disclosure requirements designed to draw comparisons between the different measurement attributes elected for similar types of assets and liabilities. SFAS 159 was adopted effective January 1, 2008 and did not have a material impact on our financial statements.

In December 2007, the FASB issued SFAS No. 141R,“Business Combinations” (SFAS 141R) and SFAS No. 160,“Noncontrolling Interests in Consolidated Financial Statements”(SFAS 160). SFAS 141R requires most identifiable assets, liabilities, noncontrolling interests and goodwill acquired in a business combination to be recorded at “full fair value.” The Statement applies to all business combinations, including combinations among mutual entities and combinations by contract alone. Under SFAS 141R, all business combinations will be accounted for by applying the acquisition method. SFAS 141R is effective for periods beginning on or after December 15, 2008. SFAS 160 will require noncontrolling interests (previously referred to as minority interests) to be treated as a separate component of equity, not as a liability or other item outside of permanent equity. The statement applies to the accounting for noncontrolling interests and transactions with noncontrolling interest holders in consolidated financial statements.

SFAS 160 is effective for periods beginning on or after December 15, 2008 and will be applied prospectively to all noncontrolling interests, including any that arose before the effective date except that comparative period information must be recast to classify noncontrolling interests in equity, attribute net income and other comprehensive income to noncontrolling interests, and provide other disclosures required by SFAS 160.

In March of 2008, the FASB issued SFAS No. 161,“Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133”(SFAS 161). SFAS 161 requires entities to provide greater transparency about how and why the entity uses derivative instruments, how the instruments and related hedged items are accounted for under SFAS 133 and how the instruments and related hedged items affect the financial position, results of operations and cash flows of the entity. SFAS 161 is effective for fiscal years beginning after November 15, 2008. The principal impact to the Company will be to require expanded disclosure regarding derivative instruments.

Disclosure Regarding Forward-Looking Statements

This Quarterly Report onForm 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that are based on information currently available to management as well as management’s assumptions and beliefs. Statements included in this report which are not historical facts are forward-looking

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statements. These statements can be identified by the use of forward-looking terminology including “forecast,” “may,” “believe,” “will,” “expect,” “anticipate,” “estimate,” “continue” or other similar words. These statements discuss future expectations, contain projections of results of operations or of financial condition or state other“forward-looking” information. 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 specific uncertainties discussed elsewhere in thisForm 10-Q, the risk factors set forth in Part I, “Item 1A. Risk Factors” in our Annual Report onForm 10-K for the year ended December 31, 2007, and those set forth in Part II, “Item 1A. Risk Factors” of this report 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 3.   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 the Partnership’s floating rate debt.

Interest Rate Risk

The Partnership is exposed to interest rate risk on its variable rate bank credit facility. At September 30, 2008, its bank credit facility had outstanding borrowings of $852.8 million which approximated its fair value. The Partnership manages a portion of its interest rate exposure on its variable rate debt by utilizing interest rate swaps, which allow it to convert a portion of variable rate debt into fixed rate debt. In January 2008, the Partnership amended its existing interest rate swaps covering $450.0 million of the variable rate debt to extend the period by one year (coverage periods end from November 2010 through October 2011) and reduce the interest rates to a range of 4.38% to 4.68%. In September 2008, the Partnership entered into additional interest rate swaps covering the $450.0 million that converted the floating rate portion of the original swaps from three month LIBOR to one month LIBOR. In addition, the Partnership entered into one new interest rate swap in January 2008 covering $100.0 million of the variable rate debt for a period of one year at an interest rate of 2.83%. As of September 30, 2008, the fair value of these interest rate swaps was reflected as a liability of $11.8 million ($6.2 million in net current liabilities and $5.6 million in long-term liabilities) on its financial statements. The Partnership estimates that a 1% increase or decrease in the interest rate would increase or decrease the fair value of these interest rate swaps by approximately $11.5 million. Considering the interest rate swaps and the amount outstanding on its bank credit facility as of September 30, 2008, the Partnership estimates that a 1% increase or decrease in the interest rate would change its annual interest expense by approximately $3.0 million for period when the entire portion of the $550.0 million of interest rate swaps are outstanding and $8.5 million for annual periods after 2011 when all the interest rate swaps lapse.

At September 30, 2008, the Partnership had total fixed rate debt obligations of $482.1 million, consisting of its senior secured notes with a weighted average interest rate of 6.75%. The fair value of these fixed rate obligations was approximately $361.7 million as of September 30, 2008. The Partnership estimates that a 1% increase or decrease in interest rates would increase or decrease the fair value of the fixed rate debt (its senior secured notes) by $15.1 million based on the debt obligations as of September 30, 2008.

Commodity Price Risk

Approximately 4.1% of the natural gas marketed by the Partnership 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, resale margins are higher during periods of high natural gas prices and lower during periods of lower natural gas prices.

Another price risk faced by the Partnership is the risk of mismatching volumes of gas bought or sold on a monthly price versus volumes bought or sold on a daily price. The Partnership enters each month with a balanced

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book of gas bought and sold substantially on the same basis. However, it is normal to experience fluctuations in the volumes of gas bought or sold under either basis, which leaves the Partnership with short or long positions that must be covered. The Partnership uses financial swaps to mitigate the exposure at the time it is created to maintain a balanced position.

The Partnership has commodity price risk associated with its processed volumes of natural gas. The Partnership currently processes gas under three main types of contractual arrangements:

1. Processing margin contracts:  Under this type of contract, the Partnership pays the producer for the full amount of inlet gas to the plant, and makes 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) in processing. The 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. The Partnership controls its risk on current processing margin contracts primarily through its ability to bypass processing when it is not profitable or by contracts that revert to a minimum fee.

2. Percent of proceeds contracts:  Under these contracts, the Partnership receives 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, margins from these contracts are greater during periods of high liquids prices. The Partnership’s margins from processing cannot become negative under percent of proceeds contracts, but decline during periods of low NGL prices.

3. Fee based contracts:  Under these contracts the Partnership has no commodity price exposure, and is paid a fixed fee per unit of volume that is treated or conditioned.

Gas processing margins by contract type, gathering and transportation margins and treating margins as a percent of total margin for the comparative quarterly and year-to-date periods are as follows:

	For the						For the
	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
Gathering and transportation margin		40.1	%		42.8	%		42.6	%		44.7	%
Gas processing margins:
Processing margin		26.4	%		17.3	%		23.0	%		13.3	%
Percent of proceeds		16.0	%		21.1	%		16.3	%		20.2	%
Fee based		5.8	%		7.0	%		7.1	%		8.4	%
Total gas processing margins		48.2	%		45.4	%		46.4	%		41.9	%
Treating margin		11.7	%		11.8	%		11.0	%		13.4	%
Total		100.0	%		100.0	%		100.0	%		100.0	%

The Partnership also has hedges in place at September 30, 2008 covering liquids volumes it expects to receive under percent of proceeds contracts as set forth in the following table. The relevant payment index price is the monthly average of the daily closing price for deliveries of commodities into Mont Belvieu, Texas as reported by the Oil Price Information Service (OPIS).

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		Notional				Fair Value
Period	Underlying	Volume	We Pay	We Receive		Asset/(Liability)
						(In thousands)
October2008-December 2009	Ethane	183 (MBbls)	Index	$	0.640 - $0.858/gal	$	883
October2008-December 2009	Propane	193 (MBbls)	Index	$	1.057 - $1.493/gal		(349	)
October2008-December 2009	Iso Butane	50 (MBbls)	Index	$	1.295 - $1.812/gal		151
October2008-December 2009	Normal Butane	68 (MBbls)	Index	$	1.278 - $1.797/gal		230
October2008-December 2009	Natural Gasoline	146 (MBbls)	Index	$	1.573 -$2.181/gal		(261	)
						$	654

The Partnership also has hedges in place at September 30, 2008 covering the frac spread risk related to its processing margin contracts as set forth in the following table:

		Notional			Fair Value
Period	Underlying	Volume	We Pay	We Receive	Asset/(Liability)
					(In thousands)
October2008-December 2008	Ethane	159 (MBbls)	Index	$0.79/gal	$	953
October2008-December 2008	Propane	81 (MBbls)	Index	$1.52/gal		241
October2008-December 2008	Iso Butane	26 (MBbls)	Index	$1.72/gal		98
October2008-December 2008	Normal Butane	28 (MBbls)	Index	$1.70/gal		104
October2008-December 2008	Natural Gasoline	62 (MBbls)	Index	$2.085/gal		76
October2008-December 2008	Natural Gas	17,785 (MMBtu/d)	$7.375-$7.875/MMBtu	Index		(504	)
					$	968

The Partnership has hedged its expected exposure to declines in prices for natural gas and NGL volumes produced for its account in the approximate percentages set forth below:

	2008			2009
Natural gas		74	%		34	%
NGLs		59	%		19	%

The Partnership’s primary commodity risk management objective is to reduce volatility in its cash flows. The Partnership maintains a Risk Management Committee, including members of senior management, which oversees all hedging activity. The Partnership enters into hedges for natural gas and NGLs using NYMEX futures orover-the-counter derivative financial instruments with only certain well-capitalized counterparties which have been approved by the Risk Management Committee.

The use of financial instruments may expose the Partnership 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) counterparties fail to purchase the contracted quantities of natural gas or otherwise fail to perform. To the extent that the Partnership engages in hedging activities it may be prevented from realizing the benefits of favorable price changes in the physical market. However, the Partnership is similarly insulated against unfavorable changes in such prices.

As of September 30, 2008, outstanding natural gas swap agreements, NGL swap agreements, swing swap agreements, storage swap agreements and other derivative instruments were a net fair value asset of $3.8 million. The aggregate effect of a hypothetical 10% increase in gas and NGL prices would result in a decrease of approximately $5.5 million in the net asset fair value of these contracts as of September 30, 2008.

Item 4.   Controls and Procedures

(a)   Evaluation of Disclosure Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and

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procedures as of the end of the period covered by this report pursuant to Exchange ActRules 13a-15 and15d-15. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2008 in alerting them in a timely manner to material information required to be disclosed in our reports filed with the Securities and Exchange Commission.

(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 September 30, 2008 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

PART II — OTHER INFORMATION

Item 1A.   Risk Factors

Information about risk factors for the three months ended September 30, 2008 does not differ materially from that set forth in Part I, Item 1A, of our Annual Report onForm 10-K for the year ended December 31, 2007.

Item 5.   Other Information

On November 7, 2008, the Partnership entered into the Fifth Amendment and Consent (the “Fifth Amendment”) to its credit facility with Bank of America, N.A., as administrative agent, and the banks and other parties thereto. A copy of the Fifth Amendment is filed as Exhibit 10.1 to this Quarterly Report onForm 10-Q. The Fifth Amendment amended the agreement governing the Partnership’s credit facility to, among other things, (i) increase the maximum permitted leverage ratio the Partnership must maintain for the fiscal quarters ending December 31, 2008 through September 30, 2009, (ii) lower the minimum interest coverage ratio the Partnership must maintain for the fiscal quarter ending December 31, 2008 and each fiscal quarter thereafter, (iii) permit the Partnership to sell a non-strategic asset dispositions described in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Business Strategy through 2009”, (iv) increase the interest rate the Partnership pays on the obligations under the credit facility and (v) lower the maximum permitted leverage ratio the Partnership must maintain if the Partnership or its subsidiaries incur unsecured note indebtedness.

Under the amended credit agreement, borrowings will bear interest at the Partnership’s option at the administrative agent’s reference rate plus 0.50% to 2.00% (ranges were 0% to 0.25% prior to amendment) or LIBOR plus 1.50% to 3.00% (ranges were 1.00% to 1.75% prior to amendment). The applicable margins for the Partnership’s interest rate, letter of credit fees and commitment fees all vary quarterly based on the Partnership’s leverage ratio. The fees charged for letters of credit range from 1.50% to 3.00% per annum (ranges were 1.00% to 1.75% prior to amendment) plus a fronting fee of 0.125% per annum. The Partnership will incur quarterly commitment fees ranging from 0.20% to 0.50% (ranges were 0.20% to 0.375% prior to amendment) on the unused amount of the credit facility. Based on the Partnership’s forecasted leverage ratios for the fourth quarter of 2008 and 2009, the Partnership expects the applicable margins to be at the higher end of these ranges for its interest rate, letter of credit fees and commitment fees.

Under the amended credit facility, the maximum leverage ratio (total funded debt to consolidated earnings before interest, taxes, depreciation and amortization) is as follows:

•  5.00 to 1.00 for any fiscal quarter ending through June 30, 2009;

•  4.75 to 1.00 for the fiscal quarter ending September 30, 2009; and

•  4.50 to 1.00 for any fiscal quarter ending thereafter.

For any fiscal quarter ending after December 31, 2010, during an acquisition period, as defined in the credit facility, the maximum leverage ratio shall be increased by 0.50 to 1.00 from the otherwise applicable rate set forth above. In addition, if the maximum leverage ratio is greater than 4.50 to 1.00 during an acquisition period, then borrowings will bear interest at the Partnership’s option at the administrative agent’s reference rate plus 2.25% or LIBOR plus 3.25%.

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The minimum interest coverage ratio (as defined in the agreement, measured quarterly on a rolling four-quarter basis) was also lowered to 2.50 to 1.00 from 3.00 to 1.00 prior to amendment.

On November 7, 2008, the Partnership also entered into the Waiver and Letter Amendment No. 3 (“Letter Amendment No. 3”) to its Amended and Restated Note Purchase Agreement with Prudential Investment Management, Inc. and the other holders of its senior secured notes. A copy of Letter Amendment No. 3 is filed as Exhibit 10.2 to this Quarterly Report onForm 10-Q. Letter Amendment No. 3 amended the agreement governing the Partnership’s senior secured notes to, among other things, (i) increase the maximum permitted leverage ratio the Partnership must maintain for the fiscal quarters ending December 31, 2008 through September 30, 2009, consistent with the ratios under the amendment to the bank credit facility (ii) lower the minimum interest coverage ratio the Partnership must maintain for the fiscal quarter ending December 31, 2008 and each fiscal quarter thereafter consistent with the ratio under the amendment to the bank credit facility, (iii) permit the Partnership to sell anon-strategic asset described in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Our Business Strategy through 2009” and (iv) increase the interest rate the Partnership pays on the senior secured notes. The interest rate the Partnership pays on the senior secured notes will increase by 0.5%. In addition, the interest rate on the senior secured notes will increase by an additional 0.75% (referred to as an excess leverage fee) if its leverage ratio is greater than 3.75 to 1.00 as of the end of any fiscal quarter, commencing with the fiscal quarter ended on September 30, 2008. Based on the Partnership’s forecasted leverage ratios for the fourth quarter of 2008 and 2009, the Partnership expects to pay such excess leverage fee.

Item 6.   Exhibits

The exhibits filed as part of this report are as follows (exhibits incorporated by reference are set forth with the name of the registrant, the type of report and registration number or last date of the period for which it was filed, and the exhibit number in such filing):

Number				Description
	3	.1	—	Amended and Restated Certificate of Incorporation of Crosstex Energy, Inc. (incorporated by reference to Exhibit 3.1 to Crosstex Energy, Inc.’s Current Report onForm 8-K dated October 26, 2006, filed with the Commission on October 31, 2006).
	3	.2	—	Third Amended and Restated Bylaws of Crosstex Energy, Inc. (incorporated by reference from Exhibit 3.1 to Crosstex Energy, Inc.’s Current Report onForm 8-K dated March 22, 2006, filed with the Commission on March 28, 2006).
	3	.3	—	Certificate of Limited Partnership of Crosstex Energy, L.P. (incorporated by reference to Exhibit 3.1 to Crosstex Energy, L.P.’s Registration Statement onForm S-1, fileNo. 333-97779).
	3	.4	—	Sixth Amended and Restated Agreement of Limited Partnership of Crosstex Energy, L.P., dated as of March 23, 2007 (incorporated by reference to Exhibit 3.1 to Crosstex Energy, L.P.’s current report onForm 8-K dated March 23, 2007, filed with the Commission on March 27, 2007).
	3	.5	—	Amendment No. 1 to Sixth Amended and Restated Agreement of Limited Partnership of Crosstex Energy, L.P., dated December 20, 2007 (incorporated by reference to Exhibit 3.1 to Crosstex Energy, L.P.’s Current Report onForm 8-K dated December 20, 2007, filed with the Commission on December 21, 2007).
	3	.6	—	Amendment No. 2 to Sixth Amended and Restated Agreement of Limited Partnership of Crosstex Energy, L.P., effective as of January 1, 2007 (incorporated by reference to Exhibit 3.1 to Crosstex Energy, L.P.’s Current Report onForm 8-K dated March 27, 2008, filed with the Commission on March 28, 2008).
	3	.7	—	Certificate of Limited Partnership of Crosstex Energy Services, L.P. (incorporated by reference to Exhibit 3.3 to Crosstex Energy, L.P.’s Registration Statement onForm S-1, fileNo. 333-97779).
	3	.8	—	Second Amended and Restated Agreement of Limited Partnership of Crosstex Energy Services, L.P., dated as of April 1, 2004 (incorporated by reference to Exhibit 3.5 to Crosstex Energy, L.P.’s Quarterly Report onForm 10-Q for the quarterly period ended March 31, 2004).

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Number				Description
	3	.9	—	Certificate of Limited Partnership of Crosstex Energy GP, L.P. (incorporated by reference to Exhibit 3.5 to Crosstex Energy, L.P.’s Registration Statement onForm S-1, fileNo. 333-97779).
	3	.10	—	Agreement of Limited Partnership of Crosstex Energy GP, L.P., dated as of July 12, 2002 (incorporated by reference to Exhibit 3.6 to Crosstex Energy, L.P.’s Registration Statement onForm S-1, fileNo. 333-97779).
	3	.11	—	Certificate of Formation of Crosstex Energy GP, LLC (incorporated by reference to Exhibit 3.7 to Crosstex Energy, L.P.’s Registration Statement onForm S-1, fileNo. 333-97779).
	3	.12	—	Amended and Restated Limited Liability Company Agreement of Crosstex Energy GP, LLC, dated as of December 17, 2002 (incorporated by reference to Exhibit 3.8 to Crosstex Energy, L.P.’s Registration Statement onForm S-1, fileNo. 333-97779).
	3	.13	—	Amended and Restated Certificate of Formation of Crosstex Holdings GP, LLC (incorporated by reference from Exhibit 3.11 to Crosstex Energy, Inc.’s Registration Statement onForm S-1, fileNo. 333-110095).
	3	.14	—	Limited Liability Company Agreement of Crosstex Holdings GP, LLC, dated as of October 27, 2003 (incorporated by reference from Exhibit 3.12 to Crosstex Energy, Inc.’s Registration Statement onForm S-1, fileNo. 333-110095).
	3	.15	—	Certificate of Formation of Crosstex Holdings LP, LLC (incorporated by reference from Exhibit 3.13 to Crosstex Energy, Inc.’s Registration Statement onForm S-1, fileNo. 333-110095).
	3	.16	—	Limited Liability Company Agreement of Crosstex Holdings LP, LLC, dated as of November 4, 2003 (incorporated by reference from Exhibit 3.14 to Crosstex Energy, Inc.’s Registration Statement onForm S-1, fileNo. 333-110095).
	3	.17	—	Amended and Restated Certificate of Limited Partnership of Crosstex Holdings, L.P. (incorporated by reference from Exhibit 3.15 to Crosstex Energy, Inc.’s Registration Statement onForm S-1, fileNo. 333-110095).
	3	.18	—	Agreement of Limited Partnership of Crosstex Holdings, L.P., dated as of November 4, 2003 (incorporated by reference from Exhibit 3.16 to Crosstex Energy, Inc.’s Registration Statement onForm S-1, fileNo. 333-110095).
	10	.1*	—	Fifth Amendment and Consent to Fourth Amended and Restated Credit Agreement, effective as of November 7, 2008, among Crosstex Energy, L.P., Bank of America, N.A. and certain other parties.
	10	.2*	—	Waiver and Letter Amendment No. 3 to Amended and Restated Note Purchase Agreement, effective as of November 7, 2008, among Crosstex Energy, L.P., Prudential Investment Management, Inc. and certain other parties.
	31	.1*	—	Certification of the principal executive officer.
	31	.2*	—	Certification of the principal financial officer.
	32	.1*	—	Certification of the principal executive officer and principal financial officer of the Company pursuant to 18 U.S.C. Section 1350.

* Filed herewith.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

CROSSTEX ENERGY, INC.

By:  /s/  WILLIAM W. DAVIS

William W. Davis,

Executive Vice President and

Chief Financial Officer

November 10, 2008

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EXHIBIT INDEX

Number				Description
	3	.1	—	Amended and Restated Certificate of Incorporation of Crosstex Energy, Inc. (incorporated by reference to Exhibit 3.1 to Crosstex Energy, Inc.’s Current Report onForm 8-K dated October 26, 2006, filed with the Commission on October 31, 2006).
	3	.2	—	Third Amended and Restated Bylaws of Crosstex Energy, Inc. (incorporated by reference from Exhibit 3.1 to Crosstex Energy, Inc.’s Current Report onForm 8-K dated March 22, 2006, filed with the Commission on March 28, 2006).
	3	.3	—	Certificate of Limited Partnership of Crosstex Energy, L.P. (incorporated by reference to Exhibit 3.1 to Crosstex Energy, L.P.’s Registration Statement onForm S-1, fileNo. 333-97779).
	3	.4	—	Sixth Amended and Restated Agreement of Limited Partnership of Crosstex Energy, L.P., dated as of March 23, 2007 (incorporated by reference to Exhibit 3.1 to Crosstex Energy, L.P.’s current report onForm 8-K dated March 23, 2007, filed with the Commission on March 27, 2007).
	3	.5	—	Amendment No. 1 to Sixth Amended and Restated Agreement of Limited Partnership of Crosstex Energy, L.P., dated December 20, 2007 (incorporated by reference to Exhibit 3.1 to Crosstex Energy, L.P.’s Current Report onForm 8-K dated December 20, 2007, filed with the Commission on December 21, 2007).
	3	.6	—	Amendment No. 2 to Sixth Amended and Restated Agreement of Limited Partnership of Crosstex Energy, L.P., effective as of January 1, 2007 (incorporated by reference to Exhibit 3.1 to Crosstex Energy, L.P.’s Current Report onForm 8-K dated March 27, 2008, filed with the Commission on March 28, 2008).
	3	.7	—	Certificate of Limited Partnership of Crosstex Energy Services, L.P. (incorporated by reference to Exhibit 3.3 to Crosstex Energy, L.P.’s Registration Statement onForm S-1, fileNo. 333-97779).
	3	.8	—	Second Amended and Restated Agreement of Limited Partnership of Crosstex Energy Services, L.P., dated as of April 1, 2004 (incorporated by reference to Exhibit 3.5 to Crosstex Energy, L.P.’s Quarterly Report onForm 10-Q for the quarterly period ended March 31, 2004).
	3	.9	—	Certificate of Limited Partnership of Crosstex Energy GP, L.P. (incorporated by reference to Exhibit 3.5 to Crosstex Energy, L.P.’s Registration Statement onForm S-1, fileNo. 333-97779).
	3	.10	—	Agreement of Limited Partnership of Crosstex Energy GP, L.P., dated as of July 12, 2002 (incorporated by reference to Exhibit 3.6 to Crosstex Energy, L.P.’s Registration Statement onForm S-1, fileNo. 333-97779).
	3	.11	—	Certificate of Formation of Crosstex Energy GP, LLC (incorporated by reference to Exhibit 3.7 to Crosstex Energy, L.P.’s Registration Statement onForm S-1, fileNo. 333-97779).
	3	.12	—	Amended and Restated Limited Liability Company Agreement of Crosstex Energy GP, LLC, dated as of December 17, 2002 (incorporated by reference to Exhibit 3.8 to Crosstex Energy, L.P.’s Registration Statement onForm S-1, fileNo. 333-97779).
	3	.13	—	Amended and Restated Certificate of Formation of Crosstex Holdings GP, LLC (incorporated by reference from Exhibit 3.11 to Crosstex Energy, Inc.’s Registration Statement onForm S-1, fileNo. 333-110095).
	3	.14	—	Limited Liability Company Agreement of Crosstex Holdings GP, LLC, dated as of October 27, 2003 (incorporated by reference from Exhibit 3.12 to Crosstex Energy, Inc.’s Registration Statement onForm S-1, fileNo. 333-110095).
	3	.15	—	Certificate of Formation of Crosstex Holdings LP, LLC (incorporated by reference from Exhibit 3.13 to Crosstex Energy, Inc.’s Registration Statement onForm S-1, fileNo. 333-110095).
	3	.16	—	Limited Liability Company Agreement of Crosstex Holdings LP, LLC, dated as of November 4, 2003 (incorporated by reference from Exhibit 3.14 to Crosstex Energy, Inc.’s Registration Statement onForm S-1, fileNo. 333-110095).
	3	.17	—	Amended and Restated Certificate of Limited Partnership of Crosstex Holdings, L.P. (incorporated by reference from Exhibit 3.15 to Crosstex Energy, Inc.’s Registration Statement onForm S-1, fileNo. 333-110095).
	3	.18	—	Agreement of Limited Partnership of Crosstex Holdings, L.P., dated as of November 4, 2003 (incorporated by reference from Exhibit 3.16 to Crosstex Energy, Inc.’s Registration Statement onForm S-1, fileNo. 333-110095).
	10	.1*	—	Fifth Amendment and Consent to Fourth Amended and Restated Credit Agreement, effective as of November 7, 2008, among Crosstex Energy, L.P., Bank of America, N.A. and certain other parties.
	10	.2*	—	Waiver and Letter Amendment No. 3 to Amended and Restated Note Purchase Agreement, effective as of November 7, 2008, among Crosstex Energy, L.P., Prudential Investment Management, Inc. and certain other parties.
	31	.1*	—	Certification of the principal executive officer.

Number				Description
	31	.2*	—	Certification of the principal financial officer.
	32	.1*	—	Certification of the principal executive officer and principal financial officer of the Company pursuant to 18 U.S.C. Section 1350.

* Filed herewith.