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Crosstex Energy Inc – ‘424B4’ on 1/13/04

On:  Tuesday, 1/13/04, at 6:27am ET   ·   Accession #:  1047469-4-697   ·   File #:  333-110095

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 1/13/04  Crosstex Energy Inc               424B4                  1:1.9M                                   Merrill Corp/New/FA

Document/Exhibit                   Description                      Pages   Size 

 1: 424B4       Prospectus                                          HTML   1.69M 

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TABLE OF CONTENTS
INDEX TO FINANCIAL STATEMENTS
TABLE OF CONTENTS 3

PROSPECTUS

2,306,000 Shares

Crosstex Energy, Inc.

Common Stock

        This is an initial public offering of 2,306,000 shares of common stock of Crosstex Energy, Inc. The selling stockholders are selling all of the shares. We will not receive any proceeds from the sale of the shares of common stock by any selling stockholder. Crosstex Energy, Inc. owns and controls the general partner of Crosstex Energy, L.P., a publicly-traded limited partnership engaged in the gathering, transmission, treating, processing and marketing of natural gas, and a 54.3% limited partner interest in Crosstex Energy, L.P.

        Before the offering, there has been no public market for our common stock. The shares have been approved for listing on the Nasdaq National Market under the symbol "XTXI."

Investing in our common stock involves risk.
See "Risk Factors" beginning on page 12.

PRICE $19.50 PER SHARE

        We have granted the underwriters a 30-day option to purchase up to an additional 345,900 shares of common stock to cover over-allotments. The underwriters expect to deliver the shares to purchasers on or about January 16, 2004.

        Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

A.G. Edwards & Sons, Inc.

Raymond James

RBC Capital Markets

Prospectus dated January 13, 2004

We own and control the general partner of, and a 54.3% limited partner interest in, Crosstex Energy, L.P. Our cash flow is derived almost exclusively from our ownership of partnership interests in Crosstex Energy, L.P.

TABLE OF CONTENTS

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ii

iii

iv

GUIDE TO READING THIS PROSPECTUS

        The following information should help you understand some of the conventions used in this prospectus.

•

References in this prospectus to "Crosstex Energy, Inc.," "we," "ours," "us," or like terms refer to Crosstex Energy, Inc. and its subsidiaries on a consolidated basis. References to "our predecessor" refer to Crosstex Energy Services, Ltd. The selling stockholders are offering shares of common stock of Crosstex Energy, Inc.



•

References in this prospectus to "Crosstex Energy, L.P.," the "Partnership," or like terms when used in the present tense, prospectively or for historical periods since December 2002 refer to Crosstex Energy, L.P. and its operating subsidiaries. References to "Crosstex Energy, L.P.'s predecessor," the "Partnership's predecessor" or like terms refer to Crosstex Energy Services, Ltd. Substantially all of the assets of Crosstex Energy Services, Ltd. were transferred to Crosstex Energy, L.P. at the closing of its initial public offering in December 2002.



•

References in this prospectus to "Crosstex Energy GP, L.P.," the "general partner," the "Partnership's general partner" or like terms refer to Crosstex Energy GP, L.P. Crosstex Energy GP, L.P. is the general partner of Crosstex Energy, L.P.

        For ease of reference, a glossary of some terms used in this prospectus is included in this prospectus as Appendix A.

        Unless otherwise specified, the information in this prospectus assumes that the underwriters' over-allotment option is not exercised.

v

PROSPECTUS SUMMARY

        The summary highlights information contained elsewhere in this prospectus. You should read the entire prospectus carefully, including the historical and pro forma financial statements and notes to those financial statements. You should read "Summary of Risk Factors" beginning on page 6 and "Risk Factors" beginning on page 12 for more information about important factors that you should consider before buying shares of common stock.

Crosstex Energy, Inc.

        Our assets consist almost exclusively of partnership interests in Crosstex Energy, L.P. (NASDAQ symbol: XTEX), a publicly traded limited partnership engaged in the gathering, transmission, treating, processing and marketing of natural gas. These partnership interests consist of the following:

•

333,000 common units and 4,667,000 subordinated units, representing a 54.3% limited partner interest in the Partnership; and



•

100% ownership interest in Crosstex Energy GP, L.P., the general partner of the Partnership, which owns a 2.0% general partner interest and all of the incentive distribution rights in the Partnership.

        Our cash flows consist almost exclusively of distributions from the Partnership on the partnership interests we own. 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. The Partnership paid a distribution of $0.70 per unit for the quarter ended September 30, 2003, resulting in a quarterly distribution to us of $4,016,798, consisting of the following:

•

$3,500,000 on the common units and subordinated units;



•

$136,686 on the 2.0% general partner interest; and



•

$380,112 on the incentive distribution rights.

The incentive distribution rights 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 13.0% of all cash distributed in a quarter after each unit has received $0.50 for that quarter, 23.0% of all cash distributed after each unit has received $0.625 for that quarter and 48.0% of all cash distributed after each unit has received $0.75 for that quarter. For a more detailed description of cash distributions on the partnership interests of Crosstex Energy, L.P., please see "Material Provisions of the Partnership Agreement of Crosstex Energy, L.P.—Cash Distribution Policy" beginning on page 113.

        We intend to pay to our stockholders, on a quarterly basis, dividends equal to the cash we receive from our Partnership distributions, less reserves for expenses, future dividends and other uses of cash, including:

•

federal income taxes, which we are required to pay because we are taxed as a corporation;



•

the expenses of being a public company;



•

other general and administrative expenses;



•

capital contributions to the Partnership upon the issuance by it of additional partnership securities in order to maintain the general partner's 2.0% general partner interest; and



•

reserves our board of directors believes prudent to maintain, including reserves equal to the benefit we will receive in 2004 from our existing net operating loss carryforwards.

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For a discussion of our net operating loss carryforwards please see "Material Federal Income Tax Consequences—Our Tax Treatment" beginning on page 123.

        Based on the current distribution policy of the Partnership, our expected federal income tax liabilities disregarding our net operating loss carryforwards which we expect to utilize in 2004 and our expected level of other expenses and reserves that our board of directors believes prudent to maintain, we expect that our initial quarterly dividend rate will be $0.30 per share. If the Partnership is successful in implementing its business strategy and increasing distributions to its partners, we would generally expect to increase dividends to our stockholders, although the timing and amount of any such increased dividends will not necessarily be comparable to the increased Partnership distributions. We expect to pay a pro rated dividend for the portion of the first quarter of 2004 that we are public on or about May 15, 2004 to holders of record on March 21, 2004. However, we cannot assure you that any dividends will be declared or paid. See "Dividend Policy" on page 32.

        The Partnership's strategy is to increase distributable cash flow per unit by making accretive acquisitions of assets that are essential to the production, transportation and marketing of natural gas, improving the profitability of its assets by increasing their utilization while controlling costs and pursuing new construction or expansion opportunities in its core operating areas. If the Partnership is successful in implementing this strategy, we believe the total amount of cash distributions it makes will increase and our share of those distributions will also increase. The Partnership announced increases in its quarterly distribution two times since its initial public offering in December 2002. During that time, the Partnership increased the per unit quarterly cash distribution on its common and subordinated units by 40.0%, from $0.50 to $0.70. If the Partnership increased its per unit quarterly distribution to $0.80, its total quarterly distribution would increase $1,504,167 and we would receive $1,101,667, or 73.2%, of that increase. If the Partnership then issued an additional 1,000,000 units and maintained its per unit quarterly distribution at $0.80 per unit, its total quarterly distribution would increase another $923,930 and we would receive $123,930, or 13.4%, of that increase, assuming the general partner made a capital contribution to the Partnership sufficient to maintain its 2.0% general partner interest.

        So long as we own the general partner, we are prohibited by an omnibus agreement with the Partnership from engaging in the business of gathering, transmitting, treating, processing, storing and marketing natural gas and transporting, fractionating, storing and marketing natural gas liquids (NGLs), except to the extent that the Partnership, with the concurrence of a majority of its independent directors comprising its conflicts committee, elects not to engage in a particular acquisition or expansion opportunity. The Partnership may elect to forego an opportunity for several reasons, including:

•

the nature of some or all of the target's assets or income might affect the Partnership's ability to be taxed as a partnership for federal income tax purposes;



•

the board of directors of Crosstex Energy GP, LLC may conclude that some or all of the target assets are not a good strategic opportunity for the Partnership; or



•

the seller may desire equity, rather than cash, as consideration and may not want to accept the Partnership's units as consideration.

        We have no present intention of engaging in additional operations or pursuing the types of opportunities that we are permitted to pursue under the omnibus agreement, although we may decide to pursue them in the future, either alone or in combination with the Partnership.

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Crosstex Energy, L.P.

Overview

        Crosstex Energy, L.P. is a rapidly growing independent midstream energy company engaged in the gathering, transmission, treating, processing and marketing of natural gas. The Partnership connects the wells of natural gas producers in its market areas to its gathering systems, treats natural gas to remove impurities to ensure that it meets pipeline quality specifications, processes natural gas for the removal of natural gas liquids, or NGLs, transports natural gas and ultimately provides an aggregated supply of natural gas to a variety of markets. The Partnership purchases natural gas from natural gas producers and other supply points and sells that natural gas to utilities, industrial consumers, other marketers and pipelines and thereby generates gross margins based on the difference between the purchase and resale prices. In addition, the Partnership purchases natural gas from producers not connected to its gathering systems for resale and sells natural gas on behalf of producers for a fee.

        The Partnership has grown rapidly since the inception of its various predecessors in 1992 through a combination of acquisitions and the construction of new assets. Since January 2000, the Partnership has acquired and integrated 13 operations with an aggregate purchase price of approximately $143.1 million, including its $68.1 million acquisition of assets from Duke Energy Field Services, which we refer to in this prospectus as DEFS. Additionally, during the same period, the Partnership has invested in excess of $62.0 million in expansion projects and other capital expenditures. The Partnership's net income increased to $2.0 million for the year ended December 31, 2002, compared to a net loss of $0.5 million for the year ended December 31, 1998. The Partnership's net income was $9.7 million for the nine months ended September 30, 2003. The Partnership's gross margin increased to $32.7 million for the year ended December 31, 2002, compared to $2.2 million for the year ended December 31, 1998. The Partnership's gross margin was $41.2 million for the nine months ended September 30, 2003.

        The Partnership has two operating divisions, the Midstream division, which consists of its natural gas gathering, transmission, processing, marketing and producer services operations, and the Treating division, which provides natural gas treating for the removal of carbon dioxide and other contaminants. The Partnership's primary Midstream assets include systems located along the Texas Gulf Coast and in south-central Mississippi, which, in the aggregate, consist of approximately 2,500 miles of gathering and transmission pipelines, and three natural gas processing plants. After giving pro forma effect to its acquisition of assets from DEFS, for the year ended December 31, 2002 and the nine months ended September 30, 2003, the Partnership would have gathered and transported approximately 501,233 MMBtu/d and 621,881 MMBtu/d of natural gas, respectively. In the Partnership's producer services operations, it purchases for resale volumes of natural gas that do not move through its gathering, processing or transmission assets from over 50 independent producers. The Partnership's treating plants remove carbon dioxide and hydrogen sulfide from natural gas before it is delivered into transportation systems to ensure that the natural gas meets pipeline quality specifications.

Recent Developments

Recent Acquisitions and Expansion

        Duke Energy Field Services.    In June 2003, the Partnership acquired various midstream assets located in Mississippi, Texas, Alabama and Louisiana from DEFS for $68.1 million in cash. The principal assets acquired were the AIM pipeline system, a 638-mile natural gas gathering and transmission system in Mississippi that serves utility and industrial customers, and a 12.4% non-operating interest in the Seminole gas processing plant, which provides carbon dioxide separation and sulfur removal services for several major oil companies in West Texas. The acquisition provided the Partnership with a new core area for growth in south-central Mississippi, expanded its presence in West Texas, increased the total miles of its pipelines from 1,700 to 2,500 and enabled it to enter the business

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of carbon dioxide separation. In addition, the Partnership believes that the acquisition has increased the stability of its cash flow as operating profits from the AIM pipeline system are generated through purchasing, gathering, transporting and reselling natural gas which generates margins not affected by commodity prices, and a majority of the income it receives from the Seminole gas plant is based on fixed fees for carbon dioxide separation and sulfur removal.

        Gregory Expansion.    In August 2003, the Partnership completed an expansion of its Gregory processing plant. The expansion increased the plant capacity from approximately 99,900 MMBtu/d to 166,500 MMBtu/d, at a cost of approximately $7.0 million. In addition, the Partnership has significantly reduced its exposure to commodity prices by renegotiating a number of its commodity-based contracts, where revenues were subject to fluctuating commodity prices, to fee-based contracts.

Other Developments

        Offering.    In September 2003, the Partnership completed a public offering of 1,725,000 common units at $35.97 per common unit. The Partnership received net proceeds of approximately $59.1 million, including an approximate $1.3 million capital contribution by the general partner. The net proceeds were used by the Partnership to repay borrowings outstanding under the bank credit facility of its operating partnership.

        Bank Credit Facility.    In June 2003, the Partnership's operating partnership, Crosstex Energy Services, L.P., entered into a new $100.0 million senior secured credit facility, which matures in June 2006, consisting of a $70.0 million acquisition facility and a $30.0 million working capital and letter of credit facility. As of September 30, 2003, the operating partnership had $2.5 million of outstanding borrowings under the acquisition facility and $22.5 million of letters of credit issued under the working capital and letter of credit facility. In October 2003, the Partnership increased the limit on its working capital and letter of credit facility to $50.0 million.

        Secured Notes Offering.    In June 2003, the operating partnership entered into a master shelf agreement with an institutional lender pursuant to which it issued $30.0 million of senior secured notes with an interest rate of 6.95% and a maturity of seven years. In July 2003, the operating partnership issued $10.0 million of senior secured notes pursuant to the master shelf agreement with an interest rate of 6.88% and a maturity of seven years. The senior secured notes are guaranteed by the operating partnership's subsidiaries and the Partnership. The operating partnership used the net proceeds from the senior notes offering to repay indebtedness under its bank credit facility.

Comparison of Rights of Holders of Our Common Stock and the Partnership's Common Units

        Our shares of common stock and the Partnership's common units are unlikely to trade in simple relation or proportion to one another. Instead, while the trading prices of our shares and the common units are likely to follow generally similar broad trends, the trading prices may diverge because, among other things:

•

common unitholders have a priority over the subordinated units and the incentive distribution rights during the subordination period with respect to Partnership distributions;



•

we participate in the general partner's distributions and the incentive distribution rights and the common unitholders do not; and



•

we and our stockholders are taxed differently from the Partnership and its common unitholders.

4

        An investment in common units of a partnership is inherently different from an investment in common stock of a corporation. The following table compares certain features of the Partnership's common units and our shares of common stock.

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Summary of Risk Factors

Risks Inherent in an Investment in Us

•

Our cash flow consists almost exclusively of distributions from Crosstex Energy, L.P.



•

Crosstex Energy, L.P. could be treated as a corporation for federal income tax purposes, which would substantially reduce the amount of our cash dividends and our stock price.



•

The amount of cash distributions from the Partnership that we will be able to distribute to you will be reduced by our expenses, including federal corporate income taxes and the costs of being a public company, and reserves for future dividends.



•

We are largely prohibited from engaging in activities that compete with the Partnership.

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•

In our corporate charter, we have renounced business opportunities that may be pursued by the Partnership or by affiliated stockholders that hold a majority of our common stock.



•

Substantially all of our partnership interests in the Partnership are subordinated to the common units.



•

Although we control the Partnership, the general partner owes fiduciary duties to the Partnership and the unitholders.



•

The initial public offering price of our common stock may not be indicative of the market price of our common stock after this offering. In addition, our stock price may be volatile.



•

You may have limited liquidity for your shares of common stock. A trading market may not develop for our common stock, and you may not be able to resell your shares at the initial public offering price.



•

The dividends we pay will be taxable to you.

Risks Related to Crosstex Energy, L.P.'s Business

•

The Partnership must continually compete for natural gas supplies, and any decrease in its supplies of natural gas could reduce its ability to make distributions to its unitholders.



•

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



•

The Partnership's profitability is dependent upon prices and market demand for natural gas and NGLs, which are beyond its control and have been volatile.



•

If the Partnership is unable to integrate its recent acquisitions, or if it does not continue to make acquisitions on economically acceptable terms, its future financial performance may be limited.



•

The Partnership has limited control over the development of certain assets because it is not the operator.



•

The Partnership expects to encounter significant competition in any new geographic areas into which it seeks to expand and its ability to enter such markets may be limited.



•

The Partnership is exposed to the credit risk of its customers and counterparties, and a general increase in nonpayment and nonperformance by its customers could reduce its ability to make distributions to its unitholders.



•

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



•

The Partnership depends on certain key customers, and the loss of any of its key customers could adversely affect its financial results.



•

The Partnership has a limited combined operating history.



•

The Partnership's use of derivative financial instruments has in the past, and could in the future, result in financial losses or reduce its income.



•

Due to the Partnership's lack of asset diversification, adverse developments in its gathering, transmission, treating, processing and producer services businesses would reduce its ability to make distributions to its unitholders.



•

The Partnership's success depends on key members of its management, the loss of whom could disrupt its business operations.

Corporate Structure And Management

        Our principal executive offices are located at 2501 Cedar Springs, Suite 600, Dallas, Texas 75201, and our phone number is (214) 953-9500.

        The chart on the following page depicts the organization and our ownership of our subsidiaries, upon completion of this offering. We own a 100% membership interest in Crosstex Energy GP, LLC and a 99.999% limited partner interest in the general partner. Crosstex Energy GP, LLC owns a 0.001% general partner interest in the general partner. The general partner owns a 2.0% general partner interest in the Partnership and all of the Partnership's incentive distribution rights. We own a 54.3% limited partner interest in the Partnership.

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OWNERSHIP OF CROSSTEX ENERGY, INC.

(1)

For more information on the ownership of Crosstex Energy, Inc., please see "Security Ownership of Management and Selling Stockholders" beginning on page 92.

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THE OFFERING

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SUMMARY HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA

        The following table sets forth summary historical financial and operating data for Crosstex Energy, Inc. as of and for the dates and periods indicated and summary pro forma financial and operating data for us as of and for the year ended December 31, 2002 and the nine months ended September 30, 2003. The summary historical financial data for the years ended December 31, 2001 and 2002 and the eight months ended December 31, 2000 are derived from the audited financial statements of Crosstex Energy, Inc. The selected financial data for the four months ended April 30, 2000 are derived from the audited financial statements of Crosstex Energy Services, Ltd. and its predecessor. The summary historical financial data for the nine months ended September 30, 2002 and 2003 are derived from our unaudited financial statements and, in our opinion, have been prepared on the same basis as the audited financial statements and include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of this information.

        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. Accordingly, the summary historical financial data set forth in the following table primarily reflects the operating activities and results of operations of the Partnership. Since we control the general partner, 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 in the Partnership is reflected as a liability on our balance sheet and the non-controlling partner's share of income for the Partnership is reflected as an expense in our results of operations.

        As described in our historical financial statements, the investment in the Partnership's predecessor by Yorktown Energy Partners IV, L.P. in May 2000 resulted in the dissolution of the predecessor partnership and the creation of a new partnership with the same organization, purpose, assets and liabilities. Accordingly, the audited financial statements for 2000 are divided into the four months ended April 30, 2000 and the eight months ended December 31, 2000 because a new basis of accounting was established effective May 1, 2000 to give effect to the Yorktown transaction. In addition, the summary historical financial and operating data include the results of operations of the Arkoma system beginning in September 2000, the Gulf Coast system beginning in September 2000 and the CCNG system, which includes the Corpus Christi system, the Gregory gathering system and the Gregory processing plant, beginning in May 2001.

        The summary pro forma financial and operating data reflect Crosstex Energy, Inc.'s consolidated historical operating results as adjusted for the Partnership's DEFS acquisition, the Partnership's senior secured note offerings, the Partnership's September 2003 offering of common units, this offering and the conversion of our outstanding preferred stock to common stock, our two-for-one common stock split, effected in the form of a stock dividend, and our cancellation of shares held in treasury, each of which will occur concurrently with the closing of this offering, and the Partnership's initial public offering. The summary pro forma financial data is derived from the unaudited pro forma financial statements. The pro forma balance sheet assumes that this offering and the conversion of our outstanding preferred stock to common stock occurred on September 30, 2003. The pro forma statements of operations assume that the Partnership's DEFS acquisition, the Partnership's senior secured note offerings, the Partnership's September 2003 offering of common units, the Partnership's initial public offering, this offering, the conversion of our outstanding preferred stock to common stock, our two-for-one common stock split, effected in the form of a stock dividend, and our cancellation of shares held in treasury, occurred on January 1, 2002. For a description of all of the assumptions used in preparing the summary pro forma financial data, you should read the notes to the pro forma financial statements. The pro forma financial and operating data should not be considered as indicative of the historical results Crosstex Energy, Inc. would have had or the future results that we will have after this offering.

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        We derived the information in the following table from, and that information should be read together with, and is qualified in its entirety by reference to, the historical and pro forma financial statements and the accompanying notes included in this prospectus. The table should be read together with "Management's Discussion and Analysis of Financial Condition and Results of Operations" beginning on page 35.

(1)

We, through our ownership interest in the Partnership, are the successor to Crosstex Energy Services, Ltd. Results of operations and balance sheet data prior to May 1, 2000 represent historical results of the predecessor to Crosstex Energy Services, Ltd. These results are not necessarily comparable to the results subsequent to May 2000 due to the new basis of accounting. There are no income tax provisions for these predecessor periods because Crosstex Energy Services, Ltd. was a limited partnership not subject to federal income taxes.

(2)

We recognized gains of $11.1 million in 2002 and $18.1 million in 2003 as a result of the Partnership issuing additional units to the public in public offerings at prices per unit greater than our equivalent carrying value.

(3)

Gross margin is defined as revenue less related cost of purchased gas.

(4)

Represents volumes for treating plants operated by the Partnership whereby its receives a fee based on the volumes treated.

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RISK FACTORS

        You should consider the following risk factors, which we believe include all material risks to our business, together with all of the other information included in this prospectus in your evaluation of an investment in our common stock.

        Realization of any of the following risks could have a material adverse effect on our business, financial condition, cash flows and results of operations. In that case, the trading price of our shares could decline and you may lose all or part of your investment.

Risks Inherent in an Investment in Us

Our cash flow consists almost exclusively of distributions from Crosstex Energy, L.P.

        Our only cash-generating assets are our partnership interests in Crosstex Energy, L.P. Our cash flow is therefore completely dependent upon the ability of the Partnership to make distributions to its partners. The amount of cash that the Partnership can distribute to its partners, including us, each quarter principally depends upon the amount of cash it generates from its operations, which will fluctuate from quarter to quarter based on, among other things:

•

the amount of natural gas transported in its gathering and transmission pipelines;



•

the level of the Partnership's processing and treating operations;



•

the fees the Partnership charges and the margins it realizes for its services;



•

the price of natural gas;



•

the relationship between natural gas and NGL prices; and



•

its level of operating costs.

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

•

the level of capital expenditures the Partnership makes;



•

the cost of acquisitions, if any;



•

its debt service requirements;



•

fluctuations in its working capital needs;



•

restrictions on distributions contained in its bank credit facility;



•

its ability to make working capital borrowings under its bank credit facility to pay distributions;



•

prevailing economic conditions; and



•

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

        Because of these factors, the Partnership may not have sufficient available cash each quarter to pay the current distribution of $0.70 per quarter or any other amount. Furthermore, you should also be aware that the amount of cash that the Partnership has available for distribution depends primarily upon its cash flow, including cash flow from financial reserves and working capital borrowings, and is not solely a function of profitability, which will be affected by non-cash items. As a result, the Partnership may be able to make cash distributions during periods when the Partnership records losses and may not be able to make cash distributions during periods when the Partnership records net income. Please read "—Risks Related to Crosstex Energy, L.P.'s Business" beginning on page 20 for a discussion of risks affecting the Partnership's ability to generate distributable cash flow.

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Crosstex Energy, L.P. could be treated as a corporation for federal income tax purposes, which would substantially reduce the amount of our cash dividends and our stock price.

        The value of our investment in the Partnership depends largely on the Partnership's being treated as a partnership for federal income tax purposes, which requires that at least 90.0% of the Partnership's annual gross income be from specific activities. The Partnership may not meet this income requirement or current law may change so as to cause, in either event, the Partnership to be treated as a corporation or otherwise be subject to federal income tax.

        If the Partnership were subject to federal income tax, it would pay tax on its income at corporate rates of up to 35.0% under current law and would probably pay state income taxes as well. In that event, its distributions to us could be taxed to us as dividends and no items of income, gains, losses or deductions of the Partnership would flow through to us as a partner in the Partnership. As a result, there would be a material reduction in our anticipated cash flow and there would likely be a material decrease in the value of our shares of common stock.

The amount of cash distributions from the Partnership that we will be able to distribute to you will be reduced by our expenses, including federal corporate income taxes and the costs of being a public company, and reserves for future dividends.

        Before we can pay dividends to our shareholders, we must first pay or reserve funds for our expenses, including federal and state corporate income taxes and the costs of being a public company and other operating expenses, and reserves for future dividends. In addition, we may reserve funds in order to meet our obligation to maintain our 2.0% general partner interest by making a capital contribution to the Partnership when it issues additional units.

        The Partnership expects that holders of units in the Partnership other than us will benefit, for a period of time, from tax basis adjustments and remedial allocations of deductions so that they will be allocated a relatively small amount of federal taxable income compared to the cash distributed to them. As a result of the remedial allocations of Partnership deductions that will be made in favor of such other holders, we will be allocated more taxable income relative to our distributions than those unitholders and the relative amount thereof may increase if the Partnership issues additional units. In addition, through our investment in the general partner of the Partnership, we indirectly own certain incentive distribution rights that will cause more taxable income to be allocated to us. If the Partnership is successful in implementing its strategy to increase distributable cash flow, such taxable income will increase over the years as the ratio of income to distributions increases for all unitholders.

        We currently have a net operating loss carryforward. We estimate that we will be able to use our net operating loss carryforward to offset most of the income allocated to us in fiscal 2004 by the Partnership. In future years, however, we do not expect to have this net operating loss carryforward to offset our income. As a result, we will have to pay tax on our federal taxable income at a maximum rate of 35.0% under current law. Thus, the amount of money available to make cash distributions to our stockholders will decrease markedly after we use all of our net operating loss carryforward. These tax payments will reduce the amount of our cash dividends that we are able to make to you and may adversely impact the value of your shares of common stock.

        Our use of this net operating loss carryforward will be limited if there is a greater than 50.0% change in our stock ownership over a three year period. However, we do not expect such a change in ownership to occur before we fully utilize our loss carryforward.

        Furthermore, our ability to pay dividends is limited by the Delaware General Corporation Law, which provides that a corporation may only pay dividends out of existing "surplus," which is defined as the amount by which a corporation's net assets exceeds its stated capital. While our ownership of the general partner and the common and subordinated units of the Partnership are included in our

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calculation of net assets, the value of these assets may decline to a level where we have no "surplus," thus prohibiting us from paying dividends under Delaware law.

        The only statutory limit on the ability of the Partnership to make distributions is that it not be rendered insolvent as a result of the distribution.

We are largely prohibited from engaging in activities that compete with the Partnership.

        So long as we own the general partner of the Partnership, we are prohibited by an omnibus agreement with the Partnership from engaging in the business of gathering, transmitting, treating, processing, storing and marketing natural gas and transporting, fractionating, storing and marketing NGLs, except to the extent that the Partnership, with the concurrence of its independent directors comprising its conflicts committee, elects not to engage in a particular acquisition or expansion opportunity. This exception for competitive activities is relatively limited. Although we have no current intention of pursuing the types of opportunities that we are permitted to pursue under the omnibus agreement, such as competitive opportunities that the Partnership declines to pursue or permitted activities that are not in competition with the Partnership, the provisions of the omnibus agreement may, in the future, limit activities that we would otherwise pursue.

In our corporate charter, we have renounced business opportunities that may be pursued by the Partnership or by affiliated stockholders that hold a majority of our common stock.

        In our restated charter and in accordance with Delaware law, we have renounced any interest or expectancy we may have in, or being offered an opportunity to participate in, any business opportunities, including any opportunities within those classes of opportunity currently pursued by the Partnership, presented to:

•

persons who are officers or directors of the company or who, on October 1, 2003, were, and at the time of presentation are, stockholders of the company (or to persons who are affiliates or associates of such officers, directors or stockholders), if the company is prohibited from participating in such opportunities by the omnibus agreement; or



•

two affiliated stockholders with a controlling interest in our company, Yorktown Energy Partners IV, L.P. and Yorktown Energy Partners V, L.P., or any other investment fund sponsored or managed by Yorktown Partners LLC, including any fund still to be formed, or to any of our directors who is an affiliate or designate of these entities.

As a result of this renunciation, these officers, directors and stockholders should not be deemed to be breaching any fiduciary duty to us if they or their affiliates or associates pursue opportunities presented as described above.

Substantially all of our partnership interests in the Partnership are subordinated to the common units.

        We own 5,000,000 units representing limited partner interests in the Partnership, of which 4,667,000 are subordinated units and 333,000 are common units. During the subordination period, the subordinated units will not receive any distributions in a quarter until the Partnership has paid the minimum quarterly distribution of $0.50 per unit, plus any arrearages in the payment of the minimum quarterly distribution from prior quarters, on all of the outstanding common units. Distributions on the subordinated units are therefore more uncertain than distributions on the common units. Furthermore, no distributions may be made on the incentive distribution rights until the minimum quarterly distribution has been paid on all outstanding units. Therefore, distributions with respect to the incentive distribution rights are even more uncertain than distributions on the subordinated units. Neither the subordinated units nor the incentive distribution rights are entitled to any arrearages from prior quarters.

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        Generally, the subordination period ends, and the subordinated units convert to common units, only after December 31, 2007 and only upon the satisfaction of certain financial tests as described in "Material Provisions of the Partnership Agreement of Crosstex Energy, L.P.—Cash Distribution Policy—Subordination Period" beginning on page 115.

Although we control the Partnership, the general partner owes fiduciary duties to the Partnership and the unitholders.

        Conflicts of interest exist and may arise in the future as a result of the relationships between us and our affiliates, including the general partner, on the one hand, and the Partnership and its limited partners, on the other hand. The directors and officers of Crosstex Energy GP, LLC have fiduciary duties to manage the general partner in a manner beneficial to us, its owner. At the same time, the general partner has a fiduciary duty to manage the Partnership in a manner beneficial to the Partnership and its limited partners. The board of directors of Crosstex Energy GP, LLC will resolve any such conflict and has broad latitude to consider the interests of all parties to the conflict. The resolution of these conflicts may not always be in our best interest or that of our stockholders.

        For example, conflicts of interest may arise in the following situations:

•

the allocation of shared overhead expenses to the Partnership and us;



•

the interpretation and enforcement of contractual obligations between us and our affiliates, on the one hand, and the Partnership, on the other hand, including obligations under the omnibus agreement;



•

the determination of the amount of cash to be distributed to the Partnership's partners and the amount of cash to be reserved for the future conduct of the Partnership's business;



•

the determination whether to make borrowings under the capital facility to pay distributions to partners; and



•

any decision we make in the future to engage in activities in competition with the Partnership, as permitted under our omnibus agreement with the Partnership.

If the general partner is not fully reimbursed or indemnified for obligations and liabilities it incurs in managing the business and affairs of the Partnership, its value, and therefore the value of our common stock, could decline.

        The general partner may make expenditures on behalf of the Partnership for which it will seek reimbursement from the Partnership. In addition, under Delaware partnership law, the general partner, in its capacity as the general partner of the Partnership, has unlimited liability for the obligations of the Partnership, such as its debts and environmental liabilities, except for those contractual obligations of the Partnership that are expressly made without recourse to the general partner. To the extent the general partner incurs obligations on behalf of the Partnership, it is entitled to be reimbursed or indemnified by the general partner. In the event that the Partnership is unable or unwilling to reimburse or indemnify the general partner, the general partner may be unable to satisfy these liabilities or obligations, which would reduce its value and therefore the value of our common stock.

Substantially all of our partnership interests in the Partnership are not publicly traded.

        The only publicly traded securities that we own are 333,000 common units, all of which are unregistered, restricted securities, within the meaning of Rule 144 under the Securities Act of 1933. We therefore face restrictions on the volume of common units we can sell in any three-month period. There is no public market for the subordinated units and we do not expect one to develop. If we were required to sell subordinated units for any reason, we likely would receive a discount to the current

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market price of the common units. In addition, our investment in the general partner is illiquid, and our ability to sell such interest is limited because there is no market for it.

The initial public offering price of our common stock may not be indicative of the market price of our common stock after this offering. In addition, our stock price may be volatile.

        Prior to this offering there has been no public market for our common stock. An active market for our common stock may not develop or may not be sustained after this offering. The initial public offering price of our common stock was determined by negotiations between the selling stockholders and the underwriters, based on numerous factors which we discuss in the "Underwriting" section of this prospectus. This price may not be indicative of the market price for our common stock after this initial public offering. The market price of our common stock could be subject to significant fluctuations after this offering, and may decline below the initial public offering price. You may not be able to resell your shares at or above the initial public offering price. The following factors could affect our stock price:

•

the Partnership's operating and financial performance and prospects;



•

quarterly variations in the rate of growth of our financial indicators, such as net income per share, net income and revenues;



•

changes in revenue or earnings estimates or publication of research reports by analysts;



•

speculation in the press or investment community;



•

sales of our common stock by our stockholders;



•

actions by institutional investors or by our existing stockholders prior to their disposition of our common stock;



•

announcements by the Partnership or its competitors of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments;



•

general market conditions; and



•

domestic and international economic, legal and regulatory factors unrelated to our performance.

        The stock markets in general have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock.

You may have limited liquidity for your shares of common stock. A trading market may not develop for our common stock, and you may not be able to resell your shares at the initial public offering price.

        Prior to the offering, there has been no public market for our common stock. We do not know the extent to which investor interest will lead to the development of a trading market or how liquid that market might be. Potential investors may be deterred from investing in our shares for various reasons, including the very limited number of publicly traded entities whose assets consist almost exclusively of partnership interests in a publicly traded partnership. You may not be able to resell your shares at or above the initial public offering price. Additionally, the lack of liquidity may result in wide bid-ask spreads, contribute to significant fluctuations in the market price of the common stock and limit the number of investors who are able to buy the common stock.

The market price of our common stock could be adversely affected by sales of substantial amounts of our common stock in the public markets, including sales by our existing stockholders.

        Sales by any of our existing stockholders of a substantial number of shares of our common stock in the public markets following this offering, or the perception that such sales might occur, could have a

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material adverse effect on the price of our common stock or could impair our ability to obtain capital through an offering of equity securities. We do not know whether any such divestiture would be made in the public market or in a private placement to strategic or financial investors, nor do we know what impact such planned or actual divestitures will have on our stock price in the future. Please read "Shares Eligible for Future Sale" on page 122.

The dividends we pay will be taxable to you.

        On May 28, 2003, the Jobs and Growth Tax Relief Reconciliation Act of 2003 was signed into law, which, among other things, generally reduces the maximum tax rate applicable to corporate dividends paid to individuals to 15.0%. This tax rate currently is subject to a sunset provision, pursuant to which dividends will be taxed at the maximum rate applicable to ordinary income for taxable years beginning after December 31, 2008. The maximum tax rate for ordinary income currently is 35.0% for individual taxpayers. An increased tax rate may reduce the value of the dividends that you receive from us and may adversely impact the value of your shares.

A successful IRS contest of the federal income tax positions taken by the Partnership may adversely impact the market for its common units and the costs of any contest will be borne by the Partnership and, therefore, indirectly by us and the other unitholders.

        The Partnership has not requested any ruling from the Internal Revenue Service, or IRS, with respect to its treatment as a partnership for federal income tax purposes or any other matter affecting it. The IRS may adopt positions that differ from the positions the Partnership takes, even positions taken with the advice of counsel. It may be necessary to resort to administrative or court proceedings to sustain some or all of the positions the Partnership takes. A court may not agree with all of the positions the Partnership takes. Any contest with the IRS may materially and adversely impact the market for the Partnership's common units and the prices at which common units trade. In addition, the costs of any contest with the IRS will be borne by the Partnership and therefore indirectly by us, as a unitholder and as the owner of the general partner of the Partnership, and by the other unitholders.

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

        Because the Partnership cannot match transferors and transferees of common units and because of other reasons, the Partnership will take depreciation and amortization positions that may not conform to all aspects of the Treasury regulations. A successful IRS challenge to those positions could adversely affect the amount of tax benefits available to unitholders of the Partnership, including us. It also could affect the timing of these tax benefits or the amount of gain from the sale of common units and could have a negative impact on the value of the common units that we hold or result in audit adjustments to our tax return.

The Partnership is registered as a tax shelter. This may increase the risk of an IRS audit of the Partnership and of us.

        The Partnership is registered with the IRS as a "tax shelter." The tax laws require that some types of entities, including some partnerships, register as "tax shelters" in response to the perception that they claim tax benefits that may be unwarranted. As a result, the Partnership may be audited by the IRS and tax adjustments could be made. Because we own a greater than 1.0% profits interest in the Partnership, we should have rights to participate in the income tax audit process of the Partnership. Any adjustments in the Partnership's tax returns will lead to adjustments to our tax returns and may lead to audits of our tax returns and adjustments of items unrelated to our ownership of common units.

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We will bear the cost of any expense incurred in connection with an examination of our corporate tax return.

Our governing documents, other agreements and the presence of controlling stockholders may frustrate beneficial transactions.

        Our restated certificate of incorporation and restated bylaws contain anti-takeover provisions, including provisions that provide for:

•

a classified board in which only a portion of our board of directors is elected each year;



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restrictions on the ability of stockholders to call a special meeting of stockholders; and



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requirement of a supermajority vote of our stockholders to amend selected provisions of our charter or bylaws.

        In addition, Delaware law imposes some restrictions on mergers and other business combinations between any holder of 15.0% or more of our outstanding common stock and us. See "Description of Our Capital Stock—Anti-Takeover Effects of Delaware Law and Our Charter and Bylaw Provisions" beginning on page 100.

        These factors could discourage or make more difficult a merger, tender offer, proxy contest or acquisition of a significant portion of our common stock even if that event potentially would be favorable to the interests of our stockholders.

The Partnership may issue additional units, including units senior to the subordinated units we own, which may increase the risk that the Partnership will not have sufficient available cash to maintain or increase the per unit distribution level.

        The Partnership has wide latitude to issue additional units, including units that rank senior to the subordinated units and the incentive distributions rights as to quarterly cash distributions, on the terms and conditions established by the general partner. The payment of distributions on these additional units may increase the risk that the Partnership will be unable to maintain or increase the per unit distribution level. To the extent these new units are senior to the subordinated units and incentive distribution rights, their issuance will render more uncertain the payment of distributions on the subordinated units and incentive distribution rights. In addition, such issuance of additional units may make it more difficult for the subordinated units to convert into common units since conversion requires that we meet specific financial tests with respect to all outstanding units.

We have two affiliated stockholders with a controlling interest in our company, who can determine the outcome of all matters voted upon by our stockholders.

        After this offering, Yorktown Energy Partners IV, L.P. and Yorktown Energy Partners V, L.P., which are under common management, will own approximately 62.0% of our common stock in the aggregate. As a result, if the Yorktown entities were to act together, they will be able to control the outcome of stockholder votes, including votes concerning the election of a majority of our directors, the adoption or amendment of provisions in our charter or bylaws, the approval of mergers, decisions affecting our capital structure and other significant corporate transactions. The Yorktown entities will also have significant control over our management and policies. Conflicts of interest may arise in the future between the Yorktown entities, the Partnership and us. The Yorktown entities' control could also have the effect of deterring hostile takeovers or delaying or preventing changes in control or changes in management.

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If in the future we cease to manage and control the Partnership through our direct or indirect ownership of the general partner interest in the Partnership, we may be deemed to be an investment company under the Investment Company Act of 1940.

        If we cease to manage and control the Partnership and are deemed to be an investment company under the Investment Company Act of 1940, we would either have to register as an investment company under the Investment Company Act, obtain exemptive relief from the SEC or modify our organizational structure or our contract rights to fall outside the definition of an investment company. Registering as an investment company could, among other things, materially limit our ability to engage in transactions with affiliates, including the purchase and sale of certain securities or other property to or from our affiliates, restrict our ability to borrow funds or engage in other transactions involving leverage and require us to add additional directors who are independent of us or our affiliates.

We are exposed to losses resulting from the bankruptcy of Enron Corp.

        In October 2002, we, through one of our subsidiaries, filed claims against certain subsidiaries of Enron Corp. in the bankruptcy proceeding filed by the Enron entities which are pending in the U.S. Bankruptcy Court for the Southern District of New York. At the date of Enron's bankruptcy, some of our subsidiaries had open gas sales contracts and related accounts receivables with Enron. We recognized a charge of $5.8 million in 2001 to reduce the value of our gas sales contracts and accounts receivable with Enron, which was based on the value at which comparable Enron claims were trading at the time. We recognized an additional charge of approximately $1.0 million in the nine months ended September 30, 2003 based on the estimated recovery in Enron's recently filed reorganization plan. The timing of the resolution of the claims by the Bankruptcy Court is not certain, and the amounts ultimately received by us may be less than the approximate $1.5 million book value of our claim.

Liabilities assumed by certain of our subsidiaries could adversely affect our ability to pay dividends to our stockholders and the price of our common stock.

        Concurrently with the closing of its initial public offering, certain transactions were consummated in connection with the formation of the Partnership. These transactions involved the transfer to the Partnership by us of substantially all the assets and liabilities of Crosstex Energy Services, Ltd. (the predecessor of Crosstex Energy, L.P.'s operating partnership Crosstex Energy Services, L.P.). As a result, certain of our subsidiaries, including the operating partnership and certain of its affiliates assumed liabilities and obligations of the operating partnership's predecessor. These included both unknown liabilities and known but contingent liabilities of the predecessor and certain of its affiliates for matters such as claims for title defects, claims relating to environmental matters or other liabilities associated with the operations of the operating partnership's predecessor. As a result, the Partnership's results of operations may be adversely affected by these liabilities and obligations, reducing the amount of distributions that it may make to us. In turn, our ability to pay dividends to our stockholders and the price of our common stock may be adversely affected.

You will experience immediate and substantial dilution in the net tangible book value of your shares.

        The offering price of our common stock will be substantially higher than the pro forma net tangible book value per share of the outstanding common stock immediately after the offering. If you purchase common stock in this offering you will incur immediate and substantial dilution in the pro forma net tangible book value per share of the common stock from the price you pay for the common stock. Additionally, there are a substantial number of outstanding options to acquire shares of our common stock. A total of 1,200,000 shares have been reserved for issuance upon exercise of options that we have granted or may grant in the future. A total of 355,606 of these options are "in the money" and are currently exercisable as of December 30, 2003. "In the money" generally means that the current market price of the common stock is above the exercise price of the shares subject to the

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option. The issuance of common stock upon the exercise of these options could adversely affect the market price of the common stock and will result in dilution to our stockholders.

We may face risks similar to those that Crosstex Energy, L.P. faces if we acquire operations or assets independent from the Partnership.

        While we have no present intention to engage in activities other than our ownership of partnership interests in the Partnership, we may, in the future, acquire operations or assets independent from Crosstex Energy, L.P. Those operations and assets may involve our engagement in the gathering, transmission, treating, processing and marketing natural gas. Thus, the risks that we would face as a result of these activities would be similar to those faced by the Partnership and would have similar effects on our business and results of operations as those described below in "—Risks Related to Crosstex Energy, L.P.'s Business."

Risks Related to Crosstex Energy, L.P.'s Business

The Partnership must continually compete for natural gas supplies, and any decrease in its supplies of natural gas could reduce its ability to make distributions to its unitholders.

        Competition is intense in many of the Partnership's markets. The principal areas of competition include obtaining gas supplies and the marketing and transportation of natural gas and NGLs. The Partnership's competitors include major integrated oil companies, interstate and intrastate pipelines and natural gas gatherers and processors. The Partnership's competitors in the Texas Gulf Coast area include El Paso Field Services, Kinder Morgan Inc., Houston Pipeline Company and Duke Energy Field Services. The Partnership's competitors in Mississippi include Southern Natural Gas and Gulf South Pipeline Company. Some of the Partnership's competitors offer more services or have greater financial resources and access to larger natural gas supplies than the Partnership does.

        If the Partnership is unable to maintain or increase the throughput on its systems by accessing new natural gas supplies to offset the natural decline in reserves, its business and financial results could be materially adversely affected. In addition, its future growth will depend, in part, upon whether the Partnership can contract for additional supplies at a greater rate than the rate of natural decline in its currently connected supplies.

        In order to maintain or increase throughput levels in its natural gas gathering systems and asset utilization rates at its treating and processing plants, the Partnership must continually contract for new natural gas supplies. The Partnership may not be able to obtain additional contracts for natural gas supplies. The primary factors affecting its ability to connect new wells to its gathering facilities include its success in contracting for existing natural gas supplies that are not committed to other systems and the level of drilling activity near its gathering systems. Fluctuations in energy prices can greatly affect production rates and investments by third parties in the development of new oil and natural gas reserves. Drilling activity generally decreases as oil and natural gas prices decrease. The Partnership has no control over producers and depends on them to maintain sufficient levels of drilling activity. A material decrease in natural gas production or in the level of drilling activity in its principal geographic areas for a prolonged period, as a result of depressed commodity prices or otherwise, likely would have a material adverse effect on its results of operations and financial position. See "Business—Crosstex Energy, L.P.—Natural Gas Supply" on page 77 for more information on Crosstex Energy, L.P.'s supplies of natural gas.

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

        A substantial portion of the Partnership's assets, including its gathering systems and its treating plants, is dedicated to certain natural gas reserves and wells for which the production will naturally decline over time. Accordingly, its cash flows associated with these assets will also decline. If the

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Partnership is unable to access new supplies of natural gas either by connecting additional reserves to its existing assets or by constructing or acquiring new assets that have access to additional natural gas reserves, its ability to make distributions to its unitholders could decrease.

The Partnership's profitability is dependent upon prices and market demand for natural gas and NGLs, which are beyond its control and have been volatile.

        The Partnership is subject to significant risks due to fluctuations in commodity prices. These risks are based upon three components of its business: (1) the purchase of certain volumes of natural gas at a price that is a percentage of a relevant index; (2) certain processing contracts for its Gregory system whereby the Partnership is exposed to natural gas and NGL commodity price risks; and (3) part of its fee from the Seminole gas plant is based on a portion of the NGLs produced, and, therefore, is subject to commodity price risks.

        The margins the Partnership realizes from purchasing and selling a portion of the natural gas that it transports through its pipeline systems decrease in periods of low natural gas prices because its gross margins are based on a percentage of the index price. For the year ended December 31, 2002 and the nine months ended September 30, 2003, the Partnership purchased approximately 6.1% and 9.1%, respectively, of its gas at a percentage of relevant index. Accordingly, a decline in the price of natural gas could have an adverse impact on the Partnership's results of operations.

        A portion of the Partnership's profitability is affected by the relationship between natural gas and NGL prices. For a component of its Gregory system volumes, the Partnership purchases natural gas, processes natural gas and extracts NGLs, and then sells the processed natural gas and NGLs. Since the Partnership extracts Btus from the gas stream in the form of the liquids or consumes it as fuel during processing, the Partnership reduces the Btu content of the natural gas. Accordingly, its margins under these arrangements can be negatively affected in periods in which the value of natural gas is high relative to the value of NGLs. For example, a decrease of $0.01 per gallon in the price of NGLs and an increase of $0.10 per MMBtu in the average price of natural gas for the nine months ended September 30, 2003 would have resulted in a decrease in processing margins of approximately $136,000. For the nine months ended September 30, 2003, the Partnership purchased approximately 18% of the natural gas volumes on its Gregory system under such contracts.

        In the past, the prices of natural gas and NGLs have been extremely volatile, and the Partnership expects this volatility to continue. For example, in 2001, the NYMEX settlement price for natural gas for the prompt month contract ranged from a high of $9.98 per MMBtu to a low of $1.83 per MMBtu. In 2002, the same index ranged from $4.12 per MMBtu to $2.01 per MMBtu. For the nine months ended September 30, 2003, the same index ranged from $9.13 per MMBtu to $4.69 per MMBtu. A composite of the OPIS Mt. Belvieu monthly average liquids price based upon the Partnership's average liquids composition in 2001 ranged from a high of approximately $0.71 per gallon to a low of approximately $0.27 per gallon. In 2002, the same composite ranged from approximately $0.48 per gallon to approximately $0.27 per gallon. For the nine months ended September 30, 2003, the same composite ranged from approximately $0.65 per gallon to approximately $0.46 per gallon.

        The Partnership may not be successful in balancing its purchases and sales. In addition, a producer could fail to deliver contracted volumes or deliver in excess of contracted volumes, or a consumer could purchase less than contracted volumes. Any of these actions could cause its purchases and sales not to be balanced. If its purchases and sales are not balanced, the Partnership will face increased exposure to commodity price risks and could have increased volatility in its operating income.

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

•

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

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•

the level of domestic oil and natural gas production;



•

the availability of imported oil and natural gas;



•

actions taken by foreign oil and gas producing nations;



•

the availability of local, intrastate and interstate transportation systems;



•

the availability and marketing of competitive fuels;



•

the impact of energy conservation efforts; and



•

the extent of governmental regulation and taxation.

If the Partnership is unable to integrate its recent acquisitions, or if it does not continue to make acquisitions on economically acceptable terms, its future financial performance may be limited.

        With the completion of the DEFS acquisition, the Partnership geographically expanded its operations into Alabama and Mississippi. For the year ended December 31, 2002, the DEFS assets would have constituted 33.2% of the Partnership's pro forma gross margin. The Partnership may not successfully integrate this or any other acquisition into its operations, and the Partnership may not achieve the desired profitability from such acquisitions. Failure to successfully integrate these substantial acquisitions could adversely affect its operations and cash flows available for distribution to its unitholders.

        The Partnership's future financial performance will depend, in part, on its ability to make acquisitions of assets and businesses at attractive prices. From time to time, the Partnership will evaluate and seek to acquire assets or businesses that the Partnership believes complement its existing business and related assets. Any acquisition involves potential risks, including:

•

the inability to integrate the operations of recently acquired businesses or assets;



•

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



•

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



•

a significant increase in the Partnership's indebtedness; and



•

potential environmental liabilities and title problems.

The assessment by the Partnership's management of these risks is necessarily inexact and may not reveal or resolve all existing or potential problems with an acquisition.

        If the Partnership consummates any future acquisition, its capitalization and results of operations may change significantly, and we will not have the opportunity to evaluate the economic, financial and other relevant information that the Partnership will consider in determining the application of these funds and other resources.

        The Partnership's acquisition strategy is based, in part, on its expectation of ongoing divestitures of gas processing and transportation assets by large industry participants. A material decrease in such divestitures will limit its opportunities for future acquisitions and could adversely affect its operations and cash flows available for distribution to its unitholders.

The Partnership has limited control over the development of certain assets because it is not the operator.

        As the owner of a non-operating interest in the Seminole gas processing plant, the Partnership does not have the right to direct or control the operation of the plant. As a result, the success of the activities conducted at the plant, which is operated by a third party, may be affected by factors outside of the Partnership's control. The failure of the third-party operator to make decisions, perform its services, discharge its obligations, deal with regulatory agencies or comply with laws, rules and regulations affecting the plant, including environmental laws and regulations, in a proper manner could result in material adverse consequences to the Partnership's interest and adversely affect its results of operations.

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The Partnership expects to encounter significant competition in any new geographic areas into which it seeks to expand and its ability to enter such markets may be limited.

        With its acquisition of assets from DEFS, the Partnership expanded its operations into new geographic areas. As the Partnership expands its operations into new geographic areas, the Partnership expects to encounter significant competition for natural gas supplies and markets. Competitors in these new markets include companies larger than the Partnership, which have both lower capital costs and greater geographic coverage, as well as smaller companies, which have lower total cost structures. As a result, the Partnership may not be able to successfully develop acquired assets and markets located in new geographic areas and its results of operations could be adversely affected.

The Partnership is exposed to the credit risk of its customers and counterparties, and a general increase in nonpayment and nonperformance by its customers could reduce its ability to make distributions to its unitholders.

        Risks of nonpayment and nonperformance by the Partnership's customers are a major concern in its business. Several participants in the energy industry have been receiving heightened scrutiny from the financial markets in light of the collapse of Enron Corp. The Partnership is subject to risks of loss resulting from nonpayment or nonperformance by its customers. The Partnership recognized a charge of $5.7 million in 2001 for sales contracts with Enron. These contracts related to its producer services operations in which the Partnership purchased and sold natural gas that did not move on its gathering and transmission systems. Any increase in the nonpayment and nonperformance by its customers could reduce its ability to make distributions to its unitholders.

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

        The renewal or replacement of existing contracts with the Partnership's customers at rates sufficient to maintain its current revenues and cash flows depends on a number of factors beyond its control, including competition from other pipelines, and the price of, and demand for, natural gas in the markets the Partnership serves.

        For the nine months ended September 30, 2003, approximately 57% of the Partnership's sales of gas which were transported using its physical facilities were to industrial end-users and utilities. As a consequence of the increase in competition in the industry and volatility of natural gas prices, end-users and utilities are reluctant to enter into long-term purchase contracts. Many end-users purchase natural gas from more than one natural gas company and have the ability to change providers at any time. Some of these end-users also have the ability to switch between gas and alternate fuels in response to relative price fluctuations in the market. Because there are numerous companies of greatly varying size and financial capacity that compete with the Partnership in the marketing of natural gas, the Partnership often competes in the end-user and utilities markets primarily on the basis of price. The inability of its management to renew or replace its current contracts as they expire and to respond appropriately to changing market conditions could have a negative effect on its profitability.

The Partnership depends on certain key customers, and the loss of any of its key customers could adversely affect its financial results.

        The Partnership currently derives a significant portion of its revenues from contracts with a subsidiary of Kinder Morgan, Inc. To the extent that Kinder Morgan, Inc. and other customers may reduce volumes of natural gas purchased under existing contracts, the Partnership would be adversely affected unless the Partnership were able to make comparably profitable arrangements with other customers. Sales to the subsidiary of Kinder Morgan, Inc. accounted for 21.9% of its revenues during the first nine months of 2003, 27.5% of its revenues during 2002 and 23.9% of its revenues during 2001. The Partnership's agreements with its key customers provide for minimum volumes of natural gas that each customer must purchase until the expiration of the term of the applicable agreement, subject

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to certain force majeure provisions. The Partnership's customers may default on their obligations to purchase the minimum volumes required under the applicable agreements. The Partnership's primary contract with Kinder Morgan, Inc. expires in March 2006.

The Partnership has a limited combined operating history.

        Because it has grown rapidly, the Partnership has a limited operating history for most of its operations to which investors may look to evaluate its performance. As a result, the historical and pro forma information may not give investors an accurate indication of what the Partnership's actual results would have been if the acquisitions had been completed at the beginning of the periods presented or of what the Partnership's future results of operations are likely to be.

Growing its business by constructing new pipelines and processing and treating facilities subjects the Partnership to construction risks and risks that natural gas supplies will not be available upon completion of the facilities.

        One of the ways the Partnership intends to grow its business is through the construction of additions to its existing gathering systems and construction of new gathering, processing and treating facilities. The Partnership recently completed an expansion of its Gregory processing plant at an estimated cost of approximately $7.0 million. The construction of gathering, processing and treating facilities requires the expenditure of significant amounts of capital, which may exceed its expectations. Generally, the Partnership may have only limited natural gas supplies committed to these facilities prior to their construction. Moreover, the Partnership may construct facilities to capture anticipated future growth in production in a region in which anticipated production growth does not materialize. The Partnership may also rely on estimates of proved reserves in its decision to construct new pipelines and facilities, which may prove to be inaccurate because there are numerous uncertainties inherent in estimating quantities of proved reserves. As a result, new facilities may not be able to attract enough natural gas to achieve its expected investment return, which could adversely affect its results of operations and financial condition.

        The Partnership does not always hire independent petroleum engineers to independently review the reserve estimates that are supplied to it by its customers. Accordingly, the Partnership may not always have estimates of total reserves dedicated to its systems or the anticipated life of such producing reserves. As a result, the building of new facilities may never achieve the expected investment returns and could result in impairments being charged against earnings.

The Partnership's business involves many hazards and operational risks, some of which may not be fully covered by insurance.

        The Partnership's operations are subject to the many hazards inherent in the gathering, compressing, treating and processing of natural gas and storage of residue gas, including:

•

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



•

inadvertent damage from construction and farm equipment;



•

leaks of natural gas, NGLs and other hydrocarbons; and



•

fires and explosions.

        These risks could result in substantial losses due to personal injury and/or loss of life, severe damage to and destruction of property and equipment and pollution or other environmental damage and may result in curtailment or suspension of the Partnership's related operations. The Partnership's operations are concentrated in the Texas Gulf Coast, and a natural disaster or other hazard affecting this region could have a material adverse effect on its operations. The Partnership is not fully insured against all risks incident to its business. In accordance with typical industry practice, the Partnership

24

does not have any property insurance on any of its underground pipeline systems which would cover damage to the pipelines. The Partnership is not insured against all environmental accidents which might occur, other than those considered to be sudden and accidental. The Partnership's business interruption insurance covers only its Gregory processing plant. If a significant accident or event occurs that is not fully insured, it could adversely affect the Partnership's operations and financial condition.

The Partnership's indebtedness may limit its ability to borrow additional funds, make distributions to us or capitalize on acquisitions or other business opportunities.

        At September 30, 2003, the Partnership had total outstanding long-term indebtedness of approximately $43.2 million, including $40.0 million of senior secured notes, $2.5 million of outstanding borrowings under the bank credit facility and approximately $0.7 million of other indebtedness. Payments of principal and interest on the indebtedness will reduce the cash available for distribution on the units. The bank credit facility and senior secured notes contain various covenants limiting the Partnership's ability to incur indebtedness, grant liens, engage in transactions with affiliates, make distributions to its unitholders and capitalize on acquisition or other business opportunities. The bank credit facility and the Partnership's senior secured notes also contain covenants requiring the Partnership to maintain certain financial ratios, such as debt to EBITDA, EBITDA to interest, current assets to current liabilities and minimum tangible net worth. The Partnership is prohibited from making any distribution to unitholders if such distribution would cause a default or an event of default under the bank credit facility or the senior secured notes. Each of the bank credit facility and the senior secured notes limits the use of borrowings under the bank credit facility to pay distributions to unitholders to $5.0 million over the term of the bank credit facility. Any subsequent refinancing of the Partnership's current indebtedness or any new indebtedness could have similar or greater restrictions. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Description of Indebtedness" beginning on page 52 for a discussion of the Partnership's bank credit facility and senior secured notes.

Federal, state or local regulatory measures could adversely affect the Partnership's business.

        While the Federal Energy Regulatory Commission, or FERC, generally does not regulate any of the Partnership's operations, directly or indirectly, FERC influences certain aspects of its business and the market for its products. As a raw natural gas gatherer, the Partnership generally is exempt from FERC regulation under the Natural Gas Act of 1938, or NGA, but FERC regulation still significantly affects the Partnership's business. In recent years, FERC has pursued pro-competitive policies in its regulation of interstate natural gas pipelines. However, FERC may not continue this approach as FERC considers matters such as pipeline rates and rules and policies that may affect rights of access to natural gas transportation capacity.

        Some of the Partnership's intrastate natural gas transmission pipelines are subject to regulation as a common carrier and as a gas utility by the Texas Railroad Commission, or TRRC. The TRRC's jurisdiction extends to both rates and pipeline safety. The rates the Partnership charges for transportation services are deemed just and reasonable under Texas law unless challenged in a complaint. Should a complaint be filed or should regulation become more active, the Partnership's business may be adversely affected.

        Other state and local regulations also affect the Partnership's business. The Partnership is subject to ratable take and common purchaser statutes in the states where the Partnership operates. Ratable take statutes generally require gatherers to take, without undue discrimination, natural gas production that may be tendered to the gatherer for handling. Similarly, common purchaser statutes generally require gatherers to purchase without undue discrimination as to source of supply or producer. These statutes have the effect of restricting the Partnership's right as an owner of gathering facilities to decide with whom the Partnership contracts to purchase or transport natural gas. Federal law leaves any economic regulation of natural gas gathering to the states, and some of the states in which the

25

Partnership operates have adopted complaint-based or other limited economic regulation of natural gas gathering activities. States in which the Partnership operates that have adopted some form of complaint-based regulation, like Oklahoma and Texas, generally allow natural gas producers and shippers to file complaints with state regulators in an effort to resolve grievances relating to natural gas gathering access and rate discrimination.

        The states in which the Partnership conducts operations administer federal pipeline safety standards under the Pipeline Safety Act of 1968. The "rural gathering exemption" under the Natural Gas Pipeline Safety Act of 1968 presently exempts substantial portions of the Partnership's gathering facilities from jurisdiction under that statute, including those portions located outside of cities, towns, or any area designated as residential or commercial, such as a subdivision or shopping center. The "rural gathering exemption," however, may be restricted in the future, and it does not apply to the Partnership's natural gas transmission pipelines. In response to recent pipeline accidents in other parts of the country, Congress and the Department of Transportation have passed or are considering heightened pipeline safety requirements. See "Business—Crosstex Energy, L.P.—Regulation" beginning on page 77.

        Compliance with pipeline integrity regulations issued by the TRRC, or those issued by the United States Department of Transportation, or DOT, in late 2003 could result in substantial expenditures for testing, repairs and replacement. TRRC regulations require periodic testing of all intrastate pipelines meeting certain size and location requirements. In addition, the DOT issued regulations for interstate pipeline testing in late 2003. The Partnership expects its costs relating to compliance with the required testing under the TRRC regulations to be approximately $1.0 million in 2003 and between $1.0 million and $2.0 million in each of 2004 and 2005. If its pipelines fail to meet the safety standards mandated by the TRRC regulations, then the Partnership may be required to repair or replace sections of such pipelines, the cost of which cannot be estimated at this time.

The Partnership's business involves hazardous substances and may be adversely affected by environmental regulation.

        Many of the operations and activities of the Partnership's gathering systems, plants and other facilities are subject to significant federal, state and local environmental laws and regulations. These include, for example, laws and regulations that impose obligations related to air emissions and discharge of wastes from its facilities and the cleanup of hazardous substances that may have been released at properties currently or previously owned or operated by us or locations to which the Partnership has sent wastes for disposal. Various governmental authorities have the power to enforce compliance with these regulations and the permits issued under them, and violators are subject to administrative, civil and criminal penalties, including civil fines, injunctions or both. Liability may be incurred without regard to fault for the remediation of contaminated areas. Private parties, including the owners of properties through which the Partnership's gathering systems pass, may also have the right to pursue legal actions to enforce compliance as well as to seek damages for non-compliance with environmental laws and regulations or for personal injury or property damage.

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

        The Partnership's business may be adversely affected by increased costs due to stricter pollution control requirements or liabilities resulting from non-compliance with required operating or other

26

regulatory permits. New environmental regulations might adversely affect its products and activities, including processing, storage and transportation, as well as waste management and air emissions. Federal and state agencies could also impose additional safety requirements, any of which could affect the Partnership's profitability. See "Business—Crosstex Energy, L.P.—Environmental Matters" beginning on page 79.

The Partnership's use of derivative financial instruments has in the past, and could in the future, result in financial losses or reduce its income.

        The Partnership uses over-the-counter price and basis swaps with other natural gas merchants and financial institutions, and the Partnership uses futures and option contracts traded on the New York Mercantile Exchange. Use of these instruments is intended to reduce the Partnership's exposure to short-term volatility in commodity prices. As of September 30, 2003, the Partnership had hedges in place on 100,000 MMBtu of gas per month at prices ranging from $4.02 per MMBtu to $6.13 per MMBtu for the period from October 1, 2003 to December 31, 2003, 90,000 MMBtu of gas per month at prices ranging from $4.02 per MMBtu to $5.67 per MMBtu for the period from January 1, 2004 to March 31, 2004, 70,000 MMBtu of gas per month at prices ranging from $4.67 per MMBtu to $5.49 per MMBtu for the period from April 1, 2004 to June 30, 2004, and 30,000 MMBtu of gas per month at a price of $4.85 per MMBtu for the period from July 1, 2004 to December 31, 2004. The Partnership estimates that these quantities represent approximately 80%, 75%, 60% and 28% of the margin on natural gas that the Partnership will buy at a percentage of index and upon which the Partnership will be exposed to the risk of fluctuations in natural gas prices. The Partnership could incur financial losses or fail to recognize the full value of a market opportunity as a result of volatility in the market values of the underlying commodities or if one of its counterparties fails to perform under a contract. For additional information about the Partnership's risk management activities, including its use of derivative financial instruments, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Quantitative and Qualitative Disclosures About Market Risk" beginning on page 56.

Due to the Partnership's lack of asset diversification, adverse developments in its gathering, transmission, treating, processing and producer services businesses would reduce its ability to make distributions to its unitholders.

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

The Partnership's success depends on key members of its management, the loss of whom could disrupt its business operations.

        The Partnership depends on the continued employment and performance of the officers of Crosstex Energy GP, LLC and key operational personnel. Crosstex Energy GP, LLC has entered into employment agreements with each of its executive officers. If any of these officers or other key personnel resign or become unable to continue in their present roles and are not adequately replaced, our business operations could be materially adversely affected. The Partnership does not maintain any "key man" life insurance for any officers. See "Management—Crosstex Energy, L.P." beginning on page 86.

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FORWARD-LOOKING STATEMENTS

        This prospectus and the documents incorporated by reference in this prospectus contain forward-looking statements within the meaning of the federal securities laws.

        These forward-looking statements include, among others, statements regarding:

•

our ability to pay dividends to our stockholders;



•

our anticipated receipt of distributions from the Partnership;



•

our acquisition of operating assets either alone or in combination with the Partnership;



•

anticipated trends in our business;



•

our future results of operations;



•

our liquidity and ability to finance our activities;



•

market conditions in the Partnership's industry;



•

the Partnership's ability to make and integrate acquisitions; and



•

the impact of governmental regulation on us and the Partnership.

These statements may be found under "Prospectus Summary," "Risk Factors," "Use of Proceeds," "Dividend Policy," "Management's Discussion and Analysis of Financial Condition and Results of Operation" and "Business." Forward-looking statements are typically identified by use of terms such as "may," "will," "expect," "believe," "anticipate," "estimate" and similar words, although some forward- looking statements may be expressed differently.

        In addition, the Partnership's classification as a partnership for federal income tax purposes means that generally it does not pay federal income taxes on its net income. The Partnership relies on a legal opinion from its counsel, and not a ruling from the Internal Revenue Service, as to its proper classification for federal income tax purposes. If the Partnership were to be classified as a corporation for tax purposes, its tax payment would decrease the amount of cash available for distribution to its partners, including the general partner and us, thus limiting our ability to pay dividends to our stockholders.

        You should be aware that our actual results could differ materially from those contained in the forward-looking statements. You should consider carefully the statements under "Risk Factors" and other sections of this prospectus, which describe factors that could cause our actual results to differ from those set forth in the forward-looking statements. We disclaim any obligation to update the above list or to announce publicly the result of any revisions to any forward-looking statements to reflect future events or developments.

        You should consider the above information when reading any forward-looking statements in:

•

this prospectus;



•

press releases; or



•

oral statements made by us or the Partnership or any of the respective officers or other persons acting on behalf of us or the Partnership.

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USE OF PROCEEDS

        We will not receive any of the net proceeds from any sale of shares of common stock by any selling stockholders. The selling stockholders will use approximately $5.0 million of the net proceeds received by them to retire outstanding notes from the selling stockholders held by us. See "Certain Relationships and Related Transactions—Loans to Directors and Executive Officers" beginning on page 95.

        We expect to incur approximately $1.5 million of expenses in connection with this offering, including all expenses of the selling stockholders which we have agreed to pay.

        If the underwriters exercise their over-allotment option in full, we estimate that our net proceeds from this offering will be approximately $4.8 million, after deducting underwriting discounts and estimated offering expenses. We intend to use any net proceeds from the exercise of the over-allotment option for general corporate purposes.

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CAPITALIZATION

        The following table sets forth our cash and cash equivalents and capitalization as of September 30, 2003 on:

•

a historical basis; and



•

a pro forma as adjusted basis to give effect to this offering and the conversion of our outstanding preferred stock to common stock, our two-for-one common stock split, effected in the form of a stock dividend, and our cancellation of shares held in treasury, each of which will occur concurrently with the closing of this offering.

        You should read our financial statements and notes that are included elsewhere in this prospectus for additional information about our capital structure.

(1)

The selling stockholders will use approximately $5.0 million of the net proceeds received by them to repay outstanding notes from the selling stockholders held by us. The pro forma as adjusted amounts do not give effect to such repayment.

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DILUTION

        On a pro forma basis as of September 30, 2003 after giving effect to the offering, the tangible net book value of our assets would have been approximately $57.3 million or $4.89 per share, at an initial public offering price of $19.50 per share. Purchasers of common stock in the offering will experience substantial and immediate dilution in tangible net book value per share of common stock for financial accounting purposes, as illustrated in the following table. The pro forma tangible net book value per share of common stock after the offering is determined by dividing the 11,733,348 shares of common stock to be outstanding after the offering into our pro forma tangible net book value, after giving effect to the application of the net proceeds of the offering.