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Rating Action:

Moody's upgrades Crosstex Energy to B1 CFR

16 Mar 2011

Approximately $725 million of debt securities affected

New York, March 16, 2011 -- Moody's Investors Service upgraded Crosstex Energy, L.P.'s Corporate Family Rating (CFR) to B1 from B2 and upgraded the ratings on its senior unsecured notes to B2. The company's SGL-3 Speculative Grade Liquidity rating remains unchanged. The rating outlook is stable.

"The ratings upgrade reflects Crosstex's improved financial leverage metrics and the expected conservative management of its distribution policies and capital spending program," commented Gretchen French, Moody's Vice President -- Senior Analyst.

RATINGS RATIONALE

Crosstex's B1 CFR is supported by the relatively high proportion of its gross margin that is considered non-commodity based and management's conservative business strategy in recent years, which we expect to remain in place as the company pursues growth opportunities. The rating also reflects the company's improved financial leverage following significant debt reduction in 2009 and 2010. The CFR is restrained by Crosstex's high level of exposure to the relatively mature Barnett Shale, and inherent volume and price risk in gathering and processing natural gas. The rating also considers management's prior history of more aggressive financial policies, and risks inherent to the MLP business model.

Since the fourth quarter of 2008, Crosstex's management has pursued a more conservative business strategy than in prior years, focusing on improving financial flexibility and enhancing profitability. The company temporarily suspended distributions and then reinstated unitholder payments at lower levels, sold over $600 million in assets with the proceeds primarily used to repay debt, sharply cut back capital spending and improved its cost structure. These financial policies contrast to the company's prior track record, where management pursued an aggressive growth strategy, with high multiples paid for acquisitions, elevated capital spending levels, high distribution growth rates and funding falling short of management's 50% equity financing target.

Through asset sales, Crosstex has reduced its debt burden by approximately $550 million since the end of 2008, significantly improving its leverage profile. Debt/EBITDA has declined to 4.3x (as adjusted for Moody's standard adjustments) from 6.9x during this time frame and has gravitated towards the company's publicly stated target of 4x. The current leverage profile is more closely aligned with Crosstex's ratings given its size, revenue mix and geographic concentration.

With the recent reinstatement of distributions, we expect Crosstex will look to grow distributions through acquisitions and organic growth projects, including expanding into new geographic areas, exposing investors to event, integration and financing risks. For 2011, the company has increased its growth capital budget to between $50 million and $150 million, with growth targeted in a number of emerging liquids-rich shale plays, as well as bolt-on projects related to the company's existing infrastructure. However, with Crosstex's currently relatively strong distribution coverage ratio (1.6x in the fourth quarter of 2010) and commitment to maintaining leverage around current levels, we expect that the company's credit metrics will remain supportive of the B1 CFR.

The stable outlook reflects our view that over the next 12 to 18 months, the company will continue to exercise capital discipline and manage its distributions and liquidity in a prudent manner. The outlook assumes that any major capital project or acquisition will have a substantial equity funding component.

Given today's upgrade, positive rating action is unlikely over the near term. However, an upgrade or positive outlook is possible over the medium to longer term if Crosstex demonstrates that it can consistently maintain leverage around 4x, and at the same time maintain a high proportion of more durable fee based revenues as it pursues growth projects. Operational and cash flow diversification through a sustainable presence in geographical areas outside of the Barnett would also be viewed positively.

The rating would come under pressure if Crosstex's operating performance shows a substantial weakening trend making its leverage unsustainable under 5x. A negative outlook or an outright downgrade could also result due to poor liquidity or a significant leveraging transaction.

The B2 rating on the senior notes reflects both the overall probability of default of Crosstex, to which Moody's assigns a PDR of B1, and a loss given default of LGD 4 (68%). The company has a committed $420 million senior secured revolving credit facility. The notes are unsecured and are subordinate to the senior secured credit facility's potential priority claim to the company's assets. The size of the potential senior secured and other structurally superior claims relative to the unsecured notes results in the notes being notched one rating beneath the B1 CFR under Moody's Loss Given Default Methodology.

The principal methodologies used in this rating were Global Midstream Energy published in December 2010, and Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009.

Crosstex Energy, L.P., headquartered in Dallas, Texas, is a publicly traded master limited partnership engaged in the gathering, processing, transmission and marketing of natural gas and natural gas liquids.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, public information, confidential and proprietary Moody's Investors Service information, and confidential and proprietary Moody's Analytics information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of maintaining a credit rating.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

New York
Gretchen French
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Steven Wood
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's upgrades Crosstex Energy to B1 CFR
No Related Data.
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