ITEM 3. LEGAL PROCEEDINGS
In February 1998, MarkWest filed arbitration proceedings to resolve issues with Columbia regarding three natural gas processing plants in Appalachia. In this arbitration, MarkWest requests a declaration of rights and status to clarify agreements between the companies.
Issues arose during ongoing negotiations between MarkWest and Columbia to finalize terms of a 1997 preliminary agreement in which, among other things, Columbia agreed to sell its Cobb plant to MarkWest and to transfer from Columbia to MarkWest the operation of the Boldman plant. These issues also include matters regarding operations at the Kenova plant. MarkWest owns the Boldman and Kenova plants.
MarkWest's intention in taking over operations at these plants is to assist Columbia in their rate settlement and to possibly increase its liquids processing business on Columbia's transmission system. The initial economic effect in taking over operations is neutral. Columbia and MarkWest continue to have several ongoing contracts, the most important of which extends through the year 2010. Although the outcome of arbitration or the length of the process cannot be predicted, the Company anticipates that the arbitration will have a minimal effect on MarkWest in the interim.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the quarter ended December 31, 1997.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of March 13, 1998, there were 8,498,613 shares of common stock outstanding held by 555 holders of record. The common stock is traded on The Nasdaq Stock Market under the symbol "MWHX". The following table sets forth quarterly high and low closing sales prices as reported by the Nasdaq National Market for the periods indicated.
HIGH LOW ------ ------- Fourth Quarter................................ 23 1/2 19 1/2 Third Quarter................................. 23 1/2 14 3/4 Second Quarter................................ 15 1/4 12 First Quarter................................. 16 1/8 14 1/16
Fourth Quarter (1)............................ 15 1/2 10 1/4
(1) The Company's initial public offering was completed on October 9, 1996.
The Company has paid no dividends on the common stock, and anticipates that, for the foreseeable future, it will continue to retain earnings for use in the operation of its business. Payment of cash dividends in the future will depend upon the Company's earnings, financial condition, any contractual restrictions, restrictions imposed by law and other factors deemed relevant by the Company's Board of Directors.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated statement of operations and balance sheet data for the years ended December 31, 1997, 1996 and 1995 and as of December 31, 1997 and 1996 are derived from, and are qualified by reference to, audited consolidated financial statements of the Company included elsewhere in this Form 10-K. The selected consolidated statement of operations and balance sheet data set forth below for the year ended December 31, 1994 and 1993 and as of December 31, 1995, 1994 and 1993 have been derived from audited financial statements not included in this Form 10-K. The selected consolidated financial information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's Consolidated Financial Statements and related notes thereto included elsewhere in this Form 10-K.
N/M - Not meaningful.
(1) Prior to October 7, 1996, the Company was organized as a partnership, MarkWest Hydrocarbon Partners, Ltd. ("MarkWest Partnership") and, consequently, was not subject to income tax. Effective October 7, 1996, the Company reorganized (the "Reorganization") and the existing general and limited partners exchanged 100% of their interests in MarkWest Partnership for 5,725,000 common shares of the Company. Pro forma information has been presented for purposes of comparability as if the Company had been a taxable entity for all periods presented:
(a) Pro forma weighted average shares outstanding for the year ended December 31, 1996 represents the weighted average of, for the period prior to the offering, the number of common shares issued in the Reorganization plus the number of shares issued in the Offering for which the net proceeds were used to repay outstanding indebtedness and, for the period subsequent to the Offering, the total number of common shares outstanding. Pro forma weighted
average shares outstanding for the years ended December 31, 1995, 1994 and 1993 represent the weighted average number of common shares issued in the Reorganization. (2) Weighted average shares outstanding for the year ended December 31, 1996 represents the weighted average of, for the period prior to the Company's initial public offering, the number of common shares issued in the Reorganization and, for the period subsequent to the Offering, the total number of common shares outstanding. Weighted average shares outstanding for the years ended December 31, 1995, 1994 and 1993 represent the weighted average number of common shares issued in the Reorganization. (3) 1997 includes fee gas processed at the Boldman and Cobb plants, effective February 1, 1997, as well as the fee gas processed at the Kenova plant. (4) 1997 results reflect the Company's acquisition of the remaining 40 percent interest of the Michigan project from MEC in November 1997.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following analysis should be read in conjunction with the selected financial data and the Company's Consolidated Financial Statements included in this Form 10-K.
RESULTS OF OPERATIONS - ----------------------
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996 (in thousands of dollars)
For the year ended December 31, 1997 1996 $ Change % Change ------- ------- -------- -------- Revenue $79,917 $71,952 $ 7,965 11% Gross profit (a) 19,397 20,895 (1,498) (7%)
Income before income taxes 12,397 14,760 (2,363) (16%)
Provision for income taxes 4,550 6,991 (2,441) (35%) ------- ------- -------- -------- Net income 7,847 7,769 78 1% ======= ======= ======== ========
Pro forma information (b): Income before income taxes 12,397 14,760 (2,363) (16%)
Provision for income taxes 4,550 5,609 1,059 19% ------- ------- -------- -------- Net income 7,847 9,151 (1,304) (14%) ======= ======= ======== ========
(a) Excludes interest income, general and administrative expense and interest expense. (b) 1996 information is pro forma for net income. Prior to a reorganization in October 1996, MarkWest was organized as a partnership and, consequently, was not subject to income tax. Pro forma net income for 1996 has been presented for purposes of comparability as if MarkWest had been a taxable entity.
For the year ended December 31, 1997, income before income taxes was $12.4 million, compared to income before income taxes of $14.8 million, for the year ended December 31, 1996. The decrease in income before income taxes was primarily a result of the effect of an industry-wide decrease in prices from 1996, when near record high levels had a positive impact on the Company's terminal operations. As a result, in 1996, the terminals recorded above average gross margins compared to relatively flat margins in 1997, when prices dropped significantly in the first quarter and margins remained low throughout the year. This factor was partially offset by increased volumes and margins at the Company's Appalachia plants.
REVENUES
Gathering, processing and marketing revenue. Gathering, processing and marketing revenue increased $7.1 million or 10% for the year ended December 31, 1997, compared to 1996, due to a variety of reasons.
The Company's Appalachian operations accounted for the majority of the overall revenue increase, primarily on the strength of favorable results recognized in 1997 from hedging positions put in place during the fourth quarter of 1996. Appalachian revenue was also positively affected by a 71% increase in fee gas processed during 1997. Fee gas volumes processed in 1997, which includes fee gas processed at the Boldman and Cobb plants effective February 1997, as well as fee gas processed at the Kenova plant, increased because of a change in the structure of the Company's processing fee
arrangements effective in early 1997. In addition, the Company's Siloam plant sold a record 103 million gallons in 1997, a nine percent increase over the previous year.
The above factors were substantially offset by a 20% decrease in throughput at the Company's terminals. Moreover, the terminals suffered price decreases up to 18% compared to 1996, especially during the fourth quarter at which time near record prices existed in the prior year.
The Company's Michigan operations contributed the remaining increase in revenue in 1997 compared to the year ended December 31, 1996, principally as the result of a 180% increase in the volume of gas processed. The Company's activities in Michigan were operational for a full year for the first time in 1997. Additionally, the connection of another company's well to MarkWest's pipeline following the well's completion during the second quarter of 1997 also contributed to the volume increase.
Oil and gas revenue. Oil and gas revenue increased $570,000 or 164% for the year ended December 31, 1997, compared to 1996. This increase was directly attributable to an increase in production from nine new wells in 1997.
Interest income. Interest income increased $469,000 or 244% for the year ended December 31, 1997, compared to 1996. The increase was primarily due to interest earned on a note receivable, which accrues interest at a rate of 5.98%. The note, due from MPC, is for the costs incurred by the Company for the construction of the 30 mile extension to the gas pipeline in Michigan.
COSTS AND EXPENSES
Cost of sales. Cost of sales increased $4.8 million or 12% for the year ended December 31, 1997, compared to 1996. The Company's Appalachian operations accounted for the majority of the increase, primarily as a result of a 6% increase in unit costs and a 9% increase in volumes sold at the Company's Siloam plant. This increase was substantially offset by a 20% decrease in throughput at the Company's terminals. The remaining increase was a direct result of the increase in the volume of gas processed by the Company's Michigan operations.
Operating expenses. Operating expenses increased $3.9 million or 55% for the year ended December 31, 1997, compared to 1996. The majority of the increase was driven by the Company's operations in Michigan, which commenced operations in May 1996. The remaining increase resulted from additional repair and maintenance and other operating costs at the Company's Appalachian facilities, including operating costs attributable to the Company's Boldman plant and Columbia's Cobb plant, pursuant to the change in fee structure described previously.
General and administrative expenses. General and administrative expenses increased $1.9 million or 36% for the year ended December 31, 1997, compared to 1996. This increase was attributable to administrative support activities related to the new operations in Michigan and to costs incurred in connection with being a public company for a full year in 1997.
Depreciation, depletion and amortization expense. Depreciation, depletion and amortization expense increased $336,000 or 12% for the year ended December 31, 1997, compared to 1996. This increase was principally due to increased depreciation attributable to the Company's new Michigan operations.
Provision for income taxes. The provision for income taxes decreased $2.4 million for the year ended December 31, 1997, compared to 1996. The decrease is primarily a result of the one-time charge of $3.7 million taken in the fourth quarter of 1996 in connection with the Company's reorganization from a partnership, together with reduced levels of pre-tax income.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 (IN THOUSANDS OF DOLLARS)
For the year ended December 31, 1996 1995 $ Change % Change -------- -------- -------- --------
Revenue $71,952 $48,226 $23,726 49% Gross profit (a) 20,895 12,365 8,530 69%
Income before income taxes 14,760 7,824 6,936 89% Provision for income taxes 6,991 -- 6,991 (100%) -------- -------- -------- -------- Net income 7,769 7,824 (55) (1%) ======== ======== ======== ========
Pro forma information (b): Income before income taxes 14,760 7,824 6,936 89% Provision for income taxes 5,609 2,937 (2,672) (91%)
Net income 9,151 4,887 4,264 87% ======= ======= ======== ========
(a) Excludes interest income, general and administrative expense and interest expense. (b) 1996 and 1995 information are pro forma for net income. Prior to a reorganization in October 1996, MarkWest was organized as a partnership and, consequently, was not subject to income tax. Pro forma net income for 1996 and 1995 have been presented for purposes of comparability as if MarkWest had been a taxable entity.
For the year ended December 31, 1996, income before income taxes was $14.8 million, compared to income before income taxes of $7.8 million, for the year ended December 31, 1995. The increase in income before income taxes was primarily a result of industry-wide strong NGL prices, which were at near record levels in the fourth quarter of 1996, combined with a 21% increase in throughput volumes at the Company's terminals in 1996 compared to 1995.
REVENUES
Gathering, processing and marketing revenue. Gathering, processing and marketing revenue increased $23.4 million or 50% for the year ended December 31, 1996, compared to 1995, for a variety of reasons.
The Company's Appalachia operations accounted for the majority of the increase, primarily as a result of price-related increases for all NGLs in the fourth quarter of 1996, when NGL prices were at near record levels. These price increases were complemented by the addition of the new terminal in Church Hill, Tennessee, which was operational for a full year for the first time in 1996, and an overall 21% increase in throughput volumes at the Company's propane terminals, principally due to higher demand as a result of colder temperatures during the first and fourth quarters of 1996.
Offsetting these favorable price and terminal volume increases was a volume decrease at the Company's Siloam plant. The volume decrease at Siloam, which receives approximately 70% of its raw NGL mix from the Kenova plant, was due to start-up delays at the Company's new Kenova processing facility during the first quarter of 1996. The new Kenova plant, which was placed into service in January 1996, generated additional fee revenue in 1996 compared to 1995.
The remaining increase in gathering, processing and marketing revenue can be attributed to the Company's new operations in Michigan, which commenced in May 1996.
COSTS AND EXPENSES
Cost of sales. Cost of sales increased $11.7 million or 40% for the year ended December 31, 1996, compared to 1995. The Company's Appalachia operations accounted for the majority of the increase, primarily as a result of increased natural gas and propane prices, and due to an increase in volumes sold from the Company's terminals.
Operating expenses. Operating expenses increased $2.3 million or 50% for the year ended December 31, 1996, compared to 1995. This increase was partially due to new operations at both the Kenova and Church Hill facilities, which commenced operations in January 1996 and October 1995, respectively. The remaining increase resulted from the Company's Michigan operations, which commenced in May 1996.
Depreciation, depletion and amortization expense. Depreciation, depletion and amortization expense increased $1.2 million or 66% for the year ended December 31, 1996, compared to 1995, primarily as a result attributable to the Company's new Kenova plant and Michigan operations.
Interest expense. Interest expense increased $582,000 for the year ended December 31, 1996, compared to 1995. This increase resulted principally from an increase in average outstanding long-term debt of $12.0 million for 1996 compared to $8.1 million for 1995.
Provision for income taxes. Provision for income taxes increased $7.0 million for the year ended December 31, 1996, compared to 1995, as a result of the Company's Reorganization from a partnership in October of 1996.
LIQUIDITY AND CAPITAL RESOURCES - -------------------------------
The Company's sources of liquidity and capital resources historically have been net cash provided by operating activities, funds available under its financing facilities, and in 1996, proceeds from an initial public offering of equity. In the past, these sources have been sufficient to meet its needs and finance the growth of its business.
The following summary table reflects comparative cash flows for the Company for the years ended December 31, 1997, 1996 and 1995:
For the year ended December 31, 1997 1996 1995 -------- -------- --------
Net cash provided by operating activities $ 4,885 $ 16,815 $ 5,436 Net cash used in investing activities (30,329) (17,516) (12,610) Net cash provided by financing activities 22,536 4,341 2,467
For the year ended December 31, 1997, net cash provided by operating activities before adjustments for working capital decreased $2.1 million from the prior year, primarily as a result of a decrease in gross profit since 1996. The Company's working capital accounts, excluding cash, increased $7.8 million in the year ended December 31, 1997, in contrast to the decrease in working capital accounts, excluding cash, of $2.1 million which occurred in the year ended December 31, 1996. The change in working capital was driven by increases in accounts receivable, prepaid feedstock and other current assets and decreases in accounts payable and accrued liabilities, primarily related to tax payments made in 1997, both of which were offset by a decrease in inventory levels in 1997.
Cash used in investing activities increased $12.8 million for the year ended December 31, 1997 compared to 1996, primarily related to higher capital expenditures made in 1997 (see further discussion under "Capital Investment Program").
For the year ended December 31, 1997, cash provided by financing activities increased $18.2 million compared to 1996. This increase was caused by borrowings in 1997 to fund increased capital expenditures and working capital requirements. Cash provided by financing activities increased $1.9 million for the year ended December 31, 1996, as compared to the year ended December 31, 1995. This increase resulted primarily from the initial public offering in October 1996, which was partially offset by payments made on long-term debt.
The Company believes that cash provided by operating activities, together with amounts available to be borrowed under its financing facilities, will provide sufficient funds to maintain its existing facilities and complete its current capital expenditure program. Depending on the timing and amount of the Company's future projects, it may be required to seek additional sources of capital. While the Company believes that it would be able to secure additional financing, if required, no assurance can be given that it will be able to do so.
In November 1997, the Company acquired the remaining 40% interest in the Michigan project from its partner for a purchase price of $8.5 million plus up to $13.5 million in contingent payments. The future contingent payments consist of nine payments ranging from $1.0 million to $2.7 million. The Company believes that, if required to make any or all of the payments, cash flow provided by operating activities, together with amounts available to be borrowed under its financing facilities, will provide sufficient funds to cover the contingent payments.
FINANCING FACILITIES
Effective June 20, 1997, the Company replaced its existing financing agreement with a new credit facility (the "credit facility") with the Bank of Montreal, as agent, NationsBank and Colorado National Bank. The credit facility, as amended in December 1997, allows the Company to borrow up to $60.0 million, pursuant to a revolving loan commitment. The revolving loan commitment converts to a reducing loan commitment on May 31, 1999. The reducing loan commitment reduces ratably on a quarterly basis to zero by June 20, 2003.
Interest rates are based on either the agent bank's prime rate plus 1% or the London Interbank Offered Rate (LIBOR), plus an applicable margin of between 50 and 150 basis points, based on the Company's debt to capitalization ratio. At December 31, 1997, approximately $33.9 million was outstanding. Of the total outstanding, $31.9 million bears interest at 6.5% and $2.0 million bears interest at 8.5%.
Effective January 14, 1998, the Company's wholly owned subsidiary, 155 Inverness, Inc., obtained a promissory note in the amount of $3.7 million with Allianz Life Insurance Company, to finance the purchase of the Company's office building, which was acquired on July 1, 1997.
CAPITAL INVESTMENT PROGRAM
During 1997, the Company invested $19.3 million in capital expenditures, including $9.1 million in Michigan. In addition, the Company spent $8.5 million in Michigan to buy out its previous partner, and an additional $1.9 million for the construction of the 30 mile gas pipeline extension in Michigan built on behalf of MPC. During the year ended December 31, 1996, the Company invested $9.8 million in capital expenditures, primarily in connection with the start up of its Michigan operations, and an additional $7.7 million for the construction of the gas pipeline extension in Michigan built on behalf of MPC . During 1995, the Company expended $12.4 million in capital programs, $12.2 million of which were incurred in connection with the construction of the Kenova plant.
The Company's capital investment program for 1998 is estimated at $24 million, including $18 million in Michigan to fund a further extension of the pipeline and expansion of the current system capacity. The remaining capital programs for 1998 include $3 million for various projects in Appalachia, including a new compressor at the Company's Kenova facility, and $3 million in exploration and production activities.
1998 OUTLOOK - ------------
Price levels in the fourth quarter of 1997 were fairly consistent with historical, normal levels, as opposed to the near record high price levels experienced in the fourth quarter of 1996. Propane prices rose dramatically in the fourth quarter of 1996 due to an early cold start to the winter and a Mexican plant explosion, which had a detrimental impact on imported propane volumes into the United States. The Company was able to extend the benefit from these high price levels by entering into various hedge contracts which positively affected the Company's results in the first quarter of 1997. It is expected that the results from the first quarter of 1998 will reflect price levels below historical levels, and the outlook for the balance of the year cannot be predicted. The sales price of natural gas liquids is correlated with the price of crude oil, and crude oil prices have fallen significantly beginning in the fourth quarter of 1997.
A significant portion of the Company's revenues, and as a result, its gross margins, remain dependent upon the sales price of propane, which fluctuates with the winter weather conditions and other supply and demand determinants. Currently, MarkWest has an annual sensitivity to NGL prices equal to $1 million in pretax income for every $0.01/gallon change in NGL prices and an annual sensitivity to natural gas prices equal to $1 million in pretax income for every $0.10/mmbtu change in natural gas prices.
The Company's future results are expected to be positively affected by volumes through its sour gas pipeline and plant in Western Michigan, which more than tripled to 13.2 mmcf/d in the fourth quarter of 1997 from 4.2 mmcf/d in the fourth quarter of 1996. Drilling activities in the area are increasing considerably because of recent discoveries and the pending approval of further pipeline extensions. By mid-1998, MarkWest plans to extend the pipeline to connect to new and existing shut-in wells, which will add 23 mmcf/d in the second half of 1998. These increased volumes, along with the new NGL extraction plant, which began operations in December 1997, are expected to add substantial production volumes and related revenues to the Company's operations in the second half of 1998 and beyond. The Company expects greater volumes to have a substantial and positive impact on earnings and cash flow in 1998.
RISK MANAGEMENT ACTIVITIES - --------------------------
The Company's primary risk management objectives are to meet or exceed budgeted gross margins by locking in budgeted or above-budgeted prices in the financial derivatives and physical markets and to protect margins from precipitous declines. The Company maintains a three-person committee of senior management that oversees all hedging activity. Under internal guidelines, speculative transactions are prohibited.
MarkWest achieves its goals utilizing a combination of fixed price forward contracts, New York Mercantile Exchange-traded futures, and fixed/floating price swaps on the over the counter ("OTC") market. First, the Company protects margins through purchases of natural gas forward contracts with predetermined BTU differentials based upon a basket of Gulf Coast NGL prices (or a substitute for propane such as crude oil). Second, MarkWest also protects margins by purchasing natural gas futures while simultaneously selling propane futures of approximately the same BTU value. Third, the Company manages its commodity price risk on terminal propane purchases and sales by purchasing and selling, respectively, propane futures contracts. Fourth, by purchasing propane futures contracts, the Company locks in desired prices on forward sales to certain customers. Fifth, the Company's wholly owned subsidiary, MarkWest Resources, Inc., enters into OTC swaps with certain other creditworthy companies to hedge exposure to changes in spot market prices on certain levels of production.
Gains and losses related to qualifying hedges, as defined by Statement of Financial Accounting Standards No. 80, "Accounting for Futures Contracts", of firm commitments or anticipated transactions are recognized in revenue and cost of sales upon execution of the hedged physical transaction.
The Company had no material notional quantities of natural gas, NGL, or crude oil futures, swaps or options at December 31, 1997. At December 31, 1996, the Company had a total of 295 short and 135 long open propane futures contracts representing a notional quantity amounting to 160,000 barrels of production. Late in 1996, the Company entered into agreements with certain natural gas suppliers for gas purchases (25,000 mmbtus a day) for the summer of 1997 at differentials to crude oil futures and NGL baskets at December 31, 1996. There were no material notional quantities of natural gas or crude oil futures or options at December 31, 1996.
During the years ended December 31, 1997 and 1996, a $989,000 gain and a $1.1 million loss, respectively, were recognized in operating income on the settlement of propane and natural gas futures. Financial instrument gains and losses on hedging activities were generally offset by amounts realized from the sale of the underlying products in the physical market.
In addition to these risk management tools, MarkWest utilizes its liquids storage facilities and contracts for third party storage to build product inventories during historically lower-priced periods for resale during higher- priced periods. Also, MarkWest has contractual arrangements to purchase certain quantities of its natural gas feedstock in advance of physical needs.
IMPACT OF THE YEAR 2000 ISSUE - -----------------------------
The Year 2000 Issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities.
In the first quarter of 1998, the Company began its preliminary assessment of the Year 2000 Issue. Many of the Company's computer systems are purchased from third party vendors who have represented to the Company that they are Year 2000 compliant. A complete analysis, including an evaluation of the extent to which the Company is vulnerable to the failure of significant customers and suppliers to properly remediate their own Year 2000 Issue, is expected to be completed by the fourth quarter of 1998. The outcome of this analysis will be a formal Year 2000 plan and remediation, if any, is expected to be completed in 1999. The Company believes that total Year 2000 project costs will not be material to the Company's results of operations, liquidity or capital resources, and that there should be little impact to the Company's computer systems.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of MarkWest Hydrocarbon, Inc.
In our opinion, the accompanying consolidated balance sheet and related consolidated statements of operations, of cash flows and of changes in stockholders' equity/partners' capital present fairly, in all material respects, the financial position of MarkWest Hydrocarbon, Inc., a Delaware corporation, and its subsidiaries at December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Denver, Colorado February 10, 1998
MARKWEST HYDROCARBON, INC. CONSOLIDATED BALANCE SHEET (000S, EXCEPT SHARE DATA)
The accompanying notes are an integral part of these financial statements.
MARKWEST HYDROCARBON, INC. CONSOLIDATED STATEMENT OF OPERATIONS (000S, EXCEPT PER SHARE DATA)
The accompanying notes are an integral part of these financial statements.
MARKWEST HYDROCARBON, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (000S)
The accompanying notes are an integral part of these financial statements.
MARKWEST HYDROCARBON, INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY/ PARTNERS' CAPITAL (000S)
The accompanying notes are an integral part of these financial statements.
MARKWEST HYDROCARBON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF OPERATIONS AND SIGNIFICANT BUSINESS ACQUISITIONS
NATURE OF OPERATIONS
MarkWest Hydrocarbon, Inc. ("MarkWest" or the "Company") provides compression, gathering, treatment, processing and natural gas liquids ("NGLs") extraction services to natural gas producers and fractionates NGLs into marketable products for sale to third parties. The Company also purchases, stores and markets natural gas and NGLs and conducts strategic exploration for new natural gas resources for its processing and fractionation activities. The Company's processing and marketing operations are concentrated in two core areas: the southern Appalachian region of eastern Kentucky, southern West Virginia and southern Ohio; and western Michigan.
1996 REORGANIZATION
The Company was incorporated in June 1996 to act as the successor to MarkWest Hydrocarbon Partners, Ltd. (the "Partnership"). Effective October 7, 1996, the Partnership reorganized (the "Reorganization") and the existing general and limited partners exchanged 100% of their interests in the Partnership for 5,725,000 common shares of the Company. An additional 2,760,000 shares of common stock were offered for public sale, totaling 8,485,000 shares outstanding as of October 31, 1996. This transaction was a reorganization of entities under common control, and, accordingly, it was accounted for at historical cost.
SIGNIFICANT BUSINESS ACQUISITIONS
The Michigan Project
The Michigan project provides natural gas gathering, treatment, processing and NGL marketing in Manistee, Mason and Oceana Counties in Michigan. Effective May 6, 1996, the Company began to earn an interest in the project by funding various capital programs, principally a 26 mile pipeline extension. By June 1997, the Company completed its earn-in of a 60 percent interest after funding $16.8 million in capital programs. In November 1997, MarkWest acquired the remaining 40 percent interest in the Michigan project from its partner, Michigan Energy Company, L.L.C. ("MEC") for a purchase price of $8.5 million plus up to $13.5 million in future contingent payments (see Note 5).
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Excess cash is used to pay down the credit facility. Accordingly, investments are limited to overnight investments of end-of-day cash balances.
INVENTORIES
Inventories comprise the following (in 000s):
At December 31, 1997 1996 -------- --------
Product inventory....................... $4,728 $5,292 Materials and supplies inventory........ 413 340 -------- -------- $5,141 $5,632 ======== ========
MARKWEST HYDROCARBON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Product inventory consists primarily of finished goods (propane, butane, isobutane, natural gasoline and natural gas) and is valued at the lower of cost, using the first-in, first-out method, or market. Inventory write-downs at December 31, 1997 and 1996 were $585,000 and $0, respectively. In addition, the Company recorded a write-down of $251,000 related to firm commitments held at December 31, 1997 for the purchase of natural gas inventory. Capitalized overhead costs of $166,000 and $232,000 were included in product inventory at December 31, 1997, and 1996, respectively. Materials and supplies are valued at the lower of average cost or estimated net realizable value.
PREPAID FEEDSTOCK
Prepaid feedstock consists of natural gas purchased in advance of its actual use. It is valued at the lower of cost, using the first-in, first-out method, or market. Prepaid feedstock write-downs at December 31, 1997 and 1996 were $160,000 and $0, respectively.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost. Expenditures which extend the useful lives of assets are capitalized. Repairs, maintenance and renewals which do not extend the useful lives of the assets are expensed as incurred. Interest costs for the construction or development of significant long-term assets are capitalized and amortized over the related asset's estimated useful life.
Depreciation is provided principally on the straight-line method over the following estimated useful lives: plant facilities and pipelines, 20 years; buildings, 40 years; furniture, leasehold improvements and other, 3-10 years. Depreciation for oil and gas properties is provided for using the units-of- production method.
Oil and gas properties consist of leasehold costs, producing and non-producing properties, oil and gas wells, equipment and pipelines. The Company uses the full cost method of accounting for oil and gas properties. Accordingly, all costs associated with acquisition, exploration and development of oil and gas reserves are capitalized to the full cost pool.
These capitalized costs, including estimated future costs to develop the reserves and estimated abandonment costs, net of salvage value, are amortized on a units-of-production basis using estimates of proved reserves. Investments in unproved properties and major development projects are not amortized until proved reserves associated with the projects can be determined or until impairment occurs. If the results of an assessment of such properties indicate that the properties are impaired, the amount of impairment is added to the capitalized cost base to be amortized. As of December 31, 1997 and 1996, approximately $967,000 and $649,000 of investments in unproved properties were excluded from amortization.
The capitalized costs included in the full cost pool are subject to a "ceiling test," which limits such costs to the aggregate of the estimated present value, using a 10 percent discount rate, of the future net revenues from proved reserves, based on current economics and operating conditions. No impairment existed during the three years ended December 31, 1997.
Sales of proved and unproved properties are accounted for as adjustments of capitalized costs with no gain or loss recognized, unless such adjustments would significantly alter the relationship between capitalized costs and proved reserves of oil and gas, in which case the gain or loss is recognized in the consolidated statement of operations.
IMPAIRMENT OF LONG-LIVED ASSETS
During 1996, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, which requires that an impairment loss be recognized when the carrying amount of an asset exceeds the expected future undiscounted net cash flows. There was no effect on the Company's financial statements in 1997 or 1996 as a result of adopting SFAS No. 121.
INTANGIBLE ASSETS
Intangible assets consist of deferred financing costs which are amortized using the straight-line method over the term of the associated agreement.
MARKWEST HYDROCARBON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE RECEIVABLE
Note receivable at December 31, 1997 and 1996 consists of a note receivable (the "Note") from Michigan Production Company, LLC ("MPC"). The Note is for the costs incurred by the Company for the construction of the 31 mile extension to the Basin pipeline. The Note bears an interest rate of 5.98% and is payable to the Company on the earlier of two dates which are contingent upon certain events as defined in the governing agreement.
HEDGING ACTIVITIES
The Company limits its exposure to natural gas and propane price fluctuations related to future purchases and production with futures contracts. These contracts are accounted for as hedges in accordance with the provisions of SFAS No. 80, Accounting for Futures Contracts. Gains and losses on such hedge contracts are deferred and included as a component of revenues and cost of sales when the hedged production is sold, or gas supplies are purchased.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents, receivables, accounts payable and other current liabilities, and long-term debt. Except for long-term debt, the carrying amounts of financial instruments approximate fair value due to their short maturities. At December 31, 1997 and 1996, based on rates available for similar types of debt, the fair value of long-term debt was not materially different from its carrying amount.
REVENUE RECOGNITION
Revenue for sales or services is recognized at the time the product is shipped or at the time the service is performed.
INCOME TAXES
Deferred income taxes reflect the impact of "temporary differences" between amounts of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws. These temporary differences are determined in accordance with the liability method of accounting for income taxes as prescribed by SFAS No. 109, Accounting for Income Taxes.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of trade accounts receivable and note receivable. The trade accounts receivable risk is limited due to the large number of entities comprising the Company's customer base and their dispersion across industries and geographic locations. The note receivable risk is limited due to the fact that the note is secured by the pipeline extension. At December 31, 1997 and 1996, the Company had no significant concentrations of credit risk.
STOCK COMPENSATION
As permitted under SFAS No. 123, Accounting for Stock-Based Compensation, the Company has elected to continue to measure compensation costs for stock-based employee compensation plans as prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. See Note 9 for the applicable disclosures required by SFAS No. 123.
EARNINGS PER SHARE (EPS)
For the year ended December 31, 1997, the Company adopted SFAS No. 128, Earnings Per Share. SFAS No. 128 replaced the presentation of primary EPS with a presentation of basic EPS. Basic earnings per common share are determined by dividing net income by the weighted-average number of common shares outstanding during the year. Diluted earnings per common share are determined by dividing net income by the weighted-average number of common shares and common stock equivalents outstanding.
SUPPLEMENTAL CASH FLOW INFORMATION
Interest of $1.0 million, $1.0 million and $792,000 was paid during the years ended December 31, 1997, 1996 and 1995, respectively. Interest paid in 1997 is net of $557,000 capitalized in relation to various construction projects.
MARKWEST HYDROCARBON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income taxes of $7.0 million were paid during the year ended December 31, 1997. There were no income taxes paid during the two years ended December 31, 1996 because of the Company's partnership status.
In 1996, non-cash investing activities included the contribution of Basin Pipeline, LLC by Michigan Energy, LLC ("MEC") to the Company. MEC's contribution was valued at approximately $9.2 million.
In 1996, non-cash financing activities included the purchase of certain assets from the Dow Chemical Company ("Dow") by the assumption of a note valued at approximately $421,000. As of December 31, 1997 and 1996, $187,000 and $337,000, respectively, was outstanding under this note.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the 1997 presentation.
NOTE 3. DEBT
New Credit Facility. Effective June 20, 1997, the Company replaced its existing financing agreements with a new credit facility (the "credit facility") with the Bank of Montreal, as agent, NationsBank and Colorado National Bank. The credit facility initially allowed the Company to borrow up to $55 million pursuant to a revolving loan commitment. Effective December 24, 1997, the credit facility was amended to increase the borrowing capacity to $60 million. The revolving loan commitment converts to a reducing loan commitment on June 20, 1999. The reducing loan commitment reduces ratably on a quarterly basis to zero by June 20, 2003.
The credit facility permits the Company to borrow money using either a base rate loan or a London Interbank Offered Rate ("LIBOR") loan option. The base rate loan accrues interest based on the agent bank's prime rate plus 1%. At December 31, 1997, approximately $2.0 million was outstanding under the base rate loan option bearing interest at 8.5%. Alternatively, LIBOR loans accrue interest based on the LIBOR, plus an applicable margin of between 50 and 150 basis points, based upon the Company's debt to capitalization ratio. At December 31, 1997, approximately $31.9 million was outstanding under the LIBOR option bearing interest at 6.5%.
The Company pays a commitment fee at the rate of 0.2% of 1% per annum on the average daily unused commitment. The credit facility is secured by a first mortgage on the Company's major assets.
The loan agreement restricts certain activities and requires the maintenance of certain financial ratios and other conditions. As a direct result of entering into a new credit facility, the Company wrote off previously deferred financing costs associated with the previous credit facility of approximately $235,000 in the second quarter of 1997.
155 Inverness Building Financing. Effective January 14, 1998, the Company's wholly owned subsidiary, 155 Inverness, Inc. ("155 Inverness"), obtained separate financing for the purchase of an office building, which was acquired on July 1, 1997. 155 Inverness entered into a promissory note (the "note") with Allianz Life Insurance Company. The note is in the amount of $3.7 million and it matures on February 10, 2003. Interest accrues on the note at the rate of 7.25%. The note is secured by the property's deed of trust and by a ten year master lease with the Company.
Previous Loan Agreements. Prior to the establishment of the aforementioned credit facility, the Company had two financing agreements with four financial institutions. The first financing agreement was structured as a revolver loan (the "revolver") and had a maximum borrowing base of $40 million. Terms of the revolver dictated that the loan must be repaid by June 30, 2002, via 16 equal quarterly installments commencing September 30, 1998. The second financing arrangement was a working capital line of credit (the "line of credit") with a maximum borrowing base of $7.5 million and a maturity date of June 30, 1998.
MARKWEST HYDROCARBON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The revolver allowed the Company to borrow money using either a base rate or a LIBOR loan option. Interest on the base rate loan was calculated based on the prime rate and the Company's debt to capitalization ratio. At December 31, 1996, $4.2 million was outstanding under a base rate loan bearing interest at 8.5%. The LIBOR option allowed the Company to lock in a portion of the revolver balance for a period of one, two, three or six months. Interest on the LIBOR option was calculated based on the LIBOR and the Company's debt to capitalization ratio. At December 31, 1996, $0 was outstanding under the LIBOR commitment. Interest on the line of credit was calculated based on the prime rate and the Company's debt to capitalization ratio. At December 31, 1996, $5.7 million was outstanding under the line of credit bearing interest at 8.5%.
The revolver was secured by a first mortgage on the Company's major assets. The revolver restricted certain activities and required the maintenance of certain financial ratios and other conditions. The Revolver/Term Loan was paid off in full and canceled by the Company effective June 20, 1997. All amounts outstanding under the line of credit were paid off on February 6, 1997. The line of credit was also canceled by the Company effective June 20, 1997.
Resources' Revolver Loan. Resources, the Company's wholly-owned subsidiary, had a revolving credit agreement with Colorado National Bank. As of December 31, 1996, $1.2 million was outstanding. The agreement was terminated by Resources effective April 25, 1997.
Scheduled debt maturities under the terms of the facilities are as follows (in 000s):
At December 31, 1997 ------------------------------------ Credit facility Subsidiary debt --------------- ---------------
1998....................... $ - $156 1999....................... 6,357 31 2000....................... 8,476 - 2001....................... 8,476 - 2002 and thereafter........ 10,591 - --------------- ---------------
Total...................... $33,900 $187 =============== ===============
NOTE 4. RELATED PARTY TRANSACTIONS
The Company, through its wholly-owned subsidiary, Resources, holds a varied undivided interest in several exploration and production assets owned jointly with MAK-J Energy, which owns a 51% undivided interest in such properties. The general partner of MAK-J Energy is a corporation owned and controlled by the President and Chief Executive Officer of the Company. The properties are held pursuant to joint venture agreements entered into between Resources and MAK-J Energy. Resources is the operator under such agreements. As the operator, Resources is obligated to provide certain engineering, administrative and accounting services to the joint ventures. The joint venture agreements provide for a monthly fee payable to Resources for all such expenses. As of December 31, 1997 and 1996, the Company has receivables due from MAK-J Energy for approximately $790,000 and $0, and payables to MAK-J Energy for approximately $202,000 and $62,000, respectively.
The Company made contributions of $271,000, $299,000 and $211,000 to a profit- sharing plan for the years ended December 31, 1997, 1996 and 1995, respectively. The plan is discretionary, with annual contributions determined by the Company's Board of Directors.
The Company (formerly a Partnership) periodically extended offers to employees to purchase interests in the Company. The employees provide the Company with promissory notes as part of the exercise price. According to the terms of the notes, interest accrues at 7% and payments are required for the greater of accrued interest or excess distributions and are payable in full on October 8, 1999. Notes in the amounts of $167,000 and $376,000 have been recorded as a reduction of additional paid-in capital at December 31, 1997 and 1996, respectively. Purchase of Company stock with financing provided by the Company was discontinued concurrent with the Company's public offering in October 1996.
MARKWEST HYDROCARBON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. COMMITMENTS AND CONTINGENCIES
In connection with the Company's acquisition of the remaining 40 percent interest in its western Michigan project from its partner, MEC (see Note 1), the Company is committed to make additional future contingent payments of up to $13.5 million. The future contingent payments consist of nine payments ranging from $1.0 million to $2.7 million, and are contingent upon several factors, including substantial sustained increases in system throughput volumes, ranging from 45 million cubic feet per day ("mmcfd") to 75 mmcfd, and a minimum internal rate of return on the capital programs undertaken to expand throughput capacity.
NOTE 6. SIGNIFICANT CUSTOMERS
For the year ended December 31, 1997, 1996 and 1995, sales to one customer accounted for approximately 19%, 16% and 18% of total revenues. Management believes the loss of this customer would not adversely impact operations, as alternative markets are available.
NOTE 7. FINANCIAL DERIVATIVES
The Company uses futures contracts and fixed/floating price swaps to hedge its commodity price risk. Gains and losses experienced on hedging transactions are offset by the related gains or losses on the sale of the commodity. Under internal guidelines, speculative positions are prohibited.
Futures. The Company enters into futures transactions on the New York Mercantile Exchange ("NYMEX") and is subject to margin requirement deposits. MarkWest protects margins by purchasing natural gas futures while simultaneously selling propane futures of approximately the same British Thermal Unit ("BTU") value. The Company also manages its commodity price risk on terminal propane purchases and sales by purchasing and selling, respectively, propane futures contracts. The Company had no material notional quantities of natural gas, NGL, or crude oil futures, swaps or options at December 31, 1997. At December 31, 1996, the Company had a total of 295 short and 135 long open propane futures contracts representing a notional quantity amounting to 160,000 barrels. Late in 1996, the Company entered into agreements with certain natural gas suppliers for gas purchases (25,000 mmbtus a day) for the summer of 1997 at differentials to crude oil futures and NGL baskets at December 31, 1996. There were no material notional quantities of natural gas or crude oil futures or options at December 31, 1996.
During the years ended December 31, 1997 and 1996, a $989,000 gain and a $1.1 million loss, respectively, were recognized in operating income on the settlement of propane and natural gas futures. Financial instrument gains and losses on hedging activities were generally offset by amounts realized from the sale of the underlying products in the physical market.
Swaps. The Company's wholly owned subsidiary, MarkWest Resources, Inc., enters into OTC swaps with certain other creditworthy companies. Resources uses swap agreements to hedge exposure to changes in spot market prices on the amount of natural gas production covered in the agreement. At December 31, 1997, Resources had three open swap agreements in place covering certain monthly production through 1999.
NOTE 8. INCOME TAXES
In connection with the reorganization from a partnership to a corporation, the Company recorded deferred income taxes as of October 7, 1996 and a one-time charge to earnings of $3.7 million. No provision was recorded in 1995 as the entity was a partnership.
The total income tax provision has been allocated as follows (in 000s):
Year ended December 31, 1997 1996 ------ ------
Arising from Reorganization............. $ -- $3,745 Subsequent to Reorganization............ 4,550 3,246 ------ ------ $4,550 $6,991 ====== ======
MARKWEST HYDROCARBON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The provision for income taxes subsequent to reorganization is comprised of (000s):
The differences between the provision for income taxes at the statutory rate and the actual provision for income taxes for the years ended December 31, 1997 and 1996 are summarized as follows (in 000s):
MARKWEST HYDROCARBON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. STOCK COMPENSATION PLANS
At December 31, 1997, the Company has two stock-based compensation plans, which are described below. The Company applies APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its fixed stock option plans. Had compensation cost for the Company's two stock-based compensation plans been determined based on the fair value at the grant dates under those plans consistent with the method prescribed by SFAS No. 123, Accounting for Stock-Based Compensation, the Company's pro forma net income and earnings per share would have been reduced to the pro forma amounts listed below (in 000s, except per share data):
1997 1996 1995 ------ ------ ------
Net income As reported...... $7,847 $7,769 $6,074 Pro forma........ 7,732 7,714 6,062
Basic earnings per share As reported...... $ 0.92 $ 1.21 $ 1.06 Pro forma........ 0.91 1.20 1.06
Earnings per share assuming As reported...... $ 0.91 $ 1.20 $ 1.06 dilution Pro forma........ 0.89 1.19 1.06
The Company historically granted employees the right to purchase partnership interests in the Partnership. As part of the Reorganization, such employee options to purchase partnership interests were replaced by options to purchase shares pursuant to the Company's 1996 Stock Incentive Plan.
Under the 1996 Stock Incentive Plan, the Company may grant options to its employees for up to 850,000 shares of common stock in the aggregate. Under this plan, the exercise price of each option equals the market price of the Company's stock on the date of the grant, and an option's maximum term is 10 years. Options are granted periodically throughout the year and vest at the rate of 20% on the first anniversary of the option grant date and at the rate of 20% on each subsequent anniversary thereof until fully vested.
Under the 1996 Non-employee Director Stock Option Plan, the Company may grant options to its non-employee directors for up to 20,000 shares of common stock in the aggregate. Under this plan, the exercise price of each option equals the market price of the Company's stock on the date of the grant, and an option's maximum term is 3 years. Options are granted upon either the date the director first becomes a director, or on the date of each Annual Meeting of Stockholders, provided that the director has served since the date of the last Annual Meeting of Stockholders. Options granted upon the date the director first becomes a director vest at the rate of 33.33% on the first anniversary of the option grant date, and at the rate of 33.33% on each subsequent anniversary thereof until fully vested. Options granted on the date of each Annual Meeting vest 100% on the first anniversary of the option grant date.
The fair value of each option is estimated on the date of grant using the Black- Scholes Option-Pricing model with the following weighted-average assumptions: dividend yield of $0/share for options granted in 1997, 1996 and 1995; expected volatility of 30% for 1997 option grants, 33% for 1996 option grants and 34% for 1995 option grants; risk-free interest rate of 5.83% for 1997 option grants, 6.55% for 1996 option grants and 6.22% for 1995 option grants; expected lives of 6 years for 1997, 1996 and 1995 option grants.
MARKWEST HYDROCARBON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the status of the Company's two fixed stock option plans as of December 31, 1997, 1996 and 1995 and changes during the years ended on those dates is presented below:
The following table summarizes information about fixed stock options outstanding at December 31, 1997:
NOTE 10. EARNINGS PER SHARE
During 1997, the Company adopted Financial Accounting Standards ("SFAS") Statement No. 128, Earnings per Share. This statement requires that all periods presented be retroactively restated in accordance with SFAS No. 128. The following table shows the amounts used in computing earnings per share and weighted average number of shares of dilutive potential common stock for the three years ending December 31, 1997 (in 000s, except per share data):
NOTE 11. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following summarizes certain quarterly results of operations (000s):
(1) Excludes interest income. (2) Excludes general and administrative expenses and interest expense. (3) Weighted average shares outstanding for each quarter in 1996 represents the weighted average of, for each quarter prior to the Company's initial public offering, the number of shares issued in the Reorganization and, for the quarter subsequent to the Offering, the total number of common shares outstanding.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12.
ITEM 12. SECURITY OWNERSHIP AND CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to instruction G(3) to Form 10-K, Items 10, 11, 12 and 13 are omitted because the Company will file a definitive proxy statement (the "Proxy Statement") pursuant to Regulation 14A under the Exchange Act of 1934 not later than 120 days after the close of the fiscal year. The information required by such Items will be included in the definitive proxy statement to be so filed for the Company's annual meeting of stockholders scheduled for May 21, 1998 and is hereby incorporated by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements:
Reference is made to the listing on page 18 for a list of all financial statements filed as a part of this report.
(2) Financial Statement Schedules:
None required.
(3) Exhibits
2.1 Purchase and Sale Agreement between MarkWest Hydrocarbon, Inc. and Michigan Energy Company, L.L.C. dated November 21, 1997 (Filed as exhibit 2.1 to MarkWest Hydrocarbon, Inc.'s Form 8-K filed on January 29, 1998 and incorporated herein by reference).
3.1 Certificate of Incorporation of MarkWest Hydrocarbon, Inc. (Filed as exhibit 3.1 to MarkWest Hydrocarbon, Inc.'s Registration Statement on Form S-1, Registration No. 333-09513 and incorporated herein by reference).
3.2 Bylaws of MarkWest Hydrocarbon, Inc. (Filed as exhibit 3.2 to MarkWest Hydrocarbon, Inc.'s Registration Statement on Form S-1, Registration No. 333-09513 and incorporated herein by reference).
10.1 Amended and Restated Reorganization Agreement made as of August 1, 1996, by and among MarkWest Hydrocarbon, Inc., MarkWest Hydrocarbon Partners, Ltd., MWHC Holding, Inc. RIMCO Associates, Inc. and each of the limited partners of MarkWest Hydrocarbon Partners, Ltd. (Filed as exhibit 10.1 to MarkWest Hydrocarbon, Inc.'s Registration Statement on Form S-1, Registration No. 333-09513 and incorporated herein by reference).
10.2 Participation, Ownership and Operating Agreement for West Shore Processing Company, L.L.C. dated May 2, 1996 (Filed as exhibit 10.7 to MarkWest Hydrocarbon, Inc.'s Registration Statement on Form S-1, Registration No. 333-09513 and incorporated herein by reference).
10.3 Second Amended and Restated Operating Agreement for Basin Pipeline L.L.C., dated May 2, 1996 (Filed as exhibit 10.8 to MarkWest Hydrocarbon, Inc.'s Registration Statement on Form S-1, Registration No. 333-09513 and incorporated herein by reference).
10.4 Gas Treating and Processing Agreement, dated May 1, 1996, between West Shore Processing Company, LLC and Shell Offshore, Inc. (Filed as exhibit 10.10 to MarkWest Hydrocarbon, Inc.'s Registration Statement on Form S- 1, Registration No. 333-09513 and incorporated herein by reference).
10.5 Gas Processing and Treating Agreement, dated March 29, 1996, between Manistee Gas Limited Liability Company and Michigan Production Company, L.L.C. (Filed as exhibit 10.14 to MarkWest Hydrocarbon, Inc.'s Registration Statement on Form S-1, Registration No. 333-09513 and incorporated herein by reference).
10.6 Processing Agreement (Kenova Processing Plant), dated March 15, 1995, between Columbia Gas Transmission Corporation and MarkWest Hydrocarbon Partners, Ltd. (Filed as exhibit 10.15 to MarkWest Hydrocarbon, Inc.'s Registration Statement on Form S-1, Registration No. 333-09513 and incorporated herein by reference).
10.7 Natural Gas Liquids Purchase Agreement (Cobb Plant), between Columbia Gas Transmission Corporation and MarkWest Hydrocarbon Partners, Ltd. (Filed as exhibit 10.16 to MarkWest Hydrocarbon, Inc.'s Registration Statement on Form S-1, Registration No. 333-09513 and incorporated herein by reference).
10.8 Purchase and Demolition Agreement Construction Premises, dated March 15, 1995, between Columbia Gas Transmission Corporation and MarkWest Hydrocarbon Partners, Ltd. (Filed as exhibit 10.17 to MarkWest Hydrocarbon, Inc.'s Registration Statement on Form S-1, Registration No. 333-09513 and incorporated herein by reference).
10.9 Purchase and Demolition Agreement Remaining Premises, dated March 15, 1995, between Columbia Gas Transmission Corporation and MarkWest Hydrocarbon Partners, Ltd. (Filed as exhibit 10.18 to MarkWest Hydrocarbon, Inc.'s Registration Statement on Form S-1, Registration No. 333-09513 and incorporated herein by reference).
10.10 Agreement to Design and Construct New Facilities, dated March 15, 1995, between Columbia Gas Transmission Corporation and MarkWest Hydrocarbon Partners, Ltd. (Filed as exhibit 10.19 to MarkWest Hydrocarbon, Inc.'s Registration Statement on Form S-1, Registration No. 333-09513 and incorporated herein by reference).
10.11 Contract for Construction and Lease of Boldman Plant, dated December 24, 1990, between Columbia Gas Transmission Corporation and MarkWest Hydrocarbon Partners, Ltd. (Filed as exhibit 10.22 to MarkWest Hydrocarbon, Inc.'s Registration Statement on Form S-1, Registration No. 333-09513 and incorporated herein by reference).
10.12 Natural Gas Liquids Purchase Agreement (Boldman Plant), dated December 24, 1990, between Columbia Gas Transmission Corporation and MarkWest Hydrocarbon Partners, Ltd. (Filed as exhibit 10.23 to MarkWest Hydrocarbon, Inc.'s Registration Statement on Form S-1, Registration No. 333-09513 and incorporated herein by reference).
10.13 Natural Gas Liquids Purchase Agreement, dated April 26, 1988, between Columbia Gas Transmission Corporation and MarkWest Hydrocarbon Partners, Ltd. (Filed as exhibit 10.24 to MarkWest Hydrocarbon, Inc.'s Registration Statement on Form S-1, Registration No. 333-09513 and incorporated herein by reference).
10.14 1996 Incentive Compensation Plan (Filed as exhibit 10.25 to MarkWest Hydrocarbon, Inc.'s Registration Statement on Form S-1, Registration No. 333-09513 and incorporated herein by reference).
10.15 1996 Stock Incentive Plan (Filed as exhibit 10.26 to MarkWest Hydrocarbon, Inc.'s Registration Statement on Form S-1, Registration No. 333-09513 and incorporated herein by reference).
10.16 1996 Non-employee Director Stock Option Plan (Filed as exhibit 10.27 to MarkWest Hydrocarbon, Inc.'s Registration Statement on Form S-1, Registration No. 333-09513 and incorporated herein by reference).
10.17 Form of Non-Compete Agreement between John M. Fox and MarkWest Hydrocarbon, Inc. (Filed as exhibit 10.28 to MarkWest Hydrocarbon, Inc.'s Registration Statement on Form S-1, Registration No. 333-09513 and incorporated herein by reference).
10.18 Pipeline Construction and Operating Agreement between Michigan Production Company, L.L.C. and West Shore Processing Company, L.L.C., dated October 1, 1996. (Filed as exhibit 10.31 to MarkWest Hydrocarbon, Inc.'s Form 10-K for the year ended December 31, 1996 and incorporated herein by reference).
10.19 Non-Recourse Loan Agreement between Michigan Production Company, L.L.C. and West Shore Processing Company, L.L.C., dated October 1, 1996. (Filed as exhibit 10.32 to MarkWest Hydrocarbon, Inc.'s Form 10-K for the year ended December 31, 1996 and incorporated herein by reference).
10.20 First Amendment to Participation, Ownership and Operating Agreement for West Shore Processing Company, L.L.C., dated October 1, 1996. (Filed as exhibit 10.33 to MarkWest Hydrocarbon, Inc.'s Form 10-K for the year ended December 31, 1996 and incorporated herein by reference).
10.21 Option and Agreement to Purchase and Sell Pipeline, dated October 1, 1996. (Filed as exhibit 10.34 to MarkWest Hydrocarbon, Inc.'s Form 10-K for the year ended December 31, 1996 and incorporated herein by reference).
10.22 Mortgage, Assignment, Security Agreement and Financing Statement from Michigan Production Company, L.L.C. to West Shore Processing Company, L.L.C., dated October 22, 1996. (Filed as exhibit 10.35 to MarkWest Hydrocarbon, Inc.'s Form 10-K for the year ended December 31, 1996 and incorporated herein by reference).
10.23 Amendment to Participation, Ownership and Operating Agreement for West Shore Processing Company, L.L.C., dated December 12, 1996. (Filed as exhibit 10.36 to MarkWest Hydrocarbon, Inc.'s Form 10-K for the year ended December 31, 1996 and incorporated herein by reference)
10.24 Amended and Restated Credit Agreement, dated as of June 20, 1997 among MarkWest Hydrocarbon, Inc., as the Borrower, and Certain Commercial Lending Institutions, as the Lenders, and Bank of Montreal, acting through certain U.S. branches or agencies, as the Agent for the Lenders (Filed as exhibit 10.1 to MarkWest Hydrocarbon, Inc.'s Form 10-Q for the three months ended June 30, 1997 and incorporated herein by reference).
10.25 MarkWest Hydrocarbon, Inc. 1997 Severance and Non-Compete Plan (Filed as exhibit 10.1 to MarkWest Hydrocarbon, Inc.'s Form 10-Q for the three months ended September 30, 1997 and incorporated herein by reference).
10.26 First Amendment dated as of December 24, 1997 to the Amended and Restated Credit Agreement dated as of June 20, 1997 between MarkWest Hydrocarbon, Inc., as the Borrower, and Certain Commercial Lending Institutions, as the Lenders, and Bank of Montreal, acting through certain U.S. branches or agencies, as the Agent for the Lenders.
11. Statement regarding computation of earnings per share.
21. List of Subsidiaries of MarkWest Hydrocarbon, Inc.
23. Consent of Price Waterhouse LLP, independent accountants.
27. Financial Data Schedule
(b) Reports on Form 8-K:
(i) A report on Form 8-K dated December 3, 1997 was filed during the fourth quarter of 1997 to announce the Company's acquisition of the remaining 40 percent interest in its western Michigan project from its partner, Michigan Energy Company, L..L.C.
(ii) A report of Form 8-K dated February 24, 1998 was filed during the first quarter of 1998 to announce the Company's arbitration with Columbia Gas Transmission Corporation to resolve issues regarding three natural gas processing plants in Appalachia.
(c) Exhibits required by Item 601 of Regulation S-K. See (a) (3) above.
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Englewood, State of Colorado on March 20, 1998.
MarkWest Hydrocarbon, Inc. (Registrant)
BY: /s/ John M. Fox ------------------------------------ John M. Fox President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ John M. Fox March 20, 1998 -------------------------------- John M. Fox President, Chief Executive Officer and Director
/s/ Brian T. O'Neill March 20, 1998 -------------------------------- Brian T. O'Neill Senior Vice President, Chief Operating Officer and Director
/s/ Gerald A. Tywoniuk March 20, 1998 -------------------------------- Gerald A. Tywoniuk Chief Financial Officer and Vice President of Finance (Principal Financial and Accounting Officer)
/s/ Arthur J. Denney March 20, 1998 -------------------------------- Arthur J. Denney Director
/s/ Norman H. Foster March 20, 1998 -------------------------------- Norman H. Foster Director
/s/ Barry W. Spector March 20, 1998 -------------------------------- Barry W. Spector Director
/s/ David R. Whitney March 20, 1998 -------------------------------- David R. Whitney Director