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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 [ Fee Required ] for the fiscal year ended December
31, 1996
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required] for the transition period from
__________ to ____________
COMMISSION FILE NUMBER 1-11566
MARKWEST HYDROCARBON, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 84-1352233
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5613 DTC PARKWAY, SUITE 400, ENGLEWOOD, COLORADO 80111
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 303-290-8700
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
------------------- ------------------------------------
Common Stock, $.01 par value Nasdaq National Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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The aggregate market value of voting common stock held by non-affiliates of the
registrant on March 17, 1997 was $48,695,252.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this Report (Items 10, 11, 12 and 13) is
incorporated by reference from the registrant's proxy statement to be filed
pursuant to Regulation 14A with respect to the annual meeting of stockholders
scheduled to be held on June 6, 1997.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
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MARKWEST HYDROCARBON, INC.
FORM 10-K
TABLE OF CONTENTS
Page
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PART I
Items 1. and 2. Business and Properties........................... 3
Item 3. Legal Proceedings......................................... 14
Item 4. Submission of Matters to a Vote of Security Holders....... 14
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters............................................ 15
Item 6. Selected Financial Data................................... 16
Item 7. Management's Discussions and Analysis of Financial
Condition and Results of Operation............................. 17
Item 8. Financial Statements and Supplementary Data............... 22
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............................ 40
PART III
Item 10. Directors and Executive Officers of the Registrant....... 40
Item 11. Executive Compensation................................... 40
Item 12. Security Ownership of Certain Beneficial Owners and
Management..................................................... 40
Item 13. Certain Relationships and Related Transactions........... 40
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K....................................................... 40
2
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PART I
ITEMS 1. AND 2. BUSINESS AND PROPERTIES
GENERAL
.
MarkWest Hydrocarbon, Inc. (the "Company" or "MarkWest") is engaged in natural
gas processing and related services. The Company, which has grown substantially
since its founding in 1988, is the largest processor of natural gas in
Appalachia, and recently established a venture to provide natural gas processing
services in western Michigan. The independent gas processing industry has grown
rapidly in the last 10 years, and the Company believes there will be substantial
opportunities to grow its gas processing operations within these existing core
regions and in new markets. The Company provides compression, gathering,
treatment, and natural gas liquids (NGL) extraction services to natural gas
producers and pipeline companies and fractionates NGLs into marketable products
for sale to third parties. The Company also purchases, stores and markets
natural gas and NGLs and has begun to conduct strategic exploration for new
natural gas sources for its processing activities. For the year ended December
31, 1996, MarkWest produced approximately 95 million gallons of NGLs and
marketed approximately 137 million gallons of NGLs.
The Company's processing and marketing operations are concentrated in two core
areas that are significant gas-producing basins: the southern Appalachian region
of eastern Kentucky, southern West Virginia, and southern Ohio (the "Appalachian
Core Area"), and western Michigan (the "Michigan Core Area"). At the Company's
processing plants, natural gas is treated to remove contaminants, and NGLs are
extracted and fractionated into propane, normal butane, isobutane and natural
gasoline. The Company then markets the fractionated NGLs to refiners,
petrochemical companies, gasoline blenders, multistate and independent propane
dealers, and propane resellers. In addition to processing and NGL marketing, the
Company engages in terminalling and storage of NGLs in a number of NGL storage
complexes in the central and eastern United States and operates propane
terminals in Arkansas and Tennessee.
During 1996, the Company took several key steps to expand its operations. In
January 1996, the Company commissioned a new natural gas liquids extraction
plant in Wayne County, West Virginia. In May 1996, the Company established West
Shore Processing Company, LLC ("West Shore"), a venture in western Michigan,
which the Company will develop as the Michigan Core Area. The Company has
identified opportunities, and has entered into agreements, to expand its gas
gathering operations and to commence gas processing operations in the Michigan
Core Area in the near future. See "Natural Gas Processing and Related Services."
The Company's principal offices are located at 5613 DTC Parkway, Suite 400,
Englewood, Colorado 80111, and its telephone number is (303) 290-8700. The
Company was incorporated in Delaware in 1996.
NATURAL GAS PROCESSING AND RELATED SERVICES
The Company's processing operations are located in its Appalachian Core Area
consisting of eastern Kentucky, southern West Virginia, and southern Ohio, and
its Michigan Core Area consisting of the area of western Michigan north of Grand
Rapids and south of Traverse City. The Company's operations in Appalachia date
from the Company's founding in 1988. At present, the Company is the largest
processor of natural gas in Appalachia based on the volume of natural gas
processed at its owned facilities, including those it leases to third parties.
The Company began development of the Michigan Core Area in June 1996.
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APPALACHIAN CORE AREA
The Company's operations in Appalachia consist of two extraction facilities, a
fractionation plant, an NGL pipeline, rail terminals and related processing
assets. Since 1988, the volume of natural gas processed by the Company in the
Appalachian Core Area has grown to approximately 170 MMcf/D, and the Company's
NGL production has grown to approximately 275 MGal/D.
The Company believes that this region has favorable supply and demand
characteristics. The Appalachian Core Area is geographically situated between
the TET pipeline to the north and the Dixie pipeline to the south. In addition
to Appalachia, the TET pipeline serves the upper midwestern and eastern United
States, and the Dixie pipeline serves the southeast. Because the areas directly
served by these two pipelines are experiencing significant population growth,
the demand for NGL products exceeds the capacity of these two lines. The demand
for propane from the TET and Dixie pipelines is such that the pipelines allocate
supply to purchasers during peak wintertime periods, thereby limiting the
available supply to Appalachia. There are few sources of propane to the
Appalachian Core Area other than the Company's facilities, the TET and Dixie
pipelines, and propane shipped by rail cars from other producing areas. In
addition, the Appalachian mountain range limits access to the Dixie pipeline by
distributors in the Appalachian Core Area. These factors enable producers in
Appalachia (principally MarkWest, Ashland Oil Company and CNG Transmission
Corporation) to price their products (particularly propane) at a premium to Gulf
Coast spot prices during times of supply shortages from other sources,
especially during winter high demand periods. The underground storage caverns at
the Company's Siloam location allow the Company to defer sales of NGLs to the
winter months when peak demand periods often lead to higher product prices and
provide local consumers with needed wintertime supplies. The Company also
believes that there are significant growth opportunities in this region both
from the improvement of gas processing efficiencies for existing gas production
in the area and the Company's capacity to process natural gas streams from areas
that are not currently processed.
NGL Extraction. The Company currently owns two NGL extraction plants in
Appalachia, one which it operates and one which it leases to Columbia Gas
Transmission Company ("Columbia Gas"). Extraction plants remove NGLs, as well as
water vapor, solids and other contaminants, such as hydrogen sulfide or carbon
dioxide, contained in the natural gas stream. The Company provides NGL
extraction services under a fee-based arrangement.
Kenova Plant. The Company began construction of its Kenova natural gas liquids
extraction plant, located in Wayne County, West Virginia, in 1995. The Kenova
plant was commissioned in January 1996 and replaced a 1958 extraction facility
owned and operated by Columbia Gas. Because the Company owns and operates this
new facility, which is situated on a main gathering line of Columbia Gas, the
Company will generate fee revenues related to the processing operations. In
addition, the Company believes that this new facility will generate greater NGL
recovery from natural gas, reduce downtime for maintenance, and significantly
reduce fuel costs compared to the replaced facility. Construction and related
costs for development of the Kenova plant were approximately $12.2 million. To
date, substantially all of Kenova's processing throughput has been obtained from
Columbia Gas. Substantially all of the Kenova plant's extracted NGLs are
transported via the Company's 38.5 mile high pressure pipeline to its Siloam
fractionation facility located in South Shore, Kentucky, for separation into
marketable NGL products.
Boldman Plant. The Company constructed the Boldman natural gas liquids
extraction plant, located in Pike County, Kentucky, in 1991. Construction and
related costs for development of the Boldman plant were approximately $4.0
million. The Boldman plant is currently leased to, and operated by, Columbia
Gas. Under such lease, the Company receives a monthly rental fee ranging from
$40,000 to $47,000. Columbia Gas also has an option to purchase the Boldman
plant at set prices during the term and upon expiration of the lease. Columbia
Gas has dedicated all NGLs recovered at the Boldman plant to the Company's
Siloam facility for fractionation under a contract which runs through December
31, 2003. This production is transported via tanker trucks from the Boldman
plant to the Siloam plant for processing.
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NGL Pipeline. The Company owns a 38.5 mile, high pressure steel pipeline that
connects its Kenova processing plant to the Company's Siloam fractionation
facility. The pipeline currently delivers approximately 70 million gallons per
year to the Siloam facility from the Kenova processing plant. Because this
pipeline was originally designed to handle a high pressure ethane-rich stream,
it has the capacity to handle almost twice as much product if it becomes
available.
Fractionation. The Company's fractionation services in the Appalachian Core
Area are performed at its Siloam fractionation plant located in South Shore,
Kentucky. At this facility, extracted NGLs are subjected to various processes
that cause the natural gas to separate, or fractionate, into separate NGL
products, including propane, isobutane, normal butane and natural gasoline. The
Siloam facility is one of only two fractionation plants in the Appalachian Core
Area producing over 6,500 barrels, or 275,000 gallons, per day of NGLs.
Substantially all of the Company's fractionation services in its Appalachian
Core Area are provided under keep-whole contracts with Columbia Gas.
The Company acquired the Siloam plant in April 1988 from Columbia Gas for $3.5
million. During 1989, the Company began an approximately $11.0 million expansion
program at the Siloam plant. The expansion program, among other enhancements,
included the construction of additional storage facilities, improvements to
existing electrical and control systems and the addition of loading facilities.
The expansion was fully operational in early 1991.
Approximately 77% of the fractionation throughput at the Siloam plant comes from
the production of the Company's Kenova and Boldman plants. The Company also
makes purchases of NGLs from third-party processors and of additional production
from Columbia Gas. The Company's most significant purchase contract for NGLs is
with Columbia Gas. In addition to the approximately 9.0 MMGal per year of
Columbia Gas NGL production from the Boldman plant, Columbia Gas dedicates
approximately 17.0 MMGal per year from its Cobb, West Virginia extraction plant.
Pursuant to the Columbia Gas purchase agreements, the Company is committed to
purchase substantially all of the NGLs produced at Columbia Gas' own processing
plants, as well as those produced by the Company for Columbia Gas. Under these
contracts, the Company is required to compensate Columbia Gas for the BTU energy
equivalent of NGLs and fuel removed from the natural gas as a result of
processing. In 1996, the Company's cost for purchases under these contracts was
$23 million, and such purchases represented 95% of all NGLs fractionated by the
Company.
MICHIGAN CORE AREA
The Company was attracted to the Michigan Core Area because of the potential for
providing gathering and processing services in the area. Substantially all of
the natural gas in the Michigan Core Area is sour and, therefore, has limited
outlets for processing. West Shore was formed in May 1996 and is governed by an
operating agreement between MarkWest Michigan, Inc. and Michigan Energy Company
("MEC"). West Shore is a venture dedicated to natural gas gathering, treatment,
processing and NGL marketing in Manistee, Mason and Oceana Counties in Michigan.
As a result of availability of large shut-in sour gas wells and the expected
increase in drilling by producers who previously had no outlet for sour gas
production in the area, the Company entered into several related agreements in
May 1996 providing for the development of gathering, treatment and processing
facilities in western Michigan. Through West Shore, the Company expects to be
able to gather and process this sour gas.
The most significant assets of West Shore currently include the Basin Pipeline,
a 31-mile sour gas pipeline which is situated in Manistee and Mason Counties,
rights to obtain a sour gas treatment plant located in Manistee County,
Michigan, and various agreements that dedicate natural gas production to West
Shore for processing. Until completion of the second phase of the Michigan
Project, West Shore's revenues will be derived from fees generated by gathering
of natural gas on the Basin Pipeline and by treatment of sour gas. Following
completion of the second phase, revenues will be derived from fees generated by
gathering, treatment and extraction and fractionation of NGLs.
5
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The Michigan Project is completing its first phase of development, which
includes construction of a two-mile pipeline from one of West Shore's main
gathering locations to a treatment plant owned and operated by Shell Offshore,
Inc. ("Shell") in Manistee County. The purpose of this pipeline is to deliver
sour gas to Shell for treatment. The first phase also includes the construction
of a 30-mile pipeline that will connect the Slocum natural gas well owned by MPC
in Oceana County to the Basin Pipeline. Initially West Shore will operate this
pipeline for Michigan Production Company, L.L.C. ("MPC") as an individual well
pipeline. Following approval from the Michigan Public Service Commission, Basin
will acquire the pipeline from MPC and will operate it to gather gas from
additional wells in Mason and Oceana counties. The Slocum well has estimated
reserves of approximately 13 Bcf, and estimated initial well deliverabilities of
approximately 8 MMcf/D. The first phase of the Michigan Project will cost
approximately $11 million.
The second phase of the Michigan Project includes construction of a two-mile
residue return line from the Shell treatment plant to the natural gas
transmission line of Michigan Consolidated Gas Company ("MichCon") and
construction of approximately 18 miles of pipeline to connect natural gas wells
in southern Oceana County, including the Claybanks wells owned by MPC, with
estimated reserves of approximately 7.5 Bcf and estimated initial well
deliverabilities of approximately 8 MMcf/D, to the Basin Pipeline. The second
phase will also include the construction of an NGL extraction and fractionation
facility at the site of the Shell treatment plant. The facility will be owned by
West Shore and operated by Shell. The Company currently expects that the second
phase of the Michigan Project will be completed by the end of the fourth quarter
of 1997. The second phase of the Michigan Project is expected to cost
approximately $9 million.
When the first two phases of the Michigan Project are complete, the Company will
own a 60% interest in West Shore. As of December 31, 1996, the Company had made
contributions of approximately $10.4 million and owns a 47% interest.
Upon completion of the first two phases of development, West Shore's treating
and processing operations are expected to have 30 MMcf/D of capacity and
approximately 25 MMcf/D of dedicated production from currently drilled and
proven wells. With a current pipeline capacity of 35 MMcf/D and deliverabilities
of individual wells commonly exceeding 5 MMcf/D, the Company expects that demand
at West Shore could exceed capacity. As a result, the Company is already
planning to expand West Shore to increase capacity in the second phase of the
Michigan Project. There can be no assurance, however, that demand for West
Shore's services will reach the levels anticipated by the Company.
Availability of Natural Gas Supply. West Shore has exclusive gathering,
treatment and processing agreements with Michigan Production Company ("MPC")
covering the natural gas production from all wells and leases presently owned by
MPC within Manistee, Mason and Oceana Counties, Michigan. In addition, West
Shore has a gathering, treating and processing agreement with Oceana Acquisition
Company ("Oceana") covering the production from the initial phase of Oceana's
drilling program in Oceana County, Michigan. West Shore also is negotiating an
agreement with Longwood Exploration Company ("Longwood") that may result in the
dedication of its natural gas production to the pipeline, treatment and
processing facilities of West Shore.
The Company believes that the expansion of the Basin Pipeline southward will
provide an outlet for sour gas production in the area and may stimulate new
drilling activity in the area. Both MPC and Longwood are considering initiating
drilling programs in the area, to begin by early 1997. Production from the MPC
program has been dedicated to the Basin Pipeline, and West Shore is negotiating
with Longwood for dedication of its production to the Basin Pipeline. MarkWest
Resources, Inc. ("Resources"), a wholly owned subsidiary of the Company, has
agreed to purchase a 17.5% working interest in the Longwood drilling program.
MarkWest also has had discussions with other exploration companies that are
evaluating possible exploration and production activities in the corridor to be
serviced by the expanded Basin Pipeline. MarkWest currently is evaluating
various drilling programs and expects to participate actively in drilling wells
in the area.
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The natural gas streams to be dedicated to West Shore under these agreements
will primarily be produced from an extension of the Northern Niagaran Reef trend
in western Michigan. To date, over 2.5 trillion cubic feet equivalent of natural
gas has been produced from the Northern Niagaran Reef trend. Substantially all
of the natural gas produced from the western region of this trend, however, is
sour. While several successful large wells were developed in the region, the
natural gas producers lacked adequate gathering and treatment facilities for
sour gas, and development of the trend stopped in northern Manistee County. With
the sour gas pipeline, treatment and processing facilities and capacity to be
provided by West Shore, the Company believes there could be increased
development in the region. In addition, the Company believes that improvements
in seismic technology may increase exploration and production efforts, as well
as drilling success rates.
Shell Treatment and Processing Agreement. In addition to the establishment of
West Shore, the Michigan Project includes a number of related agreements. To
provide treatment for natural gas dedicated to West Shore, West Shore has
entered into a gas treatment and processing agreement with Shell. Currently, the
agreement provides West Shore with 30 MMcf/D of gas treatment capacity at
Shell's facility in Manistee County, Michigan. The agreement also permits West
Shore to cause the expansion of Shell's treatment facilities. In addition, the
agreement grants West Shore the right to construct and install an NGL processing
plant at the site of Shell's treatment plant. Following completion of the new
processing plant, Shell will act as contract operator for West Shore.
GAS PROCESSING CONTRACTS AND NATURAL GAS SUPPLY
The Company historically has processed natural gas under two types of
arrangements: keep-whole and fee-based processing. While the Company has been
heavily dependent upon keep-whole contracts in the past, it intends to pursue
fee-based processing contracts in the future to reduce the fluctuations in
margins inherent in processing natural gas under keep-whole arrangements.
Keep-Whole Contracts. Under keep-whole contracts, the principal cost is the
reimbursement to the natural gas producers for the BTUs extracted from the gas
stream in the form of liquids or consumed as fuel during processing. In such
cases, the Company creates operating margins by maximizing the value of the NGLs
extracted from the natural gas stream and minimizing the cost of replacement of
BTUs. While the Company maintains programs to minimize the cost to deliver the
replacement of fuel and shrinkage to the natural gas supplier, the Company's
margins under keep-whole contracts can be negatively affected by either
decreases in NGL prices or increases in prices of replacement natural gas.
Approximately 59% of the Company's total revenue during 1996 resulted from keep-
whole contracts.
Fee Contracts. The Company has entered into a fee-based contract with Columbia
Gas, which expires December 31, 2010, pursuant to which Columbia Gas has agreed
to use its best efforts to deliver a minimum of 115 MMcf/D of natural gas to the
Company's Kenova processing plant, and the Company has agreed to process all
natural gas made available by Columbia Gas to the Company at the Kenova plant.
In 1996, deliveries by Columbia Gas to the Kenova plant under this contract
represented approximately 95% of all throughput processed by the Company. Under
the agreement, Columbia Gas pays the Company a fee per MMbtu of processed
natural gas. The terms of the contract provide for automatic two-year extensions
after 2010, unless either party gives notice to terminate the contract at least
one year in advance of an expiration date. In its Michigan Core Area, West Shore
has entered into a fee-based contract with MPC, which expires December 2016,
pursuant to which MPC has agreed to use its best efforts to deliver all of its
natural gas to West Shore's pipeline and treating facilities. Under the
agreement, MPC pays West Shore a fee per MMbtu of transported and treated
natural gas. Approximately 5% of the Company's total revenues during 1996
resulted from fee-based contracts.
Percent-of-Proceeds Contracts. Under percent-of-proceeds contracts, the Company
retains a portion of NGLs and/or natural gas as compensation for the processing
services provided. Operating revenues earned by the Company under percent-of-
proceeds contracts increase proportionately with the price of NGLs and natural
gas sold. While historically the Company has not entered into percent-of-
proceeds contracts,
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recently the Company offered to process natural gas for certain suppliers in the
Appalachian Core Area under percent-of-proceeds arrangements.
The Company and Columbia Gas are in the process of negotiating fee and/or
percent-of-proceeds arrangements whereby the Company will process natural gas
directly for third-party shippers who utilize Columbia Gas's pipeline and
distribution system. In addition, part of the fee structure for transporting and
treating natural gas in the Michigan Core Area includes retaining a portion of
extracted NGLs.
SALES AND MARKETING
The Company attempts to maximize the value of its NGL output by marketing to
distributors, resellers, blenders, refiners and petrochemical companies. The
Company minimizes the use of third-party brokers and instead supports a direct
marketing staff focused on multistate and independent dealers. Additionally, the
Company uses its own truck and tank car fleet, as well as its own terminals and
storage facilities, to enhance supply reliability to its customers. All of these
efforts have allowed the Company to maintain premium pricing of its NGL products
compared to Gulf Coast spot prices.
Substantially all of the Company's revenue is derived from sales of NGLs,
particularly propane. Revenues from NGLs represented 91%, 98% and 88% of total
revenues, excluding gains on sale of property, in each of 1996, 1995 and 1994,
respectively. The Company markets and sells NGLs to numerous customers,
including refiners, petrochemical companies, gasoline blenders, multistate and
independent propane distributors and propane resellers. The majority of the
Company's sales of NGLs are based on spot prices at the time the NGLs are sold.
Spot market prices are based upon prices and volumes negotiated for short terms,
typically 30 days.
EXPLORATION AND PRODUCTION
The Company maintains a strategic gas exploration effort intended to permit the
Company to gain a foothold position in production areas that have strong
potential to create demand for its processing services. The Company, through
Resources, currently owns interests in several exploration and production
assets. Such assets include the following:
. A 49% undivided interest in two separate exploration and production projects
in La Plata County, Colorado, situated on the Fruitland Formation coal seam.
One project currently contains nine coal seam wells that produce approximately
2,300 Mcf/D of natural gas. It is estimated that full development of these two
projects will cost the Company approximately $3.2 million through the end of
1997.
. A 5.4% working interest in a 66-well drilling program operated by Conley
Smith, Denver, Colorado. The majority of these well sites are in Oklahoma,
Kansas, Nevada and Texas. MarkWest believes it may have a future opportunity
to provide its processing expertise to Conley Smith in the areas with
successful drilling sites. There can be no assurance, however, that Conley
Smith will use the Company's processing services.
. A 25% working interest in a 31,000-acre project to be developed in the
Piceance Basin of Colorado. The project includes both the exploration for
conventional natural gas and the development of the Cameo Coal Formation
utilizing tax credit qualified existing well bores. While there can be no
assurance that these projects will generate substantial natural gas volumes,
MarkWest believes that this area could generate increased demand for
processing services.
. A 17.5% working interest in the drilling program of the Niagran Reef Trend in
the Michigan Core Area. Longwood intends to conduct a 25-square-mile three-
dimensional seismic survey in the prospective area and thereafter acquire
acreage and conduct drilling activities.
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PROPERTIES
The following table provides information concerning the Company's principal gas
processing plants and gathering facilities.
<TABLE>
<CAPTION>
YEAR ACQUIRED GAS NGL PRODUCTION
OR PLACED THROUGHPOUT THROUGHPUT THROUGHPUT
INTO SERVICE CAPACITY (Mcf/D)/a, b/ (Gal/YEAR)/b/
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
PROCESSING PLANTS
Siloam Fractionation Plant,
South Shore, KY (1)..................... 1988 360,000 Gal/D NA 94,909,000
Boldman Extraction Plant,
Pike County, KY (2)..................... 1991 70,000 Mcf/D 55,000 8,461,000
Kenova Extraction Plant,
Wayne County, WV (3).................... 1996 120,000 Mcf/D 115,000 65,443,000
PIPELINES
38.5-mile Kenova--Siloam NGL pipeline
Wayne County, WV to
South Shore, KY (4)..................... 1988 350,000 Gal/D NA 65,443,000
31-mile sour gas gathering line
Manistee County, MI (3)................. 1996 35,000 Mcf/D 5,500 NA
YEAR ACQUIRED STORAGE
OR PLACED CAPACITY ANNUAL SALES
INTO SERVICE (Gal) (Gal/YEAR)/b/
------------------------------------------------
TERMINAL AND STORAGE
Siloam Fractionation Storage
South Shore, KY (1).................................... 1988 14,000,000 94,909,000
Terminal and Storage
West Memphis, AR (5)................................... 1992 2,500,000 33,798,000
Terminal and Storage
Church Hill, TN (6).................................... 1995 240,000 4,053,000
- ------------
</TABLE>
/a/ Mcf/D = cubic feet per day
/b/ For the year ended December 31, 1996
(1) At the Siloam Fractionation Plant facility, extracted NGLs are subjected to
various processes that cause the natural gas to separate, or fractionate,
into separate NGL products, including propane, isobutane, normal butane and
natural gasoline. The Siloam plant, situated on approximately 290 Company-
owned acres, also has over 14.0 million gallons of on-site product storage,
including an 8.4-million-gallon propane underground storage cavern, a 3.1-
million-gallon butane underground storage cavern, and approximately 3.0
million gallons of above-ground storage tanks. The Siloam plant is served by
the following modern loading and unloading facilities: four automated truck
loading docks for propane/butane; two automated truck unloading docks for
mixed feedstock; one automated bottom-loading dock for natural gasoline;
truck scales; a rail siding capable of holding over 20 railcars and
simultaneously loading or unloading eight cars; and barge facilities for the
loading of natural gasoline and butanes.
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(2) The Boldman plant is a refrigeration plant that extracts NGLs by cooling
natural gas down to minus 20 degrees Fahrenheit. The plant includes two
60,000-gallon product storage tanks and truck-loading facilities. The
Boldman plant is currently leased to, and operated by, Columbia Gas.
(3) See "Natural Gas Processing and Related Services".
(4) The Company owns a 38.5-mile, high-pressure steel pipeline that connects its
Kenova processing plant to the Company's Siloam fractionation facility.
Because this liquids pipeline was originally designed to handle a high-
pressure ethane-rich stream, it has the capacity to handle almost twice as
much product if it becomes available.
(5) At the West Memphis terminal (a seven-acre propane terminal and storage
facility), the Company maintains 45 pressurized storage tanks that have a
storage capacity of just over 2.5 million gallons of NGLs. The terminal has
an automated loading facility with two loading docks for propane, operating
24 hours per day, seven days per week. The West Memphis terminal is capable
of serving railcar and trucking transportation. An adjoining Union Pacific
rail siding holds up to 17 railcars and has 6 loading/unloading stations.
The terminal is located approximately 1/4 mile from the Mississippi River
and is secured by a long-term lease held by the Company.
(6) The Company leases and operates a propane terminal in Church Hill,
Tennessee, which principally receives product by rail and redelivers the
product to dealers and resellers by truck. The Church Hill terminal has
240,000 gallons of pressurized storage, an automated truck loading station
and a rail siding that can hold four cars and has two unloading stations.
Executive Offices. MarkWest occupies approximately 12,000 square feet of space
at its executive offices in Denver, Colorado under a lease expiring in March
1997. While the Company will require additional office space as its business
expands, the Company believes that its existing facilities are adequate to meet
its needs for the immediate future, and that additional facilities will be
available on commercially reasonable terms as needed.
COMPETITION
The Company faces intense competition in obtaining natural gas supplies for its
gathering and processing operations, in obtaining processed NGLs for
fractionation and in marketing its products and services. The Company's
principal competitors include major integrated oil and gas companies, such as
Ashland and Amoco Oil Co.; major interstate pipeline companies, such as CNG
Transmission Corporation; NGL processing companies, such as Natural Gas
Clearinghouse; and national and local gas gatherers, brokers, marketers and
distributors of varying sizes, financial resources and experience. Many of the
Company's competitors, such as major oil and gas and pipeline companies, have
capital resources and control supplies of natural gas substantially greater than
those of the Company. Smaller local distributors may enjoy a marketing advantage
in their immediate service areas.
The Company competes against other companies in its gas processing business both
for supplies of natural gas and for customers to which it sells its products.
Competition for natural gas supplies is based primarily on location of gas
gathering facilities and gas processing plants, operating efficiency and
reliability, and ability to obtain a satisfactory price for products recovered.
Competition for customers is based primarily on price, delivery capabilities,
and maintenance of quality customer relationships.
The Company's fractionation business competes against other fractionation
facilities that serve local markets. Competitive factors affecting the Company's
fractionation business include proximity to industry marketing centers and
efficiency and reliability of service.
In marketing its products and services, the Company has numerous competitors,
including interstate pipelines and their marketing affiliates, major producers,
and local and national gatherers, brokers, and marketers of widely varying
sizes, financial resources and experience. Marketing competition is primarily
based upon reliability, transportation, flexibility and price.
OPERATIONAL RISKS AND INSURANCE
The Company's operations are subject to the usual hazards incident to the
exploration for and production, transmission, processing and storage of natural
gas and NGLs, such as explosions, product spills, leaks,
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<PAGE>
emissions and fires. These hazards can cause personal injury and 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
operations at the affected facility.
The Company maintains general public liability, property and business
interruption insurance in amounts that it considers to be adequate for such
risks. Such insurance is subject to deductibles that the Company considers
reasonable and not excessive. Consistent with insurance coverage generally
available to the NGL industry, the Company's insurance policies do not provide
coverage for losses or liabilities related to pollution or other environmental
damage, except for sudden and accidental occurrences.
The occurrence of a significant event not fully insured or indemnified against,
and/or the failure of a party to meet its indemnification obligations, could
materially and adversely affect the Company's operations and financial
condition. Moreover, no assurance can be given that the Company will be able to
maintain adequate insurance in the future at rates it considers reasonable. To
date, however, the Company has experienced no material uninsured losses.
GOVERNMENT REGULATION
Certain of the Company's pipeline activities and facilities are involved in the
intrastate or interstate transportation of natural gas and NGLs and are subject
to state and/or federal regulation. Historically, the transportation and sale
for resale of natural gas in interstate commerce have been regulated pursuant to
the Natural Gas Act of 1938 ("NGA"), the Natural Gas Policy Act of 1978
("NGPA"), and the regulations promulgated thereunder by the Federal Energy
Regulatory Commission ("FERC"). In the past, the federal government regulated
the prices at which oil and gas could be sold, as well as certain terms of
service. However, the deregulation of natural gas sales pricing began under
terms of the NGPA and was completed in January 1993 pursuant to the Natural Gas
Wellhead Decontrol Act of 1989 (the "Decontrol Act"). Thus, all sales by the
Company of NGLs and natural gas currently can be made at uncontrolled market
prices. There can be no assurance, however, that Congress will not reenact price
controls in the future which could apply to, or substantially affect, these
sales activities.
FERC's jurisdiction over the interstate transportation of natural gas was not
removed or limited by the NGPA or the Decontrol Act. FERC also retains
jurisdiction over the interstate transportation of liquid hydrocarbons, such as
NGLs and product streams derived therefrom. The processing of natural gas for
the removal of liquids currently is not viewed by the FERC as an activity
subject to its jurisdiction. If a processing plant's primary function is
extraction of NGLs and not natural gas transportation, the FERC has
traditionally maintained that the plant is not a facility for transportation or
sale for resale of natural gas in interstate commerce and therefore is not
subject to jurisdiction under the Natural Gas Act. Although the FERC has not
been requested to and has made no specific declaration as to the jurisdictional
status of the Company's gas processing operations or facilities, the Company
believes that because its gas processing plants are primarily involved in
removing NGLs, their processing activities are exempt from FERC jurisdiction.
Notwithstanding the foregoing, Columbia Gas is seeking abandonment approval of
the processing plant that was replaced by the Company's Kenova extraction plant.
The previous Columbia Gas processing plant was considered by FERC to be
transportation-related and was included in Columbia Gas's certificated
facilities. Because of this prior regulatory classification when owned by
Columbia Gas, the Company has specifically requested a ruling from FERC
confirming that the new Kenova extraction plant is exempt from FERC
jurisdiction. While there can be no assurance that FERC will issue such a
ruling, the Company believes, based upon opinions of legal counsel to the
Company, that such a ruling will be forthcoming. In the event FERC does not
confirm such exemption, the rates charged by the Company for processing services
at the Kenova plant would be subject to regulation by FERC, and such rates and
regulation could affect the volume of natural gas delivered to the facility by
producers. If imposed, such regulation could have a material adverse effect on
the Company's results of operations.
As part of the Michigan Project, the Company will own and operate pipeline
gathering facilities in conjunction with its processing plants. Under the NGA,
facilities which have as their "primary function"
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<PAGE>
the performance of gathering activities and are not owned by interstate gas
pipeline companies are wholly exempt from FERC jurisdiction. Interstate
transmission facilities, on the other hand, are subject to FERC jurisdiction.
The FERC distinguishes between these two types of activities on a fact-specific
basis, which may make it difficult to state with certainty the status of the
Company's pipeline gathering facilities. Although the FERC has not been
requested to or issued any order or opinion declaring the Company's facilities
as gathering rather than transmission facilities, based on opinion of legal
counsel, management believes these systems are NGA-exempt gathering facilities.
In addition, state and local regulatory authorities oversee intrastate gathering
and other natural gas pipeline operations.
Because the Company's NGL pipeline facilities do not transport liquids in
continuous flow in interstate commerce, they are not subject to FERC regulation
under the Interstate Commerce Act. However, the design, construction, operation,
and maintenance of the Company's NGL and natural gas pipeline facilities are
subject to the safety regulations established by the Secretary of the Department
of Transportation pursuant to the Natural Gas Pipeline Safety Act of 1968, as
amended ("1968 Act"), or by state agency regulations which meet or exceed the
requirements of the 1968 Act.
The Company's natural gas exploration and production operations are subject to
various types of regulation at the federal, state and local levels. Such
regulation includes requiring permits for the drilling of wells, meeting bonding
requirements in order to drill or operate wells and regulating the location of
wells, the methods of drilling and casing wells, the surface use and restoration
of properties upon which wells are drilled, the plugging and abandoning of wells
and the disposal of fluids used in connection with such operations. Production
operations are also subject to various conservation laws and regulations. These
typically include the regulation of the size of drilling and spacing or
proration units and the density of wells which may be drilled therein and the
unitization or pooling of oil and gas properties. Whether the state has forced
pooling, or integration of smaller tracts to form a tract large enough to
conduct drilling operations, or relies only on voluntary pooling can affect the
ease with which a property can be developed. State conservation laws also
typically establish maximum rates of production of natural gas, generally
prohibit the venting or flaring of gas and impose certain requirements regarding
the ratability of production and the handling of nonhydrocarbon gases, such as
carbon dioxide and hydrogen sulfide. The effect of these regulations may limit
the amount of oil and gas available to the Company or which the Company can
produce from its wells. They also substantially affect the cost and
profitability of conducting natural gas exploration and production activities.
Inasmuch as such laws and regulations are frequently expanded, amended or
reinterpreted, the Company is unable to predict the future cost or impact of
complying with these production-related regulations.
Commencing in April 1992, the FERC issued a series of orders, generally referred
to collectively as Order No. 636, which, among other things, require interstate
pipelines such as Columbia Gas to "restructure" to provide transportation
services separate or "unbundled" from the interstate pipelines sales of gas.
Order No. 636 also requires interstate pipelines to provide open-access
transportation on a basis that is equal for all shippers and all supplies of
natural gas. This order was implemented through pipeline-by-pipeline
restructuring proceedings. In many instances, the result has been to
substantially reduce or bring to an end interstate pipelines' traditional role
as wholesalers of natural gas in favor of providing only storage and
transportation services. On July 16, 1996, the United States Court of Appeals
for the District of Columbia Circuit upheld the validity of most of the
provisions and features of Order No. 636. However, in many instances, appeals
remain outstanding in the individual pipeline restructuring proceedings, so the
Company cannot predict the final outcome of these proceedings. Order No. 636 is
intended to foster increased competition within all phases of the natural gas
industry. It remains unclear what impact, if any, increased competition within
the natural gas industry under Order No. 636 will have on the Company or its
various lines of business. Additionally, the FERC has issued a number of other
orders which are intended to supplement various facets of its open access
program, all of which will continue to affect how and by whom natural gas
production and associated NGLs will be transported and sold in the marketplace.
In its current form, FERC's open access initiatives could provide the Company
with additional access to gas supplies and markets and could assist the Company
and its customers by mandating more fairly applied service rates, terms and
conditions. On the other hand, it could also subject the Company and entities
with
12
<PAGE>
which it does business to more restrictive pipeline imbalance tolerances,
more complex operations and greater monetary penalties for violation of the
pipelines tolerances and other tariff provisions. The Company does not believe,
however, that it will be affected by any action taken with respect to Order No.
636 materially differently than any other producers, gatherers, processors or
marketers with which it competes.
ENVIRONMENTAL MATTERS
The Company is subject to environmental risks normally incident to the operation
and construction of gathering lines, pipelines, plants and other facilities for
gathering, processing, treatment, storing and transporting natural gas and other
products including, but not limited to, uncontrollable flows of natural gas,
fluids and other substances into the environment, explosions, fires, pollution,
and other environmental and safety risks. The following is a discussion of
certain environmental and safety concerns related to the Company. It is not
intended to constitute a complete discussion of the various federal, state and
local statutes, rules, regulations, or orders to which the Company's operations
may be subject. For example, the Company, without regard to fault, could incur
liability under the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980, as amended (also known as the "Superfund" law), or state
counterparts, in connection with the disposal or other releases of hazardous
substances, including sour gas, and for natural resource damages. Further, the
recent trend in environmental legislation and regulations is toward stricter
standards, and this will likely continue in the future.
The Company's activities in connection with the operation and construction of
gathering lines, pipelines, plants, injection wells, storage caverns, and other
facilities for gathering, processing, treatment, storing, and transporting
natural gas and other products are subject to environmental and safety
regulation by federal and state authorities, including, without limitation, the
state environmental agencies and the federal Environmental Protection Agency
("EPA"), which can increase the costs of designing, installing and operating
such facilities. In most instances, the regulatory requirements relate to the
discharge of substances into the environment and include measures to control
water and air pollution.
Environmental laws and regulations may require the acquisition of a permit or
other authorization before certain activities may be conducted by the Company.
These laws also include fines and penalties for non-compliance. Further, these
laws and regulations may limit or prohibit activities on certain lands lying
within wilderness areas, wetlands, areas providing habitat for certain species
or other protected areas. The Company is also subject to other federal, state,
and local laws covering the handling, storage or discharge of materials used by
the Company, or otherwise relating to protection of the environment, safety and
health. The Company believes that it is in material compliance with all
applicable environmental laws and regulations.
EMPLOYEES
As of December 31, 1996, the Company had 84 employees.
Eighteen employees at the Company's Siloam fractionation facility in South
Shore, Kentucky, are represented by the Oil, Chemical and Atomic Workers
International Union, Local 3-372 (Siloam Sub-Local). The Company recently
negotiated a new collective bargaining agreement with this Union that is
effective May 1, 1996, and expires on April 30, 2000. The agreement covers only
hourly, nonsupervisory employees. The Company considers labor relations to be
satisfactory at this time.
RISK FACTORS
This Annual Report on Form 10-K contains statements which, to the extent that
they are not recitations of historical fact, constitute "forward looking
statements" within the meaning of Section 27A of the Securities and Exchange Act
of 1933 and Section 21E of the Securities and Exchange Act of 1934. All forward
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<PAGE>
looking statements involve risks and uncertainties. The forward looking
statements in this document are intended to be subject to the safe harbor
protection provided by Sections 27A and 21E. Factors that most typically impact
the Company's operating results and financial condition include (i) changes in
general economic conditions in regions in which the Company's products are
located, (ii) the availability and prices of NGLs and competing commodities,
(iii) the availability of raw natural gas supply, (iv) the ability of the
Company to negotiate favorable marketing agreements, (v) the risks that natural
gas exploration and production activities will not be successful, (vi) the
Company's dependence on certain significant customers, (vii) competition from
other NGL processors, including major oil and gas companies, and (viii) the
Company's ability to identify and consummate acquisitions complementary to its
business. For discussions identifying other important factors that could cause
actual results to differ materially from those anticipated in the forward
looking statements, see the Company's Securities and Exchange Commission
filings; and "Management's Discussion and Analysis of Financial Conditions and
Results of Operations" of this Form 10-K.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently a party to any legal proceedings, and is not aware
of any threatened litigation, the adverse outcome of which, individually or in
the aggregate, would have a material adverse effect on the Company's financial
condition or results of operations.
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, 1996.
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<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of January 29, 1997, there were 8,485,000 shares of Common Stock outstanding
held by 410 holders of record. The Common Stock is traded on the Nasdaq
Exchange 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
------- -------
1996
Fourth Quarter................... 15 1/2 10 1/4
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.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated statement of operations and balance sheet data for the
years ended December 31, 1996, 1995 and 1994 and as of December 31, 1996 and
1995 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 for
below for the years ended December 31, 1993 and 1992 and as of December 31, 1993
and 1992 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.
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(in thousands, except per share and operating data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Revenues................................ $ 71,952 $ 48,226 $ 52,963 $ 55,871 $ 82,977
Income (loss) before taxes,
extraordinary item and cumulative
effect of change in accounting......... 14,760 7,824 5,120 540 5,449
Income tax provision
Arising from reorganization............ 3,745 -- -- -- --
Subsequent to reorganization........... 3,246 -- -- -- --
Income before extraordinary item and
cumulative effect of change in
accounting............................. 7,769 7,824 5,120 540 5,449
Extraordinary loss...................... -- (1,750) - -- --
Cumulative effect of change in
accounting............................. -- -- -- -- 877
Net income.............................. 7,769 6,074 5,120 540 6,326
Pro forma information (1):
Historical income before extraordinary
item................................... 14,760 7,824 5,120 540 5,449
Pro forma provision for income taxes.... 5,609 2,937 1,424 228 2,060
Pro forma net income.................... 9,151 4,887 3,696 312 3,389
Pro forma earnings per share of common..
stock (2).............................. 1.16 .85
Pro forma weighted average shares
outstanding(2)......................... 7,908 5,725
BALANCE SHEET DATA:
Total assets............................ $ 78,254 $ 46,896 $ 35,913 $ 40,668 $ 41,092
Long-term debt.......................... 11,257 17,500 9,887 16,486 11,750
Partners' capital....................... -- 25,161 22,183 17,350 19,614
Stockholders' equity.................... 43,664 -- -- -- --
OPERATING DATA:
Fee gas processed (mbtu)................ 33,899,744 -- -- -- --
NGL production (gallons)................ 94,908,534 92,239,000 99,735,000 93,355,000 88,616,000
Terminal throughput (gallons)........... 37,851,450 31,206,000 32,664,000 30,116,000 26,273,000
Michigan pipeline throughput (mcf)...... 1,161,182 -- -- -- --
- ----------------------------------------
</TABLE>
(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. A pro forma provision for income
taxes has been presented for purposes of comparability as if the Company had
been a taxable entity for all periods presented.
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<PAGE>
(2) Pro forma weighted average shares outstanding at December 31, 1996
represents the weighted average of 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 at December 31, 1995 represents the weighted average number of
common shares issued in the Reorganization.
ITEM 7. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion is intended to provide an analysis of the Company's
financial condition and results of operations for the three years ended December
31, 1996, and should be read in conjunction with the selected financial data and
the Company's Consolidated Financial Statements and related Notes thereto
included elsewhere in this Form 10-K.
RESULTS OF OPERATIONS
Year ended December 31, 1996 Compared to Year Ended December 31, 1995
Revenues. Plant revenue increased to $45.9 million from $33.8 million for the
year ended December 31, 1996 as compared to the year ended December 31, 1995, an
increase of $12.1 million or 36%. This increase is primarily a result of
price-related increases of all NGLs of $9.9 million, partially offset by a
volume-related decrease of $1.1 million. The volume decrease at the
fractionation plant at Siloam, which receives approximately 70% of its raw NGL
mix from the Kenova plant, was due principally to normal start-up delays in the
transition from an older processing facility at Kenova to the Company's new
plant in the first quarter of 1996. In addition, the new Kenova processing
plant, which was placed into service in January 1996, generated an additional
$3.5 million of fee revenue during 1996.
Terminal and marketing revenue increased to $22.9 million from $13.2 million for
the year ended December 31, 1996 as compared to the year ended December 31,
1995, an increase of $9.7 million, or 74%. This increase of $9.7 million was
due to a $5.4 million volume-related increase and a $4.3 million price-related
increase. Revenue from the West Memphis terminal accounted for $7.9 million of
the increase and the new terminal in Church Hill, Tennessee, which became
operational in the fall of 1995, accounted for $1.8 million of the increase.
The increase in revenues from the West Memphis terminal was due principally to
colder temperatures during the first and fourth quarters of 1996.
Oil and gas and other revenue increased to $3.0 million from $1.1 million for
the year ended December 31, 1996 as compared to the year ended December 31,
1995, an increase of $1.9 million, or 173%. This increase is principally due
to the consolidation of MarkWest Michigan revenue of $1.7 million, offset by a
decrease in miscellaneous revenue of approximately $100,000.
Costs and expenses. Plant feedstock purchases increased to $22.2 million from
$17.3 million for the year ended December 31, 1996 as compared to the year ended
December 31, 1995, an increase of $4.9 million or 28%. This increase is
principally due to price-related increases in raw materials.
Terminal and marketing purchases increased to $18.7 million from $11.9 million
for the year ended December 31, 1996 as compared to the year ended December 31,
1995, an increase of $6.8 million, or 57%. Increased propane prices resulted
in a $2.5 million increase, in addition to volume increases at West Memphis and
Churchill which resulted in increases of $2.9 million and $1.4 million,
respectively.
Operating expenses increased to $7.0 million from $4.7 million for the year
ended December 31, 1996 as compared to the year ended December 31, 1995, an
increase of $2.3 million, or 49%. This increase is partially due to new
operations at both the Kenova and Church Hill facilities which commenced
operations
17
<PAGE>
in January 1996 and October 1995, respectively. Additional operating expenses
resulted from the consolidation of MarkWest Michigan operations, which began in
May 1996.
Depreciation and amortization increased to $2.9 million from $1.8 for the year
ended December 31, 1996 as compared to the year ended December 31, 1995, an
increase of $1.1 million or 61%. This increase is due principally to
depreciation attributable to the Company's new Kenova plant and MarkWest
Michigan's pipeline and facilities.
Net interest expense. Net interest expense increased to $900,000 from $400,000
for the year ended December 31, 1996 as compared to the year ended December 31,
1995, an increase of $500,000 or 125%. This increase resulted principally from
an increase in average outstanding long-term debt of $12 million for 1996
compared to $8.1 million for 1995. Additionally, $301,000 of interest was
capitalized in conjunction with capital projects in 1995, compared to only
$27,000 of interest capitalized for 1996 projects.
Income tax expense. Income tax expense increased $7 million for the year ended
December 31, 1996, as compared to the year ended December 31, 1995, which had $0
income tax expense. As a partnership, MarkWest Hydrocarbon Partners, Ltd. (the
Company's predecessor) was not subject to federal and state income tax, and its
income was taxed directly to its respective partners. MarkWest Hydrocarbon, Inc.
is a taxable entity and therefore, recorded income tax expense in 1996.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Revenues. Plant revenue increased to $33.8 million from $33.1 million for the
year ended December 31, 1995 as compared to the year ended December 31, 1994, an
increase of $767,000, or 2%. This increase resulted principally from a $2.0
million increase due to an increase in average NGL sales prices, offset by a
$1.2 million decrease due to reduced volumes sold.
Terminal and marketing revenue decreased to $13.2 million from $13.7 million for
the year ended December 31, 1995 as compared to the year ended December 31,
1994, a decrease of $494,000 or 4%. This decrease principally resulted from the
expiration of the remaining third-party brokerage sales in 1994, including a net
volume-related decrease of $3.1 million offset by a net price-related increase
of $2.6 million.
Oil and gas and other revenue decreased to $1.1 million from $1.8 million for
the year ended December 31, 1995 as compared to the year ended December 31,
1994, a decrease of $755,000 or 41%. The decrease resulted principally from the
Company's sale in 1994 of substantially all of its San Juan Basin coalbed
methane properties and associated gathering systems. The Company sold its San
Juan Basin coalbed methane properties and associated gathering systems in 1994
because it had the opportunity to do so at a substantial profit, and, at that
time, such properties did not provide natural gas dedicated to the Company's
processing operations.
Gain on sale of oil and gas properties of $4.3 million in 1994 was due to the
sale of a majority of the Company's oil and gas producing assets for
approximately $10.1 million.
Costs and expenses. Plant feedstock purchases decreased to $17.3 million from
$21.6 million for the year ended December 31, 1995 as compared to the year ended
December 31, 1994, a decrease of $4.3 million or 20%. This decrease resulted
from the acquisition of feedstock quantities during off-peak periods, when
prices typically are lower, rather than at spot prices during peak season.
Terminal and marketing purchases increased to $11.9 million from $11.5 million
for the year ended December 31, 1995 as compared to the year ended December 31,
1994, an increase of $440,000 or 4%. This increase was due principally to an
increase in the average price per gallon of propane.
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<PAGE>
Operating expenses increased to $4.7 million from $4.4 million for the year
ended December 31, 1995 as compared to the year ended December 31, 1994, an
increase of $313,000 or 7%. The increase was attributable to the construction
and start up of the Kenova gas processing facility.
General and administrative expenses increased to $4.2 million from $3.7 million
for the year ended December 31, 1995 as compared to the year ended December 31,
1994, an increase of $535,000 or 15%. The increase was attributable to
administrative support activities related to the Michigan Project and the new
Kenova and Church Hill facilities.
Depreciation and amortization decreased to $1.8 million from $1.9 million for
the year ended December 31, 1995 as compared to the year ended December 31,
1994, a decrease of $188,000 or 10%. This decrease resulted principally from
lower plant carrying values due to reductions made in 1994.
Reduction in carrying value of assets of $3.0 million in 1994 was due to a one-
time charge reflecting the shutdown of the isomerization unit at the Siloam
plant and a charge for the write-down of other non-productive equipment.
Net interest expense. Net interest expense decreased to $400,000 from $1.7
million for the year ended December 31, 1995 as compared to the year ended
December 31, 1994, a decrease of $1.3 million or 79%. The decrease resulted
principally from lower average borrowing levels of approximately $16.0 million
in 1994 to $8.1 million in 1995, a decrease in interest rates, the
capitalization of approximately $301,000 of interest in connection with the
construction of the Kenova gas processing plant, and the early extinguishment of
a note that required the Company to pay additional interest averaging $400,000
per year based on the throughput of the Company's Siloam facility.
LIQUIDITY AND CAPITAL RESOURCES
The Company's sources of liquidity and capital resources historically have been
net cash provided by operating activities; proceeds from issuance of long-term
debt; in 1994, the proceeds from the sale of certain oil and gas properties; and
in 1996, an initial public offering of equity. The Company's principal uses of
cash have been to fund operations and acquisitions.
The following summary table reflects comparative cash flows for the Company for
the years ended December 31, 1996, 1995 and 1994:
Year Ended December 31,
---------------------------------
1996 1995 1994
---- ---- ----
Net cash provided by operating
activities............................. $ 16,815 $ 5,436 $ 994
Net cash provided by (used in)
investing activities................... $(17,516) $(12,610) $ 9,068
Net cash provided by (used in)
financing activities................... $ 4,341 $ 2,467 $(5,886)
For the year ended December 31, 1996, net cash provided by operating activities
increased by $11.4 million over the year ended December 31, 1995. This increase
resulted primarily from an increase in revenue of $23.7 million, which was
offset by a $15.1 million increase in feedstock purchases, terminal and
marketing purchases, operating expenses and general and administrative expenses.
Cash used in investing activities increased $4.9 million for the year ended
December 31, 1996, as compared to the year ended December 31, 1995, primarily
due to capital expenditures incurred during 1996 related to the Michigan
project.
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<PAGE>
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, which
was partially offset by payments made on long-term debt.
Financing Facilities
Revolver Loan. The Company currently has a financing agreement with Norwest Bank
Denver, N.A., as agent, First American National Bank of Nashville, Tennessee,
First Chicago NBD and N M Rothschild and Sons Limited. The agreement is
structured as a revolving facility, with a maximum borrowing base of $40.0
million as of December 31, 1996. Interest rates are based on either the agent
bank's prime rate plus 1/4 % or the London Interbank Offered Rate (LIBOR) plus
2%. The repayment period begins on September 30, 1998, continuing for 16 equal
quarterly installments until June 30, 2002. Outstanding borrowings at December
31, 1996 were $4.2 million. This facility is secured by substantially all of the
Company's assets.
Working Capital Loan. The Company has a working capital line of credit with a
maximum borrowing base of $7.5 million as of December 31, 1996. Interest rates
are based on prime plus 1/4 %, with maturity on June 30, 1998. Outstanding
borrowings at December 31, 1996 were $5.7 million. The working capital loan is
secured by the Company's inventories, receivables and cash. All amounts
outstanding under this facility were repaid effective February 19, 1997.
Resources Revolver Loan. The Company's Resources subsidiary has a revolving
facility with Colorado National Bank ("CNB") with a maximum borrowing base of
$5.8 million as of December 31, 1996. Interest is based on CNB's bank rate plus
1/2 %. The facility has a maturity date of April 2003. This facility is
restricted for the exploration and development of oil and gas properties and as
of December 31, 1996, $1.2 million was outstanding. This facility is secured by
substantially all of MarkWest Resources' assets. The Company has guaranteed $1.0
million of this facility. All amounts outstanding under this facility were
repaid effective February 19, 1997.
The loan agreements contain affirmative and negative covenants customary in
commercial lending transactions, including restrictions on the incurrence of
additional debt, restrictions on the payment of dividends that would cause the
Company to violate the financial covenants contained in the loan agreements,
maintenance of a specified tangible net worth, current ratio, ratio of funded
debt to total capitalization and fixed charge coverage ratio.
Capital Investment Program
The Company expects to invest approximately $20.0 for activities in the Michigan
Core Area during 1997. The Company also expects to invest approximately $3.6
million in Resources in 1997. For the year ended December 31, 1996, the Company
made capital expenditures totaling $9.8 million.
During 1996 and 1995, the Company expended $12.2 million in connection with the
construction of the Kenova plant. During 1995, the Company expended $213,000 for
the construction and related costs for development of the Church Hill terminal
and storage facility, respectively.
During 1994, the Company expended $1.4 million for the expansion and upgrade of
existing facilities.
RISK MANAGEMENT ACTIVITIES
The Company's policy is to utilize risk management tools primarily to reduce
commodity price risk for its natural gas shrink replacement purchases. This
effectively allows the Company to fix a portion of its margin because gains or
losses in the physical market are offset by corresponding losses or gains in the
financial instruments market. The Company's hedging activities generally fall
into three categories--contracting for future purchases of natural gas at a
predetermined BTU differential based upon a basket of
20
<PAGE>
Gulf Coast NGL prices, the fixing of margins between propane sales prices and
natural gas reimbursement costs by purchasing natural gas contracts and
simultaneously selling propane contracts (or a substitute for propane such as
crude oil) of approximately the same BTU value, and the purchase of propane
futures contracts to hedge future sales of propane at the Company's terminals or
gas plants.
The Company maintains a three-person committee that oversees all hedging
activity of the Company. This committee reports monthly to management regarding
recommended hedging transactions and positions. Gains and losses related to
qualifying hedges, as defined by Statement of Financial Accounting Standards,
("SFAS") No. 80, "Accounting for Futures Contracts", of firm commitments or
anticipated transactions are recognized in plant revenue and feedstock purchases
upon execution of the hedged physical transaction.
As of December 31, 1996, 1995 and 1994, the Company did not hold any material
notional quantities of natural gas, NGL, or crude oil futures, swaps or options.
For the year ended December 31, 1996, the Company recognized a $1.1 million loss
in operating income on the settlement of propane and natural gas futures.
This Annual Report on Form 10-K contains statements which, to the extent that
they are not recitations of historical fact, constitute "forward looking
statements" within the meaning of Section 27A of the Securities and Exchange Act
of 1933 and Section 21E of the Securities and Exchange Act of 1934. All forward
looking statements involve risks and uncertainties. The forward looking
statements in this document are intended to be subject to the safe harbor
protection provided by Sections 27A and 21E. Factors that most typically impact
the Company's operating results and financial condition include (i) changes in
general economic conditions in regions in which the Company's products are
located, (ii) the availability and prices of NGLs and competing commodities,
(iii) the availability of raw natural gas supply, (iv) the ability of the
Company to negotiate favorable marketing agreements, (v) the risks that natural
gas exploration and production activities will not be successful, (vi) the
Company's dependence on certain significant customers, (vii) competition from
other NGL processors, including major oil and gas companies, and (viii) the
Company's ability to identify and consummate acquisitions complementary to its
business. For discussions identifying other important factors that could cause
actual results to differ materially from those anticipated in the forward
looking statements, see the Company's Securities and Exchange Commission
filings; and "Management's Discussion and Analysis of Financial Conditions and
Results of Operations" of this Form 10-K.
21
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Accountants......................................... 23
Consolidated Balance Sheet at December 31, 1996 and 1995.................. 24
Consolidated Statement of Operations for each of the three years ended
December 31, 1996........................................................ 25
Consolidated Statement of Cash Flows for each of the three years ended
December 31, 1996........................................................ 26
Consolidated Statement of Changes in Stockholders' Equity/ Partners'
Capital for each of the three years ended December 31, 1996.............. 27
Notes to Consolidated Financial Statements................................ 28
22
<PAGE>
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 (formerly MarkWest Hydrocarbon Partners, Ltd., a Colorado limited
partnership), and its subsidiaries at December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
the Company 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
March 5, 1997
23
<PAGE>
MARKWEST HYDROCARBON, INC.
(SUCCESSOR TO MARKWEST HYDROCARBON PARTNERS, LTD.)
CONSOLIDATED BALANCE SHEET
($000S, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
December 31,
ASSETS 1996 1995
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents............... $ 4,401 $ 761
Receivables............................. 9,755 8,909
Inventories............................. 5,632 2,830
Prepaid expenses and other assets....... 2,289 2,104
-------- -------
Total current assets.................. 22,077 14,604
-------- -------
Property and equipment:
Gas processing, gathering, storage and
marketing.............................. 45,247 23,134
Oil and gas properties and equipment.... 3,731 1,883
Construction in progress................ 5,831 10,282
Land, buildings and other equipment..... 5,647 6,216
-------- -------
60,456 41,515
Less: accumulated depreciation,
depletion and amortization............. (12,316) (9,568)
-------- -------
Total property and equipment, net..... 48,140 31,947
-------- -------
Intangible assets, net of accumulated
amortization of $315 and $152
respectively.................... 380 320
Note receivable and other assets......... 7,657 25
-------- -------
Total assets.......................... $ 78,254 $46,896
======== =======
LIABILITIES AND
STOCKHOLDERS' EQUITY/PARTNERS' CAPITAL
Current liabilities:
Trade accounts payable.................. $ 5,382 $ 3,283
Accrued liabilities..................... 1,629 952
Income taxes payable.................... 3,014 --
Current portion of long-term debt....... 156 --
-------- -------
Total current liabilities............. 10,181 4,235
Deferred income taxes.................... 3,977 --
Long-term debt........................... 11,257 17,500
-------- -------
Total liabilities..................... 25,415 21,735
Minority interest........................ 9,175 --
-------- -------
Commitments and contingencies............ -- --
-------- -------
Stockholders' equity/ partners' capital:
Common stock, par value $.01;
8,485,000 shares authorized, issued
and outstanding........................ 85 --
Additional paid-in capital.............. 42,237 --
Partners' capital....................... -- 25,161
Retained earnings....................... 1,342 --
-------- -------
Total stockholders' equity/ partners'
capital............................... 43,664 25,161
-------- -------
Total liabilities and stockholders'
equity/partners' capital................ $ 78,254 $46,896
======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
24
<PAGE>
MARKWEST HYDROCARBON, INC.
(SUCCESSOR TO MARKWEST HYDROCARBON PARTNERS, LTD.)
CONSOLIDATED STATEMENT OF OPERATIONS
($000S, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
For the Year Ended December 31,
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Revenues:
Plant revenue................................................... $45,880 $33,823 $33,056
Terminal and marketing revenue.................................. 22,858 13,172 13,666
Oil and gas and other revenue................................... 3,022 1,075 1,830
Interest income................................................. 192 156 136
Gain on sales of oil and gas properties......................... -- -- 4,275
------- ------- -------
Total revenues................................................ 71,952 48,226 52,963
------- ------- -------
Costs and expenses:
Plant feedstock purchases....................................... 22,231 17,308 21,582
Terminal and marketing purchases................................ 18,676 11,937 11,497
Operating expenses.............................................. 7,048 4,706 4,393
General and administrative expenses............................. 5,302 4,189 3,654
Depreciation, depletion and
amortization................................................... 2,910 1,754 1,942
Interest expense................................................ 1,090 508 1,825
Reduction in carrying value of assets........................... -- -- 2,950
------- ------- -------
Total costs and expenses...................................... 57,257 40,402 47,843
------- ------- -------
Income before minority interest, income
taxes and extraordinary item.................................... 14,695 7,824 5,120
Minority interest in net loss of
subsidiary...................................................... 65 -- --
------- ------- -------
Income before income taxes and
extraordinary item.............................................. 14,760 7,824 5,120
Income tax provision:
Arising from reorganization..................................... 3,745 -- --
Subsequent to reorganization.................................... 3,246 -- --
------- ------- -------
Income before extraordinary item................................. 7,769 7,824 5,120
Extraordinary loss on extinguishment of
debt............................................................ -- (1,750) --
------- ------- -------
Net income....................................................... $ 7,769 $ 6,074 $ 5,120
======= ======= =======
Pro forma information (Note 2):
Historical income before
extraordinary item............................................ $14,760 $ 7,824 $ 5,120
Pro forma provision for income taxes........................... 5,609 2,937 1,424
------- ------- -------
Pro forma net income........................................... $ 9,151 $ 4,887 $ 3,696
======= ======= =======
Pro forma earnings per share of
common stock.................................................. $ 1.16 $ .85
======= =======
Pro forma weighted average number of
outstanding shares of common stock............................ 7,908 5,725
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
25
<PAGE>
MARKWEST HYDROCARBON, INC.
(SUCCESSOR TO MARKWEST HYDROCARBON PARTNERS, LTD.)
CONSOLIDATED STATEMENT OF CASH FLOWS
($000S)
<TABLE>
<CAPTION>
For the Year Ended December 31,
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................. $ 7,769 $ 6,074 $ 5,120
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation, depletion and 2,910 1,754 1,942
amortization.....................
Deferred income taxes............. 3,977 -- --
Option granted in conjunction
with extinguishment of debt..... -- 1,050 --
Loss (gain) on sale of assets..... 46 -- (4,275)
Reduction in carrying value of
assets........................... -- -- 2,950
(Increase) in receivables......... (846) (4,729) (977)
(Increase) decrease in inventories (2,802) (19) 1,348
(Increase) decrease in prepaid
expenses and other assets........ (185) (86) (1,125)
Increase (decrease) in accounts
payable and accrued liabilities.. 5,946 1,392 (3,989)
-------- -------- --------
Net cash flow provided by
operating activities.... 16,815 5,436 994
Cash flows from investing activities:
Capital expenditures.............. (9,824) (12,426) (1,442)
Proceeds from sale of assets...... -- -- 10,166
Increase in long-term notes
receivable....................... (7,657) -- --
Decrease (increase) in intangible
and other assets................. (35) (184) 344
-------- -------- --------
Net cash provided by
(used in) investing
activities.............. (17,516) (12,610) 9,068
Cash flows from financing activities:
Proceeds from issuance of
long-term debt.................. 1,174 -- --
Repayments of long-term debt...... (84) (500) --
Borrowings under revolving credit
facility......................... 45,950 26,050 7,201
Payments on revolving credit
facility........................ (53,548) (18,937) (12,800)
Partners' distributions........... (14,150) (4,150) (320)
Payments on partner notes......... 320 -- --
Payments on options............... 71 4 33
Proceeds from issuance of
common stock.................... 24,608 -- --
-------- -------- --------
Net cash provided by
(used in) financing
activities.............. 4,341 2,467 (5,886)
Net increase (decrease)
in cash and cash
equivalents............. 3,640 (4,707) 4,176
Cash and cash equivalents at beginning
of year.............................. 761 5,468 1,292
-------- -------- --------
Cash and cash equivalents at end of
year................................. $ 4,401 $ 761 $ 5,468
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
26
<PAGE>
MARKWEST HYDROCARBON, INC.
(SUCCESSOR TO MARKWEST HYDROCARBON PARTNERS, LTD.)
CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY/ PARTNERS' CAPITAL
($000S)
<TABLE>
<CAPTION>
TOTAL
PARTNERS' COMMON ADDITIONAL PAID-IN RETAINED STOCKHOLDERS'
CAPITAL STOCK CAPITAL EARNINGS EQUITY
---------- ------ ------------------ --------- --------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1993 $ 17,350 $ $ -- $ $ 17,350
Net income 5,120 -- -- -- 5,120
Distributions, net of contributions (287) -- -- -- (287)
-------- ------ ------------------ -------- --------
Balance, December 31, 1994 22,183 -- -- -- 22,183
Net income 6,074 -- -- -- 6,074
Distributions, net of contributions (4,146) -- -- -- (4,146)
Option granted in conjunction with
extinguishment of debt 1,050 -- -- -- 1,050
-------- ------ ------------------ -------- --------
Balance, December 31, 1995 25,161 -- -- -- 25,161
Net income prior to reorganization 6,427 -- -- -- 6,427
Notes receivable from partners, net, 205 -- -- -- 205
prior to reorganization
Distributions prior to reorganization (14,150) -- -- -- (14,150)
Exercise of options, prior to 71 -- -- -- 71
reorganization
Reorganization from a limited
partnership to a corporation (17,714) 57 17,657 -- --
Deferred taxes relating to the
reorganization -- -- -- (3,745) (3,745)
Common stock issued -- 28 24,580 -- 24,608
Net income after reorganization -- -- -- 5,087 5,087
-------- ------ ------------------ -------- --------
Balance, December 31, 1996 $ -- $85 $42,237 $ 1,342 $ 43,664
======== ====== ================== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
27
<PAGE>
MARKWEST HYDROCARBON, INC.
(SUCCESSOR TO MARKWEST HYDROCARBON PARTNERS, LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF OPERATIONS AND SIGNIFICANT BUSINESS ACQUISITIONS
NATURE OF OPERATIONS AND RECENT REORGANIZATION
MarkWest Hydrocarbon, Inc. (the "Company") provides compression, gathering,
treatment, processing and natural gas liquids extraction services to natural gas
producers and pipeline companies and fractionates natural gas liquids into
marketable products for sale to third parties. The Company also purchases,
stores and markets natural gas and natural gas liquids and has begun to conduct
strategic exploration for new natural gas resources for its processing and
fractionation activities.
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 2,400,000 shares of
common stock were offered for public sale, totaling 8,125,000 shares outstanding
as of October 15, 1996. The over-allotment of 360,000 shares was also exercised
during October, resulting in a total of 8,485,000 shares outstanding at 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
Prior to July 1, 1996, the Partnership owned 49% of MarkWest Coalseam
Development Company LLC (formerly MarkWest Coalseam Joint Venture) ("Coalseam"),
a natural gas development venture, and MW Gathering LLC ("Gathering"), a natural
gas gathering venture. Effective July 1, 1996, Gathering was merged into
Coalseam. Simultaneously, the Partnership formed MarkWest Resources Inc.
("Resources"), and Coalseam distributed 49% of its assets to Resources and 51%
to MAK-J Energy Partners, Ltd. (formerly MarkWest Energy Partners, Ltd.)
("Energy"), a partnership whose general partner is a corporation owned and
controlled by the President of the Company. The consolidated financial
statements reflect Resources' 49% proportionate share of the underlying oil and
gas assets, liabilities, revenues and expenses.
Effective May 6, 1996, the Partnership acquired the right to earn up to a 60%
interest for $16.8 million in a newly formed venture, West Shore Processing, LLC
("West Shore"). The most significant asset of West Shore is Basin Pipeline,
LLC, which was contributed by the Partnership's venture partner, Michigan Energy
Company, LLC. The West Shore agreement is structured so that the Company's
ownership interest increases as capital expenditures for the benefit of West
Shore are made by the Company. As of December 31, 1996, the Company has
recorded a net investment in West Shore of $10.4 million, representing a 47%
ownership interest. The Company is committed to make capital expenditures of
approximately $21.0 million through 1997 in conjunction with the first two
phases of the agreement. Phase I of the project will be completed in early
1997. Phase II, scheduled for completion in late 1997, is underway.
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, Resources and MarkWest Michigan, Inc. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
28
<PAGE>
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 term/revolver loan facility. Accordingly, investments are limited
to overnight investments of end-of-day cash balances.
RECEIVABLES
Receivables comprise the following (in $000s):
<TABLE>
<CAPTION>
At December 31,
1996 1995
------- ------
<S> <C> <C>
Trade and other receivables... $9,755 $5,735
Short-term advances........... -- 3,174
------ ------
$9,755 $8,909
====== ======
</TABLE>
No allowance for doubtful accounts is considered necessary based on favorable
historical experience.
During the fourth quarter of 1995, the Partnership made several short-term
advances totaling $3,174,000 as part of an agreement with a partner to develop a
joint project. In accordance with the terms of the agreement, the Partnership
was reimbursed for the full amount of the advances at the closing date of May 6,
1996.
INVENTORIES
Inventories comprise the following (in $000s):
<TABLE>
<CAPTION>
At December 31,
1996 1995
------- ------
<S> <C> <C>
Product inventory.................. $5,292 $2,718
Materials and supplies inventory... 340 112
------ ------
$5,632 $2,830
====== ======
</TABLE>
Product inventory consists primarily of finished goods (propane, butane,
isobutane and natural gasoline) and is valued at the lower of cost, using the
first-in, first-out method, or market. Market value of the Company's product
inventory was $7.6 million and $3.8 million at December 31, 1996 and 1995,
respectively. Capitalized overhead costs of $232,000 and $219,000 were included
in product inventory at December 31, 1996, and 1995, respectively. Materials
and supplies are valued at the lower of average cost or estimated net realizable
value.
PREPAID EXPENSES AND OTHER ASSETS
Prepaid expenses and other assets comprise the following (in $000s):
<TABLE>
<CAPTION>
At December 31,
1996 1995
------ -------
<S> <C> <C>
Prepaid feedstock............ $1,831 $1,729
Prepaid expenses............. 458 375
------ ------
</TABLE>
29
<PAGE>
$2,289 $2,104
====== ======
Prepaid feedstock consists of natural gas purchased in advance of its actual
use. It is valued on a first-in, first-out method.
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, 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
gas wells and 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, 1996 and 1995,
approximately $649,000 and $862,000 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. Impairment under
the ceiling test of $116,000 was recognized in 1994 and is included in
depreciation, depletion and amortization in the accompanying consolidated
statement of operations. No impairment existed as of December 31, 1996 and
1995.
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 as a result of adopting SFAS No. 121.
INTANGIBLE ASSETS
30
<PAGE>
Deferred financing costs and a non-compete agreement with a former officer and
director are included in intangible assets. Both are amortized using the
straight-line method over the terms of the associated agreements.
NOTE RECEIVABLE
Note receivable at December 31, 1996 consists of a note receivable (the "Note")
from Michigan Production Company, LLC ("MPC"). The Note is for all sums
necessary 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
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 propane revenues and
feedstock purchases when the hedged production is sold.
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, 1996 and
1995, 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 delivered
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. The risk is
limited due to the large number of entities comprising the Company's customer
base and their dispersion across industries and geographic locations. At
December 31, 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. The Company has complied with
the pro forma disclosure requirements of SFAS No. 123 as required under the
pronouncement.
31
<PAGE>
SUPPLEMENTAL CASH FLOW INFORMATION
Interest of $1,012,000, $792,000 and $1,805,000 was paid for years ended
December 31, 1996, 1995 and 1994, respectively. Interest paid in 1996 is net of
$27,000 capitalized in relation to various construction projects.
There were no income taxes paid during the three years ended December 31, 1996.
The Consolidated Statement of Cash Flows for the year ended December 31, 1996
excludes non-cash activities related to the contribution of Basin Pipeline, LLC
by Michigan Energy, LLC ("MEC") to West Shore. MEC's contribution was valued
at approximately $9.2 million.
In 1996, the Company financed the purchase of certain assets from the Dow
Chemical Company ("Dow") with a note valued at approximately $421,000. As of
December 31, 1996, $337,000 was outstanding under this note.
PRO FORMA INFORMATION
Pro forma provision for income taxes and pro forma net income. Prior to the
Reorganization, MarkWest was organized as a partnership and, consequently, was
not subject to income tax. A pro forma provision for income taxes for the years
ended December 31, 1996, 1995 and 1994 has been presented for purposes of
comparability as if MarkWest had been a taxable entity for all periods
presented.
Pro forma weighted average shares outstanding at December 31, 1996 and December
31, 1995. Pro forma weighted average shares outstanding at 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 at
December 31, 1995 represents the number of common shares issued in the
Reorganization.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the 1996
presentation.
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.
NOTE 3. DEBT
REVOLVER/TERM LOAN
On November 20, 1992, the Partnership entered into a financing agreement with
Norwest Bank Denver, N.A. ("Norwest") and First American National Bank ("FANB")
of Nashville, Tennessee. The facility is structured as a revolver and had an
initial maximum borrowing base of $20 million. The borrowing base on the
facility is redetermined semi-annually. On September 8, 1995, the agreement was
amended to add N M Rothschild and Sons Limited ("Rothschild") as a lender,
revise the interest rate for base rate loans and institute the option of LIBOR
(London Interbank Offered Rate) interest. On May 31, 1996, the facility was
further amended to increase the maximum borrowing base to $40 million and extend
the repayment period
32
<PAGE>
to June 30, 2002, with 16 equal quarterly installments commencing September 30,
1998. As of December 31, 1996 and 1995, outstanding borrowings were $4.2 million
and $15 million, respectively. The remaining borrowing base of $35.8 million and
$10 million was unutilized at December 31, 1996 and 1995, respectively.
Interest on a base rate loan is now calculated at prime plus 1/4 % if the
Company's total debt is less than or equal to 40% of total capitalization. If
debt exceeds 40% of capitalization, the rate increases to prime plus 1/2 %. At
December 31, 1996 and 1995, $0 million and $3 million were outstanding under a
base rate loan bearing interest at 8 1/2 % and 9 %, respectively.
The LIBOR option allows the Company to lock in a portion of the revolver balance
for a period of one, two, three or six months. Interest on a LIBOR loan is
calculated at LIBOR plus 2% if the Company's total debt is less than or equal to
40% of total capitalization. If debt exceeds 40% of capitalization, the rate
increases to LIBOR plus 2 1/4 %. At December 31, 1996 and 1995, $0 and $12
million were outstanding under the LIBOR commitment, respectively.
This debt is secured by a first mortgage on the Company's property, plant,
equipment and contracts, excluding railcars and truck trailers. The loan
agreement restricts certain activities and requires the maintenance of certain
financial ratios and other conditions.
WORKING CAPITAL LINE OF CREDIT
On November 20, 1992, the Partnership entered into a working capital line of
credit agreement with Norwest and FANB in the amount of $5 million. The
borrowing base, as defined in the credit agreement, is redetermined monthly. On
September 8, 1995, the agreement was amended to add Rothschild as a lender,
revise the interest rate, increase the maximum borrowing base to $7.5 million,
and extend the working capital commitment period and maturity date. The
extended due date on the working capital note is June 30, 1998. The interest
rate change is the same as discussed above for the revolver/term loan. No LIBOR
option is available for the working capital line. At December 31, 1996 and
1995, $5.7 million and $2.5 million were outstanding bearing interest at 8 1/2
% and 9 %, respectively. All amounts outstanding under this facility were paid
off effective February 6, 1997.
MARKWEST RESOURCES REVOLVER LOAN
The Company's MarkWest Resources subsidiary has a revolving facility with
Colorado National Bank ("CNB") with a maximum borrowing base of $5.8 million as
of December 31, 1996. Interest is based on CNB's bank rate plus 1/2 %. The
facility has a maturity date of April 2003. This facility is restricted for the
exploration and development of oil and gas properties and as of December 31,
1996 and December 31, 1995, $1.2 million and $0 were outstanding, respectively.
This facility is secured by substantially all of MarkWest Resources' assets.
The Company has guaranteed $1 million of this facility. All amounts outstanding
under this facility were repaid effective February 19, 1997.
Scheduled debt maturities under the terms of the facilities are as follows (in
$000s):
<TABLE>
<CAPTION>
At December 31, 1996 At December 31, 1995
Revolver Line of Subsidiary Revolver Line of
loan credit Debt loan credit
-------- ------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
1997 $ - $ - $ 156 $ 1,875 $2,500
1998 525 5,700 156 3,750 -
1999 1,050 - 25 3,750 -
2000 1,050 - - 3,750 -
2001 and thereafter 1,575 - 1,176 1,875 -
------ ------- ------ ------- --------
</TABLE>
33
<PAGE>
Total $4,200 $5,700 $1,513 $15,000 $2,500
====== ======= ====== ======= ========
SOUTH SHORE NOTE
The note agreement for the purchase of the South Shore plant and the
isomerization expansion allowed for the prepayment of principal to no less than
$500,000. In November 1992, the Partnership exercised its prepayment rights
relative to this agreement by paying $9.2 million of the then-outstanding
balance. The remaining $500,000 principal balance accrued interest at 12%.
Under the terms of the note, additional interest was payable annually based on
certain operating results of the fractionation plant and proceeds from asset
dispositions. Such additional interest expense was $422,000 for 1994.
During 1995, the Partnership reached an agreement with the noteholder to fully
retire the note. Accordingly, the Partnership paid the remaining balance of
$500,000 as well as $700,000 of additional interest. In addition, the
Partnership granted to the noteholder an option to acquire 3.5% of the
Partnership. Based on management's best estimate of the fair value of the
Partnership, the option was valued at $1,050,000 which, together with the
$700,000 of additional interest, is reflected in the Consolidated Statement of
Operations as an extraordinary loss due to the early extinguishment of debt.
NOTE 4. RELATED PARTY AND CAPITAL TRANSACTIONS
The Company made contributions of $299,000, $211,000, $213,000 to a profit-
sharing plan for the years ended December 31, 1996, 1995 and 1994, respectively.
The plan is discretionary, with annual contributions determined by the
Company's Board of Directors.
The Partnership periodically extended offers to employees to purchase interests
in the Partnership. The partners and/or employees provided the Partnership 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. Notes in the amounts of $376,000 and
$512,000 have been recorded as a reduction of additional paid-in capital at
December 31, 1996 and 1995, respectively.
The Company has receivables from employees and officers of $23,000 and $74,000
at December 31, 1996 and 1995, respectively.
The Company's employees perform certain administrative functions on behalf of
its subsidiaries. At December 31, 1996 and 1995, no material amounts were due
to or from the subsidiaries for miscellaneous administrative expenses.
NOTE 5. SPECIAL ITEMS
In 1994, the Partnership shut down the South Shore plant's isomerization unit
when it was unable to find satisfactory markets for its isobutane. Accordingly,
the Partnership recorded a $2,242,000 charge to write down the unit to its
estimated realizable value. In addition, a catalyst used in the isomerization
process was sold, resulting in a $347,000 loss. The Partnership also recorded a
charge of $361,000 in 1994 for the write-down of non-productive equipment
related to various business development projects.
NOTE 6. COMMITMENTS AND CONTINGENCIES
The Company is involved in various litigation and administrative proceedings
arising in the normal course of business. In the opinion of management, any
liabilities (net of insurance) that may result from these claims will not,
individually or in the aggregate, have a material adverse effect on the
Company's financial position or results of operations.
NOTE 7. SIGNIFICANT CUSTOMERS
34
<PAGE>
For the year ended December 31, 1995, sales to one customer accounted for
approximately 18% of total revenues. During 1996 and 1994, no sales to any one
customer accounted for more than 10% of total revenue. Management believes the
loss of these customers would not adversely impact operations, as alternative
markets are available.
NOTE 8. HEDGING ACTIVITIES
MarkWest's primary hedging objectives are to meet or exceed budgeted gross
margins by locking in budgeted or above-budgeted prices in the financial
derivatives markets and to protect margins from precipitous declines. Under
internal guidelines, speculative positions are prohibited.
The Company's hedging activities generally fall into three categories - 1)
contracting for future purchases of natural gas at a predetermined BTU
differential based upon a basket of Gulf Coast NGL prices (or a substitute for
propane such as crude oil), 2) the fixing of margins between propane sales
prices and natural gas reimbursement costs by purchasing natural gas contracts
and simultaneously selling propane contracts of approximately the same BTU
value, and 3) the purchase of propane futures contracts to hedge future sales of
propane at the Company's terminals or gas plants. The Company enters into
futures transactions on the New York Mercantile Exchange ("NYMEX"). Future gas
purchases are based on predetermined BTU differentials are negotiated with
natural gas suppliers and structured to provide similar risk protections as
NYMEX futures.
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, and no material notional quantities
of natural gas, NGL, or crude oil futures, swaps or options at December 31,
1995.
During the years ended December 31, 1996 and 1995, a $1.1 million loss and
$300,000 gain, 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.
NOTE 9. 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.
The total income tax provision for the year ended December 31, 1996 has been
allocated as follows (in $000s):
<TABLE>
<CAPTION>
<S> <C>
Arising from reorganization $3,745
Subsequent to reorganization 3,246
------
$6,991
======
</TABLE>
35
<PAGE>
The components of the income tax provision subsequent to reorganization
consisted of the following (in $000s):
<TABLE>
<CAPTION>
Year ended
December 31,
1996
------------
<S> <C>
Current federal $2,616
Current state 398
------
Total current..................... 3,014
------
Deferred federal.............................. 212
Deferred state 20
------
Total deferred.................... 232
------
Total income tax provision subsequent......... $3,246
to reorganization............................ ======
The deferred tax liability is comprised
of the following (in $000s):
December 31,
1996
------------
Property and equipment........................ $3,667
Intangible assets............................. (6)
Other assets.................................. 316
------
Net deferred tax liability.................... $3,977
======
</TABLE>
Income taxes subsequent to reorganization as reflected in the Consolidated
Statement of Operations differ from the amounts computed by applying the
statutory federal corporate tax rate to income as follows (in $000s):
<TABLE>
<CAPTION>
Year ended
December 31,
1996
------------
<S> <C>
Income taxes subsequent to 2,916
reorganization at statutory rate.............
State income taxes, net of federal 140
benefit......................................
Tax credits................................... (35)
Other......................................... 225
------
Income taxes subsequent to
reorganization............................... $3,246
======
</TABLE>
NOTE 10. STOCK COMPENSATION PLANS
At December 31, 1996, 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
(1996 and 1995 grants only) under those plans consistent with the method
prescribed by SFAS No. 123, Accounting for Stock-Based Compensation, the
36
<PAGE>
Company's pro forma net income and earnings per share would have been reduced to
the pro forma amounts listed below (in $000s):
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C> <C>
Pro forma net income As reported $9,151 $4,887
Pro forma 9,127 4,887
Pro forma earnings per share As reported $ 1.16 $ 0.85
Pro forma 1.15 0.85
</TABLE>
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 600,000 shares of common stock in the aggregate. 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 both plans, 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.
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
used for grants in 1996 and 1995, respectively: dividend yield of $0/share for
all years; expected volatility of 33% for 1996 option grants and 34% for 1995
plan options; risk-free interest rate of 6.55% for 1996 option grants and 6.22%
for 1995 option grants; and expected lives of 6 years for 1996 and 1995 option
grants.
A summary of the status of the Company's two fixed stock option plans as of
December 31, 1996 and 1995 and changes during the years ended on those dates is
presented below:
<TABLE>
<CAPTION>
1996 1995
----------------------- ------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
FIXED OPTIONS ------- ----------- ------ ---------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 64,004 $6.99 -- --
Granted 138,032 9.65 64,004 $6.99
Exercised -- -- -- --
Forfeited (1,146) -- -- --
------- ----- ------ -----
Outstanding at end of year 200,890 $8.86 64,004 $6.99
======= ===== ====== =====
Options exercisable at 12/31/96 12,800 12,800
Weighted-average fair value of options
granted during the year $ 4.37 $ 3.16
</TABLE>
37
<PAGE>
The following table summarizes information about fixed stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------- ----------------------
Weighted-
Average Weighted- Weighted-
Number Remaining Average Number Average
Outstanding Contractual Exercise Exercisable Exercise
Range of Exercise Prices at 12/31/96 Life Price at 12/31/96 Price
- ------------------------- ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$6.99 64,004 8.6 years $6.99 12,800 $6.99
$7.00 to $10.00 136,886 9.7 years $9.65 --
---------- ------
200,890 12,800
========== ======
</TABLE>
NOTE 11. STOCK ACTIVITY
Activity in the Company's common stock for each of the three years ended
December 31, 1996 is summarized below (in 000s of shares):
<TABLE>
<CAPTION>
# of shares
-----------
<S> <C>
Balance at December 31, 1993 --
Balance at December 31, 1994 --
Balance at December 31, 1995 --
Shares issued in exchange for
partnership interests 5,725
Shares issued in initial public offering 2,400
Shares issued in over-allotment 360
-----
Balance at December 31, 1996 8,485
=====
</TABLE>
38
<PAGE>
NOTE 12. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following summarizes certain quarterly results of operations ($000s):
<TABLE>
<CAPTION>
First Second Third Fourth
-------- ------- --------- --------
<S> <C> <C> <C> <C>
1996
- --------------------------------------
Revenue(1) $19,832 $8,760 $14,935 $28,233
Gross profit (2) 5,514 1,580 3,533 10,268
Pro forma net income (3) 2,588 195 1,205 5,163
Per common share data:
Pro forma net income $ .33 $ .03 $ .15 $ .65
1995
- --------------------------------------
Revenue (1) $15,566 $7,360 $ 8,665 $16,479
Gross profit (2) 4,770 1,860 1,564 4,171
Pro forma income before extraordinary
loss (3) 2,261 421 352 1,853
Extraordinary loss on extinguishment of
debt -- -- (1,750) --
Pro forma net income(3) 2,261 421 (1,398) 1,853
Per common share data:
Pro forma income before
extraordinary loss $ .40 $ .07 $ .06 $ .32
Extraordinary loss -- -- (.30) --
Pro forma net income (loss) .40 .07 (.24) .32
</TABLE>
(1) Excludes interest income.
(2) Excludes general and administrative expenses and interest expense.
(3) During 1996, the Company reorganized and became a taxable entity. Pro forma
net income reflects the results of the Company had it been a taxable entity
for all periods presented.
39
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP AND CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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 Securities 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 June 6,
1997 and is hereby incorporated by reference.
PART IV
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 22 for a list of all
financial statements filed as a part of this report.
(2) Financial Statement Schedules:
None required.
(3) Exhibits
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).
40
<PAGE>
10.2 Loan Agreement dated November 20, 1992, among MarkWest Hydrocarbon
Partners, Ltd., Norwest Bank Denver, National Association,
individually and as Agent, and First American National Bank (Filed as
exhibit 10.21 to MarkWest Hydrocarbon, Inc.'s Registration Statement
on Form S-1, Registration No. 333-09513 and incorporated herein by
reference).
10.3 Modification Agreement, dated July 31, 1996, among MarkWest
Hydrocarbon Partners, Ltd., MarkWest Hydrocarbon, Inc., Norwest Bank
Colorado, N.A., First American National Bank N M Rothschild and Sons
Limited and Norwest (Filed as exhibit 10.2 to MarkWest Hydrocarbon,
Inc.'s Registration Statement on Form S-1, Registration No. 333-09513
and incorporated herein by reference).
10.4 Amended and Restated Mortgage, Assignment, Security Agreement and
Financing Statement, dated May 2, 1996, between West Shore Processing
Company, L.L.C. and Bank of America Illinois (Filed as exhibit 10.3
to MarkWest Hydrocarbon, Inc.'s Registration Statement on Form S-1,
Registration No. 333-09513 and incorporated herein by reference).
10.5 Secured Guaranty, dated May 2, 1996, between West Shore Processing
Company LLC and Bank of America Illinois (Filed as exhibit 10.4 to
MarkWest Hydrocarbon, Inc.'s Registration Statement on Form S-1,
Registration No. 333-09513 and incorporated herein by reference).
10.6 Security Agreement, dated May 2, 1996, between West Shore Processing
Company L.L.C. and Bank of America Illinois (Filed as exhibit 10.5 to
MarkWest Hydrocarbon, Inc.'s Registration Statement on Form S-1,
Registration No. 333-09513 and incorporated herein by reference).
10.7 Pledge Agreement, dated May 2, 1996, between West Shore Processing
Company, L.L.C. and Bank of America Illinois (Filed as exhibit 10.6
to MarkWest Hydrocarbon, Inc.'s Registration Statement on Form S-1,
Registration No. 333-09513 and incorporated herein by reference).
10.8 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).
10.9 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).
10.10 Subordination Agreement, dated May 2, 1996, among MarkWest Michigan
LLC, Bank of America Illinois, West Shore Processing Company, L.L.C.,
Basin Pipeline L.L.C., Michigan Energy Company, L.L.C. (Filed as
exhibit 10.9 to MarkWest Hydrocarbon, Inc.'s Registration Statement on
Form S-1, Registration No. 333-09513 and incorporated herein by
reference).
10.11 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).
10.12 Gas Gathering, Treating and Processing Agreement, dated May 2, 1996,
between Oceana Acquisition Company and West Shore Processing Company,
LLC (Filed as exhibit 10.11 to MarkWest Hydrocarbon, Inc.'s
Registration Statement on Form S-1, Registration No. 333-09513 and
incorporated herein by reference).
10.13 Gas Gathering, Treating and Processing Agreement, dated May 2, 1996,
between Michigan Production Company, L.L.C. and West Shore Processing
Company, LLC(Filed as exhibit 10.12 to
41
<PAGE>
MarkWest Hydrocarbon, Inc.'s Registration Statement on Form S-1,
Registration No. 333-09513 and incorporated herein by reference).
10.14 Products Exchange Agreements, dated May 1, 1996, with Ferrellgas,
L.P. (Filed as exhibit 10.13 to MarkWest Hydrocarbon, Inc.'s
Registration Statement on Form S-1, Registration No. 333-09513 and
incorporated herein by reference).
10.15 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).
10.16 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).
10.17 Natural Gas Liquids Purchase Agreement (Cobb Plant), between
Columbia Gas Transmission Corporation and MarkWest Hydrocarbon
Partners, Ltd. (Filed as exhibit 10.16to MarkWest Hydrocarbon, Inc.'s
Registration Statement on Form S-1, Registration No. 333-09513 and
incorporated herein by reference).
10.18 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).
10.19 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).
10.20 Agreement to Design and Construct New Facilities, dated March 165,
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).
10.21 Sales Acknowledgment, dated August 8, 1994, NO. 12577, confirming
sale to Ashland Petroleum Company (Filed as exhibit 10.20 to MarkWest
Hydrocarbon, Inc.'s Registration Statement on Form S-1, Registration
No. 333-09513 and incorporated herein by reference).
10.22 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).
10.23 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).
10.24 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
42
<PAGE>
MarkWest Hydrocarbon, Inc.'s Registration Statement on Form S-1,
Registration No. 333-09513 and incorporated herein by reference).
10.25 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).
10.26 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).
10.27 1996 Nonemployee 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).
10.28 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).
10.29 Sales Acknowledgment by Ashland Petroleum, 54 million gallons of
Normal Butane, dated September 9, 1996.
10.30 Sales Acknowledgment by Ashland Petroleum, 19.5 million gallons of
Isobutane, dated September 9, 1996.
10.31 Pipeline Construction and Operating Agreement between Michigan
Production Company, L.L.C. and West Shore Processing Company, L.L.C.,
dated October 1, 1996.
10.32 Non-Recourse Loan Agreement between Michigan Production Company,
L.L.C. and West Shore Processing Company, L.L.C., dated October 1,
1996.
10.33 First Amendment to Participation, Ownership and Operating Agreement
for West Shore Processing Company, L.L. C., dated October 1, 1996.
10.34 Option and Agreement to Purchase and Sell Pipeline, dated October 1,
1996.
10.35 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.
10.36 Amendment to Participation, Ownership and Operating Agreement for
West Shore Processing Company, L.L.C., dated December 12, 1996.
10.37 Assignment and Bill of Sale by and between Enron Gas Processing
Company and West Shore Processing Company, L.L.C., dated January 13,
1997.
11. Statement regarding computation of per share
21. List of Subsidiaries of MarkWest Hydrocarbon, Inc.
23. Consent of Price Waterhouse LLP, independent accountants
43
<PAGE>
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 24, 1997.
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 24, 1997
---------------------------------
John M. Fox
President, Chief Executive
Officer and Director
/s/ Brian T. O'Neill March 24, 1997
---------------------------------
Brian T. O'Neill
Senior Vice President, Chief
Operating Officer and Director
/s/ Rita E. Harvey March 24, 1997
---------------------------------
Rita E. Harvey
Director of Finance and Treasurer
(Principal Financial and
Accounting Officer)
/s/ Arthur J. Denney March 24, 1997
---------------------------------
Arthur J. Denney
Director
/s/ Norman H. Foster March 24, 1997
---------------------------------
Norman H. Foster
Director
/s/ Barry W. Spector March 24, 1997
---------------------------------
Barry W. Spector
Director
/s/ David R. Whitney March 24, 1997
---------------------------------
David R. Whitney
Director
44
<PAGE>
MARKWEST
MarkWest Hydrocarbon Partners, Ltd PH (303) 290-8700
5613 DTC Parkway, Suite 400 FAX (303) 290-8769
Englewood, CO 80111
SALES ACKNOWLEDGMENT
We hereby confirm sale to:
Ashland Petroleum Company DATE: September 9, 1996
Division of Ashland, Inc.
PO Box 391 No. __________________
Ashland, KY 41105
Per conversations between Mr. Howard Beverly and our
Mr. Fred Shato
PRODUCT: Normal Butane
QUANTITY: Approximately 54,000,000 gallons
PRICE: See attached terms
COSIGNEE:
ORIGIN:
FOB POINT: Siloam, Kentucky
ROUTING:
TERMS OF PAYMENT: Net 10 calendar days via check
TIME OF DELIVERY: September 1, 1996 through August 31, 1999
HOW DELIVERED: Into railcars or barges provided by Buyer via
Rail/Barge
REMARKS: See Attachment "A"
SUBJECT TO TERMS AND CONDITIONS ATTACHED
Void if not returned fully executed to this office within ten (10) days from the
date of the order.
MARKWEST HYDROCARB0N PARTNERS, LTD.
Ashland Petroleum Company BY: MarkWest Hydrocarbon, Inc.
Division of Ashland, Inc. General Partner
/S/Robert Yancey /S/ Brian O'Neill
------------- ------------------------
President /S/ John M. Fox
Accepted 9/19/96
<PAGE>
ATTACHMENT "A"
ADDITIONAL TERMS AND CONDITIONS
ASHLAND PETROLEUM NC4 PURCHASE AGREEMENT
1) Ashland Petroleum Company, Division of Ashland, Inc., (Buyer)
agrees to purchase from MarkWest Hydrocarbon Partners, Ltd. (Seller) the total
production of normal butane from Seller's Siloam, KY fractionation plant,
estimated to be approximately 17 million gallons per year (approximately 1.4
million gallons per month), with a projected yearly volume increase of
approximately 5%.
2) Term of sale shall be September 1, 1996 through August 31, 1999 (3
years) with an option to extend year to year thereafter, unless a 90 day written
notice of cancellation is provided by either party.
Product to be delivered FOB Seller's Siloam, KY plant loaded into
Buyer provided railcars and/or barges at Buyer's option.
4) It is anticipated that deliveries made during April through
September will be predominantly for shipment to Ashland Chemical Company, while
deliveries made during October through March will be predominantly for shipment
to Ashland Petroleum company, however, direction of shipment of all deliveries
shall be at Buyer's option.
5) Minimum purity for deliveries into railcars or barges for shipment
to Ashland Chemical shall be 97.5% during April through September. Minimum
purity for deliveries into railcars or barges for shipment to Ashland Petroleum
shall be 95.0% at all times
6) Seller will designate on each invoice of Buyer's entities
shipment was made.
7) The base price for deliveries made during the first through the
fifteenth day of each month shall be the simple average of the daily high-low
postings for TET spot normal butane at Mt. Belvieu, Texas as reported in Oil
Price Information Service (OPIS) during the sixteenth through the last day of
the month immediately preceding delivery.
The base price for deliveries made during the sixteenth through the
last day of each month shall be the simple average of the daily high-low
postings for TET spot normal butane at Mt. Belvieu, Texas as reported in OPIS
for the first through the fifteenth day of the month of delivery.
Deliveries for shipment to Ashland Chemical Company will be billed at
the foregoing described base price plus $0.0150 per
<PAGE>
gallon. Deliveries for shipment to Ashland Petroleum Company will be billed at
the foregoing described base price plus $0.010 per gallon.
8) Payment terms are net 10 days from date of shipment via check.
9) Buyer has the right to utilize Seller's normal butane cavern
storage of approximately 3 million gallons. Buyer agrees to lift product so as
to ernpty said cavern for at least one twenty-four (24)hour period sometime
between January first and April first each year during the term of the
Agreement.
10) Truck loading available when needed at the following premium:
Weekday 9:00 A.M. to 5:00 P.M. + $0.0200 per gallon and Weekend 9:00 A.M. to
5:00 P.M. + $0.0800 per gallon. Any loading requiring additional hours will be
billed at an additional $0.0200 per gallon premium.
<PAGE>
MARKWEST
MarkWest Hydrocarbon Partners, Ltd. PH (303) 290-8700
5613 DTC Parkway, Suite 400 FAX (303) 290-8769
Englewood, CO 80111
SALES ACKNOWLEDGMENT
We hereby confirm sale to:
Ashland Petroleum Company DATE: September 9, 1996
Division of Ashland, Inc. No.____________
PO Box 391
Ashland, KY 41105
Per conversations between Mr. Howard Beverly and our Mr. Fred
Shato
PRODUCT: Isobutane
QUANTITY: Approximately 19,500,000 gallons
PRICE: See attached terms
COSIGNEE:
ORIGIN:
FOB POINT: Siloam, Kentucky
ROUTING:
TERMS OF PAYMENT: Net 10 calendar days via check
TIME OF DELIVERY: September 1, 1996 through August 31, 1999
HOW DELIVERED: Into railcars or barges provided by Buyer via
Rail/Barge
REMARKS: See Attachment "A"
SUBJECT TO TERMS AND CONDITIONS ATTACHED
Void if not returned fully executed to this office within
ten (10) days from the date of the order.
MARKWEST HYDROCARBON PARTNERS, LTD.
Ashland Petroleum Company, By: MarkWest Hydrocarbon, Inc.
Division of Ashland, Inc. General Partner
/S/ Robert Yancey /S/Brian O'Neill
President /S/John M. Fox
Accepted: 12/23/96 Accepted: 9/19/96
<PAGE>
ATTACHMENT "A"
ADDITIONAL TERMS AND CONDITIONS
ASHLAND PETROLEUM IC4 PURCHASE AGREEMENT
1) Ashland Petroleum Company, Division of Ashland, Inc., (Buyer)
agrees to purchase from MarkWest Hydrocarbon Partners, Ltd. (Seller) the total
production of Isobutane from Seller's Siloam, KY fractionation plant, estimated
to be approximately 6.5 million gallons per year (approximately 540,000 gallons
per month), with a projected yearly volume increase of approximately 5%.
2) Term of sale shall be September 1, 1996 through August 31, 1999
(3years) with an option to extend year to year thereafter, unless a 90 day
written notice of cancellation is provided by either party.
3) Product to be delivered FOB Seller's Siloam, KY plant loaded into
Buyer provided railcars and/or barges at Buyer's option.
4) The base price for deliveries made during the first through the
fifteenth day of each month shall be the lower of the simple average of the
daily high-low postings for TET spot isobutane at Mt. Belvieu, Texas or Sarnia,
------------------- -------
Canada as reported in Oil Price Information Service (OPIS) during the sixteenth
- -------
through the last day of the month immediately preceding delivery as adjusted
below.
The base price for deliveries made during the sixteenth through the
last day of each month shall be the *simple average of the daily high-low
postings for TET spot isobutane at Mt. Belvieu, Texas or Sarnia, Canada as
reported in OPIS the first through the fifteenth day of the month of delivery,
as adjusted below.
From October through March, if the price is a Mt. Belvieu basis,
subtract $0.005 per gallon, and if the price is a Sarnia basis, subtract $0.022
per gallon. From April through September, if the price is a Mt. Belvieu basis,
subtract $0.0150 per gallon and if the price is a Sarnia basis, subtract $0.017
per gallon.
5) Price re-opener - contract shall be renegotiated in the event
BP/Lima, Ohio or Ashland/Canton, Ohio refineries are closed.
6) Payment terms are net 10 days from date of shipment via check.
7) Truck loading available when needed at the following premium:
Weekday 9:00 A.M. to 5:00 P.M. + $0.0200 per gallon and Weekend 9:00 A.M. to
5:00 p.m. + $0.0800 per gallon. Any loading requiring additional hours will be
billed at an additional $0.0200 per gallon premium.
*lower of the
<PAGE>
PIPELINE CONSTRUCTION AND
OPERATING AGREEMENT
between
MICHIGAN PRODUCTION COMPANY, L.L.C.
Owner
and
WEST SHORE PROCESSING COMPANY, L.L.C.
Operator
October 1, 1996
<PAGE>
<TABLE>
TABLE OF CONTENTS
Page
<S> <C> <C>
ARTICLE 1 DEFINITIONS................................... 1
ARTICLE 2 CONSTRUCTION OF THE PIPELINE SYSTEM........... 3
2.1 General Contractor........................ 3
2.2 Property and Permits...................... 3
2.3 Construction.............................. 3
2.4 Management............................... 3
ARTICLE 3 OPERATION OF THE PIPELINE SYSTEM.............. 3
3.1 Operator.................................. 3
3.2 Custody................................... 4
3.3 Agreement of Operator to Operate
the Pipeline.................................. 4
ARTICLE 4 DUTIES OF OPERATOR............................ 4
4.1 Supervision of Operations..................... 4
4.2 Acquisitions.................................. 4
4.3 Payment of Expenses; Liens; Claims............ 4
4.4 No Conditional Sale Contracts, Etc............ 5
4.5 Employment of Personnel....................... 5
4.6 Information................................... 5
4.7 Carrier Status................................ 5
4.8 Compliance with Regulations................... 5
4.9 Continued Authority........................... 5
4.10 Access; Books and Records..................... 5
4.11 Prohibition on Transfers...................... 6
4.12 Operator's Performance........................ 6
4.13 Notification of Adverse Changes............... 6
4.14 General Supervision........................... 7
ARTICLE 5 MATTERS REQUIRING CONSENT OF OWNER........ 7
5.1 Releases and Partial Releases................. 7
5.2 Claims Not Covered by Insurance............... 7
ARTICLE 6 MATTERS NOT REQUIRING CONSENT OF OWNER.... 7
6.1 Normal Operations............................. 7
6.2 Emergency..................................... 7
ARTICLE 7 OPERATING PROCEDURE....................... 7
7.1 Product Acceptance............................ 7
7.2 Line Fill..................................... 7
7.3 Measurement and Sampling...................... 8
ARTICLE 8 LIABILITY................................. 8
8.1 Liability of Operator......................... 8
8.2 No Liability of Owner......................... 8
ARTICLE 9 INSURANCE................................. 8
9.1 Insurance Policies............................ 8
9.2 Insurance Proceeds............................ 9
</TABLE>
(i)
<PAGE>
<TABLE>
<C> <S> <C>
9.3 Insurance by Owner............................ 9
9.4 Contractor Insurance.......................... 9
9.5 Third Party Damage Liability.................. 9
9.6 Pipeline System Damages....................... 9
9.7 Settlement of Claims.......................... 10
ARTICLE 10 ACCOUNTING.................................. 10
10.1 Maintenance of Accounts; Monthly Statements... 11
10.2 Payments...................................... 11
10.3 Adjustments................................... 11
10.4 Audits........................................ 11
10.5 Certain Costs and Expenses.................... 11
10.6 Taxes......................................... 11
ARTICLE 11 REPRESENTATIONS AND WARRANIES............... 11
11.1 Authority and Power........................... 11
11.2 Valid and Binding Obligation.................. 11
11.3 Litigation and Condemnation................... 11
11.4 Title to the Property......................... 11
11.5 Accuracy of Information....................... 11
11.6 Tax and Other Payments........................ 11
11.7 Environmental Matters......................... 11
11.8 Permits and Restrictions...................... 12
ARTICLE 12 MISCELLANEOUS............................... 12
12.1 Modifications................................. 12
12.2 Rights of Third Parties....................... 12
12.3 No Agency, Partnership or Joint Venture....... 12
12.4 Further Assurances............................ 12
12.5 Notices....................................... 12
12.6 Severability.................................. 13
12.7 Number and Gender............................. 13
12.8 Time of Essence............................... 14
12.9 Captions...................................... 14
12.10 Applicable Law................................ 14
12.11 Counterparts.................................. 14
12.12 Successors and Assigns........................ 14
12.13 No Oral Agreement............................. 14
12.14 Term of Agreement............................. 14
</TABLE>
(ii)
<PAGE>
PIPELINE CONSTRUCTION AND OPERATING AGREEMENT
THIS PIPELINE CONSTRUCTION AND OPERATING AGREEMENT (this "Agreement"),
dated as of October 1, 1996, is between WEST SHORE PROCESSING COMPANY, LLC, a
Michigan limited liability company ("Operator"), and MICHIGAN PRODUCTION
COMPANY, L.L.C., a Michigan limited liability company ("Owner").
WHEREAS, Owner has previously determined to design, construct, and
operate the Pipeline (as hereinafter defined), the general location and physical
description of which are more particularly set forth in Article 1;
WHEREAS, Owner desires to appoint Operator to construct, operate, and
maintain the Pipeline on Owner's behalf and Operator desires to accept such
appointment;
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants herein contained, and for other consideration, the receipt and
adequacy of which are hereby acknowledged, and without limitation of the
parties' rights and obligations under the Gathering Agreement and the
Participation Agreement (as such terms are hereinafter defined), Owner and
Operator hereby agree as follows:
ARTICLE 1
DEFINITIONS
-----------
For purposes of this Agreement, the following terms are defined as
follows:
Affiliate of any Person means any other Person directly or indirectly
controlling, controlled by or under common control with such person. A Person
shall be deemed to control another Person if the controlling Person owns 50% or
more of any class of voting securities (or other ownership interests) of the
controlled Person or possesses, directly or indirectly, the power to direct or
cause the direction of the management or policies of the controlled Person,
whether through ownership of stock, by contact or otherwise.
Basin means Operator's Affiliate, Basin Pipeline, L.L.C., a Michigan
limited liability company.
Capital Expenditures shall mean all costs incurred in constructing the
Pipeline and any additions or changes thereto, subject to such adjustment as may
be required for removal or abandonment of all or part of the Pipeline.
Gathering Agreement means the Gas Gathering, Treatment and Processing
Agreement dated May 2, 1996, as amended from time to time, between Owner, as
producer, and Operator, as processor.
Governmental Authority means the United States of America or any
nation, commonwealth, state, county, city, territory,
1
<PAGE>
possession, parish, town, municipality, and any other political subdivision,
agency, court, department, commission, board, bureau, or other instrumentality.
Governmental Requirements means all Laws of any Governmental Authority
applicable to Operator or the Pipeline.
Law or Laws means all applicable statutes, laws, ordinances,
regulations, orders, writs, injunctions, decisions, opinions, or decrees of any
Governmental Authority.
Loan Agreement means the Non-Recourse Loan Agreement dated as of
October 1, 1996, between Operator, as lender, and Owner, as borrower, as amended
from time to time.
MARKWEST means Operator's Affiliate, MarkWest Michigan, LLC, a
Michigan limited liability company, or any successor in interest to MarkWest
Michigan, LLC, in connection with any reorganization of such company.
OPERATING ACCOUNT shall mean the account that represents the financial
responsibility of Operator to Owner. Specifically, it shall represent the
accountability of all revenue, expense, allocations, and distributions of the
Operator on behalf of Owner.
OPTION AGREEMENT means the Option and Agreement to Purchase and Sell
Pipeline dated as of October 1, 1996, between Owner and Operator, as amended
from time to time.
PARTICIPATION AGREEMENT means the Participation, Ownership and
Operating Agreement for West Shore Processing Company, LLC, dated May 2, 1996,
between MarkWest and Michigan Energy Company, L.L.C., as amended by the First
Amendment thereto dated as of October 1, 1996, and as further amended from time
to time.
PIPELINE means the nominal 10-inch diameter, natural gas producer
pipeline extending along the right of way of Consumers Power from the delivery
point at the gathering lateral of Owner's Slocum 1-21 Well, which delivery point
is expected to be in the Northwest quarter of Section 30, Township 15 North,
Range 16 West, Elbridge Township, in Oceana County, Michigan, to the terminus of
Basin's existing pipeline located in Section 32, Township 19 North, Range 17
West, Victory Township, in Mason Countv, Michigan, including, without
limitation, (a) the Property, and (b) all pipes, pipelines, pumping equipment,
assemblies, heaters, valves, controls, monitoring equipment, communications
equipment, towers, sensors, cathodic protection systems, test stations,
corrosion detection and monitoring devices, inspection pigs, drums, flare
facilities, sampling equipment, and all associated facilities and equipment,
including spare parts, related thereto, as wel1 as any and all additions,
replacements, extension, modifications or enlargements of any of the foregoing.
2
<PAGE>
PLAN OF DEVELOPMENT means the Plan of Development for the Pipeline
(including the final working drawings and specifications), together with any
amendments or modifications thereto, and authorizations for expenditures
prepared by MarkWest under the Participation Agreement and approved in
accordance with the Participation Agreement.
PRODUCTS shal1 mean all natural gas, natural gas liquids and other
petroleum or petroleum related commodities that the Pipeline will transport for
the benefit of Owner.
PROPERTY means all rights of way, easements, leaseholds, fee parcels
and other real property interests associated with the Pipeline, as contemplated
by the Plan of Development.
ARTICLE 2
CONSTRUCTION OF THE PIPELINE SYSTEM
-----------------------------------
2.1 General Contractor. Owner hereby designates Operator as the
--------------------
general contractor for the construction of the Pipeline and, subject to the
provisions of this Agreement, Operator shall have the exclusive right to act as
such general contractor.
2.2 Property and Permits. Operator shall acquire, on behalf of Owner,
----------------------
the Property and all permits from Government Authorities required for the
construction, operation and maintenance of the Pipeline.
2.3 Construction. Operator (directly, or acting through Basin or
--------------
MarkWest) shall construct the Pipeline in accordance with the Plan of
Development and all Governmental Requirements.
2.4 Management. Operator shall be in direct charge and shall
------------
supervise, on behalf of Owner, all matters arising under the construction and
shall proceed with such matters in a good and workmanlike manner and, subject to
the provisions of this Agreement, in accordance with its best judgment of what a
prudent general contractor would do under the same or similar circumstances.
Operator shall consult freely with Owner and shall keep Owner reasonably
informed of all significant matters arising during the construction of the
Pipeline.
ARTICLE 3
OPERATION OF THE PIPELINE SYSTEM
3.1 Operator. Owner hereby designates Operator as the operator of the
---------
Pipeline and, subject to the provisions of this Agreement, Operator shall have
the exclusive right (directly, or acting through Basin or MarkWest) to operate
the Pipeline.
3
<PAGE>
3.2 Custody. Operator shall have custody of the Pipeline and
-------
the Pipeline will be held by Operator for Owner's benefit.
3.3 Agreement of Operator to Operate the Pipeline. Operator shall
---------------------------------------------
conduct all operations hereunder in a good and workmanlike manner, and, subject
to the provisions of this Agreement, in accordance with is best judgment of what
a prudent operator would do under the same or similar circumstances. Operator
shall consult freely with Owner and shall keep Owner reasonably informed of all
significant matters arising during the operation, maintenance, or alteration of
the Pipeline.
ARTICLE 4
DUTIES OF OPERATOR
------------------
Supervision of Operations. Operator shall supervise all operations of
-------------------------
the Pipeline for measurement, analysis, dispatching, pumping, and transporting
of Products from all points of delivery into or out of the Pipeline.
4.2 Acquisitions. Operator shall supervise the purchase and use of all
------------
materials, contract services, utilities, and supplies in connection with the
construction, operation and maintenance of the Pipeline. Operator shall cause
all materials supplied for, or intended to be used in, the construction of the
Pipeline, but not affixed to or incorporated into the Pipeline, to be stored on
the Property or at such other location as may be approved by Owner in writing
prior to storage in such other location, with adequate safeguards, as required
by Owner, to prevent loss, theft, damage, or commingling with other materials or
Pipelines.
4.3 Payment of Expenses; Liens; Claims. Operator shall promptly pay
----------------------------------
and discharge all costs and expenses incurred in connection with the
construction, maintenance and operation of the Pipeline pursuant to this
Agreement and take advantage of trade discounts where available. Operator shall
keep the Pipeline free and clear of any Liens arising out of the Pipeline's
construction, operation or maintenance, other than Liens in favor of Bank of
America Illinois and liens approved in writing by Owner (and Liens hereafter
created by Owner, which Owner agrees to promptly discharge and remove). Operator
(a) may contest the validity or amount of any claim of any contractor,
consultant, or other person providing labor, materials, or services with respect
to the Pipeline, (b) may contest any Tax levied by any Governmental Authority,
and (c) may contest the enforcement of or compliance with any Governmental
Requirements; provided however, that during the pendency of any such contest,
Operator shall set aside adequate reserves being established in accordance with
GAAP and shall pay any amount adjudged by a court of competent jurisdiction to
be due, with all costs, interest, and penalties thereon, before such judgment
becomes a lien on the Property. Owner may (but shall not be obligated to)
commence, appear in, or defend any proceeding purporting to affect the Pipeline,
or the respective rights and obligations of Owner and Operator pursuant to this
Agreement.
4
<PAGE>
Owner may (but shall not be obligated to) pay all necessary expenses,
including reasonable attorneys' fees and expenses incurred in connection
with such proceeding which Operator agrees to repay upon demand.
4.4 NO CONDITIONAL SALE CONTRACTS. ETC. No materials, equipment, or
-----------------------------------
fixtures shall be supplied, purchased or installed for the construction or
operation of the Pipeline pursuant to security agreements, conditional sale
contracts, lease agreements, or other arrangements or understandings whereby a
security interest or title is retained by any party or the right is reserved or
accrues to any party to remove or repossess such materials, equipment, or
fixtures, except in favor of Lender.
4.5 EMPLOYMENT OF PERSONNEL. Operator shall employ as its employees,
-----------------------
or contract for, all personnel reasonably required to construct, operate and
maintain the Pipeline efficiently and pay the wages and salaries of such
personnel at reasonable rates for the type and character of the services
performed. Such personnel shall be the employees of Operator and not the
employees of Owner.
4.6 INFORMATION. Operator shall furnish to Owner each month, along
-------------
with the Operating Account statement required by Section 10.1, (a) all
information regarding the Pipeline which is required to be furnished by MarkWest
to Michigan Energy Company, L.L.C., under the Participation Agreement, and (b)
all other reasonable information required by Owner from Operator relating to the
construction, operation and maintenance of the Pipeline. Operator shall promptly
notify Owner of any change in any fact or circumstance represented or warranted
by Operator to Owner.
4.7 CARRIER STATUS. Operator shall operate the Pipeline as a
---------------
"producer pipeline" under Michigan Law, and not as a "common carrier."
4.8 COMPLIANCE WITH REGULATIONS. Operator shall abide by and conform
-----------------------------
to all Governmental Requirements, and insofar as proper operation of the
Pipeline shall require it, make all necessary reports, tax renditions and
returns to Governmental Authorities, secure all necessary licenses and permits,
and pay all valid applicable taxes and fees levied upon the Pipeline or on
operations hereunder.
4.9 CONTINUED AUTHORITY. Operator shall preserve and maintain all
---------------------
licenses, permits, privileges, franchises, certificates and the like necessary
for the operation of its business and its ownership, construction and operation
of the Pipeline.
4.10 ACCESS: BOOKS AND RECORDS. Operator grants Owner access to the
-------------------------
Pipeline site at all reasonable times and shall permit Owner, at all
reasonable times, to examine
5
<PAGE>
and copy (a) Operator's books and records pertaining to the
Operating Account and the Pipeline, and (b) all contracts,
statements, invoices, bills, and claims for labor, materials, and
services supplied for the operation and maintenance of the Pipeline.
Such books and records of Operator shall be kept in accordance with
GAAP.
4.11 PROHIBITION ON TRANSFERS. A Transfer may not occur without
--------------------------
Owner's prior written consent (other than pursuant to the Option Agreement). The
term "Transfer" means the occurrence, whether direct or indirect, voluntary or
involuntary, by written instrument (whether or not filed for record), by
operation of law or otherwise, of any of the following: (a) any interest in
Operator is sold, conveyed, mortgaged, pledged or otherwise transferred or
encumbered (other than transfers to Affiliates or in connection with a
reorganization of Operator or Operator's parent entity, where such Affiliate or
reorganized company has assumed Operator's obligations under this Agreement),
(b) any Lien is hereafter created by Operator or arises with respect to Operator
covering the Pipeline or the Pipeline is hereafter pledged or encumbered by
Operator in any manner, (c) any easement, right-of-way or any other right
whatsoever with respect to the Pipeline is hereafter created or granted by
Operator without Owner's prior written consent, which consent may not be
unreasonably withheld, or (d) possession of the Pipeline is transferred by
Operator. As used in this paragraph, the term "Pipeline" includes all of the
Pipeline, part of the Pipeline, or any interest in all of part of the Pipeline.
4.12 OPERATOR'S PERFORMANCE. If Operator fails to comply with any of
------------------------
its agreements, covenants, or obligations under this Agreement, then Owner (in
Operator's name or in its own name), after giving Operator at least 10 days'
prior written notice of its intent to do so, may perform those agreements,
covenants, or obligations or cause them to be performed for the account of
Operator and at Operator's sole cost and expense, but Owner shall not be
obligated to do so. Any and all costs and expenses thus incurred or paid by
Owner shall be Operator's demand obligations to Owner and shall bear interest
from the date of Owner's payment of any such obligation or expense for
Operator's account until the date that Operator repays it to Owner at the
Default Rate described in the Loan Agreement. Upon making any such payment or
incurring any such cost or expense, Owner shall be fully subrogated to all of
the rights of the Person receiving such payment.
The amount and nature of any such cost and expense and the time when
paid shall be fully established by the affidavit of Owner or any of Owner's
officers or agents.
4.13 NOTIFICATION OF ADVERSE CHANGES. Operator shall promptly notify
---------------------------------
Owner of the occurrence of any event or
6
<PAGE>
condition which, if not remedied, would result in a material, adverse change to
the financial condition of Operator or would materially and adversely affect the
value of the Pipeline.
4.14 General Supervision. Operator shall supervise all other
---------------------
matters necessary to the full accomplishment of the purpose of this Agreement.
ARTICLE 5
MATTERS REQUIRING CONSENT OF OWNER
----------------------------------
5.1 Releases and Partial Releases. Any full or partial release,
-------------------------------
surrender, relinquishment or termination of any permits held by or for the
benefit of the Pipeline or the Owner or of any portion of the Property shall
require the prior written consent of Owner.
5.2 Claims Not Covered by Insurance. Payment of any claims in excess
-------------------------------
of $10,000 which are not covered by insurance maintained by Operator shall
require the prior written consent of Owner, which consent shall not be
unreasonably withheld.
ARTICLE 6
MATTERS NOT REQUIRING CONSENT OF OWNER
--------------------------------------
6.1 Normal Operations. Except as specifically set forth in Article
-------------------
5, Operator is authorized, without prior approval of Owner, to make all
expenditures necessary for the construction of the Pipeline in accordance with
the Plan of Development, and for normal or recurring operating and maintenance
expenses.
6.2 Emergency. In the event of explosion, fire, flood, or other
-----------
sudden emergency, Operator may take such steps and incur such expense as, in its
reasonable opinion, are required to safeguard life and property, but upon so
doing Operator shall as promptly as possible thereafter report the emergency and
the action taken to Owner.
ARTICLE 7
OPERATING PROCEDURE
-------------------
7.1 Product Acceptance. Products will be accepted by Operator for
--------------------
transportation through the Pipeline only in accordance with the Gathering
Agreement.
7.2 Line Fill. Title to line fill shall, in accordance with the terms
-----------
of the Gathering Agreement, remain at all times in Owner in its capacity as
producer under the Gathering Agreement. During the term of this Agreement
possession of line fill shall be held by the Operator for the Owner's benefit.
Upon the termination of
7
<PAGE>
this Agreement, possession of line fill shall be held by the Operator in its
capacity as processor under the Gathering Agreement without affecting the
"Pipeline Cost" (as defined in the Loan Agreement).
7.3 Measurement and Sampling. During each monthly accounting period,
--------------------------
Operator-shall be responsible for the accurate measurement and sampling of all
Products transported into and out of the Pipeline. Operator shall operate
measurement facilities at locations as specified in, and in accordance with the
procedures of, the Gathering Agreement.
ARTICLE 8
LIABILITY
---------
8.1 Liability of Operator. In the conduct of the construction,
-----------------------
operation and maintenance of the Pipeline hereunder, Operator shall be obligated
to use the care and diligence customarily exercised by a prudent general
contractor and operator. Operator shall be liable for, and hereby indemnifies
Owner, its employees and agents against, any loss resulting from, or relating
to, the Pipeline or its construction, operation or maintenance, unless caused
solely by the gross negligence or willful misconduct of Owner.
8.2 No Liability of Owner. Owner shall have no liability, obligation,
-----------------------
or responsibility whatsoever with respect to the construction, operation or
maintenance of the Pipeline. Owner shall not be obligated to inspect the
Pipeline, nor be liable for the performance or default of Operator or any other
party, or for any failure to construct, complete, protect, or insure the
Pipeline, or for the payment of costs of labor, materials, or services supplied
for the construction of the Pipeline. Nothing shall be construed as a
representation or warranty, express or implied, to any party by Owner. Operator
agrees to indemnify and hold harmless Owner from and against all claims,
liabilities, costs, expenses and causes of action arising out of or based upon
or related to the construction, operation and maintenance of the Pipeline, other
than those which arise solely from actions taken by Owner without the
authorization of Operator.
ARTICLE 9
INSURANCE
---------
9.1 Insurance Policies. As to all work hereunder, Operator shall
--------------------
cause MarkWest to carry for the benefit and protection of the parties
hereto the Worker's Compensation and Employer's Liability insurance,
Comprehensive General Liability insurance, Comprehensive Auto
Liability insurance, All Risk insurance and other insurance required
by Article VII of the Participation Agreement. To the extent permitted
by the Laws of
8
<PAGE>
Michigan, all such policies of insurance shall (x) name Owner as an additional
insured with loss proceeds payable to Operator and Owner, as their interests may
appear, (y) provide for at least 30 days prior written notice to Owner of any
cancellation or change in coverage, and (z) provide that no act of the insured
nor use of the Pipeline will invalidate such insurance with respect to Owner.
9.2 Insurance Proceeds. If an insured loss occurs, any and all monies
--------------------
that may be become payable under any insurance policies required hereunder by
reason of damage to, or loss or destruction of the Pipeline or any part thereof
shall be applied to repair, rebuild and restore the Pipeline to its condition
prior to the occurrence of the insured loss, with any excess monies applied to
Owner's Obligation under the Loan Agreement
9.3 Insurance by Owner. Owner may acquire such insurance as it deems
--------------------
proper to protect itself against third party claims or damages to the Pipeline,
and such insurance shall inure solely to the benefit of Owner.
9.4 Contractor Insurance. Operator shall require all third party
----------------------
contractors which are performing work in connection with, or for the benefit of,
operations hereunder to comply with applicable Worker's Compensation and
Employer's Liability Laws and to maintain (a) Worker's Compensation insurance,
(b) Employer's Liability insurance (with minimum limits of $500,000 per
accident, per disease-policy and per disease-each employee), (c) Comprehensive
General Liability insurance (including pollution liability, owners and
contractors protective liability, products and completed operations liability,
contractual liability, explosion, blowout and cratering with minimum limits of
$1,000,000 bodily injury and property damage per occurrence), (d) Business
Automobile Liability insurance (with minimum limits of $1,000,000 bodily injury
and property damage per occurrence), (e) Umbrella Liability insurance (of not
less than $5,000,000 per occurrence and in the aggregate), (f) Contractor's
Protective or Contingent Liability insurance (with minimum limits of $1,000,000
bodily injury and property damage per occurrence), (g) Environmental Impairment
Liability insurance (or the equivalent, with minimum limits of $10,000,000
bodily injury and property damage per occurrence), and (h) any other insurance
as Operator shall deem necessary.
9.5 Third Party Damage Liability. The liability, if any, in damages
------------------------------
for claims growing out of personal injury to or death of third parties or damage
to or destruction of property of third parties resulting from operations
conducted hereunder shall be borne by Operator, unless such claims are due
solely to the willful misconduct or gross negligence of Owner.
9.6 Pipeline System Damages. Operator shall be liable to Owner for
--------------------------
damage to or for loss or destruction of Owner's
9
<PAGE>
property from operations hereunder, unless such damage, loss, or destruction
arises solely out of the willful misconduct or gross negligence of Owner.
9.7 Settlement of Claims. In accordance with Section 5.6, any claims
----------------------
asserted by any person in connection with the Pipeline which are not covered by
insurance may be settled by Operator if such amount does not exceed $10,000.
Operator shall promptly furnish Owner written notice of any loss, damage or
claim in excess of such amount, and settlement shall be subject to approval by
Owner, which approval shall not be unreasonably withheld.
ARTICLE 10
ACCOUNTING
----------
10.1 Maintenance of Accounts; Monthly Statements. Operator shall
-------------------------------------------
maintain an accurate Operating Account of all costs and expenses incurred by it
in constructing, operating and maintaining the Pipeline and all income from the
operation of the Pipeline. Each month Operator shall transmit to the Owner a
statement showing the total charges and credits to the Operating Account during
the preceding calendar month. The Operating Account shall be maintained in
accordance with generally accepted accounting principles and methods prescribed
by applicable regulatory agencies.
10.2 Payments. Operator shall pay all costs and expenses incurred in
--------
the construction, operation and maintenance of the Pipeline. All such payments
which relate to the construction of the Pipeline shall be deemed to be advances
by Operator, as lender, to Owner, as borrower, under the terms of the Loan
Agreement and shall be repayable in accordance with the terms of the Loan
Agreement. Owner shall have no obligation to pay for any such costs of
construction by any other method, regardless of whether any default exists under
the Loan Agreement, and no default under the Loan Agreement shall relieve the
Operator of its obligations under this Agreement.
10.3 Adjustments. Payment of any such amounts by Operator under
-------------
Section 10.2 shall not prejudice the right of Owner to protest or question the
correctness thereof . Without limiting Owner's audit rights under Section 10.4,
all statements rendered to Owner by Operator during any calendar year shall
conclusively be presumed to be true and correct 60 days after delivery of such
statements, unless Owner makes claim on Operator for adjustment.
10.4 Audits. Owner, upon notice in writing to Operator, shall have
--------
the right to audit Operator's accounts and records relating to the accounting
hereunder for any period prior to date of audit. Operator shall bear no portion
of Owner's audit cost incurred under this paragraph, unless agreed to by
Operator. All discrepancies disclosed by said audit must be provided in writing
to Operator within 60 days after completion of said audit.
10
<PAGE>
10.5 Certain Costs and expenses. Charges incurred by Operator in
-----------------------------
connection with the Pipeline for damages and losses to property and
equipment, litigation, insurance premiums and claims, and administrative
overhead shall be the responsibility of Operator and shall not be deemed to be
advances to Owner under the Loan Agreement.
10.6 Taxes.
-----
(a) Income Taxes. Each party shall be responsible for the
------------
preparation, filing and payment of its own income tax returns.
(b) Non-Income Taxes. Except to the extent that Operator is
------------------
prohibited or prevented from doing so by Law, or by the administrative practice
of any taxing office, or by the fact that to do so requires information which is
in the possession of Owner, but not of Operator and which Owner cannot legally
furnish to Operator (all of which are herein called "Preventing Factors"),
Operator, acting for itself and Owner, shall (i) prepare and file all reports,
returns, and renditions in connection with ad valorem taxes and all other taxes
(other than taxes on or measured by income) on all interest in, and business
through, the Pipeline, and (ii) pay such taxes on or before the date due and
shall charge same to Operating Account; provided that Operator may contest the
validity of any such tax or any assessment made in connection therewith, and may
defer payment of the tax appurtenant to the contested assessment until the
proceedings are terminated or until Operator determines that further contest is
useless, if, in each case, such contest or payment deferral does not jeopardize
the operation of the Pipeline or its ownership by Owner. Upon the request of
Operator, Owner shall (except to the extent it is prohibited by Law from doing
so) promptly furnish Operator with any information needed by Operator in order
to carry out its obligations under this Subparagraph, Operator shall. give
written notice of such fact to Owner, specifying the Preventing Factors
concerned and the taxes and governmental units to which such Preventing Factors
apply, and thereafter Owner shall pay the taxes applicable to it, or to its
interest in, and business through, the Pipeline insofar as they relate to the
taxes and governmental units specified in the notice.
ARTICLE 11
REPRESENTATIONS AND WARRANTIES
------------------------------
11.1 Authority and Power: Each party represents and warrants to the
--------------------
other that (a) it is a limited liability company duly organized,
validly existing, and in good standing under the laws of Michigan,
(b) the nature and extent of its business and properties do not
require it to qualify to transact business as a foreign entity in
any other jurisdiction, and (c) it possesses all
11
<PAGE>
requisite authority, power, licenses, permits, and franchises to conduct its
business as is now being conducted.
11.2 Valid and Binding Obligation. Each party represents and
------------------------------
warrants to the other that its execution, delivery, and performance of this
Agreement (a) have been duly authorized, (b) have received all, if any,
requisite prior approvals of any Governmental Authority, (c) constitute the
legal, valid, and binding obligations of it, (d) will not violate, be in
conflict with, result in a breech, or constitute (with due notice or lapse of
time, or both) a default under, its Articles of Organization or Regulations or
any Governmental Requirement or any material agreement to which it is a party or
by which it may be bound or affected, and (e) will not result in the creation or
imposition of any Lien upon any of its property or assets.
11.3 Litigation and Condemnation. Each party represents and warrants
----------------------------
to the other that, to its knowledge, there is no threatened or pending
Litigation against or affecting the Pipeline before or by any Governmental
Authority.
11.4 Title to the Property. Operator represents and warrants to
---------------------
Owner that it has good and indefeasible title to the permits, rights of way,
easements, leaseholds, fee parcels and other real property interests obtained by
it on behalf of Owner in connection with the Pipeline.
11.5 Accuracy of Information. Operator represents and warrants to
-------------------------
Owner that no information, certification, or report submitted to Owner by or on
behalf of Operator contains any material misstatement of fact or omits to state
a material fact or any fact necessary to make the information not misleading.
11.6 Tax and Other Payments. Operator represents and warrants to
----------------------
Owner that Operator has filed or will file all required Tax returns with respect
to the Pipeline and has paid or will pay all Taxes with respect to the Pipeline
which have become due pursuant to such returns or pursuant to any assessments
received by it. All other governmental charges imposed upon Operator or its
assets which are due and payable, have been paid or will be paid before they
become delinquent. Operator has paid or will pay in full all sums owing or
claimed for labor, materials, supplies, personal property (whether or not
constituting a fixture), and services of every kind and character used,
furnished, or installed in the Pipeline and no claim for the same currently
exists or will be permitted to become past due, unless contested by the Operator
in good faith, by appropriate proceedings and with adequate reserves being
established in accordance with GAAP.
11.7 Environmental Matters. Operator represents and warrants to
-----------------------
Owner that Operator (a) knows of no environmental condition or
circumstance adversely
12
<PAGE>
affecting its operations or the Pipeline, (b) has not received any report of any
violations of any Environmental Law, (c) knows of no obligation to remedy any
violations of any Environmental Law.
11.8 Permits and Restrictions. Operator represents and warrants to
-------------------------
Owner that all permits required for the construction and operation of the
Pipeline have been obtained and are currently in effect or will be obtained by
the Operator prior to performing the activity which requires such permit. There
are no deed restrictions which have not been effectively waived which would
prohibit, limit, or interfere with the operation of the Pipeline.
ARTICLE 12
MISCELLANEOUS
-------------
12.1 Modifications. No provision of this Agreement may be modified,
--------------
waived, or terminated except by a written instrument executed by the party
against whom a modification, waiver, or termination is sought to be enforced.
12.2 Rights of Third Parties. All conditions of Operator's
-------------------------
obligations under this Agreement are imposed solely and exclusively for the
benefit of Owner and its successors and assigns and no other Person shall have
standing to require satisfaction of such conditions in accordance with their
terms, and no other Person shall under any circumstances be deemed a beneficiary
of this Agreement. Any and all of the terms and conditions of this Agreement may
be freely waived in whole or in part by Owner at any time if in its sole
discretion Owner deems it desirable to do so. Owner reserves the right to enter
into modifications or amendments of this Agreement with Operator without notice
to or the consent of any other party.
12.3 No Agency, Partnership or Joint Venture. Owner is not the agent
---------------------------------------
or representative of Operator. Operator is not the agent or representative of
Owner. Nothing in this Agreement shall be construed to make Owner liable to
anyone for goods delivered or services performed upon the Pipeline or for debts
or claims accruing against Operator. Nothing herein shall be construed to
create a relationship between Owner and anyone supplying labor or materials to
the Pipeline. Nothing in this Agreement or in the acts of the parties hereto
shall be construed to create a partnership or joint venture between Operator and
Owner.
12.4 Further Assurances. Operator shall perform, execute,
--------------------
acknowledge and deliver, at Operator's sole cost and expense, all such
additional documents as Owner may reasonably require from time to time in order
to better confirm to Owner all the Rights now or hereafter intended to be
granted to Owner under this Agreement.
12.5 Notices. All notices required or permitted to be
---------
13
<PAGE>
given under this Agreement must be in writing and shall be effective upon
delivery to the address specified below. By giving at least 10 days written
notice, Operator or Owner shall have the right from time to time and at any time
during the term of this Agreement to change their respective addresses or fax
numbers and each shall have the right to specify a different address or fax
number within the United States of America.
If to Operator:
West Shore Processing Company, LLC
5613 DTC Parkway, Suite 400
Englewood, Colorado 80111
Telephone No: (303) 290-8700
Facsimile No: (303) 290-8769
Attention: Randy S. Nickerson
If to Owner:
Michigan Production Company, L.L.C.
c/o Tenneco Ventures Corporation
1100 Louisiana, Suite 1543
Houston, Texas 77002
Telephone No.: (713) 757-3698
Facsimile No.: (713) 757-8314
Attention: Rick Lester
12.6 Severability. In the event any of the provisions of this
-------------
Agreement shall for any reason be held to be invalid, illegal, or unenforceable,
such invalidity, illegality, or unenforceability shall not affect any other
provision hereof, and such document shall be construed as if such provision had
never been contained herein. Such provision shall be automatically replaced by
a clause or provision judicially construed and interpreted to be as similar in
substance and content to such provision as the context thereof would reasonably
allow, so that such provision would thereafter be legal, valid, and enforceable.
However, if disregarding or replacing such provision would frustrate the intent
and purposes of such document, Owner may petition any Governmental Authority
having jurisdiction in equity to render a judgment modifying the disregarded
provision or provisions of such document so as to carry out such intent and
purposes.
12.7 Number and Gender. Except as expressly otherwise stated with
------------------
respect to the language used in this Agreement, particularly the
defined terms, the singular shall include the plural, the plural
shall include the singular, and the reference to any gender shall
include all genders.
14
<PAGE>
12.8 Time of Essence. Time is of the essence in performance of
-----------------
this Agreement by Operator.
12.9 Captions The captions, headings, and arrangements used in this
---------
Agreement are for convenience only and do not in any way affect, limit, amplify,
or modify the terms and provisions hereof.
12.10 Applicable Law. This Agreement shall be governed by and
---------------
construed in accordance with the laws of the State of Michigan and the laws of
the United States applicable to transactions within such State.
12.11 Counterparts. This Agreement may be executed in any number of
--------------
counterparts, each of which shall be an original, but all of which together
shall constitute one agreement.
12.12 Successors and Assigns. This Agreement shall inure to the
------------------------
benefit of and be binding upon the parties hereto and their respective
successors and assigns. However, the Loan Documents may not be assigned by
Operator or Owner without the others prior written consent. Any such attempted
assignment shall be void.
12.13 No Oral Agreement. THE RIGHTS AND OBLIGATIONS OF THE PARTIES
------------------
HERETO SHALL BE DETERMINED SOLELY FROM WRITTEN AGREEMENTS, DOCUMENTS, AND
INSTRUMENTS, AND ANY PRIOR ORAL AGREEMENTS BETWEEN THE PARTIES ARE SUPERSEDED BY
AND MERGED INTO SUCH WRITINGS. THIS AGREEMENT (AS AMENDED IN WRITING FROM TIME
TO TIME) AND THE OTHER WRITTEN LOAN DOCUMENTS EXECUTED BY OPERATOR AND OWNER (OR
BY OPERATOR FOR THE BENEFIT OF OWNER) REPRESENT THE FINAL AGREEMENT BETWEEN
OPERATOR AND OWNER AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS BY THE PARTIES. THERE ARE NO
ORAL AGREEMENTS BETWEEN THE PARTIES.
12.14 Term of Agreement This Agreement shall remain in force until
------------------
Owner disposes of the Pipeline accordance with this Agreement and the Loan
Agreement, whereupon all operations hereunder shall be brought to a conclusion,
and Operator shall make final accounting between Operator and Owner.
EXECUTED on the date first above recited.
WEST SHORE PROCESSING COMPANY, LLC
MARKWEST Michigan, Inc.
/S/ ARTHUR J. DENNEY
VICE PRESIDENT
MICHIGAN PRODUCTION COMPANY, L.L.C.
/S/ MICHAEL V. RONCA, MANAGER
/S/ ROBERT L. ZORICH, MANAGER
15
<PAGE>
NON-RECOURSE LOAN AGREEMENT
between
MICHIGAN PRODUCTION COMPANY, L.L.C.
Borrower
and
WEST SHORE PROCESSING COMPANY, LLC
Lender
October 1, 1996
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<C> <S> <C>
ARTICLE I DEFINITIONS 1
ARTICLE II COMMITMENT OF LENDER 5
2.1 Loan Commitment; Note 5
2.2 Term Loan 6
2.3 Advances 6
2.4 Conditions to Advances 6
2.5 Interest on the Loan 6
2.6 Payment 7
2.7 Permitted Prepayment 7
2.8 Advances Do Not Constitute a Waiver 7
ARTICLE III REPRESENTATIONS AND WARRANIES 7
3.1 Authority and Power 7
3.2 Valid and Binding Obligation 7
3.3 Litigation and Condemnation 7
3.4 Tax and Other Payments 8
3.5 Environmental Matters 8
ARTICLE IV COVENANTS AND AGREEMENTS OF BORROWER 8
4.1 Continued Authority 8
4.2 Reports and Other Information 8
4.3 Inspection of the Property 8
4.4 Books and Records 8
4.5 Prohibition on Transfers 9
4.6 Condemnation 9
4.7 Notification of Adverse Changes 9
ARTICLE V EVENTS OF DEFAULT 9
5.1 Payment 9
5.2 Performance 9
5.3 Misrepresentation 10
5.4 Receiver 10
5.5 Liens 10
5.6 Attachment 10
5.7 Voluntary Bankruptcy 10
5.8 Involuntary Bankruptcy 10
5.9 Transfer 10
5.10 Title and Lien Priority 10
ARTICLE VI RIGHTS AND REMEDIES OF LENDER 10
6.1 Remedies 10
6.2 No Waiver or Exhaustion 11
6.3 Cessation of Advances 11
ARTICLE VII GENERAL TERMS AND CONDITIONS 11
7.1 Modifications 11
7.2 Election of Remedies 11
7.3 Usury 12
</TABLE>
(i)
<PAGE>
<TABLE>
<C> <S> <C>
7.4 Rights of Third Parties 12
7.5 No Agency, Partnership or Joint Venture 13
7.6 Further Assurances 13
7.7 Notices 13
7.8 Survival of Obligations, Warranties and Indemnities 13
7.9 Final Release 14
7.10 Controlling Agreement 14
7.11 Severability 14
7.12 Form and Substance 14
7.13 Number and Gender 14
7.14 Time of Essence 14
7.15 Captions 14
7.16 Applicable Law 14
7.17 Counterparts 15
7.18 Successors and Assigns 15
7.19 No Oral Agreement 15
7.20 Non-Recourse 15
</TABLE>
(ii)
<PAGE>
NON-RECOURSE LOAN AGREEMENT
THIS NON-RECOURSE LOAN AGREMENT (this "Agreement"), dated as of
October 1, 1996, is between WEST SHORE PROCESSING COMPANY, LLC, a Michigan
limited liability company ("Lender"), and MICHIGAN PRODUCTION COMPANY, L.L.C., a
Michigan limited liability company ("Borrower").
WHEREAS, Borrower, as producer, and Lender, as processor, have entered
into a Gas Gathering, Treatment and Processing Agreement dated May 2, 1996 (as
amended from time to time, the "Gathering Agreement'); and
WHEREAS, Borrower, as owner, and Lender, as operator, have entered
into a Pipeline Construction and Operating Agreement dated as of October 1, 1996
(as amended from time to time, the "Operating Agreement"); and
WHEREAS, Borrower, as seller, and Lender, as purchaser, have entered
into an Option and Agreement to Purchase and Sell Pipeline dated as of October
1, 1996 (the "Option Agreement"); and
WHEREAS, Lender wishes to loan to Borrower, and Borrower wishes to
borrow from Lender, all sums necessary for the construction of the Pipeline from
the date hereof through the date of its sale by Borrower to Lender or Lender's
designee under the Option Agreement (the "Pipeline Cost").
NOW, THEREFORE, in consideration of the foregoing and the
representations, warranties, and covenants of this Agreement and for other
consideration, the receipt and adequacy of which are hereby acknowledged, Lender
and Borrower hereby agree as follows:
ARTICLE I
DEFINITIONS
For purposes of this Agreement, the following terms are defined
as follows:
Advance means a disbursement from Lender to or for the benefit of
Borrower of any of the proceeds of the Loan.
Bankruptcy Code means Title 11 of the United States Code, as
amended from time to time.
Business Day means any day which is not a Saturday, Sunday or other
day on which commercial banks in Michigan are authorized or obligated to close.
1
<PAGE>
Closing Date means the date of Borrower's execution and delivery of
the Loan Documents to Lender and Lender's execution thereof, regardless whether
funding actually occurs on that date.
Code means the Uniform Commercial Code as enacted in Michigan and
as amended from time to time.
Debtor Relief Laws means the Bankruptcy Code and any and all
applicable Laws regarding liquidation, conservatorship, bankruptcy, assignment
for the benefit of creditors, moratorium, rearrangement, receivership,
suspension of payments, insolvency, reorganization, or similar Laws affecting
the Rights of creditors generally, as in effect from time to time and as
hereafter ammended.
Default means the occurrence of any event which with notice and the
passage of time will become an Event of Default.
Default Rate means, subject to Section 7.3, an annual interest
rate of 8%.
Environmental Law means any Law that relates to the pollution or
protection of the environment or to Hazardous Substances.
Event of Default is defined in Article V.
Federal Income Taxes means all funds paid for, or escrowed for payment
of, federal income taxes attributable to then current tax period.
Financing Statements means the Form UCC-1 or other non-standard Code
financing statements perfecting the security interest securing the Loan.
Fiscal Year means the 12-month period ending December 31 of each
year.
GAAP means generally accepted accounting principles of the Accounting
Principles Board of the American Institute of Certified Public Accountants and
the Financial Accounting Standards Board that are applicable from time to time.
Gathering Agreement is defined in the recitals.
Governmental Authority means the United States of America or any
nation, commonwealth, state. county, city, territory, possession, parish, town,
municipality, and any other political subdivision, agency, court, department,
commission, board, bureau, or other instrumentality.
2
<PAGE>
Governmental Requirements means all Laws of any Governmental Authority
applicable to Borrower or the Pipeline.
Hazardous Substance means (a) any substance the presence of which
requires removal, remediation or investigation under any applicable
Environmental Law, (b) any substance that is defined or classified as a
hazardous waste, hazardous material, pollutant, contaminant, or toxic or
hazardous substance under any applicable Environmental Law, or (c) petroleum,
petroleum products, oil, and asbestos.
Highest Lawful Rate means the maximum rate (or, if the context so
requires, an amount calculated at such rate) of interest which Lender is allowed
to contract for, charge, take, reserve, or receive under applicable Law after
taking into account, to the extent required by applicable Law, any and all
relevant payments or charges.
Impositions means all Taxes, utility rates and charges; charges
imposed pursuant to any subdivision or planned unit development declaration or
restrictions; charges for any easement, license or agreement maintained for the
benefit of the Pipeline, and any interest, costs, or penalties of any kind with
respect to the Pipeline which may be assessed, levied, or imposed upon the
Pipeline or the ownership, use, occupancy, or enjoyment thereof.
Law or Laws means all applicable statutes, laws, ordinances,
regulations, orders, writs, injunctions, decisions, opinions, or decrees of any
Governmental Authority.
Lender Liens means all Liens in favor of Lender securing the
Obligation.
LIEN means any lien, mortgage, security interest, pledge, charge, or
encumbrance of any kind, including, without limitation, a mechanic's lien, a
materialman's lien, the rights of a vendor, lessor, or similar party under any
conditional sales agreement or other title retention agreement or lease
substantially equivalent thereto (except for approved equipment leases) and any
other right of or arrangement with any creditor to have its claim satisfied out
of any property or assets, or the proceeds therefrom, prior to the general
creditors of the owner thereof.
Litigation means any action, proceeding, condemnation action, claim,
and/or lawsuit conducted by or before any Governmental Authority.
Loan means the multiple advance term loan by Lender to Borrower
for the construction of the Pipeline.
Loan Amount is defined in Section 2.1.
3
<PAGE>
Loan Documents means this Agreement, the Note, the Mortgage, the
Financing Statements, and such other instruments or documents evidencing,
securing, or pertaining to the Loan as shall, from time to time, be executed and
delivered to Lender by Borrower, any Person, or any other party pursuant to this
Agreement, and all renewals, rearrangements, modifications, amendments, and
extensions of any of the foregoing.
Maturity Date means the earlier of (a) the date of the "Closing" under
the Option Agreement., or (b) the date on which all options of Borrower and
Lender to sell or purchase the Pipeline under the Option Agreement have expired.
Mortgage means the Mortgage, Assignment, Security Agreement and
Financing Statement executed in connection with this Agreement for the benefit
of Lender and its successors and assigns as security for the payment and
performance of the Obligation.
Note is defined in Section 2.1.
Obligation means the Loan and the principal of, interest on, and all
other amounts and payments due under the Loan Documents, together with all funds
hereafter advanced by Lender to or for the benefit of Borrower as contemplated
by any covenant or provision contained in any Loan Document.
Operating Agreement is defined in the recitals.
Permitted Liens means (a) any Liens of Bank of America Illinois
subordinated to the Mortgage on terms acceptable to Lender, (b) any Liens for
Taxes not yet due and payable, (c) Lender Liens created by or pursuant to the
Loan Documents in favor of Lender, (d) mechanics' and materialmen's liens with
respect to obligations that are not yet due and payable, and (e) other Liens to
which Lender gives its prior written consent.
Person means any individual, firm, corporation, limited liability
company, association, partnership, joint venture, trust, other entity,
unincorporated organization, or Governmental Authority.
Pipeline means the nominal 10-inch diameter, natural gas producer
pipeline extending along the right of way of Consumers Power from the delivery
point at the gathering lateral of Borrower's Slocum 1-21 Well, which delivery
point is expected to be in the Northwest quarter of Section 3O, Township 15
North, Range 16 West, Elbridge Township, in Oceana County, Michigan, to the
terminus of Basin Pipeline, L.L.C.'s existing pipeline located in Section 32,
Township 19 North, Range 17 West, Victory Township, in Mason County, Michigan,
including without limitation, (a) the Property, and (b) all pipes, pipelines,
pumping equipment, assemblies, heaters, valves, controls, monitoring equipment,
communications equipment, towers, sensors, cathodic protection systems, test
stations, corrosion detection and monitoring
4
<PAGE>
devices, inspection pigs, drums, flare facilities, sampling equipment, and all
associated facilities and equipment, including spare parts, related thereto, as
well as any and all additions, replacements, extension, modifications or
enlargements of any of the foregoing.
Pipeline Cost is defined in the recitals.
Plan of Development means the Plan of Development for the Pipeline,
which shall include any working drawings and specifications, together with any
amendments or modifications thereto, and authorizations for expenditures
prepared by MarkWest Michigan, LLC under, and approved in accordance with, the
Participation, Ownership and Operating Agreement for West Shore Processing
Company, LLC, dated May 1, 1996, as ammended.
Property means all rights of way, easements, leaseholds, fee parcels
and other real property interests associated with the Pipeline, as contemplated
by the Plan of Development.
Rights meas benefits, rights, remedies, powers, and privileges.
Taxes means Federal Income Taxes, real estate and personal property ad
valorem taxes, and all other taxes, standbv fees, assessments, fees, levies,
imposts, duties, deductions, withholdings, or other charges of any nature
whatsoever from time to time or at any time imposed by any Laws or by any
Governmental Authority.
Transfer is defined in Section 4.5 of this Agreement.
ARTICLE II
COMMITMENT OF LENDER
--------------------
Subject to the terms, provisions, and conditions of this
Agreement:
2.1 Loan Commitment; Note. Lender agrees to lend to Borrower, in
----------------------
several Advances, an aggregate principal amount ("Loan Amount") equal to the
Pipeline Cost. Such Advances shall only be used by Borrower to fund the Pipeline
Cost. Lender's commitment to make Advances shall terminate upon the occurrence
of a Default and on the Maturity Date (provided that Lender's Rights and
Borrower's duties and obligations under the Loan Documents shall continue in
full force and effect until the Obligation is fully paid or otherwise
satisfied), but no Default under this Agreement shall relieve Lender of its
obligations as operator under the Operating Agreement. The aggregate of all
Advances (whether or not outstanding) may not at any time exceed the Pipeline
Cost. The Advances shall be evidenced by Borrower's Sec red Non-Recourse
Promissory Note substantially in the form of Exhibit A (the "Note").
5
<PAGE>
2.2 Term Loan. This Agreement evidences a term loan and not a
----------
revolving credit facility. Although interest and the principal portion of the
Loan Amount may be prepaid pursuant to the terms of this Agreement, any amount
paid under this Agreement which reduces the outstanding principal amount of the
Loan may not be reborrowed.
2.3 Advances. Under the terms of the Operating Agreement, Lender, as
----------
operator, is obligated to pay all costs and expenses incurred in the
construction, operation and maintenance of the Pipeline. All such payments which
relate to the construction of the Pipeline shall be deemed Advances by Lender to
Borrower and shall be payable in accordance with the terms of this Agreement.
2.4 Conditions to Advances. As a condition precedent to each and
-----------------------
every Advance, in addition to all other requirements herein, Borrower must
satisfy the following requirements and, if required by Lender, have delivered to
Lender evidence of such satisfaction:
(a) Borrower shall be in compliance with all of the covenants,
agreements, obligations and undertakings required to be performed by Borrower
under the Loan Documents, unless compliance thereof shall have been waived in
writing by Lender,
(b) No Default or Event of Default exists;
(c) The representations and warranties made in this Agreement shall be
true and correct on and as of the date of each Advance, with the same effect as
if made on that date;
(d) Borrower shall have executed and delivered the Note and the
Mortgage to Lender, and such documents shall be in full force and effect with no
default thereunder by Borrower,
(e) Borrower and Lender shall have executed and delivered the Option
Agreement, and such agreement shall be in full force and effect with no default
thereunder by Borrower, and
(f) Borrower shall deliver to Lender any and all other supporting
documents reasonably required by Lender.
2.5 Interest on the Loan. Except as otherwise provided in Sections
---------------------
4.8 and 7.3, Advances under the Loan accrue interest at an annual rate of 5.98%,
compounded semi-annually. Interest will be calculated on the basis of actual
numbers of days elapsed (including the first day, but excluding the last day) in
a calendar year of 365 (or 366 as the case may be) days. All interest rate
determinations and calculations by Lender are conclusive and binding, absent
manifest error.
6
<PAGE>
2.6 Payment. All outstanding principal, all accrued and unpaid
--------
interest, and all other outstanding amounts which comprise the Obligation, are
due and payable on the Maturity Date, which shall be payable in the form of the
transfer of the Pipeline to Lender or Lender's designee pursuant to the Option
Agreement.
2.7 Permitted Prepayment Borrower may voluntarily prepay all or any
---------------------
part of the principal amount of the Loan at any time without premium or penalty,
subject to the following conditions: (a) Lender must receive Borrower's written
or telephonic prepayment notice by 10:00 a.m. (Detroit Time) on the Business Day
preceding the proposed date of prepayment; (b) Borrower's prepayment notice
shall specify the prepayment date and the amount to be prepaid: and (c) each
partial prepayment must be in a minimum amount of at least $10,000.
2.8 Advances Do Not Constitute A Waiver. No Advance shall constitute a
-----------------------------------
waiver of any of the conditions of Lender's obligations to make further Advances
nor, in the event Borrower is unable to satisfy any such condition, shall any
such waiver have the effect of precluding Lender from thereafter declaring such
inability to be a Default or an Event of Default.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
------------------------------
3.1 Authority and Power: Each party represents and warrants to the
--------------------
other that (a) it is a limited liability company duly organized, validly
existing, and in good standing under the laws of Michigan, (b) the nature and
extent of its business and properties do not require it to qualify to transact
business as a foreign entity in any other jurisdiction, and (c) it possesses all
requisite authority, power, licenses, permits, and franchises to conduct its
business as is now being conducted.
3.2 Valid and Binding Obligation. Each party represents and warrants
-----------------------------
to the other that its execution, delivery, and performance of the Loan Documents
(a) have been duly authorized, (b) have received all, if any, requisite prior
approvals of any Governmental Authority, (c) constitute the legal, valid, and
binding obligations of it, (d) will not violate, be in conflict with, result in
a breach, or constitute (with due notice or lapse of time, or both) a default
under, its Articles of Organization or Regulations or any Governmental
Requirement or any material agreement to which it is a party or by which it may
be bound or affected, and (e) will not result in the creation or imposition of
any Lien upon any of its property or assets, except as contemplated by the terms
of the Loan Documents.
3.3 Litigation and Condemnation. Each party represents and warrants to
-----------------------------
the other that, to its knowledge, there is no threatened or pending Litigation
against or affecting the Pipeline or the Loan Documents before or by any
Governmental Authority.
7
<PAGE>
3.4 Tax and Other Payments. Borrower represents and warrants to
-----------------------
Lender that Borrower has filed all required Tax returns, if any, with respect to
the Pipeline and has paid all Taxes, if any, with respect to the Pipeline which
have become due pursuant to such returns or pursuant to any assessments received
by it. All other governmental charges imposed upon Borrower or its assets which
are due and payable, have been paid or will be paid before they become
delinquent.
3.5 Environmental Matters. Borrower represents and warrants to Lender
----------------------
that Borrower (a) knows of no environmental condition or circumstance adversely
affecting the Pipeline, (b) has not received any report of any violations of any
Environmental Law affecting the Pipeline, (c) knows of no obligation to remedy
any violations of any Environmental Law affecting the Pipeline.
ARTICLE IV
COVENANTS AND AGREEMENTS OF BORROWER
------------------------------------
Borrower unconditionally covenants and agrees with Lender as follows:
4.1 Continued Authority. Borrower shall not fully or partially
--------------------
release, surrender, relinquish or terminate any licenses, permits, privileges,
franchises, certificates and the like necessary for the operation of its
business and its ownership of the Pipeline without the prior written consent of
the Lender.
4.2 Reports and Other Information. Borrower shall promptly deliver to
------------------------------
Lender:
(a) Promptly, upon discovery, notice of change in any fact or
circumstances represented or warranted by Borrower in the Loan Documents.
(b) Such other information, not otherwise required herein, respecting
the business affairs, assets, and liabilities of Borrower as Lender shall from
time to time reasonably request, including, but not limited to, such opinions,
certificates, and documents, in addition to those heretofore mentioned, as
Lender may reasonably request.
4.3 Inspection of the Property. Borrower shall permit Lender and any
--------------------------
Governmental Authority, and their agents and representatives, to enter upon the
Property for the purpose of inspecting the Pipeline at all reasonable times.
4.4 Books and Records. Borrower shall permit Lender, at all reasonable
------------------
times, to examine and copy Borrower's books and records pertaining to the Loan
and the Pipeline.
8
<PAGE>
4.5 Prohibition on Transfers. A Transfer may not occur without Lender's
-------------------------
prior written consent, unless the Obligation is fully repaid and Lender's option
to acquire the Pipeline under the Option Agreement has expired. The term
"Transfer" means the occurrence, whether direct or indirect, voluntary or
involuntary, by written instrument (whether or not filed for record), by
operation of law or otherwise, of any of the following (a) the Pipeline is sold,
transferred, or otherwise conveyed by Borrower, (b) any contract or instrument
for the sale, transfer or conveyance of the Pipeline is entered into by
Borrower, (c) any Lien (other than Permitted Liens) is hereafter created by
Borrower or arises with respect to Borrower covering the Pipeline or the
Pipeline is hereafter pledged or encumbered by Borrower in any manner, (d) any
easement, right-of-way or any other right whatsoever with respect to the
Pipeline is hereafter created or granted by Borrower, or (e) the Pipeline is
leased or possession thereof is transferred by Borrower, for any purpose to
anyone other than Lender or Lender's designee uncles the Option Agreement As
used in this paragraph, the term "Pipeline" includes all of the Pipeline, part
of the Pipeline, or any interest in all of part of the Pipeline.
4.6 Condemnation. If the Pipeline, or any part thereof, is condemned or
-------------
otherwise taken for public or quasi-public use under the power of eminent
domain, or is transferred in lieu thereof, all damages or other amounts awarded
therefor shall be applied to the Obligation and any amounts in excess of the
Obligation shall be retained by Lender.
4.7 Notification of Adverse Changes. Borrower shall promptly notify Lender
---------------------------------
of the occurrence of any event or condition which, if not remedied, would result
in a material, adverse change to the financial condition of Borrower or would
materially and adversely affect the value of the Pipeline.
ARTICLE V
EVENTS OF DEFAULT
-----------------
The term "Event of Default" as used in this Agreement and in the Loan
Documents, shall mean the occurrence at any time and from time to time, of any
one or more of the following:
5.1 Payment. Borrower fails to pay all or any portion of the Obligation as
--------
and when the same shall become due and payable, whether on the Maturity Date, by
acceleration, or otherwise.
5.2 Performance. Borrower fails to fully and timely perform, discharge, or
------------
observe any of the terms, covenants, or conditions contained in any Loan
Document, as and when required.
9
<PAGE>
5.3 Misrepresentation. Any misrepresentation or warranty made by Borrower
-----------------
to Lender in any Loan Document, or in any other certificate or document
furnished to Lender in connection with the Loan or in furtherance of the
requirements of any Loan Document, is incorrect in any material respect at the
time it is made or restated.
5.4 Receiver. A receiver, liquidator, or trustee of Borrower or all or any
---------
portion of the Pipeline (a) is appointed after notice and a hearing or (b) is
appointed without notice and a hearing and the appointment is not vacated within
60 days after the appointment.
5.5 Liens. A Lien (other than a Permitted Lien) is filed against the
-----
Pipeline or any part thereof with respect to any obligation of Borrower and
remains unsatisfied or unbonded (in a manner approved in writing by Lender) 60
days after Borrower receives notice of the filing of such Lien.
5.6 Attachment. A levy on, or an attachment or sequestration of, or
-----------
relating to, the Pipeline with respect to any obligation of Borrower occurs and
is not discharged within 60 days.
5.7 Voluntarv Bankruptcv. Borrower shall (a) file a petition seeking an
---------------------
order for relief under any Debtor Relief Law, (b) seek, consent to, or not
contest the appointment of a receiver or trustee for itself or for all or any
part of its or its property, (c) voluntarily be adjudicated a bankrupt or
insolvent, (d) make a general assignment for the benefit of its creditors, or
(e) admit in writing its inability to pay its debts as they mature.
5.8 Involuntary Bankruptcy. A petition is filed against Borrower seeking an
-----------------------
order for relief under any Debtor Relief Law and such petition is not dismissed
in 60 days after being filed.
5.9 Transfer. A Transfer occurs.
----------
5.10 Title and Lien Priority. The status of the Lien created by the
------------------------
Mortgage as a first and prior lien and security interest on the Pipeline shall
be challenged or endangered by any Person whatsoever, and the same cannot be
cured within a reasonable time period.
ARTICLE VI
RIGHTS AND REMEDIES OF LENDER
------------------------------
6.1 Remedies. If an Event of Default exists, Lender may, at Lender's option,
---------
exercise any or all of the following rights:
10
<PAGE>
(a) Acceleration. Declare the entire Obligation immediately due and payable
-------------
without notice of default, notice of intent to accelerate, notice of
acceleration, or any other notice (except notice expressly required by the terms
of this Agreement), presentment, protest, demand or action of any kind or nature
whatsoever (each of which is hereby expressly waived by Borrower), whereupon the
entire Obligation shall become immediately due and payable.
(b) Appointment of Receiver. Apply for and obtain, by appropriate judicial
------------------------
action, appointment of a receiver or receivers for all or any part of the
Pipeline.
(c) Mortgage; Loan Dccuments. Exercise any and all rights under the
-------------------------
Mortgage or any of the other Loan Documents and any Rights afforded by Law.
(d) Remedies in the Event of Transfer. Borrower acknowledges that money
----------------------------------
damages may be difficult to ascertain and that Lender would incur irreparable
harm in the event of a Transfer. Accordingly, in the event of a Transfer, or a
threatened transfer, Lender shall be entitled to injunctive relief in addition
to all other remedies available at law or in equity.
6.2 No Waiver or Exhaustion. No waiver by Lender of any of its Rights under
------------------------
any Loan Document, or otherwise, shall be considered a waiver of any other or
subsequent Right of Lender. No delay or omission by Lender in the exercise or
enforcement of any Rights shall ever be construed as a waiver of any Right of
Lender and no exercise or enforcement of any such Rights shall ever be held to
exhaust any Right of Lender.
6.3 Cessation of Advances. Upon the occurrence of a Default, the obligation
----------------------
of Lender to make any Advance and all other obligations of Lender hereunder and
under the Loan Documents shall, at Lender's option, immediately terminate.
ARTICLE VII
GENERAL TERMS AND CONDITIONS
----------------------------
7.1 Modifications. No provision of any Loan Document may be modified,
--------------
waived, or terminated except by a written instrument executed by the party
against whom a modification, waiver, or termination is sought to be enforced
7.2 Election of Remedies. Subject to Section 7.2O, Lender shall have all of
---------------------
the Rights granted in the Loan Documents in addition to Rights available to it
at law or in equity. These Rights shall be cumulative and may, at Lender's sole
discretion, be pursued separately, successively, or concurrently against
Borrower or the Pipeline. The exercise or failure to exercise any
11
<PAGE>
of these Rights shall not constitute a waiver or release thereof or of any other
Right, and such exercise or failure to exercise shall be nonexclusive.
7.3 Usury. It is the intention of Lender and Borrower to comply with all
------
applicable federal and state laws relating to usury, that is, laws limiting
charges for the use, detention or forbearance of money and governing contracts
relating thereto. Accordingly, the Loan Documents are expressly limited so that
in no event, whether by reason of acceleration of the maturity of the
Obligation, or otherwise, shall the amount paid or agreed to be paid to Lender
for the use, forbearance or detention of the money to be loaned under the Loan
Documents, or for the performance or payment of any covenant or obligation
contained in any Loan Document exceed the Highest Lawful Rate. In the event
Lender ever receives, collects, or applies as interest, any amount which would
be excessive interest, that amount shall be treated as a principal prepayment
under this Agreement and applied to reduce the outstanding principal balance of
the Loan; provided that, if the principal of the Loan is paid in full, any
remaining excess shall be paid to Borrower. In determining whether or not the
interest paid or payable, under any specific contingency, exceeds the Highest
Lawful Rate, Borrower and Lender shall, to the maximum extent permitted under
applicable Law, (a) characterize any non-principal payment as an expense, fee,
or premium rather than as interest, (b) exclude voluntary prepayments and the
effects thereof, and (c) spread the total amount of interest throughout the
entire contemplated term of the Loan; provided that, if the Loan is paid and
performed in full prior to the end of its full contemplated term, and if the
interest received by Lender for the actual period of existence of the Loan
exceeds the Highest Lawful Rate, Lender shall refund to Borrower the amount of
such excess, and, in such event, Lender shall not be subject to any penalties
provided by any laws for contracting for, charging, taking, reserving, or
receiving interest in excess of the Highest Lawful Rate.
7.4 Rights of Third Parties. All conditions of Lender's obligations under
------------------------
the Loan Documents are imposed solely and exclusively for the benefit of Lender
and its successors and assigns (and for the benefit of its members and their
successor and assigns) and no other Person shall have standing to require
satisfaction of such conditions in accordance with their terms, and no other
Person shall under any circumstances be deemed a beneficiary of this Agreement.
Any and all of the terms and conditions of this Agreement may be freely waived
in whole or in part by Lender at any time if in its sole discretion Lender deems
it desirable to do so. Lender reserves the right to enter into modifications or
amendments of the Loan Documents with Borrower without notice to or the consent
of any other party. This provision shall survive the repayment of the Loan and
shall continue in full force and effect.
12
<PAGE>
7.5 No Agency, Partnership or Joint Venture. Lender is not the agent or
----------------------------------------
representative of Borrower. Borrower is not the agent or representative of
Lender. Nothing herein shall be construed to create a relationship between
Lender and anyone supplying labor or materials to the Pipeline. Nothing in this
Agreement or in the acts of the parties hereto shall be construed to create a
partnership or joint venture between Borrower and Lender.
7.6 Further Assurances. Borrower shall perform, execute, acknowledge and
-------------------
deliver, at Borrower's sole cost and expense, all such additional documents,
acts, deeds; conveyances, mortgages, assignments, estoppel certificates, notices
of assignment, transfers and assurances as Lender may reasonably require from
time to time in order to better assure, convey, assign, transfer and confirm to
Lender all the Rights now or hereafter intended to be granted to Lender under
the Loan Documents and to facilitate the performance of this Agreement.
7.7 Notices. All notices required or permitted to be given under the Loan
--------
Documents must be in writing, and shall be effective upon delivery to the
address specified below. By giving at least 10 days written notice, Borrower or
Lender shall have the right from time to time and at any time during the term of
this Agreement to change their respective addresses or fax numbers and each
shall have the right to specify a different address or fax number within the
United States of America.
If to Lender:
West Shore Processing Company, LLC
5613 DTC Parkway, Suite 400
Englewood, Colorado 80111
Telephone No: (303) 290-8700
Facsimile No: (303) 290-8769
Attention: Randy S. Nickerson
If to Borrower:
Michigan Production Company, L.L.C.
% Tenneco Ventures Corporation
1100 Louisiana, Suite 1543
Houston, Texas 77002
Telephone No.: (713) 757-3698
Facsimile No.: (713) 757-8314
Attention: Rick Lester
7.8 Survival of Obligations. Warranties. and Indemnities. All covenants,
----------------------------------------------------
agreements, representations, warranties made by Borrower in the Loan Documents,
including without limitation, any certificates or other documents or instruments
delivered pursuant to any Loan Document, shall survive Lender's making of the
Loan and the execution and delivery of the Loan Documents.
13
<PAGE>
7.9 Final Release. Full payment of the Obligation by Borrower or any
--------------
other Person shall automatically constitute a full release of any claims or
causes of action existing as of the date of such payment in favor of Lender or
any other Party, in connection with the Loan Documents, (other than the
prohibition on Transfers contained in Section 4.5, which shall continue in force
until the Pipeline is sold to Lender or Lender's designee under the Option
Agreement.)
7.10 Controlling Agreement. If provisions of the other Loan Documents
----------------------
conflict with any provision of this Agreement, this Agreement shall control to
the extent of such conflict.
7.11 Severability In the event any of the provisions of the Loan
------------
Documents shall for any reason be held to be invalid, illegal or unenforceable,
such invalidity, illegality, or unenforceability shall not affect any other
provision of the Loan Documents, and such document shall be construed as if such
provision had never been contained herein. Such provision shall be
automatically replaced by a clause or provision judicially construed and
interpreted to be as similar in substance and content to such provision as the
context thereof would reasonably allow, so that such provision would thereafter
be legal, valid, and enforceable. However, if disregarding or replacing such
provision would frustrate the intent and purposes of such document, Lender may
petition any Governmental Authority having jurisdiction in equity to render a
judgment modifying the disregarded provision or provisions of such document so
as to carry out such intent and purposes.
7.12 Form and Substance. All documents, certificates, insurance
-------------------
policies, and other items required under any Loan Document to be executed and/or
delivered to Lender shall be in form and substance satisfactory to Lender.
Lender shall receive copies (or certified copies where appropriate in Lender's
judgment) of all documents which it may request in connection with this
Agreement or the Loan.
7.13 Number and Gender. Except as expressly otherwise stated, with
-----------------
respect to the language used in any Loan Document, particularly the defined
terms, the singular shall include the plural, the plural shall include the
singular, and the reference to any gender shall include all genders.
7.14 Time of Essence. Time is of the essence in performance of
----------------
the Loan Documents by Borrower.
7.15 Captions. The captions, headings, and arrangements used in the
---------
Loan Documents are for convenience only and do not in any way affect, limit,
amplify, or modify the terms and provisions of the Loan Documents.
7.16 Applicable Law. The Loan Documents shall be governed
---------------
14
<PAGE>
by and construed in accordance with the laws of the State of Michigan and the
laws of the United States applicable to transactions within such State.
7.17 Counterparts. Each Loan Document (other than the Note) may be
-------------
executed in any number of counterparts, each of which shall be an original, but
all of which together shall constitute one agreement.
7.18 Successors and Assigns. The Loan Document shall inure to the
-----------------------
benefit of and be binding upon the parties hereto and their respective
successors and assigns. However, the Loan Documents may not be assigned by
Borrower or Lender without the other's prior written consent. Any such attempted
assignment shall be void.
7.19 No Oral Agreement. THE RIGHTS AND OBLIGATIONS OF THE PARTIES
------------------
HERETO SHALL BE DETERMINED SOLELY FROM WRITTEN AGREEMENTS, DOCUMENTS, AND
INSTRUMENTS, AND ANY PRIOR ORAL AGREEMENTS BEIWEEN THE PARTIES ARE SUPERSEDED BY
AND MERGED INTO SUCH WRITINGS. THIS AGREEMENT (AS AMENDED IN WRITING FROM TIME
TO TIME) AND THE OTHER WRITTEN LOAN DOCUMENTS EXECUTED BY BORROWER AND LENDER
(OR BY BORROWER FOR THE BENEFIT OF LENDER) REPRESENT THE FINAL AGREEMENT BETWEEN
BORROWER AND LENDER AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS BY THE PARTIES. THERE ARE NO ORAL
AGREEMENTS BETWEEN THE PARTIES.
7.20 Non-Recourse. Notwithstanding anything to the contrary contained
------------
in any Loan Document, there shall be no personal or corporate liability on
Borrower, Borrower's successors or assigns, or the members of Borrower or their
successors or assigns, to pay the Obligation, or for the observance or
performance of any of the covenants, conditions or agreements contained in any
Loan Document, and Lender and its successors and assigns will look solely to the
collateral described in the Mortgage and will not seek any money judgment,
deficiency or otherwise, against Borrower, or its successors or assigns, in the
event of default in the payment of the Obligation or in the event of any other
Event of Default; provided that the foregoing shall not limit Lender's remedies
under Section 6.1(d) in the event of a Transfer or threatened Transfer
prohibited by Section 4.5, and shall not limit either party's remedies in the
event of any fraud on the part of the other party in connection with any Loan
Document.
EXECUTED on the date first above recited.
WEST SHORE PROCESSING COMPANY, LLC
MW MICHIGAN, INC.
/S/ Arthur J. Denney
Vice President
MICHIGAN PRODUCTION COMPANY, L.L.C.
/S/ Michael V. Ronca, Manager
/S/ Robert L. Zorich, Manager 15
15
<PAGE>
EXHIBIT A
---------
SECURED NON-RECOURSE PROMISSORY N0TE:
October 1, 1996
FOR VALUE RECEIVED, MICHIGAN PRODUCTION COMPANY, L.L.C. ("Maker"), hereby
promises to pay to the order of WEST SHORE PROCESSING COMPANY, ILC ('Payee") on
or before the Maturity Date the full amount of the Obligation.
This note has been executed and delivered under, and is subject to the terms
of, the Non-Recourse Loan Agreement dated the same date as this note (as
amended, supplemented or replaced, (the "Loan Agreement"), between Maker and
Payee and is the Note referred to in the Loan Agreement. Unless defined in this
note, or the context requires otherwise, capitalized terms used in this note
have the meanings given to such terms in the Loan Agreement. Reference is made
to the Loan Agreement for provisions affecting this note regarding applicable
interest rates, principal and interest payment dates, final maturity, voluntary
and mandatory prepayments, acceleration of maturity, exercise of Rights, and
security for the payment of this note. This note is a Loan Document and,
therefore, is subject to the applicable provisions of Article VII of the Loan
Agreement, all of which applicable provisions are incorporated into this note by
reference as if set, forth in this note verbatim.
Specific reference is made to Section 7.3 of the Loan Agreement for usury
savings provisions and to Section 7.20 of the Loan Agreement for provisions
governing the non-recourse nature of this note.
This note is secured by the Mortgage.
MICHIGAN PRODUCTION COMPANY, L.L.C.
/S/ Michael V. Ronca, Manager
/S/ Robert L. Zorich, Manager
<PAGE>
FIRST AMENDMENT TO PARTICIPATION, OWNERSHIP AND
OPERATING AGREEMENT FOR WEST SHORE PROCESSING COMPANY, LLC
This First Amendment to Participation, Ownership and Operating
Agreement ("Amendment") is made and entered into this 1/st/ day of October,
1996, by and among MarkWest Michigan, Inc. (herein referred to as "MarkWest")
and Michigan Energy Company, L.L.C. (herein referred to as "MEC").
RECITALS:
A. The parties entered into that certain Participation, Ownership and
Operating Agreement for West Shore Processing Company LLC, ("West Shore") dated
May 2, 1996 (the "Participation Agreement").
B. Among the activities to be undertaken by MarkWest under the
Participation Agreement and as a portion of MarkWest's initial contributions to
West Shore, MarkWest was to provide an extension of the pipeline owned by Basin
Pipeline, L.L.C. ("Basin") from its current configuration to a delivery point at
the gathering lateral of the existing Slocum No. 1-21 well, which well is owned
by Michigan Production Company, L.L.C. ("MPC").
C. The parties have agreed among themselves and with MPC that the
extension of the Basin Pipeline to the Slocum No. l-21 well will be initially
owned and constructed by MPC.
D. MPC will acquire the funding necessary to install that pipeline
extension from the proceeds of a loan entered into between West Shore and MPC
pursuant to a Loan Agreement of even date herewith.
E. MEC and MarkWest have agreed that MarkWest's obligation to pay for
that pipeline extension under the terms of the Participation Agreement shall be
fully satisfied and credited to MarkWest by having MarkWest provide the funds to
West Shore necessary for West Shore to loan those amounts to MPC for MPC's
construction of the pipeline extension; all in accordance with the terms hereof
and in accordance with the terms of the Loan Agreement, the Construction and
Operating Agreement between West Shore and MPC, and the Option and Agreement to
Purchase and Sell Pipeline Agreement between West Shore and MPC, all of even
date herewith.
Now, therefore, in consideration of the mutual covenants and
agreements, the parties agree as follows:
1. Section 2.1. MarkWest's Initial Contributions and Obligations,
-------------------------------------------------
shall be amended by deleting subparagraph (a)(i) thereof in its entirety and
replacing it with the following revised subparagraph (a)(i):
<PAGE>
"(i) Provide the funding to the Company, at times and in amounts, as
necessary to permit the Company to make advances to Michigan Production Company,
L.L.C. ("MPC") under that certain Non-Recourse Loan Agreement between the
Company and MPC dated October 1, 1996 (the "Loan"); which loan advances shall be
used by MPC to construct and install a nominal 10-inch diameter pipeline
extension of the Basin pipeline (subject to acquisition by the Company, or its
designee, under an Option and Agreement to Purchase and Sell Pipeline dated
October 1, 1996) from the existing terminus of the Basin pipeline located in
Section 32, Township 19 North, Range 17 West, Victory Township, Mason County,
Michigan, along the right of way of Consumers Power to the delivery point at the
gathering lateral of the existing Slocum No. 1-21 well (which well is located in
Section 21, Township 15 North, Range 16 West, Elbridge Township, Oceana County,
Michigan), and which delivery point is anticipated to be located in the
northwest quarter of Section 30, Township 15 North, Range 16 West, Elbridge
Township, Oceana County, Michigan, (as approximately depicted on the map
attached hereto as Exhibit N), including all matters related to the acquisition
of requisite permits (for which permits MarkWest shall diligently apply for and
use its reasonable efforts to acquire in the name of MPC), installation,
construction, and acquisition of necessary easements and rights of way ("Basin
Extension"). MarkWest will perform the installation, construction and operation
of the Basin Extension in a good and workmanlike manner consistent with prudent
industry standards in its capacity as Operator of the Company and pursuant to a
Pipeline Construction and Operating Agreement between the Company and MPC dated
October 1, 1996 (the "Construction and Operating Agreement"). Should the amount
required for the Company to advance to MPC under the Loan to enable MPC to
complete that extension exceed $10,000,000, then MEC shall be obligated to
provide the Company 80% of all funding to advance amounts to MPC, under the
Loan, in excess of $10,000,000, and MarkWest shall be obligated to provide the
Company 20% of all such excess amounts to be advanced, under the Loan, to MPC;
which excess amounts shall not be utilized in calculating Ownership Interests
hereunder. MarkWest will, under the Construction and Operating Agreement
commence activities related to this installation promptly following the
Effective Date. MarkWest will, as Operator of the Company and pursuant to the
Construction and Operating Agreement, undertake planning aimed at completing the
Basin Extension by December 31, 1996, and, in any event, will use its reasonable
efforts to complete the Basin Extension, subject to conditions not within
MarkWest's reasonable control, by March 31, 1997. Additionally, MarkWest will
reimburse MEC for costs related to the Basin Extension and which were incurred
before the Effective Date to the extent those costs are specified on Exhibit D,
attached hereto."
2. Section 2.2. MEC's Initial Contributions and Obligations, shall be
---------------------------------------------
amended by deleting subparagraph (d)(i) in its entirety and replacing it with
the following revised subparagraph (d)(i):
<PAGE>
"(d)(i) Should the amount required to be loaned to MPC for MPC to complete
the Basin Extension exceed $10,000,000.00, then MEC shall be obligated to
provide the Company with 80% of all such excess amounts required to be advanced
by the Company to MPC under the Loan."
3. Section 3.3. Conveyance of Ownership Interests, shall be amended by
-----------------------------------
deleting paragraph (b) thereof in its entirety and replacing it with the
following revised paragraph (b):
"(b) The Ownership Interests shall be determined at the end of each calendar
month based upon the cumulative contributions made by MarkWest under Section 2.1
(and as paid under Section 3.1 (b), if applicable) as of the end of that month
and the deemed contribution of MEC under Section 2.2, above. Contributions by
MarkWest shall be based upon actual expenditures made on behalf of the Company
and actual funds provided to the Company for advances to MPC. The calculation of
Ownership Interests at the end of a calendar month shall be deemed effective for
all purposes under this Agreement as of the last day of that month for which the
determination was made."
4. Section 3.5. Tax Depreciation, shall be amended by deleting it in its
------------------
entirety and replacing it with the following revised Section 3.5, Tax
---
Depreciation:
- -------------
"3.5 Tax Depreciation. Tax depreciation related to the Company will be
-----------------
allocated in accordance with Exhibit E; provided, in all events, MarkWest will
be allocated 100% of depreciation attributable to the capital contributions made
by MarkWest under Section 2.1. and MEC will be allocated 100% of depreciation
attributable to the capital contributions made by MEC under Section 2.2.
Allocation of depreciation attributable to the Basin Extension shall be shared
in proportion to the amounts provided to the Company by MarkWest or MEC for
advances to MPC to construct the Basin Extension."
5. Article III shall be amended by adding the following new Sections 3.7,
Acquisition of Basin Extension and 3.8, Allocation of Interest Income:
- ------------------------------- -----------------------------
"Section 3.7. Acquisition of Basin Extension. The Company and MPC have
------------------------------
entered into that certain Option and Agreement to Purchase and Sell Pipeline
dated October 1, 1996, ("Option Agreement") under which the Company, or its
designee, will have the right to acquire the Basin Extension. The parties agree
to diligently pursue obtaining all information required to file an application
with the Michigan Public Service Commission ("MPSC") and thereafter promptly
file for and diligently pursue an application with the MPSC for certifications
and authorizations under 1929 P.A. (Act 9), M.C.L. Sec. 483.101 et seq.; M.S.A.
Sec. 22.1311 et seq., ("Act 9 Authorization") authorizing the Company, or its
designee, to acquire, own and operate the Basin Extension. The parties agree to
cause the Company to exercise its option to
<PAGE>
acquire, or have its designee acquire the Basin Extension upon the earlier of
(i) the date upon which that Act 9 Authorization is received by the Company or
its designee, or (ii) such other date upon which the parties agree. The
acquisition of the Basin Extension shall not modify the then effective Ownership
Interests of the parties. MarkWest, as part of its contributions under Section
2.1 (a), shall provide funding to the Company for any sales, use, transfer, real
property transfer, recording, or other similar taxes and fees ("Transfer Taxes")
which arise out of or in connection with the transactions effected pursuant to
the Option Agreement, and which amounts will be included in calculating
MarkWest's Ownership Interest.
Section 3.8. Allocation of Interest Income. Any income received by West
------------------------------
Shore which is related to the capitalization of interest associated with the
construction of the Basin Extension shall be allocated to the parties in the
same proportion in which depreciation on the Basin Extension is allocated."
6. Except for the foregoing, all other terms and provisions of the
Participation Agreement shall remain in full force and effect.
In witness whereof, the parties have executed this Amendment the date first
above written.
MARKWEST MICHIGAN, INC.
/S/ ARTHUR J. DENNEY
MICHIGAN ENERGY COMPANY, L.L.C.
/S/ MICHAEL V. RONCA, MANAGER
AND
/S/ ROBERT L. ZORICH, MANAGER
<PAGE>
OPTION AND AGREEMENT TO PURCHASE AND SELL PIPELINE
This Option and Agreement to Purchase and Sell Pipeline (Agreement) is
made and entered into this 1st day of October, 1996, by and between Michigan
Production Company, L.L.C. (MPC) and West Shore Processing Company, LLC (West
Shore).
RECITALS:
A. MPC intends to install, construct and operate, or cause to be
installed, constructed and operated, a natural gas pipeline in Mason and Oceana
Counties, Michigan.
B. West Shore and MPC each desire to grant each other an option to
require the purchase by West Shore and the sale by MPC of that pipeline subject
to the terms and conditions of this Agreement.
Now, therefore, in consideration of the mutual covenants and
agreements contained herein, the parties agree as follows:
ARTICLE I
OPTION
------
1.1 Property Subject to Option. The property to which this Agreement
--------------------------
and the options granted hereunder apply shall be that certain nominal 10-inch
diameter pipeline extension of the current Basin Pipeline, L.L.C. ("Basin")
pipeline from its present terminus in Section 32, Township 19 North, Range 17
West, Victory Township, Mason County, Michigan, along the right of way of
Consumers Power to the delivery point at the gathering lateral of the existing
Slocum No. 1-21 well (which well is located in Section 21, Township 15 North,
Range 16 West, Elbridge Township, Oceana County, Michigan), and which delivery
point is anticipated to be located in the northwest quarter of Section 30,
Township 15 North, Range 16 West, Elbridge Township, Oceana County, Michigan, to
be constructed and installed by or for MPC; including all pipeline, rights-of-
way, easements, valves, fittings, and other equipment, fixtures or facilities
installed in connection therewith, and including all facilities and assets
acquired and installed by MPC or for MPC, (collectively the foregoing is
referred to herein as the "Pipeline"); together with the other properties and
rights described in Section 3.1, below.
1.2 MPC's Option. West Shore hereby grants MPC the option, during
-------------
MPC's Option Period, defined below, to require West Shore, or West Shore's
designee, to purchase the Pipeline on the terms and conditions stated in this
Agreement. "MPC's Option Period" shall commence upon the earlier of (i) January
1, 1999, or (ii) the date upon which West Shore, or its designee, has received
authorization pursuant to 1929 P.A. (Act 9), M.C.L. Sec. 483.101 et seq.; M.S.A.
Sec. 22.1311 et seq., ("Act 9 Authorization") from the Michigan Public Service
Commission (MPSC), in form and content reasonably acceptable to West Shore, or
its designee, and which
<PAGE>
authorization has been accepted by West Shore, or its designee, to acquire, own
and operate the Pipeline, and shall continue thereafter for a period ending 10
years following the date hereof.
1.3 West Shore's Option. MPC hereby grants West Shore the option, during
-------------------
West Shore's Option Period, defined below, to require MPC to sell the Pipeline
to West Shore, or to West Shore's designee, on the terms and conditions stated
in this Agreement. "West Shore's Option Period" shall commence on the date
hereof and shall continue in force until the thirty (30) days after the date
upon which West Shore, or its designee, has received final MPSC Act 9
Authorization, in form and content reasonably acceptable to West Shore, or its
designee, and which authorization has been accepted by West Shore, or its
designee, to own and operate the Pipeline; provided, in any event, West Shore's
Option Period shall expire upon ten (10) years following the date hereof.
1.4 Exclusivity. During West Shore's Option Period, MPC agrees and
------------
covenants with West Shore that, subject to the rights of Bank of America
Illinois (which rights are subject to that certain Subordination Agreement dated
May 2, 1996 and to that certain Subordination Agreement and Financing Statement
dated October 1, 1996, herein collectively the "Subordination Agreements"), MPC
shall not sell, dispose of, transfer or encumber, or agree to sell, dispose of,
transfer or encumber any portion or all of the Pipeline to any person, firm or
entity other than to West Shore, or its designee, in exercise of West Shore's
Option. Upon the execution hereof, the parties shall execute a recording
memorandum to give notice of West Shore's Option to acquire the Pipeline.
ARTICLE II
EXERCISE OF OPTION
------------------
2.1 Method of Exercise. The option of West Shore or MPC granted hereunder
------------------
shall be exercised, if at all, by the exercising party providing written notice
thereof to the other party prior to the end of the exercising party's Option
Period. Upon providing notice of the exercise of an option, West Shore and MPC
shall proceed to consummate the purchase and sale of the Pipeline in accordance
with the terms and conditions of this Agreement.
ARTICLE III
PURCHASE AND SALE
-----------------
3.1 Purchase and Sale. Subject to the terms and conditions of this
------------------
Agreement, and upon the timely exercise of an option granted hereunder, MPC
shall sell and West Shore shall purchase and pay for, at the Closing, an
undivided 100% of the right, title and interest in and to:
a. The Pipeline;
<PAGE>
b. All files, books, records, papers, instruments and logs, including all of
MPC's counterparts of all conveyed contracts, all documents of title relating to
the Pipeline, blueprints, specifications, plats, maps, surveys, accounting and
financial records and sales and property tax records relating to the Pipeline
(Records);
c. To the extent transferable, all licenses, certificates, approvals,
registrations, variances, exemptions, rights of way, privileges, immunities,
grants, permits, franchises, consents, authorizations or other rights of every
kind and character held by MPC and exclusively and directly related to the
ownership or operation of the Pipeline; and,
d. All other or additional privileges, rights, interests, properties,
contracts, agreements of MPC of every kind and description and located upon the
Pipeline, in each case that are used or intended for use in connection with the
continued conduct of the Pipeline.
3.2 Assumption of Obligations and Liabilities: Indemnity. Contemporaneously
------------------------------------------------------
with the purchase of the Pipeline and related assets pursuant to the exercise of
the Option as set forth in Section 3.1, above, West Shore, or its designee,
shall assume all of the obligations and liabilities of MPC related to the
Pipeline and such related assets arising from or associated with its
construction and operation by executing an Assignment and Assumption Agreement
in form and substance substantially as set forth in Exhibit C, hereto. In
addition, West Shore shall indemnify and hold harmless MPC, its affiliates,
officers, directors, employees, agents and representatives, from and against any
and all claims, losses, damages and costs arising from the construction or
operation of the Pipeline, whether arising before the sale transaction or
thereafter, except to the extent arising from the gross negligence or willful
misconduct of MPC.
ARTICLE IV
PURCHASE PRICE
--------------
4.1 Purchase Price. The Purchase Price shall be equal to the total amount of
--------------
all outstanding funds advanced to MPC, plus accrued but unpaid interest thereon,
under the terms of that certain Loan Agreement between MPC and West Shore which
remains outstanding as of the date upon which an option is exercised hereunder.
4.2 Payment of Purchase. The Purchase Price shall be paid by West Shore to
--------------------
MPC in the form of obtaining and delivering to MPC the promissory note executed
by MPC under its Loan Agreement with West Shore, marked "Cancelled". The
discharge and cancellation of that promissory note shall constitute full payment
of the Purchase Price.
<PAGE>
4.3 Tax Matters. West Shore shall pay all sales, use, transfer, real
-----------
property transfer, recording and other similar taxes and fees ("Transfer Taxes")
arising out of or in connection with the transactions effected pursuant to this
Agreement. MPC and West Shore shall cooperate in the preparation and filing of
all necessary documentation and returns with respect to Transfer Taxes and West
Shore shall prepare and file all such returns.
ARTICLE V
REPRESENTATIONS OF MPC
----------------------
MPC represents and warrants to West Shore that as of the date hereof:
5.1 Existence. MPC is a limited liability company duly organized, validly
----------
existing and in good standing under the laws of the State of Michigan and is
qualified and in good standing to conduct business in the State of Michigan.
5.2 Power. MPC has the requisite power to enter into and perform this
-----
Agreement and the transactions contemplated hereby.
5.3 Litigation. There is no litigation, pending or, to MPC's knowledge,
-----------
threatened against MPC, which would MATERIALLY affect the Pipeline after Closing
or which would seek to prevent the consummation of the transactions contemplated
hereunder.
5.4 Title to Property. MPC will warrant title to the Pipeline by, through
------------------
and under MPC, but not otherwise.
ARTICLE VI
REPRESENTATIONS OF WEST SHORE
-----------------------------
West Shore represents and warrants to MPC that as of the date hereof:
6.1 Existence. West Shore is a limited liability company duly organized,
----------
validly existing and in good standing under the laws of the State of Michigan.
6.2 Power. West Shore has the power to enter into and perform this Agreement
-----
and the transactions contemplated hereby.
6.3 Litigation. There is no litigation, pending or to the knowledge of West
-----------
Shore, threatened against West Shore or its affiliates, which would seek to
prevent the consummation of the transactions contemplated hereunder.
ARTICLE VII
COVENANTS AND PRE-CLOSING OBLIGATIONS
-------------------------------------
7.1 Disclaimer of Warranties. EXCEPT AS EXPRESSLY CONTAINED IN THIS
--------------------------
AGREEMENT, IT IS THE EXPLICIT INTENT OF EACH PARTY HERETO
<PAGE>
THAT MPC IS MAKING NO REPRESENTATION OR WARRANTY WHATSOEVER, EXPRESS OR IMPLIED,
BEYOND THOSE EXPRESSLY GIVEN IN THIS AGREEMENT (INCLUDING THOSE RELATED TO
ENVIRONMENTAL CONDITIONS), AND IT IS UNDERSTOOD THAT WITH RESPECT TO EQUIPMENT
AND PERSONAL PROPERTY COMPRISING PORTIONS OF THE PIPELINE, WEST SHORE SHALL TAKE
THOSE PROPERTIES "AS IS" AND "WHERE IS," WITH ALL FAULTS. WITHOUT LIMITING THE
GENERALITY OF THE IMMEDIATELY FOREGOING, MPC HEREBY EXPRESSLY DISCLAIMS AND
NEGATES ANY REPRESENTATION OR WARRANTY, EXPRESSED OR IMPLIED, AT COMMON LAW, BY
STATUTE OR OTHERWISE, RELATING TO THE CONDITION OF THE PIPELINE (INCLUDING
WITHOUT LIMITATION ANY IMPLIED OR EXPRESS WARRANTY OF MERCHANTABILITY OR FITNESS
FOR A PARTICULAR PURPOSE, OR OF CONFORMITY TO MODELS OR SAMPLES OF MATERIALS).
THE PARTIES AGREE THIS DISCLAIMER CONTSTITUTES A CONSPICUOUS DISCLAIMER.
7.9 Construction and Operations. From the date of this Agreement until
---------------------------
Closing, MPC shall cause the Pipeline to be constructed and operated by West
Shore under the terms of and pursuant to that certain Pipeline Construction and
Operating Agreement between the Company and MPC dated October 1, 1996
("Construction and Operating Agreement"), and MPC will not take any action to
terminate or cancel the Construction and Operating Agreement except in
accordance with the terms thereof.
7.3 MPSC Authorization. Upon the execution hereof, West Shore, or its
-------------------
designee, shall, at its expense, diligently pursue obtaining all information
required to file an application with the MPSC and thereafter promptly file for
and diligently pursue an application with the MPSC for Act 9 Authorization
authorizing West Shore, or its designee, to acquire, own and operate the
Pipeline.
7.4 Other Access. Until the Closing, MPC will give West Shore reasonable
-------------
access to the Pipeline and reasonable access during MPC's normal business hours
to all other information related to the Pipeline in MPC's custody at the present
location of those documents.
ARTICLE VIII
MPC'S CONDITIONS OF CLOSING
---------------------------
Upon the exercise of the option granted to either party hereunder,
MPC's obligation to consummate the transactions provided for herein is subject
to the satisfaction or waiver by MPC of the following conditions:
8.1 Representations. The representations and warranties of West Shore
---------------
contained herein shall be true and correct in all material respects on the date
of Closing, as defined below, as though made on and as of that date.
8.2 Pending Matters. No suit, action or other proceeding by a third
----------------
party or a governmental authority shall be pending or threatened which seeks
substantial damages from MPC in connection
<PAGE>
with, or seeks to restrain, enjoin or otherwise prohibit the consummation of the
transactions contemplated by this Agreement.
ARTICLE IX
WEST SHORE'S CONDITIONS OF CLOSING
----------------------------------
Upon the exercise of the option granted to either party hereunder,
West Shore's obligation to consummate the transactions provided for herein is
subject to the satisfaction or waiver by West Shore of the following conditions:
9.1 Representations. The representations and warranties of MPC
---------------
contained herein shall be true and correct in all material respects on the date
of Closing, defined below, as though made on and as of that date.
9.2 Pending Matters. No suit, action, or other proceeding by a third
----------------
party or a governmental authority shall be pending or threatened which seeks
substantial damages from West Shore in connection with, or seeks to restrain,
enjoin or otherwise prohibit, the consummation of the transactions contemplated
by this Agreement.
ARTICLE X
CLOSING
-------
10.1 Time and Place of Closing. If the conditions to Closing have been
-------------------------
satisfied or waived, the consummation of the transactions contemplated hereby
(the "Closing") shall be held within 30 days following the date upon which the
party exercising its option provides notice of that exercise to the other party,
at the offices of West Shore, Englewood, Colorado, or at such other mutually
agreeable location.
10.2 Closing Obligations. At Closing:
-------------------
(a) MPC shall execute, acknowledge and deliver a General Conveyance,
in the form attached hereto as Exhibit A, and the Assignment of Rights
of Way, in the form attached hereto as Exhibit B, all of which
together will convey all of MPC's rights in and to the Pipeline,
together with all of the Records, to West Shore, with special warranty
of title.
(b) West Shore shall make payment of the Purchase Price to MPC by
providing the promissory note marked "Cancelled" in accordance
with the terms of Section 4.2, above, or otherwise discharging and
canceling the obligations owed by MPC under the Loan Agreement.
(c) West Shore, or its designee, and MPC will execute and deliver the
Assignment and Assumption Agreement in the form attached hereto as
Exhibit C; and, West Shore and MPC shall execute such other
instruments and take such other action as may be necessary to
carry out their
<PAGE>
respective obligations under this Agreement.
ARTICLE XI
MISCELLANEOUS
-------------
11.1 Governing Law. This Agreement and all instruments executed in
-------------
accordance with it shall be governed by and interpreted in accordance with the
laws of the State of Michigan without regard to choice of law principles.
11.2 Waiver. No waiver of any of the provisions of this Agreement shall be
------
deemed or shall constitute a waiver of any other provisions hereof (whether or
not similar), nor shall such waiver constitute a continuing waiver unless
otherwise expressly provided.
11.3 Assignment. No party hereto shall assign this Agreement or any of its
----------
rights or obligations hereunder without the prior written consent of the other
parties, and any assignment made without such consent shall be void; provided,
---------
that each of the parties hereby consents to the pledge and assignment for
security purposes hereof and the granting of a security interest in its rights
hereunder to Bank of America Illinois subject to the Subordination Agreements.
Except as otherwise provided herein, this Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective permitted
successors and assigns.
11.4 Notices. Any notice provided or permitted to be given under this
-------
Agreement shall be in writing, and may be served by personal delivery or by
depositing same in the mail, addressed to the party to be notified, postage
prepaid, and registered or certified with a return receipt requested.
Notice deposited in the mail, as described, shall be deemed to have been given
and received if and when actually received by the addressee. For purposes of
notice, the addresses of the parties shall be as follows:
MPC's mailing address:
Michigan Production Company, L.L.C.
c/o Tenneco Ventures Corporation
1100 Louisiana Street, Suite 1543
Houston, Texas 77002
Ph. (713) 757-3698
Fax (713) 757-8314
Attn: Rick Lester
West Shore's mailing address:
West Shore Processing Company, LLC
5613 DTC Parkway, Suite 400
Englewood, Colorado 80111
Ph. (303) 290-8700
Fax. (303) 290-8769
Attn: Randy S. Nickerson
<PAGE>
Any party shall have the right, upon giving ten (10) days' prior notice to the
other in the manner hereinabove provided, to change its address for purposes of
notice.
11.5 Expenses. Except as otherwise provided herein, each party shall be
--------
solely responsible for all expenses incurred by it in connection with this
transaction (including, without limitation, fees and expenses of its own counsel
and accountants).
11.6 Severability. If any term or other provision of this Agreement is
------------
invalid, illegal or incapable of being enforced under any rule or law, all other
conditions and provisions of this Agreement shall nevertheless remain in full
force and effect so long as the economic or legal substance of the transactions
contemplated hereby is not affected in a materially adverse manner with respect
to any party.
11.7 Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first set forth above.
West Shore Processing Company, LLC
By: MarkWest Michigan, Inc., its manager
/S/ ARTHUR J. DENNEY, VICE PRESIDENT
Michigan Production Company, L.L.C.
/S/ Michael V. Ronca, Manager
/S/ Robert L. Zorich, Manager
<PAGE>
EXHIBIT A
GENERAL CONVEYANCE
KNOW ALL MEN BY THESE PRESENTS:
THAT, the undersigned MICHIGAN PRODUCTION COMPANY, L.L.C., (herein
"Assignor") for and in consideration of Ten Dollars ($10.00) and other good and
valuable consideration, the receipt of which is hereby acknowledged, does hereby
sell, assign, transfer and convey unto WEST SHORE PROCESSING COMPANY, LLC,
(herein "Assignee"), with an address of 5613 DTC Parkway, Suite 400, Englewood,
Colorado 80111, all of Assignor's right, title and interest in and to the
following properties, assets, contracts and other rights, both real and
personal:
a. that certain nominal 10-inch diameter pipeline extension of the
Basin pipeline from its present terminus in Section 32, Township
19 North, Range 17 West, Victory Township, Mason County, Michigan,
along the right of way of Consumers Power to the delivery point at
the gathering lateral of the existing Slocum No. 1-21 well (which
well is located in Section 21, Township 15 North, Range 16 West,
Elbridge Township, Oceana County, Michigan), and which delivery
point is anticipated to be located in the northwest quarter of
Section 30, Township 15 North, Range 16 West, Elbridge Township,
Oceana County, Michigan; including all pipeline, rights-of-way,
easements, valves, fittings, and other equipment, fixtures or
facilities installed in connection therewith (collectively the
foregoing is referred to herein as the "Pipeline").
b. All files, books, records, papers, instruments and logs, including
all of the Assignor's counterparts of all conveyed contracts, all
documents of title relating to the Pipeline, blueprints,
specifications, plats, maps, surveys, accounting and financial
records and sales and property tax records; except that Assignor
may retain a copy of any accounting, financial or tax records for
its own use;
c. To the extent transferable, all licenses, certificates, approvals,
registrations, variances, exemptions, rights of way, privileges,
immunities, grants, permits, franchises, consents, authorizations
or other rights of every kind and character held by Assignor and
directly related to the ownership or operation of the Pipeline;
and,
d. All other or additional privileges, rights, interests properties,
contracts, agreements and Pipeline of the Assignor of every kind
and description and located upon the Pipeline that are used or
intended for use in connection with the continued conduct of the
Pipeline as presently being conducted.
Exhibit A, Page 1
<PAGE>
This Assignment is made expressly subject to and in accordance with the
terms and conditions of that certain Option and Agreement to Purchase and Sell
Pipeline between Assignor and Assignee, dated ____, 1996, (the "Agreement") and
all covenants, indemnities and obligations of the parties under the Agreement
shall survive the execution and delivery of this Assignment strictly in
accordance, and only in accordance with the terms of the Agreement.
ASSIGNOR IS MAKING NO REPRESENTATION OR WARRANTY WHATSOEVER, EXPRESS OR
IMPLIED, BEYOND THOSE EXPRESSLY GIVEN HEREIN, AND IT IS UNDERSTOOD THAT WITH
RESPECT TO EQUIPMENT AND PERSONAL PROPERTY COMPRISING PORTIONS OF THE PIPELINE,
ASSIGNEE SHALL TAKE THOSE "AS IS" AND "WHERE IS," WITH ALL FAULTS. WITHOUT
LIMITING THE GENERALITY OF THE IMMEDIATELY FOREGOING, ASSIGNOR HEREBY EXPRESSLY
DISCLAIMS AND NEGATES ANY REPRESENTATION OR WARRANTY, EXPRESSED OR IMPLIED, AT
COMMON LAW, BY STATUTE OR OTHERWISE, RELATING TO THE CONDITION OF THE PIPELINE
(INCLUDING WITHOUT LIMITATION ANY IMPLIED OR EXPRESS WARRANTY OF MERCHANTABILITY
OR FITNESS FOR A PARTICULAR PURPOSE, OR OF CONFORMITY TO MODELS OR SAMPLES OF
MATERIALS).
All of the provisions of this Assignment shall be available to and binding
upon the respective successors and assigns of Assignor and Assignee herein.
Assignor hereby warrants title to the Pipeline against all lawful claims of
persons claiming by, through, or under Assignor, but not otherwise.
EXECUTED this ____ day of ____, 199_, but effective for all purposes as of
______, 199__, at 7:00 a.m., Central Time.
ASSIGNOR: MICHIGAN PRODUCTION COMPANY, L.L.C.
By: Michael V. Ronca, Manager
By: Robert L. Zorich, Manager
ASSIGNEE:
WEST SHORE PROCESSING COMPANY, LLC
By: MarkWest Michigan, LLC, its manager
By: MarkWest Hydrocarbon Partners, Ltd., its manager
By: MWHC Holding, Inc., its general manager
By:
Name:
Title:
Exhibit A Page 2
<PAGE>
THE STATE OF ________)
COUNTY OF ___________)
The foregoing instrument was acknowledged before me this ____ day of
________, 199_, by ___________________, the _____________ of MICHIGAN PRODUCTION
COMPANY, L.L.C.
Witness my Hand and Official Seal.
My Commission expires:
Notary Public
THE STATE OF __________)
COUNTY OF _____________)
The foregoing instrument was acknowledged before me this _____ day of
__________,199_, by ______________________, the ________________________ of WEST
SHORE PROCESSING COMPANY, LLC.
Witness my Hand and Official Seal.
My Commission expires:
Notary Public
Exhibit A, Page 3
<PAGE>
EXHIBIT B
ASSIGNMENT OF RIGHTS OF WAY, EASEMENTS AND PERMITS
THE STATE OF MICHIGAN
KNOW ALL MEN BY THESE PRESENTS:
COUNTIES OF
THAT, MICHIGAN PRODUCTION COMPANY, L.L.C., a limited liability company,
whose address is ________, Houston, Texas 77002, ("Assignor"), for and in
consideration of the sum of Ten Dollars ($10.00) and other valuable
consideration to it paid by WEST SHORE PROCESSING COMPANY, LLC, a Michigan
limited liability company, whose address is 5613 DTC Parkway, Suite 400,
Englewood, Colorado 80111, ("Assignee"), the receipt and sufficiency of which
are hereby acknowledged, has transferred, assigned and conveyed and by these
presents does transfer, assign, grant and convey unto Assignee, its successors
and assigns, all of its right, title and interest in and to those certain rights
of way, easement, and permits described in Attachment 1 (the "Assigned
Properties").
This Assignment is made subject to and in accordance with that certain
Option and Agreement to Purchase and Sell Pipeline between Assignor and Assignee
dated ______, 1996. Assignor makes this Assignment with special warranty
covenants and will defend its title to the Assigned Properties against all
claims arising by, through or under Assignor, but not otherwise.
Assignee agrees to indemnify and hold Assignor harmless from and against all
claims, liabilities, costs, expenses, and causes of action arising out of or
based upon or related to Assignee's ownership, use or abandonment of the right,
title and interest conveyed by Assignor to Assignee hereunder.
To facilitate filing or recording this Assignment, (i) the counterpart to be
recorded in a given county may contain only that part of the exhibits that
describe the portion of the Assigned Properties located in that county, and (ii)
each counterpart, if any, filed with a federal, state, county or local
government agency or office may contain only that portion of the exhibits that
describe the Assigned Property under the jurisdiction of that agency or office.
Assignor and Assignee have each retained a counterpart of this Assignment with
complete exhibits.
Exhibit B, Page 1
<PAGE>
This Assignment, and all of its terms and conditions, are binding on
Assignor, Assignee, and their respective successors and assigns. All covenants
set forth in this Assignment run with the land.
Executed this ________ day of ____________________, 199__,
but effective as of _____________.
ASSIGNOR
MICHIGAN PRODUCTION COMPANY, L.L.C.
By: MICHAEL V. RONCA, MANAGER
and
By: Robert L. Zorich, Manager
ASSIGNEE
WEST SHORE PROCESSING COMPANY,
By: MarkWest Michigan, LLC, its manager
By: MarkWest Hydrocarbon Partners, Ltd., its manager
By: MWHC Holding, Inc.,
its general partner
By:
Exhibit B, Page 2
<PAGE>
STATE OF COLORADO )
)ss.
COUNTY OF _____________)
The foregoing instrument was acknowledged, subscribed and sworn to before me
this _____ day of ________, 1996, by _______, and _____________ Managers of
MICHIGAN PRODUCTION COMPANY, L.L.C.
Witness my Hand and Official Seal.
My Commission expires:
Notary Public
STATE OF COLORADO )
)ss.
COUNTY OF ________________)
The foregoing instrument was acknowledged, subscribed and sworn to before me
this _________ day of _________, 1996, by _____________, _________________ of
WEST SHORE PROCESSING COMPANY, LLC.
Witness my Hand and Official Seal.
My Commission expires:
Notary Public
Exhibit B, Page 3
<PAGE>
EXHIBIT C
ASSIGNMENT AND ASSUMPTION AGREEMENT
KNOW ALL MEN BY THESE PRESENTS:
THIS ASSIGNMENT AND ASSUMPTION AGREEMENT (referred to hereinafter as
"Assignment"), effective as of 7:00 A.M., Mountain time, as of the date hereof,
(referred to as "Effective Time"), from MICHIGAN PRODUCTION COMPANY, L.L.C.,
(REFERRED to hereinafter as "Assignor"), to WEST SHORE PROCESSING COMPANY, LLC,
A MICHIGAN LIMITED LIABILITY COMPANY, 5613 DTC Parkway, Suite 400, Englewood,
Colorado 80111, (referred to hereinafter as "Assignee").
WITNESSETH:
----------
FOR Ten Dollars and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Assignor hereby GRANTS, SELLS,
TRANSFERS, BARGAINS, CONVEYS and ASSIGNS to Assignee, all of Assignor's right,
title and interest in and to the contracts, agreements and other instruments
("Contracts") pertaining to or related to the installation, Ownership,
construction and operation of that certain nominal 10-inch diameter pipeline
extension of the Basin pipeline from its present terminus in Section 32,
Township 19 North, Range 17 West, Victory Township, Mason County, Michigan,
along the right of way of Consumers Power to the delivery point at the gathering
lateral of the existing Slocum No. l-21 well (which well is located in Section
21, Township 15 North, Range 16 West, Elbridge Township, Oceana County,
Michigan), and which delivery point is anticipated to be located in the
northwest quarter of Section 30. Township 15 North, Range 16 West, Elbridge
Township, Oceana County, Michigan (the "Pipeline").
TO HAVE AND TO HOLD the Contracts forever subject to the following terms and
conditions:
1. Observance of Laws. This Assignment is subject to all applicable laws,
------------------
ordinances, rules, and regulations affecting the Contracts.
2. Successors and Assigns. The terms, covenants, and conditions hereof bind
------------------------
and inure to the benefit of the parties hereto and their respective successors
and assigns.
3. Authoritv. Assignor represents that (i) it has the full authority to
-----------
execute this Assignment, (ii) this Assignment is enforceable in accordance with
its terms.
4. Option and Agreement to Purchase and Sell Pipeline. This Assignment is
----------------------------------------------------
made expressly subject to and in accordance with the terms and conditions of
that certain Option and Agreement to
<PAGE>
Purchase and Sell Pipeline between Assignor and Assignee, dated ________, 1996
(the "Agreement"), and all representations, warranties, covenants, indemnities
and obligations of the parties under the Agreement shall survive the execution
and delivery of this Assignment in accordance with the terms of the Agreement.
5. Further Assurances. The parties agree to execute any and all other
------------------
instruments reasonably required to effectuate and consummate the transactions
between them as contemplated by this Assignment and by the Agreement.
6. Assumption of Obligations and Indemnification. Assignee hereby assumes
---------------------------------------------
all of the liabilities and all obligations, debts, costs, expenses, liens,
encumbrances, demands, claims, actions, losses and damages of any kind
whatsoever arising under or affecting the Contracts or related to the ownership,
construction and operation of the Pipeline, whether accruing before or after the
date hereof. Assignee hereby agrees to indemnify and hold Assignor harmless from
and against all claims, liabilities, costs, expenses, and causes of action
arising out of, related to or affecting the Contracts or related to the
ownership, construction and operation of the Pipeline, whether accruing before
or after the date hereof.
EXECUTED this ________ day of __________, 1996.
MICHIGAN PRODUCTION COMPANY, L.L.C.
By: MICHAEL V. RONCA, MANAGER
and
By: ROBERT L. ZORICH, MANAGER
WEST SHORE PROCESSING COMPANY, LLC
By: MarkWest Michigan, LLC, its manager
By: MarkWest Hydrocarbon Partners, Ltd., its manager
By: MWHC Holding, Inc., its general partner
By: ____________________________
Exhibit C, Page 2
<PAGE>
THE STATE OF _________)
COUNTY OF ____________)
The foregoing instrument was acknowledged before me this _______ day of
________, 1996,BY ____________________, the ___________Manager of MICHIGAN
ENERGY COMPANY, L.L.C.
Witness my Hand and Official Seal.
My Commission expires: _________________
Notary Public
THE STATE OF _________)
COUNTY OF ____________)
The foregoing instrument was acknowledged before me this _________ day
of _______, 1996, by _________________, the ____________Manager of MARKWEST
MICHIGAN, LLC.
Witness my Hand and Official Seal.
My Commission expires:
Notary Public
Exhibit C, Page 3
<PAGE>
MORTGAGE, ASSIGNMENT, SECURITY
AGREEMENT AND FINANCING STATEMENT
FROM
MICHIGAN PRODUCTION COMPANY, L.L.C., MORTGAGOR
TO
WEST SHORE PROCESSING COMPANY, LLC, LENDER
DATED AS OF OCTOBER 1, 1996
A CARBON, PHOTOGRAHIC, FACSIMLE, OR OTIIER REPRODUCTION OF THIS INSTRUMENT IS
SUFFICIENT AS A FINANCING STATEMENT.
THIS INSTRUMENT CONTAINS AFTER-ACQUIRED PROPERTY PROVISIONS, SECURES PAYMENT OF
FUTURE ADVANCES, AND COVERS PROCEEDS OF COLLATERAL.
THIS INSTRUMENT SHALL BE EFFECTIVE AS A FINANCING STATEMENT FILED AS A FIXTIJRE
FILING WITH RESPECT TO ALL FIXTURES INCLUDED IN TIIE PROPERTY, AND IS TO BE
FILED FOR RECORD, AMONG OTHER PLACES, IN THE REAL ESTATE OR COMPARABLE RECORDS
OF THE COUNTIES REFERENCED IN EXHIBIT A. MORTGAGOR HAS AN INTEREST OF RECORD
IN THE REAL ESTATE CONCERNED, WHICH 1NTEREST IS DESCRIBED IN SECTION 1.1.
A POWER OF SALE HAS BEEN GRANTED IN THIS MORTGAGE, A POWER OF SALE MAY ALLOW
- ----------------------------------------------------------------------------
LENDER (AS HERINAFTER DEFINED) TO TAKE THE MORTGAGED PROPERTIES AND SELL THEM
- -----------------------------------------------------------------------------
WITHOUT GOING TO COURT IN A FORECLOSURE ACTION UPON DEFAULT BY MORTGAGOR (AS
- -----------------------------------------------------------------------------
HERINAFTER DEFINED) UNDER THIS MORTGAGE.
- ----------------------------------------
WARNING: THIS MORTGAGE CONTAINS A POWER OF SALE AND UPON DEFAULT MAY BE
- ------------------------------------------------------------------------
FORECLOSED BY ADVERTISEMENT. IN FORECLOSURE BY ADVERTISEMENT AND THE SALE OF
- -----------------------------------------------------------------------------
THE PROPERTY IN CONNECTION THEREWITH, NO HEARING IS REQUIRED AND THE ONLY NOTICE
- --------------------------------------------------------------------------------
REQUIRED IS THE PUBLICATION OF NOTICE IN A LOCAL NEWSPAPER AND THE POSTING OF A
- -------------------------------------------------------------------------------
COPY OF THE NOTICE ON THE PROPERTY.
- -----------------------------------
WHEN RECORDED OR FILED RETURN TO:
Barry W. Spector
Suite 1660/Prudential Plaza
1050 Seventeenth Street
Denver, Colorado 80265
<PAGE>
THIS MORTGAGE, ASSIGNMENT, SECURITY AGREEMENT AND FINANCING STATEMENT (this
"Mortgage"), dated as of October 1, 1996, is from MICHIGAN PRODUCTION COMPANY,
L.L.C. ("Mortgagor"), to WEST SHORE PROCESSING COMPANY, LLC ("Lender").
WITNESSETH:
ARTICLE I.
Granting Clauses; Obligation
----------------------------
Section 1.1. Grant and Mortgage. Mortgagor for and in
-------------------
consideration of the sum of Ten Dollars ($ 10.00) to Mortgagor in hand paid, and
in order to secure the payment of the Obligation hereinafter referred to and the
performance of the obligations, covenants, agreements, warranties and
undertakings of Mortgagor hereinafter described, does hereby MORTGAGE AND
WARRANT to Lender and grant to Lender a POWER OF SALE (pursuant to this Mortgage
and applicable law) with respect to, all of the following described rights,
interests and properties (the "Mortgaged Properties"):
A. The easements (the "Easements") described in Exhibit A;
B. The nominal 10-inch diameter, natural gas producer pipeline extending
along the right of way of Consumers Power from the delivery point at the
gathering lateral of Mortgagor's Slocum 1-21 Well, which delivery point is
expected to be in the Northwest quarter of Section 30, Township 15 North, Range
16 West, Elbridge Township, in Oceana County, Michigan, to the terminus of Basin
Pipeline, L.L.C.'s existing pipeline located in Section 32, Township 19 North,
Range 17 West, Victory Township, in Mason County, Michigan, including, without
limitation, all pipes, pipelines, pumping equipment, assemblies, heaters,
valves, controls, monitoring equipment, communications equipment, towers,
sensors, cathodic protection systems, test stations, corrosion detection and
monitoring devices, inspection pigs, drums, flare facilities, sampling
equipment, and all associated facilities and equipment, including spare parts,
related thereto, appurtenant thereto or used in connection therewith, as well as
any and all additions, replacements, extension, modifications or enlargements of
any of the foregoing (the "Pipeline"); and
C. All of Mortgagor's interest (whether now owned or hereafter acquired by
operation of law or otherwise) in all permits, licenses, orders, franchises,
certificates and other rights and privileges which are now used, or held for
use, in connection with, or otherwise relate to, the ownership or operation of
the Pipeline.
TO HAVE AND TO HOLD the Mortgaged Properties unto Lender, and Lender's
successors and assigns, upon the terms, provisions and conditions herein set
forth.
Section 1.2. Grant of Security Interest. In order to further secure the
----------------------------
payment of the Obligation hereinafter referred
<PAGE>
to and the performance of the obligations, covenants, agreements, warranties,
and undertakings of Mortgagor hereinafter described, Mortgagor hereby grants to
Lender a security interest in the entire interest of Mortgagor (whether now
owned or hereafter acquired by operation of law or otherwise) in and to:
(a) all equipment, inventory, improvements, fixtures, accessions, goods and
other personal property (of whatever nature) of Mortgagor now or hereafter
located in or on the Mortgaged Properties (or in connection with the operation
thereof), and all accessions and appurtenances thereto, and all renewals or
replacements of or substitutions for any of the foregoing;
(b) all permits, licenses, orders, franchises, certificates, similar
authorizations, and other rights and privileges now held or hereafter obtained
in connection with the Mortgaged Properties or the Collateral (as hereinafter
defined) (or in connection with the operation thereof), and all renewals or
replacements of the foregoing or substitutions for the foregoing;
(c) all contract rights, choses in action (i.e., rights to enforce contracts
or to bring claims thereunder) and other general intangibles (regardless of
whether the same arose, and/or the events which gave rise to the same occurred,
on or before or after the date hereof) of Mortgagor which relate to the
Mortgaged Properties (or the operation thereof);
(d) all accounting, legal, title, technical and other business data
concerning the Mortgaged Properties which are now or hereafter in the possession
of Mortgagor or in which Mortgagor can otherwise grant a security interest, and
all books, files, records, magnetic media, and other forms of recording or
obtaining access to such data;
(e) all money, documents, instruments, chattel paper, securities, accounts
or general intangibles of Mortgagor arising from or by virtue of any transaction
(regardless of whether such transaction occurred on or before or after the date
hereof) related to the Mortgaged Properties (all of the properties, rights, and
interests described in subsections (a), (b), (c ), (d), and this subsection (e)
being herein sometimes collectively called the "Collateral"); and
(f) all proceeds of the Collateral and of the Mortgaged Properties, whether
such proceeds or payments are goods, money, documents, instruments, chattel
paper, securities, accounts, general intangibles, fixtures, real property,
personal property or other assets including, without limitation, insurance
proceeds and condemnation proceeds (the Mortgaged Properties, the Collateral and
the proceeds of the Collateral being herein sometimes collectively called the
"Property").
Section 1.3. Obligation Secured. This Mortgage is made to secure and
-------------------
enforce the payment and performance of the "OBLIGATION," as defined in the Non-
Recourse Loan Agreement of even date herewith between Mortgagor and Lender (the
"Loan Agreement").
<PAGE>
Section 1.4. Future Advance Mortgage. This is a future advance mortgage
-------------------------
within the meaning of Act. No. 348 of Michigan Public Act of 1990.
ARTICLE II
Representations, Warranties and Covenants
-----------------------------------------
Section 2.1. Mortgagor hereby confirms each representation, warranty and
covenant applicable to it contained in the Loan Agreement.
Section 2.2 Not a Foreign Person. Mortgagor is not a "foreign person"
--------------------
within the meaning of the Internal Revenue Code of 1986, as amended (the
"Code"), Sections 1445 and 7701 (i.e. Mortgagor is not a non-resident alien,
foreign corporation, foreign partnership, foreign trust or foreign estate as
those terms are defined in the Code and any regulations promulgated thereunder).
Section 2.3. Performance by Lender on Mortgagor's Behalf. Mortgagor agrees
-------------------------------------------
that, if Mortgagor fails to perform any act or to take any action which
hereunder Mortgagor is required to perform or take, or to pay any money which
hereunder Mortgagor is required to pay, Lender, in Mortgagor name or its own
name, may, but shall not be obligated to, perform or cause to be performed such
action or pay such money.
ARTICLE III.
Assignment of Rents, Profits, Income, Contracts and Bonds
----------------------------------------------------------
Section 3.1. Assignment. Mortgagor does hereby absolutely and
-----------
unconditionally assign, transfer and set over to Lender all rents, income,
receipts, revenues, profits, proceeds and other sums of money to be derived from
the Property, including without limitation the immediate and continuing right to
collect and receive all of such rents, income, receipts, revenues, profits,
proceeds, and other sums of money that may now or at any time hereafter become
due and payable to Mortgagor (the "Proceeds").
Section 3.2. Effectuating Payment of Proceeds to Lender. Independent of
-------------------------------------------
the foregoing provisions and authorities herein granted, and without limitation,
upon the occurrence of an Event of Default, Mortgagor hereby constitutes and
appoints Lender as Mortgagor's special attorney-in-fact (with full power of
substitution, either generally or for such periods or purposes as Lender may
from time to time prescribe) in the name, place and stead of Mortgagor to do any
and every act and exercise any and every power that Mortgagor might or could do
or exercise personally with respect to all Proceeds (the same having been
assigned by Mortgagor to Lender pursuant to Section 3.1), giving and granting
unto said attorney-in-fact full power and authority to do and perform any and
every act and thing whatsoever necessary and requisite to be done as fully and
to all intents and purposes, as Mortgagor might or could do if personally
present. The powers and authorities herein conferred upon Lender may be
exercised by Lender through any person who, at the time of the execution of the
<PAGE>
particular instrument, is an officer of Lender. The power of attorney herein
conferred is granted for valuable consideration and hence is coupled with an
interest and is irrevocable so long as the Obligation, or any part thereof,
shall remain unpaid. All persons dealing with Lender or any substitute shall be
fully protected in treating the powers and authorities conferred by this
paragraph as continuing in full force and effect until advised by Lender that
all the Obligation is fully and finally paid. Lender may, but shall not be
obligated to, take such action as it deems appropriate in an effort to collect
the Proceeds.
Section 3.3. Application of Proceeds. Proceeds received by Lender shall be
-----------------------
applied by Lender to the Obligation in accordance with the Loan Agreement and
any excess shall be paid to Mortgagor.
ARTICLE IV.
Remedies Upon Default
---------------------
Section 4.1 Pre-Foreclosure Remedies. Upon the occurrence of an
-------------------------
"Event of Default" (as defined in the Loan Agreement) Lender may exercise any of
the remedies set forth in Article VI of the Loan Agreement and is authorized,
prior or subsequent to the institution of any foreclosure proceedings, to enter
upon the Property, or any part thereof, and to take possession of the Property
and all books and records relating thereto, and to exercise without interference
from Mortgagor any and all rights which Mortgagor has with respect to the
management, possession, operation, protection or preservation of the Property.
If necessary to obtain the possession provided for above, Lender may invoke any
and all remedies to dispossess Mortgagor.
Section 4.2. Foreclosure
------------
(a) Upon the occurrence of an Event of Death, this Mortgage may be
foreclosed as to the Mortgaged Properties, or any part thereof, in any manner
permitted by applicable law. Cumulative of the foregoing and the other
provisions of this Section 4.2, Lender may commence foreclosure proceedings
against the property through judicial proceedings or by advertisement, at the
option of Lender, pursuant to the statutes in such case made and provided, and
sell the property or to cause the same to be sold at public sale, and convey the
same to the purchaser in accordance with said statutes in a single parcel or in
several parcels at the option of Lender.
A POWER OF SALE HAS BEEN GRANTED IN THIS MORTGAGE, A POWER OF SALE MAY ALLOW
LENDER TO TAKE THE MORTGAGED PROPERTIES AND SELL THEM WITHOUT GOING TO COURT IN
A FORECLOSURE ACTION UPON DEFAULT BY MORTGAGOR UNDER THIS MORTGAGE.
WARNING: THIS MORTGAGE CONTAINS A POWETR OF SALE AND UPON DEFAULT MAY BE
FORECLOSED BY ADVERTISEMENT IN FORECLOSURE BY ADVERTISEMENT AND THE SALE OF THE
PROPERTY IN CONNECTITON THEREWITH, NO HEARING IS REQUIRED AND THE ONLY NOTICE
REQUIRED IS THE PUBLICATION OF NOTICE IN A LOCAL NEWSPAPER AND THE POSTING OF A
COPY OF THE NOTICE ON THE PROPERTY.
<PAGE>
(b) Upon the occurrence of an Event of Default, Lender may exercise its
rights of enforcement with respect to the Collateral under the Uniform
Commercial Code or similar statute in force in Michigan, or in force in any
other state to the extent the same is applicable law. Cumulative of the
foregoing and the other provisions of this Section 4.2:
(i) Lender may enter upon the Mortgaged Properties or otherwise upon
Mortgagor's premises to take possession of, assemble and collect the Collateral
or to render it unusable; and
(ii) written notice mailed to Mortgagor as provided herein at least five (5)
days prior to the date of public sale of the Collateral or prior to the date
after which private sale of the Collateral will be made shall constitute
reasonable notice; and
(iii) in the event of a foreclosure of the liens and/or security interests
evidenced hereby, the Collateral, or any part thereof, and the Mortgaged
Properties, or any part thereof may, at the option of Lender, be sold, as a
whole or in parts, together or separately (including, without limitation, where
a portion of the Mortgaged Properties is sold, the Collateral related thereto
may be sold in connection therewith); and
(iv) should, under this subsection, the Collateral be disposed of, other
than by sale, any proceeds of such disposition shall be treated under Section
4.4 as if the same were sales proceeds.
(c) To the extent permitted by applicable law, the sale by Lender
hereunder of less than the whole of the Property shall not exhaust the powers of
sale herein granted or the right to judicial foreclosure, and successive sale or
sales may be made until the whole of the Property shall be sold, and, if the
proceeds of such sale of less than the whole of the Property shall be less than
the aggregate of the Obligation and the expense of conducting such sale, this
Mortgage and the liens and security interests hereof shall remain in full force
and effect as to the unsold portion of the Property just as though no sale had
been made; provided, however, that Mortgagor shall never have any right to
require the sale of less than the whole of the Property. In the event any sale
hereunder is not completed or is defective in the opinion of Lender, such sale
shall not exhaust the powers of sale hereunder or the right to judicial
foreclosure, and Lender shall have the right to cause a subsequent sale or sales
to be made. Any sale may be adjourned by announcement at the time and place
appointed for such sale without further notice except as may be required by law.
Lender, acting under power of sale, may appoint or delegate any one or more
persons as agent to perform any act or acts necessary or incident to any sale
held by it (including, without limitation, the posting of notices and the
conduct of sale). Any and all statements of fact or other recitals made in any
deed or deeds, or other instruments of transfer, given in connection with a sale
as to nonpayment of the Obligation or as to the Occurrence of any Event of
Default, or as to Lender's having declared all of the Obligation to be due and
payable, or as to the request to sell, or as to notice of time, place and terms
of sale and the properties to be sold having been duly given, or as to any other
act or thing
<PAGE>
having been duly done, shall be taken as prima facie evidence of the truth of
the facts so stated and recited. With respect to any sale held in foreclosure of
the liens and/or security interests covered hereby, it shall not be necessary
for Lender, any public officer acting under execution or order of the court or
any other party to have physically present or constructively in his/her or its
possession, either at the time of or prior to such sale, the Property or any
part thereof.
Section 4.3. Receiver. In addition to all other remedies herein
---------
provided for, Mortgagor agrees that upon the occurrence of an Event of Default,
Lender shall be entitled to the appointment of a receiver or receivers for all
or any part of the Property, whether such receivership be incident to a proposed
sale (or sales) of such property or otherwise, and without regard to the value
of the Property or the solvency of any person or persons liable for the payment
of the Obligation, and Mortgagor does hereby consent to the appointment of such
receiver or receivers, waives any and all defenses to such appointment, and
agrees not to oppose any application therefor by Lender, and agrees that such
appointment shall in no manner impair, prejudice or otherwise affect the rights
of the Lender under Article III. Nothing herein is to be construed to deprive
Lender of any other right, remedy or privilege it may now or hereafter have
under the law to have a receiver appointed.
Section 4.4. Proceeds of Foreclosure. The proceeds of any sale held in
------------------------
foreclosure of the liens and/or security interests evidenced hereby shall be
applied by Lender to the Obligation in accordance with the Loan Agreement and
any excess shall be paid to Mortgagor.
Section 4.5. Lender as Purchaser. Lender shall have the right to become the
--------------------
purchaser at any sale held in foreclosure of the liens and/or security interests
evidenced hereby, and shall have the right to credit upon the amount of the bid
made therefor, to the extent necessary to satisfy such bid, the Obligation.
Section 4.6. Foreclosure as to Matured Debt. Upon the occurrence of an
-------------------------------
Event of Default, Lender shall have the right to proceed with foreclosure of the
liens and/or security interests evidenced hereby without declaring the entire
Obligation due, and in such event, any such foreclosure sale may be made subject
to the unmatured part of the Obligation and shall not in any manner affect the
unmatured part of the Obligation, but as to such unmatured part, this Mortgage
shall remain in full force and effect just as though no sale had been made. The
proceeds of such sale shall be applied as provided in Section 4.4.
Section 4.7. Remedies Cumulative. All remedies herein provided for are
--------------------
cumulative of each other and of all other remedies existing at law or in equity
and are cumulative of any and all other remedies provided for in any other Loan
Document, and Lender shall, in addition to the remedies herein provided, be
entitled to avail itself of all such other remedies as may now or hereafter
exist at law or in equity for the collection of the Obligation and the
enforcement of the covenants herein and the
<PAGE>
foreclosure of the liens and/or security interests evidenced hereby, and the
resort to any remedy provided for hereunder or under any such other Loan
Document or provided for by law shall not prevent the concurrent or subsequent
employment of any other appropriate remedy or remedies.
Section 4.8. Lender's Discretion as to Security. Lender may resort to any
-----------------------------------
security given by this Mortgage or to any other security now existing or
hereafter given to secure the payment of the Obligation, in whole or in part,
and in such portions and in such order as may seem best to Lender in its sole
and uncontrolled discretion, and any such action shall not in any way be
considered as a waiver of any of the rights, benefits, liens or security
interests evidenced by this Mortgage.
Section 4.9. Mortgagor's Waiver of Certain Rights. To the full extent
------------------------------------
Mortgagor may do so, Mortgagor agrees that Mortgagor will not at any time insist
upon, plead, claim or take the benefit or advantage of any law now or hereafter
in force providing for any appraisement, valuation, stay, extension or
redemption, and Mortgagor, for Mortgagor, Mortgagor's heirs, devisees,
representatives, successors and assigns, and for any and all persons ever
claiming any interest in the Property, to the extent permitted by applicable
law, hereby waives and releases all rights of appraisement, valuation, stay of
execution, redemption, notice of intention to mature or declare due the whole of
the Obligation, notice of election to mature or declare due the whole of the
Obligation and all rights to a marshaling of assets of mortgagor, including the
Property, or to a sale in inverse order of alienation in the event of
foreclosure of the liens and/or security interests hereby created. To the extent
permitted by applicable law, Mortgagor shall not have or assert any right under
any statute or rule of law pertaining to the marshaling of assets, sale in
inverse order of alienation, the exemption of homestead, the administration of
estates of decedents, or other matters whatever to defeat, reduce or affect the
right of Lender under the terms of this Mortgage to a sale of the Property for
the collection of the Obligation without any prior or different resort for
collection, or the right of Lender under the terms of this Mortgage to the
payment of the Obligation out of the proceeds of sale of the Property in
preference to every other claimant whatever. If any law referred to in this
Section 4.9 and now in force, of which Mortgagor or Mortgagor's successors or
assigns or any other persons claiming any interest in the Mortgaged Properties
or the Collateral might take advantage despite this Section 4.9, shall hereafter
be repealed or cease to be in force, such law shall not thereafter be deemed to
preclude the application of this Section 4.9.
ARTICLE V.
Miscellaneous
-------------
Section 5.1. Scope of Mortgage. This Mortgage is a mortgage of both real
------------------
and personal property, a security agreement, a financing statement and an
assignment, and also covers proceeds and fixtures.
<PAGE>
Section 5.2. Effective as a Financial Statement. This Mortgage shall be
-----------------------------------
effective as a financing statement filed as a fixture filing with respect to all
fixtures included within the Property. This Mortgage is to be filed for record
in the real estate records of each county where any part of the Mortgaged
Properties is situated, and may also be filed in the offices of the Bureau of
Land Management or the Minerals Management Service or any similar Michigan state
agency (or any successor agencies). This Mortgage shall also be effective as a
financing statement covering any other Property and may be filed in any other
appropriate filing or recording office. The mailing address of Mortgagor is the
address of Mortgagor as set forth at the end of this Mortgage and the address of
Lender from which information concerning the security interests hereunder may be
obtained is the address of Lender set forth at the end of this Mortgage.
Section 5.3 Reproduction of Mortgage as a Financing Statement. A carbon,
--------------------------------------------------
photographic, facsimile or other reproduction of this Mortgage or of any
financing statement relating to this Mortgage shall be sufficient as a financing
statement for any of the purposes referred to in Section 5.2.
Section 5.4 Notice to Account Debtors. In addition to, but without
--------------------------
limitation of, the rights granted in Article III, Lender may at any time when an
Event of Default exists notify the account debtors or obligors of any accounts,
chattel paper, negotiable instruments or other evidences of indebtedness
included in the Collateral to pay Lender directly.
Section 5.5. Waiver by Lender. Lender may at any time and from time to time
-----------------
in writing waive compliance by Mortgagor with any covenant herein made by
Mortgagor to the extent and in the manner specified in such writing, or consent
to Mortgagor's doing any act which hereunder Mortgagor is prohibited from doing,
or to Mortgagor's failing to do any act which hereunder Mortgagor is required to
do, to the extent and in the manner specified in such writing, or release any
part of the Property or any interest therein or any Proceeds from the lien and
security interest of this Mortgage, or release any party liable, either directly
or indirectly, for the Obligation or for any covenant herein or in any other
Loan Document, without impairing or releasing the liability of any other party.
No such act shall in any way impair the rights or powers of Lender hereunder
except to the extent specifically agreed to by Lender in such writing.
Section 5.6. No Impairment of Security. The lien, security interest and
--------------------------
other security rights of Lender hereunder shall not be impaired by any
indulgence, moratorium or release granted by Lender including, BUT NOT limited
to, any renewal, extension or modification which Lender may grant with respect
to any indebtedness, or any surrender, compromise, release, renewal, extension,
exchange or substitution which Lender may grant in respect of the Property
(including without limitation Proceeds), or any part thereof or any interest
therein, or any release or indulgence granted to any endorser, guarantor or
surety of any indebtedness.
<PAGE>
Section 5.7. Acts Not Constituting Waiver by Lender. Lender may waive any
---------------------------------------
default without waiving any other prior or subsequent default. Lender may remedy
any default without waiving the default remedied. Neither failure by Lender to
exercise, nor delay by Lender in exercising, any right, power or remedy upon any
default shall be construed as a waiver of such default or as a waiver of the
right to exercise any such right, power or remedy at a later date. No single or
partial exercise by Lender of any right, power or remedy hereunder shall exhaust
the same or shall preclude any other or further exercise thereof, and every such
right, power or remedy hereunder may be exercised at any time and from time to
time. No modification or waiver of any provision hereof nor consent to any
departure by Mortgagor therefrom shall in any event be effective unless the same
shall be in writing and signed by Lender and then such waiver or consent shall
be effective only in the specific instances, for the purpose for which given and
to the extent therein specified. No notice to nor demand on Mortgagor in any
case shall of itself entitle Mortgagor to any other or further notice or demand
in similar or other circumstances. Acceptance by Lender of any payment in an
amount less than the amount then due on the Obligation shall be deemed an
acceptance on account only and shall not in any way excuse the existence of an
Event of Default.
Section 5.8. Mortgagor's Successors. In the event the ownership of the
-----------------------
Property or any part thereof becomes vested in a person other than Mortgagor,
Lender may, without notice to Mortgagor, deal with such successor or successors
in interest with reference to this Mortgage and to the Obligation in the same
manner as with Mortgagor, without in any way vitiating or discharging
Mortgagor's liability hereunder or for the payment of the Obligation or
performance of the obligations secured hereby. No transfer of the Property, no
forbearance on the part of Lender, and no extension of the time for the payment
of the Obligation given by Lender shall operate to release, discharge, modify,
change or affect, in whole or in part, the liability of Mortgagor hereunder or
for the payment of the Obligation secured hereby or the liability of any other
person hereunder or for the payment of the Obligation.
Section 5.9. Compliance With Usury Laws. It is the intent of Mortgagor,
---------------------------
Lender and all other parties to the Loan Documents to contract in strict
compliance with applicable usury law from time to time in effect. In furtherance
thereof, it is stipulated and agreed that none of the terms and provisions
contained herein shall ever be construed to create a contract to pay, for the
use, forbearance or detention of money, interest in excess of the maximum amount
of interest permitted to be charged by applicable law from time to time in
effect.
Section 5.10. Release of Mortgage. If all of the Obligation be paid as the
--------------------
same becomes due and payable and all of the covenants, warranties, undertakings
and agreements made in
<PAGE>
this Mortgage are kept and performed and Lender shall have no further obligation
to provide credit or advance funds to Mortgagor (or other obligor with respect
to other debt) secured hereby, then, Lender shall, at Mortgagor's request,
release this mortgage.
Section 5.11. Notices. All notices, requests, consents, demands and other
--------
communications required or permitted hereunder shall be in writing and shall be
deemed sufficiently given or furnished if delivered by personal delivery, by
telecopy, by delivery service with proof of delivery, or by registered or
certified United States mail, postage prepaid, at the addresses specified at the
end of this Mortgage (unless changed by similar notice in writing given by the
particular party whose address is to be changed). Any such notice or
communication shall be deemed to have been given (a) in the case of personal
delivery or delivery service, as of the date of first attempted delivery at the
address and in the manner provided herein, (b) in the case of telecopy, upon
receipt, and (c) in the case of registered or certified United States mail,
three days after deposit in the mail. Notwithstanding the foregoing, or anything
else in the Loan Documents which may appear to the contrary, any notice given in
connection with a foreclosure of the liens and/or security interests created
hereunder, or otherwise in connection with the exercise by Lender of its rights
hereunder or under any other Loan Document, which is given in a manner permitted
by applicable law shall constitute proper notice; without limitation of the
foregoing, notice given in a form required or permitted by statute shall (as to
the portion of the Property to which such statute is applicable) constitute
proper notice.
Section 5.12 Invalidity of Certain Provisions. A determination that any
---------------------------------
provision of this mortgage is unenforceable or invalid shall not affect the
enforceability or validity of any other provision and the determination that the
application of any provision of this Mortgage to any person or circumstance is
illegal or unenforceable shall not affect the enforeceability or validity of
such provision as it may apply to other persons or circumstances.
Section 5.13 Gender Titles. Within this Mortgage, words of any gender
--------------
shall be held and construed to include the plural, unless the context otherwise
requires. Titles appearing at the beginning of any subdivisions hereof are for
convenience only, do not constitute any part of such subdivisions and shall be
disregarded in construing the language contained in such subdivisions.
Section 5.14. Counterparts. This Mortgage may be executed in several
-------------
counterparts all of which are identical. All of such counterparts together shall
constitute one and the same instrument.
Section 5.15. Successors and Assigns. The terms, provisions covenants
----------------------
representations and conditions hereof shall be binding upon Mortgagor, and the
successors and assigns of Mortgagor and shall inure to the benefit of Lender
<PAGE>
and its successors and assigns and shall constitute covenants running with the
Mortgaged Properties. All references in this Mortgage to Mortgagor or Lender
shall be deemed to include all such successors and assigns.
SECTION 5.16. FINAL AGREEMENT OF THE PARTIES. THE WRITTEN LOAN DOCUMENTS
-------------------------------
REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY
EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE
PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
SECTION 5.17. CHOICE OF LAW. THIS MORTGAGE SHALL BE CONSTRUED AND ENFORCED
--------------
IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF MICHIGAN APPLICABLE
TO CONTRACTS MADE AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE AND THE LAWS OF
THE UNITED STATES OF AMERICA.
Section 5.18. No Merger. If both the lessor's and lessee's estates under
----------
any lease or any portion thereof which constitutes a part of the Mortgaged
Properties shall at any time become vested in one owner, this instrument and the
lien and security interest created hereby shall not be destroyed or terminated
by application of the doctrine of merger and, in such event, Lender shall
continue to have and enjoy all of the rights and privileges of Lender as to the
separate estates. In addition, upon the foreclosure of the lien and security
interest created by this instrument on the Mortgaged Properties pursuant to the
provisions hereof, any leases or subleases then existing and created by
Mortgagor shall not be destroyed or terminated by application of the law of
merger or as a matter of law or as a result of such foreclosure unless Lender or
any purchaser at any such foreclosure sale shall so elect. No act by or on
behalf of Lender or any such purchaser shall constitute a termination of any
lease or sublease unless Lender or such purchaser shall give written notice
thereof to such tenant or subtenant. In addition, no interest held or acquired
by Lender under this instrument shall ever be deemed to merge with or into any
other interest held or acquired by Lender in the lands, properties or interests
comprising the Mortgaged Properties.
Section 5.19. Non-Recourse Obligation. Specific reference is made to
------------------------
Section 7.20 of the Loan Agreement for provisions governing the non-recourse
nature of the Obligation.
IN WITNESS WHEREOF, this instrument is executed by Mortgagor.
WITNESSES: MICHIGAN PRODUCTION COMPANY, L.L.C.
/S/ R.G. LESTER /S/ MICHAEL V. RONCA, MANAGER
/S/ PAMELA VANSTAVERN /S/ ROBERT L. ZORICH, MANAGER
/S/ ROBERT ECKERT, JR.
/S/ BRONIA E. KOCH
The address of Lender is: The address of the Mortgagor is:
West Shore Processing Company L.L.C. MICHIGAN PRODUCTION COMPANY, L.L.C.
5613 DTC Parkway Suite 400 c/o Tenneco Ventures Corporation
Englewood, Colorado 80111 1100 Louisiana Street, Suite 1543
<PAGE>
Telephone: (303)290-8700 Houston, TX 77002
Facsimile: (303)290-8769 Telephone: (713)757-3698
Attention: Randy S. Nickerson Facsimile: (713)757-8314
Attention: Rick Lester
This instrument prepared by:
Porter & Hedges, L.L.P.
700 Louisiana Street, 35/th/ Floor
Houston, TX 77002
<PAGE>
STATE OF TEXAS
COUNTY OF HARRIS
The foregoing instrument was acknowledged before me on this 22/nd/ day of
October, 1996, by MICHAEL V. RONCA, Manager of Michigan Production Company,
L.L.C., a Michigan limited liability company, on behalf of said company.
(STAMP OF JUDY WILLIS) /S/ JUDY WILLIS
NOTARY PUBLIC, STATE OF TEXAS NOTARY PUBLIC, STATE OF TEXAS
COMMISSION EXPIRES 05-24-97
My commission expires:
05/24/97
STATE OF TEXAS
COUNTY OF HARRIS
The foregoing instrument was acknowledged before me on this 22/nd/ day of
October, 1996, by ROBERT L. ZORICH, Manager of Michigan Production Company,
L.L.C., a Michigan limited liability company, on behalf of said company.
(STAMP OF KIM RUTHERFORD) /S/ KIM RUTHERFORD
NOTARY PUBLICE, STATE OF TEXAS
MY COMMISSION EXPIRES
September 3, 2000
<PAGE>
EXHIBIT A
to Mortgage, Assignment, Security Agreement
and Financing Statement dated October 1, 1996 from
Michigan Production Company, L.L.C., Mortgagor to
West Shore Processing Company, LLC, Lender
Mason and Oceana Counties, State of Michigan
TABLE ATTACHED LISTING GRANTOR, GRANTEE, DATE, COUNTY, PROPERTY DESCRIPTION,
LIBER AND PAGE
<PAGE>
AMENDMENT TO
PARTICIPATION, OWNERSHIP
AND
OPERATING AGREEMENT
FOR
WEST SHORE PROCESSING COMPANY.
This Amendment to Participation, Ownership Agreement for West Shore
Processing Company, is made and entered into this 12/th/ day of December,
between MICHIGAN ENERGY COMPANY, L.L.C. (MEC) AND MW MICHIGAN, INC., as
successor-in-interest to MarkWest Michigan LLC, (MarkWest).
RECITALS:
A. MEC and MarkWest entered into that certain Participation, Ownership
and Operating Agreement for West Shore Processing Company, LLC, dated May 2,
1996, as heretofore amended (the "Participation Agreement").
B. Under the Participation Agreement, among other obligations,
MarkWest was to undertake the construction and installation of compression
facilities, turbo expander extraction facilities and related facilities near the
Shell #23 Plant.
C. The parties have determined that the amounts of money specified in
the Participation Agreement with regard to those facilities do not accurately
reflect costs which may be incurred in the construction and installation of
those facilities.
Now therefore, in consideration of the mutual covenants and agreements
contained herein the parties agree as follows:
1. Section 2.1, MarkWest's Initial Contributions, Paragraph (a), shall
--------------------------------
be amended by deleting subparagraph (iii) thereof in its entirety and replacing
it with the following revised subparagraph (iii):
"(iii) constructing and installing compression facilities, turbo
expander extraction facilities designed to recover no less than 80% of the
propane content of the gas, and such other facilities at or near the Shell
Western E&P, Inc., #23 facility, located in Section 23, Township 22 North, Range
16 West, Manistee County, Michigan, ("Shell #23 Plant"), on terms acceptable to
MarkWest and MEC, as necessary to deliver gas into the MichCon dry header and to
extract, depropanize and/or separate natural gas liquids. Should the amount to
be paid for those facilities exceed $6,700,000, then:
A. MEC SHALL BE obligated to pay 80% of all such EXCESS AMOUNTS up to an
aggregate cost for those facilities of $8,450,000, and MarkWest shall be
obligated to pay 20% of all such excess amounts up to an aggregate cost for
those facilities of $8,450,000; and,
<PAGE>
B. In the event the total amount to be paid for those facilities exceeds
$8,450,000, then MEC and MarkWest agree to pay their proportionate share of all
amounts exceeding that aggregate maximum based upon each Party's then applicable
Ownership Interest in the Company as specified in Article III, below;
which amounts paid by either party under A. and/or B., above, shall not be
utilized in calculating Ownership Interests hereunder. Prior to the commencement
of the construction and installation of those facilities, MEC shall have the
right to propose alternate activities with regard to the extraction of natural
gas liquids from the gas and the basis upon which MEC believes, based upon its
interest in the Company only, without regard to the interests of producers, that
such alternative will be economically advantageous to the Company. If MarkWest
agrees with MEC's proposal, based solely upon an economic analysis of the effect
on the Company without regard to any economic effect upon producers, then the
character of the facilities to be constructed will be modified accordingly.
MarkWest agrees that its concurrence to MEC's proposal shall not be unreasonably
withheld,".
2. Section 2.2, MEC's Initial Contributions and Obligations, Paragraph (d),
-------------------------------------------
shall: be amended by deleting subparagraph (ii) thereof in its entirety and
replacing it with the following revised subparagraph (ii):
"(ii) Should the amount to be paid for the facilities related to the Shell
#23 Plant, as described in Section 2.1(a)(iii), necessary to deliver gas into
THE MICHCON DRY header and to extract, fractionate and/or separate natural gas
liquids at that Plant exceed $6,700,000, then:
A. MEC shall be obligated to pay 80% of all such excess amounts up to an
aggregate cost for those facilities of $8,450,000, and MarkWest shall be
obligated to pay 20% of all such excess amounts up to an aggregate cost for
those facilities of $8,450,000; and,
B. In the event the total amount to be paid for those facilities exceeds
$8,450,000, then MEC and MarkWest agree to pay their proportionate share of all
amounts exceeding that aggregate maximum based upon each Party's then applicable
Ownership Interest in the Company as specified in Article III, below,".
3. Except for the foregoing, all other terms and provisions of the
Participation Agreement shall remain in full force and effect.
In Witness Whereof, the parties have executed this Amendment the date first
above written.
MICHIGAN ENERGY COMPANY, L.L.C.
<PAGE>
/S/ Michael V. Ronca, Manager
and
/S/ Robert L. Zorich, Manager
MW MICHIGAN, INC.
/S/ Arthur J. Denney, Vice President
<PAGE>
ENRON CAPITAL & TRADE RESOURCESENRON CAPITAL & TRADE RESOURCES
WORLDWIDE ENERGY SOLUTIONS
January 14, 1997
CERTIFIED MAIL, RRR # P 130 457 809
West Shore Processing, L.L.C.
5613 DTC Parkway, Suite 400
Englewood, Colorado 80111
Attn: Mr. John Mollenkopf
Re: Assignment and Bill of Sale by and between Enron Gas
Processing Company and West Shore Processing Company, LLC
Dear Mr. Mollenkopf:
As Enron Processing Company has completed the title work that was a
precondition to closing the sale of the Magnolia City Processing Plant Equipment
to West Shore, enclosed is one fully executed original of the above-referenced
Assignment and Bill of Sale. This should complete Enron Processing's obligation
under the Agreement of Sale and Procedure which was assigned to West Shore. We
will continue to coordinate removal of the processing plant equipment with Don
York of Hamilton Refining Company. Should you have any questions or comments
regarding the enclosed, please do not hesitate to give me a call.
Sincerely,
Steve Van Hooser
SVH:ri
Enclosure
cc: Steve Schneider
Barry Spector, Esq.
Don York
1400 Smith Street Houston TX 77002-7361 PO Box 4428 Houston
TX 77210-4428 . 713-853-7500
<PAGE>
ASSIGNMENT AND BILL OF SALE
---------------------------
KNOW ALL MEN BY THESE PRESENTS, that in consideration of Ten Dollars
($10.00) and other good and valuable consideration, the receipt of which is
hereby acknowledged, ENRON GAS PROCESSING COMPANY, a Delaware corporation
(hereinafter "Assignor"), does hereby grant, sell, transfer and deliver unto
WEST SHORE PROCESSING COMPANY, LLC (hereinafter referred to as "Assignee"), all
of the personal property, equipment, and interest identified in Exhibit " 1 "
attached hereto.
Assignor hereby covenants with Assignee that the property conveyed by this
Assignment and Bill of Sale is free of all burdens, liens and encumbrances; that
the title to the property being conveyed by this Assignment and Bill of Sale is
good, and its transfer is rightful; and Assignor hereby agrees to indemnify and
defend Assignee, its successors and assigns against the lawful claims of all
persons claiming by, through and under Assignor.
NOTWITHSTANDING ANYTHING TO THE CONTRARY HEREIN, THE PERSONAL PROPERTY
CONVEYED BY THIS ASSIGNMENT AND BILL OF SALE IS CONVEYED "AS IS, WHERE IS," AND
ASSIGNOR EXPRESSLY DISCLAIMS ALL WARRANTIES, EXPRESS OR IMPLED, OTHER THAN THE
WARRANTY OF TITLE SET FORTH HEREINABOVE, INCLUDING, WITHOUT LIMITATION, THE
WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.
This Assignment and Bill of Sale shall be binding upon and inure to the
benefit of Assignor and Assignee, and their respective successors, heirs and
assigns.
IN WITNESS WHEREOF, the Assignor has hereunto set his hand effective January
13, 1997.
ENRON GAS PROCESSING COMPANY
By:
Stephen C. Schneider
Vice President
<PAGE>
EXHIBIT "1"
to
Assignment and Bill of Sale
PERSONAL PROPERTY, EQUIPMENT AND INTEREST DESCRIPTION
-----------------------------------------------------
All that certain Turbo Expander Plant, compression, and associated
equipment, known as the Magnolia City facility, with exception of the truck
loading facility, the LPG storage tank farm and its separate equipment, and the
amine unit and its separate equipment.
Equipment List
--------------
1. Inlet Suction Scrubber, V-11, 60" OD x 8'0" S/S
2. Mole Sieve Dehydrators, V-120 & V-120A, each 48" x 16'0"
S/S
Mole Sieve Dehydrator, V-110, 42" x 16'0" S/S
3. Inlet Gas Filter/Separator, F-810, 30" ID x 115" S/S
4. Dry Gas Dust Filter, F-800, 18" ID x 4'6" S/S
5. Mercury Guard Bed, V-120B, 54" ID x 16'0" S/S
6. Dust Filter, F-800A, 20" ID x 5'-10" S/FF
7. Dehy Switching Valve Skid, including:
(a) Switching valves, piping & controls
(b) Regen Gas Compressor, K-620, 40 HP electric motor
(c) Regen Gas Scrubber, V-130, 12-3/4" ID x 4'6" S/S
8. Regen Gas Cooler, AC-2, 1,362 MBtu/hr
9. Regen Gas Heater, 1,351 MBtu/hr (waste heat exchanger in compressor
engine exhaust piping)
10. Inlet/Residue Gas Compressors, C-1 & C-2, two White
Superior Compressors Model MW64, Cooper Superior 12SGTA engines, 2,000 HP
each, each compressor with (4) four 9.5" x 7" cylinders
11. Inlet Gas Compressor Discharge Cooler, AC-1, 8,418 MBtu/hr Residue Gas
Compressor Discharge Cooler, AC-5, 5,280 Mbtu/hr (AC- 1 & AC-5 are in
common structure sharing (3) three 25 HP electric motors)
12. Engine/Compressor Utility Equipment, Piping & Controls, including:
(a) Turbo Water Coolers, AC-7 & AC-9
(b) Jacket Water Coolers, AC-6 & AC-8
(c) Jacket Water Surge Tanks, TK-371A & TK-371B, (2) two each 10" OD x
8'0" OAL
(d) Lube Oil Filters, F-320A & F-320B, (2) each 10" OD x 48"
<PAGE>
(e) Lube Oil Filters, F-321A & F-321B, (2) each 8" OD x 48"
(f) Jacket Water Pumps, Turbo Water Pumps, Lube Oil Pumps, Engine &
Compressor Lube Oil, Coolers, Turbo Inner Coolers, and all associated
valves and controls
13. Expander Skid, including:
(a) Turboexpander, EX-600, and Booster Compressor, K-600, Rotoflow Model
No. 20- 4E6C
(b) J-T Valve, PCV-1002
(c) Booster Compressor Cooler, AC-3, 1,567 MBtu/hr
(d) Lube Oil Tank, V-601, 24" OD x 4'0" S/S
(e) Lube Oil Circ Pumps, P631 A&B, (2) two each 15 gpm, 3 HP
Lube Oil Cooler, AC-641
(f) Lube Oil Cooler, AC-641
14. Cold Separator/Heat Exchanger Skid, including:
(a) Cold Separator, V-200 42" OD x 8'0" S/S
(b) Demethanizer Trim Reboiler, E- 1, 2,627 MBtu/hr
(c) Cold Gas Exchangers, E-420 A&B, 655 MBtu/hr
(d) Warm Gas Exchangers, E-400 A-C, 4,426 MBtu/hr
(e) Cold Gas Exchangers, E-410 A-C, 5,586 MBtu/hr
(f) Demethanizer Side Heaters, E-430 A-C, 2,500 Mbtu/hr
(g) Demethanizer Reboilers, E-450 A- C, 690 MBtu/hr
15. Cold Gas Exchanger, E-421 (plate fin exchanger added in 1994)
16. Warm Gas/Cold Gas Exchanger, E-401 (plate fin exchanger added in 1994)
17. Demethanizer, T-1000, 48"/36" ID x 75'0" S/S
18. Product Surge Tank, V-3 30,000 gallon capacity
19. Product Pumps, P-2A & B, Wheatley triplex pumps, (2) two each
20. Four (4) Storage Tanks - Spent Water, Slop Oil, Compressor Lube Oil,
Engine Oil Coolant
21. Instrument Air Compressor Skid, including (2) two Sullair rotary screw
compressors, air coolers, air dryers, surge tank, and other piping,
controls and appurtenances
22. Flare Stack and associated flare tips, piping and guy wires
23. All interconnecting and pipe rack piping, valves and appurtenances,
including steel beam supports
24. Compressor building with bridge crane
25. Instrument Control Panel and associated instruments and controls
<PAGE>
26. Electrical switch gear, motor starters, etc.
27. All ladders, platforms and other structural steel items associated with
the plant equipment and skids
28. Floodlighting and support poles
<PAGE>
EXHIBIT 23
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 333-20829) and (No. 333-20833) of MarkWest
Hydrocarbon, Inc. of our report dated March 5, 1997 appearing on page 23 of this
Form 10-K.
PRICE WATERHOUSE LLP
Denver, Colorado
March 5, 1997
