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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________ TO ___________
COMMISSION FILE NUMBER 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.)
155 INVERNESS DRIVE WEST, SUITE 200, ENGLEWOOD, CO 80112-5004
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 303-290-8700
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 __
-----
The registrant had 8,477,195 shares of common stock, $.01 per share par value,
outstanding as of October 31, 1998.
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<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION Page
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<S> <C>
Item 1. Consolidated Financial Statements
Consolidated Balance Sheet at September 30, 1998 and
December 31, 1997.................................................................. 1
Consolidated Statement of Operations for the Three and Nine
Months Ended September 30, 1998 and 1997........................................... 2
Consolidated Statement of Cash Flows for the Three and Nine Months
Ended September 30, 1998 and 1997.................................................. 3
Notes to the Consolidated Financial Statements....................................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................ 5
PART II - OTHER INFORMATION
Item 1. Legal Proceedings...................................................................... 11
Item 6. Exhibits and Reports on Form 8-K....................................................... 11
SIGNATURES 12
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
MARKWEST HYDROCARBON, INC.
CONSOLIDATED BALANCE SHEET
(000s, except share data)
<TABLE>
<CAPTION>
September 30,
1998 December 31,
ASSETS (Unaudited) 1997
------------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents ..................................................... $ 651 $ 1,364
Receivables, net of allowance for doubtful accounts of $120 and $120,
respectively ............................................................. 8,351 10,279
Receivable from income taxes paid ............................................. 1,129 --
Inventories ................................................................... 5,542 5,141
Prepaid feedstock ............................................................. 647 2,690
Other assets .................................................................. 677 2,698
--------- ---------
Total current assets ..................................................... 16,997 22,172
Property and equipment:
Gas processing, gathering, storage and marketing equipment .................... 67,099 58,794
Oil and gas properties and equipment .......................................... 10,969 7,854
Land, buildings and other equipment ........................................... 10,067 9,363
Construction in progress ...................................................... 13,562 5,258
--------- ---------
101,697 81,269
Less: accumulated depreciation, depletion and amortization .................... (18,225) (15,439)
--------- ---------
Total property and equipment, net ........................................ 83,472 65,830
Intangible assets, net of accumulated amortization of $389 and $287,
respectively .................................................................. 906 555
Note receivable and other assets .................................................. -- 10,100
--------- ---------
Total assets ...................................................................... $ 101,375 $ 98,657
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable ........................................................ $ 1,917 $ 3,074
Accrued liabilities ........................................................... 6,184 4,339
Current portion of long-term debt ............................................. 115 156
--------- ---------
Total current liabilities ................................................ 8,216 7,569
Deferred income taxes ............................................................. 6,342 5,609
Long-term debt .................................................................... 36,594 33,931
Stockholders' equity:
Preferred stock, par value $0.01, 5,000,000 shares authorized, 0 shares
issued and outstanding ...................................................... -- --
Common stock, par value $0.01, 20,000,000 shares authorized, 8,527,401 and
8,519,724 shares issued, respectively ....................................... 85 85
Additional paid-in capital .................................................... 42,739 42,729
Retained earnings ............................................................. 8,087 9,189
Treasury stock, 49,511 and 27,511 shares, respectively ........................ (688) (455)
--------- ---------
Total stockholders' equity ......................................... 50,223 51,548
--------- ---------
Total liabilities and stockholders' equity ......................................... $ 101,375 $ 98,657
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
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MARKWEST HYDROCARBON, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(000S, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
1998 1997 1998 1997
------------- ------------ --------- ----------
<S> <C> <C> <C> <C>
Revenues:
Gathering, processing and marketing revenue.... $ 13,838 $ 14,450 $ 44,454 $ 54,459
Oil and gas revenue............................ 334 497 940 797
Interest income................................ 24 65 138 406
Other income (expense)......................... (80) -- (59) 72
------------- ------------ --------- ----------
Total revenue......................... 14,116 15,012 45,473 55,734
------------- ------------ --------- ----------
Costs and expenses:
Cost of sales.................................. 9,841 8,092 30,712 31,139
Operating expenses............................. 2,728 3,000 7,737 8,050
General and administrative expenses............ 1,369 1,479 4,206 5,027
Depreciation, depletion and amortization....... 1,164 825 3,270 2,408
Interest expense............................... 480 401 1,372 726
------------- ------------ --------- ----------
Total costs and expenses.............. 15,582 13,797 47,297 47,350
------------- ------------ --------- ----------
Income (loss) before minority interest and income
taxes........................................ (1,466) 1,215 (1,824) 8,384
------------- ------------ --------- ----------
Minority interest in net loss of subsidiary........ -- 30 -- 252
------------- ------------ --------- ----------
Income (loss) before income taxes.................. (1,466) 1,245 (1,824) 8,636
Provision for income taxes:
Current........................................ (336) (544) (1,458) 2,001
Deferred....................................... (254) 922 733 1,185
------------- ------------ --------- ----------
(590) 378 (725) 3,186
------------- ------------ --------- ----------
Net income (loss).................................. ($ 876) $ 867 ($ 1,099) $ 5,450
============= ============ ========= ==========
Basic earnings (loss) per share of common stock.... ($ 0.10) $ 0.10 ($ 0.13) $ 0.64
============== ============ ========= ==========
Earnings (loss) per share assuming dilution........ ($ 0.10) $ 0.10 ($ 0.13) $ 0.63
============== ============ ========= ==========
Weighted average number of outstanding shares of
common stock................................. 8,488 8,485 8,495 8,485
============== ============ ========= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
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MARKWEST HYDROCARBON, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(000S)
<TABLE>
<CAPTION>
For the three months For the nine months
ended September 30, ended September 30,
1998 1997 1998 1997
--------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Reconciliation of net income (loss) to net cash provided by (used
in) operating activities:
Net income (loss)............................................. ($ 876) $ 867 ($ 1,099) $ 5,450
Add income items that do not affect working capital:
Depreciation, depletion and amortization................... 1,164 825 3,270 2,408
Deferred income taxes...................................... (254) 922 733 1,185
Loss (gain) on sale of assets.............................. 39 -- 39 (75)
--------- --------- ---------- ---------
73 2,614 2,943 8,968
Adjustments to working capital to arrive at net cash provided
by (used in) operating activities:
(Increase) decrease in accounts receivable................ (1,966) (187) 1,928 1,006
Increase in inventories................................... (954) (4,499) (401) (1,787)
(Increase) decrease in prepaid feedstock and other assets. 1,553 (1,447) 2,933 (1,307)
Increase (decrease) in accounts payable and accrued
liabilities ............................................. 810 (958) 351 (4,523)
--------- --------- ---------- ---------
(557) (7,091) 4,811 (6,611)
Net cash provided by (used in) operating activities... (484) (4,477) 7,754 2,357
Cash flows from investing activities:
Capital expenditures...................................... (5,890) (8,450) (14,836) (16,170)
Proceeds from sale/leaseback transaction.................. 4,281 -- 4,281 --
Increase in note receivable and intangible assets......... (7) (513) (352) (2,401)
Other..................................................... -- 206 -- 62
--------- --------- ---------- ---------
Net cash used in investing activities................ (1,616) (8,757) (10,907) (18,509)
Cash flows from financing activities:
Proceeds from long-term debt.............................. 10,500 13,000 30,700 22,920
Repayment of long-term debt............................... (7,532) (57) (28,037) (11,207)
Other..................................................... (272) 105 (223) 38
--------- --------- ---------- ---------
Net cash provided by financing activities............ 2,696 13,048 2,440 11,751
--------- --------- ---------- ---------
Net increase (decrease) in cash and cash equivalents............... 596 (186) (713) (4,401)
Cash and cash equivalents at beginning of period................... 55 186 1,364 4,401
--------- --------- ---------- ---------
Cash and cash equivalents at end of period......................... $ 651 $ -- $ 651 $ --
========= ========= ========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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MARKWEST HYDROCARBON, INC.
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1. GENERAL
The consolidated financial statements include the accounts of MarkWest
Hydrocarbon, Inc. ("MarkWest" or the "Company") and its wholly owned
subsidiaries, MarkWest Resources, Inc. ("Resources"), MarkWest Michigan, Inc.
("Michigan") and 155 Inverness, Inc. ("155 Inverness"). All significant
intercompany accounts and transactions have been eliminated in consolidation.
The unaudited financial statements presented herein have been prepared in
accordance with the instructions to Form 10-Q and do not include all the
information and note disclosures required by generally accepted accounting
principles for complete financial statements. The interim consolidated financial
statements should be read in conjunction with the Consolidated Financial
Statements and Notes thereto for the year ended December 31, 1997 included in
the Company's Annual Report on Form 10-K, as filed with the Securities and
Exchange Commission. In the opinion of management, all adjustments necessary
for a fair statement of the results for the unaudited interim periods have been
made. These adjustments consist only of normal recurring adjustments.
The effective tax rate for interim periods is based on the estimated annual
effective tax rate, excluding certain nonrecurring or unusual events. The
effective tax rate varies from statutory rates due primarily to tax credits and
intangible development costs.
Certain prior year amounts have been reclassified to conform to the 1998
presentation.
NOTE 2. SUPPLEMENTARY CASH FLOW INFORMATION
During the nine months ended September 30, 1998, non-cash investing activities
included the forgiveness of a note receivable (the "Note") valued at $10.1
million from Michigan Production Company, LLC in exchange for the title to the
31 mile extension to the Basin pipeline. The Note was originally for the costs
incurred by the Company for the construction of the pipeline extension.
NOTE 3. LONG-TERM DEBT
Effective May 6, 1998 and October 30, 1998, the Company amended its existing
credit agreement. The amended credit agreement provides for a maximum borrowing
amount of $85 million, $50 million of which is available pursuant to a term
loan commitment and the remaining $35 million pursuant to a revolving loan
commitment. Actual borrowing limits may be a lesser amount, depending on
trailing cash flow, as defined in the agreement. The term loan commitment
period will terminate on October 20, 1999. Any outstanding balance thereunder
will be payable in eight equal quarterly installments, beginning June 30, 2002.
The revolving loan commitment converts to a reducing loan commitment on May 6,
2000. The reducing loan commitment reduces ratably on a quarterly basis to zero
by May 6, 2004.
Interest rates are based on either the agent bank's base rate or the London
Interbank Offered Rate (LIBOR), plus an applicable margin of between 0% and
0.875% or 0.625% and 2.50%, respectively, based upon a certain Company debt to
earnings ratio.
The debt is secured by a first mortgage on the Company's major assets. The loan
agreement restricts certain activities and requires the maintenance of certain
financial ratios and other conditions.
NOTE 4. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement No. 133
("SFAS 133"), Accounting for Derivative Instruments and Hedging Activities.
This Statement is effective for fiscal years beginning after June 15, 1999.
Earlier application is encouraged; however, the Company does not anticipate
adopting SFAS 133 until the fiscal year beginning January 1, 2000. SFAS 133
requires that an entity recognize all derivatives as assets or liabilities in
the statement of financial position and measure those instruments at fair value.
Although the Company is currently evaluating SFAS 133, it is not expected to
have a material impact on the financial condition or results of operations of
the Company.
4
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations 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 Act of 1933 ("Section 27A") and
Section 21E of the Securities and Exchange Act of 1934 ("Section 21E"). 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 natural gas liquids ("NGLs") and
competing commodities, (iii) the availability and prices 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, gatherers and transporters of natural gas, (vii) competition from
other NGL processors, including major energy 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.
Forward-looking statements involve many uncertainties which are beyond the
Company's ability to control and in many cases the Company cannot predict what
factors would cause actual results to differ materially from those indicated by
the forward-looking statements.
THIRD QUARTER 1998 SUMMARY
MarkWest incurred a net loss of $876,000 or $0.10 per share, on revenues of
$14.1 million for the quarter ended September 30, 1998. This compares to net
income of $867,000 or $0.10 per share, on revenues of $15.0 million for the same
period in 1997. The net loss primarily resulted from $2.1 million, or $0.25 per
share, of lower after-tax gas processing margins at MarkWest's Appalachian
plants. This margin squeeze was due to a combination of weak natural gas liquid
prices and relatively strong natural gas costs affecting the entire gas
processing industry. Solid growth in the Michigan project's natural gas
transportation volumes, which generate fee income, partially offset these low
margins. For the quarter, Michigan's after-tax operating income totaled
$500,000, or $0.06 per share, up from a loss of $100,000, or $0.01 per share,
for the same period in 1997. These Michigan results reflect less than three
months' benefit from new wells connected during the quarter. Future quarters
will see the full benefit of these increased volumes. MarkWest's fee-based
income is expected to generate nearly 50% of MarkWest's income in 1999 (50%
assumes normal processing margins in Appalachia). This will provide an earnings
mix that is less volatile to swings in commodity prices.
Appalachia's third quarter 1998 gas processing margin of $0.37 per million
British thermal units (mmbtu) was approximately 80% below its 10-year average of
$1.80 per mmbtu, and down by a similar percentage compared to third quarter
1997. NGL prices have moved down sharply in response to lower crude oil prices.
On a 12-month forward-looking basis, the spread between crude oil and natural
gas has been confined to a low trading range since March 1998. Historically,
these narrow spreads reverse as supply and demand factors impact the relative
prices of the two commodities, restoring spreads to more normal levels.
NINE MONTHS ENDED SEPTEMBER 30, 1998 SUMMARY
For the nine months ended September 30, 1998, the Company's net loss was $1.1
million, or $0.13 per share, compared to net income of $5.5 million, or $0.64
per share, for the same period in 1997. The primary cause of the net loss was
attributable to lower gas processing margins at MarkWest's Appalachian plants,
experienced throughout the first nine months of 1998.
5
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<TABLE>
<CAPTION>
OPERATING STATISTICS Three Months Ended September 30, Nine Months Ended September 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Appalachia:
NGL production--Siloam plant (gallons) 25,712,615 26,440,651 76,894,955 76,318,338
NGLs marketed--Siloam plant (gallons) 25,237,438 20,851,267 72,413,052 70,721,011
Fee gas processed (mmbtu) (a) 7,994,455 13,667,349 28,871,428 41,039,676
Terminal throughput (gallons) 6,632,774 5,842,224 20,091,212 19,127,090
Michigan:
Pipeline throughput (mcf) 1,735,493 1,175,060 3,689,729 2,018,408
NGLs marketed (gallons) 3,052,486 -- 6,264,175 --
Appalachia plant and Michigan:
Average sales price per gallon $ 0.27 $ 0.40 $ 0.31 $ 0.51
Gas production sold (mcfe) 221,382 133,253 636,860 309,887
</TABLE>
(a) Due to the ongoing arbitration with Columbia, fee gas processed in
1998 only includes volumes processed at the Company's Kenova plant
beginning March 1, 1998. In 1997 and early 1998, fee gas processed
included volumes at the Boldman and Cobb plants, in addition to the
Kenova plant. The loss of fee revenue is partly offset by cost savings
from not operating Boldman and Cobb.
APPALACHIAN CORE AREA
Third quarter NGL production volumes totaled 25.7 million gallons, down 3
percent from the same period last year. The production decline was due to
scheduled repairs on a third party's natural gas transmission pipeline. These
repairs caused a temporary shutdown of MarkWest's Boldman plant for thirty days
in the third quarter and reduced NGL volumes at the Company's Kenova plant. The
Boldman plant is expected to be shutdown for an additional 45 days in the fourth
quarter. Despite this shutdown, year-to-date NGL production volumes are
slightly higher than in the prior year period. Third quarter NGL marketing
volumes of 25.2 million gallons were up 21 percent from the same period last
year. This increase was primarily due to timing differences in storing
inventory for the upcoming winter months. Inventory in 1998 was built in the
second quarter, whereas in 1997 inventory was built in the third quarter.
MICHIGAN CORE AREA
During the third quarter of 1998, MarkWest connected two wells, each producing 8
million cubic feet of natural gas per day (mmcfd), to newly completed portions
of its gathering pipeline. These wells increased pipeline throughput volume to
28 mmcfd at quarter end, up from an average of 11 mmcfd during the first half of
1998. In early October 1998, the Company completed the final third of its 27-
mile southern pipeline extension. This extension will allow pipeline connection
of additional shut-in wells, with an estimated 5 mmcfd in total production, upon
completion of the producer's wellhead facilities in the fourth quarter of 1998.
Average throughput volumes were 19 mmcfd for the third quarter and are projected
to be 30 mmcfd for the fourth quarter. This compares to an average volume of 13
mmcfd for 1997's third and fourth quarters. By the end of 1998, MarkWest
expects its Michigan pipeline and NGL extraction plant to be operating near
their 35 mmcfd capacity. Depending upon drilling success, MarkWest plans to
expand pipeline and plant capacity to 50 mmcfd in 1999 at an expected cost of $3
million.
MarkWest is also participating in regional exploration activities targeting
Niagaran reef reservoirs. The Company holds a 17.5 percent working interest in
one program. The first well in the 1998 program was drilled in late September.
While this well proved unsuccessful, MarkWest understands that exploration and
production companies currently have developed up to 50 good leads and prospects.
The Company and its partners are reprocessing seismic data before drilling the
remainder of the program's prospects. Two other programs plan to drill three
wells by the end of the year. MarkWest is negotiating transportation and
processing contracts with several additional exploration companies.
ROCKY MOUNTAINS
Natural gas sold in the third quarter of 1998 totaled 221,382 mcf equivalent
(mcfe), a 66 percent increase over the same period last year. This increase
largely resulted from the Company's March 1998 acquisition of 40 producing wells
in Colorado's San Juan Basin, building on MarkWest's existing assets in the
region. Production performance has improved due to recently completed workover
activities on the purchased wells. MarkWest continues to pursue
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viable gas projects in the Rocky Mountain region that would lead to gathering
and transportation investment opportunities.
OUTLOOK
NGL prices in the third quarter of 1998 were below historical levels and are
expected to remain so in the fourth quarter of 1998. These prices are often
correlated with and driven by the price of crude oil, which has not recovered
from its decline over the fourth quarter of 1997 and the first quarter of 1998.
A substantial portion of the Company's revenues, and as a result, its gross
margins, remain dependent upon the sales price of NGLs, particularly propane,
which fluctuates with the winter weather conditions and other supply and demand
determinants. The strongest demand for propane and the highest propane sales
margins generally occur during the winter heating season. As a result, the
Company recognizes a substantial portion of its annual income during the first
and fourth quarters of the year.
The Company anticipates that until a crude oil price recovery is underway and/or
gas prices soften, the Company will continue to experience earnings pressures,
like others in the industry. However, MarkWest's NGL commodity exposure is
partially offset by selling liquids in a premium market, utilizing storage
capability and its ability to pre-buy natural gas. In addition, an increase of
fee-based income, primarily a result of connecting new wells increasing system
throughput in Michigan, helps to offset the fluctuation of NGL and natural gas
prices. The Company anticipates fee-based activity will generate nearly 50% of
total gross margins in 1999 (50% assumes normal processing margins in
Appalachia). This will provide an earnings mix that is less volatile to swings
in commodity prices.
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
Three months ended September 30,
1998 1997 Change
---------- ------------ ---------------
<S> <C> <C> <C>
Revenues $ 14,116 $15,012 ($ 896)
Gross profit (loss) (a) 359 3,030 (2,671)
Income (loss) before income taxes (1,466) 1,245 (2,711)
Provision for income taxes (590) 378 (968)
------------ ------- -----------
Net income (loss) ($ 876) $ 867 ($ 1,743)
------------ ------- -----------
</TABLE>
(a) Excludes interest income, general and administrative expense and interest
expense.
REVENUES
Gathering, processing and marketing revenue. Gathering, processing and
marketing revenue decreased $612,000 or 4% for the three months ended September
30, 1998, compared to the same period in 1997, due to a variety of reasons. The
Company's Appalachian operations accounted for the majority of the overall
revenue decrease, primarily as a result of weak NGL prices in the third quarter
of 1998 compared to the same period in 1997. This decrease was partially offset
by the third quarter 1998 NGL marketing volumes of 25.2 million gallons which
were up 21 percent from the same period last year. This increase was primarily
due to timing differences in storing inventory for the upcoming winter months.
Inventory in 1998 was built in the second quarter, whereas in 1997 inventory was
built in the third quarter.
The overall decrease in revenues was partially offset by a 48% increase in the
volume of gas processed in the Company's Michigan operations during the three
months ended September 30, 1998, compared to the three months ended September
30, 1997. Gas processed in the Company's Michigan operations contributed both
fee-based processing income and revenues from the sale of propane and other
liquids extracted at the Company's new NGL extraction plant, which began
operations in December 1997.
COSTS AND EXPENSES
Cost of sales. Cost of sales increased $1.7 million or 22% for the three
months ended September 30, 1998 compared to the same period in 1997. The
Company's Appalachian operations accounted for the majority of the
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increase, primarily as a result of an increase in volumes sold at the Company's
Siloam plant. Cost of sales during the third quarter of 1998 also included costs
associated with the Company's new NGL extraction plant in Michigan, which
commenced operations at the end of 1997.
Operating expenses. Operating expenses decreased $272,000 or 9% for the three
months ended September 30, 1998 compared to the three months ended September 30,
1997. The majority of the decrease was driven by lower operating expenses in
the Company's Michigan operations in the third quarter of 1998 compared to the
third quarter of 1997. In addition, in response to low processing margins, the
Company implemented cost-controlling measures and reduced operating costs for
the three months ended September 30, 1998, compared to the same time period in
1997.
General and administrative expenses. General and administrative expenses
decreased $110,000 or 7% for the three months ended September 30, 1998 compared
to the same period in 1997. General and administrative expenses incurred during
the three months ended September 30, 1997 included a continuation of many
initial costs, including significant professional service fees, incurred in
connection with the Company's reorganization into a public company following the
initial public offering in October 1996. In addition, in response to low
processing margins, the Company implemented cost-controlling measures and
reduced general and administrative expenses for the three months ended September
30, 1998, compared to the same time period in 1997.
Depreciation, depletion and amortization. Depreciation, depletion and
amortization increased $339,000 or 41% for the third quarter of 1998 compared to
the third quarter of 1997. This increase was principally due to increased
depreciation attributable to the Company's new NGL extraction plant and pipeline
extension in Michigan.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 1997
<TABLE>
<CAPTION>
Nine months ended September 30,
1998 1997 Change
------------- ------------- -------------------
<S> <C> <C> <C>
Revenues $ 45,473 $ 55,734 ($ 10,261)
Gross profit (loss) (a) 3,616 13,731 (10,115)
Income (loss) before income taxes (1,824) 8,636 (10,460)
Provision for income taxes (725) 3,186 (3,911)
---------- --------- -----------
Net income (loss) ($ 1,099) $ 5,450 ($ 6,549)
========== ========= ===========
</TABLE>
(a) Excludes interest income, general and administrative expense and interest
expense.
REVENUES
Gathering, processing and marketing revenue. Gathering, processing and
marketing revenue decreased $10.0 million or 18% for the nine months ended
September 30, 1998, compared to the same period in 1997, due to a variety of
reasons. The Company's Appalachian operations accounted for the majority of the
overall revenue decrease, primarily as a result of weak NGL prices in the nine
months ended September 30, 1998 compared to the same period in 1997.
The above factor was partially offset by a 83% increase in the volume of gas
processed in the Company's Michigan operations during the nine months ended
September 30, 1998 compared to the nine months ended September 30, 1997. Gas
processed in the Company's Michigan operations contributed both fee-based
processing income and revenues from the sale of propane and other liquids
extracted at the Company's new NGL extraction plant, which began operations in
December 1997.
Oil and gas revenue. Oil and gas revenue increased by $143,000 for the nine
months ended September 30, 1998 compared to the same period in 1997. This
increase was primarily attributable to an increase in gas production from the
prior year.
COSTS AND EXPENSES
Cost of sales. Cost of sales decreased $427,000 or 1% for the nine months
ended September 30, 1998 compared to the same period in 1997. The Company's
Appalachian operations accounted for the majority of the decrease,
8
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primarily as a result of a decrease in the unit cost of propane at the Company's
terminals. This decrease was partially offset by an increase in cost of sales at
the Company's Michigan operations, where the Company's new NGL extraction plant
commenced operations in December 1997.
Operating expenses. Operating expenses decreased $313,000 or 4% for the nine
months ended September 30, 1998 compared to the nine months ended September 30,
1997. For the first nine months in 1998, the Company experienced lower
operating costs in its Appalachian operations compared to the same time period
in 1997. In response to low processing margins, the Company implemented cost-
controlling measures and reduced operating costs for the nine months ended
September 30, 1998, compared to the same time period in 1997. This decrease was
partially offset by the introduction of operational costs from the Company's new
NGL extraction plant in Michigan during the first nine months of 1998.
General and administrative expenses. General and administrative expenses
decreased $821,000 or 16% for the nine months ended September 30, 1998 compared
to the same period in 1997. General and administrative expenses incurred during
the nine months ended September 30, 1997 included a continuation of many initial
costs, including significant professional service fees, incurred in connection
with the Company's reorganization into a public company following the initial
public offering in October 1996. In addition, in response to low processing
margins, the Company implemented cost-controlling measures and reduced general
and administrative expenses for the nine months ended September 30, 1998,
compared to the same time period in 1997.
Depreciation, depletion and amortization. Depreciation, depletion and
amortization increased $862,000 or 36% for the first nine months of 1998
compared to the first nine months of 1997. This increase was principally due to
increased depreciation attributable to the Company's new NGL extraction plant
and pipeline extension in Michigan.
Interest expense. Interest expense increased $646,000 or 89% for the nine
months ended September 30, 1998 compared to the nine months ended September 30,
1997. This increase was principally due to an increase in average outstanding
long-term debt in the first three quarters of 1998 compared to the first three
quarters of 1997.
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; and in 1996, an initial public offering of equity. In the past, these
sources have been sufficient to meet its needs and finance the growth of its
business.
The following summary table reflects comparative cash flows for the Company for
the nine months ended September 30, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
For the nine months ended
September 30,
1998 1997
-------------- ----------------
<S> <C> <C>
Net cash provided by operating activities before change
in working capital $ 2,943 $ 8,968
Net cash provided by (used in) operating activities
from change in working capital 4,811 (6,611)
Net cash used in investing activities (10,907) (18,509)
Net cash provided by financing activities 2,440 11,751
</TABLE>
For the nine months ended September 30, 1998, net cash provided by operating
activities before adjustments for working capital decreased $6.0 million from
the same period in 1997, primarily as a result of a decrease in gas processing
margins at MarkWest's Appalachian plants since 1997. As shown above, this was
enhanced by a $4.8 million decrease in the Company's working capital accounts,
excluding cash, for the nine months ended September 30, 1998, compared to a $6.6
million increase in working capital accounts, excluding cash, for the nine
months ended September 30, 1997. The change in working capital in the first
nine months of 1998 was principally driven by decreases in accounts receivable,
prepaid feedstock and other assets and increases in inventories and accounts
payable. The change in working capital in the first nine months of 1997 was
principally driven by decreases in accounts receivable, accounts payable and
accrued liabilities and increases in inventories, prepaid feedstock and other
assets.
9
<PAGE>
Cash used in investing activities decreased $7.6 million for the nine months
ended September 30, 1998 compared to the nine months ended September 30, 1997,
primarily related to the proceeds received on the sale of equipment in the third
quarter of 1998, when the Company sold and leased back three compressors at its
Kenova facility. In addition, cash used in investing activities was affected by
fewer capital expenditures (see further discussion under "Capital Investment
Program") and a smaller increase in notes receivable and intangible assets in
the first nine months of 1998 compared to the same period in 1997.
For the nine months ended September 30, 1998, cash provided by financing
activities was $2.4 million, a decrease of approximately $9.3 million compared
to the same period in 1997. The decrease was the net result of the
aforementioned operating and investing activities.
Financing Facilities
At September 30, 1998, the Company had approximately $55 million of available
credit, of which $37 million had been utilized as of September 30, 1998, and
working capital of $8.8 million. The Company believes that cash provided by
operating activities, together with amounts available to be borrowed under its
financing facilities, will provide sufficient funds to maintain its existing
facilities and fund its capital expenditure program. Depending on the timing
and amount of the Company's future projects, it may be required to seek
additional sources of capital. While the Company believes that it would be able
to secure additional financing on terms acceptable to the Company, if required,
no assurance can be given that it will be able to do so.
Capital Investment Program
The Company's capital investment program for 1998 is estimated at $17 million,
down from the $24 million originally estimated at the beginning of 1998 and the
subsequent revised estimate of $18 million. The new estimate includes $10
million in Michigan to fund a further extension of the pipeline and expansion of
the current system capacity. The remaining capital programs include $3 million
for various projects in Appalachia, $3 million for exploration and production
activities, including $2.4 million in the first quarter acquisition of 40
producing wells located in the northern San Juan Basin of southwest Colorado,
and $1 million for other various capital projects. For the nine months ended
September 30, 1998, the Company made capital expenditures totaling approximately
$14.8 million.
RISK MANAGEMENT ACTIVITIES
During the three months ended September 30, 1998 and 1997, a $43,000 loss and $0
gain, respectively, were recognized in operating income on the settlement of
propane and natural gas futures. During the nine months ended September 30,
1998 and 1997, a $43,000 loss and $1 million 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 offset by
amounts realized from the sale of the underlying products in the physical
market.
At September 30, 1998, the Company had 300 long open propane futures and forward
contracts along with 120 short open natural gas futures contracts representing
notional quantities of 300,000 barrels and 1,200,000 mmbtus, respectively, at
average prices of $.29/gallon and $2.68/mmbtu, respectively.
At September 30, 1998, the Company had an additional 91 short open natural gas
futures contracts, used to hedge future natural gas purchases, representing a
notional quantity of 910,000 mmbtus at an average price of $2.68/mmbtu. At
September 30, 1998, the Company had committed to purchase 1,170,000 mmbtus of
natural gas at an average price of $2.00/mmbtu. The Company had also committed
to purchase 61,000 barrels of propane at an average price of $.29/gallon.
At September 30, 1998, the Company had no material notional quantities of crude
oil futures or NGL, natural gas, or crude oil swaps or options. At September
30, 1997, the Company had no material notional quantities of NGL, natural gas or
crude oil futures, swaps or options.
IMPACT OF YEAR 2000 ISSUE
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Unless the Company's
computer programs are Year 2000 compliant, any of the Company's computer
programs that have date-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal
10
<PAGE>
business activities. The Company's most significant risk related to the Year
2000 Issue is the worst case scenario that its plants and pipelines, if not Year
2000 compliant, may not be operable, causing a loss of both processing volumes
and associated revenues.
In the first quarter of 1998, the Company began its preliminary assessment of
the Year 2000 Issue. Many of the Company's computer systems, which include both
financial systems and plant control systems, are purchased from third party
vendors who have represented to the Company that they are Year 2000 compliant.
In some cases, the Company may need to upgrade to the most recent release. A
complete analysis, including an evaluation of the extent to which the Company is
vulnerable to the failure of significant customers and suppliers to properly
remediate their own Year 2000 Issue, is expected to be completed by the end of
the first quarter of 1999. The outcome of this analysis will include the
development of a contingency plan to protect the Company against the worst case
scenario that either the Company or significant customers or suppliers are not
Year 2000 compliant. Remediation has already begun and is expected to be
completed by the second quarter of 1999. The Company believes that total Year
2000 project costs will not be material to the Company's results of operations,
liquidity or capital resources, and that as a result of the Company's efforts,
there should be little impact to the Company's computer systems.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously reported, MarkWest filed arbitration proceedings in February 1998
to resolve issues with Columbia Gas Transmission Corporation regarding three
Appalachia natural gas processing plants. These plants are governed by several
contracts, the most important of which extends through the year 2010. In this
arbitration, MarkWest requests a declaration of rights and status to clarify
agreements between the companies and certain monetary relief. Issues arose
during ongoing negotiations between MarkWest and Columbia to finalize terms of a
1997 preliminary agreement in which, among other things, Columbia agreed to sell
its Cobb plant to MarkWest and to transfer from Columbia to MarkWest the
operation of the Boldman plant. These issues also include matters regarding
operations at the Kenova plant. MarkWest owns the Boldman and Kenova plants.
As previously reported, in April 1998, Columbia filed a Complaint against
MarkWest in the United States District Court for the Southern District of West
Virginia. The details of the Complaint were reported in the first quarter 1998
Form 10-Q. In the third quarter, the district court judge ruled contract issues
underlying Columbia's complaint are already subject to the binding arbitration
noted above.
A preliminary hearing is scheduled in November to establish the remaining
arbitration process and schedule. Management believes it will prevail in its
position and, accordingly, the outcome of this dispute is not likely to have a
material effect on the financial condition, results of operations or prospects
of MarkWest.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11 - Statement regarding computation of earnings per share.
27 - Financial Data Schedule.
(b) Reports on Form 8-K
(i) No reports on Form 8-K were filed during the quarter ended
September 30, 1998.
11
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
MarkWest Hydrocarbon, Inc.
(Registrant)
Date: November 6, 1998 By: /s/ Gerald A. Tywoniuk
----------------------------------
Gerald A. Tywoniuk
Chief Financial Officer and Vice President
of Finance
(On Behalf of the Registrant and as
Principal Financial and Accounting Officer)
12
<PAGE>
EXHIBIT 11
MARKWEST HYDROCARBON, INC.
COMPUTATION OF EARNINGS PER COMMON SHARE
(000S, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1998
------------------------ -----------------------------
<S> <C> <C>
Net income $ (876) $ (1,099)
Weighted average number of outstanding shares of
common stock 8,488 8,495
Basic earnings per share $ (0.10) $ (0.13)
============ ==============
Net income (876) (1,099)
Weighted average number of outstanding shares of
common stock 8,488 8,495
Dilutive stock options 69 119
------------ --------------
8,557 8,614
Earnings per share assuming dilution $ (0.10) $ (0.13)
============ ==============
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS OF THE
COMPANY'S FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 651
<SECURITIES> 0
<RECEIVABLES> 8,471
<ALLOWANCES> (120)
<INVENTORY> 5,542
<CURRENT-ASSETS> 16,997
<PP&E> 101,697
<DEPRECIATION> (18,225)
<TOTAL-ASSETS> 101,375
<CURRENT-LIABILITIES> 8,216
<BONDS> 36,709
0
0
<COMMON> 85
<OTHER-SE> 50,138
<TOTAL-LIABILITY-AND-EQUITY> 101,375
<SALES> 45,394
<TOTAL-REVENUES> 45,473
<CGS> 30,712
<TOTAL-COSTS> 30,712
<OTHER-EXPENSES> 16,585
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,372
<INCOME-PRETAX> (1,824)
<INCOME-TAX> (725)
<INCOME-CONTINUING> (1,099)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,099)
<EPS-PRIMARY> (0.13)
<EPS-DILUTED> (0.13)
</TABLE>
