<PAGE>
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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 June 30, 1999
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 80112-5000
(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 8,471,205 shares of common stock, $.01 per share par value,
outstanding as of August 11, 1999.
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<TABLE>
<CAPTION>
PART I--FINANCIAL INFORMATION Page
--------
<S> <C>
Item 1. Consolidated Financial Statements
Consolidated Balance Sheet at June 30, 1999 and December 31, 1998......... 1
Consolidated Statement of Operations for the Three and Six Months
Ended June 30, 1999 and 1998............................................. 2
Consolidated Statement of Cash Flows for the Three and Six Months Ended
June 30, 1999 and 1998................................................... 3
Notes to the Consolidated Financial Statements............................ 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................... 6
Item 3. Quantitative and Qualitative Disclosures About Market Risk................... 12
PART II--OTHER INFORMATION
Item 1. Legal Proceedings............................................................ 12
Item 4. Submission of Matters to a Vote of Security Holders.......................... 12
Item 6. Exhibits and Reports on Form 8-K............................................. 12
SIGNATURES............................................................................ 14
</TABLE>
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Glossary of Terms
Mcf: thousand cubic feet of natural gas
MMgal: million gallons
MMBtu: million British thermal units, an energy measurement
MMcfd: million cubic feet per day
NGL: natural gas liquids, such as propane, butanes and natural gasoline
One barrel of oil or NGL is the energy equivalent of six Mcf of natural gas.
<PAGE>
PART I--FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
MARKWEST HYDROCARBON, INC.
CONSOLIDATED BALANCE SHEET
(000s, except share data)
<TABLE>
<CAPTION>
June 30,
1999 December 31,
(Unaudited) 1998
----------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents......................................................... $ 1,696 $ 2,055
Receivables, net of allowance for doubtful accounts of $120 and $120,
respectively................................................................. 9,887 7,738
Inventories....................................................................... 4,846 4,583
Prepaid feedstock................................................................. -- 1,957
Income taxes receivable........................................................... 130 2,763
Other assets...................................................................... 350 289
-------- --------
Total current assets.......................................................... 16,909 19,385
Property and equipment:
Gas processing, gathering, storage and marketing equipment........................ 77,003 78,018
Oil and gas properties and equipment.............................................. 11,069 9,207
Land, buildings and other equipment............................................... 11,334 11,240
Construction in progress.......................................................... 1,319 4,466
-------- --------
100,725 102,931
Less: accumulated depreciation, depletion and amortization........................ (20,407) (19,609)
-------- --------
Total property and equipment, net............................................. 80,318 83,322
Intangible assets, net of accumulated amortization of $285 and $169, respectively..... 788 924
-------- --------
Total assets.......................................................................... $ 98,015 $103,631
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable............................................................ $ 1,587 $ 2,765
Accrued liabilities............................................................... 11,758 5,094
Current portion of long-term debt................................................. 65 63
-------- --------
Total current liabilities..................................................... 13,410 7,922
Deferred income taxes................................................................. 7,151 7,077
Long-term debt........................................................................ 26,567 38,597
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, 8,494,275 and
8,531,206 shares issued, respectively............................................ 85 85
Additional paid-in capital........................................................ 42,565 42,693
Retained earnings................................................................. 8,660 7,978
Treasury stock, 36,931 and 60,300 shares, respectively............................ (423) (721)
-------- --------
Total stockholders' equity.................................................... 50,887 50,035
-------- --------
Total liabilities and stockholders' equity............................................ $ 98,015 $103,631
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
<PAGE>
MARKWEST HYDROCARBON, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(000s, except per share data)
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
1999 1998 1999 1998
--------- -------- -------- -------
<S> <C> <C> <C> <C>
Revenues:
Gathering, processing and marketing revenue............ $17,511 $10,762 $39,339 $30,617
Oil and gas revenue, net of transportation and
taxes................................................ 467 248 732 606
Interest income........................................ 12 44 26 115
Gain on sale of West Memphis terminal.................. 2,509 -- 2,509 --
Other income (expense)................................. (29) -- (45) 21
--------- -------- -------- --------
Total revenues................................. 20,470 11,054 42,561 31,359
--------- -------- -------- --------
Costs and expenses:
Cost of sales.......................................... 12,971 7,587 28,236 20,871
Operating expenses..................................... 2,922 2,385 5,906 5,100
General and administrative expenses.................... 1,682 1,269 3,263 2,746
Depreciation, depletion and amortization............... 1,311 1,136 2,614 2,107
Interest expense....................................... 631 445 1,432 893
--------- -------- -------- --------
Total costs and expenses....................... 19,517 12,822 41,451 31,717
--------- -------- -------- --------
Income (loss) before income taxes.......................... 953 (1,768) 1,110 (358)
Provision (benefit) for income taxes:
Current................................................ 302 (1,156) 349 (1,122)
Deferred............................................... 74 528 74 987
--------- -------- -------- --------
376 (628) 423 (135)
--------- -------- -------- --------
Net income (loss).......................................... $ 577 $(1,140) $ 687 $ (223)
========= ======== ======== ========
Basic earnings (loss) per share of common stock............ $ 0.07 $ (0.13) $ 0.08 $ (0.03)
========= ======== ======== ========
Earnings (loss) per share assuming dilution................ $ 0.07 $ (0.13) $ 0.08 $ (0.03)
========= ======== ======== ========
Weighted average number of outstanding shares of common
stock..................................................... 8,492 8,500 8,485 8,498
======== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
MARKWEST HYDROCARBON, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(000s)
<TABLE>
<CAPTION>
For the three months For the six months
ended June 30, ended June 30,
1999 1998 1999 1998
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................................. $ 577 $(1,140) $ 687 $ (223)
Add income items that do not affect working capital:
Depreciation, depletion and amortization.................. 1,311 1,136 2,614 2,107
Deferred income taxes..................................... 74 528 74 987
Gain on sale of assets.................................... (11) -- (21) ---
Gain on sale of West Memphis terminal..................... (2,509) -- (2,509) ---
-------- ------- -------- --------
(558) 524 845 2,871
Adjustments to working capital:
(Increase) decrease in accounts receivable................ 143 48 (2,149) 4,379
(Increase) decrease in inventories........................ (3,255) (2,022) (263) 553
(Increase) decrease in prepaid expenses and other assets.. 2,118 (1,022) 4,529 1,381
Increase (decrease) in accounts payable and accrued
liabilities.............................................. 5,433 (171) 5,978 (456)
-------- ------- -------- --------
4,439 (3,167) 8,095 5,857
Net cash provided by (used in) operating activities... 3,881 (2,643) 8,940 8,728
Cash flows from investing activities:
Capital expenditures...................................... (1,649) (4,985) (3,802) (8,865)
Proceeds from sale of assets.............................. 5,927 -- 6,347 --
(Increase) decrease in note receivable and intangible
assets.............................................. 1 (398) 20 (428)
-------- ------- -------- --------
Net cash provided by (used in) investing activities... 4,279 (5,383) 2,565 (9,293)
Cash flows from financing activities:
Proceeds from long-term debt............................... 7,000 11,500 11,619 20,200
Repayment of long-term debt................................ (14,013) (5,052) (23,652) (20,508)
Net reissuance of treasury stock........................... 37 -- 169 --
Other...................................................... -- (2) -- 49
-------- ------- -------- --------
Net cash provided by (used in) financing activities.. (6,976) 6,446 (11,864) (259)
-------- ------- -------- --------
Net increase (decrease) in cash and cash equivalents............... 1,184 (1,580) (359) (824)
Cash and cash equivalents at beginning of period................... 512 2,249 2,055 1,493
-------- ------- -------- --------
Cash and cash equivalents at end of period......................... $ 1,696 $ 669 $ 1,696 $ 669
======== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
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., MarkWest Michigan, Inc. and 155
Inverness, Inc. 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, 1998, 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 corporate tax rate for interim periods is based on the estimated
annual effective corporate 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 1999
presentation.
NOTE 2. LONG-TERM DEBT
Effective May 13, 1999, the Company amended its existing credit agreement. The
amended credit agreement provides for a maximum borrowing amount of $45 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.
NOTE 3. COMMITMENTS AND CONTINGENCIES
MarkWest filed arbitration proceedings in February 1998 to resolve issues with
Columbia Gas Transmission Corporation ("Columbia") regarding three Appalachia
natural gas 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.
In April 1998, Columbia filed a Complaint against MarkWest in the United States
District Court for the Southern District of West Virginia. The Complaint seeks
declaratory relief that certain agreements, or certain specified provisions
thereof, are void and that MarkWest is in breach of the Federal Energy
Regulatory Commission-approved settlement agreement under which MarkWest was to
acquire the Cobb plant and operate the Boldman plant. The certain agreements
concern, among other matters, Columbia's obligation to guarantee the delivery of
natural gas or NGL to MarkWest. In the Complaint, Columbia also seeks
injunctive relief to enjoin MarkWest from interfering with arrangements Columbia
may seek to undertake with natural gas producers and suppliers and with
negotiations Columbia may pursue with third parties to terminate its interests
in the products extraction business. In the third quarter of 1998, the District
Court judge stayed proceedings pending the binding arbitration noted above.
Arbitration hearings initially scheduled to commence in March 1999 were
rescheduled to the fourth quarter of 1999. 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.
4
<PAGE>
MARKWEST HYDROCARBON, INC.
NOTES TO THE FINANCIAL STATEMENTS
NOTE 4. SEGMENT REPORTING
In 1998, the Company adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. The Company's operations are classified
into two reportable segments, as follows:
(1) Processing and Related Services--provides compression, gathering,
treatment and NGL extraction, and fractionation services; also
purchases and markets natural gas and NGL; and
(2) Exploration and Production--explores for and produces natural gas.
MarkWest evaluates the performance of its segments and allocates resources to
them based on gross operating income. There are no intersegment revenues.
MarkWest's business is conducted solely in the United States.
The table below presents information about gross operating income for the
reported segments for the second quarter of 1999 and the six months ended June
30, 1999, and for the corresponding periods in 1998. Asset information by
reportable segment is not reported, since MarkWest does not produce such
information internally.
<TABLE>
<CAPTION>
Processing and Related Exploration and
Services Production Total
(000s) (000s) (000s)
---------------------- -------------- -------------
<S> <C> <C> <C>
For the Quarter Ended June 30, 1999
Revenues........................................... $ 17,511 $ 467 $ 17,978
Gross operating income............................. $ 1,922 $ 163 $ 2,085
For the Quarter Ended June 30, 1998
Revenues........................................... $ 10,762 $ 248 $ 11,010
Gross operating income............................. $ 986 $ 52 $ 1,038
For the Six Months Ended June 30, 1999
Revenues........................................... $ 39,339 $ 732 $ 40,071
Gross operating income............................. $ 5,624 $ 305 $ 5,929
For the Six Months Ended June 30, 1998
Revenues........................................... $ 30,617 $ 606 $ 31,223
Gross operating income............................. $ 4,920 $ 332 $ 5,252
</TABLE>
A reconciliation of total segment revenues to total consolidated revenues and of
total segment gross operating income to total consolidated income (loss) before
taxes is as follows (000s):
<TABLE>
<CAPTION>
Six Months Six Months
Quarter Ended Quarter Ended Ended Ended
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenues:
Total segment revenues..................... $ 17,978 $ 11,010 $ 40,071 $ 31,223
Interest income............................ 12 44 26 115
Other income (expense)..................... 2,480 -- 2,464 21
--------------- --------------- --------------- ---------------
Total revenues....................... $ 20,470 $ 11,054 $ 42,561 $ 31,359
=============== =============== =============== ===============
</TABLE>
5
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Gross operating income:
Total segment gross operating income....... $ 2,085 $ 1,038 $ 5,929 $ 5,252
General and administrative expenses........ (1,682) (1,269) (3,263) (2,746)
Depreciation and amortization.............. (1,311) (1,136) (2,614) (2,107)
Interest expense........................... (631) (445) (1,432) (893)
Interest income............................ 12 44 26 115
Other income (expense)..................... 2,480 -- 2,464 21
--------------- --------------- --------------- ---------------
Income (loss) before taxes........... $ 953 $ (1,768) $ 1,110 $ (358)
=============== =============== =============== ===============
</TABLE>
6
<PAGE>
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
MarkWest'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 NGL 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 occur or be
successful, (vi) the Company's dependence on certain significant customers,
producers, gatherers and transporters of natural gas, (vii) competition from
other NGL processors, including major energy companies, (viii) the Company's
ability to identify and consummate acquisitions complementary to its business,
and (ix) winter weather conditions. 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 that 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.
Second Quarter 1999 Results
For the quarter ended June 30, 1999, net income was $577,000, or $0.07 per
share, on revenues of $20.5 million. Excluding the $1.5 million after-tax gain
from the sale of the Company's West Memphis terminal, the net loss was $942,000,
or $0.11 per share, on revenues of $18.0 million. These results compare to a net
loss of $1.1 million, or $0.13 per share, on revenues of $11.1 million for the
same period in 1998. Excluding the $2.5 million pretax gain from the sale of the
Company's West Memphis terminal, earnings before interest, taxes, depreciation
and amortization (EBITDA) totaled $374,000 for the quarter, up from a loss of
$231,000 reported for the same period in 1998.
Second quarter results typically reflect seasonally low sales volumes in
Appalachia; propane usage is traditionally higher during the colder months as it
is consumed for heating. Second quarter 1999 operating results were an
improvement over operating results from the second quarter in 1998. Increased
productivity in each of the Company's three business units--Appalachia NGL
production increased 7 percent, Michigan pipeline throughput increased 83
percent, and Rocky Mountain natural gas production increased 6 percent--
contributed approximately $0.9 million after-tax. This increase was partially
offset by expected increases in operating, general and administrative, interest
and depreciation expenses (approximately $0.8 million after-tax).
Six Months Ended June 30, 1999, Results
For the six months ended June 30, 1999, net income was $687,000, or $0.08 per
share, on revenues of $42.6 million. Excluding the $1.5 million after-tax gain
from the sale of the Company's West Memphis terminal, the net loss was $866,000,
or $0.10 per share, on revenues of $40.1 million. This compares to a net loss
of $223,000, or $0.03 per share, on revenues of $31.4 million for the six months
ended June 30, 1998. Margins at MarkWest's Appalachian operations were down $1.0
million after-tax for the six months ended June 30, 1999, compared to results
from the same period in 1998. Expected increases in operating, general and
administrative, interest and depreciation expenses further decreased results
$1.5 million after-tax. These unfavorable variances were partially offset by
the NGL sales volume increase in Appalachia ($0.5 million after-tax) and the
increase in Michigan throughput volumes ($1.2 million after-tax).
7
<PAGE>
Operating Statistics
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------------- -------------------------------
1999 1998 % Change 1999 1998 % Change
--------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C>
Appalachia:
NGL production--Siloam plant (MMgal) 25.8 24.3 7% 53.9 51.2 5%
NGLs marketed--Siloam plant (MMgal) 21.2 18.5 15% 56.9 47.2 21%
Processing margin per gallon (1)
Average NGL sales price $0.322 $0.301 7% $0.288 $0.331 (13%)
Average natural gas cost (2) $0.258 $0.248 4% $0.219 $0.251 (13%)
------ ------ ------ ------
Processing margin per gallon $0.064 $0.053 21% $0.069 $0.080 (14%)
Processing margin per MMBtu (1)
Average NGL sales price $ 3.29 $ 3.10 $ 2.99 $ 3.43
Average natural gas cost (2) $ 2.64 $ 2.55 $ 2.27 $ 2.60
------ ------ ------ ------
Processing margin per MMBtu $ 0.65 $ 0.55 $ 0.72 $ 0.83
Michigan:
Pipeline throughput (MMcfd) 17.3 9.5 83% 19.3 10.7 80%
NGLs marketed (MMgal) 3.4 1.4 150% 7.2 3.2 123%
Rocky Mountains:
Natural gas sold (MMcfd) 2.8 2.7 6% 2.5 2.3 8%
- -------------------------------------
</TABLE>
(1) For convenience, processing margin is expressed both per gallon and per
MMBtu.
(2) Represents cost of sales for Appalachia. Includes transportation cost of
unfractionated liquids from Cobb and Boldman to Siloam and Cobb fuel
charge, totaling approximately $0.20/MMBtu.
Processing and Related Services - Appalachia
Second quarter 1999 NGL production volumes totaled 26 MMgal, up 7 percent
compared to the same period last year, due to the benefits of an additional
compressor installed mid-1998 and to increased producer drilling. Second quarter
1999 plant NGL marketing volumes of 21 MMgal were up 15 percent from the same
period last year.
As previously reported, MarkWest entered into a long-term natural gas processing
services contract with a producer in Appalachia. Beginning early next year, the
producer will consolidate its gas and liquids volumes into existing and expanded
MarkWest facilities and a new 75 MMcfd mechanical refrigeration, natural gas
liquids extraction plant to be built by MarkWest. This project will increase NGL
production and significantly increase the Company's fee-based business.
Depending on the final scope of the expansion of MarkWest facilities, the
Company plans to spend approximately $17.3 million for related capital
expenditures in 1999 and 2000, to be financed from operating cash flows and
existing credit facilities.
As previously reported, the Company sold its West Memphis, Arkansas, wholesale
propane terminal in the second quarter of 1999 for cash proceeds of $5.55
million. The Company realized a $1.5 million, or $0.18 per share, after-tax gain
on the sale.
Production is expected, as previously announced, to be reduced by about 4 MMgal
over the third and fourth quarters of 1999 due to scheduled third-party repairs
on a natural gas transmission pipeline located upstream of MarkWest facilities.
Similar repairs and reduction in production occurred in 1998 and are expected to
occur again in 2000, at which point the project should be completed. In 1998,
these repairs caused a temporary shutdown of MarkWest's Boldman plant for about
two months and reduced NGL volumes at the Company's Kenova plant.
Processing and Related Services - Michigan
Pipeline throughput volumes were 17.3 MMcfd in the second quarter of 1999, up 83
percent over the same period in 1998. During the first half of 1999, a
producer's delay in completing wellhead facilities prevented the connection of
an estimated 7 MMcfd in production. However, during the quarter just ended,
MarkWest began working with the producer to make the necessary wellhead
upgrades; consequently, the wellhead facilities should be completed by mid-third
quarter of 1999. The Company forecast remains at an average of 20 to 21 MMcfd in
pipeline throughput for the year.
During the second quarter of 1999, MarkWest completed several arrangements to
initiate drilling along the Company's transportation and processing facilities.
One producer group agreed to drill four wells by the end of 1999;
8
<PAGE>
MarkWest has a nine percent interest in this program. Two other companies each
committed to drill a well during the fourth quarter of this year. As previously
reported, during the first quarter of 1999, MarkWest signed an agreement with a
producer to earn an interest in their acreage and prospects by drilling up to
five wells. Currently, drilling permits are being obtained for one exploratory
well to be drilled during the fourth quarter of 1999. Further exploration leads
in this program are under evaluation.
Exploration and Production - Rocky Mountains
Natural gas sold in the second quarter of 1999 totaled 2.8 MMcfd, a 6 percent
increase over the same period last year. As previously reported, a new
fracturing technique for coalbed methane gas production was implemented during
the first quarter of 1999. During the second quarter of 1999, based on the
success of the new fracture technology, MarkWest initiated the expansion of
compression facilities in the San Juan Basin to allow for increased volumes.
Upon completion of the compression facilities expansion, the Company anticipates
additional volumes of 1.0 to 1.5 MMcfd. MarkWest has approximately 40 additional
locations to apply the new fracture technology.
Three Months Ended June 30, 1999, Compared to the Three Months Ended June 30,
1998 (in 000s)
<TABLE>
<CAPTION>
1999 (1) 1998 $ Change
-------------------- -------------------- --------------------
<S> <C> <C> <C>
Revenues..................................... $ 17,961 $ 11,054 $ 6,907
Gross profit (loss) (2)...................... $ 745 $ (98) $ 843
Income (loss) before income taxes............ $ (1,556) $ (1,768) $ 212
Provision (benefit) for income taxes......... (614) (628) (14)
-------------------- -------------------- --------------------
Net income (loss)............................ $ (942) $(1,140) $ 198
==================== ==================== ====================
- ---------------------------------------------
</TABLE>
(1) Excludes $2.5 million gain ($1.5 million after-tax) on the sale of the
Company's West Memphis terminal.
(2) Excludes interest income, general and administrative expense and interest
expense.
Revenues
Gathering, processing and marketing revenue. Gathering, processing and
marketing revenue increased $6.7 million or 63 percent for the three months
ended June 30, 1999, compared to the same period in 1998. The revenue increase
was principally attributable to a $4.2 million increase in the Company's new gas
marketing operations. An 83 percent increase in the volume of gas gathered and
processed in Michigan added an incremental $1.3 million in revenues for the
quarter ended June 30, 1999. 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 NGL extraction facility.
At the Company's Siloam fractionation facility, a 7 percent or $0.5 million
increase in the average NGL sales price coupled with a 15 percent or $0.8
million increase in gallons sold contributed $1.3 million to the increase in
revenues.
Oil and gas revenue. Oil and gas revenue increased by $219,000 for the three
months ended June 30, 1999, compared to the same period in 1998. The increase
is principally attributable to a 77 percent increase in unit sales prices. A 6
percent increase in volumes sold also contributed to the overall revenue
increase.
Costs and Expenses
Cost of sales. Cost of sales increased $5.4 million or 71 percent for the
three months ended June 30, 1999, compared to the same period in 1998. The
increase was primarily caused by a $4.4 million increase in gas marketing
purchases and a $0.2 million increase in Michigan NGL sold. A 4 percent or $0.2
million increase in Appalachia natural gas costs plus a 15 percent or $0.7
million increase in volumes sold at the Company's Siloam facility combined to
increase cost of sales by $0.9 million.
Operating expenses. Operational expenses increased $537,000 or 23 percent for
the three months ended June 30, 1999, compared to the three months ended June
30, 1998. The increase in operating expenses was principally attributable to
two factors. First, MarkWest sold and leased back three compressors at its
Kenova processing plant beginning in the third quarter of 1998. Consequently,
second quarter 1999 operating expenses include lease expense whereas second
quarter 1998 results do not. Secondly, second quarter 1998 operating expenses
were lower due to a sales and use tax refund.
9
<PAGE>
General and administrative expenses. General and administrative expenses
increased $413,000 or 33 percent for the three months ended June 30, 1999,
compared to the same period in 1998. The increase was primarily the result of
two items. First, the Company did not pay its employees bonuses in 1998 due to
poor market conditions and associated operating results. First quarter 1998
accrued bonus expense was reversed during the second quarter of 1998. Second,
legal fees increased due to the Company's ongoing arbitration with Columbia.
Depreciation, depletion and amortization. Depreciation, depletion and
amortization increased $175,000 or 15 percent for the second quarter of 1999
compared to the second quarter of 1998, principally from the completion of
pipeline extensions in Michigan.
Interest expense. Interest expense increased $186,000 for the second quarter
of 1999 compared to the second quarter of 1998. This increase was caused by
higher average debt balances and an increase in average interest rates.
Six Months Ended June 30, 1999, Compared to the Six Months Ended June 30, 1998
(in 000s)
<TABLE>
<CAPTION>
1999 (1) 1998 $ Change
-------------------- -------------------- --------------------
<S> <C> <C> <C>
Revenues..................................... $ 40,052 $31,359 $ 8,693
Gross profit (loss) (2)...................... $ 3,270 $ 3,166 $ 104
Income (loss) before income taxes............ $ (1,399) $ (358) $(1,041)
Provision for income taxes................... (533) (135) 398
----------- ---------- ----------
Net income (loss)............................ $ (866) $ (223) $ (643)
=========== ========== ==========
- ---------------------------------------------
</TABLE>
(1) Excludes $2.5 million gain ($1.5 million after-tax) on the sale of the
Company's West Memphis terminal.
(2) Excludes interest income, general and administrative expense and interest
expense.
Revenues
Gathering, processing and marketing revenue. Gathering, processing and
marketing revenue increased $8.7 million or 28 percent for the six months ended
June 30, 1999, compared to the same period in 1998. The revenue increase was
principally attributable to a $6.0 million increase in the Company's rapidly
expanding gas marketing operations. An 80 percent increase in the volume of
gas gathered and processed in Michigan added an incremental $2.9 million to the
six months ended June 30, 1999. 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 NGL extraction
facility. At the Company's Siloam fractionation facility, a 13 percent or $2.4
million decrease in the average NGL sales price partially offset a 21 percent or
$3.2 million increase in gallons sold, netting an incremental $0.8 million
increase in revenues. Margins from the Company's remaining Appalachian
operations decreased $0.9 million.
Oil and gas revenue. Oil and gas revenue increased by $126,000 for the six
months ended June 30, 1999, compared to the same period in 1998. Average sales
price per unit increased 12 percent while volumes sold increased 8 percent.
Costs and Expenses
Cost of sales. Cost of sales increased $7.4 million or 35 percent for the six
months ended June 30, 1999, compared to the same period in 1998. The increase
was primarily caused by a $6.2 million increase in gas marketing purchases and
$0.9 million increase in Michigan NGL sold. A 13 percent or $1.8 million
decrease in average Appalachia natural gas costs partially offset a 21 percent
or $2.4 million increase in volumes sold at the Company's Siloam facility
resulting in an incremental increase to cost of sales of $0.6 million.
Operating expenses. Operational expenses increased $806,000 or 16 percent for
the six months ended June 30, 1999, compared to the six months ended June 30,
1998. The increase in operating expenses was principally attributable to two
factors. First, MarkWest sold and leased back three compressors at its Kenova
processing plant beginning in the third quarter of 1998. Consequently,
operating expenses from the first six months of 1999 include
10
<PAGE>
lease expense whereas results from the comparable time period in 1998 do not.
Secondly, year to date 1998 operating expenses were lower due to a sales and use
tax refund.
General and administrative expenses. General and administrative expenses
increased $517,000 for the six months ended June 30, 1999, compared to the same
period in 1998. The increase was primarily attributable to two items. First,
the Company did not pay its employees bonuses in 1998 due to poor market
conditions and associated operating results. Second, legal fees increased due
to the Company's ongoing arbitration with Columbia.
Depreciation, depletion and amortization. Depreciation, depletion and
amortization increased $507,000 or 24 percent for the first six months of 1999
compared to the first six months of 1998, principally from the completion of
pipeline extensions in Michigan.
Interest expense. Interest expense increased $539,000 for the six months
ended June 30, 1999 compared to the six months ended June 30, 1998. This
increase was principally attributable to higher average debt balances and an
increase in average interest rates.
Liquidity and Capital Resources
The Company's sources of liquidity and capital resources historically have been
net cash provided by operating activities; proceeds from the issuance of long-
term debt and equity; and, in 1999, proceeds from the sale of the Company's West
Memphis terminal. In the past, these sources have been sufficient to meet
MarkWest's needs and finance the growth of its business.
The following summary table reflects comparative cash flows for the Company for
the six months ended June 30, 1999 and 1998 (in 000s):
<TABLE>
<CAPTION>
For the six months ended June 30,
1999 1998
------------------------ ------------------------
<S> <C> <C>
Net cash provided by operating activities before change in
working capital................................................. $ 845 $ 2,871
Net cash provided by operating activities from change in working
capital......................................................... 8,095 5,857
Net cash provided by (used in) investing activities.............. 2,565 (9,293)
Net cash used in financing activities............................ $(11,864) $ (259)
</TABLE>
For the six months ended June 30, 1999, net cash provided by operating
activities before adjustments for working capital decreased $2.0 million
compared to the same period in 1998, primarily as a result of a decrease in
operating income over the same time period.
Net cash provided by operating activities from the change in working capital
increased $2.2 million for the six months ended June 30, 1999, compared to the
same time period in 1998. The change in working capital was principally
attributable to an income tax refund.
Cash provided by investing activities increased $11.9 million for the six months
ended June 30, 1999, compared to the six months ended June 30, 1998. During the
six months ended June 30, 1999, MarkWest received $6.3 million in gross proceeds
from the sales of the Company's West Memphis terminal and non-core Rocky
Mountain properties. During the first half of 1998, the Company's pipeline
extension in Michigan was under construction, contributing an incremental $5.1
million in capital expenditures. This project was completed in late 1998.
For the six months ended June 30, 1999, cash used in financing activities, being
net debt repayments, increased $11.6 million compared to the same period in
1998. The increase was strictly a function of the other aforementioned factors
impacting cash flows.
Financing Facilities
At June 30, 1999, the Company had approximately $31.6 million of available
credit, of which net debt (debt less cash) of $24.9 million had been utilized,
and working capital of $3.5 million. The Company believes that cash provided by
operating activities, together with amounts available to be borrowed under its
financing facilities, will
11
<PAGE>
provide sufficient funds to maintain its existing facilities and fund its
capital expenditure program. As 1999 progresses, the Company's credit
availability is expected to increase as its Michigan volumes contribute more to
MarkWest's trailing cash flow calculation, the determinant of the Company's
available credit, even if processing margins remain low. Depending on the timing
and amount of the Company's future projects, it may be required to seek
additional sources of capital. Although the Company believes that, if required,
it would be able to secure additional financing on terms acceptable to the
Company, no assurance can be given that it will be able to do so.
Capital Investment Program
The Company's capital investment program for 1999 is estimated at $18 million,
up from the $5.6 million previously estimated. The increase in expected capital
investment stems from the Company's second quarter execution of a long-term
natural gas processing services contract with a producer in Appalachia. As a
result of this new arrangement, MarkWest plans to expand existing facilities
while building a new 75 MMcfd mechanical refrigeration, NGL extraction plant in
Appalachia. Construction commences in the second half of 1999 and is
anticipated to be completed in 2000. Of the Company's total capital budget of
$18 million for 1999, approximately $10 million is earmarked for the new NGL
extraction plant and expansion of existing MarkWest facilities in Appalachia.
The remaining capital programs will focus primarily on exploration and
production activities in Michigan and the Rocky Mountains. For the six months
ended June 30, 1999, the Company's capital expenditures totaled approximately
$3.8 million, including $1.4 million for properties acquired in the San Juan
Basin.
Risk Management Activities
During the three months ended June 30, 1999 and 1998, and during the six months
ended June 30, 1999 and 1998, no gains or losses were recognized in operating
income on the settlement of propane and natural gas futures. Financial
instrument gains and losses on hedging activities are generally offset by
amounts realized from the sale of the underlying products in the physical
market.
As of June 30, 1999, the Company was short 647,312 MMBtu, which were accrued at
$2.26 per MMBtu, related to its processing operations. The Company's short
position was covered in July 1999 at approximately its accrued price. In the
San Juan Basin, MarkWest has locked in an average sales price of $1.87 per MMBtu
on 225,000 MMBtu of third quarter 1999 production, an average sales price of
$1.90 per MMBtu on 225,000 MMBtu of fourth quarter 1999 production, and an
average sales price of $1.97 per MMBtu on 587,000 MMBtu of production from
January through October 2000.
As of August 12, 1999, the Company has locked in virtually all of its forecasted
Appalachian third quarter 1999 NGL sales volumes at an approximate $0.12 per
gallon margin. For the fourth quarter of 1999, MarkWest has locked in 5.3
million gallons, or an estimated 15-20 percent, of Appalachian NGL sales volumes
at an approximate $0.15 per gallon margin. These margins were obtained through
the purchase of natural gas forward contracts with predetermined Btu
differentials based upon certain index propane prices; NGL basis risk has not
been hedged.
At June 30, 1999, the Company had no other material notional quantities of NGL,
natural gas, or crude oil futures, swaps or options. At June 30, 1998, the
Company had a total of 295 long open propane futures and forward contracts
representing a notional quantity of 295,000 barrels. The Company also had a
total of 110 short open natural gas futures contracts representing a notional
quantity of 1,100,000 MMBtu. At June 30, 1998, the Company had no other
material notional quantities of crude oil futures or NGL, natural gas, or crude
oil swaps or options.
Impact of the Year 2000 Issue
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. 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 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 gathering and processing volumes and associated revenues.
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 has upgraded or plans to upgrade to the most recent release. A complete
analysis of the
12
<PAGE>
Company's Year 2000 Issue, 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, was completed in early 1999.
Remediation has begun and is expected to be completed during the third quarter
of 1999 for existing systems. The Company is evaluating new systems as they
arise, and expects to have full remediation of these systems before the end of
the fourth quarter. A contingency plan to deal with unexpected Year 2000 issues
is being developed and will be finalized in the fourth quarter of 1999. Based
upon current information, the Company estimates that the total cost of its Year
2000 initiative will be approximately $110,000. The Year 2000 costs include all
activities undertaken on Year 2000 related matters across the Company,
including, but not limited to, remediation, testing, third-party review, risk
mitigation and contingency planning. All Year 2000 costs have been and will
continue to be funded through operating cash flow and are expensed in the period
in which they are incurred. 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, Year 2000
should have little impact on the Company's computer systems.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Reference is made to Risk Management Activities in Item 2 of this Form 10-Q.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to Note 3 of the Company's Consolidated Financial Statements
in Item 1 of this Form 10-Q.
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Stockholders held on May 13, 1999, the following
proposals were adopted by the margins indicated:
1. To elect two Class II directors to hold office for a three-year term
expiring at the Annual Meeting of Stockholders occurring in the year 2002
or until the election and qualification of their respective successors.
<TABLE>
<CAPTION>
Number of Shares For Withheld
----------------------- ----------------------
<S> <C> <C>
John M. Fox..................................................... 6,774,019 731,700
Donald D. Wolf.................................................. 6,774,119 731,600
</TABLE>
2. To ratify the selection of PricewaterhouseCoopers LLP as the Company's
independent accountants for the fiscal year ending December 31, 1999.
<TABLE>
<CAPTION>
Number of
Shares
--------------------
<S> <C>
For............................................................. 7,502,544
Withheld........................................................ 3,175
</TABLE>
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
13
<PAGE>
(1) A report on Form 8-K dated May 27, 1999 was filed during the second quarter
of 1999 to announce the sale of the Company's West Memphis, Arkansas
wholesale propane terminal to Texon Distributing, L.P.
(2) A report on Form 8-K dated June 10, 1999 was filed during the second
quarter of 1999 to announce that the Company had entered into a long-term
natural gas processing services contract with a producer in Kentucky.
14
<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: August 12, 1999 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)
15
<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 six months ended
June 30, 1999 June 30, 199
--------------------- ------------------------
<S> <C> <C>
Net income $ 577 $ 687
Weighted average number of outstanding
shares of common stock 8,492 8,485
Basic earnings per share $ 0.07 $ 0.08
====================== ========================
Net income $ 577 $ 687
Weighted average number of outstanding
shares of common stock 8,492 8,485
Dilutive stock options 11 7
--------------------- ------------------------
8,503 8,492
Earnings per share assuming dilution $ 0.07 $ 0.08
===================== ========================
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extractedfrom the
consolidated balance sheet and consolidated statements of operations of the
Company's March 31, 1999 Form 10-Q and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,696
<SECURITIES> 0
<RECEIVABLES> 10,007
<ALLOWANCES> 120
<INVENTORY> 4,846
<CURRENT-ASSETS> 16,909
<PP&E> 100,725
<DEPRECIATION> (20,407)
<TOTAL-ASSETS> 98,015
<CURRENT-LIABILITIES> 13,410
<BONDS> 26,567
0
0
<COMMON> 85
<OTHER-SE> 50,802
<TOTAL-LIABILITY-AND-EQUITY> 98,015
<SALES> 40,071
<TOTAL-REVENUES> 42,561
<CGS> 28,236
<TOTAL-COSTS> 28,236
<OTHER-EXPENSES> 11,783
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,432
<INCOME-PRETAX> 1,110
<INCOME-TAX> 423
<INCOME-CONTINUING> 687
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 687
<EPS-BASIC> 0.08
<EPS-DILUTED> 0.08
</TABLE>
