<PAGE>
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, 2000
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 (IRS 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 8,452,174 shares of common stock, $.01 per share par value,
outstanding as of June 30, 2000.
<PAGE>
<TABLE>
<CAPTION>
Page
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PART I--FINANCIAL INFORMATION
<S> <C>
Item 1. Consolidated Financial Statements
Consolidated Balance Sheet at June 30, 2000 and December 31, 1999 ... 1
Consolidated Statement of Operations for the Three and Six Months
Ended June 30, 2000 and 1999 .................................... 2
Consolidated Statement of Cash Flows for the Three and Six Months
Ended June 30, 2000 and 1999 .................................... 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
SIGNATURE ...................................................................... 13
</TABLE>
GLOSSARY OF TERMS
Bbls barrels
Bcf billion cubic feet of natural gas
Btu British thermal units, an energy measurement
EBITDA earnings before gain on sale, interest income, interest expense,
income taxes, depreciation, depletion and amortization; a cash flow
financial measure commonly used in the oil and gas industry
MM million
Mcf thousand cubic feet of natural gas
Mcfd thousand cubic feet of natural gas per day
MMBtu million British thermal units, an energy measurement
MMcf million cubic feet of natural gas
MMcfd million cubic feet of natural gas 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
(UNAUDITED)
(000s, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 2000 1999
--------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents .................................................. $ 1,518 $ 1,356
Receivables ................................................................ 16,421 16,360
Inventories ................................................................ 6,761 6,043
Prepaid feedstock .......................................................... 4,118 1,895
Other assets ............................................................... 352 327
--------- ---------
Total current assets .................................................. 29,170 25,981
Property and equipment:
Gas processing, gathering, storage and marketing equipment ................. 92,791 78,476
Oil and gas properties and equipment ....................................... 16,366 14,518
Land, buildings and other equipment ........................................ 6,124 11,409
Construction in progress ................................................... 3,302 10,697
--------- ---------
118,583 115,100
Less: accumulated depreciation, depletion and amortization ................. (24,950) (22,789)
--------- ---------
Total property and equipment, net ..................................... 93,633 92,311
Intangible assets, net of accumulated amortization of $515 and
$438, respectively .......................................................... 924 951
--------- ---------
Total assets .......................................................... $ 123,727 $ 119,243
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities ................................... $ 21,438 $ 14,366
Current portion of long-term debt .......................................... -- 104
--------- ---------
Total current liabilities ............................................. 21,438 14,470
Deferred income taxes .......................................................... 9,260 8,019
Long-term debt ................................................................. 36,000 44,035
Stockholders' equity:
Preferred stock, par value $0.01, 5,000,000 shares authorized, 0 shares
outstanding .............................................................. -- --
Common stock, par value $0.01, 20,000,000 shares authorized, 8,531,206 and
8,531,206 shares issued, respectively .................................... 85 85
Additional paid-in capital ................................................. 42,240 42,222
Retained earnings .......................................................... 15,163 10,801
Treasury stock, 79,032 and 69,504 shares, respectively ..................... (459) (389)
--------- ---------
Total stockholders' equity ............................................ 57,029 52,719
--------- ---------
Total liabilities and stockholders' equity ............................ $ 123,727 $ 119,243
========= =========
</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,
-------------------------- --------------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Gathering, processing and marketing revenue ................. $ 38,698 $ 17,511 $ 83,332 $ 39,339
Oil and gas revenue, net of transportation and
taxes ..................................................... 630 467 1,121 732
-------- -------- -------- --------
Total revenues ......................................... 39,328 17,978 84,453 40,071
Operating expenses:
Cost of sales ............................................... 30,417 12,971 62,428 28,236
Operating expenses .......................................... 4,089 2,922 7,895 5,906
General and administrative expenses ......................... 2,018 1,682 3,857 3,263
Depreciation, depletion and amortization .................... 1,461 1,311 2,896 2,614
-------- -------- -------- --------
Total operating expenses ............................... 37,985 18,886 77,076 40,019
Income from operations ................................. 1,343 (908) 7,377 52
Other income and expense:
Interest income ............................................. 31 12 53 26
Interest expense ............................................ (655) (631) (1,402) (1,432)
Gain on sale of assets ...................................... 1,000 2,509 1,000 2,509
Other income (expense) ...................................... 66 (29) 93 (45)
-------- -------- -------- --------
Income before income taxes ............................. 1,785 953 7,121 1,110
Provision for income taxes:
Current ..................................................... 373 302 1,518 349
Deferred .................................................... 305 74 1,241 74
-------- -------- -------- --------
678 376 2,759 423
-------- -------- -------- --------
Net income ............................................. $ 1,107 $ 577 $ 4,362 $ 687
======== ======== ======== ========
Basic earnings per share of common stock ........................ $ 0.13 $ 0.07 $ 0.52 $ 0.08
======== ======== ======== ========
Earnings per share assuming dilution ............................ $ 0.13 $ 0.07 $ 0.51 $ 0.08
======== ======== ======== ========
Weighted average number of outstanding shares of common stock:
Basic .................................................. 8,451 8,492 8,452 8,485
======== ======== ======== ========
Assuming dilution ...................................... 8,483 8,503 8,475 8,492
======== ======== ======== ========
</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,
-------------------------- --------------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income ................................................. $ 1,107 $ 577 $ 4,362 $ 687
Add income items that do not affect working capital:
Depreciation, depletion and amortization ............... 1,461 1,311 2,896 2,614
Deferred income taxes .................................. 305 74 1,241 74
Gain on sale of assets ................................. (1,000) (2,509) (1,000) (2,509)
Other .................................................. (9) (11) (137) (21)
-------- -------- -------- --------
1,864 (558) 7,362 845
Adjustments to working capital:
(Increase) decrease in receivables ..................... (3,364) 143 (61) (2,149)
Increase in inventories ................................ (3,010) (3,255) (718) (263)
(Increase) decrease in prepaid expenses and other
assets ................................................. (2,099) 2,118 (2,256) 4,529
Increase in accounts payable and accrued liabilities ... 1,127 5,433 7,093 5,978
-------- -------- -------- --------
(7,346) 4,439 4,058 8,095
Net cash provided by (used in) operating
activities .................................... (5,482) 3,881 11,420 8,940
Cash flows from investing activities:
Capital expenditures ................................... (2,728) (1,649) (9,288) (3,802)
Proceeds from sale of assets ........................... 1,399 5,927 6,484 6,347
Other .................................................. -- 1 -- 20
-------- -------- -------- --------
Net cash provided by (used in) investing
activities .................................... (1,329) 4,279 (2,804) 2,565
Cash flows from financing activities:
Proceeds from long-term debt .............................. 15,000 7,000 20,500 11,619
Repayment of long-term debt ............................... (9,049) (14,013) (28,639) (23,652)
Net reissuance (buy-back) of treasury stock ............... 19 37 (52) 169
Debt issuance costs ....................................... (263) -- (263) --
-------- -------- -------- --------
Net cash provided by (used in) financing
activities .................................... 5,707 (6,976) (8,454) (11,864)
-------- -------- -------- --------
Net increase (decrease) in cash and cash equivalents ............ (1,104) 1,184 162 (359)
Cash and cash equivalents at beginning of period ................ 2,622 512 1,356 2,055
-------- -------- -------- --------
Cash and cash equivalents at end of period ...................... $ 1,518 $ 1,696 $ 1,518 $ 1,696
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
MARKWEST HYDROCARBON, INC.
NOTES TO CONSOLIDATED 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., and MarkWest Michigan, 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, 1999, 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 primarily due to tax
credits.
NOTE 2. LONG-TERM DEBT
Effective May 26, 2000, the Company amended its existing credit agreement. The
amended agreement extends for an additional year, through the year 2006, and
provides for a $15 million increase to the maximum borrowing amount, now $65
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. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. This statement, as amended by SFAS Nos. 137
and 138, is effective for fiscal years beginning after June 15, 2000. SFAS No.
133 requires an entity to recognize all derivatives as assets or liabilities in
the balance sheet and measure those instruments at fair value. Although the
Company is currently evaluating SFAS No. 133, it is not expected to have a
material impact on the financial condition or operations of the Company.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB") No. 101, REVENUE RECOGNITION IN FINANCIAL
STATEMENTS, that provides guidance on the recognition, presentation and
disclosure of revenue in financial statements filed with the SEC. This bulletin,
as amended by SAB No. 101B, must be implemented no later than the fourth fiscal
quarter of 2000. Although the Company is currently evaluating SAB No. 101, it is
not expected to have a material impact on the financial condition or operations
of the Company.
NOTE 4. SEGMENT REPORTING
The Company's operations are classified into two reportable segments, as
follows:
(1) Processing and Related Services--provide compression, gathering,
treatment and NGL extraction, and fractionation services; also
purchase and market natural gas and NGL; and
(2) Exploration and Production--explore for and produce natural gas.
MarkWest evaluates the performance of its segments and allocates resources to
them based on operating income. There are no intersegment revenues. MarkWest's
business is conducted solely in the United States.
The table below presents information about operating income for the reported
segments for the second quarter of 2000 and the six months ended June 30, 2000,
and for the corresponding periods in 1999. Operating income for each segment
includes total revenues less operating expenses, and excludes depreciation,
depletion and amortization, corporate administrative expenses, interest expense,
interest income and income taxes. Asset information by reportable segment is not
reported, since MarkWest does not produce such information internally.
4
<PAGE>
MARKWEST HYDROCARBON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Processing and Exploration and
Related Services Production Total
(000s) (000s) (000s)
---------------- --------------- ------
<S> <C> <C> <C>
FOR THE QUARTER ENDED JUNE 30, 2000
Revenues ............................. $38,698 $ 630 $39,328
Segment operating income ............. $ 4,540 $ 282 $ 4,822
FOR THE QUARTER ENDED JUNE 30, 1999
Revenues ............................. $17,511 $ 467 $17,978
Segment operating income ............. $ 1,922 $ 163 $ 2,085
FOR THE SIX MONTHS ENDED JUNE 30, 2000
Revenues ............................. $83,332 $1,121 $84,453
Segment operating income ............. $13,551 $ 579 $14,130
FOR THE SIX MONTHS ENDED JUNE 30, 1999
Revenues ............................. $39,339 $ 732 $40,071
Segment operating income ............. $ 5,624 $ 305 $ 5,929
</TABLE>
A reconciliation of total segment 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, 2000 June 30, 1999 June 30, 2000 June 30, 1999
------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Total segment operating income ......... $ 4,822 $ 2,085 $ 14,130 $ 5,929
General and administrative expenses .... (2,018) (1,682) (3,857) (3,263)
Depreciation and amortization .......... (1,461) (1,311) (2,896) (2,614)
Interest income ........................ 31 12 53 26
Interest expense ....................... (655) (631) (1,402) (1,432)
Gain on sale of assets ................. 1,000 2,509 1,000 2,509
Other income (expense) ................. 66 (29) 93 (45)
------- ------- -------- -------
Income before taxes .............. $ 1,785 $ 953 $ 7,121 $ 1,110
======= ======= ======== =======
</TABLE>
5
<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
third party or Company natural gas exploration and production activities will
not occur or be successful; (vi) the Company's dependence on certain significant
customers, producers, gatherers, treaters and transporters of natural gas, (vii)
competition from other NGL processors, including major energy companies; (viii)
the Company's ability to identify and consummate grass roots projects or
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 2000 RESULTS
For the quarter ended June 30, 2000, net income was $1.1 million, or $0.13 per
share, up $0.5 million or $0.06 per share, from 1999. Excluding the $0.6 million
after-tax gain from the sale of an asset in May 2000 and the $1.5 million
after-tax gain from the sale of a terminal in May 1999, net income was $0.5
million, or $0.6 per share, for the quarter ended June 30, 2000 compared to a
net loss was $0.9 million, or $0.11 per share for the quarter ended June 30,
1999. Excluding the $1.0 million pre-tax gain from the sale of an asset,
earnings before interest, taxes and depreciation, depletion and amortization
("EBITDA") totaled $2.9 million for the second quarter of 2000. Excluding the
$2.5 million pre-tax gain from the sale of a terminal, EBITDA totaled $0.4
million for the quarter ended June 30, 1999.
Results from MarkWest's Appalachian operations increased $1.9 million after-tax
principally from increased processing margins ($1.6 million) and the first full
quarter's contribution from the recently completed Phase I expansion, partially
offset by a scheduled reduction in processing fees. Decreased western Michigan
throughput and sales volumes were largely offset by increased sales prices, and
improved Rocky Mountain business unit results. General and administrative and
depreciation expenses increased as expected by $0.3 million after-tax.
SIX MONTHS ENDED JUNE 30, 2000, RESULTS
For the six months ended June 30, 2000, net income was $4.4 million, or $0.52
per share, up $3.7 million or $0.44 per share from 1999. Excluding the
aforementioned after-tax gains from the sale of Company assets in the second
quarters of 2000 and 1999, net income was $3.8 million, or $0.44 per share, for
the six months ended June 30, 2000 compared to a net loss of $0.9 million, or
$0.10 per share, for the six months ended June 30, 1999. EBITDA in 2000 was
$10.4 million; four times 1999's $2.6 million.
Results from MarkWest's Appalachian operations increased $5.3 million after-tax
for the six months ended June 30, 2000, compared to results from the same period
in 1999, from increased processing margins ($4.6 million) and the completion of
the Phase I expansion in mid-first quarter 2000. However, expected increases in
general and administrative, and depreciation expenses decreased results $0.5
million after-tax. The decline in western Michigan throughput and sales volumes
were largely offset by increased sales prices, and improved results in the Rocky
Mountain business unit.
6
<PAGE>
OPERATING STATISTICS
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
-------------------------------------- --------------------------------------
2000 1999 % Change 2000 1999 % Change
---------- ---------- -------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Appalachia:
NGL production--Siloam plant (gallons) ... 40,500,000 25,800,000 57% 73,800,000 53,900,000 37%
NGL sales--Siloam plant (gallons):
Sales earning a processing margin ..... 23,200,000 21,200,000 9% 55,600,000 56,900,000 (2%)
Sales earning fee income .............. 9,600,000 -- -- 14,100,000 -- --
---------- ---------- ---------- ----------
Total NGL sales--Siloam plant ......... 32,800,000 21,200,000 55% 69,700,000 56,900,000 22%
Processing margin per gallon:
Average NGL sales price ............... $ 0.53 $ 0.32 66% $ 0.56 $ 0.29 93%
Average natural gas cost .............. 0.36 0.26 38% 0.35 0.22 59%
---------- ---------- ---------- ----------
Processing margin per gallon .......... $ 0.17 $ 0.06 183% $ 0.21 $ 0.07 200%
Michigan:
Pipeline throughput (Mcfd) ............... 12,300 17,300 (29%) 12,800 19,300 (34%)
NGL sales (gallons) ...................... 2,400,000 3,400,000 (29%) 5,200,000 7,200,000 (28%)
Rocky Mountains:
Natural gas produced (Mcfd) .............. 3,300 2,500 32% 3,300 2,200 50%
</TABLE>
PROCESSING AND RELATED SERVICES - APPALACHIA
Second quarter 2000 marked the first full quarter of operations at the Company's
recently completed Phase I expansion of its Appalachian facilities. Phase I
expansion consisted of the construction of a 75 MMcfd, mechanical refrigeration,
NGL extraction plant ("Maytown") in southern Kentucky; the connection of the
Maytown plant to the Company's Siloam fractionation facility; and the expansion
of the Siloam fractionator, which is expected to increase throughput volumes
from 310,000 gallons per day to 460,000 gallons per day during 2000.
Phase I expansion led to second quarter 2000 NGL production volumes of 40.5
MMgal, up 57 percent compared to the same period last year. Second quarter 2000
plant NGL marketing volumes of 32.8 MMgal were up 55 percent from the same
period last year.
PROCESSING AND RELATED SERVICES - MICHIGAN
Pipeline throughput volumes were 12,300 Mcfd in the second quarter of 2000, down
29 percent over the same period in 1999. This reduction was due to natural
production declines and delays on receiving volumes from shut-in wells involved
in third-party litigation. MarkWest's own exploration continues to move ahead.
The first well drilled by MarkWest encountered a reef as predicted, and a
horizontal leg will evaluate its potential in August 2000. A second well was
unsuccessful. An additional two wells identified with extensive seismic
reprocessing will be drilled in August 2000. The Company estimate for the
remainder of 2000 is an average of 9,500 Mcfd in pipeline throughput.
Construction on the Company's eastern Michigan operations ("Au
Gres")--consisting of a well and well facility, a pipeline, and a gas processing
plant--was completed prior to the end of second quarter. The well was producing
up to 1,800 Mcfd during early July 2000. After further production history,
several more wells in the field may be brought on stream. The Au Gres project
has the potential to make an important impact on our Michigan operations.
EXPLORATION AND PRODUCTION - ROCKY MOUNTAINS
Natural gas sold in the second quarter of 2000 totaled 3,300 Mcfd, a 32 percent
increase over the same period last year. In the second quarter 2000, MarkWest
decided on the basis of the favorable outlook for natural gas prices not to sell
its San Juan Basin unit as previously announced. Instead, further development of
existing San Juan Basin properties will be pursued. The Company sold its
Piceance Basin properties for $0.3 million in proceeds during the second quarter
of 2000.
7
<PAGE>
THREE MONTHS ENDED JUNE 30, 2000, COMPARED TO THE THREE MONTHS ENDED JUNE 30,
1999 (IN THOUSANDS)
<TABLE>
<CAPTION>
2000 (1) 1999 (2) $ Change
-------- -------- --------
<S> <C> <C> <C>
Revenues ............................... $ 39,328 $ 17,978 $ 21,350
Income (loss) from operations .......... $ 1,343 $ (908) $ 2,251
Income (loss) before income taxes ...... $ 785 $ (1,556) $ 2,341
Provision (benefit) for income taxes.... 298 (614) (912)
-------- -------- --------
Net income (loss) ...................... $ 487 $ (942) $ 1,429
======== ======== ========
</TABLE>
-------------------
(1) Excludes $1.0 million gain ($0.6 million after-tax) on the sale of an
asset.
(2) Excludes $2.5 million gain ($1.5 million after-tax) on the sale of a
terminal.
REVENUES
GATHERING, PROCESSING AND MARKETING REVENUE. Gathering, processing and marketing
revenue increased $21.2 million or 121 percent for the three months ended June
30, 2000, compared to the same period in 1999. At the Company's Siloam
fractionation facility, a 66 percent or $4.8 million increase in the average NGL
sales price coupled with a 55 percent or $5.9 million increase in gallons sold
contributed $10.7 million to the increase in revenues. The increase in average
NGL sales prices was attributable to the corresponding increase in oil prices.
The increase in gallons sold was a result of the first full quarter's operations
of the Company's expanded Appalachian facilities. Gas marketing sales, boosted
by higher year over year natural gas prices and volumes, contributed an
additional $12.1 million in revenues during the second quarter 2000. Combined
with a corresponding increase in gas marketing cost of sales, the second quarter
2000 gross margin from gas marketing increased $60,000 over second quarter 1999.
The Company's gas marketing activities generate low margins; these activities
are executed in support of MarkWest's processing business. Other items decreased
revenues by $1.6 million.
COSTS AND EXPENSES
COST OF SALES. Cost of sales increased $17.4 million or 135 percent for the
three months ended June 30, 2000, compared to the same period in 1999. A 38
percent or $2.4 million increase in Appalachia natural gas costs plus a 55
percent or $4.7 million increase in volumes sold at the Company's Siloam
facility combined to increase cost of sales by $7.1 million. The increase was
also caused by an $12.1 million increase in gas marketing purchases. Combined
with a corresponding increase in gas marketing sales, the second quarter 2000
gross margin from gas marketing increased $60,000 over second quarter 1999. The
Company's gas marketing activities generate low margins; these activities are
executed in support of MarkWest's processing business. Other items decreased
cost of sales by $1.8 million
OPERATING EXPENSES. Operating expenses increased $1.2 million or 40 percent for
the three months ended June 30, 2000, compared to the three months ended June
30, 1999. The increase in operating expenses was principally attributable to
operating costs associated with incremental facilities added in Appalachia since
June 30, 1999: the Lynchburg and Lordstown terminals; the Maytown, Boldman and
Cobb extraction facilities and related pipeline; and the expanded Siloam
fractionation plant.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased $0.3 million or 20 percent primarily in support of the additional and
expanded Appalachia facilities previously mentioned and rent for office space;
the Company sold its corporate headquarters and leased back its office space
commencing in February 2000. The aforementioned increases were partially offset
by reduced legal costs.
DEPRECIATION, DEPLETION AND AMORTIZATION. Depreciation, depletion and
amortization increased as a result of the completion of the Phase I expansion in
Appalachia in the first quarter of 2000.
8
<PAGE>
SIX MONTHS ENDED JUNE 30, 2000, COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1999
(IN 000s)
<TABLE>
<CAPTION>
2000 (1) 1999 (2) $ Change
-------- -------- --------
<S> <C> <C> <C>
Revenues ............................... $84,453 $ 40,071 $ 44,382
Income from operations ................. $ 7,377 $ 52 $ 7,325
Income (loss) before income taxes ...... $ 6,121 $ (1,399) $ 7,520
Provision (benefit) for income taxes ... 2,372 (533) (2,905)
-------- -------- --------
Net income (loss) ...................... $ 3,749 $ (866) $ 4,615
======= ======== ========
</TABLE>
-------------------
(1) Excludes $1.0 million gain ($0.6 million after-tax) on the sale of an
asset.
(2) Excludes $2.5 million gain ($1.5 million after-tax) on the sale of a
terminal.
REVENUES
GATHERING, PROCESSING AND MARKETING REVENUE. Gathering, processing and marketing
revenue increased $44.0 million or 112 percent for the six months ended June 30,
2000, compared to the same period in 1999. At the Company's Siloam fractionation
facility, a 93 percent or $15.0 million increase in the average NGL sales price
coupled with a 22 percent or $7.6 million increase in gallons sold contributed
$22.6 million to the increase in revenues. The increase in average NGL sales
prices was attributable to the corresponding increase in oil prices. The
increase in gallons sold was a result of the mid-first quarter 2000 start up of
the Company's expanded Appalachian facilities. Gas marketing sales, boosted by
higher year over year natural gas prices and volumes, contributed an additional
$20.8 million in revenues during the first six months of 2000. Combined with a
corresponding increase in gas marketing cost of sales, the gross margin from gas
marketing increased $0.2 million over six-month period ended June 30, 1999. The
Company's gas marketing activities generate low margins; these activities are
executed in support of MarkWest's processing business. Lastly, increased sales
prices and volumes at the Company's Appalachia terminals and greater fee income
in Appalachia from the Phase I expansion, partially offset by reduced results in
Michigan, added $0.6 million.
COSTS AND EXPENSES
COST OF SALES. Cost of sales increased $34.2 million or 121 percent for the six
months ended June 30, 2000, compared to the same period in 1999. A 59 percent or
$7.3 million increase in Appalachia natural gas costs plus a 22 percent or $6.5
million increase in volumes sold at the Company's Siloam facility combined to
increase cost of sales by $13.8 million. The increase in cost of sales was also
caused by a $20.6 million increase in gas marketing purchases. Combined with a
corresponding increase in gas marketing sales, the gross margin from gas
marketing increased $0.2 million over the six-month period ended June 30, 2000.
The Company's gas marketing activities generate low margins; these activities
are executed in support of MarkWest's processing business. Reduced pipeline
throughput in Michigan offset the increase in cost of sales by $0.2 million.
OPERATING EXPENSES. Operating expenses increased $2.0 million or 34 percent for
the six months ended June 30, 2000, compared to the six months ended June 30,
1999. The increase in operating expenses was principally attributable to
facilities added since June 30, 1999: the Lynchburg and Lordstown terminals; the
Maytown, Boldman and Cobb extraction facilities and related pipeline; and the
expanded Siloam fractionation plant.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased $0.6 million or 18 percent primarily in support of the additional and
expanded Appalachia facilities previously mentioned and rent for office space;
the Company sold its corporate headquarters and leased back its office space
commencing in February 2000. The aforementioned increases were partially offset
by reduced legal costs.
DEPRECIATION, DEPLETION AND AMORTIZATION. Depreciation, depletion and
amortization increased as a result of the completion of the Phase I expansion in
Appalachia in the first quarter of 2000.
LIQUIDITY AND CAPITAL RESOURCES
The Company's sources of liquidity and capital resources historically have been
internal cash flow and its revolving line of credit. In the first quarter of
2000, these sources were supplemented by proceeds from the sale of the
9
<PAGE>
Company's corporate office building. In the second quarter of 2000, MarkWest
increased its line of credit by $15 million to $65 million. MarkWest believes
its ability to generate cash from operations to reinvest in its business is one
of its fundamental financial strengths. The Company anticipates that its
operating activities in 2000, coupled with selective asset sales and existing
bank credit arrangements, will continue to provide adequate cash flows for its
business expansion and to meet its financial commitments.
The following summary table reflects comparative cash flows for the Company for
the six months ended June 30, 2000 and 1999 (in thousands):
<TABLE>
<CAPTION>
For the six months ended June 30,
---------------------------------
2000 1999
------- --------
<S> <C> <C>
Net cash provided by operating activities before
change in working capital ........................... $ 7,362 $ 845
Net cash provided by operating activities from
change in working capital ........................... 4,058 8,095
Net cash provided by (used in) investing activities .... (2,804) 2,565
Net cash used in financing activities .................. $(8,454) $(11,864)
</TABLE>
CAPITAL INVESTMENT PROGRAM
MarkWest forecasts a baseline capital budget of $22 million in 2000 and $14
million in 2001. This budget funded the completion of Phase I and will fund
Phase II expansion in Appalachia and other requirements, including Michigan
drilling and maintenance capital. Management believes that funds generated from
operations, the February 2000 sale of the Company's office building for $5.0
million in net cash proceeds, and unused borrowing capacity will enable the
Company to fund its 2000-2001 capital expenditure programs.
FINANCING FACILITIES
Financing activities consist primarily of net borrowings under the Company's
credit facility. At June 30, 2000, the Company had $65 million of available
credit, of which net debt (debt less cash) of $34.5 million had been utilized,
and working capital of $7.7 million. MarkWest's credit availability has
increased significantly since December 31, 1999, as the Company's trailing cash
flow calculation, the determinant of the Company's available credit, rose
because of improvements in Appalachia processing margins and completion of its
Phase I expansion. To further increase its financial flexibility, in the second
quarter of 2000 the Company amended its existing credit facility increasing the
maximum borrowing amount from $50 million to $65 million. As of June 30, 2000,
unutilized credit was $30.5 million. Depending on the timing and amount of the
Company's future projects beyond the level described above, MarkWest may be
required to seek additional sources of capital. While the Company believes that
it will 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.
RISK MANAGEMENT ACTIVITIES
The Company's primary risk management objectives are to meet or exceed budgeted
gross margins by locking in budgeted or above-budgeted prices in the financial
derivatives and physical markets and to protect margins from precipitous
declines. Hedging levels increase with capital commitments and debt levels and
when above-average margins exist. The Company maintains a committee, including
members of senior management, which oversees all hedging activity.
MarkWest achieves its goals utilizing a combination of fixed-price forward
contracts, New York Mercantile Exchange ("NYMEX")-traded futures, and
fixed/floating price swaps on the over-the-counter ("OTC") market. Futures and
swaps allow the Company to protect margins, because gains or losses in the
physical market are generally offset by corresponding losses or gains in the
value of financial instruments.
The Company enters into futures transactions on NYMEX and through OTC swaps with
various counterparties, consisting primarily of other energy companies. The
Company conducts its standard credit review of OTC counterparties and has
agreements with such parties that contain collateral requirements. The Company
generally uses standardized swap agreements that allow for offset of positive
and negative exposures. OTC exposure is marked to market daily for the credit
review process. The Company's OTC credit risk exposure is partially limited by
10
<PAGE>
its ability to require a margin deposit from its major counterparties based upon
the mark-to-market value of their net exposure. The Company is subject to margin
deposit requirements under NYMEX and OTC agreements.
The use of financial instruments may expose the Company to the risk of financial
loss in certain circumstances, including instances when (a) equity volumes are
less than expected, or (b) the Company's OTC counterparties fail to purchase or
deliver the contracted quantities of natural gas, NGL, or crude oil or otherwise
fail to perform. To the extent that the Company engages in hedging activities,
it may be prevented from realizing the benefits of favorable price changes in
the physical market. However, it is similarly insulated against decreases in
such prices.
MarkWest seeks to reduce its basis risk for natural gas but is generally unable
to do so for NGL. Basis is the difference in price between the physical
commodity being hedged and the price of the futures or physical contract used
for hedging. Basis risk is the risk that an adverse change in the futures or
physical market will not be completely offset by an equal and opposite change in
the cash price of the commodity being hedged. The Company's basis risk primarily
stems from the geographic price differentials between MarkWest's sales locations
and futures or OTC contract delivery locations.
The Company protects Appalachia processing margins by using a combination of
methods. MarkWest protects margins by purchasing natural gas priced on
predetermined Btu differentials to propane or crude, by simultaneously selling
propane or crude oil and purchasing natural gas, and by using swaps to achieve
the same result. Crude oil is highly correlated with certain NGL products. All
projected margins on open positions assume the basis differentials between the
Company's sales location and the hedging contract's specified location and
between crude oil and NGL are consistent with historical averages. No basis risk
was hedged except for a portion of the natural gas. The Company's position, in
terms of volumes hedged and associated projected margin, as of August 8, 2000 is
as follows:
<TABLE>
<CAPTION>
Q3 2000 Q4 2000 Total 2000 Total 2001
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Using crude oil:
---------------------
Gallons 10,400,000 6,200,000 16,600,000 --
$/Gallon $ 0.16 $ 0.22 $ 0.18 --
Using propane:
---------------------
Gallons 13,300,000 14,400,000 27,700,000 12,600,000
$/Gallon $ 0.18 $ 0.19 $ 0.19 $ 0.22
Total:
---------------------
Gallons 23,700,000 20,600,000 44,300,000 12,600,000
$/Gallon $ 0.17 $ 0.20 $ 0.18 $ 0.22
</TABLE>
Finally, the Company locked in a $0.43 per gallon sales price on 630,000 third
quarter 2000 gallons for a portion of its percent of proceeds contract volumes.
Given the size of the Company's capital expenditure program, the Company's
primary hedging strategy in 2000 was designed to protect a portion of its
Appalachian margins against possible decline in product prices. This strategy
limited the benefit the Company otherwise would have recognized had its hedges
not been in place during the first six months of 2000. Specifically, net income
would have been higher by approximately $0.3 million and $0.9 million for the
three and six months ended June 30, 2000.
The Company also hedges exposure to changes in spot market prices on certain
levels of natural gas production. As of July 19, 2000, the Company's position,
in terms of production volumes and sales price hedged, was as follows:
<TABLE>
<CAPTION>
Q3 2000 Q4 2000 Total 2000 Q1 2001 Q2 2001 Q3 2001 Q4 2001 Total 2001 Total 2002
------- ------- ---------- ------- ------- ------- ------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mcf 180,000 150,000 330,000 176,000 178,000 180,000 121,000 655,000 149,000
$/Mcf $ 1.97 $ 2.16 $ 2.06 $ 2.59 $ 2.59 $ 2.59 $ 2.76 $ 2.62 $ 2.39
</TABLE>
The Company enters into speculative futures transactions on an infrequent basis.
Specific approval by the Board of Directors is necessary prior to executing such
transactions. Speculative futures are marked to market at the end of
11
<PAGE>
each accounting period, and any gain or loss is recognized in income for that
period. There were no such speculative activities for the quarters ended June
30, 2000, and 1999.
In addition to these risk management tools, MarkWest utilizes its NGL storage
facilities and contracts for third-party storage to build product inventories
during historically lower-priced periods for resale during higher-priced
periods. Also, MarkWest has contractual arrangements to purchase certain
quantities of its natural gas feedstock in advance of physical needs.
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
The Company is currently involved in litigation arising in the ordinary course
of business. Management believes that costs of settlements or judgements, if
any, arising from such suits will not have a material adverse effect on the
Company's consolidated financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders held on May 18, 2000, 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 2003
or until the election and qualification of their respective successors.
<TABLE>
<CAPTION>
Number of Shares For Withheld
--------- ---------
<S> <C> <C>
Arthur J. Denney................... 7,034,463 1,212
Karen L. Rogers.................... 7,034,463 1,212
</TABLE>
2. To ratify the selection of PricewaterhouseCoopers LLP as the Company's
independent accountants for the fiscal year ending December 31, 2000.
<TABLE>
<CAPTION>
Number of Shares
----------------
<S> <C>
For................................. 7,034,463
Against............................. 1,196
Abstain............................. 16
</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
(i) -- A report on Form 8-K was filed on May 12, 2000, announcing a new
ticker symbol (AMEX:MWP).
12
<PAGE>
SIGNATURE
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 __, 2000 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)
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