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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 MARCH 31, 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 8,449,816 shares of common stock, $.01 per share par value,
outstanding as of March 31, 2000.
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<TABLE>
<CAPTION>
Page
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PART I--FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheet at March 31, 2000 and December 31, 1999.......................... 1
Consolidated Statement of Operations for the Three Months Ended March 31, 2000 and 1999..... 2
Consolidated Statement of Cash Flows for the Three Months Ended March 31, 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.................................... 10
PART II--OTHER INFORMATION
Item 1. Legal Proceedings............................................................................. 10
Item 6. Exhibits and Reports on Form 8-K.............................................................. 10
SIGNATURES............................................................................................. 11
</TABLE>
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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.
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<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
MARKWEST HYDROCARBON, INC.
CONSOLIDATED BALANCE SHEET
(000S, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
March 31,
2000 December 31,
(Unaudited) 1999
------------------ ----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................... $ 2,622 $ 1,356
Receivables................................................................. 13,057 16,360
Inventories................................................................. 3,751 6,043
Prepaid feedstock........................................................... 2,135 1,895
Other assets................................................................ 236 327
------------------ ----------------
Total current assets................................................... 21,801 25,981
Property and equipment:
Gas processing, gathering, storage and marketing equipment.................. 92,510 78,476
Oil and gas properties and equipment........................................ 15,781 14,518
Land, buildings and other equipment......................................... 6,114 11,409
Construction in progress.................................................... 1,852 10,697
------------------ ----------------
116,257 115,100
Less: accumulated depreciation, depletion and amortization.................. (23,593) (22,789)
------------------ ----------------
Total property and equipment, net...................................... 92,664 92,311
Intangible assets, net of accumulated amortization of $412 and $438,
respectively................................................................ 764 951
------------------ ----------------
Total assets........................................................... $ 115,229 $ 119,243
================== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable...................................................... $ 3,532 $ 4,997
Accrued liabilities......................................................... 16,790 9,369
Current portion of long-term debt........................................... 49 104
------------------ ----------------
Total current liabilities.............................................. 20,371 14,470
Deferred income taxes........................................................... 8,955 8,019
Long-term debt.................................................................. 30,000 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.................................................. 42,229 42,222
Retained earnings........................................................... 14,056 10,801
Treasury stock, 81,390 and 69,504 shares, respectively...................... (467) (389)
------------------ ----------------
Total stockholders' equity............................................. 55,903 52,719
------------------ ----------------
Total liabilities and stockholders' equity............................. $ 115,229 $ 119,243
================== ================
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
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MARKWEST HYDROCARBON, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(000S, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
For the three months ended
March 31,
----------------------------------------
2000 1999
------------------ ------------------
<S> <C> <C>
Revenues:
Gathering, processing and marketing revenue.................. $ 44,634 $ 21,828
Oil and gas revenue, net of transportation and taxes......... 491 265
Interest income.............................................. 23 14
Other income (expense)....................................... 26 (16)
------------------ ------------------
Total revenue........................................... 45,174 22,091
------------------ ------------------
Costs and expenses:
Cost of sales................................................ 32,011 15,265
Operating expenses........................................... 3,806 2,985
General and administrative expenses.......................... 1,839 1,580
Depreciation, depletion and amortization..................... 1,435 1,303
Interest expense............................................. 747 800
------------------ ------------------
Total costs and expenses................................ 39,838 21,933
------------------ ------------------
Income before income taxes....................................... 5,336 158
Provision for income taxes:
Current...................................................... 1,145 51
Deferred..................................................... 936 (4)
------------------ ------------------
2,081 47
------------------ ------------------
Net income....................................................... $ 3,255 $ 111
================== ==================
Basic earnings per share......................................... $ 0.39 $ 0.01
================== ==================
Earnings per share assuming dilution............................. $ 0.38 $ 0.01
================== ==================
Weighted average number of outstanding shares of
common stock:
Basic......................................................... 8,452 8,478
================== ==================
Assuming dilution............................................. 8,467 8,481
================== ==================
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
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MARKWEST HYDROCARBON, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(000S)
<TABLE>
<CAPTION>
For the three months
ended March 31,
-----------------------------------------
2000 1999
------------------- -------------------
<S> <C> <C>
Cash flows from operating activities:
Net income......................................................... $ 3,255 $ 111
Add income items that do not affect working capital:
Depreciation, depletion and amortization........................ 1,435 1,303
Deferred income taxes........................................... 936 (4)
Gain on sale of assets.......................................... (128) (12)
------------------- -------------------
5,498 1,398
Adjustments to working capital:
(Increase) decrease in receivables............................. 3,303 (2,292)
Decrease in inventories........................................ 2,292 2,992
(Increase) decrease in prepaid expenses and other assets....... (157) 2,411
Increase in accounts payable and accrued liabilities........... 5,966 545
------------------- -------------------
11,404 3,656
Net cash provided by operating activities................. 16,902 5,054
Cash flows from investing activities:
Capital expenditures........................................... (6,560) (2,153)
Proceeds from sale of assets................................... 5,085 420
Other.......................................................... -- 18
------------------- -------------------
Net cash used in investing activities..................... (1,475) (1,715)
Cash flows from financing activities:
Proceeds from long-term debt................................... 5,500 4,798
Repayment of long-term debt.................................... (19,590) (9,812)
Net reissuance (buy-back) of treasury stock.................... (71) 132
------------------- -------------------
Net cash used in financing activities..................... (14,161) (4,882)
------------------- -------------------
Net increase (decrease) in cash and cash equivalents...... 1,266 (1,543)
Cash and cash equivalents at beginning of period........................ 1,356 2,055
------------------- -------------------
Cash and cash equivalents at end of period.............................. $ 2,622 $ 512
=================== ===================
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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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.; 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, 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. 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 NGLs; 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 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 quarters ended March 31, 2000 and 1999. Asset
information by reportable segment is not reported, since MarkWest does not
produce such information internally.
<TABLE>
<CAPTION>
Processing and Exploration and
Related Services Production Total
------------------- --------------------- -------------------
<S> <C> <C> <C>
FOR THE QUARTER ENDED MARCH 31, 2000
(in 000s):
Revenues................................... $ 44,634 $ 491 $ 45,125
Gross operating income..................... $ 9,010 $ 298 $ 9,308
FOR THE QUARTER ENDED MARCH 31, 1999
(in 000s):
Revenues................................... $ 21,828 $ 265 $ 22,093
Gross operating income..................... $ 3,700 $ 143 $ 3,843
</TABLE>
4
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A reconciliation of total segment revenues to total consolidated revenues and
of total segment gross operating income to total consolidated income for the
quarters ended March 31, 2000 and 1999, is as follows:
<TABLE>
<CAPTION>
2000 1999
---------------- -----------------
<S> <C> <C>
Revenues:
Total segment revenues.............................. $ 45,125 $ 22,093
Interest income..................................... 23 14
Other income (expense).............................. 26 (16)
---------------- -----------------
Total consolidated revenues................... $ 45,174 $ 22,091
================ =================
Gross operating income:
Total segment gross operating income................ $ 9,308 $ 3,843
General and administrative expenses................. (1,839) (1,580)
Depreciation, depletion and amortization............ (1,435) (1,303)
Interest expense.................................... (747) (800)
Interest income..................................... 23 14
Other income (expense).............................. 26 (16)
---------------- -----------------
Consolidated income before taxes.............. $ 5,336 $ 158
================ =================
</TABLE>
5
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains statements which, to the extent that they are not
recitations of historical fact, constitute "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933 ("Section
27A") and Section 21E of the Securities and Exchange Act of 1934 ("Section
21E"). All forward-looking statements involve risks and uncertainties. The
forward-looking statements in this document are intended to be subject to the
safe harbor protection provided by Sections 27A and 21E. Factors that most
typically impact 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 NGLs and competing
commodities; (iii) the availability and prices of raw natural gas supply;
(iv) the ability of the Company to negotiate favorable marketing agreements;
(v) the risks that 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.
FIRST QUARTER 2000 RESULTS
For the quarter ended March 31, 2000, net income was $3.3 million, or $0.39
per share, compared to net income of $0.1 million, or $0.01 per share, in the
comparable 1999 period. Earnings before interest, taxes and depreciation,
depletion and amortization ("EBITDA") totaled $7.5 million for the first
quarter of 2000, up from $2.2 million reported in the first quarter of 1999.
The increase in quarter over quarter net income was principally driven by a
$3.1 million after-tax increase in Appalachian gas processing margins.
OPERATING STATISTICS
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------------------
2000 1999 % Change
------------------ ------------------ ------------------
<S> <C> <C> <C>
Appalachia:
NGL production--Siloam plant (gallons)........ 33,300,000 28,000,000 + 19%
NGL sales--Siloam plant (gallons):
Sales earning a processing margin.......... 32,400,000 35,700,000 -9%
Sales earning fee income................... 4,500,000 -- NM
------------- -------------
Total NGL sales--Siloam plant............... 36,900,000 35,700,000 +3%
Processing margin per gallon:
Average NGL sales price.................... $ 0.58 $ 0.27 + 115%
Average natural gas cost................... 0.35 0.20 + 75%
------------- -------------
Processing margin per gallon............... $ 0.23 $ 0.07 + 229%
Michigan:
Pipeline throughput (Mcfd)................... 13,400 21,400 - 37%
NGL sales (gallons).......................... 2,800,000 3,800,000 - 26%
Rocky Mountains:
Natural gas produced (Mcfd).................. 3,300 1,900 + 74%
</TABLE>
PROCESSING AND RELATED SERVICES--APPALACHIA
First quarter 2000 was an eventful period for the Company, especially in
Appalachia where the Company acquired facilities and completed the first
phase ("Phase I") of a two part expansion program. Four processing facilities
and a propane terminal were added to MarkWest's operations, and another
facility was significantly expanded.
First, the Company completed the construction of its new 75 MMcfd, mechanical
refrigeration, NGL extraction plant ("Maytown") in southern Kentucky.
Contemporaneously, construction on the recently acquired 40-mile NGL pipeline
connecting the Maytown plant to the Company's Siloam fractionation facility
was also completed. This pipeline significantly reduces the feedstock
transportation costs from Boldman, a MarkWest owned processing plant that
came off lease and back under MarkWest's operational control in February
2000, to Siloam. The Company also
6
<PAGE>
purchased another extraction plant, Cobb, from a third party in March 2000.
The Company completed expansion of its Siloam fractionator; throughput
volumes are expected to increase from 310,000 gallons per day to 460,000
gallons per day during 2000 as a result of this expansion.
MarkWest also announced a new marketing arrangement with a global freight
transportation company. MarkWest has installed a propane distribution tank
and related unloading and loading facilities at Lordstown, Ohio's transfer
terminal. The Lordstown propane market size is initially expected to be 5
million to 6 million gallons per year and is expected to expand by 1 million
gallons per year. Revenues from the new agreement are estimated for 2000 to
range from $2 million to $2.5 million.
MarkWest is paid for its processing services in Appalachia through sales of
liquids extracted and fees for units of throughput. Sales volumes of liquids
at Siloam in the first quarter were 36.9 million gallons compared to 35.7
million gallons last year due to a partial quarter's contribution from the
Phase I expansion (completed in February 2000). Processing margins expanded
from $0.07 per gallon to $0.23 per gallon, increasing after-tax income by
$3.1 million. The ten-year average margin has been $0.16 per gallon. Due to
the expansion, quarterly production of liquids increased from last year's
28.0 million gallons to 33.3 million gallons, and MarkWest's run rate
exceeded 40.0 million gallons per quarter by March 31, 2000. Incremental
production increases, however, did not completely translate into additional
sales due to timing differences between this winter and last. Importantly,
Phase I expansion completed this last quarter will increase MarkWest's fee
business substantially.
PROCESSING AND RELATED SERVICES--MICHIGAN
Pipeline throughput volumes of 13,400 Mcfd in the first quarter of 2000 were
down nearly 37% from the first quarter of 1999, in part due to the unexpected
curtailment of production in January 2000 stemming from the shutdown of a
third party's treatment facility. While drilling activity and drilling
success have been slow to develop, MarkWest's own exploration efforts, along
with third party partners, have identified good prospects along the 90-mile
corridor. MarkWest expects to drill and evaluate a minimum of three
additional reefs by June 30, 2000.
Construction on the Company's eastern Michigan operations ("Au
Gres")--consisting of a well and well facility, a pipeline, and a gas
processing plant--is progressing as planned. Start up of the Au Gres
operation is expected in the second quarter of 2000.
EXPLORATION AND PRODUCTION--ROCKY MOUNTAINS
Natural gas sold during the first quarter of 2000 averaged 3,300 Mcfd, up 74%
from first quarter 1999. Production has increased because of the Company's
1999 capital program. MarkWest has decided to monetize this unit and has put
its Rocky Mountain production up for sale and expects to complete this
process by mid-year. This should result in a non-recurring gain in the third
quarter.
THREE MONTHS ENDED MARCH 31, 2000, COMPARED TO THE THREE MONTHS ENDED MARCH 31,
1999 (IN THOUSANDS)
<TABLE>
<CAPTION>
2000 1999 $ Change
-------------- -------------- ---------------
<S> <C> <C>
<C>
Revenue............................ $ 45,174 $ 22,091 $ 23,083
Gross profit (1)................... $ 7,899 $ 2,524 $ 5,375
Income before income taxes......... $ 5,336 $ 158 $ 5,178
Provision for income taxes......... 2,081 47 2,034
---------- ---------- ---------
Net income......................... $ 3,255 $ 111 $ 3,144
========== ========== =========
</TABLE>
(1) Excludes interest income, general and administrative expense and interest
expense.
REVENUE
GATHERING, PROCESSING AND MARKETING REVENUE. Gathering, processing and
marketing revenue increased $22.8 million, or 104%, for the three months
ended March 31, 2000, compared to the same period in 1999. The revenue
increase was principally attributable to four factors. First, first quarter
2000 average NGL sales prices, following on the heels of a similar increase
in crude oil, soared 115% over those from a year ago, causing a $10.0 million
increase in revenue. Second, first quarter 2000 Siloam sales volumes,
benefiting from the mid-quarter
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completion of the Phase I expansion, increased 1.2 million gallons over first
quarter 1999 volumes. The volume increase added $1.9 million in revenue.
Third, increased NGL prices partially offset lower volumes in Michigan.
Finally, increased gas marketing sales contributed an additional $8.6 million
in revenue during the first quarter of 2000. Combined with a corresponding
increase in gas marketing cost of sales, the first quarter 2000 gross margin
from gas marketing increased $0.1 million over first quarter 1999. The
Company's gas marketing activities are low margin; these activities are
executed in support of MarkWest's processing business.
COSTS AND EXPENSES
COST OF SALES. Cost of sales increased $16.7 million, or 110%, for the three
months ended March 31, 2000, compared to the same time period in 1999. The
cost of the Company's replacement feedstock in Appalachia increased 75%,
contributing $4.8 million in additional cost of sales. The Company's
increased Siloam sales volumes contributed an incremental $1.9 million in the
first quarter of 2000. In addition, the cost of gas marketing activities
increased $8.5 million over the first quarter of 1999. Combined with a
corresponding increase in gas marketing sales, the first quarter 2000 gross
margin from gas marketing increased $0.1 million over first quarter 1999. The
Company's gas marketing activities are low margin; these activities are
executed in support of MarkWest's processing business.
OPERATING EXPENSES. Operating expenses increased approximately $0.8 million,
or 28%, for the three months ended March 31, 2000, compared to the three
months ended March 31, 1999. The increase in operating expenses is primarily
the result of facilities added since the first quarter of 1999: the Lynchburg
terminal; 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 16%, for the three months ended March 31, 2000,
compared to the three months ended March 31, 1999. The increase primarily
stems from the Company's recent stage of growth.
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 2000, these
sources were supplemented by proceeds from the sale of the Company's
corporate office building. 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 three months ended March 31, 2000 and 1999 (in thousands):
<TABLE>
<CAPTION>
For the three months ended March 31,
-------------------------------------------------
2000 1999
----------------------- -----------------------
<S> <C> <C>
Net cash provided by operating activities before
change in working capital....................... $ 5,498 $ 1,398
Net cash provided by operating activities from
change in working capital....................... 11,404 3,656
Net cash used in investing activities.............. (1,475) (1,715)
Net cash used in financing activities.............. $ (14,161) $ (4,882)
</TABLE>
CAPITAL INVESTMENT PROGRAM
MarkWest forecasts a baseline capital budget of $12 million in 2000 and $16
million in 2001. This budget will fund the completion of Phase I and Phase II
expansion in Appalachia and other requirements, including Michigan drilling
and maintenance capital. In addition, MarkWest is targeting another $20
million in other new projects and acquisitions. 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. Depending on the timing and amount of its future projects, MarkWest
may be required to seek additional sources of capital. While the Company
believes it would be able to secure
8
<PAGE>
additional financing on terms acceptable to MarkWest, if required, no
assurance can be given that the Company will be able to do so.
FINANCING FACILITIES
Financing activities consist primarily of net borrowings under the Company's
credit facility. At March 31, 2000, the Company had approximately $50 million
of available credit, of which net debt (debt less cash) of $27.4 million had
been utilized as of December 31, 1999, and working capital of $1.4 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, the Company sold its corporate office
building in February 2000 for $5.0 million in net proceeds. As of March 31,
2000, unutilized credit was approximately $22.6 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 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, NGLs, 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 NGLs. 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 using a combination of
three different methods. MarkWest protects margins by purchasing natural gas
priced on predetermined Btu differentials to propane or crude prices.
MarkWest also protects its margins by selling crude oil and purchasing
natural gas. Crude oil is highly correlated with certain NGL products. As of
March 31, 2000, through this form of hedging, the Company had locked in an
approximate margin of $0.17 per gallon on 30.7 million gallons of the
Company's expected production through December 2000. MarkWest also protects
margins by purchasing natural gas while simultaneously selling propane of
approximately the same Btu value. As of March 31, 2000, through this later
form of hedging, the Company had locked in an approximate margin of $0.18 per
gallon on 28.3 million gallons of its expected production through December
2000. All projected margins on open positions at March 31, 2000 assume the
basis differentials between
9
<PAGE>
the Company's sales location and the hedging contract's specified location
and between crude oil and NGLs are consistent with historical averages. No
basis risk was hedged except for a portion of the natural gas.
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 quarter of 2000. Specifically, net
income would have been higher by approximately $0.6 million through March 31,
2000.
The Company also hedges exposure to changes in spot market prices on certain
levels of natural gas production. As of March 31, 2000, the Company locked in
an average sales price of $1.97/Mcf on 4,000 Mcfd of production through
October 2000, an average sales price of $2.29/Mcf on 3,000 Mcfd of November
2000 to October 2001 production, and an average sales price of $2.39/Mcf on
1,000 Mcfd of November 2001 to October 2002 production.
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 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 March 31, 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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10 -- Amendment Number One to MarkWest Hydrocarbon, Inc. 1996
Nonemployee Director Stock Option Plan.
11 -- Statement regarding computation of earnings per share.
27 -- Financial Data Schedule.
(b) Reports on Form 8-K
None filed in the first quarter of 2000.
10
<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: May 8, 2000 By: /s/ Gerald A. Tywoniuk
-------------------------------------------
Gerald A. Tywoniuk
Chief Financial Officer and Vice President
Of Finance
(On Behalf of the Registrant and as Officer)
11
<PAGE>
ACTION WITHOUT MEETING OF
THE BOARD OF DIRECTORS
OF
MARKWEST HYDROCARBON, INC.
The undersigned, being all of the Directors of MarkWest Hydrocarbon, Inc.
(the "Corporation"), a Delaware corporation, in accordance with the authority
contained in Section 141(f) of the Delaware General Corporation Law, in lieu
of holding a meeting, do hereby adopt and approve the attached resolution.
RESOLVED, that form of Amendment Number One to the MarkWest
Hydrocarbon 1996 Nonemployee Director Stock Option Plan, attached to
this resolution as EXHIBIT A and incorporated into this resolution by
reference, be and it hereby is ratified and approved and the officers
of the Company, and they hereby are authorized to do any acts that they
deem to be in furtherance of such amendment.
IN WITNESS WHEREOF we have hereunto set our hands of this 2nd day of
December, 1999.
- ---------------------------- -----------------------------
John M. Fox Barry W. Spector
- ---------------------------- -----------------------------
Brian T. O'Neill Donald D. Wolf
- ---------------------------
Arthur J. Denney
<PAGE>
EXHIBIT A
AMENDMENT NUMBER ONE
TO
MARKWEST HYDROCARBON, INC.
1996 NONEMPLOYEE DIRECTOR STOCK OPTION PLAN
THIS FIRST AMENDMENT ("Amendment") is made as of this 2nd day of
December, 1999, to the Markwest Hydrocarbon, Inc. ("Company") 1996 NonEmployee
Director Stock Option Plan ("Plan"). In the event of any conflict between the
terms of this Amendment and the terms of the Plan, the terms of this Amendment
shall control. All capitalized terms not defined in this Amendment shall have
their respective meaning set forth in the Plan.
The Plan shall be amended as follows:
1. Administration of and Grants of Options under the Plan.
Section 4(b)(iv) is amended so that as amended such Section
reads as follows:
(iv) Each Outside Director shall automatically
receive, on the date of each Annual Meeting of Stockholders
AND each date that is six months thereafter, an option to
purchase 1,000 Shares of the Company's Common Stock, such
Options to become exercisable one year subsequent to the date
of grant; PROVIDED, HOWEVER, that such Options shall only be
granted to Outside Directors who have served since the date of
the last Annual Meeting of Stockholders and, as the case may
be, the date that is six months from such Annual Meeting of
Stockholders and will continue to serve after the date of
grant of such Options.
2. Ratification. Except as modified by this Amendment, the terms
and conditions of the Plan are hereby ratified by this
Amendment.
IN WITNESS WHEREOF, the Company has caused its duly authorized officer
to execute this Amendment effective as of the date set forth above.
MARKWEST HYDROCARBON, INC.,
a Delaware corporation
By:
----------------------------------------
John M. Fox, Chief Executive Officer
2
<PAGE>
EXHIBIT 11
MARKWEST HYDROCARBON, INC.
COMPUTATION OF EARNINGS PER COMMON SHARE
(000S, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
MARCH 31, 2000
--------------------------
<S> <C>
Net income $ 3,255
Weighted average number of outstanding shares of
common stock 8,452
Basic earnings per share $ 0.39
=========================
Net income $ 3,255
Weighted average number of outstanding shares of
common stock 8,452
Dilutive stock options 15
-------------------------
8,467
Earnings per share assuming dilution $ 0.38
=========================
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 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>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 2,622
<SECURITIES> 0
<RECEIVABLES> 13,057
<ALLOWANCES> 0
<INVENTORY> 3,751
<CURRENT-ASSETS> 21,801
<PP&E> 116,257
<DEPRECIATION> (23,593)
<TOTAL-ASSETS> 115,229
<CURRENT-LIABILITIES> 20,371
<BONDS> 30,000
0
0
<COMMON> 85
<OTHER-SE> 55,818
<TOTAL-LIABILITY-AND-EQUITY> 115,229
<SALES> 45,125
<TOTAL-REVENUES> 45,174
<CGS> 32,011
<TOTAL-COSTS> 32,011
<OTHER-EXPENSES> 7,080
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 747
<INCOME-PRETAX> 5,336
<INCOME-TAX> 2,081
<INCOME-CONTINUING> 3,255
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,255
<EPS-BASIC> 0.39
<EPS-DILUTED> 0.38
</TABLE>
