-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JndmN8xDL3J4vTFh+7LmJbyAaOGrWya7fYrdjn6Ih8uf8KJlvGxsc7SeuwBKO8eM cAWRczTRMmHa9zwPpUgZHQ== 0000927356-97-000344.txt : 19970401 0000927356-97-000344.hdr.sgml : 19970401 ACCESSION NUMBER: 0000927356-97-000344 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MARKWEST HYDROCARBON INC CENTRAL INDEX KEY: 0001019756 STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS DISTRIBUTION [4924] IRS NUMBER: 841352233 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-21353 FILM NUMBER: 97568596 BUSINESS ADDRESS: STREET 1: 5613 DTC PARKWAY STREET 2: SUITE 400 CITY: ENGLEWOOD STATE: CO ZIP: 80111 BUSINESS PHONE: 3032908700 MAIL ADDRESS: STREET 1: 5613 DTC PARKWAY STREET 2: SUITE 400 CITY: ENGLEWOOD STATE: CO ZIP: 80111 10-K 1 FORM 10-K ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 [ Fee Required ] for the fiscal year ended December 31, 1996 [ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 [No Fee Required] for the transition period from __________ to ____________ COMMISSION FILE NUMBER 1-11566 MARKWEST HYDROCARBON, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 84-1352233 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5613 DTC PARKWAY, SUITE 400, ENGLEWOOD, COLORADO 80111 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 303-290-8700 Securities registered pursuant to Section 12(b) of the Act: TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED ------------------- ------------------------------------ Common Stock, $.01 par value Nasdaq National Market Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- The aggregate market value of voting common stock held by non-affiliates of the registrant on March 17, 1997 was $48,695,252. DOCUMENTS INCORPORATED BY REFERENCE The information required by Part III of this Report (Items 10, 11, 12 and 13) is incorporated by reference from the registrant's proxy statement to be filed pursuant to Regulation 14A with respect to the annual meeting of stockholders scheduled to be held on June 6, 1997. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] ================================================================================ MARKWEST HYDROCARBON, INC. FORM 10-K TABLE OF CONTENTS Page ---- PART I Items 1. and 2. Business and Properties........................... 3 Item 3. Legal Proceedings......................................... 14 Item 4. Submission of Matters to a Vote of Security Holders....... 14 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters............................................ 15 Item 6. Selected Financial Data................................... 16 Item 7. Management's Discussions and Analysis of Financial Condition and Results of Operation............................. 17 Item 8. Financial Statements and Supplementary Data............... 22 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............................ 40 PART III Item 10. Directors and Executive Officers of the Registrant....... 40 Item 11. Executive Compensation................................... 40 Item 12. Security Ownership of Certain Beneficial Owners and Management..................................................... 40 Item 13. Certain Relationships and Related Transactions........... 40 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K....................................................... 40 2 PART I ITEMS 1. AND 2. BUSINESS AND PROPERTIES GENERAL . MarkWest Hydrocarbon, Inc. (the "Company" or "MarkWest") is engaged in natural gas processing and related services. The Company, which has grown substantially since its founding in 1988, is the largest processor of natural gas in Appalachia, and recently established a venture to provide natural gas processing services in western Michigan. The independent gas processing industry has grown rapidly in the last 10 years, and the Company believes there will be substantial opportunities to grow its gas processing operations within these existing core regions and in new markets. The Company provides compression, gathering, treatment, and natural gas liquids (NGL) extraction services to natural gas producers and pipeline companies and fractionates NGLs into marketable products for sale to third parties. The Company also purchases, stores and markets natural gas and NGLs and has begun to conduct strategic exploration for new natural gas sources for its processing activities. For the year ended December 31, 1996, MarkWest produced approximately 95 million gallons of NGLs and marketed approximately 137 million gallons of NGLs. The Company's processing and marketing operations are concentrated in two core areas that are significant gas-producing basins: the southern Appalachian region of eastern Kentucky, southern West Virginia, and southern Ohio (the "Appalachian Core Area"), and western Michigan (the "Michigan Core Area"). At the Company's processing plants, natural gas is treated to remove contaminants, and NGLs are extracted and fractionated into propane, normal butane, isobutane and natural gasoline. The Company then markets the fractionated NGLs to refiners, petrochemical companies, gasoline blenders, multistate and independent propane dealers, and propane resellers. In addition to processing and NGL marketing, the Company engages in terminalling and storage of NGLs in a number of NGL storage complexes in the central and eastern United States and operates propane terminals in Arkansas and Tennessee. During 1996, the Company took several key steps to expand its operations. In January 1996, the Company commissioned a new natural gas liquids extraction plant in Wayne County, West Virginia. In May 1996, the Company established West Shore Processing Company, LLC ("West Shore"), a venture in western Michigan, which the Company will develop as the Michigan Core Area. The Company has identified opportunities, and has entered into agreements, to expand its gas gathering operations and to commence gas processing operations in the Michigan Core Area in the near future. See "Natural Gas Processing and Related Services." The Company's principal offices are located at 5613 DTC Parkway, Suite 400, Englewood, Colorado 80111, and its telephone number is (303) 290-8700. The Company was incorporated in Delaware in 1996. NATURAL GAS PROCESSING AND RELATED SERVICES The Company's processing operations are located in its Appalachian Core Area consisting of eastern Kentucky, southern West Virginia, and southern Ohio, and its Michigan Core Area consisting of the area of western Michigan north of Grand Rapids and south of Traverse City. The Company's operations in Appalachia date from the Company's founding in 1988. At present, the Company is the largest processor of natural gas in Appalachia based on the volume of natural gas processed at its owned facilities, including those it leases to third parties. The Company began development of the Michigan Core Area in June 1996. 3 APPALACHIAN CORE AREA The Company's operations in Appalachia consist of two extraction facilities, a fractionation plant, an NGL pipeline, rail terminals and related processing assets. Since 1988, the volume of natural gas processed by the Company in the Appalachian Core Area has grown to approximately 170 MMcf/D, and the Company's NGL production has grown to approximately 275 MGal/D. The Company believes that this region has favorable supply and demand characteristics. The Appalachian Core Area is geographically situated between the TET pipeline to the north and the Dixie pipeline to the south. In addition to Appalachia, the TET pipeline serves the upper midwestern and eastern United States, and the Dixie pipeline serves the southeast. Because the areas directly served by these two pipelines are experiencing significant population growth, the demand for NGL products exceeds the capacity of these two lines. The demand for propane from the TET and Dixie pipelines is such that the pipelines allocate supply to purchasers during peak wintertime periods, thereby limiting the available supply to Appalachia. There are few sources of propane to the Appalachian Core Area other than the Company's facilities, the TET and Dixie pipelines, and propane shipped by rail cars from other producing areas. In addition, the Appalachian mountain range limits access to the Dixie pipeline by distributors in the Appalachian Core Area. These factors enable producers in Appalachia (principally MarkWest, Ashland Oil Company and CNG Transmission Corporation) to price their products (particularly propane) at a premium to Gulf Coast spot prices during times of supply shortages from other sources, especially during winter high demand periods. The underground storage caverns at the Company's Siloam location allow the Company to defer sales of NGLs to the winter months when peak demand periods often lead to higher product prices and provide local consumers with needed wintertime supplies. The Company also believes that there are significant growth opportunities in this region both from the improvement of gas processing efficiencies for existing gas production in the area and the Company's capacity to process natural gas streams from areas that are not currently processed. NGL Extraction. The Company currently owns two NGL extraction plants in Appalachia, one which it operates and one which it leases to Columbia Gas Transmission Company ("Columbia Gas"). Extraction plants remove NGLs, as well as water vapor, solids and other contaminants, such as hydrogen sulfide or carbon dioxide, contained in the natural gas stream. The Company provides NGL extraction services under a fee-based arrangement. Kenova Plant. The Company began construction of its Kenova natural gas liquids extraction plant, located in Wayne County, West Virginia, in 1995. The Kenova plant was commissioned in January 1996 and replaced a 1958 extraction facility owned and operated by Columbia Gas. Because the Company owns and operates this new facility, which is situated on a main gathering line of Columbia Gas, the Company will generate fee revenues related to the processing operations. In addition, the Company believes that this new facility will generate greater NGL recovery from natural gas, reduce downtime for maintenance, and significantly reduce fuel costs compared to the replaced facility. Construction and related costs for development of the Kenova plant were approximately $12.2 million. To date, substantially all of Kenova's processing throughput has been obtained from Columbia Gas. Substantially all of the Kenova plant's extracted NGLs are transported via the Company's 38.5 mile high pressure pipeline to its Siloam fractionation facility located in South Shore, Kentucky, for separation into marketable NGL products. Boldman Plant. The Company constructed the Boldman natural gas liquids extraction plant, located in Pike County, Kentucky, in 1991. Construction and related costs for development of the Boldman plant were approximately $4.0 million. The Boldman plant is currently leased to, and operated by, Columbia Gas. Under such lease, the Company receives a monthly rental fee ranging from $40,000 to $47,000. Columbia Gas also has an option to purchase the Boldman plant at set prices during the term and upon expiration of the lease. Columbia Gas has dedicated all NGLs recovered at the Boldman plant to the Company's Siloam facility for fractionation under a contract which runs through December 31, 2003. This production is transported via tanker trucks from the Boldman plant to the Siloam plant for processing. 4 NGL Pipeline. The Company owns a 38.5 mile, high pressure steel pipeline that connects its Kenova processing plant to the Company's Siloam fractionation facility. The pipeline currently delivers approximately 70 million gallons per year to the Siloam facility from the Kenova processing plant. Because this pipeline was originally designed to handle a high pressure ethane-rich stream, it has the capacity to handle almost twice as much product if it becomes available. Fractionation. The Company's fractionation services in the Appalachian Core Area are performed at its Siloam fractionation plant located in South Shore, Kentucky. At this facility, extracted NGLs are subjected to various processes that cause the natural gas to separate, or fractionate, into separate NGL products, including propane, isobutane, normal butane and natural gasoline. The Siloam facility is one of only two fractionation plants in the Appalachian Core Area producing over 6,500 barrels, or 275,000 gallons, per day of NGLs. Substantially all of the Company's fractionation services in its Appalachian Core Area are provided under keep-whole contracts with Columbia Gas. The Company acquired the Siloam plant in April 1988 from Columbia Gas for $3.5 million. During 1989, the Company began an approximately $11.0 million expansion program at the Siloam plant. The expansion program, among other enhancements, included the construction of additional storage facilities, improvements to existing electrical and control systems and the addition of loading facilities. The expansion was fully operational in early 1991. Approximately 77% of the fractionation throughput at the Siloam plant comes from the production of the Company's Kenova and Boldman plants. The Company also makes purchases of NGLs from third-party processors and of additional production from Columbia Gas. The Company's most significant purchase contract for NGLs is with Columbia Gas. In addition to the approximately 9.0 MMGal per year of Columbia Gas NGL production from the Boldman plant, Columbia Gas dedicates approximately 17.0 MMGal per year from its Cobb, West Virginia extraction plant. Pursuant to the Columbia Gas purchase agreements, the Company is committed to purchase substantially all of the NGLs produced at Columbia Gas' own processing plants, as well as those produced by the Company for Columbia Gas. Under these contracts, the Company is required to compensate Columbia Gas for the BTU energy equivalent of NGLs and fuel removed from the natural gas as a result of processing. In 1996, the Company's cost for purchases under these contracts was $23 million, and such purchases represented 95% of all NGLs fractionated by the Company. MICHIGAN CORE AREA The Company was attracted to the Michigan Core Area because of the potential for providing gathering and processing services in the area. Substantially all of the natural gas in the Michigan Core Area is sour and, therefore, has limited outlets for processing. West Shore was formed in May 1996 and is governed by an operating agreement between MarkWest Michigan, Inc. and Michigan Energy Company ("MEC"). West Shore is a venture dedicated to natural gas gathering, treatment, processing and NGL marketing in Manistee, Mason and Oceana Counties in Michigan. As a result of availability of large shut-in sour gas wells and the expected increase in drilling by producers who previously had no outlet for sour gas production in the area, the Company entered into several related agreements in May 1996 providing for the development of gathering, treatment and processing facilities in western Michigan. Through West Shore, the Company expects to be able to gather and process this sour gas. The most significant assets of West Shore currently include the Basin Pipeline, a 31-mile sour gas pipeline which is situated in Manistee and Mason Counties, rights to obtain a sour gas treatment plant located in Manistee County, Michigan, and various agreements that dedicate natural gas production to West Shore for processing. Until completion of the second phase of the Michigan Project, West Shore's revenues will be derived from fees generated by gathering of natural gas on the Basin Pipeline and by treatment of sour gas. Following completion of the second phase, revenues will be derived from fees generated by gathering, treatment and extraction and fractionation of NGLs. 5 The Michigan Project is completing its first phase of development, which includes construction of a two-mile pipeline from one of West Shore's main gathering locations to a treatment plant owned and operated by Shell Offshore, Inc. ("Shell") in Manistee County. The purpose of this pipeline is to deliver sour gas to Shell for treatment. The first phase also includes the construction of a 30-mile pipeline that will connect the Slocum natural gas well owned by MPC in Oceana County to the Basin Pipeline. Initially West Shore will operate this pipeline for Michigan Production Company, L.L.C. ("MPC") as an individual well pipeline. Following approval from the Michigan Public Service Commission, Basin will acquire the pipeline from MPC and will operate it to gather gas from additional wells in Mason and Oceana counties. The Slocum well has estimated reserves of approximately 13 Bcf, and estimated initial well deliverabilities of approximately 8 MMcf/D. The first phase of the Michigan Project will cost approximately $11 million. The second phase of the Michigan Project includes construction of a two-mile residue return line from the Shell treatment plant to the natural gas transmission line of Michigan Consolidated Gas Company ("MichCon") and construction of approximately 18 miles of pipeline to connect natural gas wells in southern Oceana County, including the Claybanks wells owned by MPC, with estimated reserves of approximately 7.5 Bcf and estimated initial well deliverabilities of approximately 8 MMcf/D, to the Basin Pipeline. The second phase will also include the construction of an NGL extraction and fractionation facility at the site of the Shell treatment plant. The facility will be owned by West Shore and operated by Shell. The Company currently expects that the second phase of the Michigan Project will be completed by the end of the fourth quarter of 1997. The second phase of the Michigan Project is expected to cost approximately $9 million. When the first two phases of the Michigan Project are complete, the Company will own a 60% interest in West Shore. As of December 31, 1996, the Company had made contributions of approximately $10.4 million and owns a 47% interest. Upon completion of the first two phases of development, West Shore's treating and processing operations are expected to have 30 MMcf/D of capacity and approximately 25 MMcf/D of dedicated production from currently drilled and proven wells. With a current pipeline capacity of 35 MMcf/D and deliverabilities of individual wells commonly exceeding 5 MMcf/D, the Company expects that demand at West Shore could exceed capacity. As a result, the Company is already planning to expand West Shore to increase capacity in the second phase of the Michigan Project. There can be no assurance, however, that demand for West Shore's services will reach the levels anticipated by the Company. Availability of Natural Gas Supply. West Shore has exclusive gathering, treatment and processing agreements with Michigan Production Company ("MPC") covering the natural gas production from all wells and leases presently owned by MPC within Manistee, Mason and Oceana Counties, Michigan. In addition, West Shore has a gathering, treating and processing agreement with Oceana Acquisition Company ("Oceana") covering the production from the initial phase of Oceana's drilling program in Oceana County, Michigan. West Shore also is negotiating an agreement with Longwood Exploration Company ("Longwood") that may result in the dedication of its natural gas production to the pipeline, treatment and processing facilities of West Shore. The Company believes that the expansion of the Basin Pipeline southward will provide an outlet for sour gas production in the area and may stimulate new drilling activity in the area. Both MPC and Longwood are considering initiating drilling programs in the area, to begin by early 1997. Production from the MPC program has been dedicated to the Basin Pipeline, and West Shore is negotiating with Longwood for dedication of its production to the Basin Pipeline. MarkWest Resources, Inc. ("Resources"), a wholly owned subsidiary of the Company, has agreed to purchase a 17.5% working interest in the Longwood drilling program. MarkWest also has had discussions with other exploration companies that are evaluating possible exploration and production activities in the corridor to be serviced by the expanded Basin Pipeline. MarkWest currently is evaluating various drilling programs and expects to participate actively in drilling wells in the area. 6 The natural gas streams to be dedicated to West Shore under these agreements will primarily be produced from an extension of the Northern Niagaran Reef trend in western Michigan. To date, over 2.5 trillion cubic feet equivalent of natural gas has been produced from the Northern Niagaran Reef trend. Substantially all of the natural gas produced from the western region of this trend, however, is sour. While several successful large wells were developed in the region, the natural gas producers lacked adequate gathering and treatment facilities for sour gas, and development of the trend stopped in northern Manistee County. With the sour gas pipeline, treatment and processing facilities and capacity to be provided by West Shore, the Company believes there could be increased development in the region. In addition, the Company believes that improvements in seismic technology may increase exploration and production efforts, as well as drilling success rates. Shell Treatment and Processing Agreement. In addition to the establishment of West Shore, the Michigan Project includes a number of related agreements. To provide treatment for natural gas dedicated to West Shore, West Shore has entered into a gas treatment and processing agreement with Shell. Currently, the agreement provides West Shore with 30 MMcf/D of gas treatment capacity at Shell's facility in Manistee County, Michigan. The agreement also permits West Shore to cause the expansion of Shell's treatment facilities. In addition, the agreement grants West Shore the right to construct and install an NGL processing plant at the site of Shell's treatment plant. Following completion of the new processing plant, Shell will act as contract operator for West Shore. GAS PROCESSING CONTRACTS AND NATURAL GAS SUPPLY The Company historically has processed natural gas under two types of arrangements: keep-whole and fee-based processing. While the Company has been heavily dependent upon keep-whole contracts in the past, it intends to pursue fee-based processing contracts in the future to reduce the fluctuations in margins inherent in processing natural gas under keep-whole arrangements. Keep-Whole Contracts. Under keep-whole contracts, the principal cost is the reimbursement to the natural gas producers for the BTUs extracted from the gas stream in the form of liquids or consumed as fuel during processing. In such cases, the Company creates operating margins by maximizing the value of the NGLs extracted from the natural gas stream and minimizing the cost of replacement of BTUs. While the Company maintains programs to minimize the cost to deliver the replacement of fuel and shrinkage to the natural gas supplier, the Company's margins under keep-whole contracts can be negatively affected by either decreases in NGL prices or increases in prices of replacement natural gas. Approximately 59% of the Company's total revenue during 1996 resulted from keep- whole contracts. Fee Contracts. The Company has entered into a fee-based contract with Columbia Gas, which expires December 31, 2010, pursuant to which Columbia Gas has agreed to use its best efforts to deliver a minimum of 115 MMcf/D of natural gas to the Company's Kenova processing plant, and the Company has agreed to process all natural gas made available by Columbia Gas to the Company at the Kenova plant. In 1996, deliveries by Columbia Gas to the Kenova plant under this contract represented approximately 95% of all throughput processed by the Company. Under the agreement, Columbia Gas pays the Company a fee per MMbtu of processed natural gas. The terms of the contract provide for automatic two-year extensions after 2010, unless either party gives notice to terminate the contract at least one year in advance of an expiration date. In its Michigan Core Area, West Shore has entered into a fee-based contract with MPC, which expires December 2016, pursuant to which MPC has agreed to use its best efforts to deliver all of its natural gas to West Shore's pipeline and treating facilities. Under the agreement, MPC pays West Shore a fee per MMbtu of transported and treated natural gas. Approximately 5% of the Company's total revenues during 1996 resulted from fee-based contracts. Percent-of-Proceeds Contracts. Under percent-of-proceeds contracts, the Company retains a portion of NGLs and/or natural gas as compensation for the processing services provided. Operating revenues earned by the Company under percent-of- proceeds contracts increase proportionately with the price of NGLs and natural gas sold. While historically the Company has not entered into percent-of- proceeds contracts, 7 recently the Company offered to process natural gas for certain suppliers in the Appalachian Core Area under percent-of-proceeds arrangements. The Company and Columbia Gas are in the process of negotiating fee and/or percent-of-proceeds arrangements whereby the Company will process natural gas directly for third-party shippers who utilize Columbia Gas's pipeline and distribution system. In addition, part of the fee structure for transporting and treating natural gas in the Michigan Core Area includes retaining a portion of extracted NGLs. SALES AND MARKETING The Company attempts to maximize the value of its NGL output by marketing to distributors, resellers, blenders, refiners and petrochemical companies. The Company minimizes the use of third-party brokers and instead supports a direct marketing staff focused on multistate and independent dealers. Additionally, the Company uses its own truck and tank car fleet, as well as its own terminals and storage facilities, to enhance supply reliability to its customers. All of these efforts have allowed the Company to maintain premium pricing of its NGL products compared to Gulf Coast spot prices. Substantially all of the Company's revenue is derived from sales of NGLs, particularly propane. Revenues from NGLs represented 91%, 98% and 88% of total revenues, excluding gains on sale of property, in each of 1996, 1995 and 1994, respectively. The Company markets and sells NGLs to numerous customers, including refiners, petrochemical companies, gasoline blenders, multistate and independent propane distributors and propane resellers. The majority of the Company's sales of NGLs are based on spot prices at the time the NGLs are sold. Spot market prices are based upon prices and volumes negotiated for short terms, typically 30 days. EXPLORATION AND PRODUCTION The Company maintains a strategic gas exploration effort intended to permit the Company to gain a foothold position in production areas that have strong potential to create demand for its processing services. The Company, through Resources, currently owns interests in several exploration and production assets. Such assets include the following: . A 49% undivided interest in two separate exploration and production projects in La Plata County, Colorado, situated on the Fruitland Formation coal seam. One project currently contains nine coal seam wells that produce approximately 2,300 Mcf/D of natural gas. It is estimated that full development of these two projects will cost the Company approximately $3.2 million through the end of 1997. . A 5.4% working interest in a 66-well drilling program operated by Conley Smith, Denver, Colorado. The majority of these well sites are in Oklahoma, Kansas, Nevada and Texas. MarkWest believes it may have a future opportunity to provide its processing expertise to Conley Smith in the areas with successful drilling sites. There can be no assurance, however, that Conley Smith will use the Company's processing services. . A 25% working interest in a 31,000-acre project to be developed in the Piceance Basin of Colorado. The project includes both the exploration for conventional natural gas and the development of the Cameo Coal Formation utilizing tax credit qualified existing well bores. While there can be no assurance that these projects will generate substantial natural gas volumes, MarkWest believes that this area could generate increased demand for processing services. . A 17.5% working interest in the drilling program of the Niagran Reef Trend in the Michigan Core Area. Longwood intends to conduct a 25-square-mile three- dimensional seismic survey in the prospective area and thereafter acquire acreage and conduct drilling activities. 8 PROPERTIES The following table provides information concerning the Company's principal gas processing plants and gathering facilities.
YEAR ACQUIRED GAS NGL PRODUCTION OR PLACED THROUGHPOUT THROUGHPUT THROUGHPUT INTO SERVICE CAPACITY (Mcf/D)/a, b/ (Gal/YEAR)/b/ --------------------------------------------------------------------- PROCESSING PLANTS Siloam Fractionation Plant, South Shore, KY (1)..................... 1988 360,000 Gal/D NA 94,909,000 Boldman Extraction Plant, Pike County, KY (2)..................... 1991 70,000 Mcf/D 55,000 8,461,000 Kenova Extraction Plant, Wayne County, WV (3).................... 1996 120,000 Mcf/D 115,000 65,443,000 PIPELINES 38.5-mile Kenova--Siloam NGL pipeline Wayne County, WV to South Shore, KY (4)..................... 1988 350,000 Gal/D NA 65,443,000 31-mile sour gas gathering line Manistee County, MI (3)................. 1996 35,000 Mcf/D 5,500 NA YEAR ACQUIRED STORAGE OR PLACED CAPACITY ANNUAL SALES INTO SERVICE (Gal) (Gal/YEAR)/b/ ------------------------------------------------ TERMINAL AND STORAGE Siloam Fractionation Storage South Shore, KY (1).................................... 1988 14,000,000 94,909,000 Terminal and Storage West Memphis, AR (5)................................... 1992 2,500,000 33,798,000 Terminal and Storage Church Hill, TN (6).................................... 1995 240,000 4,053,000 - ------------
/a/ Mcf/D = cubic feet per day /b/ For the year ended December 31, 1996 (1) At the Siloam Fractionation Plant facility, extracted NGLs are subjected to various processes that cause the natural gas to separate, or fractionate, into separate NGL products, including propane, isobutane, normal butane and natural gasoline. The Siloam plant, situated on approximately 290 Company- owned acres, also has over 14.0 million gallons of on-site product storage, including an 8.4-million-gallon propane underground storage cavern, a 3.1- million-gallon butane underground storage cavern, and approximately 3.0 million gallons of above-ground storage tanks. The Siloam plant is served by the following modern loading and unloading facilities: four automated truck loading docks for propane/butane; two automated truck unloading docks for mixed feedstock; one automated bottom-loading dock for natural gasoline; truck scales; a rail siding capable of holding over 20 railcars and simultaneously loading or unloading eight cars; and barge facilities for the loading of natural gasoline and butanes. 9 (2) The Boldman plant is a refrigeration plant that extracts NGLs by cooling natural gas down to minus 20 degrees Fahrenheit. The plant includes two 60,000-gallon product storage tanks and truck-loading facilities. The Boldman plant is currently leased to, and operated by, Columbia Gas. (3) See "Natural Gas Processing and Related Services". (4) The Company owns a 38.5-mile, high-pressure steel pipeline that connects its Kenova processing plant to the Company's Siloam fractionation facility. Because this liquids pipeline was originally designed to handle a high- pressure ethane-rich stream, it has the capacity to handle almost twice as much product if it becomes available. (5) At the West Memphis terminal (a seven-acre propane terminal and storage facility), the Company maintains 45 pressurized storage tanks that have a storage capacity of just over 2.5 million gallons of NGLs. The terminal has an automated loading facility with two loading docks for propane, operating 24 hours per day, seven days per week. The West Memphis terminal is capable of serving railcar and trucking transportation. An adjoining Union Pacific rail siding holds up to 17 railcars and has 6 loading/unloading stations. The terminal is located approximately 1/4 mile from the Mississippi River and is secured by a long-term lease held by the Company. (6) The Company leases and operates a propane terminal in Church Hill, Tennessee, which principally receives product by rail and redelivers the product to dealers and resellers by truck. The Church Hill terminal has 240,000 gallons of pressurized storage, an automated truck loading station and a rail siding that can hold four cars and has two unloading stations. Executive Offices. MarkWest occupies approximately 12,000 square feet of space at its executive offices in Denver, Colorado under a lease expiring in March 1997. While the Company will require additional office space as its business expands, the Company believes that its existing facilities are adequate to meet its needs for the immediate future, and that additional facilities will be available on commercially reasonable terms as needed. COMPETITION The Company faces intense competition in obtaining natural gas supplies for its gathering and processing operations, in obtaining processed NGLs for fractionation and in marketing its products and services. The Company's principal competitors include major integrated oil and gas companies, such as Ashland and Amoco Oil Co.; major interstate pipeline companies, such as CNG Transmission Corporation; NGL processing companies, such as Natural Gas Clearinghouse; and national and local gas gatherers, brokers, marketers and distributors of varying sizes, financial resources and experience. Many of the Company's competitors, such as major oil and gas and pipeline companies, have capital resources and control supplies of natural gas substantially greater than those of the Company. Smaller local distributors may enjoy a marketing advantage in their immediate service areas. The Company competes against other companies in its gas processing business both for supplies of natural gas and for customers to which it sells its products. Competition for natural gas supplies is based primarily on location of gas gathering facilities and gas processing plants, operating efficiency and reliability, and ability to obtain a satisfactory price for products recovered. Competition for customers is based primarily on price, delivery capabilities, and maintenance of quality customer relationships. The Company's fractionation business competes against other fractionation facilities that serve local markets. Competitive factors affecting the Company's fractionation business include proximity to industry marketing centers and efficiency and reliability of service. In marketing its products and services, the Company has numerous competitors, including interstate pipelines and their marketing affiliates, major producers, and local and national gatherers, brokers, and marketers of widely varying sizes, financial resources and experience. Marketing competition is primarily based upon reliability, transportation, flexibility and price. OPERATIONAL RISKS AND INSURANCE The Company's operations are subject to the usual hazards incident to the exploration for and production, transmission, processing and storage of natural gas and NGLs, such as explosions, product spills, leaks, 10 emissions and fires. These hazards can cause personal injury and loss of life, severe damage to and destruction of property and equipment, and pollution or other environmental damage, and may result in curtailment or suspension of operations at the affected facility. The Company maintains general public liability, property and business interruption insurance in amounts that it considers to be adequate for such risks. Such insurance is subject to deductibles that the Company considers reasonable and not excessive. Consistent with insurance coverage generally available to the NGL industry, the Company's insurance policies do not provide coverage for losses or liabilities related to pollution or other environmental damage, except for sudden and accidental occurrences. The occurrence of a significant event not fully insured or indemnified against, and/or the failure of a party to meet its indemnification obligations, could materially and adversely affect the Company's operations and financial condition. Moreover, no assurance can be given that the Company will be able to maintain adequate insurance in the future at rates it considers reasonable. To date, however, the Company has experienced no material uninsured losses. GOVERNMENT REGULATION Certain of the Company's pipeline activities and facilities are involved in the intrastate or interstate transportation of natural gas and NGLs and are subject to state and/or federal regulation. Historically, the transportation and sale for resale of natural gas in interstate commerce have been regulated pursuant to the Natural Gas Act of 1938 ("NGA"), the Natural Gas Policy Act of 1978 ("NGPA"), and the regulations promulgated thereunder by the Federal Energy Regulatory Commission ("FERC"). In the past, the federal government regulated the prices at which oil and gas could be sold, as well as certain terms of service. However, the deregulation of natural gas sales pricing began under terms of the NGPA and was completed in January 1993 pursuant to the Natural Gas Wellhead Decontrol Act of 1989 (the "Decontrol Act"). Thus, all sales by the Company of NGLs and natural gas currently can be made at uncontrolled market prices. There can be no assurance, however, that Congress will not reenact price controls in the future which could apply to, or substantially affect, these sales activities. FERC's jurisdiction over the interstate transportation of natural gas was not removed or limited by the NGPA or the Decontrol Act. FERC also retains jurisdiction over the interstate transportation of liquid hydrocarbons, such as NGLs and product streams derived therefrom. The processing of natural gas for the removal of liquids currently is not viewed by the FERC as an activity subject to its jurisdiction. If a processing plant's primary function is extraction of NGLs and not natural gas transportation, the FERC has traditionally maintained that the plant is not a facility for transportation or sale for resale of natural gas in interstate commerce and therefore is not subject to jurisdiction under the Natural Gas Act. Although the FERC has not been requested to and has made no specific declaration as to the jurisdictional status of the Company's gas processing operations or facilities, the Company believes that because its gas processing plants are primarily involved in removing NGLs, their processing activities are exempt from FERC jurisdiction. Notwithstanding the foregoing, Columbia Gas is seeking abandonment approval of the processing plant that was replaced by the Company's Kenova extraction plant. The previous Columbia Gas processing plant was considered by FERC to be transportation-related and was included in Columbia Gas's certificated facilities. Because of this prior regulatory classification when owned by Columbia Gas, the Company has specifically requested a ruling from FERC confirming that the new Kenova extraction plant is exempt from FERC jurisdiction. While there can be no assurance that FERC will issue such a ruling, the Company believes, based upon opinions of legal counsel to the Company, that such a ruling will be forthcoming. In the event FERC does not confirm such exemption, the rates charged by the Company for processing services at the Kenova plant would be subject to regulation by FERC, and such rates and regulation could affect the volume of natural gas delivered to the facility by producers. If imposed, such regulation could have a material adverse effect on the Company's results of operations. As part of the Michigan Project, the Company will own and operate pipeline gathering facilities in conjunction with its processing plants. Under the NGA, facilities which have as their "primary function" 11 the performance of gathering activities and are not owned by interstate gas pipeline companies are wholly exempt from FERC jurisdiction. Interstate transmission facilities, on the other hand, are subject to FERC jurisdiction. The FERC distinguishes between these two types of activities on a fact-specific basis, which may make it difficult to state with certainty the status of the Company's pipeline gathering facilities. Although the FERC has not been requested to or issued any order or opinion declaring the Company's facilities as gathering rather than transmission facilities, based on opinion of legal counsel, management believes these systems are NGA-exempt gathering facilities. In addition, state and local regulatory authorities oversee intrastate gathering and other natural gas pipeline operations. Because the Company's NGL pipeline facilities do not transport liquids in continuous flow in interstate commerce, they are not subject to FERC regulation under the Interstate Commerce Act. However, the design, construction, operation, and maintenance of the Company's NGL and natural gas pipeline facilities are subject to the safety regulations established by the Secretary of the Department of Transportation pursuant to the Natural Gas Pipeline Safety Act of 1968, as amended ("1968 Act"), or by state agency regulations which meet or exceed the requirements of the 1968 Act. The Company's natural gas exploration and production operations are subject to various types of regulation at the federal, state and local levels. Such regulation includes requiring permits for the drilling of wells, meeting bonding requirements in order to drill or operate wells and regulating the location of wells, the methods of drilling and casing wells, the surface use and restoration of properties upon which wells are drilled, the plugging and abandoning of wells and the disposal of fluids used in connection with such operations. Production operations are also subject to various conservation laws and regulations. These typically include the regulation of the size of drilling and spacing or proration units and the density of wells which may be drilled therein and the unitization or pooling of oil and gas properties. Whether the state has forced pooling, or integration of smaller tracts to form a tract large enough to conduct drilling operations, or relies only on voluntary pooling can affect the ease with which a property can be developed. State conservation laws also typically establish maximum rates of production of natural gas, generally prohibit the venting or flaring of gas and impose certain requirements regarding the ratability of production and the handling of nonhydrocarbon gases, such as carbon dioxide and hydrogen sulfide. The effect of these regulations may limit the amount of oil and gas available to the Company or which the Company can produce from its wells. They also substantially affect the cost and profitability of conducting natural gas exploration and production activities. Inasmuch as such laws and regulations are frequently expanded, amended or reinterpreted, the Company is unable to predict the future cost or impact of complying with these production-related regulations. Commencing in April 1992, the FERC issued a series of orders, generally referred to collectively as Order No. 636, which, among other things, require interstate pipelines such as Columbia Gas to "restructure" to provide transportation services separate or "unbundled" from the interstate pipelines sales of gas. Order No. 636 also requires interstate pipelines to provide open-access transportation on a basis that is equal for all shippers and all supplies of natural gas. This order was implemented through pipeline-by-pipeline restructuring proceedings. In many instances, the result has been to substantially reduce or bring to an end interstate pipelines' traditional role as wholesalers of natural gas in favor of providing only storage and transportation services. On July 16, 1996, the United States Court of Appeals for the District of Columbia Circuit upheld the validity of most of the provisions and features of Order No. 636. However, in many instances, appeals remain outstanding in the individual pipeline restructuring proceedings, so the Company cannot predict the final outcome of these proceedings. Order No. 636 is intended to foster increased competition within all phases of the natural gas industry. It remains unclear what impact, if any, increased competition within the natural gas industry under Order No. 636 will have on the Company or its various lines of business. Additionally, the FERC has issued a number of other orders which are intended to supplement various facets of its open access program, all of which will continue to affect how and by whom natural gas production and associated NGLs will be transported and sold in the marketplace. In its current form, FERC's open access initiatives could provide the Company with additional access to gas supplies and markets and could assist the Company and its customers by mandating more fairly applied service rates, terms and conditions. On the other hand, it could also subject the Company and entities with 12 which it does business to more restrictive pipeline imbalance tolerances, more complex operations and greater monetary penalties for violation of the pipelines tolerances and other tariff provisions. The Company does not believe, however, that it will be affected by any action taken with respect to Order No. 636 materially differently than any other producers, gatherers, processors or marketers with which it competes. ENVIRONMENTAL MATTERS The Company is subject to environmental risks normally incident to the operation and construction of gathering lines, pipelines, plants and other facilities for gathering, processing, treatment, storing and transporting natural gas and other products including, but not limited to, uncontrollable flows of natural gas, fluids and other substances into the environment, explosions, fires, pollution, and other environmental and safety risks. The following is a discussion of certain environmental and safety concerns related to the Company. It is not intended to constitute a complete discussion of the various federal, state and local statutes, rules, regulations, or orders to which the Company's operations may be subject. For example, the Company, without regard to fault, could incur liability under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended (also known as the "Superfund" law), or state counterparts, in connection with the disposal or other releases of hazardous substances, including sour gas, and for natural resource damages. Further, the recent trend in environmental legislation and regulations is toward stricter standards, and this will likely continue in the future. The Company's activities in connection with the operation and construction of gathering lines, pipelines, plants, injection wells, storage caverns, and other facilities for gathering, processing, treatment, storing, and transporting natural gas and other products are subject to environmental and safety regulation by federal and state authorities, including, without limitation, the state environmental agencies and the federal Environmental Protection Agency ("EPA"), which can increase the costs of designing, installing and operating such facilities. In most instances, the regulatory requirements relate to the discharge of substances into the environment and include measures to control water and air pollution. Environmental laws and regulations may require the acquisition of a permit or other authorization before certain activities may be conducted by the Company. These laws also include fines and penalties for non-compliance. Further, these laws and regulations may limit or prohibit activities on certain lands lying within wilderness areas, wetlands, areas providing habitat for certain species or other protected areas. The Company is also subject to other federal, state, and local laws covering the handling, storage or discharge of materials used by the Company, or otherwise relating to protection of the environment, safety and health. The Company believes that it is in material compliance with all applicable environmental laws and regulations. EMPLOYEES As of December 31, 1996, the Company had 84 employees. Eighteen employees at the Company's Siloam fractionation facility in South Shore, Kentucky, are represented by the Oil, Chemical and Atomic Workers International Union, Local 3-372 (Siloam Sub-Local). The Company recently negotiated a new collective bargaining agreement with this Union that is effective May 1, 1996, and expires on April 30, 2000. The agreement covers only hourly, nonsupervisory employees. The Company considers labor relations to be satisfactory at this time. RISK FACTORS This Annual Report on Form 10-K contains statements which, to the extent that they are not recitations of historical fact, constitute "forward looking statements" within the meaning of Section 27A of the Securities and Exchange Act of 1933 and Section 21E of the Securities and Exchange Act of 1934. All forward 13 looking statements involve risks and uncertainties. The forward looking statements in this document are intended to be subject to the safe harbor protection provided by Sections 27A and 21E. Factors that most typically impact the Company's operating results and financial condition include (i) changes in general economic conditions in regions in which the Company's products are located, (ii) the availability and prices of NGLs and competing commodities, (iii) the availability of raw natural gas supply, (iv) the ability of the Company to negotiate favorable marketing agreements, (v) the risks that natural gas exploration and production activities will not be successful, (vi) the Company's dependence on certain significant customers, (vii) competition from other NGL processors, including major oil and gas companies, and (viii) the Company's ability to identify and consummate acquisitions complementary to its business. For discussions identifying other important factors that could cause actual results to differ materially from those anticipated in the forward looking statements, see the Company's Securities and Exchange Commission filings; and "Management's Discussion and Analysis of Financial Conditions and Results of Operations" of this Form 10-K. ITEM 3. LEGAL PROCEEDINGS The Company is not currently a party to any legal proceedings, and is not aware of any threatened litigation, the adverse outcome of which, individually or in the aggregate, would have a material adverse effect on the Company's financial condition or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the quarter ended December 31, 1996. 14 PART II ITEM 5. MARKET FOR THE REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS As of January 29, 1997, there were 8,485,000 shares of Common Stock outstanding held by 410 holders of record. The Common Stock is traded on the Nasdaq Exchange under the symbol "MWHX". The following table sets forth quarterly high and low closing sales prices as reported by the Nasdaq National Market for the periods indicated. HIGH LOW ------- ------- 1996 Fourth Quarter................... 15 1/2 10 1/4 The Company has paid no dividends on the Common Stock, and anticipates that, for the foreseeable future, it will continue to retain earnings for use in the operation of its business. Payment of cash dividends in the future will depend upon the Company's earnings, financial condition, any contractual restrictions, restrictions imposed by law and other factors deemed relevant by the Company's Board of Directors. 15 ITEM 6. SELECTED FINANCIAL DATA The selected consolidated statement of operations and balance sheet data for the years ended December 31, 1996, 1995 and 1994 and as of December 31, 1996 and 1995 are derived from, and are qualified by reference to, audited consolidated financial statements of the Company included elsewhere in this Form 10-K. The selected consolidated statement of operations and balance sheet data set for below for the years ended December 31, 1993 and 1992 and as of December 31, 1993 and 1992 have been derived from audited financial statements not included in this Form 10-K. The selected consolidated financial information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's Consolidated Financial Statements and related notes thereto included elsewhere in this Form 10-K.
Year Ended December 31, 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- (in thousands, except per share and operating data) STATEMENT OF OPERATIONS: Revenues................................ $ 71,952 $ 48,226 $ 52,963 $ 55,871 $ 82,977 Income (loss) before taxes, extraordinary item and cumulative effect of change in accounting......... 14,760 7,824 5,120 540 5,449 Income tax provision Arising from reorganization............ 3,745 -- -- -- -- Subsequent to reorganization........... 3,246 -- -- -- -- Income before extraordinary item and cumulative effect of change in accounting............................. 7,769 7,824 5,120 540 5,449 Extraordinary loss...................... -- (1,750) - -- -- Cumulative effect of change in accounting............................. -- -- -- -- 877 Net income.............................. 7,769 6,074 5,120 540 6,326 Pro forma information (1): Historical income before extraordinary item................................... 14,760 7,824 5,120 540 5,449 Pro forma provision for income taxes.... 5,609 2,937 1,424 228 2,060 Pro forma net income.................... 9,151 4,887 3,696 312 3,389 Pro forma earnings per share of common.. stock (2).............................. 1.16 .85 Pro forma weighted average shares outstanding(2)......................... 7,908 5,725 BALANCE SHEET DATA: Total assets............................ $ 78,254 $ 46,896 $ 35,913 $ 40,668 $ 41,092 Long-term debt.......................... 11,257 17,500 9,887 16,486 11,750 Partners' capital....................... -- 25,161 22,183 17,350 19,614 Stockholders' equity.................... 43,664 -- -- -- -- OPERATING DATA: Fee gas processed (mbtu)................ 33,899,744 -- -- -- -- NGL production (gallons)................ 94,908,534 92,239,000 99,735,000 93,355,000 88,616,000 Terminal throughput (gallons)........... 37,851,450 31,206,000 32,664,000 30,116,000 26,273,000 Michigan pipeline throughput (mcf)...... 1,161,182 -- -- -- -- - ----------------------------------------
(1) Prior to October 7, 1996, the Company was organized as a partnership, MarkWest Hydrocarbon Partners, Ltd. ("MarkWest Partnership") and consequently, was not subject to income tax. Effective October 7, 1996 the Company reorganized (the "Reorganization") and the existing general and limited partners exchanged 100% of their interests in MarkWest Partnership for 5,725,000 common shares of the Company. A pro forma provision for income taxes has been presented for purposes of comparability as if the Company had been a taxable entity for all periods presented. 16 (2) Pro forma weighted average shares outstanding at December 31, 1996 represents the weighted average of the period prior to the Offering, the number of common shares issued in the Reorganization plus the number of shares issued in the Offering for which the net proceeds were used to repay outstanding indebtedness and, for the period subsequent to the Offering, the total number of common shares outstanding. Pro forma weighted average shares outstanding at December 31, 1995 represents the weighted average number of common shares issued in the Reorganization. ITEM 7. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion is intended to provide an analysis of the Company's financial condition and results of operations for the three years ended December 31, 1996, and should be read in conjunction with the selected financial data and the Company's Consolidated Financial Statements and related Notes thereto included elsewhere in this Form 10-K. RESULTS OF OPERATIONS Year ended December 31, 1996 Compared to Year Ended December 31, 1995 Revenues. Plant revenue increased to $45.9 million from $33.8 million for the year ended December 31, 1996 as compared to the year ended December 31, 1995, an increase of $12.1 million or 36%. This increase is primarily a result of price-related increases of all NGLs of $9.9 million, partially offset by a volume-related decrease of $1.1 million. The volume decrease at the fractionation plant at Siloam, which receives approximately 70% of its raw NGL mix from the Kenova plant, was due principally to normal start-up delays in the transition from an older processing facility at Kenova to the Company's new plant in the first quarter of 1996. In addition, the new Kenova processing plant, which was placed into service in January 1996, generated an additional $3.5 million of fee revenue during 1996. Terminal and marketing revenue increased to $22.9 million from $13.2 million for the year ended December 31, 1996 as compared to the year ended December 31, 1995, an increase of $9.7 million, or 74%. This increase of $9.7 million was due to a $5.4 million volume-related increase and a $4.3 million price-related increase. Revenue from the West Memphis terminal accounted for $7.9 million of the increase and the new terminal in Church Hill, Tennessee, which became operational in the fall of 1995, accounted for $1.8 million of the increase. The increase in revenues from the West Memphis terminal was due principally to colder temperatures during the first and fourth quarters of 1996. Oil and gas and other revenue increased to $3.0 million from $1.1 million for the year ended December 31, 1996 as compared to the year ended December 31, 1995, an increase of $1.9 million, or 173%. This increase is principally due to the consolidation of MarkWest Michigan revenue of $1.7 million, offset by a decrease in miscellaneous revenue of approximately $100,000. Costs and expenses. Plant feedstock purchases increased to $22.2 million from $17.3 million for the year ended December 31, 1996 as compared to the year ended December 31, 1995, an increase of $4.9 million or 28%. This increase is principally due to price-related increases in raw materials. Terminal and marketing purchases increased to $18.7 million from $11.9 million for the year ended December 31, 1996 as compared to the year ended December 31, 1995, an increase of $6.8 million, or 57%. Increased propane prices resulted in a $2.5 million increase, in addition to volume increases at West Memphis and Churchill which resulted in increases of $2.9 million and $1.4 million, respectively. Operating expenses increased to $7.0 million from $4.7 million for the year ended December 31, 1996 as compared to the year ended December 31, 1995, an increase of $2.3 million, or 49%. This increase is partially due to new operations at both the Kenova and Church Hill facilities which commenced operations 17 in January 1996 and October 1995, respectively. Additional operating expenses resulted from the consolidation of MarkWest Michigan operations, which began in May 1996. Depreciation and amortization increased to $2.9 million from $1.8 for the year ended December 31, 1996 as compared to the year ended December 31, 1995, an increase of $1.1 million or 61%. This increase is due principally to depreciation attributable to the Company's new Kenova plant and MarkWest Michigan's pipeline and facilities. Net interest expense. Net interest expense increased to $900,000 from $400,000 for the year ended December 31, 1996 as compared to the year ended December 31, 1995, an increase of $500,000 or 125%. This increase resulted principally from an increase in average outstanding long-term debt of $12 million for 1996 compared to $8.1 million for 1995. Additionally, $301,000 of interest was capitalized in conjunction with capital projects in 1995, compared to only $27,000 of interest capitalized for 1996 projects. Income tax expense. Income tax expense increased $7 million for the year ended December 31, 1996, as compared to the year ended December 31, 1995, which had $0 income tax expense. As a partnership, MarkWest Hydrocarbon Partners, Ltd. (the Company's predecessor) was not subject to federal and state income tax, and its income was taxed directly to its respective partners. MarkWest Hydrocarbon, Inc. is a taxable entity and therefore, recorded income tax expense in 1996. Year Ended December 31, 1995 Compared to Year Ended December 31, 1994 Revenues. Plant revenue increased to $33.8 million from $33.1 million for the year ended December 31, 1995 as compared to the year ended December 31, 1994, an increase of $767,000, or 2%. This increase resulted principally from a $2.0 million increase due to an increase in average NGL sales prices, offset by a $1.2 million decrease due to reduced volumes sold. Terminal and marketing revenue decreased to $13.2 million from $13.7 million for the year ended December 31, 1995 as compared to the year ended December 31, 1994, a decrease of $494,000 or 4%. This decrease principally resulted from the expiration of the remaining third-party brokerage sales in 1994, including a net volume-related decrease of $3.1 million offset by a net price-related increase of $2.6 million. Oil and gas and other revenue decreased to $1.1 million from $1.8 million for the year ended December 31, 1995 as compared to the year ended December 31, 1994, a decrease of $755,000 or 41%. The decrease resulted principally from the Company's sale in 1994 of substantially all of its San Juan Basin coalbed methane properties and associated gathering systems. The Company sold its San Juan Basin coalbed methane properties and associated gathering systems in 1994 because it had the opportunity to do so at a substantial profit, and, at that time, such properties did not provide natural gas dedicated to the Company's processing operations. Gain on sale of oil and gas properties of $4.3 million in 1994 was due to the sale of a majority of the Company's oil and gas producing assets for approximately $10.1 million. Costs and expenses. Plant feedstock purchases decreased to $17.3 million from $21.6 million for the year ended December 31, 1995 as compared to the year ended December 31, 1994, a decrease of $4.3 million or 20%. This decrease resulted from the acquisition of feedstock quantities during off-peak periods, when prices typically are lower, rather than at spot prices during peak season. Terminal and marketing purchases increased to $11.9 million from $11.5 million for the year ended December 31, 1995 as compared to the year ended December 31, 1994, an increase of $440,000 or 4%. This increase was due principally to an increase in the average price per gallon of propane. 18 Operating expenses increased to $4.7 million from $4.4 million for the year ended December 31, 1995 as compared to the year ended December 31, 1994, an increase of $313,000 or 7%. The increase was attributable to the construction and start up of the Kenova gas processing facility. General and administrative expenses increased to $4.2 million from $3.7 million for the year ended December 31, 1995 as compared to the year ended December 31, 1994, an increase of $535,000 or 15%. The increase was attributable to administrative support activities related to the Michigan Project and the new Kenova and Church Hill facilities. Depreciation and amortization decreased to $1.8 million from $1.9 million for the year ended December 31, 1995 as compared to the year ended December 31, 1994, a decrease of $188,000 or 10%. This decrease resulted principally from lower plant carrying values due to reductions made in 1994. Reduction in carrying value of assets of $3.0 million in 1994 was due to a one- time charge reflecting the shutdown of the isomerization unit at the Siloam plant and a charge for the write-down of other non-productive equipment. Net interest expense. Net interest expense decreased to $400,000 from $1.7 million for the year ended December 31, 1995 as compared to the year ended December 31, 1994, a decrease of $1.3 million or 79%. The decrease resulted principally from lower average borrowing levels of approximately $16.0 million in 1994 to $8.1 million in 1995, a decrease in interest rates, the capitalization of approximately $301,000 of interest in connection with the construction of the Kenova gas processing plant, and the early extinguishment of a note that required the Company to pay additional interest averaging $400,000 per year based on the throughput of the Company's Siloam facility. LIQUIDITY AND CAPITAL RESOURCES The Company's sources of liquidity and capital resources historically have been net cash provided by operating activities; proceeds from issuance of long-term debt; in 1994, the proceeds from the sale of certain oil and gas properties; and in 1996, an initial public offering of equity. The Company's principal uses of cash have been to fund operations and acquisitions. The following summary table reflects comparative cash flows for the Company for the years ended December 31, 1996, 1995 and 1994: Year Ended December 31, --------------------------------- 1996 1995 1994 ---- ---- ---- Net cash provided by operating activities............................. $ 16,815 $ 5,436 $ 994 Net cash provided by (used in) investing activities................... $(17,516) $(12,610) $ 9,068 Net cash provided by (used in) financing activities................... $ 4,341 $ 2,467 $(5,886) For the year ended December 31, 1996, net cash provided by operating activities increased by $11.4 million over the year ended December 31, 1995. This increase resulted primarily from an increase in revenue of $23.7 million, which was offset by a $15.1 million increase in feedstock purchases, terminal and marketing purchases, operating expenses and general and administrative expenses. Cash used in investing activities increased $4.9 million for the year ended December 31, 1996, as compared to the year ended December 31, 1995, primarily due to capital expenditures incurred during 1996 related to the Michigan project. 19 Cash provided by financing activities increased $1.9 million for the year ended December 31, 1996, as compared to the year ended December 31, 1995. This increase resulted primarily from the initial public offering in October, which was partially offset by payments made on long-term debt. Financing Facilities Revolver Loan. The Company currently has a financing agreement with Norwest Bank Denver, N.A., as agent, First American National Bank of Nashville, Tennessee, First Chicago NBD and N M Rothschild and Sons Limited. The agreement is structured as a revolving facility, with a maximum borrowing base of $40.0 million as of December 31, 1996. Interest rates are based on either the agent bank's prime rate plus 1/4 % or the London Interbank Offered Rate (LIBOR) plus 2%. The repayment period begins on September 30, 1998, continuing for 16 equal quarterly installments until June 30, 2002. Outstanding borrowings at December 31, 1996 were $4.2 million. This facility is secured by substantially all of the Company's assets. Working Capital Loan. The Company has a working capital line of credit with a maximum borrowing base of $7.5 million as of December 31, 1996. Interest rates are based on prime plus 1/4 %, with maturity on June 30, 1998. Outstanding borrowings at December 31, 1996 were $5.7 million. The working capital loan is secured by the Company's inventories, receivables and cash. All amounts outstanding under this facility were repaid effective February 19, 1997. Resources Revolver Loan. The Company's Resources subsidiary has a revolving facility with Colorado National Bank ("CNB") with a maximum borrowing base of $5.8 million as of December 31, 1996. Interest is based on CNB's bank rate plus 1/2 %. The facility has a maturity date of April 2003. This facility is restricted for the exploration and development of oil and gas properties and as of December 31, 1996, $1.2 million was outstanding. This facility is secured by substantially all of MarkWest Resources' assets. The Company has guaranteed $1.0 million of this facility. All amounts outstanding under this facility were repaid effective February 19, 1997. The loan agreements contain affirmative and negative covenants customary in commercial lending transactions, including restrictions on the incurrence of additional debt, restrictions on the payment of dividends that would cause the Company to violate the financial covenants contained in the loan agreements, maintenance of a specified tangible net worth, current ratio, ratio of funded debt to total capitalization and fixed charge coverage ratio. Capital Investment Program The Company expects to invest approximately $20.0 for activities in the Michigan Core Area during 1997. The Company also expects to invest approximately $3.6 million in Resources in 1997. For the year ended December 31, 1996, the Company made capital expenditures totaling $9.8 million. During 1996 and 1995, the Company expended $12.2 million in connection with the construction of the Kenova plant. During 1995, the Company expended $213,000 for the construction and related costs for development of the Church Hill terminal and storage facility, respectively. During 1994, the Company expended $1.4 million for the expansion and upgrade of existing facilities. RISK MANAGEMENT ACTIVITIES The Company's policy is to utilize risk management tools primarily to reduce commodity price risk for its natural gas shrink replacement purchases. This effectively allows the Company to fix a portion of its margin because gains or losses in the physical market are offset by corresponding losses or gains in the financial instruments market. The Company's hedging activities generally fall into three categories--contracting for future purchases of natural gas at a predetermined BTU differential based upon a basket of 20 Gulf Coast NGL prices, the fixing of margins between propane sales prices and natural gas reimbursement costs by purchasing natural gas contracts and simultaneously selling propane contracts (or a substitute for propane such as crude oil) of approximately the same BTU value, and the purchase of propane futures contracts to hedge future sales of propane at the Company's terminals or gas plants. The Company maintains a three-person committee that oversees all hedging activity of the Company. This committee reports monthly to management regarding recommended hedging transactions and positions. Gains and losses related to qualifying hedges, as defined by Statement of Financial Accounting Standards, ("SFAS") No. 80, "Accounting for Futures Contracts", of firm commitments or anticipated transactions are recognized in plant revenue and feedstock purchases upon execution of the hedged physical transaction. As of December 31, 1996, 1995 and 1994, the Company did not hold any material notional quantities of natural gas, NGL, or crude oil futures, swaps or options. For the year ended December 31, 1996, the Company recognized a $1.1 million loss in operating income on the settlement of propane and natural gas futures. This Annual Report on Form 10-K contains statements which, to the extent that they are not recitations of historical fact, constitute "forward looking statements" within the meaning of Section 27A of the Securities and Exchange Act of 1933 and Section 21E of the Securities and Exchange Act of 1934. All forward looking statements involve risks and uncertainties. The forward looking statements in this document are intended to be subject to the safe harbor protection provided by Sections 27A and 21E. Factors that most typically impact the Company's operating results and financial condition include (i) changes in general economic conditions in regions in which the Company's products are located, (ii) the availability and prices of NGLs and competing commodities, (iii) the availability of raw natural gas supply, (iv) the ability of the Company to negotiate favorable marketing agreements, (v) the risks that natural gas exploration and production activities will not be successful, (vi) the Company's dependence on certain significant customers, (vii) competition from other NGL processors, including major oil and gas companies, and (viii) the Company's ability to identify and consummate acquisitions complementary to its business. For discussions identifying other important factors that could cause actual results to differ materially from those anticipated in the forward looking statements, see the Company's Securities and Exchange Commission filings; and "Management's Discussion and Analysis of Financial Conditions and Results of Operations" of this Form 10-K. 21 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page ---- Report of Independent Accountants......................................... 23 Consolidated Balance Sheet at December 31, 1996 and 1995.................. 24 Consolidated Statement of Operations for each of the three years ended December 31, 1996........................................................ 25 Consolidated Statement of Cash Flows for each of the three years ended December 31, 1996........................................................ 26 Consolidated Statement of Changes in Stockholders' Equity/ Partners' Capital for each of the three years ended December 31, 1996.............. 27 Notes to Consolidated Financial Statements................................ 28 22 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of MarkWest Hydrocarbon, Inc. In our opinion, the accompanying consolidated balance sheet and related consolidated statements of operations, of cash flows and of changes in stockholders' equity/ partners' capital present fairly, in all material respects, the financial position of MarkWest Hydrocarbon, Inc., a Delaware corporation (formerly MarkWest Hydrocarbon Partners, Ltd., a Colorado limited partnership), and its subsidiaries at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP Denver, Colorado March 5, 1997 23 MARKWEST HYDROCARBON, INC. (SUCCESSOR TO MARKWEST HYDROCARBON PARTNERS, LTD.) CONSOLIDATED BALANCE SHEET ($000S, EXCEPT SHARE DATA)
December 31, ASSETS 1996 1995 -------- -------- Current assets: Cash and cash equivalents............... $ 4,401 $ 761 Receivables............................. 9,755 8,909 Inventories............................. 5,632 2,830 Prepaid expenses and other assets....... 2,289 2,104 -------- ------- Total current assets.................. 22,077 14,604 -------- ------- Property and equipment: Gas processing, gathering, storage and marketing.............................. 45,247 23,134 Oil and gas properties and equipment.... 3,731 1,883 Construction in progress................ 5,831 10,282 Land, buildings and other equipment..... 5,647 6,216 -------- ------- 60,456 41,515 Less: accumulated depreciation, depletion and amortization............. (12,316) (9,568) -------- ------- Total property and equipment, net..... 48,140 31,947 -------- ------- Intangible assets, net of accumulated amortization of $315 and $152 respectively.................... 380 320 Note receivable and other assets......... 7,657 25 -------- ------- Total assets.......................... $ 78,254 $46,896 ======== ======= LIABILITIES AND STOCKHOLDERS' EQUITY/PARTNERS' CAPITAL Current liabilities: Trade accounts payable.................. $ 5,382 $ 3,283 Accrued liabilities..................... 1,629 952 Income taxes payable.................... 3,014 -- Current portion of long-term debt....... 156 -- -------- ------- Total current liabilities............. 10,181 4,235 Deferred income taxes.................... 3,977 -- Long-term debt........................... 11,257 17,500 -------- ------- Total liabilities..................... 25,415 21,735 Minority interest........................ 9,175 -- -------- ------- Commitments and contingencies............ -- -- -------- ------- Stockholders' equity/ partners' capital: Common stock, par value $.01; 8,485,000 shares authorized, issued and outstanding........................ 85 -- Additional paid-in capital.............. 42,237 -- Partners' capital....................... -- 25,161 Retained earnings....................... 1,342 -- -------- ------- Total stockholders' equity/ partners' capital............................... 43,664 25,161 -------- ------- Total liabilities and stockholders' equity/partners' capital................ $ 78,254 $46,896 ======== =======
The accompanying notes are an integral part of these financial statements. 24 MARKWEST HYDROCARBON, INC. (SUCCESSOR TO MARKWEST HYDROCARBON PARTNERS, LTD.) CONSOLIDATED STATEMENT OF OPERATIONS ($000S, EXCEPT PER SHARE DATA)
For the Year Ended December 31, 1996 1995 1994 ------- ------- ------- Revenues: Plant revenue................................................... $45,880 $33,823 $33,056 Terminal and marketing revenue.................................. 22,858 13,172 13,666 Oil and gas and other revenue................................... 3,022 1,075 1,830 Interest income................................................. 192 156 136 Gain on sales of oil and gas properties......................... -- -- 4,275 ------- ------- ------- Total revenues................................................ 71,952 48,226 52,963 ------- ------- ------- Costs and expenses: Plant feedstock purchases....................................... 22,231 17,308 21,582 Terminal and marketing purchases................................ 18,676 11,937 11,497 Operating expenses.............................................. 7,048 4,706 4,393 General and administrative expenses............................. 5,302 4,189 3,654 Depreciation, depletion and amortization................................................... 2,910 1,754 1,942 Interest expense................................................ 1,090 508 1,825 Reduction in carrying value of assets........................... -- -- 2,950 ------- ------- ------- Total costs and expenses...................................... 57,257 40,402 47,843 ------- ------- ------- Income before minority interest, income taxes and extraordinary item.................................... 14,695 7,824 5,120 Minority interest in net loss of subsidiary...................................................... 65 -- -- ------- ------- ------- Income before income taxes and extraordinary item.............................................. 14,760 7,824 5,120 Income tax provision: Arising from reorganization..................................... 3,745 -- -- Subsequent to reorganization.................................... 3,246 -- -- ------- ------- ------- Income before extraordinary item................................. 7,769 7,824 5,120 Extraordinary loss on extinguishment of debt............................................................ -- (1,750) -- ------- ------- ------- Net income....................................................... $ 7,769 $ 6,074 $ 5,120 ======= ======= ======= Pro forma information (Note 2): Historical income before extraordinary item............................................ $14,760 $ 7,824 $ 5,120 Pro forma provision for income taxes........................... 5,609 2,937 1,424 ------- ------- ------- Pro forma net income........................................... $ 9,151 $ 4,887 $ 3,696 ======= ======= ======= Pro forma earnings per share of common stock.................................................. $ 1.16 $ .85 ======= ======= Pro forma weighted average number of outstanding shares of common stock............................ 7,908 5,725 ======= =======
The accompanying notes are an integral part of these financial statements. 25 MARKWEST HYDROCARBON, INC. (SUCCESSOR TO MARKWEST HYDROCARBON PARTNERS, LTD.) CONSOLIDATED STATEMENT OF CASH FLOWS ($000S)
For the Year Ended December 31, 1996 1995 1994 -------- -------- -------- Cash flows from operating activities: Net income............................. $ 7,769 $ 6,074 $ 5,120 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and 2,910 1,754 1,942 amortization..................... Deferred income taxes............. 3,977 -- -- Option granted in conjunction with extinguishment of debt..... -- 1,050 -- Loss (gain) on sale of assets..... 46 -- (4,275) Reduction in carrying value of assets........................... -- -- 2,950 (Increase) in receivables......... (846) (4,729) (977) (Increase) decrease in inventories (2,802) (19) 1,348 (Increase) decrease in prepaid expenses and other assets........ (185) (86) (1,125) Increase (decrease) in accounts payable and accrued liabilities.. 5,946 1,392 (3,989) -------- -------- -------- Net cash flow provided by operating activities.... 16,815 5,436 994 Cash flows from investing activities: Capital expenditures.............. (9,824) (12,426) (1,442) Proceeds from sale of assets...... -- -- 10,166 Increase in long-term notes receivable....................... (7,657) -- -- Decrease (increase) in intangible and other assets................. (35) (184) 344 -------- -------- -------- Net cash provided by (used in) investing activities.............. (17,516) (12,610) 9,068 Cash flows from financing activities: Proceeds from issuance of long-term debt.................. 1,174 -- -- Repayments of long-term debt...... (84) (500) -- Borrowings under revolving credit facility......................... 45,950 26,050 7,201 Payments on revolving credit facility........................ (53,548) (18,937) (12,800) Partners' distributions........... (14,150) (4,150) (320) Payments on partner notes......... 320 -- -- Payments on options............... 71 4 33 Proceeds from issuance of common stock.................... 24,608 -- -- -------- -------- -------- Net cash provided by (used in) financing activities.............. 4,341 2,467 (5,886) Net increase (decrease) in cash and cash equivalents............. 3,640 (4,707) 4,176 Cash and cash equivalents at beginning of year.............................. 761 5,468 1,292 -------- -------- -------- Cash and cash equivalents at end of year................................. $ 4,401 $ 761 $ 5,468 ======== ======== ========
The accompanying notes are an integral part of these financial statements. 26 MARKWEST HYDROCARBON, INC. (SUCCESSOR TO MARKWEST HYDROCARBON PARTNERS, LTD.) CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY/ PARTNERS' CAPITAL ($000S)
TOTAL PARTNERS' COMMON ADDITIONAL PAID-IN RETAINED STOCKHOLDERS' CAPITAL STOCK CAPITAL EARNINGS EQUITY ---------- ------ ------------------ --------- -------------- Balance, December 31, 1993 $ 17,350 $ $ -- $ $ 17,350 Net income 5,120 -- -- -- 5,120 Distributions, net of contributions (287) -- -- -- (287) -------- ------ ------------------ -------- -------- Balance, December 31, 1994 22,183 -- -- -- 22,183 Net income 6,074 -- -- -- 6,074 Distributions, net of contributions (4,146) -- -- -- (4,146) Option granted in conjunction with extinguishment of debt 1,050 -- -- -- 1,050 -------- ------ ------------------ -------- -------- Balance, December 31, 1995 25,161 -- -- -- 25,161 Net income prior to reorganization 6,427 -- -- -- 6,427 Notes receivable from partners, net, 205 -- -- -- 205 prior to reorganization Distributions prior to reorganization (14,150) -- -- -- (14,150) Exercise of options, prior to 71 -- -- -- 71 reorganization Reorganization from a limited partnership to a corporation (17,714) 57 17,657 -- -- Deferred taxes relating to the reorganization -- -- -- (3,745) (3,745) Common stock issued -- 28 24,580 -- 24,608 Net income after reorganization -- -- -- 5,087 5,087 -------- ------ ------------------ -------- -------- Balance, December 31, 1996 $ -- $85 $42,237 $ 1,342 $ 43,664 ======== ====== ================== ======== ========
The accompanying notes are an integral part of these financial statements. 27 MARKWEST HYDROCARBON, INC. (SUCCESSOR TO MARKWEST HYDROCARBON PARTNERS, LTD.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. NATURE OF OPERATIONS AND SIGNIFICANT BUSINESS ACQUISITIONS NATURE OF OPERATIONS AND RECENT REORGANIZATION MarkWest Hydrocarbon, Inc. (the "Company") provides compression, gathering, treatment, processing and natural gas liquids extraction services to natural gas producers and pipeline companies and fractionates natural gas liquids into marketable products for sale to third parties. The Company also purchases, stores and markets natural gas and natural gas liquids and has begun to conduct strategic exploration for new natural gas resources for its processing and fractionation activities. The Company was incorporated in June 1996 to act as the successor to MarkWest Hydrocarbon Partners, Ltd. (the "Partnership"). Effective October 7, 1996, the Partnership reorganized (the "Reorganization") and the existing general and limited partners exchanged 100% of their interests in the Partnership for 5,725,000 common shares of the Company. An additional 2,400,000 shares of common stock were offered for public sale, totaling 8,125,000 shares outstanding as of October 15, 1996. The over-allotment of 360,000 shares was also exercised during October, resulting in a total of 8,485,000 shares outstanding at October 31, 1996. This transaction was a reorganization of entities under common control, and accordingly, it was accounted for at historical cost. SIGNIFICANT BUSINESS ACQUISITIONS Prior to July 1, 1996, the Partnership owned 49% of MarkWest Coalseam Development Company LLC (formerly MarkWest Coalseam Joint Venture) ("Coalseam"), a natural gas development venture, and MW Gathering LLC ("Gathering"), a natural gas gathering venture. Effective July 1, 1996, Gathering was merged into Coalseam. Simultaneously, the Partnership formed MarkWest Resources Inc. ("Resources"), and Coalseam distributed 49% of its assets to Resources and 51% to MAK-J Energy Partners, Ltd. (formerly MarkWest Energy Partners, Ltd.) ("Energy"), a partnership whose general partner is a corporation owned and controlled by the President of the Company. The consolidated financial statements reflect Resources' 49% proportionate share of the underlying oil and gas assets, liabilities, revenues and expenses. Effective May 6, 1996, the Partnership acquired the right to earn up to a 60% interest for $16.8 million in a newly formed venture, West Shore Processing, LLC ("West Shore"). The most significant asset of West Shore is Basin Pipeline, LLC, which was contributed by the Partnership's venture partner, Michigan Energy Company, LLC. The West Shore agreement is structured so that the Company's ownership interest increases as capital expenditures for the benefit of West Shore are made by the Company. As of December 31, 1996, the Company has recorded a net investment in West Shore of $10.4 million, representing a 47% ownership interest. The Company is committed to make capital expenditures of approximately $21.0 million through 1997 in conjunction with the first two phases of the agreement. Phase I of the project will be completed in early 1997. Phase II, scheduled for completion in late 1997, is underway. NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Resources and MarkWest Michigan, Inc. All significant intercompany accounts and transactions have been eliminated in consolidation. 28 CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Excess cash is used to pay down the term/revolver loan facility. Accordingly, investments are limited to overnight investments of end-of-day cash balances. RECEIVABLES Receivables comprise the following (in $000s):
At December 31, 1996 1995 ------- ------ Trade and other receivables... $9,755 $5,735 Short-term advances........... -- 3,174 ------ ------ $9,755 $8,909 ====== ======
No allowance for doubtful accounts is considered necessary based on favorable historical experience. During the fourth quarter of 1995, the Partnership made several short-term advances totaling $3,174,000 as part of an agreement with a partner to develop a joint project. In accordance with the terms of the agreement, the Partnership was reimbursed for the full amount of the advances at the closing date of May 6, 1996. INVENTORIES Inventories comprise the following (in $000s):
At December 31, 1996 1995 ------- ------ Product inventory.................. $5,292 $2,718 Materials and supplies inventory... 340 112 ------ ------ $5,632 $2,830 ====== ======
Product inventory consists primarily of finished goods (propane, butane, isobutane and natural gasoline) and is valued at the lower of cost, using the first-in, first-out method, or market. Market value of the Company's product inventory was $7.6 million and $3.8 million at December 31, 1996 and 1995, respectively. Capitalized overhead costs of $232,000 and $219,000 were included in product inventory at December 31, 1996, and 1995, respectively. Materials and supplies are valued at the lower of average cost or estimated net realizable value. PREPAID EXPENSES AND OTHER ASSETS Prepaid expenses and other assets comprise the following (in $000s):
At December 31, 1996 1995 ------ ------- Prepaid feedstock............ $1,831 $1,729 Prepaid expenses............. 458 375 ------ ------
29 $2,289 $2,104 ====== ====== Prepaid feedstock consists of natural gas purchased in advance of its actual use. It is valued on a first-in, first-out method. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is recorded at cost. Expenditures which extend the useful lives of assets are capitalized. Repairs, maintenance and renewals which do not extend the useful lives of the assets are expensed as incurred. Interest costs for the construction or development of significant long-term assets are capitalized and amortized over the related asset's estimated useful life. Depreciation is provided principally on the straight-line method over the following estimated useful lives: plant facilities, 20 years; buildings, 40 years; furniture, leasehold improvements and other, 3-10 years. Depreciation for oil and gas properties is provided for using the units-of-production method. Oil and gas properties consist of leasehold costs, producing and non-producing gas wells and equipment, and pipelines. The Company uses the full cost method of accounting for oil and gas properties. Accordingly, all costs associated with acquisition, exploration and development of oil and gas reserves are capitalized to the full cost pool. These capitalized costs, including estimated future costs to develop the reserves and estimated abandonment costs, net of salvage value, are amortized on a units-of-production basis using estimates of proved reserves. Investments in unproved properties and major development projects are not amortized until proved reserves associated with the projects can be determined or until impairment occurs. If the results of an assessment of such properties indicate that the properties are impaired, the amount of impairment is added to the capitalized cost base to be amortized. As of December 31, 1996 and 1995, approximately $649,000 and $862,000 of investments in unproved properties were excluded from amortization. The capitalized costs included in the full cost pool are subject to a "ceiling test," which limits such costs to the aggregate of the estimated present value, using a 10 percent discount rate, of the future net revenues from proved reserves, based on current economics and operating conditions. Impairment under the ceiling test of $116,000 was recognized in 1994 and is included in depreciation, depletion and amortization in the accompanying consolidated statement of operations. No impairment existed as of December 31, 1996 and 1995. Sales of proved and unproved properties are accounted for as adjustments of capitalized costs with no gain or loss recognized, unless such adjustments would significantly alter the relationship between capitalized costs and proved reserves of oil and gas, in which case the gain or loss is recognized in the consolidated statement of operations. IMPAIRMENT OF LONG-LIVED ASSETS During 1996, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, which requires that an impairment loss be recognized when the carrying amount of an asset exceeds the expected future undiscounted net cash flows. There was no effect on the Company's financial statements as a result of adopting SFAS No. 121. INTANGIBLE ASSETS 30 Deferred financing costs and a non-compete agreement with a former officer and director are included in intangible assets. Both are amortized using the straight-line method over the terms of the associated agreements. NOTE RECEIVABLE Note receivable at December 31, 1996 consists of a note receivable (the "Note") from Michigan Production Company, LLC ("MPC"). The Note is for all sums necessary for the construction of the 31 mile extension to the Basin pipeline. The Note bears an interest rate of 5.98% and is payable to the Company on the earlier of two dates which are contingent upon certain events as defined in the agreement. HEDGING ACTIVITIES The Company limits its exposure to natural gas and propane price fluctuations related to future purchases and production with futures contracts. These contracts are accounted for as hedges in accordance with the provisions of SFAS No. 80, Accounting for Futures Contracts. Gains and losses on such hedge contracts are deferred and included as a component of propane revenues and feedstock purchases when the hedged production is sold. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments consist of cash and cash equivalents, receivables, accounts payable and other current liabilities, and long-term debt. Except for long-term debt, the carrying amounts of financial instruments approximate fair value due to their short maturities. At December 31, 1996 and 1995, based on rates available for similar types of debt, the fair value of long-term debt was not materially different from its carrying amount. REVENUE RECOGNITION Revenue for sales or services is recognized at the time the product is delivered or at the time the service is performed. INCOME TAXES Deferred income taxes reflect the impact of "temporary differences" between amounts of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws. These temporary differences are determined in accordance with the liability method of accounting for income taxes as prescribed by SFAS No. 109, Accounting for Income Taxes. CONCENTRATION OF CREDIT RISK Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of trade accounts receivable. The risk is limited due to the large number of entities comprising the Company's customer base and their dispersion across industries and geographic locations. At December 31, 1996, the Company had no significant concentrations of credit risk. STOCK COMPENSATION As permitted under SFAS No. 123, Accounting for Stock-Based Compensation, the Company has elected to continue to measure compensation costs for stock-based employee compensation plans as prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. The Company has complied with the pro forma disclosure requirements of SFAS No. 123 as required under the pronouncement. 31 SUPPLEMENTAL CASH FLOW INFORMATION Interest of $1,012,000, $792,000 and $1,805,000 was paid for years ended December 31, 1996, 1995 and 1994, respectively. Interest paid in 1996 is net of $27,000 capitalized in relation to various construction projects. There were no income taxes paid during the three years ended December 31, 1996. The Consolidated Statement of Cash Flows for the year ended December 31, 1996 excludes non-cash activities related to the contribution of Basin Pipeline, LLC by Michigan Energy, LLC ("MEC") to West Shore. MEC's contribution was valued at approximately $9.2 million. In 1996, the Company financed the purchase of certain assets from the Dow Chemical Company ("Dow") with a note valued at approximately $421,000. As of December 31, 1996, $337,000 was outstanding under this note. PRO FORMA INFORMATION Pro forma provision for income taxes and pro forma net income. Prior to the Reorganization, MarkWest was organized as a partnership and, consequently, was not subject to income tax. A pro forma provision for income taxes for the years ended December 31, 1996, 1995 and 1994 has been presented for purposes of comparability as if MarkWest had been a taxable entity for all periods presented. Pro forma weighted average shares outstanding at December 31, 1996 and December 31, 1995. Pro forma weighted average shares outstanding at December 31, 1996 represents the weighted average of, for the period prior to the Offering, the number of common shares issued in the Reorganization plus the number of shares issued in the Offering for which the net proceeds were used to repay outstanding indebtedness and, for the period subsequent to the Offering, the total number of common shares outstanding. Pro forma weighted average shares outstanding at December 31, 1995 represents the number of common shares issued in the Reorganization. RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform to the 1996 presentation. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NOTE 3. DEBT REVOLVER/TERM LOAN On November 20, 1992, the Partnership entered into a financing agreement with Norwest Bank Denver, N.A. ("Norwest") and First American National Bank ("FANB") of Nashville, Tennessee. The facility is structured as a revolver and had an initial maximum borrowing base of $20 million. The borrowing base on the facility is redetermined semi-annually. On September 8, 1995, the agreement was amended to add N M Rothschild and Sons Limited ("Rothschild") as a lender, revise the interest rate for base rate loans and institute the option of LIBOR (London Interbank Offered Rate) interest. On May 31, 1996, the facility was further amended to increase the maximum borrowing base to $40 million and extend the repayment period 32 to June 30, 2002, with 16 equal quarterly installments commencing September 30, 1998. As of December 31, 1996 and 1995, outstanding borrowings were $4.2 million and $15 million, respectively. The remaining borrowing base of $35.8 million and $10 million was unutilized at December 31, 1996 and 1995, respectively. Interest on a base rate loan is now calculated at prime plus 1/4 % if the Company's total debt is less than or equal to 40% of total capitalization. If debt exceeds 40% of capitalization, the rate increases to prime plus 1/2 %. At December 31, 1996 and 1995, $0 million and $3 million were outstanding under a base rate loan bearing interest at 8 1/2 % and 9 %, respectively. The LIBOR option allows the Company to lock in a portion of the revolver balance for a period of one, two, three or six months. Interest on a LIBOR loan is calculated at LIBOR plus 2% if the Company's total debt is less than or equal to 40% of total capitalization. If debt exceeds 40% of capitalization, the rate increases to LIBOR plus 2 1/4 %. At December 31, 1996 and 1995, $0 and $12 million were outstanding under the LIBOR commitment, respectively. This debt is secured by a first mortgage on the Company's property, plant, equipment and contracts, excluding railcars and truck trailers. The loan agreement restricts certain activities and requires the maintenance of certain financial ratios and other conditions. WORKING CAPITAL LINE OF CREDIT On November 20, 1992, the Partnership entered into a working capital line of credit agreement with Norwest and FANB in the amount of $5 million. The borrowing base, as defined in the credit agreement, is redetermined monthly. On September 8, 1995, the agreement was amended to add Rothschild as a lender, revise the interest rate, increase the maximum borrowing base to $7.5 million, and extend the working capital commitment period and maturity date. The extended due date on the working capital note is June 30, 1998. The interest rate change is the same as discussed above for the revolver/term loan. No LIBOR option is available for the working capital line. At December 31, 1996 and 1995, $5.7 million and $2.5 million were outstanding bearing interest at 8 1/2 % and 9 %, respectively. All amounts outstanding under this facility were paid off effective February 6, 1997. MARKWEST RESOURCES REVOLVER LOAN The Company's MarkWest Resources subsidiary has a revolving facility with Colorado National Bank ("CNB") with a maximum borrowing base of $5.8 million as of December 31, 1996. Interest is based on CNB's bank rate plus 1/2 %. The facility has a maturity date of April 2003. This facility is restricted for the exploration and development of oil and gas properties and as of December 31, 1996 and December 31, 1995, $1.2 million and $0 were outstanding, respectively. This facility is secured by substantially all of MarkWest Resources' assets. The Company has guaranteed $1 million of this facility. All amounts outstanding under this facility were repaid effective February 19, 1997. Scheduled debt maturities under the terms of the facilities are as follows (in $000s):
At December 31, 1996 At December 31, 1995 Revolver Line of Subsidiary Revolver Line of loan credit Debt loan credit -------- ------- ---------- ---------- -------- 1997 $ - $ - $ 156 $ 1,875 $2,500 1998 525 5,700 156 3,750 - 1999 1,050 - 25 3,750 - 2000 1,050 - - 3,750 - 2001 and thereafter 1,575 - 1,176 1,875 - ------ ------- ------ ------- --------
33 Total $4,200 $5,700 $1,513 $15,000 $2,500 ====== ======= ====== ======= ======== SOUTH SHORE NOTE The note agreement for the purchase of the South Shore plant and the isomerization expansion allowed for the prepayment of principal to no less than $500,000. In November 1992, the Partnership exercised its prepayment rights relative to this agreement by paying $9.2 million of the then-outstanding balance. The remaining $500,000 principal balance accrued interest at 12%. Under the terms of the note, additional interest was payable annually based on certain operating results of the fractionation plant and proceeds from asset dispositions. Such additional interest expense was $422,000 for 1994. During 1995, the Partnership reached an agreement with the noteholder to fully retire the note. Accordingly, the Partnership paid the remaining balance of $500,000 as well as $700,000 of additional interest. In addition, the Partnership granted to the noteholder an option to acquire 3.5% of the Partnership. Based on management's best estimate of the fair value of the Partnership, the option was valued at $1,050,000 which, together with the $700,000 of additional interest, is reflected in the Consolidated Statement of Operations as an extraordinary loss due to the early extinguishment of debt. NOTE 4. RELATED PARTY AND CAPITAL TRANSACTIONS The Company made contributions of $299,000, $211,000, $213,000 to a profit- sharing plan for the years ended December 31, 1996, 1995 and 1994, respectively. The plan is discretionary, with annual contributions determined by the Company's Board of Directors. The Partnership periodically extended offers to employees to purchase interests in the Partnership. The partners and/or employees provided the Partnership with promissory notes as part of the exercise price. According to the terms of the notes, interest accrues at 7% and payments are required for the greater of accrued interest or excess distributions. Notes in the amounts of $376,000 and $512,000 have been recorded as a reduction of additional paid-in capital at December 31, 1996 and 1995, respectively. The Company has receivables from employees and officers of $23,000 and $74,000 at December 31, 1996 and 1995, respectively. The Company's employees perform certain administrative functions on behalf of its subsidiaries. At December 31, 1996 and 1995, no material amounts were due to or from the subsidiaries for miscellaneous administrative expenses. NOTE 5. SPECIAL ITEMS In 1994, the Partnership shut down the South Shore plant's isomerization unit when it was unable to find satisfactory markets for its isobutane. Accordingly, the Partnership recorded a $2,242,000 charge to write down the unit to its estimated realizable value. In addition, a catalyst used in the isomerization process was sold, resulting in a $347,000 loss. The Partnership also recorded a charge of $361,000 in 1994 for the write-down of non-productive equipment related to various business development projects. NOTE 6. COMMITMENTS AND CONTINGENCIES The Company is involved in various litigation and administrative proceedings arising in the normal course of business. In the opinion of management, any liabilities (net of insurance) that may result from these claims will not, individually or in the aggregate, have a material adverse effect on the Company's financial position or results of operations. NOTE 7. SIGNIFICANT CUSTOMERS 34 For the year ended December 31, 1995, sales to one customer accounted for approximately 18% of total revenues. During 1996 and 1994, no sales to any one customer accounted for more than 10% of total revenue. Management believes the loss of these customers would not adversely impact operations, as alternative markets are available. NOTE 8. HEDGING ACTIVITIES MarkWest's primary hedging objectives are to meet or exceed budgeted gross margins by locking in budgeted or above-budgeted prices in the financial derivatives markets and to protect margins from precipitous declines. Under internal guidelines, speculative positions are prohibited. The Company's hedging activities generally fall into three categories - 1) contracting for future purchases of natural gas at a predetermined BTU differential based upon a basket of Gulf Coast NGL prices (or a substitute for propane such as crude oil), 2) the fixing of margins between propane sales prices and natural gas reimbursement costs by purchasing natural gas contracts and simultaneously selling propane contracts of approximately the same BTU value, and 3) the purchase of propane futures contracts to hedge future sales of propane at the Company's terminals or gas plants. The Company enters into futures transactions on the New York Mercantile Exchange ("NYMEX"). Future gas purchases are based on predetermined BTU differentials are negotiated with natural gas suppliers and structured to provide similar risk protections as NYMEX futures. At December 31, 1996, the Company had a total of 295 short and 135 long open propane futures contracts representing a notional quantity amounting to 160,000 barrels of production. Late in 1996, the Company entered into agreements with certain natural gas suppliers for gas purchases (25,000 mmbtus a day) for the summer of 1997 at differentials to crude oil futures and NGL baskets at December 31, 1996. There were no material notional quantities of natural gas or crude oil futures or options at December 31, 1996, and no material notional quantities of natural gas, NGL, or crude oil futures, swaps or options at December 31, 1995. During the years ended December 31, 1996 and 1995, a $1.1 million loss and $300,000 gain, respectively, were recognized in operating income on the settlement of propane and natural gas futures. Financial instrument gains and losses on hedging activities were generally offset by amounts realized from the sale of the underlying products in the physical market. NOTE 9. INCOME TAXES In connection with the reorganization from a partnership to a corporation, the Company recorded deferred income taxes as of October 7, 1996 and a one-time charge to earnings of $3.7 million. The total income tax provision for the year ended December 31, 1996 has been allocated as follows (in $000s):
Arising from reorganization $3,745 Subsequent to reorganization 3,246 ------ $6,991 ======
35 The components of the income tax provision subsequent to reorganization consisted of the following (in $000s):
Year ended December 31, 1996 ------------ Current federal $2,616 Current state 398 ------ Total current..................... 3,014 ------ Deferred federal.............................. 212 Deferred state 20 ------ Total deferred.................... 232 ------ Total income tax provision subsequent......... $3,246 to reorganization............................ ====== The deferred tax liability is comprised of the following (in $000s): December 31, 1996 ------------ Property and equipment........................ $3,667 Intangible assets............................. (6) Other assets.................................. 316 ------ Net deferred tax liability.................... $3,977 ======
Income taxes subsequent to reorganization as reflected in the Consolidated Statement of Operations differ from the amounts computed by applying the statutory federal corporate tax rate to income as follows (in $000s):
Year ended December 31, 1996 ------------ Income taxes subsequent to 2,916 reorganization at statutory rate............. State income taxes, net of federal 140 benefit...................................... Tax credits................................... (35) Other......................................... 225 ------ Income taxes subsequent to reorganization............................... $3,246 ======
NOTE 10. STOCK COMPENSATION PLANS At December 31, 1996, the Company has two stock-based compensation plans, which are described below. The Company applies APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its fixed stock option plans. Had compensation cost for the Company's two stock-based compensation plans been determined based on the fair value at the grant dates (1996 and 1995 grants only) under those plans consistent with the method prescribed by SFAS No. 123, Accounting for Stock-Based Compensation, the 36 Company's pro forma net income and earnings per share would have been reduced to the pro forma amounts listed below (in $000s):
1996 1995 ------- ------- Pro forma net income As reported $9,151 $4,887 Pro forma 9,127 4,887 Pro forma earnings per share As reported $ 1.16 $ 0.85 Pro forma 1.15 0.85
The Company historically granted employees the right to purchase partnership interests in the Partnership. As part of the Reorganization, such employee options to purchase partnership interests were replaced by options to purchase shares pursuant to the Company's 1996 Stock Incentive Plan. Under the 1996 Stock Incentive Plan, the Company may grant options to its employees for up to 600,000 shares of common stock in the aggregate. Under the 1996 Non-employee Director Stock Option Plan, the Company may grant options to its non-employee directors for up to 20,000 shares of common stock in the aggregate. Under both plans, the exercise price of each option equals the market price of the Company's stock on the date of the grant, and an option's maximum term is 10 years. Options are granted periodically throughout the year and vest at the rate of 20% on the first anniversary of the option grant date, and at the rate of 20% on each subsequent anniversary thereof until fully vested. The fair value of each option is estimated on the date of grant using the Black- Scholes Option-Pricing model with the following weighted-average assumptions used for grants in 1996 and 1995, respectively: dividend yield of $0/share for all years; expected volatility of 33% for 1996 option grants and 34% for 1995 plan options; risk-free interest rate of 6.55% for 1996 option grants and 6.22% for 1995 option grants; and expected lives of 6 years for 1996 and 1995 option grants. A summary of the status of the Company's two fixed stock option plans as of December 31, 1996 and 1995 and changes during the years ended on those dates is presented below:
1996 1995 ----------------------- ------------------ Weighted- Weighted- Average Average Exercise Exercise Shares Price Shares Price FIXED OPTIONS ------- ----------- ------ --------- Outstanding at beginning of year 64,004 $6.99 -- -- Granted 138,032 9.65 64,004 $6.99 Exercised -- -- -- -- Forfeited (1,146) -- -- -- ------- ----- ------ ----- Outstanding at end of year 200,890 $8.86 64,004 $6.99 ======= ===== ====== ===== Options exercisable at 12/31/96 12,800 12,800 Weighted-average fair value of options granted during the year $ 4.37 $ 3.16
37 The following table summarizes information about fixed stock options outstanding at December 31, 1996:
Options Outstanding Options Exercisable --------------------------------------- ---------------------- Weighted- Average Weighted- Weighted- Number Remaining Average Number Average Outstanding Contractual Exercise Exercisable Exercise Range of Exercise Prices at 12/31/96 Life Price at 12/31/96 Price - ------------------------- ----------- ----------- --------- ----------- --------- $6.99 64,004 8.6 years $6.99 12,800 $6.99 $7.00 to $10.00 136,886 9.7 years $9.65 -- ---------- ------ 200,890 12,800 ========== ======
NOTE 11. STOCK ACTIVITY Activity in the Company's common stock for each of the three years ended December 31, 1996 is summarized below (in 000s of shares):
# of shares ----------- Balance at December 31, 1993 -- Balance at December 31, 1994 -- Balance at December 31, 1995 -- Shares issued in exchange for partnership interests 5,725 Shares issued in initial public offering 2,400 Shares issued in over-allotment 360 ----- Balance at December 31, 1996 8,485 =====
38 NOTE 12. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following summarizes certain quarterly results of operations ($000s):
First Second Third Fourth -------- ------- --------- -------- 1996 - -------------------------------------- Revenue(1) $19,832 $8,760 $14,935 $28,233 Gross profit (2) 5,514 1,580 3,533 10,268 Pro forma net income (3) 2,588 195 1,205 5,163 Per common share data: Pro forma net income $ .33 $ .03 $ .15 $ .65 1995 - -------------------------------------- Revenue (1) $15,566 $7,360 $ 8,665 $16,479 Gross profit (2) 4,770 1,860 1,564 4,171 Pro forma income before extraordinary loss (3) 2,261 421 352 1,853 Extraordinary loss on extinguishment of debt -- -- (1,750) -- Pro forma net income(3) 2,261 421 (1,398) 1,853 Per common share data: Pro forma income before extraordinary loss $ .40 $ .07 $ .06 $ .32 Extraordinary loss -- -- (.30) -- Pro forma net income (loss) .40 .07 (.24) .32
(1) Excludes interest income. (2) Excludes general and administrative expenses and interest expense. (3) During 1996, the Company reorganized and became a taxable entity. Pro forma net income reflects the results of the Company had it been a taxable entity for all periods presented. 39 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ITEM 11. EXECUTIVE COMPENSATION ITEM 12. SECURITY OWNERSHIP AND CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Pursuant to instruction G(3) to Form 10-K, Items 10, 11, 12 and 13 are omitted because the Company will file a definitive proxy statement (the "Proxy Statement") pursuant to Regulation 14A under the Securities Exchange Act of 1934 not later than 120 days after the close of the fiscal year. The information required by such Items will be included in the definitive proxy statement to be so filed for the Company's annual meeting of stockholders scheduled for June 6, 1997 and is hereby incorporated by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: (1) Financial Statements: Reference is made to the listing on page 22 for a list of all financial statements filed as a part of this report. (2) Financial Statement Schedules: None required. (3) Exhibits 3.1 Certificate of Incorporation of MarkWest Hydrocarbon, Inc. (Filed as exhibit 3.1 to MarkWest Hydrocarbon, Inc.'s Registration Statement on Form S-1, Registration No. 333-09513 and incorporated herein by reference). 3.2 Bylaws of MarkWest Hydrocarbon, Inc. (Filed as exhibit 3.2 to MarkWest Hydrocarbon, Inc.'s Registration Statement on Form S-1, Registration No. 333-09513 and incorporated herein by reference). 10.1 Amended and Restated Reorganization Agreement made as of August 1, 1996, by and among MarkWest Hydrocarbon, Inc., MarkWest Hydrocarbon Partners, Ltd., MWHC Holding, Inc. RIMCO Associates, Inc. and each of the limited partners of MarkWest Hydrocarbon Partners, Ltd. (Filed as exhibit 10.1 to MarkWest Hydrocarbon, Inc.'s Registration Statement on Form S-1, Registration No. 333-09513 and incorporated herein by reference). 40 10.2 Loan Agreement dated November 20, 1992, among MarkWest Hydrocarbon Partners, Ltd., Norwest Bank Denver, National Association, individually and as Agent, and First American National Bank (Filed as exhibit 10.21 to MarkWest Hydrocarbon, Inc.'s Registration Statement on Form S-1, Registration No. 333-09513 and incorporated herein by reference). 10.3 Modification Agreement, dated July 31, 1996, among MarkWest Hydrocarbon Partners, Ltd., MarkWest Hydrocarbon, Inc., Norwest Bank Colorado, N.A., First American National Bank N M Rothschild and Sons Limited and Norwest (Filed as exhibit 10.2 to MarkWest Hydrocarbon, Inc.'s Registration Statement on Form S-1, Registration No. 333-09513 and incorporated herein by reference). 10.4 Amended and Restated Mortgage, Assignment, Security Agreement and Financing Statement, dated May 2, 1996, between West Shore Processing Company, L.L.C. and Bank of America Illinois (Filed as exhibit 10.3 to MarkWest Hydrocarbon, Inc.'s Registration Statement on Form S-1, Registration No. 333-09513 and incorporated herein by reference). 10.5 Secured Guaranty, dated May 2, 1996, between West Shore Processing Company LLC and Bank of America Illinois (Filed as exhibit 10.4 to MarkWest Hydrocarbon, Inc.'s Registration Statement on Form S-1, Registration No. 333-09513 and incorporated herein by reference). 10.6 Security Agreement, dated May 2, 1996, between West Shore Processing Company L.L.C. and Bank of America Illinois (Filed as exhibit 10.5 to MarkWest Hydrocarbon, Inc.'s Registration Statement on Form S-1, Registration No. 333-09513 and incorporated herein by reference). 10.7 Pledge Agreement, dated May 2, 1996, between West Shore Processing Company, L.L.C. and Bank of America Illinois (Filed as exhibit 10.6 to MarkWest Hydrocarbon, Inc.'s Registration Statement on Form S-1, Registration No. 333-09513 and incorporated herein by reference). 10.8 Participation, Ownership and Operating Agreement for West Shore Processing Company, L.L.C. dated May 2, 1996 (Filed as exhibit 10.7 to MarkWest Hydrocarbon, Inc.'s Registration Statement on Form S-1, Registration No. 333-09513 and incorporated herein by reference). 10.9 Second Amended and Restated Operating Agreement for Basin Pipeline L.L.C., dated May 2, 1996 (Filed as exhibit 10.8 to MarkWest Hydrocarbon, Inc.'s Registration Statement on Form S-1, Registration No. 333-09513 and incorporated herein by reference). 10.10 Subordination Agreement, dated May 2, 1996, among MarkWest Michigan LLC, Bank of America Illinois, West Shore Processing Company, L.L.C., Basin Pipeline L.L.C., Michigan Energy Company, L.L.C. (Filed as exhibit 10.9 to MarkWest Hydrocarbon, Inc.'s Registration Statement on Form S-1, Registration No. 333-09513 and incorporated herein by reference). 10.11 Gas Treating and Processing Agreement, dated May 1, 1996, between West Shore Processing Company, LLC and Shell Offshore, Inc. (Filed as exhibit 10.10 to MarkWest Hydrocarbon, Inc.'s Registration Statement on Form S-1, Registration No. 333-09513 and incorporated herein by reference). 10.12 Gas Gathering, Treating and Processing Agreement, dated May 2, 1996, between Oceana Acquisition Company and West Shore Processing Company, LLC (Filed as exhibit 10.11 to MarkWest Hydrocarbon, Inc.'s Registration Statement on Form S-1, Registration No. 333-09513 and incorporated herein by reference). 10.13 Gas Gathering, Treating and Processing Agreement, dated May 2, 1996, between Michigan Production Company, L.L.C. and West Shore Processing Company, LLC(Filed as exhibit 10.12 to 41 MarkWest Hydrocarbon, Inc.'s Registration Statement on Form S-1, Registration No. 333-09513 and incorporated herein by reference). 10.14 Products Exchange Agreements, dated May 1, 1996, with Ferrellgas, L.P. (Filed as exhibit 10.13 to MarkWest Hydrocarbon, Inc.'s Registration Statement on Form S-1, Registration No. 333-09513 and incorporated herein by reference). 10.15 Gas Processing and Treating Agreement, dated March 29, 1996, between Manistee Gas Limited Liability Company and Michigan Production Company, L.L.C. (Filed as exhibit 10.14 to MarkWest Hydrocarbon, Inc.'s Registration Statement on Form S-1, Registration No. 333-09513 and incorporated herein by reference). 10.16 Processing Agreement (Kenova Processing Plant), dated March 15, 1995, between Columbia Gas Transmission Corporation and MarkWest Hydrocarbon Partners, Ltd. (Filed as exhibit 10.15 to MarkWest Hydrocarbon, Inc.'s Registration Statement on Form S-1, Registration No. 333-09513 and incorporated herein by reference). 10.17 Natural Gas Liquids Purchase Agreement (Cobb Plant), between Columbia Gas Transmission Corporation and MarkWest Hydrocarbon Partners, Ltd. (Filed as exhibit 10.16to MarkWest Hydrocarbon, Inc.'s Registration Statement on Form S-1, Registration No. 333-09513 and incorporated herein by reference). 10.18 Purchase and Demolition Agreement Construction Premises, dated March 15, 1995, between Columbia Gas Transmission Corporation and MarkWest Hydrocarbon Partners, Ltd. (Filed as exhibit 10.17 to MarkWest Hydrocarbon, Inc.'s Registration Statement on Form S-1, Registration No. 333-09513 and incorporated herein by reference). 10.19 Purchase and Demolition Agreement Remaining Premises, dated March 15, 1995, between Columbia Gas Transmission Corporation and MarkWest Hydrocarbon Partners, Ltd. (Filed as exhibit 10.18 to MarkWest Hydrocarbon, Inc.'s Registration Statement on Form S-1, Registration No. 333-09513 and incorporated herein by reference). 10.20 Agreement to Design and Construct New Facilities, dated March 165, 1995, between Columbia Gas Transmission Corporation and MarkWest Hydrocarbon Partners, Ltd. (Filed as exhibit 10.19 to MarkWest Hydrocarbon, Inc.'s Registration Statement on Form S-1, Registration No. 333-09513 and incorporated herein by reference). 10.21 Sales Acknowledgment, dated August 8, 1994, NO. 12577, confirming sale to Ashland Petroleum Company (Filed as exhibit 10.20 to MarkWest Hydrocarbon, Inc.'s Registration Statement on Form S-1, Registration No. 333-09513 and incorporated herein by reference). 10.22 Contract for Construction and Lease of Boldman Plant, dated December 24, 1990, between Columbia Gas Transmission Corporation and MarkWest Hydrocarbon partners, Ltd. (Filed as exhibit 10.22 to MarkWest Hydrocarbon, Inc.'s Registration Statement on Form S-1, Registration No. 333-09513 and incorporated herein by reference). 10.23 Natural Gas Liquids Purchase Agreement (Boldman Plant), dated December 24, 1990, between Columbia Gas Transmission Corporation and MarkWest Hydrocarbon Partners, Ltd. (Filed as exhibit 10.23 to MarkWest Hydrocarbon, Inc.'s Registration Statement on Form S-1, Registration No. 333-09513 and incorporated herein by reference). 10.24 Natural Gas Liquids Purchase Agreement, dated April 26, 1988, between Columbia Gas Transmission Corporation and MarkWest Hydrocarbon Partners, Ltd. (Filed as exhibit 10.24 to 42 MarkWest Hydrocarbon, Inc.'s Registration Statement on Form S-1, Registration No. 333-09513 and incorporated herein by reference). 10.25 1996 Incentive Compensation Plan (Filed as exhibit 10.25 to MarkWest Hydrocarbon, Inc.'s Registration Statement on Form S-1, Registration No. 333-09513 and incorporated herein by reference). 10.26 1996 Stock Incentive Plan (Filed as exhibit 10.26 to MarkWest Hydrocarbon, Inc.'s Registration Statement on Form S-1, Registration No. 333-09513 and incorporated herein by reference). 10.27 1996 Nonemployee Director Stock Option Plan (Filed as exhibit 10.27 to MarkWest Hydrocarbon, Inc.'s Registration Statement on Form S-1, Registration No. 333-09513 and incorporated herein by reference). 10.28 Form of Non-Compete Agreement between John M. Fox and MarkWest Hydrocarbon, Inc. (Filed as exhibit 10.28 to MarkWest Hydrocarbon, Inc.'s Registration Statement on Form S-1, Registration No. 333-09513 and incorporated herein by reference). 10.29 Sales Acknowledgment by Ashland Petroleum, 54 million gallons of Normal Butane, dated September 9, 1996. 10.30 Sales Acknowledgment by Ashland Petroleum, 19.5 million gallons of Isobutane, dated September 9, 1996. 10.31 Pipeline Construction and Operating Agreement between Michigan Production Company, L.L.C. and West Shore Processing Company, L.L.C., dated October 1, 1996. 10.32 Non-Recourse Loan Agreement between Michigan Production Company, L.L.C. and West Shore Processing Company, L.L.C., dated October 1, 1996. 10.33 First Amendment to Participation, Ownership and Operating Agreement for West Shore Processing Company, L.L. C., dated October 1, 1996. 10.34 Option and Agreement to Purchase and Sell Pipeline, dated October 1, 1996. 10.35 Mortgage, Assignment, Security Agreement and Financing Statement from Michigan Production Company, L.L.C. to West Shore Processing Company, L.L.C., dated October 22, 1996. 10.36 Amendment to Participation, Ownership and Operating Agreement for West Shore Processing Company, L.L.C., dated December 12, 1996. 10.37 Assignment and Bill of Sale by and between Enron Gas Processing Company and West Shore Processing Company, L.L.C., dated January 13, 1997. 11. Statement regarding computation of per share 21. List of Subsidiaries of MarkWest Hydrocarbon, Inc. 23. Consent of Price Waterhouse LLP, independent accountants 43 SIGNATURES Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Englewood, State of Colorado on March 24, 1997. MarkWest Hydrocarbon, Inc. (Registrant) BY: /s/ John M. Fox ------------------------- John M. Fox President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ John M. Fox March 24, 1997 --------------------------------- John M. Fox President, Chief Executive Officer and Director /s/ Brian T. O'Neill March 24, 1997 --------------------------------- Brian T. O'Neill Senior Vice President, Chief Operating Officer and Director /s/ Rita E. Harvey March 24, 1997 --------------------------------- Rita E. Harvey Director of Finance and Treasurer (Principal Financial and Accounting Officer) /s/ Arthur J. Denney March 24, 1997 --------------------------------- Arthur J. Denney Director /s/ Norman H. Foster March 24, 1997 --------------------------------- Norman H. Foster Director /s/ Barry W. Spector March 24, 1997 --------------------------------- Barry W. Spector Director /s/ David R. Whitney March 24, 1997 --------------------------------- David R. Whitney Director 44 EX-10.29 2 SALES ACKNOWLEDGEMENT MARKWEST MarkWest Hydrocarbon Partners, Ltd PH (303) 290-8700 5613 DTC Parkway, Suite 400 FAX (303) 290-8769 Englewood, CO 80111 SALES ACKNOWLEDGMENT We hereby confirm sale to: Ashland Petroleum Company DATE: September 9, 1996 Division of Ashland, Inc. PO Box 391 No. __________________ Ashland, KY 41105 Per conversations between Mr. Howard Beverly and our Mr. Fred Shato PRODUCT: Normal Butane QUANTITY: Approximately 54,000,000 gallons PRICE: See attached terms COSIGNEE: ORIGIN: FOB POINT: Siloam, Kentucky ROUTING: TERMS OF PAYMENT: Net 10 calendar days via check TIME OF DELIVERY: September 1, 1996 through August 31, 1999 HOW DELIVERED: Into railcars or barges provided by Buyer via Rail/Barge REMARKS: See Attachment "A" SUBJECT TO TERMS AND CONDITIONS ATTACHED Void if not returned fully executed to this office within ten (10) days from the date of the order. MARKWEST HYDROCARB0N PARTNERS, LTD. Ashland Petroleum Company BY: MarkWest Hydrocarbon, Inc. Division of Ashland, Inc. General Partner /S/Robert Yancey /S/ Brian O'Neill ------------- ------------------------ President /S/ John M. Fox Accepted 9/19/96 ATTACHMENT "A" ADDITIONAL TERMS AND CONDITIONS ASHLAND PETROLEUM NC4 PURCHASE AGREEMENT 1) Ashland Petroleum Company, Division of Ashland, Inc., (Buyer) agrees to purchase from MarkWest Hydrocarbon Partners, Ltd. (Seller) the total production of normal butane from Seller's Siloam, KY fractionation plant, estimated to be approximately 17 million gallons per year (approximately 1.4 million gallons per month), with a projected yearly volume increase of approximately 5%. 2) Term of sale shall be September 1, 1996 through August 31, 1999 (3 years) with an option to extend year to year thereafter, unless a 90 day written notice of cancellation is provided by either party. Product to be delivered FOB Seller's Siloam, KY plant loaded into Buyer provided railcars and/or barges at Buyer's option. 4) It is anticipated that deliveries made during April through September will be predominantly for shipment to Ashland Chemical Company, while deliveries made during October through March will be predominantly for shipment to Ashland Petroleum company, however, direction of shipment of all deliveries shall be at Buyer's option. 5) Minimum purity for deliveries into railcars or barges for shipment to Ashland Chemical shall be 97.5% during April through September. Minimum purity for deliveries into railcars or barges for shipment to Ashland Petroleum shall be 95.0% at all times 6) Seller will designate on each invoice of Buyer's entities shipment was made. 7) The base price for deliveries made during the first through the fifteenth day of each month shall be the simple average of the daily high-low postings for TET spot normal butane at Mt. Belvieu, Texas as reported in Oil Price Information Service (OPIS) during the sixteenth through the last day of the month immediately preceding delivery. The base price for deliveries made during the sixteenth through the last day of each month shall be the simple average of the daily high-low postings for TET spot normal butane at Mt. Belvieu, Texas as reported in OPIS for the first through the fifteenth day of the month of delivery. Deliveries for shipment to Ashland Chemical Company will be billed at the foregoing described base price plus $0.0150 per gallon. Deliveries for shipment to Ashland Petroleum Company will be billed at the foregoing described base price plus $0.010 per gallon. 8) Payment terms are net 10 days from date of shipment via check. 9) Buyer has the right to utilize Seller's normal butane cavern storage of approximately 3 million gallons. Buyer agrees to lift product so as to ernpty said cavern for at least one twenty-four (24)hour period sometime between January first and April first each year during the term of the Agreement. 10) Truck loading available when needed at the following premium: Weekday 9:00 A.M. to 5:00 P.M. + $0.0200 per gallon and Weekend 9:00 A.M. to 5:00 P.M. + $0.0800 per gallon. Any loading requiring additional hours will be billed at an additional $0.0200 per gallon premium. EX-10.30 3 SALES ACKNOWLEDGEMENT MARKWEST MarkWest Hydrocarbon Partners, Ltd. PH (303) 290-8700 5613 DTC Parkway, Suite 400 FAX (303) 290-8769 Englewood, CO 80111 SALES ACKNOWLEDGMENT We hereby confirm sale to: Ashland Petroleum Company DATE: September 9, 1996 Division of Ashland, Inc. No.____________ PO Box 391 Ashland, KY 41105 Per conversations between Mr. Howard Beverly and our Mr. Fred Shato PRODUCT: Isobutane QUANTITY: Approximately 19,500,000 gallons PRICE: See attached terms COSIGNEE: ORIGIN: FOB POINT: Siloam, Kentucky ROUTING: TERMS OF PAYMENT: Net 10 calendar days via check TIME OF DELIVERY: September 1, 1996 through August 31, 1999 HOW DELIVERED: Into railcars or barges provided by Buyer via Rail/Barge REMARKS: See Attachment "A" SUBJECT TO TERMS AND CONDITIONS ATTACHED Void if not returned fully executed to this office within ten (10) days from the date of the order. MARKWEST HYDROCARBON PARTNERS, LTD. Ashland Petroleum Company, By: MarkWest Hydrocarbon, Inc. Division of Ashland, Inc. General Partner /S/ Robert Yancey /S/Brian O'Neill President /S/John M. Fox Accepted: 12/23/96 Accepted: 9/19/96 ATTACHMENT "A" ADDITIONAL TERMS AND CONDITIONS ASHLAND PETROLEUM IC4 PURCHASE AGREEMENT 1) Ashland Petroleum Company, Division of Ashland, Inc., (Buyer) agrees to purchase from MarkWest Hydrocarbon Partners, Ltd. (Seller) the total production of Isobutane from Seller's Siloam, KY fractionation plant, estimated to be approximately 6.5 million gallons per year (approximately 540,000 gallons per month), with a projected yearly volume increase of approximately 5%. 2) Term of sale shall be September 1, 1996 through August 31, 1999 (3years) with an option to extend year to year thereafter, unless a 90 day written notice of cancellation is provided by either party. 3) Product to be delivered FOB Seller's Siloam, KY plant loaded into Buyer provided railcars and/or barges at Buyer's option. 4) The base price for deliveries made during the first through the fifteenth day of each month shall be the lower of the simple average of the daily high-low postings for TET spot isobutane at Mt. Belvieu, Texas or Sarnia, ------------------- ------- Canada as reported in Oil Price Information Service (OPIS) during the sixteenth - ------- through the last day of the month immediately preceding delivery as adjusted below. The base price for deliveries made during the sixteenth through the last day of each month shall be the *simple average of the daily high-low postings for TET spot isobutane at Mt. Belvieu, Texas or Sarnia, Canada as reported in OPIS the first through the fifteenth day of the month of delivery, as adjusted below. From October through March, if the price is a Mt. Belvieu basis, subtract $0.005 per gallon, and if the price is a Sarnia basis, subtract $0.022 per gallon. From April through September, if the price is a Mt. Belvieu basis, subtract $0.0150 per gallon and if the price is a Sarnia basis, subtract $0.017 per gallon. 5) Price re-opener - contract shall be renegotiated in the event BP/Lima, Ohio or Ashland/Canton, Ohio refineries are closed. 6) Payment terms are net 10 days from date of shipment via check. 7) Truck loading available when needed at the following premium: Weekday 9:00 A.M. to 5:00 P.M. + $0.0200 per gallon and Weekend 9:00 A.M. to 5:00 p.m. + $0.0800 per gallon. Any loading requiring additional hours will be billed at an additional $0.0200 per gallon premium. *lower of the EX-10.31 4 PIPELINE CONSTRUCTION AND OPERATING AGREEMENT PIPELINE CONSTRUCTION AND OPERATING AGREEMENT between MICHIGAN PRODUCTION COMPANY, L.L.C. Owner and WEST SHORE PROCESSING COMPANY, L.L.C. Operator October 1, 1996 TABLE OF CONTENTS Page ARTICLE 1 DEFINITIONS................................... 1 ARTICLE 2 CONSTRUCTION OF THE PIPELINE SYSTEM........... 3 2.1 General Contractor........................ 3 2.2 Property and Permits...................... 3 2.3 Construction.............................. 3 2.4 Management............................... 3 ARTICLE 3 OPERATION OF THE PIPELINE SYSTEM.............. 3 3.1 Operator.................................. 3 3.2 Custody................................... 4 3.3 Agreement of Operator to Operate the Pipeline.................................. 4 ARTICLE 4 DUTIES OF OPERATOR............................ 4 4.1 Supervision of Operations..................... 4 4.2 Acquisitions.................................. 4 4.3 Payment of Expenses; Liens; Claims............ 4 4.4 No Conditional Sale Contracts, Etc............ 5 4.5 Employment of Personnel....................... 5 4.6 Information................................... 5 4.7 Carrier Status................................ 5 4.8 Compliance with Regulations................... 5 4.9 Continued Authority........................... 5 4.10 Access; Books and Records..................... 5 4.11 Prohibition on Transfers...................... 6 4.12 Operator's Performance........................ 6 4.13 Notification of Adverse Changes............... 6 4.14 General Supervision........................... 7 ARTICLE 5 MATTERS REQUIRING CONSENT OF OWNER........ 7 5.1 Releases and Partial Releases................. 7 5.2 Claims Not Covered by Insurance............... 7 ARTICLE 6 MATTERS NOT REQUIRING CONSENT OF OWNER.... 7 6.1 Normal Operations............................. 7 6.2 Emergency..................................... 7 ARTICLE 7 OPERATING PROCEDURE....................... 7 7.1 Product Acceptance............................ 7 7.2 Line Fill..................................... 7 7.3 Measurement and Sampling...................... 8 ARTICLE 8 LIABILITY................................. 8 8.1 Liability of Operator......................... 8 8.2 No Liability of Owner......................... 8 ARTICLE 9 INSURANCE................................. 8 9.1 Insurance Policies............................ 8 9.2 Insurance Proceeds............................ 9
(i) 9.3 Insurance by Owner............................ 9 9.4 Contractor Insurance.......................... 9 9.5 Third Party Damage Liability.................. 9 9.6 Pipeline System Damages....................... 9 9.7 Settlement of Claims.......................... 10 ARTICLE 10 ACCOUNTING.................................. 10 10.1 Maintenance of Accounts; Monthly Statements... 11 10.2 Payments...................................... 11 10.3 Adjustments................................... 11 10.4 Audits........................................ 11 10.5 Certain Costs and Expenses.................... 11 10.6 Taxes......................................... 11 ARTICLE 11 REPRESENTATIONS AND WARRANIES............... 11 11.1 Authority and Power........................... 11 11.2 Valid and Binding Obligation.................. 11 11.3 Litigation and Condemnation................... 11 11.4 Title to the Property......................... 11 11.5 Accuracy of Information....................... 11 11.6 Tax and Other Payments........................ 11 11.7 Environmental Matters......................... 11 11.8 Permits and Restrictions...................... 12 ARTICLE 12 MISCELLANEOUS............................... 12 12.1 Modifications................................. 12 12.2 Rights of Third Parties....................... 12 12.3 No Agency, Partnership or Joint Venture....... 12 12.4 Further Assurances............................ 12 12.5 Notices....................................... 12 12.6 Severability.................................. 13 12.7 Number and Gender............................. 13 12.8 Time of Essence............................... 14 12.9 Captions...................................... 14 12.10 Applicable Law................................ 14 12.11 Counterparts.................................. 14 12.12 Successors and Assigns........................ 14 12.13 No Oral Agreement............................. 14 12.14 Term of Agreement............................. 14
(ii) PIPELINE CONSTRUCTION AND OPERATING AGREEMENT THIS PIPELINE CONSTRUCTION AND OPERATING AGREEMENT (this "Agreement"), dated as of October 1, 1996, is between WEST SHORE PROCESSING COMPANY, LLC, a Michigan limited liability company ("Operator"), and MICHIGAN PRODUCTION COMPANY, L.L.C., a Michigan limited liability company ("Owner"). WHEREAS, Owner has previously determined to design, construct, and operate the Pipeline (as hereinafter defined), the general location and physical description of which are more particularly set forth in Article 1; WHEREAS, Owner desires to appoint Operator to construct, operate, and maintain the Pipeline on Owner's behalf and Operator desires to accept such appointment; NOW, THEREFORE, in consideration of the foregoing and the mutual covenants herein contained, and for other consideration, the receipt and adequacy of which are hereby acknowledged, and without limitation of the parties' rights and obligations under the Gathering Agreement and the Participation Agreement (as such terms are hereinafter defined), Owner and Operator hereby agree as follows: ARTICLE 1 DEFINITIONS ----------- For purposes of this Agreement, the following terms are defined as follows: Affiliate of any Person means any other Person directly or indirectly controlling, controlled by or under common control with such person. A Person shall be deemed to control another Person if the controlling Person owns 50% or more of any class of voting securities (or other ownership interests) of the controlled Person or possesses, directly or indirectly, the power to direct or cause the direction of the management or policies of the controlled Person, whether through ownership of stock, by contact or otherwise. Basin means Operator's Affiliate, Basin Pipeline, L.L.C., a Michigan limited liability company. Capital Expenditures shall mean all costs incurred in constructing the Pipeline and any additions or changes thereto, subject to such adjustment as may be required for removal or abandonment of all or part of the Pipeline. Gathering Agreement means the Gas Gathering, Treatment and Processing Agreement dated May 2, 1996, as amended from time to time, between Owner, as producer, and Operator, as processor. Governmental Authority means the United States of America or any nation, commonwealth, state, county, city, territory, 1 possession, parish, town, municipality, and any other political subdivision, agency, court, department, commission, board, bureau, or other instrumentality. Governmental Requirements means all Laws of any Governmental Authority applicable to Operator or the Pipeline. Law or Laws means all applicable statutes, laws, ordinances, regulations, orders, writs, injunctions, decisions, opinions, or decrees of any Governmental Authority. Loan Agreement means the Non-Recourse Loan Agreement dated as of October 1, 1996, between Operator, as lender, and Owner, as borrower, as amended from time to time. MARKWEST means Operator's Affiliate, MarkWest Michigan, LLC, a Michigan limited liability company, or any successor in interest to MarkWest Michigan, LLC, in connection with any reorganization of such company. OPERATING ACCOUNT shall mean the account that represents the financial responsibility of Operator to Owner. Specifically, it shall represent the accountability of all revenue, expense, allocations, and distributions of the Operator on behalf of Owner. OPTION AGREEMENT means the Option and Agreement to Purchase and Sell Pipeline dated as of October 1, 1996, between Owner and Operator, as amended from time to time. PARTICIPATION AGREEMENT means the Participation, Ownership and Operating Agreement for West Shore Processing Company, LLC, dated May 2, 1996, between MarkWest and Michigan Energy Company, L.L.C., as amended by the First Amendment thereto dated as of October 1, 1996, and as further amended from time to time. PIPELINE means the nominal 10-inch diameter, natural gas producer pipeline extending along the right of way of Consumers Power from the delivery point at the gathering lateral of Owner's Slocum 1-21 Well, which delivery point is expected to be in the Northwest quarter of Section 30, Township 15 North, Range 16 West, Elbridge Township, in Oceana County, Michigan, to the terminus of Basin's existing pipeline located in Section 32, Township 19 North, Range 17 West, Victory Township, in Mason Countv, Michigan, including, without limitation, (a) the Property, and (b) all pipes, pipelines, pumping equipment, assemblies, heaters, valves, controls, monitoring equipment, communications equipment, towers, sensors, cathodic protection systems, test stations, corrosion detection and monitoring devices, inspection pigs, drums, flare facilities, sampling equipment, and all associated facilities and equipment, including spare parts, related thereto, as wel1 as any and all additions, replacements, extension, modifications or enlargements of any of the foregoing. 2 PLAN OF DEVELOPMENT means the Plan of Development for the Pipeline (including the final working drawings and specifications), together with any amendments or modifications thereto, and authorizations for expenditures prepared by MarkWest under the Participation Agreement and approved in accordance with the Participation Agreement. PRODUCTS shal1 mean all natural gas, natural gas liquids and other petroleum or petroleum related commodities that the Pipeline will transport for the benefit of Owner. PROPERTY means all rights of way, easements, leaseholds, fee parcels and other real property interests associated with the Pipeline, as contemplated by the Plan of Development. ARTICLE 2 CONSTRUCTION OF THE PIPELINE SYSTEM ----------------------------------- 2.1 General Contractor. Owner hereby designates Operator as the -------------------- general contractor for the construction of the Pipeline and, subject to the provisions of this Agreement, Operator shall have the exclusive right to act as such general contractor. 2.2 Property and Permits. Operator shall acquire, on behalf of Owner, ---------------------- the Property and all permits from Government Authorities required for the construction, operation and maintenance of the Pipeline. 2.3 Construction. Operator (directly, or acting through Basin or -------------- MarkWest) shall construct the Pipeline in accordance with the Plan of Development and all Governmental Requirements. 2.4 Management. Operator shall be in direct charge and shall ------------ supervise, on behalf of Owner, all matters arising under the construction and shall proceed with such matters in a good and workmanlike manner and, subject to the provisions of this Agreement, in accordance with its best judgment of what a prudent general contractor would do under the same or similar circumstances. Operator shall consult freely with Owner and shall keep Owner reasonably informed of all significant matters arising during the construction of the Pipeline. ARTICLE 3 OPERATION OF THE PIPELINE SYSTEM 3.1 Operator. Owner hereby designates Operator as the operator of the --------- Pipeline and, subject to the provisions of this Agreement, Operator shall have the exclusive right (directly, or acting through Basin or MarkWest) to operate the Pipeline. 3 3.2 Custody. Operator shall have custody of the Pipeline and ------- the Pipeline will be held by Operator for Owner's benefit. 3.3 Agreement of Operator to Operate the Pipeline. Operator shall --------------------------------------------- conduct all operations hereunder in a good and workmanlike manner, and, subject to the provisions of this Agreement, in accordance with is best judgment of what a prudent operator would do under the same or similar circumstances. Operator shall consult freely with Owner and shall keep Owner reasonably informed of all significant matters arising during the operation, maintenance, or alteration of the Pipeline. ARTICLE 4 DUTIES OF OPERATOR ------------------ Supervision of Operations. Operator shall supervise all operations of ------------------------- the Pipeline for measurement, analysis, dispatching, pumping, and transporting of Products from all points of delivery into or out of the Pipeline. 4.2 Acquisitions. Operator shall supervise the purchase and use of all ------------ materials, contract services, utilities, and supplies in connection with the construction, operation and maintenance of the Pipeline. Operator shall cause all materials supplied for, or intended to be used in, the construction of the Pipeline, but not affixed to or incorporated into the Pipeline, to be stored on the Property or at such other location as may be approved by Owner in writing prior to storage in such other location, with adequate safeguards, as required by Owner, to prevent loss, theft, damage, or commingling with other materials or Pipelines. 4.3 Payment of Expenses; Liens; Claims. Operator shall promptly pay ---------------------------------- and discharge all costs and expenses incurred in connection with the construction, maintenance and operation of the Pipeline pursuant to this Agreement and take advantage of trade discounts where available. Operator shall keep the Pipeline free and clear of any Liens arising out of the Pipeline's construction, operation or maintenance, other than Liens in favor of Bank of America Illinois and liens approved in writing by Owner (and Liens hereafter created by Owner, which Owner agrees to promptly discharge and remove). Operator (a) may contest the validity or amount of any claim of any contractor, consultant, or other person providing labor, materials, or services with respect to the Pipeline, (b) may contest any Tax levied by any Governmental Authority, and (c) may contest the enforcement of or compliance with any Governmental Requirements; provided however, that during the pendency of any such contest, Operator shall set aside adequate reserves being established in accordance with GAAP and shall pay any amount adjudged by a court of competent jurisdiction to be due, with all costs, interest, and penalties thereon, before such judgment becomes a lien on the Property. Owner may (but shall not be obligated to) commence, appear in, or defend any proceeding purporting to affect the Pipeline, or the respective rights and obligations of Owner and Operator pursuant to this Agreement. 4 Owner may (but shall not be obligated to) pay all necessary expenses, including reasonable attorneys' fees and expenses incurred in connection with such proceeding which Operator agrees to repay upon demand. 4.4 NO CONDITIONAL SALE CONTRACTS. ETC. No materials, equipment, or ----------------------------------- fixtures shall be supplied, purchased or installed for the construction or operation of the Pipeline pursuant to security agreements, conditional sale contracts, lease agreements, or other arrangements or understandings whereby a security interest or title is retained by any party or the right is reserved or accrues to any party to remove or repossess such materials, equipment, or fixtures, except in favor of Lender. 4.5 EMPLOYMENT OF PERSONNEL. Operator shall employ as its employees, ----------------------- or contract for, all personnel reasonably required to construct, operate and maintain the Pipeline efficiently and pay the wages and salaries of such personnel at reasonable rates for the type and character of the services performed. Such personnel shall be the employees of Operator and not the employees of Owner. 4.6 INFORMATION. Operator shall furnish to Owner each month, along ------------- with the Operating Account statement required by Section 10.1, (a) all information regarding the Pipeline which is required to be furnished by MarkWest to Michigan Energy Company, L.L.C., under the Participation Agreement, and (b) all other reasonable information required by Owner from Operator relating to the construction, operation and maintenance of the Pipeline. Operator shall promptly notify Owner of any change in any fact or circumstance represented or warranted by Operator to Owner. 4.7 CARRIER STATUS. Operator shall operate the Pipeline as a --------------- "producer pipeline" under Michigan Law, and not as a "common carrier." 4.8 COMPLIANCE WITH REGULATIONS. Operator shall abide by and conform ----------------------------- to all Governmental Requirements, and insofar as proper operation of the Pipeline shall require it, make all necessary reports, tax renditions and returns to Governmental Authorities, secure all necessary licenses and permits, and pay all valid applicable taxes and fees levied upon the Pipeline or on operations hereunder. 4.9 CONTINUED AUTHORITY. Operator shall preserve and maintain all --------------------- licenses, permits, privileges, franchises, certificates and the like necessary for the operation of its business and its ownership, construction and operation of the Pipeline. 4.10 ACCESS: BOOKS AND RECORDS. Operator grants Owner access to the ------------------------- Pipeline site at all reasonable times and shall permit Owner, at all reasonable times, to examine 5 and copy (a) Operator's books and records pertaining to the Operating Account and the Pipeline, and (b) all contracts, statements, invoices, bills, and claims for labor, materials, and services supplied for the operation and maintenance of the Pipeline. Such books and records of Operator shall be kept in accordance with GAAP. 4.11 PROHIBITION ON TRANSFERS. A Transfer may not occur without -------------------------- Owner's prior written consent (other than pursuant to the Option Agreement). The term "Transfer" means the occurrence, whether direct or indirect, voluntary or involuntary, by written instrument (whether or not filed for record), by operation of law or otherwise, of any of the following: (a) any interest in Operator is sold, conveyed, mortgaged, pledged or otherwise transferred or encumbered (other than transfers to Affiliates or in connection with a reorganization of Operator or Operator's parent entity, where such Affiliate or reorganized company has assumed Operator's obligations under this Agreement), (b) any Lien is hereafter created by Operator or arises with respect to Operator covering the Pipeline or the Pipeline is hereafter pledged or encumbered by Operator in any manner, (c) any easement, right-of-way or any other right whatsoever with respect to the Pipeline is hereafter created or granted by Operator without Owner's prior written consent, which consent may not be unreasonably withheld, or (d) possession of the Pipeline is transferred by Operator. As used in this paragraph, the term "Pipeline" includes all of the Pipeline, part of the Pipeline, or any interest in all of part of the Pipeline. 4.12 OPERATOR'S PERFORMANCE. If Operator fails to comply with any of ------------------------ its agreements, covenants, or obligations under this Agreement, then Owner (in Operator's name or in its own name), after giving Operator at least 10 days' prior written notice of its intent to do so, may perform those agreements, covenants, or obligations or cause them to be performed for the account of Operator and at Operator's sole cost and expense, but Owner shall not be obligated to do so. Any and all costs and expenses thus incurred or paid by Owner shall be Operator's demand obligations to Owner and shall bear interest from the date of Owner's payment of any such obligation or expense for Operator's account until the date that Operator repays it to Owner at the Default Rate described in the Loan Agreement. Upon making any such payment or incurring any such cost or expense, Owner shall be fully subrogated to all of the rights of the Person receiving such payment. The amount and nature of any such cost and expense and the time when paid shall be fully established by the affidavit of Owner or any of Owner's officers or agents. 4.13 NOTIFICATION OF ADVERSE CHANGES. Operator shall promptly notify --------------------------------- Owner of the occurrence of any event or 6 condition which, if not remedied, would result in a material, adverse change to the financial condition of Operator or would materially and adversely affect the value of the Pipeline. 4.14 General Supervision. Operator shall supervise all other --------------------- matters necessary to the full accomplishment of the purpose of this Agreement. ARTICLE 5 MATTERS REQUIRING CONSENT OF OWNER ---------------------------------- 5.1 Releases and Partial Releases. Any full or partial release, ------------------------------- surrender, relinquishment or termination of any permits held by or for the benefit of the Pipeline or the Owner or of any portion of the Property shall require the prior written consent of Owner. 5.2 Claims Not Covered by Insurance. Payment of any claims in excess ------------------------------- of $10,000 which are not covered by insurance maintained by Operator shall require the prior written consent of Owner, which consent shall not be unreasonably withheld. ARTICLE 6 MATTERS NOT REQUIRING CONSENT OF OWNER -------------------------------------- 6.1 Normal Operations. Except as specifically set forth in Article ------------------- 5, Operator is authorized, without prior approval of Owner, to make all expenditures necessary for the construction of the Pipeline in accordance with the Plan of Development, and for normal or recurring operating and maintenance expenses. 6.2 Emergency. In the event of explosion, fire, flood, or other ----------- sudden emergency, Operator may take such steps and incur such expense as, in its reasonable opinion, are required to safeguard life and property, but upon so doing Operator shall as promptly as possible thereafter report the emergency and the action taken to Owner. ARTICLE 7 OPERATING PROCEDURE ------------------- 7.1 Product Acceptance. Products will be accepted by Operator for -------------------- transportation through the Pipeline only in accordance with the Gathering Agreement. 7.2 Line Fill. Title to line fill shall, in accordance with the terms ----------- of the Gathering Agreement, remain at all times in Owner in its capacity as producer under the Gathering Agreement. During the term of this Agreement possession of line fill shall be held by the Operator for the Owner's benefit. Upon the termination of 7 this Agreement, possession of line fill shall be held by the Operator in its capacity as processor under the Gathering Agreement without affecting the "Pipeline Cost" (as defined in the Loan Agreement). 7.3 Measurement and Sampling. During each monthly accounting period, -------------------------- Operator-shall be responsible for the accurate measurement and sampling of all Products transported into and out of the Pipeline. Operator shall operate measurement facilities at locations as specified in, and in accordance with the procedures of, the Gathering Agreement. ARTICLE 8 LIABILITY --------- 8.1 Liability of Operator. In the conduct of the construction, ----------------------- operation and maintenance of the Pipeline hereunder, Operator shall be obligated to use the care and diligence customarily exercised by a prudent general contractor and operator. Operator shall be liable for, and hereby indemnifies Owner, its employees and agents against, any loss resulting from, or relating to, the Pipeline or its construction, operation or maintenance, unless caused solely by the gross negligence or willful misconduct of Owner. 8.2 No Liability of Owner. Owner shall have no liability, obligation, ----------------------- or responsibility whatsoever with respect to the construction, operation or maintenance of the Pipeline. Owner shall not be obligated to inspect the Pipeline, nor be liable for the performance or default of Operator or any other party, or for any failure to construct, complete, protect, or insure the Pipeline, or for the payment of costs of labor, materials, or services supplied for the construction of the Pipeline. Nothing shall be construed as a representation or warranty, express or implied, to any party by Owner. Operator agrees to indemnify and hold harmless Owner from and against all claims, liabilities, costs, expenses and causes of action arising out of or based upon or related to the construction, operation and maintenance of the Pipeline, other than those which arise solely from actions taken by Owner without the authorization of Operator. ARTICLE 9 INSURANCE --------- 9.1 Insurance Policies. As to all work hereunder, Operator shall -------------------- cause MarkWest to carry for the benefit and protection of the parties hereto the Worker's Compensation and Employer's Liability insurance, Comprehensive General Liability insurance, Comprehensive Auto Liability insurance, All Risk insurance and other insurance required by Article VII of the Participation Agreement. To the extent permitted by the Laws of 8 Michigan, all such policies of insurance shall (x) name Owner as an additional insured with loss proceeds payable to Operator and Owner, as their interests may appear, (y) provide for at least 30 days prior written notice to Owner of any cancellation or change in coverage, and (z) provide that no act of the insured nor use of the Pipeline will invalidate such insurance with respect to Owner. 9.2 Insurance Proceeds. If an insured loss occurs, any and all monies -------------------- that may be become payable under any insurance policies required hereunder by reason of damage to, or loss or destruction of the Pipeline or any part thereof shall be applied to repair, rebuild and restore the Pipeline to its condition prior to the occurrence of the insured loss, with any excess monies applied to Owner's Obligation under the Loan Agreement 9.3 Insurance by Owner. Owner may acquire such insurance as it deems -------------------- proper to protect itself against third party claims or damages to the Pipeline, and such insurance shall inure solely to the benefit of Owner. 9.4 Contractor Insurance. Operator shall require all third party ---------------------- contractors which are performing work in connection with, or for the benefit of, operations hereunder to comply with applicable Worker's Compensation and Employer's Liability Laws and to maintain (a) Worker's Compensation insurance, (b) Employer's Liability insurance (with minimum limits of $500,000 per accident, per disease-policy and per disease-each employee), (c) Comprehensive General Liability insurance (including pollution liability, owners and contractors protective liability, products and completed operations liability, contractual liability, explosion, blowout and cratering with minimum limits of $1,000,000 bodily injury and property damage per occurrence), (d) Business Automobile Liability insurance (with minimum limits of $1,000,000 bodily injury and property damage per occurrence), (e) Umbrella Liability insurance (of not less than $5,000,000 per occurrence and in the aggregate), (f) Contractor's Protective or Contingent Liability insurance (with minimum limits of $1,000,000 bodily injury and property damage per occurrence), (g) Environmental Impairment Liability insurance (or the equivalent, with minimum limits of $10,000,000 bodily injury and property damage per occurrence), and (h) any other insurance as Operator shall deem necessary. 9.5 Third Party Damage Liability. The liability, if any, in damages ------------------------------ for claims growing out of personal injury to or death of third parties or damage to or destruction of property of third parties resulting from operations conducted hereunder shall be borne by Operator, unless such claims are due solely to the willful misconduct or gross negligence of Owner. 9.6 Pipeline System Damages. Operator shall be liable to Owner for -------------------------- damage to or for loss or destruction of Owner's 9 property from operations hereunder, unless such damage, loss, or destruction arises solely out of the willful misconduct or gross negligence of Owner. 9.7 Settlement of Claims. In accordance with Section 5.6, any claims ---------------------- asserted by any person in connection with the Pipeline which are not covered by insurance may be settled by Operator if such amount does not exceed $10,000. Operator shall promptly furnish Owner written notice of any loss, damage or claim in excess of such amount, and settlement shall be subject to approval by Owner, which approval shall not be unreasonably withheld. ARTICLE 10 ACCOUNTING ---------- 10.1 Maintenance of Accounts; Monthly Statements. Operator shall ------------------------------------------- maintain an accurate Operating Account of all costs and expenses incurred by it in constructing, operating and maintaining the Pipeline and all income from the operation of the Pipeline. Each month Operator shall transmit to the Owner a statement showing the total charges and credits to the Operating Account during the preceding calendar month. The Operating Account shall be maintained in accordance with generally accepted accounting principles and methods prescribed by applicable regulatory agencies. 10.2 Payments. Operator shall pay all costs and expenses incurred in -------- the construction, operation and maintenance of the Pipeline. All such payments which relate to the construction of the Pipeline shall be deemed to be advances by Operator, as lender, to Owner, as borrower, under the terms of the Loan Agreement and shall be repayable in accordance with the terms of the Loan Agreement. Owner shall have no obligation to pay for any such costs of construction by any other method, regardless of whether any default exists under the Loan Agreement, and no default under the Loan Agreement shall relieve the Operator of its obligations under this Agreement. 10.3 Adjustments. Payment of any such amounts by Operator under ------------- Section 10.2 shall not prejudice the right of Owner to protest or question the correctness thereof . Without limiting Owner's audit rights under Section 10.4, all statements rendered to Owner by Operator during any calendar year shall conclusively be presumed to be true and correct 60 days after delivery of such statements, unless Owner makes claim on Operator for adjustment. 10.4 Audits. Owner, upon notice in writing to Operator, shall have -------- the right to audit Operator's accounts and records relating to the accounting hereunder for any period prior to date of audit. Operator shall bear no portion of Owner's audit cost incurred under this paragraph, unless agreed to by Operator. All discrepancies disclosed by said audit must be provided in writing to Operator within 60 days after completion of said audit. 10 10.5 Certain Costs and expenses. Charges incurred by Operator in ----------------------------- connection with the Pipeline for damages and losses to property and equipment, litigation, insurance premiums and claims, and administrative overhead shall be the responsibility of Operator and shall not be deemed to be advances to Owner under the Loan Agreement. 10.6 Taxes. ----- (a) Income Taxes. Each party shall be responsible for the ------------ preparation, filing and payment of its own income tax returns. (b) Non-Income Taxes. Except to the extent that Operator is ------------------ prohibited or prevented from doing so by Law, or by the administrative practice of any taxing office, or by the fact that to do so requires information which is in the possession of Owner, but not of Operator and which Owner cannot legally furnish to Operator (all of which are herein called "Preventing Factors"), Operator, acting for itself and Owner, shall (i) prepare and file all reports, returns, and renditions in connection with ad valorem taxes and all other taxes (other than taxes on or measured by income) on all interest in, and business through, the Pipeline, and (ii) pay such taxes on or before the date due and shall charge same to Operating Account; provided that Operator may contest the validity of any such tax or any assessment made in connection therewith, and may defer payment of the tax appurtenant to the contested assessment until the proceedings are terminated or until Operator determines that further contest is useless, if, in each case, such contest or payment deferral does not jeopardize the operation of the Pipeline or its ownership by Owner. Upon the request of Operator, Owner shall (except to the extent it is prohibited by Law from doing so) promptly furnish Operator with any information needed by Operator in order to carry out its obligations under this Subparagraph, Operator shall. give written notice of such fact to Owner, specifying the Preventing Factors concerned and the taxes and governmental units to which such Preventing Factors apply, and thereafter Owner shall pay the taxes applicable to it, or to its interest in, and business through, the Pipeline insofar as they relate to the taxes and governmental units specified in the notice. ARTICLE 11 REPRESENTATIONS AND WARRANTIES ------------------------------ 11.1 Authority and Power: Each party represents and warrants to the -------------------- other that (a) it is a limited liability company duly organized, validly existing, and in good standing under the laws of Michigan, (b) the nature and extent of its business and properties do not require it to qualify to transact business as a foreign entity in any other jurisdiction, and (c) it possesses all 11 requisite authority, power, licenses, permits, and franchises to conduct its business as is now being conducted. 11.2 Valid and Binding Obligation. Each party represents and ------------------------------ warrants to the other that its execution, delivery, and performance of this Agreement (a) have been duly authorized, (b) have received all, if any, requisite prior approvals of any Governmental Authority, (c) constitute the legal, valid, and binding obligations of it, (d) will not violate, be in conflict with, result in a breech, or constitute (with due notice or lapse of time, or both) a default under, its Articles of Organization or Regulations or any Governmental Requirement or any material agreement to which it is a party or by which it may be bound or affected, and (e) will not result in the creation or imposition of any Lien upon any of its property or assets. 11.3 Litigation and Condemnation. Each party represents and warrants ---------------------------- to the other that, to its knowledge, there is no threatened or pending Litigation against or affecting the Pipeline before or by any Governmental Authority. 11.4 Title to the Property. Operator represents and warrants to --------------------- Owner that it has good and indefeasible title to the permits, rights of way, easements, leaseholds, fee parcels and other real property interests obtained by it on behalf of Owner in connection with the Pipeline. 11.5 Accuracy of Information. Operator represents and warrants to ------------------------- Owner that no information, certification, or report submitted to Owner by or on behalf of Operator contains any material misstatement of fact or omits to state a material fact or any fact necessary to make the information not misleading. 11.6 Tax and Other Payments. Operator represents and warrants to ---------------------- Owner that Operator has filed or will file all required Tax returns with respect to the Pipeline and has paid or will pay all Taxes with respect to the Pipeline which have become due pursuant to such returns or pursuant to any assessments received by it. All other governmental charges imposed upon Operator or its assets which are due and payable, have been paid or will be paid before they become delinquent. Operator has paid or will pay in full all sums owing or claimed for labor, materials, supplies, personal property (whether or not constituting a fixture), and services of every kind and character used, furnished, or installed in the Pipeline and no claim for the same currently exists or will be permitted to become past due, unless contested by the Operator in good faith, by appropriate proceedings and with adequate reserves being established in accordance with GAAP. 11.7 Environmental Matters. Operator represents and warrants to ----------------------- Owner that Operator (a) knows of no environmental condition or circumstance adversely 12 affecting its operations or the Pipeline, (b) has not received any report of any violations of any Environmental Law, (c) knows of no obligation to remedy any violations of any Environmental Law. 11.8 Permits and Restrictions. Operator represents and warrants to ------------------------- Owner that all permits required for the construction and operation of the Pipeline have been obtained and are currently in effect or will be obtained by the Operator prior to performing the activity which requires such permit. There are no deed restrictions which have not been effectively waived which would prohibit, limit, or interfere with the operation of the Pipeline. ARTICLE 12 MISCELLANEOUS ------------- 12.1 Modifications. No provision of this Agreement may be modified, -------------- waived, or terminated except by a written instrument executed by the party against whom a modification, waiver, or termination is sought to be enforced. 12.2 Rights of Third Parties. All conditions of Operator's ------------------------- obligations under this Agreement are imposed solely and exclusively for the benefit of Owner and its successors and assigns and no other Person shall have standing to require satisfaction of such conditions in accordance with their terms, and no other Person shall under any circumstances be deemed a beneficiary of this Agreement. Any and all of the terms and conditions of this Agreement may be freely waived in whole or in part by Owner at any time if in its sole discretion Owner deems it desirable to do so. Owner reserves the right to enter into modifications or amendments of this Agreement with Operator without notice to or the consent of any other party. 12.3 No Agency, Partnership or Joint Venture. Owner is not the agent --------------------------------------- or representative of Operator. Operator is not the agent or representative of Owner. Nothing in this Agreement shall be construed to make Owner liable to anyone for goods delivered or services performed upon the Pipeline or for debts or claims accruing against Operator. Nothing herein shall be construed to create a relationship between Owner and anyone supplying labor or materials to the Pipeline. Nothing in this Agreement or in the acts of the parties hereto shall be construed to create a partnership or joint venture between Operator and Owner. 12.4 Further Assurances. Operator shall perform, execute, -------------------- acknowledge and deliver, at Operator's sole cost and expense, all such additional documents as Owner may reasonably require from time to time in order to better confirm to Owner all the Rights now or hereafter intended to be granted to Owner under this Agreement. 12.5 Notices. All notices required or permitted to be --------- 13 given under this Agreement must be in writing and shall be effective upon delivery to the address specified below. By giving at least 10 days written notice, Operator or Owner shall have the right from time to time and at any time during the term of this Agreement to change their respective addresses or fax numbers and each shall have the right to specify a different address or fax number within the United States of America. If to Operator: West Shore Processing Company, LLC 5613 DTC Parkway, Suite 400 Englewood, Colorado 80111 Telephone No: (303) 290-8700 Facsimile No: (303) 290-8769 Attention: Randy S. Nickerson If to Owner: Michigan Production Company, L.L.C. c/o Tenneco Ventures Corporation 1100 Louisiana, Suite 1543 Houston, Texas 77002 Telephone No.: (713) 757-3698 Facsimile No.: (713) 757-8314 Attention: Rick Lester 12.6 Severability. In the event any of the provisions of this ------------- Agreement shall for any reason be held to be invalid, illegal, or unenforceable, such invalidity, illegality, or unenforceability shall not affect any other provision hereof, and such document shall be construed as if such provision had never been contained herein. Such provision shall be automatically replaced by a clause or provision judicially construed and interpreted to be as similar in substance and content to such provision as the context thereof would reasonably allow, so that such provision would thereafter be legal, valid, and enforceable. However, if disregarding or replacing such provision would frustrate the intent and purposes of such document, Owner may petition any Governmental Authority having jurisdiction in equity to render a judgment modifying the disregarded provision or provisions of such document so as to carry out such intent and purposes. 12.7 Number and Gender. Except as expressly otherwise stated with ------------------ respect to the language used in this Agreement, particularly the defined terms, the singular shall include the plural, the plural shall include the singular, and the reference to any gender shall include all genders. 14 12.8 Time of Essence. Time is of the essence in performance of ----------------- this Agreement by Operator. 12.9 Captions The captions, headings, and arrangements used in this --------- Agreement are for convenience only and do not in any way affect, limit, amplify, or modify the terms and provisions hereof. 12.10 Applicable Law. This Agreement shall be governed by and --------------- construed in accordance with the laws of the State of Michigan and the laws of the United States applicable to transactions within such State. 12.11 Counterparts. This Agreement may be executed in any number of -------------- counterparts, each of which shall be an original, but all of which together shall constitute one agreement. 12.12 Successors and Assigns. This Agreement shall inure to the ------------------------ benefit of and be binding upon the parties hereto and their respective successors and assigns. However, the Loan Documents may not be assigned by Operator or Owner without the others prior written consent. Any such attempted assignment shall be void. 12.13 No Oral Agreement. THE RIGHTS AND OBLIGATIONS OF THE PARTIES ------------------ HERETO SHALL BE DETERMINED SOLELY FROM WRITTEN AGREEMENTS, DOCUMENTS, AND INSTRUMENTS, AND ANY PRIOR ORAL AGREEMENTS BETWEEN THE PARTIES ARE SUPERSEDED BY AND MERGED INTO SUCH WRITINGS. THIS AGREEMENT (AS AMENDED IN WRITING FROM TIME TO TIME) AND THE OTHER WRITTEN LOAN DOCUMENTS EXECUTED BY OPERATOR AND OWNER (OR BY OPERATOR FOR THE BENEFIT OF OWNER) REPRESENT THE FINAL AGREEMENT BETWEEN OPERATOR AND OWNER AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS BY THE PARTIES. THERE ARE NO ORAL AGREEMENTS BETWEEN THE PARTIES. 12.14 Term of Agreement This Agreement shall remain in force until ------------------ Owner disposes of the Pipeline accordance with this Agreement and the Loan Agreement, whereupon all operations hereunder shall be brought to a conclusion, and Operator shall make final accounting between Operator and Owner. EXECUTED on the date first above recited. WEST SHORE PROCESSING COMPANY, LLC MARKWEST Michigan, Inc. /S/ ARTHUR J. DENNEY VICE PRESIDENT MICHIGAN PRODUCTION COMPANY, L.L.C. /S/ MICHAEL V. RONCA, MANAGER /S/ ROBERT L. ZORICH, MANAGER 15 EX-10.32 5 NON-RECOURSE LOAN AGREEMENT NON-RECOURSE LOAN AGREEMENT between MICHIGAN PRODUCTION COMPANY, L.L.C. Borrower and WEST SHORE PROCESSING COMPANY, LLC Lender October 1, 1996 TABLE OF CONTENTS
ARTICLE I DEFINITIONS 1 ARTICLE II COMMITMENT OF LENDER 5 2.1 Loan Commitment; Note 5 2.2 Term Loan 6 2.3 Advances 6 2.4 Conditions to Advances 6 2.5 Interest on the Loan 6 2.6 Payment 7 2.7 Permitted Prepayment 7 2.8 Advances Do Not Constitute a Waiver 7 ARTICLE III REPRESENTATIONS AND WARRANIES 7 3.1 Authority and Power 7 3.2 Valid and Binding Obligation 7 3.3 Litigation and Condemnation 7 3.4 Tax and Other Payments 8 3.5 Environmental Matters 8 ARTICLE IV COVENANTS AND AGREEMENTS OF BORROWER 8 4.1 Continued Authority 8 4.2 Reports and Other Information 8 4.3 Inspection of the Property 8 4.4 Books and Records 8 4.5 Prohibition on Transfers 9 4.6 Condemnation 9 4.7 Notification of Adverse Changes 9 ARTICLE V EVENTS OF DEFAULT 9 5.1 Payment 9 5.2 Performance 9 5.3 Misrepresentation 10 5.4 Receiver 10 5.5 Liens 10 5.6 Attachment 10 5.7 Voluntary Bankruptcy 10 5.8 Involuntary Bankruptcy 10 5.9 Transfer 10 5.10 Title and Lien Priority 10 ARTICLE VI RIGHTS AND REMEDIES OF LENDER 10 6.1 Remedies 10 6.2 No Waiver or Exhaustion 11 6.3 Cessation of Advances 11 ARTICLE VII GENERAL TERMS AND CONDITIONS 11 7.1 Modifications 11 7.2 Election of Remedies 11 7.3 Usury 12
(i) 7.4 Rights of Third Parties 12 7.5 No Agency, Partnership or Joint Venture 13 7.6 Further Assurances 13 7.7 Notices 13 7.8 Survival of Obligations, Warranties and Indemnities 13 7.9 Final Release 14 7.10 Controlling Agreement 14 7.11 Severability 14 7.12 Form and Substance 14 7.13 Number and Gender 14 7.14 Time of Essence 14 7.15 Captions 14 7.16 Applicable Law 14 7.17 Counterparts 15 7.18 Successors and Assigns 15 7.19 No Oral Agreement 15 7.20 Non-Recourse 15
(ii) NON-RECOURSE LOAN AGREEMENT THIS NON-RECOURSE LOAN AGREMENT (this "Agreement"), dated as of October 1, 1996, is between WEST SHORE PROCESSING COMPANY, LLC, a Michigan limited liability company ("Lender"), and MICHIGAN PRODUCTION COMPANY, L.L.C., a Michigan limited liability company ("Borrower"). WHEREAS, Borrower, as producer, and Lender, as processor, have entered into a Gas Gathering, Treatment and Processing Agreement dated May 2, 1996 (as amended from time to time, the "Gathering Agreement'); and WHEREAS, Borrower, as owner, and Lender, as operator, have entered into a Pipeline Construction and Operating Agreement dated as of October 1, 1996 (as amended from time to time, the "Operating Agreement"); and WHEREAS, Borrower, as seller, and Lender, as purchaser, have entered into an Option and Agreement to Purchase and Sell Pipeline dated as of October 1, 1996 (the "Option Agreement"); and WHEREAS, Lender wishes to loan to Borrower, and Borrower wishes to borrow from Lender, all sums necessary for the construction of the Pipeline from the date hereof through the date of its sale by Borrower to Lender or Lender's designee under the Option Agreement (the "Pipeline Cost"). NOW, THEREFORE, in consideration of the foregoing and the representations, warranties, and covenants of this Agreement and for other consideration, the receipt and adequacy of which are hereby acknowledged, Lender and Borrower hereby agree as follows: ARTICLE I DEFINITIONS For purposes of this Agreement, the following terms are defined as follows: Advance means a disbursement from Lender to or for the benefit of Borrower of any of the proceeds of the Loan. Bankruptcy Code means Title 11 of the United States Code, as amended from time to time. Business Day means any day which is not a Saturday, Sunday or other day on which commercial banks in Michigan are authorized or obligated to close. 1 Closing Date means the date of Borrower's execution and delivery of the Loan Documents to Lender and Lender's execution thereof, regardless whether funding actually occurs on that date. Code means the Uniform Commercial Code as enacted in Michigan and as amended from time to time. Debtor Relief Laws means the Bankruptcy Code and any and all applicable Laws regarding liquidation, conservatorship, bankruptcy, assignment for the benefit of creditors, moratorium, rearrangement, receivership, suspension of payments, insolvency, reorganization, or similar Laws affecting the Rights of creditors generally, as in effect from time to time and as hereafter ammended. Default means the occurrence of any event which with notice and the passage of time will become an Event of Default. Default Rate means, subject to Section 7.3, an annual interest rate of 8%. Environmental Law means any Law that relates to the pollution or protection of the environment or to Hazardous Substances. Event of Default is defined in Article V. Federal Income Taxes means all funds paid for, or escrowed for payment of, federal income taxes attributable to then current tax period. Financing Statements means the Form UCC-1 or other non-standard Code financing statements perfecting the security interest securing the Loan. Fiscal Year means the 12-month period ending December 31 of each year. GAAP means generally accepted accounting principles of the Accounting Principles Board of the American Institute of Certified Public Accountants and the Financial Accounting Standards Board that are applicable from time to time. Gathering Agreement is defined in the recitals. Governmental Authority means the United States of America or any nation, commonwealth, state. county, city, territory, possession, parish, town, municipality, and any other political subdivision, agency, court, department, commission, board, bureau, or other instrumentality. 2 Governmental Requirements means all Laws of any Governmental Authority applicable to Borrower or the Pipeline. Hazardous Substance means (a) any substance the presence of which requires removal, remediation or investigation under any applicable Environmental Law, (b) any substance that is defined or classified as a hazardous waste, hazardous material, pollutant, contaminant, or toxic or hazardous substance under any applicable Environmental Law, or (c) petroleum, petroleum products, oil, and asbestos. Highest Lawful Rate means the maximum rate (or, if the context so requires, an amount calculated at such rate) of interest which Lender is allowed to contract for, charge, take, reserve, or receive under applicable Law after taking into account, to the extent required by applicable Law, any and all relevant payments or charges. Impositions means all Taxes, utility rates and charges; charges imposed pursuant to any subdivision or planned unit development declaration or restrictions; charges for any easement, license or agreement maintained for the benefit of the Pipeline, and any interest, costs, or penalties of any kind with respect to the Pipeline which may be assessed, levied, or imposed upon the Pipeline or the ownership, use, occupancy, or enjoyment thereof. Law or Laws means all applicable statutes, laws, ordinances, regulations, orders, writs, injunctions, decisions, opinions, or decrees of any Governmental Authority. Lender Liens means all Liens in favor of Lender securing the Obligation. LIEN means any lien, mortgage, security interest, pledge, charge, or encumbrance of any kind, including, without limitation, a mechanic's lien, a materialman's lien, the rights of a vendor, lessor, or similar party under any conditional sales agreement or other title retention agreement or lease substantially equivalent thereto (except for approved equipment leases) and any other right of or arrangement with any creditor to have its claim satisfied out of any property or assets, or the proceeds therefrom, prior to the general creditors of the owner thereof. Litigation means any action, proceeding, condemnation action, claim, and/or lawsuit conducted by or before any Governmental Authority. Loan means the multiple advance term loan by Lender to Borrower for the construction of the Pipeline. Loan Amount is defined in Section 2.1. 3 Loan Documents means this Agreement, the Note, the Mortgage, the Financing Statements, and such other instruments or documents evidencing, securing, or pertaining to the Loan as shall, from time to time, be executed and delivered to Lender by Borrower, any Person, or any other party pursuant to this Agreement, and all renewals, rearrangements, modifications, amendments, and extensions of any of the foregoing. Maturity Date means the earlier of (a) the date of the "Closing" under the Option Agreement., or (b) the date on which all options of Borrower and Lender to sell or purchase the Pipeline under the Option Agreement have expired. Mortgage means the Mortgage, Assignment, Security Agreement and Financing Statement executed in connection with this Agreement for the benefit of Lender and its successors and assigns as security for the payment and performance of the Obligation. Note is defined in Section 2.1. Obligation means the Loan and the principal of, interest on, and all other amounts and payments due under the Loan Documents, together with all funds hereafter advanced by Lender to or for the benefit of Borrower as contemplated by any covenant or provision contained in any Loan Document. Operating Agreement is defined in the recitals. Permitted Liens means (a) any Liens of Bank of America Illinois subordinated to the Mortgage on terms acceptable to Lender, (b) any Liens for Taxes not yet due and payable, (c) Lender Liens created by or pursuant to the Loan Documents in favor of Lender, (d) mechanics' and materialmen's liens with respect to obligations that are not yet due and payable, and (e) other Liens to which Lender gives its prior written consent. Person means any individual, firm, corporation, limited liability company, association, partnership, joint venture, trust, other entity, unincorporated organization, or Governmental Authority. Pipeline means the nominal 10-inch diameter, natural gas producer pipeline extending along the right of way of Consumers Power from the delivery point at the gathering lateral of Borrower's Slocum 1-21 Well, which delivery point is expected to be in the Northwest quarter of Section 3O, Township 15 North, Range 16 West, Elbridge Township, in Oceana County, Michigan, to the terminus of Basin Pipeline, L.L.C.'s existing pipeline located in Section 32, Township 19 North, Range 17 West, Victory Township, in Mason County, Michigan, including without limitation, (a) the Property, and (b) all pipes, pipelines, pumping equipment, assemblies, heaters, valves, controls, monitoring equipment, communications equipment, towers, sensors, cathodic protection systems, test stations, corrosion detection and monitoring 4 devices, inspection pigs, drums, flare facilities, sampling equipment, and all associated facilities and equipment, including spare parts, related thereto, as well as any and all additions, replacements, extension, modifications or enlargements of any of the foregoing. Pipeline Cost is defined in the recitals. Plan of Development means the Plan of Development for the Pipeline, which shall include any working drawings and specifications, together with any amendments or modifications thereto, and authorizations for expenditures prepared by MarkWest Michigan, LLC under, and approved in accordance with, the Participation, Ownership and Operating Agreement for West Shore Processing Company, LLC, dated May 1, 1996, as ammended. Property means all rights of way, easements, leaseholds, fee parcels and other real property interests associated with the Pipeline, as contemplated by the Plan of Development. Rights meas benefits, rights, remedies, powers, and privileges. Taxes means Federal Income Taxes, real estate and personal property ad valorem taxes, and all other taxes, standbv fees, assessments, fees, levies, imposts, duties, deductions, withholdings, or other charges of any nature whatsoever from time to time or at any time imposed by any Laws or by any Governmental Authority. Transfer is defined in Section 4.5 of this Agreement. ARTICLE II COMMITMENT OF LENDER -------------------- Subject to the terms, provisions, and conditions of this Agreement: 2.1 Loan Commitment; Note. Lender agrees to lend to Borrower, in ---------------------- several Advances, an aggregate principal amount ("Loan Amount") equal to the Pipeline Cost. Such Advances shall only be used by Borrower to fund the Pipeline Cost. Lender's commitment to make Advances shall terminate upon the occurrence of a Default and on the Maturity Date (provided that Lender's Rights and Borrower's duties and obligations under the Loan Documents shall continue in full force and effect until the Obligation is fully paid or otherwise satisfied), but no Default under this Agreement shall relieve Lender of its obligations as operator under the Operating Agreement. The aggregate of all Advances (whether or not outstanding) may not at any time exceed the Pipeline Cost. The Advances shall be evidenced by Borrower's Sec red Non-Recourse Promissory Note substantially in the form of Exhibit A (the "Note"). 5 2.2 Term Loan. This Agreement evidences a term loan and not a ---------- revolving credit facility. Although interest and the principal portion of the Loan Amount may be prepaid pursuant to the terms of this Agreement, any amount paid under this Agreement which reduces the outstanding principal amount of the Loan may not be reborrowed. 2.3 Advances. Under the terms of the Operating Agreement, Lender, as ---------- operator, is obligated to pay all costs and expenses incurred in the construction, operation and maintenance of the Pipeline. All such payments which relate to the construction of the Pipeline shall be deemed Advances by Lender to Borrower and shall be payable in accordance with the terms of this Agreement. 2.4 Conditions to Advances. As a condition precedent to each and ----------------------- every Advance, in addition to all other requirements herein, Borrower must satisfy the following requirements and, if required by Lender, have delivered to Lender evidence of such satisfaction: (a) Borrower shall be in compliance with all of the covenants, agreements, obligations and undertakings required to be performed by Borrower under the Loan Documents, unless compliance thereof shall have been waived in writing by Lender, (b) No Default or Event of Default exists; (c) The representations and warranties made in this Agreement shall be true and correct on and as of the date of each Advance, with the same effect as if made on that date; (d) Borrower shall have executed and delivered the Note and the Mortgage to Lender, and such documents shall be in full force and effect with no default thereunder by Borrower, (e) Borrower and Lender shall have executed and delivered the Option Agreement, and such agreement shall be in full force and effect with no default thereunder by Borrower, and (f) Borrower shall deliver to Lender any and all other supporting documents reasonably required by Lender. 2.5 Interest on the Loan. Except as otherwise provided in Sections --------------------- 4.8 and 7.3, Advances under the Loan accrue interest at an annual rate of 5.98%, compounded semi-annually. Interest will be calculated on the basis of actual numbers of days elapsed (including the first day, but excluding the last day) in a calendar year of 365 (or 366 as the case may be) days. All interest rate determinations and calculations by Lender are conclusive and binding, absent manifest error. 6 2.6 Payment. All outstanding principal, all accrued and unpaid -------- interest, and all other outstanding amounts which comprise the Obligation, are due and payable on the Maturity Date, which shall be payable in the form of the transfer of the Pipeline to Lender or Lender's designee pursuant to the Option Agreement. 2.7 Permitted Prepayment Borrower may voluntarily prepay all or any --------------------- part of the principal amount of the Loan at any time without premium or penalty, subject to the following conditions: (a) Lender must receive Borrower's written or telephonic prepayment notice by 10:00 a.m. (Detroit Time) on the Business Day preceding the proposed date of prepayment; (b) Borrower's prepayment notice shall specify the prepayment date and the amount to be prepaid: and (c) each partial prepayment must be in a minimum amount of at least $10,000. 2.8 Advances Do Not Constitute A Waiver. No Advance shall constitute a ----------------------------------- waiver of any of the conditions of Lender's obligations to make further Advances nor, in the event Borrower is unable to satisfy any such condition, shall any such waiver have the effect of precluding Lender from thereafter declaring such inability to be a Default or an Event of Default. ARTICLE III REPRESENTATIONS AND WARRANTIES ------------------------------ 3.1 Authority and Power: Each party represents and warrants to the -------------------- other that (a) it is a limited liability company duly organized, validly existing, and in good standing under the laws of Michigan, (b) the nature and extent of its business and properties do not require it to qualify to transact business as a foreign entity in any other jurisdiction, and (c) it possesses all requisite authority, power, licenses, permits, and franchises to conduct its business as is now being conducted. 3.2 Valid and Binding Obligation. Each party represents and warrants ----------------------------- to the other that its execution, delivery, and performance of the Loan Documents (a) have been duly authorized, (b) have received all, if any, requisite prior approvals of any Governmental Authority, (c) constitute the legal, valid, and binding obligations of it, (d) will not violate, be in conflict with, result in a breach, or constitute (with due notice or lapse of time, or both) a default under, its Articles of Organization or Regulations or any Governmental Requirement or any material agreement to which it is a party or by which it may be bound or affected, and (e) will not result in the creation or imposition of any Lien upon any of its property or assets, except as contemplated by the terms of the Loan Documents. 3.3 Litigation and Condemnation. Each party represents and warrants to ----------------------------- the other that, to its knowledge, there is no threatened or pending Litigation against or affecting the Pipeline or the Loan Documents before or by any Governmental Authority. 7 3.4 Tax and Other Payments. Borrower represents and warrants to ----------------------- Lender that Borrower has filed all required Tax returns, if any, with respect to the Pipeline and has paid all Taxes, if any, with respect to the Pipeline which have become due pursuant to such returns or pursuant to any assessments received by it. All other governmental charges imposed upon Borrower or its assets which are due and payable, have been paid or will be paid before they become delinquent. 3.5 Environmental Matters. Borrower represents and warrants to Lender ---------------------- that Borrower (a) knows of no environmental condition or circumstance adversely affecting the Pipeline, (b) has not received any report of any violations of any Environmental Law affecting the Pipeline, (c) knows of no obligation to remedy any violations of any Environmental Law affecting the Pipeline. ARTICLE IV COVENANTS AND AGREEMENTS OF BORROWER ------------------------------------ Borrower unconditionally covenants and agrees with Lender as follows: 4.1 Continued Authority. Borrower shall not fully or partially -------------------- release, surrender, relinquish or terminate any licenses, permits, privileges, franchises, certificates and the like necessary for the operation of its business and its ownership of the Pipeline without the prior written consent of the Lender. 4.2 Reports and Other Information. Borrower shall promptly deliver to ------------------------------ Lender: (a) Promptly, upon discovery, notice of change in any fact or circumstances represented or warranted by Borrower in the Loan Documents. (b) Such other information, not otherwise required herein, respecting the business affairs, assets, and liabilities of Borrower as Lender shall from time to time reasonably request, including, but not limited to, such opinions, certificates, and documents, in addition to those heretofore mentioned, as Lender may reasonably request. 4.3 Inspection of the Property. Borrower shall permit Lender and any -------------------------- Governmental Authority, and their agents and representatives, to enter upon the Property for the purpose of inspecting the Pipeline at all reasonable times. 4.4 Books and Records. Borrower shall permit Lender, at all reasonable ------------------ times, to examine and copy Borrower's books and records pertaining to the Loan and the Pipeline. 8 4.5 Prohibition on Transfers. A Transfer may not occur without Lender's ------------------------- prior written consent, unless the Obligation is fully repaid and Lender's option to acquire the Pipeline under the Option Agreement has expired. The term "Transfer" means the occurrence, whether direct or indirect, voluntary or involuntary, by written instrument (whether or not filed for record), by operation of law or otherwise, of any of the following (a) the Pipeline is sold, transferred, or otherwise conveyed by Borrower, (b) any contract or instrument for the sale, transfer or conveyance of the Pipeline is entered into by Borrower, (c) any Lien (other than Permitted Liens) is hereafter created by Borrower or arises with respect to Borrower covering the Pipeline or the Pipeline is hereafter pledged or encumbered by Borrower in any manner, (d) any easement, right-of-way or any other right whatsoever with respect to the Pipeline is hereafter created or granted by Borrower, or (e) the Pipeline is leased or possession thereof is transferred by Borrower, for any purpose to anyone other than Lender or Lender's designee uncles the Option Agreement As used in this paragraph, the term "Pipeline" includes all of the Pipeline, part of the Pipeline, or any interest in all of part of the Pipeline. 4.6 Condemnation. If the Pipeline, or any part thereof, is condemned or ------------- otherwise taken for public or quasi-public use under the power of eminent domain, or is transferred in lieu thereof, all damages or other amounts awarded therefor shall be applied to the Obligation and any amounts in excess of the Obligation shall be retained by Lender. 4.7 Notification of Adverse Changes. Borrower shall promptly notify Lender --------------------------------- of the occurrence of any event or condition which, if not remedied, would result in a material, adverse change to the financial condition of Borrower or would materially and adversely affect the value of the Pipeline. ARTICLE V EVENTS OF DEFAULT ----------------- The term "Event of Default" as used in this Agreement and in the Loan Documents, shall mean the occurrence at any time and from time to time, of any one or more of the following: 5.1 Payment. Borrower fails to pay all or any portion of the Obligation as -------- and when the same shall become due and payable, whether on the Maturity Date, by acceleration, or otherwise. 5.2 Performance. Borrower fails to fully and timely perform, discharge, or ------------ observe any of the terms, covenants, or conditions contained in any Loan Document, as and when required. 9 5.3 Misrepresentation. Any misrepresentation or warranty made by Borrower ----------------- to Lender in any Loan Document, or in any other certificate or document furnished to Lender in connection with the Loan or in furtherance of the requirements of any Loan Document, is incorrect in any material respect at the time it is made or restated. 5.4 Receiver. A receiver, liquidator, or trustee of Borrower or all or any --------- portion of the Pipeline (a) is appointed after notice and a hearing or (b) is appointed without notice and a hearing and the appointment is not vacated within 60 days after the appointment. 5.5 Liens. A Lien (other than a Permitted Lien) is filed against the ----- Pipeline or any part thereof with respect to any obligation of Borrower and remains unsatisfied or unbonded (in a manner approved in writing by Lender) 60 days after Borrower receives notice of the filing of such Lien. 5.6 Attachment. A levy on, or an attachment or sequestration of, or ----------- relating to, the Pipeline with respect to any obligation of Borrower occurs and is not discharged within 60 days. 5.7 Voluntarv Bankruptcv. Borrower shall (a) file a petition seeking an --------------------- order for relief under any Debtor Relief Law, (b) seek, consent to, or not contest the appointment of a receiver or trustee for itself or for all or any part of its or its property, (c) voluntarily be adjudicated a bankrupt or insolvent, (d) make a general assignment for the benefit of its creditors, or (e) admit in writing its inability to pay its debts as they mature. 5.8 Involuntary Bankruptcy. A petition is filed against Borrower seeking an ----------------------- order for relief under any Debtor Relief Law and such petition is not dismissed in 60 days after being filed. 5.9 Transfer. A Transfer occurs. ---------- 5.10 Title and Lien Priority. The status of the Lien created by the ------------------------ Mortgage as a first and prior lien and security interest on the Pipeline shall be challenged or endangered by any Person whatsoever, and the same cannot be cured within a reasonable time period. ARTICLE VI RIGHTS AND REMEDIES OF LENDER ------------------------------ 6.1 Remedies. If an Event of Default exists, Lender may, at Lender's option, --------- exercise any or all of the following rights: 10 (a) Acceleration. Declare the entire Obligation immediately due and payable ------------- without notice of default, notice of intent to accelerate, notice of acceleration, or any other notice (except notice expressly required by the terms of this Agreement), presentment, protest, demand or action of any kind or nature whatsoever (each of which is hereby expressly waived by Borrower), whereupon the entire Obligation shall become immediately due and payable. (b) Appointment of Receiver. Apply for and obtain, by appropriate judicial ------------------------ action, appointment of a receiver or receivers for all or any part of the Pipeline. (c) Mortgage; Loan Dccuments. Exercise any and all rights under the ------------------------- Mortgage or any of the other Loan Documents and any Rights afforded by Law. (d) Remedies in the Event of Transfer. Borrower acknowledges that money ---------------------------------- damages may be difficult to ascertain and that Lender would incur irreparable harm in the event of a Transfer. Accordingly, in the event of a Transfer, or a threatened transfer, Lender shall be entitled to injunctive relief in addition to all other remedies available at law or in equity. 6.2 No Waiver or Exhaustion. No waiver by Lender of any of its Rights under ------------------------ any Loan Document, or otherwise, shall be considered a waiver of any other or subsequent Right of Lender. No delay or omission by Lender in the exercise or enforcement of any Rights shall ever be construed as a waiver of any Right of Lender and no exercise or enforcement of any such Rights shall ever be held to exhaust any Right of Lender. 6.3 Cessation of Advances. Upon the occurrence of a Default, the obligation ---------------------- of Lender to make any Advance and all other obligations of Lender hereunder and under the Loan Documents shall, at Lender's option, immediately terminate. ARTICLE VII GENERAL TERMS AND CONDITIONS ---------------------------- 7.1 Modifications. No provision of any Loan Document may be modified, -------------- waived, or terminated except by a written instrument executed by the party against whom a modification, waiver, or termination is sought to be enforced 7.2 Election of Remedies. Subject to Section 7.2O, Lender shall have all of --------------------- the Rights granted in the Loan Documents in addition to Rights available to it at law or in equity. These Rights shall be cumulative and may, at Lender's sole discretion, be pursued separately, successively, or concurrently against Borrower or the Pipeline. The exercise or failure to exercise any 11 of these Rights shall not constitute a waiver or release thereof or of any other Right, and such exercise or failure to exercise shall be nonexclusive. 7.3 Usury. It is the intention of Lender and Borrower to comply with all ------ applicable federal and state laws relating to usury, that is, laws limiting charges for the use, detention or forbearance of money and governing contracts relating thereto. Accordingly, the Loan Documents are expressly limited so that in no event, whether by reason of acceleration of the maturity of the Obligation, or otherwise, shall the amount paid or agreed to be paid to Lender for the use, forbearance or detention of the money to be loaned under the Loan Documents, or for the performance or payment of any covenant or obligation contained in any Loan Document exceed the Highest Lawful Rate. In the event Lender ever receives, collects, or applies as interest, any amount which would be excessive interest, that amount shall be treated as a principal prepayment under this Agreement and applied to reduce the outstanding principal balance of the Loan; provided that, if the principal of the Loan is paid in full, any remaining excess shall be paid to Borrower. In determining whether or not the interest paid or payable, under any specific contingency, exceeds the Highest Lawful Rate, Borrower and Lender shall, to the maximum extent permitted under applicable Law, (a) characterize any non-principal payment as an expense, fee, or premium rather than as interest, (b) exclude voluntary prepayments and the effects thereof, and (c) spread the total amount of interest throughout the entire contemplated term of the Loan; provided that, if the Loan is paid and performed in full prior to the end of its full contemplated term, and if the interest received by Lender for the actual period of existence of the Loan exceeds the Highest Lawful Rate, Lender shall refund to Borrower the amount of such excess, and, in such event, Lender shall not be subject to any penalties provided by any laws for contracting for, charging, taking, reserving, or receiving interest in excess of the Highest Lawful Rate. 7.4 Rights of Third Parties. All conditions of Lender's obligations under ------------------------ the Loan Documents are imposed solely and exclusively for the benefit of Lender and its successors and assigns (and for the benefit of its members and their successor and assigns) and no other Person shall have standing to require satisfaction of such conditions in accordance with their terms, and no other Person shall under any circumstances be deemed a beneficiary of this Agreement. Any and all of the terms and conditions of this Agreement may be freely waived in whole or in part by Lender at any time if in its sole discretion Lender deems it desirable to do so. Lender reserves the right to enter into modifications or amendments of the Loan Documents with Borrower without notice to or the consent of any other party. This provision shall survive the repayment of the Loan and shall continue in full force and effect. 12 7.5 No Agency, Partnership or Joint Venture. Lender is not the agent or ---------------------------------------- representative of Borrower. Borrower is not the agent or representative of Lender. Nothing herein shall be construed to create a relationship between Lender and anyone supplying labor or materials to the Pipeline. Nothing in this Agreement or in the acts of the parties hereto shall be construed to create a partnership or joint venture between Borrower and Lender. 7.6 Further Assurances. Borrower shall perform, execute, acknowledge and ------------------- deliver, at Borrower's sole cost and expense, all such additional documents, acts, deeds; conveyances, mortgages, assignments, estoppel certificates, notices of assignment, transfers and assurances as Lender may reasonably require from time to time in order to better assure, convey, assign, transfer and confirm to Lender all the Rights now or hereafter intended to be granted to Lender under the Loan Documents and to facilitate the performance of this Agreement. 7.7 Notices. All notices required or permitted to be given under the Loan -------- Documents must be in writing, and shall be effective upon delivery to the address specified below. By giving at least 10 days written notice, Borrower or Lender shall have the right from time to time and at any time during the term of this Agreement to change their respective addresses or fax numbers and each shall have the right to specify a different address or fax number within the United States of America. If to Lender: West Shore Processing Company, LLC 5613 DTC Parkway, Suite 400 Englewood, Colorado 80111 Telephone No: (303) 290-8700 Facsimile No: (303) 290-8769 Attention: Randy S. Nickerson If to Borrower: Michigan Production Company, L.L.C. % Tenneco Ventures Corporation 1100 Louisiana, Suite 1543 Houston, Texas 77002 Telephone No.: (713) 757-3698 Facsimile No.: (713) 757-8314 Attention: Rick Lester 7.8 Survival of Obligations. Warranties. and Indemnities. All covenants, ---------------------------------------------------- agreements, representations, warranties made by Borrower in the Loan Documents, including without limitation, any certificates or other documents or instruments delivered pursuant to any Loan Document, shall survive Lender's making of the Loan and the execution and delivery of the Loan Documents. 13 7.9 Final Release. Full payment of the Obligation by Borrower or any -------------- other Person shall automatically constitute a full release of any claims or causes of action existing as of the date of such payment in favor of Lender or any other Party, in connection with the Loan Documents, (other than the prohibition on Transfers contained in Section 4.5, which shall continue in force until the Pipeline is sold to Lender or Lender's designee under the Option Agreement.) 7.10 Controlling Agreement. If provisions of the other Loan Documents ---------------------- conflict with any provision of this Agreement, this Agreement shall control to the extent of such conflict. 7.11 Severability In the event any of the provisions of the Loan ------------ Documents shall for any reason be held to be invalid, illegal or unenforceable, such invalidity, illegality, or unenforceability shall not affect any other provision of the Loan Documents, and such document shall be construed as if such provision had never been contained herein. Such provision shall be automatically replaced by a clause or provision judicially construed and interpreted to be as similar in substance and content to such provision as the context thereof would reasonably allow, so that such provision would thereafter be legal, valid, and enforceable. However, if disregarding or replacing such provision would frustrate the intent and purposes of such document, Lender may petition any Governmental Authority having jurisdiction in equity to render a judgment modifying the disregarded provision or provisions of such document so as to carry out such intent and purposes. 7.12 Form and Substance. All documents, certificates, insurance ------------------- policies, and other items required under any Loan Document to be executed and/or delivered to Lender shall be in form and substance satisfactory to Lender. Lender shall receive copies (or certified copies where appropriate in Lender's judgment) of all documents which it may request in connection with this Agreement or the Loan. 7.13 Number and Gender. Except as expressly otherwise stated, with ----------------- respect to the language used in any Loan Document, particularly the defined terms, the singular shall include the plural, the plural shall include the singular, and the reference to any gender shall include all genders. 7.14 Time of Essence. Time is of the essence in performance of ---------------- the Loan Documents by Borrower. 7.15 Captions. The captions, headings, and arrangements used in the --------- Loan Documents are for convenience only and do not in any way affect, limit, amplify, or modify the terms and provisions of the Loan Documents. 7.16 Applicable Law. The Loan Documents shall be governed --------------- 14 by and construed in accordance with the laws of the State of Michigan and the laws of the United States applicable to transactions within such State. 7.17 Counterparts. Each Loan Document (other than the Note) may be ------------- executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one agreement. 7.18 Successors and Assigns. The Loan Document shall inure to the ----------------------- benefit of and be binding upon the parties hereto and their respective successors and assigns. However, the Loan Documents may not be assigned by Borrower or Lender without the other's prior written consent. Any such attempted assignment shall be void. 7.19 No Oral Agreement. THE RIGHTS AND OBLIGATIONS OF THE PARTIES ------------------ HERETO SHALL BE DETERMINED SOLELY FROM WRITTEN AGREEMENTS, DOCUMENTS, AND INSTRUMENTS, AND ANY PRIOR ORAL AGREEMENTS BEIWEEN THE PARTIES ARE SUPERSEDED BY AND MERGED INTO SUCH WRITINGS. THIS AGREEMENT (AS AMENDED IN WRITING FROM TIME TO TIME) AND THE OTHER WRITTEN LOAN DOCUMENTS EXECUTED BY BORROWER AND LENDER (OR BY BORROWER FOR THE BENEFIT OF LENDER) REPRESENT THE FINAL AGREEMENT BETWEEN BORROWER AND LENDER AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS BY THE PARTIES. THERE ARE NO ORAL AGREEMENTS BETWEEN THE PARTIES. 7.20 Non-Recourse. Notwithstanding anything to the contrary contained ------------ in any Loan Document, there shall be no personal or corporate liability on Borrower, Borrower's successors or assigns, or the members of Borrower or their successors or assigns, to pay the Obligation, or for the observance or performance of any of the covenants, conditions or agreements contained in any Loan Document, and Lender and its successors and assigns will look solely to the collateral described in the Mortgage and will not seek any money judgment, deficiency or otherwise, against Borrower, or its successors or assigns, in the event of default in the payment of the Obligation or in the event of any other Event of Default; provided that the foregoing shall not limit Lender's remedies under Section 6.1(d) in the event of a Transfer or threatened Transfer prohibited by Section 4.5, and shall not limit either party's remedies in the event of any fraud on the part of the other party in connection with any Loan Document. EXECUTED on the date first above recited. WEST SHORE PROCESSING COMPANY, LLC MW MICHIGAN, INC. /S/ Arthur J. Denney Vice President MICHIGAN PRODUCTION COMPANY, L.L.C. /S/ Michael V. Ronca, Manager /S/ Robert L. Zorich, Manager 15 15 EXHIBIT A --------- SECURED NON-RECOURSE PROMISSORY N0TE: October 1, 1996 FOR VALUE RECEIVED, MICHIGAN PRODUCTION COMPANY, L.L.C. ("Maker"), hereby promises to pay to the order of WEST SHORE PROCESSING COMPANY, ILC ('Payee") on or before the Maturity Date the full amount of the Obligation. This note has been executed and delivered under, and is subject to the terms of, the Non-Recourse Loan Agreement dated the same date as this note (as amended, supplemented or replaced, (the "Loan Agreement"), between Maker and Payee and is the Note referred to in the Loan Agreement. Unless defined in this note, or the context requires otherwise, capitalized terms used in this note have the meanings given to such terms in the Loan Agreement. Reference is made to the Loan Agreement for provisions affecting this note regarding applicable interest rates, principal and interest payment dates, final maturity, voluntary and mandatory prepayments, acceleration of maturity, exercise of Rights, and security for the payment of this note. This note is a Loan Document and, therefore, is subject to the applicable provisions of Article VII of the Loan Agreement, all of which applicable provisions are incorporated into this note by reference as if set, forth in this note verbatim. Specific reference is made to Section 7.3 of the Loan Agreement for usury savings provisions and to Section 7.20 of the Loan Agreement for provisions governing the non-recourse nature of this note. This note is secured by the Mortgage. MICHIGAN PRODUCTION COMPANY, L.L.C. /S/ Michael V. Ronca, Manager /S/ Robert L. Zorich, Manager EX-10.33 6 FIRST AMENDMENT TO PARTICIPATION, OWNERSHIP FIRST AMENDMENT TO PARTICIPATION, OWNERSHIP AND OPERATING AGREEMENT FOR WEST SHORE PROCESSING COMPANY, LLC This First Amendment to Participation, Ownership and Operating Agreement ("Amendment") is made and entered into this 1/st/ day of October, 1996, by and among MarkWest Michigan, Inc. (herein referred to as "MarkWest") and Michigan Energy Company, L.L.C. (herein referred to as "MEC"). RECITALS: A. The parties entered into that certain Participation, Ownership and Operating Agreement for West Shore Processing Company LLC, ("West Shore") dated May 2, 1996 (the "Participation Agreement"). B. Among the activities to be undertaken by MarkWest under the Participation Agreement and as a portion of MarkWest's initial contributions to West Shore, MarkWest was to provide an extension of the pipeline owned by Basin Pipeline, L.L.C. ("Basin") from its current configuration to a delivery point at the gathering lateral of the existing Slocum No. 1-21 well, which well is owned by Michigan Production Company, L.L.C. ("MPC"). C. The parties have agreed among themselves and with MPC that the extension of the Basin Pipeline to the Slocum No. l-21 well will be initially owned and constructed by MPC. D. MPC will acquire the funding necessary to install that pipeline extension from the proceeds of a loan entered into between West Shore and MPC pursuant to a Loan Agreement of even date herewith. E. MEC and MarkWest have agreed that MarkWest's obligation to pay for that pipeline extension under the terms of the Participation Agreement shall be fully satisfied and credited to MarkWest by having MarkWest provide the funds to West Shore necessary for West Shore to loan those amounts to MPC for MPC's construction of the pipeline extension; all in accordance with the terms hereof and in accordance with the terms of the Loan Agreement, the Construction and Operating Agreement between West Shore and MPC, and the Option and Agreement to Purchase and Sell Pipeline Agreement between West Shore and MPC, all of even date herewith. Now, therefore, in consideration of the mutual covenants and agreements, the parties agree as follows: 1. Section 2.1. MarkWest's Initial Contributions and Obligations, ------------------------------------------------- shall be amended by deleting subparagraph (a)(i) thereof in its entirety and replacing it with the following revised subparagraph (a)(i): "(i) Provide the funding to the Company, at times and in amounts, as necessary to permit the Company to make advances to Michigan Production Company, L.L.C. ("MPC") under that certain Non-Recourse Loan Agreement between the Company and MPC dated October 1, 1996 (the "Loan"); which loan advances shall be used by MPC to construct and install a nominal 10-inch diameter pipeline extension of the Basin pipeline (subject to acquisition by the Company, or its designee, under an Option and Agreement to Purchase and Sell Pipeline dated October 1, 1996) from the existing terminus of the Basin pipeline located in Section 32, Township 19 North, Range 17 West, Victory Township, Mason County, Michigan, along the right of way of Consumers Power to the delivery point at the gathering lateral of the existing Slocum No. 1-21 well (which well is located in Section 21, Township 15 North, Range 16 West, Elbridge Township, Oceana County, Michigan), and which delivery point is anticipated to be located in the northwest quarter of Section 30, Township 15 North, Range 16 West, Elbridge Township, Oceana County, Michigan, (as approximately depicted on the map attached hereto as Exhibit N), including all matters related to the acquisition of requisite permits (for which permits MarkWest shall diligently apply for and use its reasonable efforts to acquire in the name of MPC), installation, construction, and acquisition of necessary easements and rights of way ("Basin Extension"). MarkWest will perform the installation, construction and operation of the Basin Extension in a good and workmanlike manner consistent with prudent industry standards in its capacity as Operator of the Company and pursuant to a Pipeline Construction and Operating Agreement between the Company and MPC dated October 1, 1996 (the "Construction and Operating Agreement"). Should the amount required for the Company to advance to MPC under the Loan to enable MPC to complete that extension exceed $10,000,000, then MEC shall be obligated to provide the Company 80% of all funding to advance amounts to MPC, under the Loan, in excess of $10,000,000, and MarkWest shall be obligated to provide the Company 20% of all such excess amounts to be advanced, under the Loan, to MPC; which excess amounts shall not be utilized in calculating Ownership Interests hereunder. MarkWest will, under the Construction and Operating Agreement commence activities related to this installation promptly following the Effective Date. MarkWest will, as Operator of the Company and pursuant to the Construction and Operating Agreement, undertake planning aimed at completing the Basin Extension by December 31, 1996, and, in any event, will use its reasonable efforts to complete the Basin Extension, subject to conditions not within MarkWest's reasonable control, by March 31, 1997. Additionally, MarkWest will reimburse MEC for costs related to the Basin Extension and which were incurred before the Effective Date to the extent those costs are specified on Exhibit D, attached hereto." 2. Section 2.2. MEC's Initial Contributions and Obligations, shall be --------------------------------------------- amended by deleting subparagraph (d)(i) in its entirety and replacing it with the following revised subparagraph (d)(i): "(d)(i) Should the amount required to be loaned to MPC for MPC to complete the Basin Extension exceed $10,000,000.00, then MEC shall be obligated to provide the Company with 80% of all such excess amounts required to be advanced by the Company to MPC under the Loan." 3. Section 3.3. Conveyance of Ownership Interests, shall be amended by ----------------------------------- deleting paragraph (b) thereof in its entirety and replacing it with the following revised paragraph (b): "(b) The Ownership Interests shall be determined at the end of each calendar month based upon the cumulative contributions made by MarkWest under Section 2.1 (and as paid under Section 3.1 (b), if applicable) as of the end of that month and the deemed contribution of MEC under Section 2.2, above. Contributions by MarkWest shall be based upon actual expenditures made on behalf of the Company and actual funds provided to the Company for advances to MPC. The calculation of Ownership Interests at the end of a calendar month shall be deemed effective for all purposes under this Agreement as of the last day of that month for which the determination was made." 4. Section 3.5. Tax Depreciation, shall be amended by deleting it in its ------------------ entirety and replacing it with the following revised Section 3.5, Tax --- Depreciation: - ------------- "3.5 Tax Depreciation. Tax depreciation related to the Company will be ----------------- allocated in accordance with Exhibit E; provided, in all events, MarkWest will be allocated 100% of depreciation attributable to the capital contributions made by MarkWest under Section 2.1. and MEC will be allocated 100% of depreciation attributable to the capital contributions made by MEC under Section 2.2. Allocation of depreciation attributable to the Basin Extension shall be shared in proportion to the amounts provided to the Company by MarkWest or MEC for advances to MPC to construct the Basin Extension." 5. Article III shall be amended by adding the following new Sections 3.7, Acquisition of Basin Extension and 3.8, Allocation of Interest Income: - ------------------------------- ----------------------------- "Section 3.7. Acquisition of Basin Extension. The Company and MPC have ------------------------------ entered into that certain Option and Agreement to Purchase and Sell Pipeline dated October 1, 1996, ("Option Agreement") under which the Company, or its designee, will have the right to acquire the Basin Extension. The parties agree to diligently pursue obtaining all information required to file an application with the Michigan Public Service Commission ("MPSC") and thereafter promptly file for and diligently pursue an application with the MPSC for certifications and authorizations under 1929 P.A. (Act 9), M.C.L. Sec. 483.101 et seq.; M.S.A. Sec. 22.1311 et seq., ("Act 9 Authorization") authorizing the Company, or its designee, to acquire, own and operate the Basin Extension. The parties agree to cause the Company to exercise its option to acquire, or have its designee acquire the Basin Extension upon the earlier of (i) the date upon which that Act 9 Authorization is received by the Company or its designee, or (ii) such other date upon which the parties agree. The acquisition of the Basin Extension shall not modify the then effective Ownership Interests of the parties. MarkWest, as part of its contributions under Section 2.1 (a), shall provide funding to the Company for any sales, use, transfer, real property transfer, recording, or other similar taxes and fees ("Transfer Taxes") which arise out of or in connection with the transactions effected pursuant to the Option Agreement, and which amounts will be included in calculating MarkWest's Ownership Interest. Section 3.8. Allocation of Interest Income. Any income received by West ------------------------------ Shore which is related to the capitalization of interest associated with the construction of the Basin Extension shall be allocated to the parties in the same proportion in which depreciation on the Basin Extension is allocated." 6. Except for the foregoing, all other terms and provisions of the Participation Agreement shall remain in full force and effect. In witness whereof, the parties have executed this Amendment the date first above written. MARKWEST MICHIGAN, INC. /S/ ARTHUR J. DENNEY MICHIGAN ENERGY COMPANY, L.L.C. /S/ MICHAEL V. RONCA, MANAGER AND /S/ ROBERT L. ZORICH, MANAGER EX-10.34 7 OPTION AND AGREEMENT TO PURCHASE AND SELL PIPELINE OPTION AND AGREEMENT TO PURCHASE AND SELL PIPELINE This Option and Agreement to Purchase and Sell Pipeline (Agreement) is made and entered into this 1st day of October, 1996, by and between Michigan Production Company, L.L.C. (MPC) and West Shore Processing Company, LLC (West Shore). RECITALS: A. MPC intends to install, construct and operate, or cause to be installed, constructed and operated, a natural gas pipeline in Mason and Oceana Counties, Michigan. B. West Shore and MPC each desire to grant each other an option to require the purchase by West Shore and the sale by MPC of that pipeline subject to the terms and conditions of this Agreement. Now, therefore, in consideration of the mutual covenants and agreements contained herein, the parties agree as follows: ARTICLE I OPTION ------ 1.1 Property Subject to Option. The property to which this Agreement -------------------------- and the options granted hereunder apply shall be that certain nominal 10-inch diameter pipeline extension of the current Basin Pipeline, L.L.C. ("Basin") pipeline from its present terminus in Section 32, Township 19 North, Range 17 West, Victory Township, Mason County, Michigan, along the right of way of Consumers Power to the delivery point at the gathering lateral of the existing Slocum No. 1-21 well (which well is located in Section 21, Township 15 North, Range 16 West, Elbridge Township, Oceana County, Michigan), and which delivery point is anticipated to be located in the northwest quarter of Section 30, Township 15 North, Range 16 West, Elbridge Township, Oceana County, Michigan, to be constructed and installed by or for MPC; including all pipeline, rights-of- way, easements, valves, fittings, and other equipment, fixtures or facilities installed in connection therewith, and including all facilities and assets acquired and installed by MPC or for MPC, (collectively the foregoing is referred to herein as the "Pipeline"); together with the other properties and rights described in Section 3.1, below. 1.2 MPC's Option. West Shore hereby grants MPC the option, during ------------- MPC's Option Period, defined below, to require West Shore, or West Shore's designee, to purchase the Pipeline on the terms and conditions stated in this Agreement. "MPC's Option Period" shall commence upon the earlier of (i) January 1, 1999, or (ii) the date upon which West Shore, or its designee, has received authorization pursuant to 1929 P.A. (Act 9), M.C.L. Sec. 483.101 et seq.; M.S.A. Sec. 22.1311 et seq., ("Act 9 Authorization") from the Michigan Public Service Commission (MPSC), in form and content reasonably acceptable to West Shore, or its designee, and which authorization has been accepted by West Shore, or its designee, to acquire, own and operate the Pipeline, and shall continue thereafter for a period ending 10 years following the date hereof. 1.3 West Shore's Option. MPC hereby grants West Shore the option, during ------------------- West Shore's Option Period, defined below, to require MPC to sell the Pipeline to West Shore, or to West Shore's designee, on the terms and conditions stated in this Agreement. "West Shore's Option Period" shall commence on the date hereof and shall continue in force until the thirty (30) days after the date upon which West Shore, or its designee, has received final MPSC Act 9 Authorization, in form and content reasonably acceptable to West Shore, or its designee, and which authorization has been accepted by West Shore, or its designee, to own and operate the Pipeline; provided, in any event, West Shore's Option Period shall expire upon ten (10) years following the date hereof. 1.4 Exclusivity. During West Shore's Option Period, MPC agrees and ------------ covenants with West Shore that, subject to the rights of Bank of America Illinois (which rights are subject to that certain Subordination Agreement dated May 2, 1996 and to that certain Subordination Agreement and Financing Statement dated October 1, 1996, herein collectively the "Subordination Agreements"), MPC shall not sell, dispose of, transfer or encumber, or agree to sell, dispose of, transfer or encumber any portion or all of the Pipeline to any person, firm or entity other than to West Shore, or its designee, in exercise of West Shore's Option. Upon the execution hereof, the parties shall execute a recording memorandum to give notice of West Shore's Option to acquire the Pipeline. ARTICLE II EXERCISE OF OPTION ------------------ 2.1 Method of Exercise. The option of West Shore or MPC granted hereunder ------------------ shall be exercised, if at all, by the exercising party providing written notice thereof to the other party prior to the end of the exercising party's Option Period. Upon providing notice of the exercise of an option, West Shore and MPC shall proceed to consummate the purchase and sale of the Pipeline in accordance with the terms and conditions of this Agreement. ARTICLE III PURCHASE AND SALE ----------------- 3.1 Purchase and Sale. Subject to the terms and conditions of this ------------------ Agreement, and upon the timely exercise of an option granted hereunder, MPC shall sell and West Shore shall purchase and pay for, at the Closing, an undivided 100% of the right, title and interest in and to: a. The Pipeline; b. All files, books, records, papers, instruments and logs, including all of MPC's counterparts of all conveyed contracts, all documents of title relating to the Pipeline, blueprints, specifications, plats, maps, surveys, accounting and financial records and sales and property tax records relating to the Pipeline (Records); c. To the extent transferable, all licenses, certificates, approvals, registrations, variances, exemptions, rights of way, privileges, immunities, grants, permits, franchises, consents, authorizations or other rights of every kind and character held by MPC and exclusively and directly related to the ownership or operation of the Pipeline; and, d. All other or additional privileges, rights, interests, properties, contracts, agreements of MPC of every kind and description and located upon the Pipeline, in each case that are used or intended for use in connection with the continued conduct of the Pipeline. 3.2 Assumption of Obligations and Liabilities: Indemnity. Contemporaneously ------------------------------------------------------ with the purchase of the Pipeline and related assets pursuant to the exercise of the Option as set forth in Section 3.1, above, West Shore, or its designee, shall assume all of the obligations and liabilities of MPC related to the Pipeline and such related assets arising from or associated with its construction and operation by executing an Assignment and Assumption Agreement in form and substance substantially as set forth in Exhibit C, hereto. In addition, West Shore shall indemnify and hold harmless MPC, its affiliates, officers, directors, employees, agents and representatives, from and against any and all claims, losses, damages and costs arising from the construction or operation of the Pipeline, whether arising before the sale transaction or thereafter, except to the extent arising from the gross negligence or willful misconduct of MPC. ARTICLE IV PURCHASE PRICE -------------- 4.1 Purchase Price. The Purchase Price shall be equal to the total amount of -------------- all outstanding funds advanced to MPC, plus accrued but unpaid interest thereon, under the terms of that certain Loan Agreement between MPC and West Shore which remains outstanding as of the date upon which an option is exercised hereunder. 4.2 Payment of Purchase. The Purchase Price shall be paid by West Shore to -------------------- MPC in the form of obtaining and delivering to MPC the promissory note executed by MPC under its Loan Agreement with West Shore, marked "Cancelled". The discharge and cancellation of that promissory note shall constitute full payment of the Purchase Price. 4.3 Tax Matters. West Shore shall pay all sales, use, transfer, real ----------- property transfer, recording and other similar taxes and fees ("Transfer Taxes") arising out of or in connection with the transactions effected pursuant to this Agreement. MPC and West Shore shall cooperate in the preparation and filing of all necessary documentation and returns with respect to Transfer Taxes and West Shore shall prepare and file all such returns. ARTICLE V REPRESENTATIONS OF MPC ---------------------- MPC represents and warrants to West Shore that as of the date hereof: 5.1 Existence. MPC is a limited liability company duly organized, validly ---------- existing and in good standing under the laws of the State of Michigan and is qualified and in good standing to conduct business in the State of Michigan. 5.2 Power. MPC has the requisite power to enter into and perform this ----- Agreement and the transactions contemplated hereby. 5.3 Litigation. There is no litigation, pending or, to MPC's knowledge, ----------- threatened against MPC, which would MATERIALLY affect the Pipeline after Closing or which would seek to prevent the consummation of the transactions contemplated hereunder. 5.4 Title to Property. MPC will warrant title to the Pipeline by, through ------------------ and under MPC, but not otherwise. ARTICLE VI REPRESENTATIONS OF WEST SHORE ----------------------------- West Shore represents and warrants to MPC that as of the date hereof: 6.1 Existence. West Shore is a limited liability company duly organized, ---------- validly existing and in good standing under the laws of the State of Michigan. 6.2 Power. West Shore has the power to enter into and perform this Agreement ----- and the transactions contemplated hereby. 6.3 Litigation. There is no litigation, pending or to the knowledge of West ----------- Shore, threatened against West Shore or its affiliates, which would seek to prevent the consummation of the transactions contemplated hereunder. ARTICLE VII COVENANTS AND PRE-CLOSING OBLIGATIONS ------------------------------------- 7.1 Disclaimer of Warranties. EXCEPT AS EXPRESSLY CONTAINED IN THIS -------------------------- AGREEMENT, IT IS THE EXPLICIT INTENT OF EACH PARTY HERETO THAT MPC IS MAKING NO REPRESENTATION OR WARRANTY WHATSOEVER, EXPRESS OR IMPLIED, BEYOND THOSE EXPRESSLY GIVEN IN THIS AGREEMENT (INCLUDING THOSE RELATED TO ENVIRONMENTAL CONDITIONS), AND IT IS UNDERSTOOD THAT WITH RESPECT TO EQUIPMENT AND PERSONAL PROPERTY COMPRISING PORTIONS OF THE PIPELINE, WEST SHORE SHALL TAKE THOSE PROPERTIES "AS IS" AND "WHERE IS," WITH ALL FAULTS. WITHOUT LIMITING THE GENERALITY OF THE IMMEDIATELY FOREGOING, MPC HEREBY EXPRESSLY DISCLAIMS AND NEGATES ANY REPRESENTATION OR WARRANTY, EXPRESSED OR IMPLIED, AT COMMON LAW, BY STATUTE OR OTHERWISE, RELATING TO THE CONDITION OF THE PIPELINE (INCLUDING WITHOUT LIMITATION ANY IMPLIED OR EXPRESS WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, OR OF CONFORMITY TO MODELS OR SAMPLES OF MATERIALS). THE PARTIES AGREE THIS DISCLAIMER CONTSTITUTES A CONSPICUOUS DISCLAIMER. 7.9 Construction and Operations. From the date of this Agreement until --------------------------- Closing, MPC shall cause the Pipeline to be constructed and operated by West Shore under the terms of and pursuant to that certain Pipeline Construction and Operating Agreement between the Company and MPC dated October 1, 1996 ("Construction and Operating Agreement"), and MPC will not take any action to terminate or cancel the Construction and Operating Agreement except in accordance with the terms thereof. 7.3 MPSC Authorization. Upon the execution hereof, West Shore, or its ------------------- designee, shall, at its expense, diligently pursue obtaining all information required to file an application with the MPSC and thereafter promptly file for and diligently pursue an application with the MPSC for Act 9 Authorization authorizing West Shore, or its designee, to acquire, own and operate the Pipeline. 7.4 Other Access. Until the Closing, MPC will give West Shore reasonable ------------- access to the Pipeline and reasonable access during MPC's normal business hours to all other information related to the Pipeline in MPC's custody at the present location of those documents. ARTICLE VIII MPC'S CONDITIONS OF CLOSING --------------------------- Upon the exercise of the option granted to either party hereunder, MPC's obligation to consummate the transactions provided for herein is subject to the satisfaction or waiver by MPC of the following conditions: 8.1 Representations. The representations and warranties of West Shore --------------- contained herein shall be true and correct in all material respects on the date of Closing, as defined below, as though made on and as of that date. 8.2 Pending Matters. No suit, action or other proceeding by a third ---------------- party or a governmental authority shall be pending or threatened which seeks substantial damages from MPC in connection with, or seeks to restrain, enjoin or otherwise prohibit the consummation of the transactions contemplated by this Agreement. ARTICLE IX WEST SHORE'S CONDITIONS OF CLOSING ---------------------------------- Upon the exercise of the option granted to either party hereunder, West Shore's obligation to consummate the transactions provided for herein is subject to the satisfaction or waiver by West Shore of the following conditions: 9.1 Representations. The representations and warranties of MPC --------------- contained herein shall be true and correct in all material respects on the date of Closing, defined below, as though made on and as of that date. 9.2 Pending Matters. No suit, action, or other proceeding by a third ---------------- party or a governmental authority shall be pending or threatened which seeks substantial damages from West Shore in connection with, or seeks to restrain, enjoin or otherwise prohibit, the consummation of the transactions contemplated by this Agreement. ARTICLE X CLOSING ------- 10.1 Time and Place of Closing. If the conditions to Closing have been ------------------------- satisfied or waived, the consummation of the transactions contemplated hereby (the "Closing") shall be held within 30 days following the date upon which the party exercising its option provides notice of that exercise to the other party, at the offices of West Shore, Englewood, Colorado, or at such other mutually agreeable location. 10.2 Closing Obligations. At Closing: ------------------- (a) MPC shall execute, acknowledge and deliver a General Conveyance, in the form attached hereto as Exhibit A, and the Assignment of Rights of Way, in the form attached hereto as Exhibit B, all of which together will convey all of MPC's rights in and to the Pipeline, together with all of the Records, to West Shore, with special warranty of title. (b) West Shore shall make payment of the Purchase Price to MPC by providing the promissory note marked "Cancelled" in accordance with the terms of Section 4.2, above, or otherwise discharging and canceling the obligations owed by MPC under the Loan Agreement. (c) West Shore, or its designee, and MPC will execute and deliver the Assignment and Assumption Agreement in the form attached hereto as Exhibit C; and, West Shore and MPC shall execute such other instruments and take such other action as may be necessary to carry out their respective obligations under this Agreement. ARTICLE XI MISCELLANEOUS ------------- 11.1 Governing Law. This Agreement and all instruments executed in ------------- accordance with it shall be governed by and interpreted in accordance with the laws of the State of Michigan without regard to choice of law principles. 11.2 Waiver. No waiver of any of the provisions of this Agreement shall be ------ deemed or shall constitute a waiver of any other provisions hereof (whether or not similar), nor shall such waiver constitute a continuing waiver unless otherwise expressly provided. 11.3 Assignment. No party hereto shall assign this Agreement or any of its ---------- rights or obligations hereunder without the prior written consent of the other parties, and any assignment made without such consent shall be void; provided, --------- that each of the parties hereby consents to the pledge and assignment for security purposes hereof and the granting of a security interest in its rights hereunder to Bank of America Illinois subject to the Subordination Agreements. Except as otherwise provided herein, this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective permitted successors and assigns. 11.4 Notices. Any notice provided or permitted to be given under this ------- Agreement shall be in writing, and may be served by personal delivery or by depositing same in the mail, addressed to the party to be notified, postage prepaid, and registered or certified with a return receipt requested. Notice deposited in the mail, as described, shall be deemed to have been given and received if and when actually received by the addressee. For purposes of notice, the addresses of the parties shall be as follows: MPC's mailing address: Michigan Production Company, L.L.C. c/o Tenneco Ventures Corporation 1100 Louisiana Street, Suite 1543 Houston, Texas 77002 Ph. (713) 757-3698 Fax (713) 757-8314 Attn: Rick Lester West Shore's mailing address: West Shore Processing Company, LLC 5613 DTC Parkway, Suite 400 Englewood, Colorado 80111 Ph. (303) 290-8700 Fax. (303) 290-8769 Attn: Randy S. Nickerson Any party shall have the right, upon giving ten (10) days' prior notice to the other in the manner hereinabove provided, to change its address for purposes of notice. 11.5 Expenses. Except as otherwise provided herein, each party shall be -------- solely responsible for all expenses incurred by it in connection with this transaction (including, without limitation, fees and expenses of its own counsel and accountants). 11.6 Severability. If any term or other provision of this Agreement is ------------ invalid, illegal or incapable of being enforced under any rule or law, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in a materially adverse manner with respect to any party. 11.7 Counterparts. This Agreement may be executed in one or more ------------ counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first set forth above. West Shore Processing Company, LLC By: MarkWest Michigan, Inc., its manager /S/ ARTHUR J. DENNEY, VICE PRESIDENT Michigan Production Company, L.L.C. /S/ Michael V. Ronca, Manager /S/ Robert L. Zorich, Manager EXHIBIT A GENERAL CONVEYANCE KNOW ALL MEN BY THESE PRESENTS: THAT, the undersigned MICHIGAN PRODUCTION COMPANY, L.L.C., (herein "Assignor") for and in consideration of Ten Dollars ($10.00) and other good and valuable consideration, the receipt of which is hereby acknowledged, does hereby sell, assign, transfer and convey unto WEST SHORE PROCESSING COMPANY, LLC, (herein "Assignee"), with an address of 5613 DTC Parkway, Suite 400, Englewood, Colorado 80111, all of Assignor's right, title and interest in and to the following properties, assets, contracts and other rights, both real and personal: a. that certain nominal 10-inch diameter pipeline extension of the Basin pipeline from its present terminus in Section 32, Township 19 North, Range 17 West, Victory Township, Mason County, Michigan, along the right of way of Consumers Power to the delivery point at the gathering lateral of the existing Slocum No. 1-21 well (which well is located in Section 21, Township 15 North, Range 16 West, Elbridge Township, Oceana County, Michigan), and which delivery point is anticipated to be located in the northwest quarter of Section 30, Township 15 North, Range 16 West, Elbridge Township, Oceana County, Michigan; including all pipeline, rights-of-way, easements, valves, fittings, and other equipment, fixtures or facilities installed in connection therewith (collectively the foregoing is referred to herein as the "Pipeline"). b. All files, books, records, papers, instruments and logs, including all of the Assignor's counterparts of all conveyed contracts, all documents of title relating to the Pipeline, blueprints, specifications, plats, maps, surveys, accounting and financial records and sales and property tax records; except that Assignor may retain a copy of any accounting, financial or tax records for its own use; c. To the extent transferable, all licenses, certificates, approvals, registrations, variances, exemptions, rights of way, privileges, immunities, grants, permits, franchises, consents, authorizations or other rights of every kind and character held by Assignor and directly related to the ownership or operation of the Pipeline; and, d. All other or additional privileges, rights, interests properties, contracts, agreements and Pipeline of the Assignor of every kind and description and located upon the Pipeline that are used or intended for use in connection with the continued conduct of the Pipeline as presently being conducted. Exhibit A, Page 1 This Assignment is made expressly subject to and in accordance with the terms and conditions of that certain Option and Agreement to Purchase and Sell Pipeline between Assignor and Assignee, dated ____, 1996, (the "Agreement") and all covenants, indemnities and obligations of the parties under the Agreement shall survive the execution and delivery of this Assignment strictly in accordance, and only in accordance with the terms of the Agreement. ASSIGNOR IS MAKING NO REPRESENTATION OR WARRANTY WHATSOEVER, EXPRESS OR IMPLIED, BEYOND THOSE EXPRESSLY GIVEN HEREIN, AND IT IS UNDERSTOOD THAT WITH RESPECT TO EQUIPMENT AND PERSONAL PROPERTY COMPRISING PORTIONS OF THE PIPELINE, ASSIGNEE SHALL TAKE THOSE "AS IS" AND "WHERE IS," WITH ALL FAULTS. WITHOUT LIMITING THE GENERALITY OF THE IMMEDIATELY FOREGOING, ASSIGNOR HEREBY EXPRESSLY DISCLAIMS AND NEGATES ANY REPRESENTATION OR WARRANTY, EXPRESSED OR IMPLIED, AT COMMON LAW, BY STATUTE OR OTHERWISE, RELATING TO THE CONDITION OF THE PIPELINE (INCLUDING WITHOUT LIMITATION ANY IMPLIED OR EXPRESS WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, OR OF CONFORMITY TO MODELS OR SAMPLES OF MATERIALS). All of the provisions of this Assignment shall be available to and binding upon the respective successors and assigns of Assignor and Assignee herein. Assignor hereby warrants title to the Pipeline against all lawful claims of persons claiming by, through, or under Assignor, but not otherwise. EXECUTED this ____ day of ____, 199_, but effective for all purposes as of ______, 199__, at 7:00 a.m., Central Time. ASSIGNOR: MICHIGAN PRODUCTION COMPANY, L.L.C. By: Michael V. Ronca, Manager By: Robert L. Zorich, Manager ASSIGNEE: WEST SHORE PROCESSING COMPANY, LLC By: MarkWest Michigan, LLC, its manager By: MarkWest Hydrocarbon Partners, Ltd., its manager By: MWHC Holding, Inc., its general manager By: Name: Title: Exhibit A Page 2 THE STATE OF ________) COUNTY OF ___________) The foregoing instrument was acknowledged before me this ____ day of ________, 199_, by ___________________, the _____________ of MICHIGAN PRODUCTION COMPANY, L.L.C. Witness my Hand and Official Seal. My Commission expires: Notary Public THE STATE OF __________) COUNTY OF _____________) The foregoing instrument was acknowledged before me this _____ day of __________,199_, by ______________________, the ________________________ of WEST SHORE PROCESSING COMPANY, LLC. Witness my Hand and Official Seal. My Commission expires: Notary Public Exhibit A, Page 3 EXHIBIT B ASSIGNMENT OF RIGHTS OF WAY, EASEMENTS AND PERMITS THE STATE OF MICHIGAN KNOW ALL MEN BY THESE PRESENTS: COUNTIES OF THAT, MICHIGAN PRODUCTION COMPANY, L.L.C., a limited liability company, whose address is ________, Houston, Texas 77002, ("Assignor"), for and in consideration of the sum of Ten Dollars ($10.00) and other valuable consideration to it paid by WEST SHORE PROCESSING COMPANY, LLC, a Michigan limited liability company, whose address is 5613 DTC Parkway, Suite 400, Englewood, Colorado 80111, ("Assignee"), the receipt and sufficiency of which are hereby acknowledged, has transferred, assigned and conveyed and by these presents does transfer, assign, grant and convey unto Assignee, its successors and assigns, all of its right, title and interest in and to those certain rights of way, easement, and permits described in Attachment 1 (the "Assigned Properties"). This Assignment is made subject to and in accordance with that certain Option and Agreement to Purchase and Sell Pipeline between Assignor and Assignee dated ______, 1996. Assignor makes this Assignment with special warranty covenants and will defend its title to the Assigned Properties against all claims arising by, through or under Assignor, but not otherwise. Assignee agrees to indemnify and hold Assignor harmless from and against all claims, liabilities, costs, expenses, and causes of action arising out of or based upon or related to Assignee's ownership, use or abandonment of the right, title and interest conveyed by Assignor to Assignee hereunder. To facilitate filing or recording this Assignment, (i) the counterpart to be recorded in a given county may contain only that part of the exhibits that describe the portion of the Assigned Properties located in that county, and (ii) each counterpart, if any, filed with a federal, state, county or local government agency or office may contain only that portion of the exhibits that describe the Assigned Property under the jurisdiction of that agency or office. Assignor and Assignee have each retained a counterpart of this Assignment with complete exhibits. Exhibit B, Page 1 This Assignment, and all of its terms and conditions, are binding on Assignor, Assignee, and their respective successors and assigns. All covenants set forth in this Assignment run with the land. Executed this ________ day of ____________________, 199__, but effective as of _____________. ASSIGNOR MICHIGAN PRODUCTION COMPANY, L.L.C. By: MICHAEL V. RONCA, MANAGER and By: Robert L. Zorich, Manager ASSIGNEE WEST SHORE PROCESSING COMPANY, By: MarkWest Michigan, LLC, its manager By: MarkWest Hydrocarbon Partners, Ltd., its manager By: MWHC Holding, Inc., its general partner By: Exhibit B, Page 2 STATE OF COLORADO ) )ss. COUNTY OF _____________) The foregoing instrument was acknowledged, subscribed and sworn to before me this _____ day of ________, 1996, by _______, and _____________ Managers of MICHIGAN PRODUCTION COMPANY, L.L.C. Witness my Hand and Official Seal. My Commission expires: Notary Public STATE OF COLORADO ) )ss. COUNTY OF ________________) The foregoing instrument was acknowledged, subscribed and sworn to before me this _________ day of _________, 1996, by _____________, _________________ of WEST SHORE PROCESSING COMPANY, LLC. Witness my Hand and Official Seal. My Commission expires: Notary Public Exhibit B, Page 3 EXHIBIT C ASSIGNMENT AND ASSUMPTION AGREEMENT KNOW ALL MEN BY THESE PRESENTS: THIS ASSIGNMENT AND ASSUMPTION AGREEMENT (referred to hereinafter as "Assignment"), effective as of 7:00 A.M., Mountain time, as of the date hereof, (referred to as "Effective Time"), from MICHIGAN PRODUCTION COMPANY, L.L.C., (REFERRED to hereinafter as "Assignor"), to WEST SHORE PROCESSING COMPANY, LLC, A MICHIGAN LIMITED LIABILITY COMPANY, 5613 DTC Parkway, Suite 400, Englewood, Colorado 80111, (referred to hereinafter as "Assignee"). WITNESSETH: ---------- FOR Ten Dollars and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Assignor hereby GRANTS, SELLS, TRANSFERS, BARGAINS, CONVEYS and ASSIGNS to Assignee, all of Assignor's right, title and interest in and to the contracts, agreements and other instruments ("Contracts") pertaining to or related to the installation, Ownership, construction and operation of that certain nominal 10-inch diameter pipeline extension of the Basin pipeline from its present terminus in Section 32, Township 19 North, Range 17 West, Victory Township, Mason County, Michigan, along the right of way of Consumers Power to the delivery point at the gathering lateral of the existing Slocum No. l-21 well (which well is located in Section 21, Township 15 North, Range 16 West, Elbridge Township, Oceana County, Michigan), and which delivery point is anticipated to be located in the northwest quarter of Section 30. Township 15 North, Range 16 West, Elbridge Township, Oceana County, Michigan (the "Pipeline"). TO HAVE AND TO HOLD the Contracts forever subject to the following terms and conditions: 1. Observance of Laws. This Assignment is subject to all applicable laws, ------------------ ordinances, rules, and regulations affecting the Contracts. 2. Successors and Assigns. The terms, covenants, and conditions hereof bind ------------------------ and inure to the benefit of the parties hereto and their respective successors and assigns. 3. Authoritv. Assignor represents that (i) it has the full authority to ----------- execute this Assignment, (ii) this Assignment is enforceable in accordance with its terms. 4. Option and Agreement to Purchase and Sell Pipeline. This Assignment is ---------------------------------------------------- made expressly subject to and in accordance with the terms and conditions of that certain Option and Agreement to Purchase and Sell Pipeline between Assignor and Assignee, dated ________, 1996 (the "Agreement"), and all representations, warranties, covenants, indemnities and obligations of the parties under the Agreement shall survive the execution and delivery of this Assignment in accordance with the terms of the Agreement. 5. Further Assurances. The parties agree to execute any and all other ------------------ instruments reasonably required to effectuate and consummate the transactions between them as contemplated by this Assignment and by the Agreement. 6. Assumption of Obligations and Indemnification. Assignee hereby assumes --------------------------------------------- all of the liabilities and all obligations, debts, costs, expenses, liens, encumbrances, demands, claims, actions, losses and damages of any kind whatsoever arising under or affecting the Contracts or related to the ownership, construction and operation of the Pipeline, whether accruing before or after the date hereof. Assignee hereby agrees to indemnify and hold Assignor harmless from and against all claims, liabilities, costs, expenses, and causes of action arising out of, related to or affecting the Contracts or related to the ownership, construction and operation of the Pipeline, whether accruing before or after the date hereof. EXECUTED this ________ day of __________, 1996. MICHIGAN PRODUCTION COMPANY, L.L.C. By: MICHAEL V. RONCA, MANAGER and By: ROBERT L. ZORICH, MANAGER WEST SHORE PROCESSING COMPANY, LLC By: MarkWest Michigan, LLC, its manager By: MarkWest Hydrocarbon Partners, Ltd., its manager By: MWHC Holding, Inc., its general partner By: ____________________________ Exhibit C, Page 2 THE STATE OF _________) COUNTY OF ____________) The foregoing instrument was acknowledged before me this _______ day of ________, 1996,BY ____________________, the ___________Manager of MICHIGAN ENERGY COMPANY, L.L.C. Witness my Hand and Official Seal. My Commission expires: _________________ Notary Public THE STATE OF _________) COUNTY OF ____________) The foregoing instrument was acknowledged before me this _________ day of _______, 1996, by _________________, the ____________Manager of MARKWEST MICHIGAN, LLC. Witness my Hand and Official Seal. My Commission expires: Notary Public Exhibit C, Page 3 EX-10.35 8 MORTGAGE, ASSIGNMENT, SECURITY AGREEMENT AND FIN. MORTGAGE, ASSIGNMENT, SECURITY AGREEMENT AND FINANCING STATEMENT FROM MICHIGAN PRODUCTION COMPANY, L.L.C., MORTGAGOR TO WEST SHORE PROCESSING COMPANY, LLC, LENDER DATED AS OF OCTOBER 1, 1996 A CARBON, PHOTOGRAHIC, FACSIMLE, OR OTIIER REPRODUCTION OF THIS INSTRUMENT IS SUFFICIENT AS A FINANCING STATEMENT. THIS INSTRUMENT CONTAINS AFTER-ACQUIRED PROPERTY PROVISIONS, SECURES PAYMENT OF FUTURE ADVANCES, AND COVERS PROCEEDS OF COLLATERAL. THIS INSTRUMENT SHALL BE EFFECTIVE AS A FINANCING STATEMENT FILED AS A FIXTIJRE FILING WITH RESPECT TO ALL FIXTURES INCLUDED IN TIIE PROPERTY, AND IS TO BE FILED FOR RECORD, AMONG OTHER PLACES, IN THE REAL ESTATE OR COMPARABLE RECORDS OF THE COUNTIES REFERENCED IN EXHIBIT A. MORTGAGOR HAS AN INTEREST OF RECORD IN THE REAL ESTATE CONCERNED, WHICH 1NTEREST IS DESCRIBED IN SECTION 1.1. A POWER OF SALE HAS BEEN GRANTED IN THIS MORTGAGE, A POWER OF SALE MAY ALLOW - ---------------------------------------------------------------------------- LENDER (AS HERINAFTER DEFINED) TO TAKE THE MORTGAGED PROPERTIES AND SELL THEM - ----------------------------------------------------------------------------- WITHOUT GOING TO COURT IN A FORECLOSURE ACTION UPON DEFAULT BY MORTGAGOR (AS - ----------------------------------------------------------------------------- HERINAFTER DEFINED) UNDER THIS MORTGAGE. - ---------------------------------------- WARNING: THIS MORTGAGE CONTAINS A POWER OF SALE AND UPON DEFAULT MAY BE - ------------------------------------------------------------------------ FORECLOSED BY ADVERTISEMENT. IN FORECLOSURE BY ADVERTISEMENT AND THE SALE OF - ----------------------------------------------------------------------------- THE PROPERTY IN CONNECTION THEREWITH, NO HEARING IS REQUIRED AND THE ONLY NOTICE - -------------------------------------------------------------------------------- REQUIRED IS THE PUBLICATION OF NOTICE IN A LOCAL NEWSPAPER AND THE POSTING OF A - ------------------------------------------------------------------------------- COPY OF THE NOTICE ON THE PROPERTY. - ----------------------------------- WHEN RECORDED OR FILED RETURN TO: Barry W. Spector Suite 1660/Prudential Plaza 1050 Seventeenth Street Denver, Colorado 80265 THIS MORTGAGE, ASSIGNMENT, SECURITY AGREEMENT AND FINANCING STATEMENT (this "Mortgage"), dated as of October 1, 1996, is from MICHIGAN PRODUCTION COMPANY, L.L.C. ("Mortgagor"), to WEST SHORE PROCESSING COMPANY, LLC ("Lender"). WITNESSETH: ARTICLE I. Granting Clauses; Obligation ---------------------------- Section 1.1. Grant and Mortgage. Mortgagor for and in ------------------- consideration of the sum of Ten Dollars ($ 10.00) to Mortgagor in hand paid, and in order to secure the payment of the Obligation hereinafter referred to and the performance of the obligations, covenants, agreements, warranties and undertakings of Mortgagor hereinafter described, does hereby MORTGAGE AND WARRANT to Lender and grant to Lender a POWER OF SALE (pursuant to this Mortgage and applicable law) with respect to, all of the following described rights, interests and properties (the "Mortgaged Properties"): A. The easements (the "Easements") described in Exhibit A; B. The nominal 10-inch diameter, natural gas producer pipeline extending along the right of way of Consumers Power from the delivery point at the gathering lateral of Mortgagor's Slocum 1-21 Well, which delivery point is expected to be in the Northwest quarter of Section 30, Township 15 North, Range 16 West, Elbridge Township, in Oceana County, Michigan, to the terminus of Basin Pipeline, L.L.C.'s existing pipeline located in Section 32, Township 19 North, Range 17 West, Victory Township, in Mason County, Michigan, including, without limitation, all pipes, pipelines, pumping equipment, assemblies, heaters, valves, controls, monitoring equipment, communications equipment, towers, sensors, cathodic protection systems, test stations, corrosion detection and monitoring devices, inspection pigs, drums, flare facilities, sampling equipment, and all associated facilities and equipment, including spare parts, related thereto, appurtenant thereto or used in connection therewith, as well as any and all additions, replacements, extension, modifications or enlargements of any of the foregoing (the "Pipeline"); and C. All of Mortgagor's interest (whether now owned or hereafter acquired by operation of law or otherwise) in all permits, licenses, orders, franchises, certificates and other rights and privileges which are now used, or held for use, in connection with, or otherwise relate to, the ownership or operation of the Pipeline. TO HAVE AND TO HOLD the Mortgaged Properties unto Lender, and Lender's successors and assigns, upon the terms, provisions and conditions herein set forth. Section 1.2. Grant of Security Interest. In order to further secure the ---------------------------- payment of the Obligation hereinafter referred to and the performance of the obligations, covenants, agreements, warranties, and undertakings of Mortgagor hereinafter described, Mortgagor hereby grants to Lender a security interest in the entire interest of Mortgagor (whether now owned or hereafter acquired by operation of law or otherwise) in and to: (a) all equipment, inventory, improvements, fixtures, accessions, goods and other personal property (of whatever nature) of Mortgagor now or hereafter located in or on the Mortgaged Properties (or in connection with the operation thereof), and all accessions and appurtenances thereto, and all renewals or replacements of or substitutions for any of the foregoing; (b) all permits, licenses, orders, franchises, certificates, similar authorizations, and other rights and privileges now held or hereafter obtained in connection with the Mortgaged Properties or the Collateral (as hereinafter defined) (or in connection with the operation thereof), and all renewals or replacements of the foregoing or substitutions for the foregoing; (c) all contract rights, choses in action (i.e., rights to enforce contracts or to bring claims thereunder) and other general intangibles (regardless of whether the same arose, and/or the events which gave rise to the same occurred, on or before or after the date hereof) of Mortgagor which relate to the Mortgaged Properties (or the operation thereof); (d) all accounting, legal, title, technical and other business data concerning the Mortgaged Properties which are now or hereafter in the possession of Mortgagor or in which Mortgagor can otherwise grant a security interest, and all books, files, records, magnetic media, and other forms of recording or obtaining access to such data; (e) all money, documents, instruments, chattel paper, securities, accounts or general intangibles of Mortgagor arising from or by virtue of any transaction (regardless of whether such transaction occurred on or before or after the date hereof) related to the Mortgaged Properties (all of the properties, rights, and interests described in subsections (a), (b), (c ), (d), and this subsection (e) being herein sometimes collectively called the "Collateral"); and (f) all proceeds of the Collateral and of the Mortgaged Properties, whether such proceeds or payments are goods, money, documents, instruments, chattel paper, securities, accounts, general intangibles, fixtures, real property, personal property or other assets including, without limitation, insurance proceeds and condemnation proceeds (the Mortgaged Properties, the Collateral and the proceeds of the Collateral being herein sometimes collectively called the "Property"). Section 1.3. Obligation Secured. This Mortgage is made to secure and ------------------- enforce the payment and performance of the "OBLIGATION," as defined in the Non- Recourse Loan Agreement of even date herewith between Mortgagor and Lender (the "Loan Agreement"). Section 1.4. Future Advance Mortgage. This is a future advance mortgage ------------------------- within the meaning of Act. No. 348 of Michigan Public Act of 1990. ARTICLE II Representations, Warranties and Covenants ----------------------------------------- Section 2.1. Mortgagor hereby confirms each representation, warranty and covenant applicable to it contained in the Loan Agreement. Section 2.2 Not a Foreign Person. Mortgagor is not a "foreign person" -------------------- within the meaning of the Internal Revenue Code of 1986, as amended (the "Code"), Sections 1445 and 7701 (i.e. Mortgagor is not a non-resident alien, foreign corporation, foreign partnership, foreign trust or foreign estate as those terms are defined in the Code and any regulations promulgated thereunder). Section 2.3. Performance by Lender on Mortgagor's Behalf. Mortgagor agrees ------------------------------------------- that, if Mortgagor fails to perform any act or to take any action which hereunder Mortgagor is required to perform or take, or to pay any money which hereunder Mortgagor is required to pay, Lender, in Mortgagor name or its own name, may, but shall not be obligated to, perform or cause to be performed such action or pay such money. ARTICLE III. Assignment of Rents, Profits, Income, Contracts and Bonds ---------------------------------------------------------- Section 3.1. Assignment. Mortgagor does hereby absolutely and ----------- unconditionally assign, transfer and set over to Lender all rents, income, receipts, revenues, profits, proceeds and other sums of money to be derived from the Property, including without limitation the immediate and continuing right to collect and receive all of such rents, income, receipts, revenues, profits, proceeds, and other sums of money that may now or at any time hereafter become due and payable to Mortgagor (the "Proceeds"). Section 3.2. Effectuating Payment of Proceeds to Lender. Independent of ------------------------------------------- the foregoing provisions and authorities herein granted, and without limitation, upon the occurrence of an Event of Default, Mortgagor hereby constitutes and appoints Lender as Mortgagor's special attorney-in-fact (with full power of substitution, either generally or for such periods or purposes as Lender may from time to time prescribe) in the name, place and stead of Mortgagor to do any and every act and exercise any and every power that Mortgagor might or could do or exercise personally with respect to all Proceeds (the same having been assigned by Mortgagor to Lender pursuant to Section 3.1), giving and granting unto said attorney-in-fact full power and authority to do and perform any and every act and thing whatsoever necessary and requisite to be done as fully and to all intents and purposes, as Mortgagor might or could do if personally present. The powers and authorities herein conferred upon Lender may be exercised by Lender through any person who, at the time of the execution of the particular instrument, is an officer of Lender. The power of attorney herein conferred is granted for valuable consideration and hence is coupled with an interest and is irrevocable so long as the Obligation, or any part thereof, shall remain unpaid. All persons dealing with Lender or any substitute shall be fully protected in treating the powers and authorities conferred by this paragraph as continuing in full force and effect until advised by Lender that all the Obligation is fully and finally paid. Lender may, but shall not be obligated to, take such action as it deems appropriate in an effort to collect the Proceeds. Section 3.3. Application of Proceeds. Proceeds received by Lender shall be ----------------------- applied by Lender to the Obligation in accordance with the Loan Agreement and any excess shall be paid to Mortgagor. ARTICLE IV. Remedies Upon Default --------------------- Section 4.1 Pre-Foreclosure Remedies. Upon the occurrence of an ------------------------- "Event of Default" (as defined in the Loan Agreement) Lender may exercise any of the remedies set forth in Article VI of the Loan Agreement and is authorized, prior or subsequent to the institution of any foreclosure proceedings, to enter upon the Property, or any part thereof, and to take possession of the Property and all books and records relating thereto, and to exercise without interference from Mortgagor any and all rights which Mortgagor has with respect to the management, possession, operation, protection or preservation of the Property. If necessary to obtain the possession provided for above, Lender may invoke any and all remedies to dispossess Mortgagor. Section 4.2. Foreclosure ------------ (a) Upon the occurrence of an Event of Death, this Mortgage may be foreclosed as to the Mortgaged Properties, or any part thereof, in any manner permitted by applicable law. Cumulative of the foregoing and the other provisions of this Section 4.2, Lender may commence foreclosure proceedings against the property through judicial proceedings or by advertisement, at the option of Lender, pursuant to the statutes in such case made and provided, and sell the property or to cause the same to be sold at public sale, and convey the same to the purchaser in accordance with said statutes in a single parcel or in several parcels at the option of Lender. A POWER OF SALE HAS BEEN GRANTED IN THIS MORTGAGE, A POWER OF SALE MAY ALLOW LENDER TO TAKE THE MORTGAGED PROPERTIES AND SELL THEM WITHOUT GOING TO COURT IN A FORECLOSURE ACTION UPON DEFAULT BY MORTGAGOR UNDER THIS MORTGAGE. WARNING: THIS MORTGAGE CONTAINS A POWETR OF SALE AND UPON DEFAULT MAY BE FORECLOSED BY ADVERTISEMENT IN FORECLOSURE BY ADVERTISEMENT AND THE SALE OF THE PROPERTY IN CONNECTITON THEREWITH, NO HEARING IS REQUIRED AND THE ONLY NOTICE REQUIRED IS THE PUBLICATION OF NOTICE IN A LOCAL NEWSPAPER AND THE POSTING OF A COPY OF THE NOTICE ON THE PROPERTY. (b) Upon the occurrence of an Event of Default, Lender may exercise its rights of enforcement with respect to the Collateral under the Uniform Commercial Code or similar statute in force in Michigan, or in force in any other state to the extent the same is applicable law. Cumulative of the foregoing and the other provisions of this Section 4.2: (i) Lender may enter upon the Mortgaged Properties or otherwise upon Mortgagor's premises to take possession of, assemble and collect the Collateral or to render it unusable; and (ii) written notice mailed to Mortgagor as provided herein at least five (5) days prior to the date of public sale of the Collateral or prior to the date after which private sale of the Collateral will be made shall constitute reasonable notice; and (iii) in the event of a foreclosure of the liens and/or security interests evidenced hereby, the Collateral, or any part thereof, and the Mortgaged Properties, or any part thereof may, at the option of Lender, be sold, as a whole or in parts, together or separately (including, without limitation, where a portion of the Mortgaged Properties is sold, the Collateral related thereto may be sold in connection therewith); and (iv) should, under this subsection, the Collateral be disposed of, other than by sale, any proceeds of such disposition shall be treated under Section 4.4 as if the same were sales proceeds. (c) To the extent permitted by applicable law, the sale by Lender hereunder of less than the whole of the Property shall not exhaust the powers of sale herein granted or the right to judicial foreclosure, and successive sale or sales may be made until the whole of the Property shall be sold, and, if the proceeds of such sale of less than the whole of the Property shall be less than the aggregate of the Obligation and the expense of conducting such sale, this Mortgage and the liens and security interests hereof shall remain in full force and effect as to the unsold portion of the Property just as though no sale had been made; provided, however, that Mortgagor shall never have any right to require the sale of less than the whole of the Property. In the event any sale hereunder is not completed or is defective in the opinion of Lender, such sale shall not exhaust the powers of sale hereunder or the right to judicial foreclosure, and Lender shall have the right to cause a subsequent sale or sales to be made. Any sale may be adjourned by announcement at the time and place appointed for such sale without further notice except as may be required by law. Lender, acting under power of sale, may appoint or delegate any one or more persons as agent to perform any act or acts necessary or incident to any sale held by it (including, without limitation, the posting of notices and the conduct of sale). Any and all statements of fact or other recitals made in any deed or deeds, or other instruments of transfer, given in connection with a sale as to nonpayment of the Obligation or as to the Occurrence of any Event of Default, or as to Lender's having declared all of the Obligation to be due and payable, or as to the request to sell, or as to notice of time, place and terms of sale and the properties to be sold having been duly given, or as to any other act or thing having been duly done, shall be taken as prima facie evidence of the truth of the facts so stated and recited. With respect to any sale held in foreclosure of the liens and/or security interests covered hereby, it shall not be necessary for Lender, any public officer acting under execution or order of the court or any other party to have physically present or constructively in his/her or its possession, either at the time of or prior to such sale, the Property or any part thereof. Section 4.3. Receiver. In addition to all other remedies herein --------- provided for, Mortgagor agrees that upon the occurrence of an Event of Default, Lender shall be entitled to the appointment of a receiver or receivers for all or any part of the Property, whether such receivership be incident to a proposed sale (or sales) of such property or otherwise, and without regard to the value of the Property or the solvency of any person or persons liable for the payment of the Obligation, and Mortgagor does hereby consent to the appointment of such receiver or receivers, waives any and all defenses to such appointment, and agrees not to oppose any application therefor by Lender, and agrees that such appointment shall in no manner impair, prejudice or otherwise affect the rights of the Lender under Article III. Nothing herein is to be construed to deprive Lender of any other right, remedy or privilege it may now or hereafter have under the law to have a receiver appointed. Section 4.4. Proceeds of Foreclosure. The proceeds of any sale held in ------------------------ foreclosure of the liens and/or security interests evidenced hereby shall be applied by Lender to the Obligation in accordance with the Loan Agreement and any excess shall be paid to Mortgagor. Section 4.5. Lender as Purchaser. Lender shall have the right to become the -------------------- purchaser at any sale held in foreclosure of the liens and/or security interests evidenced hereby, and shall have the right to credit upon the amount of the bid made therefor, to the extent necessary to satisfy such bid, the Obligation. Section 4.6. Foreclosure as to Matured Debt. Upon the occurrence of an ------------------------------- Event of Default, Lender shall have the right to proceed with foreclosure of the liens and/or security interests evidenced hereby without declaring the entire Obligation due, and in such event, any such foreclosure sale may be made subject to the unmatured part of the Obligation and shall not in any manner affect the unmatured part of the Obligation, but as to such unmatured part, this Mortgage shall remain in full force and effect just as though no sale had been made. The proceeds of such sale shall be applied as provided in Section 4.4. Section 4.7. Remedies Cumulative. All remedies herein provided for are -------------------- cumulative of each other and of all other remedies existing at law or in equity and are cumulative of any and all other remedies provided for in any other Loan Document, and Lender shall, in addition to the remedies herein provided, be entitled to avail itself of all such other remedies as may now or hereafter exist at law or in equity for the collection of the Obligation and the enforcement of the covenants herein and the foreclosure of the liens and/or security interests evidenced hereby, and the resort to any remedy provided for hereunder or under any such other Loan Document or provided for by law shall not prevent the concurrent or subsequent employment of any other appropriate remedy or remedies. Section 4.8. Lender's Discretion as to Security. Lender may resort to any ----------------------------------- security given by this Mortgage or to any other security now existing or hereafter given to secure the payment of the Obligation, in whole or in part, and in such portions and in such order as may seem best to Lender in its sole and uncontrolled discretion, and any such action shall not in any way be considered as a waiver of any of the rights, benefits, liens or security interests evidenced by this Mortgage. Section 4.9. Mortgagor's Waiver of Certain Rights. To the full extent ------------------------------------ Mortgagor may do so, Mortgagor agrees that Mortgagor will not at any time insist upon, plead, claim or take the benefit or advantage of any law now or hereafter in force providing for any appraisement, valuation, stay, extension or redemption, and Mortgagor, for Mortgagor, Mortgagor's heirs, devisees, representatives, successors and assigns, and for any and all persons ever claiming any interest in the Property, to the extent permitted by applicable law, hereby waives and releases all rights of appraisement, valuation, stay of execution, redemption, notice of intention to mature or declare due the whole of the Obligation, notice of election to mature or declare due the whole of the Obligation and all rights to a marshaling of assets of mortgagor, including the Property, or to a sale in inverse order of alienation in the event of foreclosure of the liens and/or security interests hereby created. To the extent permitted by applicable law, Mortgagor shall not have or assert any right under any statute or rule of law pertaining to the marshaling of assets, sale in inverse order of alienation, the exemption of homestead, the administration of estates of decedents, or other matters whatever to defeat, reduce or affect the right of Lender under the terms of this Mortgage to a sale of the Property for the collection of the Obligation without any prior or different resort for collection, or the right of Lender under the terms of this Mortgage to the payment of the Obligation out of the proceeds of sale of the Property in preference to every other claimant whatever. If any law referred to in this Section 4.9 and now in force, of which Mortgagor or Mortgagor's successors or assigns or any other persons claiming any interest in the Mortgaged Properties or the Collateral might take advantage despite this Section 4.9, shall hereafter be repealed or cease to be in force, such law shall not thereafter be deemed to preclude the application of this Section 4.9. ARTICLE V. Miscellaneous ------------- Section 5.1. Scope of Mortgage. This Mortgage is a mortgage of both real ------------------ and personal property, a security agreement, a financing statement and an assignment, and also covers proceeds and fixtures. Section 5.2. Effective as a Financial Statement. This Mortgage shall be ----------------------------------- effective as a financing statement filed as a fixture filing with respect to all fixtures included within the Property. This Mortgage is to be filed for record in the real estate records of each county where any part of the Mortgaged Properties is situated, and may also be filed in the offices of the Bureau of Land Management or the Minerals Management Service or any similar Michigan state agency (or any successor agencies). This Mortgage shall also be effective as a financing statement covering any other Property and may be filed in any other appropriate filing or recording office. The mailing address of Mortgagor is the address of Mortgagor as set forth at the end of this Mortgage and the address of Lender from which information concerning the security interests hereunder may be obtained is the address of Lender set forth at the end of this Mortgage. Section 5.3 Reproduction of Mortgage as a Financing Statement. A carbon, -------------------------------------------------- photographic, facsimile or other reproduction of this Mortgage or of any financing statement relating to this Mortgage shall be sufficient as a financing statement for any of the purposes referred to in Section 5.2. Section 5.4 Notice to Account Debtors. In addition to, but without -------------------------- limitation of, the rights granted in Article III, Lender may at any time when an Event of Default exists notify the account debtors or obligors of any accounts, chattel paper, negotiable instruments or other evidences of indebtedness included in the Collateral to pay Lender directly. Section 5.5. Waiver by Lender. Lender may at any time and from time to time ----------------- in writing waive compliance by Mortgagor with any covenant herein made by Mortgagor to the extent and in the manner specified in such writing, or consent to Mortgagor's doing any act which hereunder Mortgagor is prohibited from doing, or to Mortgagor's failing to do any act which hereunder Mortgagor is required to do, to the extent and in the manner specified in such writing, or release any part of the Property or any interest therein or any Proceeds from the lien and security interest of this Mortgage, or release any party liable, either directly or indirectly, for the Obligation or for any covenant herein or in any other Loan Document, without impairing or releasing the liability of any other party. No such act shall in any way impair the rights or powers of Lender hereunder except to the extent specifically agreed to by Lender in such writing. Section 5.6. No Impairment of Security. The lien, security interest and -------------------------- other security rights of Lender hereunder shall not be impaired by any indulgence, moratorium or release granted by Lender including, BUT NOT limited to, any renewal, extension or modification which Lender may grant with respect to any indebtedness, or any surrender, compromise, release, renewal, extension, exchange or substitution which Lender may grant in respect of the Property (including without limitation Proceeds), or any part thereof or any interest therein, or any release or indulgence granted to any endorser, guarantor or surety of any indebtedness. Section 5.7. Acts Not Constituting Waiver by Lender. Lender may waive any --------------------------------------- default without waiving any other prior or subsequent default. Lender may remedy any default without waiving the default remedied. Neither failure by Lender to exercise, nor delay by Lender in exercising, any right, power or remedy upon any default shall be construed as a waiver of such default or as a waiver of the right to exercise any such right, power or remedy at a later date. No single or partial exercise by Lender of any right, power or remedy hereunder shall exhaust the same or shall preclude any other or further exercise thereof, and every such right, power or remedy hereunder may be exercised at any time and from time to time. No modification or waiver of any provision hereof nor consent to any departure by Mortgagor therefrom shall in any event be effective unless the same shall be in writing and signed by Lender and then such waiver or consent shall be effective only in the specific instances, for the purpose for which given and to the extent therein specified. No notice to nor demand on Mortgagor in any case shall of itself entitle Mortgagor to any other or further notice or demand in similar or other circumstances. Acceptance by Lender of any payment in an amount less than the amount then due on the Obligation shall be deemed an acceptance on account only and shall not in any way excuse the existence of an Event of Default. Section 5.8. Mortgagor's Successors. In the event the ownership of the ----------------------- Property or any part thereof becomes vested in a person other than Mortgagor, Lender may, without notice to Mortgagor, deal with such successor or successors in interest with reference to this Mortgage and to the Obligation in the same manner as with Mortgagor, without in any way vitiating or discharging Mortgagor's liability hereunder or for the payment of the Obligation or performance of the obligations secured hereby. No transfer of the Property, no forbearance on the part of Lender, and no extension of the time for the payment of the Obligation given by Lender shall operate to release, discharge, modify, change or affect, in whole or in part, the liability of Mortgagor hereunder or for the payment of the Obligation secured hereby or the liability of any other person hereunder or for the payment of the Obligation. Section 5.9. Compliance With Usury Laws. It is the intent of Mortgagor, --------------------------- Lender and all other parties to the Loan Documents to contract in strict compliance with applicable usury law from time to time in effect. In furtherance thereof, it is stipulated and agreed that none of the terms and provisions contained herein shall ever be construed to create a contract to pay, for the use, forbearance or detention of money, interest in excess of the maximum amount of interest permitted to be charged by applicable law from time to time in effect. Section 5.10. Release of Mortgage. If all of the Obligation be paid as the -------------------- same becomes due and payable and all of the covenants, warranties, undertakings and agreements made in this Mortgage are kept and performed and Lender shall have no further obligation to provide credit or advance funds to Mortgagor (or other obligor with respect to other debt) secured hereby, then, Lender shall, at Mortgagor's request, release this mortgage. Section 5.11. Notices. All notices, requests, consents, demands and other -------- communications required or permitted hereunder shall be in writing and shall be deemed sufficiently given or furnished if delivered by personal delivery, by telecopy, by delivery service with proof of delivery, or by registered or certified United States mail, postage prepaid, at the addresses specified at the end of this Mortgage (unless changed by similar notice in writing given by the particular party whose address is to be changed). Any such notice or communication shall be deemed to have been given (a) in the case of personal delivery or delivery service, as of the date of first attempted delivery at the address and in the manner provided herein, (b) in the case of telecopy, upon receipt, and (c) in the case of registered or certified United States mail, three days after deposit in the mail. Notwithstanding the foregoing, or anything else in the Loan Documents which may appear to the contrary, any notice given in connection with a foreclosure of the liens and/or security interests created hereunder, or otherwise in connection with the exercise by Lender of its rights hereunder or under any other Loan Document, which is given in a manner permitted by applicable law shall constitute proper notice; without limitation of the foregoing, notice given in a form required or permitted by statute shall (as to the portion of the Property to which such statute is applicable) constitute proper notice. Section 5.12 Invalidity of Certain Provisions. A determination that any --------------------------------- provision of this mortgage is unenforceable or invalid shall not affect the enforceability or validity of any other provision and the determination that the application of any provision of this Mortgage to any person or circumstance is illegal or unenforceable shall not affect the enforeceability or validity of such provision as it may apply to other persons or circumstances. Section 5.13 Gender Titles. Within this Mortgage, words of any gender -------------- shall be held and construed to include the plural, unless the context otherwise requires. Titles appearing at the beginning of any subdivisions hereof are for convenience only, do not constitute any part of such subdivisions and shall be disregarded in construing the language contained in such subdivisions. Section 5.14. Counterparts. This Mortgage may be executed in several ------------- counterparts all of which are identical. All of such counterparts together shall constitute one and the same instrument. Section 5.15. Successors and Assigns. The terms, provisions covenants ---------------------- representations and conditions hereof shall be binding upon Mortgagor, and the successors and assigns of Mortgagor and shall inure to the benefit of Lender and its successors and assigns and shall constitute covenants running with the Mortgaged Properties. All references in this Mortgage to Mortgagor or Lender shall be deemed to include all such successors and assigns. SECTION 5.16. FINAL AGREEMENT OF THE PARTIES. THE WRITTEN LOAN DOCUMENTS ------------------------------- REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. SECTION 5.17. CHOICE OF LAW. THIS MORTGAGE SHALL BE CONSTRUED AND ENFORCED -------------- IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF MICHIGAN APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE AND THE LAWS OF THE UNITED STATES OF AMERICA. Section 5.18. No Merger. If both the lessor's and lessee's estates under ---------- any lease or any portion thereof which constitutes a part of the Mortgaged Properties shall at any time become vested in one owner, this instrument and the lien and security interest created hereby shall not be destroyed or terminated by application of the doctrine of merger and, in such event, Lender shall continue to have and enjoy all of the rights and privileges of Lender as to the separate estates. In addition, upon the foreclosure of the lien and security interest created by this instrument on the Mortgaged Properties pursuant to the provisions hereof, any leases or subleases then existing and created by Mortgagor shall not be destroyed or terminated by application of the law of merger or as a matter of law or as a result of such foreclosure unless Lender or any purchaser at any such foreclosure sale shall so elect. No act by or on behalf of Lender or any such purchaser shall constitute a termination of any lease or sublease unless Lender or such purchaser shall give written notice thereof to such tenant or subtenant. In addition, no interest held or acquired by Lender under this instrument shall ever be deemed to merge with or into any other interest held or acquired by Lender in the lands, properties or interests comprising the Mortgaged Properties. Section 5.19. Non-Recourse Obligation. Specific reference is made to ------------------------ Section 7.20 of the Loan Agreement for provisions governing the non-recourse nature of the Obligation. IN WITNESS WHEREOF, this instrument is executed by Mortgagor. WITNESSES: MICHIGAN PRODUCTION COMPANY, L.L.C. /S/ R.G. LESTER /S/ MICHAEL V. RONCA, MANAGER /S/ PAMELA VANSTAVERN /S/ ROBERT L. ZORICH, MANAGER /S/ ROBERT ECKERT, JR. /S/ BRONIA E. KOCH The address of Lender is: The address of the Mortgagor is: West Shore Processing Company L.L.C. MICHIGAN PRODUCTION COMPANY, L.L.C. 5613 DTC Parkway Suite 400 c/o Tenneco Ventures Corporation Englewood, Colorado 80111 1100 Louisiana Street, Suite 1543 Telephone: (303)290-8700 Houston, TX 77002 Facsimile: (303)290-8769 Telephone: (713)757-3698 Attention: Randy S. Nickerson Facsimile: (713)757-8314 Attention: Rick Lester This instrument prepared by: Porter & Hedges, L.L.P. 700 Louisiana Street, 35/th/ Floor Houston, TX 77002 STATE OF TEXAS COUNTY OF HARRIS The foregoing instrument was acknowledged before me on this 22/nd/ day of October, 1996, by MICHAEL V. RONCA, Manager of Michigan Production Company, L.L.C., a Michigan limited liability company, on behalf of said company. (STAMP OF JUDY WILLIS) /S/ JUDY WILLIS NOTARY PUBLIC, STATE OF TEXAS NOTARY PUBLIC, STATE OF TEXAS COMMISSION EXPIRES 05-24-97 My commission expires: 05/24/97 STATE OF TEXAS COUNTY OF HARRIS The foregoing instrument was acknowledged before me on this 22/nd/ day of October, 1996, by ROBERT L. ZORICH, Manager of Michigan Production Company, L.L.C., a Michigan limited liability company, on behalf of said company. (STAMP OF KIM RUTHERFORD) /S/ KIM RUTHERFORD NOTARY PUBLICE, STATE OF TEXAS MY COMMISSION EXPIRES September 3, 2000 EXHIBIT A to Mortgage, Assignment, Security Agreement and Financing Statement dated October 1, 1996 from Michigan Production Company, L.L.C., Mortgagor to West Shore Processing Company, LLC, Lender Mason and Oceana Counties, State of Michigan TABLE ATTACHED LISTING GRANTOR, GRANTEE, DATE, COUNTY, PROPERTY DESCRIPTION, LIBER AND PAGE EX-10.36 9 AMMD. TO PART., OWNERSHIP AND OPERATING AGRMNT. AMENDMENT TO PARTICIPATION, OWNERSHIP AND OPERATING AGREEMENT FOR WEST SHORE PROCESSING COMPANY. This Amendment to Participation, Ownership Agreement for West Shore Processing Company, is made and entered into this 12/th/ day of December, between MICHIGAN ENERGY COMPANY, L.L.C. (MEC) AND MW MICHIGAN, INC., as successor-in-interest to MarkWest Michigan LLC, (MarkWest). RECITALS: A. MEC and MarkWest entered into that certain Participation, Ownership and Operating Agreement for West Shore Processing Company, LLC, dated May 2, 1996, as heretofore amended (the "Participation Agreement"). B. Under the Participation Agreement, among other obligations, MarkWest was to undertake the construction and installation of compression facilities, turbo expander extraction facilities and related facilities near the Shell #23 Plant. C. The parties have determined that the amounts of money specified in the Participation Agreement with regard to those facilities do not accurately reflect costs which may be incurred in the construction and installation of those facilities. Now therefore, in consideration of the mutual covenants and agreements contained herein the parties agree as follows: 1. Section 2.1, MarkWest's Initial Contributions, Paragraph (a), shall -------------------------------- be amended by deleting subparagraph (iii) thereof in its entirety and replacing it with the following revised subparagraph (iii): "(iii) constructing and installing compression facilities, turbo expander extraction facilities designed to recover no less than 80% of the propane content of the gas, and such other facilities at or near the Shell Western E&P, Inc., #23 facility, located in Section 23, Township 22 North, Range 16 West, Manistee County, Michigan, ("Shell #23 Plant"), on terms acceptable to MarkWest and MEC, as necessary to deliver gas into the MichCon dry header and to extract, depropanize and/or separate natural gas liquids. Should the amount to be paid for those facilities exceed $6,700,000, then: A. MEC SHALL BE obligated to pay 80% of all such EXCESS AMOUNTS up to an aggregate cost for those facilities of $8,450,000, and MarkWest shall be obligated to pay 20% of all such excess amounts up to an aggregate cost for those facilities of $8,450,000; and, B. In the event the total amount to be paid for those facilities exceeds $8,450,000, then MEC and MarkWest agree to pay their proportionate share of all amounts exceeding that aggregate maximum based upon each Party's then applicable Ownership Interest in the Company as specified in Article III, below; which amounts paid by either party under A. and/or B., above, shall not be utilized in calculating Ownership Interests hereunder. Prior to the commencement of the construction and installation of those facilities, MEC shall have the right to propose alternate activities with regard to the extraction of natural gas liquids from the gas and the basis upon which MEC believes, based upon its interest in the Company only, without regard to the interests of producers, that such alternative will be economically advantageous to the Company. If MarkWest agrees with MEC's proposal, based solely upon an economic analysis of the effect on the Company without regard to any economic effect upon producers, then the character of the facilities to be constructed will be modified accordingly. MarkWest agrees that its concurrence to MEC's proposal shall not be unreasonably withheld,". 2. Section 2.2, MEC's Initial Contributions and Obligations, Paragraph (d), ------------------------------------------- shall: be amended by deleting subparagraph (ii) thereof in its entirety and replacing it with the following revised subparagraph (ii): "(ii) Should the amount to be paid for the facilities related to the Shell #23 Plant, as described in Section 2.1(a)(iii), necessary to deliver gas into THE MICHCON DRY header and to extract, fractionate and/or separate natural gas liquids at that Plant exceed $6,700,000, then: A. MEC shall be obligated to pay 80% of all such excess amounts up to an aggregate cost for those facilities of $8,450,000, and MarkWest shall be obligated to pay 20% of all such excess amounts up to an aggregate cost for those facilities of $8,450,000; and, B. In the event the total amount to be paid for those facilities exceeds $8,450,000, then MEC and MarkWest agree to pay their proportionate share of all amounts exceeding that aggregate maximum based upon each Party's then applicable Ownership Interest in the Company as specified in Article III, below,". 3. Except for the foregoing, all other terms and provisions of the Participation Agreement shall remain in full force and effect. In Witness Whereof, the parties have executed this Amendment the date first above written. MICHIGAN ENERGY COMPANY, L.L.C. /S/ Michael V. Ronca, Manager and /S/ Robert L. Zorich, Manager MW MICHIGAN, INC. /S/ Arthur J. Denney, Vice President EX-10.37 10 ASSIGNMENT AND BILL OF SALE ENRON CAPITAL & TRADE RESOURCESENRON CAPITAL & TRADE RESOURCES WORLDWIDE ENERGY SOLUTIONS January 14, 1997 CERTIFIED MAIL, RRR # P 130 457 809 West Shore Processing, L.L.C. 5613 DTC Parkway, Suite 400 Englewood, Colorado 80111 Attn: Mr. John Mollenkopf Re: Assignment and Bill of Sale by and between Enron Gas Processing Company and West Shore Processing Company, LLC Dear Mr. Mollenkopf: As Enron Processing Company has completed the title work that was a precondition to closing the sale of the Magnolia City Processing Plant Equipment to West Shore, enclosed is one fully executed original of the above-referenced Assignment and Bill of Sale. This should complete Enron Processing's obligation under the Agreement of Sale and Procedure which was assigned to West Shore. We will continue to coordinate removal of the processing plant equipment with Don York of Hamilton Refining Company. Should you have any questions or comments regarding the enclosed, please do not hesitate to give me a call. Sincerely, Steve Van Hooser SVH:ri Enclosure cc: Steve Schneider Barry Spector, Esq. Don York 1400 Smith Street Houston TX 77002-7361 PO Box 4428 Houston TX 77210-4428 . 713-853-7500 ASSIGNMENT AND BILL OF SALE --------------------------- KNOW ALL MEN BY THESE PRESENTS, that in consideration of Ten Dollars ($10.00) and other good and valuable consideration, the receipt of which is hereby acknowledged, ENRON GAS PROCESSING COMPANY, a Delaware corporation (hereinafter "Assignor"), does hereby grant, sell, transfer and deliver unto WEST SHORE PROCESSING COMPANY, LLC (hereinafter referred to as "Assignee"), all of the personal property, equipment, and interest identified in Exhibit " 1 " attached hereto. Assignor hereby covenants with Assignee that the property conveyed by this Assignment and Bill of Sale is free of all burdens, liens and encumbrances; that the title to the property being conveyed by this Assignment and Bill of Sale is good, and its transfer is rightful; and Assignor hereby agrees to indemnify and defend Assignee, its successors and assigns against the lawful claims of all persons claiming by, through and under Assignor. NOTWITHSTANDING ANYTHING TO THE CONTRARY HEREIN, THE PERSONAL PROPERTY CONVEYED BY THIS ASSIGNMENT AND BILL OF SALE IS CONVEYED "AS IS, WHERE IS," AND ASSIGNOR EXPRESSLY DISCLAIMS ALL WARRANTIES, EXPRESS OR IMPLED, OTHER THAN THE WARRANTY OF TITLE SET FORTH HEREINABOVE, INCLUDING, WITHOUT LIMITATION, THE WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. This Assignment and Bill of Sale shall be binding upon and inure to the benefit of Assignor and Assignee, and their respective successors, heirs and assigns. IN WITNESS WHEREOF, the Assignor has hereunto set his hand effective January 13, 1997. ENRON GAS PROCESSING COMPANY By: Stephen C. Schneider Vice President EXHIBIT "1" to Assignment and Bill of Sale PERSONAL PROPERTY, EQUIPMENT AND INTEREST DESCRIPTION ----------------------------------------------------- All that certain Turbo Expander Plant, compression, and associated equipment, known as the Magnolia City facility, with exception of the truck loading facility, the LPG storage tank farm and its separate equipment, and the amine unit and its separate equipment. Equipment List -------------- 1. Inlet Suction Scrubber, V-11, 60" OD x 8'0" S/S 2. Mole Sieve Dehydrators, V-120 & V-120A, each 48" x 16'0" S/S Mole Sieve Dehydrator, V-110, 42" x 16'0" S/S 3. Inlet Gas Filter/Separator, F-810, 30" ID x 115" S/S 4. Dry Gas Dust Filter, F-800, 18" ID x 4'6" S/S 5. Mercury Guard Bed, V-120B, 54" ID x 16'0" S/S 6. Dust Filter, F-800A, 20" ID x 5'-10" S/FF 7. Dehy Switching Valve Skid, including: (a) Switching valves, piping & controls (b) Regen Gas Compressor, K-620, 40 HP electric motor (c) Regen Gas Scrubber, V-130, 12-3/4" ID x 4'6" S/S 8. Regen Gas Cooler, AC-2, 1,362 MBtu/hr 9. Regen Gas Heater, 1,351 MBtu/hr (waste heat exchanger in compressor engine exhaust piping) 10. Inlet/Residue Gas Compressors, C-1 & C-2, two White Superior Compressors Model MW64, Cooper Superior 12SGTA engines, 2,000 HP each, each compressor with (4) four 9.5" x 7" cylinders 11. Inlet Gas Compressor Discharge Cooler, AC-1, 8,418 MBtu/hr Residue Gas Compressor Discharge Cooler, AC-5, 5,280 Mbtu/hr (AC- 1 & AC-5 are in common structure sharing (3) three 25 HP electric motors) 12. Engine/Compressor Utility Equipment, Piping & Controls, including: (a) Turbo Water Coolers, AC-7 & AC-9 (b) Jacket Water Coolers, AC-6 & AC-8 (c) Jacket Water Surge Tanks, TK-371A & TK-371B, (2) two each 10" OD x 8'0" OAL (d) Lube Oil Filters, F-320A & F-320B, (2) each 10" OD x 48" (e) Lube Oil Filters, F-321A & F-321B, (2) each 8" OD x 48" (f) Jacket Water Pumps, Turbo Water Pumps, Lube Oil Pumps, Engine & Compressor Lube Oil, Coolers, Turbo Inner Coolers, and all associated valves and controls 13. Expander Skid, including: (a) Turboexpander, EX-600, and Booster Compressor, K-600, Rotoflow Model No. 20- 4E6C (b) J-T Valve, PCV-1002 (c) Booster Compressor Cooler, AC-3, 1,567 MBtu/hr (d) Lube Oil Tank, V-601, 24" OD x 4'0" S/S (e) Lube Oil Circ Pumps, P631 A&B, (2) two each 15 gpm, 3 HP Lube Oil Cooler, AC-641 (f) Lube Oil Cooler, AC-641 14. Cold Separator/Heat Exchanger Skid, including: (a) Cold Separator, V-200 42" OD x 8'0" S/S (b) Demethanizer Trim Reboiler, E- 1, 2,627 MBtu/hr (c) Cold Gas Exchangers, E-420 A&B, 655 MBtu/hr (d) Warm Gas Exchangers, E-400 A-C, 4,426 MBtu/hr (e) Cold Gas Exchangers, E-410 A-C, 5,586 MBtu/hr (f) Demethanizer Side Heaters, E-430 A-C, 2,500 Mbtu/hr (g) Demethanizer Reboilers, E-450 A- C, 690 MBtu/hr 15. Cold Gas Exchanger, E-421 (plate fin exchanger added in 1994) 16. Warm Gas/Cold Gas Exchanger, E-401 (plate fin exchanger added in 1994) 17. Demethanizer, T-1000, 48"/36" ID x 75'0" S/S 18. Product Surge Tank, V-3 30,000 gallon capacity 19. Product Pumps, P-2A & B, Wheatley triplex pumps, (2) two each 20. Four (4) Storage Tanks - Spent Water, Slop Oil, Compressor Lube Oil, Engine Oil Coolant 21. Instrument Air Compressor Skid, including (2) two Sullair rotary screw compressors, air coolers, air dryers, surge tank, and other piping, controls and appurtenances 22. Flare Stack and associated flare tips, piping and guy wires 23. All interconnecting and pipe rack piping, valves and appurtenances, including steel beam supports 24. Compressor building with bridge crane 25. Instrument Control Panel and associated instruments and controls 26. Electrical switch gear, motor starters, etc. 27. All ladders, platforms and other structural steel items associated with the plant equipment and skids 28. Floodlighting and support poles EX-23 11 CONSENT OF PRICE WATERHOUSE LLP EXHIBIT 23 Consent of Independent Accountants We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-20829) and (No. 333-20833) of MarkWest Hydrocarbon, Inc. of our report dated March 5, 1997 appearing on page 23 of this Form 10-K. PRICE WATERHOUSE LLP Denver, Colorado March 5, 1997 -----END PRIVACY-ENHANCED MESSAGE-----