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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Commission File Number 001-14841

MARKWEST HYDROCARBON, INC.

(Exact name of registrant as specified in its charter)

1515 Arapahoe Street, Tower 2, Suite 700, Denver, Colorado 80202-2126
(Address of principal executive offices)

Registrant's telephone number, including area code: 303-925-9200

        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 ý No o

        Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):

        Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2 of the Exchange Act)    Yes o No ý

There were 12,001,209 shares of common stock with a par value of $0.01 per share outstanding at November 1, 2007.

        Throughout this document we make statements that are classified as "forward-looking." Please refer to the "Forward-Looking Statements" included later in Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations for an explanation of these types of assertions. Also, in this document, unless the context requires otherwise, references to "we," "us," "our," "MarkWest Hydrocarbon" or the "Company" are intended to mean MarkWest Hydrocarbon, Inc., and its consolidated subsidiaries. References to "MarkWest Hydrocarbon Standalone" or the "Standalone Segment" are intended to mean MarkWest Hydrocarbon, Inc., exclusive of its consolidated subsidiaries. References to "MarkWest Energy" or "MarkWest Energy Partners" or the "Partnership" are intended to mean MarkWest Energy Partners, L.P. A reference to the "General Partner" or the "G.P." is intended to mean MarkWest Energy G.P., L.L.C.

Glossary of Terms

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

MARKWEST HYDROCARBON, INC.

Condensed Consolidated Balance Sheets

(unaudited, in thousands, except share data)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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MARKWEST HYDROCARBON, INC.

Condensed Consolidated Statements of Operations

(unaudited, in thousands, except per share amounts)

The accompanying notes are an integral part of these condensed consolidated financial statements.

4

MARKWEST HYDROCARBON, INC.

Condensed Consolidated Statements of Comprehensive Income

(unaudited, in thousands)

The accompanying notes are an integral part of these condensed consolidated financial statements.

5

MARKWEST HYDROCARBON, INC.

Condensed Consolidated Statement of Changes in Stockholders' Equity

(unaudited, in thousands)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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MARKWEST HYDROCARBON, INC.

Condensed Consolidated Statements of Cash Flows

(unaudited, in thousands)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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MARKWEST HYDROCARBON, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

1. Organization

        MarkWest Hydrocarbon, Inc. ("MarkWest Hydrocarbon" or the "Company") is an energy company primarily focused on marketing natural gas liquids and increasing shareholder value by growing MarkWest Energy Partners, L.P. ("MarkWest Energy Partners" or the "Partnership"), a consolidated subsidiary and publicly traded master limited partnership. The Partnership is engaged in the gathering, processing and transmission of natural gas; the transportation, fractionation and storage of natural gas liquids; and the gathering and transportation of crude oil. The Company also markets natural gas and Natural Gas Liquids ("NGLs"). The Company and the Partnership provide services primarily in Appalachia, Michigan, Texas, Oklahoma, Gulf Coast and other areas of the Southwest.

2. Basis of Presentation

        The Company's unaudited condensed consolidated financial statements include the accounts of all majority-owned or controlled subsidiaries. The consolidated financial statements include the accounts of the Partnership, and MarkWest Energy GP, L.L.C. (the "General Partner"). The Company consolidates the Partnership because it acts as the General Partner and the limited partners do not have substantive kick-out or participating rights. Equity investments in which the Company exercises significant influence but does not control, and is not the primary beneficiary, are accounted for using the equity method. These condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial reporting. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. In Management's opinion, the Company has made all adjustments necessary for a fair presentation of its results of operations, financial position and cash flows for the periods shown. These adjustments are of a normal recurring nature. In addition to reviewing these condensed consolidated financial statements and accompanying notes, you should also consult the audited financial statements and accompanying notes included in the Company's December 31, 2006, Annual Report on Form 10-K, as amended. Finally, consider that results for the three and nine months ended September 30, 2007, are not necessarily indicative of results for the full year 2007, or any other future period.

        The Company adopted the Financial Accounting Standards Board ("FASB") Interpretation Number 48, Accounting for Uncertainty in Income Taxes ("FIN 48"), on January 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in a company's financial statements in accordance with Statement of Financial Accounting Standards ("SFAS") Number 109, Accounting for Income Taxes ("SFAS 109"). Specifically, the pronouncement prescribes a "more likely than not" recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on the related derecognition, classification, interest and penalties, accounting for interim periods, disclosure and transition of uncertain tax positions. For the impact of FIN 48 on the Company's financial statements, see Note 11.

        On July 12, 2007, the State of Michigan enacted changes in its taxation scheme. As a result, the Company has made the necessary adjustments to its deferred tax assets (and liabilities) in the form of a charge (or benefit) to income, as part of its income tax provision in the third quarter of 2007. Michigan's new tax law replaces the single business tax with a two-prong tax. The two prongs comprise a tax at the rate of 0.8% of a taxpayer's modified gross receipts and a tax at the rate of 4.95% of the

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taxpayer's business income. The new tax takes effect on January 1, 2008 and applies to all business activity occurring after December 31, 2007. The current single business tax will remain in effect through December 31, 2007. Adopted on September 30, 2007, and effective January 1, 2008, Michigan House Bill 5104 creates a deduction from a taxpayer's pre-apportioned business income tax base equal to the total book-tax difference triggered by the enactment of the Michigan business tax that results in a net deferred tax liability. The net impact to the Partnership was a $0.2 million charge to income, with the Company recording its proportionate share of less than $0.1 million.

        The Partnership issues common units in various transactions, which results in a dilution of the Company's percentage ownership in the Partnership. The Company accounts for the sale of the Partnership common units in accordance with the Securities and Exchange Commission Staff Accounting Bulletin Number 51, "Accounting for Sales of Stock by a Subsidiary" ("SAB 51"). SAB 51 allows for the election of an accounting policy of recording such increase or decreases in a parent's investment (SAB 51 gains or losses, respectively) either in income or in equity. The Company adopted a policy of recording such SAB 51 gains or losses directly to additional paid in capital. Due to the preference nature of the Partnership's common units, the Company was precluded from recording SAB 51 gains or losses until the subordinated units converted to common units.

        On August 15, 2007, the Partnership converted its remaining 1.2 million subordinated units to common units, in accordance with the provisions of the amended and restated partnership agreement. As a result, the Company recorded a $48.2 million SAB 51 gain to additional paid in capital, a decrease in non-controlling interest in consolidated subsidiary of $77.5 million and an increase to deferred tax liability of $29.3 million associated with gains from sales of common units by the Partnership in conjunction with, and subsequent to, the Partnership's May 24, 2002 initial public offering. The changes to the Company's balance sheet resulting from the subordinated unit conversion had no effect on the Company's net income or cash flow and did not result in an increase in the number of limited partner units outstanding.

3. Recent Accounting Pronouncements

        In September 2006 the FASB issued SFAS 157, Fair Value Measurements ("SFAS 157"). SFAS 157 clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. SFAS 157 is effective for the Company's financial statements as of January 1, 2008, and interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the impact of adopting this statement.

        In February 2007 the FASB issued SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities ("SFAS 159"), which permits an entity to measure certain financial assets and financial liabilities at fair value. The statement's objective is to improve financial reporting by allowing entities to mitigate volatility in reported earnings caused by the measurement of related assets and liabilities using different attributes, without having to apply complex hedge accounting provisions. Under SFAS 159, entities that elect the fair value option will report unrealized gains and losses in earnings at each subsequent reporting date. The fair value option may be elected on an instrument-by-instrument basis, with a few exceptions, as long as it is applied to the instrument in its entirety. The fair value option election is irrevocable, unless a new election date occurs. SFAS 159

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establishes presentation and disclosure requirements to help financial statement users understand the effect of the entity's election on its earnings, but does not eliminate disclosure requirements of other accounting standards. Assets and liabilities that are measured at fair value must be displayed on the face of the balance sheet. SFAS 159 is effective for the Company's financial statements as of January 1, 2008. Early adoption is permitted as of the beginning of the previous fiscal year provided that the entity (1) makes that choice in the first 120 days of that fiscal year, (2) has not yet issued financial statements, and (3) elects to apply the provisions of SFAS 157. The Company is currently evaluating the impact of adopting this statement.

4. Merger

        On September 5, 2007, the Company announced that it had entered into an Agreement and Plan of Redemption and Merger (the "Redemption and Merger Agreement") by and among the Company, the Partnership and MWEP, L.L.C., a wholly owned subsidiary of the Partnership, pursuant to which the Company will be merged into the Partnership. Under the Redemption and Merger Agreement, the Company will, subject to pro ration, redeem for cash those shares of Company common stockholders electing to receive cash. Immediately after the redemption, the Partnership will acquire the Company through a merger of MWEP, L.L.C. with and into the Company, pursuant to which all remaining shares of the Company's common stock will be converted into Partnership common units. As a result of the merger, the Company will be a wholly owned subsidiary of the Partnership. In connection with the redemption and merger, the incentive distribution rights in the Partnership, the 2% economic interest of MarkWest Energy GP, L.L.C. (the "General Partner") and the Partnership common units owned by the Company will be exchanged for Partnership Class A units. Contemporaneously with the closing of the transactions contemplated by the Redemption and Merger Agreement, the Partnership will separately acquire 100% of the Class B membership interests in the General Partner currently held by current and former management and certain directors of the Company and the General Partner. Pursuant to the Redemption and Merger Agreement, the Company will pay to its stockholders approximately $240.5 million in cash in the redemption and the Partnership will issue to the Company's stockholders approximately 15.5 million Partnership common units in the merger. Each stockholder of the Company may elect the form of consideration they receive in the redemption and merger. Specifically, stockholders of the Company may elect to receive all cash, all common units, the stated consideration consisting of 1.285 common units and $20.00 in cash for each of their shares, or any combination thereof. The Partnership has secured the financing for the cash payment through a signed letter of commitment discussed further in Note 9.

        The merger is subject to customary closing conditions including, among other things, (1) approval by the affirmative vote or consent of at least a unit majority (as such term is defined in the agreement of limited partnership of the Partnership) of the holders of the outstanding common units in the Partnership, (2) approval by the affirmative vote or consent of at least a majority of the holders of outstanding common shares in the Company, (3) receipt of applicable regulatory approvals, including the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, (4) effectiveness of a registration statement on Form S-4 with respect to the issuance of the Partnership's common units in connection with the merger, (5) approval for listing the common units of the Partnership to be issued in connection with the merger on the New York Stock

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Exchange and (6) closing of the related transactions contemplated by the Redemption and Merger Agreement.

        Pursuant to the Redemption and Merger Agreement, the Partnership agreed to amend and restate its existing partnership agreement. Under the amended and restated partnership agreement, the incentive distribution rights and the 2% General Partner interest in the Partnership will be eliminated along with the General Partner's right to call all of the limited partner interests in the Partnership if the General Partner owns more than 80% of the Partnership. In addition, the Partnership common unitholders will have the right under the amended and restated partnership agreement to elect the members of the General Partner board annually by a plurality of the votes cast at a meeting of unitholders of the Partnership.

        The merger between the Company and the Partnership will be accounted for in accordance with SFAS 141, Business Combinations, and related interpretations. The merger is considered a downstream merger whereby the Company is viewed as the surviving consolidated entity for accounting purposes rather than the Partnership, which is the surviving consolidated entity for legal purposes. As such, the merger will be accounted for in the Company's consolidated financial statements as an acquisition of non-controlling interest using the purchase method of accounting. Under this accounting method, the Partnership's accounts, including goodwill, will be adjusted to proportionately step up the book value of certain assets and liabilities. The total fair value of the non-controlling interest to be acquired will be the number of non-controlling interest units outstanding on the date the merger is closed valued at the then current per unit market price of the Partnership common units. The cash and the Partnership units distributed to officers and directors of the General Partner for their Class B membership interests in the General Partner will be recorded as settlement of share-based payment liability as discussed further in Note 12.

5. Marketable Securities

        As of September 30, 2007, the Company held short-term equity investments classified as trading securities. Realized and unrealized gains and losses on trading securities are included in earnings. Dividend and interest income are recognized when earned.

        Marketable securities classified as available-for-sale are stated at market value, based on the closing price of the securities at the balance sheet date. Accordingly, unrealized gains and losses are reflected in other comprehensive income, net of applicable income taxes. For losses that are other than temporary, the cost basis of the securities is written down to fair value, and the amount of the write down is reflected in the statement of operations. The Company utilizes a first-in first-out cost basis to compute realized gains and losses. Realized gains and losses, dividends, interest income, and the amortization of discounts and premiums are reflected in the statement of operations. Purchases and sales of securities are recognized on a trade-date basis.

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        The following are the components of marketable securities (in thousands):

        For the nine months ended September 30, 2007, the Company recognized net unrealized losses on available-for-sale securities of $0.2 million, net of the related tax benefit of $0.1 million. These losses are shown as a component of other comprehensive income for 2007.

        For the nine months ended September 30, 2007, the Company recognized net unrealized gains on trading securities of less then $0.1 million, net of the related tax expense of less than $0.1 million. The gains are included in income for 2007.

6. Equity Investments

        The Company applies the equity method of accounting for its 50% non-operating interest in Starfish Pipeline Company, L.L.C. ("Starfish"). Upon the acquisition of Starfish, there were differences between the purchase price allocated to the investments and the underlying equity of the subsidiary attributable to the Company's interest. The Company is amortizing these differences based upon the hypothetical purchase price allocation to the assets and liabilities of the subsidiaries as if the Company were consolidating Starfish. The difference between the carrying amount of the Company's equity method investment and the underlying equity attributable to the Company's interest is being amortized over 17 years. Summarized financial information for Starfish is as follows (in thousands):

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7. Property, Plant and Equipment

        Property, plant and equipment consist of (in thousands):

        The Company capitalizes interest on major projects during construction. For the three and nine months ended September 30, 2007, the Company capitalized interest, including deferred finance costs, of $0.5 million and $2.8 million, respectively. For the three and nine months ended September 30, 2006, the Company capitalized interest, including deferred finance costs, of $0.2 million and $0.4 million, respectively.

        On September 27, 2007, the Partnership signed a gas gathering agreement wherein it agreed to acquire gathering assets located in Pittsburg County in Southeast Oklahoma for $5.0 million no later than November 25, 2007. In conjunction with the gas gathering agreement, the Partnership will invest up to an additional $25.0 million to support the development of certain coal bed methane initiatives with a new gathering system. The gathering assets are located adjacent to, and will become fully integrated with the Partnership's Woodford gathering system.

        Additionally, on September 28, 2007, the Partnership announced an approximate $100.0 million expansion of the Javelina plant. This expansion involves the installation of a steam methane reformer facility for the recovery of high purity hydrogen. Construction of the facility will begin in the fourth quarter of 2007.

8. Impairments of Long-Lived Assets

        The Company's policy is to evaluate whether there has been a permanent impairment in the value of long-lived assets when certain events have taken place that indicate that the remaining balance may not be recoverable. The Partnership evaluates the carrying value of its property and equipment on at least a segment level and at lower levels where cash flows for specific assets can be identified.

        The analysis determined that a system located in the Partnership's Other Southwest segment had future estimated cash inflows estimated to be near zero because the system was shut-in for a year, and as such the carrying amounts of the assets exceeded the estimated undiscounted cash flows. It was determined that an impairment of the system had occurred. Fair value of the long-lived assets was

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determined based on Management's opinion that the idle assets had no economic value. Therefore, an impairment of long-lived assets of $0.4 million was recognized during the three months ended September 30, 2007.

9. Long-Term Debt

        Debt is summarized below (in thousands):

MarkWest Hydrocarbon Standalone

        On August 18, 2006, the Company entered into the second amended and restated credit agreement (the "Company Credit Facility") which provides a maximum lending limit of $55.0 million, increased from $25.0 million; and extends the term from one to three years. The Company Credit Facility includes a $40.0 million revolving facility and a $15.0 million unit acquisition facility. The $15.0 million unit acquisition facility may be used to finance the acquisition of the Partnership's common units.

        On February 16, 2007, the Company entered into the first amendment to the second amended and restated Company Credit Facility, increasing the term by one year to August 20, 2010, and providing an additional $50.0 million of credit to enable the Company to meet potential margin requirements associated with its derivative instruments.

        On March 15, 2007, the Company entered into the second amendment to the second amended and restated Company Credit Facility. This amendment clarifies language relating to the swap contracts between the Company and the lenders or lender's affiliates in several sections of the Company Credit Facility. It provides that the non-borrowing base credit extension, as defined in the agreement, shall be used solely for the purpose of enabling the Company to meet margin requirements under swap contracts, as defined in the agreement, with counterparties that are not lenders or affiliates of the lenders.

        The Company Credit Facility bears interest at a variable interest rate, plus basis points. The variable interest rate typically is based on the London Inter Bank Offering Rate; however, in certain borrowing circumstances the rate would be based on the higher of a) the Federal Funds Rate plus 0.5-1%, and b) a rate set by the Company Credit Facility's administrative agent, based on the U.S.

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prime rate. The basis points correspond to the ratio of the revolver facility usage to the borrowing base, ranging from 0.50% to 1.75% for base rate loans, and 1.50% to 2.75% for Eurodollar rate loans. The Company pays a quarterly commitment fee on the unused portion of the credit facility at an annual rate ranging from 0.375% to 0.5%.

        Under the provisions of the Company Credit Facility, the Company is subject to a number of restrictions on its business, including its ability to grant liens on assets; make or own certain investments; enter into any swap contracts other than in the ordinary course of business; merge, consolidate or sell assets; incur indebtedness (other than subordinated indebtedness); make distributions on equity investments; declare or make, directly or indirectly, any restricted distributions.

        The Company Credit Facility also contains covenants requiring the Company to maintain:

•

a leverage ratio (as defined in the credit agreement) of not greater than 4.0:1.0, or up to 5.5:1.0, in certain circumstances;



•

a minimum net worth of a) $30.0 million plus, b) 50% of consolidated net income (if positive) earned on or after July 1, 2006, plus, c) 100% of net proceeds of all equity issued by the Company subsequent to August 18, 2006; and



•

a minimum collateral coverage ratio of not less than 2.0:1.0 as of the date of any determination.

MarkWest Energy Partners

Partnership Credit Facility

        The Partnership's wholly owned subsidiary, MarkWest Energy Operating Company, L.L.C., has a $250.0 million revolving credit facility (the "Partnership Credit Facility"). The Partnership Credit Facility is guaranteed by the Partnership, substantially all of the Partnership's subsidiaries, and is collateralized by substantially all of the Partnership's assets and those of its subsidiaries. The borrowings under the Partnership Credit Facility bear interest at a variable interest rate, plus basis points. The basis points vary as defined in the fifth amendment to the Partnership Credit Facility. For the nine months ended September 30, 2007, the weighted average interest rate on the Credit Facility was 7.51%.

        Under the provisions of the Partnership Credit Facility, the Partnership is subject to a number of restrictions and covenants as defined in the fifth amendment to the Partnership Credit Facility. These covenants are used to calculate the available borrowing capacity on a quarterly basis. At September 30, 2007, available borrowings under the Partnership Credit Facility were $139.9 million.

Senior Notes

        At September 30, 2007, the Partnership and its wholly owned subsidiary, MarkWest Energy Finance Corporation, had two series of senior notes outstanding; $225.0 million at a fixed rate of 6.875% due in November 2014 and $272.1 million, net of unamortized discount of $2.9 million, at a fixed rate of 8.5% due in July 2016 (the "2016 Notes"), together (the "Senior Notes"). The estimated fair value of the Senior Notes was approximately $478.3 million and $499.8 million at September 30, 2007 and December 31, 2006, respectively, based on quoted market prices.

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        The Partnership has no independent assets or operations, other than investments in subsidiaries and issuances of debt. Each of the Partnership's existing subsidiaries, other than MarkWest Energy Finance Corporation, has guaranteed the Senior Notes jointly and severally and fully and unconditionally. The notes are senior unsecured obligations equal in right of payment with all of the Partnership's existing and future senior debt. These notes are effectively junior in right of payment to its secured debt to the extent of the assets securing the debt, including the Partnership's obligations in respect of the Partnership Credit Facility.

        The indentures governing the Senior Notes limit the activity of the Partnership and its restricted subsidiaries. Subject to compliance with certain covenants, the Partnership may issue additional notes from time to time under the indenture pursuant to Rule 144A and Regulation S under the Securities Act of 1933.

        The Partnership agreed to file an exchange offer registration statement or, under certain circumstances, a shelf registration statement, pursuant to a registration rights agreement relating to the 2016 Senior Notes. The Partnership failed to complete the exchange offer in the time provided for in the subscription agreements and as a consequence incurred penalty interest of 0.5% from January 7, 2007 until February 26, 2007, when the exchange offer was completed.

Debt Commitment Letter

        The Partnership entered into a debt commitment letter, dated September 4, 2007, as amended on October 31, 2007, whereby, subject to the terms and conditions set forth therein, two new senior secured credit facilities in an aggregate amount of $575.0 million, subject to increase as described therein, consisting of a $225.0 million senior secured term loan and a $350.0 million senior secured revolving credit facility which under certain circumstances can be increased up to $450.0 million. Up to $25.0 million of the revolving credit facility will be available as a letter of credit sub-facility. Both the term loan and revolving credit facility will be senior secured obligations of the Partnership and guaranteed by MarkWest Energy Operating Company, L.L.C., the Company and substantially all of the subsidiaries of both the Partnership and the Company. Also in connection with the signing of the redemption and merger agreement, the Partnership committed to make an intercompany loan to the Company in the amount of $225.0 million to fund its obligations under the Redemption and Merger Agreement.

10. Derivative Financial Instruments

Commodity Instruments

        The Company's primary risk management objective is to manage volatility in its cash flows. The Company has a committee comprised of the senior management team that oversees all of the risk management activity and continually monitors the Company's risk management program and expects to continue to adjust its financial positions as conditions warrant. The Company uses mark-to-market accounting for its non-trading commodity derivative instruments, accordingly, the volatility in any given period related to unrealized gains or losses can be significant to the overall financial results of the Company; however, management ultimately expects those gains and losses to be offset when they become realized. The Company does not have any trading derivative financial instruments.

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        The Company utilizes a combination of fixed-price forward contracts, fixed-for-floating price swaps and options on the over-the-counter ("OTC") market. The Company may also enter into futures contracts traded on the New York Mercantile Exchange ("NYMEX"). Swaps and futures contracts allow the Company to manage volatility in its margins because corresponding losses or gains on the financial instruments are generally offset by gains or losses in its physical positions.

        The Company enters into OTC swaps with financial institutions and other energy company counterparties. The Company conducts a standard credit review on counterparties and has agreements containing collateral requirements where deemed necessary. The Company uses standardized swap agreements that allow for offset of positive and negative exposures. The Company may be subject to margin deposit requirements under OTC agreements (with non-bank counterparties) and NYMEX positions.

        Because of the strong correlation between NGL prices and crude oil prices and limited liquidity in the NGL financial market, the Company uses crude oil derivative instruments to manage NGL price risk. As a result of these transactions, the Company has mitigated its expected commodity price risk with agreements expiring at various times through the first quarter of 2011. The margins the Company earns from condensate sales are directly correlated with crude oil prices.

        The use of derivative instruments may expose the Company to the risk of financial loss in certain circumstances, including instances when (i) NGLs do not trade at historical levels relative to crude oil, (ii) sales volumes are less than expected requiring market purchases to meet commitments, or (iii) the Company's OTC counterparties fail to purchase or deliver the contracted quantities of natural gas, NGLs or crude oil or otherwise fail to perform. To the extent that the Company enters into derivative instruments, it may be prevented from realizing the benefits of favorable price changes in the physical market. The Company is similarly insulated, however, against unfavorable changes in such prices.

        The Company may enter into physical and/or financial positions to manage its risks related to commodity price exposure for its Standalone Segment. Due to the timing of purchases and sales, direct exposure to price volatility may result because there is no longer an offsetting purchase or sale that remains exposed to market pricing. Through marketing and derivative activities, direct price exposure may occur naturally or the Company may choose direct exposure when it is favorable as compared to the frac spread risk.

        The Partnership's primary risk management objective is to reduce volatility in its cash flows arising from changes in commodity prices related to future sales of natural gas, NGLs and crude oil. Swaps and futures contracts may allow the Partnership to reduce volatility in its realized margins as realized losses or gains on the derivative instruments generally are offset by corresponding gains or losses in the Partnership's sales of physical product. While the Partnership largely expects its realized derivative gains and losses to be offset by increases or decreases in the value of its physical sales, the Partnership will experience volatility in reported earnings due to the recording of unrealized gains and losses on its derivative positions that will have no offset.

        Fair value is based on available market information for the particular derivative instrument, and incorporates the commodity, period, volume and pricing. Where published market values are not readily available, the Company uses a third-party service. Due to the use of mark-to-market accounting, the fair value of our commodity derivative instruments is equal to the carrying value. The impact of the

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Company's commodity derivative instruments on consolidated financial position are summarized below (in thousands):

        The Partnership has recorded premium payments relating to certain derivative option contracts as risk management deposits. The premiums allowed the Partnership to secure specific pricing on those contracts. The payment is recorded as an asset and is amortized through revenue as the puts expire or are exercised. The current and noncurrent risk management premiums have been recorded as "Other assets" and "Other long-term assets", respectively, in the accompanying Condensed Consolidated Balance Sheets.

        The Company accounts for the impact of its commodity derivative instruments as either a component of revenue or purchased product costs. Sales are recognized as a component of revenue and purchases as a component of purchased product costs. The Company also has a contract which creates a floor on the frac spread which can be realized on a specific volume purchased. Gains and losses from this contract are recorded as a component of purchased product costs. The Partnership accounts for the impact of its commodity derivative instruments as a component of revenue. The Partnership also has a contract allowing it to fix a component of the price of electricity at one of its plant locations. Gains and losses from the contract are recognized as a component of facility expenses. The consolidated impact of the Company's commodity derivative instruments on revenues are summarized below (in thousands):

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        The consolidated impact of the Company's commodity derivative instruments included in purchased product costs and facility expenses in the accompanying Condensed Consolidated Statements of Operations are summarized below (in thousands):

11. Income Taxes

        The Company accounts for income taxes under the asset and liability method pursuant to SFAS 109. Under SFAS 109, deferred income taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and net operating loss and credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of any tax rate change on deferred taxes is recognized in the period that includes the enactment date of the tax rate change. Realizability of deferred tax assets is assessed and, if not more likely than not, a valuation allowance is recorded to write down the deferred tax assets to their net realizable value.

        The Company bases the effective corporate tax rate for interim periods on the estimated annual effective corporate tax rate. For the nine months ended September 30, 2007 and 2006, the estimated annual effective corporate tax rate was 42.7% and 35.4%, respectively. The 2007 estimated annual effective income tax rate varies from the statutory rate mostly due to a change in the valuation allowance in the state Net Operating Losses ("NOL") related to the state NOL utilization. As a result, income tax benefit totaled $7.9 million and $10.3 million for the three and nine months ended September 30, 2007, respectively. Income tax expense totaled $5.4 million and $5.9 million for the three and nine months ended September 30, 2006, respectively.

        The Company adopted FIN 48, effective January 1, 2007. The interpretation clarifies the accounting for uncertainty in income taxes recognized in a company's financial statements in accordance with SFAS 109. Specifically, the pronouncement prescribes a "more likely than not" recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on the related derecognition, classification, interest and penalties, accounting for interim periods, disclosure and transition of uncertain tax positions. As a result of the implementation of FIN 48, the Company recognized a liability of $0.4 million for unrecognized income tax benefits in the first quarter of 2007, none of which would affect the Company's effective tax rate if recognized. Included in the unrecognized income tax benefit is a $0.1 million reduction of retained earnings.

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        On July 12, 2007, the State of Michigan enacted changes in its taxation scheme. As a result, the Company has made the necessary adjustments to the deferred tax assets (and liabilities) in the form of a charge (or benefit) to income, as part of its income tax provision in the third quarter. Michigan's new tax law replaces the single business tax with a two-prong tax. The two prongs comprise a tax at the rate of 0.8% of a taxpayer's modified gross receipts and a tax at the rate of 4.95% of the taxpayer's business income. The new tax takes effect on January 1, 2008 and applies to all business activity occurring after December 31, 2007. The current single business tax will remain in effect through December 31, 2007. The current single business tax will remain in effect through December 31, 2007. Adopted on September 30, 2007, and effective January 1, 2008, Michigan House Bill 5104 creates a deduction from a taxpayer's pre-apportioned business income tax base equal to the total book-tax difference triggered by the enactment of the Michigan business tax that results in a net deferred tax liability. The net impact to the Partnership was a $0.2 million charge to income in the third quarter of 2007, with the Company recording its proportionate share of less than $0.1 million.

        The Texas margin tax law that was signed into law on May 18, 2006, causes the Partnership to be subject to an entity-level tax on the portion of its income that is generated in Texas beginning with tax year ending in 2007. The Texas margin tax is imposed at a maximum effective rate of 1.0%. Imposition of such a tax on the Partnership by Texas reduces the cash available for distribution to unitholders. Consistent with the principles of accounting for income taxes, the Partnership adjusted its deferred tax liability and expense by $0.1 million and $0.2 million for the three and nine months ended September 30, 2007, respectively, related to the Partnership's temporary differences that are expected to reverse in future periods when the tax will apply. No adjustment was recorded for the three months ended September 30, 2006 and a deferred tax liability of $0.7 million was recorded for the nine months ended September 30, 2006.

        The Company recognizes interest and penalties related to uncertain tax positions in "Interest expense" and "Selling, general and administrative expenses" in the accompanying Condensed Consolidated Statements of Operations. As of the date of adoption, the Company has approximately $0.1 million of accrued interest and penalties related to uncertain tax positions.

        The tax years 2002 through 2006 remain open to examination by the major taxing jurisdictions to which the Company is subject.

12. Incentive Compensation Plans

        The Company's shareholders have adopted the 2006 Stock Incentive Plan (the "2006 Plan"), the 2006 Plan allows for the grant of a maximum of 1.0 million restricted shares and stock options. The 2006 Plan is administered by the Compensation Committee of the Company's Board of Directors.

        The Company has also entered into arrangements with certain directors and employees of the Company referred to as the Participation Plan. Under it, the Company is able to sell interests in the Partnership's General Partner under a purchase and sale agreement. The Company has not sold any interests in the General Partner since the first quarter of 2006.

        The general partner of the Partnership has adopted the Long Term Incentive Plan (the "LTIP") for employees and directors of the general partner, as well as employees of its affiliates who perform services for the Partnership. The LTIP currently permits the grant of awards covering an aggregate of

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1.0 million common units, comprised of 0.4 million restricted units and 0.6 million unit options. The LTIP is administered by the Compensation Committee of the General Partner's Board of Directors. As of September 30, 2007 the Partnership had not issued any unit options.

        Total compensation cost for share-based pay arrangements was as follows (in thousands):

        Compensation expense has been recorded as "Selling, general and administrative expenses" in the accompanying Condensed Consolidated Statements of Operations. The expense not yet recognized as of September 30, 2007, related to unvested restricted stock and unvested restricted units was $0.9 million and $1.7 million, respectively, with weighted average remaining vesting periods of 1.8 and 1.7 years, respectively. The actual compensation cost recognized might differ for the restricted units, as they qualify as liability awards, which are affected by changes in fair value.

2006 Stock Incentive Plan

        The following summarizes the impact of stock option activity under the 2006 Plan (in thousands of shares):

        For the nine months ended September 30, 2007 and 2006, the Company received exercise proceeds of $0.1 million and $0.3 million, respectively, for the exercise of stock options. The Company has not granted any stock options since 2004. The fair value of each option granted in 2004 was estimated

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using the Black-Scholes option-pricing model. The following assumptions were used to compute the weighted-average fair value of options granted:

        During the nine months ended September 30, 2007, the Company had not granted any stock options and there were no forfeitures or cancellations of exercisable options. The following is a summary of stock option activity under the 2006 Plan:

        The following is a summary of restricted stock granted under the 2006 Plan:

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        During the nine months ended September 30, 2007 and 2006, the Company received no proceeds for issuing restricted stock, and there were no cash settlements.

        Pursuant to the terms of the amended and restated Class B Membership Interest Contribution Agreement dated October 26, 2007, all outstanding interests in the General Partner will be exchanged for a combination of the Partnership's common units and cash on the date of the merger as described in Note 4. The exchange will be accounted for as a settlement of a share based payment liability under SFAS 123R, Share Based Payment ("SFAS 123R"), and any difference between the carrying value of the Company's liability and the payment at the time of the redemption and merger will be recorded as additional compensation expense.

Long Term Incentive Plan

        The following is a summary of restricted units granted under the LTIP: