10-Q 1 a10-q.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to _________ Commission File Number 1-11566 MARKWEST HYDROCARBON, INC. (Exact name of registrant as specified in its charter) DELAWARE 84-1352233 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 155 INVERNESS DRIVE WEST, SUITE 200, ENGLEWOOD, CO 80112-5000 (Address of principal executive offices) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 303-290-8700 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- The registrant had 8,452,174 shares of common stock, $.01 per share par value, outstanding as of June 30, 2000.

Page ----- PART I--FINANCIAL INFORMATION Item 1. Consolidated Financial Statements Consolidated Balance Sheet at June 30, 2000 and December 31, 1999 ... 1 Consolidated Statement of Operations for the Three and Six Months Ended June 30, 2000 and 1999 .................................... 2 Consolidated Statement of Cash Flows for the Three and Six Months Ended June 30, 2000 and 1999 .................................... 3 Notes to the Consolidated Financial Statements ...................... 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ........................................... 6 Item 3. Quantitative and Qualitative Disclosures about Market Risk ............ 12 PART II--OTHER INFORMATION Item 1. Legal Proceedings ..................................................... 12 Item 4. Submission of Matters to a Vote of Security Holders ................... 12 Item 6. Exhibits and Reports on Form 8-K ...................................... 12 SIGNATURE ...................................................................... 13

GLOSSARY OF TERMS Bbls barrels Bcf billion cubic feet of natural gas Btu British thermal units, an energy measurement EBITDA earnings before gain on sale, interest income, interest expense, income taxes, depreciation, depletion and amortization; a cash flow financial measure commonly used in the oil and gas industry MM million Mcf thousand cubic feet of natural gas Mcfd thousand cubic feet of natural gas per day MMBtu million British thermal units, an energy measurement MMcf million cubic feet of natural gas MMcfd million cubic feet of natural gas per day NGL natural gas liquids, such as propane, butanes and natural gasoline One barrel of oil or NGL is the energy equivalent of six Mcf of natural gas. PART I--FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS MARKWEST HYDROCARBON, INC. CONSOLIDATED BALANCE SHEET (UNAUDITED) (000s, EXCEPT SHARE DATA)

June 30, December 31, ASSETS 2000 1999 --------- ----------- Current assets: Cash and cash equivalents .................................................. $ 1,518 $ 1,356 Receivables ................................................................ 16,421 16,360 Inventories ................................................................ 6,761 6,043 Prepaid feedstock .......................................................... 4,118 1,895 Other assets ............................................................... 352 327 --------- --------- Total current assets .................................................. 29,170 25,981 Property and equipment: Gas processing, gathering, storage and marketing equipment ................. 92,791 78,476 Oil and gas properties and equipment ....................................... 16,366 14,518 Land, buildings and other equipment ........................................ 6,124 11,409 Construction in progress ................................................... 3,302 10,697 --------- --------- 118,583 115,100 Less: accumulated depreciation, depletion and amortization ................. (24,950) (22,789) --------- --------- Total property and equipment, net ..................................... 93,633 92,311 Intangible assets, net of accumulated amortization of $515 and $438, respectively .......................................................... 924 951 --------- --------- Total assets .......................................................... $ 123,727 $ 119,243 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities ................................... $ 21,438 $ 14,366 Current portion of long-term debt .......................................... -- 104 --------- --------- Total current liabilities ............................................. 21,438 14,470 Deferred income taxes .......................................................... 9,260 8,019 Long-term debt ................................................................. 36,000 44,035 Stockholders' equity: Preferred stock, par value $0.01, 5,000,000 shares authorized, 0 shares outstanding .............................................................. -- -- Common stock, par value $0.01, 20,000,000 shares authorized, 8,531,206 and 8,531,206 shares issued, respectively .................................... 85 85 Additional paid-in capital ................................................. 42,240 42,222 Retained earnings .......................................................... 15,163 10,801 Treasury stock, 79,032 and 69,504 shares, respectively ..................... (459) (389) --------- --------- Total stockholders' equity ............................................ 57,029 52,719 --------- --------- Total liabilities and stockholders' equity ............................ $ 123,727 $ 119,243 ========= =========

The accompanying notes are an integral part of these financial statements. 1 MARKWEST HYDROCARBON, INC. CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) (000s, EXCEPT PER SHARE DATA)

For the three months ended For the six months ended June 30, June 30, -------------------------- -------------------------- 2000 1999 2000 1999 -------- -------- -------- -------- Revenues: Gathering, processing and marketing revenue ................. $ 38,698 $ 17,511 $ 83,332 $ 39,339 Oil and gas revenue, net of transportation and taxes ..................................................... 630 467 1,121 732 -------- -------- -------- -------- Total revenues ......................................... 39,328 17,978 84,453 40,071 Operating expenses: Cost of sales ............................................... 30,417 12,971 62,428 28,236 Operating expenses .......................................... 4,089 2,922 7,895 5,906 General and administrative expenses ......................... 2,018 1,682 3,857 3,263 Depreciation, depletion and amortization .................... 1,461 1,311 2,896 2,614 -------- -------- -------- -------- Total operating expenses ............................... 37,985 18,886 77,076 40,019 Income from operations ................................. 1,343 (908) 7,377 52 Other income and expense: Interest income ............................................. 31 12 53 26 Interest expense ............................................ (655) (631) (1,402) (1,432) Gain on sale of assets ...................................... 1,000 2,509 1,000 2,509 Other income (expense) ...................................... 66 (29) 93 (45) -------- -------- -------- -------- Income before income taxes ............................. 1,785 953 7,121 1,110 Provision for income taxes: Current ..................................................... 373 302 1,518 349 Deferred .................................................... 305 74 1,241 74 -------- -------- -------- -------- 678 376 2,759 423 -------- -------- -------- -------- Net income ............................................. $ 1,107 $ 577 $ 4,362 $ 687 ======== ======== ======== ======== Basic earnings per share of common stock ........................ $ 0.13 $ 0.07 $ 0.52 $ 0.08 ======== ======== ======== ======== Earnings per share assuming dilution ............................ $ 0.13 $ 0.07 $ 0.51 $ 0.08 ======== ======== ======== ======== Weighted average number of outstanding shares of common stock: Basic .................................................. 8,451 8,492 8,452 8,485 ======== ======== ======== ======== Assuming dilution ...................................... 8,483 8,503 8,475 8,492 ======== ======== ======== ========

The accompanying notes are an integral part of these financial statements. 2 MARKWEST HYDROCARBON, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (000s)

For the three months For the six months ended June 30, ended June 30, -------------------------- -------------------------- 2000 1999 2000 1999 -------- -------- -------- -------- Cash flows from operating activities: Net income ................................................. $ 1,107 $ 577 $ 4,362 $ 687 Add income items that do not affect working capital: Depreciation, depletion and amortization ............... 1,461 1,311 2,896 2,614 Deferred income taxes .................................. 305 74 1,241 74 Gain on sale of assets ................................. (1,000) (2,509) (1,000) (2,509) Other .................................................. (9) (11) (137) (21) -------- -------- -------- -------- 1,864 (558) 7,362 845 Adjustments to working capital: (Increase) decrease in receivables ..................... (3,364) 143 (61) (2,149) Increase in inventories ................................ (3,010) (3,255) (718) (263) (Increase) decrease in prepaid expenses and other assets ................................................. (2,099) 2,118 (2,256) 4,529 Increase in accounts payable and accrued liabilities ... 1,127 5,433 7,093 5,978 -------- -------- -------- -------- (7,346) 4,439 4,058 8,095 Net cash provided by (used in) operating activities .................................... (5,482) 3,881 11,420 8,940 Cash flows from investing activities: Capital expenditures ................................... (2,728) (1,649) (9,288) (3,802) Proceeds from sale of assets ........................... 1,399 5,927 6,484 6,347 Other .................................................. -- 1 -- 20 -------- -------- -------- -------- Net cash provided by (used in) investing activities .................................... (1,329) 4,279 (2,804) 2,565 Cash flows from financing activities: Proceeds from long-term debt .............................. 15,000 7,000 20,500 11,619 Repayment of long-term debt ............................... (9,049) (14,013) (28,639) (23,652) Net reissuance (buy-back) of treasury stock ............... 19 37 (52) 169 Debt issuance costs ....................................... (263) -- (263) -- -------- -------- -------- -------- Net cash provided by (used in) financing activities .................................... 5,707 (6,976) (8,454) (11,864) -------- -------- -------- -------- Net increase (decrease) in cash and cash equivalents ............ (1,104) 1,184 162 (359) Cash and cash equivalents at beginning of period ................ 2,622 512 1,356 2,055 -------- -------- -------- -------- Cash and cash equivalents at end of period ...................... $ 1,518 $ 1,696 $ 1,518 $ 1,696 ======== ======== ======== ========

The accompanying notes are an integral part of these financial statements. 3 MARKWEST HYDROCARBON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. GENERAL The consolidated financial statements include the accounts of MarkWest Hydrocarbon, Inc. ("MarkWest" or the "Company"), and its wholly owned subsidiaries: MarkWest Resources, Inc., and MarkWest Michigan, Inc. All significant intercompany accounts and transactions have been eliminated in consolidation. The unaudited financial statements presented herein have been prepared in accordance with the instructions to Form 10-Q and do not include all the information and note disclosures required by generally accepted accounting principles for complete financial statements. The interim consolidated financial statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto for the year ended December 31, 1999, included in the Company's Annual Report on Form 10-K, as filed with the Securities and Exchange Commission. In the opinion of management, all adjustments necessary for a fair statement of the results for the unaudited interim periods have been made. These adjustments consist only of normal recurring adjustments. The effective corporate tax rate for interim periods is based on the estimated annual effective corporate tax rate, excluding certain nonrecurring or unusual events. The effective tax rate varies from statutory rates primarily due to tax credits. NOTE 2. LONG-TERM DEBT Effective May 26, 2000, the Company amended its existing credit agreement. The amended agreement extends for an additional year, through the year 2006, and provides for a $15 million increase to the maximum borrowing amount, now $65 million, pursuant to a revolving loan commitment. Actual borrowing limits may be a lesser amount, depending on trailing cash flow, as defined in the agreement. NOTE 3. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. This statement, as amended by SFAS Nos. 137 and 138, is effective for fiscal years beginning after June 15, 2000. SFAS No. 133 requires an entity to recognize all derivatives as assets or liabilities in the balance sheet and measure those instruments at fair value. Although the Company is currently evaluating SFAS No. 133, it is not expected to have a material impact on the financial condition or operations of the Company. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS, that provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the SEC. This bulletin, as amended by SAB No. 101B, must be implemented no later than the fourth fiscal quarter of 2000. Although the Company is currently evaluating SAB No. 101, it is not expected to have a material impact on the financial condition or operations of the Company. NOTE 4. SEGMENT REPORTING The Company's operations are classified into two reportable segments, as follows: (1) Processing and Related Services--provide compression, gathering, treatment and NGL extraction, and fractionation services; also purchase and market natural gas and NGL; and (2) Exploration and Production--explore for and produce natural gas. MarkWest evaluates the performance of its segments and allocates resources to them based on operating income. There are no intersegment revenues. MarkWest's business is conducted solely in the United States. The table below presents information about operating income for the reported segments for the second quarter of 2000 and the six months ended June 30, 2000, and for the corresponding periods in 1999. Operating income for each segment includes total revenues less operating expenses, and excludes depreciation, depletion and amortization, corporate administrative expenses, interest expense, interest income and income taxes. Asset information by reportable segment is not reported, since MarkWest does not produce such information internally. 4 MARKWEST HYDROCARBON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Processing and Exploration and Related Services Production Total (000s) (000s) (000s) ---------------- --------------- ------ FOR THE QUARTER ENDED JUNE 30, 2000 Revenues ............................. $38,698 $ 630 $39,328 Segment operating income ............. $ 4,540 $ 282 $ 4,822 FOR THE QUARTER ENDED JUNE 30, 1999 Revenues ............................. $17,511 $ 467 $17,978 Segment operating income ............. $ 1,922 $ 163 $ 2,085 FOR THE SIX MONTHS ENDED JUNE 30, 2000 Revenues ............................. $83,332 $1,121 $84,453 Segment operating income ............. $13,551 $ 579 $14,130 FOR THE SIX MONTHS ENDED JUNE 30, 1999 Revenues ............................. $39,339 $ 732 $40,071 Segment operating income ............. $ 5,624 $ 305 $ 5,929

A reconciliation of total segment operating income to total consolidated income (loss) before taxes is as follows (000s):

Six Months Six Months Quarter Ended Quarter Ended Ended Ended June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999 ------------- ------------- -------------- ------------- Total segment operating income ......... $ 4,822 $ 2,085 $ 14,130 $ 5,929 General and administrative expenses .... (2,018) (1,682) (3,857) (3,263) Depreciation and amortization .......... (1,461) (1,311) (2,896) (2,614) Interest income ........................ 31 12 53 26 Interest expense ....................... (655) (631) (1,402) (1,432) Gain on sale of assets ................. 1,000 2,509 1,000 2,509 Other income (expense) ................. 66 (29) 93 (45) ------- ------- -------- ------- Income before taxes .............. $ 1,785 $ 953 $ 7,121 $ 1,110 ======= ======= ======== =======

5 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations contains statements which, to the extent that they are not recitations of historical fact, constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 ("Section 27A") and Section 21E of the Securities and Exchange Act of 1934 ("Section 21E"). All forward-looking statements involve risks and uncertainties. The forward-looking statements in this document are intended to be subject to the safe harbor protection provided by Sections 27A and 21E. Factors that most typically impact MarkWest's operating results and financial condition include (i) changes in general economic conditions in regions in which the Company's products are located; (ii) the availability and prices of NGL and competing commodities; (iii) the availability and prices of raw natural gas supply; (iv) the ability of the Company to negotiate favorable marketing agreements; (v) the risks that third party or Company natural gas exploration and production activities will not occur or be successful; (vi) the Company's dependence on certain significant customers, producers, gatherers, treaters and transporters of natural gas, (vii) competition from other NGL processors, including major energy companies; (viii) the Company's ability to identify and consummate grass roots projects or acquisitions complementary to its business; and (ix) winter weather conditions. For discussions identifying other important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements, see the Company's Securities and Exchange Commission filings. Forward-looking statements involve many uncertainties that are beyond the Company's ability to control and in many cases the Company cannot predict what factors would cause actual results to differ materially from those indicated by the forward-looking statements. SECOND QUARTER 2000 RESULTS For the quarter ended June 30, 2000, net income was $1.1 million, or $0.13 per share, up $0.5 million or $0.06 per share, from 1999. Excluding the $0.6 million after-tax gain from the sale of an asset in May 2000 and the $1.5 million after-tax gain from the sale of a terminal in May 1999, net income was $0.5 million, or $0.6 per share, for the quarter ended June 30, 2000 compared to a net loss was $0.9 million, or $0.11 per share for the quarter ended June 30, 1999. Excluding the $1.0 million pre-tax gain from the sale of an asset, earnings before interest, taxes and depreciation, depletion and amortization ("EBITDA") totaled $2.9 million for the second quarter of 2000. Excluding the $2.5 million pre-tax gain from the sale of a terminal, EBITDA totaled $0.4 million for the quarter ended June 30, 1999. Results from MarkWest's Appalachian operations increased $1.9 million after-tax principally from increased processing margins ($1.6 million) and the first full quarter's contribution from the recently completed Phase I expansion, partially offset by a scheduled reduction in processing fees. Decreased western Michigan throughput and sales volumes were largely offset by increased sales prices, and improved Rocky Mountain business unit results. General and administrative and depreciation expenses increased as expected by $0.3 million after-tax. SIX MONTHS ENDED JUNE 30, 2000, RESULTS For the six months ended June 30, 2000, net income was $4.4 million, or $0.52 per share, up $3.7 million or $0.44 per share from 1999. Excluding the aforementioned after-tax gains from the sale of Company assets in the second quarters of 2000 and 1999, net income was $3.8 million, or $0.44 per share, for the six months ended June 30, 2000 compared to a net loss of $0.9 million, or $0.10 per share, for the six months ended June 30, 1999. EBITDA in 2000 was $10.4 million; four times 1999's $2.6 million. Results from MarkWest's Appalachian operations increased $5.3 million after-tax for the six months ended June 30, 2000, compared to results from the same period in 1999, from increased processing margins ($4.6 million) and the completion of the Phase I expansion in mid-first quarter 2000. However, expected increases in general and administrative, and depreciation expenses decreased results $0.5 million after-tax. The decline in western Michigan throughput and sales volumes were largely offset by increased sales prices, and improved results in the Rocky Mountain business unit. 6 OPERATING STATISTICS

Three Months Ended June 30, Six Months Ended June 30, -------------------------------------- -------------------------------------- 2000 1999 % Change 2000 1999 % Change ---------- ---------- -------- ---------- ---------- -------- Appalachia: NGL production--Siloam plant (gallons) ... 40,500,000 25,800,000 57% 73,800,000 53,900,000 37% NGL sales--Siloam plant (gallons): Sales earning a processing margin ..... 23,200,000 21,200,000 9% 55,600,000 56,900,000 (2%) Sales earning fee income .............. 9,600,000 -- -- 14,100,000 -- -- ---------- ---------- ---------- ---------- Total NGL sales--Siloam plant ......... 32,800,000 21,200,000 55% 69,700,000 56,900,000 22% Processing margin per gallon: Average NGL sales price ............... $ 0.53 $ 0.32 66% $ 0.56 $ 0.29 93% Average natural gas cost .............. 0.36 0.26 38% 0.35 0.22 59% ---------- ---------- ---------- ---------- Processing margin per gallon .......... $ 0.17 $ 0.06 183% $ 0.21 $ 0.07 200% Michigan: Pipeline throughput (Mcfd) ............... 12,300 17,300 (29%) 12,800 19,300 (34%) NGL sales (gallons) ...................... 2,400,000 3,400,000 (29%) 5,200,000 7,200,000 (28%) Rocky Mountains: Natural gas produced (Mcfd) .............. 3,300 2,500 32% 3,300 2,200 50%

PROCESSING AND RELATED SERVICES - APPALACHIA Second quarter 2000 marked the first full quarter of operations at the Company's recently completed Phase I expansion of its Appalachian facilities. Phase I expansion consisted of the construction of a 75 MMcfd, mechanical refrigeration, NGL extraction plant ("Maytown") in southern Kentucky; the connection of the Maytown plant to the Company's Siloam fractionation facility; and the expansion of the Siloam fractionator, which is expected to increase throughput volumes from 310,000 gallons per day to 460,000 gallons per day during 2000. Phase I expansion led to second quarter 2000 NGL production volumes of 40.5 MMgal, up 57 percent compared to the same period last year. Second quarter 2000 plant NGL marketing volumes of 32.8 MMgal were up 55 percent from the same period last year. PROCESSING AND RELATED SERVICES - MICHIGAN Pipeline throughput volumes were 12,300 Mcfd in the second quarter of 2000, down 29 percent over the same period in 1999. This reduction was due to natural production declines and delays on receiving volumes from shut-in wells involved in third-party litigation. MarkWest's own exploration continues to move ahead. The first well drilled by MarkWest encountered a reef as predicted, and a horizontal leg will evaluate its potential in August 2000. A second well was unsuccessful. An additional two wells identified with extensive seismic reprocessing will be drilled in August 2000. The Company estimate for the remainder of 2000 is an average of 9,500 Mcfd in pipeline throughput. Construction on the Company's eastern Michigan operations ("Au Gres")--consisting of a well and well facility, a pipeline, and a gas processing plant--was completed prior to the end of second quarter. The well was producing up to 1,800 Mcfd during early July 2000. After further production history, several more wells in the field may be brought on stream. The Au Gres project has the potential to make an important impact on our Michigan operations. EXPLORATION AND PRODUCTION - ROCKY MOUNTAINS Natural gas sold in the second quarter of 2000 totaled 3,300 Mcfd, a 32 percent increase over the same period last year. In the second quarter 2000, MarkWest decided on the basis of the favorable outlook for natural gas prices not to sell its San Juan Basin unit as previously announced. Instead, further development of existing San Juan Basin properties will be pursued. The Company sold its Piceance Basin properties for $0.3 million in proceeds during the second quarter of 2000. 7 THREE MONTHS ENDED JUNE 30, 2000, COMPARED TO THE THREE MONTHS ENDED JUNE 30, 1999 (IN THOUSANDS)

2000 (1) 1999 (2) $ Change -------- -------- -------- Revenues ............................... $ 39,328 $ 17,978 $ 21,350 Income (loss) from operations .......... $ 1,343 $ (908) $ 2,251 Income (loss) before income taxes ...... $ 785 $ (1,556) $ 2,341 Provision (benefit) for income taxes.... 298 (614) (912) -------- -------- -------- Net income (loss) ...................... $ 487 $ (942) $ 1,429 ======== ======== ========

------------------- (1) Excludes $1.0 million gain ($0.6 million after-tax) on the sale of an asset. (2) Excludes $2.5 million gain ($1.5 million after-tax) on the sale of a terminal. REVENUES GATHERING, PROCESSING AND MARKETING REVENUE. Gathering, processing and marketing revenue increased $21.2 million or 121 percent for the three months ended June 30, 2000, compared to the same period in 1999. At the Company's Siloam fractionation facility, a 66 percent or $4.8 million increase in the average NGL sales price coupled with a 55 percent or $5.9 million increase in gallons sold contributed $10.7 million to the increase in revenues. The increase in average NGL sales prices was attributable to the corresponding increase in oil prices. The increase in gallons sold was a result of the first full quarter's operations of the Company's expanded Appalachian facilities. Gas marketing sales, boosted by higher year over year natural gas prices and volumes, contributed an additional $12.1 million in revenues during the second quarter 2000. Combined with a corresponding increase in gas marketing cost of sales, the second quarter 2000 gross margin from gas marketing increased $60,000 over second quarter 1999. The Company's gas marketing activities generate low margins; these activities are executed in support of MarkWest's processing business. Other items decreased revenues by $1.6 million. COSTS AND EXPENSES COST OF SALES. Cost of sales increased $17.4 million or 135 percent for the three months ended June 30, 2000, compared to the same period in 1999. A 38 percent or $2.4 million increase in Appalachia natural gas costs plus a 55 percent or $4.7 million increase in volumes sold at the Company's Siloam facility combined to increase cost of sales by $7.1 million. The increase was also caused by an $12.1 million increase in gas marketing purchases. Combined with a corresponding increase in gas marketing sales, the second quarter 2000 gross margin from gas marketing increased $60,000 over second quarter 1999. The Company's gas marketing activities generate low margins; these activities are executed in support of MarkWest's processing business. Other items decreased cost of sales by $1.8 million OPERATING EXPENSES. Operating expenses increased $1.2 million or 40 percent for the three months ended June 30, 2000, compared to the three months ended June 30, 1999. The increase in operating expenses was principally attributable to operating costs associated with incremental facilities added in Appalachia since June 30, 1999: the Lynchburg and Lordstown terminals; the Maytown, Boldman and Cobb extraction facilities and related pipeline; and the expanded Siloam fractionation plant. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased $0.3 million or 20 percent primarily in support of the additional and expanded Appalachia facilities previously mentioned and rent for office space; the Company sold its corporate headquarters and leased back its office space commencing in February 2000. The aforementioned increases were partially offset by reduced legal costs. DEPRECIATION, DEPLETION AND AMORTIZATION. Depreciation, depletion and amortization increased as a result of the completion of the Phase I expansion in Appalachia in the first quarter of 2000. 8 SIX MONTHS ENDED JUNE 30, 2000, COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1999 (IN 000s)

2000 (1) 1999 (2) $ Change -------- -------- -------- Revenues ............................... $84,453 $ 40,071 $ 44,382 Income from operations ................. $ 7,377 $ 52 $ 7,325 Income (loss) before income taxes ...... $ 6,121 $ (1,399) $ 7,520 Provision (benefit) for income taxes ... 2,372 (533) (2,905) -------- -------- -------- Net income (loss) ...................... $ 3,749 $ (866) $ 4,615 ======= ======== ========

------------------- (1) Excludes $1.0 million gain ($0.6 million after-tax) on the sale of an asset. (2) Excludes $2.5 million gain ($1.5 million after-tax) on the sale of a terminal. REVENUES GATHERING, PROCESSING AND MARKETING REVENUE. Gathering, processing and marketing revenue increased $44.0 million or 112 percent for the six months ended June 30, 2000, compared to the same period in 1999. At the Company's Siloam fractionation facility, a 93 percent or $15.0 million increase in the average NGL sales price coupled with a 22 percent or $7.6 million increase in gallons sold contributed $22.6 million to the increase in revenues. The increase in average NGL sales prices was attributable to the corresponding increase in oil prices. The increase in gallons sold was a result of the mid-first quarter 2000 start up of the Company's expanded Appalachian facilities. Gas marketing sales, boosted by higher year over year natural gas prices and volumes, contributed an additional $20.8 million in revenues during the first six months of 2000. Combined with a corresponding increase in gas marketing cost of sales, the gross margin from gas marketing increased $0.2 million over six-month period ended June 30, 1999. The Company's gas marketing activities generate low margins; these activities are executed in support of MarkWest's processing business. Lastly, increased sales prices and volumes at the Company's Appalachia terminals and greater fee income in Appalachia from the Phase I expansion, partially offset by reduced results in Michigan, added $0.6 million. COSTS AND EXPENSES COST OF SALES. Cost of sales increased $34.2 million or 121 percent for the six months ended June 30, 2000, compared to the same period in 1999. A 59 percent or $7.3 million increase in Appalachia natural gas costs plus a 22 percent or $6.5 million increase in volumes sold at the Company's Siloam facility combined to increase cost of sales by $13.8 million. The increase in cost of sales was also caused by a $20.6 million increase in gas marketing purchases. Combined with a corresponding increase in gas marketing sales, the gross margin from gas marketing increased $0.2 million over the six-month period ended June 30, 2000. The Company's gas marketing activities generate low margins; these activities are executed in support of MarkWest's processing business. Reduced pipeline throughput in Michigan offset the increase in cost of sales by $0.2 million. OPERATING EXPENSES. Operating expenses increased $2.0 million or 34 percent for the six months ended June 30, 2000, compared to the six months ended June 30, 1999. The increase in operating expenses was principally attributable to facilities added since June 30, 1999: the Lynchburg and Lordstown terminals; the Maytown, Boldman and Cobb extraction facilities and related pipeline; and the expanded Siloam fractionation plant. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased $0.6 million or 18 percent primarily in support of the additional and expanded Appalachia facilities previously mentioned and rent for office space; the Company sold its corporate headquarters and leased back its office space commencing in February 2000. The aforementioned increases were partially offset by reduced legal costs. DEPRECIATION, DEPLETION AND AMORTIZATION. Depreciation, depletion and amortization increased as a result of the completion of the Phase I expansion in Appalachia in the first quarter of 2000. LIQUIDITY AND CAPITAL RESOURCES The Company's sources of liquidity and capital resources historically have been internal cash flow and its revolving line of credit. In the first quarter of 2000, these sources were supplemented by proceeds from the sale of the 9 Company's corporate office building. In the second quarter of 2000, MarkWest increased its line of credit by $15 million to $65 million. MarkWest believes its ability to generate cash from operations to reinvest in its business is one of its fundamental financial strengths. The Company anticipates that its operating activities in 2000, coupled with selective asset sales and existing bank credit arrangements, will continue to provide adequate cash flows for its business expansion and to meet its financial commitments. The following summary table reflects comparative cash flows for the Company for the six months ended June 30, 2000 and 1999 (in thousands):

For the six months ended June 30, --------------------------------- 2000 1999 ------- -------- Net cash provided by operating activities before change in working capital ........................... $ 7,362 $ 845 Net cash provided by operating activities from change in working capital ........................... 4,058 8,095 Net cash provided by (used in) investing activities .... (2,804) 2,565 Net cash used in financing activities .................. $(8,454) $(11,864)

CAPITAL INVESTMENT PROGRAM MarkWest forecasts a baseline capital budget of $22 million in 2000 and $14 million in 2001. This budget funded the completion of Phase I and will fund Phase II expansion in Appalachia and other requirements, including Michigan drilling and maintenance capital. Management believes that funds generated from operations, the February 2000 sale of the Company's office building for $5.0 million in net cash proceeds, and unused borrowing capacity will enable the Company to fund its 2000-2001 capital expenditure programs. FINANCING FACILITIES Financing activities consist primarily of net borrowings under the Company's credit facility. At June 30, 2000, the Company had $65 million of available credit, of which net debt (debt less cash) of $34.5 million had been utilized, and working capital of $7.7 million. MarkWest's credit availability has increased significantly since December 31, 1999, as the Company's trailing cash flow calculation, the determinant of the Company's available credit, rose because of improvements in Appalachia processing margins and completion of its Phase I expansion. To further increase its financial flexibility, in the second quarter of 2000 the Company amended its existing credit facility increasing the maximum borrowing amount from $50 million to $65 million. As of June 30, 2000, unutilized credit was $30.5 million. Depending on the timing and amount of the Company's future projects beyond the level described above, MarkWest may be required to seek additional sources of capital. While the Company believes that it will be able to secure additional financing on terms acceptable to the Company, if required, no assurance can be given that it will be able to do so. RISK MANAGEMENT ACTIVITIES The Company's primary risk management objectives are to meet or exceed budgeted gross margins by locking in budgeted or above-budgeted prices in the financial derivatives and physical markets and to protect margins from precipitous declines. Hedging levels increase with capital commitments and debt levels and when above-average margins exist. The Company maintains a committee, including members of senior management, which oversees all hedging activity. MarkWest achieves its goals utilizing a combination of fixed-price forward contracts, New York Mercantile Exchange ("NYMEX")-traded futures, and fixed/floating price swaps on the over-the-counter ("OTC") market. Futures and swaps allow the Company to protect margins, because gains or losses in the physical market are generally offset by corresponding losses or gains in the value of financial instruments. The Company enters into futures transactions on NYMEX and through OTC swaps with various counterparties, consisting primarily of other energy companies. The Company conducts its standard credit review of OTC counterparties and has agreements with such parties that contain collateral requirements. The Company generally uses standardized swap agreements that allow for offset of positive and negative exposures. OTC exposure is marked to market daily for the credit review process. The Company's OTC credit risk exposure is partially limited by 10 its ability to require a margin deposit from its major counterparties based upon the mark-to-market value of their net exposure. The Company is subject to margin deposit requirements under NYMEX and OTC agreements. The use of financial instruments may expose the Company to the risk of financial loss in certain circumstances, including instances when (a) equity volumes are less than expected, or (b) the Company's OTC counterparties fail to purchase or deliver the contracted quantities of natural gas, NGL, or crude oil or otherwise fail to perform. To the extent that the Company engages in hedging activities, it may be prevented from realizing the benefits of favorable price changes in the physical market. However, it is similarly insulated against decreases in such prices. MarkWest seeks to reduce its basis risk for natural gas but is generally unable to do so for NGL. Basis is the difference in price between the physical commodity being hedged and the price of the futures or physical contract used for hedging. Basis risk is the risk that an adverse change in the futures or physical market will not be completely offset by an equal and opposite change in the cash price of the commodity being hedged. The Company's basis risk primarily stems from the geographic price differentials between MarkWest's sales locations and futures or OTC contract delivery locations. The Company protects Appalachia processing margins by using a combination of methods. MarkWest protects margins by purchasing natural gas priced on predetermined Btu differentials to propane or crude, by simultaneously selling propane or crude oil and purchasing natural gas, and by using swaps to achieve the same result. Crude oil is highly correlated with certain NGL products. All projected margins on open positions assume the basis differentials between the Company's sales location and the hedging contract's specified location and between crude oil and NGL are consistent with historical averages. No basis risk was hedged except for a portion of the natural gas. The Company's position, in terms of volumes hedged and associated projected margin, as of August 8, 2000 is as follows:

Q3 2000 Q4 2000 Total 2000 Total 2001 ---------- ---------- ---------- ---------- Using crude oil: --------------------- Gallons 10,400,000 6,200,000 16,600,000 -- $/Gallon $ 0.16 $ 0.22 $ 0.18 -- Using propane: --------------------- Gallons 13,300,000 14,400,000 27,700,000 12,600,000 $/Gallon $ 0.18 $ 0.19 $ 0.19 $ 0.22 Total: --------------------- Gallons 23,700,000 20,600,000 44,300,000 12,600,000 $/Gallon $ 0.17 $ 0.20 $ 0.18 $ 0.22

Finally, the Company locked in a $0.43 per gallon sales price on 630,000 third quarter 2000 gallons for a portion of its percent of proceeds contract volumes. Given the size of the Company's capital expenditure program, the Company's primary hedging strategy in 2000 was designed to protect a portion of its Appalachian margins against possible decline in product prices. This strategy limited the benefit the Company otherwise would have recognized had its hedges not been in place during the first six months of 2000. Specifically, net income would have been higher by approximately $0.3 million and $0.9 million for the three and six months ended June 30, 2000. The Company also hedges exposure to changes in spot market prices on certain levels of natural gas production. As of July 19, 2000, the Company's position, in terms of production volumes and sales price hedged, was as follows:

Q3 2000 Q4 2000 Total 2000 Q1 2001 Q2 2001 Q3 2001 Q4 2001 Total 2001 Total 2002 ------- ------- ---------- ------- ------- ------- ------- ---------- ---------- Mcf 180,000 150,000 330,000 176,000 178,000 180,000 121,000 655,000 149,000 $/Mcf $ 1.97 $ 2.16 $ 2.06 $ 2.59 $ 2.59 $ 2.59 $ 2.76 $ 2.62 $ 2.39

The Company enters into speculative futures transactions on an infrequent basis. Specific approval by the Board of Directors is necessary prior to executing such transactions. Speculative futures are marked to market at the end of 11 each accounting period, and any gain or loss is recognized in income for that period. There were no such speculative activities for the quarters ended June 30, 2000, and 1999. In addition to these risk management tools, MarkWest utilizes its NGL storage facilities and contracts for third-party storage to build product inventories during historically lower-priced periods for resale during higher-priced periods. Also, MarkWest has contractual arrangements to purchase certain quantities of its natural gas feedstock in advance of physical needs. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Reference is made to Risk Management Activities in Item 2 of this Form 10-Q. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is currently involved in litigation arising in the ordinary course of business. Management believes that costs of settlements or judgements, if any, arising from such suits will not have a material adverse effect on the Company's consolidated financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the Annual Meeting of Stockholders held on May 18, 2000, the following proposals were adopted by the margins indicated: 1. To elect two Class II directors to hold office for a three-year term expiring at the Annual Meeting of Stockholders occurring in the year 2003 or until the election and qualification of their respective successors.

Number of Shares For Withheld --------- --------- Arthur J. Denney................... 7,034,463 1,212 Karen L. Rogers.................... 7,034,463 1,212

2. To ratify the selection of PricewaterhouseCoopers LLP as the Company's independent accountants for the fiscal year ending December 31, 2000.

Number of Shares ---------------- For................................. 7,034,463 Against............................. 1,196 Abstain............................. 16

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 11 -- Statement regarding computation of earnings per share. 27 -- Financial Data Schedule. (b) Reports on Form 8-K (i) -- A report on Form 8-K was filed on May 12, 2000, announcing a new ticker symbol (AMEX:MWP). 12 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MarkWest Hydrocarbon, Inc. (Registrant) Date: August __, 2000 By: /s/ Gerald A. Tywoniuk -------------------------------------- Gerald A. Tywoniuk Chief Financial Officer and Vice President Of Finance (On Behalf of the Registrant and as Principal Financial and Accounting Officer) 13