-----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, TWLCSnOsFgGRF9lBPpEU9bT8/fUN3/bGzghp+rbmKnD7NXpPCk1MgU4DF3Kvu9ie zK/TWjfeGuxySlFhBpu5mg== 0000912057-00-023038.txt : 20000512 0000912057-00-023038.hdr.sgml : 20000512 ACCESSION NUMBER: 0000912057-00-023038 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000511 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-Q SEC ACT: SEC FILE NUMBER: 001-14841 FILM NUMBER: 625300 BUSINESS ADDRESS: STREET 1: 155 INVERNESS DRIVE WEST STREET 2: SUITE 200 CITY: ENGLEWOOD STATE: CO ZIP: 80112-5004 BUSINESS PHONE: 3032908700 MAIL ADDRESS: STREET 1: 155 INVERNESS DRIVE WEST STREET 2: SUITE 200 CITY: ENGLEWOOD STATE: CO ZIP: 80112-5004 10-Q 1 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 MARCH 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ____________ COMMISSION FILE NUMBER 1-11566 MARKWEST HYDROCARBON, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 84-1352233 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 155 INVERNESS DRIVE WEST, SUITE 200, ENGLEWOOD, CO 80112-5000 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 303-290-8700 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- The registrant had 8,449,816 shares of common stock, $.01 per share par value, outstanding as of March 31, 2000. - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
Page ---------- PART I--FINANCIAL INFORMATION Item 1. Consolidated Financial Statements Consolidated Balance Sheet at March 31, 2000 and December 31, 1999.......................... 1 Consolidated Statement of Operations for the Three Months Ended March 31, 2000 and 1999..... 2 Consolidated Statement of Cash Flows for the Three Months Ended March 31, 2000 and 1999..... 3 Notes to the Consolidated Financial Statements.............................................. 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................................................................... 6 Item 3. Quantitative and Qualitative Disclosures about Market Risk.................................... 10 PART II--OTHER INFORMATION Item 1. Legal Proceedings............................................................................. 10 Item 6. Exhibits and Reports on Form 8-K.............................................................. 10 SIGNATURES............................................................................................. 11
- ------------------------------------------------------------------------------- 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 (000S, EXCEPT SHARE DATA)
March 31, 2000 December 31, (Unaudited) 1999 ------------------ ---------------- ASSETS Current assets: Cash and cash equivalents................................................... $ 2,622 $ 1,356 Receivables................................................................. 13,057 16,360 Inventories................................................................. 3,751 6,043 Prepaid feedstock........................................................... 2,135 1,895 Other assets................................................................ 236 327 ------------------ ---------------- Total current assets................................................... 21,801 25,981 Property and equipment: Gas processing, gathering, storage and marketing equipment.................. 92,510 78,476 Oil and gas properties and equipment........................................ 15,781 14,518 Land, buildings and other equipment......................................... 6,114 11,409 Construction in progress.................................................... 1,852 10,697 ------------------ ---------------- 116,257 115,100 Less: accumulated depreciation, depletion and amortization.................. (23,593) (22,789) ------------------ ---------------- Total property and equipment, net...................................... 92,664 92,311 Intangible assets, net of accumulated amortization of $412 and $438, respectively................................................................ 764 951 ------------------ ---------------- Total assets........................................................... $ 115,229 $ 119,243 ================== ================ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Trade accounts payable...................................................... $ 3,532 $ 4,997 Accrued liabilities......................................................... 16,790 9,369 Current portion of long-term debt........................................... 49 104 ------------------ ---------------- Total current liabilities.............................................. 20,371 14,470 Deferred income taxes........................................................... 8,955 8,019 Long-term debt.................................................................. 30,000 44,035 Stockholders' equity: Preferred stock, par value $0.01, 5,000,000 shares authorized, 0 shares outstanding............................................................... -- -- Common stock, par value $0.01, 20,000,000 shares authorized, 8,531,206 and 8,531,206 shares issued, respectively..................................... 85 85 Additional paid-in capital.................................................. 42,229 42,222 Retained earnings........................................................... 14,056 10,801 Treasury stock, 81,390 and 69,504 shares, respectively...................... (467) (389) ------------------ ---------------- Total stockholders' equity............................................. 55,903 52,719 ------------------ ---------------- Total liabilities and stockholders' equity............................. $ 115,229 $ 119,243 ================== ================
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 March 31, ---------------------------------------- 2000 1999 ------------------ ------------------ Revenues: Gathering, processing and marketing revenue.................. $ 44,634 $ 21,828 Oil and gas revenue, net of transportation and taxes......... 491 265 Interest income.............................................. 23 14 Other income (expense)....................................... 26 (16) ------------------ ------------------ Total revenue........................................... 45,174 22,091 ------------------ ------------------ Costs and expenses: Cost of sales................................................ 32,011 15,265 Operating expenses........................................... 3,806 2,985 General and administrative expenses.......................... 1,839 1,580 Depreciation, depletion and amortization..................... 1,435 1,303 Interest expense............................................. 747 800 ------------------ ------------------ Total costs and expenses................................ 39,838 21,933 ------------------ ------------------ Income before income taxes....................................... 5,336 158 Provision for income taxes: Current...................................................... 1,145 51 Deferred..................................................... 936 (4) ------------------ ------------------ 2,081 47 ------------------ ------------------ Net income....................................................... $ 3,255 $ 111 ================== ================== Basic earnings per share......................................... $ 0.39 $ 0.01 ================== ================== Earnings per share assuming dilution............................. $ 0.38 $ 0.01 ================== ================== Weighted average number of outstanding shares of common stock: Basic......................................................... 8,452 8,478 ================== ================== Assuming dilution............................................. 8,467 8,481 ================== ==================
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 ended March 31, ----------------------------------------- 2000 1999 ------------------- ------------------- Cash flows from operating activities: Net income......................................................... $ 3,255 $ 111 Add income items that do not affect working capital: Depreciation, depletion and amortization........................ 1,435 1,303 Deferred income taxes........................................... 936 (4) Gain on sale of assets.......................................... (128) (12) ------------------- ------------------- 5,498 1,398 Adjustments to working capital: (Increase) decrease in receivables............................. 3,303 (2,292) Decrease in inventories........................................ 2,292 2,992 (Increase) decrease in prepaid expenses and other assets....... (157) 2,411 Increase in accounts payable and accrued liabilities........... 5,966 545 ------------------- ------------------- 11,404 3,656 Net cash provided by operating activities................. 16,902 5,054 Cash flows from investing activities: Capital expenditures........................................... (6,560) (2,153) Proceeds from sale of assets................................... 5,085 420 Other.......................................................... -- 18 ------------------- ------------------- Net cash used in investing activities..................... (1,475) (1,715) Cash flows from financing activities: Proceeds from long-term debt................................... 5,500 4,798 Repayment of long-term debt.................................... (19,590) (9,812) Net reissuance (buy-back) of treasury stock.................... (71) 132 ------------------- ------------------- Net cash used in financing activities..................... (14,161) (4,882) ------------------- ------------------- Net increase (decrease) in cash and cash equivalents...... 1,266 (1,543) Cash and cash equivalents at beginning of period........................ 1,356 2,055 ------------------- ------------------- Cash and cash equivalents at end of period.............................. $ 2,622 $ 512 =================== ===================
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.; MarkWest Michigan, Inc.; and 155 Inverness, Inc. All significant intercompany accounts and transactions have been eliminated in consolidation. The unaudited financial statements presented herein have been prepared in accordance with the instructions to Form 10-Q and do not include all the information and note disclosures required by generally accepted accounting principles for complete financial statements. The interim consolidated financial statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto for the year ended December 31, 1999, included in the Company's Annual Report on Form 10-K, as filed with the Securities and Exchange Commission. In the opinion of management, all adjustments necessary for a fair statement of the results for the unaudited interim periods have been made. These adjustments consist only of normal recurring adjustments. The effective corporate tax rate for interim periods is based on the estimated annual effective corporate tax rate, excluding certain nonrecurring or unusual events. The effective tax rate varies from statutory rates primarily due to tax credits. NOTE 2. SEGMENT REPORTING The Company's operations are classified into two reportable segments, as follows: (1) Processing and Related Services--provide compression, gathering, treatment and NGL extraction, and fractionation services; also purchase and market natural gas and NGLs; and (2) Exploration and Production--explore for and produce natural gas. MarkWest evaluates the performance of its segments and allocates resources to them based on gross operating income. There are no intersegment revenues. MarkWest's business is conducted solely in the United States. The table below presents information about gross operating income for the reported segments for the quarters ended March 31, 2000 and 1999. Asset information by reportable segment is not reported, since MarkWest does not produce such information internally.
Processing and Exploration and Related Services Production Total ------------------- --------------------- ------------------- FOR THE QUARTER ENDED MARCH 31, 2000 (in 000s): Revenues................................... $ 44,634 $ 491 $ 45,125 Gross operating income..................... $ 9,010 $ 298 $ 9,308 FOR THE QUARTER ENDED MARCH 31, 1999 (in 000s): Revenues................................... $ 21,828 $ 265 $ 22,093 Gross operating income..................... $ 3,700 $ 143 $ 3,843
4 A reconciliation of total segment revenues to total consolidated revenues and of total segment gross operating income to total consolidated income for the quarters ended March 31, 2000 and 1999, is as follows:
2000 1999 ---------------- ----------------- Revenues: Total segment revenues.............................. $ 45,125 $ 22,093 Interest income..................................... 23 14 Other income (expense).............................. 26 (16) ---------------- ----------------- Total consolidated revenues................... $ 45,174 $ 22,091 ================ ================= Gross operating income: Total segment gross operating income................ $ 9,308 $ 3,843 General and administrative expenses................. (1,839) (1,580) Depreciation, depletion and amortization............ (1,435) (1,303) Interest expense.................................... (747) (800) Interest income..................................... 23 14 Other income (expense).............................. 26 (16) ---------------- ----------------- Consolidated income before taxes.............. $ 5,336 $ 158 ================ =================
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 NGLs and competing commodities; (iii) the availability and prices of raw natural gas supply; (iv) the ability of the Company to negotiate favorable marketing agreements; (v) the risks that third party or Company natural gas exploration and production activities will not occur or be successful; (vi) the Company's dependence on certain significant customers, producers, gatherers, treaters and transporters of natural gas, (vii) competition from other NGL processors, including major energy companies; (viii) the Company's ability to identify and consummate grass roots projects or acquisitions complementary to its business; and (ix) winter weather conditions. For discussions identifying other important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements, see the Company's Securities and Exchange Commission filings. Forward-looking statements involve many uncertainties that are beyond the Company's ability to control and in many cases the Company cannot predict what factors would cause actual results to differ materially from those indicated by the forward-looking statements. FIRST QUARTER 2000 RESULTS For the quarter ended March 31, 2000, net income was $3.3 million, or $0.39 per share, compared to net income of $0.1 million, or $0.01 per share, in the comparable 1999 period. Earnings before interest, taxes and depreciation, depletion and amortization ("EBITDA") totaled $7.5 million for the first quarter of 2000, up from $2.2 million reported in the first quarter of 1999. The increase in quarter over quarter net income was principally driven by a $3.1 million after-tax increase in Appalachian gas processing margins. OPERATING STATISTICS
Three Months Ended March 31, ---------------------------------------- 2000 1999 % Change ------------------ ------------------ ------------------ Appalachia: NGL production--Siloam plant (gallons)........ 33,300,000 28,000,000 + 19% NGL sales--Siloam plant (gallons): Sales earning a processing margin.......... 32,400,000 35,700,000 -9% Sales earning fee income................... 4,500,000 -- NM ------------- ------------- Total NGL sales--Siloam plant............... 36,900,000 35,700,000 +3% Processing margin per gallon: Average NGL sales price.................... $ 0.58 $ 0.27 + 115% Average natural gas cost................... 0.35 0.20 + 75% ------------- ------------- Processing margin per gallon............... $ 0.23 $ 0.07 + 229% Michigan: Pipeline throughput (Mcfd)................... 13,400 21,400 - 37% NGL sales (gallons).......................... 2,800,000 3,800,000 - 26% Rocky Mountains: Natural gas produced (Mcfd).................. 3,300 1,900 + 74%
PROCESSING AND RELATED SERVICES--APPALACHIA First quarter 2000 was an eventful period for the Company, especially in Appalachia where the Company acquired facilities and completed the first phase ("Phase I") of a two part expansion program. Four processing facilities and a propane terminal were added to MarkWest's operations, and another facility was significantly expanded. First, the Company completed the construction of its new 75 MMcfd, mechanical refrigeration, NGL extraction plant ("Maytown") in southern Kentucky. Contemporaneously, construction on the recently acquired 40-mile NGL pipeline connecting the Maytown plant to the Company's Siloam fractionation facility was also completed. This pipeline significantly reduces the feedstock transportation costs from Boldman, a MarkWest owned processing plant that came off lease and back under MarkWest's operational control in February 2000, to Siloam. The Company also 6 purchased another extraction plant, Cobb, from a third party in March 2000. The Company completed expansion of its Siloam fractionator; throughput volumes are expected to increase from 310,000 gallons per day to 460,000 gallons per day during 2000 as a result of this expansion. MarkWest also announced a new marketing arrangement with a global freight transportation company. MarkWest has installed a propane distribution tank and related unloading and loading facilities at Lordstown, Ohio's transfer terminal. The Lordstown propane market size is initially expected to be 5 million to 6 million gallons per year and is expected to expand by 1 million gallons per year. Revenues from the new agreement are estimated for 2000 to range from $2 million to $2.5 million. MarkWest is paid for its processing services in Appalachia through sales of liquids extracted and fees for units of throughput. Sales volumes of liquids at Siloam in the first quarter were 36.9 million gallons compared to 35.7 million gallons last year due to a partial quarter's contribution from the Phase I expansion (completed in February 2000). Processing margins expanded from $0.07 per gallon to $0.23 per gallon, increasing after-tax income by $3.1 million. The ten-year average margin has been $0.16 per gallon. Due to the expansion, quarterly production of liquids increased from last year's 28.0 million gallons to 33.3 million gallons, and MarkWest's run rate exceeded 40.0 million gallons per quarter by March 31, 2000. Incremental production increases, however, did not completely translate into additional sales due to timing differences between this winter and last. Importantly, Phase I expansion completed this last quarter will increase MarkWest's fee business substantially. PROCESSING AND RELATED SERVICES--MICHIGAN Pipeline throughput volumes of 13,400 Mcfd in the first quarter of 2000 were down nearly 37% from the first quarter of 1999, in part due to the unexpected curtailment of production in January 2000 stemming from the shutdown of a third party's treatment facility. While drilling activity and drilling success have been slow to develop, MarkWest's own exploration efforts, along with third party partners, have identified good prospects along the 90-mile corridor. MarkWest expects to drill and evaluate a minimum of three additional reefs by June 30, 2000. Construction on the Company's eastern Michigan operations ("Au Gres")--consisting of a well and well facility, a pipeline, and a gas processing plant--is progressing as planned. Start up of the Au Gres operation is expected in the second quarter of 2000. EXPLORATION AND PRODUCTION--ROCKY MOUNTAINS Natural gas sold during the first quarter of 2000 averaged 3,300 Mcfd, up 74% from first quarter 1999. Production has increased because of the Company's 1999 capital program. MarkWest has decided to monetize this unit and has put its Rocky Mountain production up for sale and expects to complete this process by mid-year. This should result in a non-recurring gain in the third quarter. THREE MONTHS ENDED MARCH 31, 2000, COMPARED TO THE THREE MONTHS ENDED MARCH 31, 1999 (IN THOUSANDS)
2000 1999 $ Change -------------- -------------- --------------- Revenue............................ $ 45,174 $ 22,091 $ 23,083 Gross profit (1)................... $ 7,899 $ 2,524 $ 5,375 Income before income taxes......... $ 5,336 $ 158 $ 5,178 Provision for income taxes......... 2,081 47 2,034 ---------- ---------- --------- Net income......................... $ 3,255 $ 111 $ 3,144 ========== ========== =========
(1) Excludes interest income, general and administrative expense and interest expense. REVENUE GATHERING, PROCESSING AND MARKETING REVENUE. Gathering, processing and marketing revenue increased $22.8 million, or 104%, for the three months ended March 31, 2000, compared to the same period in 1999. The revenue increase was principally attributable to four factors. First, first quarter 2000 average NGL sales prices, following on the heels of a similar increase in crude oil, soared 115% over those from a year ago, causing a $10.0 million increase in revenue. Second, first quarter 2000 Siloam sales volumes, benefiting from the mid-quarter 7 completion of the Phase I expansion, increased 1.2 million gallons over first quarter 1999 volumes. The volume increase added $1.9 million in revenue. Third, increased NGL prices partially offset lower volumes in Michigan. Finally, increased gas marketing sales contributed an additional $8.6 million in revenue during the first quarter of 2000. Combined with a corresponding increase in gas marketing cost of sales, the first quarter 2000 gross margin from gas marketing increased $0.1 million over first quarter 1999. The Company's gas marketing activities are low margin; these activities are executed in support of MarkWest's processing business. COSTS AND EXPENSES COST OF SALES. Cost of sales increased $16.7 million, or 110%, for the three months ended March 31, 2000, compared to the same time period in 1999. The cost of the Company's replacement feedstock in Appalachia increased 75%, contributing $4.8 million in additional cost of sales. The Company's increased Siloam sales volumes contributed an incremental $1.9 million in the first quarter of 2000. In addition, the cost of gas marketing activities increased $8.5 million over the first quarter of 1999. Combined with a corresponding increase in gas marketing sales, the first quarter 2000 gross margin from gas marketing increased $0.1 million over first quarter 1999. The Company's gas marketing activities are low margin; these activities are executed in support of MarkWest's processing business. OPERATING EXPENSES. Operating expenses increased approximately $0.8 million, or 28%, for the three months ended March 31, 2000, compared to the three months ended March 31, 1999. The increase in operating expenses is primarily the result of facilities added since the first quarter of 1999: the Lynchburg terminal; the Maytown, Boldman and Cobb extraction facilities and related pipeline; and the expanded Siloam fractionation plant. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased $0.3 million, or 16%, for the three months ended March 31, 2000, compared to the three months ended March 31, 1999. The increase primarily stems from the Company's recent stage of growth. LIQUIDITY AND CAPITAL RESOURCES The Company's sources of liquidity and capital resources historically have been internal cash flow and its revolving line of credit. In 2000, these sources were supplemented by proceeds from the sale of the Company's corporate office building. MarkWest believes its ability to generate cash from operations to reinvest in its business is one of its fundamental financial strengths. The Company anticipates that its operating activities in 2000, coupled with selective asset sales and existing bank credit arrangements, will continue to provide adequate cash flows for its business expansion and to meet its financial commitments. The following summary table reflects comparative cash flows for the Company for the three months ended March 31, 2000 and 1999 (in thousands):
For the three months ended March 31, ------------------------------------------------- 2000 1999 ----------------------- ----------------------- Net cash provided by operating activities before change in working capital....................... $ 5,498 $ 1,398 Net cash provided by operating activities from change in working capital....................... 11,404 3,656 Net cash used in investing activities.............. (1,475) (1,715) Net cash used in financing activities.............. $ (14,161) $ (4,882)
CAPITAL INVESTMENT PROGRAM MarkWest forecasts a baseline capital budget of $12 million in 2000 and $16 million in 2001. This budget will fund the completion of Phase I and Phase II expansion in Appalachia and other requirements, including Michigan drilling and maintenance capital. In addition, MarkWest is targeting another $20 million in other new projects and acquisitions. Management believes that funds generated from operations, the February 2000 sale of the Company's office building for $5.0 million in net cash proceeds, and unused borrowing capacity will enable the Company to fund its 2000-2001 capital expenditure programs. Depending on the timing and amount of its future projects, MarkWest may be required to seek additional sources of capital. While the Company believes it would be able to secure 8 additional financing on terms acceptable to MarkWest, if required, no assurance can be given that the Company will be able to do so. FINANCING FACILITIES Financing activities consist primarily of net borrowings under the Company's credit facility. At March 31, 2000, the Company had approximately $50 million of available credit, of which net debt (debt less cash) of $27.4 million had been utilized as of December 31, 1999, and working capital of $1.4 million. MarkWest's credit availability has increased significantly since December 31, 1999, as the Company's trailing cash flow calculation, the determinant of the Company's available credit, rose because of improvements in Appalachia processing margins and completion of its Phase I expansion. To further increase its financial flexibility, the Company sold its corporate office building in February 2000 for $5.0 million in net proceeds. As of March 31, 2000, unutilized credit was approximately $22.6 million. Depending on the timing and amount of the Company's future projects beyond the level described above, MarkWest may be required to seek additional sources of capital. While the Company believes that it will be able to secure additional financing on terms acceptable to the Company, if required, no assurance can be given that it will be able to do so. RISK MANAGEMENT ACTIVITIES The Company's primary risk management objectives are to meet or exceed budgeted gross margins by locking in budgeted or above-budgeted prices in the financial derivatives and physical markets and to protect margins from precipitous declines. Hedging levels increase with capital commitments and debt levels and when above-average margins exist. The Company maintains a committee, including members of senior management, which oversees all hedging activity. MarkWest achieves its goals utilizing a combination of fixed-price forward contracts, New York Mercantile Exchange ("NYMEX")-traded futures, and fixed/floating price swaps on the over-the-counter ("OTC") market. Futures and swaps allow the Company to protect margins, because gains or losses in the physical market are generally offset by corresponding losses or gains in the value of financial instruments. The Company enters into futures transactions on NYMEX and through OTC swaps with various counterparties, consisting primarily of other energy companies. The Company conducts its standard credit review of OTC counterparties and has agreements with such parties that contain collateral requirements. The Company generally uses standardized swap agreements that allow for offset of positive and negative exposures. OTC exposure is marked to market daily for the credit review process. The Company's OTC credit risk exposure is partially limited by its ability to require a margin deposit from its major counterparties based upon the mark-to-market value of their net exposure. The Company is subject to margin deposit requirements under NYMEX and OTC agreements. The use of financial instruments may expose the Company to the risk of financial loss in certain circumstances, including instances when (a) equity volumes are less than expected, or (b) the Company's OTC counterparties fail to purchase or deliver the contracted quantities of natural gas, NGLs, or crude oil or otherwise fail to perform. To the extent that the Company engages in hedging activities, it may be prevented from realizing the benefits of favorable price changes in the physical market. However, it is similarly insulated against decreases in such prices. MarkWest seeks to reduce its basis risk for natural gas but is generally unable to do so for NGLs. Basis is the difference in price between the physical commodity being hedged and the price of the futures or physical contract used for hedging. Basis risk is the risk that an adverse change in the futures or physical market will not be completely offset by an equal and opposite change in the cash price of the commodity being hedged. The Company's basis risk primarily stems from the geographic price differentials between MarkWest's sales locations and futures or OTC contract delivery locations. The Company protects Appalachia processing margins using a combination of three different methods. MarkWest protects margins by purchasing natural gas priced on predetermined Btu differentials to propane or crude prices. MarkWest also protects its margins by selling crude oil and purchasing natural gas. Crude oil is highly correlated with certain NGL products. As of March 31, 2000, through this form of hedging, the Company had locked in an approximate margin of $0.17 per gallon on 30.7 million gallons of the Company's expected production through December 2000. MarkWest also protects margins by purchasing natural gas while simultaneously selling propane of approximately the same Btu value. As of March 31, 2000, through this later form of hedging, the Company had locked in an approximate margin of $0.18 per gallon on 28.3 million gallons of its expected production through December 2000. All projected margins on open positions at March 31, 2000 assume the basis differentials between 9 the Company's sales location and the hedging contract's specified location and between crude oil and NGLs are consistent with historical averages. No basis risk was hedged except for a portion of the natural gas. Given the size of the Company's capital expenditure program, the Company's primary hedging strategy in 2000 was designed to protect a portion of its Appalachian margins against possible decline in product prices. This strategy limited the benefit the Company otherwise would have recognized had its hedges not been in place during the first quarter of 2000. Specifically, net income would have been higher by approximately $0.6 million through March 31, 2000. The Company also hedges exposure to changes in spot market prices on certain levels of natural gas production. As of March 31, 2000, the Company locked in an average sales price of $1.97/Mcf on 4,000 Mcfd of production through October 2000, an average sales price of $2.29/Mcf on 3,000 Mcfd of November 2000 to October 2001 production, and an average sales price of $2.39/Mcf on 1,000 Mcfd of November 2001 to October 2002 production. The Company enters into speculative futures transactions on an infrequent basis. Specific approval by the Board of Directors is necessary prior to executing such transactions. Speculative futures are marked to market at the end of each accounting period, and any gain or loss is recognized in income for that period. There were no such speculative activities for the quarters ended March 31, 2000 and 1999. In addition to these risk management tools, MarkWest utilizes its NGL storage facilities and contracts for third-party storage to build product inventories during historically lower-priced periods for resale during higher-priced periods. Also, MarkWest has contractual arrangements to purchase certain quantities of its natural gas feedstock in advance of physical needs. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Reference is made to Risk Management Activities in Item 2 of this Form 10-Q. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is currently involved in litigation arising in the ordinary course of business. Management believes that costs of settlements or judgements, if any, arising from such suits will not have a material adverse effect on the Company's consolidated financial position or results of operations. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10 -- Amendment Number One to MarkWest Hydrocarbon, Inc. 1996 Nonemployee Director Stock Option Plan. 11 -- Statement regarding computation of earnings per share. 27 -- Financial Data Schedule. (b) Reports on Form 8-K None filed in the first quarter of 2000. 10 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MarkWest Hydrocarbon, Inc. (Registrant) Date: May 8, 2000 By: /s/ Gerald A. Tywoniuk ------------------------------------------- Gerald A. Tywoniuk Chief Financial Officer and Vice President Of Finance (On Behalf of the Registrant and as Officer) 11 EX-10 2 EXHIBIT 10 ACTION WITHOUT MEETING OF THE BOARD OF DIRECTORS OF MARKWEST HYDROCARBON, INC. The undersigned, being all of the Directors of MarkWest Hydrocarbon, Inc. (the "Corporation"), a Delaware corporation, in accordance with the authority contained in Section 141(f) of the Delaware General Corporation Law, in lieu of holding a meeting, do hereby adopt and approve the attached resolution. RESOLVED, that form of Amendment Number One to the MarkWest Hydrocarbon 1996 Nonemployee Director Stock Option Plan, attached to this resolution as EXHIBIT A and incorporated into this resolution by reference, be and it hereby is ratified and approved and the officers of the Company, and they hereby are authorized to do any acts that they deem to be in furtherance of such amendment. IN WITNESS WHEREOF we have hereunto set our hands of this 2nd day of December, 1999. - ---------------------------- ----------------------------- John M. Fox Barry W. Spector - ---------------------------- ----------------------------- Brian T. O'Neill Donald D. Wolf - --------------------------- Arthur J. Denney EXHIBIT A AMENDMENT NUMBER ONE TO MARKWEST HYDROCARBON, INC. 1996 NONEMPLOYEE DIRECTOR STOCK OPTION PLAN THIS FIRST AMENDMENT ("Amendment") is made as of this 2nd day of December, 1999, to the Markwest Hydrocarbon, Inc. ("Company") 1996 NonEmployee Director Stock Option Plan ("Plan"). In the event of any conflict between the terms of this Amendment and the terms of the Plan, the terms of this Amendment shall control. All capitalized terms not defined in this Amendment shall have their respective meaning set forth in the Plan. The Plan shall be amended as follows: 1. Administration of and Grants of Options under the Plan. Section 4(b)(iv) is amended so that as amended such Section reads as follows: (iv) Each Outside Director shall automatically receive, on the date of each Annual Meeting of Stockholders AND each date that is six months thereafter, an option to purchase 1,000 Shares of the Company's Common Stock, such Options to become exercisable one year subsequent to the date of grant; PROVIDED, HOWEVER, that such Options shall only be granted to Outside Directors who have served since the date of the last Annual Meeting of Stockholders and, as the case may be, the date that is six months from such Annual Meeting of Stockholders and will continue to serve after the date of grant of such Options. 2. Ratification. Except as modified by this Amendment, the terms and conditions of the Plan are hereby ratified by this Amendment. IN WITNESS WHEREOF, the Company has caused its duly authorized officer to execute this Amendment effective as of the date set forth above. MARKWEST HYDROCARBON, INC., a Delaware corporation By: ---------------------------------------- John M. Fox, Chief Executive Officer 2 EX-11 3 EXHIBIT 11 EXHIBIT 11 MARKWEST HYDROCARBON, INC. COMPUTATION OF EARNINGS PER COMMON SHARE (000S, EXCEPT PER SHARE DATA)
FOR THE QUARTER ENDED MARCH 31, 2000 -------------------------- Net income $ 3,255 Weighted average number of outstanding shares of common stock 8,452 Basic earnings per share $ 0.39 ========================= Net income $ 3,255 Weighted average number of outstanding shares of common stock 8,452 Dilutive stock options 15 ------------------------- 8,467 Earnings per share assuming dilution $ 0.38 =========================
EX-27 4 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENTS OF OPERATIONS OF THE COMPANY'S MARCH 31, 1999 FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-2000 MAR-31-2000 2,622 0 13,057 0 3,751 21,801 116,257 (23,593) 115,229 20,371 30,000 0 0 85 55,818 115,229 45,125 45,174 32,011 32,011 7,080 0 747 5,336 2,081 3,255 0 0 0 3,255 0.39 0.38
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