-----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, PGRezAwHaamo0w6GR+8kTG7T5Wis8RMUNvPXsb88y4SdaV9me6hWRto5rU/KuxP2 9YQQ2w39I8mlL2+1qsPQuA== 0000912057-02-021966.txt : 20020528 0000912057-02-021966.hdr.sgml : 20020527 20020524193632 ACCESSION NUMBER: 0000912057-02-021966 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010810 ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 20020528 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: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-14841 FILM NUMBER: 02662900 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 8-K/A 1 a2081074z8-ka.txt FORM 8-K/A =============================================================================== SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K/A AMENDMENT NO. 2 CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported): May 24, 2002 (August 10, 2001) MARKWEST HYDROCARBON, INC. (Exact name of registrant as specified in its charter) DELAWARE 1-11566 84-1352233 (STATE OR OTHER JURISDICTION OF (Commission File (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) Number) IDENTIFICATION NO.) 155 Inverness Drive West, Suite 200 DENVER, COLORADO 80112 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (303) 290-8700 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) =============================================================================== ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS. (a) AUDITED FINANCIAL STATEMENT OF BUSINESS ACQUIRED. On August 10, 2001, MarkWest Hydrocarbon, Inc. completed an acquisition of 100% of the stock of two privately-owned independent exploration and production companies - Leland Energy Canada Ltd. and Watford Energy Ltd. (combined as "Leland/Watford" herein), both headquartered in Calgary, Alberta, Canada. Combined Leland/Watford was acquired for approximately $50 million (U.S.). A Current Report on Form 8-K was filed on August 27, 2001. Audited combined financial statements for Leland/Watford as of and for the periods ended December 31, 1999 and 2000 and unaudited combined financial statements for the six months ended June 30, 2000 and 2001 follow. 2 AUDITORS' REPORT TO THE DIRECTORS We have audited the combined balance sheets of the Leland/Watford Group, as defined in note 1(a), as at December 31, 2000 and 1999 and the combined statements of operations, Group's equity and cash flows for the periods ended December 31, 2000 and 1999. These financial statements are the responsibility of the Group's management. Our responsibility is to express an opinion on these financial statements based on our audits. With respect to the combined financial statements for the period ended December 31, 2000, we conducted our audit in accordance with Canadian generally accepted auditing standards and United States generally accepted auditing standards. With respect to the combined financial statements for the period ended December 31, 1999, we conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these combined financial statements present fairly, in all material respects, the financial position of the Group as at December 31, 2000 and 1999 and the results of its operations and its cash flows for the periods ended December 31, 2000 and 1999, in accordance with Canadian generally accepted accounting principles. Canadian generally accepted accounting principles vary in certain significant respects from accounting principles generally accepted in the United States. Application of accounting principles generally accepted in the United States would have affected results of operations for the periods ended December 31, 2000 and 1999, to the extent summarized in note 10 to the combined financial statements. /s/ KPMG LLP Chartered Accountants Calgary, Canada October 19, 2001 3 FINANCIAL STATEMENTS LELAND/WATFORD GROUP Combined Balance Sheets December 31, 2000 and 1999 (note 1(a)) (Amounts Expressed in Canadian Dollars)
2000 1999 ----------- ----------- Assets Current assets: Cash and short-term investments $ 7,979,602 $ -- Accounts receivable 6,577,685 2,868,988 Prepaid expenses 449,615 178,376 Due from related parties (note 4) -- 44,386 ----------- ----------- 15,006,902 3,091,750 Capital assets (note 2) 16,661,934 13,408,007 ----------- ----------- $31,668,836 $16,499,757 =========== =========== Liabilities and Group's Equity Current liabilities: Accounts payable $ 6,265,131 $ 4,419,808 Income taxes payable 1,836,953 -- Bank indebtedness (note 3) 575,000 549,235 Due to related parties (note 4) 6,185,301 -- ----------- ----------- 14,862,385 4,969,043 Site restoration (note 2) 71,700 22,260 Future income taxes (note 6) 5,023,369 110,322 Group's equity (notes 1(a) and 5) 11,711,382 11,398,132 Subsequent events (notes 5, 8 and 9) Commitments (note 8) ----------- ----------- $31,668,836 $16,499,757 =========== ===========
See accompanying notes to combined financial statements. 4 LELAND/WATFORD GROUP Combined Statements of Operations Periods ended December 31, 2000 and 1999 (note 1(a)) (Amounts Expressed in Canadian Dollars)
2000 1999 ------------ ------------ Revenues: Petroleum and natural gas sales $ 21,422,509 $ 5,990,177 Royalties (4,437,053) (1,211,253) ------------ ------------ 16,985,456 4,778,924 Expenses: Production 2,420,239 1,255,678 General and administration 1,520,884 898,057 Depletion, depreciation and amortization 2,778,187 858,762 ------------ ------------ 6,719,310 3,012,497 Earnings before other items and income taxes 10,266,146 1,766,427 Other income (expense) items: Gain on sale of partnership (note 1(a)) 8,679,640 -- Interest and other income 491,056 353,263 Interest expense (60,038) (1,576) ------------ ------------ 9,110,658 351,687 Income taxes (note 6) Current 1,836,953 -- Future 4,913,047 110,322 ------------ ------------ 6,750,000 110,322 ------------ ------------ Net earnings $ 12,626,804 $ 2,007,792 ============ ============
See accompanying notes to combined financial statements. 5 LELAND/WATFORD GROUP Combined Statements of Group's Equity Periods ended December 31, 2000 and 1999 (note 1(a)) (Amounts Expressed in Canadian Dollars)
RETAINED PARTNERS' SHARE EARNINGS (DEFICIT) EQUITY CAPITAL TOTAL ----------------- ------------ ------------ ------------ (note 1(a)) (note 5) Balance, January 1, 1999 $ -- $ -- $ -- $ -- Issuance of share capital -- -- 120 120 Capital contributions -- 9,390,220 9,390,220 Net earnings (loss) (76,864) 2,084,656 -- 2,007,792 ------------ ------------ ------------ ------------ Balance, December 31, 1999 (76,864) 11,474,876 120 11,398,132 ------------ ------------ ------------ ------------ Issuance of share capital -- -- 250 250 Re-purchase of share capital -- -- (116) (116) Net earnings 11,304,382 1,322,422 12,626,804 Capital dividends paid (3,729,167) -- -- (3,729,167) Allocation and distribution of accumulated earnings of the partnership on the sale of the partnership 851,769 (3,407,078) -- (2,555,309) Distributions to related parties on the sale of the partnership (59,867) (5,969,345) -- (6,029,212) Allocation of partners' equity to share capital through the transfer of net assets -- (3,420,875) 3,420,875 -- ------------ ------------ ------------ ------------ Balance, December 31, 2000 $ 8,290,253 $ -- $ 3,421,129 $ 11,711,382 ============ ============ ============ ============
See accompanying notes to combined financial statements. 6 LELAND/WATFORD GROUP Combined Statements of Cash Flows Periods ended December 31, 2000 and 1999 (note 1(a)) (Amounts Expressed in Canadian Dollars) 2000 1999 ------------ ------------ Cash provided by (used in): Operations: Net earnings $ 12,626,804 $ 2,007,792 Items not involving cash: Gain on sale of partnership (8,679,640) -- Depletion, depreciation and amortization 2,778,187 858,762 Future income taxes 4,913,047 110,322 ------------ ------------ 11,638,398 2,976,876 Change in non-cash operating working capital (note 7) (2,208,870) 434,444 ------------ ------------ 9,429,528 3,411,320 Financing: Distributions on the sale of partnership (8,584,521) -- Change in due to/from related parties 6,229,687 (44,386) Capital dividends paid (3,729,167) -- Increase in bank indebtedness 25,765 549,235 Issuance of share capital 250 120 Re-purchase of share capital (116) -- Capital contributions -- 9,390,220 ------------ ------------ (6,058,102) 9,895,189 Investing: Capital asset additions (18,153,072) (14,244,509) Partner's interest in capital assets on the sale of the partnership 9,127,156 -- Proceeds on the sale of partnership 11,722,882 -- Change in non-cash working capital relating to investing (note 7) 1,911,210 938,000 ------------ ------------ 4,608,176 (13,306,509) Increase in cash and short-term investments 7,979,602 -- Cash and short-term investments, beginning of period -- -- ------------ ------------ Cash and short-term investments, end of period $ 7,979,602 $ -- ============ ============
See accompanying notes to combined financial statements. 7 LELAND/WATFORD GROUP Notes to Combined Financial Statements Periods ended December 31, 2000 and 1999 (note 1(a)) (Amounts Expressed in Canadian Dollars) GENERAL: The Leland/Watford Group (the "Group") is comprised of various entities (see note 1(a)) that are engaged in the exploration for and development and production of crude oil and natural gas. 1. SIGNIFICANT ACCOUNTING POLICIES: (a) Basis of presentation: The combined financial statements of the Group comprise all of the accounts of the following entities for the period beginning with the later of the incorporation or formation date of the entity or the start of the calendar year as detailed below:
PERIOD ENDED PERIOD ENDED DECEMBER 31, 2000 DECEMBER 31, 1999 - ------------------------------------------------------------------------------------------------------------------- (1) Leland Energy Canada Ltd. April 20, 2000 to December 31, 2000 N/A (2) Brian Hiebert Energy Limited Year ended December 31, 2000 December 22, 1999 to December 31, 1999 (3) Guy Grierson Energy Limited Year ended December 31, 2000 Year ended December 31, 1999 (4) Gord Maybee Energy Limited Year ended December 31, 2000 Year ended December 31, 1999 (5) Ian de Bie Energy Limited Year ended December 31, 2000 Year ended December 31, 1999 (6) E. Hiebert Energy Limited Year ended December 31, 2000 December 23, 1999 to December 31, 1999 (7) R. Grierson Energy Limited Year ended December 31, 2000 December 23, 1999 to December 31, 1999 (8) P. Maybee Energy Limited Year ended December 31, 2000 December 23, 1999 to December 31, 1999 (9) K. de Bie Energy Limited Year ended December 31, 2000 December 23, 1999 to December 31, 1999 (10) Hiebert Watford Holdings Ltd. March 3, 2000 to December 31, 2000 N/A (11) Grierson Watford Holdings Ltd. Year ended December 31, 2000 December 22, 1999 to December 31, 1999 (12) Maybee Watford Holdings Ltd. March 3, 2000 to December 31, 2000 N/A (13) de Bie Watford Holdings Ltd. Year ended December 31, 2000 December 22, 1999 to December 31, 1999 (14) Watford Energy Ltd. July 12, 2000 to December 31, 2000 N/A (15) Leland Energy Limited Partnership January 1, 2000 to April 30, 2000 March 1, 1999 to December 31, 1999 (16) Hiebert Resources Ltd. Year ended December 31, 2000 Year ended December 31, 1999 (17) Grierson Resources Ltd. Year ended December 31, 2000 Year ended December 31, 1999 (18) Maybee Resources Ltd. Year ended December 31, 2000 May 19, 1999 to December 31, 1999 (19) Wild River Resources Ltd. Year ended December 31, 2000 Year ended December 31, 1999
8 LELAND/WATFORD GROUP Notes to Combined Financial Statements Periods ended December 31, 2000 and 1999 (note 1(a)) (Amounts Expressed in Canadian Dollars) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): (a) Basis of presentation (continued): General The combined financial statements have been prepared to meet the needs of MarkWest Acquisitions Corp., the purchaser of the Group (see note 9), in satisfying its filing requirements with the United States Securities and Exchange Commission. The combined financial statements of the Group have been prepared on a basis that the Group's management believes to be reasonable and appropriate and reflect the financial position, results of operations and cash flows of businesses that comprise the above-noted entities that comprise the Group, with all significant intragroup transactions and balances eliminated. The combined financial statements include the results of operations of the Leland Energy Limited Partnership (the "Partnership"), an entity that was owned 25% collectively by Hiebert Resources Ltd., Grierson Resources Ltd., Maybee Resources Ltd. and Wild River Resources Ltd. and owned 75% by Kaiser Energy Ltd., a company controlled by the controlling shareholder of Leland Energy Canada Ltd. During the year ended December 31, 2000, the Partnership distributed certain of its net assets with a net book value totaling $3,569,044 to the partners. The Partnership was then subsequently sold, which resulted in a gain totaling $8,679,640 for those entities included within the Group that collectively owned 25% of the Partnership. Kaiser Energy Ltd. then transferred its 75% share of the net assets distributed to Leland Energy Canada Ltd. by issuing 20,333 Class A common shares with a book value aggregating $3,420,875 (see note 5). As the results of operations of the Partnership ultimately flowed directly to the individual partners, these combined financial statements reflect an adjustment both on the distribution of the net assets of the Partnership to the partners and the allocation of the partner's equity on its disposition. The combined financial statements of the Group reflect the operations of the Partnership prior to its disposition effective April 30, 2000. As the Partnership was ultimately owned 75% by an entity which was not acquired by MarkWest Hydrocarbon, Inc. (MWH), both the gain on sale of the Partnership and the percentage of partner's equity that related to Kaiser Energy Limited's ownership interest was not reflected within the combined financial statements of the Group. The combined financial statements do reflect the distribution of net assets from the Partnership to the individual partners, based upon the carrying values of the net assets. Transactions The Group acquired by MarkWest Hydrocarbon (MWH) is a group of companies involved in the exploration, development and production of oil and gas in western Canada under common management and control. Management of the Group consisted of four individuals being: 1) Guy Grierson, 2) Brian Hiebert, 3) Gord Maybee and 4) Ian de Bie (collectively the "Management") who were also shareholders of various companies comprising the Group. The Group began operations effective March 1, 1999 with the formation of the Leland Energy Limited Partnership (the "Partnership"). The Partnership was 25% owned by the Management's individual holding companies being: 1) Grierson Resources Ltd., 2) Hiebert Resources Ltd., 3) Maybee Resources Ltd., 4) Wild River Resources Ltd. (collectively the "Resource Companies"). The remaining 75% interest in the Partnership was owned by Leland Energy Ltd., the general partner and a wholly-owned subsidiary of 9 Kaiser Energy Ltd. The individuals comprising the Management were not related in any way with either Leland Energy Ltd. and/or Kaiser Energy Ltd. The partners of the Partnership and Leland Energy Ltd. had no other operations except for the oil and gas operations conducted by the Partnership. During the year ended December 31, 1999 the Partnership acquired oil and gas assets located in Western Canada from arm's length parties and operated the properties until April 30, 2000, at which time the Partnership was sold to Gulf Canada Resources Ltd. Effective April 30, 2000 and immediately prior to the transfer of certain assets and liabilities out of the Partnership and the disposition of the Partnership, the assets and liabilities of the Partnership were as follows: Cash $ 289,988 Accounts receivable 1,280,410 Prepaid expenses 158,959 Capital assets 17,046,463 Accounts payable and accrued liabilities (2,007,405) Long-term debt (992,123) Site restoration liability (35,297) ------------ Total net assets $ 15,740,995 ============
Immediately prior to the disposition, and as one of the conditions on the sale of the Partnership, the partners of the Partnership transferred all of the net assets and liabilities of the Partnership to the partners, except for capital assets totaling $12,169,541, representing the carrying value assigned to a property that was acquired by Gulf Canada Resources Limited and prepaid expenses totaling $2,410. These were the only assets left in the Partnership upon its disposition. The assets and liabilities of the Partnership were distributed to the partners before the disposition of the Partnership as the purchaser, Gulf Canada Resources Ltd., was only interested in acquiring one specific property but to facilitate income tax considerations for both the purchaser and seller, it was determined that selling the Partnership with only that property left was more advantageous then selling the property separately. The reason that the assets and liabilities were distributed/transferred out of the Partnership prior to its disposition is that each of the partners desired to continue in operation with the same assets, management and ownership structure as had existed under the Partnership. The carrying value of the assets and liabilities transferred out of the Partnership to the partners, based upon their percentage ownership in the Partnership, was as follows: Cash $ 289,988 Accounts receivable 1,280,410 Prepaid expenses 156,549 Capital assets 4,876,922 Accounts payable and accrued liabilities (2,007,405) Long-term debt (992,123) Site restoration liability (35,297) ------------ Total net assets $ 3,569,044 ============
The carrying value of the property retained in the Partnership on its disposition was determined based upon the percentage of future undiscounted revenues associated with the property that was left in the Partnership versus the Partnership's total future undiscounted revenues. As a result, the disposition of the Partnership, which was for gross cash proceeds totaling approximately $47,000,000, resulted in a gain totaling $34,718,560, after the deduction of various selling expenses. As the Resource Companies, which owned a 25% interest in the Partnership were among the entities acquired by MWH, the combined financial statements of the Group reflect their 25% in the gain which totaled $8,679,640. As Leland Energy Ltd. was not acquired by MWH, the gain relating to its 75% ownership interest in the Partnership was not reflected in the combined financial statements of the Group. As the transfer of the assets and liabilities of the 10 Partnership prior to its disposition was conducted by entities under common management and control, the assets and liabilities were transferred at their carrying values and therefore no gain or loss was recognized. A description of the adjustments relating to the distribution of the assets and liabilities of the Partnership and the allocation of partner's equity is as follows: (a) Kaiser Energy Ltd. transferred all of the net assets received upon the distribution by the Partnership to Leland Energy Canada, Ltd. and as consideration, received 20,333 Class A common shares. However, as the long-term debt of the Partnership was due to Kaiser Energy Ltd., Kaiser Energy Ltd. eliminated its share of the long-term debt and transferred the remaining net assets totaling $3,420,875 determined as follows: (75% x $3,569,044) + (75% x $992,123). As a result, Leland Energy Canada Ltd. recorded share capital totaling $3,420,875. As the distribution occurred between entities under common management and control, the transfer was conducted based upon the carrying values of the net assets transferred with no gain or loss recorded. (b) As the earnings of the Partnership are reflected in the statement of operations, an adjustment was required to remove 75% of the accumulated earnings, which related to Kaiser Energy, Ltd., which was not acquired by MWH. As such, the accumulated earnings of the Partnership immediately prior to its disposition totaled $3,407,078, which was considered part of total partner's equity. Of this amount 25% ($851,769) was transferred to retained earnings and 75% ($2,555,309) as a reduction of Group's equity since this represented Kaiser Energy Ltd.'s, which was not acquired by MWH, share of the Partnership's earnings. (c) Lastly, upon the sale of the Partnership, Kaiser Energy Ltd. received a return on capital totaling $5,969,345 relating to the contributions made to the Partnership by Kaiser Energy Ltd. Included in the December 31, 1999 Combined Statement of Operations are revenues and operating income (revenues less royalties and operating costs) of $676,136 and $519,080 respectively, attributable to the property sold to Gulf Canada Resources Ltd. For the year ended December 31, 2000, the revenues and operating income amounts included are $803,245 and $640,144 , respectively. From May 1, 2000 to June 30, 2000, management continued to operate their collective 25% ownership interest in the remaining oil and gas assets through the Resource Companies. On July 1, 2000, Management transferred their respective 25% ownership in the remaining oil and gas assets to eight successor companies being: 1) Guy Grierson Energy Ltd., 2) R. Grierson Energy Ltd., 3) Brian Hiebert Energy Ltd., 4) E. Hiebert Energy Ltd., 5) Gord Maybee Energy Ltd., 6) P. Maybee Energy Ltd., 7) Ian de Bie Energy and 8) K. de Bie Energy Ltd (collectively the "Energy Companies"). The Energy Companies were owned and controlled by the individuals comprising the Management and their respective spouses. With respect to the 75% interest in the remaining oil and gas assets transferred to Leland Energy Ltd., effective May 1, 2000 this interest was transferred, in entirety, to Leland Energy Canada Ltd. As with the Resource Companies, the operations of the Energy Companies and Leland Energy Canada Ltd. solely related to the exploration, development and production of the oil and gas assets transferred from the Partnership. As all transfers of assets and liabilities were conducted between entities under both common management and common control, the transfers were recorded at their carrying values with no gain or loss on transfer recorded. Effective July, 2000 the individuals comprising the Management started another company to conduct oil and gas operations, also in Western Canada, under the name of Watford Energy Ltd. The individuals of the Management held their ownership interest in Watford Energy Ltd. through individual holding companies being: 1) Grierson Watford Holdings Ltd., 2) Hiebert Watford Holdings Ltd., 3) Maybee Watford Holdings Ltd. and 4) de Bie Watford Holdings Ltd. (collectively the "Watford Companies"). These operations were run from the same offices and by the same people as the Partnership; the only difference being that Kaiser Energy Ltd. and/or affiliates had no ownership interest in Watford Energy Ltd. or its assets. 11 The acquisition by MWH of the Group consisted of all of the oil and gas assets owned by the Management, through their respective ownership in the Energy Companies and the Watford Companies, and Leland Energy Canada Ltd. There is no relationship between the purchaser, Gulf Canada Resources Limited, and the entities or management that comprise the Leland / Watford Group. All of the entities comprising the Group were under common management and control. (b) Petroleum and natural gas properties and equipment: (i) Capitalized costs: The Group followed the full cost method of accounting for its petroleum and natural gas properties. Under this method, all costs related to the exploration for and development of petroleum and natural gas reserves are capitalized. Costs include lease acquisition costs, geological and geophysical expenses, overhead directly related to exploration and development activities and costs of drilling both productive and non-productive wells. Proceeds from the sale of properties are applied against capitalized costs, without any gain or loss being realized, unless such sale would significantly alter the rate of depletion and depreciation. (ii) Depletion and depreciation: Depletion of petroleum and natural gas properties and depreciation of production equipment is provided using the unit-of-production method based upon estimated proven petroleum and natural gas reserves. The costs of significant unevaluated properties are excluded from costs subject to depletion. For depletion and depreciation purposes, relative volumes of petroleum and natural gas production and reserves are converted at the energy equivalent conversion rate of six thousand cubic feet of natural gas to one barrel of crude oil. (iii) Ceiling test: In applying the full cost method, the Group calculates a ceiling test whereby the net book value of petroleum and natural gas properties and production equipment, net of the accumulated provision for site restoration costs, is compared annually to an estimate of future net cash flow from the production of proven reserves. Net cash flow is estimated using period end prices, less estimated future general and administrative expenses, financing costs and income taxes. Should this comparison indicate an excess net book value, the excess is charged against earnings as additional depletion and depreciation. (iv) Joint venture: The Group conducts substantially all of its oil and gas exploration and production activities on a joint venture basis. These combined financial statements reflect only the Group's proportionate interest in such activities. (c) Site restoration provision: The Group provides for an estimate of future site restoration costs over the life of the proven reserves on a unit-of-production basis. Costs are estimated each year by management based on current regulations, costs, technology and industry standards. Actual site restoration costs are charged against the accumulated provision account as incurred. (d) Income taxes: The Group uses the liability method of accounting for income taxes. Under this method, income tax liabilities and assets are recognized for the estimated tax consequences attributable to differences between the amounts reported in the financial statements and their respective tax bases, using income tax rates 12 enacted at the balance sheet date. The effect of a change in rates on future income tax liabilities and assets is recognized in the period that the change occurs. 13 LELAND/WATFORD GROUP Notes to Combined Financial Statements Periods ended December 31, 2000 and 1999 (note 1(a)) (Amounts Expressed in Canadian Dollars) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): (e) Revenue recognition: Revenues from the sale of crude oil, natural gas and natural gas liquids are recorded on a gross basis when title passes to an external party. (f) Hedging activities: The Group may use forward contracts to hedge its exposure to commodity price fluctuations. Gains or losses on oil and natural gas transactions are reported as adjustments to oil and natural gas revenues when the related production is sold. (g) Short-term investments: The Group considers all highly liquid investments with a remaining maturity of three months or less at the time of purchase to be cash equivalents. (h) Use of estimates: The preparation of financial statements in accordance with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant estimates relate to determining the provisions for depletion, depreciation and site restoration as well as the ceiling test which are based upon estimates of proven reserves and future costs. Actual results could differ from these estimates. 2. CAPITAL ASSETS:
ACCUMULATED DEPLETION AND NET BOOK 2000 COST DEPRECIATION VALUE - ---- ----------- ------------- ----------- Petroleum and natural gas properties and production equipment $20,101,128 $ 3,511,302 $16,589,826 Office furniture and equipment 126,055 53,947 72,108 ----------- ----------- ----------- $20,227,183 $ 3,565,249 $16,661,934 =========== =========== =========== 1999 - ---- Petroleum and natural gas properties and production equipment $14,138,110 $ 817,675 $13,320,435 Office furniture and equipment 106,399 18,827 87,572 ----------- ----------- ----------- $14,244,509 $ 836,502 $13,408,007 =========== =========== ===========
14 LELAND/WATFORD GROUP Notes to Combined Financial Statements Periods ended December 31, 2000 and 1999 (note 1(a)) (Amounts Expressed in Canadian Dollars) 2. CAPITAL ASSETS (CONTINUED): At December 31, 2000, approximately $415,000 (December 31, 1999 - $56,000) of unevaluated properties were excluded from the depletion and depreciation calculation. At December 31, 2000, the estimated future site restoration costs to be accrued over the remaining proved reserves totaled approximately $877,000 (December 31, 1999 - $566,000). During the periods ended December 31, 2000 and 1999 no overhead applicable to acquisition, development and exploration activities was capitalized to petroleum and natural gas properties. 3. BANK INDEBTEDNESS: At December 31, 2000, the Group has a number of revolving production loan credit facilities aggregating to a maximum of $2,000,000. The loans bear interest at the bank's prime rate plus 1% per annum, are due on demand and are unsecured. As at December 31, 2000, $575,000 of the loan credit facilities was outstanding. 4. DUE TO/FROM RELATED PARTIES: The amounts due to/from related parties are due to/from shareholders, officers, and directors of the Group or companies under their control. These amounts are unsecured, non-interest bearing and with no specific terms of repayment. 5. SHARE CAPITAL: Share capital consists of the capital of each of the individual companies listed in note 1(a). Details of the share capital is as follows: (a) Leland Energy Canada Ltd.: (i) Authorized: (i) Unlimited number of Class A voting shares; and (ii) Unlimited number of non-voting Class B shares. (ii) Class A voting shares issued:
NUMBER OF TOTAL SHARES AMOUNT --------- ----------- Balance, December 31, 1999 -- $ -- Issued on incorporation 100 10 Issued on the distribution of the net assets of the Leland Energy Limited Partnership 20,333 3,420,875 ------ ----------- Balance, December 31, 2000 20,433 $ 3,420,885 ====== ===========
15 LELAND/WATFORD GROUP Notes to Combined Financial Statements Periods ended December 31, 2000 and 1999 (note 1(a)) (Amounts Expressed in Canadian Dollars) 5. SHARE CAPITAL (CONTINUED): (b) Brian Hiebert Energy Limited: (i) Authorized: (i) Unlimited number of voting common shares; and (ii) Unlimited number of voting preferred shares. (ii) Voting common shares issued:
NUMBER OF TOTAL SHARES AMOUNT --------- ----------- Balance, December 31, 1999 -- $ -- Issued for cash 1,000,100 25 --------- ----------- December 31, 2000 1,000,100 $ 25 ========= ===========
Subsequent to December 31, 2000, Brian Hiebert Energy Limited issued 268,377 voting flow-through common shares for proceeds totaling $268,377. (c) Guy Grierson Energy Limited: (i) Authorized: (i) Unlimited number of voting common shares; and (ii) Unlimited number of voting preferred shares. (ii) Voting common shares issued:
NUMBER OF TOTAL SHARES AMOUNT --------- ----------- Balance, December 31, 1999 -- $ -- Issued for cash 1,000,100 25 --------- ----------- December 31, 2000 1,000,100 $ 25 ========= ===========
Subsequent to December 31, 2000, Guy Grierson Energy Limited issued 268,377 voting flow-through common shares for proceeds totaling $268,377. 16 LELAND/WATFORD GROUP Notes to Combined Financial Statements Periods ended December 31, 2000 and 1999 (note 1(a)) (Amounts Expressed in Canadian Dollars) 5. SHARE CAPITAL (CONTINUED): (d) Gord Maybee Energy Limited: (i) Authorized: (i) Unlimited number of voting common shares; and (ii) Unlimited number of voting preferred shares. (ii) Voting common shares issued:
NUMBER OF TOTAL SHARES AMOUNT --------- ----------- Balance, December 31, 1999 -- $ -- Issued for cash 1,000,100 25 --------- ----------- December 31, 2000 1,000,100 $ 25 ========= ===========
Subsequent to December 31, 2000, Gord Maybee Energy Limited issued 205,674 voting flow-through common shares for proceeds totaling $164,539. (e) Ian deBie Energy Limited: (i) Authorized: (i) Unlimited number of voting common shares; and (ii) Unlimited number of voting preferred shares. (ii) Voting common shares issued:
NUMBER OF TOTAL SHARES AMOUNT --------- ------------- Balance, December 31, 1999 - $ - Issued for cash 1,000,100 25 --------- ------------- December 31, 2000 1,000,100 $ 25 ========= =============
Subsequent to December 31, 2000, Ian de Bie Energy Limited issued 253,174 voting flow-through common shares for proceeds totaling $202,539. 17 LELAND/WATFORD GROUP Notes to Combined Financial Statements Periods ended December 31, 2000 and 1999 (note 1(a)) (Amounts Expressed in Canadian Dollars) 5. SHARE CAPITAL (CONTINUED): (f) E. Hiebert Energy Limited: (i) Authorized: (i) Unlimited number of voting common shares; and (ii) Unlimited number of voting preferred shares. (ii) Voting common shares issued:
NUMBER OF TOTAL SHARES AMOUNT --------- ------------- Balance, December 31, 1999 - $ - Issued for cash 1,000,100 25 --------- ------------- December 31, 2000 1,000,100 $ 25 ========= =============
(g) R. Grierson Energy Limited: (i) Authorized: (i) Unlimited number of voting common shares; and (ii) Unlimited number of voting preferred shares. (ii) Voting common shares issued:
NUMBER OF TOTAL SHARES AMOUNT --------- ------------- Balance, December 31, 1999 - $ - Issued for cash 1,000,100 25 --------- ------------- December 31, 2000 1,000,100 $ 25 ========= =============
18 LELAND/WATFORD GROUP Notes to Combined Financial Statements Periods ended December 31, 2000 and 1999 (note 1(a)) (Amounts Expressed in Canadian Dollars) 5. SHARE CAPITAL (CONTINUED): (h) P. Maybee Energy Limited: (i) Authorized: (i) Unlimited number of voting common shares; and (ii) Unlimited number of voting preferred shares. (ii) Voting common shares issued:
NUMBER OF TOTAL SHARES AMOUNT --------- ------------- Balance, December 31, 1999 - $ - Issued for cash 1,000,100 25 --------- ------------- December 31, 2000 1,000,100 $ 25 ========= =============
(i) K. deBie Energy Limited: (i) Authorized: (i) Unlimited number of voting common shares; and (ii) Unlimited number of voting preferred shares. (ii) Voting common shares issued:
NUMBER OF TOTAL SHARES AMOUNT --------- ------------- Balance, December 31, 1999 - $ - Issued for cash 1,000,100 25 --------- ------------- December 31, 2000 1,000,100 $ 25 ========= =============
19 LELAND/WATFORD GROUP Notes to Combined Financial Statements Periods ended December 31, 2000 and 1999 (note 1(a)) (Amounts Expressed in Canadian Dollars) 5. SHARE CAPITAL (CONTINUED): (j) Watford Energy Ltd.: (i) Authorized: (i) Unlimited number of voting common shares; and (ii) Unlimited number of preferred shares. (ii) Voting common shares issued:
NUMBER OF TOTAL SHARES AMOUNT --------- ------------- Balance, December 31, 1999 - $ - Issued for cash 100 100 --------- ------------- December 31, 2000 100 $ 100 ========= =============
The outstanding shares of Watford Energy Ltd. as at December 31, 2000 were issued to and held collectively by Hiebert Watford Holdings Ltd., Grierson Watford Holdings Ltd., Maybee Watford Holdings Ltd. and de Bie Watford Holdings Ltd. and as a result, the share capital and related investment balances were eliminated in the preparation of the combined financial statements. (k) Hiebert Watford Holdings Ltd.: (i) Authorized: (i) Unlimited number of voting common shares; and (ii) Unlimited number of voting preferred shares. (ii) Voting common shares issued:
NUMBER OF TOTAL SHARES AMOUNT --------- ------------- Balance, December 31, 1999 - $ - Issued for cash 100 10 --------- ------------- December 31, 2000 100 $ 10 ========= =============
Subsequent to December 31, 2000, Hiebert Watford Holdings Ltd. issued 1,733,785 voting flow-through common shares for proceeds totaling $1,733,785. Of these shares issued, 985,100 shares were issued to Hiebert Resources Ltd., a company which forms part of the Group, for proceeds totaling $985,100. 20 LELAND/WATFORD GROUP Notes to Combined Financial Statements Periods ended December 31, 2000 and 1999 (note 1(a)) (Amounts Expressed in Canadian Dollars) 5. SHARE CAPITAL (CONTINUED): (l) Grierson Watford Holdings Ltd.: (i) Authorized: (i) Unlimited number of voting common shares; and (ii) Unlimited number of voting preferred shares. (ii) Voting common shares issued:
NUMBER OF TOTAL SHARES AMOUNT --------- ------------- Balance, December 31, 1999 - $ - Issued for cash 100 10 --------- ------------- December 31, 2000 100 $ 10 ========= =============
Subsequent to December 31, 2000, Grierson Watford Holdings Ltd. issued 1,733,785 voting flow-through common shares for proceeds totaling $1,733,785. Of these shares issued, 985,100 shares were issued to Grierson Resources Ltd., a company which forms part of the Group, for proceeds totaling $985,100. (m) Maybee Watford Holdings Ltd.: (i) Authorized: (i) Unlimited number of voting common shares; and (ii) Unlimited number of voting preferred shares. (ii) Voting common shares issued:
NUMBER OF TOTAL SHARES AMOUNT --------- ------------- Balance, December 31, 1999 - $ - Issued for cash 100 10 --------- ------------- December 31, 2000 100 $ 10 ========= =============
Subsequent to December 31, 2000, Maybee Watford Holdings Ltd. issued 865,141 voting flow-through common shares for proceeds totaling $865,141. Of these shares issued, 492,391 shares were issued to Maybee Resources Ltd., a company which forms part of the Group, for proceeds totaling $492,391. 21 LELAND/WATFORD GROUP Notes to Combined Financial Statements Periods ended December 31, 2000 and 1999 (note 1(a)) (Amounts Expressed in Canadian Dollars) 5. SHARE CAPITAL (CONTINUED): (n) De Bie Watford Holdings Ltd.: (i) Authorized: (i) Unlimited number of voting common shares; and (ii) Unlimited number of voting preferred shares. (ii) Voting common shares issued:
NUMBER OF TOTAL SHARES AMOUNT --------- ------------- Balance, December 31, 1999 - $ - Issued for cash 100 10 --------- ------------- December 31, 2000 100 $ 10 ========= =============
Subsequent to December 31, 2000, De Bie Watford Holdings Ltd. issued 1,255,006 voting flow-through common shares for proceeds totaling $1,255,006. Of these shares issued, 714,126 shares were issued to Wild River Resources Ltd., a company which forms part of the Group, for proceeds totaling $714,126. (o) Hiebert Resources Ltd.: (i) Authorized: (i) Unlimited number of voting common shares; and (ii) Unlimited number of non-voting common shares. (ii) Common shares issued:
NON-VOTING VOTING NUMBER AMOUNT NUMBER AMOUNT ------ ---------- ------ ---------- Balance, January 1, 1999 - $ - - $ - Issued for cash 49 15 51 15 ------ ---------- ------ ---------- Balance, December 31, 1999 49 15 51 15 Repurchased (49) (15) (50) (14) ------ ---------- ------ ---------- December 31, 2000 - $ - 1 $ 1 ====== ========== ====== ==========
22 LELAND/WATFORD GROUP Notes to Combined Financial Statements Periods ended December 31, 2000 and 1999 (note 1(a)) (Amounts Expressed in Canadian Dollars) 5. SHARE CAPITAL (CONTINUED): (p) Grierson Resources Ltd.: (i) Authorized: (i) Unlimited number of voting common shares; and (ii) Unlimited number of non-voting common shares. (ii) Common shares issued:
NON-VOTING VOTING NUMBER AMOUNT NUMBER AMOUNT ------ ---------- ------ ---------- Balance, January 1, 1999 - $ - - $ - Issued for cash 49 15 51 15 ------ ---------- ------ ---------- Balance, December 31, 1999 49 15 51 15 Repurchased (49) (15) (50) (14) ------ ---------- ------ ---------- December 31, 2000 - $ - 1 $ 1 ====== ========== ====== ==========
(q) Maybee Resources Ltd.: (i) Authorized: (i) Unlimited number of voting common shares; and (ii) Unlimited number of non-voting common shares. (ii) Common shares issued:
NON-VOTING VOTING NUMBER AMOUNT NUMBER AMOUNT ------ ---------- ------ ---------- Balance, January 1, 1999 - $ - - $ - Issued for cash 49 15 51 15 ------ ---------- ------ ---------- Balance, December 31, 1999 49 15 51 15 Repurchased (49) (15) (50) (14) ------ ---------- ------ ---------- December 31, 2000 - $ - 1 $ 1 ====== ========== ====== ==========
23 LELAND/WATFORD GROUP Notes to Combined Financial Statements Periods ended December 31, 2000 and 1999 (note 1(a)) (Amounts Expressed in Canadian Dollars) 5. SHARE CAPITAL (CONTINUED): (r) Wild River Resources Ltd.: (i) Authorized: (i) Unlimited number of voting common shares; and (ii) Unlimited number of non-voting common shares. (ii) Common shares issued:
NON-VOTING VOTING NUMBER AMOUNT NUMBER AMOUNT ------ ---------- ------ ---------- Balance, January 1, 1999 - $ - - $ - Issued for cash 49 15 51 15 ------ ---------- ------ ---------- Balance, December 31, 1999 49 15 51 15 Repurchased (49) (15) (50) (14) ------ ---------- ------ ---------- December 31, 2000 - $ - 1 $ 1 ====== ========== ====== ==========
6. INCOME TAXES: The provision for income taxes differs from the amount obtained by applying the combined Canadian Federal and Alberta Provincial income tax rate of 44.6% to earnings before income taxes. The difference relates to the following items:
2000 1999 ------------ ------------ Computed expected tax $ 8,642,055 $ 944,679 Non-deductible crown charges, net of Alberta Royalty Tax Credits 534,101 231,592 Small business rate reduction - (180,425) Resource allowance (1,587,919) (188,207) Non-taxable partnership income (note 1(a)) (442,350) (697,317) Non-taxable portion of gain on the sale of the partnership (395,887) - ------------ ------------ $ 6,750,000 $ 110,322 ============ ============
24 LELAND/WATFORD GROUP Notes to Combined Financial Statements Periods ended December 31, 2000 and 1999 (note 1(a)) (Amounts Expressed in Canadian Dollars) 6. INCOME TAXES (CONTINUED): The components of the net future income tax liability are as follows:
2000 1999 ------------- ------------- Future income tax assets: Future site restoration $ 23,800 $ 3,200 Capital assets - 34,600 ------------- ------------- 23,800 37,800 Future income tax liabilities: Capital assets (4,554,269) - Deferred partnership income (492,900) (148,122) ------------- ------------- Net future income tax asset (liability) $ (5,023,369) $ (110,322) ============= =============
7. SUPPLEMENTAL CASH FLOW DISCLOSURE: (a) Changes in non-cash working capital:
2000 1999 ------------- ------------- Accounts receivable $ (3,708,697) $ (2,868,988) Prepaid expenses (271,239) (178,376) Accounts payable 1,845,323 4,419,808 Income taxes payable 1,836,953 - ------------- ------------- (297,660) 1,372,444 Add (deduct) changes in non-cash working capital relating to investing (1,911,210) (938,000) ------------- ------------- $ (2,208,870) $ 434,444 ============= =============
(b) The following cash payments were made:
2000 1999 ------------- ------------- Interest $ 61,614 $ - Taxes $ 63,500 $ - ============= =============
25 LELAND/WATFORD GROUP Notes to Combined Financial Statements Periods ended December 31, 2000 and 1999 (note 1(a)) (Amounts Expressed in Canadian Dollars) 8. COMMITMENTS: (a) Hedging activities: Subsequent to December 31, 2000, the Group entered into various forward commodity contracts as follows:
START TERMINATION COMMODITY VOLUMES (i) DATE DATE PRICE --------- ----------- ----- ----------- ----- Natural gas 1,000 GJ/day January 1, 2001 March 31, 2001 $9.00/GJ Floor $12.40/GJ Ceiling Natural gas 1,000 GJ/day May 1, 2001 May 31, 2001 $6.815/GJ Natural gas 6,000 GJ/day June 1, 2001 October 31, 2001 $6.940/GJ Natural gas 1,000 GJ/day November 1, 2001 March 31, 2002 $6.815/GJ
(i) A GJ is defined as a gigajoule (b) Drilling commitment: During the year ended December 31, 2000 the Group entered into a farm-in agreement to drill 20 wells and acquire 40 square miles of seismic. As at December 31, 2000 the Group had drilled 5 wells and acquired 42 square miles of seismic. Subsequent to December 31, 2000, the Group drilled the remaining wells which satisfied all other obligations required under the farm-in agreement. 9. SUBSEQUENT EVENT: On August 10, 2001, shareholders of the Group entered into an agreement to sell all of the issued and outstanding shares of the companies comprising the Group to Markwest Acquisitions Corp., a wholly-owned subsidiary of Markwest Hydrocarbon Inc. 26 LELAND/WATFORD GROUP Notes to Combined Financial Statements Periods ended December 31, 2000 and 1999 (note 1(a)) (Amounts Expressed in Canadian Dollars) 10. RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES: The Group's combined financial statements have been prepared in accordance with accounting principles generally accepted in Canada ("GAAP"), which differ in some respects to those in the United States. Any differences in accounting principles as they pertain to the accompanying combined financial statements were not material except as described below:
2000 1999 -------------- ------------- Net earnings in accordance with Canadian GAAP $ 12,626,804 $ 2,007,792 Adjustments: Accounting for income taxes (a) (31,982) (3,294) -------------- ------------- Net earnings under U.S. GAAP $ 12,594,822 $ 2,004,498 ============== =============
Balance sheet items in accordance with U.S. GAAP:
2000 1999 -------------- ------------- Assets: Current assets $ 15,006,902 $ 3,091,750 Capital assets 16,661,934 13,408,007 -------------- ------------- $ 31,668,836 $ 16,499,757 ============== ============= Liabilities and Group Equity: Current liabilities $ 14,862,385 $ 4,969,043 Site restoration 71,700 22,260 Future income taxes (a) 5,058,645 113,616 Group's equity 11,676,106 11,394,838 -------------- ------------- $ 31,668,836 $ 16,499,757 ============== =============
(a) The Canadian GAAP liability method of accounting for income taxes requires the measurement of future income tax liabilities and assets using income tax rates that reflect enacted income tax rate reductions provided it is more likely than not that the Group will be eligible for such enacted rate reductions in the period of reversal. U.S. GAAP allows the recording of such rate reductions only when claimed. 27 LELAND/WATFORD GROUP Notes to Combined Financial Statements Periods ended December 31, 2000 and 1999 (note 1(a)) (Amounts Expressed in Canadian Dollars) U.S. GAAP ceiling tests were only performed at December 31, 2000 and December 31, 1999, which are the balance sheet dates presented. The Group performs a cost recovery ceiling test which limits net capitalized costs to the undiscounted estimated future net revenue from proven oil and gas reserves plus the cost of unproven properties less impairment, using year-end prices. In addition, the value is further limited by including financing costs, administration expenses, future abandonment and site restoration costs and income taxes. Under U.S. GAAP, companies using the "full cost" method of accounting for oil and gas producing activities perform a ceiling test using discounted estimated future net revenues from proven oil and gas reserves using a discount factor of 10%. Prices used in the U.S. GAAP ceiling tests performed for this reconciliation were those in effect at the applicable balance sheet date. Financing and administration cost are excluded from the calculation under U.S. GAAP. Application of the US GAAP ceiling test did not result in any material differences to Canadian GAAP. ADDITIONAL U.S. GAAP DISCLOSURES: Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133), establishes new accounting and reporting standards for derivative instruments and for hedging activities. This statement requires an entity to establish, at the inception of a hedge, the method it will use for assessing the effectiveness of the hedging derivative and the measurement approach for determining the ineffective aspect of the hedge. SFAS 133 is effective for the Group commencing January 1, 2001. As at January 1, 2001, the adoption of the provisions of SFAS 133 would not impact the Group. 28 ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS (b) UNAUDITED INTERIM FINANCIAL STATEMENTS OF BUSINESS ACQUIRED. LELAND/WATFORD GROUP Interim Report for June 30, 2001 and 2000 Combined Balance Sheets (Canadian Dollars)
JUNE 30, DECEMBER 31, 2001 2000 (UNAUDITED) ----------- ------------ Assets Current assets: Cash and short-term investments $ 7,432,555 $ 7,979,602 Accounts receivable 4,196,406 6,577,685 Prepaid expenses 302,391 449,615 Due from related parties 3,281,951 - ----------- ----------- 15,213,303 15,006,902 Capital assets 22,941,854 16,661,934 ----------- ----------- Total assets $38,155,157 $31,668,836 =========== =========== Liabilities and Group's Equity Current liabilities: Accounts payable $ 3,613,176 $ 6,265,131 Income taxes payable 5,192,347 1,836,953 Bank indebtedness 15,000 575,000 Due to related parties 5,183,757 6,185,301 ----------- ----------- 14,004,280 14,862,385 Site restoration 121,268 71,700 Future income taxes 6,161,353 5,023,369 Group's equity (note 2) 17,868,256 11,711,382 ----------- ----------- Total liabilities and Group's Equity $38,155,157 $31,668,836 =========== ===========
See accompanying notes to combined financial statements. 29 LELAND/WATFORD GROUP Interim Report for Six Months Ended June 30, 2001 and 2000 Combined Statements of Earnings and Group's Equity (Canadian Dollars, unaudited)
SIX MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 2001 2000 ---------------- ---------------- Revenues: Petroleum and natural gas sales $ 23,799,164 $ 5,728,640 Royalties (6,486,760) (1,150,542) ------------ ------------- 17,312,404 4,578,098 Expenses: Production 3,202,497 734,768 General and administration 1,145,125 1,016,807 Bonuses (note 3) 5,725,455 - Depletion, depreciation and amortization 2,039,407 839,437 ------------ ------------- 12,112,484 2,591,012 Earnings before other items and income taxes 5,199,920 1,987,086 Other income (expense) items: Gain on sale of partnership (note 4) - 8,679,640 Gain on settlement of derivatives 2,186,770 - Interest and other income 115,745 259,322 ------------ ------------- 2,302,515 8,938,962 Less: Income taxes Current 3,355,394 509,246 Future (287,394) 4,026,210 ------------ ------------- 3,068,000 4,535,456 ------------ ------------- Net earnings $ 4,434,435 $ 6,390,592 ============ ============= Group's equity, balance beginning of period $ 11,711,382 $ 11,398,132 Share capital issued (note 2) 1,889,454 - Net earnings for the period 4,434,435 6,390,592 Distributions paid to related parties on the Sale of the partnership - (8,584,521) Capital dividends paid (167,015) (3,729,167) ------------ ------------- 6,156,874 (5,923,096) ------------ ------------- Group's Equity, balance end of period $ 17,868,256 $ 5,475,036 ============ =============
See accompanying notes to combined financial statements. 30 LELAND/WATFORD GROUP Interim Report for Six Months Ended June 30, 2001 and 2000 Combined Statements of Cash Flows (Canadian Dollars, unaudited)
SIX MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 2001 2000 ---------------- ---------------- Cash provided by (used in): Operations: Net earnings $ 4,434,435 $ 6,390,592 Items not involving cash: Depletion, depreciation and amortization 2,039,407 839,437 Gain on sale of partnership - (8,679,640) Future income taxes (287,394) 4,026,210 ----------- ----------- 6,186,448 2,576,599 Change in non-cash operating working capital 3,231,942 (1,923,041) ----------- ----------- 9,418,390 653,558 Financing: Distributions on the sale of the partnership - (8,584,521) Issuance of share capital 3,314,832 - Net change in loan payable (560,000) (549,235) Due from related parties (4,283,495) 1,052,007 Dividend payments (167,015) (3,729,167) ----------- ----------- (1,695,678) (11,810,916) Investing: Capital asset additions (8,269,759) (4,145,217) Partners' interest in capital assets on the sale of the partnership - 9,127,156 Proceeds on the sale of partnership - 11,722,882 ----------- ----------- (8,269,759) 16,704,821 ----------- ----------- Change in cash and short-term investments (547,047) 5,547,463 Cash and short-term investments, beginning of period 7,979,602 - ----------- ----------- Cash and short-term investments, end of period $ 7,432,555 $ 5,547,463 =========== ===========
See accompanying notes to combined financial statements. 31 LELAND/WATFORD GROUP Interim Report for Six Months Ended June 30, 2001 and 2000 Notes to Interim Financial Statements (Canadian Dollars, unaudited) 1. UNAUDITED FINANCIAL STATEMENTS The accompanying unaudited combined financial statements have been prepared by management in accordance with Canadian generally accepted accounting principles. In the opinion of management, the unaudited combined financial statements contain all adjustments (consisting only of normal recurring items) necessary to present fairly the financial position of Leland Energy and Watford Energy Ltd. ("Leland/Watford") as of June 30, 2001, and the results of operations and cash flows for the six-month periods presented. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year. Management believes the disclosures made are adequate to ensure that the information is not misleading in a material respect and suggests that these financial statements be read in conjunction with Leland/Watford financial statements for the year ended December 31, 2000. 2. GROUP'S EQUITY During the six months ended June 30, 2001, the Group issued 3,406,602 flow-through voting common shares for proceeds aggregating $3,314,832. The resource expenditure deductions for income tax purposes related to exploratory and development activities funded by flow-through share arrangements are renounced to investors in accordance with Canadian tax legislation. As such, Canadian generally accepted accounting practices require future income tax liabilities and share capital to be adjusted by the estimated cost of the renounced tax deductions when the shares are issued. This adjustment totaled $1,425,378 relating to the flow-through voting common shares issued during the six months ended June 30, 2001. 3. BONUSES Bonuses were accrued at June 30, 2001 in the amount of $5,725,455 for the purpose of distributing earnings to the Group prior to closing of the sale of the Group to MarkWest Acquisitions Corp. 4. GAIN ON SALE OF PARTNERSHIP For the six months ended June 30, 2000, the Partnership distributed certain of its net assets with a net book value totaling $3,569,044 to the partners. The Partnership was then subsequently sold, which resulted in a gain totaling $8,679,640 for those entities included within the Group that collectively owned 25% of the Partnership. 5. RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES: The Group's combined financial statements have been prepared in accordance with accounting principles generally accepted in Canada ("GAAP"), which differ in some respects to those in the United States. Any differences in accounting principles as they pertain to the accompanying combined financial statements were not material except as described below: 32 LELAND/WATFORD GROUP Interim Report for Six Months Ended June 30, 2001 and 2000 Notes to Interim Financial Statements (Canadian Dollars, unaudited) 5. RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES (CONTINUED):
JUNE 30, JUNE 30, 2001 2000 -------------- ------------- Net earnings in accordance with Canadian GAAP $ 4,434,435 $ 6,390,592 Adjustments: Accounting for income taxes (a) (1,425,378) - -------------- ------------- Net earnings under U.S. GAAP $ 3,009,057 $ 6,390,592 ============== =============
Balance sheet items in accordance with U.S. GAAP:
JUNE 30 2001 -------------- Assets: Current assets $ 15,213,303 Capital assets 22,941,854 -------------- $ 38,155,157 ============== Liabilities and Group Equity: Current liabilities $ 14,004,280 Site restoration 121,268 Future income taxes (a) 6,196,629 Group's equity 17,832,980 -------------- $ 38,155,157 ==============
(a) The Canadian GAAP liability method of accounting for income taxes requires the measurement of future income tax liabilities and assets using income tax rates that reflect enacted income tax rate reductions provided it is more likely than not that the Group will be eligible for such enacted rate reductions in the period of reversal. U.S. GAAP allows the recording of such rate reductions only when claimed. 33 ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS. (c) PRO FORMA FINANCIAL INFORMATION UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION The following unaudited pro forma financial information has been prepared to assist in the analysis of the financial effects of the acquisition of the Leland/Watford Group ("Leland/Watford") by MarkWest Acquisitions Corp. We derived this information from the Leland/Watford audited combined financial statements for the year ended December 31, 2000 and unaudited financial statements for the six months ended June 30, 2001 and from Markwest's audited financial statements for the year ended December 31, 2000 and unaudited financial statements for the six months ended June 30, 2001. The information is only a summary and you should read it in conjunction with the historical financial statements and related notes contained in the annual reports and other information that Markwest has filed with the Securities and Exchange Commission and with the audited and unaudited financial statements of Leland/Watford contained herein. The applicable exchange rate is set forth in note (b). You should consider several factors when comparing the historical financial information of Markwest and Leland/Watford and to the unaudited pro forma financial information, including the following: o The unaudited pro forma condensed combined balance sheet gives effect to the consolidation as if it had occurred on June 30, 2001. The unaudited 2000 pro forma combined statement of income gives effect to the merger as if it occurred on January 1, 2000. The unaudited pro forma combined statement of income for the first six months of 2001 also gives effect to the merger as if it occurred on January 1, 2000. o The unaudited pro forma information is for illustrative purposes only. If the acquisition had occurred in the past, the combined company's financial position and operating results might have been different from that presented in the unaudited pro forma condensed combined financial statements. In addition, the purchase price allocation is preliminary and will be finalized following further analysis of the assets acquired and liabilities assumed. You should not rely on the unaudited pro forma information as an indication of the financial position or operating results that the combined company would have achieved if the merger had occurred in the past. You also should not rely on the unaudited pro forma information as an indication of future results that the company will achieve after the acquisition. 34 MARKWEST HYDROCARBON, INC. UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET JUNE 30, 2001 (IN U.S. DOLLARS, UNLESS OTHERWISE NOTED, AND IN THOUSANDS)
CDN$ US$ LELAND/(a) LELAND/(b) ACQUISITION MARKWEST MARKWEST WATFORD WATFORD ADJUSTMENTS PRO FORMA ---------- ---------- ----------- ----------- --------- Assets Current assets: Cash and cash equivalents $ 2,391 $ 7,433 $ 4,877 $ - $ 7,268 Accounts receivable 15,960 4,196 2,753 - 18,713 Inventories 5,248 - - - 5,248 Risk management asset 1,662 - - - 1,662 Other assets 1,082 3,584 2,351 - 3,433 ---------- -------- -------- --------- -------- Total current assets 26,343 15,213 9,981 - 36,324 ---------- -------- -------- --------- -------- Property and equipment: Gas processing, gathering, storage and marketing equipment 99,058 - - - 99,058 Oil and gas properties and equipment 23,470 28,419 18,646 57,452 (c) 99,568 Land, buildings & other equipment 6,536 127 83 2,603 (c) 9,222 Construction in progress 14,730 - - - 14,730 ---------- -------- -------- --------- -------- 143,794 28,546 18,729 60,055 222,578 Less: accumulated depreciation, depletion and amortization 31,015 5,604 3,677 (3,677)(c) 31,015 ---------- -------- -------- --------- -------- Net property & equipment 112,779 22,942 15,052 63,732 191,563 Risk management asset 725 - - - 725 Intangible assets, net 253 - - - 253 ---------- -------- -------- --------- -------- Total assets $ 140,100 $ 38,155 $ 25,033 $ 63,732 $228,865 ========== ======== ======== ========= ======== Liabilities and shareholders' equity Current liabilities: Accounts payable $ 8,764 $ 3,628 $ 2,380 $ - $ 11,144 Accrued liabilities 8,114 10,376 6,808 - 14,922 Risk management liability 405 - - - 405 ---------- -------- -------- --------- -------- 17,283 14,004 9,188 - 26,471 Deferred income taxes 12,327 6,161 4,042 25,150 (c) 41,519 Long-term debt 46,000 - - 50,306 (c) 96,306 Other liabilities - 121 80 - 80 Shareholders' equity: Common stock 87 - - - 87 Additional paid-in capital 42,539 1,989 1,305 (1,305)(c) 42,539 Retained earnings 21,136 15,879 10,418 (10,418)(c) 21,136 Accumulated other comprehensive income 1,279 - - - 1,279 Treasury stock (551) - - - (551) ---------- -------- -------- --------- -------- Total stockholders' equity 64,490 17,868 11,723 (11,723) 64,490 Total liabilities and stockholders' equity $ 140,100 $ 38,155 $ 25,033 $ 63,732 $228,865 ========== ======== ======== ========= ========
35 MARKWEST HYDROCARBON, INC. UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 2000 (IN U.S DOLLARS, UNLESS OTHERWISE NOTED, AND IN THOUSANDS)
CDN$ US$ LELAND/(a) LELAND/(b) ACQUISITION MARKWEST MARKWEST WATFORD WATFORD ADJUSTMENTS PRO FORMA ---------- ----------- ----------- ----------- --------- Revenues: Gathering, processing and marketing $ 217,393 $ - $ - - $217,393 Exploration and production 4,161 16,985 11,441 - 15,602 ---------- -------- -------- --------- -------- Total revenues 221,554 16,985 11,441 - 232,995 Expenses: Cost of sales 173,281 - - - 173,281 Operating expenses 17,339 2,420 1,630 - 18,969 General and administration 8,761 1,521 1,025 - 9,786 Depletion, depreciation and amortization 6,314 2,778 1,871 2,637 (d) 10,822 ---------- -------- -------- --------- -------- Total operating expenses 205,695 6,719 4,526 2,637 212,858 Income from operations: 15,859 10,266 6,915 (2,637) 20,137 Other income and expense: Interest income 101 491 331 - 432 Interest expense (3,110) (60) (40) (4,287)(e) (7,437) Gain on sale of assets 1,000 8,680 5,847 - 6,847 Other income (expense) (84) - - - (84) ---------- -------- -------- --------- -------- Total other income and expense (2,093) 9,111 6,138 (4,287) (242) Income before taxes 13,766 19,378 13,053 (6,924) 19,895 Provision for income taxes 4,888 6,750 4,547 (2,888)(f) 6,547 ---------- -------- -------- --------- -------- Net income $ 8,878 $ 12,627 $ 8,506 $ (4,036) $ 13,348 ========== ======== ======== ========= ======== Weighted average number of common shares outstanding Basic 8,452 - - - 8,452 Diluted 8,452 - - - 8,452 ---------- -------- -------- --------- -------- Net income per common share Basic $ 1.05 - - - $ 1.58 Diluted $ 1.05 - - - $ 1.58 ========== ======== ======== ========= ========
See accompanying notes to pro forma financial statements. 36 MARKWEST HYDROCARBON, INC. UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS SIX MONTHS ENDED JUNE 30, 2001 (IN U.S. DOLLARS, UNLESS OTHERWISE NOTED, AND IN THOUSANDS)
CDN$ US$ LELAND/(A) LELAND/(B) ACQUISITION MARKWEST MARKWEST WATFORD WATFORD ADJUSTMENTS PRO FORMA ---------- ----------- ----------- ----------- --------- Revenues: Gathering, processing and marketing $ 114,058 $ - $ - - $114,058 Exploration and production 5,036 17,312 11,403 - 16,439 ---------- -------- -------- --------- -------- Total revenues 119,094 17,312 11,403 - 130,497 Expenses: Cost of sales 98,675 - - - 98,675 Operating expenses 8,997 3,203 2,110 - 11,107 General and administration 4,283 1,145 754 - 5,037 Bonuses - 5,725 3,771 - 3,771 Depletion, depreciation and amortization 3,405 2,039 1,343 2,863 (d) 7,611 ---------- -------- -------- --------- -------- Total operating expenses 115,360 12,112 7,978 2,863 126,201 Income from operations: 3,734 5,200 3,425 (2,863) 4,296 Other income and expense: Interest income 82 118 78 - 160 Interest expense (1,260) (2) (1) (1,756)(e) (3,017) Gain on settlement of hedges - 2,187 1,441 - 1,441 Gain on sale of assets - - - - - Other income (expense) (248) - - - (248) ---------- -------- -------- --------- -------- Total other income and expense (1,426) 2,303 1,518 (1,756) (1,664) Income before taxes 2,308 7,503 4,943 (4,619) 2,632 Provision for income taxes 851 3,068 2,021 (1,926)(f) 946 ---------- -------- -------- --------- -------- Net income $ 1,457 $ 4,435 $ 2,922 ($ 2,693) $ 1,686 ========== ======== ======== ========= ======== Weighted average number of common shares outstanding Basic 8,469 - - - 8,469 Diluted 8,498 - - - 8,469 ---------- -------- -------- --------- -------- Net income per common share Basic $ 0.17 - - - $ 0.20 Diluted $ 0.17 - - - $ 0.20 ========== ======== ======== ========= ========
See accompanying notes to pro forma financial statements. 37 NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION (a) Leland/Watford historical financial statements, prepared in accordance with Canadian generally accepted accounting principles, stated in Canadian dollars. (b) Leland/Watford's historical financial statements have been translated from Canadian dollars to U.S. dollars as follows: Leland/Watford's assets and liabilities were translated to U.S. dollars using the exchange rate in effect at June 30, 2001, of $1 Canadian to $0.6561 U.S. Leland/Watford's revenues and expenses for the year ended December 31, 2000, and the six months ended June 30, 2001, were translated to U.S. dollars using the weighted average exchange rate for the period of $1 Canadian to $0.6736 U.S. and $1 Canadian to $0.6587 U.S., respectively. (c) To eliminate the historical book value of Leland/Watford's assets and liabilities and to reflect the purchase of Leland/Watford's stock by MarkWest. The following table recaps the net pro forma adjustments to eliminate the historical book value of Leland/Watford's assets and liabilities and the allocation of the purchase price paid for Leland/Watford to the assets received and the liabilities assumed.
ELIMINATION OF PURCHASE NET PRO LELAND/WATFORD PURCHASE PRICE FORMA HISTORICAL PRICE ALLOCATION ADJUSTMENT ------------- ------------- ------------- ------------- Current assets $ (9,981) $ 9,981 $ - Oil & gas properties (18,646) 76,098 57,452 Other equipment (83) 2,686 2,603 Accumulated depreciation, depletion & amortization 3,677 - 3,677 -------- -------- -------- -------- $(25,033) $ 88,766 $ 63,732 ======== ======== ======== ======== Current liabilities $ (9,188) $ 9,188 $ - Long-term debt - 50,306 50,306 Deferred income taxes (i) (4,042) 29,192 25,150 Other liabilities (80) 80 - Common stock and paid-in capital (1,305) (1,305) Retained earnings (10,418) (10,418) -------- -------- -------- -------- $(25,033) $ 88,766 $ 63,732 ======== ======== ======== ========
The following table reflects the calculation of the purchase price for Leland/Watford: Current liabilities assumed $ 9,188 Incremental borrowings by MarkWest 50,306 Deferred income taxes(i) 29,192 Other liabilities assumed 80 ---------- $ 88,766 ==========
(i) The difference between the book and tax basis of the Leland/Watford resulted in a deferred tax adjustment of approximately $29,000. 38 The allocation of the purchase price to the assets acquired was based upon the estimated relative fair value of each asset. MarkWest estimated the fair value of Leland/Watford's current assets, other property, current liabilities and other non-current liabilities to be equivalent to Leland/Watford's historical net book value. The oil and gas properties of Leland/Watford were valued based upon proved and probable oil and gas reserve valuations prepared in conjunction with the acquisition and an internal appraisal was made of the undeveloped leasehold position and seismic of Leland/Watford. (d) The increase in the cost basis assigned to Leland/Watford's oil and gas properties resulted in an increase in the depreciation, depletion and amortization expense. (e) Included in the December 31, 2000 Consolidated Statement of Operations are revenues and net operating income (revenues less royalties and operating expenses) of $541,061 and $431,197 respectively, attributable to the property sold to Gulf Canada Resources Ltd. (f) Interest expense increased as a result of borrowing approximately $50 million under MarkWest's new bank line of credit. (g) The income tax (provision) benefit was adjusted for the impact of the acquisition and the pro forma adjustments. (h) The following are supplemental information on oil and gas producing activities at December 31, 2000:
MarkWest Leland/ MarkWest Hydrocarbon Hydrocarbon Watford Pro Forma ---------------- ------- -------------------- Proved reserves (Mmcfe) 34,585 26,394 60,979 Standardized measure of discounted net cash flow related to proved reserves $65,050 $46,860 $111,910
39 ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS (d) EXHIBITS. The following exhibits are furnished as part of this report. 2.1 - Share Purchase Agreement between MarkWest Acquisitions Corp. and Kaiser Energy Ltd. (Schedules omitted. MarkWest agrees to provide supplementally a copy of the schedules to the Commission upon request)* 2.2 - Share Purchase Agreement between MarkWest Acquisitions Corp. and Brian E. Hiebert, Guy C. Grieson, Ian R. De Bie, Gordon A. Maybee, Erin Hiebert, Raylene Grierson, Kathleen De Bie, and Patricia Maybee. (Schedules omitted. MarkWest agrees to provide supplementally a copy of the schedules to the Commission upon request)* 10.1 - Bank Credit Agreement between MarkWest Hydrocarbon, Inc. and Bank of America N.A.* 10.2 - 4th Amended and Restated Credit Agreement among MarkWest Hydrocarbon, Inc., and various lenders** 10.3 - Canadian Credit Agreement among MarkWest Resources Canada Corp. and various lenders** 99.1 - Consent of Independent Chartered Accountants--KPMG LLP * Incorporated by reference from the Company's 8-K filed with the Commission on August 27, 2001 ** Previously filed with Amendment No. 1 to the Form 8-K on October 24, 2001. 40 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 hereunto duly authorized. Date: May 24, 2002 MarkWest Hydrocarbon, Inc. 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) 41 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION 99.1 Consent of Independent Chartered Accountants--KPMG
42 EX-99.1 3 a2081074zex-99_1.txt EXHBIT 99.1 EXHIBIT 99.1 CONSENT OF INDEPENDENT CHARTERED ACCOUNTANTS We consent to the inclusion of our report dated October 19, 2001, with respect to the combined financial statements of Leland/Watford Group included in the current report of MarkWest Hydrocarbon, Inc., on Form 8-K/A dated May 24, 2002, filed with the Securities and Exchange Commission. /s/ KPMG LLP Chartered Accountants Calgary, Canada May 24, 2002 43 -----END PRIVACY-ENHANCED MESSAGE-----