-----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, TZk0eOgXtIZU7njPshOjTdkkf+c3CsKumW4hkDIfej2gSJBqGu7EDpXHfPfwT9xh o3IHNxLJBEec4zfgtqOsiA== 0000927356-97-000628.txt : 19970520 0000927356-97-000628.hdr.sgml : 19970520 ACCESSION NUMBER: 0000927356-97-000628 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970515 SROS: NASD 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: 1934 Act SEC FILE NUMBER: 000-21353 FILM NUMBER: 97606626 BUSINESS ADDRESS: STREET 1: 5613 DTC PARKWAY STREET 2: SUITE 400 CITY: ENGLEWOOD STATE: CO ZIP: 80111 BUSINESS PHONE: 3032908700 MAIL ADDRESS: STREET 1: 5613 DTC PARKWAY STREET 2: SUITE 400 CITY: ENGLEWOOD STATE: CO ZIP: 80111 10-Q 1 FORM 10-Q DATED MARCH 31,1997 ================================================================================ 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, 1997 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 (I.R.S. Employer incorporation or organization) Identification No.) 5613 DTC PARKWAY, SUITE 400, ENGLEWOOD, COLORADO 80111 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 303-290-8700 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 8,483,598 shares of common stock, $.01 per share par value, outstanding as of April 30, 1997. ================================================================================ ===============================================================================
PART I - FINANCIAL INFORMATION Page ------ Item 1. Consolidated Financial Statements Consolidated Statement of Operations for the Three Months ended March 31, 1997 and 1996.................................. 1 Consolidated Balance Sheet at March 31, 1997 and December 31, 1996..................... 2 Consolidated Statement of Cash Flows for the three months ended March 31, 1997 and 1996.............................. 3 Notes to the Consolidated Financial Statements.. 4 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition........... 6 PART II - OTHER INFORMATION Item 1. Legal Proceedings................................ 9 Item 6. Exhibits and Reports on Form 8-K................. 9 SIGNATURES................................................ 10
PART I - FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS MARKWEST HYDROCARBON, INC. (SUCCESSOR TO MARKWEST HYDROCARBON PARTNERS, LTD. ) CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) (000S, EXCEPT PER SHARE DATA)
For the three months ended March 31, 1997 1996 ---------- --------- Revenues: Plant revenue................................ $21,289 $11,224 Terminal and marketing revenue............... 6,489 8,407 Oil and gas and other revenue................ 649 67 Interest income.............................. 171 28 Other income................................. 106 134 ---------- --------- Total revenue........................... 28,704 19,860 Costs and expenses: Plant feedstock purchases.................... 10,269 4,588 Terminal and marketing purchases............. 6,702 7,227 Operating expenses........................... 2,199 1,722 General and administrative expenses.......... 1,935 1,205 Depreciation, depletion and amortization..... 772 652 Interest expense, net of capitilized interest 111 293 ---------- --------- Total costs and expenses................ 21,988 15,687 ---------- --------- Income before minority interest and income taxes.................................... 6,716 4,173 Minority interest in net loss of subsidiary...... 202 -- ---------- --------- Income before income taxes....................... 6,918 4,173 Provision for income taxes: Current...................................... 2,373 -- Deferred..................................... 263 -- ---------- --------- Net income....................................... $ 4,282 $ 4,173 ========== ========= Earnings per share of common stock (A)........... $0.50 $0.33 ========== ========= Weighted average number of outstanding shares of common stock (A)............................. 8,485 7,908 ========== ========= Pro forma Net Income (Note 4): Historical income before income taxes........ $ N/A $ 4,173 Provision for income taxes................... N/A 1,586 ---------- --------- Net income................................... $ N/A $ 2,587 ========== =========
- ---------- (A) Pro forma for 1996 (See Note 4). The accompanying notes are an integral part of these financial statements. 1 MARKWEST HYDROCARBON, INC. (SUCCESSOR TO MARKWEST HYDROCARBON PARTNERS, LTD.) CONSOLIDATED BALANCE SHEET (000S)
March 31, ASSETS 1997 December 31, (Unaudited) 1996 ----------- ------------ Current assets: Cash and cash equivalents........... $ 3,080 $ 4,401 Receivables......................... 6,441 9,755 Inventories......................... 2,374 5,632 Prepaid feedstock................... -- 1,831 Other assets........................ 400 458 ----------- ------------ Total current assets.............. 12,295 22,077 Property and equipment: Gas processing, gathering, storage and marketing...................... 46,443 45,247 Oil and gas properties and equipment 4,981 3,731 Land, buildings and other equipment. 5,103 5,647 Construction in progress............ 4,510 5,831 ----------- ------------ 61,037 60,456 Less: accumulated depreciation, depletion and amortization......... (13,061) (12,316) ----------- ------------ Total property and equipment, net. 47,976 48,140 Intangible assets, net of accumulated amortization of $134 299 380 and $315 respectively................... Note receivable and other assets........ 9,367 7,657 ----------- ------------ Total assets............................ $ 69,937 $ 78,254 =========== ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Trade accounts payable.............. $ 2,112 $ 5,382 Accrued liabilities................. 3,915 1,629 Income taxes payable................ 2,373 3,014 Current portion of long-term debt... 156 156 ----------- ------------ Total current liabilities......... 8,556 10,181 ----------- ------------ Deferred income taxes................... 4,253 3,977 Long-term debt.......................... 144 11,257 ----------- ------------ Total liabilities........ 12,953 25,415 ----------- ------------ Minority interest....................... 9,038 9,175 ----------- ------------ Stockholders' equity: Preferred stock, par value $0.01, 5,000,000 shares authorized, 0 shares issued and outstanding.... -- -- Common stock, par value $0.01, 20,000,000 shares authorized, 8,485,000 shares issued and outstanding........................ 85 85 Additional paid-in capital.......... 42,237 42,237 Retained earnings................... 5,624 1,342 ----------- ------------ Total stockholders' equity.................. 47,946 43,664 ----------- ------------ Total liabilities and stockholders' equity................................. $ 69,937 $ 78,254 =========== ============
The accompanying notes are an integral part of these financial statements. 2 MARKWEST HYDROCARBON, INC. (SUCCESSOR TO MARKWEST HYDROCARBON PARTNERS, LTD. ) CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (000S)
For the three months ended March 31, 1997 1996 ----------- -------- Reconciliation of net income to net cash provided by operating activities: Net income........................... $ 4,282 $ 4,173 Add income items that do not affect working capital: Depreciation, depletion and amortization................... 772 652 Deferred income taxes........... 263 -- Gain on sale of assets.......... (75) -- ----------- -------- 5,242 4,825 Adjustments to working capital to arrive at net cash provided by operating activities: Decrease in accounts receivable. 3,314 1,343 Decrease in inventories......... 3,258 1,038 Decrease in prepaid feedstock and other assets............... 1,889 1,709 (Decrease) increase in accounts payable and accrued liabilities (1,625) 305 ----------- -------- Net cash provided by operating activities.......................... 12,078 9,220 Cash flows from investing activities: Capital expenditures................. (595) (931) Other................................ (62) -- (Increase) decrease on note receivable and other assets.................... (1,629) 66 ----------- -------- Net cash used in investing activities (2,286) (865) Cash flows from financing activities: Repayments of long-term debt......... (11,113) (5,500) Partners' distributions.............. -- (557) ----------- -------- Net cash used in financing activities (11,113) (6,057) Net (decrease) increase in cash and cash equivalents.................... (1,321) 2,298 Cash and cash equivalents at beginning of period.............................. 4,401 761 ----------- -------- Cash and cash equivalents at end of period................................. $ 3,080 $ 3,059 =========== ========
The accompanying notes are an integral part of these financial statements. 3 MARKWEST HYDROCARBON, INC. (SUCCESSOR TO MARKWEST HYDROCARBON PARTNERS, LTD.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 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. ("Resources") and MarkWest Michigan, Inc. ("Michigan"). 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, 1996 included in the Company's 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 due primarily to tax credits and intangible development costs. Certain prior year amounts have been reclassified to conform to the 1997 presentation. NOTE 2. REORGANIZATION The Company was incorporated in June 1996 to act as the successor to MarkWest Hydrocarbon Partners, Ltd. (the "Partnership"). Effective October 7, 1996, the Partnership reorganized (the "Reorganization") and the existing general and limited partners exchanged 100% of their interests in the Partnership for 5,725,000 common shares of the Company. An additional 2,400,000 shares of common stock were offered for public sale, totaling 8,125,000 shares outstanding as of October 15, 1996. The over-allotment of 360,000 shares was also exercised during October, resulting in a total of 8,485,000 shares outstanding at October 31, 1996. This transaction was a reorganization of entities under common control, and accordingly, it was accounted for at historical cost. NOTE 3. SIGNIFICANT BUSINESS ACQUISITIONS Prior to July 1, 1996, the Partnership owned 49% of MarkWest Coalseam Development Company LLC (formerly MarkWest Coalseam Joint Venture) ("Coalseam"), a natural gas development venture, and MW Gathering LLC ("Gathering"), a natural gas gathering venture. Effective July 1, 1996, Gathering was merged into Coalseam. Simultaneously, the Partnership formed MarkWest Resources Inc. ("Resources"), and Coalseam distributed 49% of its assets to Resources and 51% to MAK-J Energy Partners, Ltd. (formerly MarkWest Energy Partners, Ltd.) ("Energy"), a partnership whose general partner is a corporation owned and controlled by the President of the Company. The consolidated financial statements reflect Resources' 49% proportionate share of the underlying oil and gas assets, liabilities, revenues and expenses. Effective May 6, 1996, the Partnership acquired the right to earn up to a 60% interest for $16.8 million in a newly formed venture, West Shore Processing, LLC ("West Shore"). The most significant asset of West Shore is Basin Pipeline LLC, which was contributed by the Partnership's venture partner, Michigan Energy Company, LLC. The West Shore agreement is structured so that the Company's ownership interest increases as capital expenditures for the benefit of West Shore are made by the Company. As of March 31, 1997, the Company had made contributions of approximately $13.4 million to, and owned a 55% ownership interest in, West Shore. The Company is committed to make capital expenditures of approximately $20.0 million in 1996 and 1997 in conjunction with the first two phases of the agreement. The Company expects to complete the first phase of the Michigan Project, which will cost approximately $11.0 million, in the first half of 1997. The Company currently anticipates that the second phase of the Michigan Project, which is expected to cost approximately $9.0 million, will be completed by the end of the fourth quarter of 1997. 4 MARKWEST HYDROCARBON, INC. (SUCCESSOR TO MARKWEST HYDROCARBON PARTNERS, LTD.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 4. PRO FORMA INFORMATION Prior to the Reorganization, the Company was organized as a partnership and consequently, was not subject to income tax. A pro forma provision for income taxes and pro forma net income for the quarter ended March 31, 1996 have been presented for purposes of comparability as if the Company had been a taxable entity. In addition, the Company's historical capital structure is not indicative of its current structure and, accordingly, historical net income per common share has not been presented. Pro forma net income per common share for the quarter ended March 31, 1996 has been computed using the weighted average number of common and common equivalent shares outstanding for the fourth quarter of 1996 following the Company's initial public offering. NOTE 5. RECENT ACCOUNTING PRONOUNCEMENTS In February 1997, the Financial Accounting Standards Board issued Statement No. 128 ("SFAS 128"), "Earnings Per Share". This Statement is effective for financial statements issued for periods ending after December 15, 1997. Earlier adoption is not permitted. SFAS 128 requires dual presentation of basic and diluted EPS for entities with complex capital structures. The impact of adopting SFAS 128 will not have a material effect on the Company's earnings per share calculation. 5 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL MarkWest Hydrocarbon, Inc. ("MarkWest" or the "Company") provides compression, gathering, treatment, processing and natural gas liquids ("NGL") extraction services to natural gas producers and pipeline companies and fractionates NGLs into marketable products for sale to third parties. The Company also purchases, stores and markets natural gas and NGLs. The majority of the Company's operating income is derived from gas processing and NGL fractionation. NGL prices and the volume of liquids extracted, fractionated, and sold are the primary determinants of revenues. Prices of NGLs typically do not vary directly with natural gas prices, but more closely follow the prices of crude oil. In addition to sales of NGLs processed by the Company, the Company generates income from the purchase and resale of NGLs as part of its terminal and marketing activities, and provides marketing activities in support of its company-owned facilities and production. The Company also currently operates two propane terminals. In May 1996, the Company entered into arrangements for the establishment of West Shore Processing Company LLC ("West Shore"), a company jointly owned with Michigan Energy Company, LLC ("MEC"). At that time, the most significant assets of West Shore consisted of a 31-mile sour gas pipeline (the "Basin Pipeline") that is situated in Manistee and Mason Counties, Michigan, the rights to obtain a sour gas treatment plant located in Manistee County and various agreements that dedicate natural gas production to West Shore for processing. West Shore has completed a 30-mile extension to provide access to existing shut-in wells owned by Michigan Production Company ("MPC"). West Shore has entered into agreements to construct approximately 27 miles of additional pipeline to provide access to processing services to existing shut-in wells. West Shore will also construct a new 50 million cubic feet per day plant to extract NGLs, with start-up expected in the fourth quarter. In addition, the Company expects either to construct a new treatment plant or to expand Shell's existing plant capacity to treat the sour gas predominant in the Michigan Core Area. The Company maintains a strategic gas exploration effort intended to permit the Company to gain a foothold position in production areas that have strong potential to create demand for its processing services. The Company, through its MarkWest Resources, Inc. subsidiary, currently owns interests in several exploration and production assets. Such assets include a 49% undivided interest in exploration and production projects in La Plata County, Colorado; a 5.4% working interest in a 66 well drilling program on well sites in Oklahoma, Nevada, Kansas and Texas; a 25% working interest in a 31,000 acre project to be developed in the Piceance Basin of Colorado; and a 17.5% working interest in the drilling program of the Niagran Reef Trend in the Michigan Core Area. The Company's results of operations fluctuate substantially from quarter to quarter as a result of changes in availability of, and prices for, natural gas, and changes in demand for gas and NGLs because of weather and variability in demand for NGLs used as feedstocks in petrochemical and other industries. The Company's principal NGL product, propane, is used primarily as home heating fuel. Sales volume and prices of propane usually increase during the winter season and decrease during the summer season. However, demand for, and prices of, propane also depend, to a large extent, upon the severity of the weather in the Company's operating areas during the winter months. To meet the needs of the marketplace, the Company seasonally stores product to meet anticipated winter demand and also increases its third party purchases to meet wintertime needs. As a result, the Company recognizes the greatest proportion of its operating income during the first and fourth quarters of the year. Because of the foregoing factors, the Company's operating results for any particular quarterly period may not be indicative of results for future periods. Management's Discussion and Analysis of Financial Condition and Results of Operations include forward-looking statements (within the meaning of Section 21E of the Securities Exchange Act of 1934) reflecting the expectations, plans and objectives of management for operations of the Company. Such statements are based on current expectations that involve numerous risks and uncertainties. Assumptions relating to these expectations involve judgments with respect to, among other things, future economic, competitive and market conditions, including the price of natural gas, all of which are difficult or impossible to predict accurately and many of which are beyond the 6 control of the Company. Accordingly, there can be no assurance that the forward- looking statements included in the Form 10-Q will prove to be accurate. Inclusion of such information should not be regarded as a representation by the Company or any other person that the expectations, plans and objectives of the Company will be realized. RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THE THREE MONTHS ENDED MARCH 31, 1996 The Company reported net income of $4.3 million or $0.50 per share on revenues of $28.7 million for the first quarter of 1997. This compares to pro forma net income of $2.6 million or $0.33 per share on revenues of $19.9 million for the same period in 1996. This 66% increase in net income is primarily due to the strength of the Company's Appalachian core area, where both volumes of natural gas liquids sold and margins increased, more than offsetting the effect of warmer winter weather on the Company's terminal operations. Revenues The Company's first quarter 1997 plant revenues increased $10.1 million, or 90%, to $21.3 million, compared to $11.2 million for the first quarter of 1996. An increase in NGL production and sales volumes of 25% accounted for approximately $2.5 million of the revenue increase, with higher selling prices per gallon for all NGL products accounting for a $1.1 million increase. The remaining $6.5 million increase resulted from NGL exchange contracts and hedging positions put in place during the fourth quarter of 1996. NGL recoveries were greater for the first quarter of 1997 at the Company's Kenova plant, due to reduced down time, compared to operations during the plant's start-up period in the first quarter of 1996. Richer gas streams were also available during the first quarter of 1997 due to a temporary maintenance shutdown of a competitor's plant upstream of Kenova. In addition, increased processing of third party feedstocks occurred. Terminal and marketing revenue for the first quarter of 1997 decreased $1.9 million, or 23%, to $6.5 million, compared to $8.4 million for the first quarter of 1996. This decrease was the result of a $2.5 million volume decrease at the Company's West Memphis terminal, partially offset by $0.6 million worth of price-related increases. Warmer winter months in 1997 resulted in decreased sales volumes, compared to the first quarter of 1996. Oil and gas and other revenue increased to $649,000 for the first quarter of 1997 as compared to $67,000 for the first quarter of 1996, an increase of $582,000. This increase was due principally to an additional $122,000 in revenues from the Company's oil and gas properties, an additional $210,000 in transportation and compression revenues from the Company's Basin Pipeline subsidiary, and an additional $250,000 in processing revenues from the Company's West Shore operations for the first quarter of 1997. Interest income Interest income increased $143,000 from $28,000 for the first quarter of 1996 to $171,000 for the first quarter of 1997. This increase resulted primarily from the interest income earned in the first quarter of 1997 on long-term notes receivable, which bears an interest rate of 5.98%. Costs and expenses Plant feedstock costs increased to $10.3 million for the first quarter of 1997, compared to $4.6 million for the first quarter of 1996, an increase of $5.7 million, or 124%. Of this $5.7 million increase, $1.4 million was attributable to NGL production volumes which was partially offset by increased pricing, and $4.3 million of the increase was due to NGL exchange contracts and hedging positions put in place during the fourth quarter of 1996. Terminal and marketing purchases decreased $0.5 million, from $7.2 million in the first quarter of 1996, to $6.7 million for the first quarter of 1997, a decrease of 7%. This decrease was primarily a result of a $2.1 million volume decrease, which was significantly offset by an increase in propane pricing of $1.6 million. 7 Operating expenses increased $0.5 million or 29% from $1.7 million to $2.2 million for the first quarter of 1997, as compared to the first quarter of 1996. The increase was principally driven by the Company's operations in Michigan, which commenced in May 1996. General and administrative expenses increased $0.7 million or 58%, to $1.9 million for the first quarter of 1997 from $1.2 million for the first quarter of 1996. The increase was attributable to administrative support activities related to the West Shore operations in Michigan, to costs incurred in connection with the Partnership reorganization and being a public company in 1997. Depreciation and amortization increased to $772,000 from $652,000 for the first quarter of 1997 compared to the first quarter of 1996, an increase of $120,000, or 18%. This increase was principally due to increased depreciation attributable to the Company's West Shore facilities. Interest expense Interest expense decreased $182,000 or 62% from interest expense of $293,000 for the first quarter of 1996 to interest expense of $111,000 for the first quarter of 1997. This decrease resulted primarily from the decrease in average outstanding long-term debt to $3.6 million for the first quarter of 1997 compared to $13.8 million for the first quarter of 1996. LIQUIDITY AND CAPITAL RESOURCES The Company's sources of liquidity and capital resources historically have been net cash provided by operating activities; proceeds from issuance of long-term debt; and in 1996, an initial public offering of equity. The Company's principal uses of cash have been to fund operations, capital expenditures and acquisitions. For the first quarter of 1997, net cash provided by operating activities increased by $2.9 million to $12.1 million compared to the first quarter of 1996. This increase resulted primarily from an increase in revenue of $8.8 million, which was offset by a $6.4 million increase in feedstock purchases, operating expenses and general and administrative expenses. Cash used in investing activities increased $1.4 million for the first quarter of 1997 to $2.3 million, as compared to the first quarter of 1996, mainly due to West Shore's financing of a 31-mile extension to the Basin Pipeline, which West Shore is building on behalf of Michigan Production Company. Financing activities during the first quarter of both 1997 and 1996 principally consisted of payments on long-term debt. Financing Facilities At March 31, 1997, the Company had $47.5 million of available credit and working capital of $3.7 million. The Company believes that cash flows generated by its operations and existing credit facilities will be sufficient to meet its anticipated cash needs for working capital and capital expenditures for the next 12 months. Resources Revolver Loan The Company had a revolving facility with Colorado National Bank with a maximum borrowing base of $5.8 million as of March 31, 1997. As of March 31, 1997, there were no outstanding borrowings on this facility. This facility was canceled by the Company, effective April 25, 1997. Capital Investment Program The Company expects to spend in excess of $20.0 million during 1997, including approximately $12.0 million in the Michigan Core Area in order to complete construction of a pipeline and a new liquids facility, with the balance being allocated for projects in the Appalachian Core Area and exploration projects. For the three months ended 8 March 31, 1997, the Company made capital expenditures totaling approximately $600,000, and funded $1.6 million to complete the 30-mile extension of the Basin Pipeline. RISK MANAGEMENT ACTIVITIES The Company's primary hedging objectives are to meet or exceed budgeted gross margins by locking in budgeted or above-budgeted prices in the financal derivatives markets and to protect margins from precipitous declines. Under internal guidelines, speculative positions are prohibited. The Company's hedging activities generally fall into three categories - 1) contracting for future purchases of natural gas at a predetermined BTU differential based upon a basket of Gulf Coast NGL prices (or a substitute for propane such as crude oil), 2) the fixing of margins between propane sales prices and natural gas reimbursement costs by purchasing natural gas contracts and simultaneously selling propane contracts of approximately the same BTU value, and 3) the purchase of propane futures contracts to hedge future sales of propane at the Company's terminals or gas plants. The Company enters into futures transactions on the New York Mercantile Exchange ("NYMEX"). Future gas purchases are based on predetermined BTU differentials and are negotiated with natural gas suppliers and structured to provide similar risk protections as NYMEX futures. The Company maintains a three-person committee that oversees all hedging activity of the Company. This committee reports monthly to management regarding recommended hedging transactions and positions. Gains and losses related to qualifying hedges, as defined by Statement of Financial Accounting Standards No. 80, "Accounting for Futures Contracts", of firm commitments or anticipated transactions are recognized in plant revenue and feedstock purchases upon execution of the hedged physical transaction. During the three months ended March 31, 1997, a $1,018,000 gain was recognized in operating income on the settlement of propane and natural gas futures. Financial instrument gains and losses on hedging activities were generally offset by amounts realized from the sale of the underlying products in the physical market. RECENT ACCOUNTING PRONOUNCEMENTS In February 1997, the Financial Accounting Standards Board issued Statement No. 128 ("SFAS 128"), "Earnings Per Share". This Statement is effective for financial statements issued for periods ending after December 15, 1997. Earlier adoption is not permitted. SFAS 128 requires dual presentation of basic and diluted EPS for entities with complex capital structures. The impact of adopting SFAS 128 will not have a material effect on Company's earnings per share calculation. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In April 1997, Domain Energy Corporation and EnCap Investments, L.C. informed the Company that they had purported to transfer their interests in MEC and Michigan Production Company to Energy Acquisition Corp. MEC holds a minority interest in West Shore. The Company believes that the transfer of the interest in MEC would be in violation of the arrangements for the establishment and operation of West Shore, and is, therefore, invalid. Accordingly, the Company has not recognized the purported transfer and has commenced arbitration proceedings pursuant to the Participation, Ownership and Operating Agreement for West Shore. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 11 - Statement regarding computation of earnings per share 9 27 - Financial Data Schedule (a) Reports on Form 8-K A report on Form 8-K dated April 28, 1997, was submitted announcing the hiring of Gerald A. Tywoniuk as Chief Financial Officer and Vice President of Finance. 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 12, 1997 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) 10 EX-11 2 COMPUTATION EARNINGS PER SHARE Exhibit 11 MARKWEST HYDROCARBON, INC. COMPUTATION OF EARNINGS PER COMMON SHARE
FOR THE THREE MONTHS ENDED MARCH 31, 1997 1996 -------------------------------------- Net income (pro forma for 1996) $4,282 $2,587 Weighted average common shares outstanding (pro forma for 1996) 8,485 7,908 Earnings per common share (pro forma for 1996) $ .50 $ .33
EX-27 3 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the consolidated balance sheet and consolidated statements of operations on pages 1 and 2 of the Company's 1997 Form 10-Q for the three months ended March 31, 1997, and is qualified in its entirety by reference to such financial statements. 1,000 3-MOS MAR-31-1997 JAN-01-1997 MAR-31-1997 3,080 0 6,441 0 2,374 12,295 61,037 (13,601) 69,937 8,556 144 0 0 85 47,861 69,937 28,427 28,704 16,971 16,971 5,017 0 111 6,918 2,636 4,282 0 0 0 4,282 0.50 0
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