-----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, AG+Grk/72JBVBYZcR9EaEQveUSphY3DzXu5xo3nKAX1F9ieHgv4vnVlbqnnf6Qnu lzHJjqxJtjbcWFofiTc3fQ== 0000927356-98-000806.txt : 19980514 0000927356-98-000806.hdr.sgml : 19980514 ACCESSION NUMBER: 0000927356-98-000806 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980513 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: SEC FILE NUMBER: 000-21353 FILM NUMBER: 98617996 BUSINESS ADDRESS: STREET 1: 155 INVERNESS DRIVE WEST STREET 2: SUITE 200 CITY: ENGLEWOOD STATE: CO ZIP: 80112-5004 BUSINESS PHONE: 3032908700 MAIL ADDRESS: STREET 1: 155 INVERNESS DRIVE WEST STREET 2: SUITE 200 CITY: ENGLEWOOD STATE: CO ZIP: 80112-5004 10-Q 1 FORM 10-Q - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998 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.) 155 INVERNESS DRIVE WEST, SUITE 200, ENGLEWOOD, CO 80112-5004 (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 8,499,890 shares of common stock, $.01 per share par value, outstanding as of May 8, 1998. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART I - FINANCIAL INFORMATION Page ---- Item 1. Consolidated Financial Statements Consolidated Balance Sheet at March 31, 1998 and December 31, 1997........................................................ 1 Consolidated Statement of Operations for the Three Months Ended March 31, 1998 and 1997............................... 2 Consolidated Statement of Cash Flows for the Three Months Ended March 31, 1998 and 1997............................... 3 Notes to the Consolidated Financial Statements................ 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................... 5 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. CONSOLIDATED BALANCE SHEET (000S, EXCEPT SHARE DATA)
March 31, 1998 December 31, ASSETS (Unaudited) 1997 ----------- ------------ Current assets: Cash and cash equivalents............................................ $ 2,249 $ 1,493 Receivables, net of allowance for doubtful accounts of $120 and $120, respectively....................................................... 5,819 10,150 Inventories.......................................................... 2,566 5,141 Prepaid feedstock.................................................... -- 2,690 Other assets......................................................... 2,985 2,698 ---------- ---------- Total current assets........................................... 13,619 22,172 Property and equipment: Gas processing, gathering, storage and marketing equipment........... 59,156 58,794 Oil and gas properties and equipment................................. 10,344 7,854 Land, buildings and other equipment.................................. 10,023 9,363 Construction in progress............................................. 5,618 5,258 ---------- ---------- 85,141 81,269 Less: accumulated depreciation, depletion and amortization........... (16,394) (15,439) ---------- ---------- Total property and equipment, net.............................. 68,747 65,830 Intangible assets, net of accumulated amortization of $299 and $287 respectively......................................................... 577 555 Note receivable and other assets....................................... 10,100 10,100 ---------- ---------- Total assets........................................................... $ 93,043 $ 98,657 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Trade accounts payable............................................... $ 1,916 $ 3,074 Accrued liabilities.................................................. 5,212 4,339 Current portion of long-term debt.................................... 191 156 ---------- ---------- Total current liabilities...................................... 7,319 7,569 Deferred income taxes.................................................. 6,068 5,609 Long-term debt......................................................... 27,141 33,931 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, 8,526,514 and 8,519,724 shares issued, respectively.......................... 85 85 Additional paid-in capital........................................... 42,780 42,729 Retained earnings.................................................... 10,105 9,189 Treasury stock, 27,511 and 27,511 shares, respectively............... (455) (455) ---------- ---------- Total stockholders' equity..................................... 52,515 51,548 ---------- ---------- Total liabilities and stockholders' equity............................. $ 93,043 $ 98,657 ========== ==========
The accompanying notes are an integral part of these financial statements. 1 MARKWEST HYDROCARBON, INC. CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) (000S, EXCEPT PER SHARE DATA)
For the three months ended March 31, 1998 1997 -------- -------- Revenues: Gathering, processing and marketing revenue....... $19,854 $28,357 Oil and gas revenue............................... 357 172 Interest income................................... 71 171 Other income...................................... 20 75 -------- -------- Total revenue............................... 20,302 28,775 -------- -------- Costs and expenses: Cost of sales..................................... 13,284 16,971 Operating expenses................................ 2,669 2,222 General and administrative expenses............... 1,522 1,991 Depreciation, depletion and amortization.......... 970 772 Interest expense.................................. 447 103 -------- -------- Total costs and expenses.................... 18,892 22,059 -------- -------- Income before minority interest and income taxes.... 1,410 6,716 Minority interest in net loss of subsidiary......... -- 202 -------- -------- Income before income taxes.......................... 1,410 6,918 Provision for income taxes: Current........................................... 34 2,373 Deferred.......................................... 459 263 -------- -------- 493 2,636 -------- -------- Net income.......................................... $ 917 $ 4,282 ======== ======== Basic earnings per share............................ $ 0.11 $ 0.50 ======== ======== Earnings per share assuming dilution................ $ 0.11 $ 0.50 ======== ======== Weighted average number of outstanding shares of common stock...................................... 8,496 8,485 ======== ========
The accompanying notes are an integral part of these financial statements. 2 MARKWEST HYDROCARBON, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (000S)
For the three months ended March 31, 1998 1997 --------- --------- Cash flows from operating activities: Net income............................................... $ 917 $ 4,282 Add income items that do not affect working capital: Depreciation, depletion and amortization................ 970 772 Deferred income taxes................................... 459 263 Gain on sale of assets.................................. -- (75) --------- --------- 2,346 5,242 Adjustments to working capital: Decrease in accounts receivable......................... 4,331 3,314 Decrease in inventories................................. 2,575 3,258 Decrease in prepaid feedstock and other assets.......... 2,403 1,889 Decrease in accounts payable and accrued liabilities.... (285) (1,625) --------- --------- 9,024 6,836 Net cash provided by operating activities............ 11,370 12,078 Cash flows from investing activities: Capital expenditures.................................... (3,880) (595) Increase in intangible assets, note receivable and other assets................................................ (30) (1,629) Other................................................... -- (62) --------- --------- Net cash used in investing activities................ (3,910) (2,286) Cash flows from financing activities: Proceeds from long-term debt............................ 8,700 -- Repayment of long-term debt............................. (15,455) (11,113) Other................................................... 51 -- --------- --------- Net cash used in financing activities................ (6,704) (11,113) --------- --------- Net (decrease) increase in cash and cash equivalents...... 756 (1,321) Cash and cash equivalents at beginning of period.......... 1,493 4,401 --------- --------- Cash and cash equivalents at end of period................ $ 2,249 $ 3,080 ========= =========
The accompanying notes are an integral part of these financial statements. 3 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"), MarkWest Michigan, Inc. ("Michigan") and 155 Inverness, Inc. ("155 Inverness"). 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, 1997 included in the Company's Annual Report on Form 10-K, as filed with the Securities and Exchange Commission. In the opinion of management, all adjustments necessary for a fair statement of the results for the unaudited interim periods have been made. These adjustments consist only of normal recurring adjustments. The effective corporate tax rate for interim periods is based on the estimated annual effective corporate tax rate, excluding certain nonrecurring or unusual events. The effective tax rate varies from statutory rates due primarily to tax credits and intangible development costs. Certain prior year amounts have been reclassified to conform to the 1998 presentation. NOTE 2. SUBSEQUENT EVENT Effective May 6, 1998, the Company amended its existing credit agreement. The amended credit agreement provides for a maximum borrowing amount of $85 million, $50 million of which is available pursuant to a term loan commitment and the remaining $35 million pursuant to a revolving loan commitment. Actual borrowing limits may be a lesser amount, depending on trailing cash flow, as defined in the agreement. The term loan commitment period will terminate on October 20, 1999. Any outstanding balance thereunder will be payable in eight equal quarterly installments, beginning June 30, 2002. The revolving loan commitment converts to a reducing loan commitment on May 6, 2000. The reducing loan commitment reduces ratably on a quarterly basis to zero by May 6, 2004. Interest rates are based on either the agent bank's base rate or the London Interbank Offered Rate (LIBOR), plus an applicable margin of between 0% and 0.75% or 0.625% and 2.25%, respectively, based upon a certain Company debt to earnings ratio. The debt is secured by a first mortgage on the Company's major assets. The loan agreement restricts certain activities and requires the maintenance of certain financial ratios and other conditions. 4 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations contains statements which, to the extent that they are not recitations of historical fact, constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 ("Section 27A") and Section 21E of the Securities and Exchange Act of 1934 ("Section 21E"). All forward-looking statements involve risks and uncertainties. The forward-looking statements in this document are intended to be subject to the safe harbor protection provided by Sections 27A and 21E. Factors that most typically impact the Company's operating results and financial condition include (i) changes in general economic conditions in regions in which the Company's products are located, (ii) the availability and prices of natural gas liquids ("NGLs") and competing commodities, (iii) the availability and prices of raw natural gas supply, (iv) the ability of the Company to negotiate favorable marketing agreements, (v) the risks that natural gas exploration and production activities will not be successful, (vi) the Company's dependence on certain significant customers, gatherers and transporters of natural gas, (vii) competition from other NGL processors, including major energy companies, and (viii) the Company's ability to identify and consummate acquisitions complementary to its business. For discussions identifying other important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements, see the Company's Securities and Exchange Commission filings. GENERAL MarkWest Hydrocarbon, Inc. (the "Company" or "MarkWest") is engaged in natural gas processing and related services. The Company, which has grown substantially since its founding in 1988, is the largest processor of natural gas in Appalachia, and in 1996, established a venture to provide natural gas transportation and processing services in western Michigan. The independent gas processing industry has expanded rapidly in the last 10 years, and the Company believes there will be significant opportunities to grow its gas processing operations within these existing core regions and in new markets. The Company provides compression, gathering, treatment and 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 and conducts strategic exploration for new natural gas sources for its processing and fractionation activities. The Company's processing and marketing operations are concentrated in two core areas: the significant gas-producing basin in the southern Appalachian region of eastern Kentucky, southern West Virginia, and southern Ohio (the "Appalachian Core Area") and the developing basin in western Michigan (the "Michigan Core Area"). At the Company's processing plants, natural gas is treated to remove contaminants and NGLs are extracted and fractionated into propane, normal butane, isobutane and natural gasoline. The Company then markets the fractionated NGLs to refiners, petrochemical companies, gasoline blenders, multistate and independent propane dealers and propane resellers. In addition to processing and NGL marketing, the company engages in terminalling and storage of NGLs in a number of NGL storage complexes in the central and eastern United States and operates propane terminals in Arkansas and Tennessee. FIRST QUARTER 1998 SUMMARY For the three months ended March 31, 1998, net income was $917,000, compared to net income of $4.3 million for the same period in 1997. The decrease in net income resulted from lower gross margins on NGL sales at MarkWest's Appalachian plants, a function of weak NGL prices. Last year's first quarter gross margin on a per-unit basis was approximately 80 percent above MarkWest's last ten years' average, benefiting 1997 results by about $2.4 million after tax. In contrast, this year's gross margin was approximately 40 percent below MarkWest's ten year average, reducing 1998 results by about $1.4 million after tax. NGL prices are closely correlated with crude oil prices, which fell to an average spot price of about $15 per barrel for West Texas Intermediate in the first quarter of 1998 compared to $22 per barrel in the first quarter of 1997. Results in the first quarter of 1997 benefited from hedged positions put in place in late 1996 when processing margins were at extremely high levels. Terminal operating income improved by $500,000 in the first quarter of 1998, the result of improved margins. APPALACHIAN CORE AREA NGL production volumes of 26.9 million gallons in the first quarter of 1998 were down three percent from the first quarter of 1997. Production volumes returned to more normal levels as compared to the unusually rich gas streams processed at MarkWest's Kenova plant in the first quarter of 1997. MarkWest continues to work with producers to increase volumes through its systems and is pursuing consolidation of area plants, acquisitions and new grassroots facilities. 5 MICHIGAN CORE AREA MarkWest's new NGL extraction plant started operations in December 1997, adding significantly to the revenue MarkWest generated in the first quarter of 1998. Before this plant came on-line, an outside plant was receiving the revenue from the propane and other liquids extracted. The volume of gas transported and processed more than tripled to 12.1 million cubic feet per day ("mmcfd") in the first quarter of 1998, compared with 3.8 mmcfd in the first quarter of 1997. EXPLORATION AND PRODUCTION On March 31, 1998, the Company announced the acquisition of 40 producing wells from an undisclosed seller for $2.4 million. The acquisition includes approximately 6.6 billion cubic feet of natural gas net to the Company located in the northern San Juan Basin of southwest Colorado. This acquisition will augment the Company's existing gathering and compression operations in the San Juan Basin and provide opportunities for new well completions and well operating efficiencies. OUTLOOK NGL prices in the first quarter of 1998 were below historical levels and are expected to remain so in the second quarter of 1998. These prices are often correlated with and driven by the price of crude oil, which has not fully recovered from its decline over the fourth quarter of 1997 and the first quarter of 1998. A majority of the Company's revenues, and as a result, its gross margins, remain dependent upon the sales price of NGLs, particularly propane, which fluctuates with the winter weather conditions and other supply and demand determinants. The strongest demand for propane and the highest propane sales margins generally occur during the winter heating season. As a result, the Company recognizes the greatest proportion of its annual income during the first and fourth quarters of the year. Currently, MarkWest has an annual sensitivity to NGL prices equal to $1 million in pretax income for every $0.01/gallon change in NGL prices and an annual sensitivity to natural gas prices equal to $1 million in pretax income for every $0.10/mmbtu change in natural gas prices. MarkWest is progressing in its program to extend its Michigan pipeline by 27 miles to connect additional production. Permitting for the first one third of the southern extension was completed in the first quarter of 1998. Construction began in March 1998, which will allow for the connection of an eight mmcfd well early in the third quarter. The permit for the remaining two thirds of the extension is expected in the second quarter of 1998, allowing for an additional 15 mmcfd to be connected by early fourth quarter of 1998. When completed, the project's initial 35 mmcfd capacity will be full. For an additional $3 million, MarkWest can expand the project's capacity to 50 mmcfd. The timing of project expansion will depend on exploration success in the area. Drilling activities are increasing considerably along the MarkWest pipeline in Michigan. MarkWest is participating in exploration activities in the region, holding a 17.5 percent working interest in a recently completed seismic program. Drilling of the first of three to four wells in this program is expected early in the third quarter of 1998. Two drilling programs by other companies are also underway. One of these programs recently confirmed drilling success of a two mmcfd well, has drilled two other wells, and has plans for more seismic work and additional well drilling this year. Another program plans to drill four new wells by year-end. Drilling successes in any of these three programs could add significantly to pipeline and NGL throughput for MarkWest. OPERATING STATISTICS Three Months Ended March 31, 1998 1997 % Change ---------- ---------- -------- Appalachia: NGL production--Siloam plant (gallons) 26,899,179 27,822,619 (3%) NGLs marketed--Siloam plant (gallons) 28,665,330 30,480,920 (6%) Fee gas processed (mmbtu) 11,636,374 12,882,403 (10%) Terminal throughput (gallons) 10,403,555 10,358,249 - 6 Michigan: Pipeline throughput (mcf) 1,085,540 346,324 213% NGLs marketed (gallons) 1,858,381 -- -- Gas production (mcf) 173,246 80,850 114% THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THE THREE MONTHS ENDED MARCH 31, 1997 Three months ended March 31, 1998 1997 $ Change % Change -------- -------- -------- -------- Revenue $20,302 $28,775 $(8,473) (29%) Gross profit (a) 3,308 8,841 (5,533) (63%) Income before income taxes 1,410 6,918 (5,508) (80%) Provision for income taxes 493 2,636 (2,143) (81%) -------- -------- -------- -------- Net income 917 4,282 (3,365) (79%) ======== ======== ======== ======== (a) Excludes interest income, general and administrative expense and interest expense. REVENUES Gathering, processing and marketing revenue. Gathering, processing and marketing revenue decreased $8.5 million or 30% for the three months ended March 31, 1998, compared to the same period in 1997, due to a variety of reasons. The Company's Appalachian operations accounted for the majority of the overall revenue decrease, primarily as a result of weak prices in the first quarter of 1998 compared to the same time period in 1997. The above factor was partially offset by a 213% increase in the volume of gas processed in the Company's Michigan operations during the three months ended March 31, 1998 compared to the three months ended March 31, 1997. Gas processed in the Company's Michigan operations contributed both fee-based processing income and, for the first time in 1998, revenues from the sale of propane and other liquids extracted at the Company's new NGL extraction plant, which began operations in December 1997. Oil and gas revenue. Oil and gas revenue increased $185,000 or 108% for the three months ended March 31, 1998, compared to the same time period in 1997. This increase was directly attributable to a 114% increase in gas production from the prior year. COSTS AND EXPENSES Cost of sales. Cost of sales decreased $3.7 million or 22% for the three months ended March 31, 1998 compared to the same time period in 1997. The Company's Appalachian operations accounted for the majority of the decrease, primarily as a result of a decrease in unit costs and volumes sold at the Company's Siloam plant. Appalachian cost of sales was also impacted by a decrease in unit costs at the Company's terminals. These factors were partially offset by an increase in cost of sales at the Company's Michigan operations, where the Company's new NGL extraction plant was operational during the first quarter of 1998. Operating expenses. Operating expenses increased $447,000 or 20% for the three months ended March 31, 1998 compared to the three months ended March 31, 1997. The majority of the increase was driven by the Company's Michigan operations, where the Company's new NGL extraction plant was operational during the first quarter of 1998. This increase was partially offset by lower operating expenses at the Company's Siloam plant in the first quarter of 1998 compared to the same period in 1997. General and administrative expenses. General and administrative expenses decreased $469,000 or 24% for the three months ended March 31, 1998 compared to the same time period in 1997. General and administrative expenses incurred during the three months ended March 31, 1997 included many initial costs, including significant professional service fees, incurred in connection with its reorganization into a public company. 7 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. In the past, these sources have been sufficient to meet its needs and finance the growth of its business. The following summary table reflects comparative cash flows for the Company for the three months ended March 31, 1998 and 1997 (in thousands): For the three months ended March 31, 1998 1997 --------- --------- Net cash provided by operating activities before change in working capital $ 2,346 $ 5,242 Net cash provided by operating activities from change in working capital 9,024 6,836 Net cash used in investing activities (3,910) (2,286) Net cash used financing activities (6,704) (11,113) For the three months ended March 31, 1998, net cash provided by operating activities before adjustments for working capital decreased $2.9 million from the same period in 1997, primarily as a result of a decrease in gross profit since 1997. This was partially offset by a $9.0 million decrease in the Company's working capital accounts, excluding cash, for the three months ended March 31, 1998, compared to a $6.8 million decrease in working capital accounts, excluding cash, for the three months ended March 31, 1997. The change in working capital was principally driven by greater decreases in accounts receivable, prepaid feedstock and other current assets in the first quarter of 1998, compared to the first quarter of 1997. These changes were partially offset by a smaller decrease in inventories and accounts payable in the first quarter of 1998, compared to the first quarter of 1997. Cash used in investing activities increased $1.6 million for the three months ended March 31, 1998 compared to the three months ended March 31, 1997, primarily related to higher capital expenditures made in 1997 (see further discussion under "Capital Investment Program"). For the three months ended March 31, 1998, cash used in financing activities was $6.7 million, a decrease of $4.4 million compared to the same time period in 1997, as less debt repayments occurred. Financing Facilities At March 31, 1998, the Company had $36.5 million of available credit and working capital of $6.3 million. The Company believes that cash provided by operating activities, together with amounts available to be borrowed under its financing facilities, will provide sufficient funds to maintain its existing facilities and fund its capital expenditure program. Depending on the timing and amount of the Company's future projects, it may be required to seek additional sources of capital. While the Company believes that it would be able to secure additional financing, if required, no assurance can be given that it will be able to do so. Capital Investment Program The Company's capital investment program for 1998 is estimated at $18 million, down from the $24 million previously estimated. The new estimate includes $11 million in Michigan to fund a further extension of the pipeline and expansion of the current system capacity. The remaining capital programs include $3 million for various projects in Appalachia, including a new compressor at the Company's Kenova facility and $4 million in exploration and production activities. For the three months ended March 31, 1998, the Company made capital expenditures totaling approximately $3.9 million, including $2.4 million in an acquisition of 40 producing wells located in the northern San Juan Basin of southwest Colorado. RISK MANAGEMENT ACTIVITIES During the three months ended March 31, 1998 and 1997, a $0 and $1.0 million gain, respectively, were 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. 8 At March 31, 1998 and 1997, the Company had no material notional quantities of NGL, natural gas, or crude oil futures, swaps or options. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS As previously reported, MarkWest filed arbitration proceedings in February 1998 to resolve issues with Columbia Gas Transmission Corporation regarding three Appalachia natural gas processing plants, which are governed by several contracts, one of which extends through the year 2010. In this arbitration, MarkWest requests a declaration of rights and status to clarify agreements between the companies. Issues arose during ongoing negotiations between MarkWest and Columbia to finalize terms of a 1997 preliminary agreement in which, among other things, Columbia agreed to sell its Cobb plant to MarkWest and to transfer from Columbia to MarkWest the operation of the Boldman plant. These issues also include matters regarding operations at the Kenova plant. MarkWest owns the Boldman and Kenova plants. On April 28, 1998, MarkWest was advised by Columbia that Columbia had filed a Complaint against MarkWest in the United States District Court for the Southern District of West Virginia. The Complaint seeks declaratory relief that certain agreements, or certain specified provisions thereof, are void and that MarkWest is in breach of the Federal Energy Regulatory Commission-approved settlement agreement under which MarkWest was to acquire the Cobb plant and operate the Boldman plant. The certain agreements concern, among other matters, Columbia's obligation to guarantee the delivery of natural gas or natural gas liquids to MarkWest. In the Complaint, Columbia also seeks injunctive relief to enjoin MarkWest from interfering with arrangements Columbia may seek to undertake with natural gas producers and suppliers and with negotiations Columbia may pursue with third parties to terminate its interests in the products extraction business. MarkWest believes that the contract issues underlying Columbia's Complaint are already subject to the binding arbitration noted above. MarkWest intends to vigorously defend its position that Columbia is not entitled to any legal or equitable relief under the Complaint. Management believes that it will prevail in this position and that the outcome of this dispute is not likely to have a material effect on the financial condition, results of operations or prospects of MarkWest. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 11 - Statement regarding computation of earnings per share. 27 - Financial Data Schedule. (b) Reports on Form 8-K (i) A report on Form 8-K dated February 24, 1998 was filed during the first quarter of 1998 to announce the Company's arbitration with Columbia Gas Transmission Corporation to resolve issues regarding three natural gas processing plants in Appalachia. 9 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 11, 1998 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 OF EARNINGS PER COMMON SHARE EXHIBIT 11 MARKWEST HYDROCARBON, INC. COMPUTATION OF EARNINGS PER COMMON SHARE (000s, except per share data) For the quarter ended March 31, 1998 --------------------- Net income 917 Weighted average number of outstanding shares of common stock 8,496 Basic earnings per share $ 0.11 ===================== Net income 917 Weighted average number of outstanding shares of common stock 8,496 Dilutive stock options 154 --------------------- 8,650 Earnings per share assuming dilution $ 0.11 ===================== EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS OF THE COMPANY'S FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 2,249 0 5,939 120 2,566 13,619 85,141 (16,394) 93,043 7,319 27,332 0 0 85 52,430 93,043 20,211 20,302 13,284 13,284 5,608 0 447 1,410 493 917 0 0 0 917 0.11 0.11
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