<Page>
===============================================================================
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)
===============================================================================
<Page>
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
<Page>
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
<Page>
FINANCIAL STATEMENTS
LELAND/WATFORD GROUP
Combined Balance Sheets
December 31, 2000 and 1999 (note 1(a))
(Amounts Expressed in Canadian Dollars)
<Table>
<Caption>
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
=========== ===========
</Table>
See accompanying notes to combined financial statements.
4
<Page>
LELAND/WATFORD GROUP
Combined Statements of Operations
Periods ended December 31, 2000 and 1999 (note 1(a))
(Amounts Expressed in Canadian Dollars)
<Table>
<Caption>
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
============ ============
</Table>
See accompanying notes to combined financial statements.
5
<Page>
LELAND/WATFORD GROUP
Combined Statements of Group's Equity
Periods ended December 31, 2000 and 1999 (note 1(a))
(Amounts Expressed in Canadian Dollars)
<Table>
<Caption>
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
============ ============ ============ ============
</Table>
See accompanying notes to combined financial statements.
6
<Page>
LELAND/WATFORD GROUP
Combined Statements of Cash Flows
Periods ended December 31, 2000 and 1999 (note 1(a))
(Amounts Expressed in Canadian Dollars)
<Table>
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 $ --
============ ============
</Table>
See accompanying notes to combined financial statements.
7
<Page>
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:
<Table>
<Caption>
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
</Table>
8
<Page>
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
<Page>
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:
<Table>
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
============
</Table>
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:
<Table>
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
============
</Table>
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
<Page>
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
<Page>
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
<Page>
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
<Page>
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:
<Table>
<Caption>
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
=========== =========== ===========
</Table>
14
<Page>
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:
<Table>
<Caption>
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
====== ===========
</Table>
15
<Page>
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:
<Table>
<Caption>
NUMBER OF TOTAL
SHARES AMOUNT
--------- -----------
Balance, December 31, 1999 -- $ --
Issued for cash 1,000,100 25
--------- -----------
December 31, 2000 1,000,100 $ 25
========= ===========
</Table>
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:
<Table>
<Caption>
NUMBER OF TOTAL
SHARES AMOUNT
--------- -----------
Balance, December 31, 1999 -- $ --
Issued for cash 1,000,100 25
--------- -----------
December 31, 2000 1,000,100 $ 25
========= ===========
</Table>
Subsequent to December 31, 2000, Guy Grierson Energy Limited issued 268,377
voting flow-through common shares for proceeds totaling $268,377.
16
<Page>
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:
<Table>
<Caption>
NUMBER OF TOTAL
SHARES AMOUNT
--------- -----------
Balance, December 31, 1999 -- $ --
Issued for cash 1,000,100 25
--------- -----------
December 31, 2000 1,000,100 $ 25
========= ===========
</Table>
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:
<Table>
<Caption>
NUMBER OF TOTAL
SHARES AMOUNT
--------- -------------
Balance, December 31, 1999 - $ -
Issued for cash 1,000,100 25
--------- -------------
December 31, 2000 1,000,100 $ 25
========= =============
</Table>
Subsequent to December 31, 2000, Ian de Bie Energy Limited issued
253,174 voting flow-through common shares for proceeds totaling
$202,539.
17
<Page>
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:
<Table>
<Caption>
NUMBER OF TOTAL
SHARES AMOUNT
--------- -------------
Balance, December 31, 1999 - $ -
Issued for cash 1,000,100 25
--------- -------------
December 31, 2000 1,000,100 $ 25
========= =============
</Table>
(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:
<Table>
<Caption>
NUMBER OF TOTAL
SHARES AMOUNT
--------- -------------
Balance, December 31, 1999 - $ -
Issued for cash 1,000,100 25
--------- -------------
December 31, 2000 1,000,100 $ 25
========= =============
</Table>
18
<Page>
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:
<Table>
<Caption>
NUMBER OF TOTAL
SHARES AMOUNT
--------- -------------
Balance, December 31, 1999 - $ -
Issued for cash 1,000,100 25
--------- -------------
December 31, 2000 1,000,100 $ 25
========= =============
</Table>
(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:
<Table>
<Caption>
NUMBER OF TOTAL
SHARES AMOUNT
--------- -------------
Balance, December 31, 1999 - $ -
Issued for cash 1,000,100 25
--------- -------------
December 31, 2000 1,000,100 $ 25
========= =============
</Table>
19
<Page>
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:
<Table>
<Caption>
NUMBER OF TOTAL
SHARES AMOUNT
--------- -------------
Balance, December 31, 1999 - $ -
Issued for cash 100 100
--------- -------------
December 31, 2000 100 $ 100
========= =============
</Table>
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:
<Table>
<Caption>
NUMBER OF TOTAL
SHARES AMOUNT
--------- -------------
Balance, December 31, 1999 - $ -
Issued for cash 100 10
--------- -------------
December 31, 2000 100 $ 10
========= =============
</Table>
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
<Page>
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:
<Table>
<Caption>
NUMBER OF TOTAL
SHARES AMOUNT
--------- -------------
Balance, December 31, 1999 - $ -
Issued for cash 100 10
--------- -------------
December 31, 2000 100 $ 10
========= =============
</Table>
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:
<Table>
<Caption>
NUMBER OF TOTAL
SHARES AMOUNT
--------- -------------
Balance, December 31, 1999 - $ -
Issued for cash 100 10
--------- -------------
December 31, 2000 100 $ 10
========= =============
</Table>
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
<Page>
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:
<Table>
<Caption>
NUMBER OF TOTAL
SHARES AMOUNT
--------- -------------
Balance, December 31, 1999 - $ -
Issued for cash 100 10
--------- -------------
December 31, 2000 100 $ 10
========= =============
</Table>
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:
<Table>
<Caption>
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
====== ========== ====== ==========
</Table>
22
<Page>
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:
<Table>
<Caption>
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
====== ========== ====== ==========
</Table>
(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:
<Table>
<Caption>
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
====== ========== ====== ==========
</Table>
23
<Page>
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:
<Table>
<Caption>
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
====== ========== ====== ==========
</Table>
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:
<Table>
<Caption>
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
============ ============
</Table>
24
<Page>
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:
<Table>
<Caption>
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)
============= =============
</Table>
7. SUPPLEMENTAL CASH FLOW DISCLOSURE:
(a) Changes in non-cash working capital:
<Table>
<Caption>
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
============= =============
</Table>
(b) The following cash payments were made:
<Table>
<Caption>
2000 1999
------------- -------------
Interest $ 61,614 $ -
Taxes $ 63,500 $ -
============= =============
</Table>
25
<Page>
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:
<Table>
<Caption>
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
</Table>
(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
<Page>
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:
<Table>
<Caption>
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
============== =============
</Table>
Balance sheet items in accordance with U.S. GAAP:
<Table>
<Caption>
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
============== =============
</Table>
(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
<Page>
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
<Page>
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)
<Table>
<Caption>
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
=========== ===========
</Table>
See accompanying notes to combined financial statements.
29
<Page>
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)
<Table>
<Caption>
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
============ =============
</Table>
See accompanying notes to combined financial statements.
30
<Page>
LELAND/WATFORD GROUP
Interim Report for Six Months
Ended June 30, 2001 and 2000
Combined Statements of Cash Flows
(Canadian Dollars, unaudited)
<Table>
<Caption>
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
=========== ===========
</Table>
See accompanying notes to combined financial statements.
31
<Page>
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
<Page>
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):
<Table>
<Caption>
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
============== =============
</Table>
Balance sheet items in accordance with U.S. GAAP:
<Table>
<Caption>
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
==============
</Table>
(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
<Page>
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
<Page>
MARKWEST HYDROCARBON, INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
JUNE 30, 2001
(IN U.S. DOLLARS, UNLESS OTHERWISE NOTED, AND IN THOUSANDS)
<Table>
<Caption>
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 $228,865
========== ======== ======== ========= ========
</Table>
35
<Page>
MARKWEST HYDROCARBON, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2000
(IN U.S DOLLARS, UNLESS OTHERWISE NOTED, AND IN THOUSANDS)
<Table>
<Caption>
CDN$ 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
========== ======== ======== ========= ========
</Table>
See accompanying notes to pro forma financial statements.
36
<Page>
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)
<Table>
<Caption>
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
========== ======== ======== ========= ========
</Table>
See accompanying notes to pro forma financial statements.
37
<Page>
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.
<Table>
<Caption>
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
======== ======== ======== ========
</Table>
The following table reflects the calculation of the purchase
price for Leland/Watford:
<Table>
Current liabilities assumed $ 9,188
Incremental borrowings by MarkWest 50,306
Deferred income taxes(i) 29,192
Other liabilities assumed 80
----------
$ 88,766
==========
</Table>
(i) The difference between the book and tax basis of the
Leland/Watford resulted in a deferred tax adjustment of
approximately $29,000.
38
<Page>
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:
<Table>
<Caption>
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
</Table>
39
<Page>
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
<Page>
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
<Page>
INDEX TO EXHIBITS
<Table>
<Caption>
EXHIBIT NUMBER DESCRIPTION
99.1 Consent of Independent Chartered Accountants--KPMG
</Table>
42