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 SEPTEMBER 30, 1999
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 80112-5000
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 303-290-8700
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
The registrant had 8,456,065 shares of common stock, $.01 per share par
value, outstanding as of November 9, 1999.
PART I--FINANCIAL INFORMATION Page
----
Item 1. Consolidated Financial Statements
Consolidated Balance Sheet at September 30, 1999
and December 31, 1998..................................... 1
Consolidated Statement of Operations for the Three and
Nine Months Ended September 30, 1999 and 1998............. 2
Consolidated Statement of Cash Flows for the Three and
Nine Months Ended September 30, 1999 and 1998............. 3
Notes to the Consolidated Financial Statements.............. 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 6
Item 3. Quantitative and Qualitative Disclosures About Market Risk.... 12
PART II--OTHER INFORMATION
Item 1. Legal Proceedings............................................. 12
Item 6. Exhibits and Reports on Form 8-K.............................. 12
SIGNATURES............................................................. 13
GLOSSARY OF TERMS
Mcf: thousand cubic feet of natural gas
MMgal: million gallons
MMBtu: million British thermal units, an energy measurement
MMcfd: million cubic feet per day
NGL: natural gas liquids, such as propane, butanes and natural gasoline
One barrel of oil or NGL is the energy equivalent of six Mcf of natural gas.
PART I--FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
MARKWEST HYDROCARBON, INC.
CONSOLIDATED BALANCE SHEET
(000S, EXCEPT SHARE DATA)
September 30,
1999 December 31,
(Unaudited) 1998
-------------- ------------
Current assets:
Cash and cash equivalents.......................................... $ 2,007 $ 2,055
Receivables, net of allowance for doubtful accounts
of $60 and $120, respectively.................................... 16,407 7,738
Inventories........................................................ 4,909 4,583
Prepaid feedstock.................................................. 2,655 1,957
Income taxes receivable............................................ 130 2,763
Other assets....................................................... 361 289
------------ ------------
Total current assets............................................. 26,469 19,385
Property and equipment:
Gas processing, gathering, storage and marketing equipment......... 77,022 78,018
Oil and gas properties and equipment............................... 12,257 9,207
Land, buildings and other equipment................................ 11,351 11,240
Construction in progress........................................... 2,006 4,466
------------ ------------
102,636 102,931
Less: accumulated depreciation, depletion and amortization......... (21,634) (19,609)
------------ ------------
Total property and equipment, net................................ 81,002 83,322
Intangible assets, net of accumulated amortization of
$343 and $169, respectively........................................ 1,025 924
------------ ------------
Total assets......................................................... $ 108,496 $ 103,631
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable............................................. $ 2,595 $ 2,765
Accrued liabilities................................................ 15,837 5,094
Current portion of long-term debt.................................. 66 63
------------ ------------
Total current liabilities........................................ 18,498 7,922
Deferred income taxes................................................ 7,113 7,077
Long-term debt....................................................... 32,106 38,597
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,
8,531,206 and 8,531,206 shares issued, respectively.............. 85 85
Additional paid-in capital......................................... 42,539 42,693
Retained earnings.................................................. 8,718 7,978
Treasury stock, 54,876 and 60,300 shares, respectively............. (563) (721)
------------ ------------
Total stockholders' equity....................................... 50,779 50,035
------------ ------------
Total liabilities and stockholders' equity........................... $ 108,496 $ 103,631
============ ============
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 For the nine months ended
September 30, September 30,
-------------------------- -------------------------
1999 1998 1999 1998
-------- --------- --------- ---------
Revenues:
Gathering, processing and marketing revenue............... $ 30,123 $ 13,838 $ 69,462 $ 44,454
Oil and gas revenue, net of transportation and
taxes................................................. 361 334 1,093 940
Interest income........................................... 12 24 37 138
Gain on sale of West Memphis terminal..................... -- -- 2,509 --
Other income (expense).................................... (48) (80) (93) (59)
-------- --------- --------- ---------
Total revenues.......................................... 30,448 14,116 73,008 45,473
-------- --------- --------- ---------
Costs and expenses:
Cost of sales............................................. 24,146 9,841 52,382 30,712
Operating expenses........................................ 2,874 2,728 8,780 7,737
General and administrative expenses....................... 1,635 1,369 4,897 4,206
Depreciation, depletion and amortization.................. 1,287 1,164 3,901 3,270
Interest expense.......................................... 598 480 2,030 1,372
-------- --------- --------- ---------
Total costs and expenses................................ 30,540 15,582 71,990 47,297
-------- --------- --------- ---------
Income (loss) before income taxes........................... (92) (1,466) 1,018 (1,824)
Provision (benefit) for income taxes:
Current................................................... (113) (336) 236 (1,458)
Deferred.................................................. (38) (254) 36 733
-------- --------- --------- ---------
(151) (590) 272 (725)
-------- --------- --------- ---------
Net income (loss)........................................... $ 59 $ (876) $ 746 $ (1,099)
======== ========= ========= =========
Basic earnings (loss) per share of common stock............. $ 0.01 $ (0.10) $ 0.09 $ (0.13)
======== ========= ========= =========
Earnings (loss) per share assuming dilution................. $ 0.01 $ (0.10) $ 0.09 $ (0.13)
======== ========= ========= =========
Weighted average number of outstanding shares of
common stock.............................................. 8,473 8,488 8,481 8,495
======== ========= ========= =========
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 For the nine months ended
September 30, September 30,
-------------------------- -------------------------
1999 1998 1999 1998
-------- --------- --------- ---------
Cash flows from operating activities:
Net income (loss)........................................ $ 59 $ (876) $ 746 $ (1,099)
Add income items that do not affect working capital:
Depreciation, depletion and amortization............... 1,287 1,164 3,901 3,270
Deferred income taxes.................................. (38) (254) 36 733
(Gain) loss on sale of assets.......................... 6 39 (15) 39
Gain on sale of West Memphis terminal.................. -- -- (2,509) --
-------- --------- --------- ---------
1,314 73 2,159 2,943
Adjustments to working capital:
(Increase) decrease in accounts receivable............. (6,520) (1,966) (8,669) 1,928
Increase in inventories................................ (63) (954) (326) (401)
(Increase) decrease in prepaid feedstock and other
assets................................................. (2,666) 1,553 1,863 2,933
Increase in accounts payable and accrued liabilities... 5,098 810 11,069 351
-------- --------- --------- ---------
(4,151) (557) 3,937 4,811
Net cash provided by (used in) operating
activities......................................... (2,837) (484) 6,096 7,754
Cash flows from investing activities:
Capital expenditures..................................... (1,960) (5,890) (5,762) (14,836)
Proceeds from sale/leaseback transaction................. -- 4,281 -- 4,281
Proceeds from sale of assets............................. 32 -- 6,379 --
Increase in intangible assets............................ (298) (7) (275) (352)
-------- --------- --------- ---------
Net cash provided by (used in) investing
activities........................................... (2,226) (1,616) 342 (10,907)
Cash flows from financing activities:
Proceeds from long-term debt............................. 14,555 10,500 26,055 30,700
Repayment of long-term debt.............................. (9,015) (7,532) (32,543) (28,037)
Net reissuance (buy-back) of treasury stock.............. (166) -- 2 --
Other.................................................... -- (272) -- (223)
-------- --------- --------- ---------
Net cash provided by (used in) financing
activities........................................... 5,374 2,696 (6,486) 2,440
-------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents....... 311 596 (48) (713)
Cash and cash equivalents at beginning of period........... 1,696 55 2,055 1,364
-------- --------- --------- ---------
Cash and cash equivalents at end of period................. $ 2,007 $ 651 $ 2,007 $ 651
======== ========= ========= =========
The accompanying notes are an integral part of these financial statements.
3
MARKWEST HYDROCARBON, INC.
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1. GENERAL
The consolidated financial statements include the accounts of MarkWest
Hydrocarbon, Inc. ("MarkWest" or the "Company"), and its wholly owned
subsidiaries: MarkWest Resources, Inc.; MarkWest Michigan, Inc.; and 155
Inverness, Inc. All significant intercompany accounts and transactions have
been eliminated in consolidation.
The unaudited financial statements presented herein have been prepared in
accordance with the instructions to Form 10-Q and do not include all the
information and note disclosures required by generally accepted accounting
principles for complete financial statements. The interim consolidated
financial statements should be read in conjunction with the Consolidated
Financial Statements and Notes thereto for the year ended December 31, 1998,
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 1999
presentation.
NOTE 2. LONG-TERM DEBT
Effective September 29, 1999, the Company amended and restated its existing
credit agreement. The amended and restated agreement, which extends through
the year 2005, provides for a maximum borrowing amount of $50 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 credit facility permits the Company to borrow money using either a base
rate loan or a London Interbank Offered Rate loan option, plus an applicable
margin of between 0% and 2.75%, based on a certain Company debt to earnings
ratio.
NOTE 3. COMMITMENTS AND CONTINGENCIES
MarkWest and Columbia Gas Transmission Corporation, a subsidiary of Columbia
Energy Group, have signed a settlement agreement resolving all outstanding
arbitration and litigation between the two parties. Part of the settlement
will result in MarkWest assuming operations of the Boldman and Cobb gas
plants with a combined capacity of 100,000 gallons per day. As part of the
settlement, all outstanding actions in the Federal Court in West Virginia and
arbitration in Denver were dismissed.
4
MARKWEST HYDROCARBON, INC.
NOTES TO THE FINANCIAL STATEMENTS
NOTE 4. SEGMENT REPORTING
In 1998, the Company adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION. The Company's operations are classified
into two reportable segments, as follows:
(1) Processing and Related Services--provide compression, gathering,
treatment and NGL extraction, and fractionation services; also
purchase and market natural gas and NGL; and
(2) Exploration and Production--explore for and produce natural gas.
MarkWest evaluates the performance of its segments and allocates resources to
them based on gross operating income. There are no intersegment revenues.
MarkWest's business is conducted solely in the United States.
The table below presents information about gross operating income for the
reported segments for the third quarter of 1999 and the nine months ended
September 30, 1999, and for the corresponding periods in 1998. Asset
information by reportable segment is not reported, since MarkWest does not
produce such information internally.
Processing Exploration
and Related and Production
Services (000s) Total
(000s) (000s)
----------- --------------- -----------
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
Revenues........................................... $ 30,123 $ 361 $ 30,484
Gross operating income............................. $ 3,291 $ 173 $ 3,464
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
Revenues........................................... $ 13,838 $ 334 $ 14,172
Gross operating income............................. $ 1,563 $ 40 $ 1,603
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
Revenues........................................... $ 69,462 $ 1,093 $ 70,555
Gross operating income............................. $ 8,915 $ 478 $ 9,393
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
Revenues........................................... $ 44,454 $ 940 $ 45,394
Gross operating income............................. $ 6,573 $ 372 $ 6,945
A reconciliation of total segment revenues to total consolidated revenues and
of total segment gross operating income to total consolidated income (loss)
before taxes is as follows (000s):
For the quarter ended For the nine months ended
September 30, September 30,
------------------------------- --------------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
Revenues:
Total segment revenues................ $ 30,484 $ 14,172 $ 70,555 $ 45,394
Interest income....................... 12 24 37 138
Other income (expense)................ (48) (80) 2,416 (59)
---------- ---------- ---------- ----------
Total revenues................... $ 30,448 $ 14,116 $ 73,008 $ 45,473
========== ========== ========== ==========
Gross operating income:
Total segment gross operating income.. $ 3,464 $ 1,603 $ 9,393 $ 6,945
General and administrative expenses... (1,635) (1,369) (4,897) (4,206)
Depreciation and amortization......... (1,287) (1,164) (3,901) (3,270)
Interest expense...................... (598) (480) (2,030) (1,372)
Interest income....................... 12 24 37 138
Other income (expense)................ (48) (80) 2,416 (59)
---------- ---------- ---------- ----------
Income (loss) before taxes...... $ (92) $ (1,466) $ 1,018 $ (1,824)
========== ========== ========== ==========
5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains statements which, to the extent that they are not
recitations of historical fact, constitute "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933 ("Section
27A") and Section 21E of the Securities and Exchange Act of 1934 ("Section
21E"). All forward-looking statements involve risks and uncertainties. The
forward-looking statements in this document are intended to be subject to the
safe harbor protection provided by Sections 27A and 21E. Factors that most
typically impact MarkWest's operating results and financial condition include
(i) changes in general economic conditions in regions in which the Company's
products are located, (ii) the availability and prices of NGL 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
occur or be successful, (vi) the Company's dependence on certain significant
customers, producers, gatherers and transporters of natural gas, (vii)
competition from other NGL processors, including major energy companies,
(viii) the Company's ability to identify and consummate acquisitions
complementary to its business, and (ix) winter weather conditions. For
discussions identifying other important factors that could cause actual
results to differ materially from those anticipated in the forward-looking
statements, see the Company's Securities and Exchange Commission filings.
Forward-looking statements involve many uncertainties that are beyond the
Company's ability to control and in many cases the Company cannot predict
what factors would cause actual results to differ materially from those
indicated by the forward-looking statements.
THIRD QUARTER 1999 RESULTS
For the quarter ended September 30, 1999, net income was $59,000, or $0.01
per share. These results are a $0.9 million, or $0.11 per share, improvement
over the net loss of $876,000, or $0.10 per share, from the same period in
1998. Earnings before interest, taxes, depreciation and amortization (EBITDA)
totaled $1.8 million for the quarter, up from $154,000 reported for the same
period in 1998.
Quarterly results improved primarily due to increased processing margins in
Appalachia of $0.9 million after-tax. In addition, incremental gas marketing
activity added $0.2 million after-tax, and stronger sales prices and sales
volumes in Michigan contributed $0.2 million after-tax. These favorable
variances were partially offset by expected increases in operating, general
and administrative, interest and depreciation expenses of $0.4 million
after-tax.
NINE MONTHS ENDED SEPTEMBER 30, 1999 RESULTS
For the nine months ended September 30, 1999, net income was $746,000, or
$0.09 per share. Excluding the $1.5 million after-tax gain from the sale of
the Company's West Memphis terminal, the net loss was $807,000, or $0.10 per
share. These results are a $0.3 million, or $0.03 per share, improvement over
the net loss of $1.1 million, or $0.13 per share, for the same period in
1998. Processing margins from MarkWest's Appalachian operations increased
approximately $1.0 million after-tax as both prices ($0.6 million after-tax)
and volumes ($0.4 million after-tax) increased. Stronger sales prices and
increased throughput volumes in Michigan further increased results over the
nine-month period $1.4 million after-tax. These favorable variances were
partially offset by expected increases in operating, general and
administrative, interest and depreciation expenses of $1.8 million after-tax.
6
OPERATING STATISTICS
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------- ---------------------------------------
1999 1998 % CHANGE 1999 1998 % CHANGE
--------------------------------------- ---------------------------------------
Appalachia:
NGL production--Siloam plant (MMgal) 27.6 25.7 7% 81.5 76.9 6%
NGLs marketed--Siloam plant (MMgal) 24.4 25.2 (3%) 81.3 72.4 12%
Processing margin per gallon:
Average NGL sales price $ 0.422 $ 0.272 55% $ 0.328 $ 0.310 6%
Average natural gas cost $ 0.326 $ 0.236 (38%) $ 0.251 $ 0.246 (2%)
------- ------- ------- -------
Processing margin per gallon $ 0.096 $ 0.036 167% $ 0.077 $ 0.064 20%
Processing margin per MMBtu:
Average NGL sales price $ 4.37 $ 2.81 $ 3.41 $ 3.21
Average natural gas cost $ 3.38 $ 2.45 $ 2.61 $ 2.54
------- ------- ------- -------
Processing margin per MMBtu $ 0.99 $ 0.36 $ 0.80 $ 0.67
Michigan:
Pipeline throughput (MMcfd) 17.4 19.0 (8%) 18.7 13.5 39%
NGLs marketed (MMgal) 3.4 3.0 13% 10.6 6.3 68%
Rocky Mountains:
Natural gas sold (MMcfd) 2.4 2.0 20% 2.5 2.2 14%
PROCESSING AND RELATED SERVICES - APPALACHIA
Third quarter 1999 NGL production volumes totaled 27.6 MMgal, up 7 percent
over the same period last year. The increase resulted from an additional
compressor installed in mid-1998, increased producer drilling and active
efforts by MarkWest's gas marketing group to source new supplies for the
plants. Third quarter 1999 plant NGL marketing volumes of 24.4 MMgal declined
3 percent from the same period last year.
Construction on MarkWest's new 75 MMcfd natural gas liquids extraction plant
in Appalachia is underway and is expected to be completed in early 2000. As
noted in Form 8-K filed on October 25, 1999, in order to accommodate
additional natural gas production in the region, the Company expects to
expand its Kenova natural gas liquids extraction plant to 340,000 from
230,000 gallons per day. The expansion will begin in mid-2000 for startup in
mid-2001. MarkWest is also expanding its Siloam, Kentucky fractionator to
600,000 from 350,000 gallons per day. The expansion will handle increasing
Appalachian producer volumes and additional liquids from the Company's new
Appalachian plant currently under construction.
In November 1999, MarkWest purchased a third party's propane terminal in
Lynchburg, Virginia, and additional wholesale businesses in Tirzah, South
Carolina, and Stephens City, Virginia. The purchase price was $2.0 million
plus working capital. The terminal will expand the market area for production
from the Company's Siloam fractionator.
PROCESSING AND RELATED SERVICES - MICHIGAN
Pipeline throughput volumes were 17.4 MMcfd in the third quarter of 1999,
down 8 percent from the same period in 1998. During the first half of 1999, a
producer's delay in completing wellhead facilities prevented the connection
of approximately 7 MMcfd in production. However, late in the quarter just
ended, MarkWest completed on behalf of the producer the necessary wellhead
upgrades; consequently, throughput volumes were averaging 21 MMcfd by
mid-October 1999. The Company's forecast is reduced slightly to an average of
18-20 MMcfd in pipeline throughput for the year, up 13-25 percent from 1998.
During the third quarter of 1999, drilling along the Company's transportation
and processing facilities resumed with four wells scheduled to be drilled
between now and second quarter 2000.
EXPLORATION AND PRODUCTION - ROCKY MOUNTAINS
Natural gas sold in the third quarter of 1999 totaled 2.4 MMcfd, representing
a 20 percent increase from the same period last year. During the third
quarter of 1999, production was curtailed as the Company completed its
expansion of compression facilities in the San Juan Basin.
7
MarkWest recently received approval for additional down-spaced coal wells in
the San Juan Basin resulting in approximately twenty additional development
locations. As these wells are completed over the next two years, MarkWest
expects an additional 1.5 - 2.0 MMcfd net to its 49 percent interest. Future
spacing requests for other producing horizons in MarkWest's San Juan Basin
properties could yield another twenty development locations.
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE
THREE MONTHS ENDED SEPTEMBER 30, 1998
(IN 000S)
1999 1998 $ Change
--------- --------- ---------
Revenues................................ $ 30,448 $ 14,116 $ 16,332
Gross profit (loss) (1)................. $ 2,129 $ 359 $ 1,770
Loss before income taxes................ $ (92) $ (1,466) $ 1,374
Benefit for income taxes................ (151) (590) 439
--------- --------- ---------
Net income (loss)....................... $ 59 $ (876) $ 935
========= ========= =========
- ------------------------------
(1) Excludes interest income, general and administrative expense and interest
expense.
REVENUES
GATHERING, PROCESSING AND MARKETING REVENUE. Gathering, processing and
marketing revenue increased $16.3 million or 118 percent for the three months
ended September 30, 1999, compared to the same period in 1998. The revenue
increase was principally attributable to a $14.4 million increase in the
Company's gas marketing operations. At the Company's Siloam fractionation
facility, a 55 percent increase in the average NGL sales price contributed
$3.6 million to the increase in revenues. These favorable variances were
partially offset by a decrease in revenue of $2.0 million from the Company's
West Memphis propane terminal which was sold during the second quarter of
1999.
COSTS AND EXPENSES
COST OF SALES. Cost of sales increased $14.3 million or 145 percent for the
three months ended September 30, 1999, compared to the same period in 1998.
This increase was primarily caused by a $14.1 million increase in gas
marketing purchases. A 38 percent increase in Appalachia natural gas costs
contributed $2.2 million to increased cost of sales, offset by a $1.9 million
decrease in costs from the West Memphis propane terminal.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased $266,000 or 19 percent for the three months ended September 30,
1999, compared to the same period in 1998. This is primarily a result of
increased performance-based incentive compensation in 1999.
DEPRECIATION, DEPLETION AND AMORTIZATION. Depreciation, depletion and
amortization increased $123,000 or 11 percent for the third quarter of 1999
compared to the third quarter of 1998, principally from the completion of
pipeline extensions in Michigan.
INTEREST EXPENSE. Interest expense increased $118,000 for the third quarter
of 1999 compared to the third quarter of 1998. Average debt outstanding
decreased approximately $5.5 million; however, this was more than offset by
higher average interest rates in 1999 and, in 1998, a portion of interest
expense was capitalized during construction of Michigan pipeline extensions.
8
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE
NINE MONTHS ENDED SEPTEMBER 30, 1998
(IN 000S)
1999 (1) 1998 $ Change
---------- ---------- ----------
Revenues................................. $ 70,499 $ 45,473 $ 25,026
Gross profit (loss) (2).................. 5,399 3,616 1,783
Income (loss) before income taxes........ (1,491) (1,824) 333
Benefit for income taxes................. (684) (725) 41
---------- ---------- ----------
Net income (loss)........................ $ (807) $ (1,099) $ 292
========== =========== =========
- ------------------------------
(1) Excludes $2.5 million gain ($1.5 million after-tax) on the sale of the
Company's West Memphis terminal.
(2) Excludes interest income, general and administrative expense and
interest expense.
REVENUES
GATHERING, PROCESSING AND MARKETING REVENUE. Gathering, processing and
marketing revenue increased $25.0 million or 56 percent for the nine months
ended September 30, 1999, compared to the same period in 1998. The revenue
increase was principally attributable to a $20.4 million increase in the
Company's gas marketing operations. At the Company's Siloam fractionation
facility, both higher NGL sales prices (six percent) and larger volumes of
NGLs marketed (12 percent) contributed an incremental $4.2 million to 1999
revenues. Increased sales and volumes of gas gathered and processed in
Michigan contributed $3.3 million over the prior year. Gas processed in the
Company's Michigan operations contributed both fee-based processing income
and revenues from the sale of propane and other liquids extracted at the
Company's NGL extraction facility. These favorable variances were offset by a
decrease in revenue of $2.1 million from the Company's West Memphis propane
terminal which was sold during the second quarter of 1999.
COSTS AND EXPENSES
COST OF SALES. Cost of sales increased $21.6 million or 71 percent for the
nine months ended September 30, 1999, compared to the same period in 1998.
This increase was primarily caused by a $20.3 million increase in gas
marketing purchases. A 12 percent increase in volumes sold at the Siloam
facility coupled with a two percent increase in average Appalachia natural
gas costs contributed to a $2.6 million increase in cost of sales. Larger
Michigan sales further increased cost of sales by $1.0 million. Selling the
Company's West Memphis propane terminal in the second quarter of 1999
resulted in a $2.3 million decrease in cost of sales.
OPERATING EXPENSES. Operational expenses increased $1.0 million or 13 percent
for the nine months ended September 30, 1999, compared to the nine months
ended September 30, 1998. The increase in operating expenses was principally
attributable to three factors. First, MarkWest sold and leased back three
compressors at its Kenova processing plant beginning in the third quarter of
1998. Consequently, 1999 operating expenses include nine full months of lease
expense whereas the results from the comparable time period in 1998 do not.
Secondly, these compressors were overhauled in 1999. Thirdly, 1998 operating
expenses were lower due to a sales and use tax refund during that period.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased $0.7 million or 16 percent for the nine months ended September 30,
1999, compared to the same period in 1998. This is primarily a result of
increased performance-based incentive compensation in 1999. Also, legal fees
increased in 1999 due to the Company's arbitration with Columbia.
DEPRECIATION, DEPLETION AND AMORTIZATION. Depreciation, depletion and
amortization increased $0.6 million or 19 percent for the first nine months
of 1999 compared to the first nine months of 1998, principally from the
completion of pipeline extensions in Michigan.
INTEREST EXPENSE. Interest expense increased $0.7 million or 48 percent for
the nine months ended September 30, 1999 compared to the nine months ended
September 30, 1998. This increase was principally attributable to higher
average debt balances and an increase in average interest rates. Also, in
1998, a portion of interest expense was capitalized during construction of
Michigan pipeline extensions.
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LIQUIDITY AND CAPITAL RESOURCES
The Company's sources of liquidity and capital resources historically have
been net cash provided by operating activities; proceeds from the issuance of
long-term debt and equity; and, in 1999, proceeds from the sale of the
Company's West Memphis terminal. In the past, these sources have been
sufficient to meet MarkWest's needs and finance the growth of its business.
The following summary table reflects comparative cash flows for the Company
for the nine months ended September 30, 1999 and 1998 (in 000s):
For the nine months ended
September 30,
--------------------------
1999 1998
-------- --------
Net cash provided by operating activities before
change in working capital............................... $ 2,159 $ 2,943
Net cash provided by operating activities from
change in working capital............................... 3,937 4,811
Net cash provided by (used in) investing activities....... 342 (10,907)
Net cash provided by (used in) financing activities....... (6,486) 2,440
For the nine months ended September 30, 1999, net cash provided by operating
activities before adjustments for working capital decreased $0.8 million from
the same period in 1998, primarily as a result of a decrease in operating
income over the same time period.
Net cash provided by operating activities from the change in working capital
decreased $0.9 million for the nine months ended September 30, 1999 compared
to the same period in 1998, primarily due to a larger decrease in prepaid
expenses and other assets for the nine months ended September 30, 1998
compared to the same period in 1999.
For the nine months ended September 30, 1999, net cash provided by investing
activities was $342,000, an increase of $11.2 million compared to the same
period in 1998. During the nine months ended September 30, 1999, MarkWest
received $6.3 million in gross proceeds from the sales of the Company's West
Memphis terminal and non-core Rocky Mountain properties. During 1998, the
Company's capital expenditures were higher mainly due to construction of
pipeline extensions in Michigan.
Cash used in financing activities, being net debt repayments, increased
approximately $8.9 million compared to the nine months ended September 30,
1998. The increase was due to increased cash flows as a net result of the
aforementioned operating and investing activities.
FINANCING FACILITIES
At September 30, 1999, the Company had approximately $31.6 million of
available credit, of which net debt (debt less cash) of $30.2 million had
been utilized, and working capital of $8.0 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.
Throughout the remainder of 1999 and on into 2000, the Company's credit
availability is expected to increase along with our trailing cash flow
calculation, the determinant of the Company's available credit, because of
improvements in Appalachia processing margins. Moreover, MarkWest has
implemented forward hedging contracts to lock in approximately one-third of
the Company's expected fourth quarter 1999 liquid volumes at a $0.165 per
gallon margin, MarkWest's ten year historical average. The Company has
similarly locked in approximately 25 percent of its year 2000 liquid volumes
at a $0.15 per gallon margin. Depending on the timing and the amount of the
Company's future projects, it may be required to seek additional sources of
capital. Although the Company believes that it would, if required, be able to
secure additional financing on terms acceptable to the Company, no assurance
can be given that it will be able to do so.
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CAPITAL INVESTMENT PROGRAM
The Company's capital investment program for 1999 is estimated at $18
million. Approximately $8 million of this capital budget is earmarked for the
previously-reported new 75 MMcfd NGL extraction plant in Appalachia and the
expansion of the Company's existing Siloam fractionation facility.
Construction has commenced on these projects and is anticipated to be
completed in early 2000. In November 1999, MarkWest purchased a propane
terminal in Lynchburg, Virginia for approximately $2.0 million and working
capital. The remaining capital programs focus primarily on exploration and
production activities in Michigan and the Rocky Mountains.
For the nine months ended September 30, 1999, capital expenditures totaled
$5.8 million. Among other projects, this includes $1.4 million for properties
acquired in the San Juan Basin, approximately $1.5 million for recompletion
costs, and $0.5 million for work completed to date on the Company's new NGL
extraction plant and expansion of the Siloam fractionation facility.
RISK MANAGEMENT ACTIVITIES
During the three and nine months ended September 30, 1999 and 1998, a $0 gain
and a $43,000 loss, respectively, were recognized in operating income on the
settlement of propane and natural gas futures. Financial instrument gains and
losses on hedging activities are generally offset by amounts realized from
the sale of the underlying products in the physical market.
In the San Juan Basin, MarkWest has locked in an average sales price of
approximately $1.90 per MMBtu on 225,000 MMBtu of fourth quarter 1999
production, an average sales price of $2.01 per MMBtu on 703,000 MMBtu of
2000 production, and an average sales price of approximately $2.30 per MMBtu
on 522,000 MMBtu on 2001 production.
As of November 11, 1999, MarkWest has locked in approximately one-third of
the Company's expected fourth quarter 1999 liquid volumes at an approximate
$0.165 per gallon margin. This margin was obtained either by: (a) purchasing
natural gas forward contracts with predetermined Btu differentials based upon
certain index propane prices, or (b) purchasing a certain amount of natural
gas while simultaneously selling an equivalent amount of propane over the
same time period in the physical market. In either case, NGL basis risk has
not been hedged. The Company has also locked in approximately 28 percent of
its year 2000 liquid volumes--representing the majority of the Company's
expected butane, isobutane, and natural gasoline volumes--at a $0.155 per
gallon margin. Year 2000 margins were obtained either by: (a) purchasing a
certain amount of natural gas while simultaneously selling an equivalent
amount of propane over the same time period in the physical market, or (b)
selling fixed/float price swaps on a desired price spread between WTI oil and
Mt. Belvieu natural gas. In either case, NGL basis risk has not been hedged.
At September 30, 1999, the Company had no material notional quantities of
crude oil, NGL or natural gas futures options. At September 30, 1998, the
Company had no material notional quantities of NGL, natural gas or crude oil
futures, swaps or options.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Unless the
Company's computer programs are Year 2000 compliant, any of the Company's
computer programs that have date-sensitive software may recognize a date
using "00" as the year 1900 rather than the year 2000. This could result in a
system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities. The Company's
most significant risk related to the Year 2000 Issue is the worst-case
scenario that its plants and pipelines, if not Year 2000 compliant, may not
be operable, causing a loss of both gathering and processing volumes and
associated revenues.
Many of the Company's computer systems, which include both financial systems
and plant control systems, are purchased from third-party vendors who have
represented to the Company that they are Year 2000 compliant. In some cases,
the Company has upgraded to the most recent release. A complete analysis of
the Company's Year 2000 Issue, including an evaluation of the extent to which
the Company is vulnerable to the failure of significant customers and
suppliers to properly remediate their own Year 2000 Issue, was completed in
early 1999. Remediation was largely completed by the end of the third quarter
of 1999. A contingency plan to deal with unexpected Year 2000 issues is being
developed and will be finalized in the fourth quarter of 1999. Based upon
current information, the Company estimates that the total cost of its Year
2000 initiative will be approximately
11
$110,000. The Year 2000 costs include all activities undertaken on Year 2000
related matters across the Company, including, but not limited to,
remediation, testing, third-party review, risk mitigation and contingency
planning. All Year 2000 costs have been and will continue to be funded
through operating cash flow and are expensed in the period in which they are
incurred. The Company believes that total Year 2000 project costs will not be
material to the Company's results of operations, liquidity or capital
resources, and that as a result of the Company's efforts, Year 2000 should
have little impact on the Company's computer systems.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Reference is made to Risk Management Activities in Item 2 of this Form 10-Q.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to Note 3 of the Company's Consolidated Financial
Statements in Item 1 of this Form 10-Q.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
10 Second Amended and Restated Credit Agreement
11 Statement regarding computation of earnings per share.
27 Financial Data Schedule.
b) Reports on Form 8-K
(i) No reports on Form 8-K were filed during the quarter ended
September 30, 1999. A report on Form 8-K was filed on
October 25, 1999 announcing the settlement of all outstanding
arbitration and litigation between MarkWest and Columbia Gas
Transmission Corporation, and announcing the expansion of its
Kenova NGL extraction plant and its Siloam fractionator.
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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: November 11, 1999 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)
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