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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, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO __________
COMMISSION FILE NUMBER 1-11566
MARKWEST HYDROCARBON, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 84-1352233
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5613 DTC PARKWAY, ENGLEWOOD, COLORADO 80111
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 303-290-8700
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports)
Yes X No
-- --, and
(2) has been subject to such filing requirements for the past 90 days,
Yes No X
-- --
The registrant had 8,485,000 shares of common stock, $.01 per share par
value, outstanding as of October 31, 1996.
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MARKWEST HYDROCARBON, INC.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS **
Consolidated Balance Sheets at September 30, 1996
and December 31, 1995................................... 1
Consolidated Statements of Income for the Three Months
and Nine Months ended September 30, 1996
and September 30, 1995.................................. 2
Consolidated Statements of Cash Flows for the Nine
Months ended September 30, 1996 and September
30, 1995................................................ 3
Notes to Consolidated Financial Statements...................... 4
** The financial statements presented are those of MarkWest
Hydrocarbon Partners, Ltd., the predecessor to the Registrant.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS....................................... 5
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................ 11
SIGNATURES............................................................... 12
PART I - FINANCIAL INFORMATION
MARKWEST HYDROCARBON PARTNERS, LTD.
( PREDECESSOR TO MARKWEST HYDROCARBON, INC. )
CONSOLIDATED BALANCE SHEET
($000S)
December 31, September 30,
ASSETS 1995 1996
------------- -------------
(unaudited)
Current assets:
Cash and cash equivalents........................... $ 761 $ 2,256
Trade receivables................................... 5,735 5,223
Short-term advances (Note 6)........................ 3,174 -
Product inventory (Note 3).......................... 2,718 6,729
Materials and supplies inventory.................... 112 275
Prepaid expenses and other assets................... 375 725
Prepaid feedstock (Note 4)......................... 1,729 3,114
------ ------
Total current assets............................ 14,604 18,322
Property, plant and equipment, at cost, net of
accumulated depreciation, depletion and
amortization of $9,568 and $11,541, respectively.... 31,947 32,896
Intangible assets, net of accumulated amortization
of $152 and $ 271 respectively...................... 320 712
Investment in West Shore Processing (Note 5).......... - 1,969
Other assets.......................................... 25 -
------ ------
Total Assets.......................................... $46,896 $53,899
====== ======
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Trade accounts payable.............................. $ 3,283 $ 4,259
Accrued liabilities................................. 404 600
Interest payable.................................... 147 226
Accrued bonus and profit sharing.................... 401 278
Current portion of long-term debt................... - -
------ ------
Total current liabilities....................... 4,235 5,363
Long-term debt........................................ 17,500 21,140
------ ------
Total Liabilities............................... 21,735 26,503
Partners' capital..................................... 25,161 27,396
------ ------
Total liabilities and partners' capital.............. $46,896 $53,899
====== ======
The accompanying notes are an integral part of these financial statements.
1
MARKWEST HYDROCARBON PARTNERS, LTD.
( PREDECESSOR TO MARKWEST HYDROCARBON, INC. )
CONSOLIDATED STATEMENT OF OPERATIONS
($000S)
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
1995 1996 1995 1996
---------- -------- --------- ---------
Revenues:
Plant revenue.......................................... $ 6,076 $10,543 $23,302 $28,582
Terminal and marketing revenue......................... 2,341 3,976 7,540 13,805
Oil and gas and other revenue.......................... 248 416 749 1,146
---------- -------- --------- --------
Total revenue.......................................... 8,665 14,935 31,591 43,533
Costs and Expenses
Plant feedstock purchases.............................. 3,327 5.882 11,935 14,417
Terminal and marketing purchases....................... 2,133 3,372 6,960 12,055
Operating expenses..................................... 1,203 1,365 3,210 4,344
General and administrative expenses.................... 1,124 1,238 3,187 3.377
Depreciation, depletion and amortization............... 437 783 1,290 2,109
---------- -------- --------- -------
Total costs and expenses............................... 8,224 12,640 26,582 36,302
---------- -------- --------- -------
Earnings from operations................................. 441 2,295 5,009 7,231
Other income (expense)
Interest expense, net of interest income............... 127 (352) (173) (804)
---------- -------- --------- -------
Total other income (expense)........................... 127 (352) (173) (804)
Income before extraordinary item......................... 568 1,943 4,836 6,427
Extraordinary loss on extinguishment of debt............. (1,750) -- (1,750) --
---------- -------- --------- -------
Net Income............................................... $(1,182) $ 1,943 $ 3,086 $ 6,427
========== ======== ========= =======
Pro forma information (unaudited) (Note 7):
Historical income before extraordinary item............. $ 568 $ 1,943 $ 4,836 $ 6,427
Pro forma provision for income taxes (Note 8)........... 216 738 1,838 2,442
---------- -------- --------- -------
Pro forma net income.................................... $ 352 $ 1,205 $ 2,998 $ 3,985
========== ======== ========= =======
Pro forma net income per share.......................... $ 0.04 $ 0.14 $ 0.35 $ 0.46
========== ======== ========= =======
Pro forma weighted average number of shares
outstanding........................................... 8,649 8,649 8,649 8,649
The accompanying notes are an integral part of these financial statements.
2
MARKWEST HYDROCARBON PARTNERS, LTD.
( PREDECESSOR TO MARKWEST HYDROCARBON, INC. )
CONSOLIDATED STATEMENT OF CASH FLOWS
($000S)
(UNAUDITED)
Nine Months Ended
September 30,
1995 1996
---------- --------
Cash Flows From Operating Activities:
Net Income............................................... $ 3,086 $ 6,427
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization........... 1,290 2,109
(Increase) decrease in accounts receivable......... 2,017 3,647
(Increase) decrease in inventories................. (1,372) (5,560)
(Increase) decrease in prepaids.................... (135) (317)
Increase (decrease) in accounts payable and
accrued liabilities............................. 1,060 1,503
---------- --------
Net cash flow provided by operating activitieS........... 5,946 7,809
Cash Flows From Investing Activities:
Capital expenditures..................................... (9,467) (4,993)
Decrease (increase) in intangible and other assets....... (224) (392)
---------- --------
Net cash used in investing activities.................... (9,691) (5,385)
Cash Flows From Financing Activities:
Proceeds from issuance of long-term debt................. 12,950 12,290
Repayments of long-term debt............................. (10,387) (8,650)
Partners' distributions.................................. (2,979) (4,192)
Other.................................................... 4 (377)
---------- --------
Net cash used in financing activities.................... (412) (929)
Net increase (decrease) in cash and cash equivalents..... (4,157) 1,495
Cash and cash equivalents at beginning of period.............. 5,468 761
---------- --------
Cash and cash equivalents at end of period.................... $ 1,311 $ 2,256
========== ========
The accompanying notes are an integral part of these financial statements.
3
MARKWEST HYDROCARBON PARTNERS. LTD.
( PREDECESSOR TO MARKWEST HYDROCARBON, INC. )
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: General
- -----------------
The consolidated financial statements include the accounts of MarkWest
Hydrocarbon Partners, Ltd. ("Partnership"), the predecessor to MarkWest
Hydrocarbon, Inc. (the "Company" or "MarkWest"), and its wholly-owned
subsidiaries, MarkWest Resources, Inc. and MarkWest Michigan, LLC.
The interim consolidated financial statements presented herein should be
read in conjunction with the Consolidated Financial Statements and Notes thereto
for the period ended June 30, 1996 included in the Company's Registration
Statement on Form S-1, as filed with the Securities and Exchange Commission.
The interim consolidated financial statements as of September 30, 1996 and 1995
are unaudited, but reflect, in the opinion of management, all adjustments (which
include only normal recurring adjustments) necessary to fairly present the
results for such periods. All material intercompany transactions have been
eliminated.
Note 2: Reorganization
- ------------------------
Effective October 8, 1996, the Partnership reorganized and the existing
general and limited partners exchanged 100% of their interests in the
Partnership for 5,725,000 common shares of MarkWest Hydrocarbon, Inc., a
corporation formed to be the successor to the Partnership. An additional
2,400,000 shares of common stock were offered for public sale, totaling
8,125,000 shares outstanding as of October 15, 1996. The over-allotment of
360,000 shares was also exercised during October, resulting in a total of
8,485,000 shares outstanding at October 31, 1996. Since this transaction
represents a reorganization of entities under common control, it will be
accounted for at historical cost.
Note 3: Inventory
- -------------------
Product inventory consists primarily of finished goods (propane, butane,
isobutane and natural gasoline) and is valued at the lower of cost, using the
first-in, first-out method, or market. Market value of the Partnership's
inventory was $3.9 million and $9.8 million at December 31, 1995 and September
30, 1996, respectively.
Note 4: Prepaid Feedstock
- ---------------------------
Prepaid feedstock consists of natural gas purchased in advance of its
actual use. It is valued on a first-in, first-out method.
Note 5: Investment in West Shore
- -----------------------------------
Effective May 6, 1996, the Partnership acquired the right to earn up to a
60% interest for $16.8 million in a newly formed venture, West Shore
Processing, LLC ("West Shore"). The most significant asset of West Shore is
Basin Pipeline, LLC, which was contributed by the Partnership's venture partner,
Michigan Energy Company, LLC. The West Shore agreement is structured so that
the Partnership's ownership interest increases as capital expenditures for the
benefit of West Shore are made by the Partnership. As of September 30, 1996,
the Partnership has recorded a net investment in West Shore of $1,969,000
representing a 11.26% ownership interest. The Partnership is committed to make
capital expenditures of approximately $10.0 million through early 1997 in
conjunction with the first phase of the agreement.
Note 6: Short Term Advances
- -----------------------------
During the fourth quarter of 1995, the Partnership made several short term
advances totaling $3,174,000 as part of the West Shore agreement. In accordance
with the terms of the agreement, the Partnership was reimbursed for the full
amount of the advances at the closing date of May 6, 1996.
Note 7: Pro Forma Earnings per Share of Common Stock
- -------------------------------------------------------
Pro Forma earnings per share has been presented for all periods as if the
Partnership had been a publicly-held entity for all periods presented. The
weighted average number of shares includes the outstanding number of shares at
October 31, 1996 and shares issuable upon exercise of stock options effective
as of October 31, 1996
4
Note 8: Income Taxes
- ----------------------
The Partnership has not been subject to federal and most state income tax,
and its income was taxed directly to its respective partners. Since MarkWest
Hydrocarbon, Inc. is a taxable entity, a pro forma provision for income taxes is
presented in the financial statements, using a combined effective tax rate of 38
%, as if the Company had been taxed as a Subchapter C corporation under the
Internal Revenue Code, for all periods presented.
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
MarkWest Hydrocarbon, Inc. ( "MarkWest" ) provides compression, gathering,
treatment, processing and NGL extraction services to natural gas producers and
pipeline companies and fractionates NGLs into marketable products for sale to
third parties. The Company also purchases, stores and markets natural gas and
NGLs. The majority of the Company's operating income is derived from gas
processing and NGL fractionation. NGL prices and the volume of liquids
extracted, fractionated, and sold are the primary determinants of revenues.
Prices of NGLs typically do not vary directly with natural gas prices, but more
closely follow the prices of crude oil. In addition to sales of NGLs processed
by the Company, the Company generates income from the purchase and resale of
NGLs as part of its terminal and marketing activities, and provides marketing
activities in support of its company-owned facilities and production. The
Company also currently operates two propane terminals.
The Company's results of operations fluctuate substantially from quarter to
quarter as a result of changes in availability of, and prices for, natural gas,
and changes in demand for gas and NGLs because of weather and variability in
demand for NGLs used as feedstocks in petrochemical and other industries. The
Company's principal NGL product, propane, is used primarily as home heating
fuel. Sales volume and prices of propane usually increase during the winter
season and decrease during the summer season. However, demand for, and prices
of, propane also depend, to a large extent, upon the severity of the weather in
the Company's operating areas during the winter months. To meet the needs of the
marketplace, the Company seasonally stores product to meet anticipated winter
demand and also increases its third party purchases to meet wintertime needs. As
a result, the Company recognizes the greatest proportion of its operating income
during the first and fourth quarters of the year. Because of the foregoing
factors, the Company's operating results for any particular quarterly period may
not be indicative of results for future periods.
Management's Discussion and Analysis of Financial Condition and Results of
Operations include forward-looking statements (within the meaning of Section 21E
of the Securities Exchange Act of 1934) reflecting the expectations, plans and
objectives of management for operations of the Company. Such statements are
based on current expectations that involve numerous risks and uncertainties.
Assumptions relating to these expectations involve judgments with respect to,
among other things, future economic, competitive and market conditions,
including the price of natural gas, all of which are difficult or impossible to
predict accurately and many of which are beyond the control of the Company.
Accordingly, there can be no assurance that the forward looking statements
included in the Form 10-Q will prove to be accurate. Inclusion of such
information should not be regarded by the Company as a representation by the
Company or any other person that the expectations, plans and objectives of the
Company will be realized. It is important to note that the Company's actual
results could differ materially from those in such forward looking statements.
Among the factors that could cause actual results to differ are those risks
discussed in the "Risk Factors" section included in the Company's Registration
Statement on Form S-1, as declared effective by the Securities and Exchange
Commission on October 7, 1996 (Reg No. 333-09513).
5
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1995
Three Months Ended Nine Months Ended
September 30 September 30
1995 1996 % Change 1995 1996 % Change
---------------------------------- -----------------------------
(in thousands) (in thousands)
Financial Results:
- ------------------
Plant revenues........................ $6,076 $10,543 74% $23,302 $28,582 23%
Plant feedstock purchases............. 3,327 5,882 77% 11,935 14,417 21%
Terminal & marketing revenues......... $2,341 $ 3,976 70% $ 7,540 $13,805 83%
Terminal & marketing purchases........ 2,133 3,372 58% 6,960 12,055 73%
Income before extraordinary
items and taxes...................... $ 568 $ 1,943 242% $ 4,836 $ 6,427 33%
Revenues
The Company's third quarter 1996 plant revenues increased $ 4.5 million, or
74%, to $10.5 million, compared to $6.1 million for third quarter 1995. An
increase in NGLs sold of 26% accounted for approximately $1.5 million of the
revenue increase, with higher selling prices per gallon for all NGL products
accounting for approximately $ 2.1 million increase. An additional $ 851,000 of
revenue was generated by the Company's new Kenova processing plant for third
quarter 1996. The Company's new Kenova plant, which became operational in
January 1996, also accounted for all of the Company's increased NGL production
by supplying greater raw NGL volumes to the Company's Siloam plant.
Plant revenue for the nine months ended September 30, 1996 increased $5.3
million, or 23%, to $28.6 million compared to the nine months ended September
30, 1996. Revenue generated by the new Kenova facility resulted in $2.4 million
of the increase. Pricing increases accounted for $ 2.9 million of the increase,
offset by a decrease in volumes fractionated at the Siloam plant of 3% for the
nine month period ending September 1996. The volume decrease at the Siloam
plant, which receives approximately 70% of its raw NGL mix from the Kenova
plant, was primarily due to normal start-up delays in the transition from an
older processing facility at Kenova to the Company's new plant during the first
quarter of 1996.
Terminal and marketing revenue for third quarter 1996 increased $1.6
million, or 70%, to $3.9 million, compared to revenue for the third quarter 1995
of $2.3 million. Of the $1.6 million increase, $1.0 million was related to an
increase in volume and $600,000 was related to an increase in price. Revenue
from the West Memphis terminal accounted for approximately $880,000 of the
volume-related increase and the Company's terminal in Church Hill, Tennessee,
which became operational in October 1995, accounted for approximately $120,000
of the volume-related increase for third quarter 1996.
For the nine months ended September 30, 1996, terminal and marketing
revenue increased $6.3 million, or 83%, to $13.8 million, compared to $7.5
million for the nine months ended September 30,
6
1995. Sales volumes increased 52% for the nine months ended September 30, 1996,
compared to nine months ended September 30, 1995, accounting for $3.8 million of
the $6.3 million increase. The Church Hill terminal contributed 29% of the
volume, for $1.1 million of the volume increase. Volume increases from the West
Memphis terminal were principally due to the colder temperatures during the
first half of 1996, resulting in an increased demand for propane. Price-related
increases accounted for the remaining $2.5 million of increased revenues for
nine months ended September 30, 1996.
Oil and gas and other revenue increased to $416,000 from $248,000 for the
third quarter 1996 as compared to the third quarter 1995, an increase of
$168,000, or 68%. This increase was due principally to production from certain
of the Company's oil and gas properties, which began producing in the fourth
quarter of 1995. Other revenue consists of income received from the leasing of
Company-owned railcars to third parties.
For the nine months ended September 30, 1996, oil and gas and other revenue
increased from $749,000 to $1.1 million, or 53%, as compared to the nine months
ended September 30, 1995. This increase was due principally to a full nine
months of production in 1996 for certain of the Company's oil and gas
properties, which began producing in late 1995.
Costs and expenses
Plant feedstock costs increased for third quarter 1996, to $5.9 million
compared to $3.3 million for the third quarter 1995, an increase of $2.6
million, of 77%. Of this $2.6 million increase in feedstock costs, $1.0
million was attributable to NGL production volumes, and $1.6 million was due to
increased pricing.
Plant feedstock costs also increased for the nine months ended September 30,
1996 compared to the nine months ended September 30, 1995 by $ 2.5 million, or
21%, as a result of decreased volumes of $ 200,000 and price increases of $2.7
million.
Terminal and marketing purchases increased $1.2 million, from $2.1 million in
third quarter 1995, to $3.3 million for third quarter 1996, an increase of 58%,
as a result of both increased volumes and pricing.
Terminal and marketing purchases also increased for the nine months ended
September 30, 1996 compared to the nine months ended September 30, 1995 by $5.1
million, or 73%, to $12 million. Approximately $3.6 million was related to an
increase in volume and $1.5 million was related to an increase in price.
Operating expenses increased $162,000, from $1.2 million to $1.4 million for
the third quarter 1996, as compared to third quarter 1995. For the nine months
ended September 30, 1996, operating expenses increased $1.1 million, or 35%, to
$4.3 million from $3.2 million for the nine month period ended September 30,
1995. The increase was due principally to new operations at both the Kenova and
Church Hill facilities, which commenced operations in the first quarter of 1996
and the fourth quarter of 1995, respectively.
General and administrative expenses increased $114,000, to $1.2 million for
the three months ended September 30, 1996 from $1.1 million for the three months
ended September 30, 1995. For the nine months ended September 30, 1996, general
and administrative expenses increased $ 190,000, or 6%, to $3.4 million from
$3.2 million for the nine month period ended September 30, 1995. The increases
are attributable to administrative support activities related to the West Shore
acquisition in Michigan and the new Kenova and Church Hill facilities.
Depreciation and amortization increased to $783,000 from $437,000 for the
third quarter 1996 compared to the third quarter 1995, an increase of $346,000,
or 79%. For the nine months ended September 30, 1996, depreciation and
amortization increased from $1.3 million to $ 2.1 million, or 57%, as compared
to the nine months ended September 30, 1995. These increases are principally due
to increased depreciation attributable to the Company's new Kenova plant.
Net interest expense
Net interest expense increased $479,000, from interest income of $127,000
for the third quarter of 1995 to $352,000 interest expense for the third quarter
of 1996. This increase resulted primarily from an increase in outstanding long-
term debt of $ 13.5 million at September 30, 1995 to $21.1 million at September
30, 1996, offset by a decrease in interest rates from 8.125% to 7.5%.
Net interest expense for the nine months ended September 30, 1996 increased
$631,000, to $804,000 from $173,000 for the nine months ended September 30,
1995. This increase was due to the capitalization of interest in 1995 in
connection with construction of the Kenova plant, and an increase in
7
average outstanding long-term debt for the nine month period ended September 30,
1996 of approximately $ 13 million compared to the average outstanding long-term
debt for the nine month period ended September 30, 1995 of approximately $ 5
million partially offset by a decrease in interest rates in 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's sources of liquidity and capital resources historically have
been net cash provided by operating activities and proceeds from borrowed,
long-term debt. The Company's principal uses of cash have been to fund
operations and acquisitions.
For the nine months ended September 30, 1996, net cash provided by operating
activities increased by $1.6 million over the nine months ended September 30,
1995. This increase resulted primarily from an increase in revenue of $11.9
million, which was offset by a $8.9 million increase in feedstock purchases,
terminal and marketing purchases, operating expenses and general and
administrative expenses. Cash flow from operations was further reduced by an
increase in working capital requirements. For the nine months ended September
30, 1996, accounts receivable decreased by $3.6 million primarily due to
repayment of a short-term advance of $3.2 million made in conjunction with the
West Shore agreement. Inventories and feedstocks increased $5.6 million for the
nine months ended September 30, 1996, as a result of the Company building
inventory levels for the fourth quarter demands and increasing prepaid feedstock
accounts with lower-priced inventory. Accounts payable increased while costs and
expenses decreased due to the timing of the payments for prepaid feedstock.
Cash used in investing activities decreased $4.6 million for the nine month
period ended September 30, 1996, as compared to the nine month period endeds
September 30, 1995, mainly due to the completion of the Kenova facility under
construction during the prior year, offset by investments in West Shore. Cash
used in investing activities in 1995 was principally due to the expenditures
resulting from the construction of the Kenova facility.
Financing activities during the nine months ended September 30, 1995 and 1996
principally consisted of payments on long-term debt.
In October 1996, the Company completed an initial public offering of its
common stock, which generated $ 25.0 MM in net proceeds to the Company, after
deducting estimated expenses of the offering. The Company believes that the net
proceeds from its October 1996 public offering, together with its current credit
facilities and cash flows generated by its operations, will be sufficient to
meet its anticipated cash needs for working capital and capital expenditures for
at least the next twelve months. Thereafter, if cash generated from operations
is insufficient to satisfy the Company's liquidity requirements, the Company may
seek to sell additional equity or debt securities, obtain additional credit
facilities or adjust the level of its operating and capital expenditures. The
sale of additional equity securities could result in dilution to the Company's
stockholders.
Financing Facilities.
- ---------------------
Revolver Loan
The Company currently has a financing agreement with Norwest Bank Denver,
N.A. as agent, First American National Bank of Nashville, Tennessee, N M
Rothschild and Sons Limited and First Chicago/ NBD (collectively, the
"Lenders"). The agreement is structured as a revolving facility with a maximum
borrowing base of $40 million. Interest rates are based on either the agent
bank's prime plus 1/4% or the London Interbank Offered Rate (LIBOR) plus 2%.
The repayment period begins on September 30, 1998, continuing for 16 equal
quarterly installments until June 30, 2002. Outstanding borrowings at September
30, 1996 were $13 million. After application of the net proceeds of the
Company's October offering, no
8
amounts were outstanding under this facility as of November 11, 1996. This
facility is secured by substantially all of the Company's assets.
Working Capital Loan
The Company has a working capital line of credit with a maximum borrowing
base of $7.5 million as of September 30, 1996. Interest rates are based on
prime plus 1/4%, with maturity on July 1, 1998. Outstanding borrowings at
September 30, 1996 were $7.3 million. Upon application of the net proceeds of
the Offering, $ 4.2 million is outstanding under this facility as of October 31,
1996. The working capital is secured by the Company's inventory, receivables
and cash.
Subsidiary's Revolver Loan
The Company's MarkWest Resources subsidiary has a revolving facility with
Colorado National Bank ( "CNB " ) with a maximum borrowing base of $ 5.8 MM as
of September 30, 1996. Interest is based on CNB's bank rate plus 1/2%. The
facility has a maturity date of April 2003. This facility is restricted for the
exploration and development of oil and gas properties and as of September 30,
1996, $ 790,000 was outstanding. This facility is secured by substantially all
of MarkWest Resources' assets. The Company has guaranteed $ 1 million of this
facility.
The loan agreements contain affirmative and negative covenants customary in
commercial lending transactions, including restrictions on the incurrence of
additional debt, restrictions on the payment of dividends that would cause the
Company to violate the financial covenants contained in the loan agreements,
maintenance of a specified tangible net worth, current ratio, ratio of funded
debt to total capitalization and fixed charge coverage ratio.
Capital Investment Program
During 1996, the Company expects to make approximately $10 million in capital
investments. The Company expects to invest approximately $4 million in the
Company's subsidiary, MarkWest Michigan, Inc. ("MW Michigan"), for activities in
the Michigan area. Through MW Michigan, the Company is committed to make
certain capital contributions to West Shore, a venture dedicated to natural gas
gathering, treatment, processing and NGL marketing in western Michigan. The
Company has committed to fund up to $1.2 million of West Shore's construction of
a two-mile gathering pipeline and up to $10.0 million for a 30-mile extension of
the Basin Pipeline. In addition, the Company has committed to fund 60% of the
costs in excess of such amounts if necessary to complete these projects. The
Company also expects to invest approximately $5.0 million in the Company's
exploration and production subsidiary, MarkWest Resources Inc. ("MarkWest
Resources"). For the nine months ended September 30, 1996, the Company made
capital expenditures totaling $ 5.0 million, including $1.9 million for MW
Michigan and $ 1.8 million for MarkWest Resources.
RISK MANAGEMENT ACTIVITIES
The Company's policy is to utilize risk management tools primarily to reduce
commodity price risk for its natural gas shrink replacement purchases. This
effectively allows the Company to fix a portion of its margin because gains or
losses in the physical market are offset by corresponding losses or gains in the
financial instruments market. The Company's hedging activities generally fall
into three categories - contracting for future purchases of natural gas at a
predetermined BTU differential based upon a basket of Gulf Coast NGL prices, the
fixing of margins between propane sales prices and natural gas reimbursement
costs by purchasing natural gas contracts and simultaneously selling propane
contracts (or a substitute for propane such as crude oil) of approximately the
same BTU value, and the purchase of propane futures contracts to hedge future
sales of propane at the Company's terminals or gas plants.
The Company maintains a three-person committee that oversees all hedging
activity of the Company. This committee reports monthly to management regarding
recommended hedging transactions and positions. Gains and losses related to
qualifying hedges, as defined by SFAS No. 80,
9
"Accounting for Futures Contracts", of firm commitments or anticipated
transactions are recognized in plant revenue and feedstock purchases upon
execution of the hedged physical transaction.
As of September 30, 1996, the Company did not hold any material notional
quantities of natural gas, NGL, or crude oil futures, swaps or options.
10
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Change in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
10.1 Amended and Restated Loan Agreement made as of , among MarkWest
Hydrocarbon, Inc. and Norwest Bank Colorado, N.A., First
American National Bank, NM Rothschild and Sons Limited and First
Chicago, NBD
10.2 Amended and Restated Working Capital Loan Agreement made as of
October 8, 1996, among MarkWest Hydrocarbon, Inc. and Norwest
Bank Colorado, N.A., First American National Bank, NM Rothschild
and Sons Limited and First Chicago, N.B.D.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
September 30, 1996.
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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 21, 1996 BY: /s/ Brian T. O'Neill
---------------------------------
Brian T. O'Neill
President and
Chief Executive Officer
BY: /s/ Faye E. McGuar
---------------------------------
Faye E. McGuar
Chief Accounting Officer
12