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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 JUNE 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM________TO________
COMMISSION FILE NUMBER 1-11566
MARKWEST HYDROCARBON, INC.
(Exact name of registrant as specified in its charter)
Delaware 84-1352233
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
155 Inverness Drive West, Suite 200, Englewood, CO 80112-5004
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 303-290-8700
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
The registrant had 8,495,890 shares of common stock, $.01 per share par value,
outstanding as of July 24, 1998.
________________________________________________________________________________
PART I - FINANCIAL INFORMATION Page
---------------------
Item 1. Consolidated Financial Statements
Consolidated Balance Sheet at June 30, 1998 and December 31, 1997.........
1
Consolidated Statement of Operations for the Three and Six Months
Ended June 30, 1998 and 1997............................................ 2
Consolidated Statement of Cash Flows for the Three and Six Months Ended
June 30, 1998 and 1997.................................................. 3
Notes to the Consolidated Financial Statements............................ 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................... 5
PART II - OTHER INFORMATION
Item 1. Legal Proceedings............................................................ 10
Item 4. Submission of Matters to a Vote of Security Holders.......................... 10
Item 6. Exhibits and Reports on Form 8-K............................................. 11
SIGNATURES 12
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
MARKWEST HYDROCARBON, INC.
CONSOLIDATED BALANCE SHEET
(000S, EXCEPT SHARE DATA)
June 30,
1998 December 31,
(Unaudited) 1997
ASSETS ---------------- --------------
Current assets:
Cash and cash equivalents......................................................... $ 669 $ 1,493
Receivables, net of allowance for doubtful accounts of $120 and $120,
respectively................................................................. 5,771 10,150
Receivable from income taxes paid................................................. 1,122 --
Inventories....................................................................... 4,588 5,141
Prepaid feedstock................................................................. -- 2,690
Other assets...................................................................... 2,885 2,698
---------- ----------
Total current assets.......................................................... 15,035 22,172
Property and equipment:
Gas processing, gathering, storage and marketing equipment........................ 71,255 58,794
Oil and gas properties and equipment.............................................. 10,434 7,854
Land, buildings and other equipment............................................... 10,036 9,363
Construction in progress.......................................................... 8,507 5,258
---------- ----------
100,232 81,269
Less: accumulated depreciation, depletion and amortization........................ (17,499) (15,439)
---------- ----------
Total property and equipment, net............................................. 82,733 65,830
Intangible assets, net of accumulated amortization of $352 and $287 respectively......
935 555
Note receivable and other assets...................................................... -- 10,100
---------- ----------
Total assets.......................................................................... $ 98,703 $ 98,657
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable............................................................ $ 1,697 $ 3,074
Accrued liabilities............................................................... 5,260 4,339
Current portion of long-term debt................................................. 153 156
---------- ----------
Total current liabilities..................................................... 7,110 7,569
Deferred income taxes................................................................. 6,596 5,609
Long-term debt........................................................................ 33,626 33,931
Stockholders' equity:
Preferred stock, par value $0.01, 5,000,000 shares authorized, 0 shares issued
and outstanding.................................................................. -- --
Common stock, par value $0.01, 20,000,000 shares authorized, 8,527,401 and
8,519,724 shares issued, respectively............................................ 85 85
Additional paid-in capital........................................................ 42,739 42,729
Retained earnings................................................................. 8,963 9,189
Treasury stock, 28,211 and 27,511 shares, respectively............................ (416) (455)
Total stockholders' equity.................................................... 51,371 51,548
---------- ----------
Total liabilities and stockholders' equity............................................ $ 98,703 $ 98,657
========== ==========
The accompanying notes are an integral part of these financial statements
1
MARKWEST HYDROCARBON, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(000S, EXCEPT PER SHARE DATA)
For the three months ended For the six months ended
June 30, June 30,
1998 1997 1998 1997
----------- ----------- ----------- ---------
Revenues:
Gathering, processing and marketing revenue......... $10,762 $11,650 $30,617 $40,006
Oil and gas revenue................................. 248 128 606 300
Interest income..................................... 44 170 115 341
Other income........................................ -- -- 21 74
----------- ----------- ----------- ----------
Total revenue............................... 11,054 11,948 31,359 40,721
----------- ----------- ----------- ----------
Costs and expenses:
Cost of sales....................................... 7,587 6,076 20,871 23,047
Operating expenses.................................. 2,340 2,770 5,008 5,049
General and administrative expenses................. 1,314 1,615 2,838 3,548
Depreciation, depletion and amortization............ 1,136 812 2,107 1,584
Interest expense.................................... 445 222 893 325
----------- ---------- ----------- ----------
Total costs and expenses.................... 12,822 11,495 31,717 33,553
----------- ---------- ----------- ----------
Income (loss) before minority interest and income taxes. (1,768) 453 (358) 7,168
Minority interest in net loss of subsidiary............. -- 20 -- 223
----------- ----------- ----------- ----------
Income (loss) before income taxes....................... (1,768) 473 (358) 7,391
Provision for income taxes:
Current............................................. (1,156) 173 (1,122) 2,546
Deferred............................................ 528 -- 987 263
----------- ----------- ----------- ----------
(628) 173 (135) 2,809
----------- ----------- ----------- ----------
Net income (loss)....................................... $(1,140) $ 300 $ (223) $ 4,582
=========== =========== =========== ==========
Basic earnings (loss) per share of common stock......... $ (0.13) $ 0.04 $ (0.03) $ 0.54
=========== =========== =========== ==========
Earnings (loss) per share assuming dilution............. $ (0.13) $ 0.03 $ (0.03) $ 0.53
=========== =========== =========== ==========
Weighted average number of outstanding shares of common
stock.................................................. 8,500 8,484 8,498 8,484
=========== =========== =========== ==========
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 For the six months
ended June 30, ended June 30,
1998 1997 1998 1997
--------- -------- -------- ---------
Reconciliation of net income (loss) to net cash provided by (used
in) operating activities:
Net income.................................................... $(1,140) $ 300 $ (223) $ 4,582
Add income items that do not affect working capital:
Depreciation, depletion and amortization................... 1,136 812 2,107 1,584
Deferred income taxes...................................... 528 -- 987 263
Gain on sale of assets..................................... -- -- -- (75)
---------- --------- ---------- ---------
524 1,112 2,871 6,354
Adjustments to working capital to arrive at net cash provided
by (used in) operating activities:
(Increase) decrease in accounts receivable................ 48 (2,121) 4,379 1,193
(Increase) decrease in inventories........................ (2,022) (546) 553 2,712
(Increase) decrease in prepaid feedstock and other
assets................................................ (1,022) (1,749) 1,381 140
Decrease in accounts payable and accrued liabilities...... (171) (1,940) (456) (3,565)
--------- --------- --------- ----------
(3,167) (6,356) 5,857 480
Net cash provided by (used in) operating activities.. (2,643) (5,244) 8,728 6,834
Cash flows from investing activities:
Capital expenditures...................................... (4,985) (7,125) (8,865) (7,720)
Increase in note receivable and intangible assets......... (398) (259) (428) (1,888)
Other..................................................... -- (82) -- (144)
---------- --------- --------- ----------
Net cash used in investing activities................ (5,383) (7,466) (9,293) (9,752)
Cash flows from financing activities:
Proceeds from long-term debt.............................. 11,500 9,920 20,200 9,920
Repayment of long-term debt............................... (5,052) (37) (20,508) (11,150)
Other..................................................... (2) (67) 49 (67)
---------- --------- --------- ----------
Net cash provided by (used in) financing activities.. 6,446 9,816 (259) (1,297)
---------- --------- --------- ----------
Net decrease in cash and cash equivalents.......................... (1,580) (2,894) (824) (4,215)
Cash and cash equivalents at beginning of period................... 2,249 3,080 1,493 4,401
---------- --------- --------- ----------
Cash and cash equivalents at end of period......................... $ 669 $ 186 $ 669 $ 186
========== ========= ========= ==========
the accompamying 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. ("Resources"), MarkWest Michigan, Inc.
("Michigan") and 155 Inverness, Inc. ("155 Inverness"). All significant
intercompany accounts and transactions have been eliminated in consolidation.
The unaudited financial statements presented herein have been prepared in
accordance with the instructions to Form 10-Q and do not include all the
information and note disclosures required by generally accepted accounting
principles for complete financial statements. The interim consolidated financial
statements should be read in conjunction with the Consolidated Financial
Statements and Notes thereto for the year ended December 31, 1997 included in
the Company's Annual Report on Form 10-K, as filed with the Securities and
Exchange Commission. In the opinion of management, all adjustments necessary
for a fair statement of the results for the unaudited interim periods have been
made. These adjustments consist only of normal recurring adjustments.
The effective corporate tax rate for interim periods is based on the estimated
annual effective corporate tax rate, excluding certain nonrecurring or unusual
events. The effective tax rate varies from statutory rates due primarily to tax
credits and intangible development costs.
Certain prior year amounts have been reclassified to conform to the 1998
presentation.
NOTE 2. SUPPLEMENTARY CASH FLOW INFORMATION
During the three months ended June 30, 1998, non-cash investing activities
included the forgiveness of a note receivable (the "Note") valued at $10.1
million from Michigan Production Company, LLC in exchange for the title to the
31 mile extension to the Basin pipeline. The Note was originally for the costs
incurred by the Company for the construction of the pipeline extension.
NOTE 3. LONG TERM DEBT
Effective May 6, 1998, the Company amended its existing credit agreement. The
amended credit agreement provides for a maximum borrowing amount of $85 million,
$50 million of which is available pursuant to a term loan commitment and the
remaining $35 million pursuant to a revolving loan commitment. Actual borrowing
limits may be a lesser amount, depending on trailing cash flow, as defined in
the agreement. The term loan commitment period will terminate on October 20,
1999. Any outstanding balance thereunder will be payable in eight equal
quarterly installments, beginning June 30, 2002. The revolving loan commitment
converts to a reducing loan commitment on May 6, 2000. The reducing loan
commitment reduces ratably on a quarterly basis to zero by May 6, 2004.
Interest rates are based on either the agent bank's base rate or the London
Interbank Offered Rate (LIBOR), plus an applicable margin of between 0% and
0.75% or 0.625% and 2.25%, respectively, based upon a certain Company debt to
earnings ratio.
The debt is secured by a first mortgage on the Company's major assets. The loan
agreement restricts certain activities and requires the maintenance of certain
financial ratios and other conditions.
NOTE 4. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement No. 133
("SFAS 133"), Accounting for Derivative Instruments and Hedging Activities.
This Statement is effective for fiscal years beginning after June 15, 1999.
Earlier application is encouraged; however, the Company does not anticipate
adopting SFAS 133 until the fiscal year beginning January 1, 2000. SFAS 133
requires that an entity recognize all derivatives as assets or liabilities in
the statement of financial position and measure those instruments at fair value.
Although the Company is currently evaluating SFAS 133, it is not expected to
have a material impact on the financial condition or results of operations of
the Company.
4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains statements which, to the extent that they are not
recitations of historical fact, constitute "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933 ("Section 27A") and
Section 21E of the Securities and Exchange Act of 1934 ("Section 21E"). All
forward-looking statements involve risks and uncertainties. The forward-looking
statements in this document are intended to be subject to the safe harbor
protection provided by Sections 27A and 21E. Factors that most typically impact
the Company's operating results and financial condition include (i) changes in
general economic conditions in regions in which the Company's products are
located, (ii) the availability and prices of natural gas liquids ("NGLs") and
competing commodities, (iii) the availability and prices of raw natural gas
supply, (iv) the ability of the Company to negotiate favorable marketing
agreements, (v) the risks that natural gas exploration and production activities
will not be successful, (vi) the Company's dependence on certain significant
customers, gatherers and transporters of natural gas, (vii) competition from
other NGL processors, including major energy companies, and (viii) the Company's
ability to identify and consummate acquisitions complementary to its business.
For discussions identifying other important factors that could cause actual
results to differ materially from those anticipated in the forward-looking
statements, see the Company's Securities and Exchange Commission filings.
Forward-looking statements involve many uncertainties which 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.
SECOND QUARTER 1998 SUMMARY
MarkWest incurred a net loss of $1.1 million, or $0.13 per share, on revenues of
$11.1 million for the quarter ended June 30, 1998. This compares to net income
of $300,000, or $0.04 per share, on revenues of $11.9 million for the same
period in 1997. The net loss primarily resulted from lower gross margins on NGL
sales at MarkWest's Appalachian plants, based on a combination of weak NGL
prices and strong natural gas costs affecting the entire gas processing
industry. For the quarter, NGL prices moved down sharply in response to lower
crude oil prices. The average West Texas Intermediate crude oil spot price for
the second quarter of 1998 is down over 20 percent from the same quarter last
year. MarkWest's average NGL sales price is down by a similar percentage.
Strong natural gas prices, which represent MarkWest's cost of sales, played a
secondary role in the gross margin squeeze. This quarter's gross margin on a
per-unit basis was approximately 70 percent below MarkWest's ten-year average in
Appalachia, reducing second quarter results by about $1.4 million or $0.16 per
share. In contrast, 1997's second quarter gross margin was in line with
MarkWest's ten-year average.
SIX MONTHS ENDED JUNE 30, 1998 SUMMARY
For the six months ended June 30, 1998, the Company's net loss was $223,000, or
($0.03) per share on revenues of $31.4 million. This compares to net income of
$4.6 million or $0.54 per share on revenues of $40.7 million for the six months
ended June 30, 1997. The primary cause of the net loss was lower gross margins
on NGL sales at the Company's Appalachian plants, due to weak NGL prices in the
first quarter and a combination of weak NGL prices and strong gas prices in the
second quarter.
OPERATING STATISTICS Three Months Ended June 30, Six Months Ended June 30,
1998 1997 % Change 1998 1997 % Change
----------- ----------- ---------- ----------- ----------- ----------
Appalachia:
NGL production--Siloam plant (gallons) 24,253,161 22,055,068 10% 51,152,340 49,877,687 3%
NGLs marketed--Siloam plant (gallons) 18,510,284 19,388,827 (5%) 47,175,614 49,869,744 (5%)
Fee gas processed (mmbtu) (a) 8,185,641 14,489,924 (44%) 20,360,835 27,372,327 (26%)
Terminal throughput (gallons) 3,054,883 2,926,617 4% 13,458,438 13,284,866 1%
Michigan:
Pipeline throughput (mcf) 860,087 511,266 68% 1,945,627 857,890 127%
NGLs marketed (gallons) 1,372,137 -- -- 3,230,518 -- --
Appalachia plant and Michigan:
Average sales price per gallon $0.30 $0.39 (23%) $0.33 $0.56 (41%)
Gas production (mcfe) 242,232 95,784 153% 415,478 176,634 135%
5
(a) Due to the ongoing arbitration with Columbia, fee gas processed in
1998 only includes volumes processed at the Company's Kenova plant
beginning March 1, 1998. In 1997 and early 1998, fee gas processed
included volumes at the Boldman and Cobb plants, in addition to the
Kenova plant. The loss of fee revenue is partly offset by cost
savings from not operating Boldman and Cobb.
APPALACHIAN CORE AREA
Second quarter NGL production volumes remained strong at 24.3 million gallons,
up 10 percent from the same period last year. NGL marketing volumes of 18.5
million gallons in the second quarter of 1998 were down 5 percent from the
second quarter of 1997. The decline was primarily due to an earlier inventory
build for the upcoming winter months than was done in 1997. MarkWest recently
completed a ten-year NGL purchase contract to purchase 2 million to 3 million
gallons per year of mixed liquids from a third party's new processing plant
beginning September 1998.
MICHIGAN CORE AREA
MarkWest completed the first third of its 27-mile southern pipeline extension in
July. This portion of the extension provided for the connection of a well that
started flowing at 5 million cubic feet per day (mmcfd) and is expected to
increase to more than 8 mmcfd in August. The second third of the extension will
be completed in late August or early September allowing for the connection of
another 5-10 mmcfd well. An additional 7 mmcfd from shut-in wells will be
connected upon completion of the final third of the extension early in the
fourth quarter. Michigan volumes are currently flowing at 17 mmcfd, up from the
second quarter average of 9.5 mmcfd. Average throughput volumes are projected
to be about 18 mmcfd for the third quarter and 30 mmcfd for the fourth quarter
providing significantly higher cash flow and earnings in the second half of
1998. At 35 mmcfd, the Michigan NGL extraction plant will be at full capacity.
MarkWest expects to expand plant and pipeline capacity to 50 mmcfd, at a cost of
$3 million, when drilling success adds volumes, perhaps in 1999.
Drilling activities continue along the MarkWest pipeline. MarkWest is
participating in exploration activities in the region, holding a 17.5 percent
working interest in a recently completed seismic program. Drilling of the first
two of three to four wells in the 1998 program will begin in October. Two other
companies each plan to drill two wells by the end of the year. Drilling
successes in any of these three programs could add significantly to pipeline and
NGL throughput for MarkWest.
EXPLORATION AND PRODUCTION
Natural gas sold in the second quarter of 1998 totaled 242,000 mcf equivalent
(mcfe), a 153 percent increase over the same period last year. This increase
largely resulted from the Company's March 1998 acquisition of 40 producing wells
in Colorado's San Juan Basin, building on MarkWest's existing assets in the
region. Production performance is being further improved due to work-over
activities on the purchased wells. MarkWest continues to pursue viable gas
projects in the Rocky Mountain region that would lead to gathering and
transportation investment opportunities.
OUTLOOK
NGL prices in the second quarter of 1998 were below historical levels and are
expected to remain so in the third quarter of 1998. These prices are often
correlated with and driven by the price of crude oil, which has not fully
recovered from its decline over the fourth quarter of 1997 and the first quarter
of 1998.
A substantial portion of the Company's revenues, and as a result, its gross
margins, remain dependent upon the sales price of NGLs, particularly propane,
which fluctuates with the winter weather conditions and other supply and demand
determinants. The strongest demand for propane and the highest propane sales
margins generally occur during the winter heating season. As a result, the
Company recognizes a substantial portion of its annual income during the first
and fourth quarters of the year.
The Company anticipates that until a crude oil price recovery is underway and/or
gas prices soften, the Company will continue to experience earnings pressures,
like others in the industry. However, MarkWest's NGL commodity exposure is
partially offset by selling liquids in a premium market, utilizing storage
capability and its ability to pre-buy natural gas. In addition, an increase of
fee-based income, primarily a result of connecting new wells increasing
6
system throughput in Michigan, helps to offset the fluctuation of NGL and
natural gas prices. The Company anticipates fee based activity will generate
nearly fifty percent of total gross margins in 1999.
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
1997
Three months ended June 30,
1998 1997 $ Change
------------------- ----------------- --------------------
Revenues $ 11,054 $11,948 ($ 894)
Gross profit (loss) (a) (53) 2,120 (2,173)
Income (loss) before income taxes (1,768) 473 (2,241)
Provision for income taxes (628) 173 801
------------------- ----------------- --------------------
Net income (loss) ($ 1,140) $ 300 ($ 1,440)
=================== ================= ====================
(a) Excludes interest income, general and administrative expense and interest
expense.
REVENUES
Gathering, processing and marketing revenue. Gathering, processing and
marketing revenue decreased $888,000 or 8% for the three months ended June 30,
1998, compared to the same period in 1997, due to a variety of reasons. The
Company's Appalachian operations accounted for the majority of the overall
revenue decrease, primarily as a result of weak NGL prices in the second
quarter of 1998 compared to the same period in 1997.
The above factor was partially offset by a 68% increase in the volume of gas
processed in the Company's Michigan operations and an increase in gas marketing
activity during the three months ended June 30, 1998 compared to the three
months ended June 30, 1997. 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 new NGL extraction plant,
which began operations in December 1997.
Oil and gas revenue. Oil and gas revenue increased by $120,000 or 94% for the
three months ended June 30, 1998 compared to the same period in 1997. This
increase was directly attributable to a significant increase in gas production
from the prior year.
COSTS AND EXPENSES
Cost of sales. Cost of sales increased $1.5 million or 25% for the three
months ended June 30, 1998 compared to the same period in 1997. The Company's
Appalachian operations accounted for the majority of the increase, primarily as
a result of an increase in unit costs of natural gas at the Company's Siloam
plant. Cost of sales during the second quarter of 1998 also included costs
associated with the Company's new NGL extraction plant in Michigan. The overall
increase in cost of sales was partially offset by a decrease in unit costs of
propane at the Company's terminals.
Operating expenses. Operational expenses decreased $430,000 or 16% for the
three months ended June 30, 1998 compared to the three months ended June 30,
1997. The majority of the decrease was driven by lower operating expenses in
the Company's Appalachia operations in the second quarter of 1998 compared to
the second quarter of 1997. This decrease was partially offset by increased
Michigan operational expenses caused by the Company's new NGL extraction plant.
General and administrative expenses. General and administrative expenses
decreased $301,000 or 19% for the three months ended June 30, 1998 compared to
the same period in 1997. General and administrative expenses incurred during
the three months ended June 30, 1997 included a continuation of many initial
costs, including significant professional service fees, incurred in connection
with its reorganization into a public company following the initial public
offering in October 1996.
Depreciation, depletion and amortization. Depreciation, depletion and
amortization increased $324,000 or 40% for the second quarter of 1998 compared
to the second quarter of 1997. This increase was principally due to increased
depreciation attributable to the Company's new NGL extraction plant and pipeline
extension in Michigan.
7
Interest expense. Interest expense increased $223,000 or 100% for the second
quarter of 1998 compared to the second quarter of 1997. This increase was
principally due to an increase in average outstanding long-term debt in the
second quarter of 1998 compared to the second quarter of 1997.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1997
Six months ended June 30,
1998 1997 $ Change
------------------- ----------------- --------------------
Revenues $31,359 $40,721 ($ 9,362)
Gross profit (loss) (a) 3,258 10,700 (7,442)
Income (loss) before income taxes (358) 7,391 (7,749)
Provision for income taxes (135) 2,809 2,944
------------------- ----------------- --------------------
Net income (loss) ($ 223) $ 4,582 ($ 4,805)
=================== ================= ====================
(a) Excludes interest income, general and administrative expense and interest
expense.
REVENUES
Gathering, processing and marketing revenue. Gathering, processing and marketing
revenue decreased $9.4 million or 23% for the six months ended June 30, 1998,
compared to the same period in 1997, due to a variety of reasons. The Company's
Appalachian operations accounted for the majority of the overall revenue
decrease, primarily as a result of weak NGL prices in the six months ended June
30, 1998 compared to the same period in 1997.
The above factor was partially offset by a 127% increase in the volume of gas
processed in the Company's Michigan operations and an increase in gas marketing
activity during the six months ended June 30, 1998 compared to the six months
ended June 30, 1997. 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 new NGL extraction plant,
which began operations in December 1997.
Oil and gas revenue. Oil and gas revenue increased by $306,000 or 102% for the
six months ended June 30, 1998 compared to the same period in 1997. This
increase was directly attributable to a significant increase in gas production
from the prior year.
COSTS AND EXPENSES
Cost of sales. Cost of sales decreased $2.2 million or 9% for the six months
ended June 30, 1998 compared to the same period in 1997. The Company's
Appalachian operations accounted for the majority of the decrease, primarily as
a result of a decrease in unit costs of propane at the Company's terminals.
This decrease was partially offset by an increase in cost of sales at the
Company's Michigan operations, where the Company's new NGL extraction plant
commenced operations in December 1997.
Operating expenses. Operational expenses remained relatively constant with only
a slight decrease of $41,000 for the six months ended June 30, 1998 compared to
the six months ended June 30, 1997. For the first six months in 1998, the
Company experienced lower operating costs in its Appalachian operations compared
to the same time period in 1997. This decrease was offset by the introduction
of operational costs from the Company's new NGL extraction plant in Michigan
during the first half of 1998.
General and administrative expenses. General and administrative expenses
decreased $710,000 or 20% for the six months ended June 30, 1998 compared to the
same period in 1997. General and administrative expenses incurred during the
six months ended June 30, 1997 included a continuation of many initial costs,
including significant professional service fees, incurred in connection with its
reorganization into a public company following the initial public offering in
October 1996.
Depreciation, depletion and amortization. Depreciation, depletion and
amortization increased $523,000 or 33% for the first six months of 1998 compared
to the first six months of 1997. This increase was principally due to increased
depreciation attributable to the Company's new NGL extraction plant and pipeline
extension in Michigan.
8
Interest expense. Interest expense increased $568,000 for the six months ended
June 30, 1998 compared to the six months ended June 30, 1997. This increase was
principally due to an increase in average outstanding long-term debt in the
first half of 1998 compared to the first half of 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's sources of liquidity and capital resources historically have been
net cash provided by operating activities; proceeds from issuance of long-term
debt; and in 1996, an initial public offering of equity. In the past, these
sources have been sufficient to meet its needs and finance the growth of its
business.
The following summary table reflects comparative cash flows for the Company for
the six months ended June 30, 1998 and 1997 (in thousands):
For the six months ended June 30,
1998 1997
---------------------- -----------------------
Net cash provided by operating activities before change
in working capital $ 2,871 $ 6,354
Net cash provided by operating activities from change
in working capital 5,857 480
Net cash used in investing activities (9,293) (9,752)
Net cash used in financing activities (259) (1,297)
For the six months ended June 30, 1998, net cash provided by operating
activities before adjustments for working capital decreased $3.5 million from
the same period in 1997, primarily as a result of a decrease in gross profit
since 1997. As shown above, this was partially offset by a $5.9 million
decrease in the Company's working capital accounts, excluding cash, for the six
months ended June 30, 1998, compared to a $480,000 decrease in working capital
accounts, excluding cash, for the six months ended June 30, 1997. The change in
working capital was principally driven by greater decreases in accounts
receivable, prepaid feedstock and other assets in the first six months of 1998,
compared to the first six months of 1997. These changes were partially offset
by a smaller decrease in inventories and accounts payable in first half of 1998
compared to the first half of 1997.
Cash used in investing activities decreased $459,000 for the six months ended
June 30, 1998 compared to the six months ended June 30, 1997, primarily related
to a smaller increase in notes receivable and other assets in the first six
months of 1998 compared to the same period in 1997. This was partially offset
by greater capital expenditures in the first six months of 1998 compared to the
first six months of 1997 (see further discussion under "Capital Investment
Program").
For the six months ended June 30, 1998, cash used in financing activities was
$259,000, a decrease of approximately $1 million compared to the same period in
1997. The decrease was primarily related to the timing and frequency of debt
repayments in 1998.
Financing Facilities
At June 30, 1998, the Company had approximately $27 million of available credit
and working capital of $7.9 million. The Company believes that cash provided by
operating activities, together with amounts available to be borrowed under its
financing facilities, will provide sufficient funds to maintain its existing
facilities and fund its capital expenditure program. Depending on the timing
and amount of the Company's future projects, it may be required to seek
additional sources of capital. While the Company believes that it would be able
to secure additional financing, if required, no assurance can be given that it
will be able to do so.
Capital Investment Program
The Company's capital investment program for 1998 is estimated at $17 million,
down from the $24 million originally estimated at the beginning of 1998 and the
subsequent revised estimate of $18 million. The new estimate includes $10
million in Michigan to fund a further extension of the pipeline and expansion of
the current system capacity. The remaining capital programs include $2 million
for various projects in Appalachia, $4 million for exploration and production
activities, including $2.4 million in an acquisition of 40 producing wells
located in the northern San Juan Basin of southwest Colorado, and $1 million for
other various capital projects. For the six months ended June 30, 1998, the
Company made capital expenditures totaling approximately $8.9 million.
RISK MANAGEMENT ACTIVITIES
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During the three months ended June 30, 1998 and 1997, a $0 and $14,000 gain,
respectively, were recognized in operating income on the settlement of propane
and natural gas futures. During the six months ended June 30, 1998 and 1997, a
$0 and $1.0 million gain, respectively, were recognized in operating income on
the settlement of propane and natural gas futures. Financial instrument gains
and losses on hedging activities were generally offset by amounts realized from
the sale of the underlying products in the physical market.
At June 30, 1998, the Company had a total of 295 long open propane futures and
forward contracts representing a notional quantity of 295,000 barrels. The
Company also had a total of 110 short open natural gas futures contracts
representing a notional quantity of 1,100,000 mmbtus. The Company had no
material notional quantities of crude oil futures or NGL, natural gas, or crude
oil swaps or options. At June 30, 1997, the Company had no material notional
quantities of NGL, natural gas, or crude oil futures, swaps or options.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously reported, MarkWest filed arbitration proceedings in February 1998
to resolve issues with Columbia Gas Transmission Corporation regarding three
Appalachia natural gas processing plants. These plants are governed by several
contracts, the most important of which extends through the year 2010. In this
arbitration, MarkWest requests a declaration of rights and status to clarify
agreements between the companies and certain monetary relief. Issues arose
during ongoing negotiations between MarkWest and Columbia to finalize terms of a
1997 preliminary agreement in which, among other things, Columbia agreed to sell
its Cobb plant to MarkWest and to transfer from Columbia to MarkWest the
operation of the Boldman plant. These issues also include matters regarding
operations at the Kenova plant. MarkWest owns the Boldman and Kenova plants.
As previously reported, in April 1998, Columbia filed a Complaint against
MarkWest in the United States District Court for the Southern District of West
Virginia. The details of the complaint were reported in the first quarter 1998
Form 10-Q. MarkWest believes that the contract issues underlying Columbia's
Complaint are already subject to the binding arbitration noted above.
In both the arbitration and court actions, each of the parties has filed initial
and response pleadings. The parties await decisions from both the arbitrators
and the court on the scope of arbitration and the establishment of the remaining
schedule. Management believes that it will prevail in its position and,
accordingly, the outcome of this dispute is not likely to have a material effect
on the financial condition, results of operations or prospects of MarkWest.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders held on May 21, 1998, the following
proposals were adopted by the margins indicated:
1. To elect two Class II directors to hold office for a three-year term expiring
at the Annual Meeting of Stockholders occurring in the year 2001 or until the
election and qualification of their respective successors.
Number of Shares For Withheld
---------------------- ---------------------
Brian T. O'Neill 8,132,362 600
Barry W. Spector 8,132,362 600
2. To ratify the selection of Price Waterhouse LLP as the Company's independent
accountants for the fiscal year ending December 31, 1998.
Number of Shares
----------------------
10
For 8,132,962
Withheld 0
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 - Second Amendment dated as of May 6, 1998 to the Amended and
Restated Credit Agreement dated as of June 20, 1997 between
MarkWest Hydrocarbon, Inc., as the Borrower, and Certain Commercial
Lending Institutions, as the Lenders, and Bank of Montreal, acting
through certain U.S. branches or agencies, as the Agent for the
Lenders.
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
June 30, 1998.
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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: July 29, 1998 By: /s/ Gerald A. Tywoniuk
----------------------------
Gerald A. Tywoniuk
Chief Financial Officer and Vice
President of Finance
(On Behalf of the Registrant
and as Principal Financial and
Accounting Officer)
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