Document/Exhibit Description Pages Size
1: S-1 Registration Statement (General Form) 87 465K
2: EX-5.1 Opinion of Dorsey & Whitney 2 7K
3: EX-11.1 Computation of Earnings Per Common Share 1 4K
4: EX-23.1 Consent of Price Waterhouse, LLP 1 4K
As filed with the Securities and Exchange Commission on April 30, 1997
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
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MARKWEST HYDROCARBON, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 3970 84-135223
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
5613 DTC PARKWAY, SUITE 400
ENGLEWOOD, COLORADO 80111
(303) 290-8700
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
--------------------
BRIAN T. O'NEILL
SENIOR VICE PRESIDENT AND CHIEF OPERATING OFFICER
MARKWEST HYDROCARBON, INC.
5613 DTC PARKWAY, SUITE 400
ENGLEWOOD, COLORADO 80111
(303) 290-8700
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------------
COPIES OF COMMUNICATIONS TO:
GEORGE A. HAGERTY, ESQ.
DORSEY & WHITNEY LLP
REPUBLIC PLAZA BLDG., SUITE 4400
DENVER, COLORADO 80202
(303) 629-3400
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
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If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act") check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
[Enlarge/Download Table]
CALCULATION OF REGISTRATION FEE
=========================================================================================================
Proposed Maximum Proposed Maximum
Title of Each Class of Amount to be Offering Price Aggregate Offering Amount of
Securities to be Registered Registered Per Share (1) Price (1) Registration Fee
---------------------------------------------------------------------------------------------------------
Common Stock, $.01 par value 322,464 shares $13.25 $4,272,648 $1294.74
========================================================================================================
(1)Estimated solely for the purpose of calculating the registration fee pursuant
to Rule 457 under the Securities Act on the basis of the average of the high and
low sale prices of the Registrant's Common Stock as quoted on The Nasdaq
National Market on April 23, 1997.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
================================================================================
MARKWEST HYDROCARBON, INC.
FORM S-1 REGISTRATION STATEMENT
CROSS-REFERENCE SHEET
[Enlarge/Download Table]
REGISTRATION STATEMENT
ITEMS AND HEADING LOCATION IN PROSPECTUS
--------------------------------- ----------------------------------------
1. Forepart of the Registration Statement Outside Front Cover Page
and Outside Front Cover Page of
Prospectus
2. Inside Front and Outside Back Inside Front Cover Page; Outside Back Cover Page
Cover Pages of Prospectus
3. Summary Information, Risk Prospectus Summary; The Company; Risk Factors
Factors and Ratio of Earnings
to Fixed Charges
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Not Applicable
6. Dilution Not Applicable
7. Selling Security Holders Selling Stockholders
8. Plan of Distribution Outside Front Cover Page; Plan of Distribution
9. Description of Securities to be Registered Description of Capital Stock
10. Interests of Named Experts and Counsel Not Applicable
11. Information with Respect to the Registrant
a. Description of Business Prospectus Summary; The Company; Risk
Factors; Management's Discussion and
Analysis of Financial Condition and
Results of Operations; Business; Certain
Transactions; note 1 to Notes to
Financial Statements.
b. Description of Property Business - Properties
c. Legal Proceedings Business - Legal Proceedings
d. Market Price and Dividends of Outside Front Cover Page; Price Range of
Equity Securities Common Stock; Dividend Policy;
Description of Capital Stock; Certain
Transactions
e. Financial Statements Financial Statements
f. Selected Financial Data Prospectus Summary; Selected Consolidated
Financial and Other Information
[Enlarge/Download Table]
REGISTRATION STATEMENT
ITEMS AND HEADING LOCATION IN PROSPECTUS
--------------------------------------------------- -----------------------------------------
g. Supplementary Financial Information Not Applicable
h. Management's Discussion and Analysis Management's Discussion and Analysis of
of Financial Condition and Results of Financial Condition and Results of
Operations Operations
i. Changes in and Disagreements with Not Applicable
Accountants on Accounting and Financial
Disclosure
j. Directors and Executive Officers Management; Principal Stockholders
k. Executive Compensation Management
l. Security Ownership of Certain Beneficial Principal Stockholders
Owners and Management
m. Certain Relationships and Related Transactions Management; Certain Transactions
12. Disclosure of Commission Position on Indemnification Not Applicable
for Securities Act Liabilities
SUBJECT TO COMPLETION, DATED APRIL 30, 1997
322,464 SHARES
MARKWEST HYDROCARBON, INC.
COMMON STOCK
The 322,464 shares of Common Stock, par value $0.01 per share (the "Common
Stock"), of MarkWest Hydrocarbon, Inc. (the "Company") which may be offered
hereby are being sold by certain non-affiliate stockholders of the Company (the
"Selling Stockholders") who received such shares in connection with the
reorganization in October 1996 of the Company's predecessor, MarkWest
Hydrocarbon Partners, Ltd. ("MarkWest Partnership"), into the Company, pursuant
to a reorganization agreement entered into among the Company, MarkWest
Partnership, and each of the partners of MarkWest Partnership (the
"Reorganization Agreement"). See "Selling Stockholders." The Company will not
receive any of the proceeds from the sale of the shares of Common Stock offered
hereby. The Company has agreed to file and maintain a shelf registration
statement relating to such shares in order to permit the Selling Stockholders to
resell such shares from time to time during a period of at least 60 days from
the date of this Prospectus.
The Common Stock is traded on the Nasdaq National Market under the symbol
"MWHX." On April 23, 1997, the last reported sales price for the Common Stock
on the Nasdaq National Market was $13.25 per share. See "Price Range of Common
Stock."
FOR A DISCUSSION OF RISKS OF AN INVESTMENT IN THE SHARES OF COMMON STOCK
OFFERED HEREBY, SEE "RISK FACTORS" ON PAGES 9-15.
____________________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
____________________________
The distribution of shares of Common Stock by the Selling Stockholders may
be effected from time to time in one or more transactions (which may involve
block transactions) in the over-the-counter market or on the Nasdaq National
Market, in negotiated transactions, through the writing of options on shares
(whether such options are listed on an options exchange or otherwise), or a
combination of such methods of sale, at market prices prevailing at the time of
sale, at prices related to such prevailing market prices, or at negotiated
prices. The Selling Stockholders may effect such transactions by selling shares
to or through broker-dealers, and such broker-dealers may receive compensation
in the form of underwriting discounts, concessions or commissions from the
Selling Stockholders and/or purchasers of shares for whom they may act as agent
(which compensation may be in excess of customary commissions). The Selling
Stockholders also may pledge shares as collateral for margin accounts and such
shares could be resold pursuant to the terms of such accounts.
All expenses of the registration of the Common Stock covered by this
Prospectus will be borne by the Company pursuant to preexisiting agreements,
except that the Company will not pay (i) any Selling Stockholder's underwriting
discounts or selling commissions, or (ii) fees and expenses of the Selling
Stockholder's counsel.
The date of this Prospectus is May , 1997
PROSPECTUS SUMMARY
The following summary should be read in conjunction with, and is qualified in
its entirety by, the more detailed information and financial statements and
notes thereto appearing elsewhere in this Prospectus. As used in this
Prospectus, the terms "Company" and "MarkWest" refer, unless the context
requires otherwise, to the Company, its predecessor, subsidiaries, joint venture
entities managed by the Company or its subsidiaries, or their interests therein.
THE COMPANY
MarkWest Hydrocarbon, Inc. ("MarkWest" or the "Company") is engaged in
natural gas processing and related services. The Company, which has grown
substantially since its founding in 1988, is the largest processor of natural
gas in Appalachia and, in 1996, established a venture to provide natural gas
processing services in western Michigan. The independent gas processing
industry has grown rapidly in the last 10 years, and the Company believes there
will be substantial opportunities to grow its gas processing operations within
these existing core regions and in new markets. The Company provides
compression, gathering, treatment, and natural gas liquid ("NGL") extraction
services to natural gas producers and pipeline companies and fractionates NGLs
into marketable products for sale to third parties. The Company also purchases,
stores and markets natural gas and NGLs and has begun to conduct strategic
exploration for new natural gas sources for its processing activities. For the
year ended December 31, 1996, MarkWest produced approximately 95 million gallons
of NGLs and marketed approximately 137 million gallons of NGLs.
The Company's processing and marketing operations are concentrated in two
core areas which are significant gas producing basins: the southern Appalachian
region of eastern Kentucky, southern West Virginia, and southern Ohio (the
"Appalachian Core Area"), and western Michigan (the "Michigan Core Area").
At the Company's processing plants, natural gas is treated to remove
contaminants, and NGLs are extracted and fractionated into propane, normal
butane, isobutane and natural gasoline. The Company then markets the
fractionated NGLs to refiners, petrochemical companies, gasoline blenders,
multistate and independent propane dealers, and propane resellers. In addition
to processing and NGL marketing, the Company engages in terminalling and storage
of NGLs in a number of NGL storage complexes in the central and eastern United
States, and operates propane terminals in Arkansas and Tennessee.
During 1996, the Company took several key steps intended to expand its
operations. In January 1996, the Company commissioned a new natural gas liquids
extraction plant in Wayne County, West Virginia, which replaced a 1958 vintage
extraction facility owned and operated by Columbia Gas Transmission Company
("Columbia Gas"). Because the Company owns and operates this new facility,
which is situated on a main gathering line of Columbia Gas, the Company will
generate fee revenues related to processing operations. In addition, the
Company believes this new facility will generate greater NGL recovery from
natural gas, reduce downtime for maintenance, and significantly decrease fuel
costs compared to the replaced facility.
In May 1996, the Company established West Shore Processing Company, LLC
("West Shore"), a venture in western Michigan, which the Company will develop
as its Michigan Core Area. West Shore has exclusive gathering, treatment and
processing agreements with Michigan Energy Company, LLC ("MEC") and Michigan
Production Company ("MPC") covering the natural gas production from all wells
and leases owned by them within western Michigan. West Shore also is negotiating
agreements with several exploration and production companies that would result
in additional dedication of natural gas production to the gathering, treatment
and processing facilities of West Shore. The natural gas streams to be dedicated
to West Shore will primarily be produced from an extension of the Northern
Niagaran Reef trend in western Michigan. To date, over 2.5 trillion cubic feet
equivalent of natural gas have been produced from the Northern Niagaran Reef
trend. Upon completion of the first two phases of development, West Shore's
processing operations are expected to
2
have 30 million cubic feet per day (MMcf/D) of capacity provided by Shell
Offshore, Inc. ("Shell"), and approximately 25 MMcf/D of dedicated production
from currently drilled and proven wells. With a current pipeline capacity of 35
MMcf/D and deliverabilities of individual wells commonly exceeding 5 MMcf/D, the
Company expects that demand at West Shore will exceed capacity. The Company also
has entered into an agreement with Longwood Exploration Company ("Longwood")
to conduct exploration activity in the Michigan Core Area. See "-Recent
Developments."
INDUSTRY OVERVIEW
Natural gas processing and related services represent a major segment of the
oil and gas industry, providing the necessary service of converting natural gas
into marketable energy products. When natural gas is produced at the wellhead,
it must be gathered, and in some cases compressed or pressurized, for
transportation via pipelines (described as gathering services) to gas processing
plants. The processing plants remove water vapor, solids and other
contaminants, such as hydrogen sulfide or carbon dioxide in the natural gas
stream that would interfere with pipeline transportation or marketing of the gas
to consumers and also extract the NGLs from the natural gas (described as
treatment and extraction services, respectively). The NGLs are then subjected
to various processes that cause the NGLs to separate, or fractionate, into
marketable products such as propane, normal butane, isobutane and natural
gasoline (described as fractionation services).
Over the past 10 years, independent natural gas processing has experienced
significant growth. In 1995, independent natural gas processing companies
accounted for 319,000 barrels per day of NGL production, or approximately 23% of
total U.S. NGL production by the 20 largest U.S. natural gas producers, compared
to less than 4% of such producers' NGL production in 1985. The increase in the
independent natural gas processing industry has resulted in part from the
divestiture by major energy companies and interstate pipeline companies of their
gas gathering and processing assets and the decision by many such companies to
outsource their gas processing needs.
An important factor expected to contribute to the continuing growth of
independent natural gas processing companies is the upward trend of natural gas
consumption and production in the United States. Natural gas consumption in the
United States has increased from 16.2 trillion cubic feet (Tcf) per year in 1986
to 21.3 Tcf per year in 1995, and is forecast to increase to 24.0 Tcf per year
by the year 2000. The number of natural gas rigs in service also has recently
increased. From June 1995 to June 1996, the number of natural gas rigs in
service rose from 340 to 464. This natural gas rig count is the highest in over
four years, and, as a percentage of total oil and gas rigs in service, the
highest in the last decade. Many newly discovered natural gas wells and fields
will require access to gathering and processing infrastructure, providing
significant opportunities for growth-oriented independent natural gas processing
companies such as MarkWest.
STRATEGY
The Company's primary objective is to achieve sustainable growth in cash flow
and earnings by increasing the volume of natural gas that it gathers and
processes and the volume of NGLs that it produces and markets. To achieve this
objective, the Company employs a number of related strategies.
Geographic Core Areas. The Company emphasizes opportunities for investment
in geographic core areas where there is significant potential to achieve a
position as the area's dominant natural gas processor. The Company believes
that growth in core areas can be achieved by developing processing facilities
both in areas where a large energy or pipeline company requires processing
services and in areas where there is significant potential for natural gas
production but not significant processing capacity.
Long-Term Strategic Relationships. The Company seeks strategic relationships
with the dominant pipelines and gas producers in each area in which the Company
operates. In the
3
Appalachian Core Area, MarkWest owns three processing plants that process
natural gas or NGLs dedicated by Columbia Gas. In its Michigan Core Area, the
Company has entered into gas supply and processing relationships with Shell and
MPC.
NGL Marketing. The Company strives to maximize the downstream value of its
gas and liquid products by marketing directly to distributors and resellers.
Particularly in the area of NGL marketing, the Company minimizes the use of
third party brokers and instead supports a direct marketing staff focused on
refiners, petrochemical companies, gasoline blenders, and multistate and
independent propane dealers. Additionally, the Company uses its own truck and
tank car fleet, as well as its own terminals and storage facilities, to provide
supply reliability to its customers. All of these efforts have allowed the
Company to maintain pricing of its NGL products at a premium to Gulf Coast spot
prices.
Cost-Efficient Operations. The Company seeks a competitive advantage by
utilizing in-house processing and operating expertise to provide lower-cost
service. To provide competitive processing services, the Company emphasizes
facility design, project management and operating expertise that permits
efficient installation and operation of its facilities. The Company has in-
house engineering personnel who oversee the design and construction of the
Company's processing plants and equipment.
Acquisitions. The Company believes that there are significant opportunities
to make strategic acquisitions of gathering and processing assets because of the
divestiture by major energy companies and interstate pipeline companies of their
gas gathering and processing assets. The Company pursues acquisitions that can
add to existing core area investments or can lead to new core area investments.
Exploration as a Tool to Enhance Gas Processing. The Company maintains a
strategic gas exploration effort that is designed to permit the Company to gain
access to additional natural gas supplies within its existing core areas and to
gain foothold positions in production regions that the Company might develop as
new core processing areas.
RECENT DEVELOPMENTS
In May 1996, the Company entered into arrangements for the establishment of
West Shore, a company jointly owned with MEC. At that time, the most
significant assets of West Shore consisted of a 31-mile sour gas pipeline that
is situated in Manistee and Mason Counties, Michigan (the "Basin Pipeline"),
the rights to obtain a sour gas treatment plant located in Manistee County and
various agreements that dedicate natural gas production to West Shore for
processing. West Shore is currently completing a 30-mile extension to provide
access to existing shut-in wells owned by MPC. West Shore is dedicated to
natural gas gathering, treatment and processing and NGL marketing in western
Michigan. MarkWest is the operator of West Shore.
The Company has entered into agreements to construct approximately 27 miles
of additional pipeline to provide access to processing services to existing
shut-in wells and providing it the right to construct a new 50 million cubic
feet per day plant to extract NGLs. In addition, the Company expects either to
construct a new treatment plant or to expand Shell's existing plant capacity to
treat the sour gas predominant in the Michigan Core Area. The activities
contemplated by such agreements, together with the further development of West
Shore and the Basin Pipeline, are referred to herein as the "Michigan
Project."
Substantially all of the natural gas produced from the western region of the
Michigan Core Area is sour. While several successful large wells have been
developed in the region, the natural gas producers have lacked adequate
gathering and processing facilities for sour gas, and development of the trend
has been inhibited as a result. With the additional capacity to be provided by
West Shore's sour gas pipeline and processing and treatment facilities, the
Company expects further development in western
4
Michigan which will create demand for West Shore's gathering and processing
services. See "Business-Natural Gas Processing and Related Services-Michigan
Core Area."
In late 1996, Columbia Gas filed a settlement document with the FERC relating
to its most recent rate case. The settlement was approved by the FERC by order
dated April 17, 1997 (the "Columbia Abandonment Order") and is effective as of
February 1, 1997. As a part of the Columbia Abandonment Order, the Company
agreed to take over operations of the Boldman plant, and Columbia Gas agreed to
sell its Cobb natural gas liquids extraction plant located in West Virginia to
the Company for a purchase price of $.9 million. The Company and Columbia Gas
have signed a "Points of Agreement" and are currently negotiating definitive
agreements to complete both the assumption of operations at the Boldman plant by
the Company and the sale of the Cobb plant to the Company. Execution of
definitive agreements is anticipated in the third or fourth quarter of 1997. See
"Business-Natural Gas Processing and Related Services-Appalachian Core Area."
In April 1997, Domain Energy Corporation ("Domain") and EnCap Investments,
L.C. ("EnCap") informed the Company that they had purported to transfer their
interests in MEC and MPC to Energy Acquisition Corp. The Company believes the
transfer of the interests in MEC is invalid. The Company does not anticipate
any change in the operation or management of West Shore, regardless of whether
or not the transfer of the interests in MEC is effective. Moreover, the
purported transfer of the interests in MPC has no effect on the Company's
gathering, treatment and processing arrangements with MPC. See "Business-
Natural Gas Processing and Related Services-Michigan Core Area" and "-Legal
Proceedings."
REORGANIZATION
The Company was incorporated as a Delaware corporation in 1996 to act as the
successor to the business of MarkWest Partnership, a Colorado limited
partnership formed in 1988. Upon effectiveness of the Company's initial public
offering in October 1996, the Company succeeded to the business, assets and
liabilities of MarkWest Partnership. See "Certain Transactions."
The Company's principal executive offices are located at 5613 DTC Parkway,
Suite 400, Englewood, Colorado 80111. Its telephone number is (303) 290-8700.
5
THE OFFERING
Common Stock offered by the Selling Stockholders.............. 322,464 shares
Common Stock to be Outstanding after this Offering (1)........ 8,485,000 shares
Nasdaq National Market Symbol................................. MWHX
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(1) Based upon an examination of the stock ledger of the Company as of March
31, 1997. Excludes (i) 281,171 shares issuable upon exercise of stock options
outstanding as of the effective date of this offering (the "Offering") with a
weighted average exercise price of $8.55 per share under the Company's 1996
Stock Incentive Option Plan (the "Stock Incentive Plan") (including options to
purchase an aggregate of 14,000 shares of Common Stock granted by the
Compensation Committee of the Board of Directors, subject to stockholder
approval of certain amendments to the Stock Incentive Plan at the annual meeting
of stockholders scheduled for June 1997); (ii) 568,829 shares reserved for
future issuance under the Stock Incentive Plan (including 250,000 shares of
Common Stock authorized for issuance under the Stock Incentive Plan by the Board
of Directors, subject to stockholder approval of certain amendments to the Stock
Incentive Plan at the annual meeting of stockholders scheduled for June 1997);
(iii) 3,000 shares issuable upon exercise of stock options outstanding as of the
effective date of the Offering, each with an exercise price of $10 per share,
under the Company's 1996 Non-Employee Director Stock Option Plan (the "Non-
Employee Director Plan") (including options to purchase an aggregate of 1,500
shares of Common Stock approved by the Board of Directors, subject to
stockholder approval of certain amendments to the Non-Employee Director Plan at
the annual meeting of stockholders scheduled for June 1997); and (iv) 17,000
shares reserved for future issuance under the Non-Employee Director Plan.
6
SUMMARY CONSOLIDATED FINANCIAL INFORMATION AND OTHER DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA AND OTHER DATA)
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
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1996 1995 1994
----------- ------------- -------------
STATEMENT OF OPERATIONS DATA:
Revenues.......................................... $ 71,952 $ 48,226 $ 52,963
Income before taxes and extraordinary item........ 14,760 7,824 5,120
Income tax provision:
Arising from reorganization................... 3,745
Subsequent to reorganization.................. 3,246 - -
----------- ----------- -----------
Income before extraordinary item.................. 7,769 7,824 5,120
Extraordinary loss................................ - (1,750) -
----------- ----------- -----------
Net income........................................ $ 7,769 $ 6,074 $ 5,120
=========== =========== ===========
PRO FORMA INFORMATION (1):
Historical income before income taxes.............
and extraordinary item........................ $ 14,760 $ 7,824 $ 5,120
Pro forma provision for income taxes.............. 5,609 2,937 1,424
----------- ----------- -----------
Pro forma income before extraordinary item........ $ 9,151 $ 4,887 $3,696
=========== =========== ===========
Pro forma earnings per share of Common Stock (2).. $1.16 $0.85
=========== ===========
Pro forma weighted average number of
outstanding shares of Common Stock (2)........ 7,908 5,725
=========== ===========
BALANCE SHEET DATA (as of December 31):
Total assets...................................... $ 78,254 $ 46,896 $ 35,913
Long-term debt.................................... 11,257 17,500 9,887
Partners' capital................................. -- 25,161 22,183
Stockholders' equity.............................. 43,664 -- --
OTHER DATA:
Fee gas processed (MMBtu)......................... 33,899,744 -- --
NGL production (gallons) 94,908,534 92,239,000 99,735,000
Terminal throughput (gallons)..................... 37,851,450 31,206,000 32,664,584
Michigan pipeline throughput (Mcf)................ 1,161,182 -- --
(1) Prior to October 7, 1996, the Company was organized as a partnership,
MarkWest Partnership, and consequently, was not subject to income tax.
Effective October 7, 1996, the Company reorganized and the existing general
and limited partners exchanged 100% of their interests in MarkWest
Partnership for 5,725,000 shares of Common Stock. A pro forma provision for
income taxes has been presented for purposes of comparability as if the
Company had been a taxable entity for all periods presented.
(2) Pro forma weighted average shares outstanding at December 31, 1996
represents the weighted average of, for the period prior to the Company's
initial public offering in October 1996, the number of shares of Common
Stock issued in the initial public offering for which the net proceeds were
used to repay outstanding indebtedness and, for the period subsequent to the
initial public offering, the total number of shares of Common Stock
outstanding.
7
CERTAIN DEFINITIONS
The definitions set forth below apply to the terms used in this Prospectus:
"Bcf" means billion cubic feet of natural gas.
"BTUs" means British thermal units.
"Dedicated reserves" means natural gas reserves subject to long-term contracts
providing for the dedication to the Company's facilities for purchase or
processing of all gas produced from all formations on designated properties for
periods typically ranging from 10 to 20 years.
"EPA" means the Environmental Protection Agency.
"Extraction" means removing liquid and liquefiable hydrocarbons from natural
gas.
"FERC" means the Federal Energy Regulatory Commission.
"Fractionation" is the process by which the NGL stream is subjected to
controlled temperatures, causing the NGLs to separate, or fractionate, into the
separate NGL products ethane, propane, butane, isobutane and natural gasoline.
"Mcf" means thousand cubic feet of natural gas.
"MGal/D" or "MGal per day" mean thousand gallons per day.
"MMbtu" means million British thermal units.
"MMcf" means million cubic feet of natural gas.
"MMcf/D" or "MMcf per day" means million cubic feet per day.
"NGLs" means natural gas liquids.
"Processing" includes treatment, extraction and fractionation. "Processing
contracts" are those supply contracts dedicated to Company facilities whereby
title to the gas and marketing rights for such gas may remain with the gas
producer.
"Sour gas" means natural gas which contains sulfur compounds in excess of a
specified amount.
"Tcf" means trillion cubic feet of natural gas.
"Treatment" refers to the removal of water vapor, solids and other
contaminants, such as hydrogen sulfide or carbon dioxide, contained in the
natural gas stream that would interfere with pipeline transportation or
marketing of the gas to consumers.
8
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following factors should be considered carefully in evaluating the Company and
its business before purchasing any of the shares of Common Stock offered hereby.
Prospective investors are cautioned that the statements in this Prospectus that
are not descriptions of historical facts constitute "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended,
including, but not limited to, statements contained in "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Business."
Such statements are based on many assumptions and are subject to risks and
uncertainties. The forward-looking statements in this Prospectus are intended
to be subject to the safe harbor protection provided by Section 27A. Actual
results could differ materially from the results discussed in the forward-
looking statements due to a number of factors, including, but not limited to,
those identified below as well as those set forth elsewhere in this Prospectus.
For discussions identifying important factors, in addition to the risk factors
identified below, that could cause actual results to differ materially from
those anticipated in the forward-looking statements, see "Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
COMMODITY PRICE RISKS
The Company's products, including NGLs, natural gas and related by-products,
are commodities. As such, their prices are often subject to material changes in
response to relatively minor changes in supply and demand, general economic
conditions and other market conditions over which the Company has no control.
Other conditions affecting the Company's business include the availability and
prices of competing commodities and of alternative energy and feedstock sources
(primarily oil), government regulation, industry-wide inventory levels, the
seasons, the weather and the impact of energy conservation efforts.
Substantially all of the Company's revenue is derived from the sale of NGLs,
particularly propane. Revenues from the sale of NGLs represented approximately
91% of total revenue in 1996. Propane sold to the Company's customers is used
primarily for home heating, and therefore the demand tends to be seasonal,
increasing sharply in the winter months. 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. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations-
General," "-Seasonality" and "Business-Industry Overview."
Under the Company's keep-whole contracts, which accounted for approximately
59% of the Company's total revenues during 1996, a principal cost of processing
gas is the reimbursement to the natural gas producers for the energy (measured
in BTUs) extracted from the natural gas stream in the form of NGLs and consumed
as fuel during processing, less the amount of energy the Company is
contractually entitled to retain. Profitability under such contracts is largely
influenced by the margin between NGL sales prices and the cost of such
reimbursement (which cost is directly related to the price of natural gas), and
may be negatively affected by increases in natural gas prices. A contraction of
the margin between the two prices may result in a reduction in the Company's
operating margin. A prolonged contraction of such margin could have a material
adverse effect on the financial condition and results of operations of the
Company. See "Business-Natural Gas Processing and Related Services-Gas
Processing Contracts and Natural Gas Supply."
AVAILABILITY OF NATURAL GAS SUPPLY
Natural gas is the source of the Company's NGLs. To maintain throughput in
its NGL extraction and fractionation systems, the Company must continually
contract to process additional natural gas provided from new or existing
sources. Future natural gas supplies available for processing at the Company's
plants will be affected by a number of factors that are not within the Company's
control, including partial or complete shut downs of major pipelines supplying
the Company's processing plants, the depletion rate of gas reserves currently
connected and the extent of exploration for, production and development of, and
demand for natural gas in the areas in which the Company operates. Over 95% of
9
the natural gas processed by the Company is dedicated under contracts with
remaining terms of one year or more. However, long-term contracts do not
protect the Company from shut-ins or supply curtailments by gas suppliers or
from depletion of gas reserves. Although the Company has historically been
successful in contracting for new gas supplies and in renewing gas supply
contracts as they have expired, there can be no assurance that the Company will
in the future be successful in renewing or increasing its access to natural gas
supply or the throughput of its processing facilities. See "Business-Natural
Gas Processing and Related Services."
DEPENDENCE ON MAJOR PIPELINES
In recent years, all of the Company's gas volume has been delivered through
the Columbia Gas pipeline gathering systems. Columbia Gas has, from time to
time, sold portions of its transmission and gathering systems. The Company has
been informed by Columbia Gas that it intends to engage in negotiations with
third parties regarding the possible sale of all or a portion of the gathering
systems that provide throughput to the Company's plants. If Columbia Gas were
to sell such systems or change its policies significantly with respect to gas
transported for producers, other sources of natural gas might have to be
obtained. There can be no assurance that adequate alternative sources of
natural gas will be available or that such sources will be available at prices
that are as favorable to the Company as existing arrangements. See "Business-
Natural Gas Processing and Related Services."
RISKS OF NGL AND NATURAL GAS MARKETING
The profitability of the NGL and natural gas marketing operations of the
Company depends in large part on the ability of the Company's management to
assess and respond to changing market conditions in negotiating natural gas
purchase and/or processing agreements and NGL and natural gas sales agreements.
The inability of management to respond appropriately to changing market
conditions could have a negative effect on the Company's profitability. The
duration of the Company's natural gas processing contracts range from one-time
spot purchase and processing agreements to 15 years. Under certain longer-term
agreements, the Company is obligated to purchase or sell specified quantities of
natural gas at prices related to the market price. Although the Company
attempts to match its long-term purchase obligations with long-term sales
obligations, it is still subject to price risk, particularly where the index or
market for determining the purchase price under a purchase contract is different
from the index or market for determining the sales price under the corresponding
sales contract. Because longer-term purchase contracts may permit some
variation in the amount the producer is obligated to deliver or a purchaser is
obligated to purchase, unmatched contracts may result in an imbalance of the
natural gas volumes the Company is obligated to purchase and sell. See
"Business-Gas Processing Contracts and Natural Gas Supply."
RISKS OF OIL AND GAS EXPLORATION AND PRODUCTION ACTIVITIES
To date, the Company has conducted only limited exploration and production
activities for new natural gas sources as a supporting function for its
processing services. However, the Company expects to make significant
investments in exploration and production activities in the Michigan Core Area
and elsewhere. Exploration and production activities are subject to many risks,
including the risk that no commercially productive reservoirs will be
encountered. There can be no assurance that the Company's natural gas
exploration efforts will be productive or that the Company will recover all or
any portion of its investment in such activities. Drilling for natural gas may
involve unprofitable efforts, not only from dry wells, but also from wells that
are productive but do not produce sufficient net revenues to return a profit
after drilling, operating and other costs. The cost of drilling, completing and
operating wells is often uncertain. The Company's drilling operations may be
curtailed, delayed or canceled as a result of numerous factors, many of which
are beyond the Company's control, including a substantial or extended decline in
the price for oil and natural gas, title problems, weather conditions,
compliance with governmental requirements and shortages or delays in the
delivery of equipment and services. See "Business-Exploration and
Production."
10
RISKS RELATING TO THE MICHIGAN PROJECT
In May 1996, the Company entered into a number of agreements providing for the
development of gathering, treatment and processing facilities in the Michigan
Core Area. There can be no assurance that the projects proposed by the Company
in Michigan can be completed in the time frame projected or within the current
budget or that upon completion the Company will be able to successfully
integrate the newly developed assets into the Company's business. In addition,
certain of the assets acquired in the Michigan Core Area have a history of
losses. There can be no assurance that the Company will be able to operate its
Michigan Core Area assets in a profitable manner or recover all or any portion
of its investment in the Michigan Core Area. See "Business-Natural Gas
Processing and Related Services-Michigan Core Area."
GENERAL BUSINESS RISKS
The Company and its affiliates are subject to all of the risks generally
associated with the gathering, processing, transportation and storage of natural
gas and NGLs, including damage to its own and third party pipelines, storage
facilities, related equipment and surrounding properties caused by weather and
other acts of God, fires and explosions, as well as leakage of natural gas and
spills of NGLs. The Company's exploration and production operations are subject
to hazards and risks inherent in drilling for and production of oil and natural
gas, such as fires, natural disasters, explosions, encountering formations with
abnormal pressures, blowouts, cratering, pipeline ruptures and spills, any of
which could result in the loss of hydrocarbons, environmental pollution,
personal injury claims and other damage to the property of the Company and
others. The Company's operations in the Michigan Core Area are subject to
additional risks resulting from the processing and treatment of sour gas,
including an increased risk of property damage, bodily injury or death from the
highly toxic nature of sour gas. The Company's operating storage facilities
incorporate certain primary and backup equipment which, in the event of
mechanical failure, might take some time to replace, and the operation of such
storage facility could be materially impaired. The Company does not fully
insure against such risks, nor does the Company insure against potential loss of
product in such storage facilities. Losses resulting from the occurrence of
such events in excess of the Company's insurance could have a material adverse
effect on the financial condition and results of operations of the Company. See
"Business-Operational Risks and Insurance."
POTENTIAL VARIABILITY IN QUARTERLY OPERATING RESULTS
The Company's quarterly revenues and operating results have varied
significantly in the past and are likely to vary substantially from quarter to
quarter in the future. Quarterly revenues and operating results may fluctuate
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 the petrochemical, refining and other industries.
Substantially all of the Company's revenue is derived from the sale of NGLs,
particularly propane. Revenues from the sale of NGLs represented approximately
91% of total revenue in 1996. The strongest demand for propane and the highest
propane sales margins generally occur during the winter heating season. As a
result, the Company recognizes the greatest proportion of its operating income
during the first and fourth quarters of the year. Operating results may also
vary based upon the prices of natural gas purchased by the Company. Because of
the foregoing factors, the Company's operating results for any particular
quarterly period may not be indicative of results for future periods and there
can be no assurance that the Company will be able to achieve or maintain
profitability on a quarterly or annual basis in the future. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations-Results
of Operations."
11
DEPENDENCE ON CERTAIN CUSTOMERS
Sales to Ashland Petroleum Company and Ashland Chemical Company (collectively,
"Ashland") and Ferrellgas, L.P. ("Ferrellgas") accounted for 15.9% and 9.3%,
respectively, of the Company's revenues during 1996. The existing contracts with
Ashland expire August 31, 1999. The existing contracts with Ferrellgas expired
on April 30, 1997. The Company negotiates contracts with Ferrellgas on an annual
basis, and is currently negotiating a contract with Ferrellgas for the period
from May 1, 1997 through April 30, 1998. The Company expects to continue doing
business with Ferrellgas under the terms of the expired contract until a new
contract is executed. To the extent that Ashland, Ferrellgas and other customers
may reduce volumes under existing contracts, the Company would be adversely
affected unless it were able to make comparably profitable arrangements with
other customers. See "Business-Sales and Marketing."
GOVERNMENT REGULATION
Many aspects of the gathering, processing, marketing and transportation of gas
and NGLs by the Company are subject to federal, state and local laws and
regulations that can have a significant effect upon its operations. For
example, construction and operation of the Company's facilities require
governmental permits and approvals. Changes to federal laws and regulations
applicable to interstate transportation of gas implemented primarily during the
last five years have encouraged competition in nationwide markets for natural
gas sales and have fundamentally changed the business and regulatory environment
in which the Company markets and sells natural gas. Many of these regulatory
changes have been promulgated by the FERC. FERC regulation is still evolving
and is subject to future modifications by the FERC and the courts. The Company
cannot predict the final requirements of the FERC initiatives or their effect on
the availability or cost of transportation services to the Company or natural
gas supplies associated with such transportation services. See "Business-
Government Regulation."
ENVIRONMENTAL MATTERS
Certain aspects of the Company's activities are subject to laws and
regulations designed to protect the environment. The cost of compliance with
such environmental laws that affect the Company can be substantial and could
have a material adverse effect on the Company's financial condition.
Additionally, these laws could impose liability for remediation costs or result
in civil or criminal penalties for non-compliance. Environmental laws
frequently impose "strict liability" on property owners, facility operators
and certain other persons, which means that in some situations the Company could
be liable for cleanup costs resulting from improper conduct or conditions caused
by previous property owners, operators, lessees or other persons not associated
with the Company. Blowouts, ruptures or spills occurring in connection with the
Company's exploration and production activities, as well as accident or breakage
in any of the Company's natural gas gathering, processing or related facilities,
or at the Company's NGL storage facilities, could subject the Company to
liability for substantial cleanup costs for resulting spills, leaks, emissions
or other damage to the environment or other property. See "Business-
Environmental Matters."
COMPETITION
The Company's competitors in its respective lines of business include major
integrated oil and gas companies, affiliates of major interstate and intrastate
pipeline companies and national and local natural gas gatherers, NGL brokers and
distributors of varying size, financial resources and experience. Many of
these competitors, particularly those affiliated with major integrated oil and
gas and interstate and intrastate pipeline companies, have financial resources
substantially greater than those of the Company and control supplies of natural
gas and NGLs substantially greater than those available to the Company. In
addition, producers of natural gas and NGLs have the ability to sell directly to
customers in competition with the Company and in periods of ample supply may do
so at prices below the prices in the Company's natural gas and NGLs sales
contracts. Certain regulatory
12
actions of the FERC have also increased competition in natural gas and NGL
marketing. See "Business-Competition" and "-Government Regulation."
DEPENDENCE ON KEY PERSONNEL
The Company is highly dependent on a limited number of key management
personnel, particularly John M. Fox, its Chief Executive Officer, Brian T.
O'Neill, its Chief Operating Officer and Arthur J. Denney, its Vice President
of Engineering and Business Development. The Company's future success will also
depend, in part, on its ability to attract and retain additional highly
qualified personnel. There can be no assurance that the Company will be
successful in hiring or retaining qualified personnel. The loss of key
personnel to death, disability or termination, or the inability to hire and
retain qualified personnel, could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
has key-person life insurance on Messrs. Fox and O'Neill. See "Management."
RISKS PERTAINING TO ACQUISITIONS
An important element of the Company's business strategy has been, and
continues to be, to expand through acquisitions. The Company's future growth is
partially dependent upon its ability to identify suitable acquisitions and
effectively integrate acquired assets with the Company's operations. There can
be no assurance that suitable assets will be available for acquisition by the
Company, that such assets will be available on terms acceptable to the Company
or that competition for such assets will not render such acquisitions
economically infeasible. In addition, there can be no assurance that financing
will be available to fund future acquisitions, or, if available, that the cost
of such funds will be available on terms favorable to the Company. In
connection with certain acquisitions, the Company may also be required to assume
certain liabilities, including environmental liabilities, known or unknown. See
"-Environmental Matters."
LIMITED TRADING HISTORY; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Company's initial public offering in October 1996, there had been
no public trading market for the Common Stock. Currently, the Common Stock is
thinly traded, and stockholders may not be able to sell a significant amount of
Common Stock at the price quoted or at all. The market price for the Common
Stock may be highly volatile depending on various factors, including the general
economy, stock market conditions, announcements by the Company, its suppliers or
competitors and fluctuations in the Company's operating results. In addition,
the stock market historically has experienced volatility which has affected the
market price of securities of many companies and which has sometimes been
unrelated to the operating performance of such companies. The trading price of
the Common Stock could also be subject to significant fluctuations in response
to variations in quarterly results of operations, changes in earnings estimates
by analysts, governmental regulatory action, general trends in the industry and
overall market conditions, and other factors. See "Price Range of Common
Stock."
CONTROL BY SIGNIFICANT STOCKHOLDERS
As of March 31, 1997, John M. Fox, the Company's Chief Executive Officer, and
Brian T. O'Neill, the Company's Chief Operating Officer, (collectively, the
"Significant Stockholders"), controlled approximately 53.8% of the outstanding
Common Stock. If they decide to vote together, these stockholders would be able
to elect all of the Company's directors, control the management and policies of
the Company and determine the outcome of any matter submitted to a vote of the
Company's stockholders. Provisions of the Company's Certificate of
Incorporation also strengthen the control of the Significant Stockholders over
the Company and may act to reduce the likelihood of a successful attempt to take
over the Company or acquire a substantial amount of Common Stock without their
consent. See "Principal Stockholders" and "Description of Capital Stock."
13
CONFLICTS OF INTEREST
Currently, the Company and MAK-J Energy Partners, Ltd. ("MAK-J Energy"), an
entity controlled by John M. Fox, the President and Chief Executive Officer of
the Company, own 49% and 51% undivided interests, respectively, in certain oil
and gas properties that the Company operates pursuant to joint venture
agreements governing such properties. Pursuant to the agreements, the Company
provides certain management and administrative services related to the
properties for which MAK-J Energy pays the Company a monthly fee. While the
amount of the monthly fee will in the future be subject to renegotiation and
approval by the Company's independent directors, the monthly fee for fiscal year
1996 was not negotiated on an arm's length basis. Moreover, conflicts of
interest may arise regarding such oil and gas activities, including decisions
regarding expenses and capital expenditures and the timing of the development
and exploitation of the properties. See "Business-Exploration and Production"
and "Certain Transactions-Investments with Affiliate."
Mr. Fox has agreed that as long as he is an officer or director of the Company
and for two years thereafter, he will not, directly or indirectly, participate
in any future oil and gas exploration or production activities with the Company
except and to the extent that the Company's independent and disinterested
directors deem it advisable and in the best interests of the Company to include
one or more additional participants, which participants may include entities
controlled by Mr. Fox. Additionally, Mr. Fox has agreed that as long as he is
an officer or director of the Company and for two years thereafter, he will not,
directly or indirectly, participate in any future oil and gas exploration or
production activity that may be in competition with exploration or production
activities of the Company except and to the extent that Mr. Fox has first
offered the Company the opportunity to participate in that activity and the
Company's independent and disinterested directors deem it advisable and in the
best interests of the Company not to participate in that activity. The terms of
any future transactions between the Company and its directors, officers,
principal stockholders or other affiliates, or the decision to participate or
not participate in transactions offered by the Company's directors, officers,
principal stockholders or other affiliates will be approved by a majority of the
Company's independent and disinterested directors. The Company's Board of
Directors will use such procedures in evaluating their terms as are appropriate
considering the fiduciary duties of the Board of Directors under Delaware law.
In any such review the Board may use outside experts or consultants including
independent legal counsel, secure appraisals or other market comparisons, refer
to generally available statistics or prices or take such other actions as are
appropriate under the circumstances. Although such procedures are intended to
ensure that transactions with affiliates will be on an arm's length basis, no
assurance can be given that such procedures will produce such result.
POSSIBLE ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION
AND BYLAWS
The Certificate of Incorporation and Bylaws of the Company include certain
provisions that may be deemed to have anti-takeover effects and may delay,
defer, or prevent a takeover attempt that a stockholder of the Company might
consider to be in the best interest of the Company or its stockholders. These
provisions authorize 5,000,000 shares of preferred stock that may be issued from
time to time by the Board of Directors of the Company with such powers, rights,
preferences and limitations as may be designated by the Board of Directors. The
Company's Bylaws provide that directors are elected in three classes for a
three-year term for each class. This provision limits the ability of a
controlling stockholder to change the composition of the Board of Directors for
at least two years. The Company also is subject to Section 203 of the Delaware
General Corporation Law ("Section 203") regulating corporate takeovers.
Section 203 prevents Delaware corporations from engaging, under certain
circumstances, in a business combination with any "interested stockholder" for
three years after the date such stockholder became an "interested
stockholder." See "Description of Capital Stock-Change of Control
Provisions."
14
SHARES ELIGIBLE FOR FUTURE SALE
The availability for sale of certain shares of Common Stock held by existing
stockholders of the Company after this Offering could adversely affect the
market price of the Common Stock. As of March 31, 1997, the Company had
outstanding 8,485,000 shares of Common Stock. In addition, the Company
currently has 284,171 shares reserved for issuance upon the exercise of options
granted under the Stock Incentive Plan and the Non-Employee Director Plan
(including options to purchase 15,500 shares of Common Stock granted subject to
stockholder approval of certain amendments to the Stock Incentive Plan and the
Non-Employee Director Plan at the annual meeting of stockholders scheduled for
June 1997), and 585,829 shares reserved for future issuance under the Stock
Incentive Plan and the Non-Employee Director Plan (including 250,000 shares of
Common Stock authorized for issuance under the Stock Incentive Plan by the Board
of Directors, subject to stockholder approval at the annual meeting of
stockholder scheduled for June 1997). Of the shares of Common Stock to be
outstanding following this Offering, the 322,464 shares being offered by the
Selling Stockholders hereby and the 2,760,000 shares sold in the Company's
initial public offering in October 1996 will be freely tradeable without
restrictions or additional registration under the Securities Act of 1933, as
amended (the "Securities Act"). The remaining shares were issued by the
Company in private transactions in reliance upon exemptions from registration
under the Securities Act. All of these shares will be eligible for resale
pursuant to Rule 144 under the Securities Act ("Rule 144") commencing August 1,
1997. Sales of a substantial amount of the currently outstanding shares of
Common Stock in the public market may adversely affect the market price of the
Common Stock and the ability of the Company to raise additional capital by
occurring at a time when it would be beneficial for the Company to sell
securities. See "Description of Capital Stock," "Shares Eligible for Future
Sale."
15
PRICE RANGE OF COMMON STOCK
The Common Stock was initially offered to the public on October 9, 1996 at a
price of $10.00 per share and is quoted on the Nasdaq National Market under the
symbol "MWHX." The following table sets forth quarterly high and low closing
sales prices as reported by the Nasdaq National Market for the periods
indicated.
HIGH LOW
---- ---
1996
Fourth quarter (since October 9th).......... 15/1/2/ 10/1/4/
1997
First quarter............................... 16/1/8/ 14/1/16/
As of April 23, 1997, the last sale price of the Common Stock was $13.25 as
reported on the Nasdaq National Market. As of April 14, 1997, there were 724
stockholders of record of the Common Stock.
DIVIDEND POLICY
The Company has never paid any cash dividends on its stock and anticipates
that, for the foreseeable future, it will continue to retain any earnings for
use in the operation of its business. Payment of cash dividends in the future
will depend upon the Company's earnings, financial condition, any contractual
restrictions, restrictions imposed by applicable law, capital requirements and
other factors deemed relevant by the Company's Board of Directors. The
Company's predecessor, MarkWest Partnership, has made partnership distributions
from time to time. See "Certain Transactions-Partnership Distributions."
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of Common Stock by the
Selling Stockholders.
16
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1996. This table should be read in conjunction with the
Consolidated Financial Statements and the notes thereto included elsewhere in
this Prospectus.
[Download Table]
(In thousands)
CURRENT PORTION OF LONG TERM DEBT:
West Shore Dow note........................................... $ 156
-------
Total current portion of long term debt 156
LONG TERM DEBT:
Working capital line of credit................................ 5,700
Revolver loan................................................. 4,200
MarkWest Resources revolver loan.............................. 1,176
West Shore Dow note........................................... 181
-------
Total long term debt....................................... 11,257
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 5,000,000 shares authorized;
0 shares issued and outstanding............................ -
Common stock, $.01 par value, 20,000,000 shares authorized;
8,485,000 shares issued and outstanding (1)................ 85
Additional paid-in capital.................................... 42,237
Retained Earnings............................................. 1,342
-------
Total stockholders' equity................................. 43,664
-------
Total capitalization.................................... $55,077
=======
--------------
(1) Excludes (i) 281,171 shares issuable upon exercise of stock options
outstanding as of the effective date of this offering (the "Offering") with a
weighted average exercise price of $8.55 per share under the Stock Incentive
Plan (including options to purchase an aggregate of 14,000 shares of Common
Stock granted by the Compensation Committee of the Board of Directors, subject
to stockholder approval of certain amendments to the Stock Incentive Plan at the
annual meeting of stockholders scheduled for June 1997); (ii) 568,829 shares
reserved for future issuance under the Stock Incentive Plan (including 250,000
shares of Common Stock authorized for issuance under the Stock Incentive Plan by
the Board of Directors, subject to stockholder approval of certain amendments to
the Stock Incentive Plan at the annual meeting of stockholders scheduled for
June 1997); (iii) 3,000 shares issuable upon exercise of stock options
outstanding as of the effective date of the Offering, each with an exercise
price of $10 per share, under the Company's 1996 Non-Employee Director Stock
Plan (including options to purchase an aggregate of 1,500 shares of Common Stock
approved by the Board of Directors, subject to stockholder approval of certain
amendments to the Non-Employee Director Plan at the annual meeting of
stockholders scheduled for June 1997); and (iv) 17,000 shares reserved for
future issuance under the Non-Employee Director Plan.
17
SELECTED CONSOLIDATED FINANCIAL AND OTHER INFORMATION
The selected consolidated statement of operations and balance sheet data set
forth below for each of the three years in the period ended December 31, 1996
and as of December 31, 1996 and 1995 are derived from, and are qualified by
reference to, audited consolidated financial statements of the Company included
elsewhere in this Prospectus. The selected consolidated statement of operations
and balance sheet data set forth below for the years ended December 31, 1993 and
1992 and as of December 31, 1994 , 1993 and 1992 are derived from, and are
qualified by reference to, audited consolidated financial statements of MarkWest
Partnership, the predecessor to the Company, not included in this Prospectus.
The selected consolidated financial information set forth below should be read
in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's Consolidated Financial
Statements and related notes thereto included elsewhere in this Prospectus.
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1996 1995 1994 1993 1992
------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
STATEMENT OF OPERATIONS:
Revenues.......................................................... $ 71,952 $ 48,226 $ 52,963 $ 55,871 $ 82,977
Income before taxes, extraordinary item and cumulative effect of
change in accounting............................................. 14,760 7,824 5,120 540 5,449
Income tax provision..............................................
Arising from reorganization..................................... 3,745 - - - -
Subsequent to reorganization.................................... 3,246 - - - -
Income before extraordinary item and cumulative effect of change in
accounting....................................................... 7,769 7,824 5,120 540 5,449
Extraordinary loss................................................ - (1,750) - - -
Cumulative effect of change in accounting........................ - - - - 877
Net income........................................................ 7,769 6,074 5,120 540 6,326
PRO FORMA INFORMATION (1):
Historical income before income taxes, extraordinary item and
cumulative effect of change in accounting........................ 14,760 7,824 5,120 540 5,449
Pro forma provision for income taxes............................. 5,609 2,937 1,424 228 2,060
Pro forma income before extraordinary item........................ 9,151 4,887 3,696 312 3,389
Pro forma earnings per share of common stock (2)................. 1.16 .85
Pro forma weighted average shares outstanding (2)............... 7,908 5,725
BALANCE SHEET DATA (as of December 31):
Total assets...................................................... $ 78,254 $ 46,896 $ 35,913 $ 40,668 $ 41,092
Long-term debt.................................................... 11,257 17,500 9,887 16,486 11,750
Partners' capital................................................. - 25,161 22,183 17,350 19,614
Stockholders' equity.............................................. 43,664 - - - -
OPERATING DATA:
Fee gas processed (MMbtu)......................................... 33,899,744 - - - -
NGL production (gallons).......................................... 94,908,534 92,239,000 99,735,000 93,355,000 88,616,000
Terminal throughput (gallons)..................................... 37,851,450 31,206,000 32,664,584 30,116,981 26,273,000
Michigan pipeline throughput (mcf)................................ 1,161,182 - - - -
------------------
(1) Prior to October 7, 1996, the Company was organized as a partnership,
MarkWest Partnership, and consequently, was not subject to income tax.
Effective October 7, 1996, the Company reorganized and the existing general
and limited partners exchanged 100% of their interests in MarkWest
Partnership for 5,725,000 shares of Common Stock. A pro forma provision for
income taxes has been presented for purposes of comparability as if the
Company had been a taxable entity for all periods presented.
(2) Pro forma weighted average shares outstanding at December 31, 1996
represents the weighted average of, for the period prior to the Company's
initial public offering in October 1996, the number of shares of Common
Stock issued in the initial public offering for which the net proceeds were
used to repay outstanding indebtedness and, for the period subsequent to the
initial public offering, the total number of shares of Common Stock
outstanding.
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to provide an analysis of the Company's
financial condition and results of operations, and should be read in conjunction
with the Company's Consolidated Financial Statements included elsewhere in this
Prospectus and "Selected Consolidated Financial and Other Information."
GENERAL
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 and has begun to
conduct strategic exploration for new natural gas sources for its processing and
fractionation activities.
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.
The majority of the Company's NGL production is purchased under keep-whole
contracts. Keep-whole contracts accounted for approximately 59% of the Company's
total revenues during 1996. In keep-whole contracts, the Company's principal
cost is the reimbursement to the natural gas producers for the energy extracted
from the natural gas stream and consumed as fuel during processing.
Profitability under such contracts is largely influenced by the margin between
NGL sales prices and the cost of such reimbursement, which is directly related
to the Company's cost for natural gas. In the event there is a contraction of
the margin between the two prices, the Company's profitability will decrease.
See "Risk Factors-Commodity Price Risks."
The Company intends to emphasize fee-based processing in the future to reduce
the fluctuations in margins inherent in processing natural gas under keep-whole
arrangements. In 1995, the Company began construction of a new NGL extraction
facility in Kenova, West Virginia, which became operational in January 1996.
This facility provides services to Columbia Gas and other gas producers in the
Appalachian Core Area. Services provided by the Kenova plant are based on a fee
for volumes processed. The fee contracts related to the Kenova plant are
expected to help offset margin fluctuations in the keep-whole contracts related
to the Siloam fractionation plant. The Kenova plant generated $3.5 million of
fee revenue during 1996. See "Business-Gas Processing Contracts and Natural Gas
Supply-Fee Contracts."
In recent years, a substantial majority of the gas received by the Company's
processing plants was received from major pipelines owned by third parties. From
time to time, such pipeline transmission systems have been partially shut down
for maintenance or repairs for up to four months. Partial or complete shut downs
of pipelines supplying the Company's processing plants could have a material
impact on the volumes of natural gas processed and on the volumes of NGLs
fractionated and sold, and correspondingly on the revenues realized by the
Company. See "Risk Factors-Availability of Natural Gas Supply" and "-Dependence
on Major Pipelines."
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. The Company previously engaged in third party trading and
brokerage activities, which significantly increased revenue. Because of minimal
gross margins and significant operating costs related to the brokerage and
trading business, the Company discontinued brokerage and trading in mid-1993.
The Company continues to
19
provide marketing activities in support of its company-owned facilities and
production and, with the acquisition of its Church Hill facility in 1995, the
Company currently operates two propane terminals.
The Company plans to increase its investment in its new Michigan Core Area
and the Company's results of operations in the future should be increasingly
impacted by the operations in the Michigan Core Area. The Company's assets in
the Michigan Core Area presently consist of the Basin Pipeline and a number of
processing contracts. In May 1996, the Company entered into several related
agreements providing for the further development of gathering, treatment and
processing facilities in western Michigan. The Company also plans to invest in
exploration and production activities in the Michigan Core Area and has agreed
to purchase a 17.5% working interest in the drilling program of Longwood. See
"Business-Natural Gas Processing and Related Services-Michigan Core Area." The
operation of certain assets acquired in the Michigan Core Area prior to their
purchase by the Company was not profitable. The Company's fiscal 1995 pro forma
net income, giving effect to the inclusion of Basin Pipeline with the Company,
would have been lower by $350,000. While the Company has entered into agreements
that the Company believes will increase the profitability of Basin Pipeline,
there can be no assurance that such operations will be profitable in the future
or that the Company's planned expansion efforts will be successful. See "Risk
Factors-Risks Relating to the Michigan Project."
The Company also plans to increase its investment in exploration and
production activities for new natural gas sources as a supporting function for
its processing services. Exploration and production activities are subject to
many risks, including the risk that no commercially productive reserves will be
found. There can be no assurance that its natural gas exploration efforts will
be productive or that the Company will recover all or a portion of its
investment in such activities. See "Risk Factors-Certain Risks of Oil and Gas
Exploration and Production Activities."
All statements other than statements of historical fact contained in this
Prospectus, including statements concerning the Company's financial position and
liquidity, results of operations, prospects for development of the Appalachian
Core Area and the Michigan Core Area, prospects for development of exploration
and production assets and other matters are forward looking statements. Although
the Company believes that the expectations reflected in such forward looking
statements are reasonable, no assurance can be given that such expectations will
prove correct. Factors that could cause the Company's results to differ
materially from the results discussed in such forward looking statements include
the risks described under "Risk Factors," such as commodity price risks, risks
involved in future supplies of natural gas, dependence on major pipelines,
general business risks in NGL marketing and exploration and production
activities, dependence on certain customers, intense competition, regulatory and
other risks in the natural gas processing and related services industry. All
forward looking statements in this Prospectus are expressly qualified in their
entirety by the cautionary statements in this paragraph.
SEASONALITY
The Company's results of operations fluctuate from quarter to quarter, due in
large part to the impact of seasonal factors on the prices and sales volumes of
NGLs and natural gas. The Company's principal NGL product, propane, is used
primarily as home heating fuel in the Company's marketing areas. 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. See "Risk Factors-Potential Variability
in Quarterly Operating Results."
20
RESULTS OF OPERATIONS
Year ended December 31, 1996 Compared to Year Ended December 31, 1995
Revenues. Plant revenue increased to $45.9 million from $33.8 million for the
year ended December 31, 1996 as compared to the year ended December 31, 1995, an
increase of $12.1 million or 36%. This increase is primarily a result of price-
related increases of all NGLs of $9.9 million, partially offset by a volume-
related decrease of $1.1 million. The volume decrease at the fractionation plant
at Siloam, which receives approximately 70% of its raw NGL mix from the Kenova
plant, was due principally to normal start-up delays in the transition from an
older processing facility at Kenova to the Company's new plant in the first
quarter of 1996. In addition, the new Kenova processing plant, which was placed
into service in January 1996, generated an additional $3.5 million of fee
revenue during 1996.
Terminal and marketing revenue increased to $22.9 million from $13.2 million
for the year ended December 31, 1996 as compared to the year ended December 31,
1995, an increase of $9.7 million, or 74%. This increase of $9.7 million was due
to a $5.4 million volume-related increase and a $4.3 million price-related
increase. Revenue from the West Memphis terminal accounted for $7.9 million of
the increase and the new terminal in Church Hill, Tennessee, which became
operational in the fall of 1995, accounted for $1.8 million of the increase. The
increase in revenues from the West Memphis terminal was due principally to
colder temperatures during the first and fourth quarters of 1996.
Oil and gas and other revenue increased to $3.0 million from $1.1 million for
the year ended December 31, 1996 as compared to the year ended December 31,
1995, an increase of $1.9 million, or 173%. This increase is principally due to
the addition of MarkWest Michigan revenue of $1.7 million, offset by a decrease
in miscellaneous revenue of approximately $100,000.
Costs and expenses. Plant feedstock purchases increased to $22.2 million from
$17.3 million for the year ended December 31, 1996 as compared to the year ended
December 31, 1995, an increase of $4.9 million or 28%. This increase is
principally due to price-related increases in raw materials.
Terminal and marketing purchases increased to $18.7 million from $11.9
million for the year ended December 31, 1996 as compared to the year ended
December 31, 1995, an increase of $6.8 million, or 57%. Increased propane prices
resulted in a $2.5 million increase, in addition to volume increases at West
Memphis and Churchill which resulted in increases of $2.9 million and $1.4
million, respectively.
Operating expenses increased to $7.0 million from $4.7 million for the year
ended December 31, 1996 as compared to the year ended December 31, 1995, an
increase of $2.3 million, or 49%. This increase is partially due to new
operations at both the Kenova and Church Hill facilities which commenced
operations in January 1996 and October 1995, respectively. Additional operating
expenses resulted from the commencement of MarkWest Michigan operations, which
began in May 1996.
Depreciation and amortization increased to $2.9 million from $1.8 for the
year ended December 31, 1996 as compared to the year ended December 31, 1995, an
increase of $1.1 million or 61%. This increase is due principally to
depreciation attributable to the Company's new Kenova plant and MarkWest
Michigan's pipeline and facilities.
Net interest expense. Net interest expense increased to $900,000 from
$400,000 for the year ended December 31, 1996 as compared to the year ended
December 31, 1995, an increase of $500,000 or 125%. This increase resulted
principally from an increase in average outstanding long-term debt of $12
million for 1996 compared to $8.1 million for 1995. Additionally, $301,000 of
interest was capitalized in conjunction with capital projects in 1995, compared
to only $27,000 of interest capitalized for 1996 projects.
21
Income tax expense. Income tax expense increased $7 million for the year
ended December 31, 1996, as compared to the year ended December 31, 1995, which
had $0 income tax expense. As a partnership, MarkWest Hydrocarbon Partners, Ltd.
(the Company's predecessor) was not subject to federal and state income tax, and
its income was taxed directly to its respective partners. The Company is a
taxable entity and therefore, recorded income tax expense in 1996.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Revenues. Plant revenue increased to $33.8 million from $33.1 million for the
year ended December 31, 1995 as compared to the year ended December 31, 1994, an
increase of $767,000, or 2%. This increase resulted principally from a $2.0
million increase due to an increase in average NGL sales prices, offset by a
$1.2 million decrease due to reduced volumes sold.
Terminal and marketing revenue decreased to $13.2 million from $13.7 million
for the year ended December 31, 1995 as compared to the year ended December 31,
1994, a decrease of $494,000 or 4%. This decrease principally resulted from the
expiration of the remaining third-party brokerage sales in 1994, including a net
volume-related decrease of $3.1 million offset by a net price-related increase
of $2.6 million.
Oil and gas and other revenue decreased to $1.1 million from $1.8 million for
the year ended December 31, 1995 as compared to the year ended December 31,
1994, a decrease of $755,000 or 41%. The decrease resulted principally from the
Company's sale in 1994 of substantially all of its San Juan Basin coalbed
methane properties and associated gathering systems. The Company sold its San
Juan Basin coalbed methane properties and associated gathering systems in 1994
because it had the opportunity to do so at a substantial profit, and, at that
time, such properties did not provide natural gas dedicated to the Company's
processing operations.
Gain on sale of oil and gas properties of $4.3 million in 1994 was due to the
sale of a majority of the Company's oil and gas producing assets for
approximately $10.1 million.
Costs and expenses. Plant feedstock purchases decreased to $17.3 million from
$21.6 million for the year ended December 31, 1995 as compared to the year ended
December 31, 1994, a decrease of $4.3 million or 20%. This decrease resulted
from the acquisition of feedstock quantities during off-peak periods, when
prices typically are lower, rather than at spot prices during peak season.
Terminal and marketing purchases increased to $11.9 million from $11.5
million for the year ended December 31, 1995 as compared to the year ended
December 31, 1994, an increase of $440,000 or 4%. This increase was due
principally to an increase in the average price per gallon of propane.
Operating expenses increased to $4.7 million from $4.4 million for the year
ended December 31, 1995 as compared to the year ended December 31, 1994, an
increase of $313,000 or 7%. The increase was attributable to the construction
and start up of the Kenova gas processing facility.
General and administrative expenses increased to $4.2 million from $3.7
million for the year ended December 31, 1995 as compared to the year ended
December 31, 1994, an increase of $535,000 or 15%. The increase was attributable
to administrative support activities related to the Michigan Project and the new
Kenova and Church Hill facilities.
Depreciation and amortization decreased to $1.8 million from $1.9 million for
the year ended December 31, 1995 as compared to the year ended December 31,
1994, a decrease of $188,000 or 10%. This decrease resulted principally from
lower plant carrying values due to reductions made in 1994.
22
Reduction in carrying value of assets of $3.0 million in 1994 was due to a
one-time charge reflecting the shutdown of the isomerization unit at the Siloam
plant and a charge for the write-down of other non-productive equipment.
Net interest expense. Net interest expense decreased to $400,000 from $1.7
million for the year ended December 31, 1995 as compared to the year ended
December 31, 1994, a decrease of $1.3 million or 79%. The decrease resulted
principally from lower average borrowing levels of approximately $16.0 million
in 1994 to $8.1 million in 1995, a decrease in interest rates, the
capitalization of approximately $301,000 of interest in connection with the
construction of the Kenova gas processing plant, and the early extinguishment of
a note that required the Company to pay additional interest averaging $400,000
per year based on the throughput of the Company's Siloam facility.
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, in 1994, the proceeds from the sale of certain oil and gas
properties, and in 1996, an initial public offering of equity. The Company's
principal uses of cash have been to fund operations and acquisitions.
The following summary table reflects comparative cash flows for the Company
for the years ended December 31, 1996, 1995 and 1994:
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
----- ---- ----
(IN THOUSANDS)
Net cash provided by operating activities............ $ 16,815 $ 5,436 $ 994
Net cash provided by (used in) investing activities.. $(17,516) $(12,610) $ 9,068
Net cash provided by (used in) financing activities.. $ 4,341 $ 2,467 $(5,886)
For the year ended December 31, 1996, net cash provided by operating
activities increased by $11.4 million over the year ended December 31, 1995.
This increase resulted primarily from an increase in revenue of $23.7 million,
which was offset by a $15.1 million increase in feedstock purchases, terminal
and marketing purchases, operating expenses and general and administrative
expenses.
Cash used in investing activities increased $4.9 million for the year ended
December 31, 1996, as compared to the year ended December 31, 1995, primarily
due to capital expenditures incurred during 1996 related to the Michigan
project.
Cash provided by financing activities increased $1.9 million for the year
ended December 31, 1996, as compared to the year ended December 31, 1995. This
increase resulted primarily from the initial public offering in October, which
was partially offset by payments made on long-term debt.
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, First Chicago NBD and N M Rothschild and Sons Limited. The agreement
is structured as a revolving facility, with a maximum borrowing base of $40.0
million as of December 31, 1996. Interest rates are based on either the agent
bank's prime rate 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 December
31, 1996 were $4.2 million. 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 December 31, 1996. Interest rates
are based on prime plus 1/4 %,
23
with maturity on June 30, 1998. Outstanding borrowings at December 31, 1996 were
$5.7 million. The working capital loan is secured by the Company's inventories,
receivables and cash.
Resources 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 million as of December 31, 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 December 31, 1996, $1.2 million was outstanding. This facility is secured
by substantially all of MarkWest Resources' assets. The Company has guaranteed
$1.0 million of this facility. All amounts outstanding under this facility were
paid off, effective February 19, 1997.
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
The Company expects to spend in excess of $20.0 million during 1997,
including approximately $12.0 million in the Michigan Core Area in order to
complete construction of a pipeline and a new liquids facility, with the balance
being allocated for projects in the Appalachian Core Area and exploration
projects. The Company anticipates that such capital investments will be funded
through cash flows and existing credit facilities. For the year ended December
31, 1996, the Company made capital expenditures totaling $9.8 million.
During 1996 and 1995, the Company expended $12.2 million in connection with
the construction of the Kenova plant. During 1995, the Company expended $213,000
for the construction and related costs for development of the Church Hill
terminal and storage facility, respectively.
During 1994, the Company expended $1.4 million for the expansion and upgrade
of existing facilities.
RISK MANAGEMENT ACTIVITIES
The Company's policy is to utilize risk management tools to reduce commodity
price risk. 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 Statement of Financial Accounting Standards,
("SFAS") No. 80, "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 December 31, 1996, 1995 and 1994, the Company did not hold any
material notional quantities of natural gas, NGL, or crude oil futures, swaps or
options. For the year ended December 31, 1996, the Company recognized a $1.1
million loss in operating income on the settlement of propane and natural gas
futures.
24
TERMINATION OF PARTNERSHIP TAX STATUS
The Company's immediate predecessor, MarkWest Partnership, was not subject
to federal and most state income tax as its income was taxed directly to its
respective partners. The financial data set forth in this Prospectus reflects
pro forma income tax provisions as if the Company had been taxed as a Subchapter
C corporation under the Internal Revenue Code during the relevant periods. Pro
forma income taxes giving effect to termination of MarkWest Partnership's tax
status resulted in an effective income tax rate of approximately 27.8%, 37.5%
and 38.0% in 1994, 1995 and 1996, respectively. See Note 9 of Notes to
Consolidated Financial Statements.
25
BUSINESS
GENERAL
The Company is engaged in natural gas processing and related services. The
Company, which has grown substantially since its founding in 1988, is the
largest processor of natural gas in Appalachia, according to statistics compiled
by LPG Almanac, an independent natural gas data source, and recently established
a venture to provide natural gas processing services in western Michigan. The
independent gas processing industry has grown rapidly in the last 10 years, and
the Company believes there will be substantial opportunities to grow its gas
processing operations within these existing core regions and in new markets. The
Company provides compression, gathering, treatment, and NGL extraction services
to natural gas producers and pipeline companies and fractionates NGLs into
marketable products for sale to third parties. The Company also purchases,
stores and markets natural gas and NGLs and has begun to conduct strategic
exploration for new natural gas sources for its processing activities. For the
year ended December 31, 1996, the Company produced approximately 95 million
gallons of NGLs and marketed approximately 137 million gallons of NGLs.
The Company's processing and marketing operations are concentrated in two
core areas which are significant gas producing basins: the southern Appalachian
region of eastern Kentucky, southern West Virginia, and southern Ohio (the
Appalachian Core Area), and western Michigan (the Michigan Core Area). At the
Company's processing plants, natural gas is treated to remove contaminants, and
NGLs are extracted and fractionated into propane, normal butane, isobutane and
natural gasoline. The Company then markets the fractionated NGLs to refiners,
petrochemical companies, gasoline blenders, multistate and independent propane
dealers, and propane resellers. In addition to processing and NGL marketing, the
Company engages in terminalling and storage of NGLs in a number of NGL storage
complexes in the central and eastern United States, and operates propane
terminals in Arkansas and Tennessee.
During 1996, the Company took several key steps intended to expand its
operations. In January 1996, the Company commissioned a new natural gas liquids
extraction plant in Wayne County, West Virginia. See "-Natural Gas Processing
and Related Services-Appalachian Core Area-NGL Extraction-Kenova Plant." In May
1996, the Company established West Shore, a venture in western Michigan, which
the Company will develop as the Michigan Core Area. The Company has identified
opportunities, and has entered into agreements, to expand its gas gathering
operations and to commence gas processing operations in the Michigan Core Area
in the near future. See "-Natural Gas Processing and Related Services-Michigan
Core Area."
INDUSTRY OVERVIEW
Natural gas processing and related services represent a major segment of the
oil and gas industry, providing the necessary service of converting natural gas
into marketable energy products. When natural gas is produced at the wellhead,
it must be gathered, and in some cases compressed or pressurized, for
transportation via pipelines (described as gathering services) to gas processing
plants. The processing plants remove water vapor, solids and other contaminants,
such as hydrogen sulfide or carbon dioxide in the natural gas stream that would
interfere with pipeline transportation or marketing of the gas to consumers and
also extract the NGLs from the natural gas (described as treatment and
extraction services, respectively). The NGLs are then subjected to various
processes that cause the NGLs to separate, or fractionate, into marketable
products such as propane, normal butane, isobutane and natural gasoline
(described as fractionation services).
Over the past 10 years, independent natural gas processing has experienced
significant growth. In 1995, independent natural gas processing companies
accounted for 319,000 barrels per day of NGL production, or approximately 23% of
total U.S. NGL production by the 20 largest U.S. natural gas
26
producers, compared to less than 4% of such producers' NGL production in 1985.
The increase in the independent natural gas processing industry has resulted in
part from the divestiture by major energy companies and interstate pipeline
companies of their gas gathering and processing assets and the decision by many
such companies to outsource their gas processing needs.
An important factor expected to contribute to the continuing growth of
independent processing companies is the upward trend of natural gas consumption
and production in the United States. Natural gas consumption in the United
States has increased from 16.2 Tcf per year in 1986 to 21.3 Tcf per year in
1995, and is forecast to increase to 24.0 Tcf per year by the year 2000. The
number of natural gas rigs in service also has recently increased. From June
1995 to June 1996, the number of natural gas rigs in service rose from 340 to
464. This natural gas rig count is the highest in over four years, and as a
percentage of total oil and gas rigs in service, the highest in the last decade.
Many newly discovered natural gas wells and fields will require access to
gathering and processing infrastructure, providing significant opportunities for
growth-oriented independent natural gas processing companies such as MarkWest.
STRATEGY
The Company's primary objective is to achieve sustainable growth in cash
flow and earnings by increasing the volume of natural gas that it gathers and
processes and the volume of NGLs that it produces and markets. To achieve this
objective, the Company employs a number of related strategies.
Geographic Core Areas. The Company emphasizes opportunities for investment
in geographic core areas where there is significant potential to achieve a
position as the area's dominant natural gas processor. The Company believes that
growth in core areas can be achieved by developing processing facilities both in
areas where a large energy or pipeline company requires processing services and
in areas where there is significant potential for natural gas production but not
significant processing capacity.
Long-Term Strategic Relationships. The Company seeks strategic relationships
with the dominant pipelines and gas producers in each area in which the Company
operates. In the Appalachian Core Area, MarkWest owns three processing plants
that process natural gas or NGLs dedicated by Columbia Gas. In its Michigan Core
Area, the Company has entered into gas supply and processing relationships with
Shell and MPC.
NGL Marketing. The Company strives to maximize the downstream value of its
gas and liquid products by marketing directly to distributors and resellers.
Particularly in the area of NGL marketing, the Company minimizes the use of
third party brokers and instead supports a direct marketing staff focused on
refiners, petrochemical companies, gasoline blenders, and multistate and
independent propane dealers. Additionally, the Company uses its own truck and
tank car fleet, as well as its own terminals and storage facilities, to provide
supply reliability to its customers. All of these efforts have allowed the
Company to maintain pricing of its NGL products at a premium to Gulf Coast spot
prices.
Cost-Efficient Operations. The Company seeks a competitive advantage by
utilizing in-house processing and operating expertise to provide lower-cost
service. To provide competitive processing services, the Company emphasizes
facility design, project management and operating expertise that permits
efficient installation and operation of its facilities. The Company has in-house
engineering personnel who oversee the design and construction of the Company's
processing plants and equipment.
Acquisitions. The Company believes that there are significant opportunities
to make strategic acquisitions of gathering and processing assets because of the
divestiture by major energy companies and interstate pipeline companies of their
gas gathering and processing assets. The Company pursues acquisitions that can
add to existing core area investments or can lead to new core area investments.
27
Exploration as a Tool to Enhance Gas Processing. The Company maintains a
strategic gas exploration effort that is designed to permit the Company to gain
access to additional natural gas supplies within its existing core areas and to
gain foothold positions in production regions that the Company might develop as
new core processing areas.
NATURAL GAS PROCESSING AND RELATED SERVICES
The Company's processing operations are located in its Appalachian Core Area
consisting of eastern Kentucky, southern West Virginia, and southern Ohio, and
its Michigan Core Area consisting of the area of western Michigan north of Grand
Rapids and south of Traverse City. The Company's operations in Appalachia date
from the Company's founding in 1988. At present, the Company is the largest
processor of natural gas in Appalachia based on the volume of natural gas
processed at its owned facilities, including those it leases to third parties.
The Company began development of the Michigan Core Area in June 1996.
APPALACHIAN CORE AREA
The Company's operations in Appalachia consist of two extraction facilities,
a fractionation plant, an NGL pipeline, rail terminals and related processing
assets. Since 1988, when the Company purchased its Siloam fractionation plant
(see "-Fractionation"), the volume of natural gas processed by the Company in
the Appalachian Core Area has grown to approximately 170 MMcf/D, and the
Company's NGL production has grown to approximately 275 MGal/D.
The Company believes that this region has favorable supply and demand
characteristics. The Appalachian Core Area is geographically situated between
the TET pipeline to the north and the Dixie pipeline to the south. In addition
to Appalachia, the TET pipeline serves the upper midwestern and eastern United
States, and the Dixie pipeline serves the southeast. Because the areas directly
served by these two pipelines are experiencing significant population growth,
the demand for NGL products exceeds the capacity of these two lines. The demand
for propane from the TET and Dixie pipelines is such that the pipelines allocate
supply to purchasers during peak wintertime periods, thereby limiting the
available supply to Appalachia. There are few sources of propane to the
Appalachian Core Area other than the Company's facilities, the TET and Dixie
pipelines, and propane shipped by rail cars from other producing areas. In
addition, the Appalachian mountain range limits access to the Dixie pipeline by
distributors in the Appalachian Core Area. These factors enable producers in
Appalachia (principally MarkWest, Ashland and CNG Transmission Corporation) to
price their products (particularly propane) at a premium to Gulf Coast spot
prices during times of supply shortages from other sources, especially during
winter high demand periods. The underground storage caverns at the Siloam
location allow the Company to store NGLs in anticipation of the winter months
when peak demand periods often lead to higher product prices and provide local
consumers with needed wintertime supplies. The Company also believes that there
are significant growth opportunities for existing gas production in the area and
the Company's capacity to process natural gas streams from areas that are not
currently processed.
NGL EXTRACTION. The Company currently owns two NGL extraction plants in
Appalachia, one which it operates and one which it currently leases to Columbia
Gas. Extraction plants remove NGLs, as well as water vapor, solids and other
contaminants, such as hydrogen sulfide or carbon dioxide, contained in the
natural gas stream. The Company provides NGL extraction services under a fee-
based arrangement.
Kenova Plant. The Company began construction of its Kenova natural gas
liquids extraction plant, located in Wayne County, West Virginia, in 1995. The
Kenova plant was commissioned in January 1996 and replaced a 1958 extraction
facility owned and operated by Columbia Gas. Because the Company owns and
operates this new facility, which is situated on a main gathering line of
Columbia Gas, the Company will generate fee revenues related to processing
operations. In addition, the Company
28
believes that this new facility will generate greater NGL recovery from natural
gas, reduce downtime for maintenance, and significantly reduce fuel costs
compared to the replaced facility. Construction and related costs for
development of the Kenova plant were approximately $12.2 million. To date,
substantially all of Kenova's processing throughput has been obtained from
Columbia Gas. See "-Gas Processing Contracts and Natural Gas Supply."
Substantially all of the Kenova plant's extracted NGLs are transported via the
Company's 38.5 mile high pressure pipeline to its Siloam fractionation facility
located in South Shore, Kentucky, for separation into marketable NGL products.
The Company has contracted with Columbia Gas to purchase an additional 4.6
acres adjacent to the Kenova plant from Columbia Gas during the second quarter
of 1997 for a purchase price of $400,000. The Company will demolish the old
facility on such property, thereby affording it the opportunity to expand its
operations at the Kenova plant in the future.
Boldman Plant. The Company constructed the Boldman natural gas liquids
extraction plant, located in Pike County, Kentucky, in 1991. Construction and
related costs for development of the Boldman plant were approximately $4.0
million. The Boldman plant is currently leased to, and operated by, Columbia
Gas. Under such lease, the Company receives a monthly rental fee ranging from
$40,000 to $47,000. Columbia Gas has dedicated all NGLs recovered at the Boldman
plant to the Company's Siloam facility for fractionation under a contract which
runs through December 31, 2003. Production from the Boldman plant is transported
via tanker trucks to the Siloam plant for processing.
As a part of the Columbia Abandonment Order, the Company agreed to take
over operations of the Boldman plant. As a result, the Company will own and
operate the Boldman plant and enter into fee-based and keep-whole processing
contracts directly with the NGL producers that utilize the Boldman Plant. The
Company and Columbia Gas have signed a "Points of Agreement" and are currently
negotiating a definitive agreement to complete the assumption of operations at
the Boldman plant by the Company. Execution of a definitive agreement is
anticipated in the third or fourth quarter of 1997.
NGL Pipeline. The Company owns a 38.5 mile, high pressure steel pipeline
that connects its Kenova processing plant to the Company's Siloam fractionation
facility. The pipeline currently delivers approximately 70 million gallons per
year to the Siloam facility from the Kenova processing plant. Because this
pipeline was originally designed to handle a high pressure ethane-rich stream,
it has the capacity to handle almost twice as much product if it becomes
available.
FRACTIONATION. The Company's fractionation services in the Appalachian
Core Area are performed at its Siloam fractionation plant located in South
Shore, Kentucky. At this facility, extracted NGLs are subjected to various
processes that cause the natural gas to separate, or fractionate, into separate
NGL products, including propane, isobutane, normal butane and natural gasoline.
The Siloam facility is one of only two fractionation plants in the Appalachian
Core Area producing over 6,500 barrels, or 275,000 gallons, per day of NGLs.
Substantially all of the Company's fractionation services in its Appalachian
Core Area are provided under keep-whole contracts with Columbia Gas. See "-Gas
Processing Contracts and Natural Gas Supply-Keep-Whole Contracts."
The Company acquired the Siloam plant in April 1988 from Columbia Gas for
$3.5 million. During 1989, the Company began an approximately $11.0 million
expansion program at the Siloam plant. The expansion program, among other
enhancements, included the construction of additional storage facilities,
improvements to existing electrical and control systems and the addition of
loading facilities. The expansion was fully operational in early 1991.
Approximately 77% of the fractionation throughput at the Siloam plant comes
from the production of the Company's Kenova and Boldman plants. The Company also
makes purchases of NGLs from third
29
party processors and of additional production from Columbia Gas. The Company's
most significant purchase contract for NGLs during 1996 was with Columbia Gas.
In addition to the approximately 9.0 MMGal per year of Columbia Gas NGL
production from the Boldman plant, Columbia Gas dedicated approximately 17.0
MMGal per year from its Cobb, West Virginia extraction plant. As a part of the
Columbia Abandonment Order, Columbia Gas agreed to sell the Cobb plant to the
Company for a purchase price of $.9 million (the plant's net book value). The
Company and Columbia Gas have signed a "Points of Agreement" and are currently
negotiating a definitive agreement to complete the sale of the Cobb plant to the
Company. Execution of a definitive agreement is anticipated in the third or
fourth quarter of 1997. In 1996, pursuant to the Columbia Gas purchase
agreements, the Company was committed to purchase substantially all of the NGLs
produced at Columbia Gas' own processing plants, as well as those produced by
the Company for Columbia Gas. Under these contracts, the Company was required to
compensate Columbia Gas for the BTU energy equivalent of NGLs and fuel removed
from the natural gas as a result of processing. In 1996, the Company's cost for
purchases under these contracts was $23.0 million, and such purchases
represented 95% of all NGLs fractionated by the Company. As a result of the
Columbia Abandonment Order and upon the execution of definitive agreements
(anticipated to be in late 1997), the Company will own and operate the Kenova,
Boldman and Cobb plants and enter into fee-based and keep-whole processing
contracts directly with the producers that utilize such plants. The Company
is currently negotiating an interim financial arrangement with Columbia Gas
whereby Columbia Gas would continue to operate the Cobb and Boldman plants on
behalf of the Company during the negotiation of definitive agreements and the
Company would reimburse Columbia Gas for direct operating costs during such time
period. The Company is currently negotiating a Gas Processing Agreement with
Columbia Gas that will extend the processing term through 2009.
MICHIGAN CORE AREA
The Company was attracted to the Michigan Core Area because of the
potential for providing gathering and processing services in the area.
Substantially all of the natural gas in the Michigan Core Area is sour and,
therefore, has limited outlets for processing. West Shore was formed in May 1996
and is governed by an operating agreement between the Company's MarkWest
Michigan, Inc. subsidiary and MEC. West Shore is a venture dedicated to natural
gas gathering, treatment, processing and NGL marketing in Manistee, Mason and
Oceana Counties in Michigan. As a result of availability of large shut-in sour
gas wells and the expected increase in drilling by producers who previously had
no outlet for sour gas production in the area, the Company entered into several
related agreements in May 1996 providing for the development of gathering,
treatment and processing facilities in western Michigan. Through West Shore, the
Company expects to be able to gather and process this sour gas.
The most significant assets of West Shore in May 1996 included the Basin
Pipeline, a 31-mile sour gas pipeline which is situated in Manistee and Mason
Counties, rights to obtain a sour gas treatment plant located in Manistee
County, and various agreements that dedicate natural gas production to West
Shore for processing. Until completion of the second phase of the Michigan
Project, West Shore's revenues will be derived from fees generated by gathering
of natural gas on the Basin Pipeline and by treatment of sour gas. Following
completion of the second phase, revenues will be derived from fees generated by
gathering, treatment and extraction and fractionation of NGLs.
The Michigan Project is completing its first phase of development, which
includes construction of a two-mile pipeline from one of West Shore's main
gathering locations to a treatment plant owned and operated by Shell in Manistee
County. The purpose of this pipeline is to deliver sour gas to Shell for
treatment. The first phase also includes the construction of a 30-mile pipeline
that will connect the Slocum natural gas well owned by MPC in Oceana County to
the Basin Pipeline. Pending approval by the Michigan Public Service Commission
of this pipeline as part of the Basin Pipeline, MPC will own, and West Shore
will operate for MPC, this connecting pipeline. The Slocum well has estimated
reserves of approximately 13 Bcf, and estimated initial well deliverabilities of
approximately 8 MMcf/D. The Company currently expects to complete the first
phase of the Michigan Project in the first half of 1997. The first phase of the
Michigan Project will cost approximately $11.0 million.
30
The second phase of the Michigan Project includes construction of a two-
mile residue return line from the Shell treatment plant to the natural gas
transmission line of Michigan Consolidated Gas Company ("MichCon") and
construction of approximately 18 miles of pipeline to connect natural gas wells
in southern Oceana County, including the Claybanks wells owned by MPC with
estimated reserves of approximately 7.5 Bcf and estimated initial well
deliverabilities of approximately 8 MMcf/D, to the Basin Pipeline. The second
phase will also include the construction of an NGL extraction and fractionation
facility at the site of the Shell treatment plant. The facility will be owned by
West Shore and operated by Shell. The Company currently expects that the second
phase of the Michigan Project will be completed by the end of the fourth quarter
of 1997. The second phase of the Michigan Project is expected to cost
approximately $9.0 million.
When the first two phases of the Michigan Project are complete, the Company
will own a 60% interest in West Shore. As of March 31, 1997, the Company had
made contributions of approximately $13.4 million to, and owned a 55% interest
in, West Shore.
Upon completion of the first two phases of development, West Shore's
treating and processing operations are expected to have 30 MMcf/D of capacity
and approximately 25 MMcf/D of dedicated production from currently drilled and
proven wells. With a current pipeline capacity of 35 MMcf/D and deliverabilities
of individual wells commonly exceeding 5 MMcf/D, the Company expects that demand
at West Shore could exceed capacity. As a result, the Company is already
planning to expand West Shore to increase capacity in the second phase of the
Michigan Project. There can be no assurance, however, that demand for West
Shore's services will reach the levels anticipated by the Company.
In April 1997, Domain and EnCap informed the Company that they had
purported to transfer their interests in MEC and MPC to Energy Acquisition Corp.
The Company believes that the transfer of the interests in MEC would be in
violation of the arrangements for the establishment and operation of West Shore,
and is, therefore, invalid. Accordingly, the Company has not recognized the
purported transfer and has commenced arbitration proceedings pursuant to the
Participation, Ownership and Operating Agreement for West Shore. The Company
does not anticipate any change in the operation or management of West Shore,
regardless of whether or not the transfer of interests in MEC is effective.
Moreover, the purported transfer of the interests in MPC has no effect on the
Company's gathering, treatment and processing arrangements with MPC.
Availability of Natural Gas Supply. West Shore has exclusive gathering,
treatment and processing agreements with MPC covering the natural gas production
from all wells and leases presently owned by MPC within Manistee, Mason and
Oceana Counties, Michigan. In addition, West Shore has a gathering, treating and
processing agreement with Oceana Acquisition Company ("Oceana") covering the
production from the initial phase of Oceana's drilling program in Oceana County,
Michigan. West Shore also is negotiating an agreement with Longwood that may
result in the dedication of its natural gas production to the pipeline,
treatment and processing facilities of West Shore.
The Company believes that the expansion of the Basin Pipeline southward
will provide an outlet for sour gas production in the area and may stimulate new
drilling activity in the area. Both MPC and Longwood are considering initiating
drilling programs in the area, to begin in early 1997. Production from the MPC
program has been dedicated to the Basin Pipeline, and West Shore is negotiating
with Longwood for dedication of its production to the Basin Pipeline. MarkWest
Resources has agreed to purchase a 17.5% working interest in the Longwood
drilling program. MarkWest also has had discussions with other exploration
companies that are evaluating possible exploration and production activities in
the corridor to be serviced by the expanded Basin Pipeline. MarkWest currently
is evaluating various drilling programs and expects to participate actively in
drilling wells in the area.
31
The natural gas streams to be dedicated to West Shore under these
agreements will primarily be produced from an extension of the Northern Niagaran
Reef trend in western Michigan. To date, over 2.5 trillion cubic feet equivalent
of natural gas has been produced from the Northern Niagaran Reef trend.
Substantially all of the natural gas produced from the western region of this
trend, however, is sour. While several successful large wells were developed in
the region, the natural gas producers lacked adequate gathering and treatment
facilities for sour gas, and development of the trend stopped in northern
Manistee County. With the sour gas pipeline, treatment and processing facilities
and capacity to be provided by West Shore, the Company believes there could be
increased development in the region. In addition, the Company believes that
improvements in seismic technology may increase exploration and production
efforts, as well as drilling success rates.
Shell Treatment and Processing Agreement. In addition to the establishment
of West Shore, the Michigan Project includes a number of related agreements. To
provide treatment for natural gas dedicated to West Shore, West Shore has
entered into a gas treatment and processing agreement with Shell. Currently, the
agreement provides West Shore with 30 MMcf/D of gas treatment capacity at
Shell's facility in Manistee County, Michigan. The agreement also permits West
Shore to cause the expansion of Shell's treatment facilities. In addition, the
agreement grants West Shore the right to construct and install an NGL processing
plant at the site of Shell's treatment plant. Following completion of the new
processing plant, Shell will act as contract operator for West Shore.
GAS PROCESSING CONTRACTS AND NATURAL GAS SUPPLY
The Company historically has processed natural gas under two types of
arrangements: keep-whole and fee-based processing. While the Company has been
heavily dependent upon keep-whole contracts in the past, it intends to pursue
fee-based processing in the future to reduce the fluctuations in margins
inherent in processing natural gas under keep-whole arrangements.
Keep-Whole Contracts. Under keep-whole contracts, the principal cost is the
reimbursement to the natural gas producers for the BTUs extracted from the gas
stream in the form of liquids or consumed as fuel during processing. In such
cases, the Company creates operating margins by maximizing the value of the NGLs
extracted from the natural gas stream and minimizing the cost of replacement of
BTUs. While the Company maintains programs to minimize the cost to deliver the
replacement of fuel and shrinkage to the natural gas supplier, the Company's
margins under keep-whole contracts can be negatively affected by either
decreases in NGL prices or increases in prices of replacement natural gas.
Approximately 59% of the Company's total revenue during 1996 resulted from keep-
whole contracts. See "Risk Factors-Commodity Price Risks."
Fee Contracts. The Company has entered into a fee-based contract with
Columbia Gas, which expires December 31, 2010, pursuant to which Columbia Gas
has agreed to use its best efforts to deliver a minimum of 115 MMcf/D of natural
gas to the Company's Kenova processing plant, and the Company has agreed to
process all natural gas made available by Columbia Gas to the Company at the
Kenova plant. In 1996, deliveries by Columbia Gas to the Kenova plant under this
contract represented approximately 95% of all throughput processed by the
Company. Under the agreement, Columbia Gas pays the Company a fee per MMbtu of
processed natural gas. The terms of the contract provide for automatic two-year
extensions after 2010, unless either party gives notice to terminate the
contract at least one year in advance of an expiration date. In its Michigan
Core Area, West Shore has entered into a fee-based contract with MPC, which
expires December 2016, pursuant to which MPC has agreed to use its best efforts
to deliver all of its natural gas to West Shore's pipeline and treating
facilities. Under the agreement, MPC pays West Shore a fee per MMbtu of
transported and treated natural gas. Approximately 5% of the Company's total
revenues during 1996 resulted from fee-based contracts.
Percent-of-Proceeds Contracts. Under percent-of-proceeds contracts, the
Company retains a portion of NGLs and/or natural gas as compensation for the
processing services provided. Operating revenues earned by the Company under
percent-of-proceeds contracts increase proportionately with the price of
32
NGLs and natural gas sold. While historically the Company has not entered into
percent-of-proceeds contracts, recently the Company offered to process natural
gas for certain suppliers in the Appalachian Core Area under percent-of-proceeds
arrangements.
The Company and Columbia Gas are in the process of negotiating fee and/or
percent-of-proceeds arrangements whereby the Company will process natural gas
directly for third party shippers who utilize Columbia Gas' pipeline and
distribution system. In addition, part of the fee structure for transporting and
treating natural gas in the Michigan Core Area includes retaining a portion of
extracted NGLs.
SALES AND MARKETING
The Company attempts to maximize the value of its NGL output by marketing
to distributors, resellers, blenders, refiners and petrochemical companies. The
Company minimizes the use of third party brokers and instead supports a direct
marketing staff focused on multistate and independent dealers. Additionally, the
Company uses its own truck and tank car fleet, as well as its own terminals and
storage facilities, to enhance supply reliability to its customers. All of these
efforts have allowed the Company to maintain premium pricing of its NGL products
compared to Gulf Coast spot prices.
Substantially all of the Company's revenue is derived from sales of NGLs,
particularly propane. Revenues from NGLs represented 91%, 98% and 88% of total
revenues, excluding gains on sale of property, in each of 1996, 1995 and 1994,
respectively. The Company markets and sells NGLs to numerous customers,
including refiners, petrochemical companies, gasoline blenders, multistate and
independent propane distributors and propane resellers. The majority of the
Company's sales of NGLs are based on spot prices at the time the NGLs are sold.
Spot market prices are based upon prices and volumes negotiated for short terms,
typically 30 days.
EXPLORATION AND PRODUCTION
The Company maintains a strategic gas exploration effort intended to permit
the Company to gain a foothold position in production areas that have strong
potential to create demand for its processing services. The Company, through its
MarkWest Resources subsidiary, currently owns interests in several exploration
and production assets. Such assets include the following:
. A 49% undivided interest in two separate exploration and production
projects in La Plata County, Colorado, situated on the Fruitland Formation
coal seam. One project currently contains nine coal seam wells that produce
approximately 2,300 Mcf/D of natural gas. It is estimated that full
development of these two projects will cost the Company approximately $3.2
million through the end of 1997.
. A 5.4% working interest in a 66 well drilling program operated by Conley
Smith, Denver, Colorado. The majority of these well sites are in Oklahoma,
Nevada, Kansas and Texas. MarkWest believes it may have a future
opportunity to provide its processing expertise to Conley Smith in the
areas with successful drilling sites. There can be no assurance, however,
that Conley Smith will use the Company's processing services.
. A 25% working interest in a 31,000 acre project to be developed in the
Piceance Basin of Colorado. The project includes both the exploration for
conventional natural gas and the development of the Cameo Coal Formation
utilizing tax credit qualified existing well bores. While there can be no
assurance that these projects will generate substantial natural gas
volumes, MarkWest believes that this area could generate increased demand
for processing services.
33
. A 17.5% working interest in the drilling program of the Niagran Reef Trend
in the Michigan Core Area. Longwood intends to conduct a 25 square mile
three-dimensional seismic survey in the area, and thereafter acquire
acreage and conduct drilling activities. See "-Natural Gas Processing and
Related Services-Michigan Core Area."
PROPERTIES
The following table provides information concerning the Company's principal
gas processing plants and gathering facilities.
[Enlarge/Download Table]
YEAR NGL
ACQUIRED GAS PRODUCTION
OR PLACED THROUGHPUT THROUGHPUT THROUGHPUT
INTO SERVICE CAPACITY (MCF/D)/A,B/ (GAL/YEAR)/B/
------------ ------------- ------- ----------
PROCESSING PLANTS
Siloam Fractionation Plant,
South Shore, KY (1).................... 1988 360,000 Gal/D NA 94,909,000
Boldman Extraction Plant,
Pike County, KY (2).................... 1991 70,000 Mcf/D 55,000 8,461,000
Kenova Extraction Plant,
Wayne County, WV (3)................... 1996 120,000 Mcf/D 115,000 65,443,000
PIPELINES
38.5-mile Kenova-Siloam NGL pipeline
Wayne County, WV to
South Shore, KY (4).................... 1988 350,000 Gal/D NA 65,443,000
31-mile sour gas gathering line
Manistee County, MI (3)................ 1996 35,000 Mcf/D 5,500 NA
[Enlarge/Download Table]
YEAR ACQUIRED STORAGE
OR PLACED CAPACITY ANNUAL SALES
INTO SERVICE (GAL) (GAL/YEAR)/B/
------------ ---------- ----------
TERMINAL AND STORAGE
Siloam Fractionation Storage
South Shore, KY (1).............................. 1988 14,000,000 94,909,000
Terminal and Storage
West Memphis, AR (5)............................. 1992 2,500,000 33,798,000
Terminal and Storage
Church Hill, TN (6).............................. 1995 240,000 4,053,000
/a/Mcf/D = cubic feet per day
/b/For the year ended December 31, 1996
(1) At the Siloam Fractionation Plant facility, extracted NGLs are subjected to
various processes that cause the natural gas to separate, or fractionate,
into separate NGL products, including propane, isobutane, normal butane and
natural gasoline. The Siloam plant, situated on approximately 290 Company-
owned acres, also has over 14.0 million gallons of on-site product storage,
including an
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8.4 million-gallon propane underground storage cavern, a 3.1 million-gallon
butane underground storage cavern, and approximately 3.0 million gallons of
above-ground storage tanks. The Siloam plant is served by the following
modern loading and unloading facilities: four automated truck loading docks
for propane/butane; two automated truck unloading docks for mixed feedstock;
one automated bottom-loading dock for natural gasoline; truck scales; a rail
siding capable of holding over 20 railcars and simultaneously loading or
unloading eight cars; and barge facilities for the loading of natural
gasoline and butanes.
(2) The Boldman plant is a refrigeration plant that extracts NGLs by cooling
natural gas down to minus 20 degrees Fahrenheit. The plant includes two
60,000-gallon product storage tanks and truck-loading facilities. The
Boldman plant is currently leased to, and operated by, Columbia Gas. See
"Natural Gas Processing and Related Services -Appalachian Core Area."
(3) See "Natural Gas Processing and Related Services."
(4) The Company owns a 38.5-mile, high-pressure steel pipeline that connects its
Kenova processing plant to the Company's Siloam fractionation facility.
Because the liquids pipeline was originally designed to handle a high-
pressure ethane-rich stream, it has the capacity to handle almost twice as
much product if it becomes available.
(5) At the West Memphis terminal (a seven-acre propane terminal and storage
facility), the Company maintains 45 pressurized storage tanks that have a
storage capacity of just over 2.5 million gallons of NGLs. The terminal has
an automated loading facility with two loading docks for propane, operating
24 hours per day, seven days per week. The West Memphis terminal is capable
of serving railcar and trucking transportation. An adjoining Union Pacific
rail siding holds up to 17 railcars and has 6 loading/unloading stations.
The terminal is located approximately 1/4 mile from the Mississippi River
and is secured by a long-term lease held by the Company.
(6) The Company leases and operates a propane terminal in Church Hill,
Tennessee, which principally receives product by rail and redelivers the
product to dealers and resellers by truck. The Church Hill terminal has
240,000 gallons of pressurized storage, an automated truck loading station
and a rail siding that can hold four cars and has two unloading stations.
Executive Offices. MarkWest occupies approximately 15,000 square feet of
space at its executive offices in Denver, Colorado under a lease which has been
extended through September 1997. The Company is currently negotiating a contract
for future office space which may include the purchase of a small office
building on commercially reasonable terms.
COMPETITION
The Company faces intense competition in obtaining natural gas supplies for
its gathering and processing operations, in obtaining processed NGLs for
fractionation, and in marketing its products and services. The Company's
principal competitors include major integrated oil and gas companies such as
Ashland and Amoco Oil Co.; major interstate pipeline companies such as CNG
Transmission Corporation; NGL processing companies such as Natural Gas
Clearinghouse; and national and local gas gatherers, brokers, marketers and
distributors of varying sizes, financial resources and experience. Many of the
Company's competitors, such as major oil and gas and pipeline companies, have
capital resources and control supplies of natural gas substantially greater than
those of the Company. Smaller local distributors may enjoy a marketing advantage
in their immediate service areas.
The Company competes against other companies in its natural gas processing
business both for supplies of natural gas and for customers to which it sells
its products. Competition for natural gas
35
supplies is based primarily on location of gas gathering facilities and gas
processing plants, operating efficiency and reliability and ability to obtain a
satisfactory price for products recovered. Competition for customers is based
primarily on price, delivery capabilities, and maintenance of quality customer
relationships.
The Company's fractionation business competes against other fractionation
facilities that serve local markets. Competitive factors affecting the Company's
fractionation business include proximity to industry marketing centers and
efficiency and reliability of service.
In marketing its products and services, the Company has numerous
competitors, including interstate pipelines and their marketing affiliates,
major producers, and local and national gatherers, brokers, and marketers of
widely varying sizes, financial resources and experience. Marketing competition
is primarily based upon reliability, transportation, flexibility and price.
OPERATIONAL RISKS AND INSURANCE
The Company's operations are subject to the usual hazards incident to the
exploration for and production, transmission, processing and storage of natural
gas and NGLs, such as explosions, product spills, leaks, emissions and fires.
These hazards can cause personal injury and loss of life, severe damage to and
destruction of property and equipment, and pollution or other environmental
damage, and may result in curtailment or suspension of operations at the
affected facility.
The Company maintains general public liability, property and business
interruption insurance in amounts that it considers to be adequate for such
risks. Such insurance is subject to deductibles that the Company considers
reasonable and not excessive. Consistent with insurance coverage generally
available to the NGL industry, the Company's insurance policies do not provide
coverage for losses or liabilities related to pollution or other environmental
damage, except for sudden and accidental occurrences.
The occurrence of a significant event not fully insured or indemnified
against, and/or the failure of a party to meet its indemnification obligations,
could materially and adversely affect the Company's operations and financial
condition. Moreover, no assurance can be given that the Company will be able to
maintain adequate insurance in the future at rates it considers reasonable. To
date, however, the Company has experienced no material uninsured losses.
GOVERNMENT REGULATION
Certain of the Company's pipeline activities and facilities are involved in
the intrastate or interstate transportation of natural gas and NGLs, and are
subject to state and/or federal regulation. Historically, the transportation and
sale for resale of natural gas in interstate commerce have been regulated
pursuant to the Natural Gas Act of 1938 ("NGA"), the Natural Gas Policy Act of
1978 ("NGPA"), and the regulations promulgated thereunder by the FERC. In the
past, the federal government regulated the prices at which oil and gas could be
sold, as well as certain terms of service. However, the deregulation of natural
gas sales pricing began under terms of the NGPA and was completed in January
1993 pursuant to the Natural Gas Wellhead Decontrol Act of 1989 (the "Decontrol
Act"). Thus, all sales by the Company of NGLs and natural gas currently can be
made at uncontrolled market prices. There can be no assurance, however, that
Congress will not reenact price controls in the future which could apply to, or
substantially effect, these sales activities.
The FERC's jurisdiction over the interstate transportation of natural gas
was not removed or limited by the NGPA or the Decontrol Act. The FERC also
retains jurisdiction over the interstate transportation of liquid hydrocarbons,
such as NGLs and product streams derived therefrom. The processing of natural
gas for the removal of liquids currently is not viewed by the FERC as an
activity subject to its jurisdiction. If a processing plant's primary function
is extraction of NGLs and not natural
36
gas transportation, the FERC has traditionally maintained that the plant is not
a facility for transportation or sale for resale of natural gas in interstate
commerce and therefore is not subject to jurisdiction under the Natural Gas Act.
Although the FERC has not been requested to and has made no specific declaration
as to the jurisdictional status of the Company's gas processing operations or
facilities, the Company believes that, because its gas processing plants are
primarily involved in removing NGLs, their processing activities are exempt from
FERC jurisdiction. Columbia Gas has received abandonment approval of the
processing plant that was replaced by the Company's Kenova extraction plant. The
previous Columbia Gas processing plant was considered by the FERC to be
transportation-related and was included in Columbia Gas' certificated
facilities. See "-Natural Gas Processing and Related Services-Appalachian Core
Area-NGL Extraction" and "-Facilities." The Company recently received a
ruling from the FERC confirming that the new Kenova extraction plant is exempt
from FERC jurisdiction.
As part of the Michigan Project, the Company will own and operate pipeline
gathering facilities in conjunction with its processing plants. Under the NGA,
facilities which have as their "primary function" the performance of gathering
activities and are not owned by interstate gas pipeline companies are wholly
exempt from FERC jurisdiction. Interstate transmission facilities, on the other
hand, are subject to FERC jurisdiction. The FERC distinguishes between these two
types of activities on a fact-specific basis, which may make it difficult to
state with certainty the status of the Company's pipeline gathering facilities.
Although the FERC has not been requested to or issued any order or opinion
declaring the Company's facilities as gathering rather than transmission
facilities, based on opinion of legal counsel, management believes these systems
are NGA-exempt gathering facilities. In addition, state and local regulatory
authorities oversee intrastate gathering and other natural gas pipeline
operations.
Because the Company's NGL pipeline facilities do not transport liquids in
continuous flow in interstate commerce, they are not subject to FERC regulation
under the Interstate Commerce Act. However, the design, construction, operation,
and maintenance of the Company's NGL and natural gas pipeline facilities are
subject to the safety regulations established by the Secretary of the Department
of Transportation pursuant to the Natural Gas Pipeline Safety Act of 1968, as
amended ("1968 Act"), or by state agency regulations which meet or exceed the
requirements of the 1968 Act.
The Company's natural gas exploration and production operations are subject
to various types of regulation at the federal, state and local levels. Such
regulation includes requiring permits for the drilling of wells, meeting bonding
requirements in order to drill or operate wells and regulating the location of
wells, the methods of drilling and casing wells, the surface use and restoration
of properties upon which wells are drilled, the plugging and abandoning of wells
and the disposal of fluids used in connection with such operations. Production
operations are also subject to various conservation laws and regulations. These
typically include the regulation of the size of drilling and spacing or
proration units and the density of wells which may be drilled therein and the
unitization or pooling of oil and gas properties. Whether the state has forced
pooling, or integration of smaller tracts to form a tract large enough to
conduct drilling operations, or relies only on voluntary pooling can affect the
ease with which a property can be developed. State conservation laws also
typically establish maximum rates of production of natural gas, generally
prohibit the venting or flaring of gas and impose certain requirements regarding
the ratability of production and the handling of nonhydrocarbon gases, such as
carbon dioxide and hydrogen sulfide. The effect of these regulations may limit
the amount of oil and gas available to the Company or which the Company can
produce from its wells. They also substantially affect the cost and
profitability of conducting natural gas exploration and production activities.
Inasmuch as such laws and regulations are frequently expanded, amended or
reinterpreted, the Company is unable to predict the future cost or impact of
complying with these production-related regulations.
Commencing in April 1992, the FERC issued a series of orders, generally
referred to collectively as Order No. 636, which, among other things, require
interstate pipelines such as Columbia Gas to
37
"restructure" to provide transportation services separate or "unbundled"
from the interstate pipelines sales of gas. Order No. 636 also requires
interstate pipelines to provide open-access transportation on a basis that is
equal for all shippers and all supplies of natural gas. This order was
implemented through pipeline-by-pipeline restructuring proceedings. In many
instances, the result has been to substantially reduce or bring to an end
interstate pipelines' traditional role as wholesalers of natural gas in favor of
providing only storage and transportation services. On July 16, 1996, the United
States Court of Appeals for the District of Columbia Circuit upheld the validity
of most of the provisions and features of Order No. 636. However, in many
instances, appeals remain outstanding in the individual pipeline restructuring
proceedings, so the Company cannot predict the final outcome of these
proceedings. Order No. 636 is intended to foster increased competition within
all phases of the natural gas industry. It remains unclear what impact, if any,
increased competition within the natural gas industry under Order No. 636 will
have on the Company or its various lines of business. Additionally, the FERC has
issued a number of other orders which are intended to supplement various facets
of its open access program, all of which will continue to affect how and by whom
natural gas production and associated NGL's will be transported and sold in the
marketplace. In its current form, FERC's open access initiatives could provide
the Company with additional access to gas supplies and markets, and could assist
the Company and its customers by mandating more fairly applied service rates,
terms and conditions. On the other hand, it could also subject the Company and
entities with which it does business to more restrictive pipeline imbalance
tolerances, more complex operations and greater monetary penalties for violation
of the pipelines tolerances and other tariff provisions. The Company does not
believe, however, that it will be affected by any action taken with respect to
Order No. 636 materially differently than any other producers, gatherers,
processors or marketers with which it competes.
ENVIRONMENTAL MATTERS
The Company is subject to environmental risks normally incident to the
operation and construction of gathering lines, pipelines, plants and other
facilities for gathering, processing, treatment, storing and transporting
natural gas and other products including, but not limited to, uncontrollable
flows of natural gas, fluids and other substances into the environment,
explosions, fires, pollution, and other environmental and safety risks. The
following is a discussion of certain environmental and safety concerns related
to the Company. It is not intended to constitute a complete discussion of the
various federal, state and local statutes, rules, regulations, or orders to
which the Company's operations may be subject. For example, the Company, without
regard to fault, could incur liability under the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, as amended (also known as the
"Superfund" law), or state counterparts, in connection with the disposal or
other releases of hazardous substances, including sour gas, and for natural
resource damages. Further, the recent trend in environmental legislation and
regulations is toward stricter standards, and this will likely continue in the
future.
The Company's activities in connection with the operation and construction
of gathering lines, pipelines, plants, injection wells, storage caverns, and
other facilities for gathering, processing, treatment, storing, and transporting
natural gas and other products are subject to environmental and safety
regulation by federal and state authorities, including, without limitation, the
state environmental agencies and the federal Environmental Protection Agency
("EPA"), which can increase the costs of designing, installing and operating
such facilities. In most instances, the regulatory requirements relate to the
discharge of substances into the environment and include measures to control
water and air pollution.
Environmental laws and regulations may require the acquisition of a permit
or other authorization before certain activities may be conducted by the
Company. These laws also include fines and penalties for non-compliance.
Further, these laws and regulations may limit or prohibit activities on certain
lands lying within wilderness areas, wetlands, areas providing habitat for
certain species or other protected areas. The Company is also subject to other
federal, state, and local laws covering the
38
handling, storage or discharge of materials used by the Company, or otherwise
relating to protection of the environment, safety and health. The Company
believes that it is in material compliance with all applicable environmental
laws and regulations.
EMPLOYEES
As of December 31, 1996, the Company had 84 employees.
Eighteen employees at the Company's Siloam fractionation facility in South
Shore, Kentucky are represented by the Oil, Chemical and Atomic Workers
International Union, Local 3-372 (Siloam Sub-Local). The current collective
bargaining agreement with this Union became effective May 1, 1996 and expires on
April 30, 2000. The agreement covers only hourly, non-supervisory employees. The
Company considers labor relations to be satisfactory at this time.
LEGAL PROCEEDINGS
In April 1997, Domain and EnCap informed the Company that they had
purported to transfer their interests in MEC and MPC to Energy Acquisition Corp.
The Company believes that the transfer of the interests in MEC would be in
violation of the arrangements for the establishment and operation of West Shore,
and is, therefore, invalid. Accordingly, the Company has not recognized the
purported transfer and has commenced arbitration proceedings pursuant to the
Participation, Ownership and Operating Agreement for West Shore.
From time to time the Company has been involved in certain legal
proceedings that have arisen in the ordinary course of business, none of which
has had a material adverse effect on the Company's financial position or results
of operations. The Company is not currently a party to any other legal
proceedings, and is not aware of any litigation threatened against the Company,
the adverse outcome of which, individually or in the aggregate, would have a
material adverse effect on the Company's financial condition or results of
operations.
39
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
[Enlarge/Download Table]
Name Age Position
---- --- --------
John M. Fox............... 57 President, Chief Executive Officer and Director
Brian T. O'Neill.......... 49 Senior Vice President, Chief Operating Officer and Director
Arthur J. Denney.......... 48 Vice President of Engineering and Business Development and Director
Robert F. Garvin.......... 56 Vice President of Exploration
Gerald A. Tywoniuk........ 35 Vice President of Finance and Chief Financial Officer
Norman H. Foster (1)(2)... 62 Director
Barry W. Spector (2)...... 45 Director
David R. Whitney (1)(2)... 44 Director
KEY EMPLOYEES
Certain key employees of the Company are as follows:
[Download Table]
Name Age Position
---- --- --------
Katherine S. Holland...... 44 Manager, NGL and Natural Gas Supply
Kimberly H. Marle......... 39 Manager, Information Systems
Faye E. McGuar............ 46 Controller
Randy S. Nickerson........ 35 Manager, West Shore and Basin Pipeline
Joseph D. O'Meara......... 52 Manager, Appalachian Area
Fred R. Shato............. 49 General Manager, Marketing
Warren Warner............. 62 Manager of New Projects
____________
(1) Member of the Compensation Committee of the Board of Directors.
(2) Member of the Audit Committee of the Board of Directors.
EXECUTIVE OFFICERS AND DIRECTORS
JOHN M. FOX has been the Company's President, Chief Executive Officer and a
member of the Board of Directors since its inception in April 1988. Mr. Fox was
a founder of Western Gas Resources, Inc., a company listed on the New York Stock
Exchange, and was its Executive Vice President and Chief Operating Officer from
1972 to 1986. Mr. Fox holds a bachelors degree in engineering from the United
States Air Force Academy and an MBA from the University of Denver. Mr. Fox is
also a director of Maverick Tube Company, a publicly-held company.
BRIAN T. O'NEILL has been the Company's Senior Vice President, Chief
Operating Officer and a member of the Board of Directors since its inception in
April 1988. Mr. O'Neill has approximately 20
40
years of experience in NGL and natural gas marketing, and served as a Marketing
Manager for Western Gas Resources, Inc., specializing in gas acquisition and
sales, new business development and NGL marketing, from 1982 to 1987. Mr.
O'Neill holds a bachelors degree in advertising and psychology from the
University of Florida and a masters degree in international marketing and
finance from the American Graduate School of International Management.
ARTHUR J. DENNEY has been the Company's Vice President of Engineering and
Business Development since January 1990 and a member of the Board of Directors
since June 1996. Mr. Denney has over 22 years of experience in gas gathering,
gas processing and the NGL business. From 1987 to 1990, Mr. Denney served as
Manager of Business Development for Lair Petroleum, Inc. From 1974 to 1987, Mr.
Denney was employed by Enron Gas Processing Co. in a variety of positions,
including seven years as its Rocky Mountain Regional Manager for business
development. Mr. Denney holds a bachelors degree in mechanical engineering and
an MBA from the University of Nebraska.
NORMAN H. FOSTER, PH.D., has been a member of the Board of Directors of the
Company since June 1996. Dr. Foster has more than 34 years of experience in oil
and natural gas exploration, both domestic and international. Dr. Foster has
been an independent geologist since 1979, and has held positions with Sinclair
Oil Corporation, Trend Exploration Limited and Filon Exploration Corporation. In
1995, he co-founded Voyager Exploration, Inc., a private exploration and
production company for which he serves as President. Dr. Foster holds a
bachelors degree in general science and a masters degree in geology from the
University of Iowa and a Ph.D. in geology from the University of Kansas.
ROBERT F. GARVIN joined the Company in 1995 as Manager, Exploration. Mr.
Garvin has been the Company's Vice President of Exploration since April 1996.
From 1988 to 1995, Mr. Garvin was Manager, Exploration, for an affiliate of the
Company. Mr. Garvin has more than 29 years of oil and gas industry experience.
During his career, Mr. Garvin has been employed as a geologist by Phillips
Petroleum Company, Duncan Oil Properties, Excel Energy Corporation, Ecological
Engineering Systems and has been a self-employed geologist. Mr. Garvin holds a
bachelors degree in geology from Westminster College and a masters degree in
geology from the University of Utah.
BARRY W. SPECTOR has been a member of the Board of Directors of the Company
since September 1995. Mr. Spector has practiced law as a sole practitioner since
1979. Mr. Spector's practice emphasizes oil and gas law with a particular
emphasis in natural gas contracts, interstate and intrastate regulation and
marketing. Mr. Spector holds a bachelors degree in biology and a J.D. from the
University of Denver.
GERALD A. TYWONIUK was appointed Vice President of Finance and Chief
Financial Officer in April 1997. Mr. Tywoniuk is a Canadian Chartered Accountant
with fifteen years of experience in accounting, planning, information systems,
finance and management. From August 1993 to March 1997, Mr. Tywoniuk was
Controller and Vice President -- Controller of Echo Bay Mines Ltd. ("Echo Bay"),
a gold mining, exploration and development company. From September 1985 to July
1993, he held a variety of corporate and mine site roles with Echo Bay. Prior to
September 1985, Mr. Tywoniuk was employed with two public accounting firms,
including KPMG Peat Marwick. Mr. Tywoniuk holds a bachelor of commerce degree in
accounting and finance from the University of Alberta.
DAVID R. WHITNEY has been a member of the Board of Directors of the Company
since April, 1988. Since 1985, Mr. Whitney has been a Managing Director of
Resource Investors Management Company Limited Partnership ("RIMCO"), a full
service investment management company specializing in the energy industry and
the holder of 2.4% of the Company's shares of Common Stock. Mr. Whitney holds a
bachelors degree in economics from the University of Colorado and an MBA from
the University of Connecticut.
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KEY EMPLOYEES
KATHERINE S. HOLLAND joined the Company in 1988. She has been the Company's
Manager, NGL and Natural Gas Supply, since late 1993. Prior to that, she served
as the Company's Manager, Railcar Fleet and Distribution. Ms. Holland has
approximately 13 years' combined experience in the oil and gas industry and the
NGL and natural gas segment of the oil and gas industry. From 1983 to 1988, Ms.
Holland was employed by Sherwood Exploration Company, an oil and gas exploration
and production company. Ms. Holland holds a bachelors degree in art history from
the University of Colorado.
KIMBERLY H. MARLE has been the Company's Manager, Information Systems,
since March 1995. Ms. Marle joined the Company in December 1993 as an
information systems consultant developing applications for the Company's
accounting systems. Ms. Marle has an extensive background in oil and gas
computerization, having worked for Forest Oil Corporation for four years prior
to joining the Company. Ms. Marle holds a bachelors degree in business from the
University of Memphis and is currently pursuing a masters degree in information
systems at the University of Denver.
FAYE E. MCGUAR joined the Company in May 1996 as Controller. Ms. McGuar is
a certified public accountant with over 15 years of experience in accounting,
budgeting, treasury and finance. From 1994 to 1996, Ms. McGuar was employed by
the Southern Pacific Railroad as Budget Director, and from 1982 to 1988, she was
employed by the Anschutz Corporation, serving as its controller from 1987 to
1988. Ms. McGuar holds a bachelors degree in finance from the University of
Utah.
RANDY S. NICKERSON joined the Company in 1995 as Manager, New Projects, and
now serves as Manager, West Shore Processing and Basin Pipeline. From 1984 to
1990, he was a project manager and a project engineer for Chevron USA, and from
1991 to 1995, he was a project engineer and Regional Engineering Manager for
Western Gas Resources, Inc. Mr. Nickerson holds a bachelors degree in chemical
engineering from Colorado State University.
JOSEPH D. O'MEARA joined the Company in 1992 as Manager, Siloam Plant. In
1995, Mr. O'Meara was promoted to Manager, Appalachian Area. Prior to joining
MarkWest, Mr. O'Meara was employed for 26 years by Cities Service/Occidental
Petroleum, during which time he held a number of operational, supervisory and
management positions.
FRED R. SHATO joined the Company in 1989 as Manager, Marketing. In 1992,
Mr. Shato became the Company's General Manager, Marketing. Mr. Shato has 20
years of experience in gasoline and NGL acquisition, trading and marketing, and
served as Manager of Trading and Product Acquisition for Certified Oil
Corporation from 1980 to 1989. Mr. Shato holds a bachelors degree in history and
political science from Defiance College.
WARREN WARNER has been the Company's Manager of New Projects since March
1996. Mr. Warner joined the Company in April 1991 as Vice President of
Operations. Prior to joining the Company, Mr. Warner had approximately 33 years
of experience in project development, construction and operation of pipelines
and plants, contracts, acquisition evaluations and project management. Mr.
Warner holds a bachelors degree in petroleum and natural gas engineering from
Texas A&I University.
BOARD OF DIRECTORS
The Company's Bylaws provide for a classified board of directors. The two
class I directors, Messrs. Denney and Foster, have been elected for an initial
term expiring at the 1997 annual meeting. The Board of Directors has nominated
Messrs. Denney and Foster for reelection at the 1997 annual meeting. The two
class II directors, Messrs. O'Neill and Spector, have been elected for an
initial term expiring at the 1998 annual meeting. The two class III directors,
Messrs. Fox and Whitney, have been elected for an initial term expiring at the
1999 annual meeting. All subsequent elections will be for successive three-year
terms. No director is selected or serves pursuant to any special arrangement or
contract.
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Officers serve at the discretion of the Board and are elected annually.
There are no family relationships between the directors or executive officers of
the Company.
The Board of Directors has a Compensation Committee and an Audit Committee.
The Compensation Committee makes recommendations to the Board concerning
salaries and incentive compensation for the Company's officers and employees and
administers the Stock Incentive Plan and the Company's 1996 Incentive
Compensation Plan (the "Incentive Compensation Plan"). The Audit Committee aids
management in the establishment and supervision of the Company's financial
controls, evaluates the scope of the annual audit, reviews audit results,
consults with management and the Company's independent auditors prior to the
presentation of financial statements to stockholders and, as appropriate,
initiates inquiries into aspects of the Company's financial affairs.
Directors who are employees of the Company receive no compensation, as
such, for services as members of the Board. Effective December 1996, all
directors who are not employees of the Company receive an attendance fee of
$1,500 for each board meeting or committee meeting attended in person by that
director and $500 for each board meeting or committee meeting in which such
director participates by telephone. All directors are reimbursed for out-of-
pocket expenses incurred while attending board and committee meetings. In
addition, pursuant to the Non-Employee Director Plan, each non-employee director
received options to purchase 500 shares of Common Stock upon the completion of
the Company's initial public offering in October 1996 and is entitled to receive
options to purchase an additional 500 shares of Common Stock on the day after
each annual meeting of the Company's stockholders. At the Company's Annual
Meeting of stockholders, the stockholders will vote on a proposal to amend the
Non-Employee Director Plan to (i) increase the initial grant to newly-appointed,
non-employee directors from options to purchase 500 shares of Common Stock to
options to purchase 1,000 shares of Common Stock, and (ii) provide for a
retroactive grant of options, effective as of the approval of the Non-Employee
Director Plan by the Board of Directors on July 31, 1996, to purchase 500 shares
of Common Stock under the Non-Employee Director Plan with an exercise price
equal to the initial public offering price of $10 per share, to each non-
employee director of the Company as of such date. Directors who are also
employees of the Company do not receive any additional stock incentive
compensation for serving on the Board of Directors.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company is incorporated in Delaware in part to take advantage of
certain provisions in the Delaware General Corporation Law (the "Delaware
Code") relating to limitations on liability of corporate officers and
directors.
The Company's Certificate of Incorporation limits the liability of
directors to the fullest extent permitted by the Delaware Code. Under current
Delaware law, a director's liability to a company or its stockholders may not be
limited with respect to (i) any breach of his duty of loyalty to the company or
its stockholders, (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) unlawful payments or
dividends or unlawful stock repurchases or redemptions as provided in Section
174 of the Delaware Code or (iv) transactions from which the director derived an
improper personal benefit. The Company's Bylaws provide that the Company shall
indemnify its officers and directors and may indemnify its employees and other
agents to the fullest extent permitted under the Delaware Code.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent of the Company where indemnification would
be required or permitted. The Company is not aware of any overtly threatened
litigation or proceeding that might result in a claim for indemnification.
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EXECUTIVE COMPENSATION
The following table sets forth the cash and noncash compensation for fiscal
years 1994, 1995 and 1996 awarded to or earned by (i) the individual who served
as the Company's Chief Executive Officer ("CEO") in fiscal year 1996; and (ii)
the Company's four most highly compensated executive officers, other than the
CEO, who were serving as executive officers for fiscal year 1996. No other
executive officer had compensation in excess of $100,000 for fiscal year 1996:
SUMMARY COMPENSATION TABLE
[Enlarge/Download Table]
ANNUAL LONG TERM
COMPENSATION COMPENSATION
------------------- -------------
SALARY BONUS OPTIONS
NAME AND PRINCIPAL POSITIONS FISCAL YEAR ($)(1) ($)(2) (#)
---------------------------- ----------- -------- ------- ------------
John M. Fox.......................................... 1996 $148,223 $80,113 13,000*
President and CEO.................................. 1995 $140,510 $43,350 -
1994 $109,516 $36,786 -
Brian T. O'Neill..................................... 1996 $150,834 $80,113 13,000*
Senior Vice President and Chief Operating Officer.. 1995 $142,191 $43,350 4,580
1994 $117,338 $36,786 -
Arthur J. Denney..................................... 1996 $134,075 $71,374 13,000*
Vice President of Engineering and Business......... 1995 $127,179 $39,235 6,331
Development..................................... 1994 $109,515 $34,333 -
Robert F. Garvin..................................... 1996 $ 90,071 $47,609 5,008
Vice President of Exploration...................... 1995 $ 82,500 $17,242 4,580
1994 - - -
Rita E. Harvey (3)................................... 1996 $ 82,800 $39,615 4,000
Director of Finance and Treasurer.................. 1995 $ 71,667 $13,219 3,578
1994 $ 42,199 $ 9,092 -
_____________
* The 3,000 shares in excess of the 10,000 share per year limitation on
grants to individual employees under the Stock Incentive Plan are subject
to stockholder approval of the certain amendments to the Stock Incentive
Plan to be voted on at the annual meeting of stockholders scheduled for
June 1997. Excludes shares underlying options issued as replacement options
for options to purchase equity interests in the Company's predecessor.
(1) Includes actual salary paid in each respective fiscal year.
(2) Includes actual bonus paid in each respective fiscal year. In fiscal year
1996, this amount includes bonuses paid for performance in fiscal years
1996 and 1995.
(3) Ms. Harvey resigned as the Company's Director of Finance and Treasurer in
April 1997.
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OPTION GRANTS IN FISCAL 1996
[Enlarge/Download Table]
NUMBER OF SECURITIES PERCENT OF TOTAL OPTIONS EXERCISE
UNDERLYING OPTIONS GRANTED TO EMPLOYEES PRICE EXPIRATION
NAME GRANTED (#) IN FISCAL 1996 ($/SH) DATE
---- -------------------- ------------------------ -------- ---------------
John M. Fox........... 13,000 9.7% $11.00 October 9, 2001
Brian T. O'Neill...... 13,000 9.7 10.00 October 9, 2006
Arthur J. Denney...... 13,000 9.7 10.00 October 9, 2006
Robert F. Garvin...... 4,000 3.0 10.00 October 9, 2006
Robert F. Garvin...... 1,008 .7 7.86 June 2, 2006
Rita E. Harvey........ 4,000 3.0 10.00 October 9, 2006
FISCAL YEAR-END OPTION VALUES
The following table summarizes the value of the options held at the end of
fiscal year 1996 by the Named Executive Officers. None of the Named Executive
Officers exercised any options during fiscal year 1996.
[Enlarge/Download Table]
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT END OF FISCAL 1996 (#) AT END OF FISCAL 1996 ($) (1)
--------------------------------- -------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------------- ---------------- ------------- ---------------
John M. Fox................. 5,724 14,431 $44,702 $ 69,676
Brian T. O'Neill............ 6,640 18,095 $56,506 $114,858
Arthur J. Denney............ 5,390 19,095 $45,852 $123,385
Robert F. Garvin............ 916 8,672 $ 7,795 $ 60,881
Rita E. Harvey.............. 716 6,862 $ 6,093 $ 46,359
________________
(1) Value based on the difference between the closing price of the Company's
Common Stock as reported by the Nasdaq National Market on December 31,
1996 and the option exercise price per share multiplied by the number of
shares subject to the option.
COMPENSATION PLANS
1996 Stock Incentive Plan. The Stock Incentive Plan was adopted in 1996. As
currently in effect, the maximum number of shares authorized to be issued under
the Stock Incentive Plan is 600,000 shares of Common Stock and the maximum
number of shares underlying awards that may be granted to an individual employee
in a calendar year is 10,000 shares of Common Stock. In April 1997, the Board of
Directors approved amendments to the Stock Incentive Plan, subject to
stockholder approval, to (i) increase the maximum number of shares of Common
Stock underlying awards that may be granted to an eligible person who is an
employee of the Company at the time of grant from 10,000 shares in any once
calendar year to 20,000 shares in any one calendar year and (ii) increase the
number of shares of Common Stock authorized for issuance under the Stock
Incentive Plan from 600,000 shares in the aggregate to 850,000 shares in the
aggregate. As of December 31, 1996, an aggregate of approximately 326,251 shares
of Common Stock had been reserved for issuance under the Stock Incentive Plan
and options to purchase an aggregate of 273,749 shares of Common Stock were
outstanding under the Stock Incentive Plan. Outstanding options granted under
the Stock Incentive Plan generally vest and become exercisable at a rate of 20%
per annum beginning on the first anniversary after the date of grant. Generally,
the term of each outstanding option is ten years. The exercise price for options
granted under the Stock Incentive Plan is at least equal to 100% of the fair
market value of the Common Stock of the Company on the date of grant. The Stock
Incentive Plan permits the granting of stock options, including incentive stock
options ("ISOs") as defined under Section 422 of the Internal Revenue Code of
1986, as amended (the "Code"), and non-qualified stock options ("NQSOs")
which do not qualify as ISOs. The purpose of the Stock Incentive Plan is to
reward and provide incentives for executive officers and key employees of the
Company by providing them with an opportunity to acquire an equity interest in
the
45
Company, thereby increasing their personal interest in its continued success and
progress. The purpose of the Stock Incentive Plan is also to retain the services
of executive officers and key employees as well as to assist in attracting new
executive officers and key employees. Non-employee directors are not eligible to
receive grants under the Stock Incentive Plan.
The Stock Incentive Plan is administered by the Compensation Committee,
which has the sole and complete authority to select the employees (including
executive officers) who will receive options under the Stock Incentive Plan. The
Compensation Committee has the authority to determine the number of stock
options to be granted to eligible individuals, whether the options will be ISOs
or NQSOs and the terms and conditions of the options (which may vary from
grantee to grantee). The Compensation Committee determines the period for which
each stock option may be exercisable, but in no event may a stock option be
exercisable more than three years from the date the option becomes vested. The
number of shares available under the Stock Incentive Plan and the exercise price
of the options granted thereunder are subject to adjustment by the Compensation
Committee to reflect stock splits, stock dividends, recapitalization, mergers,
or other major corporate actions.
The Compensation Committee also has the authority under the Stock Incentive
Plan to grant Stock Appreciation Rights ("SARs") to employees. SARs confer on
the holder a right to receive, upon exercise, the excess of the Fair Market
Value of one Share on the date of exercise over the grant price of the SAR as
specified by the Committee, which price may not be less than 100% of the Fair
Market Value of one Share on the date of grant of the SAR. The grant price,
term, methods of exercise, dates of exercise, methods of settlement and any
other terms and conditions of any SAR are determined by the Committee.
The Board of Directors may discontinue, amend, or suspend the Stock
Incentive Plan in a manner consistent with the Stock Incentive Plan's
provisions, provided such changes do not violate the federal or state securities
laws.
1996 Incentive Compensation Plan. The Incentive Compensation Plan provides
for cash incentive awards to executives and employees of the Company in varying
amounts, and is administered by the Compensation Committee of the Company's
Board of Directors. The Incentive Compensation Plan was effective as of January
1, 1996. Certain bonus payments were made under the Incentive Compensation Plan
in May 1996. The Incentive Compensation Plan lists five tiers for determining
eligibility: Tier One includes all executive level employees; Tier Two includes
all management level employees; Tier Three includes all mid-level exempt
employees; Tier Four includes all lower-level exempt employees; and Tier Five
includes certain non-exempt employees. An incentive award is based upon the
financial performance of the Company compared to corporate goals for the year in
question. Profit sharing payments under the Incentive Compensation Plan are paid
annually; incentive payments under the Incentive Compensation Plan are paid
periodically throughout the year. The purpose of the Incentive Compensation Plan
is to reward and provide incentives for executives and employees of the Company
by providing them with an opportunity to acquire cash rewards, thereby
increasing their personal interest in the Company's continued success and
progress.
During fiscal year 1996, the Company made profit sharing payments under the
Incentive Compensation Plan of approximately $299,000 and incentive compensation
payments of approximately $702,000.
1996 Non-Employee Director Stock Option Plan. In July 1996, the Company
adopted the Non-Employee Director Plan, which has a five-year term. As currently
in effect, the Non-Employee Director Plan provides for an initial automatic
grant of NQSOs to purchase 500 shares of Common Stock to each newly-appointed,
non-employee director of the Company upon the date on which such person becomes
a director of the Company, and an automatic grant to each non-employee director
of the Company of options to purchase an additional 500 shares of Common Stock
on the day after each annual meeting of the Company's stockholders. In addition,
the non-employee directors of the Company at the
46
time of approval of the Non-Employee Director Plan by the Board of Directors in
July 1996 received a grant of options to purchase 500 shares of Common Stock at
such time. In April 1997, the board of Directors approved amendments to the Non-
Employee Director Plan, subject to stockholder approval, to (i) increase the
initial grant under the Non-Employee Director Plan to a newly-appointed, non-
employee director of the Company upon the date on which such person first
becomes a director from options to purchase 500 shares of Common Stock to
options to purchase 1,000 shares of Common Stock, and (ii) provide for a
retroactive grant, effective as of the approval of the Non-Employee Director
Plan on July 31, 1996, of options to purchase 500 shares of Common Stock under
the Non-Employee Director Plan with an exercise price equal to the initial
public offering price of $10 per share, to each non-employee director of the
Company as of such date. The exercise price for each option issued under the
Non-Employee Director Plan is equal to the fair market value of the Common Stock
on the date of grant. Initial option grants vest and become exercisable as to
one-third of the shares covered by the option on each annual anniversary of the
date of grant if the holder remains a director on such date, provided that, in
the event of the death of the holder, the holder's estate or heir shall, in
addition, be entitled to exercise any options that would have vested within six
months of the holder's death. Annual option grants vest and become exercisable
as to 100% of the shares covered by the option on the six-month anniversary of
the date of grant if the holder remains a director on such date, provided that,
in the event of the death of the holder, the holder's estate or heir shall, in
addition, be entitled to exercise any options that would have vested within six
months of the holder's death. The Company has reserved 20,000 shares of Common
Stock for issuance under the Non-Employee Director Plan.
CERTAIN TRANSACTIONS
REORGANIZATION
The Company's business historically was conducted by MarkWest Partnership.
Concurrently with the effectiveness of the initial public offering in October
1996, the Company acquired from the partners of MarkWest Partnership all of the
partnership interests in MarkWest Partnership in exchange for shares of the
Company pursuant to the Reorganization Agreement. Immediately following the
acquisition of MarkWest Partnership, MarkWest Partnership was dissolved and the
Company succeeded to the business, assets and liabilities of MarkWest
Partnership. The Company believes that the transactions contemplated by the
Reorganization qualified as a tax-free reorganization for United States federal
income tax purposes.
Pursuant to the Reorganization, the partners of MarkWest received an
aggregate of 5,725,000 shares of the Company's Common Stock. Pursuant to the
terms of the Reorganization Agreement, each partner of MarkWest Partnership
received a fully diluted percentage of the Company's Common Stock outstanding
immediately after consummation of the Reorganization (calculated prior to the
issuance of the Shares in the Company's initial public offering) substantially
equivalent to the partners' interests in MarkWest Partnership.
Immediately prior to the consummation of the Reorganization, MarkWest
Partnership had outstanding options issued to current and former employees that
granted such employees the right to purchase partnership interests representing
approximately 3% of the fully diluted aggregate partnership interests in
MarkWest Partnership. As part of the Reorganization, such employee options to
purchase MarkWest Partnership interests were replaced by options to purchase
shares of the Company's Common Stock issuable pursuant to the Company's Stock
Incentive Plan. Such options are subject to all of the terms and conditions of
the Stock Incentive Plan. See "Management-Compensation Plans-1996 Stock
Incentive Plan."
PARTNERSHIP DISTRIBUTIONS
Immediately prior to consummation of the Reorganization, MarkWest
Partnership made cash distributions to its partners equal to $10.0 million as a
partial distribution of partnership capital. Such
47
distribution was distributed pro rata to partners of MarkWest based upon such
partners' percentage interests in the partnership at the time of the
distribution. MarkWest Partnership borrowed the money necessary to make such
distribution under its bank credit facility. As MarkWest Partnership's
successor, the Company became obligated for such indebtedness, which was repaid
out of the proceeds of the Company's initial public offering.
MarkWest Partnership was a partnership for purposes of federal income
taxes. As a result, the net income of MarkWest Partnership was taxed for federal
and state income tax purposes directly to the partners of MarkWest Partnership
rather than to MarkWest Partnership. MarkWest Partnership distributed to its
partners an aggregate of $995,000, $320,000 and $4.2 million during the 1993,
1994 and 1995 fiscal years, respectively, to cover income taxes and an aggregate
of $2.1 million during the 1993 fiscal year as a distribution of partnership net
earnings. No distributions of partnership net earnings were made during fiscal
years 1994 and 1995. The Partnership distributed an aggregate of $4.1 million in
1996 for partner income tax liabilities. MWHC Holding, Inc., a Colorado
corporation (the "MarkWest General Partner"), received 70%, 69%, 69% and 73%
of such distributions during the 1993, 1994, 1995 and 1996 fiscal years,
respectively, and Erin Partners, Ltd., a Colorado limited partnership ("Erin
Partners"), received 11% of such distributions during each of the 1993, 1994,
1995 fiscal years and 15% during the 1996 fiscal year. The MarkWest General
Partner is controlled by John M. Fox, President and Chief Executive Officer of
the Company. Erin Partners (which has since been dissolved) was controlled by
Brian T. O'Neill, Senior Vice President and Chief Operating Officer of the
Company. See "Principal Stockholders."
INVESTMENTS WITH AFFILIATE
The Company, through its MarkWest Resources subsidiary, holds a 49%
undivided interest in several exploration and production assets ("E&P Assets")
owned jointly with MAK-J Energy, which owns a 51% undivided interest in such
properties. See "Business-Exploration and Production." The general partner of
MAK-J Energy is a corporation owned and controlled by John M. Fox, President and
Chief Executive Officer of the Company. The properties are held pursuant to
joint venture agreements entered into between MarkWest Resources and MAK-J
Energy. MarkWest Resources is the operator under such agreements. As the
operator, MarkWest Resources is obligated to provide certain engineering,
administrative and accounting services to the joint ventures. The joint venture
agreements provide for a monthly fee payable to MarkWest Resources for all such
expenses. While the amount of the monthly fee will in the future be subject to
review by the Company's independent directors, the monthly fee for fiscal year
1996 was not negotiated on an arm's length basis. Moreover, conflicts of
interest may arise regarding such oil and gas activities, including decisions
regarding expenses and capital expenditures and the timing of the development
and exploitation of the properties. Management nevertheless believes that the
terms of the Company's co-investments with MAK-J Energy are as favorable to the
Company as could have been obtained from unaffiliated third parties. As of
December 31, 1996, MarkWest had invested $4.3 million in E&P Assets owned
jointly with MAK-J Energy. See "Risk Factors-Conflicts of Interest."
The E&P Assets were originally developed by MarkWest Coalseam Development
Company LLC ("Coalseam LLC"), a natural gas development venture, and MW
Gathering LLC ("Gathering LLC"), a natural gas gathering venture. Coalseam LLC
and Gathering LLC originally were owned 51% by MAK-J Energy and 49% by the
Company. In connection with the Reorganization, in June 1996 Coalseam LLC and
Gathering LLC were merged, the Company transferred its interest in the combined
company to MarkWest Resources, and the combined company dissolved and
distributed its properties to MarkWest Resources and MAK-J Energy in proportion
to their respective interests.
In December 1996, the Company and MAK-J Energy each purchased a 22.5%
interest in a geological prospect for oil and gas (the "Prospect") that had
previously been owned 50% by Methane Resources, LLC ("Methane Resources") and
50% by Norman H. Foster, a director of the Company, for a price of approximately
$54,000 each. Methane Resources and Dr. Foster commenced purchases of the
various
48
properties that constitute the Prospect in December 1995. The aggregate purchase
price paid by Methane Resources and Dr. Foster for the properties that
constitute the Prospect was approximately $84,000. The Company's purchase of an
interest in the Prospect was unanimously approved by the independent and
disinterested directors of the Company. The purchase price paid by the Company
for its interest in the Prospect was negotiated on an arm's length basis and
management believes that the terms of the purchase were as favorable to the
Company as could have been obtained from unaffiliated third parties.
Mr. Fox has agreed that as long as he is an officer or director of the
Company and for two years thereafter, he will not, directly or indirectly,
participate in any future oil and gas exploration or production activities with
the Company except and to the extent that the Company's independent and
disinterested directors deem it advisable and in the best interests of the
Company to include one or more additional participants, which participants may
include entities controlled by Mr. Fox. Additionally, Mr. Fox has agreed that as
long as he is an officer or director of the Company and for two years
thereafter, he will not, directly or indirectly, participate in any future oil
and gas exploration or production activity that may be in competition with
exploration or production activities of the Company except and to the extent
that Mr. Fox has first offered the Company the opportunity to participate in
that activity and the Company's independent and disinterested directors deem it
advisable and in the best interests of the Company not to participate in that
activity. The terms of any future transactions between the Company and its
directors, officers, principal stockholders or other affiliates, or the decision
to participate or not participate in transactions offered by the Company's
directors, officers, principal stockholders or other affiliates will be approved
by a majority of the Company's independent and disinterested directors. The
Company's Board of Directors will use such procedures in evaluating their terms
as are appropriate considering the fiduciary duties of the Board of Directors
under Delaware law. In any such review the Board may use outside experts or
consultants including independent legal counsel, secure appraisals or other
market comparisons, refer to generally available statistics or prices or take
such other actions as are appropriate under the circumstances. Although such
procedures are intended to ensure that transactions with affiliates will be on
an arm's length basis, no assurance can be given that such procedures will
produce such result.
LEGAL FEES PAID TO DIRECTOR
Barry W. Spector, a director of the Company, periodically provides legal
services to the Company. During 1996, the Company paid Mr. Spector legal fees of
approximately $65,000 in return for such services.
RELATED PARTY INDEBTEDNESS
MarkWest Partnership periodically extended offers to partners and employees
to purchase initial or additional interests in MarkWest Partnership. Such
partners and/or employees provided MarkWest Partnership with promissory notes as
part of the purchase price for such interests. According to the terms of such
promissory notes, interest accrued at 7% and payments were required for the
greater of accrued interest or distributions made by MarkWest Partnership to
partners in excess of the partner's income tax liability. As part of the
Reorganization, the remaining indebtedness under such promissory notes was
replaced by promissory notes owed to the Company. The notes owed to the Company
accrue interest at 7%, payable annually, and require full payment of principal
and outstanding interest on the third anniversary of the effective date of the
Reorganization. An aggregate of $376,000 principal amount of such notes was
outstanding as of December 31, 1996.
49
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of March 31, 1997 (i) by each person
(or group of affiliated persons) who is known by the Company to own beneficially
more than five percent (5%) of the Company's Common Stock, (ii) by each of the
Named Executive Officers, (iii) by each of the Company's directors, and (iv) by
all directors and executive officers as a group. The Company believes that the
persons and entities named in the table have sole voting and investment power
with respect to all shares of Common Stock shown as beneficially owned by them,
subject to community property laws, where applicable.
[Download Table]
BENEFICIAL OWNERSHIP (1)
-------------------------
AMOUNT AND
NATURE OF
BENEFICIAL PERCENT
OWNERSHIP OF CLASS
------------ -----------
NAME OF BENEFICIAL OWNER
--------------------------------------
MWHC Holding, Inc. (2)................ 3,806,084 44.5%
FMR Corp. (3)......................... 507,000 5.9
Skyline Asset Management, L.P. (4).... 458,800 5.4
John M. Fox (5)....................... 4,071,092 47.9
Brian T. O'Neill (6).................. 494,046 5.8
Arthur J. Denney...................... 67,344 *
David R. Whitney (7).................. 200,375 2.3
Barry W. Spector...................... 5,699 *
Norman H. Foster...................... 0 *
All directors and executive officers
as a group (8 persons) (5)(6)....... 4,848,239 56.5%
------------------
* Represents less than 1% of the outstanding shares.
(1) All percentages have been determined at March 31, 1997 in accordance with
Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). For purposes of this table, a person or group of persons is deemed to
have "beneficial ownership" of any shares of Common Stock that such person or
group has the right to acquire within sixty days after March 31, 1997. For
purposes of computing the percentage of outstanding shares of Common Stock held
by each person or group of persons named above, any security which such person
or group has the right to acquire within sixty days after March 31, 1997 is
deemed to be outstanding for the purpose of computing the percentage ownership
of such person or group, but is not deemed to be outstanding for the purpose of
computing the percentage ownership of any other person or group. At March 31,
1997, a total of 8,485,000 shares of Common Stock were issued and outstanding
and options to acquire a total of 77,860 shares of Common Stock were exercisable
within sixty days.
(2) MWHC Holding, Inc. is an entity controlled by John M. Fox.
(3) Information is based solely on a Schedule 13G filed with the Securities
and Exchange Commission by FMR Corp. ("FMR") with respect to shares held as of
December 31, 1996. The Schedule 13G indicates that Fidelity Management &
Research Company, a registered investment adviser and a wholly-owned subsidiary
of FMR, beneficially owns 266,600 shares and Fidelity Management Trust Company,
a bank and a wholly-owned subsidiary of FMR, owns 240,400 shares. According to
the Schedule 13G, FMR
50
has sole voting power with respect to 240,400 shares and sole dispositive
power with respect to 507,000 shares.
(4) Information is based solely on a Schedule 13G filed with the Securities
and Exchange Commission by Skyline Asset Management, L.P. ("Skyline"), a
registered investment adviser, with respect to shares held as of December
31, 1996. The Schedule 13G indicates that the shares reported are owned by
clients of Skyline and that Skyline has shared voting power and shared
dispositive power with respect to 458,800 shares.
(5) Includes an aggregate of 257,853 shares held in the Brent A. Crabtree
Trust, The Brian T. Crabtree Trust and the Carrie L. Crabtree Trust (the
"Crabtree Trusts"), for which Mr. Fox is the Trustee. Also includes all
shares owned directly by MWHC Holding, Inc., an entity controlled by Mr.
Fox. As a result of Mr. Fox's control of MWHC Holding, Inc., Mr. Fox may
be deemed to have an indirect pecuniary interest (within the meaning of
Rule 16a-1 under the Exchange Act), in an indeterminate portion of the
shares beneficially owned by MWHC Holding, Inc. Mr. Fox disclaims
"beneficial ownership" of these shares within the meaning of Rule 13d-3
under the Exchange Act, and also disclaims beneficial ownership of the
shares held in the Crabtree Trusts.
(6) Includes all shares owned directly by Erin Investments, Inc., an entity
controlled by Mr. O'Neill. As a result of Mr. O'Neill's control of Erin
Investments, Inc., Mr. O'Neill may be deemed to have an indirect pecuniary
interest (within the meaning of Rule 16a-1 under the Exchange Act), in an
indeterminate portion of the shares beneficially owned by Erin
Investments, Inc. Mr. O'Neill disclaims "beneficial ownership" of these
shares within the meaning of Rule 13d-3 under the Exchange Act.
(7) All of the shares indicated as owned by Mr. Whitney are owned by certain
limited partnerships whose general partner is RIMCO, and are included
because Mr. Whitney is a Managing Director of RIMCO. As such, Mr. Whitney
may be deemed to have an indirect pecuniary interest (within the meaning
of Rule 16a-1 under the Exchange Act), in an indeterminate portion of the
shares within the meaning of Rule 13d-3 under the Exchange Act. Mr.
Whitney disclaims "beneficial ownership" of these shares within the
meaning of Rule 13d-3 under the Exchange Act.
51
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of twenty million
(20,000,000) shares of Common Stock, $0.01 par value, and five million
(5,000,000) shares of Preferred Stock, $0.01 par value, for a total of twenty-
five million (25,000,000) shares of capital stock.
COMMON STOCK
As of March 31, 1997, 8,485,000 shares of Common Stock were issued and
outstanding. The holders of Common Stock are entitled to one vote per share on
all matters to be voted on by the stockholders. Subject to preferences that may
be applicable to outstanding shares of Preferred Stock, if any, the holders of
Common Stock are entitled to receive ratably such dividends as may be declared
from time to time by the Board of Directors out of funds legally available
therefor. In the event of the liquidation, dissolution or winding up of the
Company, the holders of Common Stock are entitled to share ratably in all assets
remaining after payment of liabilities, subject to prior liquidation rights of
Preferred Stock, if any, then outstanding. The Common Stock has no preemptive
conversion rights or other subscription rights. There are no redemption or
sinking funds provisions applicable to the Common Stock. All outstanding shares
of Common Stock are fully paid and nonassessable.
PREFERRED STOCK
The Company is authorized to issue 5,000,000 shares of undesignated Preferred
Stock, none of which has been issued to date. The Board of Directors has the
authority to issue the undesignated Preferred Stock in one or more series and to
fix the rights, preferences, privileges and restrictions granted to or imposed
upon any wholly unissued series of undesignated Preferred Stock and to fix the
number of shares constituting any series in the designations of such series,
without any further vote or action by the stockholders. The Board of Directors,
without stockholder approval, can issue Preferred Stock with voting and
conversion rights which could adversely affect the voting power of the holders
of Common Stock. The issuance of Preferred Stock may have the effect of
delaying, deferring or preventing a change in control of the Company. The
Company has no present plan to issue Preferred Stock.
CHANGE OF CONTROL PROVISIONS
Certain provisions of the Company's Certificate of Incorporation and Bylaws
may have the effect of preventing, discouraging or delaying a change in the
control of the Company and may maintain the incumbency of the Board of Directors
and management. The authorization of undesignated Preferred Stock makes it
possible for the Board of Directors to issue Preferred Stock with voting or
other rights or preferences that could impede the success of any attempt to
change control of the Company. In addition, the Company's Bylaws limit the
ability of stockholders of the Company to raise matters at a meeting of
stockholders without giving advance notice. The Bylaws also classify the
Company's Board of Directors into three classes, each class serving a three-year
term. Without the vote of 80% of the Company's capital stock, directors may not
be removed without cause by the stockholders. These provisions have the effect
of delaying a stockholder's ability to replace a majority of the Board of
Directors.
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law ("Section 203") regulating corporate takeovers.
Section 203 prevents certain Delaware corporations, including those whose
securities are listed on the Nasdaq National Market, from engaging, under
certain circumstances, in a "business combination" (which includes a merger or
sale of more than 10% of the corporation's assets) with any "interested
stockholder" (a stockholder who acquired 15% or more of the corporation's
outstanding voting stock without the prior approval of the corporation's Board
of Directors) for three years following the date that such stockholder became an
"interested stockholder." A Delaware corporation may "opt out" of Section
203 with an express provision in its
52
original certificate of incorporation or an express provision in its certificate
of incorporation or bylaws resulting from a stockholders' amendment approved by
at least a majority of the outstanding voting shares. The Company has not
"opted out" of the provisions of Section 203.
REGISTRATION RIGHTS
Pursuant to the terms of the Reorganization Agreement, certain beneficial
owners of interests in MarkWest Partnership (including certain limited
partnerships whose general partner is RIMCO) who received shares of Common Stock
as part of the Reorganization and who are not officers, directors or employees
of the Company, or the beneficial holders of ten percent or more of the
outstanding shares of Common Stock (either immediately following the
Reorganization or at the time of a request for registration of shares of Common
Stock) were granted certain rights with respect to the registration of the
shares of Common Stock held by each of them. The Common Stock offered hereby is
being registered at the request of the Selling Stockholders pursuant to such
registration rights.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is American Securities
Transfer Inc.
LISTING
The Common Stock is listed on the Nasdaq National Market under the trading
symbol "MWHX."
53
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Company's initial public offering in October 1996, there had
been no public trading market for the Common Stock, and there can be no
assurance that a regular trading market for the Common Stock will continue after
the Offering or that the market price for the Common Stock will not fall below
the offering price. Sale of a substantial number of shares of Common Stock into
the public market following the Offering could adversely affect prevailing
market prices for the Common Stock.
Of the shares of Common Stock to be outstanding following this Offering, the
322,464 shares being offered by the Selling Stockholders hereby and the
2,760,000 shares sold in the Company's initial public offering in October 1996
will be freely tradeable without restrictions or additional registration under
the Securities Act. The remaining shares were issued and sold by the Company in
private transactions in reliance upon exemptions from registration under the
Securities Act. All of these shares will be eligible for resale pursuant to
Rule 144, commencing August 1, 1997.
In general, under Rule 144 as currently in effect, a person (or persons whose
shares are aggregated), who has beneficially owned shares for at least two years
(including the holding period of any prior owner except an affiliate) is
entitled to sell in "broker's transactions" or to market makers, within any
three-month period, a number of such shares that does not exceed the greater of
(i) one percent of the then outstanding shares of Common Stock, or (ii)
generally, the average weekly trading volume in the Common Stock during the four
calendar weeks preceding the sale. Sales under Rule 144 are also subject to the
filing of a Form 144 with respect to such sale and certain other limitations and
restrictions. Under Rule 144(k), a person who is not deemed to have been an
affiliate of the Company at any time during the ninety (90) days preceding a
sale, and who has beneficially owned the shares proposed to be sold for at least
three years, would be entitled to sell such shares without having to comply with
the manner of sale, volume limitation or notice filing provisions described
above.
The Company is unable to estimate the number of shares that will be sold
under Rule 144, as this will depend on the market price for the Common Stock of
the Company, the personal circumstances of the sellers and other factors. Any
future sale of substantial amounts of the Common Stock in the open market may
adversely affect the market price of the Common Stock offered hereby.
The Company has filed a registration statement on Form S-8 under the
Securities Act to register up to 600,000 shares of Common Stock reserved for
issuance under its Stock Incentive Plan, thus permitting the resale of such
shares by nonaffiliates in the public market without restriction under the
Securities Act, subject to vesting restrictions with the Company, and intends to
amend such registration statement to include 250,000 additional shares of Common
Stock authorized for issuance under the Stock Incentive Plan by the Board of
Directors, subject to stockholder approval of certain amendments to the Stock
Incentive Plan at the annual meeting of stockholders scheduled for June 1997.
Currently, there are a total of 281,171 shares subject to options issued under
the Stock Incentive Plan which are the subject matter of such registration
statement.
54
SELLING STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock by the Selling Stockholders
as of the date of this Prospectus, and as adjusted to reflect the assumed sale
of all of the shares offered hereby by the Selling Stockholders.
[Download Table]
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED
PRIOR TO THE OFFERING AFTER THE OFFERING
--------------------- ------------------
SHARES
NUMBER PERCENT OFFERED NUMBER PERCENT
------ ------- ------- --------------
Murray Company (1) 143,261 1.7% 143,261 - -%
Pat Murray (2) 101,129 1.2 101,129 - -
Marjorie Fox (3) 30,000 * 30,000 - -
Thomas Reed (4) 20,000 * 20,000 - -
Barry O'Neill (5) 10,000 * 10,000 - -
Stephen O'Neill (6) 10,000 * 10,000 - -
Donna O'Neill (7) 4,513 * 4,513 - -
Rita Harvey (8) 3,561 * 3,561 - -
--------
* Less than 1%
(1) Murray Company is an entity controlled by Pat Murray, a former Vice
President of the Company and an original investor in MarkWest Partnership.
The address of the Murray Company is 300 E. Irwin Place, Englewood, Colorado
80112.
(2) Pat Murray is a former Vice President of the Company and an original
investor in MarkWest Partnership. Mr. Murray's address is 300 E. Irwin
Place, Englewood, Colorado 80112.
(3) Marjorie Fox is the mother of John M. Fox, President, Chief Executive
Officer and a director of the Company. Ms. Fox's address is 1214 Gowen
Avenue, Richland, Washington 99352.
(4) Thomas Reed is an original investor in MarkWest Partnership and the cousin
of John M. Fox, President, Chief Executive Officer and a director of the
Company. Mr. Reed's address is 3435 Golden Avenue, Cincinnati, Ohio 45266.
(5) Barry O'Neill is the brother of Brian T. O'Neill, Senior Vice President,
Chief Operating Officer and a director of the Company. Mr. O'Neill's address
is 2381 Juniper Court, Golden, Colorado 80401.
(6) Stephen O'Neill is the brother of Brian T. O'Neill, Senior Vice President,
Chief Operating Officer and a director of the Company. Mr. O'Neill's address
is 11653 W. 75th Circle, Arvada, Colorado 80005.
(7) Donna O'Neill is the sister of Brian T. O'Neill, Senior Vice President,
Chief Operating Officer and a director of the Company. Ms. O'Neill's address
is 4408 Island Place, #302, Annandale, Virginia 22003.
(8) Rita Harvey is the former Director of Finance and Treasurer of the Company.
Ms. Harvey's address is 2992 Bellaire Street, Denver, Colorado 80207.
55
PLAN OF DISTRIBUTION
The distribution of shares of Common Stock by the Selling Stockholders may
be effected from time to time in one or more transactions (which may involve
block transactions) in the over-the-counter market or on the Nasdaq National
Market, in negotiated transactions, through the writing of options on shares
(whether such options are listed on an options exchange or otherwise), or a
combination of such methods of sale, at market prices prevailing at the time of
sale, at prices related to such prevailing market prices, or at negotiated
prices. The Selling Stockholders may effect such transactions by selling shares
to or through broker-dealers, and such broker-dealers may receive compensation
in the form of underwriting discounts, concessions or commissions from the
Selling Stockholders and/or purchasers of shares for whom they may act as agent
(which compensation may be in excess of customary commissions). The Selling
Stockholders also may pledge shares as collateral for margin accounts and such
shares could be resold pursuant to the terms of such accounts.
LEGAL MATTERS
Certain legal matters with respect to the legality of the issuance of shares
of Common Stock offered hereby will be passed upon for the Company by Dorsey &
Whitney LLP, Denver, Colorado.
EXPERTS
The financial statements as of December 31, 1996 and 1995 and for each of the
three years in the period ended December 31, 1996 included in this Prospectus
have been so included in reliance on the report of Price Waterhouse LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and, in accordance therewith, files reports,
proxy statements, information statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements, information statements and other information filed by the Company
with the Commission can be inspected and copied at the public reference
facilities maintained by the Commission at the principal offices of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, or at the
Commission's regional offices: Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661; and 7 World Trade Center, 13th
Floor, New York, New York 19948. The Common Stock is traded on the Nasdaq
National Market and reports, proxy statements and other information concerning
the Company may be inspected at the offices of the Nasdaq National Market, 1735
K Street, N.W., Washington, D.C. 20006. In addition, the Commission maintains a
Web site (http://www.sec.gov) that contains reports, proxy and other information
statements and other information regarding issuers that file electronically with
the Commission.
56
The Company has filed with the Commission a Registration Statement on Form S-
1 with respect to the shares of Common Stock offered hereby, of which this
Prospectus forms a part. In accordance with the rules of the Commission, this
Prospectus omits certain information contained in the Registration Statement.
For further information with respect to the Company and the securities offered
hereby, reference is made to the Registration Statement and the exhibits and
schedules filed therewith. Statements contained in this Prospectus concerning
the provisions of such documents are necessarily summaries of such documents and
each such statement is qualified in its entirety by reference to the copy of the
applicable document filed with the Commission as an exhibit to the Registration
Statement. Copies of the Registration Statement and the exhibits and schedules
thereto may be inspected, without charge, at the offices of the Commission, or
obtained at prescribed rates from the Public Reference Section of the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549.
57
MARKWEST HYDROCARBON, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Accountants.......................................... F-2
Consolidated Balance Sheet at December 31, 1996 and 1995................... F-3
Consolidated Statement of Operations for each of the three years ended
December 31, 1996.................................................. F-4
Consolidated Statement of Cash Flows for each of the three years ended
December 31, 1996.................................................. F-5
Consolidated Statement of Changes in Stockholders' Equity/ Partners'
Capital for each of the three years ended December 31, 1996........ F-6
Notes to Consolidated Financial Statements................................. F-7
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of MarkWest Hydrocarbon, Inc.
In our opinion, the accompanying consolidated balance sheet and related
consolidated statements of operations, of cash flows and of changes in
stockholders' equity/ partners' capital present fairly, in all material
respects, the financial position of MarkWest Hydrocarbon, Inc., a Delaware
corporation (formerly MarkWest Hydrocarbon Partners, Ltd., a Colorado limited
partnership), and its subsidiaries at December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Denver, Colorado
March 5, 1997
F-2
MARKWEST HYDROCARBON, INC.
( SUCCESSOR TO MARKWEST HYDROCARBON PARTNERS, LTD. )
CONSOLIDATED BALANCE SHEET
($000S, EXCEPT SHARE DATA)
[Download Table]
December 31,
1996 1995
-------- -------
ASSETS
Current assets:
Cash and cash equivalents.............. $ 4,401 $ 761
Receivables............................ 9,755 8,909
Inventories............................ 5,632 2,830
Prepaid expenses and other assets...... 2,289 2,104
-------- -------
Total current assets................. 22,077 14,604
-------- -------
Property and equipment:
Gas processing, gathering, storage and
marketing............................. 45,247 23,134
Oil and gas properties and equipment... 3,731 1,883
Construction in progress............... 5,831 10,282
Land, buildings and other equipment.... 5,647 6,216
-------- -------
60,456 41,515
Less: accumulated depreciation,
depletion and amortization............ (12,316) (9,568)
-------- -------
Total property and equipment, net.... 48,140 31,947
-------- -------
Intangible assets, net of accumulated
amortization of $315
and $152 respectively................. 380 320
Note receivable and other assets........ 7,657 25
-------- -------
Total assets........................ $ 78,254 $46,896
======== =======
LIABILITIES AND
STOCKHOLDERS' EQUITY/PARTNERS' CAPITAL
Current liabilities:
Trade accounts payable................. $ 5,382 $ 3,283
Accrued liabilities.................... 1,629 952
Income taxes payable................... 3,014 --
Current portion of long-term debt...... 156 --
-------- -------
Total current liabilities........... 10,181 4,235
Deferred income taxes................... 3,977 --
Long-term debt.......................... 11,257 17,500
-------- -------
Total liabilities................... 25,415 21,735
Minority interest....................... 9,175 --
-------- -------
Commitments and contingencies........... -- --
-------- -------
Stockholders' equity/ partners' capital:
Preferred stock, par value $.01;
5,000,000 shares authorized, 0 shares
issued and outstanding................ -- --
Common stock, par value $.01;
20,000,000 shares authorized,
8,485,000 shares issued and
outstanding......................... 85 --
Additional paid-in capital............. 42,237 --
Partners' capital...................... -- 25,161
Retained earnings...................... 1,342 --
-------- -------
Total stockholders' equity/
partners' capital.................. 43,664 25,161
-------- -------
Total liabilities and stockholders'
equity/partners' capital............... $ 78,254 $46,896
======== =======
The accompanying notes are an integral part of these financial statements
F-3
MARKWEST HYDROCARBON, INC.
(SUCCESSOR TO MARKWEST HYDROCARBON PARTNERS, LTD.)
CONSOLIDATED STATEMENT OF OPERATIONS
($000S, EXCEPT PER SHARE DATA)
[Enlarge/Download Table]
For the Year Ended December 31,
1996 1995 1994
------- ------- -------
Revenues:
Plant revenue............................................. $45,880 $33,823 $33,056
Terminal and marketing revenue............................ 22,858 13,172 13,666
Oil and gas and other revenue............................. 3,022 1,075 1,830
Interest income........................................... 192 156 136
Gain on sales of oil and gas properties................... -- -- 4,275
------- ------- -------
Total revenues........................................... 71,952 48,226 52,963
------- ------- -------
Costs and expenses:
Plant feedstock purchases................................. 22,231 17,308 21,582
Terminal and marketing purchases.......................... 18,676 11,937 11,497
Operating expenses........................................ 7,048 4,706 4,393
General and administrative expenses....................... 5,302 4,189 3,654
Depreciation, depletion and amortization.................. 2,910 1,754 1,942
Interest expense.......................................... 1,090 508 1,825
Reduction in carrying value of assets..................... -- -- 2,950
------- ------- -------
Total costs and expenses................................. 57,257 40,402 47,843
------- ------- -------
Income before minority interest, income taxes and
extraordinary item........................................ 14,695 7,824 5,120
Minority interest in net loss of subsidiary................ 65 -- --
------- ------- -------
Income before income taxes and extraordinary item.......... 14,760 7,824 5,120
Income tax provision:
Arising from reorganization............................... 3,745 -- --
Subsequent to reorganization.............................. 3,246 -- --
------- ------- -------
Income before extraordinary item........................... 7,769 7,824 5,120
Extraordinary loss on extinguishment of debt............... -- (1,750) --
------- ------- -------
Net income................................................. $ 7,769 $ 6,074 $ 5,120
======= ======= =======
Pro forma information (Note 2):
Historical income before income taxes and extraordinary
item..................................................... $14,760 $ 7,824 $ 5,120
Pro forma provision for income taxes...................... 5,609 2,937 1,424
------- ------- -------
Pro forma income before extraordinary item................ $ 9,151 $ 4,887 $ 3,696
======= ======= =======
Pro forma earnings per share of common stock.............. $ 1.16 $ .85
======= =======
Pro forma weighted average number of outstanding shares
of common stock.......................................... 7,908 5,725
======= =======
The accompanying notes are an integral part of these financial statements.
F-4
MARKWEST HYDROCARBON, INC.
( SUCCESSOR TO MARKWEST HYDROCARBON PARTNERS, LTD. )
CONSOLIDATED STATEMENT OF CASH FLOWS
($000S)
[Download Table]
For the Year Ended December 31,
1996 1995 1994
-------- -------- --------
Cash flows from operating activities:
Net income............................. $ 7,769 $ 6,074 $ 5,120
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation, depletion and
amortization....................... 2,910 1,754 1,942
Deferred income taxes............... 3,977 -- --
Option granted in conjunction with
extinguishment of debt............ -- 1,050 --
Loss (gain) on sale of assets....... 46 -- (4,275)
Reduction in carrying value of
assets............................. -- -- 2,950
(Increase) in receivables........... (846) (4,729) (977)
(Increase) decrease in inventories.. (2,802) (19) 1,348
(Increase) decrease in prepaid
expenses and other assets.......... (185) (86) (1,125)
Increase (decrease) in accounts
payable and accrued liabilities.... 5,946 1,392 (3,989)
-------- -------- --------
Net cash flow provided by
operating activities.............. 16,815 5,436 994
Cash flows from investing activities:
Capital expenditures................ (9,824) (12,426) (1,442)
Proceeds from sale of assets........ -- -- 10,166
Increase in long-term notes
receivable......................... (7,657) -- --
Decrease (increase) in intangible
and other assets................... (35) (184) 344
-------- -------- --------
Net cash provided by (used in)
investing activities.............. (17,516) (12,610) 9,068
Cash flows from financing activities:
Proceeds from issuance of long-term
debt................................. 1,174 -- --
Repayments of long-term debt.......... (84) (500) --
Borrowings under revolving credit
facility............................. 45,950 26,050 7,201
Payments on revolving credit facility. (53,548) (18,937) (12,800)
Partners' distributions............... (14,150) (4,150) (320)
Payments on partner notes............. 320 -- --
Payments on options................... 71 4 33
Proceeds from issuance of common stock 24,608 -- --
-------- -------- --------
Net cash provided by (used in)
financing activities.............. 4,341 2,467 (5,886)
Net increase (decrease) in cash
and cash equivalents.............. 3,640 (4,707) 4,176
Cash and cash equivalents at beginning
of year................................ 761 5,468 1,292
-------- -------- --------
Cash and cash equivalents at end of year $ 4,401 $ 761 $ 5,468
======== ======== ========
The accompanying notes are an integral part of these financial statements.
F-5
MARKWEST HYDROCARBON, INC.
(SUCCESSOR TO MARKWEST HYDROCARBON PARTNERS, LTD.)
CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY/ PARTNERS' CAPITAL
($000S)
[Enlarge/Download Table]
ADDITIONAL TOTAL
PARTNERS' COMMON PAID-IN RETAINED STOCKHOLDERS'
CAPITAL STOCK CAPITAL EARNINGS EQUITY
---------- ------ ---------- -------- -------------
Balance, December 31, 1993 $ 17,350 $ -- $ -- $ -- $ 17,350
Net income 5,120 -- -- -- 5,120
Distributions, net of contributions (287) -- -- -- (287)
---------- ------ ---------- -------- -------------
Balance, December 31, 1994 22,183 -- -- -- 22,183
Net income 6,074 -- -- -- 6,074
Distributions, net of contributions (4,146) -- -- -- (4,146)
Option granted in conjunction with
extinguishment of debt 1,050 -- -- -- 1,050
---------- ------ ---------- -------- -------------
Balance, December 31, 1995 25,161 -- -- -- 25,161
Net income prior to reorganization 6,427 -- -- -- 6,427
Notes receivable from partners, net,
prior to reorganization 205 -- -- -- 205
Distributions prior to reorganization (14,150) -- -- -- (14,150)
Exercise of options, prior to
reorganization 71 -- -- -- 71
Reorganization from a limited
partnership to a corporation (17,714) 57 17,657 -- --
Deferred taxes relating to the
reorganization -- -- -- (3,745) (3,745)
Common stock issued -- 28 24,580 -- 24,608
Net income after reorganization -- -- -- 5,087 5,087
---------- ------ ---------- -------- -------------
Balance, December 31, 1996 $ -- $ 85 $ 42,237 $ 1,342 $ 43,664
========== ====== ========== ======== =============
The accompanying notes are an integral part of these financial statements.
F-6
MARKWEST HYDROCARBON, INC.
( SUCCESSOR TO MARKWEST HYDROCARBON PARTNERS, LTD. )
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF OPERATIONS AND SIGNIFICANT BUSINESS ACQUISITIONS
NATURE OF OPERATIONS AND RECENT REORGANIZATION
MarkWest Hydrocarbon, Inc. (the "Company") provides compression, gathering,
treatment, processing and natural gas liquids extraction services to natural gas
producers and pipeline companies and fractionates natural gas liquids into
marketable products for sale to third parties. The Company also purchases,
stores and markets natural gas and natural gas liquids and has begun to conduct
strategic exploration for new natural gas resources for its processing and
fractionation activities.
The Company was incorporated in June 1996 to act as the successor to MarkWest
Hydrocarbon Partners, Ltd. (the "Partnership"). Effective October 7, 1996, the
Partnership reorganized (the "Reorganization") and the existing general and
limited partners exchanged 100% of their interests in the Partnership for
5,725,000 common shares of the Company. 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. This transaction was a reorganization of entities under common
control, and accordingly, it was accounted for at historical cost.
SIGNIFICANT BUSINESS ACQUISITIONS
Prior to July 1, 1996, the Partnership owned 49% of MarkWest Coalseam
Development Company LLC (formerly MarkWest Coalseam Joint Venture) ("Coalseam"),
a natural gas development venture, and MW Gathering LLC ("Gathering"), a natural
gas gathering venture. Effective July 1, 1996, Gathering was merged into
Coalseam. Simultaneously, the Partnership formed MarkWest Resources Inc.
("Resources"), and Coalseam distributed 49% of its assets to Resources and 51%
to MAK-J Energy Partners, Ltd. (formerly MarkWest Energy Partners, Ltd.)
("Energy"), a partnership whose general partner is a corporation owned and
controlled by the President of the Company. The consolidated financial
statements reflect Resources' 49% proportionate share of the underlying oil and
gas assets, liabilities, revenues and expenses.
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 Company's
ownership interest increases as capital expenditures for the benefit of West
Shore are made by the Company. As of December 31, 1996, the Company has
recorded a net investment in West Shore of $10.4 million, representing a 47%
ownership interest. The Company is committed to make capital expenditures of
approximately $21.0 million through 1997 in conjunction with the first two
phases of the agreement. Phase I of the project will be completed in early
1997. Phase II, scheduled for completion in late 1997, is underway.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, Resources and MarkWest Michigan, Inc. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
F-7
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents. Excess cash is used to
pay down the term/revolver loan facility. Accordingly, investments are limited
to overnight investments of end-of-day cash balances.
RECEIVABLES
Receivables comprise the following (in $000s):
[Download Table]
At December 31,
1996 1995
------- ------
Trade and other receivables $9,755 $5,735
Short-term advances -- 3,174
------ ------
$9,755 $8,909
====== ======
No allowance for doubtful accounts is considered necessary based on favorable
historical experience.
During the fourth quarter of 1995, the Partnership made several short-term
advances totaling $3,174,000 as part of an agreement with a partner to develop a
joint project. 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.
INVENTORIES
Inventories comprise the following (in $000s):
[Download Table]
At December 31,
1996 1995
------- ------
Product inventory $5,292 $2,718
Materials and supplies inventory 340 112
------ ------
$5,632 $2,830
====== ======
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 Company's product
inventory was $7.6 million and $3.8 million at December 31, 1996 and 1995,
respectively. Capitalized overhead costs of $232,000 and $219,000 were included
in product inventory at December 31, 1996, and 1995, respectively. Materials and
supplies are valued at the lower of average cost or estimated net realizable
value.
F-8
PREPAID EXPENSES AND OTHER ASSETS
Prepaid expenses and other assets comprise the following (in $000s):
[Download Table]
At December 31,
1996 1995
------- ------
Prepaid feedstock $1,831 $1,729
Prepaid expenses 458 375
------ ------
$2,289 $2,104
====== ======
Prepaid feedstock consists of natural gas purchased in advance of its actual
use. It is valued on a first-in, first-out method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost. Expenditures which extend the
useful lives of assets are capitalized. Repairs, maintenance and renewals which
do not extend the useful lives of the assets are expensed as incurred. Interest
costs for the construction or development of significant long-term assets are
capitalized and amortized over the related asset's estimated useful life.
Depreciation is provided principally on the straight-line method over the
following estimated useful lives: plant facilities, 20 years; buildings, 40
years; furniture, leasehold improvements and other, 3-10 years. Depreciation for
oil and gas properties is provided for using the units-of-production method.
Oil and gas properties consist of leasehold costs, producing and non-producing
gas wells and equipment, and pipelines. The Company uses the full cost method of
accounting for oil and gas properties. Accordingly, all costs associated with
acquisition, exploration and development of oil and gas reserves are capitalized
to the full cost pool.
These capitalized costs, including estimated future costs to develop the
reserves and estimated abandonment costs, net of salvage value, are amortized on
a units-of-production basis using estimates of proved reserves. Investments in
unproved properties and major development projects are not amortized until
proved reserves associated with the projects can be determined or until
impairment occurs. If the results of an assessment of such properties indicate
that the properties are impaired, the amount of impairment is added to the
capitalized cost base to be amortized. As of December 31, 1996 and 1995,
approximately $649,000 and $862,000 of investments in unproved properties were
excluded from amortization.
The capitalized costs included in the full cost pool are subject to a "ceiling
test," which limits such costs to the aggregate of the estimated present value,
using a 10 percent discount rate, of the future net revenues from proved
reserves, based on current economics and operating conditions. Impairment under
the ceiling test of $116,000 was recognized in 1994 and is included in
depreciation, depletion and amortization in the accompanying consolidated
statement of operations. No impairment existed as of December 31, 1996 and 1995.
Sales of proved and unproved properties are accounted for as adjustments of
capitalized costs with no gain or loss recognized, unless such adjustments would
significantly alter the relationship between capitalized costs and proved
reserves of oil and gas, in which case the gain or loss is recognized in the
consolidated statement of operations.
F-9
IMPAIRMENT OF LONG-LIVED ASSETS
During 1996, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, which requires that an impairment loss be
recognized when the carrying amount of an asset exceeds the expected future
undiscounted net cash flows. There was no effect on the Company's financial
statements as a result of adopting SFAS No. 121.
INTANGIBLE ASSETS
Deferred financing costs and a non-compete agreement with a former officer and
director are included in intangible assets. Both are amortized using the
straight-line method over the terms of the associated agreements.
NOTE RECEIVABLE
Note receivable at December 31, 1996 consists of a note receivable (the "Note")
from Michigan Production Company, LLC ("MPC"). The Note is for all sums
necessary for the construction of the 31 mile extension to the Basin pipeline.
The Note bears an interest rate of 5.98% and is payable to the Company on the
earlier of two dates which are contingent upon certain events as defined in the
agreement.
HEDGING ACTIVITIES
The Company limits its exposure to natural gas and propane price fluctuations
related to future purchases and production with futures contracts. These
contracts are accounted for as hedges in accordance with the provisions of SFAS
No. 80, Accounting for Futures Contracts. Gains and losses on such hedge
contracts are deferred and included as a component of propane revenues and
feedstock purchases when the hedged production is sold.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents,
receivables, accounts payable and other current liabilities, and long-term debt.
Except for long-term debt, the carrying amounts of financial instruments
approximate fair value due to their short maturities. At December 31, 1996 and
1995, based on rates available for similar types of debt, the fair value of
long-term debt was not materially different from its carrying amount.
REVENUE RECOGNITION
Revenue for sales or services is recognized at the time the product is delivered
or at the time the service is performed.
INCOME TAXES
Deferred income taxes reflect the impact of "temporary differences" between
amounts of assets and liabilities for financial reporting purposes and such
amounts as measured by tax laws. These temporary differences are determined in
accordance with the liability method of accounting for income taxes as
prescribed by SFAS No. 109, Accounting for Income Taxes.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of trade accounts receivable. The risk is
limited due to the large number of entities comprising
F-10
the Company's customer base and their dispersion across industries and
geographic locations. At December 31, 1996, the Company had no significant
concentrations of credit risk.
STOCK COMPENSATION
As permitted under SFAS No. 123, Accounting for Stock-Based Compensation, the
Company has elected to continue to measure compensation costs for stock-based
employee compensation plans as prescribed by Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees. The Company has complied with
the pro forma disclosure requirements of SFAS No. 123 as required under the
pronouncement.
SUPPLEMENTAL CASH FLOW INFORMATION
Interest of $1,012,000, $792,000 and $1,805,000 was paid for years ended
December 31, 1996, 1995 and 1994, respectively. Interest paid in 1996 and 1995
is net of $27,000 and $301,000, respectively, capitalized in relation to various
construction projects.
There were no income taxes paid during the three years ended December 31, 1996.
The Consolidated Statement of Cash Flows for the year ended December 31, 1996
excludes non-cash activities related to the contribution of Basin Pipeline, LLC
by Michigan Energy, LLC ("MEC") to West Shore. MEC's contribution was valued
at approximately $9.2 million.
In 1996, the Company financed the purchase of certain assets from the Dow
Chemical Company ("Dow") with a note valued at approximately $421,000. As of
December 31, 1996, $337,000 was outstanding under this note.
PRO FORMA INFORMATION
Pro forma provision for income taxes and pro forma net income. Prior to the
Reorganization, MarkWest was organized as a partnership and, consequently, was
not subject to income tax. A pro forma provision for income taxes for the years
ended December 31, 1996, 1995 and 1994 has been presented for purposes of
comparability as if MarkWest had been a taxable entity for all periods
presented.
Pro forma weighted average shares outstanding at December 31, 1996 and December
31, 1995. Pro forma weighted average shares outstanding at December 31, 1996
represents the weighted average of, for the period prior to the Offering, the
number of common shares issued in the Offering for which the net proceeds were
used to repay outstanding indebtedness and, for the period subsequent to the
Offering, the total number of common shares outstanding. Pro forma weighted
average shares outstanding at December 31, 1995 represents the weighted average
number of common shares issued in the Reorganization.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the 1996
presentation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F-11
NOTE 3. DEBT
REVOLVER/TERM LOAN
On November 20, 1992, the Partnership entered into a financing agreement with
Norwest Bank Denver, N.A. ("Norwest") and First American National Bank ("FANB")
of Nashville, Tennessee. The facility is structured as a revolver and had an
initial maximum borrowing base of $20 million. The borrowing base on the
facility is redetermined semi-annually. On September 8, 1995, the agreement was
amended to add N M Rothschild and Sons Limited ("Rothschild") as a lender,
revise the interest rate for base rate loans and institute the option of LIBOR
(London Interbank Offered Rate) interest. On May 31, 1996, the facility was
further amended to increase the maximum borrowing base to $40 million and extend
the repayment period to June 30, 2002, with 16 equal quarterly installments
commencing September 30, 1998. As of December 31, 1996 and 1995, outstanding
borrowings were $4.2 million and $15 million, respectively. The remaining
borrowing base of $35.8 million and $10 million was unutilized at December 31,
1996 and 1995, respectively.
Interest on a base rate loan is now calculated at prime plus 1/4 % if the
Company's total debt is less than or equal to 40% of total capitalization. If
debt exceeds 40% of capitalization, the rate increases to prime plus 1/2 %. At
December 31, 1996 and 1995, $4.2 million and $3 million were outstanding under a
base rate loan bearing interest at 8 1/2 % and 9 %, respectively.
The LIBOR option allows the Company to lock in a portion of the revolver balance
for a period of one, two, three or six months. Interest on a LIBOR loan is
calculated at LIBOR plus 2% if the Company's total debt is less than or equal to
40% of total capitalization. If debt exceeds 40% of capitalization, the rate
increases to LIBOR plus 2 1/4 %. At December 31, 1996 and 1995, $0 and $12
million were outstanding under the LIBOR commitment, respectively.
This debt is secured by a first mortgage on the Company's property, plant,
equipment and contracts, excluding railcars and truck trailers. The loan
agreement restricts certain activities and requires the maintenance of certain
financial ratios and other conditions.
WORKING CAPITAL LINE OF CREDIT
On November 20, 1992, the Partnership entered into a working capital line of
credit agreement with Norwest and FANB in the amount of $5 million. The
borrowing base, as defined in the credit agreement, is redetermined monthly. On
September 8, 1995, the agreement was amended to add Rothschild as a lender,
revise the interest rate, increase the maximum borrowing base to $7.5 million,
and extend the working capital commitment period and maturity date. The
extended due date on the working capital note is June 30, 1998. The interest
rate change is the same as discussed above for the revolver/term loan. No LIBOR
option is available for the working capital line. At December 31, 1996 and
1995, $5.7 million and $2.5 million were outstanding bearing interest at 8 1/2
% and 9 %, respectively. All amounts outstanding under this facility were paid
off effective February 6, 1997.
MARKWEST RESOURCES 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 million as
of December 31, 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 December 31,
1996 and December 31, 1995, $1.2 million and $0 were outstanding, respectively.
This facility is secured by substantially all of MarkWest Resources' assets.
The Company has guaranteed $1 million of this facility. All amounts outstanding
under this facility were repaid effective February 19, 1997.
F-12
Scheduled debt maturities under the terms of the facilities are as follows (in
$000s):
[Download Table]
At December 31, 1996 At December 31, 1995
Revolver Line of Subsidiary Revolver Line of
loan credit Debt loan credit
-------- ------- ----- ------ ------
1997 $ - $ $ 156 $ 1,875 $2,500
1998 525 5,700 156 3,750 -
1999 1,050 - 25 3,750 -
2000 1,050 - - 3,750 -
2001 and thereafter 1,575 - 1,176 1,875 -
------ ------- ------ ------- --------
Total $4,200 $5,700 $1,513 $15,000 $2,500
====== ======= ====== ======= ========
SOUTH SHORE NOTE
The note agreement for the purchase of the South Shore plant and the
isomerization expansion allowed for the prepayment of principal to no less than
$500,000. In November 1992, the Partnership exercised its prepayment rights
relative to this agreement by paying $9.2 million of the then-outstanding
balance. The remaining $500,000 principal balance accrued interest at 12%. Under
the terms of the note, additional interest was payable annually based on certain
operating results of the fractionation plant and proceeds from asset
dispositions. Such additional interest expense was $422,000 for 1994.
During 1995, the Partnership reached an agreement with the noteholder to fully
retire the note. Accordingly, the Partnership paid the remaining balance of
$500,000 as well as $700,000 of additional interest. In addition, the
Partnership granted to the noteholder an option to acquire 3.5% of the
Partnership. Based on management's best estimate of the fair value of the
Partnership, the option was valued at $1,050,000 which, together with the
$700,000 of additional interest, is reflected in the Consolidated Statement of
Operations as an extraordinary loss due to the early extinguishment of debt.
NOTE 4. RELATED PARTY AND CAPITAL TRANSACTIONS
The Company made contributions of $299,000, $211,000, $213,000 to a profit-
sharing plan for the years ended December 31, 1996, 1995 and 1994, respectively.
The plan is discretionary, with annual contributions determined by the
Company's Board of Directors.
The Partnership periodically extended offers to employees to purchase interests
in the Partnership. The partners and/or employees provided the Partnership with
promissory notes as part of the exercise price. According to the terms of the
notes, interest accrues at 7% and payments are required for the greater of
accrued interest or excess distributions. Notes in the amounts of $376,000 and
$512,000 have been recorded as a reduction of additional paid-in capital at
December 31, 1996 and 1995, respectively.
The Company has receivables from employees and officers of $23,000 and $74,000
at December 31, 1996 and 1995, respectively.
The Company's employees perform certain administrative functions on behalf of
its subsidiaries. At December 31, 1996 and 1995, no material amounts were due
to or from the subsidiaries for miscellaneous administrative expenses.
Barry F. Spector, a director of the Company, periodically provides legal
services to the Company. During 1996, the Company paid Mr. Spector legal fees of
approximately $65,000 in return for such services.
F-13
NOTE 5. SPECIAL ITEMS
In 1994, the Partnership shut down the South Shore plant's isomerization unit
when it was unable to find satisfactory markets for its isobutane. Accordingly,
the Partnership recorded a $2,242,000 charge to write down the unit to its
estimated realizable value. In addition, a catalyst used in the isomerization
process was sold, resulting in a $347,000 loss. The Partnership also recorded a
charge of $361,000 in 1994 for the write-down of non-productive equipment
related to various business development projects.
NOTE 6. COMMITMENTS AND CONTINGENCIES
The Company is involved in various litigation and administrative proceedings
arising in the normal course of business. In the opinion of management, any
liabilities (net of insurance) that may result from these claims will not,
individually or in the aggregate, have a material adverse effect on the
Company's financial position or results of operations.
NOTE 7. SIGNIFICANT CUSTOMERS
For the year ended December 31, 1996 and 1995, sales to one customer accounted
for approximately 16% and 18% of total revenues, respectively. During 1994, no
sales to any one customer accounted for more than 10% of total revenue.
Management believes the loss of these customers would not adversely impact
operations, as alternative markets are available.
NOTE 8. HEDGING ACTIVITIES
MarkWest's primary hedging objectives are to meet or exceed budgeted gross
margins by locking in budgeted or above-budgeted prices in the financial
derivatives markets and to protect margins from precipitous declines. Under
internal guidelines, speculative positions are prohibited.
The Company's hedging activities generally fall into three categories - 1)
contracting for future purchases of natural gas at a predetermined BTU
differential based upon a basket of Gulf Coast NGL prices (or a substitute for
propane such as crude oil), 2) the fixing of margins between propane sales
prices and natural gas reimbursement costs by purchasing natural gas contracts
and simultaneously selling propane contracts of approximately the same BTU
value, and 3) the purchase of propane futures contracts to hedge future sales of
propane at the Company's terminals or gas plants. The Company enters into
futures transactions on the New York Mercantile Exchange ("NYMEX"). Future gas
purchases are based on predetermined BTU differentials are negotiated with
natural gas suppliers and structured to provide similar risk protections as
NYMEX futures.
At December 31, 1996, the Company had a total of 295 short and 135 long open
propane futures contracts representing a notional quantity amounting to 160,000
barrels of production. Late in 1996, the Company entered into agreements with
certain natural gas suppliers for gas purchases (25,000 mmbtus a day) for the
summer of 1997 at differentials to crude oil futures and NGL baskets at December
31, 1996. There were no material notional quantities of natural gas or crude oil
futures or options at December 31, 1996, and no material notional quantities of
natural gas, NGL, or crude oil futures, swaps or options at December 31, 1995.
During the years ended December 31, 1996 and 1995, a $1.1 million loss and
$300,000 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.
F-14
NOTE 9. INCOME TAXES
In connection with the reorganization from a partnership to a corporation, the
Company recorded deferred income taxes as of October 7, 1996 and a one-time
charge to earnings of $3.7 million.
The total income tax provision for the year ended December 31, 1996 has been
allocated as follows (in $000s):
Arising from reorganization ........................ $3,745
Subsequent to reorganization ....................... 3,246
------
$6,991
======
The components of the income tax provision subsequent to reorganization
consisted of the following (in $000s):
Year ended
December 31,
1996
------------
Current federal .................................... $2,616
Current state ...................................... 398
------
Total current ............................. 3,014
------
Deferred federal ................................... 212
Deferred state ..................................... 20
------
Total deferred ............................ 232
------
Total income tax provision subsequent to
reorganization .................................... $3,246
======
The deferred tax liability is comprised of the
following (in $000s):
December 31,
1996
------------
Property and equipment ............................. $3,667
Intangible assets .................................. (6)
Other assets ....................................... 316
------
Net deferred tax liability ......................... $3,977
======
Income taxes subsequent to reorganization as reflected in the Consolidated
Statement of Operations differ from the amounts computed by applying the
statutory federal corporate tax rate to income as follows (in $000s):
Year ended
December 31,
1996
------------
Income taxes subsequent to reorganization at
statutory rate .................................... $2,916
State income taxes, net of federal benefit ......... 140
Tax credits ........................................ (35)
Other .............................................. 225
------
Income taxes subsequent to reorganization .......... $3,246
======
F-15
NOTE 10. STOCK COMPENSATION PLANS
At December 31, 1996, the Company has two stock-based compensation plans, which
are described below. The Company applies APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related Interpretations in accounting for its
plans. Accordingly, no compensation cost has been recognized for its fixed
stock option plans. Had compensation cost for the Company's two stock-based
compensation plans been determined based on the fair value at the grant dates
(1996 and 1995 grants only) under those plans consistent with the method
prescribed by SFAS No. 123, Accounting for Stock-Based Compensation, the
Company's pro forma net income and earnings per share would have been reduced to
the pro forma amounts listed below (in $000s):
[Download Table]
1996 1995
------- -------
Pro forma net income As reported....... $ 9,151 $ 4,887
Pro forma......... 9,127 4,887
Pro forma earnings per share As reported....... $ 1.16 $ 0.85
Pro forma......... 1.15 0.85
The Company historically granted employees the right to purchase partnership
interests in the Partnership. As part of the Reorganization, such employee
options to purchase partnership interests were replaced by options to purchase
shares pursuant to the Company's 1996 Stock Incentive Plan.
Under the 1996 Stock Incentive Plan, the Company may grant options to its
employees for up to 600,000 shares of common stock in the aggregate. Under the
1996 Non-employee Director Stock Option Plan, the Company may grant options to
its non-employee directors for up to 20,000 shares of common stock in the
aggregate. Under both plans, the exercise price of each option equals the market
price of the Company's stock on the date of the grant, and an option's maximum
term is 10 years. Options are granted periodically throughout the year and vest
at the rate of 20% on the first anniversary of the option grant date, and at the
rate of 20% on each subsequent anniversary thereof until fully vested.
The fair value of each option is estimated on the date of grant using the Black-
Scholes Option-Pricing model with the following weighted-average assumptions
used for grants in 1996 and 1995, respectively: dividend yield of $0/share for
all years; expected volatility of 33% for 1996 option grants and 34% for 1995
plan options; risk-free interest rate of 6.55% for 1996 option grants and 6.22%
for 1995 option grants; and expected lives of 6 years for 1996 and 1995 option
grants.
F-16
A summary of the status of the Company's two fixed stock option plans as of
December 31, 1996 and 1995 and changes during the years ended on those dates is
presented below:
[Enlarge/Download Table]
1996 1995
------------------- ------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
------ -------- ------- ---------
FIXED OPTIONS
Outstanding at beginning of year........... 64,004 $6.99 -- $ --
Granted.................................... 138,032 9.65 64,004 6.99
Exercised.................................. -- -- -- --
Forfeited.................................. (1,146) -- -- --
------- -------- ------- ---------
Outstanding at end of year................. 200,890 $8.86 64,004 $ 6.99
======= ======== ======= =========
Options exercisable at 12/31/96............ 12,800 12,800
Weighted-average fair value of
options granted during the year $4.37 $ 3.16
The following table summarizes information about fixed stock options outstanding
at December 31, 1996:
Options Outstanding Options Exercisable
------------------------------------ ---------------------
Weighted-
Average Weighted- Weighted-
Number Remaining Average Number Average
Outstanding Contractual Exercise Exercisable Exercise
Range of Exercise Prices at 12/31/96 Life Price at 12/31/96 Price
------------------------- ----------- ------------ -------- ----------- ---------
$6.99.................... 64,004 8.6 years $ 6.99 12,800 $6.99
$7.00 to $10.00.......... 136,886 9.7 years $ 9.65 --
----------- ------------ -------- ----------- ---------
200,890 12,800
=========== ===========
NOTE 11. STOCK ACTIVITY
Activity in the Company's common stock for each of the three years ended
December 31, 1996 is summarized below (in 000s of shares):
# of shares
------------
Balance at December 31, 1993........................... --
Balance at December 31, 1994........................... --
Balance at December 31, 1995........................... --
Shares issued in exchange for partnership
interests............................................. 5,725
Shares issued in initial public offering............... 2,400
Shares issued in over-allotment........................ 360
-------
Balance at December 31, 1996........................... 8,485
=======
F-17
NOTE 12. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following summarizes certain quarterly results of operations ($000s):
[Enlarge/Download Table]
First Second Third Fourth
------- ------ ------- -------
1996
-----------------------------------------------------
Revenue (1).......................................... $19,832 $8,760 $14,935 $28,233
Gross profit (2)..................................... 5,514 1,580 3,533 10,268
Pro forma net income (3)............................. 2,588 195 1,205 5,163
Per common share data:
Pro forma net income............................. $ .33 $ .03 $ .15 $ .65
1995
-----------------------------------------------------
Revenue (1).......................................... $15,566 $7,360 $ 8,665 $16,479
Gross profit (2)..................................... 4,770 1,860 1,564 4,171
Pro forma net income before extraordinary loss (3)... 2,261 421 352 1,853
Extraordinary loss on extinguishment of debt......... -- -- (1,750) --
Pro forma net income (3)............................. 2,261 421 (1,398) 1,853
Per common share data:
Pro forma income before extraordinary loss....... $ .40 $ .07 $ .06 $ .32
Extraordinary loss............................... -- -- (.30) --
Pro forma net income (loss)...................... .40 .07 (.24) .32
(1) Excludes interest income.
(2) Excludes general and administrative expenses and interest expense.
(3) During 1996, the Company reorganized and became a taxable entity. Pro forma
net income reflects the results of the Company had it been a taxable entity
for all periods presented.
F-18
================================================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN, AND IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL,
OR A SOLICITATION OF AN OFFER TO BUY, SHARES OF COMMON STOCK IN ANY JURISDICTION
TO ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION IN
SUCH JURISDICTION OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS
NOT QUALIFIED TO DO SO. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE
DATE HEREOF.
--------------------------------------------
PAGE
----
Prospectus Summary....................................................... 2
Risk Factors............................................................. 9
Price Range of Common Stock.............................................. 16
Dividend Policy.......................................................... 16
Use of Proceeds.......................................................... 16
Capitalization........................................................... 17
Selected Consolidated Financial and Other Information.................... 18
Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................... 19
Business................................................................. 26
Management............................................................... 40
Certain Transactions..................................................... 47
Principal Stockholders................................................... 50
Description of Capital Stock............................................. 52
Shares Eligible for Future Sale.......................................... 54
Selling Stockholders..................................................... 55
Plan of Distribution..................................................... 56
Legal Matters............................................................ 56
Experts.................................................................. 56
Additional Information................................................... 56
Financial Statements..................................................... F-1
=============================================================================
MARKWEST
HYDROCARBON, INC.
___________________
322,464 SHARES
COMMON STOCK
PROSPECTUS
MAY , 1997
___________________
================================================================================
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable in connection with the sale of
the Common Stock being registered hereby.
[Download Table]
ITEM AMOUNT
---- -----------
SEC registration fee................... $ 1,294.74
Printing and engraving expenses........ 1,500.00
Legal fees and expenses................ 10,750.00
Auditors' accounting fees and expenses. 15,000.00
Miscellaneous expenses................. 13,455.26
-----------
Total............................ $ 42,000.00
===========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law (the "Delaware Law")
authorizes a court to award, or a corporation's Board of Directors to grant,
indemnity to directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended (the "Securities Act"). Article IX of the Registrant's Certificate of
Incorporation (Exhibit 3.1 hereto) and Article VIII of the Registrant's Bylaws
(Exhibit 3.2 hereto) provide for indemnification of the Registrant's directors,
officers, employees and other agents to the maximum extent permitted by Delaware
Law. In addition, the Reorganization Agreement (Exhibit 10.1 hereto) provides
for cross-indemnification among the Registrant and the Selling Stockholders with
respect to certain matters, including matters arising under the Securities Act.
The Registrant's Certificate of Incorporation also provides that directors
of the Registrant shall be under no liability to the Registrant for monetary
damages for breach of fiduciary duty as a director of the Registrant, except for
those specific breaches and acts or omissions with respect to which Delaware Law
expressly provides that a corporation's certificate of incorporation shall not
eliminate or limit such personal liability of directors. Section 102(b)(7) of
the Delaware Law provides that a corporation's certificate of incorporation may
not limit the liability of directors for (i) breaches of their duty of loyalty
to the corporation and its stockholders, (ii) acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) unlawful dividends or unlawful stock repurchases under Section 174 of the
Delaware Law, or (iv) transactions from which a director derives an improper
personal benefit.
Reference is made to the following documents filed as exhibits to this
Registration Statement regarding relevant indemnification provisions described
above and elsewhere herein:
[Enlarge/Download Table]
DOCUMENT EXHIBIT NUMBER
-------- --------------
Registrant's Certificate of Incorporation............................... 3.1
Registrant's Bylaws..................................................... 3.2
Reorganization Agreement................................................ 10.1
II-1
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The following is a summary of the transactions by Registrant during the
last three years involving sales of Registrant's securities that were not
registered under the Securities Act of 1933, as amended (the "Securities Act"):
1. In conjunction with the acquisition by the Company in October 1996
from the partners of MarkWest Hydrocarbon Partners Ltd. ("MarkWest
Partnership"), the Company's predecessor, of all of the partnership interests in
MarkWest Partnership, the Company issued 5,725,000 shares of Common Stock to the
holders of partnership interests in MarkWest Partnership in exchange for the
partnership interests of such holders. The issuance of securities to such
holders was deemed to be exempt from registration under the Securities Act in
reliance on Rule 506 promulgated under Section 4(2) thereunder as a transaction
by an issuer not involving any public offering.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
3.1 Certificate of Incorporation of Registrant (Filed as exhibit 3.1 to
the Registrant's Registration Statement on Form S-1, Registration
No. 333-09513, and incorporated herein by reference).
3.2 Bylaws of Registrant (Filed as exhibit 3.2 to the Registrant's
Registration Statement on Form S-1, Registration No. 333-09513, and
incorporated herein by reference).
4.1 Specimen Common Stock Certificate of Registrant (Filed as exhibit
4.1 to the Registrant's Registration Statement on Form S-1,
Registration No. 333-09513, and incorporated herein by reference).
5.1 Opinion of Dorsey & Whitney LLP.
10.1 Amended and Restated Reorganization Agreement made as of August 1,
1996, by and among the Registrant, MarkWest Partnership, MWHC
Holding, Inc., RIMCO Associates, Inc. and each of the limited
partners of MarkWest Partnership (Filed as exhibit 10.1 to the
Registrant's Registration Statement on Form S-1, Registration No.
333-09513, and incorporated herein by reference).
10.2 Loan Agreement dated November 20, 1992, among MarkWest Partnership,
Norwest Bank Denver, National Association, individually and as
Agent, and First American National Bank (Filed as exhibit 10.21 to
the Registrant's Registration Statement on Form S-1, Registration
No. 333-09513, and incorporated herein by reference).
10.3 Modification Agreement, dated July 31, 1996, among the Registrant,
MarkWest Partnership, Norwest Bank Colorado, N.A., First American
National Bank, N M Rothschild and Sons Limited and Norwest (Filed as
exhibit 10.2 to the Registrant's Registration Statement on Form S-1,
Registration No. 333-09513, and incorporated herein by reference).
10.4 Amended and Restated Mortgage, Assignment, Security Agreement and
Financing Statement, dated May 2, 1996, between West Shore
Processing Company, LLC and Bank
II-2
of America Illinois (Filed as exhibit 10.3 to the Registrant's
Registration Statement on Form S-1, Registration No. 333-09513, and
incorporated herein by reference).
10.5 Secured Guaranty, dated May 2, 1996, between West Shore Processing
Company, LLC and Bank of America Illinois (Filed as exhibit 10.4 to
the Registrant's Registration Statement on Form S-1, Registration
No. 333-09513, and incorporated herein by reference).
10.6 Security Agreement, dated May 2, 1996, between West Shore Processing
Company, LLC and Bank of America Illinois (Filed as exhibit 10.5 to
the Registrant's Registration Statement on Form S-1, Registration
No. 333-09513, and incorporated herein by reference).
10.7 Pledge Agreement, dated May 2, 1996, between West Shore Processing
Company, LLC and Bank of America Illinois (Filed as exhibit 10.6 to
the Registrant's Registration Statement on Form S-1, Registration
No. 333-09513, and incorporated herein by reference).
10.8 Participation, Ownership and Operating Agreement for West Shore
Processing Company, LLC, dated May 2, 1996 (Filed as exhibit 10.7 to
the Registrant's Registration Statement on Form S-1, Registration
No. 333-09513, and incorporated herein by reference).
10.9 Second Amended and Restated Operating Agreement for Basin Pipeline
LLC, dated May 2, 1996 (Filed as exhibit 10.8 to the Registrant's
Registration Statement on Form S-1, Registration No. 333-09513, and
incorporated herein by reference).
10.10 Subordination Agreement, dated May 2, 1996, among MarkWest Michigan
LLC, Bank of America Illinois, West Shore Processing Company, LLC,
Basin Pipeline LLC, and Michigan Energy Company, LLC (Filed as
exhibit 10.9 to the Registrant's Registration Statement on Form S-1,
Registration No. 333-09513, and incorporated herein by reference).
10.11 Gas Treating and Processing Agreement, dated May 1, 1996, between
West Shore Processing Company, LLC and Shell Offshore, Inc. (Filed
as exhibit 10.10 to the Registrant's Registration Statement on Form
S-1, Registration No. 333-09513, and incorporated herein by
reference).
10.12 Gas Gathering, Treating and Processing Agreement, dated May 2, 1996,
between Oceana Acquisition Company and West Shore Processing
Company, LLC (Filed as exhibit 10.11 to the Registrant's
Registration Statement on Form S-1, Registration No. 333-09513, and
incorporated herein by reference).
10.13 Gas Gathering, Treating and Processing Agreement, dated May 2, 1996,
between Michigan Production Company, LLC and West Shore Processing
Company, LLC (Filed as exhibit 10.12 to the Registrant's
Registration Statement on Form S-1, Registration No. 333-09513, and
incorporated herein by reference).
10.14 Products Exchange Agreements, dated May 1, 1996, with Ferrellgas,
L.P. (Filed as exhibit 10.13 to the Registrant's Registration
Statement on Form S-1, Registration No. 333-09513, and incorporated
herein by reference).
II-3
10.15 Gas Processing and Treating Agreement, dated March 29, 1996, between
Manistee Gas Limited Liability Company and Michigan Production
Company, LLC (Filed as exhibit 10.14 to the Registrant's
Registration Statement on Form S-1, Registration No. 333-09513, and
incorporated herein by reference).
10.16 Processing Agreement (Kenova Processing Plant), dated March 15,
1995, between Columbia Gas Transmission Corporation and MarkWest
Partnership (Filed as exhibit 10.15 to the Registrant's Registration
Statement on Form S-1, Registration No. 333-09513, and incorporated
herein by reference).
10.17 Natural Gas Liquids Purchase Agreement (Cobb Plant) between Columbia
Gas Transmission Corporation and MarkWest Partnership (Filed as
exhibit 10.16 to the Registrant's Registration Statement on Form S-
1, Registration No. 333-09513, and incorporated herein by
reference).
10.18 Purchase and Demolition Agreement Construction Premises, dated March
15, 1995, between Columbia Gas Transmission Corporation and MarkWest
Partnership (Filed as exhibit 10.17 to the Registrant's Registration
Statement on Form S-1, Registration No. 333-09513, and incorporated
herein by reference).
10.19 Purchase and Demolition Agreement Remaining Premises, dated March
15, 1995, between Columbia Gas Transmission Corporation and MarkWest
Partnership (Filed as exhibit 10.18 to the Registrant's Registration
Statement on Form S-1, Registration No. 333-09513, and incorporated
herein by reference).
10.20 Agreement to Design and Construct New Facilities, dated March 15,
1995, between Columbia Gas Transmission Corporation and MarkWest
Hydrocarbon Partnership (Filed as exhibit 10.19 to the Registrant's
Registration Statement on Form S-1, Registration No. 333-09513, and
incorporated herein by reference).
10.21 Sales Acknowledgement, dated August 8, 1994, NO. 12577, confirming
sale to Ashland Petroleum Company (Filed as exhibit 10.20 to the
Registrant's Registration Statement on Form S-1, Registration No.
333-09513, and incorporated herein by reference).
10.22 Contract for Construction and Lease of Boldman Plant, dated December
24, 1990, between Columbia Gas Transmission Corporation and MarkWest
Hydrocarbon Partnership (Filed as exhibit 10.22 to the Registrant's
Registration Statement on Form S-1, Registration No. 333-09513, and
incorporated herein by reference).
10.23 Natural Gas Liquids Purchase Agreement (Boldman Plant), dated
December 24, 1990, between Columbia Gas Transmission Corporation and
MarkWest Partnership (Filed as exhibit 10.23 to the Registrant's
Registration Statement on Form S-1, Registration No. 333-09513, and
incorporated herein by reference).
10.24 Natural Gas Liquids Purchase Agreement, dated April 26, 1988,
between Columbia Gas Transmission Corporation and MarkWest
Partnership (Filed as exhibit 10.24 to the Registrant's Registration
Statement on Form S-1, Registration No. 333-09513, and incorporated
herein by reference).
II-4
10.25 1996 Incentive Compensation Plan (Filed as exhibit 10.25 to the
Registrant's Registration Statement on Form S-1, Registration No.
333-09513, and incorporated herein by reference).
10.26 1996 Stock Incentive Plan (Filed as exhibit 10.26 to the
Registrant's Registration Statement on Form S-1, Registration No.
333-09513, and incorporated herein by reference).
10.27 1996 Non-employee Director Stock Option Plan (Filed as exhibit 10.27
to the Registrant's Registration Statement on Form S-1, Registration
No. 333-09513, and incorporated herein by reference).
10.28 Form of Non-Compete Agreement between John M. Fox and the Registrant
(Filed as Exhibit 10.28 to the Registrant's Registration Statement
on Form S-1, Registration No. 333-09513, and incorporated herein by
reference).
10.29 Sales Acknowledgement by Ashland Petroleum, 54 million gallons of
Normal Butane, dated September 9, 1996 (Filed as Exhibit 10.29 to
the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1996, and incorporated herein by reference).
10.30 Sales Acknowledgement by Ashland Petroleum, 19.5 million gallons of
Isobutane, dated September 9, 1996 (Filed as Exhibit 10.30 to the
Registrant's Annual Report on Form 10-K for the year ended December
31, 1996, and incorporated herein by reference).
10.31 Pipeline Construction and Operating Agreement between Michigan
Production Company, LLC and West Shore Processing Company, LLC,
dated October 1, 1996 (Filed as Exhibit 10.31 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1996, and
incorporated herein by reference).
10.32 Non-Recourse Loan Agreement between Michigan Production Company, LLC
and West Shore Processing Company, LLC, dated October 1, 1996 (Filed
as Exhibit 10.32 to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1996, and incorporated herein by
reference).
10.33 First Amendment to Participation, Ownership and Operating Agreement
for West Shore Processing Company, LLC, dated October 1, 1996 (Filed
as Exhibit 10.33 to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1996, and incorporated herein by
reference).
10.34 Option and Agreement to Purchase and Sell Pipeline, dated October 1,
1996 (Filed as Exhibit 10.34 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1996, and incorporated
herein by reference).
10.35 Mortgage, Assignment, Security Agreement and Financing Statement
from Michigan Production Company, LLC to West Shore Processing
Company, LLC, dated October 22, 1996 (Filed as Exhibit 10.35 to the
Registrant's Annual Report on Form 10-K for the year ended December
31, 1996, and incorporated herein by reference).
10.36 Amendment to Participation, Ownership and Operating Agreement for
West Shore Processing Company, LLC, dated December 12, 1996 (Filed
as Exhibit 10.36 to the
II-5
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1996, and incorporated herein by reference).
10.37 Assignment and Bill of Sale by and between Enron Gas Processing
Company and West Shore Processing Company, LLC, dated January 13,
1997 (Filed as Exhibit 10.37 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1996, and incorporated
herein by reference).
11.1 Computation of per share earnings.
23.1 Consent of Price Waterhouse LLP.
23.2 Consent of Dorsey & Whitney LLP (included as part of Exhibit 5.1).
24. Power of Attorney (see page II-7).
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described in Item 14, or otherwise, the
Registrant has been advised that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid by a
director, officer of controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the Registrant will treat the information omitted from the form of prospectus
filed as part of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant under Rule 424(b)(1),
or (4), or 497(h) under the Securities Act as part of this Registration
Statement as of the time the Commission declares it effective.
(2) For purposes of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-6
SIGNATURES
In accordance with the requirement of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form S-1 and authorized this Registration
Statement to be signed on its behalf by the undersigned, in the City of Denver,
State of Colorado, on the 30th day of April, 1997.
MARKWEST HYDROCARBON, INC.
By: /s/ John M. Fox
---------------------
John M. Fox
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints John M. Fox and Brian T. O'Neill and each of
them, as his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and to file the same with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or either of them, or their or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement was signed by the following persons in the capacities
indicated below and on the dates stated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ John M. Fox President and April 30, 1997
--------------------------------- Chief Executive Officer
John M. Fox (Principal Executive Officer)
/s/ Brian T. O'Neill Senior Vice President, and April 30, 1997
--------------------------------- Chief Operating Officer
Brian T. O'Neill
/s/ Gerald A. Tywoniuk Vice President of Finance April 30, 1997
--------------------------------- and Chief Financial Officer
Gerald A. Tywoniuk (Principal Financial and
Accounting Officer)
II-7
/s/ Arthur J. Denney Vice President of Engineering and April 30,1997
------------------------ Business Development
Arthur J. Denney
/s/ Norman H. Foster Director April 30, 1997
------------------------
Norman H. Foster
/s/ Barry W. Spector Director April 30, 1997
------------------------
Barry W. Spector
/s/ David R. Whitney Director April 30, 1997
------------------------
David R. Whitney
II-8
Dates Referenced Herein and Documents Incorporated by Reference
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