** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 
| **ý** | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 or 15(d)** |
|------------|------------|-------------------------------------------------------|
| ** ** | ** ** | **OF THE  SECURITIES EXCHANGE ACT OF 1934**           |

 

**For thequarterly period ended March 31, 2006**

 

**OR**

 
| **o**      | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE** |
|------------|------------|---------------------------------------------------------------|
| ** ** | ** ** | **SECURITIES  EXCHANGE ACT OF 1934**                          |

 

**For thetransition period from                   to                   **

 

**CommissionFile Number 001-14841**

 

**MARKWEST HYDROCARBON, INC.**

(Exact name ofregistrant as specified in its charter)

 

| **Delaware**                     | ** ** | **84-1352233**       |
|----------------------------------|------------|----------------------|
| (State or other  jurisdiction of |       | (IRS Employer        |
| incorporation or  organization)  |       | Identification  No.) |

 

**155Inverness Drive West, Suite 200, Englewood, CO 80112-5000**

(Address ofprincipal executive offices)

 

Registrant’s telephonenumber, including area code:  **303-290-8700**

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

Yes  ý    No  o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer.  See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one):

 

Large acceleratedfiler      o      Accelerated filer     ý      Non-accelerated filer     o

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).

Yes  o    No  ý

 

The registrant had 10,846,455shares of common stock, $0.01 per share par value, outstanding as of March 31,2006.

 

 

----

 
| **PART  I—FINANCIAL INFORMATION** | ** **                                                                                                           |
|----------------------------------------|----------------------------------------------------------------------------------------------------------------------|
|                                   |                                                                                                                 |
| Item 1.                                | Condensed  Consolidated Financial Statements                                                                         |   |
|                                   | Condensed  Consolidated Balance Sheets at March 31, 2006 and December 31, 2005                                       |   |
|                                   | Condensed  Consolidated Statements of Operations for the Three Months Ended March 31,  2006 and 2005                 |   |
|                                   | Condensed  Consolidated Statements of Comprehensive Income for the Three Months Ended  March 31, 2006 and 2005       |   |
|                                   | Condensed  Consolidated Statement of Changes in Stockholders’ Equity for the Three  Months Ended March 31, 2006 |   |
|                                   | Condensed  Consolidated Statements of Cash Flows for the Three Months Ended March 31,  2006 and 2005                 |   |
|                                   | Notes  to the Condensed Consolidated Financial Statements                                                            |   |
|                                   |                                                                                                                 |   |
| Item 2.                                | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                          |   |
| Item 3.                                | Quantitative  and Qualitative Disclosures about Market Risk                                                          |   |
| Item 4.                                | Controls and  Procedures                                                                                             |   |
|                                   |                                                                                                                 |
| **PART II—OTHER  INFORMATION**    |                                                                                                                 |
|                                   |                                                                                                                 |
| Item 1.                                | Legal Proceedings                                                                                                    |   |
| Item  6.                               | Exhibits                                                                                                             |   |
|                                   |                                                                                                                 |
| **SIGNATURE**                          |                                                                                                                 |

 

**Glossary of Terms**

 
| Bbl/d                                                |   | barrels of oil per day                                              |
|------------------------------------------------------|--------|---------------------------------------------------------------------|
| Btu                                                  |   | British thermal units,  an energy measurement                       |
| Gal/d                                                |   | gallons per day                                                     |
| Mcf                                                  |   | thousand cubic feet of  natural gas                                 |
| Mcf/d                                                |   | thousand cubic feet of  natural gas per day                         |
| MMBtu                                                |   | million British thermal  units, an energy measurement               |
| MMcf                                                 |   | million cubic feet of  natural gas                                  |
| MMcf/d                                               |   | million cubic feet of  natural gas per day                          |
| Net operating margin (a  non-GAAP financial measure) |   | revenues less purchased  product costs                              |
| NGL                                                  |   | natural gas liquids,  such as propane, butanes and natural gasoline |

 

2

----

 

**PART I—FINANCIAL INFORMATION**

 

**Item 1. Financial Statements**

 

**MARKWEST HYDROCARBON, INC.**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

(Unaudited, inthousands)

 
| ** **                                                                                                           | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                           | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Current assets:                                                                                                      |       |                     |       |                        |       |
| Cash and cash  equivalents                                                                                           |       | $                        | 38,632     |                        | $          | 20,968 |   |
| Marketable  securities                                                                                               |       | 6,378                    |       | 6,070                       |       |
| Receivables, net  of allowance for doubtful accounts of $164 and $175, respectively                                  |       | 102,163                  |       | 145,539                     |       |
| Inventories                                                                                                          |       | 16,056                   |       | 30,500                      |       |
| Prepaid  replacement natural gas                                                                                     |       | 4,377                    |       | 10,567                      |       |
| Other current  assets                                                                                                |       | 21,920                   |       | 16,314                      |       |
| Total current assets                                                                                                 |       | 189,526                  |       | 229,958                     |       |
|                                                                                                                 |       |                     |       |                        |       |
| Property, plant and equipment                                                                                        |       | 586,469                  |       | 573,198                     |       |
| Less: accumulated depreciation, depletion,  amortization and impairment                                              |       | (85,534                  | )          | (78,500                     | )          |
| Total property,  plant and equipment, net                                                                            |       | 500,935                  |       | 494,698                     |       |
|                                                                                                                 |       |                     |       |                        |       |
| Other assets:                                                                                                        |       |                     |       |                        |       |
| Investment in  Starfish                                                                                              |       | 40,986                   |       | 39,167                      |       |
| Intangible assets, net                                                                                               |       | 342,839                  |       | 346,496                     |       |
| Deferred  financing costs, net of accumulated amortization of $5,263 and $4,442, respectively                        |       | 17,730                   |       | 18,463                      |       |
| Deferred  contract cost, net of accumulated amortization of $468 and $390, respectively                              |       | 2,782                    |       | 2,860                       |       |
| Investment in  and advances to other equity investee                                                                 |       | 199                      |       | 182                         |       |
| Other long term  assets                                                                                              |       | 326                      |       | 326                         |       |
| Notes receivable  from related parties                                                                               |       | 154                      |       | 154                         |       |
| Total other  assets                                                                                                  |       | 405,016                  |       | 407,648                     |       |
| Total assets                                                                                                         |       | $                        | 1,095,477  |                        | $          | 1,132,304 |   |
|                                                                                                                 |       |                     |       |                        |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                       |       |                     |       |                        |       |
| Current liabilities:                                                                                                 |       |                     |       |                        |       |
| Accounts payable  (including related party payables of $0 and $25, respectively)                                     |       | $                        | 96,674     |                        | $          | 119,105 |   |
| Accrued  liabilities                                                                                                 |       | 41,677                   |       | 45,869                      |       |
| Fair value of  derivative instruments                                                                                |       | 2,526                    |       | 728                         |       |
| Deferred income  taxes                                                                                               |       | 477                      |       | 362                         |       |
| Current portion  of long term debt                                                                                   |       | 3,650                    |       | 2,738                       |       |
| Total current  liabilities                                                                                           |       | 145,004                  |       | 168,802                     |       |
|                                                                                                                 |       |                     |       |                        |       |
| Deferred income taxes                                                                                                |       | 4,390                    |       | 3,487                       |       |
| Long-term debt                                                                                                       |       | 588,850                  |       | 608,762                     |       |
| Other long-term liabilities                                                                                          |       | 11,937                   |       | 10,256                      |       |
| Non-controlling interest in consolidated subsidiary                                                                  |       | 303,480                  |       | 301,015                     |       |
| Total  liabilities                                                                                                   |       | 1,053,661                |       | 1,092,322                   |       |
|                                                                                                                 |       |                     |       |                        |       |
| Commitments and contingencies (Note 10)                                                                              |       |                     |       |                        |       |
|                                                                                                                 |       |                     |       |                        |       |
| Stockholders’ equity:                                                                                           |       |                     |       |                        |       |
| Preferred stock,  par value $0.01, 5,000,000 shares authorized, no shares outstanding                                |       | —                   |       | —                      |       |
| Common stock,  par value $0.01, 20,000,000 shares authorized, 10,862,573 and 10,857,939  shares issued, respectively |       | 109                      |       | 108                         |       |
| Additional  paid-in capital                                                                                          |       | 46,906                   |       | 48,797                      |       |
| Deferred  compensation                                                                                               |       | —                   |       | (398                        | )          |
|                                                                                                                 |       |                     |       |                        |       |
| Accumulated  deficit                                                                                                 |       | (5,593                   | )          | (8,425                      | )          |
| Accumulated  other comprehensive income, net of tax                                                                  |       | 550                      |       | 357                         |       |
| Treasury stock,  16,118 and 55,619 shares, respectively                                                              |       | (156                     | )          | (457                        | )          |
| Total  stockholders’ equity                                                                                     |       | 41,816                   |       | 39,982                      |       |
| Total  liabilities and stockholders’ equity                                                                     |       | $                        | 1,095,477  |                        | $          | 1,132,304 |   |

 

The accompanyingnotes are an integral part of these unaudited condensed consolidated financialstatements.

 

3

----

 

**MARKWEST HYDROCARBON, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

(Unaudited,in thousands, except per share amounts)

 
| ** **                                                                                                         | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                         | ** ** | **2006**                         | ** ** | **2005** | ** ** |
|                                                                                                               |       |                             |       |   |   |
| Revenues:                                                                                                          |       |                             |       |   |   |
| Revenue                                                                                                            |       | $                                | 240,880    |   | $ | 138,260 |   |
| Derivatives                                                                                                        |       | (1,259                           | )          | 93 |   |
| Total revenues                                                                                                     |       | 239,621                          |       | 138,353 |   |
|                                                                                                               |       |                             |       |   |   |
| Operating expenses:                                                                                                |       |                             |       |   |   |
| Purchased  product costs                                                                                           |       | 181,167                          |       | 104,699 |   |
| Facility  expenses                                                                                                 |       | 13,704                           |       | 9,260 |   |
| Selling, general  and administrative expenses                                                                      |       | 11,376                           |       | 8,102 |   |
| Depreciation                                                                                                       |       | 7,378                            |       | 4,741 |   |
| Amortization of  intangible assets                                                                                 |       | 4,016                            |       | 2,095 |   |
| Accretion of  asset retirement obligations                                                                         |       | 25                               |       | 10 |   |
| Total operating  expenses                                                                                          |       | 217,666                          |       | 128,907 |   |
|                                                                                                               |       |                             |       |   |   |
| Income from  operations                                                                                            |       | 21,955                           |       | 9,446 |   |
|                                                                                                               |       |                             |       |   |   |
| Other income (expense):                                                                                            |       |                             |       |   |   |
| Earnings from  unconsolidated subsidiary                                                                           |       | 945                              |       | — |   |
| Interest income                                                                                                    |       | 406                              |       | 249 |   |
| Interest expense                                                                                                   |       | (11,044                          | )          | (3,704 | ) |
| Amortization of  deferred financing costs (a component of interest expense)                                        |       | (825                             | )          | (536 | ) |
| Dividend income                                                                                                    |       | 106                              |       | 92 |   |
| Other income                                                                                                       |       | 2,242                            |       | 87 |   |
|                                                                                                               |       |                             |       |   |   |
| Income from  operations before non-controlling interest in net income of consolidated  subsidiary and income taxes |       | 13,785                           |       | 5,634 |   |
|                                                                                                               |       |                             |       |   |   |
| Income tax (expense) benefit                                                                                       |       |                             |       |   |   |
| Current                                                                                                            |       | 493                              |       | — |   |
| Deferred                                                                                                           |       | (902                             | )          | (770 | ) |
| Income tax expense                                                                                                 |       | (409                             | )          | (770 | ) |
|                                                                                                               |       |                             |       |   |   |
| Non-controlling interest in net income of  consolidated subsidiary                                                 |       | (10,544                          | )          | (3,325 | ) |
| Net income                                                                                                         |       | $                                | 2,832      |   | $ | 1,539 |   |
|                                                                                                               |       |                             |       |   |   |
| Net income per share:                                                                                              |       |                             |       |   |   |
| Basic                                                                                                              |       | $                                | 0.26       |   | $ | 0.14 |   |
| Diluted                                                                                                            |       | $                                | 0.26       |   | $ | 0.14 |   |
|                                                                                                               |       |                             |       |   |   |
| Weighted average number of outstanding shares of  common stock:                                                    |       |                             |       |   |   |
| Basic                                                                                                              |       | 10,821                           |       | 10,766 |   |
| Diluted                                                                                                            |       | 10,923                           |       | 10,917 |   |
|                                                                                                               |       |                             |       |   |   |
| Cash dividend per common share                                                                                     |       | $                                | 0.175      |   | $ | 0.075 |   |

 

The accompanyingfinancial statements are an integral part of these unaudited condensedconsolidated financial statements.

 

4

----

 

**MARKWEST HYDROCARBON, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME**

(Unaudited, in thousands)

 
| ** **                                                                                                        | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                        | ** ** | **2006**                         | ** ** | **2005** | ** ** |
|                                                                                                              |       |                             |       |   |   |
| Net income                                                                                                        |       | $                                | 2,832      |   | $ | 1,539 |   |
| Other  comprehensive income (loss), net of tax:                                                                   |       |                             |       |   |   |
| Unrealized gains  on marketable securities, net of income tax provision of $115 and income tax  benefit of $542   |       | 193                              |       | (753 | ) |
| Unrealized  losses on commodity derivative instruments accounted for as hedges, net of  income tax benefit of $51 |       | —                           |       | (84 | ) |
|                                                                                                              |       | 193                              |       | (837 | ) |
| Comprehensive income                                                                                              |       | $                                | 3,025      |   | $ | 702 |   |

 

The accompanyingnotes are an integral part of these unaudited condensed consolidated financialstatements.

 

5

----

 

**MARKWEST HYDROCARBON, INC.**

**CONDENSEDCONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY**

(Unaudited, in thousands)

 
| ** **                                                                                                                             | ** ** | **Shares of  Common  Stock** | ** ** | **Shares of  Treasury  Stock** | ** ** | **Common  Stock** | ** ** | **Additional  Paid-In  Capital** | ** ** | **Deferred  Compensation** | ** ** | **Accumulated  Earnings  (Deficit)** | ** ** | **Accumulated  Other  Comprehensive  Income** | ** ** | **Treasury  Stock** | ** ** | **Total** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|-------------------------------------|------------|-------------------|------------|----------------------------------|------------|----------------------------|------------|--------------------------------------|------------|-----------------------------------------------|------------|---------------------|------------|-----------|------------|
|                                                                                                                                   |       |                              |       |                                |       |              |       |                             |       |                       |       |                                 |       |                                          |       |                |       |      |       |
| Balance, December  31, 2005                                                                                                            |       | 10,858                            |       | (56                                 | )          | $                 | 108        |                             | $          | 48,797                     |       | $                                    | (398       | )                                             | $          | (8,425              | )          | $         | 357        |   | $ | (457 | ) | $ | 39,982 |   |
| Stock option  exercises                                                                                                                |       | —                            |       | 5                                   |       | 1                 |       | (1                               | )          | —                     |       | —                               |       | —                                        |       | 43                  |       | 43        |       |
| Stock-based  compensation                                                                                                              |       | —                            |       | —                              |       | —            |       | 121                              |       | —                     |       | —                               |       | —                                        |       | —              |       | 121       |       |
| Issuance of  restricted stock                                                                                                          |       | 1                                 |       | 35                                  |       | —            |       | (258                             | )          | —                     |       | —                               |       | —                                        |       | 258                 |       | —    |       |
| Cashless stock  options                                                                                                                |       | 4                                 |       | —                              |       | —            |       | —                           |       | —                     |       | —                               |       | —                                        |       | —              |       | —    |       |
| Reclassification  of unearned compensation related to the adoption of Statement of Financial  Accounting Standards No. 123(R) (Note 2) |       | —                            |       | —                              |       | —            |       | (398                             | )          | 398                        |       | —                               |       | —                                        |       | —              |       | —    |       |
| Net income                                                                                                                             |       | —                            |       | —                              |       | —            |       | —                           |       | —                     |       | 2,832                                |       | —                                        |       | —              |       | 2,832     |       |
| Dividend                                                                                                                               |       | —                            |       | —                              |       | —            |       | (1,355                           | )          | —                     |       | —                               |       | —                                        |       | —              |       | (1,355    | )          |
| Other  comprehensive income                                                                                                            |       | —                            |       | —                              |       | —            |       | —                           |       | —                     |       | —                               |       | 193                                           |       | —              |       | 193       |       |
| Balance, March  31, 2006                                                                                                               |       | 10,863                            |       | (16                                 | )          | $                 | 109        |                             | $          | 46,906                     |       | $                                    | —     |                                          | $          | (5,593              | )          | $         | 550        |   | $ | (156 | ) | $ | 41,816 |   |

 

The accompanyingnotes are an integral part of these unaudited condensed consolidated financialstatements.

 

6

----

 

**MARKWEST HYDROCARBON, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

(Unaudited,in thousands)

 
| ** **                                                                                      | ** ** | **March 31,** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|---------------|------------|
| ** **                                                                                      | ** ** | **2006**      | ** ** | **2005** | ** ** |
| ** **                                                                                      | ** ** | ** **    | ** ** | ** ** | ** ** |
| **Cash flows from operating activities:**                                                       |       |          |       |   |   |
| Net Income                                                                                      |       | $             | 2,832      |   | $ | 1,539 |   |
| Adjustments to  reconcile net income (loss) to net cash provided by operating activities:       |       |          |       |   |   |
| Depreciation                                                                                    |       | 7,378         |       | 4,741 |   |
| Amortization of  intangible assets                                                              |       | 4,016         |       | 2,095 |   |
| Amortization of  deferred financing costs                                                       |       | 825           |       | 536 |   |
| Amortization of  gas contract                                                                   |       | 78            |       | 78 |   |
| Accretion of  asset retirement obligation                                                       |       | 25            |       | 10 |   |
| Non-controlling  interest in net income of consolidated subsidiary                              |       | 10,544        |       | 3,325 |   |
| Equity in earnings  of investee                                                                 |       | (945          | )          | (3 | ) |
| Unrealized  losses (gains) on derivative instruments                                            |       | 1,798         |       | (766 | ) |
| Deferred income  taxes                                                                          |       | 902           |       | 770 |   |
| Stock option  compensation expense                                                              |       | 21            |       | 720 |   |
| Restricted stock  compensation expense                                                          |       | 105           |       | 14 |   |
| Restricted unit  compensation expense                                                           |       | 458           |       | 230 |   |
| Participation  Plan compensation expense                                                        |       | 1,496         |       | 1,607 |   |
| Contribution of  treasury shares to 401(k) benefit plan                                         |       | 43            |       | 105 |   |
| Gain from sale  of property, plant and equipment                                                |       | (410          | )          | (39 | ) |
| Gain from sale  of marketable securities                                                        |       | —        |       | (60 | ) |
|                                                                                            |       |          |       |   |   |
| Changes in  operating assets and liabilities, net of working capital acquired in  acquisitions: |       |          |       |   |   |
| Decrease in  receivables                                                                        |       | 38,376        |       | 19,710 |   |
| Decrease in  inventories                                                                        |       | 14,444        |       | 3,956 |   |
| Decrease in  prepaid replacement natural gas and other assets                                   |       | 6,190         |       | 6,187 |   |
| Decrease  (increase) in other current assets                                                    |       | (5,606        | )          | 44 |   |
| Decrease in  accounts payable and accrued liabilities                                           |       | (27,038       | )          | (5,548 | ) |
| Increase in  other long-term liabilities                                                        |       | 92            |       | 225 |   |
| Net cash  provided by operating activities                                                      |       | 55,624        |       | 39,476 |   |
|                                                                                            |       |          |       |   |   |
| **Cash  flows from investing activities:**                                                      |       |          |       |   |   |
| Purchase of  marketable securities                                                              |       | —        |       | (7,437 | ) |
| Proceeds from  sale of marketable securities                                                    |       | —        |       | 1,634 |   |
| Javelina  acquisition, net of cash acquired                                                     |       | (360          | )          | — |   |
| Capital  expenditures                                                                           |       | (13,249       | )          | (16,000 | ) |
| Proceeds from  sale of property, plant and equipment                                            |       | 529           |       | 39 |   |
| Investment in  equity affiliate                                                                 |       | (890          | )          | (41,688 | ) |
| Net cash used in  investing activities                                                          |       | (13,970       | )          | (63,452 | ) |
|                                                                                            |       |          |       |   |   |
| **Cash  flows from financing activities:**                                                      |       |          |       |   |   |
| Proceeds from  long-term debt                                                                   |       | 25,000        |       | 40,000 |   |
| Repayments of  long-term debt                                                                   |       | (44,000       | )          | — |   |
| Payments for  debt issuance costs                                                               |       | (105          | )          | (50 | ) |
| Proceeds from  MarkWest Energy’s private placement, net                                    |       | 5,000         |       | — |   |
| Distributions to  MarkWest Energy unitholders                                                   |       | (8,529        | )          | (6,375 | ) |
| Payment of  dividends                                                                           |       | (1,355        | )          | (808 | ) |
| Exercise of  stock options                                                                      |       | (1            | )          | 37 |   |
| Purchase of  treasury shares                                                                    |       | —        |       | (161 | ) |
| Proceeds from  sale of MarkWest Energy units                                                    |       | —        |       | 37 |   |
| Net cash  provided by (used in) financing activities                                            |       | (23,990       | )          | 32,680 |   |
|                                                                                            |       |          |       |   |   |
| Net increase in  cash and cash equivalents                                                      |       | 17,664        |       | 8,704 |   |
| Cash and cash  equivalents at beginning of year                                                 |       | 20,968        |       | 12,844 |   |
| Cash and cash  equivalents at end of year                                                       |       | $             | 38,632     |   | $ | 21,548 |   |
|                                                                                            |       |          |       |   |   |
| **Supplemental  disclosures of cash flow information:**                                         |       |          |       |   |   |
| Cash paid for  interest                                                                         |       | $             | 5,319      |   | $ | 4,147 |   |
|                                                                                            |       |          |       |   |   |
| **Supplemental  disclosures of non-cash investing and financing activities:**                   |       |          |       |   |   |
| Starfish insurance  recovery                                                                    |       | $             | 1,800      |   | — |   |

 

The accompanyingnotes are an integral part of these unaudited condensed consolidated financialstatements.

 

7

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**MARKWESTHYDROCARBON, INC.**

**NOTES TOUNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

**1. Organization**

 

MarkWest Hydrocarbon, Inc. (“MarkWest Hydrocarbon” or the “Company”)is an energy company primarily focused on marketing natural gas liquids (NGLs)and increasing shareholder value by growing MarkWest Energy Partners, L.P. (“MarkWestEnergy Partners” or the “Partnership”), a consolidated subsidiary andpublicly-traded master limited partnership. MarkWest Energy Partners is engagedin the gathering, processing and transmission of natural gas; thetransportation, fractionation and storage of natural gas liquids; and thegathering and transportation of crude oil. The Company also markets natural gasand NGLs. MarkWest Hydrocarbon and MarkWest Energy Partners provide servicesprimarily in Appalachia, Michigan, Texas, Oklahoma, Gulf Coast and other areasof the southwest.

 

**2. Basis of Presentation**

 

TheCompany’s unaudited condensed consolidated financial statements include theaccounts of all majority-owned or controlled subsidiaries. Equity investmentsin which we exercise significant influence but do not control, and are not theprimary beneficiary, are accounted for using the equity method. The Companyregularly reviews its investments to determine whether a decline in fair valuebelow the cost basis is other than temporary. The Company’s accounting policyrequires it to evaluate operating losses (if any), credit defaults and otherfactors that may indicate a decrease in value of the investment that is otherthan temporary. The primary factors the Company considers in its determinationof an impairment that is other than temporary are the length of time that thefair value of the investment is below the Company’s carrying value and thefinancial condition, operating performance and near-term prospects of theinvestee. The Company also considers the reason for the decline in fair value,be it general market conditions, industry-specific or investee-specific; andthe Company’s intent and ability to hold the investment for a period of timesufficient to allow for a recovery in fair value. The Company evaluates fairvalue based on specific information (valuation methodologies, financialstatements, estimates of appraisals, etc.). Due to a lack of a public marketprice for the Company’s current investments, it uses its best estimates andassumptions to arrive at the estimated fair value of such investments. If thedecline in fair value is deemed to be other than temporary, the cost basis ofthe security is written down to fair value. The Company’s assessment of theforegoing factors involves a high degree of judgment and, accordingly, actualresults may differ materially from the Company’s estimates and judgments.

 

These condensedconsolidated financial statements have been prepared in accordance withaccounting principles generally accepted in the United States of America (“GAAP”)for interim financial reporting. Accordingly, certain information and footnotedisclosures normally included in annual financial statements prepared inaccordance with GAAP have been condensed or omitted. In management’s opinion,we have made all adjustments necessary for a fair presentation of the Company’sresults of operations, financial position and cash flows for the periods shown.These adjustments are of a normal recurring nature. In addition to reviewingthese condensed consolidated financial statements and accompanying notes, youshould also consult the audited financial statements and notes that makes upthe Company’s December 31, 2005, Annual Report on Form 10-K. Finally, considerthat results for the three months ended March 31, 2006, are not necessarilyindicative of results for the full year 2006, or any other future period.

 

*Stock and Incentive Compensation Plans*

 

The Company adopted SFASNo. 123R, *Accounting for Stock-BasedCompensation* on January 1, 2006, using the modified prospectivemethod. Prior to adopting SFAS No. 123R, the Company elected to measurecompensation expense for equity-based employee compensation plans as prescribedby Accounting Principles Board (“APB”) No. 25, *Accountingfor Stock Issued to Employees*.

 

Under SFAS No. 123R,compensation expense is based on the fair value of the award. SFAS No. 123Rclassifies stock-based compensation as either equity or liability awards. Thefair value on the date of grant for an award classified as equity is recognizedover the requisite service period, with a corresponding credit to equity (generally,paid-in capital). The requisite service period is the period during which anindividual is required to provide service in exchange for an award, which oftenis the vesting period. The requisite service period is estimated based on ananalysis of the terms of the share-based payment award. Compensation expensefor a liability award is based on the award’s fair value, remeasured at eachreporting date until the date of settlement. Additionally, compensation expenseis reduced by 4.6% for an estimate of expected award forfeitures.

 

Under APB No. 25,compensation expense is based on the intrinsic value (typically the differencebetween the equity-based instrument to be received and the cost to acquire thatequity-based instrument). APB No. 25 classified stock-

 

8

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based compensation as either fixed or variable awards. Theintrinsic value on the date of grant for an award classified as fixed isrecognized over the requisite service period. Compensation expense for variableawards is based on the award’s intrinsic value, remeasured at each reportingdate until the date of settlement.

 

Compensation expenseunder each plan is included in selling, general and administrative expenses.

 

*MarkWest Hydrocarbon*

 

*Stock Options*

 

Stock options are issuedunder the Company’s 1996 Stock Incentive Plan and 1996 Non-employee DirectorStock Option Plan.  Under SFAS No. 123R, the plans are categorized asequity awards. Under APB No. 25, the plans were categorized as variable awards.

 

*Restricted Stock*

 

The Company also issuesrestricted stock, for no consideration, under the Company’s 1996 StockIncentive Plan and 1996 Non-employee Director Stock Option Plan.  Uponsettlement, the individual receives common stock of the Company. Under SFAS No.123R, the restricted stock qualifies as an equity award, and under APB No. 25qualified as a fixed award.

 

*Participation Plan*

 

The Company has alsoentered into arrangements with certain directors and employees of the Companyreferred to as the Participation Plan.  Under the Participation Plan, theCompany sells subordinated partnership units of the Partnership or interests inthe Partnership’s general partner, under a purchase and sale agreement. As the formula used to determine the sale and buy-back price is not based on independentthird party valuation, coupled with the attributes of the put-and-callprovisions, these transactions are considered compensatory arrangements. Thegeneral partner interests may be held indefinitely, but have historically beensettled for cash when the employee leaves the Company. The subordinated unitsconvert to common units after a holding period; however, historically,management has settled some subordinated units for cash when individuals haveleft the Company. The subordinated partnership units of the Partnership werealso sold to the employees and directors based on a formula that may notnecessarily fully reflect fair value, thus the subordinated units areconsidered compensatory. Under SFAS 123R, the subordinated units and generalpartner interests are classified as liability awards, while under APB No. 25,they were classified as variable awards.

 

Under Topic 1-B of thecodification of the Staff Accounting Bulletins, Allocation of Expenses AndRelated Disclosure in Financial Statements of Subsidiaries, Divisions or LesserBusiness Components of Another Entity, some portion of compensation expenserelated to services provided by MarkWest Hydrocarbon’s employees and directorsrecognized under the Participation Plan should be allocated to thePartnership.  The allocation is based on the percent of time that eachemployee devotes to the Company.  Compensation attributable to intereststhat were sold to individuals who serve on both the board of MarkWest Hydrocarbonand the Partnership’s Board of Directors is allocated equally.

 

*MarkWest Energy Partners*

 

*Restricted Units*

 

The Partnership issuesrestricted units under the MarkWest Energy Partners, L.P. Long-Term IncentivePlan.  A restricted unit is a “phantom” unit that entitles the grantee toreceive a common unit upon the vesting of the phantom unit or, at thediscretion of the Compensation Committee, cash equivalent to the value of acommon unit.  The restricted units are treated as liability awards underSFAS No. 123R, and were treated as variable awards under APB No. 25.

 

To satisfy common unitawards, common units may be acquired on the open market, from the generalpartner or any other person, as well as from the issuance of new commonunits.  The cost of the common unit awards, therefore, will be borne bythe Partnership.

 

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*Pro Formas*

 

Had compensation cost forthe Company’s stock-based and unit-based compensation plans been determinedbased on the fair value at the grant dates under those plans consistent withthe method prescribed by SFAS No. 123R, *Accountingfor Stock-Based Compensation,*the Company’s net income and earningsper share would have been reduced to the pro forma amounts listed below (inthousands, except per share data):

 
| ** **                                                                                                                                   | ** ** | **Three months ended  March 31, 2005** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| Net income, as reported                                                                                                                      |       | $                                      | 1,539      |   |
| Add:  compensation expense included in reported net income, net of related tax  effect                                                       |       | 1,712                                  |       |
| Deduct: total  stock-based employee compensation expense determined under fair value-based  method for all awards, net of related tax effect |       | (1,257                                 | )          |
| Pro forma net income                                                                                                                         |       | $                                      | 1,994      |   |
|                                                                                                                                         |       |                                   |       |
| Net income per share:                                                                                                                        |       |                                   |       |
| Basic:                                                                                                                                       |       |                                   |       |
| As reported                                                                                                                                  |       | $                                      | 0.14       |   |
| Pro forma                                                                                                                                    |       | $                                      | 0.19       |   |
| Diluted:                                                                                                                                     |       |                                   |       |
| As reported                                                                                                                                  |       | $                                      | 0.14       |   |
| Pro forma                                                                                                                                    |       | $                                      | 0.19       |   |

 

**3. RecentAccounting Pronouncements**

 

InMay 2005, the FASB issued SFAS No. 154, *Accounting Changes and Error Corrections—a replacement of APB OpinionNo. 20 and FASB Statement No. 3*. SFAS No. 154replaces Accounting**PrinciplesBoard Opinion No. 20, *AccountingChanges*, and SFAS No. 3, *ReportingAccounting Changes in Interim Financial Statements*, and changes therequirements for the accounting for and reporting of a**change in accounting principle. Thisstatement applies to all voluntary changes in accounting principle**and also applies to changes required byan accounting pronouncement in the unusual instance that the**pronouncement does not include specifictransition provisions. The statement is effective for accounting**changes and corrections of errors made infiscal years beginning after December 15, 2005. The**Company adopted the provisions of SFASNo. 154 beginning in January 2006. The adoption of the provisions of SFASNo. 154 did not have an impact on the**Company’scondensed consolidated financial statements.

 

In February 2006,the FASB issued SFAS No. 155, *Accountingfor Certain Hybrid Financial Instruments—an amendment of FASB StatementsNo. 133 and 140*(“SFAS 155”). This statement amends*SFAS No. 133, Accounting for Derivative Instrumentsand Hedging Activities* (“SFAS 133”), and SFAS No. 140, *Accounting for Transfers and Servicing of FinancialAssets and Extinguishments of Liabilities*and resolves issuesaddressed in SFAS 133 Implementation Issue No. D1, “Application ofStatement 133 to Beneficial Interest in Securitized Financial Assets.”  This Statement: (a) permits fair valueremeasurement for any hybrid financial instrument that contains an embeddedderivative that otherwise would require bifurcation; (b) clarifies whichinterest-only strips and principal-only strips are not subject to therequirements of SFAS 133; (c) establishes a requirement to evaluatebeneficial interests in securitized financial assets to identify interests thatare freestanding derivatives or that are hybrid financial instruments thatcontain an embedded derivative requiring bifurcation; (d) clarifies thatconcentrations of credit risk in the form of subordination are not embeddedderivatives; and, (e) eliminates restrictions on a qualifying special-purposeentity’s ability to hold passive derivative financial instruments that pertainto beneficial interests that are or contain a derivative financial instrument.The standard also requires presentation within the financial statements thatidentifies those hybrid financial instruments for which the fair value electionhas been applied and information on the income statement impact of the changesin fair value of those instruments. The Company is required to apply SFAS 155to all financial instruments acquired, issued or subject to a remeasurementevent beginning January 1, 2007, although early adoption is permitted asof the beginning of an entity’s fiscal year. The adoption of SFAS 155 is notexpected to have a material impact on the condensed consolidated financialstatements of the Company.

 

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**4.****Acquisitionsby MarkWest Energy Partners**

 

*Javelina Acquisition*

 

OnNovember 1, 2005, the Partnership acquired equity interests in JavelinaCompany, Javelina Pipeline Company and Javelina Land Company, L.L.C., whichwere 40%, 40% and 20%, respectively, owned by subsidiaries of El PasoCorporation, Kerr-McGee Corporation and Valero Energy Corporation. ThePartnership paid consideration of $357.0 million, plus $41.3 million for networking capital that included approximately $35.5 million in cash. The CorpusChristi, Texas, gas-processing facility treats and processes off-gas from sixlocal refineries, two of which are owned by Valero Energy Corporation, two byKoch Industries, Inc. and two by Citgo Petroleum Corporation. Constructed in1989 to recover up to 28,000 Bbl/d of NGLs, the facility currently processesapproximately 125 to 130 MMcf/d of inlet gas and produces approximately 25,400Bbl/d of NGLs. The Partnership and the seller are still negotiating the finalvalue of the acquired working capital, so the purchase price may change uponsettlement.

 

*StarfishJoint Venture*

 

On March 31, 2005, thePartnership acquired a 50% non-operating membership interest in StarfishPipeline Company, LLC, (“Starfish”) from an affiliate of Enterprise ProductsPartners L.P. for $41.7 million. The Partnership financed the acquisition byborrowing $40.0 million from its credit facility during the first quarter of2005. Starfish is a joint venture with Enbridge Offshore Pipelines LLC, whichthe Partnership accounts for using the equity method. Starfish owns theFERC-regulated Stingray natural gas pipeline, and the unregulated Tritonnatural gas-gathering system and West Cameron dehydration facility. All arelocated in the Gulf of Mexico and southwestern Louisiana.

 

The Partnership appliesthe equity method of accounting for its interests in Starfish. Summarizedfinancial information for 100 percent of Starfish is as follows:

 

| ** **       | ** ** | **Three months ended** | ** ** |
|------------------|------------|------------------------|------------|
| ** **       | ** ** | **March 31, 2006**     | ** ** |
| ** **       | ** ** | **(unaudited)**        | ** ** |
| Revenues         |       | $                      | 5,097      |   |
| Operating income |       | $                      | 1,429      |   |
| Net income       |       | $                      | 2,000      |   |

 

*ProForma Results of Operations*

 

Thefollowing table reflects the unaudited pro forma consolidated results ofoperations for the three months ended March 31, 2005, as though the Starfishacquisition and the Javelina acquisition had occurred on January 1, 2005. Theactual results for the three months ended March 31, 2006, are included in theaccompanying condensed consolidated statement of operations. The pro formaamounts include certain adjustments, including recognition of depreciationbased on the allocated purchase price of property and equipment, amortizationof customer contracts, amortization of the excess Starfish purchase price overnet book value, amortization of deferred financing costs and interest expense.

 

Theunaudited pro forma results do not necessarily reflect the actual results thatwould have occurred had the entities been combined during the period presented,nor does it necessarily indicate the future results of the combined entities.

 

| ** **                                                      | ** ** | **Three Months Ended**                    | ** ** |
|-----------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                      | ** ** | **March 31, 2005**                        | ** ** |
| ** **                                                      | ** ** | **(in thousands, except  per unit data)** | ** ** |
| Revenue                                                         |       | $                                         | 180,281    |   |
| Net income:                                                     |       | 478                                       |       |
| Net income per share:                                           |       |                                      |       |
|                                                            |       |                                      |       |
| Basic                                                           |       | 0.04                                      |       |
| Diluted                                                         |       | 0.04                                      |       |
|                                                            |       |                                      |       |
| Weighted average  number of outstanding shares of common stock: |       |                                      |       |
| Basic                                                           |       | 10,766                                    |       |
| Diluted                                                         |       | 10,917                                    |       |
|                                                                 |            |                                           |            |  |

 

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**5.     Debt**

 

***MarkWest Hydrocarbon***

 

*Credit Facility*

 

OnJanuary 31, 2006, the Company entered into the First Amended and RestatedCredit Agreement, which provides a maximum lending limit of $25.0 million for aone-year term and which amended and restated the October 2004 agreementdiscussed below.

 

The credit facility bearsinterest at a variable interest rate, plus basis points.  The variableinterest rate is typically based on the London Inter Bank Offering Rate (“LIBOR”);however, in certain borrowing circumstances the rate would be based on thehigher of a) the Federal Funds Rate plus 0.5-1%, and b) a rate set by theFacility’s administrative agent, based on the U.S. prime rate. The basis pointscorrespond to the ratio of the Revolver Facility Usage (as defined in the Company CreditFacility) to the Borrowing Base (asdefined in the Company Credit Facility), ranging from 0.75% to 1.75% for BaseRate loans, and 1.75% to 2.75% for Eurodollar Rate loans. The Company pays aquarterly commitment fee on the unused portion of the credit facility at anannual rate of 50.0 basis points.

 

Under the provisions ofthe Company Credit Facility, the Company is subject to a number of restrictionson its business, including restrictions on its ability to grant liens onassets; make or own certain investments; enter into any swap contracts otherthan in the ordinary course of business; merge, consolidate or sell assets;incur indebtedness (other than subordinated indebtedness); make distributionson equity investments; declare or make, directly or indirectly, any restricteddistributions.

 

The credit facility alsocontains covenants requiring the Company to maintain:

 

•      a ratio of not more than 3.50 to 1.00 of total consolidateddebt to consolidated EBITDA for any fiscal quarter-end;

 

•      a minimum net worth of a) $34.0 million plus, b) 50% ofconsolidated net income (if positive) earned on or after October 1, 2005plus, c) 100% of net proceeds of all equity issued by the Company subsequent toJanuary 31, 2006; and

 

•      a minimum available cash and marketable securities reserve of$13.0 million, which is to be reduced to zero in the event the Companyrestructures a keep-whole contract with one of its significant customers.

 

On March 23, 2006, theCompany amended the First Amended and Restated Credit Agreement to reduce thecash reserve requirement from $13.0 million to $5.0 million through December31, 2006.

 

In October 2004, theCompany entered into a $25.0 million senior credit facility with a term of oneyear.  The $25.0 million revolving facility had a variable interest ratebased on the base rate, which is equal to the higher of a) the Federal FundsRate plus 1⁄2 of 1%, and b) the rate of interest in effect for such day aspublicly announced from time to time by the Administrative Agent as its prime rate,plus the applicable rate, which is based on a utilization percentage.  InOctober, November, and December 2005, the Company entered into the first,second and third amendment to the credit agreement.  The first amendmentextended the term of the original agreement to November 15, 2005.  Thesecond amendment reduced the lending amount from $25.0 million to $16.0million, of which $6.0 million of availability is committed to a letter ofcredit, leaving $10.0 million available for revolving loans.  The secondamendment also extended the term of the revolving credit to December 30, 2005. The third amendment extended the term of the revolving credit to January 31,2006, and reduced the lending amount from $16.0 million to $13.5 million, ofwhich $6.0 million of availability is committed to a letter of credit, leaving$7.5 million available for revolving loans.

 

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***MarkWest Energy Partners***

 

*PartnershipCredit Facility*

 

On December 29,2005, MarkWest Energy Operating Company, L.L.C., a wholly owned subsidiary ofMarkWest Energy Partners L.P., entered into the fifth amended and restatedcredit agreement (“Partnership Credit Facility”), which provides for a maximumlending limit of $615.0 million for a five-year term.  The credit facilityincludes a revolving facility of $250.0 million and a $365.0 million termloan.  The credit facility is guaranteed by the Partnership and all of thePartnership’s subsidiaries and is collateralized by substantially all of thePartnership’s assets and those of its subsidiaries.  The borrowings underthe credit facility bear interest at a variable interest rate, plus basispoints.  The variable interest rate is typically based on the London InterBank Offering Rate (“LIBOR”); however, in certain borrowing circumstances therate would be based on the higher of a) the Federal Funds Rate plus 0.5 to1.0%, and b) a rate set by the Facility’s administrative agent, based on theU.S. prime rate.  The basis points vary based on the ratio of thePartnership’s Consolidated Debt (as defined in the Partnership Credit Facility)to Consolidated EBITDA (as defined in the Partnership Credit Facility), rangingfrom 0.50% to 1.50% for Base Rate loans, and 1.50% to 2.50% for Eurodollar Rateloans.  The basis points will increase by 0.50% during any period (not toexceed 270 days) where the Partnership makes an acquisition for a purchaseprice in excess of $50.0 million (“Acquisition Adjustment Period”). The rate atMarch 31, 2006, was 7.01%, a LIBOR-based rate.

 

*SeniorNotes*

 

In October 2004the Partnership and its subsidiary, MarkWest Energy Finance Corporation, issued$225.0 million in senior notes at a fixed rate of 6.875%, payable semi-annuallyin arrears on May 1 and November 1, commencing on May 1, 2005. The notes matureon November 2, 2014. The Partnership may redeem some or all of the notesat any time on or after November 1, 2009, at certain redemption pricestogether with accrued and unpaid interestto the date of redemption. The Partnership may redeem all of the notes at anytime prior to November 1, 2009, at a make-whole redemption price. Inaddition, prior to November 1, 2007, the Partnership may redeem up to 35%of the aggregate principal amount of the notes with the proceeds of certainequity offerings at a stated redemption price. The Partnership must offer torepurchase the notes at a specified price if it a) sells certain assets anddoes not reinvest the proceeds or repay senior indebtedness, or b) thePartnership experiences specific kinds of changes in control. Each of thePartnership’s existing subsidiaries, other than MarkWest Energy FinanceCorporation, has guaranteed the notes jointly and severally, and fully andunconditionally. The notes are senior unsecured obligations equal in right ofpayment with all of the Partnership’s existing and future senior debt. They aresenior in right of payment to all of the Partnership’s future subordinated debtbut effectively junior in right of payment to its secured debt to the extent ofthe assets securing the debt, including the Partnership’s obligations inrespect of its Partnership Credit Facility. The proceeds from these notes wereused to pay down the Partnership’s outstanding debt under its credit facility.

 

The indenture governingthe senior notes include certain limitations on the activities of thePartnership and its restricted subsidiaries. Limitations include the ability ofthe Partnership and its restricted subsidiaries to incur additionalindebtedness; declare or pay dividends or distributions or redeem, repurchaseor retire equity interests or subordinated indebtedness; make investments;incur liens; create any consensual limitation on the ability of the Partnership’srestricted subsidiaries to pay dividends, make loans or transfer property tothe Partnership; engage in transactions with the Partnership’s affiliates; sellassets, including equity interests of the Partnership’s subsidiaries; make anypayment on or with respect to, or purchase, redeem, defease or otherwiseacquire or retire for value any subordinated obligation or guarantorsubordination obligation (except principal and interest at maturity); andconsolidate, merge or transfer assets. Subject to compliance with certaincovenants, the Partnership may issue additional notes from time to time underthe indenture pursuant to Rule 144A and Regulation S under the SecuritiesAct of 1933.

 

The Partnership agreed tofile an exchange offer registration statement or, under certain circumstances,a shelf registration statement, pursuant to a registration rights agreementrelating to the 2004 senior notes. The Partnership failed to complete theexchange offer in the time provided for in the subscription agreements(April 26, 2005) and, as a consequence, is incurring an interest ratepenalty of 0.5% annually, increasing 0.25% every 90 days thereafter up to 1%,until such time as the exchange offer is completed. The registration statementwas filed on January 17, 2006, the exchange offer was completed on March 7,2006, and the interest penalty ceased.

 

##### **6. Derivative Financial Instruments**

 

*Commodity Instruments*

 

MarkWest Hydrocarbon andMarkWest Energy may utilize a combination of fixed-price forward contracts,fixed-for-floating price swaps and options available in the over-the-counter (“OTC”)market, and futures contracts traded on the New York Mercantile Exchange (“NYMEX”). The Company and the Partnership enter into OTC swaps with financialinstitutions and other energy company counterparties.  Management conductsa standard credit review on counterparties and

 

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has agreements containing collateral requirements, where deemednecessary.  The Company and the Partnership use standardized agreementsthat allow for offset of positive and negative exposures.  Some of theagreements may require margin deposit.

 

The use of derivative instrumentsmay create exposure to the risk of financial loss in certain circumstances,including instances when (i) NGLs do not trade at historical levelsrelative to crude oil, (ii) sales volumes are less than expected,requiring market purchases to meet commitments, or (iii) our OTCcounterparties fail to purchase or deliver the contracted quantities of naturalgas, NGLs or crude oil or otherwise fail to perform.  To the extent thatthe Company, or the Partnership, engage in derivative activities, they may beprevented from realizing the benefits of favorable price changes in thephysical market; however, they are similarly insulated against unfavorablechanges in such prices.

 

Both theCompany and the Partnership have a committee, which is comprised of the seniormanagement team, that oversees all of the hedging activity.

 

Fair value is based onavailable market information for the particular derivative instrument, andincorporates the commodity, period, volume and pricing.  Positive(negative) amounts represent unrealized gains (losses).

 

*MarkWestHydrocarbon*

 

MarkWest Hydrocarbon mayenter into physical and/or financial positions to manage its risks related tocommodity price exposure.  Due to timing of purchases and sales, directexposure to price volatility can be created, because there is no longer anoffsetting purchase or sale that remains exposed to market pricing. Through marketing and derivatives activities, direct exposure may occurnaturally, or we may choose direct exposure when we favor that exposure overfrac spread risk.

 

The following tablesummarizes MarkWest Hydrocarbon’s specific derivative positions at March 31,2006:

 
| **Swaps:**                    | ** ** | **Period**                     | ** ** | **Fixed Price** | ** ** | **Fair Value at  March 31, 2006  (in thousands)** | ** ** |
|-------------------------------|------------|--------------------------------|------------|-----------------|------------|---------------------------------------------------|------------|
| Propane - 6.4 Mm Gal          |       | Oct-Dec 2006                   |       | $               | 0.93       |                                              | $          | (407 | ) |
| Propane - 6.4 Mm Gal          |       | Jan-Mar 2007                   |       | $               | 0.96       |                                              |       | (257 | ) |
|                          |       |                           |       |            |       |                                              |       |
| Iso-butane - 0.7 Mm Gal       |       | Oct-Dec 2006                   |       | $               | 1.12       |                                              |       | (96 | ) |
| Iso-butane - 0.6 Mm Gal       |       | Jan-Mar 2007                   |       | $               | 1.16       |                                              |       | (58 | ) |
|                          |       |                           |       |            |       |                                              |       |
| Normal butane - 2.0 Mm Gal    |       | Oct-Dec 2006                   |       | $               | 1.10       |                                              |       | (174 | ) |
| Normal butane - 1.7 Mm Gal    |       | Jan-Mar 2007                   |       | $               | 1.13       |                                              |       | (96 | ) |
|                          |       |                           |       |            |       |                                              |       |
| Natural gasoline - 2.1 Mm Gal |       | Jul-Sep 2006                   |       | $               | 1.47       |                                              |       | 13 |   |
|                          |       |                           |       |            |       |                                              |       |   |   |
| Natural gasoline - 1.3 Mm Gal |       | Oct-Dec 2006                   |       | $               | 1.39       |                                              |       | (86 | ) |
| Natural gasoline - 1.1 Mm Gal |       | Jan-Mar 2007                   |       | $               | 1.37       |                                              |       | (94 | ) |
|                          |       |                           |       |            |       |                                              | (1,255     | ) |
| Other                         |       |                           |       |            |       |                                              | (244       | ) |
|                          |       | **Total MarkWest Hydrocarbon** |       | $               | (1,499     | )                                                 |
|                               |            |                                |            |                 |            |                                                   |            |  |  |  |  |  |  |

 

 

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The impact of MarkWestHydrocarbon’s commodity derivative instruments on results of operations and financialposition are summarized below:

 
| ** **                     | ** ** | **Three months ended  March 31, 2006** | ** ** |
|--------------------------------|------------|----------------------------------------|------------|
| Unrealized loss – revenue |       | $                                      | (1,499     | ) |
|                                |            |                                        |            |  |

 
| ** **                               | ** ** | **Three months ended  March 31, 2006** | ** ** |
|------------------------------------------|------------|----------------------------------------|------------|
| Unrealized loss – current liability |       | $                                      | 1,499      |   |
|                                          |            |                                        |            |  |

 

*MarkWestEnergy Partners*

 

The Partnership’s primaryrisk management objective is to reduce volatility in its cash flows arisingfrom changes in commodity prices related to future sales of natural gas, NGL’sand crude.  Swaps and futures contracts may allow the Partnership toreduce volatility in its margins, because losses or gains on the derivativeinstruments are generally offset by corresponding gains or losses in thePartnership’s physical positions.

 

The following tableincludes information on MarkWest Energy’s specific derivative positions atMarch 31, 2006:

 
| **Costless collars:**       | ** ** | **Period**        | ** ** | **Floor** | ** ** | **Cap** | ** ** | **Fair Value at  March 31, 2006  (in thousands)** | ** ** |
|-----------------------------|------------|-------------------|------------|-----------|------------|---------|------------|---------------------------------------------------|------------|
| Crude Oil - 500 Bbl/d       |       | 2006              |       | $         | 57.00      |    | $          | 67.00                                             |       | $ | (605 | ) |
| Crude Oil - 250 Bbl/d       |       | 2006              |       | $         | 57.00      |    | $          | 67.00                                             |       | $ | (302 | ) |
| Crude Oil - 205 Bbl/d       |       | 2006              |       | $         | 57.00      |    | $          | 65.10                                             |       | $ | (312 | ) |
|                        |       |              |       |      |       |    |       |                                              |       |
| Propane - 20,000 Gal/d      |       | 2006              |       | $         | 0.90       |    | $          | 0.99                                              |       | $ | (141 | ) |
| Propane - 10,000 Gal/d      |       | 2006              |       | $         | 0.97       |    | $          | 1.15                                              |       | $ | 108 |   |
| Propane - 12,750 Gal/d      |       | Jan-Jun 2006      |       | $         | 0.90       |    | $          | 1.01                                              |       | $ | (5 | ) |
|                        |       |              |       |      |       |    |       |                                              |       |
| Ethane - 22,950 Gal/d       |       | 2006              |       | $         | 0.65       |    | $          | 0.80                                              |       | $ | 471 |   |
|                        |       |              |       |      |       |    |       |                                              |       |
| Natural gas - 645 Mmbtu/d   |       | Apr-Jun 2006      |       | $         | 6.71       |    | $          | 12.46                                             |       | $ | (7 | ) |
| Natural gas - 1,575 Mmbtu/d |       | Apr-Oct 2006      |       | $         | 8.50       |    | $          | 10.05                                             |       | $ | 725 |   |
| Natural gas - 1,575 Mmbtu/d |       | Nov 2006-Mar 2007 |       | $         | 9.00       |    | $          | 12.50                                             |       | $ | 235 |   |
|                        |       |              |       |      |       |    |       | $                                                 | 167        |   |

 
| **Swaps:**                              | ** ** | **Period**   | ** ** | ** **                          | ** ** | **Fixed Price** | ** ** | **Fair Value at  March 31, 2006  (in thousands)** | ** ** |
|-----------------------------------------|------------|--------------|------------|-------------------------------------|------------|----------------------|------------|-----------------------------------------------------------------------|------------|
| Crude oil - 250 Bbl/d                   |       | 2006         |       |                                |       | $                    | 62.00      |                                                                  | $          | (471 | ) |
| Crude oil - 185 Bbl/d                   |       | 2006         |       |                                |       | $                    | 61.00      |                                                                  | $          | (398 | ) |
| Crude oil - 250 Bbl/d                   |       | 2007         |       |                                |       | $                    | 65.30      |                                                                  | $          | (365 | ) |
|                                    |       |         |       |                                |       |                 |       |                                                                  |       |
| Natural gas basis swap - 10,000 Mmbtu/d |       | Apr-Oct 2006 |       |                                |       | $                    | 0.82       |                                                                  | $          | (672 | ) |
| Natural gas basis swap - 10,000 Mmbtu/d |       | Apr-Oct 2006 |       |                                |       | $                    | 0.85       |                                                                  | $          | 703 |   |
| Natural gas basis swap - 4,000 Mmbtu/d  |       | Apr-Oct 2006 |       |                                |       | $                    | 1.07       |                                                                  | $          | 96 |   |
| Natural gas basis swap - 4,000 Mmbtu/d  |       | Apr-Oct 2006 |       |                                |       | $                    | 1.04       |                                                                  | $          | (87 | ) |
|                                    |       |         |       |                                |       |                 |       | $                                                                     | (1,194     | ) |
|                                    |       |         |       |                                |       |                 |       |                                                                  |       |
|                                    | ** ** |         | ** ** | **Total MarkWest  Energy Partners** |       | $                    | (1,027     | )                                                                     |

 

15

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The impact of MarkWestEnergy’s commodity derivative instruments on results of operations andfinancial position are summarized below:

 
| ** **                                               | ** ** | **Three months ended March 31,** | ** ** |
|----------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                               | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| Realized gains – revenue                            |       | $                                | 539        |   | $ | 42 |   |
| Unrealized gains (losses) – revenue                 |       | (299                             | )          | 51 |   |
| Other  comprehensive income – changes in fair value |       | —                           |       | (191 | ) |
| Other comprehensive income - settlement                  |       | —                           |       | 42 |   |
|                                                          |            |                                  |            |  |  |  |  |

 
| ** **                                 | ** ** | **March 31,** | ** ** |
|--------------------------------------------|------------|---------------|------------|
| ** **                                 | ** ** | **2006**      | ** ** | **2005** | ** ** |
| Unrealized gains – current asset      |       | $             | —     |   | $ | 9 |   |
| Unrealized losses – current liability |       | 1,027         |       | 450 |   |
|                                            |            |               |            |  |  |  |  |

 

**7.Income Taxes**

 

TheCompany accounts for income taxes under the asset and liability method pursuantto SFAS No. 109, *Accounting for IncomeTaxes*. Under SFAS No. 109, deferred income taxes are recognizedfor the future tax consequences attributable to differences between thefinancial statement carrying amounts of existing assets and liabilities andtheir respective tax basis and net operating loss and credit carryforwards.Deferred tax assets and liabilities are measured using enacted tax ratesexpected to apply to taxable income in the years in which those temporary differencesare expected to be recovered or settled. The effect of any tax rate change ondeferred taxes is recognized as income in the period that includes theenactment date of the tax rate change. Realizability of deferred tax assets isassessed and, if not more likely than not, a valuation allowance is recorded towrite down the deferred tax assets to their net realizable value. The Companybases the effective corporate tax rate for interim periods on the estimatedannual effective corporate tax rate. Income tax expense totaled $0.4 millionfor the first three months of 2006 and an income tax expense of $0.8 millionfor the same period in 2005, resulting in an effective tax rates of 12.6% and33.4% for each respective period. The change in the annual effective tax ratereflects the utilization of various state net operating losses (“NOL”) and thecorresponding change in the state NOL valuation allowance.  The Companybelieves, however, that it is more likely than not that the state NOLs will notbe fully realized and continues to maintain a valuation allowance againstthis long-term deferred tax asset.

 

**8. Stock and Incentive Compensation Plans**

 

Total compensation costfor share-based pay arrangements was as follows:

 
| ** **                | ** ** | **Three months ended March 31,** | ** ** |
|---------------------------|------------|----------------------------------|------------|
| ** **                | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| Stock options             |       | $                                | 21         |   | $ | 720 |   |
| Restricted stock          |       | 105                              |       | 14 |   |
| General partner interests |       | 1,509                            |       | 1,645 |   |
| Subordinated units        |       | (13                              | )          | (38 | ) |
| Restricted units          |       | 458                              |       | 230 |   |
| Total compensation cost   |       | 2,080                            |       | 2,571 |   |
| Income tax benefit        |       | (263                             | )          | (859 | ) |
| Net compensation cost     |       | $                                | 1,817      |   | $ | 1,712 |   |
|                           |            |                                  |            |  |  |  |  |  |  |

 

The following summarizes the total compensation cost as ofmarch 31, 2006, related to nonvested awards not yet recognized. The actualcompensation cost recognized may differ for the restricted units, as theyqualify as liability awards, which are impacted by changes in the fair value.

 

16

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| ** **       | ** ** | **Amount** | ** ** | **Weighted-average  Remaining  Vesting Period  (years)** | ** ** |
|------------------|------------|------------|------------|---------------------------------------------------------------|------------|
| Stock options    |       | 60         |       | 1.7                                                           |       |
| Restricted stock |       | 669        |       | 2.4                                                           |       |
| Restricted units |       | 1,928      |       | 2.4                                                           |       |
| Total            |       | $          | 2,657      |                                                          |       |   |
|                  |            |            |            |                                                               |            |  |

 

At March 31, 2006,the Company has four stock-based compensation plans, one of which is throughits consolidated subsidiary, MarkWest Energy Partners. These plans aredescribed below.

 

*Stock Options*

 

Stock options are issued under the Company’s 1996Stock Incentive Plan and 1996 Non-employee Director Stock Option Plan. The options vest over a service period of from three to five years. The optionshave a maximum term of ten years. At the discretion of the Company, the holdermay use Company-assisted or broker-assisted cashless exercise. The Company maygrant options to its employees for up to 925,000 shares of common stock. At March 31, 2006, there were approximately 214,000 options available forgrant under this plan. The Company may grant options to its non-employeedirectors for up to 30,000 shares of common stock, however, it does not intendto use options as a compensation tool in the future.

 

The fair value of stockoptions is estimated using the Black-Scholes option-pricing model.  Nooptions were granted in 2006 or 2005.

 

Under SFAS No. 123R,compensation expense is based on the fair value of the stock options, reducedfor an estimate of expected forfeitures (4.6% in the first quarter of 2006).

 

The following summarizesthe impact of the Company’s stock option plans (in thousands):

 
| ** **                  | ** ** | **Three Months Ended March 31,** | ** ** |
|-----------------------------|------------|----------------------------------|------------|
| ** **                  | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| Options exercised, cashless |       | 7                                |       | 20 |   |
| Shares issued, cashless     |       | 4                                |       | 12 |   |
| Options exercised, cash     |       | 7                                |       | 5 |   |
| Shares issued, cash         |       | 5                                |       | 5 |   |

 

A summary of the statusof the Company’s stock option plans as of March 31, 2006 and 2005 are presentedbelow.  Stock option information in the following table has not beenadjusted to give retroactive effect to stock dividends paid.

 
| ** **                       | ** ** | **Number of Shares** | ** ** | **Weighted-  average Exercise  Price** | ** ** | **Weighted-average  Remaining  Contractual Term** | ** ** | **Aggregate Intrinsic  Value** | ** ** |
|----------------------------------|------------|--------------------------------|------------|---------------------------------------------|------------|--------------------------------------------------------|------------|-------------------------------------|------------|
| Outstanding at December 31, 2005 |       | 114,007                        |       | $                                           | 8.28       |                                                   | 7          |                                | $          | 1,356,919 |   |
| Changes during the quarter:      |       |                           |       |                                        |       |                                                   |       |                                |       |
| Granted                          |       | —                         |       | —                                      |       | —                                                 |       | —                              |       |
|                             |       |                           |       |                                        |       |                                                   |       |                                |       |
| Exercised                        |       | (13,705                        | )          | 7.32                                        |       | 5                                                      |       | 212,634                             |       |
| Forfeited                        |       | —                         |       | —                                      |       | —                                                 |       | —                              |       |
| Expired                          |       | —                         |       | —                                      |       | —                                                 |       | —                              |       |
|                             |       |                           |       |                                        |       |                                                   |       |                                |       |
| Outstanding at March 31, 2006    |       | 100,302                        |       | $                                           | 8.41       |                                                   | 6          |                                | $          | 1,453,758 |   |
|                             |       |                           |       |                                        |       |                                                   |       |                                |       |
| Exercisable at March 31, 2006    |       | 66,179                         |       |                                        |       |                                                   |       |                                |       |
| Exercisable at March 31, 2005    |       | 72,595                         |       |                                        |       |                                                   |       |                                |       |
|                                  |            |                                |            |                                             |            |                                                        |            |                                     |            |  |  |  |  |

 

17

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| ** **                                                     | ** ** | **March 31,** | ** ** |
|----------------------------------------------------------------|------------|---------------|------------|
| ** **                                                     | ** ** | **2006**      | ** ** | **2005** | ** ** |
| Total fair value of options vested during the  quarter         |       | $             | 22,352     |   | $ | 35,697 |   |
| Total intrinsic value of options exercised during  the quarter |       | $             | 212,634    |   | $ | 339,582 |   |
|                                                                |            |               |            |  |  |  |  |  |

 

*Restricted Stock*

 

The Company also issuesrestricted stock, for no consideration, under the Company’s 1996 StockIncentive Plan and 1996 Non-employee Director Stock Option Plan.  The restrictedstock vests over a service period of three years. The fair value of restrictedstock is determined on the date of grant, based on the fair value of the commonstock. The holder of restricted stock receives dividends as though the shareswere unrestricted. Upon settlement, the individual receives common stock of theCompany. Under SFAS No. 123R, compensation expense is based on the fairvalue, reduced for an estimate of expected forfeitures (4.6% in the firstquarter of 2006).

 

The following summarizesthe impact of the Company’s restricted stock plans (in thousands, except forper share data):

 
| ** **                   | ** ** | **Number of Shares** | ** ** | **Weighted-average  Grant-date Fair  Value** | ** ** |
|------------------------------|------------|----------------------|------------|----------------------------------------------|------------|
| Nonvested at January 1, 2006 |       | 22,673               |       | $                                            | 21.24      |   |
| Granted                      |       | 15,651               |       | 24.00                                        |       |
| Vested                       |       | (2,327               | )          | 19.16                                        |       |
| Forfeited                    |       | —               |       | —                                       |       |
| Nonvested at March 31, 2006  |       | 35,997               |       | $                                            | 22.57      |   |

 
| ** **                                                                             | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                             | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| Weighted-average  grant-date fair value of restricted stock granted during the quarter |       | $                                | 375,624    |   | $ | 133,603 |   |
| Total fair value  of restricted stock vested during the quarter                        |       | 44,585                           |       | — |   |
|                                                                                        |            |                                  |            |  |  |  |  |

 

During the quartersended March 31, 2006 and 2005, the Company received no proceeds for issuingrestricted stock, and there were no cash settlements.

 

*Participation Plan*

 

The Company has alsoentered into arrangements with certain directors and employees of the Companyreferred to as the Participation Plan.  Under the Participation Plan, theCompany sells subordinated partnership units of the Partnership or interests inthe Partnership’s general partner, under a purchase and sale agreement. There is no vesting period or maximum contractual term under the ParticipationPlan. The Company’s capacity to grant further general partner interests islimited by its ownership in the general partner.

 

The subordinated unitsare sold without any restrictions on transfer.   Compensation expenseis based on changes in the market value of the subordinated units. Nosubordinated units were sold to the employees or directors in 2006 or2005.  MarkWest Hydrocarbon reacquired no subordinated units in 2006 or2005. During the quarters ended March 31, 2006 and 2005, the Company receivedno proceeds for issuing subordinated units, and there were no cash settlementsor conversions to common units.

 

The interest in thePartnership’s general partner is sold with certain put-and-call provisions thatallow the individuals to require MarkWest Hydrocarbon to buy back, or requirethe individuals to sell back their interest in the general partner to

 

18

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MarkWest Hydrocarbon.  Specifically, the employees anddirectors can exercise their put if (1) MarkWest Hydrocarbon or thePartnership’s general partner undergoes a change of control;(2) additional membership interests are issued that, on a pro forma basis,decreases the distributions to all the then existing members; (3) anyamendment, alteration or repeal of the provisions of the general partneragreement is undertaken which materially and adversely affects the thenexisting rights, duties, obligations or restrictions of the employees anddirectors; or (4) the employee or director (i) becomes totallydisabled while a director, officer or employee of the general partner, ofMarkWest Hydrocarbon or of any of their affiliates, or (ii) dies, or(iii) retires as a director, officer or employee of the general partner,of MarkWest Hydrocarbon or of any of their affiliates after reaching the age of60 years.  The employee or his estate has 120 days after the put event toexercise the put under (4) and 30 days after notice to exercise under(1) through (3).  MarkWest Hydrocarbon can exercise its call optionif the employee or director ceases to be a director or employee of MarkWestHydrocarbon or any of its affiliates, or if there is a change of control. MarkWest Hydrocarbon can exercise its call option if (i) the employee ordirector ceases to be a director or employee of MarkWest Hydrocarbon or any ofits affiliates, or (ii) if there is a change of control of MarkWest or of thePartnership’s general partner. For the call option based upon a termination ofthe employment or directorship, MarkWest Hydrocarbon has 12 months followingthe termination date of the employee or director to exercise its call option. MarkWestHydrocarbon has agreed  to exempt thegeneral partner interests of three present or former directors from the calloption based upon a termination of employment or directorship. Additionally,pursuant to the terms of Mr. Semple’s employment agreement with MarkWestHydrocarbon, 66% of his general partner interest has become exempt from thecall option based upon a termination of employment or directorship for otherthan cause, and the remaining 34% will likewise become exempt after November 1,2006. For the call option based upon a change of control of MarkWest or of thePartnership’s general partner, MarkWest Hydrocarbon has 30 days following thechange of control to exercise its call option.

 

As the formula used todetermine the sale and buy-back price is not based on an independent thirdparty valuation, coupled with the attributes of the put-and-call provisions,these transactions are considered compensatory arrangements, similar to a stockappreciation right. Compensation expense related to general partner interestsis calculated as the difference in the formula value and the amount paid bythose individuals.  The formula value is the amount MarkWest Hydrocarbonwould have to pay the employees and directors to repurchase the general partnerinterests, and is based on the current market value of the Partnership’s commonunits and the current quarterly distributions paid.  During the quartersended March 31, 2006 and 2005, the Company received $0.3 million and $0.2million, respectively, for issuing, and distributed $0.2 million and $0, respectively,to repurchase general partner interests.

 

###### *MarkWestEnergy Partners, L.P. Long-Term Incentive Plan*

###### * *

The general partner hasadopted the MarkWest Energy Partners, L.P. Long-Term Incentive Plan foremployees and directors of the general partner, as well as employees of itsaffiliates who perform services for us. The plan consists of two components,restricted units and unit options. The plan currently permits the grant ofawards covering an aggregate of 500,000 common units, comprised of 200,000 restrictedunits and 300,000 unit options. The Compensation Committee of the generalpartner’s Board of Directors administers the plan.

 

*Restricted Units.*A restricted unit is a “phantom” unit thatentitles the grantee to receive a common unit upon the vesting of the phantomunit or, at the discretion of the Compensation Committee, cash equivalent tothe value of a common unit.  The restricted units vest over a serviceperiod of three to four years; however, vesting for certain awards acceleratesif specific annualized distribution goals are met. These restricted units areentitled, during the vesting period, to receive distribution equivalents, whichrepresent cash equal to the amount of distributions made on common units.

 

The following is asummary of the Long-Term Incentive Plan restricted units issued under thePartnership’s Long-Term Incentive Plan:

 
| ** **                      | ** ** | **Number of units** | ** ** | **Weighted-average  grant-date fair value** | ** ** |
|---------------------------------|------------|-------------------------------|------------|-------------------------------------------------------|------------|
| Non-vested at December 31, 2005 |       | 38,864                        |       | $                                                     | 45.60      |   |
| Granted                         |       | 30,293                        |       | 46.64                                                 |       |
| Vested                          |       | (9,643                        | )          | 46.44                                                 |       |
| Forfeited                       |       | —                        |       | —                                                |       |
| Non-vested at March 31, 2006    |       | 59,514                        |       | $                                                     | 46.00      |   |

 

19

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| ** **                                                                             | ** ** | **March 31,** | ** ** |
|----------------------------------------------------------------------------------------|------------|--------------------|------------|
| ** **                                                                             | ** ** | **2006**           | ** ** | **2005** | ** ** |
| Weighted-average  grant-date fair value of restricted units granted during the quarter |       | $                  | 1,412,993  |   | $ | 385,994 |   |
| Total fair value  of restricted units vested during the quarter                        |       | 447,841            |       | 69,025 |   |
| Total intrinsic  value of restricted units exercised during the quarter                |       | $                  | 965,152    |   | $ | 316,969 |   |

 

During the quartersended March 31, 2006 and 2005, the Partnership received no proceeds for issuingrestricted units, and there were no cash settlements.

 

Of the total number ofrestricted units that vested in the first quarter of 2006 and 2005, thePartnership did not redeem any restricted units for cash. It issued 9,643common units in 2006. In 2005, the Partnership issued 8,850 common units andacquired 250 more common units in the open market.  The Partnershiprecorded $0.5 million  and $0.2 millionin compensation expense for the three months ended March 31, 2006 and 2005,respectively.

 

*Unit Options**.** *The Compensation Committeemakes grants of unit options under the plan to employees and directorscontaining such terms as the committee shall determine. Unit options will havean exercise price that, at the discretion of the committee, may be less than,equal to or more than the fair market value of the units on the date of grant.Unit options  are exercisable over aperiod determined by the Compensation Committee. Unit options also areexercisable upon a change in control of us, the general partner, MarkWestHydrocarbon or upon the achievement of specified financial objectives.

 

As of March 31,2006, the Partnership had not granted common unit options to employees ordirectors of the general partner, or employees of its affiliates or members ofsenior management.

 

**9. Dividends to Shareholders**

 

*CashDividends*

 

On January 26, 2006, the Company’s Board ofDirectors declared a quarterly cash dividend of $0.125 per share, payable on February 22, 2006, to the stockholders of record as of theclose of business on February 15, 2006. The ex-dividend date was February 13,2006.

 

On April 27, 2006, the Company’s Board ofDirectors declared a quarterly cash dividend of $0.175 per share, an increase of $0.10 per share from the same period of2005, payable on June 5, 2006, to the stockholders of record as of the close of business on May 26,2006. The ex-dividend date will be May 24, 2006.

 

*StockDividends*

 

On April 27, 2006, theBoard of Directorsdeclared a stock dividend of one share of common stock for each tenshares of common stock held by stockholders of record as of the close ofbusiness on May 11, 2006. The stock dividend is to be paid on May 23, 2006,with an ex-dividend date of May 9, 2006.

 

**10.  Commitments and Contingencies**

 

*Legal*

 

In the ordinary course ofbusiness, the Company is subject to a variety of risks and disputes normallyincident to its business and is a party to various legal proceedings. Wemaintain insurance policies in amounts and with coverage and deductibles as webelieve are reasonable and prudent. However, we cannot assure either that theinsurance companies will promptly honor their policy obligations or that thecoverage or levels of insurance will be adequate to protect us from allmaterial expenses related to future claims for property loss or businessinterruption to the Company or for third party claims of personal and propertydamage, or that the coverages or levels of insurance it presently has will beavailable in the future at economical prices.

 

20

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Inearly 2005, MarkWest Hydrocarbon, Inc., the Partnership and several of itsaffiliates were served with two lawsuits, Ricky J. Conn, *et al.* v. MarkWest Hydrocarbon, Inc. *et al.*(filed February 2, 2005), and CharlesC. Reid, *et al.* v. MarkWestHydrocarbon, Inc. *et al.*(filedFebruary 8, 2005), in Floyd Circuit Court, Commonwealth of Kentucky, CivilAction No. 05-CI-00137 and Civil Action No. 05-CI-00156, which actions onFebruary 24, 2005, were removed to the jurisdiction of the U.S. District Courtfor the Eastern District of Kentucky, Pikeville Division. The Company, thePartnership and its affiliates were served with an additional lawsuit, CommunityTrust and Investment Co., *et al.*v. MarkWest Hydrocarbon, Inc. *et al.*,filed November 7, 2005,in Floyd County Circuit Court, Kentucky, that added fivenew claimants but essentially alleged the same facts and claims as the earliertwo suits. On March 27, 2006, the U.S. District Court remanded the cases backto Floyd County Circuit Court, Kentucky.

 

Theseactions are for third-party claims of property and personal injury damagessustained as a consequence of an NGL pipeline leak and an ensuing explosion andfire that occurred on November 8, 2004. The pipeline was owned by an unrelatedbusiness entity and leased and operated by the Partnership’s subsidiary,MarkWest Energy Appalachia, LLC. It transports NGLs from the Maytown gasprocessing plant to the Partnership’s Siloam fractionator. The fire from theleaked vapors resulted in property damage to five homes and injuries to some ofthe residents. The pipeline owner, the U.S. Department of Transportation,Office of Pipeline Safety (“OPS”), and the Partnership continue to investigatethe incident. Discovery in the action is now just getting underway followingthe remand back to state court.

 

TheCompany notified its general liability insurance carriers of the incident andthe lawsuits in a timely manner and is coordinating its legal defense with theinsurers. At this time, the Company believes that it has adequate generalliability insurance coverage for third-party property damage and personalinjury liability resulting from the incident. The Company has settled withseveral of the claimants for third-party property damage claims (damage toresidences and personal property), and reached settlements for some of thepersonal injury claims. These have been paid for or reimbursed under theCompany’s general liability insurance. As a result, the Company has notprovided for a loss contingency.

 

Pursuantto OPS regulation mandates and to a Corrective Action Order issued by the OPSNovember 18, 2004, pipeline and valve integrity evaluation, testing and repairswere conducted on the affected pipeline segment before service could be resumed.OPS authorized a partial return to service of the affected pipeline in October2005. MarkWest is in the process of applying for return to full service.

 

Relatedto the above referenced pipeline incident, MarkWest Hydrocarbon and thePartnership has filed an independent action captioned MarkWest Hydrocarbon,Inc., *et al.* v. Liberty MutualIns. Co., *et al.* (DistrictCourt, Arapahoe County, Colorado, Case No. 05CV3953 filed August 12, 2005), asremoved to the U.S. District Court for the District of Colorado, Civil ActionNo. 1:05-CV-1948, on October 7, 2005), against its All-Risks Property andBusiness Interruption insurance carriers as a result of the companies’ refusalto honor their insurance coverage obligation to pay the Company for certainexpenses. These include the Company’s internal expenses and costs incurred fordamage to, and loss of use of the pipeline, equipment, products, the extratransportation costs incurred for transporting the liquids while the pipelinewas out of service, the reduced volumes of liquids that could be processed, andthe costs of complying with the OPS Corrective Action Order (hydrostatictesting, repair/replacement and other pipeline integrity assurance measures).These expenses and costs have been expensed as incurred and any potentialrecovery from the All-Risks Property and Business Interruption insurancecarriers will be treated as “other income” if and when they are received. TheCompany has not provided for a receivable for these claims because of theuncertainty as to whether and how much the Company will ultimately recoverunder these policies. The Company has also asserted that the cost of pipelinetesting, replacement and repair are subject to an equitable sharing arrangementwith its owner, pursuant to the terms of the pipeline lease agreement.

 

The Company has also beeninvolved in a lawsuit captioned Ross Bros. Construction v. MarkWestHydrocarbon, Inc., (U.S. Court Appeals for the Sixth Circuit, Case No.05-6251). This lawsuit involved the expansion construction of the SiloamKentucky gas processing and fractionation plant and a dispute as to themonetary value of work and additional work beyond the contract’s lump sum priceperformed by the contractor. This lawsuit involved a claim of approximately$0.7 million in extra costs. The Company was recently granted Summary Judgmenton its defense asserting accord and satisfaction. In August 2005, Plaintiffsfiled an appeal of the Summary Judgment to the U.S. Court of Appeals for the 6th Circuit. The Company believes that,while it is not able to predict the outcome of this matter, based on the judge’sdiscussion on the grant of the summary judgment and denial of Ross Brothers’motion for reconsideration, it is probable that the Company will prevail in theappeal. As a result, the Company has not provided for a loss contingency.

 

TheCompany has been involved in an arbitration proceeding captioned Kevin Stoweand Scott Daves v. MarkWest Hydrocarbon, Inc., American ArbitrationAssociation arbitration, Case No. 77 168 Y 0052 05 BEAH, Denver, Colorado,2005. Claimants filed an arbitration proceeding against the Company seekingfurther payments out of a dispute and

 

21

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settlement over interests in certain wells in Colorado. In February2006, the Arbitrator in the action granted MarkWest’s motion for summaryjudgment and the arbitration action was dismissed with prejudice.

 

In theordinary course of business, the Company is a party to various other legalactions. In the opinion of management, none of these actions, eitherindividually or in the aggregate, will have a material adverse effect on theCompany’s financial condition, liquidity or results of operations.

 

***11.***** ****SubsequentEvents**

 

*Headquarters Office Lease*

 

In April 2006,the Partnership entered into a ten-year office lease and will relocate its andMarkWest Hydrocarbon, Inc.’s corporate headquarters to the Park CentralBuilding, Tower II, 1515 Arapahoe Street, Suite 700, Denver, Colorado 80202. Thelease provides for a tenant improvement allowance of up to approximately $1.8million through December 31, 2006. A security deposit of $1.0 million wasprovided in the form of an irrevocable letter of credit. The future minimumlease payments of the new lease are as follows:

 
| **Year ending December 31,** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|------------|------------|------------|
| 2006                                        |       | $          | —     |       |
| 2007                                        |       | 927,442    |       |
| 2008                                        |       | 972,138    |       |
| 2009                                        |       | 1,016,834  |       |
| 2010                                        |       | 1,044,769  |       |
| Thereafter                                  |       | 5,983,677  |       |
| Total                                       |       | $          | 9,944,860  |       |

 

The Company’sheadquarters is currently in a building leased by MarkWest Hydrocarbon.  Aportion of the lease cost for that building has historically been allocated toboth the Company and the Partnership.  MarkWest Hydrocarbon has notdetermined the final disposition of its existing lease; however, a portion ofincremental expense, if any, may potentially be allocated to the Partnership.

 

*S-1 Registration Statement*

 

On April 20, 2006,the Partnership filed a Form S-1 registration statement registering unitsissued in the fourth quarter of 2005 under private placement offerings. ThePartnership will receive no proceeds from the sale of any units offered underthis registration statement.

 

On April 25, 2006, thePartnership filed a Form S-1 registration statement for a new unitissuance offering. The Partnership expects to offer up to 3.85 million newunits.

 

**12.****  SegmentReporting**

 

MarkWestHydrocarbon’soperations are classified into two reportable segments:

 

1.     *MarkWest Hydrocarbon Standalone* — TheCompany sells its equity and third-party NGLs, purchases third-party naturalgas, and sells its equity and third-party natural gas. Since February 2004,the Company is also engaged in the wholesale marketing of propane. MarkWestHydrocarbon Standalone operates MarkWest Energy Partners, a publicly tradedlimited partnership.

 

2.     *MarkWest Energy Partners* — The Partnershipis engaged in the gathering, processing and transmission of natural gas; thetransportation, fractionation and storage of natural gas liquids; and thegathering and transportation of crude oil.

 

The Company evaluatesthe performance of its segments and allocates resources to them based onoperating income.  There were no intersegment revenues prior toMay 24, 2002.  The Company conducts its continuing operations in theUnited States.

 

22

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The table below presentsinformation about net income/(loss) for the reported segments for the threemonths ended March 31, 2006 and 2005. Net income/(loss) for each segmentincludes total revenues minus purchased product costs, facility expenses,selling, general and administrative expenses, depreciation, amortization ofintangible assets, accretion of asset retirement obligations and impairmentsand excludes interest income, interest expense, amortization of deferredfinancing costs, gain on sale of non-operating assets, non-controlling interestin net income of consolidated subsidiary, miscellaneous income (expense) andincome taxes.

 

Selling, general andadministrative expenses are allocated to the segments based on direct expensesincurred by the segments or allocated based on****the percent of time that employees devote to thesegment in accordance with the Partnership’s services agreement with theCompany.****

**** ****

| ** **                                                                                         | ** ** | **MarkWest  Hydrocarbon  Standalone** | ** ** | **MarkWest  Energy  Partners** | ** ** | **Eliminating  Entries** | ** ** | **Total**  | ** ** |
|----------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------|------------|--------------------------|------------|------------|------------|
| **Quarter ended March 31, 2006:**                                                                  | ** ** | ** **                            | ** ** | ** **                     | ** ** | ** **               | ** ** | ** ** | ** ** |
| Revenues                                                                                           |       | $                                     | 100,593    |                           | $          | 156,743                  |       | $          | (17,715    | ) | $ | 239,621 |   |
| Purchased product costs                                                                            |       | 92,025                                |       | 100,797                        |       | (11,655                  | )          | 181,167    |       |
| Facility expenses                                                                                  |       | 5,770                                 |       | 13,994                         |       | (6,060                   | )          | 13,704     |       |
| Selling, general and administrative expenses                                                       |       | 3,038                                 |       | 8,338                          |       | —                   |       | 11,376     |       |
| Depreciation                                                                                       |       | 205                                   |       | 7,173                          |       | —                   |       | 7,378      |       |
| Amortization of intangible assets                                                                  |       | —                                |       | 4,016                          |       | —                   |       | 4,016      |       |
| Accretion of  asset retirement and lease obligations                                               |       | —                                |       | 25                             |       | —                   |       | 25         |       |
| Operating income  (loss)                                                                           |       | (445                                  | )          | 22,400                         |       | —                   |       | 21,955     |       |
| Other income (expense):                                                                            |       |                                  |       |                           |       |                     |       |       |       |
| Earnings from unconsolidated subsidiary                                                            |       | —                                |       | 945                            |       | —                   |       | 945        |       |
| Interest income                                                                                    |       | 186                                   |       | 220                            |       | —                   |       | 406        |       |
| Interest expense                                                                                   |       | (68                                   | )          | (10,976                        | )          | —                   |       | (11,044    | )          |
| Amortization of  deferred financing costs (a component of interest expense)                        |       | (17                                   | )          | (808                           | )          | —                   |       | (825       | )          |
| Dividend income                                                                                    |       | 106                                   |       | —                         |       | —                   |       | 106        |       |
| Other income                                                                                       |       | 150                                   |       | 2,092                          |       | —                   |       | 2,242      |       |
| Income before  non-controlling interest in net income of consolidated subsidiary and income  taxes |       | (88                                   | )          | 13,873                         |       | —                   |       | 13,785     |       |
| Income tax expense                                                                                 |       | (409                                  | )          | —                         |       | —                   |       | (409       | )          |
| Non-controlling  interest in net income of consolidated subsidiary                                 |       | —                                |       | —                         |       | (10,544                  | )          | (10,544    | )          |
| Net income                                                                                         |       | $                                     | (497       | )                              | $          | 13,873                   |       | $          | (10,544    | ) | $ | 2,832 |   |

 

23

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| ** **                                                                                         | ** ** | **MarkWest  Hydrocarbon  Standalone** | ** ** | **MarkWest  Energy  Partners** | ** ** | **Eliminating  Entries** | ** ** | **Total**  | ** ** |
|----------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------|------------|--------------------------|------------|------------|------------|
| **Quarter ended March 31, 2005:**                                                                  | ** ** | ** **                            | ** ** | ** **                     | ** ** | ** **               | ** ** | ** ** | ** ** |
| Revenues                                                                                           |       | $                                     | 64,521     |                           | $          | 89,637                   |       | $          | (15,805    | ) | $ | 138,353 |   |
| Purchased product costs                                                                            |       | 53,821                                |       | 60,785                         |       | (9,907                   | )          | 104,699    |       |
| Facility expenses                                                                                  |       | 5,827                                 |       | 9,331                          |       | (5,898                   | )          | 9,260      |       |
| Selling, general  and administrative expenses                                                      |       | 3,463                                 |       | 4,639                          |       | —                   |       | 8,102      |       |
| Depreciation                                                                                       |       | 415                                   |       | 4,326                          |       | —                   |       | 4,741      |       |
| Amortization of  intangible assets                                                                 |       | —                                |       | 2,095                          |       | —                   |       | 2,095      |       |
| Accretion of  asset retirement and lease obligations                                               |       | —                                |       | 10                             |       | —                   |       | 10         |       |
| Operating income  (loss)                                                                           |       | 995                                   |       | 8,451                          |       | —                   |       | 9,446      |       |
| Other income (expense):                                                                            |       |                                  |       |                           |       |                     |       |       |       |
| Interest income                                                                                    |       | 182                                   |       | 67                             |       | —                   |       | 249        |       |
| Interest expense                                                                                   |       | (30                                   | )          | (3,674                         | )          | —                   |       | (3,704     | )          |
| Amortization of  deferred financing costs (a component of interest expense)                        |       | (61                                   | )          | (475                           | )          | —                   |       | (536       | )          |
| Dividend income                                                                                    |       | 92                                    |       | —                         |       | —                   |       | 92         |       |
| Other income                                                                                       |       | 191                                   |       | (104                           | )          | —                   |       | 87         |       |
| Income before  non-controlling interest in net income of consolidated subsidiary and income  taxes |       | 1,369                                 |       | 4,265                          |       | —                   |       | 5,634      |       |
| Income tax expense                                                                                 |       | (770                                  | )          | —                         |       | —                   |       | (770       | )          |
| Non-controlling  interest in net income of consolidated subsidiary                                 |       | —                                |       | —                         |       | (3,325                   | )          | (3,325     | )          |
| Net income                                                                                         |       | $                                     | 599        |                           | $          | 4,265                    |       | $          | (3,325     | ) | $ | 1,539 |   |

 

Otherincome for the three months ended March 31, 2006, includes $1.8 million inearnings for insurance recoveries related to charges incurred in 2005 fromHurricane Rita.

 

In the fourth quarter of2004, the Partnership received a communication from a customer alleging ameasurement or volume discrepancy with the Partnership. Based on the evidenceavailable at that time, the Partnership recorded a contingent liability ofapproximately $1.9 million. In the first quarter of 2006, after a thoroughinvestigation, management of the Partnership concluded that it was no longerprobable that a liability existed with respect to the alleged measurement orvolume discrepancy. Accordingly, the $1.9 million accrued liability wasreversed to revenue in the first quarter of 2006.

 

24

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##### **Item 2. Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

Management’s Discussionand Analysis (“MD&A”) contains statements that are forward-looking. Statementsincluded in this quarterly report on Form 10-Q that are not historical factsare forward-looking statements within the meaning of Section 27A of theSecurities Act of 1933, as amended, and Section 21E of the Securities andExchange Act of 1934, as amended. We use words such as “may,” “believe,” “estimate,”“expect,”  “intend,” “project,” “anticipate,”and similar expressions to identify forward-looking statements.

 

Theseforward-looking statements are made based upon management’s expectations,estimates, assumptions and beliefs concerning future events impacting us andtherefore involve a number of risks and uncertainties. We caution thatforward-looking statements are not guarantees and that actual results coulddiffer materially from those expressed or implied in the forward-lookingstatements.

 

Forward-lookingstatements include statements relating to, among other things:

 

•      Ourexpectations regarding MarkWest Energy Partners, L.P.

•      Our ability togrow MarkWest Energy Partners, L.P.

•      Our ability toamend certain producer contracts.

•      Ourexpectations regarding natural gas, NGLs product and prices.

•      Our efforts toincrease fee-based contract volumes.

•      Our ability tomanage our commodity price risk.

•      Our ability tomaximize the value of our NGL output.

•      The adequacy ofour general public liability, property, and business interruption insurance.

•      Our ability tocomply with environmental and governmental regulations.

 

Important factors thatcould cause our actual results of operations or our actual financial conditionto differ include, but are not necessarily limited to:

 

•      Theavailability of raw natural gas supply for our gathering and processingservices.

•      Theavailability of NGLs for our transportation, fractionation and storageservices.

•      Prices of NGLproducts and natural gas, including the effectiveness of any hedgingactivities.

•      Our ability tonegotiate favorable marketing agreements.

•      The risks thatthird party natural gas exploration and production activities will not occur orbe successful.

•      Our dependenceon certain significant customers, producers, gatherers, treaters andtransporters of natural gas.

•      Competitionfrom other NGL processors, including major energy companies.

•      Our dependenceon certain significant customers, producers, gatherers, treaters andtransporters of natural gas.

•      Our substantialdebt and other financial obligations could adversely impact our financialcondition.

•      Our ability tosuccessfully integrate our recent or future acquisitions.

•      Our ability to identify and completeorganic growth projects or acquisitions complementary to our business.

•      Damage to facilities and interruption ofservice due to casualty, weather, mechanical failure or any extended orextraordinary maintenance or inspection that may be required.

•      Changes ingeneral economic conditions in regions in which our products are located.

•      The threat ofterrorist attacks or war.

•      Winter weatherconditions.

 

Thislist is not necessarily complete. Other unknown or unpredictable factors couldalso have material adverse effects on future results. The Company does notupdate publicly any forward-looking statement with new information or futureevents. Investors are cautioned not to put undue reliance on forward-lookingstatements as many of these factors are beyond our ability to control orpredict. You should read “Risk Factors” included in Item 1A of thisForm 10-K for further information.

 

25

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##### **Overview**

 

MarkWestHydrocarbon reported net income of $2.8 million, or $0.26 per dilutedshare, for the three months ended March 31, 2006, compared to net income of$1.5 million, or $0.14 per diluted share, for the corresponding quarter of2005. The Company reports its results under accounting principles generallyaccepted in the United States (“GAAP”), which require that the Companyconsolidate MarkWest Energy Partners.

 

***MarkWest Hydrocarbon Standalone Results***

 

For the three monthsended March 31, 2006, MarkWest Hydrocarbon Standalone reported an operatingloss of $0.4 million, compared to operating income of $1.0 million in2005. MarkWest Hydrocarbon Standalone reported a net loss of $0.5 million in2006, compared to net income of $0.6 million in 2005, for the comparableperiod.

 

*CashDividends*

 

On January 26, 2006, the Company’s Board ofDirectors declared a quarterly cash dividend of $0.125 per share, payable on February 22, 2006, to the stockholders of record as of theclose of business on February 15, 2006. The ex-dividend date was February 13,2006.

 

On April 27, 2006, the Company’s Board ofDirectors declared a quarterly cash dividend of $0.175 per share, an increase of $0.10 per share from the same period of2005, payable on June 5, 2006, to the stockholders of record as of the close of business on May 26,2006. The ex-dividend date was May 24, 2006.

 

*StockDividends*

 

On April 27, 2006, the Board of Directorsdeclared a stockdividend of one share of common stock for each ten shares of common stock heldby stockholders of record as of the close of business on May 11, 2006. Thestock dividend is to be paid on May 23, 2006, with an ex-dividend date of May9, 2006.

 

***MarkWest Energy Partners Results***

 

For the three monthsended March 31, 2006, the Partnership reported operating income of $22.4million compared to $8.5 million for the corresponding quarter of 2005, anincrease of $13.9 million, or 165%. The Partnership reported net income of $13.9million in the first quarter of 2006, compared to $4.3 million in 2005.

 

**Our Business**

 

MarkWest Hydrocarbon wasfounded in 1988 as a partnership and later incorporated in Delaware.  Wecompleted our initial public offering of common shares in 1996.

 

MarkWest Hydrocarbon isan energy company primarily focused on marketing natural gas liquids (NGLs) andincreasing shareholder value by growing MarkWest Energy Partners, L.P. (“MarkWestEnergy Partners” or “The Partnership”), our consolidated subsidiary and apublicly-traded master limited partnership. MarkWest Energy Partners is engagedin the gathering, processing and transmission of natural gas; thetransportation, fractionation and storage of natural gas liquids; and thegathering and transportation of crude oil.

 

MarkWest Hydrocarbon’sassets consist primarily of partnership interests in MarkWest Energy Partnersand certain processing agreements in Appalachia.  As of March 31,2006, the Company owned a 21% interest in the Partnership, consisting of the following:

 

•     1,633,334 subordinated unitsand 836,162 common units, representing a 19% limited partner interest in thePartnership; and

•     an 89% ownership interest inMarkWest Energy GP, L.L.C., the general partner of the Partnership, which inturn owns a 2% general partner interest and all of the incentive distributionrights in the Partnership.

 

To better understand ourbusiness and the results of operations discussed below, it is important to havean understanding of three factors:

 

•      The nature ofthe business from which we derive our revenues and from which MarkWest EnergyPartners derives its revenues;

•      The nature ofour relationship with MarkWest Energy Partners; and

 

26

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•      The lack ofcomparability within our results of operations across periods because ofMarkWest Energy Partners’ significant acquisition activity.

 

***MarkWestHydrocarbon***

 

Excluding the revenuesderived from MarkWest Energy Partners, we generate the majority of our revenuesand net operating margin  (defined and discussed further, below) from ourAppalachia processing agreements. We outsource these services to thePartnership, and pay the Partnership a fee for providing processing andfractionation services. As compensation for providing processing services toour Appalachian producers, we earn a fee and receive title to the NGLs produced.In return, we are required to replace, in dry natural gas, the Btu value of theNGLs extracted.  This Btu replacement obligation is referred to in the industryas a “keep-whole” arrangement. In keep-whole arrangements, our principal costis purchasing and delivering dry gas of an equivalent Btu content to replaceBtus extracted from the gas stream in the form of NGLs, or consumed as fuelduring processing.  The spread between the NGL product sales price and thepurchase price of natural gas with an equivalent Btu content is called the “fracspread.”  Generally, the frac spread ispositive and offsets all or a portion of the fees that we pay the Partnership. In the event natural gas becomes more expensive, on a Btu equivalent basis,than NGL products, and the associated fees that we pay the Partnership, the netoperating margin associated with the Appalachian processing agreements resultsin operating losses.

 

In Appalachia, we haveentered into operating agreements with a customer with respect to natural gasdelivered into its transmission facilities, upstream of MarkWest EnergyPartners’ Kenova, Boldman and Cobb facilities. Under the terms of theseoperating agreements, the customer has agreed to use reasonable, diligentefforts to supply these facilities with consistent volumes of natural gasshipped by the customer, on behalf of the Appalachian producers. The initialterms of our agreements with this customer run through December 31, 2015,with annual renewals thereafter.

 

At the closing ofMarkWest Energy Partners’ initial public offering on May 24, 2002, weoutsourced our midstream services to the Partnership.  Pursuant to theterms of the operating agreements, we retained all the benefits and associatedrisks of our keep-whole contracts with producers.  Our NGL marketing andnatural gas supply operations were retained by us and not contributed toMarkWest Energy Partners.

 

In September 2004,we entered into several new and amended agreements, expiring December 31,2009, with one of the largest Appalachia producers, which allow us tosignificantly reduce our exposure to commodity price risk, for approximately25% of our keep-whole gas volumes.  Under these agreements, the Company’sexposure to the keep-whole natural gas is limited in the event natural gasbecomes more expensive than the NGL product sales price, thereby mitigating therisk of incurring operating losses.

 

Beginning in 2006, wealso entered into derivative instruments, which are marked to market, to manageour risks related to commodity price exposure. Our keep-whole contracts exposeus to commodity price risk, both on the sales side (of NGLs) and on thepurchase side (of natural gas), which, in turn, may increase the volatility ofour standalone results and cash flows.  We attempt to mitigate ourcommodity price risk through our commodity price risk management program (seeItem 3, “Quantitative and Qualitative Disclosures about Market Risk” for furtherdetails about our commodity price risk management program).

 

Our natural gasmarketing group markets natural gas for MarkWest Energy Partners’ facilities,purchases replacement Btu gas requirements and assists with businessdevelopment efforts. We also purchase and resell natural gas obtained fromthird parties. Beginning in February 2004, we initiated a wholesale propanemarketing business. We buy propane on a wholesale basis and resell it to thirdparties, primarily propane retailers. This operation is, fundamentally, ahigh-dollar, low margin business. MarkWest Hydrocarbon also enters into futuresale agreements that, as derivative instruments, are marked to market.

 

MarkWest Hydrocarbon alsoreceives revenue under fee-based arrangements for processing natural gas.

 

27

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***MarkWest Energy Partners***

 

ThePartnership generates the majority of its revenues and net operating margin(defined and discussed further, below) from natural gas gathering, processing andtransmission, NGL transportation, fractionation and storage, and crude oilgathering and transportation. In many cases, the Partnership provides servicesunder contracts that contain a combination of more than one of the arrangementsdescribed below. While all of these services constitute midstream energyoperations, the Partnership provides services under the following types ofarrangements:

 

•      *Fee-based arrangements.*Under fee-basedarrangements, the Partnership receives a fee or fees for one or more of thefollowing services: gathering, processing and transmission of natural gas,transportation, fractionation and storage of NGLs, and gathering andtransportation of crude oil. The revenue the Partnership earns from thesearrangements is directly related to the volume of natural gas, NGLs or crudeoil that flows through our systems and facilities and is not directly dependenton commodity prices. In certain cases, these arrangements provide for minimumannual payments. If a sustained decline in commodity prices were to result in adecline in volumes; however, the Partnership’s revenues from these arrangementswould be reduced.

 

•      *Percent-of-proceedsarrangements.* Under percent-of-proceeds arrangements, the Partnership gathers and processesnatural gas on behalf of producers, sells the resulting residue gas and NGLs atmarket prices, and remits to producers an agreed-upon percentage of theproceeds based on an index price. In other cases, instead of remitting cashpayments to the producer, the Partnership delivers an agreed-upon percentage ofthe residue gas and NGLs to the producer, and sells the volumes it keeps tothird parties at market prices.  Generally, under these types ofarrangements, its revenues and net operating margins generally increase as naturalgas prices and NGL prices increase, and its revenues and net operating marginsdecrease as natural gas and NGL prices decrease

 

•      *Percent-of-indexarrangements.* Under percent-of-index arrangements, the Partnership generally purchasesnatural gas at either (1) a percentage discount to a specified indexprice, (2) a specified index price less a fixed amount, or (3) apercentage discount to a specified index price less an additional fixed amount.It then gathers and delivers the natural gas to pipelines, where it resells thenatural gas at the index price, or at a different percentage discount to theindex price. The net operating margins the Partnership realizes under thesearrangements decrease in periods of low natural gas prices, because these net operatingmargins are based on a percentage of the index price. Conversely, their netoperating margins increase during periods of high natural gas prices.

 

•      *Keep-wholearrangements.* Under keep-whole arrangements, the Partnership gathers natural gas from theproducer, processes the natural gas, and sells the resulting NGLs to thirdparties at market prices. Because the extraction of the NGLs from the naturalgas during processing reduces the Btu content of the natural gas, thePartnership must either purchase natural gas at market prices for return toproducers, or make cash payment to the producers equal to the energy content ofthis natural gas. Accordingly, under these arrangements, its revenues and netoperating margins increase as the price of NGLs increases relative to the priceof natural gas, and decreases as the price of natural gas increases relative tothe price of NGLs.

 

•      *Settlementmargin.* Typically, the Partnership is allowed to retain a fixed percentage of thevolume gathered to cover the compression fuel charges and deemed linelosses.  To the extent the gathering system is operated more efficientlythan specified per contract allowance, the Partnership is entitled to retainthe difference for its own account.

 

•      *Condensatesales.*  During the gathering process, thermodynamic forces contributeto changes in operating conditions of the natural gas flowing through thepipeline infrastructure. As a result, hydrocarbon dew points are reached,causing condensation of hydrocarbons in the high-pressure pipelines. Condensatecollected in the system is sold at a monthly crude-oil index-based price, andthe proceeds are retained

 

Inmany cases, it provides services under contracts that contain a combination ofmore than one of the arrangements described above. The terms of the Partnership’scontracts vary based on gas quality conditions, the competitive environment atthe time the contracts are signed and customer requirements. The Partnership’scontract mix and, accordingly, its exposure to natural gas and NGL prices, maychange as a result of changes in producer preferences, its expansion in regionswhere some types of contracts are more common and other market factors. Anychange in mix will influence the Partnership’s financial results.

 

28

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AtMarch 31, 2006, the Partnership’s primary exposure to keep-whole contracts waslimited to its Arapaho (Oklahoma) processing plant and its East Texasprocessing contracts. At the Arapaho plant inlet, the Btu content of thenatural gas meets the downstream pipeline specification; however, thePartnership has the option of extracting NGLs when the processing marginenvironment is favorable. In addition, approximately half, as measured involumes, of the related gas gathering contracts include additional fees tocover plant operating costs, fuel costs and shrinkage costs in a low-processingmargin environment. Because of the Partnership’s ability to operate the plantin several recovery modes, including turning it off, coupled with theadditional fees provided for in the gas gathering contracts, its overallkeep-whole contract exposure is limited to a small portion of the operatingcosts of the plant. For the three months ended March 31, 2006, approximately7.7% of East Texas inlet volumes were processed pursuant to keep-wholecontracts.

 

For the threemonths ended March 31, 2006, MarkWest Energy Partners generated the followingpercentages of its revenues and net operating margin from the following typesof contracts:

 
| ** **           | ** ** | **Fee-Based** | ** ** | **Percent-of-  Proceeds (1)** | ** ** | **Percent-of-  Index (2)** | ** ** | **Keep-  Whole (3)** | ** ** | **Total** | ** ** |
|----------------------|------------|---------------|------------|-------------------------------|------------|----------------------------|------------|----------------------|------------|-----------|------------|
| Revenues             |       | 11            | %          | 18                            | %          | 31                         | %          | 40                   | %          | 100       | %          |
| Net operating margin |       | 33            | %          | 31                            | %          | 24                         | %          | 12                   | %          | 100       | %          |

 

----

(1)   Includes other types ofarrangements tied to NGL prices.

(2)   Includes settlement margin,condensate sales and other types of arrangements tied to natural gas prices.

(3)   Includes settlement margin,condensate sales and other types of arrangements tied to both NGL and naturalgas prices.

 

***Our Relationship with MarkWest Energy Partners***

 

We spun off the majorityof our then-existing natural gas gathering and processing and NGLtransportation, fractionation and storage assets into MarkWest Energy Partnersin May 2002, just before the Partnership completed its initial publicoffering. At the time of its formation and initial public offering, we enteredinto four contracts with MarkWest EnergyPartners whereby MarkWest Energy Partnersprovides midstream services in Appalachia to us for a fee.  Additionally,MarkWest Energy Partners receives 100% of all fee and percent-of-proceedsconsideration for the first 10 MMcf/d that it gathers and processes inMichigan. MarkWest Hydrocarbon retains a 70% net profits interest in thegathering and processing income earned on quarterly pipeline throughput inexcess of 10 MMcf/d.  In accordance with accounting principles generallyaccepted in the United States (“GAAP”), MarkWest Energy Partners’ financialresults are included in our consolidated financial statements.  Allintercompany accounts and transactions are eliminated during consolidation.

 

As a result of thecontracts mentioned above, the Company is one of the Partnership’s largestcustomers.  For the quarter ended March 31, 2006, we accounted for11% of the Partnership’s revenues and 14% of its net operating margin. This represents a decrease from the quarter ended March 31, 2005, when weaccounted for 13% of the Partnership’s revenues and 20% of its net operatingmargin.  We expect we will continue to account for less of the Partnership’sbusiness in the future as it continues to acquire assets and increase itscustomer base or diversify its business.

 

We control and operate MarkWest EnergyPartners through our majority ownership in the Partnership’s generalpartner.  Our employees are responsible for conducting the Partnership’sbusiness and operating its assets pursuant to a Services Agreement, which wasformalized and made effective January 1, 2004.

 

***Impact of Recent Acquisitions on Comparability of FinancialResults***

 

*Recent MarkWest Energy Partners Acquisition Activity*

 

Inreading the discussion of our historical results of operations, you should beaware of the impact of our recent acquisitions, which fundamentally affect thecomparability of our results of operations over the periods discussed.

 

Since the Partnership’s initial publicoffering, it has completed eight acquisitions for an aggregate purchase priceof approximately $794 million, net of working capital. The following tablesets forth information regarding each of these acquisitions:

 

29

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| **Name**                | ** ** | **Assets**                                                       | ** ** | **Location**                      | ** ** | **Consideration  (in millions)** | ** ** | **Closing Date** | ** **        |
|-------------------------|------------|------------------------------------------------------------------|------------|-----------------------------------|------------|----------------------------------|------------|------------------|-------------------|
| Javelina (1)            |       | Gas processing and fractionation facility                        |       | Corpus Christi, TX                |       | $                                | 398.3      |             | November 1, 2005  |   |
|                    |       |                                                             |       |                              |       |                             |       |             |              |
| Starfish (2)            |       | Natural gas pipeline, gathering system and  dehydration facility |       | Gulf of Mexico/Southern Louisiana |       | $                                | 41.7       |             | March 31, 2005    |   |
|                    |       |                                                             |       |                              |       |                             |       |             |              |
| East Texas              |       | Gathering system and gas procession assets                       |       | East Texas                        |       | $                                | 240.7      |             | July 30, 2004     |   |
|                    |       |                                                             |       |                              |       |                             |       |             |              |
| Hobbs                   |       | Natural gas pipeline                                             |       | New Mexico                        |       | $                                | 2.3        |             | April 1, 2004     |   |
|                    |       |                                                             |       |                              |       |                             |       |             |              |
| Michigan Crude Pipeline |       | Common carrier crude oil pipeline                                |       | Michigan                          |       | $                                | 21.3       |             | December 18, 2003 |   |
|                    |       |                                                             |       |                              |       |                             |       |             |              |
| Western Oklahoma        |       | Gathering system                                                 |       | Western Oklahoma                  |       | $                                | 38.0       |             | December 1, 2003  |   |
|                    |       |                                                             |       |                              |       |                             |       |             |              |
| Lubbock Pipeline        |       | Natural gas pipeline                                             |       | West Texas                        |       | $                                | 12.2       |             | September 2, 2003 |   |
|                    |       |                                                             |       |                              |       |                             |       |             |              |
| Pinnacle                |       | Natural gas pipelines and gathering systems                      |       | East Texas                        |       | $                                | 39.9       |             | March 28, 2003    |   |

 

----

(1)  Consideration includes $35.5 million in cash.

(2)  Represents a 50% non-controlling interest.

 

**Results of Operations**

 

***Operating Data***

 

| ** **                                      | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------------------------|------------|----------------------------------|------------|
| ** **                                      | ** ** | **2006**                         | ** ** | **2005** | ** ** | **%****Change** | ** ** |
| **MarkWest Hydrocarbon Standalone:**            |       |                             |       |   |   |   |   |
| ***Frac Spread***                               |       |                             |       |   |   |   |   |
| NGL product  sales (gallons) (1)                |       | 49,967,000                       |       | 52,164,000 |   | -4.2 | % |
|                                            |       |                             |       |   |   |   |   |
| ***Marketing***                                 |       |                             |       |   |   |   |   |
| NGL product  sales (gallons) (2)                |       | 27,196,000                       |       | 19,672,332 |   | 38.2 | % |
|                                            |       |                             |       |   |   |   |   |
| **MarkWest Energy Partners:**                   |       |                             |       |   |   |   |   |
| ***East Texas***(3)                             |       |                             |       |   |   |   |   |
| Gathering systems  throughput (Mcf/d)           |       | 346,000                          |       | 287,000 |   | 20.6 | % |
| NGL product  sales (gallons)                    |       | 35,436,000                       |       | 27,612,000 |   | 28.3 | % |
|                                            |       |                             |       |   |   |   |   |
| ***Oklahoma***                                  |       |                             |       |   |   |   |   |
| Foss Lake  gathering systems throughput (Mcf/d) |       | 87,600                           |       | 67,000 |   | 30.7 | % |
| Arapaho NGL  product sales (gallons)            |       | 18,417,000                       |       | 15,217,000 |   | 21.0 | % |
|                                            |       |                             |       |   |   |   |   |
| ***Other Southwest***(4)                        |       |                             |       |   |   |   |   |
| Appleby  gathering systems throughput (Mcf/d)   |       | 33,500                           |       | 28,000 |   | 19.6 | % |
| Other gathering  systems throughput (Mcf/d)     |       | 19,100                           |       | 17,000 |   | 12.4 | % |
| Lateral  throughput volumes (Mcf/d)             |       | 49,700                           |       | 52,000 |   | -4.4 | % |
|                                            |       |                             |       |   |   |   |   |
| ***Appalachia***(5)                             |       |                             |       |   |   |   |   |
| Natural gas  processed for a fee (Mcf/d)        |       | 205,000                          |       | 210,000 |   | -2.4 | % |
| NGLs  fractionated for a fee (Gal/day)          |       | 449,000                          |       | 462,000 |   | -2.8 | % |
| NGL product  sales (gallons)                    |       | 10,482,000                       |       | 10,765,000 |   | -2.6 | % |
|                                            |       |                             |       |   |   |   |   |
| ***Michigan***                                  |       |                             |       |   |   |   |   |
| Natural gas  processed for a fee (Mcf/d)        |       | 6,300                            |       | 6,900 |   | -8.7 | % |
| NGL product  sales (gallons)                    |       | 1,449,000                        |       | 1,563,000 |   | -7.3 | % |
| Crude oil  transported for a fee (Bbl/d)        |       | 14,000                           |       | 14,100 |   | -0.7 | % |
|                                            |       |                             |       |   |   |   |   |
| ***Gulf Coast***(6)                             |       |                             |       |   |   |   |   |
| Natural gas  processed for a fee (Mcf/d)        |       | 120,000                          |       | NA |   | NA |   |
| NGLs  fractionated for a fee (Gal/day)          |       | 820,000                          |       | NA |   | NA |   |

 

30

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----

(1)   Represents sales at the Siloamfractionator.

(2)   Represents sales from our wholesale business.

(3)   MarkWest EnergyPartners acquired the East Texas System in late July 2004.

(4)   MarkWest EnergyPartners acquired the Lubbock pipeline (a/k/a the Power-tex Lateral Pipeline)in September 2003 and the Hobbs lateral pipeline in April 2004. TheLubbock and Hobbs pipelines are the only laterals the Partnership owns thatproduce revenue on a per-unit-of-throughput basis. MarkWest Energy Partners receivea flat fee from our other lateral pipelines and, consequently, the throughputdata from these lateral pipelines is excluded from this statistic.

(5)   Includesthroughput from the Kenova, Cobb, and Boldman processing plants.

(6)   MarkWest EnergyPartners acquired the Javelina system (Gulf Coast) on November 1, 2005.

 

***Financial Results***

 

Management evaluatesperformance on the basis of net operating margin (a “non-GAAP” financialmeasure), which is defined as income (loss) from operations, excluding facilitycost, selling, general and administrative expense, depreciation, amortization,impairments and accretion of asset retirement. These charges have been excludedfor the purpose of enhancing the understanding by both management and investorsof the underlying baseline operating performance of our contractualarrangements, which management uses to evaluate our financial performance forpurposes of planning and forecasting. Net operating margin does not have anystandardized definition and therefore is unlikely to be comparable to similarmeasures presented by other reporting companies. Net operating margin resultsshould not be evaluated in isolation of, or as a substitute for our financialresults prepared in accordance with United States GAAP. Our usage of netoperating margin and the underlying methodology in excluding certain charges isnot necessarily an indication of the results of operations expected in thefuture, or that we will not, in fact, incur such charges in future periods.

 

The following includes areconciliation to the most comparable GAAP financial measure of this non-GAAPfinancial measure (in thousands):

 

| ** **                                                                                         | ** ** | **MarkWest  Hydrocarbon  Standalone** | ** ** | **MarkWest  Energy  Partners** | ** ** | **Eliminating  Entries** | ** ** | **Total**  | ** ** |
|----------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------|------------|--------------------------|------------|------------|------------|
| **Quarter ended March 31, 2006:**                                                                  | ** ** | ** **                            | ** ** | ** **                     | ** ** | ** **               | ** ** | ** ** | ** ** |
| Revenues                                                                                           |       | $                                     | 100,593    |                           | $          | 156,743                  |       | $          | (17,715    | ) | $ | 239,621 |   |
| Purchased product costs                                                                            |       | 92,025                                |       | 100,797                        |       | (11,655                  | )          | 181,167    |       |
| Net operating  margin                                                                              |       | 8,568                                 |       | 55,946                         |       | (6,060                   | )          | 58,454     |       |
| Facility expenses                                                                                  |       | 5,770                                 |       | 13,994                         |       | (6,060                   | )          | 13,704     |       |
| Selling, general  and administrative expenses                                                      |       | 3,038                                 |       | 8,338                          |       | —                   |       | 11,376     |       |
| Depreciation                                                                                       |       | 205                                   |       | 7,173                          |       | —                   |       | 7,378      |       |
| Amortization of  intangible assets                                                                 |       | —                                |       | 4,016                          |       | —                   |       | 4,016      |       |
| Accretion of  asset retirement and lease obligations                                               |       | —                                |       | 25                             |       | —                   |       | 25         |       |
| Operating income  (loss)                                                                           |       | (445                                  | )          | 22,400                         |       | —                   |       | 21,955     |       |
| Other income (expense):                                                                            |       |                                  |       |                           |       |                     |       |       |       |
| Earnings from unconsolidated  subsidiary                                                           |       | —                                |       | 945                            |       | —                   |       | 945        |       |
| Interest income                                                                                    |       | 186                                   |       | 220                            |       | —                   |       | 406        |       |
| Interest expense                                                                                   |       | (68                                   | )          | (10,976                        | )          | —                   |       | (11,044    | )          |
| Amortization of  deferred financing costs (a component of interest expense)                        |       | (17                                   | )          | (808                           | )          | —                   |       | (825       | )          |
| Dividend income                                                                                    |       | 106                                   |       | —                         |       | —                   |       | 106        |       |
| Other income                                                                                       |       | 150                                   |       | 2,092                          |       | —                   |       | 2,242      |       |
| Income before  non-controlling interest in net income of consolidated subsidiary and income  taxes |       | (88                                   | )          | 13,873                         |       | —                   |       | 13,785     |       |
| Income tax expense                                                                                 |       | (409                                  | )          | —                         |       | —                   |       | (409       | )          |
| Non-controlling  interest in net income of consolidated subsidiary                                 |       | —                                |       | —                         |       | (10,544                  | )          | (10,544    | )          |
| Net income                                                                                         |       | $                                     | (497       | )                              | $          | 13,873                   |       | $          | (10,544    | ) | $ | 2,832 |   |

 

31

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| ** **                                                                                         | ** ** | **MarkWest  Hydrocarbon  Standalone** | ** ** | **MarkWest  Energy  Partners** | ** ** | **Eliminating  Entries** | ** ** | **Total**  | ** ** |
|----------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------|------------|--------------------------|------------|------------|------------|
| **Quarter  ended March 31, 2005:**                                                                 | ** ** | ** **                            | ** ** | ** **                     | ** ** | ** **               | ** ** | ** ** | ** ** |
| Revenues                                                                                           |       | $                                     | 64,521     |                           | $          | 89,637                   |       | $          | (15,805    | ) | $ | 138,353 |   |
| Purchased  product costs                                                                           |       | 53,821                                |       | 60,785                         |       | (9,907                   | )          | 104,699    |       |
| Net operating  margin                                                                              |       | 10,700                                |       | 28,852                         |       | (5,898                   | )          | 33,654     |       |
| Facility  expenses                                                                                 |       | 5,827                                 |       | 9,331                          |       | (5,898                   | )          | 9,260      |       |
| Selling, general  and administrative expenses                                                      |       | 3,463                                 |       | 4,639                          |       | —                   |       | 8,102      |       |
| Depreciation                                                                                       |       | 415                                   |       | 4,326                          |       | —                   |       | 4,741      |       |
| Amortization of  intangible assets                                                                 |       | —                                |       | 2,095                          |       | —                   |       | 2,095      |       |
| Accretion of  asset retirement and lease obligations                                               |       | —                                |       | 10                             |       | —                   |       | 10         |       |
| Operating income  (loss)                                                                           |       | 995                                   |       | 8,451                          |       | —                   |       | 9,446      |       |
| Other income  (expense):                                                                           |       |                                  |       |                           |       |                     |       |       |       |
| Interest income                                                                                    |       | 182                                   |       | 67                             |       | —                   |       | 249        |       |
| Interest expense                                                                                   |       | (30                                   | )          | (3,674                         | )          | —                   |       | (3,704     | )          |
| Amortization of  deferred financing costs (a component of interest expense)                        |       | (61                                   | )          | (475                           | )          | —                   |       | (536       | )          |
| Dividend income                                                                                    |       | 92                                    |       | —                         |       | —                   |       | 92         |       |
| Other income                                                                                       |       | 191                                   |       | (104                           | )          | —                   |       | 87         |       |
| Income before  non-controlling interest in net income of consolidated subsidiary and income  taxes |       | 1,369                                 |       | 4,265                          |       | —                   |       | 5,634      |       |
| Income tax expense                                                                                 |       | (770                                  | )          | —                         |       | —                   |       | (770       | )          |
| Non-controlling  interest in net income of consolidated subsidiary                                 |       | —                                |       | —                         |       | (3,325                   | )          | (3,325     | )          |
| Net income                                                                                         |       | $                                     | 599        |                           | $          | 4,265                    |       | $          | (3,325     | ) | $ | 1,539 |   |

 

***MarkWestHydrocarbon Standalone***

 

*Revenues.*Revenues increased$36.1 million, or 56%, for the three months ended March 31, 2006, compared tothe corresponding quarter of 2005. This was due primarily to approximately a$25.8 million increase in our propane wholesale and natural gas marketingbusiness, attributable to a 35% increase in volumes and a 65% increase inprices. Frac spread revenues increased approximately $10.5 million,attributable to a 32% increase in prices, offset by a 4% decrease in volumes. Themark to market adjustment for derivative instruments decreased revenue by approximately$1.5 million and $0, respectively, in 2006 and 2005.

 

*PurchasedProduct Costs.*Purchased product costs increased $38.2million, or 71%, for the three months ended March 31, 2006, compared to thecorresponding quarter of 2005. This was due primarily to approximately a $24.3million increase in our propane wholesale and natural gas marketing business,attributable to a 35% increase in volumes and a 65% increase in prices. Fracspread product costs increased approximately $13.9 million, primarily due to a45% increase in costs, offset by a 4% decrease in volumes.

 

*FacilityExpenses.*Facility expenses decreased by approximately $0.1million, or 1%, during the three months ended March 31, 2006, compared tocorresponding quarter of 2005 primarily as a result of favorable fuelreimbursement at our Kenova, Cobb and Boldman facilities.

 

*Selling, General and Administrative Expenses.*Selling,general and administrative expenses decreased by $0.4 million, or 12%, duringthe three months ended March 31, 2006, compared to the corresponding quarter of2005 as a result of a $0.2 million decrease in compensation expense attributedto the 1996 Stock Incentive Plan and 1996 Non-employee

 

32

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Director Stock Option Plan, and an increaseto the allocation of selling, general and administrative expenses to thePartnership due to the increased activities, such as acquisitions.

 

*Depreciation.*Depreciation expense decreasedby $0.2 million, or 51%, during the three months ended March 31, 2006, comparedto the corresponding quarter of 2005, due to fixed assets becoming fullydepreciated in 2005.

 

*Income taxes.*Income tax expense decreased by$0.4 million, or 51%, due to the decrease in net income in the three monthsended March 31, 2006, compared to the corresponding quarter of 2005. The change in the annual effective tax ratereflects the utilization of various state net operating losses (“NOL”) and thecorresponding change in the state NOL valuation allowance.  The Companybelieves, however, that it is more likely than not that the state NOLs will notbe fully realized and continues to maintain a valuation allowance againstthis long-term deferred tax asset.

 

***MarkWest Energy Partners***

 

*Revenues.*Revenues for the three months ended March 31,2006, increased by $67.1 million, or 75%, compared to the corresponding quarterof 2005, due to the Partnership’s Javelina acquisition in November 2005, whichcontributed $15.0 million, as well as increased volumes and prices in Oklahoma of$25.0 million, in East Texas of $17.8 million, and in Other Southwest of $7.3million.

 

*Purchased Product Costs.*Purchased product costs increased during thethree months ended March 31, 2006 by $40.0 million, or 66%, compared to thecorresponding quarter of 2005. The increase was due primarily to increasedvolumes in Oklahoma of $22.8 million and in Other Southwest of $6.7 million, aswell as increased volumes and prices in East Texas of $9.6 million.

 

*Facility Expenses.*Facility expenses increased approximately$4.7 million, or 50%, during the three months ended March 31, 2006, compared tothe corresponding quarter of 2005, primarily due to the Partnership’s November2005 Javelina Acquisition, which contributed $1.9 million, and $1.3 millionrelated to the new Carthage facility in East Texas , which started operationson January 1, 2006.

 

*Selling,General and Administrative Expenses.*Selling, general andadministrative expenses (“SG&A”) increased $3.7 million, or 80%, during thethree months ended March 31, 2006, relative to the comparable period in 2005. Theincrease related primarily to additional audit and Sarbanes Oxley professionalfees of $1.3 million. Our acquisitions and overall growth led to increasedlabor costs from additional personnel of $1.1 million and increased insurancepremiums of $0.9 million.

 

*Earnings from Unconsolidated Subsidiary*.   Earnings from unconsolidated affiliatesduring the three months ended March 31, 2006, increased as a result of theMarch 31, 2005, acquisition of Starfish.

 

*InterestExpense and Amortization of Deferred Financing Costs (a component of interestexpense). *Interest expense increased by $7.3 million,or 199%, during the three months ended March 31, 2006, compared to 2005,primarily as a result of the additional debt related to the Starfish andJavelina acquisitions.

 

**MattersInfluencing Future Results**

 

During August and September 2005, Hurricanes Katrinaand Rita caused severe and widespread damage to oil and gas assets in the Gulfof Mexico and Gulf Coast regions. Within our Gulf Coast Business Unit, ourStarfish operations have been substantially curtailed since shortly before thehurricanes hit the Gulf Coast. Until necessary repairs are completed, Starfishwill not be able to fully return to normal operations, which will have acontinuing impact on our operating income. We are submitting insurance claims for both businessinterruption and property damage purposes, and we have engaged in  conversations with our insurer and adjusterand have begun to recover expenses and losses incurred since the hurricane(less the insurance deductibles) during 2006.

 

The resulting loss to bothoffshore and onshore assets led to substantial insurance claims within the oiland gas industry. Along with other industry participants, we expect ourinsurance costs to increase within this region as a result of thesedevelopments. We are currently negotiating with our insurer regarding therenewal of our insurance coverage relating to Starfish. We are also exploringalternatives to mitigate the significant cost increases we are facing,including reduced coverage levels, higher deductibles and self insuranceretentions.

 

33

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**CriticalAccounting Policies**

 

Our consolidatedfinancial statements have been prepared in accordance with accountingprinciples generally accepted in the United States of America. Preparation ofthese statements requires management to make significant judgments andestimates. Some accounting policies have a significant impact on amountsreported in these financial statements. A summary of significant accountingpolicies and a description of accounting policies that are considered criticalmay be found in our Annual Report on Form 10-K for the period endingDecember 31, 2005, in Note 2 of the Notes to the Consolidated FinancialStatements, and in the Critical Accounting Policies section of Management’sDiscussion and Analysis of Financial Condition and Results of Operations.

 

**RecentAccounting Pronouncements**

 

InMay 2005, the FASB issued SFAS No. 154, *Accounting Changes and Error Corrections—a replacement of APB OpinionNo. 20 and FASB Statement No. 3*. SFAS No. 154replaces Accounting**PrinciplesBoard Opinion No. 20, *AccountingChanges*, and SFAS No. 3, *ReportingAccounting Changes in Interim Financial Statements*, and changes therequirements for the accounting for and reporting of a**change in accounting principle. Thisstatement applies to all voluntary changes in accounting principle**and also applies to changes required byan accounting pronouncement in the unusual instance that the**pronouncement does not include specifictransition provisions. The statement is effective for accounting**changes and corrections of errors made infiscal years beginning after December 15, 2005. The**Company adopted the provisions of SFASNo. 154 beginning in January 2006. The adoption of the provisions of SFASNo. 154 did not have an impact on the**Company’scondensed consolidated financial statements.

 

InFebruary 2006, the FASB issued SFAS No. 155, *Accounting for Certain Hybrid FinancialInstruments—an amendment of FASB Statements No. 133 and 140*(“SFAS155”). This statement amends*SFASNo. 133, Accounting for Derivative Instruments and Hedging Activities*(“SFAS 133”), and SFAS No. 140, *Accountingfor Transfers and Servicing of Financial Assets and Extinguishments ofLiabilities*and resolves issues addressed in SFAS 133 ImplementationIssue No. D1, “Application of Statement 133 to Beneficial Interest inSecuritized Financial Assets.”  ThisStatement: (a) permits fair value remeasurement for any hybrid financialinstrument that contains an embedded derivative that otherwise would requirebifurcation; (b) clarifies which interest-only strips and principal-onlystrips are not subject to the requirements of SFAS 133; (c) establishes arequirement to evaluate beneficial interests in securitized financial assets toidentify interests that are freestanding derivatives or that are hybridfinancial instruments that contain an embedded derivative requiring bifurcation;(d) clarifies that concentrations of credit risk in the form ofsubordination are not embedded derivatives; and, (e) eliminatesrestrictions on a qualifying special-purpose entity’s ability to hold passivederivative financial instruments that pertain to beneficial interests that areor contain a derivative financial instrument. The standard also requirespresentation within the financial statements that identifies those hybridfinancial instruments for which the fair value election has been applied and informationon the income statement impact of the changes in fair value of thoseinstruments. The Company is required to apply SFAS 155 to all financialinstruments acquired, issued or subject to a remeasurement event beginningJanuary 1, 2007, although early adoption is permitted as of the beginningof an entity’s fiscal year. The adoption of SFAS 155 is not expected to have amaterial impact on the condensed consolidated financial statements of theCompany.

 

34

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#### **Item 3. Quantitative andQualitative Disclosures about Market Risk**

 

Marketrisk includes the risk of loss arising from adverse changes in market rates andprices.  We face market risk from commodity price changes and, to a lesserextent, interest rate changes.

 

***Commodity Price Risk***

 

Our primary riskmanagement objective is to manage volatility in our cash flows.  Acommittee, comprised of members of the senior management team, oversees all ofour derivative activity.

 

Wemay utilize a combination of fixed-price forward contracts, fixed-for-floatingprice swaps and options on the over-the-counter (“OTC”) market.  TheCompany may also enter into futures contracts traded on the New York MercantileExchange (“NYMEX”).  Swaps and futures contracts allow us to managevolatility in our margins because corresponding losses or gains on thefinancial instruments are generally offset by gains or losses in our physicalpositions.

 

We enter into OTC swapswith financial institutions and other energy company counterparties.  Weconduct a standard credit review on counterparties and have agreementscontaining collateral requirements where deemed necessary.  We usestandardized swap agreements that allow for offset of positive and negativeexposures.  We may be subject to margin deposit requirements under OTCagreements (with non-bank counterparties) and NYMEX positions.

 

The use of derivativeinstruments may expose us to the risk of financial loss in certaincircumstances, including instances when (i) NGL’s do not trade at historicallevels relative to crude oil, (ii) sales volumes are less than expectedrequiring market purchases to meet commitments, or (iii) our OTC counterpartiesfail to purchase or deliver the contracted quantities of natural gas, NGL’s orcrude oil or otherwise fail to perform. To the extent that we enter intoderivative instruments, we may be prevented from realizing the benefits offavorable price changes in the physical market. We are similarly insulated,however, against unfavorable changes in such prices.

 

Fair value is based onavailable market information for the particular derivative instrument, andincorporates the commodity, period, volume and pricing.  Positive(negative) amounts represent unrealized gains (losses).

 

***MarkWest Hydrocarbon Risk Management Activity***

 

MarkWest Hydrocarbon mayenter into physical and/or financial positions to manage its risks related tocommodity price exposure.  Due to timing of purchases and sales, directexposure to price volatility can be created, because there is no longer anoffsetting purchase or sale that remains exposed to market pricing. Through marketing and derivatives activities, direct exposure may occurnaturally, or we may choose direct exposure when we favor that exposure overfrac spread risk. Beginning in 2006, MarkWest Hydrocarbon pre-purchased naturalgas for shrink requirements in future months and, for both natural gas andNGLs, has entered into swaps and future sales agreements to manage frac spreadrisk. These derivative instruments are marked to market.

 

The following tablesummarizes MarkWest Hydrocarbon’s specific derivative positions at March 31,2006:

 
| **Swaps:**                    | ** ** | **Period**   | ** ** | ** ** | ** **                     | **Fixed Price** | ** ** | **Fair Value at  March 31, 2006  (in thousands)** | ** ** |
|-------------------------------|------------|--------------|------------|------------|--------------------------------|----------------------|------------|-----------------------------------------------------------------------|------------|
| Propane - 6.4 Mm Gal          |       | Oct-Dec 2006 |       |       |                           | $                    | 0.93       |                                                                  | $          | (407 | ) |
| Propane - 6.4 Mm Gal          |       | Jan-Mar 2007 |       |       |                           | $                    | 0.96       |                                                                  | (257       | ) |
|                          |       |         |       |       |                           |                 |       |                                                                  |       |
| Iso-butane - 0.7 Mm Gal       |       | Oct-Dec 2006 |       |       |                           | $                    | 1.12       |                                                                  | (96        | ) |
| Iso-butane - 0.6 Mm Gal       |       | Jan-Mar 2007 |       |       |                           | $                    | 1.16       |                                                                  | (58        | ) |
|                          |       |         |       |       |                           |                 |       |                                                                  |       |
| Normal butane - 2.0 Mm Gal    |       | Oct-Dec 2006 |       |       |                           | $                    | 1.10       |                                                                  | (174       | ) |
| Normal butane - 1.7 Mm Gal    |       | Jan-Mar 2007 |       |       |                           | $                    | 1.13       |                                                                  | (96        | ) |
|                          |       |         |       |       |                           |                 |       |                                                                  |       |
| Natural gasoline - 2.1 Mm Gal |       | Jul-Sep 2006 |       |       |                           | $                    | 1.47       |                                                                  | 13         |   |
| Natural gasoline - 1.3 Mm Gal |       | Oct-Dec 2006 |       |       |                           | $                    | 1.39       |                                                                  | (86        | ) |
| Natural gasoline - 1.1 Mm Gal |       | Jan-Mar 2007 |       |       |                           | $                    | 1.37       |                                                                  | (94        | ) |
|                          |       |         |       |       |                           |                 |       | (1,255                                                                | )          |
| Other                         |       |         |       |       |                           |                 |       | (244                                                                  | )          |
|                          |       |         |       |       |                           |                 |       |                                                                  |       |
|                          |       |         |       |       | **Total MarkWest Hydrocarbon** | $                    | (1,499     | )                                                                     |

 

35

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The impact of MarkWestHydrocarbon’s commodity derivative instruments on results of operations andfinancial position are summarized below:

 

| ** **                     | ** ** | **Three months ended  March 31,** | ** ** |
|--------------------------------|------------|-----------------------------------|------------|
| ** **                     | ** ** | **2006**                          | ** ** |
| Unrealized loss – revenue |       | $                                 | (1,499     | ) |
|                                |            |                                   |            |  |

 

| ** **                               | ** ** | **March 31,** | ** ** |
|------------------------------------------|------------|---------------|------------|
| ** **                               | ** ** | **2006**      | ** ** |
| Unrealized loss – current liability |       | $             | 1,499      |   |
|                                          |            |               |            |  |

 

The following tablesummarizes MarkWest Hydrocarbon’s physical inventory position at March 31,2006, which could be used in a number of ways, including satisfying shrinkrequirements or physically settling future sales commitments:

 

| **Product**                                                   | ** ** | **Quantity** | ** ** | **Units of  Measure**     | ** ** | **Weighted Average  Cost at March 31,  2006** | ** ** | **Total Cost at  March 31, 2006** | ** ** |
|---------------------------------------------------------------|------------|--------------|------------|--------------------------------|------------|-------------------------------------------------------------------|------------|-------------------------------------------------------|------------|
| Natural gas                                                   |       | 785,000      |       | Mmbtu                          |       | $                                                                 | 7.56       |                                                  | $          | 5,933 |   |
| NGLs                                                          |       | 5,206,000    |       | Gallons                        |       | $                                                                 | 0.88       |                                                  | 4,606      |   |
|                                                          |       |         |       |                           |       |                                                              |       |                                                  |       |
| ** **                                                    |       | ** **   |       | **Total MarkWest Hydrocarbon** |       | $                                                                 | 10,539     |                                                  |
|                                                          |       |         |       |                           |       |                                                              |       |                                                  |       |
| Natural gas, purchased in March 2006 for April 2006  delivery |       | 1,740,010    |       | Mmbtu                          |       | $                                                                 | 7.46       |                                                  | $          | 12,972 |   |

 

The Company entered intothe following future sale contracts in May, 2006:

 

| **Future sale contracts:** | ** ** | **Period**   | ** ** | **Weighted Average  Price** | ** ** |
|--------------------------------------|------------|--------------|------------|----------------------------------|------------|
| Propane - 1.0 Mm Gal                 |       | Nov-Dec 2006 |       | $                                | 1.07       |   |
| Propane - 1.0 Mm Gal                 |       | Jan-Feb 2007 |       | $                                | 1.08       |   |
|                                      |            |              |            |                                  |            |  |  |

 

***The Partnership’s Derivative Activity***

 

The Partnership’sprimary risk management objective is to reduce volatility in its cash flowsarising from changes in commodity prices related to future sales of naturalgas, NGL’s and crude.  Swaps and futures contracts may allow thePartnership to reduce volatility in its margins, because losses or gains on thederivative instruments are generally offset by corresponding gains or losses inthe Partnership’s physical positions.

 

36

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The following tableincludes information on MarkWest Energy’s specific derivative positions atMarch 31, 2006:

 

| **Costless collars:**  | ** ** | **Period**        | ** ** | **Floor** | ** ** | **Cap** | ** ** | **Fair Value at  March 31, 2006 (in  thousands)** | ** ** |
|-----------------------------|------------|-------------------|------------|-----------|------------|---------|------------|----------------------------------------------------------------------------|------------|
| Crude Oil - 500 Bbl/d       |       | 2006              |       | $         | 57.00      |    | $          | 67.00                                                                      |       | $ | (605 | ) |
| Crude Oil - 250 Bbl/d       |       | 2006              |       | $         | 57.00      |    | $          | 67.00                                                                      |       | $ | (302 | ) |
| Crude Oil - 205 Bbl/d       |       | 2006              |       | $         | 57.00      |    | $          | 65.10                                                                      |       | $ | (312 | ) |
|                        |       |              |       |      |       |    |       |                                                                       |       |
| Propane - 20,000 Gal/d      |       | 2006              |       | $         | 0.90       |    | $          | 0.99                                                                       |       | $ | (141 | ) |
| Propane - 10,000 Gal/d      |       | 2006              |       | $         | 0.97       |    | $          | 1.15                                                                       |       | $ | 108 |   |
| Propane - 12,750 Gal/d      |       | Jan-Jun 2006      |       | $         | 0.90       |    | $          | 1.01                                                                       |       | $ | (5 | ) |
|                        |       |              |       |      |       |    |       |                                                                       |       |
| Ethane - 22,950 Gal/d       |       | 2006              |       | $         | 0.65       |    | $          | 0.80                                                                       |       | $ | 471 |   |
|                        |       |              |       |      |       |    |       |                                                                       |       |
| Natural gas - 645 Mmbtu/d   |       | Apr-Jun 2006      |       | $         | 6.71       |    | $          | 12.46                                                                      |       | $ | (7 | ) |
| Natural gas - 1,575 Mmbtu/d |       | Apr-Oct 2006      |       | $         | 8.50       |    | $          | 10.05                                                                      |       | $ | 725 |   |
| Natural gas - 1,575 Mmbtu/d |       | Nov 2006-Mar 2007 |       | $         | 9.00       |    | $          | 12.50                                                                      |       | $ | 235 |   |
|                        |       |              |       |      |       |    |       | $                                                                          | 167        |   |

 

| **Swaps:**                              | ** ** | **Period**   | ** ** | ** **                         | ** ** | **Fixed Price** | ** ** | **Fair Value at  March 31, 2006 (in  thousands)** | ** ** |
|-----------------------------------------|------------|--------------|------------|------------------------------------|------------|----------------------|------------|----------------------------------------------------------------------------|------------|
| Crude oil - 250 Bbl/d                   |       | 2006         |       |                               |       | $                    | 62.00      |                                                                       | $          | (471 | ) |
| Crude oil - 185 Bbl/d                   |       | 2006         |       |                               |       | $                    | 61.00      |                                                                       | $          | (398 | ) |
| Crude oil - 250 Bbl/d                   |       | 2007         |       |                               |       | $                    | 65.30      |                                                                       | $          | (365 | ) |
|                                    |       |         |       |                               |       |                 |       |                                                                       |       |
| Natural gas basis swap - 10,000 Mmbtu/d |       | Apr-Oct 2006 |       |                               |       | $                    | 0.82       |                                                                       | $          | (672 | ) |
| Natural gas basis swap - 10,000 Mmbtu/d |       | Apr-Oct 2006 |       |                               |       | $                    | 0.85       |                                                                       | $          | 703 |   |
| Natural gas basis swap - 4,000 Mmbtu/d  |       | Apr-Oct 2006 |       |                               |       | $                    | 1.07       |                                                                       | $          | 96 |   |
| Natural gas basis swap - 4,000 Mmbtu/d  |       | Apr-Oct 2006 |       |                               |       | $                    | 1.04       |                                                                       | $          | (87 | ) |
|                                    |       |         |       |                               |       |                 |       | $                                                                          | (1,194     | ) |
|                                    |       |         |       |                               |       |                 |       |                                                                       |       |
|                                    | ** ** |         | ** ** | **Total MarkWest Energy Partners** |       | $                    | (1,027     | )                                                                          |

 

The impact of MarkWestEnergy’s commodity derivative instruments on results of operations andfinancial position are summarized below:

 

| ** **                                              | ** ** | **Three months ended March 31,** | ** ** |
|---------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                              | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| Realized gains – revenue                           |       | $                                | 539        |   | $ | 42 |   |
| Unrealized gains (losses) – revenue                |       | (299                             | )          | 51 |   |
| Other comprehensive income – changes in fair value |       | —                           |       | (191 | ) |
| Other comprehensive income - settlement                 |       | —                           |       | 42 |   |
|                                                         |            |                                  |            |  |  |  |  |

 

| ** **                                 | ** ** | **March 31,** | ** ** |
|--------------------------------------------|------------|---------------|------------|
| ** **                                 | ** ** | **2006**      | ** ** | **2005** | ** ** |
| Unrealized gains – current asset      |       | $             | —     |   | $ | 9 |   |
| Unrealized losses – current liability |       | 1,027         |       | 450 |   |
|                                            |            |               |            |  |  |  |  |

 

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##### **Item 4. Controls andProcedures**

##### ** **

***Disclosure Controls and Procedures***

 

In connection with thepreparation of this quarterly report on Form 10-Q, our senior management withparticipation of our Chief Executive Officer and Chief Financial Officer,evaluated the effectiveness of the design and operation of our disclosurecontrols and procedures as of March 31, 2006, pursuant to Rule 13a-15 under theSecurities Exchange Act of 1934 (the “Act”). Based upon that evaluation, ourChief Executive Officer and Chief Financial Officer concluded that as of March31, 2006, as a result of the material weaknesses in our internal control overfinancial reporting, our disclosure controls and procedures were ineffective toprovide reasonable assurance that information required to be disclosed by us inreports that we file or submit under the Act, is recorded, processed,summarized and reported, within the time periods specified in the SEC’s rulesand forms; and to ensure that information required to be disclosed by us in thereports that we file under the Act is accumulated and communicated tomanagement, including our certifying officers, as appropriate, to allow timelydecisions regarding required disclosures.

 

Through the date of thefiling of this Form 10-Q, we have adopted remedial measures to address thedeficiencies in our internal controls that existed on March 31, 2006. Inaddition, we have applied compensating procedures and processes as necessary toensure the reliability of our financial reporting. Such additional proceduresincluded detail management review of our account reconciliations for allaccounts in all business units and multiple-level management review of accountreconciliations for all accounts in all business. Accordingly, managementbelieves, based on its knowledge, that (i) this report does not containany untrue statement of a material fact that would make the statementsmisleading; (ii) this report does not omit any material fact, the omission ofwhich would make the statements misleading, in light of the circumstance underwhich they were made with respect to the period covered by this report and(iii) the financial statements, and other financial information includedin this report, fairly present in all material respects our financialcondition, results of operations and cash flows as of, and for, the periodspresented in this report.

 

***Changes in Internal Control over Financial Reporting***

 

During the period coveredby this quarterly report on Form 10-Q, although we continue to make changes tothe internal control structure, we have not completed our annual assessment andwe are not in a position to assert that these changes have materially affectedthe Company’s internal control over financial reporting. We do not expect to bein a position to make such an assertion until we have completed our annualassessment of the effectiveness of internal controls as of December 31, 2006.

 

In response to thematerial weaknesses identified in the 2005 Form 10-K our management hasdedicated significant resources to improve our control environment and toremedy the identified material weaknesses. These ongoing efforts are focused onexpanding our organization capabilities through the addition of employees withappropriate skills and abilities to improve our control environment andimplementing process changes to strengthen our internal control design andmonitoring activities. While we are not in a position to assert that anymaterial changes have occurred, we believe the actions we have taken haveimproved and will continue to improve our internal control over financialreporting, as well as our disclosure controls and procedures. However, giventhe breadth of areas affected, it will take time to remediate all of ourmaterial weaknesses. Our management, with oversight from our audit committee,will continue to identify and take steps to remedy all known materialweaknesses as expeditiously as possible and enhance the overall design andcapability of our control environment.

 

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**PART II—OTHER INFORMATION**

 

##### **Item 1.**             Legal Proceedings

 

In the ordinary course ofbusiness, the Company is subject to a variety of risks and disputes normallyincident to its business and is a party to various legal proceedings. Wemaintain insurance policies in amounts and with coverage and deductibles as webelieve are reasonable and prudent. However, we cannot assure either that theinsurance companies will promptly honor their policy obligations or that thecoverage or levels of insurance will be adequate to protect us from allmaterial expenses related to future claims for property loss or businessinterruption to the Company or for third party claims of personal and propertydamage, or that the coverages or levels of insurance it presently has will beavailable in the future at economical prices.

 

Inearly 2005, MarkWest Hydrocarbon, Inc., the Partnership and several of itsaffiliates were served with two lawsuits, Ricky J. Conn, *et al.* v. MarkWest Hydrocarbon, Inc. *et al.*(filed February 2, 2005), and CharlesC. Reid, *et al.* v. MarkWestHydrocarbon, Inc. *et al.*(filedFebruary 8, 2005), in Floyd Circuit Court, Commonwealth of Kentucky, CivilAction No. 05-CI-00137 and Civil Action No. 05-CI-00156, which actions onFebruary 24, 2005, were removed to the jurisdiction of the U.S. District Courtfor the Eastern District of Kentucky, Pikeville Division. The Company, thePartnership and its affiliates were served with an additional lawsuit, CommunityTrust and Investment Co., *et al.*v. MarkWest Hydrocarbon, Inc. *et al.*,filed November 7, 2005,in Floyd County Circuit Court, Kentucky, that added fivenew claimants but essentially alleged the same facts and claims as the earliertwo suits. On March 27, 2006, the U.S. District Court remanded the cases backto Floyd County Circuit Court, Kentucky.

 

Theseactions are for third-party claims of property and personal injury damagessustained as a consequence of an NGL pipeline leak and an ensuing explosion andfire that occurred on November 8, 2004. The pipeline was owned by an unrelatedbusiness entity and leased and operated by the Partnership’s subsidiary,MarkWest Energy Appalachia, LLC. It transports NGLs from the Maytown gasprocessing plant to the Partnership’s Siloam fractionator. The fire from theleaked vapors resulted in property damage to five homes and injuries to some ofthe residents. The pipeline owner, the U.S. Department of Transportation,Office of Pipeline Safety (“OPS”), and the Partnership continue to investigatethe incident. Discovery in the action is now just getting underway followingthe remand back to state court.

 

TheCompany notified its general liability insurance carriers of the incident andthe lawsuits in a timely manner and is coordinating its legal defense with theinsurers. At this time, the Company believes that it has adequate generalliability insurance coverage for third-party property damage and personalinjury liability resulting from the incident. The Company has settled withseveral of the claimants for third-party property damage claims (damage toresidences and personal property), and reached settlements for some of thepersonal injury claims. These have been paid for or reimbursed under theCompany’s general liability insurance. As a result, the Company has notprovided for a loss contingency.

 

Pursuantto OPS regulation mandates and to a Corrective Action Order issued by the OPSNovember 18, 2004, pipeline and valve integrity evaluation, testing and repairswere conducted on the affected pipeline segment before service could be resumed.OPS authorized a partial return to service of the affected pipeline in October2005. MarkWest is in the process of applying for return to full service.

 

Relatedto the above referenced pipeline incident, MarkWest Hydrocarbon and thePartnership has filed an independent action captioned MarkWest Hydrocarbon,Inc., *et al.* v. Liberty MutualIns. Co., *et al.* (DistrictCourt, Arapahoe County, Colorado, Case No. 05CV3953 filed August 12, 2005), asremoved to the U.S. District Court for the District of Colorado, Civil ActionNo. 1:05-CV-1948, on October 7, 2005), against its All-Risks Property andBusiness Interruption insurance carriers as a result of the companies’ refusalto honor their insurance coverage obligation to pay the Company for certainexpenses. These include the Company’s internal expenses and costs incurred fordamage to, and loss of use of the pipeline, equipment, products, the extratransportation costs incurred for transporting the liquids while the pipelinewas out of service, the reduced volumes of liquids that could be processed, andthe costs of complying with the OPS Corrective Action Order (hydrostatictesting, repair/replacement and other pipeline integrity assurance measures).These expenses and costs have been expensed as incurred and any potentialrecovery from the All-Risks Property and Business Interruption insurancecarriers will be treated as “other income” if and when they are received. TheCompany has not provided for a receivable for these claims because of theuncertainty as to whether and how much the Company will ultimately recoverunder these policies. The Company has also asserted that the cost of pipelinetesting, replacement and repair are subject to an equitable sharing arrangementwith its owner, pursuant to the terms of the pipeline lease agreement.

 

The Company has also beeninvolved in a lawsuit captioned Ross Bros. Construction v. MarkWest Hydrocarbon,Inc., (U.S. Court Appeals for the Sixth Circuit, Case No. 05-6251). Thislawsuit involved the expansion construction of the

 

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Siloam Kentucky gas processing and fractionation plant and a dispute asto the monetary value of work and additional work beyond the contract’s lumpsum price performed by the contractor. This lawsuit involved a claim ofapproximately $0.7 million in extra costs. The Company was recently grantedSummary Judgment on its defense asserting accord and satisfaction. In August2005, Plaintiffs filed an appeal of the Summary Judgment to the U.S. Court ofAppeals for the 6thCircuit. The Company believes that, while it is not able to predict the outcomeof this matter, based on the judge’s discussion on the grant of the summaryjudgment and denial of Ross Brothers’ motion for reconsideration, it isprobable that the Company will prevail in the appeal. As a result, the Companyhas not provided for a loss contingency.

 

TheCompany has also been involved in an arbitration proceeding captioned KevinStowe and Scott Daves v. MarkWest Hydrocarbon, Inc., American ArbitrationAssociation arbitration, Case No. 77 168 Y 0052 05 BEAH, Denver, Colorado,2005. Claimants filed an arbitration proceeding against the Company seekingfurther payments out of a dispute and settlement over interests in certainwells in Colorado. In February 2006, the Arbitrator in the action grantedMarkWest’s motion for summary judgment and the arbitration action was dismissedwith prejudice.

 

In theordinary course of business, the Company is a party to various other legalactions. In the opinion of management, none of these actions, eitherindividually or in the aggregate, will have a material adverse effect on theCompany’s financial condition, liquidity or results of operations.

 

**Item 6. Exhibits**

 
| 10.30   |   | First amended and  restated credit agreement dated as of January 31, 2006, among MarkWest  Hydrocarbon, Inc., as borrower, Royal Bank of Canada, as Administrative Agent  for the Lenders, Royal Bank of Canada, U.S. Bank National Association and  Bank of Oklahoma, N.A., as lenders.(1)                      |
|---------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                                                                                                                                                                                                                             |
| 10.30.1 |   | Amendment No. 1 to the  first amended and restated credit agreement dated as of March 23, 2006, among  MarkWest Hydrocarbon, Inc., as borrower, Royal Bank of Canada, as  Administrative Agent for the Lenders, Royal Bank of Canada, U.S. Bank  National Association and Bank of Oklahoma, N.A., as lenders.(2) |
|    |   |                                                                                                                                                                                                                                                                                                             |
| 31.1    |   | Certification of the  Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange  Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                  |
|    |   |                                                                                                                                                                                                                                                                                                             |
| 31.2    |   | Certification of the  Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange  Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                  |
|    |   |                                                                                                                                                                                                                                                                                                             |
| 32.1    |   | Certification of the  Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                         |
|    |   |                                                                                                                                                                                                                                                                                                             |
| 32.2    |   | Certification of the  Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                         |

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(1) Incorporated byreference to MarkWest Hydrocarbon, Inc.'s Current Report on Form 8-K, filedwith the Commission on February 6, 2006.

 

(2) Incorporated by referenceto MarkWest Hydrocarbon, Inc.'s Current Report on Form 8-K, filed with theCommission on March 29, 2006.

 

40

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# ***SIGNATURES***

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|                     |                 | MarkWest Hydrocarbon, Inc.                          |   |
|--------------------------|----------------------|-----------------------------------------------------|--------|
|                     |                 | (Registrant)                                        |   |
|                     |                 |                                                |
| Date:  May  8, 2006 | /s/ FRANK M.  SEMPLE |
|                     |                 | Frank M. Semple                                     |
|                     |                 | Chief Executive  Officer                            |
|                     |                 |                                                |
| Date:  May 8, 2006  | /s/ NANCY K. MASTEN  |
|                     |                 | Nancy K. Masten                                     |
|                     |                 | Senior Vice  President and Chief Accounting Officer |

 

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