**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**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 the quarterly period endedSeptember 30, 2005**

 

**OR**

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

 

**For the transition period from                        to                                     **

 

**Commission File Number 001-14841**

 

**MARKWESTHYDROCARBON, INC.**

(Exact name of registrantas specified in its charter)

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

 

**155 Inverness Drive West, Suite200, Englewood, CO  80112-5000**

(Address of principalexecutive offices)

 

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

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

Yes  o    No  ý

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Exchange Act).

Yes  o    No  ý

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).

Yes  o    No  ý

 

The registrant had 10,802,320 shares ofcommon stock, $0.01 per share par value, outstanding as of December 31, 2005.

 

 

----

 
|                                                                                                                         | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|
| **PART  I—FINANCIAL INFORMATION**                                                                                       | ** ** |
|                                                                                                                         |       |
| Item  1. Condensed Consolidated Financial Statements (unaudited)                                                             |       |
| Condensed Consolidated Balance Sheets at  September 30, 2005 and December 31, 2004                                           |       |
| Condensed Consolidated Statements of  Operations for the Quarters Ended September 30, 2005 and 2004                          |       |
| Condensed Consolidated Statements of Operations for  the Nine Months Ended September 30, 2005 and 2004                       |       |
| Condensed Consolidated Statements of Comprehensive  Loss for the Quarters and Nine Months Ended  September 30, 2005 and 2004 |       |
| Condensed Consolidated Statement of Changes  in Stockholders’ Equity for the Nine Months Ended  September 30, 2005      |       |
| Condensed Consolidated Statements of Cash Flows for  the Nine Months Ended September 30, 2005 and 2004                       |       |
| 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.  Condensed Consolidated Financial Statements**

 

**MARKWESTHYDROCARBON, INC.**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

(Unaudited)

(in thousands, exceptshare and per share data)

 
| ** **                                                                                                                                                 | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| **ASSETS**                                                                                                                                                 | ** ** | ** **              | ** ** | ** **             | ** ** |
| Current assets:                                                                                                                                            |       |                    |       |                   |       |
| Cash and cash  equivalents                                                                                                                                 |       | $                       | 2,158      |                   | $          | 12,844 |   |
| Restricted cash                                                                                                                                            |       | 15,000                  |       | 15,000                 |       |
| Marketable  securities                                                                                                                                     |       | 15,307                  |       | 14,815                 |       |
| Receivables, net  (including related party receivables of $110 and $44, respectively, and allowance  for doubtful accounts of $319 and $249, respectively) |       | 75,134                  |       | 64,856                 |       |
| Inventories                                                                                                                                                |       | 26,280                  |       | 11,292                 |       |
| Prepaid  replacement natural gas                                                                                                                           |       | 6,814                   |       | 10,245                 |       |
| Deferred income  taxes                                                                                                                                     |       | —                  |       | 25                     |       |
| Other current assets                                                                                                                                       |       | 10,112                  |       | 1,898                  |       |
| Total current assets                                                                                                                                       |       | 150,805                 |       | 130,975                |       |
|                                                                                                                                                       |       |                    |       |                   |       |
| Property, plant  and equipment                                                                                                                             |       | 391,982                 |       | 342,636                |       |
| Less:  accumulated depreciation, depletion, amortization and impairment                                                                                    |       | (73,219                 | )          | (59,443                | )          |
| Total property,  plant and equipment, net                                                                                                                  |       | 318,763                 |       | 283,193                |       |
|                                                                                                                                                       |       |                    |       |                   |       |
| Other assets:                                                                                                                                              |       |                    |       |                   |       |
| Investment in  Starfish                                                                                                                                    |       | 39,805                  |       | —                 |       |
| Intangible  assets, net of accumulated amortization of $9,907 and $3,640, respectively                                                                     |       | 155,713                 |       | 162,001                |       |
| Deferred  financing costs, net of accumulated amortization of $7,480 and $5,541,  respectively                                                             |       | 17,095                  |       | 13,849                 |       |
| Deferred  contract cost, net of accumulated amortization of $312 and $78, respectively                                                                     |       | 2,938                   |       | 3,172                  |       |
| Investment in  and advances to other equity investee                                                                                                       |       | 203                     |       | 177                    |       |
| Notes receivable  from related parties                                                                                                                     |       | 154                     |       | 207                    |       |
| Total other  assets                                                                                                                                        |       | 215,908                 |       | 179,406                |       |
| Total assets                                                                                                                                               |       | $                       | 685,476    |                   | $          | 593,574 |   |
|                                                                                                                                                       |       |                    |       |                   |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                              |       |                    |       |                   |       |
| Current  liabilities:                                                                                                                                      |       |                    |       |                   |       |
| Accounts payable  (including related party payables of $25 and $30, respectively)                                                                          |       | $                       | 60,866     |                   | $          | 45,103 |   |
| Accrued  liabilities                                                                                                                                       |       | 43,779                  |       | 30,908                 |       |
| Fair value of  derivative instruments                                                                                                                      |       | 441                     |       | 1,057                  |       |
| Deferred income  taxes                                                                                                                                     |       | 77                      |       | —                 |       |
| Asset retirement obligation                                                                                                                                |       | 291                     |       | —                 |       |
| Total current  liabilities                                                                                                                                 |       | 105,454                 |       | 77,068                 |       |
|                                                                                                                                                       |       |                    |       |                   |       |
| Deferred income  taxes                                                                                                                                     |       | 3,358                   |       | 6,258                  |       |
| Senior notes                                                                                                                                               |       | 225,000                 |       | 225,000                |       |
| Long-term debt                                                                                                                                             |       | 85,500                  |       | —                 |       |
| Other long-term  liabilities                                                                                                                               |       | 10,357                  |       | 7,487                  |       |
| Non-controlling  interest in consolidated subsidiary                                                                                                       |       | 212,979                 |       | 228,000                |       |
|                                                                                                                                                       |       |                    |       |                   |       |
| Commitments and  contingencies (Note 13)                                                                                                                   |       |                    |       |                   |       |
|                                                                                                                                                       |       |                    |       |                   |       |
| 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, 10,851,556 and 10,821,760 shares  issued, respectively                                       |       | 108                     |       | 108                    |       |
| Additional  paid-in capital                                                                                                                                |       | 50,044                  |       | 51,455                 |       |
| Deferred  compensation                                                                                                                                     |       | (79                     | )          | —                 |       |
| Accumulated  deficit                                                                                                                                       |       | (7,381                  | )          | (1,623                 | )          |
| Accumulated  other comprehensive income, net of tax                                                                                                        |       | 592                     |       | 246                    |       |
| Treasury stock,  55,619 and 63,586 shares, respectively                                                                                                    |       | (456                    | )          | (425                   | )          |
| Total  stockholders’ equity                                                                                                                           |       | 42,828                  |       | 49,761                 |       |
| Total  liabilities and stockholders’ equity                                                                                                           |       | $                       | 685,476    |                   | $          | 593,574 |   |

 

The accompanying notesare an integral part of these unaudited condensed consolidated financial statements.

 

3

----

 

**MARKWESTHYDROCARBON, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OFOPERATIONS**

(Unaudited)

(in thousands, except per sharedata)

 
| ** **                                                                                       | ** ** | **Three Months Ended September 30,** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                       | ** ** | **2005**                             | ** ** | **2004** | ** ** |
|                                                                                             |       |                                 |       |   |   |
| Revenues                                                                                         |       | $                                    | 170,625    |   | $ | 121,511 |   |
|                                                                                             |       |                                 |       |   |   |
| Operating expenses:                                                                              |       |                                 |       |   |   |
| Purchased  product costs                                                                         |       | 145,876                              |       | 95,209 |   |
| Facility  expenses                                                                               |       | 12,082                               |       | 8,398 |   |
| Selling, general  and administrative expenses                                                    |       | 7,913                                |       | 7,252 |   |
| Depreciation                                                                                     |       | 5,025                                |       | 4,510 |   |
| Amortization of  intangible assets                                                               |       | 2,098                                |       | 1,400 |   |
| Accretion of  asset retirement and lease obligations                                             |       | 116                                  |       | 13 |   |
| Total operating  expenses                                                                        |       | 173,110                              |       | 116,782 |   |
|                                                                                             |       |                                 |       |   |   |
| Income (loss)  from operations                                                                   |       | (2,485                               | )          | 4,729 |   |
|                                                                                             |       |                                 |       |   |   |
| Other income (expense):                                                                          |       |                                 |       |   |   |
| Loss from  unconsolidated subsidiary                                                             |       | (999                                 | )          | (32 | ) |
| Interest income                                                                                  |       | 271                                  |       | 180 |   |
| Interest expense                                                                                 |       | (4,980                               | )          | (3,739 | ) |
| Amortization of  deferred financing costs (a component of interest expense)                      |       | (557                                 | )          | (3,120 | ) |
| Dividend income                                                                                  |       | 101                                  |       | 86 |   |
| Other income                                                                                     |       | 65                                   |       | 585 |   |
|                                                                                             |       |                                 |       |   |   |
| Loss before  non-controlling interest in net income of consolidated subsidiary and income  taxes |       | (8,584                               | )          | (1,311 | ) |
|                                                                                             |       |                                 |       |   |   |
| Provision (benefit) for income taxes:                                                            |       |                                 |       |   |   |
| Current                                                                                          |       | —                               |       | 39 |   |
| Deferred                                                                                         |       | (2,868                               | )          | 112 |   |
| Provision  (benefit) for income taxes                                                            |       | (2,868                               | )          | 151 |   |
|                                                                                             |       |                                 |       |   |   |
| Non-controlling interest in net income of  consolidated subsidiary                               |       | 28                                   |       | (504 | ) |
|                                                                                             |       |                                 |       |   |   |
| Net loss                                                                                         |       | $                                    | (5,688     | ) | $ | (1,966 | ) |
|                                                                                             |       |                                 |       |   |   |
| Net loss per share:                                                                              |       |                                 |       |   |   |
| Basic                                                                                            |       | $                                    | (0.53      | ) | $ | (0.18 | ) |
| Diluted                                                                                          |       | $                                    | (0.53      | ) | $ | (0.18 | ) |
|                                                                                             |       |                                 |       |   |   |
| Weighted average number of outstanding shares of  common stock:                                  |       |                                 |       |   |   |
| Basic                                                                                            |       | 10,792                               |       | 10,736 |   |
| Diluted                                                                                          |       | 10,879                               |       | 10,800 |   |
| Cash dividend per common share                                                                   |       | $                                    | 0.10       |   | $ | 0.023 |   |

 

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

 

4

----

 

**MARKWESTHYDROCARBON, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

(Unaudited)

(in thousands, except per sharedata)

 
| ** **                                                                                       | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                       | ** ** | **2005**                            | ** ** | **2004** | ** ** |
|                                                                                             |       |                                |       |   |   |
| Revenues                                                                                         |       | $                                   | 450,018    |   | $ | 304,235 |   |
|                                                                                             |       |                                |       |   |   |
| Operating expenses:                                                                              |       |                                |       |   |   |
| Purchased  product costs                                                                         |       | 362,929                             |       | 247,960 |   |
| Facility  expenses                                                                               |       | 32,327                              |       | 20,459 |   |
| Selling, general  and administrative expenses                                                    |       | 25,140                              |       | 17,637 |   |
| Depreciation                                                                                     |       | 14,761                              |       | 11,695 |   |
| Amortization of  intangible assets                                                               |       | 6,288                               |       | 1,468 |   |
| Accretion of  asset retirement and lease obligations                                             |       | 137                                 |       | 13 |   |
| Total operating  expenses                                                                        |       | 441,582                             |       | 299,232 |   |
|                                                                                             |       |                                |       |   |   |
| Income from  operations                                                                          |       | 8,436                               |       | 5,003 |   |
|                                                                                             |       |                                |       |   |   |
| Other income  (expense):                                                                         |       |                                |       |   |   |
| Loss from  unconsolidated subsidiary                                                             |       | (9                                  | )          | (49 | ) |
| Interest income                                                                                  |       | 841                                 |       | 536 |   |
| Interest expense                                                                                 |       | (13,273                             | )          | (5,792 | ) |
| Amortization of  deferred financing costs (a component of interest expense)                      |       | (1,651                              | )          | (3,734 | ) |
| Dividend income                                                                                  |       | 289                                 |       | 169 |   |
| Other income                                                                                     |       | 300                                 |       | 596 |   |
|                                                                                             |       |                                |       |   |   |
| Loss before  non-controlling interest in net income of consolidated subsidiary and income  taxes |       | (5,067                              | )          | (3,271 | ) |
|                                                                                             |       |                                |       |   |   |
| Provision (benefit) for income taxes:                                                            |       |                                |       |   |   |
| Current                                                                                          |       | —                              |       | 151 |   |
| Deferred                                                                                         |       | (2,900                              | )          | 438 |   |
| Provision  (benefit) for income taxes                                                            |       | (2,900                              | )          | 589 |   |
|                                                                                             |       |                                |       |   |   |
| Non-controlling interest in net income of  consolidated subsidiary                               |       | (3,591                              | )          | (3,759 | ) |
|                                                                                             |       |                                |       |   |   |
| Net loss                                                                                         |       | $                                   | (5,758     | ) | $ | (7,619 | ) |
|                                                                                             |       |                                |       |   |   |
| Net loss per share:                                                                              |       |                                |       |   |   |
| Basic                                                                                            |       | $                                   | (0.53      | ) | $ | (0.71 | ) |
| Diluted                                                                                          |       | $                                   | (0.53      | ) | $ | (0.71 | ) |
|                                                                                             |       |                                |       |   |   |
| Weighted average number of outstanding shares of  common stock:                                  |       |                                |       |   |   |
| Basic                                                                                            |       | 10,780                              |       | 10,665 |   |
| Diluted                                                                                          |       | 10,889                              |       | 10,715 |   |
| Cash dividend per common share                                                                   |       | $                                   | 0.275      |   | $ | 0.50 |   |

 

The accompanying notesare an integral part of these unaudited condensed consolidated financialstatements.

 

5

----

 

**MARKWESTHYDROCARBON, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF COMPREHENSIVELOSS**

(Unaudited)

(inthousands)

** **
| ** **                                                                                                                      | ** ** | **Three  Months Ended September 30,** | ** ** | **Nine  Months Ended September 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                                                      | ** ** | **2005**                              | ** ** | **2004**                             | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                                                                            |       |                                  |       |                                 |       |   |   |   |   |
| Net loss                                                                                                                        |       | $                                     | (5,688     | )                                    | $          | (1,966 | ) | $ | (5,758 | ) | $ | (7,619 | ) |
|                                                                                                                            |       |                                  |       |                                 |       |   |   |   |   |
| Other  comprehensive income (loss), net of tax:                                                                                 |       |                                  |       |                                 |       |   |   |   |   |
| Unrealized gains  on commodity derivatives accounted for as hedges, net of income tax provision  of $240, $531, $118 and $1,002 |       | 392                                   |       | 888                                  |       | 195 |   | 1,656 |   |
| Unrealized gains  (losses) on marketable securities, net of income tax provision (benefit) of  $(24), $168, $92 and $(56)       |       | (40                                   | )          | 277                                  |       | 151 |   | (93 | ) |
| Total other  comprehensive income                                                                                               |       | 352                                   |       | 1,165                                |       | 346 |   | 1,563 |   |
|                                                                                                                            |       |                                  |       |                                 |       |   |   |   |   |
| Comprehensive  loss                                                                                                             |       | $                                     | (5,336     | )                                    | $          | (801 | ) | $ | (5,412 | ) | $ | (6,056 | ) |

 

The accompanying notesare an integral part of these unaudited condensed consolidated financial statements.

 

6

----

 

**MARKWESTHYDROCARBON, INC.**

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

(Unaudited)

(inthousands)

 
| ** **                                              | ** ** | **Shares  of  Common  Stock** | ** ** | **Shares  of  Treasury Stock** | ** ** | **Common  Stock** | ** ** | **Additional  Paid-In  Capital** | ** ** | **Deferred  Compensation** | ** ** | **Accumulated  Deficit** | ** ** | **Accumulated  Other  Comprehensive  Income** | ** ** | **Treasury  Stock** | ** ** | **Total  Stockholders’  Equity** | ** ** |
|---------------------------------------------------------|------------|-------------------------------|------------|--------------------------------|------------|-------------------|------------|----------------------------------|------------|----------------------------|------------|--------------------------|------------|-----------------------------------------------|------------|---------------------|------------|---------------------------------------|------------|
|                                                    |       |                          |       |                           |       |              |       |                             |       |                       |       |                     |       |                                          |       |                |       |                                  |       |
| Balance, December  31, 2004                             |       | 10,822                        |       | (64                            | )          | $                 | 108        |                             | $          | 51,455                     |       | $                        | —     |                                          | $          | (1,623              | )          | $                                     | 246        |   | $ | (425 | ) | $ | 49,761 |   |
|                                                    |       |                          |       |                           |       |              |       |                             |       |                       |       |                     |       |                                          |       |                |       |                                  |       |
| Stock option  exercises                                 |       | 30                            |       | —                         |       | —            |       | 77                               |       | —                     |       | —                   |       | —                                        |       | —              |       | 77                                    |       |
|                                                    |       |                          |       |                           |       |              |       |                             |       |                       |       |                     |       |                                          |       |                |       |                                  |       |
| Issuance of  restricted stock                           |       | —                        |       | 7                              |       | —            |       | 76                               |       | (134                       | )          | —                   |       | —                                        |       | 58                  |       | —                                |       |
|                                                    |       |                          |       |                           |       |              |       |                             |       |                       |       |                     |       |                                          |       |                |       |                                  |       |
| Amortization of  deferred stock-based compensation      |       | —                        |       | —                         |       | —            |       | —                           |       | 55                         |       | —                   |       | —                                        |       | —              |       | 55                                    |       |
|                                                    |       |                          |       |                           |       |              |       |                             |       |                       |       |                     |       |                                          |       |                |       |                                  |       |
| Cashless stock  options                                 |       | —                        |       | —                         |       | —            |       | 1,285                            |       | —                     |       | —                   |       | —                                        |       | —              |       | 1,285                                 |       |
|                                                    |       |                          |       |                           |       |              |       |                             |       |                       |       |                     |       |                                          |       |                |       |                                  |       |
| Treasury stock  acquired                                |       | —                        |       | (7                             | )          | —            |       | —                           |       | —                     |       | —                   |       | —                                        |       | (161                | )          | (161                                  | )          |
|                                                    |       |                          |       |                           |       |              |       |                             |       |                       |       |                     |       |                                          |       |                |       |                                  |       |
| Contribution of  treasury shares to 401(k) benefit plan |       | —                        |       | 8                              |       | —            |       | 116                              |       | —                     |       | —                   |       | —                                        |       | 72                  |       | 188                                   |       |
|                                                    |       |                          |       |                           |       |              |       |                             |       |                       |       |                     |       |                                          |       |                |       |                                  |       |
| Net loss                                                |       | —                        |       | —                         |       | —            |       | —                           |       | —                     |       | (5,758                   | )          | —                                        |       | —              |       | (5,758                                | )          |
|                                                    |       |                          |       |                           |       |              |       |                             |       |                       |       |                     |       |                                          |       |                |       |                                  |       |
| Dividend                                                |       | —                        |       | —                         |       | —            |       | (2,965                           | )          | —                     |       | —                   |       | —                                        |       | —              |       | (2,965                                | )          |
|                                                    |       |                          |       |                           |       |              |       |                             |       |                       |       |                     |       |                                          |       |                |       |                                  |       |
| Other  comprehensive income                             |       | —                        |       | —                         |       | —            |       | —                           |       | —                     |       | —                   |       | 346                                           |       | —              |       | 346                                   |       |
|                                                    |       |                          |       |                           |       |              |       |                             |       |                       |       |                     |       |                                          |       |                |       |                                  |       |
| Balance,  September 30, 2005                            |       | 10,852                        |       | (56                            | )          | $                 | 108        |                             | $          | 50,044                     |       | $                        | (79        | )                                             | $          | (7,381              | )          | $                                     | 592        |   | $ | (456 | ) | $ | 42,828 |   |

 

The accompanying notesare an integral part of these unaudited condensed consolidated financialstatements.

 

7

----

 

**MARKWESTHYDROCARBON, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

(Unaudited)

(inthousands)

 
| ** **                                                                       | ** ** | **Nine Months Ended September 30,** | ** ** |
|----------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                       | ** ** | **2005**                            | ** ** | **2004** | ** ** |
| **Cash flows from operating activities:**                                        |       |                                |       |   |   |
| Net loss                                                                         |       | $                                   | (5,758     | ) | $ | (7,619 | ) |
| Adjustments to  reconcile net loss to net cash provided by operating activities: |       |                                |       |   |   |
| Depreciation                                                                     |       | 14,761                              |       | 11,694 |   |
| Amortization of  intangible assets                                               |       | 6,288                               |       | 1,468 |   |
| Amortization of  deferred financing costs                                        |       | 1,651                               |       | 2,265 |   |
| Write down of  deferred financing costs                                          |       | —                              |       | 1,469 |   |
| Amortization of  deferred contract costs reflected in purchase product costs     |       | 234                                 |       | — |   |
| Accretion of  asset retirement and lease obligations                             |       | 137                                 |       | — |   |
| (Gain) loss from  sale of property, plant and equipment                          |       | (220                                | )          | 145 |   |
| Gain from sale  of marketable securities                                         |       | (56                                 | )          | — |   |
| Imputed interest  income on debt securities                                      |       | (11                                 | )          | — |   |
| Phantom unit  compensation expense                                               |       | 900                                 |       | 732 |   |
| Participation  Plan compensation expense                                         |       | 3,610                               |       | 1,205 |   |
| Stock option  compensation expense                                               |       | 1,285                               |       | 1,531 |   |
| Restricted stock  compensation expense                                           |       | 55                                  |       | — |   |
| Losses from  unconsolidated subsidiaries in excess of distributions              |       | 1,857                               |       | 50 |   |
| Deferred income  taxes (benefit)                                                 |       | (2,900                              | )          | 438 |   |
| Non-controlling  interest in net income of consolidated subsidiary               |       | 3,591                               |       | 3,759 |   |
| Contribution of  treasury shares to 401(k) benefit plan                          |       | 188                                 |       | 107 |   |
| (Gains) losses  on derivative instruments                                        |       | (739                                | )          | 732 |   |
| Other                                                                            |       | 1                                   |       | (51 | ) |
| Changes in  operating assets and liabilities:                                    |       |                                |       |   |   |
| Increase in  receivables                                                         |       | (10,278                             | )          | (15,248 | ) |
| Increase in  inventories                                                         |       | (14,988                             | )          | (6,902 | ) |
| (Increase)  decrease in prepaid replacement natural gas                          |       | 3,431                               |       | (7,233 | ) |
| Increase in  other current assets                                                |       | (8,214                              | )          | (3,133 | ) |
| Increase in  accounts payable and accrued liabilities                            |       | 28,413                              |       | 30,114 |   |
| Increase  (decrease) in other long-term liabilities                              |       | 44                                  |       | (2 | ) |
| Net cash flow  provided by operating activities                                  |       | 23,282                              |       | 15,521 |   |
|                                                                             |       |                                |       |   |   |
| **Cash  flows from investing activities:**                                       |       |                                |       |   |   |
| Increase in  restricted cash                                                     |       | —                              |       | (550 | ) |
| Purchase of  marketable securities                                               |       | (8,725                              | )          | (11,920 | ) |
| Proceeds from  the sales of marketable securities                                |       | 8,536                               |       | — |   |
| Starfish  acquisition                                                            |       | (41,688                             | )          | — |   |
| East Texas  System acquisition                                                   |       | —                              |       | (240,606 | ) |
| Hobbs Lateral acquisition                                                        |       | —                              |       | (2,275 | ) |
| Capital  expenditures                                                            |       | (50,368                             | )          | (12,668 | ) |
| Proceeds from  sale of assets                                                    |       | 248                                 |       | 206 |   |
| Increase in  other contracts                                                     |       | —                              |       | (3,250 | ) |
| Proceeds from  financing lease receivable                                        |       | —                              |       | 133 |   |
| Net cash used in  investing activities                                           |       | (91,997                             | )          | (270,930 | ) |
|                                                                                  |            |                                     |            |  |  |  |  |

 

8

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| ** **                                                                       | ** ** | **Nine Months Ended September 30,** | ** ** |
|----------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                       | ** ** | **2005**                            | ** ** | **2004** | ** ** |
| **Cash flows from financing activities:**                                        |       |                                |       |   |   |
| Collection of  notes receivable                                                  |       | 53                                  |       | — |   |
| Proceeds from  long-term debt                                                    |       | 97,000                              |       | 215,600 |   |
| Repayment of  long-term debt                                                     |       | (11,500                             | )          | (144,300 | ) |
| Payments for  debt issuance costs                                                |       | (5,096                              | )          | (7,193 | ) |
| Proceeds from  MarkWest Energy Partners’ common unit public offerings, net  |       | —                              |       | 140,014 |   |
| Proceeds from  MarkWest Energy Partners’ common unit private placement, net |       | —                              |       | 44,139 |   |
| Distribution to  MarkWest Energy Partners’ unitholders                      |       | (19,379                             | )          | (9,437 | ) |
| Exercise of  stock options                                                       |       | 77                                  |       | 1,413 |   |
| Purchase of  treasury shares                                                     |       | (161                                | )          | (36 | ) |
| Payment of  dividends                                                            |       | (2,965                              | )          | (5,288 | ) |
| Net cash  provided by financing activities                                       |       | 58,029                              |       | 234,912 |   |
|                                                                             |       |                                |       |   |   |
| Net decrease in cash and cash equivalents                                        |       | (10,686                             | )          | (20,497 | ) |
|                                                                             |       |                                |       |   |   |
| Cash and cash equivalents at beginning of period                                 |       | 12,844                              |       | 42,144 |   |
|                                                                             |       |                                |       |   |   |
| Cash and cash equivalents at end of period                                       |       | $                                   | 2,158      |   | $ | 21,647 |   |
|                                                                             |       |                                |       |   |   |
| **Supplemental disclosures of cash flow  information:**                          |       |                                |       |   |   |
| Cash paid during  the period for:                                                |       |                                |       |   |   |
| Interest, net of  amounts capitalized                                            |       | $                                   | 13,009     |   | $ | 4,607 |   |
| Income taxes                                                                     |       | $                                   | 549        |   | $ | — |   |
|                                                                             |       |                                |       |   |   |
| **Supplemental schedule of non-cash investing and  financing activities:**       |       |                                |       |   |   |
| Construction  projects in-progress obligations                                   |       | $                                   | 329        |   | $ | 1,094 |   |
| Property, plant  and equipment asset retirement obligations                      |       | $                                   | 479        |   | $ | 377 |   |

 

The accompanying notesare an integral part of these unaudited condensed consolidated financialstatements.

 

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**MARKWEST HYDROCARBON, INC.**

**NOTES TO UNAUDITED CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

(Unaudited)

 

**1.  Organization**

 

MarkWest Hydrocarbon, Inc. (“MarkWest Hydrocarbon” orthe “Company”) manages MarkWest Energy Partners, L.P. (“MarkWest EnergyPartners” or the “Partnership”), a publicly traded master limited partnership engagedin the gathering, processing and transmission of natural gas; thetransportation, fractionation and storage of natural gas liquids (“NGLs”); andthe gathering and transportation of crude oil.  The Company also markets natural gas and NGLs. MarkWest Hydrocarbon andMarkWest Energy Partners provide services primarily in Appalachia, Michigan, eastTexas, western Oklahoma and other areas of the southwest.  Through eight acquisitions completed byMarkWest Energy Partners in 2003, 2004 and 2005, the Company has significantlyexpanded its natural gas activities.

 

**2.  Basis ofPresentation**

 

Thecondensed consolidated financial statements include the accounts of MarkWestHydrocarbon and its subsidiaries, including MarkWest Energy Partners (collectively“MarkWest Hydrocarbon” or the “Company”). Through consolidation, MarkWestHydrocarbon has eliminated all significant intercompany accounts andtransactions. Equity investments in which the Company exercises significantinfluence but does not control and is not the primary beneficiary are accountedfor using the equity method. The Company regularly reviews its investments todetermine whether a decline in fair value below the cost basis is other thantemporary.  The Company’s accountingpolicy requires it to evaluate operating losses (if any), credit defaults andother factors that may be indicative of a decrease in value of the investmentthat which is other than temporary.  Theprimary factors the Company considers in its determination of an impairmentthat is other than temporary are the length of time that the fair value of theinvestment is below the Company’s carrying value and the financial condition,operating performance and near-term prospects of the investee.  In addition, the Company considers the reasonfor the decline in fair value, be it general market conditions,industry-specific or investee-specific; and the Company’s intent and ability tohold the investment for a period of time sufficient to allow for a recovery infair 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 investment. 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 the foregoing factors involves a high degreeof judgment and, accordingly, actual results may differ materially from theCompany’s estimates and judgments.

 

These financial statements have been prepared in accordancewith accounting principles generally accepted in the United States of Americafor interim financial reporting.  Theyear-end condensed consolidated balance sheet data was derived from auditedfinancial statements.  In management’sopinion, the Company has made all adjustments necessary for a fair presentationof the Company’s results of operations, financial position and cash flows forthe periods shown.  These adjustments areof a normal recurring nature. In addition to reviewing these condensed consolidatedfinancial statements and accompanying notes, you should also consult theaudited financial statements and notes that make up the Company’s December 31,2004, Annual Report on Form 10-K. Finally, results for the nine months ended September 30, 2005, are notnecessarily indicative of results for the full year 2005, or for any other futureperiod.

 

**3.  Recent Accounting Pronouncements**

 

In December 2004, the Financial Accounting StandardsBoard issued Statement of Financial Accounting Standards (“SFAS”) No. 123(revised 2004), *Share-Based Payment*(“SFASNo. 123 (R)”).  This statement addressesthe accounting for share-based payment transactions in which an enterprisereceives employee services in exchange for (a) equity instruments of theenterprise, or (b) liabilities that are based on the fair value of theenterprise’s equity instruments or that may be settled by the issuance of suchequity instruments.  SFAS No. 123(R)requires an entity to recognize the grant-date fair-value of stock options andother equity-based compensation issued to employees in the income statement.  The revised Statement generally requires thatan entity account for those transactions using the fair-value-based method, andeliminates the intrinsic value method of accounting in Accounting PrinciplesBoard Opinion (“APB”) No. 25, *Accounting forStock Issued to Employees*, which was 

 

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permitted under SFAS No. 123, as originally issued.  The revised Statement requires entities todisclose information about the nature of the share-based payment transactionsand the effects of those transactions on the financial statements.  SFAS No. 123(R) is effective for publiccompanies for the first fiscal year beginning after December 15, 2005.  All public companies must use either themodified prospective or the modified retrospective transition method.  On March 29, 2005, the SEC staff issued StaffAccounting Bulletin (“SAB”) No. 107, *Share-Based Payment*to express the views of the staff regarding the interaction between SFAS No.123(R) and certain SEC rules and regulations and to provide the staff’s viewsregarding the valuation of share-based payment arrangements for publiccompanies.  The Company will take intoconsideration the additional guidance provided by SAB 107 in connection withthe implementation of SFAS No. 123(R). The Company has not yet evaluated the impact of the adoption of thispronouncement, which must be adopted in the first quarter of calendar year2006.

 

In March 2005, the FASB issuedFASB Interpretation (FIN) No. 47, *Accountingfor Conditional Asset Retirement Obligations*, which clarifies theaccounting for conditional asset retirement obligations as used in SFAS No.143, *Accounting for Asset RetirementObligations*.  A conditionalasset retirement obligation is an unconditional legal obligation to perform anasset retirement activity in which the timing and (or) method of settlement areconditional on a future event that may or may not be within the control of theentity.   An entity is required torecognize a liability for the fair value of a conditional asset retirementobligation under SFAS No. 143 if the fair value of the liability can bereasonably estimated.  FIN 47 permits,but does not require, restatement of interim financial information.  The provisions of FIN 47 are effective forreporting periods ending after December 15, 2005.  The Company has not yet assessed the impactof adopting FIN 47 on its consolidated financial statements.

 

In May 2005, the FASB issued SFASNo. 154, *Accounting Changes and ErrorCorrections—a replacement of APB Opinion No. 20 and FASB StatementNo. 3*. SFAS No. 154 replaces Accounting**Principles Board Opinion No. 20, *Accounting Changes*, and SFAS No. 3, *Reporting Accounting Changes in Interim FinancialStatements*, and changes the requirements for the accounting for andreporting of a**change inaccounting principle. This statement applies to all voluntary changes inaccounting principle**and alsoapplies to changes required by an accounting pronouncement in the unusualinstance that the**pronouncementdoes not include specific transition provisions. The statement is effective foraccounting**changes andcorrections of errors made in fiscal years beginning after December 15,2005. The**Company will adopt theprovisions of SFAS No. 154 beginning in calendar year 2006. Management**believes that the adoption of theprovisions of SFAS No. 154 will not have a material impact on the**Company’s consolidated financialstatements.

 

**4.  Stock and Unit Compensation**

 

As permitted under SFASNo. 123, *Accounting for Stock-Based Compensation,*theCompany has elected to continue to measure compensation costs for stock-basedand unit-based employee compensation plans as prescribed by APB No. 25, *Accounting for Stock Issued to Employees,* and SFAS No. 148, *Accounting for Stock Based Compensation — Transition andDisclosure. *The Company hastwo fixed compensation plans and two variable plans, one of which is throughthe Company’s consolidated subsidiary, MarkWest Energy Partners.  The Company accounts for these plans usingfixed and variable accounting as appropriate*.*

 

***TheCompany’s 1996 Stock Incentive Plan and 1996 Non-employee Director Stock Plan***

 

*Stock Options*

 

Stock options are issued under the Company’s 1996 StockIncentive Plan and 1996 Non-employee Director Stock Option Plan.  The plans allow for the exercise of stockoptions using the cashless method, but only at the discretion of theCompany.  Under a cashless exercise, theCompany withholds those shares that otherwise would be issued upon the exerciseof the option, the number of shares with a fair market value equal to theoption exercise price and remits the remaining shares to the employees.  Prior to April 2004, the Company did notallow participants to exercise their 

 

11

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stockoptions using the cashless method. Accordingly, compensation expense was not recognized for stock optionsgranted unless the options were granted at an exercise price less than thequoted market price of the Company on the grant date.  In April 2004, the Company changed its policyto allow participants to exercise their stock options using the cashlessmethod.  Under APB No. 25, a fixed stockoption plan that permits the use of a cashless exercise becomes variable if apattern of exercising the stock options using the cashless method isdemonstrated.  As a result, in April2004, the Company was required to account for stock options issued under theplans as variable awards.  Compensationexpense for stock options issued as variable awards is measured as thedifference in the market value of the Company’s common stock and the exerciseprice of the stock options.  Thedifference is amortized into earnings over the period of service as the optionsvest, adjusted quarterly for the change in the fair value of the unvested stockoptions awarded.  Increases or decreasesin the market value of the Company’s common stock between April 2004 and theend of each reporting period result in a change in the measure of compensationfor vested awards, which is reflected currently in operations in selling,general and administrative expenses.  TheCompany recorded compensation expense for options granted under the plans of$0.3 million and $1.3 million for the three and nine months ended September 30,2005, respectively; and $0.5 million and $1.2 for the three and nine monthsended September 30, 2004, respectively.

 

During the three and nine months ended September 30, 2005,recipients exercised their options to purchase an aggregate 9,043 and 39,708shares of the Company’s common stock, respectively.  During the three and nine months endedSeptember 30, 2005, recipients exercised options for 6,623 and 28,000 sharesusing the cashless method, respectively, resulting in the net issuance of 4,689and 17,780 shares of common stock, respectively. During the three and ninemonths ended September 30, 2004, recipients exercised their options topurchase an aggregate of 23,000 and 216,000 shares of the Company’s commonstock, respectively.  During the threeand nine months ended September 30, 2004, recipients exercised options for64,563 and 111,000 shares using the cashless method resulting in the netissuance of 18,463 and 36,000 shares of common stock, respectively.

 

During the three months ended March 31, 2004, two officers resignedfrom the Company.  Because the formerofficers continued to serve on the Company’s Board of Directors, the Companyagreed that the individual’s stock options would continue to vest and beexercisable in accordance with the original vesting and exerciseprovisions.  Due to the modification tothe stock options for these officers, the outstanding stock options areaccounted for as a variable award.   As aresult, the Company recorded compensation expense of $0.4 million for the ninemonths ended September 30, 2004, measured as the difference in the market valueof the Company’s common stock on the date the officer’s status changed and thestrike price of the outstanding stock options. These charges are included in selling, general and administrativeexpenses.

 

*Restricted Stock*

 

The Company also issues restricted stock under the Company’s1996 Stock Incentive Plan and 1996 Non-employee Director Stock OptionPlan.  In accordance with APB No. 25, theCompany applies fixed accounting for the plans. As a result, since therestricted stock is granted for no consideration, compensation expense isrecognized on the date of grant equal to the market price of the Company’scommon stock.  The fair value of thestock awarded is amortized into earnings over the period of service.  The restricted stock vests over a statedperiod.  During the nine months endedSeptember 30, 2005, the Company granted 6,973 shares of restricted stock; noneof the shares were issued during the three months ended September 30,2005.  The Company recorded compensationexpense of less than $0.1 million and $0.1 million for the three and ninemonths ended September 30, 2005, respectively. The Company recorded no compensation expense for the three and ninemonths ended September 30, 2004.  Thesecharges are included in selling, general and administrative expenses.

 

*Participation Plan*

 

The Company has also entered into arrangements with certaindirectors and employees of the Company referred to as the ParticipationPlan.  The Company sells subordinatedpartnership units of the Partnership and interests in the Partnership’s generalpartner to employees and directors of the Company under a purchase and saleagreement.  In accordance with theprovisions of APB No. 25, and EITF No. 95-16, *Accountingfor Stock Compensation Arrangements with Employer Loan Features*, theParticipation Plan is accounted for as a variable plan.  Since the employees and directors are 100%vested on the date they purchase the subordinated units or general partnerinterest, compensation expense for the subordinated units is measured as thedifference between the market value of the subordinated Partnership units andthe amount paid by those individuals.  

 

12

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Compensationrelated to the general partner interest is calculated as the difference in theformula value and the amount paid by those individuals.  The formula value is the amount MarkWestHydrocarbon would have to pay the directors and employees to repurchase thegeneral partners interests and is based on the current market value of thePartnership’s common units and the current quarterly distribution paid by thePartnership.  Increases or decreases inthe market value of the subordinated units and the formula value of the generalpartner interests between the date they are acquired and the end of eachreporting period result in a change in the measure of compensation, which isreflected currently in operations.  TheCompany recorded compensation expense of $0.8 million and $0.7 million for thethree months ended September 30, 2005 and 2004, respectively; and compensationexpense of $3.6 million and $1.2 million for the nine months ended September30, 2005 and 2004, respectively.  Thesecharges are included in selling, general and administrative expense.

 

The Amended and Restated Agreement of Limited Partnership ofMarkWest Energy Partners, L.P., (the “Partnership Agreement”), containsspecific provisions for the conversion of subordinated units into commonunits.  Under the Partnership Agreement, the subordination period ends onthe first day of any quarter beginning after June 30, 2009, when certainfinancial tests (defined in the Partnership Agreement) are met.  However,a portion of the subordinated units may convert earlier into common units on aone-for-one basis if additional financial tests (also defined in thePartnership Agreement) are met.  By achieving the goals defined in thePartnership Agreement in June 2005, the subordinated units owned by thedirectors and officers under the Participation Plan converted into common unitson August 15, 2005.  As a result of theconversion, the units are no longer subject to variable plan accounting andaccordingly, the Company retired the outstanding liability related to theseunits of $1.1 million to non-controlling interests in consolidated subsidiary.  This treatment does not apply to subordinatedunits that were purchased through the issuance of non-recourse loans.  These units as well as the interests in thePartnership’s general partner owned by the employees and directors of theCompany under the Participation Plan will continue to be treated as a variableplan.

 

13

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*MarkWestEnergy Partners Long-Term Incentive Plan*

 

The Partnership issues restricted units under theMarkWest Energy Partners, L.P. Long-Term Incentive Plan.  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 market value of a common unit.  Inaccordance with APB No. 25, the Partnership applies variable accounting for theplan because a phantom unit is an award to employees entitling them toincreases in the market value of the Partnership’s units subsequent to the dateof grant without issuing units to the employees, similar to a stockappreciation right.  As a result, thePartnership is required to mark to market the awards at the end of eachreporting period.  Compensation expenseis measured for the phantom unit grants using the market price of MarkWestEnergy Partner’s common units on the date the units are granted.  The fair value of the units awarded isamortized into earnings over the period of service, adjusted quarterly for thechange in the fair value of the unvested units granted.  The phantom units vest over a statedperiod.  For some employees, vesting isaccelerated if certain performance measures are met.  The accelerated vesting criteria provisionsare based on annualized distribution goals. If the Partnership’s distributions are at or above the goal for anidentified certain number of consecutive quarters, vesting of the employee’sphantom units is accelerated.  However,the vesting of any phantom units may not occur until at least one yearfollowing the date of grant.  The generalpartner of the Partnership may also elect to accelerate the vesting ofoutstanding awards, which results in an immediate charge to operations for theunamortized portion of the award.  ThePartnership recorded compensation expense of $0.2 million and $0.4 million forthe three months ended September 30, 2005 and 2004, respectively; and,compensation expense of $0.9 million and $0.7 million for the nine months endedSeptember 30, 2005 and 2004, respectively.

 

Had compensation cost for the Company’s stock-basedcompensation plans been determined based on the fair value at the grant datesunder those plans consistent with the method prescribed by SFAS No. 123,**the Company’s net loss and net loss per share would havebeen revised to the pro forma amounts listed below (in thousands):

 
| ** **                                                                                                                                   | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                                                                   | ** ** | **2005**                             | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                                                                                         |       |                                 |       |                                |       |   |   |   |   |
| Net loss, as  reported                                                                                                                       |       | $                                    | (5,688     | )                                   | $          | (1,966 | ) | $ | (5,758 | ) | $ | (7,619 | ) |
| Add:  compensation expense included in reported net loss, net of related tax effect                                                          |       | 922                                  |       | 1,744                               |       | 3,894 |   | 3,758 |   |
| Deduct: total  stock-based employee compensation expense determined under fair value based  method for all awards, net of related tax effect |       | (708                                 | )          | (1,291                              | )          | (3,050 | ) | (2,242 | ) |
| Pro forma net  loss                                                                                                                          |       | $                                    | (5,474     | )                                   | $          | (1,513 | ) | $ | (4,914 | ) | $ | (6,103 | ) |
|                                                                                                                                         |       |                                 |       |                                |       |   |   |   |   |
| Net loss per  share:                                                                                                                         |       |                                 |       |                                |       |   |   |   |   |
| Basic:                                                                                                                                       |       |                                 |       |                                |       |   |   |   |   |
| As reported                                                                                                                                  |       | $                                    | (0.53      | )                                   | $          | (0.18 | ) | $ | (0.53 | ) | $ | (0.71 | ) |
| Pro forma                                                                                                                                    |       | $                                    | (0.51      | )                                   | $          | (0.14 | ) | $ | (0.46 | ) | $ | (0.57 | ) |
| Diluted:                                                                                                                                     |       |                                 |       |                                |       |   |   |   |   |
| As reported                                                                                                                                  |       | $                                    | (0.53      | )                                   | $          | (0.18 | ) | $ | (0.53 | ) | $ | (0.71 | ) |
| Pro forma                                                                                                                                    |       | $                                    | (0.51      | )                                   | $          | (0.14 | ) | $ | (0.46 | ) | $ | (0.57 | ) |

 

**5.  Marketable Securities**

 

Marketable securities are classified as available-for-saleand stated at market based on the closing price of the securities at thebalance sheet date.  Accordingly,unrealized gains or temporary losses are reflected in other comprehensiveincome, net of applicable income taxes. For losses that are other than temporary, the cost basis of thesecurities is written down to fair value and the amount of the write down isreflected in the statement of operations. 

 

14

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The Company utilizes a first-infirst-out cost basis to compute realized gains and losses.  Realized gains and losses, dividends,interest income, and the amortization of discounts and premiums are reflectedin operations.

 

The following are the components of marketablesecurities (in thousands):

 
| ** **                                                          | ** ** | **Cost Basis** | ** ** | **Unrealized   gains** | ** ** | **Unrealized   losses** | ** ** | **Recorded   Basis** | ** ** |
|---------------------------------------------------------------------|------------|----------------|------------|------------------------|------------|-------------------------|------------|----------------------|------------|
| **September 30, 2005**                                              | ** ** | ** **     | ** ** | ** **             | ** ** | ** **              | ** ** | ** **           | ** ** |
| **Equity  securities:**                                             |       |           |       |                   |       |                    |       |                 |       |
| Master limited  partnership units                                   |       | $              | 5,497      |                   | $          | 1,224                   |       | $                    | (18        | ) | $ | 6,703 |   |
| **Fixed  maturities:**                                              |       |           |       |                   |       |                    |       |                 |       |
| Mortgage backed  securities (due after one year through five years) |       | 8,740          |       | —                 |       | (136                    | )          | 8,604                |       |
| Total marketable  securities, classified as current                 |       | $              | 14,237     |                   | $          | 1,224                   |       | $                    | (154       | ) | $ | 15,307 |   |
|                                                                |       |           |       |                   |       |                    |       |                 |       |   |   |   |   |
| **December  31, 2004**                                              | ** ** | ** **     | ** ** | ** **             | ** ** | ** **              | ** ** | ** **           | ** ** |
| **Equity  securities:**                                             |       |           |       |                   |       |                    |       |                 |       |
| Master limited  partnership units                                   |       | $              | 5,248      |                   | $          | 872                     |       | $                    | (19        | ) | $ | 6,101 |   |
| **Fixed  maturities:**                                              |       |           |       |                   |       |                    |       |                 |       |
| Mortgage backed  securities (due after one year through five years) |       | 8,750          |       | 10                     |       | (46                     | )          | 8,714                |       |
| Total marketable  securities, classified as current                 |       | $              | 13,998     |                   | $          | 882                     |       | $                    | (65        | ) | $ | 14,815 |   |

 

At September 30, 2005, unrealizedgains of $1.2 million relate primarily to investments in equity securities ofdomestic energy partnerships.  Unrealized losses of $0.2 million relateprimarily to mortgage backed securities and are primarily attributable tochanges in interest rates.  Net unrealized gains on marketable securitiesof $1.1 million, net of the related tax effect of $0.4 million, are reflectedas a component of other comprehensive loss at September 30, 2005.

 

At December 31, 2004, unrealized gainsof $0.9 million relate primarily to investments in equity securities ofdomestic energy partnerships.  Unrealized losses of $0.1 million relateprimarily to mortgage backed securities and are primarily attributable tochanges in interest rates.  Net unrealized gains on marketable securitiesof $0.8 million, net of the related tax effect of $0.3 million, are reflectedas a component of other comprehensive income at December 31, 2004.

 

**6.  Income Taxes**

 

The Company accounts forincome taxes under the asset and liability method pursuant to SFASNo. 109, *Accounting for Income Taxes*.Under SFAS No. 109, deferred income taxes are recognized for the futuretax consequences attributable to differences between the financial statementcarrying amounts of existing assets and liabilities and their respective taxbasis and net operating loss and credit carryforwards. Deferred tax assets andliabilities are measured using enacted tax rates expected to apply to taxableincome in the years in which those temporary differences are expected to berecovered or settled. The effect of any tax rate change on deferred taxes isrecognized as income in the period that includes the enactment date of the taxrate change.  Realizability of deferredtax assets is assessed and, if not more likely than not, a valuation allowanceis recorded to write down the deferred tax assets to their net realizablevalue. The Company bases the effective corporate tax rate for interim periodson the estimated annual effective corporate tax rate.  Income tax benefit totaled $2.9 million forboth the three and nine months ended September 30, 2005, respectively,resulting in an effective tax rate of 33.5%. Income tax expense totaled $0.1 million and $0.6 million for the threeand nine months ended September 30, 2004, respectively, resulting in aneffective income tax rate of (8.4)% for both the three and nine months endedSeptember 30, 2004.

 

15

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**7. ****MarkWest Energy Partners’ Acquisitions**

 

*Starfish Acquisition*

 

On March 31, 2005, MarkWestEnergy Partners completed the acquisition of a 50% non-operating membership interestin Starfish Pipeline Company, LLC, (“Starfish”) from an affiliate of EnterpriseProducts Partners L.P. for $41.7 million. Starfish is a joint venture with Enbridge Offshore Pipelines LLC, whichthe Company accounts for using the equity method.  Starfish owns the FERC-regulated Stingraynatural gas pipeline and the unregulated Triton natural gas gathering systemand West Cameron dehydration facility, all located in the Gulf of Mexico andSouthwestern Louisiana.

 

*East Texas System Acquisition*

 

On July 30, 2004, MarkWest EnergyPartners completed the acquisition of American Central Eastern Texas’ Carthagegathering system located in east Texas (the “East Texas System”) forapproximately $240.7 million.  The Company’s condensedconsolidated financial statements include the East Texas System’s results ofoperations from July 30, 2004.  Theassets acquired consist of gathering systems, compressor stations and aprocessing facility currently under construction, as well as a NGL pipelinecurrently under construction.

 

Thetotal adjusted purchase price was $240.7 million, and was allocated asfollows (in thousands):

 
| Acquisition  costs:              |   |   |    |
|----------------------------------|--------|--------|---------|
| Cash consideration               |   | $      | 240,269 |   |
| Direct  acquisition costs        |   | 457    |    |
| Total                            |   | $      | 240,726 |   |
|                             |   |   |    |
| Allocation of acquisition costs: |   |   |    |
| Customer  contracts              |   | $      | 165,379 |   |
| Property, plant  and equipment   |   | 76,012 |    |
| Inventory                        |   | 65     |    |
| Imbalance  payable               |   | (337   | )       |
| Property taxes  payable          |   | (393   | )       |
| Total                            |   | $      | 240,726 |   |

 

*ProForma Results of Operations (Unaudited)*

 

The following table reflects theunaudited pro forma consolidated results of operations for the comparableperiod presented, as though the East Texas System and Starfish acquisitions hadoccurred on January 1, 2004.  Theunaudited pro forma results have been prepared for comparative purposes onlyand may not be indicative of future results.

 
| ** **          | ** ** | **Nine Months Ended September 30, 2005**  | ** ** |
|---------------------|------------|-------------------------------------------|------------|
| ** **          | ** ** | **MarkWest  Hydrocarbon**                 | ** ** | **Starfish** | ** ** | **Adjustments (1)** | ** ** | **Total** | ** ** |
| ** **          | ** ** | **(in thousands, except per share data)** | ** ** |
| Revenue             |       | $                                         | 450,018    |   | $ | — |   | $ | — |   | $ | 450,018 |   |
| Net loss            |       | $                                         | (5,758     | ) | $ | 984 |   | $ | (957 | ) | $ | (5,731 | ) |
| Net loss per share: |       |                                      |       |   |   |   |   |   |   |
| Basic               |       | $                                         | (0.53      | ) |   |   |   |   | $ | (0.53 | ) |
| Diluted             |       | $                                         | (0.53      | ) |   |   |   |   | $ | (0.53 | ) |

 

16

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| ** **          | ** ** | **Three Months Ended September 30, 2004** | ** ** |
|---------------------|------------|-------------------------------------------|------------|
| ** **          | ** ** | **MarkWest  Hydrocarbon**                 | ** ** | **East Texas** | ** ** | **Starfish** | ** ** | **Adjustments (1)** | ** ** | **Total** | ** ** |
| ** **          | ** ** | **(in thousands, except per share data)** | ** ** |
| Revenue             |       | $                                         | 121,511    |   | $ | 3,573 |   | $ | — |   | $ | — |   | $ | 125,084 |   |
| Net loss            |       | $                                         | (1,966     | ) | $ | 2,101 |   | $ | 950 |   | $ | (3,582 | ) | $ | (2,497 | ) |
| Net loss per share: |       |                                      |       |   |   |   |   |   |   |   |   |
| Basic               |       | $                                         | (0.18      | ) |   |   |   |   |   |   | $ | (0.23 | ) |
| Diluted             |       | $                                         | (0.18      | ) |   |   |   |   |   |   | $ | (0.23 | ) |

 
| ** **          | ** ** | **Nine Months Ended September 30, 2004**  | ** ** |
|---------------------|------------|-------------------------------------------|------------|
| ** **          | ** ** | **MarkWest  Hydrocarbon**                 | ** ** | **East Texas** | ** ** | **Starfish** | ** ** | **Adjustments (1)** | ** ** | **Total** | ** ** |
| ** **          | ** ** | **(in thousands, except per share data)** | ** ** |
| Revenue             |       | $                                         | 304,235    |   | $ | 20,679 |   | $ | — |   | $ | — |   | $ | 324,914 |   |
| Net loss            |       | $                                         | (7,619     | ) | $ | 9,328 |   | $ | 3,042 |   | $ | (12,978 | ) | $ | (8,227 | ) |
| Net loss per share: |       |                                      |       |   |   |   |   |   |   |   |   |
| Basic               |       | $                                         | (0.71      | ) |   |   |   |   |   |   |   | $ | (0.77 | ) |
| Diluted             |       | $                                         | (0.71      | ) |   |   |   |   |   |   |   | $ | (0.77 | ) |

 

----

(1)Adjustments primarily for amortization and financing costs.

 

**8.  Related Party Transactions**

 

Through the Company’s wholly owned subsidiary, Matrex, LLC,the Company holds interests in a few exploration and production assets in whichMAK-J Energy Partners Ltd. (“MAK-J”) also owns interests.  The general partner of MAK-J is a corporationowned and controlled by the Company’s former President and Chief ExecutiveOfficer and current Chairman of the Board of Directors.

 

The Company has receivables due from MAK-J, representing itsshare of operating and capital costs generated in the normal course ofbusiness, of $0.1 million and less than $0.1 million as of September 30, 2005and December 31, 2004, respectively. The Company also has payables to MAK-J,representing its share of revenues generated in the normal course of business,of less than $0.1 million as of both September 30, 2005 and December 31, 2004.

 

**9.  Asset Retirement Obligations**

 

In June 2001 the FASB issued SFAS No. 143, *Accounting for Asset Retirement Obligations. *The Company adopted SFAS No. 143beginning January 1, 2003. The most significant impact of this standard on theCompany was a change in the method of accruing for site restoration costs.  Under SFAS No. 143, the fair value of assetretirement obligations is recorded as a liability when incurred, which istypically at the time the assets are placed in service.  Amounts recorded for the related assets areincreased by the amount of these obligations. Over time, the liabilities are accreted for the change in their presentvalue and the initial capitalized costs are depreciated over the useful livesof the related assets.

 

The Company’s assets subject to assetretirement obligations are primarily certain gas gathering pipelines andprocessing facilities, a crude oil pipeline and other related pipeline assetsoperated by the Partnership.

 

The Partnership reviews applicable laws andregulations governing obligations for asset retirement obligations, as well asthe leases.  Based on the Partnership’s review, there are certain landleases in East Texas, Oklahoma, Appalachia and Other Southwest that require thePartnership to return the land to its original condition upon the terminationof the lease.  Based on the review of these leases, the Partnershiprecorded an asset retirement obligation of $0.5 million and $0.4 million duringthe nine months ended September 30, 2005 and 2004, 

 

17

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respectively, using an estimated average term of the leasesof 25 years.  Accretion expense for the nine months ended September 30,2005 and 2004 was $0.1 million and less than $0.1 million, respectively.

 

In October 2003, the Board of Directors ofthe general partner approved a plan to shut down the existing Cobb processingplant and construct a replacement facility.  Construction was completed inthe first quarter of 2005.  During the fourth quarter of 2003, thePartnership estimated the amount of the asset retirement obligation associatedwith the shut down of the old Cobb facility to be $0.5 million and recorded anaccrued liability.  The Partnership began the process of shutting down theold Cobb facility during the third quarter of 2005.  As a result, the Partnershipsettled $0.2 million of the liability in the three months ended September 30,2005.  The Partnershipcompleted the decommissioning and dismantlement of the old Cobb facility in thefourth quarter of 2005.  At September 30, 2005, theasset retirement obligation was $0.3 million.

 

At September 30, 2005 and 2004, there wereno assets legally restricted for purposes of settling asset retirement obligations.

 

The following is a reconciliation of theCompany’s asset retirement obligation activity for the nine months endedSeptember 30, 2005 (in thousands):

 
| Asset retirement  obligation as of December 31, 2004 |   | $      | 892    |   |
|------------------------------------------------------|--------|--------|--------|--------|
| Liability accrued                                    |   | 479    |   |
| Accretion                                            |   | 133    |   |
| Liability settled                                    |   | (159   | )      |
| Asset retirement obligation as of September 30, 2005 |   | $      | 1,345  |   |
|                                                 |   |   |   |
| Current                                              |   | $      | 291    |   |
| Long-term                                            |   | 1,054  |   |
| Asset retirement obligation as of September 30, 2005 |   | $      | 1,345  |   |

 

**10.****       Property, Plant andEquipment**

 

Property, plant and equipment consists of:

 
| ** **                                                              | ** ** | **September 30, 2005** | ** ** | **December 31, 2004** | ** ** |
|-------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                              | ** ** | **(in thousands)**     | ** ** |
| Property, plant and equipment:                                          |       |                   |       |                  |       |
| Gas gathering  facilities                                               |       | $                      | 201,541    |                  | $          | 160,763 |   |
| Gas processing  plants                                                  |       | 58,218                 |       | 56,239                |       |
| Fractionation  and storage facilities                                   |       | 22,531                 |       | 22,112                |       |
| Natural gas  pipelines                                                  |       | 38,167                 |       | 38,167                |       |
| Crude oil  pipelines                                                    |       | 19,451                 |       | 18,499                |       |
| NGL  transportation facilities                                          |       | 4,425                  |       | 4,381                 |       |
| Furniture,  office equipment and other                                  |       | 3,701                  |       | 4,113                 |       |
| Land, buildings  and other equipment                                    |       | 10,371                 |       | 9,418                 |       |
| Construction in  progress                                               |       | 33,577                 |       | 28,944                |       |
|                                                                    |       | 391,982                |       | 342,636               |       |
| Less:  Accumulated depreciation, depletion, amortization and impairment |       | (73,219                | )          | (59,443               | )          |
| Total property,  plant and equipment, net                               |       | $                      | 318,763    |                  | $          | 283,193 |   |

 

The Company capitalizedinterest on construction in-progress, including amortization of deferredfinancing costs, of $0.5 million and $0.3 million for the three months endedSeptember 30, 2005 and 2004, respectively, and $1.4 million and $0.3 millionfor the nine months ended September 30, 2005 and 2004, respectively.

 

18

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**11.****       Dividends to Shareholders**

 

On April 28, 2005,the Company’s Board of Directors declared a quarterly cash dividend of $0.10 per share, an increase of $0.075 per sharefrom the same period of 2004, payable on May 23, 2005, to the stockholders of record as of theclose of business on May 16, 2005.  Theex-dividend date was May 12, 2005.

 

On July 22, 2005,the Company’s Board of Directors declared a quarterly cash dividend of $0.10 per share, an increase of $0.075 per sharefrom the same period of 2004, payable on August 22, 2005, to the stockholders of record as of theclose of business on August 15, 2005. The ex-dividend date was August 11, 2005.

 

On October 27,2005, the Company’s Board of Directors declared a quarterly cashdividend of $0.125 per share, an increaseof $0.08 per share from the same period of 2004, payable on November 22, 2005, to the stockholders of record as of theclose of business on November 15, 2005. The ex-dividend date was November 11, 2005.

 

**12.****       Segment Reporting**

 

The Company’s operationsare classified into two reportable segments:

 

(1)        MarkWestEnergy Partners — The Partnership is engaged in the gathering, processing andtransmission of natural gas; the transportation, fractionation and storage ofnatural gas liquids; and the gathering and transportation of crude oil.

(2)        MarkWestHydrocarbon Standalone — The Company sells its equity and third-party NGLs,purchases third-party natural gas and sells its equity and third-party naturalgas.  Since February 2004, the Companyis also engaged in the wholesale marketing of propane. MarkWest HydrocarbonStandalone operates MarkWest Energy Partners, a publicly traded limitedpartnership.

 

Theaccounting policies the Company applies in the preparation of business segmentinformation are generally the same as those described in Note 2 to theConsolidated Financial Statements in the Company’s December 31, 2004, AnnualReport on Form 10-K. An exception is that certain items below the “Incomebefore non-controlling interest in net income of consolidated subsidiary andincome taxes” line are not allocated to business segments as they are notconsidered by management in its evaluation of business unit performance.

 

The table below presents information about income beforenon-controlling interest in net income of consolidated subsidiary and incometaxes for the reported segments for the three and nine months endedSeptember 30, 2005 and 2004. Selling,general and administrative expenses are allocated to the segments based ondirect expenses incurred by the segments or allocated based on****the percent of timethat employees devote to the segment in accordance with the Partnership’sservices agreement with the Company.****

 

19

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| ** **                                                                                                | ** ** | **MarkWest Hydrocarbon Standalone** | ** ** | **MarkWest  Energy  Partners** | ** ** | **Eliminating  Entries** | ** ** | **Total** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|--------------------------------|------------|--------------------------|------------|-----------|------------|
| ** **                                                                                                | ** ** | **(in thousands)**                  | ** ** |
| **Three Months Ended September 30, 2005:**                                                                |       |                                |       |                           |       |                     |       |      |       |
| Revenues                                                                                                  |       | $                                   | 56,078     |                           | $          | 130,568                  |       | $         | (16,021    | ) | $ | 170,625 |   |
| Purchased product costs                                                                                   |       | 57,789                              |       | 98,874                         |       | (10,787                  | )          | 145,876   |       |
| Facility expenses                                                                                         |       | 4,802                               |       | 12,514                         |       | (5,234                   | )          | 12,082    |       |
| Selling, general and administrative expenses                                                              |       | 2,591                               |       | 5,322                          |       | —                   |       | 7,913     |       |
| Depreciation                                                                                              |       | 254                                 |       | 4,771                          |       | —                   |       | 5,025     |       |
| Amortization of intangible assets                                                                         |       | —                              |       | 2,098                          |       | —                   |       | 2,098     |       |
| Accretion of  asset retirement and lease obligations                                                      |       | (1                                  | )          | 117                            |       | —                   |       | 116       |       |
| Income (loss)  from operations                                                                            |       | (9,357                              | )          | 6,872                          |       | —                   |       | (2,485    | )          |
|                                                                                                      |       |                                |       |                           |       |                     |       |      |       |
| Loss from  unconsolidated subsidiary                                                                      |       | —                              |       | (999                           | )          | —                   |       | (999      | )          |
| Interest income                                                                                           |       | 191                                 |       | 80                             |       | —                   |       | 271       |       |
| Interest expense                                                                                          |       | (30                                 | )          | (4,950                         | )          | —                   |       | (4,980    | )          |
| Amortization of  deferred financing costs (a component of interest expense)                               |       | (61                                 | )          | (496                           | )          | —                   |       | (557      | )          |
| Dividend income                                                                                           |       | 101                                 |       | —                         |       | —                   |       | 101       |       |
| Other income                                                                                              |       | 47                                  |       | 18                             |       | —                   |       | 65        |       |
| Income (loss)  before non-controlling interest in net income of consolidated subsidiary and  income taxes |       | $                                   | (9,109     | )                              | $          | 525                      |       | $         | —     |   | $ | (8,584 | ) |
|                                                                                                      |       |                                |       |                           |       |                     |       |      |       |
| **September  30, 2005:**                                                                                  |       |                                |       |                           |       |                     |       |      |       |
| Cash, cash  equivalents and restricted cash                                                               |       | $                                   | 7,113      |                           | $          | 10,045                   |       | $         | —     |   | $ | 17,158 |   |
| Marketable  securities                                                                                    |       | 15,307                              |       | —                         |       | —                   |       | 15,307    |       |
| Current assets                                                                                            |       | 84,983                              |       | 65,822                         |       | —                   |       | 150,805   |       |
| Current  liabilities                                                                                      |       | 42,014                              |       | 63,440                         |       | —                   |       | 105,454   |       |
| Total assets                                                                                              |       | 89,878                              |       | 595,598                        |       | —                   |       | 685,476   |       |
| Total debt                                                                                                |       | —                              |       | 310,500                        |       | —                   |       | 310,500   |       |

 

20

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| ** **                                                                                                | ** ** | **MarkWest Hydrocarbon Standalone** | ** ** | **MarkWest  Energy  Partners** | ** ** | **Eliminating  Entries** | ** ** | **Total** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|--------------------------------|------------|--------------------------|------------|-----------|------------|
| ** **                                                                                                | ** ** | **(in thousands)**                  | ** ** |
| **Three  Months Ended September 30, 2004:**                                                               |       |                                |       |                           |       |                     |       |      |       |
| Revenues                                                                                                  |       | $                                   | 59,040     |                           | $          | 77,842                   |       | $         | (15,371    | ) | $ | 121,511 |   |
| Purchased  product costs                                                                                  |       | 52,564                              |       | 51,716                         |       | (9,071                   | )          | 95,209    |       |
| Facility  expenses                                                                                        |       | 6,201                               |       | 8,497                          |       | (6,300                   | )          | 8,398     |       |
| Selling, general  and administrative expenses                                                             |       | 2,929                               |       | 4,323                          |       | —                   |       | 7,252     |       |
| Depreciation                                                                                              |       | 303                                 |       | 4,207                          |       | —                   |       | 4,510     |       |
| Amortization of  intangible assets                                                                        |       | —                              |       | 1,400                          |       | —                   |       | 1,400     |       |
| Accretion of  asset retirement and lease obligations                                                      |       | —                              |       | 13                             |       | —                   |       | 13        |       |
| Income (loss)  from operations                                                                            |       | (2,957                              | )          | 7,686                          |       | —                   |       | 4,729     |       |
|                                                                                                      |       |                                |       |                           |       |                     |       |      |       |
| Loss from  unconsolidated subsidiary                                                                      |       | —                              |       | (32                            | )          | —                   |       | (32       | )          |
| Interest income                                                                                           |       | 167                                 |       | 13                             |       | —                   |       | 180       |       |
| Interest expense                                                                                          |       | (24                                 | )          | (3,715                         | )          | —                   |       | (3,739    | )          |
| Amortization of  deferred financing cost (a component of interest expense)                                |       | (64                                 | )          | (3,056                         | )          | —                   |       | (3,120    | )          |
| Dividend income                                                                                           |       | 86                                  |       | —                         |       | —                   |       | 86        |       |
| Other income  (expense)                                                                                   |       | 766                                 |       | (181                           | )          | —                   |       | 585       |       |
| Income (loss)  before non-controlling interest in net income of consolidated subsidiary and  income taxes |       | $                                   | (2,026     | )                              | $          | 715                      |       | $         | —     |   | $ | (1,311 | ) |
|                                                                                                      |       |                                |       |                           |       |                     |       |      |       |
| **September  30, 2004:**                                                                                  |       |                                |       |                           |       |                     |       |      |       |
| Cash, cash  equivalents and restricted cash                                                               |       | $                                   | 11,721     |                           | $          | 13,587                   |       | $         | —     |   | $ | 25,308 |   |
| Marketable  securities                                                                                    |       | 12,205                              |       | —                         |       | —                   |       | 12,205    |       |
| Current assets                                                                                            |       | 73,452                              |       | 38,342                         |       | —                   |       | 111,794   |       |
| Current  liabilities                                                                                      |       | 40,510                              |       | 31,831                         |       | —                   |       | 72,341    |       |
| Total assets                                                                                              |       | 79,709                              |       | 474,048                        |       | —                   |       | 553,757   |       |
| Total debt                                                                                                |       | —                              |       | 197,500                        |       | —                   |       | 197,500   |       |

 

21

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| ** **                                                                                                | ** ** | **MarkWest Hydrocarbon Standalone** | ** ** | **MarkWest  Energy  Partners** | ** ** | **Eliminating  Entries** | ** ** | **Total** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|--------------------------------|------------|--------------------------|------------|-----------|------------|
| ** **                                                                                                | ** ** | **(in thousands)**                  | ** ** |
| **Nine  Months Ended September 30, 2005:**                                                                |       |                                |       |                           |       |                     |       |      |       |
| Revenues                                                                                                  |       | $                                   | 173,386    |                           | $          | 323,165                  |       | $         | (46,533    | ) | $ | 450,018 |   |
| Purchased  product costs                                                                                  |       | 159,340                             |       | 233,521                        |       | (29,932                  | )          | 362,929   |       |
| Facility  expenses                                                                                        |       | 15,723                              |       | 33,205                         |       | (16,601                  | )          | 32,327    |       |
| Selling, general  and administrative expenses                                                             |       | 8,653                               |       | 16,487                         |       | —                   |       | 25,140    |       |
| Depreciation                                                                                              |       | 1,088                               |       | 13,673                         |       | —                   |       | 14,761    |       |
| Amortization of  intangible assets                                                                        |       | —                              |       | 6,288                          |       | —                   |       | 6,288     |       |
| Accretion of  asset retirement and lease obligations                                                      |       | 1                                   |       | 136                            |       | —                   |       | 137       |       |
| Income (loss)  from operations                                                                            |       | (11,419                             | )          | 19,855                         |       | —                   |       | 8,436     |       |
|                                                                                                      |       |                                |       |                           |       |                     |       |      |       |
| Loss from  unconsolidated subsidiary                                                                      |       | —                              |       | (9                             | )          | —                   |       | (9        | )          |
| Interest income                                                                                           |       | 631                                 |       | 210                            |       | —                   |       | 841       |       |
| Interest expense                                                                                          |       | (91                                 | )          | (13,182                        | )          | —                   |       | (13,273   | )          |
| Amortization of  deferred financing costs (a component of interest expense)                               |       | (183                                | )          | (1,468                         | )          | —                   |       | (1,651    | )          |
| Dividend income                                                                                           |       | 289                                 |       | —                         |       | —                   |       | 289       |       |
| Other income                                                                                              |       | 244                                 |       | 56                             |       | —                   |       | 300       |       |
| Income (loss)  before non-controlling interest in net income of consolidated subsidiary and  income taxes |       | $                                   | (10,529    | )                              | $          | 5,462                    |       | $         | —     |   | $ | (5,067 | ) |
|                                                                                                      |       |                                |       |                           |       |                     |       |      |       |
| **Nine  Months Ended September 30, 2004:**                                                                |       |                                |       |                           |       |                     |       |      |       |
| Revenues                                                                                                  |       | $                                   | 140,718    |                           | $          | 207,326                  |       | $         | (43,809    | ) | $ | 304,235 |   |
| Purchased  product costs                                                                                  |       | 124,036                             |       | 148,940                        |       | (25,016                  | )          | 247,960   |       |
| Facility  expenses                                                                                        |       | 18,139                              |       | 21,113                         |       | (18,793                  | )          | 20,459    |       |
| Selling, general  and administrative expenses                                                             |       | 8,291                               |       | 9,346                          |       | —                   |       | 17,637    |       |
| Depreciation                                                                                              |       | 1,042                               |       | 10,653                         |       | —                   |       | 11,695    |       |
| Amortization of intangible  assets                                                                        |       | —                              |       | 1,468                          |       | —                   |       | 1,468     |       |
| Accretion of  asset retirement and lease obligations                                                      |       | —                              |       | 13                             |       | —                   |       | 13        |       |
| Income (loss)  from operations                                                                            |       | (10,790                             | )          | 15,793                         |       | —                   |       | 5,003     |       |
|                                                                                                      |       |                                |       |                           |       |                     |       |      |       |
| Loss from  unconsolidated subsidiary                                                                      |       | —                              |       | (49                            | )          | —                   |       | (49       | )          |
| Interest income                                                                                           |       | 502                                 |       | 34                             |       | —                   |       | 536       |       |
| Interest expense                                                                                          |       | (33                                 | )          | (5,759                         | )          | —                   |       | (5,792    | )          |
| Amortization of  deferred financing cost (a component of interest expense)                                |       | (55                                 | )          | (3,679                         | )          | —                   |       | (3,734    | )          |
| Dividend income                                                                                           |       | 169                                 |       | —                         |       | —                   |       | 169       |       |
| Other income  (expense)                                                                                   |       | 798                                 |       | (202                           | )          | —                   |       | 596       |       |
| Income (loss)  before non-controlling interest in net income of consolidated subsidiary and  income taxes |       | $                                   | (9,409     | )                              | $          | 6,138                    |       | $         | —     |   | $ | (3,271 | ) |

 

**13.****       Commitments andContingencies**

 

*Legal*

 

The Company and several of its affiliates were servedearlier in 2005 with two lawsuits presently under the jurisdiction of the U.S.District Court for the Eastern District of Kentucky, Pikeville Division. Inearly November 2005, 

 

22

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we were servedwith an additional lawsuit filed in Floyd County Circuit Court, Kentucky,adding five new claimants, but essentially alleging the same facts and claimsas the earlier two suits.  These suitsare for third-party claims of property and personal injury damages sustained asa consequence of a NGL pipeline leak and an ensuing explosion and fire thatoccurred on November 8, 2004 from a natural gas pipeline, owned by an unrelatedbusiness entity, and leased and operated by the Partnership’s subsidiary,MarkWest Energy Appalachia, LLC.  Thepipeline transports NGLs from the Maytown gas processing plant to thePartnership’s Siloam fractionator. An ignition and fire from the leaked vaporsresulted in property damage to five homes and injuries to some of theresidents. The cause of the pipeline split, leak, and resulting explosion andfire is being investigated by the pipeline owner, the U.S. Department ofTransportation, Office of Pipeline Safety (“OPS”) and the Partnership.

 

The Company and the Partnership have timely notifiedtheir general liability insurance carriers of the incident and of the filedKentucky actions and is coordinating the defense of these third-party lawsuitswith the insurers.  At this time, theCompany and the Partnership believe that they have adequate general liabilityinsurance coverage for third-party property damage and personal injuryliability resulting from the incident. To date, the Company and the Partnership have settled with several ofthe claimants for third-party property damage claims (damage to residences andpersonal property) related to this incident, in addition to reaching settlementfor some of the personal injury claims related to the pipeline explosion andfire.  These settlements have been paidfor or reimbursed under the Partnership’s general liability insurance.  As a result, the Company has not provided fora loss contingency.

 

Pursuant to OPS regulation mandates and to aCorrective Action Order issued by the OPS immediately after the incident,pipeline and valve integrity evaluation, testing and repair efforts wererequired and conducted on the affected pipeline segment before service could beresumed.  Partial return to service ofthe affected pipeline began in October 2005. The Company and the Partnership have filed an independent action againsttheir All-Risk Property and Business Interruption insurance carriers as aresult of their refusal to honor their insurance coverage obligation forproviding the Company and the Partnership insurance payments for certainexpenses.  These expenses related to thePartnership’s internal expenses and costs incurred for damage to, and loss ofuse of, the pipeline, equipment, products, the extra transportation costsincurred for transporting the liquids while the pipeline was out of service,the reduced volumes of liquids that could be processed, and the costs ofcomplying with the OPS Corrective Action Order (hydrostatic testing,repair/replacement and other pipeline integrity assurance measures).  These expenses and costs have been expensedas incurred and any potential recovery from the All-Risks Property and BusinessInterruption insurance carriers will be treated as “other income” if they arereceived.  The Partnership has notprovided for a receivable related to these claims because of the uncertainty asto whether and how much the Company and the Partnership will ultimately recoverunder the All-Risks Property and Business Interruption insurance policies.  In addition to the property and businesslosses and interruption costs, through September 30, 2005, the Partnership hasincurred pipeline testing, refurbishment and replacements costs ofapproximately $5.1 million, of which $1.3 million has been capitalized. ThePartnership’s current estimate is that the full cost of pipeline testing,repair and improvements will be approximately $7.0 million, of whichapproximately $1.7 million will be capitalized. The Company and the Partnership have also asserted that the costsassociated with such testing, replacement and repair are subject to an equalsharing arrangement with the owner of the pipeline, pursuant to the terms ofthe pipeline lease agreement.

 

The Company has also been involved in a lawsuitcaptioned *Ross Bros. Construction v.MarkWest Hydrocarbon, Inc*., (U.S. District Court EasternDistrict of Kentucky, Ashland Division, Civ. Action No. 01-CV-205).  This lawsuit involved the construction of theSiloam Kentucky plant and a dispute as to the monetary value of additional workbeyond the contract’s lump sum price performed by the contractor.  This lawsuit involved a claim ofapproximately $0.7 million in extra costs. The Company was recently granted Summary Judgment on its defenseasserting accord and satisfaction.  In August2005, Plaintiffs filed an appeal of the Summary Judgment to the U.S. Court ofAppeals for the 6th Circuit. 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 is probablethat the Company will prevail in the appeal. As a result, the Company has notprovided for a loss contingency.

 

The Company has also been involved in an arbitrationproceeding captioned *Kevin Stowe andScott Daves v. MarkWest Hydrocarbon, Inc*., American ArbitrationAssociation arbitration, Case No. 77 168 Y 0052 05 BEAH, 

 

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Denver, Colorado,2005.  Claimants filed an arbitrationproceeding against the Company seeking further payments out of a dispute andsettlement over interests in certain wells in Colorado.  The Company had transferred, via a purchaseand sale agreement, any liability for any payments out of the settlement it hadreached with claimants to a third party in the sale of certain of the Company’soil and gas property interests.  TheCompany has been in communication with the third-party purchaser and thethird-party purchaser has admitted it has those liabilities under the purchaseand sale agreement, and the Company believes the earlier settlement with theclaimants precludes any of their claims. The Company does not believe there are material liabilities associatedwith this claim.  As a result, theCompany has not provided for a loss contingency.

 

In September 2005, a lawsuit captioned C.F. QualiaOperating, Inc. v. MarkWest Pinnacle, L.P., (District Court of Midland, Texas,385th Judicial District, Case No. CV-45188), wasserved on the Partnership’s subsidiary, MarkWest Pinnacle, L.P., allegingbreach of contract, fraud and breach of implied duty of good faith with respectto a dispute on volumes of gas purchased by the Partnership under a gaspurchase agreement.  Under the gaspurchase agreement, MarkWest Energy Partners paid the Plaintiff based onvolumes of gas measured at the wellhead (delivery point).  Plaintiff claims that it is entitled to aprorated portion of any system gain, i.e., that it is to be paid for more gasthan it actually sold and delivered to the Partnership.  MarkWest Energy Partners has filed an Answerto the Complaint denying Plaintiff’s allegations and has asserted acounter-claim for declaratory judgment on the contract terms as being clear andunambiguous as to payment being limited to those volumes measured at thewellhead, that Plaintiff’s claims are without merit, and that the Partnershipalso may have overpaid Plaintiff based on, among other things, the wet versusdry Btu measurements.  Discovery has notyet begun, and at this time, the Partnership is not able to predict the outcomeof this matter.  As a result, thePartnership has not provided for a loss contingency.

 

In the ordinary course of business, the Company is aparty to various other legal actions.  Inthe opinion of management, none of these actions, either individually or in theaggregate, will have a material adverse effect on the Company’s financialcondition, liquidity or results of operations.

 

*Lease Obligations*

 

TheCompany has various non-cancelable operating lease agreements for equipment andoffice space expiring at various times through fiscal 2015. The Company’sminimum future lease payments under these operating leases as of September 30,2005, are as follows (in thousands):

 
| 2005                |   | $     | 1,588  |   |
|---------------------|--------|-------|--------|--------|
| 2006                |   | 5,526 |   |
| 2007                |   | 2,643 |   |
| 2008                |   | 1,922 |   |
| 2009                |   | 1,511 |   |
| 2010 and thereafter |   | 736   |   |
| Total               |   | $     | 13,926 |   |

 

The Company also has a commitment to purchaseequipment of $0.7 million at September 30, 2005.

 

**14.  Subsequent Event – Javelina**

 

On November 1, 2005,MarkWest Energy Partners completed the acquisition of 100% of the interests inthe Javelina gas processing and fractionation facility, and related pipelinefacilities located in Corpus Christi, Texas, from El Paso Corporation,Kerr-McGee Corporation, and Valero Energy Corporation for approximately $355.0million (the “Javelina Acquisition”), plus $35.9 million for net workingcapital.

 

The gas processingfacility was constructed in 1989 to process off-gas from six refineries in theCorpus Christi area, recovering up to 28,000 barrels per day of natural gasliquids, as well as hydrogen.  TheJavelina facility currently processes 125 to 130 MMcf/d of inlet gas.

 

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MarkWest Energy Partnersfinanced the Javelina acquisition through borrowing under its amended and restatedcredit agreement.  The fourth amended andrestated credit agreement provided for a $100.0 million revolving creditfacility and a $400.0 million term loan. In addition to financing the acquisition, proceeds were used to retirethe outstanding debt and provide for future liquidity requirements of thePartnership.  The Partnership refinancedthe debt incurred to complete the Javelina acquisition as more throughlydiscussed in Note 15 below.  Permanentcapital will be issued in amounts designed to bring the Partnership’s capitalstructure in line with its stated goal of less than 50% debt.

 

On November 9, 2005, thePartnership completed a private placement of 1,644,065 common units.  The units were issued at a purchase price of$44.21 each, raising approximately $74.0 million, including the general partner’scontribution.  On December 27, 2005, thePartnership completed a private placement of 574,714 common units.  The units were issued at a purchase price of$43.50 each, raising approximately $25.0 million, including the general partner’scontribution.  Proceeds from the equityplacements were used to reduce borrowing under the revolver and to reduce thesize of the term loan.

 

**15.   Subsequent Event –Debt**

 

In October 2004 theCompany entered into a $25.0 million senior credit facility with a term of oneyear.  The $25.0 million revolvingfacility has a variable interest rate based on the base rate, which is equal tothe higher of a) the Federal Funds Rate plus 1⁄2 of 1%, and b) the rate ofinterest in effect for such day as publicly announced from time to time by theAdministrative Agent as its prime rate, plus the applicable rate, which isbased on a utilization percentage.  InOctober, November, and December 2005, the Company entered into the first, secondand third amendment to the credit agreement. The first amendment extended the term of the original agreement toNovember 15, 2005.  The second amendmentsreduced the lending amount from $25.0 million to $16.0 million, of which $6.0million of availability is committed to a letter of credit, leaving $10.0million available for revolving loans. The second amendment also extended the term of the revolving credit toDecember 30, 2005.  The third amendmentextended the term of the revolving credit to January 31, 2006 and reduced thelending amount from $16.0 million to $13.5 million, of which $6.0 million ofavailability is committed to a letter of credit, leaving $7.5 million availablefor revolving loans.  If the revolvingcredit is converted into a term loan, the term will be extended to December 29,2006.

 

In connection with thecredit facility, the Company is subject to a number of restrictions on itsbusiness, including restrictions on its ability to grant liens on assets;merge, consolidate or sell assets; incur indebtedness; make acquisitions;engage in other businesses; enter into operating leases; enter into certainswap contracts; engage in transactions with affiliates; make dispositions; makerestricted payments, distributions and redemptions and other usual andcustomary covenants.  As of September 30,2005, the Company had no outstanding borrowings from the credit facility.  At December 31, 2005, the Company had noborrowing capacity.  The credit facilityalso contains covenants requiring the Company to maintain a minimum net worthof $40.0 million plus 50% of proceeds of equity issued subsequent to October25, 2004.

 

***MarkWest Energy Partners***

 

On November 1, 2005, the Partnership entered into thefourth amended and restated credit agreement, which provided for a maximumlending limit of $500.0 million for a term of one year.  The credit facility included a revolvingfacility of $100.0 million and a $400.0 million term loan.  On December 29, 2005, the Partnership enteredinto the fifth amended and restated credit agreement (“Partnership CreditFacility”), which provides for a maximum lending limit of  $615.0 million for a five-year term.  The credit facility includes a revolvingfacility of $250.0 million and a $365.0 million term loan.  The credit facility is guaranteed by thePartnership and all of the Partnership’s subsidiaries and is collateralized bysubstantially all of the Partnership’s assets and those of itssubsidiaries.  The borrowings under thecredit facility bear interest at a variable interest rate plus basis pointsthat correspond to the ratio of the Partnership’s Consolidated Senior Debt (asdefined in the Partnership Credit Facility) to Consolidated EBITDA (as definedin the Partnership Credit Facility), ranging from 0.50% to 1.50% for Base Rateloans, and 1.50% to 2.50% for Eurodollar Rate loans.  The basis points will increase by 0.50%during any period (not to exceed 270 days) where the Partnership makes anacquisition for a purchase price in excess of $50.0 million (“Acquisition AdjustmentPeriod”).  Borrowings under the PartnershipCredit Facility were used to finance, in part, the Javelina acquisitiondiscussed in Note 14 above.

 

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Under the provisions of the Partnership CreditFacility, the Partnership is subject to a number of restrictions on itsbusiness, including restrictions on its ability to grant liens on assets; makeor own certain investments; enter into any swap contracts other than in theordinary course of business; merge, consolidate or sell assets; incur indebtedness(other than subordinated indebtedness); make distributions on equityinvestments; declare or make, directly or indirectly, any restricted payments.

 

The Partnership Credit Facility also containscovenants requiring the Partnership to maintain:

 

•      a ratio of not less than 2.00 to 1.00 ofconsolidated EBITDA to consolidated interest expense for any fiscal quarter-endincreasing to 3.00 to 1.00 upon the first to occur of September 30, 2006 or thefirst fiscal quarter-end following the Partnership raising at least $175.0million in aggregate proceeds from equity offerings;

•      a ratio of not more than 6.50 to 1.00 oftotal consolidated debt to consolidated EBITDA for any fiscal quarter-enddecreasing to 5.25 to 1.00 upon the first to occur of September 30, 2006 or thefirst fiscal quarter-end following the Partnership raising at least $175.0million in aggregate proceeds from equity offerings;

•      a ratio of not more than 4.75 to 1.00 ofConsolidated senior debt to consolidated EBITDA for any fiscal quarter-enddecreasing to 3.75 to 1.00 upon the first to occur of September 30, 2006 or thefirst fiscal quarter-end following the Partnership raising at least $175.0million in aggregate proceeds from equity offerings and

•      Both the total debt and senior debt ratioscontain adjustment clauses during any Acquisition Adjustment Period.

 

These covenants are used to calculate the availableborrowing capacity on a quarterly basis. The Partnership incurs a commitment fee on the unused portion of thecredit facility at a rate between 30.0 and 50.0 basis points based upon theratio of Consolidated Senior Debt (as defined in the Partnership CreditFacility) to Consolidated EBITDA (as defined in the Partnership CreditFacility).  The term loan portion of thefacility is paid in quarterly installments of 1% a year on the last businessday of March, June, September and December with the remaining balance payableon December 29, 2010.  The revolverportion of the facility matures on December 29, 2010.  The Partnership’s Credit Facility alsocontains provisions requiring prepayments from certain Net Cash Proceeds (asdefined in the Partnership Credit Facility) received from certain triggeringsales that have not been reinvested within one hundred eighty days, EquityOfferings (as defined in the Partnership Credit Facility) and loan proceeds inexcess of $15.0 million from a Senior Debt Offering.  In addition, commencing with the fiscal yearending December 31, 2006, and annually thereafter within ninety days of eachfiscal year end, the Partnership is required to make a mandatory prepaymentequal to fifty percent of Excess Cash Flow. Excess Cash Flow means quarterly, the amount, not less than zero, equalto consolidated cash flow from operations for such quarter, minus the sum of (i)capital expenditures for such quarter, (ii) principal and interest payments onindebtedness actually made during such quarter and (iii) the Partnership’sdistributions made during such quarter.

 

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##### **Item 2.  Management’s Discussion and Analysis of Financial Condition and Resultsof Operations**

 

##### **Management Overview of the Three and Nine MonthsEnded September 30, 2005**

 

MarkWest Hydrocarbon reported a net loss of$5.7 million, or $(0.53) per diluted share, for the three months endedSeptember 30, 2005, compared to a net loss of $2.0 million, or $(0.18) perdiluted share, for the corresponding quarter of 2004.  The Company also reported a net loss of$5.8 million, or $(0.53) per diluted share, for the nine months endedSeptember 30, 2005, compared to a net loss of $7.6 million, or $(0.71) perdiluted share, for the corresponding period of 2004.

 

***MarkWest Hydrocarbon Standalone Results***

 

For the three months endedSeptember 30, 2005, the loss before non-controlling interest in net income ofconsolidated subsidiary and income taxes was $9.1 million, compared to a lossbefore non-controlling interest in net income of consolidated subsidiary andincome taxes of $2.0 million for the corresponding quarter of 2004, an increaseto the loss of $7.1 million, or (350%).  The increase to theloss of $7.1 million was primarily attributable to an unfavorablemark-to-market adjustment of $7.8 million to replacement gas that resulted froma sharp increase to natural gas prices, offset by the favorable fuelreimbursement of $0.5 million at our Kenova, Cobb and Boldman facilities.

 

For the nine months endedSeptember 30, 2005, the loss before non-controlling interest in net income ofconsolidated subsidiary and income taxes was $10.5 million, compared to a lossbefore non-controlling interest in net income of consolidated subsidiary andincome taxes of $9.4 million for the corresponding nine months of 2004, anincrease to the loss of $1.1 million, or (12%).   The increase to the loss of $1.1 million wasprimarily attributable to an unfavorable mark-to-market adjustment of $8.5million to replacement gas that resulted from a sharp increase to natural gasprices, offset by the favorable impact from an increase to NGL revenues, thatbenefited from an increase to prices despite a decline in volumes, in excess ofassociated purchased product costs of $6.9 million and a decrease to selling,general and administrative expenses of $0.3 million.

 

MarkWestHydrocarbon Standalone’s primary source of growth is from the marketing ofnatural gas and NGLs, as well as quarterly distributions received from MarkWestEnergy Partners.  The Company owns 89% ofthe general partner of MarkWest Energy Partners.  The general partner of MarkWest EnergyPartners owns the 2% general partner interest and all of the incentivedistribution rights.  The incentivedistribution rights entitle the Company to receive an increasing percentage ofcash distributed by the Partnership as certain target distribution levels are reached.  For the nine months ended September 30, 2005,the Company received $5.9 million in distributions for its subordinated units,and the general partner received $3.5 million, including $2.9 millionrepresenting payments on incentive distribution rights.  For the nine months ended September 30, 2004,the Company received $5.2 million in distributions for its subordinated units,and the general partner received $0.9 million, including $0.7 millionrepresenting payments on incentive distribution rights.

 

***MarkWest Energy Partners Results***

 

For the three months ended September 30, 2005, thePartnership reported income before non-controlling interest in net income ofconsolidated subsidiary and income taxes of $0.5 million compared to $0.7million for the corresponding quarter of 2004, a decrease of $0.2 million or(29%).  The decrease is primarily due toincreased facility and purchased product costs of $1.8 million related to thePartnership’s testing and repair program on the Appalachian Liquids Pipeline System(ALPS) as well as additional trucking costs for moving product while the lineis out of service, a decrease in net operating margin (a non-GAAP financialmeasure) of $1.8 million in Appalachia from reduced volumes, and increasedselling, general and administrative expenses of $1.0 million related to ongoingaudit and compliance requirements and non-cash compensation expense.  These items were partially offset by theaddition of the Partnership’s East Texas System, which added $3.2 million andan increase of $1.0 million from improved gathering volumes on thePartnership’s Appleby system.

 

For the nine months ended September 30, 2005, thePartnership reported income before non-controlling interest in net income ofconsolidated subsidiary and income taxes of $5.5 million compared to $6.1million for the 

 

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corresponding nine months of 2004. The decrease is primarily due to increased selling, general andadministrative expenses of $7.1 million related to ongoing audit and compliancerequirements and non-cash compensation expense, increased facility andpurchased product costs of $5.8 million related to the Partnership’s testingand repair program on ALPS as well as additional trucking costs for moving productwhile the line is out of service, higher interest expense and deferredfinancings costs of $5.2 million to fund the Partnership’s 2004 and 2005acquisitions, a decrease of $1.6 in net operating margin (a non-GAAP financialmeasure) generated from reduced volumes on the Partnership’s systems inAppalachia, and a decrease of $1.3 million in net operating margin (a non-GAAPfinancial measure) generated from reduced through put volumes on thePartnership’s systems in Michigan.  Theseitems were partially offset by the addition of the Partnership’s East TexasSystem, which added $15.4 million, an increase of $4.5 million from improvedgathering volumes on the Partnership’s Appleby and Western Oklahoma systems andan increase in miscellaneous income and interest income of $0.4 million.

 

Testing and repair of theAppalachia pipeline commenced in the first quarter of 2005 and was completedduring the fourth quarter of 2005. Through September 30, 2005, the Partnership has incurred pipelinetesting, refurbishment and replacement costs of approximately $5.1 million, ofwhich $1.3 million has been capitalized. Transportation costs have been approximately $0.7 million perquarter.  The Partnership is seekingrecovery under its business interruption insurance and has asserted that thecosts associated with such testing, repairs and improvements are subject to asharing arrangement with the owner of the pipeline pursuant to the terms of thepipeline lease agreement.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 they are received.

 

On March 31, 2005, MarkWest Energy Partners acquired a50% non-operating membership interest in Starfish Pipeline Company, LLC, froman affiliate of Enterprise Products Partners, L.P. for $41.7 million.  Starfish owns the FERC-regulated Stingraynatural gas pipeline, and the unregulated Triton natural gas gathering systemand West Cameron dehydration facility, all located in the Gulf of Mexico andSouthwestern Louisiana.  The acquisitionwas financed through the Partnership’s existing credit facility.

 

***Cash Dividend***

 

On October 27, 2005, theBoard of Directors of MarkWest Hydrocarbon declared a cash dividend of $0.125per share of its common stock.  Thedividend was paid on November 22, 2005, to the stockholders of record as of theclose of business on November 15, 2005. The ex-dividend date was November 11,2005.  Declaration of future dividendswill be dependent upon the financial performance of the Company.

 

**Our Business**

 

We were founded in 1988 as a partnership and laterincorporated in Delaware.  We completedour initial public offering in 1996.

 

We are an energy company primarily focused on increasingshareholder value by growing MarkWest Energy Partners, our consolidatedsubsidiary and a publicly-traded master limited partnership engaged in thegathering, processing and transmission of natural gas; the transportation,fractionation and storage of natural gas liquids; and the gathering andtransportation of crude oil. We also market natural gas and natural gas liquids(NGLs). We discontinued our exploration and production activities in 2003.

 

Our assets consist primarily of partnership interestsin MarkWest Energy Partners.  As ofSeptember 30, 2005, our partnership interests consisted of the following:

 

•                  2,469,496subordinated units, representing a 23% limited partner interest in thePartnership; and

•                  An89% ownership interest in MarkWest Energy GP, L.L.C., the general partner ofthe Partnership, which owns a 2% general partner interest and all of theincentive distribution rights in the Partnership.  This ownership interest excludes interestheld by employees and directors but deemed owned by the Company through theParticipation Plan.

 

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Tobetter understand our business and the results of operations discussed below,it is important to have an understanding of three factors:

 

•                  Thenature of our relationship with MarkWest Energy Partners;

•                  Thenature of the contracts from which we derive our revenues and from whichMarkWest Energy Partners derives its revenues; and

•                  Thelack of comparability within our results of operations across periods because ofMarkWest Energy Partners’ significant and recent acquisition activity.

 

***Our Relationship with MarkWest EnergyPartners***

 

Wespun off the majority of our then-existing natural gas gathering and processingand NGL transportation, fractionation and storage assets into MarkWest EnergyPartners in 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 Energy Partners whereby MarkWest EnergyPartners provides midstream services in Appalachia 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 generally accepted accountingprinciples, MarkWest Energy Partners’ financial results are included in ourcondensed consolidated financial statements. All intercompany accounts and transactions are eliminated duringconsolidation. You should read Note 12 to our Condensed Consolidated FinancialStatements, appearing earlier in this Form 10-Q, for further informationregarding our two business segments: (i) MarkWest Energy Partners and (ii)MarkWest Hydrocarbon Standalone.

 

As a result of our contracts with MarkWest Energy Partnersmentioned above, we accounted for 12% and 14% of the Partnership’s revenues,and 17% and 21% of its net operating margin (a non-GAAP financial measure) forthe three and nine months ended September 30, 2005, respectively. Thisrepresents a decrease from the year ended December 31, 2004, during whichMarkWest Hydrocarbon accounted for 20% of the Partnership’s revenues and 33% ofits net operating margin (a non-GAAP financial measure).  We expect to account for less of MarkWestEnergy Partners’ business in the future as it continues to acquire assets andincrease its customer and business diversification.

 

Also, at the time of the initial public offering, weentered into an Omnibus Agreement with MarkWest Energy Partners and relatedparties that governs potential competition and indemnification obligationsamong the parties.

 

Through our majority ownership in the Partnership’sgeneral partner, we control and operate MarkWest Energy Partners. Our employeesare responsible for conducting the Partnership’s business and operating itsassets pursuant to a Services Agreement, which was formalized effective January1, 2004. We receive $5,000 annually from MarkWest Energy Partners for servicesprovided under this agreement. We also are reimbursed for any reasonable costsincurred in the operation of the Partnership.

 

***Our Contracts***

 

Excluding the revenues and net operating margin (anon-GAAP financial measure) derived from MarkWest Energy Partners, we generatethe majority of our revenues and net operating margin (a non-GAAP financialmeasure) from the marketing of NGLs and, to a lesser extent, natural gas. Ascompensation for providing processing services to our Appalachian producers (wehave since outsourced these services to MarkWest Energy Partners as discussedbelow), we earn a fee and receive title to the NGLs produced. In return, we arerequired to replace, in dry natural gas, the Btu value of the NGLs extracted.This Btu replacement obligation is referred to in the industry as a “keep-whole”arrangement. In keep-whole arrangements, our principal cost is the replacement,of the Btus extracted from the gas stream in the form of NGLs or consumed asfuel during processing with dry gas of an equivalent Btu content.  The spread between the NGL product sales priceand the purchase price of natural gas with an equivalent Btu content is calledthe “frac spread.” Generally, the frac spread and, consequently, the netoperating margins (a non-GAAP 

 

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financial measure) are positive under these contracts. In the eventnatural gas becomes more expensive on a Btu equivalent basis than NGL products,the cost of keeping the producer “whole” results in operating losses.

 

At the closing of MarkWest Energy Partners’ initialpublic offering on May 24, 2002, we outsourced our midstream services to thePartnership. Pursuant to the terms of the operating agreements, we retained allthe benefits and associated risks of our keep-whole contracts with producers.Our NGL and gas marketing operations were retained by us and not contributed toMarkWest Energy Partners.

 

Our keep-whole contracts expose us to commodity pricerisk, both on the sales side (of NGLs) and on the purchase side (of naturalgas), which in turn  may increase thevolatility of our marketing results and cash flows. We attempt to mitigate ourcommodity price risk through our hedging program.  You should read Item 3, “Quantitative andQualitative Disclosures about Market Risk” for further details about ourcommodity price risk management program.

 

### ***MarkWestEnergy Partners’ Contracts***

 

The Partnership generates the majority of its revenuesand net operating margin from natural gas gathering, processing andtransmission; NGL transportation, fractionation and storage, and crude oilgathering and transportation. While all of these services constitute midstream energyoperations, the Partnership provides its services pursuant to the followingfive different types of contracts.

 

•                  *Fee-based contracts.*  Under fee-based contracts, the Partnershipreceives a fee or fees for one or more of the following services: gathering,processing, and transmission of natural gas, transportation, fractionation andstorage of NGLs, and gathering and transportation of crude oil. The revenueMarkWest Energy Partners earns from these contracts generally is directlyrelated to the volume of natural gas, NGLs or crude oil that flows through itssystems and facilities and is not directly dependent on commodity prices. Incertain cases, the Partnership’s contracts provide for minimum annual payments.If a sustained decline in commodity prices results in a decline in volumes,however, the Partnership’s revenues from these contracts would be reduced.

 

•                  *Percent-of-proceeds contracts.*  Under percent-of-proceeds contracts, MarkWestEnergy Partners generally gathers and processes natural gas on behalf ofproducers, sells the resulting residue gas and NGLs at market prices and remitsto producers an agreed-upon percentage of the proceeds based on an index price.In other cases, instead of remitting cash payments to the producer, thePartnership delivers an agreed-upon percentage of the residue gas and NGLs tothe producer and sells the volumes it keeps to third parties at market prices.Under these types of contracts, MarkWest Energy Partners’ revenues and netoperating margins increase as natural gas prices and NGL prices increase, andits revenues and net operating margins (a non-GAAP financial measure) decreaseas natural gas prices and NGL prices decrease.

 

•                  *Percent-of-index contracts.*  Under percent-of-index contracts, thePartnership generally purchases natural gas at either (1) a percentagediscount to a specified index price, (2) a specified index price less afixed amount or (3) a percentage discount to a specified index price lessan additional fixed amount. MarkWest Energy Partners then gathers and deliversthe natural gas to pipelines where it resells the natural gas at the indexprice, or at a different percentage discount to the index price. With respectto (1) and (3) above, the net operating margins (a non-GAAP financialmeasure) the Partnership realizes under the arrangements decrease in periods oflow natural gas prices because they are based on a percentage of the indexprice. Conversely, MarkWest Energy Partners’ net operating margins increaseduring periods of high natural gas prices.

 

•                  *Keep-whole contracts.*  Under keep-whole contracts, the Partnershipgathers natural gas from the producer, processes the natural gas and sells theresulting NGLs to third parties at market prices. Because the extraction of theNGLs from the natural gas during processing reduces the Btu content of thenatural gas, MarkWest Energy Partners must either purchase natural gas atmarket prices for return to producers or make cash payment to the producersequal to the value of this natural gas. Accordingly, under these arrangementsthe Partnership’s revenues and net operating margins (a non-GAAP financialmeasure) increase as the price of NGLs increases relative to the price ofnatural gas, 

 

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and its revenues and netoperating margins (a non-GAAP financial measure) decrease as the price ofnatural gas increases relative to the price of NGLs.

 

•      *Other Gathering Arrangements. *Inthese contracts, the Partnerships gather volumes under contracts with feearrangements, which are unique to each system. These contracts typically contain one or more of the following revenuecomponents:

 

•      *Fixed gathering and compression fees. *Typically, gathering and compression fees are comprised of afixed-fee portion in which producers pay a fixed rate per unit to transporttheir natural gas through the gathering system. Under the majority of these arrangements, fees are adjusted annuallybased on the Consumer Price Index.

 

•      *Settlement margin. *Typically,the terms of the Partnership’s gathering arrangements specify that it isallowed to retain a fixed percentage of the volume gathered to cover thecompression fuel charges and deemed line losses.  To the extent the gathering system isoperated more efficiently than specified per contract allowance, thePartnership is entitled to retain the difference for its own account.

 

•      *Condensate sales. *Duringthe gathering process, thermodynamic forces contribute to physical changes inthe natural gas flowing through the pipeline infrastructure.  As a result, hydrocarbon dew points arereached, causing condensation of hydrocarbons in the high-pressurepipelines.  The Partnership sells 100% ofthe condensate collected in the system at a monthly crude-oil index-based priceand it retains the proceeds.

 

In itscurrent areas of operations, MarkWest Energy Partners utilizes a combination ofcontract types.  In many cases, thePartnership provides services under contracts that contain a combination ofmore than one of the arrangements described above.  The terms of the Partnership’s contracts varybased on gas quality conditions, the competitive environment at the time thecontracts are signed and customer requirements. The Partnership’s contract mix and, accordingly, our exposure to naturalgas and NGL prices, may change as a result of changes in producer preferences,the Partnership’s expansion in regions where some types of contracts are morecommon and other market factors.  Anychanges in mix will influence our financial results.

 

At September 30, 2005, MarkWestEnergy Partners’ primary exposure to keep-whole contracts was limited to itsArapaho (Oklahoma) processing plant and its East Texas processingcontracts.  At the Arapaho plant inlet,the Btu content of the natural gas meets the downstream pipeline specification;however, the Partnership has the option of extracting NGLs when the processingmargin environment is favorable.  Inaddition, approximately half, as measured in volume, of the related gasgathering contracts include additional fees to cover plant operating costs,fuel costs and shrinkage costs in a low-processing-margin environment.  The Partnership’s ability to operate theplant in several recovery modes, including turning it off, coupled with theadditional fees provided for in the gas gathering contracts, means thePartnership’s overall keep-whole contract exposure is limited to a portion ofthe operating costs of the plant.

 

Management evaluates contract performance on the basisof net operating margin (a non-GAAP financial measure), which is defined asincome (loss) from operations, excluding facility cost, selling, general andadministrative expense, depreciation, amortization, impairments and accretionof asset retirement and lease obligations. These charges have been excluded for the purpose of enhancing theunderstanding by both management and investors of the underlying baselineoperating performance of our contractual arrangements, which management uses toevaluate our financial performance for purposes of planning and forecastingfuture periods.  Net operating margin (anon-GAAP financial measure) does not have any standardized definition andtherefore is unlikely to be comparable to similar measures presented by otherreporting companies.  Net operating margin(a non-GAAP financial measure) results should not be evaluated in isolation of,or as a substitute for, our financial results prepared in accordance withUnited States GAAP.  Our usage of netoperating margin (a non-GAAP financial measure), and the underlying methodologyin excluding certain charges, is not necessarily an indication of the resultsof operations that may be expected in the future, or that we will not, in fact,incur such charges in future periods.

 

31

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For the nine months endedSeptember 30, 2005 and 2004, the Partnership generated the followingpercentages of its revenues and net operating margin (a non-GAAP financialmeasure) from the following types of contracts:

 
| ** **                                           | ** ** | **Fee-Based** | ** ** | **Percent-of-  Proceeds (1)** | ** ** | **Percent-of-  Index (2)** | ** ** | **Keep-Whole (3)** | ** ** | **Total** | ** ** |
|------------------------------------------------------|------------|---------------|------------|-------------------------------|------------|----------------------------|------------|--------------------|------------|-----------|------------|
| **Nine  Months Ended September 30, 2005:**           |       |          |       |                          |       |                       |       |               |       |      |       |
| Revenues                                             |       | 15            | %          | 10                            | %          | 35                         | %          | 40                 | %          | 100       | %          |
| Net operating  margin (a non-GAAP financial measure) |       | 54            | %          | 4                             | %          | 34                         | %          | 8                  | %          | 100       | %          |
|                                                 |       |          |       |                          |       |                       |       |               |       |      |       |
| **Nine  Months Ended September 30, 2004:**           |       |          |       |                          |       |                       |       |               |       |      |       |
| Revenues                                             |       | 17            | %          | 15                            | %          | 22                         | %          | 46                 | %          | 100       | %          |
| Net operating  margin (a non-GAAP financial measure) |       | 60            | %          | 10                            | %          | 12                         | %          | 18                 | %          | 100       | %          |

 

----

(1)   Includesother types of contracts tied to NGL prices.

(2)   Includesother types of contracts tied to natural gas prices.

(3)   Includesother types of contracts tied to both NGL and natural gas prices.

 

Internal managementuses the term “net operating margin” (a non-GAAP financial measure) as a unitof performance measurement.  We calculatenet operating margin (a non-GAAP financial measure) as the sum of income fromoperations, facility costs, selling, general and administrative costs,depreciation, amortization of intangible assets, impairments and accretion ofasset retirement and lease obligations. The following is a reconciliation to the most comparable GAAP financialmeasure of this non-GAAP financial measure for the Company (in thousands):

 
| ** **                                           | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|------------------------------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| ** **                                           | ** ** | **2005**                             | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues                                             |       | $                                    | 170,625    |                                | $          | 121,511 |   | $ | 450,018 |   | $ | 304,235 |   |
|                                                 |       |                                 |       |                                |       |   |   |   |   |
| Purchased product costs                              |       | 145,876                              |       | 95,209                              |       | 362,929 |   | 247,960 |   |
|                                                 |       |                                 |       |                                |       |   |   |   |   |
| Net operating margin (a non-GAAP financial measure)  |       | 24,749                               |       | 26,302                              |       | 87,089 |   | 56,275 |   |
|                                                 |       |                                 |       |                                |       |   |   |   |   |
| Facility  expenses                                   |       | 12,082                               |       | 8,398                               |       | 32,327 |   | 20,459 |   |
| Selling, general  and administrative expenses        |       | 7,913                                |       | 7,252                               |       | 25,140 |   | 17,637 |   |
| Depreciation                                         |       | 5,025                                |       | 4,510                               |       | 14,761 |   | 11,695 |   |
| Amortization of  intangible assets                   |       | 2,098                                |       | 1,400                               |       | 6,288 |   | 1,468 |   |
| Accretion of  asset retirement and lease obligations |       | 116                                  |       | 13                                  |       | 137 |   | 13 |   |
| Income (loss) from operations                        |       | $                                    | (2,485     | )                                   | $          | 4,729 |   | $ | 8,436 |   | $ | 5,003 |   |

 

***ItemsAffecting Comparability of Financial Results***

 

*Recent MarkWest Energy PartnersAcquisition Activity*

 

In reading the discussion of our historical results ofoperations, you should be aware of the impact of MarkWest Energy Partners’recent significant acquisitions, which influence the comparability of ourresults of operations for the periods discussed.

 

32

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Through September 30, 2005, thePartnership completed seven acquisitions for an aggregate purchase price of$396.1 million.  Four of theseacquisitions occurred in 2003 and are included in the results of operations forboth the three and nine months ended September 30, 2005 and 2004,respectively.  These four acquisitionsinclude:

 

•      The Pinnacleacquisition, which closed on March 28, 2003, for consideration of$39.9 million;

 

•      The LubbockPipeline acquisition (also known as the Power-Tex Lateral pipeline), whichclosed September 2, 2003, for consideration of $12.2 million;

 

•      The WesternOklahoma acquisition, which closed December 1, 2003, for consideration of$38.0 million; and

 

•      The MichiganCrude Pipeline acquisition, which closed December 18, 2003, forconsideration of $21.3 million.

 

The Hobbs Pipelineacquisition closed on April 1, 2004, for consideration of $2.3 million.  Therefore, our historical results ofoperations for the three months ended September 30, 2004 reflect the impact ofthis acquisition, and our historical results of operations for the nine monthsended September 30, 2004, reflect the impact of six months of operations sincethe date of this acquisition.

 

The East Texas acquisition, which closed on July 30,2004, for consideration of $240.7 million. Therefore, our historical results of operations for the three and ninemonths ended September 30, 2004, reflect the impact of two months of operationssince the date of this acquisition.

 

The Starfish acquisition closed on March 31, 2005, forconsideration of $41.7 million. Therefore, our historical results of operations for the three monthsended September 30, 2005 reflect the impact of this acquisition, and ourhistorical results of operations for the nine months ended September 30, 2005,reflect the impact of six months of operations since the date of thisacquisition.

 

33

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**Results of Operations**

 

***Operating Data***

 
| ** **                                     | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|------------------------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| ** **                                     | ** ** | **2005**                             | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                           |       |                                 |       |                                |       |   |   |   |   |
| Marketing                                      |       |                                 |       |                                |       |   |   |   |   |
| NGL product  sales (gallons)                   |       | 33,003,000                           |       | 42,904,000                          |       | 116,484,000 |   | 130,132,000 |   |
|                                           |       |                                 |       |                                |       |   |   |   |   |
| Wholesale (1)                                  |       |                                 |       |                                |       |   |   |   |   |
| NGL product sales  (gallons)                   |       | 14,815,000                           |       | 10,984,000                          |       | 41,574,000 |   | 15,931,000 |   |
|                                           |       |                                 |       |                                |       |   |   |   |   |
| MarkWest Energy Partners                       |       |                                 |       |                                |       |   |   |   |   |
| ***Southwest:***                               |       |                                 |       |                                |       |   |   |   |   |
| *East  Texas*(2)                               |       |                                 |       |                                |       |   |   |   |   |
| Gathering system  throughput (Mcf/d)           |       | 330,000                              |       | 246,600                             |       | 313,000 |   | 246,600 |   |
| NGL product  sales (gallons)                   |       | 38,362,000                           |       | 12,268,000                          |       | 88,958,000 |   | 12,268,000 |   |
| *Oklahoma*                                     |       |                                 |       |                                |       |   |   |   |   |
| Foss Lake  gathering system throughput (Mcf/d) |       | 81,000                               |       | 63,300                              |       | 73,000 |   | 60,700 |   |
| Arapaho NGL  product sales (gallons)           |       | 14,506,000                           |       | 12,174,000                          |       | 46,180,000 |   | 28,686,000 |   |
| *Other*                                        |       |                                 |       |                                |       |   |   |   |   |
| Appleby  gathering systems throughput (Mcf/d)  |       | 38,000                               |       | 24,500                              |       | 33,000 |   | 23,300 |   |
| Other gathering  systems throughput (Mcf/d)    |       | 16,000                               |       | 15,500                              |       | 16,000 |   | 17,700 |   |
| Lateral  throughput volumes (Mcf/d) (3)        |       | 126,000                              |       | 97,200                              |       | 90,000 |   | 83,100 |   |
|                                           |       |                                 |       |                                |       |   |   |   |   |
| ***Appalachia:***                              |       |                                 |       |                                |       |   |   |   |   |
| Natural gas  processed for a fee (Mcf/d) (4)   |       | 188,000                              |       | 196,000                             |       | 197,000 |   | 201,000 |   |
| NGLs  fractionated for a fee (Gal/d)           |       | 396,000                              |       | 489,000                             |       | 426,000 |   | 474,000 |   |
| NGL product  sales (gallons)                   |       | 10,132,000                           |       | 10,710,000                          |       | 31,051,000 |   | 32,638,000 |   |
|                                           |       |                                 |       |                                |       |   |   |   |   |
| ***Michigan:***                                |       |                                 |       |                                |       |   |   |   |   |
| Natural gas  volumes transported (Mcf/d)       |       | 6,500                                |       | 12,300                              |       | 6,700 |   | 12,800 |   |
| NGL product  sales (gallons)                   |       | 1,391,000                            |       | 2,453,000                           |       | 4,447,000 |   | 7,557,000 |   |
| Crude oil  transported (Bbl/d)                 |       | 14,100                               |       | 15,100                              |       | 14,100 |   | 14,800 |   |

 

----

NA – Not applicable.
| (1)       | Represents  sales from our wholesale business. Volumes are for the period since the  Company started the line of business in February 2004.                                                                                                                                                                                                                                                                                   |
|-----------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2)       | We  acquired our East Texas System in late July 2004. Volumes are for the periods  of time since we acquired the facility in 2004.                                                                                                                                                                                                                                                                                            |
| (3)       | We  acquired our Lubbock pipeline (a/k/a the PowerTex Lateral Pipeline) in  September 2003 and our Hobbs lateral pipeline in April 2004. The Lubbock and  Hobbs pipelines are the only laterals we own that produce revenue on a  per-unit-of-throughput basis. We receive a flat fee from our other lateral  pipelines and, consequently, the throughput data from these lateral pipelines  is excluded from this statistic. |
| ***(4)*** | ***Includes throughput from our Kenova, Cobb, and Boldman processing  plants.***                                                                                                                                                                                                                                                                                                                                              |

 

34

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***Three Months Ended September 30, 2005 Compared to the Three MonthsEnded September 30, 2004***

 
| ** **                                                                                                | ** ** | **MarkWest  Hydrocarbon  Standalone** | ** ** | **MarkWest  Energy  Partners** | ** ** | **Eliminating  Entries** | ** ** | **Total** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------|------------|--------------------------|------------|-----------|------------|
| ** **                                                                                                | ** ** | **(in thousands)**                    | ** ** |
| **Three Months Ended September 30, 2005:**                                                                |       |                                  |       |                           |       |                     |       |      |       |
| Revenues                                                                                                  |       | $                                     | 56,078     |                           | $          | 130,568                  |       | $         | (16,021    | ) | $ | 170,625 |   |
| Purchased product costs                                                                                   |       | 57,789                                |       | 98,874                         |       | (10,787                  | )          | 145,876   |       |
| Facility expenses                                                                                         |       | 4,802                                 |       | 12,514                         |       | (5,234                   | )          | 12,082    |       |
| Selling, general and administrative expenses                                                              |       | 2,591                                 |       | 5,322                          |       | —                   |       | 7,913     |       |
| Depreciation                                                                                              |       | 254                                   |       | 4,771                          |       | —                   |       | 5,025     |       |
| Amortization of intangible assets                                                                         |       | —                                |       | 2,098                          |       | —                   |       | 2,098     |       |
| Accretion of  asset retirement and lease obligations                                                      |       | (1                                    | )          | 117                            |       | —                   |       | 116       |       |
| Income (loss)  from operations                                                                            |       | (9,357                                | )          | 6,872                          |       | —                   |       | (2,485    | )          |
| Loss from unconsolidated subsidiary                                                                       |       | —                                |       | (999                           | )          | —                   |       | (999      | )          |
| Interest income                                                                                           |       | 191                                   |       | 80                             |       | —                   |       | 271       |       |
| Interest expense                                                                                          |       | (30                                   | )          | (4,950                         | )          | —                   |       | (4,980    | )          |
| Amortization of  deferred financing costs (a component of interest expense)                               |       | (61                                   | )          | (496                           | )          | —                   |       | (557      | )          |
| Dividend income                                                                                           |       | 101                                   |       | —                         |       | —                   |       | 101       |       |
| Other income                                                                                              |       | 47                                    |       | 18                             |       | —                   |       | 65        |       |
| Income (loss)  before non-controlling interest in net income of consolidated subsidiary and  income taxes |       | $                                     | (9,109     | )                              | $          | 525                      |       | $         | —     |   | $ | (8,584 | ) |
| **Three Months Ended September 30, 2004:**                                                                |       |                                  |       |                           |       |                     |       |      |       |
| Revenues                                                                                                  |       | $                                     | 59,040     |                           | $          | 77,842                   |       | $         | (15,371    | ) | $ | 121,511 |   |
| Purchased product costs                                                                                   |       | 52,564                                |       | 51,716                         |       | (9,071                   | )          | 95,209    |       |
| Facility expenses                                                                                         |       | 6,201                                 |       | 8,497                          |       | (6,300                   | )          | 8,398     |       |
| Selling, general and administrative expenses                                                              |       | 2,929                                 |       | 4,323                          |       | —                   |       | 7,252     |       |
| Depreciation                                                                                              |       | 303                                   |       | 4,207                          |       | —                   |       | 4,510     |       |
| Amortization of intangible assets                                                                         |       | —                                |       | 1,400                          |       | —                   |       | 1,400     |       |
| Accretion of  asset retirement and lease obligations                                                      |       | —                                |       | 13                             |       |                     |       | 13        |       |
| Income (loss)  from operations                                                                            |       | (2,957                                | )          | 7,686                          |       | —                   |       | 4,729     |       |
| Loss from unconsolidated subsidiary                                                                       |       | —                                |       | (32                            | )          | —                   |       | (32       | )          |
| Interest income                                                                                           |       | 167                                   |       | 13                             |       | —                   |       | 180       |       |
| Interest expense                                                                                          |       | (24                                   | )          | (3,715                         | )          | —                   |       | (3,739    | )          |
| Amortization of  deferred financing cost (a component of interest expense)                                |       | (64                                   | )          | (3,056                         | )          | —                   |       | (3,120    | )          |
| Dividend income                                                                                           |       | 86                                    |       | —                         |       | —                   |       | 86        |       |
| Other income (expense)                                                                                    |       | 766                                   |       | (181                           | )          | —                   |       | 585       |       |
| Income (loss)  before non-controlling interest in net income of consolidated subsidiary and  income taxes |       | $                                     | (2,026     | )                              | $          | 715                      |       | $         | —     |   | $ | (1,311 | ) |

 

35

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| ** **                                                                                       | ** ** | **Three Months Ended September 30,** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                       | ** ** | **2005**                             | ** ** | **2004** | ** ** |
| ** **                                                                                       | ** ** | **(in thousands)**                   | ** ** |
| Loss before  non-controlling interest in net income of consolidated subsidiary and income  taxes |       | $                                    | (8,584     | ) | $ | (1,311 | ) |
| Provision (benefit) for income taxes                                                             |       | (2,868                               | )          | 151 |   |
| Non-controlling interest in net income of  consolidated subsidiary                               |       | 28                                   |       | (504 | ) |
| Net loss                                                                                         |       | $                                    | (5,688     | ) | $ | (1,966 | ) |

 

***MarkWest Hydrocarbon Standalone***

 

*Revenues.*  Revenues decreased $3.0 million, or 5%, forthe three months ended September 30, 2005 compared to the corresponding quarterof 2004. This was due primarily to an unfavorable mark-to market adjustment of$7.8 million offset by an increase in our wholesale propane marketing businessrevenue of $4.8 million.

 

*Purchased Product Costs.*  Purchased product costs increased $5.2million, or 10%, for the three months ended September 30, 2005 compared to thecorresponding quarter of 2004 primarily due to $4.8 million of increasedactivity in our wholesale propane marketing business, that was introduced inFebruary 2004.  The remaining increase isattributable to an increase in price and volumetric activity.

 

*Facility Expenses.*  Facility expenses decreased by approximately$1.4 million, or 23%, during the three months ended September 30, 2005 comparedto corresponding quarter of 2004 primarily as a result of favorable fuelreimbursement at our Kenova, Cobb and Boldman facilities.

 

*Selling,General and Administrative Expenses. *Selling, general andadministrative expenses decreased by $0.3 million, or 12%, during the threemonths ended September 30, 2005 compared to the corresponding quarter of 2004as a result of a $0.2 million decrease in compensation expense attributed tothe 1996 Stock Incentive Plan and 1996 Non-employee Director Stock Option Planand an increase to allocations of selling, general and administrative expensesto the Partnership.

 

*Depreciation*.  The decrease in depreciation expense of lessthan $0.1 million, or 16%, during the three months ended September 30, 2005compared to the corresponding quarter of 2004 was principally due to the fulldepreciation of a pipeline in Michigan in June 2005.

 

*Interest Income. *Interest income increased by less than $0.1 million, or 14%, during threemonths ended September 30, 2005 compared to the corresponding quarter of 2004primarily due to an increase in interest earned on cash equivalents.

 

*Interest Expense.*  Interest expense increased by less than $0.1million during the three months ended September 30, 2005 compared to thecorresponding quarter of 2004 primarily due to commitment fees related to theOctober 2004 credit facility.

 

*Amortizationof Deferred Financing Costs (a component of interest expense). *The Company amortizedapproximately $0.1 million of deferred financing costs during the three monthsended September 30, 2005 related to debt issuance costs incurred from theOctober 2004 credit facility.  Theincrease in 2005 relative to the corresponding period in 2004 is attributableto debt refinancing completed in the last quarter of 2004.  Deferred financing costs are being amortizedover the terms of the related obligations, which approximates the effectiveinterest method.

 

*DividendIncome. *Dividendincome increased by less than $0.1 million, or 17%, during the three monthsended September 30, 2005, compared to the corresponding quarter of 2004 as aresult of the increase in investments in master limited partnerships.

 

*OtherIncome. *Other incomedecreased by $0.7 million, or 94%, during the three months ended September 30,2005, compared to the corresponding quarter of 2004.  During the fourth quarter of 2001, EnronCorporation and its subsidiaries (“Enron”) filed for bankruptcyprotection.  In response to this filing,we terminated all derivative contracts

 

36

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where Enron was the counterparty. As a result, in 2001 we wrote off $1.1 million of fair value derivativeinstrument assets related to our cash flow hedges offset by $0.1 million offair value derivative instrument liabilities related to our fair valuehedges.  In the third quarter of 2004, wesold our claim to these assets for $0.8 million.  As a result, we recorded $0.8 million asother income in the third quarter of 2004.

 

37

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***MarkWest Energy Partners***

 

*Revenues. *Revenues for the three months ended September 30, 2005 were higher by$52.7 million, or 68%, compared to the corresponding quarter of 2004 primarilydue to the Partnership’s East Texas System acquisition, which added $17.6million to the Partnership’s 2005 revenue.Revenue also increased during the three months ended September 30, 2005relative to the corresponding quarter of 2004 due to increased well volumescontracted to the gathering system, higher crude oil prices enhancingcondensate sales and higher processing margins in western Oklahoma of $21.1million. In addition, Other Southwest revenues increased $14.2 million due to a55% increase in natural gas volumes and natural gas prices, primarily on theAppleby gathering system.  These itemswere partially offset by reductions in natural gas liquids sales volumes inMichigan from reduced throughput volumes on the natural gas wells on thesystems.

 

*Purchased Product Costs.* Purchased product costs were higher during the three months endedSeptember 30, 2005 by $47.2 million, or 91%, compared to the correspondingquarter of 2004.  The increase was primarilyas a result of an increase in purchasedvolumes and price increases in western Oklahoma and Other Southwest, primarilyon the Appleby gathering system that produced incremental costs of $20.8million and $12.8 million, respectively. The remainder of the increase was due to the Partnership’s late2004 acquisition of the East Texas System, which increased its purchasedproduct costs by $11.7 million.  EastTexas costs were impacted by the April 2005 consummation of gas purchaseagreements to process product previously subject to service contracts.  In addition, East Texas operations reflectedthree months of activity in 2005 compared to two months of activity in 2004since the date of acquisition.  A $0.19per gallon increase to purchase prices and a $0.7 million increase to costs totransport product from our Maytown and Boldman plants to our Siloamfractionator, as a result of the November 2004 pipeline failure, partiallyoffset by a 5.4% reduction to volumes, contributed to a $2.2 million increasein purchased product costs.  These itemswere partially offset by a $0.3 million decrease in costs in Michigan due to areduction in volumes available for natural gas liquids processing fromproduction shortfalls.

 

*Facility Expenses. *Facility expenses increased approximately$4.0 million, or 47%, during the three months ended September 30, 2005 relativeto the corresponding quarter of 2004 primarily due to the Partnership’s 2004acquisition of the East Texas System, which added $1.2 million.  The remainder of the increase is due to increased pipeline repair and maintenance costsin Appalachia of approximately $1.1 million, and increased fuel costs ofapproximately $1.2 million.  Theremainder of the increase is attributed to additional maintenance and rentexpense due to additional compressors on our Oklahoma and Appleby systems.

 

*Selling, General and Administrative Expenses. *Selling, general andadministrative expenses increased by $1.0 million, or 23%, during the threemonths ended September 30, 2005, compared to the corresponding quarter of 2004primarily as a result of an increase in outside legal and finance of $0.3million and audit and Sarbanes Oxley related costs of $0.2 million.  Compensation expense from the ParticipationPlan increased by $0.1 million, from $0.4 million in 2004 to $0.5 million in2005.  In addition, insurance expenseincreased by $0.2 million.

 

*Depreciation. *Depreciation expense increased $0.6 million,or 13%, during the three months ended September 30, 2005, compared to thecorresponding quarter of 2004 primarily due to the Partnership’s July 2004 EastTexas System acquisition.

 

*Amortization of Intangible Assets. *Amortization expense increased $0.7 million during the three months endedSeptember 30, 2005, compared to the corresponding quarter of 2004 primarily dueto the East Texas System acquisition in July 2004.  On July 30, 2004, the Partnershipcompleted the acquisition of American Central Eastern Texas’ Carthage gatheringsystem and gas processing assets, located in east Texas for approximately$240.7 million.  Of the total purchase price,$165.4 million was allocated to customer contracts, of which $2.1 million and$1.4 million were amortized during the three months ended September 30, 2005and 2004, respectively.

 

*Accretionof Asset Retirement and Lease Obligations. *Accretion of asset retirement and lease obligationsincreased by $0.1 million, and is the result of recording an asset retirementobligation in the third quarter of 2005 of $0.5 million for new land leases inEast Texas, Oklahoma, Appalachia and Other Southwest that require thePartnership to return the land to its original condition upon the terminationof the lease.

 

*Loss fromUnconsolidated Subsidiary*. Loss from unconsolidated subsidiary increased $1.0

 

38

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million during the three months ended September 30,2005, compared to the corresponding quarter of 2004.  The loss was primarily attributable to theMarch 31, 2005 Starfish acquisition.

 

*InterestIncome. *Interest income increased by $0.1 million duringthe three months ended September 30, 2005, compared to the correspondingquarter of 2004 primarily due to an increase in interest earned on cashequivalents.

 

*Interest Expense.*  Interest expense increased by $1.2 million,or 33%, during the three months ended September 30, 2005, compared to thecorresponding quarter of 2004.  Theincrease was principally attributable to MarkWest Energy Partners’ increasedoutstanding debt levels, a function of financing its 2004 and 2005 acquisitions,and its 2005 capital expenditures. In October2004 the Partnership issued $225.0 million in senior notes.

 

*Amortizationof Deferred Financing Costs (a component of interest expense). *Amortization of deferredfinancing costs decreased by $2.6 million, or 84%, during the three monthsended September 30, 2005, compared to the corresponding quarter of 2004.  The decrease in the amortization of deferredfinancing costs in 2005 relative to the comparable period in 2004 isattributable to the write off of deferred financings costs associated with thePartnership’s debt refinancing completed in the third quarter of 2004 as wellas a shorter amortization terms in 2004 due to the then-current nature of thePartnership’s debt.  Deferred financingcosts are being amortized over the terms of the related obligations, whichapproximates the effective interest method.

 

***Other***

 

*Income Tax Provision (Benefit). *The income tax benefitincreased by $3.0 million for the three months ended September 30, 2005,compared to the corresponding quarter of 2004, due primarily to the decrease innet income before taxes.  The Companybases the effective corporate tax rate for interim periods on the estimatedannual effective corporate tax rate.  Thebenefit for income taxes was $2.9 million and the provision for income taxes was$0.2 million for the three months ended September 30, 2005 and 2004,respectively, resulting in effective income tax rates of 33.5% and (8.4)%,respectively.

 

*Non-controllingInterest in Net Income of Consolidated Subsidiary. *Non-controlling interest innet income of consolidated subsidiary decreased by $0.5 million, for the threemonths ended September 30, 2005 compared to the corresponding quarter of 2004as a result of a decrease in earnings further impacted by an increase in theincentive distribution rights.

 

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***NineMonths Ended September 30, 2005 Compared to the Nine Months Ended September 30,2004***

 
| ** **                                                                                                | ** ** | **MarkWest Hydrocarbon Standalone** | ** ** | **MarkWest  Energy  Partners** | ** ** | **Eliminating  Entries** | ** ** | **Total** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|--------------------------------|------------|--------------------------|------------|-----------|------------|
| ** **                                                                                                | ** ** | **(in thousands)**                  | ** ** |
| **Nine Months Ended September 30, 2005:**                                                                 |       |                                |       |                           |       |                     |       |      |       |
| Revenues                                                                                                  |       | $                                   | 173,386    |                           | $          | 323,165                  |       | $         | (46,533    | ) | $ | 450,018 |   |
| Purchased product costs                                                                                   |       | 159,340                             |       | 233,521                        |       | (29,932                  | )          | 362,929   |       |
| Facility expenses                                                                                         |       | 15,723                              |       | 33,205                         |       | (16,601                  | )          | 32,327    |       |
| Selling, general and administrative expenses                                                              |       | 8,653                               |       | 16,487                         |       | —                   |       | 25,140    |       |
| Depreciation                                                                                              |       | 1,088                               |       | 13,673                         |       | —                   |       | 14,761    |       |
| Amortization of intangible assets                                                                         |       | —                              |       | 6,288                          |       | —                   |       | 6,288     |       |
| Accretion of  asset retirement and lease obligations                                                      |       | 1                                   |       | 136                            |       | —                   |       | 137       |       |
| Income (loss) from  operations                                                                            |       | (11,419                             | )          | 19,855                         |       | —                   |       | 8,436     |       |
| Loss from unconsolidated subsidiary                                                                       |       | —                              |       | (9                             | )          | —                   |       | (9        | )          |
| Interest income                                                                                           |       | 631                                 |       | 210                            |       | —                   |       | 841       |       |
| Interest expense                                                                                          |       | (91                                 | )          | (13,182                        | )          | —                   |       | (13,273   | )          |
| Amortization of  deferred financing costs (a component of interest expense)                               |       | (183                                | )          | (1,468                         | )          | —                   |       | (1,651    | )          |
| Dividend income                                                                                           |       | 289                                 |       | —                         |       | —                   |       | 289       |       |
| Other income                                                                                              |       | 244                                 |       | 56                             |       | —                   |       | 300       |       |
| Income (loss)  before non-controlling interest in net income of consolidated subsidiary and  income taxes |       | $                                   | (10,529    | )                              | $          | 5,462                    |       | $         | —     |   | $ | (5,067 | ) |
| **Nine Months Ended September 30, 2004:**                                                                 |       |                                |       |                           |       |                     |       |      |       |
| Revenues                                                                                                  |       | $                                   | 140,718    |                           | $          | 207,326                  |       | $         | (28,438    | ) | $ | 304,235 |   |
| Purchased product costs                                                                                   |       | 124,036                             |       | 148,940                        |       | (15,945                  | )          | 247,960   |       |
| Facility expenses                                                                                         |       | 18,139                              |       | 21,113                         |       | (12,493                  | )          | 20,459    |       |
| Selling, general and administrative expenses                                                              |       | 8,291                               |       | 9,346                          |       | —                   |       | 17,637    |       |
| Depreciation                                                                                              |       | 1,042                               |       | 10,653                         |       | —                   |       | 11,695    |       |
| Amortization of intangible assets                                                                         |       | —                              |       | 1,468                          |       | —                   |       | 1,468     |       |
| Accretion of  asset retirement and lease obligations                                                      |       | —                              |       | 13                             |       | —                   |       | 13        |       |
| Income (loss)  from operations                                                                            |       | (10,790                             | )          | 15,793                         |       | —                   |       | 5,003     |       |
| Loss from unconsolidated subsidiary                                                                       |       | —                              |       | (49                            | )          | —                   |       | (49       | )          |
| Interest income                                                                                           |       | 502                                 |       | 34                             |       | —                   |       | 536       |       |
| Interest expense                                                                                          |       | (33                                 | )          | (5,759                         | )          | —                   |       | (5,792    | )          |
| Amortization of  deferred financing cost (a component of interest expense)                                |       | (55                                 | )          | (3,679                         | )          | —                   |       | (3,734    | )          |
| Dividend income                                                                                           |       | 169                                 |       | —                         |       | —                   |       | 169       |       |
| Other income (expense)                                                                                    |       | 798                                 |       | (202                           | )          | —                   |       | 596       |       |
| Income (loss)  before non-controlling interest in net income of consolidated subsidiary and  income taxes |       | $                                   | (9,409     | )                              | $          | 6,138                    |       | $         | —     |   | $ | (3,271 | ) |

 

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| ** **                                                                                       | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                       | ** ** | **2005**                            | ** ** | **2004** | ** ** |
| ** **                                                                                       | ** ** | **(in thousands)**                  | ** ** |
| Loss before  non-controlling interest in net income of consolidated subsidiary and income  taxes |       | $                                   | (5,067     | ) | $ | (3,271 | ) |
| Provision (benefit) for income taxes                                                             |       | (2,900                              | )          | 589 |   |
| Non-controlling interest in net income of  consolidated subsidiary                               |       | (3,591                              | )          | (3,759 | ) |
| Net loss                                                                                         |       | $                                   | (5,758     | ) | $ | (7,619 | ) |

 

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***MarkWest Hydrocarbon Standalone***

 

*Revenues.*  Revenues increased $32.7 million, or 23%, forthe nine months ended September 30, 2005 compared to the corresponding periodof 2004 primarily due to an increase in our wholesale propane marketingbusiness revenue of $22.5 million.  Thewholesale propane marketing business began at the end of the first quarter of2004.  Revenues also increased due to anincrease in NGL product sale prices, in excess of the impact that resulted froma decline in volumes, in Appalachia of $14.3 million. In addition, gas-marketingrevenues increased $5.2 million due to an increase in price.  Increases to revenues were offset by an $8.5million unfavorable mark-to-market adjustment to replacement gas that resultedfrom a fulminant increase to natural gas prices, and a $0.8 decrease inMichigan operations that resulted primarily from a reduction to volumes.

 

*Purchased Product Costs.*  Purchased product costs increased $35.3million, or 28%, for the nine months ended September 30, 2005 compared to thecorresponding period of 2004.  Theincrease was primarily due to costs from our wholesale propane marketingbusiness, introduced in February 2004, which added $22.5 million, and anincrease in our Appalachian natural gas liquids business of $7.6 million, whichresulted from of an increase in prices that was partially offset by a decreasein volumes.  Purchased product costs alsoincreased by $5.0 million as a result of an increase in gas marketing purchasesdue to an increase in prices that was partially offset by a decrease in volumes.

 

*Facility Expenses.*  Facility expenses decreased by approximately$2.4 million, or 13%, during the nine months ended September 30, 2005 comparedto corresponding period of 2004.  Thedecrease was the result of a $1.1 million favorable fuel reimbursement at ourKenova, Cobb and Boldman facilities, a reduction to inventory losses at theAppalachia Liquids Pipeline System (ALPS) of $0.6 million, a net reduction toSiloam fractionation fees and Kenova and Boldman processing fees of $1.0million, offset by an increase to inventory losses at Siloam of $0.3 million.

 

*Selling,General and Administrative Expenses. *Selling, general andadministrative expenses increased by $0.4 million, or 4%, during the ninemonths ended September 30, 2005 compared to the corresponding period of 2004 asa result of the increase in compensation expense attributed to theParticipation Plan and the 1996Stock Incentive Plan and 1996 Non-employee Director Stock Option Plan,partially offset by an increase to allocations of selling, general andadministrative expenses to the Partnership.

 

*Depreciation*.  The increase in depreciation expense of lessthan $0.1 million, or 4%, during the nine months ended September 30, 2005compared to the corresponding period of 2004 was principally due to theincrease in software and hardware additions associated with the upgrade of ourinformation technology infrastructure; and the acceleration of depreciation ofour facilities in Michigan to more closely match our declining reserves.

 

*Interest Income. *Interest income increased by $0.1 million, or 26%, during the nine monthsended September 30, 2005 compared to the corresponding period of 2004 primarilydue to an increase in interest earned on cash equivalents.

 

*Interest Expense.*  Interest expense increased by $0.1 millionduring the nine months ended September 30, 2005 compared to the correspondingperiod of 2004 primarily due to commitment fees related to the October 2004credit facility.

 

*Amortizationof Deferred Financing Costs (a component of interest expense). *The Company amortizedapproximately $0.2 million of deferred financing costs during the nine monthsended September 30, 2005 related to debt issuance costs incurred from theOctober 2004 credit facility.  Theincrease in 2005 relative to the corresponding period of 2004 is attributableto debt refinancing completed in the last quarter of 2004.  Deferred financing costs are being amortizedover the terms of the related obligations, which approximates the effectiveinterest method.

 

*DividendIncome. *Dividendincome increased by approximately $0.1 million, or 71%, during the nine monthsended September 30, 2005 compared to the corresponding period of 2004 as aresult of the increase in investments in master limited partnerships.  We began receiving distributions on themaster limited partnerships in the second quarter of 2004.

 

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***MarkWest Energy Partners***

 

*Revenues. *Revenues for the nine months ended September30, 2005 were higher by $115.8 million, or 56%, compared to the correspondingperiod of 2004.  The increase wasprimarily due to the Partnership’s July 30, 2004 East Texas System acquisition,that added $51.3 million to the Partnership’s 2005 revenue in excess of 2004.  Revenuesreflected nine months of activity during 2005 compared to two months ofactivity during 2004.  Revenue alsoincreased in western Oklahoma during the nine months ended September 30, 2005relative to the corresponding period of 2004 due to increased well volumescontracted to the gathering system, higher crude oil prices enhancingcondensate sales and higher liquids revenue that resulted from ethane recoveryduring 2005 versus ethane rejection during 2004 that contributed to incrementalrevenue of $42.0 million. In addition, Other Southwest revenues increased $21.3million due to a 27% increase in natural gas volumes, primarily on the Applebyand Edwards gathering systems.

 

*Purchased Product Costs.* Purchased product costs were higher during the nine months ended September30, 2005 by $84.6 million, or 57%, compared to the corresponding period of 2004primarily.  The combination of an increase in purchased volumes and price contributed toincreases in western Oklahoma and Other Southwest, primarily Appleby andEdwards, of $36.7 million and $20.4 million, respectively.  In addition, the increase was due tothe Partnership’s July 30, 2004 East Texas System acquisition, which increasedpurchased product costs by $21.8 million. Purchased product costs in eastTexas reflected nine months of activity during 2005 compared to two months ofactivity during 2004.  Purchased productcosts also increased $5.6 million in Appalachia as a result of a $0.17 pergallon increase to product costs associated with the Maytown percent-of-proceedscontract.

 

*Facility Expenses. *Facility expenses increased approximately$12.1 million, or 57%, during the nine months ended September 30, 2005 relativeto the corresponding period of 2004 primarily due to the Partnership’s July 30,2004 East Texas System acquisition, which added $6.3 million.  Facility expenses reflected nine months of activity during 2005 compared to two months ofactivity during 2004.  Inaddition, Appalachia facility expensesincreased $4.8 million as a result of pipeline repair and maintenance costs of$3.8 million, and increased salary and utility expenses.  A $0.8 million increase to western Oklahomafacility expenses was the result of additional utility and maintenance expensesassociated with system expansion.

 

*Selling, General and Administrative Expenses. *Selling, general andadministrative expenses increased by $7.1 million, or 76%, during the ninemonths ended September 30, 2005 compared to the corresponding period of 2004 asa result of the increase in incentive compensation expense of $2.6 million, andaudit and Sarbanes-Oxley related costs of $1.6 million.  In addition, the allocation of compensationexpense from the Participation Plan increased by $1.6 million, outside legaland financial consulting services increased by $0.5 million, and insuranceadjustment charges increased by $0.8 million.

 

*Depreciation. *Depreciation expense increased $3.0 million,or 28%, during the nine months ended September 30, 2005 compared to thecorresponding period of 2004 primarily due to the Partnership’s July 30, 2004East Texas System acquisition, which added $2.9 million.  The remaining increase is the result ofadditions of compressors to the Butler Compressor Station and additional wellconnections to the system.

 

*Amortization of Intangible Assets. *Amortization expense increased $4.8 million during the nine months endedSeptember 30, 2005 compared to the corresponding period of 2004 primarily dueto the East Texas System acquisition in July 2004.  On July 30, 2004, the Partnershipcompleted the acquisition of American Central Eastern Texas’ Carthage gatheringsystem and gas processing assets located in east Texas for approximately $240.7million.  Of the total purchase price,$165.4 million was allocated to customer contracts, of which $6.3 million and$1.5 million were amortized during the nine months ended September 30, 2005 and2004, respectively.

 

*Accretionof Asset Retirement and Lease Obligations. *Accretion of asset retirement and lease obligationsincreased by $0.1 million, and is the result of recording an asset retirementobligation in the third quarter of 2005 of $0.5 million for new land leases inEast Texas, Oklahoma, Appalachia and Other Southwest that require thePartnership to return the land to its original condition upon the terminationof the lease.

 

*Loss fromUnconsolidated Subsidiary*. Loss from unconsolidated subsidiary decreased by less than $0.1 millionduring the nine months ended September 30, 2005 compared to the correspondingperiod of 2004.

 

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The losses were primarily attributable to the March31, 2005 Starfish acquisition.  Theequity in earnings for the second quarter of 2005 of $1.0 million were offsetby losses of approximately $1.0 million during the third quarter of 2005 thatwere the consequence of the adverse events that resulted from Hurricane Rita.

 

*InterestIncome. *Interest income increased by $0.2 million duringthe nine months ended September 30, 2005 compared to the corresponding periodof 2004 primarily due to an increase in interest earned on cash equivalents.

 

*Interest Expense.*  Interest expense increased by $7.4 million,or 129%, during the nine months ended September 30, 2005 compared to thecorresponding period of 2004.  Theincrease was principally attributable to MarkWest Energy Partners’ increasedoutstanding debt from financing its July 30, 2004 East Texas System acquisitionand associated capital expenditures to construct a new plant and its March 31,2005, Starfish acquisition. In October 2004,the Partnership issued $225.0 million in senior notes and have borrowed $85.5million under the Partnership’s credit facility during 2005.

 

*Amortizationof Deferred Financing Costs (a component of interest expense). *Amortization of deferredfinancing costs decreased by $2.2 million, or 60%, during the nine months endedSeptember 30, 2005 compared to the corresponding period of 2004.  The decrease in the amortization of deferredfinancing costs is attributable to the write off of deferred financings costsassociated with the Partnership’s debt refinancing completed in the thirdquarter of 2004 as well as a shorter amortization term in 2004 due to the thencurrent nature of the Partnership’s debt. Deferred financing costs are being amortized over the terms of therelated obligations, which approximates the effective interest method.

 

***Other***

 

*Income Tax Provision (Benefit). *The income tax benefitincreased $3.3 million for the nine months ended September 30, 2005 compared tothe corresponding period of 2004, due primarily to the decrease in net income beforetaxes.  The Company bases the effectivecorporate tax rate for interim periods on the estimated annual effectivecorporate tax rate.  The benefit forincome taxes was $2.9 million and the provision for income taxes was $0.6million for the nine months ended September 30, 2005 and 2004, respectively,resulting in effective income tax rates of 33.5% and (8.4)%, respectively.

 

*Non-controllingInterest in Net Income of Consolidated Subsidiary. *Non-controlling interest innet income of consolidated subsidiary for the nine months ended September 30,2005 decreased by $0.2 million, or 4%, compared to the corresponding period of2004 as a result of the decrease in earnings of MarkWest Energy Partners and anincrease in ownership of non-controlling interests commensurate with privateplacements and public offerings to finance acquisitions.

 

**Liquidity and Capital Resources**

 

***MarkWestHydrocarbon***

 

Our primary source of liquidityto meet operating expenses and fund capital expenditures is cash flow fromoperations, principally from the marketing of natural gas and NGLs, andquarterly distributions received from MarkWest Energy Partners.  Based on current volume, price and expense assumptions,we expect cash flow from operations and distributions from the Partnership tofund our operations and capital expenditures in 2005.  Most of our future capital expenditures arediscretionary.  During 2005, we havebudgeted $0.8 million for capital expenditures, consisting principally ofcomputer hardware and software.

 

As of September 30, 2005, we hadan aggregate of $7.4 million of unrestricted cash and marketable securities,and restricted cash of $15.0 million (the restriction was subsequently removedon November 15, 2005), exclusive of MarkWest Energy Partner’s $10.0 millioncash on hand.  Exclusive of MarkWestEnergy Partners, we had no outstanding debt through September 30, 2005.  On January 21, 2005, our Board of Directorsdeclared a quarterly cash dividend of $0.075 per share of our commonstock.  The dividend was paid on February21, 2005, to the stockholders of record as of the close of business on February9, 2005.  We disbursed $0.8 million topay this

 

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dividend. On April 28, 2005, our Board of Directors declared a quarterly cashdividend of $0.10 per share of our common stock.  The dividend was paid on May 23, 2005, to thestockholders of record as of the close of business on May 16, 2005.  We disbursed $1.1 million to pay thisdividend.  On July 22, 2005, our Board ofDirectors declared a quarterly cash dividend of $0.10 per share of our commonstock.  The dividend was paid on August22, 2005, to the stockholders of record as of the close of business on August15, 2005.  We disbursed $1.1 million topay this dividend.  On October 27, 2005,our Board of Directors announced that it declared a quarterly cash dividend of$0.125 per share of our common stock. The dividend was paid on November 22, 2005, to the stockholders of recordas of the close of business on November 15, 2005.  We disbursed approximately $1.4 million topay this dividend.

 

We own 89% of the generalpartner of MarkWest Energy Partners, excluding interest held by certainemployees and directors but deemed owned by the Company through theParticipation Plan.  The general partnerof MarkWest Energy Partners owns the 2% general partner interest and all of theincentive distribution rights.  Theincentive distribution rights entitle us to receive an increasing percentage ofcash distributed by the Partnership as certain target distribution levels arereached.  Specifically, they entitle usto receive 13% of all cash distributed in a quarter after each unit hasreceived $0.55 for that quarter; 23% of all cash distributed after each unithas received $0.625 for that quarter; and 48% of all cash distributed aftereach unit has received $0.75 for that quarter. For the nine months ended September 30, 2005, we received $5.9 millionin distributions from our subordinated units and $3.1 million from our generalpartner interest, of which $2.9 million represented payments on incentivedistribution rights.  For the year endingDecember 31, 2005, we expect to receive $7.9 million in distributions for oursubordinated and common units (that will result from converting a portion ofour subordinated units), and we expect the general partner to receive $4.9million, or an aggregate of $12.8 million.

 

Cash flows generated from ourmarketing operations are subject to volatility in energy prices, especiallyprices for NGLs and natural gas.  Ourcash flows are enhanced in periods when the prices received for NGLs are highrelative to the price of natural gas we purchase to satisfy our “keep-whole”contractual arrangements in Appalachia. Conversely, they are reduced in periods when the prices received forNGLs are low relative to the price of natural gas we purchase to satisfy suchcontractual arrangements.  Under “keep-whole”contracts, we retain and sell the NGLs produced in our processing operationsfor third-party producers, and then reimburse or “keep whole” the producers forthe energy content of the NGLs removed through the re-delivery to the producersof an equivalent amount (on a Btu basis) of dry natural gas.  Generally, the value of the NGLs extracted isgreater than the cost of replacing those Btus with dry gas, resulting inpositive operating margins under these contracts.  Periodically, natural gas becomes moreexpensive, on a Btu equivalent basis, than NGL products, and the cost ofkeeping the producer “whole” can result in operating losses.  We entered into several new and amendedagreements in September 2004 with one of the largest Appalachia producers thatallow us to significantly reduce our exposure to commodity price risk forapproximately 25% of our keep-whole gas volumes.  Under these agreements, the Company islimited on the costs it would have to pay to the producer should natural gasbecomes more expensive than the NGL product sales price, thereby mitigating therisk of incurring operating losses.  Inconnection with these agreements, we paid $3.3 million of consideration to theproducer that is being amortized as additional cost of the gas purchased overthe term of the contracts, October 1, 2004, through February 9, 2015.

 

*Debt*

 

In October 2004, theCompany entered into a $25.0 million senior credit facility with a term of oneyear.  The $25.0 million revolvingfacility has a variable interest rate based on the base rate, which is equal tothe higher of a) the Federal Funds Rate plus 1⁄2 of 1%, and b) the rate ofinterest in effect for such day as publicly announced from time to time by theAdministrative Agent as its prime rate, plus the applicable rate, which isbased on a utilization percentage.  InOctober, November, and December 2005, the Company entered into the first, secondand third amendment to the credit agreement. The first amendment extended the term of the original agreement toNovember 15, 2005.  The second amendmentreduced the lending amount from $25.0 million to $16.0 million, of which $6.0million of availability is committed to a letter of credit, leaving $10.0million available for revolving loans. The second amendment also extended the term of the revolving credit toDecember 30, 2005.  The third amendmentextended the term of the revolving credit to January 31, 2006 and reduced thelending amount from $16.0 million to $13.5 million, of which $6.0 million ofavailability is committed to a letter of credit, leaving $7.5 million availablefor revolving loans.  If the revolvingcredit is converted into a term loan, the term will be extended to December 29,2006.

 

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In connection with thecredit facility, the Company is subject to a number of limitations on itsbusiness, including restrictions on its ability to grant liens on assets;merge, consolidate or sell assets; incur indebtedness; make acquisitions;engage in other businesses; enter into operating leases; enter into certainswap contracts; engage in transactions with affiliates; make disposition; makerestricted payments, distributions and redemptions and other usual andcustomary covenants.  As of September 30,2005, the Company had no outstanding borrowings.  At December 31, 2005, the Company had noborrowing capacity.  The credit facilityalso contains covenants requiring the Company to maintain a minimum net worthof $40.0 million plus 50% of proceeds of equity issued subsequent to October25, 2004.

 

*Liquidity Requirements*

 

Wehave spent $0.3 million for capital expenditures through September 30,2005.  We have budgeted $0.2 million forthe fourth quarter of 2005, consisting principally of computer hardware andsoftware.  We believe that cash on hand,cash received from quarterly distributions (including the incentivedistribution rights) from MarkWest Energy Partners, and projected cashgenerated from our marketing operations will be sufficient to meet our workingcapital requirements and fund our required capital expenditures, if any, forthe next twelve months.  Cash generatedfrom our marketing operations will depend on our operating performance, whichwill be affected by prevailing commodity prices and other factors, some ofwhich are beyond our control.

 

***MarkWest Energy Partners***

 

*Overview*

 

The Partnership’s primary sourceof liquidity to meet operating expenses and fund capital expenditures (otherthan for larger acquisitions) is cash flow generated by operations.  The public and institutional markets havebeen the Partnership’s principal source of capital to finance a significantamount of its growth (including acquisitions). During the first quarter of 2005 the Partnership borrowed $40.0 millionfrom its credit facility to finance the acquisition of a 50% non-operatingmembership interest in Starfish Pipeline Co. LLC.  Starfish owns the FERC-regulated Stingraynatural gas pipeline, and the unregulated Triton natural gas gathering systemand West Cameron dehydration facility, all located in the Gulf of Mexico andsouthwestern Louisiana.  During the ninemonths ended September 30, 2005, we spent $50.2 million on capitalexpenditures, primarily for the construction of a new processing plant andgathering systems in East Texas to handle future contractual commitments.  On November 1, 2005, we acquired a 100%interest in the Javelina gas processing and fractionation facility in CorpusChristi, Texas, for approximately $355.0 million.  We borrowed approximately $500.0 million:$355.0 million to finance Javelina, $45.0 million for working capital adjustmentsand $100.0 million to retire long-term debt from the predecessor revolvingcredit facility.  On November 1, 2005,the available borrowing capacity under the Partnership Credit Facility was $43.0million.

 

As of September 30, 2005, thePartnership spent $50.2 million on capital expenditures exclusive of anyacquisitions.  As of September 30, 2005,the Partnership has budgeted $23.2 million for capital expenditures for theremainder of 2005, exclusive of any acquisitions, consisting of $22.6 millionfor expansion capital and $0.6 million for sustaining capital.  Expansion capital includes expenditures madeto expand or increase the efficiency of the existing operating capacity of thePartnership’s assets, or facilitate an increase in volumes within operations,whether through construction or acquisition. Sustaining capital includes expenditures to replace partially or fullydepreciated assets in order to extend their useful lives.

 

*Equity*

 

On November 9, 2005, thePartnership completed a private placement of 1,644,065 common units.  The units were issued at a purchase price of$44.21 each, raising approximately $74.0 million, including the general partner’scontribution.  On December 27,2005, the Partnership completed a private placement of 574,714 commonunits.  The units were issued at apurchase price of $43.50 each, raising approximately $25.0 million, includingthe general partner’s contribution.  The permanent capital was issued to bring thePartnership’s capital structure in line with the Partnership’s stated goal ofless than 50% debt.

 

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The inability of the Partnershipto file its Annual Report on Form 10-K for the year ended December 31, 2004,and its quarterly report on Form 10-Q for the quarterly period ending March 31,2005, may influence the timing of the Partnership’s efforts to raise equity inthe future.  The Partnership no longerhas the ability to incorporate by reference information from its filings into anew registration statement for one year following the date the Partnershipbecame current with its filings, or October 11, 2005, if the Partnership seeksto raise capital through a public offering of registered debt or equitysecurities.  The Partnership intends toraise additional capital through public debt or equity offerings.  As a result, the Partnership will be requiredto file a Form S-1, which is a long form type of registration statement.  The requirement to file a Form S-1 may affectthe Partnership’s ability to access the capital markets on a timely basis andmay increase the costs of doing so.

 

The Partnership has the abilityto issue an unlimited number of units to fund immediately accretive acquisitions.  Under the provisions of the PartnershipAgreement, an immediately accretive acquisition is one that in the generalpartner’s good faith determination would have, if acquired by the Partnershipas of the date that is one year prior to the first day of the quarter in whichsuch acquisition is consummated, resulted in an increase to the amount ofoperating surplus generated by the Partnership on a per-unit basis (for alloutstanding units) with respect to each of the four most recently completedquarters (on a pro forma basis) as compared to the actual amount of operatingsurplus generated by the Partnership on a per-unit basis (for all outstandingunits), excluding operating surplus generated by the Partnership on a per-unitbasis (for all outstanding units), excluding operating surplus attributable tothe acquisition with respect to each of such four most recently completedquarters.  For acquisitions that are notimmediately accretive, the Partnership has the ability to issue up to 1,207,500common units without unitholder approval.

 

*Debt*

 

The Partnership’s $200.0 million credit facility wasestablished to fund capital expenditures and acquisitions, working capitalrequirements (including letters of credit) and distributions to unitholders.Advances to fund distributions to unitholders may not exceed $0.50 peroutstanding unit in any 12-consecutive-month period. To date there have been nosuch advances.  At September 30, 2005,the Partnership had borrowed $85.5 million, $40.0 million to finance itsinvestment in Starfish in March 2005 and $45.5 million to fund capitalexpenditures.  In November 2005 weamended and restated the Partnership’s credit facility, decreasing the maximumlending limit from $200.0 million to $100.0 million and decreasing the term ofthe facility to one year, due October 31, 2006. We also entered into a $400.0 million term loan due October 31, 2006.  On December 29, 2005, the Partnership enteredinto the fifth amended and restated credit agreement, which provides for amaximum lending limit of  $615.0 millionfor a five-year term.  The creditfacility includes a revolving facility of $250.0 million and a $365.0 millionterm loan.  The term loan portion of thefacility is paid in quarterly installments of 1% a year on the last businessday of March, June, September and December with the remaining balance payableon December 29, 2010.  The revolverportion of the facility matures on December 29, 2010.

 

Conditions of thePartnership’s credit facility mean we are subject to a number of restrictionson our business.  These includerestrictions on our ability to grant liens on assets; make or own certaininvestments; enter into any swap contracts other than in the ordinary course ofbusiness; merge, consolidate or sell assets; incur indebtedness (other thansubordinated indebtedness); make acquisitions; engage in other business; enterinto capital or operating leases; engage in transactions with affiliates; makedistributions on equity interests; declare or make, directly or indirectly anyrestricted payment and other usual and customary covenants.

 

The Partnership and itssubsidiary, MarkWest Energy Finance Corporation, also have $225.0 million in seniornotes at a fixed rate of 6.875% outstanding at September 30, 2005.  The notes mature on November 2, 2014.  Subject to compliance with certain covenants,we may issue additional notes from time to time under the indenture pursuant toRule 144A and Regulation S under the Securities Act of 1933.  The proceeds from these notes were used topay down the outstanding debt under the Partnership’s credit facility inOctober 2004.

 

The indenture governing thesenior notes limits the activity of the Partnership and its restrictedsubsidiaries.  The provisions of suchindenture places limits on the ability of the Partnership and its restricted subsidiariesto incur additional indebtedness; declare or pay dividends or distributions orredeem, repurchase or retire equity interests or subordinated indebtedness;make investment; incur liens; create any consensual limitation on the abilityof the Partnership’s restricted subsidiaries to pay dividends, make loans ortransfer property to the Partnership; engage in transactions with thePartnership’s affiliates; sell assets, including equity interest of thePartnership’s subsidiaries; make any payment on or with respect to, orpurchase, redeem, defease or otherwise acquire or retire for value any subordinatedobligation or guarantor subordination obligation (except principal and interestat maturity); and

 

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consolidate, merge or transfer assets.

 

The Partnership has agreedto file an exchange offer registration statement; or, under certaincircumstances, a shelf registration statement, pursuant to a registrationrights agreement relating to the 2004 senior notes.  The Partnership failed to complete theexchange offer in the time provided for in the subscription agreements (April26, 2005) and, as a consequence, is incurring an interest rate penalty of 0.5%,increasing 0.25% every 90 days thereafter up to 1%, until such time as theexchange offer is completed.  ThePartnership is currently being charged an interest rate penalty of 1%.

 

*LiquidityRequirements*

 

The Partnership has budgeted$23.2 million for capital expenditures for the fourth quarter of 2005,exclusive of any acquisitions, consisting of $22.6 million for expansioncapital and $0.6 million for sustaining capital.  Expansion capital includes expenditures madeto expand or increase the efficiency of the exiting operating capacity of thePartnership’s assets, or facilitate an increase in volumes within operations,whether through construction or acquisition. Sustaining capital includes expenditures to replace partially or fullydepreciated assets in order to extend their useful lives.

 

We believe that the Partnership’savailable cash provided by operating activities and funds available under thePartnership’s credit facility will be sufficient to fund the Partnership’soperating, interest and general and administrative expenses; the Partnership’scapital expenditures budget; short-term contractual obligations; and distributionpayments at current levels for the foreseeable future.  However, the Partnership’s ability to financeadditional acquisitions will likely require the issuance of additional commonunits, the expansion of the credit facility, additional debt financing or acombination thereof.  In the event thatthe Partnership desires or needs to raise additional capital, we cannotguarantee that additional funds will be available at times or on termsfavorable to the Partnership, if at all.

 

The Partnership’s ability to paydistributions to its unitholders and to fund planned capital expenditures andmake acquisitions will depend upon its future operating performance, which willbe affected by prevailing economic conditions in its industry and financial,business and other factors, some of which are beyond our control.

 

***Cash Flows***

 
| ** **                                | ** ** | **Nine Months Ended September 30,** | ** ** |
|-------------------------------------------|------------|-------------------------------------|------------|
| ** **                                | ** ** | **2005**                            | ** ** | **2004** | ** ** |
| ** **                                | ** ** | **(in thousands)**                  | ** ** |
|                                      |       |                                |       |   |   |
| Net cash provided by operating activities |       | $                                   | 23,282     |   | $ | 15,521 |   |
| Net cash used in investing activities     |       | $                                   | (91,997    | ) | $ | (270,930 | ) |
| Net cash provided by financing activities |       | $                                   | 58,029     |   | $ | 243,912 |   |

 

Net cash provided byoperating activities was higher during the nine months ended September 30,2005, than during the corresponding period of 2004, primarily due to increasedactivities as a result of the Partnership’s East Texas System acquisition.  The increase is also attributable to higherprocessing margins and volumes from the Partnership’s Oklahoma segment.

 

Net cash used in investingactivities during the nine months ended September 30, 2005, consisted primarilyof the $41.7 million Starfish acquisition, capital expenditures of $50.4million for existing facilities and $8.7 million for investments in marketablesecurities, net of $8.5 million from sales of marketable securities.  Net cash used in investing activities duringthe nine months ended September 30, 2004 was primarily due to the $240.1million East Texas System acquisition and the $2.3 million Hobbs acquisition,capital expenditures of $12.7 million for existing facilities, $3.3 million fora contract to reduce exposure to commodity price risk and $11.9 million forinvestment in marketable securities.

 

Net cash provided byfinancing activities during the nine months ended September 30, 2005, consisted

 

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primarily of proceeds from long-term debt in excess of repayments of$85.5 million, payments of debt issuance costs of $5.1 million, distributionsby Markwest Energy Partners of $19.4 million to unitholders other than MarkWestHydrocarbon and the general partner, and cash dividends paid to shareholders of$3.0 million.  Net cash used in financingactivities during the nine months ended September 30, 2004, consisted primarilyof proceeds from long-term debt in excess of repayments of $71.3 million;payments of debt issuance costs of $7.2 million; proceeds from MarkWest EnergyPartners’ secondary public offerings of $140.0 million and private placementsof $44.1 million, distributions by Markwest Energy Partners of $9.4 million tounitholders other than MarkWest Hydrocarbon and the general partner; proceedsfrom stock option exercises of $1.4 million and cash dividends paid toshareholders of $5.3 million.

 

**TotalContractual Cash Obligations**

 

A summary of our total contractual cash obligations as ofSeptember 30, 2005, is as follows, in thousands:

 
| ** **                         | ** ** | **Payment Due by Period** | ** ** |
|------------------------------------|------------|---------------------------|------------|
| **Type of obligation**             | ** ** | **Total  obligation**     | ** ** | **Due in  2005** | ** ** | **Due in  2006-2007** | ** ** | **Due in  2008-2009** | ** ** | **Thereafter** | ** ** |
|                               |       |                      |       |   |   |   |   |   |   |   |   |
| Long-term debt (1)                 |       | $                         | 472,327    |   | $ | 5,180 |   | $ | 41,437 |   | $ | 125,944 |   | $ | 299,766 |   |
| Operating leases                   |       | 13,926                    |       | 1,588 |   | 8,169 |   | 3,433 |   | 736 |   |
| Purchase obligations               |       | 663                       |       | 663 |   | — |   | — |   | — |   |
| Total contractual cash obligations |       | $                         | 486,916    |   | $ | 7,431 |   | $ | 49,606 |   | $ | 129,377 |   | $ | 300,502 |   |

 

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| (1) | Includes interest on  the Partnership’s 6.875% senior notes through 2014 of $140.5 million and  interest on the Partnership’s 6.14% credit facility through 2009 of $21.3  million. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

**MattersImpacting Future Results**

 

The Company and several of its affiliates were servedearlier this year with two lawsuits presently under the jurisdiction of theU.S. District Court for the Eastern District of Kentucky, Pikeville Division.In early November 2005, we were served with an additional lawsuit filed inFloyd County Circuit Court, Kentucky, adding five new claimants, butessentially alleging the same facts and claims as the earlier two suits.  These suits are for third-party claims ofproperty and personal injury damages sustained as a consequence of a NGLpipeline leak and an ensuing explosion and fire that occurred on November 8,2004 from a natural gas pipeline, owned by an unrelated business entity, andleased and operated by the Partnership’s subsidiary, MarkWest Energy Appalachia,LLC.  The pipeline transports NGLs fromthe Maytown gas processing plant to the Partnership’s Siloam fractionator. Anignition and fire from the leaked vapors resulted in property damage to fivehomes and injuries to some of the residents. The cause of the pipeline split,leak, and resulting explosion and fire is being investigated by the pipelineowner, the U.S. Department of Transportation, Office of Pipeline Safety (“OPS”),and the Partnership.

 

The Company and the Partnership have timely notified theirgeneral liability insurance carriers of the incident and of the filed Kentuckyactions and is coordinating the defense of these third-party lawsuits with theinsurers.  At this time, the Company andthe Partnership believe that they have adequate general liability insurancecoverage for third-party property damage and personal injury liabilityresulting from the incident.  To date,the Company and the Partnership have settled with several of the claimants forthird-party property damage claims (damage to residences and personal property)related to this incident, in addition to reaching settlement for some of thepersonal injury claims related to the pipeline explosion and fire.  These settlements have been paid for orreimbursed under the Partnership’s general liability insurance.  As a result, the Company has not provided fora loss contingency.

 

Pursuant to OPS regulation mandates and to aCorrective Action Order issued by the OPS immediately after the incident,pipeline and valve integrity evaluation, testing and repair efforts wererequired and conducted on the affected pipeline segment before service could beresumed.  Partial return to service ofthe affected pipeline began in October 2005. The Company and the Partnership have filed an independent action againsttheir All-Risk Property and Business Interruption insurance carriers as aresult of their refusal to honor their insurance coverage obligation forproviding the Company and the Partnership insurance payments for certainexpenses.  These expenses related to

 

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the Partnership’sinternal expenses and costs incurred for damage to, and loss of use of, thepipeline, equipment, products, the extra transportation costs incurred fortransporting the liquids while the pipeline was out of service, the reducedvolumes of liquids that could be processed, and the costs of complying with theOPS Corrective Action Order (hydrostatic testing, repair/replacement and otherpipeline integrity assurance measures). These expenses and costs have been expensed as incurred and anypotential recovery from the All-Risks Property and Business Interruptioninsurance carriers will be treated as “other income” if they are received.  The Partnership has not provided for a receivablerelated to these claims because of the uncertainty as to whether and how muchthe Company and the Partnership will ultimately recover under the All-RisksProperty and Business Interruption insurance policies.  In addition to the property and businesslosses and interruption costs, through September 30, 2005, the Partnership hasincurred pipeline testing, refurbishment and replacements costs ofapproximately $5.1 million, of which $1.3 million has been capitalized. ThePartnership’s current estimate is that the full cost of pipeline testing,repair and improvements will be approximately $7.0 million, of whichapproximately $1.7 million will be captialized. The Company and the Partnership have also asserted that the costsassociated with such testing, replacement and repair are subject to an equalsharing arrangement with the owner of the pipeline, pursuant to the terms ofthe pipeline lease agreement.

 

The Company has also been involved in a lawsuitcaptioned *Ross Bros. Construction v.MarkWest Hydrocarbon, Inc*., (U.S. District Court EasternDistrict of Kentucky, Ashland Division, Civ. Action No. 01-CV-205).  This lawsuit involved the construction of theSiloam Kentucky plant and a dispute as to the monetary value of additional workbeyond the contract’s lump sum price performed by the contractor.  This lawsuit involved a claim ofapproximately $0.7 million in extra costs. The Company was recently granted Summary Judgment on its defenseasserting accord and satisfaction.  InAugust 2005, Plaintiffs filed 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 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.

 

The Company has also been involved in an arbitrationproceeding captioned *Kevin Stowe andScott Daves v. MarkWest Hydrocarbon, Inc*., American ArbitrationAssociation arbitration, Case No. 77 168 Y 0052 05 BEAH, Denver, Colorado,2005.  Claimants filed an arbitrationproceeding against the Company seeking further payments out of a dispute andsettlement over interests in certain wells in Colorado.  The Company had transferred, via a purchaseand sale agreement, any liability for any payments out of the settlement it hadreached with claimants to a third party in the sale of certain of the Company’soil and gas property interests.  TheCompany has been in communication with the third-party purchaser and thethird-party purchaser has admitted it has those liabilities under the purchaseand sale agreement, and the Company believes the earlier settlement with theclaimants precludes any of their claims. The Company does not believe there are material liabilities associatedwith this claim.  As a result, theCompany has not provided for a loss contingency.

 

In September 2005, a lawsuit captioned C.F. QualiaOperating, Inc. v. MarkWest Pinnacle, L.P., (District Court of Midland, Texas,385th Judicial District, Case No. CV-45188), wasserved on the Partnership’s subsidiary, MarkWest Pinnacle, L.P., allegingbreach of contract, fraud and breach of implied duty of good faith with respectto a dispute on volumes of gas purchased by the Partnership under a gaspurchase agreement.  Under the gaspurchase agreement, MarkWest Energy Partners paid the Plaintiff based onvolumes of gas measured at the wellhead (delivery point).  Plaintiff claims that it is entitled to aprorated portion of any system gain, i.e., that it is to be paid for more gasthan it actually sold and delivered to the Partnership.  MarkWest Energy Partners has filed an Answerto the Complaint denying Plaintiff’s allegations and has asserted acounter-claim for declaratory judgment on the contract terms as being clear andunambiguous as to payment being limited to those volumes measured at thewellhead, that Plaintiff’s claims are without merit, and that the Partnershipalso may have overpaid Plaintiff based on, among other things, the wet versusdry Btu measurements.  Discovery has notyet begun, and at this time, the Partnership is not able to predict the outcomeof this matter.  As a result, thePartnership has not provided for a loss contingency.

 

In response to a shipperinquiry to the Federal Energy Regulatory Commission (“FERC”) regarding thePartnership’s Michigan Crude Pipeline, and following unsuccessfulFERC-requested rate structure discussions with the shippers, FERC recentlyrequested that we file a tariff.  ThePartnership filed a tariff with FERC establishing a cost of service ratestructure to be effective starting January 1, 2006.  Two shippers and a producer filed a joint protestto the FERC filing with the Commission, and the Partnership filed a response tothis joint protest vigorously

 

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defending itsfiling and opposing the protest.  TheCommission issued an order on December 29, 2005, rejecting the protestor’srequest for interim rates and accepting the Partnership’s filing, and the newrates and rate structure become effective January 1, 2006.  The Commission established hearing proceduresfor the tariff filing, but held them in abeyance pending the outcome of FERCsponsored settlement discussions, which the parties have been referred to underthe FERC procedures.  However, thePartnership cannot predict whether the FERC tariff protest or any settlementwill adversely affect its Michigan Crude Pipeline results of operations.

 

The Partnership has a 50% non-operating ownershipinterest in Starfish Pipeline Company (“Starfish”). In connection with theimpact of Hurricane Rita on the Starfish operations, based on our continuingdiscussions with the operator and other 50% owner of Starfish, EnbridgeOffshore (Gas Transmission) L.L.C. (“Enbridge), the Partnership has beeninformed that initial onsite and aerial inspections indicated no materialdamage to the offshore platform facilities and that pipe integrity was notcompromised.  Sonar inspection ofunderwater pipe to assess sediment support and cover is pending.  Some structural damage occurred at theonshore Starfish dehydration and compressor facilities, although it appears tobe limited.  However, due to damage fromthe hurricane, the electrical systems, control equipment and office buildingsat the onshore facilities do require significant repair, which will continuethrough the first quart of 2006. Starfish operations have been substantially curtailed since shortlybefore the hurricane hit the Gulf Coast in September 2005, and until suchrepairs are completed Starfish is not able to return to normal operations andthis will have a continuing impact operating income.  Based on this preliminary information andwithout further update on the situation from Enbridge, we are unable to furtherestimate the ultimate impact of Hurricane Rita to 2005 net income, but weexpect that the effect will be material. Our evaluation is subject to a number of factors including ongoingassessments, disclosures by operators of interconnecting production andprocessing facilities, and discussions with insurance carriers for insurancerecovery for damages and business interruption.

 

Under the terms of certain gathering contracts in thePartnership’s East Texas systems, the Partnership is required to buy gas basedon a specific index price. The Partnership’s typical process has been to sellits best estimate of the production at the same index price near the end of theprior month.  Due to unexpectedvolatility and a corresponding lack of liquidity in the gas trading market atthe end of October 2005, the Partnership was unable to sell all of itsrequirements at the same index price.  Asa result, the Partnership was not able to sell approximately 16,000 MMBtu/dayof gas from its Appleby and East Texas assets for November 2005.  During the month of November, the Partnershipsold the gas at a different index price, which was lower than the index purchaseprice for the month.  The Partnershipcannot currently predict the exact financial impact, but based on its currentestimate of volume and price, the Partnership expects a negative impact tooperating income from operations of approximately $2.5 million from the Applebyand East Texas operations.  ThePartnership has implemented additional controls and procedures to mitigate asimilar exposure going forward.  ThePartnership has sold 90% of its forecasted volumes through March 2006 at indexprice.  The Partnership has alsoestablished firm guidelines to sell the remainder of forecast volumes earlierin the preceding month to reduce the risk of encountering unexpected marketconditions that preclude these types of index sales.

 

Under the terms of the keep-whole agreements in thePartnership’s western Oklahoma System, the Partnership purchases gas to replacethe shrink and fuel requirements under those arrangements.  The Partnership then sells the natural gasliquids processed at the Foss Lake plant. The continued strong pricing environment for natural gas liquids,coupled with the decline in mid-continent natural gas prices in November, hasresulted in higher- than-expected margins in the Partnership’s western OklahomaSystem of approximately $1.0 million.

 

**RecentAccounting Pronouncements**

 

In December 2004 the FASB issued SFAS No. 123 (revised2004), *Share-Based Payment* (“SFASNo. 123(R)”).  This statement addressesthe accounting for share-based payment transactions in which an enterprisereceives employee services in exchange for (a) equity instruments of theenterprise, or (b) liabilities that are based on the fair value of the enterprise’sequity instruments or that may be settled by the issuance of such equityinstruments.  SFAS No. 123(R) requires anentity to recognize the grant-date fair-value of stock options and otherequity-based compensation issued to employees in the income statement.  The revised Statement generally requires thatan entity account for those transactions using the fair-value-based method, andeliminates the intrinsic value method of accounting in APB Opinion No. 25, *Accounting for Stock Issues to Employees*,which was permitted under SFAS

 

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No. 123 as originally issued. The revised Statement required entities to disclose information aboutthe nature of the share-based payment transactions and the effects of thosetransactions on the financial statements. SFAS No. 123(R) is effective for public companies for the first fiscalyear beginning after December 15, 2005. All public companies must use either the modified prospective or themodified retrospective transition method. We have not yet evaluated the impact of the adoption of thispronouncement, which must be adopted in the first quarter of calendar year2006.  On March 29, 2005, the SEC staffissued Staff Accounting Bulletin (“SAB”) No. 107, *Share-Based Payment* to express the views of the staff regardingthe interaction between SFAS No. 123(R) and certain SEC rules and regulationsand to provide the staff’s views regarding the valuation of share-based paymentarrangements for public companies.  TheCompany will take into consideration the additional guidance provided by SAB107 in connection with the implementation of SFAS No. 123(R).  We have not yet evaluated the impact of theadoption of this pronouncement, which must be adopted in the first quarter ofcalendar year 2006.

 

In March 2005 the FASB issued FASB Interpretation(FIN) No. 47, *Accounting for ConditionalAsset Retirement Obligations*, which clarifies the accounting forconditional asset retirement obligations as used in SFAS No. 142, *Accounting for Asset Retirement Obligations*.  A conditional asset retirement obligation isan unconditional legal obligation to perform an asset retirement activity inwhich the timing and (or) method of settlement are conditional on a futureevent that may or may not be within the control of the entity.  An entity is required to recognize aliability for the fair value of a conditional asset retirement obligation underSFAS No. 143 if the fair value of the liability can be reasonablyestimated.  FIN 47 permits, but does notrequire, restatement of interim financial information.  The provisions of FIN 47 are effective forreporting periods ending after December 15, 2005.  The Company has not yet assessed the impactof adopting FIN 47 on its consolidated financial statements.

 

In May 2005 the FASB issued SFAS No. 154, *Accounting Changes and Error Corrections—a replacementof APB Opinion No. 20 and FASB Statement No. 3*. SFASNo. 154 replaces 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 will adopt the provisions of SFASNo. 154 beginning in calendar year 2006. Management**believes that the adoption of theprovisions of SFAS No. 154 will not have a material impact on the**Company’s consolidated financialstatements.

 

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**Forward-Looking Information**

 

Statementsincluded in this Management’s Discussion and Analysis that are not historicalfacts are 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 usewords such as “may,” “believe,” “estimate,” “expect,” “plan,” “intend,” “project,”“anticipate,” and similar expressions to identify forward-looking statements.

 

Theseforward-looking statements are made based upon management’s current plans,expectations, estimates, assumptions and beliefs concerning future eventsaffecting us and therefore involve a number of risks and uncertainties. Wecaution that forward-looking statements are not guarantees and that actualresults could differ materially from those expressed or implied in theforward-looking statements.

 

Importantfactors that could cause our actual results of operations or our actualfinancial condition to differ include, but are not necessarily limited to:

 

•      Our expectations regarding MarkWest Energy Partners, L.P.

•      Our ability to grow MarkWest Energy Partners, L.P. andsuccessfully integrate its acquisitions.

•      MarkWest Energy Partners, L.P.’s ability to obtain naturalgas supply for its gathering and processing services.

•      The Partnership’s substantial debt and other financialobligations that could impact our financial condition.

•      The availability of NGLs for the Partnership’stransportation, fractionation and storage services.

•      Our ability to amend certain producer contracts.

•      Our expectations regarding natural gas and NGL productprices.

•      Our efforts to increase fee-based contract volumes.

•      Our ability to manage our commodity price risk.

•      Our ability to maximize the value of our NGL output.

•      The adequacy of our general public liability, property, andbusiness interruption insurance.

•      Our ability to comply with environmental and governmentalregulations.

•      Our risk of being delisted by the American Stock Exchange.

 

Many of such factors are beyondour ability to control or predict. Investors are cautioned not to put undue reliance on forward-lookingstatements.

 

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#### **Item 3. Quantitative and Qualitative Disclosures about Market Risk**

 

Market risk includes the risk of loss arising fromadverse changes in market rates and prices. We face market risk from commodity price changes and to a lesser extent,interest rate changes.

 

***Commodity Price Risk***

 

Through our consolidated subsidiary, MarkWest EnergyPartners, we are engaged in the gathering, processing and transmission ofnatural gas, the transportation, fractionation and storage of NGLs and thegathering and transportation of crude oil. We also market natural gas and NGL products.  Our products are commodities that are subjectto price risk resulting from material changes in response to fluctuations insupply and demand, as well as general economic and other market conditions,such as weather patterns, over which we have no control.

 

Our primary risk management objective is to managevolatility in our cash flows.  Acommittee, which includes members of senior management of our general partner,oversees all of our hedging activity.

 

We may utilize a combination of fixed-price forwardcontracts, fixed-for-floating price swaps and options on the over-the-counter (“OTC”)market.  The Partnership may also enterinto futures contracts traded on the New York Mercantile Exchange (“NYMEX”).  Swaps and futures contracts allow us toprotect our margins because corresponding losses or gains on the financialinstruments are generally offset by gains or losses in our physical positions.

 

We enter into OTC swaps with financial institutionsand other energy company counterparties. We conduct a standard credit review on counterparties and haveagreements containing collateral requirements where deemed necessary.  We use standardized swap agreements thatallow for offset of positive and negative exposures.  We are subject to margin deposit requirementsunder OTC agreements (with non-bank counterparties) and NYMEX positions.

 

Theuse of financial instruments may expose us to the risk of financial loss incertain circumstances, including instances when (i) NGLs do not trade athistorical levels relative to crude oil, (ii) sales volumes are less thanexpected 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 that we engage in hedging activities,we may be prevented from realizing the benefits of favorable price changes inthe physical market.  However, we aresimilarly insulated against unfavorable changes in such prices.

 

*Commodity Risk Management Position*

 

As ofSeptember 30, 2005, we have entered into derivative instruments designedto manage the price risk of forecasted NGL and natural gas sales in 2005 asfollows:

 

**MarkWestEnergy Partners, L.P.**
| Natural gas swaps:                |   |   |   |
|-----------------------------------|--------|--------|--------|
| Natural gas MMBtu                 |   | 46,000 |   |
| Natural gas sales price per MMBtu |   | $      | 4.26   |   |
|                                   |        |        |        |  |

 

As part of an ongoingcomprehensive hedge plan designed to manage risk and stabilize future cashflows, during October 2005, the Partnership entered into the followingadditional hedges that settle monthly through December 31, 2006:

 

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| **Costless Collars:**            | ** ** | **Period**        | ** ** | **Floor** | ** ** | **Cap** | ** ** |
|----------------------------------|------------|-------------------|------------|-----------|------------|---------|------------|
| Crude Oil — 500 Bbl/d       |       | 2006              |       | $         | 57.00      |    | $          | 67.00 |   |
| Crude Oil — 250 Bbl/d       |       | 2006              |       | $         | 57.00      |    | $          | 67.00 |   |
| Crude Oil — 205 Bbl/d       |       | 2006              |       | $         | 57.00      |    | $          | 65.10 |   |
|                             |       |              |       |      |       |    |       |
| Propane — 10,000 Gal/d      |       | 2006              |       | $         | 0.97       |    | $          | 1.15 |   |
| Propane — 20,000 Gal/d      |       | 2006              |       | $         | 0.90       |    | $          | 0.99 |   |
| Propane — 12,750 Gal/d      |       | Jan - June 2006   |       | $         | 0.90       |    | $          | 1.01 |   |
|                             |       |              |       |      |       |    |       |
| Ethane — 22,950 Gal/d       |       | 2006              |       | $         | 0.65       |    | $          | 0.80 |   |
|                             |       |              |       |      |       |    |       |
| Natural Gas — 1,575 Mmbtu/d |       | Jan - Mar 2006    |       | $         | 9.00       |    | $          | 11.40 |   |
| Natural Gas — 1,575 Mmbtu/d |       | April - Oct 2006  |       | $         | 8.50       |    | $          | 10.05 |   |
| Natural Gas — 1,575 Mmbtu/d |       | Nov - Mar 2007    |       | $         | 9.00       |    | $          | 12.50 |   |
| Natural Gas — 645 Mmbtu/d   |       | Jan - Mar 2006    |       | $         | 8.86       |    | $          | 15.21 |   |
| Natural Gas — 645 Mmbtu/d   |       | April - June 2006 |       | $         | 6.71       |    | $          | 12.46 |   |

 
| **Swaps**                  |   |   |   | **Fixed Price** |   |   |   |
|----------------------------|--------|--------|--------|-----------------|--------|--------|--------|
| Crude Oil — 250 Bbl/d |   | 2006   |   | $               | 62.00  |   |   |   |
| Crude Oil — 185 Bbl/d |   | 2006   |   | $               | 61.00  |   |   |   |
| Crude Oil — 250 Bbl/d |   | 2007   |   | $               | 65.30  |   |   |   |

 

While we expect these hedges to provide economicstability against the impact of changing commodity prices on our physicalpositions, for accounting purposes we will not designate these derivatives ascash flow hedges and will not apply hedge accounting.  We will expand our disclosure around theresulting mark-to-market impacts.

 

##### ***InterestRate Risk***

 

MarkWestEnergy Partners is exposed to changes in variable interest rates payable on$85.5 million of borrowings under its credit facility as of September 30, 2005,primarily as a result of its floating interest rates under this facility.  For the nine months ended September 30, 2005,the weighted average interest rate on the credit facility was 6.14%.  The carrying value of the credit facilityapproximates fair value because the facility bears interest at current marketrates.  As of September 30, 2005,floating-rate debt comprised 28% of total outstanding debt.  The Partnership may make use of interest rateswap agreements in the future to adjust the ratio of fixed and floating ratesin the debt portfolio.  The Partnershipalso has fixed-rate senior notes payable of $225.0 million.  At September 30, 2005, the fair value of thesenior notes payable was approximately $222.8 million based on quoted marketprices.

 

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

 

***Disclosure Controls and Procedures***

 

Inconnection with the preparation of this quarterly report on Form 10-Q, oursenior management, with participation of our Chief Executive Officer, ChiefFinancial Officer and Chief Accounting Officer, evaluated the effectiveness ofthe design and operation of our disclosure controls and procedures as ofSeptember 30, 2005, pursuant to Rule 13a-15 under the Securities Exchange Actof 1934.  Based upon that evaluation, ourChief Executive Officer, Chief Financial Officer and Chief Accounting Officerconcluded that as of September 30, 2005, as a result of the material weaknessesin our internal control over financial reporting discussed below, ourdisclosure controls and procedures were ineffective to provide reasonableassurance that information required to be disclosed by us in reports that wefile or submit under the Securities Exchange Act of 1934 (the “Act”), isrecorded, processed, summarized and reported, within the time periods specifiedin the SEC’s rules and forms; and to ensure that information required to bedisclosed by us in the reports that we file under the Act is accumulated andcommunicated to management, including our certifying officers, as appropriateto allow timely decisions regarding required disclosures.

 

Through thedate of the filing of this Form 10-Q, we have adopted remedial measures toaddress the deficiencies in our internal controls that existed on September 30,2005.  In addition, we have appliedcompensating procedures and processes as necessary to ensure the reliability ofour financial reporting.  Such additionalprocedures include detailed management review of account reconciliations forall accounts in all business units, multiple-level management review ofaccounting treatment for significant non-routine transactions, and additionalreview at the Southwest Business Unit by Corporate personnel.  Accordingly, management believes, based onits knowledge, that (i) this report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstance under which they were made, not misleadingwith respect to the period covered by this report, and (ii) the financialstatements, and other financial information included in this report, fairlypresent in all material respects our financial condition, results of operationsand cash flows as of, and for, the periods presented in this report.

 

***Changes in Internal Control over FinancialReporting***

 

During the period covered by thisquarterly report on Form 10-Q, there were no changes in our internal controlover financial reporting that have materially affected, or are reasonablylikely to materially affect, the Company’s internal control over financialreporting.

 

***Material Weaknesses in Internal ControlOver Financial Reporting***

 

As of December 31, 2004, seniormanagement concluded that we did not maintain effective internal control overfinancial reporting due to a number of material weaknesses.  All of the material weaknesses discussedbelow were originally identified in management’s assessment of internal controlthat was conducted as of December 31, 2004.

 

Based on our evaluation, seniormanagement has concluded that, as of September 30, 2005, we did not maintaineffective internal control over financial reporting due to the followingmaterial weaknesses:

 

*Ineffective Control Environment* – Our control environment did not sufficientlypromote effective internal control over financial reporting throughout ourmanagement structure, and this material weakness was a contributing factor inthe development of other material weaknesses described below.  Principal contributing factors included thelack of adequate personnel with sufficient expertise to perform accountingfunctions necessary to ensure preparation of financial statements in accordancewith generally accepted accounting principles, and a lack of adequate policiesand procedures to enable the timely preparation of reliable financialstatements, as described more fully below.

 

To date, we have taken thefollowing steps to remediate this material weakness:

 

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•      We have hired a Chief Accounting Officer withpublic company accounting and reporting technical expertise.

 

•      We have hired additional accounting staff tosupplement our existing technical accounting resources.

 

•      We have hired a Vice President of Compliance tocoordinate our internal audit and internal control compliance efforts.

 

•      We have implemented an internal audit outsourcingand technical consultation arrangement with a professional accounting andconsulting firm.

 

•      We have conducted entity-level risk assessment,established an internal audit plan, and we have begun to execute that plan.

 

*Insufficient technical accounting expertise, inadequatepolicies and procedures related to accounting matters, and inadequatemanagement review in the financial reporting process* — We did not have sufficient technicalaccounting expertise to address, or adequate policies and procedures associatedwith complex accounting matters.  Inaddition, we did not maintain policies and procedures to ensure adequatemanagement review of information supporting our financial statements.

 

To date, we have taken thefollowing steps to remediate this material weakness:

 

•      We have hired a Chief Accounting Officer withpublic company accounting and reporting technical expertise.

 

•      We have hired additional accounting staff tosupplement our existing technical accounting resources.

 

•      We have hired a Vice President of Compliance tocoordinate our internal audit and internal control compliance efforts.

 

•      We have implemented an internal audit outsourcingand technical consultation arrangement with a professional accounting andconsulting firm.

 

•      We have conducted entity-level risk assessment,established an internal audit plan, and have begun to execute that plan.

 

*Inadequate personnel, processes, and controls at ourSouthwest Business Unit* —We did not have adequate personnel, policies, and procedures at our SouthwestBusiness Unit to enable timely preparation of reliable financial informationfor that business unit.

 

To date, we have taken thefollowing steps to remediate this material weakness:

 

•      We have formalized the monthly accountreconciliation process for all balance sheet accounts.  We have also implemented a formal review ofthese reconciliations by our business unit accounting management.

 

•      Wehave instituted a quarterly corporate review of all account reconciliations bythe corporate accounting staff and management.

 

•      Wehave provided specific training for our Southwest Business Unit accountants onour accounting systems.

 

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•      Weinitiated the process of consistently comparing each month’s accrual to theactual results in an effort to further refine our estimation process.

 

•      Wehave systematized the data gathering function for the accounts payable invoicesreceived after period end.  The corporateaccounting staff now reviews this accrual monthly.

 

*Inadequatelydesigned controls and procedures over property, plant and equipment*— We did not have adequately designed policies and procedures to ensure thatcosts associated with activities related to our facilities were properlyaccounted for as a capital expenditure or as a maintenance expense.  This material weakness in internal controlover financial reporting resulted in a material misstatement of property, plantand equipment, and in facilities expenses.

 

To date, we have taken the following steps toremediate this material weakness:

 

•      Wecapitalize interest on major construction projects.  The financial reporting team in our corporateoffice has assumed the responsibility for calculating and recording capitalizedinterest related to major construction projects.

 

•      Aperiodic review meeting is now held by our Business Unit Managers to reviewissues with active, open construction projects. The fixed asset accountant and all operational managers are present forthese meetings.

 

Planned Remediation of Internal Control Weaknesses

 

Going forward, we expect to implement the followingadditional measures to strengthen our internal control processes:

 

•      Weare implementing additional entity-level controls, including a robustdisclosure review process and additional technical accounting reviews.

 

•      Weare continuing our implementation processes of our new risk management andderivative transaction reporting software.

 

•      Wewill conduct in-depth training for all persons with coding responsibilities toensure clear and consistent understanding of capitalization policies.

 

•      Throughour annual certification of the design and operating effectiveness of ourinternal controls, we are identifying and remediating specific control gaps.

 

Our Audit Committee has been andexpects to remain actively involved in the remediation planning and implementation.  The Company is fully committed to remediatingour material weaknesses in internal control over financial reporting.  However, the remediation of the design of thedeficient controls and the associated testing efforts are not complete, andfurther fixes may be required.

 

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**PART II—OTHER INFORMATION**

 

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

 

We refer you to Note 13four Consolidated Financial Statements in Item 1 of this Form 10-Q.

 

**Item6.  Exhibits**

 
| 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 Accounting 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. |
|   |   |                                                                                                                                                                             |
| 31.3   |   | 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 Accounting Officer  Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                        |
|   |   |                                                                                                                                                                             |
| 32.3   |   | 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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**SIGNATURE**

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, MarkWest Hydrocarbon, as registrant, has dulycaused this report to be signed on its behalf by the undersigned, thereuntoauthorized.

 
|                   |                      | MarkWest Hydrocarbon, Inc. |
|------------------------|---------------------------|----------------------------|
|                   |                      |                       | (Registrant) |
|                   |                      |
| Date: January 10, 2006 | /s/ Nancy K.  Masten      |                       |
|                   | Nancy K. Masten           |
|                   | Chief Accounting  Officer |
|                        |                           |                            |  |  |

 

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| **Exhibit  Number** | ** ** | **Exhibit Index**                                                                                                                                                                |
|---------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                             |
| 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 Accounting 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. |
|                |       |                                                                                                                                                                             |
| 31.3                |       | 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 Accounting Officer  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                        |
|                |       |                                                                                                                                                                             |
| 32.3                |       | 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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