**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q/A**

**(Amendment No. 1)**

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

 

**For the quarterly period ended September 30, 2004**

 

**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**

 

**MARKWEST HYDROCARBON, INC.**

(Exact name of registrant as specified in itscharter)

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

 

**155 Inverness Drive West, Suite 200, Englewood, CO80112-5000**

(Address of principal executive offices)

 

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

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

Yes  o  No  ý

 

Indicateby check mark whether the registrant is an accelerated filer (as defined inRule 12b-2 of the Act).

Yes  o  No  ý

 

Theregistrant had 10,746,218 shares of common stock, $.01 per share par value,outstanding as of October 31, 2004.

 

 

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| **PART I—FINANCIAL INFORMATION**                                                                                                      | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------|------------|
|                                                                                                                                       |       |
| Item 1. Consolidated Financial Statements                                                                                                  |       |
| Consolidated  Balance Sheets at September 30, 2004 and December 31, 2003 (unaudited)                                                       |       |
| Consolidated  Statements of Operations for the Three and Nine Months Ended September 30,  2004 and 2003 (unaudited)                        |       |
| Consolidated  Statements of Other Comprehensive Income (Loss) for the Three and Nine Months  Ended September 30, 2004 and 2003 (unaudited) |       |
| Consolidated  Statements of Cash Flows for the Nine Months Ended September 30, 2004 and  2003 (unaudited)                                  |       |
| Consolidated  Statement of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2004 (unaudited)              |       |
| Notes  to the Consolidated Financial Statements (unaudited)                                                                                |       |
|                                                                                                                                       |       |
| 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 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 |
| Gross  margin          |   | revenues  less purchased product costs |
| 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 |
| NGL                    |   | natural  gas liquids, such as propane, butanes and natural gasoline |

 

----

 

##### **ExplanatoryNote**

 

Wehave determined that, in certain cases, we did not comply with generallyaccepted accounting principles in the preparation of our 2003 and 2004 thirdquarter consolidated financial statements and, accordingly, this Amendment No.1 on Form 10-Q/A amends the Quarterly Report on Form 10-Q originally filed byMarkWest Hydrocarbon, Inc. (the “Company”) on November 22, 2004 for the thirdquarter ended September 30, 2004.

 

TheCompany has determined that previously issued financial statements for theyears 2002 and 2003 and the first three quarters of 2003 and 2004 should berestated to reflect compensation expense for the sale of subordinated units of MarkWestEnergy Partners, L.P. (“MarkWest Energy Partners” or the “Partnership”) andinterests in MarkWest Energy GP, LLC (the “general partner” of MarkWest EnergyPartners, L.P., a consolidated subsidiary) to certain employees and directorsof the Company from 2002 through 2004 and for an error in accounting fornatural gas inventory in the fourth quarter of 2003.  The Company is filing contemporaneously withthis Form 10-Q/A for the quarterly period ended September 30, 2004, its AnnualReport on Form 10-K for the year ended December 31, 2004, which includesrestated financial statements for the years ended December 31, 2002 and 2003.

 

Asdiscussed more fully in Note 16, *Restatementand Reclassifications of Consolidated Financial Statements*, to theconsolidated financial statements, we have restated our previously reportedresults to account for the sale by the Company of a portion of its interests inthe general partner to certain employees and directors of the Company, and thesale by the Company of its subordinated units of the Partnership to certainemployees and directors of the Company as compensatory arrangements consistentwith the guidance in Accounting Principles Board Opinion (“APB”) No. 25, *Accounting for Stock Issued to Employees*andEmerging Issues Task Force (“EITF”) No. 95-16, *Accountingfor Stock Compensation Arrangements with Employer Loan Features under APBOpinion No. 25*.  This guidancerequires MarkWest Hydrocarbon to record compensation expense based on themarket value of the subordinated partnership units and the formula value of thegeneral partner interests held by these employees and directors at the end ofeach reporting period.  Thesetransactions were previously reflected as sales of assets.  In addition, certain other restatementadjustments have also been recorded to correct other errors in the financialstatements for the first three quarters of 2004, including adjustments toaccruals for revenue and purchased product costs, adjustments for costsimproperly capitalized as property, plant and equipment, adjustments toproperly record capitalized interest on major construction projects in process,adjustments to record as a financing lease, a lease agreement previouslyentered into by an acquired business, an adjustment to reflect separately restrictedmarketable securities, adjustments for dividends received on marketablesecurities improperly recorded as a reduction in the carrying value ofmarketable securities, an adjustment to record losses on derivative instrumentsthat do not qualify for hedge accounting treatment and adjustments to accruedproperty taxes.

 

Adjustmentswere also made to record compensation expense as a result of the modificationof the provisions of certain stock options for two officers who terminatedtheir employment with the Company but who continued to serve on its Board ofDirectors.  Compensation expense was alsorecorded as a result of a policy change that required the company to accountfor all outstanding stock options as variable awards.  In April 2004, the Company changed its policyto allow participants to exercise their stock options using the cashlessexercise method.  Under APB 25, *Accounting for Stock Issued to Employees,*afixed stock option plan that permits the use of a cashless exercise becomes avariable plan if a pattern of exercising stock options using the cashlessmethod is demonstrated.  Additionally,the Company made adjustments to reclassify a portion of dividends paid duringthe nine months ended September 30, 2004 from retained earnings to additionalpaid in capital for the amount of dividends distributed in excess ofaccumulated earnings.

 

Cashwas also adjusted primarily as a result of reclassifying amounts recorded forthe purchase of property, plant and equipment, intangible assets and accrued propertytax relating to an acquisition, from cash to those respective accounts.  Initially, the purchase of those assets wererecorded to a cash clearing account until the purchase price was settled in thefourth quarter of 2004.  Other lesssignificant restatement adjustments and reclassifications, to conform tocurrent year presentation, were identified and recorded in conjunction with therestatement process as discussed in Note 16.

 

Inaddition, on October 28, 2004, the Company’s Board of Directors declared astock dividend of one share of MarkWest Hydrocarbon’s common stock for each tenshares owned by stockholders.  The stockdividend was paid on November 19, 2004 to the stockholders of record as of theclose of business on November 9, 2004.  

 

----

 

Common stock information in this Form 10-Q/Ahas been restated to give retroactive effect to stock dividend paid.  The Company is also filing contemporaneouslywith this Form 10-Q/A, its quarterly reports on Form 10-Q/A for the quarterlyperiods ended March 31, 2004 and June 30, 2004.

 

ThisForm 10-Q/A amends and restates only Items 1, 2, 3 and 4 of Part I and Item 6of Part II of the original report.  Theremaining items are not amended hereby. Except for the foregoing amended information, this Form 10-Q/A continuesto describe conditions as of the date of the original report, and the Companyhas not updated the disclosures contained herein to reflect events thatoccurred subsequently.  Accordingly, thisForm 10-Q/A should be read in conjunction with Company filings made with theSecurities and Exchange Commission subsequent to the filing of the originalreport, including any amendments of those filings.

 

----

## ** **

## **PART I—FINANCIAL INFORMATION**

 

## **Item 1.  ConsolidatedFinancial Statements**

 

**MARKWEST HYDROCARBON, INC.**

**CONSOLIDATED BALANCE SHEETS**

**(UNAUDITED)**

**(in thousands, except share and per share data)**

 
| ** **                                                                                                                                                       | ** ** | **September 30,  2004**        | ** ** | **December 31,  2003** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|------------------------|------------|
| ** **                                                                                                                                                       | ** ** | **(as restated, see note 16)** | ** ** |
| **ASSETS**                                                                                                                                                       | ** ** | ** **                     | ** ** | ** **             | ** ** |
| Current  assets:                                                                                                                                                 |       |                           |       |                   |       |
| Cash and cash equivalents                                                                                                                                        |       | $                              | 21,647     |                   | $          | 42,144 |   |
| Restricted cash                                                                                                                                                  |       | 550                            |       | —                 |       |
| Marketable securities                                                                                                                                            |       | 12,206                         |       | —                 |       |
| Restricted marketable securities                                                                                                                                 |       | 2,500                          |       | 2,500                  |       |
| Receivables, net (including related party  receivables of $87 and $40, respectively, and net of allowance for doubtful  accounts of $250 and $120, respectively) |       | 45,448                         |       | 29,910                 |       |
| Inventories                                                                                                                                                      |       | 12,450                         |       | 5,548                  |       |
| Prepaid replacement natural gas                                                                                                                                  |       | 13,173                         |       | 5,940                  |       |
| Deferred income taxes                                                                                                                                            |       | 68                             |       | 534                    |       |
| Other current assets                                                                                                                                             |       | 3,658                          |       | 503                    |       |
| Total current  assets                                                                                                                                            |       | 111,700                        |       | 87,079                 |       |
|                                                                                                                                                             |       |                           |       |                   |       |
| Property,  plant and equipment                                                                                                                                   |       | 323,963                        |       | 232,257                |       |
| Less:  accumulated depreciation, depletion and amortization                                                                                                      |       | (54,967                        | )          | (44,134                | )          |
| Total property, plant and equipment, net                                                                                                                         |       | 268,996                        |       | 188,123                |       |
|                                                                                                                                                             |       |                           |       |                   |       |
| Other  assets:                                                                                                                                                   |       |                           |       |                   |       |
| Intangibles and other assets, net                                                                                                                                |       | 166,459                        |       | 84                     |       |
| Deferred financing costs, net                                                                                                                                    |       | 7,184                          |       | 3,747                  |       |
| Deferred offering costs, net                                                                                                                                     |       | —                         |       | 995                    |       |
| Investment in and advances to equity  investee                                                                                                                   |       | 200                            |       | 250                    |       |
| Notes receivable from officers                                                                                                                                   |       | 207                            |       | 217                    |       |
| Total other assets                                                                                                                                               |       | $                              | 174,050    |                   | 5,293      |   |
| Total assets                                                                                                                                                     |       | $                              | 554,746    |                   | $          | 280,495 |   |
|                                                                                                                                                             |       |                           |       |                   |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                    |       |                           |       |                   |       |
|                                                                                                                                                             |       |                           |       |                   |       |
| Current  liabilities:                                                                                                                                            |       |                           |       |                   |       |
| Accounts payable (including related party  payables of $32 and $51, respectively)                                                                                |       | $                              | 46,703     |                   | $          | 24,052 |   |
| Accrued liabilities                                                                                                                                              |       | 23,309                         |       | 16,511                 |       |
| Fair value of derivative instruments                                                                                                                             |       | 2,747                          |       | 1,769                  |       |
| Total current liabilities                                                                                                                                        |       | 72,759                         |       | 42,332                 |       |
|                                                                                                                                                             |       |                           |       |                   |       |
| Long-term  debt                                                                                                                                                  |       | 197,500                        |       | 126,200                |       |
| Deferred  income taxes                                                                                                                                           |       | 6,387                          |       | 5,594                  |       |
| Fair value  of derivative instruments                                                                                                                            |       | —                         |       | 125                    |       |
| Other  long-term liabilities                                                                                                                                     |       | 4,780                          |       | 2,901                  |       |
| Non-controlling  interest in consolidated subsidiary                                                                                                             |       | 230,451                        |       | 52,429                 |       |
| 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, 10,817,967 and 10,601,775 shares issued, respectively                                              |       | 108                            |       | 106                    |       |
| Additional paid-in capital                                                                                                                                       |       | 51,769                         |       | 50,705                 |       |
| Retained earnings (accumulated deficit)                                                                                                                          |       | (8,339                         | )          | 2,406                  |       |
| Accumulated other comprehensive loss, net  of tax                                                                                                                |       | (230                           | )          | (1,793                 | )          |
| Treasury stock at cost, 65,999 and 75,930  shares, respectively                                                                                                  |       | (439                           | )          | (510                   | )          |
| Total stockholders’ equity                                                                                                                                  |       | 42,869                         |       | 50,914                 |       |
| Total liabilities and stockholders’ equity                                                                                                                  |       | $                              | 554,746    |                   | $          | 280,495 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

1

----

 

**MARKWEST HYDROCARBON, INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(UNAUDITED)**

**(in thousands, except per share data)**

 
| ** **                                                                                                                                           | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                                                                           | ** ** | **2004**                             | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                                                                           | ** ** | **(as restated, see note 16)**       | ** ** |
|                                                                                                                                                 |       |                                 |       |                                |       |   |   |   |   |
| Revenues                                                                                                                                             |       | $                                    | 121,511    |                                | $          | 48,719 |   | $ | 304,235 |   | $ | 148,191 |   |
|                                                                                                                                                 |       |                                 |       |                                |       |   |   |   |   |
| Operating  expenses:                                                                                                                                 |       |                                 |       |                                |       |   |   |   |   |
| Purchased product costs                                                                                                                              |       | 95,209                               |       | 44,521                              |       | 247,960 |   | 134,881 |   |
| Facility expenses                                                                                                                                    |       | 8,398                                |       | 5,445                               |       | 20,459 |   | 14,750 |   |
| Selling, general and administrative  expenses                                                                                                        |       | 7,252                                |       | 3,707                               |       | 17,637 |   | 10,097 |   |
| Depreciation                                                                                                                                         |       | 4,510                                |       | 2,471                               |       | 11,695 |   | 6,171 |   |
| Amortization of intangible assets                                                                                                                    |       | 1,400                                |       | —                              |       | 1,468 |   | — |   |
| Accretion of asset retirement obligation                                                                                                             |       | 13                                   |       | —                              |       | 13 |   | — |   |
| Loss on sale of terminals                                                                                                                            |       | —                               |       | 55                                  |       | — |   | 55 |   |
| Total operating expenses  (a component of interest expense)                                                                                          |       | 116,782                              |       | 56,199                              |       | 299,232 |   | 165,954 |   |
|                                                                                                                                                 |       |                                 |       |                                |       |   |   |   |   |
| Income (loss) from operations                                                                                                                        |       | 4,729                                |       | (7,480                              | )          | 5,003 |   | (17,763 | ) |
|                                                                                                                                                 |       |                                 |       |                                |       |   |   |   |   |
| Other income  (expense):                                                                                                                             |       |                                 |       |                                |       |   |   |   |   |
| Interest expense, net                                                                                                                                |       | (3,559                               | )          | (658                                | )          | (5,256 | ) | (2,906 | ) |
| Amortization of deferred financing costs  (a component of interest expense)                                                                          |       | (3,120                               | )          | (457                                | )          | (3,734 | ) | (1,270 | ) |
| Dividend income                                                                                                                                      |       | 86                                   |       | —                              |       | 169 |   | — |   |
| Other income                                                                                                                                         |       | 553                                  |       | 31                                  |       | 547 |   | 15 |   |
| Income (loss) from continuing operations  before non-controlling interest in net income of consolidated subsidiary and  income taxes                 |       | (1,311                               | )          | (8,564                              | )          | (3,271 | ) | (21,924 | ) |
|                                                                                                                                                 |       |                                 |       |                                |       |   |   |   |   |
| Provision  (benefit) for income taxes:                                                                                                               |       |                                 |       |                                |       |   |   |   |   |
| Current                                                                                                                                              |       | 39                                   |       | (3,885                              | )          | 151 |   | (9,676 | ) |
| Deferred                                                                                                                                             |       | 112                                  |       | 169                                 |       | 438 |   | 421 |   |
| Provision (benefit) for income taxes                                                                                                                 |       | 151                                  |       | (3,716                              | )          | 589 |   | (9,255 | ) |
|                                                                                                                                                 |       |                                 |       |                                |       |   |   |   |   |
| Non-controlling interest in net income of  consolidated subsidiary                                                                                   |       | (504                                 | )          | (1,519                              | )          | (3,759 | ) | (3,188 | ) |
|                                                                                                                                                 |       |                                 |       |                                |       |   |   |   |   |
| Loss from continuing operations                                                                                                                      |       | (1,966                               | )          | (6,367                              | )          | (7,619 | ) | (15,857 | ) |
|                                                                                                                                                 |       |                                 |       |                                |       |   |   |   |   |
| Discontinued  operations:                                                                                                                            |       |                                 |       |                                |       |   |   |   |   |
| Income (loss) from discontinued exploration  and production operations (net of income taxes in 2003 of $(330) and $625,  respectively)               |       | —                               |       | (1,262                              | )          | — |   | 2,606 |   |
| Gain from disposal of discontinued  exploration and production operations (less applicable income taxes of $0, $2,750,  $0 and $8,173, respectively) |       | —                               |       | 593                                 |       | — |   | 14,862 |   |
| Income (loss) from discontinued operations                                                                                                           |       | —                               |       | (669                                | )          | — |   | 17,468 |   |
| Income (loss) before cumulative effect of  accounting change                                                                                         |       | (1,966                               | )          | (7,036                              | )          | (7,619 | ) | 1,611 |   |
| Cumulative effect of change in accounting  for asset retirement obligations, net of tax                                                              |       | —                               |       | —                              |       | — |   | (29 | ) |
|                                                                                                                                                 |       |                                 |       |                                |       |   |   |   |   |
| Net income (loss)                                                                                                                                    |       | $                                    | (1,966     | )                                   | $          | (7,036 | ) | $ | (7,619 | ) | $ | 1,582 |   |
|                                                                                                                                                 |       |                                 |       |                                |       |   |   |   |   |
| Loss from  continuing operations per share:                                                                                                          |       |                                 |       |                                |       |   |   |   |   |
| Basic                                                                                                                                                |       | $                                    | (0.18      | )                                   | $          | (0.62 | ) | $ | (0.71 | ) | $ | (1.54 | ) |
| Diluted                                                                                                                                              |       | $                                    | (0.18      | )                                   | $          | (0.62 | ) | $ | (0.71 | ) | $ | (1.54 | ) |
| Net income  (loss) per share:                                                                                                                        |       |                                 |       |                                |       |   |   |   |   |
| Basic                                                                                                                                                |       | $                                    | (0.18      | )                                   | $          | (0.68 | ) | $ | (0.71 | ) | $ | 0.15 |   |
| Diluted                                                                                                                                              |       | $                                    | (0.18      | )                                   | $          | (0.68 | ) | $ | (0.71 | ) | $ | 0.15 |   |
| Weighted average number of outstanding  shares of common stock:                                                                                      |       |                                 |       |                                |       |   |   |   |   |
| Basic                                                                                                                                                |       | 10,736                               |       | 10,316                              |       | 10,665 |   | 10,300 |   |
| Diluted                                                                                                                                              |       | 10,800                               |       | 10,340                              |       | 10,715 |   | 10,318 |   |
| Cash  dividend per common share                                                                                                                      |       | $                                    | 0.023      |                                | $          | — |   | $ | 0.50 |   | $ | — |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

2

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**MARKWEST HYDROCARBON, INC.**

**CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME(LOSS)**

**(UNAUDITED)**

**(in thousands)**

 
| ** **                                                         | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                                         | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                         | ** ** | **(as restated, see note 16)**        | ** ** |
|                                                               |       |                                  |       |                                 |       |   |   |   |   |
| Net income  (loss)                                                 |       | $                                     | (1,966     | )                                    | $          | (7,036 | ) | $ | (7,619 | ) | $ | 1,582 |   |
|                                                               |       |                                  |       |                                 |       |   |   |   |   |
| Other  comprehensive income (loss), net of tax:                    |       |                                  |       |                                 |       |   |   |   |   |
| Foreign currency translation                                       |       | —                                |       | (265                                 | )          | — |   | 3,796 |   |
| Unrealized gains on commodity derivatives  accounted for as hedges |       | 888                                   |       | 3,666                                |       | 1,656 |   | 3,142 |   |
| Unrealized gains on marketable securities                          |       | 277                                   |       | —                               |       | (93 | ) | — |   |
| Total other comprehensive income                                   |       | 1,165                                 |       | 3,401                                |       | 1,563 |   | 6,938 |   |
|                                                               |       |                                  |       |                                 |       |   |   |   |   |
| Other  comprehensive income (loss)                                 |       | $                                     | (801       | )                                    | $          | (3,635 | ) | $ | (6,056 | ) | $ | 8,520 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

3

----

 

**MARKWEST HYDROCARBON, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(UNAUDITED)**

**(in thousands)**

** **
| ** **                                                                                | ** ** | **Nine Months Ended September 30,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                | ** ** | **2004**                            | ** ** | **2003** | ** ** |
| ** **                                                                                | ** ** | **(as restated, see note 16)**      | ** ** |
| **Cash  flows from operating activities:**                                                |       |                                |       |   |   |
| Net income (loss)                                                                         |       | $                                   | (7,619     | ) | $ | 1,582 |   |
| Adjustments to reconcile net income (loss)  to net cash provided by operating activities: |       |                                |       |   |   |
| Cumulative effect of change in accounting                                                 |       | —                              |       | 29 |   |
| Depreciation and depletion                                                                |       | 11,694                              |       | 18,814 |   |
| Amortization of deferred financing costs                                                  |       | 2,265                               |       | 1,270 |   |
| Write down of deferred financing costs                                                    |       | 1,469                               |       | — |   |
| Amortization of intangible asset                                                          |       | 1,468                               |       | — |   |
| Stock option compensation expense                                                         |       | 1,531                               |       | — |   |
| Restricted unit compensation expense                                                      |       | 732                                 |       | 554 |   |
| Participation Plan compensation expense                                                   |       | 1,205                               |       | 569 |   |
| Contribution of treasury shares to 401(k)  benefit plan                                   |       | 107                                 |       | 190 |   |
| Equity in losses of investee                                                              |       | 50                                  |       | — |   |
| Loss from sale of property, plant and  equipment                                          |       | 145                                 |       | — |   |
| Non-controlling interest in net income of  consolidated subsidiary                        |       | 3,759                               |       | 3,188 |   |
| Unrealized losses (gains) on derivative  instrument                                       |       | 732                                 |       | (2,207 | ) |
| Reclassification of Enron hedges to  purchased product costs                              |       | —                              |       | (153 | ) |
| Deferred income taxes                                                                     |       | 438                                 |       | 4,637 |   |
| Gain from non-operating assets sale to  related party                                     |       | —                              |       | — |   |
| Gain on sale of San Juan Basin properties                                                 |       | —                              |       | (23,035 | ) |
| Cost of exiting hedges                                                                    |       | —                              |       | (3,440 | ) |
| Other                                                                                     |       | (51                                 | )          | 427 |   |
| Changes in operating assets and  liabilities:                                             |       |                                |       |   |   |
| (Increase) decrease in receivables                                                        |       | (15,248                             | )          | 15,046 |   |
| Increase in inventories                                                                   |       | (6,902                              | )          | (2,540 | ) |
| Increase in prepaid replacement natural gas                                               |       | (7,233                              | )          | (3,941 | ) |
| Increase in other current assets                                                          |       | (3,133                              | )          | — |   |
| Increase (decrease) in accounts payable and  accrued liabilities                          |       | 30,114                              |       | (9,066 | ) |
| (Decrease) increase in other long-term  liabilities                                       |       | (2                                  | )          | 1,565 |   |
| Net cash flow provided by operating  activities                                           |       | 15,521                              |       | 3,489 |   |
|                                                                                      |       |                                |       |   |   |
| **Cash  flows from investing activities:**                                                |       |                                |       |   |   |
| Increase in restricted cash                                                               |       | (550                                | )          | — |   |
| Purchase of marketable securities                                                         |       | (11,920                             | )          | — |   |
| East Texas System acquisition                                                             |       | (240,606                            | )          | — |   |
| Hobbs Lateral  acquisition                                                                |       | (2,275                              | )          | — |   |
| Pinnacle acquisition, net of cash acquired                                                |       | —                              |       | (38,238 | ) |
| Lubbock  pipeline acquisition                                                             |       | —                              |       | (12,222 | ) |
| Proceeds from sale of San Juan Basin  properties, net of disposal costs                   |       | —                              |       | 55,007 |   |
| Capital expenditures                                                                      |       | (12,668                             | )          | (24,968 | ) |
| Proceeds from sales of terminals                                                          |       | —                              |       | 2,438 |   |
| Proceeds from sale of assets                                                              |       | 206                                 |       | — |   |
| Increase in other contracts                                                               |       | (3,250                              | )          | — |   |
| Proceeds on financing lease receivable                                                    |       | 133                                 |       | — |   |
| Proceeds from sale of assets to related  parties                                          |       | —                              |       | — |   |
| Net cash used in investing activities                                                     |       | (270,930                            | )          | (17,983 | ) |
|                                                                                           |            |                                     |            |  |  |  |  |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

4

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| ** **                                                                                                                                             | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                                                                             | ** ** | **2004**                            | ** ** | **2003** | ** ** |
| ** **                                                                                                                                             | ** ** | **(as restated, see note 16)**      | ** ** |
| **Cash  flows from financing activities:**                                                                                                             |       |                                |       |   |   |
| Proceeds from long-term debt                                                                                                                           |       | 215,600                             |       | 86,835 |   |
| Repayment of long-term debt                                                                                                                            |       | (144,300                            | )          | (75,130 | ) |
| Payments for debt issuance costs                                                                                                                       |       | (7,193                              | )          | (811 | ) |
| Proceeds from public offerings of MarkWest  Energy Partners’ common units, net                                                                    |       | 140,014                             |       | — |   |
| Proceeds from private placement of MarkWest  Energy Partners’ common units, net                                                                   |       | 44,139                              |       | 9,764 |   |
| Distributions to MarkWest Energy Partners’  unitholders                                                                                           |       | (9,437                              | )          | (5,107 | ) |
| Acquisitions and dispositions of MarkWest  Energy GP general partnership interests and MarkWest Energy Partners  subordinated units to related parties |       | —                              |       | 17 |   |
| Exercise of stock options                                                                                                                              |       | 1,413                               |       | 333 |   |
| Repurchase of treasury shares                                                                                                                          |       | (36                                 | )          | (348 | ) |
| Payment of dividends                                                                                                                                   |       | (5,288                              | )          | — |   |
| Net cash provided by financing activities                                                                                                              |       | 234,912                             |       | 15,553 |   |
|                                                                                                                                                   |       |                                |       |   |   |
| Effect of  exchange rate changes on cash                                                                                                               |       | —                              |       | 111 |   |
|                                                                                                                                                   |       |                                |       |   |   |
| Net increase  (decrease) in cash and cash equivalents                                                                                                  |       | (20,497                             | )          | 1,170 |   |
| Cash and  cash equivalents at beginning of period                                                                                                      |       | 42,144                              |       | 6,410 |   |
| Cash and  cash equivalents at end of period                                                                                                            |       | $                                   | 21,647     |   | $ | 7,580 |   |
| ** **                                                                                                                                             | ** ** | ** **                          | ** ** | ** ** | ** ** |
| **Supplemental  cash flow information:**                                                                                                               | ** ** | ** **                          | ** ** | ** ** | ** ** |
| Cash paid for interest, net of amount  capitalized                                                                                                     |       | $                                   | 4,607      |   | $ | 1,474 |   |
| Construction projects in progress  obligation                                                                                                          |       | $                                   | 1,094      |   | $ | — |   |
| Property, plant and equipment asset  retirement obligation                                                                                             |       | $                                   | 377        |   | $ | — |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

5

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**MARKWEST HYDROCARBON, INC.**

**CONSOLIDATED STATEMENT OF CHANGES IN**

**STOCKHOLDERS’ EQUITY**

**(UNAUDITED)**

**(in thousands)**

 
| ** **                                              | ** ** | **Shares  of  Common  Stock** | ** ** | **Shares  of  Treasury  Stock** | ** ** | **Common  Stock** | ** ** | **Additional  Paid-In  Capital** | ** ** | **Retained  Earnings (Accumulated Deficit)** | ** ** | **Accumulated  Other  Comprehensive  Income  (Loss)** | ** ** | **Treasury  Stock** | ** ** | **Total  Stockholders’  Equity** | ** ** |
|---------------------------------------------------------|------------|-------------------------------|------------|---------------------------------|------------|-------------------|------------|----------------------------------|------------|----------------------------------------------|------------|-------------------------------------------------------|------------|---------------------|------------|---------------------------------------|------------|
|                                                    |       |                          |       |                            |       |              |       |                             |       |                                         |       |                                                  |       |                |       |                                  |       |
| Balance, December 31, 2003, as restated, see note 16    |       | 10,602                        |       | (76                             | )          | $                 | 106        |                             | $          | 50,705                                       |       | $                                                     | 2,406      |                | $          | (1,793                                | )          | $ | (510 | ) | $ | 50,914 |   |
|                                                    |       |                          |       |                            |       |              |       |                             |       |                                         |       |                                                  |       |                |       |                                  |       |
| Stock option exercises                                  |       | 216                           |       | —                          |       | 2                 |       | 1,695                            |       | —                                       |       | —                                                |       | —              |       | 1,697                                 |       |
|                                                    |       |                          |       |                            |       |              |       |                             |       |                                         |       |                                                  |       |                |       |                                  |       |
| Modification of stock options, as restated, see note 16 |       | —                        |       | —                          |       | —            |       | 1,531                            |       | —                                       |       | —                                                |       | —              |       | 1,531                                 |       |
|                                                    |       |                          |       |                            |       |              |       |                             |       |                                         |       |                                                  |       |                |       |                                  |       |
| Treasury stock acquired                                 |       | —                        |       | (3                              | )          | —            |       | —                           |       | —                                       |       | —                                                |       | (36                 | )          | (36                                   | )          |
|                                                    |       |                          |       |                            |       |              |       |                             |       |                                         |       |                                                  |       |                |       |                                  |       |
| Treasury stock reissued                                 |       | —                        |       | 13                              |       | —            |       | —                           |       | —                                       |       | —                                                |       | 107                 |       | 107                                   |       |
|                                                    |       |                          |       |                            |       |              |       |                             |       |                                         |       |                                                  |       |                |       |                                  |       |
| Dividends, as restated, see note 16                     |       | —                        |       | —                          |       | —            |       | (2,162                           | )          | (3,126                                       | )          | —                                                |       | —              |       | (5,288                                | )          |
|                                                    |       |                          |       |                            |       |              |       |                             |       |                                         |       |                                                  |       |                |       |                                  |       |
| Net loss, as restated, see note 16                      |       | —                        |       | —                          |       | —            |       | —                           |       | (7,619                                       | )          | —                                                |       | —              |       | (7,619                                | )          |
|                                                    |       |                          |       |                            |       |              |       |                             |       |                                         |       |                                                  |       |                |       |                                  |       |
| Other comprehensive income                              |       | —                        |       | —                          |       | —            |       | —                           |       | —                                       |       | 1,563                                                 |       | —              |       | 1,563                                 |       |
|                                                    |       |                          |       |                            |       |              |       |                             |       |                                         |       |                                                  |       |                |       |                                  |       |
| Balance, September 30, 2004, as restated, see note 16   |       | 10,818                        |       | (66                             | )          | $                 | 108        |                             | $          | 51,769                                       |       | $                                                     | (8,339     | )                   | $          | (230                                  | )          | $ | (439 | ) | $ | 42,869 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

6

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MARKWEST HYDROCARBON, INC.

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS

(UNAUDITED)

 

**1.****             ****General**

 

MarkWestHydrocarbon, Inc. (“MarkWest Hydrocarbon” or the “Company”) markets natural gasand natural gas liquids itself, and also manages MarkWest Energy Partners, L.P.(“MarkWest Energy Partners” or the “Partnership”), through its majorityownership in the general partner of the Partnership.  MarkWest Energy Partners is a publicly tradedmaster limited partnership engaged in the gathering, processing andtransmission of natural gas; the transportation, fractionation and storage ofnatural gas liquids (NGLs); and the gathering and transportation of crudeoil.  The Company’s employees areresponsible for conducting the Partnership’s business and operating its assets,pursuant to a Services Agreement.

 

TheCompany’s assets consist primarily of partnership interests in MarkWest EnergyPartners.  As of September 30, 2004, itspartnership interests consisted of 2,469,496 subordinated units, representing a23% limited partner interest in the Partnership and a 90% membership (ownership)interest in MarkWest Energy GP, L.L.C., the general partner of the Partnership,which owns a 2% general partner interest and all of the incentive distributionrights in the Partnership.

 

Theconsolidated financial statements include the accounts of MarkWest Hydrocarbon,Inc. and its subsidiaries, including MarkWest Energy Partners. Throughconsolidation, the Company has eliminated all significant intercompany accountsand transactions. The Company has reclassified certain prior period amounts toconform to the current year’s presentation (See Note 16).

 

TheCompany has prepared the unaudited financial statements presented herein inaccordance with the instructions to Form 10-Q.  The statements do not include all theinformation and note disclosures required by generally accepted accountingprinciples for complete financial statements. Please read the interim consolidated financial statements in conjunctionwith the Consolidated Financial Statements and attached notes thereto as of andfor the year ended December 31, 2003 (which has been restated) included in theCompany’s December 31, 2004, Annual Report on Form 10-K.  In the opinion of management, the Company hasmade all necessary adjustments for a fair statement of the results for theunaudited interim periods.  Results forthe three and nine months ended September 30, 2004, are not necessarilyindicative of results for the full year 2004 or any other future period.

 

TheCompany bases the effective corporate tax rate for interim periods on theestimated annual effective corporate tax rate.

 

**2.****             ****Stock and Unit Compensation**

 

Aspermitted under SFAS No. 123, *Accounting forStock-Based Compensation,*the Company has elected to continue tomeasure compensation costs for stock-based and unit-based employee compensationplans as prescribed by APB No. 25, *Accountingfor Stock Issued to Employees*, as permitted under SFAS No. 123, *Accounting for Stock Based Compensation*,and SFAS No. 148, *Accounting for Stock BasedCompensation — Transition and Disclosure. *The Company has four stock-based compensation plans, one ofwhich is through its consolidated subsidiary, MarkWest Energy.  The Company accounts for these plans usingfixed or variable accounting as appropriate.

 

*Stock Option Plans*

 

Stockoptions are issued under the Company’s 1996 Stock Incentive Plan and 1996Non-employee Director Stock Option Plan. The plans allow for the exercise of stock options using the cashlessmethod, but only at the discretion of the Company.  Under a cashless exercise, the Company withholdsfrom shares that otherwise would be issued upon the exercise of the option, thenumber of shares with a fair market value equal to the option exercise priceand remits the remaining shares to the employee.  Prior to April 2004, the Company did not allowparticipants to exercise their stock options using the cashless method.  Accordingly, compensation expense was notrecognized for stock options granted unless the options were granted at anexercise price less than the quoted market price of the Company’s stock on thegrant date.  In April 2004, the Companychanged its policy to allow participants to exercise their stock options usingthe cashless method.  Under APB 25, *Accounting for Stock Issued to Employees,*afixed stock option plan that permits the use of a cashless exercise becomesvariable if a pattern of exercising stock options using the cashless method isdemonstrated.  As a result, in April2004, the Company was required to account for 

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

7

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stock options issued under the plans asvariable awards.  Compensation expensefor stock options accounted for 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, adjustedquarterly for the change in the fair value of the unvested stock options awarded.  Increases or decreases in the market value ofthe Company’s common stock between April of 2004 and the end of each reportingperiod result in a change in the measure of compensation for vested awards,which is reflected currently in operations. The Company recorded compensation expense for options granted under theplans accounted for as variable awards of $0.5 million and $1.2 million for thethree and nine months ended September 30, 2004 and no compensation expense forthe three and nine months ended September 30, 2003.  During the nine months ended September 30,2004, recipients exercised their options to purchase an aggregate ofapproximately 216,000 shares of the Company’s common stock.  Recipients exercised options forapproximately 111,000 shares using the cashless method resulting in the netissuance of approximately 36,000 shares of common stock.  During the three months ended March 31, 2004,two officers resigned from the Company. As the former officers continued to serve on the Company’s Board ofDirectors, the Company agreed that the individual’s stock options wouldcontinue to vest and be exercisable in accordance with the original vesting andexercise provisions.  As a result of themodification to the stock options for these officers the outstanding stockoptions are to be accounted for as variable awards, and as a result, theCompany recorded compensation expense of $0.4 million for the three monthsended March 31, 2004, measured as the difference in the market value of theCompany’s common stock on the date the officer’s status changed and the strikeprice of the outstanding stock options. These charges are included in selling, general and administrativeexpenses.

 

*Participation Plan*

 

TheCompany has also entered into agreements with certain directors and officers ofthe Company.  These arrangements arereferred to as the Participation Plan. Under the Participation Plan, MarkWest Hydrocarbon 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,**theParticipation Plan is accounted for as a variable plan.  Since the employee and director are 100%vested on the date they purchase the subordinated units or general partnerinterests, compensation expense for the subordinated units is measured as thedifference in the market value of the subordinated Partnership units and theamount paid by those individuals. Compensation related to the general partner interest is calculated asthe difference in the formula value and the amount paid by thoseindividuals.  The formula value is theamount MarkWest Hydrocarbon would have to pay the directors and employees torepurchase the general partner interests and is based on the current marketvalue of the Partnership’s common units and the current quarterly distributionpaid by the Partnership.  Increases ordecreases in the market value of the subordinated units and the formula valueof the general partner interests between the date they are acquired and the endof each reporting period result in a change in the measure of compensation,which is reflected currently in operations. The Company recorded compensation expense of $0.8 million and $0.2million for the three months ended September 30, 2004 and 2003, respectively.For the nine months ended September 30, 2004 and 2003, the Company recordedcompensation expense of $1.2 million and $0.6 million, respectively.  These charges are included in selling,general and administrative expenses.

 

*MarkWest Energy Partners Long-Term Incentive Plan*

 

ThePartnership issues restricted units under the MarkWest Energy Partners, L.P.Long-Term Incentive Plan.  A restrictedunit is a “phantom” unit that entitles the grantee to receive a common unitupon the vesting of the phantom unit, or at the discretion of the CompensationCommittee, cash equivalent to the value of a common unit.  In accordance with APB No. 25, the Partnershipapplies variable accounting for the plan because a phantom unit is an award toan employee entitling them to increases in the market value of the Partnership’sunits subsequent to the date of grant without issuing units to the employees,similar to a stock appreciation right. As a result, the Partnership is required to mark to market the awards atthe end of each reporting period. Compensation expense is measured for the phantom unit grants using themarket price of MarkWest Energy’s common units on the date the units aregranted.  The fair value of the unitsawarded is amortized into earnings over the period of service, adjustedquarterly for the change in the fair value of the unvested units granted.  The phantom units vest over a stated period.  For certain employees vesting is acceleratedif certain performance measures are met. The accelerated vesting criteria provisions are based on annualizeddistribution goals.  If the Partnership’sdistributions are at or above the goal for a certain number of consecutivequarters, vesting of the employee’s phantom units is accelerated.  However, the 

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

8

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vesting of any phantom units may not occuruntil at least one year following the date of grant.  The general partner of the Partnership mayalso elect to accelerate the vesting of outstanding awards, which results in animmediate charge to operations for the unamortized portion of the award.  During the three months ended September 30,2004, 15,200 restricted units were granted. There were no restricted units granted during the three months endedSeptember 30, 2003.  During the nine monthsended September 30, 2004 and 2003, 23,200 and 3,000 restricted units, respectively,were granted.  The Partnership recordedcompensation expense of $0.4 million and $0.2 million for the three monthsended September 30, 2004 and 2003, respectively.  For the nine months ended September 30, 2004and 2003, the Company recorded compensation expense of $0.7 million and $0.6million, respectively.  These charges areincluded in selling, general and administrative expenses.

 

Had compensation cost for the Company’s stock-basedand unit-based compensation plans been determined based on the fair value atthe grant dates under those plans consistent with the method prescribed by SFASNo. 123, the Company’s net income (loss) and net income (loss) per share wouldhave been revised to the pro forma amounts listed below:

 
| ** **                                                                                                                                   | ** ** | **Three Months Ended September 30,**      | ** ** | **Nine Months Ended September 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                                                                   | ** ** | **2004**                                  | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                                                                   | ** ** | **(in thousands, except per share data)** | ** ** |
| ** **                                                                                                                                   | ** ** | **(as restated,  see note 16)**           | ** ** | **(as restated, see  note 16)**     | ** ** | **(as restated,  see note 16)** | ** ** | **(as restated, see  note 16)** | ** ** |
| Net income (loss), as reported                                                                                                               |       | $                                         | (1,966     | )                                   | $          | (7,036 | ) | $ | (7,619 | ) | $ | 1,582 |   |
| Add: compensation expense included in  reported net income (loss)                                                                            |       | 1,609                                     |       | 289                                 |       | 3,468 |   | 1,123 |   |
| Deduct: total stock-based employee  compensation expense determined under fair value based method for all awards,  net of related tax effect |       | (1,156                                    | )          | (317                                | )          | (1,952 | ) | (1,416 | ) |
| Pro forma net  income (loss)                                                                                                                 |       | $                                         | (1,513     | )                                   | $          | (7,064 | ) | $ | (6,103 | ) | $ | 1,289 |   |
|                                                                                                                                         |       |                                      |       |                                |       |   |   |   |   |
| Net income (loss) per share:                                                                                                                 |       |                                      |       |                                |       |   |   |   |   |
| Basic:                                                                                                                                       |       |                                      |       |                                |       |   |   |   |   |
| As reported                                                                                                                                  |       | $                                         | (0.18      | )                                   | $          | (0.68 | ) | $ | (0.71 | ) | $ | 0.15 |   |
| Pro forma                                                                                                                                    |       | $                                         | (0.14      | )                                   | $          | (0.68 | ) | $ | (0.57 | ) | $ | 0.15 |   |
| Diluted:                                                                                                                                     |       |                                      |       |                                |       |   |   |   |   |
| As reported                                                                                                                                  |       | $                                         | (0.18      | )                                   | $          | (0.68 | ) | $ | (0.71 | ) | $ | 0.15 |   |
| Pro forma                                                                                                                                    |       | $                                         | (0.14      | )                                   | $          | (0.68 | ) | $ | (0.57 | ) | $ | 0.15 |   |

 

**3.****             ****MarkWest Energy Partners’Common Unit Offerings**

 

During January 2004, thePartnership completed an offering of 1,100,444 common units at $39.90 per unitfor gross proceeds of $43.9 million.  Inaddition, of the 172,200 common units available to underwriters to coverover-allotments, 72,500 were sold for gross proceeds of $2.9 million. Tomaintain its 2% interest, the general partner of the Partnership contributed$1.0 million.  Gross proceeds fromparties other than MarkWest Hydrocarbon, Inc. of $46.9 million less associatedoffering costs of $3.8 million, of which $0.1 million related to the generalpartner’s share, resulted in net proceeds from the secondary public offering of$43.1 million.  As approximately $1.0million of the offering costs had been incurred during fiscal 2003, net cashgenerated from the offering during 2004 was approximately $44.1 million.

 

DuringJuly 2004, the Partnership sold 1,304,438 common units at $34.50 per unit forgross proceeds of $45.0 million in a private placement to certain accreditedinvestors.  Transaction costs were $1.0million and the capital contribution from the general partner to maintain its2% general partner interest was $0.9 million. Net proceeds were used to partially finance the American Central EasternTexas Gas Co, Limited Partnership (“American Central East Texas”) Carthagegathering system and gas processing assets (See Note 5).

 

On September 21, 2004, thePartnership completed a secondary public offering of 2,323,609 of its common 

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

9

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units at $43.41 per unit for gross proceedsof $100.9 million and 157,395 common units sold by certain sellingunitholders.  Of the 2,323,609 commonunits sold, 323,609 common units were sold by the Partnership pursuant to theunderwriter’s over-allotment option. MarkWest Energy Partners did not receiveany proceeds from the common units sold by the selling unitholders.  The total net proceeds from the offering,after deducting transaction costs of $5.2 million and including the generalpartner’s 2% capital contribution of $2.1 million, were $97.8 million and wereused to repay a portion of the outstanding indebtedness under the amended andrestated credit facility.

 

**4.****             ****Marketable Securities**

 

Marketablesecurities are classified as available-for-sale and stated at market based onthe closing price of the securities at the balance sheet date.  Accordingly, unrealized gains or losses arereflected in other comprehensive income (loss), net of applicable incometaxes.  For losses that are other thantemporary, the cost basis of the securities is written down to fair value andthe amount of the write-down is reflected in the statement of operations.  The Company utilizes a weighted-average costbasis to compute realized gains and losses. Realized gains and losses, dividends and interest income, are reflectedin earnings.

 

Debtand equity are classified as available-for-sale.  The following are components of marketablesecurities (in thousands):

 
| **September 30, 2004****(as restated, see note 16)**                | ** ** | **Cost Basis** | ** ** | **Unrealized   gains** | ** ** | **Unrealized   losses** | ** ** | **Recorded   Basis** | ** ** |
|---------------------------------------------------------------------|------------|----------------|------------|------------------------|------------|-------------------------|------------|----------------------|------------|
| **Equity  securities:**                                             |       |           |       |                   |       |                    |       |                 |       |
| Master limited partnership units                                    |       | $              | 5,150      |                   | $          | 318                     |       | $                    | (25        | ) | $ | 5,443 |   |
| Equity securities, classified as current                            |       | 5,150          |       | 318                    |       | (25                     | )          | 5,443                |       |
| **Fixed  maturities:**                                              |       |           |       |                   |       |                    |       |                 |       |
| Mortgage backed securities (due after one  year through five years) |       | 6,753          |       | 39                     |       | (29                     | )          | 6,763                |       |
| Mortgage back securities, classified as  non-current                |       | 6,753          |       | 39                     |       | (29                     | )          | 6,763                |       |
| Total marketable securities                                         |       | $              | 11,903     |                   | $          | 357                     |       | $                    | (54        | ) | $ | 12,206 |   |
|                                                                |       |           |       |                   |       |                    |       |                 |       |
| **Restricted  fixed maturities:**                                   |       |           |       |                   |       |                    |       |                 |       |
| Mortgage backed securities (due December  2007)                     |       | $              | 2,500      |                   | $          | —                  |       | $                    | —     |   | $ | 2,500 |   |
| Total restricted marketable securities                              |       | $              | 2,500      |                   | $          | —                  |       | $                    | —     |   | $ | 2,500 |   |
| ** **                                                          | ** ** | ** **     | ** ** | ** **             | ** ** | ** **              | ** ** | ** **           | ** ** |
| **December 31, 2003****(as  restated, see note 16)**                | ** ** | **Cost Basis** | ** ** | **Unrealized   gains** | ** ** | **Unrealized   losses** | ** ** | **Recorded   Basis** | ** ** |
| **Restricted  fixed maturities:**                                   |       |           |       |                   |       |                    |       |                 |       |
| Mortgage backed securities (due December  2007)                     |       | $              | 2,500      |                   | $          | —                  |       | $                    | —     |   | $ | 2,500 |   |
| Total restricted marketable securities                              |       | $              | 2,500      |                   | $          | —                  |       | $                    | —     |   | $ | 2,500 |   |

 

At September 30, 2004, unrealized gains of $0.4million relate primarily to investments in domestic equity securities in energypartnerships.  Unrealized losses of $0.1million relate primarily to mortgage backed securities and are primarilyattributable to changes in interest rates.

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

10

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**5.****             ****MarkWest Energy Partners’Acquisitions**

 

*East Texas System Acquisition*

 

OnJuly 30, 2004, MarkWest Energy Partners completed the acquisition (the “EastTexas System acquisition”) of American Central Eastern Texas’ Carthagegathering system and gas processing assets located in East Texas forapproximately $240.6 million.  Throughthe consolidation of the Partnership, the Company included the results ofoperations of the Carthage gathering system from July 30, 2004.  The assets acquired consist of processingplants, gathering systems, a processing facility currently under constructionand a NGL pipeline to be completed in 2005.

 

Inconjunction with the closing of the acquisition, the Partnership completed anoffering of 1,304,438 of its common units, at $34.50 per unit, which nettedMarkWest Energy Partners approximately $45.0 million after transaction costs ofapproximately $0.9 million and including a contribution from the generalpartner of $0.9 million to maintain its ownership interest.  In addition, the Partnership amended andrestated its credit facility, increasing the maximum lending limit from $140.0million to $315.0 million.  The creditfacility includes a $265.0 million revolving facility and a $50.0 million termloan facility.  MarkWest Energy Partnersused the proceeds from the private offering and borrowings of $195.7 millionunder the Partnership’s credit facility to finance the East Texas Systemacquisition.

 

The purchase price was comprised of$240.6 million, and was allocated as follows (in thousands):

 
| Acquisition  costs:               |   |   |    |
|-----------------------------------|--------|--------|---------|
| Cash consideration                |   | $      | 240,211 |   |
| Direct acquisition costs          |   | 396    |    |
| Total                             |   | $      | 240,607 |   |
|                              |   |   |    |
| Allocation  of acquisition costs: |   |   |    |
| Customer contracts                |   | $      | 164,473 |   |
| Property, plant and equipment     |   | 76,767 |    |
| Inventory                         |   | 66     |    |
| Imbalance payable                 |   | (337   | )       |
| Property taxes payable            |   | (362   | )       |
| Total                             |   | $      | 240,607 |   |

 

*Hobbs Lateral Acquisition*

 

OnApril 1, 2004, the Partnership acquired the Hobbs Lateral pipeline forapproximately $2.3 million.  The HobbsLateral consists of a four-mile pipeline, with a capacity of 160 million cubicfeet of natural gas per day, connecting the Northern Natural Gas interstatepipeline to Southwestern Public Service’s Cunningham and Maddox powergenerating stations in Hobbs, New Mexico. The Hobbs Lateral is a New Mexico intrastate pipeline regulated by theFederal Energy Regulatory Commission. The pro forma results of operations of the Hobbs Lateral acquisitionhave not been presented, as they are not significant.

 

*Michigan Crude Pipeline*

 

On December 18, 2003, MarkWestEnergy Partners completed the acquisition (the “Michigan Crude Pipelineacquisition”) of Shell Pipeline Company, LP’s and Equilon Enterprises, LLC’s,doing business as Shell Oil Products US (“Shell”), Michigan Crude GatheringPipeline (the “System”), for approximately $21.3 million. The System’s resultsof operations have been included in the Company’s consolidated financialstatements since December 18, 2003. The $21.3 million purchase price wasfinanced through borrowings under the Partnership’s line of credit.

 

The System extends fromproduction facilities near Manistee, Michigan to a storage facility nearLewiston, Michigan.  The trunk lineconsists of approximately 150 miles of pipe. Crude oil is gathered into the System from 57 injection points, including52 central production facilities and five truck unloading facilities and fiveunloading facilities, and approximately 100 miles of pipe..  The System also includes truck-unloadingstations at Manistee, Seeley Road and Junction, and the Samaria Truck UnloadingStation located in Monroe County, Michigan, near Toledo, Ohio.

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

11

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The System is a commoncarrier Michigan intrastate pipeline and gathers light crude oil fromwells.  The oil is transported for a feeto the Lewiston, Michigan station where it is batch injected into the EnbridgeLakehead Pipeline.

 

The purchase price was comprised of $21.3 millionpaid in cash to Shell plus direct acquisition costs and was allocated asfollows (in thousands):

 
| Acquisition costs:                |   |   |   |
|-----------------------------------|--------|--------|--------|
| Cash consideration                |   | $      | 21,155 |   |
| Direct acquisition costs          |   | 128    |   |
| Total                             |   | $      | 21,283 |   |
|                              |   |   |   |
| Allocation  of acquisition costs: |   |   |   |
| Property, plant and equipment     |   | $      | 21,283 |   |

 

###### *Western Oklahoma Acquisition*

 

OnDecember 1, 2003, MarkWest Energy Partners completed the acquisition of certainassets of American Central Western Oklahoma Gas Company, L.L.C. forapproximately $38.0 million.  Results ofoperations for the acquired assets have been included in the Partnership’sconsolidated financial statements since that date.

 

Theassets acquired include the Foss Lake gathering system located in the westernOklahoma counties of Roger Mills and Custer. The gathering system is comprised of approximately 167 miles ofpipeline, connected to approximately 270 wells, and 11,000 horsepower ofcompression facilities.  The assets alsoinclude the Arapaho gas processing plant that was installed during 2000.

 

Thepurchase price of approximately $38.0 million was financed through borrowingsunder the Partnership line of credit, which was amended at the closing of theacquisition to increase availability under the credit facility from $75.0million to $140.0 million.

 

The purchase price was comprised of$38.0 million paid in cash, and was allocated as follows (in thousands):

 
| Acquisition costs:                |   |   |   |
|-----------------------------------|--------|--------|--------|
| Cash consideration                |   | $      | 37,850 |   |
| Direct acquisition costs          |   | 101    |   |
| Total                             |   | $      | 37,951 |   |
|                              |   |   |   |
| Allocation  of acquisition costs: |   |   |   |
| Property, plant and equipment     |   | $      | 37,951 |   |

######  

###### *Lubbock Pipeline Acquisition*

 

On September 2, 2003,MarkWest Energy Partners completed the acquisition (the “Lubbock Pipelineacquisition”) of a 68-mile intrastate gas transmission pipeline system nearLubbock, Texas from a subsidiary of ConocoPhillips for approximately $12.2million.  The transaction was financedthrough borrowings under the Partnership’s then-existing credit facility.  The acquisition was accounted for as apurchase business combination.  The proforma results of operations of the Lubbock Pipeline acquisition have not beenpresented, as they are not significant.

 

###### *Pinnacle Acquisition*

 

On March 28, 2003,MarkWest Energy Partners completed the acquisition (the “Pinnacle acquisition”)of Pinnacle Natural Gas Company, Pinnacle Pipeline Company, PNG TransmissionCompany, Inc., PNG Utility Company 

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

12

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and Bright Star Gathering, Inc.(collectively, “Pinnacle”).  Pinnacle’sresults of operations have been included in the Company’s consolidatedfinancial statements since that date.

 

                The Pinnacle acquisition wasaccomplished through a merger under Texas law of the Sellers and four newlyformed wholly owned subsidiaries of the Partnership as buyers.  In the merger, most of the assets andliabilities of the Sellers were allocated to the Partnership entities, and allentities survived the merger.  The assetsacquired from the Sellers, primarily located in the State of Texas, with thebalance located in New Mexico, Louisiana, Mississippi and Kansas, werecomprised of three lateral natural gas pipelines and twenty gathering systems.

 

Thepurchase price was allocated as follows (in thousands):

 
| Acquisition costs:                            |   |   |   |
|-----------------------------------------------|--------|--------|--------|
| Long-term debt incurred                       |   | $      | 39,471 |   |
| Direct acquisition costs                      |   | 450    |   |
| Current liabilities assumed                   |   | 8,945  |   |
| Total                                         |   | $      | 48,866 |   |
|                                          |   |   |   |
| Allocation  of acquisition costs:             |   |   |   |
| Current assets                                |   | $      | 10,643 |   |
| Fixed assets (including long-term  contracts) |   | 38,223 |   |
| Total                                         |   | $      | 48,866 |   |

 

*Pro Forma Results of Operations(Unaudited)*

 

The following table reflectsthe unaudited pro forma consolidated results of operations for the comparableperiod presented, as though the Pinnacle acquisition, the Western Oklahomaacquisition, the Michigan Crude Pipeline and the East Texas System acquisitioneach had occurred as of the beginning of the period presented.  The unaudited pro forma results have been preparedfor comparative purposes only and may not be indicative of future results.  The pro forma results of operations of theHobbs Lateral acquisition and the Lubbock Pipeline acquisition have not beenpresented, as they are not significant.

 
| ** **                                           | ** ** | **Three Months   Ended  September 30,  2004** | ** ** | **Three Months   Ended   September 30,  2003** | ** ** | **Nine Months   Ended   September 30,  2004** | ** ** | **Nine Months   Ended   September 30,  2003** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------------|------------|------------------------------------------------|------------|-----------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                           | ** ** | **(in thousands, except per share data)**     | ** ** |
| ** **                                           | ** ** | **(as restated,   see note 16)**              | ** ** | **(as restated, see   note 16)**               | ** ** | **(as restated,   see note 16)**              | ** ** | **(as restated,   see note 16)**              | ** ** |
| Revenue                                              |       | $                                             | 125,084    |                                           | $          | 67,440                                        |       | $                                             | 324,913    |   | $ | 224,466 |   |
| Income  (loss) from continuing operations            |       | $                                             | (1,599     | )                                              | $          | (8,059                                        | )          | $                                             | (7,063     | ) | $ | (27,144 | ) |
| Income (loss) from continuing operations  per share: |       |                                          |       |                                           |       |                                          |       |                                          |       |
| Basic                                                |       | $                                             | (0.15      | )                                              | $          | (0.78                                         | )          | $                                             | (0.66      | ) | $ | (2.64 | ) |
| Diluted                                              |       | $                                             | (0.15      | )                                              | $          | (0.78                                         | )          | $                                             | (0.66      | ) | $ | (2.64 | ) |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

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##### **6.****             ****Property, Plant andEquipment**

 

The following provides thecomposition of the Company’s property, plant and equipment at:

 
| ** **                                                              | ** ** | **September 30, 2004 (1)**       | ** ** | **December 31, 2003** | ** ** |
|-------------------------------------------------------------------------|------------|----------------------------------|------------|-----------------------|------------|
| ** **                                                              | ** ** | **(in thousands)**               | ** ** |
| ** **                                                              | ** ** | **(as restated, see   note 16)** | ** ** | ** **            | ** ** |
| Property,  plant and equipment:                                         |       |                             |       |                  |       |
| Gas gathering facilities                                                |       | $                                | 146,721    |                  | $          | 73,424 |   |
| Gas processing plants                                                   |       | 56,277                           |       | 55,888                |       |
| Fractionation and storage facilities                                    |       | 22,496                           |       | 22,160                |       |
| Natural gas pipelines                                                   |       | 39,030                           |       | 38,790                |       |
| Crude oil pipeline                                                      |       | 18,499                           |       | 18,352                |       |
| NGL transportation facilities                                           |       | 4,391                            |       | 4,415                 |       |
| Marketing assets                                                        |       | 1,606                            |       | 1,987                 |       |
| Oil and gas properties and equipment, full  cost method                 |       | 2,509                            |       | 2,380                 |       |
| Land, buildings and other equipment                                     |       | 11,258                           |       | 12,499                |       |
| Construction in-progress                                                |       | 21,176                           |       | 2,362                 |       |
|                                                                    |       | 323,963                          |       | 232,257               |       |
| Less: Accumulated depreciation, depletion,  amortization and impairment |       | (54,967                          | )          | (44,134               | )          |
| Total property, plant and equipment, net                                |       | $                                | 268,996    |                  | $          | 188,123 |   |

 

*Cobb Processing Plant*

 

During 2003, the Companyentered into an agreement with the Partnership for the construction of a newCobb processing plant.  Initially, weexpected the construction costs of the new plant and the costs to decommissionand dismantle the old plant to be approximately $2.1 million, $1.7 million tobe funded by the Company and $0.4 million to be funded by the Partnership.  In the third quarter of 2004, this number wasrevised and the Company now expects the costs to be $3.6 million to constructand $0.4 million to decommission and dismantle. The Partnership will fund the $1.9 million increase in expectedcosts.  Construction is expected to becompleted by the end of 2004.  As ofSeptember 30, 2004, the Company had contributed $1.3 million, resulting in $0.4million to be contributed during the fourth quarter of fiscal 2004.

 

**7.****             ****Adoption of SFAS No. 143**

 

InJune 2001, the Financial Accounting Standards Board issued Statement 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.

 

Thecumulative effect of this accounting change for years prior to 2003 was lessthan $0.1 million and is reflected in the Company’s statement of operations forthe three months ended March 31, 2003. At the time of adoption, the Companyrecorded an asset retirement obligation of $3.4 million, decreased a siterestoration liability of $0.9 million that was recorded prior to theimplementation of SFAS No. 143 and increased net property, plant and equipment$2.4 million in accordance with the provisions of SFAS No. 143. There was noimpact on the Company’s cash flows as a result of adopting SFAS No. 143.  For the year ended December 31, 2003, theimpact on earnings per share from the cumulative effect of the change inaccounting for asset retirement obligations was not significant. The assetretirement obligation, which is included on the consolidated balance sheet inother long-term liabilities, was $0.9 million and $3.8 million at September 30,2004 and 2003, respectively.

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

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Thefollowing is a reconciliation of the changes in the asset retirement obligationfrom January 1, 2004 to September 30, 2004 (in thousands):

 
| Asset retirement obligation as of December  31, 2003  |   | $   | 504    |   |
|-------------------------------------------------------|--------|-----|--------|--------|
| Liabilities accrued during the period                 |   | 377 |   |
| Liabilities settled                                   |   | (4  | )      |
| Accretion                                             |   | 13  |   |
| Asset retirement obligation as of September  30, 2004 |   | $   | 890    |   |

 

The Company’s assets subject toasset retirement obligations, exclusive of assets owned by MarkWest Energy,were primarily oil and gas wells. The Company discontinued its exploration andproduction business and sold off substantially all of its assets as of December31, 2003.

 

The Partnership reviewed currentlaws and regulations governing obligations for asset retirements as well asleases.  Based on that review, thePartnership identified certain land leases in East Texas that containprovisions requiring the Partnership to return the land to its originalcondition upon the termination of the lease. Based on the review of the leases, the Partnership recorded an assetretirement obligation of $0.4 million during the three months ended September30, 2004, using an estimated average term of the leases of 25 years.

 

In accordance with SFAS No. 143,the Partnership has identified certain assets that have an indeterminate life,and thus a future retirement obligation is not determinable.  These assets include certain pipelines andprocessing plants.  A liability for theseasset retirement obligations will be recorded when a fair value isdeterminable.

 

The asset retirement obligationassociated with the Partnership’s remaining facilities was insignificant andnot recognized in the financial statements.

 

In October 2003, the board of directorsof the Company’s general partner approved a plan to shut down the Partnership’sexisting Cobb processing facility, and construct a replacementfacility. Construction of the new facility was completed in the firstquarter of 2005.  During the fourth quarter of 2003, the Partnershipestimated the amount of the asset retirement obligation associated with thedecommissioning and dismantlement of the old Cobb facility to be $0.5 millionand, accordingly, the Company recorded a related accrued liability.  At September 30, 2004, the asset retirementobligation was $0.5 million.

 

At January 1 and December 31, 2004and 2003, there were no assets legally restricted for purposes of settlingasset retirement obligations.

 

**8.****             ****Intangible Assets**

 

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 $240.6million.  Of the total purchase price,$164.5 million was allocated to amortizable intangible assets (i.e., customercontracts) based on the net present value of the projected cash flows. The keyvariables that determined the valuation of the customer contracts was theassumption of renewals, economic incentives to retain customers, historicalvolumes, current and future capacity of the gathering system and pricingvolatility.  The Partnership isamortizing the fair value of these customer contracts on a straight-line basisover an estimated economic life of 20 years. The estimated economic life was determined by assessing the life of theassets to which the contracts relate, likelihood of renewals, competitivefactors, regulatory or legal provisions, and maintenance and renewal costs.

 

The Company entered into a seriesof agreements with a gas producer in September, under which the Companyprocesses natural gas for the producer under modified keep-wholecontracts.  Other intangible assetsinclude $3.3 million in consideration given to the producer in connection withthese non-separable contracts that is being amortized over the term of thecontracts, October 1, 2004 through February 9, 2015.

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

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The Company reviews long-livedassets for potential impairment whenever there is an indication that thecarrying amount may not be recoverable from future estimated cash flows.  Through September 30, 2004, management believesthat there have been no indications of impairment of the intangible assets.

 

The Company’s purchased intangibleassets associated with the East Texas System acquisition and othernon-acquisition contract costs at September 30, 2004, are composed of (inthousands):

 
| ** **                                      | ** ** | **Gross** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** |
|-------------------------------------------------|------------|-----------|------------|-------------------------------|------------|---------|------------|
| Customer contracts (1-20 years)                 |       | $         | 164,677    |                          | $          | 1,468   |       | $ | 163,209 |   |
| Other (October 1, 2004 – February 9, 2015) |       | 3,250     |       | —                        |       | 3,250   |       |
| Total intangible  assets                        |       | $         | 167,927    |                          | $          | 1,468   |       | $ | 166,459 |   |

 

Amortizationexpense related to customer contracts was $1.4 million for the nine monthsended September 30, 2004.

 

Estimatedfuture amortization expense related to intangible assets at September 30, 2004is as follows (in thousands):

 
| Year ending  December 31: |   |    |   |
|---------------------------|--------|---------|--------|
| 2004                      |   | $       | 2,162  |   |
| 2005                      |   | 8,579   |   |
| 2006                      |   | 8,511   |   |
| 2007                      |   | 8,511   |   |
| 2008                      |   | 8,511   |   |
| 2009                      |   | 8,511   |   |
| Thereafter                |   | 121,674 |   |
|                           |        |         |        |  |

 

**9.****             ****Debt**

 

In July 2004 and August 2004, thePartnership amended and restated its credit facility, increasing its maximumlending limit from $140.0 million to $315.0 million.  The credit facility includes a $265.0 millionrevolving facility and a $50.0 million term loan facility.  MarkWest Energy Partners used the proceedsfrom the offering and borrowings under its amended and restated credit facilityto finance the East Texas System acquisition. All of the Partnership’s assetsare pledged to the credit facility lenders to secure the repayment of theoutstanding borrowings under the credit facility. The term loan portion of theamended and restated credit facility matures in December 2004 and the revolvingportion matures in May 2005.  Under theterm loan, to the extent that a portion or all of the term loan is repaid, thenthose amounts may not be reborrowed.  Inaddition, there are certain restrictions on the reborrowing amounts paid underthe revolver loan.  At September 30,2004, $197.5 million was outstanding, and $46.5 million was available under thePartnership credit facility.

 

The interest rate on the creditfacility is determined using a variable interest rate based on one of twoindices that include either (i) LIBOR plus 3.5% to LIBOR plus 4.5% or (ii) BaseRate (“BR”) (as defined for any day, a fluctuating rate per annum equal to thehigher of (a) the Federal Funds Rate plus 1⁄2 of 1% and (b) the rate of interestin effect for such day as publicly announced from time to time by theAdministrative Agent of the debt as its “prime rate”) plus 2.5% to BR plus3.5%, depending on our maintenance of certain financial leverage ratios.  The Partnership is also required to pay acommitment fee equal to the applicable rate (as defined in the creditagreement) times the actual daily amount by which the aggregate revolvercommitments exceed the sum of (i) the outstanding amount of revolver loans plus(ii) the outstanding amount of letters of credit obligations.  The commitment fee is due and payablequarterly in arrears on the last business day of each March, June, Septemberand December.  For the nine months endedSeptember 30, 2004, the weighted average interest rate was 5.4%.

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

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*Subsequent event*

 

In October 2004, the Partnershipamended and restated its credit facility, decreasing the maximum lending limitfrom $315.0 million to $200.0 million and increasing the term of the facilityto five years.  The credit facilityincludes a revolving facility of $200.0 million with the potential to increasethe maximum lending limit to $300.0 million. The credit facility is guaranteed by the Partnership and all of itspresent and future subsidiaries and is collateralized by substantially all ofits existing and future assets and those of its subsidiaries, including stockand other equity interests.  Theborrowing under the Partnership’s credit facility will bear interest at avariable interest rate based on one of two indices that include either (i)LIBOR plus an applicable margin, which is fixed at a rate of 2.75% for thefirst two quarters following the closing of the credit facility or (ii) BaseRate (as defined for any day, a fluctuating rate per annum equal to the higherof (a) the Federal Funds Rate plus 1⁄2 of 1% and (b) the rate of interest ineffect for such day as publicly announced from time to time by the AdministrativeAgent of the debt as its “prime rate”) plus an applicable margin, which shallbe fixed at a rate of 2.00% for the first two quarters following the closing ofthe credit facility.  After that period,the applicable margin will be adjusted quarterly based on its ratio of fundeddebt to EBITDA (as defined in the credit agreement).  Consequently, as of September 30, 2004, theCompany has classified the debt balance as non-current.

 

In connection with the creditfacility, the Partnership 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 (other than subordinateindebtedness), make acquisitions, engage in other businesses, enter intocapital or operating leases, engage in transactions with affiliates, makedistributions on equity interests and other usual and customary covenants.  In addition, the Partnership is subject tocertain financial maintenance covenants, including its ratios of total debt toEBITDA, total senior secured debt to EBITDA, EBITDA to interest and a minimumnet worth requirement.  Failure to complywith the provisions of any of these covenants could result in acceleration ofthe Partnership’s debt and other financial obligations.

 

In October 2004, the Partnershipissued $225.0 million of senior notes at a fixed rate of 6.875% and with amaturity date of November 1, 2014. Subject to compliance with certain covenants, the Partnership may issue additionalnotes from time to time under the indenture. Interest on the notes accrue at the rate of 6.875% per year and arepayable semi-annually in arrears on May 1 and November 1, commencing on May 1,2005.  The Partnership may redeem some orall of the notes at any time on or after November 1, 2009 at certain redemptionprices together with accrued and unpaid interest to the date of redemption, andthe Partnership may redeem all of the notes at any time prior to November 1,2009 at a make-whole redemption price. In addition, prior to November 1, 2007, MarkWest Energy Partners mayredeem up to 35% of the aggregate principal amount of the notes with theproceeds of certain equity offerings at a certain redemption price.  If the Partnership sells certain assets anddoes not reinvest the proceeds or repay senior indebtedness, or if itexperiences specific kinds of changes in control, it must offer to repurchasenotes at a specified price.  Each ofMarkWest Energy Partner’s existing subsidiaries, other than MarkWest EnergyFinance Corporation, has guaranteed the notes initially and so long as suchsubsidiary guarantees any of the Partnership’s other debt.  Not all of the Partnership’s futuresubsidiaries will have to become guarantors. The notes are senior unsecured obligations with equal in right ofpayment with all of the existing and future senior debt.  These notes are senior in right of payment toall of the Partnership’s future subordinated debt but effectively junior inright of payment to its secured debt to the extent of the assets securing thedebt, including its obligations in respect to its bank credit facility.  The proceeds from these notes were used topay down the outstanding debt under the Partnership’s credit facility.

 

OnOctober 25, 2004, the Company entered into a $25.0 million senior creditfacility with a term of one year.  The$25.0 million revolving facility has a variable interest rate based on the baserate, which is equal to the higher of a) the Federal Funds Rate plus 1⁄2 of 1%,and b) the rate of interest in effect for such day as publicly announced fromtime to time by the Administrative Agent as its prime rate, plus the applicablerate, which is based on a utilization percentage.  The amount available to be drawn under thecredit facility is based upon the amount of the Company’s eligible accountsreceivable and inventory balance.  Inaddition, the Company is required to pay a commitment fee equal to theapplicable rate times the actual daily amount by which the aggregate commitmentexceeds the sum of (i) the outstanding amount of loans plus (ii) theoutstanding amount of its letter of credit obligations.  Substantially all of the Company’s assets andthose of its subsidiaries (other than excluded MarkWest Energy Partnersentities) are pledged to the lender to secure the repayment of the outstandingborrowings under the credit facility. The proceeds from this borrowing will be used to finance inventory andaccounts receivable, issue 

 

The accompanying notes are an integral part of these consolidated financialstatements.

 

17

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lettersof credit and pay fees, costs and expenses related to this agreement.  As of October 31, 2004, the Company had nooutstanding borrowings.

 

**10.****      ****Recovery of Receivable**

 

Duringthe fourth quarter of 2001, Enron Corporation and its subsidiaries (“Enron”)filed for bankruptcy protection.  Inresponse to this filing, MarkWest Hydrocarbon terminated all derivativecontracts where Enron was the counterparty. As a result, in 2001 the Company wrote off $1.1 million of fair valuederivative instrument assets related to its cash flow hedges offset by $0.1million of fair value derivative instrument liabilities related to its fairvalue hedges.  In the third quarter of2004, the Company sold its claim to these assets for $0.8 million.  As a result, the Company recorded $0.8million as other income in the third quarter of 2004.

 

**11.****      ****Segment Reporting**

 

The Company’s operations areclassified into two reportable segments:

 

(1)          ManagingMarkWest Energy Partners—the Company operates MarkWest Energy Partners, apublicly-traded master limited partnership engaged in the gathering, processingand transmission of natural gas; the transportation, fractionation and storageof natural gas liquids; and the gathering and transportation of crude oil.

(2)          Marketing—the Company sells its equity and third-party NGLs, purchases third-partynatural gas and sells its equity and third-party natural gas.  Since February 2004, the Company is alsoengaged in the wholesale marketing of propane.

 

During 2003, the Companydiscontinued its exploration and production business segment. The Company’scontinuing operations are conducted solely in the United States.

 

The table below presentsinformation about operating income (loss) for the reported segments for thethree and nine months ended September 30, 2004 and 2003. Segment operatingincome (loss) includes total revenues less purchased product costs, facilityexpenses, depreciation, amortization of intangible assets and accretion ofasset retirement obligation. Items excluded from segment operating income(loss) are reflected in the reconciliation of total segment operating income(loss) to income (loss) from continuing operations before taxes.

 
| ** **                                    | ** ** | ** **          | ** ** | **MarkWest** | ** ** | ** **      | ** ** | ** ** | ** ** |
|-----------------------------------------------|------------|---------------------|------------|--------------|------------|-----------------|------------|------------|------------|
| ** **                                    | ** ** | ** **          | ** ** | **Energy**   | ** ** | **Eliminating** | ** ** | ** ** | ** ** |
| ** **                                    | ** ** | **Marketing**       | ** ** | **Partners** | ** ** | **Entries**     | ** ** | **Total**  | ** ** |
| ** **                                    | ** ** | **(in  thousands)** | ** ** |
| **Three Months Ended September 30, 2004(1):** |       |                |       |         |       |            |       |       |       |
| Revenues from external customers              |       | $                   | 58,919     |         | $          | 62,592          |       | $          | —     |   | $ | 121,511 |   |
| Intersegment revenues                         |       | $                   | 121        |         | $          | 15,250          |       | $          | (15,371    | ) | $ | — |   |
| Segment operating income (loss)               |       | $                   | (28        | )            | $          | 12,009          |       | $          | —     |   | $ | 11,981 |   |
| Total segment assets                          |       | $                   | 93,828     |         | $          | 480,345         |       | $          | (19,427    | ) | $ | 554,746 |   |
|                                          |       |                |       |         |       |            |       |       |       |
| **Three Months Ended September 30, 2003(1):** |       |                |       |         |       |            |       |       |       |
| Revenues from external customers              |       | $                   | 29,831     |         | $          | 18,888          |       | $          | —     |   | $ | 48,719 |   |
| Intersegment revenues                         |       | $                   | 313        |         | $          | 12,524          |       | $          | (12,837    | ) | $ | — |   |
| Segment operating income (loss)               |       | $                   | (9,198     | )            | $          | 5,480           |       | $          | —     |   | $ | (3,718 | ) |
| Total segment assets                          |       | $                   | 159,588    |         | $          | 142,290         |       | $          | (14,176    | ) | $ | 287,702 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

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| ** **                                   | ** ** | ** **          | ** ** | **MarkWest** | ** ** | ** **      | ** ** | ** ** | ** ** |
|----------------------------------------------|------------|---------------------|------------|--------------|------------|-----------------|------------|------------|------------|
| ** **                                   | ** ** | ** **          | ** ** | **Energy**   | ** ** | **Eliminating** | ** ** | ** ** | ** ** |
| ** **                                   | ** ** | **Marketing**       | ** ** | **Partners** | ** ** | **Entries**     | ** ** | **Total**  | ** ** |
| ** **                                   | ** ** | **(in  thousands)** | ** ** |
| **Nine Months Ended September 30, 2004(1):** |       |                |       |         |       |            |       |       |       |
| Revenues from external customers             |       | $                   | 140,258    |         | $          | 163,977         |       | $          | —     |   | $ | 304,235 |   |
| Intersegment revenues                        |       | $                   | 460        |         | $          | 43,349          |       | $          | (43,809    | ) | $ | — |   |
| Segment operating income (loss)              |       | $                   | (2,499     | )            | $          | 25,139          |       | $          | —     |   | $ | 22,640 |   |
| Total segment assets                         |       | $                   | 93,828     |         | $          | 480,345         |       | $          | (19,427    | ) | $ | 554,746 |   |
|                                         |       |                |       |         |       |            |       |       |       |
| **Nine Months Ended September 30, 2003(1):** |       |                |       |         |       |            |       |       |       |
| Revenues from external customers             |       | $                   | 105,450    |         | $          | 42,741          |       | $          | —     |   | $ | 148,191 |   |
| Intersegment revenues                        |       | $                   | 758        |         | $          | 36,000          |       | $          | (36,758    | ) | $ | — |   |
| Segment operating income (loss)              |       | $                   | (20,896    | )            | $          | 13,285          |       | $          | —     |   | $ | (7,611 | ) |
| Total segment assets                         |       | $                   | 159,630    |         | $          | 142,248         |       | $          | (14,176    | ) | $ | 287,702 |   |

 

Areconciliation of total segment operating income (loss) to loss from continuingoperations before non-controlling interest in net income of consolidatedsubsidiary and income taxes is as follows:

 
| ** **                                                                                                                  | ** ** | **Three Months  Ended September 30,** | ** ** | **Nine Months  Ended September 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                                                  | ** ** | **2004 (1)**                          | ** ** | **2003 (1)**                         | ** ** | **2004 (1)** | ** ** | **2003 (1)** | ** ** |
| ** **                                                                                                                  | ** ** | **(in  thousands)**                   | ** ** |
| Segment operating income (loss)                                                                                             |       | $                                     | 11,981     |                                 | $          | (3,718 | ) | $ | 22,640 |   | $ | (7,611 | ) |
| Selling, general and administrative  expenses                                                                               |       | (7,252                                | )          | (3,707                               | )          | (17,637 | ) | (10,097 | ) |
| Loss on sale of terminals                                                                                                   |       | —                                |       | (55                                  | )          | — |   | (55 | ) |
| Interest expense, net                                                                                                       |       | (3,559                                | )          | (658                                 | )          | (5,256 | ) | (2,906 | ) |
| Amortization of deferred financing costs                                                                                    |       | (3,120                                | )          | (457                                 | )          | (3,734 | ) | (1,270 | ) |
| Dividend income                                                                                                             |       | 86                                    |       | —                               |       | 169 |   | — |   |
| Other income                                                                                                                |       | 553                                   |       | 31                                   |       | 547 |   | 15 |   |
| Loss from  continuing operations before non-controlling interest in net income of  consolidated subsidiary and income taxes |       | $                                     | (1,311     | )                                    | $          | (8,564 | ) | $ | (3,271 | ) | $ | (21,924 | ) |

 

----

(1) As Restated.  See Note 16.

 

**12.****      ****Related Party Transactions**

 

WilliamP. Nicoletti, who serves as a member of MarkWest Energy Partners generalpartner’s board of directors, the general partner of the Partnership, is amember of the board of directors of Star Gas LLC, the general partner of StarGas Partners, L.P., a retail propane and heating oil master limitedpartnership.  Star Gas Propane, asubsidiary of Star Gas Partners, L.P., is a significant customer of theCompany, and generated revenue of approximately $4.3 million and $16.3 millionfor the three and nine months ended September 30, 2004, respectively, and $2.0million and $14.1 million for the three and nine months ended September 30, 2003,respectively.  On September 30, 2004, theCompany’s outstanding receivable balance with Star Gas Partners, L.P. was $0.9million.

 

Star Gas Partners, L.P.’s heatingoil distribution subsidiary, Petro, announced on October 18 that it has beenunable to pass along record heating-oil prices to its customers and that its2004 net income will be substantially below net income for 2003. Through theCompany’s discussions with Star Gas Propane, the Company expects to receivefull payment for the outstanding receivable balance because Star Gas Propanehas its own financing that is not connected to Petro.  As a result, the Company has not reserved forthe outstanding receivable balance.  However,the Company will assess doing business with Star Gas Propane and the allowance,if any, for doubtful accounts.  Shouldthere be a change in circumstance, the Company will adjust the reserveaccordingly.  In addition, the Companybelieves that it will be able to sustain the revenue generated from thiscustomer in 2004 and the foreseeable future.

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

19

----

 

**13.****      ****Commitments and Contingencies**

 

TheCompany is involved in various litigation and administrative proceedingsarising in the normal course of business. In the opinion of management, anyliabilities that may result from these claims will not, individually or in theaggregate, have a material adverse effect on its financial position or resultsof operations.

 

A summary of the Company’s totalcontractual cash obligations as of September 30, 2004, is as follows (inthousands):

 
| **Type of Obligation** | ** ** | **Total   Obligation** | ** ** | **Due in   2004-2005** | ** ** | **Due in   2006-2007** | ** ** | **Thereafter** | ** ** |
|------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|----------------|------------|
| Operating Leases       |       | $                      | 14,050     |                   | $          | 5,600                  |       | $              | 4,448      |   | $ | 4,002 |   |
| Debt                   |       | 197,500                |       | —                 |       | —                 |       | 197,500        |       |
| Total                  |       | $                      | 211,550    |                   | $          | 5,600                  |       | $              | 4,448      |   | $ | 201,502 |   |

 

**14.****      ****Recent Accounting Pronouncements**

 

On March 31, 2004, the EmergingIssues Task Force issued EITF No. 03-6 which clarifies the computation ofearnings per share in SFAS No. 128, for companies that have issued securitiesother than common stock that entitle the holder to participate in the company’sdeclared dividends and earnings.  The consensus states that securitiesshould be included in basic earnings per share calculations when the holder isentitled to receive dividends rather than if the holder is entitled to receiveearnings or value upon redemption of the securities or liquidation ofassets.  The effective date of EITF No. 03-6 is the first fiscal periodbeginning after March 31, 2004, and requires restatement of prior periodinformation.  Implementation of theconsensus had no effect on the financial results and resulted in no change inearnings per share for the three month and nine month periods ended September30, 2004, and 2003.

 

**15.****      ****Subsequent Event**

 

On November 8, 2004, a leakoccurred in a natural gas liquids (NGLs) line owned by Equitable Supply, andleased and operated by MarkWest Energy Appalachia, LLC, a subsidiary ofMarkWest Energy Partners.  The 4-inchpipeline transports NGLs from the Partnership’s Maytown gas processing plant toits Siloam fractionator.  A subsequentignition and fire from the leaked vapors resulted in property damage to fivehomes and injuries to some of the residents. The exact cause of the leak and resulting fire is unknown and is beinginvestigated by MarkWest Energy Partners and the U.S. Department ofTransportation Office of Pipeline Safety. Until repairs are completed and service is resumed on the line, NGLsfrom the Maytown plant will be trucked directly to the Siloam fractionator,resulting in a minor impact to the Company’s operations.

 

While investigation into theincident continues, at this time the Partnership believes that it has adequateinsurance coverage for property damage and personal injury liability, if any,resulting from the incident.

 

**16.****      ****Restatement and Reclassifications of Consolidated FinancialStatements**

 

The Company has determined that, incertain cases, it did not comply with generally accepted accounting principlesin the preparation of its 2003 and 2004 consolidated financial statements and,accordingly, the Company has restated its consolidated financial statements forthe nine months and quarterly periods ended September 30, 2004 and 2003.

 

The restatements primarily resultfrom compensation expense attributed to the sale of a portion of MarkWestHydrocarbon’s subordinated Partnership units and interests in the Partnership’sgeneral partner to certain employees and directors from 2002 through 2004.  MarkWest Hydrocarbon had historicallyrecorded its sale of the subordinated Partnership units and interests in thePartnership’s general partner to certain of MarkWest Hydrocarbon’s employeesand directors as a sale of an asset.  Thesearrangements are referred to as the Participation Plan.  However, MarkWest Hydrocarbon determined thatthese transactions should be accounted for as compensatory arrangements,pursuant to the guidance in APB No. 25, *Accountingfor Stock Issued to Employees*and EITF No. 95-16, *Accounting for Stock Compensation Arrangements withEmployer Loan Features under APB Opinion No. 25. *This guidance requires MarkWestHydrocarbon to record compensation expense based on the 

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

20

----

 

marketvalue of the subordinated Partnership units and the formula value of thegeneral partner interests held by the employees and directors at the end ofeach reporting period.

 

In addition, certain otherrestatement adjustments have also been recorded to correct other errors in thefinancial statements for the first three quarters of 2004, includingadjustments to accruals for revenue and purchased product costs, adjustmentsfor costs improperly capitalized as property, plant and equipment, adjustmentsto properly record capitalized interest on major construction projects inprocess, adjustments to record as a financing lease, a lease agreement previouslyentered into by an acquired business (“Blackhawk pipeline”), an adjustment torecord natural gas inventory at cost, an adjustment to reflect separatelyrestricted marketable securities, adjustments for dividends received onmarketable securities improperly recorded as a reduction in the carrying valueof marketable securities, an adjustment to record losses on derivativeinstruments that do not qualify for hedge accounting treatment and adjustmentsto accrued property taxes.  Adjustmentswere also made to record compensation as a result of the modification of theprovisions of certain stock options for two officers who terminated theiremployment with the Company but who continued to serve on its Board ofDirectors.  Compensation expense was alsorecorded as a result of a policy change that required the Company to accountfor all outstanding stock options as variable awards.  In April 2004, the Company changed its policyto allow participants to exercise their stock options using the cashlessexercise method.  Under APB 25, *Accounting for Stock Issued to Employees,*afixed stock option plan that permits the use of a cashless exercise becomesvariable if a pattern of exercising stock options using the cashless method isdemonstrated. Additionally, the Company made an adjustment to restate a portionof dividends paid during the nine months ended September 30, 2004 from retainedearnings to additional paid in capital for the amount of dividends distributedin excess of accumulated earnings.

 

Cash was also adjusted primarily asa result of reclassifying amounts recorded for the purchase of property, plantand equipment, intangible assets and accrued property tax relating to anacquisition, from cash to those respective accounts.  Initially, the purchase of those assets wererecorded to a cash clearing account until the purchase price was settled in thefourth quarter of 2004. The Company has also restated restricted marketablesecurities from restricted cash.

 

In addition, on October 28, 2004,the Company’s Board of Directors declared a stock dividend of one share ofMarkWest Hydrocarbon’s common stock for each ten shares owned bystockholders.  The stock dividend waspaid on November 19, 2004 to the stockholders of record as of the close ofbusiness on November 9, 2004.  Commonstock information in the Form 10-Q/A has been restated to give retroactiveeffect to the stock dividend paid.

 

The Company has reclassifiedcertain prior year amounts to conform to the current year’s presentation.  The Company has reclassified intangible andother assets to a separate line item on the consolidated balance sheet. TheCompany has also reclassified interest income and amortization of deferredfinancing costs to separate line items on the consolidated income statement.

 

Allamounts in the accompanying notes have been restated or reclassified for theseadjustments.  The following tablespresent the consolidated balance sheets as of September 30, 2004 and December31, 2003 as previously reported and as restated, and the consolidated statementsof income for the three months and nine months ended September 30, 2004 and2003 as previously reported and as restated and the consolidated statement ofcash flows for the nine months ended September 30, 2004 and 2003 as previouslyreported and as restated.  The tablesalso reflect the amounts reported for changes in stockholders’ equity for thenine months ended September 30, 2004, as previously reported and asrestated.  The impact of theserestatements was to decrease net income per basic and diluted share by $0.23for the three months ended September 30, 2004. In addition, the impact of these restatements was to decrease net incomeper basic and diluted share by $0.54 and $0.04 for the nine months endedSeptember 30, 2004 and 2003, respectively.

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

21

----

 

**BalanceSheet Amounts:**

 
| ** **                                                                              | ** ** | **September 30, 2004**                          | ** ** |
|-----------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                              | ** ** | **As Previously  Reported**                          | ** ** | **Adjustment** | ** ** | **As Restated** | ** ** |
| ** **                                                                              | ** ** | **(in thousands, except share and  per share data)** | ** ** |
| **ASSETS**                                                                              | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Current assets:                                                                         |       |                                                 |       |   |   |   |   |
| Cash and  cash equivalents                                                              |       | $                                                    | 22,258     |   | $ | (611 | )**(1)** | $ | 21,647 |   |
| Restricted  cash                                                                        |       | 3,050                                                |       | (2,500 | )**(2)** | 550 |   |
| Marketable  securities                                                                  |       | 12,062                                               |       | 144 | **(3)** | 12,206 |   |
| Restricted  marketable securities                                                       |       | —                                               |       | 2,500 | **(2)** | 2,500 |   |
| Receivables,  net                                                                       |       | 44,162                                               |       | 1,286 | **(4)** | 45,448 |   |
| Inventories                                                                             |       | 12,450                                               |       | — |   | 12,450 |   |
| Prepaid  replacement natural gas                                                        |       | 13,173                                               |       | — |   | 13,173 |   |
| Deferred  income taxes                                                                  |       | 968                                                  |       | (900 | )**(5)** | 68 |   |
| Other  current assets                                                                   |       | 3,645                                                |       | 13 | **(6)** | 3,658 |   |
| Total current assets                                                                    |       | 111,768                                              |       | (68 | ) | 111,700 |   |
|                                                                                    |       |                                                 |       |   |   |   |   |
| Property, plant and equipment                                                           |       | 324,144                                              |       | (181 | )**(7)** | 323,963 |   |
| Less: accumulated depreciation, depletion  and amortization                             |       | (55,629                                              | )          | 662 | **(8)** | (54,967 | ) |
| Total  property, plant and equipment, net                                               |       | 268,515                                              |       | 481 |   | 268,996 |   |
|                                                                                    |       |                                                 |       |   |   |   |   |
| Other assets:                                                                           |       |                                                 |       |   |   |   |   |
| Intangibles  and other assets, net                                                      |       | 165,857                                              |       | 602 | **(9)** | 166,459 |   |
| Deferred financing  costs, net                                                          |       | 7,184                                                |       | — |   | 7,184 |   |
| Investment  in and advances to equity investee                                          |       | 200                                                  |       | — |   | 200 |   |
| Notes  receivable from officers                                                         |       | 207                                                  |       | — |   | 207 |   |
| Other assets                                                                            |       | 42                                                   |       | (42 | )**(10)** | — |   |
| Total other  assets                                                                     |       | 173,490                                              |       | 560 |   | 174,050 |   |
| Total assets                                                                            |       | $                                                    | 553,773    |   | $ | 973 |   | $ | 554,746 |   |
|                                                                                    |       |                                                 |       |   |   |   |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                          |       |                                                 |       |   |   |   |   |
|                                                                                    |       |                                                 |       |   |   |   |   |
| Current liabilities:                                                                    |       |                                                 |       |   |   |   |   |
| Accounts  payable                                                                       |       | $                                                    | 45,044     |   | $ | 1,659 | **(11)** | $ | 46,703 |   |
| Accrued  liabilities                                                                    |       | 20,962                                               |       | 2,347 | **(12)** | 23,309 |   |
| Fair value  of derivative instruments                                                   |       | 2,747                                                |       | — |   | 2,747 |   |
| Total  current liabilities                                                              |       | 68,753                                               |       | 4,006 |   | 72,759 |   |
|                                                                                    |       |                                                 |       |   |   |   |   |
| Long-term debt                                                                          |       | 197,500                                              |       | — |   | 197,500 |   |
| Deferred income taxes                                                                   |       | 8,434                                                |       | (2,047 | )**(13)** | 6,387 |   |
| Other long-term liabilities                                                             |       | 502                                                  |       | 4,278 | **(14)** | 4,780 |   |
| Non-controlling interest in consolidated  subsidiary                                    |       | 231,558                                              |       | (1,107 | )**(15)** | 230,451 |   |
| 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, 10,817,967 shares  issued |       | 108                                                  |       | — |   |  108 |   |
| Additional  paid-in capital                                                             |       | 52,399                                               |       | (630 | )**(16)** | 51,769 |   |
| Accumulated  deficit                                                                    |       | (3,457                                               | )          | (4,882 | )**(17)** | (8,339 | ) |
| Accumulated  other comprehensive loss, net of tax                                       |       | (1,585                                               | )          | 1,355 | **(18)** | (230 | ) |
| Treasury  stock at cost, 65,999 shares                                                  |       | (439                                                 | )          | — |   | (439 | ) |
| Total  stockholders’ equity                                                        |       | 47,026                                               |       | (4,157 | ) | 42,869 |   |
| Total  liabilities and stockholders’ equity                                        |       | $                                                    | 553,773    |   | $ | 973 |   | $ | 554,746 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

22

----

 
| ** **                                                                             | ** ** | **December 31, 2003**                          | ** ** |
|----------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                             | ** ** | **As Previously  Reported**                         | ** ** | **Adjustments** |   | **As Restated** | ** ** |
| ** **                                                                             | ** ** | **(in thousands, except share and per share data)** | ** ** |
| **ASSETS**                                                                             | ** ** | ** **                                          | ** ** | ** ** |   | ** ** | ** ** |
| Current assets:                                                                        |       |                                                |       |   |   |   |   |
| Cash and cash equivalents                                                              |       | $                                                   | 42,144     |   | $ | — |   | $ | 42,144 |   |
| Restricted cash                                                                        |       | 2,500                                               |       | (2,500 | )**(19)** | — |   |
| Restricted marketable securities                                                       |       | —                                              |       | 2,500 | **(19)** | 2,500 |   |
| Receivables, net                                                                       |       | 30,750                                              |       | (840 | )**(20)** | 29,910 |   |
| Inventories                                                                            |       | 4,815                                               |       | 733 | **(21)** | 5,548 |   |
| Prepaid replacement natural gas                                                        |       | 5,940                                               |       | — |   | 5,940 |   |
| Deferred income taxes                                                                  |       | 603                                                 |       | (69 | )**(22)** | 534 |   |
| Other current assets                                                                   |       | 503                                                 |       | — |   | 503 |   |
| Total current  assets                                                                  |       | 87,255                                              |       | (176 | ) | 87,079 |   |
|                                                                                   |       |                                                |       |   |   |   |   |
| Property, plant  and equipment                                                         |       | 232,257                                             |       | — |   | 232,257 |   |
| Less: accumulated  depreciation, depletion, amortization and impairment                |       | (44,134                                             | )          | — |   | (44,134 | ) |
| Total property, plant and equipment, net                                               |       | 188,123                                             |       | — |   | 188,123 |   |
|                                                                                   |       |                                                |       |   |   |   |   |
| Other assets:                                                                          |       |                                                |       |   |   |   |   |
| Intangibles and other assets, net                                                      |       | 3,831                                               |       | (3,747 | )**(23)** | 84 |   |
| Deferred financing costs, net                                                          |       | —                                              |       | 3,747 | **(23)** | 3,747 |   |
| Deferred offering costs and other, net                                                 |       | 1,037                                               |       | (42 | )**(24)** | 995 |   |
| Investment in and advances to equity  investee                                         |       | 250                                                 |       | — |   | 250 |   |
| Notes receivable from officers                                                         |       | 217                                                 |       | — |   | 217 |   |
| Total other assets                                                                     |       | 5,335                                               |       | (42 | ) | 5,293 |   |
| Total assets                                                                           |       | $                                                   | 280,713    |   | $ | (218 | ) | $ | 280,495 |   |
|                                                                                   |       |                                                |       |   |   |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                          |       |                                                |       |   |   |   |   |
|                                                                                   |       |                                                |       |   |   |   |   |
| Current  liabilities:                                                                  |       |                                                |       |   |   |   |   |
| Accounts payable (including related party  payables of $51)                            |       | $                                                   | 24,052     |   | $ | — |   | $ | 24,052 |   |
| Accrued liabilities                                                                    |       | 16,751                                              |       | (240 | )**(25)** | 16,511 |   |
| Fair value of derivative instruments                                                   |       | 1,769                                               |       | — |   | 1,769 |   |
| Total current liabilities                                                              |       | 42,572                                              |       | (240 | ) | 42,332 |   |
|                                                                                   |       |                                                |       |   |   |   |   |
| Long-term debt                                                                         |       | 126,200                                             |       | — |   | 126,200 |   |
| Deferred income  taxes                                                                 |       | 6,346                                               |       | (752 | )**(26)** | 5,594 |   |
| Fair value of  derivative instruments                                                  |       | 125                                                 |       | — |   | 125 |   |
| Other long-term  liabilities                                                           |       | 504                                                 |       | 2,397 | **(27)** | 2,901 |   |
| Non-controlling  interest in consolidated subsidiary                                   |       | 52,782                                              |       | (353 | )**(28)** | 52,429 |   |
|                                                                                   |       |                                                |       |   |   |   |   |
| 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, 10,601,775 shares issued |       | 106                                                 |       | — |   | 106 |   |
| Additional paid-in capital                                                             |       | 50,705                                              |       | — |   | 50,705 |   |
| Retained earnings                                                                      |       | 3,676                                               |       | (1,270 | ) | 2,406 |   |
| Accumulated other comprehensive loss, net  of tax                                      |       | (1,793                                              | )          | — |   | (1,793 | ) |
| Treasury stock at cost, 75,930 shares                                                  |       | (510                                                | )          | — |   | (510 | ) |
| Total stockholders’ equity                                                        |       | 52,184                                              |       | (1,270 | ) | 50,914 |   |
| Total liabilities and stockholders’ equity                                        |       | $                                                   | 280,713    |   | $ | (218 | ) | $ | 280,495 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

23

----

 

**Income Statement Amounts:**

 
| ** **                                                                                                                       | ** ** | **Three Months Ended September 30, 2004** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                                                                                       | ** ** | **As Previously  Reported**                    | ** ** | **Adjustments** |   | **As Restated** | ** ** |
| ** **                                                                                                                       | ** ** | **(in thousands, except per share data)**      | ** ** |
|                                                                                                                             |       |                                           |       |   |   |   |   |
| Revenues                                                                                                                         |       | $                                              | 122,938    |   | $ | (1,427 | )**(29)** | $ | 121,511 |   |
|                                                                                                                             |       |                                           |       |   |   |   |   |
| Operating  expenses:                                                                                                             |       |                                           |       |   |   |   |   |
| Purchased product costs                                                                                                          |       | 95,128                                         |       | 81 | **(30)** | 95,209 |   |
| Facility expenses                                                                                                                |       | 8,281                                          |       | 117 | **(31)** | 8,398 |   |
| Selling, general and administrative  expenses                                                                                    |       | 5,966                                          |       | 1,286 | **(32)** | 7,252 |   |
| Depreciation                                                                                                                     |       | 5,975                                          |       | (1,465 | )**(33)** | 4,510 |   |
| Amortization of intangible assets                                                                                                |       | —                                         |       | 1,400 | **(34)** | 1,400 |   |
| Accretion of asset retirement obligation                                                                                         |       | —                                         |       | 13 | **(35)** | 13 |   |
| Total operating expenses                                                                                                         |       | 115,350                                        |       | 1,432 |   | 116,782 |   |
|                                                                                                                             |       |                                           |       |   |   |   |   |
| Income from operations                                                                                                           |       | 7,588                                          |       | (2,859 | ) | 4,729 |   |
|                                                                                                                             |       |                                           |       |   |   |   |   |
| Other income  (expense):                                                                                                         |       |                                           |       |   |   |   |   |
| Interest expense, net                                                                                                            |       | (7,002                                         | )          | 3,443 | **(36)** | (3,559 | ) |
| Amortization of deferred financing costs (a  component of interest expense)                                                      |       | —                                         |       | (3,120 | )**(37)** | (3,120 | ) |
| Dividend income                                                                                                                  |       | —                                         |       | 86 | **(38)** | 86 |   |
| Other income                                                                                                                     |       | 553                                            |       | — |   | 553 |   |
| Income (loss) from continuing operations  before non-controlling interest in net income of consolidated subsidiary  income taxes |       | 1,139                                          |       | (2,450 | ) | (1,311 | ) |
|                                                                                                                             |       |                                           |       |   |   |   |   |
| Provision  (benefit) for income taxes:                                                                                           |       |                                           |       |   |   |   |   |
| Current                                                                                                                          |       | (2,744                                         | )          | 2,783 |   | 39 |   |
| Deferred                                                                                                                         |       | 3,104                                          |       | (2,992 | ) | 112 |   |
| Provision (benefit) for income taxes                                                                                             |       | 360                                            |       | (209 | )**(39)** | 151 |   |
|                                                                                                                             |       |                                           |       |   |   |   |   |
| Non-controlling  interest in net income of consolidated subsidiary                                                               |       | (210                                           | )          | (294 | )**(40)** | (504 | ) |
|                                                                                                                             |       |                                           |       |   |   |   |   |
| Net income (loss)                                                                                                                |       | $                                              | 569        |   | $ | (2,535 | ) | $ | (1,966 | ) |
|                                                                                                                             |       |                                           |       |   |   |   |   |
| Net income (loss)  per share:                                                                                                    |       |                                           |       |   |   |   |   |
| Basic                                                                                                                            |       | $                                              | 0.05       |   | $ | (0.23 | ) | $ | (0.18 | ) |
| Diluted                                                                                                                          |       | $                                              | 0.05       |   | $ | (0.23 | ) | $ | (0.18 | ) |
|                                                                                                                             |       |                                           |       |   |   |   |   |
| Weighted average  number of outstanding shares of common stock:                                                                  |       |                                           |       |   |   |   |   |
| Basic                                                                                                                            |       | 10,736                                         |       |   |   | 10,736 |   |
| Diluted                                                                                                                          |       | 10,800                                         |       |   |   | 10,800 |   |
|                                                                                                                             |       |                                           |       |   |   |   |   |
| Cash dividend per  common share                                                                                                  |       | $                                              | 0.023      |   |   |   | $ | 0.023 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

24

----

 
| ** **                                                                                                         | ** ** | **Three Months Ended September 30, 2003** | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                                                                         | ** ** | **As Previously  Reported**                    | ** ** | **Adjustments** |   | **As Restated** | ** ** |
| ** **                                                                                                         | ** ** | **(in thousands, except per share data)**      | ** ** |
|                                                                                                               |       |                                           |       |   |   |   |   |
| Revenues                                                                                                           |       | $                                              | 48,228     |   | $ | 491 | **(41)** | $ | 48,719 |   |
|                                                                                                               |       |                                           |       |   |   |   |   |
| Operating  expenses:                                                                                               |       |                                           |       |   |   |   |   |
| Purchased product costs                                                                                            |       | 44,521                                         |       | — |   | 44,521 |   |
| Facility expenses                                                                                                  |       | 5,204                                          |       | 241 | **(42)** | 5,445 |   |
| Selling, general and administrative  expenses                                                                      |       | 3,549                                          |       | 158 | **(43)** | 3,707 |   |
| Depreciation                                                                                                       |       | 2,220                                          |       | 251 | **(44)** | 2,471 |   |
| Loss on sale of terminals                                                                                          |       | 55                                             |       | — |   | 55 |   |
| Total operating expenses                                                                                           |       | 55,549                                         |       | 650 |   | 56,199 |   |
|                                                                                                               |       |                                           |       |   |   |   |   |
| Loss from operations                                                                                               |       | (7,321                                         | )          | (159 | ) | (7,480 | ) |
|                                                                                                               |       |                                           |       |   |   |   |   |
| Other income  (expense):                                                                                           |       |                                           |       |   |   |   |   |
| Interest expense, net                                                                                              |       | (1,115                                         | )          | 457 | **(45)** | (658 | ) |
| Amortization of deferred financing costs (a  component of interest expense)                                        |       | —                                         |       | (457 | )**(45)** | (457 | ) |
| Other income                                                                                                       |       | 31                                             |       | — |   | 31 |   |
| Loss from continuing operations before  income taxes                                                               |       | (8,405                                         | )          | (159 | ) | (8,564 | ) |
|                                                                                                               |       |                                           |       |   |   |   |   |
| Provision  (benefit) for income taxes:                                                                             |       |                                           |       |   |   |   |   |
| Current                                                                                                            |       | —                                         |       | (3,885 | ) | (3,885 | ) |
| Deferred                                                                                                           |       | (3,701                                         | )          | 3,870 |   | 169 |   |
| Provision (benefit) for income taxes                                                                               |       | (3,701                                         | )          | (15 | )**(46)** | (3,716 | ) |
|                                                                                                               |       |                                           |       |   |   |   |   |
| Non-controlling  interest in net income of consolidated subsidiary                                                 |       | (1,607                                         | )          | 88 | **(47)** | (1,519 | ) |
|                                                                                                               |       |                                           |       |   |   |   |   |
| Loss from continuing operations                                                                                    |       | (6,311                                         | )          | (56 | ) | (6,367 | ) |
|                                                                                                               |       |                                           |       |   |   |   |   |
| Discontinued  operations:                                                                                          |       |                                           |       |   |   |   |   |
| Loss from discontinued exploration and  production operations (net of income taxes of $(303))                      |       | (1,260                                         | )          | (2 | ) | (1,262 | ) |
| Gain from disposal of discontinued  exploration and production operations (less applicable income taxes of $2,750) |       | 593                                            |       | — |   | 593 |   |
| Loss from discontinued operations                                                                                  |       | (667                                           | )          | (2 | )**(48)** | (669 | ) |
|                                                                                                               |       |                                           |       |   |   |   |   |
| Net loss                                                                                                           |       | $                                              | (6,978     | ) | $ | (58 | ) | $ | (7,036 | ) |
|                                                                                                               |       |                                           |       |   |   |   |   |
| Loss from  continuing operations per share:                                                                        |       |                                           |       |   |   |   |   |
| Basic                                                                                                              |       | $                                              | (0.61      | ) | $ | (0.01 | ) | $ | (0.62 | ) |
| Diluted                                                                                                            |       | $                                              | (0.61      | ) | $ | (0.01 | ) | $ | (0.62 | ) |
|                                                                                                               |       |                                           |       |   |   |   |   |
| Net loss per  share:                                                                                               |       |                                           |       |   |   |   |   |
| Basic                                                                                                              |       | $                                              | (0.68      | ) | $ | — |   | $ | (0.68 | ) |
| Diluted                                                                                                            |       | $                                              | (0.68      | ) | $ | — |   | $ | (0.68 | ) |
|                                                                                                               |       |                                           |       |   |   |   |   |
| Weighted average  number of outstanding shares of common stock:                                                    |       |                                           |       |   |   |   |   |
| Basic                                                                                                              |       | 10,316                                         |       |   |   | 10,316 |   |
| Diluted                                                                                                            |       | 10,340                                         |       |   |   | 10,340 |   |
|                                                                                                               |       |                                           |       |   |   |   |   |
| Cash dividend per  common share                                                                                    |       | $                                              | —     |   |   |   | $ | — |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

25

----

 
| ** **                                                                                                                  | ** ** | **Nine Months Ended September 30, 2004** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                                                  | ** ** | **As Previously  Reported**                   | ** ** | **Adjustments** |   | **As Restated** | ** ** |
| ** **                                                                                                                  | ** ** | **(in thousands, except per share data)**     | ** ** |
|                                                                                                                        |       |                                          |       |   |   |   |   |
| Revenues                                                                                                                    |       | $                                             | 304,422    |   | $ | (187 | )**(49)** | $ | 304,235 |   |
|                                                                                                                        |       |                                          |       |   |   |   |   |
| Operating  expenses:                                                                                                        |       |                                          |       |   |   |   |   |
| Purchased product costs                                                                                                     |       | 245,715                                       |       | 2,245 | **(50)** | 247,960 |   |
| Facility expenses                                                                                                           |       | 20,147                                        |       | 312 | **(51)** | 20,459 |   |
| Selling, general and administrative  expenses                                                                               |       | 14,712                                        |       | 2,925 | **(52)** | 17,637 |   |
| Depreciation                                                                                                                |       | 13,385                                        |       | (1,690 | )**(53)** | 11,695 |   |
| Amortization of intangible assets                                                                                           |       | —                                        |       | 1,468 | **(54)** | 1,468 |   |
| Accretion of asset retirement obligation                                                                                    |       | —                                        |       | 13 | **(55)** | 13 |   |
| Total operating expenses                                                                                                    |       | 293,959                                       |       | 5,273 |   | 299,232 |   |
|                                                                                                                        |       |                                          |       |   |   |   |   |
| Income from operations                                                                                                      |       | 10,463                                        |       | (5,460 | ) | 5,003 |   |
|                                                                                                                        |       |                                          |       |   |   |   |   |
| Other income  (expense):                                                                                                    |       |                                          |       |   |   |   |   |
| Interest expense, net                                                                                                       |       | (9,452                                        | )          | 4,196 | **(56)** | (5,256 | ) |
| Amortization of deferred financing costs (a  component of interest expense)                                                 |       | —                                        |       | (3,734 | )**(57)** | (3,734 | ) |
| Dividend income                                                                                                             |       | —                                        |       | 169 | **(58)** | 169 |   |
| Other income                                                                                                                |       | 585                                           |       | (36 | )**(59)** | 547 |   |
|                                                                                                                        |       |                                          |       |   |   |   |   |
| Loss from continuing operations before  non-controlling interest in net income of consolidated subsidiary and income  taxes |       | 1,596                                         |       | (4,867 | ) | (3,271 | ) |
|                                                                                                                        |       |                                          |       |   |   |   |   |
| Provision  (benefit) for income taxes:                                                                                      |       |                                          |       |   |   |   |   |
| Current                                                                                                                     |       | (2,744                                        | )          | 2,895 |   | 151 |   |
| Deferred                                                                                                                    |       | 1,733                                         |       | (1,295 | ) | 438 |   |
| Benefit for income taxes                                                                                                    |       | (1,011                                        | )          | 1,600 | **(60)** | 589 |   |
|                                                                                                                        |       |                                          |       |   |   |   |   |
| Non-controlling  interest in net income of consolidated subsidiary                                                          |       | (4,452                                        | )          | 693 | **(61)** | (3,759 | ) |
|                                                                                                                        |       |                                          |       |   |   |   |   |
| Net loss                                                                                                                    |       | $                                             | (1,845     | ) | $ | (5,774 | ) | $ | (7,619 | ) |
|                                                                                                                        |       |                                          |       |   |   |   |   |
| Net loss per  share:                                                                                                        |       |                                          |       |   |   |   |   |
| Basic                                                                                                                       |       | $                                             | (0.17      | ) | $ | (0.54 | ) | $ | (0.71 | ) |
| Diluted                                                                                                                     |       | $                                             | (0.17      | ) | $ | (0.54 | ) | $ | (0.71 | ) |
|                                                                                                                        |       |                                          |       |   |   |   |   |
| Weighted average  number of outstanding shares of common stock:                                                             |       |                                          |       |   |   |   |   |
| Basic                                                                                                                       |       | 10,665                                        |       |   |   | 10,665 |   |
| Diluted                                                                                                                     |       | 10,715                                        |       |   |   | 10,715 |   |
|                                                                                                                        |       |                                          |       |   |   |   |   |
| Cash dividend per  common share                                                                                             |       | $                                             | 0.50       |   |   |   | $ | 0.50 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

26

----

 
| ** **                                                                                                                  | ** ** | **Nine Months Ended September 30, 2003** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                                                  | ** ** | **As Previously  Reported**                   | ** ** | **Adjustments** |   | **As Restated** | ** ** |
| ** **                                                                                                                  | ** ** | **(in thousands, except per share data)**     | ** ** |
|                                                                                                                        |       |                                          |       |   |   |   |   |
| Revenues                                                                                                                    |       | $                                             | 146,767    |   | $ | 1,424 | **(62)** | $ | **148,191** |   |
|                                                                                                                        |       |                                          |       |   |   |   |   |
| Operating  expenses:                                                                                                        |       |                                          |       |   |   |   |   |
| Purchased product costs                                                                                                     |       | 134,881                                       |       | — |   | 134,881 |   |
| Facility expenses                                                                                                           |       | 13,983                                        |       | 767 | **(63)** | 14,750 |   |
| Selling, general and administrative  expenses                                                                               |       | 9,462                                         |       | 635 | **(64)** | 10,097 |   |
| Depreciation                                                                                                                |       | 5,791                                         |       | 380 | **(65)** | 6,171 |   |
| Loss on sale of terminals                                                                                                   |       | 55                                            |       | — |   | 55 |   |
| Total operating expenses                                                                                                    |       | 164,172                                       |       | 1,782 |   | 165,954 |   |
|                                                                                                                        |       |                                          |       |   |   |   |   |
| Loss from operations                                                                                                        |       | (17,405                                       | )          | (358 | ) | (17,763 | ) |
|                                                                                                                        |       |                                          |       |   |   |   |   |
| Other income  (expense):                                                                                                    |       |                                          |       |   |   |   |   |
| Interest expense, net                                                                                                       |       | (4,176                                        | )          | 1,270 | **(66)** | (2,906 | ) |
| Amortization of deferred financing costs (a  component of interest expense)                                                 |       | —                                        |       | (1,270 | )**(66)** | (1,270 | ) |
| Gain on sale to related party                                                                                               |       | 188                                           |       | (188 | )**(67)** | — |   |
| Other income                                                                                                                |       | 15                                            |       | — |   | 15 |   |
|                                                                                                                        |       |                                          |       |   |   |   |   |
| Loss from continuing operations before  non-controlling interest in net income of consolidated subsidiary and income  taxes |       | (21,378                                       | )          | (546 | ) | (21,924 | ) |
|                                                                                                                        |       |                                          |       |   |   |   |   |
| Provision  (benefit) for income taxes:                                                                                      |       |                                          |       |   |   |   |   |
| Current                                                                                                                     |       | —                                        |       | (9,676 | ) | (9,676 | ) |
| Deferred                                                                                                                    |       | (9,058                                        | )          | 9,479 |   | 421 |   |
| Provision (benefit) for income taxes                                                                                        |       | (9,058                                        | )          | (197 | )**(68)** | (9,255 | ) |
|                                                                                                                        |       |                                          |       |   |   |   |   |
| Non-controlling  interest in net income of consolidated subsidiary                                                          |       | (3,342                                        | )          | 154 | **(69)** | (3,188 | ) |
|                                                                                                                        |       |                                          |       |   |   |   |   |
| Loss from continuing operations                                                                                             |       | (15,662                                       | )          | (195 | ) | (15,857 | ) |
|                                                                                                                        |       |                                          |       |   |   |   |   |
| Discontinued  operations:                                                                                                   |       |                                          |       |   |   |   |   |
| Income from discontinued exploration and  production operations (net of income taxes of $625)                               |       | 2,788                                         |       | (182 | ) | 2,606 |   |
| Gain from disposal of discontinued  exploration and production operations (less applicable income taxes of  $8,173)         |       | 14,862                                        |       | — |   | 14,862 |   |
| Income from discontinued operations                                                                                         |       | 17,650                                        |       | (182 | )**(70)** | 17,468 |   |
| Income before cumulative effect of  accounting change                                                                       |       | 1,988                                         |       | (377 | ) | 1,611 |   |
| Cumulative effect of change in accounting  for asset retirement obligations, net of tax                                     |       | (29                                           | )          | — |   | (29 | ) |
| Net income                                                                                                                  |       | $                                             | 1,959      |   | $ | (377 | ) | $ | 1,582 |   |
|                                                                                                                        |       |                                          |       |   |   |   |   |
| Loss from  continuing operations per share:                                                                                 |       |                                          |       |   |   |   |   |
| Basic                                                                                                                       |       | $                                             | (1.52      | ) | $ | (0.02 | ) | $ | (1.54 | ) |
| Diluted                                                                                                                     |       | $                                             | (1.52      | ) | $ | (0.02 | ) | $ | (1.54 | ) |
|                                                                                                                        |       |                                          |       |   |   |   |   |
| Net income per  share:                                                                                                      |       |                                          |       |   |   |   |   |
| Basic                                                                                                                       |       | $                                             | 0.19       |   | $ | (0.04 | ) | $ | 0.15 |   |
| Diluted                                                                                                                     |       | $                                             | 0.19       |   | $ | (0.04 | ) | $ | 0.15 |   |
|                                                                                                                        |       |                                          |       |   |   |   |   |
| Weighted average  number of outstanding shares of common stock:                                                             |       |                                          |       |   |   |   |   |
| Basic                                                                                                                       |       | 10,300                                        |       |   |   | 10,300 |   |
| Diluted                                                                                                                     |       | 10,318                                        |       |   |   | 10,318 |   |
|                                                                                                                        |       |                                          |       |   |   |   |   |
| Cash dividend per  common share                                                                                             |       | $                                             | —     |   |   |   | $ | — |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

27

----

 

**Cash Flow Amounts:**

 
| ** **                                                                       | ** ** | **Nine Months Ended September 30, 2004** | ** ** |
|----------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                       | ** ** | **As Previously  Reported**                   | ** ** | **Adjustments** | ** ** | **As Restated** | ** ** |
| ** **                                                                       | ** ** | **(in thousands)**                            | ** ** |
| **Cash flows from operating activities:**                                        |       |                                          |       |   |   |   |   |
| Net loss                                                                         |       | $                                             | (1,845     | ) | $ | (5,774 | ) | $ | (7,619 | ) |
| Adjustments to reconcile net loss to net  cash provided by operating activities: |       |                                          |       |   |   |   |   |
| Depreciation and depletion                                                       |       | 12,018                                        |       | (324 | ) | 11,694 |   |
| Amortization of deferred financing costs                                         |       | 3,836                                         |       | (1,571 | ) | 2,265 |   |
| Write down of deferred financing costs                                           |       | —                                        |       | 1,469 |   | 1,469 |   |
| Amortization of intangible assets                                                |       | 1,366                                         |       | 102 |   | 1,468 |   |
| Stock option compensation expense                                                |       | —                                        |       | 1,531 |   | 1,531 |   |
| Restricted unit compensation expense                                             |       | 732                                           |       | — |   | 732 |   |
| Participation Plan compensation expense                                          |       | —                                        |       | 1,205 |   | 1,205 |   |
| Contribution of treasury shares to 401(k)  benefit plan                          |       | —                                        |       | 107 |   | 107 |   |
| Equity in losses of investee                                                     |       | 50                                            |       | — |   | 50 |   |
| Loss from sale of property, plant and  equipment                                 |       | 145                                           |       | — |   | 145 |   |
| Non-controlling interest in net income of  consolidated subsidiary               |       | 4,452                                         |       | (693 | ) | 3,759 |   |
| Unrealized losses on derivative instruments                                      |       | 732                                           |       | — |   | 732 |   |
| Deferred income taxes                                                            |       | 1,732                                         |       | (1,294 | ) | 438 |   |
| Other                                                                            |       | (51                                           | )          | — |   | (51 | ) |
| Changes in  operating assets and liabilities:                                    |       |                                          |       |   |   |   |   |
| Increase in receivables                                                          |       | (13,122                                       | )          | (2,126 | ) | (15,248 | ) |
| Increase in inventories                                                          |       | (7,635                                        | )          | 733 |   | (6,902 | ) |
| Increase in prepaid replacement natural gas                                      |       | (7,233                                        | )          | — |   | (7,233 | ) |
| Increase in other current assets                                                 |       | (3,142                                        | )          | 9 |   | (3,133 | ) |
| Increase in accounts payable and accrued  liabilities                            |       | 25,424                                        |       | 4,690 |   | 30,114 |   |
| Decrease in other long-term liabilities                                          |       | (2                                            | )          | — |   | (2 | ) |
| Net cash flow provided by operating activities                                   |       | 17,457                                        |       | (1,936 | )**(71)** | 15,521 |   |
|                                                                             |       |                                          |       |   |   |   |   |
| **Cash flows from investing activities:**                                        |       |                                          |       |   |   |   |   |
| Increase in restricted cash                                                      |       | (550                                          | )          | — |   | (550 | ) |
| Purchase of marketable securities                                                |       | (11,776                                       | )          | (144 | ) | (11,920 | ) |
| East Texas System acquisition                                                    |       | (240,606                                      | )          | — |   | (240,606 | ) |
| Hobbs Lateral  acquisition                                                       |       | (2,275                                        | )          | — |   | (2,275 | ) |
| Capital expenditures                                                             |       | (13,798                                       | )          | 1,130 |   | (12,668 | ) |
| Proceeds from sale of assets                                                     |       | 206                                           |       | — |   | 206 |   |
| Increase in other contracts                                                      |       | (3,250                                        | )          | — |   | (3,250 | ) |
| Proceeds on financing lease receivable                                           |       | —                                        |       | 133 |   | 133 |   |
| Proceeds from sale of assets to related  parties                                 |       | 10                                            |       | (10 | ) | — |   |
| Net cash used in investing activities                                            |       | (272,039                                      | )          | 1,109 | **(72)** | (270,930 | ) |
|                                                                                  |            |                                               |            |  |  |  |  |  |  |  |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

28

----

 
| ** **                                                                                                                                             | ** ** | **Nine Months Ended September 30, 2004** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                                                                             | ** ** | **As Previously Reported**                    | ** ** | **Adjustments** | ** ** | **As Restated** | ** ** |
| ** **                                                                                                                                             | ** ** | **(in thousands)**                            | ** ** |
| **Cash flows from financing activities:**                                                                                                              |       |                                          |       |   |   |   |   |
| Proceeds from long-term debt                                                                                                                           |       | 215,600                                       |       | — |   | 215,600 |   |
| Repayment of long-term debt                                                                                                                            |       | (144,300                                      | )          | — |   | (144,300 | ) |
| Debt issuance costs                                                                                                                                    |       | (7,193                                        | )          | — |   | (7,193 | ) |
| Proceeds from public offerings of MarkWest  Energy Partners’ common units, net                                                                    |       | 140,014                                       |       | — |   | 140,014 |   |
| Proceeds from private placement of MarkWest  Energy Partners’ common units, net                                                                   |       | 44,139                                        |       | — |   | 44,139 |   |
| Distributions to MarkWest Energy Partners’  unitholders                                                                                           |       | (9,603                                        | )          | 166 |   | (9,437 | ) |
| Acquisitions and dispositions of MarkWest  Energy GP general partnership interests and MarkWest Energy Partners  subordinated units to related parties |       | (157                                          | )          | 157 |   | — |   |
| Exercise of stock options                                                                                                                              |       | 1,413                                         |       | — |   | 1,413 |   |
| Repurchase of treasury shares                                                                                                                          |       | 71                                            |       | (107 | ) | (36 | ) |
| Payment of dividends                                                                                                                                   |       | (5,288                                        | )          | — |   | (5,288 | ) |
| Net cash provided by financing activities                                                                                                              |       | 234,696                                       |       | 216 | **(73)** | 234,912 |   |
|                                                                                                                                                   |       |                                          |       |   |   |   |   |
| Effect of  exchange rate on changes in cash                                                                                                            |       | —                                        |       | — |   | — |   |
|                                                                                                                                                   |       |                                          |       |   |   |   |   |
| Net decrease in  cash and cash equivalents                                                                                                             |       | (19,886                                       | )          | (611 | ) | (20,497 | ) |
| Cash and cash  equivalents at beginning of period                                                                                                      |       | 42,144                                        |       | — |   | 42,144 |   |
| Cash and cash  equivalents at end of period                                                                                                            |       | $                                             | 22,258     |   | $ | (611 | ) | $ | 21,647 |   |
| ** **                                                                                                                                             | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Supplemental cash flow information:**                                                                                                                | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash paid for interest, net of amounts  capitalized                                                                                                    |       | $                                             | 4,607      |   | $ | — |   | $ | 4,607 |   |
| Construction projects in progress  obligation                                                                                                          |       | $                                             | —     |   | $ | 1,094 |   | $ | 1,094 |   |
| Property, plant and equipment asset  retirement obligation                                                                                             |       | $                                             | —     |   | $ | 377 |   | $ | 377 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

29

----

 
| ** **                                                                         | ** ** | **Nine Months Ended September 30, 2003** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                         | ** ** | **As Previously  Reported**                   | ** ** | **Adjustments** | ** ** | **As Restated** | ** ** |
|                                                                               |       |                                          |       |   |   |   |   |
| **Cash flows from operating activities:**                                          |       |                                          |       |   |   |   |   |
| Net income                                                                         |       | $                                             | 1,959      |   | $ | (377 | ) | $ | 1,582 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |                                          |       |   |   |   |   |
| Cumulative effect of change in accounting                                          |       | 29                                            |       | — |   | 29 |   |
| Depreciation, depletion and amortization                                           |       | 18,814                                        |       | — |   | 18,814 |   |
| Amortization of deferred financing costs                                           |       | 1,270                                         |       | — |   | 1,270 |   |
| Restricted unit compensation expense                                               |       | 554                                           |       | — |   | 554 |   |
| Participation Plan compensation expense                                            |       | —                                        |       | 569 |   | 569 |   |
| Contribution of treasury shares to 401(k)  benefit plan                            |       | —                                        |       | 190 |   | 190 |   |
| Non-controlling interest in net income of  consolidated subsidiary                 |       | 3,342                                         |       | (154 | ) | 3,188 |   |
| Unrealized gains on derivative instruments                                         |       | (2,207                                        | )          | — |   | (2,207 | ) |
| Reclassification of Enron hedges to  purchased gas costs                           |       | (153                                          | )          | — |   | (153 | ) |
| Deferred income taxes                                                              |       | (4,846                                        | )          | 9,483 |   | 4,637 |   |
| Gain on sale of San Juan Basin properties                                          |       | (23,035                                       | )          | — |   | (23,035 | ) |
| Cost of exiting hedges                                                             |       | (3,440                                        | )          | — |   | (3,440 | ) |
| Other                                                                              |       | 427                                           |       | — |   | 427 |   |
| Changes in operating assets and  liabilities:                                      |       |                                          |       |   |   |   |   |
| Decrease in receivables                                                            |       | 15,046                                        |       | — |   | 15,046 |   |
| Increase in inventories                                                            |       | (2,540                                        | )          | — |   | (2,540 | ) |
| Increase in prepaid replacement natural gas                                        |       | (3,941                                        | )          | — |   | (3,941 | ) |
| Increase (decrease) in accounts payable and  accrued liabilities                   |       | 309                                           |       | (9,375 | ) | (9,066 | ) |
| Increase in other long-term liabilities                                            |       | 1,565                                         |       | — |   | 1,565 |   |
| Net cash flow provided by operating  activities                                    |       | 3,153                                         |       | 336 | **(74)** | 3,489 |   |
|                                                                               |       |                                          |       |   |   |   |   |
| **Cash flows from investing activities:**                                          |       |                                          |       |   |   |   |   |
| Pinnacle acquisition, net of cash acquired                                         |       | (38,238                                       | )          | — |   | (38,238 | ) |
| Lubbock  pipeline acquisition                                                      |       | (12,222                                       | )          | — |   | (12,222 | ) |
| Proceeds from sale of San Juan Basin  properties, net of disposal costs            |       | 55,007                                        |       | — |   | 55,007 |   |
| Capital expenditures                                                               |       | (24,968                                       | )          | — |   | (24,968 | ) |
| Proceeds from sales of terminals                                                   |       | 2,438                                         |       | — |   | 2,438 |   |
| Proceeds from sale of assets to related  parties                                   |       | 212                                           |       | (212 | ) | — |   |
| Net cash used in investing activities                                              |       | (17,771                                       | )          | (212 | )**(75)** | (17,983 | ) |
|                                                                                    |            |                                               |            |  |  |  |  |  |  |  |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

30

----

 
| ** **                                                                                                                                             | ** ** | **Nine Months Ended September 30, 2003** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                                                                             | ** ** | **As Previously  Reported**                   | ** ** | **Adjustments** | ** ** | **As Restated** | ** ** |
|                                                                                                                                                   |       |                                          |       |   |   |   |   |
| **Cash flows from financing activities:**                                                                                                              |       |                                          |       |   |   |   |   |
| Proceeds from long-term debt                                                                                                                           |       | 86,835                                        |       | — |   | 86,835 |   |
| Repayment of long-term debt                                                                                                                            |       | (75,130                                       | )          | — |   | (75,130 | ) |
| Debt issuance costs                                                                                                                                    |       | (811                                          | )          | — |   | (811 | ) |
| Proceeds from private placement of MarkWest  Energy Partners’ common units, net                                                                   |       | 9,764                                         |       | — |   | 9,764 |   |
| Distributions to MarkWest Energy Partners’  unitholders                                                                                           |       | (5,173                                        | )          | 66 |   | (5,107 | ) |
| Acquisitions and dispositions of MarkWest  Energy GP general partnership interests and MarkWest Energy Partners  subordinated units to related parties |       | 17                                            |       | — |   | 17 |   |
| Exercise of stock options                                                                                                                              |       | 333                                           |       | — |   | 333 |   |
| Repurchase of treasury shares                                                                                                                          |       | (158                                          | )          | (190 | ) | (348 | ) |
| Net cash provided by financing activities                                                                                                              |       | 15,677                                        |       | (124 | )**(76)** | 15,553 |   |
|                                                                                                                                                   |       |                                          |       |   |   |   |   |
| Effect of  exchange rate on changes in cash                                                                                                            |       | 111                                           |       | — |   | 111 |   |
|                                                                                                                                                   |       |                                          |       |   |   |   |   |
| Net increase in  cash and cash equivalents                                                                                                             |       | 1,170                                         |       | — |   | 1,170 |   |
| Cash and cash  equivalents at beginning of period                                                                                                      |       | 6,410                                         |       | — |   | 6,410 |   |
| Cash and cash  equivalents at end of period                                                                                                            |       | $                                             | 7,580      |   | $ | — |   | $ | 7,580 |   |
| ** **                                                                                                                                             | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Supplemental cash flow information:**                                                                                                                | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                                                                                                                   |       |                                          |       |   |   |   |   |
| Cash paid for interest                                                                                                                                 |       | $                                             | 1,201      |   | $ | 273 | **(77)** | $ | 1,474 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

31

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**Changes in Stockholders’ EquityAmounts:**

 
| ** **                                                                                          | ** ** | **Shares of  Common  Stock** | ** ** | **Shares of  Treasury  Stock** | ** ** | **Common**

**Stock** | ** ** | **Additional  Paid-In  Capital** | ** ** | **Accumulated  Deficit** | ** ** | **Accumulated  Other  Comprehensive  Income  (Loss)** | ** ** | **Treasury  Stock** | ** ** | **Total  Stockholders’  Equity** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|------------------------------|------------|--------------------------------|------------|-----------------------|------------|----------------------------------|------------|--------------------------|------------|-------------------------------------------------------|------------|---------------------|------------|---------------------------------------|------------|
| ** **                                                                                          | ** ** | **(in thousands)**           | ** ** |
| Balance, as previously reported, September 30,  2004                                           |       | 9,835                        |       | (66                            | )          | $                     | 98         |                             | $          | 52,409                   |       | $                                                     | (3,457     | )                   | $          | (1,585                                | )          | $ | (439 | ) | $ | 47,026 |   |
|                                                                                                |       |                         |       |                           |       |                  |       |                             |       |                     |       |                                                  |       |                |       |                                  |       |
| Stock dividend                                                                                      |       | 983                          |       | —                         |       | 10                    |       | (10                              | )          | —                   |       | —                                                |       | —              |       | —                                |       |
|                                                                                                |       |                         |       |                           |       |                  |       |                             |       |                     |       |                                                  |       |                |       |                                  |       |
| Reclassification of dividends paid                                                                  |       | —                       |       | —                         |       | —                |       | (2,162                           | )          | 2,162                    |       | —                                                |       | —              |       | —                                |       |
|                                                                                                |       |                         |       |                           |       |                  |       |                             |       |                     |       |                                                  |       |                |       |                                  |       |
| Modification of stock options                                                                       |       | —                       |       | —                         |       | —                |       | 1,531                            |       | —                   |       | —                                                |       | —              |       | 1,531                                 |       |
|                                                                                                |       |                         |       |                           |       |                  |       |                             |       |                     |       |                                                  |       |                |       |                                  |       |
| Recognition of losses on derivative  instruments that do not qualify for hedge accounting treatment |       | —                       |       | —                         |       | —                |       | —                           |       | —                   |       | 1,355                                                 |       | —              |       | 1,355                                 |       |
|                                                                                                |       |                         |       |                           |       |                  |       |                             |       |                     |       |                                                  |       |                |       |                                  |       |
| Restatement adjustment to net income for  the year ended December 31, 2002                     |       | —                       |       | —                         |       | —                |       | —                           |       | (213                     | )          | —                                                |       | —              |       | (213                                  | )          |
|                                                                                                |       |                         |       |                           |       |                  |       |                             |       |                     |       |                                                  |       |                |       |                                  |       |
| Restatement adjustments to net income for  the year ended December 31, 2003                    |       | —                       |       | —                         |       | —                |       | —                           |       | (1,057                   | )          | —                                                |       | —              |       | (1,057                                | )          |
|                                                                                                |       |                         |       |                           |       |                  |       |                             |       |                     |       |                                                  |       |                |       |                                  |       |
| Restatement of results of operations for  the nine months ended September 30, 2004             |       | —                       |       | —                         |       | —                |       | —                           |       | (5,774                   | )          | —                                                |       | —              |       | (5,774                                | )          |
|                                                                                                |       |                         |       |                           |       |                  |       |                             |       |                     |       |                                                  |       |                |       |                                  |       |
| Balance, as restated, September 30,  2004                                                      |       | 10,818                       |       | (66                            | )          | $                     | 108        |                             | $          | 51,769                   |       | $                                                     | (8,339     | )                   | $          | (230                                  | )          | $ | (439 | ) | $ | 42,869 |   |

 

----

***September 30, 2004 Balance Sheet***

 

**(1)****                                **Cashwas decreased by $0.6 million primarily as a result of restating amountsrecorded for the purchase of property, plant and equipment of $0.2 million,intangible assets of $0.5 million and accrued property tax of $0.1 millionrelating to the East Texas acquisition from cash to those respectiveaccounts.  Initially, the purchase ofthose assets were recorded to a cash clearing account until the purchase pricewas settled in the fourth quarter of 2004.

 

**(2)****                                **Restrictedcash was reduced by $2.5 million and restricted marketable securities increasedby a corresponding amount as a result of restating restricted marketablesecurities from restricted cash to restricted marketable securities.

 

**(3)****                                **Marketablesecurities was increased by $0.1 million to properly record dividends receivedas dividend income.  Previously, thedividends were incorrectly recorded as a reduction to the carrying value ofmarketable securities.

 

**(4)****                                **Receivablesnet, were increased by $1.3 million to correct the amounts recorded for accruedrevenue.

 

**(5)****                                **Thecurrent portion deferred income tax asset was decreased by $0.9 million toreflect the tax effect of the restatement adjustments.

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

32

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**(6)**                                 Otherassets were increased by $0.01 million primarily due to restating a prepaymentof maintenance fees from construction in-progress to prepaid expenses.

 

**(7)**                                 Property,plant and equipment were decreased by $0.2 million primarily as a result of thefollowing restatement adjustments:

 

•                  adecrease of $0.7 million.  During 2003,as a part of the Pinnacle acquisition, the Partnership acquired the Blackhawkpipeline.  The pipeline was subject to alease with a third party.  ThePartnership incorrectly recorded the pipeline as property and equipment anddepreciated it over its estimated useful life. The lease has now been accounted for as a sales-type financing lease.

•                  adecrease of $0.3 million to record repair expense improperly capitalized asproperty, plant and equipment.

•                  anincrease of $0.4 million to record an asset retirement obligation assumed inour East Texas acquisition.  The Companyidentified certain land leases in East Texas that contain provisions requiringthe Partnership to return the land to its original condition upon thetermination of the lease.

•                  anincrease of $0.3 million to capitalize interest on major construction projectsin progress.

•                  anincrease of $0.2 million to restate amounts recorded for the purchase ofproperty, plant and equipment from the East Texas acquisition from a cashclearing account.

•                  adecrease of $0.1 million relating to miscellaneous other adjustments.

 

**(8)****                                **Accumulateddepreciation was reduced by $0.7 million to reverse the depreciation previouslyrecorded on the Blackhawk pipeline.

 

**(9)**                                 Intangibleassets were increased by $0.6 million primarily as a result of the followingrestatement adjustments:

 

•                  anincrease of $0.1 million to record an intangible asset relating to a customercontract acquired as a part of the Pinnacle acquisition.

•                  anincrease of $0.5 million to restate the amounts recorded for the purchase ofintangible assets from the East Texas acquisition from a cash clearing account*.*

 

**(10)****                         **Otherassets were decreased by $0.04 million as a result of reversing the asset thatwas previously recorded with the repurchase of the Partnership’s generalpartner interest and the Partnership’s subordinated units by the Company underthe Participation Plan.  TheParticipation Plan has now been accounted for as a compensatory arrangement.

 

**(11)****                         **Accountspayable were increased by $1.7 million to correct amounts recorded for accruedproduct costs.

 

**(12)****                         **Accruedliabilities were increased by $2.3 million primarily as a result of thefollowing restatement adjustments:

 

•                  anincrease of $2.8 million to reflect the current tax effect of the restatementadjustments.

•                  adecrease of $0.3 million to correct amounts recorded for accrued product costs.

•                  adecrease of $0.3 million to reverse deferred income previously recorded underthe Participation Plan as a result of accounting for the Plan as a compensatoryarrangement.  Previously the sale ofsubordinated partnership units and interests in the Partnership’s generalpartner to certain employees and directors of the Company was incorrectlyrecorded as a sale of an asset.  TheCompany recorded deferred income to the extent the Company loaned the employeesand directors a portion of the purchase price.

•                  adecrease of $0.1 million to correct amounts recorded for accrued propertytaxes.

•                  anincrease of $0.1 million to restate the amounts recorded for accrued propertytaxes from the East Texas acquisition from a cash clearing account.

•                  anincrease of $0.1 million for other miscellaneous adjustments.

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

33

----

 

**(13)****                         **Thenon-current portion of deferred income tax liabilities decreased by $2.0million primarily as a result of the following restatement adjustments toreflect the tax effect of the restatement adjustments.

 

**(14)****                         **Otherlong-term liabilities were increased by $4.3 million primarily as a result ofthe following restatement adjustments:

 

•                  anincrease of $3.9 million to reflect compensation expense accrued under theParticipation Plan.

•                  anincrease of $0.4 million to record an asset retirement obligation assumed inour East Texas acquisition.  Weidentified certain land leases in East Texas that contain provisions requiringthe Partnership to return the land to its original condition upon thetermination of the lease.

 

**(15)****                         **Non-controllinginterest in consolidated subsidiary were decreased by $1.1 million to reflectthe impact of the portion of the restatement adjustments attributable to theeffect of the non-controlling interest in MarkWest Energy Partners and toeliminate the effect of the subordinated units and general partner interestsowned by the employees and directors under the Participation Plan, which werepreviously accounted for as non-controlling interests.  The Participation Plan is now accounted for asa compensatory arrangement and as a result the Company records a separateliability for the fair value of the subordinated units and general partnerinterests held by participants in the Plan.

 

**(16)****                         **Additionalpaid-in capital decreased by $0.6 million as a result of the followingrestatement adjustments:

 

•                  adecrease of $2.2 million as a result of restating dividends paid during thenine months ended September 30, 2004 from retained earnings to additionalpaid in capital for dividends distributed in excess of accumulated earnings.

•                  anincrease of $1.1 million to reflect compensation expense for stock optionsaccounted for as variable awards.  In April 2004,the Company changed its policy to allow participants to exercise their stockoptions using the cashless method.  UnderAPB 25, a fixed stock option plan that permits the use of a cashless exercisebecomes variable if a pattern of exercising stock options using the cashlessmethod is demonstrated.

•                  anincrease of $0.4 million to reflect compensation as a result of themodification of the provisions of stock options for two officers who terminatedtheir employment with the Company but who continued to serve on the Company’sBoard of Directors.

•                  anincrease of $0.1 million relating to miscellaneous other adjustments.

 

**(17)****                         **Accumulateddeficit increased by $4.9 million as a result of the following restatementadjustments:

 

•                  adecrease of $2.2 million as a result of restating dividends paid from retainedearnings to additional paid in capital for dividends distributed in excess ofaccumulated earnings.

•                  anincrease of $0.2 million and $1.3 million to reflect the effect of therestatement adjustments on net income for the years ended December 31,2002 and 2003, respectively.

•                  anincrease of $5.8 million to reflect the effect of the restatement adjustmentson net income for the nine months ended September 30, 2004.

 

**(18)****                         **Accumulatedother comprehensive loss, net of tax decreased by $1.4 million as a result ofrecognizing losses on derivative instruments of $2.2 million that do notqualify for hedge accounting treatment, net of related deferred income taxes of$0.8 million. Previously, the losses had been deferred in accumulated othercomprehensive income.

 

***December 31, 2003 Balance Sheet***

 

**(19)****                         **Restrictedcash was reduced by $2.5 million and restricted marketable securities increasedby a corresponding amount as a result of restating restricted marketablesecurities from restricted cash to restricted marketable securities.

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

34

----

 

**(20)****                         **Receivables,net were reduced by $0.8 million to restate natural gas inventory fromreceivables to inventory.  Previously theinventory was incorrectly identified as a pipeline imbalance and was recordedas a receivable.

 

**(21)****                         **Inventorieswere increased by $0.7 million as a result of the following restatementadjustments:

 

•                  anincrease of $0.8 million to restate natural gas inventory from receivables toinventory.  Previously the inventory wasincorrectly identified as a pipeline imbalance and was recorded at marketvalue.

•                  adecrease of $0.1 million to record natural gas inventory at cost.  The inventory was previously incorrectlyidentified as a pipeline imbalance and was recorded at market value.

 

**(22)****                         **Thecurrent deferred income tax asset was decreased by $0.1 million to reflect thetax effect of the restatement adjustments.

 

**(23)****                         **Deferredfinancing costs, net increased by $3.7 million and intangibles and other assetsdecreased by a corresponding amount as a result of reclassifying deferredfinancing costs, net to a separate line item on the consolidated balance sheet.

 

**(24)****                         **Otherassets were decreased by $0.04 million to eliminate the excess cost recorded onthe repurchase of an interest in the Partnership’s general partner andsubordinated Partnership units previously sold to an officer under theParticipation Plan.  The ParticipationPlan has now been accounted for as a compensatory arrangement and payments torepurchase the general partnership interests and subordinated units are appliedagainst the liability recorded for the Participation Plan.

 

**(25)****                         **Accruedliabilities were decreased by $0.3 million primarily as a result of thefollowing restatement adjustments:

 

•                  anincrease of $0.22 million to eliminate deferred income as a result ofaccounting for the Participation Plan as a compensatory arrangement.  Previously the sale of subordinatedpartnership units and interests in the Partnership’s general partner to certainemployees and directors of the Company was incorrectly recorded as a sale of anasset.  The Company recorded deferredincome to the extent the Company had loaned the employees and directors aportion of the purchase price.

•                  anincrease of $0.02 million to reflect the current tax effect of the restatementadjustments.

 

**(26)****                         **Thenon-current deferred income tax liability was decreased by $0.8 million toreflect the tax effect of the restatement adjustments.

 

**(27)****                         **Otherlong-term liabilities were increased by $2.4 million to reflect compensationexpense accrued under the Participation Plan.

 

**(28)****                         **Non-controllinginterest in consolidated subsidiary was decreased by $0.4 million to reflectthe impact of the portion of the restatement adjustments attributable to thenon-controlling interest in MarkWest Energy Partners and to eliminate theeffect of the subordinated units and general partner interest owned byemployees and directors under the Participation Plan, which were previously accountedfor as non-controlling interests.    TheParticipation Plan is now accounted for as a compensatory arrangement and as aresult the Company records a separate liability for the fair value of thesubordinated units and general partner interests held by participants in thePlan.

 

***Three months ended September 30, 2004 Income Statement***

 

**(29)****                         **Revenuesfor the third quarter of 2004 were decreased by $1.4 million primarily as aresult of the following restatement adjustments:

 

•                  adecrease of $2.2 million to recognize losses on derivative instruments that didnot qualify for hedge accounting.

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

35

----

 

•                  anincrease of $0.4 million to correct the amounts recorded for accrued revenue.

•                  anincrease of $0.4 million to restate a pipeline imbalance credit that wasimproperly recorded as an adjustment of product costs.

 

**(30)****                         **Purchasedproduct costs for the third quarter of 2004 were increased by $0.1 millionprimarily as a result of the following restatement adjustments:

 

•                  anincrease of $0.4 million to restate a pipeline imbalance credit that wasimproperly recorded as an adjustment of product costs.

•                  adecrease of $0.3 million to correct amounts recorded for accrued product costs.

 

**(31)****                         **Facilityexpense increased by $0.1 million to record repair expense improperlycapitalized as property, plant and equipment.

 

**(32)****                         **Selling,general and administrative expenses increased by $1.3 million for the thirdquarter of 2004 primarily as a result of the following restatement adjustments:

 

•                  anincrease of $0.8 million to reflect the compensation expense under theParticipation Plan.

•                  anincrease of $0.5 million to record compensation expense for stock optionsaccounted for as variable awards.  In April 2004,the Company changed its policy to allow participants to exercise their stockoptions using the cashless method.  UnderAPB 25, a fixed stock option plan that permits the use of a cashless exercisebecomes variable if a pattern of exercising stock options using the cashlessmethod is demonstrated.

 

**(33)****                         **Depreciationexpense for the third quarter of 2004 were decreased by $1.5 million primarilyas a result of the following restatement adjustments:

 

•                  adecrease of $0.1 million for the reversal of depreciation expense previouslyrecorded on the Blackhawk pipeline.

•                  adecrease of $1.4 million to reclassify amortization of intangible assets to aseparate line item on the consolidated income statement.

 

**(34)****                         **Amortizationof intangible assets for the third quarter of 2004 were increased by $1.4million primarily as a result of the following restatement adjustments:

 

•                  anincrease of $1.4 million to reclassify amortization of intangible assets fromdepreciation expense to a separate line item on the consolidated incomestatement.

•                  increaseof $0.03 million to record amortization of a customer contract that wasacquired with the Blackhawk pipeline.

 

**(35)****                         **Accretionexpense increased by $0.01 million to record accretion expense attributed tothe asset retirement obligation assumed in our East Texas acquisition.

 

**(36)****                         **Interestexpense decreased by $3.4 million for the third quarter of 2004 primarily as aresult of the following restatement adjustments:

 

•                  a decreaseof $3.1 million to reclassify amortization of deferred financing costs to aseparate line item on the consolidated income statement.

•                  adecrease of $0.3 million to capitalize interest expense on major constructionprojects in progress.

 

**(37)****                         **Amortizationof deferred financing costs increased $3.1 million as a result of reclassifythe amortization of deferred financing costs from interest expense to aseparate line item on the consolidated income statement.

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

36

----

 

**(38)****                         **Dividendincome increased by $0.1 million as a result of recording dividends received onmarketable securities as dividend income. Previously, the dividends were improperly recorded as a reduction of thecarrying value of marketable securities.

 

**(39)****                         **Theprovision for income taxes was decreased by $0.2 million to reflect the taxeffect of the restatement adjustments.

 

**(40)****                         **Non-controllinginterest in consolidated subsidiary was increased by $0.3 million to reflectthe impact of the portion of the restatement adjustments attributable to thenon-controlling interest in MarkWest Energy Partners and to eliminate theeffect of the subordinated units and general partner interests owned byemployees and directors under the Participation Plan, which were previouslyaccounted for as non-controlling interests. The Participation Plan is now accounted for as a compensatory arrangementand as a result the Company records a separate liability for the fair value ofthe subordinated units and general partner interests held by participants inthe Plan.

 

***Three months ended September 30, 2003 Income Statement***

 

**(41)****                         **Revenuesincreased by $0.5 million to reclassify gas revenues from discontinuedoperations to continuing operations.  TheCompany retained its interests in three wells in Michigan, which it originallyintended to dispose of in connection with the discontinuance of its explorationand production business.

 

**(42)****                         **Facilityexpenses increased by $0.2 million to reclassify expenses related to theretained exploration and production operations from discontinued operations tocontinuing operations.

 

**(43)****                         **Selling,general and administrative expenses increased by $0.2 million for the thirdquarter of 2003 to reflect compensation expense under the Participation Plan.

 

**(44)****                         **Depreciationexpense increased by $0.3 million to reclassify expenses related to theretained exploration and production operations from discontinued operations tocontinuing operations.

 

**(45)****                         **Interestexpense decreased by $0.5 million and the amortization of deferred financingcosts increased by a corresponding amount as a result of reclassifyingamortization of deferred financing costs to a separate line item on theconsolidated income statement.

 

**(46)****                         **Thebenefit for income taxes was decreased by $0.02 million to reflect the taxeffect of the restatement adjustments.

 

**(47)****                         **Non-controllinginterest in consolidated subsidiary was increased by $0.1 million to reflectthe impact of the portion of the restatement adjustments attributable to thenon-controlling interest in MarkWest Energy Partners and to eliminate theeffect of the subordinated units and general partner interests owned by theemployees and directors under the Participation Plan, which were previouslyaccounted for as non-controlling interests.   The Participation Plan is now accounted for as a compensatoryarrangement and as a result the Company records a separate liability for thefair value of the subordinated units and general partner interests held byparticipants in the Plan.

 

**(48)****                         **Lossfrom discontinued exploration and production operations was decreased by lessthan $0.01 million related to miscellaneous other adjustments.

 

***Nine months ended September 30, 2004 Income Statement***

 

**(49)****                         **Revenuesfor the nine months ended September 30, 2004 decreased by $0.2 millionprimarily as a result of the following restatement adjustments:

 

•                  adecrease of $2.2 million to recognize losses on derivative instruments that didnot qualify for hedge accounting..

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

37

----

 

•                  anincrease of $1.3 million to correct the amounts recorded for accrued revenue.

•                  anincrease of $0.9 million to restate a pipeline imbalance credit that wasimproperly recorded as an adjustment of product cost.

•                  anincrease of $0.1 million to record natural gas inventory at cost.  Previously the inventory was incorrectlyidentified as a pipeline imbalance and was recorded at market value.

•                  adecrease of $0.1 million to reduce revenue for the proceeds on the Blackhawkfinancing lease receivable.

•                  adecrease of $0.1 million to restate the settlement of a commodity hedge frominterest expense to revenue.

•                  adecrease of $0.1 million related to miscellaneous other adjustments.

 

**(50)****                         **Purchased****product costs for the nine months ended September 30,2004 increased by $2.2 million primarily as a result of the following restatementadjustments:

 

•                  anincrease of $1.4 million to correct amounts recorded for accrued product costs.

•                  anincrease of $0.9 million to restate a pipeline imbalance credit that wasimproperly recorded as an adjustment of product cost to revenue.

 

**(51)****                         **Facilitycosts for the nine months ended September 30, 2004 were increased by $0.3million primarily as a result of the following restatement adjustments:

 

•                  adecrease of $0.08 million to adjust the property tax accrual from estimate toactual taxes paid.

•                  anincrease of $0.03 million to primarily record storage fees related to inventorythe Partnership held for sale.

•                  anincrease of $0.3 million to record repair expense improperly capitalized asproperty, plant and equipment.

 

**(52)****                         **Selling,general and administrative expenses increased by $2.9 million for the ninemonths ended September 30, 2004 primarily as a result of the followingrestatement adjustments:

 

•                  anincrease of $1.1 million to record compensation expense for stock optionsissued as variable awards.  In April 2004,the Company changed its policy to allow participants to exercise their stockoptions using the cashless method.  UnderAPB 25, a fixed stock option plan that permits the use of a cashless exercisebecomes variable if a pattern of exercising stock options using the cashlessmethod is demonstrated..

•                  anincrease of $0.4 million to reflect compensation as a result of themodification of the provisions of stock options for two employees whoterminated their employment with the Company but who continued to serve on theCompany’s Board of Directors.

•                  anincrease of $1.4 million to reflect compensation expense under theParticipation Plan

 

**(53)****                         **Depreciationexpense for the nine months ended September 30, 2004 were decreased by$1.7 million primarily as a result of the following restatement adjustments:

 

•                  adecrease of $1.4 million to reclassify amortization of intangible assets to aseparate line item on the consolidated income statement.

•                  adecrease of $0.3 million for the reversal of depreciation expense previouslyrecorded on the Blackhawk pipeline.

 

**(54)****                         **Amortizationof intangible assets for the nine months ended September 30, 2004 wereincreased by $1.5 million primarily as a result of the following restatementadjustments:

 

•**                 **anincrease of $1.4 million to reclassify amortization of intangible assets fromdepreciation expense to a separate line item on the consolidated incomestatement.

•                  anincrease of $0.1 million to record amortization of a customer contract that wasacquired with the Blackhawk pipeline.

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

38

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**(55)****                         **Accretionexpense increased by $0.01 million to record accretion expense attributed toour East Texas segment asset retirement obligation.

 

**(56)****                         **Interestexpense decreased by $4.2 million for the nine months ended September 30,2004 primarily as a result of the following restatement adjustments:

 

•                  adecrease of $3.7 million to reclassify amortization of deferred financing coststo a separate line item on the consolidated income statement.

•                  adecrease of $0.1 million to restate the settlement of a commodity hedge frominterest expense to revenue.

•                  adecrease of $0.4 million to capitalize of interest expense on majorconstruction projects in-progress.

 

**(57)****                         **Amortizationof deferred financing costs increased $3.7 million as a result of reclassifyingthe amortization of deferred financing costs from interest expense to aseparate line item on the consolidated income statement.

 

**(58)****                         **Dividendincome increased by $0.2 million as a result of recording dividends received onmarketable securities as dividend income. Previously, the dividends were improperly recorded as a reduction of thecarrying value of marketable securities.

 

**(59)****                         **Otherincome decreased by $0.04 million to reflect an additional adjustment relatingto the financing lease adjustment for the Blackhawk pipeline.

 

**(60)****                         **Thebenefit for income taxes was decreased by $1.6 million to reflect the taxeffect of the restatement adjustments.

 

**(61)****                         **Non-controllinginterest in consolidated subsidiary was increased by $0.7 million to reflectthe impact of the portion of the restatement adjustments attributable to thenon-controlling interest in MarkWest Energy Partners and to eliminate theeffect of the subordinated units and general partner interests owned byemployees and directors under the Participation Plan, which were previouslyaccounted for as non-controlling interests. The Participation Plan is now accounted for as a compensatoryarrangement and as a result the Company records a separate liability for thefair value of the subordinated units and general partner interests held byparticipants in the Plan.

 

***Nine months ended September 30, 2003 Income Statement***

 

**(62)****                         **Revenuesincreased by $1.4 million to reclassify gas revenues from discontinuedoperations to continuing operations.  TheCompany retained its interests in three wells in Michigan, which it originallyintended to dispose of in connection with the discontinuance of its explorationand production business.

 

**(63)****                         **Facilityexpenses increased by $0.8 million to reclassify expenses related to theretained exploration and production operations from discontinued operations tocontinuing operations.

 

**(64)****                         **Selling,general and administrative expense increased by $0.6 million to reflectcompensation expense under the Participation Plan.

 

**(65)****                         **Depreciationexpense increased by $0.4 million to reclassify expenses related to theretained exploration and production operations from discontinued operations tocontinuing operations.

 

**(66)****                         **Interestexpense decreased by $1.3 million and amortization of deferred financing costsincreased by a corresponding amount as a result of reclassifying amortizationof deferred financing costs to a separate line item on the consolidated incomestatement.

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

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**(67)****                         **Gainon sale to related party was decreased by $0.2 million to eliminate a gainimproperly recognized on the sale of subordinated partnership units andinterests in the Partnership’s general partner to certain employees anddirectors.   The Participation Plan hasnow been accounted for as a compensatory arrangement.

 

**(68)****                         **Thebenefit for income taxes was increased by $0.2 million to reflect the taxeffect of the restatement adjustments.

 

**(69)****                         **Non-controllinginterest in consolidated subsidiary was increased by $0.2 million to reflectthe impact of the portion of the restatement adjustments attributable to thenon-controlling interest in MarkWest Energy Partners and to eliminate theeffect of the subordinated units and general partner interests owned byemployees and directors under the Participation Plan, which were previouslyaccounted for as non-controlling interests.  The Participation Plan is now accounted for as a compensatoryarrangement and as a result the Company records a separate liability for thefair value of the subordinated units and general partner interests held byparticipants in the Plan.

 

**(70)****                         **Incomefrom discontinued exploration and production operations (net of income tax provisionof $0.6 million) was decreased by $0.2 million to reclassify income related tothe retained exploration and production operations from discontinued operationsto continued operations.

 

***Nine months ended September 30, 2004 Cash Flow Statement***

 

**(71)****                         **Netcash provided by operating activities decreased by $1.9 million, after anadjustment to cash of $0.6 million, to adjust obligations for constructionprojects in process, to reflect a portion of amounts received under the leasefor the Blackhawk pipeline as payments on the financing lease receivable, toreflect the capitalization of interest expense, to record repair expenseimproperly capitalized as property, plant and equipment, to reclassify thecontribution of treasury shares to the 401(k) benefit plan from financingactivities to operating activities, to reflect dividends received as income, toreflect the repurchase and proceeds from the sale of membership interests inthe Partnership’s general partner and subordinated units in the Partnershipfrom a related party as an operating activity and to reflect distributions paidunder the Participation Plan as an operating activity.  Cash was adjusted by $0.6 million primarilyas a result of reclassifying amounts recorded for the purchase of property,plant and equipment of $0.2 million, intangible assets of $0.5 million andaccrued property tax of $0.1 million relating to the East Texas acquisitionfrom cash to those respective accounts.

 

**(72)****                         **Netcash used in investing activities decreased by $1.1 million to reflect proceedsfrom the sale of membership interests in the Partnership’s general partner andsubordinated units in the Partnership from a related party as an operatingactivity, to adjust obligations for construction projects in process, toreflect a portion of amounts received under the lease for the Blackhawkpipeline as payments on the financing lease receivable, to record repairexpense improperly capitalized as property, plant and equipment and to reflectdividends received on marketable securities as income.

 

**(73)****                         **Netcash used in financing activities decreased by $0.2 million to reflect therepurchase of membership interests in the Partnership’s general partner andsubordinated units in the Partnership from a related party as an operatingactivity, to reclassify the contribution of treasury shares to the 401(k)benefit plan from financing activities to operating activities and to reflectdistributions paid under the Participation Plan as an operating activity.

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

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***Nine months ended September 30, 2003Cash Flow Statement***

 

##### **(74)****                         **Netcash provided by operating activities increased by $0.3 million to reflectproceeds from the sale of membership interests in the Partnership’s generalpartner and subordinated units in the Partnership from a related party as anoperating activity, to reclassify the contribution of treasury shares to the401(k) benefit plan from financing activities to operating activities and toreflect distributions paid under the Participation Plan as an operatingactivity.

#####  

##### **(75)****                         **Netcash used in investing activities increased by $0.2 million to reflect proceedsfrom the sale of membership interests in the Partnership’s general partner andsubordinated units in the Partnership from a related party as an operatingactivity.

#####  

##### **(76)****                         **Netcash provided by financing activities decreased by $0.1 million to reclassifythe contribution of treasury shares to the 401(k) benefit plan from financingactivities to operating activities and to reflect distributions paid under theParticipation Plan as an operating activity.

 

**(77)**                          Cashpaid for interest, under supplemental cash flow information, was increased by$0.3 million to properly state cash paid for interest.

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

41

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##### **Item 2.   Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

On April 11,2005, management, after discussion with the Audit Committee of our Board ofDirectors, determined that previously issued financial statements for the yearsended December 31, 2002 and 2003 and for each of the first three quartersof 2003 and 2004 should be restated to reflect compensation expenseattributable to the sale of subordinated Partnership units and interests in thePartnership’s general partner to certain employees and directors of the Companythat occurred during 2002, 2003 and 2004. In addition, certain other restatement adjustments have also beenrecorded to correct other errors in the consolidated financial statements,including adjustments to accruals for revenue and purchased product costs,adjustments for costs improperly capitalized as property, plant and equipment,adjustments to record capitalized interest on major construction projectsin-process, adjustments to record as a financing lease a lease agreementpreviously entered into by an acquired business, an adjustment to recordnatural gas inventory at cost, an adjustment to reflect separately restrictedmarketable securities, adjustments for dividends received on marketablesecurities improperly recorded as a reduction in the carrying value ofmarketable securities, adjustment to reverse transactions improperly recorded asa derivative transaction with hedge accounting treatment and adjustments toaccrued property taxes.  Adjustments werealso made to record compensation expense as a result of the modification of theprovisions of certain stock options for two officers who terminated theiremployment with the Company but who continued to serve on its Board ofDirectors.  Compensation expense was alsorecorded for stock options issued as variable awards.  In April 2004, the Company changed itspolicy to allow participants to exercise their stock options using the cashlessexercise method.  Under APB 25, *Accounting for Stock Issued to Employees,*afixed stock option plan that permits the use of a cashless exercise becomesvariable if a pattern of exercising stock options using the cashless method isdemonstrated.  Additionally, the Companymade an adjustment to reclassify a portion of dividends paid during the ninemonths ended September 30, 2004 from retained earnings to additional paidin capital for the amount of the dividends distributed in excess of accumulatedearnings.

 

Cash wasalso adjusted primarily as a result of reclassifying amounts recorded for thepurchase of property, plant and equipment, intangible assets and accruedproperty tax relating to an acquisition, from cash to those respectiveaccounts.  Initially, the purchase ofthose assets were recorded to a cash clearing account until the purchase pricewas settled in the fourth quarter of 2004. In addition, on October 28, 2004, the Company’s Board of Directorsdeclared a stock dividend of one share of MarkWest Hydrocarbon’s common stockfor each ten shares owned by stockholders. The stock dividend was paid on November 19, 2004. Common stockinformation in the Form 10Q/A has been adjusted to give retroactive effectto stock dividend paid. Other less significant adjustments andreclassifications were identified and recorded in conjunction with therestatement process.

 

Refer toNote 16, *Restatement and Reclassificationsof Consolidated Financial Statements*, to the Consolidated FinancialStatements in Part 1, Item 1 of this Form 10-Q/A for furtherinformation regarding the restatement of our previously issued financialstatements.

 

##### **ManagementOverview of the Three and Nine Months Ended September 30, 2004**

 

Wereported a net loss for the three months ended September 30, 2004 of $2.0million, or $0.18 per diluted share, compared to a net loss of $7.0 million, or$0.68 per diluted share, for the third quarter of 2003.  For the nine months ended September 30,2004, we reported a net loss of $7.6 million, or $0.71 per diluted share,compared to net income of $1.6 million, or $0.15 per diluted share, for thenine months ended September 30, 2003.

 

Wereported a net loss from continuing operations of $2.0 million, or $0.18 per dilutedshare, for the three months ended September 30, 2004, compared to a netloss from continuing operations of $6.4 million, or $0.62 per diluted share,for the third quarter of 2003.  For thenine months ended September 30, 2004, we reported a net loss fromcontinuing operations of $7.6 million, or $0.71 per diluted share, compared toa net loss from continuing operations of $15.9million, or $1.54 per dilutedshare, for the corresponding nine months of 2003.

 

Theimproved results for the third quarter of 2004 as compared to the correspondingquarter of 2003 was attributed to the impact of better NGL product margins, thenon-recurrence of approximately $1.7 million of crude oil hedging losses andhigher NGL product sales volumes.  Othermatters benefiting third quarter results included an

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

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approximate $0.8 million in otherincome from the sale of the rights to a former Enron receivable that had beenpreviously written-off.

 

Theimproved net income from continuing operations for the first nine months of2004 as compared to the corresponding period of 2003 was also attributed to thefactors impacting the third quarter comparisons.  Approximately $8.7 million of the change wasattributable to a reduction in our crude oil hedging losses.  The remainder of the change was primarily dueto better NGL product margins and due to acquisitions made by MarkWest EnergyPartners, late in 2003 and in the third quarter of 2004.

 

Finally,in September 2004, we entered into several new and amended agreements withone of the largest Appalachia producers, which allow us to significantly reduceour exposure to commodity price risk for approximately 25% of our keep-wholegas volumes.

 

On October 28,2004, our board of directors declared a stock dividend of one share of ourcommon stock for each ten shares of common stock held by our commonstockholders.  The stock dividend is tobe paid on November 19, 2004 to stockholders of record as of the close ofbusiness on November 9, 2004.

 

On thesame date, our board of directors declared a cash dividend of $0.05 per shareof its common stock held by our common stockholders.  This represented a $0.025 per share increaseover the previous quarter’s dividend. The indicated annual rate is $0.20 per share.  Our board has declared that the dividend isto be paid on December 6, 2004, to the stockholders of record as of theclose of business on November 24, 2004.

 

## **Our Business**

 

We werefounded in 1988 as a partnership and later incorporated in Delaware.  We completed our initial public offering in1996.

 

We are anenergy company primarily focused growing the value of our investment inMarkWest Energy Partners, our consolidated subsidiary, and a publicly tradedmaster limited partnership engaged in the gathering, processing andtransmission of natural gas, the transportation, fractionation and storage ofnatural gas liquids (“NGLs”), and the gathering and transportation of crudeoil. We also market NGLs and natural gas. We discontinued our exploration and production activities during 2003.

 

Ourassets consist almost entirely of partnership interests in MarkWest EnergyPartners.  As of September 30, 2004,our partnership interests consisted of the following:

 

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

•                  A90% 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.

 

TheCompany’s operations are classified into two reportable segments:

 

(1)          ManagingMarkWest Entergy — The Company operates MarkWest Energy, a publicly tradedlimited partnership engaged in the gathering, processing and transmission ofnatural gas, the transportation, fraction and storage of natural gas liquids,and the gathering and transpiration of crude oil.

(2)          Marketing— The Company sells its equity and third party NGLs, purchases third-partynatural gas and sells its equity and third-party natural gas.  Since February 2004, the Company is alsoengaged in the wholesale marketing of propane.

 

During2003, the Company discontinued its exploration and production business segment.

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

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To betterunderstand our business and the results of operations discussed below, it isimportant 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

•                  Thecomparability 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 initialpublic offering. At the time of its formation and initial public offering, weentered into four contracts with MarkWest Energy Partners whereby MarkWestEnergy Partners provides midstream services to us in Appalachia in exchange forfees. Additionally, MarkWest Energy Partners receives 100% of all fee andpercent-of-proceeds consideration for the first 10 MMcf/d that it gathers andprocesses in Michigan. MarkWest Hydrocarbon retains a 70% net profits interestin the gathering and processing income earned on quarterly pipeline throughputin excess of 10 MMcf/d. In accordance with generally accepted accountingprinciples, MarkWest Energy Partners’ financial results are included in ourconsolidated financial statements.  Allintercompany accounts and transactions are eliminated during consolidation.

 

As aresult of our contracts with MarkWest Energy Partners mentioned above, we arethe Partnership’s largest customer, accounting for 20% and 21% of its revenuesfor the three and nine months ended September 30, 2004, respectively, and24% and 31% of its gross margin for the three and nine months ended September 30,2003, respectively. We expect we will account for less of MarkWest EnergyPartners’ business in the future as MarkWest Energy Partners expands itsexisting operations, continues to acquire assets and increases its customer andbusiness diversification.

 

Also, atthe time of the initial public offering, we entered into an Omnibus Agreementwith MarkWest Energy Partners and related parties that governs potentialcompetition and indemnification obligations among the parties.

 

Throughour majority ownership in the Partnership’s general partner, we manage thebusiness operations of MarkWest Energy Partners. Our employees are responsiblefor conducting the Partnership’s business and operating its assets pursuant toa Services Agreement, which was formalized effective January 1, 2004. Wereceive $5,000 annually from MarkWest Energy Partners for services providedunder the Services Agreement. We also are reimbursed for any reasonable costsincurred in the operation of the Partnership.

 

***Our Contracts***

 

                                                Excludingthe revenues and gross margin (defined as revenues less purchased productcosts) derived by MarkWest Energy Partners, we generate the majority of ourrevenues and gross margin from our marketing of NGLs and, to a lesser extent,natural gas.  As compensation forproviding processing services to Appalachian producers (we have sinceoutsourced these services to MarkWest Energy Partners as discussed above), weearn a fee and receive title to the NGLs produced.  In return, we are required to replace, in drynatural gas, the Btu value of the NGLs extracted.  This Btu replacement obligation is referredto in the industry as a “keep-whole” arrangement.  In keep-whole arrangements, our principalcost is the replacement of the Btus extracted from the gas stream in the formof NGLs or consumed as fuel during processing with dry gas of an equivalent Btucontent.  The spread between the NGLproduct sales price and the purchase price of natural gas with an equivalentBtu content is called the “frac spread”. Generally, the frac spread and,consequently, the operating margins are favorable under these contracts.  In the event natural gas becomes moreexpensive on a Btu equivalent basis than NGL products, the cost of keeping theproducer “whole” results in operating losses.

 

At theclosing of MarkWest Energy Partners’ initial public offering on May 24,2002, we outsourced our midstream services to the Partnership. Pursuant to theterms of the operating agreements, we retained all the benefits

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

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and associated risks of ourkeep-whole contracts with producers. Our NGL and gas marketing operations wereretained by us and not contributed to MarkWest Energy Partners.

 

Ourkeep-whole contracts expose us to commodity price risk, both on the sales side(of NGLs) and on the purchase side (of natural gas), which may increase thevolatility of our marketing results and cash flows. However, in September, weentered into several new and amended agreements with one of the largestAppalachia producers, which allow us to significantly reduce our exposure tocommodity price risk for approximately 25% of our keep-whole gas volumes. Wealso attempt to mitigate our commodity price risk through our hedging program.Under a hedging strategy implemented approximately two years ago that was basedon our then-existing natural gas production and historical pricing data throughthat point in time, we incurred significant hedging losses. For the nine monthsended September 30, 2004 and 2003, we lost approximately $2.7 million and$13.6 million, respectively, as a result of that hedging strategy.  The last transactions associated with thishedging strategy settled in April 2004.

 

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

 

ThePartnership generates the majority of its revenues and gross margin (defined asrevenues less purchased product costs) from natural gas gathering, processingand transmission, NGL transportation, fractionation and storage, and crude oilgathering and transportation.  While allof these services constitute midstream energy operations, the Partnershipprovides its services pursuant to five 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 revenue thePartnership earns from these contracts is directly related to the volume ofnatural gas, NGLs or crude oil that flows through its systems and facilitiesand is not directly dependent on commodity prices. In certain cases, thecontracts provide for minimum annual payments. To the extent a sustained decline in commodity prices results in adecline in volumes, however, the Partnership’s revenues from these contractswould be reduced.

 

•                  *Percent-of-proceeds contracts.*  Under percent-of-proceeds contracts, thePartnership generally gathers and processes natural gas on behalf of producers,sells the resulting residue gas and NGLs at market prices and remits toproducers an agreed upon percentage of the proceeds based on an index price. Inother cases, instead of remitting cash payments to the producer, MarkWestEnergy Partners delivers an agreed upon percentage of the residue gas and NGLsto the producer and sells the volumes it keeps to third parties at marketprices. Under these types of contracts, the Partnership’s revenues and grossmargins increase as natural gas prices and NGL prices increase, and itsrevenues and gross margins decrease as natural gas prices and NGL pricesdecrease.

 

•                  *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.  With respect to (1) and (3) above,the gross margins the Partnership realizes under the arrangements describedabove decrease in periods wherein natural gas prices are falling because thesegross margins are based on a percentage of the index price. Conversely, ourgross margins increase during periods of rising 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 the naturalgas, the Partnership must either purchase natural gas at market prices forreturn to producers or make cash payment to the producers equal to the value ofthis natural gas. Accordingly, under these arrangements, the Partnership’srevenues and gross margins increase as the price of NGLs increase relative tothe price of natural gas, and its revenues and gross margins decrease as theprice of natural gas increases relative to the price of NGLs.

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

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•                  *East Texas System gathering arrangements.*  The Partnership gathers volumes on the EastTexas System under contracts with fee arrangements that are unique to thatsystem.  These contracts typicallycontain one or more of the following revenue components:

 

•                  *Fixed gathering and compression fees.*  Typically, gathering and compression fees arecomprised of a fixed fee portion in which producers pay a fixed rate per unitto transport their natural gas through the gathering system.  Under the majority of these arrangements,fees are adjusted annually based on the Consumer Price Index.

 

•                  *Settlement margin. *Typically,the terms of the Partnership’s East Texas System gathering arrangements specifythat it is allowed to retain a fixed percentage of the volume gathered to coverthe compression fuel charges and deemed line losses.  To the extent the East Texas System isoperated more efficiently than provided for by contracted allowances, MarkWestEnergy Partners is entitled to retain the difference for its own account.

 

•                  *Condensate sales.*  During the gathering process, thermodynamicforces contribute to changes in operating conditions of the natural gas flowingthrough the pipeline infrastructure.  Asa result, hydrocarbon dew points are reached, causing condensation ofhydrocarbons in the high-pressure pipelines. The East Texas System sells 100% of the condensate collected in thesystem at a monthly crude-oil based price.

 

In manycases, the Partnership provides services under contracts that contain acombination of more than one of the arrangements described above.  The terms of the contracts vary based on gasquality conditions, the competitive environment at the time the contracts aresigned and customer requirements.  Thecontract mix and, accordingly, the Partnership’s exposure to natural gas andNGL prices, may change as a result of changes in producer preferences, thePartnership’s expansion in regions where some types of contracts are morecommon and other market factors.  Anychange in MarkWest Energy Partners’ contract mix may impact the financialresults.

 

At September 30,2004, the Partnership’s primary exposure to keep-whole contracts was limited toits Arapaho (OK) processing plant and its East Texas (“Carthage”) processingcontract with a third party.  At theArapaho (OK) plant inlet, the Btu content of the natural gas meets thedownstream pipeline specifications; however, MarkWest Energy Partners has theoption of extracting NGLs when the processing margin environment isfavorable.  In addition, approximatelyhalf, as measured in volumes, of the related gas gathering contracts includeadditional fees to cover plant operating costs, fuel costs and shrinkage costsin a low processing margin environment. Because of the Partnership’s ability to operate the plant in severalrecovery modes, including turning it off, coupled with the additional feesprovided for in the gas gathering contracts, the Partnership’s overallkeep-whole contract exposure is limited to a portion of the operating costs ofthe plant.

 

Inregards to the exposure to keep-whole contracts in Carthage, the Partnershiphas a third party processing agreement to offer percent of liquids (“POL”)processing services to area customers and to process gas for its ownaccount.  Of the total system inlet,approximately 26% of the volume is processed under POL terms and 16% isprocessed as keep-whole gas.  Theremaining 58% is subject to gathering services. However, the exposure is limited by the Partnership’s ability to rejector recover ethane to help manage the keep-whole processing volumes.

 

***Recent MarkWest Energy Partners AcquisitionActivity***

 

Inreading the discussion of our historical results of operations, you should beaware of MarkWest Energy Partners’ recent significant acquisitions, whichimpact the comparability of our results of operations for the periodsdiscussed.

 

From itsinitial public offering through September 30, 2004, the Partnership hascompleted six acquisitions for an aggregate purchase price of approximately$354.3 million. These six acquisitions include:

 

•                                          thePinnacle acquisition, which closed on March 28, 2003, for consideration of$39.9 million;

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

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•                                          theLubbock pipeline acquisition (also known as the Power-Tex Lateral pipeline),which closed on September 2, 2003, for consideration of$12.2 million;

 

•                                          thewestern Oklahoma acquisition, which closed on December 1, 2003, forconsideration of $38.0 million;

 

•                                          theMichigan Crude Pipeline acquisition, which closed on December 18, 2003,for consideration of $21.3 million;

 

•                                          theHobbs Lateral acquisition, which closed on April 1, 2004, forconsideration of $2.3 million; and

 

•                                          theEast Texas System acquisition, which closed on July 30, 2004, forconsideration of $240.6 million.

 

Ourhistorical results of operations for the nine months ended September 30,2003, save for six months of activity from the Pinnacle acquisition and onemonth for the Lubbock pipeline acquisition, do not reflect the impact of theseacquisitions on our operations. However, our results of operations for thethree months ended September 30, 2004, do reflect the impact from the four2003 acquisitions, three months of operations for the Hobbs Lateral acquisitionand two months of results from the East Texas System acquisition.  The results of operations for the nine monthsended September 30, 2004, reflect the impact from the four 2003acquisitions, six months of operations for the Hobbs Lateral acquisition andtwo months of results from the East Texas acquisition.

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

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##### **Resultsof Operations**

 

***Operating Data***

 
| ** **                                 | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                 | ** ** | **2004**                                   | ** ** | **2003**                                  | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Marketing**                              |       |                                       |       |                                      |       |   |   |   |   |
| NGL  product sales (gallons)               |       | 42,900,000                                 |       | 40,800,000                                |       | 130,100,000 |   | 125,700,000 |   |
| **Wholesale**(1)                           |       |                                       |       |                                      |       |   |   |   |   |
| NGL  product sales (gallons)               |       | 10,879,000                                 |       | —                                    |       | 15,816,000 |   | — |   |
| **MarkWest  Energy Partners**              |       |                                       |       |                                      |       |   |   |   |   |
| Appalachia:                                |       |                                       |       |                                      |       |   |   |   |   |
| Natural gas processed for a fee (Mcf/d)(2) |       | 196,000                                    |       | 204,000                                   |       | 201,000 |   | 198,000 |   |
| NGLs fractionated for a fee (Gal/d)        |       | 489,000                                    |       | 511,000                                   |       | 474,000 |   | 449,000 |   |
| NGL product sales (gallons)                |       | 10,710,000                                 |       | 10,771,000                                |       | 32,638,000 |   | 29,142,000 |   |
| Michigan:                                  |       |                                       |       |                                      |       |   |   |   |   |
| Natural gas processed for a fee (Mcf/d)    |       | 12,300                                     |       | 17,300                                    |       | 12,800 |   | 15,900 |   |
| NGL product sales (gallons)                |       | 2,453,000                                  |       | 3,982,000                                 |       | 7,557,000 |   | 9,112,000 |   |
| Crude oil transported for a fee (Bbl/d)(3) |       | 15,100                                     |       | —                                    |       | 14,800 |   | — |   |
| Southwest:                                 |       |                                       |       |                                      |       |   |   |   |   |
| Gathering systems throughput (Mcf/d):      |       |                                       |       |                                      |       |   |   |   |   |
| East Texas System(4)                       |       | 246,600                                    |       | —                                    |       | 246,600 |   | — |   |
| Foss Lake (OK)(5)                          |       | 63,300                                     |       | —                                    |       | 60,700 |   | — |   |
| Appleby (6)                                |       | 24,500                                     |       | 25,200                                    |       | 23,300 |   | 24,300 |   |
| Other gathering systems (6)                |       | 15,500                                     |       | 21,300                                    |       | 17,700 |   | 21,100 |   |
| Lateral throughput volumes (Mcf/d)(7)      |       | 97,200                                     |       | 43,600                                    |       | 83,100 |   | 43,600 |   |
| NGL product sales (gallons):               |       |                                       |       |                                      |       |   |   |   |   |
| Arapaho (OK)(8)                            |       | 12,174,000                                 |       | —                                    |       | 28,686,000 |   | — |   |
| East Texas System(4)                       |       | 12,268,000                                 |       | —                                    |       | 12,268,000 |   | — |   |

 

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(1)   Wholesale NGLproduct sales started in February 2004.

(2)   Includes throughput from our Kenova, Cobb, andBoldman processing plants.

(3)   We acquired our Michigan Crude Pipeline in December 2003.

(4)   We acquired our East Texas System in late July 2004.

(5)   We acquired our Foss Lake (OK) gathering systemin December 2003.

(6)   We acquired our Pinnacle gathering systems inlate March 2003.

(7)   We acquired our Power-Tex Lateral pipeline (a/k/athe Lubbock Pipeline) in September 2003 and our Hobbs lateral pipeline in April 2004.  The Power-Tex and Hobbs Lateral pipelines arethe only laterals we own that produce revenue on a per-unit-of-throughputbasis.  We receive a flat fee from ourother lateral pipelines and, consequently, the throughput data from these threelateral pipelines is excluded from this statistic.

(8)   We acquired our Arapaho (OK) processing plant in December 2003.

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

48

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***Three Months Ended September 30,2004 Compared to the Three Months Ended September 30, 2003***

 
| ** **                                          | ** ** | **Marketing**      | ** ** | **MarkWest  Energy  Partners** | ** ** | **Eliminating  Entries** | ** ** | **Total**  | ** ** |
|-----------------------------------------------------|------------|--------------------|------------|--------------------------------|------------|--------------------------|------------|------------|------------|
| ** **                                          | ** ** | **(in thousands)** | ** ** |
| **Three Months Ended  September 30, 2004(1):** | ** ** | ** **         | ** ** | ** **                     | ** ** | ** **               | ** ** | ** ** | ** ** |
| Revenues                                            |       | $                  | 59,041     |                           | $          | 77,842                   |       | $          | (15,372    | ) | $ | 121,511 |   |
|                                                |       |               |       |                           |       |                     |       |       |       |
| Purchased product costs                             |       | 52,564             |       | 51,716                         |       | (9,071                   | )          | 95,209     |       |
| Facility expenses                                   |       | 6,202              |       | 8,497                          |       | (6,301                   | )          | 8,398      |       |
| Depreciation                                        |       | 303                |       | 4,207                          |       | —                   |       | 4,510      |       |
| Amortization of  intangible assets                  |       | —             |       | 1,400                          |       | —                   |       | 1,400      |       |
| Accretion of asset  retirement obligation           |       | —             |       | 13                             |       | —                   |       | 13         |       |
| Total  segment operating expenses                   |       | 59,069             |       | 65,833                         |       | (15,372                  | )          | 109,530    |       |
|                                                |       |               |       |                           |       |                     |       |       |       |
| Segment operating  income (loss)                    |       | $                  | (28        | )                              | $          | 12,009                   |       | $          | —     |   | $ | 11,981 |   |
|                                                |       |               |       |                           |       |                     |       |       |       |
| **Three Months Ended  September 30, 2003(1):** |       |               |       |                           |       |                     |       |       |       |
| Revenues                                            |       | $                  | 30,144     |                           | $          | 31,412                   |       | $          | (12,837    | ) | $ | 48,719 |   |
|                                                |       |               |       |                           |       |                     |       |       |       |
| Purchased product costs                             |       | 32,294             |       | 18,510                         |       | (6,283                   | )          | 44,521     |       |
| Facility expenses                                   |       | 6,603              |       | 5,396                          |       | (6,554                   | )          | 5,445      |       |
| Depreciation and  amortization                      |       | 445                |       | 2,026                          |       | —                   |       | 2,471      |       |
| Total  segment operating expenses                   |       | 39,342             |       | 25,932                         |       | (12,837                  | )          | 52,437     |       |
|                                                |       |               |       |                           |       |                     |       |       |       |
| Segment operating  income (loss)                    |       | $                  | (9,198     | )                              | $          | 5,480                    |       | $          | —     |   | $ | (3,718 | ) |

 
| ** **                                                                                                                  | ** ** | **Three Months Ended September 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                                                  | ** ** | **2004 (1)**                              | ** ** | **2003 (1)** | ** ** |
| ** **                                                                                                                  | ** ** | **(in thousands)**                        | ** ** |
| Segment  operating income (loss)                                                                                            |       | $                                         | 11,981     |   | $ | (3,718 | ) |
| Selling,  general and administrative                                                                                        |       | (7,252                                    | )          | (3,707 | ) |
| Loss  on sale of terminals                                                                                                  |       | —                                    |       | (55 | ) |
| Interest  expense, net                                                                                                      |       | (3,559                                    | )          | (658 | ) |
| Amortization  of deferred financing costs                                                                                   |       | (3,120                                    | )          | (457 | ) |
| Dividend  income                                                                                                            |       | 86                                        |       | — |   |
| Other  income                                                                                                               |       | 553                                       |       | 31 |   |
| Loss  from continuing operations before non-controlling interest in net income of  consolidated subsidiary and income taxes |       | $                                         | (1,311     | ) | $ | (8,564 | ) |

 

----

(1)  As Restated.  See Note 16,*Restatement and Reclassifications of Consolidated FinancialStatements,*to Notes to the Consolidated Financial Statements.

 

*Marketing.*Our marketing segmentoperating loss was $0.03 million for the three months ended September 30,2004, compared to a loss of $9.2 million for the three months ended September 30,2003, a change of $9.2 million. The increase is primarily due to higher NGL product sales prices andvolumes.

 

*MarkWestEnergy Partners.*Segmentoperating income from MarkWest Energy Partners was $12.0 million for the threemonths ended September 30, 2004, compared to $5.5 million for the threemonths ended September 30, 2003, an increase of $6.5 million, or 118%. Theincrease is primarily attributable to the Partnership’s late 2003 and 2004acquisitions, which contributed $7.3million to operating income.  This was offset in part by an increase of$0.7 million in depreciation expense primarily as a result of accelerating thedepreciation of our Michigan gathering pipeline and processing plant byreducing the estimated useful lives of the related assets from twenty years tofifteen years to more closely match expected lives of reserves behind ourfacilities.

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

49

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*Selling,*g*eneral and administrative expenses.* Selling, general andadministrative expenses were $7.3 million for the three months ended September 30,2004, compared to $3.7 million for the three months ended September 30,2003, an increase of $3.6 million, or 97%. The increase is attributable to additional administrative costsassociated with the growth of MarkWest Energy Partners compensation expenseassociated with the Participation Plan, compensation expense associated withstock options, Sarbanes Oxley compliance expenses, bonus and profit sharing (abonus was not accrued during the three months ended September 30, 2003)and increases in franchise taxes and insurance.

 

*Interestexpense, net.*  Interestexpense, net was $3.6 million for the three months ended September 30,2004, compared to $0.7 million for the three months ended September 30,2003, an increase of $2.9 million, or 414%. The increase was principallyattributable to amortization and write off of deferred financing costs from theamendment and restatement of our credit facility in July 2004.  In addition, interest expense increased dueto greater debt levels resulting from the financing of our late 2003 and 2004acquisitions and an increase in our average interest rate.

 

*Loss**fromdiscontinued operations.*Lossfrom discontinued operations was $0.7 million for the three months ended September 30,2003. The amounts recorded for discontinued operations were a result of thesale of substantially all of our U.S. exploration and production business nearthe end of the second quarter of 2003.

 

***Nine Months Ended September 30,2004 Compared to the Nine Months Ended September 30, 2003***

 
| ** **                                        | ** ** | **Marketing**      | ** **    | **MarkWest  Energy  Partners** | ** ** | **Eliminating  Entries** | ** ** | **Total**  | ** **    |
|---------------------------------------------------|------------|--------------------|---------------|--------------------------------|------------|--------------------------|------------|------------|---------------|
| ** **                                        | ** ** | **(in thousands)** | ** **    |
| **Nine Months Ended September 30, 2004(1):** | ** ** | ** **         | ** **    | ** **                     | ** ** | ** **               | ** ** | ** ** | ** **    |
| 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     |          |
| Depreciation                                      |       | 1,042              |          | 10,653                         |       | —                   |       | 11,695     |          |
| Amortization  of intangible assets                |       | —             |          | 1,468                          |       | —                   |       | 1,468      |          |
| Accretion  of asset retirement obligation         |       | —             |          | 13                             |       | —                   |       | 13         |          |
| Total  segment operating expenses                 |       | 143,217            |          | 182,187                        |       | (43,809                  | )          | 281,595    |          |
|                                              |       |               |          |                           |       |                     |       |       |          |
| Segment  operating income (loss)                  |       | $                  | (2,499        | )                              | $          | 25,139                   |       | $          | —        |   | $ | 22,640 |   |
|                                              |       |               |          |                           |       |                     |       |       |          |
| **Nine Months Ended September 30, 2003(1):** |       |               |          |                           |       |                     |       |       |          |
| Revenues                                          |       | $                  |  106,208 |                           | $          |  78,741             |       | $          |  (36,758 | ) | $ | 148,191 |   |
|                                              |       |               |          |                           |       |                     |       |       |          |
| Purchased  product costs                          |       | 108,089            |          | 45,325                         |       | (18,533                  | )          | 134,881    |          |
| Facility  expenses                                |       | 18,075             |          | 14,900                         |       | (18,225                  | )          | 14,750     |          |
| Depreciation                                      |       | 940                |          | 5,231                          |       | —                   |       | 6,171      |          |
| Total  segment operating expenses                 |       | 127,104            |          | 65,456                         |       | (36,758                  | )          | 155,802    |          |
|                                              |       |               |          |                           |       |                     |       |       |          |
| Segment  operating income (loss)                  |       | $                  | (20,896       | )                              | $          | 13,285                   |       | $          | —        |   | $ | (7,611 | ) |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

50

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| ** **                                                                                                                  | ** ** | **Nine Months Ended September 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                                                                  | ** ** | **2004 (1)**                             | ** ** | **2003 (1)** | ** ** |
| ** **                                                                                                                  | ** ** | **(in thousands)**                       | ** ** |
| Segment  operating income (loss)                                                                                            |       | $                                        | 22,640     |   | $ | (7,611 | ) |
| Selling,  general and administrative                                                                                        |       | (17,637                                  | )          | (10,097 | ) |
| Loss  on sale of terminals                                                                                                  |       | —                                   |       | (55 | ) |
| Interest  expense, net                                                                                                      |       | (5,256                                   | )          | (2,906 | ) |
| Amortization  of deferred financing costs                                                                                   |       | (3,734                                   | )          | (1,270 | ) |
| Dividend  income                                                                                                            |       | 169                                      |       | — |   |
| Other  income                                                                                                               |       | 547                                      |       | 15 |   |
| Loss  from continuing operations before non-controlling interest in net income of  consolidated subsidiary and income taxes |       | $                                        | (3,271     | ) | $ | (21,924 | ) |

 

----

(1)  As Restated.  See Note 16,*Restatement and Reclassifications of Consolidated FinancialStatements,*to Notes to the Consolidated Financial Statements.

 

*Marketing.*Our marketing segmentoperating loss was $2.5 million for the nine months ended September 30,2004, compared to a loss of $20.9 million for the nine months ended September 30,2003, a decrease of $18.4 million, or 88%. Approximately $6.5 million of the changewas attributable to a reduction in our hedging losses.  The remainder of the change is primarilyattributable to higher NGL productsales prices and volumes.

 

*MarkWestEnergy Partners.*Segmentoperating income from MarkWest Energy Partners was $25.1 million for the ninemonths ended September 30, 2004, compared to $13.3 million for the ninemonths ended September 30, 2003, an increase of $11.8 million, or 89%. Theincrease is primarily attributable to the Partnership’s late 2003 and 2004acquisitions, which contributed $13.1million to operating income. This wasoffset by an increase in depreciation expense primarily as a result ofaccelerating the depreciation of our Michigan gathering pipeline and processingplant by reducing the estimated useful lives of the related assets from twentyyears to fifteen years to more closely match expected lives of reserves behindour facilities.

 

*Selling,*g*eneral and administrative expenses.* Selling, general andadministrative expenses were $17.6 million for the nine months ended September 30,2004, compared to $10.1 million for the nine months ended September 30,2003, an increase of $7.5 million, or 74%. The increase is attributable to several factors, including additionaladministrative costs associated with the growth of MarkWest Energy Partners,through its 2003 and 2004 acquisitions, costs associated with the growth ofMarkWest Energy Partners compensation expense associated with the ParticipationPlan, compensation expense associated with stock options, Sarbanes Oxleycompliance expenses, bonus and profit sharing (bonus was not accrued during thenine months ended September 30, 2003) and increases in franchise taxes andinsurance.

 

*Interestexpense, net.*  Interestexpense, net was $5.3 million for the nine months ended September 30,2004, compared to $2.9 million for the nine months ended September 30,2003, an increase of $2.4 million, or 83%. The increase was primarilyattributable to amortization and write off of deferred financing costs from theamendment and restatement of our credit facility in July 2004.  In addition interest expense increased due toheightened debt levels resulting from the financing of our late 2003 and 2004acquisitions and an increase in our average interest rate.

 

*Income**fromdiscontinued operations.*Incomefrom discontinued operations was $17.7 million, net of tax, for the nine monthsended September 30, 2003. The amounts recorded for discontinued operationswere a result of the sale of substantially all of our U.S. exploration andproduction business near the end the second quarter of 2003.

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

51

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**Liquidityand Capital Resources**

 

During 2003, wediscontinued our exploration and production activities and sold all of ourrelated Canadian oil and gas properties and substantially all of our U.S. oiland gas properties.  The sales netted us$106.7 million in cash.  The proceedswere primarily used to pay off and terminate our then existing credit facilityin its entirety in December 2003. We also had $33.4 million inunrestricted cash on hand at December 31, 2003, exclusive of MarkWestEnergy Partners’ $8.7 million cash on hand. As a result, exclusive of MarkWestEnergy Partners’ debt, we had no debt as of September 30, 2004 and December 31,2003. In February 2004, we disbursed approximately $4.8 million to pay aspecial one-time dividend of $0.50 per share to our common stockholders. In May 2004,we disbursed approximately $0.2 million to pay the first quarterly dividend of$0.025 per common share to our common shareholders. On August 19, 2004, wedisbursed approximately $0.2 million to pay the second quarterly dividend of$0.025 per share to our common stockholders. On October 28, 2004, our board of directors declared a stockdividend of one share of our common stock for each ten shares of common stockheld by our common stockholders.  Thestock dividend is to be paid on November 19, 2004, to the stockholders of recordas of the close of business on November 9, 2004. On the same date, ourboard of directors also announced that it declared a quarterlycash dividend of $0.05 per share of our common stock.  This represented a $0.025 per share increaseover the previous quarter’s dividend. The indicated annual rate is $0.20 per share.  Our Board has declared that the dividend isto be paid on December 6, 2004, to the stockholders of record as of theclose of business on November 24, 2004.

 

Going forward,we expect our primary sources of liquidity to be quarterly distributionsreceived from MarkWest Energy Partners and cash flows generated principallyfrom providing processing services and the associated marketing of natural gasand NGLs.

 

We own 90% of the generalpartner of MarkWest Energy Partners.  Thegeneral partner of MarkWest Energy Partners owns a 2% general partner interestand all of the incentive distribution rights in MarkWest Energy Partners.  The incentive distribution rights entitle usto receive, through the general partner, an increasing percentage of cashdistributed by the Partnership upon attainment of target distribution levels.Specifically, incentive distribution rights entitle us to receive 13% of theincremental cash distributed in a quarter greater than $0.55 per unit and up toand including $0.625 per unit for that quarter; 23% of the incremental cashdistributed in a quarter greater than $0.625 per unit and up to and including$0.75 per unit for that quarter; and 48% of the incremental cash distributed ina quarter above $0.75 per unit for that quarter. For the nine months ended September 30,2004, we received $5.2 million in distributions for our subordinated units, andthe general partner received $0.9 million, including $0.7 million representingpayments on incentive distribution rights. If the Partnership continues to growand increase its quarterly distributions per limited partner unit, we expectour distributions to increase accordingly.

 

Cash flowsgenerated from providing processing services and our marketing operations aresubject to volatility primarily in NGLs and natural gas prices.  Our cash flows are enhanced in periods whenthe prices received for NGLs exceed the prices paid for natural gas we purchaseto satisfy our “keep-whole” contractual arrangements in Appalachia, and arereduced in periods when the prices received for NGLs are low relative to theprice of natural gas we purchase to satisfy such contractual arrangements.Under “keep-whole” contracts, we retain and sell the NGLs produced in ourprocessing operations for third-party producers, and then reimburse or “keepwhole” the producers for the Btu content of the NGLs removed through there-delivery to the producers of an equivalent amount (on a Btu basis) of drynatural gas. Generally, the frac spread and, consequently, the operatingmargins, are favorable. Periodically, when natural gas becomes more expensive,on a Btu equivalent basis, compared to NGL products, the cost of keeping theproducer “whole”, in conjunction with our operating costs, can result inoperating losses. As noted previously, we entered into several new and amendedagreements in September 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. We, however, cannot predictwith any certainty what the pricing environment will be in the future.

 

On October 25, 2004,we 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.  Theamount available to be drawn under the credit facility is based upon the amountof our eligible

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

52

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accounts receivable andinventory balance.  In addition, we arerequired to pay a commitment fee equal to the applicable rate times the actualdaily amount by which the aggregate commitment exceeds the sum of (i) theoutstanding amount of loans plus (ii) the outstanding amount of our letterof credit obligations.  Substantially allof our assets and our subsidiaries (other than excluded MarkWest Energy Partnersentities) are pledged to the lender to secure the repayment of the outstandingborrowings under the credit facility.  The proceeds from this borrowing will be used to finance inventory andaccounts receivable, issue letters of credit and pay fees, costs and expensesrelated to this agreement.  As of October 31,2004, we had no outstanding borrowings.

 

We believe that cash onhand, cash received from quarterly distributions (including the incentivedistribution rights) from MarkWest Energy Partners, and cash generated from ourprocessing services and marketing operations will be sufficient to meet ourworking capital requirements and fund our required capital expenditures, ifany, for the foreseeable future. Most of our future capital expenditures are discretionaryand minimal in nature.  During 2004, wehave budgeted $1.0 million for our capital contribution to MarkWest EnergyPartners for our share of the costs to replace the Cobb plant and an additional$0.1 million for other miscellaneous projects. As of September 30, 2004 we had contributed $1.3 million for theCobb plant, including amounts contributed in 2003, resulting in $0.4 million tobe contributed during the fourth quarter of fiscal 2004.  Cash generated from our processing servicesand marketing operations will depend on our operating performance, which willbe affected by prevailing commodity prices and other factors, some of which arebeyond our control.

 

In an effort toincrease our liquidity, we may renegotiate certain keep-whole contracts inorder to reduce our commodity price risk.

 

***MarkWest Energy Partners***

 

*Partnership Equity Offerings*

 

DuringJanuary 2004, the Partnership completed an offering of 1,100,444 of itscommon units, at $39.90 per unit, which netted approximately $44.9 millionafter transaction costs and the general partner contribution.  The Partnership primarily used the proceedsto pay down its outstanding debt.

 

During July 2004,MarkWest Energy Partners completed a private placement of 1,304,438 of itscommon units, at $34.50 per unit, which netted approximately $44.9 millionafter transaction costs and the general partner contribution.  The Partnership used the proceeds from theoffering to finance the East Texas System acquisition.

 

On September 21,2004, MarkWest Energy Partners completed a public offering of 2,323,609 of itscommon units at $43.41 per unit for gross proceeds of $100.9 million and157,395 common units sold by certain selling unitholders.  Of the 2,323,609 common units sold, 323,609common units were sold pursuant to the underwriter’s over-allotmentoption.  The Partnership did not receiveany proceeds from the common units sold by the selling unitholders.  Total net proceeds from the offering, afterdeducting transaction costs of $5.2 million and including the general partner’s2% capital contribution of $2.1 million, were $97.8 million and were used torepay a portion of the outstanding indebtedness under the amended and restatedcredit facility.

 

*Partnership Debt*

 

ThePartnership’s $315.0 million credit facility, as amended and restated in August 2004,is available to fund capital expenditures and certain permitted acquisitionsand distributions to unitholders. Advances to fund distributions to unitholdersmay not exceed $0.50 per outstanding unit in any 12-consecutive-month period.To date there have been no advances under the credit facility to funddistributions to unitholders.  Under the term loan, to theextent that a portion or all of the term loan is repaid, then those amounts maynot be reborrowed.  In addition, thereare certain restrictions on the reborrowing of amounts paid under the revolverloan.  At September 30, 2004,$197.5 million was outstanding, and $46.5 million was available for borrowing,under the Partnership’s credit facility.

 

In October 2004,the Partnership’s credit facility was amended and restated, decreasing themaximum lending limit from $315.0 million to $200.0 million and increasing theterm of the facility to five years.  Thecredit facility includes a revolving facility of $200.0 million with thepotential to increase the maximum lending limit to

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

53

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$300.0million.  The credit facility is guaranteedby the Partnership and all of its present and future subsidiaries and iscollateralized by substantially all of its existing and future assets and thoseof its subsidiaries, including stock and other equity interests.  The borrowing under the credit facility willbear interest at a variable interest rate based on one of two indices thatinclude either (i) LIBOR plus an applicable margin, which is fixed at arate of 2.75% for the first two quarters following the closing of the creditfacility or (ii) Base Rate (as defined for any day, a fluctuating rate perannum equal to the higher of (a) the Federal Funds Rate plus 1⁄2 of 1% and (b) therate of interest in effect for such day as publicly announced from time to timeby the Administrative Agent of the debt as its “prime rate”) plus an applicablemargin, which shall be fixed at a rate of 2% for the first two quartersfollowing the closing of the credit facility. After that period, the applicable margin will be adjusted quarterlybased on the Partnership’s ratio of funded debt to EBITDA (as defined in thecredit agreement).  The Partnership isalso required to pay a commitment fee equal to the applicable rate (as definedin the credit agreement) times the actual daily amount by which the aggregaterevolver commitments exceed the sum of (i) the outstanding amount ofrevolver loans plus (ii) the outstanding amount of letters of creditobligations.  The commitment fee is dueand payable quarterly in arrears on the last business day of each March, June, September andDecember.

 

In connectionwith the credit facility, the Partnership is subject to a number ofrestrictions on its business, including restrictions on its ability to grantliens on assets, merge, consolidate or sell assets, incur indebtedness (otherthan subordinate indebtedness), make acquisitions, engage in other businesses,enter into capital or operating leases, engage in transactions with affiliates,make distributions on equity interests and other usual and customary covenants.  In addition, MarkWest Energy Partners issubject to certain financial maintenance covenants, including ratios of totaldebt to EBITDA, total senior secured debt to EBITDA, EBITDA to interest and aminimum net worth requirement.  Failureto comply with the provisions of any of these covenants could result inacceleration of the debt and other financial obligations.

 

Concurrent withthe amendment of the credit facility, in October 2004, the Partnershipissued $225.0 million in senior notes at a fixed rate of 6.875% and with amaturity date of November 1, 2014. Subject to compliance with certain covenants, the Partnership may issueadditional notes from time to time under the indenture.   Interest on the notes accrue at the rate of6.875% per year and are payable semi-annually in arrears on May 1 and November 1,commencing on May 1, 2005.  MarkWestEnergy Partners may redeem some or all of the notes at any time on or after November 1,2009 at certain redemption prices together with accrued and unpaid interest tothe date of redemption, and the Partnership may redeem all of the notes at anytime prior to November 1, 2009 at a make-whole redemption price.  In addition, prior to November 1, 2007,the Partnership may redeem up to 35% of the aggregate principal amount of thenotes with the proceeds of certain equity offerings at a certain redemptionprice.  If MarkWest Energy Partners sellscertain assets and does not reinvest the proceeds or repay senior indebtedness,or if it experiences specific kinds of changes in control, it must offer torepurchase notes at a specified price. Each of its existing subsidiaries, other than MarkWest Energy FinanceCorporation, has guaranteed the notes initially and so long as such subsidiaryguarantees any of the other debt.  Notall of the Partnership’s future subsidiaries will have to becomeguarantors.  The notes are seniorunsecured obligations with equal in right of payment with all of the existingand future senior debt.  These notes aresenior in right of payment to all of the Partnership’s future subordinated debtbut effectively junior in right of payment to its secured debt to the extent ofthe assets securing the debt, including its obligations in respect of the bankcredit facility.  Borrowings under thesenotes were used to pay down the outstanding debt under the credit facility.

 

On October 31,2004, after the closing of the senior indentured notes and after thePartnership had amended and restated the credit agreement, the Partnership had$225.0 million of senior indebtedness outstanding, comprised of $225.0 millionunsecured senior notes at a fixed rate of 6.875%.

 

Cashgenerated from operations, borrowings under the credit facility and funds fromthe private and public equity offerings are the Partnership’s primary source ofliquidity. We believe that funds from these sources will be sufficient to meetboth the Partnership’s short-term and long-term working capital requirementsand anticipated capital expenditures. The Partnership’s ability to fund additional acquisitions will likelyrequire the issuance of additional common units, the expansion of the creditfacility, additional debt financing or a combination of all three.  In the event that the Partnershipneeds or desires to raise additional capital, it cannot be sure that additionalfunds will be available at times or on terms favorable to the Partnership.

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

54

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The Partnership’s ability to pay distributions to its unitholders and tofund planned capital expenditures and to make acquisitions will depend upon itsfuture operating performance, which will be affected by prevailing economicconditions in the industry and financial, business and other factors, some ofwhich are beyond our control.

 

The Partnership’s largest customer is MarkWestHydrocarbon, Inc. Consequently, matters affecting our business andfinancial condition—including our operations, management, customers, vendors,and the like—have the potential to impact, both positively and negatively, thePartnership’s liquidity.

 

Sustainingcapital expenditures, which are expenditures made to replace partially or fullydepreciated assets in order to maintain the existing operating capacity of theassets and to extend their useful lives, are estimated to approximate $0.7million for the Partnership for the remainder of 2004. For the nine monthsended September 30, 2004, these expenditures were $1.0 million.

 

***Total Contractual cash obligations***

 

A summaryof our total contractual cash obligations as of September 30, 2004, is asfollows (in thousands):

 

| **Type of Obligation** | ** ** | **Total  Obligation** | ** ** | **Due in  2004-2005** | ** ** | **Due in  2006-2007** | ** ** | **Thereafter** | ** ** |
|------------------------|------------|-----------------------|------------|-----------------------|------------|-----------------------|------------|----------------|------------|
| Operating  Leases      |       | $                     | 14,050     |                  | $          | 5,600                 |       | $              | 4,448      |   | $ | 4,002 |   |
| Debt                   |       | 197,500               |       | —                |       | —                |       | 197,500        |       |
| Total                  |       | $                     | 211,550    |                  | $          | 5,600                 |       | $              | 4,448      |   | $ | 201,502 |   |
|                        |            |                       |            |                       |            |                       |            |                |            |  |  |  |  |  |  |  |  |

 

***Cash Flows***

 
| ** **                                 | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------------------------|------------|------------------------------------------|------------|
| ** **                                 | ** ** | **2004(1)**                              | ** ** | **2003(1)** | ** ** |
| ** **                                 | ** ** | **(in thousands)**                       | ** ** |
| Net cash provided by  operating activities |       | $                                        | 15,521     |   | $ | 3,489 |   |
| Net cash used in investing  activities     |       | $                                        | (270,930   | ) | $ | (17,983 | ) |
| Net cash provided by  financing activities |       | $                                        | 234,912    |   | $ | 15,553 |   |

 

----

(1)  As Restated.  See Note 16, *Restatement and Reclassifications of ConsolidatedFinancial Statements,*to Notes to the Consolidated FinancialStatements..

 

Net cash****provided by operating activities for thenine months ended September 30, 2004, increased relative to the sameperiod in the prior year principally due to an increase in accounts payable andaccrued liabilities as a result of the 2003 and 2004 acquisitions.

 

Net cash used ininvesting activities for the nine months ended September 30, 2004,increased relative to the same period in the prior year primarily due to thePartnership’s acquisition of the East Texas System in July 2004 for $240.6million.  Additionally, we invested $11.9million in marketable securities.

 

Net cash provided byfinancing activities for the nine months ended September 30, 2004, wasprimarily attributable to equity financings and borrowings under our Partnership’scredit facility.  In January 2004,the Partnership completed a secondary public offering generating net proceedsof $44.9 million in 2004.  The proceedswere used to pay down the outstanding debt. The Partnership also amended and restated its credit facility in July 2004to increase its total borrowing capacity to $315.0 million.  MarkWest Energy Partners borrowed $200.8million under this credit facility to partially finance its East Texas Systemacquisition.  In July 2004, thePartnership completed a private placement of 1,304,438 of common units to agroup of institutional investors, generating total net proceeds of $44.9million.  These funds were also used topartially finance the East Texas System acquisition.  In addition, the Partnership raised netproceeds of $97.8 million through a public offering of 2,323,609 common unitsin September 2004.  Proceeds fromthis offering were used to reduce our outstanding indebtedness.  Additionally, we paid dividends of $5.3million and MarkWest Energy Partners paid distributions to its unitholders of$9.4 million.

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

55

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***Recent Accounting Pronouncements***

 

On March 31, 2004,the Emerging Issues Task Force issued EITF No. 03-6 which clarifies thecomputation of earnings per share in SFAS No. 128, for companies that haveissued securities other than common stock that entitle the holder toparticipate in the company’s declared dividends and earnings.  Theconsensus states that securities should be included in basic earnings per sharecalculations when the holder is entitled to receive dividends rather than ifthe holder is entitled to receive earnings or value upon redemption of thesecurities or liquidation of assets.  The effective date of EITF No. 03-6is the first fiscal period beginning after March 31, 2004, and requiresrestatement of prior period information. Implementation of the consensus had no effect on the financial resultsand resulted in no change in earnings per share for the three month and ninemonth periods ending September 30, 2004, and 2003.

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

56

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**Forward-LookingInformation**

 

Statementsincluded in this Management’s Discussion and Analysis that are not historicalfacts are forward-looking statements within the meaning of Section 27A ofthe Securities Act of 1933, as amended, and Section 21E of the Securitiesand Exchange Act of 1934, as amended.  Weuse words such as “may,” “believe,” “estimate,” “expect,” “plan,” “intend,” “project,”“anticipate,” and similar expressions to identify forward-looking statements.

 

These forward-lookingstatements are made based upon management’s current plans, expectations,estimates, assumptions and beliefs concerning future events impacting us andtherefore involve a number of risks and uncertainties. We caution thatforward-looking statements are not guarantees and that actual results coulddiffer materially from those expressed or implied in the forward-lookingstatements as a result of certain factors as more fully discussed under theheading “Risk Factors” contained in our annual report on Form 10-K filedon March 15, 2004 with the Securities and Exchange Commission (File No. 001-31239)for our fiscal year ended December 31, 2003. Forward-looking statementsinclude statements relating to, among other things:

 

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

•      The continued growth of MarkWest Energy Partners, L.P.

•      Our ability to amend certain producer contracts.

•      Our ability to increase fee-based contract volumes.

•      Our expectations regarding natural gas and NGL productionand prices.

•      Our ability to manage our commodity price risk.

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

 

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

 

•      Changesin general economic conditions in regions in which our products are located.

•      Theavailability and prices of NGL and competing commodities.

•      Theavailability and prices of raw natural gas supply.

•      Ourability to negotiate favorable marketing agreements.

•      Therisks that third party natural gas exploration and production activities willnot occur or be successful.

•      Ourdependence on certain significant customers, producers, gatherers, treaters,and transporters of natural gas.

•      Competitionfrom other NGL processors, including major energy companies.

•      Ourability to identify and consummate grass-roots projects or acquisitionscomplementary to our business.

•      Winterweather conditions.

 

Forward-lookingstatements involve many uncertainties that are beyond our ability to control.In many cases, we cannot predict what factors would cause actual results todiffer materially from those indicated by the forward-looking statements.

 

In addition, certain ofthe Partnership’s pipelines could in the future become subject to thejurisdiction of the Federal Energy Regulatory Commission, or FERC, dependingupon possible changes in the factual circumstances upon which each pipeline’sjurisdictional status is based.  Such achange could adversely affect the terms of service, rates and revenues of suchpipelines.

 

The Michigan CrudePipeline is not currently subject to the jurisdiction of the FERC.  If a shipper sought to challenge thejurisdictional status of this pipeline, however, FERC could determine thattransportation on this pipeline is within its jurisdiction under the InterstateCommerce Act, thereby requiring the Partnership to file a tariff and cost-basedrates for such transportation with FERC. While no shipper has filed a formal complaint, one shipper on theMichigan Crude Pipeline has contacted FERC about the transportation rates andquestion the jurisdictional status of the pipeline.  FERC requested that MarkWest Energy Partnersand the shipper resolve the dispute.  Ifthe Partnership is unable to successfully resolve this dispute or any futuredispute over the jurisdictional status of the Michigan Crude Pipeline, it couldbecome subject to FERC regulation, and the cost of compliance with that

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

57

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regulation couldadversely affect our profitability.

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

58

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#### **Item3.  Quantitative and QualitativeDisclosures about Market Risk**

#### ** **

Market risk includes therisk of loss arising from adverse changes in market rates and prices. We facemarket risk from commodity price variations and also incur, to a lesser extent,credit risks and risks related to interest rate variations.

 

***Commodity Price Risk***

 

We marketnatural gas and NGL products.  Inaddition, through our consolidated subsidiary, MarkWest Energy Partners, we areengaged in the gathering processing and transmission of natural gas, thetransportation, fractionation and storage of NGLs and the gathering andtransportation of crude oil.  Ourproducts are commodities that are subject to price risk resulting from materialchanges in response to fluctuations in supply and demand, general economicconditions and other market conditions, such as weather patterns, over which wehave no control.

 

Our primary riskmanagement objective is to reduce volatility in our cash flows.  Our hedging approach includes statisticalmethods that analyze momentum and average pricing over time, and variousfundamental data such as industry inventories, industry production, demand andweather. A committee, which includes members of senior management, oversees allof our hedging activity.

 

We may utilize acombination of fixed-price forward contracts, fixed-for-float price swaps andoptions on the over-the-counter (OTC) market. New York Mercantile Exchange (NYMEX) traded futures are authorized foruse.  Swaps and futures allow us toprotect our margins because corresponding losses or gains in the value offinancial instruments are generally offset by gains or losses in the physicalmarket.

 

We enter OTC swaps withfinancial institutions and other energy company counterparties. We conduct astandard credit review on counterparties and have agreements containingcollateral requirements where deemed necessary. We use standardized swapagreements that allow for offset of positive and negative exposures.  Net credit exposure is marked to marketdaily.  We are subject to margin depositrequirements under OTC agreements and NYMEX positions.

 

The use of financialinstruments may expose us to the risk of financial loss in certaincircumstances, 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 weengage in hedging activities, we may be prevented from realizing the benefitsof favorable price changes in the physical market.  However, we are similarly insulated againstdecreases in such prices.

 

In addition to these riskmanagement tools, we utilize our NGL product storage facilities and contractsfor third-party storage to build product inventories during lower-demandperiods for resale during higher-demand periods.

 

*NGL Price Risk*

 

Within our NGL marketingsegment, our price risk varies by contract as well as by spot market prices forboth NGL and natural gas commodities. The Appalachian producers compensate us for providing midstream servicesunder the following contract types:

 

•      Under “keep-whole” contracts, we take title to and sell theNGLs produced in our processing operations. We also reimburse or “keep whole”the producers for the Btu content of the NGLs removed through the re-deliveryto the producers of an equivalent amount (on a Btu basis) of dry naturalgas.  Keep-whole contracts thereforeexpose us to NGL product price risk (on the sales side) and natural gas pricerisk (on the purchase or reimbursement side). Generally, the value of the NGLs extracted is greater than the cost ofreplacing those Btus with dry gas, resulting in positive operating marginsunder these contracts.  In the eventnatural gas becomes more expensive, on a Btu equivalent basis, than NGLproducts, in conjunction with our operating expenses, the cost of keeping theproducer “whole” results

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

59

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in operating losses.  The spread between the NGL product salesprice and the purchase price of natural gas with an equivalent Btu content iscalled the “frac spread”.

 

•      Under “percent-of-proceeds” contracts, the Partnership takestitle to the NGLs produced in its processing operations, sells the NGLs tothird parties and pays the producer a specified percentage of the proceedsreceived from the sales. Percent-of-proceeds contracts therefore expose the Partnership to NGLproduct price risk.  All of the Michiganprocessing business is also governed by percent-of-proceeds contracts.

 

Our consolidatedsubsidiary, MarkWest Energy Partners, is also subject to NGL price risk.  For the nine months ended September 30,2004, approximately 39% of the Partnership’s business (as measured by grossmargin, which is defined as revenue less purchased product cost) was directlysubject to natural gas and NGL product price risk.  This includes the entire gross margin fromthe Partnership’s business based on percent-of-index contracts,percent-of-proceeds contracts and keep-whole contracts.  Regarding the 19% of the gross margingoverned by keep-whole contracts, MarkWest Energy Partners actively manages therelated commodity price risk exposure, to the extent possible, by not operatingits Arapaho processing plant in Oklahoma during low processing marginenvironments and through our ability to reject or recover ethane inCarthage.  See related discussion in Item2. Management’s Discussion and Analysis”.

 

As of September 30,2004, we had contracts in place to manage our NGL product price risk asfollows:

 
| ** **                   | ** ** | **Year Ending December 31,** | ** ** |
|------------------------------|------------|-----------------------------------|------------|
| ** **                   | ** ** | **2004**                          | ** ** | **2005** | ** ** |
| **Hedged NGL product price** |       |                              |       |   |   |
| NGL gallons                  |       | 8,778,000                         |       | 8,274,000 |   |
| $/gallons                    |       | $                                 | 0.88       |   | $ | 0.86 |   |
|                              |            |                                   |            |  |  |  |  |

 

Asof September 30, 2004, we hedged our natural gas price risk viapre-purchases as follows:

 
| ** **                        | ** ** | **Year Ending December 31** | ** ** |
|-----------------------------------|------------|----------------------------------|------------|
| ** **                        | ** ** | **2004**                         | ** ** | **2005** | ** ** |
| **Hedged Natural Gas Purchases:** |       |                             |       |   |   |
| MMBtu                             |       | 850,929                          |       | 802,071 |   |
| $/MMBtu                           |       | $                                | 5.56       |   | $ | 5.56 |   |
|                                   |            |                                  |            |  |  |  |  |

 

The NGL and natural gasswaps are not designed as hedges.  As aresult, changes in the fair value of the NGL and natural gas swaps arereflected currently in earnings.

 

***MarkWest Energy Partners***

 

ThePartnership hedges its natural gas price risk in Texas (part of our Pinnacleacquisition) by entering into fixed-for-float price swaps or buying puts.  As of September 30, 2004, the Partnershiphedged its Texas natural gas price risk via swaps as follows:

 
| ** ** | ** ** | **Year Ending December 31,** | ** ** |
|------------|------------|-----------------------------------|------------|
| ** ** | ** ** | **2004**                          | ** ** | **2005** | ** ** |
|       |       |                              |       |   |   |
| MMBtu      |       | 30,500                            |       | 182,500 |   |
| $/MMBtu    |       | $                                 | 4.57       |   | $ | 4.26 |   |
|            |            |                                   |            |  |  |  |  |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

60

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As of September 30,2004, MarkWest Energy Partners also had hedged its Texas natural gas price riskvia puts as follows:

 
| ** **             | ** ** | **Year Ending December 31,** | ** ** |
|------------------------|------------|-----------------------------------|------------|
| ** **             | ** ** | **2004**                          | ** ** | **2005** | ** ** |
|                   |       |                              |       |   |   |
| MMBtu                  |       | 61,000                            |       | — |   |
| Strike price ($/MMBtu) |       | $                                 | 4.00       |   | $ | — |   |
|                        |            |                                   |            |  |  |  |  |

 

Additionally, at September 30,2004, the Partnership had hedged its Oklahoma natural gas basis risk via swapas follows:

 
| ** ** | ** ** | **Year Ending December 31,** | ** ** |
|------------|------------|-----------------------------------|------------|
| ** ** | ** ** | **2004**                          | ** ** | **2005** | ** ** |
|       |       |                              |       |   |   |
| MMBtu      |       | 951,000                           |       | 900,000 |   |
| ($/MMBtu)  |       | $                                 | (0.035     | ) | $ | (0.035 | ) |
|            |            |                                   |            |  |  |  |  |

 

*InterestRate Risk*

 

The Partnership isexposed to changes in interest rates, primarily as a result of its long-termdebt under the credit facility with floating interest rates.  The Partnership makes use of interest rateswap and collar agreements to adjust the ratio of fixed and floating rates(LIBOR plus an applicable margin) in the debt portfolio.

 

Asof September 30, 2004, the Partnership was a party to interest rate swapagreements to fix interest rates on debt of $8.0 million at 3.84% through May 2005and $25.0 million at 3.33% through November 2006 (currently $33.0 millionwith a weighted average interest rate of 3.46%).  In addition, the Partnership is a party to aninterest-rate collar agreement on $20.0 million of debt with a maximum rate of3.33% through May 2005, and a minimum rate of 1.25% through August 2004,1.30% through November 2004, 2.10% through February 2005 and 2.60%through May 2005.

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

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##### **Item 4.**Controls and Procedures

##### ** **

Overview

 

ThisForm 10-Q/A reflects adjustments to the consolidated financial report forthe third quarter of each of the years 2003 and 2004.  Please refer to Note 16, *Restatement and Reclassifications of ConsolidatedFinancial Statements,*to the consolidated financial statements forfurther information.

 

Restatements

 

The Company has determined that previously issuedfinancial statements for the years 2002 and 2003 and the first three quartersof 2003 and 2004 should be restated to reflect compensation expense for thesale of subordinated partnership units and interests in the Partnership’sgeneral partner to certain employees and directors of MarkWest Hydrocarbon from2002 through 2004 and for an error in accounting for natural gas inventory inthe fourth quarter of 2003.

 

In addition, certain other restatement adjustments havealso been recorded to correct other errors in the financial statements for thefirst three quarters of 2004, including adjustments to accruals for revenue andpurchased product costs, adjustments for cost improperly capitalized asproperty and equipment, adjustments to properly record capitalized interest onmajor construction projects in process, adjustments to record as a financinglease, a lease agreement previously entered into by an acquired business, an adjustment to reflectseparately restricted marketable securities, adjustments for dividendsreceived on marketable securities improperly recorded as a reduction in thecarrying value of marketable securities, an adjustment to reverse transactionsimproperly recorded as a derivative transaction with hedge accounting treatmentand adjustments to accrued property taxes. Adjustments were also made torecord compensation as a result of the modification of the provisions ofcertain stock options for two officers who terminated their employment with theCompany but who continued to serve on its Board of Directors.  Compensation expense was also recorded forstock options issued as variable awards. In April 2004, the Company changed its policy to allow participantsto exercise their stock options using the cashless exercise method.  Under APB 25, *Accounting for Stock Issued to Employees,*a fixed stockoption plan that permits the use of a cashless exercise becomes variable if apattern of exercising stock options using the cashless method isdemonstrated.  Additionally, the Companymade an adjustment to reclassify a portion of dividends paid during the ninemonths ended September 30, 2004 from retained earnings to additional paidin capital for the amount of dividends distributed in excess of accumulatedearnings.   Cash was also adjusted primarily as a resultof reclassifying amounts recorded for the purchase of property, plant andequipment, intangible assets and accrued property tax relating to anacquisition from cash to those respective accounts.  Initially, the purchase of those assets wasrecorded to a cash clearing account until the purchase price was settled in thefourth quarter of 2004.  Other lesssignificant adjustments and reclassifications were identified and recorded inconjunction with the restatement process. In addition,on October 28, 2004, the Company’s Board of Directors declared a stockdividend of one share of MarkWest Hydrocarbon’s common stock for each tenshares owned by stockholders.  The stockdividend was paid on November 19, 2004 to the stockholders of record as ofthe close of business on November 9, 2004. Stock information has been adjusted to give retroactive effect to stockdividends paid.  The Company is filing contemporaneously with this Form 10-Q/Afor the quarterly period ended September 30, 2004, its Annual Report on Form 10-Kfor the year ended December 31, 2004, which includes restated financialstatements for the years ended December 31, 2002 and 2003.  The Company is also filing contemporaneouslywith this Form 10-Q/A, its quarterly reports on Form 10-Q/A for thequarterly periods ending March 31, 2004 and June 30, 2004.

 

Disclosure Controls andProcedures

 

In connection with thepreparation of this quarterly report on Form 10-Q as amended by this Form 10-Q/A,our senior 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 of September 30,2004.  Based upon that evaluation, our Chief Executive Officer, ChiefFinancial Officer and Chief Accounting Officer concluded that our disclosurecontrols and procedures were ineffective, as of September 30, 2004, toprovide reasonable assurance that information required to be disclosed by us inreports that we file or submit under the Security Exchange Act of 1934 (the “Act”),is recorded, processed, summarized and reported, within the time periodsspecified in the SEC’s rules and forms and to ensure that informationrequired to be disclosed by us in the reports that we file under the Act isaccumulated and communicated to management, including our

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

62

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certifying officers, as appropriate, toallow timely decisions regarding required disclosures.  Through the date of the filing of this Form 10-Q/A,we have adopted certain measures to address the deficiencies in our internalcontrols that existed on September 30, 2004 and have applied compensatingprocedures and processes as necessary to ensure the reliability of ourfinancial reporting. We believe that this quarterly report on Form 10-Q asamended by this Form 10-Q/A properly reports all information required tobe included in such report.

 

Changes in Internal Controlsover Financial Reporting

 

During the periodcovered by this quarterly report on Form 10-Q as amended by this Form 10-Q/A,there were no changes in our internal control over financial reporting duringthe period covered by the original report that have materially affected, or arereasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

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**PART II—OTHER INFORMATION**

 

##### **Item 1.  LegalProceedings**

##### ** **

Reference is madeto Note 13 of our Consolidated Financial Statements in Part I, Item 1, ofthis Form 10-Q/A (Amendment No. 1), which is incorporated herein byreference.

 

**Item 6.  Exhibits**

 
| 2.1    | (1)    | Asset Purchase and Sale  Agreement and addendum, thereto, dated as of July 1, 2004 by and between  American Central Eastern Texas Gas Company Limited Partnership, ACGC  Gathering Company, L.L.C. and MarkWest Energy East Texas Gas Company’s L.P.                                                                                                                                                                                                                |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.1    | (1)    | Unit Purchase Agreement  dated as of July 29, 2004 among MarkWest Energy Partners, L.P., and  MarkWest Energy GP, L.L.C. and each of Kayne Anderson Energy Fund II, L.P.,  Kayne Anderson Capital Income Partners, L.P., Kayne Anderson MLP Fund, L.P.,  Kayne Anderson Capital Income Fund, LTD., Kayne Anderson Income Partners,  L.P., HFR RV Performance Master Trust, Tortoise Energy Infrastructure  Corporation and Energy Income and Growth Fund, as Purchasers. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.2    | (1)    | Registration Rights  Agreement dated as of July 29, 2004 among MarkWest Energy Partners,  L.P., and each of Kayne Anderson Energy Fund II, L.P., Kayne Anderson Capital  Income Fund, LTD., Kayne Anderson Income Partners, L.P., HFR RV Performance  Master Trust, Tortoise Energy Infrastructure Corporation and Energy Income  and Growth Fund.                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 31.1   |   | Certification of the  Chief Executive Officer pursuant to Rule 13a-14(a) of the  Securities Exchange Act, as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 31.2   |   | Certification of the  Chief Financial Officer pursuant to Rule 13a-14(a) of the  Securities Exchange Act, as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 31.3   |   | 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.                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 32.1   |   | Certification of the  Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 32.2   |   | Certification of the  Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 32.3   |   | 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.                                                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 99.1   | (1)    | Second Amended and  Restated Credit Agreement dated as of July 30, 2004 among MarkWest  Energy Operating Company, L.L.C., as Borrower, MarkWest Energy Partners,  L.P., as Guarantor, Royal Bank of Canada, as Administrative Agent, Fortis  Capital Corp., as Syndication Agent, Bank One, NA, as Documentation Agent and  Societe Generale, as Documentation Agent to the $315,000,000 Senior Credit  Facility.                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 99.2   | (1)    | First Amendment to the  Second Amended and Restated Credit Agreement dated as of August 20,  2004, among MarkWest Energy Operating Company, L.L.C., as Borrower, MarkWest  Energy Partners, L.P., as Guarantor, Royal Bank of Canada, as Administrative  Agent, Fortis Capital Corp., as Syndication Agent, Bank One, NA, as  Documentation Agent and Societe Generale, as Documentation Agent.                                                                          |

 

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

64

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| 99.3   | (2)    | Firm Gas Processing  Agreement (Dwale) entered into on September 23, 2004 between Equitable  Production Company and MarkWest Hydrocarbon, Inc.                    |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                        |
| 99.4   | (2)    | Sale and Purchase of  Natural Gas Agreement entered into on September 23, 2004 between  Equitable Production Company and MarkWest Hydrocarbon, Inc.               |
|   |   |                                                                                                                                                                        |
| 99.5   | (2)    | Netting, Financial  Responsibility and Security Agreement entered into on September 23, 2004  between Equitable Production Company and MarkWest Hydrocarbon, Inc. |

 

----

(1)  Filed as an exhibit to the Registrants’ Form 8-K/Adated July 30, 2004 and filed on October 12, 2004.

(2)  Portions of the agreement have been redacted, as wewill request confidential treatment from the Securities and ExchangeCommission.

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

65

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**SIGNATURE**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, MarkWest Hydrocarbon, asregistrant, has duly caused this report to be signed on its behalf by theundersigned, thereunto authorized.

 
|                              |   |   | MarkWest Hydrocarbon, Inc. |
|-----------------------------------|--------|--------|---------------------------------|
|                              |   |   | (Registrant)                    |
|                              |   |   |
| Date:  October 20, 2005 |   |   | /s/ James G. Ivey               |
|                              |   |   |                            | James G. Ivey |
|                              |   |   | Chief Financial Officer         |
|                                   |        |        |                                 |  |  |  |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

66

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| **Exhibit  Number** | ** ** | **Exhibit Index**                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|---------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 2.                  | 1(1)       | Asset Purchase and Sale  Agreement and addendum, thereto, dated as of July 1, 2004 by and between  American Central Eastern Texas Gas Company Limited Partnership, ACGC  Gathering Company, L.L.C. and MarkWest Energy East Texas Gas Company’s L.P.                                                                                                                                                                                                                |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.                  | 1(1)       | Unit Purchase Agreement  dated as of July 29, 2004 among MarkWest Energy Partners, L.P., and  MarkWest Energy GP, L.L.C. and each of Kayne Anderson Energy Fund II, L.P.,  Kayne Anderson Capital Income Partners, L.P., Kayne Anderson MLP Fund, L.P.,  Kayne Anderson Capital Income Fund, LTD., Kayne Anderson Income Partners,  L.P., HFR RV Performance Master Trust, Tortoise Energy Infrastructure  Corporation and Energy Income and Growth Fund, as Purchasers. |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.2                 | (1)        | Registration Rights  Agreement dated as of July 29, 2004 among MarkWest Energy Partners,  L.P., and each of Kayne Anderson Energy Fund II, L.P., Kayne Anderson Capital  Income Fund, LTD., Kayne Anderson Income Partners, L.P., HFR RV Performance  Master Trust, Tortoise Energy Infrastructure Corporation and Energy Income  and Growth Fund.                                                                                                                       |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 31.                 | 1          | Certification of the  Chief Executive Officer pursuant to Rule 13a-14(a) of the  Securities Exchange Act, as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                               |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 31.                 | 2          | Certification of the  Chief Financial Officer pursuant to Rule 13a-14(a) of the  Securities Exchange Act, as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                               |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 31.                 | 3          | 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.                                                                                                                                                                                                                                                                              |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 32.                 | 1          | Certification of the  Chief Executive Officer pursuant to 18 U.S. C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                           |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 32.                 | 2          | Certification of the  Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                            |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 32.                 | 3          | 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.                                                                                                                                                                                                                                                                                                           |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 99.                 | 1(1)       | Second Amended and  Restated Credit Agreement dated as of July 30, 2004 among MarkWest Energy  Operating Company, L.L.C., as Borrower, MarkWest Energy Partners, L.P., as  Guarantor, Royal Bank of Canada, as Administrative Agent, Fortis Capital  Corp., as Syndication Agent, Bank One, NA, as Documentation Agent and Societe  Generale, as Documentation Agent to the $315,000,000 Senior Credit Facility.                                                         |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 99.                 | 2(1)       | First Amendment to the  Second Amended and Restated Credit Agreement dated as of August 20,  2004, among MarkWest Energy Operating Company, L.L.C., as Borrower, MarkWest  Energy Partners, L.P., as Guarantor, Royal Bank of Canada, as Administrative  Agent, Fortis Capital Corp., as Syndication Agent, Bank One, NA, as  Documentation Agent and Societe Generale, as Documentation Agent.                                                                          |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 99.                 | 3(2)       | Firm Gas Processing  Agreement (Dwale) entered into on September 23, 2004 between Equitable  Production Company and MarkWest Hydrocarbon, Inc.                                                                                                                                                                                                                                                                                                                      |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 99.                 | 4(2)       | Sale and Purchase of  Natural Gas Agreement entered into on September 23, 2004 between  Equitable Production Company and MarkWest Hydrocarbon, Inc.                                                                                                                                                                                                                                                                                                                 |
|                     |            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

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| 99. | 5(2) | Netting, Financial  Responsibility and Security Agreement entered into on September 23, 2004  between Equitable Production Company and MarkWest Hydrocarbon, Inc. |
|-----|------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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(1)   Filed as an exhibit tothe Registrants’ Form 8-K/A dated July 30, 2004 and filed on October 12,2004.

(2)   Portions of theagreement have been redacted, as we will request confidential treatment fromthe Securities and Exchange Commission.

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

68

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