**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q/A**

**(AmendmentNo. 1)**

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

 

**For thequarterly period ended March 31, 2004**

 

**OR**

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

 

**For thetransition period from              to              **

 

**CommissionFile Number 001-14841**

 

**MARKWEST HYDROCARBON, INC.**

(Exact name of registrant asspecified in its charter)

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

 

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

(Address of principal executiveoffices)

 

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

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.

Yes o        No ý

 

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

Yes o        No ý

 

The registrant had 10,663,510 shares of common stock, $.01 per sharepar value, outstanding as of April 30, 2004.

 

 

----

 
| **PART I—FINANCIAL INFORMATION**                                                                                 | ** ** |
|----------------------------------------------------------------------------------------------------------------------------|------------|
|                                                                                                                       |       |
| Item 1. Consolidated Financial Statements                                                                                  |       |
| Consolidated Balance Sheets at  March 31, 2004 and December 31, 2003 (unaudited)                                 |       |
| Consolidated Statements of Operations for  the Three Months Ended March 31, 2004 and 2003 (unaudited)                 |       |
| Consolidated Statements of Other Comprehensive  Income for the Three Months Ended March 31, 2004 and 2003 (unaudited) |       |
| Consolidated Statements of Cash Flows for the Three Months Ended  March 31, 2004 and 2003 (unaudited)                 |       |
| Consolidated Statement of Changes in Stockholders’ Equity for the  Three Months Ended March 31, 2004 (unaudited) |       |
| Notes to the Consolidated Financial  Statements (unaudited)                                                                |       |
|                                                                                                                       |       |
| Item 2. Management’s Discussion and Analysis of Financial Condition  and Results of Operations                        |       |
| Item 4. Controls and Procedures                                                                                            |       |
|                                                                                                                       |       |
| **PART II—OTHER INFORMATION**                                                                                    |       |
|                                                                                                                       |       |
| Item 6. Exhibits                                                                                                           |       |
|                                                                                                                       |       |
| **SIGNATURE**                                                                                                              |       |

 

#### **Glossaryof 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 |

 

----

 

**Explanatory Note**

 

We have determined that, in certain cases, we did notcomply with generally accepted accounting principles in the preparation of our2003 and 2004 first quarter consolidated financial statements and, accordingly,this Amendment No. 1 on Form 10-Q/A amends the Quarterly Report on Form 10-Qoriginally filed by MarkWest Hydrocarbon, Inc. (the “Company”) on May 13,2004 for the first quarter ended March 31, 2004.

 

The Company has determined that previouslyissued financial statements for the years 2002 and 2003 and the first threequarters of 2003 and 2004 should be restated to reflect compensation expensefor the sale of subordinated units of MarkWest Energy Partners, L.P. (“MarkWestEnergy Partners” or the “Partnership”) and interests in MarkWest Energy GP, LLC(the “general partner” of MarkWest Energy Partners, L.P., a consolidatedsubsidiary) to certain employees and directors of the Company from 2002 through2004 and for an error in accounting for natural gas inventory in the fourthquarter of 2003.  The Company is filingcontemporaneously with this Form 10-Q/A for the quarterly period ended March 31,2004, its Annual Report on Form 10-K for the year ended December 31,2004, which includes restated financial statements for the years ended December 31,2002 and 2003.

 

As discussed more fully in Note 10, *Restatement and Reclassifications of ConsolidatedFinancial Statements*, to the consolidated financial statements, wehave restated our previously reported results to account for the sale by theCompany of a portion of its interests in the general partner to certainemployees and directors of the Company, and the sale by the Company of itssubordinated units of the Partnership to certain employees and directors of theCompany as compensatory arrangements consistent with the guidance in AccountingPrinciples Board Opinion (“APB”) No. 25, *Accountingfor Stock Issued to Employees*and Emerging Issues Task Force (“EITF”)No. 95-16, *Accounting for StockCompensation Arrangements with Employer Loan Features under APB Opinion No. 25*.  This guidance requires MarkWest Hydrocarbonto record compensation expense based on the market value of the subordinatedPartnership units and the formula value of the general partner interests heldby these employees and directors at the end of each reporting period.  These transactions were previously reflectedas sales of assets.  In addition, certainother restatement adjustments have also been recorded to correct other errorsin the financial statements for the first three quarters of 2004, including adjustmentsto accruals 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 separatelyrestricted marketable securities and adjustments to accrued propertytaxes.  Adjustments were also made torecord compensation expense as a result of the modification of the provisionsof certain stock options for two officers who terminated their employment withthe Company but who continued to serve on its Board of Directors.  Additionally, the Company made an adjustmentto reclassify a portion of dividends paid during the three months ended March 31,2004 from retained earnings to additional paid in capital for the amount ofdividends distributed in excess of accumulated earnings.  Other less significant adjustments andreclassifications were identified and recorded in conjunction with therestatement process as discussed in Note 10.

 

In addition, on October 28, 2004, theCompany’s Board of Directors declared a stock dividend of one share of MarkWestHydrocarbon’s common stock for each ten shares owned by stockholders.  The stock dividend was paid on November 19,2004 to the stockholders of record as of the close of business on November 9,2004.  Common stock information in this Form 10-Q/Ahas been restated to give retroactive effect to the stock dividend paid.  The Company is also filing contemporaneouslywith this Form 10-Q/A, its quarterly reports on Form 10-Q/A for thequarterly periods ending June 30, 2004 and September 30, 2004.

 

This Form 10-Q/A amends and restatesonly Items 1, 2 and 4 of Part I and Item 6 of Part II of the originalreport.  The remaining items are notamended hereby.  Except for the foregoingamended information, this Form 10-Q/A continues to describe conditions asof the date of the original report, and the Company has not updated thedisclosures contained herein to reflect events that occurred subsequently.  Accordingly, this Form 10-Q/A should beread in conjunction with Company filings made with the Securities and ExchangeCommission subsequent to the filing of the original report, including anyamendments of those filings.

 

----

 

## **PART I—FINANCIAL INFORMATION**

## ** **

## **Item 1. Consolidated Financial Statements**

## ** **

**MARKWESTHYDROCARBON, INC.**

**CONSOLIDATEDBALANCE SHEETS**

**(UNAUDITED)**

**(inthousands, except share and per share data)**

 
| ** **                                                                                                                                                      | ** ** | **March 31,  2004**       | ** ** | **December 31,  2003** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                      | ** ** | **(as restated, see note 10)** | ** ** |
| **ASSETS**                                                                                                                                                      | ** ** | ** **                     | ** ** | ** **                  | ** ** |
| Current  assets:                                                                                                                                                |       |                           |       |                        |       |
| Cash and cash equivalents                                                                                                                                       |       | $                              | 49,115     |                        | $          | 42,144 |   |
| Marketable securities                                                                                                                                           |       | 4,430                          |       | —                      |       |
| Restricted marketable securities                                                                                                                                |       | 2,500                          |       | 2,500                       |       |
| Receivables, net (including related party  receivables of $56 and $40, respectively, and net of allowance for doubtful  accounts of $84 and $120, respectively) |       | 24,814                         |       | 29,910                      |       |
| Inventories                                                                                                                                                     |       | 1,448                          |       | 5,548                       |       |
| Prepaid replacement natural gas                                                                                                                                 |       | 15                             |       | 5,940                       |       |
| Deferred income taxes                                                                                                                                           |       | 161                            |       | 534                         |       |
| Other current assets                                                                                                                                            |       | 1,047                          |       | 503                         |       |
| Total current  assets                                                                                                                                           |       | 83,530                         |       | 87,079                      |       |
|                                                                                                                                                            |       |                           |       |                        |       |
| Property,  plant and equipment                                                                                                                                  |       | 234,050                        |       | 232,257                     |       |
| Less:  accumulated depreciation, depletion and amortization                                                                                                     |       | (46,981                        | )          | (44,134                     | )          |
| Total property, plant and equipment, net                                                                                                                        |       | 187,069                        |       | 188,123                     |       |
|                                                                                                                                                            |       |                           |       |                        |       |
| Other  assets:                                                                                                                                                  |       |                           |       |                        |       |
| Intangible assets, net                                                                                                                                          |       | 170                            |       | 84                          |       |
| Deferred financing costs, net                                                                                                                                   |       | 3,507                          |       | 3,747                       |       |
| Deferred offering costs, net                                                                                                                                    |       | —                         |       | 995                         |       |
| Investment in and advances to equity  investee                                                                                                                  |       | 245                            |       | 250                         |       |
| Note receivables from officers                                                                                                                                  |       | 207                            |       | 217                         |       |
| Other assets                                                                                                                                                    |       | 23                             |       | —                      |       |
| Total assets                                                                                                                                                    |       | $                              | 274,751    |                        | $          | 280,495 |   |
|                                                                                                                                                            |       |                           |       |                        |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                   |       |                           |       |                        |       |
|                                                                                                                                                            |       |                           |       |                        |       |
| Current  liabilities:                                                                                                                                           |       |                           |       |                        |       |
| Accounts payable (including related party  payables of $48 and $51, respectively)                                                                               |       | $                              | 23,296     |                        | $          | 24,052 |   |
| Accrued liabilities                                                                                                                                             |       | 13,829                         |       | 16,511                      |       |
| Fair value of derivative instruments                                                                                                                            |       | 747                            |       | 1,769                       |       |
| Total current liabilities                                                                                                                                       |       | 37,872                         |       | 42,332                      |       |
|                                                                                                                                                            |       |                           |       |                        |       |
| Deferred  income taxes                                                                                                                                          |       | 5,801                          |       | 5,594                       |       |
| Long-term  debt                                                                                                                                                 |       | 84,200                         |       | 126,200                     |       |
| Fair value  of derivative instruments                                                                                                                           |       | 154                            |       | 125                         |       |
| Other  long-term liabilities                                                                                                                                    |       | 3,283                          |       | 2,901                       |       |
| Non-controlling  interest in consolidated subsidiary                                                                                                            |       | 94,173                         |       | 52,429                      |       |
| Commitments  and contingencies (Note 8)                                                                                                                         |       |                           |       |                        |       |
|                                                                                                                                                            |       |                           |       |                        |       |
| 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, 10,732,017 and 10,601,775 shares issued, respectively                                             |       | 108                            |       | 106                         |       |
| Additional paid-in capital                                                                                                                                      |       | 50,402                         |       | 50,705                      |       |
| Retained earnings                                                                                                                                               |       | —                         |       | 2,406                       |       |
| Accumulated other Comprehensive loss, net  of tax                                                                                                               |       | (768                           | )          | (1,793                      | )          |
| Treasury stock at cost, 71,328 and 75,930  shares, respectively                                                                                                 |       | (474                           | )          | (510                        | )          |
| Total stockholders’ equity                                                                                                                                 |       | 49,268                         |       | 50,914                      |       |
| Total liabilities and stockholders’ equity                                                                                                                 |       | $                              | 274,751    |                        | $          | 280,495 |   |

 

The accompanying notes are an integral part ofthese financial statements.

 

1

----

 

**MARKWEST HYDROCARBON, INC.**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(UNAUDITED)**

**(inthousands, except per share data)**

 
| ** **                                                                                               | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                               | ** ** | **2004**                              | ** ** | **2003** | ** ** |
| ** **                                                                                               | ** ** | **(as restated, see note 10)**        | ** ** |
|                                                                                                     |       |                                  |       |   |   |
| Revenues                                                                                                 |       | $                                     | 93,700     |   | $ | 51,231 |   |
|                                                                                                     |       |                                  |       |   |   |
| Operating  expenses:                                                                                     |       |                                  |       |   |   |
| Purchased product costs                                                                                  |       | 75,488                                |       | 46,003 |   |
| Facility expenses                                                                                        |       | 6,086                                 |       | 4,632 |   |
| Selling, general and administrative  expenses                                                            |       | 5,314                                 |       | 2,624 |   |
| Depreciation                                                                                             |       | 3,528                                 |       | 1,602 |   |
| Amortization of intangible assets                                                                        |       | 34                                    |       | — |   |
| Total operating expenses                                                                                 |       | 90,450                                |       | 54,861 |   |
|                                                                                                     |       |                                  |       |   |   |
| Income (loss) from operations                                                                            |       | 3,250                                 |       | (3,630 | ) |
|                                                                                                     |       |                                  |       |   |   |
| Other income  (expense):                                                                                 |       |                                  |       |   |   |
| Interest expense, net                                                                                    |       | (995                                  | )          | (754 | ) |
| Amortization of deferred financing costs (a  component of interest expense)                              |       | (307                                  | )          | (309 | ) |
| Other income (expense)                                                                                   |       | 25                                    |       | (15 | ) |
| Income (loss) before non-controlling interest  in net income of consolidated subsidiary and income taxes |       | 1,973                                 |       | (4,708 | ) |
|                                                                                                     |       |                                  |       |   |   |
| Provision  (benefit) for income taxes:                                                                   |       |                                  |       |   |   |
| Current                                                                                                  |       | (14                                   | )          | (2,144 | ) |
| Deferred                                                                                                 |       | (42                                   | )          | 93 |   |
| Provision (benefit) for income taxes                                                                     |       | (56                                   | )          | (2,051 | ) |
|                                                                                                     |       |                                  |       |   |   |
| Non-controlling  interest in net income of consolidated subsidiary                                       |       | (1,309                                | )          | (857 | ) |
|                                                                                                     |       |                                  |       |   |   |
| Income (loss) from continuing operations                                                                 |       | 720                                   |       | (3,514 | ) |
|                                                                                                     |       |                                  |       |   |   |
| Income from  discontinued exploration and production operations (net of income tax of  $1,143)           |       | —                                |       | 2,130 |   |
|                                                                                                     |       |                                  |       |   |   |
| Income (loss) before cumulative effect of  accounting change                                             |       | 720                                   |       | (1,384 | ) |
|                                                                                                     |       |                                  |       |   |   |
| Cumulative  effect of change in accounting for asset retirement obligations, net of tax                  |       | —                                |       | (29 | ) |
|                                                                                                     |       |                                  |       |   |   |
| Net income (loss)                                                                                        |       | $                                     | 720        |   | $ | (1,413 | ) |
| Income  (loss) from continuing operations per share:                                                     |       |                                  |       |   |   |
| Basic                                                                                                    |       | $                                     | 0.07       |   | $ | (0.34 | ) |
| Diluted                                                                                                  |       | $                                     | 0.07       |   | $ | (0.34 | ) |
| Net income  (loss) per share:                                                                            |       |                                  |       |   |   |
| Basic                                                                                                    |       | $                                     | 0.07       |   | $ | (0.14 | ) |
| Diluted                                                                                                  |       | $                                     | 0.07       |   | $ | (0.14 | ) |
| Weighted  average number of outstanding shares of common stock:                                          |       |                                  |       |   |   |
| Basic                                                                                                    |       | 10,577                                |       | 10,298 |   |
| Diluted                                                                                                  |       | 10,595                                |       | 10,302 |   |
| Cash  dividend per common share                                                                          |       | $                                     | 0.455      |   | $ | — |   |

 

Theaccompanying notes are an integral part of these financial statements.

 

2

----

 

**MARKWESTHYDROCARBON, INC.**

**CONSOLIDATEDSTATEMENTS OF OTHER COMPREHENSIVEINCOME**

**(UNAUDITED)**

**(inthousands)**

 
| ** **                                                                  | ** ** | **Three Months Ended March 31,** | ** ** |
|-----------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                  | ** ** | **2004**                              | ** ** | **2003** | ** ** |
| ** **                                                                  | ** ** | **(as restated, see note 10)**        | ** ** |
|                                                                        |       |                                  |       |   |   |
| Net income  (loss)                                                          |       | $                                     | 720        |   | $ | (1,413 | ) |
|                                                                        |       |                                  |       |   |   |
| Other Comprehensive  income, net of tax:                                    |       |                                  |       |   |   |
| Foreign currency translation                                                |       | —                                |       | 2,264 |   |
| Unrealized gains (losses) on commodity  derivatives accounted for as hedges |       | 872                                   |       | (393 | ) |
| Unrealized gain on marketable securities                                    |       | 153                                   |       | — |   |
| Total other Comprehensive income                                            |       | 1,025                                 |       | 1,871 |   |
|                                                                        |       |                                  |       |   |   |
| Other Comprehensive  income                                                 |       | $                                     | 1,745      |   | $ | 458 |   |

 

Theaccompanying notes are an integral part of these financial statements.

 

3

----

 

**MARKWEST HYDROCARBON, INC.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(UNAUDITED)**

**(inthousands)**

 
| ** **                                                                                | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                | ** ** | **2004**                               | ** ** | **2003** | ** ** |
| ** **                                                                                | ** ** | **(as  restated, see note 10)**        | ** ** |
| **Cash  flows from operating activities:**                                                |       |                                   |       |   |   |
| Net income (loss)                                                                         |       | $                                      | 720        |   | $ | (1,413 | ) |
| Adjustments to reconcile net income (loss)  to net cash provided by operating activities: |       |                                   |       |   |   |
| Cumulative effect of change in accounting  principle                                      |       | —                                 |       | 29 |   |
| Depreciation and depletion                                                                |       | 3,528                                  |       | 5,098 |   |
| Amortization of deferred financing costs                                                  |       | 307                                    |       | 309 |   |
| Amortization of intangible assets                                                         |       | 34                                     |       | — |   |
| Stock option compensation expense                                                         |       | 358                                    |       | — |   |
| Restricted unit compensation expense                                                      |       | 374                                    |       | 212 |   |
| Participation Plan compensation expense                                                   |       | 402                                    |       | 53 |   |
| Contribution of treasury shares to 401(k)  benefit plan                                   |       | 72                                     |       | 91 |   |
| Equity in loss of investee                                                                |       | 5                                      |       | — |   |
| Gain from sale of property, plant and  equipment                                          |       | (63                                    | )          | — |   |
| Non-controlling interest in net income of  consolidated subsidiary                        |       | 1,309                                  |       | 857 |   |
| Unrealized losses (gains) on derivative  instruments                                      |       | 476                                    |       | (922 | ) |
| Reclassification of Enron hedges to  purchased product costs                              |       | —                                 |       | (18 | ) |
| Deferred income taxes                                                                     |       | (41                                    | )          | 1,180 |   |
| Other                                                                                     |       | —                                 |       | 28 |   |
| Changes in operating assets and  liabilities:                                             |       |                                   |       |   |   |
| (Increase) decrease in receivables                                                        |       | 5,096                                  |       | (3,844 | ) |
| Decrease in inventories                                                                   |       | 4,100                                  |       | 1,124 |   |
| (Increase) decrease in prepaid replacement  natural gas                                   |       | 5,925                                  |       | (907 | ) |
| (Increase) decrease in other current assets                                               |       | (535                                   | )          | 34 |   |
| Increase (decrease) in accounts payable and  accrued liabilities                          |       | (4,694                                 | )          | 7,708 |   |
| Net cash flow provided by operating  activities                                           |       | 17,373                                 |       | 9,619 |   |
|                                                                                      |       |                                   |       |   |   |
| **Cash  flows from investing activities:**                                                |       |                                   |       |   |   |
| Purchase of marketable securities                                                         |       | (4,277                                 | )          | — |   |
| Pinnacle acquisition, net of cash acquired                                                |       | —                                 |       | (38,238 | ) |
| Capital expenditures                                                                      |       | (1,629                                 | )          | (6,735 | ) |
| Proceeds from sales of assets                                                             |       | 94                                     |       | 24 |   |
| Proceeds on financing lease receivable                                                    |       | 133                                    |       | — |   |
| Other                                                                                     |       | 3                                      |       | — |   |
| Net cash used in investing activities                                                     |       | (5,676                                 | )          | (44,949 | ) |
|                                                                                           |            |                                        |            |  |  |  |  |

 

Theaccompanying notes are an integral part of these financial statements.

 

4

----

 
| ** **                                                              | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                              | ** ** | **2004**                               | ** ** | **2003** | ** ** |
| ** **                                                              | ** ** | **(as restated, see Note 10)**         | ** ** |
|                                                                    |       |                                   |       |   |   |
| **Cash  flows from financing activities:**                              |       |                                   |       |   |   |
| Proceeds from long-term debt                                            |       | —                                 |       | 45,700 |   |
| Repayment of long-term debt                                             |       | (42,000                                | )          | (6,500 | ) |
| Payments for debt issuance costs                                        |       | —                                 |       | (810 | ) |
| Proceeds from MarkWest Energy Partners’  secondary public offering |       | 44,102                                 |       | — |   |
| Distribution to MarkWest Energy Partners’  unitholders             |       | (3,007                                 | )          | (1,509 | ) |
| Exercise of stock options                                               |       | 1,017                                  |       | — |   |
| Repurchase of treasury shares                                           |       | (36                                    | )          | (167 | ) |
| Payment of dividends                                                    |       | (4,802                                 | )          | — |   |
| Net cash provided by (used in) financing  activities                    |       | (4,726                                 | )          | 36,714 |   |
|                                                                    |       |                                   |       |   |   |
| Effect of  exchange rate changes on cash                                |       | —                                 |       | 114 |   |
|                                                                    |       |                                   |       |   |   |
| Net increase  in cash and cash equivalents                              |       | 6,971                                  |       | 1,498 |   |
| Cash and  cash equivalents at beginning of period                       |       | 42,144                                 |       | 6,410 |   |
| Cash and  cash equivalents at end of period                             |       | $                                      | 49,115     |   | $ | 7,908 |   |
|                                                                    |       |                                   |       |   |   |
| **Supplemental  cash flow information:**                                |       |                                   |       |   |   |
| Construction  projects in progress obligation                           |       | $                                      | 1,199      |   | $ | — |   |
| Cash paid  for interest, net of amounts capitalized                     |       | $                                      | 1,459      |   | $ | 382 |   |

 

Theaccompanying notes are an integral part of these financial statements.

 

5

----

 

**MARKWEST HYDROCARBON, INC.**

**CONSOLIDATEDSTATEMENT OF CHANGES IN**

**STOCKHOLDERS’EQUITY**

**(UNAUDITED)**

**(inthousands)**

 
| ** **                                                 | ** ** | **Shares  of  Common  Stock** | ** ** | **Shares  of  Treasury  Stock** | ** ** | **Common  Stock** | ** ** | **Additional    Paid-In  Capital** | ** ** | **Accumulated  Earnings (Deficit)** | ** ** | **Accumulated    Other   Comprehensive  Income (Loss)** | ** ** | **Treasury  Stock** | ** ** | **Total  Stockholders’  Equity** | ** ** |
|------------------------------------------------------------|------------|-------------------------------|------------|---------------------------------|------------|-------------------|------------|------------------------------------|------------|-------------------------------------|------------|---------------------------------------------------------|------------|---------------------|------------|---------------------------------------|------------|
|                                                       |       |                          |       |                            |       |              |       |                               |       |                                |       |                                                    |       |                |       |                                  |       |
| Balance, December 31,  2003, as restated, see note 10 |       | 10,602                        |       | (76                             | )          | $                 | 106        |                               | $          | 50,705                              |       | $                                                       | 2,406      |                | $          | (1,793                                | )          | $ | (510 | ) | $ | 50,914 |   |
|                                                       |       |                          |       |                            |       |              |       |                               |       |                                |       |                                                    |       |                |       |                                  |       |
| Stock options  exercised                                   |       | 130                           |       | —                          |       | 2                 |       | 1,015                              |       | —                              |       | —                                                  |       | —              |       | 1,017                                 |       |
|                                                       |       |                          |       |                            |       |              |       |                               |       |                                |       |                                                    |       |                |       |                                  |       |
| Modification of stock  options, as restated, see note 10   |       | —                        |       | —                          |       | —            |       | 358                                |       | —                              |       | —                                                  |       | —              |       | 358                                   |       |
|                                                       |       |                          |       |                            |       |              |       |                               |       |                                |       |                                                    |       |                |       |                                  |       |
| Treasury stock  acquired                                   |       | —                        |       | (3                              | )          | —            |       | —                             |       | —                              |       | —                                                  |       | (36                 | )          | (36                                   | )          |
|                                                       |       |                          |       |                            |       |              |       |                               |       |                                |       |                                                    |       |                |       |                                  |       |
| Treasury stock  reissued                                   |       | —                        |       | 8                               |       | —            |       | —                             |       | —                              |       | —                                                  |       | 72                  |       | 72                                    |       |
|                                                       |       |                          |       |                            |       |              |       |                               |       |                                |       |                                                    |       |                |       |                                  |       |
| Dividends, as  restated, see note 10                       |       | —                        |       | —                          |       | —            |       | (1,676                             | )          | (3,126                              | )          | —                                                  |       | —              |       | (4,802                                | )          |
|                                                       |       |                          |       |                            |       |              |       |                               |       |                                |       |                                                    |       |                |       |                                  |       |
| Net income, as  restated, see note 10                      |       | —                        |       | —                          |       | —            |       | —                             |       | 720                                 |       | —                                                  |       | —              |       | 720                                   |       |
|                                                       |       |                          |       |                            |       |              |       |                               |       |                                |       |                                                    |       |                |       |                                  |       |
| Other Comprehensive  income                                |       | —                        |       | —                          |       | —            |       | —                             |       | —                              |       | 1,025                                                   |       | —              |       | 1,025                                 |       |
|                                                       |       |                          |       |                            |       |              |       |                               |       |                                |       |                                                    |       |                |       |                                  |       |
| Balance,  March 31, 2004, as restated, see note 10    |       | 10,732                        |       | (71                             | )          | $                 | 108        |                               | $          | 50,402                              |       | $                                                       | —     |                | $          | (768                                  | )          | $ | (474 | ) | $ | 49,268 |   |

 

Theaccompanying notes are an integral part of these financial statements.

 

6

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MARKWEST HYDROCARBON, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

**1.     General**

 

MarkWest Hydrocarbon, Inc. (“MarkWestHydrocarbon” or the “Company”) manages MarkWest Energy Partners, L.P. (“MarkWestEnergy Partners” or the “Partnership”), a publicly-traded master limitedpartnership engaged in the gathering, processing and transmission of naturalgas; the transportation, fractionation and storage of natural gas liquids (NGLs);and the gathering and transportation of crude oil.   The Company also markets natural gas andNGLs.  MarkWest Hydrocarbon and MarkWestEnergy Partners provide services primarily in the Southwest, Appalachia andMichigan.

 

The Company’sassets consist primarily of partnership interests in MarkWest EnergyPartners.  As of March 31, 2004, theCompany’s partnership interests consisted of 2,470,996 subordinated units,representing a 35% limited partner interest in the Partnership and a 90%membership (ownership) interest in MarkWest Energy GP, L.L.C., the generalpartner of the Partnership, which owns a 2% general partner interest and all ofthe incentive distribution rights in the Partnership.

 

Theconsolidated financial statements include the accounts of MarkWest Hydrocarbonand its subsidiaries, including MarkWest Energy Partners. Throughconsolidation, the Company has eliminated all significant intercompany accountsand transactions.

 

The Company hasprepared the unaudited financial statements presented herein in accordance withthe instructions to Form 10-Q.  Thestatements do not include all the information and note disclosures required bygenerally accepted accounting principles for complete financialstatements.  You should read theseconsolidated financial statements and notes thereto along with the auditedfinancial statements and notes thereto as of and for the year ended December 31,2003 (which have been restated) included in the Company’s December 31,2004 Annual Report on Form 10-K.  Inthe opinion of management, the Company has made all necessary adjustments for afair statement of the results for the unaudited interim periods.  All such adjustments are of a recurringnature.  Results for the three monthsended March 31, 2004, are not necessarily indicative of results for thefull year 2004 or any other future period.

 

The Companybases the effective corporate tax rate for interim periods on the estimatedannual effective corporate tax rate.

 

**2.     MarketableSecurities**

 

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, net of applicable income taxes.  For losses that are other than temporary, thecost basis of the securities is written down to fair value and the amount ofthe write down is reflected in the statement of operations. The Companyutilizes a weighted-average cost basis to compute realized gains and losses.Realized gains and losses, and dividend and interest income, are reflected inearnings.

 

Debt and equitysecurities are classified as available-for-sale.  The following are the components ofmarketable securities (in thousands):

 
| **March 31, 2004(as restated, see note 10)**                   | ** ** | **Cost Basis** | ** ** | **Unrealized   gains** | ** ** | **Unrealized   losses** | ** ** | **Recorded   Basis** | ** ** |
|---------------------------------------------------------------------|------------|----------------|------------|------------------------|------------|-------------------------|------------|----------------------|------------|
| **Equity  securities:**                                             |       |           |       |                   |       |                    |       |                 |       |
| Master limited partnership units                                    |       | $              | 4,277      |                   | $          | 179                     |       | $                    | (26        | ) | $ | 4,430 |   |
| Equity securities, classified as current                            |       | 4,277          |       | 179                    |       | (26                     | )          | 4,430                |       |
| **Fixed  maturities:**                                              |       |           |       |                   |       |                    |       |                 |       |
| Mortgage backed securities (due after one  year through five years) |       | $              | 2,500      |                   | $          | —                  |       | $                    | —     |   | $ | 2,500 |   |
| Fixed Maturities, classified as non-current                         |       | 2,500          |       | —                 |       | —                  |       | 2,500                |       |
| Total marketable securities                                         |       | $              | 6,777      |                   | $          | 179                     |       | $                    | (26        | ) | $ | 6,930 |   |

 

7

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| **December 31, 2003(as restated, see note 10)** | ** ** | **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 March 31, 2004, unrealized gains of$0.2 million and unrealized losses of less than $0.1 million relate primarilyto investments in domestic equity securities in energy partnerships.

 

**3.     Acquisitionsby MarkWest Energy Partners**

 

###### *PinnacleAcquisition*

###### * *

On March 28, 2003, the Partnershipcompleted the acquisition (the “Pinnacle Acquisition”) of Pinnacle Natural GasCompany, Pinnacle Pipeline Company, PNG Transmission Company, Inc., PNGUtility Company and Bright Star Gathering, Inc. (collectively, “Pinnacle”or the “Sellers”).  Pinnacle’s results ofoperations have been included in the Company’s consolidated financialstatements since that date.

 

The Pinnacle Acquisition was accomplishedthrough a merger under Texas law of the Sellers and four newly formed whollyowned 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 assets acquired from the Sellers, primarilylocated in the State of Texas, with the balance located in New Mexico,Louisiana, Mississippi and Kansas, are comprised of three lateral natural gaspipelines and twenty gathering systems.

 

The purchase price wasallocated 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 |   |

###### * *

###### *WesternOklahoma Acquisition*

###### * *

On December 1, 2003, the Partnership completed theacquisition of certain assets of American Central Western Oklahoma Gas Company,L.L.C. (“AWOC”) for approximately $38.0 million.  Results of operations for the acquired assets have beenincluded in the Company’s consolidated financial statements since that date.

 

The assets include the Foss Lake gathering systemlocated in the western Oklahoma counties of Roger Mills and Custer.  The gathering system is comprised ofapproximately 167 miles of pipeline, connected to approximately 270 wells, and11,000 horsepower of compression facilities.  The assets also include the Arapaho gas processing plant that wasinstalled during 2000.

 

8

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The purchase price of approximately $38.0 million wasfinanced through borrowings under the Partnership line of credit, which wasamended at the closing of the acquisition to increase availability under thecredit facility from $75.0 million to $140.0 million.  Substantially all of the acquired assets arepledged to the credit facility lenders to secure the repayment of theoutstanding borrowings under the credit facility.

 

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

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

 

###### *MichiganCrude Pipeline*

###### * *

On December 18, 2003, the Partnershipcompleted the acquisition (the “Michigan Crude Pipeline acquisition”) of ShellPipeline Company, LP’s and Equilon Enterprises, LLC’s, doing business as ShellOil Products US (“Shell”), Michigan Crude Gathering Pipeline (the “System”),for approximately $21.3 million. The System’s results of operations have been includedin the Company’s consolidated financial statements since December 18,2003. The $21.3 million purchase price was financed through borrowings underthe Partnership’s line of credit.

 

The System extends from production facilitiesnear Manistee, Michigan to a storage facility near Lewiston, Michigan.  The trunk line consists of approximately 150miles of pipe.  Crude oil is gatheredinto the System from 57 injection points, including 52 central productionfacilities and five truck unloading facilities, and comprises approximately 100miles of pipe.  The System also includestruck-unloading stations at Manistee, Seeley Road and Junction, and the SamariaTruck Unloading Station located in Monroe County, Michigan, near Toledo, Ohio.

 

The System is a common carrier Michiganintrastate pipeline and gathers light crude oil from wells.  The oil is transported for a fee to theLewiston, Michigan station where it is batch injected into the EnbridgeLakehead Pipeline.

 

The purchase price was comprised of$21.3 million paid in cash to Shell plus direct acquisition costs and wasallocated as follows (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 |   |

 

9

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*Pro Forma Results ofOperations (Unaudited)*

 

The following table reflects the unauditedpro forma consolidated results of operations for the comparable period presented,as though the Pinnacle acquisition, the Western Oklahoma acquisition andMichigan Crude Pipeline acquisition each had occurred on January 1,2003.  The unaudited pro forma resultshave been prepared for comparative purposes only and may not be indicative offuture results.

 
| ** **                  | ** ** | **Three Months Ended March 31, 2003** | ** ** |
|-----------------------------|------------|--------------------------------------------|------------|
| ** **                  | ** ** | **MarkWest********Hydrocarbon**            | ** ** | **Pinnacle** | ** ** | **Western  Oklahoma** | ** ** | **Michigan  Crude  Pipeline** | ** ** | **Adjustments** | ** ** | **Total** | ** ** |
| ** **                  | ** ** | **(in thousands, except per share data)**  | ** ** |
| ** **                  | ** ** | **(as restated,   see note 10)**           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **(as restated,   see note 10)** | ** ** |
| Revenue                     |       | $                                          | 51,231     |   | $ | 18,614 |   | $ | 11,083 |   | $ | 1,110 |   | $ | (827 | ) | $ | 81,211 |   |
| Net income                  |       | $                                          | (1,413     | ) | $ | 1,114 |   | $ | 16 |   | $ | 494 |   | $ | (1,297 | ) | $ | (1,086 | ) |
| Basic net  loss per share   |       | $                                          | (0.14      | ) |   |   |   |   |   |   |   |   | $ | (0.11 | ) |
| Diluted net  loss per share |       | $                                          | (0.14      | ) |   |   |   |   |   |   |   |   | $ | (0.11 | ) |

 

*Subsequent Event*

 

On April 1,2004, the Partnership acquired the Hobbs Lateral pipeline for approximately$2.3 million.  The Hobbs Lateral pipelineconsists of a four-mile pipeline, with a capacity of 160 million cubic feet ofnatural gas per day, connecting the Northern Natural Gas interstate pipeline toSouthwestern Public Service’s Cunningham and Maddox power generating stationsin Hobbs, New Mexico.  The Hobbs Lateralpipeline is a New Mexico intrastate pipeline regulated by the Federal EnergyRegulatory Commission.

 

**4.****              Property, Plant andEquipment**

 

The following provides the composition of theCompany’s property, plant and equipment at:

 
| ** **                                                              | ** ** | **March 31,**               | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------|------------|----------------------------------|------------|-----------------------|------------|
| ** **                                                              | ** ** | **2004**                         | ** ** | **2003**              | ** ** |
| ** **                                                              | ** ** | **(in thousands)**               | ** ** |
| ** **                                                              | ** ** | **(as restated, see   note 10)** | ** ** | ** **            | ** ** |
| Property,  plant and equipment:                                         |       |                             |       |                  |       |
| Gas gathering facilities                                                |       | $                                | 74,955     |                  | $          | 73,424 |   |
| Gas processing plants                                                   |       | 56,289                           |       | 55,888                |       |
| Fractionation and storage facilities                                    |       | 22,387                           |       | 22,160                |       |
| Natural gas pipelines                                                   |       | 38,817                           |       | 38,790                |       |
| Crude oil pipelines                                                     |       | 18,329                           |       | 18,352                |       |
| NGL transportation facilities                                           |       | 4,415                            |       | 4,415                 |       |
| Marketing assets                                                        |       | 1,606                            |       | 1,987                 |       |
| Oil and gas properties and equipment, full  cost method                 |       | 2,495                            |       | 2,380                 |       |
| Land, buildings and other equipment                                     |       | 12,915                           |       | 12,499                |       |
| Construction in-progress                                                |       | 1,842                            |       | 2,362                 |       |
|                                                                    |       | 234,050                          |       | 232,257               |       |
| Less: Accumulated depreciation, depletion,  amortization and impairment |       | (46,981                          | )          | (44,134               | )          |
| Total property, plant and equipment, net                                |       | $                                | 187,069    |                  | $          | 188,123 |   |

 

10

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#### **5.**              Adoptionof SFAS No. 143

 

In June 2001, the Financial AccountingStandards Board issued Statement No. 143, *Accountingfor Asset Retirement Obligations.*The Company adopted SFAS No. 143beginning January 1, 2003. The most significant impact of this standard onthe Company was a change in the method of accruing for site restorationcosts.  Under SFAS No. 143, the fairvalue of asset retirement obligations is recorded as a liability when incurred,which is typically at the time the assets are placed in service.  Amounts recorded for the related assets areincreased by the amount of these obligations. Over time, the liabilities are accreted for the change in their presentvalue and the initial capitalized costs are depreciated over the useful livesof the related assets.

 

The cumulativeeffect of this accounting change for years prior to 2003 was less than $0.1million and is reflected in the Company’s statement of operations for the threemonths ended March 31, 2003. At the time of adoption, the Company recordedan asset retirement obligation of $3.4 million, decreased a site restorationliability of $0.9 million that was recorded prior to the implementation of SFASNo. 143 and increased net property, plant and equipment $2.4 million inaccordance with the provisions of SFAS No. 143.   For the three months ended March 31,2003, the impact on earnings per share from the cumulative effect of the changein accounting for asset retirement obligations was not significant.  The asset retirement obligation, which isincluded on the consolidated balance sheet in other long-term liabilities, was$0.5 million and $2.4 million at March 31, 2004 and December 31,2003, respectively.

 

**6.****              MarkWestEnergy Partners’ Secondary Public Offering**

 

On January 12, 2004, the Partnership pricedits offering of 1,148,000 common units at $39.90 per unit.  Of the 1,148,000 common units, 1,100,444 weresold by the Partnership for gross proceeds of $43.9 million. The remaining47,556 were sold by certain selling unitholders, proceeds of which wereretained by them.  Inconnection with the over-allotment provisions of the underwriting agreement,the Partnership issued an additional 72,500 common units for gross proceeds of$2.9 million.  Aggregate gross proceeds of$46.8 million were reduced by underwriters’ fees of $2.5 million andprofessional fees and other offering costs of $1.3 million, resulting in netproceeds of $43.0 million.  The netproceeds of $43.0 million and the $0.9 million contributed by the general partnerto maintain its 2% interest resulted in total net proceeds to the Partnershipassociated with the offering of $43.9 million, which were used to pay down thePartnership’s credit facility.

 

**7.****              Segment Reporting**

 

The Company’s operations are classified into tworeportable 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—theCompany sells its equity and third party NGLs, purchases third party naturalgas and sells its equity and third party natural gas.  Since February 2004, the Company is alsoengaged in the wholesale marketing of propane.

 

During 2003, the Company discontinued its explorationand production business segment. The Company’s continuing operations areconducted solely in the United States.

 

The table belowpresents information about operating income (loss) for the reported segmentsfor the three months ended March 31, 2004 and 2003. Segment operatingincome (loss) includes total revenues less purchased product costs, facilityexpenses, depreciation and amortization of intangible assets. Items excludedfrom segment operating income (loss) are reflected in the reconciliation oftotal segment operating income (loss) to income (loss) from continuingoperations before taxes.  The Company hasnot reported asset information by reportable segment because it does notproduce such information internally.

 

11

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| ** **                                      | ** ** | **Marketing**      | ** ** | **MarkWest   Energy   Partners** | ** ** | **Eliminating  Entries** | ** ** | **Total** | ** ** |
|-------------------------------------------------|------------|--------------------|------------|----------------------------------|------------|--------------------------|------------|-----------|------------|
| ** **                                      | ** ** | **(in thousands)** | ** ** |
| **Three  Months Ended March 31, 2004 (1)** |       |               |       |                             |       |                     |       |      |       |
| Revenues  from external customers               |       | $                  | 44,169     |                             | $          | 49,531                   |       | $         | —     |   | $ | 93,700 |   |
| Intersegment  revenues                          |       | $                  | 224        |                             | $          | 14,294                   |       | $         | (14,518    | ) | $ | — |   |
| Segment  operating income                       |       | $                  | 2,061      |                             | $          | 6,503                    |       | $         | —     |   | $ | 8,564 |   |
|                                            |       |               |       |                             |       |                     |       |      |       |
| **Three  Months Ended March 31, 2003**     |       |               |       |                             |       |                     |       |      |       |
| Revenues  from external customers               |       | $                  | 46,932     |                             | $          | 4,299                    |       | $         | —     |   | $ | 51,231 |   |
| Intersegment  revenues                          |       | $                  | 267        |                             | $          | 13,394                   |       | $         | (13,661    | ) | $ | — |   |
| Segment  operating income (loss)                |       | $                  | (4,625     | )                                | $          | 3,619                    |       | $         | —     |   | $ | (1,006 | ) |

 

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

 
| ** **                                                                                                                            | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                                                            | ** ** | **2004 (1)**                          | ** ** | **2003 (1)** | ** ** |
| ** **                                                                                                                            | ** ** | **(in thousands)**                    | ** ** |
| Total  segment operating income (loss)                                                                                                |       | $                                     | 8,564      |   | $ | (1,006 | ) |
| Selling,  general and administrative expenses                                                                                         |       | (5,314                                | )          | (2,624 | ) |
| Interest  expense, net                                                                                                                |       | (995                                  | )          | (754 | ) |
| Amortization  of deferred financing costs                                                                                             |       | (307                                  | )          | (309 | ) |
| Other income  (expense)                                                                                                               |       | 25                                    |       | (15 | ) |
| Income (loss) from continuing operations  before non- controlling interest in net income of consolidated subsidiary and  income taxes |       | $                                     | 1,973      |   | $ | (4,708 | ) |

 

----

(1)          Asrestated, see Note 10.

 

**8.****              Commitments and Contingencies**

 

The Company is involved in various litigationand administrative proceedings arising in the normal course of business. In theopinion of management, any liabilities that may result from these claims willnot, individually or in the aggregate, have a material adverse effect on itsfinancial position or results of operations.

 

12

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**9.****              Stock and Unit Compensation**

 

As permitted under SFAS No. 123, *Accounting for Stock-Based Compensation,*the Company haselected to continue to measure compensation costs for stock-based andunit-based employee compensation plans as prescribed by APB No. 25, *Accounting for Stock Issued to Employees*, as permitted under SFAS No. 123, *Accounting for Stock Based Compensation*, and SFAS No. 148, *Accounting for Stock Based Compensation — Transition andDisclosure. *The Company hastwo fixed compensation plans and two variable plans, one of which is throughits consolidated subsidiary, MarkWest Energy. The Company accounts for these plans using fixed and variable accountingas appropriate.

 

*Stock Option Plans*

 

The Company’s stock options are issued undera fixed plan. Accordingly, compensation expense is not recognized for stockoptions unless the options are granted at an exercise price lower than marketon the grant date.  During the threemonths ended March 31, 2004, two officers resigned from the Company.  As the former officers continued to serve onthe Company’s Board of Directors, the Company agreed that the individual’sstock options would continue to vest and be exercisable in accordance with theoriginal vesting and exercise provisions.  As a result of the modification to the stock options for these officersthe outstanding stock options are to be accounted for as variable awards, andas a result the Company recorded compensation expense of $0.4 million for thethree months ended March 31, 2004, measured as the difference in themarket value of the Company’s common stock on the date the officer’s statuschanged and the strike price of the outstanding stock options.

 

*Participation Plan*

 

The Company has also entered intoarrangements with certain directors and officers of the Company.  These arrangements are referred to as theParticipation Plan.  Under the ParticipationPlan, MarkWest Hydrocarbon sells subordinated partnership units of thePartnership and interests in the Partnership’s general partner to employees anddirectors of the Company under a purchase and sale agreement.  In accordance with the provisions of APB No. 25,the Participation 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 those individuals.  The formula value is the amount MarkWestHydrocarbon would have to pay the directors and employees to repurchase thegeneral partner interests and is based on the current market value of thePartnership’s common units and the current quarterly distribution paid by thePartnership.  Increases or decreases in themarket value of the subordinated units and the formula value of the generalpartner interests between the date they are acquired and the end of eachreporting period result in a change in the measure of compensation, which isreflected currently in operations.  TheCompany recorded compensation expense of $0.4 million and $0.1 million for thethree months ended March 31, 2004 and 2003, respectively. These chargesare included in selling, general and administrative expenses.

 

*MarkWest EnergyPartners Long-Term Incentive Plan*

 

The Partnership issues restricted units underthe MarkWest Energy Partners, L.P. Long-Term Incentive Plan.  A restricted unit is a “phantom” unit thatentitles the grantee to receive a common unit upon the vesting of the phantomunit, or at the discretion of the Compensation Committee, cash equivalent tothe value of a common unit.  Inaccordance with APB No. 25, the Partnership applies variable accountingfor the plan because a phantom unit is an award to an employee entitling themto increases in the market value of the Partnership’s units subsequent to thedate of grant without issuing units to the employees, similar to a stockappreciation right.  As a result, thePartnership is required to mark to market the awards at the end of eachreporting period.  Compensation expenseis measured for the phantom unit grants using the market price of MarkWestEnergy’s common units on the date the units are granted.  The fair value of the units awarded isamortized into earnings over the period of service, adjusted quarterly for thechange in the fair value of the unvested units granted.  The phantom units vest over a statedperiod.  For certain employees vesting isaccelerated if certain performance measures are met.  The accelerated vesting criteria provisionsare based on annualized distribution goals. If the Partnership’s distributions are at or above the goal for a 

 

13

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certain number of consecutivequarters, vesting of the employee’s phantom units is accelerated.  However, the vesting of any phantom units maynot occur until 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. Duringthe three months ended March 31, 2004 and 2003, 2,500 and 1,000 restrictedunits, respectively, were granted.  ThePartnership recorded compensation expense of $0.4 million and $0.2 million forthe three months ended March 31, 2004 and 2003, respectively.  These charges are included in selling,general and administrative expenses.

 

Had compensation cost for the Company’sstock-based and unit-based compensation plans been determined based on the fairvalue at the grant dates under those plans consistent with the methodprescribed by SFAS No. 123, *,*the Company’snet income (loss) and net income (loss) per share would have been revised tothe pro forma amounts listed below:

 
| ** **                                                                                                                                   | ** ** | **Three Months Ended March 31,**     | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                                                                   | ** ** | **2004**                                  | ** ** | **2003** | ** ** |
| ** **                                                                                                                                   | ** ** | **(in thousands, except per share data)** | ** ** |
| ** **                                                                                                                                   | ** ** | **(as restated, see   note 10)**          | ** ** | **(as restated,   see note 10)** | ** ** |
|                                                                                                                                         |       |                                      |       |   |   |
| Net income (loss), as reported                                                                                                               |       | $                                         | 720        |   | $ | (1,413 | ) |
| Add: compensation expense included in  reported net income (loss)                                                                            |       | 1,134                                     |       | 265 |   |
| Deduct: total stock-based employee  compensation expense determined under fair value based method for all  awards, net of related tax effect |       | (803                                      | )          | (338 | ) |
| Pro forma net income (loss)                                                                                                                  |       | $                                         | 1,051      |   | $ | (1,486 | ) |
|                                                                                                                                         |       |                                      |       |   |   |
| Net income (loss) per share:                                                                                                                 |       |                                      |       |   |   |
| Basic:                                                                                                                                       |       |                                      |       |   |   |
| As reported                                                                                                                                  |       | $                                         | 0.07       |   | $ | (0.14 | ) |
| Pro forma                                                                                                                                    |       | $                                         | 0.10       |   | $ | (0.14 | ) |
| Diluted:                                                                                                                                     |       |                                      |       |   |   |
| As reported                                                                                                                                  |       | $                                         | 0.07       |   | $ | (0.14 | ) |
| Pro forma                                                                                                                                    |       | $                                         | 0.10       |   | $ | (0.14 | ) |

 

**10.****      ****Restatement andReclassifications of Consolidated Financial Statements**

 

The Company has determined that, in certain cases, itdid not comply with generally accepted accounting principles in the preparationof its 2003 and 2004 consolidated financial statements and, accordingly, theCompany has restated its consolidated financial statements for the quarterlyperiods ended March 31, 2004 and 2003.

 

The restatements primarily result fromcompensation expense attributed to the sale of a portion of MarkWestHydrocarbon’s subordinated Partnership units and interests in the Partnership’sgeneral partner to certain of its employees and directors from 2002 through2004.  MarkWest Hydrocarbon hadhistorically recorded the sale of the subordinated Partnership units andinterests in the general partner to certain of MarkWest Hydrocarbon’s employeesand directors as a sale of an asset. These arrangements 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 market value of thesubordinated Partnership units and the formula value of the general partnerinterests held by the employees and directors at the end of each reportingperiod.  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,

 

14

----

 

adjustments to record as afinancing lease, a lease agreement previously entered into by an acquired business(“Blackhawk pipeline”), an adjustment to record natural gas inventory at cost,adjustments to accrued property taxes and adjustments to deferred and currenttaxes payable.  Adjustments were alsomade 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.  Additionally, the Companymade an adjustment to reclassify a portion of dividends paid during the threemonths ended March 31, 2004 from retained earnings to additional paid incapital for the amount of dividends distributed in excess of accumulatedearnings.

 

In addition, on October 28, 2004, theCompany’s Board of Directors declared a stock dividend of one share of MarkWestHydrocarbon’s common stock for each ten shares owned by stockholders.  The stock dividend was paid on November 19,2004 to the stockholders of record as of the close of business on November 9,2004.  Common stock information in this Form 10-Q/Ahas been adjusted to give retroactive effect to the stock dividend paid.

 

The Company hasreclassified certain prior year amounts to conform to the current year’spresentation.  The Company hasreclassified intangible and other assets to a separate line item on theconsolidated balance sheet. The Company has also reclassified interest incomeand amortization of deferred financing costs to separate line items on theconsolidated income statement.

 

All amounts inthe accompanying notes have been restated or reclassified for these restatementadjustments.  The following tablespresent the consolidated balance sheets as of March 31, 2004 and December 31,2003 as previously reported and as restated, and the consolidated statements ofincome for the three months ended March 31, 2004 and 2003 as previouslyreported and as restated and the consolidated statement of cash flows for thethree months ended March 31, 2004 as previously reported and asrestated.  The tables also reflect the amountsreported for changes in stockholders’ equity for the three months ended March 31,2004, as previously reported and as restated. The impact of these restatements was to reducenet income per basic and diluted share by $0.01 and $0.04 for the three monthsended March 31, 2004 and 2003, respectively.

 

15

----

 

**Balance Sheet Amounts (in thousands):**

 
| ** **                                                                             | ** ** | **March 31, 2004**                                  | ** ** |
|----------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                             | ** ** | **As Previously Reported**                          | ** ** | **Adjustments** | ** ** | **As Restated** | ** ** |
| ** **                                                                             | ** ** | **(in thousands, except share and per share data)** | ** ** |
| **ASSETS**                                                                             |       |                                                |       |   |   |   |   |
| Current assets:                                                                        |       |                                                |       |   |   |   |   |
| Cash and cash equivalents                                                              |       | $                                                   | 49,115     |   | $ | — |   | $ | 49,115 |   |
| Restricted cash                                                                        |       | 2,500                                               |       | (2,500 | )**(1)** | — |   |
| Marketable securities                                                                  |       | 4,430                                               |       | — |   | 4,430 |   |
| Restricted marketable securities                                                       |       | —                                              |       | 2,500 | **(1)** | 2,500 |   |
| Receivables, net                                                                       |       | 24,751                                              |       | 63 | **(2)** | 24,814 |   |
| Inventories                                                                            |       | 1,448                                               |       | — |   | 1,448 |   |
| Prepaid replacement natural gas                                                        |       | 15                                                  |       | — |   | 15 |   |
| Deferred income taxes                                                                  |       | 230                                                 |       | (69 | )**(3)** | 161 |   |
| Other current assets                                                                   |       | 1,047                                               |       | — |   | 1,047 |   |
| Total current  assets                                                                  |       | 83,536                                              |       | (6 | ) | 83,530 |   |
|                                                                                   |       |                                                |       |   |   |   |   |
| Property,  plant and equipment                                                         |       | 234,756                                             |       | (706 | )**(4)** | 234,050 |   |
| Less:  accumulated depreciation, depletion and amortization                            |       | (47,432                                             | )          | 451 | **(5)** | (46,981 | ) |
| Total property, plant and equipment, net                                               |       | 187,324                                             |       | (255 | ) | 187,069 |   |
|                                                                                   |       |                                                |       |   |   |   |   |
| Other  assets:                                                                         |       |                                                |       |   |   |   |   |
| Intangible assets, net                                                                 |       | 3,507                                               |       | (3,337 | )**(6)** | 170 |   |
| Deferred financing costs, net                                                          |       | —                                              |       | 3,507 | **(7)** | 3,507 |   |
| Investment in and advances to equity  investee                                         |       | 245                                                 |       | — |   | 245 |   |
| Note receivables from officers and  directors                                          |       | 207                                                 |       | — |   | 207 |   |
| Other assets                                                                           |       | 65                                                  |       | (42 | )**(8)** | 23 |   |
| Total assets                                                                           |       | $                                                   | 274,884    |   | $ | (133 | ) | $ | 274,751 |   |
| ** **                                                                             |       |                                                |       |   |   |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                          |       |                                                |       |   |   |   |   |
|                                                                                   |       |                                                |       |   |   |   |   |
| Current  liabilities:                                                                  |       |                                                |       |   |   |   |   |
| Accounts payable                                                                       |       | $                                                   | 22,893     |   | $ | 403 | **(9)** | $ | 23,296 |   |
| Accrued liabilities                                                                    |       | 14,284                                              |       | (455 | )**(10)** | 13,829 |   |
| Fair value of derivative instruments                                                   |       | 747                                                 |       | — |   | 747 |   |
| Total current liabilities                                                              |       | 37,924                                              |       | (52 | ) | 37,872 |   |
|                                                                                   |       |                                                |       |   |   |   |   |
| Deferred  income taxes                                                                 |       | 7,048                                               |       | (1,247 | )**(11)** | 5,801 |   |
| Long-term  debt                                                                        |       | 84,200                                              |       | — |   | 84,200 |   |
| Fair value  of derivative instruments                                                  |       | 154                                                 |       | — |   | 154 |   |
| Other  long-term liabilities                                                           |       | 504                                                 |       | 2,779 | **(12)** | 3,283 |   |
| Non-controlling  interest in consolidated subsidiary                                   |       | 94,797                                              |       | (624 | )**(13)** | 94,173 |   |
|                                                                                   |       |                                                |       |   |   |   |   |
| Commitments  and contingencies                                                         |       |                                                |       |   |   |   |   |
|                                                                                   |       |                                                |       |   |   |   |   |
| 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, 10,732,017 shares issued |       | 108                                                 |       | — |   | 108 |   |
| Additional paid-in capital                                                             |       | 51,720                                              |       | (1,318 | )**(14)** | 50,402 |   |
| Accumulated deficit                                                                    |       | (329                                                | )          | 329 | **(15)** | — |   |
| Accumulated other Comprehensive loss, net  of tax                                      |       | (768                                                | )          | — |   | (768 | ) |
| Treasury stock at cost, 71,328 shares                                                  |       | (474                                                | )          | — |   | (474 | ) |
| Total stockholders’ equity                                                        |       | 50,257                                              |       | (989 | ) | 49,268 |   |
| Total liabilities and stockholders’ equity                                        |       | $                                                   | 274,884    |   | $ | (133 | ) | $ | 274,751 |   |

 

16

----

 
| ** **                                                                             | ** ** | **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 | )**(16)** | — |   |
| Restricted marketable securities                                                       |       | —                                              |       | 2,500 | **(16)** | 2,500 |   |
| Receivables, net                                                                       |       | 30,750                                              |       | (840 | )**(17)** | 29,910 |   |
| Inventories                                                                            |       | 4,815                                               |       | 733 | **(18)** | 5,548 |   |
| Prepaid replacement natural gas                                                        |       | 5,940                                               |       | — |   | 5,940 |   |
| Deferred income taxes                                                                  |       | 603                                                 |       | (69 | )**(19)** | 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 and amortization                            |       | (44,134                                             | )          | — |   | (44,134 | ) |
| Total property, plant and equipment, net                                               |       | 188,123                                             |       | — |   | 188,123 |   |
|                                                                                   |       |                                                |       |   |   |   |   |
| Other  assets:                                                                         |       |                                                |       |   |   |   |   |
| Intangible assets, net                                                                 |       | 3,831                                               |       | (3,747 | )**(20)** | 84 |   |
| Deferred financing costs, net                                                          |       | —                                              |       | 3,747 | **(20)** | 3,747 |   |
| Deferred offering costs and other, net                                                 |       | 1,037                                               |       | (42 | )**(21)** | 995 |   |
| Investment in and advances to equity  investee                                         |       | 250                                                 |       | — |   | 250 |   |
| Note receivables from officers                                                         |       | 217                                                 |       | — |   | 217 |   |
| Total assets                                                                           |       | $                                                   | 280,713    |   | $ | (218 | ) | $ | 280,495 |   |
| ** **                                                                             |       |                                                |       |   |   |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                          |       |                                                |       |   |   |   |   |
|                                                                                   |       |                                                |       |   |   |   |   |
| Current  liabilities:                                                                  |       |                                                |       |   |   |   |   |
| Accounts payable                                                                       |       | $                                                   | 24,052     |   | $ | — |   | $ | 24,052 |   |
| Accrued liabilities                                                                    |       | 16,751                                              |       | (240 | )**(22)** | 16,511 |   |
| Fair value of derivative instruments                                                   |       | 1,769                                               |       | — |   | 1,769 |   |
| Total current liabilities                                                              |       | 42,572                                              |       | (240 | ) | 42,332 |   |
|                                                                                   |       |                                                |       |   |   |   |   |
| Deferred  income taxes                                                                 |       | 6,346                                               |       | (752 | )**(23)** | 5,594 |   |
| Long-term  debt                                                                        |       | 126,200                                             |       | — |   | 126,200 |   |
| Fair value  of derivative instruments                                                  |       | 125                                                 |       | — |   | 125 |   |
| Other  long-term liabilities                                                           |       | 504                                                 |       | 2,397 | **(24)** | 2,901 |   |
| Non-controlling  interest in consolidated subsidiary                                   |       | 52,782                                              |       | (353 | )**(25)** | 52,429 |   |
|                                                                                   |       |                                                |       |   |   |   |   |
| Commitments  and contingencies                                                         |       |                                                |       |   |   |   |   |
|                                                                                   |       |                                                |       |   |   |   |   |
| 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 |   |

 

17

----

 

**Income Statement Amounts:**

 
| ** **                                                                                        | ** ** | **Three Months Ended March 31, 2004** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                        | ** ** | **As Previously Reported**                 | ** ** | **Adjustments** | ** ** | **As Restated** | ** ** |
| ** **                                                                                        | ** ** | **(in thousands, except per share data)**  | ** ** |
|                                                                                              |       |                                       |       |   |   |   |   |
| Revenues                                                                                          |       | $                                          | 93,426     |   | $ | 274 | **(26)** | $ | 93,700 |   |
|                                                                                              |       |                                       |       |   |   |   |   |
| Operating  expenses:                                                                              |       |                                       |       |   |   |   |   |
| Purchased product costs                                                                           |       | 75,135                                     |       | 353 | **(27)** | 75,488 |   |
| Facility expenses                                                                                 |       | 5,975                                      |       | 111 | **(28)** | 6,086 |   |
| Selling, general and administrative  expenses                                                     |       | 4,268                                      |       | 1,046 | **(29)** | 5,314 |   |
| Depreciation                                                                                      |       | 3,458                                      |       | 70 | **(30)** | 3,528 |   |
| Amortization of intangible assets                                                                 |       | —                                     |       | 34 | **(31)** | 34 |   |
| Total operating expenses                                                                          |       | 88,836                                     |       | 1,614 |   | 90,450 |   |
|                                                                                              |       |                                       |       |   |   |   |   |
| Income from operations                                                                            |       | 4,590                                      |       | (1,340 | ) | 3,250 |   |
|                                                                                              |       |                                       |       |   |   |   |   |
| Other income  (expense):                                                                          |       |                                       |       |   |   |   |   |
| Interest expense, net                                                                             |       | (1,358                                     | )          | 363 | **(32)** | (995 | ) |
| Amortization of deferred financing costs (a  component of interest expense)                       |       | —                                     |       | (307 | )**(33)** | (307 | ) |
| Other income                                                                                      |       | 62                                         |       | (37 | )**(34)** | 25 |   |
| Income before non-controlling interest in  net income of consolidated subsidiary and income taxes |       | 3,294                                      |       | (1,321 | ) | 1,973 |   |
|                                                                                              |       |                                       |       |   |   |   |   |
| Provision  for income taxes:                                                                      |       |                                       |       |   |   |   |   |
| Current                                                                                           |       | 115                                        |       | (129 | ) | (14 | ) |
| Deferred                                                                                          |       | 512                                        |       | (554 | ) | (42 | ) |
| Provision for income taxes                                                                        |       | 627                                        |       | (683 | )**(35)** | (56 | ) |
|                                                                                              |       |                                       |       |   |   |   |   |
| Non-controlling  interest in net income of consolidated subsidiary                                |       | (1,693                                     | )          | 384 | **(36)** | (1,309 | ) |
|                                                                                              |       |                                       |       |   |   |   |   |
| Income from continuing operations                                                                 |       | 974                                        |       | (254 | ) | 720 |   |
|                                                                                              |       |                                       |       |   |   |   |   |
| Loss from discontinued exploration and  production operations (net of income tax benefit of $104) |       | (177                                       | )          | 177 | **(37)** | — |   |
|                                                                                              |       |                                       |       |   |   |   |   |
| Net income                                                                                        |       | $                                          | 797        |   | $ | (77 | ) | $ | 720 |   |
|                                                                                              |       |                                       |       |   |   |   |   |
| Income from  continuing operations per share:                                                     |       |                                       |       |   |   |   |   |
| Basic                                                                                             |       | $                                          | 0.09       |   | $ | (0.02 | ) | $ | 0.07 |   |
| Diluted                                                                                           |       | $                                          | 0.09       |   | $ | (0.02 | ) | $ | 0.07 |   |
| Net income  per share:                                                                            |       |                                       |       |   |   |   |   |
| Basic                                                                                             |       | $                                          | 0.08       |   | $ | (0.01 | ) | $ | 0.07 |   |
| Diluted                                                                                           |       | $                                          | 0.08       |   | $ | (0.01 | ) | $ | 0.07 |   |
| Weighted  average number of outstanding shares of common stock:                                   |       |                                       |       |   |   |   |   |
| Basic                                                                                             |       | 10,577                                     |       |   |   | 10,577 |   |
| Diluted                                                                                           |       | 10,595                                     |       |   |   | 10,595 |   |
| Cash  dividend per common share                                                                   |       | $                                          | 0.455      |   |   |   | $ | 0.455 |   |

 

18

----

 
| ** **                                                                                              | ** ** | **Three Months Ended March 31, 2003** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                              | ** ** | **As Previously  Reported**                | ** ** | **Adjustments** |   | **As Restated** | ** ** |
| ** **                                                                                              | ** ** | **(in thousands, except per share data)**  | ** ** |
|                                                                                                    |       |                                       |       |   |   |   |   |
| Revenues                                                                                                |       | $                                          | 50,651     |   | $ | 580 | **(38)** | $ | 51,231 |   |
|                                                                                                    |       |                                       |       |   |   |   |   |
| Operating expenses:                                                                                     |       |                                       |       |   |   |   |   |
| Purchased product costs                                                                                 |       | 46,003                                     |       | — |   | 46,003 |   |
| Facility expenses                                                                                       |       | 4,362                                      |       | 270 | **(39)** | 4,632 |   |
| Selling, general and administrative  expenses                                                           |       | 2,550                                      |       | 74 | **(40)** | 2,624 |   |
| Depreciation                                                                                            |       | 1,530                                      |       | 72 | **(41)** | 1,602 |   |
| Total operating expenses                                                                                |       | 54,445                                     |       | 416 |   | 54,861 |   |
|                                                                                                    |       |                                       |       |   |   |   |   |
| Loss from operations                                                                                    |       | (3,794                                     | )          | 164 |   | (3,630 | ) |
|                                                                                                    |       |                                       |       |   |   |   |   |
| Other income (expense):                                                                                 |       |                                       |       |   |   |   |   |
| Interest expense, net                                                                                   |       | (1,063                                     | )          | 309 | **(42)** | (754 | ) |
| Amortization of deferred financing costs (a  component of interest expense)                             |       | —                                     |       | (309 | )**(42)** | (309 | ) |
| Other expense                                                                                           |       | (15                                        | )          | — |   | (15 | ) |
| Loss before non-controlling interest in net  income of consolidated subsidiary and income taxes         |       | (4,872                                     | )          | 164 |   | (4,708 | ) |
|                                                                                                    |       |                                       |       |   |   |   |   |
| Benefit for income taxes:                                                                               |       |                                       |       |   |   |   |   |
| Current                                                                                                 |       | (170                                       | )          | (1,974 | ) | (2,144 | ) |
| Deferred                                                                                                |       | (2,281                                     | )          | 2,374 |   | 93 |   |
| Benefit for income taxes                                                                                |       | (2,451                                     | )          | 400 | **(43)** | (2,051 | ) |
|                                                                                                    |       |                                       |       |   |   |   |   |
| Non-controlling interest in net income of  consolidated subsidiary                                      |       | (874                                       | )          | 17 | **(44)** | (857 | ) |
|                                                                                                    |       |                                       |       |   |   |   |   |
| Loss from continuing operations                                                                         |       | (3,295                                     | )          | (219 | ) | (3,514 | ) |
|                                                                                                    |       |                                       |       |   |   |   |   |
| Income from discontinued exploration and  production operations (net of income tax provision of $1,143) |       | 2,282                                      |       | (152 | )**(45)** | 2,130 |   |
|                                                                                                    |       |                                       |       |   |   |   |   |
| Loss before cumulative effect of accounting  change                                                     |       | (1,013                                     | )          | (371 | ) | (1,384 | ) |
|                                                                                                    |       |                                       |       |   |   |   |   |
| Cumulative effect of change in accounting  for asset retirement obligations, net of tax                 |       | (29                                        | )          | — |   | (29 | ) |
| Net loss                                                                                                |       | $                                          | (1,042     | ) | $ | (371 | ) | $ | (1,413 | ) |
|                                                                                                    |       |                                       |       |   |   |   |   |
| Loss from continuing operations per share:                                                              |       |                                       |       |   |   |   |   |
| Basic                                                                                                   |       | $                                          | (0.32      | ) | $ | (0.02 | ) | $ | (0.34 | ) |
| Diluted                                                                                                 |       | $                                          | (0.32      | ) | $ | (0.02 | ) | $ | (0.34 | ) |
| Net loss per share:                                                                                     |       |                                       |       |   |   |   |   |
| Basic                                                                                                   |       | $                                          | (0.10      | ) | $ | (0.04 | ) | $ | (0.14 | ) |
| Diluted                                                                                                 |       | $                                          | (0.10      | ) | $ | (0.04 | ) | $ | (0.14 | ) |
| Weighted average number of outstanding  shares of common stock:                                         |       |                                       |       |   |   |   |   |
| Basic                                                                                                   |       | 10,298                                     |       |   |   | 10,298 |   |
| Diluted                                                                                                 |       | 10,302                                     |       |   |   | 10,302 |   |

 

19

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**Cash Flow Amounts:**

 
| ** **                                                                                                                           | ** ** | **Three Months Ended March 31, 2004** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                                                           | ** ** | **As Previously Reported**                 | ** ** | **Adjustments** |   | **As Restated** | ** ** |
| ** **                                                                                                                           | ** ** | **(in thousands)**                         | ** ** |
| **Cash  flows from operating activities:**                                                                                           |       |                                       |       |   |   |   |   |
| Net income                                                                                                                           |       | $                                          | 797        |   | $ | (77 | ) | $ | 720 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities:                                                   |       |                                       |       |   |   |   |   |
| Depreciation                                                                                                                         |       | 3,640                                      |       | (112 | ) | 3,528 |   |
| Gain from sale of property, plant and  equipment                                                                                     |       | (63                                        | )          | — |   | (63 | ) |
| Amortization of deferred financing costs                                                                                             |       | 312                                        |       | (5 | ) | 307 |   |
| Amortization of intangible assets                                                                                                    |       | —                                     |       | 34 |   | 34 |   |
| Stock option compensation expense                                                                                                    |       | —                                     |       | 358 |   | 358 |   |
| Restricted unit compensation expense                                                                                                 |       | 374                                        |       | — |   | 374 |   |
| Participation Plan compensation expense                                                                                              |       | —                                     |       | 402 |   | 402 |   |
| Contribution of treasury shares to 401(k)  benefit plan                                                                              |       | —                                     |       | 72 |   | 72 |   |
| Equity in investee losses                                                                                                            |       | 5                                          |       | — |   | 5 |   |
| Non-controlling interest in net income of  consolidated subsidiary                                                                   |       | 1,693                                      |       | (384 | ) | 1,309 |   |
| Unrealized losses on derivative instrument                                                                                           |       | 476                                        |       | — |   | 476 |   |
| Deferred income taxes                                                                                                                |       | 455                                        |       | (496 | ) | (41 | ) |
| Changes in operating assets and  liabilities:                                                                                        |       |                                       |       |   |   |   |   |
| Decrease in receivables                                                                                                              |       | 5,999                                      |       | (903 | ) | 5,096 |   |
| Decrease in inventories                                                                                                              |       | 3,367                                      |       | 733 |   | 4,100 |   |
| Decrease in prepaid replacement gas and  other assets                                                                                |       | 5,925                                      |       | — |   | 5,925 |   |
| Increase in other current assets                                                                                                     |       | (544                                       | )          | 9 |   | (535 | ) |
| Decrease in accounts payable and accrued  liabilities                                                                                |       | (3,574                                     | )          | (1,120 | ) | (4,694 | ) |
| Net cash flow provided by operating  activities                                                                                      |       | 18,862                                     |       | (1,489 | )**(46)** | 17,373 |   |
|                                                                                                                                 |       |                                       |       |   |   |   |   |
| **Cash  flows from investing activities:**                                                                                           |       |                                       |       |   |   |   |   |
| Payments for marketable securities                                                                                                   |       | (4,277                                     | )          | — |   | (4,277 | ) |
| Capital expenditures                                                                                                                 |       | (2,863                                     | )          | 1,234 |   | (1,629 | ) |
| Proceeds from sale of assets                                                                                                         |       | 94                                         |       | — |   | 94 |   |
| Proceeds on financing lease receivable                                                                                               |       | —                                     |       | 133 |   | 133 |   |
| Other                                                                                                                                |       | 3                                          |       | — |   | 3 |   |
| Net cash used in investing activities                                                                                                |       | (7,043                                     | )          | 1,367 | **(47)** | (5,676 | ) |
|                                                                                                                                 |       |                                       |       |   | ** ** |   |   |
| **Cash flows from financing activities:**                                                                                            |       |                                       |       |   |   |   |   |
| Repayment of long-term debt                                                                                                          |       | (42,000                                    | )          | — |   | (42,000 | ) |
| Proceeds from MarkWest Energy Partners’  secondary public offering                                                              |       | 44,102                                     |       | — |   | 44,102 |   |
| Distribution to MarkWest Energy Partners’  unitholders                                                                          |       | (3,054                                     | )          | 47 |   | (3,007 | ) |
| Exercise of stock options                                                                                                            |       | 1,017                                      |       | — |   | 1,017 |   |
| Acquisition of general partner’s membership  interests and MarkWest Energy Partners’ subordinated units from related party |       | (147                                       | )          | 147 |   | — |   |
| Repurchase of treasury shares                                                                                                        |       | 36                                         |       | (72 | ) | (36 | ) |
| Payment of dividend                                                                                                                  |       | (4,802                                     | )          | — |   | (4,802 | ) |
| Net cash used in financing activities                                                                                                |       | (4,848                                     | )          | 122 | **(48)** | (4,726 | ) |
|                                                                                                                                 |       |                                       |       |   |   |   |   |
| Net increase  in cash and cash equivalents                                                                                           |       | 6,971                                      |       | — |   | 6,971 |   |
| Cash and  cash equivalents at beginning of period                                                                                    |       | 42,144                                     |       | — |   | 42,144 |   |
| Cash and  cash equivalents at end of period                                                                                          |       | $                                          | 49,115     |   | $ | — |   | $ | 49,115 |   |
|                                                                                                                                 |       |                                       |       |   |   |   |   |
| **Supplemental  cash flow information:**                                                                                             |       |                                       |       |   |   |   |   |
| Construction  projects in progress obligation                                                                                        |       | $                                          | —     |   | $ | 1,199 |   | $ | 1,199 |   |
| Cash paid  for interest, net of amount capitalized                                                                                   |       | $                                          | —     |   | $ | 1,459 |   | $ | 1,459 |   |

 

20

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| ** **                                                                       | ** ** | **Three Months Ended March 31, 2003** | ** ** |
|----------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                       | ** ** | **As Previously Reported**                 | ** ** | **Adjustments** | ** ** | **As Restated** | ** ** |
| ** **                                                                       | ** ** | **(in thousands)**                         | ** ** |
| **Cash  flows from operating activities:**                                       |       |                                       |       |   |   |   |   |
| Net loss                                                                         |       | $                                          | (1,042     | ) | $ | (371 | ) | $ | (1,413 | ) |
| Adjustments to reconcile net loss to net  cash provided by operating activities: |       |                                       |       |   |   |   |   |
| Cumulative effect of change in accounting                                        |       | 29                                         |       | — |   | 29 |   |
| Depreciation and depletion                                                       |       | 5,098                                      |       | — |   | 5,098 |   |
| Amortization of deferred financing costs                                         |       | 309                                        |       | — |   | 309 |   |
| Restricted unit compensation expense                                             |       | 212                                        |       | — |   | 212 |   |
| Participation Plan compensation expense                                          |       | —                                     |       | 53 |   | 53 |   |
| Contribution of treasury shares to 401(k)  benefit plan                          |       | —                                     |       | 91 |   | 91 |   |
| Non-controlling interest in net income of  consolidated subsidiary               |       | 874                                        |       | (17 | ) | 857 |   |
| Unrealized gains on derivative instruments                                       |       | (922                                       | )          | — |   | (922 | ) |
| Reclassification of Enron hedges to  purchased gas costs                         |       | (18                                        | )          | — |   | (18 | ) |
| Deferred income taxes                                                            |       | (1,199                                     | )          | 2,379 |   | 1,180 |   |
| Other                                                                            |       | 28                                         |       | — |   | 28 |   |
| Changes in operating assets and  liabilities:                                    |       |                                       |       |   |   |   |   |
| Increase in receivables                                                          |       | (3,844                                     | )          | — |   | (3,844 | ) |
| Decrease in inventories                                                          |       | 1,124                                      |       | — |   | 1,124 |   |
| Increase in prepaid replacement natural gas                                      |       | (873                                       | )          | (34 | ) | (907 | ) |
| Increase in other assets                                                         |       | —                                     |       | 34 |   | 34 |   |
| Increase in accounts payable and accrued  liabilities                            |       | 9,773                                      |       | (2,065 | ) | 7,708 |   |
| Net cash flow provided by operating activities                                   |       | 9,549                                      |       | 70 | **(49)** | 9,619 |   |
|                                                                             |       |                                       |       |   |   |   |   |
| **Cash  flows from investing activities:**                                       |       |                                       |       |   |   |   |   |
| Pinnacle acquisition, net of cash acquired                                       |       | (38,238                                    | )          | — |   | (38,238 | ) |
| Capital expenditures                                                             |       | (6,735                                     | )          | — |   | (6,735 | ) |
| Proceeds from sale of assets                                                     |       | 24                                         |       | — |   | 24 |   |
| Net cash used in investing activities                                            |       | (44,949                                    | )          | — |   | (44,949 | ) |
|                                                                             |       |                                       |       |   |   |   |   |
| **Cash flows from financing activities:**                                        |       |                                       |       |   |   |   |   |
| Proceeds from long-term debt                                                     |       | 45,700                                     |       | — |   | 45,700 |   |
| Repayment of long-term debt                                                      |       | (6,500                                     | )          | — |   | (6,500 | ) |
| Payments for debt issuance costs                                                 |       | (810                                       | )          | — |   | (810 | ) |
| Distribution to MarkWest Energy Partners’  unitholders                      |       | (1,530                                     | )          | 21 |   | (1,509 | ) |
| Repurchase of treasury shares                                                    |       | (76                                        | )          | (91 | ) | (167 | ) |
| Net cash provided by financing activities                                        |       | 36,784                                     |       | (70 | )**(49)** | 36,714 |   |
|                                                                             |       |                                       |       |   |   |   |   |
| Effect of  exchange rate on changes in cash                                      |       | 114                                        |       | — |   | 114 |   |
|                                                                             |       |                                       |       |   |   |   |   |
| Net increase  in cash and cash equivalents                                       |       | 1,498                                      |       | — |   | 1,498 |   |
| Cash and  cash equivalents at beginning of period                                |       | 6,410                                      |       | — |   | 6,410 |   |
| Cash and  cash equivalents at end of period                                      |       | $                                          | 7,908      |   | $ | — |   | $ | 7,908 |   |
|                                                                             |       |                                       |       |   |   |   |   |
| **Supplemental  cash flow information:**                                         |       |                                       |       |   |   |   |   |
| Cash paid  for interest                                                          |       | $                                          | —     |   | $ | 382 | **(50)** | $ | 382 |   |

 

21

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**Changes in Stockholders’ Equity Amounts:**

 
| ** **                                                                           | ** ** | **Shares  of  Common  Stock** | ** ** | **Shares  of  Treasury  Stock** | ** ** | **Common  Stock** | ** ** | **Additional  Paid-In  Capital** | ** ** | **Accumulated  Deficit** | ** ** | **Accumulated  Other Comprehensive Loss** | ** ** | **Treasury  Stock** | ** ** | **Total  Stockholders’  Equity** | ** ** |
|--------------------------------------------------------------------------------------|------------|-------------------------------|------------|---------------------------------|------------|-------------------|------------|----------------------------------|------------|--------------------------|------------|-------------------------------------------|------------|---------------------|------------|---------------------------------------|------------|
| ** **                                                                           | ** ** | **(in  thousands)**           | ** ** |
| Balance, as  previously reported, March 31, 2004                                |       | 9,756                         |       | (71                             | )          | $                 | 98         |                             | $          | 51,730                   |       | $                                         | (329       | )                   | $          | (768                                  | )          | $ | (474 | ) | $ | 50,257 |   |
|                                                                                 |       |                          |       |                            |       |              |       |                             |       |                     |       |                                      |       |                |       |                                  |       |
| Stock dividend                                                                       |       | 976                           |       | —                          |       | 10                |       | (10                              | )          | —                   |       | —                                    |       | —              |       | —                                |       |
|                                                                                 |       |                          |       |                            |       |              |       |                             |       |                     |       |                                      |       |                |       |                                  |       |
| Reclassifications  of dividends paid                                                 |       | —                        |       | —                          |       | —            |       | (1,676                           | )          | 1,676                    |       | —                                    |       | —              |       | —                                |       |
|                                                                                 |       |                          |       |                            |       |              |       |                             |       |                     |       |                                      |       |                |       |                                  |       |
| Modification of  stock options                                                       |       | —                        |       | —                          |       | —            |       | 358                              |       | —                   |       | —                                    |       | —              |       | 358                                   |       |
|                                                                                 |       |                          |       |                            |       |              |       |                             |       |                     |       |                                      |       |                |       |                                  |       |
| 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  adjustment to net income for the three months ended March 31, 2004 |       | —                        |       | —                          |       | —            |       | —                           |       | (77                      | )          | —                                    |       | —              |       | (77                                   | )          |
| Balance, as  restated, March 31, 2004                                           |       | 10,732                        |       | (71                             | )          | $                 | 108        |                             | $          | 50,402                   |       | $                                         | —     |                | $          | (768                                  | )          | $ | (474 | ) | $ | 49,268 |   |

 

----

***March 31, 2004 Balance Sheet***

 

**(1).****                             **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.

 

**(2).****                             **Receivablesnet, were increased by $0.06 million to correct the amounts recorded foraccrued revenue.

 

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

 

**(4).****                             **Property, plant and equipment,net, were reduced by $0.7 million. During 2003, as a part of the Pinnacle acquisition, the Partnershipacquired the Blackhawk pipeline.  Thepipeline was subject to a lease with a third party.  The Partnership incorrectly recorded thepipeline as property and equipment and depreciated it over its estimated usefullife.  The lease has now been accountedfor as a sales-type financing lease.

 

**(5).****                             **Accumulateddepreciation was reduced by $0.5 million to reverse the depreciation previouslyrecorded on the Blackhawk pipeline.

 

**(6).****                             **Intangible assets, net weredecreased by $3.3 million primarily as a result of the following restatementadjustments:

 

•                  a decrease of $3.5 million toreclassify deferred financing costs, net to a separate line item on theconsolidated balance sheet.

 

22

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•                  an increase of $0.2 million torecord the remaining balance of the financing lease receivable relating to thelease agreement for the Blackhawk pipeline. Under the terms of the lease agreement the pipeline reverted to the lesseein April 2004.

 

**(7).****                             **Deferred financing costs, netwere increased by $3.5 million as a result of the reclassification of thedeferred financing costs, net from intangible assets, net to a separate lineitem on the consolidated balance sheet.

 

**(8).**                              Other assets were decreased by $0.04 million as a result ofreversing an asset that was previously recorded with the repurchase of thePartnership’s general partner interest and the Partnership’s subordinated unitsby the Company under the Participation Plan. The Participation Plan has now been accounted for as a compensatoryplan.

 

**(9).**          Accounts payable were increased by $0.4 million to correctamounts recorded for accrued product costs.

 

**(10).****                      **Accruedliabilities were decreased by $0.5 million primarily as a result of thefollowing restatement adjustments:

 

•                  adecrease of $0.3 million to reverse deferred income as a result of accountingfor 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 loaned the employees and directors a portionof the purchase price.

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

•                  adecrease of $0.2 million to reflect the current tax effect of the restatementadjustments

•                  anincrease of $0.1 million for other miscellaneous adjustments.

 

**(11).****                      **Thenon-current deferred income tax liability was decreased by $1.2 million toreflect the tax effect of the restatement adjustments.

 

**(12).       **Otherlong-term liabilities were increased by $2.8 million to reflect compensationexpense accrued under the Participation Plan.

 

**(13).       **Non-controllinginterest in consolidated subsidiary was decreased by $0.6 million to reflectthe portion of the restatement adjustments attributable to the non-controllinginterest in MarkWest Energy Partners, and to eliminate the effect of thesubordinated units and general partner interests owned by employees anddirectors under the Participation Plan, which were previously accounted for asnon-controlling interests.    The ParticipationPlan is now accounted for as a compensatory arrangement and as a result theCompany records a separate liability for the fair value of the subordinatedunits and general partner interests held by participants in the Plan.

 

**(14).       **Additionalpaid-in capital decreased by $1.3 million as a result of the followingrestatement adjustments:

 

•                  adecrease of $1.7 million as a result of restating dividends paid during thethree months ended March 31, 2004 from retained earnings to additionalpaid in capital for dividends distributed in excess of accumulated earnings.

•                  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.

 

**(15).       **Accumulatedearnings increased $0.3 million as a result of the following restatementadjustments:

 

•                  anincrease of $1.7 million as a result of restating dividends paid from retainedearnings to additional paid in capital for dividends distributed in excess ofaccumulated earnings.

 

23

----

 

•                  adecrease 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.

•                  adecrease of $0.1 million to reflect the effect of the restatement adjustmentson net income for the three months ended March 31, 2004.

 

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

 

**(16).       **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.

 

**(17).       **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.

 

**(18).       **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.

 

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

 

**(20).       **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.

 

**(21).       **Other assets were decreased by $0.04million to eliminate the excess cost recorded on the repurchase of an interestin the Partnership’s general partner and subordinated Partnership unitspreviously sold to an officer under the Participation Plan.  The Participation Plan has now been accountedfor as a compensatory arrangement and payments to repurchase the generalpartnership interests and subordinated units are applied against the liabilityrecorded for the Participation Plan.

 

**(22).       **Accruedliabilities were decreased by $0.2 million primarily as a result of thefollowing restatement adjustments:

 

•                  adecrease 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.

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

 

**(23).       **The non-current deferred incometax liability was decreased by $0.8 million to reflect the tax effect of therestatement adjustments.

 

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

 

**(25).       **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 interests owned by employeesand directors under the Participation Plan, which were previously accounted foras 

 

24

----

 

non-controllinginterests.  The Participation Plan is nowaccounted for as a compensatory arrangement and as a result the Company recordsa separate liability for the fair value of the subordinated units and generalpartner interests held by participants in the Plan.

 

***Three Months Ended March 31, 2004 Income Statement***

 

**(26).       **Revenues for the first quarterof 2004 increased by $0.3 million primarily as a result of the followingrestatement adjustments:

 

•                  an increase of $0.3 million toreclassify gas revenues from discontinued operations to continuingoperations.  The Company retained itsinterests in three wells in Michigan, which it originally intended to disposeof in connection with the discontinuance of its exploration and productionbusiness.

•                  an increase of $0.08 million torecord natural gas inventory at cost. Previously the inventory was incorrectly identified as a pipelineimbalance and was recorded at market value.

•                  an increase of $0.06 million tocorrect the amounts recorded for accrued revenue.

•                  a decrease of $0.03 million torestate the settlement of a commodity hedge from interest expense to revenue.

•                  a decrease of $0.1 million toreduce revenue for the proceeds on the Blackhawk financing lease receivable.

 

**(27).       **Purchased product costs for thefirst quarter of 2004 increased by $0.4 million to correct amounts recorded foraccrued product costs.

 

**(28).       **Facility expenses increased by$0.11 million for the first quarter of 2004 primarily as a result of thefollowing restatement adjustments:

 

•                  an increase of $0.14 million toreclassify lease operating expenses from discontinued operations to continuingoperations.

•                  a decrease of $0.08 million tocorrect amounts recorded for accrued property taxes.

•                  an increase of $0.03 million torecord storage fees related to inventory the Partnership held for sale.

•                  an increase of $0.02 million torecord repair expense improperly capitalized as property, plant and equipment.

 

**(29).       **Selling, general andadministrative expenses increased by $1.1 million for the first quarter of 2004primarily as a result of the following restatement adjustments:

 

•                  an increase of $0.5 million toreflect the compensation expense under the Participation Plan.

•                  anincrease of $0.4 to record compensation for the modification of stock optionsfor two officers who terminated their employment with the Company but whocontinued to serve on the Company’s Board of Directors.

•                  an increase of $0.2 million toreclassify expenses related to the retained exploration and productionoperations from discontinued operations to continuing operations.

 

**(30).       **Depreciation expense decreasedby $0.1 million for the reversal of depreciation expense previously recorded onthe Blackhawk pipeline.

 

**(31).       **Amortization of intangibleassets expense increased by $0.03 million to record amortization of a customercontract that was acquired with the Blackhawk pipeline.

 

**(32).       **Interest expense decreased by$0.4 million for the first quarter of 2004 primarily as a result of thefollowing restatement adjustments:

 

•                  a decrease of $0.3 million toreclassify amortization of deferred financing costs to a separate line item onthe consolidated income statement.

 

25

----

 

•                  a decrease of $0.03 million tocapitalize interest expense on major construction projects in progress in 2004and other miscellaneous adjustments.

•                  a decrease of $0.03 to restatethe settlement of a commodity hedge from interest expense to revenue.

 

**(33).       **Amortization of deferredfinancing costs increased $0.3 million as a result of the reclassification ofthe amortization of deferred financing costs from interest expense to aseparate line item on the consolidated income statement.

 

**(34).       **Other income decreased by $0.04million to reflect an additional adjustment relating to the financing leasereceivable for the Blackhawk pipeline.

 

**(35).       **The provision for income taxeswas decreased by $0.7 million primarily as a result of the followingrestatement adjustments:

 

•                  a decrease of $0.1 million toreclassify current taxes relating to retained oil and gas operations fromdiscontinued operations to continuing operations.

•                  a decrease of $0.6 million toreflect the tax effect of the restatement adjustments.

 

**(36).       **Non-controllinginterest in consolidated subsidiary was increased by $0.4 million to reflectthe portion of the restatement adjustments attributable to non-controllinginterest in MarkWest Energy Partners, and to eliminate the effect of thesubordinated units and general partner interests held by employees anddirectors under the Participation Plan, which were previously accounted for asnon-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.

 

**(37).       **Loss from discontinuedexploration and production operations was decreased by $0.2 million toreclassify the loss from the retained exploration and production operationsfrom discontinued operations to continuing operations.

 

***Three Months Ended March 31, 2003 Income Statement***

 

**(38).       **Revenues for the first quarterof 2003 increased by $0.6 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.

 

**(39).       **Facility expenses increased by$0.3 million to reclassify expenses related to the retained exploration andproduction operations from discontinued operations to continuing operations.

 

**(40).       **Selling, general andadministrative expense increased by $0.1 million to reflect the compensationexpense under the Participation Plan.

 

**(41).       **Depreciation expense increasedby $0.1 million to reclassify expenses related to the retained exploration andproduction operations from discontinued operations to continuing operations.

 

**(42).       **Interest expense decreased $0.3million and amortization of deferred financing costs increased by acorresponding amount as a result of reclassifying the amortization of deferredfinancing costs from interest expense to a separate line item on theconsolidated income statement.

 

**(43).       **The income tax benefit wasdecreased by $0.4 million primarily as a result of the following restatementadjustments:

 

•                  a decrease of $0.3 million toreflect the tax effect of the restatement adjustments.

 

26

----

 

•                  a decrease of $0.1 million toreclassify current taxes relating to retained oil and gas operations fromdiscontinued operations to continuing operations.

 

**(44).       **Non-controllinginterest in consolidated subsidiary was increased by $0.02 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 held 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.

 

**(45).       **Loss from discontinuedexploration and production operations (net of income tax provision of $1.1million) was decreased by $0.2 million to reclassify the loss from the retainedexploration and production operations from discontinued operations tocontinuing operations.

 

***Three Months Ended March 31, 2004 Cash Flow Statement***

 

**(46).       **Net cash provided by operating activities decreasedby $1.5 million to adjust obligationsfor construction projects in process, to reflect a portion of amounts receivedunder the lease for the Blackhawk pipeline as payments on the financing leasereceivable, to reclassify the contribution of treasury shares to the 401(k)benefit plan from financing activities to operating activities, to recordrepair expense improperly capitalized as property, plant and equipment, toreflect the repurchase of membership interests in the Partnership’s generalpartner and subordinated units in the Partnership from a related party as anoperating activity and to reflect distributions paid under the ParticipationPlan as an operating activity.

 

**(47).       **Net cash used in investing activities decreased by$1.4 million to adjust obligationsfor construction projects in process, to reflect a portion of amounts receivedunder the lease for the Blackhawk pipeline as payments on the financing leasereceivable and to record repair expense improperly capitalized as property,plant and equipment.

 

**(48).       **Netcash used in financing activities decreased by $0.1 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.

 

***Three Months Ended March 31,  2003 Cash Flow Statement***

 

**(49).       **Netcash provided by operating activities increased by $0.1 million and net cashprovided by financing activities decreased by a corresponding amount toreclassify the contribution of treasury shares to the 401(k) benefit plan fromfinancing activities to operating activities and to reflect distributions paidunder the Participation Plan as an operating activity.

 

**(50).****                      **Cashpaid for interest, under supplemental cash flow information, was increased by$0.4 million to disclose cash paid for interest.

 

27

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

 

OnApril 11, 2005, management, after discussion with the Audit Committee ofour Board of Directors, determined that previously issued financial statementsfor the years ended December 31, 2002 and 2003 and for each of the firstthree quarters of 2003 and 2004 should be restated to reflect compensationexpense for 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. Inaddition, certain other adjustments have also been recorded to correct othererrors in the consolidated financial statements, including adjustments toaccruals for revenue and purchased product costs, adjustments for costimproperly 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 record natural gasinventory at cost, an adjustment to properly record restricted marketablesecurities and adjustments to accrued property taxes.  Adjustments were also made to recordcompensation expense as a result of the modification of the provisions of certainstock options for two officers who terminated their employment with the Companybut who continued to serve on its Board of Directors.  Additionally, the Company made an adjustmentto reclassify a portion of dividends paid during the three months ended March 31,2004 from retained earnings to additional paid in capital for the amount ofdividends distributed in excess of accumulated earnings.

 

In addition, on October 28, 2004, theCompany’s Board of Directors declared a stock dividend of one share of MarkWestHydrocarbon’s common stock for each ten shares owned by stockholders.  The stock dividend was paid on November 19,2004 to the stockholders of record as of the close of business on November 9,2004.  Common stock information in this Form 10-Q/Ahas been adjusted to give retroactive effect to the stock dividend paid.  Other less significant adjustments andreclassifications were identified and recorded in conjunction with therestatement process.

 

Referto Note 10, *Restatement andReclassifications of Consolidated Financial Statements*, to theConsolidated Financial Statements in Part 1, Item 1 of this Form 10-Q/Afor further information regarding the restatement of our previously issuedfinancial statements.

 

##### **ManagementOverview of the Quarter Ended March 31, 2004**

##### ** **

MarkWestHydrocarbon reported net income of $0.7 million, or $0.07 per dilutedshare, for the three months ended March 31, 2004, compared to a net lossof $1.4 million, or $0.14 per diluted share, for the first quarter of2003.

 

On April 22, 2004, the board ofdirectors of MarkWest Hydrocarbon declared the Company’s first quarterly cashdividend of $0.023 per share of its common stock, which implies an annualdividend of $0.092 per share. The board of directors declared that the dividendis to be paid on May 19, 2004, to the stockholders of record as of theclose of business on May 5, 2004. The ex-dividend date is May 3,2004. The board announced that its objective is to maintain a regular quarterlydividend, but that any future dividends will be dependent upon the financialperformance of the Company.

 

First quarter2004 results primarily benefited from two events. First, the full-quartercontributions from MarkWest Energy Partners’ 2003 acquisitions increased incomefrom continuing operations by approximately $2.2 million relative to firstquarter 2003.  MarkWest Energy Partnersis our consolidated subsidiary.  Firstquarter 2003 did not include any financial impact from MarkWest Energy Partners’2003 acquisitions except for approximately $50,000, which represents four daysof results from its March 28, 2003, Pinnacle acquisition. Second,healthier margins from our marketing business, primarily due to a favorablepricing environment and a reduction in hedging losses, accounted for anapproximate $7.0 million increase in income from continuing operations. Theseincreases were offset by increases in selling, general and administrativeexpenses due to the significant growth of MarkWest Energy Partners.

 

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## **Our Business**

## ** **

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

 

We are anenergy company primarily focused on growing the value of our investment inMarkWest Energy Partners, L.P., a publicly-traded limited partnership engagedin the gathering, processing and transmission of natural gas, thetransportation, fractionation and storage of natural gas liquids (“NGLs”) andthe gathering and transportation of crude oil. We also market NGLs and naturalgas. We discontinued our exploration and production activities during 2003.

 

Our assets consist almost entirely of ourpartnership interests in MarkWest Energy Partners.  As of March 31, 2004, our partnershipinterests consisted of the following:

 

•                  2,470,996subordinated units, representing a 34.6% limited partner interest in thePartnership; and

•                  A90.2% ownership interest in MarkWest Energy GP, L.L.C., the general partner ofthe Partnership, which owns a 2.0% general partner interest and all of theincentive distribution rights in the Partnership.

 

The Company’s operations are classified into tworeportable segments:

 

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

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

 

During 2003, the Company discontinued itsexploration and production business segment.

 

To better understand our business and theresults of operations discussed below, it is important to have an understandingof 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 recent acquisition activity.

 

***OurRelationship with MarkWest Energy Partners***

 

We spun off the majority of our then-existingnatural gas gathering and processing and NGL transportation, fractionation andstorage assets into MarkWest Energy Partners in May 2002, just before thePartnership completed its initial public offering. At the time of its formationand initial public offering, we entered into four contracts with MarkWestEnergy Partners whereby MarkWest Energy Partners provides midstream services inAppalachia in exchange for a fee. Additionally, MarkWest Energy Partners receives100% of all fee and percent-of-proceeds consideration for the first 10 MMcf/dthat it gathers and processes in Michigan. MarkWest Hydrocarbon retains a 70%net profits interest in the gathering and processing income earned on quarterlypipeline throughput in excess of 10 MMcf/d. In accordance with generallyaccepted accounting principles, MarkWest Energy Partners’ financial results areincluded in our consolidated financial statements.  All intercompany accounts and transactionsare eliminated during consolidation.

 

As a result ofour contracts with MarkWest Energy Partners mentioned above, we are thePartnership’s largest customer, accounting for 22% of its revenues and 38% ofits gross margin (revenues less purchased product costs) for the three monthsended March 31, 2004. We expect we will account for less of MarkWestEnergy Partners’ business in the future as it continues to acquire assets andincrease its customer and business diversification.

 

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Also at the time of the initial publicoffering, we entered into an Omnibus Agreement with MarkWest Energy Partnersand related parties that governs potential competition and indemnificationobligations among the parties.

 

Through our majority ownership in thePartnership’s general partner, we control and operate MarkWest Energy Partners.Our employees are responsible for conducting the Partnership’s business andoperating its assets pursuant to a Services Agreement, which was formalizedeffective January 1, 2004. We receive $5,000 annually from MarkWest EnergyPartners for services provided under the Services Agreement. We also arereimbursed for any reasonable costs incurred in the operation of thePartnership.

 

***OurContracts***

 

Excluding the revenues and gross margin(defined as revenues less purchased product costs) derived from MarkWest EnergyPartners, we generate the majority of our revenues and gross margin from themarketing of NGLs and, to a lesser extent, natural gas.  As compensation for providing processingservices to our Appalachian producers (we have since outsourced these servicesto MarkWest Energy Partners as discussed below), we earn a fee and receivetitle to the NGLs produced. In return, we are required to replace, in drynatural gas, the Btu value of the NGLs extracted. This Btu replacementobligation is referred to in the industry as a “keep-whole” arrangement. Inkeep-whole arrangements, our principal cost is the replacement of the Btusextracted from the gas stream in the form of NGLs or consumed as fuel duringprocessing with dry gas of an equivalent Btu content. The spread between theNGL product sales price and the purchase price of natural gas with anequivalent Btu content is called the “frac spread.” Generally, the frac spreadand, consequently, the operating margins, are favorable under these contracts.In the event natural gas becomes more expensive on a Btu equivalent basis thanNGL products, the cost of keeping the producer “whole” results in operatinglosses.

 

At the closing of MarkWest Energy Partners’initial public offering on May 24, 2002, we outsourced our midstreamservices to the Partnership. Pursuant to the terms of the operating agreements,we retained all the benefits and associated risks of our keep-whole contractswith producers. Our NGL and gas marketing operations were retained by us andnot contributed to MarkWest Energy Partners.

 

Our keep-whole contracts expose us tocommodity price risk, both on the sales side (of NGLs) and on the purchase side(of natural gas), which may increase the volatility of our marketing resultsand cash flows. We attempt to mitigate our commodity price risk through ourhedging program. Under our hedging program, implemented two years ago based inpart on historical pricing data through that point in time, we have incurredsignificant hedging losses. For the three months ended March 31, 2004 and2003, we lost $2.2 million and $7.3 million, respectively, as a result of ourhedging program. The last transactions associated with this unfavorable hedgingprogram settled in April 2004.

 

### ***MarkWest Energy Partners’ Contracts***

 

The Partnership generates the majority of itsrevenues and gross margin (defined as revenues less purchased product costs)from natural gas gathering, processing and transmission, NGL transportation,fractionation and storage, and crude oil gathering and transportation. Whileall of these services constitute midstream energy operations, the Partnershipprovides its services pursuant to four different types of contracts.

 

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

 

30

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prices results in a decline in volumes,however, the Partnership’s revenues from these contracts would be reduced.

 

•                  *Percent-of-proceeds contracts.*  Under percent-of-proceeds contracts, MarkWestEnergy Partners generally gathers and processes natural gas on behalf ofproducers, sells the resulting residue gas and NGLs at market prices and remitsto producers an agreed upon percentage of the proceeds based on an index price.In other cases, instead of remitting cash payments to the producer, thePartnership delivers an agreed upon percentage of the residue gas and NGLs tothe producer and sells the volumes it keeps to third parties at market prices.Under these types of contracts, MarkWest Energy Partners’ revenues and 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, or at a different percentage discount to the index price. With respectto (1) and (3) above, the gross margins the Partnership realizesunder the arrangements decrease in periods of low natural gas prices becausethese gross margins are based on a percentage of the index price. Conversely,MarkWest Energy Partners’ gross margins increase during periods of high naturalgas prices.

 

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

 

Inits current areas of operations, MarkWest Energy Partners has a combination ofcontract types, including limited keep-whole arrangements. The only Partnershipkeep-whole contracts are associated with the Arapaho processing plant that wereassumed as a part of its December 2003 Oklahoma acquisition. However,since the Btu content of the inlet natural gas meets the downstream pipelinespecifications, MarkWest Energy Partners has the option of not extracting NGLsin a low processing margin environment. In addition, approximately 45% of therelated gas-gathering contracts include additional fees to cover plantoperating costs, fuel costs and shrinkage costs in a low processing marginenvironment. Because of its ability to operate the plant in several recoverymodes, including turning it off, and the additional fees provided for in thegas gathering contracts, the Partnership’s exposure is limited to a portion ofthe operating costs of the plant.

 

Inmany cases, MarkWest Energy Partners provides services under contracts thatcontain a combination of more than one of the arrangements described above. Theterms of our contracts vary based on gas quality conditions, the competitiveenvironment at the time the contracts are signed and customer requirements. ThePartnership’s contract mix and, accordingly, its exposure to natural gas andNGL prices, may change as a result of changes in producer preferences, itsexpansion in regions where some types of contracts are more common and othermarket factors. Any change in mix may impact MarkWest Energy Partners’financial results.

 

##### ***Items Impacting Comparability of Financial Results***

 

*Recent MarkWest EnergyPartners Acquisition Activity*

 

In reading the discussion of our historicalresults of operations, you should be aware of the impact of MarkWest EnergyPartners’ recent significant acquisitions, which impact the comparability ofour results of operations for the periods discussed.

 

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Since its initial public offering, thePartnership has completed four acquisitions for an aggregate purchase price ofapproximately $110.0 million. These four acquisitions include:

 

•                  ThePinnacle acquisition, which closed on March 28, 2003, for consideration of$38.5 million;

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

•                  Thewestern Oklahoma acquisition, which closed December 1, 2003, forconsideration of $38.0 million; and

•                  TheMichigan Crude Pipeline acquisition, which closed December 18, 2003, forconsideration of $21.3 million.

 

Except for four days of activity from thePinnacle acquisition, our consolidated statement of operations for the threemonths ended March 31, 2003, does not reflect the impact of theseacquisitions.  However, our consolidatedresults of operations for the three months ended March 31, 2004, do reflectthe impact from these acquisitions.

 

*Cobb ProcessingFacility Repair*

 

First quarter 2004 results were adverselyimpacted by unexpected downtime at the Partnership’s Cobb processing plant inAppalachia. The facility was shutdown for approximately 45 days during thefirst quarter due to equipment failure. The plant has since been repaired andis operating normally. Income from operations was approximately $0.3 millionless than it would have been had the Cobb operations not been interruptedduring first quarter 2004.  Current plansare to replace the existing plant with a new facility during the second half of2004.

 

##### **Results of Operations**

 

***Operating Data***

 
| ** **                                   | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------------------------|------------|---------------------------------------|------------|
| ** **                                   | ** ** | **2004**                              | ** ** | **2003** | ** ** | **% Change** | ** ** |
|                                         |       |                                  |       |   |   |   |   |
| Marketing                                    |       |                                  |       |   |   |   |   |
| NGL product sales (gallons)                  |       | 51,525,000                            |       | 53,986,000 |   | (5 | )% |
|                                         |       |                                  |       |   |   |   |   |
| MarkWest  Energy Partners                    |       |                                  |       |   |   |   |   |
| Appalachia:                                  |       |                                  |       |   |   |   |   |
| Natural gas processed (Mcf/d) (1)       |       | 207,000                               |       | 203,000 |   | 2 | % |
| NGLs fractionated (Gal/d)                    |       | 462,000                               |       | 446,000 |   | 4 | % |
| Michigan:                                    |       |                                  |       |   |   |   |   |
| Natural gas volumes transported (Mcf/d)      |       | 13,900                                |       | 15,400 |   | (10 | )% |
| NGL product sales (gallons)                  |       | 2,700,000                             |       | 2,900,000 |   | (7 | )% |
| Crude oil transported (Bbl/d) (2)       |       | 14,600                                |       | NA |   | NA |   |
| Southwest:                                   |       |                                  |       |   |   |   |   |
| Gathering system throughput (Mcf/d) (3) |       | 97,800                                |       | NA |   | NA |   |
| Lateral pipeline throughput (Mcf/d) (4) |       | 28,900                                |       | NA |   | NA |   |

 

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NA – Not applicable.

(1)          Includes throughput from the Kenova, Cobb, and Boldman processing plants.

(2)          The Partnership acquired its Michigan Crude Pipeline in December 2003.

(3)          Includes volumes from the Partnership’s Pinnacle gathering systems, whichwere acquired in late March 2003, and its Oklahoma gathering systems,which were acquired in December 2003.

(4)          Includes volumes from the Partnership’s Power-Tex Lateral pipeline, whichwas acquired in September 2003. The Power-Tex Lateral pipeline (previouslyreferred to as the Lubbock Pipeline) is the only lateral the Partnership ownedduring the first quarter of 2004 that produces revenue on aper-unit-of-throughput basis. MarkWest Energy Partners receives a flat fee fromthe other three lateral pipelines it owned during the first quarter of 2004and, therefore, the throughput data from these lateral pipelines is excludedfrom this statistic. The Partnership acquired a fifth lateral pipeline,referred to as the Hobbs Lateral, on April 1, 2004.  The Hobbs Lateral generates revenue on aper-unit-of-throughput basis similar to the Power-Tex lateral.

 

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***ThreeMonths Ended March 31, 2004 Compared to the Three Months Ended March 31,2003***

 
| ** **                                       | ** ** | **Marketing**      | ** ** | **MarkWest   Energy   Partners, L.P.** | ** ** | **Eliminating  Entries** | ** ** | **Total**  | ** ** |
|--------------------------------------------------|------------|--------------------|------------|----------------------------------------|------------|--------------------------|------------|------------|------------|
| ** **                                       | ** ** | **(in thousands)** | ** ** |
| **Three  Months Ended March 31, 2004 (1):** | ** ** | ** **         | ** ** | ** **                             | ** ** | ** **               | ** ** | ** ** | ** ** |
| Revenues                                         |       | $                  | 44,393     |                                   | $          | 63,825                   |       | $          | (14,518    | ) | $ | 93,700 |   |
|                                             |       |               |       |                                   |       |                     |       |       |       |
| Purchased  product costs                         |       | 35,851             |       | 47,853                                 |       | (8,216                   | )          | 75,488     |       |
| Facility  expenses                               |       | 6,098              |       | 6,290                                  |       | (6,302                   | )          | 6,086      |       |
| Depreciation                                     |       | 383                |       | 3,145                                  |       | —                   |       | 3,528      |       |
| Amortization  of intangible assets               |       | —             |       | 34                                     |       | —                   |       | 34         |       |
| Total segment operating expenses                 |       | 42,332             |       | 57,322                                 |       | (14,518                  | )          | 85,136     |       |
|                                             |       |               |       |                                   |       |                     |       |       |       |
| Segment  operating income                        |       | $                  | 2,061      |                                   | $          | 6,503                    |       | $          | —     |   | $ | 8,564 |   |
|                                             |       |               |       |                                   |       |                     |       |       |       |
| **Three  Months Ended March 31, 2003(1):**  |       |               |       |                                   |       |                     |       |       |       |
| Revenues                                         |       | $                  | 47,199     |                                   | $          | 17,693                   |       | $          | (13,661    | ) | $ | 51,231 |   |
|                                             |       |               |       |                                   |       |                     |       |       |       |
| Purchased  product costs                         |       | 45,210             |       | 8,392                                  |       | (7,599                   | )          | 46,003     |       |
| Facility  expenses                               |       | 6,357              |       | 4,337                                  |       | (6,062                   | )          | 4,632      |       |
| Depreciation                                     |       | 257                |       | 1,345                                  |       | —                   |       | 1,602      |       |
| Total segment operating expenses                 |       | 51,824             |       | 14,074                                 |       | (13,661                  | )          | 52,237     |       |
|                                             |       |               |       |                                   |       |                     |       |       |       |
| Segment  operating income (loss)                 |       | $                  | (4,625     | )                                      | $          | 3,619                    |       | $          | —     |   | $ | (1,006 | ) |

 
| ** **                                                                                                                           | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                                                           | ** ** | **2004 (1)**                          | ** ** | **2003 (1)** | ** ** |
| ** **                                                                                                                           | ** ** | **(in thousands)**                    | ** ** |
| Segment  operating income (loss)                                                                                                     |       | $                                     | 8,564      |   | $ | (1,006 | ) |
| Selling,  general and administrative expenses                                                                                        |       | (5,314                                | )          | (2,624 | ) |
| Interest  expense, net                                                                                                               |       | (995                                  | )          | (754 | ) |
| Amortization  of deferred financing costs                                                                                            |       | (307                                  | )          | (309 | ) |
| Other income  (expense)                                                                                                              |       | 25                                    |       | (15 | ) |
|                                                                                                                                 |       |                                  |       |   |   |
| Income (loss) from continuing operations  before non-controlling interest in net income of consolidated subsidiary and  income taxes |       | $                                     | 1,973      |   | $ | (4,708 | ) |

 

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(1)          As restated.  See Note 10, *Restatementand Reclassifications of Consolidated Financial Statements*, to Notesto the Consolidated Financial Statements.

 

*Marketing.*Our marketing segmentoperating income was $2.1 million for the three months ended March 31,2004, compared to a loss of $4.6 million for the three months ended March 31,2003, an increase of $6.7 million. The increase is primarily attributable to a$5.2 million reduction in our hedging losses. The remainder of the change isattributable to a more favorable pricing environment coupled with our abilityto leverage off of existing storage arrangements thereby allowing us to pre-buyreplacement natural gas earlier when prices were lower.

 

*MarkWest Energy Partners.*Segment operating income from MarkWestEnergy Partners was $6.5 million for the three months ended March 31,2004, compared to $3.6 million for the three months ended March 31, 2003,an increase of $2.9 million, or 81%. The increase is primarily attributable tothe Partnership’s 2003 acquisitions, which increased segment operating incomeby $2.6 million.

 

*Selling,*g*eneral and administrative expenses.* Selling, general andadministrative expenses were $5.3 million for the three months ended March 31,2004, compared to $2.6 million for the three months ended March 31, 2003,an 

 

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increase of $2.7 million, or92%.  The increase is primarilyattributable to increased back office costs associated with the growth plans ofMarkWest Energy Partners, compensation expense associated with theParticipation Plan, compensation expense associated with stock options, bonusand profit sharing (a bonus was not accrued during the quarter ended March 31,2003) and severance.

 

*Interest expense, net.*  Interest expense, net was $1.0 million forthe three months ended March 31, 2004, compared to $0.8 million for thethree months ended March 31, 2003, an increase of $0.2 million, or 25%.The increase was principally attributable to MarkWest Energy Partners’increased outstanding debt levels, resulting from financing of its 2003acquisitions.

 

*Income**from discontinued operations.*Income from discontinuedoperations was $2.1 million for the three months ended March 31, 2003;there were no discontinued operations for the corresponding quarter ended March 31,2004.  The amounts recorded fordiscontinued operations were a result of the sale of substantially all of ourexploration and production business subsequent to the first quarter of 2003.

 

**Liquidity and 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 existing credit facility inits entirety in December 2003. We also had $33.4 million in unrestrictedcash on hand at December 31, 2003, exclusive of MarkWest Energy Partners’cash on hand. As a result, exclusive of MarkWest Energy Partners’ debt, we hadno debt as of March 31, 2004 and December 31, 2003.  In February 2004, we disbursedapproximately $4.8 million to pay a special one-time dividend of $0.50 pershare to our common shareholders.

 

Going forward,we expect MarkWest Hydrocarbon’s primary sources of liquidity to be quarterlydistributions received from MarkWest Energy Partners and cash flows generatedprincipally from the marketing of natural gas and NGLs.

 

We own 90% of the general partner of MarkWestEnergy Partners.  The general partner ofMarkWest Energy Partners owns a 2% general partner interest and all of theincentive distribution rights in MarkWest Energy Partners.  The incentive distribution rights entitle usto receive an increasing percentage of cash distributed by the Partnership uponattainment of target distribution levels. Specifically, they entitle us toreceive 13.0% of all cash distributed in a quarter after each unit has received$0.55 for that quarter, 23% of all cash distributed after each unit hasreceived $0.625 for that quarter and 48% of all cash distributed after eachunit has received $0.75 for that quarter. For the three months ended March 31, 2004, we received $2.0 millionin distributions for our subordinated units, and the general partner received$0.3 million, including $0.2 million representing payments on incentivedistribution rights. If the Partnership continues to grow and increase itsquarterly distributions per limited partner unit, we expect our distributionsto increase accordingly.

 

Cash flowsgenerated from our marketing operations are subject to volatility primarily inNGLs and natural gas prices. Our cash flows are enhanced in periods when theprices received for NGLs are high relative to the price of natural gas wepurchase to satisfy our “keep-whole” contractual arrangements in Appalachia,and are reduced in periods when the prices received for NGLs are low relativeto the price of natural gas we purchase to satisfy such contractualarrangements. Under “keep-whole” contracts, we retain and sell the NGLsproduced in our processing operations for third party producers, and thenreimburse or “keep whole” the producers for the Btu content of the NGLs removedthrough the re-delivery to the producers of an equivalent amount (on a Btubasis) of dry natural gas. Generally, the frac spread and, consequently, theoperating margins, are favorable. Periodically, when natural gas becomes moreexpensive, on a Btu equivalent basis, than NGL products, the cost of keepingthe producer “whole” can result in operating losses. We, however, cannotpredict with any certainty what the pricing environment will be in the future.

 

We believe that cash on hand, cash receivedfrom quarterly distributions (including the incentive distribution rights) fromMarkWest Energy Partners, and cash generated from our marketing operations willbe sufficient to meet our working capital requirements and fund our requiredcapital expenditures for the foreseeable 

 

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future.  Most of our future capital expenditures arediscretionary and minimal in nature. During 2004, MarkWest Hydrocarbon has budgeted $1.7 million for ourcontribution to the Cobb plant replacement and an additional $0.3 million forother miscellaneous projects.  Cashgenerated from our marketing operations will depend on our operatingperformance, which will be affected by prevailing commodity prices and otherfactors, some of which are beyond our control.

 

In an effort toincrease our liquidity, we may seek to establish a bank credit facility andrenegotiate certain keep-whole contracts in order to reduce our commodity pricerisk.

 

*MarkWest EnergyPartners*

 

The Partnership expects to finance futureacquisitions through a combination of debt and issuance of additional units, asis common practice with master limited partnerships.

 

The Partnership paid down its debt byapproximately $42.0 million in January 2004 with the proceeds from itssecondary offering. As of March 31, 2004, the Partnership had borrowed$84.2 million of the $140.0 million available under its credit facility.

 

***MarkWestEnergy Partners’ Credit Facility***

 

ThePartnership’s $140.0 million credit facility is available to fund capitalexpenditures and acquisitions, working capital requirements (including lettersof credit) and distributions to unitholders. Advances to fund distributions tounitholders may not exceed $0.50 per outstanding unit in any12-consecutive-month period. To date there have been no advances to funddistributions to unitholders. At March 31, 2004, $84.2 million wasoutstanding, and $55.8 million was available, under the Partnership’s creditfacility. The Partnership’s credit facility matures in November 2006.  The Partnership’s average interest rate wasapproximately 4.6% at March 31, 2004.

 

## ***Cash Flows***

 
| ** **                                           | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                           | ** ** | **2004 (1)**                          | ** ** | **2003(1)** | ** ** |
| ** **                                           | ** ** | **(in thousands)**                    | ** ** |
|                                                 |       |                                  |       |   |   |
| Net cash  provided by operating activities           |       | $                                     | 17,373     |   | $ | 9,619 |   |
| Net cash  used in investing activities               |       | $                                     | (5,676     | ) | $ | (44,949 | ) |
| Net cash  provided by (used in) financing activities |       | $                                     | (4,726     | ) | $ | 36,714 |   |

 

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(1)          Asrestated.  See Note 10, *Restatement and Reclassifications of ConsolidatedFinancial Statements*, to the Notes to the Consolidated Financial Statements.

 

Net cash provided by operating activities washigher during the three months ended March 31, 2004, than during the threemonths ended March 31, 2003, primarily due to increased activities as aresult of the Partnership’s Pinnacle, Power-Tex lateral pipeline, westernOklahoma, and Michigan Crude Pipeline acquisitions.  Net cash used in investing activities duringthe three months ended March 31, 2004, was due to capital expenditures forexisting facilities; net cash used in investing activities during the threemonths ended March 31, 2003, was primarily due to the Pinnacleacquisition.  Net cash used in financingactivities during the three months ended March 31, 2004, included netproceeds from a secondary public offering of $44.1 million; of the net proceedsfrom the secondary offering, $42.0 million were used for the repayment oflong-term debt.  In addition, thePartnership distributed $3.0 million to unitholders other than MarkWestHydrocarbon and the general partner, and the Company paid a special dividend of$4.8 million. Other financing activities included $1.0 million of proceeds fromthe exercise of stock options. Net cash provided by financing activities duringthe three months ended March 31, 2003, included $45.7 million of netproceeds from long-term debt, the majority of which was used to fund thePinnacle acquisition, and repayments of long-term debt of $6.5 million.  In addition, the Partnership distributed $1.5million to unitholders other than MarkWest Hydrocarbon and the general partner.

 

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**Forward-Looking Information**

 

Statements included in this Management’sDiscussion and Analysis that are not historical facts are forward-lookingstatements within the meaning of Section 27A of the Securities Act of1933, as amended, and Section 21E of the Securities and Exchange Act of1934, as amended.  We use words such as “may,”“believe,” “estimate,” “expect,” “plan,” “intend,” “project,” “anticipate,” andsimilar expressions to identify forward-looking statements.

 

These forward-looking statements are made basedupon management’s current plans, expectations, estimates, assumptions andbeliefs concerning future events impacting us and therefore involve a number ofrisks and uncertainties. We caution that forward-looking statements are notguarantees and that actual results could differ materially from those expressedor implied in the forward-looking statements. Forward-looking statementsinclude statements relating to, among other things:

 

•                  Our expectations regardingMarkWest Energy Partners, L.P.

•                  Our ability to grow MarkWestEnergy Partners, L.P. and successfully integrate its acquisitions.

•                  Our ability to amend certainproducer contracts.

•                  Our expectations regardingnatural gas, NGL product and prices.

•                  Our efforts to increasefee-based contract volumes.

•                  Our ability to manage ourcommodity price risk.

•                  Our ability to maximize thevalue of our NGL output.

•                  The adequacy of our generalpublic liability, property, and business interruption insurance.

•                  Our ability to comply withenvironmental and governmental regulations.

•                  Our ability to raise sufficientcapital to execute our business plan through borrowing or issuing equity.

 

Important factors that could cause our actualresults of operations or our actual financial condition to differ include, butare 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-looking statements involve many uncertainties that are beyondour ability to control. In many cases, we cannot predict what factors wouldcause actual results to differ materially from those indicated by the forward-lookingstatements.

 

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##### **Item4. Controls and Procedures**

##### ** **

Overview

 

This Form 10-Q/Areflects adjustments to the consolidated financial report for the first quarterof each of the years 2003 and 2004.  Pleaserefer to Note 10, *Restatement andReclassifications of Consolidated Financial Statements,*to theconsolidated financial statements for further 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 adjustments have also been recorded to correct other errors inthe financial statements for the first three quarters of 2004, includingadjustments to accruals for revenue and purchased product costs, adjustmentsfor cost improperly capitalized as property 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 and adjustments to accrued propertytaxes.  Adjustments were also made torecord compensation expense as a result of the modification of the provisionsof certain stock options for two officers who terminated their employment withthe Company but who continued to serve on its Board of Directors.  Additionally, the Company made an adjustmentto reclassify a portion of dividends paid during the three months ended March 31,2004 from retained earnings to additional paid in capital for the amount ofdividends distributed in excess of accumulated earnings.

 

In addition, on October 28, 2004, theCompany’s Board of Directors declared a stock dividend of one share of MarkWestHydrocarbon’s common stock for each ten shares owned by stockholders.  The stock dividend was paid on November 19,2004 to the stockholders of record as of the close of business on November 9,2004.  Common stock information in thisform 10-Q/A has been adjusted to give retroactive effect to the stock dividendpaid.  Other less significant adjustments and reclassifications were identifiedand recorded in conjunction with the restatement process.  The Company is filing contemporaneously withthis Form 10-Q/A for the quarterly period ended March 31, 2004, itsAnnual Report on Form 10-K for the year ended December 31, 2004,which includes restated financial statements for the years ended December 31,2002 and 2003.  The Company is alsofiling contemporaneously with this Form 10-Q/A, its quarterly reports on Form 10-Q/Afor the quarterly periods ending June 30, 2004 and September 30,2004.

 

Disclosure Controls and Procedures

 

In connection with the preparation of our quarterly report onForm 10-Q, as amended by this Form 10-Q/A, our senior management,with participation of our Chief Executive Officer, Chief Financial Officer andChief Accounting Officer, evaluated the effectiveness of the design andoperation of our disclosure controls and procedures as of March 31,2004.  Based upon that evaluation, our Chief Executive Officer, ChiefFinancial Officer and Chief Accounting Officer concluded that our disclosurecontrols and procedures were ineffective, as of March 31, 2004, to providereasonable assurance that information required to be disclosed by us in reportsthat we file or submit under the Security Exchange Act of 1934 (the “Act”), isrecorded, processed, summarized and reported, within the time periods specifiedin the SEC’s rules and forms and to ensure that information required to bedisclosed by us in the reports that we file under the Act is accumulated andcommunicated to management, including our certifying officers, as appropriate,to allow 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 March 31, 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.

 

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Changes in Internal Controls over Financial Reporting

 

During the period covered by this quarterly report on Form 10-Qas amended by this Form 10-Q/A, there were no changes in our internalcontrol over financial reporting during the period covered by the originalreport that have materially affected, or are reasonably likely to materiallyaffect, the Company’s internal control over financial reporting.

 

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**PART II—OTHER INFORMATION**

 

**Item6.  Exhibits**

 

(a)          Exhibits

 
| 31.1   |   | Chief  Executive Officer Certification pursuant to Rule 13a-14(a) of the  Securities Exchange Act.                                                        |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                |
| 31.2   |   | Chief  Accounting Officer Certification pursuant to Rule 13a-14(a) of the  Securities Exchange Act.                                                       |
|   |   |                                                                                                                                                                |
| 31.3   |   | Chief  Financial Officer Certification pursuant to Rule 13a-14(a) of the  Securities Exchange Act.                                                        |
|   |   |                                                                                                                                                                |
| 32.1   |   | Certification  of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.  |
|   |   |                                                                                                                                                                |
| 32.2   |   | Certification of the Chief Accounting  Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002. |
|   |   |                                                                                                                                                                |
| 32.3   |   | Certification of the Chief Financial  Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.  |

 

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**SIGNATURE**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, MarkWestHydrocarbon, as registrant, has duly caused this report to be signed on itsbehalf by the undersigned, thereunto authorized.

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

 

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| **Exhibit   Number** |   | **Exhibit Index**                                                                                                                                              |
|---------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                      |   |                                                                                                                                                                |
| 31.1                      |   | Certification of  the Chief Executive Officer pursuant to Rule 13a-14(a) of the  Securities Exchange Act.                                                 |
|                      |   |                                                                                                                                                                |
| 31.2                      |   | Certification of  the Chief Accounting Officer pursuant to Rule 13a-14(a) of the  Securities Exchange Act.                                                |
|                      |   |                                                                                                                                                                |
| 31.3                      |   | Certification of  the Chief Financial Officer pursuant to Rule 13a-14(a) of the  Securities Exchange Act.                                                 |
|                      |   |                                                                                                                                                                |
| 32.1                      |   | Certification of  the Chief Executive Officer pursuant to 18 U.S. C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|                      |   |                                                                                                                                                                |
| 32.2                      |   | Certification of  the Chief Accounting Officer pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|                      |   |                                                                                                                                                                |
| 32.3                      |   | Certification of  the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.  |

 

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