** **

**UNITEDSTATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

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

 

**For the quarterly period endedJune 30, 2005**

 

**OR**

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

 

**For the transition period from                             to                             **

 

**Commission File Number 001-14841**

 

**MARKWESTHYDROCARBON, INC.**

(Exact name of registrantas specified in its charter)

** **

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

 

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

(Address of principalexecutive offices)

 

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

 

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

Yes  o  No  ý

 

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

Yes  o  No  ý

 

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

Yes  o  No  ý

 

The registrant had 10,799,149 shares of common stock, $0.01 per sharepar value, outstanding as of November 30, 2005.

 

 

----

 
|                                                                                                                    |       |
|-------------------------------------------------------------------------------------------------------------------------|------------|
| **PART I—FINANCIAL INFORMATION**                                                                                   | ** ** |
|                                                                                                                    |       |
| Item 1. Condensed Consolidated Financial Statements  (unaudited)                                                        |       |
| Condensed Consolidated Balance Sheets at June 30, 2005  and December 31, 2004                                      |       |
| Condensed Consolidated Statements of Operations for  the Three Months Ended June 30, 2005 and 2004                 |       |
| Condensed Consolidated Statements of Operations for  the Six Months Ended June 30, 2005 and 2004                   |       |
| Condensed Consolidated Statements of Comprehensive  Loss for the Three and Six Months Ended June 30, 2005 and 2004 |       |
| Condensed Consolidated Statements of Cash Flows for  the Six Months Ended June 30, 2005 and 2004                   |       |
| Condensed  Consolidated Statement of Changes in Stockholders’ Equity for the Six Months  Ended June 30, 2005  |       |
| Notes to the Condensed Consolidated Financial  Statements                                                               |       |
|                                                                                                                    |       |
| Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations                     |       |
| Item 3. Quantitative and Qualitative Disclosures about  Market Risk                                                     |       |
| Item 4. Controls and Procedures                                                                                         |       |
|                                                                                                                    |       |
| **PART  II—OTHER INFORMATION**                                                                                     |       |
|                                                                                                                    |       |
| Item  1. Legal Proceedings                                                                                              |       |
| Item 6. Exhibits                                                                                                        |       |
|                                                                                                                    |       |
| **SIGNATURE**                                                                                                           |       |
|                                                                                                                    |       |

 

**Glossary of Terms**

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

 

----

 

 

**PART I—FINANCIAL INFORMATION**

 

**Item 1. Condensed Consolidated Financial Statements**

 

**MARKWESTHYDROCARBON, INC.**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**(UNAUDITED)**

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

 
| ** **                                                                                                                                                 | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|------------------------|------------|
| **ASSETS**                                                                                                                                                 | ** ** | ** **         | ** ** | ** **             | ** ** |
| Current assets:                                                                                                                                            |       |               |       |                   |       |
| Cash and cash equivalents                                                                                                                                  |       | $                  | 10,378     |                   | $          | 12,844 |   |
| Restricted cash                                                                                                                                            |       | 15,000             |       | 15,000                 |       |
| Marketable securities                                                                                                                                      |       | 20,344             |       | 14,815                 |       |
| Receivables, net (including related party receivables of $117 and  $44, respectively, and allowance for doubtful accounts of $304 and $249,  respectively) |       | 49,022             |       | 64,856                 |       |
| Inventories                                                                                                                                                |       | 18,620             |       | 11,292                 |       |
| Prepaid replacement natural gas                                                                                                                            |       | 2,808              |       | 10,245                 |       |
| Deferred income taxes                                                                                                                                      |       | 136                |       | 25                     |       |
| Other current assets                                                                                                                                       |       | 3,723              |       | 1,898                  |       |
| Total current assets                                                                                                                                       |       | 120,031            |       | 130,975                |       |
|                                                                                                                                                       |       |               |       |                   |       |
| Property, plant and  equipment                                                                                                                             |       | 376,705            |       | 342,636                |       |
| Less: accumulated  depreciation, depletion, amortization and impairment                                                                                    |       | (68,695            | )          | (59,443                | )          |
| Total property, plant and equipment, net                                                                                                                   |       | 308,010            |       | 283,193                |       |
|                                                                                                                                                       |       |               |       |                   |       |
| Other assets:                                                                                                                                              |       |               |       |                   |       |
| Investment in Starfish                                                                                                                                     |       | 42,009             |       | —                 |       |
| Intangible assets, net of accumulated amortization of $7,809 and  $3,640, respectively                                                                     |       | 157,812            |       | 162,001                |       |
| Deferred financing costs, net of accumulated amortization of $6,878  and $5,541, respectively                                                              |       | 12,696             |       | 13,849                 |       |
| Deferred contract costs, net of accumulated amortization of $234 and  $78, respectively                                                                    |       | 3,016              |       | 3,172                  |       |
| Notes receivable from related parties                                                                                                                      |       | 154                |       | 207                    |       |
| Investment in and advances to other equity investee                                                                                                        |       | 207                |       | 177                    |       |
| Total other assets                                                                                                                                         |       | 215,894            |       | 179,406                |       |
|                                                                                                                                                       |       |               |       |                   |       |
| Total assets                                                                                                                                               |       | $                  | 643,935    |                   | $          | 593,574 |   |
|                                                                                                                                                       |       |               |       |                   |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                              |       |               |       |                   |       |
| Current liabilities:                                                                                                                                       |       |               |       |                   |       |
| Accounts payable (including related party payables of $23 and $30,  respectively)                                                                          |       | $                  | 41,665     |                   | $          | 45,103 |   |
| Accrued liabilities                                                                                                                                        |       | 27,170             |       | 30,908                 |       |
| Fair value of derivative instruments                                                                                                                       |       | 952                |       | 1,057                  |       |
| Asset retirement obligation                                                                                                                                |       | 450                |       | —                 |       |
| Total current liabilities                                                                                                                                  |       | 70,237             |       | 77,068                 |       |
|                                                                                                                                                       |       |               |       |                   |       |
| Deferred income taxes                                                                                                                                      |       | 6,226              |       | 6,258                  |       |
| Senior notes                                                                                                                                               |       | 225,000            |       | 225,000                |       |
| Long-term debt                                                                                                                                             |       | 65,000             |       | —                 |       |
| Other long-term  liabilities                                                                                                                               |       | 10,048             |       | 7,487                  |       |
| Non-controlling interest  in consolidated subsidiary                                                                                                       |       | 218,539            |       | 228,000                |       |
| Total long-term liabilities                                                                                                                                |       | 524,813            |       | 466,745                |       |
|                                                                                                                                                       |       |               |       |                   |       |
| Commitments and  contingencies (Note 13)                                                                                                                   |       |               |       |                   |       |
|                                                                                                                                                       |       |               |       |                   |       |
| Stockholders’ equity:                                                                                                                                 |       |               |       |                   |       |
| Preferred stock, par value $0.01, 5,000,000 shares authorized, no  shares outstanding                                                                      |       | —             |       | —                 |       |
| Common stock, par value $0.01, 20,000,000 shares authorized, 10,844,144  and 10,821,760 shares issued, respectively                                        |       | 108                |       | 108                    |       |
| Additional paid-in capital                                                                                                                                 |       | 50,791             |       | 51,455                 |       |
| Deferred compensation                                                                                                                                      |       | (100               | )          | —                 |       |
| Accumulated deficit                                                                                                                                        |       | (1,693             | )          | (1,623                 | )          |
| Accumulated other comprehensive income, net of tax                                                                                                         |       | 240                |       | 246                    |       |
| Treasury stock, 48,950 and 63,586 shares, respectively                                                                                                     |       | (461               | )          | (425                   | )          |
| Total stockholders’ equity                                                                                                                            |       | 48,885             |       | 49,761                 |       |
|                                                                                                                                                       |       |               |       |                   |       |
| Total liabilities and stockholders’ equity                                                                                                            |       | $                  | 643,935    |                   | $          | 593,574 |   |

 

**Theaccompanying notes are an integral part of these unaudited condensedconsolidated financial statements.**

 

1

----

 

**MARKWESTHYDROCARBON, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**(UNAUDITED)**

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

** **
| ** **                                                                                      | ** ** | **Three Months Ended June 30,** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                      | ** ** | **2005**                        | ** ** | **2004** | ** ** |
|                                                                                            |       |                            |       |   |   |
| Revenues                                                                                        |       | $                               | 141,040    |   | $ | 89,024 |   |
|                                                                                            |       |                            |       |   |   |
| Operating expenses:                                                                             |       |                            |       |   |   |
| Purchased product costs                                                                         |       | 112,354                         |       | 77,262 |   |
| Facility expenses                                                                               |       | 10,985                          |       | 5,975 |   |
| Selling, general and administrative expenses                                                    |       | 9,125                           |       | 5,070 |   |
| Depreciation                                                                                    |       | 4,995                           |       | 3,657 |   |
| Amortization of intangible assets                                                               |       | 2,095                           |       | 34 |   |
| Accretion of asset retirement and sublease obligations                                          |       | 11                              |       | — |   |
| Total operating expenses                                                                        |       | 139,565                         |       | 91,998 |   |
|                                                                                            |       |                            |       |   |   |
| Income (loss) from operations                                                                   |       | 1,475                           |       | (2,974 | ) |
|                                                                                            |       |                            |       |   |   |
| Other income (expense):                                                                         |       |                            |       |   |   |
| Earnings from unconsolidated subsidiary                                                         |       | 989                             |       | — |   |
| Interest income                                                                                 |       | 321                             |       | 221 |   |
| Interest expense                                                                                |       | (4,588                          | )          | (923 | ) |
| Amortization of deferred financing costs (a component of interest  expense)                     |       | (558                            | )          | (307 | ) |
| Dividend income                                                                                 |       | 96                              |       | 83 |   |
| Other income (expense)                                                                          |       | 148                             |       | (31 | ) |
|                                                                                            |       |                            |       |   |   |
| Loss before non-controlling interest in net income of consolidated  subsidiary and income taxes |       | (2,117                          | )          | (3,931 | ) |
|                                                                                            |       |                            |       |   |   |
| Provision (benefit) for  income taxes:                                                          |       |                            |       |   |   |
| Current                                                                                         |       | —                          |       | 126 |   |
| Deferred                                                                                        |       | (802                            | )          | 365 |   |
| Provision (benefit) for income taxes                                                            |       | (802                            | )          | 491 |   |
|                                                                                            |       |                            |       |   |   |
| Non-controlling interest  in net income of consolidated subsidiary                              |       | (294                            | )          | (1,946 | ) |
|                                                                                            |       |                            |       |   |   |
| Net loss                                                                                        |       | $                               | (1,609     | ) | $ | (6,368 | ) |
|                                                                                            |       |                            |       |   |   |
| Net loss per share:                                                                             |       |                            |       |   |   |
| Basic                                                                                           |       | $                               | (0.15      | ) | $ | (0.60 | ) |
| Diluted                                                                                         |       | $                               | (0.15      | ) | $ | (0.60 | ) |
|                                                                                            |       |                            |       |   |   |
| Weighted average number of  outstanding shares of common stock:                                 |       |                            |       |   |   |
| Basic                                                                                           |       | 10,782                          |       | 10,681 |   |
| Diluted                                                                                         |       | 10,867                          |       | 10,681 |   |
|                                                                                            |       |                            |       |   |   |
| Cash dividend per common  share                                                                 |       | $                               | 0.10       |   | $ | 0.023 |   |

 

**Theaccompanying notes are an integral part of these unaudited condensedconsolidated financial statements.**

 

2

----

 

**MARKWEST HYDROCARBON, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**(UNAUDITED)**

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

** **
| ** **                                                                                               | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                                               | ** ** | **2005**                      | ** ** | **2004** | ** ** |
|                                                                                                     |       |                          |       |   |   |
| Revenues                                                                                                 |       | $                             | 279,393    |   | $ | 182,724 |   |
|                                                                                                     |       |                          |       |   |   |
| Operating expenses:                                                                                      |       |                          |       |   |   |
| Purchased product costs                                                                                  |       | 217,053                       |       | 152,750 |   |
| Facility expenses                                                                                        |       | 20,245                        |       | 12,061 |   |
| Selling, general and administrative expenses                                                             |       | 17,227                        |       | 10,385 |   |
| Depreciation                                                                                             |       | 9,736                         |       | 7,185 |   |
| Amortization of intangible assets                                                                        |       | 4,190                         |       | 68 |   |
| Accretion of asset retirement and sublease obligations                                                   |       | 21                            |       | — |   |
| Total operating expenses                                                                                 |       | 268,472                       |       | 182,449 |   |
|                                                                                                     |       |                          |       |   |   |
| Income from operations                                                                                   |       | 10,921                        |       | 275 |   |
|                                                                                                     |       |                          |       |   |   |
| Other income (expense):                                                                                  |       |                          |       |   |   |
| Earnings from unconsolidated subsidiary                                                                  |       | 990                           |       | — |   |
| Interest income                                                                                          |       | 570                           |       | 356 |   |
| Interest expense                                                                                         |       | (8,293                        | )          | (2,053 | ) |
| Amortization of deferred financing costs (a component of interest  expense)                              |       | (1,094                        | )          | (614 | ) |
| Dividend income                                                                                          |       | 188                           |       | 83 |   |
| Other income (expense)                                                                                   |       | 235                           |       | (5 | ) |
|                                                                                                     |       |                          |       |   |   |
| Income (loss) before non-controlling interest in net income of  consolidated subsidiary and income taxes |       | 3,517                         |       | (1,958 | ) |
|                                                                                                     |       |                          |       |   |   |
| Provision (benefit) for  income taxes:                                                                   |       |                          |       |   |   |
| Current                                                                                                  |       | —                        |       | 112 |   |
| Deferred                                                                                                 |       | (32                           | )          | 325 |   |
| Provision (benefit) for income taxes                                                                     |       | (32                           | )          | 437 |   |
|                                                                                                     |       |                          |       |   |   |
| Non-controlling interest  in net income of consolidated subsidiary                                       |       | (3,619                        | )          | (3,255 | ) |
|                                                                                                     |       |                          |       |   |   |
| Net loss                                                                                                 |       | $                             | (70        | ) | $ | (5,650 | ) |
|                                                                                                     |       |                          |       |   |   |
| Net loss per share:                                                                                      |       |                          |       |   |   |
| Basic                                                                                                    |       | $                             | (0.01      | ) | $ | (0.53 | ) |
| Diluted                                                                                                  |       | $                             | (0.01      | ) | $ | (0.53 | ) |
|                                                                                                     |       |                          |       |   |   |
| Weighted average number of  outstanding shares of common stock:                                          |       |                          |       |   |   |
| Basic                                                                                                    |       | 10,774                        |       | 10,628 |   |
| Diluted                                                                                                  |       | 10,886                        |       | 10,628 |   |
|                                                                                                     |       |                          |       |   |   |
| Cash dividend per common  share                                                                          |       | $                             | 0.175      |   | $ | 0.477 |   |

 

**Theaccompanying notes are an integral part of these unaudited condensedconsolidated financial statements.**

 

3

----

 

**MARKWESTHYDROCARBON, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS**

**(UNAUDITED)**

**(inthousands)**

** **
| ** **                                                                                                                                                          | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|-------------------------------|------------|
| ** **                                                                                                                                                          | ** ** | **2005**                        | ** ** | **2004**                      | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                                                                                                                |       |                            |       |                          |       |   |   |   |   |
| Net loss                                                                                                                                                            |       | $                               | (1,609     | )                             | $          | (6,368 | ) | $ | (70 | ) | $ | (5,650 | ) |
|                                                                                                                                                                |       |                            |       |                          |       |   |   |   |   |
| Other comprehensive income  (loss), net of tax:                                                                                                                     |       |                            |       |                          |       |   |   |   |   |
| Unrealized gains (losses) on commodity derivatives accounted for as  hedges, net of income tax provision (benefit) of $420, $(213), $(122), and  $471, respectively |       | 556                             |       | (347                          | )          | (197 | ) | 768 |   |
| Unrealized gains (losses) on marketable securities, net of income tax  provision (benefit) of $166, $(172), $115, and $(227), respectively                          |       | 275                             |       | (280                          | )          | 191 |   | (370 | ) |
| Total other comprehensive income (loss)                                                                                                                             |       | 831                             |       | (627                          | )          | (6 | ) | 398 |   |
|                                                                                                                                                                |       |                            |       |                          |       |   |   |   |   |
| Comprehensive loss                                                                                                                                                  |       | $                               | (778       | )                             | $          | (6,995 | ) | $ | (76 | ) | $ | (5,252 | ) |
|                                                                                                                                                                     |            |                                 |            |                               |            |  |  |  |  |  |  |  |  |  |

 

**Theaccompanying notes are an integral part of these unaudited condensedconsolidated financial statements.**

 

4

----

 

**MARKWEST HYDROCARBON, INC.**

**CONDENSED CONSOLIDATED STATEMENTOF CHANGES IN**

**STOCKHOLDERS’ EQUITY**

**(UNAUDITED)**

**(in thousands)**

** **
| ** **                                              | ** ** | **Shares  of  Common  Stock** | ** ** | **Shares  of  Treasury  Stock** | ** ** | **Common  Stock** | ** ** | **Additional  Paid-In  Capital** | ** ** | **Deferred  Compensation** | ** ** | **Accumulated  Deficit** | ** ** | **Accumulated  Other  Comprehensive  Income (Loss)** | ** ** | **Treasury  Stock** | ** ** | **Total  Stockholders’  Equity** | ** ** |
|---------------------------------------------------------|------------|-------------------------------|------------|---------------------------------|------------|-------------------|------------|----------------------------------|------------|----------------------------|------------|--------------------------|------------|------------------------------------------------------|------------|---------------------|------------|---------------------------------------|------------|
|                                                    |       |                          |       |                            |       |              |       |                             |       |                       |       |                     |       |                                                 |       |                |       |                                  |       |
| Balance,  December 31, 2004                        |       | 10,822                        |       | (64                             | )          | $                 | 108        |                             | $          | 51,455                     |       | $                        | —     |                                                 | $          | (1,623              | )          | $                                     | 246        |   | $ | (425 | ) | $ | 49,761 |   |
|                                                    |       |                          |       |                            |       |              |       |                             |       |                       |       |                     |       |                                                 |       |                |       |                                  |       |
| Stock option  exercises                                 |       | 22                            |       | —                          |       | —            |       | 66                               |       | —                     |       | —                   |       | —                                               |       | —              |       | 66                                    |       |
|                                                    |       |                          |       |                            |       |              |       |                             |       |                       |       |                     |       |                                                 |       |                |       |                                  |       |
| Issuance of  restricted stock                           |       | —                        |       | 7                               |       | —            |       | 77                               |       | (134                       | )          | —                   |       | —                                               |       | 57                  |       | —                                |       |
|                                                    |       |                          |       |                            |       |              |       |                             |       |                       |       |                     |       |                                                 |       |                |       |                                  |       |
| Amortization of  deferred stock-based compensation      |       | —                        |       | —                          |       | —            |       | —                           |       | 34                         |       | —                   |       | —                                               |       | —              |       | 34                                    |       |
|                                                    |       |                          |       |                            |       |              |       |                             |       |                       |       |                     |       |                                                 |       |                |       |                                  |       |
| Cashless stock  options                                 |       | —                        |       | —                          |       | —            |       | 979                              |       | —                     |       | —                   |       | —                                               |       | —              |       | 979                                   |       |
|                                                    |       |                          |       |                            |       |              |       |                             |       |                       |       |                     |       |                                                 |       |                |       |                                  |       |
| Treasury stock  acquired                                |       | —                        |       | (7                              | )          | —            |       | —                           |       | —                     |       | —                   |       | —                                               |       | (161                | )          | (161                                  | )          |
|                                                    |       |                          |       |                            |       |              |       |                             |       |                       |       |                     |       |                                                 |       |                |       |                                  |       |
| Contribution of  treasury shares to 401(k) benefit plan |       | —                        |       | 15                              |       | —            |       | 100                              |       | —                     |       | —                   |       | —                                               |       | 68                  |       | 168                                   |       |
|                                                    |       |                          |       |                            |       |              |       |                             |       |                       |       |                     |       |                                                 |       |                |       |                                  |       |
| Net loss                                                |       | —                        |       | —                          |       | —            |       | —                           |       | —                     |       | (70                      | )          | —                                               |       | —              |       | (70                                   | )          |
|                                                    |       |                          |       |                            |       |              |       |                             |       |                       |       |                     |       |                                                 |       |                |       |                                  |       |
| Other  comprehensive loss                               |       | —                        |       | —                          |       | —            |       | —                           |       | —                     |       | —                   |       | (6                                                   | )          | —              |       | (6                                    | )          |
|                                                    |       |                          |       |                            |       |              |       |                             |       |                       |       |                     |       |                                                 |       |                |       |                                  |       |
| Dividends paid                                          |       | —                        |       | —                          |       | —            |       | (1,886                           | )          | —                     |       | —                   |       | —                                               |       | —              |       | (1,886                                | )          |
|                                                    |       |                          |       |                            |       |              |       |                             |       |                       |       |                     |       |                                                 |       |                |       |                                  |       |
| Balance,  June 30, 2005                            |       | 10,844                        |       | (49                             | )          | $                 | 108        |                             | $          | 50,791                     |       | $                        | (100       | )                                                    | $          | (1,693              | )          | $                                     | 240        |   | $ | (461 | ) | $ | 48,885 |   |

 

**Theaccompanying notes are an integral part of these unaudited condensedconsolidated financial statements.**

 

5

----

 

**MARKWESTHYDROCARBON, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(UNAUDITED)**

**(in thousands)**

** **
| ** **                                                                         | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                         | ** ** | **2005**                      | ** ** | **2004** | ** ** |
| **Cash flows from operating  activities:**                                         |       |                          |       |   |   |
| Net loss                                                                           |       | $                             | (70        | ) | $ | (5,650 | ) |
| Adjustments to reconcile net income to net cash provided by operating  activities: |       |                          |       |   |   |
| Depreciation                                                                       |       | 9,736                         |       | 7,185 |   |
| Amortization of intangible assets                                                  |       | 4,190                         |       | 68 |   |
| Amortization of gas purchase contract                                              |       | 156                           |       | — |   |
| Amortization of deferred financing costs                                           |       | 1,094                         |       | 614 |   |
| Accretion of asset retirement and sublease obligation                              |       | 21                            |       | — |   |
| Gain from sale of property, plant and equipment                                    |       | (161                          | )          | (42 | ) |
| Gain from sale of marketable securities                                            |       | (56                           | )          | — |   |
| Imputed interest on debt securities                                                |       | (52                           | )          | — |   |
| Restricted unit compensation expense                                               |       | 665                           |       | 344 |   |
| Restricted stock compensation expense                                              |       | 34                            |       | — |   |
| Stock option compensation expense                                                  |       | 979                           |       | 1,026 |   |
| Participation Plan compensation expense                                            |       | 2,790                         |       | 489 |   |
| Contribution of treasury shares to 401(k) benefit plan                             |       | 168                           |       | 89 |   |
| Equity in (earnings) losses of unconsolidated subsidiaries                         |       | (351                          | )          | 18 |   |
| Non-controlling interest in net income of consolidated subsidiary                  |       | 3,619                         |       | 3,255 |   |
| Unrealized (gains) losses on derivative instruments                                |       | (734                          | )          | 732 |   |
| Deferred income taxes                                                              |       | (32                           | )          | 325 |   |
| Changes in operating assets and liabilities:                                       |       |                          |       |   |   |
| Decrease in receivables                                                            |       | 15,834                        |       | 748 |   |
| Increase in inventories                                                            |       | (7,328                        | )          | (3,564 | ) |
| Decrease in prepaid replacement natural gas                                        |       | 7,437                         |       | 5,676 |   |
| (Increase) decrease in other current assets                                        |       | (1,825                        | )          | 97 |   |
| Increase (decrease) in accounts payable and accrued liabilities                    |       | (10,802                       | )          | 9,928 |   |
| Increase in other long-term liabilities                                            |       | 200                           |       | — |   |
| Net cash flow provided by operating activities                                     |       | 25,512                        |       | 21,338 |   |
|                                                                               |       |                          |       |   |   |
| **Cash flows from investing  activities:**                                         |       |                          |       |   |   |
| Purchase of marketable securities                                                  |       | (8,725                        | )          | (11,745 | ) |
| Proceeds from the sale of marketable securities                                    |       | 3,603                         |       | — |   |
| Starfish acquisition                                                               |       | (41,688                       | )          | — |   |
| Hobbs Lateral acquisition                                                          |       | —                        |       | (2,275 | ) |
| Capital expenditures                                                               |       | (31,442                       | )          | (7,813 | ) |
| Proceeds from sale of assets                                                       |       | 162                           |       | 195 |   |
| Proceeds from financing lease receivable                                           |       | —                        |       | 133 |   |
| Other                                                                              |       | —                        |       | 8 |   |
| Net cash used in investing activities                                              |       | (78,090                       | )          | (21,497 | ) |
|                                                                               |       |                          |       |   |   |
| **Cash flows from financing  activities:**                                         |       |                          |       |   |   |
| Collection of related party notes receivable                                       |       | 53                            |       | — |   |
| Proceeds from long-term debt                                                       |       | 65,000                        |       | 3,000 |   |
| Repayment of long-term debt                                                        |       | —                        |       | (43,000 | ) |
| Debt issuance and registration costs                                               |       | (95                           | )          | — |   |
| Proceeds from MarkWest Energy Partners’ secondary public offering             |       | —                        |       | 44,103 |   |
| Distributions to MarkWest Energy Partners’ unitholders                        |       | (12,865                       | )          | (6,110 | ) |
| Exercise of stock options                                                          |       | 66                            |       | 1,380 |   |
| Purchase of treasury shares                                                        |       | (161                          | )          | (36 | ) |
| Payment of dividends                                                               |       | (1,886                        | )          | (5,045 | ) |
| Net cash provided by (used in) financing activities                                |       | 50,112                        |       | (5,708 | ) |
|                                                                               |       |                          |       |   |   |
| Net decrease in cash and  cash equivalents                                         |       | (2,466                        | )          | (5,867 | ) |
| Cash and cash equivalents  at beginning of period                                  |       | 12,844                        |       | 42,144 |   |
| Cash and cash equivalents  at end of period                                        |       | $                             | 10,378     |   | $ | 36,277 |   |

**(continued)**

 

**Theaccompanying notes are an integral part of these unaudited condensedconsolidated financial statements.**

 

6

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**MARKWESTHYDROCARBON, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS, Continued**

**(UNAUDITED)**

**(inthousands)**

** **
| ** **                                         | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------------------|------------|-------------------------------|------------|
| ** **                                         | ** ** | **2005**                      | ** ** | **2004** | ** ** |
| **Supplemental cash flow  information:**           |       |                          |       |   |   |
| Cash paid for interest, net of amounts capitalized |       | $                             | 8,013      |   | $ | 2,077 |   |
| Cash paid for income taxes                         |       | $                             | 523        |   | $ | — |   |
| **Non-cash investing and  financing activities:**  |       |                          |       |   |   |
| Construction projects in progress obligation       |       | $                             | 7,040      |   | $ | 179 |   |

 

**Theaccompanying notes are an integral part of these unaudited condensed consolidatedfinancial statements.**

 

7

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**MARKWEST HYDROCARBON, INC.**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

 

**1.             Organization**

 

MarkWest Hydrocarbon,Inc. (“MarkWest Hydrocarbon” or the “Company”) manages MarkWest EnergyPartners, L.P. (“MarkWest Energy Partners” or the “Partnership”), a publiclytraded master limited partnership engaged in the gathering, processing andtransmission of natural gas; the transportation, fractionation and storage ofnatural gas liquids (“NGLs”); and the gathering and transportation of crude oil.  The Company also markets natural gas andNGLs. MarkWest Hydrocarbon and MarkWest Energy Partners provide servicesprimarily in Appalachia, Michigan, East Texas, Western Oklahoma and other areasof the Southwest.  The Companysignificantly expanded its natural gas activities through eight acquisitionscompleted by MarkWest Energy Partners in 2003, 2004 and 2005.

 

**2.             Basisof Presentation**

 

Thecondensed consolidated financial statements include the accounts of MarkWestHydrocarbon and its subsidiaries, including MarkWest Energy Partners(collectively “MarkWest Hydrocarbon” or the “Company”). Through consolidation,MarkWest Hydrocarbon has eliminated all significant intercompany accounts andtransactions.  Equity investments inwhich the Company exercises significant influence but does not control and isnot the primary beneficiary are accounted for using the equity method. TheCompany regularly reviews its investments to determine whether a decline infair value below the cost basis is other than temporary.  The Company’s accounting policy requires itto evaluate operating losses (if any), credit defaults and other factors thatmay indicate a decrease in value of the investment that is other thantemporary.  The primary factors the Companyconsiders in its determination of an impairment that is other than temporaryare the length of time that the fair value of the investment is below theCompany’s carrying value and the financial condition, operating performance andnear-term prospects of the investee. In addition, the Company considers thereason for the decline in fair value, be it general market conditions,industry-specific or investee-specific; and the Company’s intent and ability tohold the investment for a period of time sufficient to allow for a recovery infair value.  The Company evaluates fairvalue based on specific information (valuation methodologies, financialstatements, estimates of appraisals, etc.). Lack of a public market price forthe Company’s current investments means it uses its best estimates andassumptions to arrive at the estimated fair value of such investment. If thedecline in fair value is deemed to be other than temporary, the cost basis ofthe security is written down to fair value. The Company’s assessment of the foregoing factors involves a high degreeof judgment and, accordingly, actual results may differ materially from theCompany’s estimates and judgments.

 

These financial statements have been prepared in accordancewith accounting principles generally accepted in the United States of Americafor interim financial reporting.  Theyear-end condensed consolidated balance sheet data was derived from auditedfinancial statements.  In management’sopinion, we have made all adjustments necessary for a fair presentation of theCompany’s results of operations, financial position and cash flows for theperiods shown.  These adjustments are ofa normal recurring nature. In addition to reviewing these condensed  consolidated financial statements andaccompanying notes, you should also consult the audited financial statementsand notes that make up the Company’s December 31, 2004 Annual Report on Form10-K.  Finally, results for the sixmonths ended June 30, 2005 are not necessarily indicative of results for thefull year 2005, or for any other future period.

 

**3.             Recent Accounting Pronouncements**

 

                In December 2004,the Financial Accounting Standards Board issued Statement of FinancialAccounting Standards (“SFAS”) No. 123 (revised 2004), *Share-Based Payment*(“SFAS No. 123 (R)”).  This statement addresses the accounting forshare-based payment transactions in which an enterprise receives employeeservices in exchange for (a) equity instruments of the enterprise, or (b)liabilities that are based on the fair value of the enterprise’s equityinstruments or that may be settled by the issuance of such equityinstruments.  SFAS No. 123(R) requires anentity to recognize the grant-date fair-value of stock options and otherequity-based compensation issued to employees in the income statement.  The revised Statement generally requires thatan entity account for those transactions using the fair-value-based method, andeliminates the intrinsic value method of accounting in Accounting PrinciplesBoard Opinion (“APB”) No. 25, *Accounting forStock Issued to Employees*, which was permitted under SFAS No. 123,as originally issued.  The revisedStatement requires entities to disclose information about the nature of theshare-based payment transactions and the effects of those transactions on thefinancial

 

8

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statements.  SFAS 123(R) iseffective for public companies for the first fiscal year beginning afterDecember 15, 2005.  All public companiesmust use either the modified prospective or the modified retrospectivetransition method.  On March 29, 2005,the SEC staff issued Staff Accounting Bulletin (“SAB”) No. 107, “Share-BasedPayment” to express the views of the staff regarding the interaction betweenSFAS No. 123(R) and certain SEC rules and regulations and to provide the staff’sviews regarding the valuation of share-based payment arrangements for publiccompanies.  The Company will take intoconsideration the additional guidance provided by SAB 107 in connection withthe implementation of SFAS No. 123(R). The Company has not yet evaluated the impact of the adoption of thispronouncement, which must be adopted in the first quarter of calendar year2006.

 

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

 

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

 

**4.             Stock andUnit Compensation**

 

As permitted underFinancial Accounting Standards Statement (SFAS) No. 123, *Accountingfor Stock-Based Compensation,*the Company has elected to continue tomeasure compensation costs for stock-based and unit-based employee compensationplans as prescribed by Accounting Principles Board Opinion No. 25, *Accounting for Stock Issued to Employees,* as permitted under SFAS No. 123, and SFASNo. 148, *Accounting for Stock Based Compensation —Transition and Disclosure. *TheCompany has two fixed compensation plans and two variable plans, one of whichis through our consolidated subsidiary, MarkWest Energy Partners.  The Company accounts for these plans usingfixed and variable accounting as appropriate*.*

 

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

 

*Stock Options*

 

Stock options are issued under the Company’s 1996 StockIncentive Plan and 1996 Non-employee Director Stock Option Plan.  The plans allow for the exercise of stockoptions using the cashless method, but only at the discretion of theCompany.  Under a cashless exercise, theCompany withholds those shares that otherwise would be issued upon the exerciseof the option, the number of shares with a fair market value equal to theoption exercise price and remits the remaining shares to the employees.  Prior to April 2004, the Company did notallow participants to exercise their stock options using the cashlessmethod.  Accordingly, compensationexpense was not recognized for stock options granted unless the options weregranted at an exercise price less than the quoted market price of the Companyon the grant date.  In April 2004, theCompany changed its policy to allow participants to exercise their stockoptions using the cashless method.  UnderAPB 25, *Accounting for Stock Issued toEmployees,*a fixed stock option plan that permits the use of acashless exercise becomes variable if a pattern of exercising the stock options

 

9

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using the cashless method is demonstrated.  As a result, in April 2004, the Company wasrequired to account for stock options issued under the plans as variableawards.  Compensation expense for stockoptions issued as variable awards is measured as the difference in the marketvalue of the Company’s common stock and the exercise price of the stockoptions.  The difference is amortizedinto earnings over the period of service as the options vest, adjustedquarterly for the change in the fair value of the unvested stock optionsawarded.  Increases or decreases in themarket value of the Company’s common stock between April 2004 and the end ofeach reporting period result in a change in the measure of compensation forvested awards, which is reflected currently in operations in selling, generaland administrative expenses.  The Companyrecorded compensation expense for options granted under the plans accounted foras variable awards of $0.3 million and $1.0 million for the three and sixmonths ended June 30, 2005, respectively and $0.7 million for the three and sixmonths ended June 30, 2004.

 

During the three and sixmonths ended June 30, 2005, recipients exercised their options to purchase anaggregate 5,771 and 30,665 shares of the Company’s common stock,respectively.  During the three and sixmonths ended June 30, 2005, recipients exercised options for 1,430 and 21,377shares using the cashless method, respectively, resulting in the net issuanceof 909 and 13,091 shares of common stock, respectively. During the three andsix months ended June 30, 2004, recipients exercised their options topurchase an aggregate of 118,403 and 193,000 shares of the Company’s commonstock, respectively.  During the threeand six months ended June 30, 2004, recipients exercised options for 46,437shares using the cashless method resulting in the net issuance of 17,537 sharesof common stock.

 

During the three months ended March 31, 2004, two officers resignedfrom the Company.  As the former officerscontinued to serve on the Company’s Board of Directors, the Company agreed thatthe individual’s stock options would continue to vest and be exercisable inaccordance with the original vesting and exercise provisions.  As a result of the modification to the stockoptions for these officers, the outstanding stock options are to be accountedfor as variable awards and, as a result, the Company recorded compensation expenseof $0.4 million for the three months ended June 30, 2004, measured as thedifference in the market value of the Company’s common stock on the date theofficer’s status changed and the strike price of the outstanding stockoptions.  These charges are included inselling, general and administrative expenses.

 

*Restricted Stock*

 

The Company also issues restricted stock under its 1996 StockIncentive Plan and 1996 Non-employee Director Stock Option Plan.  In accordance with APB No. 25, the Companyapplies fixed accounting for the plan. As a result, since the restricted stockis granted for no consideration, compensation expense is recognized on the dateof grant, and is equal to the difference between the market price of theCompany’s common stock and the grant price. The fair value of the stock awarded is amortized into earnings over theperiod of service.  The restricted stockvests over a stated period.  During thesix months ended June 30, 2005, the Company granted 6,973 shares of restrictedstock.  The Company recorded compensationexpense of less than $0.1 million for both the three and six months ended June30, 2005.  The Company recorded nocompensation expense for the three and six months ended June 30, 2004.  These charges are included in selling,general and administrative expenses.

 

***ParticipationPlan***

 

The Company has also entered into arrangements with certainof its directors and employees.  Thesearrangements are referred to as the Participation Plan.  Under the Participation Plan, the Companysells subordinated partnership units of the Partnership and interests in thePartnership’s general partner to employees and directors of the Company under apurchase and sale agreement.  Inaccordance with the provisions of APB No. 25, *Accountingfor Stock Issued to Employees,*and EITF No. 95-16, *Accounting for Stock Compensation Arrangements withEmployer Loan Features,*the Participation Plan is accounted for as avariable plan.  Since the employee and directorare 100% vested on the date they purchase the subordinated units or generalpartner interest, compensation expense for the subordinated units is measuredas the difference in the market value of the subordinated Partnership units andthe amount paid by those individuals. Compensation related to the general partner interest is calculated asthe difference in the formula value and the amount paid by thoseindividuals.  The formula value is theamount MarkWest Hydrocarbon would have to pay the directors and employees torepurchase the general partners’ interests

 

10

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and is based on the current market value of the Partnership’s commonunits and the current quarterly distribution paid by the Partnership.  Increases or decreases in the market value ofthe subordinated units and the formula value of the general partner interestsbetween the date they are acquired and the end of each reporting period resultin a change in the measure of compensation. This is reflected currently in operations.  The Company recorded compensation expense of$1.2 million and $0.1 million for the three months ended June 30, 2005 and2004, respectively and compensation expense of $2.8 million and $0.5 millionfor the six months ended June 30, 2005 and 2004, respectively.  These charges are included in selling,general and administrative expense.

 

***MarkWest Energy Partners Long-TermIncentive Plan***

 

                The Partnershipissues restricted units under the MarkWest Energy Partners, L.P. Long-TermIncentive Plan.  A restricted unit is a “phantom”unit that entitles the grantee to receive a common unit upon the vesting of thephantom unit; or, at the discretion of the Compensation Committee, cashequivalent to the market value of a common unit.  In accordance with APB No. 25, thePartnership applies variable accounting for the plan because a phantom unit isan award to employees entitling them to increases in the market value of thePartnership’s units subsequent to the date of grant without actually issuingunits to the employees—similar to a stock appreciation right.  As a result, the Partnership is required tomark to market the awards at the end of each reporting period.  Compensation expense is measured for thephantom unit grants using the market price of MarkWest Energy Partner’s commonunits on the date the units are granted. The fair value of the units awarded is amortized into earnings over theperiod of service, adjusted quarterly for the change in the fair value of theunvested units granted.  The phantomunits vest over a stated period.  Forcertain employees, vesting is accelerated if certain performance measures aremet.  The accelerated vesting criteriaprovisions are based on annualized distribution goals.  If the Partnership’s distributions are at orabove the goal for a certain number of consecutive quarters, vesting of theemployee’s phantom units is accelerated. The vesting of any phantom units may not occur, however, until at leastone year following the date of grant. The general partner of the Partnership may also elect to accelerate thevesting of outstanding awards, which results in an immediate charge tooperations for the unamortized portion of the award.  The Partnership recorded compensation expenseof $0.5 million and compensation income of less than $0.1 million for the threemonths ended June 30, 2005 and 2004, respectively, and compensation expense of$0.7 million and $0.3 million for the six months ended June 30, 2005 and 2004,respectively.

 

                Had compensationcost for the Company’s stock-based compensation plans been determined based onthe fair value at the grant dates under those plans consistent with the methodprescribed by SFAS No. 123,**our net lossand net loss per share would have been revised to the pro forma amounts listedbelow:

 
| ** **                                                                                                                                   | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|-------------------------------|------------|
| ** **                                                                                                                                   | ** ** | **2005**                        | ** ** | **2004**                      | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                                                                                         |       |                            |       |                          |       |   |   |   |   |
| Net loss, as  reported                                                                                                                       |       | $                               | (1,609     | )                             | $          | (6,368 | ) | $ | (70 | ) | $ | (5,650 | ) |
| Add:  compensation expense included in reported net loss, net of related tax effect                                                          |       | 1,297                           |       | 783                           |       | 3,052 |   | 2,008 |   |
| Deduct: total  stock-based employee compensation expense determined under fair value based  method for all awards, net of related tax effect |       | (1,116                          | )          | (98                           | )          | (2,405 | ) | (994 | ) |
| Pro forma net  income (loss)                                                                                                                 |       | $                               | (1,428     | )                             | $          | (5,683 | ) | $ | 577 |   | $ | (4,636 | ) |
|                                                                                                                                         |       |                            |       |                          |       |   |   |   |   |
| Net income  (loss) per share:                                                                                                                |       |                            |       |                          |       |   |   |   |   |
| Basic:                                                                                                                                       |       |                            |       |                          |       |   |   |   |   |
| As reported                                                                                                                                  |       | $                               | (0.15      | )                             | $          | (0.60 | ) | $ | (0.01 | ) | $ | (0.53 | ) |
| Pro forma                                                                                                                                    |       | $                               | (0.13      | )                             | $          | (0.53 | ) | $ | 0.05 |   | $ | (0.44 | ) |
| Diluted:                                                                                                                                     |       |                            |       |                          |       |   |   |   |   |
| As reported                                                                                                                                  |       | $                               | (0.15      | )                             | $          | (0.60 | ) | $ | (0.01 | ) | $ | (0.53 | ) |
| Pro forma                                                                                                                                    |       | $                               | (0.13      | )                             | $          | (0.53 | ) | $ | 0.05 |   | $ | (0.44 | ) |

 

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**5.             MarketableSecurities**

 

Marketable securities are classified as available-for-saleand stated at market based on the closing price of the securities at the balancesheet date.  Accordingly, unrealizedgains or temporary losses are reflected in other comprehensive income, net ofapplicable income taxes.  For losses thatare other than temporary, the cost basis of the securities is written down tofair value, and the amount of the write down is reflected in the statement ofoperations. The Company utilizes a first-in first-out cost basis to computerealized gains and losses.  Realizedgains and losses, dividends, interest income, and the amortization of discountsand premiums are reflected in earnings.

 

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

 
| **June 30, 2005**                                                   | ** ** | **Cost Basis** | ** ** | **Unrealized  gains** | ** ** | **Unrealized  losses** | ** ** | **Recorded  Basis** | ** ** |
|---------------------------------------------------------------------|------------|----------------|------------|-----------------------|------------|------------------------|------------|---------------------|------------|
| **Equity  securities:**                                             |       |           |       |                  |       |                   |       |                |       |
| Master limited  partnership unit securities                         |       | $              | 5,498      |                  | $          | 1,213                  |       | $                   | (4         | ) | $ | 6,707 |   |
| **Fixed  maturities:**                                              |       |           |       |                  |       |                   |       |                |       |
| Mortgage backed  securities (due after one year through five years) |       | 13,724         |       | —                |       | (87                    | )          | 13,637              |       |
| Total marketable  securities, classified as current                 |       | $              | 19,221     |                  | $          | 1,213                  |       | $                   | (91        | ) | $ | 20,344 |   |

** **
| **December 31, 2004**                                               | ** ** | **Cost Basis** | ** ** | **Unrealized  gains** | ** ** | **Unrealized  losses** | ** ** | **Recorded  Basis** | ** ** |
|---------------------------------------------------------------------|------------|----------------|------------|-----------------------|------------|------------------------|------------|---------------------|------------|
| **Equity  securities:**                                             |       |           |       |                  |       |                   |       |                |       |
| Master limited  partnership units                                   |       | $              | 5,248      |                  | $          | 872                    |       | $                   | (19        | ) | $ | 6,101 |   |
| **Fixed  maturities:**                                              |       |           |       |                  |       |                   |       |                |       |
| Mortgage backed  securities (due after one year through five years) |       | 8,750          |       | 10                    |       | (46                    | )          | 8,714               |       |
| Total marketable  securities, classified as current                 |       | $              | 13,998     |                  | $          | 882                    |       | $                   | (65        | ) | $ | 14,815 |   |

 

At June 30, 2005, unrealized gains of$1.2 million relate primarily to investments in equity securities of domesticenergy partnerships.  Unrealized losses of $0.1 million relate primarilyto mortgage backed securities and are primarily attributable to changes ininterest rates.  Net unrealized gains on marketable securities of $0.2 million,net of the related tax effect of $0.1 million, are reflected as a component ofother comprehensive loss at June 30, 2005.

 

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

 

**6.             IncomeTaxes**

 

                TheCompany accounts for income taxes under the asset and liability method pursuantto SFAS No. 109, *Accounting for IncomeTaxes*. Under SFAS No. 109, deferred income taxes are recognizedfor the future tax consequences attributable to differences between thefinancial statement carrying amounts of existing assets and liabilities andtheir respective tax basis and net operating loss and credit carryforwards.Deferred tax assets and liabilities are measured using enacted tax ratesexpected to apply to taxable income in the years in which those temporary differencesare expected to be recovered or settled. The effect of any tax rate change ondeferred taxes is recognized as income in the period that includes theenactment date of the tax rate change. Realizability of deferred

 

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tax assets is assessed and, if not more likely thannot, a valuation allowance is recorded to write down the deferred tax assets totheir net realizable value. The Company bases the effective corporate tax ratefor interim periods on the estimated annual effective corporate tax rate.  Income tax benefit totaled $0.8 million andless than $0.1 million for the three and six months ended June 30, 2005,respectively, resulting in an effective tax rate of 31.7%.  Income tax expense totaled $0.5 million and$0.4 million for the three and six months ended June 30, 2004, respectively, resultingin an effective income tax rate of (8.4)%.

 

**7.             MarkWestEnergy Partners’ Acquisitions**

 

*StarfishAcquisition*

 

**               **OnMarch 31, 2005, MarkWest Energy Partners completed the acquisition of a 50%non-operating membership interest in Starfish Pipeline Company, LLC, (“Starfish”)from an affiliate of Enterprise Products Partners L.P. for $41.7 million.  Starfish is a joint venture with EnbridgeOffshore Pipelines LLC, which we account for using the equity method.  Starfish owns the FERC-regulated Stingray naturalgas pipeline and the unregulated Triton natural gas gathering system and WestCameron dehydration facility, all located in the Gulf of Mexico andSouthwestern Louisiana.

 

*East TexasSystem Acquisition*

 

                On July 30, 2004,MarkWest Energy Partners completed the acquisition of American Central EasternTexas’ Carthage gathering system located in East Texas (the “East Texas System”)for approximately $240.7 million.  TheCompany’s condensed consolidated financial statements include American CentralEastern Texas’ results of operations from July 30, 2004.  The assets acquired consist of gatheringsystems, compressor stations and a processing facility currently underconstruction, as well as an NGL pipeline being constructed in 2005.

 

                The totaladjusted purchase price was $240.7 million, and was allocated as follows(in thousands):

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

 

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*                ProForma Results of Operations (Unaudited)*

 

                The followingtable reflects the unaudited pro forma consolidated results of operations forthe comparable period presented, as though the East Texas and Starfishacquisitions had occurred on January 1, 2004. The unaudited pro forma results have been prepared for comparativepurposes only and may not be indicative of future results.

 
| ** **                    | ** ** | **Six Months Ended June 30, 2005**        | ** ** |
|-------------------------------|------------|-------------------------------------------|------------|
| ** **                    | ** ** | **MarkWest  Hydrocarbon**                 | ** ** | **Starfish** | ** ** | **Adjustments(1)** | ** ** | **Total** | ** ** |
| ** **                    | ** ** | **(in thousands, except per share data)** | ** ** |
| Revenue                       |       | $                                         | 279,393    |   | $ | — |   | $ | — |   | $ | 279,393 |   |
| Net income  (loss)            |       | $                                         | (70        | ) | $ | 984 |   | $ | (957 | ) | $ | (43 | ) |
| Net income  (loss) per share: |       |                                      |       |   |   |   |   |   |   |
| Basic                         |       | $                                         | (0.01      | ) |   |   |   |   | $ | 0.00 |   |
| Diluted                       |       | $                                         | (0.01      | ) |   |   |   |   | $ | 0.00 |   |

** **
| ** **           | ** ** | **Three Months Ended June 30, 2004**      | ** ** |
|----------------------|------------|-------------------------------------------|------------|
| ** **           | ** ** | **MarkWest  Hydrocarbon**                 | ** ** | **East Texas** | ** ** | **Starfish** | ** ** | **Adjustments(1)** | ** ** | **Total** | ** ** |
| ** **           | ** ** | **(in thousands, except per share data)** | ** ** |
| Revenue              |       | $                                         | 89,024     |   | $ | 9,248 |   | $ | — |   | $ | — |   | $ | 98,272 |   |
| Net income  (loss)   |       | $                                         | (6,368     | ) | $ | 3,368 |   | $ | 1,018 |   | $ | (4,640 | ) | $ | (6,622 | ) |
| Net loss per  share: |       |                                      |       |   |   |   |   |   |   |   |   |
| Basic                |       | $                                         | (0.60      | ) |   |   |   |   |   |   | $ | (0.62 | ) |
| Diluted              |       | $                                         | (0.60      | ) |   |   |   |   |   |   | $ | (0.62 | ) |

 
| ** **           | ** ** | **Six Months Ended June 30, 2004**        | ** ** |
|----------------------|------------|-------------------------------------------|------------|
| ** **           | ** ** | **MarkWest  Hydrocarbon**                 | ** ** | **East Texas** | ** ** | **Starfish** | ** ** | **Adjustments(1)** | ** ** | **Total** | ** ** |
| ** **           | ** ** | **(in thousands, except per share data)** | ** ** |
| Revenue              |       | $                                         | 182,724    |   | $ | 17,106 |   | $ | — |   | $ | — |   | $ | 199,830 |   |
| Net income (loss)    |       | $                                         | (5,650     | ) | $ | 7,227 |   | $ | 2,092 |   | $ | (9,695 | ) | $ | (6,026 | ) |
| Net loss per  share: |       |                                      |       |   |   |   |   |   |   |   |   |
| Basic                |       | $                                         | (0.53      | ) |   |   |   |   |   |   | $ | (0.57 | ) |
| Diluted              |       | $                                         | (0.53      | ) |   |   |   |   |   |   | $ | (0.57 | ) |

 

(1) Adjustments primarily for amortizationand financing costs.

 

**8.****              Related Party Transactions**

 

                Through theCompany’s wholly owned subsidiary, Matrex, LLC, the Company holds interests incertain exploration and production assets in which MAK-J Energy Partners Ltd. (“MAK-J”)also owns interests.  The general partnerof MAK-J is a corporation owned and controlled by the Company’s formerPresident and Chief Executive Officer and current Chairman of the Board ofDirectors.  Two former officers, both ofwho left the Company during 2003, were limited partners in MAK-J.  Both parties are participants in jointoperating agreements involving other third parties.

 

                The Company hasreceivables due from MAK-J, representing its share of operating and capitalcosts generated in the normal course of business, of $0.1 million and less than$0.1 million as of June 30, 2005, and December 31, 2004, respectively. TheCompany also has payables to MAK-J, representing its share of revenuesgenerated in the normal course of business, of less than $0.1 million as ofboth June 30, 2005, and December 31, 2004.

 

14

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                Immediately after the Partnership’s initial public offeringon May 24, 2002, MarkWest Hydrocarbon sold an 8.6% interest in the generalpartner of the Partnership and 24,864 of its Partnership subordinated units, tocertain officers of MarkWest Hydrocarbon for a total purchase price of $0.6million.  The officers and employees paidapproximately 30% of the purchase price in cash, or $0.2 million, and financedthe remainder, approximately $0.4 million, with notes payable to MarkWestHydrocarbon.  The non-recourse promissorynotes requires that the principal balance is to be repaid no later thanJune 30, 2009 and the notes bear interest at the rate of 7% per annum on theunpaid balance.  Outstanding notesreceivable from two officers pertaining to the loans made in May 2002 wereapproximately $0.2 million as of June 30, 2005. Outstanding notes receivable from two officers and one former officerwere approximately $0.2 million at December 31, 2004.  In the second quarter of 2005, a formerofficer paid off the outstanding balance on his loan for less than $0.1million.

 

**9.             AssetRetirement Obligations**

 

                In June 2001, theFASB issued Statement No. 143, *Accountingfor Asset Retirement Obligations. *TheCompany adopted SFAS No. 143 beginning January 1, 2003. The most significantimpact of this standard on the Company was a change in the method of accruingfor site restoration costs.  Under SFASNo. 143, the fair value of asset retirement obligations is recorded as a liabilitywhen incurred, which is typically at the time the assets are placed inservice.  Amounts recorded for therelated assets are increased by the amount of these obligations.  Over time, the liabilities are accreted forthe change in their present value and the initial capitalized costs aredepreciated over the useful lives of the related assets.

 

                The Partnershipreviewed current laws and regulations governing obligations for assetretirements as well as leases.  Based onthat review, the Partnership identified certain land leases in East Texas thatcontain provisions requiring the Partnership to return the land to its originalcondition upon the termination of the lease. Based on the review of the leases, the Partnership recorded an assetretirement obligation of $0.4 million during the year ended December 31, 2004,using an estimated average term of the leases of 25 years.  For both the three and six months ended June30, 2005, accretion expense was less than $0.1 million.  At June 30, 2005, the asset retirementobligation was $0.4 million.

 

                In accordance withSFAS No. 143, the Partnership has identified certain assets that have anindeterminate life, and thus a future retirement obligation is notdeterminable.  These assets includecertain pipelines and processing plants. A liability for these asset retirement obligations will be recorded whena fair value is determinable.

 

                The assetretirement obligation associated with the Partnership’s remaining facilitieswas insignificant, and so was not recognized in the financial statements.

 

                In October 2003,the Board of Directors of the Company’s general partner approved a plan to shutdown the Partnership’s existing Cobb processing facility and construct areplacement facility. Construction of the new facility was completed inthe first quarter of 2005.  During the fourth quarter of 2003, thePartnership estimated the amount of the asset retirement obligation associatedwith the decommissioning and dismantlement of the old Cobb facility to be $0.5million, and, accordingly, the Partnership recorded a related currentliability.  The Partnership expects tocomplete the decommissioning and dismantlement of the old Cobb facility in thefourth quarter of 2005.  At June 30,2005, the asset retirement obligation was $0.5 million.

 

                At June 30, 2005and 2004, there were no assets legally restricted for purposes of settlingasset retirement obligations.

 

15

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                The following is areconciliation of the Company’s asset retirement obligation activity for thesix months ended June 30, 2005 (in thousands):

 
| Asset retirement  obligation as of December 31, 2004 |   | $      | 892    |   |
|------------------------------------------------------|--------|--------|--------|--------|
| Accretion                                            |   | 17     |   |
| Asset retirement obligation as of June 30, 2005      |   | $      | 909    |   |
|                                                 |   |   |   |
| Current                                              |   | $      | 450    |   |
| Long-term                                            |   | 459    |   |
| Asset retirement obligation as of June 30, 2005      |   | $      | 909    |   |

 

**10.          Property,Plant and Equipment**

 

                Property, plantand equipment consists of:

 
| ** **                                | ** ** | **June 30, 2005**  | ** ** | **December 31, 2004** | ** ** |
|-------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                | ** ** | **(in thousands)** | ** ** |
| Property, plant and equipment:            |       |               |       |                  |       |
| Gas gathering  facilities                 |       | $                  | 182,843    |                  | $          | 160,763 |   |
| Gas processing  plants                    |       | 58,617             |       | 56,239                |       |
| Fractionation  and storage facilities     |       | 22,778             |       | 22,112                |       |
| Natural gas  pipelines                    |       | 38,167             |       | 38,167                |       |
| Crude oil  pipelines                      |       | 19,447             |       | 18,499                |       |
| NGL  transportation facilities            |       | 4,425              |       | 4,381                 |       |
| Furniture,  office equipment and other    |       | 3,743              |       | 4,113                 |       |
| Land, buildings  and other equipment      |       | 10,031             |       | 9,418                 |       |
| Construction in progress                  |       | 36,654             |       | 28,944                |       |
|                                      |       | 376,705            |       | 342,636               |       |
| Less:  Accumulated depreciation           |       | (68,695            | )          | (59,443               | )          |
| Total property,  plant and equipment, net |       | $                  | 308,010    |                  | $          | 283,193 |   |

 

**               **Forthe three and six months ended June 30, 2005, the Company capitalized intereston construction in progress, including amortization of deferred financingcosts, of $0.4 million and $1.0 million, respectively. For the three and sixmonths ended June 30, 2004, the Company capitalized interest on construction inprogress, including amortization of deferred financing costs, of less than $0.1million for each period, respectively.

 

**11.          Dividendsto Shareholders**

 

                On April 28, 2005, our Board of Directorsdeclared a quarterly cash dividend of $0.10per share.  This represented an increaseof $0.075 per share from the same period of 2004, payable on May 23, 2005,to the stockholders of record as of the close of business on May 16, 2005.  The ex-dividend date was May 12, 2005.

 

16

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                On July 22, 2005, our Board of Directorsdeclared a quarterly cash dividend of $0.10per share.  This represented an increaseof $0.075 per share from the same period of 2004, payable on August 22, 2005,to the stockholders of record as of the close of business on August 15,2005.  The ex-dividend date wasAugust 11, 2005.

 

                The Boardcontinues to support its objective of maintaining a regular quarterly dividend,but cautions that any such future declaration will be dependent upon ourfinancial performance.

 

**12.          SegmentReporting**

 

                Our operations areclassified into two reportable segments:

 

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

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

 

                The accountingpolicies the Company applies in the preparation of business segment informationare generally the same as those described in Note 2 to the ConsolidatedFinancial Statements in our December 31, 2004, Annual Report on Form10-K.  An exception is that certain itemsbelow the “Income before non-controlling interest in net income of consolidatedsubsidiary and income taxes” line are not allocated to business segments asthey are not considered by management in its evaluation of business unitperformance.

 

                The table belowpresents information about income before non-controlling interest in net incomeof consolidated subsidiary and income taxes for the reported segments for thethree and six months ended June 30, 2005 and 2004. Selling, general and administrative expenses are allocated to thesegments based on direct expenses incurred by the segments, or allocated basedon****thepercent of time that employees devote to the segment in accordance with thePartnership’s services agreement with the Company.****

 

17

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| ** **                                                                                                | ** ** | **MarkWest  Hydrocarbon  Standalone** | ** ** | **MarkWest  Energy  Partners** | ** ** | **Eliminating  Entries** | ** ** | **Total** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------|------------|--------------------------|------------|-----------|------------|
| ** **                                                                                                | ** ** | **(in thousands)**                    | ** ** |
| **Three  Months Ended June 30, 2005:**                                                                    |       |                                  |       |                           |       |                     |       |      |       |
| Revenues                                                                                                  |       | $                                     | 52,786     |                           | $          | 102,960                  |       | $         | (14,706    | ) | $ | 141,040 |   |
| Purchased  product costs                                                                                  |       | 47,729                                |       | 73,862                         |       | (9,237                   | )          | 112,354   |       |
| Facility  expenses                                                                                        |       | 5,094                                 |       | 11,360                         |       | (5,469                   | )          | 10,985    |       |
| Selling, general  and administrative expenses                                                             |       | 2,814                                 |       | 6,311                          |       | —                   |       | 9,125     |       |
| Depreciation                                                                                              |       | 419                                   |       | 4,576                          |       | —                   |       | 4,995     |       |
| Amortization of  intangible assets                                                                        |       | —                                |       | 2,095                          |       | —                   |       | 2,095     |       |
| Accretion of  asset retirement and sublease obligations                                                   |       | 2                                     |       | 9                              |       | —                   |       | 11        |       |
| Income (loss)  from operations                                                                            |       | (3,272                                | )          | 4,747                          |       | —                   |       | 1,475     |       |
|                                                                                                      |       |                                  |       |                           |       |                     |       |      |       |
| Equity in  earning of unconsolidated subsidiary                                                           |       | (1                                    | )          | 990                            |       |                     |       | 989       |       |
| Interest income                                                                                           |       | 258                                   |       | 63                             |       | —                   |       | 321       |       |
| Interest expense                                                                                          |       | (30                                   | )          | (4,558                         | )          | —                   |       | (4,588    | )          |
| Amortization of  deferred financing costs (a component of interest expense)                               |       | (61                                   | )          | (497                           | )          | —                   |       | (558      | )          |
| Dividend income                                                                                           |       | 96                                    |       | —                         |       | —                   |       | 96        |       |
| Other income  (expense)                                                                                   |       | 222                                   |       | (74                            | )          | —                   |       | 148       |       |
| Income (loss)  before non-controlling interest in net income of consolidated subsidiary and  income taxes |       | $                                     | (2,788     | )                              | $          | 671                      |       | $         | —     |   | $ | (2,117 | ) |
| **June  30, 2005:**                                                                                       |       |                                  |       |                           |       |                     |       |      |       |
| Cash, cash  equivalents and restricted cash                                                               |       | $                                     | 12,175     |                           | $          | 13,203                   |       | $         | —     |   | $ | 25,378 |   |
| Marketable  securities                                                                                    |       | 20,344                                |       | —                         |       | —                   |       | 20,344    |       |
| Current assets                                                                                            |       | 75,548                                |       | 44,483                         |       | —                   |       | 120,031   |       |
| Current  liabilities                                                                                      |       | 26,968                                |       | 43,269                         |       | —                   |       | 70,237    |       |
| Total assets                                                                                              |       | 80,577                                |       | 563,358                        |       | —                   |       | 643,935   |       |
| Total debt                                                                                                |       | —                                |       | 290,000                        |       | —                   |       | 290,000   |       |
|                                                                                                      |       |                                  |       |                           |       |                     |       |      |       |
| **Three  Months Ended June 30, 2004:**                                                                    |       |                                  |       |                           |       |                     |       |      |       |
| Revenues                                                                                                  |       | $                                     | 37,286     |                           | $          | 65,659                   |       | $         | (13,921    | ) | $ | 89,024 |   |
| Purchased  product costs                                                                                  |       | 35,620                                |       | 49,371                         |       | (7,729                   | )          | 77,262    |       |
| Facility expenses                                                                                         |       | 5,841                                 |       | 6,326                          |       | (6,192                   | )          | 5,975     |       |
| Selling, general  and administrative expenses                                                             |       | 2,945                                 |       | 2,125                          |       | —                   |       | 5,070     |       |
| Depreciation                                                                                              |       | 356                                   |       | 3,301                          |       | —                   |       | 3,657     |       |
| Amortization of  intangible assets                                                                        |       | —                                |       | 34                             |       | —                   |       | 34        |       |
| Income (loss)  from operations                                                                            |       | (7,476                                | )          | 4,502                          |       | —                   |       | (2,974    | )          |
|                                                                                                      |       |                                  |       |                           |       |                     |       |      |       |
| Interest income                                                                                           |       | 207                                   |       | 14                             |       | —                   |       | 221       |       |
| Interest expense                                                                                          |       | (8                                    | )          | (915                           | )          | —                   |       | (923      | )          |
| Amortization of  deferred financing cost (a component of interest expense)                                |       | 8                                     |       | (315                           | )          | —                   |       | (307      | )          |
| Dividend income                                                                                           |       | 83                                    |       | —                         |       | —                   |       | 83        |       |
| Other expense                                                                                             |       | (7                                    | )          | (24                            | )          | —                   |       | (31       | )          |
| Income (loss)  before non-controlling interest in net income of consolidated subsidiary and  income taxes |       | $                                     | (7,193     | )                              | $          | 3,262                    |       | $         | —     |   | $ | (3,931 | ) |
| **June  30, 2004:**                                                                                       |       |                                  |       |                           |       |                     |       |      |       |
| Cash, cash  equivalents and restricted cash                                                               |       | $                                     | 27,406     |                           | $          | 8,871                    |       | $         | —     |   | $ | 36,277 |   |
| Marketable  securities                                                                                    |       | 13,875                                |       | —                         |       | —                   |       | 13,875    |       |
| Current assets                                                                                            |       | 61,652                                |       | 27,570                         |       | —                   |       | 89,222    |       |
| Current  liabilities                                                                                      |       | 24,122                                |       | 112,361                        |       | —                   |       | 136,483   |       |
| Total assets                                                                                              |       | 65,050                                |       | 217,470                        |       | —                   |       | 282,520   |       |
| Total debt                                                                                                |       | —                                |       | 86,200                         |       | —                   |       | 86,200    |       |
|                                                                                                           |            |                                       |            |                                |            |                          |            |           |            |  |  |  |  |  |  |  |  |  |

 

18

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| ** **                                                                                                | ** ** | **MarkWest  Hydrocarbon  Standalone** | ** ** | **MarkWest  Energy  Partners** | ** ** | **Eliminating  Entries** | ** ** | **Total** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------|------------|--------------------------|------------|-----------|------------|
| ** **                                                                                                | ** ** | **(in thousands)**                    | ** ** |
| **Six  Months Ended June 30, 2005:**                                                                      |       |                                  |       |                           |       |                     |       |      |       |
| Revenues                                                                                                  |       | $                                     | 117,307    |                           | $          | 192,597                  |       | $         | (30,511    | ) | $ | 279,393 |   |
| Purchased  product costs                                                                                  |       | 101,550                               |       | 134,647                        |       | (19,144                  | )          | 217,053   |       |
| Facility  expenses                                                                                        |       | 10,921                                |       | 20,691                         |       | (11,367                  | )          | 20,245    |       |
| Selling, general  and administrative expenses                                                             |       | 6,277                                 |       | 10,950                         |       | —                   |       | 17,227    |       |
| Depreciation                                                                                              |       | 834                                   |       | 8,902                          |       | —                   |       | 9,736     |       |
| Amortization of  intangible assets                                                                        |       | —                                |       | 4,190                          |       | —                   |       | 4,190     |       |
| Accretion of  asset retirement and sublease obligations                                                   |       | 2                                     |       | 19                             |       | —                   |       | 21        |       |
| Income (loss)  from operations                                                                            |       | (2,277                                | )          | 13,198                         |       | —                   |       | 10,921    |       |
|                                                                                                      |       |                                  |       |                           |       |                     |       |      |       |
| Equity in  earnings of unconsolidated subsidiaries                                                        |       | —                                |       | 990                            |       | —                   |       | 990       |       |
| Interest income                                                                                           |       | 440                                   |       | 130                            |       | —                   |       | 570       |       |
| Interest expense                                                                                          |       | (61                                   | )          | (8,232                         | )          | —                   |       | (8,293    | )          |
| Amortization of  deferred financing costs (a component of interest expense)                               |       | (122                                  | )          | (972                           | )          | —                   |       | (1,094    | )          |
| Dividend income                                                                                           |       | 188                                   |       | —                         |       | —                   |       | 188       |       |
| Other income  (expense)                                                                                   |       | 413                                   |       | (178                           | )          | —                   |       | 235       |       |
| Income (loss)  before non-controlling interest in net income of consolidated subsidiary and  income taxes |       | $                                     | (1,419     | )                              | $          | 4,936                    |       | $         | —     |   | $ | 3,517 |   |
|                                                                                                      |       |                                  |       |                           |       |                     |       |      |       |
| **Six  Months Ended June 30, 2004:**                                                                      |       |                                  |       |                           |       |                     |       |      |       |
| Revenues                                                                                                  |       | $                                     | 81,678     |                           | $          | 129,484                  |       | $         | (28,438    | ) | $ | 182,724 |   |
| Purchased  product costs                                                                                  |       | 71,471                                |       | 97,224                         |       | (15,945                  | )          | 152,750   |       |
| Facility  expenses                                                                                        |       | 11,938                                |       | 12,616                         |       | (12,493                  | )          | 12,061    |       |
| Selling, general  and administrative expenses                                                             |       | 5,362                                 |       | 5,023                          |       | —                   |       | 10,385    |       |
| Depreciation                                                                                              |       | 739                                   |       | 6,446                          |       | —                   |       | 7,185     |       |
| Amortization of  intangible assets                                                                        |       | —                                |       | 68                             |       | —                   |       | 68        |       |
| Income (loss)  from operations                                                                            |       | (7,832                                | )          | 8,107                          |       | —                   |       | 275       |       |
|                                                                                                      |       |                                  |       |                           |       |                     |       |      |       |
| Interest income                                                                                           |       | 335                                   |       | 21                             |       | —                   |       | 356       |       |
| Interest expense                                                                                          |       | (9                                    | )          | (2,044                         | )          | —                   |       | (2,053    | )          |
| Amortization of  deferred financing cost (a component of interest expense)                                |       | 9                                     |       | (623                           | )          | —                   |       | (614      | )          |
| Dividend income                                                                                           |       | 83                                    |       | —                         |       | —                   |       | 83        |       |
| Other income  (expense)                                                                                   |       | 33                                    |       | (38                            | )          | —                   |       | (5        | )          |
| Income (loss)  before non-controlling interest in net income of consolidated subsidiary and  income taxes |       | $                                     | (7,381     | )                              | $          | 5,423                    |       | $         | —     |   | $ | (1,958 | ) |
|                                                                                                           |            |                                       |            |                                |            |                          |            |           |            |  |  |  |  |  |  |

 

**13.          Commitmentsand Contingencies**

 

**               ***Legal*

 

*               *TheCompany and several of its affiliates were served earlier this year with twolawsuits presently under the jurisdiction of the U.S. District Court for theEastern District of Kentucky, Pikeville Division.  In early November 2005, the Company wasserved with an additional lawsuit filed in Floyd County Circuit Court,Kentucky, adding five new claimants, essentially alleging the same facts andclaims as the earlier two suits.  Thesesuits are for third-party claims of property and personal injury damagessustained as a consequence of a NGL pipeline leak and an ensuing explosion andfire that occurred on November 8, 2004 from a natural gas pipeline, owned by anunrelated business entity, and leased and operated by the Partnership’ssubsidiary, MarkWest Energy Appalachia, LLC. The pipeline transports NGLs from the Maytown gas processing plant tothe Partnership’s Siloam fractionator. An ignition and fire from the leakedvapors resulted in property damage to five homes and injuries to some of theresidents.  The

 

19

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cause of the pipeline split, resulting leak, explosion, and fire is beinginvestigated by the pipeline owner, the U.S. Department of Transportation,Office of Pipeline Safety (“OPS”), and the Partnership.

 

                The Company andthe Partnership have timely notified their general liability insurance carriersof the incident and of the filed Kentucky actions and are coordinating thedefense of these third-party lawsuits with the insurers.  At this time, the Company and the Partnershipbelieve that they have adequate general liability insurance coverage for third-partyproperty damage and personal injury liability resulting from the incident.  To date, the Company and the Partnership havesettled with several of the claimants for third-party property damage claims(damage to residences and personal property) related to this incident, inaddition to reaching settlement for some of the personal injury claims relatedto the pipeline explosion and fire. These settlements have been paid for or reimbursed under the Partnership’sgeneral liability insurance.  As aresult, the Company has not provided for a loss contingency.

 

                Pursuant to OPS regulationmandates and to a Corrective Action Order issued by the OPS immediately afterthe incident, pipeline and valve integrity evaluation, testing, and repairefforts were required and conducted on the affected pipeline segment beforeservice could be resumed.  Partial returnto service of the affected pipeline occurred in October 2005.  The Company and the Partnership have filed anindependent action against their All-Risk Property and Business Interruptioninsurance carriers as a result of their refusal to honor their insurancecoverage obligation for providing the Company and the Partnership insurancepayments for certain expenses.  Theseexpenses related to the Partnership’s internal expenses and costs incurred fordamage to, and loss of use of, the pipeline, equipment, products, the extratransportation costs incurred for transporting the liquids while the pipelinewas out of service, the reduced volumes of liquids that could be processed, andthe costs of complying with the OPS Corrective Action Order (hydrostatictesting, repair/replacement and other pipeline integrity assurancemeasures).  These expenses and costs havebeen expensed as incurred and any potential recovery from the All-RisksProperty and Business Interruption insurance carriers will be treated as “otherincome” if and when they are received. The Company has not provided for a receivable related to these claimsbecause of the uncertainty as to whether and how much the Company and thePartnership will ultimately recover under the All-Risks Property and BusinessInterruption insurance policies.  TheCompany and the Partnership have also asserted that the costs associated withsuch testing, replacement and repair are also subject to an equitable sharingarrangement with the owner of the pipeline, pursuant to the terms of the pipelinelease agreement.

 

The Company has also been involved in a lawsuitcaptioned *Ross Bros. Construction v.MarkWest Hydrocarbon, Inc.,* (U.S. District Court EasternDistrict of Kentucky, Ashland Division, Civ. Action No. 01-CV-205).  This lawsuit involved the construction of theSiloam, Kentucky plant and a dispute as to the monetary value of additionalwork beyond the contract’s lump sum price performed by the contractor.  This lawsuit involved a claim of approximately$0.7 million in extra costs.  The Companywas recently granted Summary Judgment on its defense asserting accord and satisfaction.  In August 2005, Plaintiffs filed an appeal ofthe Summary Judgment to the U.S. Court of Appeals for the 6thCircuit.  The Company believes that whileit is not able to predict the ultimate outcome of this matter, based on theCourt’s discussion on the grant of the summary judgment and denial of RossBrothers’ motion for reconsideration, it is probable that the Company willprevail in the appeal. As a result, the Company and the Partnership have notprovided for a loss contingency.

 

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

 

                In September 2005, a lawsuit captioned C.F. QualiaOperating, Inc. v. MarkWest Pinnacle, L.P., (District

 

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Court of Midland, Texas,385th Judicial District, Cause No. CV-45188, was served on thePartnership’s subsidiary, MarkWest Pinnacle, L.P., alleging breach of contract,fraud and breach of implied duty of good faith with respect to a dispute onvolumes of gas purchased by the Partnership under a gas purchaseagreement.  Under the gas purchaseagreement, MarkWest Energy Partners paid the Plaintiff based on volumes of gasmeasured at the wellhead (delivery point). Plaintiff claims that it is entitled to a prorated portion of any systemgain that is to be paid for more gas than it actually sold and delivered to thePartnership.  MarkWest Energy Partners hasfiled an Answer to the Complaint, denying Plaintiff’s allegations and hasasserted a counter-claim for declaratory judgment on the contract terms asbeing clear and unambiguous as to payment being limited to those volumes measuredat the wellhead, that Plaintiff’s claims are without merit, and that thePartnership also may have overpaid Plaintiff based on, among other things, thewet versus dry Btu measurements. Discovery has just begun and, at this time, the Partnership is not ableto predict the ultimate outcome of this matter. As a result, the Partnership has not provided for a loss contingency.

 

                In the ordinary course ofbusiness, the Company is a party to various other legal actions.  In the opinion of management, none of theseactions, either individually or in the aggregate, will have a material adverseeffect on the Company’s financial condition, liquidity, or results ofoperations.

 

*                LeaseObligations*

 

                The Company hasvarious non-cancelable operating lease agreements for equipment and office spaceexpiring at various times through fiscal 2015. The Company’s minimum futurelease payments under these operating leases as of June 30, 2005 are as follows(in thousands):

 
| 2005                |   | $     | 2,614  |   |
|---------------------|--------|-------|--------|--------|
| 2006                |   | 4,308 |   |
| 2007                |   | 2,310 |   |
| 2008                |   | 1,463 |   |
| 2009                |   | 1,381 |   |
| 2010 and thereafter |   | 829   |   |
| Total               |   | $     | 12,905 |   |

 

                The Company alsohas a commitment to purchase equipment of $1.4 million at June 30, 2005.

 

**14.          SubsequentEvent — Javelina**

 

**               **OnNovember 1, 2005, MarkWest Energy Partners completed the acquisition of 100% ofthe interests in the Javelina gas processing and fractionation facility, andrelated pipeline facilities located in Corpus Christi, Texas, from El PasoCorporation, Kerr-McGee Corporation, and Valero Energy Corporation forapproximately $355.0 million (the “Javelina Acquisition”) plus working capitalof approximately $35.9 million.

 

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

 

                MarkWest EnergyPartners financed the Javelina acquisition through a borrowing under itsamended and restated credit agreement as more thoroughly discussed in Note 15below.  The amended and restated creditagreement provided for a $100.0 million revolving credit facility and a $400.0million term loan.  In addition tofinancing the acquisition, proceeds were used to retire the outstanding debtand provide for future liquidity requirements of the Partnership.  The loans mature on October 31, 2006.  The Partnership intends to refinance the debtincurred to complete the Javelina acquisition, as well as its growth capitalprojects, with a combination of private and public equity and long-term debtover the next several months.  Permanentcapital will be issued in amounts designed to bring the Partnership’s capitalstructure in line with its stated goal of less than 50% debt.

 

                On November 9,2005, the Partnership completed a private placement of 1,644,065 commonunits.  The units were issued at apurchase price of $44.21 per unit, raising approximately $74.0 million,including the general

 

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partner’s contribution.  Proceedsfrom the equity placement were used to reduce borrowing under the revolver, andreduce the size of the term loan.

 

**15.          SubsequentEvent —Debt**

 

                In October 2004,the Company entered into a $25.0 million senior credit facility with a term ofone year.  The $25.0 million revolvingfacility has a variable interest rate based on the base rate, which is equal tothe higher of a) the Federal Funds Rate plus 1⁄2 of 1%, or b) the rate ofinterest in effect for such day as publicly announced from time to time by theAdministrative Agent as its prime rate, plus the applicable rate, which isbased on a utilization percentage.  InOctober and November 2005, the Company entered into the first and secondamendment to the credit agreement.  Thefirst amendment extended the term of the original agreement to November 15,2005.  The second amendment reduced thelending amount from $25.0 million to $16.0 million, of which $6.0 million ofavailability is committed to a letter of credit, leaving $10.0 millionavailable for revolving loans.  Thesecond amendment also extended the term of the revolving credit to December 30,2005.  If the revolving credit isconverted into a term loan, the term will be extended to December 29, 2006.

 

                In connection withthe credit facility, the Company is subject to a number of restrictions on itsbusiness, including: restrictions on its ability to grant liens on assets;merge, consolidate or sell assets; incur indebtedness; make acquisitions;engage in other businesses; enter into operating leases; enter into certainswap contracts; engage in transactions with affiliates; make dispositions; makerestricted payments, distributions and redemptions and other usual andcustomary covenants.  As of June 30,2005, the Company had no outstanding borrowings from the credit facility.  At November 15, 2005, the Company had aborrowing capacity of $10.0 million.  Thecredit facility also contains covenants requiring the Company to maintain aminimum net worth of $40.0 million plus 50% of proceeds of equity issued subsequentto October 25, 2004.

 

**                *MarkWest Energy Partners***

 

                On November 1,2005, the Partnership entered into the fourth amended and restated creditagreement (“Partnership Credit Facility”), which provides for a maximum lendinglimit of  $500.0 million for a term ofone year.  The credit facility includes arevolving facility of $100.0 million and a $400.0 million term loan.  The credit facility is guaranteed by thePartnership and all of the Partnership’s subsidiaries, and is collateralized bysubstantially all of the Partnership’s assets and those of itssubsidiaries.  The borrowings under thecredit facility bear interest at a variable interest rate plus basis pointsthat correspond to the ratio of the Partnership’s Consolidated Senior Debt (asdefined in the Partnership Credit Facility) to Consolidated EBITDA (as definedin the Partnership Credit Facility), ranging from 1.25% to 2.00% for Base Rateloans, and 2.25% to 3.00% for Eurodollar Rate loans.  The basis points will increase by 0.25% inMay 2006 and August 2006, for a total increase of 0.50%.  Borrowings under the Partnership Credit Facilitywere used to finance, in part, the Javelina acquisition discussed in Note 14above.

 

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

 

                The Partnership Credit Facilityalso contains covenants requiring the Partnership to maintain:

 

•                  a ratio of notless than 2.00 to 1.00 of consolidated EBITDA to consolidated interest expensefor any fiscal quarter-end through and including March 31, 2006 and 3.00 to1.00 for any fiscal quarter-end thereafter;

•                  a ratio of notmore than 7.00 to 1.00 of total consolidated debt to consolidated EBITDA forany fiscal quarter-end through and including March 31, 2006 and 5.00 to 1.00for any fiscal quarter-end thereafter;

 

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•                  a ratio of notmore than 5.00 to 1.00 of Consolidated senior debt to consolidated EBITDA forany fiscal quarter-end through and including March 31, 2006 and 3.50 to 1.00for any fiscal quarter-end thereafter; and

•                  a minimum networth of $200.0 million plus 50% of proceeds from partnership interests.

 

                These covenantsare used to calculate the available borrowing capacity on a quarterlybasis.  The Partnership incurs acommitment fee on the unused portion of the credit facility at 50.0 basispoints based upon the ratio of Consolidated Senior Debt (as defined in thePartnership Credit Facility) to Consolidated EBITDA (as defined in thePartnership Credit Facility).  ThePartnership Credit Facility matures on October 31, 2006.  At that time, the Partnership Credit Facilityterminates and all outstanding amounts thereunder are due and payable.

 

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

 

**Management Overview of the Quarterand First Half Ended June 30, 2005**

 

                MarkWestHydrocarbon reported a net loss of $1.6 million, or $(0.15) per dilutedshare, for the three months ended June 30, 2005, compared to a net loss of $6.4 million,or $(0.60) per diluted share, for the second quarter of 2004.  The Company also reported a net loss of $0.1 million,or $(0.01) per diluted share, for the six months ended June 30, 2005, comparedto a net loss of $5.7 million, or $(0.53) per diluted share, for the firsthalf of 2004.

 

***MarkWest HydrocarbonStandalone Results***

 

*               *Theloss before non-controlling interest in net income of consolidated subsidiaryand income taxes was $2.8 million for the three months ended June 30,2005, compared to a loss before non-controlling interest in net income ofconsolidated subsidiary and income taxes of $7.2 million for thecorresponding quarter of 2004.  Theimprovement is primarily due to an increase in NGL product sales margin inAppalachia of $2.2 million as a result of an increase in commodityprices.  The increase is also due to afavorable mark to market adjustment in the long-term shrink purchase obligationof $1.5 million and a decrease to facility expense of $0.7 millionprimarily as a result of lower volumes processed in Siloam and Kenova.

 

                The loss beforenon-controlling interest in net income of consolidated subsidiary and incometaxes was $1.4 million for the six months ended June 30, 2005, compared toa loss before non-controlling interest in net income of consolidated subsidiaryand income taxes of $7.4 million for the corresponding half of 2004.  The improvement is primarily due to anincrease in NGL product sale prices in Appalachia of $4.8 million and adecrease in hedge losses realized in the first half of 2005 of $0.6 millioncompared to $2.7 million in the first half of 2004.  The loss in 2004 was the result of anunfavorable hedging program that settled in April 2004.  This was offset in part by an increase in selling,general and administrative expenses of $0.9 million resulting primarilyfrom as additional compensation expense recognized under the Company’s ParticipationPlan and the 1996 Stock Incentive Plan and 1996 Non-employee Director StockOption Plan.

 

                MarkWest Hydrocarbon Standalone’s primary sourceof growth is from the marketing of natural gas and NGLs, as well as quarterlydistributions received from MarkWest Energy Partners.  The Company owns 89% of the general partnerof MarkWest Energy Partners.  The generalpartner of MarkWest Energy Partners owns the 2% general partner interest andall of the incentive distribution rights. The incentive distribution rights entitle the Company to receive an increasingpercentage of cash distributed by the Partnership as certain targetdistribution levels are reached.  For thesix months ended June 30, 2005, the Company received $3.9 million indistributions for its subordinated units, and the general partner received $2.0 million,including $1.9 million representing payments on incentive distributionrights.  For the six months ended June30, 2004, the Company received $3.4 million in distributions for itssubordinated units, and the general partner received $0.5 million,including $0.4 representing payments on incentive distribution rights.

 

***MarkWest Energy PartnersResults***

 

                The Partnershipreported income before non-controlling interest in net income of consolidatedsubsidiary and income taxes of $0.7 million for the three months endedJune 30, 2005 compared to $3.3 million for the three months ended June 30,2004.  The decrease is primarily due toincreased selling, general and administrative expenses of $4.2 millionrelated to ongoing audit and compliance requirements and non-cash compensationexpense, higher interest expense and deferred financing costs of $3.8 millionrelated to increased borrowing to fund our 2004 acquisitions, increasedfacility and purchased product costs of $2.3 million related to ourtesting and repair program on the Appalachian Liquids Pipeline System (ALPS) aswell as additional trucking costs for moving product while the line is out ofservice and a decrease of $0.5 million in operating margin generated fromreduced throughput volumes on our systems in Michigan.  These items were partially offset by theaddition of our East Texas system which added $6.0 million, an increase of$1.0 million from improved gathering volumes on our Appleby and WesternOklahoma systems and an increase of $1.0 million with the addition of ourinterest in Starfish Gathering Company, LLC, which we acquired in the firstquarter of 2005.

 

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                The Partnershipreported income before non-controlling interest in net income of consolidatedsubsidiary and income taxes of $4.9 million for the six months ended June30, 2005 compared to $5.4 million for the six months ended June 30,2004.  The decrease is primarily due tohigher interest expense and deferred financing costs of $6.5 million as aresult of increased borrowing to fund acquisitions.  The decrease is also due to increasedexpenses incurred in the Partnership’s testing and repair program on ALPS aswell as additional trucking costs for moving product while the line is out ofservice of $4.0 million.  Reducedthroughput volumes on our systems in Michigan resulted in a decrease of $0.9 millionand selling, general and administrative expense increased $5.9 million asa result of ongoing audit and compliance requirements and non-cash compensationexpense recognized under the Participation Plan.  This was offset in part by an increase of$12.3 million in operating income contributed by the July 2004 East Texassystem acquisition, improved gathering volumes on our Appleby and WesternOklahoma systems of $4.2 million and an increase from the addition of ourinterest in Starfish Gathering Company, LLC, which we acquired in the firstquarter of 2005.

 

                Testing and repairof the Appalachia pipeline commenced in the first quarter of 2005 and wascompleted during the fourth quarter of 2005. Through September 30, 2005, the Partnership has incurred pipelinetesting, refurbishment and replacement costs of approximately $5.1 million,of which $1.3 million has been capitalized.  First quarter testing and repair costsincurred were $0.2 million, and second quarter costs were approximately$2.5 million.  Transportation costshave been approximately $0.7 million per quarter.  The Partnership is seeking recovery under itsbusiness interruption insurance and has asserted that the costs associated withsuch testing, repairs and improvements are subject to a sharing arrangementwith the owner of the pipeline pursuant to the terms of the pipeline leaseagreement. These expenses and costs have been expensed as incurred and any potentialrecovery from the All-Risks Property and Business Interruption insurancecarriers will be treated as “other income” if they are received.

 

***Cash Dividend***

 

                On July 22, 2005,the Board of Directors of MarkWest Hydrocarbon declared a cash dividend of$0.10 per share of its common stock.  Thedividend was paid on August 22, 2005, to the stockholders of record as of theclose of business on August 15, 2005. The ex-dividend date was August 11,2005.  Declaration of future dividendswill be dependent upon the financial performance of the Company.

 

**Our Business**

 

                We were founded in1988 as a partnership and later incorporated in Delaware.  We completed our initial public offering in1996.

 

                We are an energycompany primarily focused on increasing shareholder value by growing MarkWest EnergyPartners, our consolidated subsidiary and a publicly traded master limitedpartnership engaged in the gathering, processing and transmission of naturalgas; the transportation, fractionation and storage of natural gas liquids; andthe gathering and transportation of crude oil. We also market natural gas andnatural gas liquids (NGLs). We discontinued our exploration and productionactivities in 2003.

 

                Our assets consistprimarily of partnership interests in MarkWest Energy Partners.  As of June 30, 2005, our partnershipinterests consisted of the following:

 

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

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

 

To better understand our business and the results of operationsdiscussed below, it is important to have an understanding of three factors:

 

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•                  Thenature of our relationship with MarkWest Energy Partners;

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

•                  Thelack of comparability within our results of operations across periods becauseof MarkWest Energy Partners’ significant recent acquisition activity.

 

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

 

                We spun off themajority of our then-existing natural gas gathering and processing and NGLtransportation, fractionation and storage assets into MarkWest Energy Partnersin May 2002, just before the Partnership completed its initial public offering.At the time of the Partnership’s formation and initial public offering, weentered into four contracts with MarkWest Energy Partners whereby MarkWestEnergy Partners provides midstream services in Appalachia for a fee.Additionally, MarkWest Energy Partnersreceives 100% of all fee and percent-of-proceeds consideration for the first 10MMcf/d that it gathers and processes in Michigan. MarkWest Hydrocarbon retainsa 70% net profits interest in the gathering and processing income earned onquarterly pipeline throughput in excess of 10 MMcf/d. In accordance withgenerally accepted accounting principles, MarkWest Energy Partners’ financial resultsare included in our condensed consolidated financial statements.  All intercompany accounts and transactionsare eliminated during consolidation. You should read Note 12 to our CondensedConsolidated Financial Statements, appearing earlier in this Form 10-Q, forfurther information regarding our two business segments: (i) MarkWest EnergyPartners and (ii) MarkWest Hydrocarbon Standalone.

 

                As a result of ourcontracts with MarkWest Energy Partners mentioned above, we accounted for 16%of the Partnership’s revenues and 22% of its net operating margin (a non-GAAPfinancial measure) for the six months ended June 30, 2005. This represents adecrease from the year ended December 31, 2004, during which MarkWestHydrocarbon accounted for 20% of the Partnership’s revenues and 33% of its netoperating margin (a non-GAAP financial measure).  We expect to account for less of MarkWestEnergy Partners’ business in the future as it continues to acquire assets andincrease its customer and business diversification.

 

                Also, at the timeof the initial public offering, we entered into an Omnibus Agreement withMarkWest Energy Partners and related parties that govern potential competitionand indemnification obligations among the parties.

 

                Through ourmajority ownership in the Partnership’s general partner, we control and operateMarkWest Energy Partners. Our employees are responsible for conducting thePartnership’s business and operating its assets pursuant to a ServicesAgreement, which was formalized January 1, 2004. MarkWest Energy Partners payus $5,000 annually for providing these services. We also are reimbursed for allreasonable costs incurred in the operation of the Partnership.

 

***OurContracts***

 

                Excluding therevenues and net operating margin (a non-GAAP financial measure) derived fromMarkWest Energy Partners, we generate the majority of our revenues and netoperating margin (a non-GAAP financial measure) from the marketing of NGLs and,to a lesser extent, natural gas. As compensation for providing processing servicesto our Appalachian producers (we have since outsourced these services toMarkWest Energy Partners as discussed below), we earn a fee and receive titleto the NGLs produced. In return, we are required to replace, in dry naturalgas, the Btu value of the NGLs extracted. This Btu replacement obligation isreferred to in the industry as a “keep-whole” arrangement. Our principal cost,therefore, is the replacement of the Btus extracted from the gas stream in theform of NGLs or consumed as fuel during processing with dry gas of anequivalent Btu content. The spread between the NGL product sales price and thepurchase price of natural gas with an equivalent Btu content is called the “fracspread.” Generally, the frac spread and, consequently, the net operatingmargins, (non-GAAP financial measure) are positive under these contracts. Inthe event natural gas becomes more expensive on a Btu equivalent basis than NGLproducts, however, the cost of keeping the producer “whole” results inoperating losses.

 

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                At the closing ofMarkWest Energy Partners’ initial public offering on May 24, 2002, weoutsourced our midstream services to the Partnership. Pursuant to the terms ofthe operating agreements, we retained all the benefits and associated risks ofour keep-whole contracts with producers. Our NGL and gas marketing operationswere retained by us and not contributed to MarkWest Energy Partners.

 

                Our keep-wholecontracts expose us to commodity price risk, both on the sales side (of NGLs)and on the purchase side (of natural gas), which may increase the volatility ofour marketing results and cash flows. We attempt to mitigate our commodityprice risk through our hedging program. You should read Item 3, “Quantitative and Qualitative Disclosures aboutMarket Risk” for further details about our commodity price risk management program.

 

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

 

                The Partnershipgenerates the majority of its revenues and net operating margin from naturalgas gathering, processing and transmission, NGL transportation, fractionationand storage, and crude oil gathering and transportation. While all of theseservices constitute midstream energy operations, the Partnership provides itsservices under five types of contracts.

 

•                  *Fee-based contracts.*  Under fee-based contracts, thePartnership receives a fee or fees for one or more of the following services:gathering, processing, and transmission of natural gas; transportation,fractionation and storage of NGLs; and gathering and transportation of crudeoil. The revenue MarkWest Energy Partners earns from these contracts isgenerally directly related to the volume of natural gas, NGLs or crude oil thatflows through its systems and facilities, and is not directly dependent oncommodity prices. In certain cases, the Partnership’s contracts provide forminimum annual payments. To the extent a sustained decline in commodity pricesresults in a decline in volumes, however, the Partnership’s revenues from thesecontracts would be reduced.

 

•                  *Percent-of-proceeds contracts.*  Underpercent-of-proceeds contracts, MarkWest Energy Partners generally gathers andprocesses natural gas on behalf of producers, sells the resulting residue gasand NGLs at market prices, and then remits to producers an agreed-uponpercentage of the proceeds based on an index price. In other cases, instead ofremitting cash payments to the producer, the Partnership delivers anagreed-upon percentage of the residue gas and NGLs to the producer and sells thevolumes it keeps to third parties at market prices. Under these types ofcontracts, MarkWest Energy Partners’ revenues and net operating marginsincrease as natural gas and NGL prices increase, and its revenues and netoperating margins decrease as natural gas and NGL prices decrease.

 

•                  *Percent-of-index contracts.*  Underpercent-of-index contracts, the Partnership generally purchases natural gas ateither (1) a percentage discount to a specified index price, (2) aspecified index price less a fixed amount or (3) a percentage discount toa specified index price less an additional fixed amount. MarkWest EnergyPartners then gathers and delivers the natural gas to pipelines where itresells the natural gas at the index price, or at a different percentage discountto the index price. With respect to (1) and (3) above, the net operatingmargins the Partnership realizes under the arrangements decrease in periods oflow natural gas prices because these net operating margins are based on apercentage of the index price. Conversely, MarkWest Energy Partners’ netoperating margins increase during periods of high natural gas prices.

 

•                  *Keep-whole contracts.*  Under keep-whole contracts, thePartnership gathers natural gas from the producer, processes the natural gas andsells the resulting NGLs to third parties at market prices. Because theextraction of the NGLs from the natural gas during processing reduces the Btucontent of the natural gas, MarkWest Energy Partners must either purchasenatural gas at market prices for return to producers, or make cash payment tothe producers equal to the value of this natural gas. Accordingly, under thesearrangements, the Partnership’s revenues and net operating margins increase asthe price of NGLs increases relative to the price of natural gas, and itsrevenues and net operating margins (a non-GAAP financial measure) decrease as the price of natural gas increasesrelative to the price of NGLs.

 

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

 

•                  *Fixed gathering and compression fees. *Typically,gathering and compression fees are comprised of a fixed-fee portion in whichproducers pay a fixed rate per unit to transport their natural gas through thegathering system.  Under the majority ofthese arrangements, fees are adjusted annually based on the Consumer PriceIndex.

 

•                  *Settlement margin. *Typically, the terms of the Partnership’sgathering arrangements specify that they are allowed to retain a fixedpercentage of the volume gathered to cover the compression fuel charges anddeemed line losses.  If the gatheringsystem is operated more efficiently than specified per contract allowance, thePartnership is entitled to retain the difference for its own account.

 

•                  *Condensate sales. *During the gathering process, thermodynamic forcescontribute to changes in operating conditions of the natural gas flowingthrough the pipeline infrastructure.  Asa result, hydrocarbon dew points are reached, causing condensation ofhydrocarbons in the high-pressure pipelines. The Partnership sells 100% of the condensate collected in the system ata monthly crude-oil index-based price and retains the proceeds.

 

                In many cases, the Partnership provides servicesunder contracts that contain a combination of more than one of the arrangementsdescribed above.  The terms of thePartnership’s contracts vary based on gas quality conditions, the competitiveenvironment at the time the contracts are signed, and customerrequirements.  The Partnership’s contractmix and, accordingly, our exposure to natural gas and NGL prices, may change asa result of changes in producer preferences, the Partnership’s expansion inregions where some types of contracts are more common, and other marketfactors.  Any change in mix will impactour financial results.

 

                MarkWestEnergy Partners has a limited number of keep-whole arrangements. At June 30,2005, MarkWest Energy Partners’ primary exposure to keep-whole contracts waslimited to its Arapaho (Oklahoma) processing plant and its East Texasprocessing contracts.  At the Arapahoplant inlet, the Btu content of the natural gas meets the downstream pipelinespecification; however, the Partnership has the option of extracting NGLs whenthe processing margin environment is favorable. In addition, approximately half, as measured in volumes, of the relatedgas gathering contracts include additional fees to cover plant operating costs,fuel costs and shrinkage costs in a low-processing-margin environment.  Because of the Partnership’s ability tooperate the plant in several recovery modes, including turning it off, coupledwith the additional fees provided for in the gas gathering contracts, thePartnership’s overall keep-whole contract exposure is limited to a portion ofthe operating costs of the plant.

 

                Managementevaluates contract performance on the basis of net operating margin (a non-GAAPfinancial measure), which is defined as income (loss) from operations,excluding facility cost, selling, general and administrative expense,depreciation, amortization, impairments and accretion of asset retirement andsublease obligations.  These charges havebeen excluded for the purpose of enhancing the understanding by both managementand investors of the underlying baseline operating performance of ourcontractual arrangements, which management uses to evaluate our financialperformance for purposes of planning and forecasting future periods.  Net operating margin (a non-GAAP financialmeasure) does not have any standardized definition and therefore is unlikely tobe comparable to similar measures presented by other reporting companies.  Net operating margin (a non-GAAP financialmeasure) results should not be evaluated in isolation of, or as a substitutefor our financial results prepared in accordance with United States GAAP.  Our usage of net operating margin (a non-GAAPfinancial measure), and the underlying methodology in excluding certaincharges, is not necessarily an indication of the results of operations that maybe expected in the future; or that we will not, in fact, incur such charges infuture periods.

 

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                For the six monthsended June 30, 2005 and 2004, the Partnership generated the followingpercentages of its revenues and net operating margin from the following typesof contracts:

 
| ** **                                           | ** ** | **Fee-Based** | ** ** | **Percent-of-  Proceeds****(1)** | ** ** | **Percent-of-  Index****(2)** | ** ** | **Keep-Whole****(3)** | ** ** | **Total** | ** ** |
|------------------------------------------------------|------------|---------------|------------|----------------------------------|------------|-------------------------------|------------|-----------------------|------------|-----------|------------|
| **Six  Months Ended June 30, 2005:**                 |       |          |       |                             |       |                          |       |                  |       |      |       |
| Revenues                                             |       | 17            | %          | 11                               | %          | 32                            | %          | 40                    | %          | 100       | %          |
| Net operating  margin (a non-GAAP financial measure) |       | 55            | %          | 4                                | %          | 32                            | %          | 9                     | %          | 100       | %          |
|                                                 |       |          |       |                             |       |                          |       |                  |       |      |       |
| **Six  Months Ended June 30, 2004:**                 |       |          |       |                             |       |                          |       |                  |       |      |       |
| Revenues                                             |       | 18            | %          | 15                               | %          | 23                            | %          | 44                    | %          | 100       | %          |
| Net operating  margin (a non-GAAP financial measure) |       | 71            | %          | 11                               | %          | 11                            | %          | 7                     | %          | 100       | %          |

___________________

(1)          Includes other types of contracts tied to NGL prices.

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

(3)          Includes other types of contracts tied to both NGL and natural gasprices.

 

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

 
| ** **                                              | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------------------------|------------|---------------------------------|------------|-------------------------------|------------|
| ** **                                              | ** ** | **2005**                        | ** ** | **2004**                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues                                                |       | $                               | 141,040    |                          | $          | 89,024 |   | $ | 279,393 |   | $ | 182,724 |   |
|                                                    |       |                            |       |                          |       |   |   |   |   |
| Purchased product costs                                 |       | 112,354                         |       | 77,262                        |       | 217,053 |   | 152,750 |   |
|                                                    |       |                            |       |                          |       |   |   |   |   |
| Net operating margin                                    |       | 28,686                          |       | 11,762                        |       | 62,340 |   | 29,974 |   |
|                                                    |       |                            |       |                          |       |   |   |   |   |
| Facility  expenses                                      |       | 10,985                          |       | 5,975                         |       | 20,245 |   | 12,061 |   |
| Selling, general  and administrative expenses           |       | 9,125                           |       | 5,070                         |       | 17,227 |   | 10,385 |   |
| Depreciation                                            |       | 4,995                           |       | 3,657                         |       | 9,736 |   | 7,185 |   |
| Amortization of  intangible assets                      |       | 2,095                           |       | 34                            |       | 4,190 |   | 68 |   |
| Accretion of  asset retirement and sublease obligations |       | 11                              |       | —                        |       | 21 |   | — |   |
| Income (loss) from operations                           |       | $                               | 1,475      |                          | $          | (2,974 | ) | $ | 10,921 |   | $ | 275 |   |
|                                                         |            |                                 |            |                               |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

##### ***        ItemsImpacting Comparability of Financial Results***

 

*Recent MarkWestEnergy Partners Acquisition Activity*

 

                In reading thediscussion of our historical results of operations, you should be aware of theimpact of MarkWest Energy Partners’ recent significant acquisitions, whichaffect the comparability of our results of operations for the periodsdiscussed.

 

29

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                Through June 30,2005, the Partnership has completed seven acquisitions for an aggregatepurchase price of approximately $396.1 million.  Four of these acquisitions occurred in 2003and are included in the results of operations for both the three and six monthsended June 30, 2005 and 2004, respectively. These four acquisitions include:

 

•                  The Pinnacle acquisition, which closed onMarch 28, 2003, for consideration of $39.9 million;

 

•                  The Lubbock Pipeline acquisition (also known asthe Power-Tex Lateral pipeline), which closed September 2, 2003, forconsideration of $12.2 million;

 

•                  The Western Oklahoma acquisition, which closedDecember 1, 2003, for consideration of $38.0 million; and

 

•                  The Michigan Crude Pipeline acquisition, whichclosed December 18, 2003, for consideration of $21.3 million.

 

                One acquisitionoccurred on April 1, 2004.  Therefore,our historical results of operations for the three months ended June 30, 2004reflect the impact of this acquisition, and our historical results of operationsfor the six months ended June 30, 2004 reflect the affect of three months ofoperations since the date of this acquisition.

 

•                  The Hobbs Pipeline acquisition, which closed onApril 1, 2004, for consideration of $2.3 million.

 

One acquisition occurred after the second quarter of 2004.  Therefore, our historical results ofoperations for the three and six months ended June 30, 2004, do not reflect theaffect of this acquisition.

 

•                  The East Texas acquisition, which closed on July30, 2004, for consideration of $240.7 million.

 

One acquisition occurred on March31, 2005.  Therefore, our historicalresults of operations for the three months ended June 30, 2005 reflect theaffect of this acquisition, and our historical results of operations for thesix months ended June 30, 2005 reflect the affect of three months of operationssince the date of this acquisition.

 

•                  The Starfish acquisition, which closed on March31, 2005, for consideration of $41.7 million.

 

30

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

 

***Operating Data***

 
| ** **                                     | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------------|------------|---------------------------------|------------|-------------------------------|------------|
| ** **                                     | ** ** | **2005**                        | ** ** | **2004**                      | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                           |       |                            |       |                          |       |   |   |   |   |
| Marketing                                      |       |                            |       |                          |       |   |   |   |   |
| NGL product  sales (gallons)                   |       | 31,317,000                      |       | 35,703,000                    |       | 83,481,000 |   | 87,228,000 |   |
|                                           |       |                            |       |                          |       |   |   |   |   |
| Wholesale                                      |       |                            |       |                          |       |   |   |   |   |
| NGL product  sales (gallons) (1)               |       | 7,087,000                       |       | 4,058,000                     |       | 26,759,000 |   | 4,947,000 |   |
|                                           |       |                            |       |                          |       |   |   |   |   |
| MarkWest Energy Partners                       |       |                            |       |                          |       |   |   |   |   |
| ***Southwest:***                               |       |                            |       |                          |       |   |   |   |   |
| *East  Texas*(2)                               |       |                            |       |                          |       |   |   |   |   |
| Gathering system  throughput (Mcf/d)           |       | 323,000                         |       | NA                            |       | 305,000 |   | NA |   |
| NGL product  sales (gallons)                   |       | 26,222,000                      |       | NA                            |       | 50,596,000 |   | NA |   |
| *Oklahoma*                                     |       |                            |       |                          |       |   |   |   |   |
| Foss Lake  gathering system throughput (Mcf/d) |       | 70,000                          |       | 63,000                        |       | 69,000 |   | 59,000 |   |
| Arapaho NGL  product sales (gallons)           |       | 16,457,000                      |       | 8,317,000                     |       | 31,674,000 |   | 16,512,000 |   |
| *Other*                                        |       |                            |       |                          |       |   |   |   |   |
| Appleby  gathering systems throughput (Mcf/d)  |       | 32,000                          |       | 25,000                        |       | 30,000 |   | 25,000 |   |
| Other gathering  systems throughput (Mcf/d)    |       | 16,000                          |       | 15,000                        |       | 17,000 |   | 17,000 |   |
| Lateral  throughput volumes (Mcf/d) (3)        |       | 91,000                          |       | 119,000                       |       | 72,000 |   | 74,000 |   |
|                                           |       |                            |       |                          |       |   |   |   |   |
| ***Appalachia:***                              |       |                            |       |                          |       |   |   |   |   |
| Natural gas  processed for a fee (Mcf/d) (4)   |       | 192,000                         |       | 197,000                       |       | 200,000 |   | 202,000 |   |
| NGLs  fractionated for a fee (Gal/d)           |       | 421,000                         |       | 480,000                       |       | 441,000 |   | 469,000 |   |
| NGL product  sales (gallons)                   |       | 10,154,000                      |       | 11,001,000                    |       | 20,919,000 |   | 21,927,000 |   |
|                                           |       |                            |       |                          |       |   |   |   |   |
| ***Michigan:***                                |       |                            |       |                          |       |   |   |   |   |
| Natural gas  volumes transported (Mcf/d)       |       | 6,800                           |       | 12,200                        |       | 6,900 |   | 13,000 |   |
| NGL product  sales (gallons)                   |       | 1,493,000                       |       | 2,390,000                     |       | 3,056,000 |   | 5,103,000 |   |
| Crude oil  transported (Bbl/d)                 |       | 14,200                          |       | 14,700                        |       | 14,200 |   | 14,700 |   |

----

NA — Not applicable.

(1)   Representssales from our wholesale business. Volumes are for the period since the Company started the line ofbusiness in February 2004.

(2)   Weacquired our East Texas System in late July 2004.  Volumes are for the periods of time since weacquired the facility in 2004.

(3)   Weacquired our Lubbock pipeline (a/k/a the PowerTex Lateral Pipeline) inSeptember 2003 and our Hobbs lateral pipeline in April 2004.  The Lubbock and Hobbs pipelines are the onlylaterals we own that produce revenue on a per-unit-of-throughput basis.  We receive a flat fee from our other lateralpipelines and, consequently, the throughput data from these lateral pipelines isexcluded from this statistic.

(4)   Includes throughput from our Kenova, Cobb,and Boldman processing plants.

 

***Segment Reporting***

 

                The Company’soperations are classified into two reportable segments:

 

***(1)***          MarkWest Energy Partners — The Partnership is engagedin the gathering, processing and transmission of natural gas, thetransportation, fractionation and storage of natural gas liquids, and thegathering and transportation of crude oil.

(2)          MarkWest HydrocarbonStandalone — The Standalone Company sells its equity and third-party NGLs,purchases third-party natural gas and sells its equity and third-party naturalgas.  Since February 2004, 

 

31

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MarkWest Hydrocarbon Standalone is also engaged in thewholesale marketing of propane. MarkWest Hydrocarbon Standalone operatesMarkWest Energy Partners, a publicly-traded limited partnership.

 

32

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***                Three Months EndedJune 30, 2005 Compared to the Three Months Ended June 30, 2004***

 
| ** **                                                                                                | ** ** | **MarkWest  Hydrocarbon  Standalone** | ** ** | **MarkWest  Energy  Partners** | ** ** | **Eliminating  Entries** | ** ** | **Total** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------|------------|--------------------------|------------|-----------|------------|
| ** **                                                                                                | ** ** | **(in thousands)**                    | ** ** |
| **Three  Months Ended June 30, 2005:**                                                                    |       |                                  |       |                           |       |                     |       |      |       |
| Revenues                                                                                                  |       | $                                     | 52,786     |                           | $          | 102,960                  |       | $         | (14,706    | ) | $ | 141,040 |   |
| Purchased  product costs                                                                                  |       | 47,729                                |       | 73,862                         |       | (9,237                   | )          | 112,354   |       |
| Facility  expenses                                                                                        |       | 5,094                                 |       | 11,360                         |       | (5,469                   | )          | 10,985    |       |
| Selling, general  and administrative expenses                                                             |       | 2,814                                 |       | 6,311                          |       | —                   |       | 9,125     |       |
| Depreciation                                                                                              |       | 419                                   |       | 4,576                          |       | —                   |       | 4,995     |       |
| Amortization of  intangible assets                                                                        |       | —                                |       | 2,095                          |       | —                   |       | 2,095     |       |
| Accretion of  asset retirement and sublease obligations                                                   |       | 2                                     |       | 9                              |       | —                   |       | 11        |       |
| Income (loss)  from operations                                                                            |       | (3,272                                | )          | 4,747                          |       | —                   |       | 1,475     |       |
|                                                                                                      |       |                                  |       |                           |       |                     |       |      |       |
| Equity in  earning of unconsolidated subsidiary                                                           |       | (1                                    | )          | 990                            |       |                     |       | 989       |       |
| Interest income                                                                                           |       | 258                                   |       | 63                             |       | —                   |       | 321       |       |
| Interest expense                                                                                          |       | (30                                   | )          | (4,558                         | )          | —                   |       | (4,588    | )          |
| Amortization of  deferred financing costs (a component of interest expense)                               |       | (61                                   | )          | (497                           | )          | —                   |       | (558      | )          |
| Dividend income                                                                                           |       | 96                                    |       | —                         |       | —                   |       | 96        |       |
| Other income  (expense)                                                                                   |       | 222                                   |       | (74                            | )          | —                   |       | 148       |       |
| Income (loss)  before non-controlling interest in net income of consolidated subsidiary and  income taxes |       | $                                     | (2,788     | )                              | $          | 671                      |       | $         | —     |   | $ | (2,117 | ) |
| **Three  Months Ended June 30, 2004:**                                                                    |       |                                  |       |                           |       |                     |       |      |       |
| Revenues                                                                                                  |       | $                                     | 37,286     |                           | $          | 65,659                   |       | $         | (13,921    | ) | $ | 89,024 |   |
| Purchased  product costs                                                                                  |       | 35,620                                |       | 49,371                         |       | (7,729                   | )          | 77,262    |       |
| Facility  expenses                                                                                        |       | 5,841                                 |       | 6,326                          |       | (6,192                   | )          | 5,975     |       |
| Selling, general  and administrative expenses                                                             |       | 2,945                                 |       | 2,125                          |       | —                   |       | 5,070     |       |
| Depreciation                                                                                              |       | 356                                   |       | 3,301                          |       | —                   |       | 3,657     |       |
| Amortization of  intangible assets                                                                        |       | —                                |       | 34                             |       | —                   |       | 34        |       |
| Income (loss)  from operations                                                                            |       | (7,476                                | )          | 4,502                          |       | —                   |       | (2,974    | )          |
|                                                                                                      |       |                                  |       |                           |       |                     |       |      |       |
| Interest income                                                                                           |       | 207                                   |       | 14                             |       | —                   |       | 221       |       |
| Interest expense                                                                                          |       | (8                                    | )          | (915                           | )          | —                   |       | (923      | )          |
| Amortization of  deferred financing cost (a component of interest expense)                                |       | 8                                     |       | (315                           | )          | —                   |       | (307      | )          |
| Dividend income                                                                                           |       | 83                                    |       | —                         |       | —                   |       | 83        |       |
| Other expense                                                                                             |       | (6                                    | )          | (24                            | )          | —                   |       | (30       | )          |
| Income (loss)  before non-controlling interest in net income of consolidated subsidiary and  income taxes |       | $                                     | (7,193     | )                              | $          | 3,262                    |       | $         | —     |   | $ | (3,931 | ) |
|                                                                                                           |            |                                       |            |                                |            |                          |            |           |            |  |  |  |  |  |

 
| ** **                                                                                       | ** ** | **Three Months Ended June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                       | ** ** | **2005**                        | ** ** | **2004** | ** ** |
| ** **                                                                                       | ** ** | **(in thousands)**              | ** ** |
| Loss before  non-controlling interest in net income of consolidated subsidiary and income  taxes |       | $                               | (2,117     | ) | $ | (3,931 | ) |
| Provision  (benefit) for income taxes                                                            |       | (802                            | )          | 491 |   |
| Non-controlling  interest in net income of consolidated subsidiary                               |       | (294                            | )          | (1,946 | ) |
| Net loss                                                                                         |       | $                               | (1,609     | ) | $ | (6,368 | ) |
|                                                                                                  |            |                                 |            |  |  |  |  |  |

 

33

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***MarkWest Hydrocarbon Standalone***

 

*                Revenues.*  Revenues increased $15.5 million, or 42%, forthe three months ended June 30, 2005, compared to the corresponding quarter of2004, primarily due to an increase in our gas marketing revenue of $7.1 millionand an increase in our wholesale propane marketing business revenue of $3.0million.  The increase in our gasmarketing revenue is due to an increase in sales price and a 29% increase involume.  Revenue also increased due to anincrease in NGL product sale prices and volumes in Appalachia of $3.8 millionand a favorable mark to market adjustment in the long-term shrink purchaseobligation of $1.5 million.

 

*                PurchasedProduct Costs.* Purchased product costs increased $12.1 million, or 34%, for the threemonths ended June 30, 2005 compared to the corresponding quarter of 2004.  This was due primarily to costs from our gasmarketing activities of $7.0 million and from our wholesale propane marketingbusiness introduced in February 2004 adding $3.2 million.  Purchased product costs also increased fromour Appalachian natural gas liquids business of $1.8 million due to an increasein volume and price.

 

*                FacilityExpenses.*  Facilityexpenses decreased by approximately $0.7 million, or 13%, during the threemonths ended June 30, 2005, compared to corresponding quarter of 2004 primarilyas a result of favorable fuel reimbursement at our Kenova, Cobb and Boldmanfacilities.

 

*                Selling,General and Administrative Expenses. *Selling,general and administrative expenses decreased by $0.1 million, or 4%, duringthe three months ended June 30, 2005, compared to the corresponding quarter of2004 as a result of a higher percentage of expenses being allocated to thePartnership.

 

*                Depreciation*.  The increase in depreciation expense of $0.1million, or 18%, during the three months ended June 30, 2005, compared to thecorresponding quarter of 2004 was principally due to the increase in softwareand hardware additions associated with the upgrade of our informationtechnology infrastructure, as well as the acceleration of depreciation of ourfacilities in Michigan to more closely match our declining reserves there.

 

                *InterestIncome. *Interest income increased by $0.1 million, or25%, during three months ended June 30, 2005, compared to the correspondingquarter of 2004 primarily due to an increase in interest earned on cashequivalents.

 

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

 

*                Amortization of DeferredFinancing Costs. *The Company amortized approximately $0.1 millionof deferred financing costs during the three months ended June 30, 2005,related to debt issuance costs incurred from the October 2004 creditfacility.  The increase in 2005 relativeto the corresponding period in 2004 is attributable to debt refinancingcompleted in the last half of 2004. Deferred financing costs are being amortized over the terms of therelated obligations, which approximates the effective interest method.

 

*                Dividend Income. *Dividend income increased by less than $0.1 million, or 16%, during thethree months ended June 30, 2005, compared to the corresponding quarter of 2004as a result of the Company’s investments in the marketable securities of masterlimited partnerships beginning in the first quarter of 2004.  The Company began receiving distributions onthe master limited partnerships in the second quarter of 2004.

 

***MarkWest Energy Partners***

 

*                Revenues. *Revenues for the threemonths ended June 30, 2005, were higher by $37.3 million, or 57%, compared tothe corresponding quarter of 2004 primarily due to the Partnership’s East Texasacquisition that added $19.0 million to the Partnership’s 2005 revenue. Revenue also increased during the three monthsended June 30, 2005, relative to the corresponding quarter of 2004 due toincreased well volumes contracted to the gathering system, higher crude oilprices positively influencing condensate sales and higher processing margins inWestern Oklahoma of $12.3 million. In addition, revenues increased $5.5 milliondue to a 25% increase in natural gas

 

34

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volumes and natural gas prices, primarily on theAppleby gathering system.

 

*                PurchasedProduct Costs.* Purchased product costs were higher during the three months ended June30, 2005, by $24.5 million, or 50%, compared to the corresponding quarter of2004 primarily as a result of an increasein purchased volumes and price increases in Western Oklahoma andAppalachia.  The remainder of theincrease is due to the Partnership’s late 2004 acquisition, which increased itspurchased product costs by $6.5 million.

 

*                FacilityExpenses. *Facilityexpenses increased approximately $5.0 million, or 80%, during the three monthsended June 30, 2005, relative to the corresponding quarter of 2004 primarilydue to the Partnership’s 2004 acquisitions, which added $2.7 million.  The remainder of the increase is due to increased pipeline repair and maintenance costsof approximately $2.5 million.

 

*                Selling,General andAdministrative Expenses.* Selling, general and administrative expenses increased by $4.2 million,or 197%, during the three months ended June 30, 2005, compared to thecorresponding quarter of 2004 as a result of an increase in audit and SarbanesOxley related costs of $1.4 million.  The addition of the Partnership’sEast Texas acquisition added approximately $0.5 million to its costs. Compensation expense from the Participation Plan increased by $0.7 million,from $0.1 million in 2004 to $0.8 million in 2005.  In addition, outsidelegal and financial consulting services costs of $0.6 million and insuranceadjustments of $0.4 million contributed to the increase in expenses.

 

*                Depreciation. *Depreciation expenseincreased $1.3 million, or 39%, during the three months ended June 30, 2005,compared to the corresponding quarter of 2004 primarily due to the Partnership’sJuly 2004 East Texas system acquisitions.

 

*                Amortizationof Intangible Assets.  *Amortizationexpense increased $2.1 million during the three months ended June 30, 2005,compared to the corresponding quarter of 2004 primarily due to the East TexasSystem acquisition in July 2004.  OnJuly 30, 2004, the Partnership completed the acquisition of AmericanCentral Eastern Texas’ Carthage gathering system and gas processing assetslocated in East Texas for approximately $240.7 million.  Of the total purchase price, $165.4 millionwas allocated to customer contracts, of which $2.1 million was amortized duringthe three months ended June 30, 2005.

 

                *Accretion of Asset Retirement and SubleaseObligations. *Accretionof asset retirement and sublease obligations increased by less than $0.1million, and is the result of recording of an asset retirement obligation inthe third quarter of 2004 for new land leases in East Texas that require thePartnership to return the land to its original condition.

 

*                Equity in Earnings ofUnconsolidated Subsidiaries*.  Equity in earnings of unconsolidatedsubsidiaries increased $1.0 million during the three months ended June 30,2005, compared to the corresponding quarter of 2004.  The increase was primarily attributable tothe March 31, 2005, Starfish acquisition.

 

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

 

*                InterestExpense.*  Interest expense increased by $3.6 million,or 398%, during the three months ended June 30, 2005, compared to thecorresponding quarter of 2004.  Theincrease was principally attributable to MarkWest Energy Partners’ increasedoutstanding debt levels, a function of financing its 2004 and 2005 acquisitions,and its 2005 capital expenditures.In October 2004, the Partnership issued $225.0 million in senior notes.

 

*                Amortization of DeferredFinancing Costs. *Amortization of deferred financing costs increasedby $0.2 million, or 58%, during the three months ended June 30, 2005, comparedto the corresponding quarter of 2004. The increase is primarily attributable to debt financing of thePartnership’s second half of 2004 acquisitions. Deferred financing costs are being amortized over the terms of therelated obligations, which approximates the effective interest method.

 

35

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***        Other***

 

*                IncomeTax Provision (Benefit). *Theincome tax benefit increased $1.3 million for the three months ended June 30,2005, compared to the corresponding quarter of 2004, due primarily to revisionin state income tax matters in 2004.  TheCompany bases the effective corporate tax rate for interim periods on theestimated annual effective corporate tax rate. Income tax benefit totaled $0.8 million for the three months ended June30, 2005 and income tax provision totaled $0.5 million for the three monthsended June 30, 2004.

 

                *Non-controlling Interest in Net Income ofConsolidated Subsidiary. *Non-controllinginterest in net income of consolidated subsidiary decreased by $1.7 million, or85%, as a result of the decrease in earnings of MarkWest Energy Partners and anincrease in ownership of non-controlling interests commensurate with privateplacements and public offerings to finance acquisitions.

 

36

----

 

 

***                Six Months Ended June 30, 2005Compared to the Six Months Ended June 30, 2004***

*** ***
| ** **                                                                                                | ** ** | **MarkWest  Hydrocarbon  Standalone** | ** ** | **MarkWest  Energy  Partners** | ** ** | **Eliminating  Entries** | ** ** | **Total** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------|------------|--------------------------|------------|-----------|------------|
| ** **                                                                                                | ** ** | **(in thousands)**                    | ** ** |
| **Six  Months Ended June 30, 2005:**                                                                      |       |                                  |       |                           |       |                     |       |      |       |
| Revenues                                                                                                  |       | $                                     | 117,307    |                           | $          | 192,597                  |       | $         | (30,511    | ) | $ | 279,393 |   |
| Purchased  product costs                                                                                  |       | 101,550                               |       | 134,647                        |       | (19,144                  | )          | 217,053   |       |
| Facility  expenses                                                                                        |       | 10,921                                |       | 20,691                         |       | (11,367                  | )          | 20,245    |       |
| Selling, general  and administrative expenses                                                             |       | 6,277                                 |       | 10,950                         |       | —                   |       | 17,227    |       |
| Depreciation                                                                                              |       | 834                                   |       | 8,902                          |       | —                   |       | 9,736     |       |
| Amortization of  intangible assets                                                                        |       | —                                |       | 4,190                          |       | —                   |       | 4,190     |       |
| Accretion of  asset retirement and sublease obligations                                                   |       | 2                                     |       | 19                             |       | —                   |       | 21        |       |
| Income (loss)  from operations                                                                            |       | (2,277                                | )          | 13,198                         |       | —                   |       | 10,921    |       |
|                                                                                                      |       |                                  |       |                           |       |                     |       |      |       |
| Equity in  earnings of unconsolidated subsidiaries                                                        |       | —                                |       | 990                            |       | —                   |       | 990       |       |
| Interest income                                                                                           |       | 440                                   |       | 130                            |       | —                   |       | 570       |       |
| Interest expense                                                                                          |       | (61                                   | )          | (8,232                         | )          | —                   |       | (8,293    | )          |
| Amortization of  deferred financing costs (a component of interest expense)                               |       | (122                                  | )          | (972                           | )          | —                   |       | (1,094    | )          |
| Dividend income                                                                                           |       | 188                                   |       | —                         |       | —                   |       | 188       |       |
| Other income  (expense)                                                                                   |       | 413                                   |       | (178                           | )          | —                   |       | 235       |       |
| Income (loss)  before non-controlling interest in net income of consolidated subsidiary and  income taxes |       | $                                     | (1,419     | )                              | $          | 4,936                    |       | $         | —     |   | $ | 3,517 |   |
| **Six  Months Ended June 30, 2004:**                                                                      |       |                                  |       |                           |       |                     |       |      |       |
| Revenues                                                                                                  |       | $                                     | 81,678     |                           | $          | 129,484                  |       | $         | (28,438    | ) | $ | 182,724 |   |
| Purchased  product costs                                                                                  |       | 71,471                                |       | 97,224                         |       | (15,945                  | )          | 152,750   |       |
| Facility  expenses                                                                                        |       | 11,938                                |       | 12,616                         |       | (12,493                  | )          | 12,061    |       |
| Selling, general  and administrative expenses                                                             |       | 5,362                                 |       | 5,023                          |       | —                   |       | 10,385    |       |
| Depreciation                                                                                              |       | 739                                   |       | 6,446                          |       | —                   |       | 7,185     |       |
| Amortization of  intangible assets                                                                        |       | —                                |       | 68                             |       | —                   |       | 68        |       |
| Income (loss)  from operations                                                                            |       | (7,832                                | )          | 8,107                          |       | —                   |       | 275       |       |
|                                                                                                      |       |                                  |       |                           |       |                     |       |      |       |
| Interest income                                                                                           |       | 335                                   |       | 21                             |       | —                   |       | 356       |       |
| Interest expense                                                                                          |       | (9                                    | )          | (2,044                         | )          | —                   |       | (2,053    | )          |
| Amortization of  deferred financing cost (a component of interest expense)                                |       | 9                                     |       | (623                           | )          | —                   |       | (614      | )          |
| Dividend income                                                                                           |       | 83                                    |       | —                         |       | —                   |       | 83        |       |
| Other income  (expense)                                                                                   |       | 33                                    |       | (38                            | )          | —                   |       | (5        | )          |
| Income (loss)  before non-controlling interest in net income of consolidated subsidiary and  income taxes |       | $                                     | (7,381     | )                              | $          | 5,423                    |       | $         | —     |   | $ | (1,958 | ) |
|                                                                                                           |            |                                       |            |                                |            |                          |            |           |            |  |  |  |  |  |

 
| ** **                                                                                                | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                                                | ** ** | **2005**                      | ** ** | **2004** | ** ** |
| ** **                                                                                                | ** ** | **(in thousands)**            | ** ** |
| Income (loss)  before non-controlling interest in net income of consolidated subsidiary and  income taxes |       | $                             | 3,517      |   | $ | (1,958 | ) |
| Provision  (benefit) for income taxes                                                                     |       | (32                           | )          | 437 |   |
| Non-controlling  interest in net income of consolidated subsidiary                                        |       | (3,619                        | )          | (3,255 | ) |
| Net loss                                                                                                  |       | $                             | (70        | ) | $ | (5,650 | ) |

 

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***MarkWest Hydrocarbon Standalone***

 

*                Revenues.*  Revenues increased $35.6 million, or 44%, forthe first half of 2005 compared to the corresponding half of 2004 primarily dueto an increase in our wholesale propane marketing business revenue of $17.7million.  The wholesale propane marketingbusiness began at the end of the first quarter of 2004.  Revenues also increased due to an increase inNGL product sale prices and volumes in Appalachia of $11.9 million. Inaddition, gas marketing revenues increased $5.3 million due to an increase inprice.  The remainder of the increase isdue to a decrease in hedge losses realized in the first half of 2005 comparedthe corresponding half of 2004.  The lossin 2004 was the result of an unfavorable hedging program that settled in April2004.

 

*                PurchasedProduct Costs.* Purchased product costs increased $30.1 million, or 42%, for the firsthalf of 2005 compared to the corresponding half of 2004 primarily due to costsfrom our wholesale propane marketing business introduced in February 2004adding $17.7 million and an increase in product costs from our Appalachiannatural gas liquids business of $7.2 million as a result of an increase involume and an increase in price. Purchased product costs also increased $5.1million as a result of an increase in gas marketing purchases due to anincrease in volume and price.

 

*                FacilityExpenses.*  Facilityexpenses decreased by approximately $1.0 million, or 9%, during the first halfof 2005 compared to corresponding half of 2004 primarily as a result offavorable fuel reimbursement at our Kenova, Cobb and Boldman facilities.

 

*                Selling,General and Administrative Expenses. *Selling,general and administrative expenses increased by $0.9 million, or 17%, duringthe first half of 2005 compared to the corresponding half of 2004 as a resultof the increase in compensation expense attributed to the Participation Plan,the 1996 Stock Incentive Plan and the 1996 Non-employee Director Stock OptionPlan.

 

*                Depreciation*.  The increase in depreciation expense of $0.1million, or 13%, during the first half of 2005 compared to the correspondinghalf of 2004 was principally due to the increase in software and hardwareadditions associated with the upgrade of our information technologyinfrastructure as well as the acceleration of depreciation of our facilities inMichigan to more closely match our declining reserves there.

 

                *InterestIncome. *Interest income increased by $0.1 million, or31%, during the first half of 2005 compared to the corresponding half of 2004primarily due to an increase in interest earned on cash equivalents.

 

*                InterestExpense.*  Interest expense increased by $0.1 millionduring the first half of 2005 compared to the corresponding half of 2004primarily due to commitment fees related to the October 2004 credit facility.

 

*                Amortization of DeferredFinancing Costs. *The Company amortized approximately $0.1 millionof deferred financing costs during the first half of 2005 related to debtissuance costs incurred from the October 2004 credit facility.  The increase in 2005 relative to thecorresponding half of 2004 is attributable to debt refinancing completed in thelast half of 2004.  Deferred financingcosts are being amortized over the terms of the related obligations, which approximatesthe effective interest method.

 

*                Dividend Income. *Dividend income increased by approximately $0.1 million, or 127%, duringthe first half of 2005 compared to the corresponding half of 2004 as a resultof the Company’s investments in the marketable securities of master limitedpartnerships beginning in the first quarter of 2004.  The Company began receiving distributions onthe master limited partnerships in the second quarter of 2004.

 

***MarkWest Energy Partners***

 

*                Revenues. *Revenues for the first halfof 2005 were higher by $63.1 million, or 49%, compared to the correspondinghalf of 2004 primarily due to the Partnership’s East Texas acquisition thatadded $33.7 million to the Partnership’s 2005 revenue. Revenue also increased during the first half of 2005 relative to thecorresponding half of 2004 due to increased well volumes contracted to thegathering system, higher crude oil prices positively affecting condensate salesand higher processing margins in Western Oklahoma of $20.9 million. Inaddition, revenues

 

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increased $7.2 million due to a 21% increase innatural gas volumes and natural gas prices, primarily on the Appleby gatheringsystem.

 

*                PurchasedProduct Costs.* Purchased product costs were higher during the first half of 2005 by$37.4 million, or 38%, compared to the corresponding half of 2004 primarily as a result of an increase in purchased volumesand price increases in Western Oklahoma and Appalachia.  The remainder of the increase is dueto the Partnership’s late 2004 acquisition, which increased its purchasedproduct costs by $10.1 million.

 

*                FacilityExpenses. *Facilityexpenses increased approximately $8.1 million, or 64%, during the first half of2005 relative to the corresponding half of 2004 primarily due to the Partnership’s2004 acquisitions, which added $5.1 million. The remainder of the increase is due to increased pipeline repair and maintenance costs of $2.7 million andincreased salary and utility expenses.

 

*                Selling,General andAdministrative Expenses.*  Selling,general and administrative expenses increased by $5.9 million, or 118%, duringthe first half of 2005 compared to the corresponding half of 2004 as a resultof an increase in audit and Sarbanes Oxley related costs of $2.1 million. The addition of the Partnership’s East Texas acquisition added approximately$0.9 million to its costs.  The allocation of compensation expense fromthe Participation Plan increased by $1.5 million, from $0.3 million in 2004 to$1.8 million in 2005.  In addition, outside legal and financial consultingservices costs of $0.9 million and insurance adjustments of $0.5 millioncontributed to the increase in expenses.

 

*                Depreciation. *Depreciation expenseincreased $2.5 million, or 38%, during the first half of 2005 compared to thecorresponding half of 2004 primarily due to the Partnership’s 2004acquisitions.

 

*                Amortizationof Intangible Assets. *Amortizationexpense increased $4.1 million during the first half of 2005 compared to thecorresponding half of 2004 primarily due to the East Texas System acquisitionin July 2004.  On July 30,2004, the Partnership completed the acquisition of American Central EasternTexas’ Carthage gathering system and gas processing assets located in EastTexas for approximately $240.7 million. Of the total purchase price, $165.4 million was allocated to customercontracts, of which $4.2 million was amortized during the first half of 2005.

 

*                Accretion of Asset Retirementand Sublease Obligations. *Accretionof asset retirement and sublease obligations increased by less than $0.1million, and is the result of recording of an asset retirement obligation inthe third quarter of 2004 for new land leases that require the Partnership toreturn the land to its original condition.

* *

*                Equity in Earnings of UnconsolidatedSubsidiaries*.  Equity in earnings of unconsolidatedsubsidiaries increased $1.0 million during the first half of 2005 compared tothe corresponding half of 2004.  Theincrease was primarily attributable to the March 31, 2005, Starfish acquisition.

 

*                Interest Income. *Interest income increased by $0.1 million during the first half of 2005compared to the corresponding half of 2004 primarily due to an increase ininterest earned on cash equivalents.

 

*                InterestExpense.*  Interest expense increased by $6.2 million,or 303%, during the first half of 2005 compared to the corresponding half of2004.  The increase was principallyattributable to MarkWest Energy Partners’ increased outstanding debt levels, afunction of financing its 2004 acquisitions. In October 2004, the Partnership issued $225.0 million in senior notes.

 

*                Amortization of DeferredFinancing Costs. *Amortization of deferred financing costs increasedby $0.3 million, or 56%, during the first half of 2005 compared to thecorresponding half of 2004.  The increaseis primarily attributable to debt financing of the Partnership’s second half of2004 acquisitions.  Deferred financingcosts are being amortized over the terms of the related obligations, whichapproximates the effective interest method.

 

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***        Other***

 

*                IncomeTax Provision (Benefit). *Theincome tax benefit increased $0.5 million for the first half of 2005 comparedto the corresponding half of 2004, due primarily to revision in state incometax matters in 2004.  The Company basesthe effective corporate tax rate for interim periods on the estimated annualeffective corporate tax rate.  Income taxbenefit totaled less than $0.1 million for the first half of 2005 and incometax provision totaled $0.4 million for the first half of 2004, resulting ineffective income tax rates of 31.7% and (8.4)%, for the six months ended June30, 2005 and 2004, respectively.

 

*                Non-controllingInterest in Net Income of Consolidated Subsidiary. *Non-controlling interest innet income of consolidated subsidiary for the first half of 2005 increased by$0.4 million, or 11%, compared to the corresponding half of 2004 as a result ofthe increase in earnings of MarkWest Energy Partners and an increase inownership of non-controlling interests commensurate with private placements andpublic offerings to finance acquisitions.

 

**Liquidity and Capital Resources**

 

**        *M**arkWest Hydrocarbon***

 

                Ourprimary source of liquidity to meet operating expenses and fund capitalexpenditures is cash flow from operations, principally from the marketing ofnatural gas and NGLs, and quarterly distributions received from MarkWest EnergyPartners.  Based on current volume, priceand expense assumptions, we expect cash flow from operations and distributionsfrom the Partnership to fund our operations and capital expenditures in2005.  Most of our future capitalexpenditures are discretionary in nature. During 2005, we have budgeted $0.8 million for capital expenditures,consisting principally of computer hardware and software.

 

                Asof June 30, 2005, we had an aggregate of $17.5 million of unrestricted cash andmarketable securities, and restricted cash of $15.0 million (the restrictionwas subsequently removed on November 15, 2005), exclusive of MarkWest EnergyPartner’s $13.2 million cash on hand. Exclusive of MarkWest Energy Partner’s debt, the Company had nooutstanding debt through September 30, 2005. On January 21, 2005, our Board of Directors declared a quarterly cashdividend of $0.075 per share of our common stock.  The dividend was paid on February 21, 2005,to the stockholders of record as of the close of business on February 9,2005.  We disbursed $0.8 million to paythis dividend.  On April 28, 2005, ourBoard of Directors declared a quarterly cash dividend of $0.10 per share of ourcommon stock.  The dividend was paid onMay 23, 2005, to the stockholders of record as of the close of business on May16, 2005.  We disbursed $1.1 million topay this dividend.  On July 22, 2005, ourBoard of Directors declared a quarterly cash dividend of $0.10 per share of ourcommon stock.  The dividend was paid onAugust 22, 2005, to the stockholders of record as of the close of business onAugust 15, 2005.  We disbursed $1.1million to pay this dividend.  On October27, 2005, our Board of Directors announced that it declared a quarterly cashdividend of $0.125 per share of our common stock.  The dividend was paid on November 22, 2005,to the stockholders of record as of the close of business on November 15, 2005.  We disbursed approximately $1.4 million topay this dividend.

 

                Weown 89% of the general partner of MarkWest Energy Partners, excluding interestheld by certain employees and directors but deemed owned by the Company throughthe Participation Plan.  The generalpartner of MarkWest Energy Partners owns the 2% general partner interest andall of the incentive distribution rights. The incentive distribution rights entitle us to receive an increasingpercentage of cash distributed by the Partnership as certain targetdistribution levels are reached. Specifically, they entitle us to receive 13% of all cash distributed ina quarter after each unit has received $0.55 for that quarter; 23% of all cashdistributed after each unit has received $0.625 for that quarter; and 48% ofall cash distributed after each unit has received $0.75 for that quarter.  For the six months ended June 30, 2005, wereceived $3.9 million in distributions from our subordinated units, and we received$2.0 million from our general partner interest, of which $1.9 millionrepresented payments on incentive distribution rights.  For the year ending December 31, 2005, weexpect to receive $7.9 million in distributions for our subordinated and commonunits (that will result from converting a portion of our subordinated units),and we expect the general partner to receive $4.9 million, or an aggregate of$12.8 million.

 

                Cashflows generated from our marketing operations are subject to volatility inenergy prices, especially prices for NGLs and natural gas.  Our cash flows are enhanced in periods whenthe prices received for NGLs are

 

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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 NGLs produced in our processing operationsfor third-party producers, and then reimburse or “keep whole” the producers forthe energy content of the NGLs removed through the re-delivery to the producersof an equivalent amount (on a Btu basis) of dry natural gas.  Generally, the value of the NGLs extracted isgreater than the cost of replacing those Btus with dry gas, resulting inpositive operating margins under these contracts.  Periodically, when natural gas becomes moreexpensive on a Btu equivalent basis than NGL products, the cost of keeping theproducer “whole” can result in operating losses.  We entered into several new and amendedagreements in September with one of the largest Appalachia producers that allowus to significantly reduce our exposure to commodity price risk for approximately25% of our keep-whole gas volumes.  Underthese agreements, the Company is limited on the amount of costs it would haveto pay to the producer in the event natural gas becomes more expensive than NGLproduct sales price, thereby mitigating the risk of incurring operatinglosses.  In connection with theseagreements, we paid $3.3 million of consideration to the producer that is beingamortized as additional cost of the gas purchased over the term of the contracts,October 1, 2004, through February 9, 2015.

 

                *Debt*

 

                In October 2004,the Company entered into a $25.0 million senior credit facility with a term ofone year.  The $25.0 million revolvingfacility has a variable interest rate based on the base rate, which is equal tothe higher of a) the Federal Funds Rate plus 1⁄2 of 1%, and b) the rate ofinterest in effect for such day as publicly announced from time to time by theAdministrative Agent as its prime rate, plus the applicable rate, which isbased on a utilization percentage.  InOctober and November 2005, the Company entered into the first and secondamendment to the credit agreement.  Thefirst amendment extended the term of the original agreement to November 15,2005.  The second amendment reduced thelending amount from $25.0 million to $16.0 million, of which $6.0 million ofavailability is committed to a letter of credit, leaving $10.0 millionavailable for revolving loans.  Thesecond amendment also extended the term of the revolving credit to December 30,2005.  If the revolving credit isconverted into a term loan, the term will be extended to December 29, 2006.

 

                In connection withthe credit facility, the Company is subject to a number of restrictions on itsbusiness, including: its ability to grant liens on assets; merge, consolidateor sell assets; incur indebtedness; make acquisitions; engage in otherbusinesses; enter into operating leases; enter into certain swap contracts;engage in transactions with affiliates; make disposition; make restrictedpayments, distributions and redemptions and other usual and customarycovenants.  As of June 30, 2005, theCompany had no outstanding borrowings. At November 15, 2005, the Company had a borrowing capacity of $10.0million.  The credit facility alsocontains covenants requiring the Company to maintain a minimum net worth of$40.0 million plus 50% of proceeds of equity issued subsequent to October 25,2004.

 

*                LiquidityRequirements*

 

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

 

        ***MarkWest Energy Partners***

 

                *Overview*

 

                ThePartnership’s primary source of liquidity to meet operating expenses and fundcapital expenditures (other than for larger acquisitions) is cash flowgenerated by operations.  The public andinstitutional markets have been the Partnership’s principal source of capitalto finance a significant amount of its growth (including

 

41

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acquisitions). During the first quarter of 2005, the Partnership borrowed $40.0 millionfrom its credit facility to finance the acquisition of a 50% non-operatingmembership interest in Starfish Pipeline Co. LLC.  Starfish owns the FERC-regulated Stingraynatural gas pipeline and the unregulated Triton natural gas gathering systemand West Cameron dehydration facility, all located in the Gulf of Mexico and SouthwesternLouisiana.  During the nine months endedSeptember 30, 2005, we spent $50.2 million on capital expenditures, primarilyfor the construction of a new processing plant and gathering systems in EastTexas to handle future contractual commitments. On November 1, 2005, we acquired a 100% interest in the Javelina gasprocessing and fractionation facility in Corpus Christi, Texas for approximately$355.0 million.  We borrowedapproximately $500.0 million, $355.0 million to finance Javelina, $45.0 millionfor working capital adjustments and $100.0 million to retire long-term debtfrom the predecessor revolving credit facility. On November 1, 2005, the available borrowing capacity under thePartnership Credit Facility was $43.0 million.

 

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

 

                *Equity*

 

                OnNovember 9, 2005, the Partnership completed a private placement of 1,644,065common units.  The units were issued at apurchase price of $44.21 per unit, raising approximately $74.0 million,including the general partner’s contribution. This permanent capital was issued as part of the plan to bring thePartnership’s capital structure in line with the Partnership’s stated goal ofless than 50% debt.

 

                Theinability of the Partnership to timely file its Annual Report on Form 10-K forthe year ended December 31, 2004 and its quarterly report on Form 10-Q for theperiod ending March 31, 2005, may influence the timing of the Partnership’sefforts to raise equity in the future. The Partnership no longer has the ability to incorporate by referenceinformation from its filings into a new registration statement for one yearfollowing the date the Partnership became current with its filings, or October11, 2005, if the Partnership seeks to raise capital through a public offeringof registered debt or equity securities. The Partnership intends to raise additional capital through public debtor equity offerings.  As a result, thePartnership will be required to file a Form S-1, which is a long-form type ofregistration statement.  The requirementto file a Form S-1 may affect the Partnership’s ability to access the capitalmarkets on a timely basis and may increase the costs of doing so.

 

                ThePartnership has the ability to issue an unlimited number of units to fundimmediately accretive acquisitions. Under the provisions of the Partnership Agreement, an immediatelyaccretive acquisition is one that in the general partner’s good faithdetermination would have, if acquired by the Partnership as of the date that isone year prior to the first day of the quarter in which such acquisition isconsummated, resulted in an increase to the amount of operating surplusgenerated by the Partnership on a per-unit basis (for all outstanding units)with respect to each of the four most recently completed quarters (on a proforma basis) as compared to the actual amount of operating surplus generated bythe Partnership on a per-unit basis (for all outstanding units), excludingoperating surplus generated by the Partnership on a per-unit basis (for alloutstanding units), excluding operating surplus attributable to the acquisitionwith respect to each of such four most recently completed quarters.  For acquisitions that are not immediatelyaccretive, the Partnership has the ability to issue up to 1,207,500 commonunits without unitholder approval.

 

                *Debt*

 

                The Partnership’s$200.0 million credit facility was established to fund capital expenditures andacquisitions, working capital requirements (including letters of credit) anddistributions to unitholders. Advances to fund distributions to unitholders maynot exceed $0.50 per outstanding unit in any 12-consecutive-month period. Todate there have been no advances to fund distributions to unitholders.  At September 30, 2005, the Partnership had

 

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borrowed $85.0 million; $40.0 million to finance its investment inStarfish in March 2005 and $45.0 million to fund capital expenditures.  In November 2005, we amended and restated thePartnership’s credit facility, decreasing the maximum lending limit from $200.0million to $100.0 million and decreasing the term of the facility to one year,due October 31, 2006.  We also enteredinto a $400.0 million term loan due October 31, 2006.

 

                Provisions of thePartnership’s credit facility subject the Partnership and certain of itssubsidiaries and affiliates to a number of restrictions on its business.  These include restrictions on the Partnership’sability to grant liens on assets; make or own certain investments; enter intoany swap contracts other than in the ordinary course of business; merge,consolidate or sell assets; incur indebtedness (other than subordinatedindebtedness); make acquisitions; engage in other business; enter into capitalor operating leases; engage in transactions with affiliates; make distributionson equity interests; declare or make, directly or indirectly any restrictedpayment and other usual and customary covenants.

 

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

 

                The indenturegoverning the senior notes limits the activity of the Partnership and itsrestricted subsidiaries.  The provisionsof such indenture places limits on the ability of the Partnership and itsrestricted subsidiaries to: incur additional indebtedness; declare or paydividends or distributions or redeem, repurchase or retire equity interests orsubordinated indebtedness; make investment; incur liens; create any consensuallimitation on the ability of the Partnership’s restricted subsidiaries to paydividends, make loans or transfer property to the Partnership; engage in transactionswith the Partnership’s affiliates; sell assets, including equity interest ofthe Partnership’s subsidiaries; make any payment on or with respect to, orpurchase, redeem, defease or otherwise acquire or retire for value any subordinatedobligation or guarantor subordination obligation (except principal and interestat maturity); and consolidate, merge or transfer assets.

 

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

 

                *Liquidity Requirements*

 

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

 

                Webelieve that the Partnership’s available cash, cash provided by operatingactivities and funds available under the Partnership’s credit facility will besufficient to fund the Partnership’s operating, interest and general andadministrative expenses; the Partnership’s capital expenditures budget;short-term contractual obligations; and distribution payments at current levelsfor the foreseeable future.  However, thePartnership’s ability to finance additional acquisitions will likely requirethe issuance of additional common units, the expansion of the credit facility,additional debt financing or a combination thereof.  In the event that the Partnership desires orneeds to raise additional capital, we cannot guarantee that additional fundswill be available at times or on terms favorable to the Partnership, if at all.

 

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

 

## ***Cash Flows***

 
| ** **                                          | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------------------------------|------------|-------------------------------|------------|
| ** **                                          | ** ** | **2005**                      | ** ** | **2004** | ** ** |
| ** **                                          | ** ** | **(in thousands)**            | ** ** |
|                                                |       |                          |       |   |   |
| Net cash provided by operating activities           |       | $                             | 25,512     |   | $ | 21,338 |   |
| Net cash used in investing activities               |       | $                             | (78,090    | ) | $ | (21,497 | ) |
| Net cash provided by (used in) financing activities |       | $                             | 50,112     |   | $ | (5,708 | ) |

 

                Net cash providedby operating activities was higher during the six months ended June 30, 2005than during the six months ended June 30, 2004, primarily due to increasedactivities as a result of the Partnership’s East Texas acquisition.  The increase is also attributable to higherprocessing margins and volumes from the Partnership’s Oklahoma segment.

 

                Net cash used ininvesting activities during the six months ended June 30, 2005, consistedprimarily of the $41.7 million Starfish acquisition, capital expenditures of$31.4 million for existing facilities and $5.1 million for investment inmarketable securities. Net cash used in investing activities during the sixmonths ended June 30, 2004, was primarily due to the $2.3 million Hobbsacquisition, capital expenditures of $7.8 million for existing facilities and$11.7 million for investment in marketable securities.

 

                Net cash providedby financing activities during the six months ended June 30, 2005, consistedprimarily of proceeds from long-term debt of $65.0 million, distributions byMarkWest Energy Partners of $12.9 million to unitholders other than MarkWestHydrocarbon and the general partner, and cash dividends paid to shareholders of$1.9 million.  Net cash used in financingactivities during the six months ended June 30, 2004, consisted primarily ofrepayments of long-term debt in excess of proceeds of $40.0 million; proceedsfrom MarkWest Energy Partners’ secondary public offering of $44.1 million;distributions by MarkWest Energy Partners of $6.1 million to unitholders otherthan MarkWest Hydrocarbon and the general partner; proceeds from stock optionexercises of $1.4 million; and cash dividends paid to shareholders of $5.0million.

 

**TotalContractual Cash Obligations**

 

                A summary of ourtotal contractual cash obligations as of June 30, 2005, is as follows, inthousands:

 
| ** **                          | ** ** | **Payment Due by Period** | ** ** |
|-------------------------------------|------------|---------------------------|------------|
| **Type of obligation**              | ** ** | **Total  obligation**     | ** ** | **Due in  2005** | ** ** | **Due in  2006-2007** | ** ** | **Due in  2008-2009** | ** ** | **Thereafter** | ** ** |
|                                |       |                      |       |   |   |   |   |   |   |   |   |
| Long-term debt (1)                  |       | $                         | 440,875    |   | $ | 10,172 |   | $ | 100,000 |   | $ | 30,937 |   | $ | 299,766 |   |
| Operating leases                    |       | 12,905                    |       | 2,614 |   | 6,618 |   | 2,844 |   | 829 |   |
| Purchase  obligations               |       | 1,353                     |       | 1,353 |   | — |   | — |   | — |   |
| Total  contractual cash obligations |       | $                         | 455,133    |   | $ | 14,139 |   | $ | 106,618 |   | $ | 33,781 |   | $ | 300,595 |   |

----

(1)  Includes interest on our 6.875% senior notesthrough 2014 of $144.4 million and interest on our 7.5% credit facility through2006 of $6.5 million, reflecting our November 1, 2005, amended credit facility,due October, 2006.

 

**MattersImpacting Future Results**

 

                The Company andseveral of its affiliates were served earlier this year with two lawsuitspresently under the jurisdiction of the U.S. District Court for the EasternDistrict of Kentucky, Pikeville Division. In early November, the Company was served with an additional lawsuitfiled in Floyd County Circuit Court, Kentucky, adding five new claimants, but essentiallyalleging the same facts and claims as the earlier two suits.  These suits are for third-party

 

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claims of property and personal injury damages sustained as aconsequence of a NGL pipeline leak and an ensuring explosion and fire thatoccurred on November 8, 2004 from a natural gas pipeline, owned by an unrelatedbusiness entity, and leased and operated by the Partnership’s subsidiary,MarkWest Energy Appalachia, LLC.  Thepipeline transports NGLs from the Maytown gas processing plant to thePartnership’s Siloam fractionator. An ignition and fire from the leaked vaporsresulted in property damage to five homes and injuries to some of theresidents.  The cause of the pipelinesplit, leak, and resulting explosion and fire is being investigated by thepipeline owner, the U.S. Department of Transportation, Office of PipelineSafety (“OPS”), and the Partnership.

 

                The Company andthe Partnership have timely notified their general liability insurance carriersof the incident and of the filed Kentucky actions and is coordinating thedefense of these third-party lawsuits with the insurers.  At this time, the Company and the Partnershipbelieve that they have adequate general liability insurance coverage forthird-party property damage and personal injury liability resulting from theincident.  To date, the Company and thePartnership have settled with several of the claimants for third-party propertydamage claims (damage to residences and personal property) related to thisincident, in addition to reaching settlement for some of the personal injuryclaims related to the pipeline explosion and fire.  These settlements have been paid for orreimbursed under the Partnership’s general liability insurance.  As a result, the Company has not provided fora loss contingency.

 

                Pursuant to OPSregulation mandates and to a Corrective Action Order issued by the OPSimmediately after the incident, pipeline and valve integrity evaluation,testing and repair efforts were required and conducted on the affected pipelinesegment before service could be resumed. Partial return to service of the affected pipeline was resumed inOctober 2005.  The Company and thePartnership have filed an independent action against their All-Risk Propertyand Business Interruption insurance carriers as a result of their refusal to honortheir insurance coverage obligation for providing the Company and thePartnership insurance payments for certain expenses.  These expenses related to the Partnership’sinternal expenses and costs incurred for damage to, and loss of use of, thepipeline, equipment, products, the extra transportation costs incurred fortransporting the liquids while the pipeline was out of service, the reducedvolumes of liquids that could be processed, and the costs of complying with theOPS Corrective Action Order (hydrostatic testing, repair/replacement and otherpipeline integrity assurance measures). These expenses and costs have been expensed as incurred and anypotential recovery from the All-Risks Property and Business Interruptioninsurance carriers will be treated as “other income” if they are received.  The Partnership has not provided for areceivable related to these claims because of the uncertainty as to whether andhow much the Company and the Partnership will ultimately recover under theAll-Risks Property and Business Interruption insurance policies.  In addition to the property and businesslosses and interruption costs, through September 30, 2005, the Partnershiphas incurred pipeline testing, refurbishment and replacements costs ofapproximately $5.1 million, of which $1.3 million has been capitalized. ThePartnership’s current estimate is that the full cost of pipeline testing,repair and improvements will be approximately $5.5 million.  The Company and the Partnership have alsoasserted that the costs associated with such testing, replacement and repairare also subject to an equal sharing arrangement with the owner of thepipeline, pursuant to the terms of the pipeline lease agreement.

 

                The Company hasalso been involved in a lawsuit captioned *RossBros. Construction v. MarkWest Hydrocarbon, Inc*., (U.S.District Court Eastern District of Kentucky, Ashland Division, Civ. Action No.01-CV-205).  This lawsuit involved theconstruction of the Siloam Kentucky plant and a dispute as to the monetaryvalue of additional work beyond the contract’s lump sum price performed by thecontractor.  This lawsuit involved aclaim of approximately $0.7 million in extra costs.  The Company was recently granted SummaryJudgment on its defense asserting accord and satisfaction.  In August 2005, Plaintiffs filed an appeal ofthe Summary Judgment to the U.S. Court of Appeals for the 6thCircuit.  The Company believes that whileit is not able to predict the ultimate outcome of this matter, based on thejudge’s lengthy and well-reasoned discussion on the grant of the summaryjudgment and denial of Ross Brothers’ motion for reconsideration, it isprobable that the Company will prevail in the appeal. As a result, the Companyhas not provided for a loss contingency.

 

                The Company hasalso been involved in an arbitration proceeding captioned *Kevin Stowe and Scott Daves v. MarkWest Hydrocarbon,Inc*., American Arbitration Association arbitration, Case No. 77168 Y 0052 05 BEAH, Denver, Colorado, 2005. Claimants filed an arbitration proceeding against the Company seekingfurther payments out of a dispute and settlement over interests in certainwells in Colorado.  The Company hadtransferred via a purchase and sale agreement, any liability for any paymentsout of the settlement it had reached with claimants to a

 

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third party in the sale of certain of the Company’s oil and gasproperty interests.  The Company has beenin communication with the third-party purchaser and the third-party purchaserhas admitted it has those liabilities under the purchase and sale agreement,and the Company believes the earlier settlement with the claimants precludesany of their claims.  The Company doesnot believe there are material liabilities associated with this claim.  As a result, the Company has not provided fora loss contingency.

 

                In September 2005,a lawsuit captioned C.F. Qualia Operating, Inc. v. MarkWest Pinnacle, L.P.,(District Court of Midland, Texas, 385th Judicial District, CauseNo. CV-45188), was served on the Partnership’s subsidiary, MarkWest Pinnacle,L.P., alleging breach of contract, fraud and breach of implied duty of goodfaith with respect to a dispute on volumes of gas purchased by the Partnershipunder a gas purchase agreement.  Underthe gas purchase agreement, MarkWest Energy Partners paid the Plaintiff basedon volumes of gas measured at the wellhead (delivery point).  Plaintiff claims that it is entitled to aprorated portion of any system gain, i.e., that is to be paid for more gas thanit actually sold and delivered to the Partnership.  MarkWest Energy Partners has filed an Answerto the Complaint, denying Plaintiff’s allegations and has asserted acounter-claim for declaratory judgment on the contract terms as being clear andunambiguous as to payment being limited to those volumes measured at thewellhead, that Plaintiff’s claims are without merit, and that the Partnershipalso may have overpaid Plaintiff based on, among other things, the wet versusdry Btu measurements.  Discovery has justbegun, and at this time, the Partnership is not able to predict the ultimateoutcome of this matter.  As a result, thePartnership has not provided for a loss contingency.

 

                In response to ashipper inquiry to the Federal Energy Regulatory Commission (“FERC”) regardingthe Partnership’s Michigan Crude Pipeline, and following unsuccessfulFERC-requested rate structure discussions with the shippers, FERC requestedthat we file a tariff.  The Partnershipfiled a tariff with FERC establishing a cost of service rate structure to beeffective starting January 1, 2006.  Twoshippers and a producer filed a joint protest to the FERC filing with theCommission, and the Partnership has filed a response to this joint protestvigorously defending its filing and opposing the protest.  The Partnership is still in discussion withthe parties and anticipates further FERC-sponsored settlement discussions.  However, the Partnership cannot predict atthis time whether the FERC tariff filing or protest will adversely affect itsMichigan Crude Pipeline results of operations.

 

                The Partnershiphas a 50% non-operating ownership interest in Starfish Pipeline Company (“Starfish”).  In connection with the impact of HurricaneRita on the Starfish operations, based on our continuing discussions with theoperator and other 50% owner of Starfish, Enbridge Offshore (Gas Transmission)L.L.C. (“Enbridge), the Partnership has been informed that initial onsite and aerial inspectionsindicated no material damage to the offshore platform facilities and that pipeintegrity was not compromised.  Sonarinspection of underwater pipe to assess sediment support and cover ispending.  No major structural damage appearsto have occurred at the onshore Starfish dehydration and compressor facilities.  However, due to flooding, the electrical,control equipment and office buildings require repairs, which Enbridge believescan be completed by the end of 2005. Starfish operations have been substantially curtailed since shortlybefore Hurricane Rita hit the Gulf Coast in September 2005, and until suchrepairs are completed, Starfish is not able to return to normal operations andthis will have a continuing impact on operating income.  Basedon this preliminary information and without further update on the situationfrom Enbridge, we are unable to further estimate the ultimate impact ofHurricane Rita to 2005 net income, but we expect that the effect will bematerial.  Our evaluation is subject to anumber of factors including ongoing assessments, disclosures by operators ofinterconnecting production and processing facilities, and discussions withinsurance carriers for insurance recovery for damages and businessinterruption.

 

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                Under the terms ofcertain gathering contracts in the Partnership’s East Texas systems, thePartnership is required to buy gas based on a specific index price. ThePartnership’s typical process has been to sell its best estimate of theproduction at the same index price near the end of the prior month.  Due to unexpected volatility and acorresponding lack of liquidity in the gas trading market at the end ofOctober 2005, the Partnership was unable to sell all of its requirementsat the same index price.  As a result,the Partnership was not able to sell approximately 16,000 Mmbtu/day of gas fromits Appleby and East Texas assets for November 2005.    During the month of November, thePartnership sold the gas at a different index price, which was lower than theindex purchase price for the month.  ThePartnership cannot currently predict the exact financial impact until the endof December, but based on its current estimate of volume and price, thePartnership expects a negative impact to operating income from operations ofapproximately $2.5 million from the Appleby and East Texas operations.  The Partnership has implemented additionalcontrols and procedures to mitigate a similar exposure going forward.  The Partnership has sold 90% of itsforecasted volumes through March 2006 at index price.  The Partnership has also established firmguidelines to sell the remainder of forecast volumes earlier in the precedingmonth to reduce the risk of encountering unexpected market conditions that precludethese types of index sales.

 

                Under the terms ofthe keep whole agreements in the Partnership’s Western Oklahoma System, thePartnership purchases gas to replace the shrink and fuel requirements underthose arrangements.  The Partnership thensells the natural gas liquids processed at the Foss Lake plant.  The continued strong pricing environment fornatural gas liquids coupled with the decline in mid-continental natural gasprices in November, that contributed to the negative impact to operations in EastTexas and Appleby, resulted in higher than expected margins in the Partnership’sWestern Oklahoma System of approximately $1.0 million.

 

**RecentAccounting Pronouncements**

 

**               **InDecember 2004, the FASB issued SFAS No. 123 (revised 2004), *Share-Based Payment* (“SFAS No. 123(R)”).  This statement addresses the accounting forshare-based payment transactions in which an enterprise receives employee servicesin exchange for (a) equity instruments of the enterprise, or (b) liabilitiesthat are based on the fair value of the enterprise’s equity instruments or thatmay be settled by the issuance of such equity instruments.  SFAS No. 123(R) requires an entity torecognize the grant-date fair-value of stock options and other equity-basedcompensation issued to employees in the income statement.  The revised Statement generally requires thatan entity account for those transactions using the fair-value-based method, andeliminates the intrinsic value method of accounting in APB Opinion No. 25, *Accounting for Stock Issues to Employees*,which was permitted under SFAS No. 123 as originally issued.  The revised Statement required entities todisclose information about the nature of the share-based payment transactionsand the effects of those transactions on the financial statements.  SFAS 123(R) is effective for public companiesfor the first fiscal year beginning after December 15, 2005.  All public companies must use either themodified prospective or the modified retrospective transition method.  We have not yet evaluated the impact of theadoption of this pronouncement, which must be adopted in the first quarter ofcalendar year 2006.  On March 29, 2005,the SEC staff issued Staff Accounting Bulletin (“SAB”) No. 107, *Share-Based Payment* to express the viewsof the staff regarding the interaction between SFAS No. 123(R) and certain SECrules and regulations and to provide the staff’s views regarding the valuationof share-based payment arrangements for public companies.  The Company will take into consideration theadditional guidance provided by SAB 107 in connection with the implementationof SFAS No. 123(R).  We have not yetevaluated the impact of the adoption of this pronouncement, which must beadopted in the first quarter of calendar year 2006.

 

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

 

                In May 2005,the FASB issued SFAS No. 154, *AccountingChanges and Error Corrections—a replacement*

 

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

 

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**Forward-LookingInformation**

 

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

 

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

 

                Important factorsthat could cause our actual results of operations or our actual financialcondition to differ include, but are not necessarily limited to:

 

•                  Our expectations regardingMarkWest Energy Partners, L.P.

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

•                  MarkWest Energy Partners, L.P.’sability to obtain natural gas supply for its gathering and processing services.

•                  The Partnership’s substantialdebt and other financial obligations that could affect our financial condition.

•                  The availability of NGLs for thePartnership’s transportation, fractionation and storage services.

•                  Our ability to amend certainproducer contracts.

•                  Our expectations regardingnatural gas and NGL product 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 risk of being delisted bythe American Stock Exchange.

 

                Manyof such factors are beyond our ability to control or predict.  Investors are cautioned not to put unduereliance on forward-looking statements.

 

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**Item 3.  Quantitative and Qualitative Disclosuresabout Market Risk**

 

                Market riskincludes the risk of loss arising from adverse changes in market rates andprices.  We face market risk fromcommodity price changes and to a lesser extent interest rate changes.

 

***Commodity Price Risk***

 

                Through ourconsolidated subsidiary, MarkWest Energy Partners, we are engaged in thegathering, processing and transmission of natural gas; the transportation,fractionation and storage of NGLs; and the gathering and transportation ofcrude oil.  We also market natural gasand NGL products.  Our products arecommodities that are subject to price risk resulting from material changes inresponse to fluctuations in supply and demand, general economic conditions andother market conditions, such as weather patterns, over which we have nocontrol.

 

                Our primary riskmanagement objective is to manage volatility in our cash flows.  A committee, which includes members of seniormanagement of our general partner, oversees all of our hedging activity.

 

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

 

                We enter into OTCswaps with financial institutions and other energy company counterparties.  We conduct a standard credit review oncounterparties and have agreements containing collateral requirements wheredeemed necessary.  We use standardizedswap agreements that allow for offset of positive and negative exposures.  We are subject to margin deposit requirementsunder OTC agreements (with non-bank counterparties) and NYMEX positions.

 

                The use offinancial instruments may expose us to the risk of financial loss in certaincircumstances, including instances when (i) NGLs do not trade at historicallevels relative to crude oil, (ii) sales volumes are less than expectedrequiring market purchases to meet commitments, or (iii) our OTC counterpartiesfail to purchase or deliver the contracted quantities of natural gas, NGLs, orcrude oil or otherwise fail to perform. To the extent that we engage in hedging activities, we may be preventedfrom realizing the benefits of favorable price changes in the physical market.  However, we are similarly insulated againstunfavorable changes in such prices.

 

*Commodity Risk Management Position*

 

                As ofJune 30, 2005, we have entered into derivative instruments designed tomanage the price risk of forecasted NGL and natural gas sales in 2005 asfollows:

 
| **MarkWest Hydrocarbon, Inc.**     |   |      |   |
|------------------------------------|--------|-----------|--------|
| NGL swaps:                         |   |      |   |
| NGL gallons                        |   | 3,113,460 |   |
| NGL sales price per gallon         |   | $         | 1.23   |   |
|                               |   |      |   |
| **MarkWest Energy Partners, L.P.** |   |      |   |
| Natural gas swaps:                 |   |      |   |
| Natural gas MMBtu                  |   | 92,000    |   |
| Natural gas sales price per MMBtu  |   | $         | 4.26   |   |

 

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

 

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| **Costless Collars:**                             | ** ** | **Period** | ** ** | **Floor**        | ** ** | **Cap** | ** ** |
|---------------------------------------------------|------------|------------|------------|------------------|------------|---------|------------|
| Crude Oil — 500 Bbl/d                        |       | 2006       |       | $                | 57.00      |    | $          | 67.00 |   |
| Crude Oil — 250 Bbl/d                        |       | 2006       |       | $                | 57.00      |    | $          | 67.00 |   |
| Crude Oil — 205 Bbl/d                        |       | 2006       |       | $                | 57.00      |    | $          | 65.10 |   |
|                                              |       |       |       |             |       |    |       |
| Propane — 10,000 Gal/d                       |       | 2006       |       | $                | 0.97       |    | $          | 1.15 |   |
| Propane — 20,000 Gal/d                       |       | 2006       |       | $                | 0.90       |    | $          | 0.99 |   |
| Propane — 12,750 Gal/d                       |       | 2006       |       | $                | 0.90       |    | $          | 1.01 |   |
|                                              |       |       |       |             |       |    |       |
| Ethane — 22,950 Gal/d                        |       | 2006       |       | $                | 0.65       |    | $          | 0.80 |   |
|                                              |       |       |       |             |       |    |       |
| Natural Gas — 1,575 Mmbtu/d                  |       | 2006       |       | $                | 9.00       |    | $          | 11.40 |   |
| Natural Gas — 1,575 Mmbtu/d                  |       | 2006       |       | $                | 8.50       |    | $          | 10.05 |   |
| Natural Gas — 1,575 Mmbtu/d                  |       | 2006       |       | $                | 9.00       |    | $          | 12.50 |   |
| Natural Gas —     645 Mmbtu/d |       | 2006       |       | $                | 8.86       |    | $          | 15.21 |   |
| Natural Gas —     645 Mmbtu/d |       | 2006       |       | $                | 6.71       |    | $          | 12.46 |   |
|                                              |       |       |       |             |       |    |       |
| **Swaps**                                         | ** ** | ** ** |       | **Fixed  Price** |       |    |       |
| Crude Oil — 250 Bbl/d                        |       | 2006       |       | $                | 62.00      |    |       |   |
| Crude Oil — 185 Bbl/d                        |       | 2006       |       | $                | 61.00      |    |       |   |

 

                While we expectthese hedges to provide economic stability against the affect of changingcommodity prices on our physical positions, for accounting purposes we will notdesignate these derivatives as cash flow hedges and will not apply hedgeaccounting.  We will expand ourdisclosure around the resulting mark-to-market impacts.

 

##### ***Interest Rate Risk***

 

                MarkWest EnergyPartners is exposed to changes in variable interest rates payable on $65.0million of borrowings under its credit facility as of June 30, 2005, primarilyas a result of its floating interest rates under this facility.  As of June 30, 2005, floating-rate debtcomprised 22% of total outstanding debt of the Partnership.  The Partnership may make use of interest rateswap agreements in the future to adjust the ratio of fixed and floating ratesin the debt portfolio.

 

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**Item 4.  Controls and Procedures**

 

***                Disclosure Controls andProcedures***

 

                In connection withthe preparation of this quarterly report on Form 10-Q, 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 June 30, 2005,pursuant to Rule 13a-15 under the Securities Exchange Act of 1934.  Based upon that evaluation, our ChiefExecutive Officer, Chief Financial Officer and Chief Accounting Officerconcluded that as of June 30, 2005, as a result of the material weaknesses inour internal control over financial reporting discussed below, our disclosurecontrols and procedures were ineffective to provide reasonable assurance thatinformation required to be disclosed by us in reports that we file or submitunder the Securities Exchange Act of 1934 (the “Act”), is recorded, processed,summarized and reported within the time periods specified in the SEC’s rulesand forms; and to ensure that information required to be disclosed by us in thereports that we file under the Act is accumulated and communicated tomanagement, including our certifying officers, as appropriate, to allow timelydecisions regarding required disclosures.

 

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

 

                ***Changes in Internal Control overFinancial Reporting***

 

                During the periodcovered by this quarterly report on Form 10-Q, there were no changes in ourinternal control over financial reporting that have materially affected, or arereasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

                ***Material Weaknesses in InternalControl Over Financial Reporting***

 

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

 

                Based on ourevaluation, senior management has concluded that, as of June 30, 2005, we did notmaintain effective internal control over financial reporting due to thefollowing material weaknesses:

 

*                IneffectiveControl Environment* — Our control environment did notsufficiently promote effective internal control over financial reportingthroughout our management structure, and this material weakness was a contributingfactor in the development of other material weaknesses described below.  Principal contributing factors included thelack of adequate personnel with sufficient expertise to perform accountingfunctions necessary to ensure preparation of financial statements in accordancewith generally accepted accounting principles, and a lack of adequate policiesand procedures to enable the timely preparation of reliable financialstatements, as described more fully below.

 

                To date, we havetaken the following steps to remediate this material weakness:

 

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•                  Wehave hired a Chief Accounting Officer with public company accounting andreporting technical expertise.

 

•                  Wehave hired additional accounting staff to supplement our existing technicalaccounting resources.

 

•                  Wehave hired a Vice President of Compliance to coordinate our internal audit andinternal control compliance efforts.

 

•                  Wehave implemented an internal audit outsourcing and technical consultationarrangement with a professional accounting and consulting firm.

 

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

 

*Insufficienttechnical accounting expertise, inadequate policies and procedures related toaccounting matters, and inadequate management review in the financial reportingprocess* — We did not have sufficient technical accountingexpertise to address, or adequate policies and procedures associated withcomplex accounting matters.  In addition,we did not maintain policies and procedures to ensure adequate managementreview of information supporting our financial statements.

 

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

 

•                  Wehave hired a Chief Accounting Officer with public company accounting andreporting technical expertise.

 

•                  Wehave hired additional accounting staff to supplement our existing technicalaccounting resources.

 

•                  Wehave hired a Vice President of Compliance to coordinate our internal audit andinternal control compliance efforts.

 

•                  Wehave implemented an internal audit outsourcing and technical consultationarrangement with a professional accounting and consulting firm.

 

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

 

*Inadequatepersonnel, processes, and controls at our Southwest Business Unit*— We did not have adequate personnel, policies, and procedures at our SouthwestBusiness Unit to enable timely preparation of reliable financial information.

 

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

 

•                  Wehave formalized the monthly account reconciliation process for all balancesheet accounts.  We have also implementeda formal review of these reconciliations by our business unit accounting management.

 

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

 

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

 

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

 

•                  Wehave systematized the data gathering function for the accounts payable invoicesreceived after period end.  This accrualis now reviewed monthly by corporate accounting staff.

 

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

 

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

 

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

 

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

 

Planned Remediation of Internal Control Weaknesses

 

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

 

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

 

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

 

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

 

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

 

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

 

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**PART II—OTHER INFORMATION**

 

**Item 1.  Legal Proceedings**

 

Reference is made to Note 13 of our CondensedConsolidated Financial Statements in Item 1 of this Form 10-Q.

 

**Item6.  Exhibits**

 
| 31.1   |   | Certification of the Chief Executive Officer  pursuant to Rule 13a-14(a) of the Securities Exchange Act, as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.  |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                             |
| 31.2   |   | Certification of the Chief Accounting Officer  pursuant to Rule 13a-14(a) of the Securities Exchange Act, as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|   |   |                                                                                                                                                                             |
| 31.3   |   | Certification of the Chief Financial Officer  pursuant to Rule 13a-14(a) of the Securities Exchange Act, as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.  |
|   |   |                                                                                                                                                                             |
| 32.1   |   | Certification of the Chief Executive Officer  Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                         |
|   |   |                                                                                                                                                                             |
| 32.2   |   | Certification of the Chief Accounting Officer  Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                        |
|   |   |                                                                                                                                                                             |
| 32.3   |   | Certification of the Chief Financial Officer  Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                         |

 

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**SIGNATURE**

 

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

 
|                    |   | MarkWest Hydrocarbon, Inc. |
|-------------------------|--------|----------------------------|
|                    |   | (Registrant)               |
|                    |   |                       |
| Date: December 19, 2005 |   | /s/ Nancy K. Masten        |
|                    |   | Nancy K. Masten            |
|                    |   | Chief Accounting Officer   |
|                    |   |                       |

 

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| **Exhibit  Number** |   | **Exhibit Index**                                                                                                                                                                 |
|---------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                                                                                                                                                                              |
| 31.1                |   | Certification of the  Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange  Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.   |
|                |   |                                                                                                                                                                              |
| 31.2                |   | Certification of the  Chief Accounting Officer pursuant to Rule 13a-14(a) of the Securities  Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of  2002. |
|                |   |                                                                                                                                                                              |
| 31.3                |   | Certification of the Chief  Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act,  as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.   |
|                |   |                                                                                                                                                                              |
| 32.1                |   | Certification of the  Chief Executive Officer pursuant to 18 U.S. C. Section 1350, as adopted pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002.                         |
|                |   |                                                                                                                                                                              |
| 32.2                |   | Certification of the  Chief Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                         |
|                |   |                                                                                                                                                                              |
| 32.3                |   | Certification of the  Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                          |

 

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