** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

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

 

**For thequarterly period ended June 30, 2006**

 

**OR**

 

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

 

**For thetransition period from                   to                   **

 

**CommissionFile Number 001-14841**

 

**MARKWEST HYDROCARBON, INC.**

(Exact name of registrant asspecified in its charter)

 

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

 

**1515Arapahoe Street, Tower 2, Suite 700, Denver, Colorado 80202**

 (Address of principal executive offices)

 

Registrant’s telephone number,including area code:  **303-925-9200**

 

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  ý    No  o

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, or a non-accelerated filer.  See definitionof “accelerated filer and large accelerated filer” in Rule 12b-2 of theExchange Act.  (Check one):

 
| Large accelerated filer |   | o |   | Accelerated filer |   | ý |   | Non-accelerated filer |   | o |
|-------------------------|--------|---|--------|-------------------|--------|--------|--------|-----------------------|--------|---|

 

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

 

Yes  o    No  ý

 

Theregistrant had 11,955,006 shares of common stock, $0.01 per share par value,outstanding as of July 14, 2006.

 

 

----

 
| **PART I—FINANCIAL INFORMATION** | ** **                                                                                                           |
|---------------------------------------|----------------------------------------------------------------------------------------------------------------------|
|                                  |                                                                                                                 |   |
| Item 1.                               | Financial Statements                                                                                                 |   |
|                                  | Condensed Consolidated Balance Sheets at June 30, 2006 and December  31, 2005                                        |   |
|                                  | Condensed Consolidated Statements of  Operations for the three and six months ended June 30, 2006 and 2005           |   |
|                                  | Condensed Consolidated Statements of Comprehensive Income for the  three and six months ended June 30, 2006 and 2005 |   |
|                                  | Condensed Consolidated Statement of Changes  in Stockholders’ Equity for the six months ended June 30, 2006     |   |
|                                  | Condensed Consolidated Statements of Cash  Flows for the six months ended June 30, 2006 and 2005                     |   |
|                                  | Notes to the Condensed Consolidated  Financial Statements                                                            |   |
|                                  |                                                                                                                 |   |
| Item 2.                               | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                          |   |
| Item 3.                               | Quantitative and Qualitative Disclosures  about Market Risk                                                          |   |
| Item 4.                               | Controls and Procedures                                                                                              |   |
|                                  |                                                                                                                 |   |
| **PART II—OTHER INFORMATION**    |                                                                                                                 |
|                                  |                                                                                                                 |   |
| Item 1.                               | Legal Proceedings                                                                                                    |   |
| Item 4.                               | Submission of Matters to a Vote of Security  Holders                                                                 |   |
| Item 6.                               | Exhibits                                                                                                             |   |
|                                  |                                                                                                                 |   |
| **SIGNATURE**                         |                                                                                                                 |

 

**Glossary of Terms**

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

 

2

----

 

**PART I—FINANCIAL INFORMATION**

 

**Item 1. Financial Statements**

 

**MARKWESTHYDROCARBON, INC.**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

(Unaudited, in thousands,except share data)

 
| ** **                                                                                                          | ** ** | **June 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| **ASSETS**                                                                                                          | ** ** | ** **                  | ** ** | ** **                      | ** ** |
| Current assets:                                                                                                     |       |                        |       |                            |       |
| Cash and cash equivalents                                                                                           |       | $                           | 26,272     |                            | $          | 20,968 |   |
| Marketable securities                                                                                               |       | 6,527                       |       | 6,070                           |       |
| Receivables, net of allowances of $165 and  $175, respectively                                                      |       | 86,848                      |       | 145,539                         |       |
| Inventories                                                                                                         |       | 47,891                      |       | 41,067                          |       |
| Other current assets                                                                                                |       | 22,554                      |       | 16,314                          |       |
| Total current assets                                                                                                |       | 190,092                     |       | 229,958                         |       |
|                                                                                                                |       |                        |       |                            |       |
| Property, plant and equipment                                                                                       |       | 599,146                     |       | 573,198                         |       |
| Less: accumulated depreciation, depletion,  amortization and impairment                                             |       | (93,312                     | )          | (78,500                         | )          |
| Total property, plant and equipment, net                                                                            |       | 505,834                     |       | 494,698                         |       |
|                                                                                                                |       |                        |       |                            |       |
| Other assets:                                                                                                       |       |                        |       |                            |       |
| Investment in Starfish                                                                                              |       | 57,211                      |       | 39,167                          |       |
| Intangible assets, net                                                                                              |       | 339,440                     |       | 346,496                         |       |
| Deferred financing costs, net of  accumulated amortization of $6,127 and $4,424, respectively                       |       | 17,042                      |       | 18,463                          |       |
| Deferred contract cost, net of accumulated  amortization of $546 and $390, respectively                             |       | 2,704                       |       | 2,860                           |       |
| Investment in and advances to other equity  investee                                                                |       | 183                         |       | 182                             |       |
| Other long-term assets                                                                                              |       | 2,001                       |       | 326                             |       |
| Notes receivable from related parties                                                                               |       | 130                         |       | 154                             |       |
| Total other assets                                                                                                  |       | 418,711                     |       | 407,648                         |       |
| Total assets                                                                                                        |       | $                           | 1,114,637  |                            | $          | 1,132,304 |   |
|                                                                                                                |       |                        |       |                            |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                      |       |                        |       |                            |       |
| Current liabilities:                                                                                                |       |                        |       |                            |       |
| Accounts payable (including related party  payables of $0 and $25, respectively)                                    |       | $                           | 96,237     |                            | $          | 119,105 |   |
| Accrued liabilities                                                                                                 |       | 45,157                      |       | 45,869                          |       |
| Fair value of derivative instruments                                                                                |       | 15,764                      |       | 728                             |       |
| Deferred taxes                                                                                                      |       | 533                         |       | 362                             |       |
| Current portion of long-term debt                                                                                   |       | 460                         |       | 2,738                           |       |
| Total current liabilities                                                                                           |       | 158,151                     |       | 168,802                         |       |
|                                                                                                                |       |                        |       |                            |       |
| Long-term liabilities:                                                                                              |       |                        |       |                            |       |
| Deferred income taxes                                                                                               |       | 4,383                       |       | 3,487                           |       |
| Fair value of derivative instruments                                                                                |       | 658                         |       |                            |       |
| Debt                                                                                                                |       | 593,628                     |       | 608,762                         |       |
| Other                                                                                                               |       | 14,203                      |       | 10,256                          |       |
| Non-controlling interest in consolidated  subsidiary                                                                |       | 305,651                     |       | 301,015                         |       |
| Total liabilities                                                                                                   |       | 1,076,674                   |       | 1,092,322                       |       |
|                                                                                                                |       |                        |       |                            |       |
| Commitments and contingencies (Note 11)                                                                             |       |                        |       |                            |       |
|                                                                                                                |       |                        |       |                            |       |
| Stockholders’ equity (December 31, 2005  adjusted to reflect May 23, 2006 Stock Dividend, See Note 2):         |       |                        |       |                            |       |
| 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, 11,958,758 and 11,943,733 shares issued, respectively |       | 120                         |       | 119                             |       |
| Additional paid-in capital                                                                                          |       | 44,958                      |       | 48,786                          |       |
| Deferred compensation                                                                                               |       | —                      |       | (398                            | )          |
| Accumulated deficit                                                                                                 |       | (7,725                      | )          | (8,425                          | )          |
| Accumulated other comprehensive income, net  of tax                                                                 |       | 644                         |       | 357                             |       |
| Treasury stock, 3,834 and 55,619 shares, respectively                                                               |       | (34                         | )          | (457                            | )          |
| Total stockholders’ equity                                                                                     |       | 37,963                      |       | 39,982                          |       |
| Total liabilities and stockholders’ equity                                                                     |       | $                           | 1,114,637  |                            | $          | 1,132,304 |   |

 

The accompanying notes are anintegral part of these condensed consolidated financial statements.

 

3

----

 

**MARKWEST HYDROCARBON, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

(Unaudited, in thousands, except per share amounts)

 
| ** **                                                                                                                                       | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                                                                       | ** ** | **2006**                                            | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues:                                                                                                                                        |       |                                                |       |                                              |       |   |   |   |   |
| Revenues                                                                                                                                         |       | $                                                   | 186,590    |                                              | $          | 141,280 |   | $ | 427,470 |   | $ | 279,540 |   |
| Derivatives                                                                                                                                      |       | (13,057                                             | )          | (240                                              | )          | (14,316 | ) | (147 | ) |
| Total revenue                                                                                                                                    |       | 173,533                                             |       | 141,040                                           |       | 413,154 |   | 279,393 |   |
|                                                                                                                                             |       |                                                |       |                                              |       |   |   |   |   |
| Operating expenses:                                                                                                                              |       |                                                |       |                                              |       |   |   |   |   |
| Purchased product costs                                                                                                                          |       | 116,858                                             |       | 112,354                                           |       | 298,025 |   | 217,053 |   |
| Facility expenses                                                                                                                                |       | 14,217                                              |       | 10,985                                            |       | 27,921 |   | 20,245 |   |
| Selling, general and administrative  expenses                                                                                                    |       | 13,061                                              |       | 9,125                                             |       | 24,437 |   | 17,227 |   |
| Depreciation                                                                                                                                     |       | 7,778                                               |       | 4,995                                             |       | 15,156 |   | 9,736 |   |
| Amortization of intangible assets                                                                                                                |       | 4,027                                               |       | 2,095                                             |       | 8,043 |   | 4,190 |   |
| Accretion of asset retirement obligations                                                                                                        |       | 26                                                  |       | 11                                                |       | 51 |   | 21 |   |
| Total operating expenses                                                                                                                         |       | 155,967                                             |       | 139,565                                           |       | 373,633 |   | 268,472 |   |
|                                                                                                                                             |       |                                                |       |                                              |       |   |   |   |   |
| Income from operations                                                                                                                           |       | 17,566                                              |       | 1,475                                             |       | 39,521 |   | 10,921 |   |
|                                                                                                                                             |       |                                                |       |                                              |       |   |   |   |   |
| Other income (expense):                                                                                                                          |       |                                                |       |                                              |       |   |   |   |   |
| Equity in earnings in unconsolidated  affiliates                                                                                                 |       | 1,228                                               |       | 989                                               |       | 2,173 |   | 990 |   |
| Interest income                                                                                                                                  |       | 436                                                 |       | 321                                               |       | 842 |   | 570 |   |
| Interest expense                                                                                                                                 |       | (10,798                                             | )          | (4,588                                            | )          | (21,842 | ) | (8,293 | ) |
| Amortization of deferred financing costs (a  component of interest expense)                                                                      |       | (859                                                | )          | (558                                              | )          | (1,684 | ) | (1,094 | ) |
| Dividend income                                                                                                                                  |       | 109                                                 |       | 96                                                |       | 215 |   | 188 |   |
| Miscellaneous income                                                                                                                             |       | 1,517                                               |       | 148                                               |       | 3,759 |   | 235 |   |
| Income (loss) from operations before  non-controlling interest in net income of consolidated subsidiary and income  taxes                        |       | 9,199                                               |       | (2,117                                            | )          | 22,984 |   | 3,517 |   |
|                                                                                                                                             |       |                                                |       |                                              |       |   |   |   |   |
| Income tax (expense) benefit                                                                                                                     |       |                                                |       |                                              |       |   |   |   |   |
| Current                                                                                                                                          |       | (64                                                 | )          | —                                            |       | 429 |   | — |   |
| Deferred                                                                                                                                         |       | 6                                                   |       | 802                                               |       | (896 | ) | 32 |   |
| Income tax (expense) benefit                                                                                                                     |       | (58                                                 | )          | 802                                               |       | (467 | ) | 32 |   |
|                                                                                                                                             |       |                                                |       |                                              |       |   |   |   |   |
| Non-controlling interest in net income of  consolidated subsidiary                                                                               |       | (11,273                                             | )          | (294                                              | )          | (21,817 | ) | (3,619 | ) |
| Net income (loss)                                                                                                                                |       | $                                                   | (2,132     | )                                                 | $          | (1,609 | ) | $ | 700 |   | $ | (70 | ) |
|                                                                                                                                             |       |                                                |       |                                              |       |   |   |   |   |
| Net income (loss) per share:                                                                                                                     |       |                                                |       |                                              |       |   |   |   |   |
| Basic                                                                                                                                            |       | $                                                   | (0.18      | )                                                 | $          | (0.14 | ) | $ | 0.06 |   | $ | (0.01 | ) |
| Diluted                                                                                                                                          |       | $                                                   | (0.18      | )                                                 | $          | (0.14 | ) | $ | 0.06 |   | $ | (0.01 | ) |
|                                                                                                                                             |       |                                                |       |                                              |       |   |   |   |   |
| Weighted average number of outstanding  shares of common stock (December 31, 2005 adjusted to reflect May 23, 2006  Stock Dividend, see Note 2): |       |                                                |       |                                              |       |   |   |   |   |
| Basic                                                                                                                                            |       | 11,936                                              |       | 11,861                                            |       | 11,921 |   | 11,852 |   |
| Diluted                                                                                                                                          |       | 11,936                                              |       | 11,861                                            |       | 12,046 |   | 11,852 |   |
|                                                                                                                                             |       |                                                |       |                                              |       |   |   |   |   |
| Dividends declared per common share                                                                                                              |       | $                                                   | 0.24       |                                              | $          | 0.091 |   | $ | 0.415 |   | $ | 0.182 |   |

 

The accompanying notes are anintegral part of these condensed consolidated financial statements.

 

4

----

 

**MARKWESTHYDROCARBON, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME**

(Unaudited,in thousands)

 
| ** **                                                                                                                                   | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                                                                   | ** ** | **2006**                                            | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                                                                                                         |       |                                                |       |                                              |       |   |   |   |   |
| Net income (loss)                                                                                                                            |       | $                                                   | (2,132     | )                                                 | $          | (1,609 | ) | $ | 700 |   | $ | (70 | ) |
|                                                                                                                                         |       |                                                |       |                                              |       |   |   |   |   |
| Other comprehensive income (loss):                                                                                                           |       |                                                |       |                                              |       |   |   |   |   |
| Unrealized gains on marketable securities, net of tax of $56, $166,  $171 and $115, respectively.                                            |       | 94                                                  |       | 275                                               |       | 287 |   | 191 |   |
| Unrealized gains (losses) on commodity derivative instruments  accounted for as hedges, net of tax of $0, $420, $0 and $(122), respectively. |       | —                                              |       | 556                                               |       | — |   | (197 | ) |
| Total other comprehensive income (loss)                                                                                                      |       | 94                                                  |       | 831                                               |       | 287 |   | (6 | ) |
|                                                                                                                                         |       |                                                |       |                                              |       |   |   |   |   |
| Comprehensive income (loss)                                                                                                                  |       | $                                                   | (2,038     | )                                                 | $          | (778 | ) | $ | 987 |   | $ | (76 | ) |

 

The accompanying notes are anintegral part of these condensed consolidated financial statements.

 

5

----

 

**MARKWESTHYDROCARBON, INC.**

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

(Unaudited,in thousands)

 
| ** **                                                                                                                             | ** ** | **Shares of********Common********Stock** | ** ** | **Shares of********Treasury********Stock** | ** ** | **Common********Stock** | ** ** | **Additional********Paid-In********Capital** | ** ** | **Deferred********Compensation** | ** ** | **Accumulated********Earnings********(Deficit)** | ** ** | **Other********Comprehensive********Income** | ** ** | **Treasury********Stock** | ** ** | **Total********Stockholders’********Equity** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|-------------------------------------------------|------------|-------------------------|------------|----------------------------------------------|------------|----------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------|------------|---------------------------|------------|---------------------------------------------------|------------|
| Balance, December  31, 2005                                                                                                            |       | 10,858                                        |       | (56                                             | )          | $                       | 108        |                                         | $          | 48,797                           |       | $                                                | (398       | )                                            | $          | (8,425                    | )          | $                                                 | 357        |   | $ | (457 | ) | $ | 39,982 |   |
| May 23, 2006  Stock Dividend Adjustment (Note 2)                                                                                       |       | 1,085                                         |       | —                                          |       | 11                      |       | (11                                          | )          | —                           |       | —                                           |       | —                                       |       | —                    |       | —                                            |       |
| *Adjusted  December 31, 2005*                                                                                                          |       | 11,943                                        |       | (56                                             | )          | 119                     |       | 48,786                                       |       | (398                             | )          | (8,425                                           | )          | 357                                          |       | (457                      | )          | 39,982                                            |       |
| Stock option  exercises                                                                                                                |       | 12                                            |       | 18                                              |       | 1                       |       | 63                                           |       | —                           |       | —                                           |       | —                                       |       | 166                       |       | 230                                               |       |
| Compensation  expense related to equity-based awards                                                                                   |       |                                          |       | —                                          |       | —                  |       | 211                                          |       | —                           |       | —                                           |       | —                                       |       | —                    |       | 211                                               |       |
| Issuance of restricted  stock                                                                                                          |       | 1                                             |       | 34                                              |       | —                  |       | (257                                         | )          | —                           |       | —                                           |       | —                                       |       | 257                       |       | —                                            |       |
| Cashless stock  option exercises                                                                                                       |       | 3                                             |       | —                                          |       | —                  |       | —                                       |       | —                           |       | —                                           |       | —                                       |       | —                    |       | —                                            |       |
| Reclassification  of unearned compensation related to the adoption of Statement of Financial  Accounting Standards No. 123(R) (Note 2) |       | —                                        |       | —                                          |       | —                  |       | (398                                         | )          | 398                              |       | —                                           |       | —                                       |       | —                    |       | —                                            |       |
| Net income                                                                                                                             |       | —                                        |       | —                                          |       | —                  |       | —                                       |       | —                           |       | 700                                              |       | —                                       |       | —                    |       | 700                                               |       |
| Dividend                                                                                                                               |       | —                                        |       | —                                          |       | —                  |       | (3,447                                       | )          | —                           |       | —                                           |       | —                                       |       | —                    |       | (3,447                                            | )          |
| Other  comprehensive income                                                                                                            |       | —                                        |       | —                                          |       | —                  |       | —                                       |       | —                           |       | —                                           |       | 287                                          |       | —                    |       | 287                                               |       |
| Balance, June 30,  2006                                                                                                                |       | 11,959                                        |       | (4                                              | )          | $                       | 120        |                                         | $          | 44,958                           |       | $                                                | —     |                                         | $          | (7,725                    | )          | $                                                 | 644        |   | $ | (34 | ) | $ | 37,963 |   |

 

The accompanying notes are an integral partof these condensed consolidated financial statements.

 

6

----

 

**MARKWEST HYDROCARBON, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

(Unaudited, in thousands)

 
| ** **                                                                                     | ** ** | **June 30,** | ** ** |
|------------------------------------------------------------------------------------------------|------------|-------------------|------------|
| ** **                                                                                     | ** ** | **2006**          | ** ** | **2005** | ** ** |
| ** **                                                                                     | ** ** | ** **        | ** ** | ** ** | ** ** |
| **Cash flows from operating activities:**                                                      |       |              |       |   |   |
| Net Income                                                                                     |       | $                 | 700        |   | $ | (70 | ) |
| Adjustments to reconcile net income (loss)  to net cash provided by operating activities:      |       |              |       |   |   |
| Depreciation                                                                                   |       | 15,156            |       | 9,736 |   |
| Amortization of intangible assets                                                              |       | 8,043             |       | 4,190 |   |
| Amortization of deferred financing costs                                                       |       | 1,684             |       | 1,094 |   |
| Amortization of gas contract                                                                   |       | 156               |       | 156 |   |
| Accretion of asset retirement obligation                                                       |       | 51                |       | 21 |   |
| Non-controlling interest in net income of  consolidated subsidiary                             |       | 21,817            |       | 3,619 |   |
| Equity in earnings of unconsolidated  affiliates                                               |       | (2,173            | )          | (351 | ) |
| Unrealized losses (gains) on derivative  instruments                                           |       | 14,378            |       | (734 | ) |
| Deferred taxes                                                                                 |       | 896               |       | (32 | ) |
| Stock option compensation expense                                                              |       | 35                |       | 979 |   |
| Restricted stock compensation expense                                                          |       | 176               |       | 34 |   |
| Restricted unit compensation expense                                                           |       | 571               |       | 665 |   |
| Participation Plan compensation expense                                                        |       | 3,944             |       | 2,790 |   |
| Contribution of treasury shares to 401(k)  benefit plan                                        |       | —            |       | 168 |   |
| Imputed interest on debt securities                                                            |       | —            |       | (52 | ) |
| Gain from sale of property, plant and  equipment                                               |       | (421              | )          | (161 | ) |
| Gain from sale of marketable securities                                                        |       | —            |       | (56 | ) |
|                                                                                           |       |              |       |   |   |
| Changes in operating assets and  liabilities, net of working capital acquired in acquisitions: |       |              |       |   |   |
| Receivables                                                                                    |       | 53,691            |       | 15,834 |   |
| Inventories                                                                                    |       | (6,824            | )          | 109 |   |
| Other assets                                                                                   |       | (4,924            | )          | (1,825 | ) |
| Accounts payable and accrued liabilities                                                       |       | (20,448           | )          | (10,802 | ) |
| Other long-term liabilities                                                                    |       | 86                |       | 200 |   |
| Net cash provided by operating activities                                                      |       | 86,594            |       | 25,512 |   |
|                                                                                           |       |              |       |   |   |
| **Cash flows from investing activities:**                                                      |       |              |       |   |   |
| Purchase of marketable securities                                                              |       | —            |       | (8,725 | ) |
| Proceeds from sale of marketable securities                                                    |       | —            |       | 3,603 |   |
| Additional Javelina acquisition costs                                                          |       | (6,582            | )          | — |   |
| Capital expenditures                                                                           |       | (25,685           | )          | (31,442 | ) |
| Proceeds from sale of property, plant and  equipment                                           |       | 499               |       | 162 |   |
| Investment in Starfish                                                                         |       | (15,872           | )          | (41,688 | ) |
| Net cash used in investing activities                                                          |       | (47,640           | )          | (78,090 | ) |
|                                                                                           |       |              |       |   |   |
| **Cash flows from financing activities:**                                                      |       |              |       |   |   |
| Proceeds from long-term debt                                                                   |       | 56,800            |       | 65,000 |   |
| Repayments of long-term debt                                                                   |       | (74,212           | )          | — |   |
| Payments for deferred  financing costs and registration costs                                  |       | (459              | )          | (95 | ) |
| Collection of related party notes  receivable                                                  |       | 24                |       | 53 |   |
| Proceeds from MarkWest Energy’s private  placement, net                                   |       | 5,000             |       | — |   |
| Distributions to MarkWest Energy  unitholders                                                  |       | (17,586           | )          | (12,865 | ) |
| Payment of dividends                                                                           |       | (3,447            | )          | (1,886 | ) |
| Exercise of stock options                                                                      |       | 230               |       | 66 |   |
| Purchase of treasury shares                                                                    |       | —            |       | (161 | ) |
| Net cash provided by (used in) financing  activities                                           |       | (33,650           | )          | 50,112 |   |
|                                                                                           |       |              |       |   |   |
| Net increase (decrease) in cash and cash  equivalents                                          |       | 5,304             |       | (2,466 | ) |
| Cash and cash equivalents at beginning of  year                                                |       | 20,968            |       | 12,844 |   |
| Cash and cash equivalents at end of year                                                       |       | $                 | 26,272     |   | $ | 10,378 |   |
|                                                                                           |       |              |       |   |   |
| **Cash paid for interest and income taxes**                                                    |       |              |       |   |   |
| Cash paid for interest, net of amount  capitalized                                             |       | $                 | 19,823     |   | $ | 8,013 |   |
| Cash paid for income taxes                                                                     |       | $                 | 584        |   | $ | 523 |   |
|                                                                                           |       |              |       |   |   |
| **Deferred offering costs payable**                                                            |       |              |       |   |   |
| Construction projects in progress                                                              |       | $                 | 1,072      |   | $ | 3,003 |   |
| Accrued financing costs                                                                        |       | $                 | 1,580      |   | $ | — |   |

 

The accompanying notes are anintegral part of these condensed consolidated financial statements.

 

7

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**MARKWESTHYDROCARBON, INC.**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

**1.Organization**

 

MarkWest Hydrocarbon, Inc. (“MarkWestHydrocarbon” or the “Company”) is an energy company primarily focused onmarketing natural gas liquids (NGLs) and increasing shareholder value bygrowing MarkWest Energy Partners, L.P. (“MarkWest Energy Partners” or the “Partnership”),a consolidated subsidiary and publicly-traded master limited partnership.MarkWest Energy Partners 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. TheCompany also markets natural gas and NGLs. MarkWest Hydrocarbon and MarkWestEnergy Partners provide services primarily in Appalachia, Michigan, Texas,Oklahoma, Gulf Coast and other areas of the southwest.

 

**2. Basis of Presentation**

 

The Company’s unaudited condensedconsolidated financial statements include the accounts of all majority-owned orcontrolled subsidiaries. Equity investments in which we exercise significantinfluence but where we do not control and are not the primary beneficiary, areaccounted for using the equity method.

 

These condensed consolidated financialstatements have been prepared in accordance with accounting principlesgenerally accepted in the United States of America (“GAAP”) for interimfinancial reporting. Accordingly, certain information and footnote disclosuresnormally included in annual financial statements prepared in accordance withGAAP have been condensed or omitted. In management’s opinion, we have made alladjustments necessary for a fair presentation of the Company’s results ofoperations, financial position and cash flows for the periods shown. Theseadjustments are of a normal recurring nature. In addition to reviewing thesecondensed consolidated financial statements and accompanying notes, you shouldalso consult the audited financial statements and notes that makes up theCompany’s December 31, 2005, Annual Report on Form 10-K. Finally, consider thatresults for the six months ended June 30, 2006, are not necessarily indicativeof results for the full year 2006, or any other future period.

 

On April 27, 2006, MarkWest Hydrocarbonannounced that its Board of Directors approved the issuance of one share ofcommon stock for each ten shares of common stock held by common stockholders.The stock was issued on May 23, 2006, to the stockholders of record as of theclose of business on May 11, 2006; the ex-dividend rate was May 9, 2006. 1,084,647shares were issued at a fair value of $24.4 million, based upon the last saleprice on the record date ($22.50 per share). Cash of $3,200 was paid in lieu offractional shares, based upon the last sale price on the record date. Allcommon stock accounts and per share data have been retroactively adjusted togive effect to the dividend of our common stock.

 

*Stock and Incentive Compensation Plans*

 

The Company adopted SFAS No. 123R, *Accounting for Stock-Based Compensation* on January 1, 2006,using the modified prospective method. Prior to adopting SFAS No. 123R, theCompany elected to measure compensation expense for equity-based employeecompensation plans as prescribed by Accounting Principles Board (“APB”) No. 25,*Accounting for Stock Issued to Employees*.

 

Under SFAS No. 123R, compensation expense is based on thefair value of the award. SFAS No. 123R classifies stock-based compensation aseither equity or liability awards. The fair value on the date of grant for anaward classified as equity is recognized over the requisite service period,with a corresponding credit to equity (generally, paid-in capital). Therequisite service period is the period during which an individual is requiredto provide service in exchange for an award, which often is the vesting period.The requisite service period is estimated based on an analysis of the terms ofthe share-based payment award. Compensation expense for a liability award isbased on the award’s fair value, remeasured at each reporting date until thedate of settlement. Additionally, compensation expense is reduced by 4.6% foran estimate of expected award forfeitures.

 

Under APB No. 25, compensation expense is based on theintrinsic value (typically the difference between the equity-based instrumentto be received and the cost to acquire that equity-based instrument). APB No.25 classified stock-based compensation as either fixed or variable awards. Theintrinsic value on the date of grant for an award classified as fixed isrecognized over the requisite service period. Compensation expense for variableawards is based on the award’s intrinsic value, remeasured at each reportingdate until the date of settlement.

 

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

 

8

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*MarkWest Hydrocarbon*

 

*Stock Options*

 

Stock options are issued under the Company’s 1996 StockIncentive Plan and 1996 Non-employee Director Stock Option Plan.  UnderSFAS No. 123R, the plans are categorized as equity awards. Under APB No. 25,the plans were categorized as variable awards.

 

*Restricted Stock*

 

The Company also issues restricted stock, for noconsideration, under the Company’s 1996 Stock Incentive Plan and 1996Non-employee Director Stock Option Plan.  Upon settlement, the individualreceives common stock of the Company. Under SFAS No. 123R, the restricted stockqualifies as an equity award, and under APB No. 25 qualified as a fixed award.

 

*Participation Plan*

 

The Company has also entered into arrangements with certaindirectors and employees of the Company referred to as the ParticipationPlan.  Under this plan, the Company sells subordinated partnership unitsof the Partnership or interests in the Partnership’s general partner, under apurchase and sale agreement.  As the formula used to determine the saleand buy-back price is not based on independent third party valuation, coupledwith the attributes of the put-and-call provisions, these transactions areconsidered compensatory arrangements. The general partner interests have nodefinite term, but historically have been settled for cash when the employeeleaves the Company. The subordinated units convert to common units after aholding period; however, historically, management has settled some subordinatedunits for cash when individuals left the Company. The subordinated partnershipunits of the Partnership were also sold to the employees and directors based ona formula that may not necessarily fully reflect fair value, thus thesubordinated units are considered compensatory. Under SFAS 123R, thesubordinated units and general partner interests are classified as liabilityawards, while under APB No. 25, they were classified as variable awards.

 

Under Topic 1-B of the codification of the Staff AccountingBulletins, Allocation of Expenses And Related Disclosure in FinancialStatements of Subsidiaries, Divisions or Lesser Business Components of AnotherEntity, some portion of compensation expense related to services provided byMarkWest Hydrocarbon’s employees and directors recognized under theParticipation Plan should be allocated to the Partnership.  The allocationis based on the percent of time that each employee devotes to theCompany.  Compensation attributable to interests that were sold to individualswho serve on both the board of MarkWest Hydrocarbon and the Partnership’s Boardof Directors is allocated equally.

 

*MarkWest Energy Partners*

 

*Restricted Units*

 

The Partnership issues restricted units under the MarkWestEnergy Partners, L.P. Long-Term Incentive 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 value of a common unit.  The restricted units aretreated as liability awards under SFAS No. 123R, and were treated as variableawards under APB No. 25.

 

To satisfy common unit awards, common units may be acquiredon the open market, from the general partner or any other person, as well asfrom the issuance of new common units.  The cost of the common unitawards, therefore, will be borne by the Partnership.

 

*Pro Formas*

 

Had compensation cost for the Company’sstock-based and unit-based compensation plans been determined based on the fairvalue at the grant dates under those plans consistent with the methodprescribed by SFAS No. 123R, *Accounting for Stock-BasedCompensation,*the Company’s net income and earnings per share wouldhave been reduced to the pro forma amounts listed below (in thousands, exceptper share data):

 

| ** **                                                                                                                                   | ** ** | **Three months ended  June 30, 2005** | ** ** | **Six months ended  June 30, 2005** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| Net loss, as reported                                                                                                                        |       | $                                                         | (1,609     | )                                                       | $          | (70 | ) |
| Add: compensation expense included in  reported net income, net of related tax effect                                                        |       | 1,297                                                     |       | 3,052                                                   |       |
| Deduct: total stock-based employee  compensation expense determined under fair value-based method for all awards,  net of related tax effect |       | (1,116                                                    | )          | (2,405                                                  | )          |
| Pro forma net income (loss)                                                                                                                  |       | $                                                         | (1,428     | )                                                       | $          | 577 |   |
|                                                                                                                                         |       |                                                      |       |                                                    |       |
| Net income (loss) per share:                                                                                                                 |       |                                                      |       |                                                    |       |
| Basic:                                                                                                                                       |       |                                                      |       |                                                    |       |
| As reported                                                                                                                                  |       | $                                                         | (0.14      | )                                                       | $          | (0.01 | ) |
| Pro forma                                                                                                                                    |       | $                                                         | (0.13      | )                                                       | $          | 0.05 |   |
| Diluted:                                                                                                                                     |       |                                                      |       |                                                    |       |
| As reported                                                                                                                                  |       | $                                                         | (0.14      | )                                                       | $          | (0.01 | ) |
| Pro forma                                                                                                                                    |       | $                                                         | (0.13      | )                                                       | $          | 0.05 |   |

 

9

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**3. Recent Accounting Pronouncements**

 

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

 

InMarch 2006, the FASB issued SFAS No. 156, *Accounting for Servicing of Financial Assets – an amendment of FASBStatement No. 140.* FAS No. 156 establishes, among otherthings, the accounting for all separately recognized servicing assets andservicing liabilities by requiring that they be initially measured at fairvalue, if practicable. SFAS No. 156 is effective as of the beginning of anentity’s first fiscal year that begins after September 15, 2006. Theadoption of SFAS No. 156 will have no impact on the Company’s condensedconsolidated financial statements of operations or financial position.

 

In June 2006 the FASB issued InterpretationNo. 48, *Accounting for Uncertainty in IncomeTaxes*. The interpretation clarifies the accounting for uncertaintyin income taxes recognized in a company’s financial statements in accordancewith Statement of Financial Accounting Standards No. 109, *Accounting for Income Taxes*. Specifically,the pronouncement prescribes a recognition threshold and a measurementattribute for the financial statement recognition and measurement of a taxposition taken or expected to be taken in a tax return. The interpretation alsoprovides guidance on the related derecognition, classification, interest andpenalties, accounting for interim periods, disclosure and transition ofuncertain tax positions. The interpretation is effective for fiscal yearsbeginning after December 15, 2006. The adoption of this pronouncement is notexpected to have a material impact on the condensed consolidated financialstatements of the Company.

 

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

 

*Javelina Acquisition*

 

On November 1, 2005, the Partnership acquired equity interests inJavelina Company, Javelina Pipeline Company and Javelina Land Company, L.L.C.,which were 40%, 40% and 20%, respectively, owned by subsidiaries of El PasoCorporation, Kerr-McGee Corporation and Valero Energy Corporation. ThePartnership paid consideration of $357.0 million, plus $41.8 million for networking capital that included approximately $35.5 million in cash. The CorpusChristi, Texas, gas-processing facility treats and processes off-gas from sixlocal refineries, two of which are owned by Valero Energy Corporation, two byKoch Industries, Inc. and two by Citgo Petroleum Corporation. Constructed in 1989to recover up to 28,000 Bbl/d of NGLs, the facility currently processesapproximately 125 to 130 MMcf/d of inlet gas and produces approximately 25,400Bbl/d of NGLs. The Partnership completed its purchase price allocation in May2006, including a final working capital settlement to the seller of $5.9million.

 

*Starfish JointVenture*

 

On March 31, 2005, the Partnership acquired a50% non-operating membership interest in Starfish Pipeline

 

10

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Company, LLC, (“Starfish”) froman affiliate of Enterprise Products Partners L.P. for $41.7 million. ThePartnership financed the acquisition by borrowing $40.0 million from its creditfacility during the first quarter of 2005. Starfish is a joint venture withEnbridge Offshore Pipelines LLC, which the Partnership accounts for using theequity method. Starfish owns the FERC-regulated Stingray natural gas pipeline,and the unregulated Triton natural gas-gathering system and West Camerondehydration facility. All are located in the Gulf of Mexico and southwesternLouisiana.

 

The Partnership applies the equity method of accounting forits interests in Starfish. Summarized financial information for 100 percent ofStarfish is as follows (in thousands):

 

| ** **       | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **       | ** ** | **2006**                                            | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues         |       | $                                                   | 7,483      |                                              | $          | 5,012 |   | $ | 12,579 |   | $ | 11,544 |   |
| Operating income |       | 1,675                                               |       | 1,963                                             |       | 3,104 |   | 3,876 |   |
| Net income       |       | 2,632                                               |       | 2,064                                             |       | 4,632 |   | 4,025 |   |
|                  |            |                                                     |            |                                                   |            |  |  |  |  |  |  |  |  |

 

*Pro Forma Results ofOperations*

 

The following table reflects the unauditedpro forma consolidated results of operations for the three months ended March31, 2005, as though the Starfish acquisition and the Javelina acquisition hadoccurred on January 1, 2005. The actual results for the six months endedJune 30, 2006, are included in the accompanying condensed consolidatedstatement of operations. The pro forma amounts include certain adjustments,including recognition of depreciation based on the allocated purchase price ofproperty and equipment, amortization of customer contracts, amortization of theexcess Starfish purchase price over net book value, amortization of deferredfinancing costs and interest expense.

 

The unaudited pro forma results do notnecessarily reflect the actual results that would have occurred had theentities been combined during the period presented, nor does it necessarilyindicate the future results of the combined entities.

 

| ** **                                                      | ** ** | **Three months ended  June 30, 2005** | ** ** | **Six months ended  June 30, 2005** | ** ** |
|-----------------------------------------------------------------|------------|-----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                      | ** ** | **(in thousands, except per share data)**                 | ** ** |
| Revenue                                                         |       | $                                                         | 209,079    |                                                    | $          | 389,360 |   |
| Net income                                                      |       | $                                                         | (3,081     | )                                                       | $          | (2,604 | ) |
| Net income per share:                                           |       |                                                      |       |                                                    |       |
| Basic                                                           |       | $                                                         | (0.26      | )                                                       | $          | (0.22 | ) |
| Diluted                                                         |       | $                                                         | (0.26      | )                                                       | $          | (0.22 | ) |
|                                                            |       |                                                      |       |                                                    |       |
| Weighted average number of outstanding  shares of common stock: |       |                                                      |       |                                                    |       |
| Basic                                                           |       | 11,861                                                    |       | 11,852                                                  |       |
| Diluted                                                         |       | 11,861                                                    |       | 11,852                                                  |       |

 

**5. Other Long-Term Assets**

** **
| ** **               | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------------|------------|--------------|------------|------------------|------------|
| ** **               | ** ** | **2006**     | ** ** | **2005**         | ** ** |
| Accrued  financing costs |       | $            | 1,675      |             | $          | — |   |
| Other                    |       | 326          |       | 326              |       |
|                     |       | $            | 2,001      |             | $          | 326 |   |

** **

*Accrued FinancingCosts*

** **

Accrued financingcosts at June 30, 2006, of $1.7 million relate to both a public offering of3,000,000 common units and a private placement of $200 million aggregateprincipal amount of the 2016 Senior Notes that closed on July 6, 2006 (SeeNote 13).

** **

**6. Debt**

 
| ** **                                                                    | ** ** | **June 30, 2006**  | ** ** | **December 31, 2005** | ** ** |
|-------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                    | ** ** | **(in thousands)** | ** ** |
| **MarkWest  Hydrocarbon Credit Facility**                                     |       |               |       |                  |       |
| Revolver  facility, 8.75% interest at December 31, 2005, due January 30, 2007 |       | $                  | —     |                  | $          | 7,500 |   |
|                                                                          |       |               |       |                  |       |
| **Partnership  Credit Facility**                                              | ** ** | ** **         | ** ** | ** **            | ** ** |
| Term loan,  8.75% interest at December 31, 2005, due December 2010            |       | 364,088            |       | 365,000               |       |
| Revolver  facility, 8.75% interest at December 31, 2005, due December 2010    |       | 5,000              |       | 14,000                |       |
|                                                                          |       |               |       |                  |       |
| **Partnership  Senior Notes**                                                 | ** ** | ** **         | ** ** | ** **            | ** ** |
| Senior  Notes, 6.875% interest, due November 2014                             |       | 225,000            |       | 225,000               |       |
|                                                                          |       | 594,088            |       | 604,000               |       |
| Less:  obligations due in one year                                            |       | (460               | )          | (2,738                | )          |
| Total  long-term debt                                                         |       | $                  | 593,628    |                  | $          | 601,262 |   |

 

----

 

(1)           The balance sheet classification of debt, between current andlong-term, reflects the repayment of $318.6 million of the Partnership CreditFacility term loan, using proceeds from the debt and equity transactions, asfurther described in Note 13.

 

*MarkWest Hydrocarbon*

 

*Credit Facility*

 

On January 31, 2006, the Company entered into the First Amended andRestated Credit Agreement, which provide a maximum lending limit of $25.0million for a one-year term and which amended and restated the October 2004agreement discussed below. As of June 30, 2006, the Company had $6.0 million ofthe availability committed to a letter of credit, leaving $19.0 millionavailable for revolving loans.

 

The credit facility bears interest at a variable interest rate, plusbasis points.  The variable interest rate is typically based on the LondonInter Bank Offering Rate (“LIBOR”); however, in certain borrowing circumstancesthe rate would be based on the higher of a) the Federal Funds Rate plus 0.5-1%,and b) a rate set by the Facility’s administrative agent, based on the U.S.prime rate. The basis points correspond to the ratio of the Revolver Facility Usage (as defined inthe Company Credit Facility) to theBorrowing Base (as defined in the Company Credit Facility), ranging from0.75% to 1.75% for Base Rate loans, and 1.75% to 2.75% for Eurodollar Rateloans. The Company pays a quarterly commitment fee on the unused portion of thecredit facility at an annual rate of 50.0 basis points.

 

11

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Under the provisions of the Company Credit Facility, the Company issubject to a number of restrictions on its business, including restrictions onits ability to grant liens on assets; make or own certain investments; enterinto any swap contracts other than in the ordinary course of business; merge,consolidate or sell assets; incur indebtedness (other than subordinated indebtedness);make distributions on equity investments; declare or make, directly orindirectly, any restricted distributions.

 

The credit facility also contains covenants requiring theCompany to maintain:

 

•                  a ratio of not more than 3.50to 1.00 of total consolidated debt to consolidated EBITDA for any fiscalquarter-end;

 

•                  a minimum net worth of a) $34.0million plus, b) 50% of consolidated net income (if positive) earned on orafter October 1, 2005 plus, c) 100% of net proceeds of all equity issuedby the Company subsequent to January 31, 2006; and

 

•                  a minimum available cash andmarketable securities reserve of $13.0 million, which is to be reduced to zeroin the event the Company restructures a keep-whole contract with one of itssignificant customers.

 

On March 23, 2006, the Company amended the First Amended andRestated Credit Agreement to reduce the cash reserve requirement from $13.0million to $5.0 million through December 31, 2006.

 

In October 2004, the Company entered into a $25.0 millionsenior credit facility with a term of one year.  The $25.0 millionrevolving facility had a variable interest rate based on the base rate, whichis equal to the higher of a) the Federal Funds Rate plus 1⁄2 of 1%, and b) therate of interest in effect for such day as publicly announced from time to timeby the Administrative Agent as its prime rate, plus the applicable rate, whichis based on a utilization percentage.  In October, November, and December2005, the Company entered into the first, second and third amendment to thecredit agreement.  The first amendment extended the term of the originalagreement to November 15, 2005.  The second amendment reduced the lendingamount 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.  The second amendment also extended theterm of the revolving credit to December 30, 2005.  The third amendmentextended the term of the revolving credit to January 31, 2006, and reduced thelending amount from $16.0 million to $13.5 million, of which $6.0 million ofavailability is committed to a letter of credit, leaving $7.5 million availablefor revolving loans, at December 31, 2005.

 

*MarkWest Energy Partners*

 

*Partnership Credit Facility*

 

On December 29, 2005, MarkWest Energy Operating Company, L.L.C., awholly owned subsidiary of MarkWest Energy Partners L.P., entered into thefifth amended and restated credit agreement (“Partnership Credit Facility”),which provides for a maximum lending limit of $615.0 million for a five-yearterm.  The credit facility includes a revolving facility of $250.0 millionand a $365.0 million term loan.  The credit facility is guaranteed by thePartnership and all of the Partnership’s subsidiaries and is collateralized bysubstantially all of the Partnership’s assets and those of itssubsidiaries.  The borrowings under the credit facility bear interest at avariable interest rate, plus basis points.  The variable interest rate istypically based on the London Inter Bank Offering Rate (“LIBOR”); however, incertain borrowing circumstances the rate would be based on the higher of a) theFederal Funds Rate plus 0.5 to 1.0%, and b) a rate set by the Facility’sadministrative agent, based on the U.S. prime rate.  The basis points varybased on the ratio of the Partnership’s Consolidated Debt (as defined in thePartnership Credit Facility) to Consolidated EBITDA (as defined in thePartnership Credit Facility), ranging from 0.50% to 1.50% for Base Rate loans,and 1.50% to 2.50% for Eurodollar Rate loans.  The basis points willincrease by 0.50% during any period (not to exceed 270 days) where thePartnership makes an acquisition for a purchase price in excess of $50.0million (“Acquisition Adjustment Period”). For the three and six months endedJune 30, 2006, the weighted average interest rate on the Partnership CreditFacility was 7.32% and 7.16%.

 

The balance sheet classification of debt, between current andlong-term, reflects the repayment of $318.6 million of the Partnership CreditFacility term loan, using proceeds from the debt and equity transactions, asfurther described in Note 13.

 

*2014 Senior Notes*

 

In October 2004 the Partnership and its subsidiary, MarkWest EnergyFinance Corporation, issued $225.0 million in senior notes (“2014 Senior Notes”)at a fixed rate of 6.875%, payable semi-annually in arrears on May 1 andNovember 1, and commencing on May 1, 2005. The notes mature on November 2,2014. The Partnership may redeem some or all of the notes at any time on orafter November 1, 2009, at certain redemption prices together with accruedand unpaid interest to the

 

12

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date ofredemption. The Partnership may redeem all of the notes at any time prior toNovember 1, 2009, at a make-whole redemption price. In addition, prior toNovember 1, 2007, the Partnership may redeem up to 35% of the aggregateprincipal amount of the notes with the proceeds of certain equity offerings ata stated redemption price. The Partnership must offer to repurchase the notesat a specified price if it a) sells certain assets and does not reinvest theproceeds or repay senior indebtedness, or b) the Partnership experiencesspecific kinds of changes in control. Each of the Partnership’s existingsubsidiaries, other than MarkWest Energy Finance Corporation, has guaranteedthe notes jointly and severally, and fully and unconditionally. The notes aresenior unsecured obligations equal in right of payment with all of thePartnership’s existing and future senior debt. They are senior in right ofpayment to all of the Partnership’s future subordinated debt but effectivelyjunior in right of payment to its secured debt to the extent of the assetssecuring the debt, including the Partnership’s obligations in respect of itsPartnership Credit Facility. The proceeds from these notes were used to paydown the Partnership’s outstanding debt under its credit facility.

 

The indenture governing the 2014 Senior Notes includes certainlimitations on the activities of the Partnership and its restrictedsubsidiaries. Limitations include 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 investments; 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 intransactions with the Partnership’s affiliates; sell assets, including equityinterests of the Partnership’s subsidiaries; make any payment on or withrespect to, or purchase, redeem, defease or otherwise acquire or retire forvalue any subordinated obligation or guarantor subordination obligation (exceptprincipal and interest at maturity); and consolidate, merge or transfer assets.Subject to compliance with certain covenants, the Partnership may issueadditional notes from time to time under the indenture pursuant toRule 144A and Regulation S under the Securities Act of 1933.

 

The Partnership agreed to file an exchange offer registration statementor, under certain circumstances, a shelf registration statement, pursuant to aregistration rights agreement relating to the 2014 Senior Notes. ThePartnership failed to complete the exchange offer in the time provided for inthe subscription agreements (April 26, 2005) and, as a consequence, isincurring an interest rate penalty of 0.5% annually, increasing 0.25% every 90days thereafter up to 1%, until such time as the exchange offer was completed.The registration statement was filed on January 17, 2006, the exchange offerwas completed on March 7, 2006, and the interest penalty ceased.

 

##### **7. DerivativeFinancial Instruments**

##### ** **

*Commodity Instruments*

 

MarkWest Hydrocarbon and MarkWest Energyutilizes a combination of fixed-price forward contracts, fixed-for-floatingprice swaps and options available in the over-the-counter (“OTC”) market, andfutures contracts traded on the New York Mercantile Exchange (“NYMEX”). The Company and the Partnership enter into OTC swaps with financialinstitutions and other energy company counterparties.  Management conductsa standard credit review on counterparties and has agreements containingcollateral requirements where deemed necessary.  The Company and thePartnership use standardized agreements that allow for offset of positive andnegative exposures.  Some of the agreements may require margin deposit.

 

The use of derivative instruments may createexposure to the risk of financial loss in certain circumstances, includinginstances when (i) NGLs do not trade at historical levels relative tocrude oil, (ii) sales volumes are less than expected, requiring marketpurchases to meet commitments, or (iii) our OTC counterparties fail topurchase or deliver the contracted quantities of natural gas, NGLs or crude oilor otherwise fail to perform.  To the extent that the Company, or thePartnership, engage in derivative activities, they may be prevented fromrealizing the benefits of favorable price changes in the physical market;however, they are similarly insulated against unfavorable changes in suchprices.

 

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

 

Fair value is based on available marketinformation for the particular derivative instrument, and incorporates thecommodity, period, volume and pricing.  Positive (negative) amountsrepresent unrealized gains (losses).

 

*MarkWest Hydrocarbon*

 

MarkWest Hydrocarbon may enter into physicaland/or financial positions to manage its risks related to commodity priceexposure for its Standalone segment. Due to timing of purchases and sales,direct exposure to price volatility can be created, because there is no longeran offsetting purchase or sale that remains exposed to market pricing. Through marketing and derivatives activities, direct exposure may occurnaturally, or we may choose direct exposure when we favor that exposure overfrac spread risk.

 

13

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The following table summarizes the derivativepositions specific to MarkWest Hydrocarbon’s Standalone segment at June 30,2006:

 

| **Swaps**                     | ** ** | **Contract Period**       | ** ** | **Fixed Price** | ** ** | **Fair Value**     | ** ** |
|-------------------------------|------------|--------------------------------|------------|----------------------|------------|-------------------------|------------|
| ** **                    | ** ** | ** **                     | ** ** | ** **           | ** ** | **(in thousands)** | ** ** |
| Propane - 6.4 Mm Gal          |       | Oct-Dec 2006                   |       | $                    | 0.93       |                    | $          | (1,734 | ) |
| Propane - 1.8 Mm Gal          |       | Oct-Dec 2006                   |       | 1.10                 |       | (190                    | )          |
| Propane - 1.9 Mm Gal          |       | Nov 2006 - Feb 2007            |       | 1.10                 |       | (200                    | )          |
| Propane - 3.0 Mm Gal          |       | Dec 2006 - Feb 2007            |       | 1.09                 |       | (341                    | )          |
| Propane - 2.8 Mm Gal          |       | Dec 2006 - Mar 2007            |       | 1.18                 |       | (100                    | )          |
| Propane - 6.2 Mm Gal          |       | Dec 2006 - Mar 2007            |       | 1.10                 |       | (684                    | )          |
| Propane - 6.4 Mm Gal          |       | Jan-Mar 2007                   |       | 0.96                 |       | (1,543                  | )          |
| Propane - 1.6 Mm Gal          |       | Jan-Mar 2007                   |       | 1.12                 |       | (145                    | )          |
|                          |       |                           |       |                 |       |                    |       |
| Iso-butane - 0.6 Mm Gal       |       | Jul-Sep 2006                   |       | 1.22                 |       | (91                     | )          |
| Iso-butane - 0.7 Mm Gal       |       | Oct-Dec 2006                   |       | 1.12                 |       | (208                    | )          |
| Iso-butane - 0.3 Mm Gal       |       | Dec 2006 - Mar 2007            |       | 1.35                 |       | (28                     | )          |
| Iso-butane - 0.6 Mm Gal       |       | Jan-Mar 2007                   |       | 1.16                 |       | (155                    | )          |
|                          |       |                           |       |                 |       |                    |       |
| Normal butane - 1.9 Mm Gal    |       | Jul-Sep 2006                   |       | 1.21                 |       | (245                    | )          |
| Normal butane - 2.0 Mm Gal    |       | Oct-Dec 2006                   |       | 1.10                 |       | (500                    | )          |
| Normal butane - 1.1 Mm Gal    |       | Dec 2006 - Mar 2007            |       | 1.29                 |       | (77                     | )          |
| Normal butane - 1.7 Mm Gal    |       | Jan-Mar 2007                   |       | 1.13                 |       | (375                    | )          |
|                          |       |                           |       |                 |       |                    |       |
| Natural gasoline - 1.3 Mm Gal |       | Jul-Sep 2006                   |       | 1.50                 |       | (94                     | )          |
| Natural gasoline - 2.1 Mm Gal |       | Jul-Sep 2006                   |       | 1.44                 |       | (277                    | )          |
| Natural gasoline - 1.3 Mm Gal |       | Oct-Dec 2006                   |       | 1.39                 |       | (255                    | )          |
| Natural gasoline - 1.0 Mm Gal |       | Dec 2006 - Mar 2007            |       | 1.59                 |       | 33                      |       |
| Natural gasoline - 1.1 Mm Gal |       | Jan-Mar 2007                   |       | 1.37                 |       | (200                    | )          |
|                          |       |                           |       |                 |       |                    |       |
| Natural gas - 0.9 Mm Mmbtu    |       | Jul-Sep 2006                   |       | 6.61                 |       | (267                    | )          |
| Natural gas - 0.4 Mm Mmbtu    |       | Jul-Sep 2006                   |       | 6.43                 |       | (51                     | )          |
|                          |       |                           |       |                 |       | (7,727                  | )          |
| Other                         |       |                           |       |                 |       | 72                      |       |
|                          |       | **Total MarkWest Hydrocarbon** |       |                 |       | $                       | (7,655     | ) |
|                               |            |                                |            |                      |            |                         |            |  |  |

 

The impact of MarkWest Hydrocarbon’scommodity derivative instruments on results of operations and financialposition are summarized below (in thousands):

 

| ** **                       | ** ** | **Three months ended  June 30, 2006** | ** ** | **Six months ended****June 30, 2006** | ** ** |
|----------------------------------|------------|-----------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| Unrealized losses – revenue |       | $                                                         | (6,156     | )                                                         | $          | (7,655 | ) |
|                                  |            |                                                           |            |                                                           |            |  |  |

 

| ** **                                    | ** ** | **June 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|-----------------------------------------------|------------|-----------------------------|------------|----------------------------|------------|
| Unrealized gains – other  current assets |       | $                           | 185        |                       | $          | — |   |
| Unrealized loss – current liability      |       |                        | (7,840     | )                          | —     |   |
|                                               |            |                             |            |                            |            |  |  |

 

*MarkWest EnergyPartners*

 

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

 

The followingtable includes information on MarkWest Energy’s specific derivative positionsat June 30, 2006:

 

14

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| **Costless collars**   | ** ** | **Contract Period** | ** ** | **Floor**  | ** ** | **Cap**    | ** ** | **Fair Value**     | ** ** |
|-----------------------------|------------|--------------------------|------------|------------|------------|------------|------------|-------------------------|------------|
| ** **                  | ** ** | ** **               | ** ** | ** ** | ** ** | ** ** | ** ** | **(in thousands)** | ** ** |
| Crude Oil - 500 Bbl/d       |       | 2006                     |       | $          | 57.00      |       | $          | 67.00                   |       | $ | (849 | ) |
| Crude Oil - 250 Bbl/d       |       | 2006                     |       | 57.00      |       | 67.00      |       | (424                    | )          |
| Crude Oil - 205 Bbl/d       |       | 2006                     |       | 57.00      |       | 65.10      |       | (409                    | )          |
| Crude Oil - 78 Bbl/d        |       | 2006                     |       | 67.50      |       | 77.30      |       | (27                     | )          |
| Crude Oil - 155 Bbl/d       |       | 2007                     |       | 67.50      |       | 78.55      |       | (121                    | )          |
| Crude Oil - 250 Bbl/d       |       | 2007                     |       | 67.50      |       | 79.15      |       | (175                    | )          |
| Crude Oil - 200 Bbl/d       |       | 2007                     |       | 70.00      |       | 75.95      |       | (175                    | )          |
|                        |       |                     |       |       |       |       |       |                    |       |
| Propane - 20,000 Gal/d      |       | 2006                     |       | 0.90       |       | 0.99       |       | (737                    | )          |
| Propane - 10,000 Gal/d      |       | 2006                     |       | 0.97       |       | 1.15       |       | (132                    | )          |
|                        |       |                     |       |       |       |       |       |                    |       |
| Ethane - 22,950 Gal/d       |       | 2006                     |       | 0.65       |       | 0.80       |       | (198                    | )          |
|                        |       |                     |       |       |       |       |       |                    |       |
| Natural Gas - 1,575 Mmbtu/d |       | 2006                     |       | 8.67       |       | 10.86      |       | 803                     |       |
| Natural Gas - 1,575 Mmbtu/d |       | Jan-Mar 2007             |       | 9.00       |       | 12.50      |       | 128                     |       |
| Natural Gas - 400 Mmbtu/d   |       | 2007                     |       | 8.25       |       | 10.03      |       | 36                      |       |
| Natural Gas - 1,500 Mmbtu/d |       | Apr-Dec 2007             |       | 7.25       |       | 10.25      |       | 147                     |       |
| Natural Gas - 1,500 Mmbtu/d |       | Jan-Mar 2008             |       | 8.00       |       | 11.29      |       | (42                     | )          |
|                        |       |                     |       |       |       |       |       | (2,175                  | )          |
|                             |            |                          |            |            |            |            |            |                         |            |  |  |  |

 

| **Swaps**             | ** ** | **Contract Period** | ** ** | **Fixed price** | ** ** | **Fair Value**     | ** ** |
|-----------------------|------------|--------------------------|------------|----------------------|------------|-------------------------|------------|
| ** **            | ** ** | ** **               | ** ** | ** **           | ** ** | **(in thousands)** | ** ** |
| Crude Oil - 250 Bbl/d |       | 2006                     |       | $                    | 62.00      |                    | $          | (614 | ) |
| Crude Oil - 185 Bbl/d |       | 2006                     |       | 61.00                |       | (487                    | )          |
| Crude Oil - 250 Bbl/d |       | 2007                     |       | 65.30                |       | (926                    | )          |
| Crude Oil - 140 Bbl/d |       | 2007                     |       | 74.10                |       | (94                     | )          |
|                  |       |                     |       |                 |       |                    |       |
| Propane - 5,000 Gal/d |       | 2006                     |       | 1.08                 |       | (104                    | )          |
|                  |       |                     |       |                 |       |                    |       |
| Natural gas           |       | Jun-Oct 2006             |       |                 |       | 18                      |       |
|                  |       |                     |       |                 |       | (2,207                  | )          |
|                       |            |                          |            |                      |            |                         |            |  |  |

 

| ** **                                               | ** ** | ** **               | ** ** | **Average**          | ** ** | ** **              | ** ** |
|----------------------------------------------------------|------------|--------------------------|------------|----------------------|------------|-------------------------|------------|
| **Future purchase / sale contracts** | ** ** | **Contract Period** | ** ** | **Fixed price** | ** ** | **Fair Value**     | ** ** |
| ** **                                               | ** ** | ** **               | ** ** | ** **           | ** ** | **(in thousands)** | ** ** |
| Natural Gas - 1.7 million Mmbtu (purchase)               |       | Jul-Oct 2006             |       | $                    | 6.07       |                    | $          | (1,349 | ) |
| Ethane - 10.8 million Gallons (sale)                     |       | Jul-Oct 2006             |       | 0.61                 |       | (910                    | )          |
| Propane - 4.9 million Gallons (sale)                     |       | Jul-Oct 2006             |       | 1.07                 |       | (596                    | )          |
| Other NGLs - 4.2 million Gallons (sale)                  |       | Jul-Oct 2006             |       | 1.40                 |       | (214                    | )          |
|                                                     |       |                     |       |                 |       | (3,069                  | )          |
|                                                     |       |                     |       |                 |       |                    |       |
| **Total MarkWest Energy Partners**                       |       | $                        | (7,451     | )                    |
|                                                          |            |                          |            |                      |            |                         |            |  |  |

 

The impact of The Partnership’s commodityderivative instruments on results of operations and financial position aresummarized below (in thousands):

 
| ** **                                               | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|----------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                               | ** ** | **2006**                                            | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| Realized gains (losses) – revenue                   |       | $                                                   | (476       | )                                                 | $          | (251 | ) | $ | 63 |   | $ | (209 | ) |
| Unrealized gains (losses) – revenue                 |       | (6,425                                              | )          | 11                                                |       | (6,724 | ) | 62 |   |
| Other comprehensive income – changes in  fair value |       | —                                              |       | 438                                               |       | — |   | 247 |   |
| Other comprehensive income - settlement                  |       | —                                              |       | (222                                              | )          | — |   | (180 | ) |
|                                                          |            |                                                     |            |                                                   |            |  |  |  |  |  |  |  |  |

 

15

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| ** **                                     | ** ** | **June 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|------------------------------------------------|------------|------------------------|------------|----------------------------|------------|
| Unrealized gains – other current  assets  | ** ** | $                      | 1,131      |                       | $          | — |   |
| Unrealized losses – current liability     |       | (7,924                 | )          | (728                       | )          |
| Unrealized losses – non-current liability |       | (658                   | )     | —                     |       |
|                                                |            |                        |            |                            |            |  |  |

 

**8. Income Taxes**

 

The Company accounts for income taxes under the assetand liability method pursuant to SFAS No. 109, *Accounting for Income Taxes*. Under SFAS No. 109,deferred income taxes are recognized for the future tax consequencesattributable to differences between the financial statement carrying amounts ofexisting assets and liabilities and their respective tax basis and netoperating loss and credit carryforwards. Deferred tax assets and liabilitiesare measured using enacted tax rates expected to apply to taxable income in theyears in which those temporary differences are expected to be recovered orsettled. The effect of any tax rate change on deferred taxes is recognized asincome in the period that includes the enactment date of the tax rate change.Realizability of deferred 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 rate forinterim periods on the estimated annual effective corporate tax rate. Incometax expense totaled less than $0.1 million and $0.5 million for the three andsix months ended June 30, 2006, respectively, resulting in an effective taxrate of 39.9%. Income tax benefit totaled $0.8 million and less than $0.1million for the comparable periods in 2005, resulting in an effective tax rateof 31.7%. The change in the annual effective tax rate is attributable to thenewly passed Texas margin tax, which increases the rate, as discussed below,and is slightly offset by the utilization of various state net operating losses(“NOL”) and the corresponding change in the state NOL valuation allowance. Theestimated annual effective rate for MarkWest Hydrocarbon as a stand-aloneentity for the six months ended June 30, 2006 was 32.4%. However, due to theenactment of the new Texas law and the corresponding establishment of thedeferred taxes of MarkWest Energy Partners, the effective rate for theconsolidated group increased to 39.9%.

 

The Texas legislature recently passed House Bill 3, 79th Leg., 3d C.S.(2006) ("H.B.3") that was signed into law on May 18, 2006. H.B. 3significantly reforms the Texas franchise tax system and replaces it with a newTexas margin tax system. The margin tax expands the type of entities subject totax to generally include all active business entities. The new margin tax willapply to common entity types that are not currently subject to tax includinggeneral and limited partnerships. The effective date of the margin tax isJanuary 1, 2008, but the tax generally will be imposed on gross margingenerated in 2007 and thereafter.

 

Based on this new law, the Partnership recorded a deferred taxliability of $679,000, related to temporary differences that are expectedto reverse in future periods.   MarkWest Hydrocarbon recorded acorresponding deferred tax asset of $47,500 for its proportionate share, as itwill receive a current tax benefit when the taxes are actually paid.

 

**9. Stockand Incentive Compensation Plans**

 

All previously awarded stock, options and all other compensationarrangements based on the market value of our common stock have been adjustedto reflect the stock dividend of one share of common stock for each ten sharesof common stock held paid in May 2006.

 

Total compensation cost for share-based pay arrangements wasas follows (in thousands):

 

| ** **                | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|---------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                | ** ** | **2006**                                            | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| Stock options             |       | $                                                   | 13         |                                              | $          | 259 |   | $ | 35 |   | $ | 979 |   |
| Restricted stock          |       | 77                                                  |       | 20                                                |       | 176 |   | 41 |   |
| General partner interests |       | 2,464                                               |       | 1,071                                             |       | 3,973 |   | 2,716 |   |
| Subordinated units        |       | (16                                                 | )          | 99                                                |       | (29 | ) | 61 |   |
| Restricted units          |       | 113                                                 |       | 435                                               |       | 571 |   | 665 |   |
| Total compensation cost   |       | 2,651                                               |       | 1,884                                             |       | 4,726 |   | 4,462 |   |
| Income tax benefit        |       | (994                                                | )          | (707                                              | )          | (1,772 | ) | (1,673 | ) |
| Net compensation cost     |       | $                                                   | 1,657      |                                              | $          | 1,177 |   | $ | 2,954 |   | $ | 2,789 |   |

 

16

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The following summarizes the totalcompensation cost as of June 30, 2006, related to nonvested awards not yetrecognized. The actual compensation cost recognized might differ for therestricted units, as they qualify as liability awards, which are impacted bychanges in the fair value.

 

| ** **       | ** ** | **Amount  (in thousands)** | ** ** | **Weighted-average  Remaining  Vesting Period  (years)** | ** ** |
|------------------|------------|----------------------------|------------|---------------------------------------------------------------|------------|
| Stock options    |       | $                          | 55         |                                                          | 1.4        |   |
| Restricted stock |       | 547                        |       | 2.4                                                           |       |
| Restricted units |       | 1,302                      |       | 2.1                                                           |       |
| Total            |       | $                          | 1,904      |                                                          |       |   |
|                  |            |                            |            |                                                               |            |  |  |

 

At June 30, 2006, the Company has five stock-basedcompensation plans, one of which is through its consolidated subsidiary,MarkWest Energy Partners. These plans are described below.

 

*Stock Options*

 

Stock options are issued under the Company’s 1996 Stock Incentive Planand 1996 Non-employee Director Stock Option Plan.  The options vest over aservice period of from three to five years. The options have a maximum term often years. At the discretion of the Company, the holder may useCompany-assisted or broker-assisted cashless exercise. The Company may grantoptions to its employees for up to 925,000 shares of common stock.  AtJune 30, 2006, there were approximately 214,000 options available for grantunder this plan. The Company may grant options to its non-employee directorsfor up to 30,000 shares of common stock. On June 15, 2006, shareholdersapproved the 2006 Stock Incentive Plan to replace the 1996 Stock IncentivePlan, which authorizes the Company to grant 1,000,000 shares. The 2006 StockIncentive Plan became effective on July 1, 2006.

 

The fair value of stock options is estimated using theBlack-Scholes option-pricing model.  No options were granted in 2006 or2005.

 

Under SFAS No. 123R, compensation expense is based on thefair value of the stock options, reduced for an estimate of expectedforfeitures (4.6% in the second quarter of 2006).

 

The following summarizes the impact of the Company’s stockoption plans (in thousands of units):

 

| ** **                  | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|-----------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                  | ** ** | **2006**                                            | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| Options exercised, cashless |       | —                                              |       | 2                                                 |       | 7 |   | 24 |   |
| Shares issued, cashless     |       | —                                              |       | 1                                                 |       | 4 |   | 14 |   |
| Options exercised, cash     |       | 23                                                  |       | 6                                                 |       | 30 |   | 34 |   |
| Shares issued, cash         |       | 23                                                  |       | 6                                                 |       | 30 |   | 34 |   |

 

A summary of the status of the Company’s stock option plansas of June 30, 2006 and 2005 are presented below.

 
| ** **                       | ** ** | **Number of Shares** | ** ** | **Weighted-  average Exercise  Price** | ** ** | **Weighted-average  Remaining  Contractual Term  (in years)** | ** ** | **Aggregate Intrinsic  Value** | ** ** |
|----------------------------------|------------|--------------------------------|------------|---------------------------------------------|------------|-------------------------------------------------------------------------|------------|-------------------------------------|------------|
| Outstanding at December 31, 2005 |       | 125,409                        |       | $                                           | 7.52       |                                                                    | 7          |                                | $          | 1,565,891 |   |
| Changes during the year:         |       |                           |       |                                        |       |                                                                    |       |                                |       |
| Granted                          |       | —                         |       | —                                      |       | —                                                                  |       | —                              |       |
|                             |       |                           |       |                                        |       |                                                                    |       |                                |       |
| Exercised                        |       | (37,541                        | )          | 6.88                                        |       | 6                                                                       |       | 559,371                             |       |
| Forfeited                        |       | (908                           | )          | 10.59                                       |       | 9                                                                       |       | 9,407                               |       |
| Expired                          |       | (597                           | )          | 8.54                                        |       | 6                                                                       |       | 7,383                               |       |
|                             |       |                           |       |                                        |       |                                                                    |       |                                |       |
| Outstanding at June 30, 2006     |       | 86,363                         |       | $                                           | 7.76       |                                                                    | 6          |                                | 1,467,122  |   |
|                             |       |                           |       |                                        |       |                                                                    |       |                                |       |
| Exercisable at June 30, 2006     |       | 53,768                         |       |                                        |       |                                                                    |       |                                |       |
| Exercisable at June 30, 2005     |       | 78,362                         |       |                                        |       |                                                                    |       |                                |       |
|                                  |            |                                |            |                                             |            |                                                                         |            |                                     |            |  |  |

 

17

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| ** **                                                    | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|---------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                    | ** ** | **2006**                                            | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| Total fair value of options vested during  the period         |       | $                                                   | 47,749     |                                              | $          | 47,760 |   | $ | 67,186 |   | $ | 112,451 |   |
| Total intrinsic value of options exercised  during the period |       | $                                                   | 346,743    |                                              | $          | 88,155 |   | $ | 559,371 |   | $ | 427,768 |   |

 

*Restricted Stock*

 

The Company also issues restricted stock, for no consideration, underthe Company’s 1996 Stock Incentive Plan and 1996 Non-employee Director StockOption Plan.  The restricted stock vests over a service period of threeyears. The fair value of restricted stock is determined on the date of grant,based on the fair value of the common stock. The holder of restricted stockreceives dividends as though the shares were unrestricted. Upon settlement, theindividual receives common stock of the Company. Under SFAS No. 123R,compensation expense is based on the fair value, reduced for an estimate ofexpected forfeitures (4.6% in the second quarter of 2006). On June 15, 2006,shareholders approved the 2006 Stock Incentive Plan to replace the 1996 StockIncentive Plan, which authorizes the Company to grant 1,000,000 shares. The2006 Stock Incentive Plan became effective on July 1, 2006.

 

The following summarizes the impact of the Company’srestricted stock plans:

 

| ** **                   | ** ** | **Number of Shares** | ** ** | **Weighted-average  Grant-date Fair  Value** | ** ** |
|------------------------------|------------|--------------------------------|------------|---------------------------------------------------|------------|
| Nonvested at January 1, 2006 |       | 24,937                         |       | $                                                 | 19.31      |   |
| Granted                      |       | 17,209                         |       | 21.82                                             |       |
| Vested                       |       | (2,556                         | )          | 17.42                                             |       |
| Forfeited                    |       | (303                           | )          | 17.42                                             |       |
| Nonvested at June 30, 2006   |       | 39,287                         |       | 20.55                                             |       |
|                              |            |                                |            |                                                   |            |  |

 

| ** **                                                                                                                                 | ** ** | **Six months ended June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                                                                 | ** ** | **2006**                                          | ** ** | **2005** | ** ** |
| Weighted-average grant-date fair value of  restricted stock granted during the period                                                      |       | $                                                 | 375,500    |   | $ | 133,559 |   |
| Total fair value of restricted stock vested  during the period / total intrinsic value of restricted stock settled during  the period |       | $                                                 | 44,526     |   | $ | — |   |

 

During the second quarter of 2006 and 2005, the Company didnot grant any shares of restricted stock, nor were there any vestings ofrestricted shares. The Company received no proceeds for issuing restrictedstock, and there were no cash settlements during the same periods.

 

*Participation Plan*

 

The Company has also entered into arrangements with certaindirectors and employees of the Company referred to as the ParticipationPlan.  Under it, the Company sells subordinated partnership units of thePartnership or interests in the Partnership’s general partner under a purchaseand sale agreement.  There is no vesting period or maximum contractualterm under the Participation Plan. The Company’s capacity to grant furthergeneral partner interests is limited by its ownership in the general partner.

 

The subordinated units are sold without any restrictions ontransfer.   Compensation expense is based on changes in the marketvalue of the subordinated units. No subordinated units were sold to employeesor directors in 2006 or 2005.  MarkWest Hydrocarbon reacquired nosubordinated units in 2006 or 2005.

 

The interest in the Partnership’s general partner is soldwith certain put-and-call provisions that allow the individuals to requireMarkWest Hydrocarbon to buy back, or require the individuals to sell back theirinterest in the general partner to MarkWest Hydrocarbon.  Specifically,the employees and directors can exercise their put if (1) MarkWestHydrocarbon or the Partnership’s general partner undergoes a change of control;(2) additional membership interests are issued that, on a pro forma basis,decrease the distributions to all the then existing members; (3) anyamendment, alteration or repeal of the provisions of the general partneragreement materially and adversely affects the then existing rights, duties,obligations or restrictions of the employees and directors; or (4) theemployee or director (i) becomes totally disabled while a director,officer or employee of the general partner, of MarkWest Hydrocarbon or of anyof their affiliates, or (ii) dies, or (iii) retires as a director, officeror employee of the general partner of MarkWest Hydrocarbon or of any of theiraffiliates after reaching

 

18

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the age of 60 years.  Theemployee or his estate has 120 days after the put event to exercise the putunder (4) and 30 days after notice to exercise under (1) through(3).  MarkWest Hydrocarbon can exercise its call option if the employee ordirector ceases to be a director or employee of MarkWest Hydrocarbon or any ofits affiliates, or if there is a change of control.  MarkWest Hydrocarboncan exercise its call option if (i) the employee or director ceases to be adirector or employee of MarkWest Hydrocarbon or any of its affiliates, or (ii)if there is a change of control of MarkWest or of the Partnership’s general partner.For the call option based upon a termination of employment or directorship,MarkWest Hydrocarbon has 12 months following the termination date to exerciseits call option. MarkWest Hydrocarbon has agreed to exempt the general partnerinterests of three present or former directors from the call option based upona termination of employment or directorship. Additionally, pursuant to theterms of Mr. Semple’s employment agreement with MarkWest Hydrocarbon, 66% ofhis general partner interest has become exempt from the call option based upona termination of employment or directorship for reasons other than cause, andthe remaining 34% will likewise become exempt after November 1, 2006. For thecall option based upon a change of control of MarkWest or of the Partnership’sgeneral partner, MarkWest Hydrocarbon has 30 days following the change ofcontrol to exercise its call option.

 

As the formula used to determine the sale and buy-back price is notbased on an independent third-party valuation, coupled with the attributes ofthe put-and-call provisions, these transactions are considered compensatoryarrangements, similar to a stock appreciation right. Compensation expenserelated to general partner interests is calculated as the difference in theformula value and the amount paid by those individuals.  The formula valueis the amount MarkWest Hydrocarbon would have to pay the employees anddirectors to repurchase the general partner interests, and is based on thecurrent market value of the Partnership’s common units and the currentquarterly distributions paid.  During the quarters ended June 30, 2006 and2005, the Company did not receive or distribute any monies for the issuance orrepurchase of general partner interests.

 

*MarkWest Energy Partners, L.P. Long-TermIncentive Plan*

 

The general partner has adopted the MarkWest Energy Partners,L.P. Long-Term Incentive Plan for employees and directors of the generalpartner, as well as employees of its affiliates who perform services for us.The plan consists of restricted units and unit options. It currently permitsthe grant of awards covering an aggregate of 500,000 common units, comprised of200,000 restricted units and 300,000 unit options. The Compensation Committeeof the general partner’s Board of Directors administers the plan.

 

*Restricted Units.*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 value of a common unit.  The restricted units vest overa service period of three to four years; however, vesting for certain awardsaccelerates if specific annualized distribution goals are met. During thevesting period, these restricted units are entitled to receive distributionequivalents, which represent cash equal to the amount of distributions made oncommon units.

 

The following is a summary of restricted units issued underthe Partnership’s Long-Term Incentive Plan:

 

| ** **                      | ** ** | **Number of units** | ** ** | **Weighted-  average grant-date  fair value** | ** ** |
|---------------------------------|------------|-------------------------------|------------|---------------------------------------------------------|------------|
| Non-vested at December 31, 2005 |       | 38,864                        |       | $                                                       | 45.60      |   |
| Granted                         |       | 30,293                        |       | 46.64                                                   |       |
| Vested                          |       | (9,643                        | )          | 46.44                                                   |       |
| Forfeited                       |       | (895                          | )          | 45.85                                                   |       |
| Non-vested at June 30, 2006     |       | 58,619                        |       | $                                                       | 46.00      |   |

 

| ** **                                                                                                                            | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                                                            | ** ** | **2006**                                            | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| Weighted-average grant-date fair value of  restricted units granted during the period                                                 |       | $                                                   | —     |                                              | $          | 322,605 |   | $ | 1,412,933 |   | $ | 708,599 |   |
| Total fair value of restricted units vested  during the period / total intrinsic value of restricted units settled during  the period |       | —                                              |       | 101,995                                           |       | 447,841 |   | 69,025 |   |
|                                                                                                                                       |            |                                                     |            |                                                   |            |  |  |  |  |  |  |  |  |

 

During the quarters ended June 30, 2006 and 2005, thePartnership received no proceeds for issuing restricted units, and there wereno cash settlements.

 

Of the total number of restricted units that vested in thesecond quarter of 2006 and 2005, the Partnership did not redeem any restrictedunits for cash. It issued 9,643 common units in 2006. In 2005 the Partnershipissued 8,850 common units and acquired 250 more common units in the openmarket.

 

19

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*Unit Options**.** *The Compensation Committee has the authority to make grantsof unit options under the plan to employees and directors containing such termsas the committee shall determine. Unit options are exercisable over a perioddetermined by the Compensation Committee. Unit options also are exercisableupon a change in control of us, the general partner, MarkWest Hydrocarbon orupon the achievement of specified financial objectives.

 

As of June 30, 2006, the Partnership had not granted commonunit options.

 

**10.Dividends Paid to Shareholders**

 

*Stock Dividend*

 

On April 27, 2006, MarkWest Hydrocarbonannounced that its Board of Directors approved the issuance of one share ofcommon stock for each ten shares of common stock held by common stockholders.The stock was issued on May 23, 2006, to the stockholders of record as of theclose of business on May 11, 2006; the ex-dividend rate was May 9, 2006. 1,084,647shares were issued at a fair value of $24.4 million, based upon the last saleprice on the record date ($22.50 per share). Cash of $3,200 was paid in lieu offractional shares, based upon the last sale price on the record date.

 

*Cash Dividends*

 

On January26, 2006, the Company’s Board of Directors declared a quarterly cashdividend of $0.125 per share, payable onFebruary 22, 2006, to the stockholders of record as of the close of business on February15, 2006. The ex-dividend date was February 13, 2006.

 

On April27, 2006, the Company’s Board of Directors declared a quarterly cashdividend of $0.175 per share, an increaseof $0.10 per share from the same period of 2005, payable on June 5, 2006, to the stockholders of record as of theclose of business on May 26, 2006. The ex-dividend date was May 24, 2006

 

On July27, 2006, the Company’s Board of Directors declared a quarterly cashdividend of $0.24 per share, payable onAugust 21, 2006, to the stockholders of record as of the close of business on August14, 2006. The ex-dividend date will be August 10, 2006.

 

**11. Commitments and Contingencies**

 

*Legal*

 

In the ordinary course of business, theCompany is subject to a variety of risks and disputes normally to its businessand is a party to various legal proceedings. We maintain insurance policies inamounts and with coverage and deductibles as we believe are reasonable andprudent. However, we cannot assure either that the insurance companies willpromptly honor their policy obligations or that the coverage or levels ofinsurance will be adequate to protect us from all material expenses related tofuture claims for property loss or business interruption to the Company or forthird party claims of personal and property damage, or that the coverages orlevels of insurance it presently has will be available in the future ateconomical prices.

 

In early 2005 MarkWest Hydrocarbon, Inc., thePartnership and several of its affiliates were served with two lawsuits, RickyJ. Conn, *et al.* v. MarkWestHydrocarbon, Inc. *et al.*(filedFebruary 2, 2005), and Charles C. Reid, *etal.* v. MarkWest Hydrocarbon, Inc. *etal.*(filed February 8, 2005), in Floyd Circuit Court,Commonwealth of Kentucky, Civil Action No. 05-CI-00137 and Civil Action No.05-CI-00156, which actions on February 24, 2005, were removed to the jurisdictionof the U.S. District Court for the Eastern District of Kentucky, PikevilleDivision. The Company, the Partnership and its affiliates were served with anadditional lawsuit, Community Trust and Investment Co., *et al.* v. MarkWest Hydrocarbon, Inc. *et al.*, filed November 7, 2005,inFloyd County Circuit Court, Kentucky, that added five new claimants butessentially alleged the same facts and claims as the earlier two suits. OnMarch 27, 2006, the U.S. District Court remanded the cases back to Floyd CountyCircuit Court, Kentucky, and the cases were consolidated into Ricky J. Conn,*et al.* v. MarkWest Hydrocarbon,Inc. *et al.,*Floyd CircuitCourt, Commonwealth of Kentucky, Civil Action No. 05-CI-00137.

 

These actions are for third-party claims ofproperty and personal injury damages sustained as a consequence of an NGLpipeline leak and an ensuing explosion and fire that occurred on November 8,2004. The pipeline was owned by an unrelated business entity and leased andoperated by the Partnership’s subsidiary, MarkWest Energy Appalachia, LLC. Ittransports NGLs from the Maytown gas processing plant to the Partnership’sSiloam fractionator. The explosion and fire from the leaked vapors resulted inproperty damage to five homes and injuries to some of the residents. Thepipeline owner, the U.S. Department of Transportation, Office of PipelineSafety (“OPS”), and the Partnership continue to investigate the incident. Discoveryin the action is now underway following the remand back to state court. Thetrial is scheduled to begin

 

20

----

 

February 5, 2007.

 

The Company notified its general liabilityinsurance carriers of the incident and the lawsuits in a timely manner and iscoordinating its legal defense with the insurers. At this time, the Companybelieves that it has adequate general liability insurance coverage forthird-party property damage and personal injury liability resulting from theincident. The Company has settled with several of the claimants for third-partyproperty damage claims (damage to residences and personal property), andreached settlements for some of the personal injury claims. These have beenpaid for or reimbursed under the Company’s general liability insurance. As aresult, the Company has not provided for a loss contingency.

 

Pursuant to OPS regulation mandates and to aCorrective Action Order issued by the OPS November 18, 2004, pipeline and valveintegrity evaluation, testing and repairs were conducted on the affectedpipeline segment before service could be resumed. OPS authorized a partialreturn to service of the affected pipeline in October 2005. MarkWest is in theprocess of applying for return to full service.

 

In late June 2006 a Notice of ProbableViolation and Proposed Civil Penalty (NOPV) was issued by OPS to both MarkWestHydrocarbon and the unaffiliated owner of the pipeline, with a proposed penaltyin the aggregate amount of $1,070,000. Initial response to the NOPV is not dueuntil at least September 1, 2006, and the Company is likely going to request anadministrative hearing and settlement conference with respect to the NOPV.

 

Related to the above referenced pipelineincident, MarkWest Hydrocarbon and the Partnership have filed an independentaction captioned MarkWest Hydrocarbon, Inc., *et al.* v. Liberty Mutual Ins. Co., *et al.* (District Court, ArapahoeCounty, Colorado, Case No. 05CV3953 filed August 12, 2005), as removed to the(U.S. District Court for the District of Colorado, Civil Action No.1:05-CV-1948, on October 7, 2005), against its All-Risks Property and BusinessInterruption insurance carriers as a result of the companies’ refusal to honortheir insurance coverage obligation to pay the Company for certain expensesrelated to the pipeline incident. These include the Company’s internal expensesand costs incurred for damage to, and loss of use of the pipeline, equipmentand products; the extra transportation costs incurred for transporting theliquids while the pipeline was out of service; the reduced volumes of liquidsthat could be processed; and the costs of complying with the OPS CorrectiveAction Order (hydrostatic testing, repair/replacement and other pipelineintegrity assurance measures). These expenses and costs have been expensed asincurred and any potential recovery from the All-Risks Property and BusinessInterruption insurance carriers will be treated as “other income” if and whenit is received. The Company has not provided for a receivable for these claimsbecause of the uncertainty as to whether and how much the Company willultimately recover under the policies. The Company has also asserted that thecost of pipeline testing, replacement and repair are subject to an equitablesharing arrangement with its owner, pursuant to the terms of the pipeline leaseagreement. Discovery in the action is continuing.

 

The Company has also been involved in alawsuit captioned Ross Bros. Construction v. MarkWest Hydrocarbon, Inc.,(U.S. Court Appeals for the Sixth Circuit, Case No. 05-6251). This lawsuitinvolved the expansion construction of the Siloam Kentucky gas processing andfractionation plant and a dispute as to the monetary value of work andadditional work beyond the contract’s lump sum price performed by thecontractor. This lawsuit involved a claim of approximately $0.7 million inextra costs. The Company was recently granted Summary Judgment on its defenseasserting accord and satisfaction. In August 2005, Plaintiffs filed an appealof the Summary Judgment to the U.S. Court of Appeals for the 6th Circuit. The case wasfully briefed and oral Argument to the 6th Circuit was heard on July18, 2006, and we are awaiting the ruling from the Court. The Company believesthat, while it is not able to predict the outcome of this matter, based on thejudge’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 has not provided for a losscontingency.

 

In the ordinary course of business, the Companyis a party to various other legal actions. In the opinion of management, noneof these actions, either individually or in the aggregate, will have a materialadverse effect on the Company’s financial condition, liquidity or results ofoperations.

 

*Office LeaseObligation*

 

The Partnershipentered into a ten-year office lease and relocated its and MarkWestHydrocarbon, Inc.’s corporate headquarters to the Park Central Building,located in downtown Denver, Colorado in July 2006. The lease provides for atenant improvement allowance of up to approximately $1.8 million throughDecember 31, 2006. A security deposit of $1.0 million was provided in the formof an irrevocable letter of credit. The future minimum lease payments of thenew lease are as follows:

 

| **Year ending December 31,** | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|------------|------------|
| 2006                                        |       | $          | —     |   |
| 2007                                        |       | 927,442    |       |
| 2008                                        |       | 972,138    |       |
| 2009                                        |       | 1,016,834  |       |
| 2010                                        |       | 1,044,769  |       |
| 2011 and thereafter                         |       | 5,983,677  |       |
| Total                                       |       | $          | 9,944,860  |   |

 

21

----

 

The Partnership’s principal executive officeis currently located in a building leased by MarkWest Hydrocarbon.  Aportion of the lease cost for that building historically had been allocated tothe Partnership. In accordance with SFAS No. 146, *Accounting for Costs Associated with Exit or Disposal Activities*,the Company incurred a liability associated with the cancelled lease of $1.3million.

 

**12. SegmentReporting**

 

MarkWest Hydrocarbon’s operations areclassified into two reportable segments:

 

1.               *MarkWest Hydrocarbon Standalone* — The Companysells its equity and third-party NGLs, purchases third-party natural gas, andsells its equity and third-party natural gas. Since February 2004, the Companyhas been engaged in the wholesale propane marketing business through a thirdparty agency agreement. In June of 2006, that agreement was terminated. Thewholesale propane marketing was largely accomplished through an agencyagreement with a third party, however in June of 2006 that agreement wasterminated. MarkWest Hydrocarbon Standalone operates MarkWest Energy Partners,a publicly traded limited partnership.

 

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

 

The Company evaluates the performance of its segments andallocates resources to them based on operating income.  There were nointersegment revenues prior to May 24, 2002.  The Company conductsits continuing operations in the United States.

 

The table below presents information about net income/(loss)for the reported segments for the three and six months ended June 30, 2006 and2005. Net income/(loss) for each segment includes total revenues minus purchasedproduct costs, facility expenses, selling, general and administrative expenses,depreciation, amortization of intangible assets, accretion of asset retirementobligations and impairments and excludes interest income, interest expense,amortization of deferred financing costs, gain on sale of non-operating assets,non-controlling interest in net income of consolidated subsidiary,miscellaneous income (expense) and income taxes.

 

Selling, general and administrative expenses are allocated tothe segments based on direct expenses incurred by the segments or allocatedbased on****thepercent of time that employees devote to the segment in accordance with thePartnership’s services agreement with the Company.****

 
| ** **                                                                                               | ** ** | **MarkWest  Hydrocarbon  Standalone** | ** ** | **MarkWest  Energy  Partners** | ** ** | **Consolidating  Entries** | ** ** | **Total**  | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------|------------|----------------------------|------------|------------|------------|
| **Three months ended June 30, 2006 (in  thousands):**                                                    | ** ** | ** **                            | ** ** | ** **                     | ** ** | ** **                 | ** ** | ** ** | ** ** |
| Revenues:                                                                                                | ** ** | ** **                            | ** ** | ** **                     | ** ** | ** **                 | ** ** | ** ** | ** ** |
| Revenue                                                                                                  |       | $                                     | 62,189     |                           | $          | 142,280                    |       | $          | (17,879    | ) | $ | 186,590 |   |
| Derivatives                                                                                              |       | (6,156                                | )          | (6,901                         | )          | —                     |       | (13,057    | )          |
| Total Revenue                                                                                            |       | 56,033                                |       | 135,379                        |       | (17,879                    | )          | 173,533    |       |
|                                                                                                     |       |                                  |       |                           |       |                       |       |       |       |
| Purchased product costs                                                                                  |       | 52,606                                |       | 76,178                         |       | (11,926                    | )          | 116,858    |       |
| Facility expenses                                                                                        |       | 4,705                                 |       | 15,465                         |       | (5,953                     | )          | 14,217     |       |
| Selling, general and administrative  expenses                                                            |       | 4,073                                 |       | 8,988                          |       | —                     |       | 13,061     |       |
| Depreciation                                                                                             |       | 394                                   |       | 7,384                          |       | —                     |       | 7,778      |       |
| Amortization of intangible assets                                                                        |       | —                                |       | 4,027                          |       | —                     |       | 4,027      |       |
| Accretion of asset retirement and lease  obligations                                                     |       | —                                |       | 26                             |       | —                     |       | 26         |       |
| Operating income (loss)                                                                                  |       | (5,745                                | )          | 23,311                         |       | —                     |       | 17,566     |       |
|                                                                                                     |       |                                  |       |                           |       |                       |       |       |       |
| Other income (expense):                                                                                  |       |                                  |       |                           |       |                       |       |       |       |
| Equity in earnings in unconsolidated  affiliates                                                         |       | —                                |       | 1,228                          |       | —                     |       | 1,228      |       |
| Interest income                                                                                          |       | 177                                   |       | 259                            |       | —                     |       | 436        |       |
| Interest expense                                                                                         |       | (84                                   | )          | (10,714                        | )          | —                     |       | (10,798    | )          |
| Amortization of deferred financing costs (a  component of interest expense)                              |       | (33                                   | )          | (826                           | )          | —                     |       | (859       | )          |
| Dividend income                                                                                          |       | 109                                   |       | —                         |       | —                     |       | 109        |       |
| Miscellaneous income                                                                                     |       | 2                                     |       | 1,515                          |       | —                     |       | 1,517      |       |
| Income (loss) before non-controlling  interest in net income of consolidated subsidiary and income taxes |       | (5,574                                | )          | 14,773                         |       | —                     |       | 9,199      |       |
| Income tax (expense) benefit                                                                             |       | 78                                    |       | (679                           | )          | 543                        |       | (58        | )          |
| Non-controlling interest in net income of  consolidated subsidiary                                       |       | —                                |       | —                         |       | (11,273                    | )          | (11,273    | )          |
| Net income (loss)                                                                                        |       | $                                     | (5,496     | )                              | $          | 14,094                     |       | $          | (10,730    | ) | $ | (2,132 | ) |

**** ****

****22****

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**** ****
| ** **                                                                                               | ** ** | **Markwest  Hydrocarbon  Standalone** | ** ** | **Markwest  Energy  Partners** | ** ** | **Consolidating  Entries** | ** ** | **Total**  | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------|------------|----------------------------|------------|------------|------------|
| **Three months ended June 30, 2005 (in  thousands):**                                                    | ** ** | ** **                            | ** ** | ** **                     | ** ** | ** **                 | ** ** | ** ** | ** ** |
| Revenues:                                                                                                | ** ** | ** **                            | ** ** | ** **                     | ** ** | ** **                 | ** ** | ** ** | ** ** |
| Revenue                                                                                                  |       | $                                     | 52,786     |                           | $          | 103,200                    |       | $          | (14,706    | ) | $ | 141,280 |   |
| Derivatives                                                                                              |       | —                                |       | (240                           | )          | —                     |       | (240       | )          |
| Total Revenue                                                                                            |       | 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 lease  obligations                                                     |       | 2                                     |       | 9                              |       | —                     |       | 11         |       |
| Operating income (loss)                                                                                  |       | (3,272                                | )          | 4,747                          |       | —                     |       | 1,475      |       |
|                                                                                                     |       |                                  |       |                           |       |                       |       |       |       |
| Other income (expense):                                                                                  |       |                                  |       |                           |       |                       |       |       |       |
| Equity in earnings in unconsolidated  affiliates                                                         |       | (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         |       |
| Miscellaneous income                                                                                     |       | 222                                   |       | (74                            | )          | —                     |       | 148        |       |
| Income (loss) before non-controlling  interest in net income of consolidated subsidiary and income taxes |       | (2,788                                | )          | 671                            |       | —                     |       | (2,117     | )          |
| Income tax benefit                                                                                       |       | 802                                   |       | —                         |       | —                     |       | 802        |       |
| Non-controlling interest in net income of  consolidated subsidiary                                       |       | —                                |       | —                         |       | (294                       | )          | (294       | )          |
| Net income (loss)                                                                                        |       | $                                     | (1,986     | )                              | $          | 671                        |       | $          | (294       | ) | $ | (1,609 | ) |

**** ****
| ** **                                                                                               | ** ** | **MarkWest  Hydrocarbon  Standalone** | ** ** | **MarkWest  Energy  Partners** | ** ** | **Consolidating  Entries** | ** ** | **Total**  | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------|------------|----------------------------|------------|------------|------------|
| **Six months ended June 30, 2006 (in  thousands):**                                                      | ** ** | ** **                            | ** ** | ** **                     | ** ** | ** **                 | ** ** | ** ** | ** ** |
| Revenues:                                                                                                | ** ** | ** **                            | ** ** | ** **                     | ** ** | ** **                 | ** ** | ** ** | ** ** |
| Revenue                                                                                                  |       | $                                     | 164,281    |                           | $          | 298,783                    |       | $          | (35,594    | ) | $ | 427,470 |   |
| Derivatives                                                                                              |       | (7,655                                | )          | (6,661                         | )          | —                     |       | (14,316    | )          |
| Total Revenue                                                                                            |       | 156,626                               |       | 292,122                        |       | (35,594                    | )          | 413,154    |       |
|                                                                                                     |       |                                  |       |                           |       |                       |       |       |       |
| Purchased product costs                                                                                  |       | 144,631                               |       | 176,975                        |       | (23,581                    | )          | 298,025    |       |
| Facility expenses                                                                                        |       | 10,475                                |       | 29,459                         |       | (12,013                    | )          | 27,921     |       |
| Selling, general and administrative  expenses                                                            |       | 7,111                                 |       | 17,326                         |       | —                     |       | 24,437     |       |
| Depreciation                                                                                             |       | 599                                   |       | 14,557                         |       | —                     |       | 15,156     |       |
| Amortization of intangible assets                                                                        |       | —                                |       | 8,043                          |       | —                     |       | 8,043      |       |
| Accretion of asset retirement and lease  obligations                                                     |       | —                                |       | 51                             |       | —                     |       | 51         |       |
| Operating income (loss)                                                                                  |       | (6,190                                | )          | 45,711                         |       | —                     |       | 39,521     |       |
|                                                                                                     |       |                                  |       |                           |       |                       |       |       |       |
| Other income (expense):                                                                                  |       |                                  |       |                           |       |                       |       |       |       |
| Equity in earnings in unconsolidated  affiliates                                                         |       | —                                |       | 2,173                          |       | —                     |       | 2,173      |       |
| Interest income                                                                                          |       | 363                                   |       | 479                            |       | —                     |       | 842        |       |
| Interest expense                                                                                         |       | (152                                  | )          | (21,690                        | )          | —                     |       | (21,842    | )          |
| Amortization of deferred financing costs (a  component of interest expense)                              |       | (50                                   | )          | (1,634                         | )          | —                     |       | (1,684     | )          |
| Dividend income                                                                                          |       | 215                                   |       | —                         |       | —                     |       | 215        |       |
| Miscellaneous income                                                                                     |       | 152                                   |       | 3,607                          |       | —                     |       | 3,759      |       |
| Income (loss) before non-controlling  interest in net income of consolidated subsidiary and income taxes |       | (5,662                                | )          | 28,646                         |       | —                     |       | 22,984     |       |
| Income tax (expense) benefit                                                                             |       | (331                                  | )          | (679                           | )          | 543                        |       | (467       | )          |
| Non-controlling interest in net income of  consolidated subsidiary                                       |       | —                                |       | —                         |       | (21,817                    | )          | (21,817    | )          |
| Net income (loss)                                                                                        |       | $                                     | (5,993     | )                              | $          | 27,967                     |       | $          | (21,274    | ) | $ | 700 |   |

**** ****

****23****

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**** ****
| ** **                                                                                               | ** ** | **Markwest  Hydrocarbon  Standalone** | ** ** | **Markwest  Energy  Partners** | ** ** | **Consolidating  Entries** | ** ** | **Total**  | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------|------------|----------------------------|------------|------------|------------|
| **Six months ended June 30, 2005 (in  thousands):**                                                      | ** ** | ** **                            | ** ** | ** **                     | ** ** | ** **                 | ** ** | ** ** | ** ** |
| Revenues:                                                                                                | ** ** | ** **                            | ** ** | ** **                     | ** ** | ** **                 | ** ** | ** ** | ** ** |
| Revenue                                                                                                  |       | $                                     | 117,307    |                           | $          | 192,744                    |       | $          | (30,511    | ) | $ | 279,540 |   |
| Derivatives                                                                                              |       | —                                |       | (147                           | )          | —                     |       | (147       | )          |
| Total Revenue                                                                                            |       | 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 lease  obligations                                                     |       | 2                                     |       | 19                             |       | —                     |       | 21         |       |
| Operating income (loss)                                                                                  |       | (2,277                                | )          | 13,198                         |       | —                     |       | 10,921     |       |
|                                                                                                     |       |                                  |       |                           |       |                       |       |       |       |
| Other income (expense):                                                                                  |       |                                  |       |                           |       |                       |       |       |       |
| Equity in earnings in unconsolidated  affiliates                                                         |       | —                                |       | 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        |       |
| Miscellaneous income                                                                                     |       | 413                                   |       | (178                           | )          | —                     |       | 235        |       |
| Income (loss) before non-controlling  interest in net income of consolidated subsidiary and income taxes |       | (1,419                                | )          | 4,936                          |       | —                     |       | 3,517      |       |
| Income tax benefit                                                                                       |       | 32                                    |       | —                         |       | —                     |       | 32         |       |
| Non-controlling interest in net income of  consolidated subsidiary                                       |       | —                                |       | —                         |       | (3,619                     | )          | (3,619     | )          |
| Net income (loss)                                                                                        |       | $                                     | (1,387     | )                              | $          | 4,936                      |       | $          | (3,619     | ) | $ | (70 | ) |

 

**13.Subsequent Events**

 

*MarkWest EnergyPartners Equity Offering*

 

On July 6, 2006, the Partnership completed its underwritten publicoffering of 3.0 million common units (the “Common Unit Offering”) at aprice of $39.75 per common unit. In addition, on July 12, 2006, the Partnershipcompleted the sale of an additional 300,000 common units to coverover-allotments in connection with the Common Unit Offering. The sale of unitsresulted in total gross proceeds of $131.2 million, and net proceeds of$127.3 million, after the underwriters’ commission and legal, accountingand other transaction expenses. The Partnership intends to use the net proceedsfrom the offering, which includes a capital contribution from its generalpartner to maintain its 2% general partner interest in the Partnership, to repaya portion of the term debt under the Partnership Credit Facility.

 

24

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*MarkWest EnergyPartners Debt Offering*

 

On July 6, 2006, the Partnership and its subsidiary, MarkWest EnergyFinance Corporation, completed their private placement of $200 million inaggregate principal amount of 8 1⁄2 % senior notes due 2016 (the “2016 SeniorNotes”) to qualified institutional buyers. The 2016 Senior Notes will mature onJuly 15, 2016, and interest is payable on each July 15 andJanuary 15, commencing January 15, 2007. The net proceeds from theprivate placement were approximately $191.2 million, after deducting theinitial purchasers’ discounts and legal, accounting and other transactionexpenses. The Partnership intends to use the net proceeds from the offering torepay a portion of the term debt under the Partnership Credit Facility. Affiliatesof several of the initial purchasers, including RBC Capital MarketsCorporation, J.P. Morgan Securities Inc., and Wachovia Capital Markets, LLC,are lenders under the Partnership Credit Facility.

 

*Change in Address ofPrincipal Executive Offices*

 

In July 2006 we relocated our principal executive office to 1515Arapahoe Street, Suite 700, Denver, Colorado 80202. Our telephone number is303-925-9200.

 

25

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##### **Item2. Management’s Discussion and Analysis of Financial Condition and Results ofOperations**

##### ** **

Statements included in this quarterly reporton Form 10-Q that are not historical facts are forward-looking statements. Weuse words such as “may,” “believe,” “estimate,” “expect,” “intend,” “project,” “anticipate,”and similar expressions to identify forward looking statements.

 

These forward-looking statements are madebased upon management’s expectations, estimates, assumptions and beliefsconcerning future events impacting us and therefore involve a number of risksand uncertainties. We caution that forward-looking statements are notguarantees and that actual results could differ materially from those expressedor implied in the forward-looking statements.

 

Forward-looking statements include statementsrelating to, among other things:

 

•      Ourexpectations regarding MarkWest Energy Partners, L.P.

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

•      Our ability toamend certain producer contracts.

•      Ourexpectations regarding natural gas, NGLs product and prices.

•      Our efforts toincrease fee-based contract volumes.

•      Our ability tomanage our commodity price risk.

•      Our ability tomaximize the value of our NGL output.

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

•      Our ability tocomply with environmental and governmental regulations.

 

Important factors that could cause our actualresults of operations or our actual financial condition to differ include, butare not necessarily limited to:

 

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

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

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

•      Our ability tonegotiate favorable marketing agreements.

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

•      Our dependenceon certain significant customers, producers, gatherers, treaters and transportersof natural gas.

•      Competitionfrom other NGL processors, including major energy companies.

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

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

•      Our ability tosuccessfully integrate our recent or future acquisitions.

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

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

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

•      The threat ofterrorist attacks or war.

•      Winter weatherconditions.

 

This list isnot necessarily complete. Other unknown or unpredictable factors could alsohave material adverse effects on future results. The Company does not publiclyupdate any forward-looking statement with new information or future events.Investors are cautioned not to put undue reliance on forward-looking statementsas many of these factors are beyond our ability to control or predict.

 

In addition, on April 27, 2006, MarkWest Hydrocarbon announced that itsBoard of Directors approved the issuance of one share of common stock for eachten shares of common stock held by common stockholders. The stock was issued onMay 23, 2006, to the stockholders of record as of the close of business on May11, 2006. 1,084,647 shares were issued at a fair value of $24.4 million, basedupon the last sale price on the record date ($22.50 per share). Cash of $3,200was paid in lieu of fractional shares, based upon the last sale price on therecord date. All common stock accounts and per share data, have beenretroactively adjusted to give effect to the dividend of our common stock.

 

26

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##### **Overview**

##### ** **

MarkWestHydrocarbon reported a net loss of $2.1 million, or $0.18 per dilutedshare, for the three months ended June 30, 2006, compared to a net loss of$1.6 million, or $0.14 per diluted share, for the corresponding quarter of2005. The company also reported a net income of $0.7 million, or $0.06 per dilutedshare for the six months ended June 30, 2006, compared to a net loss of $0.1million, or $0.01 per diluted share, for the corresponding period of 2005. TheCompany reports its results under accounting principles generally accepted inthe United States (“GAAP”), which require that the Company consolidate MarkWestEnergy Partners.

 

***MarkWestHydrocarbon Standalone Results***

 

For the three months ended June 30, 2006,MarkWest Hydrocarbon Standalone reported an operating loss of$5.7 million, compared to an operating loss of $3.3 million for thecomparable quarter of 2005. MarkWest Hydrocarbon Standalone also reported a netloss of $5.5 million for the three months ended June 30, 2006, compared to anet loss of $2.0 million for the comparable quarter of 2005.

 

For the six months ended June 30, 2006,MarkWest Hydrocarbon Standalone reported an operating loss of$6.2 million, compared to an operating loss of $2.3 million for thecomparable period of 2005. MarkWest Hydrocarbon Standalone also reported a netloss of $6.0 million for the six months ended June 30, 2006, compared to a netloss of $1.4 million for the comparable period of 2005.

 

*Stock Dividend*

 

On April 27, 2006, MarkWest Hydrocarbonannounced that its Board of Directors approved the issuance of one share of commonstock for each ten shares of common stock held by common stockholders. Thestock was issued on May 23, 2006, to the stockholders of record as of the closeof business on May 11, 2006; the ex-dividend date was May 9, 2006. 1,084,647shares were issued at a fair value of $24.4 million, based upon the last saleprice on the record date ($22.50 per share). Cash of $3,200 was paid in lieu offractional shares, based upon the last sale price on the record date.

 

*Cash Dividends*

 

On January26, 2006, the Company’s Board of Directors declared a quarterly cashdividend of $0.125 per share, payable onFebruary 22, 2006, to the stockholders of record as of the close of business on February15, 2006. The ex-dividend date was February 13, 2006.

 

On April27, 2006, the Company’s Board of Directors declared a quarterly cashdividend of $0.175 per share, an increaseof $0.10 per share from the same period of 2005, payable on June 5, 2006, to the stockholders of record as of theclose of business on May 26, 2006. The ex-dividend date was May 24, 2006

 

On July27, 2006, the Company’s Board of Directors declared a quarterly cashdividend of $0.24 per share, payable onAugust 21, 2006, to the stockholders of record as of the close of business on August14, 2006. The ex-dividend date will be August 10, 2006.

 

***MarkWestEnergy Partners Results***

 

For the three months ended June 30, 2006, thePartnership reported operating income of $23.3 million compared to $4.7 millionfor the corresponding quarter of 2005, an increase of $18.6 million, or 396%. ThePartnership also reported net income of $14.1 million in the second quarter of2006, compared to $0.7 million in 2005.

 

For the six months ended June 30, 2006, thePartnership reported operating income of $45.7 million compared to $13.2million for the corresponding period of 2005, an increase of $32.5 million, or246%. The Partnership also reported net income of $28.0 million for the sixmonths ended June 30, 2006, compared to $4.9 million in 2005.

 

**Our Business**

 

MarkWest Hydrocarbon was founded in 1988 as apartnership and later incorporated in Delaware.  We completed our initialpublic offering of common shares in 1996.

 

MarkWest Hydrocarbon is an energy companyprimarily focused on marketing natural gas liquids (NGLs) and increasing shareholdervalue by growing MarkWest Energy Partners, L.P. (“MarkWest Energy Partners” or “ThePartnership”), our consolidated subsidiary and a publicly-traded master limitedpartnership. MarkWest Energy Partners is engaged in the gathering, processingand transmission of natural gas; the transportation, fractionation and storageof natural gas liquids; and the gathering and transportation of crude oil.

 

27

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MarkWest Hydrocarbon’s assets consist primarily of partnershipinterests in MarkWest Energy Partners and certain processing agreements inAppalachia.  As of June 30, 2006, the Company owned a 21% interest in thePartnership, consisting of the following:

 

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

•     an89% ownership interest in MarkWest Energy GP, L.L.C., the general partner ofthe Partnership, which in turn owns a 2% general partner interest and all ofthe incentive distribution rights in the Partnership.

 

Following the Partnership’s equity offeringof 3.3 million new common units in July 2006 (see Note 13), MarkWestHydrocarbon and its subsidiaries, in the aggregate, owned a 17% interest in thePartnership, consisting of 1,633,334 subordinated units, 836,162 common unitsand a 2% general partner interest in the Partnership.

 

To better understand our business and theresults of operations discussed below, it is important to have an understandingof three factors:

 

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

•      The nature ofour relationship with MarkWest Energy Partners; and

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

 

*MarkWest Hydrocarbon*

 

Excluding the equity income derived from MarkWest EnergyPartners, we generate the majority of our revenues and net operatingmargin (defined and discussed further, below) from our Appalachiaprocessing agreements. We outsource these services to the Partnership, and paythe Partnership a fee for providing processing and fractionation services. Ascompensation for providing processing services to our Appalachian producers, weearn a fee and receive title to the NGLs produced. In return, we are requiredto replace, in dry natural gas, the Btu value of the NGLs extracted.  ThisBtu replacement obligation is referred to in the industry as a “keep-whole”arrangement. In keep-whole arrangements, our principal cost is purchasing anddelivering dry gas of an equivalent Btu content to replace Btus extracted fromthe gas stream in the form of NGLs, or consumed as fuel during processing. The spread between the NGL product sales price and the purchase price ofnatural gas with an equivalent Btu content is called the “frac spread.”Generally, the frac spread is positive and offsets all or a portion of the feesthat we pay the Partnership.  In the event natural gas becomes more expensive,on a Btu equivalent basis, than NGL products, and the associated fees that wepay the Partnership, the net operating margin associated with the Appalachianprocessing agreements results in operating losses.

 

In Appalachia, we have entered into operating agreements witha customer with respect to natural gas delivered into its transmissionfacilities, upstream of MarkWest Energy Partners’ Kenova, Boldman and Cobbfacilities. Under the terms of these operating agreements, the customer hasagreed to use reasonable, diligent efforts to supply these facilities withconsistent volumes of natural gas shipped by the customer, on behalf of theAppalachian producers. The initial terms of our agreements with this customerrun through December 31, 2015, with annual renewals thereafter.

 

In September 2004, we entered into several new andamended agreements, expiring December 31, 2009, with one of the largestAppalachia producers, which allow us to significantly reduce our exposure tocommodity price risk, for approximately 25% of our keep-whole gasvolumes.  Under these agreements, the Company’s exposure to the keep-wholenatural gas is limited in the event natural gas becomes more expensive than theNGL product sales price, thereby mitigating the risk of incurring operatinglosses.

 

Beginning in 2006 we also entered into derivativeinstruments, which are marked to market, to manage our risks related tocommodity price exposure. Our keep-whole contracts expose us to commodity pricerisk, both on the sales side (of NGLs) and on the purchase side (of naturalgas), which, in turn, may increase the volatility of our standalone results andcash flows.  We attempt to mitigate our commodity price risk through ourcommodity price risk management program (see Item 3, “Quantitative andQualitative Disclosures about Market Risk” for further details about ourcommodity price risk management program).

 

Our natural gas marketing group markets natural gas forMarkWest Energy Partners’ facilities, purchases replacement Btu gas requirementsand assists with business development efforts. Since February 2004, the Companyhas been engaged in the wholesale propane marketing business through a thirdparty agency agreement. In June of 2006, that agreement was terminated. MarkWestHydrocarbon also enters into future sale agreements that, as derivativeinstruments, are marked to market.

 

28

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MarkWest Hydrocarbon also receives revenueunder fee-based arrangements for processing natural gas.

 

*MarkWest EnergyPartners*

 

The Partnership generates the majority of itsrevenues and net operating margin (defined and discussed further, below) fromnatural gas gathering, processing and transmission, NGL transportation,fractionation and storage; and crude oil gathering and transportation. In manycases, the Partnership provides services under contracts that contain acombination of more than one of the arrangements described below. While all ofthese services constitute midstream energy operations, the Partnership providesservices under the following different types of arrangements:

 

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

 

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

 

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

 

•      *Keep-whole arrangements.*  Under keep-whole arrangements, the Partnership gathersnatural gas from the producer, processes the natural gas, and sells theresulting condensate and NGLs to third parties at market prices. Because theextraction of the condensate and NGLs from the natural gas during processingreduces the Btu content of the natural gas, the Partnership must eitherpurchase natural gas at market prices for return to producers, or make cashpayment to the producers equal to the energy content of this natural gas.Accordingly, under these arrangements the Partnership’s revenues and netoperating margins increase as the price of condensate and NGLs increasesrelative to the price of natural gas, and decreases as the price of natural gasincreases relative to the price of condensate and NGLs.

 

•      *Settlement margin.*  Typically, the Partnership is allowed to retain afixed percentage of the volume gathered to cover the compression fuel chargesand deemed line losses.  To the extent the gathering system is operatedmore efficiently than specified per contract allowance, the Partnership isentitled to retain the difference for its own account.

 

In many cases, it provides services undercontracts that contain a combination of more than one of the arrangementsdescribed above. The terms of the Partnership’s contracts vary based on gasquality conditions, the competitive environment at the time the contracts aresigned and customer requirements. The Partnership’s contract mix and,accordingly, its exposure to natural gas and NGL prices, may change as a resultof changes in producer preferences, its expansion in regions where some typesof contracts are more common and other market factors. Any change in mix willinfluence the Partnership’s financial results.

 

At June 30, 2006, the Partnership’s primaryexposure to keep-whole contracts was limited to its Arapaho (Oklahoma)processing plant and its East Texas processing contracts. At the Arapaho plantinlet, 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, approximatelyhalf, as measured in volumes, of the related gas gathering contracts includeadditional fees to cover plant operating costs, fuel costs and shrinkage costsin a low-processing margin environment. Because of the Partnership’s ability tooperate the plant in several recovery modes, including turning it

 

29

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off, coupled with theadditional fees provided for in the gas gathering contracts, its overallkeep-whole contract exposure is limited to a small portion of the operatingcosts of the plant. For the three and six months ended June 30, 2006,approximately 7.6% and 7.6% of East Texas inlet volumes were processed pursuantto keep-whole contracts.

 

For the sixmonths ended June 30, 2006, MarkWest Energy Partners generated the followingpercentages of its revenues and net operating margin from the following typesof contracts:

 
| ** **           | ** ** | **Fee-Based** | ** ** | **Percent-of-   Proceeds (1)** | ** ** | **Percent-of-  Index (2)** | ** ** | **Keep-  Whole (3)** | ** ** | **Total** | ** ** |
|----------------------|------------|---------------|------------|------------------------------------------|------------|---------------------------------|------------|---------------------------|------------|-----------|------------|
| Revenues             |       | 13            | %          | 36                                       | %          | 17                              | %          | 34                        | %          | 100       | %          |
| Net operating margin |       | 31            | %          | 51                                       | %          | 10                              | %          | 8                         | %          | 100       | %          |

 

----

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

(2)   Includessettlement margin, condensate sales and other types of arrangements tied tonatural gas prices.

(3)   Includessettlement margin, condensate sales and other types of arrangements tied toboth NGL and natural gas prices.

 

***Our Relationshipwith MarkWest Energy Partners***

 

We spun off the majority of our then-existing natural gasgathering and processing and NGL transportation, fractionation and storageassets into MarkWest Energy Partners in May 2002, just before thePartnership completed its initial public offering. At the time of its formationand initial public offering, we entered into four contracts with MarkWestEnergyPartners whereby MarkWestEnergy Partners provides midstream services in Appalachia to us for afee.  Additionally, MarkWest Energy Partners receives 100% of all fee andpercent-of-proceeds consideration for the first 10 MMcf/d that it gathers andprocesses in Michigan. MarkWest Hydrocarbon retains a 70% net profits interestin the gathering and processing income earned on quarterly pipeline throughputin excess of 10 MMcf/d.  In accordance with accounting principlesgenerally accepted in the United States (“GAAP”), MarkWest Energy Partners’financial results are included in our consolidated financial statements. All intercompany accounts and transactions are eliminated during consolidation.

 

As a result of the contracts mentioned above, the Company isone of the Partnership’s largest customers.  For the six months ended June30, 2006, we accounted for 12% of the Partnership’s revenues and 13% of its netoperating margin.  This represents a decrease from the six months endedJune 30, 2005, when we accounted for 16% of the Partnership’s revenues and 22%of its net operating margin.  We expect we will continue to account forless of the Partnership’s business in the future as it continues to acquireassets and increase its customer base or diversify its business.

 

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

 

***Impact of RecentAcquisitions on Comparability of Financial Results***

 

*Recent MarkWestEnergy Partners Acquisition Activity*

 

In reading the discussion of our historicalresults of operations, you should be aware of the impact of our recentacquisitions, which fundamentally affect the comparability of our results ofoperations over the periods discussed.

 

Since the Partnership’s initial publicoffering, it has completed eight acquisitions for an aggregate purchase priceof approximately $795 million, net of working capital. The following tablesets forth information regarding each of these acquisitions:

 
| **Name**                | ** ** | **Assets**                                                       | ** ** | **Location**                       | ** ** | **Consideration**      | ** ** | **Closing Date** | ** **        |
|-------------------------|------------|------------------------------------------------------------------|------------|------------------------------------|------------|------------------------|------------|-----------------------|-------------------|
| ** **              | ** ** | ** **                                                       | ** ** | ** **                         | ** ** | **(in millions)** | ** ** | ** **            | ** **        |
| Javelina (1)            |       | Gas  processing and fractionation facility                       |       | Corpus  Christi, TX                |       | $                      | 398.8      |                  | November 1, 2005  |   |
|                    |       |                                                             |       |                               |       |                   |       |                  |              |
| Starfish (2)            |       | Natural gas  pipeline, gathering system and dehydration facility |       | Gulf of  Mexico/Southern Louisiana |       | $                      | 41.7       |                  | March 31, 2005    |   |
|                    |       |                                                             |       |                               |       |                   |       |                  |              |
| East Texas              |       | Gathering system  and gas procession assets                      |       | East Texas                         |       | $                      | 240.7      |                  | July 30, 2004     |   |
|                    |       |                                                             |       |                               |       |                   |       |                  |              |
| Hobbs                   |       | Natural gas  pipeline                                            |       | New Mexico                         |       | $                      | 2.3        |                  | April 1, 2004     |   |
|                    |       |                                                             |       |                               |       |                   |       |                  |              |
| Michigan Crude Pipeline |       | Common  carrier crude oil pipeline                               |       | Michigan                           |       | $                      | 21.3       |                  | December 18, 2003 |   |
|                    |       |                                                             |       |                               |       |                   |       |                  |              |
| Western Oklahoma        |       | Gathering  system                                                |       | Western  Oklahoma                  |       | $                      | 38.0       |                  | December 1, 2003  |   |
|                    |       |                                                             |       |                               |       |                   |       |                  |              |
| Lubbock Pipeline        |       | Natural gas  pipeline                                            |       | West Texas                         |       | $                      | 12.2       |                  | September 2, 2003 |   |
|                    |       |                                                             |       |                               |       |                   |       |                  |              |
| Pinnacle                |       | Natural gas  pipelines and gathering systems                     |       | East Texas                         |       | $                      | 39.9       |                  | March 28, 2003    |   |

----

(1)   Consideration includes $35.5 million in cash.

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

 

30

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##### **Resultsof Operations**

##### ** **

***Operating Data***

 
| ** **                                      | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|-------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                      | ** ** | **2006**                                            | ** ** | **2005**                                          | ** ** | **% Change** | ** ** | **2006** | ** ** | **2005** | ** ** | **% Change** | ** ** |
| **MarkWest Hydrocarbon Standalone:**            | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ***Marketing***                                 |       |                                                |       |                                              |       |   |   |   |   |   |   |   |   |
| NGL product sales (gallons)(1)                  |       | 19,783,000                                          |       | 31,317,000                                        |       | -36.8 | % | 69,750,000 |   | 83,481,000 |   | -16.4 | % |
|                                            |       |                                                |       |                                              |       |   |   |   |   |   |   |   |   |
| ***Wholesale***                                 |       |                                                |       |                                              |       |   |   |   |   |   |   |   |   |
| NGL product sales (gallons)(2)                  |       | 7,867,000                                           |       | 7,087,000                                         |       | 11.0 | % | 35,063,000 |   | 26,759,000 |   | 31.0 | % |
|                                            |       |                                                |       |                                              |       |   |   |   |   |   |   |   |   |
| **MarkWest Energy Partners:**                   |       |                                                |       |                                              |       |   |   |   |   |   |   |   |   |
| ***East Texas*(3)**                             |       |                                                |       |                                              |       |   |   |   |   |   |   |   |   |
| Gathering systems throughput (Mcf/d)            |       | 375,000                                             |       | 323,000                                           |       | 16.1 | % | 360,000 |   | 305,000 |   | 18.0 | % |
| NGL product sales (gallons)                     |       | 40,461,000                                          |       | 26,222,000                                        |       | 54.3 | % | 75,897,000 |   | 50,596,000 |   | 50.0 | % |
|                                            |       |                                                |       |                                              |       |   |   |   |   |   |   |   |   |
| ***Oklahoma***                                  |       |                                                |       |                                              |       |   |   |   |   |   |   |   |   |
| Foss Lake gathering systems throughput  (Mcf/d) |       | 84,500                                              |       | 70,000                                            |       | 20.7 | % | 86,100 |   | 69,000 |   | 24.8 | % |
| Arapaho NGL product sales (gallons)             |       | 19,615,000                                          |       | 16,457,000                                        |       | 19.2 | % | 38,032,000 |   | 31,674,000 |   | 20.1 | % |
|                                            |       |                                                |       |                                              |       |   |   |   |   |   |   |   |   |
| ***Other Southwest*(4)**                        |       |                                                |       |                                              |       |   |   |   |   |   |   |   |   |
| Appleby gathering systems throughput  (Mcf/d)   |       | 33,600                                              |       | 32,000                                            |       | 5.0 | % | 33,600 |   | 30,000 |   | 12.0 | % |
| Other gathering systems throughput (Mcf/d)      |       | 21,900                                              |       | 16,000                                            |       | 36.9 | % | 20,500 |   | 17,000 |   | 20.6 | % |
| Lateral throughput volumes (Mcf/d)              |       | 93,600                                              |       | 91,000                                            |       | 2.9 | % | 71,500 |   | 72,000 |   | (0.7 | )% |
|                                            |       |                                                |       |                                              |       |   |   |   |   |   |   |   |   |
| ***Appalachia*(5)**                             |       |                                                |       |                                              |       |   |   |   |   |   |   |   |   |
| Natural gas processed for a fee (Mcf/d)         |       | 197,000                                             |       | 192,000                                           |       | 2.6 | % | 201,000 |   | 200,000 |   | 0.5 | % |
| NGLs fractionated for a fee (Gal/day)           |       | 450,000                                             |       | 421,000                                           |       | 6.9 | % | 450,000 |   | 441,000 |   | 2.0 | % |
| NGL product sales (gallons)                     |       | 10,468,000                                          |       | 10,154,000                                        |       | 3.1 | % | 20,951,000 |   | 20,919,000 |   | 0.2 | % |
|                                            |       |                                                |       |                                              |       |   |   |   |   |   |   |   |   |
| ***Michigan***                                  |       |                                                |       |                                              |       |   |   |   |   |   |   |   |   |
| Natural gas processed for a fee (Mcf/d)         |       | 5,800                                               |       | 6,800                                             |       | (14.7 | )% | 5,200 |   | 6,900 |   | (24.6 | )% |
| NGL product sales (gallons)                     |       | 1,394,000                                           |       | 1,493,000                                         |       | (6.6 | )% | 2,843,000 |   | 3,056,000 |   | (7.0 | )% |
| Crude oil transported for a fee (Bbl/d)         |       | 14,900                                              |       | 14,200                                            |       | 4.9 | % | 14,600 |   | 14,200 |   | 2.8 | % |
|                                            |       |                                                |       |                                              |       |   |   |   |   |   |   |   |   |
| ***Gulf Coast*(6)**                             |       |                                                |       |                                              |       |   |   |   |   |   |   |   |   |
| Natural gas processed for a fee (Mcf/d)         |       | 130,000                                             |       | NA                                                |       | NA |   | 125,000 |   | NA |   | NA |   |
| NGLs fractionated for a fee (Gal/day)           |       | 1,1128,000                                          |       | NA                                                |       | NA |   | 1,086,000 |   | NA |   | NA |   |

 

----

(1)   Represents sales at the Siloamfractionator.

(2)   Represents sales from our wholesale business.

(3)   MarkWestEnergy Partners acquired the East Texas System in late July 2004.

(4)   MarkWestEnergy Partners acquired the Lubbock pipeline (a/k/a the Power-tex LateralPipeline) in September 2003 and the Hobbs lateral pipeline inApril 2004. The Lubbock and Hobbs pipelines are the only laterals thePartnership own that produce revenue on a per-unit-of-throughput basis.MarkWest Energy Partners receive a flat fee from our other lateral pipelinesand, consequently, the throughput data from these lateral pipelines is excludedfrom this statistic.

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

(6)   MarkWestEnergy Partners acquired the Javelina system (Gulf Coast) on November 1, 2005.

 

31

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***FinancialResults***

 

Management evaluates performance on the basisof net operating margin (a “non-GAAP” financial measure), which is defined asincome (loss) from operations, excluding facility cost, selling, general andadministrative expense, depreciation, amortization, impairments and accretionof asset retirement. These charges have been excluded for the purpose ofenhancing the understanding by both management and investors of the underlyingbaseline operating performance of our contractual arrangements, whichmanagement uses to evaluate our financial performance for purposes of planningand forecasting. Net operating margin does not have any standardized definitionand therefore is unlikely to be comparable to similar measures presented by otherreporting companies. Net operating margin results should not be evaluated inisolation of, or as a substitute for our financial results prepared inaccordance with United States GAAP. Our usage of net operating margin and theunderlying methodology in excluding certain charges is not necessarily anindication of the results of operations expected in the future, or that we willnot, in fact, incur such charges in future periods.

 

The following reconcilesthis non-GAAP financial measure to the most comparable GAAP financial measurefor the three and six months ended June 30, 2006 and 2005:

 
| ** **                                                                                               | ** ** | **MarkWest  Hydrocarbon  Standalone** | ** ** | **MarkWest  Energy  Partners** | ** ** | **Consolidating  Entries** | ** ** | **Total**  | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------|------------|----------------------------|------------|------------|------------|
| **Three months ended June 30, 2006 (in  thousands):**                                                    | ** ** | ** **                            | ** ** | ** **                     | ** ** | ** **                 | ** ** | ** ** | ** ** |
| Revenues:                                                                                                | ** ** | ** **                            | ** ** | ** **                     | ** ** | ** **                 | ** ** | ** ** | ** ** |
| Revenue                                                                                                  |       | $                                     | 62,189     |                           | $          | 142,280                    |       | $          | (17,879    | ) | $ | 186,590 |   |
| Derivatives                                                                                              |       | (6,156                                | )          | (6,901                         | )          | —                     |       | (13,057    | )          |
| Total revenue                                                                                            |       | 56,033                                |       | 135,379                        |       | (17,879                    | )          | 173,533    |       |
|                                                                                                     |       |                                  |       |                           |       |                       |       |       |       |
| Purchased product costs                                                                                  |       | 52,606                                |       | 76,178                         |       | (11,926                    | )          | 116,858    |       |
| Net operating margin                                                                                     |       | 3,427                                 |       | 59,201                         |       | (5,953                     | )          | 56,675     |       |
|                                                                                                     |       |                                  |       |                           |       |                       |       |       |       |
| Operating expenses:                                                                                      |       |                                  |       |                           |       |                       |       |       |       |
| Facility expenses                                                                                        |       | 4,705                                 |       | 15,465                         |       | (5,953                     | )          | 14,217     |       |
| Selling, general and administrative  expenses                                                            |       | 4,073                                 |       | 8,988                          |       | —                     |       | 13,061     |       |
| Depreciation                                                                                             |       | 394                                   |       | 7,384                          |       | —                     |       | 7,778      |       |
| Amortization of intangible assets                                                                        |       | —                                |       | 4,027                          |       | —                     |       | 4,027      |       |
| Accretion of asset retirement and lease  obligations                                                     |       | —                                |       | 26                             |       | —                     |       | 26         |       |
| Operating income (loss)                                                                                  |       | (5,745                                | )          | 23,311                         |       | —                     |       | 17,566     |       |
|                                                                                                     |       |                                  |       |                           |       |                       |       |       |       |
| Other income (expense):                                                                                  |       |                                  |       |                           |       |                       |       |       |       |
| Equity in earnings in unconsolidated  affiliates                                                         |       | —                                |       | 1,228                          |       | —                     |       | 1,228      |       |
| Interest income                                                                                          |       | 177                                   |       | 259                            |       | —                     |       | 436        |       |
| Interest expense                                                                                         |       | (84                                   | )          | (10,714                        | )          | —                     |       | (10,798    | )          |
| Amortization of deferred financing costs (a  component of interest expense)                              |       | (33                                   | )          | (826                           | )          | —                     |       | (859       | )          |
| Dividend income                                                                                          |       | 109                                   |       | —                         |       | —                     |       | 109        |       |
| Miscellaneous income                                                                                     |       | 2                                     |       | 1,515                          |       | —                     |       | 1,517      |       |
| Income (loss) before non-controlling  interest in net income of consolidated subsidiary and income taxes |       | (5,574                                | )          | 14,773                         |       | —                     |       | 9,199      |       |
| Income tax (expense) benefit                                                                             |       | 78                                    |       | (679                           | )          | 543                        |       | (58        | )          |
| Non-controlling interest in net income of  consolidated subsidiary                                       |       | —                                |       | —                         |       | (11,273                    | )          | (11,273    | )          |
| Net income (loss)                                                                                        |       | $                                     | (5,496     | )                              | $          | 14,094                     |       | $          | (10,730    | ) | $ | (2,132 | ) |

 

32

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| ** **                                                                                               | ** ** | **MarkWest  Hydrocarbon  Standalone** | ** ** | **MarkWest  Energy  Partners** | ** ** | **Consolidating  Entries** | ** ** | **Total**  | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------|------------|----------------------------|------------|------------|------------|
| **Three months ended June 30, 2005 (in  thousands):**                                                    | ** ** | ** **                            | ** ** | ** **                     | ** ** | ** **                 | ** ** | ** ** | ** ** |
| Revenues:                                                                                                | ** ** | ** **                            | ** ** | ** **                     | ** ** | ** **                 | ** ** | ** ** | ** ** |
| Revenue                                                                                                  |       | $                                     | 52,786     |                           | $          | 103,200                    |       | $          | (14,706    | ) | $ | 141,280 |   |
| Derivatives                                                                                              |       | —                                |       | (240                           | )          | —                     |       | (240       | )          |
| Total revenue                                                                                            |       | 52,786                                |       | 102,960                        |       | (14,706                    | )          | 141,040    |       |
|                                                                                                     |       |                                  |       |                           |       |                       |       |       |       |
| Purchased product costs                                                                                  |       | 47,729                                |       | 73,862                         |       | (9,237                     | )          | 112,354    |       |
| Net operating margin                                                                                     |       | 5,057                                 |       | 29,098                         |       | (5,469                     | )          | 28,686     |       |
|                                                                                                     |       |                                  |       |                           |       |                       |       |       |       |
| Operating expenses:                                                                                      |       |                                  |       |                           |       |                       |       |       |       |
| 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 lease  obligations                                                     |       | 2                                     |       | 9                              |       | —                     |       | 11         |       |
| Operating income (loss)                                                                                  |       | (3,272                                | )          | 4,747                          |       | —                     |       | 1,475      |       |
|                                                                                                     |       |                                  |       |                           |       |                       |       |       |       |
| Other income (expense):                                                                                  |       |                                  |       | —                         |       | —                     |       |       |       |
| Equity in earnings in unconsolidated  affiliates                                                         |       | (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         |       |
| Miscellaneous income                                                                                     |       | 222                                   |       | (74                            | )          | —                     |       | 148        |       |
| Income (loss) before non-controlling  interest in net income of consolidated subsidiary and income taxes |       | (2,788                                | )          | 671                            |       | —                     |       | (2,117     | )          |
| Income tax benefit                                                                                       |       | 802                                   |       | —                         |       | —                     |       | 802        |       |
| Non-controlling interest in net income of  consolidated subsidiary                                       |       | —                                |       | —                         |       | (294                       | )          | (294       | )          |
| Net income (loss)                                                                                        |       | $                                     | (1,986     | )                              | $          | 671                        |       | $          | (294       | ) | $ | (1,609 | ) |

 

***MarkWest Hydrocarbon Standalone***

 

*Revenues.*Revenuesincreased $3.2 million, or 6%, for the three months ended June 30, 2006,compared to the corresponding quarter of 2005. This was due in part to a $2.4million increase in our wholesale NGL revenues; driven by a $0.22 per gallonprice increase and a volume increase of nearly 9,000 Gal/d. Our frac spread NGLrevenues increased by $5.8 million due primarily to an increase in prices of$0.29 per gallon, partially offset by reduced volumes of 24,000 Gal/d. Therevaluation of our long-term shrink obligation increased revenue by $1.6million in the three months ended June 30, 2006, compared to a $0.4 millionincrease in 2005, resulting in a $1.2 million positive impact to theperiod-over-period comparison.

 

*Derivatives:*  Loss from derivatives, a component ofrevenue, increased $6.2 million for the three months ended June 30, 2006,compared to the corresponding quarter of 2005. This was due to increased use ofderivative instruments for which, consistent with previous announcements, wehave not elected to adopt hedge accounting treatment.

 

*Purchased ProductCosts.* Purchased product costs increased $4.9 million,or 10%, for the three months ended June 30, 2006, compared to the correspondingquarter of 2005. The increase was due to a $2.2 million increase in ourwholesale business that was driven by volumes increasing in 2006 by nearly9,000 Gal/d and increased prices of $0.21 per gallon. Our frac spread purchasecosts increased by $2.1 million due to price increases of $0.07 per gallon,offset by slightly lower volumes.

 

*Facility Expenses.*Facilityexpenses decreased by approximately $0.4 million, or 8%, during the threemonths ended June 30, 2006, compared to corresponding quarter of 2005. Facilityexpense decreased primarily to increased fuel reimbursements.

 

*Selling, General and Administrative Expenses.*Selling,general and administrative expenses increased by $1.3 million, or 45%, duringthe three months ended June 30, 2006, compared to the same period in 2005. Thisincrease was primarily due to a $0.3 million increase to the participation plancompensation expense and higher labor and benefit costs due to increased headcount costs needed to manage the new acquisitions of the Partnership.

 

33

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*Depreciation.*Depreciation expense decreasedby less than $0.1 million, or 6%, during the three months ended June 30, 2006,compared to the corresponding quarter of 2005, due to certain fixed assetsbecoming fully depreciated in 2005.

 

*Income taxes.*Income tax expense decreased by$0.7 million, or 90%, due to the increase in losses in the three months endedJune 30, 2006, compared to the corresponding quarter of 2005. The change in theannual effective tax rate reflects the new Texas margin tax, which is offset bythe utilization of various state net operating losses (“NOL”) and thecorresponding change in the state NOL valuation allowance.  The Companybelieves, however, that it is more likely than not that the state NOLs will notbe fully realized and continues to maintain a valuation allowance againstthis long-term deferred tax asset.

 

***MarkWest Energy Partners***

 

*Revenues.*Revenues for the three months ended June 30, 2006, increased by $32.2 million,or 31%, compared to the corresponding quarter of 2005, due to the Partnership’sJavelina acquisition in November 2005, which contributed $18.9 million, as wellas increased volumes and prices resulting in revenue increases in East Texas of$12.5 million.

 

*Derivatives:*  Loss from derivatives, a component of revenuenot allocated to segments, increased $6.7 million, or 2,775%, due to increaseduse of derivative instruments for which, consistent with previousannouncements, we have not elected to adopt hedge accounting treatment. $6.4million of the 2006 loss was from mark-to-market, which is a non-cash chargethat does not impact distributable cash flow.

 

*Purchased Product Costs.*Purchased product costs increased during thethree months ended June 30, 2006, by $2.3 million, or 3%, compared to thecorresponding quarter of 2005. This increase was primarily due to $3.6 millionin costs related to the new Carthage facility in East Texas and $1.7 million inexpense in Appalachia driven by an increase in both volumes and prices. Thisincrease was partially offset by decreases in facility expenses in Oklahoma andOther Southwest of $1.8 and $1.2 million, respectively.

 

*Facility Expenses.*Facility expenses increased approximately $4.1 million, or 36%, duringthe three months ended June 30, 2006, compared to the corresponding quarter of2005, primarily due to the Partnership’s November 2005 Javelina Acquisition,which contributed $3.2 million, and $1.5 million related to the new Carthagefacility in East Texas, which started operations on January 1, 2006.

 

*Selling, General and Administrative Expenses.*Selling, general and administrative expenses increased$2.7 million, or 42%, during the three months ended June 30, 2006, relative tothe comparable period in 2005. The increase is due to a one-time charge toterminate the old headquarters lease, $0.9 million; higher non-cash,equity-based compensation expense, $0.6 million, primarily due to thePartnership’s increased market value; labor costs related to additional personnelto support our growth and strategic objectives, $1.5 million; and higherinsurance premiums, $0.7 million. These increases were offset by a decrease inprofessional fees, $0.9 million, due primarily to the majority of our auditwork being completed in the first quarter of 2006, compared to extended timingin 2005.

 

*Equity in Earningsfrom Unconsolidated Affiliates.*Equity in earningsfrom unconsolidated affiliates during the three months ended June 30, 2006,relative to the comparable period in 2005, increased $0.2 million, or 24%, dueto Starfish adding a lateral pipeline during the quarter, but offset byHurricane Rita repairs.

 

*InterestExpense and Amortization of Deferred Financing Costs (a component of interestexpense). *Interest expense increased by $6.5 million,or 128%, during the three months ended June 30, 2006, compared to 2005,primarily as a result of the additional debt related to the Starfish andJavelina acquisitions.

 

*Texasmargin Tax*.  Texas passed a Texas margin tax law thatcauses the Partnership to be subject to an entity-level tax on the portion ofour income that is generated in Texas.  We recorded a deferred taxliability of $0.7 million, related to the Partnership’s temporary differencesthat are expected to reverse in future periods. $0.5 million was allocated tominority interest.

 

The followingincludes reconciliation to the most comparable GAAP financial measure of thisnon-GAAP financial measure for the six months ended June 30, 2006 (inthousands):

 

34

----

 
| ** **                                                                                               | ** ** | **MarkWest  Hydrocarbon  Standalone** | ** ** | **MarkWest  Energy  Partners** | ** ** | **Consolidating  Entries** | ** ** | **Total**  | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------|------------|----------------------------|------------|------------|------------|
| **Six months ended June 30, 2006 (in  thousands):**                                                      | ** ** | ** **                            | ** ** | ** **                     | ** ** | ** **                 | ** ** | ** ** | ** ** |
| Revenues:                                                                                                | ** ** | ** **                            | ** ** | ** **                     | ** ** | ** **                 | ** ** | ** ** | ** ** |
| Revenue                                                                                                  |       | $                                     | 164,281    |                           | $          | 298,783                    |       | $          | (35,594    | ) | $ | 427,470 |   |
| Derivatives                                                                                              |       | (7,655                                | )          | (6,661                         | )          | —                     |       | (14,316    | )          |
| Total revenue                                                                                            |       | 156,626                               |       | 292,122                        |       | (35,594                    | )          | 413,154    |       |
|                                                                                                     |       |                                  |       |                           |       |                       |       |       |       |
| Purchased product costs                                                                                  |       | 144,631                               |       | 176,975                        |       | (23,581                    | )          | 298,025    |       |
| Net operating margin                                                                                     |       | 11,995                                |       | 115,147                        |       | (12,013                    | )          | 115,129    |       |
|                                                                                                     |       |                                  |       |                           |       |                       |       |       |       |
| Operating expenses:                                                                                      |       |                                  |       |                           |       |                       |       |       |       |
| Facility expenses                                                                                        |       | 10,475                                |       | 29,459                         |       | (12,013                    | )          | 27,921     |       |
| Selling, general and administrative  expenses                                                            |       | 7,111                                 |       | 17,326                         |       | —                     |       | 24,437     |       |
| Depreciation                                                                                             |       | 599                                   |       | 14,557                         |       | —                     |       | 15,156     |       |
| Amortization of intangible assets                                                                        |       | —                                |       | 8,043                          |       | —                     |       | 8,043      |       |
| Accretion of asset retirement and lease  obligations                                                     |       | —                                |       | 51                             |       | —                     |       | 51         |       |
| Operating income (loss)                                                                                  |       | (6,190                                | )          | 45,711                         |       | —                     |       | 39,521     |       |
|                                                                                                     |       |                                  |       |                           |       |                       |       |       |       |
| Other income (expense):                                                                                  |       |                                  |       |                           |       |                       |       |       |       |
| Equity in earnings in unconsolidated  affiliates                                                         |       | —                                |       | 2,173                          |       | —                     |       | 2,173      |       |
| Interest income                                                                                          |       | 363                                   |       | 479                            |       | —                     |       | 842        |       |
| Interest expense                                                                                         |       | (152                                  | )          | (21,690                        | )          | —                     |       | (21,842    | )          |
| Amortization of deferred financing costs (a  component of interest expense)                              |       | (50                                   | )          | (1,634                         | )          | —                     |       | (1,684     | )          |
| Dividend income                                                                                          |       | 215                                   |       | —                         |       | —                     |       | 215        |       |
| Miscellaneous income                                                                                     |       | 152                                   |       | 3,607                          |       | —                     |       | 3,759      |       |
| Income (loss) before non-controlling  interest in net income of consolidated subsidiary and income taxes |       | (5,662                                | )          | 28,646                         |       | —                     |       | 22,984     |       |
| Income tax (expense) benefit                                                                             |       | (331                                  | )          | (679                           | )          | 543                        |       | (467       | )          |
| Non-controlling interest in net income of  consolidated subsidiary                                       |       | —                                |       | —                         |       | (21,817                    | )          | (21,817    | )          |
| Net income (loss)                                                                                        |       | $                                     | (5,993     | )                              | $          | 27,967                     |       | $          | (21,274    | ) | $ | 700 |   |

 
| ** **                                                                                               | ** ** | **MarkWest  Hydrocarbon  Standalone** | ** ** | **MarkWest  Energy  Partners** | ** ** | **Consolidating  Entries** | ** ** | **Total**  | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------|------------|----------------------------|------------|------------|------------|
| **Six months ended June 30, 2005 (in  thousands):**                                                      | ** ** | ** **                            | ** ** | ** **                     | ** ** | ** **                 | ** ** | ** ** | ** ** |
| Revenues:                                                                                                | ** ** | ** **                            | ** ** | ** **                     | ** ** | ** **                 | ** ** | ** ** | ** ** |
| Revenue                                                                                                  |       | $                                     | 117,307    |                           | $          | 192,744                    |       | $          | (30,511    | ) | $ | 279,540 |   |
| Derivatives                                                                                              |       | —                                |       | (147                           | )          | —                     |       | (147       | )          |
| Total revenue                                                                                            |       | 117,307                               |       | 192,597                        |       | (30,511                    | )          | 279,393    |       |
|                                                                                                     |       |                                  |       |                           |       |                       |       |       |       |
| Purchased product costs                                                                                  |       | 101,550                               |       | 134,647                        |       | (19,144                    | )          | 217,053    |       |
| Net operating margin                                                                                     |       | 15,757                                |       | 57,950                         |       | (11,367                    | )          | 62,340     |       |
|                                                                                                     |       |                                  |       |                           |       |                       |       |       |       |
| Operating expenses:                                                                                      |       |                                  |       |                           |       |                       |       |       |       |
| 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 lease  obligations                                                     |       | 2                                     |       | 19                             |       | —                     |       | 21         |       |
| Operating income (loss)                                                                                  |       | (2,277                                | )          | 13,198                         |       | —                     |       | 10,921     |       |
|                                                                                                     |       |                                  |       |                           |       |                       |       |       |       |
| Other income (expense):                                                                                  |       |                                  |       |                           |       |                       |       |       |       |
| Equity in earnings in unconsolidated  affiliates                                                         |       | —                                |       | 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        |       |
| Miscellaneous income                                                                                     |       | 413                                   |       | (178                           | )          | —                     |       | 235        |       |
| Income (loss) before non-controlling  interest in net income of consolidated subsidiary and income taxes |       | (1,419                                | )          | 4,936                          |       | —                     |       | 3,517      |       |
| Income tax benefit                                                                                       |       | 32                                    |       | —                         |       | —                     |       | 32         |       |
| Non-controlling interest in net income of  consolidated subsidiary                                       |       | —                                |       | —                         |       | (3,619                     | )          | (3,619     | )          |
| Net income (loss)                                                                                        |       | $                                     | (1,387     | )                              | $          | 4,936                      |       | $          | (3,619     | ) | $ | (70 | ) |

 

35

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***MarkWest Hydrocarbon Standalone***

 

*Revenues.*Revenuesincreased $39.3 million, or 34%, for the six months ended June 30, 2006,compared to the corresponding period of 2005. This was due in part to a $13.1million increase in our wholesale NGL revenues, driven by a $0.17 per gallonprice increase and a volume increase of nearly 46,000 Gal/d. Our frac spreadNGL revenues improved by $12.2 million, due primarily to an increase in pricesof $0.23 per gallon, partially offset by reduced volumes of 20,000 Gal/d. Wealso realized a $15.0 million increase in our gas marketing business dueprimarily to increases in both prices and volumes. The revaluation of ourlong-term shrink obligation increased revenue by $5.7 million in the sixmonths ended June 30, 2006, compared to a $0.8 million decrease in 2005,resulting in a $6.5 million positive impact to the period-over-periodcomparison.

 

*Derivatives:*  Loss from derivatives, a component ofrevenue, increased $7.7 million for the six months ended June 30, 2006,compared to the corresponding period of 2005. This was due to increased use ofderivative instruments for which, consistent with previous announcements, wehave not elected to adopt hedge accounting treatment.

 

*Purchased Product Costs.*Purchasedproduct costs increased $43.1 million, or 42%, for the six months ended June30, 2006, compared to the corresponding period of 2005. The increase was due toa $13.0 million increase in our wholesale business, driven by volumesincreasing by nearly 46,000 Gal/d and increased prices of $0.10 per gallon. Ourfrac spread purchase costs increased by $16.0 million due to price increases of$0.27 per gallon, partially offset by reduced volumes of 20,000 Gal/d. Ournatural gas marketing business had an increase of $14.1 million, due primarilyto increases in both prices and volumes.

 

*Facility Expenses.*Facilityexpenses decreased by approximately $0.4 million, or 4%, during the six monthsended June 30, 2006, compared to corresponding quarter of 2005. The primaryreason for the decrease was due to inventory gains. These were partially offsetby increased Siloam storage fees, higher Kenova, Boldman and Cobb plantprocessing fees, and increased ALPS transportation fees of $0.4 million.

 

*Selling, General and Administrative Expenses.*Selling,general and administrative expenses increased by $0.8 million, or 13%, duringthe six months ended June 30, 2006, compared to the same period in 2005. Thisincrease was due primarily to a $0.4 million increase to the participation plancompensation expense.

 

*Depreciation.*Depreciationexpense decreased by $0.2 million, or 28%, during the six months ended June 30,2006, compared to the corresponding period of 2005 due to certain fixed assetsbecoming fully depreciated in 2005.

 

*Income taxes.*Incometax expense increased by $0.4 million, or 1134%, due to the increase in lossesin the six months ended June 30, 2006, compared to the corresponding period of2005. The change in the annual effective tax rate reflects the new Texas marginTax, which is offset by the utilization of various state net operating losses (“NOL”)and the corresponding change in the state NOL valuation allowance.  TheCompany believes, however, that it is more likely than not that the state NOLswill not be fully realized and continues to maintain a valuation allowanceagainst this long-term deferred tax asset.

 

***MarkWest Energy Partners***

 

*Revenues.*Revenues for the six months ended June 30, 2006, increased by $99.5million, or 52%, compared to the corresponding period of 2005, due to thePartnership’s Javelina acquisition in November 2005, which contributed $33.9million, as well as increased volumes and prices resulting in revenue increasein Oklahoma of $29.5 million, in East Texas of $30.2 million and in Appalachiaof $5.1 million.

 

*Derivatives:*  Loss from derivatives for the six monthsended June 30, 2006 increased $6.5 million due to increased use of derivativeinstruments for which, consistent with previous announcements, we have notelected to adopt hedge accounting treatment.

 

36

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*Purchased Product Costs.* Purchased product costs increased during thesix months ended June 30, 2006, by $42.3 million, or 31%, compared to thecorresponding quarter of 2005. This increase was primarily due to $13.2 millionin costs related to the new Carthage facility in East Texas and increasedexpenses in Oklahoma and Other Southwest of $21.0 and $5.5 million,respectively.

 

*Facility Expenses.*Facility expenses increased approximately $8.8 million, or 42%, duringthe six months ended June 30, 2006, compared to the corresponding quarter of2005, primarily due to the Partnership’s November 2005 Javelina acquisition,which contributed $5.1 million; and $2.9 million related to the new Carthagefacility in East Texas, which started operations on January 1, 2006.

 

*Selling, General and Administrative Expenses.*Selling, general and administrative expenses increased$6.4 million, or 58%, during the six months ended June 30, 2006, relative tothe comparable period in 2005. The increase is primarily due to a one-timecharge to terminate the old headquarters lease, $0.9 million; higher non-cash,equity-based compensation expense, $0.9 million, primarily due to thePartnership’s increased market value; labor costs related to additionalpersonnel to support our growth and strategic objectives, $1.2 million; higherinsurance premiums, $2.2 million; and professional services, $0.4 million.

 

*Equity in Earningsfrom Unconsolidated Affiliates. E*arnings from unconsolidatedaffiliates during the six months ended June 30, 2006, increased $1.2 million,or 119%, relative to the comparable period in 2005. The increase was primarilybecause our 2006 results included Starfish for six months, compared to justthree months in 2005, $0.9 million.

 

*Interest Expense andAmortization of Deferred Financing Costs (a component of interestexpense). *Interest expense increased by $14.1million, or 153%, during the six months ended June 30, 2006, compared to 2005,primarily as a result of the additional debt related to the Starfish andJavelina acquisitions.

 

*Texas margin Tax*. Texas passed a Texas margin tax law that causes the Partnership to be subjectto an entity-level tax on the portion of our income that is generated inTexas.  We recorded a deferred tax liability of $0.7 million, related tothe Partnership’s temporary differences that are expected to reverse in futureperiods. $0.5 million was allocated to minority interest.

 

**Liquidity and Capital Resources**

 

*MarkWest Hydrocarbon Standalone*

 

Our primary source of liquidity, to meet operating expenses and fundcapital expenditures, is cash flow from operations, principally from themarketing of NGLs, and quarterly distributions received from MarkWest EnergyPartners.  Based on current volume, price and expense assumptions, weexpect cash flow from operations and distributions from the Partnership to fundour operations and capital expenditures in 2006.  Most of our futurecapital expenditures are discretionary.

 

We own 89% of the general partner of MarkWest Energy Partners,excluding interests held by certain employees and directors, but deemed ownedby the Company through the Participation Plan.  The general partner ofMarkWest Energy Partners owns the 2% general partner interest and all of theincentive distribution rights.  The incentive distribution rights entitleus to receive an increasing percentage of cash distributed by the Partnershipas certain target distribution levels are reached.  Specifically, theyentitle us to receive 13% of all cash distributed in a quarter after each unithas received $0.55 for that quarter; 23% of all cash distributed after eachunit has received $0.625 for that quarter; and 48% of all cash distributedafter each unit has received $0.75 for that quarter.  For the six monthsended June 30, 2006, we received $4.2 million in distributions from our limitedunits, and $3.7 million from our general partner interest, of which $3.6million represented payments on incentive distribution rights.

 

Cash flows generated from our NGL marketing and natural gas supplyoperations are subject to volatility in energy prices, especially prices forNGLs and natural gas.  Our cash flows are enhanced in periods when theprices received for NGLs are high relative to the price of natural gas wepurchase to satisfy our “keep-whole” contractual arrangements inAppalachia.  Conversely, they are reduced in periods when the pricesreceived for NGLs are low relative to the price of natural gas we purchase tosatisfy such contractual arrangements.  Under “keep-whole” contracts, weretain and sell the NGLs produced in our processing operations for third-partyproducers, and then reimburse or “keep-whole” the producers for the energycontent of the NGLs removed through the re-delivery to the producers of anequivalent amount (on a Btu basis) of dry natural gas.  Generally, thevalue of the NGLs extracted is greater than the cost of replacing those Btuswith dry gas, resulting in positive operating margins under these contracts. Periodically, natural gas becomes more expensive, on a Btu equivalent basis,than NGL products, and the cost of keeping the producer “whole” can result inoperating losses.

 

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*Debt*

 

In October 2004, the Company entered into a $25.0 million senior creditfacility with a term of one year.  The $25.0 million revolving facilityhas a variable interest rate based on the base rate or the London Inter BankOffering Rate (“LIBOR”), as discussed below.  In October, November, andDecember 2005, the Company entered into the first, second and third amendmentto the credit agreement.  The first amendment extended the term of theoriginal 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.  The second amendment also extended theterm of the revolving credit to December 30, 2005.  The third amendmentextended the term of the revolving credit to January 31, 2006, and reduced thelending amount from $16.0 million to $13.5 million, of which $6.0 million ofavailability is committed to a letter of credit, leaving $7.5 million availablefor revolving loans. On January 31, 2006, the Company entered into the firstamended and restated credit agreement which reinstated the maximum lendinglimit of $25.0 million for a one year term.

 

The credit facility bears interest at a variable interest rate, plusbasis points. The variable interest rate is typically based on LIBOR; however,in certain borrowing circumstances the rate would be based on the higher of a)the Federal Funds Rate plus 0.5-1%, and b) a rate set by the Facility’sadministrative agent, based on the U.S. prime rate. The basis points correspondto the ratio of the Revolver Facility Usage (as defined in the Company CreditFacility) to the Borrowing Base (as defined in the Company Credit Facility),ranging from 0.75% to 1.75% for Base Rate loans, and 1.75% to 2.75% forEurodollar Rate loans. The Company pays a quarterly commitment fee on theunused portion of the credit facility at an annual rate of 50.0 basis points.

 

Under the provisions of the credit facility, the Company is subject toa number of restrictions on its business, including restrictions on its abilityto grant liens on assets; make or own certain investments; enter into any swapcontracts other than in the ordinary course of business; merge, consolidate orsell assets; incur indebtedness (other than subordinated indebtedness); makedistributions on equity investments; declare or make, directly or indirectly,any restricted distributions.

 

At June 30, 2006, we had no debt outstanding on the Company CreditFacility and $19.0 million available for borrowing.

 

We spent $0.3 million for capital expenditures for the year endingDecember 31, 2005.  We have budgeted $0.8 million for 2006 consistingprincipally of computer hardware and software.  We believe that cash onhand, 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 foreseeable future.  Cash generated from our marketing operations willdepend on our operating performance, which will be affected by prevailingcommodity prices and other factors, some of which are beyond our control.

 

*MarkWest Energy Partners*

 

The Partnership’s primary source ofliquidity, to meet operating expenses and fund capital expenditures (other thanfor certain acquisitions), are cash flows generated by its operations and itsaccess to equity and debt markets. The equity and debt markets, public andprivate, retail and institutional, have been the Partnership’s principal sourceof capital used to finance a significant amount of its growth, includingacquisitions.

 

On December 29, 2005, MarkWest Energy Operating Company, L.L.C., awholly owned subsidiary of MarkWest Energy Partners L.P., entered into thefifth amended and restated credit agreement (“Partnership Credit Facility”). Itprovides for a maximum lending limit of $615.0 million for a five-year term.The credit facility includes a revolving facility of $250.0 million and a$365.0 million term loan, which can be repaid at any time without penalty.Under certain circumstances, the Partnership Credit Facility can be increasedfrom $250 million up to $450 million. 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 its subsidiaries.The borrowings under the credit facility bear interest at a variable interestrate, plus basis points. The variable interest rate typically is based on theLondon Inter Bank Offering Rate (“LIBOR”); however, in certain borrowingcircumstances the rate would be based on the higher of a) the Federal FundsRate plus 0.5-1%, and b) a rate set by the Facility’s administrative agent,based on the U.S. prime rate. The basis points correspond to the ratio of thePartnership’s Consolidated Senior Debt (as defined in the Partnership CreditFacility) to Consolidated EBITDA (as defined in the Partnership CreditFacility), ranging from 0.50% to 1.50% for Base Rate loans, and 1.50% to 2.50%for Eurodollar Rate loans. The basis points will increase by 0.50% during anyperiod (not to exceed 270 days) where the Partnership makes an acquisition fora purchase price in excess of $50.0 million (“Acquisition Adjustment Period”).Borrowings under the Partnership Credit Facility were used to finance, in part,the Javelina acquisition discussed above. On June 30, 2006, the availableborrowing capacity under the Partnership Credit Facility was $243.7 million.

 

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Cash generated from operations, borrowings under the Partnership CreditFacility and funds from the Partnership’s private and public equity offeringsare its primary sources of liquidity. The timing of the Partnerships efforts toraise equity in the future, however, will be influenced by its failure to filein a timely manner its Annual Report on Form 10-K for the year endedDecember 31, 2004, and its quarterly report on Form 10-Q for thequarter ending March 31, 2005. In order to raise capital through a publicoffering with the SEC, they will not have the ability to incorporate byreference information from its future filings into a new registration statementuntil October 11, 2006. To raise additional capital through public debt orequity offerings, the Partnership is required to file a Form S-1, which isa long-form type of registration statement.

 

At June 30, 2006, the Partnership and itssubsidiary, MarkWest Energy Finance Corporation, also have $225.0 million insenior notes outstanding, at a fixed rate of 6.875%. The notes mature onNovember 2, 2014. Subject to compliance with certain covenants, thePartnership may issue additional notes from time to time under theindenture pursuant to Rule 144A and Regulation S under the Securities Actof 1933.

 

The indenture governing the 2014 senior notes limits the activity ofthe Partnership and its restricted subsidiaries. The provisions of such indentureplace limits on the ability of the Partnership and its restricted subsidiariesto incur additional indebtedness; declare or pay dividends or distributions orredeem, repurchase or retire equity interests or subordinated indebtedness;make investments; incur liens; create any consensual limitation on the abilityof the Partnership’s restricted subsidiaries to pay dividends, make loans ortransfer property to the Partnership; engage in transactions with thePartnership’s affiliates; sell assets, including equity interests of thePartnership’s subsidiaries; make any payment on or with respect to, orpurchase, redeem, defease or otherwise acquire or retire for value anysubordinated obligation or guarantor subordination obligation (except principaland interest at maturity); and consolidate, merge or transfer assets.

 

On July 6, 2006, the Partnership completed its underwritten publicoffering of 3.0 million common units (the “Common Unit Offering”) at apublic offering price of $39.75 per common unit. In addition, on July 12, 2006,the Partnership completed the sale of an additional 300,000 common units tocover over-allotments in connection with the Common Unit Offering. The sale ofunits resulted in total gross proceeds of $131.2 million, and net proceedsof $127.3 million, after the underwriters’ commission and legal,accounting and other transaction expenses. The Partnership intends to use thenet proceeds from the offering, which includes a capital contribution from itsgeneral partner to maintain its 2% general partner interest in the Partnership,to repay a portion of the term debt under the Partnership Credit Facility.

 

On July 6, 2006, the “Partnership and its subsidiary, MarkWestEnergy Finance Corporation issued $200,000,000 in aggregate principal amount of8 1⁄2 % senior notes due 2016 (the “2016 Senior Notes”).

 

The 2016 Senior Notes will mature on July 15, 2016, and interestis payable each July 15 and January 15, commencing January 15,2007. The Partnership closed this private placement on July 6, 2006. The netproceeds from the private placement were approximately $191.2 million, afterdeducting the initial purchasers’ discounts and legal, accounting and othertransaction expenses. The Partnership intends to use the net proceeds from theoffering to repay a portion of the term debt under the Partnership CreditFacility. Affiliates of several of the initial purchasers, including RBCCapital Markets Corporation, J.P. Morgan Securities Inc., and Wachovia CapitalMarkets, LLC, are lenders under the Partnership Credit Facility.

 

The indenture governing the 2016 Senior Notes restricts the Partnership’sability and the ability of certain of its subsidiaries to borrow money,pay distributions or dividends on equity or purchase, redeem or otherwiseacquire equity, make investments, use assets as collateral in othertransactions, enter into sale and leaseback transactions, sell certain assetsor merge with or into other companies, enter into transactions with affiliates,and engage in unrelated businesses. These covenants are subject to a number ofimportant exceptions and qualifications. If at any time when the 2016 SeniorNotes are rated investment grade by both Moody’s Investors Service, Inc.and Standard & Poor’s Rating Services and no Default (as defined in theIndenture) has occurred and is continuing, many of the covenants will terminateand the Partnership and its subsidiaries will cease be subject to them.

 

The Partnership’s ability to pay distributions to its unitholders andto fund planned capital expenditures and make acquisitions will depend upon itsfuture operating performance. That, in turn, will be affected by prevailingeconomic conditions in the Partnership’s industry, as well as financial,business and other factors, some of which are beyond its control.

 

The Partnership revised its budget as of June 30, 2006, to $95.2million for capital expenditures, exclusive of any acquisitions. As of June 30,2006, the Partnership has  $69.8 millionremaining in their budget consisting of $68.1 million for expansion capital and$1.7 million for sustaining capital. Expansion capital includes expendituresmade to expand or increase the efficiency of the existing operating capacity ofour assets, or facilitate an increase in volumes within our operations,

 

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whether through construction oracquisition. Sustaining capital includes expenditures to replace partially orfully depreciated assets in order to extend their useful lives.

 

**Cash Flows**

 
| ** **                                           | ** ** | **Six months ended June 30,** | ** ** |
|------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                           | ** ** | **2006**                                          | ** ** | **2005** | ** ** |
| ** **                                           | ** ** | **(in thousands)**                           | ** ** |
|                                                 |       |                                              |       |   |   |
| Net cash provided by operating activities            |       | $                                                 | 86,594     |   | $ | 25,512 |   |
| Net cash used in investing activities                |       | (47,640                                           | )          | (78,090 | ) |
| Net cash provided by (used in) financing  activities |       | (33,650                                           | )          | 50,112 |   |
|                                                      |            |                                                   |            |  |  |  |  |

 

Net cash provided by operating activities increased $61.1 millionduring the six months ended June 30, 2006, compared to the six months endedJune 30, 2005.  The increase was impacted by a $21.2 million change inoperating assets and liabilities primarily a decrease in receivables, offset bypurchases of inventory and payment of accounts payables, an additional $17.7million from non-controlling interest in net income of MarkWest Energy,incremental non-cash losses on derivative instruments of $15.1 million, due toan expanded risk management program, and additional depreciation andamortization expense of $9.3 million, due to acquisitions.

 

Net cash used in investing activities during the six months ended June30, 2006, decreased by $30.5 million from the same period in 2005, primarilydue to the acquisition of Starfish in 2005.  No significant acquisitionswere completed in the first six months of 2006.

 

Net cash used in financing activities during the six months ended June30, 2006, was $83.8 million more than for the same period in 2005.  Thedifference related primarily to repayments of debt of $74.2 million.

 

##### **Off-Balance Sheet Arrangements**

##### ** **

Other than facility and equipment leasing arrangements, we do notengage in off-balance sheet financing activities.

 

##### **MattersInfluencing Future Results**

##### ** **

During August and September 2005, Hurricanes Katrina and Rita causedsevere and widespread damage to oil and gas assets in the Gulf of Mexico andGulf Coast regions. Operations of our unconsolidated affiliate, Starfish PipelineCompany, were nominally impacted by Hurricane Katrina but were significantlyimpacted by Hurricane Rita. While Starfish has substantially returned to normaloperations, several sections of the system have not been fully repaired andreturned to operation. Until necessary repairs are completed, Starfish will notbe able to return fully to normal operations, which will have a continuingimpact on our net income.We have received $3.1 million in insurance recoveries with respect to ourproperty loss claims, and anticipate continued recovery for expenses and lossesincurred as repairs proceed.

 

Theloss to both offshore and onshore assets resulting from Hurricane Rita has ledto substantial insurance claims within the oil and gas industry. Along withother industry participants, we have seen our insurance costs increasesubstantially within this region as a result. We have renewed our insurancecoverage relating to Starfish during the second quarter and mitigated a portionof the cost increase by reducing our coverage and adding a more broadself-insurance element to our overall coverage.

 

MarkWest Hydrocarbon, Inc. is a corporationfor federal income tax purposes. As such, our federal taxable income is subjectto tax at a maximum rate of 35.0% under current law and a blended state rate of3.5%, net of Federal benefit. We expect to have future taxable income allocatedto us as a result of our investment in the Partnership.

 

We currently have a net operating losscarryforward of $18.1 million as of December 31, 2005 for federalincome taxes. We estimate that our net operating loss carryforwards will beutilized to offset federal taxable income in 2006. In years after 2006 we donot expect to have this net operating loss carryforward to offset our futuretaxable income. As a result, the amount of money available to make cashdistributions to our stockholders will decrease after we utilize all of our netoperating loss carryforward.

 

**Critical Accounting Policies**

 

Our consolidated financial statements have been prepared in accordancewith accounting principles generally accepted in the United States of America.Preparation of these statements requires management to make significant

 

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judgments and estimates. Someaccounting policies have a significant impact on amounts reported in thesefinancial statements. A summary of significant accounting policies and adescription of accounting policies that are considered critical may be found inour Annual Report on Form 10-K for the period ending December 31, 2005, inNote 2 of the Notes to the Consolidated Financial Statements, and in theCritical Accounting Policies section of Management’s Discussion andAnalysis of Financial Condition and Results of Operations.

 

**Recent Accounting Pronouncements**

 

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

 

InMarch 2006, the FASB issued SFAS No. 156, *Accounting for Servicing of Financial Assets – an amendment of FASBStatement No. 140.* FAS No. 156 establishes, among otherthings, the accounting for all separately recognized servicing assets andservicing liabilities by requiring that they be initially measured at fairvalue, if practicable. SFAS No. 156 is effective as of the beginning of anentity’s first fiscal year that begins after September 15, 2006. Theadoption of SFAS No. 156 will have no impact on the Company’s condensedconsolidated financial statements of operations or financial position.

 

In June 2006 the FASB issued InterpretationNo. 48, *Accounting for Uncertainty in IncomeTaxes*. The interpretation clarifies the accounting for uncertaintyin income taxes recognized in a company’s financial statements in accordancewith Statement of Financial Accounting Standards No. 109, *Accounting for Income Taxes*. Specifically,the pronouncement prescribes a recognition threshold and a measurementattribute for the financial statement recognition and measurement of a taxposition taken or expected to be taken in a tax return. The interpretation alsoprovides guidance on the related derecognition, classification, interest and penalties,accounting for interim periods, disclosure and transition of uncertain taxpositions. The interpretation is effective for fiscal years beginning afterDecember 15, 2006. The Partnership is evaluating the impact of this newpronouncement on its condensed consolidated financial statements.

 

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**Item 3. Quantitative and QualitativeDisclosures about Market Risk**

 

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

 

***Commodity Price Risk***

 

Our primary risk management objective is tomanage volatility in our cash flows.  A committee, comprised of members ofthe senior management team, oversees all of our derivative activity.

 

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

 

We enter into OTC swaps with financialinstitutions and other energy company counterparties.  We conduct astandard credit review on counterparties and have agreements containingcollateral requirements where deemed necessary.  We use standardized swap agreementsthat allow for offset of positive and negative exposures.  We may besubject to margin deposit requirements under OTC agreements (with non-bankcounterparties) and NYMEX positions.

 

The use of derivative instruments may exposeus to the risk of financial loss in certain circumstances, including instanceswhen (i) NGL’s do not trade at historical levels relative to crude oil, (ii)sales volumes are less than expected requiring market purchases to meetcommitments, or (iii) our OTC counterparties fail to purchase or deliver thecontracted quantities of natural gas, NGL’s or crude oil or otherwise fail toperform. To the extent that we enter into derivative instruments, we may beprevented from realizing the benefits of favorable price changes in thephysical market. We are similarly insulated, however, against unfavorablechanges in such prices.

 

Fair value isbased on available market information for the particular derivative instrument,and incorporates the commodity, period, volume and pricing.  Positive(negative) amounts represent unrealized gains (losses).

 

*MarkWest Hydrocarbon*

 

MarkWest Hydrocarbon may enter into physical and/or financialpositions to manage its risks related to commodity price exposure.  Due totiming of purchases and sales, direct exposure to price volatility can becreated, because there is no longer an offsetting purchase or sale that remainsexposed to market pricing.  Through marketing and derivatives activities,direct exposure may occur naturally, or we may choose direct exposure when wefavor that exposure over frac spread risk. Beginning in 2006 MarkWestHydrocarbon pre-purchased natural gas for shrink requirements in future monthsand, for both natural gas and NGLs, has entered into swaps and future salesagreements to manage frac spread risk. These derivative instruments are markedto market.

 

The following table summarizes MarkWest Hydrocarbon’sspecific derivative positions at June 30, 2006:

 
| **Swaps**                      | ** ** | **Contract Period** | ** ** | **Fixed Price** | ** ** | **Fair Value**     | ** ** |
|--------------------------------|------------|--------------------------|------------|----------------------|------------|-------------------------|------------|
| ** **                     | ** ** | ** **               | ** ** | ** **           | ** ** | **(in thousands)** | ** ** |
| Propane - 6.4 Mm Gal           |       | Oct-Dec 2006             |       | $                    | 0.93       |                    | $          | (1,734 | ) |
| Propane - 1.8 Mm Gal           |       | Oct-Dec 2006             |       | 1.10                 |       | (190                    | )          |
| Propane - 1.9 Mm Gal           |       | Nov 2006 - Feb 2007      |       | 1.10                 |       | (200                    | )          |
| Propane - 3.0 Mm Gal           |       | Dec 2006 - Feb 2007      |       | 1.09                 |       | (341                    | )          |
| Propane - 2.8 Mm Gal           |       | Dec 2006 - Mar 2007      |       | 1.18                 |       | (100                    | )          |
| Propane - 6.2 Mm Gal           |       | Dec 2006 - Mar 2007      |       | 1.10                 |       | (684                    | )          |
| Propane - 6.4 Mm Gal           |       | Jan-Mar 2007             |       | 0.96                 |       | (1,543                  | )          |
| Propane - 1.6 Mm Gal           |       | Jan-Mar 2007             |       | 1.12                 |       | (145                    | )          |
|                           |       |                     |       |                 |       |                    |       |
| Iso-butane - 0.6 Mm Gal        |       | Jul-Sep 2006             |       | 1.22                 |       | (91                     | )          |
| Iso-butane - 0.7 Mm Gal        |       | Oct-Dec 2006             |       | 1.12                 |       | (208                    | )          |
| Iso-butane - 0.3 Mm Gal        |       | Dec 2006 - Mar 2007      |       | 1.35                 |       | (28                     | )          |
| Iso-butane - 0.6 Mm Gal        |       | Jan-Mar 2007             |       | 1.16                 |       | (155                    | )          |
|                           |       |                     |       |                 |       |                    |       |
| Normal butane - 1.9 Mm Gal     |       | Jul-Sep 2006             |       | 1.21                 |       | (245                    | )          |
| Normal butane - 2.0 Mm Gal     |       | Oct-Dec 2006             |       | 1.10                 |       | (500                    | )          |
| Normal butane - 1.1 Mm Gal     |       | Dec 2006 - Mar 2007      |       | 1.29                 |       | (77                     | )          |
| Normal butane - 1.7 Mm Gal     |       | Jan-Mar 2007             |       | 1.13                 |       | (375                    | )          |
|                           |       |                     |       |                 |       |                    |       |
| Natural gasoline - 1.3 Mm Gal  |       | Jul-Sep 2006             |       | 1.50                 |       | (94                     | )          |
| Natural gasoline - 2.1 Mm Gal  |       | Jul-Sep 2006             |       | 1.44                 |       | (277                    | )          |
| Natural gasoline - 1.3 Mm Gal  |       | Oct-Dec 2006             |       | 1.39                 |       | (255                    | )          |
| Natural gasoline - 1.0 Mm Gal  |       | Dec 2006 - Mar 2007      |       | 1.59                 |       | 33                      |       |
| Natural gasoline - 1.1 Mm Gal  |       | Jan-Mar 2007             |       | 1.37                 |       | (200                    | )          |
|                           |       |                     |       |                 |       |                    |       |
| Natural gas - 0.9 Mm Mmbtu     |       | Jul-Sep 2006             |       | 6.61                 |       | (267                    | )          |
| Natural gas - 0.4 Mm Mmbtu     |       | Jul-Sep 2006             |       | 6.43                 |       | (51                     | )          |
|                           |       |                     |       |                 |       | (7,727                  | )          |
| Other                          |       |                     |       |                 |       | 72                      |       |
| **Total MarkWest Hydrocarbon** |       |                     |       | $                    | (7,655     | )                       |
|                                |            |                          |            |                      |            |                         |            |  |  |  |

 

42

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The impact ofMarkWest Hydrocarbon’s commodity derivative instruments on results ofoperations and financial position are summarized below (in thousands):

 
| ** **                     | ** ** | **Three months ended****June 30, 2006** | ** ** | **Six months ended****June 30, 2006** | ** ** |
|--------------------------------|------------|-------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
|                           |       |                                                        |       |                                                      |       |
| Unrealized loss – revenue |       | $                                                           | (6,156     | )                                                         | $          | (7,655 | ) |
|                                |            |                                                             |            |                                                           |            |  |  |

 

| ** **                                   | ** ** | **June 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|----------------------------------------------|------------|-----------------------------|------------|----------------------------|------------|
| Unrealized gains – other current assets |       | $                           | 185        |                       | $          | — |   |
| Unrealized loss – current liability     |       |                        | (7,840     | )                          | —     |   |
|                                              |            |                             |            |                            |            |  |  |

 

The following table summarizes MarkWest Hydrocarbon’sphysical inventory position at June 30, 2006, which could be used in a numberof ways, including satisfying shrink requirements or physically settling futuresales commitments:

 
| **Product**                    | ** ** | **Quantity** | ** ** | **Units of Measure** | ** ** | **Weighted Average Cost** | ** ** | **Total Cost**     | ** ** |
|--------------------------------|------------|--------------|------------|--------------------------------|------------|-------------------------------------|------------|-------------------------|------------|
| ** **                     | ** ** | ** **   | ** ** | ** **                     | ** ** | ** **                          | ** ** | **(in thousands)** | ** ** |
| Natural gas                    |       | 2,748,000    |       | Mmbtu                          |       | $                                   | 7.03       |                    | $          | 19,327 |   |
| NGLs                           |       | 20,857,000   |       | Gallons                        |       | $                                   | 0.79       |                    | 16,476     |   |
| **Total MarkWest Hydrocarbon** |       | $            | 35,803     |                           |

 

The Company entered into the followingderivative positions in July 2006:

 

| **Swaps**                                              | ** ** | **Contract Period**                | ** ** | **Fixed Price** | ** ** |
|--------------------------------------------------------|------------|-----------------------------------------|------------|----------------------|------------|
| Propane – 0.9 million Gallons |       | Dec 2006 - Mar 2007 |       | $                    |  1.13 |   |
| Iso-butane - 0.1 million Gallons                  |       | Dec 2006 - Mar 2007                     |       | $                    | 1.30       |   |
| Normal butane – 0.3 million Gallons          |       | Dec 2006 - Mar 2007                     |       | $                    | 1.30       |   |
| Natural gasoline – 0.2 million Gallons       |       | Dec 2006 - Mar 2007                     |       | $                    | 1.63       |   |
| Natural gas - 0.1 Mmbtu                                |       | Dec 2006 - Mar 2007                     |       | $                    | 6.66       |   |

 

*MarkWest Energy Partners*

 

The Partnership’s primary risk management objective is toreduce volatility in its cash flows arising from changes in commodity pricesrelated to future sales of natural gas, NGL’s and crude oil.  Swaps andfutures contracts may allow the Partnership to reduce volatility in itsmargins, because losses or gains on the derivative instruments generally areoffset by corresponding gains or losses in the Partnership’s physicalpositions.

 

The following table includes information on MarkWest Energy’sspecific derivative positions at June 30, 2006:

 

43

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| **Costless collars**   | ** ** | **Contract Period** | ** ** | **Floor**  | ** ** | **Cap**    | ** ** | **Fair Value**     | ** ** |
|-----------------------------|------------|--------------------------|------------|------------|------------|------------|------------|-------------------------|------------|
| ** **                  | ** ** | ** **               | ** ** | ** ** | ** ** | ** ** | ** ** | **(in thousands)** | ** ** |
| Crude Oil - 500 Bbl/d       |       | 2006                     |       | $          | 57.00      |       | $          | 67.00                   |       | $ | (849 | ) |
| Crude Oil - 250 Bbl/d       |       | 2006                     |       | $          | 57.00      |       | $          | 67.00                   |       | (424 | ) |
| Crude Oil - 205 Bbl/d       |       | 2006                     |       | $          | 57.00      |       | $          | 65.10                   |       | (409 | ) |
| Crude Oil - 78 Bbl/d        |       | 2006                     |       | $          | 67.50      |       | $          | 77.30                   |       | (27 | ) |
| Crude Oil - 155 Bbl/d       |       | 2007                     |       | $          | 67.50      |       | $          | 78.55                   |       | (121 | ) |
| Crude Oil - 250 Bbl/d       |       | 2007                     |       | $          | 67.50      |       | $          | 79.15                   |       | (175 | ) |
| Crude Oil - 200 Bbl/d       |       | 2007                     |       | $          | 70.00      |       | $          | 75.95                   |       | (175 | ) |
|                        |       |                     |       |       |       |       |       |                    |       |
| Propane - 20,000 Gal/d      |       | 2006                     |       | $          | 0.90       |       | $          | 0.99                    |       | (737 | ) |
| Propane - 10,000 Gal/d      |       | 2006                     |       | $          | 0.97       |       | $          | 1.15                    |       | (132 | ) |
|                        |       |                     |       |       |       |       |       |                    |       |
| Ethane - 22,950 Gal/d       |       | 2006                     |       | $          | 0.65       |       | $          | 0.80                    |       | (198 | ) |
|                        |       |                     |       |       |       |       |       |                    |       |
| Natural Gas - 1,575 Mmbtu/d |       | 2006                     |       | $          | 8.67       |       | $          | 10.86                   |       | 803 |   |
| Natural Gas - 1,575 Mmbtu/d |       | Jan-Mar 2007             |       | $          | 9.00       |       | $          | 12.50                   |       | 128 |   |
| Natural Gas - 400 Mmbtu/d   |       | 2007                     |       | $          | 8.25       |       | $          | 10.03                   |       | 36 |   |
| Natural Gas - 1,500 Mmbtu/d |       | Apr-Dec 2007             |       | $          | 7.25       |       | $          | 10.25                   |       | 147 |   |
| Natural Gas - 1,500 Mmbtu/d |       | Jan-Mar 2008             |       | $          | 8.00       |       | $          | 11.29                   |       | (42 | ) |
|                        |       |                     |       |       |       |       |       | (2,175                  | )          |
|                             |            |                          |            |            |            |            |            |                         |            |  |  |  |

 

| **Swaps**             | ** ** | **Contract Period** | ** ** | **Fixed price** | ** ** | **Fair Value**         | ** ** |
|-----------------------|------------|--------------------------|------------|----------------------|------------|-----------------------------|------------|
| ** **            | ** ** | ** **               | ** ** | ** **           | ** ** | **(in thousands****)** | ** ** |
| Crude Oil - 250 Bbl/d |       | 2006                     |       | $                    | 62.00      |                        | $          | (614 | ) |
| Crude Oil - 185 Bbl/d |       | 2006                     |       | $                    | 61.00      |                        | (487       | ) |
| Crude Oil - 250 Bbl/d |       | 2007                     |       | $                    | 65.30      |                        | (926       | ) |
| Crude Oil - 140 Bbl/d |       | 2007                     |       | $                    | 74.10      |                        | (94        | ) |
|                  |       |                     |       |                 |       |                        |       |
| Propane - 5,000 Gal/d |       | 2006                     |       | $                    | 1.08       |                        | (104       | ) |
|                  |       |                     |       |                 |       |                        |       |
| Natural gas           |       | Jun-Oct 2006             |       |                 |       | 18                          |       |
|                  |       |                     |       |                 |       | (2,207                      | )          |
|                       |            |                          |            |                      |            |                             |            |  |  |

 
| ** **                                               | ** ** | ** **               | ** ** | **Average**          | ** ** | ** **              | ** ** |
|----------------------------------------------------------|------------|--------------------------|------------|----------------------|------------|-------------------------|------------|
| **Future purchase / sale contracts** | ** ** | **Contract Period** | ** ** | **Fixed price** | ** ** | **Fair Value**     | ** ** |
| ** **                                               | ** ** | ** **               | ** ** | ** **           | ** ** | **(in thousands)** | ** ** |
| Natural Gas - 1.7 million Mmbtu (purchase)               |       | Jul-Oct 2006             |       | $                    | 6.07       |                    | $          | (1,349 | ) |
| Ethane - 10.8 million Gallons (sale)                     |       | Jul-Oct 2006             |       | $                    | 0.61       |                    | (910       | ) |
| Propane - 4.9 million Gallons (sale)                     |       | Jul-Oct 2006             |       | $                    | 1.07       |                    | (596       | ) |
| Other NGLs - 4.2 million Gallons (sale)                  |       | Jul-Oct 2006             |       | $                    | 1.40       |                    | (214       | ) |
|                                                     |       |                     |       |                 |       | (3,069                  | )          |
|                                                     |       |                     |       |                 |       |                    |       |
| **Total MarkWest Energy  Partners**                      |       | $                        | (7,451     | )                    |

 

The impact of MarkWest Energy’s commodityderivative instruments on results of operations and financial position aresummarized below (in thousands):

 
| ** **                                               | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|----------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                               | ** ** | **2006**                                            | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| Realized gains (losses) – revenue                   |       | $                                                   | (476       | )                                                 | $          | (251 | ) | $ | 63 |   | $ | (209 | ) |
| Unrealized gains (losses) – revenue                 |       | (6,425                                              | )          | 11                                                |       | (6,724 | ) | 62 |   |
| Other comprehensive income – changes in  fair value |       | —                                              |       | 438                                               |       | — |   | 247 |   |
| Other comprehensive income - settlement                  |       | —                                              |       | (222                                              | )          | — |   | (180 | ) |
|                                                          |            |                                                     |            |                                                   |            |  |  |  |  |  |  |  |  |

 

44

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| ** **                                     | ** ** | **June 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|------------------------------------------------|------------|------------------------|------------|----------------------------|------------|
| Unrealized gains – other current assets   |       | $                      | 1,131      |                       | $          | — |   |
| Unrealized losses – current liability     |       | (7,924                 | )          | (728                       | )          |
| Unrealized losses – non-current liability |       | (658                   | )          | —                     |       |
|                                                |            |                        |            |                            |            |  |  |

 

The Partnership entered into the followingderivative positions subsequent to June 30, 2006:

 

| **Costless Collars**    | ** ** | **Contract Period** | ** ** | **Floor** | ** ** | **Cap** | ** ** |
|------------------------------|------------|--------------------------|------------|-----------|------------|---------|------------|
| Propane –  23,000 Gal/d |       | Jan-Mar 2007             |       | $         | 1.05       |    | $          | 1.28 |   |
| Propane – 30,000  Gal/d |       | Apr07-Dec07              |       | $         | 0.96       |    | $          | 1.16 |   |
| Propane –  30,000 Gal/d |       | July07-Sept07            |       | $         | 0.97       |    | $          | 1.16 |   |
| Propane –  30,000 Gal/d |       | Oct07-Dec07              |       | $         | 0.98       |    | $          | 1.18 |   |
| Crude oil – 130 Bbl/d   |       | 2007                     |       | $         | 70.00      |    | $          | 88.50 |   |
| Crude oil – 120 Bbl/d   |       | 2007                     |       | $         | 70.00      |    | $          | 86.40 |   |
| Crude oil – 250 Bbl/d   |       | 2007                     |       | $         | 70.00      |    | $          | 88.25 |   |

 

| **Other**                         | ** ** | **Contract Period** | ** ** | **Weighted Average Price** | ** ** |
|-----------------------------------|------------|--------------------------|------------|--------------------------------------|------------|
| Ethane – 50,000 Gal/d (swap) |       | Jan-Mar 2007             |       | $                                    | 0.78       |   |
| Ethane – 50,000 Gal/d (put)  |       | Apr07-Dec07              |       | $                                    | 0.65       |   |

 

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**Item 4. Controls and Procedures**

 

Inconnection with the preparation of this quarterly report on Form 10-Q, oursenior management, with participation of our Chief Executive Officer and ChiefFinancial Officer, evaluated the effectiveness of the design and operation ofour disclosure controls and procedures as of June 30, 2006, pursuant to Rule13a-15 under the Securities Exchange Act of 1934 (the “Act”). Based upon thatevaluation, our Chief Executive Officer and Chief Financial Officer concludedthat as of June 30, 2006, as a result of the material weaknesses in ourinternal control over financial reporting, our disclosure controls andprocedures were ineffective to provide reasonable assurance that informationrequired to be disclosed by us in reports that we file or submit under the Act,is recorded, processed, summarized and reported within the time periodsspecified in the SEC’s rules and forms; and to ensure that information requiredto be disclosed by us in the reports that we file under the Act is accumulatedand communicated to management, including our certifying officers, asappropriate, to allow timely decisions regarding required disclosures.

 

Throughoutthe throughout the first and second quarters of 2006 we have adoptedremedial measures to address the deficiencies in our internal controlsthat were identified on December 31, 2005, and remained ineffect on June 30, 2006.

 

*Internal ControlEnvironment.*Inconnection with management’s assessment of the effectiveness of internal controlover financial reporting for the year ended December 31, 2005, weidentified, and Deloitte & Touche LLP confirmed, as of December 31,2005, the presence of an ongoing material weakness related to our internalcontrol environment. Specifically, our control environment did not sufficientlypromote effective internal control over financial reporting through themanagement structure to prevent a material misstatement.

 

Inorder to remediate this material weakness, we are in the process of fullyimplementing and standardizing the following processes and procedures, whichwere initiated in the last two quarters of 2005:

 

•      Weformalized the monthly account reconciliation process for all balance sheetaccounts and have implemented a formal review of reconciliations by ourbusiness unit accounting management.

 

•      Weestablished a compliance office focused on control deficiency identificationand remediation, i.e., purchasing controls, revenue recognition controls,control over non-routine transactions, unusual journal entries, the use ofestimates and judgment and application and spreadsheet change controls, thatperforms ongoing internal control evaluation and assessment and works activelywith the process owners in developing appropriate remediation of control deficiencies.

 

•      Weconducted an entity-level risk assessment, established an internal audit planand began to execute that internal audit plan. Results are reported directly toour general partner’s audit committee.

 

•      Weenhanced the segregation of duties controls through the reassignment ofaccounting personnel and realignment of control processes.

 

•      Weenhanced entity level controls through the implementation of significant newcontrols.

 

•      Westrengthened our disclosure review committee charter to solicit and reviewinput from management personnel throughout the Partnership regarding possibleinstances of fraud or significant events requiring disclosure.

 

•      Weimplemented a technical accounting issues forum to address non-routinetransactions and the use of critical estimates and judgment

 

Inaddition, we are enhancing employee awareness of our Code of Conduct, ethicsand anti-fraud policies, including a revised training program that we began todeliver to all employees in the second quarter of 2006. This includesheightened awareness of the ethics hotline availability and access options. Weare also conducting a detailed review and re-documentation of all of ourinternal control processes and will undertake significant internal controldesign changes to ensure that all internal control objectives are met.

 

*Risk management and accounting forderivative financial instruments.* In connection with management’s assessment of theeffectiveness of internal control over financial reporting for the year endedDecember 31, 2005, we identified and Deloitte & Touche LLP confirmed, as ofDecember 31, 2005, the presence of an additional material weakness related toour risk management and accounting for derivative financial instruments. We didnot have adequate internal controls and

 

46

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processes in place to supportour management’s assertions with respect to the completeness, accuracy andvalidity of commodity transactions. The design of internal controls overcommodity transactions did not support the independent validation of data orcontrol and review of transaction activity. In particular, personnelresponsible for executing and entering transactions into commodity accountingsystems also had duties that were not compatible with transaction execution andentry.

 

Inorder to remediate this material weakness, we added the following personnel toour management team in July 2005 and January and June 2006, respectively:

 

•      Vice President of Risk andCompliance, to oversee and ensure improvements in our commodity transactionverification and monitoring capabilities; and

 

•      Director of Risk Management andstaff to establish appropriate verification and monitoring activitiesassociated with our commodity transactions.

 

•      Credit Manager, to establishmore robust monitoring and reporting processes around our credit concentrationsand risk.

 

Atthe end of the first quarter of 2006 we also segregated our front office (the transactionpersonnel), mid-office (the controllers), and back-office (the accountants) processesrelated to our financial commodity transactions and a portion of our physicaltrading to ensure that proper segregation of duties exists and that theappropriate groups carry out control procedures. We are focused on attainingproper segregation for our remaining physical transaction over the comingmonths. We are enhancing our risk management policies and procedures related tothe review and approval of material purchase or sale contracts that may meetthe definition of derivatives. Additionally, we are enhancing our financialanalysis around commodity transactions and our reporting to executivemanagement and the board of directors. Finally, we moved the responsibility forcredit risk management to the mid-office in the second quarter of 2006.

 

Inaddition, we have applied compensating procedures and processes as necessary toensure the reliability of our financial reporting. Such additional proceduresincluded detail management review of our account reconciliations for all accountsin all business units and multiple-level management review of accountreconciliations for all accounts in all business. Accordingly, managementbelieves, based on its knowledge, that (i) this report does not containany untrue statement of a material fact that would make the statementsmisleading; (ii) this report does not omit any material fact, the omission ofwhich would make the statements misleading, in light of the circumstance underwhich they were made with respect to the period covered by this report and(iii) the financial statements and other financial information included inthis report fairly present in all material respects our financial condition,results of operations and cash flows as of, and for, the periods presented inthis report.

 

47

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**PART II—OTHERINFORMATION**

 

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

##### ** **

In the ordinary course of business, theCompany is subject to a variety of risks and disputes normally to its businessand is a party to various legal proceedings. We maintain insurance policies inamounts and with coverage and deductibles as we believe are reasonable andprudent. However, we cannot assure either that the insurance companies willpromptly honor their policy obligations or that the coverage or levels ofinsurance will be adequate to protect us from all material expenses related tofuture claims for property loss or business interruption to the Company or forthird party claims of personal and property damage, or that the coverages or levelsof insurance it presently has will be available in the future at economicalprices.

 

In early 2005 MarkWest Hydrocarbon, Inc., thePartnership and several of its affiliates were served with two lawsuits, RickyJ. Conn, *et al.* v. MarkWestHydrocarbon, Inc. *et al.*(filedFebruary 2, 2005), and Charles C. Reid, *etal.* v. MarkWest Hydrocarbon, Inc. *etal.*(filed February 8, 2005), in Floyd Circuit Court,Commonwealth of Kentucky, Civil Action No. 05-CI-00137 and Civil Action No.05-CI-00156, which actions on February 24, 2005, were removed to thejurisdiction of the U.S. District Court for the Eastern District of Kentucky,Pikeville Division. The Company, the Partnership and its affiliates were servedwith an additional lawsuit, Community Trust and Investment Co., *et al.* v. MarkWest Hydrocarbon, Inc. *et al.*, filed November 7, 2005,inFloyd County Circuit Court, Kentucky, that added five new claimants butessentially alleged the same facts and claims as the earlier two suits. OnMarch 27, 2006, the U.S. District Court remanded the cases back to Floyd CountyCircuit Court, Kentucky, and the cases were consolidated into Ricky J. Conn,*et al.* v. MarkWest Hydrocarbon,Inc. *et al.,*Floyd CircuitCourt, Commonwealth of Kentucky, Civil Action No. 05-CI-00137.

 

These actions are for third-party claims ofproperty and personal injury damages sustained as a consequence of an NGLpipeline leak and an ensuing explosion and fire that occurred on November 8,2004. The pipeline was owned by an unrelated business entity and leased andoperated by the Partnership’s subsidiary, MarkWest Energy Appalachia, LLC. Ittransports NGLs from the Maytown gas processing plant to the Partnership’sSiloam fractionator. The explosion and fire from the leaked vapors resulted inproperty damage to five homes and injuries to some of the residents. Thepipeline owner, the U.S. Department of Transportation, Office of PipelineSafety (“OPS”), and the Partnership continue to investigate the incident. Discoveryin the action is now underway following the remand back to state court. Thetrial is scheduled to begin February 5, 2007.

 

The Company notified its general liabilityinsurance carriers of the incident and the lawsuits in a timely manner and iscoordinating its legal defense with the insurers. At this time, the Companybelieves that it has adequate general liability insurance coverage forthird-party property damage and personal injury liability resulting from theincident. The Company has settled with several of the claimants for third-partyproperty damage claims (damage to residences and personal property), andreached settlements for some of the personal injury claims. These have beenpaid for or reimbursed under the Company’s general liability insurance. As aresult, the Company has not provided for a loss contingency.

 

Pursuant to OPS regulation mandates and to aCorrective Action Order issued by the OPS November 18, 2004, pipeline and valveintegrity evaluation, testing and repairs were conducted on the affectedpipeline segment before service could be resumed. OPS authorized a partialreturn to service of the affected pipeline in October 2005. MarkWest is in theprocess of applying for return to full service.

 

In late June 2006 a Notice of ProbableViolation and Proposed Civil Penalty (NOPV) was issued by OPS to both MarkWestHydrocarbon and the unaffiliated owner of the pipeline, with a proposed penaltyin the aggregate amount of $1,070,000. Initial response to the NOPV is not dueuntil at least September 1, 2006, and the Company is likely going to request anadministrative hearing and settlement conference with respect to the NOPV.

 

Related to the above referenced pipelineincident, MarkWest Hydrocarbon and the Partnership have filed an independentaction captioned MarkWest Hydrocarbon, Inc., *et al.* v. Liberty Mutual Ins. Co., *et al.* (District Court, ArapahoeCounty, Colorado, Case No. 05CV3953 filed August 12, 2005), as removed to the(U.S. District Court for the District of Colorado, Civil Action No.1:05-CV-1948, on October 7, 2005), against its All-Risks Property and BusinessInterruption insurance carriers as a result of the companies’ refusal to honortheir insurance coverage obligation to pay the Company for certain expensesrelated to the pipeline incident. These include the Company’s internal expensesand costs incurred for damage to, and loss of use of the pipeline, equipmentand products; the extra transportation costs incurred for transporting theliquids while the pipeline was out of service; the reduced volumes of liquidsthat could be processed; and the costs of complying with the OPS CorrectiveAction Order (hydrostatic testing, repair/replacement and other pipelineintegrity assurance measures). These expenses and costs have been expensed asincurred and any potential recovery from the All-Risks Property and BusinessInterruption insurance carriers will be treated as “other income” if andwhen  it is received. The Company has notprovided for a receivable for these claims because of the uncertainty as towhether and how much the Company will ultimately recover under the policies.The Company has also asserted that the cost of pipeline testing, 

 

48

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replacement and repair are subject to an equitable sharing arrangementwith its owner, pursuant to the terms of the pipeline lease agreement. Discoveryin the action is continuing.

 

The Company has also been involved in alawsuit captioned Ross Bros. Construction v. MarkWest Hydrocarbon, Inc.,(U.S. Court Appeals for the Sixth Circuit, Case No. 05-6251). This lawsuitinvolved the expansion construction of the Siloam Kentucky gas processing andfractionation plant and a dispute as to the monetary value of work andadditional work beyond the contract’s lump sum price performed by the contractor.This lawsuit involved a claim of approximately $0.7 million in extra costs. TheCompany was recently granted Summary Judgment on its defense asserting accordand satisfaction. In August 2005, Plaintiffs filed an appeal of the SummaryJudgment to the U.S. Court of Appeals for the 6th  Circuit. The case was fully briefed and oralArgument to the 6th Circuit was heard on July 18, 2006, and we areawaiting the ruling from the Court. The Company believes that, while it is notable to predict the outcome of this matter, based on the judge’s discussion onthe grant of the summary judgment and denial of Ross Brothers’ motion forreconsideration, it is probable that the Company will prevail in the appeal. Asa result, the Company has not provided for a loss contingency.

 

In the ordinary course of business, theCompany is a party to various other legal actions. In the opinion ofmanagement, none of these actions, either individually or in the aggregate,will have a material adverse effect on the Company’s financial condition,liquidity or results of operations.

 

49

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**Item 4.****Submission of Matters to a Voteof Security Holders**

 

 At theclose of business on May 5, 2006, the record date for the determination ofshareholders entitled to vote at the Company’s Annual Meeting to be held on June 15,2006, there were 10,802,448 shares of the Company’s Common Stockoutstanding. Atthe Annual Meeting of Stockholders held on June 15, 2006, there were notless than 9,993,841 shares or approximately 92.5% of the outstanding stockrepresented at the meeting and by proxy, therefore establishing the presence ofa quorum. The Company’s shareholders were presented with and asked to vote onthree proposals. The following are the results of the voting:

 

**Proposal No. 1:**

 

The election of Donald C. Heppermann, Anne E.Mounsey and Karen L. Rogers as Class I Directors for a term expiring at theAnnual Meeting of Stockholders in the year 2009:

 

| ** **                 | ** ** | **Number of votes** | ** ** |
|----------------------------|------------|-------------------------------|------------|
| **Director Nominees** | ** ** | **For**                       | ** ** | **Authority  Withheld** | ** ** |
| Donald C. Heppermann       |       | 9,842,849                     |       | 150,992 |   |
| Anne E. Mounsey            |       | 9,498,626                     |       | 495,215 |   |
| Karen L. Rogers            |       | 9,940,309                     |       | 53,532 |   |

 

There were no abstentions or broker non-votesapplicable to the election of directors.

 

**Proposal No. 2:**

 

The approval of the 2006 Stock Incentive Plan toreplace the 1996 Stock Incentive Plan, which by its terms expires in 2006,including the authorization of 1,000,000 shares available for granting Awardsunder the 2006 Plan, which includes the transfer of shares remaining under the1996 Plan:

 

| For:       |   | 6,550,707 |   |
|------------|--------|-----------|--------|
| Against:   |   | 947,258   |   |
| Abstained: |   | 6,052     |   |

 

Abstentions had the effect of votes “against”this proposal. Broker non-votes were not counted as votes “for” or “against”this proposal and therefore had no impact on the outcome.

 

**Proposal No. 3:**

 

The ratification of Deloitte & Touche LLPas the Company’s independent accountants for the fiscal year ending December31, 2006:

 

| For:       |   | 9,949,837 |   |
|------------|--------|-----------|--------|
| Against:   |   | 38,488    |   |
| Abstained: |   | 5,516     |   |

 

Abstentions had the effect of votes “against”this proposal. Broker non-votes were not counted as votes “for” or “against”this proposal and therefore had no impact on the outcome.

 

In accordance with the above, each of thenominees for election to the Board of Directors has received the requisitenumber of votes required for election and each of proposals numbers two andthree have received the requisite number of votes for approval. Accordingly,Mr. Heppermann, Ms. Mounsey and Ms. Rogers have been elected as Class IDirectors to serve for a term expiring at the Annual Meeting of Stockholders inthe year 2009. In addition, the adoption of the 2006 Stock Incentive Plan toreplace the Company’s 1996 Stock Incentive Plan effective July 1, 2006, wasapproved by both a majority of shares being voted as well as a majority ofshares outstanding. Finally, the selection of Deloitte & Touche LLP as theCompany’s independent registered public accountants for the fiscal year endingDecember 31, 2006, was ratified.

 

50

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**Item 6. Exhibits**

 
| 10.1(1) |   | Lease Agreement dated as of April 19, 2006, between MarkWest Energy  Partners, L.P. and Park Central Property, L.L.C.                                                                                                                                                                  |
|---------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                                                                                                                                                                                                   |
| 10.2+   |   | Gas Processing Agreement dated as of May 10, 2006, between  MarkWest Pinnacle, L.P. and Chesapeake Exploration, L.P.                                                                                                                                                              |
|    |   |                                                                                                                                                                                                                                                                                   |
| 31.1    |   | Certification of the Chief Executive Officer pursuant to Rule  13a-14(a) of the Securities Exchange Act, as adopted pursuant to Section 302  of the Sarbanes-Oxley Act of 2002.                                                                                                        |
|    |   |                                                                                                                                                                                                                                                                                   |
| 31.2    |   | Certification of the Chief Financial Officer pursuant to Rule  13a-14(a) of the Securities Exchange Act, as adopted pursuant to Section 302  of the Sarbanes-Oxley Act of 2002.                                                                                                        |
|    |   |                                                                                                                                                                                                                                                                                   |
| 32.1    |   | Certification of the Chief Executive Officer Pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of  2002.                                                                                                                               |
|    |   |                                                                                                                                                                                                                                                                                   |
| 32.2    |   | Certification of the Chief Financial Officer Pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of  2002.                                                                                                                               |
|    |
| (1)     |   | Incorporated by reference to MarkWest Hydrocarbon, Inc.’s Current  Report on Form 8-K, filed with the Commission on April 25, 2006.                                                                                                                                          |
|    |   |                                                                                                                                                                                                                                                                                   |
| +       |   | Application has been made to the Securities and Exchange Commission  for confidential treatment of certain provisions of these exhibits. Omitted  material for which confidential treatment has been requested has been filed  separately with the Securities and Exchange Commission. |

 

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# ***SIGNATURES***

# *** ***

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 
|                       |                | MarkWest  Hydrocarbon, Inc.                         |   |
|----------------------------|---------------------|-----------------------------------------------------|--------|
|                       |                | (Registrant)                                        |   |
|                       |                |                                                |
| Date:  August 7, 2006 | /s/ FRANK M. SEMPLE |                                                |
|                       |                | Frank M. Semple                                     |
|                       |                | Chief Executive Officer                             |
|                       |                |                                                |
| Date:  August 7, 2006 | /s/ NANCY K. MASTEN |                                                |
|                       |                | Nancy K. Masten                                     |
|                       |                | Senior Vice President and Chief  Accounting Officer |
|                            |                     |                                                     |        |  |

 

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