10-Q 1 a2195324z10-q.htm 10-Q

Table of Contents

UNITED STATES
SECURITIES 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 the quarterly period ended September 30, 2009

OR

o

 

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

For the transition period from            to          

Commission File Number 001-31239



MARKWEST ENERGY PARTNERS, L.P.
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization)
  27-0005456
(IRS Employer
Identification No.)

1515 Arapahoe Street, Tower 2, Suite 700, Denver, Colorado 80202-2126
(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 reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o    No o

        Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ý   Accelerated filer o   Non-accelerated filer o
(Do not check if a
smaller reporting company)
  Smaller reporting company o

        Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2 of the Exchange Act). Yes o    No ý

        The number of the registrant's common units outstanding as of November 2, 2009, was 66,265,782.


Table of Contents

PART I—FINANCIAL INFORMATION

   

Item 1.

 

Financial Statements

 
2

 

Unaudited Condensed Consolidated Balance Sheets at September 30, 2009 and December 31, 2008

 
2

 

Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2009 and 2008

 
3

 

Unaudited Condensed Consolidated Statement of Changes in Partners' Capital for the nine months ended September 30, 2009

 
4

 

Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2009 and 2008

 
5

 

Unaudited Notes to the Condensed Consolidated Financial Statements

 
6

Item 2.

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

 
44

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

 
66

Item 4.

 

Controls and Procedures

 
67

PART II—OTHER INFORMATION

   

Item 1.

 

Legal Proceedings

 
67

Item 1A.

 

Risk Factors

 
67

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 
69

Item 3.

 

Defaults Upon Senior Securities

 
69

Item 4.

 

Submission of Matters to a Vote of Security Holders

 
69

Item 5.

 

Other Information

 
69

Item 6.

 

Exhibits

 
69

SIGNATURES

 
70

        Throughout this document we make statements that are classified as "forward-looking." Please refer to the "Forward-Looking Statements" included in Part I, Item 2 for an explanation of these types of assertions. Also, in this document, unless the context requires otherwise, references to "we," "us," "our," "MarkWest Energy" or the "Partnership" are intended to mean MarkWest Energy Partners, L.P., and its consolidated subsidiaries. References to "MarkWest Hydrocarbon" or the "Corporation" are intended to mean MarkWest Hydrocarbon, Inc. prior to the redemption and merger completed on February 21, 2008.


Table of Contents

Glossary of Terms

        The abbreviations, acronyms and industry technology used in this quarterly report are defined as follows.

Bbl/d

  Barrels of oil per day

Btu

 

One British thermal unit, an energy measurement

Dth/d

 

Dekatherms per day

EBITDA

 

Earnings Before Interest, Taxes, Depreciation and Amortization

FERC

 

Federal Energy Regulatory Commission

FASB

 

Financial Accounting Standards Board

GAAP

 

Accounting principles generally accepted in the United States of America

Gal

 

Gallon

Gal/d

 

Gallons per day

LIBOR

 

London Interbank Offered Rate

Mcf/d

 

One thousand cubic feet of natural gas per day

Merger

 

On February 21, 2008, the Partnership completed the transactions contemplated by its plan of redemption and merger with MarkWest Hydrocarbon, Inc. and MWEP, L.L.C., a wholly-owned subsidiary of the Partnership. Refer to Note 3 of the Partnership's December 31, 2008 Annual Report on Form 10-K as modified by the Current Report on Form 8-K as filed with the SEC on May 18, 2009.

MMBtu

 

One million British thermal units, an energy measurement

MMBtu/d

 

One million British thermal units per day

MMcf/d

 

One million cubic feet of natural gas per day

Net operating margin (a non-GAAP financial measure)

 

Revenue, excluding any derivative gain (loss), less purchased product costs, excluding any derivative gain (loss)

NGL

 

Natural gas liquids, such as ethane, propane, butanes and natural gasoline

N/A

 

Not applicable

OTC

 

Over-the-Counter

SEC

 

Securities and Exchange Commission

1996 Hydrocarbon Plan

 

1996 Hydrocarbon Stock Incentive Plan

2002 LTIP

 

Long-Term Incentive Plan

2006 Hydrocarbon Plan

 

2006 Hydrocarbon Stock Incentive Plan

2008 LTIP

 

2008 Long-Term Incentive Plan

1


Table of Contents

PART I—FINANCIAL INFORMATION

Item 1.    Financial Statements

        


MARKWEST ENERGY PARTNERS, L.P.

Condensed Consolidated Balance Sheets

(unaudited, in thousands)

 
  September 30,
2009
  December 31,
2008
 

ASSETS

             

Current assets:

             
 

Cash and cash equivalents

  $ 65,306   $ 3,321  
 

Receivables and other current assets

    163,203     145,153  
 

Fair value of derivative instruments

    17,796     126,949  
           
   

Total current assets

    246,305     275,423  
           

Property, plant and equipment

   
2,003,400
   
1,650,692
 

Less: accumulated depreciation

    (148,244 )   (81,167 )
           
   

Total property, plant and equipment, net

    1,855,156     1,569,525  
           

Other long-term assets:

             
 

Intangibles, net of accumulated amortization of $73,542 and $42,972, respectively

    664,605     695,917  
 

Fair value of derivative instruments

    30,634     55,389  
 

Other long-term assets

    99,563     76,800  
           
   

Total other long-term assets

    794,802     828,106  
           
   

Total assets

  $ 2,896,263   $ 2,673,054  
           

LIABILITIES AND PARTNERS' CAPITAL

             

Current liabilities:

             
 

Fair value of derivative instruments

  $ 35,134   $ 37,633  
 

Other current liabilities

    175,522     186,553  
           
   

Total current liabilities

    210,656     224,186  
           

Deferred income taxes

   
11,623
   
47,465
 

Fair value of derivative instruments

    33,663     14,801  

Long-term debt, net of discounts of $41,548 and $11,735, respectively

    1,160,498     1,172,965  

Other long-term liabilities

    82,378     5,878  

Commitments and contingencies (Note 18)

             

Partners' Capital:

             
 

MarkWest Energy Partners, L.P. partners' capital (66,266 and 56,640 common units outstanding, respectively)

    1,163,494     1,204,458  
 

Non-controlling interest in consolidated subsidiaries

    233,951     3,301  
           
   

Total partners' capital

    1,397,445     1,207,759  
           
   

Total liabilities and partners' capital

  $ 2,896,263   $ 2,673,054  
           

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

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MARKWEST ENERGY PARTNERS, L.P.

Condensed Consolidated Statements of Operations

(unaudited, in thousands, except per unit amounts)

 
  Three months ended September 30,   Nine months ended September 30,  
 
  2009   2008   2009   2008  

Revenue:

                         
 

Revenue

  $ 207,933   $ 303,560   $ 576,300   $ 866,760  
 

Derivative gain (loss)

    9,758     262,811     (65,173 )   (96,030 )
                   
   

Total revenue

    217,691     566,371     511,127     770,730  
                   

Operating expenses:

                         
 

Purchased product costs

    91,086     171,539     274,052     479,747  
 

Derivative loss (gain) related to purchased product costs

    7,816     67,574     39,954     (11,520 )
 

Facility expenses

    30,165     28,213     93,945     75,641  
 

Derivative loss related to facility expenses

    1,347     1,748     122     1,395  
 

Selling, general and administrative expenses

    15,477     15,331     46,265     54,406  
 

Depreciation

    25,264     17,510     69,621     48,533  
 

Amortization of intangible assets

    10,193     10,732     30,638     28,050  
 

Other operating expenses

    689     38     1,579     106  
 

Impairment of long-lived assets

            5,855     5,009  
                   
   

Total operating expenses

    182,037     312,685     562,031     681,367  
                   
   

Income (loss) from operations

    35,654     253,686     (50,904 )   89,363  

Other income (expense):

                         
 

Earnings (loss) from unconsolidated affiliates

    169     (196 )   1,260     1,932  
 

Interest expense

    (23,440 )   (18,928 )   (63,964 )   (47,527 )
 

Amortization of deferred financing costs and discount (a component of interest expense)

    (3,091 )   (1,080 )   (6,528 )   (7,287 )
 

Derivative gain related to interest expense

    2,265         2,265      
 

Other income, net

    925     1,322     2,747     4,640  
                   
   

Income (loss) before provision for income tax

    12,482     234,804     (115,124 )   41,121  

Provision for income tax (benefit) expense:

                         
 

Current

    (46 )   7,544     6,530     22,876  
 

Deferred

    624     40,592     (34,693 )   (6,414 )
                   
   

Total provision for income tax

    578     48,136     (28,163 )   16,462  
                   
   

Net income (loss)

    11,904     186,668     (86,961 )   24,659  

Net (income) loss attributable to non-controlling interest

    (3,624 )   (122 )   (1,914 )   3,271  
                   
   

Net income (loss) attributable to the Partnership

  $ 8,280   $ 186,546   $ (88,875 ) $ 27,930  
                   

Net income (loss) attributable to the Partnership's common unitholders (Note 16):

                         
 

Basic

  $ 0.13   $ 3.24   $ (1.52 ) $ 0.55  
                   
 

Diluted

  $ 0.13   $ 3.24   $ (1.52 ) $ 0.55  
                   

Weighted average number of outstanding common units:

                         
 

Basic

    63,026     56,635     59,168     49,123  
                   
 

Diluted

    63,026     56,635     59,168     49,127  
                   

Cash distribution declared per common unit(1)

  $ 0.64   $ 0.63   $ 1.92   $ 1.42  
                   

(1)
Under the Merger, the shareholders of the Corporation exchanged each share of Corporation common stock for consideration equal to 1.9051 Partnership common units (the "Exchange Ratio"). The first quarter 2008 distribution represents MarkWest Hydrocarbon's dividend as adjusted to reflect the Exchange Ratio to give effect to the Merger.

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

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MARKWEST ENERGY PARTNERS, L.P.

Condensed Consolidated Statement of Changes in Partners' Capital

(unaudited, in thousands)

 
  MarkWest Energy
Partners, L.P.
Unitholders
   
   
 
 
  Common
Units
  Partners'
Capital
  Non-controlling
Interest
  Total  

December 31, 2008

    56,640   $ 1,204,458   $ 3,301   $ 1,207,759  

Common units issued for vested phantom units

    266     648         648  

Distributions paid

        (112,525 )   (80 )   (112,605 )

Share-based compensation related to equity awards

        3,395         3,395  

Issuance of units in public offerings, net of offering costs

    9,360     178,632         178,632  

Contributions to MarkWest Liberty Midstream joint venture, net

        (5,464 )   150,000     144,536  

Proceeds from sale of equity interest in joint venture, net

        (1,847 )   62,500     60,653  

Transfer to non-controlling interest from sale of equity interest in joint venture, net of tax

        (14,928 )   16,316     1,388  

Net (loss) income

        (88,875 )   1,914     (86,961 )
                   

September 30, 2009

    66,266   $ 1,163,494   $ 233,951   $ 1,397,445  
                   

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

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MARKWEST ENERGY PARTNERS, L.P.

Condensed Consolidated Statements of Cash Flows

(unaudited, in thousands)

 
  Nine months ended
September 30,
 
 
  2009   2008  

Net cash provided by operating activities

  $ 147,865   $ 216,132  

Cash flows from investing activities:

             
 

Change in restricted cash

    (10,025 )    
 

Acquisitions

        (41,300 )
 

Equity investments

    (6,435 )   (27,038 )
 

Cash paid to acquire General Partnership's minority interest

        (21,484 )
 

Cash paid in Merger for MarkWest Hydrocarbon, Inc. stock

        (248,395 )
 

Proceeds from sale of available for sale securities

        6,226  
 

Capital expenditures

    (388,502 )   (316,881 )
 

Proceeds from disposal of property, plant and equipment

    275     78  
           
   

Net cash flows used in investing activities

    (404,687 )   (648,794 )
           

Cash flows from financing activities:

             
 

Proceeds from long-term debt

    685,000     958,234  
 

Payments of long-term debt

    (700,900 )   (515,001 )
 

Payments for debt issuance costs, deferred financing costs and registration costs

    (8,381 )   (21,213 )
 

Proceeds from SMR transaction

    73,129      
 

Proceeds from public offerings, net

    178,632     171,395  
 

Contributions to MarkWest Liberty Midstream joint venture, net

    144,536      
 

Proceeds from sale of equity interest in joint venture, net

    60,653      
 

Share-based payment activity

    (1,257 )   1,031  
 

Payment of distributions and dividends

    (112,605 )   (74,915 )
 

Distributions to MarkWest Energy unitholders prior to the Merger

        (19,651 )
           
   

Net cash flows provided by financing activities

    318,807     499,880  
           

Net increase in cash

   
61,985
   
67,218
 

Cash and cash equivalents at beginning of year

    3,321     37,695  
           

Cash and cash equivalents at end of period

  $ 65,306   $ 104,913  
           

Supplemental disclosures of cash flow information:

             

Cash paid for interest, net of amounts capitalized

  $ 51,514   $ 29,558  

Cash paid for income taxes

    4,529     17,814  

Supplemental schedule of non-cash investing and financing activities:

             

Accrued property, plant and equipment

  $ 24,322   $ 67,826  

Interest capitalized on construction in progress

    9,262     5,035  

Property, plant and equipment asset retirement obligation

    821     9  

Merger step-up of fair value

        605,100  

Issuance of common units for vesting of share-based payment awards

    9,088     2,492  

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

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MARKWEST ENERGY PARTNERS, L.P.

Notes to the Condensed Consolidated Financial Statements

(unaudited)

1. Organization and Basis of Presentation

        MarkWest Energy Partners, L.P. was formed on January 25, 2002, as a Delaware limited partnership. The Partnership is engaged in the gathering, transportation and processing of natural gas; the transportation, fractionation, marketing and storage of NGLs; and the gathering and transportation of crude oil. The Partnership has extensive natural gas gathering, processing and transmission operations in the southwest, Gulf Coast, and northeast regions of the United States, including the Marcellus Shale, and is the largest natural gas processor in the Appalachian region.

        These unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the SEC for interim financial reporting. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. These condensed consolidated financial statements should be read in the context of the consolidated financial statements accompanying notes included in the Partnership's December 31, 2008 Annual Report on Form 10-K as modified by the Current Report on Form 8-K as filed with the SEC on May 18, 2009 for the retrospective application of changes to GAAP related to the presentation of non-controlling interest and the calculation of earnings per share. The presentation of the condensed consolidated statements has been updated to conform to the new requirements of GAAP. In management's opinion, the Partnership has made all adjustments necessary for a fair presentation of its results of operations, financial position and cash flows for the periods shown. These adjustments are of a normal recurring nature. Finally, consider that results for the three and nine months ended September 30, 2009 are not necessarily indicative of results for the full year 2009, or any other future period.

        The Partnership's condensed consolidated financial statements include all majority-owned or majority-controlled subsidiaries. In addition, MarkWest Liberty Midstream & Resources, L.L.C. ("MarkWest Liberty Midstream") and MarkWest Pioneer, L.L.C. ("MarkWest Pioneer"), variable interest entities for which the Partnership has been determined to be the primary beneficiary, are included in the condensed consolidated financial statements (see Note 4 for further discussion of MarkWest Liberty Midstream and MarkWest Pioneer). All significant intercompany investments, accounts, and transactions have been eliminated. Investments in which the Partnership exercises significant influence but does not control, and is not the primary beneficiary, are accounted for using the equity method.

2. Significant Accounting Policies

        There have not been any material changes during the nine months ended September 30, 2009 to the significant accounting policies previously disclosed in the Partnership's 2008 Annual Report on Form 10-K as modified by the Current Report on Form 8-K as filed with the SEC on May 18, 2009 except for the following items related to the accounting for regulated operations, interest rate swaps, and embedded derivatives related to long-term debt.

    Property, Plant and Equipment for FERC Regulated Assets

        Depreciation is generally computed over the asset's estimated useful life using the straight-line method. The composite weighted-average depreciation rates will be 4% for 2009. When the Partnership retires its regulated property, plant and equipment, the Partnership charges the original cost plus the cost of retirement, less salvage value, to accumulated depreciation and amortization.

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MARKWEST ENERGY PARTNERS, L.P.

Notes to the Condensed Consolidated Financial Statements (Continued)

(unaudited)

2. Significant Accounting Policies (Continued)

    Allowance for Funds Used During Construction

        Allowance for funds used during construction ("AFUDC"), which represents the estimated debt and equity costs of capital funds necessary to finance the construction and expansion of regulated facilities, consists of an equity component and an interest expense component. The equity component is a non-cash item. AFUDC is capitalized as a component of Property, plant and equipment, with offsetting credits to the Condensed Consolidated Statements of Operations included in Other income, net for the equity component and Interest expense for the interest component. After construction is completed, the Partnership is permitted to recover these costs through inclusion in the rate base and in the depreciation provision. The total amount of AFUDC included in the Condensed Consolidated Statements of Operations was $5.0 million for the nine months ended September 30, 2009 (an equity component of $2.8 million and an interest expense component of $2.2 million).

    Interest Rate Swaps

        The fair value of the Partnership's interest rate swaps is included as an asset or liability under the caption Fair value of derivative instruments in the Condensed Consolidated Balance Sheets. Changes in the fair value of interest rate swaps are recorded through Derivative gain related to interest expense in the Condensed Consolidated Statements of Operations.

    Embedded Derivatives Related to Long-Term Debt

        The fair value of derivatives related to long-term debt is included as a component of Long-term debt in the Condensed Consolidated Balance Sheet. Changes in the fair value of embedded derivatives related to long-term debt are recorded through Other income, net in the Condensed Consolidated Statements of Operations (see Note 12).

3. Recent Accounting Pronouncements

        In May 2009, the FASB established guidance for the account and reporting of subsequent events, which are events occurring after the balance sheet date but before the financial statements are issued or available to be issued. The new principles describe the circumstances that would require the Partnership to recognize the impact of subsequent events in its financial statements, provides disclosure requirements for subsequent events, and defines the period through which subsequent events must be evaluated. The guidance became effective for the Partnership as of the period ended June 30, 2009, and did not have a material impact on the Partnership's financial statements upon adoption.

        In June 2009, the FASB amended the guidance related to Variable Interest Entities ("VIEs"). The amended guidance changes the criteria for determining if a VIE exists and whether or not a VIE should be consolidated. When this guidance is adopted, the Partnership must reconsider its previous VIE conclusions and what types of financial statement disclosures are appropriate. The amended guidance is effective for the Partnership on January 1, 2010, and the Partnership is currently evaluating the impact on its financial statements.

        In June 2009, the FASB issued guidance that identifies the FASB Accounting Standards Codification (the "FASB Codification") as the source of authoritative GAAP. All of the FASB Codification's content has the same level of authority. The FASB Codification became effective for the

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MARKWEST ENERGY PARTNERS, L.P.

Notes to the Condensed Consolidated Financial Statements (Continued)

(unaudited)

3. Recent Accounting Pronouncements (Continued)


Partnership for the interim period beginning July 1, 2009. The adoption of the FASB Codification did not have a material impact on the Partnership's financial statements.

        In September 2009, the FASB amended the accounting guidance for revenue recognition for multiple-deliverable arrangements. The amended guidance establishes a hierarchy for determining the selling price of each individual deliverable and eliminates the residual value method of allocating the selling price. The amended guidance is effective prospectively for all revenue arrangements entered into or materially modified in fiscal years beginning after June 15, 2010. The Partnership is currently evaluating the impact of the amended guidance on its financial statements.

4. Variable Interest Entities

    MarkWest Liberty Midstream

        On February 27, 2009, the Partnership entered into a joint venture with M&R MWE Liberty LLC ("M&R"), an affiliate of NGP Midstream & Resources, L.P. and its affiliated funds, which is a private equity firm focused on investments in selected areas of the energy infrastructure and natural resources sectors. The joint venture entity, MarkWest Liberty Midstream, operates in the natural gas midstream business in and around the Marcellus Shale in western Pennsylvania and northern West Virginia. The Partnership contributed its existing Marcellus Shale natural gas gathering and processing assets to MarkWest Liberty Midstream in exchange for a 60% ownership interest. The agreed-to value of the contributed assets was approximately $107.5 million. At closing, M&R contributed cash of $50.0 million in exchange for a 40% ownership interest. A wholly-owned subsidiary of the Partnership serves as the operator of MarkWest Liberty Midstream and provides the field operating and general and administrative services. A portion of the fee for providing these services is fixed.

        The Partnership has determined that MarkWest Liberty Midstream is a variable interest entity primarily due to the insufficiency of equity, as defined in the generally accepted accounting principles for consolidation, at its inception as evidenced by the capital requirements outlined below. The Partnership is considered the primary beneficiary due mainly to its 60% share of profits and losses relative to the equal participation by both members in certain management decisions. The Partnership assumes additional variability based on its compensation as the operator of MarkWest Liberty Midstream. The Partnership's maximum exposure to loss as a result of its involvement with MarkWest Liberty Midstream includes its equity investment, the additional capital contribution commitments and any operating expense in excess of its compensation as the operator of MarkWest Liberty Midstream. MarkWest Liberty Midstream will be funded entirely by the Partnership and M&R and has no debt.

        M&R has contributed an additional $100.0 million through the end of the third quarter of 2009 and will contribute at least an additional $50.0 million during the remainder of 2009 to fund the capital expenditures of MarkWest Liberty Midstream. If MarkWest Liberty Midstream capital expenditures during 2009 exceed M&R's quarterly contributions, the Partnership is required to fund the excess. The Partnership contributed approximately $8.0 million to MarkWest Liberty Midstream during the nine months ended September 30, 2009. As M&R contributed the majority of capital associated with 2009 capital expenditures, the capital contributed to MarkWest Liberty Midstream is disproportionate to each party's respective ownership interest. Under the terms of the joint venture agreement, M&R received a special $1.7 million non-cash allocation of net income from MarkWest Liberty Midstream for

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MARKWEST ENERGY PARTNERS, L.P.

Notes to the Condensed Consolidated Financial Statements (Continued)

(unaudited)

4. Variable Interest Entities (Continued)


the three and nine months ended September 30, 2009 because its capital contributed exceeded its 40% ownership interest. The Partnership will make additional capital contributions to fund MarkWest Liberty Midstream's capital expenditures between January 1, 2010 and December 31, 2011 in order for the Partnership's share of contributed capital to be proportionate to its ownership interest. MarkWest Liberty Midstream's capital plan for 2010 and 2011 has not been finalized and the exact timing of these contributions is currently uncertain. If the Partnership has not contributed capital in proportion to its ownership interest by the end of 2011, M&R may require the Partnership to contribute the amount of the shortfall at December 31, 2011, or may allow the Partnership to continue to fund 100% of MarkWest Liberty Midstream's capital expenditures until its total contributed capital is proportionate to its 60% ownership interest. After the date at which each party's contributed capital is proportionate to its respective ownership interest, M&R will have the option to fund future capital expenditures in relation to its ownership interest or have its ownership interest diluted to the extent that it elects not to fund its proportionate share.

        Effective November 1, 2009, the Partnership and M&R executed the Second Amended and Restated Limited Liability Company Agreement of MarkWest Liberty Midstream ("Amended Liberty Agreement"). Refer to Note 22 for further discussion of the Amended Liberty Agreement.

    MarkWest Pioneer

        MarkWest Pioneer is the owner and operator of the Arkoma Connector Pipeline, a 50-mile interstate pipeline that was placed in service in July 2009 and provides approximately 638,000 Dth/d of Woodford Shale takeaway capacity and interconnects with the Midcontinent Express Pipeline and the Gulf Crossing Pipeline. A wholly-owned subsidiary of the Partnership serves as the operator of MarkWest Pioneer and provides the field operating and general and administrative services for fixed fees.

        On May 1, 2009, the Partnership entered into a joint venture with Arkoma Pipeline Partners, LLC ("ArcLight"), an affiliate of ArcLight Capital Partners, LLC which is an investment firm focused on opportunities throughout the energy industry. ArcLight acquired a 50% equity interest in MarkWest Pioneer for a total purchase price of $62.5 million. The Partnership retained a 50% equity interest and is obligated to fund all capital expenditures necessary to complete construction of the Arkoma Connector Pipeline in excess of $125.0 million (the "Excess Capital Expenditures").

        The Partnership has determined that MarkWest Pioneer is a variable interest entity under generally accepted accounting principles for consolidation. This determination is based primarily on disproportionate economic interests as compared to voting interests. The Partnership has economic interests that do not match its 50% voting interest due to its obligation to fund the Excess Capital Expenditures.

    Financial Statement Impact of VIEs

        As the primary beneficiary of MarkWest Liberty Midstream and MarkWest Pioneer, the Partnership consolidates the entities and recognizes non-controlling interests. The Partnership has not provided any financial support that it was not contractually obligated to provide.

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MARKWEST ENERGY PARTNERS, L.P.

Notes to the Condensed Consolidated Financial Statements (Continued)

(unaudited)

4. Variable Interest Entities (Continued)

        The Partnership reflected the following amounts in its Condensed Consolidated Balance Sheet for MarkWest Liberty Midstream and MarkWest Pioneer (in thousands):

 
  As of September 30, 2009  
 
  MarkWest
Liberty Midstream
  MarkWest
Pioneer
 

ASSETS

             
 

Cash and cash equivalents

  $ 7,914   $ 80  
 

Receivables and other current assets(1)

    20,189     1,247  
 

Property, plant and equipment, net of accumulated depreciation of $5,409 and $1,472, respectively

   
257,202
   
153,721
 
 

Other long-term assets

    10,656      
           
   

Total assets

  $ 295,961   $ 155,048  
           

LIABILITIES

             
 

Other current liabilities

  $ 21,126   $ 2,298  
 

Other long-term liabilities

    77     275  
           
   

Total liabilities

  $ 21,203   $ 2,573  
           

(1)
Includes $10.0 million of cash which is restricted for the approved use of MarkWest Liberty Midstream and is not available to the Partnership for any other purpose.

        The assets of MarkWest Liberty Midstream and MarkWest Pioneer are the property of the respective ventures and are not available to the Partnership for any other purpose, including collateral for its secured debt (see Note 12 and Note 20). The liabilities of MarkWest Liberty Midstream and MarkWest Pioneer do not represent additional claims against the Partnership's general assets. The Partnership's Liberty segment includes the results of operations of MarkWest Liberty Midstream (see Note 19). The Partnership's Southwest segment includes the results of operations of MarkWest Pioneer (see Note 19). The cash flow information for MarkWest Liberty Midstream and MarkWest Pioneer comprise substantially all of the cash flow information of non-guarantors (see Note 20).

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MARKWEST ENERGY PARTNERS, L.P.

Notes to the Condensed Consolidated Financial Statements (Continued)

(unaudited)

4. Variable Interest Entities (Continued)

        The following table shows the net income (loss) attributable to the Partnership and transfers to the non-controlling interests for the three and nine months ended September 30, 2009 (in thousands).

 
  Three Months Ended
September 30, 2009
  Nine Months Ended
September 30, 2009
 

Net income (loss) attributable to the Partnership

  $ 8,280   $ (88,875 )
 

Transfers to the non-controlling interests:

             
   

Decrease in Partners' Capital for transaction costs related to sale of equity interest in MarkWest Liberty Midstream and MarkWest Pioneer

        (7,311 )
   

Decrease to Partners' Capital for transfer to non-controlling interest from sale of equity interest in MarkWest Pioneer(1)

    (9,039 )   (14,928 )
           

Net loss attributable to the Partnership and transfers to the non-controlling interests

  $ (759 ) $ (111,114 )
           

(1)
Decrease to Partners' Capital for transfer to non-controlling interest is determined based on the total amount of Excess Capital Expenditures funded by the Partnership. As of September 30, 2009, the decrease reflects an estimate shown net of tax benefit, and is subject to further adjustment.

5. Sale of Steam Methane Reformer

        On September 1, 2009, the Partnership completed the sale of the Steam Methane Reformer ("SMR") currently being constructed at its Javelina gas processing and fractionation facility in Corpus Christi, Texas. Under the terms of the agreement, the Partnership received proceeds of $73.1 million and the purchaser will complete the construction of the SMR. The Partnership and the purchaser also executed a related hydrogen supply agreement under which the Partnership will receive all of the hydrogen produced by the SMR for the next 20 years in exchange for processing fees and the reimbursement of certain other expenses. The processing fee payments will begin when the SMR commences operations, which is expected to occur in March 2010. In accordance with generally accepted accounting principles, the Partnership is deemed to have continuing involvement with the SMR as a result of certain provisions in the related agreements. Therefore, the transaction is treated as a financing arrangement, not an asset sale. The Partnership will continue to report an asset, and the related depreciation, for the capitalized costs of constructing the SMR prior to the transaction closing date and will record the proceeds from the transaction as a liability ("SMR Liability"). The Partnership will impute interest on the SMR Liability at 9.35% annually, its incremental borrowing rate at the time of the transaction. Until the SMR is placed into service and the Partnership begins payment of the processing fee under the hydrogen supply agreement, the accrued interest on the SMR Liability will be capitalized. Each processing fee payment will have multiple elements: reduction of principal of the SMR Liability, interest expense associated with the SMR Liability, and facility expense related to the

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MARKWEST ENERGY PARTNERS, L.P.

Notes to the Condensed Consolidated Financial Statements (Continued)

(unaudited)

5. Sale of Steam Methane Reformer (Continued)


operation of the SMR. As of September 30, 2009, the following amounts related to the SMR are included in the accompanying Condensed Consolidated Balance Sheets (in thousands).

 
   
 

ASSETS

       
 

Property, plant and equipment, net of accumulated depreciation of $0

  $ 82,159  

LIABILITIES

       
 

Other current liabilities

  $ 786  
 

Other long-term liabilities

    72,912  

6. Derivative Financial Instruments

Commodity Contracts

        The Partnership's primary risk management objective is to reduce downside volatility in its cash flows arising from changes in commodity prices related to future sales or purchases of natural gas, NGLs and crude oil. Swaps, options and fixed-price forward contracts may allow the Partnership to reduce downside volatility in its realized margins as realized losses or gains on the derivative instruments generally are offset by corresponding gains or losses in the Partnership's sales or purchases of physical product. While management largely expects realized derivative gains and losses to be offset by increases or decreases in the value of physical sales and purchases, the Partnership will experience volatility in reported earnings due to the recording of unrealized gains and losses on derivative positions that will have no offset. The Partnership's commodity derivative instruments are recorded at fair value in the Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Operations. Accordingly, the volatility in any given period related to unrealized gains or losses can be significant to the overall financial results of the Partnership; however, management generally expects those gains and losses to be offset when they become realized. The Partnership does not have any trading derivative financial instruments.

        To mitigate its cash flow exposure to fluctuations in the price of NGLs, the Partnership has primarily entered into derivative financial instruments relating to the future price of crude oil. To mitigate its cash flow exposure to fluctuations in the price of natural gas, the Partnership primarily utilizes derivative financial instruments relating to the future price of natural gas. As a result of these transactions, the Partnership has mitigated a significant portion of its expected commodity price risk with agreements expiring at various times through the fourth quarter of 2012. The Partnership has a committee comprised of the senior management team that oversees all of the risk management activity and continually monitors the risk management program and expects to continue to adjust its financial positions as conditions warrant.

        To manage its commodity price risk, the Partnership utilizes a combination of fixed-price forward contracts, fixed-for-floating price swaps and options available in the OTC market. The Partnership enters into OTC derivatives with financial institutions and other energy company counterparties. Management conducts a standard credit review on counterparties and has agreements containing collateral requirements where deemed necessary. The Partnership uses standardized agreements that allow for offset of positive and negative exposures (master netting arrangements). Due to the timing of

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MARKWEST ENERGY PARTNERS, L.P.

Notes to the Condensed Consolidated Financial Statements (Continued)

(unaudited)

6. Derivative Financial Instruments (Continued)


purchases and sales, direct exposure to price volatility may result because there is no longer an offsetting purchase or sale that remains exposed to market pricing. Through marketing and derivative activities, direct price exposure may occur naturally or the Partnership may choose direct exposure when it is favorable as compared to the keep-whole risk.

        The use of derivative instruments may create exposure to the risk of financial loss in certain circumstances, including instances when (i) NGLs do not trade at historical levels relative to crude oil, (ii) sales volumes are less than expected, requiring market purchases to meet commitments, or (iii) OTC counterparties fail to purchase or deliver the contracted quantities of natural gas, NGLs or crude oil or otherwise fail to perform. To the extent that the Partnership engages in derivative activities, it may be prevented from realizing the benefits of favorable price changes in the physical market; however, it may be similarly insulated against unfavorable changes in such prices.

        The Partnership's Credit Agreement limits its ability to enter into transactions with parties that require margin calls under certain derivative instruments and prevents members of the participating bank group from requiring margin calls. As of September 30, 2009 approximately 6% of the Partnership's derivative positions, measured volumetrically, are with non-bank group counterparties and are subject to margin deposit requirements under OTC agreements that it meets with letters of credit, if necessary. In the unlikely event that the Partnership were unable to meet these margin calls with letters of credit, it would be forced to terminate the corresponding contracts.

Interest Rate Contracts

        In order to maintain a cost effective capital structure, the Partnership borrows funds using a combination of fixed and variable rate debt. The Partnership uses interest rate swap contracts to manage the interest rate risk associated with the fair value of its fixed rate borrowings and to effectively convert a portion of the underlying cash flows related to its long-term fixed rate debt securities into variable rate cash flows in order to achieve its desired mix of fixed and variable rate debt. As a result, the Partnership's future cash flows from these agreements will vary with the market rate of interest.

Other Contracts—Embedded Derivatives Related to Long-Term Debt

        On May 26, 2009, the Partnership completed the private placement of senior notes with two contingent written put options as described in Note 12. The written put options are considered embedded derivatives and are not considered clearly and closely related to the indenture. In accordance with generally accepted accounting principles, when a hybrid contract contains more than one embedded derivative requiring separate accounting, the embedded derivatives must be aggregated and accounted for as one compound embedded derivative. The initial fair value of the compound embedded derivative in the indenture (the "Compound Derivative") was recorded as a component of Long-term debt in the Condensed Consolidated Balance Sheets with a corresponding increase in the recorded balance of the original issue discount related to the senior notes issued in May 2009.

        The Partnership values its derivative instruments and estimates fair value as discussed in Note 7. The Partnership has not designated any of its instruments as cash flow or fair value hedges. The Partnership did not designate any contracts as normal purchase or sales contracts.

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MARKWEST ENERGY PARTNERS, L.P.

Notes to the Condensed Consolidated Financial Statements (Continued)

(unaudited)

6. Derivative Financial Instruments (Continued)

        The impact of the Partnership's derivative instruments on its Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Operations are summarized below (in thousands):

 
  Asset Derivatives   Liability Derivatives  
Derivative contracts not designated as
hedging instruments and their balance
sheet location
  Fair Value at
September 30,
2009
  Fair Value at
December 31,
2008
  Fair Value at
September 30,
2009
  Fair Value at
December 31,
2008
 

Commodity Contracts

                         
 

Fair value of derivative instruments—current

  $ 16,397   $ 126,949   $ (35,134 ) $ (37,633 )
 

Fair value of derivative instruments—long-term

    29,768     55,389     (33,663 )   (14,801 )

Interest rate contracts

                         
 

Fair value of derivative instruments—current

    1,399              
 

Fair value of derivative instruments—long-term

    866              

Other Contracts

                         
 

Long-term debt

            (246 )    
                   
   

Total

  $ 48,430   $ 182,338   $ (69,043 ) $ (52,434 )
                   

 
  Three months ended
September 30,
  Nine months ended
September 30,
 
Derivative contracts not designated as
hedging instruments and the location of
gain or (loss) recognized in income
 
  2009   2008   2009   2008  

Revenue: Derivative gain (loss)

                         
 

Realized gain (loss)

  $ 9,254   $ (22,197 ) $ 85,667   $ (64,961 )
 

Unrealized gain (loss)

    504     285,008     (150,840 )   (31,069 )
                   
   

Total Revenue: derivative gain (loss)

    9,758     262,811     (65,173 )   (96,030 )
                   

Derivative (loss) gain related to purchased product costs

                         
 

Realized (loss) gain

    (15,271 )   7,419     (42,530 )   15,858  
 

Unrealized gain (loss)

    7,455     (74,993 )   2,576     (4,338 )
                   
   

Total derivative (loss) gain related to purchased product costs

    (7,816 )   (67,574 )   (39,954 )   11,520  
                   

Derivative loss related to facility expenses

                         
 

Unrealized loss

    (1,347 )   (1,748 )   (122 )   (1,395 )

Derivative gain related to interest expense

                         
 

Unrealized gain

    2,265         2,265      

Other income, net

                         
 

Unrealized gain

    189         280      
                   
   

Total gain (loss)

  $ 3,049   $ 193,489   $ (102,704 ) $ (85,905 )
                   

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MARKWEST ENERGY PARTNERS, L.P.

Notes to the Condensed Consolidated Financial Statements (Continued)

(unaudited)

6. Derivative Financial Instruments (Continued)

        The change in fair value of commodity and interest rate contracts, realized and unrealized, are recorded in separate line items Derivative gain or loss related to either revenue, purchased product costs, facility expenses, or interest expense in the accompanying Condensed Consolidated Statements of Operations. Revenue gains and losses relate to contracts utilized to economically hedge the cash flow for the sale of a product. Purchased product costs gains and losses relate to contracts utilized to economically hedge costs, typically in a keep-whole arrangement. Facility expenses gains and losses relate to a contract utilized to economically hedge electricity costs for a facility. Interest expense gains relate to interest rate swaps. The unrealized gain or loss related to changes in the fair value of the Compound Derivative is recorded in Other income, net in the accompanying Condensed Consolidated Statements of Operations.

        At September 30, 2009, the fair value of the Partnership's commodity derivative contracts is inclusive of premium payments of $9.2 million, net of amortization. The Partnership amortizes the premium payments over the effective term of the underlying derivative commodity option contracts through realized gain (loss). For the three months ended September 30, 2009 and 2008, the Realized gain (loss)—revenue includes amortization of premium payments of $1.5 million and $0.7 million, respectively. For the nine months ended September 30, 2009 and 2008, the Realized gain (loss)—revenue includes amortization of premium payments of $4.2 million and $1.1 million, respectively.

Credit Risk Contingent Feature

        The Partnership has a contractual arrangement with one non-bank group counterparty that contains a credit risk contingent feature. The Partnership has OTC swap and put positions with this counterparty. This arrangement contains provisions that if the Partnership's credit rating for its long-term senior unsecured debt, as announced by Moody's Investors Service, Inc. and Standard and Poor's Corporation were to decline below B3 or B-, respectively, the Partnership would be required to post additional collateral in the amount of 15% of all outstanding transactions if the contract value of all outstanding transactions was in a net liability position. The Partnership has a standard master netting arrangement with this counterparty. The aggregate fair value of all derivative contracts with a credit risk related contingent feature that are in a liability position at September 30, 2009 is $3.1 million; however, for all outstanding transactions with this counterparty, the Partnership has a net asset position of $6.7 million. If the credit risk contingent feature was triggered as of September 30, 2009, the Partnership would not be required to post additional collateral as collateral is not required when the net position is an asset. If the Partnership's net position became a liability and collateral was required to be posted, it would be accomplished through a letter of credit due to a restriction in the credit agreement which does not allow cash collateral.

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MARKWEST ENERGY PARTNERS, L.P.

Notes to the Condensed Consolidated Financial Statements (Continued)

(unaudited)

6. Derivative Financial Instruments (Continued)

Outstanding Derivative Contracts

        The following tables provide information on the volume of the Partnership's derivative activity for positions related to long liquids and keep-whole price risk and interest rate risk at September 30, 2009, including the weighted average prices ("WAVG"):

WTI Crude Collars
  Volumes
(Bbl/d)
  WAVG Floor
(Per Bbl)
  WAVG Cap
(Per Bbl)
  Fair Value
(in thousands)
 

2009

    3,425   $ 67.50   $ 77.83   $ (5 )

2010 (Apr - Dec)

    1,297     66.48     74.49     (1,385 )

2011

    822     60.00     80.13     (1,675 )

2012

    822     60.00     85.87     (1,648 )

 

WTI Crude Puts
  Volumes
(Bbl/d)
  WAVG Floor
(Per Bbl)
  Fair Value
(in thousands)
 

2009

    2,150   $ 80.00   $ 2,026  

2010

    1,191     80.00     5,893  

2011

    1,818     80.00     9,804  

 

WTI Crude Swaps
  Volumes
(Bbl/d)
  WAVG Price
(Per Bbl)
  Fair Value
(in thousands)
 

2009

    1,585   $ 119.54   $ 6,890  

2010

    3,513     69.21     (6,025 )

2011

    535     68.20     (1,692 )

2012

    529     70.30     (1,598 )

 

Natural Gas Swaps
  Volumes
(MMBtu/d)
  WAVG Price
(Per MMBtu)
  Fair Value
(in thousands)
 

2009

    10,667   $ 8.54   $ (3,863 )

 

Interest Rate Swaps
  Principal Notional
Amount
(in thousands)
  WAVG LIBOR
Spread
  Fair Value
(in thousands)
 

2014 (Settlement Dates May 1st & Nov 1st)

  $ 275,000     3.83 % $ 2,265  

        The following tables provide information on the volume of the Partnership's taxable subsidiary's commodity derivative activity for positions related to keep-whole price risk at September 30, 2009, including the WAVG:

WTI Crude Collars
  Volumes
(Bbl/d)
  WAVG Floor
(Per Bbl)
  WAVG Cap
(Per Bbl)
  Fair Value
(in thousands)
 

2012

    648   $ 70.00   $ 91.85   $ (31 )

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MARKWEST ENERGY PARTNERS, L.P.

Notes to the Condensed Consolidated Financial Statements (Continued)

(unaudited)

6. Derivative Financial Instruments (Continued)

 

WTI Crude Swaps
  Volumes
(Bbl/d)
  WAVG Price
(Per Bbl)
  Fair Value
(in thousands)
 

2009

    4,735   $ 69.53   $ (619 )

2010

    2,906     71.27     (2,872 )

2011

    3,150     87.27     11,024  

2012 (Jan)

    2,142     91.50     819  

 

Natural Gas Swaps
  Volumes
(MMBtu/d)
  WAVG Price
(Per MMBtu)
  Fair Value
(in thousands)
 

2009

    18,212   $ 7.66   $ (5,175 )

2010

    10,577     9.44     (10,864 )

2011

    15,429     8.79     (9,440 )

2012

    4,225     7.08     109  

        The Partnership has a commodity contract with a producer in the Appalachia region which creates a floor on the frac spread for gas purchases of 9,000 Dth/d. The primary term of the commodity contract, a component of a broader regional arrangement, expires on December 31, 2009 but the producer has an option to extend certain contracts through the first quarter of 2015. In October 2009, the producer exercised its right to extend the processing agreement and the commodity contract. The fair value of the commodity contract is marked based on an index price through Derivative loss (gain) related to purchased product costs. As of September 30, 2009, the estimated fair value of this contract was $(11.6) million.

        The Partnership has a commodity contract which gives it an option to fix a component of the utilities cost to an index price on electricity at one of its plant locations. The value of the derivative component of this contract is marked to market through Derivative gain related to facility expenses. As of September 30, 2009, the estimated fair value of this contract was $(0.8) million.

        During the first quarter of 2009, the Partnership settled a portion of its derivative positions covering 2009, 2010, and 2011 for $15.2 million of net realized gains. The settlement was completed prior to the contractual settlement to improve liquidity and to mitigate credit risk with certain counterparties, and as such does not represent trading activity. The settlement was recorded as $26.5 million of realized gains in Realized gain (loss)—revenue and $11.3 million loss is included in Derivative loss (gain) related to purchased product costs in the accompanying Condensed Consolidated Statements of Operations.

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MARKWEST ENERGY PARTNERS, L.P.

Notes to the Condensed Consolidated Financial Statements (Continued)

(unaudited)

7. Fair Value

        The following table presents the Partnership's financial instruments carried at fair value as of September 30, 2009 and December 31, 2008, in accordance with the hierarchy defined in generally accepted accounting principles for fair value measurements (in thousands):

 
  Assets   Liabilities  
As of September 30, 2009
  Trading
Securities
  Derivatives   Derivatives  

Quoted prices in active markets for identical assets (Level 1)

  $   $   $  

Significant other observable inputs (Level 2)

        24,042     (47,348 )

Significant unobservable inputs (Level 3)

        24,388     (21,695 )
               

Total carrying value in Condensed Consolidated Balance Sheet

  $   $ 48,430   $ (69,043 )
               

 

 
  Assets   Liabilities  
As of December 31, 2008
  Trading
Securities
  Derivatives   Derivatives  

Quoted prices in active markets for identical assets (Level 1)

  $   $   $  

Significant other observable inputs (Level 2)

        106,826     (49,378 )

Significant unobservable inputs (Level 3)

    512     75,512     (3,056 )
               

Total carrying value in Condensed Consolidated Balance Sheet

  $ 512   $ 182,338   $ (52,434 )
               

Changes in Level 3 Fair Value Measurements

        The determination to classify a financial instrument with Level 3 of the valuation hierarchy is based upon the significance of the unobservable inputs to the overall fair value measurement. However, Level 3 financial instruments typically include, in addition to the unobservable or Level 3 inputs, observable inputs (that is, inputs that are actively quoted and can be validated to external sources); accordingly, the gains and losses for Level 3 financial instruments include changes in fair value due in part to observable inputs that are part of the valuation methodology. Level 3 financial instruments include interest rate swaps, crude oil options, all NGL transactions and the Compound Derivative as they have significant unobservable market parameters. Depending on the Level 3 financial instrument significant unobservable inputs include volatilities associated with option contracts, commodity prices interpolated and extrapolated due to inactive markets, and for the Compound Derivative assumptions about the probability of specific events occurring in the future.

        The tables below include a rollforward of the balance sheet amounts for the three and nine months ended September 30, 2009 and 2008 (including the change in fair value) for financial instruments classified by the Partnership within Level 3 of the valuation hierarchy (in thousands). For the period ended September 30, 2008 the Partnership considered options to be Level 2. After further

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MARKWEST ENERGY PARTNERS, L.P.

Notes to the Condensed Consolidated Financial Statements (Continued)

(unaudited)

7. Fair Value (Continued)


consideration, options are considered Level 3 due to significant unobservable inputs. Therefore, the rollforwards presented below for the three and nine months ended September 30, 2009 include options.

 
  Three Months Ended  
 
  September 30, 2009   September 30, 2008  
 
  Trading
Securities
  Derivatives
(net)
  Trading
Securities
  Derivatives
(net)
 

Fair Value at Beginning of Period

  $   $ 10,034   $ 1,198   $ (187,353 )

Total gain or loss (realized and unrealized) included in earnings(a)(b)

        (3,913 )       105,864  

Purchases, sales, issuances and settlements (net)

        (3,428 )       17,543  

Transfers in or out of Level 3 (net)

                 
                   

Fair Value at End of Period

  $   $ 2,693   $ 1,198   $ (63,946 )
                   

The amount of total gains or losses for the period included in earnings (or changes in net assets) attributable to the change in unrealized gains or losses relating to assets still held at September 30, 2009 and 2008, respectively(a)

  $   $ (5,237 ) $   $ 109,455  
                   

 

 
  Nine Months Ended  
 
  September 30, 2009   September 30, 2008  
 
  Trading
Securities
  Derivatives
(net)
  Trading
Securities
  Derivatives
(net)
 

Fair Value at Beginning of Period

  $ 512   $ 72,456   $ 3,674   $ (84,367 )

Total gain or loss (realized and unrealized) included in earnings(a)(b)

    40     (36,915 )   (76 )   (46,219 )

Purchases, sales, issuances and settlements (net)

    (552 )   (32,848 )   (2,400 )   66,640  

Transfers in or out of Level 3 (net)

                 
                   

Fair Value at End of Period

  $   $ 2,693   $ 1,198   $ (63,946 )
                   

The amount of total gains or losses for the period included in earnings (or changes in net assets) attributable to the change in unrealized gains or losses relating to assets still held at September 30, 2009 and 2008, respectively(a)

  $   $ (42,471 ) $ (76 ) $ (4,367 )
                   

(a)
See Note 6 for the financial statement presentation of gains and losses on derivatives.

(b)
Gains and losses on trading securities are realized and recorded in Other income, net.

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MARKWEST ENERGY PARTNERS, L.P.

Notes to the Condensed Consolidated Financial Statements (Continued)

(unaudited)

7. Fair Value (Continued)

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

        Certain assets and liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances. As of June 30, 2009, certain long-lived assets of Wirth Gathering Partnership ("Wirth"), a consolidated subsidiary, were required to be measured at fair value in conjunction with the Partnership's impairment evaluation for long-lived assets. Property, plant and equipment and intangible assets with a net book value of $5.2 million and $0.7 million, respectively, were written down to an estimated fair value of zero, resulting in an impairment charge of $5.9 million. The Partnership estimated the fair value of these assets based on an income approach using significant unobservable inputs (Level 3). See Note 10 for further discussion of the impairment. As of September 30, 2009, there were no assets or liabilities to be measured at fair value on a nonrecurring basis.

8. Inventories

        Inventories are included in Receivables and other current assets in the Condensed Consolidated Balance Sheet. Inventories consist of the following (in thousands):

 
  September 30,
2009
  December 31,
2008
 

Natural gas and natural gas liquids

  $ 22,660   $ 29,171  

Spare parts

    7,766     2,385  
           
 

Total inventories

  $ 30,426   $ 31,556  
           

9. Goodwill

        The Partnership's $9.4 million goodwill balance as of September 30, 2009 and December 31, 2008 consisted of $3.9 million allocated to the Northeast segment and $5.5 million allocated to the Southwest segment. The goodwill balance is included in Other long-term assets in the Condensed Consolidated Balance Sheet. Goodwill is not amortized but instead tested for impairment annually on November 30, or more frequently when events and circumstances occur indicating that the recorded goodwill may not be recoverable. As of September 30, 2009, the Partnership did not test goodwill for impairment as there were no indicators that the goodwill balance may not be recoverable.

10. Impairment of Long-Lived Assets

        The Partnership's policy is to evaluate whether there has been an impairment in the value of long-lived assets when certain events indicate that the remaining balance may not be recoverable. The Partnership evaluates the carrying value of its property, plant and equipment on at least a segment level and at lower levels where the cash flows for specific assets can be identified.

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MARKWEST ENERGY PARTNERS, L.P.

Notes to the Condensed Consolidated Financial Statements (Continued)

(unaudited)

10. Impairment of Long-Lived Assets (Continued)

        An analysis completed during the second quarter of 2009 indicated that the future estimated operating cash flows could be at or below zero for Wirth, which operates a small natural gas gathering system included in the Partnership's Southwest segment. The Partnership owns a 50% interest in Wirth and consolidates its assets, liabilities, and results of operations in the accompanying Condensed Consolidated Financial Statements. Wirth's expected future cash flows were adversely impacted by a significant reduction to the primary producer's drilling plan disclosed in the second quarter of 2009, as well as increased operating expenses resulting from an agreement reached in May 2009 with the non-controlling partner. The Partnership used the income approach for determining the assets' fair value and recognized an impairment of long-lived assets of approximately $5.9 million for the nine months ended September 30, 2009. After considering the impact of the non-controlling interest, the impairment increased the net loss attributable to the Partnership for the nine months ended September 30, 2009 by approximately $2.9 million, before provision for income tax.

11. Investments in Unconsolidated Affiliates

        The Partnership's investment in its unconsolidated affiliates, Starfish Pipeline Company, L.L.C. ("Starfish") and Centrahoma Processing L.L.C. ("Centrahoma"), is included in Other long-term assets in the accompanying Condensed Consolidated Balance Sheet. The Partnership's share of income from its investments in unconsolidated affiliates is included in Earnings (loss) from unconsolidated affiliates in the accompanying Condensed Consolidated Statements of Operations.

        Summarized financial information for 100% of Starfish and the Partnership's share of Starfish's net income (loss) is as follows (unaudited, in thousands):

 
  Three months
ended
September 30,
  Nine months
ended
September 30,
 
 
  2009   2008   2009   2008  

Revenue

  $ 8,566   $ 5,247   $ 22,636   $ 19,624  

Operating income (loss)

    4,102     (399 )   12,389     3,800  

Net income (loss)

    806     (355 )   3,780     4,188  

Partnership's share of net income (loss)

 
$

403
 
$

(248

)

$

1,848
 
$

1,878
 

        In addition, the Partnership settled certain insurance claims related to damage and business interruption caused by Hurricane Ike in 2008. Total insurance proceeds of $0.7 million are included in Other income, net in the Condensed Consolidated Statements of Operations.

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MARKWEST ENERGY PARTNERS, L.P.

Notes to the Condensed Consolidated Financial Statements (Continued)

(unaudited)

11. Investments in Unconsolidated Affiliates (Continued)

        Summarized financial information for 100% of Centrahoma and the Partnership's share of Centrahoma's net income (loss) is as follows (unaudited, in thousands):

 
  Three months
ended
September 30,
  Nine months
ended
September 30,
 
 
  2009   2008   2009   2008  

Revenue

  $ 2,369   $ 2,410   $ 6,568   $ 4,455  

Operating income

    556     138     2,324     134  

Net (loss) income

    (585 )   138     (1,471 )   134  

Partnership's share of net (loss) income

 
$

(234

)

$

52
 
$

(588

)

$

54
 

        The table below shows the carrying value of the Partnership's investments in unconsolidated affiliates (in thousands):

 
  September 30,
2009
  December 31,
2008
 

Investment in Starfish

  $ 24,291   $ 17,181  

Investment in Centrahoma

    29,496     28,911  
           
 

Total investment in unconsolidated affiliates

  $ 53,787   $ 46,092  
           

12. Long-Term Debt

        Long-term debt is summarized below (in thousands):

 
  September 30,
2009
  December 31,
2008
 

Credit Facility

             
 

Revolver facility, 5.0% and 2.51% interest at September 30, 2009 and December 31, 2008, respectively, due February 2012

  $ 51,800   $ 184,700  

Senior Notes (collectively the "Senior Notes")

             
 

Senior Notes, 6.875% interest, net of discount of $8,501 and $9,676, respectively, issued October 2004 and due November 2014

    216,499     215,324  
 

Senior Notes, 6.875% interest, net of discount of $31,172 and $0, respectively, issued May 2009 and due November 2014(1)

    119,074      
 

Senior Notes, 8.5% interest, net of discount of $792 and $882, respectively, issued July 2006 and due July 2016

    274,208     274,118  
 

Senior Notes, 8.75% interest, net of discount of $1,083 and $1,177, respectively, issued April 2008 and due April 2018

    498,917     498,823  
           
   

Total long-term debt

  $ 1,160,498   $ 1,172,965  
           

(1)
Includes fair value of approximately $0.2 million of written put options as discussed below.

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MARKWEST ENERGY PARTNERS, L.P.

Notes to the Condensed Consolidated Financial Statements (Continued)

(unaudited)

12. Long-Term Debt (Continued)

    Credit Facility

        On January 28, 2009, the Partnership entered into the first amendment to its Partnership Credit Agreement which became effective March 2, 2009. The amendment expands the Partnership's borrowing capacity under the revolving facility by $85.6 million from $350.0 million to $435.6 million. Pursuant to the amendment, the term of the original credit agreement has been reduced by one year and is now due on February 20, 2012. The accordion feature established under the original credit agreement was reset to $200.0 million of uncommitted funds. The borrowings under the revolving credit facility of the Partnership Credit Agreement continue to bear interest at a variable interest rate, plus basis points. The variable interest rate typically is 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%, and b) a rate set by the Partnership Credit Agreement's administrative agent, based on the U.S. prime rate. The basis points correspond to the ratio of the Partnership's Consolidated Funded Debt (as defined in the Partnership Credit Agreement) to Adjusted Consolidated EBITDA (as defined in the Partnership Credit Agreement). Under the original agreement, the basis points ranged from 50 to 125 for Base Rate loans, and 150 to 225 for LIBOR loans. Under the terms of the amendment, the basis points range from 150 to 225 for Base Rate loans and 250 to 325 for LIBOR loans. The amendment also established a floor of 2% for the LIBOR rate used to determine the interest rate on the LIBOR loans. The Partnership incurred and capitalized approximately $4.3 million of debt modification fees and other professional services as a result of the amendment. The amendment also resulted in the write-off of approximately $0.3 million of previously capitalized deferred finance costs during the first quarter of 2009, which is included in Amortization of deferred financing costs and discount in the accompanying Condensed Consolidated Statements of Operations.

        Under the provisions of the Partnership Credit Agreement, the Partnership is subject to a number of restrictions and covenants as defined by the agreement. These covenants are used to calculate the available borrowing capacity on a quarterly basis. The credit facility is guaranteed and collateralized by substantially all of the Partnership's assets and those of its wholly-owned subsidiaries. As of September 30, 2009, the Partnership had $51.8 million of borrowings outstanding and $31.5 million of letters of credit outstanding under the revolving credit facility, leaving approximately $352.3 million available for borrowing.

        The recorded value of the amounts outstanding under the revolving credit facility as of September 30, 2009 approximates fair value due to the short-term nature of the borrowings and the variable interest rate that reflects current market conditions.

    Senior Notes

        As of September 30, 2009, MarkWest Energy Partners, L.P. in conjunction with its wholly-owned subsidiary MarkWest Energy Finance Corporation (the "Issuers") had four series of Senior Notes outstanding. On May 26, 2009, the Issuers completed a private placement of $150.0 million in aggregate principal amount of 6.875% senior unsecured notes due 2014 to qualified institutional buyers under Rule 144A. The Partnership received proceeds of approximately $113.8 million, after deducting the initial purchasers' discounts and other expenses of the private placement. The proceeds were primarily used to repay borrowings under the Partnership's revolving credit facility. Interest on these senior notes is payable on each May 1 and November 1 and will accrue from May 26, 2009.

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MARKWEST ENERGY PARTNERS, L.P.

Notes to the Condensed Consolidated Financial Statements (Continued)

(unaudited)

12. Long-Term Debt (Continued)

        On July 2, 2009, the Partnership filed an exchange offer registration statement, pursuant to the registration rights agreement for the senior notes issued in May 2009. The exchange offering was initiated in the fourth quarter of 2009 and is currently in process.

        The indenture for the senior notes issued in May 2009 contains the following two contingent written put options exercisable by the debt holders (see Note 6 for more information on the separate accounting for the written put options and Note 7 for more information on the determination of the fair value):

        Change in Control Put—In the event of a change in control of the Partnership, the debt holders have the option to put the notes at 101% of principal amount, plus any accrued interest.

        Asset Sale Offer Put—In the event the Partnership consummates an asset sale, as defined in the indenture, and fails to use the net proceeds in excess of $10.0 million to: (i) pay off indebtedness under the Credit Facility; (ii) to make capital expenditures; (iii) to acquire other long-term tangible assets or (iv) to invest the proceeds in any other approved investment, the Partnership must use the excess proceeds to offer to repurchase some portion of the senior notes at 100% of principal amount, plus any accrued interest.

        The written put options are considered embedded derivatives primarily due to the fact that they are contingently exercisable and the notes were issued at a substantial discount. Substantially similar contingent written put options are also in the indentures for the Partnership's previous senior note offerings, but they do not require separate accounting because their issuance in prior years was not at a substantial discount.

        The estimated fair value of all outstanding Senior Notes was approximately $1,121.5 million and $627.1 million at September 30, 2009 and December 31, 2008, respectively, based on quoted market prices.

        The Issuers have no independent operating assets or operations. All wholly-owned subsidiaries, other than MarkWest Energy Finance Corporation, guarantee the Senior Notes, jointly and severally and fully and unconditionally. The Partnership's less than wholly-owned subsidiaries do not guarantee the Senior Notes (see Note 20 for required condensed consolidating financial information). The notes are senior unsecured obligations equal in right of payment with all of the Partnership's existing and future senior debt. These notes are senior in right of payment to all of the Partnership's future subordinated debt but effectively junior in right of payment to its secured debt to the extent of the assets securing the debt, including the Partnership's obligations in respect of the Partnership Credit Agreement.

        The indentures governing the Senior Notes limit the activity of the Partnership and its restricted subsidiaries. Subject to compliance with certain covenants, the Partnership may issue additional notes from time to time under the indentures pursuant to Rule 144A and Regulation S under the Securities Act of 1933. If at any time the Senior Notes are rated investment grade by both Moody's Investors Service, Inc. and Standard & Poor's Rating Services and no default (as defined in the indentures) has occurred and is continuing, many of such covenants will be suspended during the period of time in which the foregoing requirements are met or will terminate entirely, in which case the Partnership and its subsidiaries will cease to be subject to such terminated covenants.

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MARKWEST ENERGY PARTNERS, L.P.

Notes to the Condensed Consolidated Financial Statements (Continued)

(unaudited)

13. Income Taxes

        A reconciliation of the provision for income tax and the amount computed by applying the federal statutory rate of 35% to the income (loss) before provision for income tax for the nine months ended September 30, 2009 and 2008 is as follows (in thousands):

 
  Nine months ended September 30, 2009  
 
  Corporation   Partnership   Eliminations   Consolidated  

Loss before provision for income tax

  $ (72,819 ) $ (32,505 ) $ (9,800 ) $ (115,124 )
                         

Federal statutory rate

    35 %   0 %   0 %      
                     

Federal income tax at statutory rate

  $ (25,486 ) $   $   $ (25,486 )

Permanent items

    (6 )           (6 )

State income taxes net of federal benefit

    (1,794 )   (216 )       (2,010 )

Provision on income from Class A units

    (1,072 )           (1,072 )

Excess book deduction related to equity compensation

    408     3         411  
                   
 

Provision for income tax

  $ (27,950 ) $ (213 ) $   $ (28,163 )
                   

Effective tax rate

                     
24.5

%

 
  Nine months ended September 30, 2008  
 
  Corporation   Partnership   Eliminations   Consolidated  

Income before provision for income tax

  $ 1,876   $ 48,020   $ (8,775 ) $ 41,121  
                         

Federal statutory rate

    35 %   0 %   0 %      
                     

Federal income tax at statutory rate

  $ 657   $   $   $ 657  

Permanent items

    8             8  

State income taxes net of federal benefit

    47     302         349  

Provision on income from Class A units

    8,188             8,188  

Write-off of deferred income tax assets

    7,471             7,471  

Other

    (211 )           (211 )
                   
 

Provision for income tax

  $ 16,160   $ 302   $   $ 16,462  
                   

Effective tax rate

                     
40.0

%

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MARKWEST ENERGY PARTNERS, L.P.

Notes to the Condensed Consolidated Financial Statements (Continued)

(unaudited)

14. Incentive Compensation Plans

Compensation Expense

        Total compensation expense recorded for share-based pay arrangements is as follows (in thousands):

 
  Three months
ended
September 30,
  Nine months
ended
September 30,
 
 
  2009   2008   2009   2008  

Phantom units

  $ 1,583   $ 3,087   $ 5,755   $ 9,261  

Distribution equivalent rights

    328     230     996     468  

Restricted stock

                75  

General partner interests under Participation Plan

                5,470  
                   

Total compensation expense

  $ 1,911   $ 3,317   $ 6,751   $ 15,274  
                   

        The interests in the Partnership's General Partner sold by the Corporation to certain directors and employees were sold under an arrangement referred to as the Participation Plan which was considered a compensatory arrangement. In conjunction with the Merger, all of the outstanding interests in the General Partner were acquired for a combination of 0.9 million common units with a fair value of approximately $30.1 million and approximately $21.5 million in cash.

        As of September 30, 2009, total compensation expense not yet recognized related to the unvested awards under the 2008 LTIP and 2006 Hydrocarbon Plan was approximately $16.2 million, with a weighted average remaining vesting period of approximately 1.3 years. Total compensation expense not yet recognized related to unvested awards under the 2002 LTIP was approximately $0.5 million, with a weighted-average remaining vesting period of approximately 0.7 years. The actual compensation expense recognized for awards under the 2002 LTIP may differ as they qualify as liability awards. The compensation expense recognized for liability awards is affected by changes in the fair value of the awards.

2008 LTIP, 2006 Hydrocarbon Plan and 1996 Hydrocarbon Plan

        The following is a summary of phantom unit activity under the 2008 LTIP, 2006 Hydrocarbon Plan and 1996 Hydrocarbon Plan:

 
  Number of Units   Weighted-average
Grant-date Fair Value
 

Unvested at December 31, 2008

    909,306   $ 31.80  
 

Granted(1)

    437,535     8.47  
 

Vested(2)

    (296,818 )   31.93  
 

Forfeited(3)

    (30,233 )   20.45  
             

Unvested at September 30, 2009(4)

    1,019,790     22.08  
             

(1)
Includes 154,500 phantom units granted to senior executives and other key employees which contain performance vesting criteria ("performance units").

(2)
Includes 139,050 performance units.

(3)
Includes 13,950 performance units.

(4)
Includes 465,000 performance units. Compensation expense recorded for the performance units expected to vest was approximately $0.3 million and $2.9 million for the nine months ended September 30, 2009 and 2008, respectively.

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MARKWEST ENERGY PARTNERS, L.P.

Notes to the Condensed Consolidated Financial Statements (Continued)

(unaudited)

14. Incentive Compensation Plans (Continued)

 
  Three months
ended
September 30,
  Nine months
ended
September 30,
 
 
  2009   2008   2009   2008  
 
  (in thousands)
 

Total grant-date fair value of phantom units granted during the period

  $ 47   $ 198   $ 3,705   $ 29,351  

Total fair value of phantom units vested during the period and total intrinsic value of phantom units settled during the period

  $ 414   $ 424   $ 9,478   $ 549  

2002 LTIP

        The following is a summary of phantom unit activity under the 2002 LTIP:

 
  Number of Units   Weighted-average
Grant-date Fair Value
 

Unvested at December 31, 2008

    145,927   $ 31.45  
 

Vested

    (67,818 )   29.86  
 

Forfeited

    (5,482 )   33.56  
             

Unvested at September 30, 2009

    72,627     32.78  
             

 
  Three months
ended
September 30,
  Nine months
ended
September 30,
 
 
  2009   2008   2009   2008  
 
  (in thousands)
 

Total grant-date fair value of phantom units granted during the period

  $   $   $   $ 2,670  

Total fair value of phantom units vested during the period and total intrinsic value of phantom units settled during the period

  $ 49   $ 72   $ 867   $ 1,943  

15. Equity Offerings

        On August 18, 2009, the Partnership completed a public offering of approximately 6.03 million newly issued common units, which included the exercise of the overallotment option by the underwriters, representing limited partner interests at a purchase price of $20.95 per common unit. Net proceeds of approximately $121.0 million were used to partially fund the Partnership's 2009 capital expenditure requirements, and the remainder was used to pay down borrowings under its revolving credit facility of the Partnership Credit Agreement.

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Table of Contents


MARKWEST ENERGY PARTNERS, L.P.

Notes to the Condensed Consolidated Financial Statements (Continued)

(unaudited)

15. Equity Offerings (Continued)

        On June 10, 2009, the Partnership completed a public offering of approximately 3.34 million newly issued common units, which included the exercise of the overallotment option by the underwriters, representing limited partner interests at a purchase price of $18.15 per common unit. Net proceeds of approximately $57.7 million were used to partially fund the Partnership's 2009 capital expenditure requirements, and the remainder was used to pay down borrowings under its revolving credit facility of the Partnership Credit Agreement.

16. Earnings Per Unit

        The Partnership's outstanding phantom units are considered to be participating securities, and therefore basic and diluted earnings per common unit are calculated pursuant to the two-class method described in the generally accepted accounting principles for earnings per share. In accordance with the two-class method, basic earnings per common unit is calculated by dividing net income attributable to the Partnership, after deducting amounts that are allocable to the outstanding phantom units, by the weighted-average number of common units outstanding during the period. The amount allocable to the phantom units is generally calculated as if all of the net income attributable to the Partnership were distributed, and not on the basis of actual cash distributions for the period. However, during periods in which a net loss attributable to the Partnership is reported or periods in which the total distributions exceed the reported net income attributable to the Partnership, the amount allocable to the phantom units is based on actual distributions to the phantom unit holders. Diluted earnings per unit is calculated by dividing net income attributable to the Partnership, after deducting amounts allocable to the outstanding phantom units, by the weighted-average number of potential common units outstanding during the period. Potential common units are excluded from the calculation of diluted earnings per unit during periods in which the Partnership incurs a net loss as the impact would be anti-dilutive.

        The following table shows the computation of basic and diluted net income (loss) attributable to the Partnership per common unit, for the three and nine months ended September 30, 2009 and 2008,

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MARKWEST ENERGY PARTNERS, L.P.

Notes to the Condensed Consolidated Financial Statements (Continued)

(unaudited)

16. Earnings Per Unit (Continued)


and the weighted-average units used to compute diluted net income (loss) attributable to the Partnership per common unit (in thousands, except per unit data):

 
  Three months
ended September 30,
  Nine months
ended September 30,
 
 
  2009   2008   2009   2008  

Net income (loss) attributable to the Partnership

  $ 8,280   $ 186,546   $ (88,875 ) $ 27,930  

Less: Income allocable to phantom units

    374     3,174     1,146     918  
                   

Income (loss) available for common unitholders

  $ 7,906   $ 183,372   $ (90,021 ) $ 27,012  
                   

Weighted average common units outstanding—basic

   
63,026
   
56,635
   
59,168
   
49,123
 

Effect of dilutive instruments

                4  
                   

Weighted average common units outstanding—diluted

    63,026     56,635     59,168     49,127  
                   

Net income (loss) attributable to the Partnership's common unitholders

                         
 

Basic

  $ 0.13   $ 3.24   $ (1.52 ) $ 0.55  
 

Diluted

  $ 0.13   $ 3.24   $ (1.52 ) $ 0.55  

17. Distributions to Unitholders

Quarter Ended
  Distribution Per
Common Unit
  Declaration
Date
  Ex-dividend
Date
  Record Date   Payment Date  

September 30, 2009

  $ 0.64     October 22, 2009     October 29, 2009     November 2, 2009     November 13, 2009  

June 30, 2009

  $ 0.64     July 23, 2009     July 30, 2009     August 3, 2009     August 14, 2009  

March 31, 2009

  $ 0.64     April 23, 2009     April 30, 2009     May 4, 2009     May 15, 2009  

December 31, 2008

  $ 0.64     January 27, 2009     February 4, 2009     February 6, 2009     February 13, 2009  

18. Commitments and Contingencies

Legal

        The Partnership is subject to a variety of risks and disputes, and is a party to various legal proceedings in the normal course of its business. The Partnership maintains insurance policies in amounts and with coverage and deductibles as it believes reasonable and prudent. However, the Partnership cannot assure that the insurance companies will promptly honor their policy obligations or that the coverage or levels of insurance will be adequate to protect the Partnership from all material expenses related to future claims for property loss or business interruption to the Partnership, or for third-party claims of personal and property damage, or that the coverages or levels of insurance it currently has will be available in the future at economical prices. While it is not possible to predict the outcome of the legal actions with certainty, management is of the opinion that appropriate provisions and accruals for potential losses associated with all legal actions have been made in the condensed consolidated financial statements.

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Table of Contents


MARKWEST ENERGY PARTNERS, L.P.

Notes to the Condensed Consolidated Financial Statements (Continued)

(unaudited)

18. Commitments and Contingencies (Continued)

        In June 2006, the Office of Pipeline Safety ("OPS") issued a Notice of Probable Violation and Proposed Civil Penalty ("NOPV") (CPF No. 2-2006-5001) to both MarkWest Hydrocarbon and Equitable Production Company. The NOPV is associated with the pipeline leak and an ensuing explosion and fire that occurred on November 8, 2004 in Ivel, Kentucky on an NGL pipeline owned by Equitable Production Company and leased and operated by a subsidiary, MarkWest Energy Appalachia, L.L.C. The NOPV sets forth six counts of violations of applicable regulations, and a proposed civil penalty in the aggregate amount of $1.1 million. An administrative hearing on the matter, previously set for the last week of March 2007, was postponed to allow the administrative record to be produced and to allow OPS an opportunity to respond to MarkWest's and Equitable's motions to dismiss count one of the NOPV, which involves $0.8 million of the $1.1 million proposed penalty. This count arises out of alleged activity in 1982 and 1987, which predates MarkWest's leasing and operation of the pipeline. The administrative hearing request was withdrawn by MarkWest and Equitable in October 2009, and the case will proceed to initial resolution on the briefs, exhibits and other documents filed or submitted by the parties in the matter. MarkWest believes it has viable and mitigating defenses to the remaining counts and will vigorously defend all applicable assertions of violations at the hearing.

        MarkWest Javelina Company, L.L.C. is a party to an action styled Esmerejilda G. Valasquez, et al. v. Occidental Chemical Corp., et al., Case No. A-060352-C, 128th Judicial District, Orange County, Texas, original petition filed July 10, 2006; as refiled from previously dismissed petition captioned Jesus Villarreal v. Koch Refining Co. et al., Cause No. 05-01977-F, 214th Judicial Dist. Ct., County of Nueces, Texas, originally filed April 27, 2005), which sets forth claims for wrongful death, personal injury or property damage, and nuisance type claims, allegedly incurred as a result of operations and emissions from MarkWest Javelina's gas processing plant and from various petroleum, petrochemical and metal processing and refining operations located in the area, which were also named as defendants in the action. The action has been and is being vigorously defended, and based on initial evaluation and consultations, it appears at this time that this action should not have a material adverse impact on the Partnership's financial position or results of operations.

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

SMR Transaction

        On September 1, 2009, the Partnership entered into a hydrogen supply agreement creating a long-term contractual obligation for the payment of processing fees in exchange for all of the hydrogen processed by the SMR (see Note 5 for further discussion of this agreement and the related SMR transaction). The hydrogen received under this agreement will be sold to a refinery customer pursuant to a corresponding long-term agreement. The minimum amounts payable annually under the hydrogen

30


Table of Contents


MARKWEST ENERGY PARTNERS, L.P.

Notes to the Condensed Consolidated Financial Statements (Continued)

(unaudited)

18. Commitments and Contingencies (Continued)


supply agreement, excluding the potential impact of inflation adjustments per the agreement, are as follows (in thousands):

Year ending December 31,
   
 

2009

  $  

2010

    14,510  

2011

    17,412  

2012

    17,412  

2013

    17,412  

2014 and thereafter

    281,494  
       

  $ 348,240  
       

19. Segment Information

        The Partnership's chief operating decision maker is the Chief Executive Officer ("CEO"). The CEO reviews the Partnership's discrete financial information on a geographic and operational basis, as the products and services are closely related within each geographic region and business operation. Accordingly, the CEO makes operating decisions, assesses financial performance and allocates resources on a geographic basis. The Partnership has four segments: Southwest, Northeast, Gulf Coast and Liberty. The Southwest segment provides gathering, processing, transportation, and storage services. The Northeast segment provides gathering, processing, transportation, fractionation and storage services. The Gulf Coast segment provides processing, transportation, fractionation and storage services. The Liberty segment provides gathering, processing, and transportation services. The Liberty segment is a new segment beginning in 2009 and consists primarily of the operations in the Marcellus Shale region of western Pennsylvania and northern West Virginia. For the year ended December 31, 2008, the results of operations in the Liberty segment were included in the Northeast segment because all of the aggregation criteria under the generally accepted accounting principles for segment reporting were satisfied and the results of the Liberty segment were immaterial. However, because the Liberty operations may grow to become a larger portion of the Partnership's business, management believes that transparency to the Liberty segment will provide useful information to investors.

        The Partnership prepares segment information in accordance with generally accepted accounting principles. Certain items below Income (loss) from operations in the accompanying Condensed Consolidated Statements of Operations, certain compensation expense, certain other non-cash items and any unrealized gains (losses) from derivative instruments are not allocated to individual segments. Management does not consider these items allocable to or controllable by any individual segment and therefore excludes these items when evaluating segment performance. The segment results are also adjusted to exclude the portion of operating income attributable to the non-controlling interests.

31


Table of Contents


MARKWEST ENERGY PARTNERS, L.P.

Notes to the Condensed Consolidated Financial Statements (Continued)

(unaudited)

19. Segment Information (Continued)

        The tables below present information about operating income for the three and nine months ended September 30, 2009 and 2008 and capital expenditures for the reported segments for the nine months ended September 30, 2009 and 2008 (in thousands).

Three months ended September 30, 2009 and 2008

 
  Southwest   Northeast   Liberty   Gulf Coast   Total  

Three months ended September 30, 2009:

                               

Revenue

  $ 123,792   $ 55,554   $ 12,790   $ 15,797   $ 207,933  

Operating expenses:

                               
 

Purchased product costs

    53,425     34,506     3,155         91,086  
 

Facility expenses

    17,893     4,832     3,435     3,869     30,029  
                       

Total operating expenses before items not allocated to segments

    71,318     39,338     6,590     3,869     121,115  

Portion of operating income attributable to non-controlling interests

   
980
   
   
2,470
   
   
3,450
 
                       
   

Operating income before items not allocated to segments

  $ 51,494   $ 16,216   $ 3,730   $ 11,928   $ 83,368  
                       

 

 
  Southwest   Northeast   Liberty(1)   Gulf Coast   Total  

Three months ended September 30, 2008:

                               

Revenue

  $ 192,675   $ 82,418   $   $ 28,467   $ 303,560  

Operating expenses:

                               
 

Purchased product costs

    120,208     51,331             171,539  
 

Facility expenses

    16,670     6,172         5,085     27,927  
                       
   

Operating income before items not allocated to segments

 
$

55,797
 
$

24,915
 
$

 
$

23,382
 
$

104,094
 
                       

(1)
The Partnership began construction in the Liberty segment in May 2008 and operations commenced in October 2008.

32


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MARKWEST ENERGY PARTNERS, L.P.

Notes to the Condensed Consolidated Financial Statements (Continued)

(unaudited)

19. Segment Information (Continued)

        The following is a reconciliation of segment revenue to total revenue and operating income before items not allocated to segments to income before provision for income tax for the three months ended September 30, 2009 and 2008 (in thousands).

 
  Three months ended
September 30,
 
 
  2009   2008  

Total segment revenue

  $ 207,933   $ 303,560  

Derivative gain not allocated to segments

    9,758     262,811  
           
   

Total revenue

  $ 217,691   $ 566,371  
           

Operating income before items not allocated to segments

 
$

83,368
 
$

104,094
 
 

Portion of operating income attributable to non-controlling interests

    3,450      
 

Derivative gain not allocated to segments

    595     193,489  
 

Compensation expense included in facility expenses not allocated to segments

    (243 )   (286 )
 

Facility expenses elimination

    107      
 

Selling, general and administrative expenses

    (15,477 )   (15,331 )
 

Depreciation

    (25,264 )   (17,510 )
 

Amortization of intangible assets

    (10,193 )   (10,732 )
 

Other operating expenses

    (689 )   (38 )
           
   

Income from operations

    35,654     253,686  
 

Earnings (loss) from unconsolidated affiliates

   
169
   
(196

)
 

Interest expense

    (23,440 )   (18,928 )
 

Amortization of deferred financing costs and discount (a component of interest expense)

    (3,091 )   (1,080 )
 

Derivative gain related to interest expense

    2,265      
 

Other income, net

    925     1,322  
           
   

Income before provision for income tax

  $ 12,482   $ 234,804  
           

33


Table of Contents


MARKWEST ENERGY PARTNERS, L.P.

Notes to the Condensed Consolidated Financial Statements (Continued)

(unaudited)

19. Segment Information (Continued)

Nine months ended September 30, 2009 and 2008

 
  Southwest   Northeast   Liberty   Gulf Coast   Total  

Nine months ended September 30, 2009:

                               

Revenue

  $ 339,967   $ 165,765   $ 29,510   $ 41,058   $ 576,300  

Operating expenses:

                               
 

Purchased product costs

    150,456     117,540     6,056         274,052  
 

Facility expenses

    55,703     14,796     10,557     12,303     93,359  
                       

Total operating expenses before items not allocated to segments

    206,159     132,336     16,613     12,303     367,411  

Portion of operating income attributable to non-controlling interests

   
1,007
   
   
4,113
   
   
5,120
 
                       
   

Operating income before items not allocated to segments

  $ 132,801   $ 33,429   $ 8,784   $ 28,755   $ 203,769  
                       

Capital expenditures

  $ 197,977   $ 20,447   $ 131,315   $ 36,227   $ 385,966  

Capital expenditures not allocated to segments

                            2,536  
                               
   

Total capital expenditures

                          $ 388,502  
                               

 

 
  Southwest   Northeast   Liberty(1)   Gulf Coast   Total  

Nine months ended September 30, 2008:

                               

Revenue

  $ 536,563   $ 251,115   $   $ 79,082   $ 866,760  

Operating expenses:

                               
 

Purchased product costs

    322,370     157,377             479,747  
 

Facility expenses

    45,189     16,161         13,341     74,691  
                       
   

Operating income before items not allocated to segments

  $ 169,004   $ 77,577   $   $ 65,741   $ 312,322  
                       

Capital expenditures

  $ 217,574   $ 30,157   $ 13,880   $ 51,388   $ 312,999  

Capital expenditures not allocated to segments

                            3,882  
                               
   

Total capital expenditures

                          $ 316,881  
                               

(1)
The Partnership began construction in the Liberty segment in May 2008 and operations commenced in October 2008.

34


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MARKWEST ENERGY PARTNERS, L.P.

Notes to the Condensed Consolidated Financial Statements (Continued)

(unaudited)

19. Segment Information (Continued)

        The following is a reconciliation of segment revenue to total revenue and operating income before items not allocated to segments to (loss) income before provision for income tax for the nine months ended September 30, 2009 and 2008 (in thousands).

 
  Nine months ended
September 30,
 
 
  2009   2008  

Total segment revenue

  $ 576,300   $ 866,760  

Derivative loss not allocated to segments

    (65,173 )   (96,030 )
           
   

Total revenue

  $ 511,127   $ 770,730  
           

Operating income before items not allocated to segments

 
$

203,769
 
$

312,322
 
 

Portion of operating income attributable to non-controlling interests

    5,120      
 

Derivative loss not allocated to segments

    (105,249 )   (85,905 )
 

Compensation expense included in facility expenses not allocated to segments

    (801 )   (950 )
 

Facility expenses elimination

    215      
 

Selling, general and administrative expenses

    (46,265 )   (54,406 )
 

Depreciation

    (69,621 )   (48,533 )
 

Amortization of intangible assets

    (30,638 )   (28,050 )
 

Other operating expenses

    (1,579 )   (106 )
 

Impairment of long-lived assets

    (5,855 )   (5,009 )
           
   

(Loss) income from operations

    (50,904 )   89,363  
 

Earnings from unconsolidated affiliates

   
1,260
   
1,932
 
 

Interest expense

    (63,964 )   (47,527 )
 

Amortization of deferred financing costs and discount (a component of interest expense)

    (6,528 )   (7,287 )
 

Derivative gain related to interest expense

    2,265      
 

Other income, net

    2,747     4,640  
           
   

(Loss) income before provision for income tax

  $ (115,124 ) $ 41,121  
           

35


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MARKWEST ENERGY PARTNERS, L.P.

Notes to the Condensed Consolidated Financial Statements (Continued)

(unaudited)

19. Segment Information (Continued)

        The tables below present information about segment assets as of September 30, 2009 and December 31, 2008 (in thousands):

 
  Southwest   Northeast   Liberty   Gulf Coast   Total  

As of September 30, 2009:

                               

Total segment assets

  $ 1,598,975   $ 230,294   $ 295,962   $ 571,153   $ 2,696,384  

Assets not allocated to segments:

                               
 

Certain cash and cash equivalents

                            54,015  
 

Fair value of derivative instruments

                            48,430  
 

Investment in unconsolidated affiliates(1)

                            53,787  
 

Other(2)

                            43,647  
                               

Total assets

                          $ 2,896,263  
                               

(1)
Included in Other long-term assets in the Condensed Consolidated Balance Sheets.

(2)
Includes corporate fixed assets, deferred financing costs, income tax receivable, and other corporate assets not allocated to segments.

 
  Southwest   Northeast   Liberty   Gulf Coast   Total  

As of December 31, 2008:

                               

Total segment assets

  $ 1,487,205   $ 233,403   $ 127,785   $ 548,503   $ 2,396,896  

Assets not allocated to segments:

                               
 

Certain cash and cash equivalents

                            137  
 

Fair value of derivative instruments

                            182,338  
 

Investment in unconsolidated affiliates(1)

                            46,092  
 

Other(2)

                            47,591  
                               

Total assets

                          $ 2,673,054  
                               

(1)
Included in Other long-term assets in the Condensed Consolidated Balance Sheets.

(2)
Includes corporate fixed assets, deferred financing costs, income tax receivable and other corporate assets not allocated to segments.

36


Table of Contents


MARKWEST ENERGY PARTNERS, L.P.

Notes to the Condensed Consolidated Financial Statements (Continued)

(unaudited)

20. Supplemental Condensed Consolidating Financial Information

        MarkWest Energy Partners has no significant operations independent of its subsidiaries. As of September 30, 2009, the Partnership's obligations under the outstanding Senior Notes (see Note 12) were fully and unconditionally guaranteed, jointly and severally, by all of its wholly-owned subsidiaries. Separate financial statements for each of the Partnership's guarantor subsidiaries are not provided because such information would not be material to its investors or lenders. As of February 2009, following the closing of the joint venture with M&R, and May 2009, following the closing of the joint venture with ArcLight (see Note 4), MarkWest Liberty Midstream and MarkWest Pioneer together with certain of the Partnership's other subsidiaries that do not guarantee the outstanding Senior Notes have significant assets and operations in aggregate. For the purpose of the following financial information, the Partnership's investments in its subsidiaries and the guarantor subsidiaries' investments in their subsidiaries are presented in accordance with the equity method of accounting. The financial information may not necessarily be indicative of results of operations, cash flows, or financial position had the subsidiaries operated as independent entities. The operations, cash flows, and financial position of the Co-Issuer, MarkWest Energy Finance Corporation, are not material and therefore have been included with the Parent's financial information. Comparative financial statements have not been provided because the non-guarantor subsidiaries as of December 31, 2008 were minor subsidiaries individually and in the aggregate. Condensed consolidating financial information for MarkWest Energy

37


Table of Contents


MARKWEST ENERGY PARTNERS, L.P.

Notes to the Condensed Consolidated Financial Statements (Continued)

(unaudited)

20. Supplemental Condensed Consolidating Financial Information (Continued)


Partners and its combined guarantor and combined non-guarantor subsidiaries as of September 30, 2009 and for the three and nine months ended September 30, 2009 is as follows (in thousands):


Condensed Consolidating Balance Sheet

 
  As of September 30, 2009  
 
  Parent   Guarantor
Subsidiaries
  Non-Guarantor
Subsidiaries
  Consolidating
Adjustments
  Consolidated  

ASSETS

                               

Current assets:

                               
 

Cash and cash equivalents

  $   $ 54,745   $ 10,561   $   $ 65,306  
 

Receivables and other current assets

    1,708     139,707     21,788         163,203  
 

Intercompany receivables

    1,612,499     301,424         (1,913,923 )    
 

Fair value of derivative instruments

    281     17,515             17,796  
                       
   

Total current assets

    1,614,488     513,391     32,349     (1,913,923 )   246,305  
 

Total property, plant and equipment, net

   
3,054
   
1,444,480
   
412,136
   
(4,514

)
 
1,855,156
 

Other long-term assets:

                               
 

Investment in consolidated affiliates

    512,508     195,349         (707,857 )    
 

Intangibles, net of accumulated amortization

        663,982     623         664,605  
 

Fair value of derivative instruments

    311     30,323             30,634  
 

Intercompany notes receivable

    223,610             (223,610 )    
 

Other long-term assets

    21,457     67,449     10,657         99,563  
                       
   

Total other long-term assets

    757,886     957,103     11,280     (931,467 )   794,802  
                       
   

Total assets

  $ 2,375,428   $ 2,914,974   $ 455,765   $ (2,849,904 ) $ 2,896,263  
                       

LIABILITIES AND PARTNERS' CAPITAL

                               

Current liabilities:

                               
 

Intercompany payables

  $   $ 1,911,498   $ 2,425   $ (1,913,923 ) $  
 

Fair value of derivative instruments

        35,134             35,134  
 

Other current liabilities

    41,074     110,784     23,664         175,522  
                       
   

Total current liabilities

    41,074     2,057,416     26,089     (1,913,923 )   210,656  

Deferred income taxes

   
3,489
   
8,134
   
   
   
11,623
 

Intercompany notes payable

        223,610         (223,610 )    

Fair value of derivative instruments

        33,663             33,663  

Long-term debt, net of discounts

    1,160,498                 1,160,498  

Other long-term liabilities

    2,359     79,643     376         82,378  

Partners' Capital:

                               
 

MarkWest Energy Partners, L.P. partners' capital

    1,168,008     512,508     429,300     (946,322 )   1,163,494  
 

Non-controlling interest in consolidated subsidiaries

                233,951     233,951  
                       
   

Total partners' capital

    1,168,008     512,508     429,300     (712,371 )   1,397,445  
                       
   

Total liabilities and partners' capital

  $ 2,375,428   $ 2,914,974   $ 455,765   $ (2,849,904 ) $ 2,896,263  
                       

38


Table of Contents


MARKWEST ENERGY PARTNERS, L.P.

Notes to the Condensed Consolidated Financial Statements (Continued)

(unaudited)

20. Supplemental Condensed Consolidating Financial Information (Continued)


Condensed Consolidating Statement of Operations

 
  Three months ended September 30, 2009  
 
  Parent   Guarantor
Subsidiaries
  Non-Guarantor
Subsidiaries
  Consolidating
Adjustments
  Consolidated  

Total revenue

  $   $ 202,183   $ 15,508   $   $ 217,691  

Operating expenses:

                               
 

Purchased product costs

        95,726     3,176         98,902  
 

Facility expenses

        27,570     4,049     (107 )   31,512  
 

Selling, general and administrative expenses

    10,732     5,102     700     (1,057 )   15,477  
 

Depreciation and amortization

    137     31,579     3,793     (52 )   35,457  
 

Other operating expenses

        687     2         689  
 

Impairment of long-lived assets

                     
                       
   

Total operating expenses

    10,869     160,664     11,720     (1,216 )   182,037  
                       
   

(Loss) income from operations

   
(10,869

)
 
41,519
   
3,788
   
1,216
   
35,654
 

Earnings from consolidated affiliates

   
39,900
   
877
   
   
(40,777

)
 
 

Other (expense) income

    (20,186 )   (2,049 )   713     (1,650 )   (23,172 )
                       
   

Net income (loss) before provision for income tax

    8,845     40,347     4,501     (41,211 )   12,482  

Provision for income tax expense

    131     447             578  
                       
   

Net income (loss)

   
8,714
   
39,900
   
4,501
   
(41,211

)
 
11,904
 

Net income attributable to non-controlling interest

                (3,624 )   (3,624 )
                       
   

Net income (loss) attributable to the Partnership

  $ 8,714   $ 39,900   $ 4,501   $ (44,835 ) $ 8,280  
                       

39


Table of Contents


MARKWEST ENERGY PARTNERS, L.P.

Notes to the Condensed Consolidated Financial Statements (Continued)

(unaudited)

20. Supplemental Condensed Consolidating Financial Information (Continued)

 
  Nine months ended September 30, 2009  
 
  Parent   Guarantor
Subsidiaries
  Non-Guarantor
Subsidiaries
  Consolidating
Adjustments
  Consolidated  

Total revenue

  $   $ 482,222   $ 28,905   $   $ 511,127  

Operating expenses:

                               
 

Purchased product costs

        307,901     6,105         314,006  
 

Facility expenses

        83,783     10,499     (215 )   94,067  
 

Selling, general and administrative expenses

    33,861     13,076     1,697     (2,369 )   46,265  
 

Depreciation and amortization

    423     93,432     6,498     (94 )   100,259  
 

Other operating expenses

        1,576     3         1,579  
 

Impairment of long-lived assets

            5,855         5,855  
                       
   

Total operating expenses

    34,284     499,768     30,657     (2,678 )   562,031  
                       
   

(Loss) income from operations

   
(34,284

)
 
(17,546

)
 
(1,752

)
 
2,678
   
(50,904

)

Earnings from consolidated affiliates

   
(313

)
 
186
   
   
127
   
 

Other (expense) income

    (49,976 )   (10,904 )   3,852     (7,192 )   (64,220 )
                       
   

Net (loss) income before provision for income tax

    (84,573 )   (28,264 )   2,100     (4,387 )   (115,124 )

Provision for income tax benefit

    (212 )   (27,951 )           (28,163 )
                       
   

Net (loss) income

   
(84,361

)
 
(313

)
 
2,100
   
(4,387

)
 
(86,961

)

Net income attributable to non-controlling interest

                (1,914 )   (1,914 )
                       
   

Net (loss) income attributable to the Partnership

  $ (84,361 ) $ (313 ) $ 2,100   $ (6,301 ) $ (88,875 )
                       

40


Table of Contents


MARKWEST ENERGY PARTNERS, L.P.

Notes to the Condensed Consolidated Financial Statements (Continued)

(unaudited)

20. Supplemental Condensed Consolidating Financial Information (Continued)

Condensed Consolidating Statement of Cash Flows

 
  Nine months ended September 30, 2009  
 
  Parent   Guarantor
Subsidiaries
  Non-Guarantor
Subsidiaries
  Consolidating
Adjustments
  Consolidated  

Net cash (used in) provided by operating activities

  $ (61,492 ) $ 210,814   $ 3,151   $ (4,608 ) $ 147,865  

Cash flows from investing activities:

                               
 

Change in restricted cash

            (10,025 )       (10,025 )
 

Equity investments

    (39,038 )   (129,871 )       162,474     (6,435 )
 

Distributions from consolidated affiliates

    10,803     31,152         (41,955 )    
 

Collection of notes receivable

    7,790             (7,790 )    
 

Capital expenditures

    (738 )   (164,282 )   (228,090 )   4,608     (388,502 )
 

Proceeds from disposal of property, plant and equipment

        275             275  
 

Proceeds from sale of equity interest in consolidated subsidiary

        62,500         (62,500 )    
                       
   

Net cash flows (used in) provided by investing activities

   
(21,183

)
 
(200,226

)
 
(238,115

)
 
54,837
   
(404,687

)
                       

Cash flows from financing activities:

                               
 

Proceeds from long-term debt

    685,000                 685,000  
 

Payments of long-term debt

    (700,900 )               (700,900 )
 

Payments of intercompany notes receivable, net

        (7,790 )       7,790      
 

Payments for debt issuance costs, deferred financing costs and registration costs

    (7,881 )   (500 )           (8,381 )
 

Proceeds from SMR transaction

        73,129             73,129  
 

Proceeds from public offerings, net

    178,632                 178,632  
 

Contributions to joint ventures, net

    (5,464 )   39,038     273,436     (162,474 )   144,536  
 

Proceeds from sale of equity interest in joint venture, net

    (1,847 )           62,500     60,653  
 

Share-based payment activity

    (1,257 )               (1,257 )
 

Payment of distributions

    (112,525 )   (10,803 )   (31,232 )   41,955     (112,605 )
 

Intercompany advances, net

    48,917     (48,917 )            
                       
   

Net cash flows provided by (used in) financing activities

    82,675     44,157     242,204     (50,229 )   318,807  
                       

Net increase in cash

   
   
54,745
   
7,240
   
   
61,985
 

Cash and cash equivalents at beginning of year

            3,321         3,321  
                       

Cash and cash equivalents at end of period

  $   $ 54,745   $ 10,561   $   $ 65,306  
                       

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MARKWEST ENERGY PARTNERS, L.P.

Notes to the Condensed Consolidated Financial Statements (Continued)

(unaudited)

21. Supplemental Disclosure of Changes in Partners' Capital

        The following table provides a reconciliation of total partners' capital attributable to MarkWest Energy Partners, L.P. and total partners' capital attributable to the non-controlling interest for the nine months ended September 30, 2008 (in thousands).

 
  MarkWest Energy Partners, L.P. Unitholders    
   
 
 
  Common
Units
  Partners'
Capital
  Accumulated Other
Comprehensive
Income (loss)
  Non-controlling
Interest
  Total  

December 31, 2007

    22,861   $ 38,463   $ 928   $ 524,583   $ 563,974  

Option exercises

    98     375             375  

Common units issued for vested phantom units

    14     63             63  

Dividends paid

        (4,338 )           (4,338 )

Distributions paid

        (70,577 )           (70,577 )

Distributions to non-controlling interest holders

                (19,651 )   (19,651 )

Share-based compensation related to equity awards

        8,251             8,251  

APIC pool for excess tax benefits related to share-based compensation

        717             717  

Acquisition of equity interest in Wirth Gathering Partnership

                2,924     2,924  

Other

                881     881  

Merger and Redemption:

                               
 

Redemption of MarkWest Hydrocarbon, Inc. Common Stock

    (7,458 )   (240,513 )           (240,513 )
 

Conversion of restricted stock to phantom units in connection with the Merger of MarkWest Hydrocarbon, Inc. and MarkWest Energy Partners,  L.P. 

    (45 )                
 

Participation Plan liability settlement associated with the Merger of MarkWest Hydrocarbon, Inc. and MarkWest Energy Partners,  L.P. 

    946     30,078             30,078  
 

Purchase of non-controlling interest of MarkWest Energy Partners, L.P.

    34,474     1,095,917         (502,297 )   593,620  

Issuance of units in public offering, net of offering costs

    5,750     171,395             171,395  

Net income (loss)

   
   
27,930
   
   
(3,271

)
 
24,659
 

Realized loss on marketable securities

            (928 )       (928 )
                               

Comprehensive income

                            23,731  
                       

September 30, 2008

    56,640   $ 1,057,761   $   $ 3,169   $ 1,060,930  
                       

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MARKWEST ENERGY PARTNERS, L.P.

Notes to the Condensed Consolidated Financial Statements (Continued)

(unaudited)

22. Subsequent Events

        The Partnership has evaluated subsequent events through November 9, 2009, the date the financial statements were issued, and identified the events disclosed below.

        In January 2008, MarkWest Pioneer was granted the option to purchase a 10% membership interest in Midcontinent Express Pipeline LLC ("MEP"). MEP, owned by Energy Transfer Partners, L.P. and Kinder Morgan Energy Partners, L.P., is the owner and operator of the Midcontinent Express Pipeline, which runs from Bennington, Oklahoma to Perryville, Louisiana. On October 1, 2009, MarkWest Pioneer elected to forego the option to acquire the equity interest in MEP.

        Effective November 1, 2009, the Partnership and M&R executed the Amended Liberty Agreement pursuant to which M&R will increase its participation in MarkWest Liberty Midstream by at least an additional $150.0 million. Additionally, the Partnership and M&R will maintain a 60%/40% respective ownership interest in MarkWest Liberty Midstream until January 1, 2011, at which time M&R's ownership interest will increase from 40% to 49%. The Partnership and M&R will jointly fund the capital requirements of MarkWest Liberty Midstream at agreed upon levels until the Partnership's contributed capital is proportionate to its 51% ownership interest (the "Equalization Date"), which is expected to occur on or before December 31, 2012. Following the Equalization Date, M&R will have pre-emptive rights to maintain its ownership interest in MarkWest Liberty Midstream in a range of between 45% and 49%. As a result of the execution of the Amended Liberty Agreement, the Partnership reconsidered the accounting treatment for MarkWest Liberty Midstream as a VIE and determined that the conclusions as discussed in Note 4 remain unchanged. The unexecuted form of the Amended Liberty Agreement is attached as Exhibit A to Exhibit 10.1 hereto.

        Effective November 1, 2009, the Partnership sold its interest in Basin Pipeline, LLC ("Basin") for nominal consideration. Basin owns a natural gas pipeline in Manistee, Mason and Oceana Counties in Michigan. The Partnership ceased its operations in western Michigan, including Basin, in July 2009. The Partnership's loss on the disposal of Basin was immaterial.

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Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations

        Management's Discussion and Analysis ("MD&A") contains statements that are forward-looking and should be read in conjunction with our condensed consolidated financial statements and accompanying notes included elsewhere in this report and our December 31, 2008 Annual Report on Form 10-K as modified by our Current Report on Form 8-K as filed with the SEC on May 18, 2009 for the retrospective applications of changes to the generally accepted accounting principles for the presentation of non-controlling interest and the calculation of earnings per share. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially from those expressed or implied in the forward-looking statements as a result of a number of factors.

Overview

        We are a master limited partnership engaged in the gathering, transportation and processing of natural gas; the transportation, fractionation, marketing and storage of NGLs; and the gathering and transportation of crude oil. We have extensive natural gas gathering, processing and transmission operations in the southwest, Gulf Coast and northeast regions of the United States, including the Marcellus Shale, and are the largest natural gas processor in the Appalachian region.

    Significant Financial and Other Highlights

        Significant financial and other highlights for the three months ended September 30, 2009 are listed below. Refer to Results of Operations and Liquidity and Capital Resources for further details.

    Total segment operating income before items not allocated to segments decreased approximately $20.7 million, or 20%, for the three months ended September 30, 2009 compared to the same period in 2008. The decrease is due primarily to significantly lower NGL and natural gas prices in 2009. The decrease related to commodity prices was partially offset by the following:

    increased gathered and processed volumes in the Southwest segment due to the 2008 acquisition of the Stiles Ranch gathering system, the continued expansion of the Woodford gathering system including the start of operations for the Arkoma Connector Pipeline, and the expansion of the processing facilities in western Oklahoma and East Texas.

    increased contracted volumes from a large producer and expansion of the processing facilities in the Northeast segment.

    continued expansion of our Marcellus Shale operations in the Liberty segment which commenced in October 2008.

    During the three months ended September 30, 2009, the prices of NGLs relative to the price of crude oil have been significantly below the historical averages. This has reduced the effectiveness of our hedging program and has adversely impacted our cash flows and results of operations.

    In July 2009, we received the remaining $31.3 million in proceeds from the sale of a 50% equity interest in MarkWest Pioneer.

    In July 2009, we received an additional $50.0 million of contributions to MarkWest Liberty Midstream from M&R.

    In August 2009, we received net proceeds of $121.0 million from a public offering of approximately 6.03 million newly issued common units.

    In September 2009, we sold the SMR for proceeds of approximately $73.1 million.

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    Net Operating Margin (a non-GAAP financial measure)

        Management evaluates contract performance on the basis of net operating margin (a non-GAAP financial measure) which is defined as revenue, excluding any derivative gain (loss), less purchased product costs, excluding any derivative gain (loss). These charges have been excluded for the purpose of enhancing the understanding by both management and investors of the underlying baseline operating performance of our contractual arrangements, which management uses to evaluate our financial performance for purposes of planning and forecasting. Net operating margin does not have any standardized definition and therefore is unlikely to be comparable to similar measures presented by other reporting companies. Net operating margin results should not be evaluated in isolation of, or as a substitute for, our financial results prepared in accordance with GAAP. Our usage of net operating margin and the underlying methodology in excluding certain charges is not necessarily an indication of the results of operations expected in the future, or that we will not, in fact, incur such charges in future periods.

        The following is a reconciliation to income (loss) from operations, the most comparable GAAP financial measure of this non-GAAP financial measure (in thousands):

 
  Three months ended
September 30,
  Nine months ended
September 30,
 
 
  2009   2008   2009   2008  

Revenue

  $ 207,933   $ 303,560   $ 576,300   $ 866,760  

Purchased product costs

    91,086     171,539     274,052     479,747  
                   
 

Net operating margin

    116,847     132,021     302,248     387,013  

Facility expenses

    30,165     28,213     93,945     75,641  

Total derivative (income) loss

    (595 )   (193,489 )   105,249     85,905  

Selling, general and administrative expenses

    15,477     15,331     46,265     54,406  

Depreciation

    25,264     17,510     69,621     48,533  

Amortization of intangible assets

    10,193     10,732     30,638     28,050  

Other operating expenses

    689     38     1,579     106  

Impairment of long-lived assets

            5,855     5,009  
                   
 

Income (loss) from operations

  $ 35,654   $ 253,686   $ (50,904 ) $ 89,363  
                   

    Our Contracts

        We generate the majority of our revenue and net operating margin (a non-GAAP measure, see above for discussion and reconciliation of net operating margin) from natural gas gathering, transportation and processing; NGL transportation, fractionation, marketing and storage; and crude oil gathering and transportation. We enter into a variety of contract types. In many cases, we provide services under contracts that contain a combination of more than one of the arrangements described below. We provide services under the following different types of arrangements:

    Fee-based arrangements:  Under fee-based arrangements, we receive a fee or fees for one or more of the following services: gathering, processing and transmission of natural gas; transportation, fractionation and storage of NGLs; and gathering and transportation of crude oil. The revenue we earn from these arrangements is directly related to the volume of natural gas, NGLs or crude oil that flows through our systems and facilities and is not directly dependent on commodity prices. In certain cases, our arrangements provide for minimum annual payments or fixed demand charges. If a sustained decline in commodity prices were to result in a decline in volumes, however, our revenues from these arrangements would be reduced.

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    Percent-of-proceeds arrangements:  Under percent-of-proceeds arrangements, we gather and process natural gas on behalf of producers, sell the resulting residue gas, condensate and NGLs at market prices and remit to producers an agreed-upon percentage of the proceeds. In other cases, instead of remitting cash payments to the producer, we deliver an agreed-upon percentage of the residue gas and NGLs to the producer and sell the volumes we keep to third parties at market prices. The percentage of volumes that we retain can be either fixed or variable. Generally, under these types of arrangements our revenues and gross margins increase as natural gas, condensate and NGL prices increase, and our revenues and net operating margins decrease as natural gas, condensate and NGL prices decrease. Due to current market and financial conditions, we have seen decreases in natural gas, condensate and NGL prices, and it is uncertain if prices will remain at these lower levels in the future.

    Percent-of-index arrangements:  Under percent-of-index arrangements, we purchase natural gas at either (1) a percentage discount to a specified index price, (2) a specified index price less a fixed amount or (3) a percentage discount to a specified index price less an additional fixed amount. We then gather and deliver the natural gas to pipelines where we resell the natural gas at the index price, or at a different percentage discount to the index price. With respect to (1) and (3) above, the net operating margins we realize under the arrangements decrease in periods of low natural gas prices because these net operating margins are based on a percentage of the index price. Conversely, our net operating margins increase during periods of high natural gas prices.

    Keep-whole arrangements:  Under keep-whole arrangements, we gather natural gas from the producer, process the natural gas and sell the resulting condensate and NGLs to third parties at market prices. Because the extraction of the condensate and NGLs from the natural gas during processing reduces the Btu content of the natural gas, we must either purchase natural gas at market prices for return to producers or make cash payment to the producers equal to the energy content of this natural gas. Certain keep-whole arrangements also have provisions that require us to share a percentage of the keep-whole profits with the producers based on the oil to gas ratio. Accordingly, under these arrangements our revenues and net operating margins increase as the price of condensate and NGLs increases relative to the price of natural gas, and decrease as the price of natural gas increases relative to the price of condensate and NGLs.

    Settlement margin:  Typically, we are allowed to retain a fixed percentage of the volume gathered to cover the compression fuel charges and deemed-line losses. To the extent that we operate our gathering systems more or less efficiently than specified per contract allowance, we will retain the benefit or loss for our own account.

        The terms of our contracts vary based on gas quality conditions, the competitive environment when the contracts are signed and customer requirements. Our contract mix and, accordingly, our exposure to natural gas and NGL prices, may change as a result of changes in producer preferences, our expansion in regions where some types of contracts are more common, and other market factors, including current market and financial conditions which have increased the risk of volatility in oil, natural gas and NGL prices. Any change in mix will influence our long-term financial results.

        The following table is prepared as if we did not have an active commodity risk management program in place. For further discussion of how we have reduced the downside volatility to the portion of our net operating margin that is not fee-based, see Note 6 of the accompanying Notes to the Condensed Consolidated Financial Statements. For the nine months ended September 30, 2009, we

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calculated the following approximate percentages of our revenue and net operating margin from the following types of contracts:

 
  Fee-Based   Percent-of-Proceeds(1)   Percent-of-Index(2)   Keep-Whole(3)   Total  

Revenue

    22 %   37 %   7 %   34 %   100 %

Net operating margin

    41 %   27 %   3 %   29 %   100 %

(1)
Includes condensate sales and other types of arrangements tied to NGL prices.

(2)
Includes settlement margin and other types of arrangements tied to natural gas prices.

(3)
Includes settlement margin, condensate sales and other types of arrangements tied to both NGL and natural gas prices.

        While the percentages in the table above accurately reflect the percentages by contract type, we manage our business by taking into account the partial offset of short natural gas positions by long positions primarily in our Southwest segment, required levels of operational flexibility and the fact that our hedge plan is implemented on this basis. When the partial offset of our natural gas positions is considered, the calculated percentages for the net operating margin in the table above for percent-of-proceeds, percent-of-index and keep-whole contracts change to 43%, 0% and 16%, respectively.

    Seasonality

        Our business is affected by seasonal fluctuations in commodity prices. Sales volumes also are affected by various other factors such as fluctuating and seasonal demands for products, changes in transportation and travel patterns and variations in weather patterns from year to year. Our Northeast segment is particularly impacted by seasonality. In the Appalachia area, we store a portion of the propane that is produced in the summer to be sold in the winter months. As a result of our seasonality, we generally expect the sales volumes in our Northeast segment to be higher in the first quarter and fourth quarter.

Results of Operations

    Segment Reporting

        We classify our business in four reportable segments: Southwest, Northeast, Liberty and Gulf Coast. We capture information in this MD&A by segment. The segment information appearing in Note 19 of the accompanying Notes to the Condensed Consolidated Financial Statements is presented on a basis consistent with our internal management reporting.

    Southwest

    East Texas.  Our East Texas system consists of natural gas gathering pipelines, centralized compressor stations, a natural gas processing facility and an NGL pipeline. The East Texas system is located in Panola, Harrison and Rusk Counties and services the Carthage Field. Producing formations in Panola County consist of the Cotton Valley, Pettit, Travis Peak and Haynesville formations, which collectively form one of the largest natural gas producing regions in the United States. For natural gas that is processed in this segment, we purchase the NGLs from the producers primarily under percent-of-proceeds arrangements, or we transport volumes for a fee.

    Oklahoma.  We own the Foss Lake natural gas gathering system and the Arapaho I and II natural gas processing plants, all located in Roger Mills, Custer and Ellis Counties of western Oklahoma. The gathering portion consists of a pipeline system that is connected to natural gas

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      wells and associated compression facilities. All of the gathered gas ultimately is compressed and delivered to the processing plant. We also own and operate a gathering system in the Granite Wash formation in the Texas panhandle that is connected to our Foss Lake processing plants and our Grimes gathering system that is located in Roger Mills and Beckham Counties in western Oklahoma. In addition, we own a natural gas gathering system in the Woodford Shale play in the Arkoma Basin of southeast Oklahoma. In July 2008, we acquired a subsidiary of PetroQuest Energy, L.L.C. ("PetroQuest") that owns natural gas gathering assets located primarily in Pittsburg County in southeast Oklahoma as part of our expansion of the Woodford gathering system.

      On May 1, 2009, we entered into a joint venture with ArcLight in which ArcLight acquired a 50% equity interest in MarkWest Pioneer for a total purchase price of $62.5 million. MarkWest Pioneer is the owner and operator of the Arkoma Connector Pipeline, a 50-mile interstate pipeline that provides approximately 638,000 Dth/d of Woodford Shale takeaway capacity and interconnects with the Midcontinent Express Pipeline and the Gulf Crossing Pipeline. A complete discussion of the formation of and accounting treatment for MarkWest Pioneer appears in Note 4 of the accompanying Notes to the Condensed Consolidated Financial Statements.

    Other Southwest.  We own a number of natural gas gathering systems in Texas, Louisiana, Mississippi and New Mexico, including the Appleby gathering system in Nacogdoches County, Texas. We gather a significant portion of the natural gas produced from fields adjacent to our gathering systems. In many areas we are the primary gatherer, and in some of the areas served by our smaller systems we are the sole gatherer. In addition, we own four lateral pipelines in Texas and New Mexico.

    Northeast

    Appalachia.  We are the largest processor of natural gas in the Appalachian Basin, with fully integrated processing, fractionation, storage and marketing operations. The Appalachian Basin is a large natural gas producing region characterized by long-lived reserves and modest decline rates. Our Appalachian assets include the Kenova, Boldman, Cobb and Kermit natural gas processing plants, an NGL pipeline, the Siloam NGL fractionation plant and two caverns for storing propane.

    Michigan.  We own and operate a crude oil pipeline in Michigan as well as a natural gas gathering system in Manistee County, Michigan.

    Liberty

    MarkWest Liberty Gas Gathering, L.L.C. and MarkWest Liberty Midstream & Resources, L.L.C.  We operate natural gas gathering systems and processing facilities located primarily in western Pennsylvania and northern West Virginia. Prior to February 27, 2009, we owned a 100% interest in these assets through MarkWest Liberty Gas Gathering, L.L.C., a wholly-owned subsidiary. On February 27, 2009, we contributed these assets to a newly-formed entity, MarkWest Liberty Midstream, and sold a 40% interest in MarkWest Liberty Midstream to M&R. Effective November 1, 2009, we and M&R executed the Amended Liberty Agreement that will increase M&R's ownership interest to 49% by January 1, 2011. A complete discussion of the formation of and accounting treatment for MarkWest Liberty Midstream appears in Note 4 of the accompanying Notes to the Condensed Consolidated Financial Statements. MarkWest Liberty Midstream currently operates a mechanical refrigeration plant with a design capacity of 60 MMcf/d and a cryogenic processing facility with a design capacity of 30 MMcf/d that was

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      placed into service in the second quarter of 2009. We plan on adding a second cryogenic facility with a capacity of 120 MMcf/d by late 2009 or early 2010.

    Gulf Coast

    Javelina.  We own and operate the Javelina Processing Facility, a natural gas processing facility in Corpus Christi, Texas, that treats and processes off-gas from six local refineries.

        The following summarizes the percentage of our revenue and net operating margin (a non-GAAP financial measure, see above) generated by our assets, by identifiable segment, for the nine months ended September 30, 2009:

 
  Southwest   Northeast   Liberty   Gulf Coast   Total  

Revenue

    59 %   29 %   5 %   7 %   100 %

Net operating margin

    63 %   16 %   8 %   13 %   100 %

    Equity investments in unconsolidated affiliates

        Starfish.    We own a 50% non-operating membership interest in Starfish, a joint venture with Enbridge Offshore Pipelines, L.L.C. that is accounted for using the equity method. The financial results of Starfish are included in Earnings (loss) from unconsolidated affiliates in the accompanying Condensed Consolidated Statements of Operations and are not included in our segment results. Starfish owns the FERC-regulated Stingray natural gas pipeline, and the unregulated Triton natural gas gathering system and West Cameron dehydration facility. All of these assets are located in the Gulf of Mexico or southwestern Louisiana.

        Centrahoma.    We own a 40% non-operating membership interest in Centrahoma, a joint venture with Antero Midstream Resources Corporation that is accounted for using the equity method. The financial results of Centrahoma are included in Earnings (loss) from unconsolidated affiliates in the accompanying Condensed Consolidated Statements of Operations and are not included in our segment results. Centrahoma owns certain processing plants in the Arkoma Basin. We have signed agreements to dedicate our processing rights in certain acreage in the Woodford Shale to Centrahoma through March 1, 2018.

Three months ended September 30, 2009, compared to three months ended September 30, 2008

        Items below Income (loss) from operations in our Condensed Consolidated Statements of Operations, certain compensation expense, certain other non-cash items and any unrealized gains (losses) from derivative instruments are not allocated to individual business segments. Management does not consider these items allocable to or controllable by any individual business segment and therefore excludes these items when evaluating segment performance. The segment results are also adjusted to exclude the portion of operating income attributable to the non-controlling interests. The

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tables below present information about operating income for the reported segments for the three months ended September 30, 2009 and 2008.


Southwest

 
  Three months ended
September 30,
   
   
 
 
  2009   2008   $ Change   % Change  
 
  (in thousands)
   
 

Revenue

  $ 123,792   $ 192,675   $ (68,883 )   (36 )%

Operating expenses:

                         
 

Purchased product costs

    53,425     120,208     (66,783 )   (56 )%
 

Facility expenses

    17,893     16,670     1,223     7 %
                     

Total operating expenses before items not allocated to segments

    71,318     136,878     (65,560 )   (48 )%

Portion of operating income attributable to non-controlling interests

   
980
   
   
980
   
N/A
 
                     

Operating income before items not allocated to segments

  $ 51,494   $ 55,797   $ (4,303 )   (8 )%
                     

        Revenue.    Revenue decreased primarily due to lower commodity prices. Revenue from NGL, natural gas and condensate sales decreased across the segment by $72.9 million. The change from a gas purchase contract to a gas gathering contract with a significant producer in the Other Southwest areas also contributed to the decline in revenue. The effect of the decrease in commodity prices on NGL sales was partially offset by increased volumes processed at our East Texas facilities and increased volumes processed at the Arapaho facilities associated with the Stiles Ranch gathering system that began operations in the fourth quarter of 2008. The revenue declines associated with lower commodity prices were also partially offset by a $4.7 million increase in gathering, treating, and transportation fee revenue due to the continued expansion of our operations in the Woodford, including the start of the Arkoma Connector Pipeline operations.

        Purchased Product Costs.    NGL and natural gas purchases decreased due primarily to lower commodity prices as well as the contract change with a significant producer in the Other Southwest areas.

        Facility Expenses.    Facility expenses increased due primarily to the expansion of our western Oklahoma gathering and processing operations related to the development of Stiles Ranch, and increased repairs and maintenance resulting from the completed non-recurring environmental remediation costs in East Texas.

        Portion of Operating Income Attributable to Non-controlling Interests.    Portion of operating income attributable to non-controlling interest represents our partners' share in the net operating income of MarkWest Pioneer and Wirth Gathering Partnership.

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        Operating results for the three months ended September, 30, 2008 were adversely impacted by business interruptions caused by Hurricane Ike. Management estimated that the financial impact of these business interruptions was a $2.6 million reduction of operating income. Excluding the impact of Hurricane Ike, operating income decreased $6.9 million, or 12%, during the three months ended September 30, 2009 compared to the same period in 2008.


Northeast

 
  Three months ended
September 30,
   
   
 
 
  2009   2008   $ Change   % Change  
 
  (in thousands)
   
 

Revenue

  $ 55,554   $ 82,418   $ (26,864 )   (33 )%

Operating expenses:

                         
 

Purchased product costs

    34,506     51,331     (16,825 )   (33 )%
 

Facility expenses

    4,832     6,172     (1,340 )   (22 )%
                     

Total operating expenses before items not allocated to segments

    39,338     57,503     (18,165 )   (32 )%
                     

Operating income before items not allocated to segments

  $ 16,216   $ 24,915   $ (8,699 )   (35 )%
                     

        Revenue.    Revenue decreased due primarily to lower commodity prices realized on NGL sales from the Appalachia region. The decrease in revenue from lower commodity prices was partially offset by increased volumes which resulted from upgrades to our processing facilities in this area, and increased volumes from a producer in the Appalachia region.

        Purchased Product Costs.    Purchased product costs decreased due to lower prices for the natural gas that must be purchased to satisfy the keep-whole arrangements in the Appalachia area. The effect of the lower prices was partially offset by the increase in volumes.

        Facility Expenses.    Facility expenses decreased due primarily to ceasing our natural gas gathering and processing operations in Western Michigan during the third quarter of 2009.


Liberty

 
  Three months ended
September 30,
   
   
 
   
  % Change
 
  2009   2008   $ Change
 
  (in thousands)
   

Revenue

  $ 12,790   $   $ 12,790   N/A

Operating expenses:

                     
 

Purchased product costs

    3,155         3,155   N/A
 

Facility expenses

    3,435         3,435   N/A
                 

Total operating expenses before items not allocated to segments

    6,590         6,590   N/A

Portion of operating income attributable to non-controlling interests

   
2,470
   
   
2,470
 

N/A

                 

Operating income before items not allocated to segments

  $ 3,730   $   $ 3,730   N/A
                 

        The results of operations for the three months ended September 30, 2009 include our operations in the northern West Virginia and western Pennsylvania areas. Revenue for the three months ended September 30, 2009 consists of approximately $8.1 million of gathering fees that are based primarily on

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a fixed return on the capital invested in the gathering system. Approximately $4.7 million of the revenue relates to NGL product sales under primarily percent-of-proceeds arrangements. The portion of operating income attributable to non-controlling interest represents M&R's 40% interest in the net operating income of MarkWest Liberty Midstream.

        We did not have any operations in the Marcellus Shale during the three months ended September 30, 2008. We began construction in the second quarter of 2008 and commenced gas gathering and processing operations in the fourth quarter of 2008.


Gulf Coast

 
  Three months ended
September 30,
   
   
 
 
  2009   2008   $ Change   % Change  
 
  (in thousands)
   
 

Revenue

  $ 15,797   $ 28,467   $ (12,670 )</