| MARKWEST ENERGY PARTNERS L P ITEM 1A RISK FACTORS In addition to the other information set forth elsewhere in this Form 10-K, you should carefully consider the following factors when evaluating MarkWest Energy Partners |
| Risks Inherent in Our Business If we are unable to successfully integrate our recent or future acquisitions, our future financial performance may suffer |
| Our future growth will depend in part on our ability to integrate our recent acquisitions, as well as our ability to acquire additional assets and businesses at competitive prices |
| We recently completed the Starfish and Javelina acquisitions, which geographically expanded our operations into offshore and onshore Gulf of Mexico operations |
| We cannot guarantee that we will successfully integrate these, or any other, acquisitions into our existing operations, or that we will achieve the desired profitability and anticipated results from such acquisitions |
| Failure to achieve such planned results could adversely affect our financial condition and results of operations |
| The integration of acquisitions with our existing business involves numerous risks, including: • operating a significantly larger combined organization and integrating additional midstream operations into our existing operations; • difficulties in the assimilation of the assets and operations of the acquired businesses, especially if the assets acquired are in a new business segment or geographical area; • the loss of customers or key employees from the acquired businesses; • the diversion of management’s attention from other existing business concerns; 15 ______________________________________________________________________ • the failure to realize expected synergies and cost savings; • coordinating geographically disparate organizations, systems and facilities; • integrating personnel from diverse business backgrounds and organizational cultures; and • consolidating corporate and administrative functions |
| Further, unexpected costs and challenges may arise whenever businesses with different operations or management are combined, and we may experience unanticipated delays in realizing the benefits of an acquisition |
| Following an acquisition, we may discover previously unknown liabilities subject to the same stringent environmental laws and regulations relating to releases of pollutants into the environment and environmental protection as our existing plants, pipelines and facilities |
| If so, our operation of these new assets could cause us to incur increased costs to attain or maintain compliance with such requirements |
| If we consummate any future acquisition, our capitalization and results of operation may change significantly, and unitholders will not have the opportunity to evaluate the economic, financial and other relevant information that we will consider in determining the application of these funds and other resources |
| Our acquisition strategy is based in part on our expectation of ongoing divestitures of assets within the midstream petroleum and natural gas industry |
| A material decrease in such divestitures could limit our opportunities for future acquisitions, and could adversely affect our operations and cash flows available for distribution to our unitholders |
| Growing our business by constructing new pipelines and processing and treating facilities subjects us to construction risks and risks that natural gas supplies will not be available upon completion of the facilities |
| One of the ways we intend to grow our business is through the construction of additions to our existing gathering systems and construction of new gathering, processing and treating facilities |
| The construction of gathering, processing and treating facilities requires the expenditure of significant amounts of capital, which may exceed our expectations, and involves numerous regulatory, environmental, political and legal uncertainties |
| If we undertake these projects, we may not be able to complete them on schedule or at all or at the budgeted cost |
| Moreover, our revenues may not increase immediately upon the expenditure of funds on a particular project |
| For instance, if we build a new pipeline, the construction will occur over an extended period of time, and we will not receive any material increases in revenues until after completion of the project |
| Furthermore, we may have only limited natural gas supplies committed to these facilities prior to their construction |
| Moreover, we may construct facilities to capture anticipated future growth in production in a region in which anticipated production growth does not materialize |
| We may also rely on estimates of proved reserves in our decision to construct new pipelines and facilities, which may prove to be inaccurate because there are numerous uncertainties inherent in estimating quantities of proved reserves |
| As a result, new facilities may not be able to attract enough natural gas to achieve our expected investment return, which could adversely affect our results of operations and financial condition |
| Our substantial debt and other financial obligations could impair our financial condition, results of operations and cash flows, and our ability to fulfill our debt obligations |
| We have substantial indebtedness and other financial obligations |
| Subject to the restrictions governing our indebtedness and other financial obligations, and the indenture governing our outstanding notes, we may incur significant additional indebtedness and other financial obligations |
| Our substantial indebtedness and other financial obligations could have important consequences |
| For example, they could: • make it more difficult for us to satisfy our obligations with respect to our existing debt; • impair our ability to obtain additional financings in the future for working capital, capital expenditures, acquisitions, or general corporate and other purposes; • have a material adverse effect on us if we fail to comply with financial and restrictive covenants in our debt agreements, and an event of default occurs as a result of that failure that is not cured or waived; • require us to dedicate a substantial portion of our cash flow to payments on our indebtedness and other financial obligations, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, distributions and other general partnership requirements; 16 ______________________________________________________________________ • limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; and • place us at a competitive disadvantage compared to our competitors that have proportionately less debt |
| Furthermore, these consequences could limit our ability, and the ability of our subsidiaries, to obtain future financings, make needed capital expenditures, withstand a future downturn in our business or the economy in general, conduct operations or otherwise take advantage of business opportunities that may arise |
| Our existing credit facility contains covenants requiring us to maintain specified financial ratios and satisfy other financial conditions |
| We may be unable to meet those ratios and conditions |
| Any future breach of any of these covenants or our failure to meet any of these ratios or conditions could result in a default under the terms of our credit facility, which could result in acceleration of our debt and other financial obligations |
| If we were unable to repay those amounts, the lenders could initiate a bankruptcy or liquidation proceeding, or proceed against the collateral |
| A significant decrease in natural gas and refinery off-gas supplies in our areas of operation, due to a decline in production from existing wells, refinery operations, depressed commodity prices, reduced drilling activities or other factors, could adversely affect our revenues and operating income and cash flow |
| Our profitability depends on the volume of natural gas we gather, transmit and process, and NGLs we transport and fractionate at our facilities |
| A decrease in natural gas or refinery off-gas supplies in our areas of operation would result in a decline in the volume of natural gas delivered to our pipelines and facilities for gathering, transporting and processing, and NGLs delivered to our pipelines and facilities for fractionation, storage, transportation and sale |
| Fluctuations in energy prices can greatly affect production rates, and investments by third parties in the development of new oil and natural gas reserves |
| Drilling activity generally decreases as oil and natural gas prices decrease |
| We have no control over the level of drilling activity in our areas of operations, the amount of reserves underlying the wells and the rate at which production from a well declines |
| In addition, we have no control over producers or their production decisions, which are affected by, among other things: prevailing and projected energy prices, demand for hydrocarbons, the level of reserves, geological considerations, governmental regulation, and the availability and cost of capital |
| Failure to connect new wells to our gathering systems would, therefore, result in a reduction of the amount of natural gas we gather, transmit and process, and the amount of NGLs we transport and fractionate |
| Over time, as the current wells exhaust, this could cause us to abandon our gathering systems and, possibly, cease gathering operations |
| We depend on third parties for the natural gas and refinery off-gas we process, and the NGLs we fractionate at our facilities, and a reduction in these quantities could reduce our revenues and cash flow |
| Although we obtain our supply of natural gas, refinery off-gas and NGLs from numerous third-party producers, a significant portion comes from a limited number of key producers/suppliers who are committed to us under processing contracts |
| According to these contracts or other supply arrangements, however, the producers are under no obligation to deliver a specific quantity of natural gas or NGLs to our facilities |
| If these key suppliers, or a significant number of other producers, were to decrease the supply of natural gas or NGLs to our systems and facilities for any reason, we could experience difficulty in replacing those lost volumes |
| Because our operating costs are primarily fixed, a reduction in the volumes of natural gas or NGLs delivered to us would result not only in a reduction of revenues, but also a decline in net income and cash flow of similar magnitude |
| We derive a significant portion of our revenues from our gas processing, transportation, fractionation and storage agreements with MarkWest Hydrocarbon, and its failure to satisfy its payment or other obligations under these agreements could reduce our revenues and cash flow |
| MarkWest Hydrocarbon accounts for a significant portion of our revenues and net operating margin |
| These revenues and margins are generated by the volumes of natural gas contractually committed to MarkWest Hydrocarbon by the Appalachian producers described above, as well as the fees generated from processing, transportation, fractionation and storage services provided to MarkWest Hydrocarbon |
| We expect to derive a significant portion of our revenues and net operating margin from the services we provide under our contracts with MarkWest Hydrocarbon for the foreseeable future |
| Any default or nonperformance by MarkWest Hydrocarbon could significantly reduce our revenues and cash flows |
| Thus, any factor or event adversely affecting MarkWest Hydrocarbon’s business, creditworthiness or its ability to perform under its contracts with us, or its other contracts related to our business, could also adversely affect us |
| The fees charged to third parties under our gathering, processing, transmission, transportation, fractionation and 17 ______________________________________________________________________ storage agreements may not escalate sufficiently to cover increases in costs |
| The agreements may not be renewed or may be suspended in some circumstances |
| Our costs may increase at a rate greater than the fees we charge to third parties |
| Furthermore, third parties may not renew their contracts with us |
| Additionally, some third parties’ obligations under their agreements with us may be permanently or temporarily reduced due to certain events, some of which are beyond our control, including force majeure events wherein the supply of either natural gas, NGLs or crude oil are curtailed or cut off |
| Force majeure events include (but are not limited to): revolutions, wars, acts of enemies, embargoes, import or export restrictions, strikes, lockouts, fires, storms, floods, acts of God, explosions, mechanical or physical failures of equipment or facilities of the Partnership or third parties |
| If the escalation of fees is insufficient to cover increased costs, if third parties do not renew or extend their contracts with us or if any third party suspends or terminates its contracts with us, our financial results would suffer |
| We are exposed to the credit risk of our customers and counterparties, and a general increase in the nonpayment and nonperformance by our customers could reduce our revenues and cash flow |
| We are diligent in attempting to ensure that we issue credit to only credit-worthy customers |
| Even if our credit review and analysis mechanisms work properly, however, we may experience losses in dealing with operators and other parties |
| Any increase in the nonpayment and nonperformance by our customers could reduce our revenues and cash flow |
| We may not be able to retain existing customers, or acquire new customers, which would reduce our revenues and limit our future profitability |
| The renewal or replacement of existing contracts with our customers at rates sufficient to maintain current revenues and cash flows depends on a number of factors beyond our control, including competition from other gatherers, processors, pipelines, fractionators, and the price of, and demand for, natural gas, NGLs and crude oil in the markets we serve |
| Our competitors include large oil, natural gas, refining and petrochemical companies, some of which have greater financial resources, more numerous or greater capacity pipelines, processing and other facilities, and greater access to natural gas and NGL supplies than we do |
| Additionally, our customers that gather gas through facilities that are not otherwise dedicated to us may develop their own processing and fractionation facilities in lieu of using our services |
| Certain of our competitors may also have advantages in competing for acquisitions, or other new business opportunities, because of their financial resources and synergies in operations |
| As a consequence of the increase in competition in the industry, and the volatility of natural gas prices, end-users and utilities are reluctant to enter into long-term purchase contracts |
| Many end-users purchase natural gas from more than one natural gas company and have the ability to change providers at any time |
| Some of these end-users also have the ability to switch between gas and alternative fuels in response to relative price fluctuations in the market |
| Because there are numerous companies of greatly varying size and financial capacity that compete with us in the marketing of natural gas, we often compete in the end-user and utilities markets primarily on the basis of price |
| The inability of our management to renew or replace our current contracts as they expire and to respond appropriately to changing market conditions could affect our profitability |
| For more information regarding our competition, please see “ Industry Overview, Competition” in Item 1 of Part I of this report |
| Our profitability is affected by the volatility of NGL product and natural gas prices |
| Changes in the prices of NGL products have historically correlated closely with changes in the price of crude oil |
| Crude oil, NGL products and natural gas prices have been volatile in recent years in response to relatively minor changes in the supply and demand for NGL products and natural gas, market uncertainty, and a variety of additional factors that are beyond our control, including: • the level of domestic oil, natural gas and NGL production; • demand for natural gas and NGL products in localized markets; • imports of crude oil, natural gas and NGLs; • seasonality; • the condition of the US economy; 18 ______________________________________________________________________ • political conditions in other oil-producing and natural gas-producing countries; and • domestic government regulation, legislation and policies |
| Our net operating margins under many of our various types of commodity-based contracts are directly affected by changes in NGL product prices and natural gas prices, thus are more sensitive to volatility in commodity prices than our fee-based contracts |
| Additionally, our purchase and resale of gas in the ordinary course of business exposes us to significant risk of volatility in gas prices due to the potential difference in the time of the purchases and sales, and the existence of a difference in the gas price associated with each transaction |
| Finally, changes in natural gas prices may indirectly affect our profitability, since prices can influence drilling activity and well operations and, thus, the volume of gas we gather and process |
| In the past, the prices of natural gas and NGLs have been extremely volatile, and we expect this volatility to continue |
| Our commodity derivative activities may reduce our earnings, profitability and cash flows |
| Our operations expose us to fluctuations in commodity prices |
| We utilize derivative financial instruments related to the future price of crude oil, natural gas and certain NGLs with the intent of reducing volatility in our cash flows due to fluctuations in commodity prices |
| We account for derivative instruments in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) Nodtta 133, Accounting for Derivative Instruments and Hedging Activities |
| The extent of our commodity price exposure is related largely to the effectiveness and scope of our derivative activities |
| We have a policy to enter into derivative transactions related to only a portion of the volume of our expected production or fuel requirements and, as a result, we will continue to have direct commodity price exposure to the unhedged portion |
| Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Quantitative and Qualitative Disclosures about Market Risk |
| ” Our actual future production or fuel requirements may be significantly higher or lower than we estimate at the time we enter into derivative transactions for such period |
| If the actual amount is lower than the amount that is subject to our derivative financial instruments, we might be forced to satisfy all or a portion of our derivative transactions without the benefit of the cash flow from our sale or purchase of the underlying physical commodity, resulting in a substantial diminution of our liquidity |
| As a result of these factors, our hedging activities may not be as effective as we intend in reducing the volatility of our cash flows, and in certain circumstances may actually increase the volatility of our cash flows |
| In addition, our hedging activities are subject to the risks that a counterparty may not perform its obligation under the applicable derivative instrument, the terms of the derivative instruments are imperfect, and our hedging policies and procedures are not properly followed |
| It is possible that the steps we take to monitor our derivative financial instruments may not detect and prevent violations of our risk management policies and procedures, particularly if deception or other intentional misconduct is involved |
| We have found material weaknesses in our internal controls that require remediation and concluded, pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, that our internal controls over financial reporting at December 31, 2005, were not effective |
| As we discuss in our Management’s Report on Internal Control over Financial Reporting in Part II, Item 9A, “Controls and Procedures,” of this Form 10-K, we have discovered deficiencies, including material weaknesses, in our internal controls over financial reporting as of December 31, 2005 |
| In particular, we identified, and Deloitte & Touche’s audit report on management’s assessment of the effectiveness of internal control over financial reporting and the effectiveness of internal control over financial reporting as of December 31, 2005 confirmed the presence of, the following material weaknesses: • Ineffective control environment; and • Risk management and accounting for derivative financial instruments |
| 19 ______________________________________________________________________ We are fully committed to remediating the material weaknesses described above, and we believe that we are taking the steps that will properly address these issues |
| Further, our Audit Committee has been and expects to remain actively involved in the remediation planning and implementation |
| However, the remediation of the design of the deficient controls and the associated testing efforts are not complete, and further remediation may be required |
| While we are taking immediate steps and dedicating substantial resources to correct these material weaknesses, they will not be considered remediated until the new and improved internal controls operate for a period of time, are tested and are found to be operating effectively |
| Pending the successful completion of such testing and the hiring of additional personnel, we will perform mitigating procedures |
| If we fail to remediate any material weaknesses, we could be unable to provide timely and reliable financial information, which could have a material adverse effect on our business, results of operations or financial condition |
| We are subject to operating and litigation risks that may not be covered by insurance |
| Our industry is subject to numerous operating hazards and risks incidental to processing, transporting, fractionating and storing natural gas and NGLs, and to transporting and storing crude oil |
| These include: • damage to pipelines, plants, related equipment and surrounding properties caused by floods and other natural disasters; • inadvertent damage from construction and farm equipment; • leakage of crude oil, natural gas, NGLs and other hydrocarbons; • fires and explosions; and • other hazards, including those associated with high-sulfur content, or sour gas, that could also result in personal injury and loss of life, pollution and suspension of operations |
| As a result, we may be a defendant in various legal proceedings and litigation arising from our operations |
| We may not be able to maintain or obtain insurance of the type and amount we desire at reasonable rates |
| Market conditions could cause certain insurance premiums and deductibles to become unavailable, or available only for reduced amounts of coverage |
| For example, insurance carriers now require broad exclusions for losses due to war risk and terrorist acts |
| If we were to incur a significant liability for which we were not fully insured, it could have a material adverse effect on our financial position |
| Transportation on certain of our pipelines may be subject to federal or state rate and service regulation, and the imposition and/or cost of compliance with such regulation could adversely affect our profitability |
| Some of our gas, liquids and crude oil transmission operations are subject to rate and service regulations under FERC or various state regulatory bodies, depending upon jurisdiction |
| FERC generally regulates the transportation of natural gas and oil in interstate commerce, and FERC’s regulatory authority includes: facilities construction, acquisition, extension or abandonment of services or facilities; accounts and records; and depreciation and amortization policies |
| Intrastate natural gas pipeline operations are generally not subject to regulation by FERC, and the Natural Gas Act (“NGA”) specifically exempts some gathering systems |
| Yet such operations may still be subject to regulation by various state agencies |
| The applicable statutes and regulations generally require that our rates and terms and conditions of service provide no more than a fair return on the aggregate value of the facilities used to render services |
| FERC rate cases can involve complex and expensive proceedings |
| For more information regarding regulatory matters that could affect our business, please see Item 1, Regulatory Matters |
| We are indemnified for liabilities arising from an ongoing remediation of property on which our facilities are located and our results of operation and our ability to make payments of principal and interest on the notes could be adversely affected if the indemnifying party fails to perform its indemnification obligation |
| Columbia Gas is the previous or current owner of the property on which our Kenova, Boldman, Cobb and Kermit facilities are located and is the previous operator of our Boldman and Cobb facilities |
| Columbia Gas has been or is currently involved in investigatory or remedial activities with respect to the real property underlying the Boldman and Cobb facilities pursuant to an “Administrative Order by Consent for Removal Actions” entered into by Columbia Gas and the US Environmental Protection Agency and, in the case of the Boldman facility, an “Agreed Order” with the Kentucky Natural Resources and Environmental Protection Cabinet |
| 20 ______________________________________________________________________ Columbia Gas has agreed to retain sole liability and responsibility for, and to indemnify MarkWest Hydrocarbon against, any environmental liabilities associated with these regulatory orders or the real property underlying these facilities to the extent such liabilities arose prior to the effective date of the agreements pursuant to which such properties were acquired or leased from Columbia Gas |
| At the closing of our initial public offering, MarkWest Hydrocarbon assigned us the benefit of its indemnity from Columbia Gas with respect to the Cobb, Boldman and Kermit facilities |
| While we are not a party to the agreement under which Columbia Gas agreed to indemnify MarkWest Hydrocarbon with respect to the Kenova facility, MarkWest Hydrocarbon has agreed to provide to us the benefit of its indemnity, as well as any other third party environmental indemnity of which it is a beneficiary |
| MarkWest Hydrocarbon has also agreed to provide us an additional environmental indemnity pursuant to the terms of the Omnibus Agreement |
| Our results of operation and our ability to make cash distributions to our unitholders could be adversely affected if in the future either Columbia Gas or MarkWest Hydrocarbon fails to perform under the indemnification provisions of which we are the beneficiary |
| Our business is subject to federal, state and local laws and regulations with respect to environmental, safety and other regulatory matters, and the violation of, or the cost of compliance with, such laws and regulations could adversely affect our profitability |
| Numerous governmental agencies enforce complex and stringent laws and regulations on a wide range of environmental, safety and other regulatory matters |
| We could be adversely affected by increased costs due to stricter pollution-control requirements or liabilities resulting from non-compliance with operating or other regulatory permits |
| New environmental laws and regulations might adversely influence our products and activities |
| Federal, state and local agencies also could impose additional safety requirements, any of which could affect our profitability |
| In addition, we face the risk of accidental releases or spills associated with our operations |
| These could result in material costs and liabilities, including those relating to claims for damages to property and persons |
| Our failure to comply with environmental or safety-related laws and regulations could result in administrative, civil and criminal penalties, the imposition of investigatory and remedial obligations and even injunctions that restrict or prohibit our operations |
| For more information regarding the environmental, safety and other regulatory matters that could affect our business, please see Item 1, Regulatory Matters, Environmental Matters, and Pipeline Safety Regulations |
| The amount of gas we process, gather and transmit, or the crude oil we gather and transport, may be reduced if the pipelines to which we deliver the natural gas or crude oil cannot, or will not, accept the gas or crude oil |
| All of the natural gas we process, gather and transmit is delivered into pipelines for further delivery to end-users |
| If these pipelines cannot, or will not, accept delivery of the gas due to downstream constraints on the pipeline, we will be forced to limit or stop the flow of gas through our pipelines and processing systems |
| In addition, interruption of pipeline service upstream of our processing facilities would likewise limit or stop flow through our processing facilities |
| Likewise, if the pipelines into which we deliver crude oil are interrupted, we will be limited in, or prevented from conducting, our crude oil transportation operations |
| Any number of factors beyond our control could cause such interruptions or constraints on pipeline service, including necessary and scheduled maintenance, or unexpected damage to the pipeline |
| Because our revenues and net operating margins depend upon (1) the volumes of natural gas we process, gather and transmit, (2) the throughput of NGLs through our transportation, fractionation and storage facilities and (3) the volume of crude oil we gather and transport, any reduction of volumes could result in a material reduction in our net operating margin |
| Our business would be adversely affected if operations at any of our facilities were interrupted |
| Our operations depend upon the infrastructure that we have developed, including processing and fractionation plants, storage facilities, and various means of transportation |
| Any significant interruption at these facilities or pipelines, or our inability to transmit natural gas or NGLs, or transport crude oil to or from these facilities or pipelines for any reason, would adversely affect our results of operations |
| Operations at our facilities could be partially or completely shut down, temporarily or permanently, as the result of circumstances not within our control, such as: • unscheduled turnarounds or catastrophic events at our physical plants; • labor difficulties that result in a work stoppage or slowdown; and • a disruption in the supply of crude oil to our crude oil pipeline, natural gas to our processing plants or gathering pipelines, or a disruption in the supply of NGLs to our transportation pipeline and fractionation facility |
| 21 ______________________________________________________________________ Due to our lack of asset diversification, adverse developments in our gathering, processing, transportation, transmission, fractionation and storage businesses would reduce our ability to make distributions to our unitholders |
| We rely exclusively on the revenues generated from our gathering, processing, transportation, transmission, fractionation and storage businesses |
| An adverse development in one of these businesses would have a significantly greater impact on our financial condition and results of operations than if we maintained more diverse assets |
| A shortage of skilled labor may make it difficult for us to maintain labor productivity, and competitive costs and could adversely affect our profitability |
| Our operations require skilled and experienced laborers with proficiency in multiple tasks |
| In recent years, a shortage of workers trained in various skills associated with the midstream energy business has caused us to conduct certain operations without full staff, which decreases our productivity and increases our costs |
| This shortage of trained workers is the result of the previous generation’s experienced workers reaching the age for retirement, combined with the difficulty of attracting new laborers to the midstream energy industry |
| Thus, this shortage of skilled labor could continue over an extended period |
| If the shortage of experienced labor continues or worsens, it could have an adverse impact on our labor productivity and costs and our ability to expand production in the event there is an increase in the demand for our products and services, which could adversely affect our profitability |
| Risks Related to Our Partnership Structure Cost reimbursements and fees due our general partner may be substantial and reduce our cash available for distribution to unitholders |
| Prior to making any distribution on the common units, we reimburse our general partner for all expenses it incurs on our behalf |
| Our general partner has sole discretion in determining the amount of these expenses |
| Our general partner and its affiliates also may provide us other services for which we will be charged fees |
| MarkWest Hydrocarbon and its affiliates have conflicts of interest and limited fiduciary responsibilities, which may permit them to favor their own interests to the detriment of the unitholders MarkWest Hydrocarbon and its affiliates own and control our general partner |
| MarkWest Hydrocarbon and its affiliates also own a significant limited partner interest in us |
| A number of officers and employees of MarkWest Hydrocarbon and our general partner also own interests in the Partnership |
| Conflicts of interest may arise between MarkWest Hydrocarbon and its affiliates, including our general partner and the Partnership |
| As a result of these conflicts, our general partner may favor its own interests, and the interests of its affiliates, over the interests of our unitholders |
| These conflicts include, among others, the following situations: Conflicts Relating to Control: • Employees of MarkWest Hydrocarbon who provide services to us also devote significant time to the businesses of MarkWest Hydrocarbon and are compensated by MarkWest Hydrocarbon for these services |
| • Neither our Partnership Agreement nor any other agreement requires MarkWest Hydrocarbon to pursue a future business strategy that favors the Partnership or utilizes the Partnership’s assets for processing, transportation or fractionation services we provide |
| MarkWest Hydrocarbon’s directors and officers have a fiduciary duty to make these decisions in the best interests of the stockholders of MarkWest Hydrocarbon |
| • Our general partner is allowed to take into account the interests of other parties, such as MarkWest Hydrocarbon, in resolving conflicts of interest, which has the effect of limiting its fiduciary duty to our unitholders |
| • Our general partner may limit its liability and reduce its fiduciary duties, while also restricting the remedies available to our unitholders for actions that, without the limitations, might constitute breaches of fiduciary duty |
| As a result of purchasing units, our unitholders consent to some actions and conflicts of interest that might otherwise constitute a breach of fiduciary or other duties under applicable state law |
| 22 ______________________________________________________________________ • Our general partner controls the enforcement of obligations owed to the Partnership by our general partner and its affiliates, including the processing, transportation and fractionation agreements with MarkWest Hydrocarbon |
| • Our general partner decides whether to retain separate counsel, accountants or others to perform services for the Partnership |
| • In some instances, our general partner may cause us to borrow funds in order to make cash distributions, even if the purpose or effect of the borrowing is to make a distribution on the subordinated units or to make incentive distributions or to hasten the conversion of subordinated units |
| • Our Partnership Agreement gives our general partner broad discretion in establishing financial reserves for the proper conduct of our business |
| These reserves also will affect the amount of cash available for distribution |
| Our general partner may establish reserves for distribution on the subordinated units, but only if those reserves will not prevent us from distributing the full minimum quarterly distribution, plus any arrearages, on the common units for the following four quarters |
| Conflicts Relating to Costs: • Our general partner determines the amount and timing of asset purchases and sales, capital expenditures, borrowings, issuance of additional partnership securities and reserves, each of which can affect the amount of cash that is distributed to our unitholders |
| • Our general partner determines which costs incurred by MarkWest Hydrocarbon and its affiliates are reimbursable by us |
| • Our Partnership Agreement does not restrict our general partner from causing us to pay it or its affiliates for any services rendered on terms that are fair and reasonable to us or entering into additional contractual arrangements with any of these entities on our behalf |
| Unitholders have less ability to elect or remove management than holders of common stock in a corporation |
| Unlike the holders of common stock in a corporation, unitholders have only limited voting rights on matters affecting our business, and therefore limited ability to influence management’s decisions regarding our business |
| Unitholders did not elect our general partner or its board of directors, and have no right to elect our general partner or its board of directors on an annual or other continuing basis |
| MarkWest Hydrocarbon and its affiliates choose the board of directors of our general partner |
| The directors of our general partner also have a fiduciary duty to manage our general partner in a manner beneficial to its members, MarkWest Hydrocarbon and its affiliates |
| Furthermore, if unitholders are dissatisfied with the performance of our general partner, they have little ability to remove our general partner |
| First, our general partner generally may not be removed except upon the vote of the holders of at least 66 ^2/[3]% of the outstanding units voting together as a single class |
| Also, if our general partner is removed without cause during the subordination period, and units held by MarkWest Hydrocarbon and its affiliates are not voted in favor of that removal, all remaining subordinated units will automatically be converted into common units, and any existing arrearages on the common units will be extinguished |
| A removal under these circumstances would adversely affect the common unitholders by prematurely eliminating their contractual right to distributions over the subordinated units, which would otherwise have continued until we had met certain distribution and performance tests |
| Cause is narrowly defined to mean that a court of competent jurisdiction has entered a final, non-appealable judgment finding our general partner liable for actual fraud, gross negligence, or willful or wanton misconduct in its capacity as our general partner |
| Cause does not include most cases of charges of poor management of the business, so the removal of our general partner because of the unitholders’ dissatisfaction with its performance in managing our partnership will most likely result in the termination of the subordination period |
| Unitholders’ voting rights are restricted by the Partnership Agreement provision |
| It states that any units held by a person who owns 20prca or more of any class of units then outstanding, other than our general partner, its affiliates, their 23 ______________________________________________________________________ transferees and persons who acquired such units with the prior approval of the board of directors of our general partner, cannot be voted on any matter |
| In addition, the Partnership Agreement contains provisions limiting the ability of unitholders to call meetings or to acquire information about our operations, as well as other provisions limiting the unitholders’ ability to influence the manner or direction of management |
| These provisions may discourage a person or group from attempting to remove our general partner or otherwise change our management |
| As a result of these provisions, the price at which the common units will trade may be lower because of the absence or reduction of a takeover premium in the trading price |
| The control of our general partner may be transferred to a third party, and that party could replace our current management team, in each case without unitholder consent |
| Our general partner may transfer its general partner interest to a third party in a merger, or in a sale of all or substantially all of its assets, without the consent of the unitholders |
| Furthermore, there is no restriction in the Partnership Agreement on the ability of the owners of our general partner from transferring their ownership interest in our general partner to a third party |
| The new owner of our general partner would then be in a position to replace the board of directors and officers of our general partner with its own choices, and to control the decisions taken by the board of directors and officers |
| Our general partner’s absolute discretion in determining the level of cash reserves may adversely affect our ability to make cash distributions to our unitholders |
| Our Partnership Agreement requires our general partner to deduct from operating surplus cash reserves that, in its reasonable discretion, are necessary to fund our future operating expenditures |
| In addition, the Partnership Agreement permits our general partner to reduce available cash by establishing cash reserves for the proper conduct of our business, to comply with applicable law or agreements to which we are a party, or to provide funds for future distributions to partners |
| These cash reserves will affect the amount of cash available for distribution to our unitholders |
| Our Partnership Agreement contains provisions that reduce the remedies available to unitholders for actions that might otherwise constitute a breach of fiduciary duty by our general partner |
| Our Partnership Agreement limits the liability and reduces the fiduciary duties of our general partner to our unitholders |
| The Partnership Agreement also restricts the remedies available to unitholders for actions that would otherwise constitute breaches of our general partner’s fiduciary duties |
| If you hold common units, you will be treated as having consented to the various actions contemplated in the Partnership Agreement and conflicts of interest that might otherwise be considered a breach of fiduciary duties under applicable state law |
| We do not have any employees and rely solely on employees of MarkWest Hydrocarbon and its affiliates who serve as our agents |
| MarkWest Hydrocarbon and its affiliates conduct businesses and activities of their own in which we have no economic interest |
| If these separate activities are significantly greater than our activities, there could be material competition for the time and effort of the employees who provide services to our general partner |
| If the employees of MarkWest Hydrocarbon and its affiliates do not devote sufficient attention to the management and operation of our business, our financial results may suffer, and our ability to make distributions to our unitholders may be reduced |
| We may issue additional common units without your approval, which would dilute your ownership interests |
| During the subordination period, our general partner, without the approval of our unitholders, may cause the Partnership to issue up to 1cmam207cmam500 additional common units |
| Our general partner, without unitholder approval, may also cause the Partnership to issue an unlimited number of additional common units or other equity securities of equal rank with the common units, in several circumstances |
| These include: • the issuance of common units in connection with acquisitions or capital improvements that increase cash flow from operations per unit on a pro forma basis; • the conversion of subordinated units into common units; • the conversion of units of equal rank with the common units into common units under some circumstances; 24 ______________________________________________________________________ • the conversion of the general partner interest and the incentive distribution rights into common units as a result of the withdrawal of our general partner; • issuances of common units under our long-term incentive plan; or • issuances of common units to repay indebtedness, the cost of servicing which is greater than the distribution obligations associated with the units issued in connection with the debt’s retirement |
| The issuance of additional common units or other equity securities of equal or senior rank will have the following effects: • our unitholders’ proportionate ownership interest in the Partnership will decrease; • the amount of cash available for distribution on each unit may decrease; • because a lower percentage of total outstanding units will be subordinated units, the risk that a shortfall in the payment of the minimum quarterly distribution will be borne by our common unitholders will increase; • the relative voting strength of each previously outstanding unit may be diminished; and • the market price of the common units may decline |
| After the end of the subordination period, we may issue an unlimited number of limited partner interests of any type without the approval of our unitholders |
| Our Partnership Agreement does not give our unitholders the right to approve our issuance of equity securities ranking junior to the common units at any time |
| Our general partner has a limited call right that may require you to sell your common units at an undesirable time or price |
| If at any time more than 80prca of the outstanding common units are owned by our general partner and its affiliates, our general partner will have the right, but not the obligation, which it may assign to any of its affiliates or to the Partnership, to acquire all, but not less than all, of the remaining common units held by unaffiliated persons at a price not less than their then-current market price |
| As a result, you may be required to sell your common units at an undesirable time or price and may not receive any return on your investment |
| You may also incur a tax liability upon a sale of your units |
| You may not have limited liability if a court finds that unitholder action constitutes control of our business |
| Under Delaware law, you could be held liable for our obligations as a general partner if a court determined that the right or the exercise of the right by our unitholders as a group to remove or replace our general partner, to approve some amendments to the Partnership Agreement, or to take other action under our Partnership Agreement was considered participation in the “control” of our business |
| Our general partner usually has unlimited liability for the obligations of the Partnership, such as its debts and environmental liabilities, except for those contractual obligations of the Partnership that are expressly made without recourse to our general partner |
| In addition, Section 17-607 of the Delaware Revised Uniform Limited Partnership Act provides that, under some circumstances, a unitholder may be liable to us for the amount of a distribution for a period of three years from the date of the distribution |