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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x  QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2015

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)

1515 Arapahoe Street, Tower 1, Suite 1600, Denver, Colorado 80202-2137

(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 x 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 x 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.

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 x

As of October 28, 2015, the number of the registrant’s common units and Class B units outstanding were 197,937,249 and 7,981,756, respectively.

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Throughout this document we make statements that are classified as “forward-looking.” Please refer to “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., a wholly-owned taxable subsidiary of the Partnership. References to the “General Partner” are intended to mean MarkWest Energy GP, L.L.C., the general partner of the Partnership.

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Glossary of Terms

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PART I—FINANCIAL INFORMATION

Item 1.  Financial Statements

MARKWEST ENERGY PARTNERS, L.P.

Condensed Consolidated Balance Sheets

(unaudited, in thousands)

Asset and liability amounts in parentheses represent the portion of the condensed consolidated balance attributable to a VIE.

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)

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 Changes in Equity

(unaudited, in thousands)

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)

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 in 2002 as a Delaware limited partnership. The Partnership is engaged in the gathering, processing and transportation of natural gas; the gathering, transportation, fractionation, storage and marketing of NGLs; and the gathering and transportation of crude oil. The Partnership has a leading presence in many natural gas resource plays including the Marcellus Shale, Utica Shale, Huron/Berea Shale, Haynesville Shale, Woodford Shale and Granite Wash formations.

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 conjunction with the Partnership’s consolidated financial statements included in the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2014. 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, results for the nine months ended September 30, 2015 are not necessarily indicative of results for the full year 2015 or any other future period.

The Partnership’s unaudited condensed consolidated financial statements include all majority-owned or controlled subsidiaries. In addition, MarkWest Utica EMG, L.L.C. (“MarkWest Utica EMG”), a VIE for which the Partnership has been determined to be the primary beneficiary, is included in the condensed consolidated financial statements (See Note 4). Intercompany investments, accounts and transactions have been eliminated. The Partnership’s investments in which the Partnership exercises significant influence but does not control and does not have a controlling financial interest, are accounted for using the equity method.  The Partnership’s investments in VIEs, in which the Partnership exercises significant influence but does not control and is not the primary beneficiary, are also accounted for using the equity method.

2.  Recent Accounting Pronouncements

In May 2014, the FASB issued ASU 2014-09 — Revenue from Contracts with Customers (“ASU 2014-09”) that will supersede current revenue recognition guidance.  ASU 2014-09 is intended to provide companies with a single comprehensive model to use for all revenue arising from contracts with customers, which would include real estate sales transactions.  ASU 2014-09 is effective for the Partnership as of January 1, 2018 and must be adopted using either a full retrospective approach for all periods presented in the period of adoption (with some limited relief provided) or a modified retrospective approach.  Early adoption as of January 1, 2017 is permitted.  The Partnership is in the early stages of evaluating ASU 2014-09 and has not yet determined the impact on the Partnership’s condensed consolidated financial statements.

In August 2014, the FASB issued ASU 2014-15 — Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”), that provides guidance on management’s responsibility to perform interim and annual assessments of an entity’s ability to continue as a going concern and provides related disclosure requirements. ASU 2014-15 is effective for the Partnership as of December 31, 2016 and early adoption is permitted. The Partnership evaluated ASU 2014-15 and has determined the impact is not material to the Partnership’s condensed consolidated financial statements.

In February 2015, the FASB issued ASU 2015-02 — Consolidation (Topic 810): Amendments to the Consolidation Analysis (“ASU 2015-02”) that will modify current consolidation guidance. ASU 2015-02 makes changes to the variable interest model, including modifying the evaluation of whether limited partnerships or similar legal entities are VIEs and amending the guidance for assessing how relationships of related parties affect the consolidation analysis of VIEs. ASU 2015-02 is effective for the Partnership as of January 1, 2016 and early adoption is permitted. The Partnership evaluated ASU 2015-02 and has determined the impact is not material to the Partnership’s condensed consolidated financial statements.

In April 2015 and August 2015, the FASB issued ASU 2015-03 and ASU 2015-15 — Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03 and 2015-15”) that will modify the presentation of debt issuance costs related to debt other than lines of credit such that they are presented in the balance sheet as a direct deduction from the carrying amount of the debt liability.  ASU 2015-03 and 2015-15 is effective for the Partnership as of January 1, 2016 and early adoption is permitted. The Partnership evaluated ASU 2015-03 and 2015-15 and has determined the impact is not material to the Partnership’s condensed consolidated financial statements.

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3.  Merger

Merger Agreement

On July 11, 2015, the Partnership entered into an Agreement and Plan of Merger (the “Merger Agreement”) with MPLX LP (“MPLX”), MPLX GP LLC, the general partner of MPLX (“MPLX GP”), Sapphire Holdco LLC, a wholly owned subsidiary of MPLX (“Merger Sub” and, together with MPLX and MPLX GP, the “MPLX Entities”), and, for certain limited purposes set forth in the Merger Agreement, Marathon Petroleum Corporation, the parent of MPLX GP (“MPC”).

Pursuant to the Merger Agreement, Merger Sub will be merged with and into the Partnership (the “Merger”), with the Partnership surviving the Merger as a wholly owned subsidiary of MPLX.  After the Merger, the Partnership’s common units will cease to be publicly traded.

Under the Merger Agreement, MPC will contribute $675 million to MPLX, without receiving any new equity in exchange, and, at the effective time of the Merger (the “Effective Time”), (a) each outstanding Partnership common unit (the “Common Units”) will be converted into the right to receive 1.09 MPLX common units (the “MPLX Common Units” and, such consideration, the “Common Equity Consideration”) and an amount in cash obtained by dividing $675 million by the number of Common Units plus the number of Canceled Awards (as defined below) plus the number of Partnership Class B units (the “Class B Units”), in each case outstanding as of immediately prior to the Effective Time (together with the Common Equity Consideration, the “Common Merger Consideration”) and (b) each outstanding Class B Unit will be converted into the right to receive one MPLX Class B unit (the “MPLX Class B Units”).  Under the Merger Agreement, at the Effective Time, the Partnership Class A units, all of which are owned by wholly owned subsidiaries of the Partnership, will be converted into a specified number of MPLX Class A units, as more fully described in the Merger Agreement.

As a result of the Merger, each phantom unit under the Partnership’s equity plans outstanding immediately prior to the Effective Time will become fully vested and converted into an equivalent number of Common Units, which will be canceled and converted into the right to receive the Common Merger Consideration (the “Canceled Awards”). As of the Effective Time, each DER award will be canceled and the holder thereof will cease to have any rights with respect thereto, other than the right to receive distributions declared or made (but not yet paid) by the Partnership prior to the Effective Time. The payments pursuant to this paragraph are subject to any applicable withholding taxes.

The completion of the Merger is subject to certain customary conditions, including (a) the approval of the Merger Agreement by the Partnership’s unitholders entitled to vote thereon and (b) the approval of the MPLX Common Units comprising the Common Equity Consideration for listing on the New York Stock Exchange.  Each of the Partnership’s and MPLX’s obligation to complete the Merger is also subject to certain additional customary conditions, including (i) subject to specified standards, the accuracy of the representations and warranties of the other party and (ii) performance in all material respects by the other party of its obligations under the Merger Agreement. The registration statement filed by MPLX with respect to the Merger and Common Equity Consideration was declared effective on October 29, 2015.  The Partnership’s special unitholders meeting to consider and vote on a proposal to approve the Merger Agreement and the transactions contemplated thereby, has been scheduled to be held on December 1, 2015 at the Partnership’s offices located in Denver, Colorado.

The Merger Agreement contains customary representations and warranties from both the Partnership and MPLX, and also contains customary pre-closing covenants, including covenants requiring each of them to use their respective reasonable best efforts to cause the Merger to be consummated, and covenants requiring the Partnership and MPLX, subject to certain exceptions, to carry on their respective businesses in the ordinary course of business consistent with past practice during the period between the execution of the Merger Agreement and the closing of the Merger.

The Merger Agreement also contains a “no shop” provision that, in general, restricts the Partnership’s ability to solicit third-party acquisition proposals or provide information to or engage in discussions or negotiations with third parties that have made or that might make an acquisition proposal. The no shop provision is subject to certain limited exceptions that allow the Partnership, under certain circumstances and in compliance with certain obligations, to provide information and participate in discussions and negotiations with respect to unsolicited third-party acquisition proposals that would reasonably be expected to lead to a Superior Proposal (as defined in the Merger Agreement).

The Merger Agreement contains certain termination rights and provides that, upon termination of the Merger Agreement under specified circumstances, including, but not limited to, a change in the recommendation of the General Partner of the Partnership, the Partnership will pay MPLX a cash termination fee of $625 million.

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Under the Merger Agreement, the Partnership, MPC and the MPLX Entities have agreed that, prior to the closing of the Merger, MPLX GP will increase the size of its board of directors by two directors and will appoint two directors identified by the Partnership to such board of directors, one of which shall be independent under the NYSE rules.  MPC has also agreed to appoint one director identified by the Partnership to the board of directors of MPC.  Both such appointments shall be effective immediately following the closing of the Merger.  The partnership has identified Mr. Frank M. Semple as one of the two directors to be appointed to the MPLX GP board, and Mr. Semple has also been identified by the Partnership to be appointed to the MPC board.  The Merger Agreement also provides that MPC has agreed to fill the next vacancy on the Board of Directors of MPLX GP that arises following date of the closing of the merger, by first considering the nomination of an individual who was an independent director of the Partnership’s general partner as of the date of the Merger Agreement.  In addition, pursuant to the Merger Agreement, certain of the Partnership’s executive officers will retain their titles and become executive officers of MPLX GP and MPC, as the case may be.

Voting Agreement

On July 11, 2015, and in connection with the execution of the Merger Agreement, M&R MWE Liberty, LLC, which holds 7,352,691 Common Units (representing approximately 3.7% of the outstanding Common Units as of October 28, 2015), entered into a Voting Agreement with the MPLX Entities (the “Voting Agreement”), pursuant to which such holder has agreed, among other things, to vote (or cause to be voted) all Common Units owned by such holder in favor of approving the Merger Agreement.  The Voting Agreement shall terminate upon termination of the Merger Agreement, and certain other specified events.

Lock-Up Agreement

On July 11, 2015, and in connection with the execution of the Merger Agreement, EMG Utica, LLC (“EMG Utica”), EMG Utica Condensate, LLC, the MPLX Entities, the Partnership and M&R MWE Liberty, L.L.C. entered into a Lock-Up Agreement (the “Lock-Up Agreement”), pursuant to which the parties thereto have agreed, among other things, not to convert any Class B Units into Common Units in connection with the Merger and that certain transfer restrictions will apply, during the six-month period following consummation of the Merger, to the MPLX Common Units that the holders of Class B Units will receive as Common Merger Consideration for its Common Units.  The MPLX Class B Units will have substantially similar rights and obligations, including registration rights, as those applicable to the Class B Units, other than there will be no transfer restrictions on the MPLX Common Units into which such MPLX Class B Units are convertible.  The MPLX Class B Units will be convertible into the Common Merger Consideration on July 1, 2016 and July 1, 2017.

As of September 30, 2015, MWE owned a 55% ownership interest in MarkWest Utica EMG Condensate, L.L.C. (“Utica Condensate”). Under the terms of the Lock-Up Agreement, MWE will purchase the remaining 45% interest in Utica Condensate for $83 million in connection with, and conditioned upon, the consummation of the Merger. Utica Condensate’s business is conducted solely through its 60% ownership interest in Ohio Condensate Company, L.L.C. (“Ohio Condensate”). The owner of the remaining 40% interest in Ohio Condensate has certain participatory rights and as a result Ohio Condensate has been and will continue to be accounted for as an equity method investment.

4.  Variable Interest Entity

MarkWest Utica EMG

Effective January 1, 2012, the Partnership and EMG Utica (together the “Members”) executed agreements to form a joint venture, MarkWest Utica EMG, to develop significant natural gas gathering, processing and NGL fractionation, transportation and marketing infrastructure in eastern Ohio.

In February 2013, the Members entered into the Amended and Restated Limited Liability Company Agreement of MarkWest Utica EMG (“Amended Utica LLC Agreement”) which replaced the original agreement. Pursuant to the Amended Utica LLC Agreement, the aggregate funding commitment of EMG Utica increased to $950.0 million (the “Minimum EMG Investment”).  EMG Utica was required to fund all capital until the Minimum EMG Investment was satisfied, which occurred in May 2013. After EMG Utica funded the Minimum EMG Investment, the Partnership was required to fund, as needed, 100% of future capital for MarkWest Utica EMG until such time as the aggregate capital that had been contributed by the Members reached $2.0 billion, which occurred in November 2014. Until such time as the investment balances of the Partnership and EMG Utica are in the ratio of 70% and 30%, respectively (such time being referred to as the “Second Equalization Date”), EMG Utica has the right, but not the obligation, to fund up to 10% of each capital call for MarkWest Utica EMG, and the Partnership will be required to fund all remaining capital not elected to be funded by EMG Utica. After the Second Equalization Date, the Partnership and EMG Utica will have the right, but not the obligation, to fund their pro rata portion (based on their respective investment balances) of any additional required capital and may also fund additional capital that the other party elects not to fund. As of September 30, 2015, EMG Utica has contributed approximately $992.3 million and the Partnership has contributed approximately $1,430.6 million to MarkWest Utica EMG.

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Under the Amended Utica LLC Agreement, after EMG Utica has contributed more than $500.0 million to MarkWest Utica EMG and prior to December 31, 2016, EMG Utica’s investment balance will also be increased by a quarterly special non-cash allocation of income (“Preference Amount”) that is based upon the amount of capital contributed by EMG Utica in excess of $500.0 million. No Preference Amount will accrue to EMG Utica’s investment balance after December 31, 2016. EMG Utica received a special non-cash allocation of income of approximately $11.3 million and approximately $32.5 million for the three and nine months ended September 30, 2015, respectively. EMG Utica received a special non-cash allocation of income of approximately $9.3 million and approximately $27.2 million for the three and nine months ended September 30, 2014, respectively.  The Preference Amount along with the cash contributions result in investment balances of the Partnership and EMG Utica as of September 30, 2015 in the ratio of 56% and 44%, respectively.

Under the Amended Utica LLC Agreement, the Partnership will continue to receive 60% of cash generated by MarkWest Utica EMG that is available for distribution until the earlier of December 31, 2016 and the date on which the Partnership’s investment balance equals 60% of the aggregate investment balances of the Members. After the earlier of those dates, cash generated by MarkWest Utica EMG that is available for distribution will be allocated to the Members in proportion to their respective investment balances.

The Partnership has determined that MarkWest Utica EMG does not meet the business scope exception to be excluded as a VIE due to the unique investment structure, discussed above, which creates a de-facto agent relationship between the Members, as EMG Utica has funded portions of the Partnership’s ownership in MarkWest Utica EMG. MarkWest Utica EMG’s inability to fund its planned activities without additional subordinated financial support qualifies it to be a VIE. The Partnership has concluded that it is the primary beneficiary of MarkWest Utica EMG. As the primary beneficiary of MarkWest Utica EMG, the Partnership consolidates the entity and recognizes non-controlling interest and redeemable non-controlling interest. The decision to consolidate MarkWest Utica EMG is re-evaluated quarterly and is subject to change. Upon the earlier of December 31, 2016 and the date on which the Partnership’s investment balance equals 60% of the aggregate investment balances of the Members, the de-facto agent relationship between the Members will no longer exist.

The assets of MarkWest Utica EMG are the property of MarkWest Utica EMG and are not available to the Partnership for any other purpose, including as collateral for its secured debt (See Notes 10 and 16). MarkWest Utica EMG’s asset balances can only be used to settle its own obligations. The liabilities of MarkWest Utica EMG do not represent additional claims against the Partnership’s general assets and the creditors or beneficial interest holders of MarkWest Utica EMG do not have recourse to the general credit of the Partnership. The Partnership’s maximum exposure to loss as a result of its involvement with MarkWest Utica EMG includes its equity investment, any additional capital contribution commitments and any operating expenses incurred by the subsidiary operator in excess of its compensation received for the performance of the operating services. The Partnership did not provide any financial support to MarkWest Utica EMG that it was not contractually obligated to provide during the nine months ended September 30, 2015 and 2014.

Ohio Gathering

Ohio Gathering Company, L.L.C. (“Ohio Gathering”) is a subsidiary of MarkWest Utica EMG and is engaged in providing natural gas gathering services in the Utica Shale in eastern Ohio. Prior to June 1, 2014, MarkWest Utica EMG, as the primary beneficiary of a VIE, consolidated Ohio Gathering.  Effective June 1, 2014 (“Summit Investment Date”), Summit Midstream Partners (“Summit”) exercised its option (“Ohio Gathering Option”) and increased its equity ownership (“Summit Equity Ownership”) from less than 1% to approximately 40% through a cash investment of approximately $341.1 million that Ohio Gathering received in 2014.  MarkWest Utica EMG received approximately $336.1 million as a distribution from Ohio Gathering as a result of the exercise of the Ohio Gathering Option.  Summit purchased its initial 1% equity interest and the Ohio Gathering Option from Blackhawk Midstream LLC (“Blackhawk”) in January 2014.  As of the Summit Investment Date, MarkWest Utica EMG was no longer deemed the primary beneficiary due to Summit’s voting rights on significant operating matters obtained as a result of its increased equity ownership in Ohio Gathering. As of the Summit Investment Date, the Partnership accounted for Ohio Gathering as an equity method investment.  Ohio Gathering’s net assets are reported under the caption Investment in unconsolidated affiliates on the Condensed Consolidated Balance Sheets.

For the nine months ended September 30, 2014, the Partnership’s condensed consolidated results of operations include the consolidated results of operations of Ohio Gathering through May 31, 2014.  For the three and four months ended September 30, 2014 and for the three and nine months ended September 30, 2015, the Partnership, through its consolidation of MarkWest Utica EMG, has reported its pro rata share of Ohio Gathering’s net income under the caption Equity in earnings (loss) from unconsolidated affiliates on the Condensed Consolidated Statements of Operations.  Ohio Gathering is considered to be a related party.  The Partnership receives engineering and construction and administrative management fee revenue and other direct personnel costs (“Operational Service” revenue) for operating Ohio Gathering.  The amount of Operational Service revenue related to Ohio Gathering for the three and nine

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months ended September 30, 2015 was approximately $3.8 million and $12.7 million, respectively, and is reported as Service revenue in the Condensed Consolidated Statements of Operations. The amount of Operational Service revenue related to Ohio Gathering for the three and nine months ended September 30, 2014 was approximately $6.0 million and $7.0 million, respectively, and is reported as Service revenue in the Condensed Consolidated Statements of Operations.

5. Other Equity Interests

Utica Condensate

In December 2013, the Partnership and The Energy & Minerals Group (“EMG”) (together the “Condensate Members”) executed an agreement (“Utica Condensate LLC Agreement”) to form Utica Condensate for the purpose of engaging in wellhead condensate gathering, stabilization, terminalling, storage and marketing in the state of Ohio. If Utica Condensate requires additional capital, each Condensate Member has the right, but not the obligation, to contribute capital in proportion to its ownership interest. As of September 30, 2015, the Partnership owned 55% of Utica Condensate.

Ohio Condensate

Utica Condensate’s business is conducted solely through its subsidiary, Ohio Condensate, which was formed in December 2013 through an agreement executed between Utica Condensate and Blackhawk (“Ohio Condensate LLC Agreement”), in which Utica Condensate and Blackhawk contributed cash in exchange for equity ownership interests of 99% and 1%, respectively. In January 2014, Summit purchased Blackhawk’s less than 1% equity interest and its option to purchase up to an additional equity ownership interest of 40% in Ohio Condensate (“Ohio Condensate Option”).  Effective as of the Summit Investment Date, Summit exercised the Ohio Condensate Option and increased its equity ownership from less than 1% to 40% through a cash investment of approximately $8.6 million.

As of September 30, 2015, Utica Condensate owned 60% of Ohio Condensate.  The Partnership sold approximately $17 million of assets under construction to Utica Condensate in December 2013 and received the $17 million in the first quarter of 2014.  The Partnership has recorded the proceeds in the Proceeds from disposal of property, plant and equipment in the accompanying Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2014.  Ohio Condensate is considered to be a related party.  The amount of Operational Service revenue related to Ohio Condensate for the three and nine months ended September 30, 2015 was approximately $0.9 million and $3.0 million, respectively, and is reported as Service revenue in the Condensed Consolidated Statements of Operations. The amount of Operational Service revenue related to Ohio Condensate for the three and nine months ended September 30, 2014 was approximately $0.8 million and $2.1 million, respectively, and is reported as Service revenue in the Condensed Consolidated Statements of Operations.

6. Derivative Financial Instruments

Commodity Derivatives

NGL and natural gas prices are volatile and are impacted by changes in fundamental supply and demand, as well as market uncertainty, availability of NGL transportation and fractionation capacity and a variety of additional factors that are beyond the Partnership’s control. The Partnership’s profitability is directly affected by prevailing commodity prices primarily as a result of processing or conditioning at its own or third-party processing plants, purchasing and selling or gathering and transporting volumes of natural gas at index-related prices and the cost of third-party transportation and fractionation services. To the extent that commodity prices influence the level of natural gas drilling by the Partnership’s producer customers, such prices also affect profitability. To protect itself financially against adverse price movements and to maintain more stable and predictable cash flows so that the Partnership can meet its cash distribution objectives, debt service and capital plans, the Partnership executes a strategy governed by the risk management policy approved by the General Partner’s board of directors. The Partnership has a committee comprised of senior management that oversees risk management activities, continually monitors the risk management program and adjusts its strategy as conditions warrant. The Partnership enters into certain derivative contracts to reduce the risks associated with unfavorable changes in the prices of natural gas, NGLs and crude oil. Derivative contracts utilized are swaps and options traded on the OTC market and fixed price forward contracts. The risk management policy does not allow the Partnership to take speculative positions with its derivative contracts.

To mitigate its cash flow exposure to fluctuations in the price of NGLs, the Partnership has entered into derivative financial instruments relating to the future price of NGLs and crude oil. The Partnership currently manages the majority of its NGL price risk

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using direct product NGL derivative contracts. The Partnership enters into NGL derivative contracts when adequate market liquidity exists and future prices are satisfactory.

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 and takes into account the partial offset of its long and short gas positions resulting from normal operating activities.

As a result of its current derivative positions, the Partnership has mitigated a portion of its expected commodity price risk through the fourth quarter of 2016. The Partnership would be exposed to additional commodity risk in certain situations such as if producers under deliver or over deliver product or when processing facilities are operated in different recovery modes. In the event the Partnership has derivative positions in excess of the product delivered or expected to be delivered, the excess derivative positions may be terminated.

All of the Partnership’s financial derivative positions are with financial institutions that are participating members of the Credit Facility (“participating bank group members”). Management conducts a standard credit review on counterparties to derivative contracts. There are no collateral requirements for derivative contracts between the Partnership and any participating bank group member. Specifically, the Partnership is not required to post collateral when it enters into derivative contracts with participating bank group members, as the participating bank group members have a collateral position in substantially all the wholly owned assets of the Partnership other than MarkWest Liberty Midstream & Resources, L.L.C. (“MarkWest Liberty Midstream”) and its subsidiaries and MarkWest Panola Pipeline, L.L.C. A separate agreement with certain participating bank group members allows MarkWest Liberty Midstream to enter into derivative positions without posting cash collateral.  The Partnership uses standardized agreements that allow for offset of certain positive and negative exposures (“master netting arrangements”) in the event of default or other terminating events, including bankruptcy.

The Partnership records derivative contracts at fair value in the Condensed Consolidated Balance Sheets and has not elected hedge accounting or the normal purchases and normal sales designation.  The Partnership’s accounting may cause volatility in the Condensed Consolidated Statements of Operations as the Partnership recognizes in current earnings all unrealized gains and losses from the changes in fair value of derivatives.

As of September 30, 2015, the Partnership had the following outstanding commodity contracts that were entered into to manage cash flow risk associated with future sales of NGLs or future purchases of natural gas:

Embedded Derivatives in Commodity Contracts

The Partnership has a commodity contract with a producer in the Appalachia region that creates a floor on the spread between the NGL product sales price and the purchase price of natural gas with an equivalent Btu content (the “frac spread”) for gas purchases of 9,000 Dth/d. The commodity contract is a component of a broader regional arrangement that also includes a keep-whole processing agreement. This contract is accounted for as an embedded derivative and is recorded at fair value. The changes in fair value of this commodity contract are based on the difference between the contractual and index pricing and are recorded in earnings through Derivative gain related to purchased product costs in the Condensed Consolidated Statement of Operations. In February 2011, the Partnership executed agreements with the producer to extend the commodity contract and the related processing agreement from March 31, 2015 to December 31, 2022 with the producer’s option to extend the agreement for successive five-year terms through December 31, 2032. As of September 30, 2015, the estimated fair value of this contract was a liability of $27.4 million and the recorded value was an asset of $21.1 million. The recorded asset does not include the inception fair value of the commodity contract related to the remaining extension period of October 1, 2015 to December 31, 2022. In accordance with GAAP for non-option embedded derivatives, the fair value of this extended portion of the commodity contract at its inception of February 1, 2011 is deemed to be allocable to the host processing contract and therefore not recorded as a derivative liability. For the three months ended September 30, 2015 and period from April 1, 2015 to September 30, 2015, approximately $2.5 million and $5.1 million, respectively, of the original inception value is no longer included in the inception value below as it is deemed to have settled.  See the following table for a reconciliation of the liability recorded for the embedded derivative as of September 30, 2015 (in thousands):

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The Partnership has a commodity contract that gives it an option to fix a component of the utilities cost to an index price on electricity at a plant location in the Southwest segment through the fourth quarter of 2017. The contract is currently fixed through the fourth quarter of 2015 with the ability to fix the commodity contract for its remaining years. In October, the Partnership extended the contract through fourth quarter of 2016.  Changes in the fair value of the derivative component of this contract are recognized as Derivative loss related to facility expenses in the Condensed Consolidated Statements of Operations. As of September 30, 2015, the estimated fair value of this contract was a liability of $0.6 million on the Condensed Consolidated Balance Sheet.

Financial Statement Impact of Derivative Contracts

There were no material changes to the Partnership’s policy regarding the accounting for these instruments as previously disclosed in the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2014. The impact of the Partnership’s derivative instruments on its Condensed Consolidated Balance Sheets is summarized below (in thousands):

(1)         Includes Embedded Derivatives in Commodity Contracts as discussed above.

Although certain derivative positions are subject to master netting agreements, the Partnership has elected not to offset any derivative assets and liabilities. The gross amounts in the table below equal the balances presented in the Condensed Consolidated Balance Sheets. The table below summarizes the impact if the Partnership had elected to net its derivative positions that are subject to master netting arrangements (in thousands):

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In the tables above, the Partnership does not offset a counterparty’s current derivative contracts with the counterparty’s non-current derivative contracts, although the Partnership’s master netting arrangements would allow current and non-current positions to be offset in the event of default. Additionally, in the event of a default, the Partnership’s master netting arrangements would allow for the offsetting of all transactions executed under the master netting arrangement. These types of transactions may include non-derivative instruments, derivatives qualifying for scope exceptions, receivables and payables arising from settled positions, and other forms of non-cash collateral (such as letters of credit). These types of transactions are excluded from the offsetting tables presented above.

The impact of the Partnership’s derivative instruments on its Condensed Consolidated Statements of Operations is summarized below (in thousands):