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EX-32.2 - EXHIBIT 32.2 - Hi-Crush Inc.exhibit322q315.htm
EX-31.2 - EXHIBIT 31.2 - Hi-Crush Inc.exhibit312q315.htm
EX-32.3 - EXHIBIT 32.3 - Hi-Crush Inc.exhibit323q315.htm
EX-32.1 - EXHIBIT 32.1 - Hi-Crush Inc.exhibit321q315.htm
EX-95.1 - EXHIBIT 95.1 - Hi-Crush Inc.exhibit951q315.htm
EX-31.1 - EXHIBIT 31.1 - Hi-Crush Inc.exhibit311q315.htm
EX-31.3 - EXHIBIT 31.3 - Hi-Crush Inc.exhibit313q315.htm

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, 2015
or
¨ 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: 001-35630 
Hi-Crush Partners LP
(Exact name of registrant as specified in its charter)
Delaware
90-0840530
(State or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)
 
 
Three Riverway, Suite 1350
 
Houston, Texas
77056
(Address of Principal Executive Offices)
(Zip Code)
Registrant’s telephone number, including area code (713) 980-6200 
Three Riverway, Suite 1550
Houston, Texas, 77056
(Former Address)
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.    ý  Yes    ¨  No
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).    ý  Yes    ¨  No
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 ¨
Non-accelerated filer ¨
Smaller reporting company ¨
(Do not check if a smaller reporting company.)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    ý  No
As of October 23, 2015, there were 36,959,270 common units outstanding.



HI-CRUSH PARTNERS LP
INDEX TO FORM 10-Q

[2]


PART I
ITEM 1. FINANCIAL STATEMENTS.
HI-CRUSH PARTNERS LP
Condensed Consolidated Balance Sheets
(In thousands, except unit amounts)
(Unaudited)
 
September 30, 2015
 
December 31, 2014
Assets
 
 
 
Current assets:
 
 
 
Cash
$
5,035

 
$
4,646

Restricted cash

 
691

Accounts receivable, net
53,504

 
82,117

Inventories
33,380

 
23,684

Prepaid expenses and other current assets
3,975

 
4,081

Total current assets
95,894

 
115,219

Property, plant and equipment, net
262,272

 
241,325

Goodwill and intangible assets, net
45,945

 
66,750

Other assets
13,701

 
12,826

Total assets
$
417,812

 
$
436,120

Liabilities, Equity and Partners’ Capital
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
13,844

 
$
24,878

Accrued and other current liabilities
7,894

 
12,248

Due to sponsor
9,276

 
13,459

Current portion of long-term debt
2,436

 
2,000

Total current liabilities
33,450

 
52,585

Long-term debt
249,140

 
198,364

Asset retirement obligation
6,981

 
6,730

Total liabilities
289,571

 
257,679

Commitments and contingencies

 

Equity and partners’ capital:
 
 
 
General partner interest

 

Limited partner interests, 36,959,270 and 36,952,426 units outstanding, respectively
125,560

 
175,962

Total partners’ capital
125,560

 
175,962

Non-controlling interest
2,681

 
2,479

Total equity and partners' capital
128,241

 
178,441

Total liabilities, equity and partners’ capital
$
417,812

 
$
436,120

See Notes to Unaudited Condensed Consolidated Financial Statements.

[3]


HI-CRUSH PARTNERS LP
Condensed Consolidated Statements of Operations
(In thousands, except per unit amounts)
(Unaudited)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014 (a)
Revenues
$
81,494

 
$
102,316

 
$
267,563

 
$
255,618

Cost of goods sold (including depreciation, depletion and amortization)
66,400

 
55,640

 
198,737

 
143,665

Gross profit
15,094

 
46,676

 
68,826

 
111,953

Operating costs and expenses:
 
 
 
 
 
 
 
General and administrative expenses
5,979

 
6,183

 
17,946

 
19,287

Impairments and other expenses (Note 12)
23,718

 

 
23,718

 

Accretion of asset retirement obligation
84

 
61

 
251

 
184

Income (loss) from operations
(14,687
)
 
40,432

 
26,911

 
92,482

Other income (expense):
 
 
 
 
 
 
 
Interest expense
(3,386
)
 
(3,111
)
 
(9,682
)
 
(6,836
)
Net income (loss)
(18,073
)
 
37,321

 
17,229

 
85,646

Income attributable to non-controlling interest
(35
)
 
(292
)
 
(202
)
 
(704
)
Net income (loss) attributable to Hi-Crush Partners LP
$
(18,108
)
 
$
37,029

 
$
17,027

 
$
84,942

Earnings (loss) per limited partner unit:
 
 
 
 
 
 
 
Basic
$
(0.49
)
 
$
0.86

 
$
0.43

 
$
2.24

Diluted
$
(0.49
)
 
$
0.83

 
$
0.42

 
$
2.15


(a) Financial information has been recast to include the financial position and results attributable to Hi-Crush Augusta LLC. See Note 5.
See Notes to Unaudited Condensed Consolidated Financial Statements.


[4]


HI-CRUSH PARTNERS LP
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
 
Nine Months Ended
 
September 30,
 
2015
 
2014 (a)
Operating activities:
 
 
 
Net income
$
17,229

 
$
85,646

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and depletion
10,031

 
6,581

Losses on property, plant and equipment
4,781

 

Amortization of intangible assets
2,199

 
4,385

Loss on impairment of intangible assets
18,606

 

Amortization of deferred charges into interest expense
1,242

 
853

Management fees paid by Member on behalf of Hi-Crush Augusta LLC

 
492

Accretion of asset retirement obligation
251

 
184

Unit-based compensation to independent directors and employees
2,985

 
922

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
28,613

 
(21,507
)
Prepaid expenses and other current assets
93

 
(807
)
Inventories
(5,565
)
 
(150
)
Other assets
(1,804
)
 
(2,427
)
Accounts payable
(2,657
)
 
175

Accrued and other current liabilities
(4,683
)
 
7,131

Due to sponsor
(4,183
)
 
(3,640
)
Net cash provided by operating activities
67,138

 
77,838

Investing activities:
 
 
 
Acquisition of Hi-Crush Augusta LLC

 
(224,250
)
Capital expenditures for property, plant and equipment
(48,267
)
 
(22,321
)
Restricted cash, net
691

 

Net cash used in investing activities
(47,576
)
 
(246,571
)
Financing activities:
 
 
 
Proceeds from equity issuance

 
170,693

Proceeds from issuance of long-term debt
65,000

 
198,000

Repayment of long-term debt
(14,000
)
 
(139,250
)
Loan origination costs
(101
)
 
(7,096
)
Redemption of common units

 
(19
)
Distributions paid
(70,072
)
 
(53,578
)
Net cash (used in) provided by financing activities
(19,173
)
 
168,750

Net increase in cash
389

 
17

Cash:
 
 
 
Beginning of period
4,646

 
20,608

End of period
$
5,035

 
$
20,625

Non-cash investing and financing activities:
 
 
 
Increase (decrease) in accounts payable and accrued and other current liabilities for additions to property, plant and equipment
$
(8,377
)
 
$
5,567

Cash paid for interest
$
8,440

 
$
5,984


(a) Financial information has been recast to include the financial position and results attributable to Hi-Crush Augusta LLC. See Note 5.
See Notes to Unaudited Condensed Consolidated Financial Statements.

[5]


HI-CRUSH PARTNERS LP
Condensed Consolidated Statement of Partners’ Capital
(In thousands)
(Unaudited)
 
 
 
Limited Partners
 
 
 
 
 
 
 
General
Partner
Capital
 
Common
Unit Capital
 
Subordinated
Unit Capital
 
Total
Limited
Partner
Capital
 
Total
Partner
Capital
 
Non-Controlling
Interest
 
Total Equity and
Partners' Capital
Balance at December 31, 2014
$

 
$
184,642

 
$
(8,680
)
 
$
175,962

 
$
175,962

 
$
2,479

 
$
178,441

Issuance of limited partner units to directors

 
200

 

 
200

 
200

 

 
200

Conversion of subordinated units to common units

 
(19,960
)
 
19,960

 

 

 

 

Unit-based compensation expense

 
2,772

 

 
2,772

 
2,772

 

 
2,772

Distributions, including distribution equivalent rights
(2,622
)
 
(42,886
)
 
(24,893
)
 
(67,779
)
 
(70,401
)
 

 
(70,401
)
Net income
2,622

 
792

 
13,613

 
14,405

 
17,027

 
202

 
17,229

Balance at September 30, 2015
$

 
$
125,560

 
$

 
$
125,560

 
$
125,560

 
$
2,681

 
$
128,241

See Notes to Unaudited Condensed Consolidated Financial Statements.

[6]

HI-CRUSH PARTNERS LP
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in thousands, except per ton and per unit amounts, or where otherwise noted)


1. Basis of Presentation and Use of Estimates
The accompanying unaudited interim Condensed Consolidated Financial Statements (“interim statements”) of the Partnership have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X issued by the U.S. Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments and disclosures necessary for a fair presentation of these interim statements have been included. The results reported in these interim statements are not necessarily indicative of the results that may be reported for the entire year. These interim statements should be read in conjunction with the Partnership’s Consolidated Financial Statements for the year ended December 31, 2014, which are included in the Partnership’s Annual Report on Form 10-K filed with the SEC on February 27, 2015. The year-end balance sheet data was derived from the audited financial statements, but does not include all disclosures required by GAAP.
The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Hi-Crush Partners LP (together with its subsidiaries, the “Partnership”, “we”, “us” or “our”) is a Delaware limited partnership formed on May 8, 2012 to acquire selected sand reserves and related processing and transportation facilities of Hi-Crush Proppants LLC. In connection with its formation, the Partnership issued a non-economic general partner interest to Hi-Crush GP LLC, our general partner (the “General Partner” or “Hi-Crush GP”), and a 100% limited partner interest to Hi-Crush Proppants LLC (the “sponsor”), its organizational limited partner.
On April 8, 2014, the Partnership entered into a contribution agreement with the sponsor to acquire substantially all of the remaining equity interests in the sponsor’s Augusta facility for cash consideration of $224,250 (the “Augusta Contribution”, See Note 5 - Acquisition of Hi-Crush Augusta LLC). To finance the Augusta Contribution and refinance the Partnership’s revolving credit agreement, (i) on April 8, 2014, the Partnership commenced a primary public offering of 4,250,000 common units representing limited partnership interests in the Partnership and (ii) on April 28, 2014, the Partnership entered into a $200,000 senior secured term loan facility with certain lenders. The Partnership’s primary public offering closed on April 15, 2014. On May 9, 2014, the Partnership issued an additional 75,000 common units pursuant to the partial exercise of the underwriters' over-allotment option in connection with the April 2014 primary public offering. Net proceeds to the Partnership from the primary offering and the exercise of the over-allotment option totaled $170,693. Upon receipt of the proceeds from the public offering on April 15, 2014, the Partnership paid off the outstanding balance of $124,750 under its revolving credit agreement. The Augusta Contribution closed on April 28, 2014, and at closing, the Partnership’s preferred equity interest in Augusta was converted into common equity interests of Augusta. Following the Augusta Contribution, the Partnership owns 98.0% of Augusta’s common equity interests. In addition, on April 28, 2014, the Partnership entered into a $150,000 senior secured revolving credit agreement with various financial institutions by amending and restating its prior $200,000 revolving credit agreement (See Note 6 - Long-Term Debt).
The Augusta Contribution was accounted for as a transaction between entities under common control whereby Augusta's net assets were recorded at their historical cost. Therefore, the Partnership's historical financial information was recast to combine Augusta and the Partnership as if the combination had been in effect since inception of common control. Refer to Note 5 for additional disclosure regarding the Augusta Contribution.

2. Significant Accounting Policies
In addition to the significant accounting policies listed below, a comprehensive discussion of our critical accounting policies and estimates is included in our Annual Report on Form 10-K filed with the SEC on February 27, 2015.
Revenue Recognition
Frac sand sales revenues are recognized when legal title passes to the customer, which may occur at the production facility, rail origin or at the destination terminal. At that point, delivery has occurred, evidence of a contractual arrangement exists and collectability is reasonably assured. Amounts received from customers in advance of sand deliveries are recorded as deferred revenue. Revenue from make-whole provisions in our customer contracts is recognized at the end of the defined cure period.
A substantial portion of our frac sand is sold to customers with whom we have long-term supply agreements, the current terms of which expire between 2017 and 2020. The agreements define, among other commitments, the volume of product that the Partnership must provide, the price that will be charged to the customer, and the volume that the customer must purchase by the end of the defined cure periods, which can range from three months to the end of a contract year.

[7]

HI-CRUSH PARTNERS LP
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in thousands, except per ton and per unit amounts, or where otherwise noted)

Transportation services revenues are recognized as the services have been completed, meaning the related services have been rendered. At that point, delivery of service has occurred, evidence of a contractual arrangement exists and collectability is reasonably assured. Amounts received from customers in advance of transportation services being rendered are recorded as deferred revenue.
Goodwill
Goodwill represents the excess of purchase price over the fair value of net assets acquired. The Partnership performed its annual assessment of the recoverability of goodwill during the third quarter of 2015.
During the first nine months of 2015, global oil and natural gas commodity prices, particularly crude oil, significantly decreased as compared to 2014. This decrease in commodity prices has had, and is expected to continue to have, a negative impact on industry drilling and well completion activity, which affects the demand for frac sand.  
Although we have seen a significant decrease in the price of our common units since August 2014, which has resulted in an overall reduction in our market capitalization, our market capitalization exceeds our recorded net book value as of September 30, 2015.  Uncertain market conditions for frac sand resulting from current oil and natural gas prices continue. We have updated our internal business outlook of the D & I Silica, LLC ("D&I") reporting unit to consider the current economic environment that affects our operations. As part of the first step of goodwill impairment testing, we updated our assessment of our future cash flows, applying expected long-term growth rates, discount rates, and terminal values that we consider reasonable. We have calculated a present value of the cash flows to arrive at an estimate of fair value under the income approach, and then used the market approach to corroborate this value. As a result of these estimates, we determined that there was no impairment of goodwill as of September 30, 2015. However, should energy industry conditions further deteriorate, there is a possibility that the $33,745 of goodwill resulting from the acquisition of D&I in 2013 may be impaired in a future period.  Any resulting non-cash impairment charges to earnings may be material. Specific uncertainties affecting our estimated fair value include the impact of competition, the prices of frac sand, future overall activity levels and demand for frac sand, the activity levels of our significant customers, and other factors affecting the rate of our future growth. These factors will continue to be reviewed and assessed going forward. Additional adverse developments with regard to these factors could have a further negative impact on our fair value.
Fair Value of Financial Instruments
The amounts reported in the balance sheet as current assets or liabilities, including cash, accounts receivable, accounts payable, accrued and other current liabilities approximate fair value due to the short-term maturities of these instruments. The fair value of the senior secured term loan approximated $182,225 as of September 30, 2015, based on the market price quoted from external sources, compared with a carrying value of $197,000. If the senior secured term loan was measured at fair value in the financial statements, it would be classified as Level 2 in the fair value hierarchy.
Net Income per Limited Partner Unit
We have identified the sponsor’s incentive distribution rights as participating securities and compute income per unit using the two-class method under which any excess of distributions declared over net income or loss shall be allocated to the partners based on their respective sharing of income specified in the partnership agreement. Net income or loss per unit applicable to limited partners is computed by dividing limited partners’ interest in net income or loss, after deducting any sponsor incentive distributions, by the weighted-average number of outstanding limited partner units. Through March 31, 2014, basic and diluted net income per unit were the same as there were no potentially dilutive common or subordinated units outstanding.
Through August 15, 2014, the 3,750,000 Class B units outstanding did not have voting rights or rights to share in the Partnership’s periodic earnings, either through participation in its distributions or through an allocation of its undistributed earnings or losses, and so were not deemed to be participating securities in their form as Class B units. In addition, the conversion of the Class B units into common units was fully contingent upon the satisfaction of defined criteria pertaining to the cumulative payment of distributions and earnings per unit of the Partnership as described in Note 7. As such, until all of the defined payment and earnings criteria were satisfied, the Class B units were not included in our calculation of either basic or diluted earnings per unit. As such, for the quarter ended June 30, 2014, the Class B units were included in our calculation of diluted earnings per unit. On August 15, 2014, the Class B units converted into common units, at which time income allocations commenced on such units and the common units were included in our calculation of basic and diluted earnings per unit.
As described in Note 1, the Partnership's historical financial information has been recast to consolidate Augusta for all periods presented. The amounts of incremental income or losses recasted to periods prior to the Augusta Contribution are excluded from the calculation of net income per limited partner unit.

[8]

HI-CRUSH PARTNERS LP
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in thousands, except per ton and per unit amounts, or where otherwise noted)

Income Taxes
The Partnership is a pass-through entity and is not considered a taxing entity for federal tax purposes. Therefore, there is not a provision for income taxes in the accompanying Condensed Consolidated Financial Statements. The Partnership’s net income or loss is allocated to its partners in accordance with the partnership agreement. The partners are taxed individually on their share of the Partnership’s earnings. At September 30, 2015 and December 31, 2014, the Partnership did not have any liabilities for uncertain tax positions or gross unrecognized tax benefit.
Recent Accounting Pronouncements
In July 2015, the FASB issued Accounting Standards Update No. 2015-11, which specifies that all inventory, excluding inventory that is measured using the last-in, first-out method or the retail inventory method, be measured at the lower of cost or net realizable value. Net realizable value is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The amendment is effective for the Partnership beginning in the first quarter of 2017, with early adoption permitted, and should be applied prospectively. The Partnership is currently assessing the impact that adopting this new accounting guidance will have on its consolidated financial statements and footnote disclosures, but does not anticipate that adoption will have a material impact on its financial position, results of operations or cash flows.

3. Inventories
Inventories consisted of the following:
 
September 30, 2015
 
December 31, 2014
Raw material
$
34

 
$
63

Work-in-process
17,325

 
8,892

Finished goods
13,651

 
13,441

Spare parts
2,370

 
1,288

Inventories
$
33,380

 
$
23,684


4. Property, Plant and Equipment
Property, plant and equipment consisted of the following:
 
September 30, 2015
 
December 31, 2014
Buildings
$
5,845

 
$
3,930

Mining property and mine development
48,697

 
46,967

Plant and equipment
150,764

 
134,870

Rail and rail equipment
29,464

 
23,161

Transload facilities and equipment
61,494

 
31,742

Construction-in-progress
2,217

 
18,519

Property, plant and equipment
298,481

 
259,189

Less: Accumulated depreciation and depletion
(36,209
)
 
(17,864
)
Property, plant and equipment, net
$
262,272

 
$
241,325

Depreciation and depletion expense was $4,319 and $2,677 during the three months ended September 30, 2015 and 2014, respectively, and $10,031 and $6,581 during the nine months ended September 30, 2015 and 2014, respectively.
The Partnership recognized a loss on the disposal of fixed assets of $20 and $70 during the three and nine months ended September 30, 2015, respectively, and we recognized a gain on the disposal of fixed assets of $34 and $15 during the three and nine months ended September 30, 2014, respectively.
The Partnership recognized an impairment of $4,455 related to the write-down of certain property, plant and equipment to its net realizable value and we recognized expense of $256 related to the abandonment of certain transload construction projects during the three months ended September 30, 2015. These expenses are included in impairments and other expenses in our Condensed Consolidated Statements of Operations. Refer to Note 12 for additional disclosure on impairments.

[9]

HI-CRUSH PARTNERS LP
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in thousands, except per ton and per unit amounts, or where otherwise noted)


5. Acquisition of Hi-Crush Augusta LLC
On January 31, 2013, the Partnership entered into an agreement with our sponsor to acquire 100,000 preferred units in Hi-Crush Augusta LLC ("Augusta"), the entity that owned our sponsor’s Augusta facility, for $37,500 in cash and 3,750,000 newly issued convertible Class B units in the Partnership.
On April 28, 2014, the Partnership acquired 390,000 common units in Augusta for cash consideration of $224,250. In connection with this acquisition, the Partnership’s preferred equity interest in Augusta was converted into 100,000 common units of Augusta. Following this transaction, the Partnership maintained a 98.0% controlling interest in Augusta’s common units, with our sponsor owning the remaining 2.0% of common units.
The Augusta Contribution was accounted for as a transaction between entities under common control whereby Augusta's net assets were recorded at their historical cost. The difference between the consideration paid and the recasted historical cost of the net assets acquired was allocated in accordance with the partnership agreement to the common and subordinated unitholders based on their respective number of units outstanding as of April 28, 2014. However, this deemed distribution did not affect the tax basis capital accounts of the common and subordinated unitholders.
The Partnership's historical financial information was recast to combine the Condensed Consolidated Statements of Operations and the Condensed Consolidated Balance Sheets of the Partnership with those of Augusta as if the combination had been in effect since inception of common control. Any material transactions between the Partnership and Augusta have been eliminated. The balance of non-controlling interest as of April 28, 2014 represented the sponsor's interest in Augusta prior to the combination. Except for the combination of Condensed Consolidated Statements of Operations and the respective allocation of recasted net income between the controlling and non-controlling interest, capital transactions between the sponsor and Augusta prior to April 28, 2014 have not been allocated on a recasted basis to the common and subordinated unitholders. Such transactions are presented within the non-controlling interest column in the Condensed Consolidated Statement of Partners' Capital as the Partnership and its unitholders would not have participated in these transactions.
The following table summarizes the carrying value of Augusta's assets as of April 28, 2014, and the allocation of the cash consideration paid:
Net assets of Hi-Crush Augusta LLC as of April 28, 2014:
 
 
Cash
 
$
1,035

Accounts receivable
 
9,816

Inventories
 
4,012

Prepaid expenses and other current assets
 
114

Due from Hi-Crush Partners LP
 
1,756

Property, plant and equipment
 
84,900

Accounts payable
 
(3,379
)
Accrued liabilities and other current liabilities
 
(2,926
)
Due to sponsor
 
(4,721
)
Asset retirement obligation
 
(2,993
)
Total carrying value of Augusta's net assets
 
$
87,614

 
 
 
Allocation of purchase price
 
 
Carrying value of sponsor's non-controlling interest prior to Augusta Contribution
 
$
35,951

Less: Carrying value of 2% of non-controlling interest retained by sponsor
 
(1,752
)
Purchase price allocated to non-controlling interest acquired
 
34,199

Excess purchase price over the historical cost of the acquired non-controlling interest (a)
 
190,051

Cost of Augusta acquisition
 
$
224,250

(a) The deemed distribution attributable to the excess purchase price was allocated to the common and subordinated unitholders based on the respective number of units outstanding as of April 28, 2014.

[10]

HI-CRUSH PARTNERS LP
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in thousands, except per ton and per unit amounts, or where otherwise noted)

The following table presents our recasted revenues, net income and net income attributable to Hi-Crush Partners LP per limited partnership unit giving effect to the Augusta Contribution, as reconciled to the revenues, net income and net income attributable to Hi-Crush Partners LP per limited partnership unit of the Partnership.
 
Nine Months Ended September 30, 2014
 
 
 
Augusta
 
 
 
 
 
Partnership
 
Through
 
 
 
Partnership
 
Historical
 
April 28, 2014
 
Eliminations
 
Recasted
Revenues
$
234,418

 
$
25,356

 
$
(4,156
)
 
$
255,618

Net income
$
82,105

 
$
11,398

 
$
(7,857
)
 
$
85,646

Net income attributable to Hi-Crush Partners LP per limited partner unit - basic
$
2.24

 
 
 
 
 
$
2.64


6. Long-Term Debt
Long-term debt consisted of the following:
 
September 30, 2015
 
December 31, 2014
Term Loan Credit Facility
$
195,400

 
$
196,688

Revolving Credit Agreement
52,500

 

Other notes payable
3,676

 
3,676

Less: current portion of long-term debt
(2,436
)
 
(2,000
)
Long-term debt
$
249,140

 
$
198,364

Revolving Credit Facility
On August 21, 2012, the Partnership entered into a credit agreement (the “Prior Credit Agreement”) providing for a $100,000 senior secured revolving credit facility (the “Prior Credit Facility”) with a term of four years. In connection with our acquisition of a preferred interest in Augusta, on January 31, 2013, the Partnership entered into a consent and first amendment to the Prior Credit Agreement whereby the lending banks, among other things, (i) consented to the amendment and restatement of the partnership agreement of the Partnership and (ii) agreed to amend the Prior Credit Agreement to permit the acquisition by the Partnership of a preferred equity interest in Hi-Crush Augusta LLC. On May 9, 2013, in connection with our acquisition of D&I, the Partnership entered into a commitment increase agreement and second amendment to the Prior Credit Agreement whereby the lending banks, among other things, consented to the increase of the aggregate commitments by $100,000 to a total of $200,000 and addition of lenders to the lending bank group. The outstanding balance under the Prior Credit Facility was paid in full on April 15, 2014.
On April 28, 2014, the Partnership replaced the Prior Credit Facility by entering into an amended and restated credit agreement (the "Revolving Credit Agreement"). The Revolving Credit Agreement is a senior secured revolving credit facility that permits aggregate borrowings of up to $150,000, including a $25,000 sublimit for letters of credit and a $10,000 sublimit for swing line loans. The Revolving Credit Agreement matures on April 28, 2019.
The Revolving Credit Agreement is secured by substantially all assets of the Partnership. In addition, the Partnership's subsidiaries have guaranteed the Partnership's obligations under the Revolving Credit Agreement and have granted to the revolving lenders security interests in substantially all of their respective assets.
Borrowings under the Revolving Credit Agreement bear interest at a rate equal to, at the Partnership's option, either (1) a base rate plus an applicable margin ranging between 1.25% per annum and 2.50% per annum, based upon the Partnership's leverage ratio, or (2) a Eurodollar rate plus an applicable margin ranging between 2.25% per annum and 3.50% per annum, based upon the Partnership's leverage ratio.

[11]

HI-CRUSH PARTNERS LP
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in thousands, except per ton and per unit amounts, or where otherwise noted)

The Revolving Credit Agreement contains customary representations and warranties and customary affirmative and negative covenants, including limits or restrictions on the Partnership’s ability to incur liens, incur indebtedness, make certain restricted payments, merge or consolidate and dispose of assets. The Revolving Credit Agreement also requires compliance with customary financial covenants, which are a leverage ratio and minimum interest coverage ratio. In addition, it contains customary events of default that entitle the lenders to cause any or all of the Partnership’s indebtedness under the Revolving Credit Agreement to become immediately due and payable. The events of default (some of which are subject to applicable grace or cure periods), include among other things, non-payment defaults, covenant defaults, cross-defaults to other material indebtedness, bankruptcy and insolvency defaults and material judgment defaults. As of September 30, 2015, we were in compliance with the covenants contained in the Revolving Credit Agreement.
As of September 30, 2015, we had $89,811 of undrawn borrowing capacity ($150,000, net of $52,500 indebtedness and $7,689 letter of credit commitments) under our Revolving Credit Agreement.
Term Loan Credit Facility
On April 28, 2014, the Partnership entered into a credit agreement (the "Term Loan Credit Agreement") providing for a senior secured term loan credit facility (the “Term Loan Credit Facility”) that permits aggregate borrowings of up to $200,000, which was fully drawn on April 28, 2014. The Term Loan Credit Agreement permits the Partnership, at its option, to add one or more incremental term loan facilities in an aggregate amount not to exceed $100,000. Any incremental term loan facility would be on terms to be agreed among the Partnership, the administrative agent and the lenders who agree to participate in the incremental facility. The maturity date of the Term Loan Credit Facility is April 28, 2021.
The Term Loan Credit Agreement is secured by substantially all assets of the Partnership. In addition, the Partnership’s subsidiaries have guaranteed the Partnership’s obligations under the Term Loan Credit Agreement and have granted to the lenders security interests in substantially all of their respective assets.
Borrowings under the Term Loan Credit Agreement bear interest at a rate equal to, at the Partnership’s option, either (1) a base rate plus an applicable margin of 2.75% per annum or (2) a Eurodollar rate plus an applicable margin of 3.75% per annum, subject to a LIBOR floor of 1.00%.
The Term Loan Credit Agreement contains customary representations and warranties and customary affirmative and negative covenants, including limits or restrictions on the Partnership’s ability to incur liens, incur indebtedness, make certain restricted payments, merge or consolidate and dispose of assets. In addition, it contains customary events of default that entitle the lenders to cause any or all of the Partnership’s indebtedness under the Term Loan Credit Agreement to become immediately due and payable. The events of default (some of which are subject to applicable grace or cure periods), include, among other things, non-payment defaults, covenant defaults, cross-defaults to other material indebtedness, bankruptcy and insolvency defaults and material judgment defaults. As of September 30, 2015, we were in compliance with the terms of the agreement.
As of September 30, 2015, we had $195,400 indebtedness ($197,000, net of $1,600 of discounts) under our Term Loan Credit Facility, which carried an interest rate of 4.75% as of September 30, 2015.
Other Notes Payable
On October 24, 2014, the Partnership acquired land and underlying frac sand deposits. The Partnership paid cash consideration of $2,500, and issued a three-year promissory note in the amount of $3,676. The three-year promissory note accrues interest at a rate equal to the applicable short-term federal rate, which was 0.54% as of September 30, 2015. All principal and accrued interest is due and payable at the end of the three-year note term. However, the note may be prepaid on a quarterly basis during the three-year term if sand is extracted, delivered, sold and paid for from the property.
The Partnership did not make any prepayments during the nine months ended September 30, 2015. As of September 30, 2015, the Partnership expects to make prepayments of approximately $436 based on the volume of sand extracted, delivered, sold and paid for through September 30, 2015.
Under the terms of the Revolving Credit Agreement, our leverage ratio (total debt to trailing four quarter EBITDA) may not exceed 3.50.  While our leverage ratio as of September 30, 2015, is below this threshold, if current market conditions persist, our leverage ratio will likely exceed this threshold during 2016, which could result in a breach of covenant event and an event of default under the Revolving Credit Agreement.  If such a default were to occur, and resulted in a cross default of the Term Loan Credit Agreement, all of our outstanding debt obligations could be accelerated. The Partnership is currently in discussions with the lenders to amend the Revolving Credit Agreement to, among other things, waive the leverage and other compliance ratios.  The Partnership makes no assurance that an amendment will be obtained.

[12]

HI-CRUSH PARTNERS LP
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in thousands, except per ton and per unit amounts, or where otherwise noted)

7. Equity
On August 17, 2015, all of the 13,640,351 issued and outstanding subordinated units representing limited partner interests in the Partnership were converted into common units, on a one-for-one basis for no additional consideration, upon the expiration of the subordination period set forth in the Partnership's Second Amended and Restated Agreement of Limited Partnership. As of September 30, 2015, our sponsor owned 13,640,351 common units, representing a 36.9% ownership interest in the limited partner units. In addition, our sponsor is the owner of our General Partner. 
Class B Units
On January 31, 2013, the Partnership issued 3,750,000 subordinated Class B units and paid $37,500 in cash to our sponsor in return for 100,000 preferred equity units in our sponsor’s Augusta facility. The Class B units did not have voting rights or rights to share in the Partnership’s periodic earnings, either through participation in its distributions or through an allocation of its undistributed earnings or losses. The Class B units were eligible for conversion into common units upon satisfaction of certain conditions. The conditions precedent to conversion of the Class B units were satisfied upon payment of our distribution on August 15, 2014 and, upon such payment, our sponsor, who was the sole owner of our Class B units, elected to convert all of the 3,750,000 Class B units into common units on a one-for-one basis. 
Incentive Distribution Rights
Incentive distribution rights represent the right to receive increasing percentages (ranging from 15.0% to 50.0%) of quarterly distributions from operating surplus after minimum quarterly distribution and target distribution levels exceed $0.54625 per unit per quarter. Our sponsor currently holds the incentive distribution rights, but it may transfer these rights at any time.
Allocations of Net Income
Our partnership agreement contains provisions for the allocation of net income and loss to the unitholders and our General Partner. For purposes of maintaining partner capital accounts, the partnership agreement specifies that items of income and loss shall be allocated among the partners in accordance with their respective percentage ownership interest. Normal allocations according to percentage interests are made after giving effect, if any, to priority income allocations in an amount equal to incentive cash distributions allocated 100% to our sponsor.
During the three and nine months ended September 30, 2014, no net income was allocated to our Class B units and $168 was allocated to our holders of incentive distribution rights.
During the three months ended September 30, 2015, no income was allocated to our holders of incentive distribution rights. During the nine months ended September 30, 2015, $1,311 was allocated to our holders of incentive distribution rights.
Distributions
Our partnership agreement sets forth the calculation to be used to determine the amount of cash distributions that our limited partner unitholders and our holders of incentive distribution rights will receive.
Our recent distributions have been as follows:
Declaration Date
 
Amount Declared Per Unit
 
Record Date
 
Payment Date
 
Payment to Common and Subordinated Units
 
Payment to Holders of Incentive Distribution Rights
January 15, 2014
 
$
0.5100

 
January 31, 2014
 
February 14, 2014
 
$
14,726

 
$

April 16, 2014
 
$
0.5250

 
May 1, 2014
 
May 15, 2014
 
$
17,388

 
$

July 16, 2014
 
$
0.5750

 
August 1, 2014
 
August 15, 2014
 
$
19,088

 
$
168

October 15, 2014
 
$
0.6250

 
October 31, 2014
 
November 14, 2014
 
$
23,092

 
$
695

January 15, 2015
 
$
0.6750

 
January 30, 2015
 
February 13, 2015
 
$
24,947

 
$
1,311

April 16, 2015
 
$
0.6750

 
May 1, 2015
 
May 15, 2015
 
$
24,947

 
$
1,311

July 21, 2015
 
$
0.4750

 
August 5, 2015
 
August 14, 2015
 
$
17,555

 
$

On October 26, 2015, we announced the Board of Directors' decision to temporarily suspend the distribution payment to common unitholders. Therefore, no quarterly distribution was declared for the third quarter of 2015.


[13]

HI-CRUSH PARTNERS LP
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in thousands, except per ton and per unit amounts, or where otherwise noted)

Net Income per Limited Partner Unit
The following table outlines our basic and diluted, weighted average limited partner units outstanding during the relevant periods:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Basic
36,959,020

 
35,077,527

 
36,958,692

 
32,162,763

Diluted
36,959,020

 
37,033,959

 
37,200,426

 
35,362,327

For purposes of calculating the Partnership’s earnings per unit under the two-class method, common units are treated as participating preferred units, and the previously outstanding subordinated units were treated as the residual equity interest, or common equity. Incentive distribution rights are treated as participating securities. As the Class B units did not have rights to share in the Partnership’s periodic earnings, whether through participation in its distributions or through an allocation of its undistributed earnings or losses, they were not participating securities. In addition, the conversion of the Class B units into common units was fully contingent upon the satisfaction of defined criteria. As such, until all of the defined payment and earnings criteria were satisfied, the Class B units were not included in our calculation of either basic or diluted earnings per unit during the three months ended March 31, 2014. The Class B units were converted into common units on August 15, 2014, at which time income allocations commenced on such units.
Diluted earnings per unit excludes any dilutive awards granted (see Note 8) if their effect is anti-dilutive. During the three months ended September 30, 2015, the Partnership incurred a net loss and all 240,404 potentially dilutive awards granted and outstanding were excluded from the diluted earnings per unit calculation. Diluted earnings per unit for the nine months ended September 30, 2015 includes the dilutive effect of awards granted and outstanding at the assumed number of units which would have vested if the performance period had ended on September 30, 2015.
Distributions made in future periods based on the current period calculation of cash available for distribution are allocated to each class of equity that will receive such distributions. Any unpaid cumulative distributions are allocated to the appropriate class of equity. 
Each period the Partnership determines the amount of cash available for distributions in accordance with the partnership agreement. The amount to be distributed to limited partner unitholders and incentive distribution rights holders is subject to the distribution waterfall in the partnership agreement. Net earnings or loss for the period are allocated to each class of partnership interest based on the distributions to be made.
The following table provides a reconciliation of net loss and the assumed allocation of net loss under the two-class method for purposes of computing net loss per limited partner unit for the three months ended September 30, 2015 (in thousands, except per unit amounts):
 
General Partner and IDRs
 
Limited Partner Units
 
Total
Declared distribution
$

 
$

 
$

Assumed allocation of distributions in excess of loss

 
(18,108
)
 
(18,108
)
Assumed allocation of net loss
$

 
$
(18,108
)
 
$
(18,108
)
 
 
 
 
 
 
Loss per limited partner unit - basic
 
 
$
(0.49
)
 
 
Loss per limited partner unit - diluted
 
 
$
(0.49
)
 
 

[14]

HI-CRUSH PARTNERS LP
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in thousands, except per ton and per unit amounts, or where otherwise noted)

The following table provides a reconciliation of net income and the assumed allocation of net income under the two-class method for purposes of computing net income per limited partner unit for the nine months ended September 30, 2015 (in thousands, except per unit amounts):
 
General Partner and IDRs
 
Limited Partner Units
 
Total
Declared distribution
$
1,311

 
$
42,502

 
$
43,813

Assumed allocation of distributions in excess of earnings

 
(26,786
)
 
(26,786
)
Assumed allocation of net income
$
1,311

 
$
15,716

 
$
17,027

 
 
 
 
 
 
Earnings per limited partner unit - basic
 
 
$
0.43

 
 
Earnings per limited partner unit - diluted
 
 
$
0.42

 
 
Recasted Augusta Equity Transactions
Prior to the Augusta Contribution on April 28, 2014, the sponsor provided $492 of management services and other expenses paid on behalf of Augusta. Such costs are recognized as non-cash capital contributions in the accompanying financial statements.

8. Unit-Based Compensation
Long-Term Incentive Plan
On August 21, 2012, Hi-Crush GP adopted the Hi-Crush Partners LP Long Term Incentive Plan (the “Plan”) for employees, consultants and directors of Hi-Crush GP and those of its affiliates, including our sponsor, who perform services for the Partnership. The Plan consists of restricted units, unit options, phantom units, unit payments, unit appreciation rights, other equity-based awards, distribution equivalent rights and performance awards. The Plan limits the number of common units that may be issued pursuant to awards under the Plan to 1,364,035 units. Common units withheld to satisfy exercise prices or tax withholding obligations are available for delivery pursuant to other awards. The Plan is administered by Hi-Crush GP’s Board of Directors or a committee thereof.
The cost of services received in exchange for an award of equity instruments is measured based on the grant-date fair value of the award and that cost is generally recognized over the vesting period of the award.
Performance Phantom Units - Equity Settled
The Partnership has awarded Performance Phantom Units ("PPUs") pursuant to the Plan to certain employees. The number of PPUs that will vest will range from 0% to 200% of the number of initially granted PPUs and is dependent on the Partnership's total unitholder return over a three-year performance period compared to the total unitholder return of a designated peer group. Each PPU represents the right to receive, upon vesting, one common unit representing limited partner interests in the Partnership. The PPUs are also entitled to forfeitable distribution equivalent rights ("DERs"), which accumulate during the performance period and are paid in cash on the date of settlement. The fair value of each PPU is estimated using a fair value approach and is amortized into compensation expense, reduced for an estimate of expected forfeitures, over the period of service corresponding with the vesting period. Expected volatility is based on the historical market performance of our peer group. The following table presents information relative to our PPUs.
 
Units
 
Grant Date Weighted-Average Fair Value per Unit
Outstanding at January 1, 2015
64,414

 
$
65.57

Granted
119,550

 
$
37.52

Outstanding at September 30, 2015
183,964

 
$
47.34

As of September 30, 2015, total compensation expense not yet recognized related to unvested PPUs was $5,504, with a weighted average remaining service period of 1.9 years.

[15]

HI-CRUSH PARTNERS LP
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in thousands, except per ton and per unit amounts, or where otherwise noted)

Time-Based Phantom Units - Equity Settled
The Partnership has awarded Time-Based Phantom Units ("TPUs") pursuant to the Plan to certain employees which automatically vest if the employee remains employed at the end of a three-year vesting period. Each TPU represents the right to receive, upon vesting, one common unit representing limited partner interests in the Partnership. The TPUs are also entitled to forfeitable DERs, which accumulate during the vesting period and are paid in cash on the date of settlement. The fair value of each TPU is calculated based on the grant-date unit price and is amortized into compensation expense, reduced for an estimate of expected forfeitures, over the period of service corresponding with the vesting period. The following table presents information relative to our TPUs.
 
Units
 
Grant Date Weighted-Average Fair Value per Unit
Outstanding at January 1, 2015
16,603

 
$
47.33

Vested
(500
)
 
$
34.09

Granted
42,200

 
$
34.09

Forfeited
(1,863
)
 
$
45.63

Outstanding at September 30, 2015
56,440

 
$
37.61

As of September 30, 2015, total compensation expense not yet recognized related to unvested TPUs was $1,568, with a weighted average remaining service period of 2.2 years.
Board and Other Unit Grants
The Partnership issued 6,344 and 5,532 common units to its independent directors during the nine months ended September 30, 2015 and 2014, respectively. During the nine months ended September 30, 2014, the Partnership issued 7,022 common units to certain employees which vest approximately over a two year period.
Compensation Expense
The following table presents total unit-based compensation expense:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Performance Phantom Units
$
794

 
$
409

 
$
2,251

 
$
545

Time-Based Phantom Units
187

 
69

 
521

 
88

Director and other unit grants
67

 
91

 
213

 
289

Total compensation expense
$
1,048

 
$
569

 
$
2,985

 
$
922


9. Related Party Transactions
Effective August 16, 2012, our sponsor entered into a services agreement (the “Services Agreement”) with our General Partner, Hi-Crush Services LLC (“Hi-Crush Services”) and the Partnership, pursuant to which Hi-Crush Services provides certain management and administrative services to the Partnership to assist in operating the Partnership’s business. Under the Services Agreement, the Partnership reimburses Hi-Crush Services and its affiliates, on a monthly basis, for the allocable expenses it incurs in its performance under the Services Agreement. These expenses include, among other things, administrative, rent and other expenses for individuals and entities that perform services for the Partnership. Hi-Crush Services and its affiliates will not be liable to the Partnership for its performance of services under the Services Agreement, except for liabilities resulting from gross negligence. During the three months ended September 30, 2015 and 2014, the Partnership incurred $1,034 and $2,587, respectively, of management and administrative service expenses from Hi-Crush Services. During the nine months ended September 30, 2015 and 2014, the Partnership incurred $2,652 and $6,946, respectively, of management and administrative service expenses from Hi-Crush Services.
In the normal course of business, our sponsor and its affiliates, including Hi-Crush Services, and the Partnership may from time to time make payments on behalf of each other.
As of September 30, 2015, an outstanding balance of $9,276 payable to our sponsor is maintained as a current liability under the caption “Due to sponsor.”

[16]

HI-CRUSH PARTNERS LP
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in thousands, except per ton and per unit amounts, or where otherwise noted)

During the three months ended September 30, 2015 and 2014, the Partnership purchased $9,625 and $3,011, respectively, of sand from Hi-Crush Whitehall LLC, a subsidiary of our sponsor and the entity that owns the sponsor's Whitehall facility, at a purchase price in excess of our production cost per ton. During the nine months ended September 30, 2015 and 2014, the Partnership purchased $24,528 and $3,011, respectively, of sand from our sponsor's Whitehall facility.
During the nine months ended September 30, 2015, the Partnership purchased $2,754 of sand from Goose Landing, LLC, a wholly owned subsidiary of Northern Frac Proppants II, LLC. We did not purchase any sand during the three months ended September 30, 2015. The father of Mr. Alston, who is our general partner's Chief Operating Officer, owned a beneficial equity interest in Northern Frac Proppants II, LLC. The terms of the purchase price were the result of arm's length negotiations.

10. Segment Reporting
The Partnership manages, operates and owns assets utilized to supply frac sand to its customers. It conducts operations through its one operating segment titled "Frac Sand Sales". This reporting segment of the Partnership is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance.

11. Commitments and Contingencies
The Partnership enters into sales contracts with customers. These contracts establish minimum annual sand volumes that the Partnership is required to make available to such customers under initial terms ranging from three to six years. Through September 30, 2015, no payments for non-delivery of minimum annual sand volumes have been made by the Partnership to customers under these contracts.
D&I has entered into a long-term supply agreement with a supplier (the "Sand Supply Agreement"), which includes a requirement to purchase certain volumes and grades of sands at specified prices. The quantities set forth in such agreement are not in excess of our current requirements.
The Partnership has entered into royalty agreements under which it is committed to pay royalties on sand sold from its production facilities for which the Partnership has received payment by the customer. Royalty expense is recorded as the sand is sold and is included in costs of goods sold. Royalty expense was $2,352 and $4,011 for the three months ended September 30, 2015 and 2014, respectively, and $8,492 and $10,744 for the nine months ended September 30, 2015 and 2014, respectively.
On October 24, 2014, the Partnership entered into a purchase and sale agreement to acquire certain tracts of land and specific quantities of the underlying frac sand deposits. The transaction includes three separate tranches of land and deposits, to be acquired over a three-year period from 2014 through 2016. During 2014, the Partnership acquired the first tranche of land for $6,176. As of September 30, 2015, the Partnership has committed to purchase the remaining two tranches during 2015 and 2016 for total consideration of $12,352.
The Partnership has long-term leases for rail access, railcars and equipment at its terminal sites, which are also under long-term lease agreements with various railroads.
During 2015, we entered into a service agreement with a transload service provider which, beginning in the fourth quarter 2015, will require us to purchase a minimum amount of services over a specific period of time at a specific location. Our failure to purchase the minimum level of services would require us to pay a shortfall fee. However, the minimum quantities set forth in the agreement are not in excess of our current forecasted requirements at this location.

[17]

HI-CRUSH PARTNERS LP
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in thousands, except per ton and per unit amounts, or where otherwise noted)

As of September 30, 2015, future minimum operating lease payments and minimum purchase commitments are as follows:
Fiscal Year
Operating
Leases
 
Minimum Purchase
Commitments
2015 (three months)
$
5,307

 
$
49

2016
22,355

 
1,072

2017
22,062

 
1,170

2018
21,156

 
1,170

2019
18,634

 
1,520

Thereafter
16,863

 
6,300

 
$
106,377

 
$
11,281

In addition, the Partnership has placed orders for additional leased railcars. Such long-term operating leases commence upon the future delivery of the railcars, which will result in additional future minimum operating lease payments. During the next two years, we expect to receive delivery of approximately 1,600 additional leased railcars. Following delivery of these additional railcars, we estimate our 2018 annual minimum lease payments will increase to approximately $33,000.
From time to time the Partnership may be subject to various claims and legal proceedings which arise in the normal course of business. Management is not aware of any legal matters that are likely to have a material adverse effect on the Partnership’s financial position, results of operations or cash flows.

12. Impairments and Other Expenses
During the first nine months of 2015, global oil and natural gas commodity prices, particularly crude oil, significantly decreased as compared to 2014. This decrease in commodity prices has had, and is expected to continue to have, a negative impact on industry drilling and well completion activity, which affects the demand for frac sand.
We recognized one-time impairments and other expenses of $23,718, as outlined in the following table:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Impairment of Sand Supply Agreement
$
18,606

 
$

 
$
18,606

 
$

Impairment of idled administrative and transload facilities
4,455

 

 
4,455

 

Severance, retention and relocation
371

 

 
371

 

Abandonment of construction projects
256

 

 
256

 

Expiration of exclusivity agreement
30

 

 
30

 

Impairments and other expenses
$
23,718

 
$

 
$
23,718

 
$

During the three months ended September 30, 2015, we completed an impairment assessment of the intangible asset associated with the Sand Supply Agreement.  Given current market conditions, coupled with our ability to source sand from our sponsor on more favorable terms, we determined that the fair value of the agreement was less than its carrying value, resulting in an impairment of $18,606.
During the three months ended September 30, 2015, we elected to idle five destination transload facilities and three rail origin transload facilities.  In addition, to consolidate our administrative functions, we have commenced the process of closing down an office facility in Sheffield, Pennsylvania. As a result of these actions, we recognized an impairment of $4,455 related to the write down of these facilities’ assets to their net realizable value, and severance, retention and relocation costs of $371 for affected employees.


[18]

HI-CRUSH PARTNERS LP
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in thousands, except per ton and per unit amounts, or where otherwise noted)

13. Condensed Consolidating Financial Information
The Partnership has filed a registration statement on Form S-3 to register, among other securities, debt securities. Each of the subsidiaries of the Partnership as of March 31, 2014 (other than Hi-Crush Finance Corp., whose sole purpose is to act as a co-issuer of any debt securities) was a 100% directly or indirectly owned subsidiary of the Partnership (the “guarantors”), will issue guarantees of the debt securities, if any of them issue guarantees, and such guarantees will be full and unconditional and will constitute the joint and several obligations of such guarantors. As of September 30, 2015, the guarantors were our sole subsidiaries, other than Hi-Crush Finance Corp., Hi-Crush Augusta Acquisition Co. LLC, Hi-Crush Canada Inc and Hi-Crush Canada Distribution Corp., which are our 100% owned subsidiaries, and Augusta, of which we own 98.0% of the common equity interests.
As of September 30, 2015, the Partnership had no assets or operations independent of its subsidiaries, and there were no significant restrictions upon the ability of the Partnership or any of its subsidiaries to obtain funds from its respective subsidiaries by dividend or loan. As of September 30, 2015, none of the assets of our subsidiaries represented restricted net assets pursuant to Rule 4-08(e)(3) of Regulation S-X under the Securities Act.
For the purpose of the following financial information, the Partnership's investments in its subsidiaries are presented in accordance with the equity method of accounting. The operations, cash flows and financial position of the co-issuer are not material and therefore have been included with the parent's financial information.
Condensed consolidating financial information for the Partnership and its combined guarantor and combined non-guarantor subsidiaries is as follows for the dates and periods indicated.

[19]

HI-CRUSH PARTNERS LP
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in thousands, except per ton and per unit amounts, or where otherwise noted)

Condensed Consolidating Balance Sheet
As of September 30, 2015
 
Parent
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Consolidating Adjustments
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash
$
2,001

 
$
2,226

 
$
808

 
$

 
$
5,035

Accounts receivable, net

 
49,560

 
3,944

 

 
53,504

Intercompany receivables
54,879

 
152,837

 

 
(207,716
)
 

Inventories

 
21,301

 
12,533

 
(454
)
 
33,380

Prepaid expenses and other current assets
155

 
3,782

 
38

 

 
3,975

Total current assets
57,035

 
229,706


17,323

 
(208,170
)
 
95,894

Property, plant and equipment, net
16

 
150,136

 
112,120

 

 
262,272

Goodwill and intangible assets, net

 
45,945

 

 

 
45,945

Investment in consolidated affiliates
311,135

 

 
224,250

 
(535,385
)
 

Other assets
6,583

 
7,118

 

 

 
13,701

Total assets
$
374,769

 
$
432,905


$
353,693

 
$
(743,555
)
 
$
417,812

Liabilities, Equity and Partners' Capital
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$
38

 
$
11,077

 
$
2,729

 
$

 
$
13,844

Intercompany payables

 

 
207,716

 
(207,716
)
 

Accrued and other current liabilities
921

 
3,040

 
3,933

 

 
7,894

Due to sponsor
350

 
8,451

 
475

 

 
9,276

Current portion of long-term debt
2,000

 
436

 

 

 
2,436

Total current liabilities
3,309

 
23,004


214,853

 
(207,716
)
 
33,450

Long-term debt
245,900

 
3,240

 

 

 
249,140

Asset retirement obligation

 
1,901

 
5,080

 

 
6,981

Total liabilities
249,209

 
28,145


219,933

 
(207,716
)
 
289,571

Equity and partners' capital:
 
 
 
 
 
 
 
 
 
Partners' capital
125,560

 
404,760

 
131,079

 
(535,839
)
 
125,560

Non-controlling interest

 

 
2,681

 

 
2,681

Total equity and partners' capital
125,560

 
404,760


133,760

 
(535,839
)
 
128,241

Total liabilities, equity and partners' capital
$
374,769

 
$
432,905


$
353,693

 
$
(743,555
)
 
$
417,812



[20]

HI-CRUSH PARTNERS LP
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in thousands, except per ton and per unit amounts, or where otherwise noted)

Condensed Consolidating Balance Sheet
As of December 31, 2014
 
Parent
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Consolidating Adjustments
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash
$
308

 
$
3,490

 
$
848

 
$

 
$
4,646

Restricted cash

 
691

 

 

 
691

Accounts receivable, net

 
71,504

 
10,613

 

 
82,117

Intercompany receivables
88,621

 
120,401

 

 
(209,022
)
 

Inventories

 
18,828

 
6,521

 
(1,665
)
 
23,684

Prepaid expenses and other current assets
277

 
3,802

 
2

 

 
4,081

Total current assets
89,206

 
218,716

 
17,984

 
(210,687
)
 
115,219

Property, plant and equipment, net
23

 
136,240

 
105,062

 

 
241,325

Goodwill and intangible assets, net

 
66,750

 

 

 
66,750

Investment in consolidated affiliates
277,343

 

 
224,250

 
(501,593
)
 

Other assets
7,511

 
5,315

 

 

 
12,826

Total assets
$
374,083

 
$
427,021

 
$
347,296

 
$
(712,280
)
 
$
436,120

Liabilities, Equity and Partners' Capital
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$
151

 
$
21,401

 
$
3,326

 
$

 
$
24,878

Intercompany payables

 

 
209,021

 
(209,021
)
 

Accrued and other current liabilities
513

 
6,236

 
5,499

 

 
12,248

Due to sponsor
769

 
11,978

 
712

 

 
13,459

Current portion of long-term debt
2,000

 

 

 

 
2,000

Total current liabilities
3,433

 
39,615

 
218,558

 
(209,021
)
 
52,585

Long-term debt
194,688

 
3,676

 

 

 
198,364

Asset retirement obligation

 
1,799

 
4,931

 

 
6,730

Total liabilities
198,121

 
45,090

 
223,489

 
(209,021
)
 
257,679

Equity and partners' capital:
 
 
 
 
 
 
 
 
 
Partners' capital
175,962

 
381,931

 
121,328

 
(503,259
)
 
175,962

Non-controlling interest

 

 
2,479

 

 
2,479

Total equity and partners' capital
175,962

 
381,931

 
123,807

 
(503,259
)
 
178,441

Total liabilities, equity and partners' capital
$
374,083

 
$
427,021

 
$
347,296

 
$
(712,280
)
 
$
436,120



[21]

HI-CRUSH PARTNERS LP
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in thousands, except per ton and per unit amounts, or where otherwise noted)

Condensed Consolidating Statements of Operations
 
Three Months Ended September 30, 2015
 
Parent
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Consolidating Adjustments
 
Consolidated
Revenues
$

 
$
76,194

 
$
10,475

 
$
(5,175
)
 
$
81,494

Cost of goods sold (including depreciation, depletion and amortization)

 
63,154

 
8,154

 
(4,908
)
 
66,400

Gross profit

 
13,040

 
2,321

 
(267
)
 
15,094

Operating costs and expenses:
 
 
 
 
 
 
 
 
 
General and administrative expenses
2,406

 
3,003

 
570

 

 
5,979

Impairments and other expenses

 
23,692

 
26

 

 
23,718

Accretion of asset retirement obligation

 
34

 
50

 

 
84

Income (loss) from operations
(2,406
)
 
(13,689
)
 
1,675

 
(267
)
 
(14,687
)
Other income (expense):
 
 
 
 
 
 
 
 
 
Earnings (loss) from consolidated affiliates
(12,430
)
 

 

 
12,430

 

Interest expense
(3,272
)
 
(37
)
 
(77
)
 

 
(3,386
)
Net income (loss)
(18,108
)
 
(13,726
)
 
1,598

 
12,163

 
(18,073
)
Income attributable to non-controlling interest

 

 
(35
)
 

 
(35
)
Net income (loss) attributable to Hi-Crush Partners LP
$
(18,108
)
 
$
(13,726
)
 
$
1,563

 
$
12,163

 
$
(18,108
)
 
Nine Months Ended September 30, 2015
 
Parent
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Consolidating Adjustments
 
Consolidated
Revenues
$

 
$
252,621

 
$
38,346

 
$
(23,404
)
 
$
267,563

Cost of goods sold (including depreciation, depletion and amortization)

 
197,125

 
26,229

 
(24,617
)
 
198,737

Gross profit

 
55,496

 
12,117

 
1,213

 
68,826

Operating costs and expenses:
 
 
 
 
 
 
 
 
 
General and administrative expenses
7,261

 
8,807

 
1,878

 

 
17,946

Impairments and other expenses

 
23,692

 
26

 

 
23,718

Accretion of asset retirement obligation

 
102

 
149

 

 
251

Income (loss) from operations
(7,261
)
 
22,895

 
10,064

 
1,213

 
26,911

Other income (expense):
 
 
 
 
 
 
 
 
 
Earnings from consolidated affiliates
33,793

 

 

 
(33,793
)
 

Interest expense
(9,505
)
 
(66
)
 
(111
)
 

 
(9,682
)
Net income (loss)
17,027

 
22,829

 
9,953

 
(32,580
)
 
17,229

Income attributable to non-controlling interest

 

 
(202
)
 

 
(202
)
Net income (loss) attributable to Hi-Crush Partners LP
$
17,027

 
$
22,829

 
$
9,751

 
$
(32,580
)
 
$
17,027


[22]

HI-CRUSH PARTNERS LP
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in thousands, except per ton and per unit amounts, or where otherwise noted)

Condensed Consolidating Statements of Operations
 
Three Months Ended September 30, 2014
 
Parent
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Consolidating Adjustments
 
Consolidated
Revenues
$

 
$
88,982

 
$
24,964

 
$
(11,630
)
 
$
102,316

Cost of goods sold (including depreciation, depletion and amortization)

 
57,849

 
9,960

 
(12,169
)
 
55,640

Gross profit

 
31,133

 
15,004

 
539

 
46,676

Operating costs and expenses:
 
 
 
 
 
 
 
 
 
General and administrative expenses
3,707

 
2,117

 
359

 

 
6,183

Accretion of asset retirement obligation

 
31

 
30

 

 
61

Income (loss) from operations
(3,707
)
 
28,985

 
14,615

 
539

 
40,432

Other income (expense):
 
 
 
 
 
 
 
 
 
Earnings from consolidated affiliates
43,783

 

 

 
(43,783
)
 

Interest expense
(3,047
)
 
(28
)
 
(36
)
 

 
(3,111
)
Net income (loss)
37,029

 
28,957

 
14,579

 
(43,244
)
 
37,321

Income attributable to non-controlling interest

 

 
(292
)
 

 
(292
)
Net income (loss) attributable to Hi-Crush Partners LP
$
37,029

 
$
28,957

 
$
14,287

 
$
(43,244
)
 
$
37,029


 
Nine Months Ended September 30, 2014
 
Parent
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Consolidating Adjustments
 
Consolidated
Revenues
$

 
$
217,734

 
$
65,742

 
$
(27,858
)
 
$
255,618

Cost of goods sold (including depreciation, depletion and amortization)

 
142,502

 
28,824

 
(27,661
)
 
143,665

Gross profit

 
75,232

 
36,918

 
(197
)
 
111,953

Operating costs and expenses:
 
 
 
 
 
 
 
 
 
General and administrative expenses
9,874

 
7,864

 
1,549

 

 
19,287

Accretion of asset retirement obligation

 
94

 
90

 

 
184

Income (loss) from operations
(9,874
)
 
67,274

 
35,279

 
(197
)
 
92,482

Other income (expense):
 
 
 
 
 
 
 
 
 
Earnings from consolidated affiliates
101,506

 

 

 
(101,506
)
 

Interest expense
(6,690
)
 
(48
)
 
(98
)
 

 
(6,836
)
Net income (loss)
84,942

 
67,226

 
35,181

 
(101,703
)
 
85,646

Income attributable to non-controlling interest

 

 
(704
)
 

 
(704
)
Net income (loss) attributable to Hi-Crush Partners LP
$
84,942

 
$
67,226

 
$
34,477

 
$
(101,703
)
 
$
84,942



[23]

HI-CRUSH PARTNERS LP
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in thousands, except per ton and per unit amounts, or where otherwise noted)

Condensed Consolidating Statements of Cash Flows
 
Nine Months Ended September 30, 2015
 
Parent
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Consolidating Adjustments
 
Consolidated
Net cash provided by operating activities
$
20,866

 
$
61,935

 
$
18,079

 
$
(33,742
)
 
$
67,138

Investing activities:
 
 
 
 
 
 
 
 
 
Capital expenditures for property, plant and equipment

 
(34,591
)
 
(13,676
)
 

 
(48,267
)
Restricted cash, net

 
691

 

 

 
691

Net cash used in investing activities

 
(33,900
)
 
(13,676
)
 

 
(47,576
)
Financing activities:
 
 
 
 
 
 
 
 
 
Proceeds from issuance of long-term debt
65,000

 

 

 

 
65,000

Repayment of long-term debt
(14,000
)
 

 

 

 
(14,000
)
Advances to parent, net

 
(29,299
)
 
(4,443
)
 
33,742

 

Loan origination costs
(101
)
 

 

 

 
(101
)
Distributions paid
(70,072
)
 

 

 

 
(70,072
)
Net cash provided by (used in) financing activities
(19,173
)
 
(29,299
)