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EX-31.2 - EXHIBIT 31.2 - Hi-Crush Partners LPexhibit312q216.htm
EX-95.1 - EXHIBIT 95.1 - Hi-Crush Partners LPexhibit951q216.htm
EX-32.2 - EXHIBIT 32.2 - Hi-Crush Partners LPexhibit322q216.htm
EX-32.1 - EXHIBIT 32.1 - Hi-Crush Partners LPexhibit321q216.htm
EX-31.1 - EXHIBIT 31.1 - Hi-Crush Partners LPexhibit311q216.htm
EX-10.2 - EXHIBIT 10.2 - Hi-Crush Partners LPexhibit102wftagreement.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 June 30, 2016
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 
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 July 26, 2016, there were 49,139,227 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)
 
June 30, 2016
 
December 31, 2015
Assets
 
 
 
Current assets:
 
 
 
Cash
$
39,657

 
$
10,414

Accounts receivable, net
23,775

 
41,477

Inventories
23,788

 
27,971

Prepaid expenses and other current assets
6,813

 
4,504

Total current assets
94,033

 
84,366

Property, plant and equipment, net
282,215

 
276,455

Goodwill and intangible assets, net
10,938

 
45,524

Other assets
7,373

 
8,930

Total assets
$
394,559

 
$
415,275

Liabilities, Equity and Partners’ Capital
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
7,622

 
$
11,059

Accrued and other current liabilities
3,344

 
6,340

Due to sponsor
916

 
1,325

Current portion of long-term debt
2,917

 
3,258

Total current liabilities
14,799

 
21,982

Long-term debt
192,240

 
246,783

Asset retirement obligations
7,243

 
7,066

Total liabilities
214,282

 
275,831

Commitments and contingencies

 

Equity and partners’ capital:
 
 
 
General partner interest

 

Limited partners interest, 49,139,227 and 36,959,970 units outstanding, respectively
177,696

 
136,820

Total partners’ capital
177,696

 
136,820

Non-controlling interest
2,581

 
2,624

Total equity and partners' capital
180,277

 
139,444

Total liabilities, equity and partners’ capital
$
394,559

 
$
415,275


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
 
Six Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
Revenues
$
38,429

 
$
83,958

 
$
90,577

 
$
186,069

Cost of goods sold (including depreciation, depletion and amortization)
39,889

 
63,698

 
92,569

 
132,337

Gross profit (loss)
(1,460
)
 
20,260

 
(1,992
)
 
53,732

Operating costs and expenses:
 
 
 
 
 
 
 
General and administrative expenses
5,346

 
5,749

 
18,949

 
11,967

Impairments and other expenses (Note 11)
102

 

 
33,849

 

Accretion of asset retirement obligations
89

 
84

 
177

 
167

Income (loss) from operations
(6,997
)
 
14,427

 
(54,967
)
 
41,598

Other income (expense):
 
 
 
 
 
 
 
Interest expense
(3,914
)
 
(2,979
)
 
(7,461
)
 
(6,296
)
Net income (loss)
(10,911
)
 
11,448

 
(62,428
)
 
35,302

(Income) loss attributable to non-controlling interest
20

 
2

 
43

 
(167
)
Net income (loss) attributable to Hi-Crush Partners LP
$
(10,891
)
 
$
11,450

 
$
(62,385
)
 
$
35,135

Earnings (loss) per limited partner unit:
 
 
 
 
 
 
 
Basic
$
(0.26
)
 
$
0.31

 
$
(1.57
)
 
$
0.92

Diluted
$
(0.26
)
 
$
0.31

 
$
(1.57
)
 
$
0.91


See Notes to Unaudited Condensed Consolidated Financial Statements.


4


HI-CRUSH PARTNERS LP
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
 
Six Months Ended
 
June 30,
 
2016
 
2015
Operating activities:
 
 
 
Net income (loss)
$
(62,428
)
 
$
35,302

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
Depreciation and depletion
5,987

 
5,712

Amortization of intangible assets
841

 
1,466

Loss on impairment of goodwill
33,745

 

Provision for doubtful accounts
8,236

 

Unit-based compensation to directors and employees
1,860

 
1,937

Amortization of loan origination costs into interest expense
1,121

 
826

Accretion of asset retirement obligations
177

 
167

Gain on disposal of property, plant and equipment
(40
)
 

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
9,466

 
28,977

Prepaid expenses and other current assets
(2,095
)
 
165

Inventories
3,966

 
(2,842
)
Other assets
1,114

 
562

Accounts payable
(3,550
)
 
(6,011
)
Accrued and other current liabilities
(2,995
)
 
(2,514
)
Due to sponsor
(409
)
 
(5,720
)
Net cash provided by (used in) operating activities
(5,004
)
 
58,027

Investing activities:
 
 
 
Capital expenditures for property, plant and equipment
(11,377
)
 
(39,633
)
Net cash used in investing activities
(11,377
)
 
(39,633
)
Financing activities:
 
 
 
Proceeds from equity issuance, net
101,186

 

Proceeds from issuance of long-term debt

 
50,000

Repayment of long-term debt
(55,434
)
 
(13,500
)
Loan origination costs
(128
)
 
(101
)
Distributions paid

 
(52,516
)
Net cash provided by (used in) financing activities
45,624

 
(16,117
)
Net increase in cash
29,243

 
2,277

Cash:
 
 
 
Beginning of period
10,414

 
4,646

End of period
$
39,657

 
$
6,923

Non-cash investing and financing activities:
 
 
 
Increase (decrease) in accounts payable and accrued and other current liabilities for additions to property, plant and equipment
$
113

 
$
(7,101
)
Cash paid for interest
$
6,340

 
$
5,469


See Notes to Unaudited Condensed Consolidated Financial Statements.

5


HI-CRUSH PARTNERS LP
Condensed Consolidated Statement of Partners’ Capital
(In thousands)
(Unaudited)
 
General
Partner
Capital
 
Limited
Partner
Capital
 
Total
Partner
Capital
 
Non-Controlling
Interest
 
Total Equity and
Partners' Capital
Balance at December 31, 2015
$

 
$
136,820

 
$
136,820

 
$
2,624

 
$
139,444

Issuance of common units, net

 
101,186

 
101,186

 

 
101,186

Issuance of limited partner units to directors

 
453

 
453

 

 
453

Unit-based compensation expense

 
1,621

 
1,621

 

 
1,621

Forfeiture of distribution equivalent rights

 
1

 
1

 

 
1

Net loss

 
(62,385
)
 
(62,385
)
 
(43
)
 
(62,428
)
Balance at June 30, 2016
$

 
$
177,696

 
$
177,696

 
$
2,581

 
$
180,277


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 Hi-Crush Partners LP (together with its subsidiaries, the “Partnership”, “we”, “us” or “our”) 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 statement are reflected in the interim periods presented. 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, 2015, which are included in the Partnership’s Annual Report on Form 10-K filed with the SEC on February 23, 2016. 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. These financial statements have been prepared assuming the Partnership will continue to operate as a going concern. On a quarterly basis, the Partnership assesses whether conditions have emerged which may cast substantial doubt about the Partnership's ability to continue as a going concern for the next twelve months. Refer to Note 5 - Long-Term Debt for additional disclosure on covenant compliance under our Revolving Credit Agreement.
Hi-Crush Partners LP 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. The Partnership is engaged in the excavation and processing of raw frac sand for use in hydraulic fracturing operations for oil and natural gas wells. 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.

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 23, 2016.
Accounts Receivable
Trade receivables relate to sales of raw frac sand and related services for which credit is extended based on the customer’s credit history and are recorded at the invoiced amount and do not bear interest. The Partnership regularly reviews the collectability of accounts receivable. When it is probable that all or part of an outstanding balance will not be collected, the Partnership establishes or adjusts an allowance as necessary generally using the specific identification method. Account balances are charged against the allowance after all means of collection have been exhausted and potential recovery is considered remote. As of June 30, 2016 and December 31, 2015, the Partnership maintained an allowance for doubtful accounts of $8,612 and $663, respectively. During the six months ended June 30, 2016, the Partnership increased its allowance as the result of a spot customer filing for bankruptcy.
Deferred Charges
Certain direct costs incurred in connection with debt financing have been capitalized and are being amortized using the straight-line method, which approximates the effective interest method, over the life of the debt. Amortization expense is included in interest expense.
On April 28, 2016, we amended our Revolving Credit Agreement. As a result of this modification, we accelerated amortization of $349 representing a portion of the remaining unamortized balance of debt issuance costs. Refer to Note 5 - Long-Term Debt for additional disclosure on our Revolver Credit Agreement.
In the first quarter of 2016, we adopted and applied on a retrospective basis the Accounting Standards Update No. 2015-03, which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. As of June 30, 2016 and December 31, 2015, the Partnership maintained unamortized debt issuance costs of $3,946 and $4,354 within long-term debt, respectively (See Note 5 - Long-Term Debt).

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)

Goodwill
Goodwill represents the excess of purchase price over the fair value of net assets acquired. The Partnership performs an assessment of the recoverability of goodwill during the third quarter of each fiscal year, or more often if events or circumstances indicate the impairment of an asset may exist. Our assessment of goodwill is based on qualitative factors to determine whether the fair value of the reporting unit is more likely than not less than the carrying value. An additional quantitative impairment analysis is completed if the qualitative analysis indicates that the fair value is not substantially in excess of the carrying value. The quantitative analysis determines the fair value of the reporting unit based on the discounted cash flow method and relative market-based approaches. Refer to Note 11 - Impairments and Other Expenses for additional disclosure on goodwill.
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 2021. 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.
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.
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 $156,400 as of June 30, 2016, based on the market price quoted from external sources, compared with a carrying value of $195,500. 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.
Income Taxes
The Partnership is a pass-through entity and is not considered a taxable 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 June 30, 2016 and December 31, 2015, the Partnership did not have any liabilities for uncertain tax positions or gross unrecognized tax benefits.

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)

Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2014-09 ("ASU 2014-09"), an update that supersedes the most current revenue recognition guidance, as well as some cost recognition guidance. The update requires that an entity recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This update also requires new qualitative and quantitative disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments, information about contract balances and performance obligations, and assets recognized from costs incurred to obtain or fulfill a contract. The authoritative guidance, which may be applied on a full retrospective or modified retrospective basis whereby the entity records a cumulative effect of initially applying this update at the date of initial application, will be effective for the Partnership beginning January 1, 2018. Early adoption is not permitted. The FASB has also issued the following standards which clarify ASU 2014-09 and have the same effective date as the original standard: ASU No. 2016-12, Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients and ASU 2016-10 Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing. The Partnership is currently evaluating the potential method and impact of this authoritative guidance on its Consolidated Financial Statements.

3. Inventories
Inventories consisted of the following:
 
June 30, 2016
 
December 31, 2015
Raw material
$
10

 
$

Work-in-process
10,829

 
11,827

Finished goods
10,938

 
13,960

Spare parts
2,011

 
2,184

Inventories
$
23,788

 
$
27,971


4. Property, Plant and Equipment
Property, plant and equipment consisted of the following:
 
June 30, 2016
 
December 31, 2015
Buildings
$
5,549

 
$
5,519

Mining property and mine development
55,149

 
54,911

Plant and equipment
151,883

 
151,582

Rail and rail equipment
31,367

 
29,300

Transload facilities and equipment
77,970

 
62,557

Construction-in-progress
2,749

 
9,740

Property, plant and equipment
324,667

 
313,609

Less: Accumulated depreciation and depletion
(42,452
)
 
(37,154
)
Property, plant and equipment, net
$
282,215

 
$
276,455

Depreciation and depletion expense was $3,134 and $4,035 during the three months ended June 30, 2016 and 2015, respectively and $5,987 and $5,712 during the six months ended June 30, 2016 and 2015, respectively.
The Partnership recognized a (gain) loss on the disposal of fixed assets of $(15) and $49 during the three months ended June 30, 2016 and 2015, respectively and $(40) and $50 during the six months ended June 30, 2016 and 2015, respectively. During the fourth quarter of 2015, the Partnership elected to temporarily idle the Augusta facility. No impairment has been recorded related to the Augusta facility.

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. Long-Term Debt
Long-term debt consisted of the following:
 
June 30, 2016
 
December 31, 2015
Revolving Credit Agreement
$

 
$
52,500

Term Loan Credit Facility
195,500

 
196,500

Less: Unamortized original issue discount
(1,388
)
 
(1,529
)
Less: Unamortized debt issuance costs
(3,946
)
 
(4,354
)
Other notes payable
4,991

 
6,924

Total debt
195,157

 
250,041

Less: current portion of long-term debt
(2,917
)
 
(3,258
)
Long-term debt
$
192,240

 
$
246,783

Revolving Credit Agreement
On April 28, 2014, the Partnership entered 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. On November 5, 2015, the Partnership entered into a second amendment (the "Second Amendment") to the Revolving Credit Agreement. The Second Amendment provided for a reduction in the commitment level from $150,000 to $100,000. On April 28, 2016, the Partnership entered into a third amendment (the "Third Amendment") to the Revolving Credit Agreement which provides for a reduction in the commitment level to $75,000. The previously outstanding balance of $52,500 under the Revolving Credit Agreement was paid in full as of June 30, 2016.
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, as amended, bear interest at a rate equal to a Eurodollar rate plus an applicable margin of 4.50% per annum through June 30, 2017 (the "Effective Period").
The Revolving Credit Agreement also 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 Second Amendment to the Revolving Credit Agreement waives the compliance of customary financial covenants, which are a leverage ratio and minimum interest coverage ratio, through the Effective Period. In addition the Second Amendment established certain minimum quarterly EBITDA covenants, allows distributions to unitholders up to 50% of quarterly distributable cash flow after quarterly debt payments on the term loan, and requires that capital expenditures during 2016 not exceed $28,000. The Third Amendment waives the minimum quarterly EBITDA covenants, establishes a maximum EBITDA loss for the six months ending March 31, 2017 and provides for an equity cure that can be applied to EBITDA covenant ratios for 2017 and all future periods. In addition, the Revolving Credit Agreement contains customary events of default (some of which are subject to applicable grace or cure periods), including among other things, non-payment defaults, covenant defaults, cross-defaults to other material indebtedness, bankruptcy and insolvency defaults and material judgment defaults. Such events of default could entitle the lenders to cause any or all of the Partnership’s indebtedness under the Revolving Credit Agreement to become immediately due and payable. 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 resulting in substantial doubt regarding the Partnership’s ability to meet its obligations over the next twelve months and continue as a going concern.
As of June 30, 2016, we were in compliance with the covenants contained in the Revolving Credit Agreement. Our ability to comply with such covenants in the future could be affected by the levels of cash flows from our operations and events or circumstances beyond our control.  If market or other economic conditions deteriorate, our risk of non-compliance may increase.
As of June 30, 2016, we had no indebtedness and $67,413 of undrawn borrowing capacity ($75,000, net of $7,587 letter of credit commitments) under our Revolving Credit Agreement.

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)

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 has been fully drawn. 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 June 30, 2016, we were in compliance with the terms of the agreement.
As of June 30, 2016, we had $190,166 indebtedness ($195,500, net of $1,388 of discounts and $3,946 of debt issuance costs) under our Term Loan Credit Facility, which carried an interest rate of 4.75% as of June 30, 2016.
Other Notes Payable
On October 24, 2014, the Partnership entered into a purchase and sales agreement to acquire land and underlying frac sand deposits. Through June 30, 2016, the Partnership paid total cash consideration of $5,000, and issued two three-year promissory notes in the amounts of $3,676, each, in connection with this agreement. The three-year promissory notes accrue interest at a rate equal to the applicable short-term federal rate, which was 0.70% as of June 30, 2016. All principal and accrued interest is due and payable at the end of the three-year note terms in October 2017 and December 2018, respectively. However, the notes may be prepaid on a quarterly basis during the three-year terms if sand is extracted, delivered, sold and paid for from the properties.
During the three and six months ended June 30, 2016, the Partnership made prepayments of $676 and $1,934 based on the volume of sand extracted, delivered, sold and paid for, respectively. In July 2016, the Partnership made a prepayment of approximately $917 based on the volume of sand extracted, delivered, sold and paid for through the second quarter of 2016. We did not make any prepayments during the six months ended June 30, 2015.

6. Equity
As of June 30, 2016, our sponsor owned 13,640,351 common units, representing a 27.8% ownership interest in the limited partner units. In addition, our sponsor is the owner of our General Partner. 
During the second quarter of 2016, the Partnership completed two public offerings for a total of 12,075,000 common units, representing limited partnership interests in the Partnership for aggregate net proceeds of approximately $101,186.
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.

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)

During the three and six months ended June 30, 2016, no income was allocated to our holders of incentive distribution rights. During the three and six months ended June 30, 2015, $1,311 and $2,622, respectively, 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 Limited Partner Units
 
Payment to Holders of Incentive Distribution Rights
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. No quarterly distributions were declared for the second quarter of 2016, as the Partnership continued its distribution suspension to conserve cash.
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
 
Six Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
Basic
42,254,647

 
36,958,770

 
39,644,857

 
36,958,525

Diluted
42,254,647

 
37,200,774

 
39,644,857

 
37,200,529

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.
Diluted earnings per unit excludes any dilutive awards granted (see Note 7) if their effect is anti-dilutive. During the three and six months ended June 30, 2016, the Partnership incurred a net loss and all 210,510 potentially dilutive awards granted and outstanding were excluded from the diluted earnings per unit calculation.
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.
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.

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)

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 June 30, 2016 (in thousands, except per unit amounts):
 
General Partner and IDRs
 
Limited Partner Units
 
Total
Declared distribution
$

 
$

 
$

Assumed allocation of distributions in excess of loss

 
(10,891
)
 
(10,891
)
Assumed allocation of net loss
$

 
$
(10,891
)
 
$
(10,891
)
 
 
 
 
 
 
Loss per limited partner unit - basic
 
 
$
(0.26
)
 
 
Loss per limited partner unit - diluted
 
 
$
(0.26
)
 
 
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 six months ended June 30, 2016 (in thousands, except per unit amounts):
 
General Partner and IDRs
 
Limited Partner Units
 
Total
Declared distribution
$

 
$

 
$

Assumed allocation of distributions in excess of loss

 
(62,385
)
 
(62,385
)
Assumed allocation of net loss
$

 
$
(62,385
)
 
$
(62,385
)
 
 
 
 
 
 
Loss per limited partner unit - basic
 
 
$
(1.57
)
 
 
Loss per limited partner unit - diluted
 
 
$
(1.57
)
 
 

7. 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.

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)

 
Units
 
Grant Date Weighted-Average Fair Value per Unit
Outstanding at January 1, 2016
136,570

 
$
46.85

Granted

 
$

Outstanding at June 30, 2016
136,570

 
$
46.85

As of June 30, 2016, total compensation expense not yet recognized related to unvested PPUs was $2,307, with a weighted average remaining service period of 1.1 years.
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, 2016
55,320

 
$
37.63

Vested
(880
)
 
$
39.48

Granted
20,000

 
$
4.55

Forfeited
(500
)
 
$
39.09

Outstanding at June 30, 2016
73,940

 
$
28.65

As of June 30, 2016, total compensation expense not yet recognized related to unvested TPUs was $1,075, with a weighted average remaining service period of 1.8 years.
Board Unit Grants
The Partnership issued 103,377 and 6,344 common units to certain of its directors during the six months ended June 30, 2016 and 2015, respectively.
Unit Purchase Program
During 2015, the Partnership commenced a unit purchase program ("UPP") offered under the Plan. The UPP provides participating employees and members of our board of directors the opportunity to purchase common units representing limited partner interests of the Partnership at a discount. Non-director employees contribute through payroll deductions not to exceed 35% of the employee's eligible compensation during the applicable offering period. Directors contribute through cash contributions not to exceed $150 in aggregate. If the closing price of the Partnership's common units on February 28, 2017 (the "Purchase Date Price") is greater than or equal to 90% of the closing market price of our common units on a participant's applicable election date (the "Election Price"), then the participant will receive a number of common units equal to the amount of accumulated payroll deductions or cash contributions, as applicable (the “Contribution”), divided by the Election Price, capped at 20,000 common units. If the Purchase Date Price is less than the Election Price, then the participant’s Contribution will be returned to the participant.
On the date of election, the Partnership calculates the fair value of the discount, which is recognized as unit compensation expense on a straight-line basis during the period from election date through the date of purchase.  As of June 30, 2016, total accumulated contributions of $403 from directors under the UPP is maintained within the “Accrued and Other Current Liabilities” line item in our Condensed Consolidated Balance Sheet.

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)

Compensation Expense
The following table presents total unit-based compensation expense:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
Performance Phantom Units
$
582

 
$
793

 
$
1,164

 
$
1,457

Time-Based Phantom Units
193

 
187

 
380

 
334

Director and other unit grants
117

 
73

 
239

 
146

Unit Purchase Program
38

 

 
77

 

Total compensation expense
$
930

 
$
1,053

 
$
1,860

 
$
1,937


8. 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 June 30, 2016 and 2015, the Partnership incurred $846 and $974, respectively, of management and administrative service expenses from Hi-Crush Services. During the six months ended June 30, 2016 and 2015, the Partnership incurred $1,793 and $1,618, 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 June 30, 2016, an outstanding balance of $916 payable to our sponsor is maintained as a current liability under the caption “Due to sponsor”.
During the three months ended June 30, 2016 and 2015, the Partnership purchased $7,543 and $7,849, respectively, of sand in total from Hi-Crush Whitehall LLC and Hi-Crush Blair LLC, subsidiaries of our sponsor and the entities that respectively own the sponsor's Whitehall and Blair facilities, at a purchase price in excess of our production cost per ton. During the six months ended June 30, 2016 and 2015, the Partnership purchased $14,491 and $14,903, respectively, of sand from our sponsor's Whitehall and Blair facilities.
During the three and six months ended June 30, 2015, the Partnership purchased $329 and $2,754, respectively, of sand from Goose Landing, LLC, a wholly owned subsidiary of Northern Frac Proppants II, LLC. We did not purchase any sand from Goose Landing, LLC, during the six months ended June 30, 2016. 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.
During the six months ended June 30, 2016 and throughout 2014 and 2015, the Partnership engaged in multiple construction projects and purchased equipment, machinery and component parts from various vendors that were represented by Alston Environmental Company, Inc. or Alston Equipment Company (“Alston Companies”), which regularly represent vendors in such transactions. The vendors in question paid a commission to the Alston Companies in an amount that is unknown to the Partnership. The sister of Mr. Alston, who is our general partner's Chief Operating Officer, owns a beneficial interest in the Alston Companies. The Partnership has not paid any sum directly to the Alston Companies and Mr. Alston has represented to the Partnership that he received no compensation from the Alston Companies related to these transactions.


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)

9. 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.

10. 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 June 30, 2016, no payments for non-delivery of minimum annual sand volumes have been made by the Partnership to customers under these contracts.
D & I Silica, LLC ("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 (credits) was $(9) and $2,638 for the three months ended June 30, 2016 and 2015, respectively, and $508 and $6,140 for the six months ended June 30, 2016 and 2015, 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. Through June 30, 2016, the Partnership acquired two tranches of land for $12,352 and has committed to purchase the remaining tranche during 2016 for total consideration of $6,176.
The Partnership has long-term leases for railcars and equipment used at its terminal sites, some of which are also under long-term lease agreements with various railroads.
We have entered into service agreements with transload service providers which require us to purchase minimum amount of services over specific periods of time at specific locations. Our failure to purchase the minimum level of services would require us to pay shortfall fees. However, the minimum quantities set forth in the agreements are not in excess of our current forecasted requirements at these locations.
As of June 30, 2016, future minimum operating lease payments and minimum purchase commitments are as follows:
Fiscal Year
Operating
Leases
 
Minimum Purchase
Commitments
2016 (six months)
$
13,145

 
$
1,418

2017
26,827

 
2,836

2018
25,930

 
1,576

2019
23,876

 
1,866

2020
16,908

 
2,296

Thereafter
21,292

 
6,700

 
$
127,978

 
$
16,692

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 700 additional leased railcars. Following delivery of these additional railcars, we estimate our 2019 annual minimum lease payments will increase to approximately $29,000.
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.


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)

11. Impairments and Other Expenses
Our goodwill arose from the acquisition of D&I in 2013 and is therefore allocated to the D&I reporting unit. We performed our annual assessment of the recoverability of goodwill during the third quarter of 2015. Although we had seen a significant decrease in the price of our common units since August 2014, which had resulted in an overall reduction in our market capitalization, our market capitalization exceeded our recorded net book value as of September 30, 2015.  At such time, we updated our internal business outlook of the 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 considered reasonable. We 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 our annual assessment date.
Specific uncertainties affecting our estimated fair value include the impact of competition, the price of frac sand, future overall activity levels and demand for frac sand, activity levels of our significant customers, and other factors affecting the rate of our future growth. These factors were reviewed and assessed during the fourth quarter of 2015 and we determined that there was no impairment of goodwill as of December 31, 2015.
However, uncertain market conditions for frac sand resulting from current oil and natural gas prices continued. During the three months ended March 31, 2016, volumes sold through the D&I reporting unit declined below previously forecasted levels and pricing deteriorated further. Industry demand for frac sand has continued to decline as the reported Baker Hughes oil rig count in North America fell to 362 rigs as of March 31, 2016, marking a 2016 year-to-date decline of more than 30%. Our customers continued to face uncertainty related to activity levels and have reduced their active frac crews, resulting in further declines in well completion activity. Therefore, as of March 31, 2016, we determined that the state of market conditions and activity levels indicated that an impairment of goodwill may exist. As a result, we assessed qualitative factors and determined that we could not conclude it was more likely than not that the fair value of goodwill exceeded its carrying value. In turn, we prepared a quantitative analysis of the fair value of the goodwill as of March 31, 2016, based on the weighted average valuation across several income and market based valuation approaches. The underlying results of the valuation were driven by our actual results during the three months ended March 31, 2016 and the pricing, costs structures and market conditions existing as of March 31, 2016, which were below our forecasts at the time of the previous goodwill assessments. Other key estimates, assumptions and inputs used in the valuation included long-term growth rates, discounts rates, terminal values, valuation multiples and relative valuations when comparing the reporting unit to similar businesses or asset bases. Upon completion of the Step 1 and Step 2 valuation exercises, it was determined that a $33,745 impairment loss of all goodwill was incurred during the three months ended March 31, 2016, which was equal to the difference between the carrying value and estimated fair value of goodwill. The Partnership did not recognize any impairment losses for goodwill during the six months ended June 30, 2015.
We recognized impairments and other expenses as outlined in the following table:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
Impairment of Goodwill
$

 
$

 
$
33,745

 
$

Severance, retention and relocation
102

 

 
104

 

Impairments and other expenses
$
102

 
$

 
$
33,849

 
$



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)

12. 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 June 30, 2016, 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 June 30, 2016, 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 June 30, 2016, 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.

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)

Condensed Consolidating Balance Sheet
As of June 30, 2016
 
Parent
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Consolidating Adjustments
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash
$
37,011

 
$
2,477

 
$
169

 
$

 
$
39,657

Accounts receivable, net

 
23,775

 

 

 
23,775

Intercompany receivables
53,558

 
155,962

 

 
(209,520
)
 

Inventories

 
15,969

 
8,343

 
(524
)
 
23,788

Prepaid expenses and other current assets
422

 
6,270

 
121

 

 
6,813

Total current assets
90,991

 
204,453


8,633

 
(210,044
)
 
94,033

Property, plant and equipment, net
11

 
170,950

 
111,254

 

 
282,215

Goodwill and intangible assets, net

 
10,938

 

 

 
10,938

Investment in consolidated affiliates
277,181

 

 
224,250

 
(501,431
)
 

Other assets
1,109

 
6,264

 

 

 
7,373

Total assets
$
369,292

 
$
392,605


$
344,137

 
$
(711,475
)
 
$
394,559

Liabilities, Equity and Partners' Capital
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$
428

 
$
6,964

 
$
230

 
$

 
$
7,622

Intercompany payables

 

 
209,520

 
(209,520
)
 

Accrued and other current liabilities
1,006

 
1,900

 
438

 

 
3,344

Due to sponsor
(4
)
 
1,101

 
(181
)
 

 
916

Current portion of long-term debt
2,000

 
917

 

 

 
2,917

Total current liabilities
3,430

 
10,882


210,007

 
(209,520
)
 
14,799

Long-term debt
188,166

 
4,074

 

 

 
192,240

Asset retirement obligations

 
2,008

 
5,235

 

 
7,243

Total liabilities
191,596

 
16,964


215,242

 
(209,520
)
 
214,282

Equity and partners' capital:
 
 
 
 
 
 
 
 
 
Partners' capital
177,696

 
375,641

 
126,314

 
(501,955
)
 
177,696

Non-controlling interest

 

 
2,581

 

 
2,581

Total equity and partners' capital
177,696

 
375,641


128,895

 
(501,955
)
 
180,277

Total liabilities, equity and partners' capital
$
369,292

 
$
392,605


$
344,137

 
$
(711,475
)
 
$
394,559



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 December 31, 2015
 
Parent
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Consolidating Adjustments
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash
$
4,136

 
$
5,077

 
$
1,201

 
$

 
$
10,414

Accounts receivable, net

 
39,292

 
2,185

 

 
41,477

Intercompany receivables
47,951

 
160,108

 

 
(208,059
)
 

Inventories

 
19,180

 
9,159

 
(368
)
 
27,971

Prepaid expenses and other current assets
57

 
4,282

 
165

 

 
4,504

Total current assets
52,144

 
227,939

 
12,710

 
(208,427
)
 
84,366

Property, plant and equipment, net
14

 
164,500

 
111,941

 

 
276,455

Goodwill and intangible assets, net

 
45,524

 

 

 
45,524

Investment in consolidated affiliates
327,885

 

 
224,250

 
(552,135
)
 

Other assets
1,553

 
7,377

 

 

 
8,930

Total assets
$
381,596

 
$
445,340

 
$
348,901

 
$
(760,562
)
 
$
415,275

Liabilities, Equity and Partners' Capital
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$
56

 
$
9,941

 
$
1,062

 
$

 
$
11,059

Intercompany payables

 

 
208,059

 
(208,059
)
 

Accrued and other current liabilities
1,284

 
1,910

 
3,146

 

 
6,340

Due to sponsor
319

 
575

 
431

 

 
1,325

Current portion of long-term debt
2,000

 
1,258

 

 

 
3,258

Total current liabilities
3,659

 
13,684

 
212,698

 
(208,059
)
 
21,982

Long-term debt
241,117

 
5,666

 

 

 
246,783

Asset retirement obligations

 
1,935

 
5,131

 

 
7,066

Total liabilities
244,776

 
21,285

 
217,829

 
(208,059
)
 
275,831

Equity and partners' capital:
 
 
 
 
 
 
 
 
 
Partners' capital
136,820

 
424,055

 
128,448

 
(552,503
)
 
136,820

Non-controlling interest

 

 
2,624

 

 
2,624

Total equity and partners' capital
136,820

 
424,055

 
131,072

 
(552,503
)
 
139,444

Total liabilities, equity and partners' capital
$
381,596

 
$
445,340

 
$
348,901

 
$
(760,562
)
 
$
415,275



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 Statements of Operations
For the Three Months Ended June 30, 2016
 
Parent
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Consolidating Adjustments
 
Consolidated
Revenues
$

 
$
42,444

 
$
55

 
$
(4,070
)
 
$
38,429

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

 
43,716

 
382

 
(4,209
)
 
39,889

Gross profit (loss)

 
(1,272
)
 
(327
)
 
139

 
(1,460
)
Operating costs and expenses:
 
 
 
 
 
 
 
 
 
General and administrative expenses
2,188

 
2,669

 
489

 

 
5,346

Impairments and other expenses

 
95

 
7

 

 
102

Accretion of asset retirement obligations

 
37

 
52

 

 
89

Loss from operations
(2,188
)
 
(4,073
)
 
(875
)
 
139

 
(6,997
)
Other income (expense):
 
 
 
 
 
 
 
 
 
Loss from consolidated affiliates
(5,006
)
 

 

 
5,006

 

Interest expense
(3,697
)
 
(71
)
 
(146
)
 

 
(3,914
)
Net loss
(10,891
)
 
(4,144
)
 
(1,021
)
 
5,145

 
(10,911
)
Loss attributable to non-controlling interest

 

 
20

 

 
20

Net loss attributable to Hi-Crush Partners LP
$
(10,891
)
 
$
(4,144
)
 
$
(1,001
)
 
$
5,145

 
$
(10,891
)

For the Six Months Ended June 30, 2016
 
Parent
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Consolidating Adjustments
 
Consolidated
Revenues
$

 
$
99,129

 
$
1,400

 
$
(9,952
)
 
$
90,577

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

 
100,040

 
2,326

 
(9,797
)
 
92,569

Gross profit (loss)

 
(911
)
 
(926
)
 
(155
)
 
(1,992
)
Operating costs and expenses:
 
 
 
 
 
 
 
 
 
General and administrative expenses
4,528

 
13,480

 
941

 

 
18,949

Impairments and other expenses

 
33,842

 
7

 

 
33,849

Accretion of asset retirement obligations

 
73

 
104

 

 
177

Loss from operations
(4,528
)
 
(48,306
)
 
(1,978
)
 
(155
)
 
(54,967
)
Other income (expense):
 
 
 
 
 
 
 
 
 
Loss from consolidated affiliates
(50,703
)
 

 

 
50,703

 

Interest expense
(7,154
)
 
(108
)
 
(199
)
 

 
(7,461
)
Net loss
(62,385
)
 
(48,414
)
 
(2,177
)
 
50,548

 
(62,428
)
Loss attributable to non-controlling interest

 

 
43

 

 
43

Net loss attributable to Hi-Crush Partners LP
$
(62,385
)
 
$
(48,414
)
 
$
(2,134
)
 
$
50,548

 
$
(62,385
)



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
For the Three Months Ended June 30, 2015
 
Parent
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Consolidating Adjustments
 
Consolidated
Revenues
$

 
$
82,260

 
$
8,346

 
$
(6,648
)
 
$
83,958

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

 
64,681

 
7,695

 
(8,678
)
 
63,698

Gross profit

 
17,579

 
651

 
2,030

 
20,260

Operating costs and expenses:
 
 
 
 
 
 
 
 
 
General and administrative expenses
2,218

 
2,841

 
690

 

 
5,749

Accretion of asset retirement obligations

 
34

 
50

 

 
84

Income (loss) from operations
(2,218
)
 
14,704

 
(89
)
 
2,030

 
14,427

Other income (expense):
 
 
 
 
 
 
 
 
 
Earnings from consolidated affiliates
16,643

 

 

 
(16,643
)
 

Interest expense
(2,975
)
 
(3
)
 
(1
)
 

 
(2,979
)
Net income (loss)
11,450

 
14,701

 
(90
)
 
(14,613
)
 
11,448

Loss attributable to non-controlling interest

 

 
2

 

 
2

Net income (loss) attributable to Hi-Crush Partners LP
$
11,450

 
$
14,701

 
$
(88
)
 
$
(14,613
)
 
$
11,450


For the Six Months Ended June 30, 2015
 
Parent
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Consolidating Adjustments
 
Consolidated
Revenues
$

 
$
176,427

 
$
27,871

 
$
(18,229
)
 
$
186,069

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

 
133,971

 
18,075

 
(19,709
)
 
132,337

Gross profit

 
42,456

 
9,796

 
1,480

 
53,732

Operating costs and expenses:
 
 
 
 
 
 
 
 
 
General and administrative expenses
4,855

 
5,804

 
1,308

 

 
11,967

Accretion of asset retirement obligations

 
68

 
99

 

 
167

Income (loss) from operations
(4,855
)
 
36,584

 
8,389

 
1,480

 
41,598

Other income (expense):
 
 
 
 
 
 
 
 
 
Earnings from consolidated affiliates
46,223

 

 

 
(46,223
)
 

Interest expense
(6,233
)
 
(29
)
 
(34
)
 

 
(6,296
)
Net income
35,135

 
36,555

 
8,355

 
(44,743
)
 
35,302

Income attributable to non-controlling interest

 

 
(167
)
 

 
(167
)
Net income attributable to Hi-Crush Partners LP
$
35,135

 
$
36,555

 
$
8,188

 
$
(44,743
)
 
$
35,135



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 Cash Flows
For the Six Months Ended June 30, 2016
 
Parent
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Consolidating Adjustments
 
Consolidated
Net cash provided by (used in) operating activities
$
(14,683
)
 
$
6,874

 
$
(2,802
)
 
$
5,607

 
$
(5,004
)
Investing activities:
 
 
 
 
 
 
 
 
 
Capital expenditures for property, plant and equipment

 
(11,342
)
 
(35
)
 

 
(11,377
)
Net cash used in investing activities

 
(11,342
)
 
(35
)
 

 
(11,377
)
Financing activities:
 
 
 
 
 
 
 
 
 
Proceeds from equity issuance
101,186

 

 

 

 
101,186

Repayment of long-term debt
(53,500
)
 
(1,934
)
 

 

 
(55,434
)
Advances from (to) parent, net

 
3,802

 
1,805

 
(5,607
)
 

Loan origination costs
(128
)
 

 

 

 
(128
)
Net cash provided by (used in) financing activities
47,558

 
1,868

 
1,805

 
(5,607
)
 
45,624

Net increase (decrease) in cash
32,875

 
(2,600
)
 
(1,032
)
 

 
29,243

Cash:
 
 
 
 
 
 
 
 
 
Beginning of period
4,136

 
5,077

 
1,201

 

 
10,414

End of period
$
37,011

 
$
2,477

 
$
169

 
$

 
$
39,657


For the Six Months Ended June 30, 2015
 
Parent
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Consolidating Adjustments
 
Consolidated
Net cash provided by operating activities
$
16,860

 
$
47,556

 
$
19,603

 
$
(25,992
)
 
$
58,027

Investing activities:
 
 
 
 
 
 
 
 
 
Capital expenditures for property, plant and equipment

 
(28,758
)
 
(10,875
)
 

 
(39,633
)
Net cash used in investing activities

 
(28,758
)
 
(10,875
)
 

 
(39,633
)
Financing activities:
 
 
 
 
 
 
 
 
 
Proceeds from issuance of long-term debt
50,000

 

 

 

 
50,000

Repayment of long-term debt
(13,500
)
 

 

 

 
(13,500
)
Advances to parent, net

 
(17,300
)
 
(8,692
)
 
25,992

 

Loan origination costs
(101
)
 

 

 

 
(101
)
Distributions paid
(52,516
)
 

 

 

 
(52,516
)
Net cash used in financing activities
(16,117
)
 
(17,300
)
 
(8,692
)
 
25,992

 
(16,117
)
Net increase in cash
743

 
1,498

 
36

 

 
2,277

Cash:
 
 
 
 
 
 
 
 
 
Beginning of period
308

 
3,490

 
848

 

 
4,646

End of period
$
1,051

 
$
4,988

 
$
884

 
$

 
$
6,923



23


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion of our historical performance, financial condition and future prospects in conjunction with our unaudited condensed financial statements and accompanying notes in “Item 1. Financial Statements” contained herein and our audited financial statements as of December 31, 2015, included in our Annual Report on Form 10-K, as filed with the Securities and Exchange Commission on February 23, 2016. The information provided below supplements, but does not form part of, our unaudited condensed financial statements. This discussion contains forward-looking statements that are based on the views and beliefs of our management, as well as assumptions and estimates made by our management. Actual results could differ materially from such forward-looking statements as a result of various risk factors, including those that may not be in the control of management. See “Forward-Looking Statements” in this Quarterly Report on Form 10-Q. All amounts are presented in thousands except tonnage, acreage or per unit data, or where otherwise noted.
Overview
We are a pure play, low-cost, domestic producer and supplier of premium monocrystalline sand, a specialized mineral that is used as a proppant to enhance the recovery rates of hydrocarbons from oil and natural gas wells. Our reserves consist of “Northern White” sand, a resource existing predominately in Wisconsin and limited portions of the upper Midwest region of the United States, which is highly valued as a preferred proppant because it exceeds all American Petroleum Institute (“API”) specifications. We own, operate and develop sand reserves and related excavation and processing facilities. We operate through an extensive logistics network of rail-served destination terminals strategically located throughout Colorado, Pennsylvania, Ohio, New York and Texas.
We sell a substantial portion of the frac sand we produce to customers with whom we have long-term contracts. Through June 30, 2016, as a result of the existing and continuing market dynamics, we have provided contract customers with temporary pricing discounts and/or waivers of minimum volume purchase requirements, in certain circumstances in exchange for, among other things, additional term and/or volume. As of July 1, 2016, the average remaining contractual term was 3.4 years with remaining terms ranging from 18 to 61 months.
Our Assets and Operations
We own and operate an 857-acre facility with integrated rail infrastructure, located in Wyeville, Wisconsin (the "Wyeville facility") which, as of December 31, 2015, contained 82.1 million tons of proven recoverable reserves of frac sand. We completed construction of the Wyeville facility in June 2011 and expanded the facility in 2012. The Wyeville facility has an annual processing capacity of approximately 1,850,000 tons of 20/100 frac sand per year.
We also own a 98.0% interest in the 1,187-acre facility with integrated rail infrastructure, located in Eau Claire County, Wisconsin (the "Augusta facility") which, as of December 31, 2015, contained 40.9 million tons of proven recoverable reserves of frac sand. We completed construction of the Augusta facility in June 2012. The Augusta facility has an annual processing capacity of approximately 2,860,000 tons of 20/100 frac sand per year. As a result of current market conditions, the Augusta facility is temporarily idled.
According to John T. Boyd Company ("John T. Boyd"), our proven reserves at the Wyeville and Augusta facilities consist of coarse grade Northern White sand exceeding API specifications. Analysis of sand at our facilities by independent third-party testing companies indicates that they demonstrate characteristics exceeding of API specifications with regard to crush strength, turbidity and roundness and sphericity. Based on third-party reserve reports by John T. Boyd, as of December 31, 2015, we have an implied average reserve life of 26 years, assuming production at the rated capacity of 4,710,000 tons of 20/100 frac sand per year.
During the third quarter of 2014, our sponsor completed construction of the 1,447-acre facility with integrated rail infrastructure, located near Independence, Wisconsin and Whitehall, Wisconsin (the "Whitehall facility"). As of December 31, 2015, this facility contained 80.7 million tons of proven recoverable reserves of frac sand and is capable of delivering approximately 2,860,000 tons of 20/100 frac sand per year. As a result of current market conditions, the Whitehall facility is temporarily idled.
During March 2016, our sponsor completed construction and started operations of the 1,285-acre facility with integrated rail infrastructure, located near Blair, Wisconsin (the "Blair facility"). As of December 31, 2015, this facility contained 120.1 million tons of proven recoverable reserves of frac sand and is capable of delivering approximately 2,860,000 tons of 20/100 frac sand per year.
As of June 30, 2016, we own or operate 15 destination rail-based terminal locations throughout Colorado, Pennsylvania, Ohio, New York and Texas, of which five are temporarily idled and six are capable of accommodating unit trains. Our destination terminals include approximately 81,000 tons of rail storage capacity and approximately 120,000 tons of silo storage capacity.

24


We are continuously looking to increase the number of destination terminals we operate and expand our geographic footprint, allowing us to further enhance our customer service and putting us in a stronger position to take advantage of opportunistic short term pricing agreements. Our destination terminals are strategically located to provide access to Class I railroads, which enables us to cost effectively ship product from our production facilities in Wisconsin. As of June 30, 2016, we leased or owned 4,214 railcars used to transport our sand from origin to destination and managed a fleet of approximately 1,500 additional railcars dedicated to our facilities by our customers or the Class I railroads.
How We Generate Revenue
We generate revenue by excavating, processing and delivering frac sand and providing related services. A substantial portion of our frac sand is sold to customers with whom we have long-term contracts which have current terms expiring between 2017 and 2021. Each contract defines the minimum volume of frac sand that the customer is required to purchase monthly and annually, the volume that we are required to make available, the technical specifications of the product and the price per ton. During the six months ended June 30, 2016, we continued to provide temporary price discounts and/or waivers of minimum volume purchase requirements to contract customers in response to the market driven decline in proppant demand. We also sell our frac sand on the spot market at prices and other terms determined by the existing market conditions as well as the specific requirements of the customer.
Delivery of sand to our customers may occur at the rail origin or at the destination terminal. We generate service revenues through performance of transportation services including railcar storage fees, transload services, silo storage and other miscellaneous services performed on behalf of our customers.
Due to sustained freezing temperatures in our area of operation during winter months, it is industry practice to halt excavation activities and operation of the wet plant during those months. As a result, we excavate and wash sand in excess of current delivery requirements during the months when those facilities are operational. This excess sand is placed in stockpiles that feed the dry plant and fill customer orders throughout the year.
Costs of Conducting Our Business
The principal expenses involved in production of raw frac sand are excavation costs, labor, utilities, maintenance and royalties. We have a contract with a third party to excavate raw frac sand, deliver the raw frac sand to our processing facility and move the sand from our wet plant to our dry plant. We pay a fixed price per ton excavated and delivered without regard to the amount of sand excavated that meets API specifications. Accordingly, we incur excavation costs with respect to the excavation of sand and other materials from which we ultimately do not derive revenue (rejected materials), and for sand which is still to be processed through the dry plant and not yet sold. However, the ratio of rejected materials to total amounts excavated has been, and we believe will continue to be, in line with our expectations, given the extensive core sampling and other testing we undertook at our facilities.
Labor costs associated with employees at our processing facilities represent the most significant cost of converting raw frac sand to finished product. We incur utility costs in connection with the operation of our processing facilities, primarily electricity and natural gas, which are both susceptible to price fluctuations. Our facilities require periodic scheduled maintenance to ensure efficient operation and to minimize downtime. Excavation, labor, utilities and other costs of production are capitalized as a component of inventory and are reflected in cost of goods sold when inventory is sold.
We pay royalties to third parties at our facilities at various rates, as defined in the individual royalty agreements, at an aggregate rate up to $6.15 per ton of sand excavated, delivered at our on-site rail facilities and paid for by our customers.
The principal expenses involved in distribution of raw sand are the cost of purchased sand, freight charges, fuel surcharges, railcar lease expense, terminal switch fees, demurrage costs, storage fees, transload fees, labor and facility rent.
We purchase sand from our sponsor's production facilities, through a long-term supply agreement with a third party at a specified price per ton and also through the spot market. We incur transportation costs including trucking, rail freight charges and fuel surcharges when transporting our sand from its origin to destination. We utilize multiple railroads to transport our sand and transportation costs are typically negotiated through long-term working relationships.
We incur general and administrative costs related to our corporate operations. Under our partnership agreement and the services agreement with our sponsor and our general partner, our sponsor has discretion to determine, in good faith, the proper allocation of costs and expenses to us for its services, including expenses incurred by our general partner and its affiliates on our behalf. The allocation of such costs is based on management’s best estimate of time and effort spent on the respective operations and facilities. Under these agreements, we reimburse our sponsor for all direct and indirect costs incurred on our behalf.

25


How We Evaluate Our Operations
We utilize various financial and operational measures to evaluate our operations. Management measures the performance of the Partnership through performance indicators, including gross profit, contribution margin, earnings before interest, taxes, depreciation and amortization (“EBITDA”), Adjusted EBITDA and distributable cash flow.
Gross Profit and Contribution Margin
We use contribution margin, which we define as total revenues less costs of goods sold excluding depreciation, depletion and amortization, to measure our financial and operating performance. Contribution margin excludes other operating expenses and income, including costs not directly associated with the operations of our business such as accounting, human resources, information technology, legal, sales and other administrative activities.  We believe contribution margin is a meaningful measure because it provides an operating and financial measure of our ability to generate margin in excess of our operating cost base.  
We use gross profit, which we define as revenues less costs of goods sold, to measure our financial performance. We believe gross profit is a meaningful measure because it provides a measure of profitability and operating performance based on the historical cost basis of our assets.
As a result, contribution margin, contribution margin per ton, sales volumes, sales price per ton sold and gross profit are key metrics used by management to evaluate our results of operations.
EBITDA, Adjusted EBITDA and Distributable Cash Flow
We view EBITDA and Adjusted EBITDA as important indicators of performance. We define EBITDA as net income (loss) plus depreciation, depletion and amortization and interest expense, net of interest income. We define Adjusted EBITDA as EBITDA, adjusted for any non-cash impairments of long-lived assets and goodwill. We define distributable cash flow as Adjusted EBITDA less cash paid for interest expense, income attributable to non-controlling interests and maintenance and replacement capital expenditures, including accrual for reserve replacement, plus accretion of asset retirement obligations and non-cash unit-based compensation. We use distributable cash flow as a performance metric to compare cash generating performance of the Partnership from period to period and to compare the cash generating performance for specific periods to the cash distributions (if any) that are expected to be paid to our unitholders. Distributable cash flow will not reflect changes in working capital balances. EBITDA and Adjusted EBITDA are supplemental measures utilized by our management and other users of our financial statements, such as investors, commercial banks, research analysts and others, to assess the financial performance of our assets without regard to financing methods, capital structure or historical cost basis.
Note Regarding Non-GAAP Financial Measures
EBITDA, Adjusted EBITDA and distributable cash flow are not financial measures presented in accordance with GAAP. We believe that the presentation of these non-GAAP financial measures will provide useful information to investors in assessing our results of operations. Our non-GAAP financial measures should not be considered as alternatives to the most directly comparable GAAP financial measure. Each of these non-GAAP financial measures has important limitations as analytical tools because they exclude some but not all items that affect the most directly comparable GAAP financial measures. You should not consider EBITDA, Adjusted EBITDA or distributable cash flow in isolation or as substitutes for analysis of our results as reported under GAAP. Because EBITDA, Adjusted EBITDA and distributable cash flow may be defined differently by other companies in our industry, our definitions of these non-GAAP financial measures may not be comparable to similarly titled measures of other companies, thereby diminishing their utility.

26