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EX-95.1 - EXHIBIT 95.1 - Hi-Crush Inc.exhibit951-fy16.htm
EX-32.2 - EXHIBIT 32.2 - Hi-Crush Inc.exhibit322-fy16.htm
EX-32.1 - EXHIBIT 32.1 - Hi-Crush Inc.exhibit321-fy16.htm
EX-31.2 - EXHIBIT 31.2 - Hi-Crush Inc.exhibit312-fy16.htm
EX-31.1 - EXHIBIT 31.1 - Hi-Crush Inc.exhibit311-fy16.htm
EX-23.2 - EXHIBIT 23.2 - Hi-Crush Inc.exhibit232-jtboydconsent20.htm
EX-23.1 - EXHIBIT 23.1 - Hi-Crush Inc.exhibit231-pwcconsent2016.htm
EX-21.1 - EXHIBIT 21.1 - Hi-Crush Inc.exhibit211-listingofsubsid.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-K
þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2016
or
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common units representing limited partnership interests
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. þYes ¨No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ¨Yes þNo
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. þYes ¨No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨Yes þNo
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). þYes ¨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    ¨
Accelerated filer    þ
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 Act). ¨Yes þNo
As of June 30, 2016, the last business day of the registrant's most recently completed second fiscal quarter, the aggregate market value of common units held by non-affiliates was approximately $459,499,010 based on the closing price of $13.07 per common unit on that date.
As of February 10, 2017, there were 63,697,392 common units outstanding.



HI-CRUSH PARTNERS LP
INDEX TO FORM 10-K
 
Page
PART I
Item 1. Business
Item 1A. Risk Factors
Item 2. Properties
PART II
PART III
PART IV
Item 16. Form 10-K Summary




Forward-Looking Statements
Some of the information in this Annual Report on Form 10-K may contain forward-looking statements. Forward-looking statements give our current expectations, contain projections of results of operations or of financial condition, or forecasts of future events. Words such as “may,” “assume,” “forecast,” “position,” “predict,” “strategy,” “expect,” “intend,” "hope," “plan,” “estimate,” “anticipate,” “believe,” “project,” “budget,” “potential,” or “continue,” and similar expressions are used to identify forward-looking statements. They can be affected by assumptions used or by known or unknown risks or uncertainties. Consequently, no forward-looking statements can be guaranteed. When considering these forward-looking statements, you should keep in mind the risk factors and other cautionary statements in this Annual Report on Form 10-K. Actual results may vary materially. You are cautioned not to place undue reliance on any forward-looking statements. You should also understand that it is not possible to predict or identify all such risk factors and as such should not consider the following to be a complete list of all potential risks and uncertainties. Factors that could cause our actual results to differ materially from the results contemplated by such forward-looking statements include those described under “Risk Factors” in Item 1A of this Annual Report on Form 10-K, and the following factors, among others:
the volume of frac sand we are able to buy and sell;
the price at which we are able to buy and sell frac sand;
demand and pricing for our integrated logistics solutions;
the pace of adoption of our integrated logistics solutions;
the amount of frac sand we are able to timely deliver at the well site, which could be adversely affected by, among other things, logistics constraints, weather, or other delays at the transloading facility;
changes in prevailing economic conditions, including the extent of changes in natural gas, crude oil and other commodity prices;
the amount of frac sand we are able to excavate and process, which could be adversely affected by, among other things, operating difficulties and unusual or unfavorable geologic conditions;
changes in the price and availability of natural gas or electricity;
unanticipated ground, grade or water conditions;
reduction in the amount of water available for processing;
cave-ins, pit wall failures or rock falls;
inability to obtain necessary production equipment or replacement parts;
changes in the railroad infrastructure, price, capacity and availability, including the potential for rail line washouts;
changes in the price and availability of transportation;
availability of or failure of our contractors to provide services at the agreed-upon levels or times;
failure to maintain safe work sites at our facilities or by third parties at their work sites;
inclement or hazardous weather conditions, including flooding, and the physical impacts of climate change;
environmental hazards;
industrial and transportation related accidents;
technical difficulties or failures;
fires, explosions or other accidents;
late delivery of supplies;
difficulty collecting receivables;
inability of our customers to take delivery;
difficulties in obtaining and renewing environmental permits;
facility shutdowns in response to environmental regulatory actions;
changes in laws and regulations (or the interpretation thereof) related to the mining and hydraulic fracturing industries, silica dust exposure or the environment;
the outcome of litigation, claims or assessments, including unasserted claims;
inability to acquire or maintain necessary permits, licenses or other approvals, including mining or water rights;

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labor disputes and disputes with our third-party contractors;
inability to attract and retain key personnel;
cyber security breaches of our systems and information technology;
our ability to borrow funds and access capital markets; and
changes in the political environment of the drilling basins in which we and our customers operate.
All forward-looking statements are expressly qualified in their entirety by the foregoing cautionary statements. You should assess any forward-looking statements made within this Annual Report on Form 10-K within the context of such risks and uncertainties.

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PART I
ITEM 1. BUSINESS
References in this Annual Report on Form 10-K to “Hi-Crush Partners LP,” “we,” “our,” “us” or like terms when used in a historical context to reference operations or matters prior to August 16, 2012 refer to the business of Hi-Crush Proppants LLC, which is our accounting predecessor that contributed certain of its subsidiaries to Hi-Crush Partners LP on August 16, 2012 in connection with our initial public offering. Otherwise, those terms refer to Hi-Crush Partners LP and its subsidiaries. References in this Annual Report on Form 10-K to “Hi-Crush Proppants LLC,” “our predecessor” and “our sponsor” refer to Hi-Crush Proppants LLC.
Overview
Hi-Crush Partners LP (together with its subsidiaries, the “Partnership”) is an integrated producer, transporter, marketer and distributor of high-quality 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, which are located in Wisconsin, consist of "Northern White" sand, a resource that exists predominately in Wisconsin and limited portions of the upper Midwest region of the United States. The Partnership owns and operates a portfolio of sand facilities with on-site wet and dry plant assets, including direct access to major U.S. railroads for distribution to in-basin terminals. We own and operate a network of strategically located terminals and an integrated distribution system throughout North America, including our PropStreamTM integrated logistics solution, which delivers proppant into the blender at the well site.
Over the past decade, exploration and production companies have increasingly focused on exploiting the vast hydrocarbon reserves contained in North America’s unconventional oil and natural gas reservoirs through advanced techniques, such as horizontal drilling and hydraulic fracturing. In recent years, this focus has resulted in exploration and production companies drilling longer horizontal wells, completing more hydraulic fracturing stages per well and utilizing more proppant per stage in an attempt to efficiently maximize the volume of hydrocarbon recovery per wellbore. As a result, North American demand for proppant increased rapidly over the same period.
Beginning in August 2014 and continuing through the second quarter of 2016, oil and natural gas prices declined dramatically and persisted at levels well below those experienced during the middle of 2014. As a result, the number of rigs drilling for oil and gas fell dramatically from the high levels achieved during third quarter of 2014. Due to uncertainty experienced over the past two years regarding the timing and extent of a recovery, exploration and production companies sharply reduced their drilling and completion activities in an effort to control costs. As a result, our customers faced uncertainty related to overall activity levels, and well completion activity was significantly below levels experienced in 2014 and 2015. The combination of these and other factors reduced proppant demand and pricing during 2016 significantly from the levels experienced during 2014. Proppant demand did not decline as significantly as the rig count and well completion activity might imply, though, due to the continuing trend of longer laterals and increasing use of sand per lateral foot in well completions. Given the marginal improvement in exploration and production activity during the fourth quarter of 2016 and the energy industry's outlook for 2017 activity levels, we expect the recent years' downward trend in well completion activity to reverse over the next several quarters, which, when coupled with higher usage of frac sand per well, should result in an increased strong positive influence on demand for raw frac sand.
We utilize the significant oil and natural gas industry experience of our management team to take advantage of what we believe are favorable, long-term market dynamics as we execute our growth strategy, which includes the acquisition of additional frac sand reserves, the development of new excavation and processing facilities and the development of new terminal facilities and logistics related assets. We expect to have the opportunity to acquire significant additional acreage and reserves currently owned by our sponsor, including the 1,447-acre facility with integrated rail infrastructure, located near Independence, Wisconsin and Whitehall, Wisconsin (the "Whitehall facility"), in addition to potential acquisitions from unrelated third parties.
General
The Partnership is a Delaware limited partnership formed on May 8, 2012. In connection with its formation, the Partnership issued a non-economic general partner interest to Hi-Crush GP LLC, our general partner, and a 100% limited partner interest to our sponsor, its organizational limited partner.
Acquisition of Hi-Crush Augusta LLC
In January 2013 and April 2014, the Partnership entered into agreements with our sponsor which ultimately resulted in the acquisition of 98.0% of the common equity interests in Hi-Crush Augusta LLC (“Augusta”), the entity that owns a 1,187-acre facility with integrated rail infrastructure, located in Eau Claire County, Wisconsin (the "Augusta facility"), for total cash consideration of $261.8 million and 3,750,000 newly issued convertible Class B units in the Partnership (the “Augusta Contribution”). Subsequently on August 15, 2014, our sponsor, as 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.

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Acquisition of D & I Silica, LLC
In June 2013, the Partnership acquired an independent frac sand supplier, D & I Silica, LLC (“D&I”), transforming the Partnership into an integrated Northern White frac sand producer, transporter, marketer and distributor. Founded in 2006, D&I was the largest independent frac sand supplier to the oil and gas industry drilling in the Marcellus and Utica shales.
Acquisition of Hi-Crush Blair LLC
On August 9, 2016, the Partnership entered into a contribution agreement with the sponsor to acquire all of the outstanding membership interests in Hi-Crush Blair LLC ("Blair"), the entity that owned our sponsor's 1,285-acre facility with integrated rail infrastructure, located near Blair, Wisconsin (the "Blair facility"), for $75.0 million in cash, 7,053,292 of newly issued common units in the Partnership, and payment of up to $10.0 million of contingent earnout consideration (the "Blair Contribution"). The Partnership completed the acquisition of the Blair facility on August 31, 2016.
Assets and Operations
According to John T. Boyd Company, a leading mining consulting firm focused on the mineral and natural gas industries (“John T. Boyd”), our proven reserves consist entirely of “Northern White” sand exceeding American Petroleum Institute (“API”) minimum specifications. Analysis of our sand by independent third-party testing companies indicates that it demonstrates characteristics in excess of API minimum specifications with regard to crush strength (ability to withstand high pressures), turbidity (low levels of contaminants) and roundness and sphericity (facilitates hydrocarbon flow or conductivity).
Wyeville Facility
We own and operate a 971-acre facility with integrated rail infrastructure, located in Wyeville, Wisconsin (the "Wyeville facility"), which, as of December 31, 2016, contained 76.4 million tons of proven recoverable reserves of frac sand meeting API specifications. The Wyeville facility, completed in 2011 and expanded in 2012, has an annual processing capacity of approximately 1,850,000 tons of frac sand per year. Assuming production at the rated capacity and based on a reserve report prepared by John T. Boyd, our Wyeville facility has an implied reserve life of 41 years as of December 31, 2016.
All of the product from the Wyeville facility is shipped by rail from approximately 32,000 feet of track that connects our facility to a Union Pacific Railroad mainline. These rail spurs and the capacity of the associated product storage silos allow us to accommodate a large number of rail cars. It also enables us to accommodate unit trains, which significantly increases our efficiency in meeting our customers’ frac sand transportation needs. Unit trains, typically 80 rail cars in length or longer, are dedicated trains chartered for a single delivery destination. Generally, unit trains receive priority scheduling and do not switch cars at various intermediate junctions, which results in a more cost-effective and expedited method of shipping than the standard method of rail shipment.
Augusta Facility
The Augusta facility, as of December 31, 2016, contained 40.9 million tons of proven recoverable reserves of frac sand meeting API specifications. Construction of the Augusta facility was completed in June 2012 and we expanded the facility in 2014. The Augusta facility has an annual processing capacity of approximately 2,860,000 tons of frac sand per year. Assuming production at the rated capacity and based on a reserve report prepared by John T. Boyd, our Augusta facility has an implied reserve life of 14 years as of December 31, 2016. During September 2016, we resumed production at the Augusta facility, which was previously idled in October 2015 as a result of market conditions.
All of the product from the Augusta facility is shipped by rail from approximately 28,800 feet of track that connects our facility to a Union Pacific Railroad mainline. These rail spurs and the capacity of the associated product storage silos allow us to accommodate a large number of rail cars, including unit trains.
Blair Facility
The Blair facility, as of December 31, 2016, contained 117.7 million tons of proven recoverable reserves of frac sand meeting API specifications. Construction of the Blair facility was completed in March 2016. The Blair facility has an annual processing capacity of approximately 2,860,000 tons of frac sand per year. Assuming production at the rated capacity and based on a reserve report prepared by John T. Boyd, our Blair facility has an implied reserve life of 41 years as of December 31, 2016.
All of the product from the Blair facility is shipped by rail from approximately 43,000 feet of track that connects our facility to a Canadian National Railroad mainline. These rail spurs and the capacity of the associated product storage silos allow us to accommodate a large number of rail cars, including unit trains.

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Sponsor's Whitehall Facility
Our sponsor's Whitehall facility, as of December 31, 2016, contained 80.7 million tons of proven recoverable reserves of frac sand meeting API specifications. The Whitehall facility, completed in September 2014, has an annual processing capacity of approximately 2,860,000 tons of frac sand per year. During 2016, the Partnership purchased 413,781 tons from our sponsor's Whitehall facility. Assuming production at the rated capacity and based on a reserve report prepared by John T. Boyd, the Whitehall facility has an implied reserve life of 28 years as of December 31, 2016. As a result of market conditions, the Whitehall facility was temporarily idled during the second quarter of 2016 and is expected to resume operations in late March or early April 2017.
All of the product from the Whitehall facility is shipped by rail from approximately 30,000 feet of track that connects the facility to a Canadian National Railroad mainline. These rail spurs and the capacity of the associated product storage silos allow us to accommodate a large number of rail cars, including unit trains.
Terminal Facilities
As of December 31, 2016, we own or operate 11 terminal locations throughout Colorado, Pennsylvania, Ohio, New York and Texas, of which three are temporarily idled and six are capable of accommodating unit trains. Our terminals include approximately 74,000 tons of rail storage capacity and approximately 120,000 tons of silo storage capacity. Each terminal location is strategically positioned in the shale plays to facilitate our customers' operations. Our terminals include rail-to-truck and rail-to-storage capabilities and serve as the base for a majority of our terminal resources and materials management services. Our terminal facilities include origin and distribution material staging areas, rail track capabilities, material handling equipment, private rail fleet, bulk storage and quality assurance services.
Our 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 December 31, 2016, we leased or owned 4,200 railcars used to transport our sand from origin to destination and managed a fleet of approximately 1,358 additional railcars dedicated to our facilities by our customers or the Class I railroads.
PropStream Operations
In September 2016, the Partnership and other partners formed Proppant Express Investments, LLC (“PropX”), which was established to develop critical last-mile logistics equipment for the proppant industry. In October 2016, the Partnership announced the successful pilot test of its PropStream integrated logistics solution, which involves loading proppant at in-basin terminals into PropX containers before being transported by truck to the well site. The containers utilize intermodal container chassis or standard flatbeds for transportation, resulting in significant savings both in terms of up-front and ongoing operations costs versus widely-used pneumatic equipment. PropStream allows for increased transportation efficiency and a reduction in supply chain related congestion at well sites, lowering the number of trucks required per job and meaningfully reducing or eliminating demurrage costs.
At the well site, the proprietary conveyor system (“PropBeast™”) significantly reduces noise and dust emissions due to its enclosed environment. By reducing particulate matter emissions from sand operations at the well site by more than 90% versus the widely-used pneumatic equipment alternative. Our PropStream integrated logistics solution is designed to provide a viable solution to meet the new U.S. Occupational Safety and Health Act (“OSHA”) respirable crystalline silica standards set to become effective in 2018 with respect to hydraulic fracturing, as well as the engineering control obligations set to become effective in 2021 for hydraulic fracturing.
As of December 31, 2016, we owned 6 PropBeast conveyors and leased 300 containers from PropX. 
Competitive Strengths
We believe that we are well positioned to successfully execute our strategy and achieve our primary business objectives to provide capital appreciation and increase our cash distributions per unit over time because of the following competitive strengths:
Competitive operating cost structure. Our plant operations have been strategically designed to provide low per-unit production costs with a significant variable component for the excavation and processing of our sand. Due to the shallow overburden at our and our sponsor's facilities, we are able to use surface mining equipment, and dredging at our Wyeville facility, in our operations, which provides for a lower cost structure than underground mining operations. Our mining operations are subcontracted at a fixed cost per ton excavated, subject to a diesel fuel surcharge. Unlike many competitors, our processing and rail loading facilities are located on-site, which eliminates the requirement for on-road transportation, lowers product movement costs and minimizes the reduction in sand quality due to handling.

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Long-lived, high quality reserve base. Our Wyeville, Augusta and Blair facilities and our sponsor's Whitehall facility contain approximately 315.7 million tons of proven recoverable saleable frac sand reserves as of December 31, 2016, based on third-party reserve reports by John T. Boyd, and have an implied average reserve life of 30 years, assuming production at the rated capacity of each facility. These reserves consist of high quality Northern White frac sand. Analysis by independent third-party testing companies indicates that our sand demonstrates characteristics exceeding API specifications with regard to crush strength, turbidity and roundness and sphericity. As a result, our raw frac sand is particularly well suited for use in the hydraulic fracturing of unconventional oil and natural gas wells.
Intrinsic logistics and infrastructure advantage. The strategic location and logistics capabilities of our Wyeville, Augusta and Blair facilities and our sponsor's Whitehall facility enable us to serve all major U.S. and Canadian oil and natural gas producing basins. At our Wyeville and Augusta facilities, our on-site transportation assets include approximately 32,000 feet and 28,800 feet, respectively, of track off a Union Pacific Railroad mainline. The on-site transportation assets at our Blair facility and our sponsor's Whitehall facility include on-site rail yards that contain approximately 43,000 feet and 30,000 feet, respectively, of track off a Canadian National Railroad mainline. All of our and our sponsor's facilities are capable of accommodating unit trains, allowing our customers to receive priority scheduling, expedited delivery and a more cost-effective shipping alternative. Our logistics capabilities enable efficient loading of sand and minimize rail car turnaround times at the facilities. We expect to acquire or develop similar logistics capabilities at any facilities we own in the future. We believe we are one of the few frac sand producers with facilities initially designed to deliver frac sand exceeding API specifications to all of the major U.S. oil and natural gas producing basins by on-site rail facilities, including on-site storage capacity accommodating unit trains.
Strategically located terminal facilities. We operate through an extensive logistics network of rail-based terminals that we own strategically located throughout Colorado, Pennsylvania, Ohio, New York and Texas, as well as facilities owned and operated by third parties, to serve our customers' operations in North America's shale and other unconventional oil and natural gas plays. Many of our terminals are capable of handling unit trains, further reducing the cost of delivered sand for our customer. Our distribution network allows us to better service our customers’ short-notice needs in these basins, and at a lower price, and provide our customers with solutions to the logistical challenges presented by the large volume of sand typically required for each fracturing job.
Developing “last mile” capabilities. Our investment in PropX and the development of our PropStream integrated logistics solution expand the reach and delivery of frac sand directly to our customers’ usage points, while leveraging our logistics infrastructure advantage and utilizing our strategically located terminal facilities. The addition of “last mile” capabilities to our portfolio of services is aligned with our goals of delivering frac sand from the mine to the well more efficiently, expanding our potential customer base, and positioning us deeper into the sand supply chain.
Long-term customer relationships. We generate a substantial portion of our revenues from the sale of frac sand to customers with whom we have long-term relationships, supported by contracts. The contracts specify monthly volume requirements for customers and have an average remaining contractual term of 2.9 years. In 2015, as a result of the market dynamics existing during the year, and continuing in 2016, we began providing market-based pricing to our contract customers and/or make-whole waivers in certain circumstances in exchange for, among other things, additional term and/or volume. We believe our long-term relationships with our customers provide us with a stable base of cash flows.
Experienced and incentivized management team. Our management team has extensive experience investing and operating in the oil and natural gas industry, long-term relationships with participants in the oilfield services and exploration and production industries, a strong operational and commercial understanding of the markets in which our customers operate, and expertise in development, construction and operation of frac sand processing and terminal facilities, frac sand supply chain management, and bulk solids material handling. Our management team is focused on optimizing our current business and expanding our operations through disciplined development and accretive acquisitions and, together with members of our board of directors, are strongly incentivized to profitably and prudently grow our business and cash flows through their 13% direct and indirect ownership interest in our limited partnership units, and their 39% interest in our sponsor, which owned 20,693,643 common units and incentive distribution rights as of February 10, 2017.

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Business Strategies
Our primary business objectives are to provide capital appreciation and pay cash distributions per unit over time. We intend to accomplish this objective by executing the following strategies:
Capitalizing on compelling industry fundamentals. We intend to continue to position ourselves as a leading producer, transporter, marketer and distributor of high quality frac sand, as we believe the frac sand market offers attractive growth fundamentals over the long-term. The innovations in horizontal drilling in the various North American shales and other unconventional oil and natural gas plays has resulted in greater demand for frac sand per well and per stage. The long-term growth in sand demand is underpinned by continued horizontal drilling, increasing proppant use per well and cost advantages over other proppant types. The proppant use per well has continued to increase even in the face of depressed hydrocarbon prices. We believe increases in frac sand supply will be constrained by the difficulty in finding reserves that meet or exceed API technical specifications in contiguous quantities large enough to justify the capital investment required and overcome the challenges associated with successfully obtaining the necessary local, state and federal permits required for operations.
Building on our position as a low cost provider. We seek to maintain and improve our position as a low cost provider of sand. Our plant operations have been strategically designed to provide low per-unit production costs with a significant variable component for the excavation and processing of our sand. We will continue to analyze and pursue organic expansion efforts that will similarly allow us to cost-effectively optimize our existing assets. In addition, we seek to identify and evaluate terminal sites to expand our geographic footprint allowing us to enhance our distribution network and ensure that sand is available to meet the in-basin needs of our customers. Through a combination of our low cost production, our network of owned and operated terminals or third-party operated sites and our PropStream integrated logistics solution, we expect to find ways to reduce our customers' cost of sand delivered to the blender at the well site. We will continue to analyze and pursue third-party acquisition opportunities that would similarly allow us to cost-effectively expand our geographic footprint, optimize our existing assets and meet our customers' demand for our high quality frac sand.
Focusing on long-term relationships with key customers. A key component of our business model has been our contracting strategy, which seeks to secure a high percentage of our cash flows under long-term contracts with the major pressure pumping service providers who generally are our customers. We believe this business model serves as the foundation for our ability to serve our customers, while providing the product that is a critical component to the well completion service. We intend to utilize a substantial majority of our processing capacity to fulfill our customer contracts and continue to serve our existing and new customers with frac sand delivered through our distribution network and to the blender at the well site.
Pursuing accretive acquisitions from our sponsor and third parties. In June 2013, we acquired D&I, enabling us to operate through an extensive logistics network of rail-based terminals now strategically located throughout Colorado, Pennsylvania, Ohio, New York and Texas. In January 2013 and April 2014, the Partnership entered into contribution agreements with our sponsor to acquire substantially all of the equity interests in our sponsor’s Augusta facility. On August 9, 2016, the Partnership entered into a contribution agreement with our sponsor to acquire all of the outstanding membership interests in Blair. We expect to continue pursuing accretive acquisitions of frac sand facilities from our sponsor, including the Whitehall facility, as well as third-party frac sand production and/or distribution and logistics operations. As we evaluate acquisition opportunities, we intend to remain focused on operations that complement our reserves of premium frac sand and that provide or would accommodate the development and construction of rail or other advantaged logistics and distribution capabilities. We believe these factors are critical to our business model and are important characteristics for any potential acquisitions.
Maintaining financial flexibility and ample liquidity. We continue to pursue a disciplined financial policy and maintain liquidity aligned with our future debt maturities and financing needs. As of February 10, 2017, our senior secured term loan facility that permits aggregate borrowings of $200.0 million was fully drawn with a $194.5 million balance outstanding and we had $66.2 million of undrawn borrowing capacity ($75.0 million, net of $8.8 million letter of credit commitments) and had no indebtedness under our senior secured revolving credit agreement (the "Revolving Credit Agreement"). The Revolving Credit Agreement is available to fund working capital and general corporate purposes, including the making of certain restricted payments permitted therein. Borrowings under our Revolving Credit Agreement are secured by substantially all of our assets. In 2016, we successfully completed three public offerings for a total of 19,550,000 common units for aggregate net proceeds of approximately $189.0 million. In January 2017, we entered into an equity distribution program under which we may sell through or to certain financial institutions up to $50.0 million in common units. We believe that our borrowing capacity and ability to access debt and equity capital markets provides us with the financial flexibility necessary to achieve our organic expansion and acquisition strategy.

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Our Industry
The oil and natural gas proppant industry is comprised of businesses involved in the mining or manufacturing of the propping agents used in the drilling and completion of oil and natural gas wells. Hydraulic fracturing is the most widely used method for stimulating increased production from wells. The process consists of pumping fluids, mixed with granular proppants, into the geologic formation at pressures sufficient to create fractures in the hydrocarbon-bearing rock. Proppant-filled fractures create conductive channels through which the hydrocarbons can flow more freely from the formation into the wellbore and then to the surface.
Industry Data
The market and industry data included throughout this Annual Report on Form 10-K was obtained through our own internal analysis and research, coupled with industry publications, surveys, reports and other analysis conducted by third parties. Industry publications, surveys, reports and other analysis generally state that the information contained therein has been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. Although we believe that the industry reports are generally reliable, we have not independently verified the industry data from third-party sources. Although we believe our internal analysis and research is reliable and appropriate, such internal analysis and research has not been verified by any independent source.
Types of Proppant
There are three primary types of proppant that are commonly utilized in the hydraulic fracturing process: raw frac sand, which is the product we produce, resin-coated sand and manufactured ceramic beads.
Raw Frac Sand
Of the three primary types of proppant, raw frac sand is the most widely used due to its broad applicability in oil and natural gas wells and its cost advantage relative to other proppants. Raw frac sand has been employed in nearly all major U.S. oil and natural gas producing basins.
Raw frac sand is generally mined from the surface or underground, and in some cases crushed, and then cleaned, dried and sorted into consistent mesh sizes. The API has a range of guidelines it uses to evaluate frac sand grades and mesh sizes. In order to meet API specifications, frac sand must meet certain thresholds related to crush strength (ability to withstand high pressures), roundness and sphericity (facilitates hydrocarbon flow, or conductivity), particle size distribution, and low turbidity (low levels of contaminants). Oil and gas producers generally require that frac sand used in their drilling and completion processes meet API specifications.
Raw frac sand can be further delineated into two main types: Northern White and Brady Brown. Northern White, which is the type of frac sand we produce, is known for its high crush strength, low turbidity, roundness and sphericity and monocrystalline grain structure. Northern White frac sand historically has commanded premium prices relative to Brady Brown. Brady Brown is sometimes preferred due to its proximity to shale basins, particularly the Permian basin and Eagle Ford shale, and, therefore, lower costs due to reduced logistics costs. Northern White has historically experienced the greatest market demand relative to supply, due both to its superior physical characteristics and the fact that it is a limited resource that exists predominately in Wisconsin and other limited parts of the upper Midwest region of the United States. However, even within this superior class of Northern White sand, its quality can vary significantly across deposits due to the differing geological processes that formed the various Northern White reserves.
The term “Northern White” is a commonly-used designation for premium white sand produced in Wisconsin and other limited parts of the upper Midwest region of the United States.
Resin-Coated Frac Sand
Resin-coated frac sand consists of raw frac sand that is coated with a flexible resin that increases the sand’s crush strength and prevents crushed sand from dispersing throughout the fracture. Pressured (or tempered) resin-coated sand primarily enhances crush strength, thermal stability and chemical resistance, allowing the sand to perform under harsh downhole conditions. Curable (or bonding) resin-coated frac sand uses a resin that is designed to bond together under closure stress and high temperatures, preventing proppant flowback.
Ceramics
Ceramic proppant is a manufactured product of comparatively consistent size and spherical shape that typically offers the highest crush strength relative to other types of proppants. Ceramic proppant derives its product strength from the molecular structure of its underlying raw material and is designed to withstand extreme heat, depth and pressure environments.

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Proppant Mesh Sizes
Mesh size is used to describe the size of the proppant and is determined by sieving the proppant through screens with uniform openings corresponding to the desired size of the proppant. Each type of proppant comes in various sizes, categorized as mesh sizes, and the various mesh sizes are used in different applications in the oil and natural gas industry. The mesh number system is a measure of the number of equally sized openings there are per square inch of screen through which the proppant is sieved. For example, a 30 mesh screen has 30 equally sized openings per linear inch. Therefore, as the mesh size increases, the granule size decreases. In order to meet API specifications, 90% of the proppant described as 30/50 mesh size proppant must consist of granules that will pass through a 30 mesh screen but not through a 50 mesh screen. We excavate various mesh sizes at our facilities, and sell 20/40, 30/50, 40/70 and 100 mesh frac sand used in the hydraulic fracturing process.
Frac Sand Extraction, Processing and Distribution
Raw frac sand is a naturally occurring mineral that is mined and processed. While the specific extraction method utilized depends primarily on the geologic setting, most raw frac sand is mined using conventional open-pit bench extraction methods. The composition, depth and chemical purity of the sand also dictate the processing method and equipment utilized. For example, broken rock from a sandstone deposit may require one, two or three stages of crushing to produce sand grains required to meet API specifications. In contrast, unconsolidated deposits (loosely bound sediments of sand), like those found at our Wyeville facility, may require little or no crushing during the excavation process. After extraction, the raw frac sand is washed with water to remove fine impurities such as clay and organic particles. The final steps in the production process involve the drying and sorting of the raw frac sand according to mesh size.
Most frac sand is shipped in bulk from the processing facility to terminal facilities, or directly to the customers by truck, rail or barge. For bulk raw frac sand, transportation costs often represent a significant portion of the customer’s overall product cost. Consequently, shipping in large quantities, including by unit train particularly when shipping over long distances, provides a significant cost advantage to the customer, emphasizing the importance of rail or barge access for low cost delivery. As a result, facility location and logistics capabilities are among the most important considerations for producers, distributors and customers.
All of the product from our Wyeville and Augusta facilities is shipped by rail from on-site rail yards off a Union Pacific Railroad mainline. All of the product from our Blair facility and our sponsor's Whitehall facility is shipped by rail from on-site rail yards off a Canadian National Railroad mainline. The length of our rail spurs, size of the rail yards and the capacity of the associated product storage silos allow us to accommodate a large number of rail cars. They also enable us to accommodate unit trains, which significantly increases our efficiency in meeting our customers’ frac sand transportation needs.
Designing and using an optimized logistics system is a key strategy for many proppant suppliers, including us, to reduce transportation costs and thereby the final proppant cost for end users. As locating proppant production close to key markets is not always possible, proppant suppliers will often have terminals in regions that they serve.  The ability to deliver sand shorter distances with fewer intermediate steps is instrumental in remaining cost competitive or gaining cost advantages.  Proppants are moved from the production site by rail or barge to transload or storage facilities.  From there, they are typically transported by truck to the well site.  Strategically locating transload facilities can therefore reduce the amount of conveyance by truck, which is typically the most expensive mode of transport. Use of containerized storage systems for transportation of proppant from the transload facilities to the well site allows for a reduction in supply chain related congestion at the well site, also offering a reduction in overall transportation costs of proppant for the end users.
Demand Trends
Demand growth for frac sand and other proppants is primarily due to advancements in oil and natural gas drilling and well completion technology and techniques, such as horizontal drilling and hydraulic fracturing, as well as overall industry activity growth. These advancements have made the extraction of oil and natural gas increasingly cost-effective in formations that historically would have been unprofitable to develop, resulting in a greater number of wells being drilled. Despite depressed levels of activity in 2015 and throughout most of 2016 that lowered demand for proppant, we believe that demand for proppant will continue to grow over the long-term, primarily driven by the increase in the average amount of proppant consumed per horizontal rig and as a result of the following demand drivers:
improvements in drilling rig productivity (from, among other things, pad drilling), resulting in more wells drilled per rig per year;
increases in the number of wells drilled per acre;
increases in the length of the typical horizontal wellbore;
increases in the number of fracture stages per foot in the typical completed horizontal wellbore;
increases in the volume of proppant used per fracturing stage; and
recurring efforts to offset steep production declines in unconventional oil and natural gas reservoirs, including the drilling of new wells and secondary hydraulic fracturing of existing wells.

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Furthermore, recent growth in demand for raw frac sand has outpaced growth in demand for other types of proppants, and industry analysts predict that this trend will continue. As well completion costs have increased as a proportion of total well costs, operators have increasingly looked for ways to improve per well economics by lowering costs without sacrificing production performance. To this end, over the last few years, the oil and natural gas industry has been shifting increasingly away from the use of higher-cost proppants, such as ceramics or resin coated sand, and more towards more cost-effective proppants, such as raw frac sand.
Supply Trends
As demand for raw frac sand increased dramatically through 2014, the supply of raw frac sand failed to keep pace, resulting in a supply-demand disparity. As a result, a number of existing and new competitors announced supply expansions and greenfield projects. However, there are several key geological, operational and economic constraints to increasing raw frac sand production on an industry-wide basis, including:
the difficulty of finding frac sand reserves that meet API specifications;
the difficulty of securing contiguous frac sand reserves large enough to justify the capital investment required to develop a processing facility;
the challenges of identifying frac sand reserves with the above characteristics that either are located in close proximity to oil and natural gas reservoirs or have rail access needed for low-cost transportation to major shale basins;
the hurdles of securing mining, production, water, air, refuse and other federal, state and local operating permits from the proper authorities;
local opposition to development of facilities, especially those that require the use of on-road transportation, including hours of operations and noise level restrictions, in addition to moratoria on raw frac sand facilities in multiple counties in Wisconsin and other states which hold potential sand reserves; and
the typically long lead time required to design and construct sand processing facilities that can efficiently process large quantities of high quality frac sand.
Many announced expansions or greenfield projects were significantly delayed or canceled as a result of the decline in oil and natural gas exploration and production activity that took place in 2015 and throughout most of 2016. In addition, several existing facilities were temporarily or permanently idled.
Commencing production at facilities previously idled can require significant maintenance costs, use of working capital to build sufficient wet sand inventory for processing and hiring of employees if previously laid off. As a result, we do not believe many idled facilities will re-enter the market until frac sand pricing has reached a sustained and higher level to incentivize the investment.
Pricing
Spot market prices for frac sand have declined dramatically from the levels experienced in 2014, as sand producers, particularly those with excess inventories, substantially discounted sand pricing in order to sell product in a lower demand environment. Pricing continued its decline throughout 2015 and continued in 2016, but began to stabilize in the third quarter of 2016 and increase in the fourth quarter of 2016, although remaining near historically low levels. While the outlook for pricing of raw frac sand in 2017 is uncertain, given the expectation for increased oil and natural gas exploration and production activity in North America, coupled with the increased demand per well, and the limitations to increase sand supply noted above, frac sand pricing has risen in the first quarter of 2017 and is likely to be more favorable in 2017.
There are numerous grades and sizes of proppant which sell at various prices, dependent primarily upon the delivery point, and also quality, grade of proppant, deliverability and many other factors.  Pricing of proppant sold at the terminal is higher than pricing of proppant sold FOB plant as a result of the associated transportation and handling costs to bring the sand from the mine to the terminal. No reliable publicized pricing information for raw sand exists. However, it is believed that the overall pricing trends tend to be consistent across the various sizes and within regions with some variation due to transportation costs, resulting from distance from the source.  We believe a significant amount of proppant is sold under long-term contracts with varying pricing mechanisms, with the remainder being sold under short-term pricing arrangements.
Customers and Contracts
Our current customer base includes some of North America’s largest providers of pressure pumping services or their subsidiaries. For the year ended December 31, 2016, sales to each of Halliburton Company ("Halliburton"), Liberty Oilfield Services ("Liberty"), U.S. Well Services, LLC ("US Well") and Weatherford International Ltd. ("Weatherford") accounted for greater than 10% of our total revenues. In the fourth quarter of 2016, Weatherford made the decision to idle its U.S. pressure pumping business. As of February 10, 2017, the contractual relationship with Weatherford remains in place.

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We sell the majority of the frac sand we produce to customers with whom we have long-term contracts. For the year ended December 31, 2016, we generated 84% of our revenues from sales of frac sand to customers with whom we had long-term contracts. We expect to continue selling a majority of our sand to our customers with long-term contracts in 2017 and future years. As of January 1, 2017, our long-term contracts have an average remaining contractual term of 2.9 years and with remaining terms ranging from 8 to 55 months.
The terms of our customer contracts, including sand quality requirements, quantity parameters, permitted sources of supply, effects of future regulatory changes, force majeure and termination and assignment provisions, vary by customer. Our contracts contain penalties for non-performance by our customers. If one of our customers fails to meet its minimum obligations to us, make-whole payments, combined with the decrease in our variable costs (such as production costs, royalty payments and transportation costs), can mitigate the adverse impact on our cash flow from such failures. In addition, we have the ability to sell these sand volumes to third parties.
In 2015, as a result of the market dynamics existing during the year and continuing in 2016, we began providing market-based pricing to our contract customers and/or waivers of minimum volume purchase requirements, in certain circumstances in exchange for, among other things, additional term and/or volume. We continue to engage in discussions and may continue to deliver sand at prices or at volumes below those provided for in our existing contracts. In addition, our customers may fail to comply with the terms of their existing contracts. Our enforcement of specific contract terms may be limited by market dynamics and other factors. In December 2015, we received a settlement payment of $22.5 million for past and future obligations under a customer contract; $10.2 million of this settlement was recognized as revenue related to make-whole payments.
Our long-term customer contracts also contain penalties for our non-performance. If we are unable to deliver contracted volumes within three months of contract year end, or otherwise arrange for delivery from a third party, we are required to pay make-whole payments. We believe our production facilities, substantial reserves and our on-site processing and logistics capabilities reduce our risk of non-performance. We also have the ability to supply our customers from facilities owned by our sponsor and third party facilities. We believe our levels of inventory combined with our cure period, generally three months after contract year end, are sufficient to prevent us from paying make-whole payments as a result of plant shutdowns due to repairs to our facilities necessitated by reasonably foreseeable mechanical interruptions.
In addition to sales under our long-term contracts, we have sold raw frac sand under short-term pricing and other agreements. The terms of our short-term pricing agreements, including sand quality requirements, quantity parameters, permitted sources of supply, effects of future regulatory changes, force majeure and termination and assignment provisions, vary by customer.
Suppliers
Although the majority of the frac sand that we sell is produced from our or our sponsor's production facilities, we can purchase, and have purchased in the past, a certain amount of frac sand from various third parties for sale to our customers. During the years ended December 31, 2016, 2015 and 2014, the Partnership purchased 413,781, 1,603,875 and 781,478 tons, respectively, from our sponsor's Whitehall facility and other third parties. 
Production Operations
Excavation Operations
The surface excavation operations at our production facilities are conducted by a third-party contractor. The mining technique at our production facilities is open-pit excavation of approximately 20-acre panels of unconsolidated silica deposits. The excavation process involves clearing vegetation and trees overlying the proposed mining area, with limited blasting processes conducted at our Augusta and Blair facilities and our sponsor's Whitehall facility. The initial two to five feet of overburden is removed and utilized to construct perimeter berms around the pit and property boundary. No underground mines are operated at our production facilities.
A track excavator and articulated trucks are utilized for excavating the sand at several different elevation levels of the active pit. The pit is dry mined, and the water elevation is maintained below working level through a dewatering and pumping process. The mined material is loaded and hauled from different areas of the pit and different elevations within the pit to the primary loading facility at our mines' on-site wet processing facilities. We pay a fixed fee per ton of sand excavated, subject to a diesel fuel surcharge.
At our Wyeville facility, in addition to surface excavation, sand is also mined through dredging operations.  Silica deposits are extracted from the ground with water.  The resulting slurry is transported via pipeline to the wet processing facility.  Similar to surface excavation operations, the dredging at our Wyeville facility is performed by a third party contractor. 
Processing Facilities
Our processing facilities are designed to wash, sort, dry and store our raw frac sand, with each plant employing modern and efficient wet and dry processing technology.

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Our mined raw frac sand is initially stockpiled before processing. The material is recovered by a mounted belt feeder, which extends beneath a surge pile and is fed onto a conveyor. The sand exits the tunnel on the conveyor belt and is fed into the wet plant where impurities and unusable fine grain sand are removed from the raw feed. The wet processed sand is then stockpiled in advance of being fed into the dry plant for further processing. The wet plants operate for seven to eight months per year due to the limitations arising from sustained freezing temperatures during winter months. However, when the wet plants are operating they process more sand per day than the dry plants can process to build up stockpiles of frac sand that will be processed by the dry plants during the winter months.
The wet processed sand stockpile is fed into the dry plant hopper using a front end loader. The material is processed in a natural gas fired vibratory fluid bed dryer contained in an enclosed building. After drying, the sand is screened through gyratory screens and separated into industry standard product sizes. The finished product is then conveyed to multiple on-site storage silos for each size specification and our railcar loads are tested to ensure that the delivery meets API specifications. Oil and gas producers increasingly require current testing and proof that frac sand used in their drilling and completion processes meet API specifications.
Logistics Capabilities
All of the product sold from our Wyeville and Augusta facilities is shipped by rail from approximately 32,000 feet and 28,800 feet, respectively, of track that connects our facilities to a Union Pacific Railroad mainline. All of the product sold from our Blair facility and our sponsor's Whitehall facility is shipped by rail from approximately 43,000 feet and 30,000 feet, respectively, of track that connects our facility to a Canadian National Railroad mainline. These rail spurs, size of the rail yards and the capacity of the associated product storage silos allow us to accommodate a large number of rail cars, including unit trains, which significantly increases our efficiency in meeting our customers’ frac sand transportation needs. We believe our production facilities are some of the first frac sand facilities in the industry initially designed to accommodate large scale rail and unit train logistics, which requires sufficient acreage, loading facilities and rail spurs.
Logistics capabilities of frac sand producers are important to our customers, who focus on both the reliability and flexibility of product delivery. Because our customers generally find it impractical to store frac sand in large quantities near their job sites, they seek to arrange for product to be delivered where and as needed, which requires predictable and efficient loading and shipping of product. The integrated nature of our logistics operations and our multiple rail spurs enable us to handle railcars for multiple customers simultaneously, minimizing the number of days required to successfully load shipments, even at times of peak activity, and avoid the use of trucks and minimize transloading within the facilities. At the same time, we believe our ability to ship from all of our facilities using unit trains differentiates us from most other frac sand producers that ship using manifest, or mixed freight, trains, which may make multiple stops to switch cars before delivering cargoes, or transport their products by truck or barge. In addition, unlike some competitors, our processing and rail loading facilities are located on-site, which eliminates the requirement for on-road transportation, lowers product movement costs and minimizes any reduction of sand quality due to increased handling. Together, these advantages provide our customers with a reliable and efficient delivery method from our facility to each of the major U.S. oil and natural gas producing basins, and allow us to take advantage of the increasing demand for such a delivery method.
Terminal Operations
We generally operate our terminal locations under long-term lease agreements with third party operators or short-line rail companies. Some of these lease agreements include performance requirements, which typically specify a minimum number of rail cars that must be processed by us each year through the terminal. Each owned or operated terminal location is strategically positioned in the shale plays so that our customers typically do not need to travel more than 75 miles from the well site to purchase their frac sand requirements. Our terminals include rail-to-truck and, at silo storage locations, rail-to-storage capabilities.
Once the frac sand is loaded into rail cars at the origin, we utilize an extensive network through a combination of Class I and short-line railroads to move the sand to our terminals. For our terminals with silo storage capabilities, frac sand is loaded into delivery trucks directly from our silos. Our silos deploy sand via gravity at 10 tons per minute to trucks stationed directly on scales under each silo with the loading, electronic recording of weight and dispatch of the truck capable of being completed in less than five minutes. Silos are considerably more efficient than conveyors, which require trucks to be loaded and then moved to separate scales to be weighed; however, frac sand can also be unloaded to delivery trucks directly via a conveyor.
PropStream Operations
Our PropStream integrated logistics solution involves loading proppant at in-basin terminals into PropX containers before being transported by truck. The 8-foot cubic containers can each transport up to 33,000 pounds of proppant and, depending on Department of Transportation regulations, allow for the transport of up to 55,000 pounds per truck.  The containers utilize intermodal container chassis or standard flatbeds for transportation, resulting in significant savings both in terms of up-front and ongoing operations costs versus widely-used pneumatic equipment.  PropStream allows for increased transportation efficiency and a reduction in supply chain related congestion at well sites, lowering the number of trucks required per job and meaningfully reducing or eliminating demurrage costs.

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At the well site, the PropBeast conveyor system significantly reduces noise and dust emissions due to its enclosed environment.  PropBeast conveyors are capable of transferring up to approximately 60,000 pounds of proppant per minute into blender hoppers while reducing particulate matter emissions from sand operations at the well site by more than 90% versus the widely-used pneumatic equipment alternative. Our PropStream integrated logistics solution is designed to provide a viable solution to meet the new OSHA respirable crystalline silica standards set to become effective in 2018 with respect to hydraulic fracturing, as well as the engineering control obligations set to become effective in 2021 for hydraulic fracturing.
Competition
There are numerous large and small producers in all sand producing regions of the United States with which we compete. Our main competitors include:
U.S. Silica Holdings, Inc. (NYSE: SLCA)
Unimin Corporation
Fairmount Santrol Holdings, Inc. (NASDAQ: FMSA)
Badger Mining Corporation
Emerge Energy Services LP (NYSE: EMES)
Smart Sand, Inc. (NASDAQ: SND)
The most important factors on which we compete are price, reliability of supply, transportation capabilities, product quality, performance and sand characteristics. Demand for frac sand and the prices that we will be able to obtain for our products are closely linked to proppant consumption patterns for the completion of oil and natural gas wells in North America. These consumption patterns are influenced by numerous factors, including the price for hydrocarbons, the drilling rig count and hydraulic fracturing activity, including the number of stages completed and the amount of proppant used per stage. Further, these consumption patterns are also influenced by the location, quality, price and availability of proppant.
Our History and Relationship with Our Sponsor
Overview and History
Hi-Crush Proppants LLC, our sponsor, was formed in 2010 in Houston, Texas by members of our management team and board of directors, whom currently have a 39% membership interest. Our sponsor’s lead investor is Avista Capital Partners ("Avista"), a leading private equity firm with significant investing and operating expertise in the energy industry. Founded in 2005 by senior investment professionals who worked together at DLJ Merchant Banking Partners (“DLJMB”), then one of the world’s largest and most successful private equity franchises, Avista makes controlling or influential minority investments in connection with various transaction structures. The energy team at Avista is comprised of experienced professionals and industry executives with relevant expertise in the energy sector. Avista principals have led over $3.5 billion in equity investments in energy companies while at Avista and DLJMB, including Basic Energy Services, Inc., Brigham Exploration Company, Copano Energy, L.L.C., Seabulk International, Inc., and joint-ventures with Carrizo Oil & Gas, Inc.
Our Sponsor’s Assets
Our sponsor initially developed and constructed the Wyeville, Augusta and Blair facilities prior to their contribution or sale to the Partnership. The sponsor currently owns the Whitehall facility, completed in September 2014 and the remaining 2% interest in Augusta. As a result of market conditions, the Whitehall facility was temporarily idled during the second quarter of 2016 and is expected to resume operations in late March or early April 2017.
Our sponsor continually evaluates acquisitions and may elect to acquire, construct or dispose of assets in the future, including through sales of assets to us. As the owner of our general partner, 20,693,643 common units, and incentive distribution rights, our sponsor is well aligned and highly motivated to promote and support the successful execution of our business strategies, including utilizing our partnership as a growth vehicle for its sand mining operations. Although we expect to have the opportunity to make additional acquisitions directly from our sponsor in the future, including the Whitehall facility described above, our sponsor is under no obligation to accept any offer we make, and may, following good faith negotiations with us, sell the assets to third parties that may compete with us. Our sponsor may also elect to develop, retain and operate properties in competition with us.
Although we believe our relationship with our sponsor is a significant positive attribute, it may also be a source of conflict. For example, our sponsor is not restricted in its ability to compete with us. Since the commencement of operations at its Whitehall facility in 2014, however, our sponsor has not been competing directly with us for new and existing customers; instead, our sponsor has sold sand at favorable pricing from its Whitehall facility to us for sale by us to our customers under our long-term contracts and in the spot market. Our sponsor may develop additional frac sand excavation and processing facilities in the future, which may compete with us. While we expect that our management team, which also manages our sponsor’s retained assets, and our sponsor will allocate new and existing customer contract volumes between us and our sponsor in a manner that balances the interests of both parties, they are under no obligation to do so.

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Our Management and Employees
We are managed and operated by the board of directors and executive officers of our general partner, Hi-Crush GP LLC, a wholly owned subsidiary of our sponsor. As a result of owning our general partner, our sponsor has the right to appoint all members of the board of directors of our general partner, including at least three independent directors meeting the independence standards established by the New York Stock Exchange (“NYSE”). Our unitholders are not entitled to elect our general partner or its directors or otherwise directly participate in our management or operations. Even if our unitholders are dissatisfied with the performance of our general partner, they have limited ability to remove the general partner without its consent, because our general partner and its affiliates own a sufficient number of units. Our unitholders are able to indirectly participate in our management and operations only to the limited extent actions taken by our general partner require the approval of a percentage of our unitholders and our general partner and its affiliates do not own sufficient units to guarantee such approval.
We have entered into a services agreement with a wholly owned subsidiary of our sponsor which governs our relationship with our sponsor and its subsidiaries regarding the provisions of certain administrative services to us. In addition, under our partnership agreement, we reimburse our general partner and its affiliates, including our sponsor, for all expenses they incur and payments they make on our behalf, to the extent such expenses are not contemplated by the services agreement. Our partnership agreement does not set a limit on the amount of expenses for which our general partner and its affiliates may be reimbursed. Our partnership agreement provides that our general partner will determine in good faith the expenses that are allocable to us.
Hi-Crush Partners LP does not have any employees. All of the employees who conduct our business pursuant to the services agreement are employed by Hi-Crush Proppants LLC or its wholly owned subsidiaries. As of December 31, 2016, Hi-Crush Proppants LLC and its wholly owned subsidiaries had 288 employees. In addition, we contract our excavation operations to a third party and accordingly have no employees involved in those operations.
Environmental and Occupational Safety and Health Regulation
Mining and Workplace Safety
Federal Regulation
The U.S. Mine Safety and Health Administration (“MSHA”) is the primary regulatory agency with jurisdiction over the commercial silica industry. Accordingly, MSHA regulates quarries, surface mines, underground mines, and the industrial mineral processing facilities associated with quarries and mines. As part of MSHA’s oversight, its representatives must perform at least two unannounced inspections annually for each surface mining facility in its jurisdiction. To date, these inspections have not resulted in any citations for material violations of MSHA standards.
We also are subject to the requirements of the OSHA and comparable state statutes that regulate the protection of the health and safety of workers. In addition, the OSHA Hazard Communication Standard requires that information be maintained about hazardous materials used or produced in operations and that this information be provided to employees, state and local government authorities, and the public. OSHA regulates the users of commercial silica and provides detailed regulations requiring employers to protect employees from overexposure to silica through the enforcement of permissible exposure limits and the OSHA Hazard Communication Standard.
Health and Safety Programs
We adhere to a strict occupational health program aimed at controlling employee exposure to silica dust, which includes a silicosis prevention program comprised of routine dust sampling, medical surveillance, training, and other components. Our safety program is designed to ensure compliance with MSHA and OSHA regulations. For both health and safety issues, extensive training is provided to employees. We have safety meetings at our plants with salaried and hourly employees that are involved in establishing, implementing and improving safety standards. We perform annual internal health and safety audits and conduct annual crisis management drills to test our abilities to respond to various situations. Health and safety programs are administered by our corporate health and safety department with the assistance of plant Environmental, Health and Safety Coordinators.
Environmental Matters
We and the commercial silica industry are subject to extensive governmental regulation pertaining to matters such as permitting and licensing requirements, plant and wildlife protection, hazardous materials, air and water emissions, and environmental contamination and reclamation. A variety of federal, state and local agencies have established, implement and enforce these regulations.

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Federal Regulation
At the federal level, we may be required to obtain permits under Section 404 of the Clean Water Act from the U.S. Army Corps of Engineers for the discharge of dredged or fill material into waters of the United States, including wetlands and streams, in connection with our operations. We also may be required to obtain permits under Section 402 of the Clean Water Act from the EPA or the Wisconsin Department of Natural Resources ("Wisconsin DNR"), to whom the EPA has delegated local implementation of the permit program, for discharges of pollutants into waters of the United States, including discharges of wastewater or stormwater runoff associated with construction activities. Failure to obtain these required permits or to comply with their terms could subject us to administrative, civil and criminal penalties as well as injunctive relief.
The U.S. Clean Air Act and comparable state laws regulate emissions of various air pollutants through air emissions permitting programs and the imposition of other requirements. These regulatory programs may require us to install expensive emissions abatement equipment, modify operational practices, and obtain permits for existing or new operations. Before commencing construction on a new or modified source of air emissions, such laws may require us to reduce emissions at existing facilities. As a result, we may be required to incur increased capital and operating costs to comply with these regulations. We could be subject to administrative, civil and criminal penalties as well as injunctive relief for noncompliance with air permits or other requirements of the U.S. Clean Air Act and comparable state laws and regulations.
As part of our operations, we utilize or store petroleum products and other substances such as diesel fuel, lubricating oils and hydraulic fluid. We are subject to regulatory programs pertaining to the storage, use, transportation and disposal of these substances. Spills or releases may occur in the course of our operations, and we could incur substantial costs and liabilities as a result of such spills or releases, including claims for damage or injury to property and persons. The Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA,” also known as the Superfund law) and comparable state laws may impose joint and several liability, without regard to fault or legality of conduct, on classes of persons who are considered to be responsible for the release of hazardous substances into the environment. These persons include the owner or operator of the site where the release occurred and anyone who disposed of or arranged for disposal, including offsite disposal, of a hazardous substance generated or released at the site. Under CERCLA, such persons may be subject to liability for the costs of cleaning up the hazardous substances, for damages to natural resources, and for the costs of certain health studies. In addition, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the hazardous substances released into the environment.
In addition, the Resource Conservation and Recovery Act (“RCRA”) and comparable state statutes regulate the generation, transportation, treatment, storage, disposal and cleanup of hazardous and non-hazardous wastes. The EPA and Wisconsin DNR, to which the EPA has delegated portions of the RCRA program for local implementation, administer the RCRA program.
Our operations may also be subject to broad environmental review under the National Environmental Policy Act (“NEPA”). NEPA requires federal agencies to evaluate the environmental impact of all “major federal actions”, which could include a major development project, such as a mining operation, significantly affecting the quality of the human environment. Therefore, our projects may require review and evaluation under NEPA. As part of this evaluation, the federal agency considers a broad array of environmental impacts, including, among other things, impacts on air quality, water quality, wildlife (including threatened and endangered species), historic and archaeological resources, geology, socioeconomics and aesthetics. NEPA also requires the consideration of alternatives to the project. The NEPA review process, especially the preparation of a full environmental impact statement, can be time consuming and expensive. Though NEPA requires only that an environmental evaluation be conducted and does not mandate a particular result, a federal agency could decide to deny a permit or impose certain conditions on its approval, based on its environmental review under NEPA, or a third party could challenge the adequacy of a NEPA review and thereby delay the issuance of a federal permit or approval.
Federal agencies granting permits for our operations also must consider impacts to endangered and threatened species and their habitat under the Endangered Species Act. We also must comply with and are subject to liability under the Endangered Species Act, which prohibits and imposes stringent penalties for the harming of endangered or threatened species and their habitat. Federal agencies also must consider a project’s impacts on historic or archaeological resources under the National Historic Preservation Act, and we may be required to conduct archaeological surveys of project sites and to avoid or preserve historical areas or artifacts.

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State and Local Regulation
We are also subject to a variety of state and local environmental review and permitting requirements. Some states, including Wisconsin where our production facilities are located, have state laws similar to NEPA; thus our development of a new site or the expansion of an existing site may be subject to comprehensive state environmental reviews even if it is not subject to NEPA. In some cases, the state environmental review may be more stringent than the federal review. Our operations may require state-law based permits in addition to federal permits, requiring state agencies to consider a range of issues, many the same as federal agencies, including, among other things, a project’s impact on wildlife and their habitats, historic and archaeological sites, aesthetics, agricultural operations, and scenic areas. Wisconsin and some other states also have specific permitting and review processes for commercial silica mining operations, and state agencies may impose different or additional monitoring or mitigation requirements than federal agencies. The development of new sites and our existing operations also are subject to a variety of local environmental and regulatory requirements, including land use, zoning, building, and transportation requirements.
Certain local communities in which we operate have developed or are in the process of developing regulations or zoning restrictions intended to minimize the potential for dust to become airborne, control the flow of truck traffic, significantly restrict the area available for mining activities and require compensation to local residents for potential impacts of mining, among other regulatory initiatives. In addition, our existing permits granted by local regulatory authorities contain certain restrictions on such matters as hours of operation, permitted decibel levels and lighting, among other matters.
The regulatory framework in the jurisdictions in which we do business is potentially subject to amendments or modifications. Planned expansion of our existing facilities as well as the development of new facilities could be significantly impacted by increased regulatory activity. Delays or inability to obtain required permits for expansion of existing facilities, or the development of new facilities, as well as the increased costs of compliance with future state and local regulatory requirements could have a material negative impact on our ability to grow our business. In an effort to minimize these risks, we continue to be engaged with local communities in order to grow and maintain strong relationships with residents and regulators.
Costs of Compliance
We may incur significant costs and liabilities as a result of environmental, health, and safety requirements applicable to our activities. Failure to comply with environmental laws and regulations may result in the assessment of administrative, civil, and criminal penalties; imposition of investigatory, cleanup, and site restoration costs and liens; the denial or revocation of permits or other authorizations; and the issuance of injunctions to limit or cease operations. Compliance with these laws and regulations may also increase the cost of the development, construction, and operation of our projects and may prevent or delay the commencement or continuance of a given project. In addition, claims for damages to persons or property may result from environmental and other impacts of our activities.
The process for performing environmental impact studies and reviews for federal, state, and local permits required for our operations involves a significant investment of time and monetary resources. We cannot control the permit approval process. We cannot predict whether all permits required for a given project will be granted or whether such permits will be the subject of significant opposition. The denial of a permit essential to a project or the imposition of conditions with which it is not practicable or feasible to comply could impair or prevent our ability to develop a project. Significant opposition and delay in the environmental review and permitting process also could impair or delay our ability to develop a project. Additionally, the passage of more stringent environmental laws could impair our ability to develop new operations and have an adverse effect on our financial condition and results of operations.
Permits
Production Facilities
We operate our and our sponsor's facilities under a number of federal, state and local authorizations.
Our production facilities currently operate under construction and operation air permits from the Wisconsin DNR. Each production facility operates under an operation air permit, with the exception of Wyeville; at our Wyeville facility, we have complied with the construction air permit and have requested an operational air permit from the Wisconsin DNR. All production facilities, have developed and are in compliance with a Fugitive Dust Control Plan and a Malfunction Prevention and Abatement Plan.
Stormwater discharges from our production facilities are permitted under the Wisconsin Pollutant Discharge Elimination System (“WPDES”) administered by Wisconsin DNR; and, at our Augusta facility, also under the Eau Claire County Storm Water Management and Erosion Control ordinance. An updated Notice of Intent for the WPDES general construction permit, which would include modifications to the existing storm water management and erosion control structures for an expansion at any production facility is submitted to and approved by the Wisconsin DNR. All production facilities are currently covered by WPDES general construction permits for various projects.
Our production facilities have federal and state certifications and/or permits for the filling and/or taking of wetlands associated with our construction and/or operational activities.

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Our mining operations are subject to the conditions of nonmetallic mining permits granted and administered by either the County or City in which we operate. We submit updated nonmetallic mining plans to the relevant regulatory authority as may be required in the event of a proposed expansion of any mining operation.
We utilize groundwater through the installation and operation of high capacity wells, located at our Augusta and Blair facilities. High capacity well permits are issued and administered by the WDNR and are subject to annual (or monthly) withdraw limitations. We routinely monitor our water withdrawals, and also utilize a water recycling system to return production water and/or stormwater to minimize the water we need from those high capacity groundwater wells.
Terminal Facilities
We operate our terminal facilities under various federal, state and local authorizations.  Although the list of permits we obtain in order to commence and maintain our operations at each facility vary by location, we are typically required to obtain, among other permits and authorizations, air, land development, local building and highway occupancy permits.  We are also occasionally required to obtain a wetlands permit.
Availability of Reports; Website Access; Other Information
Our internet address is http://www.hicrush.com. Through “Investors” — “SEC Filings” on our home page, we make available free of charge our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K, SEC Forms 3, 4 and 5 and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the U.S. Securities and Exchange Commission ("SEC"). Our reports filed with the SEC are also made available to read and copy at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information about the Public Reference Room by contacting the SEC at 1-800-SEC-0330. Reports filed with the SEC are also made available on its website at www.sec.gov.

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ITEM 1A. RISK FACTORS
There are many factors that may affect our business, financial condition and results of operations and investments in us. Security holders and potential investors in our securities should carefully consider the risk factors set forth below, as well as the discussion of other factors that could affect us or investments in us included elsewhere in this Annual Report on Form 10-K. If one or more of these risks were to materialize, our business, financial condition or results of operations could be materially and adversely affected. These known material risks could cause our actual results to differ materially from those contained in any written or oral forward-looking statements made by us or on our behalf.
Risks Inherent in Our Business
We may not have sufficient cash from operations following the establishment of cash reserves and payment of costs and expenses, including cost reimbursements to our general partner and its affiliates, to enable us to pay a distribution to our unitholders.
In October 2015, we announced the suspension of our distribution. We may not have sufficient cash each quarter to pay a distribution. The amount of cash we can distribute on our common units principally depends upon the amount of cash we generate from our operations, which will fluctuate from quarter to quarter based on the following factors, some of which are beyond our control:
the volume of frac sand we are able to buy and sell;
the price at which we are able to buy and sell frac sand;
demand and pricing for our integrated logistics solutions;
the pace of adoption of our integrated logistics solutions;
the amount of frac sand we are able to timely deliver at the well site, which could be adversely affected by, among other things, logistics constraints, weather, or other delays at the transloading facility;
changes in prevailing economic conditions, including the extent of changes in natural gas, crude oil and other commodity prices;
the amount of frac sand we are able to excavate and process, which could be adversely affected by, among other things, operating difficulties and unusual or unfavorable geologic conditions;
changes in the price and availability of natural gas or electricity;
unanticipated ground, grade or water conditions;
reduction in the amount of water available for processing;
cave-ins, pit wall failures or rock falls;
inability to obtain necessary production equipment or replacement parts;
changes in the railroad infrastructure, price, capacity and availability, including the potential for rail line washouts;
changes in the price and availability of transportation;
availability of or failure of our contractors to provide services at the agreed-upon levels or times;
failure to maintain safe work sites at our facilities or by third parties at their work sites;
inclement or hazardous weather conditions, including flooding, and the physical impacts of climate change;
environmental hazards;
industrial and transportation related accidents;
technical difficulties or failures;
fires, explosions or other accidents;
late delivery of supplies;
difficulty collecting receivables;
inability of our customers to take delivery;
difficulties in obtaining and renewing environmental permits;
facility shutdowns in response to environmental regulatory actions;
changes in laws and regulations (or the interpretation thereof) related to the mining and hydraulic fracturing industries, silica dust exposure or the environment;

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the outcome of litigation, claims or assessments, including unasserted claims;
inability to acquire or maintain necessary permits, licenses or other approvals, including mining or water rights;
labor disputes and disputes with our third-party contractors;
inability to attract and retain key personnel;
cyber security breaches of our systems and information technology;
our ability to borrow funds and access capital markets; and
changes in the political environment of the drilling basins in which we and our customers operate.
In addition, the actual amount of cash we will have available for distribution will depend on other factors, some of which are beyond our control, including:
the level of capital expenditures we make;
the cost of acquisitions, including any drop-down acquisitions from our sponsor;
our debt service requirements and other liabilities;
fluctuations in our working capital needs;
our ability to borrow funds and access capital markets;
restrictions contained in debt agreements to which we are a party; and
the amount of cash reserves established by our general partner.
Our long-term business and financial performance depends on the level of drilling and completion activity in the oil and natural gas industry.
Demand for frac sand is materially dependent on the levels of activity in natural gas and oil exploration, development and production, and more specifically, the number of natural gas and oil wells completed in geological formations where sand-based proppants are used in hydraulic fracturing treatments and the amount of frac sand customarily used in the completion of such wells.
Beginning in August 2014 and continuing through the second quarter of 2016, oil and natural gas producers’ expectations for lower market prices for oil and natural gas, as well as the limited availability of capital for operating and capital expenditures, has caused them to curtail spending and future changes in oil and natural gas prices may cause them to further curtail spending, thereby reducing hydraulic fracturing activity and the demand for frac sand. Industry conditions that impact the activity levels of oil and natural gas producers are influenced by numerous factors over which we have no control, including:
governmental regulations, including the policies of governments regarding the exploration for and production and development of their oil and natural gas reserves;
global weather conditions and natural disasters;
worldwide political, military, and economic conditions;
the cost of producing and delivering oil and natural gas;
commodity prices; and
development of alternative energy sources.
A prolonged reduction in natural gas and oil prices would generally depress the level of natural gas and oil exploration, development, production and well completion activity, which could result in a corresponding decline in the demand for the frac sand we produce. In addition, any future decreases in the rate at which oil and natural gas reserves are developed, whether due to increased governmental regulation, limitations on exploration and drilling activity or other factors, could have a material adverse effect on our business, even in a stronger oil and natural gas price environment. If there is a decrease in the demand for frac sand, we may be unable to sell volumes, or be forced to reduce our sales prices, any of which would reduce the amount of cash we generate.
In addition, the price we receive for sales of our frac sand may be impacted by short term fluctuations in the market for frac sand, and any negative fluctuations in this market could have an adverse effect on our results of operations and cash flows.

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We may be adversely affected by decreased demand for raw frac sand due to the development of either effective alternative proppants or new processes to replace hydraulic fracturing.
Raw frac sand is a proppant used in the completion and re-completion of oil and natural gas wells to stimulate and maintain oil and natural gas production through the process of hydraulic fracturing. Raw frac sand is the most commonly used proppant and is less expensive than other proppants, such as resin-coated sand and manufactured ceramics. A significant shift in demand from frac sand to other proppants, or the development of new processes to replace hydraulic fracturing altogether, could cause a decline in the demand for the frac sand we produce and result in a material adverse effect on our financial condition and results of operations. In addition, a significant shift in demand from Northern White frac sand, the sole product we produce and sell, to other raw frac sand, such as brown sand, could cause a decline in the demand for the frac sand we produce and result in a material adverse effect on our financial condition and results of operations.
Our future performance will depend on our ability to succeed in competitive markets, and on our ability to appropriately react to potential fluctuations in the demand for and supply of frac sand.
We operate in a highly competitive market that is characterized by a small number of large, national producers and a larger number of small, regional or local producers. Competition in the industry is based on price, consistency and quality of product, site location, distribution and logistics capabilities, customer service, and reliability of supply and breadth of product offering.
We compete with large, national producers such as U.S. Silica Holdings, Inc., Unimin Corporation and Fairmount Santrol Holdings, Inc., and others. Our larger competitors may have greater financial and other resources than we do, may develop technology superior to ours or may have production facilities that are located closer to key customers than ours. Should the demand for hydraulic fracturing services decrease, prices in the frac sand market could materially decrease as smaller, regional producers may sell frac sand at below market prices. In addition, oil and natural gas exploration and production companies and other providers of hydraulic fracturing services could acquire their own frac sand reserves, expand their existing frac sand production capacity or otherwise fulfill their own proppant requirements and existing or new frac sand producers could add to or expand their frac sand production capacity, which may negatively impact pricing and demand for our frac sand. We may not be able to compete successfully against either our larger or smaller competitors in the future, and competition could have a material adverse effect on our business, financial condition, results of operations and cash flows.
If we are unable to make acquisitions on economically acceptable terms, our future growth would be limited, and any acquisitions we make may reduce, rather than increase, our cash generated from operations on a per unit basis.
A portion of our strategy to grow our business and increase distributions to unitholders is dependent on our ability to make acquisitions that result in an increase in our cash available for distribution per unit. If we are unable to make acquisitions from third parties, including from our sponsor and its affiliates, because we are unable to identify attractive acquisition candidates or negotiate acceptable purchase contracts, we are unable to obtain financing for these acquisitions on economically acceptable terms or we are outbid by competitors, our future growth and ability to increase distributions will be limited. Furthermore, even if we do consummate acquisitions that we believe will be accretive, they may in fact result in a decrease in our cash available for distribution per unit. Any acquisition involves potential risks, some of which are beyond our control, including, among other things:
inaccurate assumptions about revenues and costs, including synergies;
inability to successfully integrate the businesses we acquire;
inability to hire, train or retain qualified personnel to manage and operate our business and newly acquired assets;
the assumption of unknown liabilities;
limitations on rights to indemnity from the seller;
mistaken assumptions about the overall costs of equity or debt;
the diversion of management’s attention from other business concerns;
unforeseen difficulties operating in new product areas or new geographic areas; and
customer or key employee losses at the acquired businesses.
If we consummate any future acquisitions, our capitalization and results of operations may change significantly, and unitholders will not have the opportunity to evaluate the economic, financial and other relevant information that we will consider in determining the application of these funds and other resources.

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We have entered into a Revolving Credit Agreement and senior secured term loan facility which contain restrictions and financial covenants that may restrict our business and financing activities.
Our Revolving Credit Agreement and senior secured term loan facility place financial restrictions and operating restrictions on our business, which may limit our flexibility to respond to opportunities and may harm our business, financial condition and results of operations.
The operating and financial restrictions and covenants in our Revolving Credit Agreement and senior secured term loan facility restrict, and potentially any other future financing agreements that we may enter into could restrict, our ability to finance future operations or capital needs, to engage in, expand or pursue our business activities or to make distributions to our unitholders. For example, our Revolving Credit Agreement contains covenants that allows distributions to unitholders up to 50% of quarterly distributable cash flow after quarterly debt payments on the term loan, 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. Additionally, our Revolving Credit Agreement and senior secured term loan facility restrict our ability to, among other things:
enter into a merger, consolidate or acquire capital in or assets of other entities;
incur additional indebtedness;
incur liens on property;
make certain investments;
enter into transactions with affiliates;
enter into sale lease back transactions.
Our compliance with these provisions may materially adversely affect our ability to react to changes in market conditions, take advantage of business opportunities we believe to be desirable, obtain future financing, fund needed capital expenditures, finance acquisitions, equipment purchases and development expenditures, or withstand a future downturn in our business.
Our ability to comply with any such restrictions and covenants is uncertain and will be affected by the levels of cash flow from our operations and events or circumstances beyond our control. If market or other economic conditions deteriorate, our ability to comply with these covenants may be impaired. If we violate any of the restrictions, covenants, ratios or tests in the Revolving Credit Agreement or senior secured term loan facility, a significant portion of our indebtedness may become immediately due and payable and our lenders’ commitment to make further loans to us may terminate. We may not have, or be able to obtain, sufficient funds to make these accelerated payments. Even if we could obtain alternative financing, that financing may not be on terms that are favorable or acceptable to us. If we are unable to repay amounts borrowed, the holders of the debt could initiate a bankruptcy proceeding or liquidation proceeding against the collateral. In addition, our obligations under our Revolving Credit Agreement and senior secured term loan facility are secured by substantially all of our assets and if we are unable to repay our indebtedness as required under these facilities, the lenders could seek to foreclose on our assets.
Our long-term unsecured debt is currently rated by Standard and Poor’s ("S&P") and Moody's Investors Service Inc. ("Moody's"). As of February 10, 2017, the credit rating of the Partnership’s senior secured term loan credit facility was B from Standard and Poor’s and Caa1 from Moody’s. Any future downgrades in our credit ratings could negatively impact the cost of raising capital, and a downgrade could also adversely affect our ability to effectively execute aspects of our strategy and to access capital in the public markets.
Increases in interest rates could adversely affect our business and results of operations.
We have exposure to increases in interest rates under our Revolving Credit Agreement, senior secured term loan facility and other notes payable. As of December 31, 2016, we had $201.2 million of debt outstanding, with an effective interest rate of 4.62%. Assuming no change in the amount outstanding, the impact on interest expense of a 10% increase or decrease in the average interest rate would be approximately $0.9 million per year. As a result of this variable interest rate debt, our financial condition could be adversely affected by increases in interest rates.
The majority of our sales are generated under contracts with oil field service company customers. The loss of a contract or customer, a significant reduction in purchases by any customer, our customers' failure to comply with contract terms, or our inability to renegotiate, renew or replace our existing contracts on favorable terms could, individually or in the aggregate, adversely affect our business, financial condition and results of operations.
As of January 1, 2017, we were contracted to sell raw frac sand under long-term supply agreements to customers with remaining terms ranging from 8 to 55 months. During 2016, more than 78% of our volumes were earned from four of our customers.

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Some of our customers have exited or could exit the pressure pumping business or be acquired by other companies that purchase the same products and services we provide from other third-party providers. Our current customers also may seek to acquire frac sand from other providers that offer more competitive pricing or capture and develop their own sources of frac sand. The loss of a customer or contract, or a reduction in the amount of frac sand purchased by any customer, could have a material adverse effect on our business, financial condition and results of operations.
In 2015, as a result of the market dynamics existing during the year and continuing in 2016, we began providing market-based pricing to our contract customers and/or make-whole waivers, in certain circumstances in exchange for, among other things, additional term and/or volume. Because we continue to engage in discussions with our customers, the nature, extent and duration of these pricing discounts and make-whole waivers are not certain and we may deliver sand at prices or at volumes below those provided for in our existing contracts. In addition, our customers may fail to comply with the terms of their existing contracts. Our enforcement of specific contract terms may be limited by market dynamics and other factors. Our customers’ failure to comply with contract terms and our limited enforcement thereof could have a material adverse effect on our business, financial condition and results of operations.
Upon the expiration of our current supply agreements, our customers may not continue to purchase the same levels of our frac sand due to a variety of reasons. In addition, we may choose to renegotiate our existing contracts on less favorable terms or at reduced volumes in order to preserve relationships with our customers. Upon the expiration of our current contract terms, we may be unable to renew our existing contracts or enter into new contracts on terms favorable to us, or at all. The demand for frac sand or prevailing prices at the time our current supply agreements expire may render entry into new long-term supply agreements difficult or impossible. Any renegotiation of our contracts on less favorable terms, or inability to enter into new contracts on economically acceptable terms upon the expiration of our current contracts, could have a material adverse effect on our business, financial condition and results of operations.
Our long-term contracts may preclude us from taking advantage of increasing prices for frac sand or mitigating the effect of increased operational costs during the term of our long-term contracts, even though certain volumes under our long-term contracts are subject to annual fixed price escalators.
The long-term supply contracts we have may negatively impact our results of operations. If our operational costs increase during the terms of our long-term supply contracts, we may not be able to pass any of those increased costs to our customers. If we are unable to otherwise mitigate these increased operational costs, our net income and available cash for distributions could decline. Additionally, in periods with increasing prices, our sales may not keep pace with market prices.
An increase in the supply of raw frac sand having similar characteristics as the raw frac sand we produce could make it more difficult for us to renew or replace our existing contracts on favorable terms, or at all.
We believe that the supply of raw frac sand had not kept pace with the increasing demand for raw frac sand until recently. If significant new reserves of raw frac sand are discovered and developed, and those frac sands have similar characteristics to the raw frac sand we produce, we may be unable to renew or replace our existing contracts at favorable pricing, or at all. Specifically, if high quality frac sand becomes more readily available, our customers may not be willing to enter into long-term contracts, or may demand lower prices, or both, which could have a material adverse effect on our results of operations and cash flows over the long-term.
We are subject to the credit risk of our customers, and any material nonpayment or nonperformance by our customers could adversely affect our financial results and cash available for distribution.
We are subject to the risk of loss resulting from nonpayment or nonperformance by our customers, whose operations are concentrated in a single industry, the global oilfield services industry. In particular, as a result of volatility in oil and natural gas prices and ongoing uncertainty of the global economic environment our customers may not be able to fulfill their existing commitments or access financing necessary to fund their current or future obligations. Our credit procedures and policies may not be adequate to fully eliminate customer credit risk. If we fail to adequately assess the creditworthiness of existing or future customers or unanticipated deterioration in their creditworthiness, any resulting increase in nonpayment or nonperformance by them and our inability to re-market or otherwise sell the volumes could have a material adverse effect on our business, financial condition, results of operations and ability to pay distributions to our unitholders.

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Our expansion or modification of existing assets, or the construction of new assets, may not result in revenue increases and may be subject to regulatory, environmental, political, legal and economic risks, which could adversely affect our results of operations and financial condition.
The construction of additions or modifications to our existing facilities and the construction of new facilities generally involve numerous regulatory, environmental, political and legal uncertainties beyond our control and may require the expenditure of significant amounts of capital. If we undertake these projects, they may not be completed on schedule or at the budgeted cost or at all. Moreover, upon the expenditure of future funds on a particular project, our revenues may not increase immediately, or as anticipated, or at all. For instance, we may construct new facilities over an extended period of time and will not receive any material increases in revenues until the projects are completed. Moreover, we may construct facilities to capture anticipated future growth in a location in which such growth does not materialize. Since we are not engaged in the hydraulic fracturing process, we may be able unable to accurately predict the extent of drilling and completion activities to take place in future periods. To the extent we rely on estimates of future levels of drilling and completion activity in any decision to construct facilities, such estimates may prove to be inaccurate because there are numerous uncertainties inherent in forecasting the levels of drilling and completion activity. As a result, new facilities may not be able to attract enough throughput to achieve our expected investment return, which could adversely affect our results of operations and financial condition. In addition, the construction of additions to our existing assets may require us to increase the size of our railcar fleet to support transportation of additional volumes. We may be unable to increase the size of our fleet to capitalize on other expansion or modification opportunities. Additionally, it may become more expensive for us to increase the size of our railcar fleet in-line with additional capacity, which may adversely impact our cash flows.
We may be required to make substantial capital expenditures to maintain, develop and increase our asset base. The inability to obtain needed capital or financing on satisfactory terms, or at all, could have an adverse effect on our growth and profitability.
Although we have used a significant amount of our cash reserves and cash generated from our operations to fund the development and expansion of our asset base, we may depend on the availability of credit to fund future capital expenditures. Our ability to obtain bank financing or to access the capital markets for future equity or debt offerings may be limited by our financial condition at the time of any such financing or offering, the covenants contained in our Revolving Credit Agreement, senior secured term loan facility or other future debt agreements, adverse market conditions or other contingencies and uncertainties that are beyond our control. Our failure to obtain the funds necessary to maintain, develop and increase our asset base could adversely impact our growth and profitability.
Even if we are able to obtain financing or access the capital markets, incurring additional debt may significantly increase our interest expense and financial leverage, and our level of indebtedness could restrict our ability to fund future development and acquisition activities. In addition, the issuance of additional equity interests may result in dilution to our existing unitholders.
The majority of our sales are sourced at our Wisconsin production facilities located in Wyeville, Augusta and Blair and our sponsor's Wisconsin production facility located near Whitehall. Any adverse developments at the facilities could have a material adverse effect on our financial condition and results of operations.
Any adverse development at our production facilities due to catastrophic events or weather, or any other event that would cause us to curtail, suspend or terminate operations at the production facilities, could result in us being unable to meet our contracted sand deliveries. If we are unable to deliver contracted volumes within the required time frame, or otherwise arrange for delivery from a third party, we could be required to pay make-whole payments to our customers that could have a material adverse effect on our financial condition and results of operations. If we are unable to provide supply from our production facilities, any reduction in the amount of frac sand available for our purchase from third parties, could have a material adverse effect on our business, financial condition and results of operations.
Inaccuracies in estimates of volumes and qualities of our sand reserves could result in lower than expected sales and higher than expected production costs.
John T. Boyd, our independent reserve engineers, prepared estimates of our reserves based on engineering, economic and geological data assembled and analyzed by our engineers and geologists. However, frac sand reserve estimates are by nature imprecise and depend to some extent on statistical inferences drawn from available data, which may prove unreliable. There are numerous uncertainties inherent in estimating quantities and qualities of reserves and non-reserve frac sand deposits and costs to mine recoverable reserves, including many factors beyond our control. Estimates of economically recoverable frac sand reserves necessarily depend on a number of factors and assumptions, all of which may vary considerably from actual results, such as:
geological and mining conditions and/or effects from prior mining that may not be fully identified by available data or that may differ from experience;
assumptions concerning future prices of frac sand, operating costs, mining technology improvements, development costs and reclamation costs; and

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assumptions concerning future effects of regulation, including the issuance of required permits and taxes by governmental agencies.
Any inaccuracy in John T. Boyd’s estimates related to our frac sand reserves and non-reserve frac sand deposits could result in lower than expected sales and higher than expected costs. For example, John T. Boyd’s estimates of our proven reserves assume that our revenue and cost structure will remain relatively constant over the life of our reserves. If these assumptions prove to be inaccurate, some or all of our reserves may not be economically mineable, which could have a material adverse effect on our results of operations and cash flows. In addition, we pay a fixed price per ton of sand excavated regardless of the quality of the frac sand, and our current customer contracts require us to deliver frac sand that meets certain specifications. If John T. Boyd’s estimates of the quality of our reserves, including the volumes of the various specifications of those reserves, prove to be inaccurate, we may incur significantly higher excavation costs without corresponding increases in revenues, we may not be able to meet our contractual obligations, or our facilities may have a shorter than expected reserve life, which could have a material adverse effect on our results of operations and cash flows.
Our operations are dependent on our rights and ability to mine our properties and on our having renewed or received the required permits and approvals from governmental authorities and other third parties.
We hold numerous governmental, environmental, mining, and other permits, water rights, and approvals authorizing operations at our production facilities. For our extraction and processing in Wisconsin, the permitting process is subject to federal, state and local authority. For example, on the federal level, a Mine Identification Request (MSHA Form 7000-51) must be filed and obtained before mining commences. If wetlands are implicated, a U.S. Army Corps of Engineers Wetland Permit is required. At the state level, a series of permits are required related to air quality, wetlands, water quality (waste water, storm water), grading permits, endangered species, archaeological assessments, and high capacity wells in addition to others depending upon site specific factors and operational detail. At the local level, zoning, building, storm water, erosion control, wellhead protection, road usage and access are all regulated and require permitting to some degree. A non-metallic mining reclamation permit is required. A decision by a governmental agency or other third party to deny or delay issuing a new or renewed permit or approval, or to revoke or substantially modify an existing permit or approval, could have a material adverse effect on our ability to continue operations.
Title to, and the area of, mineral properties and water rights may also be disputed. Mineral properties sometimes contain claims or transfer histories that examiners cannot verify. A successful claim that we do not have title to our property or lack appropriate water rights could cause us to lose any rights to explore, develop, and extract minerals, without compensation for our prior expenditures relating to such property. Our business may suffer a material adverse effect in the event we have title deficiencies.
In some instances, we have received access rights or easements from third parties, which allow for a more efficient operation than would exist without the access or easement. A third party could take action to suspend the access or easement, and any such action could be materially adverse to our business, results of operations or financial condition.
Federal, state, and local legislative and regulatory initiatives relating to hydraulic fracturing and the potential for related litigation could result in increased costs, additional operating restrictions or delays for our customers, which could cause a decline in the demand for our frac sand and negatively impact our business, financial condition and results of operations.
Although we do not directly engage in hydraulic fracturing activities, our customers purchase our frac sand for use in their hydraulic fracturing activities. Increased regulation of hydraulic fracturing may adversely impact our business, financial condition and results of operations. The federal Safe Drinking Water Act (“SDWA”) regulates the underground injection of substances through the Underground Injection Control Program (“UIC Program”). Currently, with the exception of certain hydraulic fracturing activities involving the use of diesel, hydraulic fracturing is exempt from federal regulation under the UIC Program, and the hydraulic fracturing process is typically regulated by state or local governmental authorities. However, the practice of hydraulic fracturing has become controversial and is undergoing increased political and regulatory scrutiny. From time to time, Congress has considered various other legislation to provide for federal regulation of hydraulic fracturing under the SDWA and to require disclosure of the chemicals used in the hydraulic fracturing process.
As noted previously under Item 1, "Business: Environmental Matters", the RCRA and comparable state statutes regulate the generation, transportation, treatment, storage, disposal and cleanup of hazardous and, in some circumstances, non-hazardous wastes. From time to time various environmental groups have challenged the EPA’s exclusion of certain oil and gas wastes from regulation as hazardous wastes under RCRA. A loss of the RCRA exclusion for drilling fluids, produced waters and related wastes, if EPA were to eliminate the exclusion, would increase our costs to manage and dispose of the wastes we generate and our customers’ waste management costs and level of drilling activity, either of which could have a significant adverse effect on our results of operations and financial performance.
In addition to federal laws and regulations, various state, local, and foreign governments have implemented, or are considering, increased regulatory oversight of hydraulic fracturing through additional permitting requirements, operational restrictions, disclosure requirements, and temporary or permanent bans on hydraulic fracturing in certain areas such as environmentally sensitive watersheds. Many local governments also have adopted ordinances to severely restrict or prohibit hydraulic fracturing activities within their jurisdictions.

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The adoption of new or more stringent laws or regulations at the federal, state, local, or foreign levels imposing reporting obligations on, or otherwise limiting or delaying, the hydraulic fracturing process could make it more difficult to complete oil and natural gas wells, increase our customers’ costs of compliance and doing business, and otherwise adversely affect the hydraulic oil and gas fracturing services they perform, which could negatively impact demand for our frac sand. In addition, heightened political, regulatory, and public scrutiny of hydraulic fracturing practices could expose us or our customers to increased legal and regulatory proceedings, which could be time-consuming, costly, or result in substantial legal liability or significant reputational harm. We could be directly affected by adverse litigation involving us, or indirectly affected if the cost of compliance limits the ability of our customers to operate. Such costs and scrutiny could directly or indirectly, through reduced demand for our frac sand, have a material adverse effect on our business, financial condition and results of operations.
A facility closure or long-term idling entails substantial costs, and if we close our production facilities sooner than anticipated, our results of operations may be adversely affected.
During September 2016, the Partnership resumed production at the Augusta facility, which was previously idled in October 2015 as a result of market conditions. Our sponsor's Whitehall facility was temporarily idled during the second quarter of 2016.
If we idle our production facilities for a long period of time or close the facility sooner than expected, sales will decline unless we are able to acquire and develop additional facilities, which may not be possible. The closure of a production facility would involve significant fixed closure costs, including accelerated employment legacy costs, severance-related obligations, reclamation and other environmental costs and the costs of terminating long-term obligations, including energy contracts and equipment leases. We accrue for the costs of reclaiming open pits, stockpiles, non-saleable sand, ponds, roads and other mining support areas over the estimated mining life of our property. We base our assumptions regarding the life of our production facilities on detailed studies that we perform from time to time, but our studies and assumptions may not prove to be accurate. If we were to reduce the estimated life of our production facilities, the fixed facility closure costs would be applied to a shorter period of production, which would increase production costs per ton produced and could materially and adversely affect our results of operations and financial condition.
Applicable statutes and regulations require that mining property be reclaimed following a mine closure in accordance with specified standards and an approved reclamation plan. The plan addresses matters such as removal of facilities and equipment, regrading, prevention of erosion and other forms of water pollution, re-vegetation and post-mining land use. We are required to post a surety bond or other form of financial assurance equal to the cost of reclamation as set forth in the approved reclamation plan. The establishment of the final mine closure reclamation liability is based on permit requirements and requires various estimates and assumptions, principally associated with reclamation costs and production levels. If our accruals for expected reclamation and other costs associated with facility closures for which we will be responsible were later determined to be insufficient, our business, results of operations and financial condition would be adversely affected.
Our production process consumes large amounts of natural gas and electricity. An increase in the price or a significant interruption in the supply of these or any other energy sources could have a material adverse effect on our financial condition or results of operations.
Energy costs, primarily natural gas and electricity, represented 3% of our total sales and 13% of our total production costs during the year ended December 31, 2016. Natural gas is the primary fuel source used for drying in the frac sand production process and, as such, our profitability is impacted by the price and availability of natural gas we purchase from third parties. Because we have not contracted for the provision of natural gas on a fixed-price basis, our costs and profitability will be impacted by fluctuations in prices for natural gas. The price and supply of natural gas are unpredictable and can fluctuate significantly based on international, political and economic circumstances, as well as other events outside our control, such as changes in supply and demand due to weather conditions, actions by OPEC and other oil and natural gas producers, regional production patterns and environmental concerns. In addition, potential climate change regulations or carbon or emissions taxes could result in higher production costs for energy, which may be passed on to us in whole or in part. The price of natural gas has been extremely volatile over the last few years. In order to manage this risk, we may hedge natural gas prices through the use of derivative financial instruments, such as forwards, swaps and futures. However, these measures carry risk (including nonperformance by counterparties) and do not in any event entirely eliminate the risk of decreased margins as a result of natural gas price increases. A significant increase in the price of energy that is not recovered through an increase in the price of our products or covered through our hedging arrangements or an extended interruption in the supply of natural gas or electricity to our production facilities could have a material adverse effect on our business, financial condition, results of operations, cash flows and prospects.
Seasonal and severe weather conditions could have a material adverse impact on our business.
Our business could be materially adversely affected by severe weather conditions. Severe weather conditions may affect our customers’ operations, thus reducing their need for our products, impact our operations by resulting in weather-related damage to our facilities and equipment and impact our customers’ ability to take delivery of our products at our plant site. Any weather-related interference with our operations could force us to delay or curtail services and potentially breach our contractual obligations to deliver minimum volumes or result in a loss of productivity and an increase in our operating costs.

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In addition, severe winter weather conditions impact our operations by causing us to halt our excavation and wet plant related production activities during the winter months. During non-winter months, we excavate excess sand to build a washed sand stockpile that feeds the dry plant, which continues to operate during the winter months. Unexpected winter conditions (e.g., if winter conditions comes earlier than expected or last longer than expected) may result in us not having a sufficient sand stockpile to supply feedstock for our dry plant during winter months, which could result in us being unable to meet our contracted sand deliveries during such time and lead to a material adverse effect on our business, financial condition, results of operation and reputation.
Our cash flow fluctuates on a seasonal basis.
Our cash flow is affected by a variety of factors, including weather conditions and seasonal periods. Seasonal fluctuations in weather impact the production levels at our wet processing plant and the level of completion activity in-basin. While our sales and finished product production levels are contracted evenly throughout the year, varying levels of wet plant production and in-basin demand can lead to cash flows fluctuating through the year. For example, our mining and wet sand processing activities are limited to non-winter months and while the wet processing plant is not operating, we will perform annual maintenance activities, the majority of which are expensed. As a consequence of the seasonality we may experience lower cash costs and higher expense in the first and fourth quarter of each calendar year.
Diminished access to water may adversely affect our operations.
The excavation and processing activities in which we engage require significant amounts of water, of which we recycle a significant percentage in our operating process. As a result, securing water rights and water access is necessary for the operation of our processing facilities. If future excavation and processing activities are located in an area that is water-constrained, there may be additional costs associated with securing water access. We have obtained water rights that we currently use to service the activities on our properties, and we plan to obtain all required water rights to service other properties we may develop or acquire in the future. However, the amount of water that we are entitled to use pursuant to our water rights must be determined by the appropriate regulatory authorities in the jurisdictions in which we operate. Such regulatory authorities may amend the regulations regarding such water rights, increase the cost of maintaining such water rights or eliminate our current water rights, and we may be unable to retain all or a portion of such water rights. These new regulations, which could also affect local municipalities and other industrial operations, could have a material adverse effect on our operating costs if implemented. Such changes in laws, regulations or government policy and related interpretations pertaining to water rights may alter the environment in which we do business, which may have an adverse effect on our financial condition and results of operations. Additionally, a water discharge permit may be required to properly dispose of water at our processing sites. The water discharge permitting process is also subject to regulatory discretion, and any inability to obtain the necessary permits could have an adverse effect on our financial condition and results of operations.
Failure to maintain effective quality control systems at our facilities could have a material adverse effect on our business and operations.
The performance and quality of our products are critical to the success of our business. These factors depend significantly on the effectiveness of our quality control systems, which, in turn, depends on a number of factors, including the design of our quality control systems, our quality-training program and our ability to ensure that our employees adhere to our quality control policies and guidelines. Any significant failure or deterioration of our quality control systems could have a material adverse effect on our business, financial condition, results of operations and reputation.
Our business may suffer if we lose, or are unable to attract and retain, key personnel.
We depend to a large extent on the services of our senior management team and other key personnel. Members of our senior management and other key employees have extensive experience and expertise in evaluating and analyzing sand reserves, building new frac sand processing facilities, maximizing production from such properties, marketing frac sand production, transportation, distribution and developing and executing financing strategies, as well as substantial experience and relationships with participants in the oilfield services and exploration and production industries. Competition for management and key personnel is intense, and the pool of qualified candidates is limited. The loss of any of these individuals or the failure to attract additional personnel, as needed, could have a material adverse effect on our operations and could lead to higher labor costs or the use of less-qualified personnel. In addition, if any of our executives or other key employees were to join a competitor or form a competing company, we could lose customers, suppliers, know-how and key personnel. We do not maintain key-man life insurance with respect to any of our employees. Our success will be dependent on our ability to continue to attract, employ and retain highly skilled personnel.

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A shortage of skilled labor together with rising labor costs in the industry may further increase operating costs, which could adversely affect our results of operations.
Efficient sand production and delivery requires skilled laborers, preferably with several years of experience and proficiency in multiple tasks. Our operations utilize third party contractors and there may be a shortage of skilled labor. If the shortage of experienced skilled labor continues or worsens, we may find it difficult to renew or replace third party contractors, and we may be unable to hire or train the necessary number of skilled laborers to perform our own operations. In either event, there could be an adverse impact on our labor productivity and costs and our ability to conduct operations.
We do not own the land on which the majority of our terminal facilities are located, which could disrupt our operations.
We do not own the land on which the majority of our terminals are located and instead own leasehold interests and rights-of-way for the operation of these facilities.  Upon expiration, termination or other lapse of our current leasehold terms, we may be unable to renew our existing leases or rights-of-way on terms favorable to us, or at all.  Any renegotiation on less favorable terms or inability to enter into new leases on economically acceptable terms upon the expiration, termination or other lapse of our current leases or rights-of-way could cause us to cease operations on the affected land, increase costs related to continuing operations elsewhere and have a material adverse effect on our business, financial condition and results of operations.
Fluctuations in transportation costs and the availability or reliability of rail transportation could reduce revenues by causing us to reduce our production or by impairing the ability of our customers to take delivery.
Transportation costs represent a significant portion of the total delivered cost of frac sand for our customers and, as a result, the cost of transportation is a critical factor in a customer’s purchasing decision. Disruption of transportation services due to shortages of rail cars or trucks, weather-related problems, flooding, drought, accidents, mechanical difficulties, strikes, lockouts, bottlenecks or other events could temporarily impair our ability to supply our customers through our logistics network of rail-based terminals, or, if our customers are not using our rail transportation services, the ability of our customers to take delivery and, in certain circumstances, constitute a force majeure event under our customer contracts, permitting our customers to suspend taking delivery of and paying for our frac sand. Accordingly, if there are disruptions of the rail transportation or trucking services utilized by ourselves or our customers, our business could be adversely affected.
Increases in the price of diesel fuel may adversely affect our results of operations.
Diesel fuel costs and rail fuel surcharges generally fluctuate with increasing and decreasing world crude oil prices, and accordingly are subject to political, economic and market factors that are outside of our control. Our operations are dependent on earthmoving equipment, railcars and tractor trailers, and diesel fuel costs are a significant component of the operating expense of these vehicles. We 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, and pay a fixed price per ton of sand delivered to our wet plant, subject to a fuel surcharge based on the price of diesel fuel. In addition, rail transportation rates are generally subject to varying fuel surcharges based on the price of diesel fuel. Accordingly, increased diesel fuel costs could have an adverse effect on our results of operations and cash flows.
We face distribution and logistical challenges in our business.
As oil and natural gas prices fluctuate, our customers may shift their focus back and forth between different resource plays, some of which can be located in geographic areas that do not have well-developed transportation and distribution infrastructure systems. Transportation and logistical operating expenses comprise a significant portion of our total delivered cost of sales. Therefore, serving our customers in these less-developed areas presents distribution and other operational challenges that may affect our sales and negatively impact our operating costs. Disruptions in transportation services, including shortages of railcars or a lack of developed infrastructure, could affect our ability to timely and cost effectively deliver to our customers and could provide a competitive advantage to competitors located in closer proximity to our customers. Additionally, increases in the price of transportation costs, including freight charges, fuel surcharges, terminal switch fees and demurrage costs, or excess railcars could negatively impact operating costs if we are unable to pass those increased costs along to our customers. Failure to find long-term solutions to these logistical challenges could adversely affect our ability to respond quickly to the needs of our customers or result in additional increased costs, and thus could negatively impact our results of operations and financial condition.
The amount of cash we have available for distribution to holders of our units depends primarily on our cash flow and not solely on profitability, which may prevent us from making cash distributions during periods when we record net income.
The amount of cash we have available for distribution depends primarily upon our cash flow, including cash flow from reserves and working capital or other borrowings, and not solely on profitability, which will be affected by non-cash items. As a result, we may pay cash distributions during periods when we record net losses for financial accounting purposes and may not pay cash distributions during periods when we record net income.

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Our operations are subject to operational hazards and unforeseen interruptions for which we may not be adequately insured.
Our operations are exposed to potential natural disasters, including blizzards, tornadoes, storms, floods and earthquakes. If any of these events were to occur, we could incur substantial losses because of personal injury or loss of life, severe damage to and destruction of property and equipment, and pollution or other environmental damage resulting in curtailment or suspension of our operations.
We are not fully insured against all risks incident to our business, including the risk of our operations being interrupted due to severe weather and natural disasters. Furthermore, we may be unable to maintain or obtain insurance of the type and amount we desire at reasonable rates. As a result of market conditions, premiums and deductibles for certain of our insurance policies could increase. In addition, sub-limits have been imposed for certain risks. In some instances, certain insurance could become unavailable or available only for reduced amounts of coverage. If we were to incur a significant liability for which we are not fully insured, it could have a material adverse effect on our financial condition, results of operations and cash available for distribution to unitholders.
Continued downturn in business could result in potential impairment of intangible assets.
Beginning in August 2014 and continuing through the second quarter of 2016, global crude oil and natural gas prices, particularly crude oil, declined dramatically and persisted at levels well below those experienced during the middle of 2014. This decrease in commodity prices has had, and could continue to have, a negative impact on industry drilling and well completion activity, which affects the demand for frac sand.  Should energy industry conditions further deteriorate, there is a possibility that intangible assets 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 negative impact on our fair value.
A terrorist attack or armed conflict could harm our business.
Terrorist activities, anti-terrorist efforts and other armed conflicts involving the United States could adversely affect the United States and global economies and could prevent us from meeting financial and other obligations. We could experience loss of business, delays or defaults in payments from payors or disruptions of fuel supplies and markets if pipelines, production facilities, processing plants or refineries are direct targets or indirect casualties of an act of terror or war. Such activities could reduce the overall demand for oil and natural gas, which, in turn, could also reduce the demand for our frac sand. Terrorist activities and the threat of potential terrorist activities and any resulting economic downturn could adversely affect our results of operations, impair our ability to raise capital or otherwise adversely impact our ability to realize certain business strategies.
We are subject to cyber security risks. A cyber incident could occur and result in information theft, data corruption, operational disruption and/or financial loss.
The oil and natural gas industry has become increasingly dependent on digital technologies to conduct certain processing activities. For example, we depend on digital technologies to perform many of our services and to process and record financial and operating data. At the same time, cyber incidents, including deliberate attacks, have increased. The U.S. government has issued public warnings that indicate that energy assets might be specific targets of cyber security threats. Our technologies, systems and networks, and those of our vendors, suppliers and other business partners, may become the target of cyber attacks or information security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of proprietary and other information, or other disruption of business operations. In addition, certain cyber incidents, such as surveillance, may remain undetected for an extended period. Our systems and insurance coverage for protecting against cyber security risks may not be sufficient. As cyber incidents continue to evolve, we will likely be required to expand additional resources to continue to modify or enhance our protective measures or to investigate and remediate any vulnerability to cyber incidents. Our insurance coverage for cyber attacks may not be sufficient to cover all the losses we may experience as a result of such cyber attacks.

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Risks Related to Environmental, Mining and Other Regulation
We and our customers are subject to extensive environmental and health and safety regulations that impose, and will continue to impose, significant costs and liabilities. In addition, future regulations, or more stringent enforcement of existing regulations, could increase those costs and liabilities, which could adversely affect our results of operations.
We are subject to a variety of federal, state, and local regulatory environmental requirements affecting the mining and mineral processing industry, including among others, those relating to employee health and safety, environmental permitting and licensing, air and water emissions, water pollution, waste management, remediation of soil and groundwater contamination, land use, reclamation and restoration of properties, hazardous materials, and natural resources. These laws, regulations, and permits have had, and will continue to have, a significant effect on our business. Some environmental laws impose substantial penalties for noncompliance, and others, such as CERCLA, may impose strict, retroactive, and joint and several liability for the remediation of releases of hazardous substances. Liability under CERCLA, or similar state and local laws, may be imposed as a result of conduct that was lawful at the time it occurred or for the conduct of, or conditions caused by, prior operators or other third parties. Failure to properly handle, transport, store, or dispose of hazardous materials or otherwise conduct our operations in compliance with environmental laws could expose us to liability for governmental penalties, cleanup costs, and civil or criminal liability associated with releases of such materials into the environment, damages to property, or natural resources and other damages, as well as potentially impair our ability to conduct our operations. In addition, future environmental laws and regulations could restrict our ability to expand our facilities or extract our mineral deposits or could require us to acquire costly equipment or to incur other significant expenses in connection with our business. Future events, including changes in any environmental requirements (or their interpretation or enforcement) and the costs associated with complying with such requirements, could have a material adverse effect on us.
Any failure by us to comply with applicable environmental laws and regulations may cause governmental authorities to take actions that could adversely impact our operations and financial condition, including:
issuance of administrative, civil, or criminal penalties;
denial, modification, or revocation of permits or other authorizations;
imposition of injunctive obligations or other limitations on our operations, including cessation of operations; and
requirements to perform site investigatory, remedial, or other corrective actions.
Any such regulations could require us to modify existing permits or obtain new permits, implement additional pollution control technology, curtail operations, increase significantly our operating costs, or impose additional operating restrictions among our customers that reduce demand for our services.
We may not be able to comply with any new laws and regulations that are adopted, and any new laws and regulations could have a material adverse effect on our operating results by requiring us to modify our operations or equipment or shut down our facilities. Additionally, our customers may not be able to comply with any new laws and regulations, which could cause our customers to curtail or cease operations. We cannot at this time reasonably estimate our costs of compliance or the timing of any costs associated with any new laws and regulations, or any material adverse effect that any new standards will have on our customers and, consequently, on our operations.
Silica-related legislation, health issues and litigation could have a material adverse effect on our business, reputation or results of operations.
We are subject to laws and regulations relating to human exposure to crystalline silica. Several federal and state regulatory authorities, including the MSHA and the OSHA, may continue to propose and implement changes in their regulations regarding workplace exposure to crystalline silica, such as permissible exposure limits and required controls and personal protective equipment. We may not be able to comply with any new laws and regulations that are adopted, and any new laws and regulations could have a material adverse effect on our operating results by requiring us to modify or cease our operations.
In addition, the inhalation of respirable crystalline silica is associated with the lung disease silicosis. There is recent evidence of an association between crystalline silica exposure or silicosis and lung cancer and a possible association with other diseases, including immune system disorders such as scleroderma. These health risks have been, and may continue to be, a significant issue confronting the frac sand industry. Concerns over silicosis and other potential adverse health effects, as well as concerns regarding potential liability from the use of frac sand, may have the effect of discouraging our customers’ use of our frac sand. The actual or perceived health risks of mining, processing and handling frac sand could materially and adversely affect frac sand producers, including us, through reduced use of frac sand, the threat of product liability or employee lawsuits, increased scrutiny by federal, state and local regulatory authorities of us and our customers or reduced financing sources available to the frac sand industry.

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We are subject to the Federal Mine Safety and Health Act of 1977 and the OSHA of 1970, both of which impose stringent health and safety standards on numerous aspects of our operations.
Our operations are subject to the Federal Mine Safety and Health Act of 1977 ("MSH Act"), as amended by the Mine Improvement and New Emergency Response Act of 2006 as well as the OSHA of 1970 ("OSH Act"), including but not limited to the OSHA Silica Rule published in March 2016. The MSH Act and the OSH Act impose stringent health and safety standards on numerous aspects of our operations inclusive of mineral extraction and processing operations, transportation and transloading of silica and delivery of silica sand to well sites. These standards include, the training of personnel, operating procedures, operating and safety equipment, and other matters. Our failure to comply with such standards, or changes in such standards or the interpretation or enforcement thereof, could have a material adverse effect on our business and financial condition or otherwise impose significant restrictions on our ability to conduct operations.
We and our customers are subject to other extensive regulations, including licensing, plant and wildlife protection and reclamation regulation, that impose, and will continue to impose, significant costs and liabilities. In addition, future regulations, or more stringent enforcement of existing regulations, could increase those costs and liabilities, which could adversely affect our results of operations.
In addition to the regulatory matters described above, we and our customers are subject to extensive governmental regulation on matters such as permitting and licensing requirements, plant and wildlife protection, wetlands protection, reclamation and restoration activities at mining properties after mining is completed, the discharge of materials into the environment, and the effects that mining and hydraulic fracturing have on groundwater quality and availability. Our future success depends, among other things, on the quantity and quality of our frac sand deposits, our ability to extract these deposits profitably, and our customers being able to operate their businesses as they currently do.
In order to obtain permits and renewals of permits in the future, we may be required to prepare and present data to governmental authorities pertaining to the potential adverse impact that any proposed excavation or production activities, individually or in the aggregate, may have on the environment. Certain approval procedures may require preparation of archaeological surveys, endangered species studies, and other studies to assess the environmental impact of new sites or the expansion of existing sites. Compliance with these regulatory requirements is expensive and significantly lengthens the time needed to develop a site. Finally, obtaining or renewing required permits is sometimes delayed or prevented due to community opposition and other factors beyond our control. The denial of a permit essential to our operations or the imposition of conditions with which it is not practicable or feasible to comply could impair or prevent our ability to develop or expand a site. Significant opposition to a permit by neighboring property owners, members of the public, or other third parties, or delay in the environmental review and permitting process also could delay or impair our ability to develop or expand a site. New legal requirements, including those related to the protection of the environment, could be adopted that could materially adversely affect our mining operations (including our ability to extract or the pace of extraction of mineral deposits), our cost structure, or our customers’ ability to use our frac sand. Such current or future regulations could have a material adverse effect on our business and we may not be able to obtain or renew permits in the future.
Our customers may be subject to climate change legislation or regulations restricting emissions of greenhouse gases ("GHGs") which could result in increased operating costs and reduced demand for the products and services we provide.
There are numerous federal proposals and current regulations on GHG emissions, tracking and reporting. Federal agencies have begun directly regulating emissions of methane, a GHG, from oil and natural gas operations. EPA’s New Source Performance Standards require certain new, modified, or reconstructed facilities in the oil and natural gas sector to reduce these methane gas, and volatile organic compound emissions. Furthermore, EPA has established Potential for Significant Deterioration ("PSD") construction and Title V operating permit reviews for GHG emissions from certain large stationary sources. Those sources subject to PSD permitting would be required to meet “best available control technology” standards for those GHG emissions. The additional regulatory burden may result in the increased costs or additional operating restrictions for our customers.
Our inability to acquire, maintain or renew financial assurances related to the reclamation and restoration of mining property could have a material adverse effect on our business, financial condition and results of operations.
We are generally obligated to restore property in accordance with regulatory standards and our approved reclamation plan after it has been mined. We are required under federal, state, and local laws to maintain financial assurances, such as surety bonds, to secure such obligations. The inability to acquire, maintain or renew such assurances, as required by federal, state, and local laws, could subject us to fines and penalties as well as the revocation of our operating permits. Such inability could result from a variety of factors, including:
the lack of availability, higher expense, or unreasonable terms of such financial assurances;
the ability of current and future financial assurance counterparties to increase required collateral; and
the exercise by financial assurance counterparties of any rights to refuse to renew the financial assurance instruments.

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Our inability to acquire, maintain, or renew necessary financial assurances related to the reclamation and restoration of mining property could have a material adverse effect on our business, financial condition, and results of operations.
Risks Relating to our Structure
Our sponsor owns and controls our general partner, which has sole responsibility for conducting our business and managing our operations. Our general partner and its affiliates, including our sponsor, have conflicts of interest with us and limited duties, and they may favor their own interests to the detriment of us and our unitholders.
Our sponsor, Hi-Crush Proppants LLC, owns and controls our general partner and appoints all of the directors of our general partner. Although our general partner has a duty to manage us in a manner it believes to be in our best interests, the executive officers and directors of our general partner have a fiduciary duty to manage our general partner in a manner beneficial to our sponsor. Therefore, conflicts of interest may arise between our sponsor or any of its affiliates, including our general partner, on the one hand, and us or any of our unitholders, on the other hand. In resolving these conflicts of interest, our general partner may favor its own interests and the interests of its affiliates over the interests of our common unitholders. These conflicts include the following situations, among others:
our general partner is allowed to take into account the interests of parties other than us, such as our sponsor, in exercising certain rights under our partnership agreement, which has the effect of limiting its duty to our unitholders;
neither our partnership agreement nor any other agreement requires our sponsor to pursue a business strategy that favors us;
our partnership agreement replaces the fiduciary duties that would otherwise be owed by our general partner with contractual standards governing its duties, limits our general partner’s liabilities and restricts the remedies available to our unitholders for actions that, without such limitations, might constitute breaches of fiduciary duty;
except in limited circumstances, our general partner has the power and authority to conduct our business without unitholder approval;
our general partner determines the amount and timing of any capital expenditure and whether a capital expenditure is classified as a maintenance capital expenditure, which reduces operating surplus, or an expansion capital expenditure, which does not reduce operating surplus. This determination can affect the amount of cash that is distributed to our unitholders;
our general partner determines the amount and timing of asset purchases and sales, borrowings, issuances of additional partnership securities and the level of reserves, each of which can affect the amount of cash that is distributed to our unitholders;
our general partner may cause us to borrow funds in order to permit the payment of cash distributions to our common unitholders, even if the purpose or effect of the borrowing is to make incentive distributions;
our partnership agreement permits us to distribute up to $26 million as operating surplus, even if it is generated from asset sales, non-working capital borrowings or other sources that would otherwise constitute capital surplus. This cash may be used to fund the incentive distribution rights;
our general partner determines which costs incurred by it and its affiliates are reimbursable by us;
our partnership agreement does not restrict our general partner from causing us to pay it or its affiliates for any services rendered to us or entering into additional contractual arrangements with its affiliates on our behalf;
our general partner intends to limit its liability regarding our contractual and other obligations;
our general partner may exercise its right to call and purchase common units if it and its affiliates own more than 80% of the common units;
our general partner controls the enforcement of obligations that it and its affiliates owe to us;
our general partner decides whether to retain separate counsel, accountants or other advisors to perform services for us; and
our sponsor may elect to cause us to issue common units to it in connection with a resetting of the target distribution levels related to our sponsor’s incentive distribution rights without the approval of the conflicts committee of the board of directors of our general partner or the unitholders. This election may result in lower distributions to the common unitholders in certain situations.
In addition, we may compete directly with entities in which our sponsor has an interest for acquisition opportunities and potentially will compete with these entities for new and existing customers. In particular, our sponsor’s Whitehall facility could compete with us for new and existing frac sand customers.

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The board of directors of our general partner may modify or revoke our cash distribution policy at any time at its discretion. Our partnership agreement does not require us to pay any distributions at all.
The board of directors of our general partner has adopted a cash distribution policy pursuant to which we intend to distribute quarterly on all of our units to the extent we have sufficient cash after the establishment of cash reserves and the payment of our expenses, including payments to our general partner and its affiliates. However, the board may change such policy at any time at its discretion.
In addition, our partnership agreement does not require us to pay any distributions at all. Accordingly, investors are cautioned not to place undue reliance on the permanence of such a policy in making an investment decision. Any modification or revocation of our cash distribution policy could substantially reduce or eliminate the amounts of distributions to our unitholders. The amount of distributions we make, if any, and the decision to make any distribution at all will be determined by the board of directors of our general partner, whose interests may differ from those of our common unitholders. Our general partner has limited duties to our unitholders, which may permit it to favor its own interests or the interests of our sponsor to the detriment of our common unitholders.
On October 26, 2015, our general partner's board of directors announced the temporary suspension of our quarterly distribution to common unitholders in order to conserve cash and preserve liquidity.
Our general partner intends to limit its liability regarding our obligations.
Our general partner intends to limit its liability under contractual arrangements between us and third parties so that the counterparties to such arrangements have recourse only against our assets, and not against our general partner or its assets. Our general partner may therefore cause us to incur indebtedness or other obligations that are nonrecourse to our general partner. Our partnership agreement provides that any action taken by our general partner to limit its liability is not a breach of our general partner’s duties, even if we could have obtained more favorable terms without the limitation on liability. In addition, we are obligated to reimburse or indemnify our general partner to the extent that it incurs obligations on our behalf. Any such reimbursement or indemnification payments would reduce the amount of cash otherwise available for distribution to our unitholders.
Our sponsor competes with us, and other affiliates of our general partner have the ability to compete with us.
Affiliates of our general partner, including our sponsor, are not prohibited from engaging in other businesses or activities, including those that might be in direct competition with us. Our sponsor has investments in entities that acquire, own and operate frac sand excavation and processing facilities and may make additional investments in the future. These investments and acquisitions may include entities or assets that we would have been interested in acquiring. Therefore, our sponsor may compete with us for investment opportunities. In addition, our sponsor owns the Whitehall facility through an entity that could compete with us and we expect that it will acquire interests in additional entities that may compete with us. We share our management team with our sponsor, and despite our sponsor’s and management team’s meaningful economic interest in us, the shared management team is under no obligation to offer new and amended customer contracts to us before offering them to our sponsor, which could have a material adverse impact on our ability to renew or replace existing customer contracts on favorable terms or at all.
Pursuant to the terms of our partnership agreement, the doctrine of corporate opportunity, or any analogous doctrine, does not apply to our general partner or any of its affiliates, including its executive officers and directors and our sponsor. Any such person or entity that becomes aware of a potential transaction, agreement, arrangement or other matter that may be an opportunity for us will not have any duty to communicate or offer such opportunity to us. Any such person or entity will not be liable to us or to any limited partner for breach of any fiduciary duty or other duty by reason of the fact that such person or entity pursues or acquires such opportunity for itself, directs such opportunity to another person or entity or does not communicate such opportunity or information to us. This may create actual or potential conflicts of interest between us and affiliates of our general partner and result in less than favorable treatment of us and our unitholders.
It is our plan to distribute a significant portion of our cash available for distribution to our partners, which could limit our ability to grow and make acquisitions.
We may distribute most of our cash available for distribution, which may cause our growth to proceed at a slower pace than that of businesses that reinvest their cash to expand ongoing operations. To the extent we issue additional units in connection with any acquisitions or expansion capital expenditures, the payment of distributions on those additional units may increase the risk that we will be unable to maintain or increase our per unit distribution level. There are no limitations in our partnership agreement on our ability to issue additional units, including units ranking senior to the common units. The incurrence of additional commercial borrowings or other debt to finance our growth strategy would result in increased interest expense, which, in turn, may impact the cash that we have available to distribute to our unitholders. Our Revolving Credit Agreement allows distributions to unitholders up to 50% of quarterly distributable cash flow after quarterly debt payments on the term loan through the Effective Period, as defined.

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Our partnership agreement replaces our general partner’s fiduciary duties to holders of our units.
Our partnership agreement contains provisions that eliminate and replace the fiduciary standards to which our general partner would otherwise be held by state fiduciary duty law. For example, our partnership agreement permits our general partner to make a number of decisions in its individual capacity, as opposed to in its capacity as our general partner, or otherwise free of fiduciary duties to us and our unitholders. This entitles our general partner to consider only the interests and factors that it desires and relieves it of any duty or obligation to give any consideration to any interest of, or factors affecting, us, our affiliates or our limited partners. Examples of decisions that our general partner may make in its individual capacity include:
how to allocate business opportunities among us and its affiliates;
whether to exercise its call right;
how to exercise its voting rights with respect to the units it owns;
whether to exercise its registration rights;
whether to elect to reset target distribution levels; and
whether or not to consent to any merger or consolidation of the partnership or amendment to the partnership agreement.
By purchasing a common unit, a unitholder is treated as having consented to the provisions in the partnership agreement, including the provisions discussed above.
Our partnership agreement restricts the remedies available to holders of our units for actions taken by our general partner that might otherwise constitute breaches of fiduciary duty.
Our partnership agreement contains provisions that restrict the remedies available to unitholders for actions taken by our general partner that might otherwise constitute breaches of fiduciary duty under state fiduciary duty law. For example, our partnership agreement provides that:
whenever our general partner makes a determination or takes, or declines to take, any other action in its capacity as our general partner, our general partner is required to make such determination, or take or decline to take such other action, in good faith, and will not be subject to any other or different standard imposed by our partnership agreement, Delaware law, or any other law, rule or regulation, or at equity;
our general partner will not have any liability to us or our unitholders for decisions made in its capacity as a general partner so long as it acted in good faith, meaning that it believed that the decision was in the best interest of our partnership;
our general partner and its officers and directors will not be liable for monetary damages to us or our limited partners resulting from any act or omission unless there has been a final and non-appealable judgment entered by a court of competent jurisdiction determining that our general partner or its officers and directors, as the case may be, acted in bad faith or, in the case of a criminal matter, acted with knowledge that the conduct was criminal; and
our general partner will not be in breach of its obligations under the partnership agreement or its duties to us or our limited partners if a transaction with an affiliate or the resolution of a conflict of interest is:
(1)
approved by the conflicts committee of the board of directors of our general partner, although our general partner is not obligated to seek such approval; or
(2)
approved by the vote of a majority of the outstanding common units, excluding any common units owned by our general partner and its affiliates.
In connection with a situation involving a transaction with an affiliate or a conflict of interest, any determination by our general partner must be made in good faith. If an affiliate transaction or the resolution of a conflict of interest is not approved by our common unitholders or the conflicts committee then it will be presumed that, in making its decision, taking any action or failing to act, the board of directors of our general partner acted in good faith, and in any proceeding brought by or on behalf of any limited partner or the partnership, the person bringing or prosecuting such proceeding will have the burden of overcoming such presumption.
Our sponsor may elect to cause us to issue common units to it in connection with a resetting of the target distribution levels related to its incentive distribution rights, without the approval of the conflicts committee of the board of directors of our general partner or the holders of our common units. This could result in lower distributions to holders of our common units.
Our sponsor has the right, as the initial holder of our incentive distribution rights, at any time when it has received incentive distributions at the highest level to which it is entitled (50%) for the prior four consecutive fiscal quarters, to reset the initial target distribution levels at higher levels based on our distributions at the time of the exercise of the reset election. Following a reset election by our sponsor, the minimum quarterly distribution will be adjusted to equal the reset minimum quarterly distribution and the target distribution levels will be reset to correspondingly higher levels based on percentage increases above the reset minimum quarterly distribution.

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If our sponsor elects to reset the target distribution levels, it will be entitled to receive a number of common units. The number of common units to be issued to our sponsor will equal the number of common units that would have entitled the holder to an aggregate quarterly cash distribution in the quarter prior to the reset election equal to the distribution to our sponsor on the incentive distribution rights in the quarter prior to the reset election. We anticipate that our sponsor would exercise this reset right in order to facilitate acquisitions or internal growth projects that would not be sufficiently accretive to cash distributions per common unit without such conversion. It is possible, however, that our sponsor could exercise this reset election at a time when it is experiencing, or expects to experience, declines in the cash distributions it receives related to its incentive distribution rights and may, therefore, desire to be issued common units rather than retain the right to receive incentive distributions based on the initial target distribution levels. This risk could be elevated if our incentive distribution rights have been transferred to a third party. As a result, a reset election may cause our common unitholders to experience a reduction in the amount of cash distributions that our common unitholders would have otherwise received had we not issued new common units to our sponsor in connection with resetting the target distribution levels.
Holders of our common units have limited voting rights and are not entitled to elect our general partner or its directors, which could reduce the price at which our common units will trade.
Unlike the holders of common stock in a corporation, unitholders have only limited voting rights on matters affecting our business and, therefore, limited ability to influence management’s decisions regarding our business. Unitholders have no right on an annual or ongoing basis to elect our general partner or its board of directors. The board of directors of our general partner, including the independent directors, is chosen entirely by our sponsor, as a result of it owning our general partner, and not by our unitholders. Unlike publicly-traded corporations, we do not conduct annual meetings of our unitholders to elect directors or conduct other matters routinely conducted at annual meetings of stockholders of corporations. As a result of these limitations, the price at which the common units will trade could be diminished because of the absence or reduction of a takeover premium in the trading price.
Even if holders of our common units are dissatisfied, they cannot remove our general partner without its consent.
If our unitholders are dissatisfied with the performance of our general partner, they have limited ability to remove our general partner. Unitholders are currently unable to remove our general partner without its consent because our general partner and its affiliates own sufficient units to be able to prevent its removal. The vote of the holders of at least 66 2/3% of all outstanding units voting together as a single class is required to remove our general partner. As of December 31, 2016, our sponsor owned 32.5% of our common units.
Our general partner interest or the control of our general partner may be transferred to a third party without unitholder consent.
Our general partner may transfer its general partner interest to a third party in a merger or in a sale of all or substantially all of its assets without the consent of our unitholders. Furthermore, our partnership agreement does not restrict the ability of the members of our general partner to transfer their respective membership interests in our general partner to a third party. The new members of our general partner would then be in a position to replace the board of directors and executive officers of our general partner with their own designees and thereby exert significant control over the decisions taken by the board of directors and executive officers of our general partner. This effectively permits a “change of control” without the vote or consent of the unitholders.
The incentive distribution rights held by our sponsor may be transferred to a third party without unitholder consent.
Our sponsor may transfer the incentive distribution rights to a third party at any time without the consent of our unitholders. If our sponsor transfers the incentive distribution rights to a third party but retains its ownership interest in our general partner, our general partner may not have the same incentive to grow our partnership and increase quarterly distributions to unitholders over time as it would if our sponsor had retained ownership of the incentive distribution rights. For example, a transfer of incentive distribution rights by our sponsor could reduce the likelihood of our sponsor accepting offers made by us relating to assets owned by it, as it would have less of an economic incentive to grow our business, which in turn would impact our ability to grow our asset base.

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Our general partner has a call right that may require unitholders to sell their common units at an undesirable time or price.
If at any time our general partner and its affiliates own more than 80% of the common units, our general partner will have the right, but not the obligation, which it may assign to any of its affiliates or to us, to acquire all, but not less than all, of the common units held by unaffiliated persons at a price equal to the greater of (1) the average of the daily closing price of the common units over the 20 trading days preceding the date three days before notice of exercise of the call right is first mailed and (2) the highest per-unit price paid by our general partner or any of its affiliates for common units during the 90-day period preceding the date such notice is first mailed. As a result, unitholders may be required to sell their common units at an undesirable time or price and may not receive any return or a negative return on their investment. Unitholders may also incur a tax liability upon a sale of their units. Our general partner is not obligated to obtain a fairness opinion regarding the value of the common units to be repurchased by it upon exercise of the limited call right. There is no restriction in our partnership agreement that prevents our general partner from issuing additional common units and exercising its call right. If our general partner exercised its limited call right, the effect would be to take us private and, if the units were subsequently deregistered, we would no longer be subject to the reporting requirements of the Exchange Act. As of December 31, 2016, our sponsor owned 32.5% of our common units.
We may issue additional units without unitholder approval, which would dilute existing unitholder ownership interests.
Our partnership agreement does not limit the number of additional limited partner interests we may issue at any time without the approval of our unitholders. The issuance of additional common units or other equity interests of equal or senior rank will have the following effects:
our existing unitholders’ proportionate ownership interest in us will decrease;
the amount of cash available for distribution on each unit may decrease;
because a lower percentage of total outstanding units will be subordinated units, the risk that a shortfall in the payment of the minimum quarterly distribution will be borne by our common unitholders will increase;
the ratio of taxable income to distributions may increase;
the relative voting strength of each previously outstanding unit may be diminished; and
the market price of the common units may decline.
There are no limitations in our partnership agreement on our ability to issue units ranking senior to the common units.
In accordance with Delaware law and the provisions of our partnership agreement, we may issue additional partnership interests that are senior to the common units in right of distribution, liquidation and voting. The issuance by us of units of senior rank may (i) reduce or eliminate the amount of cash available for distribution to our common unitholders; (ii) diminish the relative voting strength of the total common units outstanding as a class; or (iii) subordinate the claims of the common unitholders to our assets in the event of our liquidation.
Our partnership agreement restricts the voting rights of unitholders owning 20% or more of our common units.
Our partnership agreement restricts unitholders’ voting rights by providing that any units held by a person or group that owns 20% or more of any class of units then outstanding, other than our general partner and its affiliates, their transferees and persons who acquired such units with the prior approval of the board of directors of our general partner, cannot vote on any matter.
Cost reimbursements due to our general partner and its affiliates for services provided to us or on our behalf will reduce cash available for distribution to our unitholders. The amount and timing of such reimbursements will be determined by our general partner.
Prior to making any distribution on the common units, we will reimburse our general partner and its affiliates for all expenses they incur and payments they make on our behalf. Our partnership agreement does not set a limit on the amount of expenses for which our general partner and its affiliates may be reimbursed. These expenses include salary, bonus, incentive compensation and other amounts paid to persons who perform services for us or on our behalf and expenses allocated to our general partner by its affiliates. Our partnership agreement provides that our general partner will determine in good faith the expenses that are allocable to us. The reimbursement of expenses and payment of fees, if any, to our general partner and its affiliates will reduce the amount of cash available for distribution to our unitholders.

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Your liability may not be limited if a court finds that unitholder action constitutes control of our business.
A general partner of a partnership generally has unlimited liability for the obligations of the partnership, except for those contractual obligations of the partnership that are expressly made without recourse to the general partner. Our partnership is organized under Delaware law, and we conduct business in a number of other states. The limitations on the liability of holders of limited partner interests for the obligations of a limited partnership have not been clearly established in some jurisdictions. You could be liable for our obligations as if you were a general partner if a court or government agency were to determine that:
we were conducting business in a state but had not complied with that particular state’s partnership statute; or
your right to act with other unitholders to remove or replace the general partner, to approve some amendments to our partnership agreement or to take other actions under our partnership agreement constitute “control” of our business.
Unitholders may have liability to repay distributions and in certain circumstances may be personally liable for the obligations of the partnership.
Under certain circumstances, unitholders may have to repay amounts wrongfully returned or distributed to them. Under Section 17-607 of the Delaware Revised Uniform Limited Partnership Act, or the Delaware Act, we may not make a distribution to our unitholders if the distribution would cause our liabilities to exceed the fair value of our assets. Delaware law provides that for a period of three years from the date of the impermissible distribution, limited partners who received the distribution and who knew at the time of the distribution that it violated Delaware law will be liable to the limited partnership for the distribution amount. Liabilities to partners on account of their partnership interests and liabilities that are non-recourse to the partnership are not counted for purposes of determining whether a distribution is permitted.
If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud. As a result, current and potential unitholders could lose confidence in our financial reporting, which would harm our business and the trading price of our units.
Effective internal controls are necessary for us to provide reliable financial reports, prevent fraud and operate successfully as a public company. If we cannot provide reliable financial reports or prevent fraud, our reputation and operating results would be harmed. We cannot be certain that our efforts to develop and maintain our internal controls will be successful, that we will be able to maintain adequate controls over our financial processes and reporting in the future or that we will be able to comply with our obligations under Section 404 of the Sarbanes Oxley Act of 2002. Any failure to develop or maintain effective internal controls, or difficulties encountered in implementing or improving our internal controls, could harm our operating results or cause us to fail to meet our reporting obligations. Ineffective internal controls could also cause investors to lose confidence in our reported financial information, which would likely have a negative effect on the trading price of our units.
The New York Stock Exchange does not require a publicly-traded partnership like us to comply with certain of its corporate governance requirements.
Our common units are listed on the NYSE under the symbol “HCLP.” Because we are a publicly-traded partnership, the NYSE does not require us to have a majority of independent directors on our general partner’s board of directors or to establish a compensation committee or a nominating and corporate governance committee. Accordingly, unitholders do not have the same protections afforded to certain corporations that are subject to all of the NYSE corporate governance requirements.

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Tax Risks to Common Unitholders
Our tax treatment depends on our status as a partnership for federal income tax purposes, as well as not being subject to a material amount of entity-level taxation by individual states. If the Internal Revenue Service (the "IRS") were to treat us as a corporation for federal income tax purposes or we were to become subject to material additional amounts of entity-level taxation for state tax purposes, then our cash available for distribution to you could be substantially reduced.
The anticipated after-tax economic benefit of an investment in our common units depends largely on us being treated as a partnership for federal income tax purposes.
Despite the fact that we are organized as a limited partnership under Delaware law, as a publicly traded partnership we may be treated as a corporation for federal income tax purposes unless 90% or more of our gross income in each year consists of certain identified types of “qualifying income” as defined by Section 7704 of the Internal Revenue Code (the “Qualifying Income Exception”). In addition to qualifying income, like many other publicly traded partnerships, we also generate ancillary income that may not be considered qualifying income. We have historically satisfied, and believe we currently satisfy, the Qualifying Income Exception to be treated as a partnership for federal income tax purposes. Although we monitor our level of gross income that may not be considered qualifying income closely and attempt to manage our operations to ensure compliance with the Qualifying Income Exception, if weak demand and low prices for frac sand were to continue, the sale of which generates qualifying income, we may not be able to continue to meet the qualifying income level necessary to maintain our status as a publicly traded partnership treated as a partnership for federal income tax purposes. To the extent we become aware that we may not generate or have not generated sufficient qualifying income with respect to a period, we can and would take action to preserve our treatment as a partnership for federal income tax purposes, including seeking relief from the IRS. Section 7704(e) of the Internal Revenue Code provides for the possibility of relief upon, among other things, determination by the IRS that such failure to meet the Qualifying Income Exception was inadvertent. However, we are unaware of examples of such relief being sought by a publicly traded partnership.
If we were treated as a corporation for federal income tax purposes, we would pay federal income tax on our taxable income at the corporate tax rate and would likely pay state income tax at varying rates. Distributions to you would generally be taxed again as corporate distributions, and no income, gains, losses, deductions or credits would flow through to you. Because a tax would be imposed upon us as a corporation, our cash available for distribution to you would be substantially reduced. Therefore, treatment of us as a corporation would result in a material reduction in the anticipated cash flow and after-tax return to the unitholders, likely causing a substantial reduction in the value of our common units.
Our partnership agreement provides that if a law is enacted or existing law is modified or interpreted in a manner that subjects us to taxation as a corporation or otherwise subjects us to entity-level taxation for federal, state or local income tax purposes, the target distribution amounts may be adjusted to reflect the impact of that law on us.
The tax treatment of publicly-traded partnerships or an investment in our units could be subject to potential legislative, judicial or administrative changes and differing interpretations, possibly on a retroactive basis.
The present federal income tax treatment of publicly-traded partnerships, including us, or an investment in our common units may be modified by administrative, legislative or judicial changes or differing interpretations at any time. For example, from time to time, members of the U.S. Congress propose and consider substantive changes to the existing federal income tax laws that affect the tax treatment of publicly traded partnerships. Although there is no current legislative proposal, a prior legislative proposal would have eliminated the qualifying income exception to the treatment of all publicly traded partnerships as corporations upon which we rely for our treatment as a partnership for federal income tax purposes. 
In addition, on January 24, 2017, final regulations regarding which activities give rise to qualifying income within the meaning of Section 7704 of the Code (the “Final Regulations”) were published in the Federal Register. The Final Regulations are effective as of January 19, 2017, and apply to taxable years beginning on or after January 19, 2017. We do not believe the Final Regulations affect our ability to be treated as a partnership for federal income tax purposes. However, there are no assurances that the Final Regulations will not be revised to take a position that is contrary to our interpretation of the current law.
Any modification to the federal income tax laws may be applied retroactively and could make it more difficult or impossible for us to meet the exception for certain publicly traded partnerships to be treated as partnerships for federal income tax purposes. In addition, such changes may affect or cause us to change our business activities, affect the tax considerations of an investment in us, change the character or treatment of portions of its income, or otherwise adversely affect an investment in our common units.  We are unable to predict whether any of these changes or any other proposals will ultimately be enacted or whether the Final Regulations will be revised to materially change interpretations of the current law. Any such changes could negatively impact the value of an investment in our common units and the amount of cash available for distribution to our unitholders.

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Our unitholders are required to pay taxes on their share of our income even if they do not receive any cash distributions from us.
Because our unitholders are treated as partners to whom we allocate taxable income that could be different in amount than the cash we distribute, they are required to pay federal income taxes and, in some cases, state and local income taxes on their share of our taxable income whether or not they receive cash distributions from us. For example, if we sell assets and use the proceeds to repay existing debt or fund capital expenditures, you may be allocated taxable income and gain resulting from the sale and our cash available for distribution would not increase. Similarly, taking advantage of opportunities to reduce our existing debt, such as debt exchanges, debt repurchases, or modifications of our existing debt could result in “cancellation of indebtedness income” being allocated to our unitholders as taxable income without any increase in our cash available for distribution. Our unitholders may not receive cash distributions from us equal to their share of our taxable income or even equal to the actual tax liability that results from that income.
On October 26, 2015, our general partner's board of directors announced the temporary suspension of our quarterly distribution to common unitholders in order to conserve cash and preserve liquidity.
The sale or exchange of 50% or more of our capital and profits interests during any twelve-month period will result in the termination of our partnership for federal income tax purposes.
We will be considered to have terminated as a partnership for federal income tax purposes if there is a sale or exchange of 50% or more of the total interests in our capital and profits within a twelve-month period. For purposes of determining whether the 50% threshold has been met, multiple sales of the same interest will be counted only once. Our termination would, among other things, result in the closing of our taxable year for all unitholders and could result in a deferral of depreciation deductions allowable in computing our taxable income. In the case of a unitholder reporting on a taxable year other than the calendar year, the closing of our taxable year may also result in more than twelve months of our taxable income or loss being includable in his taxable income for the year of termination. Our termination currently would not affect our classification as a partnership for federal income tax purposes, but instead, after our termination we would be treated as a new partnership for federal income tax purposes. If treated as a new partnership, we must make new tax elections and could be subject to penalties if we are unable to determine that a termination occurred. The IRS has announced a relief procedure whereby if a publicly traded partnership that has technically terminated requests and the IRS grants special relief, among other things, the partnership may be permitted to provide only a single Schedule K-1 to unitholders for the two short tax periods included in the year in which the termination occurs.
Tax gain or loss on the disposition of our common units could be more or less than expected.
If our unitholders sell their common units, they will recognize a gain or loss equal to the difference between the amount realized and their tax basis in those common units. Because distributions in excess of their allocable share of our net taxable income result in a decrease in their tax basis in their common units, the amount, if any, of such prior excess distributions with respect to the units they sell will, in effect, become taxable income to them if they sell such units at a price greater than their tax basis in those units, even if the price they receive is less than their original cost. Furthermore, a substantial portion of the amount realized, whether or not representing gain, may be taxed as ordinary income due to potential recapture of depreciation and depletion deductions and certain other items. In addition, because the amount realized includes a unitholder’s share of our nonrecourse liabilities, if they sell their units, they may incur a tax liability in excess of the amount of cash they receive from the sale.
Tax-exempt entities and non-U.S. persons face unique tax issues from owning common units that may result in adverse tax consequences to them.
Investments in common units by tax-exempt entities, such as employee benefit plans and individual retirement accounts (or “IRAs”), and non-U.S. persons raises issues unique to them. For example, virtually all of our income allocated to organizations that are exempt from federal income tax, including IRAs and other retirement plans, is unrelated business taxable income and is taxable to them. Distributions to non-U.S. persons are reduced by withholding taxes, and non-U.S. persons are required to file federal tax returns and pay tax on their shares of our taxable income. A unitholder that is a tax-exempt entity or a non-U.S. person should consult a tax advisor before investing in our units.

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If the IRS makes audit adjustments to our income tax returns for tax years beginning after December 31, 2017, it (and some states) may assess and collect any taxes (including any applicable penalties and interest) resulting from such audit adjustment directly from us, in which case our cash available for distribution to our unitholders might be substantially reduced.
Pursuant to the Bipartisan Budget Act of 2015, for tax years beginning after December 31, 2017, if the IRS makes audit adjustments to our income tax returns, it (and some states) may assess and collect any taxes (including any applicable penalties and interest) resulting from such audit adjustment directly from us. To the extent possible under the new rules, our general partner may elect to either pay the taxes (including any applicable penalties and interest) directly to the IRS or, if we are eligible, issue a revised Schedule K-1 to each unitholder with respect to an audited and adjusted return. Although our general partner may elect to have our unitholders take such audit adjustment into account in accordance with their interests in us during the tax year under audit, there can be no assurance that such election will be practical, permissible or effective in all circumstances. As a result, our current unitholders may bear some or all of the tax liability resulting from such audit adjustment, even if such unitholders did not own units in us during the tax year under audit. If, as a result of any such audit adjustment, we are required to make payments of taxes, penalties and interest, our cash available for distribution to our unitholders might be substantially reduced. These rules are not applicable for tax years beginning on or prior to December 31, 2017.
If the IRS contests the federal income tax positions we take, the market for our common units may be adversely impacted and the cost of any IRS contest will reduce our cash available for distribution to our unitholders.
The IRS may adopt positions that differ from the positions we take. It may be necessary to resort to administrative or court proceedings to sustain some or all of the positions we take. A court may not agree with some or all of the positions we take. Any contest by the IRS may materially and adversely impact the market for our common units and the price at which they trade. Our costs of any contest by the IRS will be borne indirectly by our unitholders and our general partner because the costs will reduce our cash available for distribution.
We treat each purchaser of our common units as having the same tax benefits without regard to the actual common units purchased. The IRS may challenge this treatment, which could adversely affect the value of the common units.
Because we cannot match transferors and transferees of common units and in order to maintain the uniformity of the economic and tax characteristics of our common units, we have adopted certain depreciation and amortization positions that may not conform to all aspects of existing Treasury Regulations. These positions may result in an overstatement of deductions and losses and an understatement of income and gain to our unitholders. A successful IRS challenge to those positions could adversely affect the amount of tax benefits available to our unitholders. It also could affect the timing of these tax benefits or the amount of gain from the sale of common units and could have a negative impact on the value of our common units or result in audit adjustments to our unitholders’ tax returns.
We generally prorate our items of income, gain, loss and deduction between transferors and transferees of our units each month based upon the ownership of our units on the first day of each month, instead of on the basis of the date a particular unit is transferred. The IRS may challenge this treatment, which could change the allocation of items of income, gain, loss and deduction among our unitholders.
We generally prorate our items of income, gain, loss and deduction between transferors and transferees of our common units each month based upon the ownership of our common units on the first day of each month (the “Allocation Date”), instead of on the basis of the date a particular common unit is transferred. Similarly, we generally allocate certain deductions for depreciation of capital additions gain or loss realized on a sale or other disposition of our assets and, in the discretion of the general partner, any other extraordinary item of income, gain, loss or deduction based upon ownership on the Allocation Date. Treasury Regulations allow a similar monthly simplifying convention, but such regulations do not specifically authorize all aspects of our proration method. If the IRS were to challenge our proration method, we may be required to change the allocation of items of income, gain, loss, and deduction among our unitholders.
A unitholder whose common units are the subject of a securities loan (e.g., a loan to a “short seller” to cover a short sale of common units) may be considered as having disposed of those common units. If so, such unitholder would no longer be treated for federal income tax purposes as a partner with respect to those common units during the period of the loan and may recognize gain or loss from the disposition.
Because there is no tax concept of loaning a partnership interest, a unitholder whose common units are the subject of a securities loan may be considered as having disposed of the loaned units. In that case, such unitholder may no longer be treated for federal income tax purposes as a partner with respect to those common units during the period of the loan to the short seller and the unitholder may recognize gain or loss from such disposition. Moreover, during the period of the loan, any of our income, gain, loss or deduction with respect to those common units may not be reportable by the unitholder and any cash distributions received by the unitholder as to those common units could be fully taxable as ordinary income. Unitholders desiring to assure their status as partners and avoid the risk of gain recognition from a loan to a short seller should modify any applicable brokerage account agreements to prohibit their brokers from borrowing their common units.

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Our unitholders are subject to state and local taxes and return filing requirements in states where they do not live as a result of investing in our common units.
In addition to federal income taxes, our unitholders are subject to other taxes, including state and local taxes, unincorporated business taxes and estate, inheritance or intangible taxes that are imposed by the various jurisdictions in which we conduct business or own property now or in the future, even if they do not live in any of those jurisdictions. As of December 31, 2016, we own assets and conduct business in several states. Most of these states currently impose a personal income tax and income taxes on corporations and other entities. Unitholders may be required to file state and local income tax returns and pay state and local income taxes in these states. Further, unitholders may be subject to penalties for failure to comply with those requirements. As we make acquisitions or expand our business, we may own assets or conduct business in additional states or foreign jurisdictions that impose a personal income tax. It is our unitholders' responsibility to file all federal, foreign, state and local tax returns.

ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.

ITEM 2. PROPERTIES
We are managed and operated by the board of directors and executive officers of our general partner, which leases office space for our principal executive offices in Houston, Texas. As of December 31, 2016, we operated three production facilities located in Wyeville, Augusta and near Blair, all in Wisconsin, of which we own all associated land. In addition, we own or operate 11 terminal locations, lease or own 4,200 railcars used to transport our sand from origin to the terminal and we lease 300 containers used to transport our sand from the terminal to the well site. Substantially all of our owned assets are pledged as security under our Revolving Credit Agreement and senior secured term loan facility; please see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources”.
Facilities
Wyeville Facility
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 frac sand per year. During the year ended December 31, 2016, the Wyeville facility produced and delivered 1,937,793 tons of frac sand. As of December 31, 2016, the total cost of our plant and equipment was $65.9 million. The plant is in good physical condition and includes modern equipment powered by natural gas and electricity.
We operate two dryer facilities at the Wyeville facility with a combined nameplate input capacity, based on manufacturer specifications, of 250 tons per hour. Unless processing operations are suspended to conduct maintenance, our dryer facilities are run on a 24-hour basis. Our estimate of annual expected processing capacity assumes a 15% loss factor due to waste and an uptime efficiency of 85% of nameplate capacity, which allows approximately 55 days for downtime and maintenance.
All of the product from the Wyeville facility is shipped by rail from approximately 32,000 feet of track that connects our facility to a Union Pacific Railroad mainline. These rail spurs and the capacity of the associated product storage silos allow us to accommodate a large number of railcars, including unit trains.
The following table summarizes certain of the key characteristics of our Wyeville facility that we believe allow us to efficiently provide our customers with high quality frac sand efficiently at competitive prices.
Facility Characteristics
 
Description
Site Geography
 
Situated on 971 contiguous acres, with on-site processing and rail loading facilities.
Deposits
 
Sand pay zones of up to 80 feet; coarse grade mesh sizes from 20 to 100; few impurities such as clay or other contaminants.
Excavation Technique
 
Dredging and shallow overburden allowing for surface excavation.
Sand Processing
 
Sands are unconsolidated; do not require crushing.
Logistics Capabilities
 
On-site transportation infrastructure capable of accommodating unit trains connected to Union Pacific Railroad mainline.

40


Augusta Facility
We completed construction of the Augusta facility in June 2012 and expanded the facility in 2014. The Augusta facility has an annual processing capacity of approximately 2,860,000 tons of frac sand per year. The Augusta facility was idled in October 2015 and resumed production in September 2016. During the year ended December 31, 2016, the Augusta facility produced and delivered 373,115 tons of frac sand. As of December 31, 2016, the total cost of the Augusta facility and equipment was $106.9 million. The plant is in good physical condition and includes modern equipment powered by natural gas and electricity.
We operate three dryer facilities at the Augusta facility with a combined nameplate input capacity, based on manufacturer specifications, of 400 tons per hour. Unless processing operations are suspended to conduct maintenance, Augusta’s dryer facilities are run on a 24-hour basis. Our estimate of annual expected processing capacity assumes a 15% loss of capacity due to waste and an uptime efficiency of 85% of nameplate capacity, which allows approximately 55 days for downtime and maintenance.
All of the product from the Augusta facility is shipped by rail from approximately 28,800 feet of track that connects our facility to a Union Pacific Railroad mainline. These rail spurs and the capacity of the associated product storage silos allow the accommodation of a large number of railcars, including unit trains.
The following table summarizes certain of the key characteristics of our Augusta facility that we believe allow us to efficiently provide our customers with high quality frac sand efficiently at competitive prices.
Facility Characteristics
 
Description
Site Geography
 
Situated on 1,187 contiguous acres, with on-site processing and rail loading facilities.
Deposits
 
Sand pay zones of up to 80 feet; coarse grade mesh sizes from 20 to 100.
Excavation Technique
 
Shallow overburden allowing for surface excavation.
Sand Processing
 
Sands are consolidated.
Logistics Capabilities
 
On-site transportation infrastructure capable of accommodating unit trains connected to Union Pacific Railroad mainline.
Blair Facility
We completed construction of the Blair facility in March 2016. The Blair facility has an annual processing capacity of approximately 2,860,000 tons of frac sand per year. During the year ended December 31, 2016, the Blair facility produced and delivered 1,482,355 tons of frac sand. As of December 31, 2016, the total cost of Blair facility and equipment was $102.2 million. The plant is in good physical condition and includes modern equipment powered by natural gas and electricity.
We operate two dryer facilities at the Blair facility with a combined nameplate input capacity, based on manufacturer specifications, of 400 tons per hour. Unless processing operations are suspended to conduct maintenance, Blair's dryer facilities are run on a 24-hour basis. Our estimate of annual expected processing capacity assumes a 15% loss of capacity due to waste and an uptime efficiency of 85% of nameplate capacity, which allows approximately 55 days for downtime and maintenance.
All of the product from the Blair facility is shipped by rail from approximately 43,000 feet of track that connects our facility to a Canadian National Railroad mainline. These rail spurs and the capacity of the associated product storage silos allow us to accommodate a large number of rail cars, including unit trains.
The following table summarizes certain of the key characteristics of our Blair facility that we believe allow us to efficiently provide our customers with high quality frac sand efficiently at competitive prices.
Facility Characteristics
 
Description
Site Geography
 
Situated on 1,285 contiguous acres, with on-site processing and rail loading facilities.
Deposits
 
Sand pay zones of up to 80 feet; coarse grade mesh sizes from 20 to 100.
Excavation Technique
 
Shallow overburden allowing for surface excavation.
Sand Processing
 
Sands are consolidated.
Logistics Capabilities
 
On-site transportation infrastructure capable of accommodating unit trains connected to Canadian National Railroad mainline.

41


Terminals
As of December 31, 2016, we own or operate 11 terminal locations as summarized in the following table:
Location
 
Storage Capabilities
 
Railroad
 
Unit Train Capable
 
On-site Laboratory
Binghamton, NY
 
Rail
 
New York Susquehanna & Western Railway
 
þ
 
 
Big Spring, TX
 
Rail
 
Big Spring Rail Systems
 
 
 
 
Dennison, OH (a)
 
Rail
 
Columbus and Ohio River Railroad
 
 
 
 
Driftwood, PA (a)
 
Rail
 
Buffalo and Pittsburgh Railroad
 
 
 
 
Evans, CO
 
Rail
 
Union Pacific Railroad
 
 
 
 
Kittanning, PA (a)
 
Rail
 
Buffalo and Pittsburgh Railroad
 
 
 
þ
Minerva, OH
 
Rail/Silo
 
Ohio-Rail Corp.
 
þ
 
þ
Mingo Junction, OH
 
Rail/Silo
 
Norfolk Southern
 
þ
 
þ
Odessa, TX
 
Rail/Silo
 
Union Pacific Railroad
 
þ
 
 
Smithfield, PA
 
Rail/Silo
 
Southwest Pennsylvania Railroad
 
þ
 
þ
Wellsboro, PA
 
Rail/Silo
 
Wellsboro & Corning Railroad
 
þ
 
þ
(a)
As a result of market conditions we elected to temporarily idle certain of our terminals.
During the year ended December 31, 2016, the Partnership sold two of the previously idled transload facilities and the leases for two of the idled transload facilities terminated. As of December 31, 2016, we leased or owned 4,200 railcars used to transport our sand from origin to the terminal and we lease 300 containers used to transport our sand from the terminal to the well site.
Sand Reserves
We own and operate the Wyeville, Augusta and Blair facilities, which as of December 31, 2016, contained 76.4 million tons, 40.9 million tons, and 117.7 million tons, respectively, of proven recoverable reserves of frac sand.
“Reserves” consist of sand that can be economically extracted or produced at the time of determination based on relevant legal, economic and technical considerations. The reserve estimates referenced herein represent proven reserves, which are defined by SEC Industry Guide 7 as those for which (a) the quantity is computed from dimensions revealed in outcrops, trenches, workings or drill holes; grade and/or quality are computed from the results of detailed sampling and (b) the sites for inspection, sampling and measurement are spaced so closely and the geologic character is so well defined that size, shape, depth and mineral content of reserves are well-established. The quantity and nature of the mineral reserves at our Wyeville, Augusta and Blair facilities are estimated by our internal geologists and mining engineers and updated periodically, with necessary adjustments for operations during the year and additions or reductions due to property acquisitions and dispositions, quality adjustments and mine plan updates. John T. Boyd has estimated our reserves as of December 31, 2016, and we intend to continue retaining third-party engineers to review our reserves on an annual basis.
To opine as to the economic viability of our reserves, John T. Boyd reviewed our financial cost and revenue per ton data at the time of the proven reserve determination. Based on its review of our cost structure and its extensive experience with similar operations, John T. Boyd concluded that it is reasonable to assume that we will operate under a similar cost structure over the remaining life of our reserves. Based on these assumptions, and taking into account possible cost increases associated with a maturing mine, John T. Boyd concluded that our current operating margins are sufficient to expect continued profitability throughout the life of our reserves.
Our reserves are a mineral resource created over millions of years. Approximately 500 million years ago, the quartz rich Cambrian sheet sands were deposited in the upper Midwest region of the United States. During the Pleistocene era, which occurred approximately two million years ago, erosion caused by the melting of glaciers cut channels into the Mount Simon sandstone formation, forming rivers. Loose grains of sand resulting from this same erosion settled in these river beds where they were washed by the consistent current of the river. The washing action of the river removed debris, known as fines, from the sand, rounded the sand grains and helped it to remain unconsolidated.
A number of characteristics are utilized to define the quality of frac sand, such as particle shape, acid solubility, cleanliness, grain size and crush strength.  Crush strength is an indication of how well a proppant can retain its structural integrity under closure pressure and is one of the key characteristics for our customers and other purchasers of frac sand in determining whether the product will be suitable for its desired application.  For example, raw frac sand with high crush strength is suitable for use in high pressure downhole conditions that would otherwise require the use of more expensive resin-coated or ceramic proppants.

42


Before acquiring new reserves, we or our sponsor perform extensive drilling of cores and analysis and other testing of the cores to confirm the quantity and quality of the acquired reserves. Core samples are sent to leading proppant sand-testing laboratories, each of which adhere to procedures and testing methods in accordance with the American Society for Testing and Materials’ standards for testing materials.
Mineral Rights
We acquired the Wyeville, Augusta and Blair acreage from separate land owners. In each transaction, we acquired surface and mineral rights, certain of which are subject to non-participating royalty interests per ton of frac sand sold. These royalties were negotiated by us or our sponsor in connection with the acquisition of the acreage. In addition, we entered into a purchase and sale agreement to acquire certain tracts of land and specific quantities of the underlying frac sand deposits, and have the option to acquire additional mineral rights underlying the acquired land.
Summary of Reserves
The following table provides a summary of our Wyeville, Augusta and Blair facilities, and our sponsor's Whitehall facility, as of December 31, 2016:
Mine/Plant Location         
 
Owned/Leased      
 
Area (in acres)    
 
Proven Reserves (in thousands of tons)  
 
Primary End Markets Served    
Wyeville, WI
 
Owned
 
971
 
76,439

 
Oil and gas proppants
Augusta, WI (a)
 
Owned
 
1,187
 
40,927

 
Oil and gas proppants
Blair, WI
 
Owned
 
1,285
 
117,675

 
Oil and gas proppants
Whitehall, WI (b)
 
Owned
 
1,447
 
80,700

 
Oil and gas proppants
(a)
Our sponsor owns 2% of Hi-Crush Augusta LLC, the entity that owns the Augusta facility.
(b)
Our sponsor owns 100% of the facility.

ITEM 3. LEGAL PROCEEDINGS
Legal Proceedings
We are subject to various routine legal proceedings, claims, and governmental inspections, audits or investigations arising out of our business which cover matters such as general commercial, governmental regulations, environmental, employment and other actions that are incidental to our business. Although the outcomes of these routine claims cannot be predicted with certainty, in the opinion of management, the ultimate resolution of these matters will not have a material adverse effect on our financial position or results of operations.

ITEM 4. MINE SAFETY DISCLOSURES
We adhere to a strict occupational health program aimed at controlling exposure to silica dust, which includes dust sampling, a silicosis prevention program, medical surveillance, training and other components. Our safety program is designed to ensure compliance with the standards of our Occupational Health and Safety Manual and U.S. Federal Mine Safety and Health Administration (“MSHA”) regulations. For both health and safety issues, extensive training is provided to employees. We have safety meetings at our plants made up of salaried and hourly employees. We perform annual internal health and safety audits and conduct semi-annual crisis management drills to test our abilities to respond to various situations. Health and safety programs are administered by our corporate health and safety department with the assistance of plant environmental, health and safety coordinators.
All of our production facilities are classified as mines and are subject to regulation by MSHA under the Federal Mine Safety and Health Act of 1977 (the “Mine Act”). MSHA inspects our mines on a regular basis and issues various citations and orders when it believes a violation has occurred under the Mine Act. Information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K (17 CFR 229.104) is included in Exhibit 95.1 to this Annual Report on Form 10-K.


43


PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON UNITS, RELATED UNITHOLDER MATTERS AND ISSUER PURCHASES OF UNIT SECURITIES
Market Information
Our common units, representing limited partner interests, are listed on and traded on the NYSE under the symbol “HCLP.”
The following table sets forth the range of high and low sales prices per unit for our common units as reported by the NYSE, and the quarterly cash distributions for the indicated periods:
Sales Price Per Common Units
For the Quarter Ended
 
High
 
Low
March 31, 2015
 
$
40.00

 
$
28.23

June 30, 2015
 
$
40.40

 
$
27.53

September 30, 2015
 
$
31.00

 
$
7.44

December 31, 2015
 
$
9.51

 
$
5.05

March 31, 2016
 
$
7.16

 
$
3.55

June 30, 2016
 
$
13.10

 
$
4.25

September 30, 2016
 
$
16.81

 
$
10.55

December 31, 2016
 
$
20.95

 
$
13.75

Cash Distributions To Limited Partner Unitholders
For the Quarter Ended
 
Record Date
 
Payment Date
 
Amount per
Limited Partner  
Unit
March 31, 2015
 
May 1, 2015
 
May 15, 2015
 
$
0.6750

June 30, 2015
 
August 5, 2015
 
August 14, 2015
 
$
0.4750

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 third quarter of 2015 or thereafter, as the Partnership continued its distribution suspension to conserve cash. It is currently uncertain when market conditions will improve to a level at which time the General Partner's board of directors would consider it appropriate to reinstate the distribution.
As of December 31, 2016, there were 63,668,244 common units outstanding held by approximately 21,479 unitholders of record. Because many of our common units are held by brokers and other institutions on behalf of unitholders, we are unable to estimate the total number of unitholders represented by these record holders. As of December 31, 2016, our sponsor owned 20,693,643 common units.
Cash Distributions to Unitholders
There is no guarantee that we will distribute quarterly cash distributions to our unitholders. We do not have a legal or contractual obligation to pay quarterly distributions at any rate. Our cash distribution policy is subject to certain restrictions and may be changed at any time. The reasons for such uncertainties in our stated cash distribution policy include the following factors:
Our cash distribution policy is subject to restrictions on distributions under our Revolving Credit Agreement and senior secured term loan facility, which contain financial tests and covenants that we must satisfy. Our Revolving Credit Agreement allows distributions to unitholders up to 50% of quarterly distributable cash flow after quarterly debt payments on the term loan during the Effective Period, as defined. Should we be unable to satisfy these restrictions or if we are otherwise in default under either facility, we will be prohibited from making cash distributions to our unitholders notwithstanding our stated cash distribution policy.
Our general partner has the authority to establish cash reserves for the prudent conduct of our business, including for future cash distributions to our unitholders, and the establishment of or increase in those reserves could result in a reduction in cash distributions from levels we currently anticipate pursuant to our stated cash distribution policy. Our partnership agreement does not set a limit on the amount of cash reserves that our general partner may establish. Any decision to establish cash reserves made by our general partner in good faith will be binding on our unitholders.

44


Prior to making any distribution on the common units, we reimburse our general partner and its affiliates for all direct and indirect expenses they incur on our behalf. Our partnership agreement does not set a limit on the amount of expenses for which our general partner and its affiliates may be reimbursed. These expenses include salary, bonus, incentive compensation and other amounts paid to persons who perform services for us or on our behalf and expenses allocated to our general partner by its affiliates. Our partnership agreement provides that our general partner determines in good faith the expenses that are allocable to us. The reimbursement of expenses and payment of fees, if any, to our general partner and its affiliates reduces the amount of cash available for distribution to pay distributions to our unitholders.
Even if our cash distribution policy is not modified or revoked, the amount of distributions we pay under our cash distribution policy and the decision to make any distribution is determined by our general partner.
Under Section 17-607 of the Delaware Act, we may not make a distribution if the distribution would cause our liabilities to exceed the fair value of our assets.
We may lack sufficient cash to pay distributions to our unitholders due to cash flow shortfalls attributable to a number of operational, commercial or other factors as well as increases in our operating or general and administrative expenses, principal and interest payments on our outstanding debt, tax expenses, working capital requirements and anticipated cash needs. While our general partner may cause us to borrow funds in order to permit the payment of cash distributions on our common units and incentive distribution rights, it has no obligation to cause us to do so.
If we make distributions out of capital surplus, as opposed to operating surplus, any such distributions would constitute a return of capital.
Our ability to make distributions to our unitholders depends on the performance of our subsidiaries and their ability to distribute cash to us. The ability of our subsidiaries to make distributions to us may be restricted by, among other things, the provisions of future indebtedness, applicable state limited liability company laws and other laws and regulations.
Distribution Policy
Intent to Distribute a Quarterly Distribution
Within 60 days after the end of each quarter, we intend to distribute to the holders of common units on a quarterly basis a quarterly distribution per unit, to the extent we have sufficient cash after establishment of cash reserves and payment of fees and expenses, including payments to our general partner and its affiliates.
Our partnership agreement does not contain a requirement for us to pay distributions to our unitholders, and there is no guarantee that we will pay a quarterly distribution, or any distribution, on the units in any quarter. However, it does contain provisions intended to motivate our general partner to make steady, increasing and sustainable distributions over time.
General Partner Interest
Our general partner owns a non-economic general partner interest in us, which does not entitle it to receive cash distributions. However, our general partner may in the future own common units or other equity securities in us and will be entitled to receive distributions on any such interests.
Incentive Distribution Rights
Our sponsor currently holds incentive distribution rights that entitle it to receive increasing percentages, up to a maximum of 50.0%, of the cash we distribute from operating surplus in excess of $0.54625 per unit per quarter. The maximum distribution of 50.0% does not include any distributions that our sponsor may receive on any limited partner units that it owns.
Percentage Allocations of Distributions From Operating Surplus
The following table illustrates the percentage allocations of distributions from operating surplus between the unitholders and our sponsor (as the holder of our incentive distribution rights) based on the specified target distribution levels. The amounts set forth under the column heading “Marginal Percentage Interest in Distributions” are the percentage interests of our sponsor (as the holder of our incentive distribution rights) and the unitholders in any distributions from operating surplus we distribute up to and including the corresponding amount in the column “Total Quarterly Distribution Per Unit.” The percentage interests shown for our unitholders and our sponsor (as the holder of our incentive distribution rights) for the minimum quarterly distribution are also applicable to quarterly distribution amounts that are less than the minimum quarterly distribution. The percentage interests set forth below assume our sponsor has not transferred its incentive distribution rights and there are no arrearages on common units.

45


 
 
 
 
Marginal Percentage
Interest in Distribution
 
 
Total Quarterly Distribution Target Amount
 
Unitholders
 
Sponsor (as Holder of our Incentive Distribution Rights)
First Target Distribution
 
Up to $0.54625
 
100.0
%
 
%
Second Target Distribution
 
$0.54625 to $0.59375
 
85.0
%
 
15.0
%
Third Target Distribution
 
$0.59375 to $0.7125
 
75.0
%
 
25.0
%
Thereafter
 
$0.7125 and above
 
50.0
%
 
50.0
%
Equity Compensation Plan Information
See Part III, Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Unitholder Matters” for information regarding our equity compensation plans as of December 31, 2016.
Recent Sales of Unregistered Securities
On August 31, 2016, in connection with our acquisition of all of the outstanding membership interests in Hi-Crush Blair, we issued, 7,053,292 common units to our sponsor.  The common units were issued pursuant to an exemption from registration under Section 4(a)(2) of the Securities Act of 1933, as amended.
Purchase of Equity Securities by the Issuer and Affiliated Purchasers
None.
Securities Authorized for Issuance under Equity Compensation Plans
See Item 12, "Security Ownership of Certain Beneficial Owners and Management and Related Unitholder Matters” for information regarding our equity compensation plan as of December 31, 2016.


46


ITEM 6. SELECTED FINANCIAL DATA
The Partnership's historical financial data has been recast to include Hi-Crush Augusta LLC for the periods from August 16, 2012 through December 31, 2014. The Predecessor periods include Hi-Crush Augusta LLC as a subsidiary of Hi-Crush Proppants LLC and were thus not subject to recast. In addition, the Partnership's historical financial data has been recast to include Hi-Crush Blair LLC for the years ended December 31, 2016, 2015 and 2014.
 
Year Ended December 31,
 
Period from August 16 Through December 31, 2012
 
Period from January 1 Through August 15, 2012
(in thousands, except tons, per ton and per unit amounts)
2016
 
2015
 
2014
 
2013
 
 
Successor
 
Successor
 
Successor
 
Successor
 
Successor
 
Predecessor
Statement of Operations Data:
 
 
 
 
 
 
 
 
 
 
 
Revenues
$
204,430

 
$
339,640

 
$
386,547

 
$
178,970

 
$
31,770

 
$
46,776

Production costs
45,474

 
48,371

 
58,452

 
41,999

 
8,944

 
12,247

Other cost of sales
143,719

 
199,801

 
156,904

 
46,688

 

 

Depreciation and depletion
15,437

 
13,199

 
10,628

 
7,197

 
1,109

 
1,089

Cost of goods sold
204,630

 
261,371

 
225,984

 
95,884

 
10,053

 
13,336

Gross profit (loss)
(200
)
 
78,269

 
160,563

 
83,086

 
21,717

 
33,440

Operating costs and expenses:
 
 
 
 
 
 
 
 
 
 
 
General and administrative
33,198

 
24,890

 
26,451

 
19,096

 
3,757

 
4,631

Impairments and other expenses
34,025

 
25,659

 

 
47

 
121

 
539

Accretion expense
369

 
336

 
246

 
228

 
102

 
16

Other operating income

 
(12,310
)
 

 

 

 

Income (loss) from operations
(67,792
)
 
39,694

 
133,866

 
63,715

 
17,737

 
28,254

Other income (expense):
 
 
 
 
 
 
 
 
 
 
 
Other income

 

 

 

 

 
6

Interest expense
(13,341
)
 
(13,903
)
 
(9,946
)
 
(3,671
)
 
(320
)
 
(3,240
)
Net income (loss)
(81,133
)
 
25,791

 
123,920

 
60,044

 
17,417

 
25,020

(Income) loss attributable to non-controlling interest
99

 
(145
)
 
(955
)
 
(274
)
 
23

 

Net income (loss) attributable to Hi-Crush Partners LP
$
(81,034
)
 
$
25,646

 
$
122,965

 
$
59,770

 
$
17,440

 
$
25,020

Earnings per limited partner unit:
 
 
 
 
 
 
 
 
 
 
 
Limited partner units - basic
$
(1.64
)
 
$
0.73

 
$
3.09

 
$
2.08

 
$
0.68

 
 
Limited partner units - diluted
$
(1.64
)
 
$
0.73

 
$
3.00

 
$
2.08

 
$
0.68

 
 
Distributions per limited partner unit
$

 
$
1.1500

 
$
2.4000

 
$
1.9500

 
$
0.7125

 
 
Statement of Cash Flow Data:
 
 
 
 
 
 
 
 
 
 
 
Net cash provided by (used in):
 
 
 
 
 
 
 
 
 
 
 
Operating activities
$
(26,644
)
 
$
83,649

 
$
104,265

 
$
64,323

 
$
14,498

 
$
16,660

Investing activities
(126,420
)
 
(120,667
)
 
(306,431
)
 
(105,585
)
 
(8,218
)
 
(80,045
)
Financing activities
146,324

 
43,263

 
186,367

 
51,372

 
2,234

 
61,048

Other Financial Data:
 
 
 
 
 
 
 
 
 
 
 
Adjusted EBITDA (a)
$
(16,921
)
 
$
79,376

 
$
147,910

 
$
73,534

 
$
18,846

 
$
29,349

Capital expenditures (b)
42,591

 
121,358

 
82,181

 
10,630

 
8,218

 
80,075

Operating Data:
 
 
 
 
 
 
 
 
 
 
 
Total tons sold
4,253,746

 
5,003,702

 
4,584,811

 
2,520,119

 
481,208

 
726,213

Average realized price (per ton sold)
$
47.65

 
$
62.05

 
$
70.46

 
$
65.64

 
$
66.02

 
$
64.41

Sand produced and delivered (in tons)
3,793,263

 
3,506,193

 
3,704,630

 
2,241,199

 
481,208

 
726,213

Contribution margin per ton sold
$
3.58

 
$
18.28

 
$
37.34

 
$
35.82

 
$
47.43

 
$
47.55

Balance Sheet Data (at period end)
 
 
 
 
 
 
 
 
 
 
 
Cash
$
4,314

 
$
11,054

 
$
4,809

 
$
20,608

 
$
10,498

 
$
8,717

Total assets
529,310

 
534,208

 
481,829

 
354,361

 
189,397

 
175,828

Long-term debt
193,458

 
246,783

 
198,364

 
138,250

 

 
111,402

Total liabilities
236,428

 
394,519

 
303,311

 
171,007

 
94,270

 
140,747

Equity
292,882

 
139,689

 
178,518

 
183,354

 
95,127

 
35,081


47


(a)
For more information, please read “Non-GAAP Financial Measures” below.
(b)
Capital expenditures made to increase the long-term operating capacity of our asset base whether through construction or acquisitions.
Non-GAAP Financial Measures
EBITDA and Adjusted EBITDA
We define EBITDA as net income plus depreciation, depletion and amortization and interest and debt expense, net of interest income. We define Adjusted EBITDA as EBITDA, adjusted for any non-cash impairments of goodwill and long-lived assets. EBITDA and Adjusted EBITDA are not a presentation made in accordance with accounting principles generally accepted in the United States ("GAAP").
EBITDA and Adjusted EBITDA are non-GAAP supplemental financial measure that management and external users of our financial statements, such as industry analysts, investors, lenders and rating agencies, may use to assess:
our operating performance as compared to other publicly-traded companies in the proppants industry, without regard to historical cost basis or financing methods; and
the viability of acquisitions and other capital expenditure projects and the returns on investment of various investment opportunities.
We believe that the presentation of EBITDA and Adjusted EBITDA will provide useful information to investors in assessing our financial condition and results of operations. Our non-GAAP financial measures of EBITDA and Adjusted EBITDA should not be considered as an alternative to GAAP net income. EBITDA and Adjusted EBITDA has important limitations as an analytical tool because it excludes some but not all items that affect net income. You should not consider EBITDA or Adjusted EBITDA in isolation or as a substitute for analysis of our results as reported under GAAP. Because EBITDA and Adjusted EBITDA may be defined differently by other companies in our industry, our definition of EBITDA and Adjusted EBITDA may not be comparable to similarly titled measures of other companies, thereby diminishing its utility.
Distributable Cash Flow
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 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.


48


The following table presents a reconciliation of EBITDA, Adjusted EBITDA and distributable cash flow to the most directly comparable GAAP financial measure, as applicable, for each of the periods indicated.
 
Year Ended December 31,
 
Period from August 16 Through December 31, 2012
 
Period from January 1 Through August 15, 2012
 
2016
 
2015
 
2014
 
2013
 
 
(in thousands)
Successor
 
Successor
 
Successor
 
Successor
 
Successor
 
Predecessor
Net income (loss)
$
(81,133
)
 
$
25,791

 
$
123,920

 
$
60,044

 
$
17,417

 
$
25,020

Depreciation and depletion expense
15,444

 
12,270

 
8,858

 
6,132

 
1,109

 
1,089

Amortization expense
1,682

 
2,620

 
5,186

 
3,687

 

 

Interest expense
13,341

 
13,903

 
9,946

 
3,671

 
320

 
3,240

EBITDA
(50,666
)
 
54,584

 
147,910

 
73,534

 
18,846

 
29,349

Non-cash impairments of goodwill and long-lived assets
33,745

 
24,792

 

 

 

 

Adjusted EBITDA
(16,921
)
 
79,376

 
147,910

 
73,534

 
18,846

 
$
29,349

Less: Cash interest paid
(11,475
)
 
(11,610
)
 
(8,682
)
 
(3,123
)
 
(193
)
 
 
Less: (Income) loss attributable to non-controlling interest
99

 
(145
)
 
(955
)
 
(274
)
 
23

 
 
Less: Maintenance and replacement capital expenditures, including accrual for reserve replacement (a)
(5,121
)
 
(4,733
)
 
(5,001
)
 
(3,026
)
 
(649
)
 
 
Add: Accretion of asset retirement obligations
369

 
336

 
246

 
228

 
102

 
 
Add: Unit-based compensation
2,620

 
2,983

 
1,470

 

 

 
 
Distributable cash flow
(30,429
)
 
66,207

 
134,988

 
67,339

 
18,129

 
 
Adjusted for: Distributable cash flow attributable to Hi-Crush Augusta LLC, net of intercompany eliminations, prior to the Augusta Contribution (b)

 

 
(7,199
)
 
696

 
832

 
 
Adjusted for: Distributable cash flow attributable to Hi-Crush Blair LLC, prior to the Blair Contribution (c)
(747
)
 
2,619

 
105

 

 

 
 
Distributable cash flow attributable to Hi-Crush Partners LP
(31,176
)
 
68,826

 
127,894

 
68,035

 
18,961

 
 
Less: Distributable cash flow attributable to holders of incentive distribution rights

 
(1,311
)
 
(18,401
)
 

 

 
 
Distributable cash flow attributable to limited partner unitholders
$
(31,176
)
 
$
67,515

 
$
109,493

 
$
68,035

 
$
18,961

 
 
(a)
Maintenance and replacement capital expenditures, including accrual for reserve replacement, were determined based on an estimated reserve replacement cost of $1.35 per ton produced and delivered during the period. Such expenditures include those associated with the replacement of equipment and sand reserves, to the extent that such expenditures are made to maintain our long-term operating capacity. The amount presented does not represent an actual reserve account or requirement to spend the capital.
(b)
The Partnership's historical financial information has been recast to consolidate Augusta for the periods from August 16, 2012 through December 31, 2014. For purposes of calculating distributable cash flow attributable to Hi-Crush Partners LP, the Partnership excludes the incremental amount of recast distributable cash flow earned during the periods prior to the Augusta Contribution.
(c)
The Partnership's historical financial information has been recast to consolidate Blair for the years ended December 31, 2016, 2015 and 2014. For purposes of calculating distributable cash flow attributable to Hi-Crush Partners LP, the Partnership excludes the incremental amount of recast distributable cash flow (loss) during the periods prior to the Blair Contribution.

49


ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion of our historical performance and financial condition together with Part II, Item 6, “Selected Financial Data,” the description of the business appearing in Part 1, Item 1, “Business,” and the consolidated financial statements and the related notes in Part II, Item 8 of this Annual Report on Form 10-K. 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. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this report, particularly in Item 1A, “Risk Factors” and under “Forward-Looking Statements.” All amounts are presented in thousands except acreage, tonnage and per unit data, or where otherwise noted.
Overview
We are an integrated producer, transporter, marketer and distributor of high-quality 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, which are located in Wisconsin, consist of "Northern White" sand, a resource that exists predominately in Wisconsin and limited portions of the upper Midwest region of the United States. The Partnership owns and operates a portfolio of sand facilities with on-site wet and dry plant assets, including direct access to major U.S. railroads for distribution to in-basin terminals. We own and operate a network of strategically located terminals and an integrated distribution system throughout North America, including our PropStreamTM integrated logistics solution, which delivers proppant into the blender at the well site.
On January 31, 2013 and April 8, 2014, the Partnership entered into agreements with our sponsor which ultimately resulted in the acquisition of 98.0% of the common equity interests in Hi-Crush Augusta LLC (“Augusta”), the entity that owns a 1,187-acre facility with integrated rail infrastructure, located in Eau Claire County, Wisconsin (the "Augusta facility"), for total cash consideration of $261,750 and 3,750,000 newly issued convertible Class B units in the Partnership (the “Augusta Contribution”). Subsequently on August 15, 2014, our sponsor, as 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.
Our June 10, 2013, acquisition of D & I Silica, LLC (“D&I”) transformed us into an integrated Northern White frac sand producer, transporter, marketer and distributor. At the time of the acquisition, D&I was the largest independent frac sand supplier to the oil and gas industry drilling in the Marcellus and Utica shales.
On August 9, 2016, the Partnership entered into a contribution agreement with the sponsor to acquire all of the outstanding membership interests in Hi-Crush Blair LLC ("Blair"), the entity that owned our sponsor's 1,285-acre facility with integrated rail infrastructure, located near Blair, Wisconsin (the "Blair facility"), for $75,000 in cash, 7,053,292 of newly issued common units in the Partnership, and payment of up to $10,000 of contingent earnout consideration (the "Blair Contribution"). The Partnership completed the acquisition of the Blair facility on August 31, 2016.
Our Assets and Operations
We own and operate a 971-acre facility with approximately 32,000 feet of integrated rail infrastructure, located in Wyeville, Wisconsin (the "Wyeville facility") and, as of December 31, 2016, contained 76.4 million tons of proven recoverable reserves of frac sand. The Wyeville facility, completed in 2011 and expanded in 2012, has an annual processing capacity of approximately 1,850,000 tons of frac sand per year.
We also own a 98.0% interest in the 1,187-acre Augusta facility with approximately 28,800 feet of integrated rail infrastructure and, as of December 31, 2016, 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 frac sand per year. During September 2016, the Partnership resumed production at its Augusta facility, which was previously idled as a result of market conditions.
We also own the 1,285-acre Blair facility, with approximately 43,000 feet of integrated rail infrastructure and, as of December 31, 2016, contained 117.7 million tons of proven recoverable reserves of frac sand. We completed construction of the Blair facility in March 2016. The Blair facility has an annual processing capacity of approximately 2,860,000 tons of frac sand per year.
During the third quarter of 2014, our sponsor completed construction of the 1,447-acre facility with approximately 30,000 feet of integrated rail infrastructure, located near Independence, Wisconsin and Whitehall, Wisconsin (the "Whitehall facility"). As of December 31, 2016, 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 frac sand per year. As a result of market conditions, the Whitehall facility was temporarily idled during the second quarter of 2016 and is expected to resume operations in late March or early April 2017.

50


According to John T. Boyd Company ("John T. Boyd"), our proven reserves at the Wyeville, Augusta and Blair facilities consist of Northern White sand exceeding American Petroleum Institute (“API”) minimum specifications. Analysis of sand at our facilities by independent third-party testing companies indicates that they demonstrate characteristics exceeding of API minimum specifications with regard to crush strength, turbidity and roundness and sphericity. Based on third-party reserve reports by John T. Boyd, we have an implied average reserve life of 31 years, assuming production at the rated capacity of 7,570,000 tons of frac sand per year.
As of December 31, 2016, we own or operate 11 terminal locations, of which three are temporarily idled and six are capable of accommodating unit trains. Our terminals include approximately 74,000 tons of rail storage capacity and approximately 120,000 tons of silo storage capacity.
We are continuously looking to increase the number of 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 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 December 31, 2016, we leased or owned 4,200 railcars used to transport our sand from origin to destination and managed a fleet of approximately 1,358 additional railcars dedicated to our facilities by our customers or the Class I railroads.
In September 2016, the Partnership entered into an agreement to form Proppant Express Investments, LLC ("PropX"), which was established to develop critical last-mile logistics equipment for the proppant industry. In October 2016, the Partnership announced the successful pilot test of its PropStream integrated logistics solution, which involves loading frac sand at in-basin terminals into PropX containers before being transported by truck to the well site. At the well site, the proprietary conveyor system (“PropBeast™”) significantly reduces noise and dust emissions due to its fully enclosed environment. As of December 31, 2016, we owned 6 PropBeast conveyors and leased 300 containers from PropX. 
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 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, terminal or well site. 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 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.

51


We pay royalties to third parties at our facilities at various rates, as defined in the individual royalty agreements. During the third quarter of 2016, the Partnership entered into an agreement to terminate certain existing royalty agreements for $6,750, of which $3,375 was paid during September 2016, with another payment scheduled for August 2017. As a result of this agreement, the Partnership reduced its ongoing future royalty payments to the applicable counterparties for each ton of frac sand that is excavated, processed and sold to the Partnership’s customers. We currently pay an aggregate rate up to $5.15 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. The principal expenses involved in delivering sand to the well site are costs associated with trucking, container rent, labor and other operating expenses associated with handling the product from the terminal to the well site.
We purchase sand from our sponsor's Whitehall facility, 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 are 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.
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 sold, 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 and debt expense, net of interest income. We define Adjusted EBITDA as EBITDA, adjusted for any non-cash impairments of goodwill and long-lived assets. 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 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.

52


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 financial condition and 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. Please read Item 6, “Selected Financial Data—Non-GAAP Financial Measures.”
Basis of Presentation
The following discussion of our historical performance and financial condition is derived from the historical financial statements.
Factors Impacting Comparability of Our Financial Results
Our historical results of operations and cash flows are not indicative of results of operations and cash flows to be expected in the future, principally for the following reasons:
During 2015 and 2016, we provided significant price concessions and waivers under our contracts. Beginning in August 2014 and continuing through the second quarter of 2016, oil and natural gas prices declined dramatically and persisted at levels well below those experienced during the middle of 2014. In 2015, as a result of the market dynamics existing during the year and continuing in 2016, we began providing market-based pricing to our contract customers and/or waivers of minimum volume purchase requirements, in certain circumstances in exchange for, among other things, additional term and/or volume. We continue to engage in discussions and may continue to deliver sand at prices or at volumes below those provided for in our existing contracts. Through December 31, 2016 these circumstances have negatively affected our revenues, net income and cash generated from operations.
Our Augusta production facility was temporarily idled from October 2015 through August 2016. On October 9, 2015, we announced a reduction in force to our employees in connection with the temporary idling of our Augusta production facility, which has a higher cost structure than our lowest cost production facility. During September 2016, the Partnership resumed production at its Augusta facility. The temporary idling of Augusta resulted in a decrease in volumes produced and delivered during 2016 as compared to 2015.
We completed construction of our Blair facility. We completed construction of our Blair facility in March 2016. Accordingly, our financial statements through December 31, 2015 do not include any sales or operations generated from our Blair facility.
Our sponsor's Whitehall facility did not commence operations until September 2014. Our first purchase of frac sand from the Whitehall facility occurred in September 2014. As a result of market conditions, the Whitehall facility was temporarily idled during the second quarter of 2016 and the Partnership only purchased $8,086 of sand from the Whitehall facility during 2016.
We received a contract settlement payment in 2015. In December 2015, we received a settlement payment of $22,500 for past and future obligations under a customer contract. Of the total contact settlement payment, $10,190 was recognized as revenue related to make-whole payments and the remainder as other operating income.
We incurred bad debt expense in connection with a customer’s bankruptcy filing. We incurred bad debt expense of $8,236 during the first quarter of 2016, principally as a result of a spot customer filing for bankruptcy.
We impaired our goodwill during the first quarter of 2016.  During the year ended December 31, 2016, we completed an impairment assessment of our goodwill. As a result of the assessment, we estimated the fair value of our goodwill and determined that it was less than its carrying value, resulting in an impairment of $33,745.
We impaired the intangible value associated with a third party supply agreement. During the year ended December 31, 2015, we completed an impairment assessment of the intangible asset associated with a third party supply agreement (the "Sand Supply Agreement").  Given 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.

53


We realized asset impairments and other expenses during 2015. As a result of market conditions, during the year ended December 31, 2015, we elected to temporarily idle five destination transload facilities and three rail origin transload facilities.  In addition, to consolidate our administrative functions, we closed down a regional office facility.  As a result of these actions, we recognized an impairment of $6,186 related to the write-down of transload and office facilities assets to their net realizable value, and severance, retention and relocation costs of $571 for affected employees.
Our outstanding balance under the Revolving Credit Agreement was paid in full as of June 30, 2016. As of December 31, 2016, we did not have any indebtedness outstanding under our senior secured revolving credit agreement (the "Revolving Credit Agreement"). As a result, our interest expense decreased during 2016 as compared to 2015.
During the fourth quarter of 2016, we launched PropStream, our integrated logistics solution, which delivers proppant into the blender at the well site. We incurred $1,125 in losses associated with the lower asset utilization rates and up front start-up costs during the initial roll out of the solution.
Market Conditions
Beginning in August 2014 and continuing through the second quarter of 2016, oil and natural gas prices declined dramatically and persisted at levels well below those experienced during the middle of 2014. As a result, the number of rigs drilling for oil and gas fell dramatically from the high levels achieved during third quarter of 2014; however, since the second quarter of 2016, the rig count has improved as oil and gas prices have somewhat stabilized. Specifically, the reported Baker Hughes oil rig count in North America fell from a high of 1,589 rigs in August 2014 to a low of 316 rigs in May 2016 and has recovered to 525 rigs as of December 31, 2016, which is relatively flat with the rig count as of December 31, 2015. As of February 10, 2017, the rig count is at 591 rigs. Due to the uncertainty experienced over the past two years regarding the timing and extent of a recovery, exploration and production companies sharply reduced their drilling and completion activities in an effort to control costs. As a result, our customers faced uncertainty related to overall activity levels, and well completion activity was significantly below levels experienced in 2014 and 2015. The combination of these, and other factors reduced proppant demand and pricing during 2016, and significantly from the levels experienced during 2014. Proppant demand did not decline as significantly as the rig count and well completion activity might imply, though, due to the continuing trend of longer laterals and increasing use of sand per lateral foot in well completions. Given the marginal improvement in exploration and production activity during the fourth quarter of 2016 and the energy industry's outlook for 2017 activity levels, we expect the recent years' downward trend in well completion activity to reverse over the next several quarters, which, when coupled with higher usage of frac sand per well, should result in an increased strong positive influence on demand for raw frac sand.
Spot market prices for frac sand have declined dramatically from the levels experienced in 2014, as sand producers, particularly those with excess inventories, substantially discounted sand pricing in order to sell product in a lower demand environment. Pricing continued to decline throughout 2015 and continued in 2016, but began to stabilize in the third quarter of 2016 and increase in the fourth quarter of 2016, although remaining near historically low levels. While the outlook for pricing of raw frac sand in 2017 is uncertain, given the expectation for increased oil and natural gas exploration and production activity in North America, coupled with the increased demand per well, and the limitations to increase sand supply noted above, frac sand pricing has risen in the first quarter of 2017 and is likely to be more favorable in 2017.
In 2015, as a result of the market dynamics existing during the year and continuing in 2016, we began providing market-based pricing to our contract customers and/or waivers of minimum volume purchase requirements, in certain circumstances in exchange for, among other things, additional term and/or volume. We continue to engage in discussions and may continue to deliver sand at prices or at volumes below those provided for in our existing contracts. We expect that these circumstances may continue to negatively affect our revenues, net income and cash generated from operations in 2017.
Over the past two years, we have taken several steps to ensure we continue to deliver low-cost solutions to our customers. We eliminated the volumes of sand purchased from third parties, and worked to ensure that volumes were sourced at our lowest cost facilities, combining our lowest production cost with the lowest origin to destination freight rates where possible. In 2015, we temporarily idled production at our Augusta facility, idled several transload facilities and closed an administrative office, reducing headcount and eliminating costs. In 2016, we further reduced headcount and our sponsor temporarily idled its Whitehall facility. We strategically managed the size of our railcar fleet by eliminating the use of system cars to reduce cost and returning cars at the end of their lease term. As of December 31, 2016, we have 605 railcars in long-term storage and will continue to incur storage expense related to these cars until they are removed from storage. Our proactive fleet management resulted in minimizing paid storage for idled railcars compared to our competitors.

54


As market conditions have improved since the second quarter of 2016, we have taken additional steps to ensure we are positioned to serve our customers with their increasing levels of well completions activity.  We completed the construction of additional in-basin storage facilities and have established relationships with additional third-party operated terminals.  In September 2016, we resumed production at our Augusta facility and our sponsor is in the process of performing the required maintenance at its Whitehall facility to enable resuming production when market conditions warrant.  We have continued to provide market-based pricing to our customers and are engaged in discussions to increase pricing and volumes as their activity levels increase. Additionally in October 2016, the Partnership announced the launch of its new PropStream integrated logistics solution, which delivers proppant into the blender at the well site.
The following table presents sales, volume and pricing comparisons for the fourth quarter of 2016, as compared to the third quarter of 2016:
 
Three Months Ended
 
 
 
 
 
December 31,
 
September 30,
 
 
 
Percentage
 
2016
 
2016
 
Change
 
Change
Revenues generated from the sale of frac sand (in thousands)
$
66,037

 
$
46,546

 
$
19,491

 
42
%
Tons sold
1,358,511

 
1,082,974

 
275,537

 
25
%
Percentage of volumes sold in-basin
57
%
 
47
%
 
10
%
 
21
%
Average price per ton sold
$
49

 
$
43

 
$
6

 
14
%
Tons sold during the fourth quarter were 25% higher than the third quarter of 2016 as market demand increased in line with rig count increases and well completion activity. The increased volumes coupled with an increased percentage of volumes being sold in-basin led to the increase in frac sand revenues as compared to the prior quarter.
Results of Operations
The following table presents consolidated revenues and expenses for the periods indicated. This information is derived from the consolidated statements of operations for the years ended December 31, 2016, 2015 and 2014.
 
Year Ended December 31,
 
2016
 
2015
 
2014
Revenues
$
204,430

 
$
339,640

 
$
386,547

Costs of goods sold
 
 
 
 
 
Production costs
45,474

 
48,371

 
58,452

Other cost of sales
143,719

 
199,801

 
156,904

Depreciation, depletion and amortization
15,437

 
13,199

 
10,628

Gross profit (loss)
(200
)
 
78,269

 
160,563

Operating costs and expenses
67,592

 
38,575

 
26,697

Income (loss) from operations
(67,792
)
 
39,694

 
133,866

Other income (expense)
 
 
 
 
 
Interest expense
(13,341
)
 
(13,903
)
 
(9,946
)
Net income (loss)
(81,133
)
 
25,791

 
123,920

(Income) loss attributable to non-controlling interest
99

 
(145
)
 
(955
)
Net income (loss) attributable to Hi-Crush Partners LP
$
(81,034
)
 
$
25,646

 
$
122,965


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Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
Revenues
The following table presents sales, volume and pricing comparisons for the year ended December 31, 2016, as compared to the year ended December 31, 2015:
 
Year Ended December 31,
 
 
 
Percentage
 
2016
 
2015
 
Change
 
Change
Revenues generated from the sale of frac sand (in thousands)
$
202,709

 
$
310,466

 
$
(107,757
)
 
(35
)%
Tons sold
4,253,746

 
5,003,702

 
(749,956
)
 
(15
)%
Percentage of volumes sold in-basin
54
%
 
51
%
 
3
%
 
6
 %
Average price per ton sold
$
48

 
$
62

 
$
(14
)
 
(23
)%
Revenues generated from the sale of frac sand were $202,709 and $310,466 for the years ended December 31, 2016 and 2015, respectively, during which we sold 4,253,746 and 5,003,702 tons of frac sand, respectively. Average sales price per ton was $48 and $62 for the years ended December 31, 2016 and 2015, respectively. The average sales price between the two periods differs due to changes in industry sales price trends, partially offset by the mix in pricing of FOB plant and in-basin volumes (54% and 51% of tons were sold in-basin for the years ended December 31, 2016 and 2015, respectively). With oil and gas prices persisting at levels well below those experienced in the middle of 2014 and the resulting decline in drilling activity, pricing of frac sand continued to decline during 2015 and through the middle of 2016, and we continued to provide additional discounted pricing for contract customers during 2016, as compared to pricing levels in 2015.
Other revenue related to transload, terminaling, silo leases, contract make-wholes and other services was $1,721 and $29,174 for the years ended December 31, 2016 and 2015, respectively. Other revenue in 2015 included $10,190 of make-whole payments related to a contract settlement payment. The decrease in other revenue, excluding the impact of make-whole payments, was driven by decreased transloading and logistics services provided at our terminals, resulting from lower overall industry sand demand and the decrease in volumes sold FOB plant.
Costs of goods sold – Production costs
We incurred production costs of $45,474 and $48,371 for the years ended December 31, 2016 and 2015, respectively, reflecting a decreased percentage of volumes being produced at our higher cost facilities, offset by an increase in tons produced and delivered.
The principal components of production costs involved in operating our business are excavation costs, plant operating costs and royalties. Such costs, with the exception of royalties, are capitalized as a component of inventory and are reflected in costs of goods sold when inventory is sold. Royalties are charged to expense in the period in which they are incurred. The following table provides a comparison of the drivers impacting the level of production costs for the years ended December 31, 2016 and 2015.
 
Year Ended December 31,
 
2016
 
2015
Excavation costs
$
16,292

 
$
13,240

Plant operating costs
23,447

 
24,820

Royalties
5,735

 
10,311

   Total production costs
$
45,474

 
$
48,371


56


Costs of goods sold – Other cost of sales
The other principal costs of goods sold 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. The cost of purchased sand and transportation related charges are capitalized as a component of inventory and are reflected in cost of goods sold when inventory is sold. Other cost components, including costs associated with storage in-basin and costs related to terminal operations, such as labor and rent, are charged to costs of goods sold in the period in which they are incurred.
 
Year Ended December 31,
 
2016
 
2015
Purchases of sand
$
8,086

 
$
36,160

Transportation costs
120,811

 
143,006

Other cost of sales
14,822

 
20,635

   Total other cost of sales
$
143,719

 
$
199,801

We procure sand from our facilities and our sponsor's Whitehall facility, and in 2015, through a long-term supply agreement with a third party at a specified price per ton. For the years ended December 31, 2016 and 2015, we purchased $8,086 and $36,160 of sand, respectively. The decrease was due to a lower average purchase price paid in 2016 as compared to 2015 and lower volumes purchased in 2016 as our sponsor temporarily idled its Whitehall facility during the second quarter of 2016.
We incur transportation costs including freight charges, fuel surcharges and railcar lease costs when transporting our sand from its origin to destination. For the years ended December 31, 2016 and 2015, we incurred $120,811 and $143,006 of transportation costs, respectively. Other costs of sales was $14,822 and $20,635 during the years ended December 31, 2016 and 2015, respectively, and was primarily comprised of demurrage, storage and transload fees and on-site labor. The decrease in transportation and other costs of sales was driven by decreased in-basin sales volumes, utilization of silo storage at our terminals and decreases in freight rates and lease costs, which were offset by increased costs of storage of idled rail cars and costs incurred in removing cars from storage. The year ended December 31, 2015 was negatively impacted by repair costs of silos at our Smithfield terminal and increased rail diversion and storage costs primarily as a result of railcar moves to the Partnership's production facilities and long-term third party storage facilities.
Costs of goods sold – Depreciation, depletion and amortization of intangible assets
For the years ended December 31, 2016 and 2015, we incurred $15,437 and $13,199, respectively, of depreciation, depletion and amortization expense. The increase was driven by an increased asset base resulting from the completion of our Blair facility, offset by reduced amortization of intangible assets due to the impairment of the Sand Supply Agreement in the third quarter of 2015.
Gross Profit (Loss)
Gross loss was $200 for the year ended December 31, 2016, compared to gross profit of $78,269 for the year ended December 31, 2015. Gross profit (loss) percentage declined to (0.1)% for the year ended December 31, 2016 from 23.0% for the year ended December 31, 2015. The decline was primarily driven by pricing discounts, decreased volumes, lower asset utilization rates and reduced other revenues.
Operating Costs and Expenses
For the years ended December 31, 2016 and 2015, we incurred total operating costs and expenses of $67,592 and $38,575, respectively. For the years ended December 31, 2016 and 2015, we incurred general and administrative expenses of $33,198 and $24,890, respectively. The increase in general and administrative expenses was primarily attributable to $850 in transaction costs associated with the Blair Contribution, $407 in other business development costs and $8,236 of bad debt expense associated primarily with a spot customer filing for bankruptcy.
For the year ended December 31, 2016, we incurred impairments and other expenses of $34,025 primarily related to the impairment of goodwill. For the year ended December 31, 2015, we incurred impairments and other expenses of $25,659 related to the impairment of the Sand Supply Agreement, idled administrative and transload facilities, costs associated with staffing reductions and relocations and the write-off of costs associated with abandoned construction projects.
In December 2015, we received a settlement payment of $22,500 for past and future obligations under a customer contract, $12,310 of this settlement was recognized as other operating income, with the remainder of the payment recorded as other revenue for make-whole payments as described above.
Interest Expense
Interest expense was $13,341 and $13,903 for the years ended December 31, 2016 and 2015, respectively. The decrease in interest expense was generally driven by the payment in full of the outstanding balance on our revolver in the second quarter of 2016.

57


Net Income (Loss) Attributable to Hi-Crush Partners LP
Net loss attributable to Hi-Crush Partners LP was $81,034 for the year ended December 31, 2016, compared to net income attributable to Hi-Crush Partners LP of $25,646 for the year ended December 31, 2015.
Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
Revenues
The following table presents sales, volume and pricing comparisons for the year ended December 31, 2015, as compared to the year ended December 31, 2014:
 
Year Ended December 31,
 
 
 
Percentage
 
2015
 
2014
 
Change
 
Change
Revenues generated from the sale of frac sand (in thousands)
$
310,466

 
$
323,043

 
$
(12,577
)
 
(4
)%
Tons sold
5,003,702

 
4,584,811

 
418,891

 
9
 %
Percentage of volumes sold in-basin
51
%
 
33
%
 
18
%
 
55
 %
Average price per ton sold
$
62

 
$
70

 
$
(8
)
 
(11
)%
Revenues generated from the sale of frac sand was $310,466 and $323,043 for the years ended December 31, 2015 and 2014, respectively, during which we sold 5,003,702 and 4,584,811 tons of frac sand, respectively. Average sales price per ton was $62 and $70 for the years ended December 31, 2015 and 2014, respectively. The average sales price between the two periods differs due to the mix in pricing of FOB plant and in-basin volumes (51% and 33% of tons were sold in-basin for the years ended December 31, 2015 and 2014, respectively), offset by changes in industry sales price trends. With the decline in oil and gas prices and resulting decline in drilling activity, we began discounting pricing for contract customers during 2015. Generally, sales prices per ton were rising throughout 2014, and declining throughout 2015. Price per ton exiting 2015 was significantly lower than 2014. Average sales price per ton was also somewhat impacted by the mix of product mesh sizes.
Other revenue related to transload, terminaling, silo leases, contract make-wholes and other services was $29,174 and $63,504 for the years ended December 31, 2015 and 2014, respectively. The level of transloading and logistics services provided at our terminals was increasing during 2014, and decreasing significantly during the corresponding period of 2015, both trends being in-line with industry demand for sand and our sales volumes. In addition, other revenue in 2015 includes $10,190 of make-whole payments related to the contract settlement payment.
Costs of goods sold – Production costs
We incurred production costs of $48,371 and $58,452 for the years ended December 31, 2015 and 2014, respectively. The overall decrease in production costs was attributable to lower excavation costs paid to our third party excavator, improved operating efficiencies, which resulted in reduced volumes of rejected material, and a focus on sourcing our sand from our lowest cost facility and lower tonnage produced and delivered from our production facilities during the year ended December 31, 2015 as compared to the year ended December 31, 2014.
The principal components of production costs involved in operating our business are excavation costs, plant operating costs and royalties. Such costs, with the exception of royalties, are capitalized as a component of inventory and are reflected in costs of goods sold when inventory is sold. Royalties are charged to expense in the period in which they are incurred. The following table provides a comparison of the drivers impacting the level of production costs for the years ended December 31, 2015 and 2014.
 
Year Ended December 31,
 
2015
 
2014
Excavation costs
$
13,240

 
$
16,122

Plant operating costs
24,820

 
27,747

Royalties
10,311

 
14,583

   Total production costs
$
48,371

 
$
58,452


58


Costs of goods sold – Other cost of sales
The other principal costs of goods sold 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. The cost of purchased sand and transportation related charges are capitalized as a component of inventory and are reflected in cost of goods sold when inventory is sold. Other cost components, including costs associated with storage in-basin, such as demurrage, and costs related to terminal operations, such as labor and rent, are charged to costs of goods sold in the period in which they are incurred.
 
Year Ended December 31,
 
2015
 
2014
Purchases of sand
$
36,160

 
$
25,090

Transportation costs
143,006

 
104,919

Other cost of sales
20,635

 
26,895

   Total other cost of sales
$
199,801

 
$
156,904

We procure sand from our facilities, our sponsor's Whitehall facility, through a long-term supply agreement with a third party at a specified price per ton and through the spot market. For the years ended December 31, 2015 and 2014, we incurred $36,160 and $25,090 of sand costs, respectively. The increase was due to increased volumes purchased from our sponsor's Whitehall facility, offset by a lower purchase price paid in 2015 as compared to 2014.
We incur transportation costs including freight charges, fuel surcharges and railcar lease costs when transporting our sand from its origin to destination. For the years ended December 31, 2015 and 2014, we incurred $143,006 and $104,919 of transportation costs, respectively, reflecting the increased volumes sold at our terminals. Other costs of sales was $20,635 and $26,895 during the years ended December 31, 2015 and 2014, respectively, and was primarily comprised of demurrage, storage and transload fees and on-site labor. The increase in transportation and other costs of sales was driven by increased throughput of tonnage at our terminals. The year ended December 31, 2015 was negatively impacted by repair costs of silos at our Smithfield terminal and increased rail diversion and storage costs primarily as a result of railcar moves to the Partnership's production facilities and long-term third party storage facilities.
Costs of goods sold – Depreciation, depletion and amortization of intangible assets
For the years ended December 31, 2015 and 2014, we incurred $13,199 and $10,628, respectively, of depreciation, depletion and amortization expense. The increase was driven by additional assets, including depreciation of the costs associated with the expansion of the Augusta facility, and depletion of additional acreage acquired during the second half of 2014.
Gross Profit
Gross profit was $78,269 and $160,563 for the years ended December 31, 2015 and 2014, respectively. Gross profit percentage declined to 23.0% for the year ended December 31, 2015 from 41.5% for the year ended December 31, 2014. The decline was primarily driven by pricing discounts and increased transportation costs as more volumes were sold at our terminals.
Operating Costs and Expenses
For the years ended December 31, 2015 and 2014, we incurred total operating costs and expenses of $38,575 and $26,697, respectively. For the years ended December 31, 2015 and 2014, we incurred general and administrative expenses of $24,890 and $26,451, respectively. The decrease in general and administrative expenses was primarily attributable to $768 of transaction costs associated with the Augusta Contribution in 2014 and decreased amortization of intangible assets of $1,731. In addition, general and administrative expenses decreased with the closure of a regional administrative office, resulting in staffing reductions and a decrease in travel costs. These decreases were offset by increased costs associated with the construction of the Blair facility.
For the year ended December 31, 2015, we incurred impairments and other expenses of $25,659 related to the impairment of the Sand Supply Agreement, idled administrative and transload facilities, costs associated with staffing reductions and relocations and the write-off of costs associated with abandoned construction projects.
In December 2015, we received a settlement payment of $22,500 for past and future obligations under a customer contract, $12,310 of this settlement was recognized as other operating income, with the remainder of the payment recorded as other revenue for make-whole payments as described above.
Interest Expense
Interest expense was $13,903 and $9,946 for the years ended December 31, 2015 and 2014, respectively. The increase in interest expense during 2015 was primarily attributable to additional borrowings on our revolver and interest on our $200,000 senior secured term loan facility, which was fully drawn on April 28, 2014 to finance the Augusta Contribution. During 2015, we amended our Revolving Credit Agreement and as a result of this modification, we accelerated amortization of $662 representing a portion of the remaining unamortized balance of debt issuance costs.

59


Net Income Attributable to Hi-Crush Partners LP
Net income attributable to Hi-Crush Partners LP was $25,646 and $122,965 for the years ended December 31, 2015 and 2014, respectively.
Liquidity and Capital Resources
Overview
We expect our principal sources of liquidity will be cash generated by our operations, supplemented by borrowings under our Revolving Credit Agreement, as available. We believe that cash from these sources will be sufficient to meet our short-term working capital requirements and long-term capital expenditure requirements. As of February 10, 2017, our sources of liquidity consisted of $5,659 of available cash and $66,216 pursuant to available borrowings under our Revolving Credit Agreement ($75,000, net of $8,784 letter of credit commitments) and had no indebtedness. In addition, we have a $200,000 senior secured term loan facility which permits us to add one or more incremental term loan facilities in an aggregate amount not to exceed $100,000. We also have entered into an equity distribution program under which we may sell, from time to time, common units representing limited partner interests in the Partnership up to an aggregate gross sales price of $50,000. Our General Partner is also authorized to issue an unlimited number of units without the approval of existing limited partner unitholders.
We expect that our future principal uses of cash will be for working capital, capital expenditures, funding debt service obligations and making distributions to our unitholders. On October 26, 2015, our General Partner’s board of directors announced the temporary suspension of our quarterly distribution to common unitholders in order to conserve cash and preserve liquidity. It is currently uncertain when market conditions will improve to a level at which time the General Partner's board of directors would consider it appropriate to reinstate the distribution.
Revolving Credit Agreement and Senior Secured Term Loan Facility
As of February 10, 2017, we have a $75,000 senior secured Revolving Credit Agreement, which matures in April 2019. As of February 10, 2017, we had $66,216 of undrawn borrowing capacity ($75,000, net of $8,784 letter of credit commitments) and had no indebtedness under our Revolving Credit Agreement. 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. Due to declining market conditions, on November 5, 2015, the Partnership entered into the Second Amendment, which waives the compliance of customary financial covenants through June 29, 2017 (the "Effective Period"), after which the maximum leverage ratio is 5.0x for for the fiscal quarter ending June 30, 2017 annualized, 4.5x for the six months ending September 30, 2017 annualized, 4.0x for the nine months ending December 31, 2017 annualized, and 3.5x for the twelve months ending March 31, 2018 and thereafter. After the Effective Period, the minimum interest coverage ratio, as defined, is 2.5x for each fiscal quarter ending on or after June 30, 2017. 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 during the Effective Period, and required that capital expenditures during 2016 not exceed $28,000. As a result, of further declines in volumes and pricing and their impact on earnings and cash flow, on April 28, 2016, the Partnership entered into the Third Amendment, which waives the minimum quarterly EBITDA covenants and establishes a maximum EBITDA loss for the six months ending March 31, 2017.
As of December 31, 2016, we were in compliance with the amended covenants contained in the Revolving Credit Agreement. However, the decline in volumes and pricing referred to above contributed to a net loss and negative cash flow from operations for the year ended December 31, 2016. Our ability to comply with such covenants in the future, and access our undrawn borrowing capacity under our Revolving Credit Agreement, is dependent primarily on achieving certain levels of EBITDA, as defined. We believe we will remain in compliance in 2017 with such covenants based on our forecasts for volumes, prices and EBITDA, which are above those experienced in the second half of 2016 and are consistent with the increasing sales volumes and prices we have experienced since the second half of 2016 through the first several weeks of 2017. The forecasted levels of EBITDA are therefore based on our expectation of future volumes and price increases which are subject to risk and uncertainty regarding market conditions for proppant. There can be no assurance that the Partnership will achieve the volumes and pricing included in the forecasts and therefore achieve the planned levels of EBITDA in future periods. If the levels of EBITDA are not sufficient to meet the minimum amounts required for covenant compliance, an event of default could occur.
As of February 10, 2017, we have a $200,000 senior secured term loan facility, which matures in April 2021. As of February 10, 2017, the senior secured term loan facility was fully drawn with a $194,500 balance outstanding. The senior secured term loan facility permits us to add one or more incremental term loan facilities in an aggregate amount not to exceed $100,000. Any incremental senior secured term loan facility would be on terms to be agreed among us, the administrative agent under the senior secured term loan facility and the lenders who agree to participate in the incremental facility. Borrowings under our senior secured term loan facility are secured by substantially all of our assets.

60


Credit Ratings
As of February 10, 2017, the credit rating of the Partnership’s senior secured term loan credit facility was B from Standard and Poor’s and Caa1 from Moody’s.
The credit ratings of the Partnership’s senior secured term loan facility reflect only the view of a rating agency and should not be interpreted as a recommendation to buy, sell or hold any of our securities.  A credit rating can be revised upward or downward or withdrawn at any time by a rating agency, if it determines that circumstances warrant such a change.  A credit rating from one rating agency should be evaluated independently of credit ratings from other rating agencies.
Equity Distribution Agreement
On January 4, 2017, the Partnership entered into an equity distribution program with certain financial institutions (each, a "Manager") under which we may sell, from time to time, through or to the Managers, common units representing limited partner interests in the Partnership up to an aggregate gross sales price of $50,000. As of February 10, 2017, the Partnership had not issued any common units under this equity distribution program.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a material effect on our current or future financial condition, changes in financial condition, sales, expenses, results of operations, liquidity, capital expenditures or capital resources.
The Partnership has long-term operating leases for railcars and equipment used at its terminal sites, some of which are also under long-term lease agreements with various railroads.
Capital Requirements
During the year ended December 31, 2016, we spent $42,591 related to costs associated with the completion of our Blair facility, completion of terminal facilities in Colorado and Texas, and expansion of rail capacity at our Wyeville facility, among other projects. We plan to spend $30,000 to $35,000 in 2017 related to equipment for the PropStream integrated logistics solution, terminal expansion and overburden removal, among other projects. In addition, we have committed to investing up to $17,400 in PropX, of which, $10,232 has been funded as of December 31, 2016.
Working Capital
Working capital is the amount by which current assets, excluding cash exceed current liabilities and is a measure of our ability to pay our liabilities as they become due. At the end of any given period, accounts receivable and payable tied to sales and purchases are relatively balanced to the volume of tons sold during the period. The factors that typically cause overall variability in the Partnership's working capital are (1) changes in receivables due to fluctuations in volumes sold, pricing and timing of collection, (2) inventory levels, which the Partnership closely manages, or (3) major structural changes in the Partnership's asset base or business operations, such as any acquisition, divestures or organic capital expenditures. As of December 31, 2016, we had a positive working capital balance of $52,686, as compared to a working capital deficit of $(63,124) at December 31, 2015. The deficit as of December 31, 2015 is due to advances received from our sponsor to finance the construction of the Blair facility. Excluding the $105,250 of outstanding sponsor advances, our working capital balance would have been positive $42,126 as of December 31, 2015.
The following table summarizes our working capital as of the dates indicated. 
 
Year Ended December 31,
 
2016
 
2015
Current assets:
 
 
 
Accounts receivable, net
$
52,834

 
$
41,477

Inventories
24,338

 
27,971

Prepaid expenses and other current assets
2,714

 
4,840

Total current assets
79,886

 
74,288

Current liabilities:
 
 
 
Accounts payable
18,223

 
24,237

Accrued and other current liabilities
7,877

 
6,429

Due to sponsor
1,100

 
106,746

Total current liabilities
27,200

 
137,412

Working capital (deficit)
$
52,686

 
$
(63,124
)

61


Accounts receivable increased by $11,357 during the year ended December 31, 2016, reflecting the combined impact of increased sales volumes during the month of December 2016 compared to the month of December 2015 and increases in days sales outstanding from customers.
Our inventory consists primarily of sand that has been excavated and processed through the wet plant and finished goods. The decrease in our inventory of $3,633 was primarily driven by decreased in-basin finished goods inventory on hand at December 31, 2016 as compared to 2015.
Prepaid expenses and other current assets decreased by $2,126 during the year ended December 31, 2016. The decrease was primarily driven by the timing of prepayments made on railcar leases.
Accounts payable and accrued liabilities decreased by $4,566 on a combined basis, primarily due to a decrease in the outstanding payables associated with the 2015 capital projects, as well as timing of payments on current construction projects. This decrease was offset by increased transportation and other related payables as in-basin sales were higher in the fourth quarter of 2016 as compared to the same period in 2015.
Our balance due to our sponsor decreased $105,646 during the year ended December 31, 2016, primarily as a result of $120,950 of sponsor advances converting to capital on August 31, 2016, in connection with the closing of the Blair Contribution and decreased payables for sand purchased from our sponsor's Whitehall facility.
The following table provides a summary of our cash flows for the periods indicated.
 
Year Ended December 31,
 
2016
 
2015
 
2014
Net cash provided by (used in):
 
 
 
 
 
Operating activities
$
(26,644
)
 
$
83,649

 
$
104,265

Investing activities
(126,420
)
 
(120,667
)
 
(306,431
)
Financing activities
146,324

 
43,263

 
186,367

Cash Flows - Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
Operating Activities
Net cash used by operating activities was $26,644 for the year ended December 31, 2016, compared to net cash provided by $83,649 for the year ended December 31, 2015. Operating cash flows include a net loss of $81,133 and net income earned of $25,791 during the years ended December 31, 2016 and 2015, respectively, adjusted for non-cash operating expenses and changes in operating assets and liabilities described above. The decrease in cash flows from operations was primarily attributable to decreased gross profit margins on 15% lower sales volumes, coupled with a net increase in our working capital as compared to 2015 as described above.
Investing Activities
Net cash used in investing activities was $126,420 for the year ended December 31, 2016, which consisted of the $75,000 cash portion of the purchase price for the Blair Contribution, $10,232 of contribution to our equity method investment in PropX and $42,591 of capital expenditures primarily related to the completion of the construction for the Blair facility and terminal facilities in Colorado and Texas, and expansion of rail capacity at our Wyeville facility.
Net cash used in investing activities was $120,667 for the year ended December 31, 2015, which primarily consisted of the $121,358 of capital expenditures for the construction of our Blair facility, expansion of our Augusta facility, expansion of silo storage at our terminals in Pennsylvania and Ohio, and construction of our terminal facilities in Colorado and Texas. During the year ended December 31, 2015, $691 of restricted cash was released from escrow upon completion of a project.
Financing Activities
Net cash provided by financing activities was $146,324 for the year ended December 31, 2016, and was comprised of $189,037 net proceeds from the issuance of 19,550,000 common units, $15,700 of advances received from our sponsor to fund the construction of the Blair facility and $111 of proceeds from participants in our unit purchase program, offset by $128 of loan origination costs, a $52,500 repayment of the outstanding balance on our Revolving Credit Agreement and $5,896 of repayments on other long-term debt.
Net cash provided by financing activities was $43,263 for the year ended December 31, 2015, and was comprised of $52,500 of net borrowings under the Revolving Credit Agreement, $63,266 of advances from our sponsor and $403 of proceeds from participants in our unit purchase program, offset by $70,072 of distributions to our unitholders, $406 of loan origination costs, and $2,428 of repayments of our long-term debt.

62


Cash Flows - Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
Operating Activities
Net cash provided by operating activities was $83,649 and $104,265 for the years ended December 31, 2015 and 2014, respectively. Operating cash flows include $25,791 and $123,920 of net income earned during the years ended December 31, 2015 and 2014, respectively, adjusted for non-cash operating expenses and changes in operating assets and liabilities described above. The decrease in cash flows from operations was primarily attributable to decreased gross profit margins, offset by a net decrease in our working capital associated with lower revenues in 2015 as compared to 2014.
Investing Activities
Net cash used in investing activities was $120,667 for the year ended December 31, 2015, which primarily consisted of the $121,358 of capital expenditures for the construction of our Blair facility, expansion of our Augusta facility, expansion of silo storage at our terminals in Pennsylvania and Ohio, and construction of our terminal facilities in Colorado and Texas. During the year ended December 31, 2015, $691 of restricted cash was released from escrow upon completion of a project.
Net cash used in investing activities was $306,431 for the year ended December 31, 2014, which primarily consisted of the $224,250 cost of the Augusta Contribution, capital expenditures primarily associated with construction of our Blair facility an expansion of our Augusta facility, purchases of additional equipment and construction of facilities to produce and store 100 mesh product at our facilities, and construction costs for our terminal facility in the Permian basin.
Financing Activities
Net cash provided by financing activities was $43,263 for the year ended December 31, 2015, and was comprised of $52,500 of net borrowings under the Revolving Credit Agreement, $63,266 of advances from our sponsor and $403 of proceeds from participants in our unit purchase program, offset by $70,072 of distributions to our unitholders, $406 of loan origination costs, and $2,428 of repayments of our long-term debt.
Net cash provided by financing activities was $186,367 for the year ended December 31, 2014, and was comprised of $198,000 of cash proceeds from the term loan issuance, $41,984 of advances from our sponsor and $170,693 from the issuance of 4,325,000 common units, offset by $77,421 of distributions to our unitholders, $7,120 of loan origination costs, $138,250 repayment of our prior revolving credit facility and $1,500 repayment of our term loan.
Customer Concentration
For the year ended December 31, 2016, sales to each of Halliburton, Liberty, US Well Services and Weatherford accounted for greater than 10% of our total revenues. In the fourth quarter of 2016, Weatherford made the decision to idle its U.S. pressure pumping business. As of February 10, 2017, the contractual relationship with Weatherford remains in place. For the year ended December 31, 2015, sales to each of FTS International, Halliburton, Liberty and Weatherford accounted for greater than 10% of our total revenues. For the year ended December 31, 2014, sales to each FTS International, Halliburton and Weatherford accounted for greater than 10% of our total revenues.
Contractual Obligations
The following table presents our contractual obligations and other commitments as of December 31, 2016:
 
Total
 
Less than 1 year
 
1-3 years
 
3-5 years
 
More than 5 years
Repayment of term loan
$
194,500

 
$
2,000

 
$
4,000

 
$
188,500

 
$

Repayment of other notes payable
6,705

 
962

 
5,743

 

 

Asset retirement obligations (a)
7,808

 

 

 

 
7,808

Investment in PropX
7,168

 
7,168

 

 

 

Minimum royalty payments
2,400

 
600

 
600

 
600

 
600

Termination of royalty agreements
3,375

 
3,375

 

 

 

Operating lease obligations
172,623

 
27,706

 
57,719

 
50,202

 
36,996

Minimum purchase commitments (b)
13,778

 
1,576

 
3,442

 
4,592

 
4,168

Total contractual obligations
$
408,357

 
$
43,387

 
$
71,504

 
$
243,894

 
$
49,572

(a)
The asset retirement obligations represent the fair value of the post closure reclamation and site restoration commitments for our property and processing facilities located in Augusta, Wisconsin, Wyeville, Wisconsin and Blair, Wisconsin.

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(b)
We have entered into service agreements with transload service providers which requires us to purchase minimum amounts 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.
Environmental Matters
We are subject to various federal, state and local laws and regulations governing, among other things, hazardous materials, air and water emissions, environmental contamination and reclamation and the protection of the environment and natural resources. We have made, and expect to make in the future, expenditures to comply with such laws and regulations, but cannot predict the full amount of such future expenditures.
Recent Accounting Pronouncements
In November 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2016-18, which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendment will be effective for the Partnership beginning January 1, 2018, with early adoption permitted, and should be applied retrospectively. The Partnership is currently assessing the impact that adopting this new accounting guidance will have on its Consolidated Financial Statements.
In August 2016, the FASB issued Accounting Standards Update No. 2016-15, which provides guidance that is intended to reduce diversity in practice in how certain cash receipts and cash payments are classified in the statement of cash flows. The amendment will be effective for the Partnership beginning January 1, 2018, with early adoption permitted. The Partnership is currently assessing the impact that adopting this new accounting guidance will have on its Consolidated Financial Statements and footnote disclosures.
In March 2016, the FASB issued Accounting Standards Update No. 2016-09, which identifies areas for simplification involving several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows. The new accounting guidance is effective for the Partnership beginning in the first quarter of 2017. 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.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, which will impact all leases with durations greater than twelve months. In general, such arrangements will be recognized as assets and liabilities on the balance sheet of the lessee. Under the new accounting guidance a right-of-use asset and lease obligation will be recorded for all leases, whether operating or financing, while the statement of operations will reflect lease expense for operating leases and amortization/interest expense for financing leases. The balance sheet amount recorded for existing leases at the date of adoption will be calculated using the applicable incremental borrowing rate at the date of adoption. The new accounting guidance is effective for the Partnership beginning in the first quarter of 2019, and should be applied retrospectively. The Partnership is currently assessing the impact that adopting this new accounting guidance will have on its Consolidated Financial Statements and footnote disclosures.
In May 2014, the 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 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 still assessing the adoption method it will elect upon implementation and related disclosure requirements.  Although we are still in the process of assessing the impact of the adoption of ASU 2014-09, the Partnership does not currently anticipate a material impact on its revenue recognition practices.

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Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally acceptable in the United States of America. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported revenues and expenses during the reporting periods. We evaluate these estimates and assumptions on an ongoing basis and base our estimates on historical experience, current conditions and various other assumptions that we believe to be reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities as well as identifying and assessing the accounting treatment with respect to commitments and contingencies. Our actual results may materially differ from these estimates.
Listed below are the accounting policies we believe are critical to our financial statements due to the degree of uncertainty regarding the estimates or assumptions involved, and that we believe are critical to the understanding of our operations.
Inventories
Sand inventory is stated at the lower of cost or market using the average cost method.
Inventory manufactured at our plant facilities includes direct excavation costs, processing costs, overhead allocation, depreciation and depletion. Stockpile tonnages are calculated by measuring the number of tons added and removed from the stockpile. Tonnages are verified periodically by an independent surveyor. Costs are calculated on a per ton basis and are applied to the stockpiles based on the number of tons in the stockpile.
Inventory transported for sale at our terminal facilities or at the blender includes the cost of purchased or manufactured sand, plus transportation and handling related charges.
Spare parts inventory includes critical spares, materials and supplies. We account for spare parts on a first-in, first-out basis, and value the inventory at the lower of cost or market. Detail reviews are performed related to the net realizable value of the spare parts inventory, giving consideration to quality, excessive levels, obsolescence and other factors.
Depletion
We amortize the cost to acquire land and mineral rights using a units-of-production method, based on the total estimated reserves and tonnage extracted each period.
Impairment of Long-lived Assets
Recoverability of investments in property, plant and equipment, and mineral rights is evaluated annually. Estimated future undiscounted net cash flows are calculated using estimates of proven and probable sand reserves, estimated future sales prices (considering historical and current prices, price trends and related factors) and operating costs and anticipated capital expenditures. Reductions in the carrying value of our investment are only recorded if the undiscounted cash flows are less than our book basis in the applicable assets.
Impairment losses are recognized based on the extent that the remaining investment exceeds the fair value, which is determined based upon the estimated future discounted net cash flows to be generated by the property, plant and equipment and mineral rights.
Management’s estimates of prices, recoverable proven and probable reserves and operating and capital costs are subject to certain risks and uncertainties which may affect the recoverability of our investments in property, plant and equipment. Although management has made its best estimate of these factors based on current conditions, it is reasonably possible that changes could occur in the near term, which could adversely affect management’s estimate of the net cash flows expected to be generated from its operating property.
Goodwill and Intangible Assets
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.
The Partnership amortizes the cost of other intangible assets on a straight line basis over their estimated useful lives, ranging from 1 to 20 years. An impairment assessment is performed if events or circumstances occur and may result in the change of the useful lives of the intangible assets.

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Equity Method Investments
The Partnership accounts for investments, which it does not control but has the ability to exercise significant influence, using the equity method of accounting. Under this method, the investment is carried originally at cost, increased by any allocated share of the Partnership's net income and contributions made, and decreased by any allocated share of the Partnership's net losses and distributions received. The Partnership's allocated share of income and losses are based on the rights and priorities outlined in the equity investment agreement.
Asset Retirement Obligations
In accordance with Accounting Standards Codification (“ASC”) 410-20, Asset Retirement Obligations, we recognize reclamation obligations when incurred and record them as liabilities at fair value. In addition, a corresponding increase in the carrying amount of the related asset is recorded and depreciated over such asset’s useful life. The reclamation liability is accreted to expense over the estimated productive life of the related asset and is subject to adjustments to reflect changes in value resulting from the passage of time and revisions to the estimates of either the timing or amount of the reclamation costs.
Revenue Recognition
Frac sand sales revenues are recognized when legal title passes to the customer, which may occur at the production facility, rail origin, terminal or well site. At that point, delivery has occurred, evidence of a contractual arrangement exists and collectability is reasonably assured. Revenue from make-whole provisions in our customer contracts is recognized at the end of the defined cure period when collectability is certain.
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.
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 $191,531 as of December 31, 2016, based on the market price quoted from external sources, compared with a carrying value of $194,500. 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 shall be allocated to the partners based on their respective sharing of income specified in the partnership agreement. Net income per unit applicable to limited partners is computed by dividing limited partners’ interest in net income, 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 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.
The Partnership's historical financial information has been recast to consolidate Augusta and Blair for all periods presented. The amounts of incremental income or losses recast to periods prior to the Augusta Contribution and Blair Contribution are excluded from the calculation of net income per limited partner unit.

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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 December 31, 2016 and 2015, the Partnership did not have any liabilities for uncertain tax positions or gross unrecognized tax benefit.
Related Party Transactions
Omnibus Agreement: On August 20, 2012, we entered into an omnibus agreement with our general partner and our sponsor. Pursuant to the terms of this agreement, our sponsor will indemnify us and our subsidiaries for certain liabilities over specified periods of time, including but not limited to certain liabilities relating to (a) environmental matters pertaining to the period prior to our IPO and the contribution of the Wyeville assets from our sponsor, provided that such indemnity is capped at $7,500 in aggregate, (b) federal, state and local tax liabilities pertaining to the period prior to our initial public offering and the contribution of the Wyeville assets from our sponsor, (c) inadequate permits or licenses related to the contributed assets, and (d) any losses, costs or damages incurred by us that are attributable to our sponsor’s ownership and operation of such assets prior to our IPO and our sponsor’s contribution of such assets. In addition, we have agreed to indemnify our sponsor from any losses, costs or damages it incurs that are attributable to our ownership and operation of the contributed assets following the closing of the IPO, subject to similar limitations as on our sponsor’s indemnity obligations to us.
Services Agreement: 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 years ended December 31, 2016, 2015 and 2014, the Partnership incurred $4,321, $4,404 and $9,421, 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 December 31, 2016 and 2015, an outstanding balance of $1,100 and $106,746, respectively, payable to our sponsor is maintained as a current liability under the caption “Due to sponsor”. The December 31, 2015, balance was primarily related to construction advances made to Blair. On August 31, 2016, $120,950 of sponsor advances were converted into capital.
During the years ended December 31, 2016, 2015 and 2014, the Partnership purchased $8,086, $33,406 and $23,705, 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, which is reflected in cost of goods sold.
During the years ended December 31, 2015 and 2014, the Partnership purchased $2,754 and $1,385, respectively, of sand from Goose Landing, LLC, a wholly owned subsidiary of Northern Frac Proppants II, LLC, which is reflected in cost of goods sold. During the year ended December 31, 2016, the Partnership did not purchase any sand from Goose Landing, LLC. The father of Mr. Alston, who is a director of our General Partner, owned a beneficial equity interest in Northern Frac Proppants II, LLC.
On September 8, 2016, the Partnership entered into an agreement to form PropX, which is accounted for as an equity method investment. Through December 31, 2016, the Partnership has invested $10,232 into PropX. During the year ended December 31, 2016, the Partnership purchased $1,566 of equipment from PropX, which is reflected in property, plant and equipment. As of December 31, 2016, the Partnership had accounts payable of $1,553 to PropX for equipment, which is reflected in accounts payable on our Consolidated Balance Sheet. In addition to equipment purchases, we incurred $124 of lease expenses, reflected in cost of goods, related to equipment leased from PropX.
During the years ended December 31, 2016, 2015 and 2014, 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 a member of our Board of Directors and through October 28, 2016 was our general partner's Chief Operating Officer, has an ownership 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.


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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
(Dollars in thousands)
Quantitative and Qualitative Disclosure of Market Risks
Market risk is the risk of loss arising from adverse changes in market rates and prices. Historically, our risks have been predominantly related to potential changes in the fair value of our long-term debt due to fluctuations in applicable market interest rates and those risks that arise in the normal course of business, as we do not engage in speculative, non-operating transactions, nor do we utilize financial instruments or derivative instruments for trading purposes.
The market for frac sand is indirectly exposed to fluctuations in the prices of crude oil and natural gas to the extent such fluctuations impact drilling and completion activity levels and thus impact the activity levels of our customers in the pressure pumping industry. We do not intend to hedge our indirect exposure to commodity risk.
Interest Rate Risk
As of December 31, 2016, we had $201,205 of principal outstanding under our senior secured term loan facility and other notes payable, with an effective interest rate of 4.62%. Assuming no change in the amount outstanding, the impact on interest expense of a 10% increase or decrease in the average interest rate would be approximately $929 per year.
Credit Risk – Customer Concentration
During the year ended December 31, 2016, 78% of our revenues were earned from four of our customers. Our customers are generally pressure pumping service providers. This concentration of counterparties operating in a single industry may increase our overall exposure to credit risk in that the counterparties may be similarly affected by changes in economic, regulatory or other conditions. If a customer defaults or if any of our contracts expire in accordance with their terms, and we are unable to renew or replace these contracts, our gross profit and cash flows may be adversely affected.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Report of Independent Registered Public Accounting Firm, our Consolidated Financial Statements, the accompanying Notes to the Consolidated Financial Statements, and the Financial Statement Schedule that are filed as part of this Annual Report are listed under Item 15. "Exhibits and Financial Statement Schedules” and are set forth beginning on page F-1 immediately following the signature pages of this Annual Report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.

ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our general partner's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Annual Report on Form 10-K. Based on such evaluation, our general partner's Chief Executive Officer and Chief Financial Officer have concluded that as of such date, our disclosure controls and procedures were effective.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Our internal control over financial reporting is a process designed under the supervision of our general partner's Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not detect or prevent misstatements.  Also, projections of any evaluation of the effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

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As of December 31, 2016, our management assessed the effectiveness of our internal control over financial reporting based on the criteria for effective internal control over financial reporting established in Internal Control - Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. Based on the assessment, management determined that we maintained effective internal control over financial reporting as of December 31, 2016, based on those criteria.
The effectiveness of our internal control over financial reporting as of December 31, 2016 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their audit report which appears herein.
Changes in Internal Controls Over Financial Reporting
During the quarter ended December 31, 2016, there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B. OTHER INFORMATION
None.

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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Management of Hi-Crush Partners LP
We are managed and operated by the board of directors and executive officers of our general partner. As of February 10, 2017, our sponsor owned 20,693,643 of our common units, representing 32.5% of common units, and all the incentive distribution rights. As a result of owning our general partner, our sponsor has the right to appoint all members of the board of directors of our general partner, including the independent directors. Our unitholders are not entitled to elect our general partner or its directors or otherwise directly participate in our management or operation. Our general partner owes certain duties to our unitholders as well as a fiduciary duty to its owners.
Our general partner has ten directors, three of whom are independent as defined under the independence standards established by the NYSE and the Exchange Act. The NYSE does not require a listed publicly-traded partnership, such as ours, to have a majority of independent directors on the board of directors of our general partner or to establish a compensation committee or a nominating committee. However, our general partner is required to have an audit committee of at least three members, and all its members are required to meet the independence and experience standards established by the NYSE and the Exchange Act. As of December 31, 2016, the following directors served on the audit committee:
Name
 
Independence Status
John F. Affleck-Graves
 
Independent
John Kevin Poorman
 
Independent
Joseph C. Winkler III
 
Independent
All of the executive officers of our general partner allocate their time between managing our business and affairs and the business and affairs of our sponsor. While the amount of time that our executive officers devote to our business and the business of our sponsor varies in any given year based on a variety of factors, we currently estimate that each of our executive officers spend approximately 75% of their time on the management of our business. Our executive officers devote as much time to the management of our business and affairs as is necessary for the proper conduct of our business and affairs.
Following the IPO on August 16, 2012, neither our general partner nor our sponsor receive any management fee or other compensation in connection with our general partner’s management of our business, but we reimburse our general partner and its affiliates, including our sponsor, for all expenses they incur and payments they make on our behalf. Our partnership agreement does not set a limit on the amount of expenses for which our general partner and its affiliates may be reimbursed. These expenses include salary, bonus, incentive compensation and other amounts paid to persons who perform services for us or on our behalf and expenses allocated to our general partner by its affiliates. Our partnership agreement provides that our general partner determines in good faith the expenses that are allocable to us.
In evaluating director candidates, our sponsor assesses whether a candidate possesses the integrity, judgment, knowledge, experience, skill and expertise that are likely to enhance the board’s ability to manage and direct our affairs and business, including, when applicable, to enhance the ability of committees of the board to fulfill their duties.

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Executive Officers and Directors of Our General Partner
The following table shows information for the executive officers and directors of our general partner. Directors are appointed for a one-year term and hold office until their successors have been elected or qualified or until the earlier of their death, resignation, removal or disqualification. Executive officers serve at the discretion of the board. There are no family relationships among any of our directors or executive officers. Some of our directors and all of our executive officers also serve as executive officers of our sponsor.
Name
 
Age
 
Position With Our General Partner
Robert E. Rasmus
 
59
 
Chief Executive Officer and Director
Laura C. Fulton
 
53
 
Chief Financial Officer
Mark C. Skolos
 
57
 
General Counsel and Secretary
Chad M. McEver
 
44
 
Vice President
William E. Barker
 
35
 
Vice President
James M. Whipkey
 
59
 
Chairman of the Board
John F. Affleck-Graves
 
66
 
Director
Jefferies V. Alston, III
 
39
 
Director
Gregory F. Evans
 
36
 
Director
John R. Huff
 
70
 
Director
John Kevin Poorman
 
65
 
Director
Trevor M. Turbidy
 
48
 
Director
Graham R. Whaling
 
62
 
Director
Joseph C. Winkler III
 
65
 
Director
Robert E. Rasmus—Chief Executive Officer and Director. Mr. Rasmus is a co-founder of Hi-Crush Proppants LLC and has served as its Co-Chief Executive Officer since its formation in October 2010 until November 2015 when he became sole Chief Executive Officer. Mr. Rasmus was named Co-Chief Executive Officer and appointed to the board of directors of our general partner in May 2012 until November 2015 when he became sole Chief Executive Officer. Mr. Rasmus was a founding member of Red Oak Capital Management LLC (“ROCM”) in June 2002 and has served as Managing Director since inception. ROCM’s business model centered on partnering with the largest oil services companies in unconventional basins in the United States. Prior to the founding of ROCM, Mr. Rasmus was the President of Thunderbolt Capital Corp., a venture firm focused on start-up and early stage private equity investments. Previously, Mr. Rasmus started, built and expanded a variety of domestic and international capital markets and corporate finance businesses. Mr. Rasmus was the Senior Managing Director of Banc One Capital Markets, Inc. (formerly First Chicago Capital Markets, Inc.) where he was responsible for the high yield and private placement businesses while functioning as a member of the management committee. Prior thereto, Mr. Rasmus was the Managing Director and Head of Investment Banking in London for First Chicago Ltd. Mr. Rasmus holds a BA in Government and International Relations from the University of Notre Dame. Mr. Rasmus is a member of the Board of Directors for the National Industrial Sand Association and the Lab for Economic Opportunities. We believe that Mr. Rasmus’ industry experience and deep knowledge of our business makes him well-suited to serve on the board of directors of our general partner.
Laura C. Fulton—Chief Financial Officer. Ms. Fulton has served as Chief Financial Officer of Hi-Crush Proppants LLC since April 2012. In May 2012, Ms. Fulton was appointed to Chief Financial Officer of our general partner. On February 26, 2013, Ms. Fulton was elected director of Targa Resources Corp. and currently serves on the audit committee. From March 2008 to October 2011, Ms. Fulton served as the Executive Vice President, Accounting and then Executive Vice President, Chief Financial Officer of AEI Services, LLC (“AEI”), an owner and operator of essential energy infrastructure assets in emerging markets. Prior to AEI, Ms. Fulton spent 12 years with Lyondell Chemical Company in various capacities, including as general auditor responsible for internal audit and the Sarbanes-Oxley certification process, and as the assistant controller. Previously, Ms. Fulton worked for Deloitte & Touche in its audit and assurance practice for 11 years. Ms. Fulton is a CPA and graduated cum laude from Texas A&M University with a BBA in Accounting. Ms. Fulton is a member of the American Institute of Certified Public Accountants and serves on the Accounting Department Advisory Board at Texas A&M University.

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Mark C. Skolos—General Counsel and Secretary. Mr. Skolos was appointed General Counsel of Hi-Crush Proppants LLC in April 2012 and named General Counsel and Secretary of our general partner in May 2012. Prior to joining Hi-Crush Proppants LLC, Mr. Skolos was a shareholder at the law firm of Weld, Riley, Prenn and Ricci S.C. (“Weld Riley”) from September 2011 to April 2012. Mr. Skolos worked as an attorney for Skolos, Millis and Matousek, S.C., or its predecessor firms (“Skolos Millis”), for 26 years prior to its merger with Weld Riley in April 2012. Mr. Skolos was made a shareholder at Skolos Millis in 1990. In his private practice, Mr. Skolos represented developers, businesses and local units of government on issues of government regulation, land use and real estate. Mr. Skolos has extensive experience representing companies in the non-metallic mining and processing industry on a wide spectrum of issues, including permitting, land acquisition and government relations. He graduated from the University of Wisconsin Law School in 1985 with a JD. Mr. Skolos has served as President of the Tri-County Bar Association of Wisconsin and acted as both Circuit Court and Family Court Commissioner in the State of Wisconsin. He is on the Board of Directors for the National Industrial Sand Association and is a member of the Texas General Counsel Forum.
Chad M. McEver—Vice President, Sales and Business Development. Mr. McEver has served as Vice President of Hi-Crush Proppants LLC since its inception in October 2010 and also served as Vice President of our general partner since 2012. In November, 2015, Mr. McEver assumed responsibility for all commercial activities related to distribution operations and services, customer sales, and business development as Vice President, Commercial and Distribution. In November 2016, Mr. McEver was appointed to lead sales and new market and business development for the company. Mr. McEver joined ROCM as an Associate in 2004 executing the business model of ROCM with responsibility for analysis, execution and origination of projects with exploration and production and oilfield services companies and ROCM’s co-investors. From 2001 to 2004, Mr. McEver was a Director at EnerCom, Inc., an investor relations consulting firm exclusively serving the energy industry. From 1999 to 2001, Mr. McEver was an analyst in the investment banking energy group at Raymond James & Associates. Mr. McEver holds a BBA from Stephen F. Austin State University and a MBA in Finance from the University of Denver.
William E. Barker—Vice President, Midstream Operations. Mr. Barker has served as Vice President of our general partner since March 2015.  In March 2015, Mr. Barker assumed responsibility for logistics and site development and in November 2016, Mr. Barker assumed responsibility in his current role for terminal operations and inventory management in addition to leading logistics and site development. From September 2013 to February 2015, he served as Assistant General Counsel of Hi-Crush Proppants LLC.  Prior to joining Hi-Crush Proppants LLC, from September 2008 to September 2013, Mr. Barker specialized in securities law and mergers and acquisitions for the law firm of Norton Rose Fulbright US LLP.  Mr. Barker holds a Bachelor of Arts degree in Economics from Rice University, where he graduated magna cum laude, and a Juris Doctorate from the University of Houston Law Center, where he graduated as a member of the Order of the Coif.
James M. Whipkey—Chairman of the Board. Mr. Whipkey has a 35 year background in the oil and natural gas industry with broad experience in both technical and financial areas. Mr. Whipkey was named Chairman of the Board of our general partner in November 2015. Mr. Whipkey is a co-founder of Hi-Crush Proppants LLC and served as its Co-Chief Executive Officer from October 2010 to November 2015. Mr. Whipkey served as Co-Chief Executive Officer of our general partner from May 2012 to November 2015, and was appointed to the board of directors of our general partner in May 2012. Mr. Whipkey was a founding member of ROCM in June 2002 and has served as Managing Director since inception. Prior to the founding of ROCM, Mr. Whipkey was an equity analyst covering the exploration and production sector, most recently as a Managing Director at ABN Amro Bank N.V. From 1997 to 2000, Mr. Whipkey was the Chief Financial Officer and Treasurer for NYSE-listed Benton Oil and Gas Company. Prior thereto, Mr. Whipkey worked in a number of investment banking positions managing a wide range of relationships and responsibilities in the energy sector. His various roles included energy derivatives trading at Phibro Energy Inc., investment banking at Kidder, Peabody & Co., and stock analysis at Lehman Brothers Holdings Inc., where he won “All-Star” recognition from the Wall Street Journal in both the E&P and oil service sectors. Mr. Whipkey began his career as a petroleum engineer with Amoco Corporation where he spent five years in operations, drilling and reservoir simulation roles. Mr. Whipkey holds a BS in Petroleum and Natural Gas Engineering from The Pennsylvania State University and an MBA in Finance from the University of Chicago. We believe that Mr. Whipkey’s experience in senior financial management and knowledge of our business serve him well as a member of the board of directors of our general partner.
John F. Affleck-Graves—Director. Mr. Affleck-Graves joined the board of directors of our general partner in November 2012 and serves as a member of the Audit Committee and Conflicts Committee. He has served in roles of increasing responsibility and seniority at The University of Notre Dame from 1986 to present, including as an Executive Vice President from 2004 to present. As Executive Vice President, he serves as one of three executive officers of the University. Additionally, Mr. Affleck-Graves is a prior Board member of St. Joseph’s Capital Bank, Student Loan Corporation and Express-1 Inc. Throughout his career, Mr. Affleck-Graves has received many distinctions and honors including MBA Outstanding Teacher Award, University of Notre Dame. He received his BSc Mathematical Statistics and Computer Science in 1971 from the University of Capetown. Mr. Affleck-Graves also holds a PhD in Mathematical Statistics and a BCom in Accounting and Financial Management from the University of Capetown. Mr. Affleck-Graves previously served as a director of Express-1 Expedited Solutions, Inc. from October 2006 to October 2011 and served on its audit committee. We believe that Mr. Affleck-Graves’ expertise and the unique perspective gained from his service at the University of Notre Dame enable him to effectively serve as a director.

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Jefferies V. Alston, III—Director. Mr. Alston served as Chief Operating Officer of Hi-Crush Proppants LLC from May 2011 until October 2016 and served as Chief Operating Officer of our general partner from May 2012 until October 2016. Mr. Alston was appointed to the board of directors of our general partner in May 2012. Mr. Alston founded Trinity Consulting, LLC (“Trinity”) in December 2009, where he designed and managed construction of numerous frac sand processing facilities and became one of the leading consultants in the industry, until dissolving Trinity to join Hi-Crush Proppants LLC. Mr. Alston worked for Alston Equipment Company, Inc. (“Alston Equipment”) from February 1999 until he founded Trinity in December 2009. While at Alston Equipment, Mr. Alston was responsible for sales, growth initiatives and customer relations. Mr. Alston attended The University of Southern Mississippi and Southeastern Louisiana University. With his extensive knowledge of the frac sand industry, we believe Mr. Alston brings substantial experience and leadership skills to the board of directors of our general partner.
Gregory F. Evans—Director. Mr. Evans has served as a director of Hi-Crush Proppants LLC since January 2014 and was appointed to the board of directors of our general partner in February 2014. Mr. Evans currently serves as a Principal of Avista Capital Partners, where he has worked since 2005. From 2003 to 2005, Mr. Evans was an Analyst at DLJ Merchant Banking Partners. Prior to joining DLJ Merchant Banking Partners, he was an Analyst in Credit Suisse First Boston’s Investment Banking Department. Mr. Evans holds a BBA in Finance from the University of Texas at Austin. We believe that Mr. Evans brings financial and analytical expertise in the energy sector, including experience as a director of numerous energy-related companies, to the board of directors of our general partner.
John R. Huff—Director. Mr. Huff has served as a director of Hi-Crush Proppants LLC since May 2011 and was appointed to the board of directors of our general partner in May 2012. Mr. Huff has served as Chairman of the board of directors of Oceaneering International, Inc. (“Oceaneering”) since 1990 and served as its Chief Executive Officer from 1986 to 2006. Prior to joining Oceaneering, Mr. Huff served as Chairman, President and Chief Executive Officer of Western Oceanic, Inc. from 1972 to 1986. In addition to his service as chairman of the board of directors of Oceaneering, Mr. Huff has served as a member of the board of directors of Suncor Energy, Inc. since 1998. Mr. Huff also served as a member of the board of directors of Rowan Companies, Inc. from April 2006 to May 2009, of KBR, Inc. from April 2007 to April 2014 and of BJ Services Company from 1992 to April 2010. Mr. Huff received a Bachelor’s degree in Civil Engineering from Georgia Tech and attended the Harvard Business School’s Program for Management Development. Mr. Huff is a Registered Professional Engineer in the State of Texas and a member of the National Academy of Engineering, Washington D.C. We believe that Mr. Huff’s substantial knowledge of energy-related businesses, as well as his considerable experience as a director of public companies, has prepared him well to serve on the board of directors of our general partner.
John Kevin Poorman—Director. Mr. Poorman joined the board of directors of our general partner in August 2013 and serves as a member of the Audit Committee and Conflicts Committee. Since June 2013, Mr. Poorman has been Chief Executive Officer of PSP Capital Partners, LLC and Pritzker Realty Group, LLC, investment managers for affiliated entities in real estate and other non-real estate business. Pritzker Realty Group, LLC is also an operator of real estate. Mr. Poorman is responsible for implementing and overseeing each company's strategic direction. He is also Executive Chairman of Vi Senior Living (formerly Classic Residence by Hyatt). Mr. Poorman previously served as an officer and director of several businesses owned by interests of the extended Pritzker family. Mr. Poorman is the past Chairman of the Board of Trustees of the Loyola University of New Orleans and served as a director of The New Orleans Jazz Orchestra, Inc. Mr. Poorman also serves as President and as a director of The Barack Obama Foundation. Prior to joining Hyatt Hotels Corporation in 1988, Mr. Poorman was a partner in the Dallas-based law firm of Johnson & Swanson. Mr. Poorman graduated from the University of Oklahoma in 1974 with a B.S. in Botany and received a Juris Doctorate therefrom in 1977 with highest honors. He is a member of the State Bars of the States of Texas and Illinois. We believe that Mr. Poorman’s business leadership skills make him well-suited to serve on the board of directors of our general partner.
Trevor M. Turbidy—Director. Mr. Turbidy has served as a director of Hi-Crush Proppants LLC since May 2011 and was appointed to the board of directors of our general partner in May 2012. Mr. Turbidy has served as an energy industry advisor for Avista Capital Partners since 2007. Prior to joining Avista Capital Partners, Mr. Turbidy served as Chief Executive Officer of Trico Marine Services (“Trico”), an international provider of marine support vessel services to the offshore oil and gas industry from 2005 to 2007. Prior to that, Mr. Turbidy was Chief Financial Officer of Trico from 2003 to 2005, functioned as the Chief Restructuring Officer during the company’s restructuring and subsequently was promoted to Chief Executive Officer after its successful completion. Prior to his service at Trico, Mr. Turbidy spent more than a decade with Donaldson, Lufkin & Jenrete Inc. (“DLJ”) and Credit Suisse First Boston in their investment banking divisions. During his tenure with DLJ and Credit Suisse First Boston, Mr. Turbidy focused on the energy sector, principally offshore and land drilling contractors, seismic service providers, oilfield equipment manufacturers, offshore support vessel providers and exploration and production companies, as well as regional opportunities in the Southwest. Mr. Turbidy previously served as a director of Grey Wolf, Inc., Precision Drilling Corporation and Trico Marine Services Inc., as well as a number of private companies in the energy industry. Mr. Turbidy holds an AB in Economics from Duke University. We believe that Mr. Turbidy’s substantial management-level experience with public and private companies, together with his considerable knowledge of the energy industry as a whole, are of great value to the board of directors of our general partner.

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Graham R. Whaling—Director. Mr. Whaling was appointed to the board of directors of our general partner in February 2015 and has a 35 year background in the energy industry. Since 2014, Mr. Whaling has served as an energy industry advisor for Avista Capital Partners. Prior to joining Avista Capital Partners, Mr. Whaling served as Chief Executive Officer of Parkman Whaling, an oil and gas investment banking advisory firm, which he co-founded in July 2007. Prior to that, Mr. Whaling was chairman and Chief Executive Officer of Laredo Energy, L.P., which he co-founded in 2001. Mr. Whaling has also been a Managing Director at DLJ Merchant Banking Partners, Chairman and Chief Executive Officer of Monterey Resources Inc. and Chief Financial Officer of Santa Fe Energy Resources, Inc. Mr. Whaling holds an M.B.A. from the Wharton School of the University of Pennsylvania and a bachelor’s degree in petroleum engineering from the University of Texas.  We believe that Mr. Whaling’s substantial management-level experience, together with his extensive knowledge of and background in the energy industry, make him particularly well-qualified to serve on the board of directors of our general partner.
Joseph C. Winkler III—Director. Mr. Winkler joined the board of directors of our general partner in connection with our IPO and serves as the Chairman of the Audit Committee and Conflicts Committee. Mr. Winkler served as Chairman and Chief Executive Officer of NYSE-listed Complete Production Services, Inc. (“Complete”), a provider of specialized oil and gas services and equipment in North America, from March 2007 until February 2012, at which time Complete was acquired by Superior Energy Services, Inc. From June 2005 to March 2007, Mr. Winkler served as Complete’s President and Chief Executive Officer. Prior to that, from March 2005 until June 2005, Mr. Winkler served as the Executive Vice President and Chief Operating Officer of National Oilwell Varco, Inc., an oilfield capital equipment and services company, and from May 2003 until March 2005 as the President and Chief Operating Officer of the company’s predecessor, Varco International, Inc. (“Varco”). From April 1996 until May 2003, Mr. Winkler served in various other capacities with Varco and its predecessor, including Executive Vice President and Chief Financial Officer. From 1993 to April 1996, Mr. Winkler served as the Chief Financial Officer of D.O.S., Ltd., a privately held provider of solids control equipment and services and coil tubing equipment to the oil and gas industry, which was acquired by Varco in April 1996. Prior to joining D.O.S., Ltd., Mr. Winkler served as Chief Financial Officer of Baker Hughes INTEQ, and served in a similar role for various companies owned by Baker Hughes Incorporated including Eastman/Telco and Milpark Drilling Fluids. Mr. Winkler served as a member of the board of directors of Dresser-Rand Group, Inc., a NYSE-listed provider of rating equipment solutions, until its acquisition by Siemens in July 2015. Mr. Winkler is also a member of the board of directors of Commercial Metals Company, a vertically integrated Fortune 500 steel company, and serves on its Finance Committee and Compensation Committee, and a member of the board of directors of Eclipse Resources Corporation, an independent exploration and production company, and serves on its audit and compensation committees. Mr. Winkler joined the board of directors of Tetra Technologies Inc. and is a member of its audit committee. Mr. Winkler received a BS degree in Accounting from Louisiana State University. We believe that Mr. Winkler’s many years of operational, financial, international and capital markets experience, a significant portion of which was with publicly traded companies in the oil and gas services, manufacturing and exploration and production industries, make him particularly well-suited to serve on the board of directors of our general partner.
Director Independence
As of December 31, 2016, three of our directors were independent.
Committees of the Board of Directors
The board of directors of our general partner maintains an audit committee and a conflicts committee. As permitted by NYSE rules, we do not currently have a compensation committee, but rather the board of directors of our general partner approves equity grants to directors and employees.
Audit Committee
We are required to have an audit committee of at least three members, and all its members are required to meet the independence and experience standards established by the NYSE and the Exchange Act. The audit committee assists the board of directors in its oversight of the integrity of our financial statements and our compliance with legal and regulatory requirements and partnership policies and controls. The audit committee has the sole authority to (1) retain and terminate our independent registered public accounting firm, (2) approve all auditing services and related fees and the terms thereof performed by our independent registered public accounting firm, and (3) pre-approve any non-audit services and tax services to be rendered by our independent registered public accounting firm. The audit committee is also responsible for confirming the independence and objectivity of our independent registered public accounting firm. Our independent registered public accounting firm is given unrestricted access to the audit committee and our management, as necessary. Messrs. Winkler, Affleck-Graves and Poorman are the members of the audit committee, with Mr. Winkler currently serving as chairman.
The board of directors of our general partner has determined that Mr. Winkler qualifies as an “audit committee financial expert,” as such term is defined under SEC rules.

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The audit committee has (1) reviewed and discussed the audited financial statements with management, (2) discussed with the independent auditors the matters required by PCAOB Auditing Standard No. 16, Communications with Audit Committees, (3) received written disclosures and the letter from the independent accountants required by applicable requirements of the PCAOB regarding the independent accountant's communications with the audit committee concerning independence and has discussed with the independent accountant the independent accountant's independence, and (4) recommended to the board of directors of our general partner that the audited financial statements be included in the Partnership's annual report on Form 10-K for the last fiscal year.
Conflicts Committee
Three independent members of the board of directors of our general partner serve on the conflicts committee to review specific matters that the board believes may involve conflicts of interest and determines to submit to the conflicts committee for review. The conflicts committee determines if the resolution of the conflict of interest is in our best interest. The members of the conflicts committee may not be officers or employees of our general partner or directors, officers or employees of its affiliates, including our sponsor, and must meet the independence standards established by the NYSE and the Exchange Act to serve on an audit committee of a board of directors, along with other requirements in our partnership agreement. Any matters approved by the conflicts committee are conclusively deemed to be in our best interest, approved by all of our partners and not a breach by our general partner of any duties it may owe us or our unitholders. Messrs. Winkler, Affleck-Graves and Poorman are the members of the conflicts committee, with Mr. Winkler currently serving as chairman.
Section 16(a) Beneficial Ownership Reporting Compliance
Pursuant to Section 16(a) of the Exchange Act, certain officers and directors of our general partner, and persons beneficially owning more than 10% of our units, are required to file with the SEC reports of their initial ownership and changes in ownership of our units. These officers and directors, and persons beneficially owning more than 10% of our units are also required by SEC regulations to furnish us with copies of all Section 16(a) forms they file. Based solely on a review of Forms 3, 4 and 5 and amendments thereto furnished to us and written representations from reporting persons that no other reports were required for those persons, we believe that during 2016, all officers and directors, and persons beneficially owning more than 10% of our units who were required to file reports under Section 16(a) complied with such requirements on a timely basis except that a Form 4 filed by Hi-Crush Proppants LLC was not timely filed.
Corporate Governance Matters
We have a Code of Business Conduct and Ethics for directors, executive officers and employees that applies to, among others, the principal executive officers, principal financial officer and principal accounting officer or controller of our general partner, as required by SEC and NYSE rules. Furthermore, we have Corporate Governance Guidelines and charters for our Audit Committee and Conflicts Committee. Each of the foregoing is available on our website at www.hicrush.com in the “Corporate Governance” section. We provide copies, free of charge, of any of the foregoing upon receipt of a written request to Hi-Crush Partners LP, Three Riverway, Suite 1350, Houston, Texas 77056, Attn: General Counsel. We disclose amendments and director and executive officer waivers with regard to the Code of Business Conduct and Ethics, if any, on our website or by filing a Current Report on Form 8-K to the extent required.
The certifications of our general partner’s Chief Executive Officer and Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act have been included as exhibits to this Annual Report on Form 10-K.
Communication with the Board of Directors
A holder of our units or other interested party who wishes to communicate with the directors of our general partner may do so by contacting our corporate secretary at the address or phone number appearing on the front page of this Annual Report on Form 10-K. Communications will be relayed to the intended recipient of the board of directors of our general partner except in instances where it is deemed unnecessary or inappropriate to do so pursuant to our communications policy, which is available on our website at www.hicrush.com in the “Corporate Governance” section. Any communications withheld under those guidelines will nonetheless be recorded and available for any director who wishes to review them.
Executive Sessions of Non-Management Directors
The board of directors of our general partner holds regular executive sessions in which the independent directors meet without any non-independent directors or members of management. The purpose of these executive sessions is to promote open and candid discussion among the independent directors. The director who presides at these meetings, the Lead Director, is chosen by the board of directors to serve until the first meeting of the Board to occur after the first anniversary of the date that the Lead Director is chosen. The current Lead Director is Mr. Winkler.


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ITEM 11. EXECUTIVE COMPENSATION
(All amounts presented in dollars)
Compensation Discussion and Analysis
General
As a publicly traded limited partnership, we do not have directors, officers or employees. Instead, we are managed by the board of directors of our general partner, Hi-Crush GP LLC, and the executive officers of our general partner perform all of our management functions. Other than Messrs. McEver and Barker, who are employed by Hi-Crush Services, a subsidiary of our sponsor, Hi-Crush Proppants LLC, all of our general partner’s named executive officers are employed by our sponsor. Under the Services Agreement, we reimburse Hi-Crush Services, on a monthly basis, for the allocable expenses that it and our sponsor incurs in compensating our general partner’s named executive officers. Please read Item 13, "Certain Relationships and Related Transactions, and Director Independence-Other Transactions with Related Persons” for more information about the Services Agreement.
Other than equity-based incentive grants under our long-term incentive plan, our sponsor as the ultimate employer of our named executive officers has responsibility and authority for non-equity based compensation related decisions for our Chief Executive Officer and, upon consultation with and recommendations by our Chief Executive Officer, for our Chief Financial Officer and General Counsel. Although our sponsor has the ultimate responsibility and authority for non-equity based compensation related decisions for our named executive officers, it regularly consults with, receives recommendations from, and obtains the approval of, the board of directors of our general partner with respect to non-equity based compensation related decisions. All compensation decisions for employees of Hi-Crush Services, including those for the individuals who are executive officers of our general partner, are made at the discretion of our Chief Executive Officer, subject to approval by our sponsor and consultation with the board of directors of our general partner. All determinations with respect to equity awards made under the Partnership’s Long-Term Incentive Plan ("LTIP") or the Amended and Restated Long-Term Incentive Plan ("Restated LTIP"), are made by the board of directors of our general partner, following the recommendation of our sponsor and the approval of the board of directors of our general partner and, where appropriate, the conflicts committee of the board of directors of our general partner.
For the year ended December 31, 2016, the named executive officers ("NEOs") of our general partner were the following:
Robert E. Rasmus, Chief Executive Officer (Principal Executive Officer)(a) 
Laura C. Fulton, Chief Financial Officer (Principal Financial Officer)
Mark C. Skolos, General Counsel and Secretary
Chad M. McEver, Vice President, Sales and Business Development
William E. Barker, Vice President, Midstream Operations
(a)
Mr. Rasmus additionally assumed the role as our Principal Operating Officer effective October 28, 2016 upon Mr. Alston’s resignation as Chief Operating Officer of our general partner effective October 28, 2016.
Distributions to Our General Partner
Our general partner is directly owned by our sponsor, which is partially-owned by certain of our named executive officers. We pay quarterly distributions to our sponsor in accordance with our partnership agreement with respect to its ownership of its limited partner interests and the incentive distribution rights as specified in our partnership agreement. The amount of each quarterly distribution that we pay to our sponsor is based solely on the provisions of our partnership agreement, which agreement specifies the amount of cash we distribute to our sponsor based on the amount of cash that we distribute to our limited partners each quarter. Accordingly, the cash distributions we make to our sponsor bear no relationship to the level or components of compensation of our named executive officers.
Summary of Key 2016 Results
Our financial performance continued to be negatively impacted by the dramatic decline in oil and natural gas prices. In 2016, the daily average spot price for WTI was $43.29, approximately 11% lower than the average spot price during 2015. The average weekly North American horizontal rig count, as reported by Baker Hughes, also fell in 2016 relative to 2015, declining more than 46% from 744 in 2015 to 400 in 2016. As a result of these adverse market conditions on well completion activity, as compared to 2015, our sales volumes decreased by 15%; our revenues decreased by 40%; our earnings per unit declined $2.37; and our Adjusted EBITDA declined $96.3 million.

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However, during 2016, we executed upon key opportunities to expand our business and customer base, reduce our logistics costs, and enhance our capital structure while continuing to operate our plants in the most efficient and cost effective manner:
Completed construction of the Blair facility on time and within budget with shipments commencing during the first quarter of 2016;
Completed construction of two new strategically located terminals in Colorado and Texas to better serve our customers in the Permian and DJ basins;
Completed expansion of rail capacity at our Wyeville facility;
Developed and launched our PropStream integrated logistics solution to expand the reach and delivery of frac sand from the mine to the well;
Reopened our Augusta facility during the 3rd quarter to meet customer demands;
Successfully executed strategies which streamlined processes and lowered product movement and storage costs; and
Improved balance sheet position through a number of capital markets transactions, including two public equity offerings in the second quarter and one during the third quarter.
We believe these results along with our competitive strengths position us to successfully execute our strategy and achieve our key business objectives.
Summary of 2016 Compensation Actions and Changes
Peer Group Review and Selection
After consulting with members of the board of directors of our general partner and BDO, USA LLP, our executive compensation consulting group, we selected eight peer companies to replace former peer companies merged into or acquired by other entities to establish a 2016 peer group of eighteen companies for competitive compensation benchmarking analysis. BDO prepared an analysis covering all major components of total compensation, including annual base salary, annual short-term cash incentive and long-term incentive awards for the named executive officers. Our sponsor and the board of directors of our general partner utilized the information provided by BDO to compare the levels of annual base salary, annual short-term cash incentive and long-term equity incentive awards at the peer companies with those of its named executive officers to ensure that the compensation of our named executive officers is both consistent with our compensation philosophy and competitive relative to the compensation for executive officers of the peer companies.
Establishment of Total Direct Compensation Value for the Chief Executive Officer
The sponsor and the board of directors of our general partner approved management’s recommendation to establish a total direct compensation target for Mr. Rasmus upon his assumption of the role of Chief Operating Officer in addition to his role as Chief Executive Officer. Prior to that time, Mr. Rasmus received $1 in annual base salary and incentive compensation as determined under the short-term incentive plan ("STI"). A short-term incentive target was established in 2014, which if earned, was settled 50% in cash and 50% in an award of performance based vesting phantom limited partner units (“PPUs”). The 2014 target value was based on a review of competitive market norms as determined through a peer analysis conducted by BDO in 2014. The ultimate target established by the sponsor and the board of directors of our general partner reflected competitive norms as well as our organizational structure which included two Co-Chief Executive Officers and a Chief Operating Officer.
The total direct compensation target approved in 2016 for Mr. Rasmus includes a base pay component which is 22% of the total compensation mix and variable pay components which comprise 78% of the total compensation mix. The variable component includes an annual, short-term incentive component which, if earned, is paid in cash, and grants of long-term equity-settled incentive awards granted in PPUs (60% of value) and time-based phantom limited partner units (“TPUs”) (40% of value). Following is a summary of the total direct compensation established for Mr. Rasmus in 2016:
Name
 
Base Salary
 
STI Target
 
Annual LTI Target
 
Total Direct Compensation Target
Robert E. Rasmus, Chief Executive Officer
 
$
500,000

 
$
500,000

 
$
1,300,000

 
$
2,300,000

Base Salary Increases
Base salary increases were approved for each of the named executive officers with increases ranging from 7% to 12% to ensure market competitiveness and to reflect position level and scope, skills, and increased responsibilities.
Annual Short-Term Cash Incentive
The short-term incentive target was adjusted for Mr. McEver and both the short and long-term incentive targets were adjusted for Mr. Barker to align total direct compensation with the competitive market and to recognize his increased responsibilities.

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Incremental Equity Awards
In September 2016, in addition to the annual long-term incentive awards approved by the board of directors of our general partner, approval was made for an incremental equity award for each named executive officer. The awards were made to recognize specific achievements made in 2015 and 2016: development and start-up of new service offerings and facilities, completion of successful financial transactions, and development and execution of strategic third party agreements, all of which support key short-term objectives to expand and diversify our business and to strengthen our capital structure. In addition, these awards were intended as an additional incentive to enhance the retention aspects of the long-term incentive program. These incremental awards were granted in TPUs with 50% vesting on the second anniversary of the date of grant and 50% on the third anniversary of the date of grant.
Amendment and Restatement of the LTIP
The LTIP, adopted on August 21, 2012 was amended and restated on January 9, 2017 following approval by the board of directors of the general partner at a special meeting held by the Partnership of its unitholders. At the meeting, the Partnership’s unitholders approved the Restated LTIP, which, among other things, provided for an increase in the number of common units of the Partnership reserved and available for delivery with respect to awards under the Restated LTIP by 2,700,000 common units to an aggregate of 4,064,035 common units. Following receipt of approval from the Partnership’s unitholders at the special meeting, the Restated LTIP was made effective as of September 21, 2016. With the restatement the following key terms were approved:
Prohibitions
Repricing of unit options or unit appreciation rights and other material amendments (for example, an amendment that increases the number of common units authorized for issuance) without unitholder approval
Director Award Limits
Annual limit on the grant date fair value of all awards granted to a non-employee director is $700,000 (or $1,400,000 in the first year the individual becomes a non-employee director)
Minimum Vesting Period
Unit options and unit appreciation rights will have a minimum one year restricted period, except with respect to substitute awards
Restrictions on Unit Options
The exercise price of unit options may be no less than the fair market value of the underlying common units as of the date of grant, except with respect to substitute awards
Other Provisions
Awards are non-transferable, except by will or by the laws of descent and distribution; no automatic award grants are made to any eligible individuals; no excise tax gross-ups; clawback provisions
Our Compensation Philosophy
Our executive compensation program is intended to align the interests of our management team with those of our unitholders by motivating our executive officers to achieve strong financial and operating results for us, which we believe closely correlate to long-term unitholder value. In addition, our program is designed to achieve the following objectives:
attract, retain and reward talented executive officers and key management employees by providing total compensation competitive with that of other executive officers;
motivate executive officers and key management employees to achieve strong financial and operational performance;
emphasize performance-based compensation, balancing short-term and long-term results; and
reward individual performance.
Methodology - Advisors and Peer Companies
We employ a compensation philosophy that emphasizes pay-for-performance based on a combination of the Partnership’s performance and the individual’s impact on the Partnership’s performance, advancement of our business strategies, levels of responsibility, skills and experience. We believe this pay-for-performance approach generally aligns the interests of our named executive officers with that of our unitholders, and at the same time enables us to maintain a lower level of base salary overhead in the event our operating and financial performance fails to meet expectations. Our executive compensation program is designed to attract and retain individuals with the background and skills necessary to successfully execute our business model in a demanding environment, to motivate those individuals to reach near-term and long-term goals in a way that aligns their interest with that of our unitholders, and to reward success in reaching such goals.
When evaluating compensation levels for each named executive officer, the sponsor and the board of directors of our general partner, reviews publicly available compensation data for executives in our peer group as well as compensation surveys needed to supplement data for positions where there is insufficient data or a lack of comparable positions reported within the peer group. The peer group data analysis and compensation survey data each serve as reference points along with the observations of the Chief Executive Officer as provided to the sponsor and the board of directors of the general partner regarding skills, experience, roles and responsibilities, objectives, as well as other factors, to determine the appropriate salary and total compensation target level for each named executive officer.

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In August 2016, we engaged the services of BDO to assist us with the review of our peer group and the selection of replacements for nine peer companies which had ceased to be publicly traded since the time of our last competitive pay analysis in 2014: Access Midstream Partners. L.P., Atlas Pipeline Partners, L.P., EnLink Midstream Partners, L.P., Markwest Energy Partners, L.P., Regency Energy Partners, LP, Targa Resources Partners LP, Eagle Rock Energy Partners, L.P., Niska Gas Storage Partners LLC, (which has since been acquired by Brookfield Infrastructure Group) and PVR Partners, L.P.
In developing a peer group, BDO includes companies whose size, as measured by market capitalization, total assets, and EBITDA, may be substantially greater than the Hi-Crush enterprise but for which helpful data is available through public filings. To account for company size, BDO uses statistical analysis to correct for variations in size. More specifically, BDO uses multiple regression analysis of peer data to predict what a reasonable total compensation amount might be for a unique executive position. BDO believes that larger sample sizes result in stronger correlations of data.
After careful review, eight companies, comprised of energy-focused partnerships or c-corporations directly competing in the proppants business, were selected: Antero Midstream Partners LP, Emerge Energy Services LP, Fairmount Santrol Holdings, Inc., Calumet Specialty Partners LP, Martin Midstream Partners LP, Tallgrass Energy Partners LP, Dominion Midstream Partners, LP, Holly Energy Partners LP, and Western Refining Logistics, LP.
The final group of eighteen peer companies was utilized by BDO to complete a benchmarking study to review and establish overall competitive compensation targets for our named executive officers. BDO used its multiple regression model to determine how market capitalization and total assets as well as EBITDA of companies in the peer group predict the value of total compensation opportunity of a company whose market capitalization and total assets equal those of Hi-Crush.
We consider BDO to be independent of the Partnership and therefore the work performed by BDO does not create a conflict of interest. The BDO study was based on compensation as reported in the proxy statements, Form 8-K filings and the annual reports on Form 10-K by each company in the peer group. In addition to peer group data, BDO utilized the following published surveys: 2016 Economic Research Institute Platform, 2016 Kenexa Comp Analyst, 2015 Mercer Total Compensation for the Energy Sector, 2015 Towers Watson CBD General Industry Executive Compensation Survey, and the AON Survey of MLPs.
The study was comprised of the following peer companies:
Antero Midstream Partners LP
American Midstream Partners, LP
Emerge Energy Services LP
Boardwalk Pipeline Partners, LP
Carbo Ceramics Inc.
Crestwood Equity Partners LP
DCP Midstream Partners, LP
Dominion Midstream Partners, LP
Fairmount Santrol Holdings, Inc.
Genesis Energy, L.P.
Calumet Specialty Partners LP
Holly Energy Partners LP
NuStar Energy L.P.
Western Refining Logistics, LP
Martin Midstream Partners LP
Summit Midstream Partners, LP
Tallgrass Energy Partners LP
U.S. Silica Holdings, Inc.
The compensation analysis provided by BDO covered all major components of total compensation, including annual base salary, annual short-term cash incentive and long-term incentive awards for the senior executives of these companies. The board of directors of our general partner utilized the information provided by BDO to compare the levels of annual base salary, annual short-term cash incentive and long-term equity incentive awards at the peer companies with those of its named executive officers to ensure that compensation of our named executive officers is both consistent with our compensation philosophy and competitive with the compensation for executive officers of the peer companies. The board of directors of our general partner also considered and reviewed the results of the study performed by BDO to ensure the results indicated that our compensation programs were yielding a competitive total compensation model prioritizing incentive-based compensation and rewarding achievement of short and long-term performance objectives.
Components of Executive Compensation
There are principally three components of compensation that are used in our executive compensation program - base salary, annual short-term cash incentive and long-term equity incentive awards. Cash incentives and equity incentives (as opposed to base salary and benefits) represent the performance driven elements of the compensation program. The determination of each individual’s short-term cash incentives will reflect their relative contribution to achieving or exceeding annual goals, and the determination of each individual’s long-term incentive awards will be based on their expected contribution with respect to longer term performance objectives.

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Base Salary
Base salary is paid in cash and is a component which recognizes each executive officer's unique value and contributions to our success in light of salary norms in the industry, provides our named executive officers with sufficient, regularly paid income and reflects position and level of responsibility. Our sponsor and the board of directors of our general partner review base salaries on an annual basis and may make adjustments as necessary to maintain a competitive executive compensation structure.
In September 2016, the sponsor and the board of directors of our general partner established a base salary of $500,000 for Mr. Rasmus and approved base salary increases for Ms. Fulton, Mr. Skolos, Mr. McEver, and Mr. Barker of 10%, 10%, 7% and 12%, respectively. No base pay increases have been awarded since February 2015. The board of directors of our general partner believe these increases in base salary are appropriate based on each executive’s individual achievements in 2015 and 2016. The actual base salaries paid by us to our named executive officers during 2016 are set forth in the “Summary Compensation Table.”
Named Executive Officer
 
2016 Annual Base Salary
Robert E. Rasmus, Chief Executive Officer
 
$
500,000

Laura C. Fulton, Chief Financial Officer
 
$
330,000

Mark C. Skolos, General Counsel and Secretary
 
$
275,000

Chad M. McEver, Vice President, Sales and Business Development
 
$
230,000

William E. Barker, Vice President, Midstream Operations
 
$
230,000

Annual Short-Term Cash Incentive
Under the STI, annual cash incentives are provided to executives to promote the achievement of our near term performance goals and objectives. Target incentive opportunities under the STI are established as a percentage of base salary. Incentive amounts are based on the attainment of pre-established financial goals, operational performance and individual performance objectives related to strategic activities for the function or business unit as applicable.
In October 2016, the board of directors of our general partner established a short-term annual cash incentive target of 100% of base salary for Mr. Rasmus and adjusted STI targets from 40% to 50% of salary for Mr. McEver and Mr. Barker.
Our goal is to set incentive target awards at levels that make total direct compensation competitive with comparable companies for the skills, experience and requirements of similar positions in order to attract and retain top talent.  The incentive target awards can differ from actual awards because of Partnership or individual performance, but the actual payout of any award is determined at the sole discretion of our sponsor and the board of directors of our general partner.
Name and Principal Position
 
2016 Targeted STI Opportunity
Robert E. Rasmus, Chief Executive Officer
 
100% of base salary
Laura C. Fulton, Chief Financial Officer
 
85% of base salary
Mark C. Skolos, General Counsel and Secretary
 
85% of base salary
Chad M. McEver, Vice President, Sales and Business Development
 
50% of base salary
William E. Barker, Vice President, Midstream Operations
 
50% of base salary
The following table shows each named executive officer’s performance-based cash incentive minimum, threshold, target and maximum payouts under the STI, which were established by our sponsor and the board of directors of our general partner in 2015 for named executive officers, and which were reviewed and in some cases adjusted in October 2016.
Name and Principal Position
 
Minimum Payout ($)
 
Threshold Payout ($)
 
Target Payout ($)
 
Maximum Payout ($)
Robert E. Rasmus, Chief Executive Officer
 

 
250,000

 
500,000

 
1,000,000

Laura C. Fulton, Chief Financial Officer
 

 
142,500

 
285,000

 
570,000

Mark C. Skolos, General Counsel and Secretary
 

 
117,500

 
235,000

 
470,000

Chad M. McEver, Vice President, Sales and Business Development
 

 
57,500

 
115,000

 
230,000

William E. Barker, Vice President, Midstream Operations
 

 
57,500

 
115,000

 
230,000


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The STI provides funding for payouts based on financial, operating, and individual performance in the following range: (i) 0% if the threshold level of performance is not achieved, (ii) 50% if the threshold level of performance is achieved, (iii) 100% if the target level of performance is achieved, and (iv) 200% if the maximum level of performance is achieved. Performance levels are determined at the sole discretion of the sponsor and the board of directors of our general partner based on qualitative and quantitative evaluations of performance.
When determining the funding of the STI pool and the payment of individual STI awards for the year, the sponsor and the board of directors of our general partner consider recommendations made by the Chief Executive Officer, which are based on his evaluation of whether, and to what extent, our Partnership met its financial and operational performance objectives during the year. He also makes recommendations based on his assessment of the individual performance of each of the other named executive officers in executing their goals and objectives, which align to strategic scorecard opportunities. Any STI award paid to the Chief Executive Officer is determined by our sponsor and the board of directors of our general partner based upon a similar review performed as described above without input from the Chief Executive Officer. The sponsor and the board of directors of our general partner ultimately determine at their discretion the total amount to be allocated to the STI pool based on their final assessment of overall annual performance.
Our Partnership performance goals and objectives are based on performance indicators that align with strategies to optimize the performance of the Partnership and the Hi-Crush enterprise, which includes both Hi-Crush Proppants LLC, the owner of our general partner, and its subsidiaries, and the Partnership combined.
The financial growth objectives for the 2016 STI were as follows:
(1)
Achievement of our budget for Adjusted EBITDA (a non-GAAP measure defined as EBITDA adjusted for any non-cash impairments of goodwill and long-lived assets), of $29.5 million (weighted 50%);
(2)
Resumption of cash distributions to unitholders by November 15, 2016 (weighted 25%), and
(3)
Achievement of a targeted year-over-year growth of 15% in total unitholder return (weighted 25%).
Adjusted EBITDA is a key indicator of the short-term financial performance of our assets without regard to financing methods, capital structure or historical cost basis. Cash distributions to unitholders is an important metric used by management to compare the Partnership’s cash generating performance from period to period and to compare cash generating performance for specific periods to the cash distributions (if any) that are expected to be paid to our unitholders. Growth in total unitholder return allows us to compare annual return performance to similarly situated companies and reinforces our objective to drive near-term and long-term value creation.
The annual budget sets expectations for sales volumes, pricing, operating expenditures, capital expenditures, and general and administrative costs so that we can forecast our financial position for mid-term and long-term periods. The annual budget process includes extensive input and reviews by the sales, production, logistics, distribution operations, human resources, inventory, and financial teams generating multiple preliminary reviews by executive management and ultimately a preliminary review with the sponsor and the board of directors before final approval in the December/January timeframe each year.
In addition to financial growth objectives, funding of the STI pool is contingent upon the achievement of goals tied to applicable strategic operating and individual performance indicators, to be targeted by each named executive officer for that particular calendar year, as reviewed and approved by our sponsor and the board of directors of our general partner. These include:
Meeting plant production uptime and operating efficiency goals;
Minimizing logistics costs;
Increasing logistics and production capacity and flexibility through organic expansion;
Enhancing pricing, gaining market share and expanding our customer base;
Diversifying our business to meet customer demands and create new opportunities;
Streamlining processes to reduce and eliminate costs;
Enhancing our capital structure; and
Meeting environmental, health and safety goals.
STI payouts for the Chief Executive Officer, the Chief Financial Officer and the General Counsel, are weighted 80% on the Partnership’s financial growth objectives and 20% on the applicable strategic individual objectives. STI payouts for Mr. McEver and Mr. Barker are weighted 20% on the Partnership’s financial growth objectives, 30% on the applicable operating objectives for their respective business segments, and 50% on strategic individual objectives.

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The sponsor and the board of directors of our general partner may also subjectively consider the individual leadership, performance and efforts of each officer with respect to the Partnership's achievement of these goals and objectives. Additionally, our sponsor and the board of directors of our general partner may apply discretion in determining actual payouts below stated maximums based on its assessment of the Partnership’s overall performance for the year.
For purposes of determining the actual funding of the STI pool, the sponsor and the board of directors of our general partner reviewed the 2016 Partnership results as summarized below:
Financial Growth Objectives
Adjusted EBITDA in millions
Threshold
 
Target
 
Maximum
 
Actual
 
Payout Factor
$26.5
 
$29.5
 
$35.4
 
$(16.9)
 
—%
Resumption of Cash Distributions to Unitholders
Threshold
 
Target
 
Maximum
 
Actual
 
Payout Factor
Jan-17
 
Nov-16
 
Aug-16
 
NA
 
—%
Year-Over-Year Growth in Total Unitholder Return %
Threshold
 
Target
 
Maximum
 
Actual
 
Payout Factor
10%
 
15%
 
20%
 
234%
 
200%
For a calculation of 2016 Adjusted EBITDA, see Item 6, "Selected Financial Data" and Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations" of this Annual Report on Form 10-K.
Performance relative to Adjusted EBITDA and Resumption of Cash Distributions to Unitholders was below Threshold yielding a payout factor of zero. Our 2016 Total Unitholder Return performance of 234% is calculated based on the December 31, 2015 closing unit price of $5.92 and the December 31, 2016 closing unit price of $19.80, which yields a return of 234% and a payout factor at maximum. Our total unitholder return for the period of December 31, 2014 through December 31, 2015 was (75%).
Operating Objectives
In addition to our financial results, the sponsor and the board of directors of the general partner reviewed performance relative to our key operating objectives, where applicable, to each named executive officer:
Production optimization goals, including uptime efficiency (operating hours per day divided by 24 hours assuming scheduled and unscheduled downtime for maintenance, checks and repairs) and operating efficiency;
Goals to reduce supply chain operating and logistics costs;
Safety and Environmental Compliance goals
Funding based on attainment of operating objectives under the STI may range as follows: (i) 0% if the threshold level of performance is not achieved, (ii) 50% if the threshold level of performance is achieved, (iii) 100% if the target level of performance is achieved, and (iv) 200% if the maximum level of performance is achieved. For each of the 2016 operating objectives, actual performance ranged between target and maximum levels.
Other Strategic Objectives
In addition to reviewing the financial growth and operating performance results, the sponsor and the board of directors of the partnership reviewed individual performance relative to key strategic opportunities established at the beginning of the year for the named executive officers based on recommendations from management and the Chief Executive Officer.
Despite achievement of one of the 2016 financial growth objectives, achievement of operating objectives above target overall, and execution of many our strategic goals, the board of directors of the general partner, in discussions with the Chief Executive Officer, exercised discretion to award no cash incentive payouts to the named executive officers due to the current industry environment, the overall Partnership financial performance, and the need to reduce cash expenses.
The financial growth metrics and key operating performance indicators utilized in 2016 for operation of the STI were generally the same for 2014 and 2015 STI plan operation. For 2014 STI payouts, funding was established between target and maximum as a result of financial and operational performance exceeding targets. No STI payments were funded for 2015 performance, based on financial performance below the established threshold levels for adjusted EBITDA, annual growth in distributions to unitholders, and total unitholder return, notwithstanding operating performance exceeding targets.

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Long-Term Incentive Compensation
In connection with our initial public offering, the board of directors of our general partner adopted the LTIP for employees, officers, consultants and directors of our general partner and its affiliates, including Hi-Crush Services LLC, who perform services for us. All Hi-Crush Services LLC employees and each of our named executive officers, are eligible to participate in the LTIP. The LTIP provides for the grant of restricted units, phantom units, unit options, unit appreciation rights, distribution equivalent rights, other unit-based awards and unit awards.
On January 9, 2017, the Partnership held a special meeting of its unitholders at which the Partnership’s unitholders approved the Restated LTIP, to provide for an increase in the number of common units of the Partnership reserved and available for delivery with respect to awards under the Restated LTIP by 2,700,000 common units to an aggregate of 4,064,035 common units. Following receipt of approval from the Partnership’s unitholders at the special meeting, the Restated LTIP was made effective as of September 21, 2016.
The Restated LTIP’s objective is to provide a focus on long-term value creation and enhance executive retention. The board of directors of our general partner approved the issuance of awards under our LTIP in September 2016 of both PPUs (60% of value) and TPUs (40% of value) to our named executive officers. Previously, long-term incentive value for the Chief Executive Officer, Chief Financial Officer and the General Counsel was delivered exclusively in the form of PPUs.
In September 2016, the board of directors of the Partnership also established a long-term incentive target and approved a long-term incentive award for Mr. Rasmus equal to 260% of base salary to be granted in both PPUs (60% of value) and TPUs (40% of value). The board also approved long-term incentive award targets for each of the other named executive officers.
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 ("TUR"), over a three-year performance period compared to the TUR of each entity in the Alerian MLP Index based on the Partnership's average position among the Peer Group for each calendar quarter in the performance period based on Quarterly TUR. 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 amount paid on the DERs will equal the quarterly distributions actually paid on the underlying securities during the performance period. Termination of employment for any reason will result in the forfeiture of any unvested units and unpaid DERs. We believe that utilizing total unitholder return as the long-term performance measure for these awards provides incentive for the continued growth of our operating footprint and distributions to unitholders. The PPUs will vest if the named executive officer continuously provides services to the Partnership from the date of grant until the end of the performance period.
If our Average TUR ranking among the companies in the group over the performance period is below the 25th percentile, 0% of the performance units will vest. If our Average TUR ranking over the performance period is greater than the 25th percentile but less than or equal to the 50th percentile, 50% to 100% of the performance units will vest. If our Average TUR ranking over the performance period is greater than the 50th percentile but less than or equal to the 75th percentile, 100% to 200% of the performance units will vest. If our Average TUR ranking over the performance period is greater than the 75th percentile, 200% of the performance units will vest. The number of phantom units that vest between applicable percentiles will be determined by straight-line interpolation. If the TUR for the Partnership during the performance period is negative (i.e. the price on the first trading day of the performance period is greater than the sum of the price on the last trading day of the performance period plus the aggregate distribution amount), then the number of phantom units earned shall not exceed 150% of the target amount. In addition, the board of directors of the general partner has discretion to increase or decrease the number of phantom units earned by up to 20%.
The TPUs vest 50% on the second anniversary of the date of grant and 50% on the third anniversary of the date of grant.
To determine the number of PPUs or TPUs to be granted to each named executive officer in September 2016, we determined the dollar amount of long-term incentive compensation that we wanted to provide, and then granted the number of PPUs or TPUs that had a fair market value equal to that amount on the date of grant. For our named executive officers, long-term incentive award targets for executives under the plan were established as a percentage of base salary (which reflects position and level of responsibility), with reference to the BDO study data for individuals in comparable positions.

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The actual 2016 long-term incentive award values granted, expressed as a percentage of base salary and the number of PPUs and TPUs awarded on September 14, 2016, were as follows:
Name and Principal Position
 
2016 Long-Term Incentive Award Value (a)
 
2016 PPUs Awarded (b)
 
2016 TPUs Awarded
Robert E. Rasmus, Chief Executive Officer
 
260% of base salary
 
49,936

 
33,291

Laura C. Fulton, Chief Financial Officer
 
151% of base salary
 
19,207

 
12,804

Mark C. Skolos, General Counsel and Secretary
 
151% of base salary
 
15,942

 
10,627

Chad M. McEver, Vice President, Sales and Business Development
 
76% of base salary
 
6,723

 
4,481

William E. Barker, Vice President, Midstream Operations
 
131% of base salary
 
11,524

 
7,683

(a)
Award value is delivered 60% in PPUs and 40% in TPUs.
(b)
Represents 100% of the PPUs awarded to the named executive officer. As discussed above, depending on the Partnership’s performance over a three-year period, between 0% and 200% of the performance units will vest.
Enhancement to 2016 Long-Term Incentive Awards
In addition to the annual long-term incentive award value, an incremental equity award for each named executive officer was approved by the board of directors of our general partner to increase retention value and to recognize specific achievements related to the development and start-up of new service offerings and facilities, completion of successful financial transactions, and development and execution of strategic third party agreements, all of which support key short-term objectives to expand and diversify our business and to strengthen our capital structure. These awards were approved on September 14, 2016, in TPUs as follows:
Name and Principal Position
 
2016 Incremental Value
 
2016 TPUs Awarded
Robert E. Rasmus, Chief Executive Officer
 
$
850,000

 
54,418

Laura C. Fulton, Chief Financial Officer
 
$
500,000

 
32,011

Mark C. Skolos, General Counsel and Secretary
 
$
400,000

 
25,609

Chad M. McEver, Vice President, Sales and Business Development
 
$
50,000

 
3,202

William E. Barker, Vice President, Midstream Operations
 
$
175,000

 
11,204

The TPUs vest 50% on the second anniversary of the date of grant and 50% on the third anniversary of the date of grant.
Unit Purchase Program
During 2015, the board of directors approved the adoption of the Hi-Crush Partners LP Unit Purchase Program (the "UPP") offered under the LTIP as a purchase right for units. The UPP provides participating directors and employees, including the named executive officers, the opportunity to purchase common units representing limited partner interests of the Partnership at a discount. Employees earning more than $1 annual salary contribute to the UPP through payroll deductions not to exceed 35% of such employee’s eligible compensation during the applicable offering period. Directors and employees earning $1 annual salary contribute to the UPP through cash contributions not to exceed $150,000 in the aggregate. 
On December 14, 2015, each named executive officer participating in the UPP was granted the right to purchase, on February 28, 2017 at $5.14 per common unit, up to the number of common units set forth in the table below, which shall be equal to (a)(i) such named executive officer’s aggregate dollar amount of contributions elected to be made to the UPP during the period of the UPP’s applicability divided by (ii) $5.14 (for named executive officers earnings $1 annual salary), or (b)(i) such named executive officer’s elected percentage of compensation multiplied by (ii) his or her actual eligible compensation during the period of the UPP's applicability divided by (iii) $5.14 (for named executive officers earning more than $1 annual salary), in each case capped at 20,000 common units:

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Name and Principal Position
 
Purchase Rights for Common Units Granted Under the UPP
Robert E. Rasmus, Chief Executive Officer
 
20,000

(a)
Laura C. Fulton, Chief Financial Officer
 
20,000

(b)
Mark C. Skolos, General Counsel and Secretary
 
5,986

(b)
Chad M. McEver, Vice President, Sales and Business Development
 
17,848

(b)
William E. Barker, Vice President, Midstream Operations
 
17,298

(b)
(a)
Calculated based on application of the formula set forth above, using the dollar amount of contributions elected by the named executive officer. 
(b)
Calculated based on the application of the formula set forth above, using the named executive officer’s elected percentage of compensation and amount of eligible compensation through February 10, 2017. 
Incentive Profits Interests
Pursuant to their employment agreements, each of Ms. Fulton, Mr. Skolos and Mr. McEver have been granted a 0.75% profits interest, 0.25% profits interest and 0.50% profits interest, respectively, in our sponsor entitling them to receive 0.75%, 0.25% and 0.50%, respectively, of any net distributions by our sponsor after the capital members of the sponsor have received aggregate distributions from our sponsor above applicable threshold amounts for each executive officer. Upon the receipt by the capital members of aggregate distributions from the sponsor above certain incremental thresholds, Mr. McEver’s profits interest increases from 0.50% up to a maximum 0.80% of any net distributions by our sponsor. No profits interest was paid to Ms. Fulton, Mr. Skolos or Mr. McEver in 2016.
Benefits
The Partnership does not maintain a defined benefit or pension plan for our named executive officers because it believes such plans primarily reward longevity rather than performance. Hi-Crush Services provides benefits to all of its employees that includes health, dental, vision, basic term life insurance, personal accident insurance and short and long-term disability coverage. Employees provided to us under the Services Agreement, including our named executive officers, are entitled to the same basic benefits. For the year ended December 31, 2016, Hi-Crush Services provided a dollar-for-dollar matching contribution under the 401(k) plan on the first 3% of eligible compensation contributed to the plan, up to $7,950. The 401(k) matching contribution vests in four installments with the first 25% vesting upon completion of one year of service and an additional 25% vesting each year thereafter.
Risk Assessment Related to our Compensation Structure
We believe that the compensation plans and programs for our named executive officers, as well as our other employees, are appropriately structured and are not reasonably likely to result in material risk to the Partnership. We believe these compensation plans and programs are structured in a manner that does not promote excessive risk-taking that could harm the value of the Partnership or reward poor judgment. We also believe that compensation has been allocated among base salary and short and long-term compensation in such a way that does not encourage excessive risk-taking. Under our STI, annual cash incentives are provided to our executives to promote achievement of the Partnership’s short-term strategic objectives. The Partnership awards performance phantom limited partner units, which represent the right to receive upon vesting one common unit representing limited partner interests in the Partnership, rather than unit options for equity awards because the phantom units retain value even in a depressed market so that employees are less likely to take unreasonable risks to get, or keep, options “in-the-money.” Finally, the time-based graded vesting over three years for the Partnership’s long-term incentive awards ensures that the interests of employees align with those of the unitholders of the Partnership for the long-term performance of the Partnership.
Tax and Accounting Implications of Equity-Based Compensation Arrangements
Deductibility of Executive Compensation
We are a partnership and not a corporation for U.S. federal income tax purposes. Therefore, we believe that the compensation paid to our named executive officers is not subject to the deduction limitations under Section 162(m) of the Internal Revenue Code and therefore is generally fully deductible for federal income tax purposes.
Accounting for Unit-Based Compensation
For unit-based compensation arrangements, including equity-based awards issued to our named executive officers, we record compensation expense over the vesting period of the awards, as discussed further in Note 12 to our consolidated financial statements.

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Board of Directors Report
The board of directors of our general partner has reviewed and discussed with management the “Compensation Discussion and Analysis” presented above. The member of management with whom the board of directors of our general partner had discussions is the Chief Executive Officer. In addition, the board of directors of our general partner engaged the services of BDO USA, LLP, an executive compensation consulting firm, to conduct a study in 2016 to assist us in establishing overall compensation packages for our executives. Based on this review and discussion, we recommended that the “Compensation Discussion and Analysis” referred to above be included in this Annual Report on Form 10-K for the year ended December 31, 2016.
Board of Directors
John F. Affleck-Graves
Jefferies V. Alston, III
Gregory F. Evans
John R. Huff
John Kevin Poorman
Robert E. Rasmus
Trevor M. Turbidy
R. Graham Whaling
James M. Whipkey
Joseph C. Winkler III
The foregoing report shall not be deemed to be incorporated by reference by any general statement or reference to this Annual Report on Form 10-K into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that we specifically incorporate this information by reference, and shall not otherwise be deemed filed under those Acts.

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Compensation Tables
Summary Compensation Table
The following table shows the compensation paid or otherwise awarded to our fiscal year 2016 named executive officers for services rendered to us and our subsidiaries during fiscal years 2016, 2015 and 2014, as applicable. The cash compensation paid or awarded by us reflects only the portion of our sponsor’s or Hi-Crush Services’ compensation expense allocated to us by Hi-Crush Services under the Services Agreement.
Name and Principal Position
 
Year
 
Salary ($)
 
Bonus ($)(a)
 
Equity Awards ($)(b)
 
Non-Equity Incentive Plan Compensation ($)(c)
 
All Other Compensation ($)(d)
 
Total $
Robert E. Rasmus
Chief Executive Officer
 
2016
 

 

 
2,137,882

 

 
44,063

(e) 
 
2,181,945

 
2015
 
1

 

 

 

 
39,247

(e) 
 
39,248

 
2014
 
1

 

 
2,310,664

 

 
27,361

(e) 
 
2,338,026

Laura C. Fulton
Chief Financial Officer
 
2016
 
247,500

 

 
887,346

 

 
18,062

 
 
1,152,908

 
2015
 
225,000

 

 
412,720

 

 
16,830

 
 
654,550

 
2014
 
219,231

 

 
363,182

 
323,000

 
5,928

 
 
911,341

Mark C. Skolos
General Counsel and Secretary
 
2016
 
206,250

 

 
723,735

 

 
26,280

(f) 
 
956,265

 
2015
 
187,500

 

 
300,160

 

 
15,443

 
 
503,103

 
2014
 
183,335

 

 
259,438

 
247,000

 
418

 
 
690,191

Chad M. McEver
Vice President, Sales and Business Development
 
2016
 
172,500

 

 
204,229

 

 
125,861

(g) 
 
502,590

 
2015
 
107,500

 

 
110,996

 

 
10,571

 
 
229,067

 
2014
 
163,400

 

 

 
76,000

 
3,790

 
 
243,190

William E. Barker
Vice President, Midstream Operations
 
2016
 
172,500

 

 
426,058

 

 
10,848

 
 
609,406

 
2015
 
102,500

 

 
193,347

 

 
7,759

 
 
303,606

(a)
The amounts reported in this column represent (i) discretionary bonuses earned by the named executive officer during the applicable fiscal year, including the portion of any cash bonuses paid by our sponsor to the named executive officer that was reimbursable by us under the Services Agreement and (ii) any bonuses provided for in the named executive officer’s employment agreement.
(b)
Equity award amounts reflect the aggregate grant date fair value of LTIP awards granted for the periods presented, computed in accordance with FASB ASC Topic 718. For Mr. Rasmus a portion of the amounts underlying the 2014 equity awards reflects equity grants made in 2015 for amounts earned in 2014 under the STI. See Note 12 to our consolidated financial statements for additional assumptions underlying the value of the equity awards.
(c)
Represents amounts paid according to the provisions of the short-term cash incentive plan then in effect. Amounts were earned in the fiscal year indicated but were paid in the next fiscal year. With respect to Mr. Rasmus, no compensation expense associated with the cash component of the 2014 STI award was allocated to us by Hi-Crush Services under the Services Agreement.
(d)
Amounts in this column reflect the amount paid by our sponsor since 2014 that was reimbursable by us under the Services Agreement for matching 401(k) contributions and premiums paid for health and welfare benefits and coverage.
(e)
Pursuant to a management services agreement entered into between Red Oak Capital Management LLC and our sponsor, our sponsor reimburses Red Oak Capital Management LLC for the health and welfare benefits and coverage paid for Mr. Rasmus.
(f)
Amount includes value of car allowance provided to Mr. Skolos.
(g)
Amount included Mr. McEver’s reimbursements for relocation and moving costs as follows: $54,766 for selling and other closing costs associated with his residence, $33,542 for actual moving-related costs, and $20,239 in tax assistance.

87


Grants of Plan-Based Awards Table
The following supplemental compensation table shows compensation details on the value of plan-based incentive awards granted during 2016 to our named executive officers.  The table includes awards made during or for 2016.  The information in the table under the caption “Estimated Future Payouts Under Non-Equity Incentive Plan Awards” represents the threshold, target and maximum amounts payable under the short-term cash incentive plan for performance in 2016.  Amounts actually paid under that plan for 2016 that were allocated to us by Hi-Crush Services under the Services Agreement are set forth in the Summary Compensation Table under the caption “Non-Equity Incentive Plan Compensation.”
 
 
 
 
Estimated Future Payouts under Non-Equity Incentive Plan
Awards (a)
 
Estimated Future Payouts under Equity Incentive Plan
Awards (b)
 
Grant Date Fair Value of LTIP Awards ($)(c)
Name
 
Grant Date
 
Threshold ($)
 
Target
($)
 
Maximum
($)
 
Threshold (#)
 
Target (#)
 
Maximum (#)
 
Robert E. Rasmus 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Short-term incentive plan
 
N/A
 
250,000

 
500,000

 
1,000,000

 

 

 

 

September 2016 PPU
 
9/14/2016
 

 

 

 
24,968

 
49,936

 
99,872

 
842,420

September 2016 TPU
 
9/14/2016
 

 

 

 

 
87,709

 

 
1,295,462

Laura C. Fulton 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Short-term incentive plan
 
N/A
 
142,500

 
285,000

 
570,000

 

 

 

 

September 2016 PPU
 
9/14/2016
 

 

 

 
9,604

 
19,207

 
38,414

 
291,754

September 2016 TPU
 
9/14/2016
 

 

 

 

 
44,815

 

 
595,591

Mark C. Skolos 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Short-term incentive plan
 
N/A
 
117,500

 
235,000

 
470,000

 

 

 

 

September 2016 PPU
 
9/14/2016
 

 

 

 
7,971

 
15,942

 
31,884

 
242,159

September 2016 TPU
 
9/14/2016
 

 

 

 

 
36,236

 

 
481,576

Chad M. McEver 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Short-term incentive plan
 
N/A
 
57,500

 
115,000

 
230,000

 

 

 

 

September 2016 PPU
 
9/14/2016
 

 

 

 
3,362

 
6,723

 
13,446

 
102,122

September 2016 TPU
 
9/14/2016
 

 

 

 

 
7,683

 

 
102,107

William E. Barker
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Short-term incentive plan
 
N/A
 
57,500

 
115,000

 
230,000

 

 

 

 

September 2016 PPU
 
9/14/2016
 

 

 

 
5,762

 
11,524

 
23,048

 
175,050

September 2016 TPU
 
9/14/2016
 

 

 

 

 
18,887

 

 
251,008

(a)
Amounts shown represent amounts under the STI. If minimum levels of performance are not met, then the payout for one or more of the components of the STI may be zero. See “-Compensation Discussion and Analysis-Components of Executive Compensation-Annual Short-Term Cash Incentive” above for further discussion of these awards.
(b)
The number of units shown represent units awarded under the LTIP. The PPUs awarded on September 14, 2016 will vest in their entirety after December 31, 2018 if the specified performance conditions are satisfied. If minimum levels of performance are not met, then none of the PPUs will vest. See “-Compensation Discussion and Analysis-Components of Executive Compensation-Long-Term Incentive Compensation” above for further discussion of these awards. The TPUs vest 50% on the second anniversary and 50% on the third anniversary of the grant date.
(c)
Equity award amounts reflect the aggregate grant date fair value of LTIP awards granted for the periods presented, computed in accordance with FASB ASC Topic 718. See Note 12 to our consolidated financial statements for additional assumptions underlying the value of the equity awards.
Narrative Disclosure to the Summary Compensation Table and Grants of the Plan-Based Awards Table
A description of material factors necessary to understand the information disclosed in the tables above with respect to salaries, bonuses, equity awards, non-equity incentive plan compensation, and 401(k) plan contributions can be found in the compensation discussion and analysis that precedes these tables.

88


Outstanding Equity Awards at Fiscal Year-End
The following are the outstanding equity awards for the named executive officers as of December 31, 2016:
 
 
Outstanding LTIP Awards
Name and Principal Position
 
Equity Incentive Plan Awards: Unearned Units That Have Not Vested (a)
 
Equity Incentive Plan Awards: Market Value of Unearned Units That Have Not Vested ($)
(a)(b)
Robert E. Rasmus, Chief Executive Officer
 
168,395

 
3,334,221

Laura C. Fulton, Chief Financial Officer
 
75,022

 
1,485,436

Mark C. Skolos, General Counsel and Secretary
 
60,178

 
1,191,524

Chad M. McEver, Vice President, Sales and Business Development
 
17,506

 
346,619

William E. Barker, Vice President, Midstream Operations
 
36,835

 
729,333

(a)
PPUs awarded in June 2014 were subject to vesting within 45 days after December 31, 2016. Our TUR ranking among the companies in the group over the performance period is below the 25th percentile, therefore 0% of the performance units will vest as determined by the board of directors of our general partner on January 25, 2017. PPUs were awarded in February 2015 and September 2016 and vest in their entirety over a range of 0% to 200% within 45 days after December 31, 2017 and 2018, respectively, if and to the extent to which, the specified performance conditions are satisfied. To determine the number of unearned units and the market value of such units, the calculation of the number of PPUs granted that are expected to vest is based on assumed performance of 100% for the 2015 and 2016 PPUs. Additionally, Mr. McEver and Mr. Barker were granted TPUs in February 2015 which vest 100% in February 2018. TPUs were awarded in September 2016 to all named executive officers and vest 50% on the second anniversary and 50% on the third anniversary of the grant date.
(b)
Value calculated based on the closing price at December 31, 2016 of our common units at $19.80.
Pension Benefits
Currently, our general partner does not, and does not intend to, provide pension benefits to our named executive officers. Our general partner may change this policy in the future.
Nonqualified Deferred Compensation
Currently, our general partner does not, and does not intend to, sponsor or adopt a nonqualified deferred compensation plan. Our general partner may change this policy in the future.
Potential Payments Upon Termination or a Change in Control
Aggregate Payments. The table below reflects the aggregate amount of payments and benefits that we believe our named executive officers would have received under their employment agreement and the Partnership’s LTIP upon certain specified termination of employment and/or a change in control events, in each case, had such event occurred on December 31, 2016. Details regarding individual plans and arrangements follow the table. The amounts below constitute estimates of the amounts that would be paid to our named executive officers upon each designated event, and do not include any amounts accrued through fiscal 2016 year-end that would be paid in the normal course of continued employment, such as accrued but unpaid salary and benefits generally available to all salaried employees. The actual amounts to be paid are dependent on various factors, which may or may not exist at the time a named executive officer is actually terminated and/or a change in control actually occurs. Therefore, such amounts and disclosures should be considered “forward-looking statements.”
Name and Principal Position
 
Change in Control ($)
 
Termination without Cause or by Executive for Good Reason ($)
 
Termination with Cause or for Death or Disability ($)
 
Termination Due to Expiration of Term ($)
Robert E. Rasmus, Chief Executive Officer
 
3,334,221

 
750,000

 

 

Laura C. Fulton, Chief Financial Officer
 
1,485,436

 
165,000

 

 
165,000

Mark C. Skolos, General Counsel and Secretary
 
1,191,524

 
137,500

 

 
137,500

Chad M. McEver, Vice President, Sales and Business Development
 
346,619

 

 

 

William E. Barker, Vice President, Midstream Operations
 
729,333

 

 

 


89


Employment Agreements. Other than Mr. McEver and Mr. Barker, each of our named executive officers has entered into an employment agreement with our sponsor. The initial term of the each employment agreement is one year from the effective date of such agreement, with automatic extensions for additional one-year periods unless either party provides at least sixty days’ advance written notice of the intent to terminate the agreement.
The employment agreements contain severance provisions. Under the terms of the employment agreements, the employment of the named executive officer may be terminated by our sponsor with or without Cause (defined below), by the named executive officer for or without Good Reason (defined below), due to the named executive officer’s disability or death, or due to expiration of the term of the employment agreement.
Upon a termination by our sponsor for Cause, by the named executive officer without Good Reason, due to the named executive officer’s disability or death, or with respect to Mr. Rasmus due to expiration of the term of the employment agreement, the named executive officer is entitled to the following severance benefits: (i) payment of all accrued and unpaid base salary through the date of termination, (ii) reimbursement for all incurred but unreimbursed expenses entitled to reimbursement, and (iii) provision of any benefits to which the named executive officer is entitled pursuant to the terms of any applicable benefit plan or program (collectively, the “Accrued Obligations”). Under Ms. Fulton’s and Mr. Skolos’ employment agreement, upon a termination due to the expiration of the term, Ms. Fulton and Mr. Skolos shall be entitled to the following severance benefits: (i) payment of the Accrued Obligations and (ii) 50% of such named executive officer’s base salary, payable over the remainder of the term of the employment agreement in installments substantially similar to our sponsor’s salary payment practices.
Upon a termination by our sponsor without Cause or by the named executive officer for Good Reason, the named executive officer is entitled to the following severance benefits: (i) payment of the Accrued Obligations and (ii) (a) in the case of Mr. Rasmus, payment of an amount equal to $750,000 in a lump sum payment on the date that is 30 days after the date of termination and (b) in the case of Ms. Fulton and Mr. Skolos, the remainder of such employee’s base salary for the remaining term of the employment agreement, which in no event shall be less than 50% of such base salary, payable over the remainder of the term of the employment agreement in installments substantially similar to our sponsor’s salary payment practices. Payment of the additional lump sum payment is contingent upon the named executive officer’s execution and non-revocation of a general release of claims in favor of us. No named executive officer has any right to receive a “gross up” for any excise tax imposed by Section 4999 of the Code, or any federal, state or local income tax.
Under the employment agreements, the following terms generally have the meanings set forth below:
Cause means a named executive officer’s (i) conviction of, or entry of a guilty plea or plea of no contest with respect to, a felony or any other crime directly or indirectly involving the named executive officer’s lack of honesty or moral turpitude, (ii) drug or alcohol abuse for which the named executive officer fails to undertake and maintain treatment within five calendar days after requested by our sponsor, (iii) acts of fraud, embezzlement, theft, dishonesty or gross misconduct, (iv) material misappropriation (or attempted misappropriation) of any of our funds or property, or (v) a breach of the named executive officer’s obligations described under the employment agreement, as determined by a majority of our sponsor’s board of directors.
Good Reason means, without the named executive officer’s consent: (i) a material breach by our sponsor of its obligations under the employment agreement, (ii) any material diminution of the duties of the named executive officer, (iii) a reduction in the named executive officer’s base salary, other than pursuant to a proportionate reduction applicable to all senior executives or employees generally and the members of our sponsor’s board of directors, to the extent such board members receive board fees, or (iv) the relocation of the geographic location of the named executive officer’s principal place of employment by more than 50 miles.
The following table reflects payments that would have been made under the named executive officer’s employment agreement in the event the named executive officer’s employment was terminated as of December 31, 2016.
Name and Principal Position
 
Termination without Cause or by Executive for Good Reason ($)
 
Termination with Cause or for Death or Disability ($)
 
Termination Due to Expiration of Term ($)
Robert E. Rasmus, Chief Executive Officer
 
750,000

 

 

Laura C. Fulton, Chief Financial Officer
 
165,000

 

 
165,000

Mark C. Skolos, General Counsel and Secretary
 
137,500

 

 
137,500

Chad M. McEver, Vice President, Sales and Business Development
 

 

 

William E. Barker, Vice President, Midstream Operations
 

 

 


90


Performance Phantom Unit Grants under the LTIP. Each of our named executive officers held PPUs, under our form of phantom unit award agreement (the “PPU Award Agreement”) and the LTIP as of December 31, 2016. If a Change in Control occurs and the named executive officer has remained continuously employed by us from the date of grant to the date upon which such Change in Control occurs, then upon such Change of Control all forfeiture restrictions shall lapse and the performance period shall be deemed to end on the date of such Change of Control. The TUR for the Partnership and for each entity in the Peer Group shall be determined for each such shortened performance period and the target amount of phantom units to be received by participant shall be calculated in accordance with performance conditions previously stated.
The following terms generally have the following meanings for purposes of the LTIP and PPU Award Agreement:
Affiliate means, with respect to any person, any other person that directly or indirectly through one or more intermediaries controls, is controlled by or is under common control with, the person in question. As used herein, the term “control” means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through ownership of voting securities, by contract or otherwise.
Change of Control means, and shall be deemed to have occurred upon one or more of the following events: (i) any “person” or “group” within the meaning of those terms as used in Sections 13(d) and 14(d)(2) of the Exchange Act, other than members of the general partner, the Partnership, or an Affiliate of either the general partner or the Partnership, shall become the beneficial owner, by way of merger, consolidation, recapitalization, reorganization or otherwise, of 50% or more of the voting power of the voting securities of the general partner, (ii) the limited partners of the general partner or the Partnership approve, in one transaction or a series of transactions, a plan of complete liquidation of the general partner or the Partnership, (iii) the sale or other disposition by either the general partner or the Partnership of all or substantially all of its assets in one or more transactions to any Person other than an Affiliate, or (iv) the general partner or an Affiliate of the general partner or the Partnership ceases to be the general partner of the Partnership;
The following table reflects amounts that would have been received by each of the named executive officers under the LTIP and related PPUs in the event there was a Change in Control as of December 31, 2016. The amounts reported below assume that the price per unit of our common units was $19.80, which was the closing price per unit of our common stock on December 31, 2016.
Name and Principal Position
 
Change in Control ($) (a)
Robert E. Rasmus, Chief Executive Officer
 
3,334,221

Laura C. Fulton, Chief Financial Officer
 
1,485,436

Mark C. Skolos, General Counsel and Secretary
 
1,191,524

Chad M. McEver, Vice President, Sales and Business Development
 
346,619

William E. Barker, Vice President, Midstream Operations
 
729,333

(a)
Amounts reported relate to the PPUs awarded in February 2015 and September 2016, which vest in their entirety over a range of 0% to 200% within 45 days after December 31, 2017 and 2018, respectively, if the specified performance conditions are satisfied. To determine the number of unearned units and the market value of such units, the calculation of the number of PPUs granted in February 2015 and September 2016 that are expected to vest is based on assumed performance of 100%. The amounts also include the value of the TPUs which were granted in June 2014, February 2015 and September 2016.

91


Director Compensation
The executive officers of our general partner who also serve as directors of our general partner do not receive additional compensation for their services as a director of our general partner. The table below sets forth the annual compensation earned during 2016 by the non-executive directors of our general partner.
Director
 
Fees Earned or Paid in Cash ($) (b)
 
Unit Awards ($)
 
All Other Compensation ($)
 
Total ($)
John F. Affleck-Graves
 

 
120,000

 

 
 
120,000

Jefferies V. Alston, III (a)
 

 

 
6,250

(c)
 
6,250

Gregory F. Evans
 

 

 

 
 

John R. Huff
 

 
100,000

 

 
 
100,000

John Kevin Poorman
 

 
120,000

 

 
 
120,000

Trevor M. Turbidy
 

 

 

 
 

R. Graham Whaling
 

 

 

 
 

James M. Whipkey
 

 

 

 
 

Joseph C. Winkler III
 

 
150,000

 

 
 
150,000

(a)
Mr. Alston became a non-executive director of our general partner on October 28, 2016 in connection with his resignation as Chief Operating Officer of our general partner.
(b)
Similar to 2016, in 2017, each independent director and Mr. Huff will receive 100% of their annual retainer and grant, as outlined below, in partnership units.
(c)
Represents amounts earned in 2016 by Mr. Alston under his Separation and Consulting Agreement with the Partnership, the general partner and the sponsor.
Following the IPO on August 16, 2012, each independent director of our general partner has received an annual retainer of $50,000. In 2016, the directors received this retainer in units. Each January, our independent directors have also received an annual grant of the number of common units having a grant date fair value of approximately $50,000 as of such date. Such units are not subject to a vesting period. Further, each independent director serving as a chairman or a member of a committee of the board of directors of our general partner has received an annual retainer of $25,000 or $10,000, respectively. Beginning in 2014, Mr. Huff, who is not an independent director, also received the foregoing annual retainers and grants.
As discussed in Item 11, "Compensation Discussion and Analysis-Components of Executive Compensation-Other Compensation-Unit Purchase Program” above, directors may contribute to the UPP through cash contributions not to exceed $150,000 in the aggregate.  On December 14, 2015, each director participating in the UPP was granted the right to purchase, on February 28, 2017 at $5.14 per common unit, up to the number of common units set forth in the table below, which shall be equal to such director’s aggregate dollar amount of contributions elected to be made to the UPP during the period of the UPP’s applicability divided by $5.14, capped at 20,000 common units:
Director (a)
 
Purchase Rights for Common Units Granted Under the UPP (b)
John F. Affleck-Graves
 
20,000

John R. Huff
 
20,000

James M. Whipkey
 
20,000

Joseph C. Winkler III
 
20,000

(a)
The UPP participation of directors who are named executive officers is provided in Item 11, "Compensation Discussion and Analysis-Components of Executive Compensation-Other Compensation-Unit Purchase Program” above.
(b)
Calculated based on application of the formula set forth above, using the dollar amount of contributions currently elected by the director.  This number may be reduced based on reductions in the director’s elected dollar amount of contributions.

92


Compensation Committee Interlocks and Insider Participation
None of the directors or executive officers of our general partner served as members of the compensation committee or board of directors of another entity that has or had an executive officer who served as a member of the board of directors of our general partner during 2016. Our general partner’s board of directors is not required to maintain, and does not maintain, a compensation committee. In addition, as previously noted, other than for equity-based awards under our LTIP, we do not directly employ or compensate the executive officers of our general partner. Rather, under the Services Agreement, we reimburse Hi-Crush Services and its affiliates for, among other things, the allocable expenses incurred in compensating our general partner’s executive officers. Messrs. Rasmus and Alston, who are members of the board of directors of our general partner, are, or were during the fiscal year 2016, also executive officers of our general partner.

93


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED UNITHOLDER MATTERS
The following table sets forth the beneficial ownership of our common units issued and outstanding as of February 10, 2017 for:
our general partner;
beneficial owners of 5% or more of our common units;
each director and named executive officer of our general partner; and
all of our general partner's directors and executive officers as a group.
 
Common Units Beneficially Owned
 
Percentage of Common Units Beneficially Owned
Hi-Crush Proppants LLC (a)(b)
20,693,643

 
 
32.5
%
Hi-Crush GP LLC (b)

 
 

Robert E. Rasmus (b)(d)
78,689

(e)
 
*

Jefferies V. Alston, III (b)

 
 

Laura C. Fulton (b)
31,000

(e)
 
*

Mark C. Skolos (b)
5,986

(f)
 
*

Chad M. McEver (b)
17,848

(g)
 
*

William E. Barker (b)
18,838

(h)
 
*

James M. Whipkey (b)
20,100

(e)
 
*

John F. Affleck-Graves (b)
58,172

(e)
 
*

Gregory F. Evans (c)

 
 

John R. Huff (b)
199,896

(e)
 
*

John Kevin Poorman (b)
35,411

 
 
*

Trevor M. Turbidy (c)

 
 

R. Graham Whaling (c)

 
 

Joseph C. Winkler III (b)
66,444

(e)
 
*

All executive officers and directors as a group (14 persons)
21,226,027

 
 
33.3
%
*
 Less than one percent
(a)
Avista Capital Partners II, LP, Avista Capital Partners (Offshore) II-A, LP and Avista Capital Partners (Offshore) II, LP indirectly own 58% of the membership interests of Hi-Crush Proppants LLC, through two investment vehicles, ACP HIP Splitter, LP and ACP HIP Splitter (Offshore), LP. Each of Avista Capital Partners II, LP, Avista Capital Partners (Offshore) II-A, LP and Avista Capital Partners (Offshore) II, LP is controlled by its general partner, Avista Capital Partners II GP, LLC (“Avista GP”). Voting and investment determinations are made by an investment committee of Avista GP, comprised of the following members: Thompson Dean, Steven Webster, David Burgstahler, David Durkin and Sriram Venkataraman. As a result, and by virtue of the relationships described above, each of Thompson Dean, Steven Webster, David Burgstahler, David Durkin and Sriram Venkataraman may be deemed to exercise voting and dispositive power with respect to securities held by ACP HIP Splitter, LP and ACP HIP Splitter (Offshore), LP. The address for Avista Capital Partners is 65 East 55th Street, 18th Floor, New York, NY 10022.
(b)
The address for each of Hi-Crush Proppants LLC, Hi-Crush GP LLC, Robert E. Rasmus, Jefferies V. Alston, III, Laura C. Fulton, Mark C. Skolos, Chad M. McEver, William E. Barker, James M. Whipkey, John R. Huff, John F. Affleck-Graves, Joseph C. Winkler III and John Kevin Poorman is Three Riverway, Suite 1350, Houston, Texas 77056.
(c)
The address for each of Gregory F. Evans, Trevor M. Turbidy and R. Graham Whaling is 1000 Louisiana St., Suite 3700, Houston, Texas 77002.
(d)
Includes 500 common units owned by the reporting person’s son. Mr. Rasmus disclaims beneficial ownership of the 500 common units held by his son.
(e)
Includes 20,000 common units that such individual has the right to purchase within 60 days, on February 28, 2017, under the Unit Purchase Program, conditioned upon such individual’s continued employment or service as a director, as applicable, on such date.

94


(f)
Includes 5,986 common units that Mr. Skolos has the right to purchase within 60 days, on February 28, 2017, under the Unit Purchase Program, conditioned upon his continued employment on such date.
(g)
Includes 17,848 common units that Mr. McEver has the right to purchase within 60 days, on February 28, 2017, under the Unit Purchase Program, conditioned upon his continued employment on such date.
(h)
Includes 17,298 common units that Mr. Barker has the right to purchase within 60 days, on February 28, 2017, under the Unit Purchase Program, conditioned upon his continued employment on such date.
Equity Compensation Plan Information
The following table sets forth information as of December 31, 2016 with respect to compensation plans under which our equity securities are authorized for issuance.
 
(1) Number of  Units to be Issued Upon 
Exercise of Outstanding Unit Options and Rights
 
(2) Weighted  Average Exercise Price Of Outstanding 
Unit Options and Rights
 
(3) Number of  Units Remaining 
Available For Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (1)) (e)
Plan Category
 
 
 
 
 
Equity compensation plans approved by unitholders:
 
 
 
 
 
Amended and Restated Long-Term Incentive Plan (a)

 

 
3,353,951

Equity compensation plans not approved by unitholders:
 
 
 
 
 
Long-Term Incentive Plan (excluding Unit Purchase Program) (a)
579,781

(b)

 

Unit Purchase Program (c)
300,090

(d)

 
(300,090
)
Total for equity compensation plans
879,871

 
$

 
3,053,861

(a)
The Partnership’s Long-Term Incentive Plan (“LTIP”) was adopted by our general partner in August 2012 in connection with our IPO. The LTIP contemplates the issuance or delivery of up to 1,364,035 common units to satisfy awards under the plan. On January 9, 2017, the Partnership held a special meeting of its unitholders at which the Partnership’s unitholders approved the first amendment and restatement to the Partnership’s Long Term Incentive Plan (the “Restated LTIP”), which, among other things, provided for an increase in the number of common units of the Partnership reserved and available for delivery with respect to awards under the Restated LTIP by 2,700,000 common units to an aggregate of 4,064,035 common units. Following receipt of approval from the Partnership’s unitholders at the special meeting, the Restated LTIP was made effective as of September 21, 2016.
(b)
Represents phantom units subject to equity-settled time-based unit awards ("TPUs") and performance unit awards ("PPUs") granted under the LTIP, assuming the target distribution at the time of vesting. Payment with respect to the outstanding equity-settled performance unit awards range from 0% to 200% of the target distribution depending on performance actually attained, with a maximum number of 403,042 units shown in column (1) being potentially issuable under the LTIP. There is no exercise price applicable to these awards. This number includes PPUs granted in June 2014 which were cancelled and forfeited as determined by the board of directors of our general partner on January 25, 2017.
(c)
The Unit Purchase Program (the "UPP") was adopted under the LTIP on December 14, 2015 as a purchase right for units.
(d)
Represents purchase right for units granted under the UPP, based on all participants' elected percentage of compensation or aggregate dollar contribution, as applicable, through February 10, 2017. These purchase rights are expected to be exercised on February 28, 2017 at $5.14 per common unit for those participants eligible on December 10, 2015 and $12.44 for those participants who became eligible after December 10, 2015 and who enrolled prior to June 26, 2016.
(e)
Includes units that may be issued in payment of the outstanding equity-settled performance phantom unit awards reported in column (1) if and to the extent such payment exceeds the target distribution amount reported in column (1) with respect to such awards.
On January 25, 2017, the Partnership issued 29,148 common units to certain directors. Any units awarded after December 31, 2016 are not included in the Equity Compensation Plan Information table above, which provides information as of December 31, 2016.

95


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
(Dollars in thousands)
As of February 10, 2017, our sponsor owned 20,693,643 common units, representing a 32.5% ownership interest in the limited partner units, owned the incentive distribution rights and owned and controlled our general partner. Our sponsor also appoints all of the directors of our general partner, which maintains a non-economic general partner interest in us.
Certain of the transactions and agreements disclosed in this section were determined by and among affiliated entities and, consequently, the terms of such transactions and agreements are not the result of arm’s length negotiations. These terms are not necessarily at least as favorable to the parties to these transactions and agreements as the terms that could have been obtained from unaffiliated third parties.
Distributions and Payments to Affiliates of our General Partner
The following summarizes the distributions and payments made or to be made by us to our general partner and its affiliates in connection with the formation, ongoing operation and any liquidation of Hi-Crush Partners LP.
Formation Stage
The aggregate consideration received by affiliates of our general partner for the contribution of their interests:
13,640,351 common units including 12,937,500 common units Hi-Crush Proppants LLC, as the selling unitholder, sold to the public in our IPO;
13,640,351 subordinated units; and
our incentive distribution rights.
Operational Stage
Distributions of cash available for distribution to our general partner and its affiliates:
We will generally make cash distributions to our unitholders, including affiliates of our general partner. In addition, if distributions exceed $0.54625 per unit and other higher target distribution levels, our sponsor (as the holder of our incentive distribution rights) will be entitled to increasing percentages of the distributions, up to 50.0% of the distributions above the highest target distribution level.
Assuming we have sufficient cash available for distribution to pay a quarterly distribution on all of our outstanding common units for four quarters and that we pay a quarterly distribution, affiliates of our general partner would receive an annual distribution equivalent to 32.5% of cash distributions to our unitholders, up to $0.54625 per unit.
Payments to our general partner and its affiliates:
Our general partner does not receive a management fee or other compensation for its management of our partnership, but we reimburse our general partner and its affiliates for all direct and indirect expenses they incur and payments they make on our behalf. Our partnership agreement does not set a limit on the amount of expenses for which our general partner and its affiliates may be reimbursed. These expenses include salary, bonus, incentive compensation and other amounts paid to persons who perform services for us or on our behalf and expenses allocated to our general partner by its affiliates. Our partnership agreement provides that our general partner will determine in good faith the expenses that are allocable to us.
Withdrawal or removal of our general partner:
If our general partner withdraws or is removed, its non-economic general partner interest and our sponsor’s incentive distribution rights will either be sold to the new general partner for cash or converted into common units, in each case for an amount equal to the fair market value of those interests.
Liquidation Stage
Upon our liquidation, the partners will be entitled to receive liquidating distributions according to their particular capital account balances.
Agreements with Affiliates in connection with our Initial Public Offering
In connection with our IPO on August 16, 2012, we entered into certain agreements with our sponsor, as described in more detail below.

96


Contribution Agreement
We entered into a contribution agreement that affected the transactions, including the transfer of the ownership interests in certain subsidiaries related to the Wyeville facility and the issuance by us to our sponsor of common units, subordinated units and incentive distribution rights. While we believe this agreement is on terms no less favorable to any party than those that could have been negotiated with an unaffiliated third party, it was not the result of arm’s-length negotiations. All of the transaction expenses incurred in connection with these transactions were paid by our sponsor from the proceeds of the IPO.
Omnibus Agreement
We entered into an omnibus agreement with affiliates of our general partner, including our sponsor, which addresses certain aspects of our relationship with them, including:
our use of the name “Hi-Crush” and related marks;
our payment of administrative services fees to our sponsor for general and administrative services;
the assumption by our sponsor of one of our customer contracts beginning on May 1, 2013 (our sponsor waived its right to require us to assign to the sponsor the customer contract); and
certain indemnification obligations.
The omnibus agreement can be amended by written agreement of all parties to the agreement. However, we may not agree to any amendment or modification that would, in the reasonable discretion of our general partner, be adverse in any material respect to the holders of our common units without prior approval of the conflicts committee. So long as our sponsor controls our general partner, the omnibus agreement will remain in full force and effect unless mutually terminated by the parties. If our sponsor ceases to control our general partner, the omnibus agreement will terminate.
Registration Rights Agreement
In connection with our IPO on August 16, 2012, we entered into a registration rights agreement with our sponsor (the “Registration Rights Agreement”), pursuant to which we may be required to register the sale of the (i) common units issued (or issuable) to our sponsor pursuant to the contribution agreement, (ii) subordinated units and (iii) common units issuable upon conversion of the subordinated units or the Combined Interests (as defined in our partnership agreement) pursuant to the terms of the partnership agreement (together, the “Registrable Securities”) it holds. Under the Registration Rights Agreement, our sponsor will have the right to request that we register the sale of Registrable Securities held by it, and our sponsor will have the right to require us to make available shelf registration statements permitting sales of Registrable Securities into the market from time to time over an extended period, subject to certain limitations. The Registration Rights Agreement also includes provisions dealing with indemnification and contribution and allocation of expenses. All of our Registrable Securities held by our sponsor and any permitted transferee will be entitled to these registration rights.
Services Agreements
Effective August 16, 2012, we entered into the Services Agreement by and among our general partner, Hi-Crush Services, a wholly-owned subsidiary of the sponsor, and the Partnership, pursuant to which Hi-Crush Services provides certain management and administrative services to our general partner to assist in operating our 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, salary, bonus, incentive compensation, rent and other administrative expense for individuals and entities that perform services for us or on our behalf. Hi-Crush Services and its affiliates are not liable to us for its performance of services under the Services Agreement except a liability resulting from gross negligence. During the years ended December 31, 2016, 2015 and 2014, the Partnership incurred $4,321, $4,404 and $9,421, respectively, of management and administrative service expenses from Hi-Crush Services.
Agreements with Affiliates in connection with our Acquisition of Hi-Crush Augusta LLC
On January 31, 2013 and April 8, 2014, the Partnership entered into agreements with our sponsor which ultimately resulted in the acquisition of 98.0% of the common equity interests in Hi-Crush Augusta LLC (“Augusta”), the entity that owns a 1,187-acre facility with integrated rail infrastructure, located in Eau Claire County, Wisconsin (the "Augusta facility"), for total cash consideration of $261,750 and 3,750,000 newly issued convertible Class B units in the Partnership (the “Augusta Contribution”). Subsequently on August 15, 2014, our sponsor, as 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. The Partnership completed the acquisition of Augusta on April 28, 2014.

97


Agreements with Affiliates in connection with our Acquisition of Hi-Crush Blair LLC
On August 9, 2016, the Partnership entered into a contribution agreement with the sponsor to acquire all of the outstanding membership interests in Hi-Crush Blair LLC, the entity that owned our sponsor's Blair facility, for $75,000 in cash, 7,053,292 of newly issued common units in the Partnership, and payment of up to $10,000 of contingent earnout consideration (the "Blair Contribution"). The Partnership completed the acquisition of the Blair facility on August 31, 2016. The Registration Rights Agreement was amended to incorporate the 7,053,292 newly issued common units into the definition of Registrable Securities therein.
Other Transactions with Related Persons
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 December 31, 2016 and 2015, an outstanding balance of $1,100 and $106,746, respectively, payable to our sponsor is maintained as a current liability under the caption “Due to sponsor”. The December 31, 2015, balance was primarily related to construction advances made to Blair. On August 31, 2016, $120,950 of sponsor advances were converted into capital.
During the years ended December 31, 2016, 2015 and 2014, the Partnership purchased $8,086, $33,406 and $23,705, 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, which is reflected in cost of goods sold.
During the years ended December 31, 2015 and 2014, the Partnership purchased $2,754 and $1,385, respectively, of sand from Goose Landing, LLC, a wholly owned subsidiary of Northern Frac Proppants II, LLC, which is reflected in cost of goods sold. During the year ended December 31, 2016, the Partnership did not purchase any sand from Goose Landing, LLC. The father of Mr. Alston, who is a director of our General Partner, owned a beneficial equity interest in Northern Frac Proppants II, LLC.
On September 8, 2016, the Partnership entered into an agreement to form PropX, which is accounted for as an equity method investment. Through December 31, 2016, the Partnership has invested $10,232 into PropX. During the year ended December 31, 2016, the Partnership purchased $1,566 of equipment from PropX, which is reflected in property, plant and equipment. As of December 31, 2016, the Partnership had accounts payable of $1,553 to PropX for equipment, which is reflected in accounts payable on our Consolidated Balance Sheet. In addition to equipment purchases, we incurred $124 of lease expenses, reflected in cost of goods, related to equipment leased from PropX.
During the years ended December 31, 2016, 2015 and 2014, 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 a member of our Board of Directors and through October 28, 2016 was our general partner's Chief Operating Officer, has an ownership 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.
Procedures for Review, Approval and Ratification of Transactions with Related Persons
The board of directors of our general partner has adopted policies for the review, approval and ratification of transactions with related persons and a written Code of Business Conduct and Ethics. Under our code of business conduct and ethics, a director is required to bring to the attention of the chief executive officer(s) or the board any conflict or potential conflict of interest that may arise between the director or any affiliate of the director, on the one hand, and us or our general partner on the other. The resolution of any such conflict or potential conflict should, at the discretion of the board in light of the circumstances, be determined by a majority of the disinterested directors. In determining whether to approve or ratify a transaction with a related party, the board of directors of our general partner will take into account, among other factors it deems appropriate, (1) whether the transaction is on terms no less favorable than terms generally available to an unaffiliated third party under the same or similar circumstances, (2) the extent of the related person’s interest in the transaction and (3) whether the interested transaction is material to the Partnership. Our partnership agreement contains detailed provisions regarding the resolution of conflicts of interest, as well as the standard of care the board of directors of our general partner must satisfy in doing so.
If a conflict or potential conflict of interest arises between our general partner or its affiliates, on the one hand, and us or our unitholders, on the other hand, the resolution of any such conflict or potential conflict will be addressed by the board of directors of our general partner in accordance with the provisions of our partnership agreement. Such a conflict of interest may arise, for example, in connection with negotiating and approving the acquisition of any assets from our sponsor. At the discretion of the board in light of the circumstances, the resolution may be determined by the board in its entirety or by the conflicts committee meeting the definitional requirements for such a committee under our partnership agreement. We do not expect that our code of business conduct and ethics or any policies that the board of directors of our general partner will adopt will require the approval of any transactions with related persons, including our sponsor, by our unitholders.

98


We expect to have the opportunity to acquire additional assets from our sponsor in the future. Our sponsor or other affiliates of our general partner are free to offer properties to us on terms they deem acceptable. Under our code of business conduct and ethics, the board of directors of our general partner (or the conflicts committee, if the board of directors delegates the necessary authority to the conflicts committee) will be free to accept or reject any such offers and to negotiate any terms it deems acceptable to us and that the board of directors of our general partner or the conflicts committee will decide the appropriate value of any assets offered to us by affiliates of our general partner. In making such determination of value, the board of directors of our general partner or the conflicts committee are permitted to consider any factors they determine in good faith to consider. The board of directors or the conflicts committee will consider a number of factors in its determination of value, including, without limitation, operating data, reserve information, operating cost structure, current and projected cash flow, financing costs, the anticipated impact on distributions to our unitholders, the price outlook for frac sand, reserve life and the location and quality of the reserves.
Based on our code of business conduct and ethics, any executive officer is required to avoid conflicts of interest unless approved by the board of directors of our general partner.
In the case of any sale of equity by us in which an owner or affiliate of an owner of our general partner participates, our practice is to obtain approval of the board for the transaction. The board will typically delegate authority to set the specific terms to a pricing committee, consisting of the chief executive officer and one independent director. Actions by the pricing committee require unanimous approval.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Our general partner is responsible for the Partnership’s internal controls and the financial reporting process. The independent registered public accounting firm, PricewaterhouseCoopers LLP (“PwC”), is responsible for performing independent audits of the Partnership’s consolidated financial statements and issuing an opinion on the conformity of those audited financial statements with United States generally accepted accounting principles. The audit committee monitors the Partnership’s financial reporting process and reports to the board of directors of our general partner on its findings.
The audit committee of the board of directors of our general partner selected and engaged PwC to audit our consolidated financial statements for the years ended December 31, 2016, 2015 and 2014.
The board of directors of our general partner has adopted a policy for pre-approving the services and associated fees of the independent registered public accounting firm. Under this policy, the audit committee must pre-approve all services and associated fees provided to us by its independent registered public accounting firm, with certain exceptions described in the policy.
All PwC services and fees in each of the three years ended December 31, 2016 were pre-approved by our sponsor or the board of directors of our general partner, as applicable.
The following table presents fees billed or expected to be billed for professional audit services and other services rendered to the Partnership by PwC for the periods ended December 31, 2016, 2015 and 2014 (in thousands).
 
Year Ended December 31,
 
2016
 
2015
 
2014
Audit Fees
$
890

 
$
611

 
$
665

All Other Fees (a)

 

 
48

Audit-Related Fees (b)
174

 

 
92

Tax Fees (c)
539

 
467

 
312

Total Fees paid to PwC
$
1,603

 
$
1,078

 
$
1,117

(a)Represents fees related to tax compliance and consulting.
(b)Represents fees related to offering documents.
(c)Represents fees related to tax return preparation.
The audit committee has established procedures for engagement of PwC to perform services other than audit, review and attest services. In order to safeguard the independence of PwC, for each engagement to perform such non-audit service, (a) management and PwC affirm to the audit committee that the proposed non-audit service is not prohibited by applicable laws, rules or regulations; (b) management describes the reasons for hiring PwC to perform the services; and (c) PwC affirms to the audit committee that it is qualified to perform the services. The audit committee has delegated to its chair its authority to pre-approve such services in limited circumstances, and any such pre-approvals are reported to the audit committee at its next regular meeting. All services provided by PwC in 2016 were audit-related or tax and are permissible under applicable laws, rules and regulations and were pre-approved by the board of directors of our general partner in accordance with its procedures. In 2016, the board of directors of our general partner considered the amount of non-audit services provided by PwC in assessing its independence.

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PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements
The Report of Independent Registered Public Accounting Firm, our Consolidated Financial Statements, the accompanying Notes to the Consolidated Financial Statements, and the Financial Statement Schedule that are filed as part of this Annual Report are set forth beginning on page F-1 immediately following the signature pages of this Annual Report.
(a)(2) Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts
Schedule II is filed as part of this Annual Report immediately following the Notes to the Consolidated Financial Statements referred to above. The other schedules have been omitted because they are either not applicable, not required or the information called for therein appears in the consolidated financial statements or notes thereto.
(a)(3) Exhibits
The following documents are filed as a part of this Annual Report on Form 10-K or incorporated by reference:
Exhibit  Number
 
Description
2.1***
 
Membership Interest Purchase Agreement, dated May 13, 2013, by and among the Partnership, the members of D & I Silica, LLC, and their respective owners (incorporated by reference to Exhibit 1.01 to the Registrant’s Current Report on Form 8-K, filed with the SEC on May 16, 2013).
3.1
 
Certificate of Limited Partnership of Hi-Crush Partners LP (incorporated by reference to Exhibit 3.1 to the Registrant's Registration Statement on Form S-1, Registration No. 333-182574, filed with the SEC on July 9, 2012).
3.2
 
Second Amended and Restated Agreement of Limited Partnership of Hi-Crush Partners LP, dated January 31, 2013 (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K, filed with the SEC on February 5, 2013).
4.1
 
Registration Rights Agreement by and between Hi-Crush Partners LP and Hi-Crush Proppants LLC dated August 20, 2012 (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K, filed with the SEC on August 21, 2012).
4.2
 
First Amendment to Registration Rights Agreement by and between Hi-Crush Partners LP and Hi-Crush Proppants LLC, dated January 31, 2013 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed with the SEC on February 5, 2013).
4.3
 
Second Amendment to Registration Rights Agreement by and between Hi-Crush Partners LP and Hi-Crush Proppants LLC, dated August 31, 2016 (incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K, filed with the SEC on September 6, 2016).
10.1
 
Amended and Restated Credit Agreement, dated April 28, 2014, among Hi-Crush Partners LP, as borrower, Amegy Bank National Association, as administrative agent, issuing lender and swing line lender, Barclays Bank PLC and Morgan Stanley Senior Funding, Inc., as co-documentation agents, IberiaBank, as syndication agent, and the lenders named therein (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q, filed with the SEC on August 5, 2014).
10.2
 
Second Amendment to the Amended and Restated Credit Agreement, dated November 5, 2015, by and among Hi-Crush Partners LP, as borrower, Amegy Bank National Association, as administrative agent, and the lenders named therein (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K, filed with the SEC on November 6, 2015).
10.3
 
Third Amendment to the Amended and Restated Credit Agreement, dated April 28, 2016, by and among Hi-Crush Partners LP, as borrower, ZB, N.A. DBA Amegy Bank, as administrative agent, and the lenders named therein (incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q, filed with the SEC on April 28, 2016).
10.4
 
Fourth Amendment to the Amended and Restated Credit Agreement, dated August 31, 2016, by and among Hi-Crush Partners LP, as borrower, ZB, N.A. DBA Amegy Bank, as administrative agent, and the lenders named therein (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K, filed with the SEC on September 6, 2016).
10.5
 
Credit Agreement, dated April 28, 2014, among Hi-Crush Partners LP, as borrower, Morgan Stanley Senior Funding, Inc., as administrative agent and collateral agent, Barclays Bank PLC, as syndication agent, and the lenders named therein (incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q, filed with the SEC on August 5, 2014).

100


Exhibit  Number
 
Description
10.6
 
Management Services Agreement dated effective August 16, 2012, among Hi-Crush Partners LP, Hi-Crush GP LLC and Hi-Crush Services LLC (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q, filed with the SEC on November 11, 2012).
10.7
 
Maintenance and Capital Spare Parts Agreement dated effective August 16, 2012, among Hi-Crush Partners LP, Hi-Crush GP LLC and Hi-Crush Proppants LLC (incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q, filed with the SEC on November 11, 2012).
10.8
 
Contribution, Assignment and Assumption Agreement by and among Hi-Crush Partners LP, Hi-Crush GP LLC and Hi-Crush Proppants LLC, dated August 15, 2012 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed with the SEC on August 21, 2012).
10.9
 
Contribution Agreement by and among Hi-Crush Partners LP, Hi-Crush Augusta LLC and Hi-Crush Proppants LLC, dated January 31, 2013 (incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K, filed with the SEC on February 5, 2013).
10.10
 
Omnibus Agreement by and among Hi-Crush Partners LP, Hi-Crush GP LLC and Hi-Crush Proppants LLC, dated August 20, 2012 (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K, filed with the SEC on August 21, 2012).
10.11
 
First Amendment to Omnibus Agreement, among Hi-Crush Partners LP, Hi-Crush GP LLC and Hi-Crush Proppants LLC, dated January 31, 2013 (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K, filed with the SEC on February 5, 2013).
10.12
 
Contribution Agreement by and among Hi-Crush Proppants LLC, Hi-Crush Augusta Acquisition Co. LLC and Hi-Crush Partners LP, dated April 8, 2014 (incorporated by reference to Exhibit 2.1 to the Registrant's Current Report on Form 8-K, filed with the SEC on April 29, 2014).
10.13
 
Contribution Agreement by and between Hi-Crush Proppants LLC and Hi-Crush Partners LP, dated August 9, 2016, (incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q, filed with the SEC on October 31, 2016).
10.14†
 
Hi-Crush Partners LP First Amended and Restated Long-Term Incentive Plan, adopted as of September 21, 2016 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed with the SEC on January 10, 2017).
10.15†
 
Form of Hi-Crush Partners LP Long-Term Incentive Plan Phantom Unit Award Agreement (Performance-Based Vesting) (incorporated by reference to Exhibit 10.8 to the Registrant’s Quarterly Report on Form 10-Q, filed with the SEC on August 5, 2014).
10.16†
 
Form of Hi-Crush Partners LP Long-Term Incentive Plan Phantom Unit Award Agreement (Time-Based Vesting) (incorporated by reference to Exhibit 10.9 to the Registrant’s Quarterly Report on Form 10-Q, filed with the SEC on August 5, 2014).
10.17†
 
Form of Hi-Crush Partners LP Unit-Purchase Program Enrollment Agreement and Terms and Conditions (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K, filed with the SEC on December 17, 2015).
10.18†
 
Employment Agreement, dated May 25, 2011, between Hi-Crush Proppants LLC and Robert E. Rasmus (incorporated by reference to Exhibit 10.14 to the Registrant’s Registration Statement on Form S-1, Registration No. 333-182574, filed with the SEC on July 9, 2012).
10.19†
 
Letter Agreement, dated July 13, 2012, between Hi-Crush Proppants LLC and Robert E. Rasmus (incorporated by reference to Exhibit 10.19 to the Registrant’s Registration Statement on Form S-1, Registration No. 333-182574, filed with the SEC on July 25, 2012).
10.20†
 
Separation and Consulting Agreement, dated October 28, 2016, by and among Jefferies Alston, III, Hi-Crush Proppants LLC, Hi-Crush GP LLC, and Hi-Crush Partners LP (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed with the SEC on October 31, 2016).
10.21†
 
Management Services Agreement, dated May 25, 2011 between Red Oak Capital Management LLC and Hi-Crush Proppants LLC (incorporated by reference to Exhibit 10.18 to the Registrant’s Registration Statement on Form S-1, Registration No. 333-182574, filed with the SEC on July 25, 2012).
10.22+
 
Supply Agreement, effective as of January 11, 2011, between Weatherford Artificial Lift Systems, Inc. and Hi-Crush Operating LLC (incorporated by reference to Exhibit 10.5 to the Registrant’s Registration Statement on Form S-1, Registration No. 333-182574, filed with the SEC on July 9, 2012).
10.23+
 
Amended and Restated First Amendment to Supply Agreement by and between Weatherford Artificial Lift Systems, L.L.C. and Hi-Crush Operating LLC, dated May 5, 2014 (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q, filed with the SEC on May 5, 2014).
10.24+
 
Second Amendment to Supply Agreement, dated August 8, 2014, by and between Weatherford U.S. L.P. and Hi-Crush Operating LLC (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q, filed with the SEC on November 4, 2014).

101


Exhibit  Number
 
Description
10.25+
 
Letter Agreement, dated May 13, 2016, by and between Hi-Crush Operating LLC and Weatherford U.S., L.P. (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q/A, filed with the SEC on October 28, 2016).
10.26+
 
Purchase Agreement by and between Halliburton Energy Services, Inc. and Hi-Crush Operating LLC, dated June 18, 2014 (incorporated by reference to Exhibit 10.5 to the Registrant’s Quarterly Report on Form 10-Q, filed with the SEC on August 5, 2014).
10.27+
 
First Amendment to Purchase Agreement, dated October 8, 2014, between Halliburton Energy Services, Inc. and Hi-Crush Operating LLC.
10.28+
 
Letter Agreement, dated September 6, 2016, by and between D & I Silica, LLC, Hi-Crush Operating LLC and Halliburton Energy Services, Inc. (incorporated by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q, filed with the SEC on October 31, 2016).
21.1
 
List of Subsidiaries of Hi-Crush Partners LP
23.1
 
Consent of PricewaterhouseCoopers LLP
23.2
 
Consent of John T. Boyd Company
31.1
 
Certification pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 signed by the Principal Executive Officer, filed herewith.
31.2
 
Certification pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 signed by the Principal Financial Officer, filed herewith.
32.1
 
Statement Required by 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 signed by Principal Executive Officer, filed herewith. (1)
32.2
 
Statement Required by 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 signed by Principal Financial Officer, filed herewith. (1)
95.1
 
Mine Safety Disclosure Exhibit
101
 
Interactive Data Files- XBRL
(1)
This document is being furnished in accordance with SEC Release Nos. 33-8212 and 34-47551.
Compensatory plan or arrangement.
+    Confidential treatment has been granted with respect to portions of this exhibit.
*    Parts of the exhibit have been omitted pursuant to a request for confidential treatment.
***    Pursuant to Item 601(b)(2) of Regulation S-K, the Partnership agrees to furnish supplementally a copy of any omitted exhibit or schedule to the SEC upon request.


ITEM 16. FORM 10-K SUMMARY
None.


102


SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, on February 21, 2017.
HI-CRUSH PARTNERS LP
 
 
By: 
Hi-Crush GP LLC, its general partner
 
 
By: 
/s/ Laura C. Fulton
 
Laura C. Fulton
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on February 21, 2017.
Hi-Crush Partners LP (Registrant)
By: Hi-Crush GP LLC, its general partner
Name
 
Capacity
/s/ Robert E. Rasmus
 
Chief Executive Officer and Director (Principal Executive Officer)
Robert E. Rasmus
 
 
 
 
 
/s/ Laura C. Fulton
 
Chief Financial Officer (Principal Financial and Accounting Officer)
Laura C. Fulton
 
 
 
 
 
/s/ James M. Whipkey
 
Chairman of the Board
James M. Whipkey
 
 
 
 
 
/s/ John F. Affleck-Graves
 
Director
John F. Affleck-Graves
 
 
 
 
 
/s/ Jefferies V. Alston, III
 
Director
Jefferies V. Alston, III
 
 
 
 
 
/s/ Gregory F. Evans
 
Director
Gregory F. Evans
 
 
 
 
 
/s/ John R. Huff
 
Director
John R. Huff
 
 
 
 
 
/s/ John Kevin Poorman
 
Director
John Kevin Poorman
 
 
 
 
 
/s/ Trevor M. Turbidy
 
Director
Trevor M. Turbidy
 
 
 
 
 
/s/ R. Graham Whaling
 
Director
R. Graham Whaling
 
 
 
 
 
/s/ Joseph C. Winkler III
 
Director
Joseph C. Winkler III
 
 


103


HI-CRUSH PARTNERS LP
INDEX TO FINANCIAL STATEMENTS
 
Page
Consolidated Balance Sheets as of December 31, 2016 and 2015
Consolidated Statements of Operations for the years ended December 31, 2016, 2015 and 2014
Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015 and 2014
Consolidated Statements of Partners' Capital for the years ended December 31, 2016, 2015 and 2014

F-1


Report of Independent Registered Public Accounting Firm

To the Board of Directors of Hi-Crush GP LLC
and Unitholders of Hi-Crush Partners LP

In our opinion, the accompanying consolidated balance sheets as of December 31, 2016 and 2015 and the related consolidated statements of operations, partners’ capital and cash flows present fairly, in all material respects, the financial position of Hi-Crush Partners LP and its subsidiaries at December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Partnership maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Partnership's management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Partnership's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.


A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.



/s/ PricewaterhouseCoopers LLP
Houston, Texas
February 21, 2017


F-2


HI-CRUSH PARTNERS LP
Consolidated Balance Sheets
(In thousands, except unit amounts)
 
December 31,
 
2016
 
2015 (a)
Assets
 
 
 
Current assets:
 
 
 
Cash
$
4,314

 
$
11,054

Accounts receivable, net
52,834

 
41,477

Inventories
24,338

 
27,971

Prepaid expenses and other current assets
2,714

 
4,840

Total current assets
84,200

 
85,342

Property, plant and equipment, net
416,950

 
393,512

Goodwill and intangible assets, net
10,097

 
45,524

Equity method investments
10,232

 

Other assets
7,831

 
9,830

Total assets
$
529,310

 
$
534,208

Liabilities, Equity and Partners' Capital
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
18,223

 
$
24,237

Accrued and other current liabilities
7,877

 
6,429

Due to sponsor
1,100

 
106,746

Current portion of long-term debt
2,962

 
3,258

Total current liabilities
30,162

 
140,670

Long-term debt
193,458

 
246,783

Asset retirement obligations
7,808

 
7,066

Other liabilities
5,000

 

Total liabilities
236,428

 
394,519

Commitments and contingencies

 

Equity and partners' capital:
 
 
 
General partner interest

 

Limited partners interest, 63,668,244 and 36,959,970 units outstanding, respectively
290,357

 
134,096

Total partners' capital
290,357

 
134,096

Non-controlling interest
2,525

 
5,593

Total equity and partners' capital
292,882

 
139,689

Total liabilities, equity and partners' capital
$
529,310

 
$
534,208


(a)
Financial information has been recast to include the financial position and results attributable to Hi-Crush Blair LLC. See Note 4.

See Notes to Consolidated Financial Statements.

F-3


HI-CRUSH PARTNERS LP
Consolidated Statements of Operations
(In thousands, except per unit amounts)
 
Year Ended December 31,
 
2016
 
2015 (a)
 
2014 (a)(b)
Revenues
$
204,430

 
$
339,640

 
$
386,547

Cost of goods sold (excluding depreciation, depletion and amortization)
189,193

 
248,172

 
215,356

Depreciation, depletion and amortization
15,437

 
13,199

 
10,628

Gross profit (loss)
(200
)
 
78,269

 
160,563

Operating costs and expenses:
 
 
 
 
 
General and administrative expenses
33,198

 
24,890

 
26,451

Impairments and other expenses (Note 14)
34,025

 
25,659

 

Accretion of asset retirement obligations
369

 
336

 
246

Other operating income

 
(12,310
)
 

Income (loss) from operations
(67,792
)
 
39,694

 
133,866

Other income (expense):
 
 
 
 
 
Interest expense
(13,341
)
 
(13,903
)
 
(9,946
)
Net income (loss)
(81,133
)
 
25,791

 
123,920

(Income) loss attributable to non-controlling interest
99

 
(145
)
 
(955
)
Net income (loss) attributable to Hi-Crush Partners LP
$
(81,034
)
 
$
25,646

 
$
122,965

Earnings (loss) per limited partner unit:
 
 
 
 
 
Basic
$
(1.64
)
 
$
0.73

 
$
3.09

Diluted
$
(1.64
)
 
$
0.73

 
$
3.00


(a)
Financial information has been recast to include the financial position and results attributable to Hi-Crush Blair LLC. See Note 4.
(b)
Financial information has been recast to include the financial position and results attributable to Hi-Crush Augusta LLC. See Note 4.

See Notes to Consolidated Financial Statements.

F-4


HI-CRUSH PARTNERS LP
Consolidated Statements of Cash Flows
(In thousands)
 
Year Ended December 31,
 
2016
 
2015 (a)
 
2014 (a)(b)
Operating activities:
 
 
 
 
 
Net income (loss)
$
(81,133
)
 
$
25,791

 
$
123,920

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
 
 
Depreciation and depletion
15,444

 
12,270

 
8,858

Amortization of intangible assets
1,682

 
2,620

 
5,186

Loss on impairments of goodwill and intangible assets
33,745

 
18,606

 

Provision for doubtful accounts
8,236

 

 

Unit-based compensation to directors and employees
2,620

 
2,983

 
1,470

Amortization of loan origination costs into interest expense
1,866

 
2,293

 
1,264

Accretion of asset retirement obligations
369

 
336

 
246

(Gain) loss on disposal or impairments of property, plant and equipment
(357
)
 
6,514

 

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

 

 
492

Changes in operating assets and liabilities:
 
 
 
 
 
Accounts receivable
(19,593
)
 
40,640

 
(44,675
)
Inventories
3,946

 
(2,406
)
 
(1,738
)
Prepaid expenses and other current assets
2,105

 
1,645

 
(4,837
)
Other assets
1,360

 
(2,962
)
 
(2,974
)
Accounts payable
2,037

 
(3,773
)
 
6,889

Accrued and other current liabilities
1,425

 
(6,468
)
 
4,580

Due to sponsor
(396
)
 
(14,440
)
 
5,584

Net cash provided by (used in) operating activities
(26,644
)
 
83,649

 
104,265

Investing activities:
 
 
 
 
 
Capital expenditures for property, plant and equipment
(42,591
)
 
(121,358
)
 
(82,181
)
Proceeds from sale of property, plant and equipment
1,403

 

 

Cash used for business combinations
(75,000
)
 

 
(224,250
)
Equity method investments
(10,232
)
 

 

Restricted cash, net

 
691

 

Net cash used in investing activities
(126,420
)
 
(120,667
)
 
(306,431
)
Financing activities:
 
 
 
 
 
Proceeds from equity issuances, net
189,037

 

 
170,693

Proceeds from issuance of long-term debt

 
65,000

 
198,000

Repayment of long-term debt
(58,396
)
 
(14,928
)
 
(139,750
)
Loan origination costs
(128
)
 
(406
)
 
(7,120
)
Affiliate financing, net
15,700

 
63,266

 
41,984

Proceeds from unit purchase program participants
111

 
403

 

Redemption of common units

 

 
(19
)
Distributions paid

 
(70,072
)
 
(77,421
)
Net cash provided by financing activities
146,324

 
43,263

 
186,367

Net increase (decrease) in cash
(6,740
)
 
6,245

 
(15,799
)
Cash at beginning of period
11,054

 
4,809

 
20,608

Cash at end of period
$
4,314

 
$
11,054

 
$
4,809

Non-cash investing and financing activities:
 
 
 
 
 
Increase (decrease) in accounts payable and accrued liabilities for additions to property, plant and equipment
$
(8,051
)
 
$
1,962

 
$
9,051

Increase in property, plant and equipment for asset retirement obligations
373

 

 
1,857

Debt financed capital expenditures
3,676

 
3,676

 
3,676

Estimated fair value of contingent consideration liability
5,000

 

 

Increase (decrease) in accrued distribution equivalent rights
(88
)
 
245

 

Due to sponsor balance converted into non-controlling interest
120,950

 

 

Expense paid by Member on behalf of Hi-Crush Blair LLC
1,652

 
2,787

 
182

Cash paid for interest
$
11,475

 
$
11,610

 
$
8,682


(a)
Financial information has been recast to include the financial position and results attributable to Hi-Crush Blair LLC. See Note 4.
(b)
Financial information has been recast to include the financial position and results attributable to Hi-Crush Augusta LLC. See Note 4.

See Notes to Consolidated Financial Statements.

F-5


HI-CRUSH PARTNERS LP
Consolidated Statements of Partners’ Capital
(In thousands)
 
General Partner Capital
 
Sponsor Class B Units
 
Limited Partners
 
 
 
 
 
 
 
Common Unit 
Capital    
 
Sponsor Subordinated Unit Capital    
 
Total Limited Partner Capital    
 
Total Partner 
Capital
 
Non-Controlling Interest
 
Total Equity and Partners Capital
Balance at December 31, 2013
$

 
$
9,543

 
$
88,321

 
$
50,259

 
$
138,580

 
$
148,123

 
$
35,231

 
$
183,354

Issuance of 12,554 common units to directors and employees

 

 
458

 

 
458

 
458

 

 
458

Unit-based compensation expense

 

 
1,109

 

 
1,109

 
1,109

 

 
1,109

Management fees paid by sponsor on behalf of the Partnership (b)

 

 

 

 

 

 
492

 
492

Issuance of 4,325,000 common units, net

 

 
170,693

 

 
170,693

 
170,693

 

 
170,693

Acquisition of 390,000 common units of Hi-Crush Augusta LLC

 

 
(111,794
)
 
(78,257
)
 
(190,051
)
 
(190,051
)
 
(34,199
)
 
(224,250
)
Redemption of 299 common units

 

 
(19
)
 

 
(19
)
 
(19
)
 

 
(19
)
Conversion of Class B units into 3,750,000 common units

 
(9,543
)
 
9,543

 

 
9,543

 

 

 

Non-cash contributions by sponsor (a)

 

 

 

 

 

 
182

 
182

Distributions (b)
(863
)
 

 
(46,073
)
 
(30,485
)
 
(76,558
)
 
(77,421
)
 

 
(77,421
)
Net income (a)(b)
863

 

 
72,342

 
49,760

 
122,102

 
122,965

 
955

 
123,920

Balance at December 31, 2014

 

 
184,580

 
(8,723
)
 
175,857

 
175,857

 
2,661

 
178,518

Issuance of 6,344 common units to directors

 

 
200

 

 
200

 
200

 

 
200

Conversion of subordinated units to common units (a)

 

 
(21,393
)
 
21,393

 

 

 

 

Unit-based compensation expense

 

 
2,710

 

 
2,710

 
2,710

 

 
2,710

Distributions, including distribution equivalent rights
(2,622
)
 

 
(42,802
)
 
(24,893
)
 
(67,695
)
 
(70,317
)
 

 
(70,317
)
Non-cash contributions by sponsor (a)

 

 

 

 

 

 
2,787

 
2,787

Net income (a)
2,622

 

 
10,801

 
12,223

 
23,024

 
25,646

 
145

 
25,791

Balance at December 31, 2015

 

 
134,096

 

 
134,096

 
134,096

 
5,593

 
139,689

Issuance of 19,550,000 common units, net

 

 
189,037

 

 
189,037

 
189,037

 

 
189,037

Issuance of 103,377 common units to directors

 

 
453

 

 
453

 
453

 

 
453

Unit-based compensation expense

 

 
2,146

 

 
2,146

 
2,146

 

 
2,146

Forfeiture of distribution equivalent rights

 

 
88

 

 
88

 
88

 

 
88

Non-cash contributions by sponsor

 

 

 

 

 

 
1,652

 
1,652

Conversion of advances to Hi-Crush Proppants LLC

 

 

 

 

 

 
120,950

 
120,950

Acquisition of Hi-Crush Blair LLC

 

 
45,571

 

 
45,571

 
45,571

 
(125,571
)
 
(80,000
)
Net loss

 

 
(81,034
)
 

 
(81,034
)
 
(81,034
)
 
(99
)
 
(81,133
)
Balance at December 31, 2016
$

 
$

 
$
290,357

 
$

 
$
290,357

 
$
290,357

 
$
2,525

 
$
292,882


(a)
Financial information has been recast to include the financial position and results attributable to Hi-Crush Blair LLC. See Note 4.
(b)
Financial information has been recast to include the financial position and results attributable to Hi-Crush Augusta LLC. See Note 4.

See Notes to Consolidated Financial Statements.

F-6

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



1. Business and Organization
Hi-Crush Partners LP (together with its subsidiaries, the “Partnership”, "we", "us" or "our") is a Delaware limited partnership formed on May 8, 2012. In connection with its formation, the Partnership issued a non-economic general partner interest to Hi-Crush GP LLC (the “General Partner”), and a 100% limited partner interest to Hi-Crush Proppants LLC (the “sponsor”), its organizational limited partner. The Partnership is an integrated producer, transporter, marketer and distributor of high-quality 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, which are located in Wisconsin, consist of "Northern White" sand, a resource that exists predominately in Wisconsin and limited portions of the upper Midwest region of the United States. The Partnership owns and operates a portfolio of sand facilities with on-site wet and dry plant assets, including direct access to major U.S. railroads for distribution to in-basin terminals. We own and operate a network of strategically located terminals and an integrated distribution system throughout North America, including our PropStreamTM integrated logistics solution, which delivers proppant into the blender at the well site.
On January 31, 2013, the Partnership entered into an agreement with the sponsor to acquire a preferred interest in Hi-Crush Augusta LLC ("Augusta"), the entity that owned the sponsor’s Augusta raw frac sand processing facility, for $37,500 in cash and 3,750,000 newly issued convertible Class B units in the Partnership (See Augusta Contribution below). Subsequently on August 15, 2014, 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. The 3,750,000 converted common units were sold to the public on August 15, 2014.
On June 10, 2013, the Partnership acquired an independent frac sand supplier, D & I Silica, LLC (“D&I”), transforming the Partnership into an integrated Northern White frac sand producer, transporter, marketer and distributor. Founded in 2006, D&I was the largest independent frac sand supplier to the oil and gas industry drilling in the Marcellus and Utica shales.
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”). To finance the Augusta Contribution and refinance the Partnership’s revolving credit agreement, the Partnership sold 4,325,000 newly issued common units in the Partnership and entered into a $200,000 senior secured term loan facility with certain lenders. 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 owned 98.0% of Augusta’s common equity interests.
On August 9, 2016, the Partnership entered into a contribution agreement with the sponsor to acquire all of the outstanding membership interests in Hi-Crush Blair LLC ("Blair"), the entity that owned our sponsor's Blair facility, for $75,000 in cash, 7,053,292 of newly issued common units in the Partnership, and payment of up to $10,000 of contingent earnout consideration (the "Blair Contribution"). The Partnership completed the acquisition of the Blair facility on August 31, 2016.

2. Basis of Presentation
The Augusta Contribution and Blair Contribution were accounted for as transactions between entities under common control whereby Augusta and Blair's net assets were recorded at their historical cost. Therefore, the Partnership's historical financial information has been recast to combine Augusta and Blair with the Partnership as if the combination had been in effect since inception of the common control. Refer to Note 4 - Business Combinations for additional disclosure regarding the Augusta Contribution and Blair Contribution.
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 following the issuance of these financial statements. Refer to Note 8 - Long-Term Debt for additional disclosure regarding our assessment of events and conditions and our ability to comply with covenants under our senior secured revolving credit agreement (the "Revolving Credit Agreement").


F-7

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


3. Significant Accounting Policies
Use of Estimates
The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America (“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. The more significant estimates relate to purchase accounting allocations and valuations, estimates and assumptions for our mineral reserves and its impact on calculating our depreciation and depletion expense under the units-of-production depreciation method, assessing potential impairment of long-lived assets, estimating potential loss contingencies, inventory valuation, valuation of unit-based compensation, estimated fair value of contingent consideration in the future and the estimated cost of future asset retirement obligations. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents consist of all cash balances and highly liquid investments with an original maturity of three months or less.
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 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 December 31, 2016 and 2015, the Partnership maintained an allowance for doubtful accounts of $1,549 and $663, respectively. During the first quarter of 2016, the Partnership incurred bad debt expense of $8,236 which was primarily 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 and was $1,866, $2,293 and $1,264 for the years ended December 31, 2016, 2015 and 2014, respectively.
On April 28, 2016 and November 5, 2015, we amended our Revolving Credit Agreement. As a result of these modifications, we accelerated amortization of $349 and $662, respectively, representing a portion of the remaining unamortized balance of debt issuance costs. Refer to Note 8 - 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 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 December 31, 2016 and 2015, the Partnership maintained unamortized debt issuance costs of $3,538 and $4,354 within long-term debt, respectively (See Note 8 - Long-Term Debt) and $913 and $1,541 within other assets, respectively. Balances maintained in other assets represent costs associated with our revolving credit facility.
The following is a summary of future amortization expense associated with deferred charges:
For the years ending December 31,
 
2017
$
1,208

2018
1,208

2019
947

2020
816

2021
272

Total
$
4,451

Inventories
Sand inventory is stated at the lower of cost or market using the average cost method.
Inventory manufactured at our plant facilities includes direct excavation costs, processing costs, overhead allocation, depreciation and depletion. Stockpile tonnages are calculated by measuring the number of tons added and removed from the stockpile. Tonnages are verified periodically by an independent surveyor. Costs are calculated on a per ton basis and are applied to the stockpile based on the number of tons in the stockpile.

F-8

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


Inventory transported for sale at our terminal facilities or at the blender includes the cost of purchased or manufactured sand, plus transportation and handling related charges.
Spare parts inventory includes critical spares, materials and supplies. We account for spare parts on a first-in, first-out basis, and value the inventory at the lower of cost or market. Detail reviews are performed related to the net realizable value of the spare parts inventory, giving consideration to quality, excessive levels, obsolescence and other factors.
Property, Plant and Equipment
Additions and improvements occurring through the normal course of business are capitalized at cost. When assets are retired or disposed of, the cost and the accumulated depreciation and depletion are eliminated from the accounts and any gain or loss is reflected in the Consolidated Statements of Operations. Expenditures for normal repairs and maintenance are expensed as incurred. Construction-in-progress is primarily comprised of machinery and equipment which has not been placed in service.
Mine development costs include engineering, mineralogical studies, drilling and other related costs to develop the mine, the removal of overburden to initially expose the mineral and building access ways. Exploration costs are expensed as incurred and classified as exploration expense. Capitalization of mine development project costs begins once the deposit is classified as proven and probable reserves.
Drilling and related costs are capitalized for deposits where proven and probable reserves exist and the activities are directed at obtaining additional information on the deposit or converting non-reserve minerals to proven and probable reserves and the benefit is to be realized over a period greater than one year.
Mining property and development costs are amortized using the units-of-production method on estimated measured tons in in-place reserves. The impact of revisions to reserve estimates is recognized on a prospective basis.
Capitalized costs incurred during the year for major improvement and capital projects that are not placed in service are recorded as construction-in-progress. Construction-in-progress is not depreciated until the related assets or improvements are ready to be placed in service. We capitalize interest cost as part of the historical cost of constructing an asset and preparing it for its intended use. These interest costs are included in the property, plant and equipment line in the balance sheet.
Fixed assets other than plant facilities and buildings associated with productive, depletable properties are carried at historical cost and are depreciated using the straight-line method over the estimated useful lives of the assets, as follows:
Computer equipment
3 years
Furniture and fixtures
7 years
Vehicles
5 years
Equipment
5-15 years
Rail spurs and asset retirement obligations
17-33 years
Rail and rail equipment
15-20 years
Transload facilities and equipment
15-25 years
Plant facilities and buildings associated with productive, depletable properties that contain frac sand reserves are carried at historical cost and are depreciated using the units-of-production method. Units-of-production rates are based on the amount of proved developed frac sand reserves that are estimated to be recoverable from existing facilities using current operating methods.
Impairment of Long-lived Assets
Recoverability of investments in property, plant and equipment, and mineral rights is evaluated annually. Estimated future undiscounted net cash flows are calculated using estimates of proven and probable sand reserves, estimated future sales prices (considering historical and current prices, price trends and related factors) and operating costs and anticipated capital expenditures. Reductions in the carrying value of our investment are only recorded if the undiscounted cash flows are less than our book basis in the applicable assets.
Impairment losses are recognized based on the extent that the remaining investment exceeds the fair value, which is determined based upon the estimated future discounted net cash flows to be generated by the property, plant and equipment and mineral rights.
Management’s estimates of prices, recoverable proven and probable reserves and operating and capital costs are subject to certain risks and uncertainties which may affect the recoverability of our investments in property, plant and equipment. Although management has made its best estimate of these factors based on current conditions, it is reasonably possible that changes could occur in the near term, which could adversely affect management’s estimate of the net cash flows expected to be generated from its operating property.

F-9

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


During the year ended December 31, 2015, we elected to idle five destination transload facilities and three rail origin transload facilities.  In addition, to consolidate our administrative functions, we closed down a regional office facility. As a result of these actions, we recognized an impairment of $6,186 related to the write-down of transload and office facilities assets to their net realizable value. No impairment charges were recorded during the years ended December 31, 2016 and 2014. Refer to Note 14 - Impairments and Other Expenses for additional disclosure regarding impairments.
Goodwill and Intangible Assets
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. During the year ended December 31, 2016, we recognized a $33,745 impairment loss of all goodwill. Refer to Note 14 - Impairments and Other Expenses for additional disclosure regarding our goodwill impairment assessment.
The Partnership amortizes the cost of other intangible assets on a straight line basis over their estimated useful lives, ranging from 1 to 20 years. An impairment assessment is performed if events or circumstances occur and may result in the change of the useful lives of the intangible assets. During the year ended December 31, 2015, we completed an impairment assessment of the intangible asset associated with a third party supply agreement (the "Sand Supply Agreement").  Given 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. The Partnership did not recognize any impairments for intangible assets during the year ended December 31, 2016. Refer to Note 14 - Impairments and Other Expenses for additional disclosure regarding impairments.
Equity Method Investments
The Partnership accounts for investments, which it does not control but has the ability to exercise significant influence, using the equity method of accounting. Under this method, the investment is carried originally at cost, increased by any allocated share of the Partnership's net income and contributions made, and decreased by any allocated share of the Partnership's net losses and distributions received. The Partnership's allocated share of income and losses are based on the rights and priorities outlined in the equity investment agreement.
On September 8, 2016, the Partnership entered into an agreement to form Proppant Express Investments, LLC ("PropX"), which was established to develop critical last-mile logistics equipment for the proppant industry. PropX is responsible for manufacturing containers and conveyor systems that allow for transportation of frac sand from in-basin terminals to the well site. Through December 31, 2016, the Partnership has invested $10,232 into PropX, which is accounted for as an equity method investment as the Partnership has a non-controlling interest in PropX, but has the ability to exercise significant influence.
Asset Retirement Obligations
In accordance with Accounting Standards Codification (“ASC”) 410-20, Asset Retirement Obligations, we recognize reclamation obligations when incurred and record them as liabilities at fair value. In addition, a corresponding increase in the carrying amount of the related asset is recorded and depreciated over such asset’s useful life. The reclamation liability is accreted to expense over the estimated productive life of the related asset and is subject to adjustments to reflect changes in value resulting from the passage of time and revisions to the estimates of either the timing or amount of the reclamation costs.
Revenue Recognition
Frac sand sales revenues are recognized when legal title passes to the customer, which may occur at the production facility, rail origin, terminal or well site. At that point, delivery has occurred, evidence of a contractual arrangement exists and collectability is reasonably assured. Revenue from make-whole provisions in our customer contracts is recognized at the end of the defined cure period when collectability is certain.
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.

F-10

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


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 $191,531 as of December 31, 2016, based on the market price quoted from external sources, compared with a carrying value of $194,500. 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 shall be allocated to the partners based on their respective sharing of income specified in the partnership agreement. Net income per unit applicable to limited partners is computed by dividing limited partners’ interest in net income, 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 11. 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 2, the Partnership's historical financial information has been recast to consolidate Augusta and Blair for all periods presented. The amounts of incremental income or losses recast to periods prior to the Augusta Contribution and Blair Contribution are excluded from the calculation of net income per limited partner unit.
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 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 December 31, 2016 and 2015, the Partnership did not have any liabilities for uncertain tax positions or gross unrecognized tax benefit.
Recent Accounting Pronouncements
In November 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2016-18, which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendment will be effective for the Partnership beginning January 1, 2018, with early adoption permitted, and should be applied retrospectively. The Partnership is currently assessing the impact that adopting this new accounting guidance will have on its Consolidated Financial Statements.
In August 2016, the FASB issued Accounting Standards Update No. 2016-15, which provides guidance that is intended to reduce diversity in practice in how certain cash receipts and cash payments are classified in the statement of cash flows. The amendment will be effective for the Partnership beginning January 1, 2018, with early adoption permitted. The Partnership is currently assessing the impact that adopting this new accounting guidance will have on its Consolidated Financial Statements and footnote disclosures.
In March 2016, the FASB issued Accounting Standards Update No. 2016-09, which identifies areas for simplification involving several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows. The new accounting guidance is effective for the Partnership beginning in the first quarter of 2017. 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.

F-11

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


In February 2016, the FASB issued Accounting Standards Update No. 2016-02, which will impact all leases with durations greater than twelve months. In general, such arrangements will be recognized as assets and liabilities on the balance sheet of the lessee. Under the new accounting guidance a right-of-use asset and lease obligation will be recorded for all leases, whether operating or financing, while the statement of operations will reflect lease expense for operating leases and amortization/interest expense for financing leases. The balance sheet amount recorded for existing leases at the date of adoption will be calculated using the applicable incremental borrowing rate at the date of adoption. The new accounting guidance is effective for the Partnership beginning in the first quarter of 2019, and should be applied retrospectively. The Partnership is currently assessing the impact that adopting this new accounting guidance will have on its Consolidated Financial Statements and footnote disclosures.
In May 2014, the 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 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 still assessing the adoption method it will elect upon implementation and related disclosure requirements.  Although we are still in the process of assessing the impact of the adoption of ASU 2014-09, the Partnership does not currently anticipate a material impact on its revenue recognition practices.

4. Business Combinations
Acquisition of Hi-Crush Blair LLC
On August 9, 2016, the Partnership entered into a contribution agreement with our sponsor to acquire all of the outstanding membership interests in Blair, the entity that owned our sponsor’s Blair facility, for $75,000 in cash, 7,053,292 of newly issued common units in the Partnership, and payment of up to $10,000 of contingent earnout consideration (the "Blair Contribution"). The Partnership completed the acquisition of the Blair facility on August 31, 2016. In connection with this acquisition, the Partnership incurred $850 of acquisition related costs during the year ended December 31, 2016, included in general and administrative expenses.
The contingent earnout consideration is based on the Partnership's adjusted earnings before interest, taxes, depreciation and amortization ("Adjusted EBITDA") exceeding certain thresholds for each of the fiscal years ending December 31, 2017 and 2018. If the Partnership exceeds either or both of the respective thresholds, then it will pay an additional $5,000 for each threshold met or exceeded, for an undiscounted total of up to $10,000. As of December 31, 2016, the estimated fair value of the contingent consideration liability based on available information was $5,000, as reflected in other liabilities on our Condensed Consolidated Balance Sheet.
As a result of this transaction, the Partnership's historical financial information has been recast to combine the Consolidated Statements of Operations and the Consolidated Balance Sheets of the Partnership with those of Blair as if the combination had been in effect since inception of common control on July 31, 2014. Any material transactions between the Partnership and Blair have been eliminated. The balance of non-controlling interest as of December 31, 2016 includes the sponsor's interest in Blair prior to the combination. Except for the combination of the Consolidated Statements of Operations and the respective allocation of recast net income (loss), capital transactions between the sponsor and Blair prior to August 31, 2016 have not been allocated on a recast basis to the Partnership’s unitholders. Such transactions are presented within the non-controlling interest column in the Consolidated Statement of Partners' Capital as the Partnership and its unitholders would not have participated in these transactions.

F-12

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


The following table summarizes the carrying value of Blair's assets as of August 31, 2016, and the allocation of the cash consideration payable:
Net assets of Hi-Crush Blair LLC as of August 31, 2016:
 
Cash
$
75

Inventories
6,310

Prepaid expenses and other current assets
360

Due from Hi-Crush Partners LP
406

Property, plant and equipment
125,565

Other assets
700

Accounts payable
(5,653
)
Accrued liabilities and other current liabilities
(2,269
)
Due to sponsor
(311
)
Due to Hi-Crush Partners LP
(1,240
)
Asset retirement obligation
(380
)
Total carrying value of Blair's net assets
$
123,563

 
 
Allocation of purchase price
 
Carrying value of sponsor's non-controlling interest prior to Blair Contribution
$
125,571

Excess purchase price over the acquired interest (a)
(45,571
)
Cost of Blair acquisition
$
80,000

(a) The deemed contribution attributable to the purchase price was allocated to the common unitholders and excludes the $5,000 estimated fair value of contingent consideration payable in the future.
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 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 maintains a 98.0% controlling interest in Augusta’s common units, with the sponsor owning the remaining 2.0% of common units. In connection with this acquisition, the Partnership incurred $768 of acquisition related costs during the year ended December 31, 2014, included in general and administrative expenses.
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 recast 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 Consolidated Statements of Operations and the 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 December 31, 2013 includes the sponsor's interest in Augusta prior to the combination. Except for the combination of the Consolidated Statements of Operations and the respective allocation of recast 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 recast basis to the common and subordinated unitholders. Such transactions are presented within the non-controlling interest column in the Consolidated Statement of Partners' Capital as the Partnership and its unitholders would not have participated in these transactions.

F-13

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


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.
Recast Financial Results
The following tables present our recast revenues, net income (loss) and net income (loss) attributable to Hi-Crush Partners LP per limited partner unit giving effect to the Augusta Contribution and Blair Contribution, as reconciled to the revenues, net income (loss) and net income (loss) attributable to Hi-Crush Partners LP per limited partner unit.
 
Year Ended December 31, 2016
 
Partnership
Historical
 
Blair through August 31, 2016
 
Eliminations
 
Partnership
Recast
Revenues
$
204,430

 
$
13,761

 
$
(13,761
)
 
$
204,430

Net income (loss)
$
(81,412
)
 
$
716

 
$
(437
)
 
$
(81,133
)
Net loss attributable to Hi-Crush Partners LP per limited partner unit - basic
$
(1.64
)
 
 
 
 
 
$
(1.63
)
 
Year Ended December 31, 2015
 
Partnership
Historical
 
Blair
 
Eliminations
 
Partnership
Recast
Revenues
$
339,640

 
$

 
$

 
$
339,640

Net income (loss)
$
28,410

 
$
(2,619
)
 
$

 
$
25,791

Net income attributable to Hi-Crush Partners LP per limited partner unit - basic
$
0.73

 
 
 
 
 
$
0.66


F-14

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


 
Year Ended December 31, 2014
 
Partnership
Historical
 
Augusta
 
Blair
 
Eliminations
 
Partnership
Recast
Revenues
$
365,347

 
$
25,356

 
$

 
$
(4,156
)
 
$
386,547

Net income (loss)
$
120,484

 
$
11,398

 
$
(105
)
 
$
(7,857
)
 
$
123,920

Net income attributable to Hi-Crush Partners LP per limited partner unit - basic
$
3.09

 
 
 
 
 
 
 
$
3.14


5. Inventories
Inventories consisted of the following:
 
December 31,
 
2016
 
2015
Raw material
$

 
$

Work-in-process
13,018

 
11,827

Finished goods
9,304

 
13,960

Spare parts
2,016

 
2,184

Inventories
$
24,338

 
$
27,971


6. Property, Plant and Equipment
Property, plant and equipment consisted of the following:
 
December 31,
 
2016
 
2015
Buildings
$
9,696

 
$
5,519

Mining property and mine development
93,694

 
79,244

Plant and equipment
237,870

 
151,582

Rail and rail equipment
44,935

 
29,300

Transload facilities and equipment
78,105

 
62,557

Construction-in-progress
1,695

 
102,464

Property, plant and equipment
465,995

 
430,666

Less: Accumulated depreciation and depletion
(49,045
)
 
(37,154
)
Property, plant and equipment, net
$
416,950

 
$
393,512

Depreciation and depletion expense was $15,444, $12,270 and $8,858 for the years ended December 31, 2016, 2015 and 2014, respectively.
The Partnership recognized a (gain) loss on the disposal of fixed assets of $(357), $72 and $(15) during the years ended December 31, 2016, 2015 and 2014, respectively, which are included in general and administrative expenses on our Consolidated Statements of Operations.
During the year ended December 31, 2016, the Partnership completed construction and commenced operations of our Blair facility, sold two of its idled transload facilities and the leases for two of the idled transload facilities terminated.
The Augusta facility was temporarily idled from October 2015 through August 2016. No impairment was recorded related to the Augusta facility.
During the year ended December 31, 2015, the Partnership recognized an impairment of $6,186 related to the write-down of transload and office facilities assets to their net realizable value and recognized expense of $256 related to the abandonment of certain transload construction projects. These expenses are included in impairments and other expenses in our Consolidated Statements of Operations. Refer to Note 14 - Impairments and Other Expenses for additional disclosure regarding impairments.

F-15

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



7. Goodwill and Intangible Assets
Changes in goodwill and intangible assets consisted of the following:
 
Goodwill
 
Intangible Assets
Balance at December 31, 2014
$
33,745

 
$
33,005

Loss on impairment (Note 14)

 
(18,606
)
Amortization expense

 
(2,620
)
Balance at December 31, 2015
33,745

 
11,779

Loss on impairment (Note 14)
(33,745
)
 

Amortization expense

 
(1,682
)
Balance at December 31, 2016
$

 
$
10,097

Goodwill
During the year ended December 31, 2016, the Partnership recognized a $33,745 impairment loss of all goodwill that was allocated from the purchase price of its acquisition of D&I in 2013. Refer to Note 14 - Impairments and Other Expenses for additional disclosure regarding our goodwill impairment assessment.
Intangible Assets
Intangible assets arising from the acquisition of D&I consisted of the following:
 
 
 
December 31,
 
Useful life
 
2016
 
2015
Supplier agreements
1-20 Years
 
$
21,997

 
$
21,997

Customer contracts and relationships
1-10 Years
 
18,132

 
18,132

Other intangible assets
1-3 Years
 
1,749

 
1,749

Intangible assets
 
 
41,878

 
41,878

Less: Accumulated amortization and impairments
 
 
(31,781
)
 
(30,099
)
Intangible assets, net
 
 
$
10,097

 
$
11,779

Amortization expense was $1,682 and $2,620 for the years ended December 31, 2016 and 2015, respectively. As of December 31, 2016, the unamortized balance of intangible assets is associated with our customer relationships. The weighted average remaining life of intangible assets was 6 years as of December 31, 2016.
During the year ended December 31, 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. The Partnership did not recognize any impairments for intangible assets during the year ended December 31, 2016. Refer to Note 14 - Impairments and Other Expenses for additional disclosure regarding impairments.
As of December 31, 2016, future amortization is as follows:
Fiscal Year
Amortization
2017
$
1,682

2018
1,682

2019
1,682

2020
1,682

2021
1,682

Thereafter
1,687

 
$
10,097



F-16

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


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

 
$
52,500

Term Loan Credit Facility
194,500

 
196,500

Less: Unamortized original issue discount
(1,247
)
 
(1,529
)
Less: Unamortized debt issuance costs
(3,538
)
 
(4,354
)
Other notes payable
6,705

 
6,924

Total debt
196,420

 
250,041

Less: current portion of long-term debt
(2,962
)
 
(3,258
)
Long-term debt
$
193,458

 
$
246,783

Revolving Credit Facility
On April 28, 2014, the Partnership entered into an amended and restated credit agreement (the "Revolving Credit Agreement"), which matures on April 28, 2019. On November 5, 2015, the Partnership entered into a second amendment (the "Second Amendment") and on April 28, 2016, into a third amendment (the "Third Amendment"). On August 31, 2016, the Partnership entered into a fourth amendment to the Revolving Credit Agreement, which allowed for the Blair Contribution. As of December 31, 2016, the Revolving Credit Agreement, as amended, is a senior secured revolving credit facility that permits aggregate borrowings of up to $75,000, including a $25,000 sublimit for letters of credit and a $10,000 sublimit for swing line loans. The outstanding balance of $52,500 under the Revolving Credit Agreement was paid in full as of June 30, 2016.
As of December 31, 2016, we had $66,368 of undrawn borrowing capacity ($75,000, net of $8,632 letter of credit commitments) and no indebtedness under our Revolving Credit Agreement.
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. Subsequent to June 30, 2017, 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.
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. Due to declining market conditions, on November 5, 2015, the Partnership entered into the Second Amendment, which waives the compliance of customary financial covenants through June 29, 2017 (the "Effective Period"), after which the maximum leverage ratio is 5.0x for for the fiscal quarter ending June 30, 2017 annualized, 4.5x for the six months ending September 30, 2017 annualized, 4.0x for the nine months ending December 31, 2017 annualized, and 3.5x for the twelve months ending March 31, 2018 and thereafter. After the Effective Period, the minimum interest coverage ratio, as defined, is 2.5x for each fiscal quarter ending on or after June 30, 2017. 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 during the Effective Period, and required that capital expenditures during 2016 not exceed $28,000. As a result, of further declines in volumes and pricing and their impact on earnings and cash flow, on April 28, 2016, the Partnership entered into the Third Amendment, which waives the minimum quarterly EBITDA covenants and establishes a maximum EBITDA loss for the six months ending March 31, 2017.

F-17

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


As of December 31, 2016, we were in compliance with the amended covenants contained in the Revolving Credit Agreement. However, the decline in volumes and pricing referred to above contributed to a net loss and negative cash flow from operations for the year ended December 31, 2016. Our ability to comply with such covenants in the future, and access our undrawn borrowing capacity under our Revolving Credit Agreement, is dependent primarily on achieving certain levels of EBITDA, as defined. We believe we will remain in compliance in 2017 with such covenants based on our forecasts for volumes, prices and EBITDA, which are above those experienced in the second half of 2016 and are consistent with the increasing sales volumes and prices we have experienced since the second half of 2016 through the first several weeks of 2017. The forecasted levels of EBITDA are therefore based on our expectation of future volumes and price increases which are subject to risk and uncertainty regarding market conditions for proppant. There can be no assurance that the Partnership will achieve the volumes and pricing included in the forecasts and therefore achieve the planned levels of EBITDA in future periods. If the levels of EBITDA are not sufficient to meet the minimum amounts required for covenant compliance, an event of default could occur.
The Third Amendment also provides for an "equity cure" that can be applied to EBITDA covenant ratios for 2017 and all future periods. On January 4, 2017, the Partnership entered into an equity distribution program with certain financial institutions (each, a "Manager") under which we may sell, from time to time, through or to the Managers, common units representing limited partner interests in the Partnership up to an aggregate gross sales price of $50,000 (See Note 11 - Equity).
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, as described below, all of our outstanding debt obligations could be accelerated which would have a material adverse impact on the Partnership.
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.
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 December 31, 2016, we were in compliance with the terms of the agreement.
As of December 31, 2016, we had $189,715 indebtedness ($194,500, net of $1,247 of discounts and $3,538 of debt issuance costs) under our Term Loan Credit Facility, which carried an interest rate of 4.75%.
Other Notes Payable
On October 24, 2014, the Partnership entered into a purchase and sales agreement to acquire land and underlying frac sand deposits. During the years ended December 31, 2016, 2015 and 2014, the Partnership paid cash consideration of $2,500, and issued a three-year promissory note in the amount of $3,676, respectively, in connection with this agreement. The promissory notes accrue interest at rates equal to the applicable short-term federal rates. All principal and accrued interest is due and payable at the end of

F-18

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


the respective three-year promissory note terms in December 2019, December 2018 and October 2017. However, the promissory notes are prepaid on a quarterly basis during the three-year terms if sand is extracted, delivered, sold and paid for from the properties.
During the years ended December 31, 2016 and 2015, the Partnership made prepayments of $3,896 and $428, respectively, based on the accumulated volume of sand extracted, delivered, sold and paid for. In January 2017, the Partnership made a prepayment of $962 based on the volume of sand extracted, delivered, sold and paid for through the fourth quarter of 2016. As of December 31, 2016, the Partnership had repaid in full the promissory note due in October 2017 and we had $6,705 outstanding on our remaining promissory notes, which carried interest rates ranging from 0.56% to 0.74%.
Maturities
As of December 31, 2016, future minimum debt repayments are as follows:
Fiscal Year
Amount
2017
$
2,962

2018
4,067

2019
5,676

2020
2,000

2021
186,500

 
$
201,205


9. Asset Retirement Obligations
Although the ultimate amount of reclamation and closure costs to be incurred is uncertain, the Partnership maintained a post-closure reclamation and site restoration obligation as follows:
Balance at December 31, 2013
$
4,627

Additions to liabilities
1,857

Accretion expense
246

Balance at December 31, 2014
6,730

Accretion expense
336

Balance at December 31, 2015
7,066

Additions to liabilities
373

Accretion expense
369

Balance at December 31, 2016
$
7,808


10. Commitments and Contingencies
Customer Contracts
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 December 31, 2016, no payments for non-delivery of minimum annual sand volumes have been made by the Partnership to customers under these contracts.
Supplier 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.
Equity Method Investments
On September 8, 2016, the Partnership committed to investing up to $17,400 in PropX over the next year to 18 months for use in the manufacturing of containers and conveyor systems, among other things. Through December 31, 2016, the Partnership funded $10,232 of its commitment, as reflected in equity method investments on the Consolidated Balance Sheet.

F-19

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


Royalty Agreements
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 $5,735, $10,311 and $14,583 for the years ended December 31, 2016, 2015 and 2014, respectively.
Certain acreage is subject to a minimum annual royalty payment. If not paid within 30 days after the annual period, the original landowner has the right to purchase the property for one dollar, subject to certain terms. If we have not made the minimum required royalty payments, we may satisfy our obligation by making a lump-sum cash make-whole payment. Accordingly, we believe there is no material risk that we will be required to sell back the subject property pursuant to this agreement.
During the year ended December 31, 2016, the Partnership entered into an agreement to terminate certain existing royalty obligations for $6,750, of which $3,375 was paid in September 2016, with another payment scheduled for August 2017. As a result of this agreement, the Partnership reduced its ongoing future royalty payments to the applicable counterparties for each ton of frac sand that is excavated, processed and sold to the Partnership’s customers. As of part of this transaction, we recorded an asset of $6,750, as reflected in property, plant and equipment on the Consolidated Balance Sheet.
Property Value Guarantees
On February 7, 2012, we entered into a mining agreement with the town of Bridge Creek, Wisconsin (“Bridge Creek”). The agreement imposes certain restrictions and conditions upon the operation of our Augusta facility inclusive of a property value guaranty (“PVG”). Our obligation is limited to the 24 properties identified on the effective date of the agreement.
On January 15, 2015, we entered into a land use agreement with the town of Springfield, Wisconsin (“Springfield”). The agreement imposes certain restrictions and conditions upon the operation of our Blair facility inclusive of a PVG. Our obligation is limited to the 31 properties identified on the effective date of the agreement.
On February 16, 2015, we entered into a land use agreement with the town of Preston, Wisconsin (“Preston”). The agreement imposes certain restrictions and conditions upon the operation of our Blair facility inclusive of a PVG. Our obligation is limited to the 11 properties identified on the effective date of the agreement.
The respective PVGs establish a process whereby we guaranty fair market value to the owners of residential property specifically identified within the body of the PVG document. According to the terms of the PVGs, the property owner must notify us in the event they wish to sell the subject residence and up to 10 acres of land in the case of Bridge Creek and 20 acres of land in the agreements with Springfield and Preston. Upon such notice, the PVGs establishes a process by which an appraisal is conducted and the subject property is appraised to establish fair market value and is listed with a real estate broker. In the event the property is sold within 180 days of listing, we agree to pay the owner any shortfall between the sales price and the established fair market value. In the event the property is not sold within the 180 day time frame, we are obligated to purchase the property for fair market value.
As of December 31, 2016, we have not accrued a liability related the PVGs noted above as these contingent liabilities are not estimable as it cannot be determined how many of the owners will elect to avail themselves of the provisions of the PVGs and it cannot be determined if shortfalls will exist in the event of a sale nor can the value of the subject property be ascertained until appraised. Through December 31, 2016, the Partnership has paid $380 under these guarantees.
Lease Obligations
The Partnership has long-term leases for railcars, equipment and certain of its terminals. Railcar rental expense was $28,597, $22,027 and $10,438 for the years ended December 31, 2016, 2015 and 2014, respectively.
The Partnership entered into long-term operating leases with PropX for use of equipment manufactured and owned by PropX.  During the year ended December 31, 2016, the Partnership incurred $124 of lease expense from PropX.
We have entered into service agreements with certain transload service providers which requires us to purchase minimum amounts 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 agreement are not in excess of our current forecasted requirements at these locations.

F-20

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


As of December 31, 2016, future minimum operating lease payments and minimum purchase commitments are as follows:
Fiscal Year
Operating
Leases
 
Minimum Purchase
Commitments
2017
$
27,706

 
$
1,576

2018
27,586

 
1,576

2019
30,133

 
1,866

2020
27,520

 
2,296

2021
22,682

 
2,296

Thereafter
36,996

 
4,168

 
$
172,623

 
$
13,778

In addition, the Partnership has placed orders for additional leased railcars. Such long-term operating leases commence upon the future delivery of the railcars. During 2016, we completed negotiations with a railcar lessor to defer the delivery of approximately 700 additional leased railcars until the second half of 2018 and reduced our annual minimum operating lease obligations by approximately $1,300.
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.

11. Equity
As of December 31, 2016, our sponsor owned 20,693,643 common units, representing a 32.5% ownership interest in the limited partner units. In addition, our sponsor is the owner of our General Partner.
During the year ended December 31, 2016, the Partnership completed three public offerings for a total of 19,550,000 common units, representing limited partnership interests in the Partnership for aggregate net proceeds of approximately $189,037. The net proceeds from these offerings were used to pay off the outstanding balance under the Partnership's Revolving Credit Agreement, to fund the Blair Contribution and for general partnership purposes.
During the year ended December 31, 2014, the Partnership completed a public offering for 4,325,000 common units, representing limited partnership interests in the Partnership for aggregate net proceeds of approximately $170,693. The net proceeds from this offering was used to fund the Augusta Contribution, refinance the Partnership’s revolving credit agreement and for general partnership purposes.
Equity Distribution Agreement
On January 4, 2017, the Partnership entered into an equity distribution program with certain financial institutions (each, a "Manager") under which we may sell, from time to time, through or to the Managers, common units representing limited partner interests in the Partnership up to an aggregate gross sales price of $50,000. The Partnership did not issue any common units under this equity distribution program through the date of this filing.
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 may transfer these rights at any time.

F-21

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


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 year ended December 31, 2016, no income was allocated to our holders of incentive distribution rights. During the years ended December 31, 2015 and 2014, $2,622 and $863 was allocated to our holders of incentive distribution rights. During the year ended December 31, 2014, no net income was allocated to our Class B units.
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 most 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, 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. No quarterly distributions were declared for the third quarter of 2015 or thereafter, 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:
 
Year ended December 31,
 
2016
 
2015
 
2014
Basic
49,567,268

 
36,958,988

 
33,370,020

Diluted
49,567,268

 
37,150,878

 
35,783,540

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. The Class B units were converted into common units on August 15, 2014, at which time income allocations commenced on such units.

F-22

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


Diluted earnings per unit excludes any dilutive awards granted (see Note 12 - Unit-Based Compensation) if their effect is anti-dilutive. During the year ended December 31, 2016, the Partnership incurred a net loss and all 579,781 potentially dilutive awards granted and outstanding were excluded from the diluted earnings per unit calculation. Diluted earnings per unit for the years ended December 31, 2015 and 2014, 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 at the end of the respective periods.
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 year ended December 31, 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

 
(81,034
)
 
(81,034
)
Add back recast income attributable to Blair through August 31, 2016

 
(279
)
 
(279
)
Assumed allocation of net loss
$

 
$
(81,313
)
 
$
(81,313
)
 
 
 
 
 
 
Loss per limited partner unit - basic
 
 
$
(1.64
)
 
 
Loss per limited partner unit - diluted
 
 
$
(1.64
)
 
 
Recast Equity Transactions
During the years ended December 31, 2016, 2015 and 2014, the sponsor paid $1,652, $2,787 and $182, respectively, of expenses on behalf of Blair. Such transactions are recognized within the non-controlling interest section of the accompanying Consolidated Statement of Partners' Capital.
During the year ended December 31, 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 by the non-controlling interest in the accompanying financial statements.

12. Unit-Based Compensation
Long-Term Incentive Plan
On August 21, 2012, Hi-Crush GP LLC adopted the Hi-Crush Partners LP Long Term Incentive Plan (the “Plan”) for employees, consultants and directors of Hi-Crush GP LLC 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. On January 9, 2017, the first amendment and restatement of the Plan was approved at a special meeting of our common unitholders and the number of common units that may be issued pursuant to awards under the Plan increased by an additional 2,700,000 common units. After giving effect to the first amendment and restatement of the Plan, to the extent that an award is forfeited, cancelled, exercised, settled in cash, or otherwise terminates or expires without the actual delivery of common units pursuant to such awards, the common units subject to the award will again be available for new awards granted under the Plan; provided, however, that any common units withheld to cover a tax withholding obligation will not again be available for new awards under the Plan. The Plan is administered by Hi-Crush GP LLC’s Board of Directors or a committee thereof.

F-23

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


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 December 31, 2015
136,570

 
$
46.85

Granted
112,345

 
$
15.94

Forfeited
(47,394
)
 
$
49.34

Outstanding at December 31, 2016
201,521

 
$
29.03

As of December 31, 2016, total compensation expense not yet recognized related to unvested PPUs was $2,263, with a weighted average remaining service period of 1.4 years. The weighted average grant date fair value per unit for PPUs granted during December 31, 2016, 2015 and 2014 was $15.94, $37.52 and $65.57, respectively.
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 the 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 December 31, 2015
55,320

 
$
37.63

Vested
(1,605
)
 
$
38.80

Granted
325,470

 
$
12.96

Forfeited
(925
)
 
$
38.48

Outstanding at December 31, 2016
378,260

 
$
16.40

As of December 31, 2016, total compensation expense not yet recognized related to unvested TPUs was $4,224, with a weighted average remaining service period of 2.3 years. The weighted average grant date fair value per unit for TPUs granted during December 31, 2016, 2015 and 2014 was $12.96, $34.09 and $47.33, respectively. The total fair value of units vested during December 31, 2016 and 2015 was $62 and $42, respectively.
Board and Other Unit Grants
The Partnership issued 103,377, 6,344 and 5,532 common units to certain of its directors during the years ended December 31, 2016, 2015 and 2014, respectively. During the year ended December 31, 2014, the Partnership issued 7,022 common units to certain employees which vest approximately over a two-year period. In January 2017, the Partnership issued 29,148 common units to certain of its directors.

F-24

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


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 employees 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 December 31, 2016, total accumulated contributions of $514 from directors under the UPP is maintained within the accrued and other current liabilities line on our Consolidated Balance Sheet. The Contribution period for the UPP ended on February 10, 2017, and as such based on all participants' elected percentage of compensation or aggregate dollar contribution, as applicable, the participants will have the right to purchase an aggregate of up to 300,090 common units on February 28, 2017.
Compensation Expense
The following table presents total unit-based compensation expense:
 
Year ended December 31,
 
2016
 
2015
 
2014
Performance Phantom Units
$
634

 
$
1,973

 
$
954

Time-Based Phantom Units
1,359

 
724

 
155

Director and other unit grants
474

 
273

 
361

Unit Purchase Program
153

 
13

 

Total compensation expense
$
2,620

 
$
2,983

 
$
1,470


13. 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 years ended December 31, 2016, 2015 and 2014, the Partnership incurred $4,321, $4,404 and $9,421, 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 December 31, 2016 and 2015, an outstanding balance of $1,100 and $106,746, respectively, payable to our sponsor is maintained as a current liability under the caption “Due to sponsor”. The December 31, 2015, balance was primarily related to construction advances made to Blair. On August 31, 2016, $120,950 of sponsor advances were converted into capital.
During the years ended December 31, 2016, 2015 and 2014, the Partnership purchased $8,086, $33,406 and $23,705, 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, which is reflected in cost of goods sold.
During the years ended December 31, 2015 and 2014, the Partnership purchased $2,754 and $1,385, respectively, of sand from Goose Landing, LLC, a wholly owned subsidiary of Northern Frac Proppants II, LLC, which is reflected in cost of goods sold. During the year ended December 31, 2016, the Partnership did not purchase any sand from Goose Landing, LLC. The father of Mr. Alston, who is a director of our General Partner, owned a beneficial equity interest in Northern Frac Proppants II, LLC.

F-25

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


On September 8, 2016, the Partnership entered into an agreement to form PropX, which is accounted for as an equity method investment. Through December 31, 2016, the Partnership has invested $10,232 into PropX. During the year ended December 31, 2016, the Partnership purchased $1,566 of equipment from PropX, which is reflected in property, plant and equipment. As of December 31, 2016, the Partnership had accounts payable of $1,553 to PropX for equipment, which is reflected in accounts payable on our Consolidated Balance Sheet. In addition to equipment purchases, we incurred $124 of lease expenses for the use of PropX equipment, which is reflected in cost of goods.
During the years ended December 31, 2016, 2015 and 2014, 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 a member of our Board of Directors and through October 28, 2016 was our general partner's Chief Operating Officer, has an ownership 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.

14. 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 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 an impairment loss of all goodwill was incurred, which was equal to the difference between the carrying value and estimated fair value of goodwill.
During the year ended December 31, 2016, the Partnership recognized a $33,745 impairment loss of all goodwill. The Partnership did not recognize any impairment losses for goodwill during the year ended December 31, 2015.
During the year ended December 31, 2015, we completed an impairment assessment of the intangible asset associated with the Sand Supply Agreement.  Given 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. The Partnership did not recognize any impairments for intangible assets during the year ended December 31, 2016.

F-26

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


During the year ended December 31, 2015, we elected to temporarily idle five destination transload facilities and three rail origin transload facilities.  In addition, to consolidate our administrative functions, we closed down a regional office facility. As a result of these actions, we recognized an impairment of $6,186 related to the write down of transload and office facilities’ assets to their net realizable value, and severance, retention and relocation costs of $571 for affected employees. No impairment charges were recorded for long-lived assets during the years ended December 31, 2016 and 2014.
We recognized impairments and other expenses as outlined in the following table:
 
Year Ended December 31,
 
2016
 
2015
 
2014
Impairment of Goodwill
$
33,745

 
$

 
$

Impairment of Sand Supply Agreement

 
18,606

 

Impairment of idled administrative and transload facilities

 
6,186

 

Severance, retention and relocation
280

 
571

 

Abandonment of construction projects

 
256

 

Expiration of exclusivity agreements

 
40

 

Impairments and other expenses
$
34,025

 
$
25,659

 
$


15. 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.

16. Concentration of Credit Risk
The Partnership is a producer of sand mainly used by the oil and natural gas industry for fracturing wells. The Partnership’s business is, therefore, dependent upon economic activity within this market. For the year ended December 31, 2016, sales to four customers accounted for 78% of the Partnership's revenue. For the year ended December 31, 2015, sales to four customers accounted for 68% of the Partnership’s revenue. For the year ended December 31, 2014, sales to three customers accounted for 64% of the Partnership’s revenue.
Throughout 2016, the Partnership has maintained cash balances in excess of federally insured amounts on deposit with financial institutions.


F-27

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


17. Quarterly Financial Data (Unaudited)
As discussed in Note 2, the Blair Contribution was accounted for as a transaction between entities under common control. Therefore, the Partnership's historical financial information has been recast to include Hi-Crush Blair LLC for the first and second quarters of 2016 and all periods of 2015.
 
First
Quarter (a)
 
Second
Quarter
 
Third
Quarter (b)
 
Fourth
Quarter (b)
 
Total
2016
 
 
 
 
 
 
 
 
 
Revenues
$
52,148

 
$
38,429

 
$
46,556

 
$
67,297

 
$
204,430

Gross profit (loss)
(576
)
 
(539
)
 
216

 
699

 
(200
)
Loss from operations
(48,772
)
 
(6,786
)
 
(7,922
)
 
(4,312
)
 
(67,792
)
Net loss
(52,353
)
 
(10,758
)
 
(10,767
)
 
(7,255
)
 
(81,133
)
Loss per limited partner unit:
 
 
 
 
 
 
 
 
 
Basic
$
(1.39
)
 
$
(0.26
)
 
$
(0.21
)
 
$
(0.11
)
 
$
(1.64
)
 
 
 
 
 
 
 
 
 
 
2015
 
 
 
 
 
 
 
 
 
Revenues
$
102,111

 
$
83,958

 
$
81,494

 
$
72,077

 
$
339,640

Gross profit
33,472

 
20,260

 
15,094

 
9,443

 
78,269

Income (loss) from operations
26,793

 
13,341

 
(15,224
)
 
14,784

 
39,694

Net income (loss)
23,476

 
10,357

 
(18,662
)
 
10,620

 
25,791

Earnings (loss) per limited partner unit:
 
 
 
 
 
 
 
 
 
Basic
$
0.61

 
$
0.31

 
$
(0.49
)
 
$
0.30

 
$
0.73

(a)
The first quarter of 2016 includes a $33,745 impairment of goodwill. Refer to Note 14 for additional disclosure.
(b)
The third and fourth quarters of 2015 include impairments and other expenses of $23,718 and $1,941, respectively. Refer to Note 14 for additional disclosure. The fourth quarter of 2015 includes a gain of $12,310 on a contract settlement payment.


F-28


HI-CRUSH PARTNERS LP
Schedule II - Valuation and Qualifying Accounts
(In thousands)

 
 
Balance at Beginning of Period
 
Charged to Costs and Expenses
 
Deductions
 
Balance at End of Period
Allowance for doubtful accounts
 
 
 
 
 
 
 
 
Year Ended December 31, 2016
 
$
663

 
$
8,236

 
$
(7,350
)
 
$
1,549

Year Ended December 31, 2015
 
$
984

 
$
101

 
$
(422
)
 
$
663

Year Ended December 31, 2014
 
$
300

 
$
750

 
$
(66
)
 
$
984




F-29