Attached files

file filename
EX-95.1 - EXHIBIT 95.1 - Emerge Energy Services LPa10q17930-q3ex951msha.htm
EX-32.2 - EXHIBIT 32.2 - Emerge Energy Services LPa10q17930-q3xex322.htm
EX-32.1 - EXHIBIT 32.1 - Emerge Energy Services LPa10q17930-q3xex321.htm
EX-31.2 - EXHIBIT 31.2 - Emerge Energy Services LPa10q17930-q3xex312.htm
EX-31.1 - EXHIBIT 31.1 - Emerge Energy Services LPa10q17930-q3xex311.htm

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

Form 10-Q
 
ý  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017
 
OR
 
¨  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from        to
 
Commission File No.  001-35912
 
EMERGE ENERGY SERVICES LP
(Exact name of registrant as specified in its charter)
 
Delaware
 
90-0832937
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
6000 Western Place, Suite 465, Fort Worth, Texas 76107
 
(817) 618-4020
(Address of principal executive offices)
 
(Registrant’s telephone number, including area code)
 
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 Partner Interests
 
New York Stock Exchange
 
Securities registered pursuant to Section 12(g) of the Act:  None
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ý  Yes    o  No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    ý  Yes    o  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 the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one)
Large-Accelerated Filer  o
 
Accelerated Filer  x
Non-Accelerated Filer  o
 
Smaller Reporting Company  o
 
 
Emerging growth company o
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o  Yes    o  No

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    o  Yes    ý  No
 
As of October 26, 2017, 30,152,610 common units were outstanding.
 

1


TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2


FORWARD-LOOKING STATEMENTS 
Certain statements and information in this Quarterly Report on Form 10-Q may constitute “forward-looking statements.”  The words “believe,” “expect,” “anticipate,” “plan,” “intend,” “foresee,” “should,” “would,” “could” or other similar expressions are intended to identify forward-looking statements, which are generally not historical in nature.  These forward-looking statements are based on our current expectations and beliefs concerning future developments and their potential effect on us.  While management believes that these forward-looking statements are reasonable as and when made, there can be no assurance that future developments affecting us will be those that we anticipate.  All comments concerning our expectations for future revenues and operating results are based on our forecasts for our existing operations and do not include the potential impact of any future acquisitions.  Our forward-looking statements involve significant risks and uncertainties (some of which are beyond our control) and assumptions that could cause actual results to differ materially from our historical experience and our present expectations or projections.  Important factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, those summarized below: 
failure to secure or maintain contracts with our largest customers, or non-performance of any of those customers under the applicable contract;
competitive conditions in our industry;
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;
the volume of frac sand we are able to sell;
the price at which we are able to sell frac sand;
changes in the long-term supply of and demand for oil and natural gas;
volatility of fuel prices;
unanticipated ground, grade or water conditions at our sand mines;
actions taken by our customers, competitors and third-party operators;
our ability to complete growth projects on time and on budget;
our ability to realize the expected benefits from recent acquisitions;
increasing costs and minimum contractual obligations relating to our transportation services and infrastructure;
inclement or hazardous weather conditions, including flooding, and the physical impacts of climate change;
environmental hazards;
industrial accidents;
changes in laws and regulations (or the interpretation thereof) related to the mining and hydraulic fracturing industries, silica dust exposure or the environment;
inability to acquire or maintain necessary permits or mining or water rights;
facility shutdowns in response to environmental regulatory actions;
inability to obtain necessary production equipment or replacement parts;
reduction in the amount of water available for processing;
technical difficulties or failures;
labor disputes and disputes with our excavation contractor;
late delivery of supplies;
difficulty collecting receivables;
inability of our customers to take delivery of our products;
changes in the price and availability of transportation;
fires, explosions or other accidents;
pit wall failures or rock falls;
the effects of future litigation; and
other factors discussed in this Quarterly Report on Form 10-Q and the detailed factors discussed under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016.
When considering forward-looking statements, you should keep in mind the known material risk factors and other cautionary statements set forth in our Annual Report on Form 10-K for the year ended December 31, 2016 in “Risk Factors” and in this Form 10-Q in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors.”  Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof.  We undertake no obligation to publicly update or revise any forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise.


3


PART I                                           FINANCIAL INFORMATION

ITEM 1.                                      FINANCIAL STATEMENTS
 
EMERGE ENERGY SERVICES LP
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
($ in thousands, except unit data)
 
 
September 30, 2017
 
December 31, 2016
 
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
$
549

 
$
4

 
Trade and other receivables, net
56,983

 
25,103

 
Inventories
26,868

 
17,457

 
Prepaid expenses and other current assets
5,536

 
11,374

 
Total current assets
89,936

 
53,938

 
 
 
 
 
 
Property, plant and equipment, net
178,408

 
165,484

 
Intangible assets, net
2,443

 
4,781

 
Other assets, net
25,099

 
25,330

 
Non-current assets held for sale
292

 
371

 
Total assets
$
296,178

 
$
249,904

 
 
 
 
 
 
LIABILITIES AND PARTNERS’ EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
$
20,710

 
$
11,221

 
Accrued liabilities
17,850

 
11,629

 
Current portion of long-term debt
22,048

 

 
Total current liabilities
60,608

 
22,850

 
 
 
 
 
 
Long-term debt, net of current portion
157,090

 
134,012

 
Business acquisition obligation, net of current portion
5,898

 
8,063

 
Other long-term liabilities
29,422

 
30,323

 
Total liabilities
253,018

 
195,248

 
 
 
 
 
 
Commitments and contingencies


 


 
Preferred units - Series A - Par value of $1,000: 0 units and 10,000 units issued and outstanding as of September 30, 2017 and December 31, 2016, respectively

 
6,914

 
Partners’ equity:
 
 
 
 
General partner

 

 
Limited partner common units - 30,150,916 units and 29,076,456 units issued and outstanding as of September 30, 2017 and December 31, 2016, respectively
43,160

 
47,742

 
Total partners’ equity
43,160

 
47,742

 
Total liabilities and partners’ equity
$
296,178

 
$
249,904

 
 
See accompanying notes to unaudited condensed consolidated financial statements.


4


EMERGE ENERGY SERVICES LP
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
($ in thousands, except unit and per unit data)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
 
Revenues
$
103,215

 
$
31,285

 
$
261,161

 
$
85,780

 
Operating expenses:
 

 
 

 
 
 
 
 
Cost of goods sold (excluding depreciation, depletion and amortization)
80,239

 
40,500

 
223,978

 
122,644

 
Depreciation, depletion and amortization
6,078

 
4,687

 
16,409

 
14,464

 
Selling, general and administrative expenses
7,302

 
4,697

 
20,030

 
15,931

 
Contract and project terminations

 
(25
)
 

 
4,011

 
Total operating expenses
93,619

 
49,859

 
260,417

 
157,050

 
Operating income (loss)
9,596

 
(18,574
)
 
744

 
(71,270
)
 
Other expense (income):
 
 
 
 
 
 
 
 
Interest expense, net
5,073

 
8,014

 
13,353

 
17,891

 
Other
(901
)
 
3,359

 
(3,218
)
 
3,356

 
Total other expense
4,172

 
11,373

 
10,135

 
21,247

 
Income (loss) from continuing operations before provision for income taxes
5,424

 
(29,947
)
 
(9,391
)
 
(92,517
)
 
Provision (benefit) for income taxes
(58
)
 
8

 
(58
)
 
29

 
Net income (loss) from continuing operations
5,482

 
(29,955
)
 
(9,333
)
 
(92,546
)
 
Discontinued Operations
 
 
 
 
 
 
 
 
Income (loss) from discontinued operations, net of taxes
(468
)
 
3,373

 
(3,125
)
 
8,852

 
Gain on sale of discontinued operations

 
31,699

 

 
31,699

 
Total income (loss) from discontinued operations, net of taxes
(468
)
 
35,072

 
(3,125
)
 
40,551

 
Net income (loss)
$
5,014

 
$
5,117

 
$
(12,458
)
 
$
(51,995
)
 
 
 
 
 
 


 


 
Earnings (loss) per common unit (1)
 
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
 
Earnings (loss) per common unit from continuing operations
$
0.19

 
$
(1.24
)
 
$
(0.31
)
 
$
(3.82
)
 
Earnings (loss) per common unit from discontinued operations
(0.02
)
 
1.45

 
(0.10
)
 
1.67

 
Basic earnings (loss) per common unit
$
0.17

 
$
0.21

 
$
(0.41
)
 
$
(2.15
)
 
 
 
 
 
 
 
 
 
 
Diluted:
 
 
 
 
 
 
 
 
Earnings (loss) per common unit from continuing operations
$
0.18

 
$
(1.24
)
 
$
(0.42
)
 
$
(3.82
)
 
Earnings (loss) per common unit from discontinued operations
(0.02
)
 
1.45

 
(0.10
)
 
1.67

 
Diluted earnings (loss) per common unit
$
0.16

 
$
0.21

 
$
(0.52
)
 
$
(2.15
)
 
 
 
 
 
 
 
 
 
 
Weighted average number of common units outstanding - basic
30,270,572

 
24,159,038

 
30,120,216

 
24,136,642

 
Weighted average number of common units outstanding - diluted
30,400,584

 
24,159,038

 
30,183,091

 
24,136,642

 
 
 
 
 
 
 
 
 
 
(1) See Note 9.
 
 
 
 
 
 
 
 

 
See accompanying notes to unaudited condensed consolidated financial statements.


5


EMERGE ENERGY SERVICES LP
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF PREFERRED UNITS AND PARTNERS’ EQUITY
($ in thousands)
 
 
Limited Partner Common Units
 
General Partner
(non-economic 
interest)
 
Total Partners’ Equity
 
Preferred Units
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2016
$
47,742

 
$

 
$
47,742

 
$
6,914

 
Net loss
(12,458
)
 

 
(12,458
)
 

 
Equity-based compensation
1,020

 

 
1,020

 

 
Conversion of preferred units
6,914

 

 
6,914

 
(6,914
)
 
Other
(58
)
 

 
(58
)
 

 
Balance at September 30, 2017
$
43,160

 
$

 
$
43,160

 
$

 
 
See accompanying notes to unaudited condensed consolidated financial statements.


6


EMERGE ENERGY SERVICES LP
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands) 
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
Cash flows from operating activities:
 
 
 
 
Net income (loss)
$
(12,458
)
 
$
(51,995
)
 
Adjustments to reconcile net income (loss) to net cash flows from operating activities:
 

 
 

 
Depreciation, depletion and amortization
16,409

 
16,818

 
Equity-based compensation expense
1,020

 
468

 
Project and contract termination costs - non-cash portion

 
4,011

 
Unrealized (gain) loss on fair value of warrant
(3,212
)
 
2,975

 
Write-down of escrow receivable
3,125

 

 
Provision for doubtful accounts

 
1,211

 
Loss on disposal of assets
79

 
285

 
Amortization of debt discount/premium and deferred financing costs
2,750

 
5,492

 
Write-down of inventory

 
5,394

 
Non-capitalized cost of private placement

 
387

 
Gain on sale of discontinued operations

 
(31,699
)
 
Unrealized (gain) loss on derivative instruments
(225
)
 
455

 
Other non-cash charges
83

 
87

 
Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable
(31,881
)
 
4,994

 
Inventories
(9,411
)
 
8,957

 
Prepaid expenses and other current assets
2,713

 
2,446

 
Accounts payable and accrued liabilities
16,888

 
866

 
Other assets
233

 
1,013

 
Cash flows from operating activities
(13,887
)
 
(27,835
)
 
 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
Purchases of property, plant and equipment
(5,439
)
 
(12,260
)
 
Net proceeds from disposal of assets
211

 
82

 
Asset acquisition
(20,430
)
 

 
Proceeds from sale of discontinued operations, net

 
153,973

 
Other investing activities

 
9

 
Cash flows from investing activities
(25,658
)
 
141,804

 
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
Proceeds from line of credit borrowings
253,075

 
259,978

 
Proceeds from second lien term loan
39,597

 

 
Repayment of line of credit borrowings
(247,272
)
 
(408,592
)
 
Net proceeds from private placement

 
18,682

 
Payment of business acquisition obligation
(2,223
)
 
(944
)
 
Payment of financing costs
(3,024
)
 
(3,940
)
 
Other financing activities
(63
)
 
(18
)
 
Cash flows from financing activities
40,090

 
(134,834
)
 
 
 
 
 
 
Cash and cash equivalents:
 
 
 
 
Net increase (decrease)
545

 
(20,865
)
 
Balance at beginning of period
4

 
20,870

 
Balance at end of period
$
549

 
$
5

 
 See accompanying notes to unaudited condensed consolidated financial statements.


7


EMERGE ENERGY SERVICES LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
1.              ORGANIZATION AND BASIS OF PRESENTATION 
Organization 
Emerge Energy Services LP (“Emerge”) is a Delaware limited partnership that completed its initial public offering (“IPO”) on May 14, 2013 to become a publicly traded partnership.  The combined entities of Superior Silica Sands LLC (“SSS”), a Texas limited liability company and Emerge Energy Services Operating LLC (“Emerge Operating”), a Delaware limited liability company, currently represent Emerge. 
References to the “Partnership,” “we,” “our” or “us” refer collectively to Emerge and all of its subsidiaries.
We are a growth-oriented energy services company engaged in the business of mining, producing, and distributing silica sand that is a key input for the hydraulic fracturing of oil and gas wells. The Sand business conducts mining and processing operations from facilities located in Wisconsin and Texas.  In addition to mining and processing silica sand for the oil and gas industry, the Sand business sells its product for use in building products and foundry operations. 
We previously owned a fuel business that operated transmix processing facilities located in the Dallas-Fort Worth area and in Birmingham, Alabama.  The Fuel business also offered third-party bulk motor fuel storage and terminal services, biodiesel refining, sale and distribution of wholesale motor fuels, reclamation services (which consists primarily of cleaning bulk storage tanks used by other petroleum terminal and others) and blending of renewable fuels. 
We completed the sale of our Fuel business pursuant to an Amended and Restated Purchase and Sale Agreement, dated August 31, 2016 (the “Restated Purchase Agreement”), with Susser Petroleum Operating Company LLC and Sunoco LP (together, “Sunoco”). Sunoco paid Emerge a purchase price of $167.7 million in cash (subject to certain working capital and other adjustments in accordance with the terms of the Restated Purchase Agreement), of which $14.25 million was placed into several escrow accounts to satisfy potential claims from Sunoco for indemnification under the Restated Purchase Agreement. See Note 3 to our Condensed Consolidated Financial Statements for further discussion.
The results of operations of the Fuel business have been classified as discontinued operations for all periods presented. We now operate our continuing business in a single sand segment. We report silica sand operations as our continuing operations and fuel operations as our discontinued operations. 
Basis of Presentation and Consolidation 
The accompanying unaudited condensed consolidated financial statements were prepared using generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Regulation S-X. Accordingly, these financial statements do not include all information or notes required by generally accepted accounting principles for annual financial statements and should be read together with our 2016 Annual Report on Form 10-K. These financial statements include the accounts of all of our subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. In the opinion of management, all adjustments and disclosures necessary for a fair presentation of these interim statements have been included.
Reclassifications
Certain reclassifications have been made to prior period amounts to conform to the current period presentation. These reclassifications do not impact net income and do not reflect a material change in the information previously presented in our Condensed Consolidated Statements of Operations.
2.             ASSET ACQUISITION
On April 12, 2017, we closed the transaction to acquire substantially all of the assets of Materials Holding Company, Inc., Osburn Materials, Inc., Osburn Sand Co. and South Lehr, Inc. (collectively “Osburn Materials”) for $20 million. The transaction was funded with a new $40 million term loan. Osburn Materials is located approximately 25 miles south of San Antonio, Texas and produced and sold construction, foundry and sports sands, but did not serve the energy markets. We upgraded the existing operations for conversion into frac sand sales and commenced frac sand production in July 2017. San Antonio’s current sand reserves, which consists mostly of 40/70 and 100 mesh sands, meets American Petroleum Institute (“API”) specifications for all grades.
We early adopted the provisions of ASC 805, Business Combinations and Accounting Standards Update (“ASU”) 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, in accounting for this transaction. Under this guidance, if substantially all of the fair value of the gross assets acquired is concentrated in a single asset or group of similar assets, the transaction

8


can be accounted for as an asset purchase. Based on our analysis of the transaction, substantially all of the fair value is concentrated in the sand reserves acquired, and thus we accounted for the transaction as an asset purchase.
Significant judgment is often required in estimating the fair values of assets acquired. We engaged a third-party valuation specialist in estimating fair values of the assets acquired. We used our best estimates and assumptions to allocate the cost of the acquisition to the assets acquired on a relative fair value basis at the acquisition date.  The fair value estimates are based on available historical information and on expectations and assumptions about the future production and sales volumes, market demands, the average selling price of sand, and the discount factor used in estimating future cash flows. While we believe those expectations and assumptions are reasonable, they are inherently uncertain. Transaction costs of $434,000 incurred for the acquisition are capitalized as a component of the cost of the assets acquired.
The assets acquired have been included in our consolidated balance sheets as of September 30, 2017 and are depreciated and depleted according to the policies described in our Annual Report on Form 10-K for the year ended December 31, 2016.
3.              DISCONTINUED OPERATIONS
At March 31, 2016, the assets and liabilities of our Fuel business were classified as held for sale and the results of operations have been classified as discontinued operations for all periods presented in accordance with ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.
The following corporate costs were allocated to discontinued operations for all periods presented:
Interest on the revolver was allocated to the discontinued operations based on the allocation of debt between Sand and Fuel business.
Equity-based compensation costs recognized for the Fuel business employees were allocated to discontinued operations.
The taxes paid on behalf of the Fuel business were compiled by review of prior tax filings and payments. These amounts were allocated to discontinued operations.
General corporate overhead costs were not allocated to discontinued operations.
Summarized results of the discontinued operations for the three and nine months ended September 30, 2017 and 2016 are as follows :
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
 
 
 
 
 
 
 
 
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
 
 
($ in thousands)
 
Revenues (1)
$

 
$
67,095

 
$

 
$
249,558

 
Cost of goods sold (excluding depreciation, depletion and amortization) (1)

 
63,481

 

 
233,025

 
Depreciation and amortization

 

 

 
2,354

 
Selling, general and administrative expenses

 
(211
)
 

 
3,581

 
Interest expense, net

 
444

 

 
1,727

 
Other expenses
468

 

 
3,125

 

 
Income from discontinued operations before provision for income taxes
(468
)
 
3,381

 
(3,125
)
 
8,871

 
Provision for income taxes

 
8

 

 
19

 
Income (loss) from discontinued operations, net of taxes
(468
)
 
3,373

 
(3,125
)
 
8,852

 
Gain on sale of discontinued operations

 
31,699

 

 
31,699

 
Total income (loss) from discontinued operations, net of taxes
$
(468
)
 
$
35,072

 
$
(3,125
)
 
$
40,551

 
 
 
 
 
 
 
 
 
 
(1) Fuel revenues and cost of goods sold include excise taxes and similar taxes:
$

 
$
9,168

 
$

 
$
35,656

 
On August 31, 2016, we completed the sale of our Fuel business pursuant to the terms of the Restated Purchase Agreement. The purchase price was $167.7 million, subject to adjustment based on actual working capital conveyed at closing. The following escrow accounts were established at closing:

9


$7 million of the sales price was withheld as a general escrow associated with certain indemnification obligations. Any unutilized escrow balance, plus any accrued interest thereon, will be paid 54 months from the closing date.
$4 million of the sales price was withheld as a hydrotreater escrow to satisfy any cost overruns of the Birmingham hydrotreater completion. During the nine months ended September 30, 2017, we wrote off the entire receivable relating to hydrotreator completion delays and cost overruns. This non-cash charge is included in Other expenses in our results of discontinued operations.
$2.25 million of the sales price was withheld as the Renewable Fuel Standard escrow account. The entire amount, along with interest thereon, was collected in April 2017.
$1 million of the sales price was withheld as a pipeline escrow account. Any unutilized escrow balance, along with any accrued interest thereon, will be released with the general escrow.
Escrow receivables are recorded at the net present values of estimated future recoveries and will be adjusted as contingencies are resolved.
The following table represents the gain on sale from the Fuel business recognized in the third quarter of 2016 (in thousands).
Purchase price
$
167,736

 
Adjustments:
 
 
Working capital true-up
3,398

 
Other adjustments
(2,911
)
 
General escrow
(7,000
)
 
Hydrotreater escrow
(4,000
)
 
Other escrow
(3,250
)
 
Net proceeds
153,973

 
Less:
 
 
Net book value of assets and liabilities sold
(125,317
)
 
Escrow receivable
10,597

 
Transaction costs including commissions
(7,679
)
 
Other receivables
125

 
Gain on sale of Fuel business
$
31,699

 
4.              OTHER FINANCIAL DATA 
Private Placement
On August 8, 2016, we entered into the Purchase Agreement with the Purchaser to issue and sell to the Purchaser in a private placement an aggregate principal amount of $20 million of our Series A Preferred Units and a Warrant that may be exercised to purchase common units representing limited partner interests in the Partnership.
The first half of the Preferred Units converted into 993,049 common units on November 3, 2016 and the second half converted to 985,222 common units on February 15, 2017.
We also issued to the Purchaser a warrant to purchase approximately 890,000 common units at an exercise price of $10.82 per common unit. The Warrant, which expires on August 16, 2022, was exercisable immediately upon issuance and contains a cashless exercise provision and other customary provisions and protections, including anti-dilution protections. This warrant is classified as a liability in accordance with ASC 480, Distinguishing Liabilities from Equity, and is included in Other long-term liabilities on our Condensed Consolidated Balance Sheets. This warrant has not been exercised as of September 30, 2017.
Public Offering
In November 2016, we completed a public offering of 3,400,000 of our common units at a price of $10.00 per unit and granted the underwriters an option to purchase up to an additional 510,000 common units, which the underwriter exercised in full. The offering closed on November 23, 2016. We received proceeds (net of underwriting discounts and offering expenses) from the offering of approximately $36.9 million.  The net proceeds from this offering were used to repay outstanding borrowings under our revolving Credit Agreement.

10


Allowance for Doubtful Accounts 
We had no allowance for doubtful accounts at September 30, 2017. The allowance for doubtful accounts totaled $3.1 million at December 31, 2016.
Inventories 
Inventories consisted of the following: 
 
September 30, 2017
 
December 31, 2016
 
 
 
 
 
 
 
($ in thousands)
 
Sand work in process
$
15,132

 
$
7,597

 
Sand finished goods
11,474

 
9,631

 
Sand raw materials and supplies
262

 
229

 
Total
$
26,868

 
$
17,457

 
 
During the first quarter of 2016, we wrote down $5.4 million of our sand inventory based on our lower of cost or market analysis. We attributed this write-down to declining market conditions and a significant decline in prices.
Prepaid expenses and other current assets
Prepaid expenses and other current assets consisted of the following: 
 
September 30, 2017
 
December 31, 2016
 
 
 
 
 
 
 
($ in thousands)
 
Prepaid lease assets, current
$
2,562

 
$
3,408

 
Prepaid insurance
684

 
826

 
Escrow receivable, current

 
5,253

 
Other
2,290

 
1,887

 
Total
$
5,536

 
$
11,374

 
Property, Plant and Equipment 
Property, plant and equipment consisted of the following: 
 
September 30, 2017
 
December 31, 2016
 
 
 
 
 
 
 
($ in thousands)
 
Machinery and equipment (1)
$
95,395

 
$
90,035

 
Buildings and improvements (1)
66,190

 
66,190

 
Land and improvements (1)
45,567

 
45,065

 
Mineral reserves
49,090

 
30,181

 
Construction in progress
3,989

 
1,878

 
Capitalized reclamation costs
2,521

 
2,445

 
Total cost
262,752

 
235,794

 
Accumulated depreciation and depletion
84,344

 
70,310

 
Net property, plant and equipment
$
178,408

 
$
165,484

 
(1) Includes assets under capital lease 
We classified $292,000 and $371,000 as assets held for sale as of September 30, 2017 and December 31, 2016.
We recognized $14.1 million and $13.1 million of depreciation and depletion expense for the nine months ended September 30, 2017 and 2016, respectively. Depreciation and depletion expense for continuing operations totaled $12.2 million for the nine months ended September 30, 2016.

11


Intangible Assets
Our intangible assets consisted of the following:
 
Cost
 
Accumulated 
Amortization
 
Net
 
 
 
 
 
 
 
 
 
($ in thousands)
 
September 30, 2017:
 
 
 
 
 
 
Patents
$
7,443

 
$
5,439

 
$
2,004

 
Supply and transportation agreements
569

 
198

 
371

 
Non-compete agreement
100

 
32

 
68

 
Total
$
8,112

 
$
5,669

 
$
2,443

 
 
 
 
 
 
 
 
December 31, 2016:
 
 
 
 
 
 
Patents
$
7,443

 
$
3,195

 
$
4,248

 
Supply and transportation agreements
569

 
112

 
457

 
Non-compete agreement
100

 
24

 
76

 
Total
$
8,112

 
$
3,331

 
$
4,781

 
We recognized $2.3 million and $3.8 million of amortization expense for the nine months ended September 30, 2017 and 2016, respectively.  Amortization expense for continuing operations totaled $2.3 million for the nine months ended September 30, 2016.
Other Assets, Net 
Other assets, net consisted of the following:
 
September 30, 2017
 
December 31, 2016
 
 
 
 
 
 
 
($ in thousands)
 
Deferred lease asset (1)
$
8,788

 
$
8,826

 
Prepaid lease assets, net of current portion (2)
7,827

 
8,616

 
Escrow receivable, non-current (3)
5,596

 
5,459

 
Other
2,888

 
2,429

 
Total
$
25,099

 
$
25,330

 
(1)
During 2016, we completed negotiations with various railcar lessors pursuant to which we terminated future orders of railcars, deferred future railcar deliveries and reduced and deferred payments on existing leases. The cost of deferring future railcar deliveries was recorded as a deferred lease asset. This asset will be amortized over the terms of the associated leases as those railcars enter service.
(2)
The cost to transport leased railcars from the manufacturer to our site for initial placement in service is capitalized and amortized over the term of the lease (typically five to seven years). This balance reflects the non-current portion of these capitalized costs.
(3)
Non-current receivables are recorded at net present value of estimated recoveries and will be adjusted as contingencies are resolved. See Note 3 - Discontinued Operations.

12


Accrued Liabilities 
Accrued liabilities consisted of the following:
 
September 30, 2017
 
December 31, 2016
 
 
 
 
 
 
 
($ in thousands)
 
Sand purchases and royalties
$
4,214

 
$
517

 
Salaries and other employee-related
3,296

 
710

 
Fuel sale related liabilities
2,474

 
2,784

 
Current portion of business acquisition obligations
1,646

 
1,703

 
Mining
1,614

 
227

 
Sales, excise, property and income taxes
1,207

 
136

 
Deferred compensation
848

 
848

 
Accrued interest
660

 
641

 
Current portion of contract termination
210

 
160

 
Logistics
175

 
1,814

 
Other
1,506

 
2,089

 
Total
$
17,850

 
$
11,629

 
Other Long-term Liabilities
Other long-term liabilities consisted of the following:
 
September 30, 2017
 
December 31, 2016
 
 
 
 
 
 
 
($ in thousands)
 
Long-term promissory note
$
9,139

 
$
8,480

 
Deferred lease obligation (1)
8,383

 
5,858

 
Contract and project terminations
5,314

 
5,319

 
Warrants
3,807

 
7,019

 
Asset retirement obligation
2,779

 
2,647

 
Other

 
1,000

 
Total
$
29,422

 
$
30,323

 
(1)
We recognize lease expense for operating leases on a straight-line basis over the term of the lease, beginning on the date we take possession of the property. The difference between the cash paid to the lessor and the amount recognized as lease expense on a straight-line basis is included in deferred lease obligation.
Long-term Promissory Note
During the second quarter of 2016, we negotiated significant concessions on the majority of our railcar leases pursuant to which we cancelled or deferred deliveries on rail cars and reduced cash payments on a substantial portion of the existing rail cars in our fleets. In exchange for these concessions, we issued at par an unsecured promissory note in the aggregate principal amount of $8 million (the “PIK Note”) for delivery deferrals. The PIK Note bears interest at a rate of 10% per annum payable in cash or, in certain situations, in-kind, when certain financial metrics have been met. The PIK Note will mature on June 2, 2020. We also issued warrants to purchase 370,000 common units representing limited partnership interests in the Partnership in exchange for these concessions during the second quarter of 2016.
Contract and Project Terminations
During 2016, we negotiated concessions on the majority of our railcar leases pursuant to which we cancelled or deferred deliveries on rail cars and reduced cash payments on a substantial portion of the existing rail cars in our fleets. In exchange for these concessions, we incurred a contract termination charge of $4 million. We issued at par an unsecured promissory note in the aggregate principal amount of $4 million with interest payable in cash or, in certain situations, in-kind, when certain financial metrics have been met. This note bears interest at a rate of five percent per annum and is due and payable within 30 days following the date on which financial statements are publicly available covering the first date on which these financial metrics have been met.

13


The following table illustrates the various contract termination liabilities and exit and disposal reserves included in Accrued liabilities and Other long-term liabilities in our Condensed Consolidated Balance Sheets:
 
($ in thousands)
 
Balance at December 31, 2016
$
5,479

 
Accretion
130

 
Payments
(85
)
 
Balance at September 30, 2017
$
5,524

 
Mining and Wet Sand Processing Agreement
In April 2014, a five-year contract with a sand processor (“Processor”) became effective to support our Sand business in Wisconsin. In January 2015, the agreement was amended and extended to expire on December 31, 2021. Under this contract, the Processor financed and built a wet wash processing plant near our Wisconsin operations. As part of the agreement, the Processor wet washes our sand, creates stockpiles of washed sand and maintains the plant and equipment. During the term of the agreement the Processor will own the wet plant along with the equipment and other temporary structures used to support this activity. At the end of the agreement, or following a default under the contract by the Processor, we have the right to take ownership of the wet plant and other equipment without charge. Subject to certain conditions, ownership of the plant and equipment will transfer to us at the expiration of the term. We accounted for the wet plant as a capital lease obligation. The original capitalized lease asset and corresponding capital lease obligation totaled $3.3 million. As of September 30, 2017, we do not have any liability for capital lease obligation.
Fair Value Measurements
Our financial instruments consist primarily of cash and cash equivalents, accounts receivable, accounts payable and debt instruments.  The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable are representative of their fair values due to their short maturities.  The carrying amounts of our revolving credit facility approximates fair value because the underlying instrument includes provisions that adjust our interest rates based on current market rates.  The fair values of our other long-term liabilities are not materially different from their carrying values.
On June 2, 2016, we issued warrants to lessors to purchase 370,000 common units representing limited partnership interests in the partnership for concessions on various long-term leases. These warrants may be exercised at any time and from time to time during next five years, at an exercise price per common unit equal to $4.77. The fair value of these warrants was calculated at $2.45 per unit based on a Black Scholes valuation model, utilizing Level 2 inputs based on the hierarchy established in ASC 820, Fair Value Measurement. These warrants are included in Partners' Equity on our Condensed Consolidated Balance Sheets.
On August 8, 2016, we, as part of the private placement described above, also issued a warrant to the Purchaser to purchase approximately 890,000 common units at an exercise price of $10.82 per common unit. This Warrant shall be exercisable for a period of six years from the closing date and include customary provisions and protections, including anti-dilution protections. The fair value of this warrant at issuance date was calculated at $5.56 per unit based on a Black Scholes valuation model, utilizing Level 2 inputs based on the hierarchy established in ASC 820, Fair Value Measurement. This liability is  marked to market each quarter with fair value gains and losses recognized immediately in earnings and included in Other income (expense) on our Consolidated Statements of Operations. The warrant liability was $3.8 million and $7.0 million at September 30, 2017 and December 31, 2016, respectively, and we recorded a gain of $0.9 million and $3.2 million during the three and nine months ended September 30, 2017, respectively.
Retirement Plan 
We sponsor a 401(k) plan for substantially all employees that provides for us to match 100% of participant contributions up to 5% of the participant’s pay.  Additionally, we can make discretionary contributions as deemed appropriate by management. 
As of May 1, 2017, we reestablished the employer 401(k) contributions, which was previously suspended on July 1, 2016. Employer contributions to these plans for continuing operations totaled $253,481 and $177,000 for the nine months ended September 30, 2017 and 2016, respectively. Employer contributions for discontinued operations were $118,000 for the nine months ended September 30, 2016. 
Seasonality 
Winter weather affects the months during which we can wash and wet-process sand in Wisconsin.  Seasonality is not a significant factor in determining our ability to supply sand to our customers because we accumulate a stockpile of wet sand feedstock during non-winter months.  During the winter, we process the stockpiled sand to meet customer requirements.  However, we sell sand for use in oil and natural gas production basins where severe weather conditions may curtail drilling activities.  This is particularly true in drilling areas located in the northern U.S. and western Canada.  If severe winter weather precludes drilling activities, our

14


frac sand sales volume may be adversely affected.  Generally, severe weather episodes affect production in the first quarter with effects possibly continuing into the second quarter. 
Concentration of Credit Risk 
We provide credit, in the normal course of business, to customers located throughout the United States and Canada.  We encounter a certain amount of credit risk as a result of a concentration of receivables among a few significant customers. We perform ongoing credit evaluations of our customers and generally do not require collateral.  The trade receivables (as a percentage of total trade receivables) as of September 30, 2017 and December 31, 2016 from such significant customers are set forth below:
 
September 30, 2017
 
December 31, 2016
 
Customer A
17
%
 
15
%
 
Customer B
13
%
 
22
%
 
Customer C
12
%
 
13
%
 
Customer D
12
%
 
*

 
An asterisk indicates trade receivables are less than ten percent.
Significant customers
The table shows the percent of revenue of our significant customers for our continuing operations represented for the nine months ended September 30, 2017 and 2016.
 
September 30, 2017
 
September 30, 2016
 
Customer B
21
%
 
43
%
 
Customer C
17
%
 
*

 
Customer D
10
%
 
*

 
Customer E
*

 
13
%
 
An asterisk indicates revenue is less than ten percent.
Geographical Data 
Although we own no long-term assets outside the United States, our Sand business began selling product in Canada during 2013.  We recognized $15.9 million and $11.2 million of revenues in Canada for the nine months ended September 30, 2017 and 2016, respectively.  All other sales have occurred in the United States.
Recent Accounting Pronouncements 
In May 2014, August 2015 and May 2016, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, ASU 2015-14, Revenue from Contracts with Customers, Deferral of the Effective Date, and ASU 2016-12, Revenue from Contracts with Customers, Narrow-Scope Improvements and Practical Expedients, respectively, as a new Topic, Accounting Standards Codification Topic 606.  The new revenue recognition standard provides a five-step analysis of transactions to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised 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. It also requires entities to disclose both quantitative and qualitative information that enable financial statements users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. This guidance is effective for annual periods beginning after December 15, 2017 with early adoption permitted on January 1, 2017 and shall be applied retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. We have certain contractual arrangements that include "take-or-pay" provisions. The fixed fees to which we have an unconditional right under these contracts could be subject to certain recognition changes and additional disclosure under ASU 2014-09. We hired an independent consultant to assist us in our assessment of our contracts. This assessment is substantially complete and we are in a position to state that this ASU will not have a significant impact on our financial position and results of operations. We are still assessing the impact on financial disclosures related to the new standard. During the remainder of 2017, we will continue our implementation process and develop any necessary policies. We will adopt this guidance in the first quarter of 2018.

15


In February 2016, the FASB issued ASU 2016-02, Leases. This ASU requires lessees to recognize lease assets and lease liabilities generated by contracts longer than a year on their balance sheets. The ASU also requires companies to disclose in the footnotes to their financial statements information about the amount, timing, and uncertainty for the payments they make for the lease agreements. ASU 2016-02 is effective for public companies for annual periods and interim periods within those annual periods beginning after December 31, 2018. Early adoption is permitted for all entities. We currently have significant long-term operating leases for rail cars and transload facilities. Pursuant to the adoption, we will record substantial liabilities and corresponding assets for these leases. While we are not yet in a position to assess the full impact of the application of this ASU, we expect that the impact of recording the lease liabilities and the corresponding additional assets will have a significant impact on our financial position and results of operations and related disclosures in the notes to our consolidated financial statements.
5.              LONG-TERM DEBT 
Following is a summary of our long-term debt: 
 
September 30, 2017
 
December 31, 2016
 
 
 
 
 
 
 
($ in thousands)
 
Revolving credit facility - principal
$
146,503

 
$
140,701

 
Second lien term loan - principal
40,000

 

 
Less: Deferred financing costs, net
(7,365
)
 
(6,689
)
 
Total debt
179,138

 
134,012

 
Less current portion net of unamortized deferred financing costs
(22,048
)
 

 
Long-term debt
$
157,090

 
$
134,012

 
Revolving Credit Facility  
On June 27, 2014, we entered into an amended and restated revolving credit and security agreement (as amended, the “Credit Agreement”) among Emerge Energy Services LP, as parent guarantor, each of its subsidiaries, as borrowers (the “Borrowers”), and PNC Bank, National Association, as administrative agent and collateral agent (the “agent”), and the lenders thereto. The Credit Agreement matures on June 27, 2019 and, after giving effect to the amendments described below, consists of a $190 million revolving credit facility, which included a sub-limit of up to $20 million for letters of credit, and incurs interest at a rate equal to either, at our option, LIBOR plus 5.00% or the base rate plus 4.00%. We also incur a commitment fee of 0.375% on committed amounts that are neither used for borrowings nor under letters of credit. Substantially all of the assets of the Borrowers are pledged as collateral under the Credit Agreement.
On August 31, 2016, we closed the sale of the Fuel business, used the net proceeds therefrom to repay outstanding borrowings under the Credit Agreement and entered into Amendment No. 11 to the Credit Agreement with the Borrowers, the lenders and the agent. Amendment No. 11, among other things, restated the Credit Agreement and provided a full waiver for all defaults or events of default arising out of our failure to comply with the financial covenant to generate minimum amounts of adjusted EBITDA during the quarters ended March 31, 2016, June 30, 2016 and September 30, 2016 and the covenant to maintain the minimum amount of excess availability for any date prior to September 1, 2016.
Pursuant to Amendment No. 11, the Credit Agreement now requires the Partnership to maintain the following financial covenants:
a covenant to maintain $15 million of excess availability (as defined in the Credit Agreement);
a covenant to limit capital expenditures (as defined in the Credit Agreement) to certain maximum amounts for each quarter through March 31, 2019;
beginning with the quarter ending June 30, 2017, a covenant to generate consolidated EBITDA (as defined in the Credit Agreement) in certain minimum amounts;
beginning with the quarter ending March 31, 2018, a covenant to maintain an interest coverage ratio (as defined in the Credit Agreement) of not less than 2.00 to 1.00, which is scheduled to increase to 3.00 to 1.00 for the fiscal quarter ending March 31, 2019; and
a covenant to raise at least $31.2 million of net proceeds from the issuance and sale of common equity by November 30, 2016, which was satisfied by our underwritten sale of common units which closed on November 23, 2016.
In addition, the Credit Agreement also prohibits us from making cash distributions to our unitholders and requires all cash receipts by us and our subsidiaries to be swept on a daily basis and used to reduce outstanding borrowings under the Credit Agreement.

16


On April 12, 2017, the Partnership entered into Amendment No. 12 to the Credit Agreement. The amendment permits the Partnership and the Borrowers to enter into the Second Lien Term Loan Agreement and to reduce commitments under the revolving credit facility to $190 million, and further reducing on a quarterly basis to $125 million for the quarter beginning January 1, 2019. Accordingly, we classified $22.0 million of our total debt as current liability at September 30, 2017.
Second Lien Term Loan Agreement
On April 12, 2017, we entered into a new $40 million second lien senior secured term loan facility with our wholly-owned subsidiaries Emerge Energy Services Operating LLC and Superior Silica Sands LLC, as borrowers (the “Borrowers”) and U.S. Bank National Association as disbursing agent and collateral agent (the “Second Lien Term Loan Agreement”). The Second Lien Term Loan Agreement matures on April 12, 2022. Proceeds of the new term credit facility were used to (i) pay down a portion of our existing revolving credit facility, (ii) fund the asset acquisition described in Note 2, (iii) pay fees and expenses incurred in connection with the new term credit facility and (iv) for general business purposes. Substantially all of our assets are pledged as collateral on a second lien basis under the Second Lien Term Loan Agreement.
The Second Lien Term Loan Agreement contains various covenants and restrictive provisions and also requires the maintenance of certain financial covenants as follows:
beginning with the fiscal quarter ending March 31, 2018, an interest coverage ratio of not less than 1.70:1.00 increasing quarterly thereafter to 2.55:1.00 for the fiscal quarter ending March 31, 2019 and thereafter;
beginning with the fiscal quarter ending June 30, 2017, a minimum EBITDA of not less than $637,500 for such fiscal quarter, increasing quarterly to $50 million for the four fiscal quarter period ending June 30, 2019 and thereafter; and
minimum excess availability of at least $12.75 million so long as the Revolving Credit Agreement remains in effect.
Loans under the Second Lien Term Loan Agreement will bear interest at the Partnership’s option at either the base rate plus 9.00%, or LIBOR plus 10.00%.
Covenants Compliance
At September 30, 2017, we were in compliance with our loan covenants and had undrawn availability under the Credit Agreement totaling $27.8 million, well above the minimum availability required under our current covenants. At September 30, 2017, our outstanding borrowings under the Credit Agreement bore interest at a weighted-average rate of 8.21% and the borrowings under the Second Lien Term Loan Agreement bore interest at a rate of 11.3%.
6.              RELATED PARTY TRANSACTIONS 
Related party transactions included in our Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Operations for continuing operations are summarized in the following table:
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
 
 
 
 
 
 
($ in thousands)
 
Wages and employee-related costs (1) 
$
13,338

 
$
7,467

 
Wages and employee-related costs for discontinued operations for September 30, 2016 were $5.9 million.
 
September 30, 2017
 
December 31, 2016
 
 
 
 
 
 
 
($ in thousands)
 
Accounts receivable
$
334

 
$
371

 
Accounts payable and accrued liabilities
$
402

 
$
436

 
(1)
We do not have any employees.  Our general partner manages our human resource assets, including fringe benefits and other employee-related charges.  We routinely and regularly reimburse our general partner for any employee-related costs paid on our behalf, and report such costs as operating expenses.

17


7.              EQUITY-BASED COMPENSATION 
Effective May 14, 2013, we adopted our 2013 Long-Term Incentive Plan (the “LTIP”) for providing long-term incentives for employees, directors, and consultants who provide services to us. The LTIP provides for the issuance of an aggregate of up to 2,321,968 common units to be granted either as options, restricted units, phantom units, distribution equivalent rights, unit appreciation rights, unit award, profits interest units, or other unit-based award granted under the plan.  All of our outstanding grants will be settled through issuance of limited partner common units.
For remaining phantom units granted to employees in 2013, we currently assume a 55-month vesting period, which represents management’s estimate of the amount of time until all vesting conditions have been met. For other phantom units granted to employees, we assume a 24 to 36-month vesting period. Restricted units are awarded to our independent directors on each anniversary of our IPO, each with a vesting period of one year.  Regarding distributions for independent directors and other employees, distributions are credited to a distribution equivalent rights account for the benefit of each participant and become payable generally within 45 days following the date of vesting.  As of September 30, 2017, the unpaid liability for distribution equivalent rights totaled $0.8 million
In 2017, we granted 31,750 time-based phantom units to certain officers and employees to vest in equal installments on each anniversary date of the grant over a period of two to three years.
The following table summarizes awards granted during the nine months ended September 30, 2017. 
 
Total
Units
 
Phantom
Units
 
Restricted
Units
 
Fair Value per Unit
at Award Date
 
Outstanding at December 31, 2016
289,607

 
213,851

 
75,756

 
$
13.09

 
Granted
54,791

 
31,750

 
23,041

 
$
12.76

 
Vested
(95,896
)
 
(20,140
)
 
(75,756
)
 
$
12.95

 
Forfeitures
(12,000
)
 
(12,000
)
 

 
$

 
Outstanding at September 30, 2017
236,502

 
213,461

 
23,041

 
$
15.84

 
 
For the nine months ended September 30, 2017 and 2016, we recorded non-cash equity-based compensation expense of $1.0 million and $0.5 million, respectively, in selling, general and administrative expenses.  Non-cash equity-based compensation expense for continuing operations was $0.1 million for the nine months ended September 30, 2016.
As of September 30, 2017, the unrecognized compensation expense related to the grants discussed above amounted to $1.3 million to be recognized over a weighted average of 0.65 years.
8.              INCOME TAXES 
Continuing operations
Our provision for income taxes for continuing operations relates to: (i) Texas margin taxes for the Partnership, and (ii) an insignificant amount of Canadian income taxes on SSS earnings in Canada (most of our earnings are exempted under a U.S/Canada tax treaty).  For federal income tax purposes, we report our income, expenses, gains, and losses as a partnership not subject to income taxes.  As such, each partner is responsible for his or her share of federal and state income tax.  Net earnings for financial statement purposes may differ significantly from taxable income reportable to each partner because of differences between the tax basis and financial reporting basis of assets and liabilities.
The composition of our provision for income taxes for continuing operations is as follows:
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
 
 
 
 
 
 
($ in thousands)
 
Texas margin tax
$
(58
)
 
$
28

 
Canadian income tax

 
1

 
Total provision for income taxes
$
(58
)
 
$
29

 
 
We are responsible for our portion of the Texas margin tax that is included in our subsidiaries’ consolidated Texas franchise tax returns.  For our operations in Texas, the effective margin tax rate is approximately 0.375% as defined by applicable state law.  The margin tax qualifies as an income tax under Generally Accepted Accounting Principles (GAAP), which requires us to recognize

18


the impact of this tax on the temporary differences between the financial statement assets and liabilities and their tax basis attributable to such tax.
9.              EARNINGS PER COMMON UNIT  
We compute basic earnings (loss) per unit by dividing net income (loss) by the weighted-average number of common units outstanding including certain participating securities.  Participating securities include unvested equity-based payment awards that contain rights to distributions, as well as convertible preferred units and warrants that contain contractual rights to participate in any distributions that are declared.  It is our policy to exclude convertible preferred units and warrants from the calculation of basic earnings (loss) per unit in periods of net losses from continuing operations since these securities are not contractually obligated to share in losses.
Diluted earnings per unit is computed by dividing net income by the weighted-average number of common units outstanding, including participating securities, and increased further to include the number of common units that would have been outstanding had potential dilutive units been exercised.  The dilutive effect of restricted units is reflected in diluted net income per unit by applying the treasury stock method.  For periods in which warrants are dilutive, we reverse the income effects of the warrants and include incremental units in our computation of diluted earnings per unit. Under FASB ASC 260-10-45, Contingently Issuable Shares, 93,806 of our outstanding phantom units are not included in basic or diluted earnings per common unit calculations as of September 30, 2017 and 2016
Basic and diluted earnings per unit for the three months ended September 30, 2017 is calculated as follows:
 
Continuing
 
Discontinued
 
Consolidated
 
 
 
 
 
Three Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
($ in thousands, except per unit data)
 
Net income (loss) used to compute earnings (loss) per common unit, basic and diluted
$
5,482

 
$
(29,955
)
 
$
(468
)
 
$
35,072

 
$
5,014

 
$
5,117

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average common units outstanding
30,150,915

 
24,159,038

 
30,150,915

 
24,159,038

 
30,150,915

 
24,159,038

 
Weighted average units deemed participating securities
119,657

 

 
119,657

 

 
119,657

 

 
Weighted average number of common units outstanding - basic
30,270,572

 
24,159,038

 
30,270,572

 
24,159,038

 
30,270,572

 
24,159,038

 
Add incremental units from assumed exercise of warrants
130,012

 

 
130,012

 

 
130,012

 

 
Weighted average number of common units outstanding - diluted
30,400,584

 
24,159,038

 
30,400,584

 
24,159,038

 
30,400,584

 
24,159,038

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Earnings (loss) per unit, basic
$
0.19

 
$
(1.24
)
 
$
(0.02
)
 
$
1.45

 
$
0.17

 
$
0.21

 
Earnings (loss) per unit, diluted
$
0.18

 
$
(1.24
)
 
$
(0.02
)
 
$
1.45

 
$
0.16

 
$
0.21

 

19


Basic and diluted earnings per unit for the nine months ended September 30, 2017 is calculated as follows:
 
Continuing
 
Discontinued
 
Consolidated
 
 
 
 
 
Nine months ended September 30,
 
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
($ in thousands, except per unit data)
 
Net income (loss) used to compute earnings (loss) per common unit, basic
$
(9,333
)
 
$
(92,546
)
 
$
(3,125
)
 
$
40,551

 
$
(12,458
)
 
$
(51,995
)
 
Unrealized (gain) loss on fair value of warrant
(3,212
)
 

 

 

 
(3,212
)
 

 
Net income (loss) used to compute earnings (loss) per common unit, diluted
$
(12,545
)
 
$
(92,546
)
 
$
(3,125
)
 
$
40,551

 
$
(15,670
)
 
$
(51,995
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average common units outstanding, basic
30,120,216

 
24,136,642

 
30,120,216

 
24,136,642

 
30,120,216

 
24,136,642

 
Add incremental units from assumed exercise of warrants
62,875

 

 
62,875

 

 
62,875

 

 
Weighted average number of common units outstanding - diluted
30,183,091

 
24,136,642

 
30,183,091

 
24,136,642

 
30,183,091

 
24,136,642

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Earnings (loss) per unit, basic
$
(0.31
)
 
$
(3.82
)
 
$
(0.10
)
 
$
1.67

 
$
(0.41
)
 
$
(2.15
)
 
Earnings (loss) per unit, diluted
$
(0.42
)
 
$
(3.82
)
 
$
(0.10
)
 
$
1.67

 
$
(0.52
)
 
$
(2.15
)
 
10.       RECURRING FAIR VALUE MEASUREMENTS
We follow FASB ASC 820, Fair Value Measurement, which defines fair value, establishes a framework for measuring fair value, and specifies disclosures about fair value measurements.  This guidance establishes a hierarchy for disclosure of the inputs to valuations used to measure fair value.  The hierarchy prioritizes the inputs into three broad levels as follows. 
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument.
Level 3 inputs are measured based on prices or valuation models that require inputs that are both significant to the fair value measurement and less observable from objective sources.
Our valuation models consider various inputs including (a) mark to market valuations, (b) time value and, (c) credit worthiness of valuation of the underlying measurement.
A financial asset or liability’s classification within the hierarchy is determined based on the lowest level of input that is significant to the fair value measurement. 
The following table shows the three interest rate swap agreements we entered into during 2013 to manage interest rate risk associated with our variable rate borrowings. 
Agreement Date
 
Effective Date
 
Maturity Date
 
Notional Amount
 
Fixed Rate
 
Variable Rate
 
Nov. 1, 2013
 
Oct. 14, 2014
 
Oct. 16, 2017
 
$25,000,000
 
1.33200%
 
1 Month LIBOR
 
Nov. 7, 2013
 
Oct. 14, 2014
 
Oct. 16, 2017
 
$25,000,000
 
1.25500%
 
1 Month LIBOR
 
Nov. 21, 2013
 
Oct. 14, 2014
 
Oct. 16, 2017
 
$20,000,000
 
1.21875%
 
1 Month LIBOR
 
The Fuel business utilized financial hedging arrangements whereby we hedged a portion of our gasoline and diesel inventory, which reduced our commodity price exposure on some of our activities.  The derivative commodity instruments we utilized consisted mainly of futures traded on the New York Mercantile Exchange.  Following the sale of the Fuel business, we have no open commodity derivative contracts.

20


We do not designate our derivative instruments as hedges under GAAP.  As a result, we recognize derivatives at fair value on the consolidated balance sheet with resulting gains and losses reflected in interest expense (for interest rate swap agreements). The resulting gains and losses for the Fuel business were recorded to cost of goods sold for discontinued operations (for derivative commodity instruments), as reported in the condensed consolidated statements of operations.  Our derivative instruments serve the same risk management purpose whether designated as a hedge or not.  We derive fair values principally from published market interest rates and fuel price quotes (Level 2 inputs).  The precise level of open position commodity derivatives is dependent on inventory levels, expected inventory purchase patterns, and market price trends.  We do not use derivative financial instruments for trading or speculative purposes. 
On August 8, 2016, we, as part of the private placement described above, issued a warrant to the Purchaser to purchase approximately 890,000 common units at an exercise price of $10.82 per common unit. The warrant shall be exercisable for a period of six years from the closing date and include customary provisions and protections, including anti-dilution protections. The fair value of this warrant at issuance date was calculated at $5.56 per unit based on a Black Scholes valuation model, utilizing Level 2 inputs based on the hierarchy established in ASC 820, Fair Value Measurement.  This liability is  marked to market each quarter with fair value gains and losses recognized immediately in earnings and included in Other expense (income) on our Consolidated Statements of Operations. We recorded non-cash mark-to-market gains of $0.9 million and $3.2 million during the three and nine months ended September 30, 2017.
The fair values of outstanding derivative instruments and warrant and their classifications within our Condensed Consolidated Balance Sheets are summarized as follows:
 
September 30, 2017
 
December 31, 2016
 
Classification
 
 
 
 
 
 
 
 
 
($ in thousands)
 
 
 
Interest rate swaps
$
2

 
$
227

 
Accrued liabilities
 
Warrant liability
$
3,807

 
$
7,019

 
Other long-term liabilities
 
The effect of derivative instruments, none of which has been designated for hedge accounting, on our Condensed Consolidated Statements of Operations was as follows: 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
Classification
 
 
 
 
 
 
 
 
 
 
((income) expense $ in thousands)
 
Interest rate swaps
$
2

 
$
(129
)
 
$
(62
)
 
434

Interest expense, net
Commodity derivative contracts

 
(144
)
 

 
557

Income from discontinued operations
Warrant
(900
)
 
2,975

 
(3,212
)
 
2,975

Other expense (income)
 
$
(898
)
 
$
2,702

 
$
(3,274
)
 
$
3,966

 
11.       SUPPLEMENTAL CASH FLOW DISCLOSURES 
The following supplemental disclosures may assist in the understanding of our Condensed Consolidated Statements of Cash Flows: 
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
 
 
 
 
 
 
($ in thousands)
 
Cash paid for interest
$
10,934

 
$
14,550

 
Cash paid for income taxes, net of refunds
$
(22
)
 
$
228

 
Purchases of PP&E accrued but not paid at period-end
$
1,432

 
$
2,705

 
Purchases of PP&E accrued in a prior period and paid in the current period
$
170

 
$
3,364

 

21


ITEM 2.                                                MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 
Emerge Energy Services LP (“Emerge”) is a Delaware limited partnership that completed its initial public offering (“IPO”) on May 14, 2013 to become a publicly traded partnership.  The combined entities of Superior Silica Sands LLC (“SSS”), a Texas limited liability company and Emerge Energy Services Operating LLC (“Emerge Operating”), a Delaware limited liability company, currently represent Emerge. 
References to the “Partnership,” “we,” “our” or “us” refer collectively to Emerge and all of its subsidiaries.

Overview 
We are a publicly-traded limited partnership formed in 2012 by management and affiliates of Insight Equity Management Company LLC and its affiliates (collectively “Insight Equity”) to own, operate, acquire and develop a diversified portfolio of energy service assets. 
We completed the sale of our Fuel business pursuant to an Amended and Restated Purchase and Sale Agreement, dated August 31, 2016 (the “Restated Purchase Agreement”), with Susser Petroleum Operating Company LLC and Sunoco LP (together, “Sunoco”). Sunoco paid Emerge a purchase price of $167.7 million in cash (subject to certain working capital and other adjustments in accordance with the terms of the Restated Purchase Agreement), of which $14.25 million was placed into several escrow accounts to satisfy potential claims from Sunoco for indemnification under the Restated Purchase Agreement. See Note 3 to our Condensed Consolidated Financial Statements for further discussion.
The results of operations of the Fuel business have been classified as discontinued operations for all periods presented and we now operate our continuing business in a single Sand segment. Through our Sand business, we are engaged in the business of mining, processing, and distributing silica sand, a key input for the hydraulic fracturing of oil and gas wells. We conduct our Sand operations through our subsidiary SSS, and we believe our SSS brand has name recognition and enjoys a positive reputation with our customers.
On April 12, 2017, we closed the transaction to acquire substantially all of the assets of Osburn Materials for $20 million. The transaction was funded with a new $40 million term loan, and the remaining proceeds (after transaction fees and expenses) were used to reduce outstanding borrowings under the revolving credit facility. Osburn Materials is located approximately 25 miles south of San Antonio, Texas and produced and sold construction, foundry and sports sands, but did not serve the energy markets. We upgraded the existing operations for conversion into frac sand sales and commenced frac sand production in July 2017.
The following discussion analyzes our financial condition and results of operations and should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2016, as well as historical condensed consolidated financial statements and notes included elsewhere in this Quarterly Report. 

22


Results of Operations 
The following table summarizes our consolidated operating results:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
 
 
($ in thousands)
 
Revenues
$
103,215

 
$
31,285

 
$
261,161

 
$
85,780

 
 
 
 
 
 
 

 
 
 
Operating expenses:
 

 
 

 
 
 
 
 
Cost of goods sold (excluding depreciation, depletion and amortization)
80,239

 
40,500

 
223,978

 
122,644

 
Depreciation, depletion and amortization
6,078

 
4,687

 
16,409

 
14,464

 
Selling, general and administrative expenses
7,302

 
4,697

 
20,030

 
15,931

 
Contract and project terminations

 
(25
)
 

 
4,011

 
Total operating expenses
93,619

 
49,859

 
260,417

 
157,050

 
Operating income (loss)
9,596

 
(18,574
)
 
744

 
(71,270
)
 
Other expense (income):
 

 
 

 
 
 
 
 
Interest expense
5,073

 
8,014

 
13,353

 
17,891

 
Other
(901
)
 
3,359

 
(3,218
)
 
3,356

 
Total other expense
4,172

 
11,373

 
10,135

 
21,247

 
Income (loss) before provision for income taxes
5,424

 
(29,947
)
 
(9,391
)
 
(92,517
)
 
Provision (benefit) for income taxes
(58
)
 
8

 
(58
)
 
29

 
Net income (loss) from continuing operations
5,482

 
(29,955
)
 
(9,333
)
 
(92,546
)
 
Discontinued Operations
 
 
 
 
 
 
 
 
Income (loss) from discontinued operations, net of taxes
(468
)
 
3,373

 
(3,125
)
 
8,852

 
Gain on sale of discontinued operations

 
31,699

 

 
31,699

 
Total income (loss) from discontinued operations, net of taxes
(468
)
 
35,072

 
(3,125
)
 
40,551

 
Net income (loss)
$
5,014

 
$
5,117

 
$
(12,458
)
 
$
(51,995
)
 
 
 
 
 
 
 
 
 
 
Adjusted EBITDA (a) 
$
18,743

 
$
(8,113
)
 
$
26,345

 
$
(26,706
)
 
(a)         See “Adjusted EBITDA” below for a discussion of Adjusted EBITDA and a reconciliation to net income (loss) and cash flows from operations. 
Major Factors Impacting Comparability Between Prior and Future Periods
Market Trends
Beginning in late 2014, the market prices for crude oil and refined products began a steep and protracted decline which continued into 2016. This greatly impacted the demand for frac sand as drilling and completion of new oil and natural gas wells was significantly curtailed in North America. As a result, we experienced significant downward pressure on sand volume and pricing. However, commodity prices stabilized in the middle of 2016, leading to an improvement in drilling activity during the third quarter of 2016 and into 2017. Market conditions have improved significantly in 2017, and based on industry outlooks from third-party research firms and customers, we expect conditions to continue to improve for the rest of the year and into 2018.
The increase in demand for frac sand has significantly tightened the availability of supply, and as a result, customers are seeking surety of supply through contractual commitments. We are now selectively agreeing to multi-year contracts with some of our key accounts. Earlier in the year, we entered into two take-or-pay sand supply agreements with customers whereby we are compensated at a fixed price per-ton if less than the minimum volume of sand committed for sale under the agreement is ultimately purchased by the customer. We are also evaluating take-or-pay sand supply agreements for our San Antonio operation and have already received a number of non-binding indications of interest for the product. We believe that sand supply agreements ensure the customers a steady supply of product in exchange for covering the infrastructure-related fixed costs plus needed margins associated with operating our business.

23


Although the near-term supply is closely aligned to current demand, our competitors have begun building in-basin frac sand operations targeting the Permian Basin in West Texas.  Our San Antonio transaction positions us to target other under-served Texas in-basin markets with comparatively less start-up costs (e.g., permitting, construction, infrastructure, and environmental analysis). There can be no assurances that all of the announced projects will be completed given permitting, construction, infrastructure, and environmental constraints.
Sale of Fuel Business
In order to improve our competitive positioning and retain upside for the eventual recovery in the oil and gas cycle, we divested our Fuel business to reduce our debt burden. We recorded a gain of $31.7 million on the sale of the Fuel business during the third quarter of 2016. Please see Note 3 to our consolidated financial statements for a detailed discussion of the sale of the Fuel business.
Expansion of Sand Resources
On April 12, 2017, we closed the transaction to acquire substantially all of the assets of Osburn Materials for approximately $20 million. Osburn Materials is located approximately 25 miles south of San Antonio, Texas and produced and sold construction, foundry and sports sands, but did not serve the energy markets. We upgraded the existing operations for conversion into frac sand sales and commenced frac sand production in July 2017. As part of our expansion strategy in San Antonio we began construction of an additional plant on the site in October 2017. This plant is targeted to be operational by the second quarter of 2018.  Our ability to fully fund construction of the new plant is limited by covenants in the Credit Agreement and the Second Lien Term Loan Agreement. However, we are currently in the process of evaluating options to amend or refinance such agreements which will remove the limitations and enable us to complete the project on schedule. San Antonio has API-specification, strategic reserves that will bolster our presence with in-basin local sands and balance our portfolio of northern white to local sands. With the close proximity of the plant to the Eagle Ford basin, we expect to sell the majority of the sand produced at the plant into this shale play, which is currently the second most active in the United States.
Fluctuating Fixed Costs for Sand
During 2014, our rapidly expanding frac sand business required us to contract for numerous railcars to be delivered and leased in the future as well as contracting for new transload facilities.  The industry downturn from 2015 through 2016 and the corresponding decline in volumes shipped created an excess number of railcars in our fleet, increasing our fixed costs per-ton. However, we successfully negotiated concessions with several of our vendors in 2016, and the recent upturn in frac sand demand has required us to place most of our idled railcars back into service, thereby reducing our fixed cost per-ton.
Changing Preferences of Customer Demand
For several years leading up to 2015, most oil and gas producers preferred the highest quality, coarsest grades of frac sand (20/40 and 30/50) to complete shale wells around North America. The drop in oil and gas prices during 2015 and 2016 forced many oil and gas producers to consider alternatives for lowering the cost to complete a new well. Lower quality proppants compared to northern white sands are often located closer to the shale basins than northern white sands, so some operators have elected to use these proppants and save on transportation costs. Finer mesh sands (40/70 and 100 mesh) have also been used more regularly as oil and gas well completion designs have evolved. As a leading provider of frac sand, we are able to meet the changing needs of our customers and the market. Our diversified set of capabilities enables us to produce both coarse and fine grades in large quantities. With our recent acquisition in San Antonio, we have two Texas operations that are well positioned geographically to meet the strong demand in the prolific Texas basins.
Cost Containment
To conserve liquidity and respond to the industry downturn, we became focused on prudently reducing costs while maintaining our ability to quickly respond to market demands. While we have successfully implemented many cost cutting measures and achieved operational efficiencies, we continue to negotiate price concessions and purchase commitment concessions from our major vendors, such as railcar lessors, rail transportation providers, mine operators, transload facilities operators, and professional services providers.
Sand Distribution System
We have developed our sand distribution system over several years through the addition of third-party transload facilities in the basins in which our customers operate. We are able to charge higher prices for these terminal sales than for FOB plant sales to provide this additional service and convenience to our customers and to cover related transportation and other services costs.
Currently, our northern white volumes are partially constrained by railroad congestion from the class I carriers due to the high volume of shipments that have surpassed prior peak periods. We are working closely with our logistics partners to resolve the bottlenecks during this period of surging demand.

24


Technology Driven Proppant Products
In early 2016, we launched our self-suspending sand marketed under the brand SandMaxX™. While subject to ongoing field testing and data validation, this new technology offers the potential to increase production in oil and gas wells in addition to improving pump time and reducing other upfront costs. Early results are proving that the technology is effective down-hole, but the customer adoption rate has been slower than initially anticipated. We are still actively marketing the product and remain encouraged by the continued inquiries from existing and new customers.
Continuing Operations
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
 
 
($ in thousands)
 
Revenues:
 
 
 
 
 
 
 
 
Frac sand revenues
$
101,795

 
$
31,147

 
$
258,055

 
$
85,384

 
Non-frac sand revenues
1,420

 
138

 
3,106

 
396

 
Total revenues
103,215

 
31,285

 
261,161

 
85,780

 
Operating expenses:
 

 
 

 
 
 
 
 
Cost of goods sold (excluding depreciation, depletion and amortization)
80,239

 
40,500

 
223,978

 
122,644

 
Depreciation, depletion and amortization
6,078

 
4,687

 
16,409

 
14,464

 
Selling, general and administrative expenses
7,302

 
4,697

 
20,030

 
15,931

 
Contract and project terminations

 
(25
)
 

 
4,011

 
Operating income (loss)
$
9,596

 
$
(18,574
)
 
$
744

 
$
(71,270
)
 
Net income (loss) from continuing operations
$
5,482

 
$
(29,955
)
 
$
(9,333
)
 
$
(92,546
)
 
Adjusted EBITDA (a) 
$
18,743

 
$
(10,872
)
 
$
26,345

 
$
(39,882
)
 
 
 
 
 
 
 
 
 
 
Volume of frac sand sold (tons in thousands)
1,361

 
487

 
3,890

 
1,313

 
Volume of non-frac sand sold (tons in thousands)
119

 
6

 
233

 
18

 
Total volume of sand sold (tons in thousands)
1,480

 
493

 
4,123

 
1,331

 
 
 
 
 
 
 
 
 
 
Volume of frac sand produced by plant (tons in thousands):
 
 
 
 
 
 
 
 
Arland, Wisconsin facility
463

 
21

 
1,339

 
21

 
Barron, Wisconsin facility
497

 
383

 
1,547

 
1,094

 
New Auburn, Wisconsin facility
346

 
10

 
965

 
190

 
Kosse, Texas facility
53

 
44

 
165

 
87

 
San Antonio, Texas facility (b)
16

 

 
16

 

 
Total volume of frac sand produced
1,375

 
458

 
4,032

 
1,392

 
(a)         See “Adjusted EBITDA” below for a discussion of Adjusted EBITDA and a reconciliation to net income (loss) and operating cash flows. 
(b) We commenced frac sand production at the San Antonio facility in July 2017.
Three Months Ended September 30, 2017 Compared to Three Months Ended September 30,  2016
Revenues
Sand revenues increased by $71.9 million, primarily due to a 200% increase in total volumes sold as a result of the increased market demand for frac sand, as well as higher prices of frac sand in 2017 compared to 2016. FOB plant sales volumes increased 399% compared to a 194% increase for the higher-priced, terminal sand sales. Terminal sales as a percentage of total volumes sold decreased from 46% in the third quarter of 2016 to 45% in the third quarter of 2017. Revenue per-ton increased to approximately $70 in the third quarter of 2017 compared to $63 in the third quarter in 2016 due to significant sand price increases.

25


Cost of goods sold (excluding depreciation, depletion and amortization) 
Our cost of goods sold consists primarily of direct costs such as processing plant wages, royalties, mining, purchased sand, and transportation to the plant or to transload facilities, as well as indirect costs such as plant repairs and maintenance. Our direct costs of producing sand and our logistics costs for finished product increased with our increased sales.  The most significant components of the $39.7 million increase are:
The major components of the $16.2 million increase in the total cost to acquire and produce sand are:
Increased variable costs due to the 200% increase in total volumes sold;
Idling our most expensive wet plant in 2016; and
Allocation of fixed costs over increased volumes.
$21.6 million increase in rail transportation-related expense resulted primarily from:
$22.6 million increased rail shipping costs due to increased terminal volumes sold; offset by
$0.6 million decreased railcar lease expense; and
$0.4 million decreased railcar storage costs as we have placed previously stored cars back into service.
$2.0 million increase in costs of transload facilities due to increased volumes.
Selling, general and administrative expenses 
The $2.6 million increase in selling, general and administrative expenses is attributable primarily to an increase in employee-related costs due to higher staffing and bonus accruals.
Interest expense
Net interest expense decrease$2.9 million mainly due to lower average balances on outstanding revolving credit facility borrowings, offset by the addition of the Second Lien Term Loan agreement and higher average interest rates in 2017.
Other
Other expenses decreased $4.3 million due to a mark-to-market gain of $0.9 million recognized in the third quarter of 2017 compared to a loss of $3.0 million recognized in the third quarter of 2016 due to a change in the fair value of the warrant issued in August 2016.
Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30,  2016
Revenues
Sand revenues increased by $175.4 million, primarily due to a 210% increase in total volumes sold as a result of the increased market demand for frac sand and higher prices of frac sand in 2017 compared to 2016. FOB plant sales volumes increased 361% compared to a 118% increase for the higher-priced terminal sand sales. Terminal sales as a percentage of total volumes sold decreased from 62% in the nine months of 2016 to 44% in the nine months of 2017. The shift in the mix of FOB plant and terminal volumes decreased the overall revenue per-ton, even though volumes and sand prices increased in 2017.
Cost of goods sold (excluding depreciation, depletion and amortization) 
Our cost of goods sold consists primarily of direct costs such as processing plant wages, royalties, mining, purchased sand, and transportation to the plant or to transload facilities, as well as indirect costs such as plant repairs and maintenance. Our direct costs of producing sand and our logistics costs for finished product increased with our increased sales.  The most significant components of the $101.3 million increase are:
The major components of the $37.7 million increase in the total cost to acquire and produce sand are:
Increased variable costs due to the 210% increase in total volumes sold;
Higher maintenance costs due to 2016 deferred maintenance;
Idling our most expensive wet plant in 2016; and
Allocation of fixed costs over increased volumes.
$53.4 million increase in rail transportation-related expense resulted primarily from:
$58.0 million increased rail shipping costs due to increased terminal volumes sold; offset by
$3.3 million decreased railcar lease expense; and

26


$1.3 million decreased railcar storage costs as we have placed previously stored cars back into service.
$4.9 million increase in costs of transload facilities; and
$5.4 million write down of sand inventory in the first quarter of 2016 based on our lower of cost or market analysis. This write down is attributed to declining market conditions and a significant decline in prices.
Selling, general and administrative expenses 
The $4.1 million increase in selling, general and administrative expenses is attributable primarily to:
$4.3 million increase in employee-related costs due to higher staffing and bonus accruals;
$0.6 million increase in equity-based compensation expense;
$0.3 million increase in employee travel related expense; and
$0.1 million increase in outside consultants; offset by
$1.7 million decrease in bad debt expense.
Interest expense
Net interest expense decrease$4.5 million mainly due to lower average balances on outstanding revolving credit facility borrowings, offset by the addition of the Second Lien Term Loan agreement and higher average interest rates in 2017.
Other
Other expenses decreased $6.6 million due to a mark-to-market gain of $3.2 million recognized in 2017 compared to a loss of $3.0 million recognized in 2016 due to a change in the fair value of the warrant issued in August 2016.
Contract and project terminations
During the first half of 2016, we negotiated various railcar lease contracts. As part of these negotiations, we paid $4.0 million as contract termination fees to a railcar lease vendor. See Note 4 to our Condensed Consolidated Financial Statements for further discussion.
Discontinued Operations
We completed the sale of our Fuel business on August 31, 2016, thus we did not have any operations for the Fuel business in 2017.
During the nine months ended September 30, 2017, we recorded a non-cash charge of $3.1 million for writedowns of the hydrotreator and pipeline escrow receivables relating to completion delays and cost overruns.
Liquidity and Capital Resources 
Sources of Liquidity
Our principal liquidity requirements are to finance current operations, fund capital expenditures, including acquisitions from time to time, to service our debt and to pay distributions to partners.  Our sources of liquidity generally include cash generated by our operations, borrowings under our revolving Credit Agreement and issuances of equity and debt securities.  We depend on the Credit Facility for both short-term and long-term capital needs and may use borrowings under our Credit Facility to fund our operations and capital expenditures to the extent cash generated by our operations is insufficient in any period. We believe that cash generated from our liquidity sources will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months.
Revolving Credit Facility
On June 27, 2014, we entered into an amended and restated revolving credit and security agreement (as amended, the “Credit Agreement”) among Emerge Energy Services LP, as parent guarantor, each of its subsidiaries, as borrowers (the “Borrowers”), and PNC Bank, National Association, as administrative agent and collateral agent (the “agent”), and the lenders thereto. The Credit Agreement matures on June 27, 2019 and, after giving effect to the amendments described below, consists of a $190 million revolving credit facility, which includes a sub-limit of up to $20 million for letters of credit, and incurs interest at a rate equal to either, at our option, LIBOR plus 5.00% or the base rate plus 4.00%. We also incur a commitment fee of 0.375% on committed amounts that are neither used for borrowings nor under letters of credit. Substantially all of the assets of the Borrowers are pledged as collateral under the Credit Agreement.
On August 31, 2016, we closed the sale of the Fuel business, used the net proceeds therefrom to repay outstanding borrowings under the Credit Agreement and entered into Amendment No. 11 to the Credit Agreement with the Borrowers, the lenders and the agent. Amendment No. 11, among other things, restated the Credit Agreement and provided a full waiver for all defaults or events

27


of default arising out of our failure to comply with the financial covenant to generate minimum amounts of adjusted EBITDA during the quarters ended March 31, 2016, June 30, 2016 and September 30, 2016 and the covenant to maintain the minimum amount of excess availability for any date prior to September 1, 2016.
Pursuant to Amendment No. 11, the Credit Agreement now requires the Partnership to maintain the following financial covenants:
a covenant to maintain $15 million of excess availability (as defined in the Credit Agreement);
a covenant to limit capital expenditures (as defined in the Credit Agreement) to certain maximum amounts for each quarter through March 31, 2019;
beginning with the quarter ending June 30, 2017, a covenant to generate consolidated EBITDA (as defined in the Credit Agreement) in certain minimum amounts;
beginning with the quarter ending March 31, 2018, a covenant to maintain an interest coverage ratio (as defined in the Credit Agreement) of not less than 2.00 to 1.00, which is scheduled to increase to 3.00 to 1.00 for the fiscal quarter ending March 31, 2019; and
a covenant to raise at least $31.2 million of net proceeds from the issuance and sale of common equity by November 30, 2016, which was satisfied by our underwritten sale of common units which closed on November 23, 2016.
In addition, the Credit Agreement also prohibits us from making cash distributions to our unitholders and requires all cash receipts by us and our subsidiaries to be swept on a daily basis and used to reduce outstanding borrowings under the Credit Agreement.
On April 12, 2017, the Partnership entered into Amendment No. 12 to the Credit Agreement. The Amendment amended the Revolving Credit Agreement to permit the Partnership and the Borrowers to enter into the Second Lien Term Loan Agreement and to reduce commitments under the revolving credit facility to $190 million, and further reducing on a quarterly basis to $125 million for the quarter beginning January 1, 2019.
We believe that we will be able to maintain compliance with the covenants and restrictions under the Credit Agreement, as amended, for at least the next 12 months.
Second Lien Term Loan Agreement
On April 12, 2017, we entered into a new $40 million second lien senior secured term loan facility with our wholly-owned subsidiaries Emerge Energy Services Operating LLC and Superior Silica Sands LLC, as borrowers (the “Borrowers”) and U.S. Bank National Association as disbursing agent and collateral agent (the “Second Lien Term Loan Agreement”). The Second Lien Term Loan Agreement matures on April 12, 2022. Proceeds of the new term credit facility were used to (i) pay down a portion of our existing revolving credit facility, (ii) fund the acquisition described in Note 2, (iii) pay fees and expenses incurred in connection with the new term credit facility and (iv) for general business purposes. Substantially all of our assets are pledged as collateral on a second lien basis under the Second Lien Term Loan Agreement.
The Second Lien Term Loan Agreement contains various covenants and restrictive provisions and also requires the maintenance of certain financial covenants as follows:
beginning with the fiscal quarter ending March 31, 2018, an interest coverage ratio of not less than 1.70:1.00 increasing quarterly thereafter to 2.55:1.00 for the fiscal quarter ending March 31, 2019 and thereafter;
beginning with the fiscal quarter ending June 30, 2017, a minimum EBITDA of not less than $637,500 for such fiscal quarter, increasing quarterly to $50 million for the four fiscal quarter period ending June 30, 2019 and thereafter; and
minimum excess availability of at least $12.75 million so long as the Revolving Credit Agreement remains in effect.
Loans under the Second Lien Term Loan Agreement will bear interest at the Partnership’s option at either the base rate plus 9.00%, or LIBOR plus 10.00%.
Covenants Compliance
At September 30, 2017, we were in compliance with our loan covenants and had undrawn availability totaling $27.8 million under the Credit Agreement, well above the minimum availability required under our current covenants. At September 30, 2017, our outstanding borrowings under the Credit Agreement bore interest at a weighted-average rate of 8.21% and the borrowings under the Second Lien Term Loan Agreement bore interest at a rate of 11.3%.

28


Liquidity Trends
Beginning in the second half of 2014 and continuing through the middle of 2016, prices for natural gas, crude oil and refined fuels were extremely volatile and decreased significantly. Although oil and gas drilling and completions activity has improved significantly in the last 18 months, our cash flows from operating activities are subject to significant quarterly variations as volatile commodity prices influence demand for our frac sand. In addition, after closing the sale of our Fuel business we are more dependent on the volatility in demand for frac sand without the benefit of cash flows generated by our Fuel business in periods of stable commodity prices. Therefore, the cash generated by our operations are driven by a number of factors beyond our control, including global and regional product supply and demand, weather, product distribution, refining and processing capacity and other supply chain dynamics, among other factors. Our liquidity needs may not be met solely by cash generated from operations, and we expect to continue relying on borrowings under the Credit Agreement as source of future liquidity.
However, our ability to comply with the restrictions and covenants of the Credit Agreement and the Second Lien Term Loan Agreement is uncertain and will be affected by the amount of cash flow from our operations and events or circumstances beyond our control, including events and circumstances that may stem from the condition of financial markets and commodity price levels. If in the future we are unable to comply with the financial covenants of the Credit Agreement and the lenders are unwilling to provide us with additional flexibility or a waiver, we may be forced to repay or refinance amounts then outstanding under the Credit Agreement and seek alternative sources of capital to fund our business and anticipated capital expenditures. Any such alternative sources of capital, such as equity transactions or debt financing, may be on terms less favorable or at higher costs than our current financing sources, depending on future market conditions and other factors, or may not be available at all.
We are currently evaluating options to amend or refinance the Credit Agreement and the Second Lien Term Loan Agreement in order to remove or modify covenants limiting our ability to make capital expenditures necessary to complete the construction of our new plant in San Antonio, Texas by the second quarter of 2018. There can be no assurances that we will be able to refinance such indebtedness or amend such agreements on terms acceptable or favorable to us, if at all.
Cash Flow Summary 
The table below summarizes our cash flows. 
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
 
 
 
 
 
 
($ in thousands)
 
Cash flows from operating activities
$
(13,887
)
 
$
(27,835
)
 
Cash flows from investing activities
$
(25,658
)
 
$
141,804

 
Cash flows from financing activities
$
40,090

 
$
(134,834
)
 
Cash and cash equivalents at beginning of period
$
4

 
$
20,870

 
Cash and cash equivalents at end of period
$
549

 
$
5

 
Operating cash flows 
Cash flows from operating activities have generally trended the same as our net income (loss) adjusted for non-cash items of depreciation, depletion and amortization, equity-based compensation, amortization of deferred financing costs, contract termination costs, unrealized losses on derivative instruments, and unrealized (gain) loss on fair value of warrants. Significant changes in our working capital resulted from rapid growth of sales and billings as well as higher costs to support our expanding business during 2017.
Investing cash flows 
Cash flows used in investing activities increased during the nine months ended September 30, 2017 due to the asset acquisition from Osburn Materials, offset by a decrease in our capital expenditures. Cash flows from investing activities increased during the nine months ended September 30, 2016 due to the proceeds from the sale of the Fuel business of $154.0 million, offset by a decrease in our capital expenditures of $12.3 million. Additionally, we have significantly curtailed our capital expenditures to comply with our bank covenants that limit capital expenditures.

29


Financing cash flows 
Our cash balance as of September 30, 2017 was $0.5 million compared to $4,000 as of December 31, 2016 and $5,000 as of September 30, 2016. We are currently subject to a cash dominion requirement as per Amendment No. 11 to our Credit Agreement, which requires all cash receipts by us and our subsidiaries to be swept on a daily basis and used to reduce outstanding borrowings under the Credit Agreement. We manage our cash on a daily basis and make advances against the revolver based on our daily disbursements.
The main categories of our financing cash flows can be summarized as follows:
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
 
 
 
 
 
 
($ in thousands)
 
Net debt proceeds (payments)
$
45,400

 
$
(148,614
)
 
Net proceeds from private placement

 
18,682

 
Other
(5,310
)
 
(4,902
)
 
Total
$
40,090

 
$
(134,834
)
 
In April 2017, we entered into a second lien term loan for $40 million. Proceeds of the new term credit facility were used to (i) pay down a portion of our existing revolving credit facility, (ii) fund the acquisition described in Note 2 (iii) pay fees and expenses incurred in connection with the new term credit facility and (iv) for general business purposes.
Critical Accounting Estimates
Significant judgment is often required in estimating the fair values of assets acquired. We engaged a third-party valuation specialist in estimating fair values of the assets acquired. We used our best estimates and assumptions to allocate the cost of the acquisition to the assets acquired on a relative fair value basis at the acquisition date.  The fair value estimates are based on available historical information and on expectations and assumptions about the future production and sales volumes, market demands, the average selling price of sand and the discount factor used in estimating future cash flows. While we believe those expectations and assumptions are reasonable, they are inherently uncertain. Transaction costs incurred for the acquisition are capitalized as a component of the cost of the assets acquired.
ADJUSTED EBITDA 
We calculate Adjusted EBITDA, a non-GAAP measure, in accordance with our current Credit Agreement as: net income (loss) plus consolidated interest expense (net of interest income), income tax expense, depreciation, depletion and amortization expense, non-cash charges and losses that are unusual or non-recurring less income tax benefits and gains that are unusual or non-recurring and other adjustments allowable under our current Credit Agreement.   Adjusted EBITDA is used as a supplemental financial measure by our management and external users of our financial statements, such as investors and commercial banks, to assess: 
our debt covenant compliance. Adjusted EBITDA is a key component of critical covenants to our Credit Agreement;
the financial performance of our assets without regard to the impact of financing methods, capital structure or historical cost basis of our assets;
the viability of capital expenditure projects and the overall rates of return on alternative investment opportunities;
our liquidity position and the ability of our assets to generate cash sufficient to make debt payments and to make distributions; and
our operating performance as compared to those of other companies in our industry without regard to the impact of financing methods and capital structure.
We believe that Adjusted EBITDA provides useful information to investors because, when viewed with our GAAP results and the accompanying reconciliations, it provides a more complete understanding of our performance than GAAP results alone.  We also believe that external users of our financial statements benefit from having access to the same financial measures that management uses in evaluating the results of our business. 
Adjusted EBITDA should not be considered an alternative to, or more meaningful than, net income, operating income, cash flows from operating activities or any other measure of financial performance presented in accordance with GAAP.  Moreover, our Adjusted EBITDA as presented may not be comparable to similarly titled measures of other companies. 

30


Reconciliation of Net Income (Loss) and Operating Cash Flows to Adjusted EBITDA 
The following table present a reconciliation of net income (loss) to Adjusted EBITDA for the three months ended September 30, 2017 and 2016:
 
Continuing
 
Discontinued
 
Consolidated
 
 
 
 
 
Three Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
($ in thousands)
 
Net income (loss)
$
5,482

 
$
(29,955
)
 
$
(468
)
 
$
35,072

 
$
5,014

 
$
5,117

 
Interest expense, net
5,073

 
8,014

 

 
444

 
5,073

 
8,458

 
Depreciation, depletion and amortization
6,078

 
4,687

 

 

 
6,078

 
4,687

 
Provision (benefit) for income taxes
(58
)
 
8

 

 
8

 
(58
)
 
16

 
EBITDA
16,575

 
(17,246
)
 
(468
)
 
35,524

 
16,107

 
18,278

 
Equity-based compensation expense
343

 
235

 

 
97

 
343

 
332

 
Contract and project terminations

 
(25
)
 

 

 

 
(25
)
 
Reduction in escrow receivable

 

 
468

 

 
468

 

 
Provision for doubtful accounts

 
8

 

 
(543
)
 

 
(535
)
 
Accretion expense
25

 
30

 

 

 
25

 
30

 
Retirement of assets

 
209

 

 

 

 
209

 
Fuel division selling expenses

 

 

 
(679
)
 

 
(679
)
 
Other state and local taxes
477

 
483

 

 
59

 
477

 
542

 
Non-cash deferred lease expense
2,223

 
2,072

 

 

 
2,223

 
2,072

 
Unrealized (gain) loss on fair value of warrant
(900
)
 
2,975

 

 

 
(900
)
 
2,975

 
Non-capitalized cost of private placement

 
387

 

 
 
 

 
387

 
Gain on sale of discontinued operations, net of tax

 

 

 
(31,699
)
 

 
(31,699
)
 
Adjusted EBITDA
$
18,743

 
$
(10,872
)
 
$

 
$
2,759

 
$
18,743

 
$
(8,113
)
 


31


The following table present a reconciliation of net income (loss) to Adjusted EBITDA for the nine months ended September 30, 2017 and 2016:
 
Continuing
 
Discontinued
 
Consolidated
 
 
 
 
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
($ in thousands)
 
Net income (loss)
$
(9,333
)
 
$
(92,546
)
 
$
(3,125
)
 
$
40,551

 
$
(12,458
)
 
$
(51,995
)
 
Interest expense, net
13,353

 
17,891

 

 
1,727

 
13,353

 
19,618

 
Depreciation, depletion and amortization
16,409

 
14,464

 

 
2,354

 
16,409

 
16,818

 
Provision (benefit) for income taxes
(58
)
 
29

 

 
19

 
(58
)
 
48

 
EBITDA
20,371

 
(60,162
)
 
(3,125
)
 
44,651

 
17,246

 
(15,511
)
 
Equity-based compensation expense
1,020

 
137

 

 
331

 
1,020

 
468

 
Write-down of sand inventory

 
5,394

 

 

 

 
5,394

 
Contract and project terminations

 
4,011

 

 

 

 
4,011

 
Reduction in escrow receivable

 

 
3,125

 

 
3,125

 

 
Provision for doubtful accounts

 
1,680

 

 
(469
)
 

 
1,211

 
Accretion expense
83

 
89

 

 

 
83

 
89

 
Retirement of assets
60

 
209

 

 
67

 
60

 
276

 
Reduction in force

 
76

 

 

 

 
76

 
Other state and local taxes
1,357

 
1,435

 

 
295

 
1,357

 
1,730

 
Non-cash deferred lease expense
6,453

 
3,679

 

 

 
6,453

 
3,679

 
Unrealized (gain) Loss on fair value of warrant
(3,212
)
 
2,975

 

 

 
(3,212
)
 
2,975

 
Non-capitalized cost of private placement

 
387

 

 
 
 

 
387

 
Gain on sale of discontinued operations, net of tax

 

 

 
(31,699
)
 

 
(31,699
)
 
Other adjustments allowable under our Credit Agreement
213

 
208

 

 

 
213

 
208

 
Adjusted EBITDA
$
26,345

 
$
(39,882
)
 
$

 
$
13,176

 
$
26,345

 
$
(26,706
)
 


32



The following table reconciles Consolidated Adjusted EBITDA to our operating cash flows for the three and nine months ended September 30, 2017 and 2016:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
 
 
 
 
 
 
 
 
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
 
 
($ in thousands)
 
Adjusted EBITDA
$
18,743

 
$
(8,113
)
 
$
26,345

 
$
(26,706
)
 
Interest expense, net
(4,169
)
 
(4,682
)
 
(10,828
)
 
(13,671
)
 
Income tax expense
(419
)
 
(558
)
 
(1,299
)
 
(1,778
)
 
Contract and project terminations - non-cash

 
25

 

 

 
Reduction in force

 

 

 
(76
)
 
Write-down of sand inventory

 

 

 
(5,394
)
 
Other adjustments allowable under our Credit Agreement

 

 
(213
)
 
(208
)
 
Fuel division selling expenses

 
679

 

 

 
Cost to retire assets

 

 
19

 
9

 
Non-cash deferred lease expense
(2,223
)
 
(2,072
)
 
(6,453
)
 
(3,679
)
 
Change in other operating assets and liabilities
(18,646
)
 
(82
)
 
(21,458
)
 
23,668

 
Cash flows from operating activities:
$
(6,714
)
 
$
(14,803
)
 
$
(13,887
)
 
$
(27,835
)
 
 
 
 
 
 
 
 
 
 
Cash flows from investing activities:
$
(2,036
)
 
$
152,816

 
$
(25,658
)
 
$
141,804

 
 
 
 
 
 
 
 
 
 
Cash flows from financing activities:
$
9,110

 
$
(141,166
)
 
$
40,090

 
$
(134,834
)
 

ITEM 3.                                                QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 
Information about market risks for the nine months ended September 30, 2017, does not differ materially from that discussed under Item 7A of our Annual Report on Form 10-K for the year ended December 31,2016.  Following the sale of the Fuel business, risks with respect to prices of refined fuels products and transmix, wholesale fuel and other feedstocks are no longer applicable to or continuing operations.
ITEM 4.                                                 CONTROLS AND PROCEDURES 
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our 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 September 30, 2017. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of such date, our disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting identified in management’s evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act during the quarter ended September 30, 2017 that materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.
PART II                                      OTHER INFORMATION 
ITEM 1.                                      LEGAL PROCEEDINGS 
Although we are, from time to time, involved in litigation and claims arising out of our operations in the normal course of business, we do not believe that we are a party to any litigation that could have a material adverse impact on our financial condition or results of operations.  We are not aware of any undisclosed significant legal or governmental proceedings against us, or contemplated to be brought against us.  We maintain such insurance policies with insurers in amounts and with coverage and deductibles as our general partner believes are reasonable and prudent.  However, we cannot assure you that this insurance will be adequate to protect

33


us from all material expenses related to potential future claims for personal and property damage or that these levels of insurance will be available in the future at acceptable prices. 
Environmental Matters
On November 21, 2013, the EPA issued a General Notice Letter and Information Request (“Notice”) under Section 104(e) of CERCLA to one of our subsidiaries operating within the Fuel business.  The Notice provides that the subsidiary may have incurred liability with respect to the Reef Environmental site in Alabama, and requested certain information in accordance with Section 107(a) of CERCLA.  We timely responded to the Notice.  At this time, no specific claim for cost recovery has been made by the EPA (or any other potentially responsible party) against us.  There is uncertainty relating to our share of environmental remediation liability, if any, because our allocable share of wastewater is unknown and the total remediation cost is also unknown.  Consequently, management is unable to estimate the possible loss or range of loss, if any.  We have not recorded a loss contingency accrual in our financial statements.  In the opinion of management, the outcome of such matters will not have a material adverse effect on our financial position, liquidity or results of operations.
In January 2016, AEC experienced a leak in its proprietary fuel pipeline that connects the bulk storage terminal to the transmix facility located in Birmingham, Alabama. AEC management notified the controlling governmental agencies of this condition, and commenced efforts to locate the leak, determine the cause of the leak, repair the leak, and remediate known contamination to the proximate soils and sub-grade. These efforts remain in progress, and management does not expect the costs to repair and remediate these conditions to have a material impact on our financial position, results of operations, or cash flows.
Under the Restated Purchase Agreement, we agreed to indemnify Sunoco against these and any other environmental liabilities associated with the business and operations of the Fuel business prior to its sale, subject to certain exceptions. We have obtained an environmental insurance policy which, pursuant to the terms of the Restated Purchase Agreement, acts as the first recourse coverage for any pre-closing environmental liability asserted by Sunoco with our indemnification obligation being for any claims in excess of the insurance policy coverage or in the event a claim is denied under the insurance policy. Our management does not expect our environmental indemnification obligations pursuant to the Restated Purchase Agreement will have a material adverse effect on our future results of operations, financial position or cash flow.
ITEM 1A.                                                RISK FACTORS 
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016, which could materially affect our business, financial condition or future results.  The risks described in this report and in our Annual Report on Form 10-K are not the only risks we face.  Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results. 
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 respiratory protection program, medical surveillance, training, and other components. We designed our safety program 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 organized safety committees at our plants made up of both salaried and hourly employees. We perform internal health and safety audits and conduct tests of our abilities to respond to various situations. Our health and safety department administers the health and safety programs with the assistance of corporate personnel and 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. Following passage of The Mine Improvement and New Emergency Response Act of 2006, MSHA significantly increased the numbers of citations and orders charged against mining operations. The dollar penalties assessed for citations issued has also increased in recent years. 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 Quarterly Report on Form 10-Q. 

34


ITEM 6.                                      EXHIBITS 
Exhibit
Number
 
Description
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
101*
 
Interactive Data Files - XBRL.
 
*    Filed herewith (or furnished in the case of Exhibits 32.1 and 32.2).
†    Certain portions have been omitted pursuant to a confidential treatment request. Omitted information has been separately filed with the Securities and Exchange Commission.



35


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. 
Date: November 2, 2017  
 
EMERGE ENERGY SERVICES LP
 
 
 
 
 
By:
EMERGE ENERGY SERVICES GP LLC, its general partner
 
 
 
 
 
 
By:
/s/ Rick Shearer
 
 
 
Rick Shearer
 
 
 
President and Chief Executive Officer
 
 
 
(Principal Executive Officer)
 
 
 
 
 
 
By:
/s/ Deborah Deibert
 
 
 
Deborah Deibert
 
 
 
Chief Financial Officer
 
 
 
(Principal Financial Officer)
 

36


INDEX TO EXHIBITS
Exhibit
Number
 
Description
 
 
 
 
 
 
3.1
 
Certificate of Limited Partnership of Emerge Energy Services LP (incorporated by reference to Exhibit 3.1 to the Registrant’s Registration Statement on Form S-1, Registration No. 333-187487).
 
 
 
3.2
 
Amendment to Certificate of Limited Partnership of Emerge Energy Services LP (incorporated by reference to Exhibit 3.2 to the Registrant’s Registration Statement on Form S-1, Registration No. 333-187487).
 
 
 
3.3
 
First Amended and Restated Limited Partnership Agreement of Emerge Energy Services LP, dated as of May 14, 2013 (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K, filed with the SEC on May 20, 2013).
 
 
 
3.4
 
Amendment No. 1 to the First Amended and Restated Agreement of Limited Partnership of Emerge Energy Services LP, dated as of August 15, 2016 (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K, filed with the SEC on August 16, 2016).
 
 
 
3.5
 
Certificate of Limited Formation of Emerge Energy Services GP LLC (incorporated by reference to Exhibit 3.5 to the Registrant’s Registration Statement on Form S-1, Registration No. 333-187487).
 
 
 
3.6
 
Amendment to Certificate of Formation of Emerge Energy Services GP LLC (incorporated by reference to Exhibit 3.6 to the Registrant’s Registration Statement on Form S-1, Registration No. 333-187487).
 
 
 
3.7
 
Amended and Restated Limited Liability Company Agreement of Emerge Energy Services GP, LLC, dated as of May 14, 2013 (incorporated by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K, filed with the SEC on May 20, 2013).
 
 
 
10.1†
 
Sand Supply Agreement, dated July 19, 2017, between Superior Silica Sand and EP Energy E&P Company, L.P. (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q, filed with the SEC on August 4, 2017).
 
 
 
31.1*
 
Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
31.2*
 
Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
32.1*
 
Certification of Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
32.2*
 
Certification of Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
95.1*
 
Mine Safety Disclosure Exhibit.
 
 
 
101*
 
Interactive Data Files - XBRL.

*    Filed herewith (or furnished in the case of Exhibits 32.1 and 32.2).

†    Certain portions have been omitted pursuant to a confidential treatment request. Omitted information has been separately filed with the Securities and Exchange Commission.


37